Investor Day – Operations Lausanne, June 22, 2012
Martin King Senior Vice President, Operations Philip Morris International The World of Operations
● Operations overview ● Leaf, direct materials and productivity ● Supply chain optimization ● Innovation focus and quality leadership ● Environment, Health & Safety programs ● Employee development ● Key takeaways
2 Operations Overview PMI Operates Cigarette and Non-Cigarette Manufacturing Facilities Worldwide
56 manufacturing facilities Cooperation with 21 Third-Party Manufacturers (TPMs) Source: PMI Financials and 38 Third-Party Operators (TPOs) 4 Manufacturing Facilities Footprint Optimization
• Greenfield and Acquisitions • Factory Restructuring Source: PMI Operations • Closures and Consolidations 5 Total Tobacco Sales Volume by Production Source
(units billion) (% increase) 1,000 +7% 942 882 101 (5)% 106 237 - 236
353 (5)% 370
251 170 +48% 0 2009 2011 Asia EU EEMA LA&C
Note: Volume includes TPMs Source: PMI Operations Finance 6 Over 50,000 People Work in Operations
2011 Headcount (%)
Other
Fixed Manufacturing Machine-made
Hand-rolled
Source: PMI Operations Finance 7 Over 50,000 People Work in Operations
Cigarettes (units million equivalent) 2011 Headcount per Variable Headcount (%) EU Region
51
50.0 Other 49.8
Fixed 49 48.7 Manufacturing Machine-made
47
Hand-rolled
45 2009 2010 2011
Source: PMI Operations Finance 8 Japan Sales Volume by Production Center
5 Factories 11 Factories
● 222 cargo charter flights and 848 commercial cargo flights
● The use of three airports
● The lease of six temporary bonded warehouses
● Trade service level of 99%
2009 2011
Source: PMI Operations Finance 9 Total Tobacco Sales Volume by Production Type
(units billion) 1,000 (% increase) 942 +7% 26 882 +44% 34 18 +10% 31 116 +23% 94
+4% 739 766
500 2009 2011 Traditional Non-Traditional Hand-Rolled Other Tobacco Products (OTP)
Note: Volume includes TPMs. Traditional format: Pack type: Box, Round-Corner Box and Soft / Diameter: regular / Length: Regular size, Long Size, King Size and 100mm Source: PMI Operations Finance 10 Total 2011 Cost of Sales of $10.7 billion
Shipping & Distribution Tobacco Leaf
8% 35% 30% Other
27%
Direct Materials
Note: Other cost of sales mainly includes employee-related costs, TPM costs and depreciation Source: PMI Operations Finance 11 Leaf, Direct Materials and Productivity PMI Leaf Purchases by Type
100% 4 6 9
Others 31 Sun-cured Oriental Burley Virginia
50
0% 2011
Source: PMI Leaf 13 Geographic Leaf Sourcing
< 5% of total kg > 5% of total kg
Source: PMI Operations Finance 14 Leaf Sourcing Model
35% of leaf sourced through vertical integration Vertical Integration Suppliers Vertical Integration and Suppliers
Source: PMI Operations Finance 15 Leaf Vertical Integration in Brazil
● In Q2 2010, PMI signed separate agreements with Alliance One and Universal Leaf to vertically integrate leaf sourcing in Brazil
● New operation provides approximately 50% of our purchases in Brazil and 10% of PMI’s global leaf requirements
● Total PMI green leaf vertical integration increased to 35% in 2011
● Successful first year of operation and second year crop being delivered
Source: PMI Leaf and PMI Operations Finance 16 Leaf Vertical Integration in Brazil Key Objectives
● Better alignment of the crop to our demand
● Better control on product quality and integrity
● Cost efficiency, predictability and transparency
● Greater positive impact on the sustainability of tobacco-growing communities
Source: PMI Leaf 17 Leaf Supply and Demand
(billion kg Traded Volumes(a) packed) Supply Demand 4.5
4.0
3.5
3.0
2.5 2008 2009 2010 2011
(a) Supply = Production + Supplier inventories; Demand = Consumption – Manufacturers inventory reduction Note: Including China Source: PMI Leaf, based on latest available data from a number of internal and external sources 18 Leaf Purchase Price Evolution
Average $ per packed kg
$5.69 $5.69 $5.64 $5.64 $5.58
$4.91
CAGR: 3.2%
+14.9% - +0.9% (1.9)% +2.0%
2007 2008 2009 2010 2011 2012 Forecast
Source: PMI Operations Finance 19 Leaf Crop Usage Illustration
100%
55 56
89 Other Crop Years
Crop Year 1
45 44
11 0% Year 1 Year 2 Year 3
Source: PMI Leaf 20 Leaf Strategy
● Secure availability of volumes, quality and predictability of prices
● Promote the growth of high quality tobacco under conditions that help protect the environment and promote sustainable crops
● Implement comprehensive Agricultural Labor Practices (ALP) Code
Source: PMI Leaf 21 Agricultural Labor Practices
● Progressively eliminate child labor and other labor abuses
● Implementing ALP Code where we source tobacco
● Trained 2,600+ field technicians to reach 500,000+ farmers
● Positive feedback from stakeholders
● Progress report on our website later this summer
Source: PMI Leaf 22 Clove Crop and Price
(million kg) (‘000 IDR / kg)
160 160
140 140
120 120
100 100
80 80
60 60
40 40
20 20
0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Forecast
Crop Average Price Source: HM Sampoerna Tbk 23 Clove Strategy
● Secure availability of volumes during large crop years
● Focus on yield improvement through technical assistance at farmer level
● Continue clove tree distribution (3.6 million since 2006)
Source: PMI Leaf 24 Key Direct Materials Categories
● Three main categories represent 72% ● 2011 spend: approximately $2.8 billion
Others Printed Board & Paper
Flexibles 16% 35% 12%
16% 21%
Fine Papers
Acetate Tow
Note: Flexibles mainly represent wrapping films, inner liner and tear tape. Others primarily reflect shipping cases, filtration materials and ingredients Source: PMI Procurement 25 Challenges in Direct Materials Procurement
● Increasing complexity
● Growing requirements for innovation
● Supply base footprint development in Asia
● Price volatility in some categories and supply/demand balance
Source: PMI Procurement 26 Direct Materials Strategy
● Supply security and speed-to-market
● Cost competitiveness and predictability
● Supplier relationship management
● Access to innovation
Source: PMI Procurement 27 Reduced Cigarette Ignition Propensity A Success Story
● Over 200 billion cigarettes with 1,200+ specifications converted in the EU in 2011
● On-going projects to improve adult smoker satisfaction while complying with regulatory standards
● Supply secured through long-term commitments
● Well-managed transition with no out-of-stock
Source: PMI Procurement 28 Indirect Materials and Services
● 2011 spend of approximately $5.6 billion
● 65% of spend is non-Operations
● Significant and growing contributor to productivity program
● Strengthen organizational capabilities to create more efficient processes that deliver ongoing productivity
Note: Indirect materials and services mainly includes marketing and sales, facility services and supplies, logistics, professional services, fleet & travel and IS Source: PMI Procurement 29 2012 Gross Productivity and Cost Savings Target: $300 million (Pre-Tax)
Total
Non- Operations
Operations
Source: PMI Operations Finance 30 2012 Gross Productivity and Cost Savings Target: $300 million (Pre-Tax)
Total Operations Contribution
Manufacturing Others performance Non- Blend & Operations specification rationalization
Operations Tobacco processing technology Procurement
Source: PMI Operations Finance 31 Supply Chain Optimization Leverage an Integrated and Agile Supply Chain
● Optimize inventory-related working capital
● Integrate supply chain from markets to suppliers
● Manage supply chain and sourcing risks
Source: PMI Supply Chain 33 Inventory Duration Development
Year-End Inventory Duration
110% 100%
100%
90% Leaf
80% Finished Goods
70%
60%
50% 2009 2010 2011 2012 Forecast Source: PMI Operations Finance 34 Finished Goods Inventory Duration Development
Year-End Inventory Duration
110% 100%
100%
90% Forestalling Inventory 80% Total Inventory
70% Regular Inventory 60%
50% 2009 2010 2011 2012 Forecast Source: PMI Operations Finance 35 SCIPIO: Key to Reducing Finished Goods Inventories
● Provides visibility on finished goods inventories and links demand and supply planning
● Rolled out in 26 factories and 107 markets, covering 74% of global tobacco volume
● Expects to cover 85% of global tobacco volume by 2013
● Complemented by inventory diagnostics, demand planning and forecasting and strengthened Sales & Operations Planning processes
Note: SCIPIO stands for Supply Chain Initiatives on Process and Inventory Optimization Source: PMI Supply Chain 36 Capital Investments ($ million)
1.0 0.9 0.8 $897
$715 $713
2009 2010 2011 Capex Capex-to-Depreciation Ratio
Source: PMI Operations Finance 37 High-Speed Investment Program
● Investment over the next three years in new generation equipment capable of producing 20,000 cigarettes per minute ● Cascade equipment and make optimal use of existing assets ● Proactively create a pool of equipment to aid innovation, quality, speed-to-market and productivity
Source: PMI Engineering 38 Innovation Focus and Quality Leadership Focused Innovation
● Innovation pipeline anchored to adult smoker preferences
● Six-month cycle of concept evaluation
● Best concepts selected for development
● Ensures a continuously filled and refined pipeline
Translation Adult Consumer Concept Component Component Industrial Product Into Product Preferences Validation Development Verification Solution Verification Concepts
Source: PMI Product Development 40 Specification Rationalization Program
● Supports focused commercial approach to sales ● Global program for specifications and SKU rationalization supported by three pillars: - Focus – “Develop once, deploy widely” - Master – Smart solutions to balance complexity/flexibility ratio of new features - Minimize – Eliminate unnecesary complexity where it adds no adult smoker benefit ● Target 20% reduction in unique specifications by 2014
Source: PMI Product Development 41 Supporting Marlboro New Architecture
Flavor Line 153 launches and revamps Tactile surface treatment Sliding lid pack
Gold Line 265 launches and revamps Tactile surface treatment Expanded to slims and super slims Fresh Line 79 launches and revamps Tailored menthol blends New filter technology Expanded range of menthol offers
Source: PMI Product Development 42 PMI Continues to Deliver Innovation Expanded portfolio of capsule products 41 new launches in 2011 • Fresh-to-Fresh • Hybrid • Capsule + Carbon Filter • 14 different tar alternatives from 1mg in Marlboro and Lark to 14mg in Sampoerna
New concept for personalization • Twistable filter • Adjust taste intensity
New technology • Fresnel lens • First time applied to tobacco packaging • High quality, high impact design
Source: PMI Product Development 43 PMI outperforms competition quality in key markets in 2011
Competition outperforms PMI PMI is statistically PMI wins 100% of the not different from comparison vs. competition competition 2% 18% 12%
68%
PMI outperforms competition in more than 50% of products
Source: PMI Product and Process Quality 44 Environment, Health and Safety (EHS) Programs EHS Performance − Safety
Manufacturing Lost Time Injury Rate(a) Fleet Crash Rate(b)
-32% -36% -17% -23% 100% 100%
75% 75%
50% 0.22 50% 8.1 0.17 6.7 0.15 5.2 25% 25%
0% 0% 2010 2011 2012 2010 2011 2012 Forecast Forecast
(a) Number of injuries in every 200,000 working hours (b) Crashes per million kilometers driven Source: PMI Environment, Health and Safety 46 EHS Manufacturing Performance − Environment
Energy per million cigarettes CO2 per million cigarettes
-20% -20% -3% -3% 100% 100%
90% 90% 8.8 8.5 746 720 80% 80% 7.0 597 70% 70% 2010 2011 2015 2010 2011 2015 Water per million cigarettes Recycling Rate
-20% -6% 100% 100% +7% +3% 90% 90% 5.4 5.1 80% 80% 85.0 4.3 79.6 81.9 70% 70% 2010 2011 2015 2010 2011 2015 Source: PMI Environment, Health and Safety 47 Employee Development Operations Performance and Engagement: OPEN
OPEN is the way we conduct business in Operations:
• Empowering and developing the people and the organization
• Standardizing processes using “Lean” techniques
• Generating a continuous improvement culture
Source: PMI Operations 49 Key Takeaways Key Takeaways
● We will work to maintain cost leadership in our industry
● We will reduce our inventories and increase the integration of our supply chain
● We will continue to innovate our products and deliver the best quality
● We will continuously develop and engage our employees to address our challenges
Source: PMI Operations 51 Investor Day – Operations Lausanne, June 22, 2012
Questions & Answers Reconciliations of non-GAAP measures included in this presentation to the most comparable GAAP measures are provided on our website at: www.pmi.com/2012InvestorDay/RecSlides