Project Star 2012: Presentation of results - AsktheEU.org report on tobacco consumption in ... Project Star 2012 Results to you or to any persons ... a comparable premium brand, as

Project Star 2012:Presentation of results

Private and ConfidentialPrivate and Confidential

2 July 2013

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIAL

Disclaimer

This report on tobacco consumption in the EU (“Project Star 2012 Results") has been prepared by KPMG LLP in accordance with specific terms of reference (“terms of reference") agreed between Philip Morris International Management S A ("PMI") and KPMG LLPspecific terms of reference ( terms of reference ) agreed between Philip Morris International Management S.A. ( PMI ) and KPMG LLP.

KPMG LLP wishes you to be aware that KPMG LLP's work for PMI was performed to meet specific terms of reference agreed betweenPMI and KPMG LLP and that there were particular features determined for the purposes of the engagement. The Project Star 2012Results should not therefore be regarded as suitable to be used or relied on by any other person or for any other purpose. Should you choose to rely on this report you do so at your own risk. KPMG LLP will accordingly accept no responsibility or liability in respect of the Project Star 2012 Results to you or to any persons other than PMI.

1© 2013 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (‘KPMG International’), a Swiss entity. All rights reserved.


Introduction

Introduction, , KPMG

, KPMG



Objectives for today

■ Provide an overview of developments in the EU illicit cigarette trade in 2012 identified as a result of P j t St Th t ti illProject Star. The presentation will cover; – Methodology– Market overview– C&C levels– C&C flows– Illicit whitesIllicit whites– Summary

A d t t i i d t il d lt f h M b St t ill b il bl f ll i th■ A document containing detailed results for each Member State will be available following the presentation

■ KPMG is happy to provide clarifications or respond to questions both at the end of the session and on an ongoing basis



Agenda

Methodology

M k t iMarket overview

C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALProject Star uses legal domestic sales, Empty Pack Survey results and consumer research to quantify the volume of C&C cigarettes consumed in the EU

Domestic consumption

Based on consumer survey results regarding cross border purchasesNon-domestic

(legal)

Counterfeit and

Non-domestic)

Obtained by subtracting legal cross border

purchases from the total non-domestic volume

Counterfeit and contraband

on (c

igar

ette

s

Outflows

Based on Empty Pack

Survey resultsLegal

Domesticsalese

cons

umpt

io

Legaldomestic

Based on Empty Pack

Survey sales

Cig

aret

te domestic consumptionresults

The Project Star methodology was developed by KPMG and approved by OLAF. It has been deployed on a consistent b i i 2006 bli i t b d b t t f it d t b d l f t


basis since 2006, enabling comparisons to be made between counterfeit and contraband volumes from year to year


Our approach integrates multiple sources with custom-built analytical tools

Primary Inputs Data Modelling and Iteration Final Output

The results are put

Empty Pack Surveys The results are put

through extensive iteration and testing to

finalise

y

Legal domestic

KPMG EU Flows Model

Preliminary non-domestic results

Model refinements are informed by gap analysis, external

public research and interviews with both

cigarette

Legal domestic sales

Final results

cigarette manufacturers/ distributors and

independent market expertsLegal cross

border purchasesNon-domestic

(legal) research

Preliminary counterfeit and

contraband resultsresults



Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALNon-domestic consumption in the EUC&C has continued to grow since 2006, reaching 11.1% in 2012. ND(L) also increased in 2012, for the first time since 2006

ND(L) and C&C share of total consumption 2006-2012(1)

8 9%

9.9%10.4%

11.1%

10%

12%

+1.0

+0.5+0.7

8.3% 8.4% 8.6%8.9%

6%

8%

cons

umpt

ion

(%) +0.1 +0.2 +0.3

4.5%4.2% 4.1%

3.7% 3.7% 3.7%4.2%

2%

4%Shar

e of

c

0%

2%

2006 2007 2008 2009 2010 2011 2012

Non domestic (legal) Counterfeit and contrabandNon domestic (legal) Counterfeit and contraband

31.0 30.3 29.0 25.0 23.7 23.3 24.8

56.8 60.6 60.5 61.1 64.2 65.3 65.5

ND(L) volume (bn cigarettes)

C&C volume (bn cigarettes)


Source: (1) EU Flows Model 2006 – 2012

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALEU Price differentialsPrice gaps have narrowed between EU countries; however, prices in countries on the Eastern border remain up to 8 times lower

Map denotes Marlboro price per 20 cigarettesEnd of 2012(1) Finland

€5.50CountryEnd of

2011End of

2012Price

changeBelarus 0 58 1 08 86 4%

Country price comparison - Marlboro pack of 20 (€)

(a)

Estonia€3.30

17%

Sweden€6.69

Denmark

Norway€13.18

Russia€1.71Latvia

€3 16

Belarus 0.58 1.08 86.4%Moldova 1.05 1.39 32.4%Hungary 2.33 2.98 28.0%Ukraine 1.09 1.31 20.4%Turkey 3.25 3.90 20.0%Russia 1.43 1.71 19.8%Sweden 5.66 6.69 18.2%Norway 11.21 13.18 17.6%UK 8 26 9 54 15 4%

( )

UK€9.54 Poland

€3 08

Ireland€9.30

Lithuania€2.69

Denmark€5.63

Belgium€5.26

Netherlands€6.32

Luxembourg €4.60

€1.71Belarus€1.08(a)

€3.16UK 8.26 9.54 15.4%Serbia 1.66 1.91 15.4%Netherlands 5.47 6.32 15.4%Slovenia 3.20 3.60 12.5%Finland 5.00 5.50 10.0%Estonia 3.00 3.30 10.0%Spain 4.25 4.65 9.4%Albania 1.62 1.76 8.4%P l d 2 86 3 08 7 5%

France€6 60

Germany€5.26

€3.08

Czech Republic

€3.41(

Hungary€2.98

Slovakia€3.58

Sl i

Ukraine€1.31

Switzerland€6.53 Moldova

€1.39

Austria€4.50

Poland 2.86 3.08 7.5%France 6.20 6.60 6.5%Slovakia 3.37 3.58 6.3%Greece 3.50 3.70 5.7%Latvia 2.99 3.16 5.7%Romania 2.87 3.01 4.9%Denmark 5.37 5.63 4.8%Bosnia 1.79 1.87 4.6%

Key: €6.00 or more €5.00 to €5.99 Spain

€6.60Italy

€5.00

Slovenia€3.60

Romania€3.01

P t l

Bulgaria€2.61

Croatia€3.05

Serbia€1.91

Montenegro€2.20 Macedonia

B-H€1.87

Andorra€2.40

Luxembourg 4.40 4.60 4.5%Lithuania 2.58 2.69 4.5%Croatia 2.93 3.05 4.3%Belgium 5.05 5.26 4.2%Switzerland 6.34 6.53 3.0%Czech Republic 3.32 3.41 2.8%Cyprus 4.40 4.50 2.3%Ireland 9.10 9.30 2.2%

€4.00 to €4.99 €3.00 to €3.99 €2.00 to €2.99 Less than €2.00

Note (a) Based upon the price of a pack of 20 Kent cigarettes, a comparable premium brand, as Marlboro is not sold in Belarus

Source: (1) PMI Management and EU Tax Tables

Malta€4.20

€4.65

Greece€3.70

Cyprus€4.50

Portugal€4.20

Albania€1.76

Macedonia€1.92 Turkey

€3.90

Algeria €1 45

Italy 4.90 5.00 2.0%Germany 5.16 5.26 2.0%Bulgaria 2.56 2.61 2.0%Montenegro 2.19 2.20 0.5%Austria 4.50 4.50 0.0%Malta 4.20 4.20 0.0%Portugal 4.20 4.20 0.0%Algeria 1.46 1.45 -0.7%


Source: (1) PMI Management and EU Tax Tables

Canary Islands€2.30

€1.45Algeria 1.46 1.45 0.7%Macedonia 1.94 1.92 -0.9%Canary Islands 2.40 2.30 -4.2%

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALEU total consumptionNon-domestic volumes increased by 1.9% in 2012, while total cigarette consumption declined by 5.7%

800

Total cigarette consumption within the EU by type2007-2012(1)(a)

30.3 29.0 25.023.7

23.3

60.6 60.561.1

64.265.3

65.5

720.1 705.6 685.0648.9 628.9

593.0600

700

)

% Change2011-2012

C&C +0 4%

629.2 616.1 598.8

24.8

300

400

500

ume

(bn

ciga

rette

s) C&C +0.4%

Non-domestic (legal) +6.5%

Total non-domestic consumption +1.9%

Legal domestic consumption -7.0%598.8 561.0 540.4 502.7

100

200

300

Volu Total consumption -5.7%

02007 2008 2009 2010 2011 2012

Source: (1) KPMG analysis based on EPS, LDS and ND(L) research


Note: (a) Total cigarette consumption within the EU by type is shown from 2007, as Romania and Bulgaria were not included in the 2006 study.

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALTotal tobacco consumption in the EUThe decline in legal domestic cigarette sales by 6.3% was partly offset by an increase in non-domestic flows and OTP sales

European Union total cigarette consumption and OTP LDS (bn sticks) 2006-2012(1)(a)(b)

Legal domestic sales of manufactured cigarettes and OTP 2007-2012(1)(a)(b)

900

677.4 658.5633.7

595.0 576.2540.0600

700

800

alen

t)

91 89 8688 89

90

97 94 121127 136

145

817 800 806776 765

739

600

700

800

900

tes)

300

400

500

olum

e (b

n st

ick

equi

va

629 616 599 561 540 503

90

200

300

400

500

Vol

ume

(bn

ciga

rett

% Change 2011 2012% Change 2011 2012

96.8 94.4120.6 127.4 136.2 145.4

0

100

200

2007 2008 2009 2010 2011 2012

Vo

0

100

200

2007 2008 2009 2010 2011 2012

% Change 2011-2012 OTP (legal domestic sales) 6.8%

Non-domestic consumption 2.0%

Legal domestic consumption -7.0%

Total consumption (including OTP) -3.4%

% Change 2011-2012Cigarettes (Legal Domestic sales) -6.3%

OTP (Legal Domestic sales) 6.8%

Note: (a) OTP is defined as MYO, MYO volume tobacco, RYO tobacco and cigarillos as appropriate, whose cigarette equivalents d fi d 0 73 f t b i tt f MYO d 0 6 i tt f RYO d MYO l t b Thi



are defined as 0.73g of tobacco per cigarette for MYO and 0.6g per cigarette for RYO and MYO volume tobacco. This definition and conversion rates have been applied for Project Star 2012 and may differ in previous reports.

(b) Significant volumes of green leaf are understood to be consumed in Poland, Czech Republic, Hungary and Bulgaria which are not captured in the LDS data above.

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALOTP pricingIn most European markets, the price differential between OTP and manufactured cigarettes is significantg

Price differential between weighted average price of RYO 20 cigarette equivalents and weighted average price of a pack of 20 cigarettes(1)(2)(3)(a)(b)

Average RYO: 1.89(c) Average cigarette: 4 00(c)

2 22

1.81

1.35

1.05

Port gal

Hungary

Poland

Greece

cigarette: 4.00(c)

2.81

2.59

2.32

2.22

Italy

Austria

Spain

Portugal

3.28

3.25

2.99

2.91

Germany

Ireland

Luxembourg

Finland

4.23

3.58

3.44

3.43

United Kingdom

Belgium

France

Netherlands

€0.00 €0.50 €1.00 €1.50 €2.00 €2.50 €3.00 €3.50 €4.00 €4.50

Price differential, €, December 2012

Note: (a) Total tobacco market defined as total legal domestic sales of manufactured cigarettes and RYO cigarette equivalents (0.65 grams cigarette equivalent rate), with the price gap being defined as the cost between the weighted average price of pack of 20 and 20 roll-your-own cigarettes For Ireland no weighted average price of RYO was available so the


Source: (1) European Commission “Excise Duty tables”, January 2013(2) Italy, Ireland and Greece – PMI estimates(3) UK – KPMG estimate based on Euromonitor sales data

of pack of 20 and 20 roll-your-own cigarettes. For Ireland no weighted average price of RYO was available so the cheapest price of 20 cigarettes and cheapest RYO cigarette equivalent was used.

(b) Weighted average of European Commission excise duty tables. (c) Simple average across each country

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALOTP consumption and growth in the EUCountries with the largest growth vs 2011 were Ireland, Italy and Greece

OTP consumption, cigarette equivalent volumes 2012(1)(a)(b)

44.04550

14.9 14.1 13.1 12.1 10 615202530354045

uiva

lent

(bn)

12.1 10.66.9 6.5 6.1 4.8 3.7 2.4 1.8 1.1 0.9 0.8 0.5 0.5 0.3 0.1 0.1 0.0 0.0

05

1015

Ger

man

y

Fran

ce

herla

nds

Belg

ium

Spai

n

UK

Hun

gary

Italy

embo

urg

Gre

ece

Pola

nd

Portu

gal

Rep

ublic

Finl

and

Aust

ria

Den

mar

k

Cyp

rus

Irela

nd

Swed

en

Esto

nia

Slov

akia

Latv

ia

ithua

nia

Stic

k eq

OTP consumption growth 2011-2012(1)(a)(b)

Highest growth markets

G

Net

h H

Luxe

P

Cze

ch R D S L

27.5%17 1%

39.6%33.6%

21.5% 25.1%

40.0%

30%40%50%

-rate

1.4%5.8%

0.6% 3.4%8.7%

17.1%7.1% 9.0%

-1.1%

4.8% 5.0%n/a n/a n/a n/a

-30%-20%-10%

0%10%20%

YoY

Gro

wth

-29.5% -26.7%-40%-30%

Ger

man

y

Fran

ce

Net

herla

nds

Belg

ium

Spai

n

UK

Hun

gary

Italy

Luxe

mbo

urg

Gre

ece

Pola

nd

Portu

gal

zech

Rep

ublic

Finl

and

Aust

ria

Den

mar

k

Cyp

rus

Irela

nd

Swed

en

Esto

nia

Slov

akia

Latv

ia

Lith

uani

a


Note: (a) OTP is defined as MYO, MYO volume tobacco, RYO tobacco and cigarillos as appropriate, whose cigarette equivalents are defined as 0.73g of tobacco per cigarette for MYO and 0.6g per cigarette for RYO and MYO volume tobacco. This definition and conversion rates have been applied for Project Star 2012 and may differ in previous reports.


(b) Significant volumes of green leaf are understood to be consumed in Poland, Czech Republic, Hungary and Bulgaria which are not captured in the LDS data above

Cz


Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALEU total consumption The Baltic countries had the highest non-domestic and C&C incidence as a proportion of total cigarette consumptiong

Total cigarette consumption by type 2012(1)

5% 9%6% 3% 1%

7%1% 1% 1%

9% 10% 8%1% 3% 1% 7% 3% 2%

1% 0% 1% 3% 1%5% 1%

31% 27%20% 19% 17% 16% 16% 16% 13% 13% 12% 11% 11% 10% 9% 9% 8% 7% 7% 7% 4% 3% 2% 2% 2% 2% 1%

80%

100%

68%75% 72%

77% 81% 83%77%

86% 86% 87%80% 79% 82%

89% 88% 91% 85% 90% 91% 95% 97% 96% 94% 97% 93% 98%

3% 5%

40%

60%

tal c

onsu

mpt

ion Outflows

C&C

ND(L)

66% 68% 72%

4% 12% 13% 1% 1% 1% 3% 1% 2% 24% 14% 1% 2% 2% 5% 7% 1% 13% 8% 31% 14% 8% 17% 2% 37% 100% 4%0%

20%

Sha

re o

f tot LDC

-4% -12% -13% -1% -1% -1% -3% -1% -2% -24% -14% -1% -2% -2% -5% -7% -1% -13% -8% -31% -14% -8% -17% -2% -37% >-100% -4%

-40%

-20%

a a a d d K a e e d a y s a a n y m n a y al s k c g a

-200%

Latv

ia

Lith

uani

a

Est

onia

Irel

and

Fin

land UK

Bulg

aria

Fra

nce

Gre

ece

Pola

nd

Mal

ta

Ger

man

y

Net

herla

nds

Aust

ria

Rom

ania

Swed

en

Ital

y

Bel

gium

Spa

in

Slo

veni

a

Hun

gary

Por

tuga

Cyp

rus

Den

mar

k

Cze

ch R

epub

lic

Luxe

mbo

urg

Slo

vaki

a



PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALNon-domestic C&C consumption in the EUThe UK experienced the highest increase of C&C at 6.4 percentage points, followed by Greece and Italy at +3.3 and +3.2 points respectivelyy p p y

Percentage point change in counterfeit and contraband consumption incidence by country, 2011 vs 2012(1)

6.4%

6%

8%

3.3% 3.2% 2.8% 2.2%1.6% 1.5% 1.4% 1.3%

0.7% 0.3% 0.3% 0.3% 0.2% 0.1% 0.1%

0.0% -0.1% -0.2% -0.6% 1 0%2%

0%

2%

4%

6%

re o

f con

sum

ptio

n

0.6% -1.0% -1.4% -1.8% -1.8% -2.0%

-3.8%-4.7%-6%

-4%

-2%

UK

Gre

ece

Italy

Swed

en

Esto

nia

Belg

ium

Finl

and

Cyp

rus

Irela

nd

herla

nds

Slov

enia

Hun

gary

Spai

n

Pola

nd

Slov

akia

embo

urg

Fran

ce

Mal

ta

Portu

gal

Den

mar

k

Latv

ia

Rep

ublic

Aust

ria

Rom

ania

Ger

man

y

ithua

nia

Bulg

aria

Shar

Counterfeit and Contraband consumption incidence by country, 2012(1)

S B

Net

h S H S

Luxe

P D

Cze

ch R R G Li B

30.7%27 5%30%

35%

on

16.4%

13.4%8.5%

11.9%

19.7%

7 5%

16.9% 19.1%

11.0%

6 7% 4 1% 7.5%

13.0%15.7%

12.1%9.7% 9.3%

11.1%

27.5%

15.5%

10%

15%

20%

25%

30%

hare

of c

onsu

mpt

io

7.5%

2.5%

6.7% 4.1% %

0.8%2.0% 2.8% 2.4% 2.2%

0%

5%

UK

Gre

ece

Italy

Swed

en

Esto

nia

Belg

ium

Finl

and

Cyp

rus

Irela

nd

ethe

rland

s

Slov

enia

Hun

gary

Spai

n

Pola

nd

Slov

akia

uxem

bour

g

Fran

ce

Mal

ta

Portu

gal

Den

mar

k

Latv

ia

h R

epub

lic

Aust

ria

Rom

ania

Ger

man

y

Lith

uani

a

Bulg

aria

Sh



N Lu

Cze

c


Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALC&C inflows by destination regionsThe share of EU illicit cigarette consumption accounted for by the Southern European countries continued to rise in 2012

Share of total EU C&C inflows by destination regions 2006-2012(1) Finland

Total 56 2 60 6 60 5 61 1 64 2 65 3 65 5

19.4% 23.1%24.6%

31.3%32 1%

14.1% 13.9% 8.9% 10.3% 13.2%19.3% 22.8%

70%

80%

90%

100%

Netherlands

Sweden Estonia

Latvia

Total 56.2 60.6 60.5 61.1 64.2 65.3 65.5

66 5% 66 5%

32.1% 24.8% 21.8%

40%

50%

60%

70%

a

UKPoland

Denmark

Luxembourg

Ireland

Lithuania

66.5% 63.0% 66.5%58.4% 54.7% 55.9% 55.4%

0%

10%

20%

30%

2006 2007 2008 2009 2010 2011 2012

Belgium

France

GermanyCzech

Republic

AustriaHungary

Slovakia

Romania2006 2007 2008 2009 2010 2011 2012

BulgariaItaly

Slovenia

SpainPortugal Greece

Malta CyprusKey: Southern EU countries – Cyprus, Greece, Italy, Malta, Portugal and Spain

Eastern border EU countries – Bulgaria, Estonia, Finland, Hungary, Latvia, Lithuania, Poland, Romania and Slovakia Western and Central EU countries Austria Belgium Czech Republic Denmark France Germany Ireland Luxembourg Netherlands Slovenia Sweden and UK


Western and Central EU countries – Austria, Belgium, Czech Republic, Denmark, France, Germany, Ireland, Luxembourg, Netherlands, Slovenia, Sweden and UKSource: (1) KPMG analysis based on EPS, LDS and ND(L) research

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALC&C inflows by destination regions: Western EU countriesC&C flows to Western EU countries remained stable in volume; however, there was an increase to the UK from Eastern Europe and Spainp p

C&C inflows to Western EU countries 2006-2012(1)

11.1% 11.5%

12.4%

11.3% 11.3%11.9%

12.3%

12.0%

14.0%

50

60

Denmark

Netherlands

SwedenDuty Free

Russia4.4 billion

7 8 9.48.6

6.7 5.45.0 8.2

4.6 3.0 1.5

0.6 1.81.6 1.6

1.7 2.0 1.5

1.3 1.41.9 1.5

3.1 3.4 5.7

5.1 4.13.3 3.2

6.0%

8.0%

10.0%

30

40 % of consum

pte (b

n ci

gare

ttes)

a

UK

Belgium

Poland

Denmark

Luxembourg

Ireland Belarus

37.8 38.240.3

35.7 35.1 36.5 36.3 15.6 billion

12.1 10.4 11.5 12.7 13.1 14.0 11.5

8.5 10.011.5 9.2 9.3

10.710.3

7.8

2.0%

4.0%

10

20

ion

Volu

me

France

GermanyCzech

Republic

Austria

0.0%02006 2007 2008 2009 2010 2011 2012

Germany France

UK Netherlands

Austria Others

C&C share of total consumption

Spain4.0

billion

p

Key: Western EU countries Source countries with inflows of >0.5 billion cigarettes in 2012 –

total flows from highlighted source countries to Western Europe

Algeria


total flows from highlighted source countries to Western EuropeSource: (1) KPMG analysis based on EPS, LDS and ND(L) research

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALC&C inflows by destination regions: Eastern EU countries Eastern European countries’ C&C inflows declined, mainly as a result of lower flows into Bulgaria and Romania

Finland

R i

C&C inflows to Eastern EU countries 2006-2012(1)

g

16%30

Estonia

Latvia

Lith i

Russia

Duty Free

2 32.2

9.9% 8 7%9.5%

12.6%

15.4%12.7%

12.1%

10%

12%

14%

20

25

% of tet

tes) 19.2

20.6

Poland

Lithuania

Belarus

3 1

4.65.3 3.1

2.52.22.7

3.3 4.8

2.72.11.1

1.1

0.80.9

0.91.01.6

0.9

1.11.6

1.10.9

4.3

2.22.1

2.3

1.71.6

9.9% 8.7%

4%

6%

8%

10

15

otal consumptionV

olum

e (b

n ci

gare

11.0

14.014.9

16.214.3 7.2 billion

2.0 billion

Hungary

SlovakiaUkraine

Romania

Moldova3.8 4.7 4.9

7.1 5.8 6.7 6.2

2.2 3.1

0.00.62.3

0%

2%

0

5

2006 2007 2008 2009 2010 2011 2012

Poland Romania

3.0 billion

Bulgaria

SerbiaPoland Romania

Bulgaria Finland

Lithuania Others


Key: Eastern EU countries Source countries with inflows of >0.5 billion cigarettes in 2012 - total flows

from highlighted source countries to Eastern Europe


from highlighted source countries to Eastern EuropeSource: (1) KPMG analysis based on EPS, LDS and ND(L) research

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALC&C inflows by destination regions: Southern EU countries Southern European countries’ C&C inflows continued to increase, mainly as a result of a 50% increase in Italy between 2011 and 2012

C&C inflows to Southern EU countries 2006-2012(1)

y

6.5%

8.5%

6%

7%

8%

9%

20

24

28

% share of tte

s)

4 6

4.1

1 9 1 8

2.7

3.1

0 7 0.4 0.3

0.4

0.4

3.5%3.7%

2.4%2.9%

4.1%

3%

4%

5%

8

12

16

total consumption

Vol

ume

(bn

ciga

re

Duty Free

Belarus

8.0 8.4

6 3

8.5

12.6

14.9

4.0 4.32.0 3.0

4.5 4.87.3

2.1 1.8

2.11.9

1.84.61.2 1.9

0.71.0

1.80.7

0.50.3

0%

1%

2%

0

4

2006 2007 2008 2009 2010 2011 2012

Ukraine5.4

6.3

2.7 billion

2.1 billion

Italy Spain

Greece Others


Spain

Italy

GreecePortugal

Key: Southern EU countries Source countries with inflows of > 0.5 billion cigarettes in 2012 - total flows

from highlighted so rce co ntries to So thern E rope

MaltaCyprus

4.0 billionAlgeria1.4 billion


from highlighted source countries to Southern EuropeSource: (1) KPMG analysis based on EPS, LDS and ND(L) research

Unspecified

Canary Islands

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALC&C source countriesThe largest source countries of C&C are from outside the EU, predominantly Belarus, which grew by 3.1 percentage points vs 2011. Within the EU Poland, the Czech Republic and Spain

Main non-domestic outflow countries and outflows 2012(1)

continue to be major source countries

Total 56 2 60 6 60 5 61 1 64 2 65 3 65 5

Russia

Total 56.2 60.6 60.5 61.1 64.2 65.3 65.5

13.2%2 4%4.6%

6.4%5.5%

4.8%3.0%

1.4%2.3%

32.6% 29.1% 25.2%19.0% 15.3% 12.4% 9.7%

80%

90%

100%

C&C

Other EU

Spain

Czech Republic

Belarus

Poland

Luxembourg

15.8% 22.8% 26.2% 30.1%

7 4%6.5%

6.0%

4.8%4.5% 3.9%

2.4%

10.7%12.4%

10.6%

13.0%11.7%

12.9%3 %

2.6%

3.0% 2.5%

2.4%

9.3%7.0%

9.4%

50%

60%

70%

Perc

enta

ge o

f to

tal C

Poland

PMI counterfeit

Other non-EU

Ukraine

MoldovaHungary

Czech Republic

19 2% 18 3% 18.1% 13.6% 8.3%6.9%

10.4%

8.9%

9.6%11.3%

9.8%8.0% 6.7%

1.7%

2.7%

1.7%1.4%

2.3%2.7% 3.5%0.3%

0.7%6.9%

7.4%10.8% 9.6%

6.2% 16.4%14.9%

7.4%

10%

20%

30%

40% Unspecified

Canary Islands

Russia

Ukraine

Spain

Romania

Serbia0.2% 1.0% 2.7% 5.0% 7.0% 10.1%19.2%

13.4%18.3%

0%

10%

2006 2007 2008 2009 2010 2011 2012

Belarus

Canary Islands

Algeria


Canary Islands

Key: Source countries with outflows of > 0.5 billion cigarettes in 2012Source: (1) KPMG analysis based on EPS, LDS and ND(L) research

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALManufacturer consumption in the EUThe share of C&C accounted for by the big four manufacturers is significantly lower than their market share of legal domestic salesg

EU27 share of manufacturers by consumption type (LDS, C&C) 2012(1)(a)

Share of market Share of C&C

14.7%

8.2%

35.3%

70%

80%

90%

100%

22.2%

18.6%

15.2%

11.0%

40%

50%

60%

70%Others

JTI

Imperial

BAT

36.3%25.0%

13.5%

0%

10%

20%

30%PMI

0%Legal Domestic sales Counterfeit and Contraband

Source: (1) KPMG analysis based on EPS, LDS and ND(L) researchNote: (a) The counterfeit and contraband calculations are made on a brand basis with brands allocated to each manufacturer.

This creates limitations where there are non-EU brands manufactured by the big four manufacturers which are included in “others”. In addition, there may be minor changes between the big 4 manufacturers where brands have been

ll t d t th f t ith th l t h d l d i id h th f t d


allocated to the manufacturer with the largest share and may exclude incidences where another manufacturer produces the same brand in a different territory.


Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit whitesConsumption of Illicit Whites increased by 3% in 2012, representing over 24% of total C&C volumes in the EU

18

Consumption of Illicit White brands2006-2012(1)(a)

13.2

15.516.0

14

16

18

Other identified Illicit White brands

Gold Mount

Nz

0.20.2 0.20.2

0 80 20.70.8

0.7

3.2

4.3

5.55.2

9.2

13.212.7

10

12

aret

tes

(bn)

Raquel

Premier

Minsk

Fest

Jin Ling

1.92.6

2.7

2.2 2.01 5

0.5 1.21.5

0.40.8

1.00.30.6 0.9

0.2

0.70.4 0.80.2

0.02.0

4.1

6

8Cig

a Jin Ling

American Legend

Classic

0 21.0

3.44.6

3.32.5 2.20.4

1.0 0.91.5

1.6

0.7

1.5

0.2

1.1

1.8

1.4

4.1

0

2

4

0.202006 2007 2008 2009 2010 2011 2012

% of total EU C&C 2.4% 6.8% 15.3% 21.5% 19.8% 23.8% 24.3%


Note: (a) The analysis covers Illicit Whites brands as defined by PMI with at least 10 packs found in 2012. Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit WhitesGrodno tobacco is the fastest growing Illicit White manufacturer, with volumes increasing by 47% in 2012

Consumption of Illicit White brands by manufacturer2006-2012(1)(a)(b)(c)

15.516.0

14

16

18Other Illict White TMOs

Kaanee American Tobacco

Explosal Ltd.

Baltic Tobacco Factory

8.8

7.6

9.2

13.212.7

10

12

14

ette

s (b

n)

Grodno Tobacco

2.00.6

1.1

0.8

0.7

6.3

9.4 8.0

4 1

6

8Cig

ar

0 71.4

3.14.6

0 8

2.72.8

2.4

2.1

0.2

0.2

0.30.90.0

1.4

3.11.4

4.1

2

4

0.70.802006 2007 2008 2009 2010 2011 2012

Note: (a) The analysis covers Illicit Whites brands as defined by PMI with at least 10 packs found in 2012. (b) Consumption represents the total consumption of each of the company’s main brands, which may include packs

labelled as Unspecified or immaterial volumes from packs labelled with another TMO.(c) Illicit White Manufacturers represent manufacturers of Illicit White brands as indicated by PMI


(c) Illicit White Manufacturers represent manufacturers of Illicit White brands as indicated by PMI. Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit WhitesWhile Grodno Tobacco brands were present in 4 countries in 2009, they have become prevalent in 10 countries in 2012

Consumption of Grodno Tobacco brands2009(1)(a)(b)

Consumption of Grodno Tobacco brands2012(1)(a)(b)

Latvia LatviaEstonia

Czech Republic

Lithuania

Czech Republic

GermanyBelgium

UK

Lithuania

PolandPolandUK

Republic Republic

Italy

Hungary

SlovakiaFrance

Note: (a) The analysis covers Illicit Whites brands with at least 10 packs found in 2012. (b) Cities marked in these maps represent locations where Grodno Tobacco brands represented at least 1% of packs

collected in that city

Key: Grodno tobacco brands comprise greater than 0.5% of TC

Grodno tobacco brands comprise


collected in that city.Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

between 0.1% and 0.5% of TC

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit WhitesBelarus has become the largest source of Illicit White brands, particularly in Eastern Europe; Unspecified brands remain significant in Southern Europeg

Source country of Top 20 Illicit White brands2012(1)(a)

Russia

0.3

Duty Free

Belarus

Germany

Lithuania

Poland0.3

0.6

2.9UK

Duty Free Illicit White inflows into Italy are mainly

comprised of Jin Ling

Flows from Belarus are largely comprised of Grodno

Tobacco brands such as Fest, Minsk and Nz

Ukraine

1.1

0.4

0.3

0.8

France

Italy

GreecePortugal

0 5

Spain

0.7

0.7

Unspecified1.3

0.5Key: Destination Countries

Source countries with inflows of 0.3 and >0.3 billion cigarettes in 2012

Note: (a) Analysis represents flows for top 20 Illicit White Brands, representing over 80% of total illicit White volumes in 2012.

Source: (1) KPMG analysis based on EPS, LDS and ND(L)

0.7

Gold Mount and American Legend are the most

prominent Unspecified brands


( ) y , ( )research

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit WhitesPoland has the largest Illicit White consumption levels in Europe at 4.5 bn cigarettes; Italy and Greece have the next highest levels at 2.8 bn cigarettes and 1.7 bn cigarettes respectively g g g y

Illicit White consumption by country2012(1)(a)

4.5

2.83.0

3.54.54.5

1 7

2.0

2.5

s (b

n)

Illicit White consumption is1.7

1.0 1.0 0.91.0

1.5

Stic

ks Illicit White consumption is highly concentrated in the

top 10 geographies, representing over 90% of

total Illicit White consumption

0.8 0.80.7 0.6

0.4

0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

0.5

0.0

Note: (a) The analysis covers Illicit Whites brands as defined by PMI with at least 10 packs found in 2012


Note: (a) The analysis covers Illicit Whites brands as defined by PMI with at least 10 packs found in 2012. Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

PRIVATE AND CONFIDENTIALPRIVATE AND CONFIDENTIALIllicit WhitesItaly and Greece have seen among the fastest growth rates of Illicit White volumes in 2012

Change in Illicit White consumption2011/2012(1)(a)(b)

(1)(a)(b)Volume and growth of illicit white brands by country

Country 2011 2012Change 11/12

%

Finland

Key: 2011/2012 % Growth > 30% 2011/2012 % Growth 0 -30% 2011/2012 % Growth < 0%

Country 2011 2012 %Hungary 0.01 0.11 >100%Slovakia 0.01 0.07 >100%Italy 1.58 2.76 75%Malta 0.02 0.03 61%Greece 1.09 1.73 59%Spain 0 49 0 76 54%

Estonia

Lith i

Latvia

Sweden

Denmark

Spain 0.49 0.76 54%UK 0.64 0.95 49%Estonia 0.07 0.11 48%Slovenia 0.05 0.06 24%Latvia 0.35 0.40 13%Austria 0.02 0.02 8%Fi l d 0 01 0 01 5%

UK

Lithuania

PolandGermany

Ireland

Netherlands

Belgium

Czech Rep.Luxembourg

Finland 0.01 0.01 5%Lithuania 0.66 0.67 2%Portugal 0.00 0.03 -Cyprus 0.00 0.01 -Luxembourg 0.00 0.00 -Poland 4.62 4.48 (3)%

Hungary

Slovakia

Slovenia

Italy

FranceRomania

Bulgaria

Austria

Rep.

Portugal

Belgium 0.02 0.02 (6)%Ireland 0.17 0.15 (9)%Denmark 0.01 0.01 (12)%Netherlands 0.08 0.07 (14)%Sweden 0.06 0.04 (21)%Bulgaria 1.02 0.76 (26)%

Note: (a) The analysis covers Illicit Whites brands as defined by PMI with at least 10 packs found in 2012.

Greece

Spain

Cyprus

PortugalRomania 1.29 0.93 (27)%France 1.58 0.96 (39)%Czech Republic 0.30 0.17 (44)%Germany 1.36 0.64 (53)%Total 15.50 15.95 3%


(b) Illicit White volumes in Portugal, Cyprus and Luxembourg were zero in 2011, therefore it is not possible to calculate a percentage change year on year; countries where volumes have increased from zero have been coloured red, while countries which remained at zero have been coloured yellow.

Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

MaltaCyprus


Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix


PRIVATE AND CONFIDENTIAL

Project Star 2012: summary of key findings

■ Although manufactured cigarette consumption declined in the EU in 2012, Counterfeit & Contraband (C&C) and Non Domestic Legal (ND(L)) increased– Cigarette consumption declined by 5.7% to 593 billion cigarettes in the EU 27– C&C and ND(L) both increased in 2012, both in absolute terms and as a proportion of consumption

■ C&C inflows to Western EU countries remained stable in volume, however there was an increase in flows to the UK from Eastern Europe and Spain

C&C i fl t E t E t i d li d i l lt f l fl i t B l i d■ C&C inflows to Eastern European countries declined, mainly as a result of lower flows into Bulgaria and Romania

■ C&C inflows to Southern European countries increased, mainly as a result of a 50% increase in flows to Italy■ C&C inflows to Southern European countries increased, mainly as a result of a 50% increase in flows to Italy between 2011 and 2012

■ The largest source countries of C&C are from outside the EU

■ Growth in Illicit White brands has predominantly been driven by emerging brands originating in Belarus– Consumption of Illicit White brands increased by 3% to 16 billion sticks in 2012, representing over 24% of total

C&C l i th EU


C&C volumes in the EU


Agenda

Methodology


C&C levels

C&C flows

Illicit whites

Summary

Appendix



Individual country results

Copies of both this presentation and individual country results for 2012 are available for your collection after this meetingg

Country results provide an overview of the total consumption and legal sales trends and detail of both the counterfeit and contraband and non-domestic (legal) results


© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of© 2013 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG p (International).

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