Project SUN

A study of the illicit cigarette market in the European UnionA study of the illicit cigarette market in the European Union

2013 Results

Presenting today: Helen Young, Associate Director, KPMG Strategy Group

Helen YoungAssociate Director, KPMG Strategy Group, London UKLondon UK

■ Helen Young is an Associate Director in KPMG’s Strategy Group with over thirteen years experience in consumer goods, retail and industrial markets

■ Helen is focussed on anti-illicit trade services and has been leading the delivery of Project SUN since 2012, a multi year project assessing the size, evolution and flows of illicit tobacco across all of the EU member states

■ She has also led a similar study assessing the illicit tobacco trade in the Latin American region

■ In addition Helen has extensive strategy consulting and■ In addition, Helen has extensive strategy consulting and transactions experience

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The Project SUN methodology

Pan industry approach

■ In 2013, Project SUN (previously Project STAR) was commissioned jointly by the four major tobacco manufacturers. The input and provision of data sources from all four major cigarette manufacturers has provided KPMG with access to a much wider set of data sources, allowing for greater refinement of results

Objective evidence sourced from LDS and EPS results are i t t th

■ The KPMG EU Flows Model is a dynamic, iterative model that is based on legal domestic sales (LDS) and Empty Pack Survey (EPS ) results and is used to estimate overall manufactured cigarette volumes

■ The KPMG EU Flows model has been developed by KPMG to specifically measure inflows and outflows of input to the bespoke KPMG EU Flows Model

p y p ycigarettes between EU countries. It is an iterative data driven model that uses LDS and EPS results to estimate the volume of non-domestic outflows and inflows to and from each EU Member State

EPS results provide b t i di ti

■ EPS is the only market research method that relies purely on physical evidence, avoiding the variability of bi f d i i t i b d th da robust indication

of the incidence of nondomestic and counterfeit packs by country of origin

consumer bias found in interview-based methods

■ The EPSs are conducted by independent market research agencies on a consistent basis across all the EU markets, allowing for direct comparison of data and the identification of inflows and outflows between all of the countries analysed

■ Over 500,000 packs were collected in 2013 as part of this research

Primary market research, combined with tourism & t l t d d

■ The key objective of the market research programme undertaken by independent market research agencies is to estimate genuine, legal non-domestic tobacco purchases (including cross border shopping) in each market

■ ND(L) data used in the analysis in the 2013 Project SUN Report is based upon approximately 160,000 full travel trends and pricing changes, is used to estimate legal non-domestic cigarette purchases

( ) y j p p pp y ,interviews and over 14,000 net respondents.

■ Primary research is critical to deliver robust results as no other sources of sufficient detail and accuracy are available for legal cross border shopping

■ In addition to the research programme, ND(L) data has been adjusted by KPMG to reflect inbound visitor

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g ■ In addition to the research programme, ND(L) data has been adjusted by KPMG to reflect inbound visitor inflows and relative price changes

Project SUN 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

KPMG has developed and refined its methodology for estimating counterfeit and contraband incidence across the 28 EU k t i 2006

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markets since 2006

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

4© 2014 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.

Executive summaryProject SUN 2013 headlines

Counterfeit and contraband volumes declined as a percentage of overall

■ Overall volumes of counterfeit and contraband (C&C) consumption declined from 65.7 billion cigarettes to 58.6billion cigarettes. The C&C share of overall consumption fell from 11.1% to 10.5%. If these cigarettes had been sold legally in the countries where they were indentified the taxpercentage of overall

consumption in 2013If these cigarettes had been sold legally in the countries where they were indentified, the tax revenue would have been worth approximately €10.9 billion.

■ The C&C decline reflects a reduction of 3.9 billion cigarettes in the UK and 3.6 billion cigarettes in Italy, whilst in most countries, consumption of C&C products remained broadly static.

■ Greece experienced the highest increase in the overall volume of C&C product consumed at 26%■ Greece experienced the highest increase in the overall volume of C&C product consumed at 26%, resulting in C&C volumes rising to over 17% of overall consumption.

Consumption of Illicit Whites brands grew from 17.1 billion to 19 6 billion cigarettes in

■ Illicit Whites brands were identified in every EU country (except Luxembourg), many with unspecified or Duty Free labelling. The majority of Illicit Whites brands are manufactured by six manufacturers and distributed across Europe through sophisticated criminal supply chainsto 19.6 billion cigarettes in

2013, 33% of overall C&C consumption

manufacturers and distributed across Europe through sophisticated criminal supply chains.

■ The largest source of Illicit Whites was Belarus, where a large volume of brands were manufactured by the Grodno Tobacco Company.

Overall consumption of legally f t d i tt i th

■ Legal domestic consumption, the most significant proportion of total consumption in all markets, d li d b 7 5% L l d ti l h b i t d b b th th imanufactured cigarettes in the

EU declined by 7%declined by 7.5%. Legal domestic sales may have been impacted by both the economic environment within Europe and price rises. Unemployment rose in 21 of the 28 EU countries, whilst in over half the EU countries prices increased by more than 5%. In some countries there is evidence of consumers switching to other tobacco products (OTP).

L l f EU t b d B d l b t h d i l i d k t b 12 0% i 2013 ILevels of EU contraband consumption (excluding Illicit Whites) declined significantly, in the main being replaced by non-domestic legal (ND(L))

■ Border sales between cheaper and more expensively priced markets grew by 12.0% in 2013. In many areas with high volumes of border sales, prices in cheaper markets increased at a greater level than in more expensive markets, resulting in a lower price gap.

■ Countries with large populations close to the border with cheaper markets had the highest volume of non-domestic legal consumption These countries included the Netherlands Austria France and

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purchasesof non-domestic legal consumption. These countries included the Netherlands, Austria, France and Germany.

European market overview There are significant hotspots of C&C consumption across the EuropeanUnionUnion

Germany has the highest

Counterfeit and contraband consumption as a percentage of overall consumption2013(1)

Estonia

Finland

Sweden The Baltic countries on the E t b d f th EU

y gvolume of C&C in Europe,

driven by contraband volumes from Poland and Czech Republic and by

Illicit Whites from BelarusIreland has typically had high volumes of C&C from

LuxembourgLithuania

Latvia Denmark

NetherlandRepublic UK

Eastern borders of the EU have historically had the

highest levels of C&C as a proportion of total

consumption

Poland and Romania

Key: C&C Consumption Over 20%

15-20%

Poland

H

Czech Republic

Austria

Germany

Netherlands

Republic of Ireland

France

UK

Belgium

SlovakiaFrance has the highest percentage of C&C of large

W t E 10-15%

5-10%

0-5%

Non-EU Country

S i

Romania

Hungary

Croatia

Austria

ItalySlovenia

Bulgaria

Portugal

Western European countries, with large volumes originating from Algeria and cheaper markets in Eastern

Europe

SpainGreece

Portugal

CyprusMaltaGreece experienced the

Large volumes of C&C that enter Spain and Italy are

Illicit White brands

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phighest rise in C&C in 2013

Illicit White brandsSource: (1) KPMG EU Flows Model 2013.

European market overviewOverall consumption declined by 7% in 2013. For the first time since thestart of the study, C&C decreased by 11% in volume termsstart of the study, C&C decreased by 11% in volume terms

Total cigarette consumption within the EU by type 2007-2013(1)(a)(b)

30.3 29 0

60.6 60.561.1

720.1 705.6685.0

648.9628.9

593 7

700

800

30.3 29.025.0

23.723.3

24.827.8

64.265.3

65.758.6

593.7558.5

400

500

600

me

(bn

ciga

rette

s)

CAGR (%) 2007-2013 2012-2013 Counterfeit and contraband (0.5)% (10.6)%

Non-domestic legal (1 4)% 12 0%

629.2 616.1 598.8561.0 540.4

503.1 472.1

100

200

300Volu

m Non domestic legal (1.4)% 12.0%

Legal domestic consumption (4.9)% (7.5)%

Total (4.3)% (7.0)%

0

100

2007 2008 2009 2010 2011 2012 2013

Note: (a) The percentages above have been calculated without the inclusion of Croatia, however the overall volumes for 2013 include Croatia for the first time. Without Croatia total consumption would have been 551.5 billion, C&C 58.3 billion, ND(L) 27.7 billion and legal domestic consumption 465.6 billion.

(b) The availability of data from all manufacturers for the first time in 2013 has allowed for additional refinement of results in some countries. The net impact of this is to allocate an additional 1 billion to ND(L) from C&C Without these refinements C&C would be 59 6 billion and ND(L) 26 8 billion

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billion to ND(L) from C&C. Without these refinements C&C would be 59.6 billion and ND(L) 26.8 billion.Source: (1) KPMG EU Flows Model 2007 – 2013.

European market overview After years of growth, C&C declined as a share of total consumption in2013, while ND(L) continued to grow2013, while ND(L) continued to grow

ND(L) and C&C share of total consumption2006-2013(1)(a)(b)

8.3% 8.4% 8.6%8.9%

9.9%10.4%

11.1%10.5%

8%

10%

12%

%)

4.5%4.2% 4.1%

3.7% 3.7% 3.7%4.2%

5.0%

4%

6%

e of

con

sum

ptio

n (%

0%

2%

2006 2007 2008 2009 2010 2011 2012 2013

Shar

e

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

ND(L) and C&C volumes (bn cigarettes)

2006 2007 2008 2009 2010 2011 2012 2013ND(L) volume 31.0 30.3 29.0 25.0 23.7 23.3 24.8 27.8( )C&C volume 56.8 60.6 60.5 31.1 64.2 65.3 65.7 58.6

Note: (a) As previously noted, the availability of additional data sources has had a net impact of 1 billion sticks in favour of ND(L). Had this not been available, the overall C&C volume would have been 10.75% of total consumption and ND(L) 4.85%.

(b) 2006 calculation does not include Bulgaria and Romania

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(b) 2006 calculation does not include Bulgaria and Romania.Source: (1) KPMG EU Flows Model calculations 2006 – 2013.

European market overview Illicit Whites grew to 33% of overall C&C consumption in 2013

Counterfeit and contraband consumption by type2007-2013(1)(a)(b)

3.4

61.5 60.5 61.164.2 65.3 65.7

58.660

70

Conducting Project SUN on a pan-industry basis has allowed for

estimation of total counterfeit volumes for the first time in 2013(b)

58.9 55.553.3

54.350.6 48.6

35.6

30

40

50

bn c

igar

ette

s

for the first time in 2013(b)

14.7 17.1 19.610

20

30

Volu

me

b

2.6 5.0 7.8 9.914.7

02007 2008 2009 2010 2011 2012 2013

Illicit Whites Contraband Counterfeit

Note: (a) Overall decline in C&C includes the effect of availability of additional data sources as stated previously.(b) The Counterfeit volume reflects Counterfeit data from BAT Imperial Tobacco JTI and PMI but does not include data from other manufacturers

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(b) The Counterfeit volume reflects Counterfeit data from BAT, Imperial Tobacco, JTI and PMI, but does not include data from other manufacturers.Source: (1) KPMG EU Flows Model 2007 – 2013.

European market overview Hungary, Slovenia and Croatia had the highest price increases in the EU in2013 in order to comply with the minimum EU tax rate2013 in order to comply with the minimum EU tax rate

Price

Country price comparison

WAP, pack of 20 (€)Price

Country price comparison

WAP, pack of 20 (€)

Country End of 2012 End of 2013Price

change

Serbia 1.52 1.79 16.2%

Hungary 2.66 3.00 13.0%

Russia 1.16 1.31 12.7%

Slovenia 2 95 3 27 10 8%

Country End of 2012 End of 2013Price

change

Slovakia 2.72 2.87 5.7%

Poland 2.65 2.80 5.5%

Switzerland 6.00 6.33 5.5%

Ireland 8 47 8 92 5 3%Slovenia 2.95 3.27 10.8%

Croatia 2.46 2.70 10.0%

Ukraine 0.80 0.88 9.9%

Albania 1.27 1.39 9.1%

Bosnia 1.57 1.71 9.1%

Ireland 8.47 8.92 5.3%

Netherlands 5.03 5.29 5.1%

Cyprus 3.91 4.08 4.3%

Czech Republic 2.76 2.88 4.2%

Macedonia 1.24 1.29 3.8%

Finland 4.50 4.89 8.7%

Canary Islands 1.68 1.83 8.6%

UK 7.52 8.15 8.5%

Latvia 2.40 2.60 8.3%

Estonia 2.62 2.82 7.6%

Germany 4.88 5.02 2.8%

Luxembourg 3.84 3.95 2.8%

Belgium 4.77 4.88 2.3%

Denmark 5.26 5.33 1.3%

Portugal 3.85 3.90 1.3%

Greece 3.28 3.50 6.8%

Spain 4.03 4.30 6.7%

France 6.10 6.50 6.6%

Romania 2.64 2.81 6.5%

Lithuania 2 25 2 38 5 8%

g

Bulgaria 2.36 2.38 0.9%

Italy 4.56 4.58 0.4%

Malta 4.14 4.07 -1.6%

Sweden 6.02 5.91 -1.8%

Belarus 0 66 0 64 3 5%Lithuania 2.25 2.38 5.8%

Austria 3.95 4.18 5.7%

Belarus 0.66 0.64 -3.5%

Norway 12.14 11.66 -3.9%

Note (a) Manufacturer estimates used for countries not included in the EU Tax Tables(b) EU countries highlighted

Key EU Countries highlighted

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(b) EU countries highlighted Source: (1) EU Tax Tables

European market overview Price gaps have narrowed between EU countries; however, prices in non-EUcountries on the Eastern border remain up to 13 times lower than the EUcountries on the Eastern border remain up to 13 times lower than the EU

Map denotes weighted average prices for a pack of 20 cigarettesEnd of 2013(1)

Estonia€2 82

17%

Sweden€5.91

Finland€4.89Norway

€11.66

€2.82%

UKIreland€8 92

Lithuania€2.38

Denmark€5.33

Belgium€4 88

Netherlands€5.29

Luxembourg €3.95

Russia€1.31

€1.31Belarus€0.64

Latvia€2.60

€8.15

France

Germany€5.02

Poland€2.80

Czech Republic

€2.76

€8.92

Hungary€

Slovakia€2.87

€4.88

Ukraine€0.88

Switzerland Austria€4 18

Key: €6.00 or more €5.00 to €5.99 €4.00 to €4.99 €3.00 to €3.99

€2 00 t €2 99

Spain

€6.50Italy

€4.58

€3.00Slovenia

€3.27Romania

€2.81

€6.33

Portugal

Bulgaria€2.38

Croatia€2.70

Serbia€1.79

Macedonia

B-H€1.71

€4.18 €2.00 to €2.99 Less than €2.00

Malta€4.07

€4.30

Greece€3.50

Cyprus€4.08

Portugal€3.90

Albania€1.39

€1.29

Canary Islands€1.83

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Note (a) Manufacturer estimates used for countries not included in the EU Tax Tables Source: (1) EU Tax Tables

European market overview The key C&C consumption markets of Germany, France and Poland were stable.Declines in Italy and UK were offset by an increase in Spain and Greece. The main

t t i B lsource country to increase was BelarusC&C volume by source country2006-2013(1)

Conducting Project SUN on

C&C volume by destination country2006-2013(1)

13.6 12.456.860.6 60.5 61.1

64.2 65.3 65.7

58.660

70

12.711.5 11.3

3 456.8

60.6 60.5 61.164.2 65.3 65.7

58.660

70

a pan-industry basis has allowed for estimation of

total counterfeit volumes for the first time in 2013(b)

4 69 48.6 6.7

5 4

5.08.2

4 21.21.9

0.7 1.01.8

2.7 3.1

3.94.04.3 2.0 3.0 4.5

4.8 7.3

3.72.2 3.1 4.6 5.3

3.12.5

2.917.4

15.8 16.0 14.917.2

12.4

40

50

n ci

gare

ttes) Other EU

Romania

Italy

Greece10.5 8.1 11.1

5.7 5.4 5.86.9

6.35.2 4 4

0.30.4

0.81.1

1.5 1.5

0.91.7 1.00.8

1.51.7 2.3

1.4 3.2 2.0 4.9 8.5 13.8 14.7

17.8

8.210.6 10.7 11.1

8.0

3.4

40

50

ciga

rett

es

Counterfeit

Other non-EU

Unspecified

Canary Islands

AlgeriaNon EU

8.5 10.011.5 9.2 9.3

10.710.3 9.6

3.8 4.74.9 7.1 5.8

6.76.2 6.12.1 1.8

2.1 1.9 1.8

4.64.1 4.47.8

9.4 5.4 4.2

10

20

30

Volu

me

(bn Greece

UK

Spain

Poland

France4 2 3 65 1

4.2 5.7 2.9 1.90.9 1.5

17.8 17.6 15.311.6 9.8 8.1 6.5

6.1

0.10.6

1.6 3.2 4.6 6.6

6.9

11.1 8.7 5.4 4.5

1.3

5.2 4.4

3.02.41.2

10

20

30

Vol

ume

bn

Russia

Ukraine

Belarus

Other EU

SpainEU

12.1 10.4 11.5 12.7 13.1 14.0 11.5 11.3

0

10

2006 2007 2008 2009 2010 2011 2012 2013

Germany5.8 7.5 6.4 7.9 7.5 8.4 8.6 5.51.4

1.8 1.5 1.5 3.0 4.2 3.62.5

5.1 5.70.4

0

10

2006 2007 2008 2009 2010 2011 2012 2013

p

Czech Republic

Poland

Almost half of C&C

EU

Almost half of C&C manufactured cigarettes are

consumed within three countries in Europe

The growth in “unspecified” as a source of C&C is the result of greater volumes

being sold with no taxstamps and as Illicit Whites

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Source: (1) KPMG EU Flows Model 2007 – 2013.

European market overview A greater proportion of counterfeit and contraband now originates from unspecifi edsources along with Belarus, Russia and North African countriessources along with Belarus, Russia and North African countries

Major C&C inflows and source countries 2013(1)

Whilst there is a 2.5 billion Belarus has become the

largest C&C source

Russia

flow from Poland to Germany, there is also a significant C&C flow into

Poland from Belarus

country, with many Illicit Whites brands

3 0 billi

BelarusPoland

UK

Germany 5.5 billion 6.9 billion

Germany has the highest

3.0 billion

Romania

UkraineCzech Republic

France

1.3 billion billion

2.5 billion

16% of C&C in Romania is counterfeit from Ukraine, with an

Germany has the highest amount of C&C in Europe by volume, driven by contraband

volumes from Poland and Czech Republic and Illicit

Whites from Belarus

Spain

Greece

Italy,

additional 50% accounted for by Illicit Whites

Canary Islands

AlgeriaUnspecified

Gibraltar

1.2 billion

2.4 billion

High volumes of unspecified packs enter Italy and Greece from unidentifiable sources, which are Illicit Whites

The flow from Algeria to France doubled in

2013

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2013Source: (1) KPMG EU Flows Model 2013.

European market overview 11 of the 28 EU markets experienced a decline in illicit cigarette consumption as apercentage of overall consumption in 2013percentage of overall consumption in 2013

C&C consumption incidence by country 2013(1)

1% 8.8%35%

% % 4% 1% 7% 7% 4.5%

4.7% 6.

4% 7.1%

7.6%

8.0% 8.8% 10

.2%

10.3

%

10.7

%

10.9

%

11.3

%

13.9

%

14.4

%

15.4

%

15.4

%

17.8

%

18.2

%

18.6

%

21.1

% 27. 28

10%15%20%25%30%

1.7%

1.9%

2.4 3.1

3. 3. 4 4

0%5%

Slov

akia

Portu

gal

uxem

bour

g

ch R

epub

lic

Den

mar

k

Cro

atia

Cyp

rus

Italy

Aust

ria

Slov

enia

Belg

ium

Hun

gary

Spai

n

UK

Net

herla

nds

Swed

en

Rom

ania

Ger

man

y

Pola

nd

Mal

ta

Fran

ce

Finl

and

Gre

ece

Bulg

aria

Esto

nia

Irela

nd

Lith

uani

a

Latv

ia

3.9% 4.4%6%

Percentage point change in C&C consumption incidence by country 2012 vs. 2013(1)

L

Cze

c N

0.9%

-0.9%

0.5% 0.9% 1.3%n/a

2.0%

-3.8%-3.4%

0.5% 0.0%1.2%

-0.7%-1.7%

1.6%0.2%

0.9%2.3%

-0.4%-1.5%

2.7%

-1.2%

2.0%

-0.4%-1.8%

6%-4%-2%0%2%4%

-6.2%-8%-6%

Slov

akia

Portu

gal

Luxe

mbo

urg

zech

Rep

ublic

Den

mar

k

Cro

atia

Cyp

rus

Italy

Aust

ria

Slov

enia

Belg

ium

Hun

gary

Spai

n

UK

Net

herla

nds

Swed

en

Rom

ania

Ger

man

y

Pola

nd

Mal

ta

Fran

ce

Finl

and

Gre

ece

Bulg

aria

Esto

nia

Irela

nd

Lith

uani

a

Latv

ia

14© 2014 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.

Cz

Source: (1) KPMG EU Flows Model 2007 – 2013.

European market overview Key ND(L) flows were from Poland and Czech Republic to neighbouring westernEuropean countriesEuropean countries

ND(L) consumption incidence by country 2013(1)

10.

10.6

11.3%

12.1%

14%

0.

0.8

1.0

1.0

1.0

1.1

1.1

1.1

1.4 %

1.4%

1.5%

1.9%

2.2%

2.3%

2.4%

2.3%

2.6%

2.6%

3.7%

4.3%

5.7%

5.8%

7.2%

9.8%

.4%

%

4%6%8%

10%12%

.4%

8%

0% 0% 0% % % % % % % %

0%2%

Portu

gal

Hun

gary

Mal

ta

Pola

nd

Gre

ece

Italy

Bulg

aria

Slov

akia

Cyp

rus

Rom

ania

Cro

atia

ch R

epub

lic

Latv

ia

Den

mar

k

Lith

uani

a

Spai

n

Slov

enia

Swed

en

Esto

nia

UK

Luxe

mbo

urg

Finl

and

Irela

nd

Fran

ce

Ger

man

y

Belg

ium

Aust

ria

Net

herla

nds

Percentage point change in ND(L) consumption incidence by country 2013(1)

Cze

c L N

2.9%3.6%

3.2%3%4%

-0.1%

0.3%

-0.4%-0.3%-0.1%

0.1%

0.0%

0.1% 0.3% 0.0% n/a

0.9%

-0.8%-1.0%-0.4%

0.7%

-0.1%

1.6%1.1%

-0.3%

1.2%1.8%

2%-1%0%1%2%3%

1.0%

-2.4%-1.7% -2.0%-3%

-2%

Portu

gal

Hun

gary

Mal

ta

Pola

nd

Gre

ece

Italy

Bulg

aria

Slov

akia

Cyp

rus

Rom

ania

Cro

atia

ech

Rep

ublic

Latv

ia

Den

mar

k

Lith

uani

a

Spai

n

Slov

enia

Swed

en

Esto

nia

UK

Luxe

mbo

urg

Finl

and

Irela

nd

Fran

ce

Ger

man

y

Belg

ium

Aust

ria

Net

herla

nds

15© 2014 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.

Cz

Source: (1) KPMG EU Flows Model 2007 – 2013.

European market overview Non-domestic legal consumption increased as a result of greater border sales between markets with large price differentialsbetween markets with large price differentials

Major border sales points(1)

Luxembourg€3.95

Poland€2.80

Germany€5.02

Belgium

Netherlands€5.29UK

€8.15

3.4 billion

0.4 billion

3.9

Key: Border sales countries Higher priced country

Lower priced countryHungary

€3.00

Czech Republic€2.88

Slovenia

Austria€4.18

€4.88

France€6.50

1.8 billion

0.5 billion

3 9billion

0.7 billion

0.3 billion

0.4 billion

Slovenia€3.27

1.5 billion

billion

Spain€4.30

16© 2014 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.

Source: (1) KPMG analysis of Non-domestic legal research

Illicit WhitesTotal consumption of Illicit Whites increased by 22% in 2013, representing 33% of total C&C volumes in the EU. The largest Illicit Whites brand is Fest, which increased it l b 44%its volumes by 44%

25

Consumption of Illicit Whites brands2006-2013(1)(a)

Top Illicit Whites brand growth

Brand 2012-13%F t 44%

19.620

25 Fest 44%Jin Ling 8%American Legend (5)%Ducal 81%Gold Mount 5%NZ 32%

7.7

8.714.7

17.1

15

Cig

aret

tes

(bn) Other

Premier

Minsk

RGD

Raquel

Raquel (11)%RGD 541%Minsk (21)%Premier (17)%

0 1 0 50.98

0 00.9 0.8

0.86

0 0

0.2 0.7

0.92

0 2

0.40.8

0.75

0 0

0.00.1

0.70

0.2

0.81.0

0.77

0.2 0 3

0.6

0.9

0.72

2.34.8

6.7

5.0

7.8

9.9

5

10

Raquel

Nz

Gold Mount

Ducal

American Legend

CAGR (%) 2007-13 2012-13Illicit Whites 40% 15%

0.0 0.0 0.0 0.2 0.5 1.2 1.5 2.100.0 0.7

2.6 2.7 2.22.0 1.5

1.66

0.00.4

1.01.9

0.91.5 1.6

1.49

0.0

0.0

0.0

0.1

0.0

0.5 0.5

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.2

0.2

0.20.7

0.0

0.0

0.0

0.00.0

0.0

0.0

0.0

0.20.4

0.0

0.0

0.0

0.3

0.1

1.2

1.2

0.1

2.6

0

5

2006 2007 2008 2009 2010 2011 2012 2013

Jin Ling

Fest

Note: (a) Our definition of Illicit Whites has been updated in 2013 to the ITIC definition (shown in the Glossary). We have updated our Illicit Whites analysis from prior years in reflection of this and have applied this definition consistently over the period shown resulting in some updates to Illicit White volumes from prior years

% of total EU C&C

0.2% 4.3% 8.3% 12.7% 15.5% 22.6% 26.0% 33.5%

17© 2014 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.

applied this definition consistently over the period shown, resulting in some updates to Illicit White volumes from prior years.Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

Illicit WhitesGrodno Tobacco remained the largest Illicit Whites trademark owner in 2013 whilst Baltic Tobacco increased volumes by 19%Baltic Tobacco increased volumes by 19%

Consumption of Illicit Whites brands by trademark owner2006-2013(1)(a)

25

19.620

25

Other Illict White TMOs

0 90.9

5 2

5.2

6.114.7

17.1

15

Cig

aret

tes

(bn)

Kaane American International Tobacco

China National

Explosal Ltd.

H. Van Landewyck GMBH

Karelia Tobacco

Illicit Whites trademark owner growth

Trademark owner 2012-13%Grodno Tobacco 9%2.41.8

1.91.7

0.9

1.11.5

0 3

0.6

1.11.3

0.1 0 1

0.1

0.3

0.9

0.9

0.8

1.63.9

5.2

5 0

7.8

9.910

Karelia Tobacco

Baltic Tobacco Factory

Grodno Tobacco

Grodno Tobacco 9%Baltic Tobacco Factory 19%Karelia Tobacco (9)%H. Van Landewyck GMBH 27%Exposal Ltd 12%China National 161%0.1 0.7 1.4

3.24.6 5.0

0.82.7

2.82.4

2.1

2.0

0.00.6

1.2

2.1 1.1

0.1

0.2

0.20.1

0.2

0.2

0.30.9

0.0

0.1

0.1

0.9

0.7

0.1

2.6

5.0

0

5

2006 200 2008 2009 2010 2011 2012 2013

Note: (a) Our definition of Illicit Whites has been updated in 2013 to the ITIC definition (shown in the Glossary). We have updated our Illicit Whites analysis from prior years in reflection of this and have applied this definition consistently over the period shown resulting in some updates to Illicit White volumes from prior years

Kaane American International Tobacco 5%2006 2007 2008 2009 2010 2011 2012 2013

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applied this definition consistently over the period shown, resulting in some updates to Illicit White volumes from prior years.Source: (1) KPMG analysis based on Empty Pack Surveys, legal domestic sales and non-domestic (legal) research.

Illicit WhitesPoland had the highest level of Illicit Whites consumption in 2013. 15 out of 28 EU markets experienced a growth in Illicit Whites consumption in 2013markets experienced a growth in Illicit Whites consumption in 2013

4.04 04.5

Illicit Whites consumption by country 2013(1)(a)

2.82.5

1.61.4 1.3

1.1 1.0 0.9 0.80.5 0.5

0 2 0 2 0 21.01.52.02.53.03.54.0

Cig

aret

tes

(bn)

0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.00.00.5

Pola

nd

Gre

ece

Spai

n

Bulg

aria

Ger

man

y

Italy UK

Fran

ce

Rom

ania

Lith

uani

a

Hun

gary

Latv

ia

Irela

nd

Esto

nia

Cro

atia

zech

Rep

ublic

Slov

akia

Swed

en

Net

herla

nds

Belg

ium

Portu

gal

Slov

enia

Aust

ria

Mal

ta

Finl

and

Den

mar

k

Cyp

rus

Luxe

mbo

urg

0.6 0.50.5

0.30.4

0 40.60.8

n)

Cz

Volume change in Illicit Whites consumption by country 2012 vs. 2013(1)(a)

0.1 0.1

-0 5

0.0 -0.1

0.3

0.1 0.1 0.1 n/a 0.0 0.1 0.1 0.0

-0.1

0.0

-0.1

0.0

-0.1 0.0

0.0 0.0 0.0

0.0

-0.6-0.4-0.20.00.20.4

Cig

aret

tes

(bn

0.5-0.8

Pola

nd

Gre

ece

Spai

n

Bulg

aria

Ger

man

y

Italy UK

Fran

ce

Rom

ania

Lith

uani

a

Hun

gary

Latv

ia

Irela

nd

Esto

nia

Cro

atia

Cze

ch R

epub

lic

Slov

akia

Swed

en

Net

herla

nds

Belg

ium

Portu

gal

Slov

enia

Aust

ria

Mal

ta

Finl

and

Den

mar

k

Cyp

rus

Luxe

mbo

urg

19© 2014 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.

Note: (a) Our definition of Illicit Whites has been updated in 2013 to the ITIC definition (shown in the Glossary). We have updated our Illicit Whites analysis from prior years in reflection of this and have applied this definition consistently over the period shown, resulting in some updates to Illicit White volumes from prior years.

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

Illicit WhitesBelarus continues to be the largest known source country of Illicit Whites brands, which are mainly manufactured by Grodno Tobacco Companywhich are mainly manufactured by Grodno Tobacco Company

Source country of Top 5 manufacturers2013(1)(a)(b)

17%

Russia%

Poland

Lithuania

Belgium

Netherlands

Luxembourg

2.6 billion

0.7 billion0.9 billion

Belarus

Grodno TobaccoB lti T b F t

Key: Destination Countries Source countries of the top 5 manufacturers with outflows of >0.5bn cigarettes per

destination country in 2013France

Germany

Poland

HungaryRomania

1.3 billion 0.6 billion

Baltic Tobacco FactoryKarelia TobaccoH. Van Landewyck GMBHExplosal Ltd.

Spain

Greece

RomaniaCroatia

0.7 billion

Note: (a) Analysis represents flows for brands of the top 5 manufacturers and from unspecified markets, representing over 60% of total illicit White volumes in 2013

Cyprus

0.6 billion

0.6 billion

20© 2014 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.

of total illicit White volumes in 2013Source: (1) KPMG analysis based on EPS, LDS and ND(L) research

Illicit WhitesWhile Grodno Tobacco brands were found in 4 countries in 2009, its brands havespread further West, becoming prevalent in 15 countries in 2013spread further West, becoming prevalent in 15 countries in 2013

Consumption of Grodno Tobacco brands 2013(1)(a)(b)

Consumption of Grodno Tobacco brands 2009(1)(a)(b)

Finland

Latvia

Lithuania

Estonia

Latvia

Lithuania

Sweden

Denmark

UK Poland

Czech Republic

Lithuania

UK Poland

SlovakiaCzech

Republic

Germany

Lithuania

Italy

Hungary Romania

GreeceGreece

Key: Grodno tobacco brands comprise greater than 0 5% of total consumption

Note: (a) The analysis covers Illicit Whites brands found in 2009 and in 2013(b) The number of dots marked represent the varying levels of consumption in each country

21© 2014 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.

Key: Grodno tobacco brands comprise greater than 0.5% of total consumption Grodno tobacco brands comprise between 0.1% and 0.5% of total consumption

(b) e u be o dots a ed ep ese t t e a y g e e s o co su pt o eac cou t y(c) Grodno brands in the EU consist of Fest, NZ, Minsk, Premier, Queen, Magnat and VIP

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

Illicit WhitesEastern European and Scandinavian countries have seen the fastest growth of IllicitWhites volumes in 2013Whites volumes in 2013

Change in Illicit Whites consumption2012/2013(1)(a)(b)

Fi l d

Volume and growth of Illicit Whites brands by country

Country 2012 2013Change 2012-

13%Share of

consumption

Estonia17%

Sweden

FinlandCountry 2012 2013 13% consumptionHungary 0.12 0.52 >100% 5.8%Finland 0.01 0.03 >100% 0.6%Slovakia 0.04 0.10 >100% 1.5%Slovenia 0.02 0.05 >100% 1.5%Czech Republic 0.09 0.15 70% 1.1%

UKPoland

Ireland

LithuaniaDenmark

Belgium

Netherlands

Luxembourg

LatviaEstonia 0.12 0.19 64% 10.3%Ireland 0.15 0.23 57% 5.0%Romania 0.60 0.93 54% 3.5%Bulgaria 1.10 1.64 50% 11.9%Germany 0.93 1.39 49% 1.4%Sweden 0 07 0 09 40% 1 5%

France

Germany

Czech Republic

Hungary

Slovakia

Slovenia RomaniaSwitzerland

Austria

Key: 2012/2013 % Growth > 30%

Sweden 0.07 0.09 40% 1.5%Spain 1.83 2.45 34% 4.9%Latvia 0.40 0.50 24% 21.1%Denmark 0.02 0.02 19% 0.4%Cyprus 0.01 0.01 18% 0.6%Lithuania 0.67 0.76 13% 21.2%

Spain

ItalySlovenia Romania

Portugal

BulgariaCroatia

Key: 2012/2013 % Growth > 30% 2012/2013 % Growth 0 -30% 2012/2013 % Growth < 0%

Greece 2.63 2.76 5% 12.2%Belgium 0.05 0.06 3% 0.5%Poland 3.87 3.99 3% 9.1%Croatia n/a 0.17 n/a 2.5%UK 1.06 1.06 (1)% 2.5%F 1 08 1 03 (5)% 1 6%

Malta

Greece

Cyprus

Note: (a) Our definition of Illicit Whites has been updated in 2013 to the ITIC definition (shown in the Glossary). We have updated our Illicit Whites analysis from prior years in reflection of this and have applied this definition consistently over the periodshown, resulting in some updates to Illicit White volumes from prior years.

France 1.08 1.03 (5)% 1.6%Malta 0.04 0.04 (5)% 7.7%Italy 1.84 1.30 (30)% 1.7%Netherlands 0.12 0.06 (48)% 0.5%Austria 0.09 0.04 (59)% 0.3%Portugal 0.13 0.05 (60)% 0.5%

22© 2014 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.

g y(b) Illicit Whites volumes in Croatia were not identified in 2012, 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.

Portugal 0.13 0.05 (60)% 0.5%Luxembourg 0.01 0.00 (100)% 0.0%Total 17.11 19.61 15%

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The KPMG name, logo and “cutting through complexity” are registered trademarks , g g g p y gor trademarks of KPMG International Cooperative (KPMG International).