Welcome to TMA’s 94 th Annual Meeting & Conference May 18, 2009 Williamsburg, Virginia

1. Welcome to TMA’s 94th Annual Meeting & ConferenceMay 18, 2009 Williamsburg, Virginia

2. Farrell Delman President Tobacco Merchants Association TMA’s 94th Annual Meeting & ConferenceMay 18, 2009 Williamsburg, Virginia

3. SCHIP FDA FCTC RECESSION

4. Conference Overview • Some Key Trends • The WHO’s Framework Convention • SCHIP • FDA

5. Conference Overview • Some Key Trends • The WHO’s Framework Convention • SCHIP • FDA

6. World CigaretteProduction & Consumption(Billions of Pieces) Source: USDA-FAS, TMA Estimates

7. World (excluding China)Cigarette Prod. vs. Cons.(Billions of Pieces) Source: USDA-FAS, TMA Estimates

8. TAXES … SMOKING BANS … NO ADVERTISING

9. POINT-OF-SALE AD BANS … KIDSIN CARS … OUTDOOR SMOKING

10. Sales Trends: Shorter Cigarettes Marlboro 72’s(Philip Morris USA and PMI)

11. Sales Trends: Smokeless Products Around the World Sweden United States India

12. The E-Cigarette Freedom e-Cigarette-USA Ruyun Equazcion

13. China’s Cigarette Market(Billions of Pieces) The China National Tobacco Corp. (CNTC) is the largest cigarette producer in the world and China is nearing 40% of the world’s consumption Source: CNTC

14. China vs. World Cigarette Consumption Forecasts(Billions of Pieces) Source: TMA Estimates

15. A Chinese WallAgainst Cigarette Imports (% of Total) 1988 1998 2008 15.99 bn(1.02%) 3.42 bn(0.21%) 3.50 bn(0.16%) 1,557.08 bn(98.98%) 2,195.74 bn(99.84%) 1,655.3 bn(99.79%) Since Joining the WTO in 1997, China’s Market is as Closed as Ever Source: TMA.org, CNTC

16. Sales Trends: Cigars(Billions of Pieces) Source: TMA International Issues Monitor

17. Sales Trends: Roll-Your-Own(Billions of Pieces) Source: TMA International Issues Monitor

18. Sales Trends:Slim/Super Slim Cigarettes Virginia Slims(PM USA &PM Int’l) Sobranie(JT/Gallaher) Vogue (JT) ESSE(KT & G) Led by Esse, Slims had 37.6% of the Korean market in 2007 and are projected to hit 59.2% by 2012; Korean slim exports grew from 6 mn pieces in 2001 to 10 bn in 2007

19. Next Stops for Public Health? Fast Food Obesity Big Pharma Alcohol

20. Conference Overview • Some Key Trends • The WHO’s Framework Convention • SCHIP • FDA

21. U.S. Ratification of the FCTC As of today, 168 nations or parties have signed the FCTC, while 164 have ratified it. The United States signed the FCTC on May 10, 2004, but has not yet ratified it.

22. FCTC - Timeline May 1999: The 52nd World Health Assembly backs a resolution which calls for the development of a Framework Convention on Tobacco Control. October 1999:1st session of FCTC Technical Working Group October 2000: Public hearings on FCTC held 1st session of Intergovernmental Negotiating Body held March 2003:WHO members draft FCTC text May 2003: 192 nations adopt FCTC text at WHO’s 56th Assembly October 2004: 1st TobReg Meeting April 2005: 1st TobLabNet Meeting Feb. 2006: 1st Conference of the Parties [COP] Feb. 2008:1st session of INB to negotiate protocol on illicit trade March 2009:4th TobLabNet meeting held in Rio, Brazil June 2009: 3rd session of INB to be held in Geneva 4Q10:4th session of the COP to be held in Uruguay

23. FCTC: Articles 9 and 10 Article 9: Tobacco Product ContentCOP 3 recommended to submit a report at COP 4 which: Identifies best practices in reporting to regulators regarding content, emissions and product characteristics Validate, within 5 years, the analytical chemical methods for testing and measuring cigarette content and emissions • Article 10: Tobacco Product Disclosure COP 3 recommended to submit a report at COP 4 which: • Collects and analyzes information on legal cases related to tobacco product disclosures

24. FCTC: Article 11 • Tobacco Product Packaging and LabelingThe COP 3 recommends: • Well-designed health warnings and messages • Large picture warnings located on principal display areas • The use of color rather than just black & white along with relevant qualitative statements to be displayed on each pack (or package) about the emissions of the tobacco Nations should also consider adopting measures to restrict or prohibit the use of logos, colors, brand images or promotional information on packaging other than brand names and product names displayed in a standard color and font style (plain packaging).

25. FCTC: Article 15 - Illicit Trade INB -3 Protocol Now Being Developed Defines “Illicit” as Smuggling Illicit Manufacturing Counterfeiting Create Practical T&T System (s) Cases / Pallets vs. Cartons vs. Packs “Sales only allowed in X Country/Province” To Determine Point of Diversion Monitoring & Reporting System (s) to Track the Product Movement through Distribution Authorized Enforcement Access to commercial shipment data bases

26. Mandates Cooperation & Data Sharing Among National & International Agencies (AP) Monitor & Collect Data on Cross-border trade (not national data alone) As well as all product “moving under suspension of taxes or duties within its jurisdiction” Provide COP Reports Requires destroying counterfeit & contraband product and machinery used to produce it and the confiscation of ill-gotten gains Encourages Nations to Enact Penalties and Remedies, including licensing, to prevent illicit trade “including counterfeit and contraband” (AP) FCTC: Article 15 - Illicit Trade

27. U.S. Ratification of the FCTC FCTC Checklist:  (Article 5) General Obligations (Article 6) Price and Tax Measures (Article 8) Protection from ETS (Article 9) Contents of Tobacco Products [FDA]  (Article 10) Tobacco Product Disclosure [FDA] (Article 11) Packaging & Labeling of Tobacco Products [FDA] (Article 12) Education, Communication, Training & Public Awareness (Article 13) Tobacco Advertising, Promotion & Sponsorship [FDA] (Article 15) Illicit Trade in Tobacco Products [FDA] (Article 19) Liability

28. Conference Overview • Some Key Trends • The WHO’s Framework Convention • SCHIP • FDA

29. US Federal Excise Taxes on Tobacco Products First Implemented 1862: Large Cigars 1865: Cigarettes 1897: Little Cigars (Under 3 pounds per 1,000) 1917: Pipe, Snuff and Chewing Tobacco 1965: Pipe, Snuff and Chewing tax eliminated 1989: Pipe, Snuff and Chewing Tobacco 2000: Roll-Your-Own Tobacco

30. The US Federal Cigarette Excise Tax Timeline(US$ per 1,000 pieces) 1865: $1.20 - to pay costs from the Civil War c.1880: $1.75 c.1890: $0.50 1920: $3.00 - to pay costs from World War I 1941:$3.25 - to pay costs from World War II 1943:$3.50 - to pay costs from World War II 1952:$4.00 - to pay costs from the Korean War 1983:$8.00 - “Tax Equity & Fiscal Resp. Act of 1982” 1991:$10.00 - “Omnibus Budget Recon. Act of 1990” 1993:$12.00 - “Omnibus Budget Recon. Act of 1990” 2000:$17.00 - for uninsured children’s health care 2002:$19.50 - for uninsured children’s health care 2009: $50.33 – State Children’s Health Insurance (SCHIP)

31. “SCHIP” Excise Tax Rate Hikes

32. State Tobacco Product Excise Taxes Cigarettes - All 50 States and D.C. Large Cigars - 47 States and D.C. (excl. FL, NH, PA) Little Cigars - 49 States and D.C. (excl. PA) Smoking Tob. - 49 States and D.C. (excl. PA) Chewing Tob. - 49 States and D.C. (excl. PA) Snuff - 49 States and D.C. (excl. PA) NOTE: Florida Senate Bill 1840 would impose anOTP tax rate of $1 per ounce on cigars.

33. Local Tobacco Product Excise Taxes Cigarette - 8 States (AK, AL, HI, IL, MO,NY, OH, VA) Major cities include among others: Anchorage, AK Chicago, IL Honolulu, HI New York City, NY Cleveland, OH Alabama (269 cities, 53 counties); Missouri - 129 Cigar - 4 States (AK, AL, HI, MD) OTP - 4 States (AK, AL, HI, MD) Source: TMA’s Tobacco Tax Guide (May 2009)

34. State Cigarette Excise Tax Increases(1999 – 2009) # of Bills# of States# of Approvals 1999 57 21 3 (MD, NH, NY) 2000 24 7 1 (LA) 2001 51 26 5 (ME (2), RI, WA, WI) 2002 116 34 21 (AZ, CT, DC, HI, IN, IL, KS, LA, MA, MD, MI, NE, NJ, NY, OH, OR, PA, RI, TN, UT, VT) 2003 175 37 15 (AR, CT, DE, DC, GA, ID, MT, NJ, NM, NV, PA, RI, SD, WV, WY) 2004 139 33 8 (AL, AK, CO, MI, MT, NJ, RI, VA) 2005 114 30 9 (KY, ME, MN(2), NC, NH, NM, OH, RI, WA) 2006 57 25 6 (AZ, HI, NJ, SD, TX, VT) 2007 105 24 8 (CT, DE, IN, IA, MD, NH, TN, WI) 2008 57 20 4 (DC, MA, NH, NY) 2009 89 32 4 (AR, KY, MS, RI…HI)

35. The Shrinking U.S. Cigarette Market Peak: 1981 – 641 bn. pieces FET Doubled(1983) MSA (November 1998) Marlboro Friday(April 1993) Bottom: 2008 – 345.1 bn. pieces Source: USDA-Economic Research ServiceTMA’s Tobacco USA

36. Cigarette DomesticTaxable Removals(First Quarter 2009) (Bn. of Pcs.) Source: TTB

37. U.S. Cigarette Sales by Quarter(Billions of Pieces) • 10.45% vs. 1Q08 Source: Maxwell Consumer Report

38. Taxable Removals by Product(February 2009 vs. March 2009) (Mn. of Lbs.) (Mn. of Pcs.) Source: TTB

39. U.S. CigarettePrice Elasticity e = Δ Quantity/ ΔPrice 2008 Est. price: 2008 consumption:$4.58 345.1 billion pieces 2009 Est. price: 2009e consumption: Elasticity:$5.50 327.8 billion pieces -0.250 $5.50 324.3 billion pieces -0.300 $5.50 320.8 billion pieces -0.350 $5.50 317.4 billion pieces -0.400

40. U.S. Cigarette Forecast(Billions of Pieces) Source: TMA Estimate

41. Cigarette Tax Revenue Forecast(Millions of US$) 2008 FET2008 Consumption2008 Fed. Tax. Rev. $0.39/pk 345.15 bn. pc $6,730.4 mn 2009 FET2009 Consumption2009 Fed. Tax. Rev. $0.39/pk 80.11 bn. pc. (Jan-Mar) $1,562.1 mn$1.0066/pk 244.19 bn. pc. (Apr-Dec) $12,290.1 mn TOTAL324.30 bn. pc. $13,852.2 mn The Federal government is expected to collect an additional $7.12 billion in 2009. Source: TMA Estimate

42. Cigarette Tax Revenue Forecast(Millions of US$) 2008 SET2008 Consumption2008 State. Tax. Rev. $1.08/pk 345.15 bn. pc $18,638.1 mn 2009 SET2009 Consumption2009 State. Tax. Rev. $1.12/pk 324.30 bn. pc $18,160.8 mn State governments will collect $477.3 mn less in tax revenues even as some States raise their excise tax rates in 2009. Source: TMA Estimate

43. State MSA Revenue Forecast(Millions of US$) 2008 Consumption2008 MSA Payment (in 2009) 345.15 bn. pc $6,769.1 mn 2009 Consumption2009 Est. MSA Payment (in 2010) 324.30 bn. pc $6,630.8 mn State governments will collect $138.3 mn less in MSA payments as the cigarette market continues to decline. Source: TMA Estimate

44. Cigarette Tax Incidence - 2007(tax share of retail price) Avg. Price Sales Tax Stateper packFETSETTaxInc. South $3.658 $0.39 $0.07 $0.196 17.9%Carolina US $4.678 $0.39 $1.0725 $0.239 36.4%(Average) Rhode $6.590 $0.39 $2.46 $0.405 49.4%Island NOTE: The price figures include sales taxes. Source: TMA, Orzechowski & Walker

45. Cigarette Tax Incidence - 2009(% of tax share of retail price) Avg. Price Sales Tax Stateper packFETSETTaxInc. South $4.574 $1.01 $0.07 $0.259 29.3%Carolina +25% US $5.743 $1.01 $1.12 $0.247 41.4%(Average) Rhode $8.584 $1.01 $3.46 $0.562 58.6%Island +30.26% NOTE: The price figures contain sales taxes. Source: TMA estimates

46. Retail Price and Tax Incidence Figures f0r 2008 Retail PriceTax Incidence Norway$11.72 71.20% UK $9.1676.49% Australia $8.46 65.65% Singapore $7.95 70.54% Canada $7.50 70.73% France $7.24 80.39% Germany $6.82 76.45% Italy $5.80 75.17% Retail PriceTax Incidence United States $4.68 36.97% Spain$4.0977.35% Portugal$3.8650.25% Poland$3.1474.15% Japan$3.2163.06% China$2.2060.73% South Korea $1.8862.61% Indonesia$0.9049.09% All Prices are in US Dollars per pack of 20.

47. Estimated Price Structure of aPremium Pack of Cigarettes (2009)(% of total price) Assuming an average retail price of a pack of premium cigarettes in 2009 at $5.50 (not including sales tax). Source: TMA Estimate

48. Estimated Price Structure of a4th Tier Pack of Cigarettes (2009)(Percentage of total price) Assuming a 4th tier average national retail price in 2009 of $3.30. Source: TMA Estimate

49. “SCHIP” Excise Tax Rate Hikes

50. U.S. Little Cigars(Billions of pieces) Source: US-TTB