Altria Group, Inc. · NYSE:MO
Altria — Morgan Stanley Global Consumer and Retail Conference 2005
77 slides from Altria's conference presentation, Nov 9, 2005
Slide 1: Morgan Stanley Global Consumer and Retail Conference
Morgan Stanley Global Consumer and Retail Conference November 9, 2005 Please note that during this webcast you will not view tobacco images from our tobacco operating companies because it is not our intention to market, advertise or promote cigarette brands on this site.
Slide 2: Key Focus Points
Key Focus Points Valuation Litigation Restructuring Strategies & Growth
Slide 3: Price Appreciation
Price Appreciation MO vs. S&P 500 21.4% 19.9% MO MO 16.0% MO 10.6% S&P 0.9% S&P -3.1% S&P Nov. YTD 3-Year 5-Year 11/02-11/05 11/00-11/05
Slide 4: MO Dividend Yield vs. S&P 500
MO Dividend Yield vs. S&P 500 MO Dividend Yield vs. S&P 500 10% MO S&P 500 5% 0% 1995 Nov. 2005
Slide 5: Total Shareholder Return
Total Shareholder Return Assuming Dividend Reinvestment 25.5% 26.5% MO MO 22.2% MO 12.6% 2.4% S&P S&P -1.5% S&P Nov. YTD 3-Year 5-Year 11/02-11/05 11/00-11/05
Slide 6: Market Capitalization
Market Capitalization Equity Value $ billions Current 160 Prior All-Time High $158.0 billion $141.7 billion (11/23/98) (10/28/05) 10-Year Low $44.3 billion (2/14/00) 20 1994 1999 2004 Dec. Dec. Dec.
Slide 7: Stock Price Appreciation
Stock Price Appreciation Altria vs. Tobacco Peers 12/31/03 to 11/7/05 67.5% 66.8% 52.2% 51.3% 49.1% 36.3% Carolina BAT Imperial Gallaher Reynolds Altria Group American
Slide 8: Key Focus Points: Valuation, Litigation
Key Focus Points Valuation Litigation
Slide 9: Improving Litigation Environment
Improving Litigation Environment “Lights” Class Action Cases Encouraged by recent developments – Watson case removed to federal court – State court in Oregon refused to certify Pearson case as a class action – Federal courts in Louisiana and Michigan dismissed major claims in Sullivan and Flanagan
Slide 10: Improving Litigation Environment
Improving Litigation Environment “Lights” Class Action Cases PM USA has strong legal and factual defenses – Individual issues make “Lights” cases inappropriate for class certification – Decades long involvement of Federal Trade Commission governing tar and nicotine testing, disclosure and advertis
Slide 11: Improving Litigation Environment
Improving Litigation Environment 10-Year Nov. 1 High 2005 Individual cases 450 229 Class actions 60 34 Reimbursement cases 140 6 Cases set for trial next 12 months 35 11 New filings 460 61 Note: Individual case count does not include Broin, West Virginia consolidated and Maryland cases
Slide 12: Improving Litigation Environment: Tort Reform
Improving Litigation Environment Tort Reform Encouraged by enactment of the Class Action Fairness Act at the federal level The Act permits removal of most newly filed state tobacco class actions to federal court
Slide 13: Improving Litigation Environment: Appeal Bond Cap Legislation
Improving Litigation Environment Appeal Bond Cap Legislation 38 States and Puerto Rico Enacted Law / Adopted Court Rule No Bonding Required
Slide 14: Improving Litigation Environment
Improving Litigation Environment Department of Justice case Engle case Price case
Slide 15: Department of Justice Case
Improving Litigation Environment Department of Justice Case Trial concluded in June and awaiting opinion by Judge Kessler D.C. Circuit Court of Appeals denied disgorgement in February U.S. Supreme Court denied government petition for review in October
Slide 16: Engle Class Action Case
Improving Litigation Environment Engle Class Action Case Awaiting decision from the Florida Supreme Court Strong legal precedent in PM USA’s favor on both class certification and punitive damages Remain optimistic that the intermediate Court’s decision will be affirmed
Slide 17: Price Lights Class Action Case
Improving Litigation Environment Price “Lights” Class Action Case Awaiting decision from the Illinois Supreme Court PM USA has very strong arguments in its favor on both the merits, and the fact that the case never should have been certified as a class action Avery v. State Farm decision invol
Slide 18: Improving Litigation Environment: Summary
Improving Litigation Environment Summary Cautiously optimistic that litigation environment will continue to improve as we await key decisions Continue to believe that patience and perseverance will ultimately be amply rewarded
Slide 19: Potential Restructuring
Potential Restructuring Precise timing of key decisions and chronology remain uncertain Remain committed to restructuring Much attention dedicated to assuring execution readiness
Slide 20: Organizational Readiness
Organizational Readiness Critical and most time consuming task Rigorous advancement planning process Each operating company has realigned its organizational structure
Slide 21: Altria Corporate Headquarters
Altria Corporate Headquarters Refined role of corporate staff Decentralized several functions, such as information technology and trademark management Reduced headcount by close to 400 positions and transferred nearly 100 positions to operating companies
Slide 22: Strengthening Balance Sheet: Increasing Shareholders' Equity
Strengthening Balance Sheet Increasing Shareholders’ Equity Altria (ex-Kraft) $ billions 8.7 -2.4 2002 2003 2004 2005E Calculated as Altria’s consolidated shareholders’ equity minus its investment in Kraft. See detailed calculation on Appendix Slide A.
Slide 23: Altria Stake in SABMiller
Altria Stake in SABMiller $ billions 8.1 2.7 Sept. 30, 2005 Current Market Book Value Value
Slide 24: Strengthening Balance Sheet: Evolution of Net Debt
Strengthening Balance Sheet Evolution of Net Debt Altria (ex-Kraft and PMCC) $ billions 10.5 5.9 4.8 Sampoerna 1.1 2001 2002 2003 2004 2005 Sept. 30 Calculated as Altria total consumer products debt minus cash and Kraft’s total debt. See Appendix Slide B.
Slide 25: Dividends Paid
Dividends Paid $ billions 6.2 5.7 5.3 5.1 4.8 2001 2002 2003 2004 2005E
Slide 26: U.S. Pension Funded Ratios
Strengthening Balance Sheet U.S. Pension Funded Ratios 128% ABO Ratio 120% 113% PBO Ratio 106% 100% 2001 2002 2003 2004 2005E
Slide 27: Altria Group, Inc. Results
Altria Group, Inc. Results Nine Months to September 2005 Net revenues Up 9.1% to $73.4 billion Operating income Up 10.5% to $13.0 billion Earnings from continuing Up 12.8% to $ 8.4 billion operations Diluted earnings per share Up 11.1% to $4.01 from continuing operations
Slide 28: Full-Year 2005 EPS Forecast
Altria Group, Inc. Full-Year 2005 EPS Forecast Forecast to reach high end of range of $5.05 to $5.10 in diluted earnings per share from continuing operations Represents growth of up to 11.6% versus 2004, despite the current strength of the U.S. dollar
Slide 29: Key Drivers of Growth
Key Drivers of Growth Building premium brand equity Driving innovation through investments in R&D and marketing Managing price gaps Enhancing productivity and cost competitiveness Supplementing organic growth with strategically compelling and financially attractive acquisitions
Slide 30: Slide 30
Slide 31: Commodity Cost Increases
Commodity Cost Increases $ millions vs. Prior Year $800 million in 2005 300 250 250 225 200 200 150 125 Q1 04 Q2 04 Q3 04 Q4 04 Q1 05 Q2 05 Q3 05 Q4 05E
Slide 32: Pricing Strategy
Pricing Strategy Carefully balancing pricing actions while preserving the health of the categories in which it competes Sustained marketing investment to enhance long-term competitiveness and growth prospects
Slide 33: Results and Progress
Results and Progress 2005 results mask progress in several critical areas – New products – Cost reduction – Cash flow
Slide 34: Improving Portfolio
Improving Portfolio Key strategic imperative is to transform portfolio organically and through acquisitions and divestitures to: – Improve growth profile – Make portfolio less prone to commodity swings
Slide 35: New Product Revenues
New Product Revenues $ billions 1.5 1.1 1.0 1.0 2002 2003 2004 2005E
Slide 36: New Products
SOUTH | ET - /| High Proteie Cereal Bar New DE UICHTLY SWEETENED - WHOL CHAIN CEREAL Chicken Caesar Wraps
Slide 37: Slide 37
Slide 38: Revenue Contribution of Top 10 New Products
Revenue Contribution of Top 10 New Products $ millions ~700 ~400 ~300 2003 2004 2005E
Slide 39: New Products – Marginal Contribution
New Products – Marginal Contribution Kraft North America ~160 100 Top 25 Categories Average Marginal Index Contribution/Lb
Slide 40: Cost Savings: Restructuring Program on Track
Cost Savings Restructuring Program on Track Three-Year Program 2005 Actual Cumulative annual cost $250-$270 million of savings of approximately estimated cumulative savings $400 million by 2006 Eliminate about 6,000 5,200 positions announced positions to date Closure or sale of 20 19 fac
Slide 41: Cost Reduction
Cost Reduction Supply chain restructuring Systems harmonization Process simplification
Slide 42: Cash Flow
Cash Flow $ billions 4.3 Net Divestiture 1.2 Proceeds* 3.0 3.1 Cash Flow 2004 2005E * Net of $400 million taxes on divestitures
Slide 43: Cash Conversion Cycle
Cash Conversion Cycle Days 74 72 70 70 68 68 67 65 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2003 2004 2004 2004 2004 2005 2005 2005
Slide 44: Prmusarat P renee age =
Prmusarat P renee age = Tet DIGIORNO £ a } —_ je Packs - l ( :- ee oe te (aes) # Nt ie aor (St __Basilikum MELKESJOKOLADE ec es re so ce ea ll A El
Slide 45: Philip Morris USA
Philip Morris USA
Slide 46: Deep Discount Retail Share of Industry
Deep Discount Retail Share of Industry % Major manufacturers' private label All other manufacturers' discount 12.0 12.1 12.0 12.0 12.0 11.9 11.7 11.9 11.7 11.8 11.8 11.9 4Q 02 1Q 03 2Q 03 3Q 03 4Q 03 1Q 04 2Q 04 3Q 04 4Q 04 1Q 05 2Q 05 3Q 05
Slide 47: Import Product Volume
Import Product Volume billion units 14.6 11.8 -19.2% August YTD August YTD 2004 2005
Slide 48: Price Gap
Price Gap Marlboro vs. Lowest Effective $4.10 $3.82 Marlboro Net 3Q ’05 46% Lowest Effective $2.62 $2.10 2002 2003 2004 3Q 05
Slide 49: Estimated Internet Cigarette Volume
Estimated Internet Cigarette Volume Jan. Aug. 2002 2005
Slide 50: Improving Industry Dynamics: Declining Internet and Counterfeit Sales
Improving Industry Dynamics Declining Internet and Counterfeit Sales Major credit card and package delivery companies have agreed to take steps to prohibit use of their services for illegal Internet cigarette sales PM USA has taken action to protect its trademarks and has received numerous favor
Slide 51: Improving Industry Dynamics: Legislative Developments
Improving Industry Dynamics Legislative Developments Adoption and enforcement of state legislation that complements the Master Settlement Agreement – NPM complementary legislation enacted in 43 states – Allocable share enacted in 44 states Elimination of tobacco quota system
Slide 52: Weighted Average State Excise Tax
Weighted Average State Excise Tax Year End SET and User Fees +12% $1.00 Per Pack 87¢ 78¢ 70¢ 66¢ 43¢ 44¢ 40¢ 35¢ 36¢ 33¢ 33¢ 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005E
Slide 53: Philip Morris USA: Retail Share Performance
Philip Morris USA Retail Share Performance % 50.1 48.1 4Q 02 3Q 05
Slide 54: Philip Morris USA: Focus on Four Retail Share Performance
Philip Morris USA Focus on Four Retail Share Performance % 48.4 46.1 2Q 03 3Q 05
Slide 55: Marlboro Menthol Retail Share of the Menthol Category
Philip Morris USA Marlboro Menthol Retail Share of the Menthol Category % 15.0 11.9 4Q 02 3Q 05
Slide 56: Philip Morris USA: Innovation and Growth
Philip Morris USA Innovation and Growth Continues to dedicate significant resources to the development of innovative products which might help address the harm caused by cigarettes Exploring several adjacent categories within the tobacco industry to supplement future growth prospects
Slide 57: Philip Morris International: Growth Prospects are Attractive
Philip Morris International Growth Prospects are Attractive Superior portfolio led by Marlboro and L&M Strong demographics Leadership of growth segments Unparalleled worldwide infrastructure
Slide 58: Philip Morris International: Cigarette Shipment Volume
Philip Morris International Cigarette Shipment Volume CAGR 2000 2005E 00-05 Total 671 802 +3.6% Acquisitions 58 Total ex-Acquisitions 671 744 +2.1% France, Italy, Germany 149 110 All other PMI 522 634 +4.0%
Slide 59: Philip Morris International: Net Revenues ex-Excise Taxes
Philip Morris International Net Revenues ex-Excise Taxes $ billions 19.9 CAGR ‘00-‘05 +8.0% 13.6 2000 2005E
Slide 60: Philip Morris International: Cigarette Excise Taxes
Philip Morris International Cigarette Excise Taxes Incidence Structure
Slide 61: Success in Advocating Fair Tax Structures
Philip Morris International Success in Advocating Fair Tax Structures Fully specific structure Minimum excise tax Minimum reference price
Slide 62: Excise Tax Reform
Philip Morris International Excise Tax Reform France and Italy have a minimum reference price in place PMI hopeful that an equalization of tax burden between cigarettes and portions will be mandated in Germany
Slide 63: Spain: Total Industry - Price Segment Shares
Spain Total Industry - Price Segment Shares % 30.0 Deep Discount 11.5 Jan. 05 2005E
Slide 64: PMI's Geographic Volume Mix
PMI’s Geographic Volume Mix 2000 2005 Developing Developing Developed 34% Developed 49% 66% 51%
Slide 65: PMI's Geographic Mix
PMI’s Geographic Mix 2005 Volume 2005 OCI Developing Developing 25% Developed 49% 51% Developed 75%
Slide 66: Top 30 International Cigarette Markets
Top 30 International Cigarette Markets PMI PMI 25.6% 14.5% Including China Excluding China 4.4 Trillion Units 2.5 Trillion Units
Slide 67: Top 30 International Cigarette Markets
Top 30 International Cigarette Markets PMI #1 PMI #2 Russia Turkey Japan Indonesia Ukraine Brazil Germany Spain Philippines Italy Poland Egypt France Mexico Thailand Argentina Greece Romania Kazakhstan Czech Republic
Slide 68: Six of Top 30 Markets
Six of Top 30 Markets PMI’s Presence Essentially Non-Existent Bangladesh Iran Pakistan Vietnam China India 2.2 Trillion Units
Slide 69: Tremendous Opportunity for Growth
Tremendous Opportunity for Growth 5.1 Trillion 95% 3.1 Trillion 5% World Cigarette PMI 2005E OCI Consumption
Slide 70: Indonesia – Company Shares
Indonesia – Company Shares SOM (%) 28.1 27.3 PMI Gudang Garam 26.5 23.3 21.6 21.0 Djarum Aug. 04 May 05 Sept. 05
Slide 71: PMI Volume and Income Trends
PMI Volume and Income Trends Volume OCI Bio $ Bio 850 8.2 2000 2005E 2000 2005E
Slide 72: Summary
Summary We believe Altria shares have significant upside potential Litigation environment continues to improve and additional positive developments are likely Appropriate actions have been taken to assure organizational readiness in preparation for a potential restructuring Our operating com
Slide 73: Combined Dividends & Share Repurchases
Combined Dividends & Share Repurchases Top 10 S&P 500 Companies 2000-2004 Cumulative Performance Rank Name $ Billions 1 ExxonMobil Corp 60.7 2 Pfizer Inc 46.9 3 ALTRIA GROUP, INC 41.1 4 Citigroup Inc 40.2 5 General Electric Co 40.1 6 Merck & Co 28.2 7 Microsoft Corp 26.9 8 IBM Corp 26.9 9 SBC Commun
Slide 74: Estimated Cumulative Cash Flow
Estimated Cumulative Cash Flow Kraft Foods on a Cash Basis 2005-2009 $54 billion 2005 2006 2007 2008 2009
Slide 75: Appendix A
Appendix A Altria Shareholders’ Equity ex-Kraft 2002-2005E (Dollars in Billions) 2002 2003 2004 2005E Altria Shareholders’ Equity $19.5 $25.1 $30.7 $36.2 Less: investment in Kraft: Kraft Shareholders’ Equity 25.8 28.5 29.9 30.0 Minority Interest in Kraft ( 4.1) (4.4) (4.4) (4.0) Other, primarily Alt
Slide 76: Appendix B
Appendix B Altria Net Debt ex-Kraft (Dollars in Billions) December 31, Sept. 30, 2001 2002 2003 2004 2005 Altria Consumer Products Debt $20.2 $21.2 $22.3 $20.8 $22.6 Less: Cash & Cash Equivalents ( 0.5) (0.6) (3.8) (5.7) (6.2) Altria Net Debt 19.7 20.6 18.5 15.1 16.4 Kraft Total Debt $ 9.4 $10.9 $12
Slide 77: Morgan Stanley Global Consumer and Retail Conference
Morgan Stanley Global Consumer and Retail Conference November 9, 2005
Altria Group — Morgan Stanley Global Consumer and Retail Conference 2005 on 6ix