Transforming our business A cigarette manufacturing line (on the left-hand side) and a heated tobacco unit manufacturing line (on the right-hand side) at our factory in Neuchâtel, Switzerland Replacing cigarettes with While several attempts have been made to develop better alternatives to smoking, smoke-free products drawbacks in the technological capability of these products and a lack of consumer In 2017, PMI manufactured and shipped acceptance rendered them unsuccessful. 791 billion cigarettes and other Recent advances in science and combustible tobacco products and technology have made it possible to 36 billion smoke‑free products, reaching develop innovative products that approximately 150 million adult consumers consumers accept and that are less in more than 180 countries. harmful alternatives to continued smoking. Smoking cigarettes causes serious PMI has developed a portfolio of disease. Smokers are far more likely smoke‑free products, including heated Contribution of Smoke-Free than non‑smokers to get heart disease, tobacco products and nicotine‑containing Products to PMI’s Total lung cancer, emphysema, and other e‑vapor products that have the potential diseases. Smoking is addictive, and it Net Revenues to significantly reduce individual risk and 13% can be very difficult to stop. population harm compared to cigarettes. The best way to avoid the harms of Many stakeholders have asked us about smoking is never to start, or to quit. the role of these innovative smoke‑free But much more can be done to improve products in the context of our business the health and quality of life of those vision. Are these products an extension of who continue to use nicotine products, our cigarette product portfolio? Are they through science and innovation. intended for developed countries only? For over a century, the basic design Are they aimed at compensating a decline and use of cigarettes have not changed. in cigarette sales? In 2016, we made a bold A smoker lights the cigarette, shredded announcement: Our business vision is tobacco leaves are burned, and the smoker to replace cigarettes with less harmful, 1 1 1 1 inhales nicotine, flavors, and various smoke-free products as soon as possible. Smoke‑Free Products Net Revenues other substances present in the smoke. Source: PMI Financials or estimates While nicotine is addictive and not risk‑free, experts agree that the primary cause of smoking‑related diseases is found in toxicants generated by combustion and inhaled in cigarette smoke. 12 Philip Morris International Sustainability Report 2017 Smoke-free products: our product Platforms Heated tobacco products Platform 1 Platform 2 Transforming our business our Transforming IQOS, using the consumables HeatSticks or HEETS, features TEEPS uses a pressed carbon heat source that, once ignited, an electronic holder that heats tobacco rather than burning it, heats the tobacco without burning it, to generate a nicotine‑ thereby creating a nicotine‑containing vapor with significantly containing vapor with a reduction in harmful toxicants similar to fewer harmful toxicants compared to cigarette smoke. IQOS. A small‑scale city test of the product was initiated in 2017. Products without tobacco Platform 3 Platform 4 Platform 3 is based on acquired technology that uses Products under this platform are e‑vapor products: a chemical process to create a nicotine‑containing vapor. battery‑powered devices that produce an aerosol by vaporizing We are exploring two routes for this platform: one with a nicotine solution. One of these – MESH – uses new proprietary electronics and one without. vaporization technology. Philip Morris International Sustainability Report 2017 13 Our ambition for a smoke-free future Projection of smoking Projected smoking prevalence prevalence Today an estimated 1.1 billion men and women around the world smoke cigarettes or other combustible tobacco products such as cigars, bidis, and pipe tobacco. 22.1% 1.9% Smoking prevalence, which was estimated at 22.1% in 2010 (age 15+), has been in constant decline for several decades, and the World Health Organization (WHO) projects it will continue declining by 0.21 percentage points per year.2 1 2025 At that pace, it will take almost 100 years until the world is smoke free. Projected number of smokers At the same time, global population is growing by around 70 million people per year. The combined effect of a 6130m growing population and a declining 5080m smoking prevalence results in a projected 1.16 billion smokers by 1123m 1159m 2025. These WHO projections assume current tobacco control policies and do not consider the potential of smoke‑free products. Member states of WHO are rightly dissatisfied with the slow pace at which smoking is declining and have established 1 a 2025 target to reduce the prevalence 2025 of tobacco use by 30% compared to 2010, aiming to achieve a smoking Global populationpopulation Projected number of smokers 3 These projections are based on WHO/UN data and refer to age 15+ prevalence of 15.5%. Projected number of smokers As population growth partially offsets These projections are based on WHO/UN data and refer to age 15+ the impact of this prevalence target, there will still be approximately 950 million smokers by the year 2025 if the WHO objective is achieved. 14 Philip Morris International Sustainability Report 2017 PMI’s ambition It is our ambition that at least 30% of the use of smoke‑free products to replace our consumers who would otherwise cigarettes for people who would otherwise We believe smoking prevalence can be continue smoking switch to our keep smoking. reduced much faster by supplementing smoke-free products by 2025 versus measures that governments take to 2010. Based on that ambition, we project Our competitors are also increasing their discourage smoking initiation and that by 2025 at least 40 million PMI efforts to develop and commercialize their encourage cessation with efforts to cigarette smokers will have switched own smoke‑free products. As a result, encourage smokers who would otherwise to smoke-free products. we expect a positive acceleration of continue smoking to switch to smoke‑free innovation, competition, and consumer products. To illustrate the opportunity for The combination of measures to adoption that could reduce global smoking public health, we project the number of discourage tobacco initiation and prevalence at a pace significantly beyond consumers of PMI products for the year encourage cessation and our full‑scale past reductions and future goals set by 2025. These calculations are consistent effort to replace cigarettes with the WHO. business our Transforming with the WHO projections, PMI’s Business smoke‑free products could reduce Transformation Metrics shown on smoking of PMI products by 40% within page 25, and assume a constant global a decade – a major acceleration towards market share for PMI (excluding China a smoke‑free world. and the U.S., where we do not have These are illustrative calculations, as we a material presence). left out the potential for PMI to grow In the base case scenario, and without market share by switching consumers smoke‑free products, the number of of competing cigarette brands to our smokers buying PMI products is projected smoke‑free products. We also excluded to increase slightly to an estimated the possible positive interventions by 152 million by 2025. The WHO target governments to regulate products to reduce the prevalence of tobacco proportionate to the harm they cause. use – assuming a proportionate effect Clearly, governments and civil society, on smokers using PMI products – implies especially leading scientists and public a 19 million reduction to 133 million health professionals, and ideally the WHO, smokers of PMI products by 2025. can play a decisive role in encouraging Consumers of PMI products – projection 2025 (assuming constant PMI market share) People who quit or less people starting People who switch to PMI smoke‑free products Smokers of PMI products Reduction aimed for by WHO with additional 19m tobacco control measures PMI’s aspiration to switch smokers to our >40m smoke‑free products 152m Smokers of PMI products <95m 2025 estimate based on 2025 estimate based on WHO prevalence WHO prevalence projection target and PMI smoke-free aspiration Philip Morris International Sustainability Report 2017 15 The rationale for our We are observing this in Japan, where We are often asked about our willingness many IQOS users previously smoked to license our technology to other tobacco business vision cigarettes made by our competitors. companies. PMI has granted Altria an We are thus increasing market share, exclusive license to commercialize IQOS We understand that our vision of replacing thereby enhancing business results. in the United States, and we are in cigarettes with smoke‑free products is In addition, the profit margins of principle open to other partnerships unprecedented for a tobacco company. smoke‑free products are similar to where it makes business sense and helps Some will question our motives, and or exceed those of cigarettes helped to advance a smoke‑free world. others will question why PMI would seek by differentiated excise tax, as many to transform a very profitable market for governments recognize that products cigarettes. The answer is simple: Our goal such as IQOS are not cigarettes and Scientific assessment of of developing and commercializing less require a different tax system and yield. harmful products to replace cigarettes is our smoke-free