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 Transforming our business
13 - vapor products: - Sustainability Report 2017 scale city test the of product was initiated in 2017. - Philip Morris International Morris Philip uses a pressed carbon heat source that, once ignited, . A small a nicotine solution. ofOne these – MESH – uses new proprietary technology. vaporization TEEPS heats the tobacco without burning it, to generate a nicotine Products under this platform are e battery‑powered devices that produce an aerosol by vaporizing containing vapor with a reduction in harmful toxicants similar to IQOS Platform 4 Platform 2
or HEETS features, containing vapor. - containing vapor with significantly - , using the consumables HeatSticks We are exploringWe two routes for this platform: one with electronics and one without. fewer harmful toxicants compared to cigarette smoke. Platform 3 is based on acquired technology that uses a chemical process to create a nicotine Products tobacco without Platform 3 IQOS an electronic holder that heats tobacco rather thanburning it, thereby creating a nicotine Platform 1 Heated tobacco products tobacco Heated Smoke-free products: our product Platforms products: product our Platforms Smoke-free 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. 1 1 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 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 613 m growing population and a declining 5 m smoking prevalence results in a projected 1.16 billion smokers by m m 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 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.
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free products to replace - free products.As a result, Sustainability Report 2017 - free products - PMI’s aspiration to switch smokers to our smoke Reduction aimed for by WHO with additional tobacco control measures the use smoke of cigarettes for people who would otherwise smoking.keep Our competitors are also increasing their efforts to develop and commercialize their own smoke we expect a positive acceleration of innovation, competition,and consumer adoption that could reduce global smoking prevalence at a pace significantly beyond past reductions and futuregoals set by the WHO.
Philip Morris International Morris Philip scale 19m -
<95m >40m target and PMI smoke-free aspiration 2025 estimate based on WHO prevalence free world. free - free products 2025 by versus free products. also We excluded free products could reduce reduce productsfree could ‑ - - It is our ambition that at least 30%of our consumers who would otherwise continue smoking switch to our smoke Based2010. on that ambition,we project that 2025 by at least 40 million PMI cigarette smokers will have switched a decade – a majoracceleration towards competingof cigarette brands to our smoke the possible positive interventions by governments to regulate products proportionate to the harm they cause. Clearly, governments and civil society, especially leading scientists and public health professionals, and ideally the WHO, can play a decisive role in encouraging to smoke-free products. The combinationof measures to discourage tobacco initiation and encourage cessation and our full effort to replace cigarettes with smoke smoking PMI of products by 40% within smoke a These are illustrative calculations,as we left out the potential for PMI to grow market share by switching consumers
free -
free products -
Smokers of of Smokers 152m PMI products PMI 2025 estimate based on WHO prevalence projection free products, the number of - Smokers of PMI products People who quit or less people starting People who switch to PMI smoke
Consumers PMI products of – projection(assuming 2025 constant PMI market share) In the base case scenario, and without smoke We believeWe smoking prevalence can be reduced much faster by supplementing measures that governments take to discourage smoking initiation and encourage cessation with efforts to otherwise would who smokers encourage continue smoking to switch to smoke products. illustrate To the opportunity for public health, we project the number of consumers PMI of products for the year 2025. These calculations are consistent with the WHO projections, PMI’s Business Transformation Metrics shown on page 25, and assume a constant global market share for PMI (excluding China and the U.S., where we do not have a material presence). smokers buying PMI products is projected to increase slightly to an estimated million by 2025.152 The WHO target to reduce the prevalence tobacco of use – assuming a proportionate effect on smokers using PMI products – implies million reductiona 19 133 million to smokers PMI of products by 2025. PMI’s ambition PMI’s 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 products completely aligned with the expectations A smoke-free world can be achieved faster The catalyst for our transformation is of smokers, society, and our shareholders. if the industry as a whole, including new the science behind our smoke-free entrants, are incentivized for efforts products. We knew from the outset that Our success as a business was primarily in this direction. A wide variety of our science would be met with skepticism. built on offering the best smoking companies – from small start-ups to Since 2008, we have hired over 400 experience through our top-quality multinational tobacco companies – scientists and engineers who are working cigarette brands, including Marlboro, is increasingly active in the smoke-free in state‑of‑the‑art facilities and use L&M and Chesterfield. We are convinced category. All multinational tobacco cutting-edge technologies to develop that our continued success will depend, companies are commercializing at least and assess our smoke-free products. above all, on our ability to offer men one smoke-free product, and the category Our scientific assessment program follows and women who smoke less-harmful is undergoing rapid change. This is a a stepwise approach inspired by alternative products. positive development, provided that all pharmaceutical industry standards and The business case is straightforward. companies show the same commitment in line with draft guidance issued by the PMI leads the smoke-free category, to scientific rigor and transparency. U.S. Food and Drug Administration’s (FDA) thanks to sustained R&D investments. Center for Tobacco Products in 2012. Technological innovation is transforming We are therefore in an excellent We conduct our research in accordance our industry. Developing, assessing, position to not only switch consumers with international standards and practices, and commercializing novel, less-harmful who smoke PMI cigarettes, but also such as internationally accepted alternatives to cigarettes should, in our those who smoke competing Good Laboratory Practices (GLPs) view, become the focus of competition. cigarette brands. and Good Clinical Practices (GCPs). PMI has been, and will continue to be, a driving force of this transformation.
Our five-step approach to assess individual risk and population harm
1. Developing the product 3. Clinical studies 5. Long-term assessment Assessment of a smoke-free product’s risk Once we have completed our laboratory research, We monitor and research the use of our reduction potential relies on the quality of the we conduct clinical studies with adult smokers smoke-free products once they are on the market initial product design and on strict manufacturing to understand whether switching to smoke-free in order to assess the product’s contribution to controls to ensure that the product delivers a products reduces their exposure to toxic harm reduction. We are undertaking post-market consistent aerosol. We eliminate combustion compounds. We also determine whether this surveillance studies, starting in Japan, where our and ensure that the product delivers less Harmful leads to a favorable change in clinical risk markers objective is to assess the marketed product in and Potentially Harmful Constituents (HPHCs). associated with smoking-related diseases. order to further substantiate the results collected In this initial phase of designing a product, The effects measured in smokers who switch to in the pre-market clinical assessment and we verify that the product’s design does not pose a smoke-free product are compared with those perception and behavioral assessment programs. any additional risks to those already known for in smokers who continue to smoke cigarettes This is done by collecting a set of qualitative and cigarettes. Only then can we begin to conduct and smokers who quit using any tobacco and quantitative data on the use of the smoke-free further research. nicotine product for the duration of the study. product in real world conditions.
2. Laboratory studies 4. Consumer use research Our next step is to verify the potential of a We also conduct several types of perception smoke-free product’s aerosol to reduce risk and behavioral studies to better understand a compared to cigarette smoke by measuring smoke-free product’s potential to benefit public a reduction in toxicity as well as a reduction health. These studies include research into how in risk using laboratory models. If they smokers perceive a product’s risk and how they are reduced significantly, we move on to adopt and use a smoke-free product under clinical studies. real-life conditions. We also verify that never smokers and former smokers understand that smoke-free products are not intended for them.
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free product - is likely to present hand smoke. - and 9 Better breath Less unpleasant aftertaste Reduced tooth discoloration Improved oral Improved hygiene Sustainability Report 2017 use does not adversely affect
approached levels observed in the observed in levels approached cessation groups; IQOS indoor quality on based air indoor air quality exposure limits and is not a source second of — — These results give us confidence that switching fully to IQOS less risk harm of than continuing to smoke. are convincedWe its introduction will benefit public health. Our research efforts will continue to seek ways to further reduce the risk harm of and to broaden our smoke portfolio such that we have products that are acceptable and affordable alternatives to all smokers.
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week - Less smell Noash No risk of burning No negative impact on indoor qualityair Reduced impact Reduced those and users on them around in two one , conducted in animal 7 related diseases month clinical studies - - market surveillance market - market perception and : Scientific substantiation progress - Japan behavior assessmentbehavior Post Totality scientific of supporting evidence potential risk reduced combustion No Reduced HPHC formation Reduced toxicity Reduced exposure risk clinical of Reversal markers Pre significantly reduced their exposure toxicants.to 15 These reductions and two three Clinical studies conducted to date confirm the resultsof our laboratory switched who studies. Smokers completely to IQOS Laboratory studies confirm that switching IQOS to model diseases,of led to a reduction and their associated mechanisms. those approached reductions These observed in the cessation group; Laboratory studies conducted in animal models disease of confirm that these lower levels toxicants of result in IQOS vapor being significantly less toxic than cigarette smoke; smoking key in — — — — — — IQOS
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free
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that starts 4 are very advanced reduction potential - term use all of our - 5 vapor contains on average average on contains vapor does not generate combustion , at our R&D center in Neuchâtel, Switzerland 95% lower levels toxicants of 95% - at similar levels to cigarette smoke; compared to the smoke from a reference cigarette designed for scientific research, with nicotine IQOS 90 IQOS or smoke; Two scientistsTwo conduct studies to understand the aerosol of PMI’s main smoke-free product, IQOS — — — Our studies on IQOS with the initial design of the product platform, a fundamental step for quality and consistency. Laboratory and clinical studies are then used to evaluate exposure and risk reduction potential. In addition, we also conduct research on how people understand communications about a product’s risk profile and on how the product isactually used. Finally, we monitor the long products once they are in the marketplace. see if our productsTo fulfill their potential to have a positive impact on public health in the real world, it is important for us to follow the products even after they have been launched on the market. combineWe a number approaches, of including safety surveillance, clinical studies and epidemiological studies, in order to progressively obtain a clearer picture the of risk products. our of and point towards risk reduction. Our findings to date show that: — Developing and assessing a smoke product is a rigorous process Encouraging scrutiny can independently develop methodologies Investing in production and draw their own conclusions. of our science through Through this robust, 21st-century capacity for smoke-free transparency and approach to peer review and scientific products engagement verification, we can gauge the extent to which our own research is in line Our company’s shift toward a smoke-free Ideological rhetoric is often fierce with these crowd‑sourced results. future means going beyond developing when tobacco is the topic, preventing Since the inception of the sbvIMPROVER the products and science. It also means the public from understanding factual platform, nearly 200 institutions across supplying the demand. The case of IQOS information and undermining sound the globe have taken part in the program, in Japan illustrates the need to anticipate public policy. Confusion can be and the Challenges have verified our demand. Despite optimistic projections exacerbated by headlines and media research. The Challenges and all for a nationwide roll-out of IQOS in Japan, stories. We understand that harsh publications and news articles related in 2016, consumer demand exceeded our media coverage or biased scientific studies to this platform are available online.10 expectations. We were surprised by the are inevitable, and certainly take great rapid pace of adult smoker conversion to care in our consumer information and We use various print and online the product once we hit a critical mass of our public statements because the public communication tools to share our science 2-3% market share nationwide. By June and consumers expect it – and deserve and encourage further debate and 2016, we had to ration the number of no less. We recognize these hurdles but understanding about our smoke-free IQOS devices sold across the country to are doing our best to counter and correct products. We have a dedicated website avoid a situation where smokers who had inaccuracies that erode the information (www.PMIscience.com) to share the latest switched to IQOS would be unable to find environment in which consumers, information about our ongoing research, heated tobacco units. At the same time, policy makers, and investors are making peer-reviewed publications, and we issue we accelerated investment in the important decisions. a regular “Scientific Update for manufacturing capacity for heated Smoke‑Free Products.” tobacco units. Sharing our science, gathering feedback, and participating in robust scientific We have created an infrastructure Our factory in Neuchâtel, Switzerland, 11 debate help answer important questions and website, Intervals.science, to share was the first to produce the heated we receive about our innovative products more detail on the methods we use tobacco units used with the IQOS device. from the public, scientific experts, and to assess products and the data we In 2015, our factory in Bologna became regulators. Since 2008, we have published generate to support our results. the first site fully dedicated to heated more than 200 smoke-free-product- With this platform, we also aim to foster tobacco unit production. We are also related studies and book chapters in increased reproducibility and trust in converting some existing cigarette peer-reviewed publications, such as the science relevant for tobacco harm factories such as in Greece and Romania. the American Journal of Physiology, reduction and a dialogue among all Nature Biotechnology and Regulatory relevant stakeholders. Toxicology and Pharmacology. Lastly, on September 12, 2017, we Milestones and investments Over the last two years, we presented announced our support of the Foundation our results at over 150 scientific for a Smoke-Free World. We agreed conferences around the world. In 2017, to contribute $80 million per year our scientists presented research results over the next 12 years, as specified in at 76 leading scientific conferences the agreement. We made an initial and published over 45 book chapters contribution of $4.5 million in 2017 and and articles in peer-reviewed journals. +$4.5bn +400 the first annual contribution of $80 million Since 2008, we have World-class scientists, In 2018, we are going one step further in the beginning of 2018. The Foundation invested more than engineers, and USD 4.5bn in technicians hired since in our scientific transparency by making is an independent body and is governed by its independent Board of Directors. fundamental research, 2008 to support our the data from our non-clinical and clinical product and commercial best-in-class R&D The Foundation’s role, as set out in its studies about our smoke-free products development, capability in our two available to the public. corporate charter, includes funding production capacity, R&D facilities in research in the field of tobacco harm scientific substantiation, Neuchâtel (Switzerland) Our systems toxicology program uses reduction, encouraging measures that and studies on adult and Singapore smoker understanding large datasets to build an understanding reduce the harm caused by smoking, of disease mechanisms, predict the extent and assessing the effect of reduced of damage to the body from exposure cigarette consumption on the industry to toxic substances, and estimate value chain. improvements if those exposures are reduced. In 2011, we launched our sbvIMPROVER platform, a crowd-sourcing +2,900 Patents granted initiative developed with IBM, to enable worldwide related to independent scientific experts to review smoke-free products and validate our scientific methods and conclusions. It does so through the publication of Challenges and defined criteria by which scientific institutions
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.
free -
free
- free - has been has devices, combined combined devices, Sustainability Report 2017 free products extends to all - efforts are necessary in finding products that are affordable and acceptable for consumers in different parts the of world. acknowledge We the need to continue working to vision we must allocate our budget a fully fledged portfolio of smoke products and realize that additional develop different product platforms solutions to reduce the financial barrier switching of to smoke products, such as the temporary A substantial partof our marketing and sales budget in countries where we have launched IQOS re‑allocated from cigarettes to IQOS Clearly, to promote our smoke and headcount accordingly. Our goal to replace cigarettes with smoke countries where we operate, regardless developmentof status. are only We at the beginning commercializing of that can achieve this goal. are We also experimenting withother lending IQOS of with promotional offers if permitted locallegislation. by .
Philip Morris International Morris Philip free kit - free. - free products, - business model - to - centric model to assist - free products contain nicotine, - are addictive, and are not risk and the start their of conversion journey. Customer care services, including digital tools, are then available to follow up and to encourage smokers not to fall back to cigarettes, as well as to address any questions or issues. Smoke to a consumer understandWe that any communication with adult smokers about these products must be carried out responsibly, attuned to the local environment and, observing regulatory obligations. Our employees and third parties acting on our behalf their behaviors. For these reasons, we are shifting from a business smokers with this transition. This effort includes the deploymentof specialized field personnel,“coaches,” or who have been rigorously trained to perform quality guided trials with adult smokers and explain the fundamental differences between cigarettes and IQOS must follow strict principles in the commercializationof smoke For adult smokers, a successful guided trial – a truly personalized experience – leads to the purchase an of IQOS which are formalized in our Good Conversion Practices(GCPs) which are being implemented as smoke products are launched. See page 28.
free - free - in Milan, in . We also. We know that free products and how - , used with IQOS free products vary from one - PMI’s factory in Greece, its first cigarette factory fully converted to the manufacture of HeatSticks products varies substantially around The regulatory environment in which Italy, and Nagoya, Japan, in late 2014. we commercialize our smoke the world. As a result,it is easier in some countries than others to make smokers aware smoke of they should use them. The differences in the regulatory environment explain, tolarge a extent, why switching rates to smoke As the heated tobacco category is new, we face several challenges unseen before: increased time to communicate product benefits; consumer acceptanceof a different ritual; and a willingness to stay the product throughout the with conversion process.know We that it usually takes one to two weeks for someone to fully stop smoking cigarettes and switch to IQOS those who smoke are reluctant to change geography to another. to geography products is only the start: The next challenge is to convince smokers to switch. have learned We a great deal about the consumer conversion journey since our city tests IQOS of Developing and manufacturing and Developing scientifically substantiated smoke Our commercialization Our commercialization efforts smoke-free behind products Our global progress overview
IQOS is available in key cities in 37 markets and nationally in Japan in 2017.
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n a s r a a e u a ss i a a s a n n a a a o e e u s ti e n f e ri a a s e r a e r ain e r b e r n ia o u Tu r r o ou is e r i u ia s s e as a n fr i a
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Sustainability Report 2017 to this end. But it is equally clear that millions men of and women will continue to smoke, and they should have the opportunity and information to switch to better alternatives. and we support regulatory measures Many regulators, including the U.S. andFDA Public Health England, have included tobacco harm reduction as a complementary pillar their of comprehensive tobacco control plans, complementing cessation and prevention programs. regulations be clear, shouldTo continue to dissuade people from starting to smoke and encourage cessation,
Philip Morris International Morris Philip
free alternatives. - free products. free future, our - - The in our answer, is view, innovation – in products and in policies. As we work yet satisfying, smoke to design a smoke priorities Technologyare changing. that we and others have developed makes it possible to shift the tobacco and nicotine market towards a future in which cigarettes are replaced by less harmful, Not all regulatory and fiscal rules that apply to cigarettes are relevant and justified for smoke Regulators must differentiate supply and demand measures – for example, product, communication, and fiscal policies – based on product attributes and riskprofiles. Thisof is critical importance for the people who smoke and who deserve policy choices that respect them and their ability to decide. And policies should be sensible, and based on principled pragmatism rather than influenced by ideology.
containing - known risks smoking of have - where those interested in our science can visit to find out more about our scientific work PMI’s R&D facility in Neuchâtel, Switzerland, Comprehensive requirements were put products should be subject to strict rules and enforcement. in place to control nearly every aspect theof cigarette business. The question then becomes: What’s the plan to address the needs men of and women who are looking for less harmful, yet satisfying, alternatives to smoking? The well Our view on tobacco tobacco on Our view regulation led regulators to impose more restrictions and higher excise taxes on cigarettes than on any other consumer product – while allowing cigarettes to remain available to adults. There’s absolutely no doubt that nicotine Philip Morris Japan on the forefront of our transformation
Nagoya, Japan, was selected as the As the market leader of this new category, Customer care call center world’s first pilot market for IQOS PMJ increased its total tobacco market With the introduction of IQOS, PMJ in November 2014. We found that adult share. In fact, around 70% of IQOS users established a dedicated call center with Japanese smokers readily accepted IQOS, have switched from competitive brands staff trained to respond to a wide variety as it allowed them to enjoy a satisfying of combustible cigarettes. of questions ranging from scientific tobacco experience with no fire, no ash, evidence to technical support. In 2017, less smell, and without negatively Transforming our business the Customer Care Call Center impacting indoor air quality. By the responded to an average of 15,000 end of the Nagoya pilot launch in August In July 2016, PMJ undertook a massive daily contacts through an omni-channel 2015, the offtake share of IQOS had organizational change wherein the approach, including phone calls, e-mail, grown to 0.8% for the city of Nagoya. number of sales staff were significantly and online self-service support. In September 2015, Philip Morris Japan reduced, and a new IQOS development (PMJ) expanded the IQOS sales area team was created. Over the last two Logistics chain to include 12 major Prefectures, years, 30% of PMJ staff have been fully To return and repair devices with followed by nationwide expansion reallocated from combustible products technical issues, PMJ has created a in April 2016. to smoke-free products, with the other bi-directional logistics network that IQOS continued to grow in popularity, 70% supporting both portfolios. On top allows for the return of defective and production was soon unable of that reorganization, more than half devices and the delivery of a new device to meet demand. It was not an of PMJ marketing and sales budgets nationwide within 24 hours. uncommon sight to see lines in front were shifted to smoke-free products. PMJ is also undertaking efforts to recycle of IQOS stores where customers PMJ continues to transform the business the metal from devices that were returned, would patiently queue in the mornings model to address new challenges with and we are considering how to expand for a chance to purchase an IQOS device. innovative solutions, such as guided trials, and improve this program in the future. In addition, the competition a dedicated customer care call center, was quickly entering the category improved logistics chain, IQOS stores, IQOS stores with pilot launches of heated tobacco and digital platforms. products in Fukuoka and Sendai, PMJ has a network of nine dedicated IQOS stores across Japan. They serve as in May and December 2016. Guided trials a touchpoint for adult smokers interested Despite the limited supply of both IQOS PMJ sales staff meet face-to-face with in switching to IQOS to learn about the devices and HeatSticks, the market share legal-age smokers interested in switching device through guided trials, as well as in Japan continued to grow and by to IQOS to explain the scientific evidence provide current users with customer October 2017, three million smokers had behind IQOS and how to properly use service, IQOS devices, and accessories. quit smoking and converted to IQOS. and maintain the device. During these As of the fourth quarter of 2017, guided trials, the staff can directly Digital platforms address questions by interested smokers HeatSticks represented 13.9% of the PMJ has several innovative digital and seek to ensure that smokers switch nationwide tobacco market in Japan. initiatives that support smokers on to IQOS with a correct understanding their conversion journey and provide While the total tobacco industry volume of the product proposition and device up-to-date content to IQOS users. continues to decline in line with long- usage. In 2017 alone, 871,000 guided Smokers switching to IQOS are supported terms trends, the decline of combustible trials were conducted in Japan. by a “30-Day Challenge” program that products has accelerated with the sends information to registered users introduction of heated tobacco products. at regular intervals either by e-mail or through a social networking service platform to support them in their lifestyle change. Also, the IQOSphere user Total Market – In Market Sales Volume, Annual 2012-2017 community provides a wealth of content to registered users to enrich their i ions IQOS experience. 1 1 1 1 1 1 1 Challenges 1 1 1 With any new product, there are new challenges that need to be addressed. 1 PMJ is on the forefront of PMI’s transformation and is striving diligently to address these new challenges. Accidental ingestion According to the Japan Poison Center 1 1 1 1 1 1 (JPC), an average of 97 cases of Reduced‑risk products (RRP) Cigarettes accidental or unintended HeatStick Source: Tobacco Institute of Japan IMS and PMJ Estimate/RRP includes competitive ingestion per month were reported RRP IMS
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free - free - use is permitted. now enjoy relaxing free products already - Sustainability Report 2017 lounge. free Japan by completely - lounge where smoking is not and the product’s scientific up from in the 5% same quarter of As2016. a result this of phenomenal growth – never before seen in the tobacco category – cigarette sales in Japan have been declining at record Realizing a smoke-free a smoke-free Realizing future In the smoke last quarter 2017, of products from PMJ and its competitors comprised the of 17% tobacco market, pace, over dropping the same by 16% period. Smoke represent over 40% PMJ’s of 2017 sales volume. Our ambition is to realize a smoke replacing cigarettes with smoke products in Japan as soon as possible. IQOS allowed, but IQOS of theof smoking room. The company met with PMJ to learn more about IQOS substantiation, especially the impact on indoor air quality. Based on these discussions, the management decided to remodel the smoking room to an Tests were performed on the air quality theof lounge, and an employee satisfaction survey was conducted to gauge the results the of new initiative. Theresults show that there nois negative impact on indoor air quality, and employees who switched from cigarette smoking to IQOS in this IQOS
Philip Morris International Morris Philip 1 1
1 , the , management 1 1 device for the users without the smell smell the without users store in Ginza, Japan. 1 IQOS smoking and offer guests the option - An a major telecommunications company were complaining about the bad smell number IQOS of and high maintenance fees traditional of rooms. smoking Goshobo is a traditional Japanese ryokan (inn) operating in the Arima hot spring resort The management since of 1191. decided to make the inn completely non rentingof an IQOS durationof their stay. As another example, employees of the inn wanted to find a way to remove the potential fire hazard of combustible cigarettes while accommodating guests who wished to enjoy tobacco during their stay. Learning IQOS of
PMI cigarettes
1
. With , PMJ is website website areas. free Japan, - IQOS related businesses. 1 ingestion by children. - offers many convenience users still need to be HeatStick free products.free IQOS PMI cigarettes and HeatSticks - free products free bothering without Source: Tobacco Institute of Japan IMS and PMJ Estimate/Note: Denominator = Cigarettes + RRP including Japan Tobacco’s PloomTECH and British American Tobacco’s glo consumables IMS 1 - manners can truly transform the way way the transform truly can 1 1 PMJ SharePMJ Market, of Annual 2012-2017 Transforming society Transforming IQOS smokers enjoy tobacco products, but to achieve a smoke regard to indoor use IQOS of benefits, IQOS considerate those of around them. Although PMJ launched a campaign to remind users to pay attention to their surroundings when using IQOS aiming to create space for users of smoke people who do not use nicotine products, for instance by transforming existing smoking areas into IQOS IQOS in 2017. As PMI became awarein 2017. such of cases, to prevent accidental ingestion by children, PMJ partnered with JPC to share information and prompt consumers calling PMJ call centers to contact JPC. Additionally, PMJ started awarenessan the through campaign and leaflets. PMJ will continueto find new ways to communicate with consumers regardingthe preventionof accidental Mitsubishi Estate Co., Ltd. is a market‑leading real comprehensive it is important for the society as a whole to understand the potential smoke of estate developer operating a wide range real of estate Mitsubishi Estate established IQOS 10 lounges in common areas office of buildings which have become very popular with tenants as they meet the needs the of rapidly growing Philip MorrisJapan on the forefrontour of transformation Business transformation The third metric – net revenues (operating revenues net of sales and metrics promotional incentives) – shows the portion of our revenues that is generated Last year, we introduced a set of business by the sales of smoke-free products transformation metrics to make the (including electronic devices and actions we are taking to pursue our accessories). Excise taxes are excluded smoke-free vision measurable and from the net revenue figures. verifiable. The first two metrics show our resource allocation between The next three metrics show our combustible products and smoke-free smoke‑free product shipment volumes products, while the following four (including both heated tobacco units show progress in making smoke-free and e-cigarettes) and ourcombustible products the core of our business. tobacco product shipment volume We will continue to publish updates (mainly cigarettes), as well assmoke-free on our performance on a regular basis. product volumes as a percentage of total volume. It is our ambition that by 2025 The first metric –R&D expenditure – at least 30% of our shipment volume shows how much of our total spend comes from smoke-free products. on research and development is dedicated to smoke-free products. As for previous years, our business transformation metrics have also It includes the costs related to clinical been assured. studies, the development of new machinery, prototype, and product acceptability testing. The R&D expenditure for our combustible tobacco products is largely related to legal compliance requirements, such as the measurement and reporting of tar, nicotine and carbon monoxide for cigarettes, and adaptation to regulatory changes.
The second metric – commercial expenditure – shows how much of our total spend on the commercialization of our products is dedicated to smoke-free products. Commercial expenditure includes costs for marketing, consumer engagement, and trade promotions. As with the other metrics these refer to our global business, and therefore, the total includes commercial expenditures related to cigarettes in the many markets where we have not yet launched smoke‑free products. For markets where we are commercializing new products, this percentage is and will be significantly higher. Last year, approximately 39% of our global commercial expenditure was dedicated to smoke-free products. The shift in resource allocation will continue in the years ahead.
PMI’s first purpose-built factory for manufacturing HeatSticks, near Bologna, Italy
24 Philip Morris International Sustainability Report 2017 Transforming our business 25 1
<550 >250 2025 >38% >30% Aspiration >46 >6% <755 >16% >55% >80% 2018 Sustainability Report 2017 36 791 74% 13% 39% 4.4% 2017
7.7 845 15% 72% 0.9% 2.7% 2016 Actuals Philip Morris International Morris Philip 8% 0.8 881 70% 0.1% 0.2% 2015 market sales. -
free/Total) - cigarettes. The 2018 aspiration pertains to in - free/Total) - free/Total) - shipment volume (billion units) 4 shipment volume (billion units) 3
(Smoke 2 free productfree free product shipment ratio(Smoke free/Total) - - Combustible product Smoke Net Revenues Net Commercial expenditure (Smoke Transforming our business our Transforming R&D expenditure (Smoke Our performance: Smoke Includes cigarettes and other combustible tobacco products. Excluding excise taxes. For future periods, at today’s pricing and excise tax assumptions. Includes heated tobacco units and e Assuming constant PMI market share. do We not set aspirational targets for R&D and commercial expenditureto enable but thewe expect stated both outcome ratios in terms to continue of shipment increasing volume. The 2017 metrics are subject to PwC’s Assurance Report. See page 75. 4 2 3 1