Stakeholder Dialogue #1

May 27, 2021

09:00-09:10 Welcome & Introductions

09:10-9:30 2020 Index Results & Post-Publication Review

9:30-9:40 Preliminary Plans for 2021 / 2022

9:40-10:50 Feedback & Discussion

10:50-11:00 Closing & Next Steps

Agenda

2

3

Participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.

Chatham House Rule

• We want discussions to proceed in line with everyone’s

respective antitrust obligations.

• As a general matter, international antitrust laws prohibit

competitors from agreeing on the prices they will charge, the

products they will offer, the customers they will serve, the

suppliers they will use, what is negotiated with either

upstream or downstream market suppliers/distributors, and

the markets in which they will compete.

• Both “vertical” and “horizontal” antitrust discussions are not

allowed, with a vertical scheme up and down a supply line

and a horizontal scheme between direct competitors (or

their representatives).

• Therefore, while you can discuss risks and concerns, there

should be no discussion or disclosure of information

with respect to anti-competitive practices, including but

not limited to:

• Profits, premiums, prices, surcharges, rebates or discounts

• Specific customers or classes of customers or whether you will or

will not do business with them (unless legal class, such as a

person under the age limit for tobacco products)

• Allocation of geographic or product markets

• Any refusal to deal with a customer or supplier

• How to deal with the market behavior of a competitor

Antitrust Disclaimer

4

5

Introductions and Background

The Foundation for a Smoke-Free Worldis an independent, philanthropic organization with the purpose of improving global health by ending smoking in this generation.

7

The Foundation’s strategic framework has three main areas of work

Euromonitor International is an independent third-

party advisor assisting with development of the Index

Euromonitor is responsible for Index process design,

research and analysis, and reporting

8

Key Index Resources

9

Foundation for a Smoke-Free World

• David Janazzo, Program

Manager, Tobacco

Transformation Index

Euromonitor

• Stefano Di Napoli – Global

Project Manager

• Amir Ali – Consultant

• Shane MacGuill – Senior

Industry Manager, Tobacco

Also joining us today…

10

Index Advisory Panel Members

• Louise Gardner

• Stefanie Miller

• Leslie Wolfe

Facilitator

• Michelle Guillermin

Foundation for a Smoke-Free World

• Derek Yach, President

• Ayda Yurekli, Principal Economist

• Synthesized input from stakeholder consultations

• Formed preliminary design 2020 Index

• Made available for industry consultation, public comment

• Developed key messages → launched website

• Euromonitor collected data

• Finalized design methodology, including “stress testing”

• Collaborated with Advisory Panel and Technical Experts

• Completed 2020 Index Results → produced reports

• Launched Tobacco Transformation Index (September 2020)

• Conducted post-publication review

• Established preliminary plans for 2021 / 2022

Since we last met…

11

October 2019

Today

12

Global Tobacco Use Challenges

13

• More than 1 billion smokers globally

• 80% living in low- and middle-income countries

• 8 million smoking-related deaths annually

• ~90% sales = cigarette

• Status quo is too slow…

The Smoking Epidemic

Source: Murkett, R., Rugh, M. & Ding, B.

(2020). Nicotine Products Relative Risk Assessment:

A Systematic Review and Meta-Analysis.High-Risk Reduced-Risk

100.00 99.53

84.18

75.72

54.95

41.10

15.10 11.18

3.38 3.18 0.24 0.22 0.15

0.0

25.0

50.0

75.0

100.0

Cig

aret

tes

Fin

e C

ut

To

bac

co

Cig

arill

os

Pip

e T

ob

acco

Sh

ish

a

Cig

ars

Mo

ist

Sn

uff

Ch

ewin

g T

ob

acco

Hea

ted

To

bac

co

Sn

us

Car

trid

ges

& E

-liq

uid

s

No

n-T

ob

acco

Po

uch

es

NR

Ts

Risk Spectrum

HARM MINIMIZATION SPECTRUM

Extreme Toxicity Much Less Harm

Relative Risk Hierarchy

14

CO

MB

INE

D R

ISK

SC

OR

E

15

Tobacco Transformation Index• Assessment of 15 Largest Tobacco Companies

• Context of 36 Countries

• Metrics Across 6 Categories; 35 Indicators

2020 Index Ranking

16

18

Key Findings from 2020 Index

• Harm reduction progress is extremely limited. The tobacco industry is not

phasing out cigarettes or transitioning smokers to reduced-risk alternatives

quickly enough.

• A small group of companies have made public commitments to harm

reduction, but none have shifted their focus enough to ensure the accelerated

decline of cigarettes.

• The majority of companies have not made any commitment to harm reduction

and/or continue to set targets to increase sales of high-risk tobacco products.

• The highest-ranked companies in the index are mostly

publicly traded multinationals, while private and state-owned

companies lag behind.

• Tobacco companies are focusing most of their reduced-risk

product efforts on higher-income countries, while high-risk

product sales in lower-income countries continue to grow.

• Better disclosure and greater overall transparency are

needed.

Key Findings from 2020 Index

19

20

Average Share of Net Value Sales, Capital and R&D Investments, and Marketing

Expenditure of Reduced vs High-Risk Products for the Six Companies Claiming

Commitment to Harm Reduction (Altria, BAT, Imperial, JTI, PMI, and Swedish Match)

Leading Indicators from 2020 Index

21

Company Country Ownership Cigarette Volume Sales 2019 (mn sticks)

1 China National Tobacco Corp China State-owned 2,311,433.3

2 Philip Morris International Inc Switzerland Publicly traded 706,009.0

3 British American Tobacco PLC UK Publicly traded 668,703.4

4 Japan Tobacco Inc Japan Publicly traded 476,057.2

5 Imperial Brands PLC UK Publicly traded 219,110.2

6 Altria Group Inc USA Publicly traded 104,553.4

7 Eastern Co SAE Egypt1bujj Publicly traded 79,294.6

8 Gudang Garam Tbk PT Indonesia Publicly traded 87,178.3

9 ITC Ltd India Publicly traded 66,554.0

10 Vietnam National Tobacco Corp Vietnam State-owned 47,412.1

11 Djarum PT Indonesia Privately held 38,395.8

12 KT&G Corp South Korea Publicly traded 80,856.8

13 Tobacco Authority of Thailand Thailand State-owned 17,840.6

14 Swedish Match AB Sweden Publicly traded n/a

15 Swisher International Group USA Privately held n/a

Tobacco Transformation Index Scope CompaniesThe Index evaluated the 15 largest tobacco companies in the world.*

* ~85% of global cigarette production

22

Tobacco Transformation Index Scope CountriesThe Index will also profile relevant context in 36 countries worldwide.*

* ~90% of global current smoking population

Country TypeCigarette Volume Sales 2019 (mn sticks)

Reported No. of Smokers 2019 (‘000)

Argentina HMIC 38,952.3 7,210.8

Australia HMIC 13,679.3 2,573.0

Bangladesh LMIC 94,235.7 n/a

Brazil LMIC 115,261.3 18,098.2

Bulgaria HMIC 11,836.5 1,863.0

Canada HMIC 32,462.8 4,409.6

China HMIC 2,433,483.2 308,190.4

Egypt LMIC 104,561.6 17,839.4

Ethiopia LMIC 9,705.0 n/a

France HMIC 46,574.1 12,681.4

Germany HMIC 81,665.0 14,705.4

India LMIC 108,960.3 115,040.0

Country TypeCigarette Volume Sales 2019 (mn sticks)

Reported No. of Smokers 2019 (‘000)

Indonesia LMIC 331,340.0 67,775.6

Italy HMIC 70,204.6 10,519.4

Japan HMIC 125,149.3 18,509.0

Kenya LMIC 8,090.3 3,157.3

Mexico HMIC 35,516.0 16,074.6

Myanmar LMIC 8,712.0 n/a

Nigeria LMIC 19,105.9 10,477.6

Pakistan LMIC 74,588.9 26,782.5

Philippines LMIC 70,147.5 15,974.1

Poland HMIC 49,318.5 10,052.1

Russia HMIC 254,874.7 38,052.4

Saudi Arabia HMIC 25,187.8 7,279.8

Country TypeCigarette Volume Sales 2019(mn sticks)

Reported No. of Smokers 2019 (‘000)

Singapore HMIC 2,766.7 579.4

South Africa HMIC 21,436.6 7,117.9

South Korea HMIC 63,850.0 9,253.0

Spain HMIC 52,414.6 9,743.7

Sweden HMIC 5,517.0 815.1

Switzerland HMIC 9,466.8 1,772.2

Thailand LMIC 42,207.3 12,036.4

Turkey LMIC 128,085.7 16,230.7

UK HMIC 33,287.8 7,487.3

Ukraine LMIC 54,818.0 9,562.1

USA HMIC 234,895.9 33,770.2

Vietnam LMIC 97,108.6 15,763.0

23

Category Weight Sub-Category Weight

1 Strategy & Management 10%1A Vision and Management Systems 80%

1B Stakeholder Engagement 20%

2 Product Sales 35%2A Volume Sales of Tobacco Products 80%

2B Value Sales of Tobacco Products 20%

3 Capital Allocation 25%3A Capital Allocation 100%

4 Product Offer 10%4A Product Portfolio 80%

4B Pricing 20%

5 Marketing 15%5A Marketing Policy 55%

5B Marketing Compliance 30%

5C Marketing Expenditure 15%

6 Lobbying and Advocacy 5% 6A Lobbying and Advocacy 100%

Index Methodology

24

Index Methodology / Topics for Discussion

• Ensuring the Index reflects actions of companies toward harm

reduction (rather than external factors)

• Category / indicator weighting

• For example: Capital Allocation versus Marketing Expenditures

• Treatment of M&A activity, disinvestment, and investment outside

tobacco in the context of tobacco harm reduction

25

Stakeholder Feedback

Program Design

• Sharpen the focus on impact

• Expand theory of change – ownership structure,

geography

• Build partnerships

Development Process

• Increase engagement and diversity of

engagement

• Integrate communications

Post-publication Recommendations

26

Index Design

• Better delineate company / country interaction

• Judge net effects of company actions

• Increase sophistication of indicators that refer to responsible

marketing and lobbying practices

Dissemination

• Improve the website

• Publish dynamic / evolving roadmap to 2030

• Acknowledge time for research, dissemination, and digestion

of results → long-term impact

27

Preliminary Plans for 2021 / 2022

28

Plans for 2022 Index

Publish material directly on the website, making it

more easily searchable and allowing for cross-linking

to enable users to navigate more easily between

related ideas and topics

Keep the Index platform up to date with articles

published in response to press releases and earnings

presentations by analyzing the potential impact of the

new information on company index performance

Website Redesign

Newsflow

Understand the tactics being employed by each company in

priority countries, with regard to their policies and actions, to

analyze discrepancies between company marketing

commitment and actual behavior, particularly for youth

Update country level data, which is otherwise

not easily accessible, to support stakeholders

and drive traffic to the website

Marketing Study

Country Fact Sheet Data Update

Integrate company and country datasets to create more

accurate comparison of companies’ performance in individual

markets in the context of regulation, consumer preferences,

and other factors shaping the character of individual markets

Update and analysis of the nicotine ecosystem by

leveraging country fact sheet data and current

reports developed by the Foundation

Country / Company Deep Dive

Global Trends in Nicotine

1

2

3

4

5

6

29

Plans for 2022 Index Research Platform

Encourage discussion around the Index as a

potential roadmap for tobacco companies on the

path toward sustainable harm reduction

Identify and research selected companies outside

the 15 currently covered by the Index (Smoore, RLX)

Multiple stakeholder dialogue sessions are planned,

gathering feedback from investors, grantees, public

health and other interested parties

Expand Beyond 15 Largest Companies

Iterate Stakeholder Dialogues

Patent landscape of heated tobacco,

nicotine vapour and smokeless tobacco

technologies for 2010 through 2020 – linking

R&D to reduced risk

Develop series of working papers that will lead to a

consolidated publication, tentatively titled “A theory

of change for state-owned tobacco enterprises”

Global Patent Landscape1

2

3

4

5

6Develop Theory of Change for State Monopolies & Privately-Owned Actors

Increase Level of Dialogue with Company Managements

Improve Incorporation into Relevant Investing Formats

Expand the utilization of the Tobacco Transformation

Index into other formats, such as ESG benchmarks

and ratings, analyst research, etc.

Feedback and Discussion

30

• Use Cases

• New Research

• Design

• Overall

Investor Insights / Topics for Discussion

31

32

Category Weight Sub-Category Weight

1 Strategy & Management 10%1A Vision and Management Systems 80%

1B Stakeholder Engagement 20%

2 Product Sales 35%2A Volume Sales of Tobacco Products 80%

2B Value Sales of Tobacco Products 20%

3 Capital Allocation 25%3A Capital Allocation 100%

4 Product Offer 10%4A Product Portfolio 80%

4B Pricing 20%

5 Marketing 15%5A Marketing Policy 55%

5B Marketing Compliance 30%

5C Marketing Expenditure 15%

6 Lobbying and Advocacy 5% 6A Lobbying and Advocacy 100%

Index Methodology

• How can we make the Index more useful for you ?

• How can the Index evolve to become a helpful framework for ESG

/ sustainable investing ?

• How can the Index become a roadmap to guide the companies’

sustainability agendas ?

• How can the Index incentivize change for state-owned and

privately held entities, in addition to the multi-nationals ?

Investor Insights / Use Cases

33

• How can the Index best evaluate company marketing policies and practices, in

particular, with respect to youth and vulnerable populations ?

• Should we extend the Index to evaluate additional players? If so, which companies ?

• How do you evaluate technology and innovation as a factor in the investment process ?

How can the Index effectively incorporate this ? Patent sharing through co-licensing ?

• What are your suggested key areas for new research ?

Investor Insights / New Research

34

• What is the right balance of indicators regarding focus versus comprehensiveness /

complexity ? Company differentiation versus industry trends ?

• What metrics should be weighted more heavily? Less so?

• How can we best ensure the Index reflects impact of company actions have toward

harm reduction rather than external factors (regulation, changes in competition,

strategy versus execution, cannibalization, etc.)?

• How should the Index handle M&A, disinvestment, and investment outside tobacco

(positive / negative) in the context of tobacco harm reduction ?

35

Investor Insights / Design

36

Investor Insights / Overall

• What have we missed?

• What can we do better?

37

Closing and Next Steps

38

What you can expect…

• Multiple follow-up dialogue sessions into 2022

• Addition of new research onto the Index research platform

• 2022 Tobacco Transformation Index

39

Thank you!