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André Calantzopoulos, CEO, PMI, Long-Term Plan presentation at CEO Investor Forum 8.0

Jun 02, 2021
Good evening, ladies and gentlemen, and thank you for giving me the opportunity to be here with you today and I will talk about the new purpose of Philip Morris, which is to deliver a smoke-free future, which is essentially a future without cigarettes. Now we will talk. Obviously a little more about the product and the product transformation, but I'll cover all the other G topics during the

presentation

, so these are the usual forward-looking and cautionary statements. I'm sure he knows them and I encourage him to read them. What is PMI? I would say PMI is known as a cigarette company, it is the largest cigarette company in the world, it was spun off from the Altria group Altria which used to own Philip Morris International and the US business and PMI was spun off in 2008 , so PMI operates. worldwide except the United States and in 2016, having developed products that can replace cigarettes by providing less harmful substances to consumers, we announced the new vision that our goal is to focus all the company's resources on the science-based development and commercialization of products that can replace cigarettes and the common denominator is that none of these products burn because it is the presence of combustion that creates the problem in cigarettes and I will get to this now that our footprint is very large, we operate in one hundred and eighty countries in which we have tobacco from 350,000 farmers directly or indirectly, that is a significant footprint: we have 150 million consumers who buy products from us, 73,000 employees and, most importantly, we also collect 75 million trillions of dollars in excise taxes for the various governments around the world if you look at the The industry is totally one that includes China and the United States.
andr calantzopoulos ceo pmi long term plan presentation at ceo investor forum 8 0
It's about eight hundred and sixty billion retail businesses, of which more than 540 billion is excise taxes, so, as I said, the problem that we are trying to solve here because I think to have an impact you first need to address the effect of the product that is produced. before you look at how the product is made, what their supply chain footprint is, so there are a billion people, over a billion people who smoke today around the world and there are still 35 million in the United States and the projection is that and that is global health. organization that even in 2025 there will still be the same number of people, as the decrease in the prevalence of smoking is offset by population growth, until now public health efforts have focused on restrictive measures, restrict marketing, restrict product access, increase taxes in an effort. to prevent the initiation and encourage cessation of smoking and the question here is can these measures only they should not fail to achieve a future without cigarettes and you may wonder why I asked this question but I would say what we all need to understand as I said?
andr calantzopoulos ceo pmi long term plan presentation at ceo investor forum 8 0

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andr calantzopoulos ceo pmi long term plan presentation at ceo investor forum 8 0...

At first, the problem of cigarettes, which is morbidity and mortality or the cause of diseases and premature death, is due to the fact that organic matter is burned, that is, tobacco, nicotine is addictive and is not the cause main cause of illness in cigarettes, and I'm sure it will be. Come to this conversation given all the developments in the US regarding e-vapor products for sure, but even the FDA clearly says that nicotine is the least of the problems except for its addiction, but not in the diseases. Genesis and tobacco per se are not a problem in the same way that fossil fuels are not the problem, it is the fact. that we burn them to create energy, that creates the problem, so now that we have the technology and the scientific capabilities to evaluate this product, we put all our efforts into developing a portfolio of products that I will explain later and that have a common denominator that does not They burn organic matter, they do not burn tobacco, so some heat tobacco and one of those recently cleared by the FDA for marketing in the US or vaporize a liquid that is better known in the US or contains pure nicotine and all of them are not risk-free, there is no product that we can develop that has zero risk, but since it does not burn, the toxicity is reduced very substantially.
andr calantzopoulos ceo pmi long term plan presentation at ceo investor forum 8 0
If we take, for example, heated tobacco products that are reviewed by the FDA, it has a 95 percent reduction in toxicity and carcinogenic substances: a cigarette by simply heating it to very low temperatures and if you look at the products If vaporizers are manufactured properly to the standards, we have 99% reductions in toxic substances, so that's the important part to retain, but at the same time, because they are addictive and because they still contain some toxicity, it cannot be said that there is zero risk and all the clinical and preclinical care evaluations that have been done and presented to many regulatory authorities, including, as I said, the US FDA, show that reduction of exposure to toxic extremes that you have in our evaluation we use a three-pronged approach: you compare these products to cigarettes but you also compare them to the two cessation when people completely abandon nicotine use because that is the only epidemiological standard we have. know what happens to people who smoke when they quit smoking completely and the closer your product comes to the effects you observed clinically after completely quitting nicotine, the more confident you will be that they will have a positive effect on public health, but At the same time it is time to quantify exactly, we should not be confused and believe that a 95% reduction in toxicity and exposure is a 95% reduction in morbidity and mortality.
andr calantzopoulos ceo pmi long term plan presentation at ceo investor forum 8 0
We need epidemiology over time to quantify what we know today. It's going to be significant, but we don't know. I know exactly how much it costs, so now, to do this on the one hand, we clearly had to develop the products and in 2016 we marketed the first product. We arrived around 2015. Sorry, marketing the first product had good acceptance and very high exchange rates. It is called Aiko's, but that is the brand, essentially it is electronically heated tobacco and we started in Japan and what we observed is that sensorially the product is very double, although it has a deficit in

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s of flavor compared to cigarettes due to the absence also of the carcinogen. substances, but it has very high adoption rates, people who bought the product completely abandon cigarettes between 70 and 75 percent from the first month or even weeks, and that is much higher than the rate we achieve with the products of vapor that we are more familiar with because they have a flavor deficit that is even greater, so after that we had the scientific evidence, we had the product portfolio and the proof that these products are capable of changing people, so our decision was that we now focus all the resources of the company to be able to market these products and move them away from cigarettes and you know the progress has been quite significant, I would say, but at the same time we had to transform the company, we introduced many new disciplines in life sciences that we've never had before, all the preclinical clinical capabilities. which are very similar to the pharmaceutical industry because the same process in which a drug is developed or delivered to consumers we use a trademarked company, we had to create a lot of intellectual property and we learn how intellectual property and patents are created .
Cigarettes have been a product. that hasn't changed for decades or hundreds of years, so it was about trademarks, here it is about IP electronics and so on, secondly, changes in the supply chain, we do electronics, we don't just do an agricultural project , we do a combination of two inverse processes. logistics and so on, so we had to bring important new talent into the company because we just didn't have the skills, I mean all the life sciences, it's Pharma people who joined the company with the condition that they would never work on cigarettes . and they never did it and at the same time we retrain the organization because now it is not a transactional product that is sold at a point of sale, it is something that must be followed by the consumer during their journey so that they do not fall.
After a week, two weeks, three weeks, four weeks, back to cigarettes, we had to digitize the entire system because we started manually and we already had five thousand ten thousand incremental people on the ground dealing with people explaining the product, what it is. , what is it. no, but you had to start with digitalized purposes, otherwise it is not scalable, there are so many new disciplines and we did it with a combination of bringing in new talent from the top but, most importantly, retraining the organization because I think that is the right thing and you know I understand The very frequently asked question is why they didn't put this product aside and know how to create a new company with the new products.
Well, if we say that we are going to replace cigarettes over time, I think you can't leave your organization behind and This is not a line extension that you put aside and then say that it is all an effort by companies to convince people to give up cigarettes and the second thing is that we will never have the access and resources that the cigarette business gave us. to sell to consumers and initially obviously the cash flow, but that can be forgotten because today's products are still profitable, so here are, as I said, the four platforms, one is electronically heated tobacco with all the connectivity that this may have to help consumers during their journey.
We have what we call platform form, which is a more typically vapor product and where, by the way, we will implement age verification for device activation because the technology exists now to minimize any impact on young people, which means that if you buy the product it doesn't work until you have a verified record and that is one measure of course there are more so I won't spend a lot of time on the platforms but it took a

long

time to develop them because we try to make products that are the most similar to the ritual and taste of people of smokers as possible, otherwise they simply do not achieve it, it is not that simply giving them any product with codeine is not enough, they need to be convinced and it requires a lot of time and effort and, as I said earlier, The most important thing here is that we knew as a company that we have a trust deficit regarding the science that is safe and that we knew very well.
We don't get a second chance this time. All of the data will be under scrutiny, so I tried to do it as best as possible, keeping in mind that when we started this process, the FDA had not even issued their guidelines on how to develop, evaluate, and examine the post-marketing of these products, so We began to assume that it would be like a pharmaceutical industry. In the process we were at 95%, so we didn't waste a lot of time and effort, but at first it was a shot in the dark, so that's the good thing: all the data is available and the science of the PMI and anyone can buy the products. and verify why they exist in many markets.
The other important factor here, sorry, two very important factors is that the convertibility of the product, because to have an impact on public health it is not enough to have a product with reduced harm, you need to have people adopt it. In the same way, it is not that it is good to have solar panels, you need people to use them and to do so you need to incentivize them and you must put all the effort and commercial emphasis behind your product once you are convinced that they are better. than the previous ones, so after four years, we are essentially in 52 markets around the world, not completely covering all countries, we entered new countries gradually, but we already cover 45% of global consumption and are constantly expanding, and the most important part is 71% of a Marketing and sales money is behind these products, whereas last year they only accounted for 19% of our profits, so at least I think we are putting our money where our mouth is and the results are good, so far we had 14 million people who used only the first IKOS platform and about 10 million have completely abandoned cigarettes, so they no

long

er use cigarettes and if I lose the trade in Japan, which was the first market , the heated tobacco category in Japan already represents 25% of total Sakura consumption and the good thing is that we do not reverse the trend of decreasing prevalence, but we make a huge difference in

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s of reducing cigarette consumption, which It is the largest public health effect ever achieved in terms of reducing cigarette consumption in the world, so these interventions can have an impact I was saying this before the checklist transformation changes the company from all angles , from the employees and I talked about them, the products themselves, the commercial effort, but then we look at our supply chain, all these products use lesstobacco, so not only you have The natural decline of cigarettes, which is very gradual at 1 to 2 percent per year worldwide, affects farmers at the same time.
Now we have products that use 1/2 or 1/3 of the tobacco, so a key group here are farming communities. and how they are helped to change crop diversification because it is not so easy. Tobacco has a great advantage for farmers: it is a commercial crop and they sell what they produce and there is no fluctuation in the price factor because it is not a basic product, It is not that a basic product is traded on the stock market, so convincing them to move on to other things is not the simplest thing in the world and that requires a lot of effort, that is what requires a lot of collaboration with society in general and regulators and I'll get to this, but I'm sorry if we can back off if we can't, it doesn't matter.
I and I also mentioned from an organizational perspective that we are now dealing with electronics. We had no idea how to make electronic products. To be honest with you, I mean, yes we did. We didn't have call centers, we didn't have reverse logistics, we had to do all sorts of recycling and similarity things as we went along, etc., so I think it's a big change and we managed to carry the organization through that change, sorry . So, you know, I think if you don't measure things, they don't happen, so these are the metrics that we have in terms of product transformation.
I'm not talking about all the other ESG aspects of the system, we have a lot of them and I will address them so that 98 percent of our R&D spending is already on new products. I talk about business expenses because our goal is to be let's say 30, 38, 40 percent of our revenue and more than 40 million people will have switched from cigarettes to our products by 2025, that's what we can achieve on our own. alone, that is, without regulatory intervention, what change in the existing regulatory regimes that do not differentiate the vast majority are products from each other, so if we move towards the external environment, you know, the question is why does it make sense for us? and for our shareholders, we already have fifty-five percent of all these new categories in terms of retirees we had the first-mover advantage and established a new brand our brand used to be a malboro cigarette brand known to almost everyone here we are creating a new brand that will have most of these platforms under heated tobacco vapor butter and already If you look at the proportion of retail cigarettes outside the US and China, thirty percent already has fifty-five percent percent, so it makes sense that the margins at the marginal level are better because some of these products are recognized as cigarettes, so they pay a little more tax. favorably but of course we had all the infrastructure expenses, now your products are creative for the bottom line so it makes sense to do it financially and yes we recognize that we had to build different infrastructure for all the reasons I explained that's all the development of research.
The cost without just incremental marketing spends seven point two billion dollars accumulated so far, but now that we have the infrastructure we can take advantage of it to have many more products and much faster for consumers, all expenses are simply incremental and I was talking about support . We now need to pick up the pace by the regulatory community and governments in public health and I must say that these products are becoming polarized in public health, especially given recent events in the US where there is a real problem which is the increase in experimentation by young people.
With nicotine products, although cigarettes went down, we had a big jump in youth vape use, which is a real problem and then there are no unfortunate deaths or illnesses that we had with lung diseases where initially people thought that this is a world of steam, traditionally steam. products and the reality was that, unfortunately, people took open or other systems and put cannabis oils, cannabis oils and the pulmonary system is not made to dissolve fats, so it was an unfortunate situation, but this has nothing to do with it. see with what happened with a vapor product that now clearly exists.
There was a lot of misinformation around this and the misinformation led to the fact that the categories stopped growing not only in the US but all over the world and this is all because there are people who are opposed to these products and it is normal when you have innovation and new things. There are always foreign people who are against reality, but the reality is that 50% of people smoke in the US. More or less the same, the rest of the world believes that vapor products are equally dangerous as cigarettes or even worse, and that is inaccurate, so confusion very often leads to people continuing to smoke and some people, because of the confusion, have recently gone back to cigarettes, which is really not something that I would like to have in public health, so I think it is very important that we have cooperation on this and support from public health.
I'm sure there will be questions about it or not in detail because that can dramatically accelerate what we're trying to accomplish here and it has to be transparent on both sides. Now we have done a thorough materiality analysis and it is not surprising that the three things that came out strongly: the product changes responsible marketing and youth use of the product, and the third is the agricultural community and everything comes after which is expected and we have prioritized areas with primary metrics for all of these areas. I will let you read it and we have attached all the metrics to our

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so that whoever is interested has the sustainability report.
We are all there, we measure much more than that in terms of impacts, but these are the main things that society told us to focus on and that is where we focus and for four categories we have very clear objectives. I talked about the first two, which is youth prevention. and involuntary in the opinions of the audience and the 40 million at least people that we would like to change by the year 2005 if we continue with the current regulation the third is that one hundred percent of the farmers earn a living so that we can eliminate the child labor we have very good agricultural labor practices as a result of a program I think we still have this problem of the best in the consumer goods categories, we still have 97 percent compliance by farmers with child labor practices and forced labor, sometimes we still need to work with the rest, but that is a normal progress in certain In some countries, the tradition of using children during school holidays is so strong that it is not so easy to solve, but I think that actually the target is 20 to 5 and reach scope 1 to achieve carbon neutrality by 2030 and obviously the entire value chain by 2050 sooner, if possible, and we are making very good progress in all of them in terms of governance.
We have the full support of the Board of Directors in this transformation. Clearly yes, we have separate roles of president and CEO. I think the board has experience in many fields and clearly. As we transform the company, there is a common understanding that we have to continue to renew the board, also breathe new skills into the board, that is necessary and you can read the rest, but the last thing is our compensation in the short and long term , junior, senior team. our own link to business transformation and related metrics, so I would say our priorities are clearly the product and the business effort behind it.
The second thing is that we are doing a lot of things in the ESG area, but we haven't talked. about this because we gave priority to the product. I think we need to increase engagement with ESG

investor

s much more. I know there are discussions about excluding sectors from ESG investing entirely. Personally, I don't think that's going to change anything in terms of consumption. behavior in people's behavior because excluding a sector means, for example, tobacco, it means that people who smoke will stop smoking or excluding certain oil sectors does not mean that people will stop consuming energy.
I think by including people and companies in the investment that are trying to do the right things and working with them and encouraging the women who sometimes give feedback on Harwood to do better. I think that's the best approach to have a real long-term impact if we believe in this, so essentially I think it makes sense for us, from a shareholder perspective, to do what we definitely do, it makes sense for our consumers and I think generally we are, if we are successful we will have a much more sustainable business and if the regulator stops dithering and starts playing the game, the FDA is much more likely to do it here.
I think we can speed this up. millions to much more and probably in 10 to 15 years, etc., countries will start talking about phasing out cigarettes, so that's all I had for you as a reminder for people who are not in the room, yet you can send questions through slides, oh, we can start. In the back room here we seem to have a question, thank you and thank you very much for the presentation. I have a question about your marketing practices. Global marketing practices. There was a recent Sanford study that presented evidence that you were doing marketing. through social media and/or organized events that had young people as young as 16, so you mentioned several times that you are trying to change your marketing practices to adults only, so what is your minimum age at the level? worldwide for your target audience? target market and then also what you are doing to ensure that all your marketing divisions meet them.
Well, first of all, internal alignment is essential and we do continuous reviews. The materials are reviewed by a legal department by the Department of External Affairs by management. That's obvious and I think we have enough experience in cigarettes and knowing what not to do for so many years is more natural than new companies that don't know what industry they are in. I would say that regarding new products, but you also know what's out there. that we take the new product, I think we should analyze measures of what actually happens, without saying that maybe this image or this execution could be attractive to young people, which is why so far we do not have red because we do post-market surveillance, it is well, recently there was a study sponsored by the Minister of Health of Japan that I mentioned in Cagney, only 0.1% of you know that school-aged teenagers used icons when the product has an 18 percent market share.
Okay, now what you're referring to was an influencer program that we used. on certain occasions at the beginning in Russia where we had set a threshold of 25 year old smokers to be qualified as influencers and the agency did not follow it, so we stopped the entire social media program worldwide, it is fine and we are reviewing the situation, so if someone gives us feedback, we can act. I can't guarantee that anyone can guarantee that there won't be one or two problems somewhere. If we get feedback, we can fix them. There's no systemic need to do it and I think that's where monitoring eventually becomes important.
We have done a very thorough review because we are the requests of the shareholders. We found that for the vast majority it works well. There are things to improve. We have work to improve them. We will make these revisions and eventually begin to introduce. external verification also to block it twice, but the most important thing is to return and we have a golden opportunity, as I said, we need a minimum age for the purchase of products that exists almost, I say it in all the counters in the world, ok, maybe in some place. I don't know, it doesn't exist, but in practically every country we need law enforcement and retail, and in some places it's not easy, there's Indonesia, with over 2 million retailers, 1.4 million in the Philippines, it's not so easy to enforce this.
It enforces it in the 300,000 400,000 points of sale that its sales force makes, but it is not an excuse. What I'm saying is that sometimes it's material issues and as we know, if teenagers try to find the product, they will, so for electronic products we have the minimum age. we need to continue with the education of the trade we need to educate teenagers differently I told my children not to smoke and my daughter came vaping and told me but I don't smoke that and she writes no smoking so we have to tell them no Don't use nicotine products and finally with technology, lock the device and unlock it, only you know once you verify your age, so I think we minimize the likelihood of us having access by young people.
Can we remove it completely? Hopefully, but I don't think this is reality. Ok, but that's not the problem we had here.Are there any more questions from the room here? Hi, I had a question that for any industry going through a transition, there are often trade-offs between environmental and social issues, so could you shed some light? of light well within social networks because, in your case, you know their lives as tobacco producers and how to manage that transition as you move through this product, we imagine that there are differences with which they begin, yes, as you say , the upward supply will be less. go back in time, but we have to work and we are working with different institutions and educating farmers to change crops.
This is a slow process, so it works and we still use tobacco. Well, it's not like that, except these products use half the tobacco because in a cigarette, half the cube burned into the air to use as an energy source. You don't need it here because you have electronic heating, so at the end of the day we also need to bring farmers to other industries in a way that we can guarantee them for 3 or 4 years that someone will buy their crops when they transition to new crops, so We need to work from all sides, of course we can help them from the agricultural point of view because we have technicians on the ground. grow other crops, that's not the problem to convince them to do it because they want to have a guarantee that they are going to make some income in the first few years and that is where we are open to partners from the food industry and other industries, if we can.
Finding a good solution for both will be great if you look at electronics, for example, we have to start recycling electronics now and we are also thinking about reusing plastics and everything else in certain editions of the product, but I think consumers They may even find it interesting. From that perspective it's all recycled materials so it's a new area that we have to learn and be better at because we didn't know how to do it so I guess overall I don't think the transition is worse than before but there are new areas that we need to master on the other hand, you know that we continue with energy reduction, certain processes with new products require more energy, there is a question that is quickly being voted on by all of our viewers and that is that you mentioned the need to encourage customers to change. to new platforms, how is that done?
Basically, we spend time explaining to them where the product is and we follow up with them so that they don't use cigarettes again, so generally it is a lot of effort on the part of the commercial organization to find the people who smoke and explain to them. giving them the new products and having them change and tracking them, and it's very different from traditional consumer goods products, like cigarettes, where the consumer goes to a retail store, buys the product and leaves, there is no, it's very transactional , it's at the point of sale, here it is. Much more direct engagement with people, at least until the product is known and then people talk to each other and to the consumer.
It brings in other consumers because they see the benefit on the other side. I think it will also be helpful and that's what I'm talking about incentivizing if the government had differentiated regulation, for example, different label, different health warning, the FDA recognizes this when it authorizes the product than removing the carbon monoxide warning requirement because it doesn't burns, for example, and potentially initially differentiate taxation in line with that continues because we do the same when we encourage people to buy electric cars or so that the methods of demand reduction measures are well known, the key is that We recognize that they have to be different, so another question that we are getting frequently now is being in Big Tobacco, how do you combat criticism and skepticism?
How do you promote sustainable business practices while being in business? a tobacco company, look as I also said during my speech, of course, there is skepticism, of course, the industry has a past, but we have to start looking at what will happen in the future. Well, where did it happen 30 years ago? 20 years ago, I can't change it. None of us today can change it, what we could change is a product itself and we are doing this and we put all our focus behind this product and that is what we are doing, is putting our mouth where our money is, our money where is our mouth and then be very transparent, all the science that we produced is totally available to everyone, anyone can buy the products and try them.
In fact, we sent these products to multiple government labs around the

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et and they found roughly the same reduction in toxicity that we found, including the FDA, so yes it is and I don't think a company can't become sustainable because Otherwise we will never incentivize companies to do better things. I think if we want to achieve something in terms of sustainability actually of humans and not the

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et, because that's why we're talking, we need to tell people what the problems are, offer them alternatives, offer them government or company incentives and then have a machine that markets to them and convinces them, and that's what you need in business and then wait for the best deal to convince people.
Changing behavior in any sector is not the easiest thing in the world, but if we do not combine all this we will never achieve anything and if struggle is how I can feel it more, it can be sustainable by changing its products and changing the way. it is and finally show that this is feasible and have support because the more we fight among ourselves and say it's okay, the people in public health think that Philip Morris can't do good things, so we won't accept anything that comes for Philip Morris. I think that leaves people who smoke completely out of the equation and they don't really care about the sectors we have in certain sectors and even the scientific debates.
Scientific debates are great, but at the end of the day people need clarity and that is what we need to do in all sectors of the economy if we really want to change things Andrew, thank you very much, we have more questions than they have time for do.

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