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Sustainability Report 2017 1 Philip Morris International Sustainability Report 2017 1
About PMI
Philip Morris International In 2017, our products were sold in substantiation of the reduced harm
over 180 markets, and we operated potential of our new products,
Inc. (PMI) is a leading 46 production facilities globally. we aim to ensure that our smoke-free
international tobacco We are building our future on products meet adult consumer
company with a diverse smoke‑free products that are preferences and rigorous regulatory
a much better consumer choice requirements. Our vision is that
workforce of 80,600
than continuing to smoke cigarettes. these products replace cigarettes
people across the globe. Through our multidisciplinary, as soon as possible, to the benefit of
state‑of-the-art capabilities in adult smokers, society, our company
product development and scientific and our shareholders.
For more information, see www.pmi.com
and www.pmiscience.com.
Raw materials and other supplies
Leaf Other
+350,000 50,000
Farmers contracted by Suppliers worldwide
PMI and our suppliers
in 28 countries
13
90% Number of languages in
which PMI’s Responsible
Manufacturing and business facilities
Of the tobacco we purchase Sourcing Principles
is through direct contracts are available
(by our leaf operations
or our tobacco suppliers)
2,800 80,600 46
Field technicians providing Employees worldwide Manufacturing
support to contracted facilities globally
tobacco farmers for
GAP implementation 34.4% 31%
Employees at
managerial level CO2e scope 1+2
are women reduction since 2010
R&D
67%
Employees covered
by collective labor
agreements
2 74% 4.9%
Research facilities Of our total R&D Employee voluntary
expenditure is turnover
+400 dedicated to our
smoke‑free vision
World-class scientists,
engineers and
technicians hired to +2,900
support our best‑in‑ Patents granted
class R&D capability worldwide related
since 2008 to our smoke‑free
products
Creating value at PMI
Sustainability at PMI
For PMI, sustainability means creating long-term value
while minimizing the negative externalities associated
with our products, operations and value chain.
From the more than 350,000 farmers from which we
source tobacco right up to the approximately 150 million
consumers of PMI products, we have an important impact
on the communities and the environment around us,
which we are committed to address. We cannot achieve
this alone.
The engagement beyond our own operations is key,
as this is where the most significant impacts take place.
While operating in a highly regulated environment,
we strive to go beyond mere compliance to achieve
a sustainable smoke-free future.
Retail Consumers
$6bn
Net earnings
5.9m 1.01 150m +4.7m $72bn
Retailers selling Fleet collision rate Consumers of PMI Adult consumers who
PMI products (vehicle collisions combustible products have stopped smoking Excise taxes on
per million km driven) cigarettes and made PMI products
77,000 100% +180 the change to IQOS
Distributors
and wholesalers Tracking and
Markets where PMI
products are sold 10,000
tracing (master Smokers switching
226 case level) to IQOS every day
CO2e emissions from
vehicles (g CO2e
per km driven)
Good Agricultural Practices (GAP) Animal Marketing Principles Good Responsible Sourcing
& Agricultural Labor Practices (ALP) welfare Conversion Practices Principles
Conflict Anti-diversion Guidebook for Success Human Rights
minerals practices and tools (PMI Code of Conduct) Commitment
Engagement
Principles
Philip Morris International Sustainability Report 2017 1
Contents
Sustainability at PMI Transforming Driving operational
our business excellence
Letter from the CEO 4 Replacing cigarettes with Ethics and compliance 26
smoke-free products 12
Our approach to sustainability 6 Responsible marketing 28
Our ambition for
Sustainability governance a smoke-free future 14 Interacting with governments 29
and management 6
The rationale for our Our approach to corporate tax 29
Defining our focus 7 business vision 16
Data protection 29
Stakeholder engagement 8 Scientific assessment of
our smoke-free products 16 Human rights 31
Our work and the UN Sustainable
Development Goals (SDGs) 9 Encouraging scrutiny Tackling illicit tobacco trade
of our science through and related crimes 32
SDGs and UNGC
transparency and engagement 18
cross-reference index 10 Responsible supply chain 36
Investing in production capacity Responsible Sourcing
for smoke-free products 18 Principles (RSP) 36
Good Agricultural
Our commercialization efforts
Practices (GAP) 38
behind smoke-free products 19
Our view on tobacco regulation 21
Business transformation metrics 24
2 Philip Morris International Sustainability Report 2017
About this report The report is structured around the This report has been reviewed by
Sustainability at PMI
important topics of our sustainability PMI’s Senior Management team,
We are happy to share our third efforts, and our disclosures are mapped including our Chief Executive Officer,
Sustainability Report. By publishing against the Ten Principles of the United Chief Financial Officer, Chief Operating
this report closer to the release of our Nations Global Compact (UNGC) and the Officer and our President, External Affairs
Annual Report 2017, we aim to provide United Nations Sustainable Development & General Counsel.
a more comprehensive overview of our Goals (SDGs). See page 10.
company and sustainability efforts earlier PricewaterhouseCoopers SA (PwC)
in the calendar year. This report builds The data and information, including has assured our transformation metrics
on the PMI Sustainability Report 2016, the infographics, cover the full year on page 25.
issued in September 2017. As we progress 2017 and all our operations, unless
explicitly mentioned. We welcome your feedback on this report
on our sustainability reporting journey,
by emailing us at: sustainability@pmi.com
we will provide deeper insights into
Transforming our business
our performance.
This blue tint indicates the stories that
relate to our business transformation.
Managing our Reducing our Concluding remarks
social impact environmental footprint
Driving operational excellence
Working at PMI 40 Climate change – Next steps 64
Transforming our company a science-based approach 54 Forward-looking and cautionary
Managing our social impact
culture 41 Science-based targets statements 65
Inclusion and diversity 41 and renewables 54 Annex 1: Overview of marketing
Labor relations 43 principles for combustible
Greening our vehicle fleet 55
products 66
Rewarding our employees 43
Working with tobacco Annex 2: Overview of
Living wage 43
farmers to reduce greenhouse engagement principles 68
Health and well-being 43 gas emissions 56
Overview of our sustainability
Safety in the workplace 46 Water: stewardship across performance 69
and beyond our operations 58
Agricultural labor practices 48 Glossary and acronyms 73
Water stewardship in tobacco
Reducing our environmental footprint
agriculture 58 Notes 74
Business Transformation Metrics –
Conserving biodiversity and Independent Assurance Report 75
combatting deforestation 59
Biodiversity 59 Key developments since 2000 76
Responsible management
of chemicals for crop protection 60
Deforestation 60
Waste management 60
Littering 61
Concluding remarks
Philip Morris International Sustainability Report 2017 3
Letter from the CEO
Dear reader, Clearly, we cannot achieve a smoke-free As for operational excellence, we remain
In my mind, sustainability encompasses future alone. It depends on a number of focused on securing the integrity of our
four aspects. First, companies need to factors out of our direct control, mainly supply chain through our efforts to tackle
reduce to the largest extent possible any support from regulatory and public health illicit trade in tobacco products. We also
harm associated with their products. authorities, that will influence the pace pushed transparency further by publishing
Being respectful of people throughout and scale of switching away from our approach to corporate tax and data
the value chain and preserving the combustible products. We are committed privacy, as well as an overview of our
environment are the next two pillars. to continue leading the industry in this Marketing Principles and our Principles for
Last, but not least, sustainability requires massive transformation, and we call on Engagement with third-parties. These last
operational excellence. all stakeholders to work together towards two policies relate to business practices
a smoke-free future. for which we receive frequent criticism
My ambition is to make PMI a true from tobacco control advocates and
leader in sustainable business practices. I am also pleased with the way we others. We therefore urge concerned
We therefore need to excel in all of these continue making progress on our social stakeholders to provide us objective
four areas, starting first and foremost sustainability agenda. For example, with feedback on these policies and examples
with our products. 34.4% of management positions held by of practices that they feel we need
women, we are on track to reach our goal to change.
Smoking cigarettes causes serious disease, of 40% by 2022. Another example is the
and the best way to avoid the harm of roll-out of our Responsible Sourcing To benchmark ourselves and learn from
smoking is never to start, or to quit. Principles that will help to identify and other companies, PMI joined the United
But much more can be done to reduce manage labor issues in our non-agricultural Nations Global Compact (UNGC) in 2015.
health risks for the world’s 1.1 billion men supply chain, which is becoming We participated in many of the UNGC
and women who would otherwise increasingly important as we transform Local Networks, not only to learn, but also
continue to smoke. While nicotine is our company from a cigarette maker to contribute and share our experiences,
addictive, it is the smoke generated by to a smoke-free technology leader. talents and resources on joint initiatives.
burning tobacco that is the principal But challenges remain, in particular on We were encouraged by the positive
problem. Through groundbreaking complex social issues such as child labor reactions in many Local Networks to our
research, we have developed a range of and living conditions for migrant workers active participation, once initial skepticism
smoke-free products that are enjoyable in our tobacco supply chain. We are towards our company was overcome. I was
for smokers and have the potential to determined to continue to address these therefore disappointed by the UNGC’s
significantly reduce health risks when issues in cooperation with civil society decision last year to exclude all tobacco
compared to smoking. partners and governments, as you can companies from its membership.
read about in our case study on Mexico.
I am often asked when we will stop selling The UNGC’s decision does not change our
cigarettes. Our objective is to reach this Last year's environmental milestones commitment to implement its principles.
moment as soon as possible by replacing include the fourth consecutive year Nor does it alter my conviction that a
cigarettes with smoke-free products. in which PMI was recognized in CDP’s smoke-free world is achievable and,
Last year, smoke-free products already Climate A-List and the first time that indeed, a better world. However, in my
represented over 4% of our shipment our water programs achieved CDP A-list mind, recognizing and encouraging those
volume and around 13% of our net ranking. PMI is one of 25 companies to willing to disrupt their existing business
revenues, excluding excise taxes, in just be A-listed for both climate and water, to replace it with a more sustainable one,
two years since commercialization. placing us in the top 1% of the 3,000 and thus lead sector transformation,
To further accelerate this transformation, corporations participating. We is the fastest way to meet global
we continue to shift resources towards acknowledge that the transformation societal expectations, rather than
smoke-free products. In 2017, 39% of of our company towards smoke‑free practicing exclusion.
our global commercial expenditure and products invariably brings along new
74% of our global R&D expenditure challenges we need to address, I am pleased to share with you this report
were spent on reduced-risk products.1 in particular increased use of water outlining our work to transform our
The results of our efforts exceeded our and energy at the manufacturing level, company. We are committed to continue
own expectations: By year-end 2017, and the management of electronic waste. operating responsibly, while successfully
over 4.7 million adult smokers had stopped delivering solutions not only to our
smoking cigarettes and made the change consumers, employees and shareholders,
to IQOS, our main smoke-free product. but also to society in general.
And 10,000 more are switching every day.
I cordially invite you to comment,
challenge, and guide us as we continuously
seek to improve the sustainability of our
business and contribute to the UN
Sustainable Development Goals.
André Calantzopoulos
Chief Executive Officer
4 Philip Morris International Sustainability Report 2017
Sustainability at PMI
My ambition is to make PMI a true leader in sustainable
business practices. We therefore need to excel in many
areas, starting first and foremost with our products.
Philip Morris International Sustainability Report 2017 5
Sustainability at PMI
Our approach Our sustainability strategy is a key element Each pillar encompasses key topics
of PMI’s overall business strategy and is addressed in this report. They cover
to sustainability structured around four pillars which specific programs, management
enable our vision of a smoke-free future: approaches, activities, processes, goals
To us, sustainability is about creating
——Transforming our business; and Key Performance Indicators (KPIs),
long-term value while minimizing the
which are managed throughout the
negative externalities associated with ——Driving operational excellence; company by the relevant functions
our products, operations, and value chain.
——Managing our social impact; and and business operations.
——Reducing our environmental footprint.
Smoke-free future
Transforming our business Driving operational Managing our social impact Reducing our
Research & Development excellence Health, safety and well-being environmental footprint
Product innovation Ethics and compliance Labor relations Climate change
Sustainable growth Supply chain management Inclusion and diversity Biodiversity
Value chain transformation Responsible marketing Talent management Water
Sustainability management and development Waste management
Human rights Agricultural Labor Practices (ALP)
Illicit trade prevention
Stakeholder engagement
Corporate tax
Sustainability governance Our Senior Management Team Led by the Vice President, Social &
(Management Board) is regularly reviewing Economic Affairs, who reports to the
and management sustainability matters – strategy, President, External Affairs & General
key programs, and budget – through Counsel, a member of PMI’s Senior
PMI’s Board of Directors believes
a cross-functional representation, Management Team, the Sustainability
that environmental, social, and
coordinated by the Sustainability Team. Team has evolved over the past years
governance (ESG) factors relevant
to ensure our company is equipped
to the company’s business are critical From an operational perspective, with the relevant know-how and
to PMI’s long-term success. the Sustainability Team manages and expertise in view of the changing
coordinates our sustainability work nature of our business.
The Board’s sustainability oversight
across PMI functions and regions seeking
was more formally established at the
to ensure it is embedded at all levels of
beginning of 2018 when its Nominating
the organization. Finally, we are creating
and Corporate Governance Committee
three cross-functional working groups
was given the mandate to oversee the
to manage environmental, social and
sustainability strategy and performance,
reporting matters that are overseen
and to advise the Board on sustainability
by committees composed of senior
matters. Part of the Board’s oversight
function heads.
is a focus on management’s efforts to
enhance shareholder value responsibly
and sustainably.
6 Philip Morris International Sustainability Report 2017
Defining our focus Credibility and responsibility ——Good Agricultural Practices: Actions
Sustainability at PMI
The analysis also identified aspects that to ensure tobacco farmers have access
In 2016, we worked with Business for are critical to building the credibility to the information, systems and tools
Social Responsibility (BSR) to identify and engagement with our stakeholders needed to be successful business
the areas that are most significant to required for our business transformation, owners who minimize the environmental
both our business sustainability and particularly the need to substantiate our impacts of their activities and provide
to our stakeholders and prioritized them. commitments, demonstrate transparency good working conditions on their farms;
That analysis also highlighted areas and consistency in our approach, and ——Climate Change Mitigation and
of opportunity and risk, emerging maintain the highest standards in our Adaptation: Efforts to reduce
themes, and gaps for management action. policies, practices and actions. This also greenhouse gas emissions and prepare
The analysis consisted of a structured includes ensuring that we continue to for the effects of climate change in our
review and engagement process, carried market our products in a responsible operations and supply chain, including
out by BSR and involving PMI’s functional way – and only to adult consumers – water stewardship actions; and
leaders and subject matter experts and being even more transparent in
as well as external stakeholders. ——Post-Consumer Waste: Actions to
how we advocate on policy issues related
It considered both our current business minimize impacts through product
to our products, including taxation
and changes driven by our vision of design, waste management programs
and regulation.
a smoke-free future. and recycling where possible. Increasing
——Corporate Governance and Ethics: our efforts to prevent littering through
The analysis helped us to focus on Promotion of the highest standards consumer education.
where we need to prioritize and allocate of compliance and integrity across
resources to mitigate negative impacts our global operations and value chain. Underpinning our approach
and create opportunities for wider Clear alignment of our public policy Governance, product, environmental and
societal value, with product harm advocacy with our core strategy employee-related aspects were identified
reduction the fundamental premise and commitment to stakeholders; as being important for our continuous
of our strategy. ——Responsible Marketing and Youth improvement efforts. Many are described
Smoking Prevention: Strive to ensure in this report and include:
We plan to update this analysis in 2018
that we continue to market our ——Employee engagement and well-being,
and share the results in our 2018
products responsibly and only to labor relations, workplace health and
Sustainability Report.
adult consumers; and safety, inclusion and diversity, and talent
The results of the 2016 analysis were ——Transparency and Reporting: recruitment and management;
sorted into four categories as follows: Disclosure of our significant ——Fighting illicit trade in tobacco products;
sustainability performance risks and
Fundamental to our business strategy opportunities in a clear, comparable ——Good laboratory and clinical practices
and accessible manner. in our R&D efforts; and
Three areas are fundamental to the
sustainability of PMI’s business strategy: ——Good environmental management
Turning strategic risks into of our operations.
——Product Innovation for Substantial
opportunities
Harm Reduction: Continued recognition
of the health impacts of our products We identified additional areas from a risk
and the prioritization and investment management perspective, including good
in reducing or eliminating those impacts agricultural and labor practices in tobacco
through innovation and development farming and the need for climate change
of products that can substantially mitigation and related action throughout
reduce individual risk and population the value chain. We also need to anticipate
harm when compared to cigarettes; and manage the supply chain risks related
to our non-tobacco materials, especially
——Public Health Policy and Research: as our product portfolio now increasingly
Our role and proactive approach includes electronic devices. Our ambition
in supporting public health and harm is to turn these strategic risks into
reduction policies and research; and opportunities to add value.
——Respect for Human Rights: ——Responsible Sourcing of Non-Tobacco
Understanding, due diligence, Materials: Actions to identify and
and actions to respect human rights trace non-tobacco materials to origin,
throughout our global operations and source them in a responsible
and value chain. and sustainable manner (including
electronics);
——Agricultural Labor Practices: Actions
to eliminate all forms of labor abuses
and to achieve safe and fair working
conditions on tobacco farms;
Philip Morris International Sustainability Report 2017 7
Stakeholder engagement guided by AccountAbility’s Stakeholder The graph below highlights our main
Engagement Standard: AA1000. stakeholders per category.
As we progress towards a smoke-free Due to the highly regulated nature
future, the trust of our stakeholders is of our business, we have also
key to our success. We engage with implemented Engagement Principles
stakeholders on an ongoing basis in a found on page 68 of this report.
number of ways. In doing so, we will be
Stakeholders
s& Employees B
stor lders comusine
ve o mu ss
In reh nit
a y
sh
Fa mwo
fa
mu fic
y
r
nit
rm rke
com ienti
ers rs
Sc
&
PMI
communities
Media
Local
Ci v
ers
il s
pli
oc
p
Su
iet
y
Re
go gula rs
ve to t a ile
rnm rs & Re
ent
s Adult
consumers
8 Philip Morris International Sustainability Report 2017Our work and the UN Sustainable Development Goals (SDGs)
Sustainability at PMI
We are committed to the SDGs and have adopted a three-pronged approach to help
make them a reality. We have prioritized our work where we can have the greatest
impact. As stakeholder expectations around the SDGs evolve, we will further refine
our work and reporting on how we contribute to the goals through our business vision
and across our operations and value chain.
Taking decisive action where we have the greatest impact
SDG 3: Smoking cigarettes This report’s section on
causes serious disease. “Transforming our business”
By replacing cigarettes describes in detail how our
with less harmful alternatives business vision aligns with
we can significantly reduce this SDG.
the negative impact of our
products on individuals
and society.
Taking ownership where we can provide a substantial contribution
SDG 2: Through good SDG 8: We ensure good SDG 12: We improve the SDG 16: Our efforts to combat
agricultural practices and crop working conditions for all our life-cycle impacts of our illicit trade in tobacco products
diversification we can help employees and can play a role products. From the challenge the perception that
to improve the productivity in promoting good working environmental impacts of illegal tobacco trade is a
and food security of conditions for thousands of tobacco growing, to efficient, victimless crime without links
smallholder farmers. workers throughout our low-carbon, manufacturing, to funding terrorism and other
supply chain. and litter prevention and serious offences.
recycling programs.
Aligning our practices with the overall goals, even where our business has less impact
We certainly care about all other SDGs. Nevertheless, our business has very little impact on certain
SDGs, and therefore we can only make a relatively modest contribution to these global objectives
at this stage.
The table on the next page provides an overview of how our activities and programs relate
to the 17 Sustainable Development Goals and the 10 principles of the UN Global Compact.
Philip Morris International Sustainability Report 2017 9SDGs and UNGC cross-reference index
Page
reference
Transforming our business
Replacing cigarettes with smoke-free products See pages 12 to 25
Driving business excellence
Ethics and compliance See pages 26 to 27
Responsible marketing See page 28
Interacting with governments See page 29
Our approach to corporate tax See page 29
Data protection See page 29
Human rights See page 31
Tackling illicit tobacco trade and related crimes See pages 32 to 35
Responsible Sourcing Principles (RSP) See pages 36 to 37
Good Agricultural Practices (GAP) See pages 38 to 39
Managing our social impact
Working at PMI See page 40
Inclusion and diversity See pages 41 to 42
Labor relations & living wage See page 43
Safety, health and well-being See page 43
Reducing our environmental footprint
Climate change See pages 54 to 57
Water See page 58
Conserving biodiversity and combatting deforestation See pages 59 to 60
Waste management See pages 60 to 61
10 Philip Morris International Sustainability Report 2017Sustainability at PMI
UNGC
Principles
10
10
10
1, 2, 4, 5, 6
10
3, 4, 5, 6, 10
3, 4, 5, 6
3, 4, 5
6
7, 8, 9
7, 8, 9
7, 8, 9
7, 8, 9
Philip Morris International Sustainability Report 2017 11Transforming 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 Contribution of Smoke-Free
smoke‑free products, including heated
than non-smokers to get heart disease,
tobacco products and nicotine-containing Products to PMI’s Total
lung cancer, emphysema, and other
diseases. Smoking is addictive, and it
e-vapor products that have the potential 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, 2014 2015 2016 2017
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 2017Smoke-free products: our product Platforms
Heated tobacco products
Platform 1 Platform 2
Transforming our business
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 13Our 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% 18.9%
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
2010 2025
by 0.21 percentage points per year.2
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
2010
a 2025 target to reduce the prevalence
2025
of tobacco use by 30% compared to
Global
Global population Projected number of smokers
2010, aiming to achieve a smoking population
These projections are based on WHO/UN data and refer to age 15+
prevalence of 15.5%.3 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 2017PMI’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.
Transforming our business
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
19m WHO with additional
tobacco control measures
PMI’s aspiration to
>40m switch smokers to our
smoke-free products
152m
Smokers of
PMI productsThe 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
harmful products to replace cigarettes is
require a different tax system and yield. 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 conduct our research in accordance
We are therefore in an excellent
our industry. Developing, assessing, with international standards and practices,
position to not only switch consumers
and commercializing novel, less-harmful such as internationally accepted
who smoke PMI cigarettes, but also
alternatives to cigarettes should, in our Good Laboratory Practices (GLPs)
those who smoke competing
view, become the focus of competition. and Good Clinical Practices (GCPs).
cigarette brands.
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 2 3 4 5
1. Developing the product 3. Clinical studies 5. Long-term assessment
Assessment of a smoke-free product’s risk nce we have completed our laboratory research,
O e monitor and research the use of our
W
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
ur next step is to verify the potential of a
O 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.
16 Philip Morris International Sustainability Report 2017Developing and assessing a smoke-free IQOS: Scientific substantiation progress
product is a rigorous process4 that starts
with the initial design of the product Totality of scientific Reduced impact Improved oral
platform, a fundamental step for quality evidence supporting on users and those hygiene
and consistency. Laboratory and clinical reduced risk potential around them
studies are then used to evaluate exposure
and risk reduction potential. In addition, No combustion Less smell Better breath
we also conduct research on how people Reduced HPHC formation No ash Less unpleasant aftertaste
understand communications about a Reduced toxicity No risk of burning Reduced tooth discoloration
product’s risk profile and on how the Reduced exposure No negative impact on indoor
product is actually used. Finally, we Reversal of clinical risk air quality
monitor the long-term use of all our markers
products once they are in the marketplace. Pre-market perception and
Transforming our business
To see if our products fulfill their potential behavior assessment
to have a positive impact on public health Post-market surveillance
in the real world, it is important for us Japan
to follow the products even after they
have been launched on the market.
We combine a number of approaches, ——Laboratory studies conducted in animal approached levels observed in the
including safety surveillance, clinical models of disease confirm that these cessation groups;9 and
studies and epidemiological studies, lower levels of toxicants result in IQOS
in order to progressively obtain a clearer ——IQOS use does not adversely affect
vapor being significantly less toxic than indoor air quality based on indoor
picture of the risk-reduction potential cigarette smoke;7
of our products. air quality exposure limits and is not
——Laboratory studies confirm that a source of second-hand smoke.8
Our studies on IQOS are very advanced switching to IQOS, conducted in animal
and point towards risk reduction. model of diseases, led to a reduction These results give us confidence that
Our findings to date show that: in key smoking-related diseases switching fully to IQOS is likely to present
and their associated mechanisms. less risk of harm than continuing to smoke.
——IQOS does not generate combustion We are convinced its introduction will
These reductions approached those
or smoke;5 benefit public health.
observed in the cessation group;8
——IQOS vapor contains on average
——Clinical studies conducted to date Our research efforts will continue to seek
90-95% lower levels of toxicants
confirm the results of our laboratory ways to further reduce the risk of harm
compared to the smoke from a
studies. Smokers who switched and to broaden our smoke-free product
reference cigarette designed for
completely to IQOS in two one-week portfolio such that we have products that
scientific research, with nicotine
and two three-month clinical studies are acceptable and affordable alternatives
at similar levels to cigarette smoke;6
significantly reduced their exposure to all smokers.
to 15 toxicants. These reductions
Two scientists conduct studies to understand
the aerosol of PMI’s main smoke-free product,
IQOS, at our R&D center in Neuchâtel, Switzerland
Philip Morris International Sustainability Report 2017 17Encouraging 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,
debate help answer important questions and website, Intervals.science,11 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
and articles in peer-reviewed journals.
contribution of $4.5 million in 2017 and
the first annual contribution of $80 million
+$4.5bn +400
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
in our scientific transparency by making is an independent body and is governed USD 4.5bn in technicians hired since
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
studies about our smoke-free products The Foundation’s role, as set out in its 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
18 Philip Morris International Sustainability Report 2017Transforming our business
PMI’s factory in Greece, its first cigarette
factory fully converted to the manufacture
of HeatSticks, used with IQOS
Our commercialization their behaviors. For these reasons, we are A substantial part of our marketing
shifting from a business-to-business model and sales budget in countries where
efforts behind smoke-free to a consumer-centric model to assist we have launched IQOS has been
products smokers with this transition. re‑allocated from cigarettes to IQOS.
Clearly, to promote our smoke-free
Developing and manufacturing This effort includes the deployment of vision we must allocate our budget
scientifically substantiated smoke-free specialized field personnel, or “coaches,” and headcount accordingly.
products is only the start: The next who have been rigorously trained to
challenge is to convince smokers to perform quality guided trials with adult Our goal to replace cigarettes with
switch. We have learned a great deal smokers and explain the fundamental smoke-free products extends to all
about the consumer conversion journey differences between cigarettes and IQOS. countries where we operate, regardless
since our city tests of IQOS in Milan, of development status. We are only
Italy, and Nagoya, Japan, in late 2014. For adult smokers, a successful guided at the beginning of commercializing
trial – a truly personalized experience – a fully fledged portfolio of smoke-free
The regulatory environment in which leads to the purchase of an IQOS kit products and realize that additional
we commercialize our smoke-free and the start of their conversion journey. efforts are necessary in finding
products varies substantially around Customer care services, including digital products that are affordable and
the world. As a result, it is easier in some tools, are then available to follow up and acceptable for consumers in different
countries than others to make smokers to encourage smokers not to fall back parts of the world. We acknowledge
aware of smoke-free products and how to cigarettes, as well as to address any the need to continue working to
they should use them. The differences questions or issues. develop different product platforms
in the regulatory environment explain, that can achieve this goal. We are
to a large extent, why switching rates Smoke-free products contain nicotine,
also experimenting with other
to smoke-free products vary from one are addictive, and are not risk-free.
solutions to reduce the financial
geography to another. We understand that any communication
barrier of switching to smoke-free
with adult smokers about these products
products, such as the temporary
As the heated tobacco category is new, must be carried out responsibly, attuned
lending of IQOS devices, combined
we face several challenges unseen before: to the local environment and, observing
with promotional offers if permitted
increased time to communicate product regulatory obligations. Our employees
by local legislation.
benefits; consumer acceptance of a and third parties acting on our behalf
different ritual; and a willingness to stay must follow strict principles in the
with the product throughout the commercialization of smoke-free products,
conversion process. We know that it which are formalized in our Good
usually takes one to two weeks for Conversion Practices (GCPs) which
someone to fully stop smoking cigarettes are being implemented as smoke-free
and switch to IQOS. We also know that products are launched. See page 28.
those who smoke are reluctant to change
Philip Morris International Sustainability Report 2017 19Our global progress overview
IQOS is available in key cities in 37 markets
and nationally in Japan in 2017.
2017
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20 Philip Morris International Sustainability Report 2017Transforming our business
PMI’s R&D facility in Neuchâtel, Switzerland,
where those interested in our science can visit
to find out more about our scientific work
Our view on tobacco The answer, in our view, is innovation – Many regulators, including the U.S.
in products and in policies. As we work FDA and Public Health England, have
regulation to design a smoke-free future, our included tobacco harm reduction
priorities are changing. Technology that as a complementary pillar of their
The well-known risks of smoking have
we and others have developed makes it comprehensive tobacco control plans,
led regulators to impose more restrictions
possible to shift the tobacco and nicotine complementing cessation and
and higher excise taxes on cigarettes
market towards a future in which prevention programs.
than on any other consumer product –
cigarettes are replaced by less harmful,
while allowing cigarettes to remain To be clear, regulations should continue
yet satisfying, smoke-free alternatives.
available to adults. There’s absolutely to dissuade people from starting to
no doubt that nicotine-containing Not all regulatory and fiscal rules that smoke and encourage cessation,
products should be subject to strict apply to cigarettes are relevant and and we support regulatory measures
rules and enforcement. justified for smoke-free products. to this end. But it is equally clear that
Regulators must differentiate supply millions of men and women will continue
Comprehensive requirements were put
and demand measures – for example, to smoke, and they should have the
in place to control nearly every aspect
product, communication, and fiscal opportunity and information to switch
of the cigarette business. The question
policies – based on product attributes to better alternatives.
then becomes: What’s the plan to address
and risk profiles. This is of critical
the needs of men and women who are
importance for the people who smoke
looking for less harmful, yet satisfying,
and who deserve policy choices that
alternatives to smoking?
respect them and their ability to decide.
And policies should be sensible,
and based on principled pragmatism
rather than influenced by ideology.
Philip Morris International Sustainability Report 2017 21Philip 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
impacting indoor air quality. By the Transforming our business the Customer Care Call Center
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,
with pilot launches of heated tobacco
IQOS stores
and digital platforms.
products in Fukuoka and Sendai, PMJ has a network of nine dedicated
in May and December 2016. IQOS stores across Japan. They serve as
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
HeatSticks represented 13.9% of the address questions by interested smokers
PMJ has several innovative digital
nationwide tobacco market in Japan. and seek to ensure that smokers switch
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
Billions IQOS experience.
200 197 193
186 182 179
171
Challenges
150
151 With any new product, there are new
challenges that need to be addressed.
100 PMJ is on the forefront of PMI’s
transformation and is striving diligently
to address these new challenges.
50
Accidental ingestion
0 According to the Japan Poison Center
2012 2013 2014 2015 2016 2017 (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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