17th November 2017

www.ECigIntelligence.com

Industry Post-Regulation E-Cigarette Summit 2017 Tim Phillips, ECigIntelligence

Agenda

Post-TPD: Has regulation been a success? Heated Tobacco: a success? Innovation: what next?

2

1

2

3

TPD: Has it been a success?

• Products notified: c. 150,000; 32,000+ in UK

• Companies notifying: 2,500+

• EC’s Common Entry Gate stretched to breaking:

– Peak: 40,000 submissions in one day; averaged 1,000+ per day

– huge problems with early notifications, system now upgraded

• Peak of activity pre November 2016 and May 2017 deadlines

• More submissions per company: increasing confidence in the regulatory system?

-

20

40

60

80

100

120

3Q 2016 4Q 2016 1Q 2017 2Q 2017

Submissions per Notifying Party

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

3Q 2016 4Q 2016 1Q 2017 2Q 2017

Total E-cigarette product submissions

Source: European Commission; October 2017

Continuing growth in sector since TPD

• Most EU countries continue to show growth following TPD implementation

• Well developed markets slow growth or static; new markets growing rapidly

• Many US companies entered EU while uncertainty over Deeming Regulations

4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

United Kingdom United States of America France Russia Germany

2015 2016 2017 % change 2015 - 2017

Source: ECigIntelligence, September 2017

How much of EU market captured by TPD?

• In many countries, regulations only apply to nicotine containing e-liquid

• Shake and Vape: definition?

– huge cost savings for consumers

– consumer demand for larger volumes

– no notification requirement

• Many markets confirmed no enforcement against shake & vape; for others, emerging area of law

5

0%

10%

20%

30%

40%

50%

60%

Germany France Italy Poland UnitedKingdom

Estimated % of total market using non-TPD product

€ 0.00

€ 0.10

€ 0.20

€ 0.30

€ 0.40

€ 0.50

€ 0.60

Germany France Italy United Kingdom

Price of e-liquid (€/ml): TPD 10ml vs Shake&Vape

10ml bottle 60ml short fill + 10ml shot

Source: ECigIntelligence consumer survey 2017

30% average price difference

Nicotine strength: consumer preferences suit Shake&Vape

• Among advanced tank users, predominance of 3 and 6 mg/ml liquid

• Shake & Vape products generally cater to these consumers (50ml 0mg + 10ml nic. shot)

6 Source: ECigIntelligence consumer surveys carried out during 2017

0%

10%

20%

30%

40%

50%

60%

No nicotine 3mg/ml 6mg/ml 12mg/ml 18mg/ml Other

Nicotine concentration (mg/ml) among advance tank users

UK (n=334) France (n=80) Germany (n=204) Italy (n=96) Poland (n=100) US (n=6046)

However consumer demand for larger bottle sizes is global

• Consumers are using increasing volume of liquid as power of devices increases/nicotine concentration decreases

• US bottles have been getting larger, with growth in 60ml and 120ml this year at expense of 30ml and smaller

7

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

10 15 30 60 120 160

Bottle size (ml) of last e-liquid purchase in the U.S.

2016 2017

Source: ECigIntelligence consumer surveys, 2016 n=5898; 2017 n=4228

But price difference not as pronounced in US

• Although 10ml bottles are rare in the US, comparison of prices of 60ml with <15ml suggest smaller price difference

• Could be due to regulatory cost savings?

8

0.00 €

0.10 €

0.20 €

0.30 €

0.40 €

0.50 €

0.60 €

0.70 €

15ml and under 30ml 60ml 100ml and over

Price per ml online for different bottle sizes in the U.S., 2016-2017

2016 2017

2016 Average: $0.53

2017 Average: $0.40

-26%

Source: ECigIntelligence

Heated tobacco (t-vapor): online tracking of strong growth

9

0

10

20

30

40

50

60

70

80

90

100

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Go

ogl

e T

ren

ds

Tota

l mo

nth

ly v

isit

s

Total monthly visits Google Trends

Notes: monthly visits to: IQOS (all official websites), discoverglo.com, discoverglo.jp, ploom.jp.

Google Trends Keywords used: IQOS, Ploom Tech, Glo, Heated tobacco, アイコス (IQOS in

Japanese); Google Trends data indexed to 100% Source: SimilarWeb and Google Trends,

September 2017

0.8 2.2

3.5 4.9

7.6

9.6

12.7

14.6

1,461,509 2,605,630

5,981,516

4,900,215

5,652,323

10,064,741 10,157,826

9,092,768

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

0

5

10

15

20

25

Q4 2015 Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017

Tota

l mo

nth

ly v

isit

s

Off

take

sh

are

Japanese offtake share Total monthly visits in Japan

Note: Offtake share represents select C-Store sales volume for HeatSticks as a

percentage of the total retail sales volume for cigarettes and heated tobacco units.

Monthly visits to: iqos.jp

Source: SimilarWeb, PMI, October 2017

IQOS in Japan: online traffic and sales correlation

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

IQOS Ploom glo

Notes: monthly visits to: iqos.jp, discoverglo.com AND discoverglo.jp, ploom.jp

Source: SimilarWeb, September 2017

glo launched in Japan

Ploom officialy

launched in Japan

Heated Tobacco: new entrants in Japan

IQOS traffic share globally: slow growth in non-Japan markets

12

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

iqos.jp iqos.ru kr.myiqos.com iqos.com.ua iqos.co.il iqos.it

iqos.ro iqos.de iqos.pt iqos.gr iqos.co.uk iqos.ch

Source: SimilarWeb, September 2017

Heated Tobacco: taxation benefit compared to combustibles

13

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU Country

% Net excise tax rate; Heated Tobacco vs Combustible Cigarettes

Source: ECigIntelligence August 2017

Pod systems in US: new products focus on lower power

14 Notes: starter kits come with varying number of empty or prefilled pods

Source: ECigIntelligence October 2017

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0

500

1,000

1,500

2,000

2,500

$0 $10 $20 $30 $40 $50 $60 $70

Bat

tery

, mA

h

Starter kit or equivalent prices (USD)

Established pod systems

New pod systems in 2017

US Pods: majority refillable; nic. salts preferred

15

Notes: n= 21 pod system devices

Source: ECigIntelligence

Hybrid open / closed pod system,

19%

Open pod system, 33% Easily hacked, 24%

Hard to hack, 14%

Can´t be hacked, 10%

Closed pod system, [VALUE]

Notes: xAOC/Convenience Database from Nielsen

Source: Nielsen data provided by Wells & Fargo Securities LLC