Quality Growth – New Consumer Experiences Matthew Phillips

Quality Growth – New Consumer Experiences
Matthew Phillips, Chief Development Officer
Disclaimer
Certain statements in this presentation
constitute or may constitute forward-looking
statements.
Any
statement
in
this
presentation that is not a statement of
historical fact including, without limitation,
those regarding the Company’s future
expectations,
operations,
financial
performance,
financial
condition
and
business is or may be a forward-looking
statement. Such forward-looking statements
are subject to risks and uncertainties that
may cause actual results to differ materially
from those projected or implied in any
forward-looking statement. These risks and
uncertainties include, among other factors,
changing economic, financial, business or
other market conditions. These and other
factors could adversely affect the outcome
2 | Imperial Brands Investor Day | June 2016
and financial effects of the plans and events
described in this presentation. As a result,
you are cautioned not to place any reliance
on such forward-looking statements. The
forward-looking statements reflect knowledge
and information available at the date of this
presentation and the Company undertakes no
obligation to update its view of such risks and
uncertainties or to update the forward-looking
statements contained herein. Nothing in this
presentation should be construed as a profit
forecast or profit estimate and no statement
in this presentation should be interpreted to
mean that the future earnings per share of
the Company for current or future financial
years will necessarily match or exceed the
historical or published earnings per share of
the Company. This presentation has been
prepared for, and only for the members of the
Company, as a body, and no other persons.
The Company, its directors, employees,
agents or advisers do not accept or assume
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this presentation is shown or into whose
hands it may come and any such
responsibility or liability is expressly
disclaimed. The material in this presentation
is not provided for tobacco product
advertising or promotional purposes. This
material does not constitute and should not
be construed as constituting an offer to sell,
or a solicitation of an offer to buy, any
tobacco products. The Company’s products
are sold only in compliance with the laws of
the particular jurisdictions in which they are
sold.
Consumer Needs
More consumers, more occasions
Consumer
focus
3 | Imperial Brands Investor Day | June 2016
Future Opportunity
Nicotine without tobacco
Nicotine by consumption vehicle
100%
80%
e-vapour
Chewing tobacco
60%
Pipe/Rolling tobacco
Cigars
40%
Snuff
20%
0%
1880
` Cigarettes
Consumers have enjoyed nicotine
in different formats for centuries
1895
1910
4 | Imperial Brands Investor Day | June 2016
1925
1940
1955
1970
1985
2000
2015
Consumers
The experience and rituals of smoking but without tobacco
Tobacco
Combustible
tobacco
products
Heated and
hybrid tobacco
products
5 | Imperial Brands Investor Day | June 2016
Non-Tobacco
e-vapour
Nicotine
replacement
therapy
Fontem Ventures
• Established Fontem Ventures
• Built our know-how
• Acquired and developed IP
• Acquired blu
• Assembling the technology roadmap
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Quality, Agility, Discipline
E-vapour
• Best brand in blu
• Pursuing best
experience through
technology
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• Lean and scalable
operating model
• Build presence in 4 key
markets then scale
• Science and regulation
will shape category
• Licensing 1st generation
technology
Quality Growth – Our Assets and Strategy in E-vapour
Arthur Van Benthem, CEO, Fontem Ventures
E-vapour does not Fully Satisfy Smokers …Yet
85%
85% of US smokers are aware of EVPs
57%
57% of US smokers have tried
6.5%
• Low conversion rates, despite
high awareness and availability
• Reflecting smoker dissatisfaction
with EVP performance
Only 6.5% are loyal users
• “an eVape is just not a cigarette”
80%
80% of regular vapers continue to smoke
9 | Imperial Brands Investor Day | June 2016
Endorsement is Building in Europe
• “e-cigarettes are 95% less harmful to your health than normal
cigarettes”
• “helps most smokers to quit tobacco altogether”
• “regulation should not be allowed to significantly inhibit the
development and use of EVPs”
• “today the work of the HCSP shows that e-cigarettes can be
considered as a tool for tobacco cessation for smokers… and
constitutes a harm reduction tool”
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FDA Deeming Regulations
• Near term - compliance and costs will push out
least reputable suppliers
• Longer term:
– quality of EVP products will improve
– sales through legitimate retailers
– positive impact on our market share and margins
• Concern - product authorisation process
slows innovation
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Expected Growth of E-vapour?
80% in 4 markets today
US, UK, France & Italy
$34B Wells Fargo
90% in 7 markets by 2020
Plus: China, Poland & Germany
Technology & Science
Unlocks growth
Canaccord
$21B Technavio
Growth
Not linear
2012 2013 2014 2015 2016F 2017F 2018F 2019F 2020F
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Quality Growth – Science of E-vapour
Joe Thompson, Director Product Science
Answers to the 4 Big Science Questions
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1
2
What impact
do EVPs
have on
consumers?
What impact
do EVPs
have on
bystanders?
3
4
Do EVPs
re-normalise
or act as a
gateway to
tobacco?
What is the
addictiveness
and health
impact of
nicotine?
Q1 Impact of EVP on Consumers?
>98% reduction of harmful chemicals
Conventional
cigarettes
100%
75%
50%
100%
>99%
>99%
>98%
>98%
>99%
>98%
>99%
reduction
reduction
reduction
reduction
reduction
reduction
reduction
reduction
25%
EVP
0%
Carbon
monoxide
Carbonyls Phenolics
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Volatiles
Metals
TSNAs
PAA
PAH
Air
Source: Rana Tayyarah, Gerald A. Long. Comparison of select analytes in aerosol from e-cigarettes with smoke
from conventional cigarettes and with ambient air Regulatory Toxicology and Pharmacology 2014, 70, 704-710.
Q1
Impact of EVP on Consumers?
Reduced toxicity in vitro
Conventional
cigarettes
100%
75%
50%
>99%
>98%
>99%
reduction
reduction
reduction
25%
EVP
0%
Cytotoxicity
(NRU)
16 | Imperial Brands Investor Day | June 2016
Bacterial
mutagenicity
(Ames)
Genotoxicity
(IVM)
Control
Source: Misra, M.; Leverette, R.D.; Cooper, B.T.; Bennett, M.B.; Brown, S.E. Comparative in vitro toxicity profile of electronic and tobacco cigarettes, smokeless tobacco and
nicotine replacement therapy products: E-liquids, extracts and collected aerosols. International journal of environmental research and public health 2014, 11, 11325-11347.
Q1
Supported by Clinical Trials
% change in urine
1-OHP
(pyrene exposure)
S-PMA
(benzene exposure)
CEMA
(acrylonitrile exposure)
% change in blood
Nicotine
Carboxyhaemoglobin [COHb]
(carbon monoxide exposure) (nicotine exposure)
MHBMA
(1,3-butadiene exposure)
Cotinine
(nicotine exposure)
(0%)
(0%)
(25%)
(25%)
(50%)
(75%)
(100%)
(50%)
-69%
E-cig use
-35%
-70%
Dual use Cessation
NNAL
(TSNA exposure)
-94%
E-cig use
-30%
-94%
Dual use Cessation
NNN
(TSNA exposure)
-85%
E-cig use
-32%
-86%
Dual use Cessation
3-HPMA
(acrolein exposure)
-90%
E-cig use
-26%
-84%
Dual use Cessation
HMPMA
(crotonaldehyde exposure)
(0%)
(75%)
-83%
-23%
-75%
-37%
-17%
-99%
-30%
+15%
-98%
E-cig use
Dual use
Cessation
E-cig use
Dual use
Cessation
E-cig use
Dual use
Cessation
(25%)
(50%)
(75%)
(100%)
-62%
E-cig use
-22%
-66%
Dual use Cessation
-93%
E-cig use
-37%
-98%
Dual use Cessation
-83%
E-cig use
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-36%
-87%
Dual use Cessation
-82%
E-cig use
-33%
-88%
Dual use Cessation
Source: D’Ruiz, C. Evaluation of biomarkers of smoke exposure in adult smokers following dual use and
complete substitution of cigarettes with electronic cigarettes. Tobacco Science Research Conference 2015.
Q2
Impact Of EVP On Bystanders?
Conventional
Cigarettes
100%
75%
80%
50%
reduction
At background level
25%
EVP
0%
Air
Nicotine
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Harmful Chemicals
Source: Grant O’Connell, Stéphane Colard , Xavier Cahours and John D. Pritchard; An Assessment of Indoor Air Quality before, during and after
Unrestricted Use of E-Cigarettes in a Small Room. International journal of environmental research and public health 2015, 12, 4889-4907.
Q3
Do
EVP Act as a Gateway to Tobacco?
• EVP being a gateway to smoking is not evidence based
• Two behavioural studies by the UK Centre for Substance Use Research*
US study
UK study
• Investigating EVPs and smoking initiation,
relapse and dependency on nicotine
• EVPs are a roadblock to smoking initiation,
not a gateway
• 30,000 vapers enrolled
• EVPs de-normalise smoking, rather than
re-normalise it
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*Studies funded by Fontem Ventures
Q4
Addictiveness and Health Impact of Nicotine?
Nicotine is
regarded
addictive
• Nicotine is regarded as addictive
• EVPs meet consumers smoking-ritual needs
• Growing evidence that EVPs support smoking cessation
No toxicity
concern
• No toxicity concern with nicotine in the small doses in an EVP
Long term
health risks?
• USSG: Science is inadequate to conclude either way on nicotine and cancer
• Any long term risks are unknown
• Further long term research is required
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Answers to the 4 Big Science Questions
 
1
2
What impact
do EVPs
have on
consumers?
What impact
do EVPs
have on
bystanders?

3
4
Do EVPs
re-normalise
or act as a
gateway to
tobacco?
What is the
addictiveness
and health
impact of
nicotine?
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Consumer perception and
behaviour assessment
Post-market surveillance
Quality Growth – Our Strategy in E-vapour
Arthur Van Benthem, CEO, Fontem Ventures
blu Strategy
Global
Invest
Build
Profitability
• blu
• Brand
• Product range
• Innovation
• Lean and
scalable
operating model
•Global
4 markets
•• IP
blulicensing
• Digital
23 | Imperial Brands Investor Day | June 2016
• product range
blu is the Best Brand
• The consumer preferred e-vapour brand
• Enjoy your moment, your truth, and make it matter!
24 |
Quality Growth
• Market
• Conversion
• Growth momentum
• Best product, best brand
• Consumer loyalty
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Source: Nielsen retail audit
blu Creates Value
Daily gross margin earned with cigarettes and blu
from an average consumer in the USA
Cigarettes
£0.50
26 | Imperial Brands Investor Day | June 2016
blu
G2
£0.58
blu
G3
£0.67
Sources Mainly from Lower Tar and Menthol
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Four Levers to Drive Quality Profit Growth
Pricing
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Trade
margin
Economies
of scale
Online
Roadmap to a ‘Better than a Cigarette’ Consumer Experience
Draw
Vaping
Flavour
Hit
Vape
Design
Accessories
Kick
29 | Imperial Brands Investor Day | June 2016
Convince Yourself…
Responsive
Choice
G3
works like a cigarette
Style
Familiarity
Simplicity
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Quality, Agility, Discipline
E-vapour
• Best brand in blu
• Pursuing best
experience through
technology
31 | Imperial Brands Investor Day | June 2016
• Lean and scalable
operating model
• Build presence in 4 key
markets then scale
• Science and regulation
will shape category
• Licensing 1st generation
technology