Business Transformation Metrics: assessing our progress toward a world without cigarettes

30 Jun 2020 · 4 min read
Our Business Transformation Metrics allow stakeholders to transparently assess both the pace and scale of our transformation.
160727_PMI Neuchatel 44_main_entrance_outside--D36A8427 article highlight

PMI believes sustainability and business performance are interlinked: at PMI, they are fully interrelated and mutually reinforcing, and are organized and presented to all stakeholders, including shareholders, in an integrated way.

We also firmly believe that sustainability strategy is corporate strategy, and that ESG topics are business topics. Reflecting this commitment to sustainability, our global sustainability team is now part of our Finance function, reporting directly to our CFO. In addition, executive compensation is now more clearly linked to ESG performance, complementing the strong product transformation incentives already present.

Working together for a smoke-free future

Working together with our key stakeholders is also fundamental to achieving our company’s purpose, and can help us accelerate the pace at which we achieve it. Our stakeholders asked us for more transparent, comparable, and reliable information on our ESG risks and performance.

So, in 2016, PMI introduced a set of bespoke Business Transformation Metrics to complement our ESG disclosure. These metrics allow stakeholders to transparently assess both the pace and scale of PMI’s transformation. 

Since then, and based on stakeholder feedback, PMI has expanded the number of Business Transformation Metrics to 28, with two new metrics introduced in our Integrated Report 2020. This includes:

  • Supply chain direct spend on smoke-free products as a proportion of the total
  • Cumulative investment on smoke-free products since 2008
Note:
The 2020 metrics marked with an asterisk (*) are subject to PwC’s Assurance Report (see page 146 of PMI Integrated Report 2020).
Aspirational goals, marked with two asterisks (**), do not constitute financial projections.
Download Business Transformation Metrics

Business Transformation Metrics
2016 2017 2018 2019 2020 Goals
R&D expenditure (in millions USD)* 429 453 383 465 495
R&D expenditure (smoke-free/total)*1 72% 74% 92% 98% 99%
Number of R&D positions (FTEs)2 n/a n/a 764 942 934
Patents granted in IP5 jurisdictions relating to smoke-free products (cumulative)3 170 300 480 740 1,300
Number of studies completed by PMI on smoke-free products (cumulative, since 2015)

Toxicological assessment

36 57 82 109 146

Clinical assessment

11 12 19 19 22

Perception and behavior (premarket and post-market)4

7 (7+0) 8 (7+1) 12 (9+3) 13 (9+4) 30 (15+15)
Supply chain direct spend expenditure (smoke-free/total)5 n/a n/a n/a 35% 33%
Cumulative investments behind smoke-free products (since 2008, in billions USD)6 3.2 4.6 6.2 7.2 8.1
Number of factories producing smoke-free products out of total number of factories*7 3 out of 48 4 out of 46 8 out of 44 8 out of 38 8 out of 39
Year-on-year change in number of SKUs—combustible products8 -1.7% -6.5% -6.1% -5.5% -4.1%
Year-on-year change in number of SKUs—smoke-free products 78.2% 9.9% 37.1% 24.9% 38.2%
SKUs (smoke-free/total) 4.7% 5.5% 7.8% 10.1% 13.9%
Number of markets where IQOS is available for sale* 20 38 44 52 64
Proportion of markets where IQOS is available for sale that are outside the OECD*10 32% 41% 44% 45% 52%
Number of IQOS stores10 26 63 81 199 259
Number of retailers that sell PMI smoke-free product consumables (in thousands) 90 292 488 679 749
Commercial expenditure (marketing) (smoke-free/total)* 15% 39% 60% 71% 76%
Smoke-free product shipment volume (billion units)* 8 36 42 60 76 >250 Smoke-free products shipment volume (in billion units)
Combustible product shipment volume (billion units)* 845 791 767 732 654 <550 Combustible product shipment volume (in billion units)
Smoke-free product shipment ratio (smoke-free/total)*11 0.9% 4.4% 5.1% 7.6% 10.4% >30% Smoke-free product shipment ratio (smoke-free/total)
Total IQOS users (in millions)*12 2.1 6.9 9.6 13.5 17.5
Estimated users who have switched to IQOS and stopped smoking (in millions)*12 1.5 4.7 6.6 9.6 12.7 >40m Estimated users who have switched to PMI smoke-free products and stopped smoking
Estimated users outside the OECD countries who have switched to IQOS and stopped smoking (in millions)*9 0.0 0.2 1.1 2.9 4.3 >20m Estimated users outside the OECD countries who have switched to PMI smoke-free products and stopped smoking
Net revenues (smoke-free/total)*13 2.7% 12.7% 13.8% 18.7% 23.8% >50% Net revenues (smoke-free/total)**
Number of markets where net revenues from smoke-free products exceed 10% of total net revenues*14 1 5 19 31 38
Number of markets where net revenues from smoke-free products exceed 50% of total net revenues*14 0 1 3 4 6

1 Smoke-free products include heated tobacco units, devices, and e-cigarettes. Total products include smoke-free products, cigarettes, and other combustible products.

2 R&D positions include scientists, engineers, technicians, and support staff. Comparable data for years prior to 2018 are not available, as the scope of R&D positions changed following company organizational changes.

3 IP5 jurisdictions are Europe (patents granted by the European Patent Office), China, South Korea, Japan, and the U.S.

4 Data related to perception and behavior studies were restated to include both premarket and post-market studies.

5 Direct spend focuses on materials used in the manufacture of our products; it includes tobacco leaf, direct materials, and electronic devices and accessories.

6 Investments reflect research, product and commercial development, production capacity, scientific substantiation, and studies on adult smoker understanding. Figure does not include commercial deployment costs.

7 Production temporarily stopped at one of our factories in Germany in December 2019 and resumed early 2020.

8 “SKUs” stands for stock-keeping units. References to number of SKUs are based on the latest available data from a number of internal sources, and exclude People’s Republic of China and the U.S.

9 Excluding PMI Duty Free. Data are based on 2020 OECD country list.

10 Includes flagship stores, and small, large, and temporary boutiques

11 The smoke-free product shipment ratio is compiled based on millions of units.

12 Excluding PMI Duty Free; see glossary.

13 Net of excise taxes.

14 Excluding PMI Duty Free and the U.S.

Transforming our stakeholder engagement

While our commitment to a sustainable smoke-free future is unwavering, we cannot complete this journey alone. Stakeholder engagement and collaboration are a crucial part of innovation, as they help inform product development. We also recognize that we cannot design new solutions effectively unless we first understand the issues we seek to address, as well as stakeholder concerns.

As we continue to transform our business and our organization, we rely on the cooperation of a host of stakeholders—from supply chain partners to regulators and public health authorities.

This requires that we work continuously to build trust, confidence. Multi-stakeholder engagement is the way to achieve systemic change; it will allow us to effectively transform and to lead an industry transition away from cigarettes. Engaging with stakeholders in an open and transparent way allows us to accelerate processes through a shared understanding of the context and the challenges.

 

 

This communication should be read in conjunction with PMI’s Integrated Report 2020, available here.

Aspirational targets and goals do not constitute financial projections, and achievement of future results is subject to risks, uncertainties, and inaccurate assumptions, as outlined in the forward-looking and cautionary statements on page 145 of the Integrated Report 2020. Key terms, definitions and explanatory notes are set forth in the Integrated Report 2020. In the 2020 Integrated Report and in related communications, the term “materiality,” “material,” and similar terms, when used in the context of economic, environmental and social topics, are defined in the referenced sustainability standards, and are not meant to correspond to the concept of materiality under the U.S. securities laws and/or disclosures required by the U.S. Securities and Exchange Commission.