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Total U.S. Nicotine Trends

Don BurkeSenior Vice PresidentManagement Science Associates, Inc.

August 12, 2020

© 2020 Management Science Associates, Inc. All rights reserved. Source: Wholesale Shipment to Retail data through 6/27/2020

Notice

This presentation is based solely on an analysis conducted by Management Science Associates Inc. (MSAi) and does not necessarily reflect the opinion of any client. The definitions and analysis used in the presentation are based on general industry knowledge and typically represent the way a tobacco retailer may refer to the broad tobacco and nicotine delivery industry. Further, this presentation refers to tobacco and non-tobacco categories, that are often reported as cigarette only, cigars and pipe tobacco only, loose leaf only and electronic and other delivery systems only.

For purposes of this presentation, all of these categories are often referred to as one category using the phrase “nicotine delivery systems”, as that is a category grouping, that in MSAi’s experience, is used by most retail establishments. This presentation’s reference to “nicotine delivery systems” is in that context of the broadest retailer categorization of these various items.

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Agenda

§ Total US Nicotine Trends

§ Trends by Product Form

§ Impact of Pandemic

§ Dollar Store Trade Analysis

§ Menthol Cigarettes

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§ Flavored Cigar Trends

§ Change in Legal Purchase Age

§ Impact of Flavor and Vapor Bans

§ Impact of FDA Deeming Regulations

§ Distributor Analysis


Modern Oral Nicotine - Category Overview

§ The Modern Oral Nicotine category includes items marketed as tobacco-free nicotine products for oral consumption.

w These products are available in varying nicotine strengths and often come in pouch form, but can also include items in the form of toothpicks and lozenges.

w This growing category currently spans 7 different brand families.

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Data Coverage

The following slides highlighting the Total US Nicotine Trends are based on just over 300,000 stores summarizing shipment-to-retail volume for these stores.

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© 2020 Management Science Associates, Inc. All rights reserved.

Total US Nicotine Trends

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Nicotine Distribution by Trade Class for US

52 Weeks Ending Q2-2020

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Total US Nicotine Trends

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% Change 52 Weeks Ending Q2-2020 vs. 52 Weeks Ending Q2-2019

Included Categories

w Moistw Snusw Modern Oral Nicotine

w Vaporw Papers/Tubes/Wrapsw Roll Your Own

w Cigarettesw Large Cigarsw Little/Filtered Cigars

All Outlets

Convenience Gas

Tobacco Outlets

Drug StoresDollar Stores

Grocery Liquor Mass Merch

Consumer Units -0.8% 0.1% -0.8% -19.3% 3.3% -4.8% 1.7% -27.1%Servings -2.6% -1.3% -1.5% -21.7% 0.2% -5.8% -0.2% -28.3%Distribution -0.1% 2.7% -2.8% -27.4% 8.3% -6.0% -0.9% -11.3%


Total US Nicotine Share (Servings)

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Share of Nicotine 52 Weeks Ending Q2-2020 vs. 52 Weeks Ending Q2-2019

Volume in Serving Units

Shr Q2-2019 Shr Q2-2020 Shr ChangeCigarettes 79.8% 78.9% -0.9Moist 7.1% 7.3% +0.2Vapor 5.6% 5.6% 0.0Papers/Tubes/Wraps 3.3% 3.4% +0.1Large Cigars 2.6% 2.8% +0.2Little/Filtered Cigars 1.2% 1.1% -0.1Modern Oral 0.1% 0.6% +0.5Snus 0.3% 0.3% 0.0Pipe Tobacco 0.0% 0.0% 0.0Roll Your Own 0.0% 0.0% 0.0


Overall Total US Nicotine Trends

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+1 to 1.5%


Cigarettes

13


Overall Total US Cigarette Trends

14Source: Shipment to Wholesale & Wholesale Shipment to Retail data through 6/27//2020

-2.0% to-3.0%



15


All Outlets

Convenience Gas

Tobacco Outlets



Cigarettes -3.5% -2.4% -2.1% -18.2% 0.7% -5.7% -1.1% -29.3%Menthol -2.0% -0.1% -4.1% -17.2% -0.4% -6.1% -0.7% -32.3%Non-Menthol -4.3% -3.8% -1.1% -18.8% 1.2% -5.6% -1.4% -27.8%

Cigarettes -3.0% -1.6% -3.1% -6.8% 2.0% -6.0% -3.1% -9.3%Menthol -3.2% -2.1% -3.5% -7.8% 1.7% -6.7% -4.3% -9.2%Non-Menthol -2.9% -1.6% -3.3% -6.9% 1.8% -5.8% -3.0% -9.0%

Cigarettes -5.1% -6.3% -8.7% -7.5% -8.8% -7.3% -7.2% -10.4%Menthol -4.4% -5.1% -8.5% -6.7% -10.4% -6.7% -6.4% -11.4%Non-Menthol -5.2% -6.8% -8.7% -7.9% -7.4% -7.6% -7.5% -9.8%

Distribution

Volume

Items



Overall Cigarettes down -2.1%

13 Weeks Ending Q2-2020 vs. YAGO

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All Other Tobacco

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Cigarettes vs. All Other Tobacco


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Breakdown of All Other Tobacco

All Other Tobacco up 8.9%


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Cigars

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Overall Total US Cigar Trends

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All Outlets

Convenience Gas

Tobacco Outlets



Large Cigars 4.9% 5.7% 5.0% -12.4% 12.6% -1.1% 8.4% -28.1%Little/Filtered Cigars -5.7% -7.1% -5.2% -5.7% 2.4% -7.7% -7.7% -64.1%

Large Cigars -1.1% -0.1% -3.0% -10.4% 11.2% -4.3% -0.3% -15.2%Little/Filtered Cigars -5.1% -5.0% -4.1% -6.5% 4.4% -9.1% -6.9% -53.6%

Large Cigars -3.0% -2.1% -3.8% -8.7% -4.0% -3.2% -2.2% -0.3%Little/Filtered Cigars -8.9% -9.9% -10.1% -7.6% -7.1% -7.9% -10.3% -62.0%

Volume

Distribution

Items


Moist

22


Overall Total US Moist Trends

23

0% to 1%


Other Tobacco Products

24


Overall Total US OTP Trends

25


All Outlets

Convenience Gas

Tobacco Outlets



Moist -0.3% -0.2% 1.3% 54.4% 21.3% -1.8% 4.5% -15.1%Snus 0.5% -0.2% -1.4% +++ -64.9% 27.9% 4.2% 8.5%Modern Oral +++ +++ 190.9% +++ N/A +++ +++ +++Roll Your Own -12.3% -9.1% -1.6% -23.6% -47.9% -18.3% -3.9% -76.2%Pipe Tobacco -5.3% -1.2% -7.4% -23.8% 19.0% -4.8% 1.8% -124.8%Papers/Tubes/Wraps 9.3% 11.5% 8.6% -9.1% 21.8% 5.0% 13.6% 37.5%

Moist -0.6% -1.2% -2.7% 114.2% 7.4% -3.6% -2.7% -8.3%Snus 0.4% -0.8% -4.0% +++ -33.7% 15.7% 1.3% 20.5%Modern Oral +++ +++ 232.5% +++ N/A +++ 296.2% +++Roll Your Own -9.5% -7.5% -4.7% -27.2% -12.2% -18.7% -3.9% -55.2%Pipe Tobacco 0.0% 0.2% -1.1% -26.3% 20.4% -7.9% 1.6% -78.4%Papers/Tubes/Wraps 3.4% 3.4% 0.3% -22.4% 19.6% 2.1% 4.0% 36.6%

Moist -2.1% -1.9% -2.1% 0.9% -48.2% 0.0% -0.3% -5.1%Snus -5.4% -2.6% 6.3% 5.0% -38.5% -4.9% 3.3% -0.4%Modern Oral 36.6% 42.4% 32.3% 251.2% N/A 104.6% 64.2% 52.9%Roll Your Own -6.5% -2.3% -5.4% -7.3% 5.7% -6.5% -4.3% -32.7%Pipe Tobacco -6.7% -3.9% -6.1% -5.9% 143.5% -4.4% -5.0% -90.1%Papers/Tubes/Wraps 10.9% 11.5% 11.3% 3.9% 33.0% 8.8% 10.8% -52.5%

Volume

Distribution

Items


Modern Oral (Tobacco Derived Products)

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Modern Oral Nicotine Trend by Trade Channel

Modern Oral Nicotine Quarterly Volume Build% values are Q2-2020 vs. previous quarter

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Modern Oral Nicotine Volume & Item Count

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Modern Oral Nicotine Volume & Distribution

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Modern Oral Nicotine Trend – Same StoresModern Oral Nicotine Quarterly Volume Build

Same Stores Only% values are change vs. previous quarter

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Modern Oral Nicotine Share of Nicotine by State

Modern Oral Share of Nicotine – Q2 2020

31

Total US: 0.7%

0% - 0.38%

0.39% - 0.62%

0.63% - 1.11%

1.12% +


Oral and Tobacco-Free Delivery Change in Share of Nicotine

32

7.7%8.2% (+0.5)

6.5%

= Modern Oral + Moist + Snus = Modern Oral + Vapor

6.2% (-0.3)



Modern Oral Nicotine Trend vs. Vapor - Servings

*Oral = Moist + Snus + Modern Oral

33



Vapor

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Overall Total US Vapor Trends (Servings)

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All Outlets

Convenience Gas

Tobacco Outlets



Cartridges -1.3% 4.3% -13.9% -64.8% +++ -28.6% -7.5% -51.9%Disposables 27.6% 75.9% 141.5% -79.7% -107.1% -27.9% +++ -101.5%Kits -84.7% -83.8% -90.6% -93.0% -79.4% -80.4% -90.1% -77.1%e-Liquid -42.5% -59.6% -41.1% -82.2% -325.7% -78.1% -52.1% -58.8%

Cartridges -5.1% 4.9% -6.4% -70.6% +++ -42.4% 4.3% -60.6%Disposables -12.7% 11.2% -3.8% -71.2% -94.8% -50.6% 35.6% -80.6%Kits -61.5% -59.8% -65.6% -71.7% -70.5% -71.3% -67.2% -65.0%e-Liquid -53.6% -61.3% -36.9% -88.6% 188.9% -77.8% -51.4% -86.5%

Cartridges -4.5% -1.1% -2.3% -26.4% 6.7% -11.1% -4.2% -40.8%Disposables 133.6% 163.0% 173.7% -48.0% -9.9% 170.7% 260.7% -33.3%Kits -31.3% -27.2% -27.3% -52.4% -69.2% -38.2% -31.6% -63.2%e-Liquid -36.4% -50.1% -35.2% -71.4% 164.7% -57.9% -53.8% -92.1%

Distribution

Items

Volume


Overview of Vapor Category

Total Vapor down -12.6% (includes Accessories)


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Vapor Volume Trend

Total US Vapor Volume

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flavor volume returns


Quarterly Volume (% Containing No Consumable Product)

95% of kit volume in 2Q20 was non-consumable/accessory

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Accessories vs. Traditional Kits


Total Vapor Volume by Flavor TypeQ2-2020 vs. YAGO

Total Vapor down -12.3% (not including Accessories)

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Impact of Pandemic

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Cigarettes

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Large Cigars

42


Moist

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Papers/Tubes/Wraps

44


Vapor

45


Little/Filtered Cigars

46


Modern Oral

47


Snus

48


Roll Your Own

49


Pipe Tobacco

50


YTD Volume v YAGO

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YTD Volume v YAGO

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Dollar Store Trade Channel Analysis

53


Dollar Store – Same Store Growth & Decline

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% Change in Dollar Store Volume, Q2-2020 vs. YAGOSame Stores Only


Menthol Cigarettes Trends Analysis

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Cigarette Volume by Flavor Type

Q2-2020 vs. YAGO

Total Cigarettes down -2.1%

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Flavored Cigar Trends Analysis

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Cigar Volume by Flavor Type and Sub-Category

Share of Cigar Sub-Category Volume by Flavor Type, Q2-2020

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Flavor Large Cigars Little/Filtered CigarsTobacco 13.8% -6.9%Menthol -41.8% -10.3%Mint -45.3% -18.2%Flavored 13.1% -14.8%

Q2-2020 vs. YAGO


Impact of Changes in Legal Tobacco Purchasing Age

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Age 21 Purchase Restriction State Overview

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*Federal 21+ legal purchase age in effect as of 2020

12/28/2019


Age 21 Purchase Restriction State Overview – No IL or DC

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*Federal 21+ legal purchase age in effect as of 2020

Estimated Potential Impact of 21+ to Major Categories

0% to -0.5%

-3% to -8%

0% to -0.5%

DC saw a $2 SET increase in October 2018IL saw a $1 SET increase in July 2018

12/28/2019


Impact of Flavor and Vapor Bans

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Flavored Cartridge Ban

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“Flavored” includes Mint but not Menthol.


Flavored Cartridge Ban – Convenience

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Flavored Cartridge Ban – Tobacco Outlet

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Flavored Cartridge Ban – All Other Trade

66



San Francisco Ban

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• With enforcement beginning January 1, 2019, San Francisco banned all flavored tobacco, including menthol and mint.

-34%-27% -24%

+19%

12/28/2019



2016 Analysis on Impact of FDA Deeming Regulations

68


Overall Total Possible Impact

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While approximately 30% of all nicotine items possibly will be impacted by the FDA Deeming Regulations that represents only about 8% of total nicotine volume

% Volume of Nicotine % of Items Possibly Impacted

% of Volume Possibly Impacted

Cigarettes 83% 14% 4%Cigars 4% 49% 49%Other Tobacco Products 10% 64% 5%Vapor 3% 100% 100%Total 100% 30% 8%

Note: Figures calculated using wholesaler shipment data managed by MSAi and may differ from manufacturer’s first ship date. These figures are estimates from 2016 of potential impacts only if the regulations are applied as currently written and there is no action by the courts or manufacturers.


Distributor Summary

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Distributor Summary

§ In total 1,541 distributors of Cigarettes, Moist, Snus, Large Cigars, Little/Filtered Cigars, Roll Your Own, Papers/Tubes/Wraps, Vapor, Modern Oral, and Pipe Tobacco were used in the following analysis.

§ Distributors were ranked based on their industry volume. § High Volume – Represents the Top 33%§ Mid Volume – Represents the Middle 33%§ Low Volume – Represents the Bottom 33%

Avg. Distributor Volume & Avg. Store Volume are weekly averages

Distributor Count

Avg. Store Count

Avg. Dist. Volume

Avg. Store Volume

Avg. Item Count

Avg. Category

High Volume 39 2,591 2,721,927 1,480 1,371 9.7Mid Volume 83 1,179 1,228,331 1,780 1,272 9.3Low Volume 1,419 242 73,302 283 418 5.6


Industry Summary – 52 Weeks Ending Q2-2020 vs. YAGO






Vapor Sub-Category – High Volume Distributor

Item count is total items across all distributors


Vapor Sub-Category – Mid Volume Distributor



Vapor Sub-Category – Low Volume Distributor



Weeks of Supply by Distributor Size & CategoryAverage Weeks of Supply, Q2-2020

Weeks of supply calculated as average weekly inventory/average weekly shipments across Q2-2020. Distributors shipping <1,000 units for a category across the quarter were excluded from that category’s calculation

THANK YOU!

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