1. Taxation and New Products Gregory N Connolly DMD, MPH National Smokeless and Spit Tobacco Summit September 22,2009

2. New Smokeless Products and Acquisitions by the Cigarette Industry Swisher $4.5 Billion RRJ – 2005 PM Acquired USSTC $16 Billion 2008 PM – Swedish Match International Joint Venture Introduction of New Forms: Snus, Dissolvables ? Today 88% of the Smokeless Market Owned by the Cigarette Industry

4. P=Premium brands Sources: FTC Reports, Annual Report of Altria and USSTC, Tax Burden on Tobacco, NAAG, USB. Components of a Tin of Moist Snuff and a Pack of Cigarettes (2008)

5. Tobacco Products Sales

6. “This flurry of smokeless category activity reflects the overall strength and growth of the OTP market. In addition to smokers’ desire for new smokeless alternatives, that growth is driven by new product introductions and flavor innovations.” “This flurry of smokeless category activity reflects the overall strength and growth of the OTP market. In addition to smokers’ desire for new smokeless alternatives, that growth is driven by new product introductions and flavor innovations.” www.awmanet.org/dc/dc_cover0706.html www.awmanet.org/dc/dc_cover0706.htmlwww.awmanet.org/dc/dc_cover0706.html

8. Dual Users are a Big Driver of Current MST Growth “Based on our research, we believe the bulk of smoker migration into MST is coming from dual users (consumers that dip and smoke). We estimate that about 30% of dippers also smoke. The proliferation of smoking bans has effectively increased the number of dipping occasions. “Based on our research, we believe the bulk of smoker migration into MST is coming from dual users (consumers that dip and smoke). We estimate that about 30% of dippers also smoke. The proliferation of smoking bans has effectively increased the number of dipping occasions. Source: UBS Research, 2007, Nat’l Tobacco Incidence Study [UST]

9. Effective Prices of Other Tobacco Products and Cigarettes per Alternative Tax Rates Data sources: Average price (except for cigarettes) from AC Nielsen ScanTrak; Average cigarette price from Tax Burden on Tobacco (2008). State tax rates from Tobacco Free kids. Federal Tax Rates from U.S Department of Treasury

10. Recent Changes in Federal Excise Taxes for Smokeless Other Tobacco Products

11. Smokeless Tobacco – Prices Data Sources: ACNielsen Scan Track; Orzechowski, Walker (2008) Prices and taxes are based on the following units: Moist snuff (1.2 oz); Dry Snuff (1.0 oz); Skoal Bandits (1.2 oz); Camel Snus (20 pouches); Camel Orbs (15 tablets); RYO (20 pieces); Small Cigars (20 pieces); Cigarettes (20 pieces)

12. Weight-based Taxation of New versus Traditional Smokeless Products TFK

14. Quotes: Moist smokeless tobacco volume is increasing faster in the nine US states that have a weight-based tax than in those with a percentage tax based on the wholesale price, indicating “there’s a latent growth in the category that may be realized if states convert to a weight- based tax.” – Retail and foodservice consulting firm, Willard Bishop.

15. State Weight-based and Ad Valorem Smokeless Tobacco Taxes (Number of States) Moist SnuffChewing and Smoking Tobacco Weight-Based189 Ad Valorem3141 Pennsylvania currently has no tax on non-cigarette tobacco products. Kentucky taxes snuff 19 cents per unit.

16. Current Moist Snuff Among Youth Ages 12-17 Years Data source: U.S. Substance Abuse and Mental Health Services Agency, National Survey on Drug Use and Health, 2002 - 2007

19. *Note –Sales and price data were derived from ScanTrak scanner data licensed from ACNielsen, a global provider of marketing research information services, in US food stores with at least $2 million in annual sales, US drug stores with at least $1 million in annual sales and all US mass merchandisers, with the exception of WalMart.

20. “New Snus Products not Expected to Hurt Cigarette Volumes The majority of our survey respondents (64%) do not believe either of the new snus products will affect cigarette volumes by promoting current smokers to quit at a faster rate. Rather, the new snus product will most likely (1) attract smokers that have previously quit, (2) that are currently using moist snuff, (3) smokers that are looking for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would have quit anyway. This bodes well for RAI and MO share holders as these new snus products don’t appear to be cannibalizing either Marlboro or Camel brands.” Citigroup Investment Research, 2007

21. “New Snus Products not Expected to Hurt Cigarette Volumes The majority of our survey respondents (64%) do not believe either of the new snus products will affect cigarette volumes by promoting current smokers to quit at a faster rate. Rather, the new snus product will most likely (1) attract smokers that have previously quit, (2) that are currently using moist snuff, (3) smokers that are looking for a temporary nicotine “kick” when they cannot smoke, or (4) smokers that would have quit anyway. This bodes well for RAI and MO share holders as these new snus products don’t appear to be cannibalizing either Marlboro or Camel brands.” Citigroup Investment Research, 2007

22. “When scientists have identified undesired compounds in a product, we have seen it as our responsibility to reduce or eliminate these compounds, if feasible.” “When scientists have identified undesired compounds in a product, we have seen it as our responsibility to reduce or eliminate these compounds, if feasible.” www.myeval.netwww.myeval.net (Swedish match No America) www.myeval.net

23. We focused on innovation, introducing a variety of more approachable new products that would appeal to smokers. We also ramped up our communication with smokers, acquainting them with smokeless tobacco products.” We focused on innovation, introducing a variety of more approachable new products that would appeal to smokers. We also ramped up our communication with smokers, acquainting them with smokeless tobacco products.” Butler, President USSTC (USSTC, May, 2008) Butler, President USSTC (USSTC, May, 2008)

24. TFK

27. Domestic Smokeless Advertising and Promotional Expenditures 1998 – 2006 (Millions of dollars) Source: Federal Trade Commission Smokeless Tobacco Report for 2006