Japan Tobacco

I am Nobuya Kato, Chief Financial Officer of the JT Group. Thank you for joining us today for JT Group's 2023 First Quarter Earnings Briefing. Before detailing each businesses, let me explain the three months consolidated financial results. Please refer to slide 3, adjusted operating profit at constant currency. Our primary performance indicator increased 5.1% year-on-year, representing a strong start of the year. This was mainly due to the significant pricing contribution in the tobacco business, which outweighed the impact of deteriorating product mix and higher input cost. On a reported basis, Revenue increased 14.4% year-on-year, driven by the top-line growth in the tobacco and pharmaceutical businesses, strengthened by the favorable exchange rates in the tobacco business due to the depreciation of the Japanese yen. Both AOP and operating profit grew at double-digit rate, supported by all businesses, and the depreciation of the Japanese yen. Profit increased as operating profit growth and lower corporate income tax offset the negative impact of financing costs. The deterioration in financing costs was primarily due to the impact of changes in the applied exchange rate in Iran Although the results on a reported basis were strong in the first quarter due to the continued depreciation of the Japanese yen, Considering the exchange rate trends last year, we expect that the FX impact associated with the appreciation of the Japanese yen and weaker local currencies will turn to headwinds as we progress towards the end of fiscal year 2023. In addition, we expect the marketing investment related to the geo-expansion of PlumeX to rise as we increase the number of launches in the second half. Next, I will explain the performance of each business. Please refer to slide 4 for the volume performance of the tobacco business. Total volume, including both combustibles and RRP, increased 1.3% year-on-year. Strong performance in combustibles, particularly in the E-mile cluster, as well as continued RRP volume growth in Japan, exceeded the impact of lower industry volume in several key markets, notably in the United Kingdom. Specifically in Turkey, our performance was driven by a higher industry volume resulting from a favorable comparison against the first quarter of 2022 when there was an industry decline due to inventory accumulation following a price increase. In addition, volume growth in global travel retail due to a gradual rebound in the numbers of travelers and positive momentum in emerging markets exceeded the industry volume contraction in markets such as the United Kingdom. In Japan, combustibles volume increased year on year due to segment share gains, especially in the value segment, offsetting the industry volume contraction and resulting in a strong start for the year. RRP volume increased by 3.0% year on year, driven by market share gains in the Japanese HTS segment. Moving on to the financial performance in the tobacco business, Please see slide 5. Core revenue and AOP at constant currency in the first quarter resulted in a year-on-year increase of 6.3% and 4.6% respectively driven by pricing contribution in a number of markets, notably in Russia and the United Kingdom. As shown in the graph, the volume variance in AOP was negative. This is due to a deterioration of the market mix from lower volume in higher margin markets such as the United Kingdom and other markets. In addition, the negative product mix due to continued down trading in Japan and other markets partially offset the pricing effect. Lastly, our initiatives to increase the cost competitiveness in the tobacco business and supply chain efficiencies are contributing to our cost space improvement. However, higher input costs related to increased raw materials, logistics and utility costs outweighed these cost-saving contributions. We expect higher input costs to continue throughout fiscal 2023. Regarding Russia, while the operating environment remains very challenging, We continue to manufacture and distribute our products in compliance with applicable regulations and international sanctions. There have been no changes in our stance. We will continue to take all necessary decisions in response to changes in circumstances and in accordance with the management principles guided by our 4S model. On the next slide, I will explain the trends in the three clusters and in our nine major markets. Please refer to slide 6. Market share in our key markets has remained solid with year-on-year growth in Italy, Japan, the Philippines, Russia, and Taiwan. First, Asia. In this cluster, the negative price-mix variance resulted from the lapping of Japan's pricing benefits in 2022, an ongoing down-trading trend. These outweighed the positive total volume variance, mainly in Japan. Core revenue on a reported basis increased slightly year-on-year, fueled by favorable FX impact, and AOP was almost flat. In Japan, continued Plumex growth, as well as strong Mebius E-series and CamelCraft, Capturing the downtrading trend led to an increase in both HDS and combustibles market share. I will explain the performance of Plumex in the Japanese market in more details on the following slide. Next, Western Europe. strong pricing implemented last year and also during the first quarter in each market exceeded the total volume decrease year on year due to industry volume contraction mainly in the United Kingdom. As a result, core revenue and AOP for this cluster increased both at constant FX and on a reported basis, the latter supported by favorable currency movements. In the UK, combustibles volume continued to decrease in line with the large total industry volume contraction following several price increases since the second half of 2021 and the lapping of the COVID trends. This negative volume was more than offset by the robust price invariance in this market. Last is EMA. As mentioned earlier, Total volume increased in Turkey, benefiting from a favorable comparison driven by trade inventory adjustment which took place last year and the continued recovery in the number of travelers in global travel retail. Strong pricing variance offset the impact of rising supply chain costs. In addition, strengthened by the positive impact of foreign exchange rates, the cluster's core revenues and AOP both increased significantly year-on-year.

Slide 7 explains the progress of PRUMEX in Japan. In the first quarter, RRP represented approximately 37% of total tobacco industry volume in Japan. This is slightly higher than anticipated in our initial forecast, mainly due to active new HTS product launches and sales promotions by both JT and competitors. I'd like to point out that our new product launches have to an extent contributed to an increase in inventory in the first quarter. Plume X shares within the HDR segment continued to grow, reaching 9.3% in the first quarter as shown on the slide. The success of the device retail price reduction implemented at the end of November last year resulted in higher year-on-year devices sales volume. In March this year, we renewed our Mebius brand refill sticks and launched a new high-quality product at a more affordable price. While still early days for the new Mebius consumables, these initiatives have contributed to Prumex's continued share gains. Share growth increased the impact of inventory enhancement after the new launch that I have just mentioned. The current off-take base share continues to show steady performance driven by active sales promotions. We continue to strive to expand and retain our consumers by leveraging both Mebius and Carmel consumables. Next, I will explain the progress of PurumaX outside of Japan. Please turn to slide 8. As announced in February, we have initiated the geographic expansion of Prumex with over 10 markets planned during 2023 and more to come in 2024, mainly in Europe. Following the launch in Japan and the UK, we have launched Prumex in Italy and Lithuania in April, with plans to launch in Portugal in mid-May. As explained previously, we leverage the knowledge we have gained in Japan and the UK to expand in the HDS segment and acquire and retain our consumers. During our upcoming Tobacco Investor Conference on Monday, May 8, we will provide additional details regarding our geo-expansion plan. I strongly invite you to register to this event. or contact the IR team if you have not received the registration link. In the UK, which was launched in October last year, the industry volume of HTS segment is still limited, and it continues to be sold only in the Greater London area. As a result, I do not have significant data to share in terms of sales volume and market share. However, I can relay that we are receiving positive consumer feedback regarding the amount of vape, the heating speed of the device, the usable hours plastic or price positioning. For Italy, where PlumeX was launched in April, the HTS segment is relatively large and represented approximately 16% in 2022. Also, we expect higher margins due to lower tax burden of HDS compared to combustibles.

We consider it is important to improve our total tobacco market share and profitability.