Japan Tobacco

I am Nobuya Kato, CFO of the JT Group. Thank you for joining us today for the JT Group's financial results briefing for the second quarter of fiscal year 2023. I will begin by explaining our six months consolidated results for the fiscal year 2023. Please refer to slide four. Adjusted operating profit at constant currency, our primary performance indicator, increased 4.7% year-on-year. This solid performance resulted from the robust pricing contributions in the tobacco business, outweighing the impacts of a deteriorating product mix, increased investment in HDS, and higher supply chain costs. Higher profits in the pharmaceutical and processed food businesses also contributed to the performance. On a reported basis, revenue increased 9.9% year-on-year, supported by continued top-line growth in the tobacco and pharmaceutical businesses, as well as continuous favorable exchange rate impacts in the tobacco business from a weaker Japanese yen. Thank you. AOP grew 6.7% compared to the same period last year, supported by increased profits across all businesses and positive foreign exchange impacts in the tobacco business due to the weaker Japanese yen. Regarding FX, I would like to point out that in the tobacco business, the impact on core revenue and AOP became unfavorable in the three months from April to June due to the appreciation of the Japanese yen against selected local currencies, reducing the positive currency impact in the first half of the fiscal year. Operating profit increased 8% year-on-year due to an increase in AOP and a decrease in amortization of trademark rights as an adjustment item. profit increased 8.7% year-on-year. In addition to the increase in the operating profit, the decrease in the corporate tax burden exceeded the impact of higher financing costs, mainly due to the change in the applicable exchange rate in Iran. Before I begin reviewing the results of each business, I would like to share my deepest concern about the recent unrest in Sudan, where many people are facing difficulties.

I strongly hope for a quick and peaceful outcome.

First, let's look at the volume results in the tobacco business. Please see slide 5. Total volume, combining sales of combustibles and RRP, was strong in the first six months of the year, with a 2.5% increase year-near. Drivers in the combustibles category include an increase in industry volume in Turkey due to favorable year-to-year comparison, further accelerated by the impact of inventory build-up ahead of a price increase in June. In addition, the combination of continued volume recovery and global travel retail as travel resumed across Asia and the positive momentum in several emerging markets drove a strong volume increase in the EMA cluster. Outside the EMA cluster, robust industry volume in Japan and share gains in the combustibles category, especially in the value price segment, also contributed to the volume growth. These positive factors outweighed the impact of lower industry volume in several key markets, including the Philippines and the UK, as well as the temporary suspension of operations due to the unrest in Sudan. In the RRP category, volume grew by 3.9% despite the disruption from one-off items impacting 2023, notably the discontinuation of Plume S in Russia. Excluding these one-off items, RRP volume grew strongly driven by HTS, with Japan HTS volume increasing approximately 46%, plus the additional volume generated from new European market launches. Turning to slide 6 to review the financial performance of tobacco business. First of all, the first half of the year showed a strong performance in core revenue, supported by pricing contributions from a number of markets, including Russia and the UK. And as explained earlier, strong total volume in the EMA cluster, including global travel retail, as well as in Japan. As shown on the slide, core revenue grows both on a constant currency basis and on a reported basis. Next, I will explain the AOP performance. As I mentioned earlier, AOP increase year-on-year both on a constant currency and reported basis due to the top line growth driven by the strong pricing contributions and positive volume contribution. However, as shown in the graph, the volume variance on the AOP was negative year in year. This was due to a lower volume composition from high margin markets such as the UK and other markets. A trend which also impacted the first quarter results. In addition, the negative product mix variance due to continued down-trading in Japan and the other markets reduced the top-line contribution to AOP. The business also experienced higher input costs due to higher raw material prices, logistics and utility costs, as well as the increased costs associated with aggressive geographic expansion on Plumex. Currency effects were positive for both core revenue and AOP throughout the first half of the year. but were negative for the three months of the second quarter due to the depreciation of several local currencies against the Japanese yen. In slide seven, I will explain the financial results in the three clusters and the performance in nine key markets. First, I'd like to explain about Asia. Despite positive volume contribution in Japan, negative price mix variance in the market resulted in lower core revenue in AOP for the Asia cluster. In Japan, combustibles volumes increased, driven by category share gains mainly in the value segment, fueled by Camel Craft, launched in June last year, and Mevius E-Series, which more than offset the category volume contraction. Total industry volume, including both combustibles and RRP, increased by 1.6 percent compared to the previous year. RRP grew year on year while combustibles declined, but in a moderate way compared to the past. Although it is difficult to pinpoint a clear reason for the increase, we assume that it is mainly due to an increase in the number of opportunities for consumers to go out and enjoy tobacco products, as well as the recovery of inbound tourism. We will continue to monitor the situation closely. Our total market share increased year-in-year due to the strong volume performance in combustibles and the continued growth of Plume X. On the other hand, from a revenue standpoint, the price mix variance negatively impacted the performance due to the ongoing down trading. Our decision to maintain prices for some HDS products during last autumn's tax hike. Moving to Western Europe. Negative volume variance, mainly due to lower industry volume in the UK, as well as higher input costs and increased investment related to Plumex launches, were offset by strong pricing contributions, notably in the UK, resulting in higher core revenue and AOP. In the UK, the large decline in industry volume is continuing due to the impact of multiple tax hikes since the second half of 2021 and the easing of travel restrictions. As a result, our combustibles volume decreased compared to the same period last year. Nevertheless, core revenue at constant FX was updriven by solid pricing contribution. Lastly, on IMA, the volume contribution led by global travel retail and the strong pricing contribution significantly exceeded the impact of higher input costs, resulting in higher revenue and AOP. The volume performance for each market is shown on the slide. Slide 8 describes the Plumex performance in Japan. As we already announced, we renewed the Plumex Mevius heated tobacco stick in March this year, launching higher quality products at more affordable prices. Our efforts to attract and retain more users continue, including a discount campaign for devices that last approximately two months, starting in late May. Despite the aggressive measures taken by competitors, such as new product launches and coupon discounts, our market share in the HDS category increased to 9.5% in the second quarter thanks to these initiatives. The current offtake base share continues to show steady performance.