Japan Tobacco

Thank you for participating in the investor meeting for 2023 full-year results at Japan Tobacco Inc. today. Before we start the meeting, I'd like to ask you to make sure that your display name is accurate. Thank you very much for your cooperation. In today's meeting, first, Mr. Terabatake, Chief Executive Officer of the JT Group, will introduce you Business Plan 2024, and Mr. Eddie Pira, CEO of JT International, will follow, who explains Tobacco Business 2023 results and 2024 outlook. Lastly, Mr. Furukawa, Chief Financial Officer of the JT Group, will explain JT Group 2023 results and 2024 forecast. Then we move on to Q&A session and this meeting is scheduled to end at 6.30 p.m. Now I'd like to introduce you the first presenter, Mr. Terabatake Priest.

Good afternoon and welcome to Japan Tobacco's 2023 full-year earnings call. I'm Masamichi Terabadake, President and CEO of Japan Tobacco. Thank you for taking the time to attend today's financial results briefing, and I am grateful for your continuing support and encouragement. Before diving into the results, I would like to express my sincere sympathy to the victims of the human tragedies and devastations unfolding globally, whether in Ukraine, Sudan, near Eastern Japan. I want to assure you that the JT Group continues to place the highest priority on the safety of our employees and their families and is extending all possible support to affected populations. Today, I will begin with an overview of fiscal year 2023, followed by our mid- to long-term strategy and the strategic role of each of our businesses. I will also share details about the profit growth outlook across Business Plan 2024, and I will provide an update on our sustainability programs, JT Group Purpose and D-LAB. Eddie Pirard, CEO of JTI, will give an overview of the 2023 tobacco business performance, and Hiro Masa Furukawa, CFO of JT Group, will explain our consolidated results for 2023 as well as the forecast for 2024. Let me begin with an overview of fiscal year 2023. We recognise that 2023 was a challenging year with the global business environment remaining volatile due to geopolitical instability, increased supply chain costs associated with inflation and large currency fluctuations. Despite this environment, all our businesses... not only exceeded the results of the previous year, but surpassed the initial guidance provided at the beginning of 2023 and reached an all-time high performance from revenue to net income. In the tobacco business, 2023 marked the second year of the combined tobacco business management structure. The results of this integration, supported by an optimized allocation of resources and a stronger collaboration, are now very visible, as you will hear from Eddie. In combustibles, the pricing contribution remained a growth engine. At the same time, we maintained strong market share momentum through a balanced portfolio and strong brand equity. In RRP, Plumex accelerated its geographic footprint expansion, reaching 13 markets at the end of 2023. In the Japanese market, Plumex continued to grow, reaching a HDS segment share of 11.4% as of December last year. Our focused investments in HDS are steadily contributing to the volume performance of our business. The pharmaceutical and processed food businesses also continue to complement the group's profit and delivered solid year-on-year profit increases. Based on the 2023 result and our shareholder return policy, we will increase the year-end dividend by 6 yen from the previously announced forecast to 100 yen per share for 2023. including the interim dividend of ¥94, the annual dividend per share for 2023 is expected to be ¥194. Next, I'd like to introduce our business plan 2024. First, let me confirm that there is no change in our resource allocation policy, which is based on the 4S model and the JT Group purpose. We will continue to place the highest priority on business investments that lead to sustainable profit growth. As a result, our main investment focus will remain the tobacco business in order to grow AOP at constant effects by achieving high-quality, top-line growth, creating incremental value and satisfying consumers and society. I am confident that the growth in AOP, driven by the benefits of business investment, will contribute to the net income increase over the medium to long term, enabling us to reach a balance between profit reinvestment needs and shareholder returns. turning to the group's mid- to long-term target and the strategies of each business. Despite external challenges, we remain committed to sustainable profit growth over the medium to long term. Specifically, we aim to deliver a mid- to high single-digit average annual growth in AOP at constant FX. During business plan 2024, covering the three years from 2024 to 2026, we expect the growth rate of consolidated AOP on a constant currency basis will be mid single digit, which is the lower end of JT's growth algorithm. While we expect a flat year-on-year growth in 2024, the growth rate is expected to increase in 2025 and to rise further in the later part of the business plan period. The business environment in the tobacco business is expected to remain challenging due to the continued decline in industry volume and downtrading. Other factors impacting the tobacco business include the geopolitical instability, the development and increasing complexity of regulations taxes on RRP and intensifying competition in the markets as well as currency fluctuations. In such circumstances, combustibles will continue to deliver top-line growth and improve their overall ROI through marketing investment, pricing contributions and cost efficiencies generated within the supply chain. In RRP, we will prioritize reinvestment of profits generated from combustibles towards HTS, which is expected to be the fastest-growing RRP segment. Infuse, oral, and e-vapor remain positioned as an exploratory category. Consequently, investments in these segments will be selective, with a flexible approach based on future market potential. In terms of key organisational capabilities to support these efforts, we will further promote consumer centricity, strategic advocacy, innovation in ROP and sustainability. For the three-year period beginning in 2024, AOP growth rate at constant exchange rate is expected to be mid-single digit due to increased investment towards RRP, especially in HTS. On the other hand, through improved ROI in combustibles and top-line growth in RRP, the growth rate is expected to increase over the second half of the planned period. In the pharmaceutical business, we recognize that the business environment will remain difficult, mainly due to significant pressure for drug price reductions. Despite these challenges, we intend to continue to contribute to the group's profits through research and development of next-generation strategic products and the value maximization of each product. We expect to maintain a stable profit level during the three-year period. In the processed food business, we acknowledge that the overall market size of the domestic processed food industry is on an expansionary trend due to factors such as the growing need for simplification in line with changing lifestyles. Overseas, the market is growing remarkably due to population growth and rising income levels. Business opportunities are also increasing following the incremental global demand for Japanese food culture. This environment supports our ambition to grow profit sustainability centered on top-line growth by strengthening allocation resources to high-value-added products. We aim to achieve mid-single-digit profit growth during the three-year period.

From slide 7, I will guide you through the Business Plan 2024 outlook for both combustibles and RRP in the tobacco business and why we expect AOP to grow mid-single digit. First, let us talk about combustibles. As you can see on the slide, during the business plan 2024 period, we expect to outperform the industry trends both in terms of volume and revenue. While we expect overall industry volume to continue to decline, we see a continuing trend of market share gains partially offsetting this with pricing in our key markets primarily driving top-line growth. We expect pricing to continue to be the driver of top-line and profit growth over the next three years. In terms of margins, we continue to reduce cost, strengthen our brand portfolio, focus on global flagship brands, and leverage the market archetypes we presented at the Tobacco Investor Conference in May to improve ROI. Moving to RRP. As you are well aware, there are a variety of products in the RRP category, highly dependent on consumers' preferences. For example, HTS is successful in Japan, eVapor is popular in the UK, while Oral is well accepted in Scandinavia. However, our industry projections show that HTS is already today the largest RRP segment in value and will continue to develop all the way to 2035. The growth rate is predicted to be the fastest among RRP categories. Accordingly, we have positioned HDS as our top investment priority. We accelerate growth in this category through major such as strengthening our global presence, as I will explain on the following slide. Specifically, from the perspective of revenue, our RRP-related revenue is expected to increase by approximately 2.5 times compared to 2023, driven by the increased footprint and sales volume. This outlook exceeds the estimated industry growth rate of 13.5%. Moving to slide 9, investment in RRP have been consistently executed to enhance the HTS pipeline and expand our presence outside of Japan. We continue our focused investment in HTS. These investments are primarily for commercialization purposes. While I cannot discuss details at this time, I can share that the majority of the investment will support the introduction of the new HDS devices, the geographic expansion of the current Prumex, and to gain segment share in existing markets while addressing the intensified competition. In terms of geographic expansion, we expect to cover approximately 80% of the total global HDS demand by the end of 2025 and PlumeX to be available to adult consumers in more than 40 markets by the end of 2026. While investments ramp up, we expect a gradual improvement in the profitability of the RRP business in the later part of the business plan period, driven by the top-line growth and enhanced productivity. Taking into account the results to date and expectations from business plan 2024, I can confirm that we are on track to deliver on the two ambitious set for 2028. In his presentation, Eddie will speak on the ambition of achieving mid-teens HDS share app segment. I will now explain our sustainability initiatives. We have recently put in place a new sustainability strategy based on our purpose, which had been formulated last year, and I'd like to provide some more details today. We believe that as nature, society and people's lives are intertwined, sustaining our ways of living and the activities of entities will depend on the sustainability of the environment and the society in which we exist. By realizing the JT Group purpose, we'd like to contribute to the sustainability of our environment and our society. In May of last year, we revised the JT Group materiality and selected five topics of materiality as a foundation for our sustainability management. Furthermore, based on the revised materiality, we have been working on specific goals and initiatives for the JT Group. we have now set the JT Group sustainability targets consisting of a total of 25 items. Let's proceed to the next slide. In setting specific goals and initiatives for the JT Group sustainability target, we focused our attention on the relationships and ties with the revised materiality while also including past initiatives. For example, in pursuing our materiality, living with the planet, we perform a comprehensive assessment on the impact of the JT Group's business on the ecosystem with a view of preserving biodiversity. Furthermore, in relation to our materiality, investing in people and provide motivation, we have set multifaceted targets with the aim of further expanding our human capital. Please visit our website for details on the targets and initiatives associated with each item. The essence of the new sustainability strategy based on the group purpose is that people's lives, society, activities of entities and activities of all humans are part of the ecosystem. As a company responsible for creating the future, JT Group is determined to proactively work on resolving social issues. As CEO, I'm involved in setting and managing the new sustainability strategy along with other board members. As part of managing the JT Group sustainability target, we revisit these targets regularly so that they can be further evolved. Furthermore, to enhance the penetration and practice of the purpose, we have strengthened the initiatives throughout the year, including visits to locations by the management team and dialogue with employees. We are now in the process of laying the groundwork to take action towards realizing our purpose by incorporating views from not only internal but also external stakeholders. Through these efforts, the new purpose has been steadily taking roots in the organization, placing us on the path to the realization of our purpose, realization which we have strengthened by delivering on the management plan through the implementation of the action guidelines and execution of each business strategy. In addition, we have established D-LAB, a corporate R&D initiative which conducts research and seeks to create future business opportunities, focusing on the concept of fulfilling moments and reaching life. As such, D-Lab will also support the realization of our purpose. The activities of D-Lab aim to contribute to nurturing our purpose in society from a long-term perspective. At the same time, D-Lab is striving to contribute to the profit growth of the JT Group, managing approximately 100 projects through trial and error. Some of the outcomes of these initiatives include the product sales of the breathing cushion, through crowdfunding, which received the Innovation Award at CES 2023. The world's largest technology exhibition held in Las Vegas last year, expansion of the availability of the product StoneS that supports the habit of deep breathing in various retail outlets, and the recognition of the new technology core role at CES 2024 Innovation Awards, leveraging the natural colors and scents of the plant materials, while these results are still embryonic. The achievements are gradually becoming tangible. On the long-term perspective, we intend to continue all kinds of corporate activities that are more progressive, while staying close to our customers and society. In the process, we won't limit ourselves to the current stake of the JT Group, but make sure that all opportunities provide value in the form of fulfilling moments and enriching life. With that, I will conclude my presentation. Next, Eddie, the CEO of JTI, will provide an explanation regarding the tobacco business.