Japan Tobacco

Thank you for participating in the investor meeting for 2024 full-year results at Japan Tobacco Inc. today despite of your busy schedule. Since it is the scheduled time, allow us to get started. Before we start the meeting, I'd like to ask you to make sure that your display name on the Zoom is accurate. Thank you for your cooperation. In today's meeting, Masamichi Terabatake, Chief Executive Officer of the JT Group, will introduce you with the business plan 2025. And Eddie Pirard, CEO of JT International, will follow with tobacco business 2024 results and 2025 forecasts. Lastly, Hiromasa Furukawa, Chief Financial Officer of the JT Group, will explain JT Group 2024 results and 2025 forecasts. Then we move on to Q&A session and this meeting is scheduled to end at 6.15pm. Now I would like to introduce you the first presenter, Mr. Terabatake, please. I am Masamichi Terabatake, President and CEO of Japan Tobacco Inc. Thank you for joining our conference call today. I would also like to thank you for your continued support and understanding of our commitment to growth. Today, I will provide an overview of the fiscal year 2024, our medium to long-term business strategies, and the profit growth prospects we expect to achieve during Business Plan 2025, as well as an update on our sustainability efforts. Eddie Pirard, CEO of JTI, will highlight the solid performance of JT Group's profit growth engine, and Hiromasa Furukawa, CFO of JT Group, will explain our consolidated results for 2024 and the forecast for 2025. Let me begin with an overview of ISCO year 2024. Our Consolidated Adjusted Operating Profit, AOP, at constant effect significantly exceeded both the initial plan and the previous year's results, achieving continuous growth. We also achieved record high revenue and AOP on a reported basis. At the same time, we have continued to make strategic and significant business investments to build the foundations for future profit growth. All this within a challenging business environment made of increased geopolitical risks, rising supply chain costs, and exchange rate fluctuations. Eddie will provide more details on the performance of the tobacco business data, but I would like to emphasize our impressive performance in both combustibles and RRP. In combustibles, market share expanded across many markets and pricing contributions continue to drive profit growth. In RRP, we have steadily invested to expand Plume's presence, bringing the number of markets where consumers can now enjoy Plume to 24 at the end of 2024. As a result, both ROP volume and ROP-related revenue grew 20% plus year-on-year. We also enhanced our footprint with the successful acquisition of Vector Group in the United States, and we are very excited by the future growth opportunities it will provide to the JT Group. Contribution was limited to only one quarter in 2024, but 2025 will see the full inclusion of this acquisition. In the pharmaceutical business, the result was better than originally planned, despite AOP declining year on year. On the other hand, the processed food business achieved a second consecutive year of record high AOP. Taking this performance into account, the annual dividend per share for 2024 is planned to be 194 yen per share as announced initially. Next, I will explain our business plan 2025, which covers the three-year period from 2025 to 2027. we will continue to allocate resources based on the 4S model and the JT Group purpose. We will place the highest priority on business investments, especially in the tobacco business, that will lead to sustainable profit growth over the medium to long term. I am confident these business investments will enable the JT Group to grow AOP at constant effects. subsequently driving medium and long-term growth in net income. I would like to confirm that our approach to shareholder returns remains unchanged. We aim to maintain a dividend payout ratio of 75%, a competitive level in the capital market, and will continue to strive to increase shareholders' returns with dividends at the forefront. turning to the positioning and strategies of each business during the period of the current business plan, starting with the tobacco business. As you are all aware, the tobacco operating environment remains highly uncertain, with geopolitical instability and hyperinflation in some markets of our IMA cluster, changing macroeconomic trends as well as tightening regulations. Also, we need to adapt as quickly as possible to changing consumer needs as society changes rapidly and significantly. Under these circumstances, we expect the combustibles category to continue facing a declining industry volume and down trading. In parallel, we believe the RRP industry volume will increase further and competition will intensify, notably in heated tobacco sticks. I am convinced that the strategic framework defined for our tobacco business will overcome these challenges and will drive sustainable profit growth over the medium to long term. In combustibles, we will continuously focus on improving return on investment through quality top-line growth based on pricing and market share expansion. We will also continue cost optimization initiatives to improve margins. In RRP, we will continue to place the highest investment priority on the HDS category, which is expected to grow the most and the fastest in the future, with the aim of achieving our 2028 ambitions. Beyond HDS, we will continue to explore the business possibilities in areas such as e-vapor and nicotine pouches and work to strengthen our existing presence. To support these efforts, we will also continue to strategically strengthen our business foundations, building on our consumer-centric approach. These investments will strengthen our presence, our capabilities, and importantly, our innovation pipeline across all segments.

I have just mentioned our 2028 RRP Ambitions. and I would like to take this opportunity to share a progress against these. One of our ambitions is to achieve meeting heated tobacco segment share by the end of 2028. Plume has accelerated its geo-expansion since 2023, and I am pleased to report that at the end of November, Plume has reached a 7.8% share of segment across the 13 markets where it has been selling for at least 12 months. This represents an increase of more than 3 percentage points compared to the segment share two years ago. As I said earlier, competition in HTS is intensifying. However, Plume's awareness among consumers has been steadily improving, and we will continue to build Plume's presence not only in each launched market, but also in new markets by leveraging insights and feedback from consumers. We will continue to strengthen our investments in RRP, especially in HTS during Business Plan 2025. Specifically, we plan to invest approximately 650 billion yen over the three-year period, primarily for marketing activities, as well as to continuously enhance our product pipelines and innovations, some of which will be released during the current business plan period. Even with the intensified investments, we remain on track to achieve our other ambition, which is to reach break-even at the brand contribution level by the end of 2028. According to our assumptions, we expect the RRP business to improve its contribution to earnings in the current business plan thanks to the growth of RRP-related revenue. Next, I will explain the strategies of the pharmaceutical and processed food businesses as well as of D-Lab, our corporate R&D organization. I would like to reiterate that the roles of pharmaceutical and processed food businesses will be to continue complementing JT Group's profit growth. the pharmaceutical business continues to face a challenging environment due to increasing hurdles around new drug creation in the areas of unmet medical needs especially related to diseases with large numbers of patients and the continuing downward trend in overseas royalty income from licensed compounds despite this sales of torii pharmaceuticals in the area of skin disease and the allergen are expanding and will continue to research and develop new generation strategic products and maximize the value of each product In the processed food business, we are also facing headwinds such as increasing labor and distribution costs in Japan due to labor shortages, higher raw material costs driven by inflation and FX fluctuation, as well as heightened consumer price consciousness due to price hikes exceeding wage increases. We must also respond to diversifying customers and increasing social demand for a sustainable food supply. During Business Plan 2025, even though price consciousness is gaining traction, we aim to achieve top-line growth by implementing optimal price revisions and expanding sales of high added value products. Following the introduction of the JT Group's purpose in 2023, we have received many positive feedback, both internally and externally. We understand that our values of fulfilling moments, enriching life, have been accepted and shared by stakeholders. We are confident that this is an important achievement that enhances our brand value and builds trust within society. As part of our efforts to materialize the purpose, we are continuing our activities in D-Lab, which continues to conduct research and identify future businesses based on the concept of fulfilling moments, enriching life. D-Lab activities are aimed at contributing to develop fulfilling moments in society from a long-term perspective, as well as contributing to the profit growth of JT Group. In exploring future business seas, we have been investing in around 200 companies, mainly in Europe and the United States, that are embracing the concept of fulfilling moments and reaching life. To drive these initiatives, we have set up a dedicated venture capital fund to invest in startups, and we are constantly working on more than 100 projects. I would like to introduce some specific D-Lab initiatives. The breath-guided robotic cushion Foofly, which won the CES 2023 Innovation Award, is based on joint research with the University of Tokyo with the aim to commercialize it. Another initiative is Cold Row, a platform for high-quality craft non-alcoholic cold beverages, which won the CES 2024 Innovation Award and is being developed with external partners. Breather, which was established to commercialize business ideas born from G-Lab activities, is manufacturing and selling deep breathing habit-enhancing tools and is currently in the phase of delivering the value of fulfilling moments to customers. While staying close to the fulfilling moments of our customers and society, which is diverse and changing, we will look beyond the current form of the JT Group and will continue to realize the value of providing fulfilling moments on the long-term perspective through all kinds of corporate activities. Based on the strategies I have just described, I will now share our ambition for Business Plan 2025. Let me confirm that we firmly intend to pursue sustainable profit growth over the medium to long term. We will continue to aim for an average annual growth rate of mid to high single digit for consolidated AOP at constant currency. If you recall, last year, we announced that we would be growing our AOP at constant effects by mid-single digit during the three-year business plan period from 2024 to 2026. I am pleased to announce that during the three-year period from 2025 to 2027, we expect an average annual growth rate of high single digit, which is the upper end of our growth algorithm. In the tobacco business, we expect to achieve high single-digit AOP growth at constant effects during Business Plan 2025, fueled by sustained pricing in combustibles and the increasing contribution from RRP, even as we strengthen investments. In the pharmaceutical business, after an AOP decrease in 2025 due to a gradual decline in overseas royalty income and an increase in R&D expenses accompanying progress in clinical trials, we expect to return to the profit level of FY2024 by the end of Business Plan 2025. The processed food business is expected to achieve mid-single-digit AOP growth during the current business plan period driven by stable top-line growth, offsetting higher costs in 2025. Finally, I would like to reiterate the value creation process that we explained in our integrated report, namely our comprehensive approach on sustainable growth. We will continue to leverage our strengths cultivated from nature and society and provide fulfilling moments to society through not only our existing businesses, but also new businesses nurtured by D-Lab. Furthermore, we are committed to actively addressing the JT group materiality, the priority material issues for the group. This commitment is based on a belief that people's lives and corporate activities can only be sustainable if the natural environment and society are sustainable. We believe that together with nature and society, the JT Group can achieve sustainable growth through our initiatives by connecting capital gains to further value creation. We will strive for such growth not only during the business plan I just presented, but also towards the future. This concludes my presentation. I will now hand over to Eddie for details on our tobacco business.

Thank you, Terabateke-san, and good afternoon to you all. It is my pleasure to present today the 2024 performance review of GT Group's tobacco business, as well as the outlook for Business Plan 2025. I will focus on the key elements of our 2024 performance, and Furukawa-san will cover the financials in his presentation later on. I'm delighted to share that the tobacco business delivered another remarkable performance in 2024, exceeding all revised forecasts across all indicators. The dedication, hard work and resilience of our employees and that of our commercial partners has again propelled us forward. O'Clear's strategic focus has fueled yet another record level of total volume, both in combustibles and R&P products. This strong volume performance combined with solid pricing drove a high single-digit increase in core revenue and adjusted operating profit, driving JT Group's growth algorithm. In RP, as announced, we increased our investments towards heated tobacco sticks. We scaled up Plume's global presence to 24 markets and grew share of segment across all of them, driving an impressive 40% increase in HGS volume and 44% in HGS revenue. Our confidence in the future potential of this RP segment is intact. In combustibles, which remains the most resilient and populous consumer segment, focused investments in our global flagship brands and continued share gains led to a 2% volume increase. This outstanding performance, combined with the solid pricing environment and our focus to drive return on investments in this category, fueled a 9% increase in combustible revenue and an improved operating margin for the category. Another exciting achievement in 2024 was the successful acquisition of Vector Group in the United States, step-changing our footprint in this highly profitable market. Importantly, this acquisition is accretive to AOP and brings incremental benefits in terms of margins and rebalances or currency exposure. Let me elaborate on each of these key drivers of our 2024 performance, starting with reduced risk products. The focus and investments in RRP translated into total RRP volume growing 24% and RRP-related revenue increasing by 21% versus 2023. Within these results, HTS volume actually grew by a significant 40%, reaching 8.2 billion units with gains across all clusters. In volume terms, Plume is now the eighth largest brand within our tobacco business. This strong volume resulted in HTS revenue growing by 44% last year. Other RP segments also contributed to our top-line growth, notably our leading Nordic Spirit brand in the U.K. Turning to other RP segments, I would like to reconfirm our approach towards eVapor and Oral. It is clear that consumer needs continue to evolve rapidly based on individual preferences and the different opportunities provided by each RP segment, an environment that drives increased multi-category usage. From the very beginning of our RP journey, we strongly believed that a portfolio strategy was essential to continue growing long term. And while we prioritize heated tobacco, we continue to explore other RP segments to improve our understanding of consumer preferences and expectations, to better grasp the different business model dynamics by segment, and ensure we are ready to invest in an optimal manner. Going forward, as highlighted by Terabata Keisan in his remarks, we will continue to accelerate investments towards RRP during this business plan period. It is worth mentioning that we expect RRP to become accretive to earnings at the latest by 2027. In line with our strategy in reduced-risk products, we increased investments towards heated tobacco. Our belief remains that heated tobacco provides the largest profit growth potential among all RP. In 2024, most of our investments were focused on the geo-expansion of Plum, building the brand equity and driving consumer adoption. As of December last year, we have successfully launched Plume in markets representing close to 75% of the global heated tobacco volume. This achievement is putting us very close to realizing a target announced in February last year of reaching approximately 80% coverage by the end of 2025. Following the 11 additional launches in 2024, Plume was available in 24 markets, excluding global travel retail, where we also expanded. Our launch strategy continues to target meaningful combustible markets where we have a presence and where consumers' awareness on heated tobacco already exists. As a result, most launches took place in Europe, where we have also introduced Plume in other markets, like Jordan, the Philippines, South Korea, and most recently, Malaysia. This expanded coverage resulted in additional value creation for all markets by strengthening the learning and leveraging consumer feedback. These have also enabled us to fine-tune our go-to-market approach at a much faster pace, as well as adjust our commercial engine based on market and consumer preferences. Importantly, in addition to its wider global availability, Plume has been the fastest-growing brand in the heated tobacco segment, fueled by share gains in all launched markets. Let me detail the share performance in some of these markets, starting with Japan, the largest and most mature heated tobacco market globally. In Japan, RP represented 43% of the total nicotine industry volume, an increase of 5 percentage points year on year. Since the introduction of the X model family back in July 2021, Plume's growth trajectory has been unwavering, gradually closing the gap to the second largest competitor. In the last quarter of 2024, Plume reached 12.6% of the heated tobacco segment, an impressive gain of 1.7 percentage points year on year, which also provides a solid momentum into 2025. Moving on to other markets, where the strong positive consumer response to Plume was also very visible. As you can see from the slide, all the highlighted markets have delivered significant growth, even those launched in 2024. We have seen sizable results in the Czech Republic, Italy, Kazakhstan, Lithuania, Portugal and the UK, where segment share grew between one and a half to two times year on year, despite established competition. Even more impressive was the performance in some of the markets launched in 2024, namely Germany, Slovakia and Spain, where Plum's share of segment almost doubled or more in less than 12 months. This is the result of constant adjustment to a commercial strategy based on learnings gathered across markets. Importantly, as mentioned by Trapatake-san, Plum's share of segment across 13 markets, where it has been available for over 12 months, reached 7.8%. To maintain the momentum and close the gap towards our 2028 ambition, we continuously aim to improve the consumer experiences with Plum. We are highly confident in the quality of our Plume device and the superior taste profile of our heated tobacco sticks. As a matter of fact, consumers in Japan have recently confirmed this during a blind survey conducted last July, in which 54% of consumers prefer the Plume sensorial taste experience over competing products. We are also comforted by the continued sequential improvement in the metrics between the Plume models resulted from innovation efforts. Back in May 2023, during our investor meeting, we had shared the improvements between Plume S 2.0 and Plume X in Japan. Well, as you can see on the slide, PlumeX Advanced is clearly outperforming PlumeX across various metrics, including exclusive user ratio, consumer satisfaction, or CSAT, and net promoter score, or NPS. In addition to R&D, we also enhance our capabilities in terms of consumer understanding, innovation, digital marketing, consumer care, and harm reduction. we are constantly improving our consumer activation strategy across all launched markets, notably by refining our plume commercial engine made of both online and offline programs with a specific emphasis on acquisition and retention. Let's now turn to our largest and most profitable category, combustibles. 2024 marked another exceptional performance of our combustible portfolio, setting a record high volume of 542 billion units, despite a challenging environment in several key markets and the continued industry volume contractions. With volume gains in over 60 markets, combustibles were up 2%, fueled again by our global flagship brands growing 15 billion units, the sixth consecutive volume increase. GFBs now represent 73% of our total volume, driven again by Winston and Camel. Winston volume grew by 4.4%, with increases in over 50 markets, including the key markets of Italy, Romania, Russia, Spain and Turkey, as well as other markets such as Egypt, global travel retail, Iran, Poland and Portugal. Winston was the fastest growing in market share terms across our footprint, strengthening its position as the second largest international combustible brand. Camel volume was up 7.9%, confirming its position as the third largest international combustible brand. Camel grew volume in over 60 markets, gaining in seven of our nine key markets and in many others like Bangladesh, Brazil, Germany, global travel retail, and Indonesia, just to name a few. JT Group's combustibles market share grew 0.5 percentage points across our entire footprint, making us the fastest growing in market share terms with gains in over 50 markets. six of our nine key markets delivered share gains, including Japan, strengthening solid leading positions in combustible. The most significant performance came from the EMA cluster, where our share grew faster than in any other cluster, both for mature and emerging markets. In addition to volume, our top-line growth was driven by another record year of pricing, added 197.5 billion Japanese yen of favorable price-mix variance to core revenue. This performance demonstrates once again the resilience of pricing in combustibles and enabled us to more than compensate the ongoing inflationary pressure due to the macroeconomic and geopolitical environments, as well as the continued downtrading. Focusing on pricing more specifically, all our key markets supported top-line expansion along with many others, notably Egypt, France, Germany, and Indonesia. Importantly, boosted by our strategic focus on improving the return on investment in combustibles, the operating margin in this category has grown by 1.2 percentage points. This improvement is a combination of focused investments based on clear and simple to understand markets archetypes, portfolio optimization initiatives, company-wide increased focus on profitably improvement and benefits generated by the one tobacco structure, which went live in January 2022. The solid pricing in combustibles and the higher operating margin will strengthen operating cash flows and support our efforts in RRP. Benefits which will be enhanced by the successful acquisition of Vector Group. An important achievement of 2024 was the acquisition of Vector Group in the United States. We are incredibly excited by this step change opportunity. This transaction not only closes a gap in our footprint, but importantly makes us the fourth largest player in the largest and most profitable combustible market outside China. Following this acquisition, the U.S. market will become one of GT's group top 10 profit markets. With its higher gross margin per stick, it fits perfectly our strategy to enhance return on investments in combustibles. These returns will also contribute to fund some of our global RP investments and will rebalance our currency profile by increasing the weight of our currencies and improving our natural hedging capabilities. We believe that we have the best-placed portfolio to address current consumer trends in the growing super-value price segment. With Montego and LD leading the way, we intend to optimize a 40% share in the super value segment, which has been growing consistently since 2021 to reach 19% of the total industry volume in the fourth quarter. The new leadership team is in place since January the 1st, capitalizing on the best expertise and experience of both JTI and LVB to drive the business forward. As the team is in process of finalizing the integration plan, I will refrain from sharing more details on the strategy and the expected future contributions. Since we are speaking about the U.S. market, I would like to update you on our partnership with Altria, and more specifically on the progress at Horizon, the joint venture established for the launch of Plume in the U.S. of A. The team is making great progress, and as previously mentioned, the joint venture is very much on track to file both PMTA and MRTP submissions with the FDA by mid-2025. All in all, the 2024 performance of the tobacco business was outstanding across the board. Throughout 2025, we will continue to implement our tobacco strategy by growing our presence in HTS and continuing to focus on growth and returns in combustibles. In our RP, we will continue to drive Plume share gains in and outside Japan. To do so, we will focus on strengthening our capabilities and the commercial engine in order to win consumers. These efforts will be supported by a strong pipeline of innovations, which is based on consumer insights and experiences gathered across the 24 markets where Plume is available. For competitive reasons, I won't expand on these innovations today, but I am confident that these will enable us to win more consumers and deliver on our 2028 ambitions. More to come. In combustibles, which will remain the profit engine over the business plan period, we will continue to drive core revenue growth through share gains, GFB contribution, and disciplined pricing opportunities. As of today, we have already secured approximately 60% of the planned pricing for 2025. The combustibles category will also benefit from the full integration of Vector Group, which we know will step change the contribution from the U.S. market. Strategic initiatives to further improve the combustible's operating margin will continue, driving profitability mid to long term. Looking at the solid results these last few years, I am confident in our ability to continue delivering steady top and bottom line growth from combustibles, while gradually building a second profit growth engine with Plum. Ultimately, our goal remains to sustainably grow currency-neutral AOP admit to high single-digit. Thank you very much for your attention and interest in the tobacco business. I will now hand over to Furukawa-san for the review of the JT Group financial results and forecast.