Japan Tobacco

Good afternoon. I'm Hiromasa Furukawa, CFO of the JT Group. Thank you for joining us today for JT Group's first quarter 2025 earnings briefing. First, I'd like to touch on the transfers of both the pharmaceutical business to Shionogi and the shares of Torii, which we have announced today. JT entered the pharmaceutical business back in 1987 and welcomed Torii as a member of the group in 1998. Over the years, together with Torii, JT built an integrated value chain for the pharmaceutical business and by maximizing synergies and opportunities, the pharmaceutical business has been providing prescription drugs that are trusted by many patients. The environment surrounding the pharmaceutical business has been changing in recent years. International competition has intensified. Also, joint R&D activities of the pharmaceutical business with external partners have been gradually restricted due to the constraints related to the presence of tobacco products at JT. Based on our assessment, it appears that under the current structure and considering the highlighted environmental changes, the mid- to long-term growth outlook of the pharmaceutical business will be uncertain as a result. We have decided to transfer the pharmaceutical business, including Torii, to Shionogi. Shionagi is a global pharmaceutical company that has grown over the past 140 years by primarily providing prescription drugs. Unlike JT's pharmaceutical business, it has strengths in original drugs based on small molecules. We believe that this aligns well with JT's pharmaceutical business R&D strategy. In addition, the compound pipeline of both companies have little overlap, creating incremental complementarity across their portfolio. Moreover, Shionogi has a long-standing policy by investing in R&D and in a consistent and significant manner. We believe that Shionogi is the best company to transfer the pharmaceutical business and optimize the drug discovery potential and human resources expertise and capabilities. Regarding the financial impact, the profit attributable to owners of the parent company is expected to decrease by approximately 6 billion yen as a result of these transactions on the consolidated financial results for the fiscal year 2025 as stated in the press release. If this transaction progresses as planned, the pharmaceutical business including Tory is expected to be classified as a discontinued operation from the third quarter of fiscal year 2025. The financial impact of 6 billion yen will be recorded under discontinued operations. As for the dividend for FY2025, it is determined based on the payout ratio calculated on a continuing operation basis, meaning there will be no impact on the dividend from these transactions. Lastly, there is no change in the strategic roles of the tobacco and processed food businesses. JT will continue to position its tobacco business as a core profit growth driver and its processed food business as a complementary driver of the JT Group's profit growth. JT will strive to achieve the JT Group purpose and deliver sustainable profit growth over the mid to long term. I'll start with the three months consolidated financial results. As shown in the slide, revenue and AOP grew strongly both on a constant FX and on a reported basis, marking a strong start for the year. AOP at constant FX, our primary performance indicator, increased by an impressive 20.8% year-on-year, driven by the solid contribution from our core tobacco business. The growth in the tobacco business was fueled by pricing in combustibles and the inclusion of Vector Group, which outweighed higher investment towards Broome, and inflation-led cost increases, including across our supply chain. The increased profit in the pharmaceutical business also complemented the overall growth. With regard to the foreign exchange impact on AOP, the depreciation of some emerging market currencies and depreciation of cost-related currencies such as the U.S. dollar partially offset the positive impact from the yen depreciation against several currencies. Operating profit increased by 15.3% year-on-year, driven by the AOP increase, despite higher cost in adjustment items, including higher amortization cost of intangible assets related to the vector acquisition. Profit was broadly stable year-on-year, as the increasing operating profit was mostly offset by higher financing costs related to vector acquisition as well as higher corporate tax expenses, mainly due to the absence of one-off factors that occurred in the previous year and had lowered effective tax rate. Moving on to the results of each business segment, starting with the tobacco business. Please see slide 5 for the volume performance of the tobacco business. Total volume combining both combustibles and RRP decreased by 1.3% year-on-year. However, when excluding the unfavorable impact of inventory adjustment mainly in Russia and Western Europe, total volume actually grew by 0.2% year-on-year. In the combustible category, share momentum continued in many markets alongside the strong volume growth in the EMA cluster. Some of the drivers in IMA included a contribution from the Vector Group acquisition, a resilient industry volume in several markets, including in the key markets of Russia and Turkey, as well as continued growth in the global travel retail. Despite these positive items, overall combustibles volume decreased 1.7% year-on-year due to continued decline in combustible industry volume in Japan, the Philippines and the UK and unfavorable inventory movement. RRP and HTS volume growth partially offset the combustibles decline through a significant year-on-year increase of 19.0% and 27.7% respectively. In HTS, which is our investment priority, prune segment share steadily increased across a global footprint. Moving on to the financial performance of the tobacco business of slide 6. In the first quarter, we delivered another remarkable top line and AOP growth driven by pricing contributions in multiple markets. Focusing on the AOP growth drivers, volume contribution was positive fueled by the inclusion of vector group. The volume increase contribution in the high margin USA market also led to an improved market mix, offsetting the negative impact of the decrease in total volume. the price mix contribution was very strong. Pricing contributions in many markets, including the Philippines, Russia, and the U.K. outweighed the lower product mix, mainly due to down trading in Japan and Philippines. These positive factors exceeded the inflation-led cost increases within the supply chain, including tobacco, leaf and labor, and incremental investment towards plume, resulting in a year-on-year increase of 20.9% in AOP at constant FX. As of today, we have already secured over 80% of the planned pricing in combustibles for FY 2025 through the implemented price increases. FX impact on AOP was unfavorable, mainly due to depreciation of cost-related currencies such as the U.S. dollar and the depreciation of certain emerging market currencies despite a weaker yen. AOP in the first quarter for both reported and at constant FX basis came in stronger than expected, feared by the solid organic performance driven by volume and pricing. In addition, the FX impact on our business was less negative. Due to the favorable movement of certain currencies, including the depreciation of the dollar on our U.S. dollar cost base compared to our full year forecast.

Slide 7 reviews, the performance of the three clusters in the tobacco business. The graphs on this slide show ear-on-ear variances in total volume, core revenue, and AOP at constant effects for each cluster. Let me start with Asia. This cluster includes the key markets of Japan, the Philippines, and Taiwan. Total volume in this cluster decreased by 2.4% year-on-year, mainly due to lower combustibles industry volume in Japan, the Philippines, and Taiwan, even though partially offset by market share gains in Bangladesh and Taiwan and higher plume volumes in Japan. Regarding financial results, a strong pricing contribution in the Philippines outweighed the negative volume impact and lower product mix, mainly due to down trading in Japan and also the Philippines, resulting in higher revenue and AOP. Turning to Western Europe, which includes the key markets of Italy, Spain and the UK, total volume decreased by 9.3% year-on-year due to lower combustibles industry volume in several markets, including France and the UK, as well as unfavourable inventory movements, which exceeded the positive share momentum in several markets. Plume continued to gain share in the HTS segment, although RRP volume decreased year-on-year. This decrease was due to an unfavorable comparison from the temporary build-up of inventory that occurred during the plume promotion activities carried out in various countries in the same period of the previous year. Core revenue and AOP grew as the pricing contributions, mainly in Italy and the UK, offset the negative volume variance, mainly in the UK, incremental investments toward plume, and inflation-led cost increases, including in the supply chain. Moving on to IMA, this cluster includes the key markets of Romania, Russia, Turkey, and from this year, the USA. Total volume increased by 1.7% year-on-year, driven by the inclusion of the Vector Group, as well as market share gains in several markets, better than expected industry volume in Russia and Turkey, and continued growth of global travel retail. The cluster reported an increase in both revenue and AOP at constant effects driven by the increase of total volume and an improved market mix from the inclusion of Vector Group. In addition, pricing contributions mainly in Russia and Iran more than offset the incremental investment towards Plume and inflation-led cost increases including in the supply chain. Moving on to slide 8, as shown in the slide, we will be introducing a new plume ecosystem this year, starting with Japan. The new ecosystem is composed of a new and improved plume device as well as premium blend heated tobacco sticks. Both were designed and developed based on consumer feedback related to Plumex and Plumex Advanced, as well as market research. We will be providing more details at the launch event, which is scheduled on 27th May. Since 2023, Plume has accelerated its geo-expansion, and I am pleased to report that at the end of February, Plume grew its share of the HTS segment by 3.6 percentage points since the end of 2022, reaching 8.2%. This achievement keeps us on track to deliver on our ambition to reach mid-teen HTS share by the end of 2028. We are confident that the introduction of the new and improved Plume ecosystem will further expand our market share, not only in Japan but also in overseas markets. Slide 9 provides an update on the HGS share trends of Plume in selected markets. As shown on the regraphs, Plume's share within the HGS segment is continuing to grow both in and outside Japan. In Japan, HTS share of segment reached 12.7% on the quarterly average in the first quarter, fueled by solid share gains in March, during which plume grew to 13.1%. Our share gains are solid and will continue, despite continued product launches and intense promotional activities by competitors. Outside of Japan, even though competition is heating up, our HTS share of segment continues to grow steadily. This is driven by the expansion of our distribution networks, leveraging opportunities through partnerships with local events and seasonal campaigns, and our strengthened marketing efforts using digital media and online platforms. Going forward, we will continue to optimize insights gained from each market as well as feedback from consumers and strive to enhance the awareness of Plume to increase its market share through a tailored approach. Next, I will explain the results of the pharmaceutical and processed food businesses. Starting with the pharmaceutical business. Revenue increased by 2.0 billion yen year on year due to the sales increase in the area of skin disease and allergen at our subsidiary Torii Pharmaceutical and increased overseas royalty income from the depreciation of the yen. AOP increased year on year due to higher revenue offsetting SG&A expenses. Moving to the processed food business, revenue increased by 0.8 billion yen year on year, driven by the positive impacts from price revisions and sales growth of packaged cooked rice due to supply shortages of rice in the frozen and ambient food business. AOP decreased mainly due to the higher raw material costs, such as rice, which could not be offset by the higher revenue. In closing, please see slide 12. To summarize the first quarter results, I am pleased to report a great start for 2025. In the tobacco business, the business fundamentals came in very strong with solid market share momentum combined with a more resilient industry volume and robust pricing. FX also trended positively compared to the initial assumptions, putting us well on track to achieve our full-year forecast. On the other hand, since April, we have seen increased instability. For instance, the dollar-yen exchange rate has been very volatile, hovering between 139 yen and 151 yen. In addition, global economic dynamics have evolved in part due to changing tariffs while geopolitical risks in our IMA cluster continued. We will continue to closely monitor the situation and will update our earnings forecast if and when necessary. Lastly, as a reminder, We will be hosting a launch event for the new and improved Plume ecosystem on 27th May. Until then, we ask for your patience regarding additional details on the device and the heated tobacco stacks. This concludes my presentation. Thank you very much for your attention.

Thank you very much. Now we'd like to move to Q&A session. Let me introduce you the speakers for answer your questions today. Hiromasa Furukawa, CFO of the JT Group and Nobuya Kato, JTI Deputy CEO. Next, I'll show you how to ask questions. We are afraid we do not accept questions in this English line. If you have any question, please send an email to jt.ir at markjt.com. We'll introduce your question accordingly.