Japan Tobacco

Good afternoon, I am Hiramasa Furukawa, CFO of the JT Group. Thank you very much for coming to the investor meeting. I will begin by explaining our six months consolidated results for the fiscal year 2025. Please see slide four. As shown on the slide, revenue and AOP increase strongly, both on a constant FX and on a reported basis. AOP at constant FX, our primary performance indicator, increased by an impressive 24.7% year-on-year, driven by a strong organic performance, boosted by the contribution of the Vector Group in the U.S., which we acquired last year. The foreign exchange impact on AOP remains negative, due to the appreciation of the Japanese yen from the second quarter onward. This led to the depreciation of major currencies and of several emerging market currencies against the Japanese yen. Operating profit increased by 10.9% year-on-year, driven by the increase in AOP, partially offset by impairment losses related to the transfer of the pharmaceutical business and higher amortization costs of intangible assets related to the vector acquisition, both of which were included in the adjusted items. Profit increased by 4.8% year-on-year, driven by the increase in operating profit, which exceeded higher financial costs and higher corporate income tax expenses. 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, increased by 0.7% year-on-year. When excluding the unfavorable impact of inventory adjustments, mainly in Russia and Western Europe, total volume actually grew by 1.9% year-on-year. This solid volume of performance, in the context of a global declining combustibles industry volume, was driven by organic growth and the inclusion of the volume from the vector group, which we acquired last year. Let me now explain the breakdown by product category. Combustibles volume increased by 0.3% year-in-year. The main driver of growth was the EMA cluster, where continued market share gains in an improved combustibles industry volume and the Vector Group inclusion delivered solid volume growth. In our other clusters, we also continue to gain market share, including in Taiwan and the UK, mostly offset by lower industry sizes. This was mainly the case in the key markets of Japan and the UK. RRP volume grew by a significant year-on-year increase of 20.2%. This was driven by continued growth in both volume and market share within the HDS category, and markets were available. This RRP performance embeds the sales performance of Plume Aura and Evo in Japan, which I will explain in more detail later. Moving on to the financial performance of the tobacco business on slide six. In the second quarter, we achieved double digit growth in both revenue and AOP driven by strong pricing contributions across multiple markets. Focusing on the AOP growth drivers, the volume contribution was positive, mainly fueled by the inclusion of the vector group, which also improved the market mix through higher margins. Regarding the vector group contribution, I can confirm that it has been in line with our initial expectation. The price mix contribution to AOP was very strong, Pricing contributions in many markets, including the Philippines, Russia and the UK, outweighed the lower product mix, mainly due to downtrading in Japan and the Philippines. These positive factors far exceeded the incremental investments toward plume and the inflation-led cost increases within the supply chain, including tobacco leaf and labor. As a result, AOP at constant FX increased by 23.1% year-on-year. As I mentioned earlier, the FX impact on AOP was unfavorable. Nonetheless, AOP in the first half came in strongly, fueled by solid pricing contributions applied to a favorable organic volume momentum. Slide 7 reviews the performance of the three clusters in the tobacco business. The graphs on this slide show year-near variances in total volume, core revenue, and AOP at constant FX for each cluster. Let me start with Asia, cluster which includes the key markets of Japan, the Philippines and Taiwan. Despite growth in the second quarter, total volume in the first half decreased by 0.4% year-on-year, mainly due to lower combustibles industry volume in Japan and Taiwan, partially offset by market share gains in several markets, including 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 these factors resulted in higher revenue in AOP at constant FX turning to Western Europe which includes the key markets of Italy, Spain, and the UK. Total volume decreased by 5.8% year-on-year due to lower combustibles industry volume in several markets, notably the UK, as well as unfavorable inventory movements in Italy and Spain. These factors exceeded the positive share momentum in several markets, including Germany and the UK. combined with continued plume share gains in the HDS segment. Core revenue in AOP grew as the pricing contributions, mainly in Italy and the UK, offset the negative volume variance, mainly in the UK. Moving on to EMA. This cluster includes the key markets of Romania, Russia, Turkey and the USA. Total volume increased by 3.2% year-on-year, mainly driven by the inclusion of the Vector Group and market share gains in several markets, as well as an improved industry volume in Russia and Turkey. The cluster reported an increase in both revenue and AOP at constant FX, driven by the increase of total volume and an improved market mix from the inclusion of the Vector Group. Pricing contributions were also strong, mainly in Russia and Turkey. The robust top-line growth across the board enabled each cluster to offset the incremental investment towards Plume and inflation-led cost increases, including in the supply chain. Slide 8 provides an update on the HDS share trends of Plume in selected markets. As shown on the graphs, Plume's share within the HDS segment is continuing to grow across the footprint In Japan, HDS share of segment reached a 13.6% average in the second quarter. Our share gains are solid despite new product launches and intense promotional activities by competitors. Speaking of new product launches, on May 27th, we launched our new device, Plume Aura, along with the premium sticks Evo and limited channels. I will provide further details on Plume Auras and performance in Japan on the next slide. Outside of Japan, even though competition in each market was intense, our HDS share of segment continued to grow steadily. This is driven by the adjustment of our go-to market. approach, including the expansion of distribution networks, promotional activities, such as collaboration with various events and use of pop-up stores, as well as marketing efforts leveraging digital media and online platforms.

Slide 9 explains the performance of Plume Aura in Japan. In Japan, after the pre-launch at the end of May, we expanded the availability of Aura nationwide on July 1st. we are very encouraged by the strong start of Aura and Evostix. As you can see from the graph on the left, cumulative device sales of Plume Aura have exceeded those of the previous model, Plume X, by approximately three times in the first three weeks of nationwide expansion under the same conditions. This significantly surpassed our past sales records for HTS devices. Importantly, after the launch, cumulative device sales have continued to grow steadily. Customer feedback includes comments such as, product offers a stronger kick with a rich and satisfying taste, and design has become slimmer and more comfortable to hold, indicating high evaluations by consumers for the major renewal points of taste and design. Regarding the premium stick EVO, We have also received very positive feedback, such as, as expected from a premium brand, the flavor is rich and delicious, and it's worth purchasing, even at 550 yen. As a result, as shown in the graph at the top right of the slide, HTS' share of segment growth in Japan has accelerated since the launch of Plume Aura and Evo. Going forward, we plan to expand the STIC lineup and gradually roll out ORA in overseas markets, starting with Switzerland in September. These developments give us confidence in our ability to continue expanding our market share, both in Japan and overseas, and keep us on track to deliver on our 2028 RRP ambitions. Next, I will explain the results of the processed food and pharmaceutical businesses, starting with the processed food business. Revenue increased by 2.9 billion yen year-on-year, driven by the positive impact from price revisions this year, and higher sales of packaged cooked rice in the frozen and ambient food business. However, this revenue increase could not offset higher raw material costs such as rice, resulting in an AOP decrease. Moving to the pharmaceutical business, revenue increased by 4.3 billion yen year-on-year, driven by the sales increase in the area of skin disease and allergen at our subsidiary, Tori Pharmaceutical, and increased overseas royalty income. AOP was broadly stable as the revenue increase offset higher SG&A expenses. From the next slide, I will guide you through our revised forecast for fiscal year 2025. First, I'll explain our full year consolidated revised forecast. Core revenue at ConstantFX has been revised upward by 54 billion yen from the initial forecast, reflecting the strong first half momentum in the tobacco business, as well as an upward revision of the revenue in the processed food business. While revenue in the pharmaceutical business has been revised downward, due to the transfer of the pharmaceutical business, this impact is more than offset by the factors I just mentioned. As a result, we expect an 8.4% year-on-year increase in core revenue at ConstantFX. AOP at ConstantFX has also been revised upward by 47 billion yen from the initial forecast. Reflecting the upward revision of core revenue at constant effects, consequently AOP is expected to increase by 14.6% year-on-year. The negative FX impact on AOP is expected to ease versus the initial forecast due to a favorable revision of assumed foreign exchange rates. As a result, AOP on a reported basis has been revised upward by 89 billion yen from the initial forecast. Operating profit has been revised upward by 68 billion yen, reflecting the upward revision of AOP, partially offset by the adjustment tied to impairment losses related to the transfer of the pharmaceutical business. Profit has been revised upward by 44 billion yen, driven by the increase in operating profit, partially offset by higher financial costs. free cash flow has been revised downward by 112 billion yen, despite cash inflows related to the transfer of the pharmaceutical business and the upward revision of AOP. This is due to the expected initial payment related to the comprehensive settlement of the Canadian litigations, which was not incorporated in the initial forecast, and higher working capital. Compared to the previous year, we expect an increase of 65.5 billion yen due to the payment made last year for the acquisition of Vector Group. The following slide explains the revised forecast of each business. First, let's look at the volume forecast for the tobacco business. Total volume combining combustibles and RRP has been revised upward, reflecting the share growth in combustibles and the improved industry volume in several markets. In the second half, We expect total volume to decline year-on-year, mainly due to the lapping of the vector group acquisition in October. As a result, we're expecting total volume to decline by approximately 1% year-on-year. Turning to the financials. Core revenue at Constant FX has been revised upward by 80 billion yen, reflecting the strong pricing delivered in the first half. This will translate in a 9.8% year-on-year increase, including the lapping of the Vector Group acquisition. The robust top-line performance will enable us to make additional investments in Plume, resulting in AOP at constant FX being revised upward by 42 billion yen. Consequently, AOP at constant FX is expected to increase by 13.4% year-on-year. In the second half, growth in core revenue and AOP is expected to moderate, reflecting a volume decline in the second half year-on-year and a higher cost base versus the first half. Although FX impacts are expected to continue to have a negative impact, the revision of assumed exchange rates is expected to reduce the extent of this negative impact compared to the initial forecast. Slide 14 explains the revised forecast for the processed food and pharmaceutical businesses. The forecast for revenue in the processed food business has been revised upward by 2 billion yen from the initial forecast, incorporating higher sales of packaged cooked rice in the frozen and ambient food business. forecast for AOP remains unchanged from the initial forecast as the upward revision of revenue is to be offset by higher raw material costs, such as rice. Moving on to the pharmaceutical business, the forecast for revenue in the pharmaceutical business has been revised downward by 28 billion yen from the initial forecast, mainly due to the deconsolidation of Torii Pharmaceutical Company Limited from July this year, following the sale of shares in Torii. Higher overseas royalty income is expected to partially offset this negative impact. AOP has been revised upward by 6 billion yen from the initial forecast, despite the downward revision of revenue. mainly driven by the exclusion of R&D expenses concentrated in the second half due to the deconsolidation. The pharmaceutical business is planned to be classified as a discontinued operation starting from the third quarter of this fiscal year. Please refer to slide 18 for details regarding the corresponding disclosure changes. Finally, please see slide 16. The first half results were very strong. The pricing contribution in the tobacco business was a significant driver of this performance, alongside the inclusion of a vector group, which contributed in line with our initial expectation. As a result, AOP at ConstantFX increased by 24.7% year-on-year, marking substantial growth. In HTS, our focus area, Plume market share has been steadily expanding. We are also seeing strong momentum for Plume Aura and EVO in Japan since July. As for the full year forecast, we have revised upward all indicators from top to bottom line. This reflects the strong momentum in the tobacco business during the first half and the anticipated reduction in negative FX impact due to a revision of the FX rate assumptions. Finally, shareholder returns. This is the first time we are making this announcement in conjunction with second quarter earnings release. Based on the revised forecasts and our shareholder return policy, we plan to revise the annual dividend guidance upward by 14 yen, from 194 yen to 208 yen. As I mentioned in the first quarter results announcement, we determined the dividend for the current period based on the payout ratio calculated on the continuing operations basis. The payout ratio will be 74.9% based on the figure which is shown on slide 18. This concludes my presentation. Thank you very much for your attention.

Thank you very much. We'd like to move on to the Q&A session. Let me introduce to you the speakers who will answer your questions today. Hiromasa Furukawa, CFO of the JT Group, and Nobuya Kato, JTI Deputy CEO. Now I would like to show you how to ask questions. Please click the Raise Hand button in the Zoom window. If you are selected, please unmute your microphone and ask your question. For participants joining by phone, please dial star 9 to raise your hand. If selected, dial star 6 to unmute and ask your question. Due to time constraints, each person may ask only one question. Please note that we may not be able to answer all questions. Thank you for your understanding. Thank you very much for waiting. I would like to introduce the first questioner from Mizuho Securities, Saji-san, please. Thank you very much for the opportunity. So it has been a very favorable result. I'm very happy. So my question relates to the domestic RRP business. So in three years, 650 billion yen is the investment plan so a large portion but So Plume Aura, the launch, is using a lot within that investment. So my question is, three years and 650 billion yen. This year, how much would you spend and what would you invest towards? So also adjusted OP, that is the way you've been communicating to us. So what is the potential expense increase would it be that is related to AOP? Also, on a mid-term basis, you're planning to turn the business into black as KPI. So by 2028, for RRP as a whole, you're planning to turn this business into black. So this year, inclusive of the deficit, what is the degree of the deficit you may have inclusive of all these expenses? Thank you very much. That question relates to RRP category, 650 billion yen investment, and a breakdown by each year, and also its usage, and also impact on adjusted OP. Also, towards the 2028 ambitions, some of the outlook on a mid-term basis. So JTI Deputy CEO, Mr. Kato would answer. Mr. Saji, thank you very much for the question. This is Kato. So you mentioned domestic. So that was part of your question. But as you know, 650 billion yen in three years. This is not just for domestic, but also on the global basis. That is the amount that we expect to invest. So breakdown by each year, unfortunately, we did not disclose. But as a general trend, shall we say, gradually it shall be on the rise because, of course, there will be more markets deployed with the RRP. And also for this year, next year, and the year after, so at the end of this year into the first half of next year, in the existing markets, we will conduct a replacement to ORA, So on a relative basis, this year and next year, perhaps somewhat investment is heavy on a relative basis. Also, as part of your question, you mentioned about the breakdown of the investment. So you're talking not just by the year, but by which products, which I think that was also part of your question as well. So I would also like to explain on that part. Needless to say, new products development, And also, we may have R&D with the base, the insights. All those are inclusive in there. And of course, we talked about Aura, replacement to Aura. And various marketing and promotional activities are only inclusive in here. Now, in terms of turning the business into Black or profitable, as Mr. Saji referred, So the year 2028 has been set as a potential milestone to bring the RRP business as a whole profitable. So that is the midterm outlook. So we would like to achieve those. And for the time being, again, we're just aiming break-even and also making the business into profitable on a mid-term basis. That is our first target. So, of course, in order to achieve that, we need to have some sort of base to start from. Therefore, at the same time, HDS, especially, of course, HDS will be the primary category. So mid-teens is the segment share we are aiming for. So we shall have certain amount of size, the base size. Once we achieve the break-even, we need to accelerate the contribution into the earnings. So in terms of the timeframe, you may wonder, when can we actually have a recoup of the investment that has been made? So basically, On a mid-term basis, first of all, the breakeven and making the business profitable. And of course, we need to have certain size as well. All these need to be taken into perspective. And beyond that, we would also need to accelerate the contribution into earnings development. So on the long-term basis, perhaps a bit more on the longer tapus, we would like to recoup the investment that we have made. So that is all in terms of my answer. Just one point to add on. In terms of adjusted OP, what is the potential expenses or cost that would hit the AOP? Because the investment amount is quite large, I believe some are concerned about the potential cost and expenses. So the expenses that would hit the AOP, how much would that be for this fiscal term, roughly? So for this fiscal term, I think that was the question in terms of adjusted OP. What would be the amount that would hit the AOP? Maybe we cannot disclose the exact amount, but perhaps on a qualitative basis, I can give you some color. So if we look, we don't have a number specifically for RRP. We cannot disclose that number specifically for RRP. So for this fiscal term, on a full year basis, in terms of AOP on a current constant FX basis, 13.4% growth year-in-year is expected. So by different, there are some positive drivers and there are some negative factors, which would be the cost. So within that, where it says others, that is negative, and also it would be realized as cost. So perhaps we can give you the breakdown within this others. So within the others, so we have the cost, the COGS, accounts for about half of that within the others. And the marketing cost, just short of 30%. And OPEX, around 25%. So that is the breakdown. So the marketing expenses accounts for quite a large portion within the investment. So within the cost, it's just short of 30% in terms of marketing. But of course, this marketing, this relates not just to RRP, but also in markets where RRP is not deployed, that is for combustibles. We are also spending the market expenses as well. So again, just as a reminder, this is not just for RRP. So this is not a direct answer to your question, but hopefully that would answer your question. Thank you very much.