Japan Tobacco

Thank you very much for joining the investor meeting for Q3 2025 results of Japan Tobacco Inc. today. It's time, so let us start. But before we start, please make sure that your name on the Zoom screen is correct. Thank you very much for your cooperation. Now let me introduce our CFO, Mr. Furukawa. Good afternoon. I am Furukawa, CFO of the JD Group. Thank you for joining us today for JD Group's third quarter 2025 earnings briefing. I will begin by explaining our nine-month consolidated result for the fiscal year 2025. Please see slide four. To begin with, let me clarify how the financial figures are presented. As announced during the second quarter earnings briefing, starting from the third quarter, we will treat the pharmaceutical business as a discontinued operation in accordance with IFRS. As a result of this reclassification, results and forecast figures for the pharmaceutical business for the current fiscal year are presented as a single line under profit from discontinued operations. In this presentation, to provide a clearer understanding of our current and future business performance, we will explain each P&L indicator on the continuing operations basis. Now, I will move on to explain the consolidated results. As shown on the slide, all indicators and the nine-month consolidated results showed significant growth. AOP at constant FX, our primary performance indicator, increased by an impressive 27.2% year-on-year, driven by a strong organic performance in the tobacco business, boosted by the contribution of the Vector Group acquisition in the USA. The foreign exchange impact on AOP remains negative, mainly due to the depreciation of emerging currencies against the Japanese yen. Operating profit increased by 20.8% year-on-year, driven by the increase in AOP, partially offset by adjustment items due to higher amortization costs of intangible assets related to the vector group acquisition. Profit from continuing operations increased by 16.6% year-on-year, driven by the increase in operating profit, which offset higher corporate income tax expenses. Moving on to the results of each business segment, starting with the tobacco business. So please turn to slide 5 for the tobacco volume performance. Total volume combining both combustibles and RRP increased by 2.2% year-on-year. This solid volume performance following a strong first half and 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 as well as accelerated RRP volume growth mainly in Japan. Let me break down this performance by product category. The combustible's volume increased by 1.7% year-on-year, mainly fueled by the EMA cluster. The main drivers of growth were the vector group inclusion and the continued market share gains across many markets, notably in Turkey. While industry volume remained robust in Russia and Turkey, showing better than expected trends, combustibles industry volume continued to decline in Japan and the UK. RRP volume grew by a remarkable year-on-year increase of 27% driven by continued growth in both volume and market share within the HTS segment in available markets, as well as by the impact of new product launches of Prim, Aura and Evo premium sticks in Japan. Moving on to the financial performance of the tobacco business on slide 6. In the third quarter, we achieved double-digit growth in both revenue and AOP, driven by strong pricing and volume contributions. Let me explain each factor. The volume contribution was positive, mainly fueled by the inclusion of the vector group. Regarding the vector growth contribution, I can confirm that it has been in line with our initial expectation. The price mix contribution to AOP was very solid. Strong pricing contributions in many markets, including the Philippines, Russia and the UK, outweighed the lower product mix, mainly due to downtrading in Japan, the Philippines and Taiwan. These positive factors far exceeded the incremental investments towards plume and the inflation-led cost increases within the supply chain including tobacco leaf and SG&A expenses such as labor. As a result, AOP at constant FX increased by 25.7% year-on-year. As I mentioned earlier, FX impact on AOP was unfavorable. Slide 7 reviews the performance of the three clusters in the tobacco business. The graphs on the slide show EONU variances in total volume, core revenue and AOP at constant effects for each cluster. Let me start with Asia, cluster which includes the key markets of Japan, the Philippines, and Taiwan. Building on the first half momentum, total volume in the third quarter continued to grow, driven by market share gains in several markets, mainly in Taiwan, and the higher plume volume in Japan. As a result, year-to-date total volume was resilient, decreasing merely by 0.2% despite lower combustibles industry volume in Japan and Taiwan. Regarding financial results, a strong pricing contribution mainly in Japan and the Philippines outweighed the negative volume impact and lower product mix mainly due to down trading in Japan, the Philippines and Taiwan. These factors resulted in higher revenue and AOP at constant effects. Turning to Western Europe which includes the key markets of Italy, Spain and the UK. The total volume decreased by 4.2% year-on-year due to lower combustibles industry volume in several markets, primarily in the UK, as well as unfavorable inventory movements, mainly in Italy and Spain. These factors exceeded the positive share momentum in many markets, notably Italy and the UK, and continued plume share gains in the HTS segment in several markets. Core revenue and AOP grew as the pricing contributions, mainly in Italy and the UK, offset the negative volume of 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 5% year-on-year, mainly driven by the inclusion of the Vector Group in the USA and market share gains in several markets, mainly in Turkey, as well as improved industry volume in Russia and Turkey. The cluster reported an increase in both revenue and AOP at constant effects driven by the increase of total volume mainly in Turkey and the USA. 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 a supply chain and SNG expenses.

Slide 8 provides an update on the HDS share trends of prune in selected market. As shown on the graphs, prune's share within the HDS segment is continuing to grow across the footprint. In Japan, the largest heated tobacco market globally, our HTS segment share growth accelerated, driven by Prume Aura and Evo premium sticks, reaching an average share of 15.5% in the third quarter. Our share gains remain solid, supported by competitive product and successful marketing initiatives despite intense activities by competitors in terms of product launches or promotional campaigns. Out of Japan, despite intensifying competition, we have been steadily increasing our share within the HTS segment through in-person and online sales promotion and marketing activities, leveraging insights gained from each market. We have further expanded our geographic footprint with Plume New Present, now present in 28 markets as of the end of October. Slide 9 explains the performance of Prume Aura and Evo premium sticks in Japan. The product launched at the end of May this year have shown strong initial momentum as mentioned in our Q2 earnings announcement and this momentum has continued after the nationwide expansion in July. Compared to previous models, Aura has a higher proportion of new purchasers. As indicated by the graphs at the top left of the slide, this has contributed to an accelerated increase in the number of prune users, which has approximately doubled by the end of Q3 compared to two years ago. Also, as of August, Aura surpassed 2 million units in cumulative device volume, marking the fastest achievement of this milestone in our RRP journey. The graph at the top right of the slide shows our HDS volume by brand. Importantly, even after the launch of new products, sales volume of existing brands such as Mavius and Camel has continued to grow. Evo, positioned as a premium offering, has also steadily added volume. This well-balanced refuel portfolio has driven overall HTS volume growth while outperforming the growth of the HTS segment and improved the product mix. In overseas market, we are gradually transitioning to AURA. With launches completed in eight markets as of the end of October, we plan to roll out AURA to approximately 15 markets by the end of 2025. These developments give us confidence in our ability to continue increasing our market share both in Japan and overseas. Next, I will explain the results of the processed food business. Revenue increased by 1.8 billion yen year-on-year, mainly driven by the positive price revision of packaged cooked rice in frozen and ambient food business. However, this revenue increase could not offset higher raw material costs such as rice, resulting in an AOP decrease. From the next slide, I will guide you through our revised forecast for fiscal year 2025. First, I will explain our four-year consolidated revised forecast. Core revenue at Constant FX has been revised upward by 109 billion yen from the previous forecast, reflecting the strong business momentum in the tobacco business. As a result, we now expect a 13.2% year-on-year increase in core revenue at Constant FX. AOP at constant FX has also been revised upward by 71 billion yen from the previous forecast, reflecting the upward revision of core revenue at constant FX. Consequently, AOP at constant FX is now expected to increase by 24.3% year-on-year. We are also expecting that the negative FX impact on AOP will ease versus the previous forecast, mainly due to the major currencies expected to be stronger against the Japanese yen. As a result, AOP on a reported basis has been revised upward by 89 billion yen from the previous forecast. Operating profit has been revised upward by ¥94 billion reflecting the upward revision of AOP and expected gain on sale of real estate in the adjusted items. Profit from continuing operation has been revised upward by ¥62 billion driven by the increase in operating profit. Profit from discontinued operation has been revised upward by 6 billion yen compared to the previous forecast, reflecting an increase in royalty income from the pharmaceutical business. Free cash flow has been revised upward by 44 billion yen driven by upward revision of AOP. In the following section, we will explain the revised forecast by business segment. Let us begin with the volume assumptions for the tobacco business. Total volume including combustibles and RRP has been revised upward to reflect the stronger than expected industry volume trends for combustibles in some key markets such as the Philippines, Russia and Turkey. Robust share momentum in many markets as well as continued HCS growth. As a result, the full year forecast is now expected to increase by 2% year-on-year. and turning to financials. Core revenue at constant FX has been revised upward by 112 billion yen from the previous forecast. This revision reflects the updated volume assumptions applied to the strong pricing contribution since the beginning of the year. Compared to the previous year, this represents a projected increase of 13.8%. AOP at constant FX has also been revised upward by 72 billion yen from the previous forecast, driven by the improved top-line growth. As a result, it is expected to increase by 22.5 percent year-on-year. As I mentioned earlier, while the FX impact on AOP is expected to remain negative, the magnitude of this impact is expected to be smaller than previous forecast. Slide 14 explains a revised forecast for the processed food business. The forecast for revenue has been revised downward by ¥3 billion from the previous forecast incorporating the latest sales results in the frozen and ambient food business. Forecast for AOP remains unchanged from the previous forecast as a downward revision of revenue is offset by expected lower cost. Finally, please see slide 16. Following the solid performance in the first half, the third quarter results came in stronger than expected. In the tobacco business, robust organic growth and the contribution from the vector group acquisition drove remarkable top line growth. As a result, consolidated AOP at constant FX increased significantly by 27.2% year-on-year. In HTS, our investment focus, pre-market share and volume continue to grow steadily across markets. In Japan, we are seeing strong performance from Prume Aura and Evo launched in May, and we accelerate the transition to these products in overseas market as well. As for the full year forecast, we have revised all indicators upward, reflecting the continuing strong performance in the tobacco business and easing of negative FX impact. As a result, we now anticipate record high figures across all indicators from revenue to profit. Finally, shareholder returns. Based on the revised forecast and our shareholder return policy, we plan to revise the annual dividend guidance upward by ¥26 from ¥208 to ¥234. As previously communicated, we determine the dividend for the current period based on the payout ratio calculated on the continuing operation business. As per the revised full-year forecast, the dividend payout ratio is expected to be 74.9%. This concludes my presentation. Thank you very much for your attention. Thank you. Now I'd like to move to Q&A session. Let me introduce the speakers who will take 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.il at markjt.com. We'll introduce your question accordingly. Thank you for your understanding.

Thank you very much. The first question comes from Sajisan of Mizuho Securities. Thank you very much. I have questions about overseas. The driver is Russia and Turkey. I want to know the contents of their contributions, especially when we look at the year to date. The market in Russia is growing at the pace of 4% and Turkey is growing nearly 9%. Why is it so strong at both of those markets? And towards the year 2026, I'm wondering about the sustainability of the growth and also the potential risks, especially on the aspect of risks. Some concerns are that down trading that's accelerating in Russia market and also the other market in Turkey is probably thinking about the risk of war next year after the PMI supply chain trouble is finished. Okay, so regarding the result and the forecast for Russia and Turkey, GTI Deputy CEO Kato is going to answer those questions. Thank you very much. This is Kato speaking. I will take up your questions. So first of all, let me refer to Russia. Well, the business has been quite strong and since last year I think we've been often talking about this, the illicit trading and the flow in as a percentage to the market has been declining quite sharply since last year and this year there was a big decline as well. Well, this is probably the restriction getting much tougher for the illicit trades or the illicit tobacco imports and I think they are starting to have as the result of that restriction. Well, last year, the percentage of the illicit products has declined, so we had assumed that there will be some reduction for this year as well. But that result has been much bigger than what we had thought. And as a result, there's been a push up demand for the cigarettes. and that trend is continuing. So that's the big driver for the study business that we are enjoying in the market of Russia. Now turning our eyes to the total volume in Turkey, well it's not limited to this year but the total demand has been increasing for the entire industry for the past years. and I think we have communicated the same thing for the last few years, but they are going through, the Turkish market is going through a hyperinflation. Against that backdrop, we are trying to work on the pricing to be aligned with the inflation speed. In the meantime, other consumable products, they are also going through the price hike. However, compared to the tobacco products, the pricing for the other consumables has been happening much at the faster speed. So as a result, the tobacco product gives an impression that it is priced reasonably. and also the total population is growing in Turkey. With those reasons, for recent years, including this year, the total demand is increasing. And also to build more on that, as you mentioned, in Turkey, we have Winston, which is growing, and then share is steadily growing. And this time, the volume expectation For the Q2, it was quite steady but our assumption is that the growth is going to be much bigger and more than half of those growth will be coming from the steady growth in Turkey and also our market share is also growing and that's the reason why the volume is increasing and we have come up with the upward revision for the volume increase. Talking about the risks, potential risks for the next year or the sustainability for the next fiscal year, whether the current situation is going to continue or not. First of all, talking about the overall market demand in Russia, we are wondering how much of the reduction we are going to see for the illicit products. transaction in Russia. It's quite hard to foresee. Is it going to bottom out or is it going to be continuously reducing? We still need to see whether that will be the case or not. Now, talking about the potential risks, the next fiscal year's VAT, the value added tax, is going to be increasing and also the tobacco excise tax. It was originally planned to increase, but there is a law or the bill that that will be much higher than the original assumption. The final confirmation is going to be done at the end of November, so at this point of time, we have no idea. However, according to the current proposed bill, the tax increase is going to be quite big. So if that will be the case, the possibility of down trade might be likely, and the total industry volume is going to be negatively influenced if that's the case. So that's the potential risk for the total market volume in Russia market. In the meantime, for Turkey, the total demand in Turkish market seems to be continuing the current trend, meaning that for the next fiscal year, a reasonable growth for the total market is expected to happen because the pricing in line with the inflation speed is going to be continuing. But looking at the pricing of other consumables, where the tobacco seems to be priced quite reasonable, so it's not going to be showing a wide gap, I guess, so that the total demand, that robust demand is going to continue is what we are assuming. The PMI, because of the supply chain issue, we had the positive impact on our share. Is it going to change? Meaning that we have taken their share but is it going to be stolen back? So far, right now, the PMI have made improvement in the supply chain issue. and they say so, but our market share that we have grown and stole from them have not been dropped. We are maintaining the share that we have taken from them. So is the share going to be significantly dropping once next year comes. We don't think that is likely to happen. However, of course, peers are going to do the best of sticking back their position. So we need to respond to their measures, trying to maintain or further grow our market share in that market. That's my answer. Thank you so much. OK, so Russia and Turkey, we can expect a good business. Russia, We currently do not have a clear visibility of the tax increase that could be serving as a negative variance, but okay, understood. Thank you so much.