Japan Tobacco

Good afternoon. I am Hiromasa Furukawa, CFO of the JT Group. Thank you very much for joining us today for JT Group's second quarter 2026 earnings briefing. Before we begin, we would like to express our deepest sympathies to all those affected by the 2026 Kumamoto earthquake in Japan. We sincerely hope that those in the affected communities remain safe and that the region recovers as quickly as possible. I will begin by explaining our six months consolidated results for the fiscal year 2026. Revenue in ALP increased significantly, reflecting the strong business momentum in both the tobacco and processed food businesses. AOP at constant FX, our key performance indicator, increased by 19.4% year-on-year, contributing to growth all the way to net income. The FX impact was positive, driven by the appreciation of several currencies, including the Russian ruble, against the Japanese yen. Operating profit increased by 29% year-on-year driven by the increase in AOP as well as a reduction in amortizing costs of intangible assets arising from past acquisitions included in the adjustment items. Profit increased by 28.9% year-on-year driven by operating profit growth and lower financial costs. Next, I will detail the performance of each business segment, starting with the tobacco business and its volume performance. Please turn to slide 5. Total volume, combining both combustibles and RRP, increased by 1% year-on-year. Excluding favorable inventory movements, total volume increased by 0.4% year-on-year. and combustibles. Although industry volume declined across several markets, including Japan, Russia and the UK, solid share and GFB volume momentum continued across our global footprint. As a result, our combustibles volume remained in line with the previous year. RRP volume increased by a significant 33.8% year-on-year, driven by plume, continuing to grow volume substantially, up by 43.5% year-on-year, and to gain share in heated products. Moving on to the financial performance of the tobacco business on slide 6. At a constant FX, core revenue increased by 10.6%. Price mix contributed 10.2%, with pricing continuing to be the primary growth driver across many markets. Let me explain the AOP drivers by factor. Volume contribution was negative as the total volume increase was offset by a deterioration in market mix from large volume declines in higher priced markets such as the UK. The price mix contribution I mentioned was driven by robust pricing including the key markets of the Philippines, Russia, Turkey and the USA. These top-line growth factors fully offset increased investments towards plume, as well as inflation-driven increases in raw materials costs and SG&A expenses such as labor, resulting in AOP at constant FX increasing by 18.8% year-on-year. As mentioned earlier, the FX impact was favorable. In summary, throughout the first half, I am happy to report that these outstanding results exceeded our initial forecasts, fueled by solid pricing contributions and positive FX impacts. On slide 7, I will explain the performance of the three clusters in the tobacco business. The graphs on this slide show year-on-year variances and 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. Total volume in this cluster increased by 4.2% year-on-year, driven by resilient combustibles industry volume and market share growth, led by Bangladesh, as well as higher plume volume, mainly in Japan and Taiwan. Revenue and profit increase, mainly driven by positive pricing in Japan and the Philippines, as well as plume volume contributions in Japan and Taiwan. Next is Western Europe, which includes Italy, Spain and the UK. Total market share gains in several markets, continued category share gains in heated products by plume and favorable inventory movements, mainly in Italy and Spain, could not offset the lower combustibles industry volume, mainly in the UK. As a result, total volume in this cluster declined by 2.4% year-on-year. Core revenue in AOP grew as pricing contributions across several markets, including the UK, offset negative volume effects, primarily in the UK. Moving on to EMA, which includes Romania, Russia, Turkey, and the USA. Total volume in this cluster increased by 0.7% year-on-year. The increase in market share gains in Turkey and the USA, combined with higher plume volume across markets and increasing industry volume in Turkey, were partially offset by declining industry volume, mainly in Russia. The cluster reported an increase in both revenue and AOP driven by pricing contributions, mainly in Russia, Turkey, and the USA. While investments in plume and inflation-driven increases in raw material costs and SG&A expenses continued across clusters, these were offset by top-line growths. On slide 8, we highlight our ROP performance. Let me share some details. As shown in the charts at the top, gross and post-ROP volume and ROP-related revenue has accelerated following the launch of Plume Aura in 2025. The stop-line growth has been driven by the continued expansion of the category, as well as the steady growth in Plume's heated product share through strategic marketing investments. In Japan, while there were some short-term fluctuations due to the timing of marketing initiatives and temporarily demand increase ahead of the RRP tax-led price revisions in the first quarter, I am pleased to report that the share momentum remains solid. Monthly share for June, when the adverse impact from the temporary demand had largely subsided, reached 18.3%, indicating steady progress in line with the growth trajectory since the launch of Plume Aura. In other markets, heated products share also continue to grow, supported by the contribution from LEO, our tobacco-free heated nicotine stick in Europe. As a result, Plume's category share across our 13 initial heated products markets reached 11.5% as of May 2026. In addition, Plume's geographic footprint has expanded to 30 markets as of July, with the rollout of ORA completed in 29 markets.

Next, I will explain the results of the processed food business. Revenue increased by 2.5 billion yen year-on-year, mainly driven by price revisions of packed cooked rice in the frozen and ambient foods business. AOP increased by 1.5 billion yen year-on-year as revenue growth offset higher raw material costs due to rising brown rice prices. From the next slide, I will guide you through our revised forecast for fiscal year 2026. First, I will explain our full-year consolidated revised forecast. Core revenue at constant effects has been revised upward by 80 billion yen from the initial forecast, reflecting the strong momentum in the tobacco business. As a result, core revenue is expected to increase by 6% year-on-year. AOP at constant FX has also been revised upward by 24 billion yen from the initial forecast, reflecting the upward revision of core revenue at constant FX. Consequently, AOP is expected to increase by 11.6% year-on-year. The FX impact on AOP is expected to improve versus the initial forecast. As a result, AOP on a reported basis has been revised upward by 80 billion yen from the initial forecast. Operating profit has been revised upward by 87 billion yen, reflecting the upward revision of AOP. Profit has been revised upward by 74 billion yen, driven by the increase in operating profit and lower financial costs. Free cash flow has been revised upward by 121 billion yen, mainly driven by the upward revision of AOP. Compared to the previous year, we expect an increase of 378.3 billion yen, notably driven by the absence of the First, let's look at the tobacco business, starting with volume expectations. Total volume, including combustibles and RRP, is forecast to be in a range between 1% year-on-year decline and in line with the prior year. This is unchanged versus our initial forecast. Indeed, first half volume performance was broadly in line with our initial forecast. This initial forecast also incorporated lower total volume for a second half, reflecting tax-driven price increases across markets and year-on-year comparison effects. Turning to the financials and starting with the constant FX indicators. As just mentioned, in the second half, we expect total tobacco volume to decline year on year, accompanied by an unfavorable market mix. In addition, supply chain costs and investments in RRP are expected to increase versus first half. As a result, growth in core revenue and AOP is expected to moderate versus first half. However, acknowledging the strong pricing contributions, we have revised core revenue upward by 80 billion yen. This will translate into 6% growth year on year. The upward revision of the top line will enable us to make additional investments in RRP, resulting in AOP being revised upward by 25 billion yen, or an 11.2% increase year on year. The FX impact on AOP is expected to improve versus our initial forecast, reflecting a stronger Russian ruble and a weaker Japanese yen than initially assumed, as well as higher hyperinflation adjustments due to pricing effects in Iran to offset inflation and local currency depreciation. Regarding the situation in the Middle East, we have incorporated the impact into our revised full-year forecasts based on certain assumptions. As stated at the first quarter results announcement, the impact is currently expected to be limited. Slide 13 explains the revised forecasts for the processed food business. Revenue is expected to increase by 10.5 billion yen year-on-year, with no change from the initial forecast. AOP is expected to remain broadly in line with the prior year and Unchanged from the initial forecast, reflecting solid business performance despite higher raw material costs and other cost increases associated with the situation in the Middle East. Finally, please see slide 15. As discussed today, the tobacco business was the primary driver of our first-half performance, delivering outstanding results that exceeded our initial expectations. In combustibles, pricing continued to contribute strongly to performance while maintaining share gains across many markets. In RRP, the expanding presence of plume steadily contributed to top-line growth. This performance is clear evidence that our strategic goals and investments to support sustainable profit growth are delivering solid results. Building on our strong confidence in the underlying strength of the business, the significant first-half results and our ability to execute, we have substantially upgraded our full-year guidance. Based on the revised forecast and our shareholder return policy, we also plan to revise the annual dividend guidance upward by 30 yen from 242 yen to 272 yen. We expect the dividend payout ratio based on the profit after the Canada adjustment to be 75.2%. This concludes my presentation. Thank you very much for your attention. Thank you, Mr. Furukawa. Now we would like to move to the 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 will explain how to ask questions. We are afraid we don't accept questions in this English line. If you do have any questions, please send an email to jt.ir at jt.com We will introduce your questions accordingly. Thank you for your understanding.

Thank you very much. We would like to introduce the first question. Mr. Saji from Mizuho Securities. Thank you very much. I have a question, one question. This relates to the overseas pricing situation, especially IMA cluster in the second quarter, 64.9 billion yen of impact you had in terms of the pricing. So perhaps in the first half, combustibles, We have just short of 2% that is declined in the Russian market. But within that, Russia seems to be contributing in terms of pricing. So in light of that, how sustainable is this pricing strategy in Russia? And also, the FX impact, which has contributed to the dividend hike. So 56 billion yen of FX impact was a positive factor that you have included. So Iran perhaps contributed. So what is the pricing situation in Iran? Appears as if it has been quite steady if you look at the adjustment and the revised guidance. So I'd like to ask about the sustainability of the pricing strategy in Russia and Iran. So that is my question. So this is a question related to Russia and Iran and the pricing and the strategy. So JTI Deputy CEO Kato would answer. So this is Kato. Mr. Saji, thank you very much for the question. So as for Russia, how sustainable is the pricing? So this year, and also going forward, the pricing environment is not expected to dramatically change. Russia, in recent months, perhaps there's an deterioration of the affordability, and the economic environment is not necessarily positive, and down trading is ongoing. We have been sharing those information. On the other hand, On a relative basis, in Russia, we do have a robust leadership position. So in the mid-price and also the higher, the premium segment, we do have a fairly strong market share. Now for down trading and the value segment, We have not been able to own strong products. So that may be the reason why the overall volume and the market share is somewhat declined. But in the mid-price or higher price segment, it has been relatively resilient. So we believe we can continue to execute a solid pricing strategy. But all in all, down trading is underway. And in the value segment, we intend to take initiatives wherever possible. So pricing as a whole in Russia, it is not likely that the situation will worsen, that we cannot actually continue with the pricing strategy. However, we are seeing some softness within the volume, and of course we have the down trading. So in terms of the level of pricing, we need to strike the right balance, taking all those information into consideration. So that's the total picture. Now, as we have shared already after the Q1 results, Russia, the tax hike has been higher than initially anticipated. Next year and the following year, the liberal tax hike has been disclosed by the government. But whether that level, whether that would come through or not, perhaps just as we have seen, perhaps the tax hike may be higher than initially anticipated. If that is the case, that may pose an impact on the affordability of the market. So we need to take those into consideration as we execute the pricing strategy. So that's the general direction. Going forward, having more challenges in executing the pricing strategy in Russia, that is not the kind of expectations we have. Now moving on to Iran, the pricing in Iran. As mentioned, hyperinflation has been adopted in the market. So the inflation level is extremely high. So the way we approach the pricing So inflation and the equivalent level of inflation, we will offset that through pricing strategy. That is our basic thought process. And that is why we have been executing the pricing strategy. So regardless of tobacco products, so in the consumables in general and around, it is facing a continuous inflation. So in that level, pricing has been executed in the past, and we have been able to do that. We believe we can continue to do so in the future. So as inflation continues, so this is not just for the tobacco products, the pricing will be impacted by the inflation. And accordingly, we will conduct the pricing. Thank you very much. So in terms of AOP, so I think the FX adjustment was quite large, about 56 billion. So Iran, how big was the portion within this? So this is Furukawa. So in terms of FX impact, 56 billion was the FX impact. So almost entirely this amount I already mentioned was in my explanation. So Iran is a hyperinflationary market. So the price related to inflation, so we try to ensure that. So the AOP from the constant FX basis, those have been excluded from that number. So that particular portion, we conducted ad-back because we have a much more clear picture of Iran. So now we have factored those into the plan. So in the adjusted plan for the FX plan, so I cannot give you the detailed number, quite a large portion of that has been taken into account through the Iran situation. Understood. Thank you very much.