Japan Tobacco Inc.

Thank you for participating in the investor meeting for Q3 2026 results at Japan Tobacco Inc. today. It's now my pleasure to introduce our CFO, Mr. Furukawa, please. Good afternoon. I'm Hiromasa Furukawa, CFO of the JT Group. Thank you very much for joining us today for JT Group's third quarter 2026 earnings briefing. I'll begin by explaining our nine-month consolidated results for the fiscal year 2026. AOP at constant effects of a key performance indicator increased by 16.9% year-on-year. The main driver was a strong top-line growth across all business segments, contributing to the growth all the way to net income. The FX impact was favorable, driven by depreciation of several currencies, including the Russian ruble, against the Japanese yen. Operating profit increased by 24.2% year-on-year, driven by increasing AOP as well as a reduction in amortization cost of intangible assets arising from past acquisitions included in the adjustment items. Profit increased by an impressive 21.0% year-on-year, driven by operating profit growth despite higher financial cost and corporate income tax expenses. 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 decreased by 0.3% year-on-year, in line with our forecast. In combustibles, Although share gains continued, led by GFBs, volume decreased by 1.0% year-on-year, reflecting lower combustibles industry volume in market including Japan, Russia, and the UK. RRP volume increased by 31.1% year-on-year, supported by steady volume growth in heated product volume, including the continued expansion of prune aura in Japan. and the contribution from RIO, a tobacco-free heated nicotine stick, in Europe. Moving on to the financial performance of the tobacco business on slide 6. At constant effects, core revenue increased by 8.7%. The price mix contribution was 9.6%, with robust pricing continuing to be the primary growth driver across many markets. Let me explain the ALP drivers by factor. Volume contribution was negative, mainly due to the lower total volume driven by a decline in combustible industry volume in higher-priced market. The pricing experience was driven by robust pricing, including in the key markets of Philippines, Russia, Turkey, the UK, and the USA. These top-line growth factors fully offset higher investment towards prune, as there as inflation-driven increases in raw material cost and SG&A expenses such as labor, resulting in AOP at constant FX increasing by 16.6% year-on-year. As mentioned earlier, the FX impact was favorable. On slide 7, I explain the performance of the three clusters in the tobacco business. The graphs on this slide show year-on-year variances in total volume, RRP volume, core revenue, and AOP at constant effects for each cluster. Let me start with Asia, which includes the key markets of Japan, the Philippines, and Taiwan. Total volume and RRV volume increased by 3.4% and 32.1% year-on-year respectively, driven by robust combustibles industry volume and market share growth mainly in Bangladesh, higher prune volume in Japan and Taiwan, and a temporary higher demand ahead of RRP tax increase in Japan. Regarding financial results, revenue and profit increase mainly driven by positive pricing in Japan and the Philippines as well as proven volume contributions in Japan. Next is Western Europe, which includes Italy, Spain, and the U.K. Total market share gains in several markets could not offset the lower combustibles industry volume, mainly in the UK. As a result, total volume in this cluster declined by 3.9% year-on-year. RRP volume increased by 13.4% year-on-year, driven by pruned share gains across markets. Core revenue and 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 decreased by 0.6% year-on-year as share gains in several markets led by Turkey as well as a higher volume growth were offset by lower industry volume, mainly in Romania, Russia, and the USA. RRP volume increased by 43.9% year-on-year. The cluster reported an increase in both revenue and AOP, driven by pricing contributions, mainly in Romania, Russia, Turkey, and the USA. While investment improvement and inflation-driven increases in raw material cost and SG&A expenses continued across clusters, these were offset by top-line growth. On slide 8, we highlight our RRP performance. As shown in the chart at the top, both RRP volume and RRP-related revenue are accelerating. I'll explain Purim's performance in Japan on the next slide. In other markets, heated product share growth continued through strategic marketing investment. As a result, Prune's category share across our 13 initial heated products market reached 11.6% as of August 2026. We will continue to expand our portfolio and strengthen the Prune brand equity while and further growing share by consistently enhancing customer engagement across entire consumer journey from awareness and trial to purchase and retention. On slide 9, I will explain fluence performance in Japan, taking into account the two RRP tax-led price increases. As shown by the bars in the chart, The RRP tax-led price increases implemented in April and October this year, together with the resulting list price increases by each company, led to temporary higher demand ahead of the price increases in March and September, followed by a temporary decline in volume due to the subsequent demand normalization. Regarding share evolution, the leading competitor benefited more largely from the temporary higher demand, briefly weighing on our share in March and September. As a result, our quarterly category share was affected by this impact. On the other hand, looking at the period following the first price increase, while volume declined in April, the month after the temporary higher demand occurred, It subsequently recovered. Share also rebounded significantly and has remained at a solid level, demonstrating the steady performance. In addition, quarterly category share on a shipment basis, excluding the impact of temporary demand, continued to grow steadily quarter on quarter, and the actual consumer demand-based share in October remained solid. While short-term fluctuations have occurred due to price increases associated with the tax hikes and the timing of marketing activities by companies, we remain confident in the ability to deliver sustained growth in plume. Next, I will explain the results of the processed food business. Revenue increased by 4.1 billion yen year-on-year, driven by price revisions and the sales growth of new products mainly frozen udon. AOP increased by 0.4 billion yen year on year as revenue growth offset higher raw material and the logistic cost. From the next slide, I will guide you through our revised forecast for fiscal year 2026. First, I will explain a four-year consolidated revised forecast. Core revenue at constant effects has been revised upward by ¥44 billion from the previous forecast, reflecting the strong momentum in the tobacco business. As a result, core revenue is now expected to increase by 7.3% year-on-year. AOP at constant FX has also been revised upward by 40 billion yen from the previous forecast, reflecting the upward revision of core revenue at constant FX. Consequently, AOP is expected to increase by 16.1% year-on-year. The FX impact on AOP is also expected to be positive. As a result, AOP on a reported basis is now expected to increase by 21.9% year-on-year. Operating profit has been revised upward by 33 billion yen, reflecting the upward revision of AOP. Profit has been revised upward by 18 billion yen, driven by the increase in operating profit. Profit is expected to increase by an outstanding 3%. 32.6% year-on-year. Free cash flow has been updated mainly to reflect the payment for the acquisition of the fine-cut tobacco brands Brake and Murrow. Compared to the previous year, we expect an increase of 323.3 billion yen, notably driven by the absence of the upfront payment associated with the Canadian litigation settlement recognized last year. The following slides explain the revised forecast of each business. First, let's look at the tobacco business starting with volume expectations. Total volume, including combustibles and RRP, is expected to decrease by 0.5% year-on-year, reflecting a resilient combustibles industry volume in Asia, as well as favorable share momentum across markets, like in Turkey. Turning to the financials and starting with the constant FX indicators. At constant FX, Core revenue and AOP were revised upwards by 47 billion yen and 42 billion yen respectively from the previous forecast, reflecting top-line performance driven by strong pricing. As a result, AOP at constant FX is now expected to increase by 15.7% year-on-year. The FX impact on AOP is expected to remain positive at broadly the same level as previous forecast. Slide 14 explains the 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 foods business. The forecast for AOP has been revised upward by 0.5 billion yen from the previous forecast, driven by margin improvements from pricing initiatives and cost reduction efforts, despite a downward revision to revenue. Finally, please see slide 16. Following a strong first half, top-line growth remained robust in the third quarter. In combustibles, performance was supported by ongoing share gains and pricing, while plume continued to increase both share and volume. As a result, for the first nine months, AOP at constant effects increased by 16.9% year-on-year, To reflect the strong momentum in the tobacco business through the third quarter, we have revised upwards all P&L indicators. As a result, we expect to achieve record high results across all indicators again this year. As for dividends, we determine our dividend per share in line with our shareholder return policy, which targets a payout ratio of 75%, plus or minus 5%. We remain confident in achieving our latest earnings forecast and have therefore maintained our annual dividend forecast at 272 yen per share, which we raised previously. Looking ahead, we will continue to steadily execute our business strategies, improving profitability through top line growth in combustibles and positioning heated products as the second growth engine alongside combustibles. This concludes my presentation. Thank you very much for your attention. Thank you, Mr. Furukawa. Now we would like to move to 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 will show you how to ask questions. We are afraid we do not accept questions in this English line. If you have any questions, Please send an email to jt.ir at jt.com We will introduce your question accordingly. Thank you for your understanding. Thank you for waiting. The first question is from Mizuho Securities, Mr. Saji. Thank you very much. Now, I'd like to ask about the combustibles. And it has been very solid. And I'd like to put a focus on Russian business. As for the key point... That includes page 27. And the down trading is continuing. And then, your LD in the value segment continue to lose shares. So, I'd like to know more about the market environment and also the share loss in the value segment. And also from January to September, RRP's mix is over 12%, I guess. So, I'd like to know more about the combustibles vis-à-vis RRP, although you are not having the RRP at this moment. So, how are you going to play around going forward in terms of the strategy? That's my first question. So, the question is, Thank you for your question, Mr. Saji. Talking about the business environment in Russia, as you know already, that the price increase along with the tax increase and also Affordability is declining when we look at the purchase capability of the consumers. And then along with that, the down trading is progressing throughout the market. And we have the strength in the mid-price and higher. So that is serving as a kind of headwind. And our performance is weakening. So how we can counter those deterioration of the affordability is Of course, we need to continue to have a close watch at the sustainability of these moves and also the level. And rather than accepting the trend as it is, we'd like to enhance the portfolio at the appropriate price range, and then we'd like to improve our performance in that trend. And to be more specific, shortly, we are going to launch the new product in value segment. And along with that, we think we will be able to have the improvement in the share trend. And another point, the expansion of the heated product category, as you are aware, well, it is moderately expanding. Therefore, the combustible market itself continues to shrink. And also, as you know, In the heated product category, we are not playing in that category at this moment. However, we continue to watch the market trend, and then we are going to identify what we can do and what we should do. Anyway, in Russia, our leadership position of our company remains unchanged and has been very solid. So, going forward, in terms of the market development, we are going to be flexible, and we will take the appropriate action to continue the sustainable business. Thank you very much. So, basically, the pricing of the combustible... We'll continue to drive as the growth in the next year onwards, and for the heated products and RRP, you don't have any plan to enter into the market again, is that right? For the combustible pricing, yes, your observation is correct. The drastic change of the pricing environment, we don't think that will be happening. And of course, we'll continue to watch the market environment and also we'll strike the good balance between the volume and the share and then determine the pricing. And next year, our tobacco tax plan is already announced just recently. So including that, we will Thank you very much. Thank you. Mr. Saji, thank you very much for your question. So let's move on to the next question. Nomura Securities, Mr. Morita, over to you. Mr. Morita, can you hear me? Thank you very much. I'd like to know about your approach about the pricing overall. Last year or this year as well, we're talking about 8% or 9%. There's been a very strong pricing when it comes to the contributions of the revenue. Historically speaking, the 8% or 9% pricing as a level is quite high, though, compared to what you have done in the past. So when we think about 2025, 2026, this strong pricing, why was that possible? And currently the inflation is still continuing. So in high single-digit level of the pricing level, do you think it's sustainable? Or is it going to be one day coming down to the level that we used to have in the past? So I just wanted to know the prospect of what you think about the pricing down the road. Thank you very much for the question. So it's about the pricing. The current pricing is at the very high level. The underlying reason for that and also whether that is sustainable or not, that will be answered by Kato. Well, Mr. Morita, thank you very much for your questions. As you just say, the positive contribution of the pricing has been quite big recently. Last year and this year. Well, the pricing per se is... Well, how the pricing is done is, of course, coming at the backside of the tax hike and the inflation and the elasticity, the price elasticity. Those factors have been considered for us to work on the pricing. And, of course, we have to look at the peer... Thank you very much. Thank you. The price competition is not happening for the entire market overall. So the availability of doing the pricing overall is, as an environment, I think that is continuing since last year into this year. We're talking about the sustainability of the pricing at Diffimable. When we look at this one to two years, the pricing has been quite... Really, the pricing was in favor and the situation was quite favorable, but to what extent that can continue? We cannot be over-optimistic. We should not be. We are at each region, each market. The inflation level and affordability, regardless of the product that is, doesn't have to be limited to the tobacco products, but the pressure is mounting, so we have to monitor that situation, and of course that's true for the consumers, but the metro for the, and also the budget of the government, I think there's been much more pressures currently, so the tobacco excise tax, How that is going to move going down the road and how the consumer will be able to have the affordability? Well, affordability we mean not only for the tobacco products but for the other commercial products as well and the price volatility. We have to look at that very closely. Well, I said that we should not be over-optimistic but we are not Thank you for watching! The same level of the strong pricing can be taken or not. We think we need to monitor closely and then execute as we need to. Okay, one confirmation. You were talking about the strong momentum for the pricing, affordability, and the elasticity, the competitive environment. Those were some factors that you have explained for the current situation. Thank you very much. Thank you. In some markets, the tax hike is happening more often than ever. So in that case, the total demand is negatively hit in several markets. So the consumer's affordability is basically up to the macro of that particular nation or the market, but the tax itself is something that we have to watch carefully. Well, in terms of the geography, last year, this year, any area that you have enjoyed a lot, and this year, however, the situation is changing so that they have to be keyed to the potential risk percentage? Okay, I understand your question. Well, when we talk about the areas, the impact on the volume, for example, that for the ability of the consumer is, is something that probably that gives you some pictures that is like Asia or EMA area. Well, those markets are quite solid. However, we'll look at the impact coming from the tax increase that Western Europe and among EMA, the Eastern Europe The impact on affordability or the impact coming from the tax increase is something that we have to be aware of. Okay, thank you very much. Thank you, Mr. Morita. Now, we'd like to take the next question. Mr. Fujiwara at JP Morgan Securities, over to you. Hello, I'm Fujiwara of JP Morgan Securities. Thank you for taking my question. So, HTS, I'd like to ask some question about the Japanese market. And as was mentioned in the presentation, you talked about the temporary demand. And also, your share has been progressing steadily. So, I'd like to have further comment. And there was the tax increase and the price increase in October. And the U.S. pricing is higher than the competitors by about 10 or 20 yen. So what was the share dynamic based on that? And also, talking about Philip Morris in Kyushu, They have launched a new device like Bose by IQOS. So is that making any impact in terms of the share dynamics? Would you give us some more insight? Based on the tax increase and the pricing in Japan and also the performance of the firm vis-a-vis the competitors' dynamics, Kato will answer your question. Mr. Fujibara, thank you very much. Talking about the volume of the prune, well, the temporary demand in September, well, actually the price increase was higher than the April. And in the case of the previous case, there was the temporary demand. And this time, it was higher, in fact. and that was reflected in the prune volume and as presented by Furukawa more than the temporary demand on our side well the volume increase of the competitor was more prominent so so that is part of the reason why our share was a bit weaker in September but as also our Thank you very much. Well, we are seeing more of the normalized impact out of the temporary demand. So, in order to come to the conclusion, I think we need to wait for another one month or two months. And also, another point presented in the presentation based on the real demand base in October, the big We are seeing the recovery very close to the September level before the temporary demand. So we need to take some more time, but current recovery track has been lying. Well, I would say that this is slightly skewed more at the positive side within our expected range. So in the short term, this year, there were two tax increase in the pricing. So, well, after year, there have been some share dynamic changes, but toward the end of the year, We think we will continue to sustain the prune share, and in one year, for this year. Well, we think we are seeing the solid growth of the prune, and that growth momentum, we do have the strong confidence. And talking about the competitor's product, then the impact out of that, Well, this is the issue of the company. And our understanding, in our understanding, first, the geographic area is limited. So, at this point of time, we are not very sure about the specific impact out of that. And the follow-up question, impact of the temporary demand in March 2021. Well, I think it was 270 million. And in September, what was the level of the temporary demand? Well, in our estimate, September was about 400 million. I'm talking about our shipment volume. So, The marches are 270 and this time 400 million. So this is the quantitative comment, though I have commented more qualitatively later. Thank you very much for your comment. Mr. Fujiwara, thank you very much for your questions. And the next question comes from Morgan Stanley, NUFG Securities, Ms. Miyake. Over to you, Ms. Miyake. Thank you very much. This is Miyake of Morgan Stanley. I have a question about the revised revision upward. In Q3, the progress itself is probably better than your original assumption. In Q4, have you changed your house view about the prospect of the Q4 result? And also about the logistic cost? Because of the Middle East impact, the cost may go up At the end of the first half, you made that comment already. So compared to that time of the comment, have you added something onto what you have expected to happen because of the Middle East impact in terms of the logistics cost? Thank you very much for your questions. The first one is about the upward revision in the four-year forecast. Kato is going to answer the factors behind that. Thank you very much for your questions, Miyake-san. Well, regarding the year to go for the Q4, the sales volume may slow down a little bit. Along with that, the core revenue AOP compared to Q3, the growth is going to be slowing down in Q4. Well, in the first half of this, from the first half to second half of this year, the growth is estimated to slow down. And that was mentioned at the time of the first half earnings call. So that is the winner's anticipation. And this time for the third quarter, the slowdown has already been obviously seen, and the same trend seems to be continuing. In the Q4. So this is within our expectation. And your second question is about the logistics cost. Any other additional factors to what we have said originally? What's your question? So at the time of the Q2 earnings call, we have said that we have included Whatever the visible cost increase would be. Are there any changes? Are there any additions that we have had since then? We think we are just following what we have made the comment at the end of the Q2 so that the expectation hasn't changed. Okay, thank you very much. When you look at the actual figure of the Q3, Thank you so much. So in that case, Q4, well, you have, of course, a reactionary decline from the temporary demand increase and also some slowdown compared to the previous financial term. But in the first half, you had some imagination of the expectation to where to land at. Any changes to that expectation, meaning that the progress in the Q3, the momentum was bigger than the original plan. So do you think that you're going to have The upswing and the positive impact kicking in in the Q4, in addition to your original plan, or are you just staying the same, remain unchanged? Well, for the first nine months, we made some revisions because of the achievement, and then based upon that achievement for the first nine months, we made the revision upgrade for the 12-month basis. The Q4, for the volume, I made some comments. The volume may slow down slightly, and that is included in our expectation. But the magnitude of that slowdown, in terms of the percentage, that could be the thing. However, the baseline was up, and then, The flow then had happened, so when we talk about the volume only, in the beginning of the year, we said that the flattish or the negative 1%, the 1% decline or so, but this time we're talking about 0.5% decline. So it's within the expectation, but it's not as big as 1% decline. Well, including the actual, we thought that we have been just learning at what we have said. Okay, thank you so much. That's all for myself. Thank you. Thank you, Ms. Miyake. Now I'd like to take the next question. Mr. Miyazaki of Goldman Sachs Japan, please. Hi, Miyazaki of Goldman Sachs. Thank you for taking my question. Well, I'd like to have the confirmation of the current progress. The pricing and also looking at the analysis for the profit change, that's included in others. And the pricing, well, that is shown in the material. And over the next year, Compared with the last year, how do you see the current progress? For example, you talked about the rush. There was announcement of the tax increase. And would you comment on the other regions as well? Do you think you're going to have the similar opportunity for the pricing? Or is that already done? And for the next year, you're going to expect the impact out of the pricing? Do you have that big expectation or not? And also, looking at the Q3 results, well, I think the cost is up by about 33 billion yen in others. And I think that's comparable with that of the Q2. So, quote-unquote, we continue to see such level of increase. And compared with the last two years, I think the pace of the expenses increase is getting milder. And with that cost increase, are you able to do what you want to do? So the question was, the pricing in this year, having the eye for the next year, and also the focus for the pricing in next year and others. And others... In the AOP's variance analysis, on the cost and also future level, Kato is going to make the comment. Thank you for your question, Mr. Miyazaki. The pricing. Well, there might be some overlap with what I have already mentioned, but this year, and Q4, also will continue to take pricing as we have been doing in the previous period. So next year, the pricing environment will continue to be robust. And in the major market, we need to be watchful for the industry demand and that will affect the affordability. And of course, we need to be watchful for the tax scheme. So having that in mind, We like to continue to take the appropriate pricing. So next year, we think we're going to have the resilient base and also based on the possible changes, we like to take pricing. And talking about the cost side, in Q3 and Q4, How is it going to be played out? I think that's your key question. In the Q4, compared with the Q3, the cost will be increasing. And that includes the marketing expenses in the Q4. And every year, there is a There is a slight skew into the Q4, and also there is some phasing impact out of that expenses. So in Q4, including the marketing cost, a bit of the Q3, the cost will be higher. And the next year, I talked about the high-level talk about the pricing for the next year. But with regard to the actual plan for the next year, we'd like to let you know in February with the presentation. So please wait for the opportunity in February. Thank you very much. And again, about others, I'd like to have that clarification again for the cost. In Q4 last year, young year, well, there was an increase of the expenses by about 44 billion yen. So, yes, last year, there was an increase of the expenses, but in this year, in Q4, the cost increase magnitude Ruby bigger than that of the Q3. Is my observation correct? Well, you were asking about the young year compared with the previous year, and I talked about the Q3 and Q4 of this year. Sorry for that. And generally speaking, expenses includes the investment for the RRP or the prune or the sales promotion cost. And that is a big chunk of that. And throughout the year, we have been increasing the investment for that. So, Quarter to quarter, in Q4, year-on-year basis also, we are going to see the increase. In Q4, cost increase is higher year-on-year basis, and when you compare with that of the Q3, it's going to be bigger, yes. So in Q3, well, cost increase in Q3 was smaller than my assumption. And you are making the investment into the prune. And we've seen that. Were you able to do what you wanted to do? Yes. Basically, yes, we were able to do. and especially for the sales promotion and marketing expenses. Well, of course we do have the plan, but we need to look at the actual current condition of each market and also vis-a-vis the competitors and then we are taking the prime timing to execute the plan. So up to Q3, Well, actually there was some phasing and pushed out to the Q4 to some extent. However, what we want to do and what we need to do, we were able to do at the proper timing. Thank you very much for your comment.

Miyazaki-sama.

Mr. Miyazaki, thank you very much for your questions. The next questions are from SMBC Neko Securities, Mr. Furuta. This is Furuta of FNBC Nikko. Thank you very much. Well, I want to know about the prospects for the next year. Well, just as always, I think you're going to be targeting at the high single-digit growth if nothing changes. Over the course of the last two years, you're looking at the level of about 20% or so, or more than that, probably coming from the resilient pricing. So not only the single digit, the high single digit, but probably the double digit is the target line, isn't it? Thank you very much for your question. How do you feel about the growth for the next fiscal year? So our CFO, Furukawa-san, is going to take that question. Well, this is Furukawa. Thank you very much for the question. Well, the following about how we are going to grow for next year, as we said, well, the profit growth for the next year and beyond is going to be explained in this call in February. Well, on the constant effect space of the expectation of the growth, the latest growth, is currently estimated at 16.1%, meaning that the launchpad or the baseline for the next fiscal year is going to be much higher. It's going to be coming from the pricing of the combustibles and also the heated products, sales volume expansion, the top-line growth, continual RRP investment, and the cost inflation coming from the cost inflation. So in the planned period, From 2026 to 2028, there is no change for the 2026 to 2028 on a constant currency basis. So again, the details and also the prospect are going to be explained much more in details in February meeting, but that's the direction that we're thinking about at this point.