Japan Tobacco Inc. (2914) Earnings Call Transcript & Summary

Good morning, good afternoon and good evening to all webcast attendees. Welcome to JT Group's tobacco Investor Conference. I'm Jerome Jaffeux, JT Group's Head of Investor Relations. Today's event will last approximately 2 hours, including Q&A. The presentations are available on jt.com and a replay of the event will be posted on JT's Investor Relations website. Please note that all remarks today contain certain forward-looking statements and projections of future results. Do review in detail the forward-looking statements in today's presentation for the various factors that could cause actual results to differ materially from our projections and forward-looking statements. Also, all product and product-related imagery in our material are exclusively to illustrate JT Group's strategy or performance to our investors. They are not to be used for any other purpose. Finally, all references to consumers in today's remarks refer to existing adult smokers or adult RRP users. Today, you will hear from several leaders in our tobacco business, who will provide details on our tobacco strategy and our efforts to expand and reduced risk products. It is now my pleasure to introduce Eddy Pirard, President and Chief Executive Officer of JT International. Over to you, Eddy.

Thank you, Jerome, and welcome to all of you. Today, my colleagues and I will share details on the long-term strategic direction of JT's tobacco business, the profit growth engine of the group. We will speak to combustibles. However, considering our strong track record of performance in this category and your main area of interest, we will focus most of the event on RRP and Ploom specifically. Our ambition is to share our confidence that we can replicate the same success in RRP as in combustibles. But first, let me start with our guiding star or new purpose. Creating fulfilling moments. Creating a better future. This is our new purpose, what drives every single one of us or reason for be. The purpose is rooted in the JT Group's own purpose of fulfilling moments, enriching life. Firstly, we're about creating fulfilling moments. At the heart of a purpose is the high-quality and enjoyable experiences our consumers around the world get from or with our products. We know that what consumers want from us is constantly evolving, and we are confident that we can and will always find ways to deliver on these expectations. Secondly, we are committed to creating a better future, a better future for both consumers and for the wider society. We will continue to invest in and develop products with the potential to be as less harmful based on robust science as well as looking for ways to make our products more sustainable. The word creating is an integral part of a purpose statement. It signals another important third dimension. We will accelerate innovation and diversification of our product portfolio. We are committed to finding new ways to provide fulfilling moments for consumers and in doing so, creating a better future for them and the societies in which we work. Our long-term tobacco strategy is guiding by our purpose and our view of the industry, which I will cover over the next slides. We are confident that our new purpose is befitted to drive JT's tobacco business. Over the last years, we developed an industry forecast model to better inform our strategy. Today, I would like to share with you some of the key takeaways. Our industry forecast covers both combustibles and RRP. Across both categories, we see meaningful growth opportunities. We forecast combustibles industry net revenues to increase by $17 billion by 2035, growing at a CAGR of approximately 1%. RRP industry net revenues will increase by $48 billion by 2035, representing a growth rate of approximately 8%. As a reminder, combustibles represents approximately 97% of our tobacco business, core revenue by 2022. Therefore, the revenue growth opportunity for us is significant both in combustibles, where we've a strong track record to continue to grow share and in RRP where we have the opportunity to catch up notably in HTS. While consumer demand for RRP is increasing according to our forecast, combustibles will remain and by far, the largest category over the next decade. As a matter of fact, a significant number of smokers try and reject RRP because products currently available are unable for now to replicate the taste and experience they get from combustible products. A first takeaway from our industry forecast is that the continued adoption of RRP by consumers will slow industry decline rate. Secondly, in 2035, we expect combustibles will still account for 74% of global industry volume versus 16% for HTS and 10% for other RRPs. Importantly, while combustible's volume will continue to decline, such decline is expected to remain broadly in line with the historical trend of 2.5% per annum. We forecast HTS to be the biggest contributor to industry volume growth followed by e-vapor and oral. Thirdly, we firmly believe that RRP growth rates will ultimately depend on innovation, consumer acceptance, regulation and taxation. In our model, we assume a growing adult consumer demand for all RRP segments, coupled with the gradually increasing taxation. We also believe that HTS is proven in most markets to be the best product to convert smokers to RRP. This is reflected in our forecast as well as the fact that HTS is the RRP segment that mostly cannibalizes combustibles. We expect the e-vapor growth rate to underperform HTS due to tightening regulation. For example, disposables are increasingly under scrutiny by regulators due to inappropriate marketing, nontobacco flavor offering and high nicotine concentration of certain products in the market. At the same time, the growing nicotine pouch segment will mainly source its volume from the existing consumer base in traditional oral. Shifting from industry volume to industry net revenues forecast, we expect HTS to be the biggest contributor to growth, followed by combustibles. We forecast HTS and combustibles to generate in 2035 additional net revenue of $33 billion and $17 billion, respectively. HTS' revenues will be driven by volume growth and pricing, while pricing will continue to more than offset combustible's volume decline. As a result, we forecast combustibles to account for 62% of global industry net revenues in 2035 versus 22% for HTS and 16% for other RRPs. The fact that combustible products are expected to still represent the majority of industry net revenues by 2035 is testament to the resilience of this category and its pricing model. At the same time, the expected total HTS industry net revenues of $44 billion, fueled by the incremental $33 billion net revenues to be generated by 2035 represents a significant growth opportunity for the JT Group. Our industry views suggest that combustibles are expected to remain the largest category in terms of volume and net revenues in all our clusters or the magnitude defers by geography. After Japan, we expect a number of markets in Western Europe to become the next HTS strongholds. However, in Asia and EMA, the vast majority of industry net revenues will be still represented by combustible products in 2035. All in all, our purpose and industry view translate into our strategy, which I will focus on next. In the combustibles category, we are and we will continue to outperform the industry. Our strategy in this category is to maximize top line growth and return on investment. To do so, we will focus on sustaining share gains, capitalizing on pricing opportunities and investing in a disciplined manner. Adult smokers value the fulfilling moments associated with combustible products and as highlighted by our industry outlook, they will remain the largest cohort of nicotine users over the next decade. By constantly exceeding their expectations, we will fund a better future and facilitate this inevitable transition of our industry. Our strategy in the RRP category is to prioritize investments behind HTS, mainly through the geographic expansion of Ploom X. At the same time, we will enhance our capabilities and run exploratory initiatives in e-vapor, oral and infused to complement our focus on heated tobacco. Tsusui-san will provide more color in his presentation later on. While we have outperforming the combustible industry, we recognize that we are latecomers to the new world of RRP. Following the initial success of Ploom X in Japan, we are now confident in our product portfolio and in our ability to compete in both categories. Our strategy is reflected in our product portfolio, which is mainly focused on combustibles and HTS, the 2 categories resonating the most with consumers currently and in our view in the foreseeable future. In combustibles, our global flagship brands, Winston, Camel, LD and Mevius generated a volume of 360 billion units in 2022. We -- in a declining category, GFBs have consistently been growing volume over the last years. Natasha will share more on this in her presentation. In HTS, our focus on creating fulfilling moments resulted in the launch of Ploom X, the third generation of our heated tobacco stick proposition. In a growing segment, Ploom X has gradually gained share in Japan and continues to do so. Last but not least, in our efforts to be a truly consumer-centric company and to constantly learn from consumers. We also have an offering in e-vapor with our Logic brand, in oral with Nordic Spirit as well as in infused products. Depending on market specificities and opportunities, we leverage the different products available in our portfolio to accelerate our learnings. In the U.K. and Ireland, for example, in addition to our combustible products, we commercialize Ploom or priority in RRP and run exploratory initiatives in e-vapor and oral with Logic and Nordic Spirit. In Japan, we offer infused products to consumers looking for an alternative to combustible and HTS with a more socially compatible proposition. Let me now cover our ambition in both combustibles and RRP. In the last 4 years alone, we increased combustible share in our top 30 markets by more than 4 percentage points. Going forward, our ambition is to sustain share gains by consistently investing in the equity of our GFBs. Focusing on a few brands and best-in-class execution allows us to be more effective and to better capitalize on pricing opportunities when they arise. Over the same period, we grew AOP at constant currency by 10% per year on average, demonstrating our ability to maximize top line and bottom line. I would like to emphasize that the solid profit growth performance is driven by combustibles only, and we expect this to last. Our ambition is to grow AOP in this category at a mid- to high single-digit rate, focusing on improving return on investment to fund investment in RRP. In this regard, our diverse geographic footprint and a specific role associated to each market will enable an emphasis on driving return on investment. We fully embrace the concept of Kaizen or continuous improvement across all our functions, including procurement, manufacturing and route to market. Later today, Vassilis and Natasa will provide more details around our initiatives in combustibles. Let's now move to RRP. In 2021, the JT Group launched its latest heated tobacco device, Ploom X in Japan, followed by London in 2022 and more recently, in Italy, Lithuania and Portugal soon to come. Since launch, Ploom's share of HTS segment more than doubled in Japan, renewing and solidifying our confidence in our ability to offer superior quality products in this growing segment. The group is planning to invest more than JPY 300 billion behind RRP between '23 and 2025 with a focus on driving additional consumer adoption in Japan and rolling out Ploom X in almost 30 markets by the end of 2024. Our ambition is to achieve a mid-teens share of HTS segment in key markets, including in Japan and Italy by 2028. It is important for us to build RRP volume in the coming years. With scale, we will add a new profit stream to our existing tobacco business. With our geographic expansion, we have the ambition to double our RRP core revenue by 2025 and to reach breakeven in RRP by 2028 at brand contribution level. We are confident that there is room for the JT Group to reach mid-teen segment share in key markets and RRP profitability by 2028. With HTS' weight of the total industry volume expected to double by 2028, we have the ambition to capture a disproportionate part of it, ultimately, outperforming the HTS segment growth. Based on our 2028 share segment ambition of mid-teens in key markets, JT's exposure to HTS will grow more than 6x. Vassilis, Natasa and Tsusui-san will add more color on the journey ahead in RRP. I want to stress that the RRP journey is a long one. One that will continue to evolve as technology improves, as regulation and taxation matures and as consumers make increasingly informed choices about their nicotine consumption. So far, I've mentioned our organic efforts to build a stronger presence in RRP, but we do not intend to rely solely on our internal capabilities. Let me touch briefly on other initiatives in the RRP space that we are also pursuing. In October last year, JT and Altria agreed to establish a joint venture to commercialize HTS in the United States, initially leveraging the Ploom brand for devices and the Marlboro brand for consumables. The U.S. joint venture is up and running and on track to submit a premarket tobacco application for HTS products to the U.S. Food and Drug Administration in the first half of 2025 and a modified risk tobacco product application by the end of 2025. On approval, JT will supply HTS devices to the joint venture, while Altria will produce domestically the refills for HTS. As part of our memorandum of understanding, we are also exploring jointly a global long-term strategic partnership in RRP. Our development efforts in RRP don't stop there. We also have established a vast number of partnerships and investments in this area. These include minority investments, joint development and intellectual property sharing agreements as well as cooperation with external ventures and incubators. We are excited about the opportunities ahead with Altria and a broader ecosystem of partners and investments. We will keep you, of course, updated on any material progress. Thank you for your attention. I will now hand over to Vassilis, who will explain how we are planning to fund our RRP expansion.

Thank you, Eddy. Good afternoon, everybody, and thank you all for joining our event. I'm Vassilis Vovos, Chief Financial Officer of Japan Tobacco International. Today, I will explain how we will be funding our RRP expansion while maintaining the momentum of our combustible tobacco business. Let me start with a reminder of our growth track record. As Eddy highlighted, our tobacco business has a solid track record of profit delivery. Over the past 5 years, it demonstrated its resilience overcoming multiple crises, including the COVID pandemic and the Russia-Ukraine war. We never stopped growing our business and to consistently delivered strong performance. Since 2018, our volumes have outperformed a declining industry, increasing by an average of 1% annually, supported by acquisitions and continuous market share gains. It is worth to say that since 2018, we have grown our volume organically in over 60 of our markets. Our share of market gains reflect our constant investment in brand equity and our consumer focus. As a result, in 2022, we became the #2 player across the 71 markets for which we are tracking market dynamics and to increase the gap to #3 again in the first quarter of '23. Our positive volume trend was further enhanced by the growth of our heated tobacco stick sales in Japan. This trend, combined with the strong pricing, drove an average of 6% annual increase of our core revenue at constant exchange rates. Our adjusted operating profit delivered a 10% average growth rate over the last 5 years while we continuously enhanced our business fundamentals and our capabilities. Let's now look at the future. Following the resolution of the shortages of semiconductor supply, our 3-year business plan, which covers the period 2023 to '25 reflects significant heated tobacco sticks investment to support our ambitious geographic expansion and to accelerate our growth in Japan. We will fund our RRP expansion while focusing on balancing our investment and our profit delivery. To achieve that, our efforts will evolve around 4 distinctive pillars. First, we will continue to grow our top line through stable volumes and sustainable pricing. Second, we will enhance return on investment by assigning specific market roles to all our geographic footprint. Our third focus area is around efficiency initiatives while building our strategic capabilities. Finally, our fourth pillar consists of generating profit growth through our investment in RRP expansion. As communicated during our full year '22 disclosure in February, over the next 3 years, we expect mid-single-digit revenue growth and low single-digit adjusted operating profit growth. This is slightly below our average growth algorithm. However, as RRP rescale, we will be benefiting from the category potential for incremental upsides. Within our Business Plan '23, our volumes will be stable, fueled by continuous gains across markets, while the industry is expected to decline by 2% on average. Heated tobacco sticks growth will further support our volume stabilization. Our global flagship brands will remain the key contributor to our share market, building on strong equity and the success of our recent launches like Camel Craft or MEVIUS E-series in Japan. We have developed over the years a competitive, well-balanced portfolio across different price segments that allows us to effectively compete in the diverse markets in which we operate. Leveraging the strong equity, our brand pricing power has proven to be solid and resilient. It has been a key driver of our revenue increase in the past and it is expected to continue contributing to sustainable top line growth going forward. In 2023, we anticipate pricing to remain strong. As recently disclosed in our first quarter '23, we delivered a strong price mix above 6% and almost 80% of our planned pricing for the year has already been implemented or announced. Our business plan assumes continuous pricing potential with the excise tax environment expected to remain broadly predictable and limited risk of significant tax rate disruptions. This combination of stable volume and strong pricing, together with a twofold increase of our RRP revenues, as highlighted by Eddy, will enable us to deliver top line growth over the next 3 years. Our second pillar of growth will come from our market architects. In the combustible business, we have assigned markets to 1 of 3 strategic roles to enhance focus and guide decision-making. Markets within earnings and earnings and share focus represent approximately 90% of our total volume. They are expected to contribute sustainably to our revenue and earnings growth. Approximately 10% of our current volumes are in markets that have the mission to grow JTI consumer base. These markets have fundamentals that represent significant potential of future revenue and profit to our business. To further improve our return on investment, we have decided to exit markets in which we did not identify a clear path to profitability. For example, Colombia, the Dominican Republic, Guatemala, Laos and Nicaragua. Another key pillar in the foundation towards future profit generation is our ongoing efforts to ensure our cost base remains efficient. Let me share a few examples. To strengthen our competitiveness, we are transforming the business and will deliver savings of over JPY 50 billion this year against the 2019 levels. These initiatives allow us to bring business solutions faster and more effectively, notably through agile ways of working and the implementation of reduced layers and spans of control. Supply chain efficiencies are expected to deliver an additional JPY 20 billion by next year, reflecting initiatives such as product simplification, integrated end-to-end supply and operational expense. In our recently expanded global business service centers, we are focusing on standardization and simplification to ensure enhanced productivity and scalability. As part of the tobacco business integration, we have embarked to a 1 ERP journey, which aims to integrate our Japan operations into our single global ERP instance, leading to increased automation while further enhancing our commercial capabilities. We will pursue the delivery of efficiencies on an ongoing basis, fully leveraging our Kaizen mindset. Let me now highlight some of the capabilities we have been developing in JTI. In line with our purpose of creating fulfilling moments, creating a better future we are strengthening our expertise spread across multiple areas of the business. For instance, in terms of product innovation, we focus our R&D investments towards reduced risk products aiming to create value for consumers through innovative product development, scientific research and exploration of novel technologies for heated tobacco and other products. This resulted in the continuous buildup of the number of intellectual property patents that we have filed with the European patent office in recent years. You will hear more about this later from Tsusui-san. We are also developing our science capabilities in the pursuit of regulator endorsed reduced risk claims as Tsusui-san will explain. We have reinforced our commercial capabilities to further enhance consumer acquisition and retention, both in the digital and the physical retail space. Natasa will share some of our initiatives in this area later. Finally, with a 1 tobacco integration, we consolidated our strength globally and established greater collaboration and faster decision-making. For example, we now operate with 1 global R&D and 1 global quality assurance functions by consolidating respective teams from the previous international and Japanese tobacco businesses. We are confident that this integration will boost our consumer-centric capabilities in line with our new purpose. Turning more specifically to our RRP investments. As you heard earlier, in the next 3 years, we will be investing over JPY 300 billion in RRP. These investments are focused towards the heated tobacco stick segments, which we view as the main driver of future volume and profit growth in RRP. Simultaneously, we will keep investing in the exploration of infused tobacco, e-vapor and nicotine power segments to generate further consumer insights and assess scale-up opportunities. Additionally, we continue to fund innovation outside of these segments towards the development of new generation propositions. During Business Plan '23, the bulk of our investment is dedicated to market commercialization to support the Ploom geo expansion. The remaining investment will be directed towards manufacturing and R&D capabilities. We will capitalize on our established commercial strengths in the markets where we launched heated tobacco sticks, including our strong trade relationships and marketing and sales expertise to enable the fast pace of Ploom deployment. Regarding heated tobacco stick manufacturing, we currently have 2 manufacturing sites, 1 in Asia and 1 in Europe, enabling us to best serve the current and future core markets. As we expand ourselves in heated tobacco stick, we will revisit this footprint in an agile manner. Looking at our projections with regards to our RRP performance targets, our international expansion of Ploom will triple our heated tobacco sticks volumes by 2025, and we expect to double those volumes again by 2028. As the category has a revenue and gross margin mix, which is more than 50% higher than cigarettes, this will enhance our revenue growth algorithm and positively impact our profit generation. Combined with the selective investment approach in other RRP segments, we are confident in our ability to reach breakeven across the whole RRP category by 2028. So let me finish by saying that in summary, the tobacco business has a solid track record of earnings growth, and we are setting the foundation for sustained future profit generation. Our growth algorithm will continue to be fueled by top line development, driven by resilient pricing in combustibles and the increasing contribution from RRP. This revenue increase, combined with a focus on return on investment in our combustible business and an optimized cost base will further enhance our profitability. This will allow us to continue building our strategic capabilities to fund our accelerated investments into RRP and to deliver mid- to high single-digit adjusted operating profit growth at constant currency on the mid- to long-term. This concludes my presentation, and I will now hand over to Natasa, who will take us through our consumer-centric approach.

Thank you, Vassilis, and welcome to all of you. I am Natasa Milosevic, Senior Vice President, Marketing and Sales of JT International. Today, I will share how we are delivering on our new purpose in marketing and sales. With a special focus on consumer centricity and the RRP brand and commercial efforts to drive JTI's business. Let me start with how consumer centricity powers our strategy. To be successful in the evolving nicotine landscape, we have adopted a future forward and strategic consumer insights approach, connecting global trends and segmentation with consumer dynamics and behaviors. Navigating the global consumer trends is essential. These socio-demographic shifts impact consumer behavior with implications for the brands and experiences we create. For example, the in-control trend reflects how consumers demand products that they want in the way that they want them, resulting in customized solutions and rewarding personalized relationships. We've also developed a sophisticated global consumer segmentation to map different consumer profiles, leveraging demographics, usage drivers, pain points and purchase behaviors that offer precise targeting and positioning of our brands for relevant adult consumer segments and addressing different usage moments. For instance, the segment called the Explorers, a proud adopters of the latest trends and technologies and they choose brands that make a statement about their personality. As a result, they're part of our core adult target audience for RRP products. That's our starting point, allowing for consumer and data-driven decision making. Now I want to demonstrate how consumer centricity supports our strategic approach. Our new marketing and sales strategic framework supports the new company purpose, and as you would expect, starts with the consumer. For us, it is crucial to anticipate how consumers define fulfilling moments and a better future in order to deliver our new mission, creating, leading power brands and experiences for the modern world. Our marketing and sales strategy is built on key pillars. In combustibles, our aim is to maximize growth through our global flagship brands and further improve return on investment to fuel our reduced risk product expansion as shared by Eddy and Vassilis. In reduced risk products, our focus is on establishing Ploom as a global power brand to become a serious challenger in the HTS segment. This will, in turn, drive sustainable long-term growth and profitability for JTI. Additionally, we're exploring the development of other innovative nicotine propositions in RRP with the mission of exploring today to win tomorrow. All of this is underpinned by delivering superior consumer experiences and services through a seamless route to consumer, best-in-class digital solutions and an excellent global consumer care platform and while always keeping an eye on the future. Let's now review in more detail our combustibles strategy. Our total combustibles performance continues delivering robust market share gains across markets. As Eddy mentioned, since our last investor conference in 2018, our total combustible share increased by 4.2 percentage points, reaching 35.6% share in our top 30 markets. The global flagship brands are at the center of our success in combustibles. These leading brands already account for 69% of the total combustibles volume for JTI, an increase of 7 percentage points versus 2018. In 2022, our GFBs grew share in 24 of our top 30 markets, led by Winston and Camel, 2 brands, we are proud to see in the top 3 cigarette brands in the world. We are committed to continue supporting our global flagship brands by delivering exceptional consumer experiences, investing in brand rejuvenations and relevant product upgrades while creating immersive activation initiatives. By doing so, we aim to maintain and enhance the strength and equity of our brands and continue addressing the evolving needs of our consumers. Let me share some of the remarkable achievements of our brands, starting with Winston. Winston continues strengthening its position as the #2 brand globally, consistently narrowing the gap versus the #1. In 2022, Winston reached its highest ever market share in more than 44 markets. It also maintains the #1 position in the smooth segment, compact and fine cut tobacco. Camel enjoys a fantastic momentum as we unleashed the Camel iconic power beyond its historical strongholds. We are adapting the brand to meet new consumer preferences and deliver exponential growth. Mevius stabilized its combustible share and leadership in Japan as we expand its unique premium experience in the Asia Pacific region. And LD continuously delivers great quality at the best possible price. In 2022, it achieved its highest share in key markets beyond Eastern Europe, like Canada, Jordan, Malaysia and the U.S. All in all, this continued success in combustibles is the result of a long-term and focused strategy driven by robust brand frameworks. Our portfolio drives business growth by meeting the evolving demands of adult consumers. We leveraged our previously shown global consumer segmentation to translate consumer insights into a comprehensive portfolio map that helps support the growth of our brands across markets. Additionally, the deep consumer understanding informs our 4 key innovation territories in combustibles. Taste and flavor, economizing, considerate smoking and sustainability. The portfolio strategy framework helps us drive revenue growth through sustained share gains while leveraging on the complementary brand positioning in terms of pricing and image territories they occupy. As well as the multilevel price propositions across brands that supports competitiveness. Last but not least, our global portfolio simplification framework aims to drive further efficiencies across the combustibles portfolio. Centered on 3 key principles: focus on our global flagship brands, rationalized tail brands and SKUs and capitalize on local needs. So as you can see, we delivered remarkable performance in combustibles and we will continue to maximize their potential to fund our RRP efforts as we invest in the future. Let's now take a closer look at our RRP priority, specifically Ploom. To succeed in RRP and build a sustainable business for the future, we need a strong brand. Therefore, our overarching ambition is to build Ploom into a global power brand. Let me guide you through our progress thus far and the strategies we've employed to achieve our goals. I want to start by sharing some key highlights of our encouraging progress in Japan, which Tsusui-san will detail it later. First and foremost, we are rapidly growing our consumer base, which has quickly surpassed 1 million users, increasing by 45% year-on-year. We observed robust adoption despite the highly competitive market environment with high regular and exclusive usage which resulted in us doubling the share of segment in 2 years. We are growing consumer awareness around our latest device, Ploom X. Our ultimate ambition is to become a top-of-mind brand in HTS. This positive momentum is the result of key strategies implemented in the market. Let's take a closer look at them. Everything we do starts with the consumer. Our approach is data-driven and we maintain a holistic view of consumers irrespective of their nicotine product preferences. With this in mind, we've identified a core adult audience for Ploom, which targets innovators and early adopters. Naturally, these consumers are more open to RRP products and actively embrace new trends, brands and technologies. This progressive audience holds paramount importance to us as they are instrumental in building an aspirational brand equity. Furthermore, this audience generates a spillover effect on other audiences through word-of-mouth and positive image perception, enabling us to scale over time. We've built the Ploom brand around our core adult target audience, reflecting their core values, beliefs and needs. Ploom is here to shape the future of mindful pleasure for the modern consumer. Ploom is an aspirational brand and accepts no compromise on design, providing the ultimate style. Ploom is all about pleasure. We're here to indulge consumers with satisfying sensations, beautiful aesthetics and a seamless consumer experience. Ploom was built with the cutting-edge technologies and is committed to constant innovation. Recent research has shown that we're delivering on this. As consumers rate stylish, credible and advanced as the top image attributes associated with the Ploom brand. Now how do we bring Ploom to life? Our robust strategy is articulated around 3 pillars: the power brand and its ecosystem, the connected consumer journey and the omnichannel activation. Ploom brand is at the core, connecting all parts of the ecosystem. The device serves as an entry point to the world of Ploom and provides advanced heated tobacco technology. The heated tobacco sticks are real tobacco taste providers with sensorial and satisfying flavors. And accessories offer customization, making the overall experience more personalized, while proven to increase retention. The consumer journey in this segment is complex with multiple online and offline touch points. I will share more details on this on the next slide. Therefore, it's important to build connected paths from discovery to advocacy with superior omnichannel activation that ensures a consistent 360-degree experience across all touch points. We know that switching to RRP can be complex, even challenging for some. To address this, we are committed to handholding consumers as they explore, try, buy and ultimately become advocates of Ploom. To achieve this, we've created a seamless consumer journey. Whether our consumers see us at retail, find us online or get a personal session with an ambassador or a referral from a friend, we deliver a quality experience every time. We focus on 3 key stages along the consumer journey: awareness, quality consumer acquisition and retention. We've also identified key touch points that provide superior experience for each stage of the consumer journey and roots all secondary channels towards them. These are Ploom stores, Ploom website, the Ploom Club loyalty program and Ploom Consumer Care. And of course, we are leveraging our strong position in retail and strong relationships with our trade partners to bring Ploom to where consumers are present every day. Retail is more than just sales. It's about an immersive experience that conveys what the Ploom brand stands for and what we can offer. We view retail as a pyramid that begins with exclusive flagship stores and extends all the way down to mass retail, with each level providing a specific experience and with a different commercial purpose. Our flagship and brand store formats provides the ultimate brand experience for new and existing consumers ranging from guided trials to exclusive Ploom Club member-only events. Pop-ups are a tactical format that allowed Ploom to efficiently reach new consumers at different locations from shopping centers to music festivals, thus bringing Ploom to consumers at consumer-relevant locations. Finally, shop-in-shops elevate conventional retail experience by providing a wider assortment of Ploom products to consumers and increasing visibility of the Ploom brand. The feedback from consumers on Ploom brand on retail experience and service levels is incredibly positive. In parallel to the retail experience, digital and data play central roles in our modern brand building approach. The digital opportunities are endless. From reaching more consumers and offering tailored communications, to delivering convenience through e-commerce and managing loyalty programs. Therefore, one of our core strategies is to connect the offline world to the online world with the Ploom website at the core. We are also excited about the potential of data using artificial intelligence to deliver a whole new level of consumer experience. Specialized learning algorithms enable us to segment users on the micro level and make our communication truly personalized. Now let's zoom in on Ploom Club, one of our key tools for retention and loyalty building as well as lead generation. The entire club experience has been designed to be frictionless and offers a multilevel and engaging reward system that gratifies users for every activity, thus fostering long-term loyalty. I specifically want to highlight our member-get-member mechanics that rewards our existing and new Ploom users while at the same time, being one of the most efficient consumer acquisition tools for the business. Our community is growing fast with an impressive 1 out of every 3 Ploom users joining the club. Last but not least, I want to emphasize the importance of our consumer care service, which supports consumers throughout their entire journey with Ploom. We've developed a centralized digital platform and global approach to offer best-in-class consumer care to Ploom users worldwide in all local languages. Ploom offers consumers multiple communication channels. Our consumer care agents undergo extensive training programs to ensure they have a deep brand and product knowledge enabling them to resolve most requests during the first contact. Consumer care is critical to handhold consumers as they experience HTS and RRP overall. This is why we have set some very high standards and ambitions, like, for instance, aiming for a 24/7 availability wherever possible. In closing, I would like to leave you with some key takeaways. We are building Ploom as a power brand. We've established necessary capabilities across the organization. Created a connected consumer journey and omnichannel experience that resulted in rapid growth of Ploom consumer base. As we are rolling out Ploom X to new markets, we will ensure powerful launches that deliver superior consumer experiences, focusing on retention, leveraging our learnings from existing markets. Additionally, we're committed to constant product innovation with new devices, sticks, accessories and special editions. Before passing the word over to Tsutsui-san, I want to give you a taste of the Ploom experience with a short video. Thank you for your attention. [Presentation]

Thank you, Natasa. My name is Takehiko Tsutsui, and I head up the Reduced Risk Products business at JT International. I hope that the video you just have seen helps you to better understand the strength of Ploom X. The presentation that I am sharing with you today seeks to add some building blocks to what has been presented by my colleagues to emphasize our strong confidence in Ploom X and our ability to continue to grow fast in this RRP category. I will go through our key developments and performance indicators, followed by our plans and strategies for the near-term future. Ploom X brings significant improvements compared to the previous generation. In doing so, we have been able to reflect all learnings and consumer feedback that we received. Let me expand on some of the key differences between Ploom X and Ploom X devices. First, we have enhanced the sensorial delivery by using a unique technology that delivers an authentic and rich tobacco taste with a constant intensity throughout the session. To achieve this, we've upgraded the heating engine, fine-tune the heating profile, shorten the heat up time and extended the session length. Secondly, we've also made Ploom X device smaller, slicker and easier to use. And thirdly, we've designed our product so it can be personalized with an interchangeable front panel, enabling consumers to choose from a wide area of colors and patterns to make their Ploom X truly unique. Additionally, there is now a broad range of elegant accessories to increase the standard further. As Natasa explained, we were now building a dedicated ecosystem for Ploom, which encompasses the device, accessory and tobacco sticks. Alongside the Ploom X device launch, we have also upgraded the portfolio of tobacco sticks. We have introduced new blends to enhance tobacco flavor and aroma in a slightly longer stick. These improvements have led to an enhanced product experience and greater consumer satisfaction. I'd like to share some key consumer metrics and their evolution to demonstrate the added benefits provided by Ploom X to our consumers. Amongst the different consumer indicators that we track, I will focus on 3: consumer satisfaction score or C-SAT; retention rate; and Net Promoter Score, or NPS. The chart shows the result of the most recent surveys in Japan. C-SAT is a percentage of consumers who say they are very satisfied with their experience with Ploom X. This metric is fundamental to understand if we are meeting their expectations. The retention rate represents the percentage of consumers who keep using their device long after the initial purchase. This indicates the size of our loyal franchise and the highlights the potential of proposition longer term. Net Promoter Score comes from asking consumer how likely they are to recommend Ploom X to others. Strong peer-to-peer advocacy is critical on our journey to build the Ploom as the true global power brand. As you can see from the charts, we are seeing meaningful improvements with Ploom X as compared to the previous generation product. These improved consumer indicators are an excellent achievement that has translated into a better commercial performance. I am pleased to report that since the launch of Ploom X in Japan, our share in HTS segment has constantly been increasing, reaching 9.3% in first quarter of this year on a shipment basis, as mentioned in Eddy's slide. Ploom segment share has demonstrated a CAGR of 64% over the past 2 years compared to 14% for the overall HTS market. This has made us the fastest-growing player in Japan's HTS segment. This achievement was not only possible because of an improved product offering but also thanks to the set of effective consumer-centric initiatives as explained by Natasa. Let me also share a few highlights of the most recent initiative we have in Japan. The relaunch of Mevius refuel range. These are entirely new tobacco sticks under Mevius brand. We have further upgraded the blends to improve tobacco flavor and aroma intensity and vapor volume for better consumer satisfaction. Additionally, we've positioned the range to a more affordable price point to further encourage consumer trial, acquisition and retention. Simultaneously, we have launched a limited blue color version device and the collection of a blue accessories to celebrate the launch. Strong performance to date and the rich pipeline of new product initiatives, which I will explain later, makes us confident in our ability to deliver on our ambition to reach mid-teen HTS segment share by 2028 in our key markets. We have learned a lot on the journey so far and much better equipped to compete and win going forward. Leveraging Japan performance we are confidently moving on to the global geo expansion phase for Ploom X with a sufficient supply of devices. Last year, despite planning to do so, we could not implement a large-scale geo expansion due to the semiconductor shortage. However, this year, we are back on track in terms of supply. Meaning we are now able to accelerate the expansion of our geographical footprint with the right level of investment as presented by Vassilis. With every new market entry, we are deploying a strategy to launch Ploom X in selective cities first. We then use certain KPIs to evaluate the performance and consequently decide expansion to other cities and ultimately nationwide. This strategy enabled us to pace the growth of our global footprint more effectively and efficiently coupled with a sound deployment of our company resources. To date, Ploom X is already present in 4 markets: Japan, U.K., Italy, Lithuania and in less than 2 weeks, we will launch Ploom X in Portugal. In selecting the markets for new launches, our expansion strategy consider several factors. Amongst these, we look at 2 main aspects: The first, HTS segment market share and its profit pool potential; and the second, the impact of HTS segment on our combustible business when it reaches a certain size. Although target markets and schedules are reviewed regularly, we expect to launch Ploom X in 10 more markets still this year, so more than 1 market every month. But we are not stopping there. In 2024, we are planning 14 additional markets. By end of 2024, we expect to be present in 28 markets and with more planned for 2025. As a result, we will have covered nearly 60% of the global total HTS markets in volume by end of this year and just shy of 80% by the end of 2024. Since we launched Ploom X in the U.K., we have received positive consumer feedback, mainly regarding the amount of the vapor, heating speed and unlimited number of puffs per stick. Although it's in the early stage of segment share development, we do recognize a solid start. Ploom X is now available in over 60% of the key accounts in London and the sales volume of both device and tobacco sticks are on track. This launch represents a meaningful step on our quest of global HTS presence. Taking advantage of what we have learned during the launch in Japan and in the U.K., the recent launches in Italy and Lithuania have been carefully prepared and are going well. Before moving our efforts into the other RRP segments, let me reinforce once again in the progress we have made in the HTS segment. On this slide, - you can see the architecture of a generational evolution of our HTS products from the beginning of our journey. We have launched our first HTS device back in 2019 in Japan. Already in the following year, we introduced a second-generation product, Ploom S 2.0 in Japan and Ploom model S in other markets. And just a year later in 2021, we have successfully launched Ploom X , our first global proposition. With every new generation launch and with every new market entry, we relentlessly accumulate consumer feedback and learnings that are fundamental to improve our offering from 1 generation to the next. Of course, learning continues with Ploom X, and we are already well into the development of our fourth generation device and tobacco sticks to be introduced in the future. Turning to our efforts in the other reduced risk product segments. Infused tobacco, nicotine pouches and e-vapor are referred as exploratory segments, as Eddy mentioned earlier. And we have set a clear strategic direction and a disciplined investment posture for each. Along with a distinct learning agenda set per segment, we are going to test new products in all of them this year in selected markets. Firstly, in infused tobacco, we are going to launch a successor generation 4 Ploom TECH+ with in the third quarter of this year in Japan. Based on its performance assessment, we will explore the opportunity for geo expansion outside of Japan. Moving to the nicotine pouch segment, where our brand, Nordic Spirit is currently present in 3 markets: the U.K. Ireland and Switzerland. This month, we are launching Nordic Spirit as a test in the Philippines, which we will be our first launch outside of Europe. Additionally, we are planning our launch our new formula in the U.K. this year, which can deliver a flavor and nicotine faster than the current pouches. Lastly, in e-vapor segment, although we are very much aware of the rapid growth of a disposable e-vapor products, we are currently not deploying any resources to compete with a similar product offering as this new segment is facing many challenges. Instead, later this quarter, we are going to launch our improved pot system in the U.K. and Ireland under the Logic brand. We want to further develop our commercial capabilities and collect relevant segment learnings to actively participate in this fast-evolving business environment and consumer trends. In parallel, we will keep advocating for better enforcement of existing regulations for the segment to ensure consumer safety and prevent underage use. Beyond these developments, we continue our efforts towards future innovation. Underpinning our broad innovation effort is the current scope of more than 90 projects in technology development and scientific research. Majority of these are related to our priority segment, heated tobacco sticks. Having said that, we are also deploying resources behind exploratory segments to build robust and sustainable future pipeline for each, but as I mentioned, in a disciplined manner. This gives us a sufficient maneuvering space and enables agility within as consumer needs and behaviors continuously develop. As a result, and also mentioned by Vassilis earlier, you can see in the graph on the right-hand side, we have been increasing the number of patent filings in the RRP field since we started our RRP journey. This significant effort places us into the top 50 applicants at the European patent office for 2 consecutive years. We are working on many patentable ideas leading to a greater competitiveness, and we aim to turn the most promising ones into a unique future propositions with the commercial potential. Our reduced risk science strategy has a critical part to play in our overall RRP strategy. Above all, we want to ensure that we deliver products with scientifically demonstrated reduced risk potential that consumers prefer and choose to use. In doing so, we must take a holistic approach from fundamental scientific research to product performance assessment. We should strive for reduced risk claims while at the same time, seek superior sensorial and functional satisfaction. Secondly, we know that the reduced risk aspect is one of the key consumer drivers. Thirdly, we have to be ready for scientific data of our products, potentially becoming a regulatory requirement for commercialization in the future. Lastly, we believe that active stakeholder engagement with reduced risk scientific evidence is hugely important if we are to be recognized as an industry leader and for success in the RRP category. Our reduced risk scientific efforts in the area have already started to indicate reduced risk potential of our products. For example, chemical analysis have indicated that selected constituent yields were significantly lower in our HTS aerosol than a reference smoke of a cigarette. And in our in vitro studies provide convincing evidence to support the reduced toxicity potential when compared to a reference cigarette. Such data has been published as peer-reviewed literature, and we plan to leverage further opportunities to expose our scientific data to the public. For more details please refer to jt-science.com. The goal of reduced risk science is not only to achieve regulatory endorsed reduced risk claims, but to ensure that these claims can be maintained over time for the sustainable growth of our RRP business and ultimately, of our entire tobacco business. This brings me to the end of my presentation. We are genuinely excited about the plans to significantly increase our presence in the growing category and are confident that through a combination of competitive products and our enhanced commercial approach, we will achieve our ambition. Thank you. I now turn the floor back to Jerome for the Q&A session.

Thank you, Tsutsui-san. We will now open the Q&A session. Joining Eddy, Vassilis, Natasa and Tsutsui-san on stage is Kato-san, Chief Financial Officer of the JT Group. Welcome, Kato-san. Before we get started, I will cover some housekeeping items. Since we've just released or -- and discussed our first quarter results, we would appreciate if your questions could focus in priority on the materials shared today. Also to maximize interactions with the management team, please limit yourself to 2 questions. If time allows, we will come back to you for more question opportunities. [Operator Instructions]. Miyake-san, please.

Hello, can you hear me?

Yes, we can.

This is Haruka Miyake from Morgan Stanley. My first question is on the total market outlook and implications for JTI's volume outlook that you provided. It'd be great if you could help me bridging a few of the industry volume outlook charts that you shared in the beginning of the presentation. I am looking at Slide #7, 9 and 18 and given that JTI's Western European mix is higher than EMA, for instance, projecting JTI's combustibles volume growth outlook down the road, should we assume greater decline than the negative 2.5% CAGR that you're assuming for combustibles in Slide 9 on a global basis. But you're also, at the same time, assuming stable volume in the next 3 years. So I'm trying to bridge the messages here. And I asked this because Japan was a case where combustible decline ended up being so significant in the first phase of RRP market penetration. But it may also not be fully fair to use Japan's initial cases, I guess, a comparative basis for international markets and also understand that you can take pricing to more than offset the volume decline in general. But it'd be very helpful to -- if you could provide additional information on what you assume for JTI volume outlook from here on?

Thank you, Miyake-san. So the question is around our outlook volume for 2035. Whether Western Europe decline rate would be worse off than the 2.5% that we've highlighted in the material and also which would be the main trends that we're seeing in that industry outlook? Well, let me start with an answer and please complete my answer if you have some points to add. Thank you again for your question. And let us just -- I think your key question is about the volumes behavior as the segment continues to evolve and especially in the geographies that we described because it's evolving in an [ unequal ] way between Western Europe and other regions. Just to go back to our track record of volume growth. As you saw in the presentations, we have been growing our volumes consistently for the last 5 years. I think we can go even further back and see that. And it's mostly organic. Actually, in the last 4 years, it's all organic growth. And this organic growth is helped basically by the fact that we compensate the market decline by the served market increases and the momentum of our served market increases continues. And in fact, in the beginning of this year, we see even stronger momentum. But looking at the longer term, I think the average decline we have for the combustibles is not exactly the same by region already in Western Europe. We have -- in some of our key markets, we have been witnessing declines that are above this average. And our model projects that this will continue to some extent. I don't foresee the same rhythm of acceleration of the heated tobacco segment as we saw in Japan. I think that's understandable. We are monitoring this. As you know, now we have a history in data points for many years. So the shift of consumer is happening more gradually. That's exactly the key point of our modeling and the way we are projecting the consumer movement. So from that point of view, I wouldn't expect that the industry size is going to decline in Western Europe, is going to accelerate as the development of the heated tobacco sticks continues already at the same rate as it has started in the last 2, 3 years. And I would consider also that even if it's not so much the point of your question, but we can come back to this later. We will have the opportunity using the strength of our brands, of course, to make sure that our revenues continue to grow by taking pricing wherever that is necessary. I hope this answers your question.

Yes. So actually, we should be expecting lighter volume decline than the 2.5 percentage negative rate for the global. And so -- just if we just take the Western European region. And how we should be proceeding at the [indiscernible]?

Sorry, you mean the Western Europe decline rate of whether it's above or below that 25%.

Yes, exactly. So I think the answer was that the many of the other regions, I think Russia was also a part of that, we're showing a lot higher decline rates than the other markets. So essentially, even going down the road, even if the global cigarette volume decline is projected at 2.5% negative CAGR, we should be expecting the Western European regions' volume declined for combustibles to be milder than that and you can take additional pricing to more than offset that impact.

If I just can clarify. In fact, already historically, the Western Europe region decline is bigger than the average global industry decline. Of course, this has been disrupted, as you know, very much by the recent COVID reduced mobility, which influenced a bit market size temporarily for a couple of years. So what I was trying to say in my answer is that the trend that we have seen over the last years will remain the same with Western Europe market decline, mature market decline, a little bit higher than the other regions, exactly because also the heated tobacco stick segment has, as you know, started to have penetration mostly in this geography versus the other regions. And it's only part of our model, of course, that as we move in time, some of our more mature markets, the ones that would also find their classification, what I saw before earnings market. We'll have less possibility of volume resilience, but this will be compensated by the earnings and served markets and largely also by the served of markets where the volume acquisition of our model is, where is the biggest one. I hope this clarifies.

Just another question from me. You have the target of mid-teens percentage HTS market share for 2028. Could you maybe highlight what the target is specifically for Japan given that you're already at 9.3%.

Okay. Thank you, Miyake-san. So the question is about our HTS share of segment in Japan. Specifically vis-a-vis our 2028 ambition.

Thank you, Miyake-san, for the question. I think we haven't given a very specific number and only indicating the teen at this point in time. I think in 2028, our ambition is not to stay where we are today. Yes, we are getting to very close to 10% at this point in time. We want to grow as fast as we can. And hopefully, we want to exceed this mid-teen indication but it's too early to precise that at this point in time. So I think if you can stay with us with this indication at this point in time, we will try to granulate our more specificness over time, and we're very confident in achieving the mid-teen target for Japan and elsewhere as well.

[Operator Instructions] Fujiwara-san, please.

Can you hear me?

Yes, we can.

This is Satoshi Fujiwara from Nomura Tokyo. Actually, recent success of Ploom X in Japan is really encouraging. So I have 1 question. Could you highlight more about what you have learned in Japan? And what kind of learnings in Japan you get transferred to overseas through rollout?

Thank you for Fujiwara-san. The question is around the learnings on Ploom X in Japan and how much we can transfer to the other launches?

Yes. Thank you, Fujiwara-san. Maybe I'll try to highlight a few things and then maybe Natasa, maybe you want to complement me. I think one of the biggest learnings we have had in Japan is really about how do we retain consumer? And how do we make sure that the consumer will not drop off along the journey. And highlighting the importance of that and building the programs that you have already heard from Natasa and measuring its effectiveness is the ongoing learning but at the same time, it was a very big learning in order to shape our launch activities in U.K., Italy and Portugal and so on and so forth. So I'll highlight this retention as one of the key learnings that we have got in Japan. Natasa?

In addition to what Tsutsui-san explained, we also know that it is an obviously competitive environment in RRP in general. So in addition to having an excellent and very strong, well-performing product, we also need to have a very strong brand. So 1 big learning is that we need powerful launches in order to build the awareness, to create acquisition and retention of the product. It is a new product in the category and a brand which speaks to this target audience like we've seen before of innovators and early adopters helps us also to create the loyalty around this product and the brand and therefore, retention. We also learned that engaging with consumers in a seamless consumer journey across all the online and offline channels. So in a fully omnichannel approach helps to bring the brand to market and ensures a seamless route to consumer, which ultimately creates this retention because this is not about just launching or just selling devices. It is about creating users and retaining them in the RRP category in our product as well. So we also have a very strong, as you've seen, loyalty program with our Ploom Club where members actually tend to have a much higher retention once they join the Ploom Club. And we are applying, obviously, all these learnings to the new markets, like we just did in Italy and the U.K. and all the upcoming markets.

Yes, if I may, this is something I wanted to add on to complement Natasa's comment. Since January last year, we have done the integration of the 2 tobacco businesses, 1 team. And I have to say that as part of your question, 1 of our ability to really learn with a view of a global, kind of, geographic expansion of the proposition [indiscernible] has been phenomenal. So all the learnings that my colleagues have just mentioned has been very well embedded into all the plans that we are clearly developing for international, which is now part of the 1 tobacco. It's important to mention that because sometimes being asked a question, what is the benefit of the unification of the 2 businesses, and this is clearly 1 of them. So the learning is not just for the domestic market in Japan, but of course, for all of the specificity of consumer-centric approach, to make sure that when we go to market, we have leveraged as much as possible of the learning that have come from the experience of witnessing some of our competitors being earlier than we were actively present on that market and other markets around the world. And that's a complement I wanted to provide. Thank you.

Our next question comes from Yoshida-san.

I'm sorry. This is Ami Yoshida from JPMorgan. I'm sorry for the trouble. So once again, could you kind of give us the HTS market share ratio for the main region in 2022. So just like the Page 9, I think you have the forecast in 2035. But could you kind of give us the market share -- current market share ratio, HTS market share ratio. And also, I think you are trying to expand the HTS category and take more market share. So do you think you need to spend more marketing cost than competitors in order to take the market share going forward? So this is 1 question related to our HTS market.

Thank you, Yoshida-san. So if I understood correctly your question, you want to know what is the HTS industry size in 2022? And also whether we need to accelerate the marketing spend in order to reach our 2028 ambition, correct?

Yes. Yes. Whether you need to spend more marketing costs than our competitors?

Yes. Hello, Yoshida-san. Let me answer the first part of the question, and then Vassilis will follow up with your secondary question. As through the HTS representation by the clusters in Asia, HTS represents in '22, 16% of the total industry, 13% in '22 for Western Europe and 4% for EMA. That's the current breakdown that we see. And maybe Vassilis?