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

Good afternoon. I am Hiromasa Furukawa, CFO of the JT Group. Thank you very much for joining us today for JT Group's Second Quarter 2026 Earnings Briefing. Before we begin, we would like to express our deepest sympathies to all those affected by the 2026 Kumamoto earthquake in Japan. We sincerely hope that those in the affected communities remain safe and that the region recovers as quickly as possible. I will begin by explaining our 6 months consolidated results for the fiscal year 2026. Revenue and AOP increased significantly, reflecting the strong business momentum in both the tobacco and processed food businesses. AOP at constant FX, our key performance indicator, increased by 19.4% year-on-year, contributing to growth all the way to net income. The FX impact was positive, driven by depreciation of several currencies, including the Russian ruble against the Japanese yen. Operating profit increased by 29% year-on-year, driven by the increase in AOP as well as a reduction in amortizing cost of intangible assets arising from past acquisitions included in the adjustment items. Profit increased by 28.9% year-on-year, driven by operating profit growth and lower financial costs. Next, I will detail the performance of each business segment, starting with the tobacco business and its volume performance. Please turn to Slide 5. Total volume, combining both combustibles and RRP increased by 1% year-on-year. Excluding favorable inventory movements, total volume increased by 0.4% year-on-year. In combustibles, although industry volume declined across several markets, including Japan, Russia and the U.K., solid share and GFB volume momentum continued across our global footprint. As a result, our combustibles volume remained in line with the previous year. RRP volume increased by a significant 33.8% year-on-year, driven by Ploom continuing to grow volume substantially, up by 43.5% year-on-year and to gain share in heated products. Moving on to the financial performance of the tobacco business on Slide 6. At a constant FX, core revenue increased by 10.6%. Price/mix contributed 10.2% with pricing continuing to be the primary growth driver across many markets. Let me explain the AOP drivers by factor. Volume contribution was negative as the total volume increase was offset by a deterioration in market mix from large volume declines in higher-priced markets such as the U.K. The price/mix contribution I mentioned was driven by robust pricing, including the key markets of the Philippines, Russia, Turkey and the U.S.A. These top line growth factors fully offset increased investments towards Ploom as well as inflation-driven increases in raw materials costs and SG&A expenses such as labor, resulting in AOP at constant FX increasing by 18.8% year-on-year. As mentioned earlier, the FX impact was favorable. In summary, throughout the first half, I am happy to report that these outstanding results exceeded our initial forecast, fueled by solid pricing contributions and positive FX impacts. On Slide 7, I will explain the performance of the 3 clusters in the tobacco business. The graphs on this slide show year-on-year variances in total volume, core revenue and AOP at constant FX for each cluster. Let me start with Asia cluster, which includes the key markets of Japan, the Philippines and Taiwan. Total volume in this cluster increased by 4.2% year-on-year, driven by resilient combustibles industry volume and market share growth, led by Bangladesh as well as higher Ploom volume, mainly in Japan and Taiwan. Regarding financial results, revenue and profit increased, mainly driven by positive pricing in Japan and the Philippines as well as Ploom volume contributions in Japan and Taiwan. Next is Western Europe, which includes Italy, Spain and the U.K. Total market share gains in several markets, continued category share gains in heated products by Ploom and favorable inventory movements, mainly in Italy and Spain, could not offset the lower combustibles industry volume, mainly in the U.K. As a result, total volume in this cluster declined by 2.4% year-on-year. Core revenue and AOP grew as pricing contributions across several markets, including the U.K., offset negative volume effects, primarily in the U.K. Moving on to EMA, which includes Romania, Russia, Turkey and the U.S.A. Total volume in this cluster increased by 0.7% year-on-year. The increase in market share gains in Turkey and the U.S.A., combined with higher Ploom volume across markets and increasing industry volume in Turkey were partially offset by declining industry volume, mainly in Russia. The cluster reported an increase in both revenue and AOP driven by pricing contributions, mainly in Russia, Turkey and the U.S.A. While investments in Ploom and inflation-driven increases in raw material costs and SG&A expenses continued across clusters, these were offset by top line growth. On Slide 8, we highlight our RRP performance. Let me share some details. As shown in the charts at the top, growth in both RRP volume and RRP-related revenue has accelerated following the launch of Ploom AURA in 2025. This top line growth has been driven by the continued expansion of the category as well as the steady growth in Ploom's heated product share through strategic marketing investments. In Japan, while there were some short-term fluctuations due to the timing of marketing initiatives and temporary demand increase ahead of the RRP tax-led price revisions in the first quarter, I am pleased to report that the share momentum remains solid. Monthly share for June when the adverse impact from the temporary demand had largely subsided, reached 18.3%, indicating steady progress in line with the growth trajectory since the launch of Ploom AURA. In other markets, heated product share also continued to grow, supported by the contribution from LEO, our tobacco-free heated nicotine stick in Europe. As a result, Ploom's category share across our 13 initial heated products markets reached 11.5% as of May 2026. In addition, Ploom's geographic footprint has expanded to 30 markets as of July with the rollout of AURA completed in 29 markets. Next, I will explain the results of the Processed Food business. Revenue increased by JPY 2.5 billion year-on-year, mainly driven by price revisions of packed cooked rice in the frozen and ambient foods business. AOP increased by JPY 1.5 billion year-on-year as revenue growth offset higher raw material costs due to rising brown rice prices. From the next slide, I will guide you through our revised forecast for fiscal year 2026. First, I will explain our full year consolidated revised forecast. Core revenue at constant FX has been revised upward by JPY 80 billion from the initial forecast, reflecting the strong momentum in the tobacco business. As a result, core revenue is expected to increase by 6% year-on-year. AOP at constant FX has also been revised upward by JPY 24 billion from the initial forecast, reflecting the upward revision of core revenue at constant FX. Consequently, AOP is expected to increase by 11.6% year-on-year. The FX impact on AOP is expected to improve versus the initial forecast. As a result, AOP on a reported basis has been revised upward by JPY 80 billion from the initial forecast. Operating profit has been revised upward by JPY 87 billion, reflecting the upward revision of AOP. Profit has been revised upward by JPY 74 billion, driven by the increase in operating profit and lower financial costs. Free cash flow has been revised upward by JPY 121 billion, mainly driven by the upward revision of AOP. Compared to the previous year, we expect an increase of JPY 378.3 billion, 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 forecast to be in a range between 1% year-on-year decline and in line with the prior year. This is unchanged versus our initial forecast. Indeed, first half volume performance was broadly in line with our initial forecast. This initial forecast also incorporated lower total volume for second half, reflecting tax-driven price increases across markets and year-on-year comparison effects. Turning to the financials and starting with the constant FX indicators. As just mentioned, in the second half, we expect total tobacco volume to decline year-on-year, accompanied by an unfavorable market mix. In addition, supply chain costs and investments in RRP are expected to increase versus first half. As a result, growth in core revenue and AOP is expected to moderate versus first half. However, acknowledging the strong pricing contributions, we have revised core revenue upward by JPY 80 billion. This will translate into 6% growth year-on-year. The upward revision of the top line will enable us to make additional investments in RRP, resulting in AOP being revised upward by JPY 25 billion or an 11.2% increase year-on-year. The FX impact on AOP is expected to improve versus our initial forecast, reflecting a stronger Russian ruble and a weaker Japanese yen than initially assumed as well as higher hyperinflation adjustments due to pricing effects in Iran to offset inflation and local currency depreciation. Regarding the situation in the Middle East, we have incorporated the impact into our revised full year forecast based on certain assumptions. As stated at the first quarter results announcement, the impact is currently expected to be limited. Slide 13 explains the revised forecast for the processed food business. Revenue is expected to increase by JPY 10.5 billion year-on-year with no change from the initial forecast. AOP is expected to remain broadly in line with the prior year and unchanged from the initial forecast, reflecting solid business performance despite higher raw material costs and other cost increases associated with the situation in the Middle East. Finally, please see Slide 15. As discussed today, the tobacco business was the primary driver of our first half performance, delivering outstanding results that exceeded our initial expectations. In combustibles, pricing continued to contribute strongly to performance while maintaining share gains across many markets. In RRP, the expanding presence of Ploom steadily contributed to top line growth. This performance is clear evidence that our strategic goals and investments to support sustainable profit growth are delivering solid results. Building on our strong confidence in the underlying strength of the business, the significant first half results and our ability to execute, we have substantially upgraded our full year guidance. Based on the revised forecast and our shareholder return policy, we also plan to revise the annual dividend guidance upward by JPY 30 from JPY 242 to JPY 272. We expect the dividend payout ratio based on the profit after the Canada adjustment to be 75.2%. This concludes my presentation. Thank you very much for your attention.

Thank you, Mr. Furukawa. Now we would like to move to the Q&A session. Let me introduce the speakers who will take your questions today. Hiromasa Furukawa, CFO of the JT Group; and Nobuya Kato, JTI Deputy CEO. Next, I will explain how to ask questions. We are afraid we don't accept questions in this English line. If you have any questions, please send an e-mail to jt.ir@jt.com. We will introduce your questions accordingly. Thank you for your understanding. We would like to introduce the first question. Mr. Saji from Mizuho Securities.

I have a question. One question. This relates to the overseas pricing situation, especially EMA cluster in the second quarter, JPY 64.9 billion of impact you had in terms of the pricing. So perhaps in the first half, combustibles, we have just short of 2% that is decline in the Russian market. But within that, Russia seems to be contributing in terms of pricing. So in light of that, how sustainable is this pricing strategy in Russia? And also the FX impact, which has contributed to the dividend hike. So JPY 56 billion of FX impact was a positive factor that you have been included. So Iran perhaps contributed. So what is the pricing situation in Iran? It appears as if it has been quite steady, if you look at the adjustment and the revised guidance. So I'd like to ask about the sustainability of the pricing strategy in Russia and Iran. So that is my question.

So this is a question related to Russia and Iran and the pricing and the strategy. So JTI, Deputy CEO, Kato, would answer.

So this is Kato. Mr. Saji, thank you very much for the question. So as for Russia, how sustainable is the pricing? So this year and also going forward, the pricing environment is not expected to dramatically change. Russia in recent months, perhaps there's a deterioration of the affordability and the economic environment is not necessarily positive and down trading is ongoing. We have been sharing those information. On the other hand, on a relative basis, in Russia, we do have a robust leadership position. So in the mid-price and also the higher the premium segment, we do have a fairly strong market share. Now for downtrading in the value segment, we have not been able to own strong products. So that may be the reason why the overall volume and the market share is somewhat declined. But in the mid-price or higher price segment, it has been relatively resilient. So we believe we can continue to execute a solid pricing strategy. But all in all, down trading is underway. And in the value segment, we intend to take initiatives wherever possible. So pricing as a whole in Russia, it is not likely that the situation will worsen that we cannot actually continue with the pricing strategy. However, we are seeing some softness within the volume. And of course, we have the down trading. So in terms of the level of pricing, we need to strike the right balance, taking all those information into consideration. So that's the total picture. Now as we have shared already after the Q1 results, Russia, the tax hike has been higher than initially anticipated. Next year and the following year, the level of tax hike has been disclosed by the government. But whether that level -- whether that would come through or not, perhaps just as we have seen, perhaps the tax hike may be higher than initially anticipated. If that is the case, that may pose an impact on the affordability of the market. So we need to take those into consideration as we execute the pricing strategy. So that's the general direction. But going forward, having more challenges in executing the pricing strategy in Russia, that is not the kind of expectations we have. Now moving on to Iran, the pricing in Iran. As mentioned, hyperinflation has been adopted in the market. So in the inflation level is extremely high. So the way we approach the pricing, so inflation and the equivalent level of inflation, we will offset that through pricing strategy. That is our basic thought process. And that is why we have been executing the pricing strategy. So regardless of tobacco products, so in the consumables in general and Iran, it is facing a continuous inflation. So in that level, pricing has been executed in the past, and we have been able to do that, and we believe we can continue to do so in the future. So as inflation continues, so this is not just for the tobacco products, the pricing will be impacted by the inflation. And accordingly, we will conduct the pricing.

So in terms of AOP, so I think the FX adjustment was quite large, about JPY 56 billion. So Iran, how big was the portion within this?

So this is Furukawa. So in terms of FX impact, JPY 56 billion was the FX impact. So almost entirely this amount, I already mentioned within my explanation. So Iran is a hyperinflationary market. So the price hike related to inflation, so we try to ensure that. So the AOP from the constant FX basis, those have been excluded from that number. So that particular portion, we conducted add back because we have a much more clear picture of Iran. So now we have factored those into the plan. So in the adjusted plan for the FX plan, so I cannot give you the detailed number. Quite a large portion of that has been taken into account through the Iran situation.

Next person is Morita-san from Nomura Securities.

This is Morita from Nomura Securities. Can you hear me?

Yes, we can. Please go ahead.

In the presentation, you were talking about current performance, which is a result of your investments that you've been making. So what kind of initiatives have borne fruit in what areas of your business? Can you share with us more detail? And as a result of that, regarding the growth rate of the profits over the medium to long term, I think it's high single digit at this moment that you were assuming. But when you look at the growth rates, do you think it can be revised upwards? Is there a possibility of that happening? I would appreciate your comments on this as well.

The question was about the results of past investments as well as what we view future profit levels are going to be. So Mr. Kato will take that question.

Morita-san, thank you very much for your question. So the investments that we've been making in the past as well as the results we've been seeing and what has been working well, leading to robust results and performance was the gist of your question. But from my point of view, personally speaking, combustibles and RRP or in particular, cater products as part of RRP our company has been focused -- has been investing in both areas and have strove to improve performance. And for combustibles, we have been RRP for combustibles, we've been looking at better ROI and improving margins. And for the profits that are generated as a result, we have been reinvesting into RRP to ensure its further growth. So I think the strategy of focusing on both parts of the business has turned out to be successful. So for the combustibles business, we are striving to improve profitability. And in order to do so, we are making necessary investments so that top line and earnings and the bottom line can grow. And effectively and efficiently, we are striving to improve the business' profitability. And so far, we have been able to generate good results. By using the profit pool, mainly around Ploom, we are striving to grow the RRP business. And like I always communicate, over 3 years, well, from several years ago, JPY 500 billion or JPY 600 billion or recently JPY 800 billion over 3 years are the numbers we've been communicating. On a yen basis, the numbers have been increasing somewhat. But in this regard, we would like to ensure that we will invest into the RRP business to ensure a good return in the future. So currently, Ploom, as we explained in the presentation, in Japan, now share of segment is 18%. And when you look at other markets, although the level is different, we are seeing steady growth. And for the 13 markets that we view as heated products markets, our share has been increasing, reaching 11.5%. So for combustibles and RRP, in particular, heated products or Ploom, the investments into these businesses have generated steady results, whether it be top line or volume and profit growth. So everything has come together. So our growth, our investments have been generating these results. As for growth rates and the future, as you rightly said, when it comes to next fiscal year and beyond, it might be too early to speak about it at this moment. However, in February this year and the next 3 years -- for the next 2 years, when you think about profit growth, high single-digit growth is what we are striving to achieve. So that is what we've already been communicating. And when you look at where we are right now, we have revised up our guidance for this fiscal year. And when you look at the guidance for the tobacco business, we do believe we can reach that level. And also for next fiscal year and beyond, at the beginning of the year, we have set forth a midterm plan where we would like to achieve high single-digit growth, which we would like to ensure to achieve. But regarding whether that level is going to change or not, I think it's too early to say at this moment. But in the next 3 years, high single-digit growth is something we have renewed confidence towards.

Well, changing the angle of the question, you are feeling more confidence in achieving high single-digit growth. I understand that. But what about double-digit growth? In order to achieve double-digit growth, what kind of conditions are required? Can you give me a comment on that?

Well, that's a pretty sharp question, which is also a difficult question. Well, last year and this year and beyond, when you think about the business environment and our performance, it's a matter of how far we can grow our business. And when you think about that, right now, we are currently confident about delivering high single-digit growth. However, when it comes to double-digit growth, like I've been saying earlier, improving the ROI of the combustibles business needs to go up a level. We need to be able to accelerate how much it goes up. And also for Ploom and RRP, I guess I'm talking about profits here, but when it comes to profitability, if we can grow even further and start to gain visibility around it and talking about visibility or expectations amongst ourselves, there's one part that is internal, and then there is the market environment that you need to look at, respectively, as a set. So from that point of view, we have just ended our first half. Therefore, we'll have to see how things go in the second half of the year so that we could think about the 3 -- what we can communicate next fiscal year at the beginning with respect to our 3-year midterm plan.

Yes, I look forward to it.

So we'd like to move on to the next question. Mr. Fujiwara, JPMorgan Securities, please.

This is Fujiwara from JPMorgan Securities. So I have a question related to Slide 12 about the revised forecast. So the changes from the initial expectation, I'd like to pose a question. So again, I know you explained a little bit, but I'd like to pose additional question. So on a constant FX basis, it's increased by JPY 80 billion. However, in terms of the profit, it's JPY 25 billion in terms of constant FX. So when you look at the high level of marginal profit for the tobacco business, so I think it might have a much more -- the contribution to the profit. So do you expect to have increased investment into RRP? Has that been factored into these numbers?

So the question was related to tobacco business, the revised forecast, about the constant FX of the core revenue and AOP constant FX, the variance between those. So Kato would like to answer.

So Mr. Fujiwara, thank you very much for that question. So the Ploom's investment, whether we are increasing the investment towards Ploom more so than initially expected, yes. Partially, yes, we are conducting some additional investment. However, that in itself is whether it is posing a large impact. I think the more fair way to look at that, it's the first half and the second half, the assumption. If you look at the whole, you would come out with the full year number. So in comparison to the core revenue growth, the AOP growth appears to be somewhat lower, especially if you were to compare the second half number. So some of the factors behind that. So of course, the Ploom-related investment, we are conducting additional investment in the second half in comparison to the initial anticipation. But of course, right from the start, the absolute amount of the investment was expected to be larger for the second half as opposed to the first half. In addition to that, when you look at the top line, the volume in the second half is expected to be weaker in comparison to the first half. So specifically, where it has been quite solid was in Turkey or Bangladesh which has been quite brisk in the first half. But in terms of the growth rate and also the total demand for the industry, we expect to see a slowdown in the second half. So for instance, Japan as well. And in October, they will be at the tax hike for the heated products. So the volume is expected to weaken in the second half in Japan as well. Also, Russia and also Poland and Romania. So in the first half, at the beginning of the year, there was a significant tax increase and the volume is expected to soften into the second half. Also, the Philippines, last year, the middle of last year, that is, there was the interim election. So it was an unusual -- the large volume that we have seen. So in comparison, of course, it will be weaker for this year. So that is why we expect to see a deceleration in the second half. So all in all, the volume, we expect to see softening in the second half. So if the volume softens, so the sales, the revenue would also decelerate. And also the profit that comes out would also weaken as well in the second half. However, if you look at the cost, the second half, we -- the Ploom's investment is larger for the second half related to the cost. So Furukawa, Mr. Furukawa mentioned the impact is not so large, but also Middle East situation, the energy price and the crude oil price is spiking and the impact on the cost, we shall see more of that realized in the second half. So the second half, the cost is the second half heavy, whereas the top line is weaker in the second half. So the first half, the top line was quite positive and the cost was somewhat lighter in comparison to the second half. So if you take all those into consideration, perhaps you would see that picture that you just outlined on the full year basis.