What was 2023 like for the JT Group?

Before looking back on the year, let me express my heartfelt support to all those affected by the many natural disasters, conflicts and painful incidents around the world, particularly in Ukraine, Sudan, the Middle East, Japan and Taiwan. The JT Group will continue to provide assistance to impacted regions, maintaining top priority on the security of our employees and their families.

Our operating environment was not exempt of challenges in 2023, including new and greater geopolitical risks, higher supply chain costs amid global inflation, and large exchange rate fluctuations, to name just a few factors.

Despite these headwinds, our continued focus on future oriented business investments have led to improved results over our 2022 figures and the targets set at the beginning of 2023 for all businesses, setting new records^*1 across all indicators from revenue to profit.

For the tobacco business, the Group’s core business and profit growth engine, 2023 marked the second year of the integration of the domestic and international tobacco businesses. In January 2024, as the final integration stage, we completed our unified business infrastructure to further enhance our strong global operations as One Team. The integration is already showing positive results, in terms of global resource allocation and collaboration.

In combustibles, in addition to steady pricing contributions, we maintained strong share momentum leveraging our balanced portfolio of high-equity brands. For RRP (Reduced-Risk Products)*2, we gradually expanded the sales territories for Ploom X, making it available in 13 markets at the end of 2023. Within HTS (heated tobacco sticks), we continued to grow, particularly in Japan, the world’s largest market for this product category, reaching 11.4% of the HTS segment in December 2023.

The pharmaceutical and processed food businesses also delivered solid year-on-year profit increases and continued to positively complement Group profit growth.

I would like to touch on the JT Group Purpose, which we announced in 2023. I have been personally involved in helping disseminate the Purpose, through dialogues in town hall meetings and with employees at every worksite I visited. These efforts are meant to reinforce our foundation towards fulfilling the Purpose, taking in the viewpoints of all stakeholders in and outside the Company. Many people have shared their support towards the values the JT Group is committed to uphold, as well as towards the image of society we envision. I was particularly impressed by the strong commitment from each employee to make it happen.

In 2024, we are entering a new phase, during which we will work to better embody the Purpose, through a set of important initiatives. To ensure that the JT Group Purpose is fulfilled, we have created Business Purposes for better integration in each business and in the evolution of its operations. In addition, we have also set action guidelines and initiatives within each business and corporate division. These decisions are made to encourage conscious actions in accordance with the Purpose, and are designed to support each employee in individual practice through workshops, and the like, provided by fellow employees. By taking ownership of the Purpose, and following through on action guidelines as well as delivering on the business plan through the execution of each business strategy, I am confident the fulfillment of the Purpose is within our reach.

*1

Revenue, Adjusted operating profit, Operating profit and Profit attributable to owners of the parent company in the ongoing business

*2

RRP (Reduced-Risk Products): Products with the potential to reduce the risks associated with smoking

Tell us about Business Plan 2024 with your understanding of our business environment.

Our business and operating environment

The corporate environment continues to evolve, becoming more complex than before. The changes I am referring to include very diverse aspects, including climate change, human rights and ESG issues, geopolitical risks, and technological innovation. This means that moving a corporation in the right direction is incrementally challenging. To address this, I feel we must ask ourselves how we will make the Group’s businesses more sustainable, while supporting continuously growing profit.

The Group as a whole

We remain committed to our medium-and long-term profit growth targets, specifically mid- to high-single-digit annual growth on average for adjusted operating profit (AOP) at constant currency on a consolidated basis. Over the three years of our current business plan (2024-2026), we project mid-single-digit annual growth on average for consolidated AOP at constant currency, the lower limit of our mid- to long-term targets. Despite expectations for similar results in 2024, we expect to return to a growth trajectory from 2025 onwards with the growth rate increasing at constant currency.

Tobacco business

We expect that the environment for the tobacco business will continue to be impacted by the decline in total industry volume, ongoing downtrading, new and increasing geopolitical risks, tighter and more complex regulations and tax regimes on RRP and intensifying competition, as well as currency risks.

To ensure sustainable growth in this operating environment, we will accelerate strategic investments in HTS, a category which we estimate will have the strongest growth going forward, to gradually build HTS as the second profit growth engine next to combustibles. Our investment will focus on marketing, in particular to fund the expansion of Ploom X sales territories, to grow our share in existing and new markets and to introduce new HTS devices. We expect these investments will drive an increase in RRP volume and RRP-related revenue, which we forecast will grow by 2026 to about 2.5 times the RRP-related revenue of 2023. In parallel, sustained share expansion and pricing opportunities in combustibles will continue to be the main drivers of our top-line growth. For 2024, rising supply chain costs with inflation and greater investments in RRP will likely offset top-line growth. As these effects will gradually phase out, we are confident in our forecast for the tobacco business of mid-single-digit compounded annual growth for AOP at constant currency from 2024 to 2026.

Regarding more specifically the RRP category, I can also confirm that we are making steady progress toward the medium-term ambitions for 2028 I have mentioned previously, specifically a mid-teens category share in the HTS segment and reaching breakeven in the RRP category. While our investment will grow, we project a gradual improvement in the profitability of the RRP business in the latter half of the current business plan period, fueled by top-line growth and the resulting productivity improvement.

Pharmaceutical business

Given high public pressure for drug price reductions amid a worldwide need to reduce healthcare costs due to tightening public budgets, we expect the environment for the pharmaceutical business will remain challenging, and royalty income from abroad will continue to erode. We are nevertheless continuing to conduct research and development of next-generation strategic products and working to maximize the value of each product to enhance the profit contribution to the entire Group. For the three-year period starting in 2024, we project the profit level will be stable.

To strengthen the value of the JT pharmaceutical business, we have integrated its value chain with listed subsidiary Torii Pharmaceutical Co., Ltd. (Torii). Together, we have established an efficient collaborative system, in which JT handles research and development while Torii produces and markets the products. And while there are costs for keeping Torii public, we are strong believers that these are more than offset by the advantages of letting Torii be independent. For instance, Torii can attract and keep excellent people, cultivate their morale, and build trust, as well as sharpen its competitiveness and expand its growth opportunities through its own operations. I am confident that these factors will help Torii build strong corporate value and enhance its contribution to the Group’s target of medium-and long-term sustainable profit growth and building value for the entire Group.

Processed food business

Japan’s processed food market is trending larger driven by lifestyle changes and related needs for greater convenience. In addition, opportunities are expanding outside Japan as populations grow, coupled with higher income standards and broadening popularity for Japanese cuisine worldwide. We intend to drive sustainable profit growth, mainly through top-line expansion, by allocating our resources to high-value product groups and taking necessary related measures. We project mid-single-digit profit growth over the three-year period starting in 2024.

Resource allocation policy

The priority in allocating resources will continue to be on investments leading to sustainable profit growth, especially in the tobacco business, based on the 4S model and the JT Group Purpose. Shareholder returns, which we are working to enhance, are also a priority, focusing on a payout ratio of 75%^*, which we view as benchmark, by achieving medium-and long-term net profit growth.

As for the 2023 dividend, we have agreed to distribute 100 yen per share at the end of the year, up six yen from the initial forecast, based on our 2023 financial results and shareholder return policy. Adding the interim dividend of 94 yen, we paid a record-high dividend of 194 yen per share in 2023.

*

Within a margin of ±5%

Tell us again about the significance of creating the JT Group Purpose.

For the JT Group to remain purposeful to our stakeholders now and going forward, we needed to define more clearly why the JT Group exists, using the 4S model management principle as a compass.

In creating the JT Group Purpose, we looked to the past for the kinds of value the Group has been offering our customers. We then looked at ourselves in the present, then in the future, imagining what we hope to be, say, in 2050. Backcasting from the future, we conducted many discussions to determine answers to important questions like: “What does the JT Group want to be in the future society?”, “What will make the JT Group appreciated by the future society?”, and “How can we contribute to the future society?”. To answer all these questions, we summarized the meaning of the JT Group’s existence in this short phrase: “Fulfilling Moments, Enriching Life.”

We have been working diligently to stay close to fulfilling moments through our products and services, and even by creating such moments. Continuing this endeavor and working for the sustainability of the Group as a corporate member of future society, we believe that both, the Group and society, will be sustainable. I firmly believe that the JT Group Purpose carries that message.

“Fulfilling Moments, Enriching Life” also expresses the Group’s hope to be close to the people and in their hearts in this rapidly changing society and highly unpredictable business environment. We work to deliver our value of fulfilling moments not just through the products and services of our tobacco, pharmaceutical, and processed food businesses, but through our many forward-looking corporate efforts that will take us beyond what the JT Group is now.

To that end, we set up D-LAB, a corporate R&D organization for multi-angle research, centered on fulfilling moments and on an effort to explore and create seeds for future business with a long-term vision. About 100 projects are going forward there now, making steady progress by adopting a trial-and-error approach, and aiming to contribute to the future profit growth of the Group. Subjects include mental wellness, breathing, sleep, aroma, diet, and appeal to the five senses, which we think will impact our existing business areas as important prospects. Step by step, D-LAB is showing increasing deliverables, such as products marketed through crowdfunding and technologies that have won innovation awards abroad.

The JT Group Purpose is our North Star, giving the Group a clear sense of direction, and our 4S model is the compass to help us reach the destination. As they guide us in pursuing our objectives, our business endeavors will evolve, building sustainable corporate value over the very long term.

Tell us about the Group’s sustainability strategy, recently revised to embody the Purpose.

We believe that as nature, society and people’s lives are intertwined, sustaining our ways of living, and the activities of entities, will depend on the sustainability of the environment and society in which we exist. By realizing the JT Group Purpose, we would like to contribute to the sustainability of our environment and our society. In May of 2023, we revised the JT Group Materiality, and selected five topics of materiality as the foundation for our sustainability management.

Furthermore, based on the revised materiality, we have been working on specific goals and initiatives for the Group. We have now set the JT Group Sustainability Targets, consisting of a total of twenty-five items, which we believe will help us embody the Purpose in our work to achieve them.

In setting specific goals and initiatives for the JT Group Sustainability Targets, we focused our attention on the relationship and ties with the revised materiality, while also including past initiatives. For example, in pursuing our materiality “Living with the planet,” we will perform a comprehensive assessment on the impact of the Group’s business on the ecosystem, with a view to preserving biodiversity.

Similarly, in considering the materiality “Investing in our people and supporting their growth,” we set clear targets focused on securing and expanding our human capital in the Group. We defined human capital from three angles: People who generate corporate activity, Organizational Culture that encourages better corporate decisions and activities, and Ownership which enables the creation of a beneficial cycle between both people and organizational culture. In setting our targets, we assigned metrics not only to the state of human capital but also the progress and results for related HR initiatives. We will monitor them regularly to steadily expand and cultivate our human capital.

For details of our material topics and related targets and initiatives, please refer to the JT Group sustainability strategy in the report (JT Group sustainability strategy).

The essence of the new sustainability strategy based on the Group Purpose is that people’s lives, society, activities of entities, and the activities of all humans are part of the ecosystem. As a company responsible for creating the future, the Group is determined to proactively work on resolving social issues.

As CEO, I am involved in setting and managing the new sustainability strategy, along with other Board Members. As part of managing the JT Group Sustainability Targets, we will revisit these targets regularly so that they can be further evolved.

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