Management information

We delivered strong business performance in 2016, as all businesses contributed to the profit growth of the JT Group. We will continue our business investment and achieve medium- to long-term profit growth.

To our shareholders

The JT group has set the goal of achieving a mid to high single-digit growth rate in adjusted operating profit at constant currency over the mid- to long-term. So far, we have consistently exceeded this profit growth target.

In 2016, we also achieved growth of 11.3% year-on-year in adjusted operating profit excluding the foreign exchange impact, higher than the target of mid to high single-digit growth rate. As expected, all businesses - the tobacco, pharmaceutical, and processed food businesses - grew their profits, leading to the strong Group performance.

In the tobacco business, we continued to emphasize three strategic pillars - quality top-line growth, competitive cost base and robust business foundation - amid drastic changes in the operating environment. Thus, the international and Japanese domestic tobacco businesses together drove the Group's profit growth. In the international tobacco business, total shipment volume and shipment volume of Global Flagship Brands (GFBs) recorded year-on-year growth of 1.2% and 3.7% respectively, driven by the increases in European markets, including Italy, France and Spain, and seeding markets where our nascent business is growing through intensive investment as well as contribution from acquired then well-integrated businesses. The expanded business scale in new and seeding markets and their incremental contributions are evidence that our continuous efforts toward geographical expansion are starting to pay off. As for the performance of our brands, our global shipment volume of Winston reached a record high last year. Aiming to further reinforce our business, we will continue investment in brand equity building. Pricing continued to drive the profit growth in the international tobacco business, supported by the shipment volume increase. As a result, currency-neutral adjusted operating profit grew 13.4% year-on-year. Our 2016 undertakings were not limited to top-line performance, but we also addressed optimization of our manufacturing footprints in anticipation of changes in the operating environment. We moved on the restructuring of factories in Europe and Russia as planned, and a new factory in Taiwan started its operation. We will continuously strive to strengthen cost competitiveness.

In the Japanese domestic tobacco business, we achieved profit growth in line with our expectation despite a steep decrease in ready-made cigarette demand due to the impact of T-Vapor category as well as a general declining trend. In January 2016, we completed the acquisition of Natural American Spirit business outside the United States, and since then, we have been executing the strategy based on the business plan for this brand. During the year, Natural American Spirit grew both volume and market share as its momentum remained strong. The addition of Natural American Spirit has allowed us to offer a well-balanced and compelling brand portfolio to our consumers. In April 2016, we increased the price of MEVIUS. After a temporary drop triggered by the price increase, MEVIUS market share has been steadily recovering, reaffirming the strong brand equity of the brand. Driven by these initiatives, our adjusted operating profit of this business increased 2.4% year-on-year, overcoming the difficult situations.

The pharmaceutical and processed food businesses have been expected to complement the JT Group's profit growth, and we have been consistently investing in these businesses for them to fulfill this role. In the pharmaceutical business, the increase in royalty revenue related to anti-HIV drugs Stribild and Genvoya made significant contributions to a substantial profit improvement. As a result, the pharmaceutical business reported a profit in 2016, and more importantly has established a foundation which enables sustainable profit generation. The processed food business also made a contribution to the Group, growing its profit for the fourth consecutive year. With the strong performance and contribution by the pharmaceutical and processed food businesses, we are increasingly confident in our business portfolio strategy.

In 2017, the operating environment will continue to be uncertain and challenging. The international tobacco business will face a full introduction of new regulations in Europe and intensifying competition in the low price segment, mainly in CIS+, while the increasing presence of the T-Vapor category and accelerated cigarette industry contraction will affect our performance in Japan.

Nonetheless, the JT Group plans to grow its adjusted operating profit on a currency neutral basis. Reflecting the harsh situation of the Japanese domestic tobacco business, the projected growth rate of 3.4% represents a slow-down compared to the historical trajectory, but there will be no change in our goal of achieving mid to high single-digit profit growth rate over the mid- to long-term. In particular, we will focus on strengthening the business foundation of our T-Vapor operations in Japan including the production capacity expansion for Ploom TECH so that we can fight back in 2018 and beyond.

Over the next three years, we may enter a new era in which conventional business wisdom does not apply. However, we have a history of weathering difficulties and achieving sustainable growth, which leverages our ability to respond to change and to commit to business investment. Our track record speaks volumes. Thus, we will prioritize business investment for the future and continue to strive for sustainable growth.

Mitsuomi Koizumi
President, CEO, and Representative Director
March 24, 2017