Management information

In 2017 we continued to deliver solid profit while investing to strengthen our future competitiveness.

2017 was a year of mixed results in which we performed as planned or even exceeded our initial expectations in certain fronts, but also encountered unexpected developments.

In the Japanese Domestic Tobacco business, we maintained a market share of over 60% in the ready-made cigarettes category. In the international tobacco business, we delivered a solid performance mainly driven by our forward-looking measures taken in the past, notably the manufacturing footprint optimization. Moreover, the pharmaceutical and processed food businesses continued to grow their profits and made a significant contribution to the JT Group.

On the other hand, there were unexpected developments. Most notably, Reduced Risk Products market in Japan expanded so rapidly and we were not able to adapt ourselves to the change. Furthermore, our performance was hit by a key distributor in the UK going into administration; that was certainly not assumed in our plan. However, under these circumstances, adjusted operating profit at constant FX remained at the same level as the prior year.

In the international tobacco business, we continue to focus our investments on three pillars for future growth, notably sustainable growth in established markets led by brand equity enhancement, geographic expansion in emerging markets and the accelerated growth in the Reduced-Risk Products category.

Although the industry contraction continued in various markets, our total shipment volume remained stable due to the contribution from emerging markets in the Middle East, South-East Asia and the Africa as well as from the acquisitions in the Philippines and Indonesia. More importantly, GFB shipment volume increased 0.8% mainly driven by share gains in several key markets.

On a constant FX basis, core revenue remained flat year- on-year. Despite the one-time loss related to a key UK distributor going into administration, adjusted operating profit grew by 4% mainly led by the cost reduction achieved through manufacturing footprint optimization. Excluding the one-time impact, we delivered a profit growth of approximately 10% year-on-year. We will continue to invest with a focus on the three pillars and target to achieve sustainable profit growth driven by quality top-line growth.

In the Japanese Domestic Tobacco business, our cigarette sales volume declined 12.5% due to the underlying trend and the expansion of Reduced-Risk Products. But our cigarette market share reached 61.3%, an increase by 0.3 percentage points year-on-year, thanks to the solid performance of the core brands. Thus, we further solidified our No. 1 position in cigarettes.

As for Ploom TECH, we have been working on the manufacturing capacity increase as the top priority. In line with the manufacturing capacity increase, we expanded its sales area across Tokyo in 2017. Core revenue declined 9.1% year-on-year, with the cigarette sales decline more than offsetting the Ploom TECH related sales increase as well as the pricing gains mainly from MEVIUS. Thus, adjusted operating profit decreased 10.7%.

Going forward, we position Reduced-Risk Products category as the growth driver and will prioritize it in allocating resources and further invest in this category. Meanwhile, ready-made cigarettes category remains important and continues to be the platform of profitability. Therefore, we will fortify our position as the market leader with an overwhelming share of market. We will consistently enhance consumers' satisfaction through investment in brand equity, especially of four core brands—MEVIUS, Natural American Spirit, Seven Stars and Winston.

In the pharmaceutical business, profit grew significantly by 14.4 billion yen, mainly driven by the royalty revenue growth thanks to the strong sales of license out compounds. In the processed food business, profit increased by 0.4 billion yen through our sales efforts to focus on higher margin products and cost reduction. As a result, we achieved profit growth for the fifth consecutive year.

In 2017, the pharmaceutical and processed food businesses combined together achieved a profit growth of about 15 billion yen, making a significant contribution to the Group's profit. Going forward, we aim to consistently grow their profits to realize the profit contribution to the JT Group.

The JT Group has achieved growth by promptly responding to changes in the operating environment and implementing initiatives with foresight. Now, the operating environment surrounding us is revolving at an unprecedented speed, leading to more and more uncertainties. In addition, the evolution of digital technology such as IoT and AI is re-defining competition from within an industry to among industries as well as altering consumers’ behaviors, and thus making it more difficult for us to have a clear outlook.

To survive and succeed in such a high uncertain circumstance, responding to changes is not enough; rather we have to develop ourselves into a company that initiates change and drive evolution. The organizations and functions in the JT Group must be bold and agile in decision-making and execution. To build such organizations and functions, each employee is encouraged to take action towards changes and innovations for improvements in a bold and prompt manner, and achieve sustainable growth over the mid- to long-term.

Masamichi Terabatake
Representative Director and President, Chief Executive Officer
March 2018