Message from the CEO

Masamichi Terabatake

Be Better, Be Faster and Be Bolder
JT is striving to be No. 1 globally by accelerating its efforts towards becoming “a company that initiates change and drives evolution.”

Masamichi Terabatake
Representative Director and President,
Chief Executive Officer

In 2018, we achieved our profit target. Going forward, we will continue to prioritize business investments as we aim to ensure sustainable growth.

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In 2018, my first year as Group CEO, I strove to thoroughly pave a new path within the Group, and those efforts are starting to bear fruit.

Adjusted operating profit at constant FX basis grew 8.9% year-on-year, enabling us to achieve sustainable profit growth and strengthen our business foundation despite a challenging environment.

In the international tobacco business, market share gains and strong pricing in key markets, supported by the positive impact of acquisitions, drove profit performance. In the Japanese domestic tobacco business, we completed the nationwide expansion of Ploom TECH and solidified our leading position in cigarettes by increasing our market share. In the pharmaceutical business, we achieved our profit target driven by increasing royalty revenue. Going forward, due to the end of a licensing agreement in Japan related to an anti-HIV drug, we expect overseas royalties to decrease. However, we will continue working to maximize product value across the board while researching and developing next-generation strategic products. Lastly, although profit declined in the processed food business due mainly to increasing raw material costs, we will continue striving to boost profitability by stepping up sales of mainstay products and improving productivity.

During my first year as Group CEO, my priority was to strengthen our Japanese domestic tobacco business. I visited each of our domestic sites and spent a lot of time sharing my ideas directly with employees, literally telling them “I want you to think this way” or “behave in this manner”. To ensure continued growth amid this tough environment, I focused on getting the JT Group and all its employees on the same page regarding what needs to be done.

Be Better, Be Faster and Be Bolder—this is the mantra we adopted after I became Group CEO. Before assuming this role, I worked at JT International S.A., a Group company based in Switzerland. The main thing I noticed when I returned to Japan was a difference in speed. I felt that decision making at JT took an excessive amount of time, especially when it came to decisions that extended beyond the organization or that encompassed multiple departments. I sensed that this lack of speed was putting us at risk, so I directed my efforts at accelerating the processes internally by promoting greater delegation of authority.

The new mantra emphasizes the fact that we will never be able to beat the competition in the future if JT does not actively change its current ways of thinking and working. We must change JT to increase the speed at which it does business. Throughout 2018, I promoted extensively this policy of “Be Better, Be Faster and Be Bolder.” I believe there has been a solid response, with each of our organizations and every employee beginning to do all they can right now. For example, we quickly responded to the rapid expansion of Reduced-Risk Products (RRP) in Japan, by uncovering growth opportunities and revising our sales structure to coordinate our employees’ efforts.

“We are not going to wait for change to happen. If JT continues to take action, we will see growth proliferate across Japan and the globe.”

We have created an unshakable business foundation, and, in any environment, our policy will be based on the unwavering management principle of the 4S model.

The tobacco industry has traditionally had a reputation for being able to accurately assess medium- to long-term business conditions. With the emergence of the new RRP category over the last two to three years, however, we have witnessed faster changes. Naturally, investment in RRP has grown, but investors are still somewhat uneasy about whether they really can count on returns. Businesspeople, meanwhile, are feeling increasingly uncertain about the environment surrounding JT, including changes in international politics, issues associated with Brexit and other geopolitical risks, and exchange risks related to the currencies of emerging economies. In the tobacco industry, conditions grow harsher every year due to intensifying competition in the RRP category as well as tightening regulations, tax increases, and a natural decline in overall demand in the face of rising health awareness.

The JT Group—the third largest global tobacco company—adopted the 4S model to transform these risks into opportunities. Consumers are the core of the 4S model. Under this model, we will continuously provide them with better products and increase the number of options on offer. Then, we will utilize the profits gained from doing so to provide a competitive level of returns to shareholders and wider society as well as fair compensation for employees. In addition, to realize sustainable profit growth, we will not focus solely on short-term profits; rather, to ensure solid medium- to long-term returns, we will strongly prioritize business investment. By repeating these actions, we will improve profitability and deliver a stable financial foundation, which, in turn, will allow us to commit to mid to high single-digit profit growth over the mid- to long-term.

“Deciding where to focus our limited investment capacity is one of our strengths.”

One of our strengths is the fact that the 4S model is a shared philosophy that has become engrained throughout the JT Group. Obviously, it will take time for the employees of acquired companies to fully understand the 4S model. Some of our acquisitions have been utterly unprepared for business investment. When I speak to them, I explain that we can outperform the competition through such actions as overhauling production systems and unifying global brands as well as by creating products that consumers want and by appropriately investing in brand equity. I also tell them how critical it is to invest in the business with an eye on mid- to long-term returns. And, as we reap the results of these actions, they will come to understand the 4S model and that this way of thinking is the right way forward. This embodies the ideal the JT Group strives for, which is a little different from that of other tobacco companies or, for that matter, European and American companies. Employees who have had lengthy careers outside of JT will come to truly understand that sustainable growth is central to JT’s business model, and I feel that this has become engrained as a steadfast policy.

M&A also provides the ultimate pool of human resources for us. We thoroughly assess each individual, giving consideration to who is best for each position, regardless of their experience or background, such as whether they came from Gallaher, JT or R.J. Reynolds. This is what we have always done. We try to be as fair as possible to each employee and place people according to their abilities regardless of their background; in this way, we have maximized the performance of the Company. By respecting the diversity of our employees’ values and attributes, we have fostered an environment in which everyone can reach their full potential. Our employees represent over 100 nationalities, and we appreciate their expertise, experience, age, gender, and nationality. In the management of our diversity-rich organization, we are always trying to be fair, transparent, and respectful. This is what I believe in, a conviction that springs from our unique corporate culture.

We view risks as growth opportunities and aim to become the Global No. 1 tobacco company.

Our medium- to long-term vision in the tobacco business is to be No. 1 globally. In this case, No. 1 means steadily expanding our share of the market in each country to achieve the No. 1 sales volume in the world as well as being the first choice of consumers. Over the last twelve months since I took over the reigns, after clearly defining what we meant by No. 1, we have been adjusting our operations accordingly.

To realize our vision, we have put in place three major strategies. The first is enhancing the equity of our brands. This means solidly expanding our current market share in countries where we already have a large share, including Japan. To do so, we will steadily invest in our existing brands and products, and differentiate ourselves by developing products that consumers enjoy along with prompt and efficient services. This will, in turn, lead to steady gains in profit.

The second strategy is geographic expansion in emerging markets. As we look toward the future, we will invest some of the profits earned from existing strongholds in emerging markets. Before I assumed the role of Group CEO, I led M&A efforts, notably in 2017 with transactions in the Philippines, Indonesia and Ethiopia. In 2018, we carried out M&A in Russia and Bangladesh. These investments enhanced our revenue immediately, with the potential to generate even more revenue in the future by boosting sales volume. While we are steadily expanding our footprint in major markets, there remain markets where our presence is small. We are now turning our attention toward Asia, Africa, and South America in pursuit of greater growth for the tobacco business.

Our third major strategy is to actively invest in RRP, including in Japan. I have been involved in this new category since 2014, when I became responsible for the RRP operations at JT International S.A., overseeing investment aimed at enhancing manufacturing and R&D capabilities. In my new role, I will ensure we continue to strengthen our presence in the category and expect to invest a total of 200.0 billion yen by 2020. Moreover, in 2019, we revised the structure of the R&D organization, optimally distributing resources throughout the JT Group to enhance competitiveness. We have now begun sprinting toward the realization of our vision through the implementation of these three strategies.

“We make decisions with an eye toward the future. However, our options are limited when no profits are made.”

Japan has garnered global attention due to the rapid growth of its RRP market. The percentage of the domestic tobacco market accounted for by RRP grew from almost nothing to 3% in 2016, 12% in 2017, and 21% in 2018. This means that there had been a need for RRP in Japan all along, and, despite being the leader in the Japanese market, JT did not notice that need. As a result, consumers shifted to other companies’ products. Realizing that we should have recognized this need sooner, we instructed the sales teams to rethink their approach; they should be putting consumers at the forefront and thinking about how to improve.

Although we had previously preached putting consumers at the forefront, our thinking may have been biased toward patrons of tobacconists and convenience stores. We might have been too caught up in how to control points of sale and how our products are displayed, rather than focusing on end-users.

We began 2018 by reflecting on whether we really had in place a system to listen to the needs of consumers. Our approach was to rely more on the sales teams by placing them at the core of the system. The approach allowed for more direct communication with the consumers and their feedback, enabling us to better identify consumer needs and prepare a wide array of options to satisfy these needs. Actually, we have developed a system that can design options to meet a broad range of needs; we can then develop products and test them with consumers. If the results are positive, we work to expand sales, and if they are not, we quickly move on and release something new. We develop products by broadening our imagination, thinking about what kind of needs consumers have and realizing how we can meet those needs. We do this again and again. While this all might seem obvious, we made a lot of progress in 2018 toward building a system that can foster the right kind of mindset and awareness. We are currently working to expand our lineup. Also in 2018, we rolled out the low-temperature heating product Ploom TECH nationwide, and, in January 2019, we initiated sales of Ploom TECH+, which has a richer vapor, as well as the high-temperature heating product Ploom S.

Ploom TECH uses JT’s original low-temperature heating technology to greatly reduce the generation of odor* and allow consumers to enjoy a variety of flavors with a clear tobacco taste. Some consumers of tobacco products are themselves sensitive to the odor of tobacco and many people who don’t smoke tobacco are also very sensitive or dislike its odor. RRP is one tool to help solve the problem posed by odor, and we expect that this strong Ploom TECH attribute will offer a huge opportunity moving forward. We are thinking about consumers in different situations, such as doing office work or going about everyday tasks. Consumer needs may vary depending on if they are in a factory, a senior facility, or a hotel or operating some kind of vehicle. For example, at senior facilities, there is the societal need to refrain from using fire to ensure safety. Delivery drivers also are prohibited from using fire and want to avoid filling up the ash tray. They also do not want to leave behind any odor, which could cause problems when another driver uses the vehicle. Smokers worry about whether hotels have smoking rooms available. We believe that our products offer a tailored solution to these various societal and latent needs. These products can also help bring about a society where smokers and non-smokers coexist in harmony. We can create business opportunities by looking at issues from different perspectives to uncover needs and expand our RRP offerings.

We also consider regulations to be opportunities. In 2018, in the lead up to the Tokyo Olympics and Paralympics, Japan’s Diet passed The Revised Health Promotion Act, which is expected to be enforced in stages by April 2020. Restaurants and bars that understand the characteristics of Ploom TECH allow patrons to use Ploom TECH even in areas that currently prohibit cigarettes. These establishments numbered around 800 a year ago but now exceed 3,700. Once the benefits of Ploom TECH are explained to business owners as well as consumers, they realize, “Hey, this product is really great. It enables smokers and non-smokers alike to coexist.” More and more businesses are therefore allowing people to enjoy the product in their establishments, leading to the considerable growth seen in just one year. Earlier, I mentioned that we are changing our sales system so that we can communicate directly with consumers. We think another of our accomplishments this year has been an improvement in our understanding of regional characteristics and the strengthening of our sales networks rooted in regional communities.

Globally, the RRP market is still in its infancy. Although it has grown quite rapidly in Japan, no other country has matched that speed of growth. If the JT Group can first reestablish its position in Japan by capturing a larger share of the market, we can use that know-how to expand globally. The real battle has yet to begin.

  • * Odor that is less than 1% of the strength of that of ready-made cigarettes

“We are under a lot of pressure, but our employees are enthusiastic and our manufacturing system is in place. The real battle has yet to begin.”

Our sustainability strategy supports the sustainable growth of our business.

In order for our Group to achieve sustainable growth, it is essential for our business to contribute to the sustainable development of our society. With this in mind, we launched our sustainability strategy in 2018. Global conditions and regulations are changing at a fast pace and the rapid growth of RRP has brought further changes to our business environment. We need to position and consider sustainability at the center of managing our business. In 2019, we appointed an Executive Officer dedicated to sustainability management and transformed the CSR Division into the Sustainability Management Division. We have tied our sustainability strategy to our business activities and to our contributions to SDGs. By pursuing the strategy globally, we will strengthen our commitment to sustainability.

In our tobacco business, we have set out four strategic focus areas: 1) products and services, 2) people, 3) supply chains, and 4) regulatory environment and illegal trade. The four strategic focus areas are supported by the JT Group’s three absolute requirements for sustainability: respect for human rights, an improved social and environmental impact, and good governance and business standards. Specific targets have been set for the focus areas and by implementing PDCA cycles, we will continue to support sustainable growth. As for building a sustainable supply chain and ensuring a sustainable tobacco leaf procurement structure, rather than merely purchasing tobacco leaf from the market, we source about half of our leaf from tobacco dealers while the other half is purchased directly from contracted farmers. Securing a long-term supply of quality leaf at the best cost is critical to our future growth. By building strong relationships with our farmers, we help improve their incomes and standards of living as well as labor practices, environmental and social conditions. Furthermore, since 2011 we have been working through the ARISE (Achieving Reduction of Child Labor in Support of Education) program to eliminate child labor at tobacco farms.

Environmental protection is also essential. As a responsible company, JT operates its businesses without increasing environmental impact. Under the Environment Long-term Plan 2020, we have been taking steps to reduce the environmental impact of our Group. As a result, in 2017, we achieved our target to reduce total Greenhouse Gas (GHG) emissions three years ahead of schedule. Furthermore, we are turning our attention to the future and we have started to establish the JT Group Environment Plan 2030. Under the new plan, we will further strengthen initiatives aimed at environmental issues that could have long-term impact, not only for our Group, but also for our value chain.

By transforming itself, JT is bringing change as it steadfastly works toward sustainable growth.

No matter the environment, we believe business investment should be the priority when allocating management resources. We will also strive to steadily increase dividends while carefully balancing shareholder returns and business investments for sustainable profit growth. As for returns to shareholders, we have increased dividends in line with the pace of growth of adjusted operating profit at constant FX basis.

There has been no change in this basic policy. However, to maintain a robust financial foundation while steadily and continuously increasing dividends, we have decided to also take into consideration annual net income from fiscal year 2019 forward. As always, we will still prioritize business investment that leads to sustainable profit growth over the medium- to long-term. We will then utilize those earnings to return them at a competitive level to our shareholders while continuing to monitor trends in returns for global fast moving consumer goods (FMCG) companies.**

In 2018, I got off to a strong start in my first year as Group CEO with all of these measures. The tobacco business still has untapped potential for growth and the confidence to spark that growth. We believe that the Japanese domestic tobacco business bottomed out in 2018 and have outlined a plan to boost revenue and profit in 2019. In 2018, the international tobacco business returned to a path of profit growth driven by strategic pricing. The tobacco business overall will therefore achieve mid to high single-digit growth over the medium- to long-term. The pharmaceutical business will continue to rebuild its business foundation. The processed food business established the Food Business Planning Division in 2019. Under this new business operation system, we will work to sustainably improve profit and aim to complement Group-wide profit growth through both the pharmaceutical and processed food businesses.

With the advent of new technologies and rapid changes in the business environment, we are no longer able to rely on conventional models for success. Through unwavering adherence to the 4S model, with our diverse human resources working more boldly and with unprecedented speed, and by transforming ourselves, we aim to continue realizing sustainable growth.

  • ** FMCG companies: Specifically, Fast Moving Consumer Goods (daily consumer goods) companies which have a stakeholder model similar to our “4S” model, and which realize strong business growth