Message from the CEO
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Driving changes on our own
The JT Group’s business environment remains difficult to predict because of changes in the international political situation, and risks related to exchange-rate fluctuations, as well as the persistent impact of the pandemic and the subsequent changes in consumer behavior and operations by businesses around the world.
It is undeniable that all our business segments currently face, and will continue to face, increasingly challenging environments. The tobacco business continues to experience tighter regulations and higher taxes, combined with increasing demand for reduced-risk products (RRP), especially heated tobacco sticks (HTS). Meanwhile, the pharmaceutical business is facing higher hurdles for new drug approval and growing pressure to lower prices, while the processed food business is facing rising costs for personnel, distribution and raw materials.
In addition, digital technology is constantly progressing, consumer preferences and behaviors are evolving with increasing awareness of sustainability and ESG priorities, and the needs and expectations among our shareholders, as well as society at large, are changing. Amid these major, rapid global trends, it is vital that we drive initiatives proactively rather than react passively.
2022 is also marked by the unprecedented crisis of the war in Ukraine. I would like to express my sincere condolences to those who have tragically lost loved ones in the war, and to the many others who have had to face devastating difficulties, such as having to leave everything behind in order to seek safety. I sincerely hope that peace will return soon.
While the JT Group’s first priority is the safety and security of our employees and their families, we are also working hand in hand with international and local aid organizations to establish relief programs and provide immediate help to those affected. We will continue to closely monitor the situation and prioritize our employees and their families’ safety, while extending all possible support to those in need, taking all necessary decisions to address the changing situation in accordance with our Group’s management principle, which is to pursue the 4S model.
Note: The word, consumers, used in the context of the tobacco business means adult consumers. Minimum legal age for smoking varies in accordance with the legislation in each country.
The JT Group has always marked its growth by taking matters in its own hands, adapting swiftly and implementing strategic initiatives. An example of such growth is represented by our tobacco business, where we made large-scale acquisitions, like those of RJRI and Gallaher; expanded geographically into emerging markets; enhanced equity, mainly for global flagship brands; and continuously allocated resources to increase presence in the expanding RRP category.
More recently, based on the anticipated, long-term business environment, and in order to increase profitability and strengthen our competitiveness in the tobacco business, we announced in February 2021 that we had refined our investment prioritization to two key categories – HTS and combustibles – and were introducing initiatives to strengthen the tobacco business operating model, including those aimed at combining the existing tobacco businesses and strengthening competitiveness in the Japanese market.
The road leading to the combination of the tobacco businesses took many steps. In the tobacco business, we formerly ran our Japanese-domestic and international tobacco businesses separately, which presented challenges for us when formulating and executing a globally uniform strategy, as well as when striving to ensure effective allocation of global resources. These challenges were especially apparent in the circumstances we faced to strengthen competitiveness in the RRP category. I believed it was urgent to establish an operating structure without divisional borders between Japanese-domestic and international operations, or between JT and JTI, to allow speedy decision-making under unified management. Additionally, for the JT Group to follow through on its customer-first policy and maintain sustainable growth, we needed a structure enabling us to effectively and efficiently offer products and services that exceeded consumer needs and expectations.
Faced with these challenges, after taking charge as CEO, I worked to unify teams for R&D initiatives and RRP management both in Japan and abroad, led the transformation of our international tobacco business, and relocated the JT head office building in Tokyo. Through these initiatives, the Group has been reinforcing our foundation and sharpening our global competitiveness.
As a result of these initiatives, we kicked off January 2022 with our new operating model, built around a unified, global tobacco business, for the JT Group to further grow and evolve into a truly global company. With this step, the tobacco business headquarter function has been consolidated at the headquarters in Geneva, creating a simpler business operation structure, optimal for accelerating speed through efficient, effective decision-making. I firmly believe that this will enable us to strengthen our competitiveness in the growing RRP category, mainly in HTS, by leveraging and allocating global resources in a prioritized and timely manner with a global perspective, as well as building a system to maximize the value we offer our consumers. Furthermore, going forward, we also plan to share and deploy best practices on a global basis in a more energized and timely manner. In respect to the Japanese market, operations will continue under the global operating model, with Japan set as one of our key markets.
In preparation for the global tobacco business, in the Japanese market we determined that it is imperative that we increase competitiveness to further enhance value to our consumers in an environment where overall business volume has shrunk amidst growing uncertainty. As a result, we have executed initiatives conducive to overcoming anticipated challenges identified in this changing environment. Over the past few years, we have undertaken a number of initiatives, sometimes requiring difficult decisions, such as reforming the sales organization, closing some production sites, implementing a voluntary retirement program, and reducing the total domestic tobacco cultivation area.
Leaving no stone unturned, we also reorganized the Corporate function. In addition to fulfilling an administrative role, this institution acts to identify and address mid- to long-term management issues. It is designed to be an organization facilitating inter-division collaboration without the constraints of divisional walls, generating high-quality output that addresses issues identified by the JT Group.
As announced in February 2022, Business Plan 2022, our three-year business plan, marks the continuation of our fundamental pursuit of sustainable mid- to long-term profit growth. More specifically, we remain committed to achieving mid to high single digit average annual growth in adjusted operating profit at constant FX over the mid to long term. We also expect to steadily grow both profit and shareholder returns in line with our shareholder-return policy.
The key to achieving these objectives lies in growth of the tobacco business, which is the core driver of the JT Group’s profit growth. Consequently, we will continue to focus on investing our management resources intensively for top-line growth and increasing profitability, designating HTS and combustibles as our top-priority categories. We see that the HTS segment provides the largest potential for sustainable profit growth within the RRP category, which we expect, with anticipated demand increases in this category, to become a strong pillar for our future growth. While the RRP category is our top investment priority in terms of future sustainability of the JT Group, we project nonetheless that combustibles will remain the tobacco industry’s biggest category through the coming decade. Therefore, we will also support efforts to continue increasing combustibles’ top-line contribution, while enhancing their profitability through lower costs and higher efficiency.
Moving on to our mid-term projections and goal, we project that HTS share in the tobacco industry as a whole will increase from the current 15% to about 20% by the end of 2027. Within this environment, the JT Group announced, in February 2022, its ambition to achieve HTS segment share in the mid-teens across our key markets by the end of 2027, and by doing so, reach break-even in the RRP business.
Having said this, in considering developments in the war in Ukraine, we have decided to suspend the launch of Ploom X in the Russian market, which was planned for 2022, and are reviewing our global launch plans to optimize the future development of Ploom X by being flexible and ensuring a state of readiness.
Needless to say, it is clear that RRP will be of significance in the industry; we expect that they will continue to gain increased attention and traction with consumers as these products have the potential to reduce the health risks associated with smoking by offering solutions that do not involve burning tobacco and produce no smoke and less odor. They thus significantly reduce not only the potentially harmful constituents in smoke generated from burning tobacco leaves, but also the inconvenience to non-smokers. However, all in all, we believe that tobacco consumer needs are diverse and require a broad range of choices, ensuring that every consumer can find a product offering a high level of satisfaction. To that end, the JT Group continues to expand product categories to meet global changes and improve the product value of all tobacco products.
Moving on to the pharmaceutical and processed food businesses, while they will continue to face a challenging business environment, their role of supplementing profit growth for the JT Group remains unchanged. In the pharmaceutical business, we will continue to enhance the value of products already introduced and still in development, as well as cultivating in- and out-licensing opportunities to reinforce our business foundation. In the processed food business, we will follow through on existing initiatives, such as allocating more resources to high-value-added and high-priced products, mainly in our core frozen and ambient food business, in order to promote a high-quality top-line increase leading to sustainable profit growth.
Lastly, we will continue allocating management resources to, and prioritizing investment in, businesses delivering sustainable profit growth, particularly the tobacco business, the core driver of the JT Group. We will also aim to increase returns to shareholders through mid- to long-term profit growth while maintaining a target payout ratio of about 75%*, and to achieve that objective, we will continue our efforts to grow adjusted operating profit at constant FX.
*To be in the range of approximately ±5%.
Pursuing the 4S model to provide higher value to stakeholders
Change in the social and business environments is accelerating, notably in terms of awareness of sustainable business practices as part of ESG considerations. I believe that a proactive and committed contribution to the development of society, through operations based on pursuing the 4S model, is essential to the long-term growth of the JT Group. To realize this ambition, we have identified, based on the 4S model, a set of priority issues (materiality) for our business and a wide range of stakeholders, and used these to focus our sustainability strategy.
We made it standard practice to involve the Board of Directors, and myself as CEO, in setting the goals for our sustainability strategy, and discussing and managing specific measures for achieving those goals, which we are firmly committed to deliver on. Since 2020, we have been holding regular Sustainability Advisory Forums, chaired by our CSO and involving representatives of JT Group businesses and functions, to discuss sustainability issues. Additionally, as we believe our proactive participation in the sustainability management process is essential, we made the Sustainability Management Division independent of other Corporate groups in January 2022, when we also reorganized our Corporate function.
Sustainability at the JT Group
In 2021, we continued to actively undertake initiatives based on our sustainability strategy. With ESG interest growing every year in the business world, we understand it is particularly important to reinforce the foundation of ESG, which is governance. To that end, we reflect our efforts to evolve corporate governance not only in our dialogue with stakeholders, including the capital markets, but also in appropriate responses to social demands related to governance, and analysis of the assessment of Board effectiveness, among other factors. What we have learned from these processes is reported to the management team and Board of Directors, whereupon, after conducting the necessary discussions, it has led to measures for improvement. Examples include a revision of the director tenure policy and the disclosure of information related to our integrated report.
We are also reviewing the KPI related to executive remuneration in order to strengthen the commitment from management to deliver sustainable profit growth for the JT Group, and to reflect a multifaceted performance scorecard using not only financial indicators, which measure current business performance, but non-financial indicators as well.
Going forward, we will continue to enhance corporate governance based on dialogue with all our stakeholders, as laid out in our management principle of pursuing the 4S model.
As for the environment, climate change is a pressing challenge requiring worldwide attention. To further enhance our environmental initiatives thus far, and contribute to the shift to a decarbonized society, the JT Group has revised its goals for energy consumption and greenhouse gas emissions in our Environment Plan 2030. We will further enhance and expand our initiatives to achieve carbon neutrality by 2030, and net zero for the entire value chain by 2050.
Concerning our responsibility to society, we have been conducting human rights due diligence assessments to overcome challenges across our supply chain. Furthermore, we have published the Group’s first Human Rights Report. Our social initiatives are multifaceted, including a new Group goal to increase our proportion of women in management to 25% by 2030, while recognizing that it is desirable that this should eventually come to exceed 40%.
Amid a business environment in which we are experiencing major, rapid global change, I believe it is important for us to take a fresh look at the value the JT Group offers to society, the reason for our existence, and the essence that has been, and will continue to be, at our core. In 2020, we created D-Lab within the Corporate research and development division, to explore opportunities beyond the existing scope of business. Today, D-Lab has various projects underway to strengthen our business portfolio, including new businesses. As such, we will keep striving to demonstrate to our consumers, shareholders and wider society they can entrust the JT Group to deliver “moments of pleasure” in the 20 to 30 years to come.
Lastly, I would like to stress my commitment to assuring the growth of the RRP category as top priority on my agenda, and I look forward to continuing to update you on what the future holds for the JT Group.