Integrated report

Message from the CFO

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Even in a highly uncertain business environment,
we are working to maintain a
strong financial foundation and enhance
business investment to achieve profit
growth over the mid to long term and raise
shareholder returns.

Nobuya Kato

Senior Vice President, Chief Financial Officer

I took office as CFO in January 2022. Making the most of my experience, particularly related to mergers and acquisitions in the international tobacco business, I am committed to realizing sustainable growth for the JT Group and am undertaking reforms to that end, firmly supporting the CEO in that effort.

Looking back on 2021 results

Our adjusted operating profit at constant FX - our primary performance indicator - increased by 22.9% year on year, driven by the tobacco business through the year in spite of the ongoing pandemic conditions and related high uncertainty. The international tobacco business in particular contributed with a strong pricing effect and volume growth.

Turning to progress regarding our mid to long term KPI goal, specifically, mid to high single digit growth in adjusted operating profit at constant FX, we see that over the past three years we have been reporting year-on-year increases in our growth rate. This has occurred despite difficult conditions in which we have consistently lagged behind our competitors in terms of RRP market share amid overall industry volume growth.

Both revenue and adjusted operating profit on a reported basis increased year on year, the former by 11.1% to 2,324.8 billion yen and the latter by 25.4% to 610.4 billion yen, owing to robust top-line performance and favorable foreign exchange impacts.

Operating profit showed year-on-year growth by 6.4%, to 499.0 billion yen, despite the higher costs in the Japanese-domestic tobacco business, including initiatives to enhance management systems and adjust tobacco cultivation areas. Despite an increase in corporate tax, profit for the term grew by 9.1% year on year, to 338.5 billion yen.

Although our ability to generate cash remains solid, free cash flow was down by 21.9 billion yen compared with the corresponding figure for 2020, partly due to the latter including a one-time revenue from the sale of the former JT head office building.


Operating environment outlook 2022-2024

We predict that current trends will continue in our tobacco business, in both RRP and combustibles, over the course of our current business plan. The RRP segment is developing into the core pillar of business growth for the future, with demand continuing to increase, especially for HTS. Combustibles will likely continue to experience down-trading and contraction in demand, but we believe they can continue to reliably deliver profit by seizing appropriate pricing opportunities and building market share.

Although the pandemic itself is not predicted to have a significant impact on our tobacco business, we must nevertheless consider the possibility that the economic stagnation may prompt some governments to raise tobacco and/or consumption taxes to secure financial resources. We also project that domestic demand for certain high-value products, which surged in 2020 and 2021 as a consequence of tighter travel restrictions and limited cross-border traffic, and which ultimately contributed to the growth of our international tobacco business, will gradually return to pre-pandemic levels. In addition, we foresee tighter and more complex government regulations on tobacco worldwide, as well as the impact of geopolitical factors on some market environments. However, as a responsible global firm, the JT Group will comply to all regulations, while monitoring the trend in government sanctions and regulations, and take appropriate measures as necessary.


Financial policy

The JT Group draws up and executes its financial plans in line with two core values: resilience, to be able to maintain our businesses despite significant and/or unexpected risks, such as an economic crisis, and flexibility, to promptly respond to attractive investment opportunities.

Cash flow management

In our cash flow management, we put highest priority on stable cash generation from top-line business growth. On the financial side, we are undertaking initiatives to reduce foreign exchange impact and optimize operating capital. In the tobacco business, particularly in the emerging markets, we are working to optimize our businesses for local levels of economic growth and build the value of our businesses in local currency over the mid to long terms.

We pursue cash creation via top-line growth, made possible by, on the one hand, pricing that takes into consideration tax hikes and inflation, and on the other, share gains building on the strength of our brand portfolio, enhanced with a long-term strategic investment view. Pricing is a driver of profit growth in our tobacco business, but we refrain from extreme pricing that could harm our brand equity or impair profit growth in the long run. Consequently, we consider it essential to understand the consumers* trends, competition, and regulations in each market before implementing any price revision.

To reduce foreign exchange impact, we utilize natural hedging, by which we mean matching incoming and outgoing currencies, as well as risk-hedging using exchange forwards and other derivatives, except for certain currencies. In principle, foreign-currency credits and debts are fully hedged. We also hedge 25-90% of future cash flow, and in some cases apply hedge accounting to reduce foreign exchange risk, taking into account possible impact on the profit-and-loss statement.

To optimize operating capital, we continuously improve our cash-conversion cycle, reviewing terms for receivables and payables and applying methods such as liquidation of receivables and supplier finance, while optimizing inventory levels. Excluding the temporary impact of M&A and so forth, over the past ten years we have been generating free cash flow of about 400 billion yen per year.

* Adult consumers. Minimum legal age for smoking varies in accordance with the legislation in each country.


Investment distribution

There is no change in our two key policies for management- resource allocation: give top priority to business investment, and balance profit growth resulting from such investment with shareholder returns. Based on the 4S model, our management principle, we will give top priority to business investments leading to sustainable profit growth, especially in the tobacco business.

In February 2021 we revised our shareholder return policy to balance profit growth and shareholder returns, with the understanding that continued investment is needed to rebuild our share of the RRP market and stay competitive. Although in 2021 we revised our dividends upwards reflecting the strong performance of our international tobacco business, under the current business plan, we will invest about 300 billion yen, particularly in HTS, as the necessity for substantial investment in HTS remains unchanged.

Under the circumstances, and based on the policy I outlined earlier, we will aim to sustainably increase shareholder returns while maintaining a target payout ratio by continuing to increase adjusted operating profit at constant FX, the foundation of our current-term profit growth, over the mid to long terms. Furthermore, as we have publicly announced, we will be making significant investments to achieve our goals for carbon neutrality by 2030 and net zero by 2050.

Our total shareholder return, including dividends, has continued to be significantly below that of the TOPIX average, mainly due to its stock price performance, and we humbly accept this as an honest evaluation of the Company by our investors. In order to further promote shared value with our shareholders and pay closer attention to the stock-price trend, in our executive-compensation system we have introduced a restricted-stock remuneration plan, paid in Company shares, with the performance share unit linked to business results over the most recent three-year period. Additionally, reviewing our KPIs related to executive remuneration, we have increased the percentage that reported-base results comprise of executive bonuses, while as an initiative to realize mid to long term growth we have introduced new assessment indices, including the ESG index (see for "KPIs for executive remuneration").


IR activitiess

The JT Group appropriately discloses timely information both financial, as with business results, and non-financial, such as management strategy, ESG factors and the status of each business segment, and engages in active dialogue with shareholders and institutional investors.

Our IR teams in Tokyo and Geneva, where JT and JTI are respectively headquartered, meet with securities analysts and institutional investors to discuss recently-announced financial results and other disclosed information, as well as conducting individual conferences on ESG matters. Due to the pandemic, these IR events are still held mostly online, as in 2021 when we held some 340 individual conferences. IR representatives participate in conferences hosted by securities houses and meets with domestic and overseas institutional investors. On some of these occasions, the CEO, myself as CFO, and the director(s) in charge are present.

In fiscal 2019 we began conferences specifically focused on ESG, to have occasions to seek investor opinion, including assessments of our Integrated Reports, and we continue to remain active in dialogue with investors, making the most of the opportunities we have created. For individual investors, we held an online briefing in May 2021 with about 1,200 participants.

The investor feedback we gather through such IR events is regularly reported to the Board of Directors and shared among all Executive Officers and people in the relevant divisions. Going forward, we will continue our efforts to ensure that investors understand the JT Group’s business results and initiatives, and moreover, continue to properly reflect their opinions and expectations in our strategies and business operations.


Better communication with bond investors

The JT Group is also working to enhance communications with bond investors. Corporate bonds are an important means to procure funds to help achieve sustainable growth. To reliably procure funds even in an unstable financial environment, we are endeavoring to broaden our scope of communications with domestic and overseas bond investors. To create more opportunities for dialogue with them and facilitate better understanding of the JT Group, we regularly hold non-deal roadshows in addition to those held at the time of bond issuances. These roadshows have been held in Europe, the Middle East, and Asia since 2018, and we plan to launch them in other regions in the future to reach more bond investors and increase opportunities for communication.

We have also begun an initiative to upload to our website new content designed for bond investors as part of our ongoing efforts to provide timely information tailored to their needs. In addition to these initiatives to enhance dialogue with bond investors, we are strengthening engagement with organizations that make ESG assessments widely referenced in the capital markets as we work to improve our ESG scores. We believe that we can further strengthen our relationships with bond investors by helping them better understand our ESG initiatives.


My resolve as a new CFO

In participating in the process of crafting the image of what the JT Group hopes to become over the long term, I hope to set optimal financial targets, KPIs, resource allocation, investment discipline, and so forth, while further expanding and strengthening the foundation for the Group’s sustainable growth over the mid to long term. I am aware of the need to implement initiatives to raise our capital efficiency, and will begin discussions on that soon.

As I mentioned, I will work on sustainable funding for the long-term future. Simultaneously, I will be working on implementing, and further improving, our short and mid-term initiatives and necessary operations, while contributing to increasing our stakeholder engagement.