Japan Tobacco : JT Group 2020 Second Quarter Investor Conference Presentation

July 31, 2020 at 02:05 am EDT

2020 Second-Quarter Results

Naohiro Minami

JT Group Chief Financial Officer

*Please be reminded that the figures shown on these slides may differ from those shown in the financial statements as they are intended to facilitate the reader's understanding of individual businesses.

*For details of each term, please refer to annotations on slide 21 and 22.

FORWARD-LOOKING STATEMENTS

This presentation contains forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief, or current and future expectations of our management with respect to our business, financial condition and results of operations. In some cases, you can identify forward-looking statements by terms such as "may", "will", "should", "would", "expect", "intend", "project", "plan", "aim", "seek", "target", "anticipate", "believe", "estimate", "predict", "potential" or the negative of these terms or other similar terminology. These statements are not guarantees of future performance and are subject to various risks and uncertainties. Actual results, performance or achievements, or those of the industries in which we operate, may differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, these forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown risks and uncertainties. Forward-looking statements regarding operating results are particularly subject to a variety of assumptions, some or all of which may not be realized.

Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation:

(1) increase in awareness of health concerns related to smoking;

(2) regulatory developments; including, without limitation, tax increases and restrictions on sales, marketing, packaging, labeling and use of tobacco products, privately imposed restrictions and governmental investigations;

(3) litigation around the world alleging adverse health and financial effects resulting from, or relating to, tobacco products;

(4) our ability to further diversify our business beyond the traditional tobacco industry;

(5) our ability to successfully expand internationally and make investments outside Japan;

(6) competition and changing consumer preferences;

(7) our ability to manage impacts derived from business diversification or business expansion;

(8) economic, regulatory and political changes, such as nationalization, terrorism, wars and civil unrest, in countries in which we operate;

(9) fluctuations in foreign exchange rates and the costs of raw materials; and (10) catastrophes, including natural disasters.

2020 Second-Quarter Results

2020 Year-to-Date Consolidated Results

(JPY BN)	2020	Year-on-year
Jan-Jun


Reported

Revenue	1,030.2	-2.7%

AOP	287.6	-0.1%

Operating profit	252.0	-19.1%

Profit	172.5	-23.8%

Consolidated Revenue

• Growth in the international tobacco business unable to offset declines in other businesses

• COVID-19 impact: Estimated to be unfavorable by around JPY 35 BN (over 3% of consolidated revenue)

Adjusted Operating Profit (AOP) at constant FX: + 7.5% YOY

• Increase driven by significant favorable pricing gains in the international tobacco business, offsetting COVID-19 impacts on tobacco and processed food businesses

Adjusted Operating Profit

• Robust currency-neutral performance offset by stronger currency headwinds than initially assumed

Operating Profit and Profit

（－）Non-recurrentone-time gain in the pharmaceutical business in 2019

（－）Higher financing cost

Japanese domestic tobacco business: Volume Performance


2020	RMC	RRP
Jan-Jun

Industry*	-6.9%y-o-y	c.25% of
total tobacco

(Total Tobacco)	c.-3.5%year-on-year

JT volume*	34.2 BnU	1.8 BnU

（YOY）	-8.6%	+ 0.4 BnU

Industry volume variance

RMC: Weaker demand following the state of emergency declaration during April and May
RRP: Grew YOY as the category continued to expand

JT volume and share performance

RMC: Lower share YOY, due to competition in the value segment
- Sequential share rebound in Q2, reaching 60%
RRP: Volume growth in line with the plan, driven by the nation-wide new product launches in 2019

SoS**	59.9%	c.10％***
（YOY）	-1.1 ppt	2019 Jan-Jun: c.8％***

*considering for only domestic taxable market **Share of Segment *** Off-take basis

Reference: RMC Monthly volume trend (YOY)

Volume trends returned to levels prior to the state of emergency declaration, after significant decline in April and May

Mar	Apr	May	Jun
-10％
-20％

Industry volume

JT volume

Japanese domestic tobacco business: Financial Results

			2020		Top-line performance
Financial	(JPY BN)		Year-on-year	（－） Negative volume contribution from RMC
	Jan-Jun

					（－） Negative RMC pricing variance following tax hike absorption on
Core revenue			248.8	-11.9%	selected products in Oct'19
					（－） Lower RRP-related revenue
Adjusted operating profit		81.8	-25.1%	• Lower sales of devices and accessories
					• Tax hike absorption in Oct'19
					（－） Negative COVID-19 impact to topline: above JPY 10 BN
Roadmap of AOP variance (JPY BN)		• Half attributed to Duty-free and China businesses
109.2					• Other half mainly due to a one-time impact in the domestic
				market

	-16.8				• Down-trading continued but no acceleration

		-2.2	-8.4		AOP variance factors
			81.8	（－） Negative top-line performance
					（－） Strengthened marketing investments
Jan-Jun	RMC volume	RMC	RRP/others	Jan-Jun
2019		price/mix		2020

International tobacco business: Volume Performance


(BN stick equivalents)	2020	Year-on-year
Jan-Jun

Total shipment volume	211.9	-4.8％
GFB shipment volume	136.3	-0.0％

Volume Performance

Shipment volume declined due to Bangladesh, Russia, Turkey and the COVID-19 impact, despite share gains in key markets

（－）

• Bangladesh/Russia/Turkey: industry and share decline driven by tax-led pricing

• Net COVID impact to volume was negative due to global travel restrictions

impacting Duty-free and lockdown consequences in Emerging Markets （＋）Robust share performance in many markets

• Notably in France, Iran, Italy, the Philippines, Romania, Spain, Taiwan and the UK

GFB volume:

• Solid share momentum in many markets drove almost flat GFB volume YOY

Topics: Russia

• Decline in RMC industry size due to economic situation and RRP expansion

• Market share stabilized sequentially despite on-going pressure from unfavorable price differential

• Solid pricing secured profit levels, despite price adjustment on some SKUs in Q2

• Ploom model S launched in March with active support through digital approaches - Distribution expansion within Key Accounts and to new cities

International tobacco business: Financial Results


2020	Year-on-year	Significant favorable pricing gains in H1, delivering
Jan-Jun
	robust profit growth

Core revenue	626.1	JPY BN	+3.1%
at constant currency	6,045	USD MM	+9.5%

AOP	214.3	JPY BN	+15.6%

at constant currency	2,144	USD MM	+27.3%

Top-line performance

Pricing gains notably in Iran, Russia, the Philippines and Turkey
- 70% of planned pricing gains materialized in H1
Negative volume contribution due to lower shipment volume
COVID-19impact to top-line: unfavorable impact of around JPY 20 BN

Roadmap of AOP variance (USD MM)

			-126	2,144	-164	1,980
		569

1,685	17

Jan-Jun	Volume	Price/Mix	Others	Jan-Jun	Local	Jan-Jun
2019				2020	currency	2020
				at constant	vs USD

AOP variance factors

（＋）Robust top-line performance

Volume skewed to European markets with a higher unit price （＋）Lower costs in Q2 due to COVID-19 restrictions

（－）Increased investments for digital and GBS* set-up as well as continued investments behind RRP/brands

（－）Currency headwinds mainly in IRR, RUB, TRY

© Copyright JT 2020	*Global Business Service Center(GBS) established for global shared service management as one of the initiatives of Transformation announced in Q3 2019	8

Pharmaceutical and Processed food businesses

Pharmaceutical Business			• Revenue decreased mainly due to lower overseas royalty income

(JPY BN)	2020	Year-on-year
• AOP growth driven by lower R&D expenses and profit increase at Torii
Jan-Jun
			Pharmaceutical
Revenue	37.3	-4.5

AOP	7.9	+2.2		• No material COVID-19 impact to top-line

				• Revenue and AOP decreased as negative impacts from COVID-19 more than
Processed Food Business
		offset positive effects
	2020
(JPY BN)	Year-on-year	 State of emergency and official requests to avoid non-essential outings
	Jan-Jun			negatively impacted the demand in:
Revenue	71.8	-3.6		 Frozen food, ambient food and seasoning products for the food
	service industry

AOP	0.3	-1.3		 Own bakery business
				 Demand for household products increased as more people stay at home

				• COVID-19 impact to the top-line: unfavorable impact of about 4 BN JPY
© Copyright JT 2020				9

Full-year forecast

Consolidated Revised Forecast : Assumptions

COVID-19 Impact Assumptions

• Lockdowns to be gradually lifted in countries/regions where already enforced

• Impacts of wave 2 not included (re-introduction of lockdowns/declaration of state of emergency)

• Assume a U-shaped economic recovery

 Economic impact persists throughout the year, while gradually subsides after having peaked in Q2

Outlook

• Second half tobacco business continues to be resilient

• However for next year onwards, need to closely monitor  Economic situation and outlook

 Evolving consumer behavior

 Regulation and tax situation in each of the country/region

• Considering the past, further impacts on tobacco business may surface with a lag

Exchange Rate

• Revised FX assumptions based on recent trends, resulting in a greater negative variance against original assumptions

No major concerns foreseen for financing

Initial plan of annual dividend per share remains unchanged

Consolidated Revised Forecast


	FY2020	vs.	vs. PY
(BN JPY)	Revised	Initial
	forecast	forecast
Reported
Revenue	2,010.0	-170.0	-7.6%
AOP	457.0	-46.0	-11.4%
Operating profit	422.0	-49.0	-16.0%
Profit	286.0	-19.0	-17.9%

FCF	350.0	-20.0	-JPY54.2BN

Revenue

• Revised downward mainly driven by the COVID impact and stronger currency headwinds

- Lower volume assumptions in the tobacco businesses - Lower demand for processed food business from the

customers in food service industry

Adjusted Operating Profit (AOP) at constant currency: lowered to 1.3% decline YOY

• Japanese-domestic tobacco and processed food businesses revised downward

• Partly offset by initiatives to mitigate the negative impact of COVID-19 on top line as well as the upward revision in the pharmaceutical business

AOP/ Operating Profit/ Profit （－）Revised FX assumptions

（＋）Partially offset by lower corporate tax burden

Japanese-domestic tobacco business

Evolving Consumer trends

Tobacco product consumption trends in wake of COVID-19
- RMC volume negatively impacted by further restrictions on smoking environment, including temporary closure of some smoking areas, following declaration of state of emergency
- RRP volume positively affected by people staying home
- The net effects on total tobacco industry volume were negative, though analysis indicates they are temporary; industry volume has already recovered after state of emergency was lifted
However, the change on consumption trend could have lasting effect on natural industry contraction, and need to be monitored

Revised Volume assumptions*

RMC industry volume revised downward to c. 8.5% declineReflecting the temporary decline after declaration of state of emergency
RRP market size estimate remains at c. 25％ of total industry

The market size estimate remains within the range of c.25%, while higher than initially expected due to strong demand in April and May

Total tobacco industry volume revised downward to c. 5% decline
JT RMC shipment volume revised downward to over 8.5% declineReflecting the decline of RMC industry volume

Our New Initiatives

Strengthening digital marketing using "CLUB JT" platform
- Respond to diversifying consumer purchasing trends including e-commerce

JT RRP shipment volume remains at over 3.5 BN stick equivalents

*Considers only domestic taxable market

Japanese-domestic tobacco business

	FY2020	vs.	vs. PY
(JPY BN)	Revised	Initial
	forecast	forecast

Core revenue	510.0	-30.0	-10.4%
AOP	160.0	-10.0	-14.5%

Core revenue revised downward by JPY 30.0 BN
- COVID impact on Duty-freetop-line was significant, considering its business size
- Reflect H1 results with transient industry decline in the domestic market
AOP revised downward by JPY 10.0 BN
- Lower Duty-freebottom-line due to weaker top-line
- In the domestic market, will mitigate top-line impact by cost reduction

Topics - Price amendment application

Applied for a retail price amendment of 50 yen per pack, with some exceptions, in response to the excise tax increase in October
Considered factors including;
- Industry contraction and down-trading following the amendment
- Higher cost per unit due to volume decline
- Investment to keep quality and enhance the brand equity

International tobacco business

Evolving industry trends

Mature Markets

Negative financial impact to consumers mitigated by economic stimulus measures
Strong Fine Cut demand in Europe partially driven by an increase in downtrading
Overall in H1, limited volume decline supported by favorable inventory movement

Emerging Markets

Greater impact than in mature markets as consumer disposable income negatively impacted by severe lockdowns, resulting in consumer demand decline and down-trading

Revised volume assumptions

Shipment volume: revised downward to decline by c. 6%
GFB shipment volume: revised downward to decline by c. 3%
- Industry volume decline due to COVID-19 especially in Duty-free and emerging markets
- Reflects lower volume in Bangladesh, Russia and Turkey
- Partially offset by strong performance in Europe

International tobacco business

	FY2020	vs.
	Initial	vs. PY
	Revised forecast
	forecast


Core revenue	1,170.0	JPY BN	-130.0	-6.6%
at constant currency	11,600	USD MM	-500	+0.9%
AOP	323.0	JPY BN	-38.0	-5.2%
at constant currency	3,440	USD MM	―	+10.0%

Core Revenue at constant currency: revised downward by USD 500MM
- Lower volume assumption impacting top-line
AOP at constant currency︓remains unchanged, 10% growth year-on-year
- Top-linedecline offset by;
- - Pricing gains upsides offsetting the accelerated down- trading due to COVID-19
  - Cost savings following restricted operations
- Second half performance impacted by
- - Unfavorable timing of pricing
  - Reversal of inventory build ups
  - Continued strategic investment
AOP︓revised downward by 38.0 JPY BN
- Stronger FX headwind assumptions notably for RUB, IRR,
  TRY

Pharmaceutical and Processed food businesses

Pharmaceutical Business

				• Revenue remains unchanged from initial forecast
	FY2020	vs.	vs. PY
(JPY BN)	Revised	Initial	• AOP revised upward by JPY 3.0 BN driven by lower-than-expected
	forecast	forecast		R&D expenses and lower costs at Torii Pharmaceutical, both due to
				limited operations resulting from COVID situation
Revenue	76.0	―	-12.5

AOP	13.0	+3.0	-2.9

Processed Food Business


	FY2020	vs.		• Revenue revised downward by JPY 7.0 BN due to lower demand from
(JPY BN)	Revised	Initial	vs. PY	the customers in food service industry and for our own bakery business
	forecast	forecast		- The lower demand bottomed out in Q2 and is expected to
				gradually improve toward year end
Revenue	153.0	-7.0	-5.6
- Demand for household products in H2 is expected to perform in

AOP	3.0	-2.0	-2.4	line with initial assumption
• AOP revised downward by JPY 2.0 BN due to lower top-line

© Copyright JT 2020				17

Closing remarks

JT Group Community Investment & COVID-19 Initiatives

Sustainable economy and society are an integral part for the sustainable growth of companies
JT Group is also contributing towards the development of a sustainable society, by making communities more inclusive.
JT Group, as a responsible member of the society in which we operate, is also supporting COVID-19 relief measures
- Taking measures to prevent spread of infection
- Responding to the requests from local communities, by offering emergency supplies such as daily necessities and financial support.
- Addressing the issues arising from the prolonged impact from the spreading of the epidemy
- Supporting activities thriving for "Build Back Better" in the future

Key measures include:

• Supporting organizations working to prevent the spread of the epidemy and support vulnerable people

• Providing supplies to local communities

- Food aid, daily necessities, hygiene products, etc.

• Volunteering activities by employees

Closing remarks

Continue to respond to the changes in environment with flexibility and agility
- Remain committed to investing in communities where we operate

Shareholders

Consumers

EmployeesSociety

Solid business momentum expected to continue during the year; following factors need to be considered when assessing the mid-tolong-term impact of COVID-19:
- Economic situation and outlook
- Evolving consumer behavior
- Regulation and tax situation in each of the country/region

Initial plans of annual dividend per share remains unchanged : JPY 154
- Interim dividend per share: JPY 77

Adjusted operating profit (AOP):	Adjusted operating profit = operating profit + amortization cost of acquired intangibles arising from business acquisitions +
	adjusted items (income and costs)*
	* Adjusted items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others
Consolidated adjusted operating profit	For International tobacco business, the same foreign exchange rates between local currencies vs. USD and JPY vs. USD as
at constant FX:	same period in previous fiscal year are applied
Profit:	Profit attributable to owners of the parent company
Reduced-Risk Products (RRP):	Products with potential to reduce the risks associated with smoking
GFB:	Global Flagship Brands: Winston, Camel, MEVIUS and LD (4 brands)
Shipment volume:	Includes fine cut, cigars, pipe tobacco, snus, kretek and T-Vapor but excludes contract manufactured products, waterpipe
(International tobacco business)	tobacco and E-Vapor
Core revenue:	Includes revenue from waterpipe tobacco and RRP, but excludes revenues from distribution, contract manufacturing and
(International tobacco business)	other peripheral businesses
Core revenue / Adjusted operating profit	The same foreign exchange rates between local currencies vs. USD as same period in previous fiscal year are applied
at constant FX
(International tobacco business)
© Copyright JT 2020	21

Total tobacco industry volume: (Japanese domestic tobacco business)

Cigarettes:

(Japanese domestic tobacco business)

Cigarette industry volume:

(Japanese domestic tobacco business)

Cigarette sales volume:

(Japanese domestic tobacco business)

RRP sales volume:

(Japanese domestic tobacco business) Little cigars:

Core revenue:

(Japanese domestic tobacco business)

Industry volume in Japan market by number of sticks based on the internal estimate. This includes cigarettes, little cigars, RRP and others

Ready made cigarettes

Industry volume of ready-made-cigarette in Japan market by number of sticks based on the internal estimate. This includes little cigars but excludes RRP

JT's cigarette sales volume excluding the volume of Domestic duty free and the China businesses. This includes little cigars but excludes RRP

JT's RRP sales volume excluding the volume of Domestic duty free business. One pack of consumables is equivalent to 20 sticks of combustible cigarette. This also excludes RRP devices, RRP related accessories, etc.

Products rolled in tobacco-based paper with the similar format to cigarette and classified as "cigars" under the Tobacco Business Act in Japan

Excluding revenue from distribution of imported tobacco in the Japanese Domestic Tobacco Business, among others, but including revenue from domestic duty free and the China business, as well as RRP related revenue

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Japan Tobacco Inc. published this content on 31 July 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 31 July 2020 06:05:16 UTC

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	1st Jan change	Capi.
JAPAN TOBACCO, INC.	+11.71%	46.8B
ITC LIMITED	-8.08%	62.58B
KT&G CORPORATION	+3.11%	7.36B
PT HANJAYA MANDALA SAMPOERNA TBK	-8.38%	6B
RLX TECHNOLOGY INC.	-11.00%	2.77B
PT GUDANG GARAM TBK	-3.81%	2.33B
BRITISH AMERICAN TOBACCO BANGLADESH COMPANY LIMITED	-24.08%	1.94B
SCANDINAVIAN TOBACCO GROUP A/S	-4.69%	1.35B
EASTERN COMPANY S.A.E	-8.49%	1.2B
KARELIA TOBACCO COMPANY INC.	+1.75%	1.02B

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