Japan Tobacco : （Updated）Integrated Report 2020

Japan Tobacco Inc.

Integrated Report 2020

Year ended December 31, 2020

Forward-looking statements

This report contains forward-looking statements. These statements appear in a number of places in this report 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,‌changing consumer preferences and behavior;
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.

CORPORATE	002	Our management principle	006	Key performance indicators
004 At a glance		• Financial performance review
PROFILE			010	• Non-financial performance review
			Our response to COVID-19
VALUE	014	Message from the CEO	022	Our value chains
018	Our history	024	Superior brand equity
CREATION
020 Our value creation process
	028	Business Plan 2021	050	Risk factors
	030	Message from the CFO	054	Regulation and key laws
	034	Business strategy/Business review	057	Litigation
BUSINESS		• Tobacco Business
	- International Tobacco Business
		- Japanese-Domestic Tobacco Business
		• Pharmaceutical Business
		• Processed Food Business
	060	Our material issues	068	Investing in people/Health and safety
	062	Sustainability strategy	072	Focus areas by business segment
SUSTAINABILITY	064	Three absolute requirements for sustainability		• Tobacco Business
	• Respect for human rights		• Pharmaceutical Business
		• Improving our social and environmental impact		• Processed Food Business
		• Good governance and business standards	082	Interview with the CSO
GOVERNANCE	086	Interview with the Outside Director	096	Management structure
090 Corporate governance	100	Internal control system &
				risk management system

Editorial policy

Period covered

In principle, this report covers the period from January 1, 2020 to December 31, 2020, but also includes some information related to activities before and after this period.

Scope of report

Japan Tobacco Inc. and consolidated subsidiaries

Published

March 2021

Referenced guidelines

The International Integrated Reporting Council's "International Integrated Reporting Framework" was referred to in the writing of this report. In addition, the GRI Standards of the Global Reporting Initiative were referred to with regard to ESG information.

FINANCIAL	106	Financial review	184	Shareholder information
114	Consolidated financial statements	185	List of key disclosures
INFORMATION/
180	Glossary of terms	185	Contact information
OTHERS
182 Awards and recognitions

CORPORATE PROFILE

The JT Group is a leading global tobacco company operating in over 70 countries/regions and our products are sold in over 130 countries/regions.

To illustrate the overview of the Group, this chapter explains the Group's management principle and vision, which are the foundation of its value creation, outlines its businesses, and presents key financial and non-financial performance indicators.

1. Our management principle

1. At a glance

1. Key performance indicators
2. • Financial performance review
   • Non-financialperformance review

1. Our response to COVID-19

PROFILE CORPORATE

CREATION VALUE

BUSINESS

SUSTAINABILITY

GOVERNANCE

INFORMATION/OTHERS FINANCIAL

Japan Tobacco Inc. Integrated Report 2020 001

Our management principle

Management principle

To pursue the 4S model

Under the 4S model, we strive to fulfill our responsibilities to our valued consumers, shareholders, employees and the wider society, carefully considering the respective interests of these four key stakeholder groups and exceeding their expectations wherever we can.

Shareholders

Consumers

Employees

Society

VISION		CORPORATE
	PROFILE
To continue to be a growing global company that
provides diverse value, unique to the JT Group.
Based on our 4S model, our vision is to continue to be a
growing global company that provides diverse value, unique to
the JT Group.		VALUE
Our long, rich history has endowed us with three key
	CREATION
strengths: a solid financial base, superior brand equity and a
diverse workforce. To realize our vision, we plan to leverage
these strengths as sources of competitiveness in our
business activities. We will create a variety of products and
services that meet the needs of our consumers and society,
enhance the corporate value of the JT Group, and create
social value that contributes to the development of a sustain-
able society.		BUSINESS
The JT Group MISSION	The JT Group WAY

By pursuing the 4S model, we aim to achieve sustainable profit growth over the mid to long term. We firmly believe that pursuing the 4S model is the best approach to continuously grow our corporate value and serve our four stakeholder constituencies' common interests.

To create, develop and nurture our unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals.

• Act with integrity, always putting the

consumer first.

• Continue to evolve while remaining committed

to quality in all its aspects.

• Harness the power of diversity across the

JT Group.

SUSTAINABILITY

Consumers

We provide exceptional products and services that deliver value beyond fulfillment of diverse needs and preferences. To keep doing so, we will upgrade our innovation capabilities by leveraging our Group's diversity.

Shareholders

We aim to enhance shareholder returns by realizing the mid- to long-term profit growth, placing priority on striking a balance between profit growth through business investments and shareholder returns.

Our mission is to create, develop and nurture our unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals through the 4S model. Our Code of Conduct and values guide the way in which every employee should act on a daily basis. We have codified them into three statements we call the JT Group WAY.

The world in which we live encompasses diverse natural environments, societies and peoples. By embracing such diversity, we	GOVERNANCE
believe we can create brands that offer value to our consumers.
We define a brand as all products, services and actions trusted by consumers and believe it is the key to forming deep bonds of

Employees

We aim to be an appealing, highly esteemed company for which our employees are proud to work. While evaluating employees fairly and transparently and supporting their personal growth, we aim to foster a corporate culture that respects and embraces diverse values.

Society

In order to fulfill our responsibility as a member of society and contribute to society's sustainable development through our business, we will work with a wide range of stakeholders and strive to resolve various issues together.

trust between us and consumers. Setting our brands as our most valuable management resource, we will continue to create,

develop, and refine distinctive brands that win consumers' trust.

In order to achieve our mission, each and every one of us at the JT Group practices the JT Group WAY as a personal guide.

INFORMATION/OTHERSFINANCIAL

002 Japan Tobacco Inc. Integrated Report 2020

Japan Tobacco Inc. Integrated Report 2020 003

At a glance

The JT Group is a leading global tobacco company operating in over 70 countries/regions and our products are sold in over 130 countries/regions. In addition to the tobacco business, we are developing pharmaceutical and processed food businesses.

PROFILE CORPORATE

International Tobacco Business

The international tobacco business, headquartered in Geneva, manufactures and offers tobacco products all over the world except Japan and a few Asian countries/regions.

Its key markets include France, Italy, Russia, Spain, Taiwan, Turkey and the U.K. Its international brand portfolio includes leading brands in cigarettes and FCT (fine cut tobacco), such as Winston, Camel, MEVIUS and LD, as well as in RRP (Reduced-Risk Products),* such as Logic and Ploom.

Japanese-Domestic Tobacco Business

The Japanese-domestic tobacco business, headquartered in Tokyo, manufactures and offers tobacco products mainly for Japan.

Its brand portfolio includes Ploom in the RRP category and the key brands such as MEVIUS, Seven Stars, Natural Ameri- can Spirit, Winston and Camel in the cigarette category.

Pharmaceutical Business

The pharmaceutical business focuses on the R&D, manufacturing and sale of prescription drugs, concentrating on three specific therapeutic areas: metabolic diseases, autoimmune/ inflammatory diseases, and viral infection.

CORECTIM® Ointment, Riona® Tablets and REMITCH® CAPSULES/OD Tablets are the main products, among others.

Processed Food Business
The processed food business handles the frozen and ambient	VALUE
food business, mainly for frozen noodles, packaged cooked	CREATION
rice, and frozen okonomiyaki (Japanese savory pancakes); the
seasonings business, focusing on seasonings including yeast
extracts; and the bakery business through bakery chain
outlets, mainly in the Tokyo metropolitan area.
Major products include "Reito-Sanuki-Udon" (frozen noodles),
"Takitate-Gohan" (packaged cooked rice), and the "Vertex"
(yeast extract seasonings) in particular.	BUSINESS

Combustibles market share in the tobacco business

The presence of JT Group in our key markets (2020)

	ITALY	25.6%
				RUSSIA
				38.4%
U.K.
	FRANCE			JAPAN
		TURKEY
45.0%
27.1%		TAIWAN
		59.8%
	26.6%
	SPAIN
			47.7%
	26.7%

Source: JT estimate, IRI, Nielsen and Logista

* RRP (Reduced-Risk Products): Products with the potential to reduce the risks associated with smoking.

004 Japan Tobacco Inc. Integrated Report 2020

Total revenue (2020)

Processed food						Other
business			0.1%
7.1%
Pharmaceutical
business
3.8%		2,092.6
			(JPY BN)

Japanese-domestic
International
tobacco business	tobacco business
26.5%	62.4%

Number of employees
(As of December 31, 2020)
Processed food
							Other
business				1.7%
8.6%								SUSTAINABILITY
Pharmaceutical
business
2.4%				58,300
					employees
											GOVERNANCE
Japanese-domestic	International
tobacco business	tobacco business
17.8%				69.6%
											INFORMATION/OTHERS FINANCIAL
				Japan Tobacco Inc. Integrated Report 2020 005

Key performance indicators

Financial performance review

Revenue

(JPY BN)

Profit

(JPY BN)

PROFILE CORPORATE

2,143.3	2,139.7	2,216.0	2,175.6	2,092.6
2016	2017	2018	2019	2020

JPY 2,092.6BN

3.8%decrease year on year

Revenue on a consolidated basis. Excludes excise and other similar taxes, as well as sales from transactions in which the JT Group acts as an agent.

421.7	392.4
	385.7
			348.2
				310.3
2016	2017	2018	2019	2020

JPY 310.3 BN

10.9%decrease year on year

Profit attributable to owners of the parent company.

CREATION VALUE

BUSINESS

Adjusted operating profit

Free cash flow

Dividend per share

(JPY BN)

586.8	585.3	595.5		+28.6	544.5	-57.6
			515.9
						487.0
2016	2017	2018	2019	Business	2020 at	FX	2020
				momentum	constant FX

5.5% increase year on year at constant FX

5.6%decrease to

JPY 487.0BN (reported basis)

Consolidated adjusted operating profit (AOP) at constant FX, JT Group's performance indicator, grew 5.5%. On a reported basis, AOP was down 5.6% due to unfavorable foreign currency impacts. Adjusted operating profit is calculated as follows: Adjusted operating profit=Operating profit+amortization cost of acquired intangibles arising from business acquisitions+ adjusted items (income and costs).*

(JPY BN)				503.9
			404.2
	72.6	105.6
-316.2
2016	2017	2018	2019	2020
JPY 503.9 BN

JPY 99.7 BN increase year on year

Free cash flow is the sum of cash flows from operating activities and investing activities, but excludes the following items:

• From operating cash flow: depreciation from lease transactions, interest

received, dividends received, interest paid and income taxes related to

these items excluding lease transactions, and other items

(JPY)					SUSTAINABILITY
130	140	150	154	154
2016	2017	2018	2019	2020

154 yen	GOVERNANCE
The sum of interim and year-end dividends per share, the
record dates of which fall in the relevant fiscal year.
	FINANCIAL

* Adjusted items (income and costs) are impairment losses on goodwill, restructuring income and costs and others.

006 Japan Tobacco Inc. Integrated Report 2020

• From investing cash flow: purchase of investment securities (both

short-term and long-term), payments into time deposits, proceeds from

sale or redemption of investment securities (both short-term and

long-term), proceeds from withdrawal of time deposits and other

investing activities not for business operation purposes

INFORMATION/OTHERS

Japan Tobacco Inc. Integrated Report 2020 007