JAPAN TOBACCO INC. Q3 FY2026 earnings call

• Strong Financial Momentum: Full-year consolidated AOP at constant FX is projected to increase by 16.1%, with reported profit expected to rise by 32.6%, driven by strong tobacco performance and favorable FX impacts.
• Tobacco Volume Dynamics: Total volume declined slightly (-0.3% YTD), but RRP volume accelerated significantly (+31.1% YTD), led by Ploom expansion in Japan and Europe. Combustible share gains continued despite industry declines in key markets like the UK and Russia.
• Pricing Power: Robust pricing remains the primary growth driver across clusters (Asia, Western Europe, EMA), effectively offsetting inflation-driven cost increases in raw materials and SG&A.
• RRP Strategy & Product Launches: Ploom category share reached 11.6% across 13 initial markets. In Japan, the new 'Ploom CUBE' device was launched to complement the popular 'AURA', offering a smaller form factor while maintaining the same stick compatibility.
• Russia Market Challenges: Facing headwinds from consumer down-trading due to tax-led price hikes and declining affordability. The company plans to launch a new value-segment product soon to regain market share, while currently not participating in the heated product category there.
• Dividend Policy: Maintained annual dividend forecast at JPY 272 per share, consistent with the 75% payout ratio target, reflecting confidence in record-high earnings results.

Tobacco Business: Core revenue at constant FX increased by 8.7%, driven by robust pricing (9.6% contribution) which offset negative volume effects. Adjusted Operating Profit (AOP) at constant FX grew by 16.6%. Total volume decreased by 1.0% in combustibles but surged 31.1% in Reduced-Risk Products (RRP). The business generated the majority of the group's top-line growth and profitability.

Processed Food Business: Revenue increased by JPY 4.1 billion year-on-year, supported by price revisions and sales growth of new products like frozen Udon. AOP increased marginally by JPY 0.4 billion, as revenue gains were largely consumed by higher raw material and logistic costs.

• Consolidated Core Revenue: Revised upward by JPY 44 billion; now expected to increase by 7.3% year-on-year.
• Consolidated AOP (Constant FX): Revised upward by JPY 40 billion; now expected to increase by 16.1% year-on-year.
• Consolidated Reported AOP: Expected to increase by 21.9% year-on-year, aided by positive FX impact.
• Consolidated Profit: Revised upward by JPY 18 billion; expected to grow by 32.6% year-on-year.
• Tobacco Business Volume: Forecast revised to decrease by 0.5% year-on-year (previously more negative), reflecting resilient combustibles in Asia and share momentum in Turkey.
• Tobacco Financials: Core revenue and AOP at constant FX revised upward by JPY 47 billion and JPY 42 billion respectively, driven by strong pricing.
• Processed Food Revenue: Revised downward by JPY 3 billion due to latest sales trends in frozen/ambient foods.
• Processed Food AOP: Revised upward by JPY 0.5 billion, driven by margin improvements from pricing initiatives and cost reductions.

• Consumer Affordability and Down-trading: Rising tobacco taxes and inflation are reducing consumer purchasing power, particularly in Russia and Western Europe, leading to market-wide down-trading that pressures volume in mid-to-high price segments.
• Regulatory and Tax Uncertainty: Frequent tax hikes in various markets negatively impact total demand and create volatility in consumer affordability, requiring continuous monitoring of government budget priorities.
• Competitive Pressures: While pricing power is strong, some markets are seeing price competition in lower segments. Competitors may gain temporary share during pre-tax hike demand spikes.
• Cost Inflation: Persistent increases in raw material costs, logistics expenses (exacerbated by geopolitical issues like the Middle East conflict), and energy costs continue to squeeze margins, though partially offset by pricing.
• RRP Investment Risks: Significant ongoing investment in RRP/Ploom requires sustained execution to maintain growth trajectory against competitors and changing consumer preferences.

Q: Mizuho Securities asked about the Russian market environment, noting share losses in the value segment and asking if JT will re-enter the heated product market given their current absence there. / A: CFO Furukawa deferred to Deputy CEO Kato, who explained that Russian consumers are down-trading due to tax-induced price hikes and declining affordability. To counter this, JT plans to launch a new product in the value segment soon. Regarding heated products, Kato confirmed they are not currently playing in that category in Russia but are closely watching trends to decide future actions, emphasizing that JT’s overall leadership position remains solid.

Q: Nomura Securities asked if the high single-digit pricing levels (8-9%) observed recently are sustainable or if they will revert to historical norms amidst continuing inflation and potential affordability shifts. / A: Deputy CEO Kato stated that current strong pricing is supported by tax hikes, inflation, and price elasticity, with no widespread price competition occurring. However, he cautioned against being overoptimistic, noting that affordability pressures from macro factors and government budgets are mounting. While the fundamental pricing environment remains favorable for the next year, management will monitor affordability closely and adjust pricing strategies accordingly rather than assuming the current intensity can be maintained indefinitely.

Q: JPMorgan Securities inquired about the share dynamics in Japan following the October tax/price increase, specifically whether JT’s larger price hike compared to competitors impacted share, and if Philip Morris’s new device ‘BONDS’ had any effect. / A: Deputy CEO Kato explained that the October price increase was larger than April’s, leading to a more prominent temporary demand spike for competitors, which briefly weakened JT’s share. However, unlike the previous cycle, JT’s recovery track is positive, with actual consumer demand-based share in October recovering close to pre-spike levels. He estimated the temporary demand volume at ~400 million units for September vs. 270 million for March. Regarding Philip Morris’s ‘BONDS’, Kato noted its geographic impact is limited and unclear at this stage, but JT remains confident in sustaining Ploom share through year-end.

Q: Morgan Stanley MUFG Securities asked if the full-year forecast revision upward included any additional assumptions regarding Q4 slowdown or increased logistics costs due to Middle East tensions, given Q3 results exceeded prior expectations. / A: Deputy CEO Kato clarified that the Q4 slowdown in volume and growth rate was already anticipated and within expectations, though the baseline is higher now. Regarding logistics costs, he confirmed that no new factors have been added since the Q2 call; the company has already incorporated visible cost increases into the forecast. The upward revision was primarily driven by stronger-than-expected pricing and revenue momentum in the first three quarters, allowing them to raise the full-year targets while maintaining the original view on cost trajectories.

Q: SMBC Nikko Securities asked for clarification on the primary growth drivers for the next fiscal year, questioning if pricing would remain the dominant force and which geographic clusters would lead growth. / A: CFO Furukawa noted that the detailed 2026-2028 plan would be released in February, but highlighted that the launch pad for next year is much higher due to current pricing and RRP volume growth. Deputy CEO Kato elaborated that pricing remains the single greatest driver, but it must be balanced against volume impacts. He identified Asia (particularly Japan and Philippines) and specific EMA markets (Turkey, USA) as having strong momentum likely to continue. He emphasized that the net impact of pricing on volume mix needs careful study, and that RRP growth will also contribute significantly to top-line and margin improvement.