JAPAF

• Opening Statement

• Management opened with condolences for those affected by the 2026 Kumamoto earthquake in Japan, and expressed wishes for a rapid recovery of affected regions.
• First half 2026 consolidated results exceeded initial forecasts, driven by strong tobacco business momentum, robust pricing contributions, and positive foreign exchange impacts from the appreciation of currencies including the Russian ruble against the Japanese yen.
• Adjusted Operating Profit (AOP, the company's core KPI) at constant FX increased 19.4% year-on-year, operating profit increased 29% year-on-year, and net profit increased 28.9% year-on-year, also supported by lower amortization of intangibles from past acquisitions and lower financial costs.

• Strategic Execution Highlights

• The company's two-pillar strategy of investing profits from the combustibles tobacco business into RRP (reduced risk products) has delivered solid results, with Plume (the company's heated tobacco product) delivering steady volume, share, and revenue growth.
• Combustible tobacco maintained solid market share across global markets, with ongoing pricing discipline driving consistent top-line and margin growth.
• Plume Aura, launched in 2025, has accelerated RRP volume and revenue growth, with expanding geographic reach and increasing customer satisfaction supporting continued share gains.

• Shareholder Return Update

• Building on better-than-expected first half results and improved full year guidance, management announced an upward revision to full year annual dividend guidance of 30 yen, increasing the annual dividend from 242 yen to 272 yen, with an expected payout ratio of 75.2% adjusted for Canada-related items.

• Full year 2026 consolidated guidance was revised upward broadly based on stronger-than-expected first half performance:
  • Core revenue at constant FX was revised upward by 80 billion yen, now expected to grow 6% year-on-year.
  • AOP at constant FX was revised upward by 24 billion yen, now expected to grow 11.6% year-on-year; reported AOP was revised upward by 80 billion yen due to better-than-expected FX impacts.
  • Operating profit was revised upward by 87 billion yen, net profit was revised upward by 74 billion yen, and free cash flow was revised upward by 121 billion yen.
• Tobacco business guidance:
  • Total full year volume guidance (combustibles + RRP) is maintained, with a forecast range of a 1% year-on-year decline to flat year-on-year, matching initial forecasts that incorporated expected second half volume softening from tax-driven price increases and base comparison effects.
  • Core revenue at constant FX was revised upward by 80 billion yen (now expected 6% year-on-year growth), and AOP at constant FX was revised upward by 25 billion yen (now expected 11.2% year-on-year growth). The upward top-line revision will fund additional RRP/Plume investment, which has already been incorporated into the AOP forecast. Favorable FX impacts from a stronger Russian ruble and hyperinflation adjustments in Iran are also incorporated.
• Processed food business guidance is unchanged from initial forecasts: revenue is expected to increase 10.5 billion yen year-on-year, and AOP is expected to be broadly flat year-on-year.
• Medium-term profit growth guidance remains unchanged at a target of high single-digit annual profit growth; management noted increased confidence in hitting this target but has not revised it to double-digit growth at this time.

1. Tobacco Business:

• Total combined volume (combustibles + RRP) increased 1% year-on-year (0.4% after excluding favorable inventory movements). Combustibles volume was flat year-on-year despite industry declines in major markets, while RRP volume grew 33.8% year-on-year, led by Plume which grew 43.5% and gained heated product share.
• At constant FX, core revenue increased 10.6% year-on-year, with price mix contributing 10.2%. AOP at constant FX increased 18.8% year-on-year, as top-line growth offset higher Plume investments, inflation-driven raw material costs, and higher SG&A.
  • Asia Cluster: Total volume +4.2% year-on-year; revenue and AOP grew on positive pricing and Plume volume contributions.
  • Western Europe Cluster: Total volume -2.4% year-on-year (offset by UK industry decline); core revenue and AOP grew as pricing gains offset negative volume effects.
  • EMA Cluster: Total volume +0.7% year-on-year; revenue and AOP grew on broad pricing contributions across key markets.
• As of May 2026, Plume held 11.5% category share across 15 core heated product markets, and expanded its geographic footprint to 30 markets as of July 2026. In Japan, Plume's June 2026 monthly segment share reached 18.3% after temporary pre-tax-hike demand fluctuations subsided.

1. Processed Food Business:

• Revenue increased 2.5 billion yen year-on-year, driven by price revisions for packed cooked rice in frozen and ambient lines. AOP increased 1.5 billion yen year-on-year, as revenue growth offset higher raw material costs from rising brown rice prices. Revenue contribution from the processed food business is a small minority share of total consolidated group revenue.

• Down-trading to lower-price segments is ongoing in the Russian market, driven by a weakening economic environment and declining consumer affordability, which creates pressure on overall pricing and margins and could harm market share performance.
• Future Russian tobacco tax hikes may come in higher than initially anticipated, which could further reduce consumer affordability and create additional challenges for pricing strategy.
• Second half volume is expected to soften across multiple major markets, including Japan (driven by an October RRP tax hike), Russia (driven by first half tax increases), and the Philippines (driven by a strong 2025 comparative base from mid-year elections), which will moderate full year profit growth.
• Inflation-driven raw material and energy costs, particularly from the ongoing situation in the Middle East, are expected to be realized more heavily in the second half, creating cost headwinds.
• The full impact of Japan's October 2026 RRP tax hike and subsequent price revisions on Plume's market share momentum remains uncertain and requires ongoing monitoring.

Q: How sustainable is current pricing strategy in Russia and Iran, and how much of the positive FX impact came from Iran?

A: In Russia, pricing conditions are not expected to change dramatically, and the company retains a strong position in mid-to-premium segments where it can maintain solid pricing. While down-trading to value segments is ongoing and future larger-than-expected tax hikes may pressure affordability, management does not expect major challenges to the current pricing strategy, and will balance pricing with volume trends. In Iran, the company uses hyperinflation accounting, and fully offsets high inflation via pricing adjustments, a strategy that has worked consistently and is expected to remain sustainable going forward. A large portion of the 56 billion yen positive FX impact is attributable to accounting adjustments for Iran's hyperinflationary environment.

Q: Past investments have driven strong first half results; is there potential to upgrade the medium-term profit growth target from high single-digit to double-digit?

A: The company's two-pillar strategy of reinvesting combustibles profits into RRP/Plume has delivered consistent results, with Plume hitting 18.3% share in Japan and 11.5% share across core global markets. While management has increased confidence in hitting the existing high single-digit medium-term growth target after strong first half results, it is too early to revise the target to double-digit growth. Double-digit growth would require further improvements in combustibles ROI and clearer visibility into accelerating RRP profitability, so management will wait to assess full year second half results before updating the medium-term plan.

Q: Why is AOP revised up by less than core revenue for the tobacco business full year forecast; is this due to additional Plume investment, and what will be the impact of Japan's October tax hike on Plume share?

A: The smaller AOP increase reflects expected second half dynamics, not just additional Plume investment. The company is making some additional second half Plume investment (which was already planned to be larger than the first half), but the main driver is expected second half volume softening across multiple key markets (Japan, Russia, Philippines, Turkey) and higher second half cost realization from Middle East-related energy price increases. Regarding the October tax hike, the resulting narrower price gap with competitors is not expected to disrupt Plume's share momentum; as of mid-2026, there has been no significant down-trading after April's price revision, and management expects Plume's strong brand equity to support continued growth.

Q: What is the current brand mix for Plume in Japan, and what is the strategy for low-temperature products like Widh?

A: Exact volume breakdowns are not disclosed, but the rough current mix is ~10-15% for premium brand Evo, ~45-50% for mid-range Mebius, and ~35-40% for value-segment Camel. The company will maintain this three-tier price portfolio to meet different consumer needs, and preserve individual brand equity after the upcoming tax hike. For low-temperature products like Widh, the product caters to a niche set of consumer preferences (no odor, no pre-heating) that differs from core high-temperature heated tobacco products like Plume. Pricing strategy will be set based on consumer value perception and profitability, with no further details disclosed for competitive reasons.