Japan Tobacco Inc. (JAPAF) Q4 2022 Earnings Call Transcript
Japan Tobacco Inc. (OTCPK:JAPAF) Q4 2022 Earnings Conference Call February 15, 2023 4:00 AM ET
Company Participants
Masamichi Terabatake – Chief Executive Officer
Eddy Pirard – Chief Executive Officer of JT International
Nobuya Kato – Chief Financial Officer
Vassilis Vovos – Chief Financial Officer of JT International
Conference Call Participants
Makoto Morita – Daiwa Securities
Nobuyoshi Miura – Citigroup
Hiroshi Saji – Mizuho Securities
Satoshi Fujiwara – Nomura Securities
Naomi Takagi – SMBC Nikko Securities
Haruka Miyake – Morgan Stanley MUFG Securities
Operator
Thank you for participating in the meeting for 2022 Full Year Results at Japan Tobacco Inc. today. It is time, so we would like to start.
In today’s meeting, first, Mr. Terabatake, Chief Executive Officer of the JT Group will introduce you Business Plan 2023. And Mr. Eddy Pirard, CEO of JT International, will follow, who explains Tobacco Business 2022 results and 2023 outlook. Lastly, Mr. Kato, Chief Financial Officer of the JT Group, will explain JT Group 2022 results and 2023 forecast. Then, we move on to Q&A session, and this meeting is scheduled to end at 8:00 p.m. JST.
Now, I’d like to introduce you the first presenter, Mr. Terabatake, please.
Masamichi Terabatake
I am Masamichi Terabatake, President and CEO of Japan Tobacco. Thank you for taking the time to attend today’s financial results briefing. I am grateful for your continuing support and encouragement.
First of all, I would like to extend my heartfelt sympathy to the victims of the recent earthquake in Turkey and their families. The JT Group has begun providing emergency relief services such as search and rescue. We sincerely pray for the safety of everyone and for the earliest possible recovery of the affected areas.
I would also like to take a moment to express my concerns about the situation between Russia and Ukraine. I am deeply concerned about the human tragedy and devastation unfolding in Ukraine and sincerely hope peace will return soon. The JT Group continues to place the highest priority on the safety of our employees and their families and it’s extending all possible support to affected people.
Today, I will begin an overview of fiscal year 2022 followed by our newly articulated JT Group Purpose. Next, I will share details behind the Business Plan 2023. Then, I’ll explain the strategic roles of each of our businesses and our initiatives towards sustainability before discussing our allocation of management resources at the end. Eddy Pirard, the CEO of JTI, will provide key highlights of the tobacco business. And Nobuya Kato, CFO of the JT Group, will detail our consolidated financial results for 2022 as well as the forecasts for 2023.
First, an overview of 2022. Please see Slide 5. 2022, in addition to changes in social and consumer behavior due to COVID, was a year of high uncertainties, including global inflation and economic stagnation, the situation in Russia and Ukraine, and FX fluctuations.
Against this backdrop, strong sheer momentum driving a resilient volume and pricing effects in the tobacco business, which is the core of our business, significantly exceeded the initial plan for 2022 announced in February last year. Despite the tight supply and demand of semiconductors, we were able to more than double our HTS category shares from the early of 2021, driven by the contribution of Ploom X in Japan.
As the first year of the combined tobacco business management structure, 2022 was a year which has successfully strengthened our business foundation and capabilities through various initiatives. Thanks to the contributions of the tobacco business, JT Group, as a whole, achieved record highs from revenue to profit, while constant currency adjusted operating profit and profit greatly exceeded the previous years and initial plans.
Considering our full year results and following the third quarter announcement, we plan to pay an annual dividend of [JPY180] (ph) per share for 2022 in accordance with our shareholder return policy.
Next, I’d like to introduce the newly articulated JT Group Purpose. Please see Slide 7. In the midst of discontinuous changes in the social and business environment, we have designed the JT Group Purpose to provide a clear direction towards being a more sustainable business for society at large.
In articulating this plan, we looked at areas where the JT Group can be expected to contribute in the future society and areas where the JT Group can continue to contribute over the long-term. We have determined that JT Group’s greatest value is to consistently provide the Fulfilling Moments through our products and services and to create these moments together with society.
Fulfilling Moments is a core value that JT has provided through its products and services. This means that the articulation of the JT Group Purpose does not embody a new set of values that differ from those of the past. On the other hand, the Fulfilling Moments demanded in the future may lie beyond the products and services of the present JT Group. Alternatively, they may be entirely different. We believe that JT must continue to evolve so that society can continue to entrust the area of Fulfilling Moments. We must also flexibly change the means of providing value in line with the ever-changing values of society and people.
By clarifying our core — course of evolution, focusing on Fulfilling Moments and changing the means of providing value as needed, we believe that together with our immutable corporate philosophy, embedded in the 4S model, the JT Group purpose will enable our corporate entities, businesses and individual employees to specify what kinds of products and services to provide and to create these moments together with society.
In order to link the JT Group Purpose to the activities of each business, we have also articulated the purpose for each business based on the JT Group Purpose. From now on, each segment will focus on the business operation with the JT Group Purpose in mind.
The purpose for each business is as described on the slide. Each business will contribute to the realization of the JT Group Purpose through the realization of each business purpose. Going forward, all of our businesses will contribute to the realization of the JT Group Purpose through the execution of their own purpose.
Details of our tobacco business purpose will be shared at the Tobacco Investor Conference, which is scheduled to be held on May 8 this year.
In our existing businesses, we will place top priority on the execution of the strategies we have outlined, and on that basis, we will aim for further evolution. Importantly, we will evolve all kinds of activities to realize the JT Group Purpose.
As an initiative toward realizing the JT Group Purpose, we established D-LAB, a corporate R&D organization. The role of D-LAB is to conduct research, explore and create the seeds of future businesses with a focus on the concept of Fulfilling Moments. This concept includes a wide range of activities, such as those that appeal to the five senses, like sense and food and those that relate to wellness, such as breathing.
D-LAB activities will contribute to the development of Fulfilling Moments and aim to contribute to JT Group’s earnings growth in the long-term. D-LAB activities are largely divided into multifaceted research on the value of Fulfilling Moments, seeds exploration and seeds creation for future businesses.
The team is constantly working on more than several dozen projects, while repeating trial and error. Let me introduce some specific initiatives for each area.
In our multifaceted research, we conduct joint research with universities as well as work with partner companies to deepen our understanding of the value of Fulfilling Moments. One of our research results we took and developed into a prototype of a respiratory-guided robotic cushion, we actually participated in the Las Vegas 2023 CES, one of the most renowned technology exhibitions in the world and won an Innovation Award.
The seeds exploration for future businesses aim to explore areas which could create Fulfilling Moments, such as technologies that can lead to future products and services. For example, we are a sole investor in a venture capital fund that invests in early-stage startups. The fund has currently invested in approximately 140 companies, mainly in Europe and the United States that have affinity with Fulfilling Moments.
We also have a organization that explores and researches natural materials mainly in Asia in collaboration with external parties, such as universities. With seeds creation for future businesses, we create products and services from zero, conduct trials and have affiliates that have reached the phase in which we actually provide Fulfilling Moments to our customers, so just through selling multiple products.
In summary, by exploring opportunities beyond those of the current JT Group, we are committed to delivering value in the form of Fulfilling Moments through a variety of corporate activities in line with the changing society, time and people. And D-LAB is one of our most prominent activities.
Next, I’d like to introduce the Business Plan 2023, our three-year plan commencing this year. Please see Slide 11. Within Business Plan 2023, our mid- to long-term target remains unchanged. We will continue to pursue sustainable profit growth over the mid- to long-term. To achieve this goal, we will rely mostly on the tobacco business as the profit growth engine of the JT Group.
Within the core tobacco business, we will strengthen our global organizational strength. At the same time, we will improve earnings in combustibles, prioritize investing mainly in RRP categories, particularly HTS, which are the most crucial for future profit growth and maintain a competitive cost base. In 2023, as the year to lay the foundations for achieving future profit growth, we will significantly invest in the tobacco business, including accelerating investments in the HTS segment.
In addition, negative impact of the higher input costs will make the adjusted operating profit at constant FX broadly stable versus the previous year. On the other hand, we expect low-single-digit growth for adjusted operating profit at constant FX in the current business plan.
However, we remain confident the stable contributions from combustibles and the improved HTS profitability to come will enable the JT Group to continue delivering on its target to achieve mid-to-high single-digit growth of adjusted operating profit at constant currency in the mid- to long-term. As a result, we intend to steadily grow DPS in line with our shareholders return policy, which targets a dividend payout ratio of 75% through sustainable mid- to long-term growth of profit.
Before moving to our business segments, I would like to add some more details around the strategic priorities in the tobacco business that I have just presented. The newly combined tobacco structure which started in January 2022 has contributed to enhance the global organizational capabilities.
We also made progress with regards to the global formulation and implementation of unified and consistent strategies and the utilization of global resources. We are continuing to improve the speed of decision-making and to build a more effective and efficient business structure, as well as to strengthen the value to consumers through digital and product innovation.
In combustibles, which we believe will remain the largest tobacco category for the foreseeable future, the focus is on continuing to grow the revenue base. By maintaining a disciplined investment approach towards our brands and markets, we will drive earnings in a sustainable and long-term manner.
We plan to invest more than JPY300 billion in RRP during business plan 2023. We consider HTS to be the category with the highest potential for sustained earnings growth. Investing in HTS will be our priority. As shown on the slide, there are three major medium- to long-term RRP ambitions. We expect RRP revenue to more than double by 2025 compared to 2022, HTS market share in the key HTS markets to reach the mid-teens level by 2028 and to breakeven in RRP category by 2028.
We have already mentioned several times some of the measures we have implemented to increase the competitiveness in the tobacco business, whether overseas or in Japan. We have already generated over JPY40 billion in run rate savings over the three-year period. Of course, we will continue as we normally do to explore new improvements, including approximately JPY20 billion within our supply chain in 2024.
In our mid- to long-term strategy, we believe that the combined tobacco structure will contribute to the future growth of JT Group.
Let’s move on to our policies for the tobacco business. As I said earlier, there is no change to the role of the tobacco business, which used to be the profit growth engine of the JT Group. As the outlook of the operating environment for Business Plan 2023, we will closely monitor changes such as the impact on the global economy of inflation and economic stagnation caused by geopolitical risks, as well as rapid cost increases, tax increases aimed at securing the financial resources of the governments of each country and further progress and complexity of the regulations.
The outlook for the future remains uncertain. But even under this environment, we continue to aim for profit growth with the tobacco business as the growth engine. Downtrading is expected to continue considering the current macroeconomic environment and the implications on consumers’ disposable income. Our focus on combustibles are improving return on investment.
We will continue to grow profits through sustained market share gains, strong brand portfolio and top-line growth fueled by pricing opportunities on top of the current business momentum. These efforts will be supported by improvements within the supply chain efficiencies and disciplined investment approach towards our strong portfolio of brands.
Next will be our strategy for RRP. As RRP is expected to expand further, particularly in HTS, it is therefore extremely important that we invest to strengthen our presence in this crucial category for the future growth of the JT Group earnings.
From an operating environment perspective, we believe that consumer demand for RRP will continue to increase, notably for HTS. 2023 plan give us much better confidence and visibility on our supply of devices for the upcoming years despite the semiconductor supply shortage.
In major HTS markets, we also expect competition to intensify. We anticipate regulatory developments to evolve. As explained earlier, we will prioritize our investment towards HTS in particular. Through these investment, we will accelerate the geo expansion of Ploom X and expand the HTS segment share of Ploom.
In addition, we are sharing feedback from consumers in each market globally and utilizing the data for R&D, marketing and other purposes to continuously improve our products and further strengthen our capabilities.
Before moving to our other business segments, let me reaffirm our strong focus on the RRP category during business plan 2023. As mentioned earlier, we plan to expand our HTS category shares in key HTS markets to the mid-teens level by 2028 and breakeven in the RRP category.
In order to realize this ambition, we will accelerate geo expansion starting with the launch of Ploom X in the U.K. in October 2022 and in Italy in April 2023. Over the two-year period of 2023 and 2024, we plan to enter more than 20 markets. In addition, we will aggressively invest in marketing in HTS to support the geo expansion.
Next, let’s move to the pharmaceutical and processed food businesses. Starting with the pharmaceutical business. It’s our understanding that the environment around the pharmaceutical business will remain challenging as drug prices continue to decline in both Japanese and overseas markets, reflecting the optimization of drug costs on a global scale. Inside JT, we are also projecting a gradual decrease in royalty income related to anti-HIV drugs. At the same time, Torii Pharmaceutical has recently delivered steady growth in the sales of drugs for allergies and skin disease.
In 2022, we saw a consistent pipeline development, including receiving approval that JW Pharma Company Limited, a licensee for ENAROY tablets received marketing authorization in South Korea. In January 2023, CORECTIM Ointment was approved for the treatment of atopic dermatitis for the treatment of infants.
We will continue to improve our drug discovery capabilities by enhancing research teams and innovating the drug discovery process. We will also work to enhance our business fundamentals by collaborating with Torii Pharmaceutical to maximize product value and strengthen in-licensing activities.
Next is the processed food business. In the processed food business, the processed food category in which JT Group mainly operates continues to expand. On the other hand, we believe it is necessary to continue to closely monitor the impact of fluctuations in international markets and exchange rates on raw material costs and the rise in personnel and logistic costs caused by labor shortages and other factors.
Against this backdrop, in the processed food business, we will steadily implement price revisions in response to the current surge in raw materials prices, mainly in the frozen and ambient foods segment. At the same time, we will transform into a highly-profitable business structure by strengthening the allocation of resources to high value-added product groups, thereby achieving sustainable profit growth. In addition, we will accelerate our efforts to grow our business from a long-term perspective and promote the creation of customer value with an eye on the future of food.
We will ensure that both pharmaceutical and processed food businesses will complement the profit growth for the group by following the basic strategies we’ve set for them.
Let me move on to the topic of our initiatives for sustainability. Sustainability initiatives are very important to support the long-term growth of our business and those are clearly in line with the 4S model, our management principle. To deliver success, myself, as the CEO, and the Board of Directors engage in setting targets, discussing specific initiatives to achieve them and monitoring the progress of the related initiatives, all with firm commitment.
Let me highlight some of the progress made in 2022. In February last year, I explained our new greenhouse gas emissions reduction targets out to 2030. The target for Scope 1 and 2 emissions is now validated by the Science Based Targets initiative as being in line with the latest climate science and 1.5 degrees pathway. Climate change is an issue needing immediate attention globally and the JT Group will strengthen initiatives to achieve the validated target and contribute to realizing the decarbonization of society.
Our sustainability initiatives are also well-recognized and the JT Group has been included in the international recognized Dow Jones Sustainability Asia/Pacific Index for the ninth consecutive year. We believe that our inclusion in the index is the result of our earnest efforts to address ESG issues across our value chain. Another example of external recognition is the selection for CDP Climate A List, which has materialized for the fourth consecutive year.
From 2023 onwards, we will further strengthen our sustainability framework and initiatives in line with the JT Group Purpose. We have initiated work to update our materiality topics for sustainable growth and also revise our value-creation process to link the values the group will provide in the JT Group Purpose.
Some of the outcomes will be explained in our next Integrated Report 2022 that is planned to be issued in June this year. For the JT Group to continue delivering long-term growth, it is essential that we contribute to social progress through our business activities. We are taking actions to enable the society and the JT Group to grow sustainably based on dialogues with our stakeholders and in line with the JT Group Purpose.
Next, let me outline our policies on resource allocation and shareholder returns. Our resource allocation policy will remain unchanged. We will prioritize investment in businesses that are conducive to sustainable profit growth, the tobacco business in particular, based on our 4S model.
While maintaining our targeted payout ratio of around 75%, we will work to improve shareholder returns through continuous profit growth over the mid- to long-term. To that end, we will continue our efforts to expand adjusted operating profit at constant currency. The dividend for 2023 is proposed to be JPY188 per share, in line with our shareholder returns policy.
In closing, please see Slide 20. In 2022, the year continued to be a year of high uncertainty, including changes in society and consumer behavior due to COVID-19. Nevertheless, we were able to realize record high profits, thanks to the strong momentum, particularly in the tobacco business. Based on our new business management structure, we continue to make consumer-centric thinking and actions, the starting point of all of our work, and we have further promoted the maximization of group-wide use of resources and the emphasis on faster and more flexible decision-making.
In 2023, we will continue to strengthen our global organizational capabilities through business investment and aim for sustainable growth over the mid- to long-term. In addition to ensuring the flexibility of our business strategy for the future, we will steadily improve shareholder returns through sustainable growth of profit over the mid- to long-term, in line with our shareholder return policy, which targets a dividend payout ratio of 75%.
On May 8, we will hold a Tobacco Investor Conference to explain our future growth-oriented tobacco business, including our efforts to achieve our ambitions for HTS through 2028.
Together with social change, we have formulated a JT Group Purpose to provide value in the form of fulfilling through a variety of corporate activities that are more evolving. To make it happen, we will evolve all kinds of initiatives and activities to realize JT Group Purpose.
Following through on the 4S model as our fundamental management principle, I will strive to keep the JT Group evolving, so that it will continue to offer products and services that exceed consumer expectations and continue to be desired by our consumers, shareholders, employees and society at large.
Thank you very much for your attention. Now, I will hand over to JTI’s CEO, Eddy Pirard, for an update of the tobacco business.
Eddy Pirard
Thank you, Terabatake-san, and good afternoon to you all. It is my pleasure to present today the 2022 full year results of JT Group’s tobacco business, combining for the first time the former international and Japan domestic tobacco businesses.
Let me start by saying that I can only echo Terabatake-san’s words on Turkey and also on Ukraine.
I will now review our 2022 performance followed by Business Plan 2023 key assumptions. In 2022, the tobacco business fully delivered on its role as profit growth engine for the JT Group, overcoming the numerous challenges, including the Russia-Ukraine war and the semiconductor supply shortage limiting our HTS expansion plans.
Our total tobacco volume, including all combustibles and RRP products, was broadly stable, fueled by sustained market share gains in our top 30 markets. Coupled with solid pricing, this performance drove our strong top-line growth, resulting in a robust adjusted operating profit increase.
We began the year with the One Tobacco integration, unifying our tobacco businesses and building a stronger and more united organization. The drive and energy of our employees around the world was a fantastic success driver. The One Tobacco integration consolidated our expertise and knowledge globally, established greater collaboration, faster decision-making and further enhanced our business fundamentals. Our global tobacco strategy is at the heart of all our initiatives. We drive earnings with a dedicated focus on combustibles ROI, profitable share gains and growing revenues in our combustible business fuels our investment in HTS.
Let me take you through our market share performance on the next slide. Our consumer focus, strong execution and excellent engagement with the trade delivered another year of market share gains in the combustibles category globally and in HTS in Japan.
In combustibles, we grew share 0.6 percentage points to 35.6% across our top 30 markets, including in our key markets of Italy, the Philippines, Spain, Taiwan and Turkey. Two-thirds of our top 30 markets grew share with progress in both cigarettes and fine-cut tobacco.
In cigarettes, we grew our share in the mid-price segment, where Winston continued to register gains and in the value price segment where Camel kept its growing momentum. In fine-cut, we strengthened our leading position, notably with Winston, Camel and Sterling in the U.K.
Global flagship brands were a key contributor to share gains in combustible, reaching a record high share of 24.8% across our top 30 markets, increasing 1.3 percentage points. Global flagship brands grew share in 24 of our top 30 markets, led by Winston and Camel. Several new launches like Camel Craft and MEVIUS E series in Japan supported the share growth momentum. I will expand on these new launches later in the presentation.
All in all, the continued share performance is a result of long-term sustained and focused investment strategy based on deep and relevant consumer insights, leading to a well-laddered portfolio of strong brands.
Our share gains bolstered our business with total volume declining by only 0.5 percentage point. This performance was fueled by a limited combustible volume decline of 0.7%, outperforming an estimated industry decline of 1.5% across our markets, combined with double-digit RRP volume growth. More than 60 markets grew volume and over 10 markets delivered an annual volume growth of at least 0.5 billion units.
GFB volume grew by 1.9 percentage points, mainly driven by Winston and Camel, which grew double-digit in more than 30 markets. Poland, Iran, Italy, Turkey, Tanzania and Brazil were the largest contributors to Winston growth, while Russia, Indonesia, the Philippines, Morocco, Spain and Japan drove Camel performance. LD and MEVIUS grew in more than 10 markets.
Importantly, RRP was our fastest-growing category in terms of volume, albeit from a small base as we made significant inroads into the HTS segment in Japan. The investments behind HTS are enhancing our total volume trend in line with our global tobacco strategy and we expect this trend to accelerate as of 2023 as we continue with our investments and expansion plans.
Let’s move on to pricing. Once again, the resilience of a combustible pricing model was amply demonstrated in 2022. In a challenging environment, we generated a record JPY140 billion in favorable price/mix variance to core revenues. This is above our 2018-2021 average and compensated for the unexpected cost increases due to the macroeconomic and geopolitical environments.
In terms of pricing, all clusters contributed positively to core revenue growth. In EMA, the main drivers were Russia, Turkey, Romania and Poland. In Western Europe, the U.K. and Germany were key. And last but not least, Japan and the Philippines, which fueled positive variances in Asia. In terms of mix, the unwinding of COVID trends, notably in the U.K., and ongoing downtrading partially offset the pricing contribution. While this was true for most markets, we also witnessed uptrading trends as was the case of Turkey and Taiwan.
Let’s now review the performance of our new clusters introduced with the unification of the two tobacco businesses. Beyond pricing, which I’ve just mentioned, all clusters contributed to growth in 2022, both in terms of combustible shares and adjusted operating profit. Core revenue and profit growth was widespread across our footprint, with more than 65 markets growing both financial metrics.
In Asia, we strengthened and broadened the base of markets contributing to growth with the support of our GFBs. The Philippines and Taiwan reached new highs and we also registered record market share and profit contribution in markets like Cambodia and Malaysia.
In Western Europe, we grew top and bottom line despite the unwinding of COVID-19 trends. This positive performance was driven by strong price/mix and combustible share gains in France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Spain and Switzerland. Beyond our key markets in the cluster, Germany continued to deliver a solid performance, fueled by GFB market share gains and core revenue growth driven by excise tax-led price increases.
EMA, our largest cluster, was the strongest contributor to core revenue and AOP growth, both increasing double-digit. This growth was fueled by strong volume performance with more than 50 markets in the cluster growing volume and global travel retail progressively recovering, all of this coupled with robust price/mix.
Another success story outside the key markets was Poland, where we grew market share by 1.2 percentage points, entirely driven by our GFBs. This, coupled with an improved industry volume and pricing, led to solid core revenue and profit growth in 2022.
Let me turn to our key markets now, starting with the U.K. In 2022, we maintained our undisputed market leadership through a balanced approach in managing share and profitability. This is the result of over a decade of investments and great execution by our U.K. team to strengthen our leading position, both in cigarettes and fine-cut.
Benson & Hedges, the Number One brand in cigarettes, grew market share by more than 8 percentage points over the last five years. Amber Leaf and Sterling, respectively first and second brands in the fine-cut tobacco, category grew by 3.7 percentage points.
In combustibles, we grew share by almost 5 percentage points to 45.1%. Over the same period, our core revenue in the U.K. increased by 19%, driven by robust pricing and the share gains just mentioned, which offset the industry volume decline.
On the topic of industry volume contraction, I would like to stress that although the decline was significant in 2022 due to the unwinding of COVID trends, the overall trend has not changed. When looking at the average combustibles industry decline over the last three years, this was equal to minus 1.1%.
We have also strengthened our offerings in the value segment to address incremental consumer demand by launching two new products in April 2022, Mayfair Silver in cigarettes and Benson & Hedges Blue in fine-cut. In heated tobacco, we launched Ploom X in London at the end of October last year, and early consumer feedback is positive.
Our strengthened portfolio and excellent trade relationships led to encouraging combustible share trends over the last months. Going forward, you can rest assured in our capability to grow earnings in the U.K. while maintaining our market share leadership.
Moving to the Philippines, where back in 2017, we acquired the assets of Mighty Corporation, immediately boosting our market share from 7% to 29%. The acquisition also allowed us to gain leadership in the value segment with the local brands Mighty and Marvels and to triple the number of point of sales served in what is a complex geography.
But it was only the start of our growth journey. From there, through focused investment and strong execution, we grew our share organically by approximately 8 percentage points to around 37%. This growth was driven mainly by Winston, now the third largest brand in the Philippines, supported by a well-articulated portfolio addressing all price segments.
Importantly, Winston share gains were delivered while its pack price more than doubled over the period. This performance drove significant core revenue and profit growth despite a fiercely competitive environment. Going forward, we are confident in our ability to maintain our market share and continue to drive a positive top- and bottom-line performance.
Turning to Japan, where the combustibles industry volume continued to decline due to the impact of tax-led price increases, although at a slower rate than the previous year. In addition, post the excise tax equalization impacting the little cigar segment in October 2021, downtrading did not slow, but shifted from adult consumers moving into little cigars to buying value cigarettes. To address this new trend, we strengthened our portfolio in the lower price segment with the launch of Camel Craft.
Camel Craft truly represent the Camel brand spirit, a unique equity at the right price for consumers. In only six months, Camel not only became the Number One brand in value, but exited the year as the Number Two combustible brands in the country. We also strengthened the Number One position of MEVIUS with the E series expansion in the mid-price segment. This new series more than doubled its share versus the start of 2022. More recently, we extended the E series to the low tar and super slim segment to broaden its appeal to a larger adult consumer base. More of such initiatives are in the pipeline.
Looking back at 2022, we’ve enhanced our leading positions in all three price segments of the Japan market. And we’ve exited the year with a market share of 60.4% in combustible, 3 percentage points above last year in January, a strong recovery, which we are confident will continue in 2023, and a testimony to our colleagues in Japan who are committed to defend and grow our strong local combustible franchise.
In Japan, not only did we strengthen our leadership in combustibles, but the launch of Ploom X provided a step change in our performance in HTS. Ploom X is our first truly global product and almost important launch in several years. In Japan, our first Ploom S device was launched in 2019, followed by the second generation in 2020 and a completely new device, Ploom X, launched in August 2021, an accelerated journey with major upgrades along the way, both in relation to devices and to consumables.
The innovations of Ploom X, including our proprietary air flow system significantly improved the consumer experience and translated in significant share gains in the HTS segment, growing from 3.2% before the rollout to reach 8.2% in December last year. More importantly, retention rates increased since launch, highlighting the competitiveness of our offering. This was enhanced by the introduction of new flavored SKUs, promotions in response to aggressive offers prevailing in the market, best-in-class customer care as well as the improvement of the Ploom X CLUB.
The Ploom X CLUB is part of our e-commerce platform, offering a personalized experience based on each adult consumer preferences. A points-based system allows consumers to unlock promotions and participate to initiatives accessible only to CLUB members. A subscription model is also available and gaining increasing traction. The Ploom CLUB is just one example of the benefits resulting from our enhanced capabilities that now encompasses both the digital and physical retail space. More investments are ongoing in this direction, and we will keep you updated on key achievements.
With its increasing success in Japan and targeted launch in London supported by great retention rates across the board, Ploom X is now ready to move to the next stage of its expansion plan. In 2023, we will accelerate the Ploom journey with the aim to become a global power brand with the planned launch of Ploom X in more than 10 markets
You can expect our focus to be on established HTS markets where we can benefit from existing high levels of category awareness among adult consumers. This focused investment strategy will allow us to optimize our investments compared to markets where larger resources would be required to inform and convert other consumers to the HTS category.
You can expect the rollout to be skewed toward the second half of 2023 as we build inventories of devices following the availability of the semiconductor supply. We intend to maintain the launch pace in 2024 with further launches planned in 10 additional markets. This accelerated expansion plan builds on a global tobacco strategy, which prioritizes HTS among RRP segments.
The Ploom geographic expansion is just one pillar of our HTS investment strategy. Equal focus is placed on enhancing our internal capabilities with strategic investments, product innovation, R&D, science and consumer acquisition and retention to dramatically scale up our competitiveness in HTS. We will share more details during our upcoming May Tobacco Investor Conference.
In closing, all in all, I believe that the first full year results of the unified tobacco business were excellent across the board and quite promising. Despite the challenges and disruptions, we exited the year stronger than when we started. Stronger with a more cohesive global tobacco business, stronger with more success in both combustible and in HTS. These achievements paved the way for further growth over our three-year business plan.
Let me start by sharing our 2023 focus areas. In RRP, our focus this year is on driving additional HTS share gains in Japan and rolling out Ploom X in more than 10 markets. As shared earlier by Terabatake-san, we are in an accelerated investment phase to achieve our ambition in RRP. This requires significant marketing support and internal investments considering the already intense competitive environment in this category.
In combustibles, which will continue to provide the fuel for the HTS investments, our focus in 2023 is on top-line growth and driving return on investments through continued profitable share gains, GFB equity building and optimized pricing opportunities. As a matter of fact, we have already announced or secured 60% of our pricing for the year.
Kato-san will provide more details on the 2023 guidance in this presentation, so let me turn to the mid-term outlook. We expect total volume to be stable over the next three years with continued market share gains expected to partly offset industry declines in combustibles. In RRP, growth in HTS is forecast to drive a double-digit volume increase. Over the Business Plan period, core revenue is expected to increase mid-single digit with combustible pricing remaining a key driver for growth, supported by increased RRP revenue contribution to the top line.
Adjusted operating profit is forecast to grow low single-digit over the three-year plan with stronger growth towards the end of the period. This reflects higher RRP investment in the initial years required to compete in this category. The Business Plan is a clear testament of our commitment to accelerate growth in HTS and progress towards our RRP ambitions while remaining focused on performance in combustibles.
Rest assured that we will continue to grow returns from the combustibles business, which will not only remain the largest and most profitable category for many years to come, but also which will fund our efforts in RRP.
Thank you for your attention and interest in the tobacco business. I will now hand over to Kato-san for the review of the JT Group financial results.
Nobuya Kato
Thank you, Eddy. I am Nobuya Kato, Chief Financial Officer of the JT Group. I will explain our consolidated financial results for 2022 and share details regarding the outlook for 2023.
First, let me explain our consolidated financial results for fiscal year 2022. Please see Slide 4. Our adjusted operating profit at constant currency, our primary performance indicator, increased 9% year-on-year, driven by the tobacco business. As Eddy mentioned, the main driver of the tobacco business’ profit growth was the strong pricing contribution, enabling us to overcome the challenging operating environment, such as increasing energy prices and worldwide inflation. As a result, we achieved record high revenue, AOP, operating profit for continuing operations and profit for continuing operations.
Revenue on a reported basis increased 14.3% year-on-year, fueled by the strong top-line growth in the tobacco business and the significant depreciation of the Japanese yen, as well as increased revenue in the pharmaceutical and processed food businesses.
AOP was also positively impacted by the revenue growth and the significant Japanese yen depreciation, resulting in a 19.2% year-on-year increase. Operating profit jumped 31% year-on-year, reflecting the AOP increase and the favorable comparison to 2021 from the absence of one-time costs related to initiatives to strengthen our competitiveness in Japan and the lack of compensation payments to retiring Japanese leaf tobacco growers.
Profit increased 30.8% year-on-year as the increase in operating profit fully offset higher financing costs.
Free cash flow decreased by JPY99.1 billion compared to the previous fiscal year, despite a significant increase in AOP. This decline was due to a deterioration in working capital, higher corporate income tax and payments related to onetime costs associated with initiatives to strengthen competitiveness in Japan.
Next, let me move on to the results for each business segment, starting with the tobacco business. Please refer to Slide 5. Eddy has explained our market share and volume performance in detail. So, I’ll focus on the financial figures on a reported basis, including FX impacts.
During 2022, strong pricing contributions from all clusters significantly outweighed the impact of an unfavorable market mix across the tobacco business as well as an unfavorable product mix associated with downtrading and higher input costs within the supply chain. The depreciation of the Japanese yen further boosted our performance, resulting in strong growth on a reported basis. As a result, both core revenue and AOP increased, achieving double-digit percent growth.
Next, I will explain the results of our pharmaceutical and processed food businesses. Please see Slide 6.
Starting with the pharmaceutical business. Revenue increased year-on-year, driven by sales growth at our consolidated subsidiary, Torii Pharmaceutical, from CORECTIM Ointment in the area of skin diseases, CEDARCURE, Japanese cedar pollen sublingual tablets, and MITICURE House Dust Mite Sublingual Tablets in the area of allergens, despite the lower onetime income from the licensing of patented JT compounds and lower overseas royalty income. AOP was broadly stable as the revenue growth was mostly offset by increases in R&D expenses at Torii Pharmaceutical.
Turning to the processed food business. Revenue increased compared to the previous fiscal year due to price increases in response to rising costs in the frozen and ambient foods business, seasonings business and bakery business as well as sales growth in household products and the recovery of food services products in the frozen and ambient food business. Despite top-line growth driven by price increases, AOP declined from the previous fiscal year due to soaring raw material and utility costs as well as negative foreign exchange effects and the unfavorable comparison of a one-time income item resulting from an insurance claim recorded last year.
Turning to our business forecast for fiscal year 2023. Before explaining the consolidated financial forecast, I would like to reiterate the current state of the Russian market. Please see Slide 8.
Regarding Russia, while the operating environment remains very challenging, we continue to manufacture and distribute our products in compliance with applicable regulations and international sanctions. Also, as announced in March 2022, we have suspended all new investments and marketing activities in Russia. There have been no changes in our stance. We will continue to take all necessary decisions in response to changes in circumstances and in accordance with our management philosophy guided by our 4S model.
In fiscal year 2022, the Russian market accounted for approximately 11% of revenue and approximately 22% of AOP in our consolidated financial results. In the consolidated forecast of 2023, which I will explain in more detail shortly, the Russian market will account for approximately 11% of revenue and approximately 25% of AOP. In 2022, the Russian business included a temporary increase in costs due to the impact of sourcing changes and other factors. As a result, we expect 2023 to account for a higher proportion of AOP than 2022 results.
I would like to conclude on Russia by mentioning the sensitivity guidance for the Russian ruble. If the Russian ruble moves by 1% against the Japanese yen, it will have approximately more than JPY2 billion impact on our AOP.
Please see Slide 9. First, I will explain the consolidated financial forecast. In the tobacco business, although we expect pricing benefits to continue, we forecast earnings growth will be limited due to the ongoing impact from higher input costs related to global inflation and our plans to accelerate investments in RRP, particularly in the HTS. As a result, AOP at constant FX, our primary performance indicator, is expected to be flat year-on-year.
Despite the anticipated increase in revenue in the pharmaceutical business, revenue on a reported basis is forecast to decrease by 1.1% year-on-year due to the negative impact of exchange rates on the tobacco business. Similarly, AOP on a reported basis is expected to decrease by 8.4% from the previous fiscal year due to the negative impact of exchange rates on the tobacco business, more than offsetting the anticipated increase in income in the pharmaceutical and processed food businesses.
For reference, we estimate the negative FX impact on the AOP will be approximately JPY60 billion for the entire year. Operating profit is expected to decrease by 6.4% year-on-year due to the decrease in AOP, partially offset by lower trademark amortization. Year-on-year profit is expected to be stable at JPY440 billion as improvement in financing costs will partially offset the decrease in operating income.
Although we expect lower AOP and an increase in capital expenditures, the favorable comparison to 2022 from the absence of payments related to initiatives to strengthen our competitiveness in Japan and the lower corporate income tax, free cash flow is expected to increase by JPY19.1 billion to JPY402 billion.
Please look at Slide 10. I will explain the forecast of each business. First, we will focus on the volume outlook of the tobacco business. In fiscal year 2023, we expect combustible share momentum to remain solid across our footprint. We also anticipate growth in combustibles volume in emerging markets and continued volume recovery in global travel retail. And RRP sales volume is also expected to increase, particularly in Japan. However, the decline in combustibles industry volume in our key markets, such as Japan, the Philippines, Russia, the U.K. and other countries will offset these positive effects. As a result, total volume included both combustibles and RRP is expected to decrease between 1.5% to 2.0% year-on-year.
On the revenue side, while combustibles volume in key markets is expected to decline and the product mix is expected to deteriorate due to continued downtrading, the pricing environment will remain robust. As Eddy mentioned, we have already announced or implemented 60% of the planned pricing for this year. In addition, RRP-related revenue is expected to grow. As a result, core revenue at constant FX is expected to increase by 2.2% over the previous year.
AOP at constant FX is expected to be broadly stable versus the previous year as the top-line growth will be offset by the impact from higher input costs and increased investments associated with the geographic expansion of HTS.
Regarding reported figures, including the impact of exchange rates, both core revenue and AOP are expected to decline year-on-year due to FX assumptions foreseeing an application of the Japanese yen.
On Slide 11, I will explain the forecast for the pharmaceutical and processed food businesses. Revenue in the pharmaceutical business is expected to increase due to a one-time income from the licensing of patented JT compounds and the revenue growth at Torii Pharmaceutical more than offsetting lower overseas royalty income. AOP is expected to increase fueled by the revenue growth despite the anticipated increase in R&D expenses.
For the processed food business, despite top-line growth due to price revisions in the frozen and ambient foods business and seasonings business in response to higher cost, revenue is expected to decrease due to the impact of the absence of sales in the bakery business, which was transferred on December 1 of the previous year. On the other hand, AOP is expected to increase despite the negative impact of the transfer of the bakery business as the price increase benefits implemented in 2022 and those planned for 2023 outweigh the negative impact of raw material and utility costs, which are expected to increase in 2023.
In closing, please see Slide 13. In fiscal year 2022, despite a challenging operating environment, we significantly exceeded our initial plans, delivering great results, driven by the strong pricing in our tobacco business and continued gross and combustible shares. We have achieved record high profits driven by the business momentum, also supported by the depreciation of Japanese yen. In fiscal year 2023, we will strengthen our investments in RRP, focusing on the HTS segment to establish the foundations for the JT Group’s future earnings growth.
The operating environment is expected to remain challenging. We anticipate a solid pricing contribution from the tobacco business, increasing input costs over the period and foreign exchange rates headwinds versus 2022. In this environment, we expect to secure the same level of AOP at constant FX as previous year through pricing and cost efficiencies.
Let me end my presentation with shareholder returns. Based on our shareholder returns policy, we plan to pay a dividend of JPY188 per share for 2022, a dividend payout ratio of 75.4%. For 2023, as Mr. Terabatake has explained, we plan to pay JPY188 per share, a dividend payout ratio of 75.8% in accordance to the target ratio of about 75% based in our shareholder returns policy.
This concludes my presentation. Thank you all very much for your attention.
Question-and-Answer Session
Unidentified Company Representative
Thank you all. We’d like to now start the Q&A session. Let me introduce you to the speakers who will take your questions, Mr. Masamichi Terabatake, CEO of the GT Group; Nobuya Kato, CFO of the JT Group; Eddy Pirard, CEO of JTI; and JTI CFO, Vassilis Vovos.
[Operator Instructions] Due to time constraints, we would like to ask each person to ask only one question each. We may not be able to take all the questions. We hope you understand. Thank you for waiting.
Let me introduce the first person from Daiwa Securities, Mr. Morita, over to you.
Makoto Morita
This is Morita from Daiwa. Thank you for taking my question. Regarding your RRP strategy, I would like you to share with us your thoughts. Smoke-free future, your competitor has a very focused strategy. And you have also been saying that you are going to increase your investments in your presentation. However, combustibles are still expected to support a large part of your profits. So, with that in mind, are you going to continue to be behind your competition? Will you be able to catch up with them? What is the determination of your management?
And you’re going to be investing in three years JPY300 billion, according to your presentation. How did you decide on the JPY300 billion number? Are you really going to be able to compete well against your competitor? Are you seriously going to be able to catch up to your competition in the RRP category?
Unidentified Company Representative
Thank you for your question. Regarding our determination towards RRP as well as the decision-making process towards the investment, our President, Mr. Terabatake, will take that question.
Masamichi Terabatake
Thank you for your question. First of all, for combustibles and RRP and how we are going to strike a balance between the two and how much of a determination are we going to have around RRP, it’s the overall picture basically you’re asking about.
Regarding competitor strategy, we are not in a position to speak about it. But like Eddy explained, for combustibles, we believe that in the next 10 years, they will still continue to be a main part of our profits. I presume that when you look at the P&L of our competitor from a profit point of view, I still believe that combustibles are generating a large part of it. That’s what we believe. And also in the tobacco business, it continues to be the main pillar. So, of course, if that pillar becomes unsteady, we won’t be able to invest into the RRP business well.
So, like we explained, we continue to see good momentum and we expect our profit growth to be sustained, and we will also focus on ROI, so that we will be efficient as well as effective in our business management. We would like to ensure that we could generate funds that we can use for investments.
And talking about RRP and its future, in the past several years, we have been integrating our R&D functionalities. We have also integrated our tobacco business, so that we could be competing with our competitors for RRP on a global scale. And we also developed a global model of Ploom X, and we launched it from August 21 in Japan. And as you can see, we have gradually been seeing signs of growth. And when you listen to feedback from consumers as well as the reinforcement of digital capabilities, we have been reinforcing our R&D capabilities to date. And finally, from 2023, we will be rolling out this business globally, even more.
To say a little more, for 2022, it’s true that in Japan, we have been able to grow HTS share of market. But in 2022, regarding the investments into HTS, there were some constraints regarding semiconductor procurement. So, we weren’t at 100%. So, we had to control our investments by a certain degree. But from 2023, we won’t have that obstacle any longer. Therefore, we can be even more proactive even in Japan to promote sales going forward, and we would like to ensure that we capture market share.
And we have been learning from Japan for the product, and we would like to ensure that our learnings are applied to the launch that is planned for Europe. Last month, I was in the U.K., and I want to see how Ploom X and its launch was doing about and it seemed that the learnings in Japan were applied well. So, so far, things have been going well. And in April, we will be launching the product in Italy. So, we have gained more visibility into the global rollout. So, personally, I am — I have the conviction of being successful.
So, regarding how we built up the plan for JPY300 billion worth of investment, the capabilities we have this year or we decided on the priority markets and we looked at the procurement of devices and decided on the volume, put together a marketing plan and then built our three-year plan. And that added up to an aggregate of approximately JPY300 billion. And of course, this will be reviewed on a rolling basis. So, the investment is worth JPY300 billion or more, like Eddy said.
In the first half of the three years, meaning this year and next year, we would like to use a good amount for marketing purposes. So, whether we are going to be able to be comparable as competitors or not, is that in each of the markets we would like to ensure that we leverage the investments. So as to first, grow our share, I think it all comes down to that. And the program that we are poised to launch, we would like to ensure that, that will lead to market share gains, which we believe will happen. And for details, and from the tobacco business, we will give you details in May when we have the meeting.
But that is the overall picture from my standpoint. So, if Eddy would like to follow up on my point, please go ahead.
Eddy Pirard
Thank you, Tera-san, and thank you for the answer. And Morita-san, thank you for the question. This is a question that indeed we do get from time to time. And I think it’s important enough to try to stress and help everyone understand exactly what stands between the combustible and the RRP category.
The question is very much, is it meaningful to pursue a strategy in combustible? Not only as we explained in the presentation, is the role of combustible quite important in the overall mix as a way to fund the transformation into an RRP demand by consumers. We are very far from being exclusively a combustible company, as you can appreciate from the plan that we have laid out in front of you.
And the JPY300 billion that was mentioned and that Terabatake-san explained, indeed will be very much in support of the geo expansion. The way we do build up those numbers are very much bottom-up with a sense of direction from the center, which means that market by market, we are ensuring that we’ve got the adequate level of resources that is required to compete given the specifics of the markets in which we go.
And as Terabatake mentioned, we’re very much a strategy that’s focused on priority markets. We will be focusing on markets where the awareness, the existence of the category is there, meaning the efficiency of our route to market, leveraging our infrastructure, leveraging our good brands and infrastructure in the market in general, the trade relationships that we have will help us be as efficient as possible. We always leave the possibility for markets to ask for more if the results demonstrate the need for more or if the competitive landscape evolves. But as of today, we are confident that the resources being put over the planned period for the development of the category is going to be quite important.
I think it’s useful to also revisit a little bit the progress that we’ve made in Japan in the area of RRP. We have grown over the last year our share of sector in RRP. Do we wish that we grow faster? Yes, we do. Are we content with the progress that we make? Very much so. We had an environment which was constrained by the supply of the microchips that we discussed before. But we were very much focused on consumer understanding and insights on learning about route to market and how to best operate an entry into a market, sophisticated market and competitive market like Japan. And all this learning will be deployed in international markets, starting with the U.K. and last year and now going into Italy and other markets. The rollout in about 20 markets plus over the planned period, I think it’s quite ambitious, will be targeted and well-funded. I hope that gives you another dimension on that strategy. Thank you.
Makoto Morita
Looking forward to that. Thank you very much.
Unidentified Company Representative
Thank you, Morita-san. We would like to introduce the next person from Citigroup Securities, Mr. Miura, please.
Nobuyoshi Miura
Good evening. This is Miura from Citigroup. Can you hear us?
Unidentified Company Representative
Yes, we can hear you.
Nobuyoshi Miura
Thank you very much for the opportunity. So just to more of a fundamental question. In terms of tobacco industry and the JT’s sustainable growth, this is my question related to. So, perhaps for the next 10 years or so the cash cow in combustibles, you can still generate profit from there through the pricing strategy, and you can probably invest in HTS. So, perhaps there is a stability for the next 10 years. However, the question is HTS may not be so profitable, and if we see increase in the proportion of HTS within the sales. So perhaps at one point profitability of tobacco industry and also for JT may actually start to come down. It could be 20 years out or it could be 30 years out, I’m not quite sure. But I do have a question about the sustainability of the profitability of HTS into the future. So, am I wrong in suggesting that? So, I’d like to hear from Terabatake-san, if you can give us your explanation, your thoughts?
Unidentified Company Representative
Thank you very much. So, the sustainability of tobacco industry and the sustainability of profitability, so Terabatake-san would answer that.
Masamichi Terabatake
Thank you very much for that really challenging question. So, within our mid- to long-term strategy, we have been discussing that on a rolling basis, 10 years, 20 years, 30 years out, how sustainable can we grow our business. So, we have been conducting continuous discussion on that. And as Miura-san just mentioned, we would like to pursue combustibles growth as far as we can. By 2028, we are trying to make the HTS business a break-even.
So, the gross margin you may perceive that as low in terms of gross margin for HTS. However, we do not see it that way. Because once we go over the break-even point, we shall see more of the profit figure increase. So, in addition to combustibles, HTS profitability will be an add-on on top of the combustibles. So, we do believe we can continue our growth.
But in terms of the sustainability, how perpetual could that be? Would that go up for another 30 years? At this point, of course, I’m not — I cannot give you with confidence that we can. But let’s just say, 10 years, 15 years, 20 years, I would say, in terms of the nicotine business and within the tobacco business, we should be able to grow quite steadily. We do have that picture for that time frame. Of course, it really depends on the market. For Italy, Poland, for instance, even as we speak today, HTS gross margin in comparison to the market share, it’s still quite — it is already significant. So, these markets, we would like to strategically address these priority markets.
So, in all the cigarette selling markets, we do not intend to sell HTS, not at the all markets. But we would like to make it the second pillar within the tobacco business, so it can assist in the growth or drive the growth of the company. That is our plan right now. So that is our mid- to long-term plan. So what I can share at this point, 10, 15, 20 years’ timeframe, with confidence, we can say within the tobacco business, we would have combustibles in HTS. It will be the main pillars to grow the profit for the company. So, at this particular moment, we do have that picture ahead of us.
Nobuyoshi Miura
Thank you very much. That was very educational. Also, just additional question from my end, Russia. So, you have been disclosing in a fair manner within your IR activities about the performance in your activities. So, at what point would the profit from Russia start to disappear? Actually, that has been my concern all along. So, what are some of the conditions that you would officially withdraw from the Russian business? What are some of the conditions? So, right now, you’re observing all the regulation. So, the question is whether you can continue the operations in Russia, I’d just like to confirm that?
Masamichi Terabatake
May I? So, in terms of Russia, there are a number of factors we need to consider, what will be the trigger for us to discontinue the operation. So, it’s hard to tell it will be a single event. To be honest with you, there is no single trigger that would start that. So right now, from the perspective of supply chain, it is still operating in terms of the sourcing of the raw materials. We’ve been able to do that. And also, the cash settlement, we’ve been able to do that also.
So, the sanctions that we are seeing, of course, there’s been an upgrade of different functions, and we have been complying with the sanctions and regulations so far. So, at this point, no, we do not perceive that we need to discontinue the operation in Russia. In fact, even as we speak today, we are not anticipating any specific events that would discontinue our operation of Russia. So, did I answer your question?
Nobuyoshi Miura
So is that all factored in the plan?
Masamichi Terabatake
So, I do believe that has been factored already into this year’s plan. So, I do have some comfort in that.
Nobuyoshi Miura
But what if there’s a sudden event, and that would actually bring down your market cap as well? So, if you have any simulations or case studies or any factors that you consider that may potentially hamper the market cap? If you can share those, that will be helpful.
Masamichi Terabatake
Well, rather than specifically looking at different factors, it’s all about how we continue our operation right now. That’s where all our wisdom and ingenuity are going in. So, we are complying all the sanctions, and we are trying to continue our operation. And the workforce, we have established a workforce in Hong Kong, who would be specifically focusing on the operation in Russia. And if we need to separate the operation from JT Group, we have been exploring different scenarios. And how we intend to separate the business, of course, that will pose different impact on our performance.
So, we are looking into those factors, but we are seeing some changes in the sanctions. Also, we may need some approval from the Russian authority. So, every instance, the conditions are changing. So, accordingly, we are conducting a subsequent evaluation of the situation. So, right now, we are not expecting any specific event that may potentially stop our operation. We don’t have that at this moment.
Nobuyoshi Miura
So, if that’s the case, so you’re working hard and complying with the regulations, but the changes are quite dramatic. And of course, there are various issues if you were to separate the business from the JT Group. So, perhaps it’s challenging to make the withdrawal then. Am I understanding this correct?
Masamichi Terabatake
Well, some of our competitors have just announced that they’re not progressing in terms of the initiative. So, of course, it is true that we have been looking into it, but it is not so easy. Of course, it is not impossible. That is not the case.
Nobuyoshi Miura
Well understood. Thank you very much for your answer.
Unidentified Company Representative
Thank you very much, Miura-san. Let me introduce the next person. Mizuho Securities, Mr. Saji, over to you.
Hiroshi Saji
Thank you very much. It might be deviating from our results, but in the U.S. market, I wanted to confirm your stance and expectations towards the U.S. market. With the JV with Altria, they haven’t been offering any additional information lately. But when you think about your profit pool, I think it is a significant market. And when you think about the global, your global business, I think there is a significance to the JV you have with Altria. So, over the short-term and medium-term, can you share your views on what kind of expectations you have towards this market?
Unidentified Company Representative
Thank you very much for your question. It was a question about our stance and expectations towards the U.S. market. So, Mr. Terabatake as well as Eddy will take your question. First is Mr. Terabatake.
Masamichi Terabatake
So, regarding the way we look at our market, I think Eddy should speak about that. But regarding the JV with Altria, the backdrop to that was both CEOs talk to one and another. And in the RRP category, we wanted to be globally Number One together. So that was the overarching framework. And within LOI, upon — agreeing upon the overall framework, we were talking about opportunities for HTS in the U.S. So that’s how things started. So that’s the way to look at it.
So, we will be supplying the Ploom devices and we will be offering the expertise around the manufacturing of it. And Altria, with their Marlboro, they will be providing their Marlboro brand. And together, we will be proving the potential of HTS in the U.S. So that is the meaning for the JV. And instead of going into the U.S. alone because the hurdles are high for that market, we wanted to work together with Altria, which is the leading company in trying to roll out an HTS business.
So, regarding the U.S. market, can Eddy speak about it? Over to you.
Eddy Pirard
Thank you, Tera-san. Let me try to give an additional little dimension. The objective for the U.S. market based on where we are today and given the complexity of the market is to continue to grow our share momentum mainly in the lower end of the market. And it is very hard as an environment to consider any external growth opportunities, as you can imagine. And our focus has been very much on developing and strengthening our presence, building capabilities, building infrastructure over time and the brand equity that allows us to compete. Looking at the latest data, in Q4 ’22, our share of market reached 1.7%. But if you focus on the states where we do operate, we are at 2.4% in the last quarter of last year.
Now as Terabatake-san said, the spirit of the partnership is very much to look at the future, to look at where the opportunities are and how to best leverage those. We have a similar view of the future when it comes to our partner in Altria. And it is really the joining forces of two powerhouses, if you will, that have similar ambitions in the space that bring to the party specific skills, infrastructure. And when it comes to the U.S. market, it’s very hard to compete with the market leader in Altria that covers an environment and a network of 200,000 outlets plus in the market, which is completely out of region on our own and would be completely disproportionate to the business that we can bring in. So, the idea of joining force is to capture that opportunity makes a lot of sense for us, starting with a focus on HTS, which is a new category and what remains the most important RRP market in the world, where we do have hope to continue providing consumers with offers to satisfy their various needs.
So, this is clearly embryonic. We just announced this very recently. There’s a lot of momentum behind this. The first step of the partnership will be, of course, to submit the product for PMTA for premarket authorization. It is very clear to us that this was also in a way, a vote of confidence in the product that we would be bringing to the market, and we’re very much looking forward to joining force to explore more opportunities in the space of RRP be in the U.S. or beyond. But clearly, the initial footstep was to look at the opportunity in the U.S. market. Thank you.
Unidentified Company Representative
Saji-san, I hope that answers your question.
Hiroshi Saji
Well, regarding the JV with Altria, you were also talking about the global perspective. But including joining hands in the RRP category, what are some opportunities in the non-U.S. markets? Have you identified anything?
Unidentified Company Representative
I think, Eddy, JTI CEO, can take that question, opportunities outside of the U.S. with Altria.
Eddy Pirard
Yes, I think that was a pleasure. We are at the early stages of that partnership and we are currently engaged very meaningfully in discussions around the various categories and really without putting anyone on a pedestal, it’s all the categories out of the HTS where we started that exploration. Altria benefits from its own intellectual property development, R&D efforts and initiatives in the space, we have our own, and we are comparing notes as to what is most relevant to satisfy the evolving consumer needs.
As you know, Altria has been particularly active in the area of nicotine patch, for example, this is an area where we are also present. We are always looking at opportunities and consumer insights to see where the market can take us. I think it’s better to just leave it for later. We’ve got something specific to share with you. But at this point in time, there is no limitation into the exploration effort that is covered by the memorandum of understanding between our two companies.
Hiroshi Saji
Thank you. Well understood.
Unidentified Company Representative
Thank you, Mr. Saji. So, I’d like to introduce the next question from Nomura Securities, Fujiwara, please.
Satoshi Fujiwara
This is Fujiwara from Nomura Securities. I have a question related to RRP. So, by 2028, in key markets, will be in the mid-teens. That is the market share that you’re looking at. So, within Japan, the PMI is overwhelmingly strong and the market shares are somewhat fixed. So, I do believe Ploom X share is increasing, but perhaps the growth will be somewhat more gradual. So, I have a question outside of Japan. So U.K., Italy and all the markets that you will be making inroads going forward, the market is at a different stage from Japan. So, what will be the pace of share gains? Would it be much more quicker than Japan? I do believe that is possible. So, what are some of the expectations in terms of the speed of share gains? And also, if you can share with us the current situation after the launch in London, that would be helpful.
Unidentified Company Representative
So, Eddy from JTI would answer that question.
Eddy Pirard
It is very difficult to disclose the pace at which we’re going to capture consumers in those various markets. Each market is specific in each market where we have specific challenges. But clearly, we are ambitious and the ambition by ’28 to have mid-teens in those priority markets, I think, is a good reflection as the pace that is embedded to get to that level. As I said in the presentation, just to reframe, in the concept of the pace of development, the U.K. was very much done in a test market of London and to start with towards the end of last year, generally before — sorry, of last year, apologies. And we will have Italy coming around April, and the markets will be skewed towards the second half of this year. So, it will give you a sense as to when we can expect to see some development of that category.
The U.K. market, it’s still too early to get meaningful feedback. What we can tell you is that we have quickly captured about 60% weighted distribution in key accounts in the London area, which we cover. The feedback from both trade and consumer is quite positive. So we are, I think, meeting our internal milestones, if you will, as to how we deploy it. We are reasonably cautiously bullish about our prospects. We are very happy to see the progress in Japan. We have a lot of improvement has been made to boost the device as well as to the combustible the sticks and the brand’s performance. So, overall, I think that the ambition that we have by ’28 is something that we are confident we can deliver on.
Vassilis Vovos
If I may add just leadership points and give some more granularity on the points that you just mentioned, Eddy. Just to add some granularity, I think the point that in Japan, the situation is very specific is correct, because the establishment of brands has started earlier, competition has been there for a longer time and the consumer habits are stronger and the equity of the competitive brands has been building for a longer time. So, having said that, I certainly believe that we are not speaking about frozen market share. So, we have proven last year that we can grow [Technical Difficulty] market share between the moment of the launched of Ploom X and today, we have moved from 300,000 consumers to 1.2 million consumers that choose Ploom X. We see continuously increasing the number of [indiscernible] consumers among our franchise and to have momentum, as you saw, which continues also in January.
But the question is more what is happening outside of Japan. We have the objective to be in mid-teens, let’s say, something like 15%-plus of our serve category by 2028. As mentioned earlier by Eddy, the markets where we are entering have already a very strong commercial infrastructure. For JTI, we have very strong consumer franchises in these markets and our overall market share is much higher than the 15% that we target in five years. So, overall, I think given also the fact that the equity of the competitive brands is more recent than what we have seen in Japan, we should expect that we can build up this market share in the next five years.
Unidentified Company Representative
Fujiwara-san, did we answer your question?
Satoshi Fujiwara
Thank you very much for that.
Unidentified Company Representative
Let me introduce the next person. SMBC Nikko Securities, Takagi-san — Ms. Takagi.
Naomi Takagi
This is Takagi. Can you hear me? I have a question for President Terabatake regarding shareholder return. Last year you did a huge dividend hike and that came across as a big surprise. And of course, I think that was attributed partially to the currency rate impact, and we really don’t know where currency rates are headed. But if they were to unwind, maybe profits may go below your expectations substantially. But should we be ready to see a dividend cut? Or regarding the currency rate risk, how are you intending on managing the balance between that and dividend? Because you have net cash, you have a strong P&L. So, can you share your views?
Unidentified Company Representative
Thank you for the question. Regarding shareholder return and how we think about the impact from currency rates, Mr. Terabatake will take your question.
Masamichi Terabatake
Thank you for your question. Last year, it’s true that there was a favorable impact from FX, but we were also seeing good momentum from our business as well that led to good performance. So, dividends reached record high levels. And I felt happy to be able to do so. And it seems that at this point, we should be able to maintain that level for this year as well, and we view that as a positive. So, for this year, if rates were to change, whether it be up or down, if they were to go negative and profits were to decline and what we’re going to do in that circumstance.
Regarding the dividend policy, the payout ratio in principle, we’ll look at 75% with the lowest being 70% and highest being 80%. We have been communicating that. We would like to manage our payout ratio in that range. So well, basically following that policy, and we’ll look at where our performance ultimately reaches. However, if profits were to go down and the currency impact were to go negative, and if we — whether or not we are going to pay it out by 85% to 90%, there may be a possibility that we still will pay out dividends even at that level. But of course, that’s what we would like to avoid. And of course, the business side will make efforts. But of course, it’s a matter of where currency rates are going to head towards and we really cannot gain full visibility around that.
Our current assumptions are adopting or close to the current rates we see. We have been conducting an estimate, and we would like to well manage the impact. But in conclusion, if FX were to have an extreme adverse impact, and there may be a possibility that the payout rate may decline somewhat. But is it just going to be due to FX? Or is it going to be because of the business that are performance declines? Regarding the outlook, we’ll need to make a comprehensive decision at the end of this year to decide on the amount of dividends to be paid, but I just wanted to reiterate our policy. Thank you.
Satoshi Fujiwara
Thank you very much.
Unidentified Company Representative
Thank you very much, Takagi-san. The next question comes from Morgan Stanley MUFG Securities, Miyake-san.
Haruka Miyake
This is Miyake from Morgan Stanley MUFG. I also have a question related to RRP. I’d like you to give you a bit more color. So, within the Japanese market, it has been challenging. And of course, the competitors have had longer history, all those we are aware of. But since you launched Ploom X gradually, you are seeing an increase in the market share. So, you have some positive learning that you’ve had in the Japanese market. Also, the subscription model is starting to work. Those are some of the comments that have been shared. So, what are some of the initiatives that have been fairly effective? What were the initiatives that was helpful in growing the market share? That is my question. And how would that be translated into U.K. and Italy? How can we use those as weapons or initiatives from the learning in Japan? So that is the first question.
Also, the second part of my question, when you look at the competitors, you have the device and the refills, the sticks. There has been a perpetual effort for innovation. So, quite frequently, they have been conducting various remodeling, renewal. And perhaps that is important in order to provide a topic and appeal to the market. So, I do believe even from [indiscernible] transition for that, it has been somewhat time-consuming or has taken time. So, going forward, what is the kind of expectation we should have in terms of the turnover or the renewal of the products going forward?
Unidentified Company Representative
Thank you very much. The question about the learning in Japan and the second point relates to the pipeline. So, Eddy, the CEO from JTI, would answer.
Eddy Pirard
Thank you for the question. As you can imagine, the Japanese market has been at the forefront of our learning of the building of capabilities and that as such, it’s pretty much all the touch point in the kind of ecosystem around the RRP category. Our colleagues in Japan have done a tremendous job in trying to better understand what was — what we call impediments to adoption and pain points on a new category development over the years where we were not able to fully compete with a proposition that we felt was as good as Ploom X to compete in the early days of the category development for ourselves. This has gone from the use of the device itself. It’s friendliness in the hand, is design features, is a requirement for cleanings and the likes to more important features maybe like the ability for people to take control of their session when they decided to vape on a stick to also flavors and the sensations that were developed by the device. And a lot of R&D efforts have been followed these consumer insights to keep on improving specifically what has been done and those that have been developed for the procurement of a global device that we are now rolling out in the market.
When it comes to the specifics of some assessments we’ve done on marketing effectiveness, for example, without going into the details and it’s very clear that different activities will relate to different market specifics. In Japan, the competitive environment, as you know, has been quite competitive in terms of price promotions, discounts and the likes. And we have learned quite a bit in terms of our necessity to observe and match sometimes competitive activities in the area. But we’ve also seen and analyzed measures that are more effective than others in merchandising, for example, and in route to market. So those will be incorporated into the learning. Even within the deployment of the development of the international markets, we have put in place some digital tools that would allow the markets to leverage one another’s learnings in terms of best practices, which will be — which are and will be ongoing as we deploy into the markets this year and next year. So that’s something that we have benefited a lot from the early efforts in Japan.
When it comes to innovation, there are two parts to the question, I believe. One is relating more to device and the speed at which we can expect to see improvement on the devices and new products coming to market. But the other one, I believe, which is also quite important is the speed at which the overall holistic offer to consumers will evolve. And that clearly goes into the combustible part, the stick, the blend development and the like. Where we stand today, we believe that a two- to three-year cycle for new product development is what will kind of come to play. We believe that the small modification to devices, small improvement might happen a bit faster, facelifts, different shapes and the likes. But in terms of technologies and major improvement on the devices, it’s probably the cycle of two to three years approximately.
On the stick development, this is an ongoing effort. And every time we have an ability to provide consumers with an improvement to the sensorial offer that we provide, this is something that we see happening on a faster pace.
I don’t know, Vassilis, if you have something to add to this or…
Vassilis Vovos
Thank you, Eddy. Just to provide some granularity on practices from the market that we can actually use as we expand, clearly, we have a lot of learnings from the Japan market in terms of the functionality and the customization of the product offered. And these are examples that we will be bringing into other markets. We have an excellent program of seamless digital engagement with the consumers. These are things that we will be bringing into the other markets.
And just to reinforce the point that the cycles of evolution can be also very frequent when it comes to the tobacco sticks that we are using in as we are improving the brands, we are very proud about the sensorial experience that the consumers are having today. And when we do consumer tests, we score very high into these areas. These are all things that we’ve learned with our deployment in Japan, we will be bringing into the other markets and continue to enrich the learnings on that.
Masamichi Terabatake
May I? So, in terms of the development of device and stick, so both from Eddy and Vassilis comments have been made. So, until we reach Ploom X, JT and JTI, we have been involved in development of the device separately. So, it took us some time. It was time-consuming to reach that global model for Ploom X. But now we have one single management, one team, tobacco, so involving on an integrated basis for the development of both the device and sticks.
So, in terms of the pipeline, we should be able to share more details in May of this year. In terms of the modification of sticks as well as the new version of the device, so it would be the next generation — the following generation, we do have visibility in terms of the development pipeline. And — but of course, because of competitive reasons, we cannot give you all the details at this particular moment. But we are steadily engaging in the development. That’s what we can tell you at this moment.
Satoshi Fujiwara
Thank you very much. And just to add on. So, RRP, as you pursue this on a global basis, so I do believe the priority is — HTS is the highest priority. So, you have no intention to focus on e-cigarettes. Am I right in understanding that?
Unidentified Company Representative
So, Eddy from JTI, CEO, would answer that.
Eddy Pirard
Yes, that’s correct. Our RRP strategy has not changed since last time. We very much see that the bulk of the growth in RRP will come from HTS. This is our core focus. This is where we will spend the bulk of our resources and efforts and we are maintaining a status of exploratory for other categories, including E-Vapor category. So, you are totally correct.
Unidentified Company Representative
Thank you very much for that. And thank you, Miyake-san for that question.
Eddy Pirard
Okay.
Unidentified Company Representative
Thank you, Ms. Miyake. Because time has come, although we have been receiving many questions, we would like to conclude the Q&A session. With this, we would like to end the fiscal 2022 results meeting. Thank you very much for participating.