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Japan Tobacco Inc. Annual Report FY2016 Year Ended December 31, 2016 Japan Tobacco Inc

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Japan Tobacco Inc. Annual Report FY2016 Year Ended December 31, 2016 Japan Tobacco Inc Japan Tobacco Inc. Annual Report FY2016 Year ended December 31, 2016 Japan Tobacco Inc. Tobacco Japan A nnual Report FY2016 nnual Contents Management Corporate Information 001 Financial Highlights 047 Environmental, Social 002 At a Glance and Governance Initiatives 004 Consolidated Five-year 048 Corporate Governance Financial Summary 060 History of the JT Group 006 Message from the 064 Regulation and Other Chairman and CEO Relevant Laws 008 CEO Business Review 067 Litigation 010 Management Principle, 068 Members of the Board, Audit Strategic Framework and Supervisory Board Members and Resource Allocation and Executive Officers 012 Business Plan 2017 069 Members of the JTI 013 Role and Target of Executive Committee Each Business 069 Corporate Data 014 Performance Measures Shareholder Information Operations & Analysis 070 Shareholder Information 017 Industry Overview 017 Tobacco Business Financial Information 019 Pharmaceutical Business 074 Financial Review 019 Processed Food Business 082 Consolidated Financial Statements 020 Review of Operations 088 Notes to Consolidated Financial 020 Message from the President Statements of Tobacco Business 141 Independent Auditor’s report 022 International Tobacco Business 028 Japanese Domestic 142 Glossary of Terms Tobacco Business 032 Pharmaceutical Business 036 Processed Food Business 038 Risk Factors 042 JT Group and Sustainability 044 Special Feature: From tobacco leaves to consumers Unless the context indicates otherwise, references with respect to our business, financial condition and 1. decrease in demand for tobacco products in in this Annual Report to “we”, “us”, “our”, “Japan results of operations. In some cases, you can identify key markets; Tobacco”, “JT Group” or “JT” are to Japan Tobacco Inc. forward-looking statements by terms such as “may”, 2. restrictions on promoting, marketing, packaging, and its consolidated subsidiaries. References to “JTI” are “will”, “should”, “would”,“expect”, “intend”, “project”, labeling and usage of tobacco products in markets to JTI Holding B.V., our consolidated subsidiary, and its “plan”, “aim”, “seek”, “target”, “anticipate”, “believe”, in which we operate; consolidated subsidiaries. References to “TableMark” “estimate”, “predict”, “potential” or the negative of are to TableMark Holdings Co., Ltd., TableMark Co., Ltd. these terms or other similar terminology. These 3. increases in excise, consumption or other taxes on and its group companies. References to “Japan Tobacco statements are not guarantees of future performance tobacco products in markets in which we operate; Inc.” are only to Japan Tobacco Inc. and references to and are subject to various risks and uncertainties. 4. litigation around the world alleging adverse health “JT International Holding B.V.” are only to JTI Holding Actual results, performance or achievements, or those and financial effects resulting from, or relating to, B.V. References to “audit & supervisory board” are to of the industries in which we operate, may differ tobacco products; “kansayaku-kai” (as defined in the Companies Act of materially from any future results, performance 5. our ability to realize anticipated results of our Japan) that performs certain supervisory functions or achievements expressed or implied by these acquisition or other similar investments; through its monitoring and audit activities within the forward-looking statements. 6. competition in markets in which we operate or into overall scheme of corporate governance pursuant to In addition, these forward-looking statements are which we seek to expand; the Companies Act of Japan. References to “audit & necessarily dependent upon assumptions, estimates supervisory board member” are to a member or and data that may be incorrect or imprecise and 7. deterioration in economic conditions in areas that members of an audit & supervisory board, also involve known and unknown risks and uncertainties. matter to us; referred to in Japanese as “kansayaku” (as Forward-looking statements regarding operating 8. economic, regulatory and political changes, such defined in the Companies Act of Japan). results are particularly subject to a variety of as nationalization, terrorism, wars and civil unrest, Forward-looking statements assumptions, some or all of which may not be realized. in countries in which we operate; This report contains forward-looking statements. These Risks, uncertainties or other factors that could 9. fluctuations in foreign exchange rates and the costs statements appear in a number of places in this report cause actual results to differ materially from those of raw materials; and and include statements regarding the intent, belief, or expressed in any forward-looking statement include, 10. catastrophes, including natural disasters. current and future expectations of our management without limitation: Financial Highlights ADJUSTED OPERATING PROFIT 586.8 (JPY BN) -6.4% YEAR-ON-YEAR CHANGE +11.3 % YEAR-ON-YEAR CHANGE AT CONSTANT EXCHANGE RATES DIVIDEND PER SHARE 130 (JPY) +10.2% YEAR-ON-YEAR CHANGE Results of FY2016 and FY2015 In FY2015, the JT Group withdrew from beverage business, which has been classified as discontinued operations accordingly. Consequently, profit (loss) and some items from continuing operations and discontinued operations are presented separately for the results of FY2015. To provide a fair business performance comparison with the results of FY2016, we offer the figures and analysis with a focus on the continuing operations of FY2015. Factsheets available at: www.jt.com/investors/results/ fact_sheet/index.html Japan Tobacco Inc. Annual Report 2016 001 At a Glance Our businesses FY2016: Results for the fiscal year ended December 31, 2016 The JT Group is a leading international tobacco company with operations in over 70 countries. Our products are sold in over 120 countries and our internationally recognized brands include Winston, Camel, MEVIUS and LD. We are also active in pharmaceutical and processed food businesses and we expect them to establish a foundation for future profit contribution, as we strive for sustainable growth. International Tobacco Business Japanese Domestic Tobacco Business The international tobacco business Results for FY2016: We are the market leader in Japan, is the JT Group’s profit growth Double-digit profit growth which is one of the largest markets engine, generating around 60% of the at constant exchange rates in the world, with more than 60% consolidated profit1. Going forward, while delivering on committed ready-made cigarette market we expect it will further increase its investments toward seeding share mainly driven by MEVIUS. contribution, enabling the JT Group initiatives and emerging products. to continue delivering sustainable Our Japanese domestic tobacco profit growth in the mid- to long-term. Key drivers: business continues to be a significant • Total and GFB volume growth profit contributor to the JT Group, Our brand portfolio is competitive • Market share gains across our generating about 40% of our and well-balanced, allowing us to footprint consolidated profit1. capture down-traders and up-traders. • Contribution from acquisitions We have structured our portfolio • Robust pricing During 2016, we have further into three broad categories including • Long-term commitment enhanced our brand portfolio through ready-made cigarettes, fine cut to investing in the acquisition of Natural American and emerging products. a. Brand equity Spirit business outside the United b. Emerging Markets, and States. In addition, we launched c. Emerging Products Ploom TECH in Fukuoka and through • Approximately 27,000 dedicated our on-line store for test marketing employees in March. Moreover, the retail price of MEVIUS was revised in April. Results for FY2016: 1. Consolidated profit: consolidated adjusted Achieved 2.4% year-on-year operating profit. profit growth. GLOBAL BRAND RANKING* FURTHER STRENGTHENED BRAND PORTFOLIO Share of Price Segment** for JT Key brands #2 #6 #12 #13 Prestige Premium * By brand owner Source: JT estimate (2016 data, as of July 2017); #1 #1 Excluding China National Tobacco Corp 002 Japan Tobacco Inc. Annual Report 2016 Management Financial Highlights 001 At a Glance 002 Consolidated Five-year Financial Summary 004 Message from the Chairman and CEO 006 CEO Business Review 008 Management Principle, Strategic Framework and Resource Allocation 010 Business Plan 2017 012 Role and Target of Each Business 013 Performance Measures 014 Revenue breakdown by business segment Processed food Others 7.7% 0.4% Pharmaceutical International tobacco 4.1% 56.0% Japanese domestic tobacco 31.9% Pharmaceutical Business Processed Food Business Composition of JT SOM2 as of 2016 JT Group’s pharmaceutical With Group company TableMark business focuses on the research Co., Ltd. taking a central role, and development, production and the processed food business is sale of prescription pharmaceutical primarily engaged in business products. Its mission is to build concerning frozen and ambient world-class, unique research and processed food, mainly staple food development capabilities and products such as frozen noodles, reinforce its market presence frozen rice, packed cooked rice through innovative drugs. and frozen baked bread, and JT concentrates on research and seasonings including yeast development activities mainly extracts and oyster sauce. on the fields of metabolic diseases; MEVIUS viral infection; and autoimmune/ We have solidified its No. 3 position Winston inflammatory diseases, while Torii
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