ANNUAL REPORT 2010 for the Year Ended March 31, 2010 JAPAN TOBACCO INC
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ANNU AL RE POR T 2 010 ANNUAL REPORT 2010 For the Year Ended March 31, 2010 JAPAN TOBACCO INC. ANNUAL Report 2010 The JT Group MISSION & The JT Group WAY The JT Group MISSION The mission of the JT Group is to create, develop and nurture its unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals. The JT Group WAY In achieving this, we are committed to fulfilling the expectations of our consumers and behaving responsibly, striving for quality in everything we do, through continuous improvement, and leveraging diversity across the JT Group. JAPAN TOBACCO INC. ANNUAL REport 2010 Contents Feature & Management Feature & Management 2 Feature . 2 Financial Highlights . 10 To Our Stakeholders . 13 CEO Interview . 14 Analysis of the Results of FY 3/2010 . 18 Business & History Business & History 21 At a Glance . 22 Feature . 2 Review of Operations . 24 • Japanese Domestic Tobacco Business . 24 • International Tobacco Business . 28 • Pharmaceutical Business . 32 • Food Business . 34 History of the JT Group . 36 Responsibility Responsibility 40 Corporate Governance . 41 To Our Stakeholders . 13 CEO Interview . 14 Activities Contributing to the Environment and Society . 49 Business Environment & Risk Financial Information Business Environment & Risk 55 Business Environment for the JT Group . 56 Major Risks of Businesses . 61 Unless the context indicates otherwise, references in this report to “we,” “us,” “our,” “Japan Tobacco,” “JT” or “ the JT Group” are to Japan Tobacco Inc. and its consolidated subsidiaries. References to “JTI” are to Japan Tobacco International, JT Group’s international tobacco business, and those subsidiaries of JT Group’s interna- tional tobacco business. FORWARD-LOOKING AND CAUTIONARY STATEMENTS Financial Information 63 This report contains forward-looking statements about our industry, business, plans and objectives, Consolidated Eleven-Year Financial Summary . 64 financial condition and results of operations that are based on our current expectations, assump- Management’s Discussion and Analysis of tions, estimates and projections. These statements discuss future expectations, identify strate- Financial Condition and Business Results . 66 gies, discuss market trends, contain projections of results of operations or of our financial condition, Consolidated Balance Sheets . 80 or state other forward-looking information. Consolidated Statements of Income . 82 These forward-looking statements are subject to various known and unknown risks, uncertain- Consolidated Statements of Changes in Equity . 83 ties and other factors that could cause our actual results to differ materially from those suggested Consolidated Statements of Cash Flows . 84 by any forward-looking statement. We assume no duty or obligation to update any forward-looking Notes to Consolidated Financial Statements . 85 statement or to advise of any change in the assumptions and factors on which they are based. Independent Auditors’ Report . 117 Risks, uncertainties or other factors that could cause actual results to differ materially from Fact Sheets those expressed in any forward-looking statement include, without limitation: Fact Sheets 118 1. health concerns relating to the use of tobacco products; Financial Data . 119 2. legal or regulatory developments and changes, including, without limitation, tax increases and Japanese Domestic Tobacco Business . 127 restrictions on the sale, marketing and usage of tobacco products, and governmental investiga- International Tobacco Business . tions and privately imposed smoking restrictions; 138 Pharmaceutical Business . 3. litigation in Japan and elsewhere; 140 4. our ability to further diversify our business beyond the tobacco industry; Food Business . 141 5. our ability to successfully expand internationally and make investments outside of Japan; Number of Employees . 142 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and General Information 9. fluctuations in foreign exchange rates and the costs of raw materials. General Information 143 Unless otherwise specified in this annual report, the information herein is as of June Shareholder Information . 143 24, 2010. Members of the Board, Auditors, and Executive Officers . 145 Corporate Data . 146 1 JAPAN TOBACCO INC. ANNUAL REport 2010 Feature In this special feature, we introduce readers to our tobacco business. Our tobacco business is the core source of profit and the driving force of profit growth for the Group. We have been growing through our geographical expansion, enhancing and developing our brand portfolio and improving our productivity and technology. In addition to satisfying the demands of tobacco consumers around the world we believe that we have a responsibility to the public and that our continued existence relies on initiatives that build trust in JT Group by respecting all members of society. 2 4 Feature & Management Business & History 1 Business activities in 120 countries around the world JT and Japanese municipalities jointly set up 835 smoking areas in public places 5 Responsibility Business Environment & Risk 2 36,000 employees worldwide in the tobacco business Planting trees covering 6,100 hectares in Malawi and Tanzania 6 Financial Information Fact Sheets 3 Community clean-up events held 1,000 times in Japan JT Group and governments fighting against illicit trade General Information 3 JAPAN TOBACCO INC. ANNUAL REport 2010 Feature JT Group Sales Volume (Billions of cigarettes) 500 445.9 434.9 385.6 400 243.1 237.2 229.0 213.3 300 218.3 212.4 220.3 240.1 203.1 215.1 203.3 198.8 189.5 174.9 167.8 200 159.9 151.9 100 2001 2002 2003 2004 2005 2006 2007 2008 2009* 2010* Japanese Domestic (Years ended March 31) Overseas (Years ended December 31) * Sales volume in the international tobacco business from FY 3/2009 onward includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products JT Group Share in Global Cigarette Market (2009) 10.4% JT Group Source: Euromonitor Tobacco Business – JT Group’s Core Source of Profits and Driving Force for Profit Growth 1 Business activities in 120 countries around the world JT Group operates in more than 120 countries around the world, which includes manufacturing, marketing and selling tobacco brands. JT Group has expanded its tobacco business through the acquisitions of RJR Nabisco’s non-US tobacco operations and Gallaher Group Plc, as well as through organic growth. 4 North & Central CIS+ Europe 214.6 Feature & Management 47.5 (Billions of cigarettes) (Billions of cigarettes) South & West Europe 64.5 Business & History (Billions of cigarettes) Responsibility Japan 151.9 (Billions of cigarettes) Business Environment & Risk Rest of the World 108.4 Financial Information (Billions of cigarettes) JT Group sold 586.8 billion sticks of tobacco products in FY 3/2010 worldwide, with global tobacco market share of 10.4% in 2009. 2 36,000 employees worldwide in the tobacco business Fact Sheets People are our most valuable asset. As part of our commitment to employees, we actively improve workplace environments, provide training for personal devel- opment, and give opportunities for international assignments within the Group. Number of Employees (As of March 31) General Information (Employees) 60,000 47,459 47,977 49,665 36,033 40,000 31,476 33,428 33,872 34,508 23,738 23,935 20,000 JT Group Total Tobacco Business 2006 2007 2008 2009 2010 5 JAPAN TOBACCO INC. ANNUAL REport 2010 Feature Japanese Domestic Tobacco Business – Laying a Stable Business Foundation as the Core Source of Profits Maintained a market share of 64.9%, the same level as in the previous fiscal year, amid difficult business conditions Key brands* commanded a strong market share of 45.1%, thanks to effective brand measures Introduced new products and conducted sales promotion activities Renewed product designs with a view to enhancing brand value Continued efforts to build an even more cost-efficient operating structure The Japanese domestic tobacco market has continued to contract mainly because of Japan’s aging population with fewer births, grow- ing public consciousness of the health risks associated with smok- ing, and public debate on a future hike in the tobacco excise tax. JT share 64.9% down 0.2ppt An increasingly fierce competitive landscape, compounded by these changes in the business environment, means that the Japa- Share of key brands* 45.1% up 0.3ppt nese domestic tobacco business – the JT Group’s core source of 151.9 billion profits – is actively engaged in the development and introduction of Total sales volume down 5.0% new products centered on its key brands, and in sales promotion cigarettes activities, in order to maintain and expand its market share. EBITDA ¥257.6 billion down 5.4% Furthermore, JT closed two Japanese domestic tobacco facto- ries at the end of March 2010 as part of our efforts to build an opti- mum operating structure. EBITDA in the Japanese Domestic JT Share and Total Share of Key Brands* (Years ended March 31) Tobacco Business (Years ended March 31) (%) (Billions of yen) 80 400 66.4 64.8 64.9 65.1 64.9 326.5 305.8 306.7 272.3 60 300 257.6 43.7 43.7 44.0 44.8 45.1 40 200 20 100 2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 JT Share Total Share of Key Brands* * Mild Seven, Seven Stars, Pianissimo (The market share figure for key brands is inclusive and retrospective of market share figures for ‘icene’ and ‘Lucia,’ which were integrated into the Pianissimo family in January 2010) 3 Community clean-up events held 1,000 times in Japan JT developed the “Pick Up and You will Love Your City” initiative in May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at community festivals and other public events in various regions across Japan and is conducted in cooperation with many different stakeholders from local governments, companies, and volunteer organiza- tions.