Japan Tobacco Inc. Japan Tobacco Inc. Japan Tobacco Inc.
2-1, Toranomon 2-chome, Annual Report 2013 Minato-ku, Tokyo 105-8422, Japan Tel: (81) 3-3582-3111 Fax: (81) 3-5572-1441 URL: http://www.jt.com/ Year ended March 31, 2013
A nnual 2013 Report
This annual report is printed using ink that contains less than 1% Volatile Organic Compounds (VOCs).
Printed in Japan C ontents Corporate Data (As of March 31, 2013)
Management Head Office Members of JT International Executive Committee (As of June 1, 2013) 001 Financial Highlights 2-1, Toranomon 2-chome, 004 At a Glance Minato-ku, Tokyo 105-8422, Japan Pierre de Labouchere Paul Bourassa 006 Consolidated Five-year Financial Summary Tel: 81-3-3582-3111 President and Chief Executive Officer Senior Vice President Legal, Regulatory 009 Message from the Chairman and CEO Fax: 81-3-5572-1441 Affairs and Compliance 010 CEO Business Review URL: http://www.jt.com/ 012 Management Principle, Resource Allocation Martin Braddock Policy and Strategic Framework Masamichi Terabatake Regional President CIS+ 013 Business Plan 2013 Executive Vice President and Deputy CEO Date of Establishment Stefan Fitz 014 Performance Measures Thomas A. McCoy Regional President Asia Pacific April 1, 1985 Chief Operating Officer Roland Kostantos Operation & Analysis Senior Vice President Finance, Information Technology and Chief Financial Officer 020 Industry Overview Paid-in Capital 020 Tobacco Business Paul Neumann 022 Pharmaceutical, Beverage and ¥100 billion Senior Vice President Global Leaf Processed Food Business Howard Parks 024 Review of Operations Senior Vice President Consumer & 024 Role of Tobacco Business JT International S.A. Trade Marketing 026 International Tobacco Business 032 Japanese Domestic Tobacco Business 1, Rue de la Gabelle CH-1211 Geneva 26, Fadoul Pekhazis 036 Role of Pharmaceutical, Beverage Switzerland Regional President Middle East, Near East, and Processed Food Business Tel: +41(0)22-7030-777 Africa, Turkey and World Wide Duty Free 038 Pharmaceutical Business Fax: +41(0)22-7030-789 Eddy Pirard 042 Beverage Business URL: http://www.jti.com/ Regional President Western Europe 046 Processed Food Business 050 Risk Factors Michel Poirier 054 Corporate Social Responsibility Regional President Americas 058 Corporate Governance Jörg Schappei Senior Vice President Human Resources
Financial Information Bill Schulz Senior Vice President Global Supply Chain 076 Financial Review 084 Financial Statements and Notes Takehisa Shibayama Senior Vice President Research & Development Fact Sheets Vassilis Vovos 142 Fact Sheets Regional President Central Europe
Frits Vranken Shareholder Information Senior Vice President Business Development and Corporate 170 Shareholder Information Communications OTHER INFORMATION
Other Information 174 History of the JT Group 178 Regulation and Other Relevant Laws 182 Litigation 184 Members of the Board, Audit & Supervisory For more information, Board Members, and Executive Officers please visit 185 Corporate Data www.jt.com
Japan Tobacco INC. Annual Report 2013 185 MANAGEMENT Financial Highlights (Year ended March 31, 2013)
Adjusted EBITDA (JPY BN) OPERATIONS & A OPERATIONS 622.1 +7.8 %
Dividend Payout Ratio n (%) a l y s is 37.6 +7.9 ppt F INANCIA Adjusted EPS (JPY) L I NFORMATION 173.65 +13.8% FACT SHEETS FACT
Unless the context indicates otherwise, references in this Annual Report differ materially from any future results, performance or achievements to “we”, “us”, “our”, “Japan Tobacco”, “JT Group” or “JT” are to Japan expressed or implied by these forward-looking statements. In addition,
Tobacco Inc. and its consolidated subsidiaries. References to “JT these forward-looking statements are necessarily dependent upon SHAREHO International” are to JT International Holding B.V., our consolidated assumptions, estimates and data that may be incorrect or imprecise subsidiary, and its consolidated subsidiaries. References to “TableMark” and involve known and unknown risks and uncertainties. Forward- are to TableMark Co., Ltd. and its consolidated subsidiaries. References looking statements regarding operating results are particularly subject to “Japan Tobacco Inc.” are only to Japan Tobacco Inc. and references to a variety of assumptions, some or all of which may not be realized. L to “JT International Holding B.V.” are only to JT International Holding D ER INFORMATION B.V. References to “audit & supervisory board” are to “kansayaku-kai” Risks, uncertainties or other factors that could cause actual results to differ (as defined in the Companies Act of Japan) that performs certain materially from those expressed in any forward-looking statement include, supervisory functions through its monitoring and audit activities within without limitation: the overall scheme of corporate governance pursuant to the Companies 1. d ecrease in demand for tobacco products in key markets; Act of Japan. References to “audit & supervisory board member” are 2. restrictions on promoting, marketing, packaging, labeling and to a member or members of an audit & supervisory board, also referred usage of tobacco products in markets in which we operate; to in Japanese as “kansayaku” (as defined in the Companies Act of Japan). 3. i ncreases in excise, consumption or other taxes on tobacco products in markets in which we operate; 4. litigation around the world alleging adverse health and financial Forward-looking statements OTHER INFORMATION effects resulting from, or relating to, tobacco products; This report contains forward-looking statements. These statements appear 5. o ur ability to realize anticipated results of our acquisition in a number of places in this report and include statements regarding the or other similar investments; intent, belief, or current and future expectations of our management with 6. c ompetition in markets in which we operate or into which we respect to our business, financial condition and results of operations. In seek to expand; some cases, you can identify forward-looking statements by terms such 7. d eterioration in economic conditions in areas that matter to us; as “may”, “will”, “should”, “would”,“expect”, “intend”, “project”, “plan”, 8. e conomic, regulatory and political changes, such as nationalization, “aim”, “seek”, “target”, “anticipate”, “believe”, “estimate”, “predict”, terrorism, wars and civil unrest, in countries in which we operate; “potential” or the negative of these terms or other similar terminology. 9. fl uctuations in foreign exchange rates and the costs of raw materials; These statements are not guarantees of future performance and are and subject to various risks and uncertainties. Actual results, performance 10. c atastrophes, including natural disasters. or achievements, or those of the industries in which we operate, may
Japan Tobacco INC. Annual Report 2013 001 Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers. 004 At a Glance MANAGEMENT 006 Consolidated Five-year Summary 009 Message from the Chairman and CEO 010 CEO Business Review 012 Management Principle, Resource Allocation Policy and Strategic Framework 013 Business Plan 2013 014 Performance Measures
Our “4S” model continues to deliver strong business results and shareholder return improvements Our unique “4S” model, resource allocation policy and strategic framework continue to deliver strong business results and shareholder return improvements. At a Glance Our Businesses
(Year ended March 31, 2013)1
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 and Mild Seven – MEVIUS. We also have pharmaceutical, beverage and processed food businesses which allow us to diversify our sources of profit and achieve future sustainable growth.
International Tobacco Business
International tobacco business will continue Business Performance Summary: strengthening its role as JT Group’s profit Total shipment volume Year-on-year change growth engine. (BnU)
International tobacco business generates more than 50% of + our consolidated profit2. In addition to acquisitions, our pursuit of 436.5 2.5% organic top-line growth with a focus on our Global Flagship Brands (GFB), investment in brand equity and pricing have contributed GFB shipment volume Year-on-year change (BnU) to the strong growth of our international tobacco business. Our portfolio is well balanced, allowing us to capture consumers in both up-trading and down-trading environments. 268.8 +4.8% Priorities: • Quality top-line growth: Core Revenue Year-on-year change (US$ MM) –– Continue to strengthen brand equity with a focus on GFBs. –– Grow or maintain market share in key markets. • Broaden the earnings base: + –– Expand geographical presence. 11,817 5.4 % –– Develop emerging product categories. • Continuous cost improvement. Adjusted EBITDA Year-on-year change (US$ MM) 4,302 +9.1%
Japanese Domestic Tobacco Business
The role of the Japanese domestic tobacco Business Performance Summary: business continues to be a highly competitive Sales Volume Year-on-year change platform of profitability. (BnU)
We are the market leader in Japan with nearly 60% market share. + Our Japanese domestic tobacco business continues to be a 116.2 7.2% significant profit contributor to the JT Group, generating over 45% of our consolidated profit2. In the year ended March 2013, Core Revenue Year-on-year change (JPY BN) we offered more than 85 products on the Japanese market. The three core brands are MEVIUS, Seven Stars and Pianissimo. + Priorities: 654.0 6.9% • Quality top-line growth: –– Continue to strengthen brand equity with a focus Adjusted EBITDA Year-on-year change (JPY BN) on our core brands. –– Further increase market share. –– Develop emerging product categories. + • Continuous cost improvement. 281.3 7.3 %
004 Japan Tobacco INC. Annual Report 2013 MANAGEMENT
Revenue breakdown by business segment
Beverage Others 8.7% 0.7% Pharmaceutical Processed food 2.5% 8.0% Japanese domestic International tobacco tobacco 32.4% 47.7%
P harmaceutical Business
We will strive to establish a stronger profit Business Performance Summary: platform while remaining R&D oriented. Revenue Year-on-year change (JPY BN) (JPY BN) Priorities: • Strive for rapid and efficient market launch of compounds + in late phase of clinical trials. 53.2 5.8 • Maximize value of each product. • Promote R&D for next generation of strategic compounds, Adjusted EBITDA Year-on-year change seek optimum timing for out-licensing. (JPY BN) (JPY BN) -12.7 -2.7
B everage Business
We expect our beverage business to strengthen its Business Performance Summary: business foundation for future growth in order to Revenue Year-on-year change make further profit contribution to the JT Group. (JPY BN) (JPY BN) Priorities: - • Continue brand equity investment in ‘Roots’. 185.5 3.3 • In addition to ‘Roots’, foster ‘Momono Tennen-sui’ as a second pillar brand. Adjusted EBITDA Year-on-year change (JPY BN) (JPY BN) • Strive further for a high quality vending machine operation. 12.4 -2.2
P rocessed Food Business
Our processed food business will strive to achieve Business Performance Summary: operating profit margin on par with or above Revenue Year-on-year change industry average to grow its profit contribution (JPY BN) (JPY BN) to the JT Group. 168.7 -1.9 Priorities: • Continue to focus on staple food products to steadily Adjusted EBITDA Year-on-year change improve profitability. (JPY BN) (JPY BN) • Combine our own technology with consumer needs to enhance product strength. • Minimize the effect of rising raw material cost and weak yen. 7.4 +1.9
1 Year ended December 31, 2012 for international tobacco business. 2 Consolidated profit: consolidated adjusted EBITDA.
Japan Tobacco INC. Annual Report 2013 005 C onsolidated Five-year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries
(Years ended March 31)
Billions of yen 2009 2010 2011 2012 2013 (JGAAP) (JGAAP) (IFRS) (IFRS) (IFRS) For the year: Net sales/Revenue (Note 1) 6,832.3 6,134.7 2,059.4 2,033.8 2,120.2 International Tobacco 3,118.3 2,633.6 963.5 966.3 1,010.7 Japanese Domestic Tobacco 3,200.5 3,042.8 665.8 646.2 687.1 Pharmaceutical 56.8 44.1 44.1 47.4 53.2 Food 436.0 394.7 367.5 359.4 – Beverage 188.8 185.5 Processed Food 170.7 168.7 Others 20.8 19.5 18.5 14.6 15.0 Adjusted net sales/Core revenue (Note 2) International Tobacco 1,080.8 906.8 887.8 894.6 943.1 Japanese Domestic Tobacco 648.8 616.0 632.2 611.9 654.0 Operating income/Operating profit (Note 3) 363.8 296.5 401.3 459.2 532.4 International Tobacco 174.8 136.9 225.9 252.4 289.5 Japanese Domestic Tobacco 188.3 198.7 202.3 209.3 241.3 Pharmaceutical 1.0 (13.6) (13.3) (13.5) (16.2) Food (11.5) (13.7) (3.6) 2.0 – Beverage 4.5 2.4 Processed Food (2.5) (5.8) Others 9.6 10.5 (9.9) 9.0 21.2 EBITDA/Adjusted EBITDA (Note 3/4) 646.2 526.7 522.0 577.1 622.1 International Tobacco 338.0 277.7 277.9 314.8 343.3 Japanese Domestic Tobacco 272.3 251.3 247.2 262.3 281.3 Pharmaceutical 4.9 (9.7) (9.8) (10.0) (12.7) Food 17.0 14.5 17.7 20.0 – Beverage 14.6 12.4 Processed Food 5.4 7.4 Others 13.1 13.3 (11.0) (9.8) (9.6) Depreciation and amortization (Note 4) 282.4 230.2 118.0 118.8 116.5 Net income/Profit (attributable to owners of the parent) (Note 5) 123.4 138.4 243.3 320.9 343.6 Free cash flow (FCF) (Note 6) 240.2 250.7 300.4 451.3 316.0
006 Japan Tobacco INC. Annual Report 2013 MANAGEMENT
(Years ended March 31)
Billions of yen 2009 2010 2011 2012 2013 (JGAAP) (JGAAP) (IFRS) (IFRS) (IFRS) At year-end: Total assets/Assets 3,879.8 3,872.6 3,655.2 3,667.0 3,852.6 Interest-bearing debts (Note 7) 996.1 874.3 709.1 502.4 327.2 Liabilities 2,255.5 2,149.3 2,053.9 1,952.4 1,960.6 Net Assets/Equity 1,624.3 1,723.3 1,601.3 1,714.6 1,892.0 Major Financial Ratios ROE (Note 8) 6.8% 8.6% 15.3% 20.3% 20.0% ROA (Note 9) 8.4% 7.8% 10.9% 12.7% 14.3% Equity Ratio (Note 10) 40.0% 42.6% 41.7% 44.6% 46.9% Amounts per share: (in yen) Diluted EPS (Notes 11/12) 12,880 14,449 25,407 168.44 180.99 Book value per share/Book value per share (attributable to owners of the parent) (Note 12) 162,088 172,140 160,180 858.09 993.75 Dividend per share (Note 12) 5,400 5,800 6,800 50 68 Dividend payout ratio before goodwill amortization/Dividend payout ratio (Note 13) 22.6% 23.6% 26.8% 29.7% 37.6%
Notes: 1. (JGAAP): Including the tobacco excise taxes. 5. (IFRS): Under IFRS, profit is presented before deducting non-controlling (IFRS): Excluding tobacco excise taxes and revenue from agent transactions. interests. For comparison, we show the profit attributable to the owners 2. ( JGAAP): Excluding revenue from the imported tobacco, domestic duty free, of the parent company. the China Division, and other miscellaneous items in the Japanese domestic tobacco 6. FCF = (cash flow from operating activities + cash flow from investing activities) business, in addition to the distribution, private label, contract manufacturing, excluding the following items: and other peripheral businesses in the international tobacco business. From “cash flows from operating activities”: Dividends received/interest (IFRS): Excluding revenue from distribution business of imported tobacco, among received and its tax effect/interest paid and its tax effect. others, in the Japanese domestic tobacco business, in addition to the distribution, From “cash flows from investing activities”: Purchase of securities/proceeds from private label, contract manufacturing, and other peripheral businesses in the sale and redemption of securities/payments into time deposits/Proceeds from international tobacco business. withdrawal of time deposits/others (but not business-related investment securities, 3. 2 010-: The method used to compute operating income was changed from the years which are included in the investment securities item). ended March 31, 2010. The operating income for these periods does not account 7. Including lease obligation. for payment of royalty fees by the international tobacco business to the Japanese 8. (JGAAP): Return on equity. domestic tobacco business. Also partially change the allocation method of (IFRS) Return on equity (attributable to owners of the parent). overhead cost and CAPEX. 9. ROA = (Operating income + financial profit)/Total assets. 4. (JGAAP): EBITDA = Operation income + depreciation and amortization 10. (JGAAP): Equity ratio. Depreciation and amortization = depreciation of tangible fixed assets + (IFRS) Equity ratio (attributable to owners of the parent). amortization of intangible fixed assets + amortization of long-term prepaid 11. (IFRS) Based on profit attributable to owners of the parent company. expenses + amortization of goodwill. 12. A 200-for-one share spilit is done, effective as of July 1, 2012. (IFRS): Adjusted EBITDA = Operating profit + depreciation and amortization ± Calculated on the assumption that this share split was conducted at the beginning adjustment items (income and costs). of the previous fiscal year (April 1, 2011). Adjustment items (income and costs) = impairment losses on goodwill ± 13. (JGAAP): Dividend payout ratio before goodwill amortization. restructuring income and costs ± others. (IFRS) Based on profit (attributable to owners of the parent). 14. Financial data disclosed herein is basically rounded.
Japan Tobacco INC. Annual Report 2013 007 Hiroshi Kimura Mitsuomi Koizumi Chairman of the Board President and CEO and Representative Director MANAGEMENT Message from the Chairman and CEO
We are pleased to share with you the achievements Strengthening corporate governance of the JT Group by delivering the annual report for We have been striving to enhance corporate governance the year ended March 2013. This past year was as a global company. The most notable initiative in the special, as we had the opportunity to welcome previous year was the appointment of two independent new shareholders after the success of a secondary outside Board members, Motoyuki Oka and Main Kohda. share offering. Their expertise has contributed to further increasing the quality and transparency of Board decisions. Successful share placement Some 333 million shares, or approximately 17% of the Our efforts to enhance communication with Company’s equity, were released by the Government capital markets continue. We are now preparing the of Japan. In conjunction with the offering, we executed harmonization of the accounting periods throughout a share buy-back program worth ¥250 billion aiming the Group to a January-to-December basis, starting at improving shareholder return and capital efficiency, from January 2015, subject to the Board’s decision as well as mitigating the potential negative impact on and shareholders’ approval. This initiative will allow the equity market. Consequently, the offer was worth our reporting to become more timely and integrated. nearly ¥750 billion and well received by the market, despite the large scale of the transaction. As a result, Furthermore, the JT Group is re-emphasizing the number of shareholders at the fiscal year end more its commitment to corporate responsibility. than tripled compared with the previous year, reaching By enhancing our contribution to society, we will a total of approximately 190 thousand. keep reinforcing our foundation in the community.
This successful offering shows a widespread support Looking ahead for our management principle and our strategies as The JT Group is proud of its accomplishments during well as our commitment to sustainable profit growth. the past year. These could not have been achieved We remain determined to meet, and even exceed, without the dedication of each and every employee the expectations of this wider shareholder base. and without the support of all our other stakeholders. We are grateful for that. Strong business performance During the past year, the Group’s business performed The global business environment remains uncertain. strongly once again, with a 15.1% growth in adjusted Economies are still fragile and geopolitical tensions EBITDA at constant rates of exchange, or 7.8% including are strong. In our industry, regulatory pressure is the impact of unfavorable currency movements. mounting, consumers’ needs are increasingly This performance was driven by our tobacco business, diverse and competition is intensifying. Despite these which achieved top-line growth by leveraging its strong challenges, we are confident that the JT Group will brand portfolio and broadening its earnings base. In the achieve sustainable profit growth in the mid- to long- pharmaceutical business, we launched for the first time term, by leveraging its ability to adapt to a changing in our history a drug containing our original compound. environment. Our track record speaks for itself. With In the beverage business, our sales volume reached this level of confidence in our business performance, a record high. In the processed food business, we we have decided to accelerate the improvement of confirmed our top-line growth momentum in the shareholder return. We now aim to reach a dividend staple food category. payout ratio of 50% for the year 2015, one year earlier than previously communicated. Shareholder return improvement Return to shareholders also improved. Dividend We are committed to continue delivering strong payout ratio reached 37.6%, up 7.9 percentage points performance in the years ahead, increasing the from the previous year, exceeding the target set at Company’s value for you and all stakeholders the beginning of the fiscal year. Importantly, this was through sustainable profit growth. attained along with higher earnings than forecast. With the aim to achieve the target, we revised our dividend per share forecasts twice, increasing dividend per share by ¥18 or 36%. As a result of profit growth, adjusted EPS grew 27.3% at constant rates of exchange, or 13.8% on a reported basis.
Japan Tobacco INC. Annual Report 2013 009 CEO Business Review
Mitsuomi Koizumi President and CEO and Representative Director
The JT Group delivered a robust performance in a difficult operating environment as we continued to invest in our business.
Performance overview Accomplishment by business segment Our “4S” model is a unique management principle in In the international tobacco business, our continued that it aims to strike a balance between the interests of all efforts to enhance brand equity and expand the stakeholders – consumers, shareholders, employees and earnings base led to a year-on-year total shipment wider society – while keeping them fulfilled. I believe volume increase. This was achieved in a context of that this “4S” model, with its comprehensive approach, industry volume declines in many markets where is a source of sustainable competitive advantage. we operate. Once again, our competitive strength was demonstrated by share gains in most of our Our strategic framework and resource allocation key markets. In addition to our positive volume policy are long-term oriented, in line with our pursuit performance, pricing gains drove revenue and profit of sustainable profit growth. Over the years, we have growth. Furthermore, we successfully completed remained committed to this approach, and the two important acquisitions, Gryson and Nakhla, investments that we have made in the past continue which complement our already solid platform, both to pay off. During the year ended March 2013, our in terms of products and markets. These acquisitions strategic emphasis on quality top-line growth resulted will contribute to fuel our future growth. in another strong business performance. At the same time, we stayed true to our mid- to long-term perspective and did not compromise on investments in the business and in our people. The end result was a strong achievement, exceeding initial forecasts in all key profit indicators, while, more importantly, reinforcing future growth potential.
010 Japan Tobacco INC. Annual Report 2013 MANAGEMENT
In the Japanese domestic tobacco business, our In the beverage business, we celebrate the achievement market share has steadily recovered from the loss of a record sales volume, led by ‘Roots’, one of the caused by the devastating earthquake. On a 12-month popular brands in the canned coffee segment in Japan. basis, it reached 59.6%, up 4.7ppt from the previous ‘Roots’ is the core brand of our beverage business, year, while the monthly shares in February and March and as such we have provided intensive support, reached the 60% threshold. Our core brands performed through extension launches and trade marketing well, supported by brand equity investments and trade initiatives to enhance its brand equity. marketing excellence, resulting in a shipment volume increase despite continued industry volume decline. In the processed food business, we have sharpened Volume growth also drove increased profits. our focus on staple food products. This strategy is proving to be successful, as evidenced by a robust Aiming to achieve future growth, our tobacco 12.4% revenue growth in the staple food category. business embarked on a bold and promising initiative: Driven by this performance, the profit margin of the the evolution of Mild Seven to MEVIUS. The objective processed food business has been improving steadily. is to develop MEVIUS to the number one global premium brand in the future, and further strengthen Outlook our global brand portfolio. In addition to the change Our strong performance in the past year further in brand name, we have introduced new sophisticated reinforces my confidence in our “4S” model as a driver package designs as well as innovative line extensions. of sustainable profit growth. Our management principle, The implementation of this strategy in Japan, where resource allocation policy and strategic framework the Mild Seven brand has commanded the top-selling remain unchanged, as they are the foundation of our position for decades, started in February. Initial track record. Keeping these management principles response from consumers has been encouraging, and our strategy in mind, each business will strive with solid performance since the launch. Building to achieve its targets in the mid- to long-term. on this, we will continue to enhance the brand equity of MEVIUS to achieve global success. The international tobacco business is well-positioned to continue driving the profit growth of the Group, In the pharmaceutical business, we made significant leveraging its robust brand portfolio and well-balanced progress in establishing a profitable business platform, geographical footprint. The Japanese domestic by launching for the first time in our history a drug, tobacco business remains a solid profit generator, “Stribild®”, containing JTK-303 which is our original underpinned by its strong market share leadership. compound. “Stribild®”, an anti-HIV single-tablet The pharmaceutical, beverage and processed regimen, was approved in the U.S. and launched by food businesses are strengthening their platforms our license partner. The same drug was approved also to contribute to the Group profit in the mid-term. in EU and other countries as well as Japan, where we I will ensure that, as each business fulfills its role, have been marketing it since May 2013. Furthermore, the JT Group continues to deliver strong results New Drug Applications of our compounds for in the mid- to long-term. hyperphosphatemia, Japanese cedar pollinosis and MEK inhibitor (trametinib) were filed during the past fiscal year. In May 2013, our license partner announced that MEK inhibitor (trametinib) was approved in the U.S.
Japan Tobacco INC. Annual Report 2013 011 Management Principle, Resource Allocation Policy and Strategic Framework
Introduction Business investment Our unique “4S” model, resource allocation policy and We expect that the international tobacco business strategic framework continue to deliver strong business drives the Group’s profit growth, while the Japanese results and shareholder return improvements. We are domestic tobacco business continues to solidify its confident that pursuit of the “4S” model and business profitable platform. Therefore, investment to enhance investments enable sustainable profit growth, and thus the competitiveness of our tobacco business is our continuously increase the Company’s value in the mid- primary focus in our resource allocation. to long-term. Investments in our pharmaceutical, beverage Management principle and processed food businesses at this stage are intended for fundamental buildings to strengthen The “4S” model future profit contribution. Our management principle is the “4S” model and this unique model defines who we are. Shareholder return Strong emphasis is placed on shareholder return Pursuit of the “4S” model means that we will balance improvement. In particular, we focus on dividend payout the interests of consumers, shareholders, employees ratio as well as adjusted EPS growth rate and set targets and wider society, and fulfill our responsibilities towards for these two indicators to drive the improvement. them, aiming to exceed their expectations. Our benchmark for dividend payout ratio is global FMCG This management principle can drive our growth in players in a variety of sectors. We aim for a dividend the mid- to long-term by continuously offering additional payout ratio comparable to them. It is our intention to value to consumers. Therefore, business investments grow adjusted EPS through business growth; however, to create additional value for our products and operations we may consider introducing share buy-back programs, will not be compromised. We firmly believe that the if necessary, in order to achieve the target. pursuit of the “4S” model increases the Company’s value through sustainable profit growth and is consequently Strategic framework in the best interests of all stakeholders. The JT Group employs a strategic framework with three key components to support sustainable profit growth. Each business develops specific strategies consistent We will balance with this framework. the interests Shareholders of consumers, Quality top-line Competitive Robust business shareholders, growth cost base foundations employees and wider society, A greater emphasis is placed on “quality top-line and fulfill our Consumers growth”. In order to achieve it, we concentrate our responsibilities resources in key brands and product categories, which towards them, Employees Society are growing or have a potential to grow, to increase aiming to exceed value-added offerings. their expectations We strive to reinforce our “competitive cost base” by establishing an efficiently operating organization to enhance profitability and cash generation capability. Resource allocation policy To this end, we seek to optimize both operational and In allocating our resources, our priority is business corporate costs without compromising quality. investment which underpins sustainable profit growth in a most efficient manner. At the same time, we are “Robust business foundations” will be established committed to improving shareholder return and willing through continuous improvement. In addition, to use our funds for this purpose. It is our intention to the JT Group invests in employees, who are strike an optimal balance between these two objectives. the cornerstone of our success, and encourages collaboration among diversified human resources.
012 Japan Tobacco INC. Annual Report 2013 MANAGEMENT B usiness Plan 2013
The JT Group’s management plan is an annual rolling plan with a three-year term. It means that we revise 3 our mid-term plan every year reflecting changes in our business environment. However, there is one thing that Business plan 2013 targets reflect management does not change: our management principle. Business intention for growth and commitment to Plan 2013, a management plan starting from the year shareholder return improvement ending March 2014, was developed based on the “4S” model with the following key features. • Group profit target remains unchanged from Business Plan 2012, our previous mid-term plan. • Shareholder return improvement will be accelerated, 1 as we aim to achieve a dividend payout ratio of 50%, one year earlier than previously planned. Pursuing the “4S” model, Business Plan 2013 aims for sustainable profit growth in the mid- Group profit target to long-term Adjusted EBITDA growth rate at constant rates of exchange: • We will fulfill our responsibilities towards • Mid to high single-digit growth per annum over stakeholders by: the mid- to long-term. ––Creating and delivering additional value for consumers Shareholder return targets ––Achieving competitive shareholder return Consolidated dividend payout ratio: ––Offering development opportunities to • 40% for this fiscal year, then aiming to reach 50% employees Expanding CSR activities for society. for the fiscal year 2015. • The JT Group continues to aim for sustainable profit growth in the mid- to long-term. Adjusted EPS growth rate at constant rates of exchange: • Our resource allocation policy and strategic • High single-digit growth per annum over the mid- framework are unchanged. to long-term. 2 4 Enhancing our ability to adapt to the changing Forecast new record earnings for the year ending environment is the key for continuous success March 2014
• The business environment remains uncertain due • Adjusted EBITDA to grow 6.1% at constant rates to economic volatility, geopolitical risks and regulatory of exchange. pressure, among others. • Reported adjusted EBITDA to reach new record level. • By further enhancing its adaptability to the changes, • Shareholder return to continuously improve. the JT Group reinvents itself to overcome challenges as it did in the past. Group profit
Actual Forecast Growth at for the year for the year constant ended March ending rates of 2013 March 2014 Growth exchange Adjusted EBITDA (JPY BN) 622.1 730.0 +17.3% +6.1%
Dividend payout ratio forecast Shareholder return for the year ending March 2014 Actual Forecast for the year for the year ended March ending 2013 March 2014 Growth Dividend payout ratio 37.6% 40.3% +2.7ppt Dividend per +24 40.3 % share (JPY) 68 92 (+35.3%) Japan Tobacco INC. Annual Report 2013 013 P erformance Measures
In our Business Plan 2013, targets are set for adjusted EBITDA growth rate at constant rates of exchange, as well as consolidated dividend payout ratio and adjusted EPS growth rate at constant rates of exchange. While they are mid- to long-term targets, we also monitor the performance measures introduced here annually.
In our strategic framework to achieve adjusted EBITDA growth rate, the JT Group places a particular emphasis on “quality top-line growth”, while, at the same time, focusing on building a “competitive cost base” and “robust business foundations”. In line with our strategic emphasis, the measures to review our business performance are skewed towards top-line related. As for shareholder return, we have selected three indicators to monitor the improvement.
Tobacco sales volume
International tobacco (BnU)
Calendar year basis + 2.5% to 436.5 BnU For the international tobacco business, total shipment volume 436.5 which includes Fine Cut, cigars, pipe tobacco and snus, but excludes 428.4 425.7 contract manufactured products and waterpipe tobacco products.
2010 2011 2012
Japanese domestic tobacco (BnU) + 7.2% to 116.2 BnU For Japanese domestic tobacco, total sales volume which 134.6 excludes sales volume of Japanese domestic duty free and the China business. 116.2 108.4
FY3/2011 FY3/2012 FY3/2013
GF B shipment volume
GFB shipment volume (BnU)
Calendar year basis + 4.8% to 268.8 BnU Shipment volume of GFBs, namely Winston, Camel, MEVIUS 268.8 (Mild Seven), B&H, Silk Cut, LD, Glamour and Sobranie, in the 256.5 249.8 international tobacco business.
2010 2011 2012
014 Japan Tobacco INC. Annual Report 2013 MANAGEMENT
The following financial figures are based on IFRS.
Core revenues
International tobacco (US$ MM)
Calendar year basis -806 + + 1,412 % % at constant12.6 rates of exchange including5.4 currency impact to US$ 12,623 MM to US$ 11,817 MM 12,623 11,817 11,211
10,113 For the international tobacco business, US dollar based core revenue excludes revenues from distribution, 2010 2011 Business 2012 at FX 2012 contract manufacturing and other peripheral businesses. constant currency
Japanese domestic tobacco (JPY BN) + 6.9% to JPY 654.0 BN For the Japanese domestic tobacco business, core revenue which 654.0 excludes revenue from distribution of imported tobacco in Japan, 632.2 among others. 611.9
FY3/2011 FY3/2012 FY3/2013
Revenue
Revenue (JPY BN) + 4.2% to JPY 2,020.2 BN
2,120.2 Revenue on a consolidated basis which, for the avoidance of doubt, excludes excise and other similar taxes, as well as sales 2,059.4 2,033.8 from transactions in which the JT Group acts as an agent.
FY3/2011 FY3/2012 FY3/2013
JAPAN TOBACCO INC. ANNUAL REPORT 2013 015 P erformance Measures continued
The following financial figures are based on IFRS.
Adjusted EBITDA
Adjusted EBITDA (JPY BN) + + -42.2 % % 87.1 at constant15.1 rates of exchange including7.8 currency impact to JPY 664.2 BN to JPY 622.1 BN 664.2 622.1 577.1 522.0 Operating profit excluding depreciation, amortization and adjustment items (income and expenses).* FY3/2011 FY3/2012 Business FY3/2013 at FX FY3/2013 constant currency * Adjustment items (income and expenses) are impairment losses on goodwill, restructuring related income and expenses and others.
Dividend payout ratio
Dividend payout ratio (%)
+7.9pp to 37.6 % Dividend per share divided by profit attributable to owners 37.6 of the parent company per share. 29.7 26.8
FY3/2011 FY3/2012 FY3/2013
bn 250 share buyback (yen)
016 Japan Tobacco INC. Annual Report 2013 MANAGEMENT
CAGR % dividend per share26 growth over the past five years
The following financial figures are based on IFRS.
Dividend per share
Dividend per share (%) + 36% to JPY 68 The sum of interim and year-end dividends per share, the record 68 dates of which fall in the relevant fiscal year. 50 34
FY3/2011 FY3/2012 FY3/2013
Adjusted EPS (diluted)
Adjusted EPS (diluted) (JPY)
20.7 + + 41.7 % % at constant27.3 rates of exchange including13.8 currency impact to JPY 194.3 to JPY 173.7 194.3 173.7 152.7 129.5 Adjusted EPS is calculated as follows: Adjusted EPS = (Profit or loss attributable to owners of the FY3/2011 FY3/2012 Business FY3/2013 at FX FY3/2013 constant parent company ± adjustment items (income and costs)* ± tax currency and minority interests adjustments) / (weighted-average common shares + increased number of ordinary shares under subscription rights to shares).
* Adjustment items (income and expenses) are impairment losses on goodwill, restructuring related income and expenses and others.
Japan Tobacco INC. Annual Report 2013 017
020 Industry Overview & A OPERATIONS 024 Review of Operations 050 Risk Factors 054 Corporate Social Responsibility 058 Corporate Governance n a l y s is
Continuous investment in our brands for quality top-line growth delivered strong results Our strategic emphasis on top-line growth resulted in another strong business performance. We stayed true to our mid- to long-term perspective and did not compromise on investments in our business and in our people. The end result was a strong achievement, exceeding our initial forecast while reinforcing future growth potential. Industry Overview Tobacco
Tobacco industry Regulations The regulatory environment continues to be more Market dynamics restrictive for the tobacco industry. Restrictions on There are many types of tobacco products available promotions and advertisements are the most common in the marketplace. Cigarettes remain the most popular around the world. An increasing number of markets choice of consumers, while cigars, pipe tobacco, snuff, are introducing bans on smoking in public places, and chewing tobacco and other product varieties continue health warnings on packages are required in numerous to draw consumers’ interest, with some of these countries with, in some cases, a pictorial format. product categories increasing their volume worldwide. Recent regulations are focusing more on the Approximately 5.8 trillion cigarettes are consumed product itself. Specifically, plain packaging has been around the world. China is by far the largest market, discussed in the UK, Ireland and New Zealand after which accounts for nearly one third of global being implemented in Australia. Further, regulators consumption, but it is almost exclusively operated are becoming more aggressive by restricting by a state monopoly. Russia, the U.S., Indonesia ingredients and emissions, following the guidelines and Japan are the next four largest markets, on these attributes proposed by the Framework according to a survey conducted in 2012.* Convention on Tobacco Control. These moves to commoditize tobacco products could undermine In general, market dynamics are distinctively different healthy competition among tobacco manufacturers between mature and emerging markets. trying to meet increasingly diverse consumer preferences. Worse, they could result in an undesired In mature markets, industry volume tends to decline increase in illicit trade, as commoditized products reflecting various factors such as limited economic with less uniqueness are easier to counterfeit and growth, tax increases, tightening regulations, more difficult to detect when smuggled. and demographic changes, among others. Excise taxes were raised in various markets during In addition, down-trading is prevalent in these markets. the past year, but there was no disruptive tax increase Consumers are inclined to seek more value as they in our key markets as Governments have become feel tobacco products become less affordable in aware that repeated tax increases in a short period the context of limited disposable income growth. of time, or steep tax increases, could be detrimental to tax revenues, due to a large decline in industry volume Recently, these trends have been especially notable and, most likely, an increase in illicit trade. in the EU countries, as weak economic conditions accelerate industry contraction and down-trading. Competition Excluding China, two thirds of world industry volume In emerging markets, on the other hand, total is produced by four major global tobacco companies, consumption tends to increase driven by population namely Philip Morris International Inc., British American growth and economic development, particularly Tobacco Plc., Japan Tobacco Inc. and Imperial Tobacco in Asia, the Middle East and Africa. Group Plc.
As their disposable income increases, consumers The competition within the industry is intense and, look for quality and trade up to products in higher as consumers’ needs and preferences continue to price bands. diversify, a strong portfolio with established brands is increasingly important to support market share Overall, when we exclude China, global industry gains. Therefore, major global companies are focusing volume has been slightly decreasing. However, more on brand equity enhancement to strengthen their importantly, industry value continues to grow even in brand portfolios by introducing innovative products. the current difficult operating environment, mainly driven In addition to the pursuit of organic growth, M&A is by price increases. This is a sign of the resilience of the an effective way to supplement growth opportunities industry. These trends – decline in volume and increase in this industry. in value – are expected to continue in the years ahead.
* Source: Euromonitor.
020 Japan Tobacco INC. Annual Report 2013 Top 10 countries by volume Billion units
Country 2008 2009 2010 2011 2012 & A OPERATIONS
China 2,143.1 2,229.2 2,316.7 2,406.2 2,477.9 Russia 393.5 390.0 383.1 375.1 374.1 U.S. 353.0 320.7 309.1 299.1 287.1
Indonesia 167.7 173.8 181.6 191.8 203.1 n a l y
Japan 248.8 235.1 217.9 195.9 197.5 s is India 97.6 98.7 98.6 102.8 102.1 Philippines 99.5 94.8 101.4 97.4 100.5 Vietnam 81.0 89.9 95.3 97.7 99.7 Turkey 107.9 107.5 93.4 91.2 95.3 South Korea 94.2 94.2 90.5 89.9 89.0
Source: Euromonitor.
Top market players Share of market (%) 2008 2009 2010 2011 2012
Philip Morris International Inc. 22.3 22.8 24.9 25.3 25.5 British American Tobacco Plc 18.6 18.7 19.0 19.2 19.1 Japan Tobacco Inc. 15.4 15.2 14.8 14.0 14.5 Imperial Tobacco Group Plc 7.2 7.1 7.0 6.9 6.7
Source: Euromonitor and JT estimate. Excluding China National Tobacco Corp (CNTC).
Top brands Billion units Brand Company 2008 2009 2010 2011 2012
Marlboro • Philip Morris International Inc. • Altria Group Inc. 428.8 414.5 412.8 406.6 400.9 Winston • Japan Tobacco Inc. • Reynolds American Inc. 122.4 122.1 122.4 122.4 129.7 Pall Mall • British American Tobacco Plc • Reynolds American Inc. 74.0 85.6 94.6 96.8 95.8 Mild Seven/ MEVIUS • Japan Tobacco Inc. 107.4 103.7 95.1 80.5 85.8 L&M • Philip Morris International Inc. 85.2 84.0 82.1 84.1 83.5 Kent • British American Tobacco Plc 61.7 60.6 59.6 62.6 66.7 Camel • Japan Tobacco Inc. • Reynolds American Inc. 78.5 69.7 64.8 61.2 61.4 Gudang Garam • Gudang Garam Tbk PT 47.4 48.8 52.3 53.7 57.8 Fortune International • Philip Morris International Inc. • Fortune Tobacco Corp 42.5 43.8 50.1 47.6 52.5 Gold Flake • ITC Ltd • British American Tobacco Plc 48.7 47.4 47.1 47.9 47.6
Source: Euromonitor. Excluding China National Tobacco Corp (CNTC)
Japan Tobacco INC. Annual Report 2013 021 Industry Overview continued Pharmaceutical, Beverage and Processed Food
Pharmaceutical industry Competition The pharmaceutical industry is highly competitive Market dynamics worldwide. Our pharmaceutical business focuses The global pharmaceutical market continues to grow, on building a R&D-led operational platform. Based reaching approximately US $950 billion in 2011 on this platform, original compounds are developed according to IMS Health. and marketed as leading products in major global markets. As such, we face competition with Japanese In emerging countries, demand for modern medicine and multinational pharmaceutical companies. These is rapidly growing due to multiple factors including companies are also pursuing to enforce their research growing consciousness of health, increase in and development pipeline. population, and development of public healthcare systems, among others. Japanese beverage industry
Mature countries also see a market value increase, Market dynamics though the pace of growth is moderate. Facing an Sales volume of the Japanese beverage market was ageing society and a fiscal deficit, the Governments approximately 1,810 million cases for 2012, up 3% in these markets try to contain healthcare costs through year-on-year. The increase was due to the increase in mandated price cuts and wider promotion of generic demand for mineral water for stocking as well as the drugs. In addition, patents of commercially successful summer heat wave and Indian summer. (Source: Inryo drugs have been expiring during recent years. Soken Inc. Data of packaged products including cans, PET bottles and glass bottles). In general, sales volume Despite the limited growth, mature markets hold is significantly affected by weather conditions including majority of share in global pharmaceutical markets. temperature, as well as by economic conditions. North America is the largest market and accounts for 36% of the worldwide market, followed by Europe Popular beverage categories in Japan include tea- and Japan, representing 28% and 12%, respectively. based drinks, coffee, carbonated drinks and mineral water. In 2012, sales volume of most categories Japan, the main market for our pharmaceutical increased year-on-year. In particular, the sale of cola business, is a typical mature market with a moderate drinks, designated as Food for Specified Health Uses, industry growth. In an ageing population, this trend contributed to the strong growth of carbonated drinks. is expected to continue at a CAGR of 1% to 4% from Tea-based drinks and coffee, the mainstay categories, 2012 through 2016, according to IMS Health. grew steadily.
Prescription drugs comprise the majority of the Key sales channels in Japan include vending machines, Japanese pharmaceutical market in terms of net sales. supermarkets, convenience stores and other channels, The Japanese generic drug market for prescription with share of sales volume standing at 37%, 32%, drugs is still small compared with the generic drug 20%, and 11% respectively (Source: Inryo Soken Inc. market in the U.S. and Europe, but the generic drug Data of packaged products including bins, cans and market has been expanding more recently due in PET bottles). In general, supermarkets frequently part to the government promotion of generic drugs offer price discounts, while vending machines and in order to control medical care expenses. convenience stores maintain regular prices. However, the consumer down-trading trend has led to the In light of these factors and consistent with the emergence of vending machines offering discounts global trend towards industry consolidation, Japanese and to the growing popularity of private-label products, pharmaceutical companies have been actively involved causing price competition to intensify. Price competition in mergers, acquisitions and other business alliances. is also driven by wholesalers and retailers. In addition to industry consolidation within Japan, cross-border mergers, acquisitions and other business alliances involving Japanese pharmaceutical companies are also expected to increase.
022 Japan Tobacco INC. Annual Report 2013 Competition Competition Many companies, both domestic and international, TableMark is competing against major players like are selling beverages in Japan, including the JT Group, Nichirei, Ajinomoto, Maruha Nichiro Foods and Nissui & A OPERATIONS Coca-Cola Group, Suntory Foods, Kirin Beverage, as well as a multitude of mid-or small-scale producers. ITO EN and Asahi Soft Drinks. The competition is As a consequence of the consolidation among the increasingly intensive. These companies are competing major wholesale or retail players, the competition in various areas including price, brand equity, in the processed food industry is increasing. distribution reach among others. n a l y s
Japanese processed food industry is
Market dynamics JT focuses on frozen and ambient processed foods, freshly baked bakery items sold in stores and seasoning through our subsidiary TableMark Co., Ltd., which plays a central role in our processed food business.
Processed foods sold in Japan include grain-based food such as noodles or packed rice, bread, meat and fish. Seasoning products include raw seasonings, such as yeast and other extracts, basic seasonings, such as soy sauce and miso, and processed seasonings such as mayonnaise and other condiments.
Frozen food is a key segment in TableMark’s processed food business. The size of the Japanese frozen food market in 2012 on a consumption basis including imports was ¥895.1 billion, up 4.2% year-on-year (Source: Japan Frozen Food Association). This was due to an increase in household consumption of frozen food as we saw stronger preference for eating in – demand for ready- made frozen food also remained solid.
Processed frozen food products constitute approximately 85% of frozen food products produced domestically in Japan (by volume/Source: Japan Frozen Food Association). Frozen udon noodles constitute approximately 11% of frozen food products produced domestically in Japan in 2012 and this category grew by more than 3% year-on-year in 2012 (by volume/ Source: Japan Frozen Food Association).
The business environment for the Japanese processed food business is challenging, as prices of raw materials such as wheat are rising in spite of the prolonged economic stagnation in Japan. The processed food business is also significantly impacted by developments in the wholesale and retail sales channels particularly by their consolidation. We will continue to monitor the development of these channels, especially in the area of M&A.
Japan Tobacco INC. Annual Report 2013 023 Review of Operations Role of Tobacco Businesses
Mid- to long-term target: • As the core business and profit growth engine of the JT Group, grow adjusted EBITDA at mid to high single-digit rate per annum ––Japanese domestic: highly competitive platform of profitability ––International: strengthen its role as the Group’s profit growth engine.
MEVIUS, a bold and promising initiative MEVIUS in international markets • With the evolution from Mild Seven to MEVIUS, • MEVIUS name change rolled out to all markets we aim to transform it into the number one global by end 2013 premium brand in the future. • Singapore was the first market to launch the • When we look at the composition of our GFBs, MEVIUS name while South Korea was the first the high price brands constitute about 20% of market to release the new name and design the portfolio. We believe that, by reinforcing • Our objective is not only to retain and expand our premium segment offerings, we can further our share in existing markets but also to achieve strengthen our brand portfolio for sustainable further geographical expansion. mid- to long-term profit growth. • In selecting a brand to enhance our premium segment MEVIUS in the Japanese market offerings, we examined various options. Early in the • A new package design was introduced process, we recognized the potential of Mild Seven in November 2012 with its smooth taste and clean finish, thanks to its • We successfully proceeded with the name unique tobacco leaf blend and the use of a charcoal change from Mild Seven to MEVIUS in February filter. Mild Seven already has a strong presence in 2013, as the first step towards becoming the several markets, especially in Asia. We therefore came number one global premium brand to the conclusion that Mild Seven has the strongest ––Market share of the MEVIUS family remained potential for cultivating demand in global markets. steady throughout the transition • To ensure the success of this evolution, we needed • Going forward, we will continue to invest to address some hurdles through a unified brand to strengthen the brand equity. image and quality for all markets and further enhanced brand equity. This led to: ––Changing the package design to better represent global premium quality. ––Expanding the product portfolio through high value-added extensions in order to meet diverse consumer needs. ––Renaming the brand to grow its geographic reach and address the ban of descriptors in certain markets, such as in the EU where terms such as “mild” or “light” are not allowed on cigarette packs.
Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers.
024 Japan Tobacco INC. Annual Report 2013 Value Chain OPERATIONS & A OPERATIONS
Sales & R&D Procurement Manufacturing Marketing Distribution n a l
Create value Ensure Support Enhance equity Expand product y s for the business stable supply top-line growth of key brands availability by is through of quality by delivering leveraging our innovation tobacco leaf quality trade marketing and quality products excellence
R&D Manufacturing Create value for the business through innovation and quality Support top-line growth by delivering quality products • We focus on fundamental research and product technology • Our emphasis on product quality is increasing to meet development, taking advantage of our global research platform, consumer expectations for innovative offerings. In addition, in close collaboration with other functions. In particular, focus we consistently pursue an optimal manufacturing footprint areas in our R&D activities are: which ensures efficient and timely product deliveries –– Develop product and analytical capabilities in line with market to markets. needs and our anticipation of regulatory trends. –– Ensure high quality of products and enhance flexibility –– Maintain existing product to comply with regulatory changes. in the manufacturing process, overcoming complexity –– Develop new technologies and improve production processes in manufacturing due to an increase in number of products. to maintain competitiveness and increase efficiency. –– At the same time, seek efficiency by containing cost increases –– Drive product innovation to enhance brand equity from various through continuous improvement and reviewing manufacturing aspects, including tobacco leaves, blends, filters, printing footprint for further optimization. techniques and packaging.
Marketing Procurement Enhance equity of key brands Ensure stable supply of quality tobacco leaf • Our strategic focus is placed on our Global Flagship Brands • Tobacco leaf is the most important material for our products, and we strive to enhance their equity through effective and we dedicate our efforts to strengthen our capability communications with consumers. to ensure a stable supply of quality leaf in the long-term. –– Allocate appropriate resources to support GFBs’ equity building. –– Increase the proportion of internally sourced leaf from our –– Reinforce non-GFBs, where necessary, to complement our procurement bases in Africa, Brazil and the U.S. brand portfolio in a market. –– Enhance sustainability of tobacco farming by helping farmers –– Implement effective marketing programs, in compliance to improve productivity as well as taking initiatives to support with applicable laws and regulations as well as our own their communities. marketing code. –– Maintain good relationships with external suppliers to ensure sufficient supply at competitive prices. Sales & Distribution Expand product availability by leveraging our trade marketing excellence • There are various sales channels for tobacco products such as supermarkets, convenience stores, street and train station kiosks, small independent retailers and vending machines. Key channels are different depending on market and we develop win-win relationships with them to increase the availability of our products. –– Strengthen relationship with key accounts, leveraging our trained sales forces. –– Develop trade marketing initiatives for each market, taking into account the channel development as well as consumer trends and competitors’ actions.
Japan Tobacco INC. Annual Report 2013 025 Review of Operations continued International Tobacco Business (Year ended December 31, 2012)
Total Shipment Volume1 Year-on-year change GFB Shipment Volume Year-on-year change (BnU) (BnU) 436.5 +2.5% 268.8 +4.8%
Core Revenue2 Year-on-year change Adjusted EBITDA3 Year-on-year change (US$ MM) (US$ MM) 11,817 +5.4 % 4,302 +9.1%
Pierre de Labouchere 1 Includes Fine Cut, cigars, pipe tobacco and snus, but excludes contract manufactured products. 2 Includes revenue from Fine Cut, but excludes revenues from distribution, contract manufacturing and other peripheral businesses. 3 Operating profit + depreciation and amortization ± adjustment items (income and costs)* * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.
“JTI continued to deliver strong results in 2012, Core Revenue grew, driven by pricing, volume and improved mix. achieving double-digit growth in both our revenue and profits, at constant rates of exchange, despite +12.6%* +5.4% the ongoing challenges in our operating environment.
-806 1,101 Our solid performance was driven by robust pricing and volume growth, and I am pleased to say that 311 12,623 our strategy of continuous investment in our Global 11,817 Flagship Brands has resulted in share gains in most 11,211 of our key markets. 2011 Volume Price/Mix 2012 at FX 2012 constant reported In addition, we continue to secure our future growth currency by expanding JTI’s presence in other tobacco categories. * 12.6% includes approximately 2ppt of pricing taken to mitigate the effect of This includes Fine Cut tobacco, with the acquisition a currency with substantial devaluation. of Gryson, and water pipe tobacco, following the • Total shipment volume grew 2.5% driven by our success in acquisition of Nakhla. These and other opportunities broadening the earnings base, through acquisitions as well will help us to further broaden our earnings base. as organic growth in newly developed geographies. • Within our total shipment volume growth, GFB shipment volume grew Looking to the future, despite ongoing economic 4.8% driven by our continued and solid investment in brand equity. and regulatory challenges, I am confident that • Revenue grew 12.6% on robust pricing and mix in key markets including Russia, Taiwan and the UK, or 5.4% including unfavorable the professionalism and dedication of our people, currency exchange movements. combined with our strategy, will continue to deliver solid performance.” Adjusted EBITDA grew 22.5% at constant currency.
Pierre de Labouchere +22.5%* +9.1% President & CEO, JT International
-381
1,094 JT International (JTI) represents the -528
173 international activities of JT Group’s tobacco 4,830 4,302 business. JTI manufactures and sells more 3,944 than 90 brands of tobacco products in more 2011 Volume Price/Mix Other 2012 at FX 2012 constant reported than 120 countries. It is the profit growth currency engine of the Group driven by its diversified * 2 2.5% includes approximately 6ppt of pricing taken to mitigate the effect of geographic profile and the strength of its a currency with substantial devaluation. brands and people. • Strong volume and price/mix drove our 22.5% profit growth. • Product cost increase was moderate (+1.5%) linked to product and packaging innovation and compliance with European LIP regulation. • Reported profit was impacted by unfavorable currency exchange movements.
026 Japan Tobacco INC. Annual Report 2013 Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers.
Global Flagship Brands (GFB) Portfolio
Our GFBs form the core of our brand portfolio. Among this portfolio, Winston & A OPERATIONS and Camel are our Engine brands and the main drivers of top-line growth.
Winston n a l
First introduced in 1954, Winston is one of our key growth drivers. y s
The second largest cigarette brand worldwide since 2007, Winston is is currently sold in more than 100 markets. 2012 was a landmark year for Winston, achieving record performance. Winston’s growth rate continued to accelerate, reaching its highest level of +6.7%. 2012 shipment volume surpassed all previous records to reach 139.4bn units.
Winston shipment volume growth Winston shipment volume by cluster (growth 2012 vs. 2011) BnU, growth % Growth %
139.4 130.7 121.2 125.0
South & West Europe +3.1% +6.7% -4.1% +3.1% +4.5% North & Central Europe +7.8%
CIS+ +13.5%
Rest-of-the-World -2.3% 2009 2010 2011 2012
Growth was driven by both pillars of the newly established of the newer players in emerging segments, XS has portfolio architecture: Winston Core and XS. grown to become No. 1 in the King Size Super Slim • Our Core pillar delivers an authentic, high quality, premium segment and No. 2 in Fat Slims globally. smoking experience. It continues to grow steadily driven • Sales have grown across most of the clusters. This by mainstream products: Winston King Size, Winston growth was driven by expansion in new geographies Super Slims and Winston Fine Cut. and roll-out of new initiatives in several markets: XSmicro, • The XS pillar offers a more style focused product, created the slimmest cigarette in the world; XSpression, the first specifically to open up new segments and territories innovative menthol capsule in Fat Slims format and to Winston. 65% of overall Winston growth in 2012 was Winston Make Your Own, deployed in a variety of attributed to this portfolio pillar, and despite being one new formats/configurations in Europe.
Camel
In 2012, rejuvenation and innovative line extensions drove Camel shipment volume and market share growth.
In 2013, we celebrate the 100 years anniversary of a global icon • Launched in 1913 and originator of the American blend, Camel has stood the test of time. It is sold today in 110 countries and is one of the top five premium brands in many of our key markets. Even after 100 years, with its strong heritage and genuine taste, Camel continues • Camel shipment volume grew by 200 million units vs. to successfully reinvent itself. prior year, driven by Camel Activate, Camel Black & White • We are celebrating Camel’s 100 years of inspiring creativity (now available in 34 markets) and Fine Cut line extensions. by reinterpreting stories from some of the brand’s iconic • Camel Curve drove share gains in most of Camel’s top 10 moments and making them relevant and unique today markets, such as The Netherlands, Belgium, Italy and Spain. through special edition packs and point of sales campaigns.
Japan Tobacco INC. Annual Report 2013 027 Review of Operations continued International Tobacco Business continued
Our strategies: shipment volume, up 1.4ppt from the year before. As in previous years, our strategic priorities are to This shows again the success of our ongoing achieve quality top-line growth and broaden our earnings investments to enhance the equity of our portfolio base. JTI is committed to deploying its key strategies and launch innovative propositions. under the guiding principle of continuous improvement. Our Engine brands performed strongly, driven by Our key strategies are: both Winston and Camel. Engine brands’ weight in • Build and nurture outstanding brands our total portfolio increased by 1.1ppt vs. the prior year. • Enhance productivity continuously • Maintain focus on responsibility and credibility Our Stronghold brands achieved solid growth, driven by • Strengthen human resources as a cornerstone the performance of LD as a result of stronger equity and of growth. the successful launch of the innovative LD Club Lounge.
Operating performance Cluster performance • JTI gained total share in most key markets. Our portfolio is well balanced, allowing us to capture Cluster breakdown consumers in both up-trading and down-trading environments, supported by superior trade Rest-of-the-World CIS+ marketing capabilities. 23% 29% 31% North & Central Europe • Total shipment volume grew 2.5% to 436.6 billion South & West Europe 38% units driven by market share gains, despite the 34% 45% context of global industry contraction. 17% 21% 11% 18% 18% Share of market (12-month moving average) 14% Shipment Core Adjusted Change vs. last year (ppt) volume Revenue EBITA
Markets 2012 Total Excl. Gryson France 17.4% +1.4 +0.3 South & West Europe Italy 21.4% +1.0 +0.9 Year-on-year 2012 change Russia 36.5% -0.6 -0.6 Total shipment volume (billion units) 62.7 +3.1% Spain 20.8% +0.6 +0.2 GFB shipment volume (billion units) 54.0 +0.9% Taiwan 38.9% +0.7 +0.7 Turkey 26.3% +2.2 +2.2 The economic outlook throughout 2012 remained UK 39.3% +1.0 +1.0 challenging and fiscal pressures have affected consumer behavior, leading to significant industry Note: Market shares include cigarettes and Fine Cut. Source: Nielsen, Logista, Altadis. contractions and down-trading, especially in France, Italy and Spain. GFB shipment volume performance Nevertheless, we have successfully grown shipment 2012 GFB shipment volume volume and market share across our key markets as Year-on-year variation (BnU) a result of brand equity building initiatives and GFB % Total Year-on- shipment year product innovations, as well as the Gryson acquisition. volume change 2011 256.5 60.2% +2.6% In Italy, JTI reached the No.2 position by market share. Engine (Winston/Camel) 9.0 41.3% +5.2% Furthermore, JTI was the only player growing market Stronghold (LD/Mild Seven/ Benson & Hedges/Silk Cut) 3.8 17.8% +5.1% share in both the cigarette and the Fine Cut categories. Future Potential (Glamour/Sobranie) -0.4 2.5% -3.2% 2012 268.8 61.6% +4.8% The pricing environment has also remained robust. Price increases, together with our strong volume performance, drove Core Revenue growth of 4.4% In 2012, GFB shipment volume grew 4.8% to 268.8 and Adjusted EBITA growth of 2.8%, at constant billion units, a clear acceleration from the 2.6% growth rates of exchange. in the prior year. GFB now represent 61.6% of our total
028 Japan Tobacco INC. Annual Report 2013 Global Flagship Brands Portfolio continued
Our other GFBs include Mild Seven – MEVIUS, Silk Cut, Benson & Hedges and & A OPERATIONS LD which hold strong positions in their regions and complement our Engine brands. There are also Sobranie and Glamour, positioned as “future potential” brands with strong growth expected in the future. Below is a more detailed description of these GFBs. n a l y s
Stronghold is
Launched in 1977 in Japan, Mild Seven Originally established in 1873, Benson is the top-selling premium charcoal brand. & Hedges has a proud British heritage Outside Japan, it is present in 16 as a leading brand. Today, JT International countries with its key markets being owns the B&H trademark in 27 EU Korea, Malaysia, Russia and Taiwan, markets (excluding Baltics) and is where it is market leader. The brand is continuously evolving its three-pillar based built around three pillars and 21 different portfolio to adapt to consumers’ lifestyles. styles. In 2012, Mild Seven benefited B&H carries 21 different SKUs and from the success of our unique Less continues to broaden its reach with Smoke Smell technology. the introduction of the B&H Progressive range in Cyprus, Denmark, Portugal, In 2013, following our brand name Slovenia and Sweden, as well as B&H change announcement in August 2012, London in Switzerland. B&H enjoys the Mild Seven will progressively become No.2 position in the UK’s sub-premium MEVIUS and aim to become the highest segment and in France’s Virginia segment. value-added global premium brand.
LD was launched in 1999 as a mid-price Launched in 1964, Silk Cut established brand in the Russian market. The brand its credentials as one of the first low tar achieved immediate success and is now brands in the 1970s, long before it became recognized as a compelling international the norm for other manufacturers. JTI brand, ranked No.2 globally in the Value owns the Silk Cut trademark throughout segment. Since 2007, LD has grown the EU. In total, Silk Cut has presence in continuously in all clusters, reaching 16 markets with the core markets being 33 countries. LD has constantly expanded Greece, Ireland and the UK, where the its portfolio to meet consumer aspirations, brand continues to grow share in the including in Fine Cut. In 2012, the LD premium segment. Silk Cut comprises Club family grew shipment volume by a portfolio of 17 different SKUs. 105% driven by the success of LD Club Lounge. LD enjoys segment leadership in various markets including Azerbaijan, Kazakhstan, Poland, Serbia and Turkey.
Future Potential
Sobranie is one of the world’s Glamour is JTI’s leading Super Slims oldest tobacco brands and has been brand. Since its introduction in 2005, synonymous with luxury cigarettes since Glamour has achieved remarkable growth, 1879. This heritage, exquisite style and consolidating its position as a Super Slims the best selected tobaccos have made brand in several CIS+ markets. Glamour Sobranie one of the most prestigious is constantly expanding its geographical brands in the world. Sobranie has presence, now covering 29 markets. presence in 23 markets and its portfolio Glamour is developing its portfolio includes 15 SKUs. In 2012, Sobranie in the growing Super Slims segment launched a number of products such around three main families. Glamour as Super Slims in Kazakhstan, Romania, holds the No.1 shipment volume position Russia and Ukraine and King Size in several segments including in Austria, Super Slims in Azerbaijan. Kazakhstan, Russia, Slovenia and Ukraine.
Japan Tobacco INC. Annual Report 2013 029 Review of Operations continued International Tobacco Business continued
North & Central Europe Rest-of-the-World Year-on-year Year-on-year 2012 change 2012 change Total shipment volume (billion units) 49.9 +1.6% Total shipment volume (billion units) 126.5 +7.2% GFB shipment volume (billion units) 24.3 +4.1% GFB shipment volume (billion units) 67.6 +0.2%
Total shipment volume growth was driven by Poland, Total shipment volume grew driven by solid Germany, Hungary and the Czech Republic. In these performances in Sudan, Turkey and markets across markets, investments in GFBs are generating positive the rest of the Middle East and Africa. This offset the returns as LD, B&H and Camel all gained share impact of the suspension of our business in Syria. of market. We achieved strong pricing gains in Canada, In the UK, in spite of the weak economic environment, Malaysia, the Middle East and Africa, and Taiwan. JTI has continued to increase its share of market. We also implemented a price increase in September, which In Turkey, during 2012, JTI reached the No.2 position more than offset strong down-trading, and enabled by market share, growing shipment volume and continued profit growth. further consolidating its #2 position by share of value.
Core Revenue and Adjusted EBITA grew 5.6% and Core Revenue and Adjusted EBITA grew by 13.0%* 16.3% respectively, at constant rates of exchange. and 17.3%*, respectively, at constant rates of exchange. Adjusted EBITA margins also improved by 3.9ppt Adjusted EBITA margin increased by 0.9ppt*. This to reach 41.8%. illustrates the ability of this cluster to significantly contribute to JTI’s overall profitability, as a result CIS+ of our growing business scale. Year-on-year 2012 change Outlook Total shipment volume (billion units) 197.4 -0.2% JTI will keep delivering on its solid track record of growth. GFB shipment volume (billion units) 122.9 +9.6% In 2013, we aim to demonstrate once again the solidity The impact of industry contractions in Russia and of our business fundamentals, the capabilities of our Ukraine was offset by our growing volume base in the people and the soundness of our strategic focus on Caucasus and Central Asia markets, and the recovery top-line growth and broadening the earnings base. in Belarus. While the economic and regulatory environments will GFB shipment volume continued to increase driven remain challenging, we are highly confident in our ability by strong performance from Winston and LD. to continue double-digit Adjusted EBITDA growth at constant rates of exchange. Our approach to pricing remained disciplined, seizing pricing opportunities mainly in Kazakhstan, Romania, Russia and Ukraine.
In Russia, GFB growth and robust pricing continued to strengthen our share of value leadership.
Core Revenue grew 14.2% and Adjusted EBITA grew by 32.2% at constant rates of exchange. Profitability in the cluster grew, with Adjusted EBITA margin up to 37.8%, driven by pricing gains and an improvement in mix.
* These numbers exclude pricing taken to mitigate the effect of a currency with substantial devaluation.
030 Japan Tobacco INC. Annual Report 2013 Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers.
New opportunities
In line with our strategy to broaden our base for future growth, over the past years & A OPERATIONS we have carried out several acquisitions and entered into partnership to extend our geographic reach and expand our portfolio. n a l
Sudan Ploom y s is In July 2011, we announced the acquisition of Haggar Cigarette In December 2011, we announced our partnership with Ploom & Tobacco Factory, the leading tobacco manufacturer in Sudan Inc. Our partnership has come a long way since then and we and South Sudan, with 80% market share and the No.1 brand have jointly developed a new, upgraded device, which is now in the market. battery powered. We continue to focus our efforts on strengthening the We also developed a range of tobacco blends to be used in brand portfolio, via the strong local brand Bringi, enhancing the device, including a number of JTI Global Flagship Brands. the route-to-market, modernizing production facilities, Unlike the so-called “e-cigarettes”, Ploom pods allow the increasing product quality to JTI standards and enhancing consumer to savor the full taste of real tobacco, but with workforce capabilities. no combustion, producing only vapor. Performance in Sudan has been strong since the acquisition, JTI and Ploom continue to work jointly on the development with shipment volume increasing 0.9 billion units to 5.5 billion of other products, including new devices. units in 2012. In May 2013, Ploom was launched in Austria, and our aim is to roll out Ploom to several other markets during the course of 2013. Gryson
The Fine Cut category is growing rapidly in several European markets, driven by the down-trading currently seen in the region due to the difficult economic environment. Over the years, JTI has developed a strong position in this category, through GFB and specific Fine Cut brands, such as Amber Leaf, which is now the largest tobacco brand in the UK. In August 2012, we acquired Gryson, a leading European Fine Cut manufacturer. This makes us the No.2 Fine Cut manufacturer in Europe. Furthermore, we are now the category leader in France, in addition to Ireland. We are also a strong No.2 player in Spain and the UK. By combining Gryson’s portfolio of products and countries Nakhla as well as manufacturing capacity with JTI’s marketing and distribution capabilities, this acquisition gives us new In March 2013, we completed the acquisition of Nakhla, one of growth opportunities. the world’s leading manufacturers of water pipe tobacco, based Fine Cut shipment volume grew 30% in 2012 (+5 billion units in in Egypt. With this acquisition, we entered a new category, cigarette equivalents). Gryson represented 38% of this increase. estimated at over 100,000 tons in the Middle East and Africa. This acquisition offers several strategic advantages: • allowing JTI to satisfy consumer needs in a different product category, while remaining close to our core competencies; • an opportunity to develop this category by improving product quality and applying JTI’s marketing and distribution capabilities; and • combining JTI’s competencies with Nakhla’s platform will enable us to distribute our cigarette brands in Egypt, a market of approximately 64 billion units. Nakhla’s shipment volume in 2012 was 5,200 tons in Egypt and 18,000 tons for export to 97 countries.
Japan Tobacco INC. Annual Report 2013 031 Review of Operations continued Japanese Domestic Tobacco Business (Year ended March 31, 2013)
Core Revenue1 Year-on-year change Adjusted EBITDA2 Year-on-year change (JPY BN) (JPY BN) 654.0 +6.9% 281.3 +7.3 %
1 Excluding revenues from distribution, contract manufacturing and other peripheral business. 2 Adjusted EBITDA = Operating profit + depreciation and amortization + impairment losses on goodwill ± restructuring-related income and costs.
Akira Saeki President, Tobacco Business
In the year ended March 31, 2013, revenue and profits Business results (vol./financial performance) of the Japanese domestic tobacco business grew • Revenue and profit growth driven by sales volume from an increase in the sales volume driven by a steady increase from market share recovery: recovery of market share, compared with the prior year ––Sales volume increased 7.2% year-on-year to when sales volume dropped steeply due to the impact 116.2 billion units driven by market share recovery, of the Great East Japan Earthquake. compared with the prior year when sales volume declined steeply due to the impact of the Great The industry volume in Japan, however, has been East Japan Earthquake. declining over the past years. In this challenging environment, we prioritize top-line growth through Sales volume investing in brand equity enhancement and launching (BnU) new products to meet consumers’ needs. In the year +7.2% ended March 2013, we launched 13 new products with a focus on key brands, and expanding the menthol segment, resulting in market share recovery. For further growth, we also aim to create innovative 116.2 new product categories with unique value propositions 108.4 to supplement our main focus on conventional cigarettes to meet diversified consumers’ needs. FY3/2012 FY3/2013 In February 2013, we completed successfully the name change of Mild Seven to MEVIUS in Japan as the first step toward becoming the number one global premium –– Core revenue increased 6.9% year-on-year brand. Market share of MEVIUS has been robust since to ¥654.0 billion due to sales volume increase. the completion of name change initiative. ––Adjusted EBITDA also increased 7.3% year-on-year to ¥281.3 billion. We continue to be a significant profit contributor to the JT Group by further quality top-line growth. Core Revenue and Adjusted EBITDA In order to achieve this goal, we will not compromise (JPY BN) investments to build brand equity. +6.9% +7.3% In the year ended March 2013, industry volume was 195.1 billion units in Japan, which is one of the largest markets in 611.9 654.0 the world. We own 9 of top 10 selling 262.3 281.3 products in such a large market. We FY3/2012 FY3/2013 FY3/2012 FY3/2013 are the undisputed market leader in Japan with nearly 60% market share.
032 Japan Tobacco INC. Annual Report 2013 Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers.
Expansion initiatives with a focus on key brands OPERATIONS & A OPERATIONS
MEVIUS (changed from Mild Seven)
• Our leading brand in Japan is MEVIUS, evolved from Extension initiatives Mild Seven. MEVIUS inherits Mild Seven’s strong • Mevius Premium Menthol series consumer base which has commanded the No.1 – 100% natural menthol. n
share in the Japanese domestic market for more than a l 30 years since 1978*. y s • In February 2013, two of the Mild Seven menthol series, is the Aqua and the Impact Menthol, were merged into the Mevius Premium Menthol series. This new Mevius Premium Menthol offering uses menthol which is 100% natural. • In May 2013, we launched “Mevius Premium Menthol Option” featuring the “aroma-changing capsule”. The three new products from the Mevius Premium Menthol series meet the diversified consumers’ needs. • The MEVIUS family encompasses 27 products (as of May 31, 2013), reflecting the evolution that it has undergone in step with the changing times and brand expansion.
Seven Stars
• Launched in 1969, Seven Stars featured Japan’s first Extension initiatives domestically produced charcoal filter in pursuit of • Limited edition package introduced better taste. in January 2013. • Since its launch, Seven Stars has consistently offered unique value in terms of taste, aroma and product design. • The Seven Stars family comprises a line-up of ten products (as of May 31, 2013) built around ‘Seven Stars’, the best selling stand-alone product by market share in the year ended March 2013*.
Pianissimo
• In August 1995, the Pianissimo family saw the launch of Extension initiatives Japan’s first 1mg-tar menthol cigarette product featuring • Limited edition package starting reduced odor and smoke**. in June 2013. • The Pianissimo brand, mainly comprising the Super King Size Slim menthol format, continues to achieve growth after integrating two other brands in the year ended March 2010. • The Pianissimo family, a core JT tobacco franchise, features a diverse line-up of nine products (as of May 31, 2013). Pianissimo Aria Menthol is the leading product in the 1mg-tar menthol segment.
* Source: TIOJ ** Reduce smoke: Less smoke is released from the tip of the cigarette based on a visual comparison with conventional JT cigarette products
Japan Tobacco INC. Annual Report 2013 033 Review of Operations continued Japanese Domestic Tobacco Business continued
Business results (market share performance) Our strategies: • Steady recovery of market share through brand In the Japanese market, as a feature of mature equity enhancement: markets, industry volume has been declining due ––Share of market recovered by +4.7ppt year-on-year to various factors such as demographic changes, ––60% market share achieved for the months of tighter regulations among others. Compared to February and March supported mainly by the other markets, the distinctive feature of the Japanese launch of MEVIUS, among others. market is the limited impact of up or down-trading • Continue with efforts to increase market share by due to its narrow price range. Under this circumstance, further enhancing brand equity of our key brands. we focus on quality top-line growth and continuous cost improvement to maintain competitiveness Share movement and to deliver profits. Full year • Priority on quality top-line growth: ––Continue to strengthen our brand equity, with a focus on our key brands ––Further increase market share ––Develop emerging product categories.
59.6% 54.9% Outlook We cannot be too optimistic about our growth for FY3/2012 FY3/2013 the year ended March 2013, which was fueled by the recovery from the unfavorable impact of the earthquake in 2011. Share movement Monthly With the declining industry volume and intensifying competition, the operating environment will remain challenging. Even under such circumstances,
60.0% the Japanese domestic tobacco business is committed to fulfilling its role as a highly competitive platform 59.1% of profitability. This will be achieved by quality top-line growth through market share gains as well as further pursuit of a competitive cost base.
Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013
MEVIUS share movement Monthly
32.2% 31.9%
30.2%
Jan Feb Mar 2013 2013 2013
Note: Market share for January 2013 is for Mild Seven.
1 Excludes sales volume of domestic duty free and the China business. 2 Excludes revenue from distribution of imported tobacco in the Japanese domestic tobacco business, among others. 3 Operating profit + depreciation and amortization ±adjustment items (income and costs)*. * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.
034 Japan Tobacco INC. Annual Report 2013 Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers. OPERATIONS & A OPERATIONS n a l y s is
Japan Tobacco INC. Annual Report 2013 035 Review of Operations continued Role of Pharmaceutical, Beverage and Processed Food Business
Role and Priorities of each business
P harmaceutical Business Strive to establish a stronger profit platform through the rapid and efficient market launch of compounds in the late phase of clinical trials and through maximization of each product value
B everage Business Strengthen the business foundation for future growth in order to make further profit contribution to the JT Group
P rocessed Food Business Strive to achieve operating profit margin on par with or above the industry average to grow its profit contribution to the JT Group
036 Japan Tobacco INC. Annual Report 2013 In addition to the Tobacco Business, our core business, JT operates:
Pharmaceutical, Beverage and Processed Food. & A OPERATIONS n a l y s
Pharmaceutical Business is
JT commenced the pharmaceutical business in outstanding shares in Torii Pharmaceutical Co., 1987. Its mission is to build world-class, unique Ltd. (Torii Pharmaceutical) in 1998 and the addition R&D capabilities and reinforce its market presence of a clinical development function to our U.S. through innovative drugs. The pharmaceutical subsidiary, Akros Pharma Inc., in 2000. In order business focuses on the development, production to establish and strengthen our earnings base, and sale of prescription drugs. The business has we are enhancing our research and development been expanding steadily, with the establishment pipeline, exploring opportunities for strategic in- of the Central Pharmaceutical Research Institute or out-licensing and strengthening collaboration in 1993, the acquisition of a majority of the with license partners.
Beverage Business
The beverage business started its operation in 1988. Our beverage products are sold in Japan. The flagship brand is ‘Roots’ and it is one of the leading brands in the canned coffee category in Japan. Another key brand is ‘Momono Tennen-sui’, a well-known long-selling beverage product in Japan. Japan Beverage Holdings Inc. (Japan Beverage), the vending machine operator, became our subsidiary in 1998 and collaboration within the Group centered on Japan Beverage will be pursued to enhance our sales network.
Processed Food Business
Our processed food business is operated by mainly staple food products such as frozen noodles, TableMark Co., Ltd. (TableMark), a 100% subsidiary frozen rice, packed cooked rice and frozen baked of JT. The business started in 1998 and has been bread. The company’s business also includes expanding through organic growth as well as bakery chain outlets, mainly in the Tokyo through M&A and strategic partnerships. In 2008, metropolitan area, as well as seasoning including we acquired Katokichi Co., Ltd. (Katokichi), a major yeast extracts and oyster source. TableMark’s frozen food manufacturing company in Japan, frozen noodles, particularly frozen ‘Sanuki-Udon’ through a tender offer. The JT Group’s processed noodles is a household name in Japan. food business was transferred over to Katokichi The bakery chain business is operated mainly as part of the integration. In 2010, Katokichi’s under ‘Saint Germain’ brands. Products for the corporate name was changed to TableMark, to seasoning business include “Vertex”, a yeast pursue synergies and foster a sense of unity within extract seasoning, which is used in various foods the group. TableMark operates mainly in Japan such as instant noodles or snacks. producing frozen and ambient processed food,
Japan Tobacco INC. Annual Report 2013 037 Review of Operations continued Pharmaceutical Business (Year ended March 31, 2013)
Revenue Year-on-year change Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN) (JPY BN) (JPY BN) 53.2 +5.8 -12.7 -2.7
1 Adjusted EBITDA = Operating profit + depreciation and amortization + impairment losses on goodwill ± restructuring-related income and costs
Muneaki Fujimoto President, Pharmaceutical Division
In the pharmaceutical business, we aim to Revenue build a unique, world-class pharmaceutical (JPY BN) business driven by R&D, and to increase +5.8 our market presence through original and innovative drugs. We strive to strengthen the profit base through the rapid and 53.2 efficient market launch of compounds 47.4 in the late phases of clinical trials and FY3/2012 FY3/2013 value maximization of each product.
Performance overview: Adjusted EBITDA1 We made significant achievements in the year (JPY BN) ended March 2013: -2.7 • Stribild, an anti-HIV single-tablet regimen containing our original compound (JTK-303)
––Launched in the U.S. by our license partner, -10.0 Gilead Sciences, Inc. (May 2013: Marketing -12.7 approval obtained in Europe). ––Manufacturing and marketing approval was obtained by us in Japan. (May 2013: Launched in Japan). FY3/2012 FY3/2013 • MEK inhibitor trametinib (melanoma) ––NDA/MAA filed in the U.S. and EU by our license partner, GlaxoSmithKline. (May 2013: Business results (financial overview): Marketing approval obtained in the U.S.). • Revenue grew driven by continued growth in sales • NDA filed by us in Japan for two compounds of Remitch Capsules and Truvada Combination ––JTT-751 (hyperphosphatemia) Tablets by Torii Pharmaceutical and the increase ––TO-194SL (Japanese cedar pollinosis) in milestone revenue for JT as a result of progress by Torii Pharmaceutical. in the development of out-licensed compounds. • Adjusted EBITDA decreased due to the increase Strategy: in R&D investments from progress in compound • Rapid and efficient market launch of development at both JT and Torii Pharmaceutical. compounds in late phases of clinical trials. • Value maximization of each product. • Promote R&D for next generation of strategic Glossary compounds and seek optimum timing for out-licensing. NDA – New drug application for marketing approval MAA – Marketing Authorization Application
038 Japan Tobacco INC. Annual Report 2013 Value Chain
R&D Manufacturing Sales & Promotion & A OPERATIONS
Continue to strengthen R&D Ensure a reliable supply Build marketing competence n
capability, a cornerstone of of quality products on our MRs a l y
our pharmaceutical business s is
R&D Sales & Promotion Continue to strengthen R&D capability, a cornerstone of our Build marketing competence on our MRs pharmaceutical business In the pharmaceutical industry, medical representatives (MRs) A particular emphasis is placed on research and development in line play a crucial role in successful sales and promotion by providing with our mission to establish a unique R&D oriented business model medical and scientific knowledge with clients. At the same time, which can compete on a global basis. By focusing our resources they collect valuable information from the medical front which on specific areas, we efficiently strengthen our R&D capability could be reflected in the ongoing or future R&D activities. Torii which enables us to create innovative drugs. In addition, we strive Pharmaceutical is marketing our products in Japan through to accelerate market launches of our compounds in pursuit of 460 highly-trained MRs. Outside Japan, we do not have a sales a profitable business base. function. As such, instead of directly marketing our products, • Focus mainly on the fields of glucose and lipid metabolism; we receive royalties based on sales performance from our license virus research; and immune disorders and inflammation to partners for the compounds for which we out-license the right best leverage our expertise. to develop and market. • Allocate adequate resources in R&D in light of the increasingly • Provide extensive training programs to MRs and expand complex, time-consuming and therefore costly development their knowledge to earn trust from our clients. process due to stringent regulations. • Strengthen our marketing capabilities by leveraging • Aiming at discovery of “first-in-class” compounds, enhance the marketing support system, which integrates clients’ pre-clinical research capability and build development information including their needs spread across functions. strategies tailored to accomplish the objective. • Build a sales and marketing strategy to meet the existing and future market needs in the changing business environment.
Manufacturing Ensure a reliable supply of quality products For pharmaceutical products, quality and safety must be assured, and our manufacturing operations ensure these key responsibilities are fulfilled. We also pursue efficiency in our manufacturing arrangements; products marketed in Japan are mainly produced by Torii Pharmaceutical to maximize intra-Group synergies, while outsourcing to contract manufacturers where appropriate. • Remain focused on quality assurance and safely control. • Maintain optimal manufacturing arrangements. • Continuously strive to reduce environmental impacts, as evidenced by the ISO 14001 certificate obtained by our Sakura plant.
Japan Tobacco INC. Annual Report 2013 039 Review of Operations continued Pharmaceutical Business continued
Japan Tobacco Inc. Clinical Development (as of April 25, 2013)
In-house development
Code Potential Indication/ (Generic name) Dosage form Mechanism Description Location Phase 1 Phase 2 Phase 3 Preparing to file Filed Origin JTK-303 Integrase inhibitor which works by blocking integrase, (elvitegravir) HIV infection/Oral HIV Integrase inhibitor an enzyme that is involved in the replication of HIV Japan In-house JTT-705 Decreases LDL (bad cholesterol) and increases HDL (dalcetrapib) Dyslipidemia/Oral CETP modulator (good cholesterol) by modulation of CETP activity Japan In-house Decreases LDL and increases HDL JTT-302 Dyslipidemia/Oral CETP inhibitor by inhibition of CETP Overseas In-house JTT-751 Decreases serum phosphorous level by binding phosphate In-license (Keryx Biopharmaceuticals) (ferric citrate) Hyperphosphatemia/Oral Phosphate binder derived from dietary in the gastrointestinal tract Japan Co-development with Torii Type 2 diabetes G protein-coupled Decreases blood glucose by stimulation of glucose-dependent Japan JTT-851 mellitus/Oral receptor 40 agonist insulin secretion Overseas In-house Anemia associated with Increases red blood cells by stimurating production of erythropoietin, Japan JTZ-951 chronic kidney disease/Oral HIF-PHD inhibitor an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD Overseas In-house Autoimmune/allergic Interleukin-2 inducible Suppresses overactive immune response via inhibition of JTE-051 diseases/Oral T cell kinase inhibitor the signal to activate T cells related to immune response Overseas In-house Autoimmune/allergic Suppresses overactive immune response via inhibitation JTE-052 diseases/Oral JAK inhibitor of Janus kinase (JAK) related to immune signal. Japan In-house
[ * Based on the first dose]
Licensed compounds
Compound (JT’s code) Licensee Mechanism Note Elvitegravir: U.S. and EU marketing HIV Integrase inhibitor which works by approvals submitted elvitegravir Integrase blocking integrase, an enzyme that Stribild: EU marketing approval submitted (JTK-303) Gilead Sciences inhibitor is involved in the replication of HIV New Single Tablet Regimen: Phase 3 Metastatic melanoma: U.S. and EU marketing approvals submitted Inhibits cellular growth by specifically Metastatic melanoma, MEK inhibiting the activity of MAPK/ERK trametinib+ dabrafenib: EU trametinib GlaxoSmithKline inhibitor Kinase (MEK1/2) marketing approval submitted Decreases LDL (bad cholesterol) Roche announced the termination dalcetrapib CETP and increases HDL (good cholesterol) of the development of dalcetrapib (JTT-705) Roche modulator by modulation of CETP activity on May 7, 2012. Anti-ICOS Suppresses overactive immune monoclonal ICOS response via inhibitation of ICOS antibody MedImmune antagonist which regulates activation of T cells
040 Japan Tobacco INC. Annual Report 2013 Japan Tobacco Inc. Clinical Development (as of April 25, 2013) OPERATIONS & A OPERATIONS In-house development
Code Potential Indication/ (Generic name) Dosage form Mechanism Description Location Phase 1 Phase 2 Phase 3 Preparing to file Filed Origin JTK-303 Integrase inhibitor which works by blocking integrase, (elvitegravir) HIV infection/Oral HIV Integrase inhibitor an enzyme that is involved in the replication of HIV Japan In-house
JTT-705 Decreases LDL (bad cholesterol) and increases HDL n a
(dalcetrapib) Dyslipidemia/Oral CETP modulator (good cholesterol) by modulation of CETP activity Japan In-house l y s
Decreases LDL and increases HDL is JTT-302 Dyslipidemia/Oral CETP inhibitor by inhibition of CETP Overseas In-house JTT-751 Decreases serum phosphorous level by binding phosphate In-license (Keryx Biopharmaceuticals) (ferric citrate) Hyperphosphatemia/Oral Phosphate binder derived from dietary in the gastrointestinal tract Japan Co-development with Torii Type 2 diabetes G protein-coupled Decreases blood glucose by stimulation of glucose-dependent Japan JTT-851 mellitus/Oral receptor 40 agonist insulin secretion Overseas In-house Anemia associated with Increases red blood cells by stimurating production of erythropoietin, Japan JTZ-951 chronic kidney disease/Oral HIF-PHD inhibitor an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD Overseas In-house Autoimmune/allergic Interleukin-2 inducible Suppresses overactive immune response via inhibition of JTE-051 diseases/Oral T cell kinase inhibitor the signal to activate T cells related to immune response Overseas In-house Autoimmune/allergic Suppresses overactive immune response via inhibitation JTE-052 diseases/Oral JAK inhibitor of Janus kinase (JAK) related to immune signal. Japan In-house
[* Based on the first dose]
Japan Tobacco INC. Annual Report 2013 041 Review of Operations continued Beverage Business (Year ended March 31, 2013)
Revenue Year-on-year change Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN) (JPY BN) (JPY BN) 185.5 -3.3 12.4 -2.2
1 Adjusted EBITDA = Operating profit + depreciation and amortization ± adjustment items (income and costs)* * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others
Goichi Matsuda President, Beverage Division
We would like to deliver our beverages Revenue to “those that matter to us most”. With (JPY BN) this aspiration in mind, the beverage -3.3 business strives to offer products that are “safe and tasty” to drink. We aim to earn the continuous support of our consumers 188.8 through ‘food’, which forms the basis of 185.5 our everyday life. We strive to enhance FY3/2012 FY3/2013 our brand equity with focus on ‘Roots’ and ‘Momono Tennen-sui’ and strengthen our Adjusted EBITDA1 cost competitiveness, as we move forward (JPY BN) to reinforce our profit generating ability. -2.2
Performance overview: • Record high volume performance of our Company products. • Sales volume of bottle can type ‘Roots’, 14.6 our flagship brand, and the long-selling brand 12.4 ‘Momono Tennen-sui’ both increased. FY3/2012 FY3/2013 Strategy: Strengthen the business base for future growth in order to make further profit contribution to the Business results (financial performance): JT Group. • In spite of increase in sales volume of company • Top-line growth: Enhance brand equity with a products, revenue was affected by decline focus on the flagship brand ‘Roots’, and foster in revenue from cup vending machines. ‘Momono Tennen-sui’ as the second pillar brand. • Adjusted EBITDA declined year-on-year, affected • Strengthen trade marketing capabilities: Strive by decline in revenue and change in distribution further for a high quality vending machine operation. channel composition, among others.
Business results (volume performance): • Sales volume of our Company products for bottle can type ‘Roots’ and ‘Momono Tennen-sui’ increased, resulting in record high sales volume of 32,250,000 cases for the year ended March 31, 2013.
042 Japan Tobacco INC. Annual Report 2013 Key Brands OPERATIONS & A OPERATIONS
Roots Aroma Black
‘Roots’ is the flagship brand of JT’s beverage business. It was first offered in the year 2000 and, ever since then, the theme of the brand has been to offer ‘genuine, tasty coffee for all occasions’.
In particular, ‘Aroma Black’ in screw top bottle cans, first sold in 2003, firmly captured the increase in demand n a
for this type of beverage product. As a result, ‘Aroma Black’ in bottle cans is now a signature product of JT’s l y
beverage business. The product’s roasty aroma and rich taste have been favored by many consumers. Since s 2011, ‘Aroma Black’* has been awarded with Monde Selection, Gold prize, for three years in a row, as it is continues to lead the bottle can coffee segment. The product was most recently renewed in April 2013 and it uses JT’s own roasting technology ‘aqua roast’ which utilizes the patented technology of Key Coffee. JT and Key Coffee jointly develop. By using water at the start of the roasting process, this new technology enables us to effectively exclude bitterness or any other odd flavors. As a result, we can extract the smooth original flavor of the beans giving the product a clean body and taste. * Roots Aroma Black 300g bottle can offered in 2010, 2011 and 2012 received the award.
Roots Aroma Revolut
‘Roots Aroma Revolut’ was first offered in 2009 as a coffee beverage with ‘overwhelming roasting aroma’. The product is a coffee beverage with milk and sugar. ‘Enjoyable aroma’ is the characteristic of ‘Aroma Black’ and, as part of the family, ‘Aroma Revolut’ offering an overwhelming roasting aroma became instantly popular. The name ‘Aroma Revolut’ shows that this product is ‘revolutionary aromatic’ and takes inspiration from the word ‘REVOLUTION’. The latest version of Roots ‘Aroma Revolut, low sugar’ is made by using the ‘aqua roast’ technology of ‘Aroma Black’. The product is a coffee beverage with milk and low sugar.
Momono Tennen-sui
‘Momono Tennen-sui’ is a long-selling product of JT. First offered in 1996, it became popular with consumers in their teens and has been popular ever since. The product uses transparent peach juice* and natural water – the characteristic of this beverage is that it is moderate in sweetness and has a clear, fresh aftertaste. The product was most recently renewed in March 2013. While leaving the clear, fresh aftertaste the same, it is now offered in ‘screw bottles’ which is reminiscent of squeezing a fruit. The package has been rejuvenated by using bright pink colors while retaining the feeling of transparency – the package also shows that it contains peach juice. * Clear fruit juice is extracted by removing insoluble components such as dietary fibers from the fruit juice.
Momono Tennen-sui SPARKLING
‘Momono Tennen-sui Sparkling’ has a fresh taste, just like the original ‘Momono Tennen-sui’. With its refreshing taste, this calorie off drink has earned many fans. The product was renewed at the same time as ‘Momono Tennen-sui’ as part of the ‘Tennen-sui (natural water)’ family. Its popular flavor has been left unchanged, while the refreshing aftertaste has been upgraded. The package design has been rejuvenated and we have used illustrations of large peaches surrounded in bubbles to show its refreshing flavor as a carbonated beverage.
Japan Tobacco INC. Annual Report 2013 043 Review of Operations continued Beverage Business continued
Value Chain
Sales & R&D Procurement Production Marketing Distribution
Strive to develop Ensure Prioritize safety Implement Increase innovative procurement and follow effective penetration products to meet of safe and established communication to retail outlets consumers’ quality raw quality control tools tailored needs materials procedures for targeted consumers
Food Safety Control
Ensure safety control at all levels of the value chain
R&D Marketing Strive to develop innovative products to meet consumers’ needs Implement effective communication tools tailored for • Search for new materials, development of new products targeted consumers and renewal of existing brands including ‘Roots’. • By examining numerous data and research, target • Development of new containers and production technology*. consumers, price-range and sales channels are set, while the most suitable and original marketing plan is construed. • As for sales promotions, mass media is used for Procurement advertising – in-store promotions are also conducted. Ensure procurement of safe and quality raw materials • When we select raw materials, we review the quality Sales & Distribution assurance certificates submitted by our suppliers. Moreover, inspect and monitor agrochemical residues while conducting Increase penetration to retail outlets regular inspection at processing plants, in compliance with • Products are sold in vending machines primarily through JT Group’s internal standards, the Food Sanitation Act and our Group company Japan Beverage, one of the leading other relevant laws. vending machine operators in Japan. Our products are also sold in convenience stores and supermarket chains. • Promotions in each of these channels are offered in order Production to enhance our sales volume. Prioritize safety and follow established quality control procedures • JT Group is pursuing the adoption of ISO 9001, the HACCP system and FSSC22000 in our and business partners’ factories. Food Safety Control • Production of beverages is outsourced to domestic partner Ensure safety control at all levels of the value chain factories (except for certain bottled drinking water), under • We have an independent food safety management strict monitoring of the production process and product quality. division responsible for overall safety control to ensure • Strong partnership with our partner factories to retain that consumers can continue to enjoy our products safely. competitive production capabilities and stable supply. • Cross functional food safety initiatives within the JT Group are promoted – for example, the beverage business utilizes the function of TableMark’s Tokyo Quality Control Center.
* HTST method: For our flagship brand ‘Roots’, we adopted the high temperature, short-time (HTST) method for the production of canned coffee. JT was the first company to use this method for canned coffee. The method considerably reduces the time needed for heat sterilization, thereby limiting flavor loss and making it possible to replicate the taste of freshly baked coffee at home.
044 Japan Tobacco INC. Annual Report 2013 OPERATIONS & A OPERATIONS n a l y s is
Japan Tobacco INC. Annual Report 2013 045 Review of Operations continued Processed Food Business (Year ended March 31, 2013)
Revenue Year-on-year change Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN) (JPY BN) (JPY BN) 168.7 -1.9 7.4 +1.9
1 Adjusted EBITDA = Operating profit + depreciation and amortization ± adjustment items (income and costs)* * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.
Miyoharu Hino President & CEO TableMark
If we are going to prepare food for those who Revenue matter to us most, we wish to do so cordially (JPY BN) with care. This is our desire when running +4.9 our business at TableMark. From 2010 onwards, TableMark began its operation as a food manufacturer with frozen and ambient 170.7 168.7 processed food, bakery items and seasoning 147.7 152.6 as our business pillars. In particular, we FY3/2012 FY3/2012 FY3/2013 FY3/2013 Excl. Fishery Excl. Fishery strive to provide high value-added products business business by focusing on staple food such as frozen Adjusted EBITDA1 noodles, frozen rice, packed cooked rice (JPY BN) and frozen baked bread. +1.9
Performance overview: • Steady top-line growth driven by continued performance of staple food products*. • Closure of the unprofitable processed fishery 7.4 product business to concentrate on core business. 5.4
Strategy: FY3/2012 FY3/2013 • Continue with a focus on staple food products for top-line growth, in order to achieve steady improvement in profitability.
Business results (financial performance): • Revenue remained more or less flat year-on-year at ¥168.7 billion. Excluding the processed fishery product business which was discontinued during the year ended March 2013, revenue grew by ¥4.9 billion to ¥152.6 billion. • Profitability continued to improve, driven by the performance of staple food products. Adjusted EBITDA increased by ¥1.9 billion to ¥7.4 billion, as the increase in raw material costs was more than offset by the absence of expenses incurred in the same period in the prior year.
* S taple food products: frozen noodles, frozen rice, packed cooked rice and frozen baked bread.
046 Japan Tobacco INC. Annual Report 2013 Staple Food Products OPERATIONS & A OPERATIONS
Frozen Udon Noodles
Frozen udon noodles are one of TableMark’s key products
in which the company has a leading market share in Japan. n In particular, frozen ‘Sanuki Udon’ noodles for household use a l y
is a well-known product in Japan. s is The texture of udon noodles is determined by the moisture level. The outside layer of the noodles has a different moisture level from the inside layer, and this forms the key to the overall texture of the noodles. After boiling, TableMark’s frozen udon noodles are ‘quickly frozen’, enabling us to maintain the texture as well as the flavor of freshly cooked noodles. This is the key to the tastiness of the product. We have a wide range in our line-up including ready-to-eat noodles. TableMark’s frozen noodles are popular as a regular food stock for everyone’s freezer.
Packed Cooked Rice
Packed cooked rice has become widely popular in recent years. It is easy to prepare and, with the increase of single-person households and an ageing population, coupled with people stocking food post earthquake, the demand for the product is growing. TableMark operates a factory located in Uonuma, a location well known for its rice production and water quality. ‘Takitate Gohan’ is one of TableMark’s packed cooked rice products that enables you to enjoy the taste of freshly cooked rice. The line-up includes, among others, products that use ‘Koshihikari’ branded rice from the Niigata-prefecture.
Frozen Baked Bread
The market size of baked bread in Japan is growing and approaching the consumption level of rice* – demand for ready-to-eat and genuine bread products is increasing. After baking, TableMark’s frozen baked bread is quickly frozen and this process maintains the moisture balance of the bread. By re-heating the product for a short period of time using a microwave or a toaster, you can enjoy the crunchy and fluffy texture of freshly baked bread. Moreover, with TableMark’s original production technique, the dryness that can come from defrosting the product has been improved. * In monetary terms.
Japan Tobacco INC. Annual Report 2013 047 Review of Operations continued Processed Food Business continued
Value Chain
Sales & R&D Procurement Production Marketing Distribution
Strive to develop Ensure Prioritize safety Strive for Increase innovative procurement and follow effective penetration products to meet of safe and established marketing to retail outlets consumers’ quality raw quality control to improve needs materials procedures product awareness
Food Safety Control
Ensure safety control at all levels of the value chain
R&D Production Strive to develop innovative products to meet consumers’ needs Prioritize safety and follow established quality control procedures • Leveraging our own know-how, we aim to develop value- • JT Group is pursuing the adoption of the HACCP system added products to meet diversified consumers’ needs. and ISO 22000 in our and business partners‘ factories. Under • Frozen baked bread products have been developed which the ISO 22000 standard, continuous improvements are made allow consumers to enjoy the taste of freshly baked bread following effective rules to control sanitation and other key at home. TableMark’s original techniques for fermentation, issues. These rules are based on the HACCP concept, and their baking and freezing recreate and preserve the taste and effectiveness is tested using scientific evidence. texture of fresh bread. • All of JT Group’s 27 factories in and outside Japan, as well as our business partners’ factories that produce frozen foods, have achieved the ISO 22000 certification. Procurement Ensure procurement of safe and quality raw materials Marketing • Review of quality assurance certificates submitted by our suppliers. Strive for effective marketing to improve product awareness • Inspections and monitoring of agrochemical residues and • We analyze the market from consumers’ point of view and, regular inspection at processing plants, in compliance with by combining the technology owned by TableMark, we strive JT Group’s internal standards, the Food Sanitation Act and to provide products with new values to increase our place other relevant laws. in the market. We strive for effective marketing in order to improve consumer awareness of our products. • Examination of safety of production sites for raw materials sourced abroad. • As for agricultural farms, inspections are made not only Sales & Distribution for soil and water but also in terms of how products are Increase penetration to retail outlets cultivated and how agrochemicals are handled. Breeding farms are also inspected. • Strive to enhance profitability through our initiatives to increase our presence in supermarkets and convenience stores, by offering a wider range of products while also seeking better shelf space. • TableMark products are also sold to restaurants and other public facilities.
048 Japan Tobacco INC. Annual Report 2013 OPERATIONS & A OPERATIONS n a l y s is
Food Safety Control Ensure safety control at all levels of the value chain • Independent food safety management division is responsible for overall safety control, ensuring that consumers can continue to enjoy our products safely. • Cross-functional food safety initiatives within the JT Group are promoted. • External food safety experts provide assessment and advice regarding our initiatives – their knowledge and viewpoints are actively incorporated into our business.
Japan Tobacco INC. Annual Report 2013 049 Risk Factors
The JT Group operates diverse businesses, namely tobacco, pharmaceutical, beverage and processed food. In addition, we conduct our business on a global basis, extending to Europe, CIS countries, Africa, the Middle East and others. Due to this diversity and these changing environments, we are exposed to various risks.
Considering such circumstances, we have put in place 1. Disruptive tax increases a risk management framework. Under the framework, Tobacco products are subject to excise or similar relevant divisions are assigned to carefully monitor taxes in addition to value-added tax. Excise taxes the development of events that may adversely impact are increasing in most markets where we operate the JT Group and prevent their materialization where as governments seek to secure their revenue or possible. When these risks are materialized, we promote public health. In general, value-added tax promptly respond in order to minimize their unfavorable is also increasing. As a general principle, we fully pass impacts. In reviewing risks, the magnitude of potential on any tax increase to consumers by adjusting our sales impact and likelihood of occurrence are most prudently prices. In addition, to the extent possible, we increase assessed among other factors. Material risks, which our prices more than the tax increase, considering could have a significant impact on our sustainable the financial impact of an expected volume decline. profit growth and business continuity, are reported A tax increase within a reasonable range is manageable to the Executive Committee. Countermeasures are through such a price increase as well as our efforts also proposed and implemented once approved by to support top-line and pursue efficiency. Most the Committee. governments are aware that a substantial tax increase or repeated tax increases can reduce their revenue and The following section describes certain risks they take a rational approach. However, in the past we which potentially have a material impact on our have experienced such tax increases in some markets, business operations and financial results, but is not which have disrupted our business. intended to be an exhaustive list of the risks we face. In addition, it is possible that risks that are currently Risk description and potential impact considered immaterial or even unknown could turn A disruptive tax increase on tobacco products could out to be material in the future, as the business result in a large legitimate industry volume decline due environment changes. to lower consumption and, in many cases, increased illicit trades. In addition, down-trading to lower priced This section should be read together with the forward- products could be initiated or accelerated. Our looking and cautionary statements contained in this shipment volume, revenue and profit could decrease annual report. due to these negative reactions by consumers.
Measures to address the risk • Promote the understanding of relevant authorities that a disruptive tax increase does not necessarily serve their purpose. • Optimize our product offerings to capture the potential changes in consumer preference. • Enhance our geographical portfolio to limit the negative impact of a disruptive tax increase in a specific market. • Further improve efficiency to protect earnings. • If a disruptive tax increase takes place, find an optimal price for each product which minimizes the unfavorable influence in the market.
050 Japan Tobacco INC. Annual Report 2013 OPERATIONS & A OPERATIONS n a l y s
2. Pressure from illicit trade Glossary is Illicit trade is a major concern not only for the tobacco industry, but for wider society. For the tobacco industry, Contraband – genuine products smuggled from abroad. it undermines the legitimate tobacco business. For Genuine products diverted from the legitimate supply chain society, illicit trade reduces excise revenue for the and sold in a country different from the intended market of government, often fuels organized crime, and may retail sale and without domestic duty paid in that country. increase health concern due to poor manufacturing standards and improper product handling. The tobacco Counterfeit – fake products appearing to be a genuine brand. industry has been fighting against illicit trade, which Products protected by intellectual property rights which are takes the forms of contraband, counterfeit and illicit manufactured without authorization from the right’s owners whites. Illegally traded products in a market tend to and with the intent to copy the genuine brand to deceive the increase after a steep tax increase. Regulatory actions consumer, also sold without duties being paid. seeking to commoditize packages and products could also trigger the acceleration of illicit trade because such Illicit whites – legitimately manufactured brands intentionally commoditization could make counterfeit manufacturing sold on the illicit market. Brands manufactured legitimately easier and detection of illicit products more difficult. in one country but smuggled into another country to provide consumers with cheap brands, also without duties being paid. We take a zero tolerance approach towards all these criminal activities with an emphasis on eliminating contraband products. Working together with authorities: Risk description and potential impact An increase in illicit trades could reduce the legitimate In 2007, JT International Holding B.V. and JT International S.A., industry volume, leading to a decline in our shipment JT Group subsidiaries, entered a cooperation agreement with volume, revenue and profit. In addition, the industry the European Commission, the executive branch of the European bears the cost to combat illicit trades, giving pressure Union (EU), and 26 EU Member States as part of efforts to combat to its earnings. Furthermore, it is possible that low illicit trades. In 2009, the United Kingdom joined the agreement. quality counterfeits and improperly handled smuggled products damage the credibility of the genuine brands, Under the terms of the agreement, the JT Group contributes as well as the reputation of their owner. US $50 million annually in the first five years from its execution and US $15 million annually in the subsequent 10 years. This Measures to address the risk financial contribution is to be used to support anti-smuggling and • Engage with the governments, regulatory bodies and anti-counterfeiting initiatives led by the EU or EU Member States. law enforcement agencies to eradicate illicit trades. • Ensure we buy from and sell to only reputable business In 2010, JTI-Macdonald Corp., a JT Group Canadian subsidiary, partners following our rigorous compliance initiatives. also signed a similar agreement with the Government and • Raise awareness among individual consumers of Provinces of Canada. the negative consequences of purchasing illegally traded products.
Japan Tobacco INC. Annual Report 2013 051 Risk Factors continued
3. Tightening tobacco regulations Risk description and potential impact The tobacco industry is highly regulated in various Political instability, economic downturn, social unrest aspects, and regulations could influence our business or other unfavorable developments in a certain market performance and financial results. could disrupt our business, leading to a lower volume, revenue and profit in the market. Among the regulations on products, for example, we may incur additional costs in order to comply Measures to address the risk with the requirements for ingredient and packaging. • Avoid overdependence on a small number of markets Furthermore, the regulatory attempt to commoditize as sources of profits by expanding the pool of highly tobacco products could lead to an increase in illicit profitable markets. trades and negatively influence our legitimate business. 5. Instability in the procurement of key materials Business activities of tobacco companies are Across the businesses, the JT Group procures raw also restricted. With more prohibitive regulations and processed materials for product manufacturing. on communication with consumers, our ability In particular, we strive to procure key materials in the to effectively market products becomes further required quantity and at reasonable costs. Our key limited, and our top-line performance may be materials include agricultural products; most notably, adversely impacted. tobacco leaf for the tobacco business, grains for the processed food business, and natural flavors for the As a responsible organization, the JT Group abides beverage business. Availability of agricultural products by the laws and regulations wherever we operate. is often affected by natural phenomena including That said, we believe that laws and regulations should climate. In addition, there is a growing concern that differ country by country, reflecting its legal, social agricultural production costs may increase, as a result and cultural background. We encourage governments, of the high demand in energy resource and other inputs regulators and stakeholders to take a reasonable due to a global population increase as well as economic and balanced approach towards tobacco regulation. growth in emerging countries.
(Risk description and potential impact) Risk description and potential impact Further tightening of tobacco regulations on marketing Insufficient supply of key materials could lead to activities could undermine our strategy for top-line inability to manufacture our products, subsequently growth as we lose opportunities to enhance brand resulting in the loss of revenue and profit. Furthermore, equity. Moreover, certain regulations may impose on the increase in procurement costs driven by higher us additional compliance costs. These may negatively production costs for agricultural products would influence our volume, revenue and profit. directly pressure our earnings.
(Measures to address the risk) Measures to address the risk • Identify ongoing regulatory initiatives as early as • Reinforce ability to procure key materials through possible by promptly collecting accurate information. building a strong relationship with suppliers. • Engage with the governments, regulators and In the case of tobacco leaf, further promote stakeholders, as necessary, to develop reasonable internal sourcing. and balanced regulations that meet their objectives. • Promote efficient use of materials by continuously reviewing the manufacturing process and product 4. Country risks specifications where possible. Our tobacco business has consistently expanded our earnings base to secure long-term growth by making 6. Unfavorable development in litigation acquisitions, entering new markets and increasing JT and some of its subsidiaries are defendants in share in markets where we had limited presence. Such lawsuits filed by plaintiffs seeking damages for harm a geographical expansion increases our exposure to allegedly caused by smoking. As of March 31 2013, country risks. In a market where we operate, we may 28 smoking and health-related cases were pending face economic, political or social turmoil which may in which one or more members of the JT Group were negatively affect our operations and financial results. named as defendant or for which JT may have certain indemnity obligations pursuant to the agreement for JT’s acquisition of RJR Nabisco Inc.’s overseas (non- U.S.) tobacco operations. We believe that we have
052 Japan Tobacco INC. Annual Report 2013 valid grounds to defend the claims in such lawsuits; 8. Currency fluctuations however, we cannot predict the outcome of any As the JT Group is operating globally, we are exposed pending or future litigation. to the risks associated with currency fluctuations. & A OPERATIONS
Risk description and potential impact The reporting currency of the JT Group consolidated A decision unfavorable to us could materially affect financial statements is Japanese yen, while the financial our financial performance due to the payment of statements of our international subsidiaries are reported monetary compensation. Critical media coverage in other currencies such as Russian ruble, euro, British n a l
of such lawsuits may reduce social tolerance of pound, Taiwanese dollar, U.S. dollar, and Swiss franc. y s and strengthen regulations on smoking. Such media Therefore, exchange rate fluctuations of these is coverage may also prompt the filing of a number of currencies against Japanese yen influence the Group’s similar lawsuits against JT or its subsidiaries, resulting reported financial results. As for the financial reporting in increased litigation costs. of the international tobacco business, JT International Holding B.V. consolidates the financial results of Measures to address the risk the international tobacco subsidiaries and reports • Continue to build well-organized teams its consolidated financial statements in U.S. dollars. coordinating with external legal counsel We often communicate the financial performance to defend ourselves against these lawsuits. of our international tobacco business in U.S. dollars, • Continue legitimate and appropriate which is affected by exchange rate fluctuations against business operations. the U.S. dollar. We do not hedge these risks which arise from the translation of financial statements. 7. Natural disasters Our operations may be disturbed by natural disasters In addition, many Group companies make transactions such as earthquakes, typhoons, floods, volcano in currencies other than their reporting currencies for eruptions and others. day-to-day operations. Such transactions also involve the risk of exchange rate fluctuations. We mitigate Japan is one of the most important markets for the these transaction risks through hedging activities; JT Group’s businesses and subject in particular to various however, it is not possible to completely eliminate them. natural disasters. The Great East Japan Earthquake was devastating. The impacts on the JT Group included Furthermore, if we liquidate or sell our Group subsidiary casualties among our employees, physical damage to which we acquired in a currency other than Japanese our factories, and shortage of supply for certain material yen or impair a substantial value of such a subsidiary, for tobacco products. Our tobacco business was forced the gain or loss from the transaction includes the to temporarily suspend product shipment and limit currency fluctuation impact. Specifically, the impact shipment volume for an extended period. comes from the difference in the exchange rates of the relevant currency against Japanese yen at the time We have developed a Business Continuity Plan to of the acquisition and at the time of such transaction. minimize the impact of such disasters, with a particular emphasis on the optimization of the global supply chain. Risk description and potential impact Fluctuations of exchange rates against Japanese Risk description and potential impact yen affect the JT Group’s reported financial results. Natural disasters could cause damage to the JT Group Reported financial results of our international tobacco as well as our suppliers, trades and consumers, leading business in U.S. dollars are similarly influenced by to disruption of our business and negatively impacting the fluctuations of exchange rates against the U.S. financial results. dollar. In addition, we are exposed to the exchange rate fluctuation risks when a Group company Measures to address the risk makes a transaction in a currency other than • Continuously review the Business Continuity Plan its reporting currency. and revise it as necessary. • Carry out emergency drills to increase employees’ Measures to address the risk preparedness against disasters. • Mitigate the risk through hedging activities such • Insure key assets such as buildings, machinery, as derivative contracts or debts in a key currency equipment and inventory to recover financial for cash inflow. losses as appropriate.
Japan Tobacco INC. Annual Report 2013 053 Corporate Social Responsibility Below is a brief summary of the JT Group CSR Report 2013. To learn more about the JT Group’s approach towards corporate social responsibility and specific programs, please visit http://www.jt.com/csr/report/index.html.
Corporate Social Responsibility forms an essential part of business and companies are expected to conduct business in an ethical and responsible manner. The pursuit of sustainable profit growth cannot be achieved without meeting this expectation. As a globally recognized company, it is our responsibility to operate with integrity and help address social concerns, thus contributing to the sustainable development of society.
Human Rights The JT Group reinforces the importance of human rights, in all areas of its business activities and workplaces. Policies are employed to ensure that no employee is subjected to discrimination or exploitation, and is treated fairly and appropriately at all times. The Group procures a wide variety of raw materials through a complex supply chain that spans the world. Accordingly, all suppliers are expected to observe the sanctity of human rights in their business operations. These standards are set out clearly in the JT Group’s Responsible Procurement Policy and all business partners are held to the same stringent standards.
ARISE Program In February 2012, JTI began a program called ARISE Seven core subjects on social responsibility (Achieving Reduction of Child Labor in Support of (ISO 26000) Education). The purpose is to help eliminate child labor We have adopted the ISO 26000 guidelines on social in the communities where it purchases tobacco leaf. responsibility as a reporting framework. The guidelines This program is currently active in Malawi, Zambia comprise seven core subjects on social responsibility. and Brazil. These are: Human Rights, Labor Practices, The Environment, Fair Operating Practices, Consumer Issues, Community Involvement and Development, and Organizational Governance.
ARISE Program
054 JAPAN TOBACCO INC. ANNUAL REPORT 2013 OPERATIONS & A OPERATIONS n a l y s
Labor Practices The Environment is The health, safety and well-being of its workforce The JT Group utilizes agricultural products worldwide are of paramount importance to the JT Group. and recognizes that its global activities have an It has established policies and standards beyond environmental impact. From the procurement of raw its statutory requirements, which safeguard the ingredients and materials, to the manufacturing and interests of all employees. distribution of products, the aim is to lessen this impact by promoting sustainability. Recognizing the importance of dialogue with staff helps to create an understanding of how the JT Group can Minimizing the environmental impact, and the be a better employer. To this end, employee surveys are promotion of the efficient use of resources, is achieved conducted and the result is a two-way communication through focusing activities on lowering greenhouse between the Group and its employees, who cooperate gas (GHG) emissions and reducing water consumption to create rewarding business environments. and waste generation. Biodiversity conservation and consideration of local ecosystems are also addressed Employee Engagement Survey (EES) in a number of ways. Between 2008 and 2009, the JT Group piloted an Employee Engagement Survey in 12 countries across The JT Group’s environmental principles and policies its CIS+ region. The aim of the Survey was to gather are set out in its Environmental Charter, which has employees’ suggestions on how to improve business led to the implementation of numerous programs practices and discover what issues they may have. that reduce environmental impact across the entire The scope of the EES was subsequently extended in value chain. 2010, and in 2012 the first Group-wide survey took place. Reducing greenhouse gas emissions The JT Group aims to reduce GHG emissions through Employees efficient energy use and a shift to low carbon fuels. In 2012, the scope of measuring GHG emissions was expanded across its entire value chain to monitor the environmental effects of energy use. GHG emissions 46,729 have decreased by 10% compared with 2007. Countries 72 Response rate 93% Languages 38 Lessening environmental impact Japan Tobacco INC. Annual Report 2013 055 C orporate Social Responsibility continued
Fair Operating Practices Consumer Issues The JT Group connects to a global market place Consumers today are faced with great choice. Making where ethics, fairness and transparency in business a purchasing decision is a complex combination of are increasingly central to the way companies are factors, and the way in which a company communicates expected to operate. regarding its products is an integral part of enabling consumers to make fully informed choices. Achieving and maintaining high standards of ethical business conduct is something the JT Group takes very The JT Group informs and educates consumers in seriously. Employees across all Group entities must be a transparent, responsible and proactive manner. This aware of and adhere to the relevant Code of Conduct includes disclosing ingredients on tobacco products, for their business. All commercial partners must engaging in dialogue, listening to customers’ needs also recognize the values embodied in these business and responding openly to complaints and opinions. standards and act accordingly at all times. Failure to do so results in serious consequences, including the The Group’s pharmaceutical business develops, termination of a partner’s commercial relationship manufactures and markets prescription drugs that are with the JT Group. strictly regulated and comply with the highest national and international standards. Additionally, internal Another important area that falls within the area of Fair systems have also been established to ensure safe, Operating Practices is the fight against illicit trade in the high-quality drugs. tobacco supply chain. Here, the JT Group cooperates with government actors such as law enforcement To ensure the integrity of its beverages and processed agencies and customs authorities. It also works closely foods, the JT Group applies rigorous quality processes. with retailers and consumers to prevent the proliferation From the sourcing of ingredients to the manufacture, of illicit tobacco products. To that end, the JT Group has packaging and sale of food products, safety controls participated in global product awareness campaigns and standards are observed at every stage. On all to inform retailers and consumers about these issues. products, ingredients are extensively disclosed and It also has a number of robust compliance programs traceability information provided. in place to monitor its commercial partners.
Food safety control
056 Japan Tobacco INC. Annual Report 2013 Community Involvement & Development Restoring forests in Japan The JT Group helps to address social needs in local JT Forest is an initiative that was first established in communities, often in relation to the elderly and those 2005. Today it includes a program of activities in nine & A OPERATIONS at an economic disadvantage. forests throughout Japan. This involvement provides necessary support for forest developers, and engages Activities aim to improve people’s lives, alleviate with local communities, authorities and experts. suffering and complement the efforts of local systems providing services to the underprivileged. This often Organizational Governance n a l
includes partnering with charities, non-governmental The JT Group structures its corporate governance y s organizations and non-profit organizations. to enable prompt, high-quality decision-making is and proper business conduct. Food bank in Spain The Madrid Banco de Alimentos Foundation is a Please refer to page 58 for detail of Corporate nonprofit charity dedicated to improving the quality Governance. of life of people with limited resources facing poverty. Its mission is to collect and distribute food among more than 400 officially registered NGOs in the Madrid community.
In 2012, JTI Spain contributed to the work of the Foundation, helping it build a new food bank facility in the southern part of Madrid, creating a new point for the collection and distribution of food. This new bank will dramatically increase the number of soup kitchens and service centers that receive food daily.
Food bank in Spain JT Forest
Japan Tobacco INC. Annual Report 2013 057 C orporate Governance Decision-Making, Business Execution, Supervision
Overview In our belief, enhancement of corporate governance is one of the critical management initiatives in order to achieve sustainable profit growth under the uncertain business environment. We have enhanced our corporate governance aiming at “quality and prompt decision-making”, “efficient business execution” and “rigorous supervisory and advisory function”.
We believe that our current governance framework is effective and contributes to the increase in company value. Our governance framework consists of the Board of Directors responsible for the resolution of important matters including the Group strategy as well as supervision of business execution; the Executive Officer System for the purpose of efficient business execution; the Audit & Supervisory Board to perform both accounting and operating audits in collaboration with the external accounting auditors and our internal audit division; and three committees (the Compensation Advisory Panel, the Compliance Committee and the Advisory Committee) which provide advice to the Board of Directors and the representative directors. We will continue to improve this framework to further strengthen our corporate governance.
Initiatives to enhance corporate governance
Quality and prompt decision-making/ Rigorous advisory function Rigorous supervisory function Efficient business execution Set up the Compliance Committee Reduced number of directors Introduced executive officer system (In the year ended March, 2001) (In the year ended March, 2001) (In the year ended March, 2002) Set up the Advisory Committee Promote the delegation of business execution to the executive officers (In the year ended March, 2002) (In the year ended March, 2001, 2009 and 2012) Set up the Compensation Advisory Panel Invited outsider directors (In the year ended March, 2007) (In the year ended March, 2013)
Our corporate governance system
General Meeting of Shareholders
Selection or dismissal of members Selection or dismissal of members Selection or dismissal of members
Audit Report Accounting audit/Operating audit Report Board of Introduction of compliance-related matters Audit & Supervisory Directors Board
nine members Review of Compliance four members (including two the policy Committee (including two outside outside directors) and the rule Audit & Supervisory relating to five members board members) Independent Advice (to Supervision compensation (including three Auditors Representative of the for board outside members) Accounting Advisory Directors) performance members audit Committee and executive ocers six members (four outside members and two Compensation Compliance Oce Auditor’s Oce outside directors) Advisory Panel
President and five members (including two outside Report/ Chief Executive Lawyers Operational Review Ocer directors and two Proposal outside Audit & Advice and Business Assurance Division Supervisory Executive Board members) Committee
Internal audit Executive Ocers Accounting audit/Operating audit Departments
Group audit Group Companies
058 Japan Tobacco INC. Annual Report 2013 General Meeting of Shareholders The Japan Tobacco Inc. Act A general meeting of shareholders resolves the matters JT was established pursuant to the Japan Tobacco, stipulated by law and our Articles of Incorporation. Inc. Act (“the JT Act”) for the purpose of managing & A OPERATIONS Under the Companies Act, certain matters are required businesses related to the manufacturing, sale and to be resolved at a shareholder meeting including, imports of tobacco products. The JT Act provides that most notably, the appointment and dismissal of the the Japanese Government must continue to hold over directors, audit & supervisory board members and one-third of all of the issued shares except for the class external accounting auditors, dividend amount, shares, which have no voting right against all matters n a l
loss compensation, as well as change in the Articles that can be resolved at our shareholders’ meeting. y s of Incorporation. Our Articles of Incorporation do The JT Act also states that the issuance of new shares is not stipulate any additional matter to be resolved at and stock acquisition rights requires the approval of our shareholders’ meeting other than matters legally the MOF. In the case of a share-for-share exchange, required. The annual general meeting of shareholders the same approval is required for issuance of new is held in June, and a special meeting of shareholders shares, stock acquisition rights and bonds with stock shall be called by the Board of Directors, as necessary. acquisition rights. Under the JT Act, subject to the The President chairs the shareholders’ meetings. approval by the MOF, JT is allowed to engage in businesses other than manufacturing, sales and Within the extent as permitted by law, requirements for imports of tobacco products or tobacco-related resolutions at our shareholders’ meeting were lowered business, provided that our engagement in such by amending our Articles of Incorporation. A resolution businesses serves the purpose of the Company. at a general meeting of shareholders can be adopted JT is also required to obtain approval from the MOF by a majority of the voting rights present or represented for certain matters, including the appointment or at the meeting. A resolution for the appointment of dismissal of directors, executive officers and audit the Company’s director and audit & supervisory board & supervisory board members as well as amendment members additionally require a quorum, which is to our Articles of Incorporation, distribution of surplus one-third of the total number of voting rights. A special (excluding loss compensation), merger, corporate resolution as stipulated under Section 2, Article 309 split, or dissolution. In addition, within three months of the Companies Act, such as amendment to the after the end of each fiscal year, we are required to Articles of Incorporation, requires the quorum of issue a statement of financial position, a statement one-third of the total number of voting rights and of income, and a business report to the MOF. the approval of at least two-thirds of the voting rights present or represented at the meeting. Certain matters The supplementary provisions of the Reconstruction resolved at our shareholders’ meetings need further Financing Act*, which came into effect on December 2, approval by the MOF in Japan. 2011 states that the Government shall study by the year ending March 31, 2023 the possibility of full disposal of government-owned JT shares by reassessing the Government’s holding in JT shares considering the Government’s involvement in the tobacco-related industries based on the Tobacco Business Act.
* Act on Special Measures for Securing Financial Resources Necessary for Reconstruction from the Great East Japan Earthquake.
Japan Tobacco INC. Annual Report 2013 059 C orporate Governance continued Decision-Making, Business Execution, Supervision continued
The Board of Directors The directors marked with * are also the The Board of Directors assumes responsibility in executive officers. making decisions for important issues including the Group strategy as well as supervising all the activities of the Group. Currently, we have nine directors including two independent outside directors.
A board meeting, in principle, is held every month and Hiroshi Kimura a special board meeting may be called, as necessary. Chairman of the Board The Board of Directors decides those matters required to be resolved by the Board of Directors under the Companies Act, such as important business plans, Date of birth: April 23, 1953 disposal or acquisition of important assets, significant Term of office: Two years since June 2012 amount of borrowings, conclusion of important Number of shares held: 28,600 agreements. For the purpose of supervising the April 1976 Company’s activities, the Board of Directors requires Joined the Company (Japan Tobacco and Salt directors to deliver a report on the progress of operations Public Corporation) at least on a quarterly basis. In year ended March 2012, January 1999 we had 16 board meetings to discuss important issues Vice President of Corporate Planning Division including the management plan. May 1999 Senior Vice President in Tobacco Business Capacity to supervise the Company’s activities has Planning Division, Tobacco Business Headquarters; Executive Vice President, been further strengthened, since outside directors JT International S.A. joined the board in 2012. The two outside directors June 1999 also invigorate the board meeting by actively engaging Member of the Board in the discussions from broad perspectives based June 2001 on their experience and expertise. Retired from the Board
June 2005 Member of the Board
June 2006 President, Chief Executive Officer and Representative Director
June 2012 Chairman of the Board (Current Position)
March 2013 Member of the Board (outside director), ASAHI GLASS CO., LTD. (Current Position)
060 Japan Tobacco INC. Annual Report 2013 OPERATIONS & A OPERATIONS
Mitsuomi Koizumi* Yasushi Shingai* Noriaki Okubo* n a l
President, Chief Executive Officer Representative Director and Executive Representative Director and Executive y s
and Representative Director Deputy President Deputy President is
Date of birth: April 15, 1957 Date of birth: January 11, 1956 Date of birth: May 22, 1959 Term of office: Two years since June 2012 Term of office: Two years since June 2012 Term of office: Two years since June 2012 Number of shares held: 21,000 Number of shares held: 20,300 Number of shares held: 9,300
April 1981 April 1980 April 1983 Joined the Company (Japan Tobacco and Salt Joined the Company (Japan Tobacco and Salt Joined the Company (Japan Tobacco and Salt Public Corporation) Public Corporation) Public Corporation)
June 2001 July 2001 April 2000 Vice President of Corporate Planning Division Vice President of Financial Planning Division Vice President of Business Development Dept., Pharmaceutical Division June 2003 June 2004 Senior Vice President, and Head of Human Senior Vice President, and Head of June 2002 Resources and Labor Relations Group Finance Group, Vice President of Financial Vice President of Business Planning Dept., Planning Division Pharmaceutical Division June 2004 Senior Vice President, and Vice President July 2004 June 2004 of Tobacco Business Planning Division, Senior Vice President, and Chief Financial Officer Member of the Board, Senior Vice President, Tobacco Business Headquarters and President, Pharmaceutical Business June 2005 June 2006 Member of the Board, Senior Vice President, June 2006 Executive Vice President, and Vice President and Chief Financial Officer Member of the Board, Executive Vice President, of Tobacco Business Planning Division, and President, Pharmaceutical Business Tobacco Business Headquarters June 2006 Member of the Board, Executive Vice President, June 2009 June 2007 JT International S.A. Member of the Board, Senior Executive Member of the Board, Executive Vice President, Vice President, and President, and Head of Marketing & Sales General Division, June 2011 Pharmaceutical Business Tobacco Business Headquarters Member of the Board, Senior Vice President, and Executive Vice President in charge of International May 2010 July 2007 Tobacco Business Member of the Board, Senior Executive Member of the Board, Executive Vice President, Vice President, and President, Pharmaceutical and Chief Marketing & Sales Officer, Tobacco June 2011 Business, Vice President of Business Planning Business Headquarters Representative Director and Executive Deputy Dept., Pharmaceutical Division President (Current Position) June 2009 January 2011 Representative Director and Executive Member of the Board, Senior Executive Deputy President Vice President, and President, Pharmaceutical Business June 2012 President, Chief Executive Officer and June 2012 Representative Director (Current Position) Representative Director and Executive Deputy President (Current Position)
Japan Tobacco INC. Annual Report 2013 061 C orporate Governance continued Decision Making, Business Execution, Supervision continued
Akira Saeki* Hideki Miyazaki* Masamichi Terabatake Representative Director and Executive Member of the Board and Executive Member of the Board Deputy President Deputy President
Date of birth: August 25, 1960 Date of birth: January 22, 1958 Date of birth: November 26, 1965 Term of office: Two years since June 2012 Term of office: Two years since June 2012 Term of office: One year since June 2013 Number of shares held: 11,700 Number of shares held: 8,800 Number of shares held: 3,600
April 1985 April 1980 April 1989 Joined the Company (Japan Tobacco Inc.) Joined Nomura Securities Co., Ltd. Joined the Company
June 2005 July 2005 July 2005 Vice President of Corporate Strategy Division Joined the Company (Japan Tobacco Inc.) General Manager, Secretary’s Office
June 2007 January 2006 July 2008 Senior Vice President, Vice President of Deputy Chief Financial Officer Vice President of Corporate Strategy Tobacco Business Planning Division, Tobacco Business Headquarters June 2008 June 2011 Senior Vice President, and Chief Financial Officer, Senior Vice President, Chief Strategy Officer May 2008 Vice President, Tax Division and Assistant to CEO in Food Business, Vice Senior Vice President, Vice President of President, Corporate Strategy Tobacco Business Planning Division, Tobacco October 2009 Business Headquarters, Head of China Division, Senior Vice President, and Chief Financial Officer March 2012 Tobacco Business Senior Vice President, Chief Strategy Officer May 2010 and Assistant to CEO in Food Business June 2008 Senior Vice President, and Chief Financial Officer, Senior Vice President, Vice President of Tobacco Vice President, Treasury Division June 2012 Senior Vice President, Chief Strategy Officer Business Planning Division, Tobacco Business June 2010 Headquarters, Chief Corporate, Scientific & Executive Vice President and Chief Financial June 2013 Regulatory Affairs Officer, Tobacco Business, Officer, Vice President, Treasury Division Member of the Board, Executive Vice President, Head of China Division, Tobacco Business JT International S.A. (Current Position) July 2010 July 2008 Executive Vice President and Chief Financial Senior Vice President, Vice President of Tobacco Officer, Vice President, Treasury Division and Business Planning Division, Tobacco Business Vice President, Procurement Planning Division Headquarters, Chief Corporate, Scientific & Regulatory Affairs Officer, Tobacco Business August 2010 Executive Vice President and Chief July 2009 Financial Officer Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business June 2012 Headquarters, Chief Corporate, Scientific & Member of the Board and Executive Regulatory Affairs Officer, Tobacco Business Vice President (Current Position)
June 2010 Executive Vice President, and Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters
June 2012 Representative Director and Executive Deputy President (Current Position)
062 Japan Tobacco INC. Annual Report 2013 The directors marked with * are also the executive officers. OPERATIONS & A OPERATIONS
Motoyuki Oka Main Kohda n a l
Member of the Board (Outside director) Member of the Board (Outside director) y s
is
Date of birth: September 15, 1943 Date of birth: April 25, 1951 Term of office: Two years since June 2012 Term of office: Two years since June 2012 Number of shares held: 0 Number of shares held: 0
April 1966 September 1995 Joined Sumitomo Corporation Started independently as Novelist (Current Position) June 1994 Director, Sumitomo Corporation January 2003 Member of Financial System Council, April 1998 Ministry of Finance Japan Managing Director, Sumitomo Corporation April 2004 April 2001 Visiting Professor, Faculty of Economics, Senior Managing Director, Sumitomo Corporation Shiga University
June 2001 March 2005 President, Chief Executive Officer, Member of the Council for Transport Policy, Sumitomo Corporation Ministry of Land, Infrastructure, Transport June 2007 and Tourism Chairman of the Board of Directors, Sumitomo November 2006 Corporation Member of the Tax Commission, Cabinet Office, June 2012 Government of Japan Advisor, Sumitomo Corporation. Member June 2010 of the Board, the Company (Current Position) Member of the Board of Governors, Japan Broadcasting Corporation (Current Position)
June 2012 Member of the Board, the Company (Current Position)
June 2013 Member of the Board (outside director), LIXIL Corporation (Current Position)
Japan Tobacco INC. Annual Report 2013 063 C orporate Governance continued Decision-Making, Business Execution, Supervision continued
The Audit & Supervisory Board Futoshi Nakamura Entrusted by shareholders and ensured of its autonomy, Audit & Supervisory Board Members the Audit & Supervisory Board conducts accounting audits as well as operating audits. Currently, we have Date of birth: November 23, 1957 four audit & supervisory board members including Term of office: Three years since June 2012 two independent outside audit & supervisory board Number of shares held: 4,800 members. Collectively, they have experience in management, legal, finance and accounting among April 1981 Joined the Company (Japan Tobacco other areas. Audit & supervisory board members have and Salt Public Corporation) various statutory rights in order to accomplish their July 2004 roles and responsibilities, including making requests Head of Procurement Planning Division to deliver reports to the directors, executive officers September 2005 and employees, issuing an injunction to prevent illegal Senior Manager of Operational Review and activities by directors, and representing the Company Business Assurance Division, JT International in case of litigation between any director and the Holding B.V. Vice President Company. In addition, the Audit & Supervisory Board July 2009 has a right to dismiss the auditing firm which conducts Senior Manager of Accounting Division accounting audit. The Audit & supervisory board July 2010 members’ report containing the results of both Head of Operational Review and Business Assurance Division the accounting and operating audits is submitted to the annual general meeting of shareholders. June 2012 Audit & Supervisory Board Members, the Company (Current Position) If directors and executive officers find any issue that may cause a substantial damage to the Company, they are obliged to report it to the Audit & Supervisory Board, along with other relevant matters that could affect the Company. Audit & supervisory board members are authorized to attend the meetings of the Board of Directors and other important meetings. Our directors and executive officers respond in a prompt and appropriate manner, when requested by audit & supervisory board members to deliver documents for their inspection, to arrange field audits and to submit reports. The Operational Review and Business Assurance Division, which conducts internal audits, as well as the Compliance Office, exchanges necessary information and works together with audit & supervisory board members.
064 Japan Tobacco INC. Annual Report 2013 Tomotaka Kojima Koichi Ueda Yoshinori Imai Audit & Supervisory Board Members Audit & Supervisory Board Members Audit & Supervisory Board Members
(Outside Audit & Supervisory (Outside Audit & Supervisory & A OPERATIONS Date of birth: December 19, 1953 Board Members) Board Members) Term of office: Two years since June 2013 Date of birth: December 17, 1943 Date of birth: December 3, 1944 Number of shares held: 0 Term of office: Four years since June 2011 Term of office: Four years since June 2011 Number of shares held: 2,300 Number of shares held: 700 Apr 1976 n
Joined Ministry of Finance April 1967 April 1968 a l Judicial Apprentice Joined Japan Broadcasting Corporation y Jul 2000 s is Director of the Fukuoka Local Finance April 1969 June 1995 Branch Bureau Appointed as Public Prosecutor Bureau Chief of General Bureau for Europe
Jul 2002 June 2006 May 2000 Deputy Head of Finance Group of the Company Superintending Public Prosecutor, the Director General, Planning & Tokyo High Public Prosecutors Office Broadcasting Department Jul 2004 Deputy Director General of Employee December 2006 June 2003 Welfare Bureau, Secretariat of National Took mandatory retirement Executive Editor and Program Host Personnel Authority January 2007 January 2008 Apr 2007 Registered as an attorney at law Executive Vice President Deputy Director General for Administrative Policy Matters, National Personnel Authority April 2007 January 2011 Specifically Appointed Professor of Meiji Retired from Executive Vice President Jan 2008 University Law School (Current Position) Director General of Equity and Investigation April 2011 Bureau, Secretariat of National Personnel Authority January 2009 Visiting Professor, Ritsumeikan University Representative Director, The Resolution (Current Position) Aug 2009 and Collection Corporation Executive Director, National Hospital Organization June 2011 March 2009 Audit & Supervisory Board Members, Mar 2010 President and Representative Director, the Company (Current Position) Retired from Executive Director, National The Resolution and Collection Corporation Hospital Organization June 2009 October 2010 Audit & Supervisory Board Members, Adviser, Japan Association of Corporate Directors the Company (Current Position)
Nov 2010 Secretary General, Japan Association of Corporate Directors
June 2013 Audit & Supervisory Board Members, the Company (Current Position)
Japan Tobacco INC. Annual Report 2013 065 C orporate Governance continued Decision-Making, Business Execution, Supervision continued
Independence of Outside Directors and 10. A close relative of a person who fits any of the Outside Audit & Supervisory Board Members following descriptions: JT reports to the securities exchanges on which it (a) A person who fits any of the descriptions is listed that the two outside directors and two outside in 2 to 8 above (if such descriptions apply to audit & supervisory board members are designated a company or any other form of organization, as independent executives. We have a criteria list a person who performs important duties thereof) to assess the independence of an executive. Based (b) A director, audit & supervisory board member, on the criteria, the independence of the four executives audit advisor, executive officer or employee has been confirmed. Motoyuki Oka and Main Kohda, of JT or an affiliate or sister company of JT who are outside directors, also serve as members (c) A person who has fit the descriptions in of the Compensation Advisory Panel and the Advisory 1 or 2 in the recent past Committee, while Koichi Ueda and Yoshinori Imai, who are outside audit & supervisory board members, also Support for Outside Directors and Outside serve as members of the Compensation Advisory Panel. Audit & Supervisory Board Members We provide supports to outside directors and Criteria list for independence of an executive outside audit & supervisory board members. The A person who fits any of the following descriptions Corporate Strategy Division or Secretary Division is not designated as an independent executive. explains the agendas for board meetings in advance, 1. A person who belongs or belonged to JT submits requested documents and delivers necessary or an affiliate or sister company of JT information to outside directors for them to contribute 2. A person who belongs to a company or any to the quality of board discussion. As an independent other form of organization of which JT is a body entrusted by shareholders, the Audit & major shareholder Supervisory Board is expected to monitor the 3. A person who is a major shareholder of JT or performance of the directors and executive officers, who belongs to a company or any other form of with an aim to underpin the Company’s healthy and organization which is a major shareholder of JT sustainable growth as well as increase its credibility. 4. A person who is a major supplier or customer For outside audit & supervisory board members to of JT (if the supplier or customer is a company perform their expected roles, we are supporting them or any other form of organization, a person by making necessary information available and allocating who belongs thereto) adequate human resources to the Auditor Office which 5. A major creditor of JT including a major loan assists audit & supervisory board members. lender (if the creditor is a company or any other form of organization, a person who belongs thereto) Executive Officer System 6. A certified public accountant who serves as an JT employs the Executive Officer System to ensure accounting auditor or an audit advisor of JT, or a effective and efficient management by promptly person who belongs to an auditing firm which serves responding to the changing environment, and thus as an accounting auditor or an audit advisor of JT aims to increase its company value. Executive officers 7. A person who receives a large amount of fees from are appointed by the Board of Directors. At the same JT in exchange for providing professional services time, the board assigns certain responsibilities and for legal, financial and tax affairs or business delegates relevant authorities to the executive officers consulting services (if the recipient of such fee in accordance with the Rules Defining the Extent is a company or any other form of organization, of Responsibility and Authority. a person who belongs thereto) 8. A person who receives a large amount of The Executive Committee has been established to donation from JT (if the recipient of such donation consult with the President who is our Chief Executive is a company or any other form of organization, Officer. Comprising the President, the Chairman, a person who belongs thereto) Deputy Presidents, as well as executive officers and 9. A person who has fit any of the descriptions other participants designated by the President, this in 2 to 8 above in the recent past Committee is, in principle, held on a weekly basis.
066 Japan Tobacco INC. Annual Report 2013 The agendas for the Executive Committee include the issues to be discussed at the board meetings as well as the matters delegated to the Committee by the & A OPERATIONS Board of Directors. Important management issues are also discussed at the Executive Committee, including management policies and fundamental strategies of the Group. Considering its significance, a full-time audit
& supervisory board member attends the Committee n a l
to monitor the discussion. y s is Please refer to page 184 for the list of executive officers.
Advisory Committee The Advisory Committee provides advice from a broad perspective concerning JT Group’s mid- to long-term direction and other subjects of similar importance. This Committee is comprising four external individuals with ample managerial or international experience and two outside directors. Based on the information shared by the Company, the Advisory Committee reviews various topics such as management strategies, management plans and financial results, and then provides advice to our representative directors. During the year ended March 2013, the Advisory Committee was held three times and discussed various issues including the regulatory environment of our tobacco business. The Committee members also made a field trip to one of TableMark’s factories.
Members of Advisory Committee
Founder and Chairman Emeritus, Member Kazuo Inamori Kyocera Corporation Former Japanese Ambassador to India and China/Vice President, Member Sakutaro Tanino Japan-China Friendship Center Senior Advisor, The Dai-ichi Life Member Tomijiro Morita Insurance Co., Ltd. Corporate Advisor, Seven & i Member Sakue Mizukoshi Holdings Co., Ltd. Associate Member Motoyuki Oka JT’s outside director Associate Member Main Kohda JT’s outside director
Japan Tobacco INC. Annual Report 2013 067 C orporate Governance continued Internal Control System & Risk Management System
Overview JT devotes its efforts to ensure appropriate business operation by reinforcing internal control such as compliance, internal audit and risk management among other matters. The developments of these internal control focuses are reported regularly to the Board of Directors. In addition, we have the Auditor Office, a department dedicated to support the Audit & Supervisory Board, for our audit & supervisory board members to effectively perform their duties. Collaboration among the Group companies is encouraged to strengthen the framework for compliance (which includes the internal consultation and reporting), reliable financial reporting, internal audit and risk management.
Internal control framework
The Board of Directors External Auditors
Reporting Monitoring
Compliance Policy and Crisis management/ Financial risks/ the Compliance Internal audit plan/ Internal control Internal control Disaster response Credit exposure Implementation Plan Internal audit report report audit
Compliance The JT Group has both internal and external hotlines A Code of Conduct has been created based on our through which employees may consult or report internal guidelines approved by the Board of Directors. any misconduct they suspect to be taking place. Under the Code of Conduct, all directors and The Compliance Office is responsible for investigating employees are expected to fully comply with applicable consulted or reported cases and implementing laws, our Articles of Incorporation, social norms and Group-wide measures to prevent the recurrence other compliance standards. In addition, the Board of misconduct after discussing it with the divisions of Directors has established a fair and effective concerned. Material cases are reviewed by the compliance framework as described below. Compliance Committee, and further reported • Set up the Compliance Committee, which reviews to the Board of Directors as necessary. and discusses compliance related matters, then directly reports to the Board of Directors The Compliance Committee is headed by the • Assign responsibility for compliance to a director Chairman, and external members comprise the (who also serves as an executive officer) majority. The Compliance Committee met five times • Assign responsibility for compliance to an executive in the year ended March 31, 2013, and discussed officer without directorship initiatives to strengthen compliance throughout • Assess and approve the Compliance Policy the Group among other matters. as well as the Compliance Implementation Plan • Review the implemented compliance initiatives. External members of the Compliance Committee
The Compliance Office is in charge of improving the Rokuro Tsuruta TSURUTA ROKURO LAW OFFICE compliance framework, while identifying any issue in Makoto Matsuo Attorney at Law, Momo-o, Matsuo, & Namba. the framework. The Compliance Office also promotes Certified Public Accountant, Hideo Kojima compliance by offering training programs to directors Hideo Kojima Certified Public Accountant Office and employees.
068 Japan Tobacco INC. Annual Report 2013 Reliable financial reporting Internal audit system In order to ensure the reliability of its financial JT has an Operational Review and Business Assurance reporting, JT has introduced a relevant internal control Division, which is thoroughly independent of other & A OPERATIONS system in accordance with the Financial Instruments JT Group divisions and organizations engaging in and Exchange Act and other standards. In addition, operations. Under such a capacity, it conducts internal a dedicated division has been created which reviews audits and directly reports to the President. The the internal control system and reports the result of Operational Review and Business Assurance Division the assessment. Reliability of our financial reporting has unlimited access to all activities, records and n a l
is confirmed by the external accounting auditor who employees Group-wide to accomplish its roles and y s makes an assessment of our internal control system responsibilities. The head of the division is required to is based on the Internal Control Report prepared by us. report to the President the results of internal audits along with their analysis and assessment, and also reports to Risk management the Board of Directors. The head of the division has the right to contact the management of JT and the Group Financial risk management companies regularly and as frequently as needed. JT has put in place the internal guidelines for financial risk management. The executive officer in charge updates the status of financial risks together with the countermeasures against these risks at the Executive Committee on a quarterly basis. The director in charge reports the status of financial borrowings and credit exposures to the Board of Directors on a quarterly basis to ensure that the board is aware of any risk in these areas.
Crisis management and disaster control In order to deal with possible crises or disasters, JT has produced a manual for crisis management and disaster control so that we can make a proper initial response. In the event of a crisis or a disaster, a project team led by the President is immediately assembled. In the project team, the Corporate Strategy Division assumes the key role to support the President. Under the leadership of the President, we respond promptly and properly, ensuring close cooperation across the organization. The director in charge reports crisis or disaster incidents to the Board of Directors on a quarterly basis.
Management of other risks In accordance with the Rules Defining the Extent of Responsibility and Authority, management of other risks is delegated to relevant divisions, which identify and monitor the risks in their areas of responsibility. Significant risks are reported to the Executive Committee, together with the request for approval to implement countermeasures against them, where necessary.
Please refer to page 50 for our risk factors.
Japan Tobacco INC. Annual Report 2013 069 C orporate Governance continued Executive Remuneration
Overview Structure of executive remuneration Remuneration for our directors is determined by In accordance with the above policy, remuneration resolution at the Board of Directors, taking into for our executive comprises (1) “base salary” paid account discussion at the Compensation Advisory monthly, (2) “executive bonus” linked to our business Panel. Remuneration for our audit & supervisory performance in the relevant year, and (3) “stock option board members is determined through the grants”, the value of which is linked to our mid- to deliberations of the Audit & Supervisory Board. long-term company value. In 2007, JT introduced a The aggregate remuneration of directors and audit stock option program as an incentive linked to the & supervisory board members cannot exceed the mid- to long-term company value. The Companies respective ceilings approved at a general meeting Act requires a special resolution at a shareholders’ of shareholders. In determining remuneration, we refer meeting if stock options are granted under particularly to research management remuneration conducted by advantageous terms or at particularly advantageous a third party, and benchmark Japanese manufacturing prices. This is not the case with our stock option companies operating globally with a scale or profit program, as our stock options are compensation for comparable with ours. the executives who perform their duties, and the options are granted in exchange for certain considerations. The Compensation Advisory Panel The Compensation Advisory Panel has been Remuneration for the directors and audit & supervisory established as an advisory body to the Board of board members are structured as follows: Directors with an aim to increase the objectiveness and transparency of our executive remuneration. Remuneration for the directors who also serve as The Compensation Advisory Panel comprises the executive officers comprises “base salary”, “executive Chairman, two outside directors and two outside bonus” and “stock option grants”. “Executive bonus” audit & supervisory board members. Upon request, is included, as they are responsible for the achievement the Panel reviews and provides advice on the policy, of assigned annual targets through their day-to- framework and calculation method for remuneration day management. of our directors and executive officers. It also monitors whether our executive remuneration level is reasonable. As for the president or each executive deputy president, During the past fiscal year, the Compensation Advisory the combined amount of “executive bonus” at a 100% Panel met twice to discuss the level of remuneration grant basis and “stock option grants” is targeted at among other matters. slightly less than 80% of respective annual base salary. The same scheme is introduced to set “executive Based on the recommendation by the Compensation bonus” and “stock option grants” for other directors, Advisory Panel, the key policy for our executive while the combined amount is targeting approximately remuneration is as follows: 70% of respective annual base salary. Excluding outside • Set the remuneration at an adequate level to retain directors, remuneration for the directors not serving personnel with superior capabilities as executive officers comprises “base salary” and • Link the remuneration to company performance “stock option grants”, as they focus on decision-making so as to motivate executives to achieve their on the Group strategies in addition to supervision of performance targets business and corporate activities. Remuneration for • Link the remuneration to company value in the outside directors consists solely of “base salary” and mid- to long-term does not include performance linked compensation • Ensure transparency by implementing an objective from the perspective of sustaining their independence. and quantitative framework.
070 Japan Tobacco INC. Annual Report 2013 Remuneration for the audit & supervisory board members is also composed of “base salary” alone, in light of their key responsibility to conduct audits. OPERATIONS & A OPERATIONS The maximum amount of the annual aggregate remuneration excluding “stock option grants” for the directors and audit & supervisory board members was approved at our 22nd Annual General Meeting of Shareholders held in June 2007. The maximum remuneration for all the directors combined is ¥870 million and ¥190 million for all the audit & supervisory board members combined. In addition, the ceiling for annual “stock option grants” for the directors was approved at the same shareholders’ meeting. The ceiling is 800 options in number and ¥200 million in value. n a l
The number of the stock options granted to the directors and the executive officers who are not directors is decided y s each year by the Board of Directors. is
The remuneration payments to the directors and audit & supervisory board members for the year ended March 2013 are as follows.
Total remuneration Total amount of remuneration and other payments by type (million yen) and other payments Number to be paid Category (million yen) Basic remuneration Director’s bonus1 Stock option grants2 (people) Directors (excluding Outside Directors) 627 324 198 105 10 Audit & Supervisory Board member (excluding Outside Audit & Supervisory Board members) 36 36 – – 2 Outside Directors and Outside Audit & Supervisory Board members 83 83 – – 5 Total 746 442 198 105 17
1 Amounts to be paid. 2 Total amounts granted for the year ended March 2013.
The remuneration payments to the directors and the audit & supervisory board members whose total remuneration exceeds ¥100 million for the year ended March 2013 are as follows.
Amount of consolidated remuneration and other payments by type (million yen) Name Category Company Basic remuneration Director’s bonus Stock option grants Total (million yen) Representative Mitsuomi Koizumi Director JT 67 64 25 156
The stock options granted for the year ended March 2013 are as follows:
Resolution date September 21, 2012 Directors seven persons Positions and number of people grants Executive officers (excluding persons serving as Directors) 17 persons 65,600 shares to Directors Number of shares 80,200 shares to Executive officers; total 145,800 shares (200 shares per stock acquisition right)
Japan Tobacco INC. Annual Report 2013 071 C orporate Governance continued External Accounting Auditors and Audit Fee
Deloitte Touche Tohmatsu LLC (Tohmatsu) conducts accounting audits in accordance with the Companies Act and the Financial Instruments and Exchange Act. The Certified Public Accountants who audited the JT Group’s consolidated financial statements for the year ended March 31, 2013 and the number of people who assisted the auditing work are as follows:
Audit partners responsible for the Group accounting audit: Yasuyuki Miyasaka Satoshi Iizuka Koji Ishikawa
Assistants for the audit: Certified public accountants: 13 persons Junior accountants: 7 persons Others: 10 persons.
Policy to determine audit fee The audit fee is determined after sufficient negotiations with external accounting auditors based on the audit plan and fee estimates proposed by them. During the process, we confirm that the proposed audit hours properly reflect the scope of audits or reviews, taking into account the focus audit areas under the audit plan and the additions or subtractions of the Group companies among other factors. We also analyze the variance between the actual and planned auditing hours in the prior audits. With these and other information being considered, the audit fee is agreed.
Consent from the Audit & Supervisory Board is acquired before final agreement on the audit fee to ensure the independence of external auditors.
Audit and non-audit fees In addition to the accounting audit fee, the JT Group pays fees to Tohmatsu for its services unrelated to the accounting audit. Fees paid to Tohmatsu for the year ended March 31, 2012 and the year ended March 31, 2013 are as follows:
Year ended March 31, 2012 Year ended March 31, 2013 Fees for audit attestation Fees for non-audit services Fees for audit attestation Fees for non-audit services Classification services (million yen) (million yen) services (million yen) (million yen) JT 310 1341 320 242 Consolidated subsidiaries in Japan 188 2 171 5 Total 498 136 491 28
1 Includes the fee for the advisory service concerning IFRS adoption. 2 Includes the fee for the issuance of the comfort letter in relation to the share offering.
072 Japan Tobacco INC. Annual Report 2013 Our subsidiaries outside Japan receive accounting audits mainly by the member firms of Deloitte Touche Tohmatsu Limited, which Tohmatsu belongs to. In particular, the fees paid by the JTIH Group for the accounting audits of their financial statements and the non-audit services are material. Fees paid to the member firms of Deloitte Touche & A OPERATIONS Tohmatsu Limited for the year ended March 31, 2012 and the year ended March 31, 2013 are as follows:
Year ended March 31, 2012 Year ended March 31, 2013 Fees for audit attestation Fees for non-audit services Fees for audit attestation Fees for non-audit services Classification services (million yen) (million yen) services (million yen) (million yen) n
JTIH Group 679 368 682 324 a l y s is
Japan Tobacco INC. Annual Report 2013 073
076 Financial Review FINANCIAL INFORMATION 084 Financial Statements and Notes
Our quest for better communication with the financial community In the year ended March 31, 2012, we adopted IFRS with the aim of improving international comparability of financial information in the capital markets. In the following year, we split the former food business into two segments, the beverage business and processed food business, to improve transparency of our business. We will continue with our efforts to improve our disclosure and communication with the financial community. Financial Review Analysis of the Results for year ended March 20131
1 Consolidated results: Year ended March 2012 and year ended March 2013. International tobacco business: Year ended December 2011 and year ended December 2012.
Actual Results Decrease Increase (Decrease in case of expense) Revenue2 (billions of yen)
FY3/2012 2,033.8
International tobacco at constant US$ vs JPY +44.3
International tobacco US$/Yen Forex Eect +0.1
Japanese domestic tobacco +41.0
Pharmaceutical +5.8
Beverage -3.3
Processed Food -1.9
Others +0.5
FY3/2013 2,120.2
• Revenue increased ¥86.4 billion or +4.2% year-on-year to ¥2,120.2 billion. • This was mainly the result of robust pricing and mix as well as an increase in total shipment volume in the international tobacco business and an increase in sales volume in the Japanese domestic tobacco business from the prior fiscal year which was affected by the earthquake disaster.
2 Excludes tobacco excise taxes and agency transactions.
Adjusted EBITDA3 (billions of yen)
FY3/2012 577.1
International tobacco at constant currency +70.7 International tobacco Local Currency vs US$ Forex Eect -42.2 International tobacco US$ vs Yen Forex Eect +0.0
Japanese domestic tobacco +19.1
Pharmaceutical -2.7
Beverage -2.2
Processed Food +1.9
Others +0.3
FY3/2013 622.1
• Adjusted EBITDA increased ¥45.0 billion or +7.8% year-on-year to ¥622.1 billion, driven mainly by the tobacco business. • In the international tobacco business, adjusted EBITDA grew driven by strong volume and price/mix, which more than offset the increase in costs and unfavorable currency exchange movements. • In the Japanese domestic tobacco business, adjusted EBITDA grew, as the increase in costs was more than offset by the increase in sales volume and the absence of the earthquake related costs incurred in the prior fiscal year. • Adjusted EBITDA at constant rates of exchange grew +15.1% year-on-year.
3 Operating profit + depreciation and amortization ±adjustment items (income and costs)*. * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.
Operating Profit (billions of yen)
FY3/2012 459.2
Adjusted EBITDA +45.0
Adjustment total +28.2
FY3/2013 532.4
• Operating profit increased ¥73.2 billion or +15.9% year-on-year, driven by an increase in revenue in the international tobacco business and the Japanese domestic tobacco business, and the absence of a cooperation fee for terminating leaf tobacco farming incurred in the prior fiscal year.
076 Japan Tobacco INC. Annual Report 2013 Profit4 (billions of yen)
FY3/2012 320.9
Operating profit +73.2
Financial income/financial cost -5.0 Income tax/Profit attributable to non-controlling interests -45.5 FY3/2013 343.6
• Profit increased ¥22.7 billion or +7.1% year-on-year to ¥343.6 billion, as the increase in operating profit more than offset the worsening in financial income/ financial cost and the increase in income tax/profit attributable to non-controlling interests. • Financial income/financial cost decreased year-on-year, as the decrease in interest expenses could not offset the increase in foreign exchange losses.
• Income tax increased (decreased as in the above graph), in the absence of the effect of the loss on the valuation of investments in subsidiaries in the FINANCIAL INFORMATION prior fiscal year.
4 Profit attributable to owners of the parent.
Revenue by business segment Adjusted EBITDA and Operating Profit by business segment
Billions of yen Billions of yen Years ended March 31 2012 2013 Years ended March 31 2012 2013 Revenue 2,033.8 2,120.2 Consolidated operating profit 459.2 532.4 International tobacco5 966.3 1,010.7 Adjustment total8 118.0 89.8 Core revenue6 894.6 943.1 Consolidated: Adjusted EBITDA 577.1 622.1 Japanese domestic tobacco 646.2 687.1 International tobacco: Operating profit9 252.4 289.5 Core revenue7 611.9 654.0 Adjustment total8 62.4 53.8 Pharmaceutical 47.4 53.2 International tobacco: Adjusted EBITDA 314.8 343.3 Beverage 188.8 185.5 Japanese domestic tobacco: Operating profit 209.3 241.3 Processed Food 170.7 168.7 Adjustment total8 53.0 40.0 Others 14.6 15.0 Japanese domestic tobacco: Adjusted EBITDA 262.3 281.3 Pharmaceutical: Operating profit (13.5) (16.2) 5 International tobacco business: Year ended December 2011 and year ended 8 December 2012. Adjustment total 3.5 3.4 6 Excludes revenues from distribution, contract manufacturing and other Pharmaceutical: Adjusted EBITDA (10.0) (12.7) peripheral businesses. 7 Excludes revenue from the distribution of imported tobacco in the Japanese Beverage: Operating profit 4.5 2.4 domestic tobacco business, among other factors. Adjustment total8 10.1 10.1 Beverage: Adjusted EBITDA 14.6 12.4 Processed Food: Operating profit (2.5) (5.8) Average Exchange Rate Adjustment total8 7.9 13.2 Processed food: Adjusted EBITDA 5.4 7.4 Others/Elimination: Operating profit 9.0 21.2 Jan-Dec Jan-Dec Adjustment total8 (18.9) (30.7) 2011 2012 Others/Elimination: Adjusted EBITDA (9.8) (9.6) YEN/US$ 79.80 79.81 RUB/US$ 29.40 31.07 • For analysis of revenue, core revenue and adjusted EBITDA of each GBP/US$ 0.63 0.63 business segment, please refer to section “Review of Operation”.
EUR/US$ 0.72 0.78 8 Depreciation and amortization ± adjustment items (income and costs)** ** Adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others. 9 International tobacco business: Year ended December 2011 and year ended December 2012.
JAPAN TOBACCO INC. ANNUAL REPORT 2013 077 Financial Review continued Analysis of the Results for year ended March 2013 continued
Consolidated Balance Sheet (Assets) (billions of yen)
March 31, 2012 3,667.0
Cash and cash equivalents -262.0
Trade and other receivables +60.1
Inventories +26.4
Goodwill +206.4
Trademark +30.3
Property, plant and equipment +52.8
Other assets +71.7
March 31, 2013 3,852.6
• Total assets increased ¥185.6 billion to ¥3,852.6 billion, as the decrease in cash and cash equivalents was more than offset by the increase of goodwill from forex impact and acquisitions, among other factors. • Cash and cash equivalents decreased from share buy-back, acquisitions and investment in the next generation raw material processing lines in the Japanese domestic tobacco business.
Consolidated Balance Sheet (Debt and Equity) (billions of yen)
March 31, 2012 3,667.0
Borrowings -93.5
Bonds -83.3
Trade and other payables +14.1
Tobacco excise tax payables etc +35.7
Other liabilities +135.3
Retained earnings +201.2 Exchange dierences on translation of foreign operations +215.8 Other equity total -239.6
March 31, 2013 3,852.6
• Total liabilities increased ¥8.2 billion to ¥1,960.6 billion. Borrowings decreased from repayment of loans and bonds decreased from redemptions. However, these were not sufficient to offset the increase in tobacco excise tax payables etc and the increase in retirement benefit liabilities and income tax payables in the international tobacco business. • Total equity increased ¥177.4 billion to ¥1,892.0 billion, mainly as retained earnings increased and exchange differences on translation of foreign operations increased, which more than offset the decrease in equity from share buy-back.
078 Japan Tobacco INC. Annual Report 2013 1. Significant Accounting Policies Adjusted EBITDA Having acquired RJR Nabisco’s non-U.S. tobacco In order to provide useful comparative information operation in 1999 and Gallaher Group Plc. in the UK in on our business performance, adjusted EBITDA 2007, the JT Group has been growing steadily as a global is presented as operating profit less depreciation, company with operations in over 70 countries and with amortization and adjustment items (income and costs). our products sold in over 120 countries. In this context, Adjustment items (income and costs) are impairment the JT Group has adopted IFRS from the year ended losses on goodwill and restructuring income and costs, March 31, 2012 to improve international comparability and others items. of financial information in capital markets and to diversify the Group’s sources of financing through international Furthermore, for the international tobacco business, capital markets. adjusted EBITDA at constant rates of exchange which excludes foreign exchange effects, is also presented While the year end of our consolidated financial as additional information. Adjusted EBITDA at FINANCIAL INFORMATION results is for March 31, the year end for our international constant rates of exchange for a relevant period tobacco business is December 31. For further details in the international tobacco business is calculated of the reporting period for our international tobacco using the foreign exchange rates of the prior year. business, please refer to Note 2 (6) to the consolidated financial statements. Adjusted EPS In order to provide useful comparative information For further details of significant accounting on our shareholder return, adjusted EPS (diluted) is policies, please refer to Note 3 to the consolidated presented after making certain adjustments to dilute financial statements. EPS. For the adjustments made for the adjusted EPS (diluted), please refer to Note 32 to the consolidated 2. Non-GAAP financial measures financial statements “Earnings per share”. The JT Group discloses certain additional financial measures that are not required or defined under IFRS. Consolidated dividend payout ratio These measures help grasp underlying performance The consolidated dividend payout ratio is calculated of each business and are used for internal by dividing the annual dividend per share for the performance management. We believe that they relevant year (total of interim dividends and year-end are useful information for users of our financial dividends for which the record dates are included statements to assess the Group’s performance. in the relevant year) by basic earnings per share.
For our international tobacco business, its consolidated Change in segments financial statements reported in US dollars are internally In the second quarter ended September 30, 2012, reviewed and therefore revenue and adjusted EBITDA the JT Group split the former “Food Business” into are externally communicated in US dollars. These two segments, the “Beverage Business” and the non-GAAP financial measures should be treated as “Processed Food Business”. For details, please refer supplementary information, rather than alternative to Note 6(1) to the consolidated financial statements. measures to corresponding financial numbers prepared in accordance with IFRS. 3. Analysis of consolidated financial results for the year ended March 31, 2013 Core revenue For the tobacco business, core revenue is disclosed 1. Consolidated financial results for the year additionally as a breakdown of revenue. Specifically, ended March 31, 2013 the core revenue for the Japanese domestic tobacco For analysis of “Revenue”, “Adjusted EBITDA”, business is presented after deducting revenue “Operating profit” and “Profit attributable to owners accounted for distribution of imported tobacco of the parent company”, please refer to page 76-77. products, among other things, from revenue, For analysis of “Assets”, “Debt” and “Equity”, while core revenue for the international tobacco please refer to page 78. business is presented after deducting the revenue accounted for the distribution business and contract For analysis of financial results by business segment, manufacturing, among other areas, from revenue. please refer to “Review of Operations”.
Japan Tobacco INC. Annual Report 2013 079 Financial Review continued
2. Adjusted EPS Adjusted profit for the year ended March 31, 2013 increased ¥38.9 billion year-on-year to ¥329.7 billion. Adjusted EPS (diluted) for the year ended March 31, 2013 increased ¥21.00 or +13.8% year-on-year to ¥173.65.
Adjusted diluted earnings per share Billions of yen Year ended Year ended March 31, March 31, 2012 2013 Profit used for calculation of adjusted diluted earnings per share 320.9 343.6 Adjustment items (income) (29.9) (34.2) Adjustment items (costs) 29.0 7.5 Adjustments on income taxes and non-controlling interests 2.0 12.8 Adjustments on income taxes related to losses on valuation of investments in subsidiaries (31.2) – Adjusted profit for the year 290.8 329.7 Weighted-average number of diluted ordinary shares during the year (thousands of shares) 1,905,040 1,898,553 Adjusted diluted earnings per share (yen) 152.65 173.65
In calculating adjusted EPS, the effect of the share split conducted at a ratio of 200 shares to one share, with July 1, 2012 as the effective date, has been reflected.
4. Results and plans of capital expenditures Capital expenditure include outlays on property, plants and equipment such as land, buildings and structures; machinery; vehicles and others; and intangible assets such as goodwill, trademark, software and others that are necessary for enhancing the productivity of our factories and other facilities; strengthening our competitiveness, and operating in various business fields.
Billions of yen, % Rates of Years ended March 31 2012 2013 Change Change Capital expenditure 119.0 137.4 +18.5 +15.5% International tobacco* 39.1 37.5 -1.6 -4.2% Japanese domestic tobacco 56.2 71.2 +15.0 +26.7% Pharmaceutical 3.9 5.8 +1.9 +47.8% Beverage 8.1 12.0 +3.9 +48.5% Processed Food 7.3 4.6 -2.7 -37.1% Other/Elimination and corporate 4.3 6.3 +2.0 +46.3% * International tobacco business: FY ended December 2011 and FY ended December 2012.
Total capital expenditure amounted to ¥137.4 billion in the year ended March 31, 2013. In the international tobacco business, capital expenditure amounted to ¥37.5 billion which was spent on expanding production capacity, maintenance and replacement of facility, and on improvement of product specifications. In the Japanese domestic tobacco business, capital expenditure amounted to ¥71.2 billion which was spent on initiatives to streamline manufacturing processes, to strengthen our ability to respond flexibly to supply and demand fluctuations with an increasingly diverse range of products, and to develop new products. In the pharmaceutical business, capital expenditure amounted to ¥5.8 billion which was spent on the development and reinforcement of R&D capabilities. In the beverage business, capital expenditure amounted to ¥12.0 billion, which was spent on maintaining and renewing the vending machine network, among other areas. In the processed food business, capital expenditure amounted to ¥4.6 billion, which was spent on enhancing and maintaining the production capacity. These capital expenditures were internally funded through cash generated by operations.
080 Japan Tobacco INC. Annual Report 2013 Plans for new installations and disposal of facilities Regarding the mid-to long-term resource allocation of the JT Group, we will place top priority on business investments that will lead to sustainable profit growth in the mid- to long-term based on our management principles. We position the international and Japanese domestic tobacco business as the core business and profit growth engine and place top priority on business investments that will lead to their sustainable profit growth. Meanwhile, regarding the pharmaceutical business, beverage business and processed food business, we will strive to strengthen foundations that will lead to future profit contribution, and we will make investments to that end. Based on this policy, we plan capital expenditures totaling ¥195.0 billion for year ending March 31, 2014. As JT and JT Group companies have wide-ranging plans for capital expenditure, figures are disclosed by segment. Our actual capital expenditures may differ significantly from the planned figures mentioned above as a result of a number of factors, including those discussed in “Risk Factors”.
Billions of yen
Capital Expenditure FINANCIAL INFORMATION plan for the year ending March 31, 2014 Main purpose of investment Funding International tobacco Investment for improvement of product specifications, expansion business 94.0 of production capacity, maintenance and upgrading of facilities Internally funded Japanese domestic Investment in production and sales facilities for the purpose tobacco business 63.0 of brand equity enhancement Same as above Pharmaceutical business 4.0 Investment for the maintaining and reinforcing of R&D Same as above Beverage business 12.0 Investment for the maintenance and reinforcing trade marketing Same as above Processed food business 8.0 Investment for enhancing and maintaining production capacity Same as above
5. Dividends The year-end dividends for the year ended March 31, 2013 were ¥38 per share. The total annual dividends per share, including the interim dividends per share of ¥30 per share, were ¥68 per share, with a consolidated payout ratio of 37.6%.
The year-end dividends related to the current year are recognized in the following year for accounting purposes. The year-end dividend related to the year ended March 31, 2012 (record date of March 31, 2012) and the interim dividends for the year ended March 31, 2013 (record date September 30, 2012) are recorded in the financial statements for the year ended March 31, 2013. For more details, please refer to Note 26 to the consolidated financial statements “Dividends”.
6. Capital management The JT Group’s management principle is pursuit of the “4S” model: ensuring that in all our activities, we satisfy and fulfill our responsibilities towards our consumers, shareholders, employees and wider society, while balancing the interest of these key stakeholder groups.
The JT Group believes that sustainable profit growth in the mid- to long-term based on this principle will increase the JT Group’s value in the mid- to long-term, and is consequently in the best interest of all stakeholders, including our shareholders.
In order to achieve sustainable growth, the JT Group understands that financing capacities sufficient enough to make agile business investments when there are opportunities, such as the acquisition of external resources for business growth, are required. For that reason, the JT Group aims to maintain a well-balanced capital structure by ensuring sound and flexible financial conditions for future business investment as well as an appropriate return on equity.
Japan Tobacco INC. Annual Report 2013 081 Financial Review continued
The JT Group manages net interest-bearing debt, 2. External financing where cash and cash equivalents are deducted from Short-term working capital needs are normally interest-bearing debt, and capital (the part attributable financed through short-term borrowings from to the owners of the parent company). The amounts financial institutions or through commercial paper, as of each year end are as follows: or a combination of both; mid- to long-term financing is done through long-term borrowings from financial Billions of yen institutions, bond or equity, or a combination of those. As of March As of March 31, 2012 31, 2013 For secure and efficient financing, we continue to Interest-bearing debt 502.4 327.2 diversify our financing means as well as the financial Cash and cash equivalents (404.7) (142.7) institutions, and set up secure financing means, such as committed facilities. The status of the debts owed by Net interest-bearing debt 97.6 184.5 Group is quarterly reported to the Executive Committee Capital (equity attributable to and, as appropriate, the Board of Directors of JT. owners of the parent company) 1,634.1 1,806.1 3. External investments Share buy-back: Our financial investments are always made taking into A repurchase of our shares requires cash outlays. account safety, liquidity and optimal yield. Speculative As of March 31, 2013, we held 182,510,100 shares dealings in pursuit of profit margin are not allowed. The of common stock as treasury stock, amounting results of the financial investment are quarterly reported to 9.13% of the total number of shares issued. to the Executive Committee and, as appropriate, the Board of Directors of JT. In order to repurchase our shares in a flexible manner, we amended the Articles of Incorporation at the 8. Results of cash flows general meeting of shareholders held on June 24, 2004 so that we could make repurchase based Year ended March 31, 2013 and year ended on a resolution made by the Board of Directors. March 31, 2012 Cash and cash equivalents at the end of the year We may continue to hold the repurchased shares ended March 31, 2013 decreased by ¥262.0 billion from as treasury stock or use them for other purposes. the end of the prior year to ¥142.7 billion. Cash and cash Stock repurchase provides our management with equivalents at the end of the prior year were ¥404.7 billion. an additional option for increasing flexibility and speed in capital management in order to adopt Note: Tobacco excise tax is paid monthly, one month in arrears, at the end of each month to a rapidly changing business environment. in Japan. Since March 31, 2012 and March 31, 2013 were both holidays for financial institutions in Japan, we did not pay the tobacco excise tax for the previous month’s tobacco sales in Japan on those fiscal year ends. The amounts of excise taxes paid 7. Financial activities on the business days immediately following March 31, 2012 and March 31, 2013 Our Group Treasury Division provides Group-wide were ¥143.5 billion and ¥136.6 billion, respectively. support to enable secure and efficient financing activities. JT Group is exposed to financial risks (credit Cash flows from (used in) operating activities risks, liquidity risks, foreign exchange risks, interest rate Net cash flows from operating activities during the year risks, and market price fluctuation risks). Treasury ended March 31, 2013 were ¥466.6 billion. The main operations are conducted pursuant to a set of group- factors were the generation of a stable cash inflow from wide financial risk management policies and results the tobacco business. As a result of holidays for financial are reported quarterly to the Executive Committee institutions, the amount of tobacco excise tax paid for and, as appropriate, the Board of Directors of JT. the prior year in Japan was for 11 months, while the For more details on financial risk management, please amount for the year ended March 31, 2013 in Japan was refer to ”(2) Financial Risk Management” to “(7) Market for 12 months. Net cash flows from operating activities Price Fluctuation Risk” of Note 35 to the consolidated were ¥551.6 billion for the year ended March 31, 2012. financial statements “Financial Instruments”. Cash flows from (used in) investing activities 1. Cash Management Systems Net cash flows used in investing activities during To maximize the total Group cash efficiency, we give the year ended March 31, 2013 were ¥147.9 billion. first priority to utilizing internal financing mainly by the This was mainly due to the purchase of property, plant Cash Management Systems (CMS) within our Group, and equipment and the purchase of shares of Gryson NV where legally permissible and economically viable. and Nakhla. Net cash flows used in investing activities were ¥103.8 billion for the year ended March 31, 2012.
082 Japan Tobacco INC. Annual Report 2013 Cash flows from (used in) financing activities Net cash flows used in financing activities during the year ended March 31, 2013 were ¥569.5 billion. This was mainly due to the buy-back of shares, the increase of dividends per share, repayments of borrowings and the redemption of bonds. Net cash flows used in financing activities were ¥279.1 billion for the year ended March 31, 2012.
9. Liquidity We have historically had, and expect to continue to have, significant cash flows from operating activities. We expect that cash generated from operating activities will continue to be stable and cover funds needed for ordinary business activities. On March 31, 2013, we had approximately ¥444.6 billion in committed lines of credit for major financial institutions both domestic and international, of which 100% was unused. In addition, we have a domestic commercial paper program, uncommitted lines of credit and a domestic bond shelf registration.
1. Long-term debt FINANCIAL INFORMATION Bonds issued (including the current portion) as of March 31, 2012 and March 31, 2013 accounted for ¥320.5 billion and ¥237.2 billion respectively and long-term borrowings as loans from financial institutions (including the current portion) accounted for ¥127.5 billion and ¥53.6 billion respectively. Annual interest rates applicable to yen- denominated long-term borrowings outstanding as of March 31, 2012 and March 31, 2013 ranged from 0.93% to 5.30% and 1.15% to 5.30% respectively. Annual interest rates for long-term borrowings denominated in other currencies ranged from 0.43% to 9.00% for those outstanding as of March 31, 2012 and 0.43% to 5.90% for those outstanding as of March 31, 2013. Long-term lease obligations accounted for ¥6.9 billion as of March 31, 2012 and ¥8.2 billion as of March 31, 2013. Maturities of interest-bearing debts are shown in the table below.
As of March 31, 2013, our long-term debt was rated Aa3 by Moody’s Japan K.K. (Moody’s), A+ by Standard & Poor’s Ratings Japan K.K. (S&P), and AA by Rating and Investment Information Inc. (R&I), with a ‘stable’ outlook from Moody’s, a ‘positive’ outlook from S&P and a ‘stable’ outlook from R&I. These ratings are among the highest ratings for international tobacco companies.
These ratings are affected by a number of factors such as developments in our major markets, our business strategies and general economic trends that are beyond our control. The ratings may be withdrawn or revised at any time. Each rating should be evaluated separately from other ratings. Under the Japan Tobacco Inc. Act, the bondholders of JT can enjoy statutory preferential rights over unsecured creditors in seeking repayment, with the exception of national and local taxes and other statutory obligations.
2. Short-term debt Short-terms borrowings totaled ¥43.5 billion as of March 31, 2012 and ¥23.8 billion as of March 31, 2013, of which borrowings denominated in the currencies other than Japanese yen were ¥32.0 billion and ¥20.7 billion, respectively. There was no commercial paper outstanding as of March 31, 2012 and March 31, 2013. Annual interest rates applicable to yen-denominated short-term borrowings ranged from 0.48% to 2.20% as of March 31, 2012, and from 0.46% to 2.10% as of March 31, 2013. Annual interest rates applicable to short-term borrowings in other currencies ranged from 1.60% to 27.00% as of March 31, 2012, and from 1.07% to 41.00% as of March 31, 2013. Short-term lease obligations totaled ¥3.9 billion as of March 31, 2012 and ¥4.3 billion as of March 31, 2013.
Billions of yen Due after Due after Due after Due after 1 year 3 years 3 years 4 years Due within through 2 through 4 through 4 through 5 Due after 5 Year ended March 31, 2013 Book Value 1 year years years years years years Short-term borrowings as loans 23.8 23.8 – – – – – Short-term lease obligations 4.3 4.3 – – – – – Long-term borrowings as loans (current portion) 20.5 20.5 – – – – – Long-term borrowings as loans 33.2 – 1.2 31.1 0.1 0.1 0.6 Bonds 237.2 – 157.3 40.0 – 20.0 20.0 Long-term lease obligations 8.2 – 3.1 2.1 1.4 0.8 0.8 Total 327.2 48.6 161.7 73.2 1.5 20.9 21.4
Japan Tobacco INC. Annual Report 2013 083 Consolidated Financial Statements Consolidated Statement of Financial Position Japan Tobacco Inc. and Consolidated Subsidiaries
Assets Millions of yen (As of March 31) 2012 2013 Current assets Cash and cash equivalents (Note 8) ¥ 404,740 ¥ 142,713 Trade and other receivables (Note 9) 327,767 387,837 Inventories (Note 10) 446,617 473,042 Other financial assets (Note 11) 27,361 29,103 Other current assets (Note 12) 123,163 177,858 Subtotal 1,329,649 1,210,552 Non-current assets held-for-sale (Note 13) 1,401 2,594 Total current assets 1,331,050 1,213,146
Non-current assets Property, plant and equipment (Notes 14, 21) 619,536 672,316 Goodwill (Notes 7, 15) 1,110,046 1,316,476 Intangible assets (Note 15) 306,448 348,813 Investment property (Note 17) 67,387 58,995 Retirement benefit assets (Note 24) 14,371 14,825 Investments accounted for using the equity method (Note 18) 18,447 22,940 Other financial assets (Note 11) 67,548 71,781 Deferred tax assets (Note 19) 132,174 133,348 Total non-current assets 2,335,957 2,639,493
Total assets ¥3,667,007 ¥3,852,639
084 Japan Tobacco INC. Annual Report 2013 Liabilities and equity Millions of yen (As of March 31) 2012 2013 Liabilities Current liabilities Trade and other payables (Note 20) ¥ 298,663 ¥ 312,741 Bonds and borrowings (Note 21) 211,766 44,301 Income tax payables 42,501 85,714 Other financial liabilities (Note 21) 8,039 8,550 Provisions (Note 22) 5,686 5,256 Other current liabilities (Note 23) 590,717 656,305 Subtotal 1,157,373 1,112,867 Liabilities directly associated with non-current assets held-for-sale (Note 13) 101 101
Total current liabilities 1,157,474 1,112,968 FINANCIAL INFORMATION
Non-current liabilities Bonds and borrowings (Note 21) 279,750 270,399 Other financial liabilities (Note 21) 20,994 18,844 Retirement benefit liabilities (Note 24) 315,020 343,095 Provisions (Note 22) 4,448 4,786 Other non-current liabilities (Note 23) 92,235 113,226 Deferred tax liabilities (Note 19) 82,460 97,309 Total non-current liabilities 794,906 847,658
Total liabilities 1,952,380 1,960,627
Equity Share capital (Note 25) 100,000 100,000 Capital surplus (Note 25) 736,410 736,411 Treasury shares (Note 25) (94,574) (344,573) Other components of equity (Note 25) (376,363) (155,462) Retained earnings 1,268,577 1,469,749 Equity attributable to owners of the parent company 1,634,050 1,806,125 Non-controlling interests 80,576 85,887 Total equity 1,714,626 1,892,012
Total liabilities and equity ¥3,667,007 ¥3,852,639
Japan Tobacco INC. Annual Report 2013 085 Consolidated Statement of Income Japan Tobacco Inc. and Consolidated Subsidiaries
Millions of yen (Years ended March 31) 2012 2013 Revenue (Notes 6, 27) ¥2,033,825 ¥2,120,196 Cost of sales (Notes 15, 24) (892,034) (899,392) Gross profit 1,141,791 1,220,804
Other operating income (Note 28) 48,512 42,165 Share of profit in investments accounted for using the equity method (Note 18) 2,047 2,775 Selling, general and administrative expenses (Notes 7, 13, 14, 15, 17, 24, 29, 34) (733,169) (733,385) Operating profit (Note 6) 459,180 532,360
Financial income (Notes 30, 35) 5,603 5,493 Financial costs (Notes 24, 30, 35) (23,429) (28,292) Profit before income taxes 441,355 509,560
Income taxes (Note 19) (112,795) (158,042) Profit for the year ¥ 328,559 ¥ 351,518
Attributable to: Owners of the parent company ¥ 320,883 ¥ 343,612 Non-controlling interests 7,676 7,906 Profit for the year ¥ 328,559 ¥ 351,518
Earnings per share Basic (Yen) (Note 32) ¥ 168.50 ¥ 181.07 Diluted (Yen) (Note 32) 168.44 180.99
Reconciliation from “Operating profit” to “Adjusted EBITDA”
Millions of yen (Years ended March 31) 2012 2013 Operating profit ¥459,180 ¥532,360 Depreciation and amortization 118,845 116,462 Adjustment items (income) (29,932) (34,234) Adjustment items (costs) 29,039 7,536 Adjusted EBITDA (Note 6) ¥577,132 ¥622,124
086 Japan Tobacco INC. Annual Report 2013 Consolidated Statement of Comprehensive Income Japan Tobacco Inc. and Consolidated Subsidiaries
Millions of yen (Years ended March 31) 2012 2013 Profit for the year ¥ 328,559 ¥351,518
Other comprehensive income Exchange differences on translation of foreign operations (Note 31) (130,331) 216,118 Net gain (loss) on derivatives designated as cash flow hedges (Note 31) (166) 121 Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income (Notes 31, 35) 4,750 4,799 Actuarial gains (losses) on defined benefit retirement plans (Notes 24, 31) (10,669) (28,200) Other comprehensive income (loss), net of taxes (136,416) 192,838 Comprehensive income (loss) for the year ¥ 192,143 ¥544,356
FINANCIAL INFORMATION Attributable to: Owners of the parent company ¥ 185,425 ¥536,068 Non-controlling interests 6,718 8,288 Comprehensive income (loss) for the year ¥ 192,143 ¥544,356
Japan Tobacco INC. Annual Report 2013 087 Consolidated Statement of Changes in Equity Japan Tobacco Inc. and Consolidated Subsidiaries
Millions of yen Equity attributable to owners of the parent company Other components of equity Exchange differences on Net gain (loss) on Net gain (loss) translation of derivatives on revaluation of Subscription foreign designated as available-for-sale (Years ended March 31) Share capital Capital surplus Treasury shares rights to shares operations cash flow hedges securities As of April 1, 2011 ¥100,000 ¥736,410 ¥ (94,574) ¥ 763 ¥(257,262) ¥ — ¥ 5,754 Cumulative effect of applying a new accounting standard — — — — (142) (5,754) Profit for the year — — — — — — — Other comprehensive income (loss) — — — — (129,966) (166) — Comprehensive income (loss) for the year — — — — (129,966) (166) — Acquisition of treasury shares (Note 25) — — — — — — — Disposal of treasury shares (Note 25) — — — — — — — Share-based payments (Note 34) — — — 265 — — — Dividends (Note 26) — — — — — — — Changes in the ownership interest in a subsidiary without a loss of control — — — — — — — Transfer from other components of equity to retained earnings — — — — — — — Other increase (decrease) — — — — — — — Total transactions with the owners — — — 265 — — — As of March 31, 2012 100,000 736,410 (94,574) 1,028 (387,228) (309) — Profit for the year — — — — — — — Other comprehensive income (loss) — — — — 215,845 121 — Comprehensive income (loss) for the year — — — — 215,845 121 — Acquisition of treasury shares (Note 25) — — (250,000) — — — — Disposal of treasury shares (Note 25) — 1 1 (2) — — — Share-based payments (Note 34) — — — 247 — — — Dividends (Note 26) — — — — — — — Changes in the ownership interest in a subsidiary without a loss of control — — — — — — — Transfer from other components of equity to retained earnings — — — — — — — Other increase (decrease) — — — — — — — Total transactions with the owners — 1 (249,999) 245 — — — As of March 31, 2013 ¥100,000 ¥736,411 ¥(344,573) ¥1,274 ¥(171,383) ¥(187) ¥ —
Millions of yen Equity attributable to owners of the parent company Other components of equity Net gain (loss) on revaluation of financial assets measured at fair Actuarial gains value through (losses) on other comprehen- defined benefit Retained Non-controlling (Years ended March 31) sive income retirement plans Total earnings Total interests Total equity As of April 1, 2011 ¥ — ¥ — ¥(250,745) ¥1,034,054 ¥1,525,145 ¥76,166 ¥1,601,311 Cumulative effect of applying a new accounting standard 5,551 — (344) 97 (247) 47 (201) Profit for the year — — — 320,883 320,883 7,676 328,559 Other comprehensive income (loss) 4,684 (10,009) (135,458) — (135,458) (958) (136,416) Comprehensive income (loss) for the year 4,684 (10,009) (135,458) 320,883 185,425 6,718 192,143 Acquisition of treasury shares (Note 25) — — — — — — — Disposal of treasury shares (Note 25) — — — — — — — Share-based payments (Note 34) — — 265 — 265 — 265 Dividends (Note 26) — — — (76,172) (76,172) (2,138) (78,310) Changes in the ownership interest in a subsidiary without a loss of control — — — (366) (366) (137) (503) Transfer from other components of equity to retained earnings (89) 10,009 9,920 (9,920) — — — Other increase (decrease) — — — — — (80) (80) Total transactions with the owners (89) 10,009 10,185 (86,458) (76,273) (2,355) (78,628) As of March 31, 2012 10,146 — (376,363) 1,268,577 1,634,050 80,576 1,714,626 Profit for the year — — — 343,612 343,612 7,906 351,518 Other comprehensive income (loss) 4,691 (28,201) 192,456 — 192,456 382 192,838 Comprehensive income (loss) for the year 4,691 (28,201) 192,456 343,612 536,068 8,288 544,356 Acquisition of treasury shares (Note 25) — — — — (250,000) — (250,000) Disposal of treasury shares (Note 25) — — (2) — 0 — 0 Share-based payments (Note 34) — — 247 — 247 — 247 Dividends (Note 26) — — — (114,258) (114,258) (4,061) (118,319) Changes in the ownership interest in a subsidiary without a loss of control — — — 17 17 (522) (505) Transfer from other components of equity to retained earnings (2) 28,201 28,199 (28,199) — — — Other increase (decrease) — — — — — 1,606 1,606 Total transactions with the owners (2) 28,201 28,444 (142,439) (363,993) (2,977) (366,970) As of March 31, 2013 ¥14,835 ¥ — ¥(155,462) ¥1,469,749 ¥1,806,125 ¥85,887 ¥1,892,012
088 Japan Tobacco INC. Annual Report 2013 Consolidated Statement of Cash Flows Japan Tobacco Inc. and Consolidated Subsidiaries
Millions of yen (Years ended March 31) 2012 2013 Cash flows from operating activities Profit before income taxes ¥ 441,355 ¥ 509,560 Depreciation and amortization 118,845 116,462 Impairment losses 7,013 3,213 Interest and dividend income (3,646) (5,137) Interest expense 14,377 10,134 Share of profit in investments accounted for using the equity method (2,047) (2,775) (Gains) losses on sale and disposal of property, plant and equipment, intangible assets and investment property (22,444) (29,218) (Increase) decrease in trade and other receivables (30,207) (24,118)
(Increase) decrease in inventories 27,388 10,791 FINANCIAL INFORMATION Increase (decrease) in trade and other payables (5,365) 1,576 Increase (decrease) in retirement benefit liabilities (9,686) (15,350) (Increase) decrease in prepaid tobacco excise taxes (1,785) (31,377) Increase (decrease) in tobacco excise tax payables 148,260 12,802 Increase (decrease) in consumption tax payables 14,807 (3,093) Other (13,002) 16,334 Subtotal 683,863 569,804 Interest and dividends received 6,181 6,764 Interest paid (16,006) (8,703) Income taxes paid (122,464) (101,258) Net cash flows from operating activities 551,573 466,608 Cash flows from investing activities Purchase of securities (5,697) (19,161) Proceeds from sale and redemption of securities 21,622 3,426 Purchase of property, plant and equipment (95,705) (114,240) Proceeds from sale of investment property 34,545 33,425 Purchase of intangible assets (18,252) (18,611) Payments into time deposits (46,648) (26,647) Proceeds from withdrawal of time deposits 34,854 45,665 Purchase of investments in subsidiaries (Note 7) (33,622) (54,128) Proceeds from sale of investments in subsidiaries 730 — Other 4,369 2,343 Net cash flows from investing activities (103,805) (147,928) Cash flows from financing activities Dividends paid to owners of the parent company (Note 26) (76,165) (114,236) Dividends paid to non-controlling interests (2,138) (4,009) Capital contribution from non-controlling interests 629 216 Increase (decrease) in short-term borrowings and commercial paper (2,408) (23,012) Proceeds from long-term borrowings — 518 Repayments of long-term borrowings (59,879) (81,165) Redemption of bonds (133,333) (92,466) Repayments of finance lease obligations (5,268) (4,814) Acquisition of treasury shares — (250,000) Payments for acquisition of interests in subsidiaries from non-controlling interests (503) (505) Other — 0 Net cash flows from financing activities (279,064) (569,473) Net increase (decrease) in cash and cash equivalents 168,704 (250,793) Cash and cash equivalents at the beginning of the year 244,240 404,740 Effect of exchange rate changes on cash and cash equivalents (8,204) (11,235) Cash and cash equivalents at the end of the year (Note 8) ¥ 404,740 ¥ 142,713
Japan Tobacco INC. Annual Report 2013 089 Notes to Consolidated Financial Statements Japan Tobacco Inc. and Consolidated Subsidiaries / As of March 31, 2012 and 2013
1. Reporting Entity
Japan Tobacco Inc. (hereinafter referred to as the “Company”) is a The details of businesses and principal business activities of joint stock corporation under the Companies Act of Japan, pursu- the Company and its subsidiaries (hereinafter referred to as the ant to the Japan Tobacco Inc. Act, with its principal places of “Group”) are stated in “6. Operating Segments.” business located in Japan since its incorporation. The addresses The Group’s consolidated financial statements for the year of the Company’s registered head office and principal business ended March 31, 2013, were approved on June 21, 2013 by offices are available on the Company’s website (http://www.jti. Mitsuomi Koizumi, President and Chief Executive Officer, and co.jp). Naohiro Minami, Chief Financial Officer.
2. Basis of Preparation
(1) Compliance with IFRS (6) Reporting Period of JT International The Group’s consolidated financial statements are prepared in Holding B.V. and its Subsidiaries accordance with International Financial Reporting Standards The fiscal year end date of JT International Holding B.V. and its (hereinafter referred to as “IFRS”). subsidiaries (hereinafter collectively referred to as the “JTIH Group”), which operate the Group’s international tobacco busi- (2) Basis of Measurement ness, is December 31, hence the Group consolidates financial Except for the financial instruments, stated in “3. Significant results of the JTIH Group for the period from January 1, 2012 to Accounting Policies,” the Group’s consolidated financial state- December 31, 2012 into the Group’s consolidated the financial ments are prepared on the historical cost basis. results for the year ended March 31, 2013. Under the consolidation process of the Group, consolidation for (3) Functional Currency and Presentation the JTIH Group (sub-consolidation) is conducted first, and then, Currency the process of consolidation for the whole Group is performed. The Group’s consolidated financial statements are presented in The JTIH Group is a unified business operation unit operating the Japanese yen, which is the functional currency of the Company. Group’s international tobacco business and manages budgets and The units are in millions of yen, and figures less than one million actual results on a sub-consolidation basis, and as a unified finan- yen are rounded to the nearest million yen. cial reporting unit, takes a major role in ensuring the accuracy and quality of the Group’s consolidated financial reporting. Under such (4) Early Adoption of New Accounting Standards a consolidation process, in order to unify the financial reporting The Group has early adopted IFRS 9 “Financial Instruments” periods across the whole Group, maintaining the same level of (revised in October 2010) (hereinafter referred to as “IFRS 9”) from quality of the Group’s consolidated financial reporting and satisfy- the beginning of the year ended March 31, 2012 (April 1, 2011). ing the statutory schedule prescribed under the Companies Act of IFRS 9 replaces IAS 39 “Financial Instruments: Recognition Japan, it is required to shorten the current closing schedule fur- and Measurement” (hereinafter referred to as “IAS 39”) and pro- ther across the Group. To achieve this objective, it is necessary to vides two measurement categories for financial instruments: review and improve the closing processes and systems for the amortized cost and fair value. Changes in fair value of financial consolidation and change the structure across the Group, such as assets measured at fair value are recognized in profit or loss. conducting the process of subconsolidation of the JTIH Group, However, changes in fair value of investments in equity instru- changing the reporting process to the Company, restructuring the ments, except for equity instruments held for trading purposes, processes of consolidation and preparation of consolidated finan- are allowed to be recognized in other comprehensive income. cial statements, including notes to financial statements, carrying out the proper assignment of personnel resources and developing (5) Changes in Method of Presentation talents and reviewing the approval process for financial reporting. (Consolidated statement of cash flows) Due to the aforementioned reasons, the management of the In the previous fiscal year, ended March 31, 2012, “Proceeds from Company concludes that it is currently difficult and impracticable sale of property, plant and equipment” were presented separately in to unify the reporting periods. “Cash flows from investing activities.” However, in this fiscal year, However, the Group is aiming to achieve the unification of ended March 31, 2013, they are included in “Other” in “Cash flows reporting periods at the earliest possible date through promoting a from investing activities” due to their immateriality. In order to groupwide effort in order to enhance and improve the efficiency of reflect this change in presentation method, the consolidated finan- the closing and management systems. cial statements for the previous fiscal year have been reclassified. Although there is a three month difference between the fiscal Accordingly, ¥1,919 million that was previously shown as year end of the JTIH Group and that of the Company, since sea- “Proceeds from sale of property, plant and equipment” in “Cash sonal and periodical fluctuations of the performance of the flows from investing activities” in the previous fiscal year has been Group’s international tobacco business have been relatively small, reclassified and is shown as “Other.” the impact from such mismatch of the reporting periods on the
090 Japan Tobacco INC. Annual Report 2013 Group’s consolidated financial position and operating results is and appropriate arrangements in order to assist the users of finan- limited. With respect to significant transactions or events occur- cial statements to properly understand and assess the consoli- ring during the time gap, the Group makes necessary adjustments dated financial position and results of operations of the Group.
3. Significant Accounting Policies
(1) Basis of Consolidation C. Joint Ventures The consolidated financial statements include financial statements A joint venture is a contractual agreement whereby two or more of the Company and its subsidiaries, and interests in investments parties undertake an economic activity that is subject to joint in associates and joint ventures. control. Joint ventures are accounted for using the equity method.
A. Subsidiaries (2) Business Combination A subsidiary is an entity that is controlled by the Group and con- Business combinations are accounted for using the acquisition FINANCIAL INFORMATION trol is the power to govern the financial and operating policies of method. Consideration transferred in a business combination is the entity so as to obtain benefits from its activities. The acquisi- measured as the sum of the acquisition-date fair value of the tion date of a subsidiary is the date on which the Group obtained assets transferred, the liabilities assumed and equity instruments control of the subsidiary, and the subsidiary is included in the issued by the Company in exchange for control over an acquiree. consolidation from the date of acquisition until the date on which Any excess of the consideration of acquisition over the fair value the Group loses control. of identifiable assets and liabilities is recognized as goodwill in the In cases where the accounting policies applied by a subsidiary consolidated statement of financial position. If the consideration are different from those applied by the Group, adjustments are of acquisition is lower than the fair value of the identifiable assets made to the subsidiary’s financial statements, if necessary. and liabilities, the difference is immediately recognized as profit in All intergroup balances, transactions, income and expenses are the consolidated statement of income. If the amount of initial eliminated on consolidation. Comprehensive income for subsidiar- accounting for a business combination is not determined by the ies is attributed to owners of the parent company and end of the reporting period in which the combination occurs, the non-controlling interests even if this results in the non-controlling provisional amounts for the items for which the accounting is interests having a deficit balance. incomplete are reported and are adjusted during the measurement The consolidated financial statements include the financial period, which is one year from the acquisition date. Acquisition- statements of subsidiaries whose fiscal year end date is different related costs incurred are recognized as expenses. The additional from that of the parent company since it is impracticable to unify acquisition of non-controlling interests after obtaining control is the fiscal year end date. The difference between the fiscal year accounted for as a capital transaction and no goodwill is recog- end date of the subsidiaries and that of the parent company does nized with respect to such transaction. not exceed three months. In cases where the financial statements of subsidiaries used for (3) Foreign Currency Translation preparing the consolidated financial statements have different Consolidated financial statements of the Group are presented in fiscal year end dates from that of the Company, necessary adjust- Japanese yen, which is the functional currency of the Company. ments are made for the effects of significant transactions or Each company in the Group specifies its own functional currency events occurring between the fiscal year end dates of the subsid- and measures transactions based on it. iaries and that of the Company. Foreign currency transactions are translated into the functional currency at the rates of exchange prevailing at the dates of trans- B. Associates actions or an approximation of the rate. Monetary assets and An associate is an entity of which the Group has significant influ- liabilities denominated in foreign currencies are translated into the ence over its financial and operating policy. Investments in associ- functional currency at the rates of exchange prevailing at the fiscal ates are accounted for using the equity method from the date on year end date. Differences arising from the translation and settle- which the Group has the significant influence until the date on ment are recognized as profit or loss. However, exchange differ- which it ceases to have the significant influence. ences arising from the translation of financial instruments The consolidated financial statements include investments in designated as hedging instruments for net investment in foreign associates with different fiscal year end dates from that of the operations (foreign subsidiaries), financial assets measured at fair parent company since, primarily due to relations with other share- value through other comprehensive income, and cash flow holders, it is impracticable to unify the fiscal year end dates. hedges are recognized as other comprehensive income. Necessary adjustments are made for the effects of significant The assets and liabilities of foreign operations are translated transactions or events occurring between the fiscal year end dates into Japanese yen at the rates of exchange prevailing at the fiscal of the associates and that of the Company. year end date, while income and expenses of foreign operations are translated into Japanese yen at the rates of exchange prevail- ing at the dates of transactions or an approximation to the rate.
Japan Tobacco INC. Annual Report 2013 091 The resulting translation differences are recognized as other com- benefits from them expire or are transferred, or when substantially prehensive income. In cases where foreign operations are dis- all the risks and rewards of the ownership are transferred. posed of, the cumulative amount of translation differences related to the foreign operations is recognized as profit or loss in the B. Impairment of Financial Assets period of disposition. In accordance with IAS 39, the Group assesses at the end of each Among subsidiaries, the JTIH Group’s fiscal year end date is reporting period whether there is any objective evidence that December 31, and an exchange rate used for the translation is financial assets measured at amortized cost are impaired. based on its fiscal year end date. Evidence of impairment includes significant financial difficulty of the borrower or a group of borrowers, a default or delinquency in (4) Financial Instruments interest or principal payments, and bankruptcy of the borrower. A. Financial Assets The Group assesses whether objective evidence of impairment (i) Initial Recognition and Measurement exists individually for financial assets that are individually signifi- Financial assets are classified into financial assets measured at cant and collectively for financial assets that are not individually fair value through profit or loss, fair value through other compre- significant. hensive income, and amortized cost. The Group determines the If there is objective evidence that impairment losses on finan- classification at initial recognition. cial assets measured at amortized cost have been incurred, the Financial assets are classified as financial assets measured at amount of the loss is measured as the difference between the amortized cost if both of the following conditions are met. asset’s carrying amount and the present value of estimated future Otherwise, they are classified as financial assets measured at fair cash flows. value. When impairment is recognized, the carrying amount of the • The asset is held within a business model whose objective is to financial asset is reduced by an allowance for doubtful accounts hold assets in order to collect contractual cash flows and impairment losses are recognized in profit or loss. The carry- • The contractual terms of the financial asset give rise on specified ing amount of financial assets measured at amortized cost is dates to cash flows that are solely payments of principal and directly reduced for the impairment when they are expected to interest on the principal amount outstanding become uncollectible in the future and all collaterals are imple- For financial assets measured at fair value, each equity instru- mented or transferred to the Group. If, in a subsequent period, the ment is designated as measured at fair value through profit or loss amount of the impairment loss provided changes due to an event or as measured at fair value through other comprehensive income, occurring after the impairment was recognized, the previously except for equity instruments held for trading purposes that must recognized impairment losses are adjusted through the allowance be measured at fair value through profit or loss. Such designa- for doubtful accounts. tions are applied consistently. All financial assets are measured at fair value plus transaction C. Financial Liabilities costs that are attributable to the financial assets, except for the (i) Initial Recognition and Measurement case of being classified in the category of financial assets mea- Financial liabilities are classified into financial liabilities measured sured at fair value through profit or loss. at fair value through profit or loss and financial liabilities measured (ii) Subsequent Measurement at amortized cost. The Group determines the classification at initial After initial recognition, financial assets are measured based on recognition. the classification as follows: All financial liabilities are measured at fair value at initial recog- (a) Financial Assets Measured at Amortized Cost nition. However, financial liabilities measured at amortized cost are Financial assets measured at amortized cost are measured at measured at cost after deducting transaction costs that are amortized cost using the effective interest method. directly attributable to the financial liabilities. (b) Other Financial Assets (ii) Subsequent Measurement Financial assets other than those measured at amortized cost are After initial recognition, financial liabilities are measured based on measured at fair value. the classification as follows: Changes in the fair value of financial assets measured at fair (a) F inancial Liabilities Measured at Fair Value through Profit value are recognized as profit or loss. or Loss However, changes in the fair value of equity instruments desig- Financial liabilities measured at fair value through profit or loss nated as measured at fair value through other comprehensive include financial liabilities held for trading and financial liabilities income are recognized as other comprehensive income and the designated as measured at fair value through profit or loss at amount in other comprehensive income is transferred to retained initial recognition. earnings when equity instruments are derecognized or the decline (b) Financial Liabilities Measured at Amortized Cost in its fair value compared to its acquisition cost is significant. After initial recognition, financial liabilities measured at amortized Dividends on the financial assets are recognized in profit or loss cost are measured at amortized cost using the effective interest for the year. method. Amortization under the effective interest method and (iii) Derecognition gains or losses on derecognition are recognized as profit or loss in Financial assets are derecognized when the rights to receive the consolidated statement of income.
092 Japan Tobacco INC. Annual Report 2013 After initial recognition, financial guarantee contracts are mea- statement of income. sured at the higher of: The amounts of hedging instruments recognized in other com- • The best estimate of expenditure required to settle the obligation prehensive income are reclassified to profit or loss when the as of the end of the fiscal year, and transactions of the hedged items affect profit or loss. In cases • The amount initially recognized less cumulative amortization. where hedged items result in the recognition of non-financial (iii) Derecognition assets or liabilities, the amounts recognized as other comprehen- Financial liabilities are derecognized when the obligation is dis- sive income are accounted for as adjustments in the original car- charged, canceled or expired. rying amount of non-financial assets or liabilities. When forecast transactions or firm commitments are no longer D. Offsetting of Financial Instruments expected to occur, any related cumulative gain or loss that has Financial assets and financial liabilities are offset and presented as been recognized in equity as other comprehensive income is reclas- a net amount in the consolidated statement of financial position sified to profit or loss. When hedging instruments expire, are sold, only when there is a legally enforceable right to set off the recog- terminated or exercised without the replacement or rollover of other nized amounts and the Group intends either to settle on a net hedging instruments, or when the hedge designation is revoked, FINANCIAL INFORMATION basis or to realize the asset and settle the liability simultaneously. amounts that have been recognized in other comprehensive income are continued to be recognized in other comprehensive E. Derivatives and Hedge Accounting income until the forecast transactions or firm commitments occur. The Group utilizes derivatives, including forward foreign exchange (iii) Hedge of Net Investment in Foreign Operations contracts and interest rate swap contracts, to hedge foreign Translation differences resulting from the hedge of net investment exchange and interest rate risks. These derivatives are initially in foreign operations are accounted for similarly to a cash flow measured at fair value when the contract is entered into, and are hedge. The effective portion of gains or losses on hedging instru- subsequently remeasured at fair value. Changes in the fair value ments is recognized as other comprehensive income in the con- of derivatives are recognized as profit or loss in the consolidated solidated statement of comprehensive income, while the statement of income. However, the gains or losses on the hedging ineffective portion is recognized as profit or loss in the consoli- instrument relating to the effective portion of cash flow hedges dated statement of income. At the time of the disposal of the and hedges of net investment in foreign operations are recognized foreign operations, any related cumulative gain or loss that has as other comprehensive income in the consolidated statement of been recognized in equity as other comprehensive income is comprehensive income. reclassified to profit or loss. At the inception of the hedge, the Group formally designates and documents the hedging relationship to which hedge account- F. Fair Value of Financial Instruments ing is applied and the objectives and strategies of risk manage- Fair value of financial instruments that are traded in active finan- ment for undertaking the hedge. The documentation includes cial markets at the fiscal year end refers to quoted prices or dealer identification of hedging instruments, the hedged items or trans- quotations. actions, the nature of the risks being hedged and how the hedg- If there is no active market, fair value of financial instruments is ing instrument’s effectiveness is assessed in offsetting the determined using appropriate valuation models. exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risks. Even though these hedges are (5) Cash and Cash Equivalents expected to be highly effective in offsetting changes in fair value Cash and cash equivalents consist of cash on hand, demand or cash flows, they are assessed on an ongoing basis and deter- deposits, and short-term investments that are readily convertible to mined actually to have been highly effective throughout the finan- known amounts of cash and subject to insignificant risk of change cial reporting periods for which the hedges were designated. in value and due within three months from the date of acquisition. Hedges that meet the stringent requirements for hedge accounting are classified in the following categories and (6) Inventories accounted for in accordance with IAS 39. The cost of inventories includes all costs of purchase, costs of (i) Fair Value Hedge conversion and other costs incurred in bringing the inventories to Changes in the fair value of derivatives are recognized as profit or their present location and condition. loss in the consolidated statement of income. Responding to Inventories are measured at the lower of cost or net realizable changes in the fair value of hedged items attributable to the value, and the costs are determined by using the weighted-average hedged risks the carrying amount of the hedged item is adjusted method. Net realizable value is determined as the estimated selling and the change is recognized as profit or loss in the consolidated price in the ordinary course of business less the estimated costs of statement of income. completion and estimated costs necessary to make the sale. (ii) Cash Flow Hedge Leaf tobacco which is stored for more than 12 months before The effective portion of gains or losses on hedging instruments is being used for production is included in current assets since it is recognized as other comprehensive income in the consolidated held within the normal operating cycle. statement of comprehensive income, while the ineffective portion is recognized immediately as profit or loss in the consolidated
Japan Tobacco INC. Annual Report 2013 093 (7) Property, Plant and Equipment (9) Leases Property, plant, and equipment is measured by using the cost Leases are classified as finance leases whenever substantially all model and is stated at cost less accumulated depreciation and the risks and rewards incidental to ownership are transferred to accumulated impairment losses. the Group. All other leases are classified as operating leases. The acquisition cost includes any costs directly attributable to In finance lease transactions, leased assets and lease obliga- the acquisition of the asset and dismantlement, removal and resto- tions are recognized in the consolidated statement of financial ration costs, as well as borrowing costs eligible for capitalization. position at the lower of the fair value of the leased property or the Except for assets that are not subject to depreciation such as present value of the minimum lease payments, each determined land, assets are depreciated using the straight-line method over at the inception of the lease. Lease payments are apportioned their estimated useful lives. The estimated useful lives of major between the financial cost and the reduction of the lease obliga- asset items are as follows: tions based on the effective interest method. Financial costs are • Buildings and structures: 38 to 50 years recognized in the consolidated statement of income. Leased • Machinery and vehicles: 10 to 15 years assets are depreciated using the straight-line method over their The estimated useful lives and depreciation method are estimated useful lives or lease terms whichever is shorter. reviewed at each fiscal year end and if there are any changes In operating lease transactions, lease payments are recognized made to the estimated useful lives and depreciation method, such as an expense using the straight-line method over the lease terms changes are applied prospectively as changes in estimate. in the consolidated statement of income. Contingent rents are recognized as an expense in the period when they are incurred. (8) Goodwill and Intangible Assets Determining whether an arrangement is, or contains, a lease is A. Goodwill based on the substance of the arrangement in accordance with Goodwill is stated at acquisition cost less accumulated impair- IFRIC 4 “Determining Whether an Arrangement Contains a Lease, ment losses. “even if the arrangement does not take the legal form of a lease. Goodwill is not amortized. It is allocated to cash-generating units that are identified according to locations and types of busi- (10) Investment Property nesses and tested for impairment annually or whenever there is Investment property is property held to earn rentals or for capital any indication of impairment. Impairment losses on goodwill are appreciation or both. recognized in the consolidated statement of income and no sub- Investment property is measured by using the cost model and sequent reversal is made. is stated at cost less accumulated depreciation and accumulated impairment losses. B. Intangible Assets Intangible assets are measured by using the cost model and are (11) Impairment of Non-financial Assets stated at cost less accumulated amortization and accumulated The Group assesses for each fiscal year whether there is any impairment losses. indication that an asset may be impaired. If any such indication Intangible assets acquired separately are measured at cost at exists, or in cases where the impairment test is required to be the initial recognition, and the costs of intangible assets acquired performed each year, the recoverable amount of the asset is esti- through business combinations are recognized at fair value at mated. In cases that the recoverable amount cannot be estimated the acquisition date. Expenditures on internally generated intan- for each asset, it is estimated by the cash-generating unit to gible assets are recognized as expense in the period when which the asset belongs. The recoverable amount of an asset or a incurred, except for development expenses that satisfy the capi- cash-generating unit is determined at the higher of its fair value talization criteria. less costs to sell or its value in use. If the carrying amount of the Intangible assets with finite useful lives are amortized using the asset or cash-generating unit exceeds the recoverable amount, straight-line method over their estimated useful lives and are impairment losses are recognized and the carrying amount is tested for impairment whenever there is any indication of impair- reduced to the recoverable amount. In determining the value in ment. The estimated useful lives and amortization method of use, estimated future cash flows are discounted to the present intangible assets with finite useful lives are reviewed at each fiscal value, using pretax discount rates that reflect current market year end, and the effect of any changes in estimate would be assessments of the time value of money and the risks specific to accounted for on prospective basis. the asset. In determining the fair value less costs to sell, the The estimated useful lives of major intangible assets with finite Group uses an appropriate valuation model supported by available useful lives are as follows: fair value indicators. • Trademarks: 20 years The Group assesses whether there is any indication that an • Software: 5 years impairment loss recognized in prior years for an asset other than Intangible assets with indefinite useful lives and intangible goodwill may no longer exist or may have decreased, such as any assets that are not ready to use are not amortized, but they are changes in assumptions used for the determination of the recover- tested for impairment individually or by cash-generating unit able amount. If any such indication exists, the recoverable amount annually or whenever there is any indication of impairment. of the asset or cash-generating unit is estimated. In cases that the recoverable amount exceeds the carrying amount of the asset or
094 Japan Tobacco INC. Annual Report 2013 cash-generating unit, impairment losses are reversed up to the the number of share options that are expected to be eventually lower of the estimated recoverable amount or the carrying amount vested. The corresponding amount is recognized as an increase in (net of depreciation) that would have been determined if no equity in the consolidated statement of financial position. impairment losses had been recognized in prior years. (15) Provisions (12) Non-current Assets Held-for-Sale The Group has present obligations (legal or constructive) resulting An asset or asset group the value of which is expected to be from past events and recognizes provisions when it is probable recovered through a sale transaction rather than through continu- that the obligations are required to be settled and the amount of ing use is classified into a non-current asset or disposal group the obligations can be estimated reliably. held-for-sale when the following conditions are met: it is highly Where the effect of the time value of money is material, the probable that the asset or asset group will be sold within one year, amount of provisions is measured at the present value of the the asset or asset group is available for immediate sale in its pres- expenditures expected to be required to settle the obligations. In ent condition, and the Group management commits to the sale calculating the present value, the Group uses the pretax discount plan. In such cases, the non-current asset is not depreciated or rate reflecting current market assessments of the time value of FINANCIAL INFORMATION amortized and is measured at the lower of its carrying amount or money and the risks specific to the liability. its fair value less costs to sell. In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets,” the Group recognizes a provision for (13) Employee Retirement Benefits restructuring when it has a detailed formal plan for the restructur- The Group sponsors defined benefit plans and defined contribu- ing and has raised a valid expectation in those affected that it will tion plans as employee retirement benefit plans. carry out the restructuring by starting to implement that plan or The Company is obligated to bear pension expenses for a announcing its main scheme to those affected by it. Restructuring mutual assistance association incurred with respect to services in provisions include only the direct expenditures arising from the or before June 1956 (prior to the enforcement of the Act on the restructuring, which meet both of the following criteria: Mutual Aid Association of Public Corporation Employees). Such • necessarily entailed by the restructuring; obligations are calculated and included in liabilities related to the • not associated with the ongoing activities of the entity. retirement benefits. For each plan the Group calculates the present value of defined (16) Revenue benefit obligations, related current service cost and past service A. Sale of Goods cost using the projected unit credit method. For a discount rate, a The Group mainly engages in the sale of tobacco products, pre- discount period is determined based on the period until the scription drugs, beverages and processed foods. Revenue from expected date of benefit payment in each fiscal year, and the the sale of these goods is recognized when the significant risks discount rate is determined by reference to market yields for the and rewards of ownership of the goods transfer to the buyers, the period corresponding to the discount period at the end of the Group retains neither continuing managerial involvement nor fiscal year on high-rating corporate bonds. Liabilities or assets for effective control over the goods sold, it is probable that the future defined benefit plans are calculated by the present value of the economic benefits will flow to the Group, and the amount of defined benefit obligation, deducting unrecognized past service revenue and the corresponding costs can be measured reliably. cost and the fair value of any plan assets (including adjustments Therefore, revenue is usually recognized at the time of delivery of for the asset ceiling for defined benefit plan and minimum funding goods to customers. In addition, revenue is recognized at fair requirements, if necessary). Expected return on plan assets and value of the consideration received or receivable less discounts, interest costs are recognized as financial costs. rebates and taxes, including consumption taxes. Actuarial gains and losses are recognized in full as other com- Since the amount of turnover where the Group is involved as an prehensive income in the period when they are incurred and trans- agency, including tobacco excise taxes, is deducted from revenue, ferred to retained earnings immediately. Past service costs are the Group recognizes only the economic benefit inflow, excluding recognized as an expense using the straight-line method over the such amount as revenue in the consolidated statements of income. average period until the benefits become vested. In cases where the benefits are already vested immediately following the intro- B. Interest Income duction or amendment of the defined benefit plan, it is recognized Interest income is recognized using the effective interest rate as profit or loss in the period when it is incurred. method. The cost for retirement benefits for defined contribution plans is recognized as an expense at the time of contribution. C. Dividend Income Dividend income is recognized when the shareholder’s right to (14) Share-based Payments receive payment is established. The Company has a share option plan as an equity-settled share- based payment plan. Share options are estimated at fair value at D. Royalties grant date and are recognized as an expense over the vesting Royalties are recognized on an accrual basis in accordance with period in the consolidated statement of income after considering the substance of the relevant agreement.
Japan Tobacco INC. Annual Report 2013 095 (17) Government Grants not reverse in the foreseeable future. Government grants are recognized at fair value when there is a Deferred tax assets and liabilities are measured at the tax rates reasonable assurance that the Group will comply with the condi- that are expected to apply to the fiscal year when the asset is tions attached to them and receive the grants. realized or the liability is settled, based on tax rates that have been In case that the government grants are related to expense enacted or substantively enacted by the fiscal year end. items, they are recognized in profit or loss on a systematic basis over the period in which the related costs for which the grants are (20) Treasury Shares intended to compensate are recognized. With regard to govern- Treasury shares are recognized at cost and deducted from equity. ment grants for assets, the amount of the grants is deducted from No gain or loss is recognized on the purchase, sale or cancellation the acquisition cost of the assets. of the treasury shares. Any difference between the carrying amount and the consideration paid is recognized in capital (18) Borrowing Costs surplus. With respect to assets that necessarily take a substantial period of time to get ready for their intended use or sale, the borrowing (21) Earnings per Share costs that are directly attributable to the acquisition, construction Basic earnings per share are calculated by dividing profit and loss or production of the assets are capitalized as part of the acquisi- attributable to ordinary shareholders of the parent company by the tion cost of the assets. Other borrowing costs are recognized as weighted-average number of ordinary shares outstanding during an expense in the period when they are incurred. the year, adjusted by the number of treasury shares. Diluted earn- ings per share are calculated by adjusting the effects of dilutive (19) Income Taxes potential ordinary shares. Income taxes in the consolidated statement of income are presented as the total of current income taxes and deferred (22) Dividends income taxes. Dividend distributions to the shareholders of the Company are Current income taxes are measured at the amount that is recognized as liabilities in the period in which, for year end divi- expected to be paid to or refunded from the taxation authorities. dends, the Annual Shareholders Meeting approves the distribu- For the calculation of the tax amount the Group uses the tax rates tion and, for interim dividends, the Board of Directors’ Meeting and tax laws that have been enacted or substantively enacted by approves the distribution. the end of the fiscal year. The current income taxes are recognized in profit or loss, except for taxes arising from items that are recog- (23) Contingencies nized in other comprehensive income or directly in equity and A. Contingent Liabilities taxes arising from business combinations. The Group discloses contingent liabilities in the notes to consoli- Deferred income taxes are calculated based on the temporary dated financial statements if it has possible obligations at the differences between the tax base for assets and liabilities and the fiscal year end, whose existence cannot be confirmed at that date, carrying amount at the fiscal year end. Deferred tax assets are or if the obligations do not meet the recognition criteria of a provi- recognized for deductible temporary differences, carryforward of sion described in “22. Provisions.” unused tax credits and unused tax losses to the extent that it is probable that future taxable profit will be available against which B. Contingent Assets they can be utilized. Deferred tax liabilities are recognized for The Group discloses contingent assets in the notes to consoli- taxable temporary differences. dated financial statements if an inflow of future economic benefits The deferred tax assets or liabilities are not recognized for the to the Group is probable, but not virtually certain at the fiscal year following temporary differences: end. • the initial recognition of goodwill • the initial recognition of assets or liabilities in transactions that (24) Adjusted Financial Measures are not business combinations and at the time of transaction, The adjusted financial measures are calculated by adding certain affect neither accounting profit nor taxable profit or tax loss adjustment items to the non-adjusted financial data or by deduct- • deductible temporary differences arising from investments in ing the items from the non-adjusted financial data. subsidiaries and associates, and interests in joint venture to the The adjustment items are determined by management’s judg- extent that it is probable that the timing of the reversal of the ment, taking into consideration the nature and frequency of the temporary difference in the foreseeable future and it is not prob- income and costs such that they provide effective comparative able that future taxable profits will be available against which information on the Group performance and that they reflect the they can be utilized way of managing our business appropriately. Adjusted financial • taxable temporary differences arising from investments in sub- measures are presented in the consolidated statement of income, sidiaries and associates, and interests in joint venture to the “6. Operating Segments” and “32. Earnings per Share.” extent that the timing of the reversal of the temporary difference The adjusted financial measures are not defined under IFRS and is controlled and that it is probable the temporary difference will are not comparable with equivalent indicators for other entities.
096 Japan Tobacco INC. Annual Report 2013 4. Significant Accounting Estimates and Judgments
Preparation of consolidated financial statements of the Group legally obligated to bear a part of the pension costs of the plan. requires management estimates and assumptions in order to The present value of defined benefit obligations on each of measure income, expenses, assets and liabilities, and disclose these plans and the related service costs are calculated based on contingencies as of the fiscal year end date. These estimates and actuarial assumptions. These actuarial assumptions require esti- assumptions are based on the best judgment of management in mates and judgments on variables, such as discount rates and the light of historical experience and various factors deemed to be long-term expected return on plan assets. reasonable as of the fiscal year end date. Given their nature, The Group obtains advice from external pension actuaries with actual results may differ from those estimates and assumptions. respect to the appropriateness of these actuarial assumptions The estimates and assumptions are continuously reviewed by including these variables. management. The effects of a change in estimates and assump- The actuarial assumptions are determined based on the best tions are recognized in the period of the change or the period of estimates and judgments made by management; however, there the change and future periods. is a possibility that these assumptions may be affected by FINANCIAL INFORMATION Among the above estimates and assumptions, the following changes in uncertain future economic conditions, or by the publi- are items that may have a material effect on the amounts recog- cation or the amendment of related laws, which may have a mate- nized in the consolidated financial statements of the Group: rial impact on the consolidated financial statements in future periods. A. Impairment of Property, Plant and Equipment, Goodwill, These actuarial assumptions and related sensitivity analysis are Intangible Assets and Investment Properties described in “24. Employee Benefits.” With regard to property, plant and equipment, goodwill, intangible assets and investment properties, if there is any indication that the C. Provisions recoverable amount declines below the carrying amounts of the The Group recognizes various provisions, including provisions for assets, the Group performs an impairment test. asset retirement obligations and restructuring, in the consolidated The important indications include significant changes with statement of financial position. adverse effect on the results of past or projected business perfor- These provisions are recognized based on the best estimates of mance, significant changes in the use of acquired assets or in the expenditures required to settle the obligations taking risks and overall business strategy, and significant deteriorations in industry uncertainty related to the obligations into account as of the fiscal trends and economic trends. With regard to goodwill, the impair- year end date. ment test is conducted at least once a year, regardless of any Expenditures required to settle the obligations are calculated indication of the impairment, in order to ensure that the recover- by taking possible results into account comprehensively; however, able amount exceeds the carrying amount. they may be affected by the occurrence of unexpected events or The impairment test is performed by comparing the carrying changes in conditions which may have a material impact on the amount and the recoverable amount of assets. If the recoverable consolidated financial statements in future periods. amount declines below the carrying amount, impairment losses The nature and amount of recognized provisions are described are recognized. The recoverable amount is mainly calculated in “22. Provisions.” based on the discounted cash flow model. Certain assumptions are made for the useful lives and the future cash flows of the D. Income Taxes assets, discount rates and long-term growth rates. These assump- The Group operates business activities around the world, and it tions are based on the best estimates and judgments made by recognizes current tax liabilities and income taxes as the esti- management; however, there’s a possibility that these assump- mated amounts to be paid to the tax authorities, based on the tions may be affected by changes in uncertain future economic estimation in accordance with their laws and regulations. conditions, which may have a material impact on the consolidated Calculating current tax liabilities and income taxes requires financial statements in future periods. estimates and judgment on various factors, including the interpre- The method for calculating the recoverable amount is tation of tax regulations by taxable entities and the tax authority in described in “14. Property, Plant and Equipment,” “15. Goodwill the jurisdiction or the experience of past tax audits. and Intangible Assets” and “17. Investment Property.” With Therefore, there may be differences between the amount rec- regard to goodwill, the sensitivity analysis is described in “15. ognized as tax liabilities and income taxes and the amount of Goodwill and Intangible Assets.” actual tax liabilities and income taxes. These differences may have a material impact on the consolidated financial statements in B. Emplo yee Retirement Benefits and Mutual Pension future periods. Benefits In addition, deferred tax assets are recognized to the extent The Group has various types of retirement benefit plans, includ- that it is probable that taxable income will be available against ing defined benefit plans. In addition, the mutual pension benefits which deductible temporary differences can be utilized. plan of the Company is one of the public pension systems under In recognizing the deferred tax assets, when judging the pos- the jurisdiction of the government of Japan and the Company is sibility of the future taxable income, we reasonably estimate the
Japan Tobacco INC. Annual Report 2013 097 timing and amount of future taxable income based on the busi- E. Contingencies ness plan. With regard to contingencies, any items that may have a material The timing when taxable income arises and the amount of impact on business in the future are disclosed in light of all the such income may be affected by changes in uncertain future available evidence as of the fiscal year end date and by taking into economic conditions. Therefore, this may have a material impact account the probability of these contingencies and their impact on on the consolidated financial statements in future periods. financial reporting. The content and amount related to income taxes are described The content of contingencies is described in “38. Contingencies.” in “19. Income Taxes.”
5. New Accounting Standards Not Yet Adopted by the Group
By the date of approval of the consolidated financial statements, The implications from adoption of these standards and inter- new accounting standards, amended standards and new interpre- pretations are assessed by the Group; however, we evaluate that tations that have been issued, but have not been early adopted by none of them will have a material impact on our operating results the Group are as follows. and financial condition.
Mandatory adoption To be adopted by IFRS (From the year beginning) the Group Description of New Standards/Amendments IFRS 1 First-time Adoption of Fiscal year ending Exemption related to government grants International Financial January 1, 2013 March 2014 Reporting Standards January 1, 2013 Fiscal year ending Provision related to reapplication of IFRS 1 March 2014 January 1, 2013 Fiscal year ending Exemption related to adjustment of borrowing costs recognized March 2014 before the application of IFRS IFRS 7 Financial Instruments: January 1, 2013 Fiscal year ending Disclosure related to offsetting of financial assets and liabilities Disclosures March 2014 IFRS 10 Consolidated Financial January 1, 2013 Fiscal year ending Amendment for definition of control, elements of control and basis of Statements March 2014 existence of control to be applied, regardless of the nature of the investee IFRS 11 Joint Arrangements January 1, 2013 Fiscal year ending Regarding arrangements of which two or more parties have joint March 2014 control, provide the classification of a joint arrangement based on legal form, contractual arrangement on assets or liabilities and other facts and conditions, not based on only legal form of the arrangement Provide accounting treatment for each classification IFRS 12 Disclosure of Interests in January 1, 2013 Fiscal year ending Expansion of the scope of the disclosure of ownership of interests in Other Entities March 2014 other entities, including unconsolidated structured entities IFRS 13 Fair Value Measurement January 1, 2013 Fiscal year ending Guidance of fair value measurement to be applied by all standards March 2014 and unify the definition of fair value which was previously provided separately in each standard IAS 1 Presentation of Financial July 1, 2012 Fiscal year ending Revision to the presentation of items in other comprehensive income Statements March 2014 January 1, 2013 Fiscal year ending Provision for comparative information. When it is disclosed though March 2014 not required under IFRS, related notes of that period are required IAS 16 Property, Plant and January 1, 2013 Fiscal year ending Clarification of treatment related to servicing equipment Equipment March 2014 IAS 19 Employee Benefits January 1, 2013 Fiscal year ending Revision to recognition and presentation of actuarial gains and March 2014 losses, past service cost, interest cost and others, and revision to disclosure of retirement benefits IAS 27 Separate Financial January 1, 2013 Fiscal year ending Transfer of the provisions regarding consolidation to IFRS 10 Statements March 2014 IAS 28 Investments in January 1, 2013 Fiscal year ending Amendments based on IFRS 10, IFRS 11 and IFRS 12 Associates and Joint March 2014 Ventures IAS 32 Financial Instruments: January 1, 2013 Fiscal year ending Clarification of accounting treatment of income taxes related to Presentation March 2014 dividend paid to the equity financial instruments holder January 1, 2014 Fiscal year ending Clarification of conditions on offset disclosure and addition of March 2015 guidelines IAS 34 Interim Financial January 1, 2013 Fiscal year ending Clarification of conditions on segment disclosure on interim financial Reporting March 2014 reporting IAS 36 Impairment of Assets January 1, 2014 Fiscal year ending Amendment for recoverable amount disclosures for non-financial March 2015 assets IFRIC 20 Stripping Costs in the January 1, 2013 Fiscal year ending Accounting treatment for waste removal costs that are incurred in Production Phase of a March 2014 surface mining activity during the production phase of the mine (Not Surface Mine applicable for costs incurred during the development phase) IFRIC 21 Levies January 1, 2014 Fiscal year ending Clarification of the accounting for levies March 2015 IFRS 10 Investment Entities January 1, 2014 Fiscal year ending Accounting treatment for the investments held by investment entities IFRS 12 March 2015 (measure their investments at fair value through profit or loss instead of consolidating them) IAS 27
098 Japan Tobacco INC. Annual Report 2013 6. Operating Segments
(1) Outline of Reportable Segments The “Domestic Tobacco Business” manufactures and sells The reportable segments of the Group are determined based on tobacco products in domestic areas (which include duty-free the operating segments that are components of the Group about shops in Japan and markets in China, Hong Kong, and Macau which separate financial information is available and are evaluated where the Company’s China Division operates). The “International regularly by the Board of Directors in deciding how to allocate Tobacco Business” manufactures and sells tobacco products resources and in assessing performance. overseas mainly through JT International S.A., which controls The Group is mainly engaged in the manufacture and sale of manufacturing and sales operations. The “Pharmaceutical tobacco products, prescription drugs, beverages and processed Business” consists of research and development, and the manu- foods. With respect to tobacco products, operations are managed facture and sale of prescription drugs. The “Beverage Business” separately for domestic and overseas markets. The reportable consists of the manufacture and sale of beverages. The segments of the Group are composed of five segments: “Processed Food Business” consists of the manufacture and sale “Domestic Tobacco Business,” “International Tobacco Business,” of frozen and room-temperature processed foods, bakery products FINANCIAL INFORMATION “Pharmaceutical Business,” “Beverage Business” and “Processed and seasonings. Food Business.” They are determined by types of products, char- acteristics, and markets. (2) Revenues and Performances for Reportable The Group changed its organizational structure effective July 1, Segments 2012, and the “Beverage Business” and the “Processed Food Revenues and performances for reportable segments are as fol- Business,” which were previously combined in “Food Business,” lows. The Board of Directors assesses the segment performance became individual reportable segments used by management in and determines resource allocation after reviewing revenues and deciding how to allocate resources and in assessing performance. adjusted EBITDA. Since financial income, financial costs and Accordingly, separate segment disclosures for the “Beverage income taxes are managed by the Group head office, this income Business” and the “Processed Food Business” have been included and these expenses are excluded from the segment performance. in the segment information since the second quarter ended Transactions within the segments are based on mainly the prevail- September 30, 2012. The comparative segment information for ing market price. the year ended March 31, 2012 is retrospectively adjusted.
For the year ended March 31, 2012
Millions of yen 2012 Reportable Segments Domestic International Processed Tobacco Tobacco (Note 2) Pharmaceuticals Beverage Food Total Other (Note 3) Elimination Consolidated Revenue External revenue (Note 4) ¥646,187 ¥966,255 ¥ 47,407 ¥188,768 ¥170,652 ¥2,019,269 ¥14,556 ¥ — ¥2,033,825 Intersegment revenue 28,115 27,497 — 85 770 56,467 9,257 (65,724) — Total revenue ¥674,303 ¥993,752 ¥ 47,407 ¥188,853 ¥171,422 ¥2,075,736 ¥23,813 ¥(65,724) ¥2,033,825 Segment profit (loss) Adjusted EBITDA (Note 1) ¥262,257 ¥314,755 ¥(10,031) ¥ 14,584 ¥ 5,416 ¥ 586,981 ¥ (8,852) ¥ (997) ¥ 577,132 Other items Depreciation and amortization ¥ 39,567 ¥ 55,227 ¥ 3,465 ¥ 10,092 ¥ 7,436 ¥ 115,788 ¥ 3,376 ¥ (319) ¥ 118,845 Impairment losses on other than financial assets 314 4,610 —— 413 5,336 1,677 — 7,013 Reversal of impairment losses on other than financial assets 5 — —— 77 82 —— 82 Share of profit (loss) in investments accounted for using the equity method 31 1,922 —— 13 1,966 81 — 2,047 Capital expenditures 56,224 39,141 3,897 8,102 7,308 114,671 4,321 (0) 118,992
Japan Tobacco INC. Annual Report 2013 099 For the year ended March 31, 2013
Millions of yen 2013 Reportable Segments Domestic International Processed Tobacco Tobacco (Note 2) Pharmaceuticals Beverage Food Total Other (Note 3) Elimination Consolidated Revenue External revenue (Note 4) ¥687,138 ¥1,010,655 ¥ 53,158 ¥185,478 ¥168,747 ¥2,105,177 ¥15,019 ¥ — ¥2,120,196 Intersegment revenue 28,402 31,029 — 108 647 60,186 9,398 (69,583) — Total revenue ¥715,541 ¥1,041,683 ¥ 53,158 ¥185,586 ¥169,394 ¥2,165,362 ¥24,417 ¥(69,583) ¥2,120,196 Segment profit (loss) Adjusted EBITDA (Note 1) ¥281,320 ¥ 343,304 ¥(12,720) ¥ 12,429 ¥ 7,357 ¥ 631,691 ¥ (8,971) ¥ (595) ¥ 622,124 Other items Depreciation and amortization ¥ 41,074 ¥ 51,101 ¥ 3,440 ¥ 10,072 ¥ 7,141 ¥ 112,828 ¥ 3,947 ¥ (313) ¥ 116,462 Impairment losses on other than financial assets 14 322 —— 1,248 1,584 1,629 — 3,213 Reversal of impairment losses on other than financial assets — ———— ——— — Share of profit (loss) in investments accounted for using the equity method 48 2,685 —— (11) 2,722 54 — 2,775 Capital expenditures 71,238 37,504 5,761 12,029 4,596 131,128 6,527 (206) 137,450
Reconciliation from “Adjusted EBITDA” to “Profit before income taxes” For the year ended March 31, 2012
Millions of yen 2012 Reportable Segments Domestic International Processed Tobacco Tobacco (Note 2) Pharmaceuticals Beverage Food Total Other (Note 3) Elimination Consolidated Adjusted EBITDA (Note 1) ¥262,257 ¥314,755 ¥(10,031) ¥ 14,584 ¥ 5,416 ¥ 586,981 ¥ (8,852) ¥(997) ¥577,132 Depreciation and amortization (39,567) (55,227) (3,465) (10,092) (7,436) (115,788) (3,376) 319 (118,845) Adjustment items (income) (Note 5) — 564 ——— 564 29,368 — 29,932 Adjustment items (costs) (Note 5) (13,426) (7,737) —— (434) (21,597) (7,443) — (29,039) Operating profit (loss) ¥209,265 ¥252,355 ¥(13,497) ¥ 4,492 ¥(2,454) ¥ 450,160 ¥ 9,697 ¥(677) 459,180 Financial income 5,603 Financial costs (23,429) Profit before income taxes ¥441,355
100 Japan Tobacco INC. Annual Report 2013 For the year ended March 31, 2013
Millions of yen 2013 Reportable Segments Domestic International Processed Tobacco Tobacco (Note 2) Pharmaceuticals Beverage Food Total Other (Note 3) Elimination Consolidated Adjusted EBITDA (Note 1) ¥281,320 ¥343,304 ¥(12,720) ¥ 12,429 ¥ 7,357 ¥ 631,691 ¥ (8,971) ¥(595) ¥ 622,124 Depreciation and amortization (41,074) (51,101) (3,440) (10,072) (7,141) (112,828) (3,947) 313 (116,462) Adjustment items (income) (Note 5) 1,200 395 ——— 1,595 32,639 — 34,234 Adjustment items (costs) (Note 5) (154) (3,057) —— (6,039) (9,250) 1,714 — (7,536) Operating profit (loss) ¥241,292 ¥289,541 ¥(16,160) ¥ 2,357 ¥(5,822) ¥ 511,208 ¥21,434 ¥(282) 532,360 FINANCIAL INFORMATION Financial income 5,493 Financial costs (28,292) Profit before income taxes ¥ 509,560
(Note 1) For adjusted EBITDA, the depreciation and amortization, and adjustment items (income and costs) are excluded from operating profit (loss). (Note 2) The foreign subsidiaries group, which includes the core company of JT International S.A., that is part of the “International Tobacco Business” segment has December 31 as its fiscal year end date and the profit or loss for the period from January 1 to December 31 is included in the years ended March 31, 2012 and 2013, respectively. (Note 3) “Other” includes business activities relating to rent of real estate and corporate expenses relating to corporate communication and operation of the head office. (Note 4) Core revenue as part of the “Domestic Tobacco Business” and the “International Tobacco Business” is as follows:
Millions of yen (Years ended March 31) 2012 2013 Domestic tobacco ¥611,925 ¥654,000 International tobacco 894,636 943,094
(Note 5) “Adjustment items (income)” include restructuring income of gains on sale of real estate. “Adjustment items (costs)” include restructuring costs of the closing down of a factory, the effect of revision to laws and regulations related to the mutual pension benefits plan, the cooperation fee for terminating leaf tobacco farming and the adjustment amount of ceasing classification as non-current assets held-for-sale. The breakdown of restructuring income is described in “28. Other Operating Income.” Restructuring costs included in “Cost of sales” and “Selling, general and administrative expenses” are ¥2,445 million and ¥9,366 million, respectively, for the year ended March 31, 2013. The breakdown of restructuring costs in “Selling, general and administrative expenses” is described in “29. Selling, General and Administrative Expenses.” The breakdown of “Adjustment items (costs)” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Restructuring costs ¥14,052 ¥11,811 Effect of revision to laws and regulations related to the mutual pension benefits plan — (4,279) Cooperation fee for terminating leaf tobacco farming 12,469 4 Adjustment of ceasing classification as non-current assets held-for-sale 2,518 — Adjustment items (costs) ¥29,039 ¥7,536
Restructuring costs for the year ended March 31, 2012 include costs of closing down of the Hofu Factory in the “Domestic Tobacco Business” and the Hainburg factory in the “International Tobacco Business.” Restructuring costs for the year ended March 31, 2013 include costs of rationalization measures in the “International Tobacco Business” and the dissolution of the processed fishery products business in the “Processed Food Business.”
(3) Geographic Information The regional breakdown of non-current assets and external revenues as of each fiscal year end is as follows:
Non-current Assets
Millions of yen (As of March 31) 2012 2013 Japan ¥ 556,102 ¥ 577,208 Overseas 1,547,315 1,819,391 Consolidated ¥2,103,417 ¥2,396,599
(Note) Non-current assets are segmented by the location of the assets, and financial instruments, deferred tax assets and retirement benefits assets are excluded.
Japan Tobacco INC. Annual Report 2013 101 External Revenue
Millions of yen (Years ended March 31) 2012 2013 Japan ¥1,051,702 ¥1,089,661 Overseas 982,123 1,030,535 Consolidated ¥2,033,825 ¥2,120,196
(Note) Revenue is segmented by the sales destination.
(4) Major Customers Information The “International Tobacco Business” of the Group sells products to the Megapolis Group that engages in distribution and wholesale business in Russia and other countries. The external revenue from the group is ¥236,050 million (11.6% of consolidated revenue) for the year ended March 31, 2012 and ¥268,566 million (12.7% of consolidated revenue) for the year ended March 31, 2013.
7. Business Combination
Acquisition of Gryson NV, V.D.M. Invest, Disprotab S.L. and Gryson Deutschland GmbH (hereinafter collectively referred to as “Gryson”)
(1) Summary of Business Combination On August 14, 2012, the Group acquired 100% of the outstanding shares of Gryson NV, V.D.M. Invest and Disprotab S.L. as well as 50% of the outstanding shares of Gryson Deutschland GmbH. Gryson has established an important presence in the Roll Your Own (“RYO”) and Make Your Own (“MYO”) market across several European countries including France, Belgium, Luxembourg, Spain and Portugal, as well as in a number of other countries. Through this acquisition, the Group obtained further opportunities to enhance its presence in the grow- ing RYO/MYO market.
(2) Financial Impact on the Group Since the acquisition date, the acquired business has contributed to consolidated revenue of ¥3,032 million and consolidated operating profit of ¥125 million. Had the business been acquired on January 1, 2012, the Group estimates that total consolidated revenue would have increased by ¥5,627 million to ¥2,125,823 million and total consolidated operating profit would have increased by ¥2,084 million to ¥534,444 million.
(3) Consideration and Detail (Aggregated total of the acquisition) The consideration was ¥54,857 million and it was paid in cash.
(4) Cash Out for the Acquisition of Subsidiaries (Aggregated total of the acquisition)
Millions of yen Cash consideration ¥54,857 Cash and cash equivalents in subsidiaries acquired (3,525) Net cash out for the acquisition of subsidiaries ¥51,332
(5) Fair Value of the Assets Acquired and Liabilities Assumed
Millions of yen Current assets ¥10,483 Non-current assets 9,696 Total assets acquired ¥20,179 Current liabilities (1,106) Non-current liabilities (4,202) Total liabilities assumed ¥ (5,308) Total equity ¥14,871 Goodwill ¥39,986
102 Japan Tobacco INC. Annual Report 2013 Goodwill of ¥39,986 million represents integration synergies including future economic benefits from enhanced business scale in the RYO/ MYO market. Transaction costs of ¥71 million were expensed as incurred and recognized in “Selling, general and administrative expenses.”
Other Acquisition In addition to the above, the Group acquired other entities through business combination for the year ended March 31, 2013, which are omitted as they are immaterial both individually and in aggregate.
8. Cash and Cash Equivalents
The breakdown of “Cash and cash equivalents” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Cash and deposits ¥108,797 ¥121,753 FINANCIAL INFORMATION Short-term investments 295,943 20,960 Total ¥404,740 ¥142,713
Cash and cash equivalents are classified as financial assets measured at amortized cost. Included in “Cash and cash equivalents” as of March 31, 2013 is ¥14,929 million (IRR 5,561 billion) held by the Group’s Iranian subsid- iary, JTI Pars PJS Co. Due to international sanctions and other factors imposed on Iran, the subsidiary’s ability to remit funds outside of Iran is restricted.
9. Trade and Other Receivables
The breakdown of “Trade and other receivables” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Note and Account receivables ¥311,803 ¥367,951 Other 17,693 21,470 Allowance for doubtful accounts (1,729) (1,584) Total ¥327,767 ¥387,837
Trade and other receivables are presented net of the allowance for doubtful accounts in the consolidated statement of financial position. Trade and other receivables are classified as financial assets measured at amortized cost.
10. Inventories
The breakdown of “Inventories” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Merchandise and finished goods (Note 1) ¥112,477 ¥133,144 Leaf tobacco (Note 2) 294,813 292,043 Other 39,327 47,855 Total ¥446,617 ¥473,042
(Note 1) For imported tobacco products (merchandise) that are sold by TS Network Co., Ltd., a subsidiary of the Company, commissions solely from wholesale are included in revenue. The amount of imported tobacco products (merchandise) that the company holds at the end of each fiscal year is included in inventories and presented as “Merchandise and finished goods.” (Note 2) Leaf tobacco includes those products that will be used after 12 months from the end of each fiscal year, but they are included in inventories since they are held within the normal operating cycle.
Japan Tobacco INC. Annual Report 2013 103 11. Other Financial Assets
(1) The breakdown of “Other financial assets” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Derivative assets ¥ 1,941 ¥ 4,077 Equity securities 39,106 46,699 Debt securities 8,835 15,676 Time deposits 24,306 5,347 Other 34,858 38,181 Allowance for doubtful accounts (14,137) (9,096) Total ¥ 94,909 ¥100,884 Current assets ¥ 27,361 ¥ 29,103 Non-current assets 67,548 71,781 Total ¥ 94,909 ¥100,884
Other financial assets are presented net of the allowance for doubtful accounts in the consolidated statement of financial position. Derivative assets are classified as financial assets measured at fair value through profit or loss excluding that to which hedge account- ing is applied, equity securities are classified as financial assets measured at fair value through other comprehensive income, and time deposits and debt securities are classified as financial assets measured at amortized cost.
(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as of each fiscal year end are as follows:
Company name Millions of yen (As of March 31) 2012 2013 KT&G Corporation ¥16,700 ¥18,609 Seven & i Holdings Co., Ltd. 2,094 2,664 Mizuho Financial Group, Inc. 1,721 2,545 Mitsubishi UFJ Financial Group, Inc. 1,447 2,010 DOUTOR∙NICHIRES Holdings Co., Ltd. 1,437 1,846 Mitsubishi Shokuhin Co., Ltd 1,269 1,772
Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets measured at fair value through other comprehensive income. In order to pursue the efficiency of assets held and to use them effectively, financial assets measured at fair value through other com- prehensive income have been sold (derecognition). The fair value at the time of sale and cumulative gain or loss that is recognized in equity through other comprehensive income for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Fair Value ¥695 ¥38 Cumulative gain or loss recognized in equity as other comprehensive income (Note) (89) (2)
(Note) The cumulative gain or loss recognized in equity as other comprehensive income is transferred to retained earnings when equity instruments are sold or the decline in its fair value compared to its acquisition cost is significant.
104 Japan Tobacco INC. Annual Report 2013 12. Other Current Assets
The breakdown of “Other current assets” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Prepaid tobacco excise taxes ¥ 87,261 ¥130,348 Prepaid expenses 10,736 9,546 Consumption tax payables 6,702 10,580 Other 18,465 27,384 Total ¥123,163 ¥177,858
13. Non-current Assets Held-for-Sale FINANCIAL INFORMATION
The breakdown of “Non-current assets held-for-sale” and “Liabilities directly associated with non-current assets held-for-sale” as of each fiscal year end is as follows:
Breakdown of Major Assets and Liabilities
Millions of yen (As of March 31) 2012 2013 Non-current assets held-for-sale Property, plant and equipment ¥ 302 ¥ 112 Investment property 1,098 2,482 Total ¥1,401 ¥2,594 Liabilities directly associated with non-current assets held-for-sale Long-term guarantee deposits ¥ 101 ¥ 101 Total ¥ 101 ¥ 101
“Non-current assets held-for-sale” as of March 31, 2012 are administrative expenses” in the consolidated statement of income mainly rental properties and idle properties which are currently for the year ended March 31, 2012. actively marketed for sale. Long-term guarantee deposits related “Non-current assets held-for-sale” as of March 31, 2013 are to the rental properties are included in “Liabilities directly associ- mainly rental properties and idle properties which are currently ated with non-current assets held-for-sale.” actively marketed for sale. Long-term guarantee deposits related With regard to such assets and assets sold, impairment losses to the rental properties are included in “Liabilities directly associ- of ¥243 million are recognized in “Selling, general and ated with non-current assets held-for-sale.”
Japan Tobacco INC. Annual Report 2013 105 14. Property, Plant and Equipment
(1) Schedule of Property, Plant and Equipment The schedules of the carrying amount, acquisition cost, and accumulated depreciation and accumulated impairment losses of “Property, plant and equipment” are as follows:
Millions of yen Carrying Amount Land, buildings Machinery and Tools, furniture Construction in (Years ended March 31) and structures vehicles and fixtures progress Total As of April 1, 2011 ¥304,242 ¥252,094 ¥ 53,887 ¥29,101 ¥639,324 Individual acquisition 15,207 34,579 22,750 26,417 98,952 Capitalization of borrowing costs (Note) — — — 23 23 Acquisition through business combinations 767 908 21 85 1,781 Transfer to investment property (5,152) (18) (20) — (5,191) Transfer to non-current assets held-for-sale (966) (2) (2) — (969) Depreciation (14,922) (48,959) (18,993) — (82,874) Impairment losses (2,709) (2,052) (78) — (4,840) Reversal of impairment losses 77 5 — — 82 Sale or disposal (716) (4,051) (445) (253) (5,464) Exchange differences on translation of foreign operations (6,011) (11,674) (1,041) (1,524) (20,250) Other 3,632 18,370 (311) (22,729) (1,037) As of March 31, 2012 293,449 239,199 55,768 31,120 619,536 Individual acquisition 17,583 45,367 26,432 22,766 112,148 Capitalization of borrowing costs (Note) — — — 72 72 Acquisition through business combinations 1,386 1,945 61 — 3,391 Transfer to investment property (2,452) (6) (23) — (2,482) Transfer to non-current assets held-for-sale (384) (0) (6) — (389) Depreciation (14,759) (44,587) (20,178) — (79,524) Impairment losses (570) (202) (88) — (860) Sale or disposal (282) (4,762) (462) (115) (5,621) Exchange differences on translation of foreign operations 9,129 14,570 1,928 1,677 27,303 Other 4,233 19,684 1,822 (26,998) (1,259) As of March 31, 2013 ¥307,332 ¥271,207 ¥ 65,256 ¥28,522 ¥672,316
(Note) The capitalization rates calculating the borrowing costs for capitalization are 3.7% for the year ended March 31, 2012 and 3.5 % for the year ended March 31, 2013, respectively.
Millions of yen Land, buildings Machinery and Tools, furniture Construction in Acquisition Cost and structures vehicles and fixtures progress Total As of April 1, 2011 ¥617,438 ¥690,412 ¥152,580 ¥29,101 ¥1,489,531 As of March 31, 2012 593,988 670,645 155,232 31,120 1,450,985 As of March 31, 2013 615,682 720,165 171,351 28,522 1,535,719
Millions of yen Land, buildings Machinery and Tools, furniture Construction in Accumulated Depreciation and Accumulated Impairment Losses and structures vehicles and fixtures progress Total As of April 1, 2011 ¥313,196 ¥438,318 ¥ 98,693 ¥— ¥850,207 As of March 31, 2012 300,539 431,446 99,464 — 831,449 As of March 31, 2013 308,350 448,958 106,095 — 863,403
106 Japan Tobacco INC. Annual Report 2013 The carrying amount of property, plant and equipment as of each fiscal year end includes the carrying amount of the following leased assets: Millions of yen Land, buildings Machinery and Tools, furniture and structures vehicles and fixtures Total As of April 1, 2011 ¥ 227 ¥3,170 ¥8,569 ¥11,966 As of March 31, 2012 279 2,875 6,749 9,902 As of March 31, 2013 1,378 3,364 6,798 11,540
(2) Impairment Losses The grouping of property, plant and equipment for impairment test selected for demolition. is the smallest cash-generating unit that independently generates The recoverable amounts of these assets are calculated mainly cash inflow. by their value in use, which is set at “zero.”
The Group recognized impairment losses of ¥4,840 million for Impairment losses recognized in the year ended March 31, FINANCIAL INFORMATION the year ended March 31, 2012 and ¥860 million for the year 2013 represent the losses incurred to reduce the carrying amounts ended March 31, 2013 in “Selling, general and administrative to the recoverable amounts of the buildings, structures, machinery expenses” in the consolidated statement of income. and vehicles due to closure of businesses or individual selection Impairment losses recognized in the year ended March 31, for demolition. 2012, represent the losses incurred to reduce the carrying The recoverable amounts of these assets are calculated mainly amounts to the recoverable amounts of the buildings, structures, by their value in use, which is set at “zero.” machinery and vehicles which were closed down or individually
15. Goodwill and Intangible Assets
(1) Schedule of Goodwill and Intangible Assets The schedules of carrying amount, acquisition cost, and accumulated amortization and accumulated impairment losses of “Goodwill” and “Intangible assets” are as follows:
Carrying Amount Millions of yen (Years ended March 31) Goodwill Trademarks Software Other Total As of April 1, 2011 ¥1,176,114 ¥286,632 ¥18,828 ¥24,734 ¥1,506,308 Individual acquisition 29 292 5,982 13,347 19,651 Acquisition through business combinations 29,352 6,947 — — 36,298 Amortization (Note) — (21,141) (7,567) (5,894) (34,602) Impairment losses — — (64) (0) (65) Sale or disposal (49) (41) (92) (1,195) (1,377) Exchange differences on translation of foreign operations (95,378) (15,544) (210) (176) (111,309) Other (22) 206 883 522 1,589 As of March 31, 2012 1,110,046 257,349 17,760 31,339 1,416,494 Individual acquisition 3 325 14,149 10,228 24,704 Acquisition through business combinations 46,509 13,240 1 1 59,750 Amortization (Note) — (20,767) (7,721) (5,815) (34,303) Impairment losses — — (61) (3) (64) Sale or disposal — — (359) (214) (573) Exchange differences on translation of foreign operations 159,918 37,255 394 310 197,877 Other — 221 7,707 (6,524) 1,404 As of March 31, 2013 ¥1,316,476 ¥287,622 ¥31,869 ¥29,321 ¥1,665,289
(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statement of income.
Japan Tobacco INC. Annual Report 2013 107 Millions of yen Acquisition Cost Goodwill Trademarks Software Other Total As of April 1, 2011 ¥1,176,201 ¥679,127 ¥ 94,122 ¥75,392 ¥2,024,842 As of March 31, 2012 1,110,046 663,875 97,314 86,792 1,958,027 As of March 31, 2013 1,316,476 733,745 111,640 87,671 2,249,531
Millions of yen Accumulated Amortization and Accumulated Impairment Losses Goodwill Trademarks Software Other Total As of April 1, 2011 ¥87 ¥392,495 ¥75,294 ¥50,658 ¥518,534 As of March 31, 2012 — 406,526 79,553 55,453 541,533 As of March 31, 2013 — 446,122 79,770 58,350 584,242
The carrying amount of intangible assets as of each fiscal year end includes the carrying amount of the following leased assets: Millions of yen Software As of April 1, 2011 ¥38 As of March 31, 2012 11 As of March 31, 2013 5
(2) Material Goodwill and Intangible Assets management. After the three-year business plan, the Group sets a Goodwill and intangible assets recognized in the consolidated growth rate that decreases gradually from 5.4% in the fourth year statement of financial position are mainly composed of goodwill (2012: 6.6%) to 4.2% in the ninth year (2012: 4.0%), and the same and trademarks in the JTIH Group. The carrying amounts of good- growth rate as the ninth year from the tenth year as a continued will as of March 31, 2012 and 2013 were ¥1,067,544 million and growth rate for inflation. ¥1,273,971 million, respectively. The carrying amounts of trade- The discount rate before taxes is 11.9% (2012: 11.8%). The marks as of March 31, 2012 and 2013 were ¥254,543 million and value in use sufficiently exceeds the carrying amount of the cash- ¥284,861 million, respectively. generating unit. Therefore, even in cases where the discount rate The majority of the goodwill and trademarks was recognized as and growth rate used in calculating the value in use fluctuate a result of acquisitions of RJR Nabisco’s non-U.S. tobacco opera- within reasonable ranges, the Group assumes that the value in tions in 1999 and Gallaher in 2007. use will not become less than the carrying amount. The trademarks are amortized using the straight-line method and the remaining amortization period is mainly 14 years. B. Processed Food Cash-Generating Unit The recoverable amount is calculated by the value in use based on (3) Impairment Test for Goodwill the three-year business plan that was prepared by reflecting past For the year ended March 31, 2013, the carrying amount of the experiences and external information and that was approved by majority of goodwill is allocated to the international tobacco cash- management. After the three-year business plan, the Group sets a generating unit of ¥1,273,971 million (¥1,067,544 million for the growth rate that decreases gradually from 3.2% in the fourth year year ended March 31, 2012) and the processed food cash-gener- (2012: 3.6%) to 1.1% in the ninth year (2012: 0.3%), and the same ating unit of ¥25,368 million (¥25,368 million for the year ended growth rate as the ninth year issued from the tenth year as contin- March 31, 2012). Details of the result of impairment tests are as ued growth rate for inflation. The discount rate before taxes is follows: 4.7% (2012: 5.4%). The value in use exceeds the carrying amount. If the discount rate increases by 2.7%, impairment losses would A. International Tobacco Cash-Generating Unit be recognized. In case that growth rate fluctuates within a reason- The recoverable amount is calculated by the value in use based on able range, the Group assumes that the value in use will not the three-year business plan that was prepared by reflecting past become less than the carrying amount. experiences and external information and that was approved by
108 Japan Tobacco INC. Annual Report 2013 16. Lease Transactions
The Group leases vehicles, vending machines and other assets as a lessee. Some of the lease contracts have renewal options or escala- tion clauses. There are no restrictions on additional debt and further leasing imposed by the lease arrangements.
(1) Present Value of Finance Lease Obligations The total of future minimum lease payments for leased assets recognized based on the finance lease contracts, their present value and future financial costs as of each fiscal year end are as follows:
Millions of yen (As of March 31) 2012 2013 Not later than 1 year Total of future minimum lease payments ¥ 4,161 ¥ 4,590 Future financial costs 216 289 Present value 3,945 4,301 FINANCIAL INFORMATION
Later than 1 year and not later than five years Total of future minimum lease payments 7,102 8,010 Future financial costs 408 586 Present value 6,693 7,424
Later than 5 years Total of future minimum lease payments 248 879 Future financial costs 34 62 Present value 215 817
Total Total of future minimum lease payments 11,511 13,480 Future financial costs 659 937 Present value 10,853 12,543
(2) Future Minimum Lease Payments under Non-cancellable Operating Leases The total of future minimum lease payments under non-cancellable operating leases as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Not later than 1 year ¥ 7,706 ¥ 6,624 Later than 1 year and not later than 5 years 12,821 12,948 Later than 5 years 1,384 5,383 Total ¥21,912 ¥24,955
(3) Total of Minimum Lease Payments and Contingent Rents The total of minimum lease payments and contingent rents of operating lease contracts recognized as an expense for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Total of minimum lease payments ¥7,863 ¥9,132 Contingent rents 2,628 1,056
Japan Tobacco INC. Annual Report 2013 109 17. Investment Property
(1) Schedule of Investment Property The schedule of the carrying amount of “Investment property” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Balance at the beginning of the year ¥ 36,477 ¥ 67,387 Expenditure after acquisition 367 525 Transfer from property, plant and equipment 5,191 2,482 Transfer from non-current assets held-for-sale 32,784 — Adjustment from ceasing classification as non-current assets held-for-sale (2,518) — Transfer to non-current assets held-for-sale (1,053) (5,491) Transfer to property, plant and equipment (360) (493) Depreciation (1,368) (2,634) Impairment losses (1,866) (2,289) Sale or disposal (340) (506) Exchange differences on translation of foreign operations 8 8 Other 65 8 Balance at the end of the year ¥ 67,387 ¥ 58,995 Acquisition cost at the beginning of the year ¥ 79,922 ¥144,976 Accumulated depreciation and accumulated impairment losses at the beginning of the year 43,445 77,589 Acquisition cost at the end of the year 144,976 127,493 Accumulated depreciation and accumulated impairment losses at the end of the year 77,589 68,498
(2) Fair Value The carrying amount and fair value of investment property as of each fiscal year end are as follows:
Millions of yen 2012 2013 (As of March 31) Carrying amount Fair value Carrying amount Fair value Investment property ¥67,387 ¥177,642 ¥58,995 ¥145,348
The fair value of investment property is determined based on a valuation conducted by an external real estate appraiser. The valuation is made in accordance with the appraisal of the country where the investment property is located and based on market evidence of trans- action prices for similar assets.
(3) Income and Expenses from Investment Property The rental income from investment property and direct operating expenses for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Rental income ¥4,395 ¥9,704 Direct operating expenses 3,476 6,674
110 Japan Tobacco INC. Annual Report 2013 (4) Impairment Losses The recoverable amount is calculated based on value in use The grouping of investment properties for impairment test is basis which is zero for buildings due to the decision of demolition, based on the smallest cash-generating unit that independently and the recoverable amount of other properties is calculated by generates cash inflow. Idle properties are grouped individually. the fair value less costs to sell. The Group recognized impairment losses of ¥1,866 million for Impairment losses recognized for the year ended March 31, the year ended March 31, 2012, and ¥2,289 million for the year 2013 represent the difference between the recoverable amount ended March 31, 2013 in “Selling, general and administrative and the carrying amount of land and buildings as idle properties expenses” in the consolidated statement of income. which were individually selected for demolition. Impairment losses recognized for the year ended March 31, The recoverable amount is calculated based on value in use 2012 represent the difference between the recoverable amount basis, which is zero for buildings due to the decision of demoli- and the carrying amount of land and buildings as idle properties tion, and the recoverable amount of other properties is calculated which were individually selected for demolition. by the fair value less costs to sell. FINANCIAL INFORMATION 18. Investments Accounted for Using the Equity Method
Condensed financial information of associates as of each fiscal year end and for each fiscal year is as follows:
Millions of yen (As of March 31) 2012 2013 Statement of financial position Total assets ¥147,592 ¥167,788 Total liabilities 124,112 141,483 Total equity 23,480 26,306
Millions of yen (Years ended March 31) 2012 2013 Statement of income Revenue ¥1,415,412 ¥1,359,534 Expense 1,407,548 1,352,423 Profit for the year 7,864 7,111
Japan Tobacco INC. Annual Report 2013 111 19. Income Taxes
(1) Deferred Tax Assets and Deferred Tax Liabilities The breakdown and schedule of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence for each fiscal year are as follows:
For the year ended March 31, 2012
Millions of yen Recognized in As of Recognized in other compre- As of Deferred Tax Assets April 1, 2011 profit or loss hensive income Other (Note 1) March 31, 2012 Fixed assets (Note 2) ¥ 36,093 ¥ 7,216 ¥ — ¥ (810) ¥ 42,500 Retirement benefits 105,451 (11,740) 837 (689) 93,859 Carryforward of unused tax losses 53,941 7,572 — (1,783) 59,731 Other 80,418 (6,122) 10 (1,569) 72,737 Subtotal 275,903 (3,074) 847 (4,850) 268,826 Valuation allowance (68,877) 3,988 2,256 954 (61,679) Total ¥207,026 ¥ 914 ¥3,103 ¥(3,896) ¥207,148
Millions of yen Recognized in As of Recognized in other compre- As of Deferred Tax Liabilities April 1, 2011 profit or loss hensive income Other (Note 1) March 31, 2012 Fixed assets (Note 2) ¥(129,350) ¥ 21,491 ¥ — ¥ 70 ¥(107,789) Retirement benefits (2,379) (436) (1,139) 37 (3,917) Other (22,421) (24,273) (1,628) 2,594 (45,728) Total ¥(154,150) ¥ (3,217) ¥(2,767) ¥2,701 ¥(157,434)
For the year ended March 31, 2013
Millions of yen Recognized in As of Recognized in other compre- As of Deferred Tax Assets April 1, 2012 profit or loss hensive income Other (Note 1) March 31, 2013 Fixed assets (Note 2) ¥ 42,500 ¥ (2,036) ¥ — ¥ 2,612 ¥ 43,075 Retirement benefits 93,859 (5,992) 9,333 2,234 99,434 Carryforward of unused tax losses 59,731 2,564 — 3,277 65,572 Other 72,737 1,438 (107) 3,295 77,363 Subtotal 268,826 (4,026) 9,226 11,417 285,444 Valuation allowance (61,679) (8,104) (148) (1,899) (71,829) Total ¥207,148 ¥(12,129) ¥9,079 ¥ 9,518 ¥213,615
Millions of yen Recognized in As of Recognized in other compre- As of Deferred Tax Liabilities April 1, 2012 profit or loss hensive income Other (Note 1) March 31, 2013 Fixed assets (Note 2) ¥(107,789) ¥ (736) ¥ — ¥(10,413) ¥(118,937) Retirement benefits (3,917) 1,511 184 (1,218) (3,440) Other (45,728) (1,254) (2,472) (5,744) (55,198) Total ¥(157,434) ¥ (479) ¥(2,289) ¥(17,375) ¥(177,576)
(Note 1) “Other” includes exchange differences on translation of foreign operations. (Note 2) “Fixed assets” include property, plant and equipment, goodwill, intangible assets and investment property.
112 Japan Tobacco INC. Annual Report 2013 The deferred tax assets are recognized by taking taxable tem- after five years) as of March 31, 2013. Tax credits, for which the porary differences, future taxable profits plan and tax planning deferred tax assets are not recognized, were ¥3,228 million into account. The carryforward of unused tax losses, for which (including ¥2,593 million, for which the carryforward expires after the deferred tax assets are not recognized, was ¥42,145 million five years) as of March 31, 2012, and ¥3,601 million (including (including ¥35,615 million, for which the carryforward expires ¥2,907 million, for which the carryforward expires after five years) after five years) as of March 31, 2012, and ¥51,621 million as of March 31, 2013. (including ¥37,128 million, for which the carryforward expires
(2) Income Taxes The breakdown of “Income taxes” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Current income taxes ¥110,493 ¥145,434 Deferred income taxes 2,303 12,608 FINANCIAL INFORMATION Total income taxes ¥112,795 ¥158,042
Deferred income taxes increased by ¥3,021 million for the year ended March 31, 2012 and decreased by ¥2,070 million for the year ended March 31, 2013, due to the effect of changes in tax rates in Japan and other countries.
(3) Reconciliation of the Effective Tax Rate The breakdown of major items that caused differences between the effective statutory tax rate and the average actual tax rate for each fiscal year is as follows: The Company is subject mainly to corporate tax, inhabitant tax, and enterprise tax, and the effective statutory tax rate calculated based on these taxes for the year ended March 31, 2012 and 2013 was 40.35% and 37.78%, respectively. In this fiscal year, ended March 31,2013, the tax rate for corporate tax was lowered and special corporate tax for reconstruction was imposed. Foreign subsidiaries are subject to income tax at their locations.
% (Years ended March 31) 2012 2013 Effective statutory tax rate 40.35 37.78 Different tax rates applied to foreign subsidiaries (11.65) (9.60) Non-deductible expenses 1.38 1.57 Losses on valuation of investments in subsidiaries (7.07) — Overseas withholding tax 1.06 1.46 Valuation allowance (0.78) 1.91 Uncertain tax position on income taxes 2.42 (0.85) Other (0.17) (1.25) Average actual tax rate 25.56 31.02
20. Trade and Other Payables
The breakdown of “Trade and other payables” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Note and account payables ¥165,427 ¥173,458 Other payables 71,736 71,325 Other 61,500 67,959 Total ¥298,663 ¥312,741
Trade and other payables are classified as financial liabilities measured at amortized cost.
Japan Tobacco INC. Annual Report 2013 113 21. Bonds and Borrowings (including Other Financial Liabilities)
(1) Breakdown of Financial Liabilities The breakdown of “Bonds and borrowings” and “Other financial liabilities” as of each fiscal year end is as follows:
Millions of yen % Average interest rate (As of March 31) 2012 2013 (Note 1) Due Derivative liabilities ¥ 5,133 ¥ 3,816 —— Short-term borrowings 43,486 23,847 9.74 — Current portion of long-term borrowings 78,219 20,454 1.70 — Current portion of bonds (Note 2) 90,061 — —— Long-term borrowings 49,277 33,163 0.57 2014–2028 Bonds (Note 2) 230,473 237,236 —— Other 23,900 23,577 —— Total ¥520,548 ¥342,094 Current liabilities ¥219,805 ¥ 52,851 Non-current liabilities 300,743 289,243 Total ¥520,548 ¥342,094
(Note 1) The average interest rate is calculated using the interest rate and outstanding balance as of March 31, 2013.
Derivative liabilities are classified as financial liabilities measured at fair value through profit or loss excluding those which hedge accounting is applied to, and bonds and borrowings are classified as financial liabilities measured at amortized cost. There are no financial covenants that have a significant impact on the Group on bonds and borrowings.
(Note 2) The summary of the issuing conditions of the bonds is as follows:
Millions of yen %
Company Name of bond Date of issuance Interest (As of March 31) 2012 2013 rate Collateral Date of maturity Japan Tobacco 4th Domestic July 24, 2007 ¥ 59,992 ¥ — 1.68 Yes July 24, 2012 Inc. straight bond (59,992) Japan Tobacco 5th Domestic Inc. straight bond June 3, 2009 99,913 99,953 1.13 Yes June 3, 2014 Japan Tobacco 6th Domestic Inc. straight bond December 9, 2010 40,000 40,000 0.53 Yes December 9, 2015 Japan Tobacco 7th Domestic Inc. straight bond December 9, 2010 20,000 20,000 0.84 Yes December 8, 2017 Japan Tobacco 8th Domestic Inc. straight bond December 9, 2010 20,000 20,000 1.30 Yes December 9, 2020 JTI (UK) Finance Straight bond in February 6, 2003 29,919 — 5.75 Non February 6, 2013 Plc GBP (29,919) [GBP 250 mil.] JTI (UK) Finance Straight bond in October 2, 2006 50,359 57,283 4.50 Non April 2, 2014 Plc EUR [EUR 500 mil.] [EUR 500 mil.] Other bonds 350 — (150) (—) Total ¥320,534 ¥237,236 (90,061) (—)
(Note 1) Figure in parentheses ( ) represents the amount of the current portion of the bond. (Note 2) Figure in parentheses [ ] represents the amount of the foreign currency-denominated bond.
114 Japan Tobacco INC. Annual Report 2013 (2) Assets Pledged as Collateral for Liabilities A. Pursuant to the provisions of Article 6 of Japan Tobacco Inc. Act, the Company’s properties are pledged as general collateral for bonds issued by the Company. Bondholders are entitled to claim satisfaction in preference to unsecured creditors of the Company properties (with the exception of national and local taxes and certain other statutory obligations). B. Assets pledged as collateral by some subsidiaries and their corresponding debts as of each fiscal year end are as follows:
Assets Pledged as Collateral
Millions of yen (As of March 31) 2012 2013 Land, buildings, and structures ¥ 9,231 ¥6,149 Machinery and vehicles 571 — Other 998 24 Total ¥10,800 ¥6,173 FINANCIAL INFORMATION
Corresponding Debts Millions of yen (As of March 31) 2012 2013 Short-term borrowings ¥ 130 ¥ 20 Current portion of long-term borrowings 901 275 Long-term borrowings 1,311 1,072 Other 350 — Total ¥2,692 ¥1,367
22. Provisions
The breakdown and schedule of “Provisions” for each fiscal year are as follows:
For the year ended March 31, 2012
Millions of yen Asset retirement Restructuring Provisions for provisions provisions sales rebates Other provisions Total As of April 1, 2011 ¥1,357 ¥ 1,078 ¥ 3,458 ¥2,802 ¥ 8,696 Provisions 288 4,217 3,938 2,565 11,008 Interest cost associated with passage of time 17 — — — 17 Provisions used (2) (4,406) (3,384) (965) (8,757) Provisions reversed — (205) (74) (238) (518) Exchange differences on translation of foreign operations — (67) — (245) (312) As of March 31, 2012 ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135 Current liabilities ¥ 2 ¥ 612 ¥ 3,938 ¥1,135 ¥ 5,686 Non-current liabilities 1,659 6 — 2,784 4,448 Total ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135
Japan Tobacco INC. Annual Report 2013 115 For the year ended March 31, 2013
Millions of yen Asset retirement Restructuring Provisions for provisions provisions sales rebates Other provisions Total As of April 1, 2012 ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135 Provisions 114 3,951 4,073 292 8,431 Interest cost associated with passage of time 31 — — — 31 Provisions used (49) (3,945) (3,811) (255) (8,061) Provisions reversed (62) (226) (126) (583) (997) Exchange differences on translation of foreign operations — 53 — 451 503 As of March 31, 2013 ¥1,695 ¥ 450 ¥ 4,073 ¥3,824 ¥10,043 Current liabilities ¥ 3 ¥ 446 ¥ 4,073 ¥ 734 ¥ 5,256 Non-current liabilities 1,692 5 — 3,090 4,786 Total ¥1,695 ¥ 450 ¥ 4,073 ¥3,824 ¥10,043
A. Asset Retirement Provisions measures for the rationalization of international tobacco business. In order to settle the obligation of restoring and of removing haz- The timing of the payment may be affected by future business ardous substances from plant facilities and premises that the plans. Group uses, the probable amount to be paid in the future is recog- nized based on past performances. These expenses are expected C. Provisions for Sales Rebates to be paid after one year or more; however, they may be affected These provisions are for contracts which reward the customers by future business plans. with discounts when the sales volume or sales amount in a given period exceeds specified volume or amount. They are expected to B. Restructuring Provisions be paid within one year. These provisions are mainly related to business integration and
23. Other Liabilities
The breakdown of “Other current liabilities” and “Other non-current liabilities” as of each fiscal year end is as follows:
Millions of yen (As of March 31) 2012 2013 Tobacco excise tax payables (Note) ¥240,532 ¥285,765 Tobacco special excise tax payables (Note) 15,052 14,473 Tobacco local excise tax payables (Note) 191,377 182,375 Consumption tax payables 83,182 85,388 Bonus to employees 39,739 45,461 Employee’s unused paid vacations liabilities 18,560 19,815 Other 94,509 136,255 Total ¥682,952 ¥769,531 Current liabilities ¥590,717 ¥656,305 Non-current liabilities 92,235 113,226 Total ¥682,952 ¥769,531
(Note) Tobacco excise tax payables, tobacco special excise tax payables and tobacco local excise tax payables as of March 31, 2012 and 2013 include those unpaid due to bank holidays at each fiscal year end.
116 Japan Tobacco INC. Annual Report 2013 24. Employee Benefits
(1) Employee Retirement Benefits average salary in their final year of service before retirement, and The Group sponsors funded/unfunded defined benefit plans and others. defined contribution plans as employee retirement benefit plans. Special termination benefits may be provided to employees on The benefits on defined benefit plans are provided based on con- their retirement before the usual retirement date under certain ditions, such as points that employees acquired in compensation circumstances. for each year of service, the payment rate, years of service,
A. Schedule of Defined Benefit Obligations The schedule of the defined benefit obligations is as follows:
Millions of yen (Years ended March 31) Japan Overseas Total As of April 1, 2011 ¥236,471 ¥278,108 ¥514,579 FINANCIAL INFORMATION Current service cost 11,455 4,793 16,249 Interest cost 3,878 14,033 17,911 Contributions by plan participants — 1,000 1,000 Actuarial gains and losses 6,445 4,947 11,392 Benefits paid (20,467) (14,058) (34,525) Past service cost 51 199 250 Special termination benefits — 1,991 1,991 Closure of the plans (curtailment or settlement) — (52) (52) Exchange differences on transition of foreign operations — (16,355) (16,355) Other 57 313 370 As of March 31, 2012 237,890 274,918 512,808 Current service cost 12,152 5,151 17,304 Interest cost 3,201 12,923 16,123 Contributions by plan participants — 875 875 Actuarial gains and losses 23,811 42,378 66,189 Benefits paid (18,538) (15,906) (34,443) Past service cost (67) (456) (523) Special termination benefits — 799 799 Closure of the plans (curtailment or settlement) — (49) (49) Exchange differences on transition of foreign operations — 44,462 44,462 Other 49 204 252 As of March 31, 2013 ¥258,498 ¥365,299 ¥623,797
Japan Tobacco INC. Annual Report 2013 117 B. Schedule of Plan Assets The schedule of the plan assets is as follows:
Millions of yen (Years ended March 31) Japan Overseas Total As of April 1, 2011 ¥96,440 ¥210,726 ¥307,166 Expected return on plan assets 2,366 11,193 13,559 Actuarial gains and losses (1,522) 1,119 (404) Contributions by the employer 3,424 8,299 11,723 Contributions by plan participants — 1,000 1,000 Benefits paid (8,539) (10,653) (19,193) Exchange differences on translation of foreign operations — (11,789) (11,789) Other — 20 20 As of March 31, 2012 92,168 209,914 302,082 Expected return on plan assets 2,205 8,915 11,120 Actuarial gains and losses 18,042 10,019 28,060 Contributions by the employer 3,115 9,204 12,319 Contributions by plan participants — 875 875 Benefits paid (7,996) (10,845) (18,842) Exchange differences on translation of foreign operations — 34,897 34,897 Other 56 1,857 1,914 As of March 31, 2013 ¥107,590 ¥264,835 ¥372,425
The Group plans to pay contributions of ¥12,930 million in the year ending March 31, 2014.
C. Reconciliation of Defined Benefit Obligations and Plan Assets The reconciliation of the defined benefit obligations and plan assets to the liabilities and assets on retirement benefits recognized in the consolidated statement of financial position as of each fiscal year end is as follows:
As of March 31, 2012
Millions of yen 2012 Japan Overseas Total Funded defined benefit obligations ¥107,451 ¥ 208,727 ¥ 316,178 Plan assets (92,168) (209,914) (302,082) Subtotal 15,283 (1,187) 14,096 Unfunded defined benefit obligations 130,439 66,191 196,630 Unrecognized past service cost — 129 129 Net amount of liabilities and assets recognized in consolidated statement of financial position ¥145,722 ¥ 65,133 ¥ 210,855 Retirement benefit liabilities ¥145,722 ¥ 79,504 ¥ 225,226 Retirement benefit assets — (14,371) (14,371) Net amount of liabilities and assets recognized in consolidated statement of financial position ¥145,722 ¥ 65,133 ¥ 210,855
118 Japan Tobacco INC. Annual Report 2013 As of March 31, 2013
Millions of yen 2013 Japan Overseas Total Funded defined benefit obligations ¥ 120,505 ¥ 275,539 ¥ 396,044 Plan assets (107,590) (264,835) (372,425) Subtotal 12,915 10,704 23,619 Unfunded defined benefit obligations 137,993 89,760 227,753 Unrecognized past service cost — 84 84 Net amount of liabilities and assets recognized in consolidated statement of financial position ¥ 150,908 ¥ 100,548 ¥ 251,456 Retirement benefit liabilities ¥ 150,912 ¥ 115,369 ¥ 266,281 Retirement benefit assets (4) (14,821) (14,825)
Net amount of liabilities and assets recognized in consolidated statement of FINANCIAL INFORMATION financial position ¥ 150,908 ¥ 100,548 ¥ 251,456
D. Major Breakdown of Plan Assets The breakdown of plan assets by major category as of each fiscal year end is as follows:
% Japan Overseas Total (As of March 31) 2012 2013 2012 2013 2012 2013 Equities 33.4 16.4 38.9 41.1 37.2 34.0 Bonds 21.7 21.2 50.3 46.2 41.6 39.0 Real estate — — 1.6 1.6 1.1 1.1 General account of life insurance companies 44.3 44.6 — — 13.5 12.9 Other 0.6 17.7 9.2 11.1 6.6 13.0 Total 100.0 100.0 100.0 100.0 100.0 100.0
(Note) The specified assumed interest rate and principal for the general account of life insurance companies is guaranteed by the life insurance companies.
The investment strategy for the Group’s major plans is as (Overseas) follows: The investment strategy for the foreign subsidiaries’ funded pen- (Japan) sion plans is decided locally by the trustee of the plan or manage- The Company’s pension fund is managed in accordance with the ment according to local legislation. The Company’s objective for internal policy for securing stable profits in the middle- and long- the foreign subsidiaries’ funded pension plans is to achieve a term in order to ensure the redemption of the plan liability. return on assets in excess of the movement in the value of the Concretely, setting target rate of return and composition ratio of defined benefit obligation, while man- aging risk relative to the plan assets by asset category within the risk tolerance that is obligation. annually assessed, the Company invests plan assets consistently Plan assets have significant allocations to liability matching with the composition ratio. When reviewing the composition ratio, bonds and the remaining assets are invested to target long term the Company considers introducing an asset investment which growth, predominantly in equities. has high correlation with the liability. In the case where an unexpected situation occurs in the market environment, it is temporarily allowed to make an adjust- ment on weight of risk assets complying with the policy.
Japan Tobacco INC. Annual Report 2013 119 E. Matters Related for Actuarial Assumptions The major items of actuarial assumptions as of each fiscal year end are as follows:
% 2012 2013 (As of March 31) Japan Overseas Japan Overseas Discount rate 1.4 2.5–5.5 1.0 1.5–4.4 Expected long-term return on plan assets 2.5 2.8–4.4 — — Inflation rate — 1.5–3.1 — 1.5–2.9
(Note) The valuation of defined benefit obligations reflects a judgment on uncertain future events. The sensitivities of defined benefit obligations due to changes in major assumptions as of each fiscal year end are as follows. Each of these sensitivities assumes that other variables remain fixed; however, in fact, they do not always change independently. Negative figures show a decrease in pension plan obligations, while positive figures show an increase.
Millions of yen 2012 2013 (As of March 31) Change in assumptions Japan Overseas Japan Overseas Discount rate Increase by 0.5% ¥ (9,438) ¥(17,195) ¥(10,223) ¥ (24,121) Decrease by 0.5% 10,153 19,130 11,022 27,001 Inflation rate Increase by 0.5% — 12,547 — 18,082 Decrease by 0.5% — (11,340) — (17,726)
F. Experience Adjustments Based on Results of Defined Benefit Obligations and Plan Assets Experience adjustments based on results of defined benefit obligations and plan assets as of each fiscal year end are as follows:
As of March 31, 2011 Millions of yen 2011 Japan Overseas Total Defined benefit obligations ¥ 236,471 ¥ 278,108 ¥ 514,579 Plan assets (96,440) (210,726) (307,166) Undefined benefit obligations ¥ 140,031 ¥ 67,381 ¥ 207,412 Adjustment based on actual results (Defined benefit obligations) ¥ 5,264 ¥ (1,274) ¥ 3,990 Adjustment based on actual results (Plan assets) 524 (8,183) (7,659)
As of March 31, 2012 Millions of yen 2012 Japan Overseas Total Defined benefit obligations ¥237,890 ¥ 274,918 ¥ 512,808 Plan assets (92,168) (209,914) (302,082) Undefined benefit obligations ¥145,722 ¥ 65,004 ¥ 210,726 Adjustment based on actual results (Defined benefit obligations) ¥ (235) ¥ (7,509) ¥ (7,744) Adjustment based on actual results (Plan assets) 1,522 (1,119) 404
As of March 31, 2013 Millions of yen 2013 Japan Overseas Total Defined benefit obligations ¥ 258,498 ¥ 365,299 ¥ 623,797 Plan assets (107,590) (264,835) (372,425) Undefined benefit obligations ¥ 150,908 ¥ 100,464 ¥ 251,372 Adjustment based on actual results (Defined benefit obligations) ¥ 13,902 ¥ 5,431 ¥ 19,333 Adjustment based on actual results (Plan assets) (18,042) (10,019) (28,060)
(Note) The experience adjustments are the effects of differences between the previous actuarial assumptions and what has actually occurred of the actuarial gains and losses for each fiscal year.
120 Japan Tobacco INC. Annual Report 2013 G. Profit and Loss Related to Retirement Benefits The profit and loss related to retirement benefits for each fiscal year are as follows:
For the year ended March 31, 2012 Millions of yen 2012 Japan Overseas Total Current service cost ¥11,455 ¥ 4,793 ¥ 16,249 Interest cost (Note 1) 3,878 14,033 17,911 Expected return on plan assets (Note 1) (2,366) (11,193) (13,559) Past service cost recognized in the year 51 179 231 Special termination benefits — 1,991 1,991 Losses or gains on closure of the plans (curtailment or settlement) — (52) (52) Total ¥13,018 ¥ 9,752 ¥ 22,770 Actual return on plan assets ¥ (843) ¥(12,312) ¥(13,155) FINANCIAL INFORMATION
For the year ended March 31, 2013 Millions of yen 2013 Japan Overseas Total Current service cost ¥ 12,152 ¥ 5,151 ¥ 17,304 Interest cost (Note 1) 3,201 12,923 16,123 Expected return on plan assets (Note 1) (2,205) (8,915) (11,120) Past service cost recognized in the year (67) (515) (581) Special termination benefits — 799 799 Losses or gains on closure of the plans (curtailment or settlement) — (49) (49) Total ¥ 13,081 ¥ 9,394 ¥ 22,475 Actual return on plan assets ¥(20,247) ¥(18,937) ¥(39,184)
(Note 1) The net amount of interest cost and the expected return on plan assets are included in “Financial costs.” Other expenses are included in “Cost of sales” and “Selling, general and administrative expenses.” (Note 2) The cost of the required contributions to the defined contribution pension plans is ¥5,506 million for the year ended March 31, 2012 and ¥4,959 million for the year ended March 31, 2013. This cost is not included in the above.
(2) Obligation of Mutual Pension Benefits The Company is obligated to bear pension costs for a mutual assistance association incurred with respect to the costs in or before June 1956 (prior to enforcement of the Act on the Mutual Aid Association of Public Corporation Employees). Such obligations are recognized as liabilities at their present value using the actuarial valuation method and included in retirement benefit liabilities.
A. Schedule of Mutual Pension Benefits Obligations The schedule of mutual pension benefits obligations is as follows:
Millions of yen (Years ended March 31) 2012 2013 Balance at the beginning of the year ¥97,577 ¥89,794 Interest cost (Note 1) 1,171 718 Actuarial gains and losses 583 (529) Benefits paid (9,536) (8,891) Past service cost (Note 2) — (4,279) Balance at the end of the year ¥89,794 ¥76,814
(Note 1) The interest cost is included and presented in “Financial costs.” (Note 2) “The Act for Partial Revision of the Employees’ Pension Insurance Act, etc. for unifying employees’ pension insurance systems,” (Law No. 63 in 2012), was promulgated on August 22, 2012 and the liabilities included in retirement benefit liabilities are expected to decrease in the future, due to the fact that the pension costs for the mutual assis- tance association that the Company is obligated to bear are expected to decrease. As a result, past service cost relating to this revision is recognized in the year ended March 31, 2013.
Japan Tobacco INC. Annual Report 2013 121 B. Matters Related to Actuarial Assumptions The actuarial assumptions for each fiscal year are as follows:
% (As of March 31) 2012 2013 Discount rate 0.8 0.6
(Note) The valuation of obligation of mutual pension benefits reflects a judgment on future uncertain events. The sensitivities of mutual pension benefits obligations due to changes in major assumptions as of each fiscal year end are as follows. Negative figures show a decrease in obligation of mutual pension benefits, while positive figures show an increase.
Millions of yen 2012 2013 (As of March 31) Change in assumptions Effect of the change Effect of the change Discount rate Increase by 0.5% ¥(2,863) ¥(2,372) Decrease by 0.5% 2,963 2,501
(3) Schedule of Actuarial Gains and Losses included in “Other comprehensive income” in the consolidated statement of comprehensive income Actuarial gains and losses included in “Other comprehensive income” in the consolidated statement of comprehensive income for each fiscal year are as follows:
Millions of yen (Years ended March 31) 2012 2013 Balance at the beginning of the year (cumulative total) ¥(34,461) ¥(45,131) Accrued during the year (10,669) (28,200) Balance at the end of the year (cumulative total) ¥(45,131) ¥(73,331)
(4) Other Employee Benefits Expense The employee benefits expense other than employees’ retirement benefits and mutual pension benefits that are included in the consoli- dated statement of income for each fiscal year are as follows:
Millions of yen (Years ended March 31) 2012 2013 Remuneration and salary ¥213,412 ¥215,369 Bonus to employees 62,590 69,161 Legal welfare expenses 37,075 39,982 Welfare expenses 22,194 22,662 Termination benefits 3,270 2,737
25. Equity and Other Equity Items
(1) Share Capital and Capital Surplus A. Authorized Shares The number of authorized shares as of March 31, 2012 and 2013 is 40,000 and 8,000,000 thousand ordinary shares, respectively.
B. Fully Paid Issued Shares The schedule of the number of issued shares and share capital is as follows:
Thousands of shares Millions of yen Number of ordinary (Years ended March 31) issued shares Share capital Capital surplus As of April 1, 2011 10,000 ¥ 100,000 ¥ 736,410 Increase (Decrease) — — — As of March 31, 2012 10,000 100,000 736,410 Increase (Decrease) (Note 2) 1,990,000 — 1 As of March 31, 2013 2,000,000 ¥100,000 ¥736,411
(Note 1) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights. (Note 2) The number of ordinary shares issued increased by 1,990,000 thousand shares for the year ended March 31, 2013 due to the 200-for-one share split conducted, with basis date of June 30, 2012 and effective date of July 1, 2012.
122 Japan Tobacco INC. Annual Report 2013 (2) Treasury Shares The schedule of the number of treasury shares and its amount as of each fiscal year end is as follows:
Thousands of shares Millions of yen (Years ended March 31) Number of shares Amount As of April 1, 2011 479 ¥ 94,574 Increase (Decrease) — — As of March 31, 2012 479 94,574 Increase (Decrease) (Notes 2, 3) 182,032 249,999 As of March 31, 2013 182,510 ¥344,573
(Note 1) The Company adopts share option plans and utilizes treasury shares for delivery of shares due to its exercise. Contract conditions and amount are described in “34. Share- Based Payments.” (Note 2) The number of treasury shares purchased based on the resolution made by the Board of Directors was 86,806 thousand shares and the total purchase cost was ¥250,000 million for the year ended March 31, 2013 including 80,071 thousand shares that were acquired from the Minister of Finance in Japan for ¥230,606 million. The number of shares delivered upon exercise of share option is 1 thousand shares for the year ended March 31, 2013. FINANCIAL INFORMATION (Note 3) The number of treasury shares increased by 95,227 thousand shares for the year ended March 31, 2013 due to the 200-for-one share split that was conducted, with basis date of June 30, 2012 and effective date of July 1, 2012.
(3) Other Components of Equity changes in the fair value of derivative transactions designated as A. Subscription rights to shares cash flow hedges. The Company adopts share option plans and issues subscription rights to shares based on the Companies Act. Contract conditions D. Net gain (loss) on revaluation of financial assets measured and amount, are described in “34. Share-based Payments.” at fair value through other comprehensive income This is the valuation difference in the fair value of financial assets B. Exchange differences on translation of foreign operations measured at fair value through other comprehensive income. This is a foreign currency translation difference that occurred when consolidating financial statements of foreign subsidiaries E. Actuarial gains (losses) on defined benefit retirement plans prepared in foreign currencies. Actuarial gains (losses) are the effects of differences between the actuarial assumptions at the beginning of the year and what has C. Net gain (loss) on derivatives designated as cash flow actually occurred, and the effects of changes in actuarial assump- hedges tions. Actuarial gains (losses) are fully recognized when occurred The Company uses derivatives for hedging to avoid the risk of as other comprehensive income and are transferred immediately fluctuation in future cash flow. This is the effective portion of from other components of equity to retained earnings.
26. Dividends
Dividends paid for each fiscal year are as follows:
For the year ended March 31, 2012
2012 Millions of yen Yen Class of shares Total dividends Dividends per share Basis date Effective date (Resolution) Annual Shareholders Meeting (June 24, 2011) Ordinary shares ¥38,086 ¥4,000 March 31, 2011 June 27, 2011 Board of Directors (October 31, 2011) Ordinary shares 38,086 4,000 September 30, 2011 December 1, 2011
For the year ended March 31, 2013 2013 Millions of yen Yen Class of shares Total dividends Dividends per share Basis date Effective date (Resolution) Annual Shareholders Meeting (June 22, 2012) Ordinary shares ¥57,129 ¥6,000 March 31, 2012 June 25, 2012 Board of Directors (October 30, 2012) Ordinary shares 57,129 30 September 30, 2012 November 30, 2012
Japan Tobacco INC. Annual Report 2013 123 Dividends per share for which the basis date falls before June the year ended March 31, 2012 (April 1, 2011), dividends per 30, 2012 do not reflect the effect of the 200-for-one share split share resolved at the Annual Shareholders’ Meeting on June 24, conducted, with basis date of June 30, 2012 and effective date of 2011, the Board of Directors’ Meeting on October 31, 2011, and July 1, 2012. Annual Shareholders’ Meeting on June 22, 2012, would have Assuming the share split coming into effect at the beginning of been ¥20, ¥20 and ¥30, respectively.
Dividends, for which effective date falls in the following fiscal year, are as follows:
For the year ended March 31, 2012
2012 Millions of yen Yen Class of shares Total dividends Dividends per share Basis date Effective date (Resolution) Annual Shareholders Meeting (June 22, 2012) Ordinary shares ¥57,129 ¥6,000 March 31, 2012 June 25, 2012
For the year ended March 31, 2013 2013 Millions of yen Yen Class of shares Total dividends Dividends per share Basis date Effective date (Resolution) Annual Shareholders Meeting (June 21, 2013) Ordinary shares ¥69,065 ¥38 March 31, 2013 June 24, 2013
27. Revenue
The reconciliation from “Gross turnover” to “Revenue” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Gross turnover ¥ 6,610,757 ¥ 6,673,222 Tobacco excise taxes and agency transaction amount (4,576,932) (4,553,027) Revenue ¥ 2,033,825 ¥ 2,120,196
The tobacco excise taxes and other transactions in which the consolidated statement of income. Group is involved as an agency are excluded from revenue. The Gross turnover is an item that the Group discloses voluntarily inflow of economic benefits after deducting the tobacco excise and is not “Revenue” as defined by IFRS. taxes and other transactions is presented as “Revenue” in the
28. Other Operating Income
The breakdown of “Other operating income” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Gains on sale of property, plant and equipment, intangible assets and investment properties (Note 1, 2) ¥30,134 ¥35,195 Other (Note 2) 18,378 6,970 Total ¥48,512 ¥42,165 (Note 1) Mainly from sales of old factory site, warehouse and company housing. (Note 2) The amount of restructuring income included in each account for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Gains on sale of property, plant and equipment, intangible assets and investment properties ¥29,368 ¥34,229 Other 564 5 Total ¥29,932 ¥34,234
124 Japan Tobacco INC. Annual Report 2013 29. Selling, General and Administrative Expenses
The breakdown of “Selling, general and administrative expenses” for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 Advertising expenses ¥ 21,530 ¥ 20,566 Promotion expenses 128,007 137,480 Shipping, warehousing expenses 27,920 27,092 Commission 40,963 41,157 Employee benefits expenses (Note 2) 235,060 241,420 Research and development expenses (Note 1) 51,461 56,860 Depreciation and amortization 58,550 59,092 Impairment losses on other than financial assets (Note 2) 7,013 3,213 Losses on sale and disposal of property, plant and equipment, intangible assets, FINANCIAL INFORMATION and investment property (Note 2) 11,454 9,265 Cooperation fee for terminating leaf tobacco farming 12,469 4 Other (Note 2) 138,743 137,235 Total ¥733,169 ¥733,385 (Note 1) All research and development expenses are included in “Selling, general and administrative expenses.” (Note 2) The amount of restructuring costs included in each account is the following.
Millions of yen (Years ended March 31) 2012 2013 Employee benefits expenses ¥ 4,651 ¥3,835 Impairment losses on other than financial assets 5,837 3,076 Losses on sale and disposal of property, plant and equipment, intangible assets, and investment property 3,342 1,258 Other 222 1,197 Total ¥14,052 ¥9,366
30. Financial Income and Financial Costs
The breakdown of “Financial income” and “Financial costs” for each fiscal year is as follows:
Financial Income Millions of yen (Years ended March 31) 2012 2013 Dividend income Financial assets measured at fair value through other comprehensive income ¥1,280 ¥1,365 Interest income Financial assets measured at amortized cost Cash and deposits, and bonds 2,366 3,772 Other 1,958 356 Total ¥5,603 ¥5,493
Financial Costs Millions of yen (Years ended March 31) 2012 2013 Interest expenses Financial liabilities measured at amortized cost Bonds and borrowings (Note 2) ¥13,962 ¥ 9,688 Other 415 446 Foreign exchange losses (Note 1) 2,738 11,285 Employee benefits expenses (Note 3) 5,523 5,721 Other 791 1,153 Total ¥23,429 ¥28,292 (Note 1) Valuation gain (loss) of currency derivatives is included in the foreign exchange loss. (Note 2) Valuation gain (loss) of interest rate derivatives is included in interest expenses. (Note 3) The employee benefits expenses are the net amount of interest cost and the expected return on plan assets related to employee benefits.
Japan Tobacco INC. Annual Report 2013 125 31. Other Comprehensive Income
Amount arising during year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive income” for each fiscal year are as follows:
For the year ended March 31, 2012
Millions of yen 2012 Reclassification Before tax Amount arising adjustments effects Tax effects Net of tax effects Exchange differences on translation of foreign operations ¥(130,331) ¥ — ¥(130,331) ¥ — ¥(130,331) Net gain (loss) on derivatives designated as cash flow hedges (556) 317 (239) 73 (166) Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income 6,248 — 6,248 (1,498) 4,750 Actual gains (losses) on defined benefit retirement plans (12,379) — (12,379) 1,709 (10,669) Total ¥(137,017) ¥317 ¥(136,700) ¥ 284 ¥(136,416)
For the year ended March 31, 2013 Millions of yen 2013 Reclassification Before tax Amount arising adjustments effects Tax effects Net of tax effects Exchange differences on translation of foreign operations ¥216,140 ¥ (22) ¥216,118 ¥ — ¥216,118 Net gain (loss) on derivatives designated as cash flow hedges 4,102 (3,914) 188 (66) 121 Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income 7,344 — 7,344 (2,545) 4,799 Actual gains (losses) on defined benefit retirement plans (37,600) — (37,600) 9,400 (28,200) Total ¥189,986 ¥(3,936) ¥186,050 ¥ 6,789 ¥192,838
126 Japan Tobacco INC. Annual Report 2013 32. Earnings per Share
(1) Basis of Calculating Basic Earnings per Share A. Profit Attributable to Ordinary Shareholders of the Parent Company
Millions of yen (Years ended March 31) 2012 2013 Profit attributable to owners of the parent company ¥320,883 ¥343,612 Profit not attributable to ordinary shareholders of the parent company — — Profit used for calculation of basic earnings per share ¥320,883 ¥343,612
B. Weighted-Average Number of Ordinary Shares Outstanding During the Year
Thousands of shares (Years ended March 31) 2012 2013 FINANCIAL INFORMATION Weighted-average number of shares during the year 1,904,295 1,897,636
(2) Basis of Calculating Diluted Earnings per Share A. Profit Attributable to Diluted Ordinary Shareholders
Millions of yen (Years ended March 31) 2012 2013 Profit used for calculation of basic earnings per share ¥320,883 ¥343,612 Adjustment — — Profit used for calculation of diluted earnings per share ¥320,883 ¥343,612
B. Weighted-Average Number of Diluted Ordinary Shares Outstanding During the Year
Thousands of shares (Years ended March 31) 2012 2013 Weighted-average number of ordinary shares during the year 1,904,295 1,897,636 Increased number of ordinary shares under subscription rights to shares 745 918 Weighted-average number of diluted ordinary shares during the year 1,905,040 1,898,553
(3) Adjusted Diluted Earnings per Share
Millions of yen (Years ended March 31) 2012 2013 Profit used for calculation of adjusted diluted earnings per share ¥320,883 ¥343,612 Adjustment items (income) (29,932) (34,234) Adjustment items (costs) 29,039 7,536 Adjustments on income taxes and non-controlling interests 2,025 12,772 Adjustments on income taxes related to losses on valuation of investments in subsidiaries (31,207) — Adjusted profit for the year ¥290,808 ¥329,687 Adjusted diluted earnings per share (yen) ¥ 152.65 ¥ 173.65
The weighted-average number of ordinary shares and the weighted-average number of diluted ordinary shares during the year reflect the effect of the share split conducted at a ratio of 200 shares to one share with June 30, 2012 as the basis date and July 1, 2012 as the effective date.
Japan Tobacco INC. Annual Report 2013 127 33. Non-cash Transactions
Significant Non-cash Transactions The amount of assets acquired under finance leases was ¥2,977 million for the year ended March 31, 2012 and ¥4,756 million for the year ended March 31, 2013, respectively.
34. Share-Based Payments
The Company adopts share option plans. Share options are Conditions related to the exercise of share options are as granted by the resolution of the Board of Directors based on the follows: approval at the Annual Shareholders Meeting. (a) The subscription rights to shares become exercisable when a The outline of the share option plan is as follows: holder of a subscription right to shares no longer holds a position as a director, an audit & supervisory board member or an execu- (1) Share Option Contract Conditions tive officer. In the subscription rights to shares allocation contract Positions of persons granted : Directors and Executive with holders of such rights, it is provided for that the rights Officers become exercisable from the date following the date on which Settlement : Issuance of share one year has elapsed after leaving their positions (however, the Effective period of granted share option : 30 years after the date rights become exercisable even within one year after leaving their of grant positions only in the case where the Board of Directors find it to Vesting conditions : None be unavoidable). (b) In the case where any holders of subscription rights to shares waive such rights, they cannot exercise them.
(2) Changes in the Number of Share Options
Shares 2012 2013 Executive Executive (Years ended March 31) Directors Officers Total Directors Officers Total Balance at the beginning of the year 1,524 1,557 3,081 1,875 2,244 4,119 Effect of share splits — — — 373,125 446,556 819,681 Granted 514 524 1,038 65,600 80,200 145,800 Exercised — — — — (600) (600) Transfer (163) 163 — (116,200) 116,200 — Balance at the end of the year 1,875 2,244 4,119 324,400 644,600 969,000 Exercisable balance at the end of the year — 430 430 — 138,200 138,200
(Note 1) The number of share options is presented as the number of underlying shares. (Note 2) All share options are granted with an exercise price of ¥1 per share. (Note 3) Share options were granted to 8 directors and 15 executive officers for the year ended March 31, 2012, and 7 directors and 17 executive officers for the year ended March 31, 2013. “Transfer” included in the “Changes in the Number of Share Options” represents the number of share options for persons granted whose management position changed during the year. (Note 4) The weighted-average fair value per share of share options granted during the year was ¥277,947 for the year ended March 31, 2012 and ¥1,600 for the year ended March 31, 2013. (Note 5) The weighted-average share price of share options at the time of exercise during the period was ¥2,924 for the year ended March 31, 2013. No share options were exercised for the year ended March 31, 2012. (Note 6) The weighted-average remaining contract year of unexercised share options at the end of the year was 27.8 years for the year ended March 31, 2012 and 27.3 years for the year ended March 31, 2013. (Note 7) The Company conducted the 200-for-one share split, with basis date of June 30, 2012 and effective date of July 1, 2012.
128 Japan Tobacco INC. Annual Report 2013 (3) Method of Measuring Fair Value of Share Options Granted During the Year A. Valuation Model Black-Scholes Model
B. Main Assumptions and Estimation
(Years ended March 31) 2012 2013 Share price ¥367,000 ¥2,238 Volatility of share price (Note 1) 35.5% 36.0% Estimated remaining period (Note 2) 15 years 15 years Estimated dividends (Note 3) ¥6,800/share ¥50/share Risk free interest rate (Note 4) 1.48% 1.30%
(Note 1) Calculated based on daily share prices quoted for the past 15 years. (Note 2) With difficulty in reasonable estimation due to insufficient data, the remaining period is estimated based on the assumption that share option rights would be exercised at a
midpoint of exercise period. FINANCIAL INFORMATION (Note 3) Based on the latest dividends paid. (Note 4) The yield of government bonds for a period of the expected remaining period.
(4) Share-Based Payments Expenses The cost for share options included in “Selling, general and administrative expenses” in the consolidated statement of income is ¥265 million for the year ended March 31, 2012 and ¥247 million for the year ended March 31, 2013.
35. Financial Instruments
(1) Capital Management In order to achieve sustainable growth, the Group under- The Group’s management principle is pursuit of the “4S” model: stands that financing capacities sufficient enough to make agile balancing the interests of consumers, shareholders, employees business investments when there are opportunities, such as the and wider society, and fulfilling our responsibilities towards them, acquisition of external resources for business growth are aiming to exceed their expectations. required. For that reason, the Group aims to maintain a well- The Group believes that sustainable profit growth in the mid- to balanced capital structure by ensuring sound and flexible finan- long-term based on this principle will increase the Group’s value in cial conditions for future business investment as well as an the mid- to long-term, and is consequently in the best interest of appropriate return on equity. all stakeholders, including our shareholders.
The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (the part attributable to the owners of the parent company). The amounts as of each year end are as follows:
Millions of yen (As of March 31) 2012 2013 Interest-bearing debt ¥ 502,368 ¥ 327,242 Cash and cash equivalents (404,740) (142,713) Net interest-bearing debt 97,628 184,530 Capital (equity attributable to owners of the parent company) 1,634,050 1,806,125
There are specific rules for shares of the Company under the (excluding bonds with subscription rights to shares) when Japan Tobacco Inc. Act as follows: exchanging with shares, the Company shall obtain the approval of The Japanese government shall hold more than one-third of all the Minister of Finance (Article 2 (2)). of the shares issued by the Company (excluding the type of Disposal of shares owned by the Japanese government shall shares, for which it is stipulated that voting rights may not be be within the limits on the number of shares decided by the Diet exercised on any matters that can be resolved by Annual in the relevant annual budget (Article 3). Shareholders Meeting)(Article 2 (1)). The Group monitors financial indicators in order to maintain a In cases where the Company intends to solicit persons to well-balanced capital structure by ensuring sound and flexible subscribe for shares to be issued or subscription rights to shares financial conditions for future investment as well as an appropriate or where the Company intends to deliver shares (excluding trea- return on equity. We monitor credit ratings for financial soundness sury shares), subscription rights to shares (excluding subscription and flexibility, and ROE (return on equity) for profitability, while right to own shares) or bonds with subscription right to shares focusing on changes in the domestic and overseas environment.
Japan Tobacco INC. Annual Report 2013 129 (2) Financial Risk Management credit risk of the financial institutions which are counterparties to The Group is exposed to financial risks (credit risks, liquidity risks, these transactions. foreign exchange risks, interest rate risks, and market price fluc- In principle, the Group sets credit lines or transaction condi- tuation risks) in the process of its management activities; and it tions with respect to trade receivables for counterparties based on manages risks based on a specific policy in order to avoid or the Credit Management Guidelines in order to control the credit reduce said risks. The results of risk management are quarterly risk relating to counterparties. In addition, the receivable balances reported by the treasury division to the Executive Committee of of counterparties with high credit risk are monitored. The Treasury the Company. Division of the Company regularly monitors the status of the The Group policy limits derivatives to transactions for the pur- occurrence and collection of bad debts, and reports them to the pose for mitigating risks from transactions based on actual Executive Committee of the Company. There is no overconcen- demand. Therefore, we do not transact derivatives for speculation trated credit risk for a single customer. purposes or trading purposes. With regard to the investment of cash surpluses and deriva- tives, the Group invests in debt securities and other financial (3) Credit Risk instruments with a certain credit rating and transacts with finan- Receivables, such as note and account receivables, acquired from cial institutions with a high credit rating in principle in order to the operating activities of the Group are exposed to customer prevent credit risks from occurring and based on the Group credit risk. Financial Operation Basic Policy. In addition, the Treasury Division The Group holds mainly debt securities for surplus investment of the Company regularly monitors the performances of these and equity securities of customers and suppliers to strengthen transactions and reports the results to the Executive Committee of relationships with them; those securities are exposed to the issu- the Company. er’s credit risk. In addition, through derivative transactions that the The maximum exposure pertaining to credit risks for financial Group conducts in order to hedge foreign exchange fluctuation assets is the carrying amount after considering impairment in the risks and interest rate fluctuation risks, we are exposed to the consolidated financial statements.
The analysis of the aging of financial assets that are past due but not impaired as of each fiscal year end date is as follows: The financial assets include amounts considered recoverable by credit insurance and collateral.
As of March 31, 2012
Millions of yen 2012 Amount past due Over 30 days, Over 60 days, Total Within 30 days within 60 days within 90 days Over 90 days Trade and other receivables ¥2,635 ¥2,376 ¥60 ¥8 ¥191 Other financial assets 285 — — — 285
As of March 31, 2013 Millions of yen 2013 Amount past due Over 30 days, Over 60 days, Total Within 30 days within 60 days within 90 days Over 90 days Trade and other receivables ¥6,709 ¥6,494 ¥120 ¥20 ¥ 76 Other financial assets 351 — — — 351
The Group reviews collectability of trade receivables depending on the credit conditions of counterparties and recognizes allowance for doubtful accounts. The schedule of the allowance of doubtful accounts is as follows:
Millions of yen (Years ended March 31) 2012 2013 Balance at the beginning of the year ¥26,322 ¥15,866 Addition 514 1,444 Decrease (intended use) (8,795) (6,016) Decrease (reversal) (2,120) (922) Other (55) 309 Balance at the end of the year ¥15,866 ¥10,681
130 Japan Tobacco INC. Annual Report 2013 (4) Liquidity Risk business plan and the Treasury Division of the Company regularly The Group raises funds by borrowings, commercial paper and monitors and collects information on the balance of liquidity-in- bonds; however, these liabilities are exposed to the liquidity risk hand and interest-bearing debt and reports it to the Executive that we would not be able to repay liabilities on the due date due Committee of the Company. In addition, the Group keeps neces- to the deterioration of the financing environment. sary credit facilities to manage liquidity risk by having commit- In accordance with the Group Financial Operation Basic Policy, ment lines with several financial institutions. the Group establishes a finance plan based on the annual
The financial liability balance (including derivative financial instruments) by maturity as of each fiscal year end is as follows:
As of March 31, 2012
Millions of yen 2012
Due after Due after Due after Due after FINANCIAL INFORMATION one year two years three years four years Carrying Contractual Due within through through through through Due after amount cash flow one year two years three years four years five years five years Non-derivative financial liabilities Trade and other payables ¥298,663 ¥298,663 ¥298,663 ¥ — ¥ — ¥ — ¥ — ¥ — Short-term borrowings 43,486 43,486 43,486 ————— Current portion of long-term borrowings 78,219 78,219 78,219 ————— Long-term borrowings 49,277 49,277 — 20,593 1,103 27,158 23 401 Current portion of bonds 90,061 90,109 90,109 ————— Bonds 230,473 230,583 — 100 150,483 40,000 — 40,000 Subtotal 790,179 790,337 510,477 20,693 151,586 67,158 23 40,401 Derivative financial liabilities (Note) Foreign exchange forward contract 1,630 1,630 1,630 ————— Interest rate swap 152 152 48 38 37 28 —— Cross currency swap 3,350 2,472 (47) (94) (200) 2,813 —— Subtotal 5,133 4,254 1,632 (56) (163) 2,841 —— Total ¥795,311 ¥794,591 ¥512,109 ¥20,637 ¥151,423 ¥69,998 ¥23 ¥40,401 (Note) Figure in parentheses ( ) represents the amount of the cash receipt.
As of March 31, 2013 Millions of yen 2013 Due after Due after Due after Due after one year two years three years four years Carrying Contractual Due within through through through through Due after amount cash flow one year two years three years four years five years five years Non-derivative financial liabilities Trade and other payables ¥312,741 ¥312,741 ¥312,741 ¥ — ¥ — ¥ — ¥ — ¥ — Short-term borrowings 23,847 23,847 23,847 ————— Current portion of long-term borrowings 20,454 20,454 20,454 ————— Long-term borrowings 33,163 33,163 — 1,217 31,145 107 109 584 Bonds 237,236 237,298 — 157,298 40,000 — 20,000 20,000 Subtotal 627,441 627,504 357,042 158,515 71,145 107 20,109 20,584 Derivative financial liabilities Foreign exchange forward contract 3,614 3,614 3,614 ————— Interest rate swap 202 200 83 66 50 ——— Subtotal 3,816 3,814 3,698 66 50 ——— Total ¥631,258 ¥631,317 ¥360,740 ¥158,582 ¥71,195 ¥107 ¥20,109 ¥20,584
Japan Tobacco INC. Annual Report 2013 131 The total of commitment lines and withdrawal as of each fiscal year end are as follows:
Millions of yen (As of March 31) 2012 2013 Total committed line of credit ¥513,525 ¥444,597 Withdrawing 76,933 — Unused balance ¥436,592 ¥444,597
(5) Foreign Exchange Risk (i) using derivatives or foreign currency-denominated interest- The Group operates businesses globally and, therefore, is exposed bearing debts when future cash flow is projected or when to the following risks due to foreign exchange fluctuation: receivables and payables are fixed. (i) The risk where the profit or loss and cash flow in each func- The Group hedges against risk (ii) using foreign currency- tional currency of the Group is influenced by foreign exchange denominated interest-bearing debts and part of these are desig- fluctuation as a result of external transactions and intergroup nated as net investment hedges. The Group does not hedge transactions, including the payment and receipt of dividends, against risk (iii) in principle. in currencies that are different from each functional currency In order to mitigate risks mentioned above resulting from the of the Group. foreign exchange fluctuation, in accordance with the Group (ii) The risk that the equity of the Group is influenced by foreign Financial Operation Basic Policy, the Group establishes a foreign exchange fluctuation when equity denominated in each func- currency hedge policy based on the current conditions and fore- tional currency of the Group is translated into Japanese yen cast of the foreign exchange market, implement the aforemen- and consolidated. tioned hedges under the supervision of the Financial Risk (iii) The risk that the profit or loss of the Group is influenced by Management Committee of the Company, and the Treasury foreign exchange fluctuation when profit or loss denominated Division of the Company regularly reports the performances to the in each functional currency of the Group is translated into Executive Committee of the Company. Japanese yen and consolidated. The Group hedges against risk
The breakdown of currency derivatives is follows:
Derivative transactions to which hedge accounting is not applied
Millions of yen 2012 2013 (As of March 31) Contract amount Over one year Fair value Contract amount Over one year Fair value Foreign exchange forward contract Buying ¥ 87,143 ¥— ¥(1,227) ¥318,342 ¥— ¥ 2,298 Selling 35,091 — 350 157,921 — (2,585) Total ¥122,235 ¥— ¥ (877) ¥476,263 ¥— ¥ (287)
Foreign currency-denominated bonds and borrowings are designated as hedging instruments for consolidated subsidiaries in order to reduce fluctuation risk of foreign currency translation differences that are incurred by translating net investment in foreign operations into the reporting currency. Bonds and borrowings that are designated as hedging instruments are as follows:
Millions of yen 2012 2013 (As of March 31) Carrying amount Due Carrying amount Due Bonds in EUR ¥50,359 2014 ¥50,995 2014 Borrowings in EUR 13,226 2012 — — Borrowings in GBP 48,592 2012 — —
Foreign Exchange Sensitivity Analysis denominated financial instruments, and assets, liabilities, income In cases where each currency other than the functional currency and expenses of foreign operations into Japanese yen is not that denominates the financial instruments held by the Group as included. Also, it is based on the assumption that currencies other of each fiscal year end increases by 10% in value against the than the currencies used for the calculation do not fluctuate. functional currency, the impact on profit before income taxes in Millions of yen the consolidated statement of income is as follows: (As of March 31) 2012 2013 The impact from the translation of functional currency- Profit before income taxes ¥1,178 ¥(118)
132 Japan Tobacco INC. Annual Report 2013 (6) Interest Rate Risk current condition and the forecast of the interest rates to reduce Interest rate risk within the Group arises from interest-bearing the interest rate fluctuation risk related to borrowings and bonds, debts after deducting cash equivalents. Borrowings and bonds implement the hedges using derivatives under the supervision of with floating rates are exposed to interest rate fluctuation risk. the Financial Risk Management Committee of the Company and In accordance with the Group Financial Operation Basic Policy, the Treasury Division of the Company regularly reports the perfor- the Group establishes an interest rate hedging policy based on the mances to the Executive Committee of the Company.
The descriptions of interest rate derivatives are as follows:
(i) Derivative transactions to which hedge accounting is not applied
Millions of yen 2012 2013 (As of March 31) Contract amount Over one year Fair value Contract amount Over one year Fair value
Interest rate swap FINANCIAL INFORMATION Fixed rate receipt and floating rate payment ¥29,959 ¥ — ¥1,187 ¥ — ¥ — ¥ — Floating rate receipt and fixed rate payment 1,814 1,814 (150) 2,063 2,063 (202) Interest rate cap Buying 29,959 — 0 — — — Total ¥61,732 ¥1,814 ¥1,037 ¥ 2,063 ¥2,063 ¥(202)
(ii) Derivative transactions to which hedge accounting is applied
Millions of yen 2012 2013 (As of March 31) Contract amount Over one year Fair value (Note) Contract amount Over one year Fair value (Note) Interest rate swap Floating rate receipt and fixed rate payment ¥ 198 ¥ 58 ¥ (2) ¥ 58 ¥ — ¥ (0) Cross currency swap Floating rate receipt and fixed rate payment 30,000 30,000 (3,350) 30,000 30,000 750 Total ¥30,198 ¥30,058 ¥(3,352) ¥30,058 ¥30,000 ¥749
(Note) Recognized at fair value in the consolidated statement of financial position by application of cash flow hedge.
Interest Rate Sensitivity Analysis interest rate fluctuation and based on the assumption that other In cases where the interest rate of financial instruments held by factors, including the impacts of foreign exchange fluctuation, are the Group as of each fiscal year end increase by 100bp, the constant. impact on profit before income taxes in the consolidated state- Millions of yen ment of income is as follows: (As of March 31) 2012 2013 The analysis is subject to financial instruments affected by Profit before income taxes ¥1,061 ¥458
(7) Market Price Fluctuation Risk With respect to securities, the Group regularly assesses the fair value and financial conditions of the issuers, and each relevant depart- ment reviews the portfolio held by taking into account the relationship with counterparty entities as necessary.
(8) Fair Value of Financial Instruments The carrying amount and fair value of financial instruments as of each fiscal year end are as follows:
Millions of yen 2012 2013 (As of March 31) Carrying amount Fair Value Carrying amount Fair Value Long-term borrowings (Note) ¥127,496 ¥127,844 ¥ 53,617 ¥ 53,624 Bonds (Note) 320,534 328,767 237,236 245,334
(Note) Current portion is included.
Japan Tobacco INC. Annual Report 2013 133 With regard to short-term financial assets and short-term finan- the same loan is newly made. cial liabilities measured at amortized cost, their fair value approxi- The fair value of bonds issued by the Group is based on the mates the carrying amount. market price for those having market prices, and based on the The fair value of long-term borrowings is calculated based on present value that is obtained by discounting the total of principal the present value which is obtained by discounting the total of the and interest by the interest rate, for which the remaining period principal and interest by the interest rate assumed in a case where and credit risk of such bonds are taken into consideration.
The fair value hierarchy of financial instruments is categorized as follows from Level 1 to Level 3:
Level 1: Fair value measured at the quoted price in the active market Level 2: Fair value that is calculated using the observable price other than categorized in Level 1 directly or indirectly Level 3: Fair value that is calculated based on valuation techniques which include input that is not based on observable market data
As of March 31, 2012
Millions of yen 2012 Level 1 Level 2 Level 3 Total Derivative assets ¥ — ¥1,941 ¥ — ¥ 1,941 Equity securities 35,712 — 3,394 39,106 Other 71 — 945 1,016 Total ¥35,783 ¥1,941 ¥4,339 ¥42,063 Derivative liabilities ¥ — ¥5,133 ¥ — ¥ 5,133 Total ¥ — ¥5,133 ¥ — ¥ 5,133
As of March 31, 2013 Millions of yen 2013 Level 1 Level 2 Level 3 Total Derivative assets ¥ — ¥4,077 ¥ — ¥ 4,077 Equity securities 43,052 — 3,646 46,699 Other 120 — 978 1,098 Total ¥43,172 ¥4,077 ¥4,625 ¥51,874 Derivative liabilities ¥ — ¥3,816 ¥ — ¥ 3,816 Total ¥ — ¥3,816 ¥ — ¥ 3,816
The schedule of financial instruments that are classified in Level 3 is as follows:
Millions of yen (Years ended March 31) 2012 2013 Balance at the beginning of the year ¥4,530 ¥4,339 Total gain (loss) Profit or loss (Note 1) (337) 36 Other comprehensive income (Note 2) 333 231 Purchases 20 42 Sales (206) (24) Balance at the end of the year ¥4,339 ¥4,625
(Note 1) Gains and losses included in profit or loss for the year ended March 31, 2012 and 2013 are related to financial assets measured at fair value through profit or loss as of the fiscal year end date. These gains and losses are included in “Financial income” and “Financial costs.” (Note 2) Gains and losses included in other comprehensive income for the year ended March 31, 2012 and 2013 are related to financial assets measured at fair value through other comprehensive income as of the fiscal year end date. These gains and losses are included in “Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income.”
134 Japan Tobacco INC. Annual Report 2013 36. Related Parties
Based on the Japan Tobacco Inc. Act, the Japanese government shall hold more than one-third of all of the shares issued by the Company (excluding the type of shares, for which it is stipulated that voting rights may not be exercised on any matters that can be resolved by Annual Shareholders Meeting). As of March 31, 2013, the Japanese government held 33.35% of all outstanding shares of the Company.
(1) Related-Party Transactions Related-party transactions are conducted under the same conditions as regular business transactions. The details of acquisition of trea- sury shares are described in “25. Equity and Other Equity Items.”
(2) Remuneration for Directors and Audit & Supervisory Board Members Remuneration for directors and audit & supervisory board members for each fiscal year is as follows:
Millions of yen (Years ended March 31) 2012 2013 FINANCIAL INFORMATION Remuneration and bonuses ¥762 ¥880 Share-based payments 133 114 Total ¥895 ¥994
37. Commitments
(1) Commitments for the Acquisition of Assets Commitments for the acquisition of assets after fiscal year end date are as follows:
Millions of yen (As of March 31) 2012 2013 Acquisition of property, plant and equipment ¥32,541 ¥78,802 Acquisition of intangible assets 8,183 2,108 Total ¥40,724 ¥80,909
(2) Procurement of Domestic Leaf Tobacco cultivation by type of tobacco and the prices by type and quality With regard to the procurement of domestic leaf tobacco by the of tobacco leaf. Under the contracts, the Company is obligated to Company, based on the Tobacco Business Act, the Company purchase all domestic leaf tobacco produced pursuant to such enters into purchase contracts with domestic leaf tobacco grow- contracts, except for any domestic leaf tobacco not suited for the ers every year, and the contracts determine the area under manufacture of tobacco products.
Japan Tobacco INC. Annual Report 2013 135 38. Contingencies
Contingent Liabilities Canada Quebec Class Action (Conseil Québécois sur le tabac et la The Company and some of its subsidiaries are defendants in law- santé): suits. Provisions are not accounted for in matters it is not prac- This class action was brought in November 1998 against three tiable to reasonably estimate the final outcomes. The Company Canadian tobacco manufacturers including JTI-Mac. Plaintiffs are believes that our allegations on these lawsuits are based on sub- seeking compensatory and punitive damages for class members stantial evidence and implement the system for response to action of approximately ¥476.7 billion (CAD 5.1 billion) without specifying with the assistance of external lawyers. any individual amount or percentages among the defendants. The class was certified by the court in February 2005. The trial com- (1) Smoking and Health Related Litigation menced in March 2012. The defendants filed a third-party claim The Company and some of its subsidiaries become defendants in against the government of Canada seeking contribution and lawsuits filed by plaintiffs seeking damages for harm allegedly indemnity on the grounds that the Canadian government was caused by smoking, the marketing of tobacco products, or expo- highly involved in the tobacco industry in respect of smoking and sure to tobacco smoke. As of March 31, 2013, there were a total health related matters. The Court of First Instance denied the of 28 smoking and health related cases pending in which one or government of Canada’s motion to dismiss such third-party claim more members of the Group were named as a defendant or for in February 2012. The Court of Appeal thereafter granted the which the Company may have certain indemnity obligations pur- government of Canada’s appeal of the decision of the Court of suant to the agreement for the Company’s acquisition of RJR First Instance in November 2012. The defendants did not appeal Nabisco Inc.’s overseas (non-U.S.) tobacco operations. that decision, which dismissed the government of Canada as a The major ongoing smoking and health related cases are as defendant in the case. follows: Canada Saskatchewan Class Action (Adams): a. Individual Claim This class action was brought against tobacco industry members There is one individual case brought against the Company’s including JTI-Mac and the Company’s indemnitees in June 2009. indemnitee in South Africa. Plaintiffs are seeking unspecified compensatory and punitive South Africa Individual Claim (Joselowitz): damages on behalf of class members who allege to be or have The individual claim was brought against the Company’s indemni- been addicted to the nicotine contained in cigarettes manufac- tee in South Africa in October 2000. Plaintiff seeks compensatory tured by the defendants. The preliminary motions are pending. The and punitive damages, alleging that the Company’s indemnitee case is currently dormant. marketed products which it knew to be dangerous to health, Canada Manitoba Class Action (Kunta): manipulated nicotine content to foster addiction, failed to comply This class action was brought against tobacco industry members with South African labeling requirements and participated in a including JTI-Mac and the Company’s indemnitees in June 2009. clandestine worldwide operation to encourage children to smoke. Plaintiffs are seeking unspecified compensatory and punitive This case has been dormant since February 2001. damages on behalf of class members who allege to be or have b. Class Actions been addicted to the nicotine contained in cigarettes manufac- There are eight ongoing class actions in Canada against the tured by the defendants. The statement of claim was served on Company’s subsidiary and/or indemnitees. the Company’s indemnitees but not on JTI-Mac. The class action Canada Quebec Class Action (Cecilia Letourneau): is currently dormant. This class action was brought in September 1998 against three Canada Nova Scotia Class Action (Semple): Canadian tobacco manufacturers including JTI-Macdonald Corp. This class action was brought against tobacco industry members (hereinafter referred to as “JTI-Mac”), the Company’s Canadian including JTI-Mac and the Company’s indemnitees in June 2009. subsidiary. Plaintiffs are seeking compensatory and punitive dam- Plaintiffs are seeking unspecified compensatory and punitive ages for class members of approximately ¥1,648.6 billion (CAD damages on behalf of class members who allege to be or have 17.8 billion) without specifying any individual amount or percent- been addicted to the nicotine contained in cigarettes manufac- ages among the defendants. The class was certified by the court tured by the defendants. The statement of claim was served on in February 2005. The trial commenced in March 2012. The defen- the Company’s indemnitees but not on JTI-Mac. The class action dants filed a third-party claim against the government of Canada is currently dormant. seeking contribution and indemnity on the grounds that the Canada British Columbia Class Action (Bourassa): Canadian government was highly involved in the tobacco industry This class action was brought against tobacco industry members in respect of smoking and health related matters. The Court of including JTI-Mac and the Company’s indemnitees in June 2010. First Instance denied the government of Canada’s motion to dis- Plaintiffs are seeking unspecified compensatory and punitive miss such third-party claim in February 2012. The Court of Appeal damages for class members. The preliminary motions are pend- thereafter granted the government of Canada’s appeal of the ing. The case is currently dormant. decision of the Court of First Instance in November 2012. The Canada British Columbia Class Action (McDermid): defendants did not appeal that decision, which dismissed the This class action was brought against tobacco industry members government of Canada as a defendant in the case. including JTI-Mac and the Company’s indemnitees in June 2010.
136 Japan Tobacco INC. Annual Report 2013 Plaintiffs are seeking unspecified compensatory and punitive Litigation: damages for class members. The preliminary motions are pend- This health-care cost recovery litigation was filed by the Province ing. The case is currently dormant. of Newfoundland and Labrador in February 2011 against tobacco Canada Ontario Class Action (Jacklin): industry members including JTI-Mac and the Company’s indemni- This class action was brought against tobacco industry members tees based on legislation similar to that introduced in the Province including JTI-Mac and the Company’s indemnitees in June 2012. of British Columbia. The claim amount is unspecified. The pre-trial Plaintiffs are seeking unspecified compensatory and punitive process is ongoing. A trial date is not yet scheduled. damages for class members. The class action has been dormant Canada Manitoba Health-Care Cost Recovery Litigation: since the date it was served on defendants. This health-care cost recovery litigation was filed by the Province c. Health-Care Cost Recovery Litigation of Manitoba in May 2012 against tobacco industry members There are nine ongoing health-care cost recovery cases in Canada including JTI-Mac and the Company’s indemnitees based on pending against the Company’s subsidiary and indemnitees legislation similar to that introduced in the Province of British brought by the Provinces of British Columbia, New Brunswick, Columbia. The claim amount is unspecified. The pre-trial process
Ontario, Newfoundland and Labrador, Manitoba, Quebec, Alberta, is ongoing. A trial date is not yet scheduled. FINANCIAL INFORMATION Saskatchewan and Prince Edward Island. These provinces filed Canada Quebec Health-Care Cost Recovery Litigation: lawsuits under their own provincial legislation which was enacted This health-care cost recovery litigation was filed by the Province exclusively for the purpose of authorizing the provincial govern- of Quebec in June 2012 against tobacco industry members includ- ment to file a direct action against tobacco manufacturers to ing JTI-Mac and the Company’s indemnitees based on legislation recoup the health-care costs the government has incurred and will similar to that introduced in the Province of British Columbia. The incur, resulting from “tobacco related wrongs.” statement of claim in this case contains allegations of joint and Canada British Columbia Health-Care Cost Recovery Litigation: several liabilities among all the defendants but does not specify This health-care cost recovery litigation was filed by the Province any individual amount or percentages, within the total amount of of British Columbia in January 2001 against tobacco industry the claim ¥5,615.7 billion (CAD 60.7 billion). The pre-trial process members including JTI-Mac and the Company’s indemnitees is ongoing. A trial date is not yet scheduled. based on its provincial legislation, the “Tobacco Damages and Canada Alberta Health-Care Cost Recovery Litigation: Health-Care Costs Recovery Act.” The claim amount is unspeci- This health-care cost recovery litigation was filed by the Province fied. In 2001, several defendants challenged the legislation’s con- of Alberta in June 2012 against tobacco industry members includ- stitutionality, which was ultimately rejected by the Supreme Court ing JTI-Mac and the Company’s indemnitees based on the legisla- of Canada in September 2005. The action remains pending in the tion similar to that introduced in the Province of British Columbia. first instance. The defendants further filed a third-party claim The statement of claim in this case contains allegations of joint against the government of Canada seeking contribution and and several liabilities among all the defendants but does not spec- indemnity on the grounds that the Canadian government was ify any individual amount or percentages, within the total claimed highly involved in the tobacco industry in respect of smoking and amount of at least ¥925.8 billion (CAD 10.0 billion). The pre-trial health related matters. In July 2011, the Supreme Court of Canada process is ongoing. A trial date is not yet scheduled. ultimately dismissed the defendants’ third-party claim against the Canada Saskatchewan Health-Care Cost Recovery Litigation: government of Canada. The pre-trial discovery process is ongoing. This health-care cost recovery litigation was filed by the Province A trial date is not yet scheduled. of Saskatchewan in June 2012 against tobacco industry members Canada New Brunswick Health-Care Cost Recovery Litigation: including JTI-Mac and the Company’s indemnitees based on This health-care cost recovery litigation was filed by the Province legislation similar to that introduced in the Province of British of New Brunswick in March 2008 against tobacco industry mem- Columbia. The claim amount is unspecified. The pre-trial process bers including JTI-Mac and the Company’s indemnitees based on is ongoing. A trial date is not yet scheduled. legislation similar to that introduced in the Province of British Canada Prince Edward Island Health-Care Cost Recovery Columbia. The claim amount is unspecified. The pre-trial discovery Litigation: process is ongoing. A trial date is not yet scheduled. This health-care cost recovery litigation was filed by the Province Canada Ontario Health-Care Cost Recovery Litigation: of Prince Edward Island in September 2012 against tobacco This health-care cost recovery litigation was filed by the Province industry members including JTI-Mac and the Company’s indemni- of Ontario in September 2009 against tobacco industry members tees based on legislation similar to that introduced in the Province including JTI-Mac and the Company’s indemnitees based on of British Columbia. The claim amount is unspecified. The pre-trial legislation similar to that introduced in the Province of British process is ongoing. A trial date is not yet scheduled. Columbia. The statement of claim in this case contains allegations In addition, there is 1 ongoing health-care cost recovery case of joint and several liabilities among all the defendants but does pending against the Company’s subsidiaries in Spain. not specify any individual amount or percentages within the total claimed amount of ¥4,629.0 billion (CAD 50.0 billion). The pre-trial process is ongoing. A trial date is not yet scheduled. Canada Newfoundland and Labrador Health-Care Cost Recovery
Japan Tobacco INC. Annual Report 2013 137 (2) Other Litigation Company) filed a claim against TableMark Co., Ltd. and its subsid- The Company and some of its subsidiaries are also named as iary seeking damages allegedly incurred by the plaintiff from an defendants in other litigation such as commercial and tax dis- asset purchase agreement between the plaintiff and Katokichi Co., putes. One major case is pending: Ltd and a joint and several guarantee provided by the plaintiff. The Commercial Litigation plaintiff argues the invalidity of the asset purchase agreement. Japan Compensatory Damages Claim: In February 2010, a former President & CEO of Katokichi Co., Ltd. (Note) The amount of damages sought denominated in foreign currencies is translated into Japanese yen at the rates of 31 March 2013. (renamed as TableMark Co., Ltd. after acquisition by the
39. Subsequent Events
No items to report
Consolidated Supplementary Information A. Quarterly Information for the Year ended March 31, 2013
Millions of yen Q1 Q2 Q3 2013 From April 1, 2012 From April 1, 2012 to From April 1, 2012 to From April 1, 2012 to to June 30, 2012 September 30, 2012 December 31, 2012 March 31, 2013 Revenue ¥512,108 ¥1,057,391 ¥1,608,399 ¥2,120,196 Profit before income taxes for the period (year) 124,391 252,106 392,042 509,560 Profit for the period (year) 86,406 171,836 268,633 351,518 Basic earnings per share for the period (year) (yen) 44.38 88.62 138.48 181.07
Q1 Q2 Q3 Q4 From April 1, 2012 From July 1, 2012 to From October 1, 2012 to From January 1, 2013 to June 30, 2012 September 30, 2012 December 31, 2012 to March 31, 2013 Basic earnings per share for the quarter (yen) ¥44.38 ¥44.24 ¥49.85 ¥42.57
(Note 1) Quarterly information from the second quarter to the fourth quarter is provided based on the “Cumulative differences method.” (Note 2) The Company conducted the 200-for-one share split, with basis date of June 30, 2012 and effective date of July 1, 2012. Basic earnings per share are calculated assuming that the share split was conducted at the beginning of the year ended March 31, 2013.
B. Significant Lawsuits The significant lawsuits of the Group are as stated in “38. Contingencies” in the notes to consolidated financial statements.
138 Japan Tobacco INC. Annual Report 2013 INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of Japan Tobacco Inc.:
We have audited the accompanying consolidated statement of financial position of Japan Tobacco Inc. and its consoli- dated subsidiaries as of March 31, 2013, and the related consolidated statements of income, comprehensive income, changes in equity, and cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. FINANCIAL INFORMATION Management’s Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accor- dance with International Financial Reporting Standards, and for such internal control as management determines is neces- sary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assess- ments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appro- priateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consoli- dated financial position of Japan Tobacco Inc. and its consolidated subsidiaries as of March 31, 2013, and the consoli- dated results of their operations and their cash flows for the year then ended in accordance with International Financial Reporting Standards.
June 21, 2013
Japan Tobacco INC. Annual Report 2013 139 JT Group is a leading international tobacco company with our products sold in over 120 countries Our internationally recognized brands include Winston, Camel and Mild Seven-MEVIUS. We also have pharmaceutical, beverage and processed food business which allow us to diversify our sources of profi t to achieve future sustainable growth. FACT SHEETS 142 Financial Data 152 International Tobacco Business 154 Japanese Domestic Tobacco Business 165 Pharmaceutical Business 166 Beverage Business & Processed Food Business 167 Number of Employees / Subsidiaries and Affi liates Fact Sheets Financial Data
Billions of yen IFRS Net Sales Excluding 3,000 Excise Taxes/Revenue 2,000
1,000
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Total 2,008.7 2,051.0 2,587.3 2,827.1 2,514.1 2,432.6 2,547.1 2,059.4 2,033.8 2,120.2 International Tobacco Business 484.3 550.3 1,057.7 1,243.3 1,039.1 963.5 966.3 963.5 966.3 1,010.7 Japanese Domestic Tobacco Business 1,173.2 1,147.2 1,122.2 1,070.3 1,016.7 1,027.9 1,147.5 665.8 646.2 687.1 Pharmaceutical Business 49.2 45.4 49.0 56.7 44.0 47.0 50.6 44.1 47.4 53.2 Food Business 278.3 286.5 336.4 435.9 394.6 375.0 367.0 367.5 359.4 Beverage Business 188.8 185.5 Processed Food Business 170.7 168.7 Other Business 23.5 21.4 21.8 20.7 19.5 19.2 15.7 18.5 14.6 15.0 Adjusted Net Sales Excluding Excise Taxes*1/Core revenue*2 International Tobacco Business 1,080.8 906.7 887.8 894.6 887.8 894.6 943.1 Japanese Domestic Tobacco Business 648.8 615.9 617.9 596.8 632.2 611.9 654.0 *1 Excluding the imported tobacco, domestic duty free, the China Division and other peripheral businesses in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business *2 Excluding revenue from distribution business of imported tobacco in the Japanese domestic tobacco business, in addition to distribution, contract manu- facturing and other peripheral business in the International tobacco business.
Billions of yen SG&A Expenses 1,000 750
500
250
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 SG&A 596.6 592.6 750.2 914.1 815.5 788.3 786.2 Personnel*1 150.8 158.5 206.0 231.5 216.0 217.1 222.6 Advertising and General Publicity 23.9 23.4 22.9 25.6 21.9 20.9 20.4 Sales Promotion 142.1 128.0 163.6 162.3 143.7 140.8 141.2 R&D 37.5 41.2 45.1 47.2 49.6 53.3 53.6 Depreciation 53.4 57.4 80.3 113.0 72.5 60.9 56.5 *1 Personnel expense is the sum of compensation, salaries, allowances, provision for retirement benefits, statutory benefits, employee bonuses and accrual of employee bonuses
142 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Billions of yen IFRS SG&A Expenses 1,000
(IFRS) 750
500
250
0 (Years ended March 31) 2011 2012 2013 SG&A 727.1 733.2 733.4 Advertising expenses 21.4 21.5 20.6 Promotion expenses 131.5 128.0 137.5 Shipping, warehousing expenses 28.0 27.9 27.1 Commission 42.2 41.0 41.2 Employee benefits expenses 231.2 235.1 241.4 Research and development expenses 48.9 51.5 56.9 Depreciation and amortization 61.7 58.5 59.1 Impairment losses on other than financial assets 6.2 7.0 3.2 Regulatory fine in Canada 12.8 — — L osses on sale and disposal of property, plant and equipment, intangible assets, and investment property 10.0 11.5 9.3 Cooperation fee for terminating leaf tobacco farming — 12.5 0.0 Other 133.2 138.7 137.2 FACT SHEETS
Billions of yen IFRS R&D Expenses 60
40
20
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 R&D 37.5 41.2 45.1 47.2 49.6 53.3 53.6 48.9 51.5 56.9 International Tobacco Business 0.9 1.3 3.3 3.8 6.1 5.0 5.2 5.0 5.2 5.8 Japanese Domestic Tobacco Business 15.1 15.1 15.8 17.7 18.9 19.5 20.2 19.1 20.0 19.0 Pharmaceutical Business 19.9 23.4 24.4 23.8 23.1 27.2 26.7 23.4 24.9 30.7 Food Business 0.8 0.7 0.7 1.1 0.7 0.8 0.6 0.8 0.6 Beverage Business 0.0 0.0 Processed Food Business 0.6 0.6 Note: The aforementioned research and development expenses includes 0.7 billion yen (FY3/2013, IFRS) relating to basic research not affiliated to any seg- ment (plant biotechnology related research, etc.) and conducted by JT corporate division.
JAPAN TOBACCO INC. ANNUAL REPORT 2013 143 Billions of yen IFRS EBITDA/ 750 Adjusted EBITDA 500
250
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 EBITDA/Adjusted EBITDA 433.3 464.6 602.0 646.2 526.7 542.6 581.1 522.0 577.1 622.1 International Tobacco Business 94.0 112.6 270.7 337.9 277.6 293.0 312.6 277.9 314.8 343.3 Japanese Domestic Tobacco Business 305.7 326.4 306.7 272.2 257.6 257.7 272.5 247.2 262.3 281.3 Pharmaceutical Business (1.8) (8.1) (6.2) 4.8 (9.6) (13.3) (12.3) (9.8) (10.0) (12.7) Food Business 11.8 12.0 8.3 17.0 14.4 17.3 21.5 17.7 20.0 Beverage Business 14.6 12.4 Processed Food Business 5.4 7.4 Other Business 22.1 21.5 22.0 13.1 13.3 (12.1) (13.3) (11.0) (9.8) (9.6) Note: EBITDA = operating income + depreciation and amortization Adjusted EBITDA = operating profit + depreciation and amortization ± adjustment items (income and costs)* * Adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others From FY3/2011, “Other Business” means “Others/Elimination and corporate.”
Billions of yen IFRS Operating Income/ 600 Operating Profit 400
200
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Operating Income/Operating Profit 306.9 331.9 430.5 363.8 296.5 333.2 374.7 401.3 459.2 532.4 International Tobacco Business 71.0 81.0 205.3 174.7 136.9 164.1 185.3 225.9 252.4 289.5 Japanese Domestic Tobacco Business 220.0 245.3 222.3 188.2 198.7 212.9 229.6 202.3 209.3 241.3 Pharmaceutical Business (5.0) (11.2) (9.6) 1.0 (13.5) (17.4) (16.1) (13.3) (13.5) (16.2) Food Business 6.3 6.7 0.6 (11.4) (13.6) (9.4) (6.3) (3.6) 2.0 Beverage Business 4.5 2.4 Processed Food Business (2.5) (5.8) Other Business 8.6 9.3 10.4 9.6 10.5 (16.9) (17.9) (9.9) 9.0 21.2 Note: From FY3/2011, “Other business” means “Others/Elimination and corporate.”
144 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Billions of yen Non-Operating 50 Income and Expenses 25 0 –25 –50 –75 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 Non-Operating Income and Expenses (9.1) (19.9) (67.8) (56.2) (41.1) (20.2) (11.9) Non-Operating Income 12.6 16.0 21.5 30.3 15.6 12.0 16.2 Financial Income*1 5.9 12.1 13.4 12.2 6.9 3.0 4.3 Non-Operating Expenses 21.7 35.9 89.4 86.5 56.7 32.2 28.1 Financial Expense*2 5.7 6.9 42.0 51.3 26.3 17.3 14.3 *1 Financial income is the sum of interest income, interest on marketable securities, interest on investment securities, dividend income, profit on redemption of securities, etc. *2 Financial expense is the sum of interest expense, bond interest paid, loss of redemption of securities, etc.
Billions of yen Recurring Profit 400
300
200
100 FACT SHEETS
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 Recurring Profit 297.8 312.0 362.6 307.5 255.3 313.1 362.7
Billions of yen IFRS Financial Income 30 and Expenses (IFRS) 25 20 15 10 5 0 (Years ended March 31) 2011 2012 2013 Financial Income 9.9 5.6 5.5 Financial Expenses (25.9) (23.4) (28.3)
JAPAN TOBACCO INC. ANNUAL REPORT 2013 145 Billions of yen Extraordinary Profit 30 and Loss 0
–30
–60 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 Extraordinary Profit and Loss 3.1 25.1 9.9 (45.4) 20.6 (31.9) (17.7) Extraordinary Profit 65.4 50.8 68.9 48.3 58.5 20.6 41.1 Gain on Sale of Property, Plant and Equipment 60.0 47.5 66.7 46.4 32.3 12.2 30.3 Extraordinary Loss 62.3 25.7 59.0 93.8 37.8 52.5 58.8 Loss on Sale of Property, Plant and Equipment 24.8 3.1 3.2 2.1 4.2 0.9 1.0 Loss on Disposal of Property, Plant and Equipment 12.2 10.4 6.3 11.5 6.3 7.3 8.5 Business Restructuring Costs 8.0 — 6.4 24.3 9.9 4.3 8.7 Impairment Loss 11.4 2.7 3.8 16.3 6.0 5.3 4.2 Introduction Costs for Vending Machines with Adult Identification Functions 0.1 5.7 12.8 13.4 — — — Regulatory Fine in Canada — ————12.8— Write-down of Investment Securities — — 11.1 7.0 1.4 1.0 — Damages Related to the Great East Japan Earthquake — ————11.015.2
Billions of yen IFRS Net Income/Profit 400
(attributable to 300 owners of the parent 200 company) 100
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Net Income/Profit (attributable to owners of the parent company) 201.5 210.7 238.7 123.4 138.4 145.4 227.4 243.3 320.9 343.6
Yen IFRS Yen 181.07 Earnings per Share 120,000 168.50 200
(EPS)/Basic Earning 90,000 150 per Share 60,000 100
30,000 50
0 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 EPS/Basic Earning per Share 105,084 22,001 24,916 12,880 14,451 15,184 23,883 25,414 168.50 181.07 Diluted EPS 12,879 14,448 15,179 23,873 25,407 168.44 180.99 Notes: A 5 for 1 stock split went into effect on April 1, 2006. A 200 for 1 stock split went into effect on July 1, 2012. Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011). FY2012 and FY2013 refer to the right hand scale in the graph.
146 JAPAN TOBACCO INC. ANNUAL REPORT 2013 % IFRS Return on Equity 25.0 (ROE)/ROE 20.0 (attributable to 15.0 owners of the parent 10.0 company) 5.0 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 ROE/ROE (attributable to owners of the parent company) 12.4 11.3 11.8 6.8 8.6 9.3 15.0 15.3 20.3 20.0
% IFRS Return on Assets 15 (ROA) 10
5
0 FACT SHEETS (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 ROA 10.4 10.7 10.5 8.4 7.8 9.1 10.8 10.9 12.7 14.3 Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period]
% IFRS Operating Income 30 Margin/Operating Profit Margin 20 10
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Operating Income Margin/ Operating Profit Margin 6.6 7.0 6.7 5.3 4.8 13.7 14.7 19.5 22.6 25.1
JAPAN TOBACCO INC. ANNUAL REPORT 2013 147 Billions of yen IFRS Free Cash Flow (FCF) 500
250
0
750
–1,500 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 FCF 145.5 223.0 (1,493.7) 240.1 250.7 299.7 452.4 300.4 451.3 316.0 Note: FCF is the total of cash flows from operating activities and investing activities excluding the following items: Cash flows from interest / dividends received and its tax effect / interest paid and its tax effect in operating activities; and Cash flows from purchase of short-term investment securities, proceeds from sale and redemption of short-term investment securities, purchase of investment securities, proceeds from sale of investment securities, payments into time deposits, proceeds from withdrawal of time deposits and others in investing activities (those from purchase/sale of securities held for business operation are not included here).
Billions of yen IFRS Capital Expenditure 150 (CAPEX) 100
50
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Capital Expenditure 98.9 102.1 129.5 134.2 137.1 146.0 119.5 148.4 119.0 137.4 International Tobacco Business 24.9 32.0 48.4 59.7 64.5 60.9 39.1 60.9 39.1 37.5 Japanese Domestic Tobacco Business 75.0 55.2 57.2 46.5 42.6 56.0 57.2 55.4 56.2 71.2 Pharmaceutical Business 2.1 3.0 4.2 3.4 2.6 2.9 2.9 6.2 3.9 5.8 Food Business 4.5 4.8 6.0 23.2 23.4 25.0 15.5 25.0 15.4 Beverage Business 8.1 12.0 Processed Food Business 7.3 4.6 Other Business 19.3 8.0 14.7 1.1 0.3 1.2 4.7 0.9 4.3 6.3 Note: From FY3/2011, “Other Business” means “Others /Elimination and corporate.”
Billions of yen IFRS Depreciation & 300 Amortization 200
100
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Depreciation & Amortization 126.4 132.6 171.5 282.4 230.1 209.4 206.4 118.0 118.8 116.5 International Tobacco Business 23.0 31.5 65.3 163.1 140.7 129.0 127.3 51.6 55.2 51.1 Japanese Domestic Tobacco Business 85.6 81.0 84.3 84.0 52.4 44.8 42.9 42.8 39.6 41.1 Pharmaceutical Business 3.2 3.0 3.3 3.8 3.9 4.1 3.8 3.5 3.5 3.4 Food Business 5.5 5.3 7.6 28.4 28.1 26.7 27.8 16.5 17.5 Beverage Business 10.1 10.1 Processed Food Business 7.4 7.1 Other Business 13.4 12.2 11.6 3.4 2.7 4.8 4.6 3.5 3.1 3.6 Note: Depreciation & Amortization = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets + Amortization of Long-Term Prepaid Expenses + Amortization of Goodwill IFRS=depreciation of tangible fixed assets + amortization of intangible fixed assets From FY3/2011, “Other Business” means “Others /Elimination and corporate.”
148 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Billions of yen IFRS Total Assets 6,000
4,000
2,000
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Total Assets 3,037.3 3,364.6 5,087.2 3,879.8 3,872.5 3,544.1 3,472.6 3,655.2 3,667.0 3,852.6 Japanese Domestic Tobacco Business 1,131.7 1,180.3 847.1 788.6 782.2 International Tobacco Business 994.8 1,275.0 3,804.4 2,700.0 2,765.9 Pharmaceutical Business 117.9 106.1 111.4 111.5 114.0 Food Business 141.4 158.8 353.2 332.6 311.1 Other Business 194.4 249.6 90.0 87.4 85.0
Billions of yen IFRS % Total Equity and Equity 2,500 80 Ratio/Total Equity and 2,000 70 Equity Ratio 1,500 60 (attributable to owners 1,000 50 of the parent company) 500 40
0 30 FACT SHEETS (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Total Equity 1,762.5 2,024.6 2,154.6 1,624.2 1,723.2 1,571.8 1,610.5 1,601.3 1,714.6 1,892.0 Equity Ratio/Total Equity and Equity Ratio (attributable to owners of the parent company) 58.0 58.3 40.8 40.0 42.6 42.2 44.0 41.7 44.6 46.9 Note: Total Equity in FY3/2006 excludes Minority Interests.
IFRS Yen 993.75 Yen Book Value per Share 1,000,000 858.09 1,000 (BPS)/Book Value per 800,000 800 Share (attributable to 600,000 600 owners of the parent 400,000 400 company) 200,000 200 0 0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 BPS/Book Value per Share (attributable to owners of the parent company) 919,780 204,617 216,707 162,087 172,139 156,997 160,571 160,180 858.09 993.75 Notes: Total Equity in FY3/2006 excludes Minority Interests. A 5 for 1 stock split went into effect on April 1, 2006. A 200 for 1 stock split went into effect on July 1, 2012. Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011). FY2012 and FY2013 refer to the right hand scale.
JAPAN TOBACCO INC. ANNUAL REPORT 2013 149 Billions of yen IFRS Liquidity and 1,500 Interest-Bearing Debt 1,200 900 600 300 0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Liquidity*1 979.6 1,185.6 218.8 169.8 167.3 276.6 431.2 276.6 431.2 168.3 Interest-Bearing Debt*2*3 216.6 219.2 1,389.2 996.0 874.3 708.7 505.2 709.1 502.4 327.2 *1 Liquidity = Cash and deposits + Marketable securities + Securities purchased under repurchase agreements *2 Interest-bearing debt = short-term bank loans + CP + bonds + long-term borrowings + lease obligation *3 Interest-Bearing Debt includes lease obligation from FY3/2009.
Times IFRS Debt/Equity Ratio 0.8
0.6
0.4
0.2
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Debt / Equity Ratio 0.12 0.11 0.67 0.64 0.53 0.47 0.33 0.46 0.31 0.18
Times IFRS Interest Coverage 60 Ratio 40
20
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Interest Coverage Ratio 54.9 49.9 10.6 7.3 11.5 19.4 26.5 15.9 19.9 19.0 Note: Interest Coverage Ratio = (Operating Income + Financial Income) / Financial Expense
150 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Yen Yen Annual Dividends 16,000 68 80 per Share 12,000 50 60
8,000 40
4,000 20
0 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Annual Dividends per Share 16,000 4,000 4,800 5,400 5,800 6,800 10,000 68 (Retroactively Adjusted) — —————50 Notes: A 5 for 1 stock split went into effect on April 1, 2006. A 200 for 1 stock split went into effect on July 1, 2012. Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011). FY2012 and FY2013 refer to the right hand scale in the graph.
% IFRS Dividend Payout Ratio 50 on a Consolidated 40 Basis 30 20 10
0 FACT SHEETS (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Dividend Payout Ratio 15.2 18.2 19.3 41.9 40.1 44.8 41.9 26.8 29.7 37.6 Goodwill Amortization Adjusted*1 18.0 19.0 22.6 23.6 27.9 30.7 *1 Payout Ratio before goodwill amortization
JAPAN TOBACCO INC. ANNUAL REPORT 2013 151 International Tobacco Business
Billions of cigarettes Tobacco Shipment 500 Volume
(by Brand) 400
300
200
100
0 (Years ended December 31) 2005 2006 2007 2008 2009 2010 2011 2012 Total 220.3 240.1 385.6 452.3 434.9 428.4 425.7 436.5 GFB Total 133.8 149.1 203.2 245.5 243.4 249.8 256.5 268.8 Winston 76.4 93.9 111.0 126.4 121.2 125.0 130.7 139.4 Camel 35.2 35.4 38.6 42.3 41.6 42.2 40.5 40.7 Mild Seven/MEVIUS 17.5 17.5 16.8 18.8 18.2 19.3 18.9 18.9 Benson & Hedges 8.3 11.2 10.7 10.7 10.6 10.3 Silk Cut 3.9 5.2 4.8 4.4 4.0 3.5 LD 17.5 29.0 34.3 36.4 40.5 45.1 Sobranie 1.2 2.3 1.4 1.3 1.3 1.8 Glamour 5.9 10.3 11.1 10.7 10.0 9.1 Other Brands 86.5 91.0 182.4 206.8 191.5 178.6 169.3 167.7 Notes: Total shipment volume: includes fine cut, cigars, pipe and snus but excludes contract manufactured products and China Division (China, Hong Kong, and Macau) In FY2005, FY2006 and FY2007, cigars, pipe and snus were not included in total shipment volume. GFB in FY2005–2006: Winston, Camel, Mild Seven, Salem GFB after FY2006: Winston, Camel, Mild Seven/MEVIUS, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour
Billions of cigarettes Tobacco Shipment 500 Volume
(by Cluster) 400
300
200
100
0 (Years ended December 31) 2005 2006 2007 2008 2009 2010 2011 2012 Total 220.3 240.1 Asia 33.5 29.1 Europe 39.2 44.1 Americas 9.3 8.8 CIS & Others 138.3 158.0 Total 240.1 385.6 452.3 434.9 428.4 425.7 436.5 South & West Europe 40.1 55.2 64.0 64.5 63.2 60.8 62.7 North & Central Europe 5.7 39.3 50.8 47.5 49.0 49.1 49.9 CIS+ 108.6 195.1 219.7 214.6 203.6 197.8 197.4 Rest-of-the-World 85.7 95.9 117.7 108.4 112.7 118.0 126.5 Notes: Total shipment volume: includes fine cut, cigars, pipe and snus but excludes contract manufactured products and China Division (China, Hong Kong, and Macau) In FY2005, FY2006 and FY2007, cigars, pipe and snus were not included in total shipment volume.
152 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Tobacco Tax Structure (in Russia)
2012 2012 (RUB) 2011 Jan–Jun Change*1 Jul–Dec Change*2 Minimum Tax (ths. cg.) 360.00 460.00 28% 510.00 11% Ad valorem tax (to retail price) (%) 7.00% 7.50% 7% 7.50% 0% Specific tax (ths. cg.) 280.00 360.00 29% 390.00 8% VAT (%) 18.00% 18.00% 0% 18.00% 0% Note 1. A comparison of the tax system of 2011 and January to June 2012. Note 2. A comparison of the tax system of January to June 2012 and July to December 2012.
[To weighted average price per pack] (RUB) 2011 2012 Change Weighted average retail price 29.71 35.02 18% Ad valorem tax 2.08 2.63 26% Specific tax 5.60 7.50 34% VAT 4.53 5.34 18% Weighted average retail price before tax 17.50 19.55 12% Note: JTI estimates
Number of 40 International 30
Factories 20
10
0 FACT SHEETS (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 International Cigarette and OTP Manufacturing Factories 15 15 15 29 28 24 23 25 Other Tobacco-related Factories 12222555
International Tobacco Manufacturing-related Factory Location (As of March 31, 2013) Cigarette and OTP manufacturing factories Other tobacco-related factories
Russia（Saint Petersburg） Switzerland Russia（Leningradskaya Oblast） Germany Sweden Russia Moscow UK Northern Ireland （ ） （ ） Poland Russia（Yelets,Lipetskaya Oblast） Belguium Serbia Ukraine Kazakhstan Canada Andorra Turkey Romania USA Spain（Canaries） Tunisia Jordan Egypt (Cairo) Egypt (Shebin El-Kom) Republic of Sudan（Khartoum） South Sudan（Juba）
Malaysia Tanzania
Malawi
South Africa Brazil
JAPAN TOBACCO INC. ANNUAL REPORT 2013 153 Japanese Domestic Tobacco Business
Billions of cigarettes Total Domestic 300 Market 200
100
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Total Domestic Market 285.2 270.0 258.5 245.8 233.8 210.2 197.5 195.1 Source: Tobacco Institute of Japan
Billions of cigarettes % JT Sales Volume and 200 80
JT Share 150 70
100 60
50 50
0 40 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 JT Sales Volume 189.4 174.9 167.7 159.9 151.8 134.6 108.4 116.2 JT Share 66.4 64.8 64.9 65.1 64.9 64.1 54.9 59.6
Billions of cigarettes Sales Volume of 4 China Division and 3
Domestic Duty-Free 2
1
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Sales Volume 3.2 3.4 3.5 3.6 3.6 3.6 3.7 3.1 Note: China Division covers China, Hong Kong, and Macau markets.
154 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Market Share % 80 by JT Brand Family
60
40
20
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Mild Seven/MEVIUS 32.2 31.6 32.0 32.3 32.1 31.8 29.5 31.2 Seven Stars*1 8.7 9.0 8.9 9.4 9.9 9.4 7.4 7.7 Pianissimo*2 2.8 3.1 3.2 3.3 3.4 3.6 2.6 3.2 Caster 6.3 6.0 5.9 5.9 5.7 5.4 4.2 4.6 Cabin 4.0 4.0 4.0 3.8 3.9 3.5 2.7 2.9 Peace 2.9 2.8 2.8 2.8 2.7 2.5 1.8 2.0 Hope 2.1 2.0 2.0 2.0 2.0 1.9 1.4 1.5 Frontier*3 1.7 1.5 1.4 1.2 1.1 1.0 0.4 0.2 Other Brands 5.7 4.8 4.7 4.5 4.4 5.2 5.1 6.3 *1 Retrospective of figures for “Alaska,” which was integrated into the Seven Stars family in October 2011. *2 Retrospective of figures for “icene” and “Lucia,” which were integrated into the Pianissimo family in January 2010. *3 “Frontier” was integrated into the Caster family in August 2012. FACT SHEETS
Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2013)
Product Brand Owner Share (%) 1 Seven Stars JT 4.3 2 Mevius Super Lights JT 3.6 3 Mevius One 100's Box JT 3.4 4 Mevius Lights JT 2.9 5 Mevius JT 2.6 6 Mevius Extra Lights JT 2.5 7 Marlboro Lights Menthol Box PMJ 2.3 8 Echo JT 2.0 9 Seven Stars Box JT 1.9 10 Wakaba JT 1.9 11 Caster Mild JT 1.7 12 Mevius Super Lights 100’s Box JT 1.6 13 Caster One 100's Box JT 1.5 14 Marlboro Ks Box PMJ 1.5 15 Kent 1 100's Box BATJ 1.5 16 Mevius One JT 1.4 17 Mevius Extra Lights Box JT 1.4 18 Cabin Mild Box JT 1.4 19 Mevius Extra Lights 100’s Box JT 1.4 20 Marlboro Ice Blast Ks Box PMJ 1.2 Source: Tobacco Institute of Japan
JAPAN TOBACCO INC. ANNUAL REPORT 2013 155 % Market Share by 100 Tar Level 80 (Market Share in 60 40 Top 100 Sales Products) 20 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 1 mg 19.9 21.2 22.7 24.0 24.3 23.6 24.7 24.5 2–3 mg 7.4 7.0 8.2 8.5 8.6 8.7 8.2 8.2 4–6 mg 23.2 23.4 23.0 22.4 21.0 20.8 18.9 19.8 7–13 mg 37.7 36.3 34.1 32.9 33.6 33.8 35.2 33.1 14 mg or Higher 11.9 12.1 12.1 12.2 12.5 13.2 13.0 14.3 Source: Tobacco Institute of Japan
% Market Share by 80
Tar Level 60
(JT Products) 40
20
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 1 mg 11.7 12.9 14.0 14.7 15.1 15.4 13.2 14.3 2–3 mg 6.6 6.7 6.7 6.9 7.0 7.1 5.6 6.3 4–6 mg 14.5 13.9 14.2 14.2 13.6 12.8 10.8 12.3 7–13 mg 22.0 19.7 18.5 17.8 17.7 16.8 13.6 14.0 14 mg or Higher 11.6 11.6 11.5 11.5 11.5 12.0 11.7 12.6
% Menthol Products 25 Market Share 20 15 10 5 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Menthol Products*1 17.2 17.4 19.3 19.8 19.8 21.0 22.0 21.6 Menthol JT Products 7.0 6.8 7.4 7.6 8.0 8.3 5.8 7.6 *1 Market Share in top 100 sales products Source: Tobacco Institute of Japan
156 JAPAN TOBACCO INC. ANNUAL REPORT 2013 % Products Priced at 15 ¥440 or more per pack 12 and D-spec Products 9 Market Share 6 3 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 JT Products Priced at ¥440 or more per pack*1 6.3 5.5 5.4 5.2 5.1 9.3 13.4 14.6 D-spec Products*2 1.72 4.04 4.59 4.96 5.21 10.7 8.5 9.7 *1 ~ Jun. 2006: ¥300 or more, Jul. 2006 ~ Sep. 2010: ¥320 or more *2 D-spec products, reduced odor segment products (known as “Less Smoke Smell” products abroad), incorporate the company’s odor reducing technology in response to customer demands for a reduction in the unpleasant smell of smoke.
Yen JT Net Sales per 5,600 Thousand Cigarettes/ Revenue per 5,000 Thousand Cigarettes 4,400
3,800 FACT SHEETS (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 JT Net Sales Per Thousand Cigarettes/Revenue per Thousand Cigarettes 3,864 3,990 4,057 4,057 4,056 4,582 5,502 5,502 Note: JT Net sales per thousand cigarettes/Revenue per thousand cigarettes = (retail price sales – retailer margins – consumption tax – national tobacco excise tax – local tobacco excise tax – national tobacco special excise tax) / sales volume X 1,000
% Composition of 100 JT Products by 80 Price Range 60 40
20 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Products Priced at ¥440 or more per pack*1 9.5 8.5 8.3 8.0 7.9 14.7 24.3 24.6 Products Priced at ¥410 per pack*2 30.7 63.2 78.7 79.2 79.5 74.6 69.1 68.1 Products Priced at ¥400 or less per pack*3 59.8 28.3 13.1 12.8 12.6 10.7 6.6 7.3 *1 ~ Jun. 2006: ¥300 or more, Jul. 2006 ~ Sep. 2010: ¥320 or more *2 ~ Jun. 2006: ¥280, Jul 2006 ~ Sep. 2010: ¥300 *3 ~ Jun. 2006: ¥270 or less, Jul. 2006 ~ Sep. 2010: ¥290 or less
JAPAN TOBACCO INC. ANNUAL REPORT 2013 157 New Product Launches and Sales Area Expansion
Year ended March 31, 2013 (13 products) (D-spec: one product, Menthol: eight products, Tar 1mg: three products, Products at ¥440 or more per pack: four products) Tar Nicotine Date Product D-spec Menthol (mg) (mg) Price Sales Region May-12 Hi-Lite Inazma Menthol 8 Box 8 0.7 410 Nationwide May-12 Hi-Lite Inazma Menthol One Box 1 0.1 410 Nationwide Jul-12 Pianissimo Precia Dia’s Menthol 6 0.4 440 Nationwide Sep-12 Seven Stars Menthol Snap Box 7 0.7 440 Limited areas Oct-12 Zerostyle Drive Concept 300 Nationwide Oct-12 Zerostyle Off Concept 300 Nationwide Oct-12 Zerostyle Night Concept 300 Nationwide Jan-13 Camel Black Box 10 0.8 440 Nationwide excl. Okinawa Jan-13 Camel White Box 6 0.5 440 Nationwide excl. Okinawa Feb-13 Mevius Premium Menthol One 100’s 1 0.1 410 Nationwide Feb-13 Mevius Premium Menthol One 1 0.1 410 Nationwide Feb-13 Mevius Premium Menthol 5 5 0.4 410 Nationwide Mar-13 Mevius Premium Menthol 8 8 0.7 410 Nationwide
Number of 15 New Products 10 Launches 5
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Number of New Products Launches 14 93678713
Number of 120 JT Cigarette Products 90
60
30
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Number of JT Cigarette Products 117 106 94 96 98 96 79 83
158 JAPAN TOBACCO INC. ANNUAL REPORT 2013 % Smoking Rate (by gender) 50 40
30
20
10 (At the time of survey) 2005 2006 2007 2008 2009 2010 2011 2012 All Adults 29.2 26.3 26.0 25.7 24.9 23.9 21.7 21.1 Male 45.8 41.3 40.2 39.5 38.9 36.6 33.7 32.7 Female 13.8 12.4 12.7 12.9 11.9 12.1 10.6 10.4 Note: The survey method, along with the sample number, was modified from 2006, resulting in a lack of comparability with results prior to 2006. Source: JT “Japan Smoking Rate Survey”
%
Smoking Rate (by age) 50 FACT SHEETS 40 30 20 10 0 (Survey in 2012) Total 20s 30s 40s 50s over-60s Male 32.7 31.5 40.4 39.0 39.0 23.5 Female 10.4 11.4 15.4 15.9 12.2 5.5 Source: JT “Japan Smoking Rate Survey”
JAPAN TOBACCO INC. ANNUAL REPORT 2013 159 Taxation
All tobacco products sold in Japan are subject to the national Consumption Tax Law, a 5% consumption tax is imposed as with tobacco excise tax, the national tobacco special excise tax, and other goods and services. All tobacco excise taxes and consump- local tobacco excise tax. The national tobacco excise tax is set at tion tax are imposed not only for tobacco products manufactured in ¥5,302 per thousand cigarettes, the national tobacco special excise Japan but also for imported tobacco products. From April 1987, no tax at ¥820 per thousand cigarettes, and the local tobacco excise customs duties apply to imported tobacco products. tax is set at ¥6,122 per thousand cigarettes. In addition, under the
Changes of Tobacco Excise Taxes
Tobacco Consumption Tax Tobacco Excise Tax Apr-1985 May-1986 Apr-1989 Apr-1997 Dec-1998 May-1999 Jul-2003 Jul-2006 Oct-2010 Specific Ad Specific Specific Specific Specific Specific Specific Specific Specific Ad valorem (¥/1,000 valorem* (¥/1,000 (¥/1,000 (¥/1,000 (¥/1,000 (¥/1,000 (¥/1,000 (¥/1,000 (¥/1,000 Item (%) units) (%) units) units) units) units) units) units) units) units) National Tobacco Excise Tax 23.0 582 23.0 1,032 3,126 3,126 3,126 2,716 3,126 3,552 5,302 National Tobacco Special Excise Tax — — — — — — 820 820 820 820 820 Local Tobacco Excise Tax 22.4 550 22.4 1,000 3,126 3,126 3,126 3,536 3,946 4,372 6,122 Total Excise Tax 45.4 1,132 45.4 2,032 6,252 6,252 7,072 7,072 7,892 8,744 12,244 Consumption Tax — — — — 3.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Tobacco Regulation • Tobacco Consumption * ¥1,000 was deducted from • Consump- • Consump- • National • Review of • Tobacco • Tobacco • Tobacco Changes Tax was introduced tax base for Ad valorem tion Tax was tion Tax was Tobacco budget Excise Tax Excise Tax Excise Tax • Tobacco Consumption Tax introduced increased Special allocations was was was was increased • Tobacco Excise Tax in line with a increased increased increased Consump- was revision of tion Tax was introduced laws renamed Tobacco Excise Tax (Reference) Retail Price of Mild Seven/MEVIUS per pack ¥200 ¥220 ¥220 ¥230 ¥250 ¥250 ¥270 ¥300 ¥410 Tax Incidence of Mild Seven/MEVIUS per pack (incl. Consumption Tax) 56.7% 59.7% 59.7% 59.1% 61.3% 61.3% 63.2% 63.1% 64.5%
Breakdown of Price Levels per Cigarettes Package
List price ¥400 per pack List price ¥410 per pack List price ¥440 per pack Consumption Tax ¥ 19.0 4.76% ¥ 19.5 4.76% ¥ 21.0 4.76% Retailer’s Margin ¥ 40.0 10.00% ¥ 41.0 10.00% ¥ 44.0 10.00% Total Tobacco Excise Tax ¥244.9 61.22% ¥244.9 59.73% ¥244.9 55.65% National Tobacco Excise Tax ¥106.0 26.51% ¥106.0 25.86% ¥106.0 24.10% Retail price sales Local Tobacco Net sales Excise Tax ¥122.4 30.61% ¥122.4 29.86% ¥122.4 27.83% including excise taxes National Tobacco Special Excise Net sales Tax ¥ 16.4 4.10% ¥ 16.4 4.00% ¥ 16.4 3.73% excluding JT’s Proceeds ¥ 96.1 24.02% ¥104.6 25.51% ¥130.2 29.58% excise taxes
160 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Tobacco Manufacturing System
Leaf processing factory International leaf tobacco Domestic Packing leaf tobacco Threshing Drying into a case Storing
Decompose leaves into Dry leaves to adjust Pack dried-leaves Ripen leaves for a mesophyll and vein. moisture content in an appropriate certain period. appropriate for storing portion for storing and ripening. and transporting. Cigarette manufacturing factory
Consumer Retailer Packing Making Flavoring Cutting Blending
Pack cigarettes into Roll cigarettes. Add aromatic Cut leaves into Blend several leaves. parcels or cartons essences called smaller pieces. and cardboard boxes. top dressing.
Number of 12 Domestic Cigarette Manufacturing 8 Factories 4
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Domestic Cigarette Manufacturing Factories 10 10 10 10 9 7 6 6 FACT SHEETS
Tobacco Manufacturing-related Factory Location (As of March 31, 2013)
Cigarette manufacturing factories: 6 Other tobacco-related factories: 3
Koriyama factory
Kita-Kanto factory Tomobe factory
Hiratsuka factory
Tokai factory Okayama printing factory
Hamamatsu factory Kansai factory Kyushu factory
JAPAN TOBACCO INC. ANNUAL REPORT 2013 161 Tobacco Sales System Consumers
sales
direct sales JT Retailers Wholesalers
registration for approval licensing requirement for selling the wholesale by way of wholesalers or direct sales requirement for the approval of retail price approval The Minister of Registered Finance Importers approval requirement for the approval of retail price registration notification imports
registration requirement for registered importers Foreign Tobacco
Thousands of stores Number of 320
Tobacco Retailers 240
160
80
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Tobacco Retailers 304 302 298 293 289 279 274 271 Source: Ministry of Finance
Thousands Number of Tobacco 800 Vending Machines 600
400
200
0 (As of December 31) 2005 2006 2007 2008 2009 2010 2011 2012 Total Tobacco Vending Machines 616 565 520 424 405 367 328 304 Source: Japan Vending Machine Manufacturers Association
162 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Thousands Number of Tobacco 300 Vending Machines 200 (JT Tobacco Vending Machines)
100
0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 JT Tobacco Vending Machines 243 228 207 196 185 150 103 86
Thousands of growers Thousands of ha Number of 20 20 Domestic Tobacco 15 15
Growers and Area 10 10 under Domestic Leaf 5 5 Tobacco Cultivation
0 0 FACT SHEETS (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Number of Domestic Tobacco Growers 15 14 14 13 12 11 9 6 Area under Domestic Leaf Tobacco Cultivation 19 19 18 17 16 15 13 9
Thousands of tons Volume of Domestic 80 and International 60
Leaf Tobacco 40 Purchase 20
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Domestic 47 38 38 38 37 29 24 20 International 39 61 69 74 72 58 53 57
JAPAN TOBACCO INC. ANNUAL REPORT 2013 163 Billions of yen Yen Value of Domestic 100 2,000 Leaf Tobacco 75 1,500
Purchase and 50 1,000 Price per 1 kg 25 500
0 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Amount 84.3 68.6 69.3 69.4 68.1 54.2 44.0 38.5 Price per 1 kg 1,801 1,818 1,833 1,803 1,859 1,849 1,865 1,957
Billions of yen Leaf Tobacco 10 Reappraisal 5
Profit/Loss 0
–5
–10 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Leaf Tobacco Reappraisal (9.5) 9.5 4.1 4.1 4.1 — — — Note: ( ) indicates reappraisal loss. Reappraisal of leaf tobacco was terminated in FY3/2007. Reversal of reappraisal loss was allocated evenly over three years.
164 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Pharmaceutical Business
Billions of yen R&D Expense on 30 a Non-consolidated Basis 20 10
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 R&D Expense on a Non-consolidated Basis 19.3 21.9 22.9 23.2 21.9 21.7 22.3 24.5
Clinical Development (As of April 25, 2013)
(In-house development) Code Potential Indication/ (Generic Name) Dosage Form Mechanism Phase Origin JTK-303 HIV infection/oral HIV Integrase Integrase inhibitor which works by blocking Preparing In-house (elvitegravir) inhibitor integrase, an enzyme that is involved in the to file replication of HIV (Japan) JTT-705 Dyslipidemia/oral CETP Decreases LDL (bad cholesterol) and increases Phase 2 In-house (dalcetrapib) modulator HDL (good cholesterol) by modulation of CETP (Japan) activity JTT-302 Dyslipidemia/oral CETP Decreases LDL and increases HDL by inhibition of Phase 2 In-house inhibitor CETP (Overseas) JTT-751 Hyperphosphatemia/ Phosphate Decreases serum phosphorous level by NDA filed In-license (ferric oral binder binding phosphate derived from dietary in the (Japan) (Keryx
citrate) gastrointestinal tract Biopharmaceuticals) FACT SHEETS Co-development with Torii JTT-851 Type 2 diabetes G protein- Decreases blood glucose by stimulation of Phase 2 In-house mellitus/oral coupled glucose-dependent insulin secretion (Japan) receptor Phase 2 40 agonist (Overseas) JTZ-951 Anemia associated HIF-PHD Increases red blood cells by stimulating Phase 1 In-house with chronic inhibitor production of erythropoietin, an erythropoiesis- (Japan) kidney disease/oral stimulating hormone, via inhibition of HIF-PHD Phase 1 (Overseas) JTE-051 Autoimmune/ Interleukin-2 Suppresses overactive immune response via Phase 1 In-house allergic inducible T inhibition of the signal to activate T cells related (Overseas) diseases/oral cell kinase to immune response inhibitor JTE-052 Autoimmune/ JAK inhibitor Suppresses overactive immune response via Phase 1 In-house allergic inhabitation of Janus kinase (JAK) related to (Japan) diseases/oral immune signal *Based on the first dose
(Licensed compounds) Compound (JT’s code) Licensee Mechanism Note elvitegravir Gilead HIV Integrase Integrase inhibitor which works by Elvitegravir: U.S. and EU marketing approvals (JTK-303) Sciences inhibitor blocking integrase, an enzyme that is submitted involved in the replication of HIV Stribild: EU marketing approval submitted New Single Tablet Regimen: Phase 3 trametinib GlaxoSmithKline MEK Inhibits cellular growth by specifically Metastatic melanoma: inhibitor inhibiting the activity of MAPK/ERK U.S. and EU marketing approval submitted Kinase (MEK1/2) Metastatic melanoma, trametinib+dabrafenib: EU marketing approval submitted dalcetrapib Roche CETP Decreases LDL (bad cholesterol) and Roche announced the termination of the (JTT-705) modulator increases HDL (good cholesterol) by development of dalcetrapib on May 7, 2012 modulation of CETP activity Anti-ICOS Medlmmune ICOS Suppresses overactive immune response monoclonal antagonist via inhibitation of ICOS which regulates antibody activation of T cells
JAPAN TOBACCO INC. ANNUAL REPORT 2013 165 Beverage Business & Processed Food Business
Billions of yen IFRS Net Sales/Revenue 500 400 300 200 100 0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013 Food Business Net Sales/Revenue 278.3 286.5 336.4 435.9 394.6 375.0 367.0 367.5 359.4 Beverage Business 185.3 190.7 194.9 187.3 186.1 192.4 196.3 185.8 188.8 185.5 Processed Food Business 93.0 95.7 141.4 248.6 208.5 182.6 170.6 181.7 170.7 168.7
Machines Number of Marking/ 200,000 Combined Vending 150,000
Machines 100,000
50,000
0 (Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Vending Machines 237,000 250,500 257,000 254,000 257,000 265,000 265,000 262,000 JT-Owned 40,500 38,000 35,500 32,000 33,000 33,000 35,000 39,000 Combined 61,500 66,000 71,500 76,500 82,000 83,000 84,000 83,000 Note: Number of vending machines includes machines operated by JT’s affiliates and cup vending machines. Combined vending machines focus on JT brand beverages but also sell non-JT brand beverages.
166 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Number of Employees / Subsidiaries and Affiliates
Employees Number of 50,000 Employees 40,000 30,000 20,000 10,000 0 (As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Total 31,476 33,428 47,459 47,977 49,665 48,472 48,529 49,507 Tobacco Business International 11,943 12,401 22,324 23,227 24,751 23,902 24,237 24,397 Japanese Domestic 11,795 11,534 11,548 11,281 11,282 11,191 11,092 11,043 Pharmaceutical Business 1,532 1,554 1,569 1,616 1,634 1,664 1,693 1,744 Food Business 5,232 7,084 11,169 10,975 11,143 10,864 10,646 Beverage Business 4,912 Processed Food Business 6,563 Other Business 604 461 441 429 352 — — — Corporate 370 394 408 449 503 851 861 848 Note: Number of employees is counted at working basis, unless otherwise indicated.
(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013 Number of Employees (parent company) 8,855 8,930 8,999 8,908 8,961 8,928 8,936 8,925 Number of Employees Based on Enrollment (parent company) 9,931 9,984 10,010 9,973 9,883 9,842 9,824 9,687 Note: The number of employees in the international tobacco business is calculated based on the number of employees as of December 31 of each year. FACT SHEETS
Status of Subsidiaries and Affiliates Capital Holding rate of Name Location (Millions of yen) Principal business voting rights (%) TS Network Co., Ltd. Taito-ku, Tokyo 460 Japanese domestic tobacco 74.5 JT Logistics Co., Ltd. Shibuya-ku,Tokyo 207 Japanese domestic tobacco 100 Japan Filter Technology Co.,Ltd. Shibuya-ku,Tokyo 461 Japanese domestic tobacco 87.6 Fuji Flavor Co., Ltd. Hamura-shi,Tokyo 196 Japanese domestic tobacco 100 JT Engineering Inc. Sumida-ku,Tokyo 200 Japanese domestic tobacco 100 JT International Group Holding B.V. Netherlands thousands USD 1,800,372 International tobacco 100 JT International Holding B.V. Netherlands thousands USD 1,800,372 International tobacco 100 (100) JT International S.A. Switzerland thousands CHF 1,215,425 International tobacco 100 (100) Gallaher Ltd. U.K. thousands GBP 172,495 International tobacco 100 (100) JTI Marketing and Sales CJSC Russia thousands RUB 108,700 International tobacco 100 (100) LLC Petro Russia thousands RUB 328,439 International tobacco 100 (100) Liggett-Ducat CJSC Russia thousands RUB 260,366 International tobacco 100 (100) JT International Germany GmbH Germany thousands EUR 37,394 International tobacco 100 (100) JTI Tütün Urunleri Sanayi A.S. Turkey thousands TRY 148,825 International tobacco 100 (100) JTI-Macdonald Corp. Canada thousands CAD 535,021 International tobacco 100 (100) Torii Pharmaceutical Co., Ltd. Chuo-ku,Tokyo 5,190 Pharmaceutical 54.5 Akros Pharma Inc. U.S.A. thousands USD 1 Pharmaceutical 100 (100) JT Beverage Inc. Shinagawa-ku,Tokyo 90 Beverage 100 Japan Beverage Holdings Inc. Shinjuku-ku,Tokyo 500 Beverage 67.6 TableMark Co., Ltd. Chuo-ku,Tokyo 47,503 Processed food 100 Notes: In addition to the above, JT has 210 consolidated subsidiaries and 12 companies accounted for by the equity method. The figures in parentheses in the “Holding rate of voting rights" column are indirect holding rates included in the figures outside the parentheses.
JAPAN TOBACCO INC. ANNUAL REPORT 2013 167 Strong emphasis on shareholder return improvement We are targeting competitive shareholder return comparable to global FMCG players. In order to drive shareholder return improvement, we have set targets for dividend payout ratio and adjusted EPS growth rate. 170 Shareholder Information SHAREHOLDER INFORMATION Shareholder Information (As of March 31, 2013)
Common Stock Note: A 200 for 1 stock split was completed on July 1, 2012
Authorized: 8,000,000,000 Issued: 2,000,000,000 Number of shareholders: 189,301
Administration of the Registry of Shareholders The Mitsubishi UFJ Trust and Banking Corporation 4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo
Stock Exchange Listings First Sections of Tokyo Stock Exchange First Sections of Osaka Securities Exchange
Principal Shareholders
Name Shares held The Minister of Finance 666,933,800 State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 52,667,589 Japan Trustee Services Bank, Ltd. (Trust Account) 52,047,200 The Master Trust Bank of Japan, Ltd. (Trust Account) 45,316,400 Trust & Custody Services Bank, Ltd. as trustee for Mizuho Bank, Ltd. Retirement Benefit Trust Account re-entrusted by Mizuho Trust and Banking Co., Ltd. 33,800,000 State Street Bank and Trust Company (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 31,006,706 Goldman Sachs and Company Regular Account (Standing Agent: Goldman Sachs Japan Co., Ltd.) 25,167,031 JPMorgan Chase Bank 380055 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 19,666,814 State Street Bank and Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 19,539,365 HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 19,247,400
Composition of Shareholders (Year ended March 31) (%)
Individuals and others Foreign institutions and others 7.4 7.2 7.8 7.5 Other institutions 15.9 Securities companies Financial institutions 26.1 26.5 26.6 27.4 Japanese government 0.8 0.7 0.7 0.5 33.5 0.5 0.6 0.6 1.1 15.2 15.0 14.4 13.5 1.1 1.2 15.0
50.0 50.0 50.0 50.0 33.3
2009 2010 2011 2012 2013
170 Japan Tobacco INC. Annual Report 2013 Offering JT Shares by Government 1st Offering
Method Offering by Bids Offering by non-Bids Offer Price Bid Price: From ¥1,362,000 to ¥2,110,000 ¥1,438,000 (Pricing Date) Weighted Average Price: ¥1,438,000 (August 31, 1994) (August 29, 1994) Number of 229,920 shares 164,356 shares Offering shares Offering Term From August 15 to 18, 1994 From September 2 to 8, 1994 Note: The Listing date October 27, 1994: First Sections of Tokyo Stock Exchange, Osaka Securities Exchange, and Nagoya Stock Exchange. November 7, 1994: Other Stock Exchanges.
2nd and 3rd, 4th Offering
2nd Offering 3rd Offering 4th Offering Method Offering by Book-Building formula Offering by Book-Building formula Offering by Book-Building formula Offer Price Bid Price: ¥815,000 ¥843,000 ¥2,949 (March 11, 2013) (Pricing Date) (June 17, 1996) (June 7, 2004) Number of Japan: 237,390 shares, Japan:198,334 shares, Japan:145,625,500 shares, Offering shares International: 35,000 shares International: 91,000 shares International: 107,636,300 shares (Total: 272,390 shares) (Total: 289,334 shares) (Total: 253,261,800 shares) Offering Term From June 18 to 19, 1996 From June 8 to 10, 2004 From March 12 to 13, 2013
Stock Price Range and Trading Volume (Yen) (Points)
All Time High Dec. 21, 2007: ¥3,540 3,500 (Pre-split: ¥708,000) 3,500
3,000 3,000
2,500 2,500 SHAREHOLDER INFORMATION
2,000 2,000
1,500 1,500
1,000 1,000 Reference TOPIX (right)
500 500 All Time Low Apr. 7, 2003: ¥644 (Pre-split: ¥128,800)
‘94/10 ‘95/3 ‘96/3 ‘97/3 ‘98/3 ‘99/3 ‘00/3 ‘01/3 ‘02/3 ‘03/3 ‘04/3 ‘05/3 ‘06/3 ‘07/3 ‘08/3 ‘09/3 ‘10/3 ‘11/3 ‘12/3 ‘13/3
Note: Due to a 5 for 1 stock split on April 1, 2006, and a 200 for 1 stock split on July 1, 2012, stock prices reflect post-split levels.
Japan Tobacco INC. Annual Report 2013 171 JT’s history dates back to 1898 when the Japanese government formed a monopoly bureau to operate the exclusive sales of domestic tobacco leaf Since then, the company has undergone four government share offerings, diversified into pharmaceutical, beverage and processed food business, and executed two large acquisitions, extending our global platform and our position as a leading international tobacco company. 174 History of the JT Group OTHER INFORMATION 178 Regulation and Other Relevant Laws 182 Litigation 184 Members of the Board, Auditors, and Executive Officers 185 Corporate Data History of the JT Group Before 1985
JT’s history in Japan dates back to 1898, when the Government formed a monopoly bureau to operate the exclusive sale of domestic tobacco leaf.
The JT Group’s overseas history began with the Foreign countries stepped up pressure on Japan to take founding of Austria Tabak in 1784. Roughly 70 years further measures to open the market that were difficult later, Tom Gallaher started out in business in Northern to implement within the framework of the monopoly Ireland, laying the foundations for the Gallaher Group. tobacco sales system. Amid such pressure as well as Meanwhile, R.J. Reynolds Tobacco Co. (RJR), which moves toward the reform of Government-run public would subsequently create the Camel and Winston corporations, a Government panel was established brands, was established in 1874 in the U.S. In this in March 1981 to conduct research into the public manner, the current JT Group can trace its origins to corporation system. In its third report (July 30, 1982), many different countries and regions such as Austria, the panel proposed drastic reform of the monopoly Northern Ireland, the U.S. and Japan. The JT Group and public corporation systems. In response to this has a long history and extensive experience in the proposal, the Government conducted a comprehensive tobacco business. review of these systems and drafted bills to:
History in Japan from the early 20th century • Abolish the tobacco monopoly law to liberalize to 1984, when the Japan Tobacco Inc. tobacco imports and establish a tobacco business Act was enacted. law to make necessary adjustments related to the Our history in Japan dates back to 1898, when the tobacco business. Government formed a monopoly bureau to undertake • Abolish the JTS law, reorganize JTS as a joint stock the exclusive sale of domestic leaf tobacco. In the early corporation so as to enable it to pursue rational 1900s, the Government extended this monopoly to corporate management as much as possible and all tobacco products in Japan and to the domestic salt establish the Japan Tobacco Inc. Act, which provides business. On June 1, 1949, the bureau was established for a necessary minimum level of regulation in light and duly named the Japan Tobacco and Salt Public of the corporation’s need to compete with foreign Corporation, or JTS. This corporation helped to ensure tobacco companies on an equal footing in the the stable supply of tobacco and secure fiscal revenues domestic market following the liberalization of for the Government. tobacco imports.
The growth in demand for cigarettes in Japan began These bills were enacted on August 3, 1984 in the to slow in the mid-1970s as a result of demographic 101st session of the Diet and promulgated on August trends and growing concern about health risks 10 of the same year. In April 1985, JT was founded associated with smoking. This trend continued, as an entity that took over the whole of the business such that growth in industry sales essentially stopped. operations and assets of JTS. In addition to the structural change, the domestic tobacco market opened up substantially to foreign suppliers, triggering competition between domestic and foreign tobacco products in Japan.
174 Japan Tobacco INC. Annual Report 2013 1913 1969 Camel is launched. Seven Stars is launched, featuring Japan’s first domestically produced 1931 charcoal filter. JT is a joint stock corporation that was Cellophane is introduced incorporated in April 1985 under the by RJR in order to preserve the freshness of tobacco. 1977 Mild Seven is Commercial Code of Japan, pursuant to launched (Japan). the Japan Tobacco Inc. Act, or the JT Act. 1949 The Monopoly Bureau becomes the Japan 1981 Tobacco and Salt Public Mild Seven is launched Corporation. internationally. 1784 Austria Tabak is founded by Emperor Joseph II. 1954 1984 Winston is launched. Japan Tobacco Inc. Act is enacted. 1857 Tom Gallaher sets up his 1955 business in Londonderry, Benson & Hedges is Northern Ireland. acquired by Gallaher. 1874 1956 RJR is founded by Richard Salem is launched. Joshua Reynolds in Winston, North Carolina. 1957 HOPE (10) is launched as 1879 Japan’s first domestically Sobranie is registered in produced filter cigarettes. London, to become one of the oldest cigarette brands in the world. 1964 1891 Silk Cut is launched. The Moscow-based Ducat factory is founded. 1968 Gallahar is acquired by the American 1898 Tobacco Company. The Japanese Monopoly Bureau is established for the sale of domestic leaf tobacco. OTHER INFORMATION
Japan Tobacco INC. Annual Report 2013 175 History of the JT Group continued In and after 1985
1994 1998 2004 October April June Government releases first JT signs an agreement Government releases third tranche of outstanding with Unimat Corporation tranche of outstanding JT shares for initial (currently, Japan Beverage JT shares (289,334 shares public offering (394,276 Holdings Inc.) on a tie-up offered at ¥843,000 shares offered at regarding beverage apiece), reducing its stake ¥1,438,000 apiece). business. JT later acquires in JT to the minimum level a majority stake in Unimat. allowed under law. JT stock is listed on the first sections of stock December November-March 2005 exchanges in Tokyo, JT acquires a majority stake JT repurchases 38,184 of 1985 Osaka and Nagoya. in Torii Pharmaceutical Co., its own shares to increase April Ltd. through a tender offer. its management options. Japan Tobacco Inc. November is established. (Japanese JT stock is listed on the tobacco market opened stock exchanges in Kyoto, to foreign tobacco Hiroshima, Fukuoka, manufacturers). Niigata and Sapporo. 1999 2005 The Business Development Acquisition of May April Division is established to Yelets (Russia).* JT acquires the non-U.S. JT terminates a licensing promote new businesses. tobacco business of RJR contract under which it had Nabisco Inc. exclusive rights to produce The Business Development and sell Marlboro brand Division is later reorganized July products in Japan and use into operational divisions JT acquires the food the Marlboro trademark engaged in the food and 1995 business of Asahi Kasei in the country. pharmaceutical businesses, May Corporation, including finishing in July 1990. Head office is moved Asahi Foods and seven June back to Minato-ku from other subsidiaries. Acquisition of CRES Shinagawa-ku following Neva Ltd. (Russia). completion of new head October Glamour is launched office building. Under a business (Russia, Ukraine, tie-up between JT and Kazakhstan).** 1987 Peter I is launched (Russia).* Torii Pharmaceutical Co., April Ltd., the two companies’ Import tariffs on imported R&D operations related cigarettes are abolished. to medical pharmaceuticals are concentrated at JT, while their promotion 2006 1996 operations are combined April June at Torii Pharmaceutical. JT implements a five-for- Government releases one stock split in order to 1988 second tranche of LD launched (Russia).** expand the investor base, October outstanding JT shares effective April 1, 2006. JT communication name (272,390 shares offered is introduced. at ¥815,000 apiece). May Acquisition of AD Acquisition of Tanzanian Duvanska Industrija tobacco production facility.* 2000 Senta in Serbia. Acquisition of Liggett- 1992 Ducat (Russia).** Acquisition of Manchester Tobacco Company Ltd. 1997 2007 Acquisition OF AS-Petro April April (Russia).* JT ends its salt monopoly 2001 JT acquires all outstanding business in line with Acquisition of shares of Gallaher abolition of the salt Austria Tabak.** Group Plc. monopoly system.
The Tobacco Mutual 1993 Aid Pension scheme September is integrated into The Central Pharmaceutical the Employees’ 2003 Research Institute Pension scheme. October is established to JT repurchases 45,800 of enhance in-house American Brands spins off its own shares to increase research capabilities. Gallaher which becomes its management options. Gallaher Group Plc and is listed on the London and New York stock exchanges.**
* Topics of RJR Nabisco's non-US operations before participating in the JT Group. ** Topics of Gallaher before participating in the JT Group.
176 Japan Tobacco INC. Annual Report 2013 The corporate history of JT is summarized in the table to the left. For the international tobacco business, 2008 2012 the history before JT’s acquisitions of RJR Nabisco’s January July non-US tobacco operations and Gallaher is included. JT acquires a majority For the purpose of stake in Katokichi Co., Ltd. enlarging Company’s through a tender offer. investor base, a 200-for-1 The operating environment for JT changed drastically stock-split is conducted. April At the same time, JT in just two years after the foundation of the Company, JT acquires a majority stake adopts the share unit with the yen’s strong appreciation following the Plaza in Fuji Foods Corporation. system, setting a share trading unit at 100 shares. Accord in 1985, a tobacco tax hike in 1986 and the July abolition of tariffs on imported cigarettes in 1987. JT concentrates its August processed food operations, Acquisition of Gryson NV, Amid the yen’s upsurge, a price increase for JT including frozen food and a Belgium Fine Cut maker. products due to the tobacco tax hike coupled with seasonings operations, at the Katokichi Group. price cuts for imported cigarettes attributable to the tariff abolition eliminated the price advantage of JT 2013 products over imported products, which had stood February at around ¥60 to ¥80 when JT was founded in 1985. 2009 The name change of Mild As a result, competition between JT and foreign May Seven to MEVIUS in Japan. JTI celebrates its tobacco makers intensified in the Japanese market, 10th anniversary. Government releases leading to a decline in JT’s market share from 97.6% fourth tranche of June outstanding JT in fiscal 1985 to 90.2% in fiscal 1987. JTI Leaf Services (U.S.) shares (333,333,200 LLC is established. shares offered). To cope with the rapid deterioration of the operating October On February 27, JT environment, JT implemented rationalization measures Acquisition of leaf suppliers repurchases 86,805,500 Kannenberg & Cia. Ltda. shares through to enhance its cost-competitiveness and pursued (Brazil) and Kannenberg, ToSTNeT-3, including diversification while taking measures to strengthen Barker, Hail & Cotton 80,071,400 shares from Tabacos Ltda. (Brazil). the Government. its marketing capability. In the 1990s, JT’s competition with foreign rivals in the Japanese market intensified November Excluding the share Acquisition of leaf suppliers repurchased by JT, further. Furthermore, overall cigarette demand in Tribac Leaf Limited (UK). 253,261,800 shares Japan peaked in the latter half of the 1990s due are offered by the Government in March. to a contraction of the adult population and growing concerns with health problems associated with smoking. March Acquisition of Al Nakhla Amid the increasingly difficult operating environment 2010 Tobacco Company S.A.E. for the Japanese domestic tobacco business, JT took January and Al Nakhla Tobacco Katokichi Co., Ltd. Company – Free Zone additional rationalization steps, pursued consolidation is renamed TableMark S.A.E., a leading Egyptian of operations in its areas of business diversification and Co., Ltd. water-pipe company. expanded the international tobacco business, thereby May strengthening its business foundation. Smokeless tobacco product Zerostyle Mint is launched. JT significantly strengthened the international tobacco business by acquiring RJR Nabisco’s non-U.S. tobacco operations in 1999 and Gallaher in 2007. With its 2011 international sales volume exceeding its domestic sales March volume, the JT Group continues to grow as a global JT repurchases 58,630 tobacco company. The international tobacco business of its own shares, as
part of its shareholder is the engine of the JT Group’s profit growth through its OTHER INFORMATION return measures. comprehensive brand portfolio which includes Winston,
November Camel and Mild Seven – MEVIUS as well as Benson Acquisition of Haggar & Hedges, Silk Cut, LD, Sobranie and Glamour. Cigarette & Tobacco Factory Ltd. (North Sudan) and Haggar Cigarette & Tobacco Factory Ltd. (South Sudan).
JAPAN TOBACCO INC. ANNUAL REPORT 2013 177 Regulation and Other Relevant Laws
Tobacco business This proposal will require approval by the European Parliament and the Council of Ministers, and any final Regulation in the international markets proposal including amendments is anticipated to be The World Health Organization (WHO) adopted the adopted in 2014, coming into effect from 2015 or 2016. Framework Convention on Tobacco Control (“FCTC”) at its 56th World Health Assembly held in May 2003. It One of the most notable regulations adopted recently came into force in February 2005 (Japanese Government is the plain packaging (PP) legislation in Australia. accepted in June 2004). Since then, there has been a In Australia, individual packages of tobacco products rising trend in regulations regarding sales promoting must be of a prescribed color, and product names must activities and the marketing of tobacco products and be displayed on the packages in a prescribed location, smoking in the international markets where JT Group's font size, color and style. In addition, visual warning tobacco products are sold. labels must take up 75% of the front side and 90% of the reverse of packages. The legislation was The purpose of the FCTC is to continuously and passed in 2011 and came into effect in December substantively control the proliferation of smoking. Its 2012. Although we, along with several other tobacco provisions include, among others, price and tax measures manufacturers, challenged this PP legislation on to reduce tobacco demand, non-price measures to constitutional grounds, the High Court of Australia reduce the demand for tobacco (such as protection from upheld the constitutionality of the legislation in August exposure to tobacco smoke, regulation of contents and 2012. A number of other countries are considering emissions of tobacco products, regulation of disclosure the implementation of similar measures. of tobacco products, regulations on packaging and labeling of tobacco products, regulations on tobacco The UK, one of our key markets, is currently advertising, promotion and sponsorship), and measures considering PP regulation that would standardize relating to the reduction of the supply of tobacco (such tobacco packaging by prohibiting the use of logos, as prevention of illicit trade and prohibition of sale of colors or brand images, leaving only brand and product tobacco products to minors). Moreover, in November names displayed in a uniform color and font, in addition 2012, the protocol to eliminate illicit trade in tobacco to health warnings. Laws including “Restrictions on products was adopted at the fifth session of the the in-store display of tobacco products” and “Ban on Conference of the Parties. As a general obligation, sale of tobacco products through vending machines” signatories to the protocol are to formulate, adopt, are already enforced in the UK. periodically update and review strategies, plans and programs for tobacco regulation. However, the content, In Russia, another of our key markets, legislation was scope and method of specific controls undertaken passed in February 2013, which includes protection in these nations are ultimately legislated by each from exposure to tobacco smoke and other matters respective nation and are not necessarily unambiguous. related to tobacco consumption. The legislation is expected to come into effect from June 2013 and to Regulation by country or region be implemented through to 2017. It contains a number In the EU, “EU Tobacco Product Directive (EU TPD)” of provisions including a display ban, restrictions on came into effect in July 2001 by which all laws, sales of tobacco products in certain retail stores, a ban regulations and ordinances of EU member countries on advertising, sponsorship and promotions, and the regarding the amount of tar, nicotine and carbon introduction of minimal pricing or a ban on smoking monoxide, warning labels on individual packages in public places. and outer wrappers, ingredients appearing on individual packages and descriptive expressions such Although it is impossible to predict the content of future as “mild,” “light,” etc. would be harmonized in the EU laws, regulations and industry guidelines relating to sales region. Moreover, in December 2012, the European activities, marketing and smoking, the JT Group expects Commission adopted a proposal to revise EU TPD. regulations like the above and new regulations (including The proposed revised legislation includes, among those of local governments) to spread across Japan and other aspects, regulation on packaging and labeling, other countries where the Group sells its products. restriction on the use of additives, and restriction on products which are similar to tobacco products.
178 JAPAN TOBACCO INC. ANNUAL REPORT 2013 Regulation in Japan The Tobacco Business Act requires JT to annually The Tobacco Business Act, related acts and statutes enter into purchase contracts with tobacco growers and voluntary standards set forth the regulations for regarding the aggregate cultivation area for specific the sale and promotion activities of tobacco products varieties of leaf tobacco and the prices for leaf tobacco in Japan that include the indication of warning labels by variety and grade. JT must purchase all leaf tobacco on tobacco product advertisements and packages produced pursuant to such contracts, except for any that urge caution over the relationship between not suited for the manufacture of tobacco products. the consumption of tobacco products and health. When JT decides the aggregate cultivation area and the prices of leaf tobacco for its contracts with tobacco In November 2003, the Ordinance for Enforcement growers, it is required to respect the opinion of the of the Tobacco Business Act was revised including Leaf Tobacco Deliberative Council (hatabako shingi kai), the wording of the cautions over the relationship which consists of members appointed by JT with the between the consumption of tobacco products and approval of the Minister of Finance from among the health indicated on tobacco product packages and, representatives of domestic leaf tobacco growers and starting in July 2005, all tobacco products sold in Japan academic appointees. Much like many other agricultural have been in conformity with the revised regulations. products in Japan, production costs for domestically- In addition, the Japanese Minister of Finance has grown leaf tobacco are higher than those of foreign- indicated a “Guideline for Advertising of Tobacco grown leaf tobacco to the extent that the purchasing Products” based on the Tobacco Business Act which, price for the former (before re-drying) is approximately in March 2004, was revised with tougher language. four times that of the latter (after re-drying). The Tobacco Institute of Japan has established voluntary standards regarding the advertising and sales Prohibition of “mild,” “light” and other descriptive labeling promotion activities for tobacco products. All member The aforementioned FCTC includes provisions companies, including JT, comply with these standards. regulating descriptive labeling such as “mild” and “light.” They stipulate that signatory countries must, Recently, cases where smoking in public areas including within three years after entry into force within their restaurants and office buildings has been restricted by country, adopt and implement effective measures laws and regulations and the like are on the rise in Japan. to prevent promotion of tobacco products by any From the perspective of passive smoking prevention, means that could create an erroneous impression various measures are being implemented and promoted about the characteristics, etc. of tobacco products by the Government and governing bodies. Ministry of including the use of terms, among others, that create Health, Labor and Welfare established the Health a false impression that a particular tobacco product Promotion Act, which imposes on the facility manager is less harmful than other tobacco products (these the obligation to make efforts to prevent passive may include terms such as “mild” and “light”). Each smoking as well as the “Guidelines for Measures on signatory country is establishing various measures Smoking in the Workplace” dealing with efforts at the required by the FCTC. workplace. We expect this trend to continue in the future. Measures vary among signatory countries including prohibiting the use of target words or expressions such Tobacco Business Act as “mild” or “light” specifically enumerated or illustrated, Importers and wholesalers of tobacco products must or the use of words that would create a false impression register with the Minister of Finance. Retailers of without specifying target words or expressions. In the tobacco products must obtain approval from the future, measures over descriptive labeling, etc. such as Minister of Finance. The Minister of Finance oversees “mild” and “light”, which would include the measures
all retail sales prices for tobacco products manufactured to comply with the requirements under the FCTC, may OTHER INFORMATION by JT and imported tobacco products. The Minister of prohibit the use of the word “mild” or “light”. Finance must approve the filed retail sales prices unless otherwise considered unfairly prejudicial to consumers. Subsequently, tobacco retailers are only permitted to sell tobacco products at the appropriate prices.
Japan Tobacco INC. Annual Report 2013 179 Regulation and Other Relevant Laws continued
With respect to Japan, in accordance with the Pharmaceutical Business Ordinance for Enforcement of the Tobacco Business The pharmaceutical industry operates in a highly Act revised in November 2003, all tobacco products regulated environment. In many countries, R&D, bound for the domestic market labeled with “mild,” manufacturing and sales activities are strictly regulated. “light,” etc. after July 2005 are subject to certain Moreover, in recent years, the approval process for necessary measures. The JT Group plans to continue new drugs has been tightening due to the increased using words like “mild” and “light” in Japan in requirements to promote public health and safety. accordance with the above Ordinance. Today, compared with the past, pharmaceutical companies are required to spend more time to examine Self-regulation on marketing pharmaceutical safety issues and conduct a greater number of clinical trials on subjects to collect more data Prevention of youth smoking on the efficacy of new pharmaceuticals. Consequently, Youth smoking prevention is an issue which must clinical trials are growing in scale, cost and time. be addressed by society as a whole. The JT Group has a voluntary code, “Global Tobacco Products In Japan, marketing of pharmaceutical products Marketing Standard”, to govern its business and is subject to the supervision of the Ministry of marketing activities in support of youth smoking Health, Labor and Welfare, or MHLW, primarily prevention. The JT Group are working with the under the Pharmaceutical Affairs Law, while part of Government, and other relevant organizations to take its supervisory authority is undertaken by the relevant steps towards preventing youth smoking in the prefectural governor. Under the Pharmaceutical Affairs countries in which it operates. For further details, please Law, in order to conduct the marketing business of refer to the following website pages: pharmaceuticals, a person is required to obtain from the MHLW a renewable, generally five-year marketing Initiatives taken in Japan: business license. In addition, under the Pharmaceutical http://www.jti.co.jp/corporate/enterprise/tobacco/ Affairs Law, in order to market pharmaceuticals, it is responsibilities/activity/index.html necessary to obtain marketing approval from the MHLW for each kind of product. Initiatives taken in the international markets: http://www.jti.com/how-we-do-business/regulating- The national health insurance system covers virtually tobacco-products/youth-smoking-prevention/ the entire Japanese population. To sell a pharmaceutical product in Japan, a marketing business license holder Global Tobacco Products Marketing Standards of pharmaceutical products must first have a new The JT Group complies with all the national regulation pharmaceutical product listed on the National Health and has implemented a “Global Tobacco Products Insurance Pharmaceutical Price List for coverage under Marketing Standard”, a self-regulatory code, which the national health insurance system. Generally, prices governs the marketing of its tobacco products in every on the price list are subject to revision once every two country. The key provision include “Strict minimum years as part of the Government’s policy to control guidelines applicable to advertise tobacco products”, healthcare spending. and “Indication of health warnings in ads and other media”, “Restrictions on sponsorships”, among others.
Please refer to the following link for more information regarding the Global Tobacco Products Marketing Standards of JTI: http://www.jti.com/how-we-do-business/regulating- tobacco-products/jti-global-marketing-standard/
180 Japan Tobacco INC. Annual Report 2013 Beverage and Processed Food Business As a producer and seller of food products, the JT Group’s beverage business and processed food business are subject to regulations mainly under the Food Safety Basic Act, the Food Sanitation Act and the JAS Act.
The Food Safety Basic Act requires food-related companies to take necessary measures to ensure food safety in each process of the supply chain, as well as to make efforts to provide accurate information about foods and food-related goods in an appropriate manner. The Food Sanitation Act concentrates on prevention of sanitary problems arising from consumption of foods and beverages. This Act requires food companies to take necessary measures under their own responsibility to ensure the safety of foods, additives, appliances and packages. The measures discussed in the Act include the acquisition of knowledge and skills, assurance of the safety of raw materials and voluntary inspection. The JAS Act provides the quality standards, the so- called JAS Standards, for agricultural and forestry products including foods and beverage products, as well as standards for food composition and production, and distribution methods. The JAS Act also sets the quality labeling standards which define the labeling requirements to indicate quality-related items such as materials and origin. Manufacturers and others must comply with the standards in preparing their product labels.
The JT Group is striving to establish a high level of food safety control from the four perspectives – “food safety”, “food defense”, “food quality” and “food communication” – in addition to complying with these laws and regulations and ensuring thorough awareness of them. OTHER INFORMATION
Japan Tobacco INC. Annual Report 2013 181 Litigation
JT and some of its subsidiaries are defendants in lawsuits • in a “lights” case in Illinois in which the class members filed by plaintiffs seeking damages for harm allegedly alleged that use of the term “lights” constituted caused by smoking, the marketing of tobacco products, fraudulent and misleading conduct, an award was or exposure to tobacco smoke. As of the fiscal year end made of damages totaling approximately US$ 10 billion date, there were a total of 28 smoking and health-related in 2003. While the tobacco product manufacturer cases pending in which one or more members of the won a reversal of this verdict in 2005, the courts JT Group were named as defendant or for which JT have upheld the timeliness of the plaintiff’s petition may have certain indemnity obligations pursuant to to re-open the prior judgment sought by the plaintiff the agreement for JT’s acquisition of RJR Nabisco Inc.’s in 2011. The case is still ongoing. A number of other overseas (non-U.S.) tobacco operations. We believe it “lights” cases have also been filed in the United States. is possible that other similar smoking and health-related lawsuits may be filed in the future. We believe that these cases partly reflect the unique nature of the judicial system in the United States In addition, JT and some of its subsidiaries are also of America arising from the jury trials, class actions, defendants in lawsuits other than the smoking and punitive damage awards and contingency fee health-related cases. Please refer to “Note 38” to arrangements for attorneys. While neither JT nor any the consolidated financial statements (Contingencies of its subsidiaries is a defendant in any of the lawsuits Contingent Liabilities) for major lawsuits to which mentioned above nor subject to any indemnity claims JT and some of its subsidiaries are named as with respect to them, we continue to monitor closely defendants. Similar lawsuits involving us may these developments in the United States of America be filed and contested in courts in the future. with particular attention. The tobacco business which JJT acquired from RJR Nabisco Inc. did not include To date, we have never lost a case or paid any settlement brands in the United States of America and, even now, award in connection with smoking and health-related our current tobacco business scale in the United States litigation. However, we are unable to predict the outcome of America remains very small. Accordingly, we consider of currently pending or future lawsuits. If a court ruling its exposure to smoking and health-related litigation is unfavorable to us, whether the lawsuits are smoking in the United States of America to be low, and we thus and health-related or not, our financial results, believe that situations under litigation in the United States production, sales and imports/exports of tobacco of America will not materially affect our businesses in products may be adversely affected. the near future. As of the fiscal year end date, there is no smoking and health-related litigation in the United In recent decades, numerous, large-scale, smoking States of America in which JT or any of its subsidiaries and health-related cases have been brought against is named as a defendant or with respect to which any tobacco product manufacturers in the United States indemnity claims have been made against JT or any of America, and some of the cases resulted in of its subsidiaries. verdicts with massive damage awards. There are nine ongoing healthcare cost recovery For example: cases in Canada pending against JTI-Macdonald • in Florida’s Engle class action in 2000, a first Corp. and JT’s indemnitees (RJR Nabisco Inc.’s affiliate), instance court issued a punitive damages award of brought by the Provinces of British Columbia, New approximately US$ 145 billion in favor of the plaintiffs. Brunswick, Ontario, Newfoundland and Labrador, At a higher court, the verdict was subsequently Manitoba, Quebec, Alberta, Saskatchewan and Prince dismissed and the plaintiff’s class was decertified in Edward Island. These provinces filed lawsuits under 2006 although common findings to be applied in their own provincial legislation which was enacted individual cases were upheld. Individual Engle exclusively for the purpose of authorizing the provincial progeny lawsuits have been filed by over 7,000 government to file a direct action against tobacco former Engle class members in Florida, of which manufacturers to recoup the healthcare costs the fewer than 100 lawsuits have been fully adjudicated Government has incurred and will incur resulting from at the trial court level and most such lawsuits are “tobacco-related wrongs”. In addition, there are eight still subject to appeal. pending class actions in Canada including two brought in Quebec in which the class was certified by the court in February 2005. The trial began in March 2012 and no decision is yet made as to the liability of the defendants.
182 Japan Tobacco INC. Annual Report 2013 As for other jurisdictions, generally speaking, the smoking and health-related litigation is of a smaller scale in terms of the number of lawsuits and the amounts claimed compared with those in the United States of America and Canada. We do not believe that litigation such as in the United States of America will spread around the world in the near future since it developed in a unique judicial environment involving jury trials, class actions, punitive damages awards, and contingency fees for attorneys.
However, the business environment surrounding the global tobacco industry has become more severe due to smoking and health issues and because of the tighter regulations resulting from such issues. Considering the relationship between the tobacco industry and society, we, as a tobacco product manufacturer, continue to closely monitor the developments and trends of the litigation involving tobacco companies in the United States of America, Canada and elsewhere, with particular interest and attention. OTHER INFORMATION
Japan Tobacco INC. Annual Report 2013 183 Members of the Board, Audit & Supervisory Board Members, and Executive Officers
(As of June 21, 2013)
Members of the Board Executive Officers
Chairman of the Board President Senior Vice Presidents Hiroshi Kimura Mitsuomi Koizumi Kazuhito Yamashita Chief Executive Officer Chief Corporate, Scientific & Regulatory Representative Directors Affairs Officer, Tobacco Business Mitsuomi Koizumi Executive Deputy Presidents Yasuyuki Yoneda Yasushi Shingai Yasushi Shingai Chief R&D Officer, Tobacco Business Noriaki Okubo Compliance, Strategy, HR, General Akira Saeki Administration, Legal and Operation Masahiko Sato Review & Business Assurance Head of Manufacturing General Division, Members of the Board Tobacco Business Noriaki Okubo Hideki Miyazaki Pharmaceutical, Bevarage, and Atsuhiro Kawamata Masamichi Terabatake Processed Food Business Head of China Division, Tobacco Business Motoyuki Oka* Main Kohda* Akira Saeki Junichi Fukuchi President, Tobacco Business Head of Tobacco Business Planning * Outside Directors under the Companies Act of Japan. Division, Tobacco Business Hideki Miyazaki CSR, Finance and Communications Muneaki Fujimoto President, Pharmaceutical Business Audit & Supervisory Senior Executive Vice Presidents Board Members Junichi Haruta Kenji Iijima Head of Central Pharmaceutical Research Chief Marketing & Sales Officer, Futoshi Nakamura Institute, Pharmaceutical Business Tobacco Business Tomotaka Kojima Ryoko Nagata Koichi Ueda* Ryoji Chijiiwa Chief CSR Officer Yoshinori Imai* Compliance and General Affairs Chito Sasaki Mutsuo Iwai * Outside Audit & Supervisory Board Members under Chief Human Resources Officer the Companies Act of Japan. Chief Strategy Officer Naohiro Minami Executive Vice President Chief Financial Officer Shinichi Murakami Haruhiko Yamada Head of Domestic Leaf Tobacco General Chief General Affairs Officer Division, Tobacco Business Kiyohide Hirowatari Chief Legal Officer
Shigenori Ohkawa Chief Science Officer, Central Pharmaceutial Research Institute, Pharmacentical Business
Goichi Matsuda Head of Bevarage Business
Yuki Maeda Chief Communication Officer
184 Japan Tobacco INC. Annual Report 2013 C ontents Corporate Data (As of March 31, 2013)
Management Head Office Members of JT International Executive Committee (As of June 1, 2013) 001 Financial Highlights 2-1, Toranomon 2-chome, 004 At a Glance Minato-ku, Tokyo 105-8422, Japan Pierre de Labouchere Paul Bourassa 006 Consolidated Five-year Financial Summary Tel: 81-3-3582-3111 President and Chief Executive Officer Senior Vice President Legal, Regulatory 009 Message from the Chairman and CEO Fax: 81-3-5572-1441 Affairs and Compliance 010 CEO Business Review URL: http://www.jt.com/ 012 Management Principle, Resource Allocation Martin Braddock Policy and Strategic Framework Masamichi Terabatake Regional President CIS+ 013 Business Plan 2013 Executive Vice President and Deputy CEO Date of Establishment Stefan Fitz 014 Performance Measures Thomas A. McCoy Regional President Asia Pacific April 1, 1985 Chief Operating Officer Roland Kostantos Operation & Analysis Senior Vice President Finance, Information Technology and Chief Financial Officer 020 Industry Overview Paid-in Capital 020 Tobacco Business Paul Neumann 022 Pharmaceutical, Beverage and ¥100 billion Senior Vice President Global Leaf Processed Food Business Howard Parks 024 Review of Operations Senior Vice President Consumer & 024 Role of Tobacco Business JT International S.A. Trade Marketing 026 International Tobacco Business 032 Japanese Domestic Tobacco Business 1, Rue de la Gabelle CH-1211 Geneva 26, Fadoul Pekhazis 036 Role of Pharmaceutical, Beverage Switzerland Regional President Middle East, Near East, and Processed Food Business Tel: +41(0)22-7030-777 Africa, Turkey and World Wide Duty Free 038 Pharmaceutical Business Fax: +41(0)22-7030-789 Eddy Pirard 042 Beverage Business URL: http://www.jti.com/ Regional President Western Europe 046 Processed Food Business 050 Risk Factors Michel Poirier 054 Corporate Social Responsibility Regional President Americas 058 Corporate Governance Jörg Schappei Senior Vice President Human Resources
Financial Information Bill Schulz Senior Vice President Global Supply Chain 076 Financial Review 084 Financial Statements and Notes Takehisa Shibayama Senior Vice President Research & Development Fact Sheets Vassilis Vovos 142 Fact Sheets Regional President Central Europe
Frits Vranken Shareholder Information Senior Vice President Business Development and Corporate 170 Shareholder Information Communications OTHER INFORMATION
Other Information 174 History of the JT Group 178 Regulation and Other Relevant Laws 182 Litigation 184 Members of the Board, Audit & Supervisory For more information, Board Members, and Executive Officers please visit 185 Corporate Data www.jt.com
Japan Tobacco INC. Annual Report 2013 185 Japan Tobacco Inc. Japan Tobacco Inc. Japan Tobacco Inc.
2-1, Toranomon 2-chome, Annual Report 2013 Minato-ku, Tokyo 105-8422, Japan Tel: (81) 3-3582-3111 Fax: (81) 3-5572-1441 URL: http://www.jt.com/ Year ended March 31, 2013
A nnual 2013 Report
This annual report is printed using ink that contains less than 1% Volatile Organic Compounds (VOCs).
Printed in Japan