Annual Report 2007 Annual Report 2007 For the Year Ended March 31, 2007 CONTENTS 1 Financial Highlights 2 JT at a Glance 4 Towards Realization of the Company JT Envisions 6 To Our Shareholders, Customers, and Employees 10 Special Feature 12 Acquisition of Gallaher Group PLC 18 Review of Operations 20 Domestic Tobacco Business 24 International Tobacco Business 28 Pharmaceutical Business 30 Foods Business 32 History of JT, Business Environment Surrounding JT 34 History of JT 36 Business Environment Surrounding JT 44 Corporate Social Responsibility 46 Corporate Governance 49 Activities Contributing to the Environment and Society 56 Financial Information 58 Consolidated Five-Year Financial Summary 60 Management’s Discussion and Analysis of Financial Condition and Results of Operations 70 Consolidated Balance Sheets 72 Consolidated Statements of Operations 73 Consolidated Statements of Changes in Equity 75 Consolidated Statements of Cash Flows 76 Notes to Consolidated Financial Statements 98 Independent Auditors’ Report 99 Fact Sheets 100 Financial Data 106 Domestic Tobacco Business 116 International Tobacco Business 118 Pharmaceutical Business 119 Foods Business 119 Number of Employees 120 Shareholder Information 122 Members of the Board, Auditors, and Executive Officers 123 Corporate Data FORWARD-LOOKING AND CAUTIONARY STATEMENTS This presentation contains forward-looking statements about our industry, business, plans and objectives, financial condition and results of operations that are based on our current expectations, assumptions, estimates and projections. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of our financial condition, or state other forward-looking information. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that could cause our actual results to dif- fer materially from those suggested by any forward-looking statement. We assume no duty or obligation to update any forward-looking statement or to advise of any change in the assumptions and fac- tors on which they are based. Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation: 1. health concerns relating to the use of tobacco products; 2. legal or regulatory developments and changes, including, without limitation, tax increases and restrictions on the sale, marketing and usage of tobacco products, and governmental investigations and privately imposed smoking restrictions; 3. litigation in Japan and elsewhere; 4. our ability to further diversify our business beyond the tobacco industry; 5. our ability to successfully expand internationally and make investments outside of Japan; 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and 9. fluctuations in foreign exchange rates and the costs of raw materials. Unless otherwise specified in this annual report, the information herein is as of June 22, 2007. Japan Tobacco Inc. and Consolidated Subsidiaries Financial Highlights Years ended March 31 Millions of Millions of yen U.S. dollars 2003 2004 2005 2006 2007 2007 For the year: Net sales ¥ 4,492,264 ¥ 4,625,151 ¥ 4,664,514 ¥ 4,637,657 ¥ 4,769,387 $ 40,401 EBITDA (Note 2) 337,296 373,435 400,115 433,391 464,634 3,936 Operating income 188,963 234,034 273,371 306,946 331,991 2,812 Net income (loss) 75,302 (7,603) 62,584 201,542 210,772 1,785 Free cash flow (FCF) (Note 3) 170,372 269,174 269,459 145,590 223,007 1,889 At year-end: Total assets ¥ 2,957,665 ¥ 3,029,084 ¥ 2,982,056 ¥ 3,037,379 ¥ 3,364,663 $ 28,502 Total equity 1,622,654 1,507,937 1,498,204 1,762,512 2,024,616 17,150 Ratios: Return on equity (ROE) 4.7% (0.5%) 4.2% 12.4% 11.3% Return on asset (ROA) 6.4% 7.9% 9.2% 10.4% 10.7% Equity Ratio 54.9% 49.8% 50.2% 58.0% 58.3% Amounts per share (in yen and U.S. dollars): Net income (loss) ¥ 37,528 ¥ (3,967) ¥ 32,090 ¥ 105,085 ¥ 22,001 $ 186 Total equity 811,204 771,516 781,814 919,780 204,618 1,733 Cash dividends applicable to the year 10,000 10,000 13,000 16,000 4,000 34 Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥118.05 per $1, the rate of exchange as of March 31, 2007. 2. EBITDA = operating income + depreciation and amortization Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill 3. FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From “cash flow from operating activities”: Dividends received / interest received and its tax effect / interest paid and its tax effect From “cash flow from investing activities”: Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item) 4. On April 1, 2006, a 5 for 1 stock split went into effect. The graph showing “Cash Dividends Applicable to the Year” is adjusted retroactively. EBITDA and Net Income (Loss) and Free Cash Flow Cash Dividends Applicable Operating Income ROE to the Year (Billions of Yen) (Billions of Yen) (%) (Billions of Yen) (Yen) 4,000 464.6 269.2 269.5 433.4 201.5 210.8 400.1 3,200 12,4 11.3 373.4 223.0 337.3 332.0 2,600 306.9 273.4 170.4 2,000 2,000 234.0 145.6 75.3 189.0 4.7 62.6 4.2 -0.5 -7.6 ’03 ’04 ’05 ’06 ’07 ’03 ’04 ’05 ’06 ’07 ’03 ’04 ’05 ’06 ’07 ’03 ’04 ’05 ’06 ’07 EBITDA Operating Income Net Income (Loss) ROE (Years ended March 31) (Years ended March 31) (Years ended March 31) (Years ended March 31) Review of Operations Financial Highlights JT Annual Report 2007 1 JT at a Glance Japan Tobacco Inc. (JT) and its 33,400 employees are striving to become a “global growth company that develops diversified, value-creating businesses.” JT is the world’s third-largest tobacco compa- ny.Our domestic tobacco business continues to maintain a significant competitive position in the Japanese market, and the international tobacco business is delivering remarkable performance as the driver of profit growth for the JT Group. As future pillar businesses, the pharmaceutical busi- ness pursued strategic licensing to world-leading pharmaceutical companies, and the foods busi- ness continued to expand profit levels steadily. Net Sales EBITDA Operating Income Net Sales EBITDA Operating Income (Loss) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) 3,491.5 245.4 3,416.3 326.5 3,405.3 305.8 5.5 1.9 296.0 57.7 49.3 -5.1 45.5 -1.8 220.1 -11.2 215.8 -8.2 Net Sales Breakdown, by Business Segment Other Business ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 0.4% ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 1.0% Pharmaceutical Business 6.0% 71.6% Domestic Tobacco Business Foods Business International Tobacco Business 21.0% Net Sales EBITDA Operating Income Net Sales EBITDA Operating Income (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) (Billions of Yen) 999.7 112.7 81.1 71.0 94.1 286.6 11.9 12.0 881.2 278.4 265.4 6.7 44.5 7.9 6.3 792.7 65.5 1.9 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 ’05 ’06 ’07 2 Pharmaceutical Business • AKROS PHARMA INC. Research activities in the pharmaceutical business and clinical development in the United States Russia Canada France Ukraine South Italy Domestic Tobacco Business Spain Tu r key Korea • JT: Headquarters Iran Taiwan Foods Business • Weihai J.K. Foods Co., Ltd. Malaysia Manufacturing and sale of seasonings International Tobacco Business • Shanghai JS Foods Co., Ltd. • JT International S.A. Manufacturing and sale of frozen foods Headquarters of the International Tobacco Operations • Swickers Kingaroy Bacon Factory Pty. Ltd. JT International is responsible Meat processing for the JT Group’s international tobacco business. • Hans Continental Smallgoods Pty. Ltd. —Approximately 12,000 employees. Manufacturing and sale of ham and sausage —Products sold in more than 120 countries. • Thai Foods International Co., Ltd. —Operates cigarette manufacturing factories in 15 countries. Manufacturing and sale of seasonings Core markets of International Tobacco Business Top 5 Brands by Sales Volume Worldwide Major Tobacco Companies’ Share (Year ended December 31, 2005) (2005) (Billions of cigarettes) (%) Brand Brand Owner Total World Annual Sales Volume 1. Marlboro Altria 472.7 17.7 2. Mild Seven JT 111.7 3. L&M Altria 106.2 12.1 4. Winston Total* 91.3 10.5 JT 77.1 Reynolds American 14.2 7.4 5. Camel Total* 59.0 3.1 3.1 JT 35.7 2.4 Reynolds American 23.3 (1) Source: The Maxwell Report “Top World Cigarette Market Leaders” Altria JT+Gallaher JT Gallaher Altadis (USA) (UK) (Spain) *Sales volume within the United States and that outside the United States belong to Reynolds American and JT, respectively British American Tobacco (UK) Imperial Tobacco(2) (UK) Source: Companies’ reports, The Maxwell Report (1): FY 3/2006 (2): FY 9/2005 Top 10 Cigarette Products in Japan, by Market Share Worldwide Demand for Cigarette (Year ended March 31, 2007) Product Manufacturer Share (%) (Billions of cigarettes) 1MILD SEVEN SUPER LIGHTS JT 6.8 5,597 5,585 2MILD