annual report 2 011
2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, Japan Tel: (81) 3-3582-3111 Fax: (81) 3-5572-1441 URL: http://www.jti.co.jp annual report 2011 For the Year Ended March 31, 2011 the jt group mission The mission of the JT Group is to create, develop and nurture its unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals. the jt group way In achieving this, we are committed to fulfilling the expectations of our consumers and behaving responsibly, striving for quality in everything we do, through continuous improvement, and leveraging diversity across the JT Group. JAPAN TOBACCO INC. Management Financial Highlights 002 Management Annual Report 2011 Consolidated Five-Year Financial Summary 004 To Our Stakeholders 005 CEO Interview 006 Contents Analysis of the Results of FY3/2011 010
Business At a Glance 014 Business & History & History Review of Operations 016 Japanese Domestic Tobacco Business 016 International Tobacco Business 020 Pharmaceutical Business 026 Food Business 028 History of the JT Group 030
Responsibility Corporate Governance 035 Responsibility Activities Contributing to the Environment and Society 044
Business Business Environment for the JT Group 049 uiesEvrnet&Rs Financial Information Business Environment & Risk Environment Major Risks of Businesses 054 & Risk
Unless the context indicates otherwise, references in this report to “we,” “us,” “our,” “Japan Tobacco,” “JT” or “ the JT Group” are to Japan Tobacco Inc. and its consolidated subsidiaries. References to “JTI” are to Japan Tobacco International, JT Group’s international tobacco business, and those subsidiaries of JT Group’s international tobacco business.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS Financial Consolidated Eleven-Year Financial Summary 058 This report contains forward-looking statements about our industry, busi- Information Management’s Discussion and Analysis of ness, plans and objectives, financial condition and results of operations that Financial Condition and Business Results 060 are based on our current expectations, assumptions, estimates and projec- Consolidated Balance Sheets 074 tions. These statements discuss future expectations, identify strategies, Consolidated Statements of Income 076 discuss market trends, contain projections of results of operations or of our Consolidated Statements of Comprehensive Income 077 financial condition, or state other forward-looking information. Consolidated Statements of Changes in Equity 078 These forward-looking statements are subject to various known and Consolidated Statements of Cash Flows 079 unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those suggested by any forward-looking Notes to Consolidated Financial Statements 080 statement. We assume no duty or obligation to update any forward-looking Independent Auditors’ Report 115 statement or to advise of any change in the assumptions and factors on Fact Financial Data 117
which they are based. Risks, uncertainties or other factors that could cause Fact Sheets actual results to differ materially from those expressed in any forward- Sheets Japanese Domestic Tobacco Business 125 looking statement include, without limitation: International Tobacco Business 136 1 health concerns relating to the use of tobacco products; Pharmaceutical Business 138 2 legal or regulatory developments and changes, including, without Food Business 139 limitation, tax increases and restrictions on the sale, marketing and Number of Employees 140 usage of tobacco products, and governmental investigations and pri- vately 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; General Shareholder Information 141 General Information 6 competition and changing consumer preferences; Information Members of the Board, Auditors, and 7 the impact of any acquisitions or similar transactions; Executive Officers 143 8 local and global economic conditions; and Corporate Data 144 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 24, 2011.
JAPAN TOBACCO INC. Annual Report 2011 page 001 Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / FY3/2011
Business Scale Business Scale: The JT Group’s total tobacco sales volume in Japan and abroad comes to JT Group Sales Volume approximately 563 billion cigarettes per year, Japanese Domestic Tobacco Business 134.6 Billions of cigarettes representing around 10% of the global market. In addition to the domestic and International Tobacco Business 428.4 Billions of cigarettes international tobacco businesses, the JT JT Group Share in Global Cigarette Market (Source: Euromonitor) Group engages in the pharmaceutical and food businesses, and its annual consolidated % 9.8 sales including excise taxes stand at approxi- Adjusted Net Sales Excluding Excise Taxes*1 mately ¥6,190 billion, adjusted net sales excluding excise taxes at approximately 1,956.6 Billions of yen ¥1,960 billion and consolidated EBITDA at EBITDA more than ¥540 billion. 541.1 Billions of yen Profitability: With the high profitability of the Profitability tobacco business, the ratio of EBITDA to adjusted net sales excluding taxes comes to EBITDA Margin*2 around 28% and ROE stands at between 9% 27.7 % and 10%. ROE Per Share Profits: Per share EPS grew as a 9.2 % result of an increase in EBITDA, recurring profit and net income, despite adjusted net Per Share Data sales excluding taxes decreased slightly. Diluted EPS Stability: Free cash flow increased to 15,137 yen up 4.8% approximately ¥300 billion supported by a Diluted EPS (excluding the impact of goodwill amortization) stable cash flow generated by the tobacco business. yen up 0.1% 24,650 D/E Ratio is about 0.5 times.
Stability Return of Profits to Shareholders: The per Free Cash Flow share dividend was set at ¥6,800. The divi- dend payout ratio excluding the impact of 299.8 Billions of yen goodwill amortization rose from last year D/E Ratio to 27.6%. 0.47 times
Return of Profits to Shareholders The Per Share Dividend
6,800 yen The Dividend Payout Ratio *1 Japanese domestic tobacco: excluding excise taxes and revenue from the imported tobacco, domestic duty free, 44.9 % the China Division, and other miscellaneous. International tobacco: excluding excise taxes and revenue from distribution, contract manufacturing and 27.6% (Excluding the Impact of Goodwill Amortization) other peripheral business. *2 EBITDA margin on Adjusted Net Sales excluding excise taxes (1,956.6 billion yen as of FY3/2011)
Financial data disclosed herein are rounded.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 002 page 003 Management
Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31
Net Sales Excluding Excise Taxes EBITDA Operating Income and Net Income
(Billions of yen) (Billions of yen) (Billions of yen) 2,500 800 500 2,243.1 430.6 2,068.4 700 646.2 1,981.0 1,956.6 602.1 2,000 400 363.8 600 541.1 1,633.2 526.7 332.0 328.7 296.5 500 464.6 1,500 300 238.7 400 210.8 1,000 200 300 138.4 145.0 123.4 200 500 100 100
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Please see Note 2 on page 4. Operating Income Net Income
Total Equity and ROE Interest-bearing Debt and D/E Ratio Free Cash Flow
(Billions of yen/%) (Billions of yen/times) (Billions of yen) 2,500 20 2,000 0.8 400 299.8 2,154.6 0.67 223.0 240.2 250.7 2,024.6 0.64 200 2,000 16 1,723.3 1,500 1,389.3 0.53 0.6 1,624.3 1,591.2 11.8 0.47 0 11.3 1,500 12 996.1 9.2 8.6 1,000 874.3 0.4 –400
1,000 8 708.7 6.8 –800 500 0.2 500 4 0.11 –1,200 219.3 –1,493.7 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Total Equity ROE Interest-bearing Debt D/E Ratio
EPS Cash Dividends Applicable to the Year Dividend Payout Ratio on a Consolidated Basis
(Yen) (Yen) (%) 40,000 8,000 50 44.9 6,800 41.9 40.1 5,800 40 30,000 6,000 5,400 24,916 24,650 23,895 24,617 4,800 22,001 30 4,000 23.6 27.6 20,000 4,000 22.6 15,137 18.2 19.3 14,449 20 12,880 18.0 19.0
10,000 2,000 10
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
EPS Dividend Payout Ratio EPS (excluding the impact of goodwill amortization) Dividend Payout Ratio (excluding the impact of goodwill amortization) Note: 2007–2009 EPS 2010–2011 Diluted EPS Financial data disclosed herein are rounded.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 002 page 003 Consolidated Five-Year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31
Millions of U.S. dollars Billions of yen (Note 1) 2007 2008 2009 2010 2011 2011 For the year: Net Sales excluding excise taxes (Note 2) 1,633.2 2,068.4 2,243.1 1,981.0 1,956.6 23,531 Japanese Domestic Tobacco 729.4 715.0 648.8 616.0 617.9 7,431 International Tobacco 550.3 946.0 1,080.8 906.8 897.5 10,793 Pharmaceutical 45.5 49.1 56.8 44.1 47.0 565 Food 286.6 336.4 436.0 394.7 375.0 4,510 Others 21.4 21.9 20.8 19.5 19.2 231 EBITDA (Note 3, Note 4) 464.6 602.1 646.2 526.7 541.1 6,508 Japanese Domestic Tobacco 326.5 306.7 272.3 251.3 257.7 3,099 International Tobacco 112.7 270.8 338.0 277.7 288.2 3,466 Pharmaceutical (8.2) (6.3) 4.9 (9.7) (13.3) (160) Food 12.0 8.4 17.0 14.5 17.3 208 Others 21.6 22.1 13.1 13.3 12.9 155 Elimination/Corporate 0.1 0.5 0.9 (20.4) (21.7) (261) Depreciation and Amortization (Note 3) 132.6 171.5 282.4 230.2 212.4 2,555 Operating Income (Note 4) 332.0 430.6 363.8 296.5 328.7 3,953 Japanese Domestic Tobacco 245.4 222.3 188.3 198.7 212.9 2,561 International Tobacco 81.1 205.4 174.8 136.9 156.1 1,878 Pharmaceutical (11.2) (9.6) 1.0 (13.6) (17.4) (209) Food 6.7 0.7 (11.5) (13.7) (9.4) (113) Others 9.3 10.4 9.7 10.6 10.0 120 Elimination/Corporate 0.7 1.4 1.5 (22.4) (23.5) (283) Net Income 210.8 238.7 123.4 138.4 145.0 1,743 Free Cash Flow (FCF) (Note 5) 223.0 (1,493.7) 240.2 250.7 299.8 3,605 At year-end: Total Assets 3,364.7 5,087.2 3,879.8 3,872.6 3,571.9 42,958 Interest-bearing Debt (Note 6) 219.3 1,389.3 996.1 874.3 708.7 8,524 Liabilities 1,340.0 2,932.6 2,255.5 2,149.3 1,980.7 23,821 Total Equity 2,024.6 2,154.6 1,624.3 1,723.3 1,591.2 19,137 Ratios: Return on equity (ROE) 11.3% 11.8% 6.8% 8.6% 9.2% — Return on assets (ROA) 10.7% 10.5% 8.4% 7.8% 8.9% — Equity Ratio 58.3% 40.8% 40.0% 42.6% 42.4% — Amounts per share: (in yen) — Net Income (Note 7) ¥ 22,001 ¥ 24,916 ¥ 12,880 ¥ 14,449 ¥ 15,137 — Total Equity 204,618 216,707 162,088 172,140 159,040 — Cash Dividends Applicable to the Year 4,000 4,800 5,400 5,800 6,800 — Dividend Payout Ratio excluding goodwill amortization (Note 8) 18.0% 19.0% 22.6% 23.6% 27.6% —
Notes: 1. Figures stated in U.S. dollars in this report are translated at the rate of ¥83.15 per $1, as of March 31, 2011. 2. 2007–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively. 2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business 3. 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 4. 2010–: Before royalty payment for the international tobacco business. Before acceptance of royalty payment for the Japanese domestic tobacco business. A part of overhead cost & CAPEX allocation were changed. 5. 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) 6. Interest-bearing Debt includes lease obligation from FY3/2009 7. Diluted net income per share. 8. Dividend payout ratio is calculated by adding goodwill amortization to net income. 9. Financial data disclosed herein are basically rounded.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 004 page 005 To Our Stakeholders Management
First and foremost, we would like to express our sincere quality and services in order to withstand the increased retail sympathy for the people affected by the tragedy of the Great prices. In the international tobacco business, we are seeing East Japan Earthquake that took place on March 11, 2011. encouraging signs in the business environment along with a We pray for an early recovery from the disaster. slowdown of industry contraction in some key markets since Looking back at the fiscal year ended March 2011, the JT the second half of 2010. We aim to achieve 10% growth in Group performed strongly despite a difficult business envi- EBITDA at constant rates of exchange through quality top- ronment both in Japan and abroad. In the Japanese domestic line growth and strict cost-control, but without compromis- tobacco business, we secured revenue and profit growth ing on investments to strengthen our business. through strategic pricing and brand-loyalty enhancing mea- Overall, we will strive to achieve the company-wide sures, more than offsetting a significant volume decline due objectives under the JT-11 medium-term management plan to a tax increase of unprecedented scale. In the international by combining the diverse domestic and overseas resources of tobacco business, we achieved another year of remarkable the JT Group. In addition, we will further strengthen our results, driving the profit growth of the JT Group. We main- business foundations with a view to seizing future growth tained our focus on top-line growth led by global flagship opportunities. brands (GFB), despite industry contraction in many countries due to the prolonged global recession and tighter regulation. June 2011 The new fiscal year ending March 2012 began with severe challenges to our product supply in the Japanese domestic market following the Great East Japan Earthquake. While we will take more vigorous and proactive measures to minimize the impact of natural disasters in the future, we are now focusing our efforts towards overcoming the current situation Yoji Wakui Hiroshi Kimura in order to recover our market share as quickly as possible. Chairman of the Board President and CEO and Furthermore, we will continue to invest in our product Representative Director
Yoji Wakui Hiroshi Kimura Chairman of the Board President and CEO and Representative Director
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 004 page 005 CEO Interview
Great East Japan Earthquake
QuESTIONS QuESTION Can you update us on the impact of the Great East Great East Japan Earthquake Japan Earthquake? FY3/2011 financial results International tobacco business: situation in key markets ANSwER Planned actions in FY3/2012 Following the Great East Japan Earthquake, we have Plan for use of cash been facing challenges posed to our product supply in the Japanese domestic market. However, we are gradually restoring a stable supply and are making every effort to ensure the resumption of normal shipments by early August. In addition, in order to quickly recover our market share, we will endeavor to strengthen our competitiveness.
The Great East Japan Earthquake, which occurred on March 11, 2011, is the greatest challenge that Japan has faced in the postwar period, and is expected to have a significant impact on our values, economic, political and social system, energy policy and enterprise management. The JT Group must consider how it should conduct its business post-March 11, and like other Japanese companies, we will take more vigorous and proactive measures to minimize the impact of earthquakes and other natural disasters in the future, such as securing alternative sources of leaf and other materials, and strengthening back-up structures for domestic and over- seas production facilities.
Hiroshi Kimura President and CEO and Representative Director
JAPAN TOBACCO INC. Annual Report 2011 page 007 Management
FY3/2011 financial results As for the food business, the beverage business performed steadily, while the processed food business Question remained stable despite a difficult business environment. What is your assessment of the financial results for the We continued to focus on core products, such as staple fiscal year ended March 2011? foods, and strengthened our production facilities. In addi- tion, we made steady progress on business integration. Answer Overall, I would say that all of our businesses performed strongly in FY3/2011, despite the busi- Adjusted Net Sales Excl. Excise Taxes* in Japanese Domestic Tobacco Business ness environment remaining difficult. The Group (Billions of yen) EBITDA increased, driven by the Japanese domestic and international tobacco businesses. In the Japanese FY3/2010 616.0 domestic tobacco business, strategic pricing more FY3/2011 than offset the volume decline that followed the tax- 617.9 led price increase. Likewise, pricing was the key 550 570 590 610 630 driver for the international tobacco business, more than offsetting volume declines due to market con- EBITDA** in Japanese Domestic Tobacco Business (Billions of yen) traction in a number of markets. Operating income, recurring profit and net income all increased. FY3/2010 251.3
EBITDA increased while adjusted net sales excluding FY3/2011 257.7 taxes declined slightly. Both operating income and 100 150 200 250 300 recurring profit recorded double-digit growth, while net income grew by 4.7% despite a large net loss from Core Net Sales Excluding Taxes*** in the International Tobacco Business extraordinary items. (Millions of US dollars)**** In the Japanese domestic tobacco business, EBITDA increased even though adjusted net sales excluding taxes 2009 9,682 remained broadly flat. In effect, we offset the volume 2010 at constant 10,144 rates of exchange decline that followed the excise tax increase in October 2010 10,223 2010 by implementing strategic pricing and measures to 5,500 6,500 7,500 8,500 9,500 10,500 enhance brand loyalty. In the international tobacco business, the business EBITDA** in the International Tobacco Business (Millions of US dollars)**** environment continued to be challenging due to industry contraction in many countries from the prolonged global 2009 2,965 recession and tighter regulations. By focusing on top-line 2010 at constant 3,194 growth led by GFB, the international tobacco business rates of exchange continued to drive the profit growth of the JT Group. 2010 3,282 1,500 2,000 2,500 3,000 3,500 In the pharmaceutical business, we made progress in the clinical development of compounds, including those * Excluding revenue from imported tobacco, domestic duty-free, the China Division, in late phases of clinical trials, and strengthened our and others. ** EBITDA=operating income+depreciation and amortization R&D pipeline. *** Excluding revenue from distribution and contract manufacturing. **** The US dollar is the reporting currency for our international tobacco business. Financial data disclosed in the CEO interview are rounded.
JAPAN TOBACCO INC. Annual Report 2011 page 007 International tobacco business: situation in key markets Planned actions in FY3/2012
Question Question How did the international tobacco business succeed in As the business environment continues to be challeng- increasing its market share in most key markets? ing in Japan and abroad, what actions will the JT Group take?
Answer Answer These positive results are mainly driven by our We will remain focused on consumers and do our balanced brand portfolio, performing strongly in utmost to achieve our objectives. In the Japanese all price segments, as well as our continuous efforts domestic tobacco business, we will put emphasis on and investment in our brands to enhance brand both product development and sales activities. The equity. international tobacco business will continue to focus on top-line growth. In many key markets, we have witnessed industry contraction and accelerated down-trading due to the recession and sharp Our business environment in the past two years has been increases in tobacco excise taxes in 2009 and 2010. However, marked by industry contraction, including Japan, and foreign in the second half of 2010, industry volumes started to show exchange fluctuations. signs of improvement and in some key markets we observed In Japan, industry volume declined due to an unprec- signs of recovery. Under these circumstances, the interna- edented tax hike and the damage inflicted by the Great tional tobacco business succeeded in increasing market share East Japan Earthquake. To better satisfy our customers, in all key markets except the United Kingdom. This positive we will continue seeking to improve the overall quality of performance was the result of our balanced brand portfolio, our products, in addition to actively launching new our steady efforts to enhance brand equity and strong trade extensions in our key brands and by implementing marketing activities. enhanced sales promotion activities. In Russia, the market share of Winston, the No. 1 In the international business, the prolonged global brand in the country, increased further. LD, the No. 3 recession and tighter regulations resulted in industry brand in the market, experienced strong growth. We are contraction. In order to achieve 10% EBITDA growth also leveraging Camel and Russian Style in the premium year-on-year at constant rates of exchange, we will con- segment, further strengthening a strong No. 2 position. tinue focusing on GFB to grow our top-line, leveraging Thus, our market share leadership in Russia has been pricing opportunities and broadening our market base. reinforced. Moreover, in other key markets such as These changes in the business environment far Turkey, France and Italy, Winston and other GFB are exceeded our assumptions in the JT-11 medium-term driving JTI’s market share growth. management plan. Nevertheless, we will do all we can to achieve our goal of 5% Group EBITDA growth as set out in JT-11. (Actual results may differ materially from those estimated in these statements as a result of a number of factors, including, but not limited to, those described in “Major Risks of Businesses.”)
JAPAN TOBACCO INC. Annual Report 2011 page 008 Management
Plan for use of cash In the fiscal year ending March 2012, although the QuESTION business environment has greater elements of uncertainty How does the JT Group, which can expect a stable than ever before, we are determined to maintain sustain- cash flow from the tobacco business, plan to use the able profit growth in the medium to long term by over- cash? will there be any change in the objective on the coming the current difficulties. distribution of profits to shareholders? The JT Group regards dividends as the main means to return profits to shareholders, and we have consistently ANSwER increased our dividend, targeting a payout ratio of 30%, We will use the cash for business investment to excluding the goodwill amortization, in the medium term. grow further as well as to repay interest-bearing In keeping with this policy, we plan to pay an annual debts. In addition, we will maintain our existing dividend of 8,000 yen per share for the fiscal year ending policy regarding the distribution of profits to March 2012. We will pursue efforts to continuously shareholders, including dividends. increase our per share dividend.
In the business year ended March 2011, despite a challeng- ing business environment, we utilized cash generated by June 2011 our businesses to invest in our future growth as well as to steadily reduce interest-bearing debts. Furthermore, in accordance with the existing policy on the allocation of resources, we will pay an annual dividend of 6,800 yen per share, including an interim dividend, for the fiscal year ended March 2011. The divi- dend payout ratio, excluding the goodwill amortization, is 27.6%. When including the recent repurchase of our own shares, worth around 20 billion yen, total returns to shareholders amount to approximately 85 billion yen.
Changes in Dividend Payout Ratio Excluding the Impact of Goodwill Amortization on a Consolidated Basis and Dividend per Share (Yen) (%) 9,000 27.6 30
23.6 22.6
19.0 4,000 6,000 20
18.0 4,000 3,000 2,800 2,600 3,000 2,200 10 4,000 2,800 2,800 2,200 2,600 1,800
0 FY3/2007 FY3/2008 FY3/2009 FY3/2010 FY3/2011 FY3/2012 0 (Forecast)
Year-end dividend per share Half-year dividend per share Dividend payout ratio (excluding the impact of goodwill amortization)
JAPAN TOBACCO INC. Annual Report 2011 page 008 1 Actual Results Analysis of the Results of FY3/2011* Decrease Increase (Decrease in case of expense) *1 International tobacco business: Year ended Dec. 2009 and Year ended Dec. 2010
Adjusted Net Sales*2 (Billions of yen)
FY3/2010 1,981.0
Japanese domestic tobacco +1.9 International tobacco at constant rates of exchange +40.5 International tobacco Forex impact (local currency vs. USD) +6.9 International tobacco Forex impact –56.7 (JPY vs. USD) Pharmaceutical +2.9
Food –19.6
Others –0.2
FY3/2011 1,956.6
1,900 1,920 1,940 1,960 1,980 2,000 2,020 2,040
Net sales in the Japanese domestic tobacco business remained broadly flat, as the strategic pricing offset the volume decline following the tax-led price increase. Net sales in the International tobacco business were affected by the yen’s appreciation. On a U.S. dollar basis, net sales increased mainly driven by continued price/mix improvement. Net sales in the Pharmaceutical business increased driven by the strong performance of Torii Pharmaceutical and the milestone revenue of out-licensed compounds. Net sales for the beverage business grew due to the summer heat waves and steady sales growth of Roots brand. However, net sales for the processed food business declined due to the closure of the rice wholesale business, the exclusion of some sub- sidiaries from the consolidation and a decline in sales to restaurants. Overall, net sales in the food business declined. *2 Japanese domestic tobacco: excluding excise taxes and revenue from the imported tobacco, domestic duty free, China Division and other peripheral business. International tobacco: excluding excise taxes and revenue from the distribution, contract manufacturing and other peripheral business.
EBITDA*3 (Billions of yen)
FY3/2010 526.7
Japanese domestic tobacco +6.4
International tobacco at constant +20.1 rates of exchange International tobacco Forex impact +7.7 (local currency vs. USD) International tobacco Forex impact –17.4 (JPY vs. USD)
Pharmaceutical –3.6
Food +2.7
Others –1.7
FY3/2011 541.1
520 525 530 535 540 545 550 555 560 565 570
EBITDA in the Japanese domestic business increased as the strategic pricing more than offset the volume decline following the tax-led price increase. EBITDA in the International tobacco business increased mainly driven by continued price/mix improvement. Yen based EBITDA grew despite the impact of strong yen. EBITDA in the Pharmaceutical business declined due to an up-front payment by Torii Pharmaceutical in respect of a license agreement, despite an increase in net sales. EBITDA in the Food business grew due to the steady performance of the beverage business and in the absence of the one-time loss in the fishery product business in the prior year. *3 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
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 010 page 011 Actual Results
Decrease Management Increase (Decrease in case of expense)
Operating Income (Billions of yen)
FY3/2010 296.5
EBITDA +14.4
Depreciation and amortization +17.8
FY3/2011 328.7
280 285 290 295 300 305 310 315 320 325 330
Operating income grew driven by EBITDA increase and decrease in amortization of goodwill in U.S. dollar terms, as a result of the yen’s appreciation.
Recurring Profit*4 (Billions of yen)
FY3/2010 255.4
Operating income +32.2
Non-operating income/loss +24.9
FY3/2011 312.5
220 230 240 250 260 270 280 290 300 310 320
Recurring profit increased due to improvement in foreign exchange profit/loss conditions and in financial income/payments, in addition to an increase in the consolidated operating income. *4 Recurring profit is calculated by combining operating income with profits and losses arising from financing activities and other non-operating profits and losses, except for nonrecurring profits and losses or those on prior years’ adjustment.
Net Income (Billions of yen)
FY3/2010 138.4
Recurring profit +57.1
Extraordinary income/loss, –50.6 Income taxes, etc. FY3/2011 145.0
0 20 40 60 80 100 120 140 160 180 200
Net income increased driven by the increase in recurring profit despite the deterioration in extraordinary income/loss due to 1) a decrease in profit on sales of property, plant and equipment, 2) absence of previous years’ reversal of liability on fines levied under the UK competition law, 3) expenses for a settlement with Canadian authorities, and 4) losses arising from the Great East Japan Earthquake.
Breakdown of Net Sales (Billions of yen) FY3/2010 FY3/2011 Adjusted net sales excl. excise taxes*5*6*7 1,981.0 1,956.6 Japanese domestic tobacco*6 616.0 617.9 International tobacco*5*7 906.8 897.5 Pharmaceutical 44.1 47.0 Food 394.7 375.0 Others 19.5 19.2
*5 International tobacco business: Year ended Dec. 2009 and Year ended Dec. 2010 *6 Excluding revenue from the imported tobacco, domestic duty free, China Division and other peripheral business. *7 Excluding revenue from the distribution, contract manufacturing and other peripheral business.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 010 page 011 EBITDA by Business Segment Average Exchange Rate (Billions of yen) FY3/2010 FY3/2011 2009 Jan. to Dec. 2010 Jan. to Dec. Consolidated EBITDA 526.7 541.1 average average Operating income 296.5 328.7 YEN/USD 93.65 87.79 Depreciation and amortization*8 230.2 212.4 RUB/USD 31.77 30.36 Japanese domestic tobacco EBITDA 251.3 257.7 GBP/USD 0.65 0.65 Operating income 198.7 212.9 EUR/USD 0.73 0.75 Depreciation and amortization*8 52.5 44.8 International tobacco EBITDA*9 277.7 288.2 Operating income 136.9 156.1 Depreciation and amortization*8 140.7 132.0 Pharmaceutical EBITDA –9.7 –13.3 Operating income –13.6 –17.4 Depreciation and amortization*8 3.9 4.1 Food EBITDA 14.5 17.3 Operating income –13.7 –9.4 Depreciation and amortization*8 28.2 26.7 Others*10 EBITDA –7.1 –8.8 Operating income –11.9 –13.5 Depreciation and amortization*8 4.8 4.8 *8 Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill *9 International tobacco business: Year ended Dec. 2009 and Year ended Dec. 2010 *10 Other peripheral business, elimination and corporate expenses
Consolidated Balance Sheet (Assets) (Billions of yen) Compared to B/S as of Mar. 31, 2010 Mar. 31, 2010 3,872.6 Cash and deposits/ +109.2 short-term investment securities Inventories –41.2
Notes and accounts receivable—trade +4.9
Trademarks –64.5
Goodwill –239.6
Other assets –69.5
Mar. 31, 2011 3,571.9
3,500 3,550 3,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000
Total assets decreased due to the effect of yen appreciation and lower goodwill and trademark amortization.
Consolidated Balance Sheet (Debt and Equity) (Billions of yen) Compared to B/S as of Mar. 31, 2010
Mar. 31, 2010 3,872.6
Loans payable –37.9
Commercial paper (CP) –119.0
Bonds –7.2
Tobacco excise tax payable +4.8
Other liabilities –9.3
Retained Earnings +89.5
Foreign currency translation adjustments –196.8
Other net assets –24.8
Mar. 31, 2011 3,571.9
3,500 3,550 3,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000
Debt and Equity decreased due to the repayment of commercial paper, and lower foreign currency transaction adjustments as a result of the yen’s appreciation.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 012 page 013 Business & History & Business
At a Glance 014 Business Review of Operations 016 Japanese Domestic Tobacco Business 016 & History International Tobacco Business 020 Pharmaceutical Business 026 Food Business 028 History of the JT Group 030
Notes: Financial data disclosed in “At a glance” are basically rounded. Financial data disclosed in “Review of Operations” are basically rounded down.
The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group. under a difficult business environment, the Japanese domestic tobacco business continues to explore opportunities for top-line growth and at the same time to build an optimum operating structure. The international tobacco business is actively exploring opportunities for top-line growth so that it can continue to act as the JT Group’s profit growth engine. In the pharmaceutical business, JT will continue to devote efforts to increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline. In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, striving to further strengthen our business foundation for future growth.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 012 page 013 At a Glance
JT Group The Japanese domestic tobacco business is the core source of profits for the JT Group. The business environment is becoming increasingly difficult due to a decline in overall demand in the domestic market and intensifying competition. In this business environment, the Japanese domestic tobacco business continues to explore opportunities for top-line growth and at the same time build an optimum operating structure. The international tobacco business is continuously exploring opportunities for top-line growth so that it can continue to be the JT Group’s profit growth engine. In the pharmaceutical business, JT will continue to build world-class, unique R&D capabilities and reinforce its market presence through innovative drugs by devoting efforts to increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline. In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, implementing measures to establish the highest standard of safety management and striving to further strengthen our business foundation for future growth.
see page 16
Japanese Domestic Tobacco Business (Years ended March 31) Overwhelm the competition in the home country market as the core source of profits.
Total Market Sales Volume (Billions of cigarettes) (Billions of cigarettes)
300 270.0 200 174.9 258.5 245.8 167.8 233.9 159.9 151.9 210.2 150 134.6 200 100 100 50
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011 Source: TIOJ
Net Sales Excl. Excise Taxes EBITDA/Operating Income (Billions of yen) (Billions of yen) 1,000 400 326.5 729.4 306.7 800 715.0 272.3 648.8 616.0 617.9 300 245.4 251.3 257.7 222.3 212.9 600 188.3 198.7 200 400 100 200
2007 2008 2009 2010 2011 2007 2008 2009 2010 2011
Note: 2007 – 2008: Excluding revenue from the imported EBITDA Operating Income tobacco. Note: 2007 – 2009: After royalty acceptance 2009 – 2011: Excluding revenues from the imported 2010 – 2011: Before royalty acceptance, we have tobacco, domestic duty free, the China Division, and changed allocation method of the overhead expenses other miscellaneous. from 2010.
see page 26
Pharmaceutical Business (Years ended March 31) Pursuing high value-added business by developing world-class innovative drugs
Net Sales EBITDA/Operating Income (Loss) (Billions of yen) (Billions of yen) 80 10 4.9 56.8 5 1.0 60 49.1 45.5 44.1 47.0 0 40 –5 –6.3 –8.2 –9.6 –9.7 –10 –11.2 20 –13.6 –13.3 –15 –17.4 2007 2008 2009 2010 2011 –20 2007 2008 2009 2010 2011
EBITDA Operating Income (Loss)
JAPAN TOBACCO INC. Annual Report 2011 page 014 page 015 Net Sales Breakdown by Business Segment (FY3/2011) JT Group Share in Global Cigarette Market (2010)
Pharmaceutical Business Other Business Business & History 2.4% 1.0% Food Business 9.8% International 19.2% Tobacco Business Japanese Domestic Tobacco Business 45.9% 31.6% Source: Euromonitor Note: Japanese Domestic Tobacco Business and International Tobacco Business are Adjusted Net Sales Excl. Excise Taxes
see page 20
International Tobacco Business (Years ended December 31) Attain a sustainable leadership position in profitability and/or market share in a growing number of markets, and continue to be the driving force for profit growth. Total Shipment Volume GFB Shipment Volume (Billions of cigarettes) (Billions of cigarettes)
500 445.9 434.9 300 428.4 245.5 249.8 385.6 243.4 400 203.2 200 300 240.1 149.1
200 100 100
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010 Note: 2008 – : Including cigars, pipe tobacco and snus, but Note: GFB in 2006: Winston, Camel, Mild Seven, Salem not including contract manufactured products GFB in 2007 – : Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour
Net Sales Excl. Excise Taxes EBITDA/Operating Income (Billions of yen) (Billions of yen) 1,200 1,080.8 400 338.0 946.0 906.8 897.5 288.2 900 300 270.8 277.7 205.4 550.3 600 200 174.8 156.1 136.9 112.7 81.1 300 100
2006 2007 2008 2009 2010 2006 2007 2008 2009 2010
Note: 2006 – 2007: Excluding revenue from distribution. EBITDA Operating Income 2008 – 2010: Excluding revenues from distribution Note: 2006 – 2008: After royalty payment contract manufacturing and other peripheral business. 2009 – 2010: Before royalty payment
see page 28
Food Business (Years ended March 31) Increasing profits by achieving sustainable growth based on the combined strength of group companies with world-class competitiveness Net Sales EBITDA/Operating Income (Loss) (Billions of yen) (Billions of yen) 17.3 500 436.0 20 17.0 394.7 14.5 375.0 15 12.0 400 336.4 8.4 286.6 10 6.7 300 5 0.7 200 0 –5 100 –10 –9.4 –11.5 –13.7 2007 2008 2009 2010 2011 –15 2007 2008 2009 2010 2011
EBITDA Operating Income (Loss)
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 014 page 015 Review of Operations
Japanese Domestic Tobacco Business
FY3/2011 Business Performance Summary
Sales volume Adjusted net sales excluding taxes* EBITDA Operating income 134.6 billion cigarettes ¥ 617.9 billion ¥ 257.6 billion ¥ 212.9 billion Down 11.3% Up 0.3% Up 2.6% Up 7.1%
* Adjusted net sales excluding taxes do not account for revenue from the imported tobacco, domestic duty free, China Division and other miscellaneous business.
As products in the premium price segment increased, product mix improved significantly after the price amendment Component ratio of price segment in When looking at the component ratio of price segments by JT sales volume, JT sales volume
share of premium price segment increased significantly. 100% 8.0 27.2 JT leads the market share in the premium price segment above 440 yen.
79.0 50% 66.0
13.0 6.8 0% FY3/2010 FY3/2011 Oct–Mar (after tax increase) less than ¥400 ¥410 more than ¥440 (Since Oct. 2010) less than ¥320 ¥300 more than ¥290 (Before Sep 2010)
As the effect of strategic pricing offset the volume decline, adjusted net sales excluding taxes remained broadly flat while EBITDA increased.
Japanese Domestic Tobacco Business –Adjusted Net Sales Excluding Taxes* Japanese Domestic Tobacco Business –EBITDA (Billions of yen) (Billions of yen)
FY3/2010 615.9 FY3/2010 251.2
Volume effect –52.4 Volume effect –69.8 Price and product +70.8 mix effect Price and product +70.8 Cost +5.5 mix effect Leaf tobacco –4.1 reappraisal gain/loss Others +0.9 Sales promotion –13.5 and others
FY3/2011 617.9 FY3/2011 257.6 500 520 540 560 580 600 620 160 180 200 220 240 260 280
* Adjusted net sales excluding taxes do not account for revenue from the imported tobacco, domestic duty free, China Division and other miscellaneous.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 016 page 017 The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group. Due to factors such as the aging of Japanese society and growing aware-
ness about the health risks associated with smoking and tightening of smok- Business & History ing-related regulations, demand has been declining. Moreover, the steep tax increase in October 2010 has resulted in a significant drop in demand and the business environment is becoming increasingly difficult. JT will strive to achieve continuous growth by providing quality and services suitable for the prices of its products. At the same time, JT will improve its productivity in order to increase the value of its Japanese domestic tobacco business in the medium term. Mitsuomi Koizumi President, Tobacco Business
Market share moved significantly, affected by the New products, mainly of key brands, were aggres- tax increase and the price amendment. sively introduced. Market share was affected by the tax increase and the price
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 016 page 017 Strategies and Specific Measures Optimizing our marketing mix toward sustainable growth through the provision of quality and services commensurate with the price
Product Strategy Improving Quality and Productivity Our product strategy will focus on enhancing the brand equity We will implement measures to maximize customer satisfaction, so as to provide value commensurate with the price, and build- including constantly improving product quality and strengthen- ing a brand portfolio that offers a wide selection of products. To ing the shipment assurance system. As part of this effort, we will that end, we will strive to enhance product innovation (enhance renew the process of raw materials processing and introduce a R&D capability), broaden the scope of brand extension and new tobacco blending method and a new tobacco processing strengthen the programs to improve package design and other technology so that we can satisfy customers’ diverse preferences product features so as to maintain and expand our market share. by providing products with a wide variety of tastes and aromas. Regarding productivity improvement, which is a critical chal- Distribution Strategy lenge for any manufacturer, we closed three factories by the end The greatest challenge for our distribution strategy is to secure of March 2011 as scheduled under the current medium-term overwhelming superiority in product exposure at retail stores. management plan. As of April, there were six factories in opera- We will strive to secure product exposure in ways suited to the tion in Japan. characteristics of each store type by making suggestions for store We will continue to strive toward an even more cost-efficient remodeling that will give more visibility to products and by operating structure. introducing display boxes. As for sales through vending machines, we will strive to make efficient allocation while Fulfilling Our Responsibility as the Market Leader making investments necessary for increasing the attractiveness of We will continue to fulfill our responsibilities as the leading our products. tobacco company in the Japanese market by endeavoring to achieve a harmonious coexistence between smokers and non- Marketing Strategy smokers. We will also engage in initiatives to improve smoking Our marketing force, the vast size of which eclipses the marketing manners and strive harder to secure and create space and teams of our competitors, satisfies the multitude and variety of opportunity for smoking, for example, by helping to provide needs of retailers scattered across the country. We will continue to comfortable smoking areas. engage in efficient and effective marketing activities in ways linked to our product and distribution strategies, while complying with As a Core Source of Profits for the JT Group regulations and rules such as restrictions on tobacco advertising We will ensure that the Japanese domestic tobacco business contin- and prevention of youth smoking. ues to serve as the JT Group’s core source of profits by overcoming challenges in the Japanese domestic market, such as the continuing decline in total tobacco demand and intensifying competition.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 018 page 019 Topics: Product Innovation
We are aggressively pursuing product innovation in order to ensure quality and Business & History & Business services commensurate with the retail price.
PRODUCT INNOvATION MEASURES IMPLEMENTED IN FY3/2011
Early April 2010 All 9 products in the Caster family Change-over to the D-Spec type Mid-November 2010 4 menthol products in the Mild Seven family Adoption of a round-corner box package Mid-February 2011 5 regular products in the Mild Seven family Adoption of a round-corner box package Mid-February 2011 Mild Seven Impact One 100’s Box Package redesign Late February 2011 3 products in the Seven Stars family Full renewal of tastes, aromas and names Seven Stars Menthol Box Seven Stars Deep Menthol Box Seven Stars Black Charcoal Menthol Box Seven Stars Solid Menthol Box Seven Stars Black Impact Box Seven Stars Solid Box
D-SPEC Regarding the Caster brand, which many customers have applauded for its low level of odor, its balance of aromatic essences has been improved so as to further reduce odor while keep- ing the taste unchanged. As a result, the Caster brand has been renewed as a product that meets JT’s D-spec low odor standard that enhances the enjoyment of taste.
ROUND-CORNER BOx Regarding the box package products in the Mild Seven family, we adopted a round-corner box package as widely requested by customers. As a result, these products feature the Mild Seven family’s image of being stylish and graceful and are also user-friendly as their package shape follows the contours of the hand.
DESIgN UNIFICATION The package of the Mild Seven Impact One 100’s Box was changed from a regular box to a round-corner box. In addition, the Blue Wind symbol of the Mild Seven family is indicated on the package in the shape of a sharp streamline, as on the package of the Mild Seven Impact One Menthol, so as to convey the sense of “impact.”
PRODUCT UPgRADE We are striving to upgrade our products so that we can satisfy customers’ diversifying needs.
RENEwAL OF 3 PRODUCTS IN ThE SEvEN STARS FAMILY We will build a more sophisticated lineup of products in response to customers’ requests for better package design, taste and aroma. Seven Stars Deep Menthol Box
Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco products or encourage smoking by consumers.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 018 page 019 International Tobacco Business
FY3/2011 Business Performance Summary
Total shipment volume* GFB shipment volume Core net sales excluding excise taxes** EBITDA 428.4 billion cigarettes 249.8 billion cigarettes $10,223 million $3,282 million Down 1.5% Up 2.7% Up 5.6% Up 10.7%
Core net sales excluding excise taxes** EBITDA $10,144 million $3,194 million * Total shipment volume includes cigars, pipe tobacco and snus, but does not include contract manufactured products. Up 4.8% Up 7.7% ** Core net sales exclude revenue from distribution, contract manufactur- ing and other peripheral business. *** Applying the previous year currency exchange rates.
Core net sales increased by 5.6% driven by: Strong EBITDA growth of 10.7%, or 7.7% at constant Robust pricing rates of exchange driven by: Market share gains in key markets owing to our continued Continued price/mix improvements, more than compensat- investment in our brands and our excellence in trade ing for the impact of shipment volume decline due to indus- marketing try contraction as well as for increasing leaf costs and Favorable currency exchange movements additional investment in brands and global infrastructure Favorable currency exchange movements
International Tobacco Business – Core Net Sales Excluding Taxes* International Tobacco Business – EBITDA (Millions of US dollars)*** (Millions of US dollars)***
FY3/2010 9,682 FY3/2010 2,965
Volume –91 Volume –128
Price/product mix +553 Price/product mix +589 Others –233 FY3/2011 at constant rates of 10,144 FY3/2011 at exchange**** constant rates of 3,194 exchange**** Forex impact** +79 Forex impact** +88
FY3/2011 10,223 FY3/2011 3,282 8,000 8,500 9,000 9,500 10,000 10,500 2,800 2,900 3,000 3,100 3,200 3,300 3,400 3,500
* Core net sales exclude revenue from distribution, contract manufacturing and other peripheral business. ** The forex impact represents the fluctuation between the US dollar and other currencies. *** The US dollar is the reporting currency for our International Tobacco Business. **** Applying the previous year currency exchange rates.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 020 page 021 Japan Tobacco International (JTI), JT Group’s international tobacco business, continues to be the profit growth engine of the JT Group, mainly thanks to its brands, its people and its diversified geographic profile. Our
continued investment in our business and innovation meant that share of History & Business market grew in most key markets, despite ongoing economic difficulties and a challenging operating environment. While the economic recovery is still fragile and pressure is mounting on the regulatory front, we believe that, based on our quality top-line growth and strong brand portfolio, we will continue delivering strong results in the future.
Pierre de Labouchere President & CEO, Japan Tobacco International
gLOBAL FLAgShIP BRANDS PORTFOLIO
The eight Global Flagship Brands (GFB) constitute the core of JTI’s brand portfolio, to drive quality top-line growth.
ENgINE Winston and Camel are the engine brands driving JTI’s growth.
First introduced in 1954, Winston has proved its Camel is an iconic international brand and originator of the status as JTI’s key growth driver, becoming in 2007 American Blend type of cigarette since 1913. Now sold in the 2nd* largest cigarette brand in the world. After more than 100 countries around the world. Camel’s 2010 almost a decade of strong momentum, Winston further accelerated its performance has been strengthened by the successful sales volume growth in the Middle East, Western Europe & CIS in 2010. introduction of Black & White line extension and the new Brand World Winston’s performance has been strengthened by Super Slims brand leading to market share gains in most key markets. extensions and ongoing product innovation. * Source: Euromonitor
STRONghOLD FUTURE POTENTIAL Four stronghold brands have a significant presence in their respective regions increasing the Sobranie and Glamour have strong future competitive power of JTI’s portfolio. growth potential.
Originating in Japan and Launched in 1964, Silk Cut estab- Sobranie is one of the world’s launched in 1977, Mild Seven lished its credentials as one of the oldest tobacco brands and has is the top-selling premium first low tar brands in the 1970’s, been synonymous with luxury charcoal brand. Its key long before it became the norm for cigarettes since 1879. This heri- markets outside Japan are Taiwan, Korea, other manufacturers. JTI owns the Silk Cut tage, exquisite style and the best selected Russia and Malaysia. trademark throughout the EU with the core tobaccos have made Sobranie one of the most markets being the UK, Ireland and Greece, prestigious brands in the world. Since 2009 a where the brand enjoys a significant market new generation Sobranie range has been share in the premium segment. rolling out across CIS markets.
Originally created for the Prince LD was launched in 1999 as a mid- Glamour is JTI’s leading of Wales in 1873, Benson & price proposition in the Russian Super Slims brand. Since its Hedges has a proud British market. The brand achieved immedi- introduction in 2005, Glam- heritage. Today, JTI owns the Benson & ate success and is accepted as a credible our has achieved remarkable growth consoli- Hedges trademark in EU markets (excl. Baltics) international proposition. Since 2007 LD has dating its No. 1 position as a Super Slims brand where it is a leading Virginia premium brand. grown continuously, expanding its presence to in several CIS markets. Glamour is constantly Benson & Hedges is continuously evolving its more than 30 countries across multiple regions expanding its geographical presence and portfolio and brand extensions to adapt to its supported by its constant portfolio expansion evolving portfolio in the growing Super Slims consumers’ lifestyles. in response to consumer aspirations. segment.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 020 page 021 Operating Performance Share in key markets 2009 2010 ppt. change JTI gained share in key markets as a result of our strength in RUSSIA 36.7% 36.9% +0.2 all price segments, as well as our excellence in trade marketing. FRANCE 14.8% 16.0% +1.2 GFB shipment volumes grew 2.7% to 249.8 billion cigarettes ITALY 18.5% 19.7% +1.2 building on our strong brand equity, which we are constantly SPAIN 20.6% 20.8% +0.2 strengthening and which will continue to drive our perfor- UK 39.2% 39.0% –0.2 TURKEY 19.0% 22.6% +3.6 mance in the future. TAIWAN 38.0% 38.4% +0.4 Total shipment volumes decreased by 1.5% to 428.4 billion * Twelve months moving average cigarettes due to global industry contraction caused by eco- ** Market shares do not include Roll-Your-Own/Make-Your-Own. Data source: AC Nielsen, Logista and Altadis nomic difficulties and excise tax increases.
GFB Portfolio Momentum
2010 GFB shipment volume vs. 2009 (Unit: billion cigarettes)
Volume/Year-on-year growth Year-on-year change
2009 243.4
Premium and above brands 1.1 +1.4%
Sub-premium 3.3 +2.5%
Mid/Value 2.1 +6.1%
2010 249.8 +2.7%
GFB shipment volumes grew 2.7% versus 2009, representing 58.3% of our total shipment volume Winston drove GFB growth, performing strongly in the Middle East and Italy, while LD performed strongly in Poland, Turkey and Hungary. Our volume in the premium and above segments grew 1.4%, or 1.1 billion cigarettes, driven by markets such as Korea, Turkey, France and Czech Republic.
Regional Breakdown
Total shipment volume Core net sales* EBITA (excluding HQ allocation)
CIS+ CIS+ CIS+ South & West Europe South & West Europe South & West Europe North & Central Europe North & Central Europe North & Central Europe 26% 30% 24% Rest-of-the-World Rest-of-the-World 31% Rest-of-the-World 30% 48% * Rest-of-the-World core 11% net sales include HQ 22% 18% 21% 24% 15%
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 022 page 023 South & West Europe (Unit: billions of cigarettes) CIS+ (Unit: billions of cigarettes) 2010 Year-on-year change 2010 Year-on-year change Total shipment volume* 63.2 –2.0% Total shipment volume* 203.6 –5.1% GFB shipment volume 55.2 –0.8% GFB shipment volume 105.3 +0.3% • Continued industry contraction, with a rebound in H2/2010 • Significant market contraction is starting to slow down • JTI gained market share in all key markets • Strengthening JTI market share and favorable pricing drove core net sales and • Favorable pricing more than offset shipment volume declines, driving core net EBITA growth Business & History sales and EBITA growth • At constant rates of exchange, core net sales excluding excise taxes and EBITA • At constant rates of exchange, core net sales excluding excise taxes and EBITA grew 6.0% and 10.7%, respectively. grew 1.7% and 4.5%, respectively.
North & Central Europe (Unit: billions of cigarettes) Rest-of-the-World (Unit: billions of cigarettes) 2010 Year-on-year change 2010 Year-on-year change Total shipment volume* 49.0 +3.1% Total shipment volume* 112.7 +4.0% GFB shipment volume 22.3 +9.7% GFB shipment volume 66.9 +7.3% • Solid total and GFB volume growth • A market rebound in Turkey and Taiwan in H2/2010 • Strong pricing drove core net sales and EBITA growth • Strong shipment volume growth led by the Middle East and Korea • At constant rates of exchange, core net sales excluding excise taxes and EBITA • At constant rates of exchange, core net sales excluding excise taxes and EBITA grew 6.4% and 9.7%, respectively. grew 4.8% and 3.0%, respectively.
* Total shipment volume includes cigars, pipe tobacco and snus, but does not include contract manufactured products ** Core net sales exclude revenue from distribution, contract manufacturing and other peripheral business
Strategies and Specific Measures 2011 Outlook: keep growing the top-line and con- Quality top-line growth is JTI’s overriding priority. JTI remains tinue to be JT Group’s profit growth engine. committed to deploying its key strategies under the guiding In 2010, pricing remained robust despite the recession and drove principle of continuous improvement. our performance, as we achieved 7.7% EBITDA growth at con- Build and nurture outstanding brands stant rates of exchange. Continue to enhance productivity We will remain focused on growing the top-line, through Sharpen focus on responsibility and credibility continued investment in our business. Looking into 2011, we are Develop human resources as a cornerstone of growth cautiously optimistic. Despite the lingering economic uncer- tainty, we are confident that with our strong brand portfolio and our focused strategy of growing the top-line, we will continue to deliver strong results.
EBITDA and EBITDA margin, 2000–2010
(Millions of US dollars) (%) 5,000 40
32% 4,000 32 3,452 3,282 2,965 3,000 24 2,452
2,000 16 10% 1,090 925 1,000 712 8 551 338 400 441
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Reported +26% CAGR
EBITDA EBITDA Margin
* As of 2009, EBITDA margin based on the revenue which excludes distribution, contract manufacturing and other peripheral business.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 022 page 023 Russian Market
Russia is JTI’s largest market, where we Market Share in Russia (%) lead both in terms of share of market and 12-month moving average 3-month average JTI Total Share of 37.1 share of value. 39 36.7 36.9 36.7 37.0 36.8 Market 34.7 34.8 35.7 33.7 34.6 34.5 34.6 JTI Total Share of • In 2010, JTI strengthened its market share Value 34 leadership and grew share of value. 31.9 Winston 10.8 10.8 LD 10.6 • Over the last 18 months, JTI has led 29 10.4 10.5 Peter I 10.3 Premium and industry pricing to fully recover excise tax above brands 10 9.7 increases and cost inflation. 5.0 5.2 5.2 5.2 5.2 5.2 4.4 5 3.4 After a 3.6% decline in 2009 due to the 3.2 3.9 3.8 4.0 4.0 4.0 2.4 2.4 2.1 2.1 2.1 2.1 2.0 economic crisis, overall market contraction 0 2008 2009 2010 Q1 Q2 Q3 Q4 Data source: AC Nielsen stabilized in the second half of 2010, slow- ing to 2.7% decline in year 2010. Total Industry Size Market Share of GFB & Non-GFB (Billions of cigarettes) (%) 500 40 36.7 36.9 33.8 34.9 35.7 We steadily increased our GFB market 405 18.1 17.7 17.7 390 380 19.2 19.0 400 share, despite a competitive environment –3.6% –2.7% 30 that continues to be challenging. 300 • We will continue to focus on GFB brand 20 19.0 19.2 200 17.6 14.6 15.9 equity building and portfolio optimization 10 through new launches and innovations. 100
0 2008 2009 2010 0 2006 2007 2008 2009 2010
Data source: JTI internal data Non-GFB GFB Data source: AC Nielsen
Turkish Market
Turkey, the largest market in the Rest-of- Market Share in Turkey (%) the-World cluster, is also the 2nd largest 12-month moving average 3-month average 23.5 JTI Total Share of market by shipment volume for JTI. 25 22.6 22.8 23.0 21.2 Market We continued to be the fastest grow- 19.0 Winston 19 16.9 14.0 Monte Carlo 13.4 13.7 LD ing manufacturer in this market. 13.2 12.6 Camel • Winston remained both the largest and 13 11.7 11.4 fastest-growing brand in the market. 4.9 4.8 5.1 5.1 6 4.2 4.7 • In the competitive popular and value 3.1 2.3 2.5 2.6 2.2 3 1.5 1.8 segments, JTI maintained its position, 0.9 0.6 1.4 1.3 1.5 1.6 capturing down-trading consumers. 0.5 1.0 0 2008 2009 2010 Q1 Q2 Q3 Q4 Data source: AC Nielsen
GFB enjoyed strong volume and share Total Industry Size Market Share of GFB & Non-GFB (Billions of cigarettes) (%) growth thanks to their increasing con- 150 25 22.6 5.5 sumer appeal and growing brand equity, 19.0 120 20 104 103 16.9 5.2 despite rising competitive pressure. 96 –1.2% 14.4 4.1 17.1 • Continuing to invest in our brand equity 90 –9.6% 15 3.3 13.8 11.2 12.9 with a focus on Winston and Camel. 2.6 11.2 60 10 • Strengthening our portfolio to enhance its 8.6 relevance to consumers. 30 5
0 2008 2009 2010 0 2006 2007 2008 2009 2010
Data source: AC Nielsen Non-GFB GFB Data source: AC Nielsen
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 024 page 025 Innovation
To continue strengthening our brand equity and further enhance the growth momentum of our Business & History & Business GFB, JTI’s strategy places significant emphasis on investment behind brands, including innovations. These innovations take several forms:
LINE ExTENSIONS TO wIDEN ThE SCOPE OF ExISTINg BRANDS: • Camel Black & White, successfully introduced in France and now available in 11 markets worldwide, represents a modern interpretation of the Camel brand. It was built as a flexible proposition that can adapt to local market needs through different formats, to address relevant consumer trends.
• Camel Essential was extended into Roll-Your-Own with a unique pack.
• Winston’s launch of XS King Size Super Slims in the CIS markets became the year’s big- gest innovation story. Sales in excess of 3 billion units in 2010 propelled XS to regional number 2 position in the King Size Super Slims segment and strengthened Winston’s leadership in Russia.
• LD Club was successfully launched in Russia and Ukraine in 2010 as the first compact format cigarette in the Value segment. LD Club offers a cosmopolitan premium style, up-to- date and convenient format at an accessible price and contributes to the LD image as a modern and international brand. In Russia, LD Club has become number 3 position in the King Size Super Slims segment after Winston XS.
• Winston Avant Edition, an image enhancer with clear innovation and premium cues, launched in Ukraine and having positive impact on Winston performance post-launch phase.
• Benson & Hedges Slide, representing the modern, progressive style of the B&H brand, has been launched in 10 markets across Europe, achieving strong growth in Central Europe in 2010. The Slide range, in tune with a new and socially interactive style that takes its cues from the design codes of technological innovation, provides a new target audience with a relevant proposition from Benson & Hedges.
• Amber Leaf new mini pouch CPB (Crush Proof Box) – a 12.5g pouch with papers offered together in a cigarette pack format, addresses the key consumer needs of increased conve- nience and freshness.
TEChNOLOgY TO TAKE ADvANTAgE OF OUR ENgINEERINg KNOw-hOw: • LSS (Less Smoke Smell) line extension is Mild Seven’s strategic innovation anchor and its success helped Mild Seven retain its status as the fastest growing international brand in the Korean market.
• WRC (Wrapped Re-functional Charcoal) filter is the newly invented technology to compete in the emerging premium menthol segment, especially in Asia. WRC technology delivers perfect balance between refreshing menthol and smooth tobacco taste.
This section is intended to explain the business operations of JT to investors, not to promote sales of tobacco products or encourage smoking by consumers.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 024 page 025 Pharmaceutical Business
FY3/2011 Business Performance Summary
Net sales EBITDA Operating loss ¥ 46.9 billion ¥ –13.2 billion ¥ –17.4 billion Up ¥2.9 billion Down ¥3.6 billion Down ¥3.8 billion
Net sales in FY3/2011 grew driven by the strong R&D Status performance of Torii Pharmaceutical Co., Ltd. and Increased and advance compounds in late phase of clinical trials from milestone revenue of out-licensed compounds and enhance R&D pipeline toward the final year of JT-11. while profits declined due to an up-front payment JTS-653 a drug for pain and overactive bladder and JTT-751 by Torii Pharmaceutical in respect of a license for treatment of hyperphosphatemia advanced to Phase 2 and agreement, among others. Phase 3, respectively, in Japan as well as Type 2 diabetes Torii Pharmaceutical Co., Ltd. posted a rise in net mellitus drug JTT-851 advanced to the clinical development sales and a decline in profits. stage in Japan. Sales of REMITCH CAPSULES, an anti-pruritus drug for hemodialysis patients, and sales of anti-HIV drug Truvada grew. An up-front fee following the signing of an agreement with ALK-Abelló A/S of Denmark on the exclusive right to develop and sell in Japan house dust mite allergy immunotherapy products to treat and diagnose asthma and allergic rhinitis.
Pharmaceutical Business – Net Sales Pharmaceutical Business – EBITDA (Billions of yen) (Billions of yen)
FY3/2010 44.0 FY3/2010 –9.6
R&D expenses +0.2 Torii Pharmaceutical (non-consolidated) Co., Ltd. +2.9 (non-consolidated) Operating income of Torii Pharmaceutical –4.2 Co., Ltd. (non-consolidated) Royalty income, etc. +0 Royalty income, etc. +0.4
FY3/2011 46.9 FY3/2011 –13.2
42.0 43.0 44.0 45.0 46.0 47.0 –16.0 –14.0 –12.0 –10.0 –8.0 –6.0 –4.0 –2.0 0.0
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 026 page 027 In the pharmaceutical business, JT will continue to build world-class, unique R&D capabilities and reinforce its market presence through innova- tive drugs by devoting efforts to increasing and advancing compounds in a
late phase of clinical trial and enhancing the R&D pipeline, so that it can Business & History pursue a high-value added business based on the development of world- class innovative drugs.
Noriaki Okubo President, Pharmaceutical Business
Clinical Development (As of May 12, 2011) Code Key indication Stage Rights Roche (Switzerland) obtained the rights to develop and commercialize the compound JTT-705 (oral) Dyslipidemia Phase 2 (Japan) worldwide, with the exception of Japan. (Development stage by Roche: Phase 3) Phase 2 (Japan) JTT-130 (oral) Dyslipidemia Phase 2 (Overseas) Gilead Sciences (US) obtained the rights to develop and commercialize this compound JTK-303 (oral) HIV infection Phase 1 (Japan) worldwide, with the exception of Japan. (Development stage by Gilead Sciences: Phase 3) JTT-302 (oral) Dyslipidemia Phase 2 (Overseas) Merck (US) obtained the rights to develop and commercialize this compound world- JTT-305 (oral) Osteoporosis Phase 2 (Japan) wide, with the exception of Japan. JTS-653 (oral) Pain Overactive bladder Phase 2 (Japan) JTK-656 (oral) HIV infection Phase 1 (Overseas) JT obtained the rights to develop and commercialize this compound in Japan from JTT-751 (oral) Hyperphosphatemia Phase 3 (Japan) Keryx Biopharmaceuticals (US). (Developed jointly with Torii) JTK-853 (oral) Hepatitis C Phase 1 (Overseas) JTT-851 (oral) Type 2 diabetes mellitus Phase 1 (Japan)
Strategies and Specific Measures Further develop Torii Pharmaceutical’s expertise in its areas of Enhance clinic development capabilities, particularly for com- strength pounds in late-stage clinical trials • Developing expertise in the field of HIV, renal disease and hemodialy- • To strengthen the capability for clinical development in order to keep sis, among others up with the progress in clinical development • Acquisition of new products for marketing and development • Expand R&D in the allergen area (cedar pollen allergies) Further Strengthen R&D pipeline
• To continue concentrating R&D resources on the following four areas: Out-Licensing Deals glucose and lipid metabolism; virus research; immune disorders and FY Code Company inflammation; and bone metabolism 3/2005 JTT-705 (anti-dyslipidemia drug) Roche (Switzerland) 3/2005 JTK-303 (anti-HIV drug) Gilead Sciences (US) Enhance licensing activities and strengthen relationships with 3/2007 Pre-clinical trial stage new compound GlaxoSmithKline (UK) Pre-clinical trial stage anti-body drug partners 3/2007 MedImmune (US) candidate • To continue exploring opportunities for out-licensing 3/2009 JTT-305 (anti-osteoporosis drug) Merck (US) • To engage in in-licensing activity with emphasis on early market launch In-Licensing Deals FY Code Company 3/2004 Three anti-HIV drugs Gilead Sciences (US) JTT-751 Keryx 3/2008 (anti-hyperphosphatemia drug) Biopharmaceuticals (US)
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 026 page 027 Food Business
FY3/2011 Business Performance Summary
Net sales EBITDA Operating loss ¥ 375.0 billion ¥ 17.2 billion ¥ –9.4 billion Down ¥19.6 billion Up ¥2.7 billion Up ¥4.2 billion
Factors behind the net sales decline Factors behind the EBITDA growth Net sales for the overall food business declined. EBITDA for the overall food business increased. Net sales for the beverage business increased due to the EBITDA for the beverages business increased due to the favorable effects of the summer heat waves and the robust favorable effect from the summer heat waves and the robust sales of the Roots brand. sales of the Roots brand. Net sales for the processed food business declined due to the EBITDA for the processed foods business grew due to the closure of the rice wholesale business and the exclusion of absence of the one-time factor in the fishery product business some subsidiaries from the consolidated results as well as a in the previous year. decline in sales of products for restaurants. One-time factor: Recording of loss provisions related to delays in the collection of some accounts receivable and valuation losses due to a steep drop in the market prices of some products.
Factors behind the operating income growth The operating income growth was led by the increased EBITDA.
Food Business – Net Sales Food Business – EBITDA (Billions of yen) (Billions of yen) FY3/2010 14.4 FY3/2010 394.6
Beverage business +1.0 Beverage business +6.2
Processed food +1.7 business, etc. Processed food –25.9 business, etc. Overhead costs +0.1
FY3/2011 375.0 FY3/2011 17.2 370 375 380 385 390 395 400 405 13.5 14.0 14.5 15.0 15.5 16.0 16.5 17.0 17.5
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 028 page 029 In the food business, we are striving to provide delicious foods that people can consume safely while wishing to “provide
products that your loved ones want to History & Business eat.” We will continue to devote our efforts to the three business areas of bev- erages, processed foods and seasonings, aiming to retain the trust of customers by serving the people’s daily lives through our offering of food products.
Ryoko Nagata Miyoharu Hino Head of Soft Drink Business Division President & CEO TableMark Co., Ltd.
• To establish a strong business foundation by continuing efforts to Strategies and Specific Measures strengthen the value chain in the whole business process, from pro- In the food business, we are devoting our efforts to the three curement, to manufacturing, and production of sales. business areas of beverages, processed foods and seasonings, • To strengthen cost competitiveness by further pursuing efficiency in implementing measures to establish the highest standard of food all business operations. safety management and striving to further strengthen our busi- ness foundation for future growth. FOOD SAFETY CONTROL I. Actions for reducing risks • Promoting the acquisition of ISO 22000 certification for food safety BEvERAgES BUSINESS management systems as well as efforts to ensure food defense against • To strengthen the Roots flagship brand, which is external purposeful attack. acclaimed for its authentic coffee taste created II. Improving consumer response by JT’s original technology, so as to enhance • Collecting customer feedback on a 365-days-a-year basis and respond- brand equity. ing to the feedback quickly and appropriately by using JT’s own food • To enhance our sales net- Number of Vending Machines safety management system to strengthen cooperation between relevant works led by Japan Bever- (Years ended March 31) business divisions. age Inc., a JT subsidiary (Machines) 300,000 III. Strengthening the institutional capability responsible for operating 250,500 257,000 254,000 257,000 265,000 • Promoting a group-wide food safety initiative by establishing a food vending machines, and to 200,000 safety management section at each of the beverages, processed foods strive to provide conscien- and seasonings businesses as the entity responsible for overseeing food tious services. 100,000 safety and analyzing raw materials and products of the beverages • To strengthen the profit business at TableMark’s Tokyo Quality Control Center. base by pursuing efficiency 2007 2008 2009 2010 2011 • Actively incorporating diverse knowledge and viewpoints into food safety in all business operations. control by seeking assessment and advice from outside experts appointed as food safety advisers, and reflecting these in business activities. PROCESSED FOODS BUSINESS, ETC. • To expand the business volume and strengthen profitability by strategic concentration in staple food products (frozen noodles, frozen and packed cooked rice and frozen bread) and yeast products in seasonings, for which we can make maximal use of acquired technology and product develop- ment power in the TableMark group.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 028 page 029 History of the JT Group
Before 1985
T is a joint stock corporation that was incorpo- Northern Ireland, laying the foundations for Gallaher Jrated in April 1985 under the Commercial Code Group. Meanwhile, R.J Reynolds Tobacco Co. (RJR), of Japan, pursuant to the Japan Tobacco Inc. Law, or which would subsequently create the Camel and the JT Law. Winston brands, was established in 1874 in the US. JT’s history in Japan dates back to 1898, when the In this manner, the current JT Group can trace its government formed a monopoly bureau to operate origins to many different countries and regions such as the exclusive sale of domestic tobacco leaf. Austria, Northern Ireland, the US and Japan. The JT The JT Group’s overseas history began with Group has a long history and extensive experience in the founding of Austria Tabak in 1784. Roughly 70 the tobacco business. years later, Tom Gallaher started out in business in
History in Japan from the early 20th century to 1984, monopoly to all tobacco products in Japan and to the domestic salt when the Japan Tobacco Inc. Law was enacted. business. On June 1, 1949, the bureau was established and duly named Our history in Japan dates back to 1898, when the government the Japan Tobacco and Salt Public Corporation, or JTS. This corpo- formed a monopoly bureau to undertake the exclusive sale of domes- ration helped to ensure the stable supply of tobacco and secure fiscal tic leaf tobacco. In the early 1900s, the government extended this revenues for the government.
1784 1857
l Austria Tabak is founded by Emperor Joseph II. l Tom Gallaher sets up his business (Londonderry, Northern Ireland).
1891 1898
l The Moscow-based Ducat factory is founded. l The Japanese Monopoly Bureau is established for the sale of domestic leaf tobacco.
1949 1954
l The Monopoly Bureau becomes the Japan Tobacco and Salt Public Corporation. l Winston is launched.
1957 1964
l HOPE (10) is launched as Japan’s first domestically produced filter cigarettes. l Silk Cut is launched.
1977 1981
l Mild Seven is launched (Japan). l Mild Seven is launched internationally.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 030 page 031 The growth in demand for cigarettes in Japan began to slow in the l Abolish the tobacco monopoly law to liberalize tobacco imports mid-1970s as a result of demographic trends and growing concern and establish a tobacco business law to make necessary adjust- Business & History about health risks associated with smoking. This trend continued, ments related to the tobacco business. such that growth in industry sales essentially stopped. In addition to l Abolish the JTS law, reorganize JTS as a joint stock corporation the structural change, the domestic tobacco market opened up sub- so as to enable it to pursue rational corporate management as stantially to foreign suppliers, triggering competition between much as possible and establish the Japan Tobacco Inc. Law, domestic and foreign tobacco products in Japan. Foreign countries which provides for a necessary minimum level of regulation in stepped up pressure on Japan to take further measures to open the light of the corporation’s need to compete with foreign tobacco market that were difficult to implement within the framework of the companies on an equal footing in the domestic market follow- monopoly tobacco sales system. Amid such pressure as well as moves ing the liberalization of tobacco imports. toward the reform of government-run public corporations, a govern- These bills were enacted on August 3, 1984 in the 101st session of ment panel was established in March 1981 to conduct research on the the Diet and promulgated on August 10 of the same year. In April public corporation system. In its third report (July 30, 1982), the 1985, JT was founded as an entity that took over the whole of the panel proposed drastic reform of the monopoly and public corpora- business operations and assets of JTS. tion systems. In response to this proposal, the government conducted a comprehensive review of these systems and drafted bills to:
1874 1879
l RJR is founded by Richard Joshua Reynolds in Winston, North Carolina. l Sobranie is registered in London, to become one of the oldest cigarette brands in the world.
1913 1931
l Camel is launched. l Cellophane is introduced by RJR in order to preserve the freshness of tobacco.
1955 1956
l Benson & Hedges is acquired by Gallaher. l Salem is launched.
1968 1969
l Gallaher is acquired by the American Tobacco Company. l Seven Stars is launched, featuring Japan’s first domestically produced charcoal filter.
1984
l Japan Tobacco Inc. Law is enacted.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 030 page 031 In and After 1985
The corporate history of JT is summarized in the table below. As for the abolition eliminated the price advantage of JT products over imported international tobacco business, the history before JT’s acquisitions of RJR products, which had stood at around ¥60 to ¥80 when JT was founded in Nabisco’s non-US tobacco operations and Gallaher is included. 1985. As a result, competition between JT and foreign tobacco makers The operating environment for JT changed drastically in just two intensified in the Japanese market, leading to a decline in JT’s market years after the foundation of the company, with the yen’s strong apprecia- share from 97.6% in fiscal 1985 to 90.2% in fiscal 1987. To cope with the tion following the Plaza Accord in 1985, a tobacco tax hike in 1986 and rapid deterioration of the operating environment, JT implemented ratio- the abolition of tariffs on imported cigarettes in 1987. Amid the yen’s nalization measures to enhance its cost-competitiveness and pursued upsurge, a price increase for JT products due to the tobacco tax hike diversification while taking measures to strengthen its marketing capabil- coupled with price cuts for imported cigarettes attributable to the tariff ity. In the 1990s, JT’s competition with foreign rivals in the Japanese
1985 1987 1988
April April October l Japan Tobacco Inc. is established. l Import tariffs on imported cigarettes are abolished. l “JT” communication name is introduced. (Japanese tobacco market opened to foreign tobacco manufacturers.) l The Business Development Division is established to promote new businesses. l The Business Development Division is later reorganized into operational divisions engaged in the food and pharmaceutical businesses, finishing in July 1990.
1995 1996 1997
May June April l Head office is moved back to Minato-ku from l Government releases second tranche of outstand- l JT ends its salt monopoly business in line with Shinagawa-ku following completion of new head ing JT shares (272,390 shares offered at 815,000 abolition of the salt monopoly system. office building. yen apiece). l The Tobacco Mutual Aid Pension scheme is integrated into the Employees’ Pension scheme. l Peter I is launched (Russia). l Acquisition of Tanzanian tobacco production facility. l American Brands spins off Gallaher which becomes Gallaher Group Plc and is listed on the London and New York stock exchanges.
2000 2001 2003
l Acquisition of Liggett-Ducat (Russia). l Acquisition of Austria Tabak. October l JT repurchases 45,800 of its own shares to increase its management options.
2006 2007 2008
April April January l JT implements a five-for-one stock split in order to l JT acquires all outstanding shares of Gallaher l JT acquires a majority stake in Katokichi Co., Ltd. expand the investor base, effective April 1, 2006. Group Plc. through a tender offer. May April l Acquisition of AD Duvanska Industrija Senta in Serbia. l JT acquires a majority stake in Fuji Foods Corporation. July l JT concentrates its processed food operations, including frozen food operations and seasonings operations, at the Katokichi Group.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 032 page 033 market intensified further. Furthermore, overall cigarette demand in in 1999 and Gallaher in 2007. With its international sales volume exceed- Business & History Japan peaked out in the latter half of the 1990s due to a contraction of the ing its domestic sales volume, the JT Group continues to grow as a global adult population and growing concerns with health problems associated tobacco company. The international tobacco business is the engine of the with smoking. Amid the increasingly difficult operating environment for JT Group’s profit growth through its comprehensive brand portfolio the domestic tobacco business, JT took additional rationalization steps, which includes Winston, Camel and Mild Seven as well as Benson & pursued consolidation of operations in its areas of business diversification Hedges, Silk Cut, LD, Sobranie and Glamour. and expanded the international tobacco business, thereby strengthening its business foundation. JT significantly strengthened the international tobacco business by acquiring RJR Nabisco’s non-US tobacco operations
1992 1993 1994
l Acquisition of Manchester Tobacco Company Ltd. September October l The Central Pharmaceutical Research Institute is l Government releases first tranche of outstanding l Acquisition of AS-Petro (Russia). established to enhance in-house research JT shares for initial public offering (394,276 shares capabilities. offered at 1,438,000 yen apiece). l JT stock is listed on the first sections of stock exchanges in Tokyo, Osaka and Nagoya. November l JT stock is listed on stock exchanges in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo.
l Acquisition of Yelets (Russia).
1998 1999
April May l JT signs an agreement with Unimat Corporation l JT acquires the non-U.S. tobacco business of RJR Nabisco Inc. (currently, Japan Beverage Inc.) on a tie-up regard- July ing beverage business. l JT acquires the food business of Asahi Kasei Corporation, including Asahi Foods and seven other subsidiaries. l JT later acquires a majority stake in Unimat. October December l Under a business tie-up between JT and Torii Pharmaceutical Co., Ltd., the two companies’ R&D operations l JT acquires a majority stake in Torii Pharmaceutical related to medical pharmaceuticals are concentrated at JT, while their promotion operations are combined at Co., Ltd. through a tender offer. Torii Pharmaceutical.
l LD launched (Russia).
2004 2005
June April l Government releases third tranche of outstanding l JT terminates a licensing contract under which it had exclusive rights to produce and sell Marlboro brand products JT shares (289,334 shares offered at 843,000 yen in Japan and use the Marlboro trademark in the country. a piece), reducing its stake in JT to the minimum June level allowed under law. l Acquisition of CRES Neva Ltd. (Russia). November–March 2005 l JT repurchases 38,184 of its own shares to l Glamour is launched (Russia, Ukraine, Kazakhstan). increase its management options.
2009 2010 2011
May January March l JTI celebrates its 10th anniversary. l Katokichi Co., Ltd. is renamed TableMark Co., Ltd. l JT repurchases 58,630 of its own shares, as part of June May its shareholder return measures. l JTI Leaf Services (US) LLC is established. l Smokeless tobacco product Zerostyle Mint is October launched. l Acquisition of leaf suppliers Kannenberg & Cia. Ltda. (Brazil) and Kannnenberg, Barker, Hail & Cotton Tabacos Ltda. (Brazil). November l Acquisition of leaf suppliers Tribac Leaf Limited (UK).
Note: l Main topics of the JT Group. l Main topics of RJR Nabisco’s non-US operations before participating in the JT Group. l Main topics of Gallaher before participating in the JT Group.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 032 page 033 Corporate Governance 035 Responsibility Activities Contributing to the Environment and Society 044
JT recognizes that prompt and proper decision-making and business execution are vital to increasing our corporate value and responding appropriately to new challenges to come in the future, as the business and social environments change. Based on this recognition, JT has been striving hard to enhance corporate governance as a top management priority. The JT Group strives to make contributions to society through a variety of corporate activities. we work to find harmony with our business environment and global environment, and aim to coexist with society as a good corporate citizen. we conduct continuing activities from this viewpoint.
JAPAN TOBACCO INC. Annual Report 2011 page 034 Corporate Governance
I Basic Concept of Corporate Governance and Basic Information Including Capital Structure and Corporate Attributes
Corporate Governance appropriately to new challenges to come in the future, as the business 1. Basic Concept and social environments change. Based on this recognition, JT has JT recognizes that prompt and proper decision-making and business been striving hard to enhance corporate governance as a top manage- execution are vital to increasing our corporate value and responding ment priority.
2. Capital Structure Combined equity stakes of foreign shareholders: between 20% and 30% Major Shareholders As of March 31, 2011 Name No. of shares held Equity stake (%)
The Minister of Finance 5,001,345 50.01 Responsibility Japan Trustee Services Bank, Ltd. (Trust Account) 256,502 2.57 State Street Bank and Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 224,116 2.24 The Master Trust Bank of Japan, Ltd. (Trust Account) 222,931 2.23 Mizuho Trust and Banking Co., Ltd., re-trusted to Trust & Custody Services Bank, Ltd., as retirement benefit trust assets 169,000 1.69 Chase Manhattan Bank 385036 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 85,107 0.85 Mellon Bank N.A. as Agent for Its Client Mellon Omnibus U.S. Pension (Standing Agent: Mizuho Corporate Bank, settlement division) 80,675 0.81 State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 78,317 0.78 HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 68,367 0.68 State Street Bank and Trust Company 505225 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 61,888 0.62 Total 6,248,248 62.48
(Note) In addition, 478,526 own shares are held by JT.
3. Corporate Attributes Listed on First sections of the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange and the major sections of the Sapporo Securities Exchange and the Fukuoka Stock Exchange Closing month of the annual account book March Business sector Foods Number of employees (consolidated basis) 1,000 or more Net sales (consolidated basis) ¥1 trillion or more Presence or absence of parent company None Number of consolidated subsidiaries Between 100 and 300
JAPAN TOBACCO INC. Annual Report 2011 page 035 4. Other Factors which May Materially Affect consolidated subsidiary of JT and is listed on the Tokyo Stock Corporate Governance Exchange. While JT is responsible for R&D, Torii Pharmaceutical The Japan Tobacco Inc. Law (the “JT Law”) obligates the govern- undertakes production and sales. In order to perform these different ment to hold JT shares. As of the end of March 2011, the govern- functions efficiently, the two companies maintain a cooperative rela- ment held 50.01% of all outstanding JT shares. tionship. JT respects the need to ensure a certain degree of indepen- The Minister of Finance has the authority to supervise JT under dence for Torii Pharmaceutical by refraining from undermining the the JT Law and Tobacco Business Law. company’s business judgment. Torii Pharmaceutical Co., Ltd. (hereinafter referred to as “Torii Pharmaceutical), which engages in the pharmaceutical business, is a
II Status of Business Management Organization Concerning Business Decision-Making, Execution and Supervision and Other Corporate Governance Systems
1. Matters Concerning the Organizational Structure outside members with expert knowledge. and Organizational Management In light of the above, we believe that the existing systems enable adequate monitoring of the execution of business. Although JT does Form of organization A company with auditors not have any outside directors at the moment, we will continually consider the role to be played by outside directors and suitable Matters concerning directors candidates.
Number of directors as set forth in the 15 company’s articles of incorporation Members of Advisory Committee (as of June 30, 2011) Term of office of directors as set 2 years Hiroyuki Itami Professor, Graduate School of Innovation Studies, forth in the company’s articles of Tokyo University of Science. incorporation Kazuo Inamori Founder and Chairman Emeritus, Kyocera Corporation Chairman of the Board of Directors Chairman Sakutaro Tanino Former Japanese Ambassador to India and China/ Vice President, Japan-China Friendship Center Number of directors 8 Tomijiro Morita Senior Advisor, The Dai-ichi Life Insurance Number of outside directors None Company, Limited Sakue Mizukoshi Corporate Adviser, SEVEN & i Publishing Co., Ltd. The reason for the adoption of the current organizational system: While there is no outside director, JT selects persons suitable for the Matters concerning auditors post of director in light of the candidates’ personality, judgment and Presence or absence of Audit Board The Audit Board is in place. experiences. In addition, in order to ensure the appropriate exercise of Number of auditors as set forth in the 4 the function of providing advice from the perspective of an outsider company’s articles of incorporation that is expected of an outside director, JT has established the Advisory Number of auditors 4 Committee, which comprises 5 outside experts and advises the man- agement team from a broad perspective with regard to how the com- Cooperation between auditors and an independent auditor: pany should operate in the medium to long term, and other issues of While auditors and the independent auditor (Deloitte Touche similar importance. In addition, JT has established an objective and Tohmatsu LLC) conduct audits individually, they endeavor to neutral management monitoring system based on audits conducted by enhance their cooperation in order to ensure appropriate audits, for auditors (the majority of the auditors are outside auditors (all of the example by sharing information on the results of their respective three auditors have the status of an independent executive)) from an audits and, as necessary, exchange information and opinions with independent and fair standpoint. There are also the Compensation each other. Advisory Panel and the Compliance Committee, both of which include
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 036 page 037 Cooperation between auditors and the internal audit division: There are three outside auditors at JT. Those outside auditors are While auditors and the Operational Review and Business Assurance appointed in light of their experiences and broad perspective in their Division conduct audits individually, they endeavor to enhance their respective backgrounds. cooperation in order to ensure appropriate audits, for example by Although one of them, Mr. Koichi Ueda, is the representative sharing information on the results of their respective audits and, as director of the Resolution and Collection Corporation, this corpora- necessary, exchange information and opinions with each other. tion does not have any business relations with JT. Therefore, Mr. Ueda himself has no direct interest in JT. As well, neither of the Information concerning outside auditors other two outside auditors has any direct interest in JT. At JT, auditors including outside auditors exercise an objective Appointment of outside auditors There are outside auditors. and neutral management monitoring function based on audits con- Number of outside auditors 3 ducted from an independent and fair standpoint. JT has designated Number of outside auditors also 3 all of the three outside auditors as independent executives based on
appointed as independent executives its judgment that in light of the attributes of them and their close Responsibility relatives, there is not any risk of conflicts of interest arising between them and ordinary shareholders.
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 Board of Accounting audit/Operating audit Audit Board Directors Introduction of compliance-related matters Report eight members four members Review of the policy and the (including three outside Independent Advisory Supervision rule relating to compensation Compliance auditors) of the for board members and Committee Auditors Committee Advice Accounting performance executive officers audit five members five members (outside members) Auditor’s Office Compensation (including three outside President and members) Chief Executive Advisory Panel Operational Officer Review and three members Business Report/ Executive (including two outside Compliance Assurance Proposal Committee members ) Office Division Executive Lawyers Internal audit Officers Advice Departments Accounting audit/Operating audit
Group audit Group Companies
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 036 page 037 Matters concerning incentives option grants, as they are required to participate in decision-making
Provision of incentives for Introduction of a performance- regarding companywide business strategies aimed at increasing the directors linked remuneration system and corporate value of JT and to perform their audit-related duties. a stock option As part of remuneration for directors and executive officers, JT Officers eligible for stock Directors, Executive Officers introduced a stock option scheme in order to enhance the motivation options to contribute to an increase in the corporate value and boost corpo- rate morale. Supplementary information concerning incentives: Remuneration for directors is linked to JT’s business perfor- Matters concerning remuneration for directors mance for each year and the company’s medium- and long-term Means of disclosure Annual securities report, business corporate value. operation report (business report), etc. Specifically, remuneration for directors who concurrently serve as Disclosure status The total amount and its breakdown executive officers comprises basic monthly pay and an executive of remuneration payments to all direc- bonus linked to the company’s business performance in the relevant tors is disclosed. The total amount of year, and stock option grants, the value of which is linked to the consolidated remuneration payments to persons who received consolidated medium- to long-term corporate value of JT, as they are expected to remuneration of ¥100 million or more achieve targets of their assigned business through their daily execu- each. tion of business. Remuneration for directors who do not concurrently serve as executive officers comprises basic monthly pay and stock
Information concerning remuneration for senior officers: The remuneration payments to senior officers made in FY3/2011 are as follows:
Total remuneration amount by remuneration type (in millions of yen) Total remuneration Number of officers Officer type amount (in millions Basic monthly pay Executive bonus Stock option grants concerned of yen) Directors 583 372 107 103 10 Auditors (excluding outside auditors) 33 33 — — 1 Outside officers 56 56 — — 3 Total 673 463 107 103 14
(Note 1) The amount of executive bonus is the amount of executive bonus that will be paid to directors. (Note 2) The amount of stock option grants is the total amount of stock option grants that was given to directors within FY3/2011.
The following information is disclosed in the 26th annual securities In accordance with the above concept, remuneration for senior report. Total amount of consolidated remuneration paid to persons officers comprises (1) “basic monthly pay,” (2) an “executive bonus” who received consolidated remuneration of ¥100 million or more linked to the company’s business performance in the relevant year, each. and (3) “stock option grants,” the value of which is linked to the medium- to long-term corporate value of JT.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 038 page 039 Remuneration for auditors basically comprises basic monthly pay 2. Matters Concerning Functions such as the alone, in light of their major duty of conducting compliance Execution of Business, Audit and Supervision, audits. Nomination, etc. Based on deliberation by the Compensation Advisory Panel, whose The Board of Directors meets once a month in principle and on members include outside experts, the amount of remuneration for more occasions if necessary, in order to make decisions with regard to directors is determined in consultations held by the Board of Direc- the matters specified by laws and regulations and other important tors and that for auditors is determined in consultations held by the matters, to supervise business execution and to receive reports from Audit Board. In this process, the Compensation Advisory Panel con- the directors on the status of business execution. ducts monitoring of the remuneration standards adopted by the major In order to maintain a high quality of business execution, JT has Japanese manufacturing companies operating on a global basis, which adopted the Executive Officer System, under which executive officers are on a par with JT in terms of the business scale or profit level. appointed by the Board of Directors execute business in their respec- The performance and corporate value-linked remuneration tive areas of responsibility, in accordance with a companywide busi-
system is as follows. ness strategy decided by the Board, by exercising the authority Responsibility ”Executive bonus” is linked with JT’s consolidated and sectoral delegated to them. In addition, the Chairman of the Board has been business performance for each year. “Stock option grants” are linked positioned as a non-executive director in order to concentrate on the with JT’s medium- and long-term corporate value. With regard to function of supervising management. directors also serving as executive officers, who are eligible to receive Moreover, as part of its efforts to enhance corporate governance, an “executive bonus,” if the amount of “executive bonus” is a standard JT has established the Advisory Committee, which comprises five amount, the total amount of “executive bonus” and “stock option outside experts and advises the management team from a broad per- grants” accounts for slightly more than 70% of the amount of “basic spective with regard to how the company should operate in the monthly pay.” medium to long term, and other issues of similar importance. Meanwhile, the Executive Committee, comprising the company’s Support for outside auditors President and other members appointed by the President, discusses JT is striving to develop an appropriate environment for audits by important management issues—particularly management policy and allocating sufficient staff to the Auditor’s Office as an organization basic plans regarding overall business operations in addition to mat- supporting the auditors in performing their duties and establishing ters to be referred to the Board of Directors. an adequate information communication system so that auditors, in JT has adopted the Audit Board System, under which auditors, in their capacity as independent agents with a mandate from share- their capacity as independent agents with a mandate from sharehold- holders, can adequately audit the execution of business by directors ers, examine the performance of duties by directors and executive and executive officers in order to ensure sound and sustainable officers in order to ensure sound and sustainable growth and maintain growth and maintain and enhance public trust in the company. and enhance public trust in the company. It should be noted that Mr. When directors and executive officers detect any matter that may Gisuke Shiozawa, one of the auditors, has a significant level of cause substantial damage to the company, they are due to report it to knowledge concerning financial and accounting affairs due to his the Audit Board. Moreover, when directors and employees detect any experience as the head of JT’s financing division. evidence of malfeasance in financial documents or serious breaches of In its articles of incorporation, JT provides that directors and laws or the company’s articles of incorporation, they are due to report auditors shall be exempt from the liability to the extent allowed under it to the Audit Board, along with other relevant matters that could the Companies Act. This is a measure intended for enabling directors affect the company’s management. and auditors to play their roles as expected and for securing person- Auditors are allowed to attend not only meetings of the Board of nel qualified for these posts from within and outside the company. In Directors but also other important meetings. When directors and addition, JT has concluded agreements with outside auditors for their employees are asked by auditors to compile important documents limited liability. available for their perusal, to accept field audits and to submit The Operational Review and Business Assurance Division, which reports, they are due to respond in a prompt and appropriate manner. is responsible for overseeing internal audits, examines and assesses Directors are due to cooperate with audits and ensure the provision the system for internal management, including the management of of funds necessary for covering audit-related expenses so as to secure group companies, from its objective standpoint as an organization their effectiveness. The Operational Review and Business Assurance independent from the organizations involved in business execution Division and the Compliance Office maintain cooperation with audi- with due consideration of such viewpoints as relevance, legal compli- tors by exchanging information. ance, and risk and submits reports and proposals to the President. The division also reports to the Board of Directors. Furthermore, the division is promoting efforts to enhance the audit system for the entire JT Group by cooperating with group companies both in Japan and abroad.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 038 page 039 JT has employed Deloitte Touche Tohmatsu LLC (DTT) as its (Assistants for the audit work) independent auditor, and DTT has conducted audits based on the Certified public accountants: 12 persons, Junior accountants: 10 Company Act and the Financial Instruments and Exchange Act. persons, Others: 8 persons The certified public accountants who audited JT’s financial state- While auditors, internal audit organizations including the ments for FY3/2011 and the persons who assisted the auditing work Operational Review and Business Assurance Division, and indepen- are as follows: dent auditors conduct audits individually, they endeavor to enhance (Certified public accountants) their cooperation in order to ensure appropriate audits, for example Tatsuo Igarashi (six years), Satoshi Iizuka (four years), Koji Ishikawa by sharing information on the results of their respective audits. (one year) * Figures in parentheses represent the number of consecu- As for the nomination of candidates for the posts of director and tive years in which the certified public accountants have engaged in auditor, the Board of Directors makes a decision by taking into con- the accounting audit of JT. sideration the personality, judgment and experiences of the candi- dates, and then the nominated candidates are proposed at a General Meeting of Shareholders.
III Implementation of Measures Related to Shareholders and Other Interested Parties
1. Status of Efforts to Invigorate General Meetings of Shareholders and Facilitate the Exercise of the Voting Right Supplementary information Sending the notice of a General Meeting of The notice of a General Meeting of Shareholders for 2010 was sent on June 2 of the year and Shareholders at an early date that for 2011 was sent on June 6 of the year. Avoiding scheduling a General Meeting of A General Meeting of Shareholders for 2010 was held on June 24 of the year and that for 2011 Shareholders for a date on which many other on June 24 of the year. companies’ shareholders’ meetings are concentrated Allowing the exercise of the voting right through JT allows the exercise of the voting right via the website designated by the company (E-voting). electromagnetic means Participating in the electronic platform for the JT participates in the electronic platform for the exercise of the voting right for institutional exercise of the voting right and implementing investors that is operated by ICJ, Inc. other measures for facilitating the exercise of the voting right by institutional investors Providing the abstract of the notice of a General JT discloses the English version of the abstract of the notice on its website. Meeting of Shareholders in English
2. IR-Related Activities Presence or absence of a Supplementary information briefing by the representative director Creation and publication of the disclosure policy JT makes its disclosure policy public on its website. — Periodic briefings for individual investors JT participates in a convention of earnings briefings sponsored by Not provided securities exchanges and other organizations several times every year. Periodic briefings for analysts and institutional JT holds briefing sessions after the announcement of earnings at its Provided investors offices or neighboring facilities. Periodic briefings for overseas investors JT holds teleconferences for overseas investors after the announce- Provided ment of earnings, and JT officials visit overseas investors several times every year to provide briefings. Publication of IR materials on the website JT publishes information concerning earnings, other timely disclo- Provided sure materials, materials used at earnings briefings, annual securities reports or quarterly securities reports, and notices of invitation to General Meetings of Shareholders. Establishment of a division (appointment of an JT has appointed an officer dedicated to IR at the Media & Investor — officer) in charge of IR Relations Division who reports to the executive in charge of communications.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 040 page 041 3. Status of Efforts to Respect the Standpoint of Stakeholders Supplementary information Establishment of internal rules, etc. concerning The JT Group has set itself the mission of “creating, developing and nurturing its unique the respect of the standpoint of stakeholders brands to win customer trust, while understanding and respecting the environment and the diversity of societies and individuals,” and there is a group-wide consensus on the mission. Implementation of environment protection From the viewpoint of achieving the JT Group Mission, JT engages in such activities as reduc- activity, CSR activity, etc. ing the burden on the environment, making contributions to local communities, tree-planting and forest preservation, and youth education and development, and it publishes the contents of those activities through an annual CSR report. Formulation of the policy concerning the provi- In order to clarify the authorities and responsibilities concerning the handling of various cor- sion of information to stakeholders porate information, JT has established rules concerning information disclosure and strives to ensure timely and appropriate information disclosure. Responsibility
IV Basic Concept of the Internal Control System and Development of the System
JT has been endeavoring to ensure appropriate business operations Matters of particular importance shall be referred to the Compli- through efforts to enhance compliance, internal audits and risk man- ance Committee for deliberation. agement, and implementing measures to ensure the effectiveness of In order to ensure the reliability of its financial reporting, JT is audits, such as improving arrangements and procedures for reporting operating a relevant internal control system that it has established in the necessary matters to auditors, as is required of a company adopt- accordance with the Financial Instruments and Exchange Act. ing the Audit Board System. By allocating a sufficient level of staff to the task of evaluating We will continue these efforts while reviewing and revising the financial results and reporting them, the company is striving to main- current system as necessary, and ensure appropriate business execution tain and improve the reliability of its financial reporting. by taking the following steps: The internal audit system is overseen by the Operational Review and Business Assurance Division, which examines and evaluates sys- 1. System to Ensure that Directors and Employees tems for supervising and managing the overall operations of the Perform their Duties in Accordance with Laws, company and the status of business execution from the viewpoints of Regulations and the Company’s Articles of legality and rationality, in order to protect the company’s assets and Incorporation improve management efficiency. With regard to the compliance system, JT has established the Guidelines for Conduct based on internal rules concerning compli- 2. Procedures and Arrangements for Storage and ance in order to ensure that directors and employees comply with Management of Information on the Performance of laws, regulations, the company’s articles of incorporation, social Duties by the Directors norms, etc., and set up the Compliance Committee as an organization JT makes sure to properly store and manage the minutes of the responsible for ensuring thorough compliance. This committee, Annual General Meetings of Shareholders, meetings of the Board of headed by the company’s Chairman, includes outside experts among Directors, and meetings of the Executive Committee, in line with its members and reports directly to the Board of Directors. laws, regulations and internal rules. Meanwhile, the Compliance Office is charged with overseeing Information on other important matters relating to business efforts to improve the company-wide compliance system, identify execution and decision-making are stored and managed by the rel- compliance problems and enhance the effectiveness of the compliance evant departments and divisions as specified by internal rules on the system by enlightening directors and employees about compliance allocation of responsibilities and authorities (hereinafter referred to through various compliance education programs. as the “Responsibilities/Authorities Allocation Rules”), in accordance Regarding the internal reporting system (whistle-blower system), with rules on the supervision of the processes of decision making, JT has a counter through which employees may report any miscon- procurement and accounting. duct they have detected. The Compliance Office is charged with investigating reported cases and implementing company-wide mea- sures to prevent the recurrence of misconduct after holding consulta- tions with the departments and divisions concerned.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 040 page 041 3. Rules on Management of Risk of Loss and Moreover, in order to ensure that business operations are man- Procedures/Arrangements for Other Matters aged in ways that contribute to the business efficiency and flexibility JT has established internal rules on the management of risk of loss of the company as a whole, basic matters concerning the company’s relating to monetary and financial affairs, and ensures that relevant organization, allocation of duties to officers and staff and the roles of reports are made to the Executive Committee on a quarterly basis. individual divisions are specified by the relevant internal rules. Mean- With regard to risk of loss relating to other affairs, the relevant while, in order to enable prompt decision-making, the departments departments and divisions specified by the Responsibilities/ and divisions responsible for business execution are specified by the Authorities Allocation Rules conduct proper management, identify- “Responsibilities/Authorities Allocation Rules.” ing risk and reporting it to the Executive Committee or referring it to the Committee for deliberation, depending on the importance of 5. System to Ensure the Appropriateness of Business the identified risk. Operations within the JT Group JT has assigned sufficient staff to the Operational Review and The JT Group has set itself the mission of creating, developing and Business Assurance Division, which functions as the company’s inter- nurturing its unique brands to win customer trust, while understand- nal audit organization. This division examines and evaluates the ing and respecting the environment and the diversity of societies and internal control systems of JT and JT Group companies—in light of individuals, and there is a group-wide consensus on the mission. We the importance of internal control procedures and arrangements and have specified the functions and rules necessary for group manage- the risks involved—from an objective viewpoint, in its capacity as an ment based on a group management policy, in order to optimize the entity independent of the organizations responsible for business operations of the JT Group as a whole. execution, and reports its findings and present proposals to the Moreover, we have been enhancing our systems for compliance President, as well as reporting to the Board of Directors. (including the internal reporting system), internal audits, financial To prepare for possible emergencies, JT has produced a manual affairs management, etc. in cooperation with JT Group companies. for crisis management and disaster response. In the event of an emer- gency or a disaster, JT is ready to establish an emergency project 6. System for Assisting Auditors and Reporting to system under the supervision of the Corporate Strategy Division, and Auditors, and Other Systems to Ensure Effective make prompt and proper responses under the leadership of senior Auditing management and through close cooperation between the relevant JT has allocated sufficient staff to the Auditor’s Office as an organiza- departments and divisions. tion supporting the auditors in performing their duties. In addition, the company makes sure to review and reform the staffing structure 4. System to Ensure that Directors Perform their as necessary based on consultations with the Audit Board. The Audit Duties Efficiently Board is involved in the selection of personnel of the Auditor’s Office The Board of Directors meets once a month in principle and on more in order to ensure the office’s independence from directors. occasions as necessary, in order to make decisions with regard to the When directors or executive officers detect any matter that may matters specified by laws and regulations and other important matters cause substantial damage to the company, they are due to report it to and to supervise business execution. Meanwhile, the Executive Com- the Audit Board. Moreover, when directors and employees detect any mittee, comprising the company’s President and other members evidence of malfeasance in financial documents or serious breaches of appointed by the President, discusses important management issues, laws or the company’s articles of incorporation, they are due to report particularly management policy and basic plans regarding overall them to the Audit Board, along with other relevant matters that could business operations of the company, in addition to matters to be affect the company’s management. referred to the Board of Directors. As auditors are allowed to attend not only meetings of the Board JT has adopted the Executive Officer System, under which execu- of Directors but also other important meetings, they usually attend tive officers appointed by the Board of Directors execute business in meetings of the Executive Committee. When directors, executive their respective areas of responsibility, in accordance with a company- officers or employees are asked by auditors to compile important wide business strategy decided by the board, by exercising the documents available for their perusal, to accept field audits and to authority delegated to them. submit reports, they are due to respond to the request in a prompt and appropriate manner. Furthermore, directors are due to cooperate with audits and ensure the provision of funds necessary for covering audit-related expenses so as to secure their effectiveness. The Operational Review and Business Assurance Division and the Compliance Office maintain cooperation with auditors by exchanging information.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 042 page 043 V. Basic Concept and Efforts for the Exclusion of Anti-social Elements
JT’s basic concept on the exclusion of anti-social elements and its responsibility for supervising efforts to exclude anti-social efforts to exclude such elements are as follows: elements, the officers in charge of those efforts have been 1) Basic concept on the exclusion of anti-social elements JT is assigned to branch offices across Japan, and are cooperating resolved not to have any relations with, and to fight against, with police, lawyers and other relevant organizations and anti-social groups and organizations that pose a threat to the parties to gather and share information in order to deal with order and safety of civil society, and organizations involved in such elements in an organized way. tobacco smuggling or counterfeiting. The measures to be taken by JT in response to unjust and The company will also never engage in practices that would unreasonable demands from anti-social elements are specified in the promote the activities of antisocial elements. If it faces a prob- company’s manual for corporate defense, which is available for lem involving such elements, JT will devote company-wide reference at all offices and plants. JT also consistently educates
efforts to dealing with it. employees, including those working for its affiliates, about the Responsibility 2) Efforts to exclude anti-social elements importance of excluding antisocial elements by providing relevant The concept on the exclusion of anti-social elements described training as necessary. above is specified and fully communicated to all employees as part of the company’s code of conduct. With the General Administration Division at JT’s headquarters assuming the
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 042 page 043 Activities Contributing to the Environment and Society
The JT Group strives to make contributions to society through a variety of corporate activities. We work to find harmony with our business environ- ment and global environment, and aim to coexist with society as a responsible corporate citizen. We conduct continuing activities from this viewpoint.
Our Approach to Protecting the Global Environment
Protecting the global environment is critical to our efforts to fulfill our to cover all consolidated subsidiaries, both in Japan and abroad, as we social responsibility and is a top priority for our corporate manage- work together to build an environmental management system for the ment. In accordance with the JT Group Environmental Charter, the entire JT Group. In addition, we have made all consolidated subsidiaries JT Group has acted as a responsible corporate citizen in all of the subject to environmental management targets—reduction targets for countries and regions in which it operates and promoted company- the emission of greenhouse gases, the water usage and the generation of wide initiatives to further reduce the environmental impact of its activ- waste—and aim to steadily achieve them. ities. Moreover, we established the JT Group Environmental Action Plan (2009–2012) as a medium-term plan for concrete environmental Fight Against Global Warming protection activities, with the aim of realizing the philosophy outlined By setting the target of reducing overall greenhouse gas emissions by in the JT Group Environmental Charter. The operational divisions of 10% in 2012 compared with 2007, we are making active reduction efforts. JT, as well as subsidiaries and affiliates, have been striving to achieve In 2010, facilities with less burden on the environment were introduced, the targets set forth under this medium-term plan. energy savings made by improving the management of the energy usage and efficiency in transportation facilitated. As a result, in Japan, JT Group Environmental Management achieved a 49.5% reduction compared with 1995, and as JT Group, a The JT Group recognizes that in order to deal with challenges with 7.4% reduction compared with 2007. which the international community as a whole is confronted, such as the preservation of the environment and sustainable utilization of resources, Effective Use of Resources we have to further enhance environmental management of the entire In order to preserve the limited natural resources available, the JT JT Group. Therefore, under the JT Group Environmental Action Plan Group is striving to reduce the water usage and the generation of waste (2009–2012), we have expanded the scope of environmental management and is promoting the reuse and recycling of used materials.
Trends in Greenhouse Gas Emissions Trends in Waste Generation and Recycling Rate JT/Japanese subsidiaries JT/Japanese subsidiaries
(1,000t-CO2) (1,000 t) (%) 500 50 97.8 97.4 98.0 100 42.6 407.5 97.6 41.6 41.4 380.6 96.8 400 351.4 40 95.8 95
300 247.6 30 25.9 25.3 25.2 90 225.8 193.3 200 20 85
100 10 80
2009 2010 2011 2009 2010 2011 JT (Years ended March 31) Waste Generation Amount for JT Recycling Rate (Years ended March 31) 35 Japanese subsidiaries Waste Generation Recycling Rate Amount for 35 Japanese subsidiaries Trends in Water Usage Amount JT/Japanese subsidiaries
(1,000 m3) 8,000 6,579 6,147 5,976 6,000
4,000
2,139 1,977 1,682 2,000
2009 2010 2011 At factories, “NAS Batteries,” a power storage system was intro- JT (Years ended March 31) duced, in order to charge electric power during night-time when the 35 Japanese subsidiaries electricity demand is low and discharge power during day-time when the demand is high, thereby reducing power demand fluctuation. JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 044 page 045 Toward Better Smoking Manners and a More Favorable Smoking Environment
(This section only describes activities in Japan.) We aim to help create a society in which smokers and nonsmokers can coexist in harmony. Enshrined in this goal is our wish to see our valued customers fully enjoy smoking at their own discretion and, at the same time, to make sure they avoid causing inconvenience to nonsmokers. By engaging in various initiatives, we will fulfill our social responsibil- ity as a tobacco company.
Examples of the Various Initiatives Setting Up Smoking Areas
We work closely with local governments and facility managers in set- Responsibility ting up smoking areas in public facilities such as railway stations and airports, in order to promote coexistence between smokers and Campaign Advertising nonsmokers. Community Clean-up Event JT has been engaged in the “Pick Up and You Will Love Your City” initiative since May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at occasions such as community festivals and other public events and is conducted in cooperation with local govern- ments, companies, and volunteers. Since these activities began in May 2004, community clean-up events have been held a total of 1,202 times in all of Japan’s prefectures as of March 3, 2011, bringing the number Public smoking area in front of THE SOHO (Minato-ku, Tokyo) of participating parties to 2,390 and the number of individual partici- Kawasaki Station, Kanagawa pants to approximately 1.20 million. Advice on Separation of Smoking and Nonsmoking Areas We provide consultation on how to separate smoking and nonsmoking areas within public facilities, commercial facilities and offices in a manner suited to the characteristics of the respective facilities and the needs of users. In our consulting service, which is free of charge, we offer our knowhow and put forward proposals to achieve the kind of separation that would satisfy smokers while giving due consideration to the concerns of nonsmokers.
“Smoking Manners” Campaign Advertising Since JT believes that improving the “smoking manners” of individuals Community Clean-up Event “Pick Up and You Will Love Your City” is essential to improving those of society as a whole, we are constantly engaged in a campaign to raise awareness about the need for appropri- For further information about JT’s efforts to improve the smoking ate smoking manners, under the slogan “Pay attention, and you can environment, please access our website. change your manners.” The advertisements used in this campaign URL: http://www.jti.co.jp/sstyle/index.html describe specific everyday situations in which smokers should show good manners, in order to prompt them to pay attention, think, and act appropriately.
JT Website
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 044 page 045 JT Group’s Social Contributions
The JT Group has strived to make contributions to society in all of the The JT Group’s major activities in the field of arts and culture are countries and regions in which we operate, building our relationships as follows: with local communities by acting as a good corporate citizen. We have • Operating the Tobacco & Salt Museum established various key areas for social contribution activities in the JT • Supporting the training of musicians Group Social Contribution Policy. • Operating the Affinis Arts Foundation • Operating the JT Biohistory Research Hall 1. JT Group’s Social Contributions Policy • Organizing JT Forum cultural events The JT Group will fulfill its corporate responsibility through making sustained contributions to the communities in which it operates. As a good neighbor, the JT Group will support the regeneration and revi- talization of local communities, focusing on: • Social Welfare • Arts and Culture • Environmental Protection • Disaster Relief
The JT Group will contribute to the development of the local communities in which we operate by selecting the most critical of these four priority areas for each and providing support. Based on this policy, The Affinis Arts Foundation The JT Forum (Summer Music Festival) the JT Group will engage in a variety of activities that contribute to (Photo: K. Miura) society, so that we can build and maintain harmonious relations with local communities while encouraging employees to be involved in such Environmental Protection activities themselves. In appreciation of what our natural environment brings to our business and out of consideration for its preservation, the JT Group engages in 2. Contributions to Japanese Society environmental protection activities such as reforestation, forest preser- Social Welfare vation and street cleanup campaigns. As part of our efforts to contribute to the regeneration and revitaliza- The JT Group’s major activities in the field of environmental tion of local communities as a good neighbor, the JT Group is imple- protection are as follows: menting a variety of social welfare programs. • Conducting reforestation and forest preservation activities The JT Group’s major activities in the field of social welfare are • Organizing the “Pick Up and You Will Love Your City” com- as follows: munity cleanup campaign • Implementing the NPO Support Projects for Youth Development • Conducting local community cleanup activities • Providing the Scholarships for Students from Asia • Sponsoring the JT Shogi Japan Series Tournament for Kids • Sponsoring the JT “Honobono” concert • Organizing volleyball coaching • Making company-owned facilities available for public use
Reforestation and Forest Preservation Activities
Disaster Relief The JT Group conducts disaster relief activities by providing assistance The NPO Support Projects for Youth The JT “Honobono” concert to the affected areas through group-wide cooperation. For the regions Development devastated by the Great East Japan Earthquake that took place in Arts and Culture March 2011, the JT Group provided relief goods, such as processed The JT Group engages in activities that contribute to the development foods and drinking water, as well as a ¥300 million donation from JT. and advancement of arts and culture. JTI contributed by founding a “Japan Disaster Relief Fund” to receive donations from employees and business partners to support the affected people of Japan.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 046 page 047 JTI Corporate Philanthropy
In alignment with the JT Group’s Social Contribution Policy, JTI is Arts committed to making a positive difference in the communities in which JTI supports contemporary art in addition to being a key supporter of it operates. We do this by helping less-advantaged people to improve a number of renowned cultural institutions worldwide including the their quality of life, and by supporting the arts. In parallel to this, the Louvre in Paris, the Prado in Madrid, the Rijksmuseum in Amsterdam, JTI Foundation is helping victims of catastrophes all over the world: it the Royal Academy of Arts in London, the Royal Hibernian Academy has been active in disaster relief and disaster risk reduction since it was in Dublin and the Teatro alla Scala Museum in Milan. In many coun- created in 2001. tries, such as France, Georgia, Jordan, Kazakhstan, Malaysia, Romania, Serbia, and Ukraine, JTI is a supporter of Japanese art and heritage. Charity In Russia, JTI partners with the Pushkin Museum of Fine Arts, the JTI supports adults and older people in more than 40 countries. This Hermitage, the Bolshoi Theatre and continues its long-term partner-
includes, for example, computer literacy programs in Canada and ship with the Mariinsky Theater led by Valery Gergiev: JTI specifically Responsibility Korea, programs for those marginalized by society in Tanzania and supports the ‘Moscow Easter Festival’ and ‘Stars of the White Nights Ireland, an adult literacy scheme in Holland, neighborly aid in Poland, Festival’ in Saint Petersburg. and residential programs in the Czech Republic. A concrete example of how JTI’s programs are making a difference can be found in Taiwan. In this country, older people already account for 10% of the popula- tion, and the government forecasts that this rate will climb to 30% within 50 years. JTI Taiwan has therefore developed a partnership with the Hondao Senior Citizens Welfare Foundation to carry out projects that fulfill both the physical and psychological needs of the elderly and find new ways to increase social inclusion: in 2010, the ‘Move to
Music’ and ‘Dreams Never Get Old’ programs were accomplished. Sleeping Beauty at the Mariinsky Theater
The JTI Foundation The JTI Foundation’s mission is to help victims of natural and man- made disasters and to engage in projects that help reduce the potential risk of these occurring. In 2010, it supported operations following the terrible devastations in Haiti and Pakistan in cooperation with one of its main partners, the Turkey-based Search and Rescue group GEA. In addition to this, the Foundation has supported emergency operations in Romania and Moldova after severe floods and in Serbia after an earthquake that left some of the most vulnerable members of the com- munity homeless. For more information visit http://www.jtifoundation.org. Dreams Never Get Old program in Taiwan
GEA search and rescue operations in Haiti
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 046 page 047 Business Environment for the JT Group 049 Business Major Risks of Businesses 054 Environment & Risk
The JT Group has long been committed to many of the FCTC’s provisions, including the prevention of youth smoking and the elimination of illicit trade, and has engaged in active efforts to address those issues on a voluntary basis. Meanwhile, JT believes that tobacco should be regulated by individual countries in light of their own circumstances, such as their local laws and regulations and cultural and social conditions.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 048 page 049 Business Environment for the JT Group
The JT Group has long been committed to many of the FCTC’s Meanwhile, JT believes that tobacco should be regulated by indi- provisions, including the prevention of youth smoking and the elimi- vidual countries in light of their own circumstances, such as their nation of illicit trade, and has engaged in active efforts to address local laws and regulations and cultural and social conditions. those issues on a voluntary basis.
Major Elements of Regulation on Global Tobacco Business
WHO: “Framework Convention on Tobacco Control” adopted with regard to establishing an intergovernmental negotiating Following six rounds of intergovernmental negotiations, the Frame- body for the purpose of developing a protocol on Article 15 (illicit work Convention on Tobacco Control (FCTC) was adopted by the trade in tobacco products) and with regard to the timetable for devel- World Health Assembly of the WHO in May 2003 and came into oping guidelines concerning other major provisions. At the third force on February 27, 2005, 90 days after its ratification by 40 signa- session of the convention, which was held in November 2008, guide- tory nations. As of March 31, 2011, a total of 172 countries (includ- lines for Paragraph 3, Article 5 (protection against the tobacco ing the EC) were party to the FCTC. Japan signed the FCTC on industry), Article 11 (packaging and labeling) and Article 13 (tobacco March 9, 2004, and accepted it on June 8, 2004. The FCTC contains advertising and promotion) were adopted, a report was made on the a number of provisions, some of which are legally binding for the progress in intergovernmental negotiations concerning the adoption signatory nations, while others allow for discretion by each nation of a protocol regarding Article 15, and resolutions were adopted with regard to interpretation and implementation. with regard to how to proceed with work concerning other major Key provisions of the FCTC include: matters. At the fourth session of the convention, which was held in — Price and tax measures (implementation of tax policies and price November 2010, guidelines for Paragraphs 12 (education, communi- Business Environment & Risk policies and imposition of restrictions on duty-free sales, etc. as cation, training and public awareness) and 14 (demand reduction appropriate, without prejudice to the sovereign right of signatory measures concerning tobacco dependence and cessation) were nations to determine and establish their tax policies) adopted and partial guidelines for Paragraphs 9 (regulation of the — Packaging and labeling (adoption of effective measures to ensure contents of tobacco products) and 10 (regulation of tobacco products (1) that tobacco product packaging and labeling do not promote disclosures) were also adopted. In addition, a resolution was adopted tobacco products by using terms that could create an erroneous for the establishment of an Intergovernmental Negotiating Body impression, for example, that a particular tobacco product is less concerning Article 15. harmful than others; and (2) that health warnings on tobacco The JT Group has long been committed to many of the FCTC’s packaging cover not less than 30% of the principal display area) provisions, including the prevention of youth smoking and the elimi- — advertising (introduction of a comprehensive ban on tobacco nation of illicit trade, and has engaged in active efforts to address advertising, sales promotion and sponsorship, or imposition of those issues on a voluntary basis. Meanwhile, JT believes that tobacco appropriate restrictions if a country is not in a position to implement a should be regulated by individual countries in light of their own comprehensive ban because of its constitution or constitutional circumstances, such as their local laws and regulations, state of legis- principles) lation, and cultural and social conditions. The JT Group has had and — Sales to minors (adoption and implementation of effective is ready to have dialogues with the governments of individual signa- measures to ban sales of tobacco products to minors) tory nations of the FCTC as necessary, in order to ensure that they — Support for alternative activities (promotion of alternative take appropriate and reasonable measures suited to their own circum- activities for tobacco workers, growers and sellers as appropriate) stances when they implement the provisions of the convention.
The first session of the Conference of the Parties to the WHO International Tobacco Product Marketing Standards Framework Convention on Tobacco Control was held in February In September 2001, JT decided to commit itself to comply with the 2006 following the convention’s entry into force. At this conference, International Tobacco Product Marketing Standards. The standards discussions were held on matters such as the procedural rules for set principles for responsible tobacco product marketing worldwide. subsequent conferences, reports to be presented at the next confer- They represent a minimum set of standards for ensuring that brand ence and the development of draft guidelines and draft protocols. In marketing is never aimed at the youth, but exclusively at adults who June 2007, the second session of the convention was held. This time, choose to smoke based on their recognition of the health risks associ- guidelines for the implementation of Article 8 (protection from expo- ated with smoking. sure to tobacco smoke) were adopted. In addition, resolutions were
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 048 page 049 The key provisions of the international standards include: • From December 1, 2006, attendance at an event or activity — tough guidelines applicable to advertising of sponsored for the purpose of tobacco product brand promotion tobacco products: must be comprised of at least 75% adults, and these events can • Print advertising is to be limited to publications with at least only generate incidental coverage in electronic media. 75% adult readership. — all promotional activities are to be limited to verified • Billboard advertising must not exceed 35 square meters in size. adult smokers. • Ads on TV, radio and the Internet are prohibited unless and until 100% adult verification is achieved. Prevention of Youth Smoking • Ads cannot run in cinemas unless there is a reasonable basis to The prevention of youth smoking is an issue to be addressed by believe that at least 75% of the audience is adult. society at large. From the viewpoint of fulfilling its corporate social • Ads cannot feature celebrities, show individuals that appear responsibility, the JT Group has been conducting business operations younger than 25, or suggest that smoking enhances athletic, in an appropriate manner and working with governments and other professional, personal or sexual success. relevant organizations to take various steps toward dealing with this — indication of health warnings in ads and other media: issue in the countries in which it operates, in accordance with volun- • Health warnings must appear in almost all advertising, and tary standards and the International Marketing Standards as well as promotional and merchandising materials, except in rare relevant local laws and regulations. instances such as point-of-sale materials smaller than 250 For detailed information on JT’s efforts to prevent youth smoking square centimeters. in Japan, please refer to the following website: — restrictions on sponsorship: http://www.jti.co.jp/corporate/enterprise/tobacco/ • For events or activities that bear a tobacco product brand name, responsibilities/activity/index.html all participants who compete or otherwise take an active part As for the JT Group’s similar efforts abroad, please refer to the must be adults. following website: http://www.jti.com/cr_home/cr_positions/ cr_positions_youth_smoking
Major Elements of Regulation of Tobacco Business in Japan
The Japan Tobacco, Inc. Law the Minister of Finance for certain matters, including the appoint- JT was established under the Japan Tobacco, Inc. Law (“the JT Law”) ment or dismissal of directors, executive officers, and auditors, amend- for the purpose of developing businesses related to the manufacture, ments to JT’s Articles of Incorporation, appropriations of capital sale, and importation of tobacco products. The JT Law provides that surplus (except disposal of losses), and any merger, corporate split, or the Japanese government must continue to hold at least one-half of dissolution of JT. Within three months after the end of each business all of the shares that the government acquired by voluntary convey- year, JT must issue its balance sheets, statements of income or loss, ance upon JT’s establishment, as adjusted for any subsequent stock and business report to the Minister of Finance. split or consolidation of shares (the number of such shares following the share split carried out on April 1, 2006, is 5 million shares), and The Tobacco Business Law that even if JT issues new shares in the future, the government must The Tobacco Business Law was enacted in August 1984 for the pur- continue to hold more than one-third of all of the issued shares. The pose of achieving sound growth for Japan’s tobacco industry, securing JT Law also states that the flotation of new shares, options to sub- stable government revenues, and contributing to the healthy expan- scribe for new shares, or in the case of a share-for-share exchange, sion of the Japanese economy. The Tobacco Business Law governs issuance of new shares, issuance of options for new shares, or issuance the cultivation and purchase of leaf tobacco and the manufacture and of bonds with options or warrants to subscribe for new shares, distribution of tobacco products. JT is obliged to negotiate contracts requires the approval of the Minister of Finance. with domestic leaf tobacco growers to determine the total area used The JT Law grants JT the freedom to enter other non-tobacco- for tobacco cultivation and tobacco leaf prices based on type and related business areas in line with its overall objectives as a corpora- quality. JT is also required to purchase the entire usable domestic tion, dependent upon ministerial permission, in addition to the tobacco crop. Contracts stipulate the area to be cultivated and the manufacture, distribution, and importation of tobacco products and prices of leaf tobacco for the subsequent year, and in this regard JT tobacco-related businesses. JT must also obtain authorization from respects the opinion of the Leaf Tobacco Deliberative Council.* As
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 050 page 051 the sole manufacturer of tobacco products in Japan as established by Guideline on Tobacco Advertising law, JT must obtain the approval of the Minister of Finance on the In line with the purpose of a guideline for advertising of tobacco maximum wholesale price of each class of tobacco released to the products promulgated by the Japanese Minister of Finance under market. Tobacco product importers and wholesalers must register Article 40 of the Tobacco Business Law, the Tobacco Institute of Japan with the Minister of Finance, and retailers of tobacco products are (TIOJ)* has established voluntary standards. All TIOJ member com- required to obtain approval from the Minister of Finance. In addi- panies, including JT, comply with these standards. The guideline tion, list prices for JT’s tobacco products and imported tobacco prod- stipulates that outdoor advertising of tobacco products (posters, bill- ucts must be approved by the Minister of Finance, although in boards, etc.) must not be displayed except where tobacco products are general, manufacturers’ list prices are approved unless the Minister of sold and in designated smoking areas. It also stipulates that special Finance deems them unfair to consumers. Tobacco retailers are only care must be taken to ensure the use of appropriate advertising meth- permitted to sell tobacco products at list prices that have been ods in daily newspapers (excluding sports tabloids, evening newspapers approved by the Minister of Finance. and the like) and specifies matters concerning the indication and
* The Leaf Tobacco Deliberative Council is a council which confers on important matters content of the health warnings that accompany tobacco advertising. In concerning the cultivation and purchase of domestically grown leaf tobacco in response to accordance with the TIOJ’s voluntary standards based on the guide- inquiries by JT representatives. The council consists of no more than 11 members, line, the TIOJ member companies, including JT, have been imple- appointed by JT with the approval of the Minister of Finance from among representatives of menting necessary measures, such as banning outdoor billboard domestic leaf tobacco growers and academic appointees. advertising and brand-specific advertising on public transportation, limiting the volume of advertising in newspapers, and limiting the Health Warnings, etc. scope of news sections in which ads may appear. In Japan, the packages of tobacco products are required under Article * Tobacco Institute of Japan: The TIOJ is a public interest corporation established for the purpose of contributing to the promotion of a fair and objective social understanding of
39 of the Tobacco Business Law to indicate “statements that urge Business Environment & Risk tobacco through collecting and disseminating information regarding tobacco and supporting caution over the relationship between the consumption of tobacco the sound development of Japan’s tobacco industry and the national economy as a whole, products and health” (health warnings) as specified in Article 36 of by engaging in various activities in a manner suited to the social environment for tobacco the Ordinance for Enforcement of the Tobacco Business Law. Details consumption. The TIOJ was established in 1987 as a voluntary organization based on the concerning the health warnings are specified by the Ordinance for Association of Tobacco Manufacturers, which was established in 1985, and reorganized as an incorporated body in 1990. Enforcement of the Tobacco Business Law. The ordinance requires the indication of warning labels regarding risks related to eight items. Four of the eight are diseases associated Prevention of Youth Smoking with direct smoking (lung cancer, heart attack, stroke and emphy- — age verification vending machines sema), while the other four are smoking by pregnant women, passive TIOJ, the Japan Tobacconist Federation and the Japan Vending smoking, addiction to smoking and youth smoking. Each tobacco Machine Manufacturers Association announced a co-developed age product package must indicate, on its main surface, a warning regard- verification vending machine and started introducing the machine in ing at least one of the four items associated with direct smoking and March 2008, aiming for a nationwide introduction. at least one of the other four items. The ordinance stipulates (1) that This machine is intended to prevent minors from purchasing these warnings must be rotated throughout the year in ways to ensure cigarettes from vending machines, as it only allows cigarettes to be that they receive equal exposure on each product item and each type dispensed when the customer is identified as an adult as a result of IC of package and (2) that the display area must occupy 30% or more of card scanning. Based on the results of the first-stage trial use program the main surface of the package. in Yokaichiba City, Chiba Prefecture, and the second trial use program In addition, the ordinance stipulates that when terms like “mild” on Tanegashima island, Kagoshima Prefecture, the nationwide intro- and “light” are used on the package, they must be accompanied by a duction of the machine was completed in July 2008. We are actively warning that prevents consumers from misunderstanding the rela- involved in efforts to ensure the smooth introduction and operation of tionship between the consumption of tobacco and health. JT ensures such machines, as we respect the purpose of the cooperative initiative appropriate indications of the required health warnings with regard to prevent youth smoking. According to TIOJ, approximately 9.98 to all products intended for shipment in the Japanese market, as million cards that can be used with the vending machine were in prescribed by the relevant laws and regulations. circulation nationwide as of May 28, 2011. Meanwhile, JT plans to continue using such terms as “mild” and “light” in the Japanese market in ways that maintain compliance with the provisions of the laws and regulations.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 050 page 051 Regulations on Tobacco Products in Japan Although the JT Group supports appropriate and reasonable and Abroad regulations on tobacco products and smoking, the JT Group has had In Japan, restrictions on smoking have been increasingly introduced and is ready to have dialogue and cooperation with governments. It is in recent years in public spaces and other locations, including restau- our belief that adults choose to smoke based on their recognition of rants and office buildings. Since the government adopted the Guide- the health risks associated with smoking, and those adults should have line on Smoking Restriction Measures in the Workplace to promote the freedom to smoke. the Health Promotion Act, which requires facility managers to take measures to prevent passive smoking, as well as smoking restriction Illicit Product Trading Such as Smuggling and activities in the workplace, a variety of activities have been imple- Counterfeiting mented by the central and local governments and other organiza- Illicit product trading, which encompasses smuggling and counter- tions. JT expects that similar activities will continue to be promoted. feiting, pose a major challenge to the tobacco industry as a whole and As such, JT continues to engage in various initiatives to promote deprives sovereign states of legitimate revenues. separation of smoking and nonsmoking areas, in order to help create As part of an effort to fight against illicit product trading, JT a society in which smokers and nonsmokers can coexist in harmony. International S.A. and JT International Holding B.V., both of which Japan, one of the countries that are party to the FCTC, takes neces- are consolidated subsidiaries of JT, signed on December 14, 2007 a sary measures based on relevant laws and regulations, including those cooperation agreement with the European Commission, the executive regarding tax, packaging and labeling. branch of the European Union (EU), and twenty-six Member States In overseas markets where the JT Group sells tobacco products, of the EU. The objective of the agreement is to develop and enhance regulations on sales and marketing of tobacco products and smoking cooperation between the EU and EU Member States and the JT have been increasing. For example, the European Union issued a International entities in combating cigarette smuggling and counter- directive concerning tobacco products in July 2001, which requires feiting. We believe that this agreement, which builds upon initiatives the EU member states to harmonize their laws, regulations and implemented by the JT Group over the past years, will help to jointly administrative provisions concerning the maximum tar, nicotine and establish, with the EU and EU Member States, an efficient and con- carbon monoxide yields of cigarettes; the warnings regarding health structive framework for combating cigarette smuggling and counter- and other information to appear on unit packets of tobacco products; feiting, and to protect the brand value of our products against the and the use on tobacco product packaging of such descriptions as threat of such illegal activities. The 27th Member State, the United “mild” and “light.” In addition, the United Kingdom has put into Kingdom, joined the agreement on April 21, 2009. The agreement force laws comprising restrictions on the in-store display of tobacco calls for the JT Group to pay US$50 million in each of the five years products and a ban on sales of tobacco products through vending following its signing and US$15 million in each of the following 10 machines. While it is impossible to predict exactly what kinds of laws, years. This financial contribution is to be used to support anti- regulations and business guidelines will be introduced in the future in smuggling and anti-counterfeiting initiatives led by the EU or EU relation to sales and marketing of tobacco products and smoking, JT Member States. expects that more similar and new regulations (including those intro- On April 13, 2010, JTI-Macdonald Corp. (“JTI-Mac”), JT’s duced by local governments) will be introduced in Japan and other Canadian consolidated subsidiary, entered into a comprehensive countries where the JT Group sells products. agreement with the Government of Canada and all provinces and territories to establish a cooperation mechanism in combating ciga- rette smuggling and contraband.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 052 page 053 Tobacco-Related Legal Proceedings
Litigation Related to Health Risks Associated Several defendants challenged the statute’s constitutionality. This with Smoking challenge was ultimately rejected by the Supreme Court of Canada in JT and its subsidiaries are defendants in lawsuits filed by plaintiffs September 2005. The provinces of New Brunswick, Ontario and seeking damages for harm allegedly caused by smoking, the marketing Newfoundland and Labrador filed similar actions in March 2008, in of tobacco products, or exposure to tobacco smoke. September 2009 and February 2011, respectively. For the time being, To date, JT and its subsidiaries have never lost a case or paid any these actions remain in pre-trial proceedings with no decision yet money to settle a case out of court. made as to the liability of any defendants. In Quebec, a first-instance In Japan, JT is currently involved in two lawsuits related to court authorized two class actions to proceed in February 2005. The smoking and health as described below. claims were filed in September 2005, and the actions remain in pre- In one case, three smokers who allege that they developed dis- trial proceedings with no decision yet made as to the liability of the eases as a result of smoking filed a lawsuit on January 19, 2005, with JT Group and other companies. The JT Group will continue to the Yokohama District Court against JT, the Government of Japan, et defend these cases in an appropriate and timely manner. JT believes al., asking for a total of ¥30 million in compensation for damages and that it is possible that other similar smoking and health-related a strengthening of the wording of health warnings indicated on lawsuits may be filed in the future. tobacco products, etc. The first hearing in this case took place on JT is unable to predict the outcome of currently pending or April 20, 2005. future lawsuits. However, if one or more actions result in a decision On January 20, 2010, the Yokohama District Court rendered a unfavorable to JT or its subsidiaries, its business could be materially judgment dismissing all of the plaintiff’s claims, against which the affected by, for example, the payment of monetary compensation.
plaintiffs filed an appeal. Moreover, regardless of the results of individual lawsuits, critical Business Environment & Risk In the other case, a taxi driver who alleges that he developed media coverage of such lawsuits may reduce social tolerance of smok- laryngeal cancer and has suffered from aggravation of arteriosclerosis ing, increase interest in the relationship between smoking and health, as a result of passive smoking in his car filed a lawsuit with the Tokyo strengthen public regulations concerning smoking and prompt the District Court on February 25, 2008, asking for ¥10 million in com- filing of a number of similar lawsuits against JT or its subsidiaries, pensation for damages and the suspension of the production and sale forcing JT or its subsidiaries to bear litigation costs and materially of tobacco products. The first hearing in this case took place on May affecting JT’s business performance. 19, 2008, and the case is still pending in the district court. Among the In addition to lawsuits related to health risks associated with lawsuits filed overseas in relation to smoking and health in which JT smoking, other lawsuits involving the JT Group may occur and be subsidiaries are defendants are damage suits filed by individuals or contested in court in the future. If a court ruling unfavorable for the classes of individuals and medical expense recovery suits filed by JT Group is issued in such cases, the group’s financial results, governments. As of the end of May 2011, there were a total of 25 production, sales and imports/exports of tobacco products may be such lawsuits pending in which JT subsidiaries are named as defen- negatively affected. dants or for which JT may owe certain indemnity obligations pursu- In the section of the annual report for the previous fiscal year ant to the agreement for JT’s acquisition of RJR Nabisco Inc.’s which described the risks related to the JT Group’s businesses, we overseas (non-US) tobacco operations. stated that, “There is a case in which JT Group companies are seek- These lawsuits include health care cost recovery actions brought ing to invalidate a tax assessment received from the Russian tax by four Canadian provinces and two class actions brought in Quebec. authorities.” However, this case was closed in a way that upheld the The province of British Columbia filed an action under a provincial JT Group’s argument and there is currently no material dispute with statute, the “Tobacco Damages and Health Care Costs Recovery the Russian tax authorities. Act,” which was enacted exclusively for the purpose of this action.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 052 page 053 Major Risks of Businesses
The major risks to which the JT Group’s businesses are exposed based on judgments made as of the end of the fiscal year ended and factors that may materially affect investors’ judgment, are March 2011. Future potential risks include, but are not limited to, described below. This section contains forward-looking statements the risks listed below.
Risks Relating to the JT Group’s Businesses, Earnings Structure and Management Policies
• Any negative impact on our domestic and international tobacco • The JT Group’s overseas operations may be negatively affected businesses, both of which are major contributors to the JT Group’s by exchange rate fluctuations, changes in laws and regulations, sales and operating income, may adversely affect the group’s overall political unrest, uncertainty over economic developments, local business performance. labor management relations, tax and tariff revisions, differences in • Although the JT Group plans to invest in our pharmaceutical and business practices, etc. food businesses, as it expects them to contribute to its business • JT’s consolidated financial statements may be affected by fluctua- performance in the future, such investment may not generate the tions in the exchange rates of the foreign currencies used by over- anticipated benefits. seas subsidiaries for calculating their financial statements relative • The JT Group may acquire, invest in, form alliances or build to the Japanese yen. There is also a risk that, if an overseas affiliate cooperative business frameworks with other companies, as it expects whose shares JT acquired by making payment in a foreign currency such measures to contribute to its future business performance. are liquidated or sold or if the value of such a subsidiary is signifi- However, its future business performance may be negatively cantly reduced, the gains/losses on investment in the affiliate affected if results fall short of its expectations. recorded in JT’s consolidated financial statements may be affected • On the JT Group’s consolidated balance sheet, there is a large by fluctuations in the exchange rate between the foreign currency amount of goodwill related to past acquisitions. We consider the and the Japanese yen. goodwill to appropriately reflect profits which could be earned from • Although JT partially hedges its exposure to foreign exchange risks the business values and synergy effects of those acquisitions. How- related to transactions conducted in foreign currencies, the possibil- ever, if those acquisitions fail to generate the anticipated benefits due ity cannot be ruled out that the JT Group’s business performance to factors such as changes in the business environment or the com- will be negatively affected by exchange rate fluctuations. petitive situation, we may be obliged to post an impairment loss, which may adversely affect the group’s overall business performance.
Risks Relating to the JT Group’s Domestic and International Tobacco Businesses
• The JT Group’s business performance may be negatively affected • Fluctuations in the prices of foreign leaf tobacco may have a direct by a decline in demand, as it expects overall cigarette demand in impact on the JT Group’s operating income. Japan to continue to decline mainly due to structural factors such • The tobacco tax rate may be raised in Japan or overseas. as a contraction of the adult population, growing awareness about • Tobacco demand may decrease due to the introduction of tighter the health risks associated with smoking and tightening of smoking- tobacco regulations. There is also a risk that efforts to comply with related regulations, while demand overseas could also decrease new regulations may entail additional costs. depending on the economic conditions and other circumstances of • If a country decides to ban the use of such terms as “mild” and the regions concerned, although the trends in demand will vary “light” in descriptions of product names, the JT Group might be from region to region. prevented from selling Mild Seven according to such a decision. In • Market shares in the domestic and overseas tobacco markets may such a case, the JT Group may have to invest a large amount of fluctuate in the short term due to temporary factors, such as the time and funds into efforts to develop a new brand comparable to launch of new products by the JT Group and other tobacco manu- Mild Seven in that country, and the new brand thus developed may facturers, and special sales promotion activities. Local market fail to achieve the same level of brand value and appeal. shares may also be affected by a number of other factors, including • There is a risk that an increase in illicit product trading such competition, pricing strategies, changes in consumer preferences, as smuggling and counterfeiting may cause the JT Group’s brand recognition and regional economic conditions. Such factors sales volume and net sales to decline, negatively affecting its may lead to a decrease in the JT Group’s market share. In addi- business performance. tion, there is a risk that the measures adopted by the JT Group to counter the decrease in market share may entail additional costs, reducing its profits.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 054 page 055 • The JT Group has been sued in Japan and overseas for allegedly • In addition to lawsuits related to health risks associated with causing smoking-related health problems, and it may be held liable smoking, other lawsuits involving the JT Group may occur and be for such health problems in these lawsuits. There is also a risk that, contested in court in the future. If a court ruling unfavorable for regardless of the outcome of the lawsuits, negative publicity from the JT Group is issued in such cases, the group’s financial results, the litigation and other factors may make smoking less acceptable production, sales and imports/exports of tobacco products may be to the public, lead to the introduction of tighter restrictions on negatively affected. smoking and prompt many similar lawsuits against the JT Group, thereby forcing it to become entangled in legal procedures and bear litigation costs.
Risks Relating to Non-Tobacco Businesses
Risks Relating to Pharmaceutical Business • Regulation may be applied broadly, covering a full range of activities • The JT Group may fail to develop and launch commercially valu- from the R&D stage to the post-launch stage of a new drug. able pharmaceutical products. To this date, JT has never brought a • The JT Group may become dependent on a certain business pharmaceutical product to market that it has developed on its own. partner in the R&D or sales of a pharmaceutical product. • The JT Group may have to invest an enormous amount of time and • In relation to the JT Group’s use and management of radioactive funds in R&D before it successfully develops pharmaceutical products. or other hazardous substances, social or legal problem may arise, • The JT Group may be forced to abandon the clinical development such as damage to the environment caused by such substances.
of a pharmaceutical product that involves another company as a co- Business Environment & Risk developer or a licensee on the basis of its or its partner company’s Risks Relating to Food Business judgment or due to some internal or external factors. • Food products developed by the JT Group may fail to meet con- • Even if the JT Group succeeds in developing and launching a sumer preferences and their product lives may prove to be short. commercially valuable pharmaceutical product, the R&D cost may • The JT Group’s profit/loss may fluctuate due to fluctuations in the exceed the revenue generated from it. prices of raw materials for food products (including those due to • The JT Group’s business performance may become dependent on changes in the exchange rate). the sale of certain pharmaceutical products. • The sales of JT’s food products may be affected by weather conditions. • The JT Group may fail to achieve efficient mass-production of • The regulation of the procurement, manufacture and sale of food pharmaceutical products. products in Japan or overseas may influence the JT Group’s busi- • Even if a pharmaceutical product developed by the JT Group ness performance, including the possibility that additional costs proves to be commercially successful, the success may be offset by may arise due to compliance with such regulation. competition with rival products developed by other companies in • The JT Group may be unable to compete with major companies Japan or overseas, a government-mandated price reduction and with larger distribution networks, stronger development capabilities other factors. and more experience. • The JT Group may become dependent on the license of pharma- • The JT Group may be unable to engage in efficient marketing ceutical products developed by other companies and on revenues activities. from such products. • The JT Group may be unable to produce, or outsource the produc- • The JT Group may become dependent on a certain outside source tion of, food products in an efficient, stable and effective manner. for the supply of critical raw materials. • The JT Group may outsource the production of a large part of • If any problem arises regarding the quality of a pharmaceutical beverage products to other domestic manufacturers, thus becoming product of the JT Group or regarding information provided by the dependant on outside sources. group about such product, the group may become the target of • If any problem arises regarding the quality or safety of the JT lawsuits seeking product liability or making other claims, or may Group’s food products, the group may become the target of law- be forced to suspend sales of such product. suits seeking product liability and making other claims, or the • JT’s business performance may be affected by lawsuits concerning reputation of the group and its products may be undermined. patents and other intellectual property rights.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 054 page 055 Other Factors which May Materially Affect Investment Decisions • The JT Law obligates the Japanese government to hold at least one half of all JT shares it acquired upon JT’s establishment, as adjusted for any subsequent stock split or consolidation of shares, and the Japanese government must continue to hold more than one third of all outstanding JT shares. As of the end of the fiscal year ended in March 2011, the Japanese government held 50.01% of all outstanding JT shares. • The Minister of Finance has the authority to supervise JT under the JT Law and Tobacco Business Law. • Under the JT Law, the scope of JT’s businesses includes the “manufacture, distribution and importation of tobacco products and ancillary businesses, as well as businesses required for attaining the objective of JT,” while “businesses required for attaining the objective of JT” are subject to the Minister of Finance’s approval. Accordingly, the Minister of Finance’s approval is required in order for JT to engage in new businesses outside the scope of currently-approved businesses. • The Tobacco Business Law requires us to annually enter into purchase contracts with tobacco growers regarding the aggregate cultivation area for specific varieties of leaf tobacco and the prices for leaf tobacco by variety and grade. JT must purchase all leaf tobacco produced pursuant to such contracts, except for any not suited for the manufacture of tobacco products. When JT decides the aggregate cultivation area and the prices of leaf tobacco for its contracts with tobacco growers, it is required to respect the opin- ion of the Leaf Tobacco Deliberative Council (hatabako shingi kai), which consists of members appointed by JT with the approval of the Minister of Finance from among the representatives of domestic leaf tobacco growers and academic appointees. • The outline of the tax reform plan for fiscal year 2011, which was adopted upon a cabinet decision on December 16, 2010, includes a statement to the effect that the tobacco excise tax rate will need to be raised in order to restrain tobacco consumption from the view- point of promoting public health, as did the outline of the tax reform plan for the previous fiscal year. • The Great East Japan Earthquake that occurred in March 2011 has inflicted damage on some factories of the JT Group and raw mate- rials suppliers, thereby creating an impact on the group’s business operations, mainly in the Japanese domestic tobacco business. Incidents related to the earthquake disaster may negatively affect the JT Group’s business performance in the future. Major earth- quakes, volcano eruptions, tsunamis and other natural disasters and unforeseen emergencies may negatively affect the JT Group’s business performance.
JAPAN TOBACCO INC. Annual Report 2011 page 056 Consolidated Eleven-Year Financial Summary 058 Financial Management’s Discussion and Analysis of 060 Financial Condition and Business Results Information Consolidated Balance Sheets 074 Consolidated Statements of Income 076 Consolidated Statements of 077 Comprehensive Income Consolidated Statements of Changes in Equity 078 Consolidated Statements of Cash Flows 079 Notes to Consolidated Financial Statements 080 Independent Auditors’ Report 115 Financial Information Financial
JAPAN TOBACCO INC. Annual Report 2011 page 057 Consolidated Eleven-Year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31
Millions of U.S. dollars Millions of yen (Note 1) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 For the year: Net sales ¥4,501,701 ¥4,544,175 ¥4,492,264 ¥4,625,151 ¥4,664,514 ¥4,637,657 ¥4,769,387 ¥ 6,409,727 ¥6,832,307 ¥6,134,695 ¥6,194,554 $74,499 Tobacco 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — — — Japanese domestic — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 3,103,356 37,322 International — — — — 792,705 881,188 999,658 2,639,969 3,118,319 2,633,636 2,649,957 31,870 Pharmaceutical 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 44,069 46,988 565 Food 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 394,653 375,016 4,510 Others 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 19,501 19,237 232 Taxation — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 3,708,401 44,599 Net sales excluding excise taxes — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 2,514,152 2,486,153 29,900 Adjusted net sales excluding excise taxes (Note 2) — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 1,956,616 23,531 Japanese domestic — — — — 874,292 760,630 729,383 715,018 648,830 615,991 617,919 7,431 International — — — — 429,791 484,333 550,347 945,989 1,080,821 906,756 897,455 10,793 EBITDA (Note 3, Note 4) ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 ¥ 526,702 ¥ 541,112 $ 6,508 Tobacco 296,318 320,969 321,419 343,163 — — — — — — — — Japanese domestic — — — — 296,031 305,753 326,470 306,726 272,280 251,263 257,690 3,099 International — — — — 65,462 94,093 112,668 270,757 337,968 277,678 288,168 3,466 Pharmaceutical (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 (9,651) (13,268) (160) Food (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 14,490 17,277 208 Others 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 13,341 12,919 155 Elimination/Corporate 1,459 (207) 767 724 (1,593) 1,339 89 474 899 (20,418) (21,674) (260) Depreciation and Amortization (Note 3) 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 230,197 212,431 2,555 Operating income (loss) (Note 4) ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 ¥ 296,505 ¥ 328,681 $ 3,953 Tobacco 165,923 192,114 213,342 238,409 — — — — — — — — Japanese domestic — — — — 215,833 220,095 245,388 222,348 188,259 198,738 212,912 2,561 International — — — — 44,458 71,031 81,085 205,360 174,772 136,936 156,130 1,878 Pharmaceutical (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 (13,593) (17,413) (210) Food (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (13,696) (9,413) (114) Others 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 10,559 9,984 120 Elimination/Corporate 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 (22,440) (23,520) (283) Net income (loss) 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 144,962 1,743 For the year: Net cash provided by operating activities ¥ 393,958 ¥ 89,727 ¥ 258,057 ¥ 334,501 ¥ 250,840 ¥ 150,343 ¥ 435,958 ¥ 145,030 ¥ 275,271 ¥ 320,024 ¥ 399,638 $ 4,806 Net cash provided by (used in) investing activities (90,477) (40,472) (74,877) (228,620) 176,914 (26,358) (149,692) (1,668,635) (65,008) (84,057) (119,407) (1,436) Net cash provided by (used in) financing activities (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (250,398) (184,951) (2,224) Free cash flow (Note 5) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 250,742 299,750 3,605 At year-end: Net property, plant and equipment ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 ¥ 679,561 ¥ 663,511 $ 7,980 Total assets 3,188,230 3,063,077 2,957,665 3,029,084 2,982,056 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 3,571,928 42,958 Interest-bearing Debt (Note 6) 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 874,330 708,732 8,524 Liabilities 1,618,877 1,400,384 1,283,939 1,467,322 1,430,256 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 1,980,725 23,821 Total equity 1,513,846 1,613,105 1,622,654 1,507,937 1,498,204 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 1,591,203 19,137 Ratios: Return on equity (ROE) 2.9% 2.4% 4.7% (0.5%) 4.2% 12.4% 11.3% 11.8% 6.8% 8.6% 9.2% — Return on assets (ROA) — 5.4% 6.4% 7.9% 9.2% 10.4% 10.7% 10.5% 8.4% 7.8% 8.9% — Operating income margin 3.1% 3.6% 4.2% 5.1% 5.9% 6.6% 7.0% 6.7% 5.3% 4.8% 5.3% — Total assets turnover (times) 1.43 1.45 1.49 1.55 1.55 1.54 1.49 1.52 1.52 1.58 1.66 — Equity ratio 47.5% 52.7% 54.9% 49.8% 50.2% 58.0% 58.3% 40.8% 40.0% 42.6% 42.4% — Debt/Equity ratio (times) 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 0.53 0.47 — Current ratio 169.7% 196.3% 226.4% 195.3% 202.7% 256.7% 226.4% 96.1% 100.2% 108.6% 117.3% — Fixed assets/Long-term capital ratio 78.1% 74.9% 69.7% 69.9% 67.6% 60.7% 61.3% 103.4% 102.5% 99.3% 95.6% — Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥83.15 per $1, the rate of exchange as of March 31, 2011. 2. 2006–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively. 2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business 3. 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 4. 2010–:Before royalty payment from JTI to JT in the Japanese domestic tobacco and International Business. A part of overhead cost & CAPEX allocation were changed. 5. 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) 6. 2009–: Interest-bearing Debt includes lease obligation 7. Financial data disclosed herein are basically rounded.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 058 page 059 Millions of U.S. dollars Millions of yen (Note 1) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2011 For the year: Net sales ¥4,501,701 ¥4,544,175 ¥4,492,264 ¥4,625,151 ¥4,664,514 ¥4,637,657 ¥4,769,387 ¥ 6,409,727 ¥6,832,307 ¥6,134,695 ¥6,194,554 $74,499 Tobacco 4,140,270 4,178,034 4,134,466 4,236,920 — — — — — — — — Japanese domestic — — — — 3,491,488 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 3,103,356 37,322 International — — — — 792,705 881,188 999,658 2,639,969 3,118,319 2,633,636 2,649,957 31,870 Pharmaceutical 66,414 61,868 53,927 51,242 57,676 49,257 45,452 49,064 56,758 44,069 46,988 565 Food 210,332 221,197 232,404 250,138 265,380 278,378 286,554 336,420 435,966 394,653 375,016 4,510 Others 84,685 83,076 71,467 86,851 57,265 23,553 21,449 21,876 20,770 19,501 19,237 232 Taxation — — — 2,605,343 2,650,586 2,628,878 2,718,358 3,822,331 4,005,123 3,620,543 3,708,401 44,599 Net sales excluding excise taxes — — — 2,019,807 2,013,927 2,008,780 2,051,029 2,587,396 2,827,184 2,514,152 2,486,153 29,900 Adjusted net sales excluding excise taxes (Note 2) — — — — 1,684,404 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 1,956,616 23,531 Japanese domestic — — — — 874,292 760,630 729,383 715,018 648,830 615,991 617,919 7,431 International — — — — 429,791 484,333 550,347 945,989 1,080,821 906,756 897,455 10,793 EBITDA (Note 3, Note 4) ¥ 312,045 ¥ 334,119 ¥ 337,296 ¥ 373,435 ¥ 400,115 ¥ 433,391 ¥ 464,634 ¥ 602,096 ¥ 646,217 ¥ 526,702 ¥ 541,112 $ 6,508 Tobacco 296,318 320,969 321,419 343,163 — — — — — — — — Japanese domestic — — — — 296,031 305,753 326,470 306,726 272,280 251,263 257,690 3,099 International — — — — 65,462 94,093 112,668 270,757 337,968 277,678 288,168 3,466 Pharmaceutical (3,105) (8,519) (5,110) (4,426) 5,474 (1,803) (8,197) (6,269) 4,890 (9,651) (13,268) (160) Food (2,660) 2,259 546 3,300 7,931 11,869 12,018 8,353 17,030 14,490 17,277 208 Others 20,033 19,617 19,674 30,674 26,810 22,140 21,586 22,055 13,150 13,341 12,919 155 Elimination/Corporate 1,459 (207) 767 724 (1,593) 1,339 89 474 899 (20,418) (21,674) (260) Depreciation and Amortization (Note 3) 172,080 170,314 148,333 139,401 126,744 126,445 132,643 171,542 282,411 230,197 212,431 2,555 Operating income (loss) (Note 4) ¥ 139,965 ¥ 163,805 ¥ 188,963 ¥ 234,034 ¥ 273,371 ¥ 306,946 ¥ 331,991 ¥ 430,554 ¥ 363,806 ¥ 296,505 ¥ 328,681 $ 3,953 Tobacco 165,923 192,114 213,342 238,409 — — — — — — — — Japanese domestic — — — — 215,833 220,095 245,388 222,348 188,259 198,738 212,912 2,561 International — — — — 44,458 71,031 81,085 205,360 174,772 136,936 156,130 1,878 Pharmaceutical (12,827) (18,985) (13,855) (12,840) 1,855 (5,057) (11,207) (9,644) 1,020 (13,593) (17,413) (210) Food (17,362) (11,860) (13,168) (4,851) 1,948 6,325 6,705 667 (11,451) (13,696) (9,413) (114) Others 3,428 1,797 932 11,976 10,427 8,673 9,331 10,448 9,695 10,559 9,984 120 Elimination/Corporate 803 739 1,712 1,340 (1,150) 5,879 689 1,375 1,511 (22,440) (23,520) (283) Net income (loss) 43,687 36,850 75,302 (7,603) 62,584 201,542 210,772 238,702 123,400 138,448 144,962 1,743 For the year: Net cash provided by operating activities ¥ 393,958 ¥ 89,727 ¥ 258,057 ¥ 334,501 ¥ 250,840 ¥ 150,343 ¥ 435,958 ¥ 145,030 ¥ 275,271 ¥ 320,024 ¥ 399,638 $ 4,806 Financial Information Net cash provided by (used in) investing activities (90,477) (40,472) (74,877) (228,620) 176,914 (26,358) (149,692) (1,668,635) (65,008) (84,057) (119,407) (1,436) Net cash provided by (used in) financing activities (76,990) (124,838) (111,968) (109,335) (202,196) (48,135) (32,635) 519,001 (217,470) (250,398) (184,951) (2,224) Free cash flow (Note 5) 307,311 31,413 170,372 269,174 269,459 145,590 223,007 (1,493,717) 240,199 250,742 299,750 3,605 At year-end: Net property, plant and equipment ¥ 757,311 ¥ 743,712 ¥ 733,314 ¥ 708,221 ¥ 639,655 ¥ 596,544 ¥ 600,436 ¥ 763,332 ¥ 668,743 ¥ 679,561 ¥ 663,511 $ 7,980 Total assets 3,188,230 3,063,077 2,957,665 3,029,084 2,982,056 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 3,571,928 42,958 Interest-bearing Debt (Note 6) 606,089 511,738 424,499 381,203 230,716 216,608 219,269 1,389,296 996,079 874,330 708,732 8,524 Liabilities 1,618,877 1,400,384 1,283,939 1,467,322 1,430,256 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 1,980,725 23,821 Total equity 1,513,846 1,613,105 1,622,654 1,507,937 1,498,204 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 1,591,203 19,137 Ratios: Return on equity (ROE) 2.9% 2.4% 4.7% (0.5%) 4.2% 12.4% 11.3% 11.8% 6.8% 8.6% 9.2% — Return on assets (ROA) — 5.4% 6.4% 7.9% 9.2% 10.4% 10.7% 10.5% 8.4% 7.8% 8.9% — Operating income margin 3.1% 3.6% 4.2% 5.1% 5.9% 6.6% 7.0% 6.7% 5.3% 4.8% 5.3% — Total assets turnover (times) 1.43 1.45 1.49 1.55 1.55 1.54 1.49 1.52 1.52 1.58 1.66 — Equity ratio 47.5% 52.7% 54.9% 49.8% 50.2% 58.0% 58.3% 40.8% 40.0% 42.6% 42.4% — Debt/Equity ratio (times) 0.40 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 0.53 0.47 — Current ratio 169.7% 196.3% 226.4% 195.3% 202.7% 256.7% 226.4% 96.1% 100.2% 108.6% 117.3% — Fixed assets/Long-term capital ratio 78.1% 74.9% 69.7% 69.9% 67.6% 60.7% 61.3% 103.4% 102.5% 99.3% 95.6% — Notes: 1. Figures stated in U.S. dollars in this report are translated solely for convenience at the rate of ¥83.15 per $1, the rate of exchange as of March 31, 2011. 2. 2006–2008: Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively. 2009–: Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business 3. 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 4. 2010–:Before royalty payment from JTI to JT in the Japanese domestic tobacco and International Business. A part of overhead cost & CAPEX allocation were changed. 5. 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) 6. 2009–: Interest-bearing Debt includes lease obligation 7. Financial data disclosed herein are basically rounded.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 058 page 059 Management’s Discussion and Analysis of Financial Condition and Business Results • The accounts of most subsidiaries outside Japan that have December 31 fiscal year-ends have been included in consolidated financial statements ended March 31. • Financial data disclosed herein are basically rounded.
The following discussion of our financial condition and business analysis contains forward-looking statements that involve risks, uncer- results should be read in reference to our consolidated financial state- tainties and assumptions. Actual results may differ materially from ments prepared in accordance with Japanese Generally Accepted those estimated in these statements as a result of a number of fac- Accounting Principles (“Japanese GAAP”) and other information tors, including, but not limited to, those described in “Major Risks of included in other sections of this annual report. This discussion and Businesses” (p54–56).
Business Description and Acquisition of Outside Resources
Japan Tobacco Inc. (“JT”) is a joint stock corporation (kabushiki kaisha) loan was later refinanced through domestic and foreign bond issues incorporated under the corporate law of Japan (the “Corporate Law”) and long-term loans from banks and insurance companies. JT repaid pursuant to the Japan Tobacco Inc. Law (the “JT Law”). JT is primarily in full the long-term loans from banks and insurance companies, engaged in the manufacture and sale of tobacco products in the Japa- redeemed the foreign bonds by July 2004 and redeemed the nese domestic and international markets, as one of the largest produc- domestic bonds in June 2009. As a result of this acquisition, JT ers of tobacco products in the world. Sales of cigarettes by JT and its obtained increased access to overseas markets, especially in Europe consolidated subsidiaries (the “JT Group” or “Group”) in the Japanese and Russia, and the rights in almost all countries outside the United domestic market in the fiscal year ended March 31, 2011, amounted States to internationally recognized trademarks such as Winston, to 134.6 billion cigarettes (Note 1), sales in the domestic duty-free market Camel and Salem. Since this acquisition, JT’s international tobacco and in the markets in China, Hong Kong and Macau, which are covered business—of which JT International (“JTI”) constitutes the core— by JT’s China Division, totaled 3.5 billion cigarettes and sales in other has consistently maintained strong growth. Although profits of the overseas markets stood at 428.4 billion cigarettes (Note 2). international tobacco business for the fiscal year ended March 2010
(Note 1) Excluding tobacco products purchased from overseas tobacco manufacturers declined both on a dollar basis and on a yen basis due to the depre- and sold to retail stores through its distribution subsidiary, TS Network Co., Ltd. ciation of local currencies of major markets against the U.S. dollar (“TS Network”) (Note 2) Including cigars, pipe tobacco and snus, excluding private label and contract and the yen’s appreciation against the U.S. dollar, profits at constant manufacturing products. rates of exchange improved. In the fiscal year ended March 2011, In the Japanese domestic tobacco market, JT manufactures and profits grew on a dollar basis as a result of favorable pricing and sells its tobacco products to retail stores all over the country in generally favorable movements of local currencies of major markets accordance with the Tobacco Business Law. This law provides that against the U.S. dollar compared with the previous year. On a yen (1) JT shall be the sole manufacturer of tobacco products in Japan basis, too, profits increased despite the impact of the yen’s apprecia- and (2) the maximum wholesale price of each tobacco product man- tion against the U.S. dollar. ufactured and sold and the retail price of each product sold in Japan, On April 18, 2007, JT completed the procedures for the acquisi- as well as any changes in these prices, shall be subject to approval tion of Gallaher Group Plc to make it a wholly owned subsidiary of JT. by the Minister of Finance. The products are transported from the The acquisition price was about £7.5 billion (¥1,720 billion at the factories to the distribution bases by its subsidiary, JT Logistics Co., exchange rate effective at the time), and the total acquisition price Ltd. and then distributed to retail stores by the subsidiary, TS including the assumption of net interest-bearing debt was approxi- Network. TS Network also acts as the wholesaler of foreign tobacco mately £9.44 billion (¥2,180 billion at the exchange rate effective at manufacturers, purchasing and selling their products to retail stores the time). This acquisition resulted in goodwill of US$15.1 billion. Of in the Japanese domestic market. the total value, ¥820 billion was covered by our own funds, ¥450 JT greatly expanded its international tobacco business through billion by a loan from Mizuho Bank, Ltd., and £1.9 billion (¥450 billion the acquisition of the non-U.S. tobacco operations of RJR Nabisco, at the exchange rate effective at the time) by a syndicated loan Inc. (“RJR Nabisco”) on May 12, 1999. JT paid US$5.0 billion for the arranged by Merrill Lynch. Of the funds borrowed from Mizuho Bank, non-U.S. tobacco operations of RJR Nabisco, which resulted in the JT Group repaid a total of ¥150 billion in May and July 2007 out US$3.5 billion of goodwill. JT also acquired non-U.S. tobacco-related of its own funds and refinanced ¥300 billion through new loans total- trademarks and intellectual properties for US$2.7 billion and other ing ¥150 billion from other domestic banks and through the issuance assets for US$0.1 billion. The acquisition, worth a total of US$7.8 of domestic bonds totaling ¥150 billion. It repaid the syndicated loan billion (¥940 billion at the exchange rate effective at that time), was of £1.9 billion with its own cash, and funds borrowed under a new financed by a syndicated loan of US$5.0 billion (¥600 billion at the credit line established outside Japan. As for the domestic bonds, exchange rate effective at that time) and US$2.8 billion (¥340 billion the JT Group redeemed ¥50 billion in July 2010, and is due to at the exchange rate effective at that time) in cash. The syndicated redeem ¥40 billion in July 2011 and ¥60 billion in July 2012. With
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 060 page 061 the acquisition of Gallaher, we have further strengthened our position billion in a two-stage deal implemented in April and September as the world’s third largest tobacco company. In addition to our 1998. In addition, JT acquired the food business of Asahi Kasei strong business foundation in Asia, we now have an increasing pres- Corporation for approximately ¥24 billion in July 1999. In January ence in Europe and the CIS region. We aim to maintain sustainable 2008, the JT Group made Katokichi Co., Ltd. a subsidiary by acquir- growth as a major tobacco company on the strength of our geo- ing additional shares of the company for approximately ¥102 billion, graphically well-balanced operations and our ample growth potential. increasing its equity stake in Katokichi from 5% to approximately JT’s international tobacco business aims to enhance its role as 94%. Following the acquisition of all voting rights of Katokichi on the driver of the JT Group’s profit growth by achieving top-line April 18, 2008, the JT Group channeled its processed food opera- growth. We count eight brands among our list of global flagship tions, including frozen food operations and seasonings operations, brands (“GFB”): Winston, Camel, Mild Seven, Benson & Hedges, through the Katokichi Group beginning on July 1, 2008. Through this Silk Cut, LD, Sobranie and Glamour. We intend to actively explore realignment, the Katokichi Group will consolidate its foundation as a opportunities for top-line growth on the strength of these GFB, unique food manufacturer on the strength of its processed food which form the core of our brand portfolio. business—including the frozen food business, which is of eminent In addition to the tobacco business, the JT Group has been scale in the Japanese market—and its superior technology for the actively engaged in its pharmaceutical and food businesses in order production of seasonings. Katokichi changed its corporate name to to diversify its source of future profits and cash flows. TableMark Co., Ltd. in January 2010. In its pharmaceutical business, the JT Group focuses on the Under the JT Law, JT must obtain approval from the Minister of research and development of prescription drugs. In the Japanese Finance with regard to certain matters, such as (1) the issuance of domestic market, Torii Pharmaceutical Co., Ltd., in which JT acquired new shares (as well as subscription rights for new shares and a stake of 53.5% for approximately ¥42 billion in December 1998, bonds with subscription rights for new shares) and (2) resolutions manufactures and sells prescription drugs through its extensive mar- adopted at shareholder meetings for any amendments to the keting network. In the overseas market, JT derives revenue principally Articles of Incorporation and appropriation of retained earnings. from royalties on the licensing of its successful anti-HIV drug. Pursuant to the JT Law, the Japanese government is required to In its food business, the JT Group principally manufactures and hold one-half or more of the JT shares that were issued upon the sells beverages, processed foods and seasonings in the Japanese company’s establishment in 1985, as adjusted for any subsequent domestic market. JT’s presence in the beverage market was substan- stock split or consolidation of shares. The amended JT Law allows tially expanded through the acquisition of a majority stake in Unimat JT to issue new shares to the extent that the number of shares Corporation, a nationwide operator of soft drink vending machines held by the government remains at more than one-third of the Financial Information that was later renamed Japan Beverage Inc., for approximately ¥29 outstanding shares.
Overview
Our net sales (Note 3) totaled ¥6,194.6 billion for the year ended on business had generated operating income since the year ended March 31, 2011 compared with ¥6,134.7 billion for the year ended March 31, 2005; however, it posted an operating loss in the year March 31, 2010. The Japanese domestic and international tobacco ended March 31, 2009, in the year ended March 31, 2010 and in businesses accounted for 50.1% and 42.8%, respectively, of our net the year ended March 31, 2011. Our pharmaceutical business has sales in the year ended March 31, 2011, compared with 49.6% and posted operating losses every year since the year ended March 31, 42.9% in the year ended March 31, 2010. Sales for our international 1998, when we started to disclose segment-by-segment informa- tobacco business have become an important component of our total tion, with the exception of the year ended March 31, 2005 and the net sales. year ended March 31, 2009. As a result, we derive almost all of our Our operating income totaled ¥328.7 billion for the year ended operating income from our tobacco business.
March 31, 2011, compared with ¥296.5 billion for the year ended (Note 3) Including tobacco excise taxes. March 31, 2010. Up to the year ended March 31, 2008 our food
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 060 page 061 Overview of the Japanese Domestic and International Tobacco Businesses
Overall tobacco demand in the Japanese domestic market has been unprecedented scale has triggered a considerable decline in total declining due to such factors as the aging of Japanese society, grow- tobacco demand. Since cost reduction alone would not be sufficient ing awareness about the health risks associated with smoking and to enable us to continue to provide products and services that the tightening of smoking-related regulations, and we expect this satisfy our customers, we raised our retail prices by a larger margin trend to continue. As for overseas markets, too, demand may decline than the tax increase. We will strive to provide quality and services depending on economic conditions and regional factors, although the which are commensurate with the retail prices and which satisfy situation will vary from region to region. In addition, tobacco demand our customers by continuing efforts to strengthen R&D capability may decline either in the domestic or overseas markets as a result of so as to offer better value for the price, launching new products of tobacco excise tax increases or the tightening of tobacco regulations. key brands and improving taste, aroma and package design. In the The total tobacco sales of the Japanese domestic tobacco busi- year ended March 31, 2011, JT strived to enhance the brand portfo- ness in the year ended March 31, 2011 fell 11.3% from the previous lio by introducing new products as well as by developing the exist- year to 134.6 billion cigarettes (Note 4) due to the price amendment that ing brands, particularly the Mild Seven family, the Seven Stars accompanied the tax increase implemented in October 2010. Mean- family and Pianissimo family, which are our core brands. Specifi- while, the total tobacco sales of the international tobacco business cally, in the Mild Seven family, the Mild Seven Aqua Squash Men- in the year ended March 31, 2011, declined 1.5% from the previous thol 7 Box and Mild Seven D-spec One 100’s Box were released year to 428.4 billion cigarettes (Note 5), due to a decline in overall nationwide, and in the Seven Stars family, the Seven Stars Black demand in Russia and other countries. The table below shows the Impact Box was launched nationwide. As for the Pianissimo family, total tobacco sales of the Japanese domestic and international the Pianissimo Super Slims Menthol One was released nationwide. tobacco businesses for the past two fiscal years. Apart from releasing these new products, JT adopted a round-
Years ended March 31 2010 2011 corner box package for nine box package products in the Mild Japanese domestic tobacco business (Note 4) 151.9 134.6 Seven family. Moreover, some products in the Seven Stars family International tobacco business (Note 5) 434.9 428.4 also underwent renewal. In the fiscal year ended March 2011, the Total 586.8 563.1 cigarette sales volume declined sharply compared with the previous (Billions of Cigarettes) year due to a decrease in demand in the second half caused by the (Note 4) Excluding tobacco products purchased from overseas tobacco manufacturers and tax hike and price increase implemented in October 2010. In addi- sold to retail stores through its distribution subsidiary, TS Network Co., Ltd. (“TS tion, market share declined partly because we varied the margin of Network”), sales volume of domestic duty-free market and in the markets in China, Hong Kong and Macau, which are covered by JT’s China Division (the sales volume price increase by product when we amended prices at the time of stood at 3.6 billion cigarettes in the fiscal year ended March 31, 2010, and at 3.5 the tax hike. Other factors behind the share decline were the short- billion cigarettes in the fiscal year ended March 31, 2011). (Note 5) Including cigars, pipe tobacco and snus, excluding private label and contract age of some products and temporary suspension of shipment of all manufacturing products. products that were caused by the damage inflicted by the Great East Japan Earthquake to factories and materials suppliers. The JT Group regards the Japanese domestic tobacco business Although the Japanese domestic tobacco business was affected as its core source of profits. The business environment is becoming by the sales volume decline, this negative impact was almost offset increasingly difficult due to a decline in overall demand in the by pricing effect. As a result, net sales excluding taxes increased Japanese domestic market and intensifying competition. To secure slightly compared with the previous year and adjusted net sales a competitive edge, JT will strive to build a strong brand portfolio excluding taxes (Note 6) remained were broadly flat. EBITDA increased and also make continuous efforts to enhance the added value of its despite sales promotion expenditures intended to ensure quality products and improve product quality so as to maximize customer and services commensurate with the retail price, one-time satisfaction and establish a highly cost-efficient business framework expenses related to the tax hike, and price increase, as pricing by increasing product exposure at key sales outlets and enhancing effect outweighed the sales volume decline. its marketing force and institutional strength. Moreover, JT will (Note 6) Net Sales excluding excise tax, and revenue from the imported tobacco, domestic continue efforts to achieve a harmonious coexistence between duty free, the China Division and other miscellaneous items smokers and nonsmokers. Meanwhile, there was a major change in the business environment for the JT Group, with the tobacco excise The international tobacco business is striving to achieve high- tax having been raised by 3.5 yen per cigarette (a tax increase of quality top-line growth by concentrating business resources on GFBs 70 yen for a 20-cigarette pack). Coupled with structural factors and through appropriate pricing and sales volume expansion due to such as the contraction of the adult population, this tax hike of an the development of outstanding brands, so that it can continue to act
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 062 page 063 as the JT Group’s profit growth engine. In addition, we will take Market shares in the Japanese domestic and overseas tobacco measures to expand our profit base, including the development of a markets may fluctuate in the short term due to temporary factors, promising market, and make active investments to further strengthen such as the launch of new products by the JT Group and other our business foundation. Moreover, we will continue to appropriately tobacco manufacturers, and special sales promotion activities. Local adapt to various regulations being considered and introduced by the market shares may also be affected by a number of other factors, European Union and other countries and regions as well as the including competition, pricing strategies, changes in consumer Framework Convention on Tobacco Control (FCTC) that has been put preferences, brand recognition and regional economic conditions.
into force under the auspices of the World Health Organization (Note 7) Excluding excise tax and revenues from the distribution, leaf tobacco, contract (WHO). In the fiscal year ended March 2011, although the total manufacturing and other peripheral business annual shipment volume declined due to a drop in overall demand in Such factors may lead to a decrease in the JT Group’s market Russia and other countries, improvement was seen in the second share. In addition, there is a risk that the measures adopted by the half. As for the GFB sales, annual shipment volume increased JT Group to counter the decrease in market share may entail addi- because of the steady sales growth of Winston in Italy and France, of tional costs, reducing its profits. The profitability of the Japanese Camel in Turkey and France and of LD in Poland. This reflected an domestic and international tobacco businesses may fluctuate due to improvement in the business environment due to a slowing of indus- various factors, including the following: try contraction in key markets in the second half and a return of • Health concerns relating to the use of tobacco product; up-trading in some markets including Russia as well as a market • Legal or regulatory developments and changes, including, share increase in most key markets. This positive performance of without limitation, tax increases and restrictions on the sale, share increase in most key markets was the result of our balanced marketing and usage of tobacco products, and governmental brand portfolio, our steady efforts to enhance brand equity and strong investigations and privately imposed smoking restriction; trade marketing activities. • Litigation in Japan and elsewhere; Although total shipment volume for the international tobacco • Our ability to successfully expand internationally and make business declined, dollar-based net sales excluding taxes and core investments outside of Japan; net sales excluding taxes (Note 7) increased because of pricing effect • Competition and changing consumer preferences; and favorable movements of key local currencies against the U.S. • The impact of any acquisitions; dollar compared with the previous year. Dollar-based EBITDA grew • Local and global economic conditions; and despite increased cost of sales due to higher leaf costs. Yen-based • Fluctuations in foreign exchange rates and the cost of raw net sales excluding taxes and adjusted net sales excluding taxes materials. Financial Information declined as a result of the impact of the strengthening of the yen. Please refer to “Major Risks of Businesses” (Page 54-56) for However, yen-based EBITDA increased. the details.
Impact of Exchange Rate Fluctuations
The JT Group has become more prone than before to exchange rate other than the U.S. dollar. This means that the JT Group’s consoli- fluctuations as a result of an expansion of its international tobacco dated results are affected not only by exchange rate fluctuations business. While JT itself makes consolidated financial statements in between the Japanese yen and the U.S. dollar but also by those terms of the Japanese yen, overseas subsidiaries and affiliates of the between the U.S. dollar and other foreign currencies used by the JT Group do so in terms of foreign currencies. Consequently, the consolidated subsidiaries and affiliates for their financial accounting. business results, assets and liabilities of the overseas subsidiaries However, the impact of such exchange rate fluctuations does not and affiliates are converted into yen terms when they are reflected in significantly affect the business fundamentals. A substantial portion JT’s consolidated financial statements. Therefore, JT’s financial state- of the JT Group’s international transactions is conducted in curren- ments are affected by the fluctuations of the foreign currencies used cies other than the Japanese yen, and that portion is affected by by the overseas subsidiaries and affiliates against the Japanese yen. exchange rate fluctuations. JT International Holding B.V. (JT’s consolidated subsidiary in the Although the JT Group partially hedges its exposure to foreign Netherlands; hereinafter referred to as “JTIH”), which is responsible exchange risks related to transactions conducted in foreign curren- for consolidating the financial results of the JT Group’s international cies, the JT Group’s exchange risks cannot be fully offset. Therefore, tobacco business, uses the U.S. dollar for its financial accounting. the possibility cannot be ruled out that the JT Group’s business However, JTIH does business through consolidated subsidiaries and performance will be negatively affected by exchange rate affiliates around the world, some of which use foreign currencies fluctuations.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 062 page 063 Consolidated Business Results and Results by Industry Segment
Consolidated Income Statement
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 2011 2011 Net sales (Note 8) ¥6,832,307 ¥6,134,695 ¥6,194,554 $74,499 Cost of sales (Note 9) 5,554,399 5,022,638 5,074,074 61,024 Gross profit 1,277,908 1,112,058 1,120,480 13,475 Selling, general and administrative expenses 914,102 815,553 791,799 9,522 Operating income 363,806 296,505 328,681 3,953 Other income (expenses), net (101,662) (20,450) (48,183) (580) Net income before income taxes and minority interests 262,144 276,055 280,498 3,373 Income taxes 134,973 131,304 130,890 1,574 Net income before minority interests 127,171 144,751 149,608 1,799 Minority interests 3,771 6,303 4,646 56 Net income ¥ 123,400 ¥ 138,448 ¥ 144,962 $ 1,743
Net income before goodwill amortization ¥ 228,911 ¥ 235,875 ¥ 236,070 $ 2,839
(Note 8) Including excise taxes (Note 9) Including excise taxes
Table of Results by Industry Segment
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 (former) 2010 (new) 2011 2011 Net sales (Note 8) ¥6,832,307 ¥6,134,695 ¥6,134,695 ¥6,194,554 $74,499 Tobacco Business Domestic 3,200,494 3,042,836 3,042,836 3,103,356 37,322 International 3,118,319 2,633,636 2,633,636 2,649,957 31,870 Pharmaceutical Business 56,758 44,069 44,069 46,988 565 Food Business 435,966 394,653 394,653 375,016 4,510 Other Business 20,770 19,501 19,501 19,237 232
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 (former) 2010 (new) 2011 2011 Net sales excluding excise taxes ¥2,827,184 ¥2,514,152 ¥2,514,152 ¥2,486,153 $29,900 Tobacco Business Domestic (Note 10) 1,070,307 1,016,788 1,016,788 1,027,876 12,362 International 1,243,381 1,039,136 1,039,136 1,017,035 12,231
(Note 10) Excluding tobacco excise tax from the amount of domestic sales of tobacco products manufactured by the JT Group within and outside Japan, domestic sales of products manufac- tured by foreign tobacco manufacturers (including sales of imported tobacco and domestic duty-free sales) which are distributed by the wholesaler functions of our subsidiaries, and sales in the China, Hong Kong and Macau markets, which are covered by JT’s China Division.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 064 page 065 Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 (former) 2010 (new) 2011 2011 Adjusted net sales excluding excise taxes (Note 11) ¥2,243,147 ¥1,980,970 ¥1,980,970 ¥1,956,616 $23,531 Tobacco Business Domestic 648,830 615,991 615,991 617,919 7,431 International 1,080,821 906,756 906,756 897,455 10,793
(Note 11) Japanese domestic tobacco: excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco: excluding excise tax and revenue from distribution, leaf tobacco, contract manufacturing and other miscellaneous.
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 (former) 2010 (new) 2011 2011 Operating income ¥363,806 ¥296,505 ¥296,505 ¥328,681 $3,953 Tobacco Business Domestic 188,259 203,339 198,738 212,912 2,561 International 174,772 109,127 136,936 156,130 1,878 Pharmaceutical Business 1,020 (13,593) (13,593) (17,413) (210) Food Business (11,451) (13,696) (13,696) (9,413) (114) Other Business 9,695 10,557 10,559 9,984 120 Elimination/Corporate 1,511 771 (22,440) (23,520) (283)
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 (former) 2010 (new) 2011 2011 EBITDA (Note 12) ¥646,217 ¥526,702 ¥526,702 ¥541,112 $6,508 Tobacco Business Domestic 272,280 257,646 251,263 257,690 3,099 International 337,968 249,869 277,678 288,168 3,466 Pharmaceutical Business 4,890 (9,651) (9,651) (13,268) (160)
Food Business 17,030 14,490 14,490 17,277 208 Financial Information Other Business 13,150 13,337 13,341 12,919 155 Elimination/Corporate 899 1,011 (20,419) (21,674) (260)
As the application of ASBJ Statement No. 17 “Accounting Standard managed exclusive of effects from the payment of royalties, these for Segment Information Disclosures” started in the fiscal year effects are also excluded from the segment profits. In addition, ended March 2011, the reportable segments determined on the following the adoption of the management approach, JT partially basis of the management approach are the Japanese domestic revised the distribution of expenses common to all group companies tobacco business, the international tobacco business, the pharma- and capital expenditures to each reportable segment. ceutical business and the foods business. The method of measuring The abovementioned “Accounting Standard for Segment segment profits has been partially revised. Information Disclosures” was applied to figures used in the year-on- Overseas consolidated subsidiaries classified under the interna- year comparison of EBITDA (Note 12) between the fiscal years ended tional tobacco business manufacture and sell tobacco products using March 2011 and 2010 in order to ensure an appropriate comparison the brand trademark rights for Camel and Winston and other brands of business performance. However, it was not applied to figures owned by JT and pay fees for the use of said rights (hereinafter used in the year-on-year comparison of EBITDA between the fiscal referred to as royalties). Previously, the segment disclosure of said years ended March 2010 and March 2009.
royalties was affected by measuring royalties received in the seg- (Note 12) EBITDA is defined as operating income before amortization (amortization of ment profit of the Japanese domestic tobacco business, while the tangible fixed assets, intangible fixed assets, long-term prepaid expenses and goodwill). The amortization of tangible fixed assets is included in the cost of sales segment profit of the international tobacco business was measured in some cases and in general and administrative expenses in other cases. The JT after deducting royalties. However, as the profit of each segment is Group uses EBITDA as the key profit indicator for management decision-making and for reporting of segment profit.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 064 page 065 Year Ended March 31, 2011 Compared with dollar, yen-based sales excluding excise taxes decreased by ¥22.1 Year Ended March 31, 2010 billion, or 2.1%, from the previous year to ¥1,017.0 billion, and core Net Sales net sales excluding excise taxes dropped by ¥9.3 billion, or 1.0%, Net sales for the year ended March 31, 2011 increased by ¥59.9 from the previous year to ¥897.5 billion. Sales denominated in local billion, or 1.0%, from the previous year to ¥6,194.6 billion. Net sales currencies are first converted into U.S. dollar terms and then into yen excluding excise taxes in the domestic and international tobacco terms based on the average exchange rate for the relevant accounting businesses declined by ¥28.0 billion, or 1.1%, to ¥2,486.2 billion. period. Adjusted net sales excluding excise taxes dropped by ¥24.3 billion, The average exchange rates of the major local currencies con- or 1.2%, to ¥1,956.6 billion. The net sales amounts for the domestic verted into dollar terms were: $1=30.36 ruble, $1=0.65 pound and and international tobacco businesses indicated below represent net $1=0.75 euro for the year ended March 31, 2011, compared with sales excluding excise taxes and adjusted net sales excluding excise $1=31.77 ruble, $1=0.65 pound, $1=0.73 euro for the year ended taxes. Net sales for each segment represent the amount of sales March 31, 2010. The 12-month average exchange rate between the excluding inter-segment transactions. Japanese yen and the U.S. dollar that was used for the conversion of sales for the year ended March 31, 2011 was ¥87.79 to $1.00, • Japanese Domestic Tobacco Business compared with ¥93.65 to $1.00 for the year ended March 31, 2010. The sales volume of JT’s tobacco products in Japan decreased by 17.2 billion cigarettes, or 11.3%, from the previous year to 134.6 • Pharmaceutical Business billion cigarettes (Note 13). The decline reflected the impact of the price Net sales for our pharmaceutical business increased by ¥2.9 billion, amendment that accompanied the tax increase implemented in or 6.6%, from the previous year to ¥47.0 billion. The increase was October 2010. Our market share declined to 64.1% from the previ- due to sales growth at Torii Pharmaceutical, a subsidiary, and a mile- ous year’s 64.9%. Net sales excluding excise tax per 1,000 cigarettes stone revenue received in exchange for progress in the development came to ¥4,582 as a result of the price amendment. Net sales of out-licensed drugs. excluding excise taxes in the Japanese domestic tobacco business increased by ¥11.1 billion, or 1.1%, from the previous year to • Food business ¥1,027.9 billion. Adjusted net sales excluding excise taxes increased Net sales for our food business declined by ¥19.6 billion, or 5.0%, by ¥1.9 billion, or 0.3%, from the previous year to ¥617.9 billion. from the previous year to ¥375.0 billion. Although net sales for the
(Note 13) In addition, 3.5 billion cigarettes sold in domestic duty-free markets and in the beverage business grew due to increased demand caused by the China, Hong Kong and Macau markets, which are covered by JT’s China Division, summer heat waves and steady sales growth of the Roots flagship are included in the domestic sales volume. brand, net sales of processed foods and other products declined due • International Tobacco Business to the closure of the rice wholesale business and the exclusion of The total shipment volume of tobacco products in the international some subsidiaries from the consolidated results as well as a decline tobacco business decreased by 6.5 billion cigarettes, or 1.5%, from in sales of products to restaurants. Net sales for the beverage busi- the previous year to 428.4 billion cigarettes due to a decline in overall ness increased by ¥6.3 billion, or 3.4%, from the previous year to demand in Russia and other countries. However, the GFB volume ¥192.4 billion, while sales of processed foods and other products grew by 6.5 billion cigarettes, or 2.7%, from the previous year to decreased by ¥25.9 billion, or 12.4%, from the previous year to 249.8 billion cigarettes. Despite the decline in the total shipment ¥182.6 billion. volume, dollar-based net sales excluding excise taxes in the interna- tional tobacco business increased by $489 million, or 4.4%, from the Cost of Sales previous year to $11,585 million, and core net sales excluding excise Cost of sales in the year ended March 31, 2011 increased by ¥51.4 taxes increased by $540 million, or 5.6%, from the previous year to billion, or 1.0%, from the previous year to ¥5,074.1 billion, as the $10,223 million. The net sales growth resulted from favorable pricing sales volume decline of the Japanese domestic tobacco business and generally favorable movements of local currencies of major mar- and the impact of the yen’s appreciation on the conversion of the kets against the U.S. dollar, which is used for accounting purposes by production cost in the international business into yen terms were the consolidated overseas subsidiary, compared with the previous offset by increased tobacco excise taxes for the Japanese domestic year. However, due to the impact of the yen’s appreciation against the and international tobacco businesses.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 066 page 067 Selling, General and Administrative Expenses Other Expenses/Income (on a net basis) Selling, general and administrative expenses in the year ended March We booked other expenses totaling ¥48.2 billion (on a net basis) in 31, 2011 decreased by ¥23.8 billion, or 2.9%, from the previous year the year ended March 31, 2011, an increase of ¥27.7 billion from the to ¥791.8 billion. This was attributable to the effects of the yen’s previous year. Interest payments decreased due to lower interest appreciation on the conversion of the selling, general and administra- rates, redemption of bonds and reduced borrowings, and exchange tive expenses of the international tobacco business into yen terms losses narrowed, but profits from the sale of fixed assets fell. The and the completion of the amortization of some trademark rights in increase in other expenses also reflected the absence of gains from the Japanese domestic tobacco business. the reversal of liability on a fine levied under the UK competition law that had been booked in the previous year and the settlement of a Operating Income and EBITDA regulatory offense in Canada. As a result of the above factors, operating income in the year ended March 31, 2011 grew by ¥32.2 billion, or 10.9%, from the Net Income before Income Taxes and previous year to ¥328.7 billion, while EBITDA increased by ¥14.4 Minority Interests billion, or 2.7%, to ¥541.1 billion. EBITDA by business segment is As a result of the above factors, net income before income taxes and defined as follows: minority interests in the year ended March 31, 2011 increased by ¥4.4 billion, or 1.6%, from the previous year to ¥280.5 billion. • Japanese Domestic Tobacco Business EBITDA for our Japanese domestic tobacco business in the year Income Taxes ended March 31, 2011 increased by ¥6.4 billion, or 2.6%, from the Income taxes in the year ended March 31, 2011 declined by ¥0.4 previous year to ¥257.7 billion. While there were sales promotion billion, or 0.3%, from the previous year to ¥130.9 billion. The actual expenditures intended to ensure quality and services commensu- effective tax rate in the year ended March 31, 2011 declined by 0.9 rate with the retail price and one-time expenses related to the tax point to 46.7%. hike and price increase, pricing effect more than offset the sales volume decline. Net Income before Minority Interests Net income before minority interests in the year ended March 31, • International Tobacco Business 2011 came to ¥149.6 billion. Minority interests in the year ended Dollar-based EBITDA for our international tobacco business March 31, 2011 decreased by ¥1.7 billion, or 26.3%, from the previ- increased by $317 million, or 10.7%, from the previous year to ous year to ¥4.6 billion mainly due to changes in the business. Financial Information $3,282 million as the net sales growth offset an increase in the cost of sales due to increased leaf tobacco prices. Yen-based EBITDA Net Income grew by ¥10.5 billion, or 3.8%, to ¥288.2 billion despite the impact As a result of the above factors, net income in the year ended March of the yen’s appreciation. 31, 2011, increased by ¥6.5 billion, or 4.7%, from the previous year to ¥145.0 billion. • Pharmaceutical Business Our pharmaceutical business recorded a negative EBITDA of ¥13.3 Net Income before Goodwill Amortization billion in the year ended March 31, 2011, representing a deterioration Since April 2008, we have booked the cost of goodwill amortization of ¥3.6 billion from the previous year, as the net sales increase was of all segments in accordance with the “standard accounting treat- more than offset by increases in the R&D expenses. ments to the accounting of overseas subsidiaries in the consolidated financial statements” (a report by the Accounting Standards Board of • Food business Japan). In the year ended March 31, 2011, the cost of goodwill amor- EBITDA for our food business in the year ended March 31, 2011 tization (Note 14) came to ¥91.1 billion, and net income before goodwill increased by ¥2.8 billion, or 19.2%, from the previous year to ¥17.3 amortization increased by ¥0.2 billion, or 0.1%, to ¥236.1 billion.
billion, due to the strong performance of the beverages business and (Note 14) The cost of goodwill amortization is included in the selling, general and administra- the absence of the one-time factor in the fishery product business tive expenses. that had resulted in losses for the processed foods business in the previous year.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 066 page 067 Year Ended March 31, 2010 Compared with converted into U.S. dollar terms and then into yen terms based on Year Ended March 31, 2009 the average exchange rate for the relevant accounting period. Net Sales Despite the sales volume decline, dollar-based net sales at constant Net sales for the year ended March 31, 2010 decreased by ¥697.6 rates of exchange increased due to price increases implemented in billion, or 10.2%, from the previous year to ¥6,134.7 billion. The net many countries. However, yen-based net sales decreased due to the sales amounts for the domestic and international tobacco businesses depreciation of local currencies of major markets against the U.S. indicated below represent net sales including excise taxes and dollar compared with the previous year and the yen’s appreciation adjusted net sales excluding excise taxes. Net sales for each seg- against the U.S. dollar. ment represent a sales amount excluding inter-segment transactions. The average exchange rates of the major local currencies con- verted into dollar terms were: $1=31.77 ruble, $1=0.65 pound, • Japanese Domestic Tobacco Business $1=0.73 euro for the year ended March 31, 2010, compared with The sales volume of JT tobacco products in Japan in the year ended $1=24.84 ruble, $1=0.53 pound and $1=0.68 euro for the year March 31, 2010 declined by 8.1 billion cigarettes, or 5%, from the ended March 31, 2009. The 12-month average exchange rate previous year to 151.9 billion cigarettes (Note 15). The decline reflected between the Japanese yen and the U.S. dollar that was used for mainly a continued drop in overall tobacco demand in the Japanese the conversion of sales for the year ended March 31, 2010, was domestic market due to such factors as the aging of Japanese soci- ¥93.65 to $1.00, compared with ¥103.48 for the year ended ety, growing awareness about the health risks associated with smok- March 31, 2009. ing and the tightening of smoking-related regulations and the weak economic conditions. The market share of JT products came to • Pharmaceutical Business 64.9%, almost unchanged from the previous year. Net sales exclud- Net sales for our pharmaceutical business dropped by ¥12.7 billion, ing excise taxes per 1,000 cigarettes stood at ¥4,056, almost or 22.4%, from the previous year to ¥44.1 billion in the year ended unchanged from the previous year. Net sales in the Japanese domes- March 31, 2010. While net sales for Torii Pharmaceutical increased, tic tobacco business (Note 16) decreased by ¥157.7 billion, or 4.9%, from the consolidated net sales declined after the previous year’s sales the previous year to ¥3,042.8 billion. Adjusted net sales excluding were boosted by the receipt of an upfront fee for the licensing of excise taxes declined by ¥32.8 billion, or 5.1%, from the previous anti-osteoporosis oral compound JTT-305 to Merck of the United year to ¥616.0 billion. States in September 2008 and a milestone revenue associated with
(Note 15) In addition, 3.6 billion cigarettes sold in domestic duty-free markets and in the progress in the development of the JTT-705 compound for the treat- China, Hong Kong and Macau markets, which are covered by JT’s China Division, ment of dyslipidemia, which was licensed to Roche in October 2004. are included in the domestic sales volume. (Note 16) This figure represents the sum of sales in Japan of products manufactured in Japan and other countries by the JT Group, sales products manufactured by • Food business foreign tobacco companies and sold by JT subsidiaries serving as wholesalers (sales of imported tobacco products including domestic duty-free sales) and sales Net sales for our food business declined by ¥41.3 billion, or 9.5%, in the China, Hong Kong and Macau markets, which are covered by JT’s China from the previous year to ¥394.7 billion. Sales of beverage products Division, including tobacco excise taxes. declined by ¥1.2 billion, or 0.6%, to ¥186.1 billion. Sales of processed foods fell by ¥40.1 billion, or 16.1%, from the previous year to ¥208.5 • International Tobacco Business billion, as a result of the withdrawal from the chilled processed food Regarding the sales volume of tobacco products in overseas markets, business and the exclusion of some subsidiaries from the consoli- the volume grew steadily for Winston in Italy, France and Turkey and dated results due to the change in ownership. for Camel in Italy and Ukraine. However, as a result of the unstable business environment in Iran and a change in the operating model in Cost of Sales the Philippines from the licensing arrangement to contract manufac- Cost of sales in the year ended March 31, 2010 decreased by ¥531.8 turing, the total sales volume in overseas markets declined by 11.0 billion, or 9.6%, from the previous year to ¥5,022.6 billion. Despite billion cigarettes, or 2.5%, from the previous year to 434.9 billion the increase of the production cost due to the price hike of foreign cigarettes. Meanwhile, the GFB sales volume decreased by 2.1 leaf tobacco, the decrease in the sales volume of the Japanese billion cigarettes, or 0.9%, to 243.4 billion cigarettes. Net sales for domestic tobacco business and the adverse currency movements in the international tobacco business totaled ¥2,633.6 billion, a decline the international tobacco business contributed to the decrease in the of ¥484.7 billion, or 15.5%, from the previous year, while core net cost of sales. sales excluding excise taxes decreased by ¥174.1 billion, or 16.1%, to ¥906.8 billion. Sales denominated in local currencies are first
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 068 page 069 Selling, General and Administrative Expenses • Others Selling, general and administrative expenses in the year ended March EBITDA for our other businesses in the year ended March 31, 31, 2010 decreased by ¥98.5 billion, or 10.8%, from the previous year 2010 increased by ¥0.2 billion, or 1.4%, from the previous year to to ¥815.6 billion. This was attributable to the effects of exchange rate ¥13.3 billion. fluctuations on the conversion of the selling, general and administra- tive expenses of the international tobacco business into yen terms Other Expenses/Income (on a net basis) and the completion of the amortization of some trademark rights in We booked other expenses totaling ¥20.5 billion (on a net basis) in the the Japanese domestic tobacco business. year ended March 31, 2010, a decrease of ¥81.2 billion from the previ- ous year. This was attributable to a decline in interest payments due to Operating Income and EBITDA reduced borrowings, redemption of bonds and lower interest rates, a As a result of the above factors, operating income in the year ended drop in exchange losses, the elimination of some expenses incurred in March 31, 2010 dropped by ¥67.3 billion, or 18.5%, from the previ- the previous year, including: expenses related to a change in the operat- ous year to ¥296.5 billion, while EBITDA declined by ¥119.5 billion, ing model in the Philippines; expenses associated with the demolition or 18.5%, to ¥526.7 billion. EBITDA by business segment is defined of company housing; and the cost of introducing vending machines as follows: with the adult identification function, and a gain from the reversal of liability on a fine levied under the UK competition law, which out- • Japanese Domestic Tobacco Business weighed a decrease in the profits from the sale of fixed assets. EBITDA for our Japanese domestic tobacco business in the year ended March 31, 2010 decreased by ¥14.6 billion, or 5.4%, from the Net Income before Income Taxes and previous year to ¥257.6 billion due to a decline in net sales caused by Minority Interests a fall in the sales volume. As a result of the above factors, net income before income taxes and minority interests in the year ended March 31, 2010 increased by • International Tobacco Business ¥13.9 billion, or 5.3%, from the previous year to ¥276.1 billion mainly EBITDA for our international tobacco business declined by ¥88.1 due to changes in the business. billion, or 26.1%, from the previous year to ¥249.9 billion. This was due to a net sales decline attributable to the depreciation of the local Income Taxes currencies of major markets against the U.S. dollar, the dollar’s Income taxes in the year ended March 31, 2010 declined by ¥3.7 depreciation against the Japanese yen and a rise in the manufactur- billion, or 2.7%, from the previous year to ¥131.3 billion. The actual Financial Information ing cost due to increased leaf tobacco prices. effective tax rate in the year ended March 31, 2010 decreased by 3.9 points to 47.6%. • Pharmaceutical Business Our pharmaceutical business recorded a negative EBITDA of ¥9.7 Net Income before Minority Interests billion in the year ended March 31, 2010, representing a deterioration Net income before minority interests in the year ended March 31, of ¥14.5 billion from the previous year. Although net sales and profits 2010 increased by ¥17.6 billion, or 13.8%, from the previous year to for Torii Pharmaceutical increased, the consolidated EBITDA and ¥144.8 billion. Minority interests in the year ended March 31, 2010 operating loss deteriorated after the previous year’s results that were increased by ¥2.5 billion, or 67.1%, from the previous year to ¥6.3 boosted by the receipt of an upfront fee for the licensing of anti- billion mainly due to changes in the business. osteoporosis oral compound JTT-305 to Merck in September 2008 and milestone revenue associated with progress in the development Net Income of the JTT-705 compound for the treatment of dyslipidemia, which As a result of the above factors, net income in the year ended March was licensed to Roche in October 2004. 31, 2010 increased by ¥15.0 billion, or 12.2%, from the previous year to ¥138.4 billion. • Food business EBITDA for our food business in the year ended March 31, 2010 Net Income before Goodwill Amortization declined by ¥2.5 billion, or 14.9%, from the previous year to ¥14.5 Since April 2008, we have booked the cost of goodwill amortization billion as a result of reduced net sales and one-time factors such as of all segments in accordance with the “standard accounting treat- losses in the fishery business despite cost reduction. ments to the accounting of overseas subsidiaries in the consolidated financial statements” (a report by the Accounting Standards Board of Japan). In the year ended March 31, 2010, the cost of goodwill amor- tization came to ¥97.4 billion, and net income before goodwill amorti- zation increased by ¥7.0 billion, or 3.0%, to ¥235.9 billion.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 068 page 069 Liquidity and Capital Resources
In our financial management, we strive to maintain a stable financial affected by short-term fluctuations in revenues. We raise the neces- base that enables the implementation of capital expenditures, the sary funds principally from cash flows provided by operations, borrow- acquisition of outside resources, and R&D activities in a cost-efficient ing from financial institutions and the issuance of long-term bonds. manner, in order to achieve business expansion without being
Cash Flows • Overview: As of March 31, 2010 and March 31, 2011, cash and cash equivalents totaled ¥154.4 billion and ¥244.2 billion, respectively.
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 2011 2011 Net cash provided by operating activities ¥ 275,271 ¥ 320,024 ¥ 399,638 $ 4,806 Net cash used in investing activities (65,008) (84,057) (119,407) (1,436) Net cash used in financing activities (217,470) (250,398) (184,951) (2,224) Effect of exchange rate changes and other (39,590) 1,542 (5,604) (68) Net increase (decrease) in cash and cash equivalents (46,798) (12,889) 89,676 1,078 Cash and cash equivalents at beginning of the period 215,009 167,258 154,369 1,857 Decrease in cash and cash equivalents resulting from exclusion of subsidiaries from consolidation (953) — 195 2 Cash and cash equivalents at end of the period ¥ 167,258 ¥ 154,369 ¥ 244,240 $ 2,937
Year Ended March 31, 2011 Compared with Year Ended March 31, 2010 Compared with Year Ended March 31, 2010 Year Ended March 31, 2009 Net cash generated by operating activities in the year ended March 31, Net cash generated by operating activities in the year ended March 2011 came to ¥399.6 billion compared with ¥320.0 billion in the year 31, 2010 came to ¥320.0 billion compared with ¥275.3 billion in the ended March 31, 2010. While inventories in the international tobacco year ended March 31, 2009, as an increase in inventories due to a business expanded substantially in the previous year due to higher leaf rise in leaf tobacco prices and increased procurement in the interna- costs and increased purchase volume, inventories in the domestic tional tobacco business was offset by stable cash flow from the tobacco business declined as a result of the impact of the earthquake tobacco business. disaster, leading to a smaller inventory increase than in the previous Net cash used in investment activities in the year ended March year. In addition, the tobacco business generated stable cash flow. 31, 2010 was ¥84.1 billion compared with ¥65.0 billion for the year Net cash used in investment activities in the year ended March ended March 31, 2009. It was mainly due to an increase in the 31, 2011 was ¥119.4 billion compared with ¥84.1 billion for the year expenditures on the acquisition of fixed assets. ended March 31, 2010. This was mainly due to an increase in the Net cash used for financing activities in the year ended March expenditures on the acquisition of fixed assets. 31, 2010 was ¥250.4 billion compared with ¥217.5 billion in net Net cash used for financing activities in the year ended March 31, cash used for such activities in the year ended March 31, 2009. 2011 was ¥185.0 billion compared with ¥250.4 in net cash used for This was mainly due to a decrease in long-term borrowings and such activities in the year ended March 31, 2010. The repayment of increases in the amounts of the redemption of corporate bonds, the short-term borrowings, the redemption of commercial paper and repayment of long-term borrowings and the payment of dividends, share repurchase were outweighed by a decline in the amount of the which outweighed the proceeds from the issuance of commercial redemption of corporate bonds and increase in the amount of long- paper and corporate bonds. term borrowings.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 070 page 071 Liquidity and Fund Needs We need liquidity mainly for capital expenditures, working capital, acquisition of outside resources and debt repayments, as well as payments of interest, dividends and income taxes.
• Capital expenditures Capital expenditures include outlays on machinery and equipment for factories, trademarks and other tangible and intangible assets necessary for enhancing the productivity of our factories and other facilities, strengthening our competitiveness, and operating in various business fields.
Millions of Millions of yen U.S. dollars For years ended March 31 2009 2010 2011 2011 Capital expenditures ¥134,273 ¥137,134 ¥146,021 $1,756
Following the application of the management approach to segment reporting due to the start of the application of ASBJ Statement No. 17 “Accounting Standard for Segment Information Disclosures” in the fiscal year ended March 2011, we also partially revised the distribution of capital expenditures to the reportable segments. (No revision was made regarding the fiscal years ended March 31, 2010 and March 31, 2009.)
For the year that ended March 31, 2011, overall capital expendi- As of June 24, 2011, our capital expenditure plans for the Japa- tures totaled ¥146.0 billion. In our Japanese domestic tobacco busi- nese domestic tobacco business and the food business in the year ness, we spent ¥56.0 billion, mainly on measures to streamline ending March 31, 2012 remain undecided due to the impact of the manufacturing processes, strengthen our ability to respond flexibly Great East Japan Earthquake. Meanwhile, in our international to supply and demand fluctuations with regard to an increasingly tobacco business, we plan to spend approximately ¥45 billion to diverse range of products and develop new products. In our interna- increase production capacity and maintain or upgrade production tional tobacco business, we invested ¥60.9 billion for the purpose of facilities. We have earmarked approximately ¥3.0 billion in invest- expanding our production capacity. In our pharmaceutical business, ment for our pharmaceutical business to strengthen the R&D capa- we spent ¥2.9 billion to enhance production and research facilities, bility. Our actual capital expenditures may differ significantly from while we invested ¥25.0 billion in our food business, mainly for the planned figures mentioned above as a result of a number of enhancing production and sales facilities. factors including, but not limited to, those discussed in the “Major In the year ended March 31, 2010, capital expenditures totaled Risks of Businesses.” ¥137.1 billion. In our Japanese domestic tobacco business, we spent ¥45.8 billion, mainly on measures to streamline manufacturing • Working Capital Financial Information processes, strengthen our ability to respond flexibly to supply and We need working capital mainly for purchasing raw materials, includ- demand fluctuations with regard to an increasingly diverse range of ing leaf tobacco and other inventory items, the payment of salaries products and develop new products. In our international tobacco and wages, sales expenses, advertising and promotion expenses, tax business, we invested ¥64.6 billion for the purpose of expanding our payments and R&D expenses. production capacity. In our pharmaceutical business, we spent ¥3.0 billion on the construction of production and research facilities, while • Acquisition of Outside Resources we invested ¥23.4 billion in our food business, mainly for enhancing As necessary, we may invest in or acquire companies deemed to production facilities. In our other businesses, capital expenditures have the potential to help us diversify our cash flow sources and were ¥0.3 billion. improve our profitability. In the year ended March 31, 2009, capital expenditures totaled ¥134.3 billion. In our Japanese domestic tobacco business, we • Dividends spent ¥46.5 billion, mainly on measures to streamline manufacturing We believe that increasing our corporate value in the medium to long processes, strengthen our ability to respond flexibly to supply and term by achieving sustainable profit growth through active business demand fluctuations with regard to an increasingly diverse range of investment is the basis for expanding profits for our shareholders. As products and develop new products. In our international tobacco our basic dividend policy, we will continue to provide a competitive business, we invested ¥59.8 billion for the purpose of expanding our level of return to shareholders in light of the implementation status of production capacity. In our pharmaceutical business, we spent ¥3.4 our mid- to long-term growth strategies and the outlook of our con- billion on the construction of production and research facilities, while solidated financial results. Aiming to achieve a consolidated dividend we invested ¥23.2 billion in our food business, mainly for enhancing payout ratio of 30% in the medium term (excluding the impact of production facilities. In our other businesses, capital expenditures goodwill amortization), we will strive to increase our per-share divi- were ¥1.1 billion, mainly for real estate development. dend payments consistently and continuously. The dividend payout ratio based on consolidated net income before goodwill amortization for the year ended March 31, 2011, was 27.6%.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 070 page 071 • Stock Repurchases Maturities of long-term debt (including the current portion) as of A repurchase of our own shares requires cash outlays. In order to March 31, 2011 were as follows: repurchase our own shares in a flexible manner, we amended the Millions of Articles of Incorporation at the general shareholders’ meeting held on For years ended March 31 Millions of yen U.S. dollars 2012 ¥222,622 $2,677 June 24, 2004 so that we could make repurchases based on a reso- 2013 163,049 1,961 lution made by the Board of Directors. As of March 31, 2011 we held 2014 54,855 660 478,526 shares of common stock as treasury stock. We may con- 2015 157,042 1,889 tinue to hold the repurchased shares as treasury stock or use them 2016 70,580 849 for share retirement or for other purposes. Stock repurchases pro- 2017 and thereafter 40,646 488 vide our management with an additional option for increasing flexibil- Total ¥708,794 $8,524 ity and speed in capital management in order to adapt to a rapidly changing business environment. We will determine the timing, scale As of March 31, 2011, our long-term debt was rated Aa3 by and manner of any further repurchase in an appropriate manner in Moody’s Investors Service, Inc., A+ by Standard & Poor’s Ratings light of our business needs and market trends. Services and AA by Rating and Investment Information, Inc. (R&I). These ratings are among the highest ratings for international tobacco Capital Resources and Use companies. By maintaining high credit ratings, we can finance large We have historically had, and expect to continue to have, significant sums of capital at relatively low cost from third parties as needed. cash flows from operating activities. Cash provided by operating Our ability to maintain high ratings is affected by a number of factors activities was ¥320.0 billion in the year ended March 31, 2010 and such as developments in our major business markets, the quality of ¥399.6 billion in the year ended March 31, 2011. We expect that execution of our business strategies, and general economic trends cash generated by operating activities will continue to cover capital that are beyond our control. The credit ratings are not recommenda- expenditures and debt repayments. tions for purchasing, selling or holding securities. The ratings could For substantial capital needs related to the acquisition of outside be withdrawn or revised at any time. Each rating should be evalu- resources, we may utilize debt financing, primarily borrowings from ated separately from other ratings. Under the JT Law, bonds issued financial institutions or the issuance of bonds, as needed. (Please by JT are secured by statutory preferential rights to the property of see “Long and Short-term Debt” below.) JT. These rights give bondholders precedence over unsecured credi- Equity financing, including warrants and bonds with warrants, tors in seeking repayment, with the exception of national and local requires the approval of the Minister of Finance under the Japan taxes and other statutory obligations. Tobacco Inc. Law. Revisions to the Japan Tobacco Inc. Law that took effect on April 19, 2002 provide us with the flexibility to issue • Short-term Debt new shares upon the approval of the Minister of Finance to the We take in short-term loans from banks and other financial institu- extent that the Japanese government retains more than one-third of tions. Short-term loans totaled ¥228.3 billion as of March 31, 2010, the outstanding shares in JT. In the future, we may choose to raise including ¥60.3 billion in foreign currency-denominated loans, and capital through stock issuance, which would dilute the value of ¥70.1 billion as of March 31, 2011, including ¥55.9 billion in foreign existing shareholders’ equity holdings. currency-denominated loans. Annual interest rates applicable to yen denominated short-term bank loans ranged from 0.090% to 3.500% Long and Short-term Debt as of March 31, 2010, and from 0.480% to 5.300% as of March 31, • Long-term Debt 2011. Annual interest rates applicable to short-term loans denomi- Our long-term liabilities consist mainly of long-term debt and liabilities nated in other currencies ranged from 1.040% to 27.250% as of for retirement benefits. As of March 31, 2011, long-term debt was March 31, 2010, and from 0.430% to 17.000% as of March 31, 2011. ¥638.7 billion, of which bonds accounted for ¥452.2 billion. Our remain- Annual interest rates applicable to commercial paper ranged from ing long-term debt (including the current portion) consisted of ¥173.9 0.106% to 0.145% as of March 31, 2010. billion in loans from banks and life insurance companies and ¥12.5 As a Japanese commercial custom, short-term and long-term billion in long-term lease obligations (including short-term lease obliga- bank loans are extended under general agreements stipulating that, tions). Annual interest rates applicable to yen-denominated long-term under certain circumstances, collateral or guarantees for present and bank loans outstanding as of March 31, 2010 and 2011 ranged from future debts should be provided upon the request of the bank, and 0.90% to 5.30% and from 0.93% to 5.30%, respectively. Annual inter- that the bank shall have the right, as the debt obligations become est rates for long-term loans denominated in other currencies ranged due or in the event of default, to offset cash deposits against debts from 0.97% to 8.75% for those outstanding as of March 31, 2010, and due to it. We have never been requested to provide such collateral from 0.43% to 9.00% for those outstanding as of March 31, 2011. or guarantees.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 072 page 073 Derivative Transactions We use interest rate swaps and interest rate cap option con- We are exposed to market risks principally from changes in interest tracts for the purpose of managing interest rate risk in relation to rates, foreign exchange rates and equity and debt security prices. borrowings. Interest rate swap agreements that qualify for hedge Our interest rate risk exposures primarily relate to financing activities. accounting under Japanese GAAP and that meet specific matching Our foreign currency exposures relate to buying, selling and financing criteria are not measured at market value, but the differential to be in currencies other than the local currencies of our operations. In paid or received under the swap agreement is accrued and included order to reduce foreign exchange rate risk and interest rate risk, we in interest expenses. We use foreign currency forward contracts, use derivative financial instruments including interest rate swaps, currency swaps and currency option contracts for the purpose of interest rate cap option contracts, foreign currency forward contracts, managing the risk of fluctuations in foreign exchange rates on fore- currency swaps and currency option contracts. We do not hedge casted transactions in foreign currencies. Gains or losses arising against price fluctuations of debt and equity securities. from changes in the value of the contracts that qualify for hedge We have risk management policies and procedures designed accounting are deferred and recognized in the period in which cor- to mitigate the risks arising from the use of derivative financial responding losses or gains from transactions being hedged by such instruments. We utilize derivatives solely for risk management contracts are recognized. purposes, and no derivatives are held or issued for trading pur- On the other hand, hedging contracts mainly related to our inter- poses. As part of our risk management procedures, we identify national tobacco operations do not qualify for hedge accounting and the specific risks and transactions to be hedged and the appropri- therefore we recognize changes in the value of foreign currency ate hedging instruments to be used to reduce the risk, and assess derivative instruments against earnings in the period in which they the correlation between the hedged risks and the hedging instru- occur. This could result in gains or losses from fluctuations in ments. The effectiveness of our hedging activities is assessed in exchange rates related to a derivative contract being recognized in a accordance with our risk management policies and practice different period from the one in which the gains or losses expected manual for hedging transactions. from the underlying forecasted transactions are recognized. We are exposed to credit-related risk in the event of default by For information about the contract and notional amount of inter- counterparties to derivative financial instruments. However, we est rate swaps, interest rate cap option contracts, foreign currency strive to mitigate this risk by limiting counterparties to international forward contracts and currency swaps outstanding as of March 31, financial institutions with high credit ratings deemed to have no 2010 and 2011 see Note 17 to the audited consolidated financial significant risk of default. statements included in this annual report. Financial Information
Outlook of Results for the Year Ending March 31, 2012
It is too early to forecast specific business results for the fiscal year profit and net income on a consolidated basis. Our actual operating ending March 31, 2012. As it is difficult for the moment to make a results may differ significantly from those described above as a result reasonable estimate of the impact of the Great East Japan Earthquake, of a number of factors including, but not limited to, those discussed in we do not disclose forecasts of net sales, operating income, recurring the “Major Risks of Businesses.”
Regarding the Shift to the International Financial Reporting Standards in the Fiscal Year Ending March 2012
The JT Group is preparing for the introduction of the International As we move to IFRS, distribution business will be recognized as Financial Reporting Standards (IFRS) starting with the full-year finan- agency business and therefore its revenue will be deducted from cial results in the fiscal year ending March 2012. Although we have net sales, leading to a further reduction in net sales. However, these been disclosing adjusted net sales excluding tax until now, the changes will not affect our profits. After the introduction of IFRS, the tobacco excise tax will be deducted from net sales, due to the change ceasing of periodical goodwill amortization, equivalent to around 80 of Japanese accounting standards, starting in the first quarter of the billion yen per year, will be the main impact on our profits. fiscal year ending March 2012.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 072 page 073 Consolidated Balance Sheets Japan Tobacco Inc. and Consolidated Subsidiaries / March 31, 2010 and 2011
Millions of U.S. dollars Millions of yen (Note 2) Assets 2010 2011 2011 Current assets: Cash and cash equivalents ¥ 154,369 ¥ 244,240 $ 2,937 Short-term investments (Note 5) 13,026 32,316 389 Trade notes and accounts receivable 296,885 301,829 3,630 Merchandise & finished goods (Note 6) 151,063 129,654 1,559 Semi-finished goods (Note 6) 109,622 103,475 1,244 Work in process (Note 6) 5,523 3,739 45 Raw materials & supplies (Note 6) 288,893 276,989 3,331 Other current assets (Note 12) 180,086 158,361 1,905 Allowance for doubtful accounts (3,623) (2,782) (33) Total current assets 1,195,844 1,247,821 15,007
Property, plant and equipment (Note 8): Land 138,703 127,208 1,530 Buildings and structures 611,509 595,929 7,167 Machinery, equipment and vehicles 668,608 688,461 8,280 Tools 170,907 157,203 1,891 Construction in progress 41,905 29,100 349 Total 1,631,632 1,597,901 19,217 Accumulated depreciation (952,071) (934,350) (11,237) Net property, plant and equipment 679,561 663,551 7,980
Investments and other assets: Investment securities (Note 5) 60,178 39,404 474 Investments in and advances to unconsolidated subsidiaries and associated companies 23,932 19,269 232 Trademarks 350,901 286,436 3,445 Goodwill 1,387,397 1,147,816 13,804 Deferred tax assets (Note 12) 85,376 82,329 990 Other assets (Note 7) 124,102 108,842 1,309 Allowance for doubtful accounts (34,695) (23,540) (283) Total investments and other assets 1,997,191 1,660,556 19,971 Total ¥3,872,596 ¥3,571,928 $ 42,958 See notes to consolidated financial statements.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 074 page 075 Millions of U.S. dollars Millions of yen (Note 2) Liabilities and Equity 2010 2011 2011 Current liabilities: Short-term bank loans (Note 8) ¥ 109,263 ¥ 70,060 $ 843 Commercial paper (Note 8) 119,000 — — Current portion of long-term debt (Note 8) 78,356 152,569 1,835 Tobacco excise taxes payable 307,795 312,554 3,759 Trade notes and accounts payable 149,462 170,821 2,054 Other payables 73,739 67,130 807 Income taxes payable 54,058 65,651 790 Consumption taxes payable 60,105 69,825 840 Other current liabilities (Notes 9 and 12) 149,757 154,764 1,861 Total current liabilities 1,101,535 1,063,374 12,789
Non-current liabilities: Long-term debt (Note 8) 567,710 486,103 5,846 Liabilities for retirement benefits (Note 9) 251,902 231,601 2,785 Deferred tax liabilities (Note 12) 94,578 72,630 873 Other non-current liabilities (Note 9) 133,592 127,017 1,528 Total non-current liabilities 1,047,782 917,351 11,032
Commitments and contingent liabilities (Note 18)
Equity (Note 10): Common stock—authorized, 40,000,000 shares; issued, 10,000,000 shares in 2010 and 2011 100,000 100,000 1,203 Capital surplus 736,407 736,410 8,856 Stock acquisition rights (Note 11) 565 763 9
Retained earnings 1,310,670 1,400,189 16,839 Financial Information Treasury stock, at cost—419,903 shares in 2010 and 478,526 shares in 2011 (74,575) (94,574) (1,137) Accumulated other comprehensive income Unrealized gain (loss) on available-for-sale securities 12,044 5,754 69 Pension liability adjustment of foreign consolidated subsidiaries (Note 9) (26,270) (27,486) (331) Foreign currency translation adjustments (409,161) (606,000) (7,287) Total 1,649,680 1,515,056 18,221 Minority interests 73,599 76,147 916 Total Equity 1,723,279 1,591,203 19,137 Total ¥3,872,596 ¥3,571,928 $42,958
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 074 page 075 Consolidated Statements of Income Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2009, 2010 and 2011
Millions of U.S. dollars Millions of yen (Note 2) 2009 2010 2011 2011 Net sales ¥6,832,307 ¥6,134,695 ¥6,194,554 $74,499 Cost of sales (Note 3 (f)) 5,554,399 5,022,637 5,074,074 61,024 Gross profit 1,277,908 1,112,058 1,120,480 13,475 Selling, general and administrative expenses (Notes 11 and 13) 914,102 815,553 791,799 9,522 Operating income 363,806 296,505 328,681 3,953
Other income (expenses): Interest and dividend income 12,276 6,982 3,028 36 Gain on disposition of property, plant and equipment—net 32,787 21,770 4,077 49 Loss on impairment of long-lived assets (Note 15) (16,365) (6,043) (5,297) (64) Interest expense (Note 8) (51,356) (26,111) (17,060) (205) Write-down of investment securities (7,063) (1,404) (951) (11) Business restructuring costs (Notes 9 and 15) (24,364) (9,900) (4,322) (52) Other—net (Note 15) (47,577) (5,744) (27,658) (333) Other income (expenses)—net (101,662) (20,450) (48,183) (580) Income Before Income Taxes and Minority Interests 262,144 276,055 280,498 3,373 Income taxes (Note 12): Current 126,732 114,145 152,403 1,833 Deferred 8,241 17,159 (21,513) (259) Total income taxes 134,973 131,304 130,890 1,574 Net Income Before Minority Interests 127,171 144,751 149,608 1,799 Minority interests 3,771 6,303 4,646 56 Net income ¥ 123,400 ¥ 138,448 ¥ 144,962 $ 1,743
U.S. dollars Yen (Note 2) Amounts per share: Basic net income (Notes 3 (s) and 20) ¥ 12,881 ¥ 14,452 ¥ 15,141 $ 182 Diluted net income (Notes 3 (s) and 20) 12,880 14,449 15,137 182 Cash dividends applicable to the year (Note 3 (s)) 5,400 5,800 6,800 82 See notes to consolidated financial statements.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 076 page 077 Consolidated Statement of Comprehensive Income Japan Tobacco Inc. and Consolidated Subsidiaries / Year ended March 31, 2011
Millions of U.S. dollars Millions of yen (Note 2) 2011 2011 Net Income Before Minority Interests ¥ 149,608 $ 1,799 Other Comprehensive Income (Note 19): Unrealized gain (loss) on available-for-sale securities (6,458) (78) Pension liability adjustment of foreign consolidated subsidiaries (1,216) (15) Foreign currency translation adjustments (196,361) (2,361) Total other comprehensive income (204,035) (2,454) Comprehensive income (Note 19) ¥ (54,427) $ (655)
Total comprehensive income attributable to (Note 19): Owners of the parent ¥ (59,384) $ (715) Minority Interests 4,957 60 See notes to consolidated financial statements. Financial Information
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 076 page 077 Consolidated Statements of Changes in Equity Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2009, 2010 and 2011
Thousands Millions of yen Accumulated other comprehensive income Deferred Pension gain (loss) liability Unrealized on adjustment Number of Stock gain (loss) derivatives of foreign Foreign shares of Acquisition on available- under consolidated currency common Common Capital Rights Retained Treasury for-sale hedge subsidiaries translation Minority stock issued stock surplus (Note 11) earnings stock securities accounting (Note 9) adjustments Total interests Total equity Balance, March 31, 2008 10,000 ¥100,000 ¥736,400 ¥186 ¥1,344,490 ¥(74,578) ¥ 21,339 ¥ 220 ¥ (10,712) ¥ (41,086) ¥2,076,259 ¥78,370 ¥2,154,629 Adjustment of retained earnings due to an adoption of PITF No. 18 (Note 3 (b)) — — — — (193,658) — — — — — (193,658) — (193,658) Net income — — — — 123,400 — — — — — 123,400 — 123,400 Appropriations: Cash dividends paid (¥5,200 per share) — — — — (49,816) — — — — — (49,816) — (49,816) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — — 47 — — — — — 47 — 47 Adjustment to retained earnings for change in the number of equity method affiliates — — — — 526 — — — — — 526 — 526 Net changes in the year — — — 179 — — (12,901) (128) (8,254) (382,476) (403,580) (7,260) (410,840) Balance, March 31, 2009 10,000 100,000 736,400 365 1,224,989 (74,578) 8,438 92 (18,966) (423,562) 1,553,178 71,110 1,624,288 Net income — — — — 138,448 — — — — — 138,448 — 138,448 Appropriations: Cash dividends paid (¥5,600 per share) — — — — (53,648) — — — — — (53,648) — (53,648) Adjustment to retained earnings for change in the number of equity method affiliates — — — — 881 — — — — — 881 — 881 Disposal of treasury stock — — 7 — — 3 — — — — 10 — 10 Net changes in the year — — — 200 — — 3,606 (92) (7,304) 14,401 10,811 2,489 13,300 Balance, March 31, 2010 10,000 100,000 736,407 565 1,310,670 (74,575) 12,044 — (26,270) (409,161) 1,649,680 73,599 1,723,279 Net income — — — — 144,962 — — — — — 144,962 — 144,962 Appropriations: Cash dividends paid (¥5,800 per share) — — — — (55,565) — — — — — (55,565) — (55,565) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — — 122 — — — — — 122 — 122 Disposal of treasury stock — — 3 — — 1 — — — — 4 — 4 Purchase of treasury stock — — — — — (20,000) — — — — (20,000) — (20,000) Net changes in the year — — — 198 — — (6,290) — (1,216) (196,839) (204,147) 2,548 (201,599) Balance, March 31, 2011 10,000 ¥100,000 ¥736,410 ¥763 ¥1,400,189 ¥(94,574) ¥ 5,754 ¥ — ¥(27,486) ¥(606,000) ¥1,515,056 ¥76,147 ¥1,591,203
Millions of U.S. dollars (Note 2) Accumulated other comprehensive income Deferred Pension gain (loss) liability Unrealized on adjustment Stock gain (loss) derivatives of foreign Foreign Acquisition on available- under consolidated currency Common Capital Rights Retained Treasury for-sale hedge subsidiaries translation Minority stock surplus (Note 11) earnings stock securities accounting (Note 9) adjustments Total interests Total equity Balance, March 31, 2010 $1,203 $8,856 $7 $15,763 $ (897) $145 $— $ (316) $ (4,921) $19,840 $885 $20,725 Net income — — — 1,743 — — — — — 1,743 — 1,743 Appropriations: Cash dividends paid ($70 per share) — — — (668) — — — — — (668) — (668) Adjustment to retained earnings for change in the number of consolidated subsidiaries — — — 1 — — — — — 1 — 1 Disposal of treasury stock — 0 — — 0 — — — — 0 — 0 Purchase of treasury stock — — — — (240) — — — — (240) — (240) Net changes in the year — — 2 — — (76) — (15) (2,366) (2,455) 31 (2,424) Balance, March 31, 2011 $1,203 $8,856 $9 $16,839 $(1,137) $ 69 $— $(331) $(7,287) $18,221 $916 $19,137 See notes to consolidated financial statements.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 078 page 079 Consolidated Statements of Cash Flows Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31, 2009, 2010 and 2011
Millions of U.S. dollars Millions of yen (Note 2) 2009 2010 2011 2011 Operating Activities: Income before income taxes and minority interests ¥ 262,144 ¥ 276,055 ¥ 280,498 $ 3,373 Adjustments for: Income taxes paid (114,414) (116,339) (122,380) (1,472) Depreciation and amortization other than goodwill 176,900 132,770 121,649 1,463 Amortization of goodwill 105,512 97,427 91,108 1,096 Gain on disposition of property, plant and equipment (32,787) (21,770) (4,077) (49) Loss on impairment of long-lived assets 16,365 6,043 5,297 64 Change in assets and liabilities: Decrease (increase) in trade notes and accounts receivable (43,141) 5,703 (29,890) (359) Decrease (increase) in inventories (47,632) (79,457) (2,453) (30) Increase (decrease) in tobacco excise taxes payable 28,981 30,842 27,627 332 Increase (decrease) in trade notes and accounts payable 2,699 (12,821) 28,970 348 Increase (decrease) in other payables (7,940) 14,905 (7,160) (86) Increase (decrease) in liabilities for retirement benefits (13,159) (8,035) (10,219) (123) Other—net (58,257) (5,299) 20,668 249 Total adjustments 13,127 43,969 119,140 1,433 Net cash provided by operating activities 275,271 320,024 399,638 4,806 Investing Activities: Purchases of short-term investments (1,643) (3,999) (30,077) (362) Proceeds from sale and redemption of short-term investments 3,272 2,471 15,870 191 Purchases of property, plant and equipment (112,408) (121,459) (131,243) (1,578) Proceeds from sale of property, plant and equipment 55,256 44,058 18,814 226 Purchases of trademarks and other assets (6,949) (6,639) (6,491) (78) Proceeds from sales and redemption of investment securities 3,058 14,719 20,617 248 Payments into time deposits (283) (14,603) (25,299) (304) Proceeds from withdrawal of time deposits 1,411 9,014 21,169 255 Purchases of shares of newly consolidated subsidiaries, net of cash acquired (3,061) (9,975) — — Payments for sales of investments in subsidiaries resulting in change in scope of consolidation — — (647) (8) Other—net (3,661) 2,356 (2,120) (26) Financial Information Net cash used in investing activities (65,008) (84,057) (119,407) (1,436) Financing Activities: Net increase (decrease) in short-term bank loans and commercial paper (125,182) 93,444 (172,081) (2,070) Proceeds from long-term debt 94,130 1,712 62,946 757 Repayments of long-term debt (54,663) (191,041) (23,207) (279) Proceeds from issuance of bonds — 100,304 79,793 960 Payments for redemption of bonds (70,810) (191,928) (50,300) (605) Purchase of treasury stock — — (20,000) (241) Dividends paid (49,752) (53,642) (55,558) (668) Proceeds from issuance of common stock to minority shareholders — 191 584 7 Dividends paid to minority shareholders (3,540) (3,681) (1,666) (20) Repayments of finance lease obligations (6,606) (5,757) (5,462) (65) Other—net (1,047) 0 0 0 Net cash used in financing activities (217,470) (250,398) (184,951) (2,224) Foreign Currency Translation Adjustments on Cash and Cash Equivalents (39,591) 1,542 (5,604) (68) Net increase in Cash and Cash Equivalents — — 89,676 1,078 Net decrease in Cash and Cash Equivalents (46,798) (12,889) — — Cash and Cash Equivalents, Beginning of Year 215,009 167,258 154,369 1,857 Increase in Cash and Cash Equivalents from Newly Consolidated Subsidiary — — 195 2 Decrease in Cash and Cash Equivalents Resulting from Exclusion of Subsidiaries from Consolidation (953) — — — Cash and Cash Equivalents, End of Year ¥ 167,258 ¥ 154,369 ¥ 244,240 $ 2,937
Finance lease obligations regarded as non-cash transactions incurred for the years ended March, 2009, 2010 and 2011 amounted to ¥6,176 million, ¥3,417 million and ¥3,574 million ($43 million) respectively. See notes to consolidated financial statements.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 078 page 079 Notes to Consolidated Financial Statements Japan Tobacco Inc. and Consolidated Subsidiaries
1. Business
Japan Tobacco Inc. (“JT”) is a joint stock corporation (kabushikikaisya) international tobacco businesses, the Group develops, manufactures, incorporated under the companies act of Japan (the “Companies distributes, and sells tobacco products, primarily cigarettes. In the Act”) pursuant to the Japan Tobacco Inc. Law (the “JT Law”). JT and Group’s pharmaceutical business, the Group develops, manufactures its consolidated subsidiaries (the “Group”) operate primarily in the and sells pharmaceutical products. In the Group’s food business, the domestic and international tobacco businesses, the pharmaceutical Group develops, manufactures and sells processed food, and devel- business and the food business. In the Group’s domestic and ops and sells beverages.
2. Basis of Presenting Consolidated Financial Statements
The accompanying consolidated financial statements have been March 31, 2010 is disclosed in Note 19. In addition, “Net Income prepared in conformity with accounting principles generally accepted Before Minority Interests” is disclosed in the consolidated state- in Japan (“Japanese GAAP”) and in accordance with the provisions ment of income from the year ended March 31, 2011. set forth in the Japanese Financial Instruments and Exchange Act In preparing these consolidated financial statements, certain and its related accounting regulations, which are different in certain reclassifications and rearrangements have been made to the respects from application, and disclosure requirements of accounting consolidated financial statements issued domestically in order to principles generally accepted in the United States of America (“U.S. present them in a form which is more familiar to readers outside GAAP”) and International Financial Reporting Standards. Japan. In addition, certain reclassifications have been made in the In the case of most foreign consolidated subsidiaries, their finan- 2009 and 2010 financial statements to conform to the classifica- cial statements are prepared in conformity with U.S. GAAP (see tions used in 2011. Note 3 (r) Foreign Consolidated Subsidiaries) and are included in the The consolidated financial statements are stated in Japanese consolidated financial statements on that basis. yen, the currency of the country in which JT is incorporated and Under Japanese GAAP, a consolidated statement of comprehen- operates. The translations of Japanese yen amounts into U.S. dollar sive income is required from the fiscal year ended March 31, 2011 amounts are included solely for the convenience of readers outside and has been presented herein. Accordingly, accumulated other Japan and have been made at the rate of ¥83.15 to $1, the approxi- comprehensive income is presented in the consolidated balance mate rate of exchange at March 31, 2011. Such translations should sheet and the consolidated statement of changes in equity. Informa- not be construed as representations that the Japanese yen amounts tion with respect to other comprehensive income for the year ended could be converted into U.S. dollars at that or any other rate.
3. Summary of Significant Accounting Policies a) Consolidation Investments in 14 material unconsolidated subsidiary and asso- The consolidated financial statements as of March 31, 2011 include ciated companies as of March 31, 2011 (22 as of March 31, 2009 the accounts of JT and its 246 significant (274 as of March 31, 2009 and 17 as of March 31, 2010) are accounted for by the equity and 258 as of March 31, 2010) subsidiaries. method. The equity method is not applied to account for the Consolidation of the remaining unconsolidated subsidiaries would investments in unconsolidated subsidiaries and the remaining not have had a material effect on the accompanying consolidated associated companies, since the effect on the accompanying financial statements. consolidated financial statements would not have been material. Most foreign consolidated subsidiaries have a December 31 fiscal Investments in the remaining unconsolidated subsidiaries and the year-end, which differs from the March 31 fiscal year-end of JT. Any associated companies are stated at cost (see (d) Securities). necessary adjustments for the three-month period are made for All significant inter-company balances and transactions have been consolidation purposes. eliminated in consolidation. All material unrealized profit resulting Under the control or influence concept, those companies in from inter-company transactions have been eliminated. which JT, directly or indirectly, is able to exercise control over opera- tions are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 080 page 081 The excess of the cost of the Group’s investments in consoli- d) Securities dated subsidiaries over the fair value of the net assets purchased at The Group’s securities are classified as held-to-maturity debt securi- the date of acquisition is recorded as goodwill. Goodwill is amortized ties or available-for-sale securities, depending on management’s on a straight-line basis over five to twenty years. Such amortization holding intent. Held-to-maturity debt securities are reported at amor- expense is included in selling, general and administrative expenses. tized cost. Available-for-sale marketable securities are reported at fair However, insignificant goodwill is charged to income when incurred. value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of equity. b) Unification of Accounting Policies Applied to Foreign The cost of available-for-sale marketable securities sold is deter- Subsidiaries for Consolidated Financial Statements mined based on the moving-average method. Non-marketable In May 2006, the Accounting Standards Board of Japan (the “ASBJ”) available-for-sale securities are stated at cost determined by the issued ASBJ Practical Issues Task Force (PITF) No. 18, “Practical moving-average method. For significant impairment in value that is Solution on Unification of Accounting Policies Applied to Foreign judged unrecoverable, carrying amounts of securities are reduced Subsidiaries for the Consolidated Financial Statements.” PITF No.18 to fair value, with a resulting charge to income. prescribes: (1) the accounting policies and procedures applied to a parent company and its subsidiaries for similar transactions and events e) Allowance for Doubtful Accounts under similar circumstances should in principle be unified for the prep- The allowance for doubtful accounts is stated in amounts considered aration of the consolidated financial statements, (2) financial statements to be appropriate based on the companies’ past credit loss experience prepared by foreign subsidiaries in accordance with either International and an evaluation of potential losses in the receivables outstanding. Financial Reporting Standards or the generally accepted accounting principles in the United States of America tentatively may be used for f) Inventories the consolidation process, (3) however, the following items should be Inventories are generally stated at the lower of cost or net selling adjusted in the consolidation process so that net income is accounted value, cost being determined by the average method. for in accordance with Japanese GAAP unless they are not material: 1. Amortization of goodwill g) Property, Plant and Equipment 2. Scheduled amortization of actuarial gain or loss of pensions Property, plant and equipment are stated at cost. Depreciation is that has been directly recorded in the equity generally computed using the declining-balance method while the 3. Expensing capitalized development costs of R&D straight-line method is applied to buildings acquired after April 1, 4. Cancellation of the fair value model accounting for property, 1998. The useful lives of buildings and structures, and machinery, Financial Information plant, and equipment and investment properties and incorpora- equipment and vehicles are principally from 38 to 50 years and 10 tion of the cost model accounting years, respectively. 5. Recording the prior years’ effects of changes in accounting For finance leases that do not transfer ownership of the leased policies in the income statement where retrospective adjust- property to the lessee, depreciation is mainly computed using ments to financial statements have been incorporated straight-line method over the lease period as the useful life and 6. Exclusion of minority interests from net income, if contained assuming no residual value. JT applied this accounting standard effective April 1, 2008. As a result of this change, retained earnings as of April 1, 2008 decreased h) Impairment of Long-Lived Assets by ¥193,658 million as JT amortized goodwill posted at consolidated The Domestic Group reviews its long-lived assets for impairment foreign subsidiaries. whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An c) Cash Equivalents impairment loss is recognized if the carrying amount of an asset or Cash equivalents are short-term investments that are readily convert- asset group exceeds the sum of the undiscounted future cash flows ible into cash and that are exposed to insignificant risk of changes in expected to result from the continued use and eventual disposition value. All of cash equivalents mature or become due within three of the asset or asset group. months of the date of acquisition. The impairment loss is measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the contin- ued use and eventual disposition of the asset or the net selling price at disposition.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 080 page 081 i) Intangible Assets m) Asset Retirement Obligations Trademarks are carried at cost less accumulated amortization, which In March 2008, the ASBJ published the accounting standard for asset is calculated by the straight-line method principally over 10 years (see retirement obligations, ASBJ Statement No. 18 “Accounting Standard Note (a) Consolidation for the accounting policy related to Goodwill). for Asset Retirement Obligations” and ASBJ Guidance No. 21 “Guid- ance on Accounting Standard for Asset Retirement Obligations.” j) Income Taxes Under this accounting standard, an asset retirement obligation is The provision for income taxes is computed based on the pretax defined as a legal obligation imposed either by law or contract that income or loss included in the consolidated statements of income. results from the acquisition, construction, development and the The asset and liability approach is used to recognize deferred tax normal operation of a tangible fixed asset and is associated with the assets and liabilities for the expected future tax consequences of retirement of such tangible fixed asset. temporary differences between the carrying amounts and the tax The asset retirement obligation is recognized as the sum of the bases of assets and liabilities, and tax operating loss and other credit discounted cash flows required for the future asset retirement and is carry-forwards. Deferred taxes are measured by applying currently recorded in the period in which the obligation is incurred if a reason- enacted tax laws to the temporary differences, tax operating loss and able estimate can be made. If a reasonable estimate of the asset other credit carry-forwards. A valuation allowance is provided for any retirement obligation cannot be made in the period the asset retire- portion of the deferred tax assets where it is considered more likely ment obligation is incurred, the liability should be recognized when a than not that they will not be realized. reasonable estimate of asset retirement obligation can be made. Upon initial recognition of a liability for an asset retirement obligation, k) Accrued bonuses an asset retirement cost is capitalized by increasing the carrying Bonuses to directors, cooperate auditors and employees are accrued amount of the related fixed asset by the amount of the liability. The at the year end to which such bonuses are attributable. asset retirement cost is subsequently allocated to expense through depreciation over the remaining useful life of the asset. Over time, the l) Liabilities for Retirement Benefits liability is accreted to its present value each period. Any subsequent (1) employees’ retirement benefits revisions to the timing or the amount of the original estimate of JT has an unfunded severance indemnity plan and a cash balance undiscounted cash flows are reflected as an increase or a decrease pension plan (the ‘‘Pension Plans’’) as well as a defined contribution in the carrying amount of the liability and the capitalized amount of plan, which cover substantially all of its employees. Its consolidated the related asset retirement cost. subsidiaries principally have unfunded severance indemnity plans, This standard was effective for fiscal years beginning on or after defined benefit plans and/or defined contribution plans. April 1, 2010. The Pension Plans and the subsidiaries’ plans are stated based The Company applied this accounting standard effective April 1, on actuarially estimated retirement benefit obligations, considering 2010. The effect of the adoption of this accounting standard for the the estimated fair value of plan assets at each balance sheet date. year ended March 31, 2011 was immaterial. Certain domestic subsidiaries apply a simplified method, under which retirement benefit obligations are recorded based on the n) Leases amount required if all employees terminated their employment as of Leases in which a significant portion of the risks and rewards of the balance sheet date. Contributions to the defined contribution ownership are retained by the lessor are classified as operating plan are charged to expenses when they are paid or accrued. leases. Payments made under operating leases are recognized in the statements of income. (2) obligations under the Public Official Mutual Assistance Leases in which a lessee has substantially all the risk and Association Law rewards of ownership are classified as finance leases. Finance As a formerly wholly government-owned company, JT is obligated by leases are capitalized to recognize lease assets and lease obligations the Public Official Mutual Assistance Association Law to reimburse in the balance sheet. the Japanese government for pension expenses incurred each year by the government for former employees of Japan Tobacco and Salt o) Appropriations of Retained Earnings Public Corporation (“JTSPC”), JT’s predecessor entity, and others for Appropriations of retained earnings are reflected in the financial their services during certain periods before July 1, 1956. Such obliga- statements for the following year upon shareholders’ approval. tions are recognized as liabilities at their present value using the actuarially determined computation method.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 082 page 083 p) Foreign Currency Transactions (2) Property, plant and equipment Receivables and payables denominated in foreign currencies are Depreciation of property, plant and equipment is generally computed translated into Japanese yen at the rates prevailing at each balance using the straight-line method over the estimated useful lives of the sheet date. The exchange gains or losses from translation are recog- respective assets. nized in the consolidated statements of income to the extent that (3) Trademarks hedging derivative financial instruments for foreign currency transac- Trademarks are principally amortized using straight-line method over tions do not qualify for hedge accounting (see (q) Derivatives). 20 years. All assets and liabilities of foreign consolidated subsidiaries are (4) Retirement benefit pension plans translated into Japanese yen at the exchange rate at each subsid- According to Financial Accounting Standards Board (“FASB”) iary’s respective fiscal year end. All revenue and expense accounts Accounting Standards Codification (“ASC”) 715 “Compensation— are translated at average exchange rates during each subsidiary’s Retirement Benefit,” which was formerly FASB statement 158 respective fiscal year. “Employers’ Accounting for Defined Benefit Pension and Other Differences arising from such translation are shown as “Foreign Postretirement Plans—an amendment of FASB statements No. 87, currency translation adjustments” and “Minority interests” in a 88, 106 and 132(R),” the difference of retirement benefits obligation separate component of equity. and fair value of plan assets is recognized on the consolidated balance sheets as of March 31, 2009, 2010 and 2011 as assets/liabilities. q) Derivatives Unrecognized actuarial net loss and prior service cost, net of All derivatives, except for certain foreign exchange forward contracts, applicable taxes, are recorded as a separate component of equity as interest rate swap contracts and interest rate and currency swap pension liability adjustment of foreign consolidated subsidiaries. contracts described below, are recognized as either assets or liabilities (5) Derivatives and measured at fair value, and gains or losses on derivative transac- All derivatives are used to hedge the exposure to foreign exchange tions are recognized in the consolidated statements of income. risk and interest rate risk are recognized as either assets or liabilities For derivatives which qualify for hedge accounting because of in the balance sheet and measured at fair value. high correlation and effectiveness between the hedging instruments Changes in the fair value of derivatives are recorded in current and the hedged items, gains or losses on derivatives are deferred earnings for each fiscal year. until the corresponding hedged items are recognized in earnings. (6) Income Taxes The Group’s trade payables that are denominated in foreign curren- Foreign consolidated subsidiaries that apply U.S. GAAP adopt the cies and have been hedged by foreign exchange forward contracts provisions of ASC 740, “Income Taxes,” which was formerly FASB Financial Information are translated at the foreign exchange rate stipulated in the contracts. Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Interest rate swaps that qualify for hedge accounting and meet Taxes,” Accounting for Uncertainty in Income Taxes. specific matching criteria are not remeasured at market value, but the differential paid or received under the swap agreements are s) Per Share Information recognized and included in interest expense or income. Basic net income per share is computed by dividing net income Interest rate and currency swap that qualify for hedge accounting available to common shareholders by the weighted-average number and meet specific matching criteria are not remeasured at market of common shares outstanding in each period, which were 9,580,080 value, but the differential paid or received under the swap agree- shares for the year ended March 31, 2009, and 9,580,092 shares for ments are recognized and included in interest expense or income, the year ended March 31, 2010, and 9,573,924 shares for the year and long-term debts that are denominated in foreign currencies and ended March 31, 2011. have been hedged by interest rate and currency swap contracts are Diluted net income per share for the year ended March 31, 2009, translated at the foreign exchange rate stipulated in the contracts. 2010 and 2011 reflects the potential dilution that could occur if stock acquisition rights were exercised. Diluted net income per share of r) Foreign Consolidated Subsidiaries common stock assumes full exercise of the outstanding stock acqui- JT International S.A. and other foreign consolidated subsidiaries princi- sition rights at the beginning of the year or at the time of issuance pally maintain their accounting records in conformity with U.S. GAAP. (see Note 20). The significant accounting policies, which are different from JT’s Cash dividends per share presented in the Consolidated State- policies, are as follows: ments of Income are dividends applicable to the respective years (1) Inventories including dividends to be paid after the end of the year. Inventories are generally stated at the lower of cost or market, cost being determined by the first-in, first-out method or average cost.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 082 page 083 t) Stock Option 1. Changes in Accounting Policies—When a new accounting The ASBJ Statement No. 8, “Accounting Standard for Stock policy is applied with revision of accounting standards, the Options” and related guidance are applicable to stock options new policy is applied retrospectively unless the revised granted on and after May 1, 2006. This standard requires companies accounting standards include specific transitional provisions. to recognize compensation expense for employee stock options When the revised accounting standards include specific based on the fair value at the date of grant and over the vesting transitional provisions, an entity shall comply with the specific period as consideration for receiving goods or services. The standard transitional provisions. also requires companies to account for stock options granted to 2. Changes in Presentations—When the presentation of financial non-employees based on the fair value of either the stock option or statements is changed, prior period financial statements are the goods or services received. In the balance sheet, the stock reclassified in accordance with the new presentation. option is presented as a stock acquisition right as a separate compo- 3. Changes in Accounting Estimates—A change in an accounting nent of equity until exercised. estimate is accounted for in the period of the change if the change affects that period only, and is accounted for prospec- u) Retirement Allowances for Directors and Corporate tively if the change affects both the period of the change and Auditors future periods. Retirement allowances for directors and corporate auditors are 4. Corrections of Prior Period Errors—When an error in prior recorded to state the liability at the amount that would be required if period financial statements is discovered, those statements all directors and corporate auditors retired at each balance sheet date. are restated. This accounting standard and the guidance are applicable to v) New Accounting Pronouncements accounting changes and corrections of prior period errors Accounting Changes and Error Corrections—In December 2009, which are made from the beginning of the fiscal year that ASBJ issued ASBJ Statement No. 24 “Accounting Standard for begins on or after April 1, 2011. Accounting Changes and Error Corrections” and ASBJ Guidance No. 24 “Guidance on Accounting Standard for Accounting Changes and Error Corrections.” Accounting treatments under this standard and guidance are as follows:
4. Business Combinations
Transactions under Common Control during the year ended March (5) Outline and purpose of the transactions: 31, 2009 The business combination enables the group to integrate JT’s 1. Outline of the transactions food business head office function and affiliated companies (1) Transferred business: Processed food business (excluding which are engaged with processed food business and season- chilled processed food business) and seasoning business of JT ing business into Katokichi. After the combination, Katokichi (2) Description of transferred business: Mainly manufacturing and holds the processed food business including the largest scale sales of processed frozen foods and seasoning product of frozen food business in Japan and seasoning business with (3) Legal form of the business combination: Business transfer of leading manufacturing capability. JT’s processed food business and seasoning business, and Katokichi keeps implementing a business restructuring and stock transfer of affiliated companies including JT Foods, and setting up further business fundamentals. consolidated subsidiaries 2. Overview of accounting methods used (4) Name of the company after business combinations: These business combinations are accounted as transactions under Katokichi Co., Ltd. (now known as TableMark Co., Ltd.) common control in accordance with “Accounting for Business Combinations” issued by the Business Accounting Council (“BAC”) on October 31, 2003, and “Guidance for Accounting Standard for Business Combinations and Business Divestitures” (ASBJ Guidance No. 10 updated on November 15, 2007).
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 084 page 085 5. Short-Term Investments and Investment Securities
Short-term investments and investment securities at March 31, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2010 2011 2011 Short-term investments: Time deposits and other deposits ¥ 7,856 ¥12,639 $152 Government and Corporate bonds 4,698 19,677 237 Trust fund investments and other 472 — — Total ¥13,026 ¥32,316 $389 Investment securities: Equity securities ¥51,147 ¥33,437 $402 Government and Corporate bonds 3,300 4,630 56 Trust fund investments and other 5,731 1,337 16 Total ¥60,178 ¥39,404 $474
The costs and aggregate fair values of marketable securities at March 31, 2010 and 2011 were as follows: Millions of yen 2010 Unrealized Unrealized Cost gain loss Fair value Available-for-sale Equity securities ¥29,070 ¥19,755 ¥1,874 ¥46,951 Government and Corporate bonds 7,583 128 13 7,698 Trust fund investments and other 4,641 1,048 108 5,581 Held-to-maturity Government bonds and municipal bonds 300 0 — 300
Millions of yen 2011
Unrealized Unrealized Financial Information Cost gain loss Fair value Available-for-sale Equity securities ¥22,134 ¥10,898 ¥2,648 ¥30,384 Government and Corporate bonds 24,301 58 52 24,307 Trust fund investments and other 47 7 — 54
Millions of U.S. dollars 2011 Unrealized Unrealized Cost gain loss Fair value Available-for-sale Equity securities $266 $131 $32 $365 Government and Corporate bonds 293 1 1 293 Trust fund investments and other 1 0 — 1
Available-for-sale securities whose fair value cannot be reliably determined at March 31, 2010 and 2011 were as follows: Millions of Millions of yen U.S. dollars 2010 2011 2011 Available-for-sale Equity securities ¥4,196 ¥3,053 $37 Trust fund investments and other 622 1,283 15 Total ¥4,818 ¥4,336 $52
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 084 page 085 Proceeds from sales of available-for-sale securities and related gross realized gains and losses on those sales, computed on the moving average cost basis for the years ended March 31, 2009, 2010 and 2011, were as follows: Millions of Millions of yen U.S. dollars 2009 2010 2011 2011 Proceeds from sales ¥2,719 ¥12,962 ¥14,886 $179 Gross realized gains ¥ 220 ¥ 3,683 ¥ 5,041 $ 60 Gross realized losses (48) (1,939) (856) (10) Net realized gain ¥ 172 ¥ 1,744 ¥ 4,185 $ 50
For the years ended March 31, 2009, 2010 and 2011, losses on experienced “significant deterioration.” A security whose value has write-downs of securities including investments in affiliated compa- declined from 30% to 50% and the effect of the decline on JT’s nies totaled ¥7,062 million, ¥1,404 million and ¥953 million ($11 financial position is material, is considered to have experienced million), respectively. In evaluating security values, a security, “significant deterioration.” If a security has a strong chance of whose value has declined by more than 50% is considered to have regaining its value, the security is not written down.
The carrying value of short-term investments and investment securities by contractual maturities at March 31, 2011 were as follows: Millions of yen Millions of U.S. dollars Time deposits Time deposits and other Available and other Available deposits for Sale deposits for Sale Due within one year ¥12,639 ¥19,677 $152 $237 Due after one year through five years — 3,531 — 42 Due after five years through ten years — 5 — 0 Due after ten years — — — — Total ¥12,639 ¥23,213 $152 $279
6. Inventories
Inventories at March 31, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2010 2011 2011 Leaf tobacco ¥359,152 ¥343,198 $4,127 Finished products 123,327 82,752 995 Other 72,621 87,907 1,057 Total ¥555,100 ¥513,857 $6,179
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 086 page 087 7. Investment Property
JT and certain consolidated subsidiaries hold rental properties such as office buildings and residences in Tokyo and other areas.
The carrying amounts, changes in such balances and market prices of such properties for the years ended March 31, 2010 and 2011 were as follows: Millions of yen 2010 Carrying amount Fair value Increase/ Use application April 1, 2009 (Decrease) March 31, 2010 March 31, 2010 Office buildings for rent ¥41,506 ¥(2,420) ¥39,086 ¥140,606 Residences for rent 5,279 (143) 5,136 26,738 Others 29,271 (10,951) 18,320 66,774 Total ¥76,056 ¥(13,514) ¥62,542 ¥234,118
Millions of yen 2011 Carrying amount Fair value Increase/ Use application April 1, 2010 (Decrease) March 31, 2011 March 31, 2011 Office buildings for rent ¥39,086 ¥(2,051) ¥37,035 ¥124,706 Residences for rent 5,136 (833) 4,303 24,038 Others 18,320 (4,439) 13,881 59,524 Total ¥62,542 ¥(7,323) ¥55,219 ¥208,268
Millions of U.S. dollars 2011 Carrying amount Fair value Increase/ Use application April 1, 2010 (Decrease) March 31, 2011 March 31, 2011 Office buildings for rent $470 $(25) $445 $1,500 Residences for rent 62 (10) 52 289 Financial Information Others 220 (53) 167 716 Total $752 $(88) $664 $2,505
Notes: 1) Carrying amount recognized in balance sheet is net of accumulated depreciation and accumulated impairment losses, if any. 2) Decreases during the fiscal years ended March 31, 2010 and 2011 primarily represent the sales of domestic idle properties of ¥11,214 million and ¥2,185 million ($26 million), respectively. 3) Fair value of investment properties at March 31, 2010 and 2011 is principally measured based on the real-estate appraisal assessed by the external real-estate appraiser. And the others are measured by the Group based on the assessed value of taxable fixed asset. However, unless the appraisal or indicators that are regarded to reflect the fair value of the investment properties appropriately change significantly since the date of acquisition or the date of the latest appraisal, the Group measures the fair value of the investment properties based on such appraisal or indicators.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 086 page 087 The income and expenses related to the investment properties for the years ended March 31, 2010 and 2011 were as follows: Millions of yen 2010 Other income/ Use application Income Expense Net gain/(loss) (expense) Office buildings for rent ¥11,546 ¥5,179 ¥6,367 ¥ (44) Residences for rent 1,512 502 1,010 (21) Others 2,942 3,329 (387) 21,768 Total ¥16,000 ¥9,010 ¥6,990 ¥21,703
Millions of yen 2011 Other income/ Use application Income Expense Net gain/(loss) (expense) Office buildings for rent ¥11,195 ¥4,602 ¥6,593 ¥ (75) Residences for rent 1,382 377 1,005 624 Others 2,150 1,577 573 4,174 Total ¥14,727 ¥6,556 ¥8,171 ¥4,723
Millions of U.S. dollars 2011 Other income/ Use application Income Expense Net gain/(loss) (expense) Office buildings for rent $135 $55 $80 $ (1) Residences for rent 17 5 12 8 Others 25 19 6 50 Total $177 $79 $98 $57
The expenses above primarily consist of depreciation, repairs and maintenance expenses, insurance expenses and fixed assets tax of each rental properties.
8. Short-term Bank Loans, Commercial Paper and Long-term Debt
Short-term bank loans and commercial paper at March 31, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2010 2011 2011 Yen loans with interest rates of 0.090% to 3.500% at March 31, 2010 and of 0.480% to 5.300% at March 31, 2011 ¥ 48,929 ¥14,196 $173 Foreign currency loans with interest rates of 1.040% to 27.250% at March 31, 2010 and of 0.430% to 17.000% at March 31, 2011 60,334 55,864 670 Commercial paper with interest rates of 0.106% to 0.145% at March 31, 2010 119,000 — — Total ¥228,263 ¥70,060 $843
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 088 page 089 Long-term debt at March 31, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2010 2011 2011 1.34% yen bonds, due 2010 ¥ 50,000 ¥ — $ — 1.53% yen bonds, due 2011 40,000 40,000 481 1.68% yen bonds, due 2012 59,997 59,999 722 1.13% yen bonds, due 2014 100,000 100,000 1,203 0.53% yen bonds, due 2015 — 40,000 481 0.84% yen bonds, due 2017 — 20,000 241 1.30% yen bonds, due 2020 — 20,000 241 Unsecured 4.63% Euro bonds issued by foreign subsidiary due in 2011 105,829 86,210 1,037 Unsecured 5.75% Sterling pound bonds issued by foreign subsidiary due in 2013 36,514 31,535 379 Unsecured 4.50% Euro bonds issued by foreign subsidiary due in 2014 66,055 53,856 648 Other bonds 1,013 625 6 Long-term bank loans due through 2028 172,594 173,905 2,091 Lease obligations due through 2019 14,064 12,542 151 Total 646,066 638,672 7,681 Less current portion (78,356) (152,569) (1,835) Long-term debt, less current portion ¥ 567,710 ¥ 486,103 $ 5,846
The weighted average interest rates for long-term lease obliga- entered into interest rate swap agreements to fix variable rate tions outstanding at March 31, 2010 and 2011 were 6.77% and interest payments of Japanese yen loans. 5.34%, respectively, and those for the current portion were 8.95% Annual interest rates applicable to Japanese yen long-term and 8.59%, respectively. loans of JT and certain domestic consolidated subsidiaries at JT has entered into an interest rate and currency swap agree- March 31, 2010 and 2011 ranged from 0.90% to 5.30% and ment to fix Japanese Yen cash flows on principal and interest 0.93% to 5.30%, respectively. payments of U.S. dollar loan repaid through June 2015, under Annual interest rates applicable to long-term loans denominated which JT pays Japanese yen interest and principal in exchange for in foreign currencies outstanding at March 31, 2010 and 2011
U.S. dollar interest and principal. ranged from 0.97% to 8.75% and 0.43% to 9.00%, respectively. Financial Information In addition, certain domestic consolidated subsidiaries have
Annual maturities of short-term bank loans and long-term debt at March 31, 2011 were as follows: Millions of Years Ending March 31, Millions of yen U.S. dollars 2011 ¥222,622 $2,677 2012 163,049 1,961 2013 54,855 660 2014 157,042 1,889 2015 70,580 849 2016 and thereafter 40,646 488 Total ¥708,794 $8,524
Under the JT Law, obligations created by the bonds issued by JT are preference to unsecured creditors (with the exception of national secured by a statutory preferential right over the property of JT. and local taxes and certain other statutory obligations). This right entitles the holders thereof to claim satisfaction in
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 088 page 089 Substantially all of the short-term bank loans and long-term debt are unsecured. Secured loans and debt of certain consolidated subsidiaries at March 31, 2011 were as follows: Millions of Millions of yen U.S. dollars Long-term bank loans ¥3,487 $42 Short-term bank loans 1,774 21 Current portion of Long-term bank loans 967 12 Others 620 7 Total ¥6,848 $82
The carrying amounts of assets pledged as collateral for the above secured loans and debt at March 31, 2011 were as follows: Millions of Millions of yen U.S. dollars Buildings and structures ¥ 7,209 $ 87 Land 3,395 41 Machinery, equipment and vehicles 1,268 15 Others 995 12 Total ¥12,867 $155
General agreements with respective banks provide, as is custom- have the right to offset cash deposited with them against any long- ary in Japan, that additional collateral must be provided under certain term or short-term debt or other debt payable to the banks. JT has circumstances if requested by such banks and that certain banks never been requested to provide additional collateral.
9. Liabilities for Retirement Benefits
(1) Employees’ Retirement Benefit Domestic consolidated subsidiaries principally have unfunded JT has an unfunded severance indemnity plan and a cash balance severance indemnity plans and/or defined benefit pension plans pension plan as well as a defined contribution plan. covering substantially all of their employees, under which benefits The unfunded severance indemnity plan provides lump-sum are provided based on the rate of pay at the time of termination, retirement benefits based on credits earned in each year of service. years of service and certain other factors. Employees are entitled to receive larger payments in certain Foreign consolidated subsidiaries principally sponsor non- circumstances such as involuntary termination, retirement at the contributory defined benefit pension plans covering most of mandatory retirement age, voluntary termination at certain specific their employees. Plans covering regular full-time employees ages prior to mandatory retirement age or death. provide pension benefits based on credits, determined by age, The cash balance pension plan provides retirement benefits in earned throughout an employee’s service and final average the form of a lump-sum payment or annuity payments based on compensation before retirement. current and past principal credits earned and interest credits over Certain foreign consolidated subsidiaries also provide cer- time based on these principal credits. tain health and life insurance benefits for retired employees and their dependents.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 090 page 091 The liabilities for employees’ retirement benefits at March 31, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2010 2011 2011 Projected benefit obligations ¥(455,264) ¥(486,862) $(5,855) Fair value of plan assets 321,317 307,113 3,693 Funded status (133,947) (179,749) (2,162) Unrecognized actuarial net loss 42,196 100,671 1,211 Unrecognized prior service cost 4,790 3,534 42 Net amount recognized (86,961) (75,544) (909) Pension liability adjustment of foreign consolidated subsidiaries (see Note 3 (r)) (35,742) (34,685) (417) Prepaid pension cost (23,391) (22,807) (274) Other current liabilities 3,721 2,434 30 Liabilities for employees’ retirement benefits ¥(142,373) ¥(130,602) $(1,570)
“Pension liability adjustment of foreign consolidated subsidiaries” present value of benefits included in the benefit obligation payable in is the unfunded obligation recognized by foreign consolidated sub- the next 12 months exceeds the fair value of plan assets in foreign sidiaries applying U.S. GAAP. consolidated subsidiaries applying U.S. GAAP. “Other current liabilities” is the amount by which the actuarial
The components of net periodic retirement benefit cost for the years ended March 31, 2009, 2010 and 2011 were as follows: Millions of Millions of yen U.S. dollars 2009 2010 2011 2011 Service cost ¥ 13,123 ¥ 11,294 ¥ 11,127 $ 134 Interest cost 21,720 18,090 17,928 216 Expected return on plan assets (20,133) (12,902) (13,883) (167) Recognized actuarial loss 748 3,876 2,903 35 Amortization of prior service cost 1,256 1,744 1,640 19 Net periodic retirement benefit costs ¥ 16,714 ¥ 22,102 ¥ 19,715 $ 237 Financial Information
Significant assumptions used for the years ended March 31, 2009, 2010 and 2011 were as follows: Year ended March 31, 2009 Japan Overseas Discount rate principally 2.5% principally between 3.3% and 6.3% Expected rate of return on plan assets principally 2.5% principally between 4.3% and 6.0% Amortization period of prior service cost principally 10 years principally between 7 years and 10 years Recognition period of actuarial gain/loss principally 10 years principally between 7 years and 15 years
Year ended March 31, 2010 Japan Overseas Discount rate principally 2.5% principally between 3.0% and 5.8% Expected rate of return on plan assets principally 2.5% principally between 4.5% and 6.2% Amortization period of prior service cost principally 10 years principally between 6 years and 10 years Recognition period of actuarial gain/loss principally 10 years principally between 5 years and 19 years
Year ended March 31, 2011 Japan Overseas Discount rate principally 1.7% principally between 2.8% and 5.4% Expected rate of return on plan assets principally 2.5% principally between 4.3% and 5.7% Amortization period of prior service cost principally 10 years principally between 7 years and 10 years Recognition period of actuarial gain/loss principally 10 years principally between 7 years and 15 years
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 090 page 091 Actuarial gains or losses that result from changes in plan experi- Certain domestic and foreign subsidiaries provided additional ence and actuarial assumptions are principally amortized over the retirement benefits for early-retired employees in connection with employees’ average remaining service period from the next fiscal the rationalization of the Domestic tobacco, International tobacco year. The prior service cost that resulted from retroactive application and Food businesses for the years ended March 31, 2009, 2010 of a plan amendment is principally amortized over the employees’ and 2011. average remaining service period. The retirement benefit attributable These restructuring activities resulted in recognition of additional to each year is calculated by assigning the same amount of pension retirement benefits as business restructuring costs of ¥2,691 million, benefits to each year of service. In determining service cost, certain ¥7,288 million and ¥2,761 million ($33 million) for the years ended foreign subsidiaries attribute benefits to periods of service under the March 31, 2009, 2010 and 2011, respectively, and as other plan’s benefit formula. expenses of ¥32 million, ¥1,235 million and ¥112 million ($1 million) The Group’s contributions to the defined contribution plans which for the years ended March 31, 2009, 2010 and 2011, respectively, were charged to expenses for the years ended March 31, 2009, which included a one-time charge for the unrecognized actuarial net 2010 and 2011 were ¥3,948 million, ¥5,680 million and ¥5,813 loss and unrecognized prior service cost attributable to the employ- million ($70 million), respectively. ees who retired earlier than expected.
Certain domestic consolidated subsidiaries participate in multi-employer contributory pension plans and the required contributions to the pension plans are recognized as a net pension cost for the year. Of these pension plans, information about Tokyo pharmaceutical industry employees’ pension funds were as follows: Millions of Millions of yen U.S. dollars 2009 2010 2010 Fair value of plan assets ¥ 325,177 ¥ 403,992 $ 4,859 Benefit obligations (502,794) (458,224) (5,511) Deficit ¥(177,617) ¥ (54,232) $ (652)
The information of the pension fund above is the status as of March 31, 2009 and 2010 respectively, because the latest pension fund information was not available within the reporting periods.
Proportion of the contribution into the entire plan which was made by the Domestic consolidated subsidiary was 1.3% for each of the years ended March 31, 2010 and 2011.
(2) Obligation Under the Public Official Mutual Assistance As a formerly wholly government-owned company, JT is obli- Association Law gated by the Law to reimburse the Japanese government for Employees of JT, including former employees of JTSPC and others pension expenses incurred each year by the government in are entitled to receive benefits under the government-sponsored respect of former employees of JTSPC and others for their ser- pension plan by the Public Official Mutual Assistance Association vices during certain periods before July 1, 1956, the enactment Law (the “Law”). The benefits, in the form of lifetime annuity pay- date of the Law. ments by the Social Insurance Agency, are determined based on the Such obligations were first recorded as liabilities at April 1, 2003 standard pay rate, the length of service and other factors. based on the actuarially determined computation method. Any actu- arial gain or loss arising subsequent to April 1, 2003 is deferred and amortized over 10 years.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 092 page 093 The liabilities and costs recognized for such obligations as of and for the years ended March 31, 2009, 2010 and 2011 were as follows: Millions of Millions of yen U.S. dollars 2010 2011 2011 Benefit obligations ¥(106,346) ¥ (97,577) $(1,174) Unrecognized actuarial (gain) loss (3,184) (3,422) (41) Liabilities recognized ¥(109,530) ¥(100,999) $(1,215)
Millions of Millions of yen U.S. dollars 2009 2010 2011 2011 Interest cost ¥1,918 ¥1,753 ¥1,595 $19 Recognized actuarial (gain) loss 107 (28) (211) (2) Net periodic costs ¥2,025 ¥1,725 ¥1,384 $17
The assumed discount rate used in the actuarial computation for the years ended March 31, 2009 and 2010 was 1.5% and that of 2011 was 1.2%.
(3) Retirement allowances for directors and corporate auditors The Domestic Group’s liabilities for retirement benefits for directors and corporate auditors as of March 31, 2010 and 2011 were ¥764 million and ¥376 million ($5 million), respectively.
10. Equity
Japanese companies are subject to the Companies Act. The signifi- (b) increases/decreases and transfer of common stock, cant provisions in the Companies Act that affect financial and reserve and surplus accounting matters are summarized below: The Companies Act requires that an amount equal to 10% of divi- dends must be appropriated as a legal reserve (a component of (a) Dividends retained earnings) or as additional paid-in capital (a component of Under the Companies Act, companies can pay dividends at any time capital surplus) depending on the equity account charged upon the Financial Information during the fiscal year in addition to the year-end dividend upon resolu- payment of such dividends until the total of aggregate amount of tion at the shareholders meeting. For companies that meet certain legal reserve and additional paid-in capital equals 25% of the criteria such as; (1) having the Board of Directors, (2) having indepen- common stock. Under the Companies Act, the total amount of addi- dent auditors, (3) having the Board of Corporate Auditors, and (4) the tional paid-in capital and legal reserve may be reversed without limita- term of service of the directors is prescribed as one year rather than tion. The Companies Act also provides that common stock, legal two years of normal term by its articles of incorporation, the Board of reserve, additional paid-in capital, other capital surplus and retained Directors may declare dividends (except for dividends in kind) at any earnings can be transferred among the accounts under certain condi- time during the fiscal year if the company has prescribed so in its tions upon resolution of the shareholders. articles of incorporation. Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorpo- ration of the company so stipulate. The Companies Act provides certain limitations on the amounts available for dividends or the purchase of treasury stock.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 092 page 093 (c) treasury stock (d) other The Companies Act also provides for companies to purchase treasury The Act on Special Measures Concerning Taxation in Japan permits stock and dispose of such treasury stock by resolution of the Board companies to take as tax deductions certain reserves if provided of Directors. The amount of treasury stock purchased cannot exceed through year-end book closing. Under Japanese tax laws, these the amount available for distribution to the shareholders which is reserves must be reversed to income in future years. The deferred determined by specific formula. gain on sales of fixed assets, net of tax, included in retained earn- ings provided under the Act on Special Measures Concerning Taxation at March 31, 2010 and 2011 was ¥43,446 million and ¥40,275 million ($484 million), respectively.
11. Stock Options
Stock option expense that was accounted for as Selling, general and administrative expenses on the consolidated statements of income for the years ended March 31, 2009, 2010 and 2011 amounted to ¥179 million, ¥210 million and ¥203 million ($2 million), respectively.
The stock options outstanding as of March 31, 2011 were as follows: Number of Exercise Stock Option Persons Granted Options Granted Date of Grant Price Service Period Covered Exercise Period 2008 stock option 11 Directors 426 shares January 8, 2008 ¥1 From June 22, 2007 From January 9, 2008 to 16 Executive officers ($0.01) to June 24, 2008 January 8, 2038 2009 stock option 11 Directors 547 shares October 6, 2008 ¥1 From June 24, 2008 From October 7, 2008 to 14 Executive officers ($0.01) to June 23, 2009 October 6, 2038 2010 stock option 9 Directors 1,153 shares October 13, 2009 ¥1 From June 23, 2009 From October 14, 2009 to 14 Executive officers ($0.01) to June 24, 2010 October 13, 2039 2011 stock option 9 Directors 979 shares October 4, 2010 ¥1 From June 24, 2010 From October 5, 2010 to 14 Executive officers ($0.01) to June 24, 2011 October 4, 2040
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 094 page 095 The rights become exercisable from one year later when a holder no longer holds a position as a director, a corporate auditor or an executive officer. The stock option activity was as follows: 2008 stock option 2009 stock option 2010 stock option 2011 stock option For the year ended March 31, 2009 Non-Vested (Shares) (Shares) March 31, 2008—Outstanding 106 — Granted — 547 Canceled — — Vested (106) (410) March 31, 2009—Outstanding — 137 Vested March 31, 2008—Outstanding 320 — Vested 106 410 Exercised — — Canceled — — March 31, 2009—Outstanding 426 410 For the year ended March 31, 2010 Non-Vested (Shares) (Shares) (Shares) March 31, 2009—Outstanding — 137 — Granted — — 1,153 Canceled — — — Vested — (137) (865) March 31, 2010—Outstanding — — 288 Vested March 31, 2009—Outstanding 426 410 — Vested — 137 865 Exercised (17) — — Canceled — — — March 31, 2010—Outstanding 409 547 865 For the year ended March 31, 2011 Financial Information Non-Vested (Shares) (Shares) (Shares) (Shares) March 31, 2010—Outstanding — — 288 — Granted — — — 979 Canceled — — — — Vested — — (288) (734) March 31, 2011—Outstanding — — — 245 Vested March 31, 2010—Outstanding 409 547 865 — Vested — — 288 734 Exercised (7) — — — Canceled — — — — March 31, 2011—Outstanding 402 547 1,153 734 Exercise price ¥1 ¥1 ¥1 ¥1 ($0.01) ($0.01) ($0.01) ($0.01) Average stock price at exercise ¥275,323 — — — Fair value price at the grant date ¥581,269 ¥285,904 ¥197,517 ¥198,386 ($2,386)
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 094 page 095 The assumptions used to measure fair value of 2011 stock options were as follows: 2011 stock option Estimate Method Black-Scholes option pricing model Volatility of stock price*1 34.351% Estimated remaining outstanding period*2 15 years Estimated dividend*3 ¥5,600 per share ($67 per share) Interest rate with risk free*4 1.406%
*1 Calculated based on stock prices for the period on and after listing date (from October 27, 1994 to October 4, 2010) *2 Due to difficulty in reasonably estimating due to insufficient data accumulation, expected remaining period is estimated on the assumption that stock option would be exercised at a mid-point of exercising period. *3 Based on interim dividend and year-end dividend for the year 2010 *4 A yield of 15-year government bond, a period of which corresponds to expected remaining period
12. Income Taxes
The Domestic Group is subject to Japanese corporate tax, inhabit- 40.35% for the years ended March 31, 2009, 2010 and 2011. Foreign ants tax and enterprise tax based on income which, in the aggregate, consolidated subsidiaries are subject to income taxes of the coun- resulted in a normal effective statutory tax rate of approximately tries in which they operate.
The tax effects of significant temporary differences and loss carry-forwards which resulted in deferred tax assets and liabilities at March 31, 2010 and 2011 were as follows: Millions of Millions of yen U.S. dollars 2010 2011 2011 Deferred tax assets: Liabilities for employees’ retirement benefits ¥ 42,984 ¥ 41,029 $ 493 Obligations under the Public Official Mutual Assistance Association Law 44,195 40,753 490 Net operating loss carryforwards 45,685 65,122 783 Foreign currency exchange losses 20,139 5,712 69 Allowance for doubtful accounts 10,489 6,634 80 Other 73,256 64,769 779 Less valuation allowance (74,102) (69,116) (831) Total 162,646 154,903 1,863 Deferred tax liabilities: Deferred gain on sales of fixed assets for income tax purposes (26,306) (25,499) (307) Basis differences in assets acquired and liabilities assumed upon acquisition (72,287) (56,577) (680) Prepaid pension cost (8,783) (8,638) (104) Other (40,214) (32,057) (386) Total (147,590) (122,771) (1,477) Net deferred tax assets (liabilities) ¥ 15,056 ¥ 32,132 $ 386
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 096 page 097 Net deferred tax assets and liabilities at March 31, 2010 and 2011 were reflected on the accompanying consolidated balance sheets under the following captions: Millions of Millions of yen U.S. dollars 2010 2011 2011 Other current assets ¥ 26,615 ¥ 24,674 $ 296 Deferred tax assets 85,376 82,329 990 Other current liabilities (2,357) (2,241) (27) Deferred tax liabilities (94,578) (72,630) (873) Net deferred tax assets (liabilities) ¥ 15,056 ¥ 32,132 $ 386
A reconciliation between the normal effective statutory tax rate for the years ended March 31, 2009, 2010 and 2011 and the actual effec- tive tax rate reflected in the accompanying consolidated statements of income was as follows: 2009 2010 2011 Normal effective statutory tax rate 40.35% 40.35% 40.35% Tax rate difference applied for foreign consolidated subsidiaries (12.60) (6.90) (10.32) Non-deductible expenses 3.77 1.95 2.75 Amortization of goodwill 10.05 8.81 8.75 Increase (reduction) in valuation allowance 5.42 6.10 (1.43) Increase (reduction) of FIN48 liability, net 3.41 1.14 5.31 Gain from the reversal of liability on a fine levied under the UK competition law — (2.44) — Regulatory fine in Canada — — 1.60 Other—net 1.09 (1.45) (0.35) Actual effective tax rate 51.49% 47.56% 46.66%
13. Research and Development Costs, Sales Promotion and Advertising Costs
Research and development costs charged to expenses as incurred Sales promotion and advertising costs were charged to expenses as
for the years ended March 31, 2009, 2010 and 2011 were ¥47,296 incurred for the years ended March 31, 2009, 2010 and 2011 were Financial Information million, ¥49,645 million and ¥53,364 million ($642 million), ¥188,023 million, ¥165,684 million and ¥161,691 million ($1,945 respectively. million), respectively.
14. Lease Transactions
The minimum rental commitments under noncancellable operating leases at March 31, 2010 and 2011 were as follows: Millions of Millions of yen U.S. dollars 2010 2011 2011 Due within one year ¥ 7,362 ¥ 6,571 $ 79 Due after one year 21,153 13,872 167 Total ¥28,515 ¥20,443 $246
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 096 page 097 15. Other Income (Expenses)
(1) Business Restructuring Costs Business restructuring costs for the years ended March 31, 2009, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2009 2010 2011 2011 Additional Retirement Benefits (see Note 9) ¥ (2,691) ¥(7,288) ¥(2,761) $(33) Loss on disposition of property, plant and equipment (404) (1,395) (931) (11) Others-net (21,269) (1,217) (630) (8) Total ¥(24,364) ¥(9,900) ¥(4,322) $(52)
Business restructuring costs were incurred in line with the business restructuring measures mainly for the rationalization of Domestic, Inter- national tobacco and Food business. Others-net for the year ended March 31, 2009 included a revision of the business model in the Philippines.
(2) Loss on Impairment of Long-lived Assets million ($64 million) respectively, which relates principally to land, Asset grouping is based on the smallest identifiable unit that gener- and certain buildings and structures of company housing and shut- ates cash flows that are largely independent of the cash flows from down factories which are planned to be demolished. other assets, except for idle property, which is grouped individually. The recoverable value of such assets was calculated mainly by its Loss on Impairment for the years ended March 31, 2009, 2010 value in use, which was set at “nil.” and 2011 amounted to ¥16,365 million, ¥6,043 million and ¥5,297
(3) Other—net “Other—net” included in “Other Income (Expenses)” for the years ended March 31, 2009, 2010 and 2011 consisted of the following: Millions of Millions of yen U.S. dollars 2009 2010 2011 2011 Financial support for domestic tobacco growers ¥ (768) ¥ (522) ¥ (1,492) $ (18) Foreign exchange gain (loss)—net (21,802) (20,228) 798 10 Equity in earnings of affiliates 2,370 2,401 2,330 28 Periodic costs from the Public Official Mutual Assistance Association liabilities (see Note 9) (2,025) (1,725) (1,384) (17) Introduction costs for vending machines with adult identification functions(*1) (13,469) — — — Gain from the reversal of liability on a fine levied under the UK competition law(*2) — 16,710 — — Regulatory fine in Canada(*3) — — (12,843) (154) Loss related to the Great East Japan Earthquake(*4) — — (10,966) (132) Expense for disposal of PCB-containing wastes — (4,056) — — Others—net (11,883) 1,676 (4,101) (50) Total ¥(47,577) ¥ (5,744) ¥(27,658) $(333)
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 098 page 099 *1) Introduction costs for vending machines with adult identifica- million sterling pound has been recognized and disclosed in the tion functions Other income on the Consolidated Statements of Income, which is “Introduction costs for vending machines with adult identification presented “Gain from the reversal of liability on a fine levied under functions” is the cost to establish the system of vending machines the UK competition law” in “Other—net.” with functions to prevent minors from purchasing cigarettes from vending machines and to dispense cigarettes only after scanning and *3) Regulatory fine in Canada verifying special IC cards that indicate whether the purchaser is an On April 13, 2010, JTI-Macdonald Corp. (“JTI-Mac”), JT’s Canadian adult or not. consolidated subsidiary, entered into a comprehensive agreement with the Government of Canada and all provinces and territories (the *2) Gain from the reversal of liability on a fine levied under the “Canadian Governments”) to establish a cooperation mechanism in UK competition law combating cigarette smuggling and contraband. In addition, JTI-Mac On April 16, 2010, Gallaher Group Ltd. (former Gallaher Group Plc) pleaded to a regulatory offense for its involvement in the illicit trade and Gallaher Ltd. (together, hereinafter, “Gallaher”), JT’s tobacco of cigarettes prior to JT’s acquisition of non-US tobacco operations business subsidiaries in the United Kingdom, received the decision of RJR Nabisco Inc. and paid CAD150 million (approximately 12.8 from Office of Fair Trading (“OFT”), the UK competition authority, billion yen). concluding that a fine of approximate 50 million sterling pound was As a result, all of the contraband-related claims against JTI-Mac levied to Gallaher for anti-competitive business practices relating to and others associated with it by the Canadian Governments have the retail pricing of tobacco products in the market during the period been withdrawn and the Notice of Assessment from the Quebec prior to JT’s acquisition of Gallaher. Ministry of Revenue has been withdrawn. Approximate 164 million sterling pound in total, based on the company’s assumption about the risk of fine being levied, had *4) Loss related to the Great East Japan Earthquake been booked as liabilities in the purchase price allocation related to Manufacturing facilities and inventories, which mainly JT and those JT’s acquisition of Gallaher Group Plc (now Gallaher Group Ltd.) on group companies in the Tohoku region of northeast Japan hold, have April 18, 2007 and such liabilities had been included in Other cur- suffered damage from the Great East Japan Earthquake occurred on rent liabilities and Other non-current liabilities on the Consolidated March 11, 2011. Balance Sheets. Accordingly, the loss related to the Great East Japan Earthquake As the amount of fine decided by the OFT was lower than the of 10,966 million yen was posted in the year ended March 31, 2011. liabilities which had been originally booked, the liability has been JT group had originally arranged accident insurances which Financial Information reversed to the amount of fine sentenced in the decision by the cover the facilities and inventories that suffered damage from the OFT, and consequently, the relevant variance of approximate 114 earthquake.
16. Financial Instruments and Related Disclosures
The information related to financial instruments and related disclo- (2) Nature and Extent of Risks Arising from sure that was applied to the year ended March 31, 2010 was follows: Financial Instruments Receivables such as trade notes and accounts receivable are (1) Policy for Financial Instruments exposed to customer’s credit risk. Receivables in foreign currencies JT and major subsidiaries effectively raise necessary funds (for busi- are exposed to the market risk of fluctuation in foreign currency ness operations) with mainly bank loans and bonds considering their exchange rates. business environment. Short-term investments and investment securities are mainly Cash surplus, if any, are invested in low risk and highly liquid bonds for surplus investment and equities of customers and suppli- financial instruments. ers of the Group and those are exposed to the issuer’s credit risk Derivatives are used, not for speculative nor trading purposes, and market price fluctuation risk. but to manage risk exposure arising from business operations. Payables such as trade notes and accounts payable in foreign currencies are exposed to the market risk of fluctuation in foreign currency exchange rates.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 098 page 099 Bank loans, commercial paper and bonds issued by the Group are Interest rate risk management exposed to the liquidity risk that the Group would not be able to prepare In accordance to the internal guidelines, JT and its major subsidiar- funding to repay such debts due to deterioration of financial market. ies establish interest rate hedging strategy based on the environ- Bank loans and bonds in variable interest rates are exposed to ment and the forecast of interest market to reduce the market market risks of interest rate fluctuation and those in foreign curren- risks of interest rate fluctuation related to bank loans and bonds. cies are exposed to the market risk of fluctuation in foreign currency The interest rate hedging strategy is reviewed and approved by exchange rates. the Financial Risk Management Committee of JT. Derivative Derivatives mainly include foreign currency forward contracts to transactions are originated based on this strategy. The Treasury manage the market risk of fluctuation in foreign currency exchange Division of JT regularly reports such derivative transactions to JT’s rate related to future cashflow in foreign currency and interest rate Executive Committee. swaps to manage the market risk of fluctuation interest rate related to interest payment for bank loans and bonds. These derivatives are Risk Management of market price fluctuation exposed to counterparty’s credit risk. With respect to short-term investments and investment securities, For hedging instruments, hedged items, hedging policies and JT and its major subsidiaries regularly monitor prices and the issuer’s assessment methods of effectiveness of hedging instruments, financial status. Except for held-to-maturity bonds, responsible divi- please see Note 17. sions revise investment strategy if necessary by taking relationship with issuers into consideration. (3) Risk Management for Financial Instruments Credit Risk Management Liquidity risk management (Liquidity risk comprises the risk With respect to receivables, in order to control customer’s credit risk, that the Group cannot meet it’s contractual obligations in JT and its major subsidiaries set credit limits or payment terms for full on maturity dates) major customers based on the Credit Management Guideline in In accordance to the internal guidelines, JT and its major subsidiaries principle. In addition, receivable balance of each customer is con- establish finance plan based on the annual business plan and the stantly checked to reduce risk of customer’s default. The Treasury Treasury Division of JT regularly monitors the balance of liquidity-in- Division of JT regularly monitors status of occurrence and collections hand and interest-bearing debt and reports to JT’s Executive Commit- of bad debts, and reports them to JT’s Executive Committee. tee. In addition, JT and its major subsidiaries keep necessary credit To control credit risk related to surplus investment and derivatives, facilities to manage liquidity risk, having commitment lines with sev- based on an internal guide line, JT and its major subsidiaries invest eral financial institutions. cash surplus into bonds and other financial instruments with a certain credit grade and have derivatives with counterparties which has high (4) Fair Values of Financial Instruments credit grade. In addition, the Treasury Division of JT regularly moni- Fair values of financial instruments are based on quoted price in tors such transactions and reports them to its Executive Committee. active markets. If quoted price is not available, other rational valua- tion techniques are used instead. The results of valuation may differ Foreign exchange risk management among assumptions because the rational valuation techniques In accordance to the internal guidelines, JT and its major subsidiaries include variable factors. Also please see Note 17 for the detail of fair establish foreign exchange hedging strategy based on the environ- value for derivatives. ment and the forecast of foreign exchange market to reduce the market risk of fluctuation in foreign currency exchange rate mainly related to future cash flow in foreign currency. The foreign exchange hedging strategy is reviewed and approved by the Financial Risk Management Committee of JT and, based on which, the derivative transactions are originated. The Treasury Division of JT regularly reports such derivative transactions to the JT’s Executive Committee.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 100 page 101 (a) Fair values of financial instruments Millions of yen Unrecognized March 31, 2010 Carrying amount Fair value gain/loss Cash and cash equivalents ¥ 154,369 ¥ 154,369 ¥ — Trade notes and accounts receivable 296,885 Allowance for doubtful accounts*1 (2,860) Subtotal 294,025 294,025 — Short-term investments and Investment securities 68,385 68,386 1 Time deposits 7,856 7,856 — Held-to-maturity securities 300 301 1 Available-for-sale securities 60,229 60,229 — Total 516,779 516,780 1 Short-term bank loans 109,263 109,263 — Commercial paper 119,000 119,000 — Tobacco excise taxes payable 307,795 307,795 — Trade notes and accounts payable 149,462 149,462 — Other payables 73,739 73,739 — Income taxes payable 54,058 54,058 — Consumption taxes payable 60,105 60,105 — Bonds 459,410 474,273 14,863 Long-term bank loans 172,595 173,733 1,138 Total 1,505,427 1,521,428 16,001 Derivatives 2,039 2,039 —
*1 Allowance for doubtful accounts are deducted from trade notes and accounts receivable to which they relate.
Cash and cash equivalents and receivables Bonds The carrying values of cash and cash equivalents and receivables The fair value of bonds that JT and its subsidiaries issued is deter- approximate fair value because of their short maturities. mined by the market price, if it is available, or by discounting the cash flows related to the debt at an assumed rate based on debt’s Financial Information Short-term investments and investment securities maturity and credit risk. The fair value of short-term investments and investment securities are measured at the quoted market price of the stock exchange for Long-term bank loans the equity instruments, and at the quoted price obtained from the The fair value of long-term bank loans is determined by discounting financial institution for certain debt instruments. the cash flows related to the loans at an assumed rate based on The information of the fair value for the short-term investments debt’s maturity and credit risk. and investment securities by classification is included in Note 5. Derivatives Payables, short-term bank loans, commercial paper, other The information of the fair value for derivatives is included in payables, tobacco excise taxes payable, Income taxes payable Note 17. and Consumption taxes payable The carrying values of the liabilities approximate fair value because of their short maturities.
(b) Financial instruments whose fair value cannot be reliably determined Carrying amount March 31, 2010 Millions of Yen Investments in equity instruments that do not have a quoted market price in an active market ¥28,400
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 100 page 101 (5) Maturity Analysis for Cash and cash equivalents and Trade notes and accounts receivable with contractual maturities Millions of Yen Due in Due after March 31, 2010 one year or less one year Cash and cash equivalents ¥154,369 ¥— Trade notes and accounts receivable 296,885 — Total 451,254 —
The information related to financial instruments and related disclo- (3) Risk Management for Financial Instruments sure that was applied to the year ended March 31, 2011 was follows: Credit Risk Management With respect to receivables, in order to control customer’s credit risk, (1) Policy for Financial Instruments JT and its major subsidiaries set credit limits or payment terms for JT and major subsidiaries effectively raise necessary funds (for busi- major customers based on the Credit Management Guideline in ness operations) with mainly bank loans and bonds considering their principle. In addition, receivable balance of each customer is con- business environment. stantly checked to reduce risk of customer’s default. The Treasury Cash surplus, if any, are invested in low risk and highly liquid Division of JT regularly monitors status of occurrence and collections financial instruments. of bad debts, and reports them to JT’s Executive Committee. Derivatives are used, not for speculative nor trading purposes, To control credit risk related to surplus investment and deriva- but to manage risk exposure arising from business operations. tives, based on an internal guide line, JT and its major subsidiaries invest cash surplus into bonds and other financial instruments with (2) Nature and Extent of Risks Arising from Financial a certain credit grade and have derivatives with counterparties Instruments which has high credit grade. In addition, the Treasury Division of Receivables such as trade notes and accounts receivable are JT regularly monitors such transactions and reports them to its exposed to customer’s credit risk. Receivables in foreign currencies Executive Committee. are exposed to the market risk of fluctuation in foreign currency exchange rates. Foreign exchange risk management Short-term investments and investment securities are mainly In accordance to the internal guidelines, JT and its major subsidiaries bonds for surplus investment and equities of customers and suppli- establish foreign exchange hedging strategy based on the environ- ers of the Group and those are exposed to the issuer’s credit risk ment and the forecast of foreign exchange market to reduce the and market price fluctuation risk. market risk of fluctuation in foreign currency exchange rate mainly Payables such as trade notes and accounts payable in foreign related to future cash flow in foreign currency. The foreign exchange currencies are exposed to the market risk of fluctuation in foreign hedging strategy is reviewed and approved by the Financial Risk currency exchange rates. Management Committee of JT. Derivative transactions are originated Bank loans and bonds issued by the Group are exposed to the based on this strategy. The Treasury Division of JT regularly reports liquidity risk that the Group would not be able to prepare funding to such derivative transactions to the JT’s Executive Committee. repay such debts due to deterioration of financial market. Bank loans and bonds in variable interest rates are exposed to Interest rate risk management market risks of interest rate fluctuation and those in foreign curren- In accordance to the internal guidelines, JT and its major subsidiaries cies are exposed to the market risk of fluctuation in foreign currency establish interest rate hedging strategy based on the environment exchange rates. and the forecast of interest market to reduce the market risks of Derivatives mainly include foreign currency forward contracts to interest rate fluctuation related to bank loans and bonds. The interest manage the market risk of fluctuation in foreign currency exchange rate hedging strategy is reviewed and approved by the Financial Risk rate related to future cashflow in foreign currency and interest rate Management Committee of JT. Derivative transactions are originated swaps to manage the market risk of fluctuation interest rate related based on this strategy. The Treasury Division of JT regularly reports to interest payment for bank loans and bonds. These derivatives are such derivative transactions to JT’s Executive Committee. exposed to counterparty’s credit risk. For hedging instruments, hedged items, hedging policies and Risk Management of market price fluctuation assessment methods of effectiveness of hedging instruments, With respect to short-term investments and investment securities, please see Note 17. JT and its major subsidiaries regularly monitor prices and the issuer’s financial status. Except for held-to-maturity bonds, responsible divi- sions revise investment strategy if necessary by taking relationship with issuers into consideration.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 102 page 103 Liquidity risk management (Liquidity risk comprises the risk (4) Fair Values of Financial Instruments that the Group cannot meet it’s contractual obligations in Fair values of financial instruments are based on quoted price in full on maturity dates) active markets. If quoted price is not available, other rational valua- In accordance to the internal guidelines, JT and its major subsidiaries tion techniques are used instead. The results of valuation may establish finance plan based on the annual business plan and the differ among assumptions because the rational valuation tech- Treasury Division of JT regularly monitors the balance of liquidity- niques include variable factors. Also please see Note 17 for the in-hand and interest-bearing debt and reports to JT’s Executive detail of fair value for derivatives. Committee. In addition, JT and its major subsidiaries keep neces- sary credit facilities to manage liquidity risk, having commitment lines with several financial institutions.
(a) Fair values of financial instruments Millions of yen Unrecognized March 31, 2011 Carrying amount Fair value gain/loss Cash and cash equivalents ¥ 244,240 ¥ 244,240 ¥ — Trade notes and accounts receivable 301,829 Allowance for doubtful accounts(*1) (2,362) Subtotal 299,467 299,467 — Short-term investments and Investment securities 67,384 67,384 — Time deposit and other deposits 12,639 12,639 — Available-for-sale securities 54,745 54,745 — Total ¥ 611,091 ¥ 611,091 ¥ — Short-term bank loans ¥ 70,060 ¥ 70,060 ¥ — Tobacco excise taxes payable 312,554 312,554 — Trade notes and accounts payable 170,821 170,821 — Other payables 67,130 67,130 — Income taxes payable 65,651 65,651 — Consumption taxes payable 69,825 69,825 — Bonds 452,225 462,476 10,251 Financial Information Long-term bank loans 173,905 174,302 397 Total ¥1,382,171 ¥1,392,819 ¥ 10,648 Derivatives ¥ 3,950 ¥ 3,950 ¥ —
Millions of U.S. dollars Unrecognized March 31, 2011 Carrying amount Fair value gain/loss Cash and cash equivalents $ 2,937 $ 2,937 $ — Trade notes and accounts receivable 3,630 Allowance for doubtful accounts(*1) (28) Subtotal 3,602 3,602 — Short-term investments and Investment securities 811 811 — Time deposits and other deposits 152 152 — Available-for-sale securities 659 659 — Total $ 7,350 $ 7,350 $ — Short-term bank loans $ 843 $ 843 $ — Tobacco excise taxes payable 3,759 3,759 — Trade notes and accounts payable 2,054 2,054 — Other payables 807 807 — Income taxes payable 790 790 — Consumption taxes payable 840 840 — Bonds 5,439 5,562 123 Long-term bank loans 2,091 2,096 5 Total $16,623 $16,751 $128 Derivatives $ 48 $ 48 $ —
*1 Allowance for doubtful accounts are deducted from trade notes and accounts receivable to which they relate. JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 102 page 103 Cash and cash equivalents and receivables Bonds The carrying values of cash and cash equivalents and receivables The fair value of bonds that JT and its subsidiaries issued is deter- approximate fair value because of their short maturities. mined by the market price, if it is available, or by discounting the cash flows related to the debt at an assumed rate based on debt’s maturity Short-term investments and investment securities and credit risk. The fair value of short-term investments and investment securities are measured at the quoted market price of the stock exchange for the Long-term bank loans equity instruments, and at the quoted price obtained from the financial The fair value of long-term bank loans is determined by discounting the institution for certain debt instruments. cash flows related to the loans at an assumed rate based on debt’s The information of the fair value for the short-term investments maturity and credit risk. and investment securities by classification is included in Note 5. Derivatives Payables, short-term bank loans, other payables, tobacco The information of the fair value for derivatives is included in Note 17. excise taxes payable, Income taxes payable and Consumption taxes payable The carrying values of the liabilities approximate fair value because of their short maturities.
(b) Financial instruments whose fair value cannot be reliably determined Carrying amount Millions of March 31, 2011 Millions of yen U.S. dollars Investments in equity instruments that do not have a quoted market price in an active market ¥23,515 $283
(5) Maturity Analysis for Cash and cash equivalents and Trade notes and accounts receivable with contractual maturities Millions of yen Millions of U.S. dollars Due in Due in one year Due after one year Due after March 31, 2011 or less one year or less one year Cash and cash equivalents ¥244,240 ¥ — $2,937 $ — Trade notes and accounts receivable 301,829 — 3,630 — Total ¥546,069 ¥ — $6,567 $ —
Please see Note 5 for the carrying value of short-term investments and investment securities by contractual maturities. Please see Note 8 for annual maturities of short-term bank loans and long-term debt.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 104 page 105 17. Derivatives
JT and certain consolidated subsidiaries use derivative financial instruments (“derivatives”), including derivatives described below, to hedge the foreign exchange risk associated with certain assets and liabilities in foreign currencies. Financial instruments 2009 2010 2011 Foreign currency forward contracts Foreign currency forward contracts Foreign currency forward contracts Currency options Currency swaps Currency options Currency swaps Currency swaps
JT and certain consolidated subsidiaries also entered into derivatives described below as a manner of managing their interest rate exposure. Financial instruments 2009 2010 2011 Interest rate swaps Interest rate swaps Interest rate swaps Interest rate cap options Interest rate cap options Interest rate cap options
Derivatives are subject to market risk and credit risk. Market risk payments on borrowings and bonds and forecasted foreign currency is the exposure created by potential fluctuations in market condi- denominated transactions. tions, including interest or foreign exchange rates. Credit risk is the The effectiveness of the hedging instruments is assessed in possibility that a loss may result from a counterparty’s failure to accordance with the Risk Management Policy and Practice Manual perform according to the terms and conditions of the contract. for financial instruments of JT and certain consolidated subsidiaries The Group does not hold or issue derivatives for trading pur- by comparing the accumulated amount of changes in hedging instru- poses. The main objective of using derivatives is to hedge the Group ments with hedged items. Hedging instruments and hedged items exposure to interest rate risks associated with certain interest were summarized as follows:
2009 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions
Interest rate swaps Borrowings Financial Information
2010 Hedging instruments Hedged items Foreign currency forward contracts Forecasted foreign currency transactions Interest rate swaps Borrowings
2011 Hedging instruments Hedged items Interest rate and currency swaps Borrowings Interest rate swaps Borrowings
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 104 page 105 The fair value of derivative transactions is measured at the quoted price obtained from the financial institution. The contract or notional amounts of derivatives which are shown in the below table do not represent the amounts exchanged by the par- ties and do not measure the Group’s exposure to credit or market risk.
Derivatives transactions to which hedge accounting is not applied at March 31, 2009, 2010 and 2011: Millions of yen 2009 2010 2011 Contract Contract/ Contract/ Contract/ Amount Notional Gain Notional Notional due after Gain Amount Fair Value (Loss) Amount Fair Value Gain (Loss) Amount One Year Fair Value (Loss) Foreign currency forward contracts: Buying ¥154,553 ¥151,600 ¥(2,953) ¥296,523 ¥ 654 ¥ 654 ¥204,216 — ¥ 2,945 ¥ 2,945 Selling 183,728 185,286 (1,558) 133,768 (490) (490) 85,173 — (1,238) (1,238) Currency swaps: Buying 59,712 (242) (242) 59,712 (123) (123) — — — — Selling 3,148 287 287 2,260 (460) (460) 1,782 1,782 (82) (82) Currency options: Buying — — — — — — 6,112 — 121 (152) Total ¥(4,466) ¥ (419) ¥ 1,473 Interest rate swaps: Receive fixed pay floating 72,284 2,811 2,811 36,606 2,297 2,297 31,576 31,576 2,192 2,192 Receive floating pay fixed 470 (5) (5) — — — — — — — Interest rate cap options: Buying 318,042 101 (1,504) 297,744 161 (1,209) 31,576 31,576 14 (514) Total ¥ 1,302 ¥ 1,088 ¥ 1,678
Millions of U.S. dollars 2011 Contract Contract/ Amount Notional due after Amount One Year Fair Value Gain (Loss) Foreign currency forward contracts: Buying $2,456 — $ 35 $ 35 Selling 1,024 — (15) (15) Currency swaps: Selling 21 21 (1) (1) Currency options: Buying 74 — 1 (1) Total $ 18 Interest rate swaps: Receive fixed pay floating 380 380 26 26 Interest rate cap options: Buying 380 380 0 (6) Total $ 20
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 106 page 107 Derivative transactions to which hedge accounting is applied at March 31, 2011 Millions of yen 2010 2011 Contract Contract Contract Amount due Fair Contract Amount due Fair Hedged item Amount after One Year Value Hedged item Amount after One Year Value Interest rate swaps (fixed rate payment, Long-term Long-term floating rate receipt) bank loans ¥1,137 437 *1 bank loans ¥ 357 198 *1
Millions of U.S. dollars 2011 Contract Contract Amount due Fair Hedged item Amount after One Year Value Interest rate swaps (fixed rate payment, Long-term floating rate receipt) bank loans $4 2 *1
*1 The above interest rate swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements are recognized and included in interest expense. In addition, the fair value of such interest rate swaps is included in that of hedged items (see Note 16).
Millions of yen 2011 Contract Contract Amount due Fair Hedged item Amount after One Year Value Interest rate and currency swaps (fixed rate payment, floating rate Long-term receipt)—Buying bank loans ¥30,000 30,000 *2
Millions of U.S. dollars 2011 Contract Contract Amount due Fair Hedged item Amount after One Year Value Interest rate and currency swaps
(fixed rate payment, floating rate Long-term Financial Information receipt)—Buying bank loans $361 361 *2
*2 The above interest rate and currency swaps which qualify for hedge accounting and meet specific matching criteria are not remeasured at market value but the differential paid or received under the swap agreements are recognized and included in interest expense. In addition, the fair value of such interest rate and currency swap is included in that of hedged items (see Note 16).
18. Commitments and Contingencies
On September 29, 2009, the Government of Ontario, Canada filed a (3) Amount of the claim lawsuit against 13 tobacco manufacturers including JT’s Canadian CAD50.0 billion (approximately ¥4,283 billion) consolidated subsidiary JTI-Mac and 1 industry organization. The * The statement of claim in this case contains allegations of joint and several liabili- detail is as follows. ties among all the defendants but does not specify any individual amount or percentages, within the total amount of the claim, which is claimed from any (1) Parties to the lawsuit individual defendant. Plaintiff Government of Ontario (Canada) Defendants 13 tobacco manufacturers including JTI-Mac and 1 JTI-Mac has valid grounds to defend the action which it will pursue industry organization by all appropriate means with the full support of JT. (2) Content of the complaint There are similar pending lawsuits against JTI-Mac and others field To seek compensation for damages for the cost of health care in Canada by the Government of British Columbia, the Government of benefits, resulting from the treatment of tobacco related disease New Brunswick and the Government of Newfoundland and Labrador or the risk of tobacco related disease, which have been paid or will claiming the recovery of health care costs; however, the amounts of be paid by the government of Ontario to relevant insured persons. claims have not been specified in these lawsuits.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 106 page 107 19. Comprehensive Income
For the year ended March 31, 2010 Total comprehensive income for the year ended March 31, 2010 was the following: Millions of yen 2010 Total comprehensive income attributable to: Owners of the parent ¥149,059 Minority interests 6,764 Total comprehensive income ¥155,823
Other comprehensive income for the year ended March 31, 2010 consisted of the following: Millions of yen 2010 Other comprehensive income: Unrealized gain (loss) on a available-for-sale securities ¥ 3,741 Deferred gain (loss) on derivatives under hedge accounting (80) Pension liability adjustment of foreign consolidated subsidiaries (7,304) Foreign currency translation adjustments 14,715 Total other comprehensive income ¥11,072
20. Net Income Per Share
Reconciliation of the differences between basic and diluted net income per share (“EPS”) for the years ended March 31, 2009, 2010 and 2011 was as follows: Millions of yen Shares Yen U.S. dollars Weighted Net Income average shares EPS EPS For the year ended March 31, 2011: Basic EPS Net income available to common shareholders ¥144,962 9,573,924 ¥15,141 $182 Effect of dilutive securities: Stock acquisition rights 2,858 Diluted EPS: Net income for computation ¥144,962 9,576,782 ¥15,137 $182 For the year ended March 31, 2010: Basic EPS Net income available to common shareholders ¥138,448 9,580,092 ¥14,452 $155 Effect of dilutive securities: Stock acquisition rights 1,849 Diluted EPS: Net income for computation ¥138,448 9,581,941 ¥14,449 $155 For the year ended March 31, 2009: Basic EPS Net income available to common shareholders ¥123,400 9,580,080 ¥12,881 $131 Effect of dilutive securities: Stock acquisition rights 846 Diluted EPS: Net income for computation ¥123,400 9,580,926 ¥12,880 $131
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 108 page 109 21. Segment Information
For the years ended March 31, 2010 and 2011 segments, “Japanese Domestic Tobacco Business,” “International In March 2008, the ASBJ revised ASBJ Statement No. 17 “Account- Tobacco Business,” “Pharmaceutical Business” and “Food ing Standard for Segment Information Disclosures” and issued ASBJ Business.” They are determined based on types of products, Guidance No. 20 “Guidance on Accounting Standard for Segment characteristics and markets. Information Disclosures.” Under the standard and guidance, an entity The “Japanese Domestic Tobacco Business” manufactures and is required to report financial and descriptive information about its sells tobacco products in domestic areas (which include duty-free reportable segments. Reportable segments are operating segments shops in Japan and markets in China, Hong Kong and Macau where or aggregations of operating segments that meet specified criteria. JT’s China Division operates). The “International Tobacco Business” Operating segments are components of an entity about which sepa- manufactures and sells tobacco products overseas mainly through rate financial information is available and such information is evaluated JT International S.A., which controls manufacturing and sales opera- regularly by the chief operating decision maker in deciding how to tions. The “Pharmaceutical Business” consists of the research and allocate resources and in assessing performance. Generally, segment development, manufacture and sale of prescription drugs. The information is required to be reported on the same basis as is used “Food Business” consists of the manufacture and sale of bever- internally for evaluating operating segment performance and deciding ages, processed foods and seasonings. how to allocate resources to operating segments. This accounting standard and the guidance are applicable to segment information 2. Method of measurement for the amounts of sales, disclosures for the fiscal years beginning on or after April 1, 2010. profit (loss), assets, and other items for each The segment information for the year ended March 31, 2010 reportable segment under the revised accounting standard is also disclosed hereunder The accounting policies of the reportable segment are consistent to as required the description of the summary of significant accounting policies (see Note 3). 1. Description of reportable segments The segment profit (loss) is based on operating income before Reportable segments of the JT Group are determined as segments depreciation and amortization (property, plant and equipment, intan- whose separate financial information is accessible from among the gible assets, and long-term prepaid expenses) and amortization of constituent units of the JT Group and that are subject to periodical goodwill (EBITDA). examination, in order for management to determine the allocation of The prices of the goods traded and services rendered among the Financial Information management resources. segments are mainly determined considering market prices of the The JT Group is mainly engaged in the manufacture and sale of goods and services. tobacco products, prescription drugs and foods. With respect to A certain part of common and company-wide expense and asset tobacco products, operations are managed separately for domestic is not allocated into reportable segments. For management purpose, and overseas. some of such expenses are allocated based on different basis from The reportable segments of the JT Group are composed of four that of assets.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 108 page 109 3. Information about net sales, profit (loss), assets and other items by reportable segment for the years ended March 31, 2010 and 2011 were as follows: Millions of yen 2010 Domestic International Tobacco Tobacco Pharmaceuticals Food Total Net sales to external customers (*1) ¥1,016,789 ¥1,039,141 ¥ 44,069 ¥394,652 ¥2,494,651 Intersegment sales or transfers 26,596 38,128 — 112 64,836 Total 1,043,385 1,077,269 44,069 394,764 2,559,487 Segment profit (loss) ¥ 251,263 ¥ 277,678 ¥ (9,651) ¥ 14,490 ¥ 533,780 Segment assets (*2) ¥ 696,660 ¥2,765,948 ¥105,540 ¥307,797 ¥3,875,945 Other: Depreciation and amortization other than goodwill (*2) ¥ 51,437 ¥ 56,090 ¥ 3,942 ¥ 16,498 ¥ 127,967 Amortization of goodwill (*3) 1,088 84,652 — 11,687 97,427 Investment in equity method affiliate 504 20,322 — 2,015 22,841 Increase in property, plant and equipment and intangible assets (*4) 42,653 64,552 2,666 23,420 133,291
Millions of yen 2011 Domestic International Tobacco Tobacco Pharmaceuticals Food Total Net sales to external customers(*1) ¥1,027,876 ¥1,017,035 ¥ 46,988 ¥375,016 ¥2,466,915 Intersegment sales or transfers 30,115 37,909 — 116 68,140 Total 1,057,991 1,054,944 46,988 375,132 2,535,055 Segment profit (loss) ¥ 257,690 ¥ 288,168 ¥ (13,268) ¥ 17,277 ¥ 549,867 Segment assets(*2) ¥ 732,335 ¥2,362,922 ¥104,942 ¥273,021 ¥3,473,220 Other: Depreciation and amortization other than goodwill(*2) ¥ 43,690 ¥ 51,638 ¥ 4,145 ¥ 17,070 ¥ 116,543 Amortization of goodwill(*3) 1,088 80,400 — 9,620 91,108 Investment in equity method affiliate 524 17,051 — 1,217 18,792 Increase in property, plant and equipment and intangible assets(*4) 55,983 60,907 2,888 25,011 144,789
Millions of U.S. dollars 2011 Domestic International Tobacco Tobacco Pharmaceuticals Food Total Net sales to external customers(*1) $12,362 $12,231 $ 565 $4,510 $29,668 Intersegment sales or transfers 362 456 — 1 819 Total 12,724 12,687 565 4,511 30,487 Segment profit (loss) $ 3,099 $ 3,466 $ (160) $ 208 $ 6,613 Segment assets(*2) $ 8,807 $28,418 $1,262 $3,284 $41,771 Other: Depreciation and amortization other than goodwill(*2) $ 525 $ 621 $50 $ 206 $ 1,402 Amortization of goodwill(*3) 13 967 — 116 1,096 Investment in equity method affiliate 6 205 — 15 226 Increase in property, plant and equipment and intangible assets(*4) 673 732 35 301 1,741
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 110 page 111 *1) Under the JT Group’s business management practices, net sales excludes the amount equivalent to tobacco excise taxes (net sales excluding tobacco excise taxes). Details of net sales including tobacco excise taxes and net sales excluding tobacco excise taxes in sales of the Japanese Domestic Tobacco Business and International Tobacco Business were as follows: Millions of yen Millions of U.S. dollars 2010 2011 2011 Domestic International Domestic International Domestic International Tobacco Tobacco Tobacco Tobacco Tobacco Tobacco Net sales including tobacco excise taxes ¥3,042,836 ¥2,633,637 ¥3,103,356 ¥2,649,957 $37,322 $31,870 Net sales excluding tobacco excise taxes 1,016,789 1,039,141 1,027,877 1,017,035 12,362 12,231 Of which, adjusted net sales excluding tobacco excise taxes* 615,991 906,756 617,919 897,455 7,431 10,793
* Net sales of the Japanese Domestic Tobacco Business consist of net sales of tobacco products of JT and net sales of tobacco products of other companies (imported tobacco products), including the wholesale. Similarly, net sales of the International Tobacco Business also include net sales relating to the distribution business and other activities that include the wholesale of tobacco products of other companies. In order to provide the adequate information about the results of the Japanese Domestic Tobacco Business and International Tobacco Business, since we believe that net sales excluding the net sales of the tobacco products of other companies, including the wholesale, are useful, which are disclosed as adjusted net sales excluding tobacco excise taxes for this reporting purpose. The following adjustments are made to calculate adjusted net sales excluding tobacco excise taxes.
Net sales relating to imported tobacco, duty-free shops in Japan and the China Division are mainly excluded from the Japanese Domestic Tobacco Business. Net sales relating to the distribution business, leaf tobacco sales and contract manufacturing are mainly excluded from the International Tobacco Business. *2) The amounts of long-term prepaid expenses are included in the segment asset. And the amortization expense of the long-term prepaid expenses is included in depreciation and amortization other than goodwill. *3) The amount is the amortization of goodwill included in operating expense. *4) Increase of long-term expenses is included in Increase in property, plant and equipment and intangible assets. *5) With respect to the international tobacco business, the accounting period of consolidated overseas subsidiaries, represented by JT International S.A., ends December 31, 2009 and 2010 and the results for the twelve months ended December 31, 2009 and 2010 are consolidated for the year ended March 31, 2010 and 2011, respectively.
4. Differences between total amounts for reportable segments and amounts in the consolidated balance sheets or consolidated statements of income and main details of these differences (matters relating to difference adjustments) Millions of Millions of yen U.S. dollars Net sales 2010 2011 2011 Reportable segments total ¥2,559,487 ¥2,535,055 $30,487 Other net sales(*1) 29,588 28,613 344
Elimination of intersegment transactions (74,923) (77,515) (931) Financial Information Amount equivalent to tobacco excise taxes ¥3,620,543 ¥3,708,401 $44,599 Net sales in the consolidated statements of income ¥6,134,695 ¥6,194,554 $74,499
Millions of Millions of yen U.S. dollars Segment profit (loss) 2010 2011 2011 Reportable segments total ¥ 533,780 ¥ 549,867 $6,613 Other profits(*1) 13,341 12,919 155 Head office expenses(*2) (20,837) (20,210) (243) Elimination of intersegment transactions (98) (434) (5) Other adjustments 516 (1,030) (12) Subtotal(*3) 526,702 541,112 6,508 Depreciation and amortization (132,770) (121,323) (1,459) Amortization of goodwill (97,427) (91,108) (1,096) Operating income in the consolidated statements of income ¥ 296,505 ¥ 328,681 $3,953
Millions of Millions of yen U.S. dollars Segment asset 2010 2011 2011 Reportable segments total ¥3,875,945 ¥3,473,220 $41,771 Other assets(*1) 90,744 85,466 1,028 Company-wide asset(*4) 172,152 284,417 3,421 Elimination of intersegment transactions (266,245) (271,175) (3,262) Total asset in the consolidated balance sheets ¥3,872,596 ¥3,571,928 $42,958
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 110 page 111 Millions of yen The amount in the consolidated Reportable segments total Other Adjustment financial statements Other items 2010 2011 2010 2011 2010 2011 2010 2011 Depreciation and amortization other than goodwill ¥127,967 ¥116,543 ¥2,781 ¥2,935 ¥2,022 ¥1,845 ¥132,770 ¥121,323 Amortization of goodwill 97,427 91,108 — — — — 97,427 91,108 Investment in equity method affiliate 22,841 18,792 470 280 — — 23,311 19,072 Increase in property, plant and equipment and intangible assets 133,291 144,789 346 575 3,497 657 137,134 146,021
Millions of U.S. dollars 2011 The amount in the Reportable consolidated segments financial total Other Adjustment statements Depreciation and amortization other than goodwill $1,402 $35 $22 $1,459 Amortization of goodwill 1,096 — — 1,096 Investment in equity method affiliate 226 3 — 229 Increase in property, plant and equipment and intangible assets 1,741 7 8 1,756
*1) Other net sales, other profits and other assets include business activities relating to rent of real estate. *2) Head office expenses are mainly general and administrative expenses not attributable to any reportable segments and mainly advertising expenses and operating expenses for the head office corporate division are included. *3) The subtotal is based on company-wide operating income before depreciation and amortization (property, plant and equipment, intangible assets, and long-term prepaid expenses) and amortization of goodwill (EBITDA). *4) Company-wide asset mainly consists of the short-term investment, managing cash surplus, land and building that are not attributable to any reportable segments and deferred tax assets that is not allocated to reportable segments.
[Related information] 1. Information about geographical areas Sales to Customers and property, plant and equipment by regions for the year ended March 31, 2011 was as follows: (1) Sales Millions of Millions of yen U.S. dollars Japan ¥3,524,089 $42,382 Foreign countries 2,670,465 32,117 Total 6,194,554 74,499
(2) Property, plant and equipment Millions of Millions of yen U.S. dollars Japan ¥426,855 $5,134 Foreign countries 236,696 2,846 Total 663,551 7,980
[Loss on Impairment of Long-lived Assets by reportable segment] Loss on Impairment of Long-lived Assets by reportable segments for the year ended March 31, 2011 were as follows: Millions of yen 2011 Domestic Tobacco International Tobacco Pharmaceuticals Food Subtotal Adjustment* Total ¥17 ¥345 ¥— ¥2,977 ¥3,339 ¥1,958 ¥5,297
Millions of U.S. dollars 2011 Domestic Tobacco International Tobacco Pharmaceuticals Food Subtotal Adjustment* Total $0 $4 $— $36 $40 $24 $64 * The amount of adjustment was impairment loss on the idle properties belonging to the head office
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 112 page 113 [Goodwill by reportable segment] The amounts of goodwill by reportable segments for the year ended March 31, 2011 were as follows: Millions of yen 2011 Domestic Tobacco International Tobacco Pharmaceuticals Food Total ¥15,238 ¥1,115,970 ¥— ¥16,608 ¥1,147,816
Millions of U.S. dollars 2011 Domestic Tobacco International Tobacco Pharmaceuticals Food Total $183 $13,421 $ — $200 $13,804
Information about industry segments, geographical segments and sales to foreign customers of the Group for the years ended March 31, 2009 and 2010 were as follows:
(1) Industry Segments Millions of yen 2009 Domestic International Elimination/ Tobacco Tobacco Pharmaceuticals Food Others Total Corporate Consolidated Sales to customers ¥3,200,494 ¥3,118,319 ¥ 56,758 ¥435,966 ¥20,770 ¥6,832,307 ¥ — ¥6,832,307 Intersegment sales 48,390 40,631 — 133 12,044 101,198 (101,198) — Total sales 3,248,884 3,158,950 56,758 436,099 32,814 6,933,505 (101,198) 6,832,307 Operating expenses 3,060,625 2,984,178 55,738 447,550 23,119 6,571,210 (102,709) 6,468,501 Operating income (loss) ¥ 188,259 ¥ 174,772 ¥ 1,020 ¥ (11,451) ¥ 9,695 ¥ 362,295 ¥ 1,511 ¥ 363,806 Assets ¥ 788,673 ¥2,700,099 ¥111,519 ¥332,670 ¥87,432 ¥4,020,393 ¥(140,590) ¥3,879,803 Depreciation and amortization other than goodwill 82,933 68,960 3,870 18,293 3,456 177,512 (612) 176,900 Impairment Loss — — — 3,830 — 3,830 12,535 16,365 Amortization of goodwill 1,089 94,235 — 10,188 — 105,512 — 105,512 Capital expenditures 46,506 59,776 3,426 23,201 1,129 134,038 235 134,273 Financial Information
Millions of yen 2010 Domestic International Elimination/ Tobacco Tobacco Pharmaceuticals Food Others Total Corporate Consolidated Sales to customers ¥3,042,836 ¥2,633,636 ¥ 44,069 ¥394,653 ¥19,501 ¥6,134,695 ¥ — ¥6,134,695 Intersegment sales 54,922 38,128 — 112 10,448 103,610 (103,610) — Total sales 3,097,758 2,671,764 44,069 394,765 29,949 6,238,305 (103,610) 6,134,695 Operating expenses 2,894,419 2,562,637 57,662 408,461 19,392 5,942,571 (104,381) 5,838,190 Operating income (loss) ¥ 203,339 ¥ 109,127 ¥ (13,593) ¥ (13,696) ¥10,557 ¥ 295,734 ¥ 771 ¥ 296,505 Assets ¥ 782,293 ¥2,765,948 ¥114,060 ¥311,190 ¥85,094 ¥4,058,585 ¥(185,989) ¥3,872,596 Depreciation and amortization other than goodwill 53,218 56,090 3,942 16,498 2,782 132,530 240 132,770 Impairment Loss 17 1,030 — 3,136 — 4,183 1,860 6,043 Amortization of goodwill 1,088 84,652 — 11,687 — 97,427 — 97,427 Capital expenditures 45,828 64,552 2,954 23,446 346 137,126 8 137,134
Operating expenses represent the aggregate amount of the cost of The domestic tobacco segment includes the sales by TS Network sales and selling, general and administrative expenses. Co., Ltd. Net sales of such imported tobacco products via TS Increase of long-term prepaid expenses is included in Capital expen- Network Co., Ltd. for the year ended March 31, 2009 and 2010 ditures and amortization expense of the long-term prepaid expenses is were ¥1,135,320 million and ¥1,084,321 million, respectively. included in depreciation and amortization other than goodwill.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 112 page 113 (2) Geographical Segments Millions of yen 2009 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers ¥3,672,004 ¥2,038,028 ¥1,122,275 ¥6,832,307 ¥ — ¥6,832,307 Intersegment sales 53,334 223,872 39,186 316,392 (316,392) — Total sales 3,725,338 2,261,900 1,161,461 7,148,699 (316,392) 6,832,307 Operating expenses 3,538,899 2,286,088 961,828 6,786,815 (318,314) 6,468,501 Operating income (loss) ¥ 186,439 ¥ (24,188) ¥ 199,633 ¥ 361,884 ¥ 1,922 ¥ 363,806 Assets ¥1,083,962 ¥2,378,679 351,080 ¥3,813,721 ¥ 66,082 ¥3,879,803 Amortization of goodwill 11,277 94,235 — 105,512 — 105,512
Millions of yen 2010 Western Elimination/ Japan Europe Others Total Corporate Consolidated Sales to customers ¥3,482,548 ¥1,677,755 ¥ 974,392 ¥6,134,695 ¥ — ¥6,134,695 Intersegment sales 59,889 196,601 34,326 290,816 (290,816) — Total sales 3,542,437 1,874,356 1,008,718 6,425,511 (290,816) 6,134,695 Operating expenses 3,357,884 1,914,645 858,222 6,130,751 (292,561) 5,838,190 Operating income (loss) ¥ 184,553 ¥ (40,289) ¥ 150,496 ¥ 294,760 ¥ 1,745 ¥ 296,505 Assets ¥1,031,911 ¥2,358,103 ¥ 433,866 ¥3,823,880 ¥ 48,716 ¥3,872,596 Amortization of goodwill 12,775 84,652 — 97,427 — 97,427
“Western Europe” includes Switzerland, United Kingdom and Germany while “Others” includes Canada, Russia and Malaysia. Operating expenses represent the aggregate amount of the cost of sales and selling, general and administrative expenses.
(3) Sales to Foreign Customers Millions of yen 2009 2010 Sales to foreign customers Western Europe ¥2,002,739 ¥1,646,648 Others 1,177,113 1,008,326 Total ¥3,179,852 ¥2,654,974 Consolidated sales ¥6,832,307 ¥6,134,695
Percentage of 2009 2010 Sales to foreign customers Western Europe 29.3 26.8 Others 17.2 16.5 Total 46.5 43.3
“Western Europe” includes Switzerland, United Kingdom and Germany while “Others” includes Canada, Russia and Malaysia.
22. Subsequent Event
JT decided by resolution at a meeting of the Board of Directors held loss on long-lived assets and other related costs are expected to on April 27, 2011, to approve the proposal of the management board arise due to those measures. These factors are expected to have an of Austria Tabak Gmbh, a consolidated subsidiary of JT, to close the impact of approximately EUR 80 million (¥9.4 billion) in the next Hainburg factory followed by a restructuring of the central office in fiscal year. Vienna. The payment of additional termination benefits, impairment
JAPAN TOBACCO INC. Annual Report 2011 page 114 Independent Auditors’ Report
To the Board of Directors of
Japan Tobacco Inc.:
We have audited the accompanying consolidated balance sheets of Japan Tobacco Inc. and consolidated subsidiaries (the “Company”) as of
March 31, 2011 and 2010, and the related consolidated statements of income for each of the three years in the period ended March 31, 2011, the consolidated statement of comprehensive income for the year ended March 31, 2011, and the related consolidated statements of changes in equity, and cash flows for each of the three years in the period ended March 31, 2011, all expressed in Japanese yen. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial Financial Information position of the Company as of March 31, 2011 and 2010, and the consolidated results of their operations and their cash flows for each of the three years in the period ended March 31, 2011, in conformity with accounting principles generally accepted in Japan.
Our audits also comprehended the translation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such U.S. dollar amounts are presented solely for the convenience of readers outside Japan.
June 24, 2011
JAPAN TOBACCO INC. Annual Report 2011 page 115 Financial Data 117 Fact Sheets Japanese Domestic Tobacco Business 125 International Tobacco Business 136 Pharmaceutical Business 138 Food Business 139 Number of Employees 140
Note: Financial data disclosed herein are basically rounded down.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 116 page 117 Financial Data
Net Sales Including (Billions of yen) 8,000 Excise Taxes 6,000
4,000
2,000
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total 4,544.1 4,492.2 4,625.1 4,664.5 4,637.6 4,769.3 6,409.7 6,832.3 6,134.6 6,194.5 Tobacco Business 4,178.0 4,134.4 4,236.9 Japanese Domestic 3,491.4 3,405.2 3,416.2 3,362.3 3,200.4 3,042.8 3,103.3 International 792.7 881.1 999.6 2,639.9 3,118.3 2,633.6 2,649.9 Pharmaceutical Business 61.8 53.9 51.2 57.6 49.2 45.4 49.0 56.7 44.0 46.9 Food Business 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6 375.0 Other Business 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 19.5 19.2
Net Sales Excluding (Billions of yen) 3,000 Excise Taxes 2,000
1,000
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total 2,041.9 2,007.5 2,019.8 2,013.9 2,008.7 2,051.0 2,587.3 2,827.1 2,514.1 2,486.1 Tobacco Business 1,675.8 1,649.7 1,631.5 Japanese Domestic 1,203.8 1,173.2 1,147.2 1,122.2 1,070.3 1,016.7 1,027.8 International 429.7 484.3 550.3 1,057.7 1,243.3 1,039.1 1,017.0 Pharmaceutical Business 61.8 53.9 51.2 57.6 49.2 45.4 49.0 56.7 44.0 46.9 Food Business 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6 375.0 Other Business 83.0 71.4 86.8 57.2 23.5 21.4 21.8 20.7 19.5 19.2 Adjusted Net Sales Excluding Excise Taxes(*) Total 2,243.1 1,980.9 1,956.6 Tobacco Business Japanese Domestic 648.8 615.9 617.9 International 1,080.8 906.7 897.4 * Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business
(Billions of yen)
SG&A Expenses Fact Sheets 1,000
750
500
250
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m SG&A 781.5 733.9 707.1 677.4 596.6 592.6 750.2 914.1 815.5 791.7 Personnel (*) 222.7 209.7 205.3 183.9 150.8 158.5 206.0 231.5 216.0 217.3 Advertising and General Publicity 40.2 35.7 35.4 27.4 23.9 23.4 22.9 25.6 21.9 20.8 Sales Promotion 155.2 142.0 141.7 140.1 142.1 128.0 163.6 162.3 143.7 140.7 R&D 52.6 44.5 42.1 40.4 37.5 41.2 45.1 47.2 49.6 53.3 Depreciation 59.5 56.7 56.7 54.2 53.4 57.4 80.3 113.0 72.5 60.8
* Personnel expense is the sum of compensation, salaries, allowances, provision for retirement benefits, statutory benefits, employee bonuses and accrual of employee bonuses
JAPAN TOBACCO INC. Annual Report 2011 page 117 R&D Expenses (Billions of yen) 60
40
20
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m R&D 52.7 44.5 42.2 40.5 37.5 41.2 45.1 47.2 49.6 53.3 Tobacco Business 14.5 14.8 16.6 Japanese Domestic 16.1 15.1 15.1 15.8 17.7 18.9 19.4 International 2.1 0.9 1.3 3.3 3.8 6.1 5.2 Pharmaceutical Business 35.4 27.1 23.7 20.5 19.9 23.4 24.4 23.8 23.1 27.1 Food Business 0.7 1.2 1.0 1.0 0.8 0.7 0.7 1.1 0.7 0.7 Other Business 0.7 0.6 0.1 0.0 — — — — — —
Note: R&D expense in FY2002–2005 includes expenses posted as manufacturing cost
EBITDA (Billions of yen) 750
500
250
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m EBITDA 334.1 337.2 373.4 400.1 433.3 464.6 602.0 646.2 526.7 541.1 Tobacco Business 320.9 321.4 343.1 Japanese Domestic 296.0 305.7 326.4 306.7 272.2 251.2 257.6 International 65.4 94.0 112.6 270.7 337.9 277.6 288.1 Pharmaceutical Business (8.5) (5.1) (4.4) 5.4 (1.8) (8.1) (6.2) 4.8 (9.6) (13.2) Food Business 2.2 0.5 3.3 7.9 11.8 12.0 8.3 17.0 14.4 17.2 Other Business 19.6 19.6 30.6 26.8 22.1 21.5 22.0 13.1 13.3 12.9
Note: EBITDA = operating income + depreciation and amortization From FY2011 accounting standard for segment information disclosures was implemented and the data of FY2010 was revised.
Operating Income (Billions of yen) 500 400 300 200
100 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Operating Income 163.8 188.9 234.0 273.3 306.9 331.9 430.5 363.8 296.5 328.6 Tobacco Business 192.1 213.3 238.4 Japanese Domestic 215.8 220.0 245.3 222.3 188.2 198.7 212.9 International 44.4 71.0 81.0 205.3 174.7 136.9 156.1 Pharmaceutical Business (18.9) (13.8) (12.8) 1.8 (5.0) (11.2) (9.6) 1.0 (13.5) (17.4) Food Business (11.8) (13.1) (4.8) 1.9 6.3 6.7 0.6 (11.4) (13.6) (9.4) Other Business 1.7 0.9 11.9 10.4 8.6 9.3 10.4 9.6 10.5 9.9
Note: From FY2011 accounting standard for segment information disclosures was implemented and the data of FY2010 was revised.
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 118 page 119 Non-Operating Income (Billions of yen) 50 and Expenses 25 0 –25 –50 –75 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Non-Operating Income and Expenses (7.1) (15.7) (20.4) (3.1) (9.1) (19.9) (67.8) (56.2) (41.1) (16.1) Non-Operating Income 11.2 9.3 10.3 15.9 12.6 16.0 21.5 30.3 15.6 12.0 Financial Income (*1) 4.7 3.7 3.2 3.3 5.9 12.1 13.4 12.2 6.9 3.0 Non-Operating Expenses 18.3 25.0 30.7 19.0 21.7 35.9 89.4 86.5 56.7 28.2 Financial Expense (*2) 10.2 8.7 8.1 5.1 5.7 6.9 42.0 51.3 26.3 17.2
*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.
Recurring Profit (Billions of yen) 400
300
200
100
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Recurring Profit 156.6 173.2 213.5 270.2 297.8 312.0 362.6 307.5 255.3 312.4
Extraordinary Profit (Billions of yen) 50 and Loss 0 –50 –100 –150 –200 Fact Sheets –250 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Extraordinary Profit and Loss (58.4) (30.7) (221.2) (168.9) 3.1 25.1 9.9 (45.4) 20.6 (31.9) Extraordinary Profit 30.0 18.3 29.3 79.2 65.4 50.8 68.9 48.3 58.5 20.6 Gain on Sale of Property, Plant and Equipment 28.2 15.4 17.2 73.3 60.0 47.5 66.7 46.4 32.3 12.1 Extraordinary Loss 88.5 49.0 250.5 248.2 62.3 25.7 59.0 93.8 37.8 52.5 Loss on Sale of Property, Plant and Equipment 2.2 2.6 4.8 2.2 24.8 3.1 3.2 2.1 4.2 0.8 Loss on Disposal of Property, Plant and Equipment 9.3 9.8 10.8 13.6 12.2 10.4 6.3 11.5 6.3 7.2 Business Restructuring Costs 13.4 11.4 40.8 224.8 8.0 — 6.4 24.3 9.9 4.3 Impairment Loss — — — 0.1 11.4 2.7 3.8 16.3 6.0 5.2
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 0.9 Damages related to the Great East Japan Earthquake ————————— 10.9 Note: Extraordinary loss in FY2004 includes ¥185 billion of one-time loss on recognition of obligations under the Public Official Mutual Assistance Association Law
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 118 page 119 Net Income (Loss) (Billions of yen) 300
200
100
0
–100 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Net Income (Loss) 36.8 75.3 (7.6) 62.5 201.5 210.7 238.7 123.4 138.4 144.9
Earnings per Share (EPS) (Yen) 100,000
75,000 50,000 25,000
0 –25,000 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m EPS 18,425 37,527 (3,966) 32,089 105,084 22,001 24,916 12,880 14,451 15,141 Diluted EPS 12,879 14,448 15,136
Note: A 5 for 1 stock split went into effect on April 1, 2006
Return on Equity (ROE) (%) 15.0
10.0
5.0
0
–5.0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 mc ROE 2.4 4.7 (0.5) 4.2 12.4 11.3 11.8 6.8 8.6 9.2
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 120 page 121 Return on Assets (ROA) (%) 12
8
4
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
mc ROA 5.4 6.4 7.9 9.2 10.4 10.7 10.5 8.4 7.8 8.9
Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period]
Free Cash Flow (FCF) (Billions of yen) 300 200 100 0 500 1,000 –1,500 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m FCF 31.4 170.3 269.1 269.4 145.5 223.0 (1,493.7) 240.1 250.7 299.7
Note: 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)
(Billions of yen)
Capital Expenditure Fact Sheets 150 (CAPEX) 100
50
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Capital Expenditure 96.5 109.1 90.8 85.1 98.9 102.1 129.5 134.2 137.1 146.0 Tobacco Business 70.0 60.9 60.5 Japanese Domestic 46.4 75.0 55.2 57.2 46.5 42.6 55.9 International 18.7 24.9 32.0 48.4 59.7 64.5 60.9 Pharmaceutical Business 2.2 1.1 2.6 3.1 2.1 3.0 4.2 3.4 2.6 2.8 Food Business 6.9 7.2 9.1 7.3 4.5 4.8 6.0 23.2 23.4 25.0 Other Business 18.1 38.8 18.0 10.6 19.3 8.0 14.7 1.1 0.3 0.5
Note: CAPEX = Tangible Assets + Intangible Assets + Long-Term Prepaid Expenses
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 120 page 121 Depreciation & (Billions of yen) 300 Amortization 200
100
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Depreciation & Amortization 170.3 148.3 139.4 126.7 126.4 132.6 171.5 282.4 230.1 212.4 Tobacco Business 128.8 108.0 104.7 Japanese Domestic 80.1 85.6 81.0 84.3 84.0 52.4 44.6 International 21.0 23.0 31.5 65.3 163.1 140.7 132.0 Pharmaceutical Business 10.4 8.7 8.4 3.6 3.2 3.0 3.3 3.8 3.9 4.1 Food Business 14.1 13.7 8.1 5.9 5.5 5.3 7.6 28.4 28.1 26.6 Other Business 17.8 18.7 18.6 16.3 13.4 12.2 11.6 3.4 2.7 2.9
Note: Depreciation & Amortization = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets + Amortization of Long-Term Prepaid Expenses + Amortization of Goodwill
Total Assets (Billions of yen) 5,000 4,000 3,000 2,000 1,000 0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total Assets 3,063.0 2,957.6 3,029.0 2,982.0 3,037.3 3,364.6 5,087.2 3,879.8 3,872.5 3,571.9 Tobacco Business 2,309.5 2,153.0 2,122.2 Japanese Domestic 1,298.2 1,131.7 1,180.3 847.1 788.6 782.2 732.3 International 838.5 994.8 1,275.0 3,804.4 2,700.0 2,765.9 2,362.9 Pharmaceutical Business 125.2 114.7 114.3 117.8 117.9 106.1 111.4 111.5 114.0 104.9 Food Business 133.2 135.3 141.4 141.6 141.4 158.8 353.2 332.6 311.1 273.0 Other Business 190.1 236.5 250.2 197.0 194.4 249.6 90.0 87.4 85.0 85.4
Note: From FY2011 accounting standard for segment information disclosures was implemented.
Total Equity and (Billions of yen) (%) 2,500 80 Equity Ratio 2,000 70 1,500 60 1,000 50 500 40 0 30 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total Equity 1,613.1 1,622.6 1,507.9 1,498.2 1,762.5 2,024.6 2,154.6 1,624.2 1,723.2 1,591.2 mc Equity Ratio 52.7 54.9 49.8 50.2 58.0 58.3 40.8 40.0 42.6 42.4
Note: Total Equity in FY2002–2006 excludes Minority Interests
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 122 page 123 Book Value per Share (Yen) 1,000,000 (BPS) 800,000 600,000 400,000 200,000 0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m BPS 806,552 811,204 771,516 781,813 919,780 204,617 216,707 162,087 172,139 159,039
Notes: 1. Total Equity in FY2002–2006 excludes Minority Interests 2. A 5 for 1 stock split went into effect on April 1, 2006
Liquidity and (Billions of yen) 1,500 Interest-Bearing Debt 1,200 900 600 300 0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Liquidity (*1) 550.7 623.5 798.4 863.6 979.6 1,185.6 218.8 169.8 167.3 276.5 m Interest-Bearing Debt (*2)(*3) 511.7 424.4 381.2 230.7 216.6 219.2 1,389.2 996.0 874.3 708.7
*1 Liquidity = Cash and deposits + Marketable securities + Commercial Paper received under repurchase agreement *2 Interest-Bearing Debt = Short-term Debt (includes current portion of Bonds and current portion of Long-term Debt) + Bonds + Long-term Debt *3 Interest-Bearing Debt includes lease obligation from FY2009
(Times)
Debt / Equity Ratio Fact Sheets 0.8
0.6
0.4
0.2
0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
mc Debt / Equity Ratio 0.32 0.26 0.25 0.15 0.12 0.11 0.67 0.64 0.53 0.47
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 122 page 123 Interest Coverage Ratio (Times) 60
40
20
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 mc Interest Coverage Ratio 16.5 22.1 29.3 54.2 54.9 49.9 10.6 7.3 11.5 19.2
Note: Interest Coverage Ratio = (Operating Income + Financial Income) / Financial Expense
Annual Dividends (Yen) 16,000 per Share 12,000
8,000
4,000
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Annual Dividends per Share 8,000 10,000 10,000 13,000 16,000 4,000 4,800 5,400 5,800 6,800 (Retroactively Adjusted) 1,600 2,000 2,000 2,600 3,200
Note: A 5 for 1 stock split went into effect on April 1, 2006
Dividend Payout Ratio on (%) 100 a Consolidated Basis 50
0
–150
–300 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 mc Dividend Payout Ratio 43.4 26.6 (252.1) 40.5 15.2 18.2 19.3 41.9 40.1 44.9 mc Goodwill amortization adjusted 18.0 19.0 22.6 23.6 27.6
Note: Payout Ratio before goodwill amortization
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 124 page 125 Japanese Domestic Tobacco Business
Total Domestic Market (Billions of cigarettes) 400
300
200
100
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total Domestic Market 319.3 312.6 299.4 292.6 285.2 270.0 258.5 245.8 233.8 210.1
Source: Tobacco Institute of Japan
JT Sales Volume and (Billions of cigarettes) (%) 250 100 JT Share 200 90 150 80 100 70 50 60 0 50 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m JT Sales Volume 237.2 229.0 218.3 213.2 189.4 174.9 167.7 159.9 151.8 134.6
mc JT Share 74.3 73.3 72.9 72.9 66.4 64.8 64.9 65.1 64.9 64.1
(Billions of cigarettes)
Sales Volume of Fact Sheets 6 China Division and Domestic Duty-Free 4
2
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Sales Volume 5.8 6.0 5.4 5.1 3.2 3.4 3.5 3.6 3.6 3.5
Note: China Division covers China, Hong Kong, and Macau markets
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 124 page 125 Market Share (%) 80 by JT Brand Family
60
40
20
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Mild Seven 33.2 32.5 32.6 32.9 32.2 31.6 32.0 32.3 32.1 31.8 m Seven Stars 8.2 8.3 8.4 8.3 8.7 9.0 8.9 9.3 9.6 9.2 m Caster 7.8 7.5 7.1 6.6 6.3 6.0 5.9 5.9 5.7 5.4 m Cabin 4.7 4.4 4.1 4.2 4.0 4.0 4.0 3.8 3.9 3.5 m Peace 3.0 3.0 3.0 2.9 2.9 2.8 2.8 2.8 2.7 2.5 m Pianissimo (*) — — — — 2.8 3.1 3.2 3.3 3.4 3.6 m Hope 2.1 2.0 2.0 2.1 2.1 2.0 2.0 2.0 2.0 1.9 m Frontier 2.8 2.6 2.2 1.9 1.7 1.5 1.4 1.2 1.1 1.0 m Other Brands 12.5 13.0 13.5 14.0 5.7 4.8 4.7 4.5 4.4 5.2
Retrospective of market share figures for “icene” and “Lucia,” which were integrated into Pianissimo family on January 2010
Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2011)
Product Brand Owner Share (%) 1 SEVEN STARS JT 4.8 2 MILD SEVEN SUPER LIGHTS JT 4.3 3 MILD SEVEN LIGHTS JT 3.4 4 MILD SEVEN ONE 100’s BOX JT 3.4 5 MILD SEVEN JT 2.9 6 MILD SEVEN EXTRA LIGHTS JT 2.7 7 MARLBORO LIGHTS MENTHOL BOX PMJ 2.6 8 CASTER MILD JT 2.1 9 SEVEN STARS BOX JT 1.9 10 MILD SEVEN ONE JT 1.6 11 CABIN MILD BOX JT 1.5 12 CASTER ONE 100’s BOX JT 1.5 13 KENT 1 100’s BOX BATJ 1.5 14 MILD SEVEN SUPER LIGHTS 100’s BOX JT 1.5 15 MILD SEVEN EXTRA LIGHTS BOX JT 1.4 16 MARLBORO KS BOX PMJ 1.4 17 PIANISSIMO ONE JT 1.3 18 MILD SEVEN ONE BOX JT 1.3 19 ECHO JT 1.3 20 MARLBORO GOLD ORIGINAL BOX PMJ 1.2 Source: Tobacco Institute of Japan
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 126 page 127 Market Share by Tar Level (%) 100 (Market Share in Top 100 Sales Products) 80 60 40
20 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m 1 mg 14.0 14.6 16.1 18.4 19.9 21.2 22.7 24.0 24.3 23.6 m 2–3 mg 7.9 7.5 6.6 6.7 7.4 7.0 8.2 8.5 8.6 8.7 m 4–6 mg 24.0 23.8 23.5 23.1 23.2 23.4 23.0 22.4 21.0 20.8 m 7–13 mg 40.8 40.9 40.3 39.8 37.7 36.3 34.1 32.9 33.6 33.8 m 14 mg or Higher 13.4 13.3 13.4 12.1 11.9 12.1 12.1 12.2 12.5 13.2
Source: Tobacco Institute of Japan
Market Share by Tar Level (%) 80 (JT Products) 60
40
20
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m 1 mg 6.0 6.1 7.2 8.5 11.7 12.9 14.0 14.7 15.1 15.4 m 2–3 mg 5.8 5.9 5.4 5.9 6.6 6.7 6.7 6.9 7.0 7.1 m 4–6 mg 17.9 17.3 17.0 16.5 14.5 13.9 14.2 14.2 13.6 12.8 m 7–13 mg 32.0 31.6 30.9 30.0 22.0 19.7 18.5 17.8 17.7 16.8 m 14 mg or Higher 12.5 12.5 12.4 12.0 11.6 11.6 11.5 11.5 11.5 12.0
(%)
Menthol Products Fact Sheets 20 Market Share 15
10
5
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 ( ) mc Menthol Products * 11.3 12.7 14.0 16.4 17.2 17.4 19.3 19.8 19.8 21.0
mc Menthol JT Products 6.4 6.8 7.6 8.9 7.0 6.8 7.4 7.6 8.0 8.3
* Market Share in top 100 sales products Source: Tobacco Institute of Japan
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 126 page 127 Products Priced at ¥440 or (%) 12 more per pack and D-spec Products 9 Market Share 6 3
0 (Years ended March 31) 2003 2004 2005 2006 2007 2008 2009 2010 2011 mc JT Products Priced at ¥440 or more per pack (*1) 10.2 11.1 11.8 6.3 5.5 5.4 5.2 5.1 9.3 ( 2) mc D-spec Products * 0.01 0.38 0.93 1.72 4.04 4.59 4.96 5.21 10.7
*1 ~ Jun. 03: ¥280 or more, Jul. 03 ~ Jun. 06: ¥300 or more, Jul. 06 ~ Sep. 10 ¥320 or more *2 D-spec products, reduced odor segment products (known as “Less Smoke Smell” products abroad), incorporate the company’s odorreducing technology in response to customer demands for a reduction in the unpleasant smell of smoke
JT Net Sales Excluding (Yen) 4,700 Excise Taxes per Thousand Cigarettes 4,400
4,100
3,800 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 mc JT Net Sales Excluding Excise Taxes Per Thousand Cigarettes 3,850 3,856 3,908 3,941 3,864 3,990 4,057 4,057 4,056 4,582
Note: JT Net sales excluding excise taxes 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 Price Range 80 60 40
20 0 (Years ended March 31) 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Products Priced at ¥440 or more per pack *1 12.1 14.7 16.1 9.5 8.5 8.3 8.0 7.9 14.7 m Products Priced at ¥410 per pack *2 22.5 26.9 28.7 30.7 63.2 78.7 79.2 79.5 74.6 m Products Priced at ¥400 or less per pack *2 61.6 57.4 55.1 59.8 28.3 13.1 12.8 12.6 10.7
*1 ~ Nov. 98: ¥240 or more, Dec. 98 ~ Jun. 03: ¥260 or more, Jul. 03 ~ Jun. 06: ¥280 or more, Jul. 06 ~ Sep. 10: ¥320 or more *2 ~ Nov. 98: ¥230 or less, Dec. 98 ~ Jun. 03: ¥250 or less, Jul. 03 ~ Jun. 06: ¥270 or less, Jul. 06 ~ Sep. 10: ¥290 or less
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 128 page 129 New Product Launches and Sales Area Expansion
Year ended March 31, 2011 (8 products) (D-spec: two product, Menthol: two products, Tar 1mg: three products, Products at ¥440 or more per pack: two products) Tar Nicotine Date Product D-spec Menthol Price Sales Region (mg) (mg) Apr-10 Seven Stars Black Impact Box 10 0.8 440 Nationwide May-10 Zerostyle Mint 410 Tokyo Jun-10 Winston Lights 6 Box 6 0.5 400 Nationwide Jun-10 Winston Extra 3 Box 3 0.3 400 Nationwide Jun-10 Winston Ultra One 100’s Box. 1 0.1 400 Nationwide Jul-10 Mild Seven Aqua Squash Menthol 7 Box 7 0.6 410 Nationwide Nov-10 Pianissimo Super Slims Menthol One 1 0.1 440 Nationwide Jan-11 Mild Seven D-SPEC One 100’s Box 1 0.1 410 Nationwide
Number of 20 New Products Launches 15
10
5
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Number of New Products Launches 7 4 14 18 14 9 3 6 7 8
Number of Fact Sheets 120 JT Cigarette Products 90
60
30
0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Number of JT Cigarette Products 102 98 93 95 117 106 94 96 98 96
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 128 page 129 Smoking Rate (by gender) (%) 60 50 40 30
20 10 (At the time of survey) 2001 2002 2003 2004 2005 2006* 2007 2008 2009 2010 mc All Adults 32.7 30.9 30.3 29.4 29.2 26.3 26.0 25.7 24.9 23.9 mc Male 52.0 49.1 48.3 46.9 45.8 41.3 40.2 39.5 38.9 36.6 mc Female 14.7 14.0 13.6 13.2 13.8 12.4 12.7 12.9 11.9 12.1
Source: JT “Japan Smoking Rate Survey” * The survey method, along with the sample number, was modified from 2006, resulting in a lack of comparability with results prior to 2006
Smoking Rate (by age) (%) 50 40 30 20 10 0 (Survey in 2010) Total 20s 30s 40s 50s over-60s m Male 36.6 38.3 43.4 43.3 42.9 26.2 m Female 12.1 15.1 16.0 16.8 14.0 7.0
Source: JT “Japan Smoking Rate Survey”
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 130 page 131 Taxation All tobacco products sold in Japan are subject to the national tobacco a 5% consumption tax is imposed as with other goods and services. excise tax, the national tobacco special excise tax, and local tobacco All tobacco excise taxes and consumption tax are imposed not only for excise tax. The national tobacco excise tax is set at ¥5,302 per thou- tobacco products manufactured in Japan but also for imported tobacco sand cigarettes, the national tobacco special excise tax at ¥820 per products. From April 1987, no customs duties apply to imported thousand cigarettes, and the local tobacco excise tax is set at ¥6,122 tobacco products. per thousand cigarettes. In addition, under the Consumption Tax Law,
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 Item 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 (%) 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 • Consumption • Consumption • National • Review of • Tobacco • Tobacco • Tobacco Changes Tax was introduced tax base for Ad valorem Tax was Tax was Tobacco budget Excise Tax Excise Tax Excise Tax • Tobacco Consumption introduced increased Special Excise allocations in was increased was increased was increased Tax was increased • Tobacco Tax was line with a Consumption introduced revision Tax was of laws renamed Tobacco Excise Tax
(Reference) Retail Price of Mild Seven per pack ¥200 ¥220 ¥220 ¥230 ¥250 ¥250 ¥270 ¥300 ¥410 Tax Incidence of Mild Seven 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 Fact Sheets 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 Retail price Excise Tax ¥106.0 26.51% ¥106.0 25.86% ¥106.0 24.10% Net sales sales ¥122.4 30.61% ¥122.4 29.86% ¥122.4 27.83% Local Tobacco Excise Tax including National Tobacco Special Net sales excise taxes Excise 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
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 130 page 131 Tobacco Manufacturing System
Leaf processing factory International leaf tobacco Domestic Packing Threshing Drying Storing leaf tobacco into a case
Decompose leaves into Dry leaves to adjust Pack dried-leaves in Ripen leaves for a mesophyll and vein. moisture content an appropriate portion certain period. appropriate for storing for storing and and ripening. transporting.
Cigarette manufacturing factory
Customer Retailer Packaging Rolling Flavoring Cutting Blending
Pack cigarettes into Roll cigarettes. Add aromatic Cut leaves into Blend several leaves. parcels or cartons and essences called top smaller pieces. cardboard boxes. dressing.
Number of Domestic 25 Cigarette Manufacturing 20 Factories 15 10
5 0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Domestic Cigarette Manufacturing Factories 25 25 22 18 10 10 10 10 9 7
Tobacco Manufacturing-related Factory Location As of March 31, 2011
Cigarette manufacturing factories: 7 Other tobacco related factories: 4
Koriyama factory
Kita-Kanto factory Tomobe factory
Hiratsuka factory Odawara factory (closed on March 31, 2011) Tokai factory Okayama printing factory
Hofu factory (to be closed on March 31, 2012) Hamamatsu factory Kansai factory Kyushu factory
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 132 page 133 Tobacco Sales System
Customers
sales
direct sales JT Retailers Wholesalers registration for the wholesale approval licensing requirement for selling 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 Companies
Number of (Thousands of stores) 300 Tobacco Retailers 200
100
0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Tobacco Retailers 307 307 305 304 304 302 298 293 289 279
Source: Ministry of Finance
(Thousands)
Number of Tobacco Fact Sheets 800 Vending Machines 600
400
200
0 (As of December 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Total Tobacco Vending Machines 629 629 626 622 616 565 520 424 405 367
Source: Japan Vending Machine Manufacturers Association
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 132 page 133 Number of Tobacco (Thousands) 300 Vending Machines
(JT Tobacco Vending Machines) 200
100
0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m JT Tobacco Vending Machines 251 254 237 226 243 228 207 196 185 150
Number of Domestic (Thousands of growers) (Thousands of hectares) 25 25 Tobacco Growers and 20 20 Area under Domestic Leaf 15 15 Tobacco Cultivation 10 10 5 5 0 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Number of Domestic Tobacco Growers 21 20 20 18 14 14 13 13 12 11 mc Area under Domestic Leaf Tobacco Cultivation 23 23 22 21 19 18 17 16 15 14
Volume of Domestic and (Thousands of tons) 100 International Leaf Tobacco 80 Purchase 60 40 20 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Domestic 60 58 50 52 46 37 37 38 36 29 m International 100 85 90 85 39 60 68 73 71 58
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 134 page 135 Value of Domestic Leaf (Billions of yen) (Yen) 200 2,000 Tobacco Purchase and Price per 1 kg 150 1,500 100 1,000
50 500
0 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Amount 114.7 109.2 93.1 98.0 84.3 68.5 69.2 69.4 68.0 54.1
mc Price per 1 kg 1,895 1,878 1,839 1,862 1,801 1,818 1,833 1,803 1,859 1,849
Leaf Tobacco Reappraisal (Billions of yen) 10 Profit / Loss 5
0
–5
–10 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Leaf Tobacco Reappraisal 1.9 0.7 6.6 (9.8) (9.5) 9.5 4.1 4.1 4.1 —
Note: ( ) indicates reappraisal loss Fact Sheets
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 134 page 135 International Tobacco Business
Tobacco Shipment Volume (Billions of cigarettes) 500 (by Brand)
400
300
200
100
0 (Years ended December 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 215.1 203.3 198.8 212.4 220.3 240.1 385.6 452.3 434.9 428.4 GFB Total 107.8 109.8 117.5 131.4 133.8 149.1 203.2 245.5 243.4 249.8 m Winston 43.0 48.0 55.9 70.1 76.4 93.9 111.0 126.4 121.2 125.0 m Camel 36.0 34.0 34.8 35.1 35.2 35.4 38.6 42.3 41.6 42.2 m Mild Seven 18.0 17.0 17.2 17.2 17.5 17.5 16.8 18.8 18.2 19.3 m Benson & Hedges 8.3 11.2 10.7 10.7 m Silk Cut 3.9 5.2 4.8 4.4 m LD 17.5 29.0 34.3 36.4 m Sobranie 1.2 2.3 1.4 1.3 m Glamour 5.9 10.3 11.1 10.7 m Other Brands 107.3 93.5 81.3 81.0 86.5 91.0 182.4 206.8 191.5 178.6
Notes: 1. Shipment volume in the China Division (China, Hong Kong, and Macau) was included in 2000 and 2001, but excluded after 2001 2. GFB in FY2000–2006: Winston, Camel, Mild Seven, Salem GFB after FY2006: Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour 3. FY2009 –: Total shipment volume includes cigars, pipe tobacco and snus, but does not include contract manufactured products
Tobacco Shipment Volume (Billions of cigarettes) 500 (by Region)
400
300
200
100
0 (Years ended December 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Total 215.1 203.3 198.8 212.4 220.3 240.1 m Asia 42.0 39.0 40.4 40.6 33.5 29.1 m Europe 38.0 38.0 36.9 38.1 39.2 44.1 m Americas 11.0 10.0 9.9 9.9 9.3 8.8 m CIS & Others 124.0 116.0 111.6 123.8 138.3 158.0 Total 240.1 385.6 452.3 434.9 428.4 m North & Central Europe 5.7 39.3 50.8 47.5 49.0 m CIS+ 108.6 195.1 219.7 214.6 203.6 m South & West Europe 40.1 55.2 64.0 64.5 63.2 m Rest-of-the-World 85.7 95.9 117.7 108.4 112.7
Notes: 1. Shipment volume in the China Division (China, Hong Kong and Macau) were included in 2001, but excluded after 2001 2. FY2009 –: Total shipment volume includes cigars, pipe tobacco and snus, but does not include contract manufactured products
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 136 page 137 Net Sales Excluding Taxes (U.S. dollars) 25 per Thousand Cigarettes 20 15 10
5 0 (Years ended December 31) 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 m Net Sales Excluding Excise Taxes per Thousand Cigarettes 14.0 15.0 17.4 18.6 19.9 19.7 20.8 23.6 m Core Net Sales Excluding Excise Taxes per Thousand Cigarettes 24.0 22.5 24.0
Notes: 1. Net sales in the China Division (China, Hong Kong, and Macau) were included in 2001, but excluded after 2001 2. Core net sales excluding excise taxes per thousand cigarettes are based on total volume, including cigars, pipe tobacco and snus, but excluding contract manufactured products, and joint ventures. (the revenues of which are not included for these purposes)
Number of 40 International Factories 30
20
10
0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m International Cigarette / OTP Manufacturing Factories 16 15 15 15 15 15 29 28 24 24 m Other Tobacco Related Factories 1 1 1 1 2 2 2 2 5 5 Fact Sheets
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 136 page 137 Pharmaceutical Business
R&D Expense on a (Billions of yen) 40 Non-consolidated Basis 30
20
10
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m R&D Expense on a Non-consolidated Basis 34.5 26.4 23.1 20.1 19.3 21.9 22.9 23.2 21.9 21.6
Clinical Development (As of May 12, 2011) Code Stage Key Indication Mechanism Characteristics Rights JTT-705 Phase 2 Dyslipidemia CETP modulator Decreases LDL and increases HDL by modulation of Roche (Switzerland) (oral) (Japan) CETP activity obtained the rights to –CETP: Cholesteryl Ester Transfer Protein, facilitates develop and commercialize transfer of cholesteryl ester from HDL to LDL the compound worldwide, with the exception of Japan. –HDL: High-density lipoprotein (“good cholesterol”) (Development stage by –LDL: Low-density lipoprotein (“bad cholesterol”) Roche: Phase 3) JTT-130 Phase 2 Dyslipidemia MTP inhibitor Treatment of dyslipidemia by reducing absorption of (oral) (Japan) cholesterol and triglycerides via inhibition of MTP Phase 2 –MTP: Microsomal Triglyceride Transfer Protein (Overseas)
JTK-303 Phase 1 HIV infection Integrase Integrase inhibitor which works by blocking integrase, Gilead Sciences (US) (oral) (Japan) inhibitor an enzyme that is involved in the replication of HIV obtained the rights to –HIV: Human Immunodeficiency Virus develop and commercialize this compound worldwide, with the exception of Japan. (Development stage by Gilead Sciences: Phase 3) JTT-302 Phase 2 Dyslipidemia CETP inhibitor Decreases LDL and increases HDL by inhibition of CETP (oral) (Overseas) –CETP: Cholesteryl Ester Transfer Protein, facilitates transfer of cholesteryl ester from HDL to LDL –HDL: High-density lipoprotein (“good cholesterol”) –LDL: Low-density lipoprotein (“bad cholesterol”) JTT-305 Phase 2 Osteoporosis CaSR antagonist Increases BMD and decreases new vertebral fractures Merck (US) obtained the (oral) (Japan) by accelerating endogenous PTH secretion via rights to develop and com- antagonism of circulating Ca on CaSR in parathyroid cells mercialize this compound –BMD: Bone Mineral Density worldwide, with the excep- tion of Japan. –PTH: Parathyroid Hormone –CaSR: Calcium-Sensing Receptor JTS-653 Phase 2 Pain Overactive TRPV1 Improves pain and overactive bladder via antagonism of (oral) (Japan) bladder antagonist TRPV1 on sensory neurons –TRPV1: Transient Receptor Potential Vanilloid subtype 1 JTK-656 Phase 1 HIV infection Integrase Integrase inhibitor which works by blocking integrase, (oral) (Overseas) inhibitor an enzyme that is involved in the replication of HIV –HIV: Human Immunodeficiency Virus JTT-751 Phase 3 Hyperphosphatemia Phosphate Decreases serum phosphorous level by binding JT obtained the rights to (oral) (Japan) binder phosphate derived from dietary in the gastrointestinal develop and commercialize tract this compound in Japan from Keryx Biopharmaceuticals (US). (Developed jointly with Torii) JTK-853 Phase 1 Hepatitis C HCV RNA Treatment of Hepatitis C by inhibiting HCV (oral) (Overseas) polymerase RNA- polymerase which relates to viral inhibitor proliferation JTT-851 Phase 1 Type 2 diabetes G protein- Decreases blood glucose by stimulation of glucose- (oral) (Japan) mellitus coupled receptor dependent insulin secretion 40 agonist
*Based on the first dose
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 138 page 139 Food Business
Net Sales (Billions of yen) 500 400 300 200 100 0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Food Business 221.1 232.4 250.1 265.3 278.3 286.5 336.4 435.9 394.6 375.0 Processed Foods (*) 48.0 60.0 73.6 87.8 93.0 95.7 141.4 248.6 208.5 182.6 Beverages 173.1 172.3 176.5 177.4 185.3 190.7 194.9 187.3 186.1 192.4
* From FY2003, JTDS and HANS were included in Processed Foods, and the data for was adjusted 2002. In addition, JT had decided to commence proceedings to dissolve Australian chilled processed foods subsidiaries such as HANS and others on November 28, 2008. The financial results of those subsidiaries were excluded from the consolidated results since December, 2008. Therefore FY 3/2009 includes 8 months of net sales.
Number of Marking / (Machines) 120,000 Combined Vending Machines 90,000 60,000
30,000
0 (Years ended March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Vending Machines 190,000 201,000 211,000 226,000 237,000 250,500 257,000 254,000 257,000 265,000 m JT-Owned 36,500 45,500 45,000 44,500 40,500 38,000 35,500 32,000 33,000 33,000 m Combined 38,500 43,500 50,500 54,000 61,500 66,000 71,500 76,500 82,000 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 Fact Sheets
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 138 page 139 Number of Employees
Number of Employees (Employees) 50,000 40,000 30,000 20,000 10,000 0 (As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Total 39,387 38,628 39,243 32,640 31,476 33,428 47,459 47,977 49,665 48,472 Tobacco Business 29,860 28,946 28,504 24,350 Japanese Domestic 11,795 11,534 11,548 11,281 11,282 11,191 International 11,943 12,401 22,324 23,227 24,751 23,902 Pharmaceutical Business 1,580 1,530 1,551 1,566 1,532 1,554 1,569 1,616 1,634 1,664 Food Business 4,097 4,581 5,409 5,357 5,232 7,084 11,169 10,975 11,143 10,864 Other Business 2,707 2,437 2,608 706 604 461 441 429 352 — Corporate 1,143 1,134 1,171 661 370 394 408 449 503 851 Note: Number of employees is counted at working basis, unless otherwise indicated
(As of March 31) 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 m Number of Employees (parent company) 14,462 14,172 13,769 10,124 8,855 8,930 8,999 8,908 8,961 8,928 Number of Employees Based on Enrollment (parent company) 17,815 17,272 16,690 11,300 9,931 9,984 10,010 9,973 9,883 9,842
(As of December 31) 2001 2002 2003 2004 JT International (Thousands of Employees) (*) 11.7 11.6 11.9 12.0
* From FY2006, the data is disclosed as those of international tobacco business
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 140 page 141 Shareholder Information (As of March 31, 2011)
Common Stock Note: A 5 for 1 stock split was completed on April 1, 2006
Authorized: 40,000,000 Issued: 10,000,000 Number of shareholders: 58,151
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 First Sections of Nagoya Stock Exchange Fukuoka Stock Exchange Sapporo Securities Exchange
Principal Shareholders Name Shares held The Minister of Finance 5,001,345 Japan Trustee Services Bank, Ltd. (Trust Account) 256,502 State Street Bank And Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 224,116 The Master Trust Bank of Japan, Ltd. (Trust Account) 222,931 Mizuho Trust and Banking Co., Ltd., re-trusted to Trust & Custody Services Bank, Ltd., as retirement benefit trust assets 169,000 The Chase Manhattan Bank 385036 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 85,107 Mellon Bank N.A. as Agent for Its Client Mellon Omnibus U.S. Pension (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 80,675 State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 78,317 HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 68,367 State Street Bank and Trust Company 505225 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 61,888
Composition of Shareholders (Years ended March 31)
(%) 100 7.4 7.1 7.4 7.2 7.2 29.0 28.9 26.1 26.5 27.1
80 0.7 0.7 0.9 0.8 0.8 0.5 0.6 0.4 0.9 0.6 60 11.8 12.7 15.2 15.0 15.0 General Information 50.0 50.0 50.0 50.0 50.0
40 Individuals and others Foreign institutions and others Other institutions 20 Securities companies Financial institutions Japanese government 0 2007 2008 2009 2010 2011
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 140 page 141 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 Offering shares 229,920 shares 164,356 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 Offering 2nd Offering 3rd Offering Method Offering by Book-Building formula Offering by Book-Building formula Offer Price Bid Price: ¥815,000 ¥843,000 (Pricing Date) (June 17, 1996) (June 7, 2004) Number of Offering shares Japan: 237,390 shares, International: 35,000 shares Japan:198,334 shares, International: 91,000 shares (Total: 272,390 shares) (Total: 289,334 shares) Offering Term From June 18 to 19, 1996 From June 8 to 10, 2004
Stock Price Range and Trading Volume
(Yen) (Points) 700,000 3,500 All Time High Dec. 21, 2007: ¥708,000
600,000 3,000
500,000 2,500
400,000 2,000
300,000 1,500
Reference TOPIX (right) 200,000 1,000
100,000 All Time Low 500 Apr. 7, 2003: ¥128,800 (Pre-split: ¥644,000)
’95/3’94/10 ’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
Note: Due to a 5 for 1 stock split on April 1, 2006, stock prices reflect post-split levels
JT Stock Data (Years ended March 31) 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 High (Yen) 240,000 204,000 204,000 208,000 262,000 308,000 193,800 182,800 178,000 163,600 266,000 435,000 604,000 708,000 555,000 358,000 352,000 Low (Yen) 153,200 142,000 149,600 156,400 174,000 137,200 138,000 139,000 137,600 128,800 152,800 238,000 362,000 492,000 216,000 227,000 243,900 Trading volume (shares) 207,678 162,657 330,107 362,349 315,892 567,207 448,631 464,116 500,302 596,318 1,213,156 1,412,073 6,119,498 5,660,892 7,699,734 6,589,843 5,795,471
Notes: 1. Highs, lows, and trading volume of shares refer to those on the First Section of the Tokyo Stock Exchange 2. Due to a 5 for 1 stock split on April 1, 2006, stock prices reflect post-split levels
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 142 page 143 Members of the Board, Auditors, and Executive Officers (As of June 24, 2011)
Members of the Board Executive Officers
Chairman of the Board President Senior Vice President Yoji Wakui Hiroshi Kimura Kazuhito Yamashita Chief Executive Officer Chief Corporate, Scientific & Regulatory Affairs Officer, Tobacco Business Representative Directors Shinichi Murakami Executive Deputy Presidents Hiroshi Kimura Head of Domestic Leaf Tobacco General Division, Munetaka Takeda Tobacco Business Munetaka Takeda Assistant to CEO in Compliance, Finance and Atsuhiro Kawamata Mitsuomi Koizumi Operational Review & Business Assurance Head of China Division, Tobacco Business Masakazu Shimizu Mitsuomi Koizumi Masahiko Sato President, Tobacco Business Yasushi Shingai Head of Manufacturing General Division, Masakazu Shimizu Tobacco Business Assistant to CEO in CSR, Communications and Junichi Haruta Members of the Board General Administration Head of Central Pharmaceutical Research Institute, Noriaki Okubo Yasushi Shingai Pharmaceutical Business Mutsuo Iwai Assistant to CEO in Strategy, HR, Legal and Ryoko Nagata Food Business Head of Soft Drink Business Division Satoshi Matsumoto Senior Executive Vice Presidents Chief Human Resources Officer Auditors Kenji Iijima Yasuyuki Tanaka Chief Marketing & Sales Officer, Tobacco Business Chief Communications Officer Standing Auditors Noriaki Okubo Masamichi Terabatake Hisao Tateishi* President, Pharmaceutical Business Chief Strategy Officer, Senior Vice President in charge of Gisuke Shiozawa Ryuichi Shimomura Food Business, Head of Corporate Strategy Division Chief Legal Officer
Auditors Koichi Ueda* Executive Vice President Yoshinori Imai* Tadashi Iwanami Chief R&D Officer, Tobacco Business * Outside Corporate Auditors under the Companies Akira Saeki Act of Japan Head of Tobacco Business Planning Division, Tobacco Business Hideki Miyazaki Chief Financial Officer Ryoji Chijiiwa Chief General Affairs Officer General Information
JAPAN TOBACCO INC. Annual Report 2011 JAPAN TOBACCO INC. Annual Report 2011 page 142 page 143 Corporate Data ( As of March 31, 2011)
Head Office JT International S.A.
2-1, Toranomon 2-chome, 1, Rue de la Gabelle CH-1211 Geneva 26, Switzerland Minato-ku, Tokyo 105-8422, Japan Tel: (41)-22-7030-777 Tel: (81)3-3582-3111 Fax: (41)-22-7030-789 Fax: (81)3-5572-1441 URL: http://www.jti.com/ URL: http://www.jti.co.jp/JTI_E/ Members of JT International Executive Committee
Date of Establishment (As of June 1, 2011)
April 1, 1985 Pierre de Labouchere President and Chief Executive Officer Paid-in Capital Mutsuo Iwai ¥100 billion Executive Vice President and Deputy CEO
Number of Employees Thomas A. McCoy Chief Operating Officer 48,472 (Consolidated) 8,928 (Parent Company) Paul Bourassa Senior Vice President Legal, Regulatory Affairs and Compliance Roland Kostantos Domestic Sales Offices Senior Vice President Finance, Information Technology and Chief Financial Officer Hokkaido (Hokkaido) Jörg Schappei Senior Vice President Human Resources Sendai (Miyagi) Frits Vranken Tokyo (Tokyo) Senior Vice President Business Development and Corporate Strategy Nagoya (Aichi) Osaka (Osaka) Martin Braddock Regional President CIS+ Hiroshima (Hiroshima) Stefan Fitz Shikoku (Kagawa) Regional President Asia Pacific Fukuoka (Fukuoka) Paul Neumann 17 other sales offices Senior Vice President Global Leaf Howard Parks Senior Vice President Consumer and Trade Marketing Domestic Factories Fadoul Pekhazis Kita-Kanto (Tochigi) Regional President Middle East / Near East / Africa / Turkey & World Wide Duty Free Tokai (Shizuoka) Eddy Pirard Regional President Western Europe Kansai (Kyoto) Michel Poirier Kyushu (Fukuoka) Regional President Americas 7 other factories Bill Schulz Senior Vice President Global Supply Chain Domestic Laboratories Takehisa Shibayama Senior Vice President Research & Development Leaf Tobacco Research Laboratory (Tochigi) Vassilis Vovos Tobacco Science Research Institute (Kanagawa) Regional President Central Europe Central Pharmaceutical Research Institute (Osaka)
JAPAN TOBACCO INC. Annual Report 2011 page 144 annual report 2011 Printed in Japan This annual report is printed using ink that contains less than 1% of Volatile Organic Compounds (VOCs). This annual report is printed using ink that contains less than 1% of Volatile 2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, Japan Tokyo 2-chome, Minato-ku, 2-1, Toranomon (81) 3-3582-3111 Tel: Fax: (81) 3-5572-1441 URL: http://www.jti.co.jp