Japan Tobacco, Inc. (JAPAF) CEO Masamichi Terabatake on Q4 2018 Results - Earnings Call Transcript

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About: Japan Tobacco (JAPAF)
by: SA Transcripts
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Earning Call Audio

Japan Tobacco, Inc. (OTCPK:JAPAF) Q4 2018 Earnings Conference Call February 8, 2019 ET

Company Participants

Tatsuya Tsukuura - General Manager, IR

Masamichi Terabatake - President & CEO

Eddy Pirard - CEO and President, JT International SA

Naohiro Minami - CFO & EVP, Communications

Mutsuo Iwai - President, Tobacco Business & EVP

Roland Kostantos - COO

Conference Call Participants

Nobuyoshi Miura - Citigroup

Naomi Takagi - SMBC Nikko Securities

Satoshi Fujiwara - Nomura Securities

Ritsuko Tsunoda - JPMorgan Chase & Co.

Satsuki Kawasaki - UBS Investment Bank

Tatsuya Tsukuura

As time has come, we would like to now get started. Ladies and gentlemen, thank you for coming today despite your busy schedule to our group's results meeting. I'll be the MC for this afternoon. I am Tsukuura from the IR department.

Let me introduce today's schedule. First, our President, Mr. Terabatake, will talk about Business Plan 2019. Then Eddy Pirard, CEO of JT International, will talk about JTI results and 2019 guidance. Then finally, from our CFO, Mr. Minami will talk about fiscal year 2018 results for the group as well as our forecast for 2019. We will then switch over to a Q&A session, and we plan to end this meeting by 4:30 p.m. We don't plan for any breaks in between, so we hope you understand.

We have handed out three types of presentations that will be presented today, as well as an earnings report as well as a questionnaire. There are five types of materials in front of you. If you don't have all of them before you, please contact the staff nearby. You can also listen in on the simultaneous interpretation offered through your devices. Channel 1 is Japanese. Channel 2 is English. For those who are absent today, we will be recording this briefing from behind this room. And this will be broadcast live online. So we would like to ask you for your understanding.

Now let's move on to the first presentation. Over to you, Mr. Terabatake.

Masamichi Terabatake

Good afternoon, ladies and gentlemen. Welcome to JT Group's 2018 full year results and business plan 2019 presentations. I am Masamichi Terabatake, President and CEO of Japan Tobacco. Thank you for taking the time to attend today's meeting, and we appreciate your interest in and support to the JT Group. My presentation will start with an overview of our 2018 performance. I will then introduce the Business Plan 2019, covering the coming three years. From there, I will go into details of the strategies of each of the group's businesses towards sustainable profit growth. And finally, I will talk about a resource allocation policy.

Let me start by giving you an overview of the 2018 full year results. 2018 represents a year of notable achievements in both business performance and initiatives for the future. We were able to expand profits, particularly in the tobacco business, the core and driver of the group's profit growth, by focusing on efforts to both RRP and conventional products. With this result, we offer a dividend payment of ¥150 per share, in line with our commitment. Mr. Minami, our Group CFO, will detail our financial performance later on. In addition to the solid financial deliverables and increasingly challenging environment across businesses, we have strengthened our business foundations for the future.

In the Japanese domestic tobacco business, our presence in the RRP category was boosted, driven by the nationwide Ploom TECH distribution. We also completed the development of new RRP products. On unconventional products front, we further solidify our leading position through market share gain in this profitable market. In the international tobacco business, we continue to deliver on our growth agenda throughout the year. We completed acquisitions in Russia and Bangladesh and, in parallel, made excellent progress integrating businesses in each of the three markets where we completed acquisition in 2017. We grew market share in key markets to reinforce our earnings base. In addition to this, we confirm that the strong pricing yielded our outstanding performance.

As you are well aware, our businesses are facing a variety of challenges. Therefore, it is critical to evolve our organization by changing attitudes and behaviors of each and every employee. We are making steady progress towards this objective, which believe is essential for us to achieve sustainable growth in the future. The details will be shared in the next slide. As I mentioned to you last year in this very event, the JT Group is aiming to become a company that initiates change and drives evolution. With our dedication, combined with strong execution capabilities, we have been making a steady progress towards this goal. In Japan, we have been putting greater focus on consumers and everything we do, as represented by our sales activities now emphasizing face-to-face and the interactive communication with consumers. Furthermore, we have integrated functions for strategic planning, product planning and marketing to cover both RRP and conventional products. This will enable us to execute in a faster and more effective manner, enhancing our competitiveness in this important market.

Internationally, we have just started assessing our current operation to identify potential challenges in areas of improvement in terms of organization. Redesigning our business operation and instilling new mindset through renewed processes will boost our agility and efficiency even under increasing uncertainties. This will be essential for JTI to remain the driver of sustainable profit growth.

Lastly, by creating additional synergies between JT and JTI, we aim to develop and build a more collaborative ground that will increase our competency as a tobacco business. As an example, since January of this year, the R&D management and organization for JT and JTI is now globally managed in an integrated manner by one single R&D head. This will not only enable us to optimize our resource allocation but also enhance our competitiveness and speed-to-market capability on a global basis, notably in terms of RRP product development. We will continue to ask ourselves what can we do to gain consumer support and will better ensure sustainable growth into the future through organizational evolution, driven by consumer-centric mindset.

Next, I would like to explain the Business Plan 2019. Over the next three years included in Business Plan 2019, our strategic direction and goal will remain unchanged. We will continue to pursue sustainable profit growth by aiming for mid- to high single-digit adjusted operating profit growth rate at constant FX.

Let me now detail the strategies of each business to achieve this goal, starting with the tobacco business. The key to our future success has been and will continue to depend on tobacco business, our core business and the group's profit growth driver. Our Japanese domestic tobacco business will resume profit growth from this very year. And our international tobacco business will remain the profit growth engine across the Business Plan 2019 period. Through our continuous business investments, we have enhanced our business base. Our diversified and innovative product portfolio enables us to respond to the evolving dynamics in the tobacco industry and, more importantly, to lead a change, as demonstrated by the creation of low-temperature heating category in Japan.

We strive for our ambition to be the most preferred consumers' choice. To achieve that, we offer a variety of options out of our portfolio and meet diverse consumers' needs. This approach will be valid in every market we operate. And together with our emphasis on flexibility and agility, it will lead us to our long-term vision of becoming the global number one tobacco company.

The Japanese domestic tobacco business, after bottoming out in 2018, aims to return to sustainable profit growth by managing RRP and conventional products in a more comprehensive manner. In parallel, it is our strong intention to increase our total market share, combining RRP and conventional products by offering consumers various options in each category.

Let me expand our strategies, starting with RRP. Competition in RRP category has further intensified, while the categories growth momentum has slowed. However, we expect RRP market to reaccelerate over the mid- to long term, driven by expected environmental changes, including regulations. For us, RRP is the pillar of our growth. Therefore, in Japan, we prioritize the allocation of our resources into this category to enhance our competitiveness and win the leading position. A certain amount of time is required to establish a new category. But by changing our organization and engaging in quality direct communications with consumers, we are seeing solid enhancements of the awareness of the benefits of low-temperature heating products among the users.

In 2019, we can offer three options, namely Ploom TECH and Ploom TECH+ of low-temperature heating variety as well as Ploom S of high-temperature heating. A consumer can make a choice from the portfolio which best meets his or her needs.

In order to be chosen by the consumers, it is imperative to build awareness and recognition for each product. We will engage in interactions with consumers at all points of contact. We will increase our investment and sales promotion, including such an interactive communication initiative as well as in activities to create better and more places to enable consumers to use tobacco products. The level of investment will be carefully managed to ensure that we achieve profit target of the Japanese domestic tobacco business.

Turning to conventional products. Industry volumes shows resiliency and remain solid. This category continues to be the base of our business and supports its growth. We will enhance the equity of our major brands. Lastly, we will take excise tax increases as an opportunity and pursue pricing optimally in both RRP and conventional products.

This is the rollout plan of Ploom TECH+ and Ploom S in Japan. Initial feedbacks from consumers are encouraging for both products. Like compared with existing high-temperature heating products, Ploom S creates less odor; or Ploom TECH+ provides rich paper and taste; maintenance free like Ploom TECH, that's also good.

As of now, their distribution is limited, only through our own channels. Both products are well accepted, as expected, and we will expand our sales points in accordance with the plan.

With regard to the international tobacco business, its role remains unchanged, namely the group's profit growth engine. In 2018, our strong results confirmed that the pricing environment is still robust and that, globally, there are still opportunities to expand the profit pool of the tobacco industry. We will aim for high levels of profit growth going forward. We are confident that we can achieve strong profit growth and will continue to drive the growth agenda highlighted on the slide. In existing markets, we will focus our efforts on enhancing the brand equity to gain further market share and seize pricing opportunities. In emerging markets, investments will drive organic growth while we remain on alert for new M&A opportunities and markets that matter. These potential M&A decisions will be partly driven by the long-term contribution these opportunities can bring to the group's bottom line. Considering that the contribution timings will likely be different for each transaction, our integration strategies will be adjusted accordingly to ensure sustainable profit growth. In RRPs, we will strengthen our investments to become a global leader in this expanding category. In addition to establishing and strengthening our presence in our key markets, we are also going to expand the reach of our product portfolio, notably with Logic Compact, which Eddy will mention in his presentation.

We will appropriately identify opportunities for market entry or portfolio diversification. We will do so by efficiently allocating resources while assessing this - the impact on existing businesses. Global economy and geopolitics in certain areas are increasingly uncertain, leading to higher FX volatility. We will address this issue and increase our managing capabilities against the risk.

With regards to the pharmaceutical and processed food businesses, they fully delivered on their role to complement the group's profit growth during 2017 and 2018 when the domestic tobacco business in particular was facing significant headwinds. However, the pharmaceutical business is in a critical stage as the licensing agreement on anti-HIV drugs in Japan was terminated, and royalty revenue from outside of Japan related to these drugs is expected to decrease gradually. The processed food business is also facing a tough situation given rising raw material costs and persistently intensive competition in the industry. Both businesses need to rebuild solid business basis as early as possible so that they can support the group's profit growth.

In the pharmaceutical business, we will continue to enhance its R&D capability to discover new drugs, maximize the value of each product and explore strategic in-licensing opportunities. In addition, Torii Pharmaceutical, our group company, announced its midterm management plan yesterday. Under the plan, Torii Pharmaceutical will undertake a comprehensive reform of its business structure, including optimization of organization, functions and workforce as well as revised resource allocation strategies. Furthermore, growth strategies are embedded in the plan with an emphasis on product value maximization in pursuit of in-licensing. Through these initiatives, the company aims to improve profitability and sustainably generate profit.

In the processed food business, we introduced a new organizational and management structure in January in order for strategy and execution to work out in a seamless and prompt manner. Our goal is to achieve continuous top line growth under the new structure. To expand top line, our focus remains on staple foods, and we also strive to develop high value-added products to respond to changing consumer needs.

Before closing, let me explain our resource allocation policy. As in the past, our resource allocation will be based on the 4S model and prioritize these business investments, leading to sustainable profit growth, in particular, for the tobacco business. Our policy for shareholder returns also remain unchanged. We aim to enhance the returns considering the group's mid- to long-term profit growth outlook. Dividend per share growth in a stable and sustainable manner continues to be of paramount importance. Let me explain the level of dividend increase.

It has been decided mainly based on the growth rate of adjusted operating profit excluding currency, an indicator which represents our business performance. However, looking at all the dynamics influencing our group, we will take into account net income, which includes currency impacts to determine the dividend per share. With regards to share buyback, we have not changed our basic approach. Going forward, we will continue to determine share buybacks after examining our business environment and financial outlook.

As for our 2019, we announced a share buyback considering our free cash flow outlook, balance sheet and other typical elements as well as various factors including the one-off cash proceed in the pharmaceuticals business and our recent share price moves. To conclude this topic, let me reiterate that our emphasis will continue to be on dividend per share growth. Finally, I'd like to convey to you once again my determination and confidence as the JT Group's CEO. Conventional products remain robust, and its profit pool will continue to grow. On the strong base, RRP offers new opportunity for growth, and we will capture it. If we look at the global economy, geopolitical risks, currency volatility, tightening regulations, borderless competition across industries due to digital technology and evolving consumer behavior all indicate that our business environment is increasingly uncertain, and we are well aware of that. Even so, we will be bold and agile to evolve ourselves to be the preferred choice of consumers, shareholders, employees and the wider society. By realizing that, the JT Group will achieve sustainable profit growth.

Thank you for your kind attention. Now I'd like to turn the floor over to Eddy, who will share with you the JTI 2018 results and the 2019 guidance.

Eddy Pirard

Thank you, Terabatake-san, and good afternoon, ladies and gentlemen. I'm very pleased to be with you today to present the 2018 international tobacco business full year results and the outlook for 2019. Let me start by sharing with you an overview of our performance in 2018. Another rewarding year in which JTI has exceeded its business objectives by further broadening its presence and capabilities in new and established markets. In 2018, JTI achieved an outstanding growth across all key performance indicators as a result of successful investments behind organic and M&A initiatives that further strengthen our business base.

Total shipment volume increased significantly, driven by acquisitions. When excluding the impact of acquisitions, our total volume was strong, declining only 1.1% and, therefore, outperforming an overall industry contraction estimated at 3.3% across our top 30 markets. This organic performance was driven by the continued expansion of the GFB consumer franchise in many geographies. As expected, the pricing environment improved in 2018, particularly in the key markets of Russia and the U.K., where price momentum returned. Robust volume and pricing contribution enabled JTI to exceed its financial targets. We achieved double-digit growth in both core revenue and adjusted operating profit on a constant-currency basis. Importantly, our top and bottom line growth was very strong even excluding acquisitions.

Our total shipment volume increased by more than 29 billion units compared to 2017. This exceptional growth was fueled by the acquisitions in Ethiopia, Indonesia and the Philippines as well as bolstered by the early benefits of the recent additions of Donskoy Tabak in Russia and UDTC in Bangladesh. These acquisitions, in line with our long-standing strategy to expand our business base in geographies that matter, have increased our presence in emerging markets with attractive dynamics, both in terms of volume and in terms of value. Organically, our shipments was strong and ahead of the industry trend in several geographies.

We grew volume in 63 markets, including Brazil, Germany, Iran, Italy, Jordan, Poland, Spain, Thailand and Turkey, just to name a few. This positive performance was driven by continued share gains. JTI's market share increased in 22 of its top 30 markets, notably in the key markets of France, Italy, Russia, Spain, Taiwan and the U.K. Our global flagship brands have been paramount to achieve such a robust performance.

GFBs increased the volume for the fourth consecutive year and represent approximately 62% of the overall volume generated by JTI. 64 markets reported GFB volume gains in 2018, of which 31 recorded a double-digit growth. That's including Brazil, the Czech Republic, Jordan, Poland, Thailand and Turkey. The continued GFB progression was driven by Winston, Camel and LD, which more than compensated the decline of MEVIUS, which was mainly attributable to severe industry contraction in Taiwan. Of particular note was the performance of Winston, which grew volume by 6 billion units, achieving the historical threshold of 150 billion units and more than 160 billion units if we include Japan. Camel and LD also performed very strongly. Camel achieved the fifth consecutive year of volume growth while LD regained momentum, driven by the strong results in Jordan and in Russia. These remarkable results, for which I would like to thank our talented people, were made possible by best-in-class products as well as sales and marketing initiatives always centered around consumers. The strong equity of our GFBs built through sustained investments has certainly been pivotal to seize pricing opportunities in 2018.

Pricing was the key driver of our full year 2018 financial performance. We recorded a total price/mix variance of almost $1 billion, supported by strong contributions from all regional clusters for South and West Europe, which was impacted by competition-driven tax absorption in France. Excluding France, South and West Europe generated positive price/mix contribution, reflecting pricing gains in a number of markets, including Italy and Spain. The annual price/mix variance returned to JTI's historical level following a year in which, as you may remember, we deployed price and portfolio investment to strengthen our competitiveness and business flexibility, mainly in Russia and the U.K. market. In 2018, these two important markets have witnessed an encouraging stabilization of the pricing dynamics, which, along with the enhanced equity of our brands, enabled JTI to pursue new top line opportunities. Needless to say, this is a strong validation of our strategic pricing decisions which we've taken in 2017.

Importantly, the positive contribution from key markets was complemented by robust pricing in other geographies as well, such as Canada, Iran, the Philippines, Romania, Sudan and Ukraine. This diverse and balanced contribution is the result of our investment strategy, which has been focusing on new and established markets with potential for sustainable pricing gains.

Let me now move to Russia, which has been a major driver of our robust top and bottom line performance in 2018. As previously mentioned, the pricing environment strengthened, with the impact of price increases more than compensating the industry volume contraction, driving a significant core revenue and profit growth at constant currency. Positive GFB momentum continued, as demonstrated by the strong share increases led by Winston and LD. Winston grew share for the third consecutive year, reaching a share market of 16.3% and a share value of 19.1%, further strengthening its unique track record as the number one FMCG brand in Russia. LD expanded its business franchise in the value segment, reaching an overall share of market of almost 8%, 7.7%, almost 1 percentage point versus 2017. New compelling consumer offerings, such as Winston XStyle Duo and LD Impulse, enable Winston and LD to perform well in the highly competitive flavor-on-demand and compact segments, driving our related share gains.

The acquisition of Donskoy Tabak in August 2018 strengthened our competitiveness and business flexibility in the Russian industry - Russian market. With the addition of Donskoy Tabak, our overall volume share achieved approximately 40%, making JTI the undisputed market leader. The transaction has also made JTI the leading company in the largest and fastest-growing value segment, with a share exceeding 32%. As a result, JTI today is the number one company in both the mid-price and in the value segments. These achievements, combined with the organic improvement led by Winston and LD, provides us with much stronger platforms to respond to changing consumer needs and competitive moves. Donskoy Tabak will be accretive to our core revenue and adjusted operating profit in 2019. And its financial contribution will increase in outer years, partly driven by the realization of synergies in areas such as inventory management, product distribution and brand portfolio.

While the Russian industry remains competitive, it continues to provide growth opportunities. I am confident that our strong brand portfolio centered on Winston and the integration of Donskoy Tabak will enable JTI to further enhance its leading position and consumer franchise while delivering attractive sustainable returns over the long term.

Moving on to another key market being the U.K. 2018 has been a positive year for the U.K. Total industry volume declined at a slower pace compared to the historical trend as the contraction in cigarette was partly offset by growth in the fine-cut category, although down-trading continued, the pricing environment improved versus 2017, resulting in a positive industry price/mix variance, which drove or return to top and bottom line growth at constant currency. While achieving a solid financial performance in the U.K., JTI also increased its share of market to 41.3%, benefiting from the positive business momentum in both cigarettes and fine cut. In cigarettes, Benson & Hedges and Sovereign grew very strongly, driving our share gains in the category. In fine cut, the significant increase in Sterling more than compensated for the slight decrease we've seen in Amber Leaf, which was attributable to very aggressive competition-driven pricing at the bottom of the market. We exited - last year was an accelerating share momentum in the U.K., which gives me great confidence in our ability to continue outperforming competition in 2019 and beyond.

2018 has also been an important year for our Reduced-Risk Products as we expanded the Logic portfolio and consumer franchise. Logic achieved a steady but solid performance last year, growing volume and revenue by 27% and 12%, respectively. This was mainly driven by the continued success of Logic Pro in Europe, where volume and revenue increased 55% and 66%; as well as by the recent launch of Logic Compact in the U.K.

Modern and pocket-size Logic Compact is a high-performance device that provides high vapor volume and ultimate convenience. Logic Compact comes in three colors and offers a wide range of flavors and nicotine levels, including a nicotine salt formula for relevant markets. In 2019, we will roll this proposition out in 13 additional geographies, out of which 10 in the first six months of the year. To date, Logic Compact has already been launch in four markets, namely Canada, Ireland, Romania and the U.K. The launch in France, Italy and Russia will take place within the first quarter of this year.

Since its launch in the U.K. in late August 2018, Logic Compact has been rapidly increasing its popularity among consumers and among our trade partners. A recent quantitative survey among adult vapers revealed that Logic Compact outperforms all major competitors in terms of vaping experience, satisfaction and overall liking after seven days of in-home usage. In addition, several opinion leaders independently stated that it has the potential to be one of the most successful pot systems given its superior product delivery and taste. These positive reviews also confirm by its early share performance. Logic Compact has steadily increased its share of value across closed tank systems, exceeding the 10% threshold at the beginning of this year in the key accounts where it is currently listed. The growing share, along with the positive consumer feedback, confirms that Logic Compact is a significant growth potential in the U.K. and in the planned launch markets. This gives me great confidence in our ability over time to develop superior products that would appeal to an increasingly demanding and knowledgeable consumer base.

Looking at 2018, I would define it as an excellent year, in which we expanded our business through successful investments in selected geographies and product categories. Our volume base broadened significantly with the addition of 29 billion units. GFB volume grew for the fourth consecutive year, driving a robust organic performance. Share of market continued to increase, highlighting the enhanced competitiveness of our brands, which continue to be the number one consumer choice in many important markets, including Russia and the U.K. As we expected entering the year, the pricing environment improved compared to 2017, resulting in an enhanced ability to pursue valuable top line growth. As demonstrated in the past, JTI is increasingly well placed to capture future opportunities as they arise. We have entered 2019 with strong business fundamentals and strong positive momentum, which gives me great confidence in our ability to continue growing in the months to come.

The most recent acquisitions in Russia and Bangladesh will be important growth drivers in 2019 and beyond, generating tailwinds in terms of volume, core revenue and adjusted operating profit. Having already covered Russia, I will now focus on Bangladesh, the third-largest cigarette market in Asia and where we acquired UDTC in December of last year, becoming the number two cigarette player with a volume base of approximately 16 billion units. Importantly, this market is expected to witness positive cigarette trends going forward, benefiting from a rapidly growing economy and improving consumer purchasing power. According to the Economist Intelligence Unit, Bangladesh will experience an annual GDP growth close to 8% between 2019 and 2021 while personal disposable income is projected to increase by circa 11% per year. Based on these strong projections, we expect a robust cigarette industry volume and net sales growth in the mid-term with significant financial benefit. To capture those benefits while strengthening our number two position, we are implementing a number of strategic initiatives, which will further enhance our portfolio and route-to-market capabilities.

In conclusion, I am pleased to report that 2019 outlook for the international tobacco business remains strong. We plan to increase JTI's total shipment volume by circa 4%, benefiting from the acquisitions in Bangladesh and in Russia. On an organic basis, the continued GFB growth will enable us to outperform the industry decline, which we estimate at 4% across our top 30 markets. Pricing is expected to drive another year of robust core revenue and adjusted operating profit growth at constant currency. As of today, we've already secured circa 2/3 of the pricing planned for the year. Let me highlight that the strong financial performance will be achieved while expanding our presence in the RRP category with Logic Compact and while continuing to invest in our people, our brands and our overall capabilities. As mentioned by Terabatake-san and in line with our kaizen approach, we continue to assess and implement initiatives across our value chain that will further enhance JTI's business agility and ability to compete.

Ladies and gentlemen, thank you very much for your attention and interest in JTI. I will now hand over to Minami-san for the review of the JT Group financial results. Thank you.

Naohiro Minami

I am Naohiro Minami, CFO of the JT Group. I will take you through the consolidated financial results for 2018 and the forecast for 2019. First, let us look at the consolidated financial results. Adjusted operating profit at constant FX, our KPI increased by 8.9% year-on-year, driven by strong profit growth of the international tobacco business. Excluding a onetime loss related to a key U.K. distributor going into administration in 2017, adjusted operating profit at constant FX increased by approximately 5%. As communicated in the third quarter earnings announcement on a reported basis, adjusted operating profit growth was 1.7% year-on-year, reflecting negative FX impact, especially in the second half. Operating profit was largely unchanged from the prior year due to the said FX impact and an increase in intangible amortization related to acquisition. Profit attributable to owners of the parent decreased by 1.7%, impacted by an increase in financial expenses. Free cash flow increased by ¥33 billion from previous year to ¥105.6 billion. An increase in proceed from real estate sales and improvement in working capital more than offset a cash payment increase for acquisition and higher capital expenditure mainly related to RRP.

Let us talk about the key variance from the revised forecast. In the Japanese domestic tobacco business, cigarette industry volume remained more resilient than expected even after price increase in October 2018. As a result, adjusted operating profit of the segment exceeded the revised forecast by ¥7 billion. The results of the international tobacco and pharmaceutical businesses were also favorable against the revised forecast. In addition, negative FX impact was significant but softer compared to our assumptions as key local currencies were not depreciated as much as expected. Operating profit exceeded the revised forecast by ¥33 billion due to higher gain from sales of real estate than expected.

Next, I will explain the performance by business segment. For more detailed analysis, please refer to the earnings report. Let me start with the Japanese domestic tobacco business. As for conventional products, cigarette industry volume declined but slower than expected, notably after the price increase in last October. And our cigarette sales volumes also exceeded the revised forecast. JT market share declined briefly due to the price increase, but our market share in last December restored to almost the same level as before the price increase. For the full year, we achieved 61.8% market share, an increase of 0.5 percentage point year-on-year.

Regarding RRP, its market size for the full 2018 was circa 21% of the total industry. We sold 2.8 billion stick equivalent of Ploom TECH tobacco capsules, in line with the revised forecast. As explained by Terabatake-san earlier, our marketing and sales activities have been focusing more on direct communication with consumers to share the benefits of low-temperature heating-type product, and this approach has been working well. We will continue this so that more consumers recognize the benefits. Total market share, including both cigarette and RRP, is recovering, while monthly shares fluctuate due to the price increase. Let me add that the total industry volume, including both cigarette and RRP, declined approximately 3% year-on-year.

Next, I will talk about the financial results in the Japanese domestic tobacco business. Core revenue decreased slightly year-on-year with the significant decline of cigarette sales volume more than offsetting RRP growth and cigarette pricing gains. RRP-related revenue for the full year of 2018 was ¥64.6 billion, accounting for over 10% of core revenue. Adjusted operating profit declined due to a decrease in cigarette sales volume and higher investment in sales promotion. Knowing that steep decline of cigarette volume would impact our earnings, we do not compromise investments, which will support us in 2019 and beyond. In particular, investment to promote consumer awareness on low-temperature heating products was strengthened. In a difficult year of profit decline, there are positive factors entering 2019. First, after the price increase in last October, cigarette industry volume was more resilient than we expected. In addition, pricing gains were firmly captured in the fourth quarter. Furthermore, RRP profits improved from the previous year, thanks to a sales volume increase, combined with product cost reduction, more than offsetting an increase in promotional investments.

Turning to the results of the international tobacco business. As Eddy just explained the details of its business performance, I would like to focus on the analysis of reported basis figures in Japanese yen. Adjusted operating profit on a reported basis increased by ¥33.2 billion or 9.5% year-on-year. Even excluding a onetime loss impact of ¥21.9 billion, which related to a key U.K. distributor going into administration in 2017, adjusted operating profit increased year-on-year. Full year FX impact was negative, amounting to ¥41.7 billion, mainly caused by weak Iranian rial and Russian ruble.

Now I will move on to the results of the pharmaceutical and processed food businesses. In the pharmaceutical business, revenue and adjusted operating profit grew year-on-year, driven by royalty revenue growth from our out-licensed products and milestone income. In 2018, no financial impact was materialized regarding the termination of the exclusive license agreements for anti-HIV drugs in Japan. In the processed food business, the positive performance of staple food and seasoning products was not able to offset the lower sales of other products, and thus, revenue declined by 1.1% year-on-year. We increased the prices of some products, but higher raw material costs impacted our profitability, and adjusted operating profit declined by 23.6% year-on-year.

Now let's move on to the financial forecast for 2019. First of all, I'd like to explain our consolidated performance forecast. As for the total tobacco business, adjusted operating profit at constant FX will grow by approximately 7%, while the pharmaceutical business is expected to see a significant decline in profits. And on a consolidated basis, we target to grow adjusted operating profit at constant FX by 2.4% year-on-year to ¥610 billion. On a reported basis, the negative FX impact will drag into 2019. We forecast the decrease of 8.3% in adjusted operating profit year-on-year due to over ¥60 billion of negative currency impact. Operating profit and profit are expected to decline by 4.4% and 4.1%, respectively. Onetime compensation gain related to a termination of the exclusive license agreement for anti-HIV drugs in the pharmaceuticals business will partially offset a decline of adjusted operating profit, a decline of gain from sale of real estate and an increase in intangible amortization arising from acquisitions.

Free cash flow is estimated at ¥360 billion. In 2019, we do not assume new acquisitions compared with two last year. Additionally, we will strengthen ability to generate free cash flow and improve working capital.

Let me detail the forecast for each business segment. First, I will explain the Japanese domestic tobacco business. In 2019, we aim to increase our total market share and achieve profit growth by comprehensively managing conventional products and RRP. The industry and JT sales volume assumptions in this slide are not targets, and therefore, we may revise them during the year when necessary while carefully monitoring market trends.

Regarding conventional products, cigarette industry volume is expected to decline over 7% year-on-year, while our cigarette sales volume is expected to decline over 7.5% year-on-year, meaning a larger decline than industry. This is mainly due to the assumption that competition in the lower price segment will intensify as the excise tax on what we call former third-class products will increase significantly in October in accordance with the tax reform plan, and we are the only one selling those products. In this year, cigarette industry volume decline is expected to decelerate compared with the recent past. This reflects a temporary slowdown of RRP market growth. In 2019, RRP industry volume is expected to increase over 3%, indicating RRP market size for - throughout 2019 is estimated at 22% to 23% in the total tobacco industry. Previously, number of consumers entering into this category significantly exceeded those who left. But since 2018, the incomers have been decreasing, resulting in a narrower gap between entrants and withdrawers. However, there are many potential consumers who have interest in and intention to try RRP. We believe that the market will keep growing over the mid- to long term, driven by the new product launches and aggressive promotions by manufacturers, including us. Ongoing change in the regulatory environment will also support the growth of the RRP market.

Our RRP sales volume assumption for 2019 is around 5 billion stick of equivalent considering nationwide launches of two new products to start in the latter half of the year. Our forecast for our core revenue is to increase 6.5% year-on-year. Cigarette pricing and RRP volume increase with two new products will more than offset the decline of cigarette sales volume. Adjusted operating profit will increase 2.9% year-on-year to ¥215 billion. Pricing gains and RRP top line growth will be partially offset by higher investment in sales promotions for RRP.

We will create and expand the opportunities for consumers to experience the benefits of low-temperature heating, which JT can exclusively offer. We are entering the high-temperature heating category from this year, which now accounts for a certain portion of the total tobacco industry. And we need to gain market share from our competitors. We will communicate the differences between our new product and the existing competitor products in a clear and plain way and implement promotion activities aggressively. As mentioned earlier by Mr. Terabatake, the earnings of the Japanese domestic tobacco business hit the lowest point in 2018. We will achieve the profit target as one tobacco business, combining conventional products and RRP, properly and flexibly addressing the changes and assumptions, if any.

Next, I will discuss the international tobacco business. We expect robust pricing gains to continue in 2019 and positive contribution from previous year's acquisitions in Russia and Bangladesh. On a reported basis, however, we expect that core revenue will be essentially unchanged from the previous year. Adjusted operating profit is forecasted to decline by 7.4% year-on-year to ¥356 billion. In terms of percentage, decline in adjusted operating profit is expected to be larger than decline in core revenue. This is primarily because local currencies in our high-margin markets, notably Russia and Iran, are expected to be depreciated more compared with other currencies. In particular, we assume that Iranian rial to cause a significant negative impact especially compared with the first half of last year. Let me add that we expect the impact of the yen-dollar rate fluctuation to be limited.

Moving on to our forecast for the pharmaceutical and processed food businesses. In the pharmaceutical business, we will lose the revenue from anti-HIV drugs in Japan due to the termination of the exclusive license agreements. And we also expect the royalty revenue from outside of Japan to decline due to the expansion of the competing product in anti-HIV drugs. Thus, we forecast a significant decline in adjusted operating profit due to revenue decrease. The onetime compensation gain related to the termination of the agreement will be recorded in operating profit but not included in adjusted operating profit.

In the processed food business, revenue is expected to be almost flat year-on-year. Adjusted operating profit is forecasted to increase by 21.3% year-on-year to ¥5 billion. Despite soaring raw material costs, we're striving to improve profitability by enhancing productivity.

In closing, in 2018, as a group, we delivered solid business performance and, importantly, continued to build our foundation towards future growth. This year, the business environment remains challenging. However, the Japanese domestic tobacco business is well prepared to resume sustainable earnings growth, and our tobacco business aims to grow currency-neutral profit at mid- to high single digit.

During the business plan period, we will ensure this momentum from the tobacco business to continue and, at the same time, rebuild the foundation of the pharmaceutical and processed food businesses. These undertakings will lead to the group's growth going forward over the long term.

Moving to shareholder returns, we plan to pay an annual dividend per share of ¥150, as announced at the beginning of the year. From this year on, as Mr. Terabatake just explained, we will take net income into account to determine dividend per share in addition to the outlook for currency-neutral adjusted operating profit growth rates over the mid- to long term. As you saw in the previous slides, negative currency impact was over ¥40 billion in 2018 and is expected to be over ¥60 billion for this year, hitting our net income hard. Considering this, we plan to offer an annual dividend of ¥154 in 2019, representing a ¥4 increase. Just to confirm, the company maintains its policy to grow dividend per share consistently and continuously.

Lastly, a share buyback program was announced yesterday up to ¥50 billion or 23 million shares during the period from February 8 to April 22. The size of the program was decided based on various factors, including free cash flow, the balance sheet, one-off cash proceeds and the impact on the market.

This concludes my presentation. Thank you for your attention.

Unidentified Company Representative

We would like to move on to Q&A. But from Mr. Minami, during the presentation, he said AOP for 2019, the negative impact from FX was ¥600 billion in Japanese, but the impact is more than ¥60 billion. We would like to make that correction for Mr. Minami's presentation. Thank you.

Tatsuya Tsukuura

Now we would like to respond to your questions. Let me introduce the people who will be taking your questions. We have Mr. Terabatake, the President; Mr. Minami, the CFO; Mr. Iwai, President of the Tobacco business; Mr. Sasaki, President of the Japan Tobacco business; and Eddy Pirard, JTI's CEO; as well as Roland Kostantos, JTI's COO.

Question-and-Answer Session

A - Tatsuya Tsukuura

I'd like to move on to the Q&A session. As this time is limited, please make sure your question is concise. And also, we'd like to take as many questions as possible from as many people as possible. Please limit your question to one question per person. And please name yourself and your affiliation before starting your question. So we would now like to entertain your questions. Would you please raise your hand? Miura-san, please.

Nobuyoshi Miura

This is Miura from Citigroup. I have a question about JTI. So for 2019, so you are expecting to see a positive competitive situation. Actually, back in 2018, probably it was because of the role that JTI has played. So this environment, specifically in U.K. and Russia, how has the turnaround of the pricing situation for U.K. and Russia? So of course, for 2019, it has already been determined. But for how long would this favorable environmental pricing will continue? Will that continue into 2020 or even beyond? If we could have your take on that, that will be very appreciated. And if there are any risks that this trend would not continue into 2020 and beyond, would you please share those with us?

Eddy Pirard

Thank you very much for the question. I think it's fair to say that we see that the tobacco industry remains very well placed for future sustainable kind of pricing gains. This is not something that we are worried about. 2017 was a bit of an exception if you remember the circumstances. According to our own estimates, we think that the value of the industry will continue to grow. We expect that we'll have growth for the mid- to long term in pricing in both the emerging and the developed market, the mature market, including Russia and the U.K. Now if I may make a reference to the two markets specifically, and then maybe I'll pass it on to you, Roland, if you want to add a dimension to this. But in Russia, if you remember, we had two years of very difficult pricing environment. And the pricing dynamic quite improved in 2018, and we feel confident that we're now on a better path. That being said, we remain very alert because we are observing that some of our competition is maybe a bit shy in terms of either a lag or sometimes rolling back into pricing. So this is not something that we take lightly. We have better faith in the pricing environment but remaining alert because we think that there is opportunities. In Russia, we see affordability still being very good and adequate for pricing opportunities. The average pack of cigarettes in the market is at about $1.80, which gives us confidence that there is an ability to put pricing on top of that. In the U.K., the pricing environment remains competitive, but we think that with the strength of our portfolio and our ability to compete in all the price sectors, we are not worried about the pricing opportunity despite the down-trading environment which we've observed for a while in that market.

Roland Kostantos

I can add a bit to that, Eddy. I think you covered most points. If we look at Russia, as Eddy said, 2017, I think, was a year where it was more of an exception than a rule. In 2018, we saw a return to pricing, a strong pricing environment by not only ourselves but the entire industry in terms of increasing the profit pool. What we see now is that pricing continuing in from the end of 2018 into 2019. We ourselves, as you know, have taken price increases in 2018, and they will carry forward, as you would expect, passing tax on initially that was levied in July of last year and the first part of '19. So we're confident on that part. We're also confident on the fact that the pricing environment is, in fact, solid still within Russia. When we look at the tax environment in Russia, and that's a very key driver, the tax plan that was published last year shows an increase in taxation but a moderate one going forward, so that gives us a sense of confidence as well when you look at that. Of course, we can't predict the future with tax, but certainly what was published gives us a sense of confidence. And that should give yourself a sense of confidence as well in terms of the pricing capabilities within Russia. Certainly, it's a competitive battleground. We don't take that lightly. We're all fighting for the same piece of territory, share of growth and earnings growth. But with respect to pricing, I think that's something that we can continue to see in the future. U.K. is a similar story. Eddy mentioned that. '17 was again an anomaly; a return to pricing in '18. We're quite familiar with the tax scenarios in the U.K. and the affordability to the consumer. And what we see is in '18 into '19 a very strong pricing environment. And for sure, we're confident through the upcoming year into '19. Thank you.

Eddy Pirard

Yes, the three additional little elements, that's a good point that I'm being reminded, that we need to be conscious about, and we'll pay attention to this as we run the business into the next year and the mid-term. Russia is facing, as you know, an increase in illicit trade. We reckon that it could go up to 11% to 13% is our estimate for 2019. This is something that we're watching. We know that the illicit trade is driven by cross-border sales. So in some parts of the country where the penetration of illicit trade is happening, then clearly, the share of illicit trade in those parts of the country are substantially higher. This is something that we have to think about. There's also some down-trading in the market. But the addition of Donskoy Tabak reinforces our ability to compete, and it's an important element in our ability to pass on pricing but with the strength in the segment of the industry. So that's - it's a good addition to that. As to the unknown for the U.K. which we've not mentioned is Brexit, your answer is our answer. We're watching. We have contingency plan in place, but we'll see how that unfolds.

Nobuyoshi Miura

As JTI, how much JUUL do you see that - how much of a threat do you think JUUL is as far as JTI is concerned?

Eddy Pirard

JUUL, as you know, has been introduced in some markets, including the U.K. And it's quite revealing, I think the chart that I showed you. We did some consumer testing and some consumer research in December of last year. This was with consumers were clearly aware of the JUUL product. Not only were they aware, but they had the product available to them. And out of all the metrics that we measured, our products rated very well. JUUL achieved some amazing commercial success in the U.S., needless to say, but we believe that we have a very competitive offer in Logic Compact. We're very encouraged by that. I'd go even further to say that 2019 will be the year for Logic. The delivery of the product, the satisfaction that consumer is getting is very encouraging. We have now extended the availability of the formulas and the nicotine salt where it matters. And we see that the consumer so far have had a very encouraging feedback to provide. So that's quite encouraging, and we're not afraid of competition in that respect.

Naomi Takagi

Just one question, right? I am Takagi from SMBC Nikko. I have a question around the domestic tobacco business. For Ploom TECH and your sales plan for this year, you said 5 billion units. Can you give me the assumption for this? Because at a glance, seems that this target shows your low confidence with regards to new products. I do understand that nationwide sales is going to start in the middle of the year. But you saw - you sold 2 billion last year for Ploom TECH only, so I was just wondering why do you have such a low target. Of course, I'm sure you account for cannibalization, but can you give me the thought process behind setting the 5 billion unit target number?

Unidentified Company Representative

I'd like to take your question. For RRP and for the market itself, like mentioned earlier, for 2018, it was about 21%. And for 2019, we're estimating that it's going to reach about 22% or 23% for the year when it comes to category share. In 2018, compared to 2017, we did see growth decelerate for RRP. As a backdrop was for those high-interest consumers, they - we already have penetrated them, and this has run its course. So with that as a backdrop, all companies, in light of this trend, are coming up with new products, they are launching new products, and they continue to implement their strategies. So far, we are not really expecting the market to substantially expand at this point in time, and we believe the current trend is going to be ongoing. Going forward, at the passed smoking legislation, when that kicks in, in 2020, I believe the environment will largely change. But for 2019, we expect the current environment is going to be persistent. So that's where we are. But with regard to that 5 billion unit target and regarding whether that's high or low, from our viewpoint, we believe we're in that point in time.

Since last year, we set a certain forecast for this business. However, when it comes to reading this market trend, it is very hard to predict, to be honest. Therefore, we did set an assumption for 5 billion units. To forecast this business, we might exceed this level. However, in any case, when it comes to our production capacity, we are better placed and stable compared to last year because the equipment for production is now higher speed, and we've been successful in shifting to higher speed. So even if we were to exceed the 5 billion number, we still are ready to support that growth. So even if there is a certain level of change going forward, we believe that we'll be able to respond to it. So I would say this target, it's a matter of how the market changes, and it's how the consumers select certain products. But we would like to continue to monitor the market closely. For last year, to that end, we weren't able to keep up with capsule production, and unfortunately, there were times when we weren't able to respond to expectations. However, this problem has been resolved already, so on our part, we would like to steadily promote this business.

Naomi Takagi

Can you give me a little bit more flavor on this? For example, for the existing Ploom TECH product you have and the growth prospects of it and how about the contribution from new products, can you break this down a little bit more for me? And in our case, low-temperature heated products is what you have. And for this category, in the overall RRP category, what kind of potential do you think that low-temperature heating products have?

Unidentified Company Representative

Unfortunately, it's hard for us to give out straight numbers to you. However, strategically, we would like to have a point of differentiation with the competition by having the low-temperature heating category, and we would like to make this category well established. That's my first point. And for this year, we'll have Ploom TECH+, and we're going to make that nationwide earlier than Ploom S. And by doing so, we would like to differentiate ourselves from competitors. So that would be our priority. Then after, with Ploom S, we will enter the market for the heat - high-temperature heating - heated product category, there's already an established market, therefore, our strategy is to take away share from competition. Unfortunately, I can't give you numbers in detail, but whatever the case may be, I mentioned that we have sufficient capacity for capsule production. And for Ploom S, it's an extension of producing RMC. We will leverage that technology. In any case, we would like to be well prepared to support growth in each of the categories.

Masamichi Terabatake

Regarding RRPs and our overall way of thinking, let me readdress this again, including what I've mentioned last year. I assumed the presidential position last year. And for 2016, 2017, in two years, the Japanese market, the RRP market grew substantially to 18%. And then after, in 2018 - beginning of 2018, we set a three year plan. We wanted to - we didn't have enough production back then, so we wanted to respond to that. And for this problem at this point in time, in 2018 - the middle of 2018, we have already completed capacity expansion, and we were able to accelerate nationwide sales of Ploom TECH. And for Ploom TECH+ and Ploom S and their capacities, especially regarding consumables, we believe we are well positioned to sufficiently provide inventory to the market. With regards to the second point, changing our sales organization, which I mentioned last year as well, in April, we have set up RRP exclusive team at each of our branches. And in October then after, we set up a team who will engage in direct communication with our customers so that we could offer a good smoking environment. And we have been able to evolve this internally as well. And we also wanted to develop outlets where Ploom TECH can be smoked. 800 outlets in Japan are now Ploom TECH Only outlets. And we've already talked about this.

But currently, this has reached 3,700, which are places where Ploom TECH can be utilized. This is going on a monthly basis, so we've been able to evolve our sales organization to that end. And as a result of that, we've been able to better communicate with stores, and our connection with the stores have become stronger. So to grow the RRP category even further, I believe we have been able to reinforce our business foundation. The fourth point was with regards to Ploom TECH, in addition to Ploom TECH, we talked about introducing Ploom TECH+ and Ploom S from the latter half of 2018 or in the first half of 2019. During Q3, we were saying, around March 2019, we were thinking about doing it during Q1. But in reality, we're able to launch the products in January instead of March, which we were assuming. So what we decided internally is something that we were able to realize. One miscalculation was the growth speed in the market as well as consumers and their attitude, meaning there is many trials, but there is a lot of withdrawals as well from RRP. Maybe it's the flavor that they're not satisfied with, and that's why they're exiting. So the net growth speed is something that we weren't able to read properly when it comes to inflow and outflow.

I think that was a big factor. So last year, we were talking about selling 200 million packs, but that went down to 140 million packs in Q3. And we were able to achieve the revised forecast. With regards to what we accounted for, for growth speed for the category as of 2020 - end of 2020, we were saying that the category might reach 30%, and our three products will achieve 40% share. That was the target we set back then. But when you look at the current environment, where growth is not accelerating, which is rather decelerating, for 2020 and the 40% assumptions we said, we believe it's not relevant from a business perspective - it's not appropriate from a business perspective to try to forcefully achieve that target, so we have decided to once put this target aside. Of course, when it comes to growth speed of RRP, it's really hard to read and forecast, so we just set a range. We mentioned that 5 billion would be our target. However, as mentioned earlier, we will be able to support higher growth or lower growth. But in any case, we would like to manage total share between RRP and RMC. And in any case, we would like to strive to achieve that ¥215 billion AOP target that we have set for this year for the tobacco business. That is the type of management style that we have decided to switch over to. If the market is not growing that much and if we make too much investments into RRP, we don't think it's going to be wise. We think it's better to manage overall profits. So that is the commitment we would like to commit to by learning the lessons from the past.

Tatsuya Tsukuura

Fujiwara-san.

Satoshi Fujiwara

This is Fujiwara from Nomura. So Terabatake-san mentioned about some internal evolution that you've gone through. So for RRP, you were looking into not just Japan but also global basis. So Logic Compact, and it was actually evaluated better than JUUL and doing well in U.K. You've mentioned that. So there are many competitors, and there are many startups as well. Competition is definitely intensifying. So it seems as if your company is lacking the speed. And to be proactive, to be ahead of the competitors, maybe as an organization, do you have that agility in order to achieve the mid- to long-term growth? If you can comment on that, that will be highly appreciated.

Mutsuo Iwai

Thank you very much for that question. As mentioned, in Japan, we definitely lagged behind, so I do understand the concerns you may have. So in the past 1.5 years or so, our organization has been evolving in order to speed up our operation. And as the pipeline, we do have the pipeline - the first phase of the pipeline, so the question is how quickly can we develop those and how quickly can we deploy those depending on the characteristics of the market. For instance, the Logic in the European market; and of course, in Japan, the T-Vapor products. And of course, we have the lineup of both low-temperature and high-temperature products. So JT and JTI have been working together as one to be involved in the development and also in the launching process. So there has been a number of kaizen in the organization front. So on a symbolic point, as Terabatake-san mentioned, the R&D - the in-charge person.

So of course, we have a large R&D department for both JT and JTI, but the head person, the top person will be just one person to be in charge. And we are looking into how can we allocate the resource for both RMC and RRP. So as boldly as we can and as quickly can we - as we can, we are making those changes, so we can rebuild the R&D function. So that is one symbolic phase. So of course, there are many areas for improvement. We do understand that. But as far as I'm concerned, this speed of development, that we are definitely making a betterment, and also on a global basis, what is the kind of product we'd like to launch, in that front, we are making some improvement as well. Depending on the market there are different tax systems, different regulations. And of course, the consumers' taste is quite different. Some may prefer more of a lighter taste as opposed to some markets may prefer a higher nicotine content products. So depending on that, especially starting from the key markets, we are trying to evaluate and examine and also are trying to deploy these products. So we would like to make sure that results show that your concern is of no ground.

Satoshi Fujiwara

Just one point I'd like to ask then, if you can add on. So yesterday at the PMI results, they mentioned the IQOS have been - has been accelerated in Europe. And so it's not E-Vapor. We're talking about T-Vapor. And they are - they were commenting that T-Vapor market is also expanding. Well, I think for JT as a group, you are looking into E-Vapor as a tool to compete in the market. But - so what do you see as a potential of T-Vapor aside from Japan and South Korea? Do you see that as a possibility or as a risk?

Mutsuo Iwai

Perhaps Roland or Eddy, you can go more into - share with us the details later. But from my end, I'd like to comment. We haven't decided that we will just launch E-Vapor only as far as Europe is concerned. For instance, in Poland, we also have the facility not just for E-Vapor but T-Vapor as well. So we definitely have the system if we decide to launch the T-Vapor in Europe. And of course, we are watching carefully how IQOS is trending. But depending on their move, we would like to address that accordingly. So it is not as if we fully decided that we are fully confined to E-Vapor only as far as the European market is concerned. It could be T-Vapor this well. And of course, we launched the Ploom S, which is a high-temperature heated products. So there is definitely potential in those markets where we haven't tapped so far.

Eddy Pirard

Let me add a dimension to this. We see the total Reduced-Risk Product category growing from, last year, we estimated about $16 billion, I think. And we look at it at the horizon 2025, it's a bit of a crystal ball, but our best estimates are looking at $56 billion or thereabout. So there is no doubt that the category will be growing, and we believe in that, and we're investing accordingly. As Iwai-san just mentioned, it's very clear that for the moment, T-Vapor is very much associated with Japan, and Japan remains the priority market that we need to address as a group. So working as one team, we've put the resources and the focus of management on sorting out the challenges that are offered by the domestic market. We have, needless to say, observed carefully the progress of some of our competitors, but it is clear that the environment is very different.

There is one Japan, and there is the rest of the world. Some markets might have more affinities to the Japanese consumers, and we know which one they are. But it's clear that the E-Vapor has taken the lead in the early days in the international markets and in Europe in particular. We are observing, we have a breadth of product offering to address different consumer needs. We have an approach, which is very much to provide consumers information so that they can make informed choice as to the product category they want to go into. We are ready. We are positioned well, as Iwai-san mentioned, to tackle the opportunity of T-Vapor in particular when it materializes to the extent that we deem that it's appropriate for us to launch our products. As you know, we have launched the Ploom TECH product internationally before. We've announced that. And we have observed, and what we do see is that there is an opportunity for consumers who particularly value what that specific product has to offer. But so far, the bulk of the opportunity has been under our Logic proposition in Europe. And I have to say that we are putting a big emphasis operationally and commercially into Compact proposition, which seemed to bridge a wider audience that we thought before. It really seem - based on the feedback that we've received so far, it seemed to address a lot of the kick and the requirement from a flavoring and overall delivery that we expected. So we're quite confident in that. And at the opportune moment, we will expand our capacity and competing in the T-Vapor once we have the opportunity to do so post Japan.

Tatsuya Tsukuura

Kawasaki-san, please.

Satsuki Kawasaki

I'm Kawasaki from UBS Securities. I have one brief question. Regarding the domestic tobacco business and your profit plan, listening to what you've said, whether it be RRP or RMC, when it comes to units, you're not really sure which is going to grow, but you are prepared, it seems. However, for this fiscal year and the profit growth, it's going to be ¥6 billion, which is only 3% growth. You're committing to a profit. However, with regards to the level of increases of ¥6 billion, I guess it seems that in 2018, you lost ¥23 billion worth of profits, which means that back in 2017, in order to recover back your profits, are you thinking that it's going to take time? That's the kind of impression I got because, for 2019, you were saying that profit was at the bottom in 2018, and you are on the path of recovering back profits. So how do you see yourselves? And for RRP, if you're going to see saturation, wouldn't that be a good pricing opportunity for RMC? So for this fiscal year, I was wondering why your earnings growth is going to be this slow.

Unidentified Company Representative

Let me take your question. First of all, for this fiscal year, as mentioned in the presentation, for RMC, first of all, for the former third-class products and abolishment of reduced tax rates, that is a factor for risks associated with the RMC business. Since last year, for Camel, we've launched a low-priced version so that we can maintain our share in the low-price category. So for RMC, we are expecting more intense competition in the low-price segment. That's one thing. Also for this year, we will merely launch RRP products, which are Ploom TECH+ and S. We're going to be in the initial stages, so we need to ensure that we will penetrate the market, so we'll be increasing our sales promotion costs for this purpose. So largely speaking with regards to how this year is structured, due to these factors, we will strive to strike a good balance as we aim for profit growth. For fiscal 2019, if we are able to set a good base, we would like to ensure that we are able to recover profit growth.

From that point of view, we believe that 2019 is going to become an important year. And our basic way of thinking that - is that we would like to ensure that we are successful in the measures we have set. For the former third-class products, it was mentioned that competition is likely to intensify, so that's one factor that we're assuming. And also, we're going to see VAT tax hike. So when it comes to pricing, it's a matter of how much flexibility we're going to have because this is not just a typical excise tax hike, it's going to be VAT tax hike. And for RRP, it's a matter of selling devices first, and then that needs to develop into consumable sales, and that's how we're able to generate sales and profits. So we're going to have new - two new types of devices available, but we're going to be in a penetration stage, and things are going to happen in stages. So you said the 5 billion units might be a low number. However, it's like a triangle when you think about the total area. So we first need to offer the three devices to our consumers as options and first penetrate the market and then ensure that we are able to develop refill sales and also generate profits from RMC. So for 2019, there are 2 or 3 factors that we need to keep a watch on.

Satsuki Kawasaki

So for the consumption tax hike and additional price increases, that is not accounted for. However, for price elasticity, you are accounting for that in your volume outlook? Is that the reason why your target is conservative?

Unidentified Company Representative

For the consumption tax hike, we can't do something that's very drastic because of the consumption tax hike, so yes, we have accounted for this event to a certain extent. Based on what's been discussed, for the medium-term three year plan with regards to managing the company and how we are going to manage the overall business, I think we need to communicate about the backdrop to this because, earlier, Mr. Terabatake mentioned this. But for last year, it was about needing to sell Ploom TECH, or else, we would have been successful. In solid growth in the market, that was the only option we were able to offer. Moreover, we had a problem with capacity, so we weren't able to communicate with conviction. That was what happened last year. As a result, many things happened, and here we are today. But with regards to the lessons learned, we believe that overly pursuing detailed targets is something we don't want to do. When you talk about our weapons or the products we have in place, I think it will be a little bit too risky if we try to be adamant about achieving the goals because, last year, it was about needing to sell Ploom TECH, or else, we won't be able to achieve the full year plan.

However, for this year, we now have three products, and the production capacity is available. So what we view is for the RRP market growth is probably going to be moderate during this period of time. So when you apply that backdrop, of course, there might be cannibalization in between our products, but it's a matter of how - whether it be RMC or RRP, how much share we can gain from competitors so that we can generate better profits. And going forward, in order to establish a strong price leadership, we believe this is key. That's why from earlier on, we were talking about total share for the tobacco business and to ensure that we are able to capture good total share. With regarding how 2019 is positioned, like we've been saying from before, we update our three year plan every year. And what's been said until last year was, to be honest, RRP growth expectations, there was a deviation on what we were expecting and what actually happened.

So going forward, before and after that Olympic Games, there is going to be legislative action, and there is going to - and when you think about that milestone over the medium to long term, we need to identify where we are able to grow RRP and what kind of consumers are going to use low-temperature heated products or high-temperature heated products. So with regards to our profit outlook for 2019, it's down by ¥50 billion compared to 2015. However, you might wonder if this is still profit growth. However, from our point of view, over the short term, we need to look into what we need to do again currently. And when you think about our rolling plan, this year would be a year when you might say this is our third attempt. However, it's a year when we need to ensure that we observe our consumers. And the potential of our products are reaffirmed because we're going to move on to the next stages from the initial stages of RRP, and we believe we're going to be going through important phases. And ultimately, we believe that this plan was best for 2019. However, at the middle of the fiscal year, we hope that we can maximize our commitments in reaching our profit plan by reviewing where we are.

Tatsuya Tsukuura

Tsunoda-san.

Ritsuko Tsunoda

Tsunoda from JPMorgan. So one question. So I have a question related to the overseas business. So JUUL, they're already in the U.K. So your Logic Compact has been steadily increasing your market share. But JUUL's market share, how much market share do they have in the U.K.? And your Logic Compact's share increase, are you taking the share away from JUUL right now? That is the second question. Also, Logic Compact's pricing, how would that compare in comparison to JUUL? That's the third question. So RRP, there was a very powerful presentation from Eddy as far as RRP is concerned. But as far as RMC is concerned, of course, you have been fairly active in the acquisition in the emerging markets, and that has led to increase in volume and revenue increase. That we can understand. But on the other end, the emerging markets currency, the FX impact is actually hitting you really hard. So the more you lean towards emerging market development, you would have a larger risk entailed with FX.

So from the shareholders' point of view, you'd have less underlying resource to pay the dividend or the return to the shareholders, so there is more anxiety. So from that perspective, you will be looking into net income as another material to consider the shareholders' return policy, including DPS. So having that additional sort of material to consider the shareholders' return, that gives more anxiety amongst the shareholders. So if you were to - it seems as if we were to terminate the discussion here, it seems as if, well, there's nothing we can do about the FX. Please share the pain. I think that is the message that we hear. So rather than going to that end, perhaps we can build earnings in certain area, and please show us that you are confident that you can increase the dividend on a steady basis going forward. That - it will be really encouraging if we can hear that kind of comment from you.

Naohiro Minami

In terms of emerging markets, our policy relative to EMs, so from the profit point of view, what is the validity? We need to really see what is the future value of the emerging market. So I think your question was related to that. It was a very intrinsic question. Thank you for that question. So from that point of view, FX, needless to say, we need to look at in a certain time frame. So if you're looking at 1 to 2 years, how can we contain the FX fluctuation within certain range, that is one way to look at it. That includes FX hedging, or it could be purchasing the raw materials in local currency. That could be another initiative. So every manufacturer, including ourselves, would need to be involved in this more so than ever, including ourselves. Now your question is related to the emerging market, what will be the long-term value of the emerging market. And so the FX volatility is definitely there, and the COGS need to be taken into effect, and also, how can we realize the value of the emerging market, I think that is another part of your question. The emerging market business, we will look at it.

We are not actually engaged in this emerging market business in a set period of time, let's just say 7 or 10 years or so. We are not doing that. It's more our take is we will be engaged in that business for a long perpetual period of time. That is our basic stance. So we do not expect to do any long-term hedging because we are not in the mining business. We're not in the commodity business, so we don't engage in long-term hedging process. So what should we do then? We should go back to the main way. For instance, whether it's Bangladesh or Ethiopia or Indonesia, especially when it comes to Bangladesh and Ethiopia, as many of you are aware, the income level or the disposable income level and per capita GDP is ranked really low in the world right now, but the market frontier is quite huge. I think many of you can appreciate that as far as Bangladesh and Ethiopia is concerned. So the way we approach this, we have certain estimate or forecast vis-à-vis the economic growth of these respective companies - countries, excuse me. And the question is, how can we capture the GDP growth of those respective countries and how can we tie those in with our profit growth? I think that is an eternal theme that we need to approach, but we need to approach this. Of course, there will be fluctuations. And of course, there could be some events that the FX might actually move on a staircase basis. But at least in the mid- to long-term basis, we need to capture that mid- to long-term economic growth. Of course, this may be a theoretical discussion, but we should be able to contain the FX risk. In fact, in some cases, we may be able to overperform the FX effect. So the question is how well can we execute this initiative. I think that is the key to our success in the emerging markets.

Masamichi Terabatake

I have a point to make about the dividends. As you rightly mentioned last year and before, we have been increasing the dividend, DPS by ¥10 per year. And this year, 2019, our forecast is ¥4 increase. And the background of that is because we will be now looking into net income as well. But of course, we are watching not just net income only. The basic is to watch the business momentum with the adjusted operating profit on a constant-currency basis. So a mid- to high single-digit growth of AOP is projected in the three year period. That is the plan here. Unfortunately, 2018, 2019, U.S. dollar seems to be the only strong currency in the world. Therefore, our policy of realizing the steady sustainable growth of DPS is - means we would not like to - we would not cut the dividend. That is our strong policy. So that is why the DPS increases for yen. If it so happens that our assumption is wrong and if the FX moved in a positive manner, that we would have to reconsider our DPS. But for the time being, we would like to stick to our policy or - of paying the dividend on a steady and sustainable basis. So ¥50 billion of share buybacks, it has also announced. So taking that into consideration, added with the ¥4 DPS, the total shareholders' return would also be enhanced.

Eddy Pirard

If I may add the dimension on JUUL, we believe that Logic Compact, in that proposition, we've developed something quite unique, and the consumer feedback has been really encouraging, albeit it's early. We launched in the U.K. in August of last year, as you know, but we've launched in a few other markets. And so far, so good, as we say. As to JUUL's performance, well, you'll have to ask them. The only thing that we do know is that they're only present in one chain for the moment. And with the awareness that the JUUL name had in the U.K., there's a bit of dilution because a lot of people are reaching out to that channel. So it might not be as representative as it might be, but again, their performance is about them. But we do believe that now with the extension of our Logic portfolio, we've got an ability to address consumers' needs on different type of deliveries, and we believe that we are competitive. So to your point on pricing, we will not launch a product which is not price competitive in the marketplace. So we are quite bullish about the prospects. In fact, one could argue that our own performance in the U.K. was suboptimal, we believe that Compact will strengthen our ability to compete even more in the closed tank system, in which we believe.

Ritsuko Tsunoda

Now just to add on then, JUUL and Logic Compact, could you bring those into Russia? Are there any regulations to prohibit that? I just like to confirm that. Could you bring JUUL into Russia and also Logic Compact? Are there any regulations to prevent that?

Roland Kostantos

To speak about Logic Compact, as Eddy presented, it's our intent to launch Logic Compact. Today, it's in the U.K. and a number other markets, Ireland, Canada. It's in Romania. And it's our intent to - by midsummer to have Logic Compact in another 10 markets. In the first quarter, we will be in Russia with Logic Compact. So yes, we can distribute and market our product there, Logic Compact, and it's our intent to do so. And in that marketplace, I won't speak on our competitors, but we will be there. And as Eddy said, we have a - what we think is an outstanding product with characteristics that will appeal to the consumer. And in Russia, as it will be in other markets, it will be priced competitively with our category of products.

Ritsuko Tsunoda

So Logic Compact, so I think it was nice to hear that Logic Compact could be used as a defense against JUUL. Terabatake-san, you mentioned, of course, DPS increased by ¥4. And inclusive was ¥50 billion of share buybacks. So 90% of the free cash flow has been returned. We are aware of that. So I'm not really sticking to that point of whether you should increase the DPS by ¥4 or ¥10. That is not the point. So this time around, this is fine. However, next year, could you continue this? Is this sustainable? I think that is the main concern of the shareholders and the market. So what is your commitment for next year onwards? So I believe you were confident about profit growth, but we don't hear that message aloud. I think it is your corporate culture. You are very modest, and perhaps, you're not boasting that to ourselves. But now the generation is changing, and we're - you're approaching to the new generation. So you cannot expect people to read your mind, so please be more proactive. It is dependent on you, Mr. President. We are looking forward to the share price tomorrow.

Masamichi Terabatake

If my comment is negative, I apologize for that. First of all, again, we will not cut dividend. I've actually clearly made that statement. And also, for the domestic tobacco market, 2018 is the bottom, and we will continue to grow the business. So tobacco business as a whole, AOP will have a 7% increase. That will be achieved for 2019. And that's mid- to high single digit even on the single year basis, we will achieve that. And we will continue to do so. We are confident that we should be able to achieve that number. So I will make sure that we'll make positive comment as much as possible. Thank you for that.

Tatsuya Tsukuura

So the next question will be the last question as we're running out of time.

Unidentified Analyst

I only have one question, but I'd like to ask a question about Russia because we have Mr. Pirard with us today. In Q4, PMI seemed to have sold a lot of IQOS in Russia. I think your share is still at 1%. But several years ago, the same thing happened in Japan. And now they're close to 20% in several years. So my question is, in Q4, seems that they've started to see a pickup in sales in Q4. Do you think this will be a catalyst for future growth? And if you can, can you give us a flavor of the differences between Russia and Japan? Do you think that Russia will not grow to 20% instantaneously? And if so, what do you think is the difference in nature between Russia and Japan?

Eddy Pirard

I wish I had a crystal ball. The one thing we're doing clearly is to make sure that we're monitoring very closely the performance of IQOS in Russia. Is it a different market? I think it is. I think that consumers in general are much more sensitive to the smell and the disruption of smoke, if I can call it this way in this market that it's in, in Russia. Our own read of the performance of IQOS, which is very much big city driven, I would say, even Moscow driven, we are reading Nielsen, and Nielsen, I think, is about 3% performance. So it is still quite a manageable number. And we're watching because we do not want to be taken by surprise. That said, I think what you've seen from the lead performance in Q4 is an expansion, as Mr. Calantzopoulos explained, of its own kind of delivery of IQOS in Russia, in more cities. Again, we're watching. We believe that we have a competitive product for the moment. Japan remains a priority on T-Vapor. We're watching, and when we deem that we need to do so, we will be ready to compete in that particular segment of the market.

Unidentified Analyst

In the case of Japan, now RMC market went down because of growth in RRPs. So do you think that in Russia, there's the potential of switchover from RMCs to RRP in the next several years?

Eddy Pirard

We've not seen an impact in Russia of RRP penetration with an impact on the ready-made cigarette. Can it change? Again, we are monitoring very closely the development. We think that the environment is somewhat different, as I said before. Does it have the potential to be as large as 20% of the market? Personally, we - as a business, we doubt very much, but we don't want to be cocky about it, and we want to be prepared. I don't want know if you want to add a dimension to this.

Roland Kostantos

I'll add a small dimension to it. You asked the questions of differences. First of all, you see Russia as being a different market than Japan, and I'm going to highlight two elements. One is, today, not only do we have T-Vapor opportunities in Russia, but there's also E-Vapor and nicotine product. And that is, I think, one distinct difference from what you've seen in Japan. The second distinct difference I think you should look at is the actual industry and the size of industry, which is although strong from a pricing perspective with capability, it's still a - 2/3 of the industry would be what I would consider in the value or the lower segment. So affordability is, in fact, a point that should be considered different than Japan. Now within the context of Russia, yes, there is opportunity for both E- and T-Vapor growth. But today, as Eddy has said, we've not seen an impact of significance. Yes, the quarterly fourth quarter shipments may be larger than the other three quarters, but they've been consistent throughout the year. And when it comes to 2019, we see the industry size in Russia largely declining by the same factors as they did in 2018 and by the same reasons, one of them being illicit as well. So yes, there is a distinction, and it's not that we are ruling anything out. We're not complacent when we look at that market. But certainly, there's a difference in terms of the two markets.

Tatsuya Tsukuura

Now as time has come, we would like to end our results meeting. Once we're ready, you'll be able to see this meeting once again on demand over the Internet. You'll be able to access through our website, so we hope you could make it - you can use this opportunity. We also have space in this venue where we are displaying Ploom TECH+ and Ploom S. You could try it out. So if you have time, please drop by. And you can get a sandwich of Ploom TECH+ and Ploom S as a souvenir today, so we hope you can take a pack back. Thank you very much once again for participating today.