Japan Tobacco Inc. (JAPAF) Management on Q2 2021 Results - Earnings Call Transcript

Japan Tobacco Inc. (OTCPK:JAPAF) Q2 2021 Earnings Conference Call July 30, 2021 3:30 AM ET

Company Participants

Naohiro Minami - Chief Financial Officer

Yuki Maeda - Senior Vice President & Chief Financial Officer

Koji Shimayoshi - Deputy Chief Executive Officer, JTI

Conference Call Participants

Nobuyoshi Miura - Citigroup

Hiroshi Saji - Mizuho Securities

Makoto Morita – Daiwa Securities

Haruka Miyake - Morgan Stanley MUFJ

Satsuki Kawasaki - UBS Securities

Keiko Yamaguchi - Goldman Sachs

Naohiro Minami

I am Naohiro Minami, Chief Financial Officer, of the JT Group. Thank you, for joining me in this briefing, relative to our second quarter earnings results. I will start by covering the highlights of our consolidated financial results for the second quarter of 2021 year-to-date.

Please take a look at Slide 4. Our adjusted operating profit at constant currency, which is our performance indicator for consolidated profit increased by 26.9% year-on-year driven by continued positive momentum in the tobacco business. We can attribute this robust performance to longer-than-predicted effects of the volume increase in some high-margin markets due to travel restrictions.

In addition, to positive momentum in the international tobacco business is our market share gains across several markets abroad. Revenue was up year-on-year due to strong top line performance in the tobacco business, despite lower sales in the pharmaceutical and processed food businesses.

Adjusted operating profit on reported basis was up as foreign exchange headwinds on the international tobacco business have been limited. Profit attributable to the owners of the parent company increased due to higher operating profit and improved financing costs.

Let me now move to the results for each business. First, let's look at volume in the Japanese domestic tobacco business. Total RMC industry volume decreased year-on-year due to growth in the RRP category and the effects of the October 2020 price hike in addition to a natural decline. At the same time share of the RRP category remained high at 29.5% influenced by changes in consumer behavior with the pandemic as well as new product launches supported by intensified sales promotions by each industry player.

Next, let me discuss about our volume performance. RMC sales volume was down due to a decrease in total industry volume consumer preferences shifting from combustibles to RRP the impact of down-trading due to intensified competition in the value segment and some market share decline. RRP sales volume stood at 2.1 billion units up 300 million units year-on-year due to steady market share growth.

Turning to our financial results. Despite a decrease in duty-free sales, core revenue grew by 3% year-on-year due to the positive effects of the RMC price hike in October 2020, which exceeded the impact of the volume decrease and the increasing year-on-year sales volume for RRP refills. Adjusted operating profit shows a major increase of 23.8% year-on-year due to top line growth a year-on-year decrease in sales promotion-related differences in promotion schedules and investment related to the Ploom X launch concentrated in the second half of the year.

Let me again mention, Ploom X, our new HTS device we launched the other day. Ploom X, is JT Group's first global device. Applying the new HEATFLOW technology, it offers richer tobacco taste than our previous product. To be specific we adopted a design that compresses a part of the inserted tobacco sticks from two sides enabling efficient heat delivery throughout the tobacco stick.

Furthermore, the device is designed for air to flow in through gaps between the outer surface of tobacco sticks and the heater for pleasant quality and amount of vapor. The enhanced battery also allows for the device to heat faster and last longer.

Design-wise with no buttons on the surface of the device it's stylish, beautiful and offers an intuitive user experience. We market Ploom X alongside with newly blended tobacco sticks improved for maximum enjoyment of flavor and aroma with the new device. We are very proud of this product into, which we incorporated consumer requests we received not just in Japan but from around the world.

We are off to a great start with the prelaunch sales and this encouraging start gives us a sense of success. We are already receiving positive feedback from our consumers commenting that Ploom X offers a significantly enriched vaping experience compared to Ploom S finding it to be much closer to combustibles and that its compact size and front panel has a premium aesthetic.

We began selling Ploom X through the CLUB JT online shop on July 26; and plan to make it available in Ploom shops nationwide on August 3, adding convenience stores and tobacco shops across Japan on August 17. Due to the tight supply of microchips of late, device supply may be limited in the future. Although, our sales plan remains unchanged as of now we will work to minimize impact as much as possible. Outside Japan, we plan to introduce Ploom X in Russia, later this year.

Next let me explain the results for the international tobacco business. Next, please turn to Slide 7. Total volume shows a strong year-on-year increase of 8% propelled by sheer momentum in key markets and many others although the duty free business has not recovered to pre-pandemic levels.

This solid volume performance was due to the continuing market share momentum robust demand in high-margin markets like the UK and Taiwan as travel restrictions continued and the relative volume growth in markets that temporarily saw a drop in demand caused by lockdowns last year.

In Russia, which was one of the key drivers of this total volume growth the shipment volume increased due to a decrease of illicit trade volumes likely from lower cross-border movements strong market share in combustibles driven by the growth of Camel product and favorable inventory adjustment.

Next, let me explain the financial results for our international tobacco business. Our core revenue recorded a high growth rate due to a positive volume variance contributed by the Philippines, Russia, Taiwan and the UK; and pricing effects mainly in the Philippines, Russia, and the UK

Driven by top line growth, adjusted operating profit is up both at constant currency and on a reported Japanese yen basis. Total costs rose due to the increased investment in RRP and digitalization. While we see some negative currency effects mainly related in the Iranian rial and Russian ruble, the effects have been limited compared with the previous year and have shown greater improvement in the recent years.

With slide eight, let me move to the financial results for our pharmaceutical business. Total revenue was almost flat year-on-year with revenue increased at our consolidated subsidiary, Torii Pharmaceutical, mostly offset by a decrease in overseas royalty income.

Adjusted operating profit decreased due mainly to the drop in overseas royalty income and recognition of losses associated with the termination of the development of a licensed compound and the lower profit at Torii Pharmaceutical.

For your reference, I'd like to mention that CORECTIM Ointment 0.25% for the treatment of pediatric patients with atopic dermatitis was listed on the Japanese national health insurance drug price list as of May 26th and launched on June 21st.

Moving on into the processed food business. Revenue was down by 1.9% year-on-year due to an unfavorable comparison to the pandemic-related increase in demand for household commodities in the previous year. This was in spite of the strong performance in the household commodities and the topline for the food service products being on a path to recovery in comparison to the previous year.

Adjusted operating profit grew despite the revenue decrease due to a favorable comparison of the depreciation cost related to the booking of impairment losses for the factories and stores in the bakery business in 2020.

From the next slide on I will talk about revised forecasts for 2021. Slide 10 is about the revised forecast we are announcing today. We have made upward revisions to our initial forecast reflecting strong results for the first half of the year notably from the international tobacco business. I will explain projected profit for each business segment in detail on the next slide and onward but here is how we see the second half.

Our performance in the second half will not be as strong as the first half considering we are projecting far smaller effects from the temporary factors leading to the major volume increase in the international tobacco business in the first half and the concentration of expenses for the Japanese domestic tobacco business in the second half.

We expect an increase in adjusted operating profit at constant currency our group-wide performance indicator by ¥10 billion or 2.0% from our initial projection which would reflect an increase of 7.2% year-on-year as corporate expenses such as investment related to IT infrastructure unification between JT and JTI which will be accounted as expenses will partly offset the growth in the international tobacco business.

On top of the business upside, our forecasts on reported basis to take into account lower currency headwinds as a result of the revised currency assumptions. The new assumption reflects several local currencies with stronger rates than we initially projected and the yen tends to be far weaker than the dollar.

We revised our revenue forecast far above the initial figure due to the upsides caused by the weakening of the yen against the dollar as well as upsides in the international tobacco business exceeding the downward revisions in the Japanese domestic tobacco and processed food businesses.

On reported basis, we will revise our forecast for adjusted operating profit upward into positive territory from the deficit we projected initially reflecting strong results in the international tobacco business in the first half and a review of our currency assumptions.

Based on these our forecasts for full year, operating profit and profit attributable to the owners of the parent company are now above those announced at the beginning of the year. Although the forecast for free cash flow is revised upward led by the projected increase in adjusted operating profit and revised capital investment, we will forecast it will show a year-on-year decrease because of the one-time cash flow -- cash inflow from the sales of real estate.

Next, I will explain the volume assumptions for the Japanese domestic tobacco business and the revised forecast based on them. We have revised our forecasts for total tobacco industry volume and RRP market share as shown based on the strong results in the first half.

The forecast for total RMC volume on the other hand has been lowered taking into account greater than projected growth in the RRP category. Our forecast for RMC sales volume will be lower due to the consumer shift towards RRP and increasing competition in the value segment, while that for RRP will remain the same as that announced at the beginning of the year.

We made a downward revision in our core revenue forecast by ¥10 billion from our initial figure taking into account the greater-than-projected decrease in RMC volume and delay in recovery of Japan's duty-free market.

We strive to achieve the adjusted operating profit level projected at the beginning of the fiscal year, while making necessary investments mainly in sales promotion for Ploom X and managing costs efficiently.

Today, at the same time as today's earnings announcement, we announced the application of a price amendment ahead of the excise tax hike in October. As we have communicated the amendments of the retail price were determined based on our policy to take into consideration factors including not only tax increase but also lower demand and down-trading following the price revision.

While our approach to price amendment remains unchanged, we will decide our course of action and apply for revisions of retail prices of certain brands including our RRP products at a later date to discern latest market trends and competitors.

Furthermore, we announced yesterday that we will ask all our Japanese leaf tobacco growers if any of them would like to cease tobacco cultivation. This decision was made considering the circumstances in the recent Japanese domestic tobacco market trends and as a measure to secure a balance of supply and demand of leaf tobacco. These factors have also been incorporated into the revised forecasts.

Now, let me explain our volume assumptions for the international tobacco business and revised forecasts. We are on slide 12. We have revised our forecasts upward for total shipment volume and GFB shipment volume due to strong performance in the first half.

We project total volume at the same level as in the previous year with GFB sales volume up by about 3%. We have revised our volume assumptions for the second half of the year considering that travel restrictions associated with the pandemic will be eased. And we expect a significant decrease in volume compared to the same period last year on more challenging comparisons.

It has been a year since we have been -- we have seen the positive industry volume effects in some high-margin markets related to travel restrictions and some of these positive effects are expected to reverse in the second half. On top of that in the second half, we expect significant industry volume decline due to factors including negative impact to the domestic demand in high margin markets related to eased travel restrictions.

Next will be the revisions of our financial forecasts. We have revised our projection for core revenue at constant currency upward to reflect the higher volume forecast I spoke of previously by US$250 million from the previous forecast.

We have also revised our forecast on a reported Japanese yen basis upward by ¥130 billion as several local currencies have been stronger than the rates forecast initially and the yen is far weaker than the dollar. We will revise adjusted operating profit at constant currency upward by US$100 million; and on a reported basis upward by ¥45 billion.

Figures on reported basis reflect the continuing negative currency effects, but we predict that the gravity of the impact will diminish substantially. As I mentioned before, we plan to launch Ploom X in Russia later this year. Regarding transformation about which I spoke with you at the beginning of the fiscal year, we are on track to deliver on our cost-saving targets.

Slide 13 please. This slide covers our revised forecasts for the pharmaceutical business. We have revised our revenue forecasts upward as we expect overseas royalty income to be better than our initial forecast. We will hold our forecast for adjusted operating profit at the same level as the initial forecast despite overseas royalty income which is expected to be better than initial forecast will be offset by the losses recognized in association with the termination of the development of a licensed compound.

Let me move on to our revised forecast for the processed food business. Following the state of emergency, we project increasing sales of household products in the frozen and ambient foods business, while sales for food service products in both the frozen and ambient foods as well as seasonings businesses in addition to the bakery business will likely have slower recovery than the initial forecasts.

For that we will revise our revenue forecast downward by JPY one billion from the initial figure. Meanwhile, we will work to achieve the adjusted operating profit level forecast at the beginning of the fiscal year by improving the product mix of frozen and ambient foods and undertaking efficient cost management.

Slide 15 please. As I have explained today we have made upward revisions in our full year forecasts to reflect our strong results in the first half. In the second half of fiscal 2021, we will put our utmost efforts into building our share of the HTS market in Japan; and preparing for the rollout in other markets focusing on our new Ploom X product.

Regarding progress towards combining our tobacco businesses and strengthening the Japan market as we announced in February, we have completed our organizational redesign to be effective in fiscal 2022 and are making steady progress to prepare for implementation. On a separate note we announced today that we will assign JTI's executive committee member as a new senior vice president at JT.

In closing, I would like to focus on shareholder returns. Based on the revised forecast our dividend payout ratio will be approximately 85%, which remains above the range I explained at the investor meeting in February. Consequently, the initial planned annual dividend of ¥130 per share remains unchanged. We plan to pay an interim dividend of ¥65 per share as initially forecasted.

Thank you very much for your attention.

Unidentified Company Representative

Thank you. Now we'd like to start the Q&A session. In addition to Mr. Minami, Chief Financial Officer, Mr. Maeda, CFO of Japanese tobacco business; and Mr. Shimayoshi JTI, Deputy CEO will answer your questions.

Question-and-Answer Session

Operator

Thank you for your patience. Our first question comes from Citigroup, Mr. Miura.

Nobuyoshi Miura

Hello. I'm Miura of Citigroup. Do you hear me well?

Naohiro Minami

I hear you clearly. Thank you.

Nobuyoshi Miura

With regard to the dividend, I'd like to have your comment on that. 75% of the payout ratio you made a commitment for that. And after one year or two years or three years, this payout ratio may be coming down then the dividend DPS can increase. That's my first question.

Naohiro Minami

Thank you very much. Minami, speaking. In February, we made announcement as of today that based on the current status the payout ratio will be about 85%. So as mentioned that will be well above the range we presented. So based on this that we think will be in line with the initial guidance.

And also as we mentioned in February our DPS growth we have not given up. And the net profit growth will be monitored and if that's good we will make a sufficient return to the shareholders. And that remains unchanged. So further down the road one year or two year or three years from now we will increase the net profit.

And within this range we'd like to have the management of the dividend. Therefore, the net profit is increasing. Then that -- if that is within the 70% or 80% then -- that our at the end of the year the DPS might be increasing. And we'd like to respond in such a way. And of course if that is below the 70%, of course, that -- we need to consider that a possibility as well. Thank you.

Nobuyoshi Miura

We understood. And additionally, a possibility of the share buyback, if the share price -- although, that is not very likely, but if that moves drastically then there is of course the possibility of share buyback. Is that right?

Naohiro Minami

So far -- that government [indiscernible] of our shares. Of course, we need to look at the smooth sell-down in the market. And also in that we have done the shares buyback. And of course we cannot ensure 100% for the future direction, but of course, we would consider that. That's our understanding.

Nobuyoshi Miura

And finally, why are you so aggressive for the profit?

Naohiro Minami

Aggressive for profit…

Nobuyoshi Miura

Your effort to increase profit was very reflected in the figures.

Naohiro Minami

That aggressiveness. I wonder. What is the definition of the aggressiveness? But as a listing company of course in the mid to long-term the profit growth has been our management top priority, and it has been so. And of course, there have been some fluctuations so far, but when we look back we have been achieving the steady growth.

And I think that is a key importance. Therefore if the growth stops then some may ask that returns should be increased. And if that is the case by achieving the growth, we'd like to consider the return to shareholders. So that is our key interest. Thank you very much.

Nobuyoshi Miura

And also Ploom X is so wonderful that I have been enjoying that for two weeks and I have decided this is it.

Unidentified Participant

Thank you. Thank you very much for the comment. Thank you Mr. Miura.

Operator

Next we would like to take the question from Mr. Saji, Mizuho Securities.

Hiroshi Saji

Yes. Thank you. So I would like to ask about the domestic tobacco business the price policy, and also the price revision, and your strategy post the revision, and also the price elasticity, if you can talk about these things please. Now you are going to apply for this price revision this time. With RMC it's ¥30, ¥40 up per pack. And the little cigars you have a wide increase. And Camel is going up only by ¥10, so the rate of increase seems to be very different by brands. So what is in the background of this price strategy? And also about the price competition going on today, if you can just give me color on what's going on in the market right now. Regarding price elasticity due to the price revision this time, how much do you expect in terms of price elasticity? Maybe compared to last time as well would be very helpful.

Unidentified Participant

So regarding the domestic price revision Mr. Maeda, CFO of Japan Tobacco business will answer.

Yuki Maeda

Hello. This is Maeda. Mr. Saji, thank you for your question. So I would like to talk about the price elasticity, because that's the easy one. 0.3 is the answer. Next, about the price strategy, we have taken various price revisions this time as you mentioned, so let me explain. For the cigarillos in one sense compared to the other RMC, the story is that the tax benefit will disappear, so basically it will be a pass-through of the increased excise tax. So we are going to ask the consumers to pay for that tax hike.

On the other hand for RMC, as Mr. Minami just explained, there is the excise tax hike and also the impact of the shrinking of the market, and also estimations on down-trading as well. We looked into all of these elements and made a comprehensive decision as to how we should price the products. And then regarding Camel, as you well understand, there is a price competition going on because of pressure from competitors with new products being introduced, and we see that the price competition is intensifying, as we speak.

So yes for this product we have decided that we will increase the price by ¥10, because there is such intense competition going on, but the big picture has really not changed. We have this basic policy of making an appropriate pricing based on the tax hike that happened. That really is the basic policy, but it's just that we're looking more meticulously into each SKU and looking into the competitive situation of each SKU and really optimizing the price hike amount for each SKU.

Saji Mizuho

I see. I think your competitors have not yet applied for the price hike and now there were differences in the price increase. And maybe the price gaps will be different than what you expect. Is there a risk on having a wider gap in the price against competitors?

Yuki Maeda

This is not just about October. It's something that is already happening in the first half right now as we speak. So, more than we expected the low-price, price competition is intensifying. So it is a fact that the competition is more tough on us right now.

If you look at the current price, it's the current price. It's before the October tax hike. So there is a ¥400 range where we have the main two competitors who are coming in with a pretty good brand with a strong proposition. So we are looking at the competitors' movement. Now of course, we don't know how much they're going to apply for the October moment, but we are looking at the market condition that is developing in front of our eyes today to make these price decisions.

Saji Mizuho

That's it for me. Understood. Thank you very much.

Unidentified Participant

Thank you very much Mr. Saji.

Operator

Next question comes from Mr. Morita of Daiwa Securities.

Makoto Morita

Morita speaking. Thank you. Domestic RRP, I'd like to have your comment. In this time, planned RRP's market has been revised upward. And what is the current consumption at the RRP and is it expanding from your expectation? What is your insight? And also, with regard to the price amendment RMC's elasticity is 0.3. And given the last year's situation, what do you think about the RRP's? And also Ploom X. You're going to have a launch that the share source of -- who are the key target for the Ploom that RMC is there, are we have own product or that other company's product?

Unidentified Company Representative

For the domestic tobacco business let the CFO of Japanese tobacco business -- Mr. Maeda will take that question.

Yuki Maeda

Maeda speaking. Thank you for your question Mr. Morita. For the RRP or your first question. That market is increasing. And also the switch between RRP and RMC, I wanted to make the -- or answer again. Together one or two years -- in the last one year or so there was one lining for us. It was that in the tobacco market -- the major event. For example, in October pricing -- or that might be tobacco-specific issue, but at the new year that -- people tend to think that -- what will be the target for this year. So that -- stop smoking might be one of the very common objectives at the new year. So RRP that mix increased happened to be October or January. We have observed some spikes in those times. So when we make a plan, we haven't realized that kind of factor sufficiently and that gap is shown in the run rate of this year. And I think that that is reflected there. Therefore, when we'll make planning from now, we need to put that into consideration; and also for those event that the RRP mix might be increasing than expectation. And we need to be aware of that development and that is what we have learned. So that is one insight for the increase of the RRP.

And Ploom X. And I -- we are very pleased to hear the good comment from Mr. Miura. And we are very confident with that product so we'd like to foster that brand and also that -- we'd like to accelerate the growth. And with regard to the share source of business, as I have been saying that to some extent there will be the -- a shift from RMC to RRP. And that might be part of the reason why the mix is increasing. So that new-entry customer for the RRP from the RMC that is one of the key factors; and also that other competitors' customers -- we'd like to take the customers from other competitors with this new product. So newcomers of the RRP or the previous consumers of the competitors these will be the key source for the growth.

Makoto Morita

Do you have any level that -- how many percentages are coming from the other competitors or the -- how many will be the newcomers?

Unidentified Company Representative

Well of course, we do have the assumption in our planning, but I don't think it'd make much sense if you give that for you. And Ploom X performance will be turning out. And after that, after the in-depth analysis, I'd like to give you those numbers.

Makoto Morita

Thank you. And also, with regard to the consumptions in October, the increase supplies and RRP's price increase was rather limited. Then the price gap began to emerge. So, what is the impact on the elasticity. Do you have any data for that?

Unidentified Company Representative

Well, I don't have the clear data at this moment. For the RMC, we see some customers who are directly affected by the price, but when we see the shift from the RMC to RRP, the big difference is that they need to buy the device anew. Otherwise, they cannot enjoy the RRP. Therefore, this is a first hurdle so that we cannot simply compare the refill of the RRP and RMC. Actually, that doesn't make sense. And we haven't seen so many customers see that -- differences. So if we see the similar pricing opportunities again then that -- we may see much more notable trend, but at this moment we cannot give you the definitive answer.

Makoto Morita

Thank you very much.

Unidentified Company Representative

Thank you very much Mr. Morita.

Operator

Next, we would like to hear from Morgan Stanley MUFJ, Haruka Miyake please.

Haruka Miyake

Thank you. This is Miyake from Morgan Stanley. I also would like to ask about the domestic market regarding the environment in which you hike the prices. Now you have the value-added tax and also the excise tax. So you have the environment to hike your prices four years consecutively in the past, but as of today ultimately consumers are -- I wonder what kind of stance they have to accept these price hikes as of today. The reason why I'm asking is because for cigarettes, we are scheduling a price increase in October. I understand that, this is really the final price hike in what is scheduled so far, but I think there will be more future price revisions going forward. So maybe 10 years every year on a regular basis, maybe you will continue to hike your prices, so that you do not lose profit as much as possible. I understand that, that probably would be your policy. But then again you have to face the low price, low-volume-zone, price competition that you are seeing right now. So I just wanted to take a moment here to ask you what really the environment is like today.

Unidentified Company Representative

Yes, regarding the domestic price revision environment, we would like to hear from Mr. Maeda, again, CFO of the Japanese tobacco business.

Yuki Maeda

Thank you, Ms. Miyake about this question, about the price environment. Or maybe this is really about the price hike opportunity. Now, as you have well described in the four years, up to date we've had the environment or the trigger or the opportunity to hike the price because of the tax hikes. And yes, it was consecutive over four years and we were able to leverage that in an optimal form. This is how we reflect this, but then if we don't have any tax hikes in the future what will we do? Well, there were some cases not many but a few cases where we were hiking the price without the tax hike. Actually, these cases are very few.

So will, we be able to hike the price every year even, if we don't have a tax hike? I don't think, we should be too optimistic to think that we can hike the price without tax hikes, so easily in the future. So we have this programmed tax hike in the past four years, and we have good visibility into the future, but going forward, I guess we'll have to design this every year one-by-one and also maybe make decisions as we execute initiatives of the times.

So we'll have to just continue to monitor the current situation and seize the opportunity for an appropriate price hike with less visibility compared to the past. Really it is, this year the last year, where we have good visibility as you well mentioned. And for RRP, the tax hike will be executed next year. That is still visible, but it's really the last element that we have clearly in our vision going forward. From there on we really need to monitor the environment well.

Haruka Miyake

Thank you. One follow-up question, please. So the RRP portfolio that you have can be divided into the low-temperature heating and the high-temperature heating markets. And I think the market is very different depending on whether the temperature is low or high, so as of the first half, regarding the refills, if you divide the story, how is the mix between low temp and high temp?

Yuki Maeda

Yeah. This is Maeda. And I actually, don't have detailed figures at hand right now, so I'll give you an image. And if I say, something wrong, I ask the IR team to follow-up on this. Now currently, it's half-half. Half-and-half right now is the rough picture, but the growth momentum is stronger for the high-temperature heat not burn products.

Haruka Miyake

Okay. And then in the low temperature, what do you have? Do you have Ploom TECH+? Is that the one with a higher mix?

Yuki Maeda

Yes exactly.

Haruka Miyake

I see. Well, thank you.

Unidentified Company Representative

Thank you very much Ms. Miyake

Operator

Next question comes from Kawasaki-san from UBS Securities.

Satsuki Kawasaki

Kawasaki of UBS Securities speaking. Thank you. I'd like to confirm some figures. According to the report for the – this quarter RRP quarter-on-quarter, 100 million sticks growth but RRP's related profit – although the volume is 10%, but profit is down. Is that due to the upcoming device? So you didn't push device sales. Is that how we should understand that quarter-on-quarter, there is a gap between the volume and the profit? That is my first question.

And secondly, and cash allocation in future and return to shareholders was already asked by Mr. Miura. And for the overseas M&A, what is your take? And what is your priority by region or by product category? I'd like to confirm, and I'd like to have the clarification on that priority. For the emerging market, there is some speculations that you may have the M&A, so I'd like to have your thought for the overseas growth through the M&A. What – how do you think about this?

Unidentified Company Representative

Thank you. For the first question, RRP's earnings for the domestic that, Mr. Maeda will take that question. And then for the second question for the international business M&A Mr. Shimayoshi will take the question.

Yuki Maeda

Thank you, Kawasaki-san. Now, why the volume is up and sales is down. Why? And the answer is quite simple. As I said before last year, Ploom TECH+ volume was high. And the growing is Ploom S refill that high temp. And there is a tax difference and the sales is different. And also there is some mix negative factors. So that is the reason for the discrepancy.

Unidentified Company Representative

And for the second question, for the overseas M&A, JTI Deputy CEO, Mr. Shimayoshi will take that question.

Koji Shimayoshi

Shimayoshi speaking, do you hear me well?

Satsuki Kawasaki

Yes, I can hear you clearly.

Koji Shimayoshi

Thank you, Ms. Kawasaki. For the overseas M&A, I think there are two factors. The first one is about RRP that IP or the technology and capital investment. And with regard to the buyers that is not a material one that will hit the balance sheet. And with regard to the RMC, emerging economies that we have been – monitored closely this area, but because of the COVID 19 that economy and also the FX has been fluctuating. So I think that environment is not very good for us, but we think sooner or later that will clear, but anyway that we will continue to monitor closely the emerging economies. And I cannot make any specific comment on each project.

Satsuki Kawasaki

Thank you. And this year's since the beginning of the year that the cash inflow – and I didn't have any clear view for the outlook. And after half a year more than expected that a stable or -- environment was achieved. So due to the COVID-19 there has been some turmoil in the emerging economies and I think you can take it as a kind of opportunity to think about the overseas M&A. And this can be the trigger for you so when the situation is normalized are you going to consider the M&A possibility? Do you think that's a better option for you?

Koji Shimayoshi

Thank you very much for that very encouraging supporting comment. Mainly emerging countries that demand has been rather volatile. And it's very hard for us to see the market size accurately. And also, when there is the drastic tax changes it's also hard to see. So there are some overlapping factors in some countries. So, to put it simply the variation is very hard at this moment.

Satsuki Kawasaki

Understood. Thank you.

Naohiro Minami

Minami speaking. One additional comment. Basically, it is correct that -- Shimayoshi mentioned. And in other side of the coin so far, we have the different time scale for the medium and long term. We were thinking about M&A and also the short-term M&A which would make a positive contribution to the portfolio so that we've had two different time scales.

And lately -- that immediate effect or the short-term cash flow improvement and the investment to have such impact will be explored further. And from that perspective as mentioned before that -- currently the environment is very volatile and the future visibility is rather poor. So it's -- under these circumstances, it's very hard for us to make the future forecast. And that is my additional comment. Thank you.

Satsuki Kawasaki

Well, understood. Thank you very much.

Naohiro Minami

Thank you, Mrs. Satsuki

Operator

Next we would like to hear from Goldman Sachs, Yamaguchi-san, please.

Keiko Yamaguchi

Yes. This is Yamaguchi from Goldman Sachs. Can you hear me?

Naohiro Minami

Yes please.

Keiko Yamaguchi

Yes. So regarding domestic business RRP competition. At the same time basically as you Philip Morris seems to be launching a new product as well focusing more on the nicotine kick as they have in the past. And the competitive edge that they have had may really not be reversed is my opinion.

I'm wondering what you think about your confidence regarding the new product and the differentiation. And also, they Philip Morris will use a lot of expense in the first half so I'm wondering what you think about their moves. Now maybe this is the background as to why you're going to decide the price revisions. The absolute amount may be more later on while seeing the current situation. I want to ask about the timing of your decision-making as well.

Naohiro Minami

Yes. Regarding the domestic RRP business Mr. Maeda CFO of Japanese tobacco business will answer.

Yuki Maeda

Yes. This is Maeda. Thank you very much Ms. Yamaguchi. The first question is a very good question. I'm wondering how I can possibly answer this one. Let me see. Well the device and the refill in any sense have been really in this kind of competition. And I think this competition will continue in the future as well. So, we JT is going to continue to launch new attractive products into the market. This Ploom X is not the end of our efforts. We are going to create a strong road map going forward.

So in long-term vision we really need to continue to participate in this battle going forward. And it really is the management's consensus that we continue with this battle but on the other hand for Ploom X speaking of this specifically, first of all when you hold the device it fits very well into the palm of your hand. And it's really a feel that you can't really experience with other devices. It's unprecedented. And then when it comes to the taste of the product, the device and the refill both contribute to a better taste, so that customers can enjoy the tobacco experience.

It's a very good product that is coming up. So, when a competitor launches a new device, this is one of the sensitivities a major sensitivity that we will have to be aware of in the second half, but then again with the confidence that we have towards Ploom X leaves us very strong. Just because we have a competition coming up, we are not wavering because we are confident that we are providing the most appealing proposition that we can give at the time.

And I think we were able to accomplish that at this time with Ploom X. So, regarding the Ploom X performance in the second half we have very high hopes and that is not changing at all. One more thing regarding RRP price list, if you're asking whether the competitor's pricing has influenced our decision? Actually no. We actually are in the third place and we are the follower. We're trying to catch up to the other competitors. So that's why we want to wait till the very last minute to make the decision regarding the prices and make a file for the prices after we have really taken time to see what's going on in the market. That's why this is separate in terms of timing. Thank you.

Keiko Yamaguchi

Understood. Thank you very much.

Yuki Maeda

Thank you, Ms. Yamaguchi

Naohiro Minami

So this concludes our call today for -- the conference call for the 2021 second quarter results at Japan Tobacco today. Thank you very much for your participation.