Japan Tobacco Inc. (OTCPK:JAPAF) Q3 2022 Earnings Conference Call October 31, 2022 4:00 AM ET
Company Participants
Nobuya Kato – Chief Financial Officer
Koji Shimayoshi – Executive Vice President and Deputy Chief Executive Officer
Conference Call Participants
Nobuyoshi Miura – Citigroup Global Market Japan Inc
Hiroshi Saji – Mizuho Securities
Makoto Morita – Daiwa Securities
Haruka Miyake – Morgan Stanley MUFG Securities
Nobuya Kato
I am Nobuya Kato, Chief Financial Officer of the JT Group. Thank you for joining us today for the JT Group’s 2022 Third Quarter Earnings Briefing. First of all, I’d like to take a moment to express my concerns about the situation in Russia and Ukraine. I’m deeply concerned about the human tragedy and devastation unfolding in Ukraine and sincerely hope peace will return soon. The JT Group continues to place the highest priority on the safety of our employees and their families and is extending all possible support to affected people.
First, I will start by covering the highlights of our consolidated financial results for the nine months of 2022. The nine-month results and the forecast for the entire fiscal year that I will explain today include the impact of hyperinflationary accounting in the tobacco business figures related to Ethiopia as well as those of Iran, Sudan and Turkey, for which hyperinflationary accounting has already been applied. For details, please refer to our earnings report.
Please refer to slide four, which summarizes our performance indicators. Adjusted operating profit at constant currency, our primary performance indicator, increased by 6.5% year-on-year, driven by the tobacco business. Building on the first half of the fiscal year, we benefited from strong pricing contributions in this quarter as well.
We achieved profit growth, also, in part, thanks to the cost containment effects of various measures we have implemented to date, despite the challenging business environment resulting from increasing energy costs and inflation. Revenue on a reported basis increased by 13.7% year-on-year, supported by the business momentum of the tobacco business, on top of the substantial depreciation of the Japanese yen, as well as by increases in revenues in the pharmaceutical and processed food businesses.
Adjusted operating profit increased by 17.5% year-on-year, benefiting from the solid top line performance and the depreciation of the Japanese yen. Operating profit increased 20.5% year-on-year, due to the increase in adjusted operating profit and a favorable comparison to the same period of the previous fiscal year, from the lack of compensation payments to leave tobacco growers who decided to retire from the business and the absence of one-time costs related to initiatives to strengthen our competitiveness in our Japanese domestic tobacco business. Profit increased by 19.2% year-on-year. Although, an increase in financing costs partially offset the increase in operating profit.
From this slide onward, I will explain the actuals of each business. First, the volume performance of the tobacco business, please see slide five. Total volume, including both combustibles and RRP was 402 billion units, almost the same level as previous year. We continue to perform strongly due to the favorable volume momentum in the EMA cluster, such as Iran, Poland and the continued recovery trend in global travel retail, driven by the eased travel restrictions.
Meanwhile, industry volume has been decreasing in several key markets, including Japan, the Philippines and the UK. And in particular, the decline in the UK was larger than expected.
Turning to the trends in each category. Total combustible volume was 396 billion units, almost at the same level as the previous year, due to volume momentum in several markets within the EMA cluster, including the recovery in global travel retail. This momentum almost offset the industry volume decline in the key markets I just mentioned.
Overall, total volumes grew year-on-year in more than 60 markets. Combustibles market share gains continued across our global footprint, including year-on-year increases in the key markets of Italy, the Philippines, Spain, Taiwan and Turkey. In some markets, such as Spain, the impact of the eased travel restrictions is positive, while it’s negative in other markets, such as the UK and France.
In Japan and the UK, competition is particularly active in the value segment. I will explain the details of our responses to this later on. Inventory shortages mentioned in the previous quarter in the markets which we’re sourcing products from both Russia and Ukraine, were largely resolved during the third quarter. Total volume of RRP increased by approximately 600 million units year-on-year to 6 billion units, driven by the launch and continued share growth of Ploom X in Japan.
Slide six explains the financial performance of the tobacco business. At constant currency, both core revenue and adjusted operating profit increased 3.9% and 5.5%, respectively. While our volume performance in unit terms was resilient compared to last year, the financial contribution from this volume was negative. This is the result of larger volume declines in high-margin markets such as Japan and the UK and the overall lower market mix of our tobacco business.
Strong pricing contributions outweighed the impact of this negative volume variance, as well as the impact of higher input costs, associated with increasing energy costs and inflation. The impact of these increased input costs is expected to be more evident in the remaining period of this year. On a reported basis, both core revenue and adjusted operating profit increased significantly year-on-year, due to the historic depreciation of the Japanese yen.
On page seven, I will take you through the trends in each cluster and major markets. First is Asia. Total volume in this cluster decreased year-over-year, primarily due to lower combustible volumes, resulting from the decline in industry volume in Japan and the Philippines. At first, volume effect offset the price/mix effects and positive foreign exchange impact, resulting in a year-on-year decrease in core revenue and adjusted operating profit.
In Japan, total volume continued to decline, although the decrease in combustibles volume is partially offset by an increase in RRP volume. In the combustibles categories, down trading trend continued, and competition in the value segment remained intense. However, our market share grew in the combustible category compared to the second quarter, driven by the successful introduction of lower-priced versions of several brands in the second quarter, Camel Craft in particular.
We will continue to develop a diverse range of prices and brand portfolios in line with consumer trends and strive to maintain and improve our combustibles share. Our RRP segment share in Japan increased to approximately 34% during the third quarter. And we believe this is due to the temporary increase in demand ahead of October RRP tax hike revisions.
We believe that the impact of the temporary demand for our products before the price revision was minimal due to the limited number of SKUs subject to price hike and the range of price increases. Progress of Ploom X will be introduced in the next slide.
Next, Western Europe. Total volume in this cluster decreased year-on-year mainly due to a decline in industry volume in the UK and France, following the eased travel restrictions yet price/mix effects outweighed negative volume effect and positive foreign exchange impacts also contributed to the increases in the clusters core revenue and adjusted operating profit year-on-year.
In the UK, we are strengthening our portfolio in the value segment for both cigarette and fine categories, and our market share grew versus the second quarter. The combustibles volume continued to decrease significantly due to ease travel restrictions and a decline in industry volume, following price hikes after the second half of the last year.
Last but not least, EMA. Total volume in this cluster increased year-on-year due to growth in Iran and Poland, and the recovering trend of global travel retail despite a decrease in industry volume in Russia and Turkey, driven by tax hikes and other factors. Both core revenue and adjusted operating profit in this cluster increased year-on-year due to the positive volume and price/mix contributions and the favorable impact of foreign exchange rates.
Turning to slide 8 to share additional details on the latest performance of Ploom X in Japan. Shares within the HTS segment continued to grow in the third quarter due to the introduction of new flavor refills and device discount promotions, reaching 7.9% on a quarterly basis. Following the tax increase in October, this year, applied only on RRPs, we have kept the prices unchanged for most brands of Ploom X refills. Encouragingly, the current offtake based share continues to show steady performance driven by active sales promotions. We will continue to roll out active marketing campaigns, both digital and in-store, as well as expand and drive user retention.
Next, please refer to slide 9. As of the end of October, we have begun Ploom X sales in selected areas of Greater London, and we are now gradually expanding to major retail chains and to more than 1,000 tobacco retailers. In the UK, we have built a leading presence in the combustible category, giving us a large distribution footprint, thanks to an amazing sales force and an excellent relationship with the trade.
In addition, although the size of the HTS market category is currently limited, the UK market is characterized by a low tax burden on HTS compared to other markets, potentially resulting in higher margins. We believe it is crucial for us to maintain and improve our market share in the UK, not only in combustibles, but also in the total share of tobacco, including RRP as well as to maintain and improve our profitability.
For these reasons, we have made the UK the second launch market for Ploom X, following Japan. By leveraging our learnings from Japan, we believe Ploom X can expand our presence in the HTS segment and strengthen our RRP offering in this market.
I mentioned earlier the semiconductor situation. Well, I have positive news to share as we have secured the necessary volume of semiconductors for devices required for the first half of 2023, if this trend continues we plan to accelerate the expansion of Ploom X at out of Japan from 2023 onward. As for the RRPs mid-term target for 2027, we’ll consider whether to update or not taking into account the postponement of the Ploom X launch in Russia and the delay created by the supply shortage of semiconductors. We intend to share our plan with you as soon as we can.
With Slide 10, let me explain about our strategic partnership we announced. JT Group and Altria Group have agreed to establish a joint venture through their respective subsidiaries. To commercialize HTS products in the United States, branded Ploom for the devices and Marlboro for consumables. We also agreed on having a strategic long-term global partnership to explore further business opportunities in the RRP category.
Altria is leading the US tobacco company, first vision is to respond lead the transition of adult smokers to a smoke-free future. This initiative is a part of our RRP business strategy which focus on HTS segment, and we expect it to accelerate the progression of RRP initiatives in the JT Group.
In addition, by commercializing Ploom in the United States, we expect that we’ll be able to deepen our understanding and analysis of consumer needs by benefiting from the many know-how and the knowledge that Atria possesses.
JT Group and Altria will mutual share their own scientific knowledges regarding regulatory information on RRP and we plan to submit a pre-market tobacco application for HTS products to the US Food and Drug Administration in the first half of 2025. On approval, JTI will provide HTS devices for this joint venture, and USA will produce refills for HTS. We expect that the promotion of such initiatives to reduce health risks associated with smoking will bring significant added value to both companies.
Now turning to Slide 11. I’d like to talk about the pharmaceutical and processed food business. Starting with the pharmaceutical business. The revenue of our consolidated subsidiary, Torii Pharmaceutical increased year- on-year. This growth was mainly driven by the revenue increase in its CORECTIM Ointment for atopic skin problems and CEDARCURE Sublingual allergen tablet and the MITICURE Sublingual allergen tablet. Adjusted operating profit increased year-on-year, driven by the top line increase of Torii Pharmaceutical.
Moving to the processed food business. Revenue increased compared to the same period of 2021, mainly due to the price revision in the frozen and ambient food business segment. Meanwhile, adjusted operating profit decreased year-on-year as the price revisions could not offset the continued rising raw material expenses, and a negative FX impact. Let me guide you through our revised full year forecast for 2022.
Before going into the consolidated revised forecast, I’d like to update a situation in the Russian market and the potential impact on our 2022 revised full year forecast. Please see slide 13. Regarding Russia, why we continue to manufacture and distribute our products, the operating environment remains very challenging. Under these circumstances, the JT Group continues to take necessary decisions to address the changing situation in accordance with the Group’s management principle, which is to pursue the 4S model, as well as in compliance with applicable regulations and international sanctions.
Next, let me explain the factors related to Russia, which could potentially affect the revised full year forecast detailed on the next slide. We estimate that in the revised consolidated earnings forecast for the fiscal year 2022. The Russian market will account for approximately 11% of revenue and 21% of the adjusted operating profit, respectively. In the previous forecast, Russia accounted for around 9% and 17%, respectively. But the proportion has increased due to the revised foreign exchange rate assumptions.
Please note, we have revised the Russian ruble assumption rate to reflect a depreciation of the Japanese yen and an appreciation of the Russian ruble compared to the second quarter. Under these new assumptions, when the Russian ruble moves by 1% against the Japanese yen, It will have approximately more than ¥2 billion impact on our adjusted operating profit.
I’d like to conclude on Russia by mentioning that we have secured raw materials for the remaining period of this year. However, there are still user risk that we could face supply chain constraints related to availability of raw materials, which is a concern as we continue to operate our business.
On slide 14, I’ll explain about our consolidated revised forecast. We project an increase in core revenue at constant currency of 2.5% compared to the previous forecast and an increase of 3.3% year-on-year, reflecting the volume upside and additional pricing benefits in the tobacco business.
Although, adjusted operating profit at constant currency was down year-on-year in the previous forecast. We have revised our forecast upward by 9.3% compared to the previous forecast, and an increase of 8.1% year-on-year anticipating that the top-line growth to outweigh the impact of increasing input costs associated to the increased energy cost and inflation.
Both revenue and adjusted operating profit on a reported basis have been revised upwards significantly from the previous forecast, reflecting the further depreciation of the Japanese yen. We have revised our projected operating profit upward by ¥100 billion from the previous forecast following an upward revision of the adjusted operating profit.
In addition, the forecast for profit has been revised upward by ¥83 billion from the previous forecast. Taking into account, the upward revision of the operating profit and the decrease in effective tax rate despite anticipated deterioration in financing costs due to exchange rate fluctuations.
Free cash flow has been revised upward by JPY 77 billion from the previous forecast due to the upward revision of the adjusted operating profit and a decrease in capital investment.
From Slide 15 onward, I explain the revised forecast for each business. First, I’d like to explain about the volume assumption in the tobacco business. In the previous quarter, I mentioned that although volume performance was strong in the fiscal year. First half of the fiscal year, considering the ongoing impact of the eased travel restrictions and the situation in Russia, Ukraine, we anticipated a substantial decrease in volume in the second half. As a result, the total sales volume for the full year would decline by around 3% year-on-year.
However, as we saw strong demand during the summer season, strong momentum in some markets as well as the continued market share growth in multiple markets, we have revised our total volume forecast as to decrease by around 2% year-on-year. We have made up for the revision to our core revenue at constant currency by 2.9% from the previous forecast due to the volume upside and additional pricing contributions.
As for the adjusted operating profit at constant currency, we indicated last quarter, it would decrease by 4.5% versus the initial forecast, taking into account the impact of the increased input cost. However, we have revised upward the forecast by 8.8% from the previous forecast and by 7.9% from the initial forecast, considering that the top line growth will outweigh the impact of increasing costs.
Having said this, we still believe that the recent cost increases on a global basis will have a negative impact on the input cost of the tobacco business in the next fiscal year. In addition, we try to accelerate our investment in RRP next year, following the improved semiconductor variability.
As a result, while it is too early to provide numbers for 2023, I’d like to flag the sensitivity related to the incorporation of these cost increases in our business plan next year. On a reported basis, both core revenue and adjusted operating profit on a reported basis have been revised upwards significantly from the previous forecast, reflecting the further depreciation of the Japanese yen.
Moving to Slide 16. Let me explain our revised forecast for the Pharmaceutical and Processed Food businesses. First, the Pharmaceutical business, we have made an upward revision to our previous forecast for both revenue and adjusted operating profit by JPY 1 billion, respectively, projecting higher growth in overseas royalty income due in part to the weak Japanese yen.
Next, the Processed Food business. We have revised our revenue forecast downward by JPY 3 billion compared to the previous forecast due to the planned transfer of shares in Saint-Germain Co., Ltd., which is responsible for the bakery business as announced on September 15 during the fiscal year as well as a slower than projected recovery, of the top line food service products following the COVID impact this summer.
In the remainder of the fiscal year 2022, we anticipate an increase in the negative impact of foreign exchange rate as a risk, but in light of cost reduction measures in the frozen and Ambient Foods segment, adjusted profit. Operating profit is expected to be JPY 2 billion unchanged from the previous forecast.
And finally, please turn to Slide 16. To conclude my presentation, let me reiterate that we delivered a strong result in the first nine months, driven by the pricing contribution in the tobacco business, further supported by the accelerated depreciation of the Japanese Yen. As for the revised forecast, based on the volume upside and the pricing strategy of the tobacco business, we have revised upward – our constant currency adjusted operating profit, as well as our adjusted operating profit and net profit on a reported basis, reflecting the depreciation of the Japanese Yen.
Importantly, our share of the HTS segment in Japan, driven by Ploom X, showing a steady performance and we intend to continue increasing our share going forward. We also began to sell Ploom X in the Greater London region, making the UK, our first Ploom X market expansion with good progress in securing semiconductors with transactive interest in the global geo expansion of Ploom X in 2023.
In addition, we announced last week our strategic partnership with Altria Group, both for HTS in the US and RRP globally. We believe that this newly formed partnership will support our status condition to build a global presence in RRP through a strong focus on HTS and drive sustainable growth for all stakeholders for S model. Joining forces with Altria Group, the leading US tobacco company to enter nascent HTS segment in the US will increase the growth opportunities and enhance ties and our objectives to provide a wide range of harm reduction products to adult consumers around the world.
Finally, regarding the shareholder vision, based on the revised forecast and our shareholder return policy, we plan to revise the annual dividend guidance upward by JPY 38 from JPY 150 to JPY 188. This concludes my presentation. Thank you very much for your attention.
Question-and-Answer Session
Operator
Thank you very much. Mr. Kato. Now I’d like to start the Q&A session. Let me introduce you to the speakers who will answer your questions today. We have Kato, CFO of the JT Group and Koji Shimayoshi, JTI’s Deputy CEO. Next, I will show you how to ask questions. We are freed we don’t accept questions in this English line. If you have any questions, please send an e-mail to jt.ir@jt.com. We will introduce your question accordingly. Thank you for your understanding.
The first question comes from Mr. Miura from Citigroup Global Market Japan Inc. Over to you.
Nobuyoshi Miura
Hello good evening. This is Miura from Citigroup. Can you hear my voice?
Nobuya Kato
Yes, we can hear you.
Nobuyoshi Miura
Thank you. Your results were stellar today. So in accordance with that, you have announced a substantial increase in dividends. So that’s my question. Regarding the dividend hike, that you announced. What is the significance behind it? Specifically, I want to ask you about, for Russia over the medium to long term did you account for Russia and decide to do the dividend hike in anticipation of the medium to long-term of your business?
And you announced ¥188 per share, does that mean that you will be able to continue to conform to regulations, but also for next year, you will be able to sustain your business in Russia. Is that the reason why you decided to increase your dividend? Or is it more about the short-term that you just wanted to increase dividends. So, can you give us your perspective on this? Thank you.
Koji Shimayoshi
Regarding the dividend hike at the medium-term and short-term perspective, Mr. Kato will be taking the question.
Nobuya Kato
This is Kato speaking. Mr. Morita. Thank you very much for your question. Well, first of all, regarding our thinking behind the dividend hike, basically, full year outlook was revised upward first of all. And major factors is due to the weaker yen for one and also because our business performance is firm. And profits are expected to go up substantially net profit.
And our expectations for net profit based off our outlook and we originally had a forecast of €150 per share for the year and doing the calculation for payout ratios, our policy for shareholder return is 75%, plus/minus 5% for shareholder return. So, the original forecast goes below that level.
And the updated outlook, we are confident that we will be able to achieve this forecast. And that is why we decided to increase the dividend per share forecast at this timing. And also for the medium term and long-term and how this announcement leads to the future. Our shareholder return policy wise is 75% plus or minus 5% of net profit. We believe that’s a competitive level of return and net profit is business base, but by growing the profit, we would like to increase the amount of dividends we pay over the medium to long-term as well.
So, basically, we have the 75% plus or minus 5% shareholder return policy, which will be the base. And on top of that, due to our firm performance, we wanted to account for that. Based off the updated revised forecast of net profit, we have decided to do the dividend hike this time around. Thank you.
Nobuyoshi Miura
Thank you very much. If that’s the case, that means that we will continue to be in compliance with the global regulations, which means that for your business in Russia, if you continue to conform to the rules, is it the feel that you will be able to continue your business there? Is that what you’re assuming?
Nobuya Kato
Regarding the continuity of the business in Russia, up until for the Ukraine and Russian situation, it has become prolonged and complicated increasingly with that as a backdrop doing a business in a steady way and sustainably, what’s happening, the conflict may pose risk to our business. And as the situation becomes even more complicated these days, we will consider various options, we are considering various options. And for the option we should pursue, we are looking at our 4S model, and we would like to derive the most optimal option in the end to draw a good conclusion. I touched upon this in the presentation, but regarding raw material procurement, which is the most critical part for running our business. For the year, we already have visibility into having sufficient amounts of procurement in place. Thank you.
Nobuyoshi Miura
Thank you. If I may ask an additional question. So what would be the trigger that will make you decide to leave Russia. Is it about raw materials, meaning as long as you have raw materials in place, will you be able to continue on with your business in conformity with the rules, and how should we view the risk of not being able to procure raw materials?
Nobuya Kato
Well, in order to continue business operations, of course, we need to procure raw materials. And based on that, we need to be able to manufacture and for the products we manufacture, we need to be able to sell them. So the overall supply chain needs to be able to be continued in order to sustain our business operations, so that’s what’s most important.
And countries around the world have various sanctions and various regulations and at this point in time, we are able to continue on with our business at this point in time. So going forward, we will look at the sanctions as well as regulations and posed by various countries, I’m sure they will change as time passes. But we will be in conformity with PISO [ph] upon that, if we are able to continue on with our business, we will.
Nobuyoshi Miura
Mr. Kato, thank you for answering my complicated questions. Thank you.
Operator
Thank you, Mr. Miura. Now I’d like to take the next question. Mr. Saji of Mizuho Securities please.
Hiroshi Saji
Thank you very much. This is Saji of Mizuho Securities. I’d like to ask also about the Russia. I’d like to have a confirmation, up until the end of this year that you would secure — then that means that if the current condition continues, then next year, you may not be able to have the production. So this year is the peak in Russia. And then that we said we are going to see the profit decrease with regard to Russia. And if that happens next year, then naturally the profit decrease, then that dividend cut might be possible. Is that possible and I’d like to have a confirmation on that? The forecast for the Russia next year and also the dividend level in line with the profit are the question.
Nobuya Kato
So with regard to the Russia, Mr. Shimayoshi will take your question. And for the dividend part, Mr. Kato will respond to your question.
Koji Shimayoshi
First of all, thank you very much for your question. This is Shimayoshi speaking. First of all, for the supply chain and raw materials in Russia that next year, what happens, actually that is not very clear at this moment. And for this year alone, that for the materials and also the finished goods are almost secured, and especially for the raw materials for this year for the procurement of that part, it has been growing every day. So if that continues, then that we have the procurement based on the rolling. And then that we’d like to give you the update based on that rollout report. And that’s all for me.
Hiroshi Saji
Now you said that the procurement is based on the rolling basis. That means that you have secured next year, you have secured for this year. That doesn’t mean that you have a cliff like station next year. And under the current situation, you will be able to procure or secure the certain level of the raw material. Is that right?
Koji Shimayoshi
If the current condition continues then that we continue to have different light to Russia consistently. So unless we have the extreme situation and everything stops. Or even that happens up to the end of this year, we’ll be able to continue our business. And that is the level of the procurement of the raw materials at this moment. So that is the indication that we are having the rolling every day. Thank you very much for your comment.
Nobuya Kato
And Kato speaking. Thank you, Mr. Saji. Next year for the Russian situation, if we see the level of the profit in Russia then the dividend might be affected. I think that is the key point of your question. And as I pointed out, that with regard to the business continuity in Russia. And based on that continuity, if that the continuity seems difficult in the middle of the year, then the profit in Russia will be decreased in line with that, and profit based on the business will be fluctuating. And that will be reflected in the dividend level basically.
But that said, on the other hand, if the business continued to be difficult then we may have the impairment loss or the transfer rate loss or the nonrecurring loss what we incurred, then we need to look at the nature and the size and we would decide how we are going to handle that. And how that will be reflected in the dividend will be decided with that regard. But besides this, we will look at the business plan in the future and onward. And then taking everything into consideration, we will decide the level of dividend.
Hiroshi Saji
Thank you very much
Operator
Thank you, Mr. Saji. The next person is from Daiwa Securities, Mr. Morita. Over to you.
Makoto Morita
This is Morita from Daiwa. Thank you for taking my question. Earlier in Kato-san’s presentation, you were talking about next fiscal year, and you need to take a severe view on costs. And in your medium to long term, managing your company, middle to single high digit growth is what you’re starting for. But if you need to have a severe view on the cost outlook next year, what did you mean about it? Does that mean that mid to high single-digit growth rate? Is there some uncertainty around it? Or are you just simply saying that costs are going to go up? Especially, regarding investments towards RRP, I think you commented out on — for the three years from 2022, you were saying ¥300 billion. That was what you have been communicating before. So, how much are you going to be investing this year and for next year, you were saying that you’re going to accelerate the pace. So, how much are you planning to invest next year? Can you give us a better image of that? Thank you.
Nobuya Kato
Mid to high single-digit growth, our perspective on that, as well as investment stores RRP, that will be answered by Mr. Shimayoshi.
Koji Shimayoshi
Morita, thank you very much for your question. Regarding our profit outlook for next fiscal year, of course, we’re working on it as we speak. So, I can’t really say anything with conviction right now. So I hope you understand. So just to talk about things in a qualitative way, first of all, regarding business investments into RRP, starting from this year, apart from Japan and other international markets, we are striving to expand the business. So that’s the plan we have, which we’ve been guiding. But due to the tight supply of semiconductors, we were not able to procure sufficiently. And because of that, we were focusing first on Japan, to concentrate our sales promotions.
But finally, we are now able to advance into the UK, although in a small scale, but in short — in the international market, we have been able to enter one year behind plan. And next year, we are going to strive to expand sales in the international market once again. So that’s our qualitative plan for now. To that end, although our plants are one year behind, we would like to strengthen our investments towards international markets for RRP. And also, as we have already communicated for EU as well as inflation and energy cost has been surging.
And under this context, due to the surge in raw material costs, with tobacco inventory, we had some left, but it’s going to start to pick up from Q4 this year. So, we’re expecting some impact on input costs for the full year starting from next year. And it’s a matter of how far energy costs are going to rise. There’s still some uncertainty there as well. Moreover, for the tobacco business in Japan, in order to strengthen our operations, we are working on cost reduction. And we have started to take efforts from April and we are expecting some benefits this year. But on a relative basis, we should see that impact drop off next year and also handling regulations in EU, a single-use plastic orders and extended manufacturer responsibility will start from 2023, and that will be a cost burden for us. So based on this, we have been – we would like to put together the business plan for next year based on all of these factors.
Makoto Morita
So in short, against your guidance, it seems that — are you saying that it’s going to be tough to meet your guidance? Or are you trying to say that through pricing, you will be able to do a good job. Can you give us more qualitative information around the message behind what you just said?
Koji Shimayoshi
Well, profit growth from next fiscal year onwards, we would like to explain that in February next year, when we talk about the full year outlook. However, regarding our results for this year, talking about our performance for this year, we are seeing higher costs related to the supply chain. And on the surface, we are – we have been able to outweigh that impact to top line growth. And also advancing a sales promoting Ploom X into international markets, which were not able to be performed, which will be a positive at the P&L level.
So next year, if possible, we would like to absorb the inflationary impact through combustibles as a business and start to invest into sales promotion for RRP in earnest. That’s for next year. So I’m not able to give you the numbers for guidance, but that’s where we are right now.
Makoto Morita
So for RRP investments, how much was it this year? And is your guidance for ¥300 billion over a three-year period, still the same? And are investments going to be greater next year. So I’m sorry, I’m beating at the horse, but can you give us the numbers there?
Koji Shimayoshi
Well, I would like to refrain from talking about actual numbers, but size-wise, there were some planned sales promotional investments that were planned for this year, but that will be carried over into next year.
Makoto Morita
Got it. Thank you very much.
Nobuya Kato
And Morita-san, this is Kato speaking. Let me also touch upon this as well. In your question earlier, you were talking about next year and in the mid to high single-digit profit growth, whether that’s feasible or not, I think you were asking that question. Our profit growth target is mid to high single-digit profit growth over the medium term, not on a single year basis, because on a single year, it really depends on what kind of year that was. And also in recent years, we have been making investments towards RRP, so as to grow RRP.
So on a single year basis or over the short term, unfortunately, there are some phases where we may not be able to meet mid to high single-digit profit growth. But over the medium to long-term, we would like to achieve a mid to high profit growth. I just wanted to mention that.
Makoto Morita
Well, I understand where you’re coming from, but does that mean that it’s going to be a dip next year because I kind of feel that’s what you’re implying. So is that what’s going to happen.
Nobuya Kato
Well, maybe. It may be a year where we’re going to keep a low profile. But we will give you better guidance in February next year, whether it be for Mr. Shimayoshi or myself, at this moment, we just wanted to share with you the concept for next fiscal year that we had in our minds. And through our interaction that we’re having right now, I hope you can get the feel of our thoughts.
Makoto Morita
Yes, I did very much. Thank you
Operator
Thank you, Mr. Morita. Now we’d like to invite the next question. Morgan Stanley MUFG Securities, Ms. Miyake, please.
Haruka Miyake
Thank you very much. Miyake of Morgan Stanley. I’d like to ask about Japan’s business. It was said that the down trading is visible in this market. And not only in compatibles, but for the HTS, do you see the down trading as well?
And also, with regard to the product mix, the share has been increasing gradually. So under which initiatives in the product lineup, do you think that will be more acceptable? And do you — what do you think is the key for success? And also, if you are to enhance the promotion in the future, why do you think that will lead to the further share gain? I’d like to have your comment on these.
And also in the third quarter or up to the third quarter that the heated tobacco stick. Our share is about 34% and there was some temporary gain in demand. So with regard to the next year and onward, what do you think will be the category share with that HTS?
Nobuya Kato
So I think there are three questions included that are down trading. And is that happening in HTS in Japanese market and also the Ploom X share and how is it going to be expanded. And also that the HTS category share forecast. So for this, Shimayoshi should take your question.
Koji Shimayoshi
Shimayoshi speaking. Thank you for your question, Miyake. Let me start with down trading condition. With regard to the combustibles, last year in October, that completed. And then however, that the consumer needs continue to be there. And then that after the price change in October, for the various segment combustibles has been increasing. And in this segment, that peers have introduced value segment combustible so that the competition is intensified and that continues. And based on that situation that we have installed product of the craft and the Mevius and the Camel craft has been there. And the – the value share has increased substantially due to those contribution.
And at the time of the price change, I said that price elasticity is about 0.3 and looking at the recent number, actually, it is below 0.3. So that means that compared with the total demand, it was not affected, that the impact was smaller than expected. And also there is a deteriorated mix, but still because of the increase that the volume is sustained.
However, talking about the combustibles, there is a shift into the value segment. And that is a rather common phenomenon in the material market and that is visible in this market as well. And talking about RRP and HTS, the down-trading, we began to see the sign of the down trading there with the expansion of the market, that we begin to see the skew into the value segment.
And so far that we have leveraged tunnel, and to capture the customers to that demand. Also for the sales promotion for the HTS. And how — what part will be effective to boost the share market? And let me give some comment on that.
So we have our in-house analysis. First, recognition by the consumers to our product and then the trial stage and after that, whether we’ll be able to retain those customers. And then the number of the consumed units are being analyzed. And there has been some gap between the initial forecast and actuals. And actually, the volume and also the number of the consumed unit has been above our initial forecast. That means that since its delivery of our product, has been actually appreciated very high.
So for example, for the RMC and HTS, there are some customers who use those, but they are shifting into the HTS alone. So there has been such movement. And also there has been the movement from the other competitors to our product. So, that the previous customers of the RMC are the main movers, and we have been able to provide the appropriate product to capture those customers. And that has led to the volume increase.
And to your final question, that whether there will be the growth still in the Japanese market of the RRP and price revision of the RRP. We need to see through the impact of that price revision, and also that we need to make the micro level analysis for those impact. And also for the RMCs value category, what is the implication for that? So rather than looking at the RRP segment share growth, and also that looking at the Japanese market alone that we need to take more time to have a more comprehensive view for the analysis.
Haruka Miyake
Thank you very much
Nobuya Kato
Thank you, Ms. Miyake. Now, as time comes, we would like to end the Q3 2022 results briefing. Ladies and gentlemen, thank you for participating today. And please make sure that you disconnect.
Be the first to comment