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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
I am Naohiro Minami, Chief Financial Officer of the JT Group. Now I will take you through the results for the first half of 2018 and full year revised forecast. First, I will explain the consolidated financial results for the first half of 2018. Please look at Slide 3. Adjusted operating profit at constant FX, our KPI, increased by 3.1% year-on-year, mainly driven by the strong performance in the international tobacco business despite the continuous challenging environment in the Japanese domestic tobacco business. On a reported basis, revenue increased due to the top line growth driven by acquisitions and pricing benefits in the international tobacco business, more than offsetting the decline in the Japanese domestic tobacco business. Adjusted operating profit increased as well despite the FX headwinds. On the other hand, operating profit and profit declined by 3.5% and 4.2% respectively mainly due to 2 factors: first, there is an unfavorable comparison as we had a one-off profit of around JPY 9 billion in the prior year, which was the reversal of profit impairment loss of an affiliate share; and the second, trademark amortization related to acquisitions increased about JPY 5 billion. Regarding the detailed analysis of business segment results, please take a look at the earnings report available on our website.
Now please move on to the revised forecast for 2018 on Slide 4. Revenue has been revised upwards by JPY 20 billion on a reported basis to reflect the acquisition of Donskoy Tabak and the revised assumption for the industry volume in Japan. Adjusted operating profit at constant FX, however, remains unchanged to reflect the increased investment in RRP in Japan. Reported adjusted operating profit has been revised downwards by JPY 14 billion following updated FX assumptions. Operating profit and profit have been revised downwards by JPY 20 billion and JPY 17 billion respectively mainly due to the change in FX assumptions and an increase in trademark amortization related to Donskoy Tabak acquisition.
Next, I'd like to explain the results for the Japanese domestic tobacco business. We estimated that Reduced-Risk Products share in the total tobacco industry volume at least around 20% during the first half of 2018, while the growth has become moderate. Affected by the expansion of RRP, cigarette industry volume decreased 14.5% year-on-year, which is better performance than we assumed. As a result, the total tobacco industry volume was estimated to decline at around 2.5%.
As for our performance, JT cigarette sales volume decreased 13.8% year-on-year due to the cigarette industry contraction. However, our cigarette market share increased to 61.5%, up by 0.5 percentage points. Regarding RRP, the sales volume and related revenue are increasing steadily and sequentially following the Ploom TECH sales area expansion. The national rollout of Ploom TECH in convenience stores commenced from July, and it has got off to a solid start. We estimated our share within the RRP category in the convenience stores is around 10% following the national rollout as was during the April-June period. In July, accumulated sales volume of Ploom TECH devices exceeded 4 million units, and the number of no-smoking Ploom TECH Only restaurants across the country also exceeded 2,000. The capsule manufacturing machines are running stably, and we are on track with the planned capacity enhancements.
Now let's move on to the revised forecast for the Japanese domestic tobacco business. Please look at Slide 6. Let me start with our view on the Japan market. Considering the cigarette industry volume trends and the moderate growth of RRP market in the first half, we have updated the assumptions for the cigarette and RRP industry volumes. To be more specific, cigarette industry volume is now estimated to decline over 14.5%, however, this is better than initial assumptions. Also, revised estimation for the RRP market size for 2018 is circa 22% of total tobacco industry, slightly below our initial assumptions. Based on the revised assumptions, JT cigarette sales volume has been revised upwards. We will not change the sales target of 4 billion sticks equivalent for Ploom TECH. This target has become further challenging, considering that the estimated RRP market size is smaller than initially assumed and competitors are also more aggressive in their marketing. Despite these headwinds, we will continue to strive to achieve these sales targets.
As for the financials, forecast for core revenue has been revised upwards by JPY 11 billion mainly due to the stronger cigarette sales volume. Adjusted operating profit remains unchanged as the profit generated from cigarette sales volume upside will be reinvested into RRP. Based on certain assumptions, price increases for both RMC and RRP for the tax hike in October is embedded in our forecast. Although we cannot give you any details regarding the range of price increase at this moment, our basic policy is that we will pass on the tax increase and the impact on our financials caused by the volume decrease due to price change. This basic policy is also going to be applied to RRP. We will take into account competitors' moves when deciding our RRP prices. Now please turn to Slide 7. As mentioned in the previous slide, RRP market growth is expected to become moderate for this year. However, over the mid- to long term, we believe this category will continue to expand and thus our outlook for RRP market share is expected to possibly reach 30% for 2020, and this remains unchanged. It is because the whole industry is committed to this category and new products, including ours, which better meets consumers' needs, which will hit the market. In addition, there is a possibility that consumers may have wider opportunity to use T-Vapor as it is treated less restrictively versus conventional cigarettes under the revised Health Promotion Act after considering the product characteristics of RRP. Based on our outlook for Japan RRP market and looking ahead to our ambition to achieve an RRP category here of 40% by the end of 2020, we recognized that now is the right time to gear up following the introduction of the regulations. Therefore, we have decided to make additional marketing investments for this year to establish a low-temperature heating category and make Ploom TECH successful. To consistently capture consumers' interests, we do and will aggressively support Ploom TECH by various measures, including increasing exposure among sales channels, launching a limited edition of devices with sophisticated design and adding new SKUs, which was just announced 2 days ago. Also, we continuously make efforts to increase the number of facilities where Ploom TECH is allowed to use by leveraging on our sales force. Furthermore, towards the enhancement of our RRP portfolio, we will surely make a solid progress to prepare for the launch of Ploom TECH+ and Ploom S. Studies showed that the new product launches by competitors and their intensive marketing activities could negatively affect our performance. In addition, the regulation on environmental tobacco smoke could also have certain impacts on the total tobacco industry. Although it is difficult to estimate the scale of these impacts, we will possibly take initiatives after carefully measuring these impacts. Now I will explain the highlights for the international tobacco business. Please look at Slide 8. As communicated in the first quarter results announcement, both top and bottom line growth continued, driven by the robust pricing gains. Mainly led by Russia and Taiwan, the price/mix contribution for the second quarter, which drove the profit growth, amounted to almost $300 million, far exceeding that in the first quarter. Driven by pricing gains, adjusted operating profit at constant FX grew strongly by 13.2% in the first half, while strengthening the business foundation in the markets where we executed acquisitions and investing in Reduced-Risk Products. Profit growth for the first half was relatively strong compared to the full year target of 8%, excluding a onetime factor in the previous year. This is mainly because we expect a larger increase in our investment in the second half compared to the first. Pricing gains are expected to continue in the latter half of the year. Now I would like to talk about the revised forecast, including the pricing gains just mentioned to the international tobacco business. Please turn to Slide 9. Our assumption on total shipment volume has been revised upwards mainly due to the Donskoy Tabak acquisition, the completion of which was announced yesterday. On the other hand, reflecting the downside in Iran, GFB shipment volume assumption has been revised to an increase of over 1%. Core revenue has been revised up by $150 million to reflect the updated volume assumptions and the strong pricing gains. Despite the upward revision of core revenue, adjusted operating profit at constant FX remains sustained as initial forecast. The main reasons are the downward revision of Iran's sales volume and prioritization for investment in foundation-building for the acquired Donskoy Tabak, which consequently is not expected to make a profit contribution this year. Considering all the variables, we are confident that we can achieve the full year profit target. Now let me explain the situation in Iran. There is a certain risk that we face a problem in procuring tobacco and nontobacco materials for local manufacturing, which ultimately could disrupt delivery of our products. The sales volume downside incorporated in the revised forecast reflects this risk under certain assumptions. And we also recognize that cash transfer from Iran is now extremely difficult and therefore we'll closely monitor the situation as well as the currency volatility. On a reported basis, as an effect of FX assumption updates, core revenue has been revised upwards by $130 million and adjusted operating profit has been revised downwards by $100 million.
Next, let's move on to the situation in Russia. Please look at Slide 10. In Russia, we are consistently seeing the pricing opportunities from the second half of last year and increased our price in June ahead of the July tax hike. Different from last year, pricing benefits continued to realize and significantly contributed to the profit growth of the international tobacco business, especially in the second quarter. Organically, GFB market share reached a high -- a record high on a 12-month moving average basis, led by Winston and LD. As mentioned in the previous slide, the acquisition of Donskoy Tabak has been completed, boosting market share to around 40% to fortify our #1 position and enhancing our presence in the growing lower price segment. In addition, our strategic options have increased with the expanded brand portfolio, and our end market capabilities in certain geographies have been strengthened, where our brands did not represent a fair share in the past. As just mentioned, the positive progress in Russia has been confirmed in the first half. But however, at the same time, we are also aware of certain competitors' pricing tactics and an increasing trend of illicit trade. We continue to closely monitor the market dynamics and the competitors' movements.
Finally, please look at Slide 11. We delivered profit growth at constant FX in the first half of 2018 with a resilient performance. International tobacco business was the main driver for the growth, and pharmaceutical and processed food businesses are on track towards the annual plan. The financial performance of the Japanese tobacco business was difficult, but it is encouraging that Ploom TECH's national rollout has gone off to a solid start. Towards the second half of this year, while expecting its business environment further evolve, the Japanese domestic business aims to achieve its profit target and more importantly, it's committed to focusing on establishing a low-temperature heating category and promoting Ploom TECH. There is also no change to the profits for the international tobacco, pharmaceutical and processed food businesses. We aim for profit growth and foundation-building for these businesses. Regarding shareholder returns, we plan to grow dividend per share in a stable and sustainable manner, considering the group's mid- to long-term profit growth outlook. And based on this policy, annual forecast for the dividend per share is JPY 150, same as the initial projection, and the planned interim dividend is JPY 75 per share.
This concludes my presentation. Thank you for your kind attention.
Thank you very much. Now we'd like to go into the Q&A session.
Mr. Minami, Naohiro, Executive Vice President, Chief Financial Officer and Communications; Mr. Koji Shimayoshi, Deputy CEO and Executive Vice President, JT International; Mr. Hisashi Ishikawa, Vice President, Head of Tobacco Business Planning Division, will answer your questions. [Operator Instructions]
In regards to your English question, your questions in English will be accepted through the e-mail at the address which we have informed you in advance. The address is jt.ir@jt.com. Please submit your questions to this e-mail address. We are now waiting for your questions to be input.
Here is the first question. Miura-san from Citi Securities.
I am Miura from Citi. I have one question for you. For the mid- to long-term 3-year period target that you have for mid- to high single-digit earnings growth, what are the risks that will impede that from happening? What kind of risks that are negative do you have in mind that you think will make this profit growth hard to achieve? So what are the risks that are in your minds right now? And it will be helpful if you can divide that up into the domestic tobacco business and the international tobacco business, respectively.
This is Minami. I will take your question. The mid- to high single-digit profit growth target that we have in place, first of all, when you look at the assumptions, we're expecting that the RRP market is going to grow and that we will fairly increase our market share. By doing so, RMC and RRP combined in Japan, we hope to ensure that we reestablish our leadership in the domestic market. That's our assumption. Therefore, with regards to activities, if these assumptions do not work out or if we are behind in our ambitions for the RRP market, that will be unfavorable for the business. So that would be one risk.
With regards to market competition right now, it is a big challenge that we are engaging in, and we are striving to meet our targets. And when you look at the business environment, first of all, you need to look at the countrywide economy and how the economy is going to grow going forward because that is going to impact consumption trends. But more than that, we have a target year, which is 2020 and towards 2020. While last month, at local governments and at the central government level, the passive smoking regulations were passed and we need to look at what kind of impact that these regulations are going to have in reality. And for smokers and nonsmokers all combined, how are the regulations going to be accepted and how are people's smoking trends or mentality going to be changed or not changed due -- when the regulations take effect. We believe this is one trend that we really need to be cautious and continue to watch in Japan. It started from prohibiting smoking on streets, and nowadays, the restrictions are going indoors with the anti-passive smoking rules coming into the picture, which was passed as a Diet. So I'm sure that smokers are going to start to feel increased pressure. However, for this part, we haven't yet been able to see anything specific happen, but we would like to continue to watch what happens and goes out and take countermeasures if we need to. With regards to our international business, this might be a general statement; however, geopolitical risk is one thing we need to keep in mind, especially U.S., Iran or other regions.
So -- and when it comes to trade, there's more countries that are involved. For the U.S. and Iran, it's more nuclear-related. However, for those regions that we have a high market share in or for regions that we would like to enter, going forward, we need to scrutinize the situation that those markets are in due to geopolitical risks. And another area would be Brexit, how is Brexit going to affect the talks between the U.K. and EU. And we don't have a factory in the U.K., so tax as well as other regulations might affect us. So it applies to us as well as other industries, but the movement of people is something that we need to look at because it's currently uncertain at this moment about what's going to happen in the future. And especially when it comes to trade in and out of the U.K., there may be a tariff imposed that may have a big impact on our business. And currently, due to regulations, down-trading trends have materialized quite strongly in the U.K. market. However, there may be other tax effects that may manifest due to Brexit. And another thing, which may be a matter of course, but as the global economy changes in this regard, when it comes to our regional portfolios, we would like to have a better diversified portfolio, but I also believe that risk management is going to become essential and become even more important. So this is execution skills on a local basis as well as exchange rates are going to become important. If there were to be an event and there were to be a volatility, that would be our concern. So that's a potential risk as well.
So overall, this might be pretty obvious, but we really want our business to trend in a steady way. That will be most favorable with a stable environment in place. However, whether it be international or in Japan, volatility and uncertainties are strengthening compared to the past. So it's a matter of how we are able to manage these risks. So that was pretty much a general statement maybe, but that's my comment.
So Mr. Shimayoshi, can you talk about your price strategies around Russia as well as the risk around Iran as well? As well as prices at the U.K.
Regarding Russia, Shimayoshi will answer your question.
So the June pricing has been established very well before the July tax timing. And also, in terms of the business environment, in short-term perspective, we can say that for this full year, profit growth, we know that the Russian pricing will continue to contribute to this full year profit and this pricing has been established. We are invoicing this. Now on the other hand, we can talk about some risk elements. What we are aware of is the illicit trade situation. To this, in 2017, we know that it used to be about 6%, but now 7.7% as of Q1. And we believe it might be as high as 9% at the end of this fiscal year. In order to countermeasure this as a government and also the initiatives of the association, we need to work harder on the Track and Trace and implement the Track and Trace technology onto the product case. Now the leader of Russia, Putin, mentioned that from March 1, 2019, this will start. This initiative will be started as of this timing, and the preparations are already made. So all we need to do is execute this and make sure that we reduce illicit trade. That is the status of Russia.
Also, continuously speaking about U.K., this -- also, we did an MPI in May -- in March. After a month, the competitors are following as we expected. So the pricing environment is becoming better. In terms of share, JTI share, after we hiked the price in March, still, our share is and has continued to be very good. For RMC, we have Benson & Hedges group, and also, we have actually been offsetting the down-trade. And because of that, we're seeing better results.
But for TPD2 -- after TPD2, RMC and fine cut, and also, shifting to a value price zone in each category has been a stronger trend recently and we think it's very important that we monitor -- continue to monitor this trend. And finally, speaking of Iran, I would like to talk about the materials import, and the current -- the clearance was stagnating at one point. This problem has been solved as of today. But going forward, we continue to be very cautious because in the worst case, we still have a risk of having to halt our manufacturing. We actually have reflected a part of this risk into our estimates that we just announced.
Now in the market level, inflation is progressing, but the demand for tobacco is actually still strong. Actually, in the wholesale level, they're stocking up the inventory to respond to the demand. So in the real business, there's no substantial problem, but we need to be very careful about the future steps taken in the production side.
And also, in terms of the sanctions, we have had various events that has happened, and we're focusing on collecting information, making sure that we would be able to respond in a timely and agile fashion. I will stop here.
Moving on to the next question. Allow me to introduce Saji-san from Mizuho.
So I would like to ask a question about the adjusted operating profit in long-term, and I understand that you have kept the current level and you said that the domestic RMC will not go down. I think it's a little bit above JPY 2 billion-plus, right? So that means you will have a buildup of profit of approximately JPY 10 billion. So I'm wondering, you are going to invest this into RRP, but how much in absolute yen amount are you going to additionally invest? And also, your investment into Donskoy's platform fortification. And also, the Iran volume decrease, I think, needs some investment as well. For these initiatives, I was wondering if you can give us some color on how much you will actually invest. We understand that RRP will see more intense competition. So when you get profit, are you going to continue to invest -- reinvest in RRP for the harsher competition, therefore us not seeing increased profit?
Yes. First of all, for AOP, constant FX, I'd like to talk about the background as to why we made this decision once again. Because to your point, for the domestic tobacco business, the RMC volume has been revised upwards, and for RRP, Ploom TECH, we have maintained the current projection. So the top line is growing, but why is that not trickling down to the bottom line is your question, I understand. Now I have already explained that at the beginning of this fiscal year, when we were putting the budget together, we knew that we will have a very tough budget. It is. And we have communicated that as a very rigid budget that we have. And the question is how much are we going to invest in RRP? What are we going to invest in, to what degree? And we've had a deep discussions, and consequently, we had to set a certain limit to how much we can invest. And that is because of the market conditions, and we'll continue to watch that. And also our initiative's development so that we can adjust it in an agile manner and decide whether we will actually use the investment budget or not. That was our plan at the beginning of the fiscal year, and now we're seeing the market situation for about half a year now. And we know that in terms of top line, the forecast is -- was changing. So that's why, this time, we have announced to -- first of all, in terms of the RRP market, the growth is not as fast as it used to be. So that means, for us, that carries Ploom TECH, which is the low-temperature heating technology. We need to make sure that we develop this product. So that, at least in the future, that's a very big strategic decision. And so that's why we're having this negotiation to revise some of our initial plans and ultimately decided, with a strong will, that we would like to focus more on the low-temperature heating technology, even more than we had planned, to make sure that we're very firm on this initiative over a multiple number of years. So that's why we have decided that we will invest, and that's why we have these numerical estimations that we have announced to you. So this is the big picture to your first question.
So then what happens in the international tobacco business, why don't you make further efforts, you might feel. But to this point, the trend up to now was that, and you might not be happy to hear this, but in the second half, we often have to pay more cost due to seasonality. And under these circumstances, we know that in terms of pricing, things are going well right now, but it doesn't mean that we don't have any risks at all.
So therefore, we know that there are some points that we must nail to prevent the risks from realizing. So that's why, for the AOP with constant FX, it is not going to be changed. That's the overall picture, if I may stop here.
I understand the qualitative description, and I understand very much, and I'm asking the quantitative response if possible.
So Ishikawa will take your question from hereon.
As explained, in July, we went nationwide with our Ploom TECH sales. We started sales at convenience stores. And now from hereon, in the low-temperature category that Ploom TECH is in, we would like to make it more well-established. So this is something that we're going to establish from hereon, which will lead to increased profit pool, and we will also be able to exert price leadership in the future. So I think that's the space that we're set to enter.
As we -- with this as a backdrop, we revised up our volume target for RMC, and the profits that are generated from here are going to be used as sales promotion expenses for RRP. That is our basic way of thinking. I'd like to give you a little bit of more flavor on which areas we would like to invest in. For the low-temperature category that Ploom TECH is in, one of the challenges that we need to tackle going forward is towards customers as well as towards society. We need to ensure that we are able to promote understanding towards this category. We are entering this critical stage. For the product itself, we are very confident about the product we have in the market. For example, with the Japanese market, when we conduct consumer surveys and ask about their expectations about RRP, they talk about social consideration being the -- of less priority, why they purchased these types of products. And when they -- when we ask about Ploom TECH compared to the leading competitor's product, they say that there is less odor, and we have a higher points on that regard. And with regards to recharging, no necessary -- no necessity to clean as well as simple operability, it seems like we were getting higher points on those areas as well. So we are confident with the product we offer. But on the other end, when it comes to recognition of the product, we still have much more to do because we scored there lower than competition. So raising awareness towards the product is one of the challenges we face, so low-temperature category Ploom TECH carries this kind of challenge.
And now we have revised upwards our sales volume targets for RMC, and for the additional profit generated, we would like to reinvest into RRP. For example, for campaigns that are point-of-sale as well as from a product point of view, we have some initiatives that we would like to invest in. For example, MEVIUS Mix Green Cooler for Ploom TECH is something we would like to launch from September with Japanese pairs and Western pairs combined in flavor. So these are some new promotional measures that we would like to invest into.
With regards to raising awareness, we believe the key is going to be directly communicating to consumers. We've changed our sales team structure from April, which is more focused on communicating with consumers directly. And in July, we went nationwide at convenience stores, and the quality and the number of sessions through which we communicate with consumers has been increased. And this is an area that we would like to reinforce going forward. Furthermore, for the no-smoking Ploom TECH Only restaurants that we've been expanding, we exceeded 2,000 as of the beginning of July. But in any case, increasing the store count for no-smoking Ploom TECH Only restaurants is something we'll continue to work on. So I think expanding the low-temperature category will bring us to a brighter future. So that is why we would like to invest over the short term.
Yes. And good luck on that. For RMC, the additional gains are going to be completely reinvested into RRP, it seems. Can you give me a number?
We cannot, but it's true that we're going to make additional investments with the profit that we gain from the RMC category. But if all of the profit is going to be invested into marketing spend going forward, that's not necessarily the case. It's more about the challenges we need to tackle right now, and that's why we would like to invest for this fiscal year. But in the future, we would like to look at our profit on an annual basis. And of course, we are going to make efforts so that we can exceed our profit plan. That's what our management is thinking.
However, like this time around, we may implement some initiatives that we were planning to do in the future, but do it faster than expected. But for the domestic tobacco business, we are working out assumptions that we would like to continue to see profit growth, and that is why we are implementing a variety of measures.
We'd like to take the next question. Allow me to introduce, from SMBC Nikko, Takagi-san.
I'm Takagi. So before the tax hike in October, I'd like to ask you about your pricing strategy. I understand the concept is plus alpha on the tax hike amount. Now when we increase -- when the taxes increase this time, I want to ask you, what is your goal? Are you going to strategically target maximum profit, or maximizing your profit, the positioning or both? If you can give me some color on this.
Yes, I am Minami. I would like to answer this question. So as we speak, for RMC, we have the 4-year consecutive program, and we're in the first year, which includes plans for VAT, and also, we have a 5-year VAT for RRP. Now this is not a matter of 1-year initiative. It's really about the long-term perspective of how we take measures to compete against the market conditions.
So within this longer-term perspective, if I talk about this fiscal year, we'd like to focus on RRP, the market in which we're not necessarily the leader, and think about how we can put our projections together, what is the strategy, that is definitely a very important thought that we need to consider. But as you mentioned, going forward 2, 3 years ahead, the mid- to high single digit that we're talking about for the mid-term perspective, I'm not sure if this is the right wording, but we want to make sure that we don't spoil the business. And when we try not to do that, how do we maintain our profit? It's a very challenging question. And so to your question, yes, we need to think both about our profit and positioning. That is the current status. So therefore, we are looking at this application, and one of the companies is already taking their steps for this battle as they made their application for the Ministry of Finance. And so now we have to fight back against this. So obviously, in terms of competition strategy, we cannot give you the details of this strategy that we have in mind. We need to continue to be silent right now and make sure that we present what we have later on.
Understood. And I think it's the RRP, the THP type of product. Do you think you can boost the market by launching a product status lower in price point?
That is a very difficult question because that's exactly what we need to think about in the mid- to long term. Will it lead to the future growth of this category if we set the price at a relatively low zone, whether it's affordable or not? And how much effective is an affordable product? Daniel mentioned in the London conference the other today, that in the western world, especially for E-Vapor, where E-Vapor is very popular, it is true that affordability and convenience is exactly what stimulates purchase intent on top of health consciousness. But in Japan, it seems like the sense of value that people have is different to the west. And so we believe that we have the right product that meets the demand of the Japanese customer. So I'm not sure if just reducing the price will help stimulate the demand or not. It's a very difficult question.
Understood. And so in terms of pricing, you're going to get both profit, so also domestic tobacco business, you're going to focus on the profitability of this business as well?
Yes. And I'd like to repeat that this is a mid- to long-term thing because this tax hike is not a onetime thing.
Here's the next person, Fujiwara-san from Nomura.
I have a question around RRP. So as Ploom TECH+ are going to come out going forward, but I just wanted to hear about the speed at which you would like to roll these products out. Of course, you need to first accumulate device inventory. But going into next year, you are quite firm in rolling out Ploom TECH nationwide, but for Ploom TECH+ and Ploom S, how quick are you going to roll out these products?
And one thing I'd like to confirm is for Ploom TECH, 300 million, 500 million sticks equivalent, but with regards to the sales trend, against the annual target of 4 billion sticks equivalent for the full year, is this in line? Now I'm sure that you would think that it's challenging because of competition, but with regards to the first half results, how does this play out compared to your 4 billion target for the full year?
This is Ishikawa speaking. I'll take your questions. For Ploom S and Ploom TECH+, one thing that I can talk about right now is that, at earliest, we could launch it by the end of 2018 or at the beginning of 2019. That's the launch timing we are currently considering. Looking at the market environment as well as the competitive landscape, we will decide ultimately when the product should be launched. So we're currently strategically considering. So at this moment, we cannot give you any flavor of the timing of the launch or how we're going to roll the products out.
With regards to your other question, with regards to the progress we're making on Ploom TECH, the trends are in line with our expectations. With regards to how Ploom TECH is doing this year, we believe the key period is going to be the second half of this fiscal year. We would like to, once again, strengthen the low-temperature category with Ploom TECH, and the second half is going to be a critical phase for us. That's all from myself.
This is Minami speaking. Let me follow up on this point. This is an -- electric RRP devices are electronic devices. And when you think about its attributes, accumulated inventory in a vertical way and rolling it out, immediately, is something that's very rare. That hardly happens when you look even beyond our industry. But we're working very hard and are trying to do our best at this moment. And we are rolling things out in steps, and as Mr. Ishikawa mentioned, for the upcoming products, we are currently -- strategically thinking about what the timing should be and how we should build them out.
For the low-temperature category, I have an additional question. You were talking about starting the low-temperature category, but when it comes to the passive smoking regulations that are going to kick in, it is a type of heated tobacco which pretty much falls under the same category as the other competitor products. So what kind of strengths do you think you can exert when these regulations start to take effect?
So let me talk about our overall concept, and then Mr. Ishikawa can go into the details. From a regulatory point of view, with regards to designated products, we're not sure how the laws are going to actually be applied to the respective products. So our heated products are being treated the same, overall, right now. So with regards to low-temperature versus high-temperature products, at this moment, we are -- we do not know how the laws are going to hit us. However, for the facility operators as well as for the restaurant owners, with a relationship to them, our products hardly smell at all, and there's no residual odor. So when it comes to dedicated smoking rooms, by having the people recognize our product, I think it will be a very strong card that we have when it comes to the implementation of smoking rooms. But of course, it's a matter of how the regulations are going to play out, but for the facility owners, for the store owners, we will have discussions with them, ultimately. It's a private sector versus private sector meeting that we're going to have, and we believe our product is stronger in that regard and we need to make an effort leading up to 2020. Of course, the facility owners are going to have to make decisions on setting up the smoking rooms, and we believe we could play a role incorporating with them.
And I, Ishikawa, would like to supplement some more comments. As Mr. Minami just mentioned, when you think about the ordinance that have their directions, they group every electronic device as THP, the tobacco-heating product. So the Ploom TECH differentiation is that it does not affect the indoor environment, including odor, compared to the competitor's product, which is the leader in the market right now. Customers acknowledge that Ploom TECH has less odor. So these are some of the competitive edges that Ploom TECH has. We are confident about our product differentiation.
And also, for people who have very strong restaurants, who have very good support for the Ploom TECH Only signs, so we already have 2,000 restaurants who support this initiative, Ploom TECH Only. And through these places, customers will realize that Ploom TECH has a strong competitive edge, including the no-odor element. So on top of this result that we have already achieved, we'd like to continue to promote some of the strengths of our product. I'll stop here.
I'd like to introduce the next person. From JPMorgan, we have Tsunoda-san.
I am Tsunoda from JPMorgan. I have a question regarding RRP as well. In your presentations, you said that your sales target of JPY 4 billion is not changed, but it will be more challenging to achieve this, you mentioned. So what is between the lines here? Are you saying that this unit -- and actually, it changed from 23% to 22%. That is the downward revision, so are you saying that 1 point difference is causing the more challenging quotation? I'd like to confirm your verbatim here.
And also, ultimately, you said 800 million units, and that is in line with the plan, you said. So how should I interpret that? This second half, 3.2 billion units, how are you going to build this up? In terms of the number of stores, you have the number of, well, convenience stores, and I think you will have 25,000 outlets, which is probably double compared to the past. But in quarter 3 and quarter 4, I want to really know how you're going to build up your results numerically. And if hypothetically, you do not achieve your numerical goal, you said that you're going to use this marketing expense. So what will you do? Will you reduce your marketing expense so that the profit stays neutral? Or what are your plans?
Yes. Minami will take your question.
Regarding the 4 billion units target that is becoming more challenging to achieve, obviously, obviously, as you point out, if the growth reach is smaller, then the pie that we can enjoy becomes smaller. And it is the situation for the total market right now. So we need to be very conscious of the positioning of our competitors, and we know that the competitors will also be as aggressive because they need to achieve their numbers too like we need to as well. And we know, currently, that the competitors have already announced messages that have the same terminology.
So therefore, compared to our initial estimation for the full year, we know that the pie, totally, is not as big as we thought it would be and it's declining compared to our initial estimation. Now we don't know how big our pie is. It's very difficult to analyze that. But that is one issue we address as challenging. And more than that, it's the competitors. We know that the competitors are as fierce facing the same competitive situation, and I think you know this very well. So that is why we know that the competition will become even more fierce, therefore making it more challenging for us to achieve the 4 billion-unit target, which we are going to keep.
So therefore, we very much acknowledge what you're saying that we need to, first of all, expand our sales area. We'll do that very proactively. And obviously, within the sales territory that we expand, we'd like to make sure that we maximize our presence with eye-catching exposure of our products and also initiatives so that we get the attention and grab people's attention. We want to display ourselves with more -- frequently so that the customers see us more and acknowledge us more in the market.
As Mr. Ishikawa mentioned earlier, again, we need to talk about Ploom TECH because we need to promote the sales of our refills, the cartridges. We need them to understand that there's a benefit here in the technology of Ploom TECH so that it boosts the sales of Ploom TECH. These 2 are the most -- 2 important initiatives so that people understand the difference of low-temperature heating. Do we have anything to add, team?
That's it.
Related to your answer, I have another question for you. So market share is about 20%. Competitors have been saying that they've already acquired the premium customers. So if you wanted to increase your shares even more, who are you going to capture? Who is going to be captured, or where is the market going to penetrate going forward? So direct-heating type of tobacco products has been pretty much dominating the market, and if low-temperature category products are being used dually, how -- what is the driver of demand is going to be going forward? Well, the slowdown of RMC might be better for you. So when the growth of RRP is slowing down and becoming more moderate, why are you continuing to maintain such an ambitious strategy to penetrate the market?
Fundamentally speaking, I think the RRP category is something that we need to pursue deeply so that we can raise awareness and so that a certain percentage of people can use RRP products. We basically would like to expand the profit pool that we have in Japan, and we believe the composure -- or the composition of the profit pool is likely to change. And regulations are becoming tighter as a trend, and there are personal health concerns that are held by the general public and people are more conscious about their health. And of course, I work for this company and I am very aware about having a focus on health management.
So because there is a benefit for the consumers, I believe, well, tobacco is being smoked because the products are being utilized because there's a benefit for the customers. And I don't think we should give up on a category just because it's grown to a certain extent. I think we need to well manage both categories. And we need to create a competitive advantage in both categories, RRP and RMC combined, so that we could exert our presence.
So in 5 years' time, RRP growth may pick up or it may not, and nobody knows that. But currently, over the past 2 years, the share of our key products went up from -- up to 20%. So that's why we see this as an opportunity, and that is why we would like to ensure that we can secure a 40% category share by 2020 for RRP.
So as the CFO, the share of RRPs going up means that the profit pool is going to expand. So it looks like already an ocean, but compared to RMC, high margins can be maintained and that's how you're going to manage this business, is that the case?
Yes, to your point, of course, we need to be aware about the tax regimes and how that's going to play out going forward. But through innovation in various ways, I believe, the product design as well as smoking scenes can accept that. And margins of -- are likely to change due to that.
I'd like to take the next question. The next question is from Daiwa Securities, Morita-san.
I'm Morita. I want to talk about next year, if I may, which is a bit ahead, I'm sorry. But in the next 2 years, you're going to keep the mid- to high single digit. It was a little bit less than mid- to high single digit until today in the past 2 years. So I guess you're building your foundation so that you can achieve it finally next year. This is what I want to confirm. And if you do so, then how will it be broken down between the domestic and international tobacco businesses, especially when we have a lot of uncertainties in the domestic business and we injected funds? And the decline of the paper cigarettes have slowed down now, so hopefully, the domestic business and the RFP stay strong. But what do you think?
Well, as I have been mentioning, we actually need to refrain from talking about next year. And -- but based on that condition, I'd like to try to mention as much as I can. Now I personally, from this -- ever since I mentioned in the February earnings result for the -- I don't know if this is a nice way to say this, but we need to make sure that this year becomes the bottom of the domestic tobacco business, and that is the preconditions to the plans that we have put together. So that means, since we're hitting the bottom this year, we'll see growth next fiscal year. And that's a very strong mission that we have shouldered. And so when we look at the progress, up to June this year, we're still in line with our plans, so obviously, we need to make sure that we achieve mid- to high single-digit achievement next year. We're in this stage already. So the most important point is, like it was last year and like it is this year, the question is whether we can execute the plan. It's really about our capability to execute our plan. So second half this year, we'd like to make sure that we do that and we execute the investment plans that we have just announced so that we can capture the demand and establish our categories. I'm sorry. That's all I can say about next year as of now.
Understood. You do feel a good response to your initiatives. That's how I'm going interpret your answer. Now I understand that your estimate for free cash flow has been downward-revised dramatically. So can you give me some color on this, please?
Yes, the biggest reason to this is because of the Donskoy Tabak acquisition, which we have not reflected in the announcement in February, but we have this time. There are other elements from the market about the price hike timing and the tax hike timing, which we have in mind, which leads to the basing up of our inventory and also the changes of the tobacco tax changes -- excise tax changes. And on top of that, we have our initial payment to make for Donskoy Tabak.
There are many questions, however, because of time, the next person will be the final person. The next person is from Goldman Sachs, Yamaguchi-san.
For Japan, the way you look at volume, you're saying a 4% decline for this fiscal year. And when you look at the second half, you have some pricing gains, I believe. So you're saying it's going to go down in the second half, but are you expecting it -- are you expecting the decline to be larger than 4% next year or not?
Another question is related to investments. So you're going to invest into RRP this year, but I think competition is going to become more intense. And you're doing low-temperature, but you're going to also start entering the high-temperature category. So I assume that your investments are going to increase. Is that the right way of looking at your investment trends?
Let me confirm, when you say investments, are you talking about capital expenditure, or are you talking about promotional marketing expenses as well, meaning overall investments or expenses around the RRP business?
Marketing expenses is what I'm talking about.
So I am Ishikawa, and I'll take the first half of your question. With regards to the 4% number that you just raised, at this moment, there's still a firm volatility, so we're not sure what's likely to happen in 2019, but tax hikes as well as regulations are going to start to kick in. So environmentally, we're moving towards a tighter environment. As we start the second half, we will have a tax increase, and there's more coverage on regulations. And we would like to be cautious and continue to watch how things roll out as we consider our outlook for 2019.
This is Minami speaking. For marketing spend, this is to be decided. With regards to how we're going to spend, it's something I can't share with you at this moment. I hope you understand. However, just to explain where we stand, we're going to formulate next year's plans going forward, and when we do so, we would like to look at the total profit of the entire tobacco business as we decide on our marketing spend. And for next year, I think this aspect is going to become stronger than before. So I'm sure -- I'm sorry that this is the kind of answer I'm providing you with, but I would like to keep my comments here.
With this, we would like to close the question-and-answer session. And now we would like to conclude the second quarter financial results briefing session. Thank you very much for participating.