Japan Tobacco Inc
TSE:2914
Earnings Call Analysis
Q3-2023 Analysis
Japan Tobacco Inc
The company is strategically expanding its heated tobacco product (HTP) Ploom brand, seizing opportunities in markets with existing consumer awareness and lower tax burdens on HTPs compared to combustibles. This is expected to result in higher margins. Initial launches in selected cities will pave the way for national rollouts. The Ploom X model has garnered positive feedback, contributing to robust sales momentum.
The pharmaceutical segment experienced revenue growth, driven partly by licensing income and increased sales in dermatology and allergy treatments. The company also saw an uptick in adjusted operating profit (AOP). Notably, a new cream application for skin conditions has been filed, showcasing the company's innovation and product development initiatives.
The processed food division maintained relatively stable revenue, despite divesting its bakery business. Growth in the food service product line, coupled with price adjustments, compensated for higher raw material costs, leading to an AOP increase. The company has been adept at managing external cost pressures while preserving the profitability of this segment.
Confidence is reflected in the revised upward forecasts for fiscal year 2023 in both revenue and AOP, largely attributed to strong tobacco sector sales. The company projects a 5.6% rise in constant currency core revenue and a 5% increase in AOP from the previous year. Enhanced financial outcomes include a JPY 45 billion upgrade in operating profit and a JPY 7 billion lift in profit forecast, notwithstanding higher financial costs and income taxes. The prediction for free cash flow has been favorably adjusted by JPY 25 billion, evidencing efficient capital management and robust operational prowess.
The tobacco division, including combustibles and reduced-risk products (RRP), witnessed a forecasted volume growth of approximately 1.5% year-on-year, countering expected industry softness. Pricing strength and volume increases have been credited for a JPY 63 billion jump in constant currency core revenue forecast, and a JPY 33 billion hike in AOP, despite additional investments in Ploom X.
Forecasts for revenue and AOP in the pharmaceutical business have been revised up due to better expected sales and overseas royalty incomes, despite currency headwinds. In contrast, the processed food business saw a modest reduction in revenue projections but anticipates a hike in AOP due to cost management efforts.
The company remains committed to rewarding its investors, maintaining its annual dividend forecast at JPY 188 per share, with a payout ratio around 72%. This aligns with the company's shareholder return policy and reflects a balance between reinvestment in the business and providing shareholder value.
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Thank you for participating in the Investor Meeting for Q3 2023 Results at Japan Tobacco Inc. today.Before we start the meeting, I would like to ask you to make sure that your display name is accurate.Thank you for your cooperation. It's now my pleasure to introduce you our CFO, Mr. Furukawa, please.
I am Hiromasa Furukawa, and I am the newly appointed CFO of the JT Group. Thank you for joining us today for the JT Group's financial results briefing for the third quarter of fiscal year 2023.First, I will detail our 9-month consolidated results for fiscal year 2023. Please turn to Page 4. As shown on the slide, revenue and adjusted operating profit increased both on a constant FX and on a reported basis. AOP at constant FX increased 5.9% year-on-year, driven mainly by the tobacco business, which continued to grow. Within the tobacco business, pricing contributions outweighed the impact of higher input costs within the supply chain and the accelerated investment towards HTS driving a mid-single-digit profit increase. This performance was supported by increased profits in the pharmaceutical and processed food businesses. The consolidated AOP growth on a reported basis was negatively impacted by the appreciation of the Japanese yen against certain currencies, including the Russian ruble. Operating profit increased 9.1% year-on-year, driven by the AOP increase, as well as gains on sales of real estate and decrease in amortization of trademark rights and the adjustment items. Profit increased 9.5% year-on-year due to the operating profit increase.Moving on to the results of each business segment, starting with the tobacco business. Please turn to Slide 5 to review the volume results. Total volume for the 9 months, combining sales of combustibles and RRP altogether outperformed the industry volume trend with a 2.1% increase year-on-year. In the combustibles category, volume continued to increase, mainly in the EMA, EMA cluster in line with trends highlighted in the first half of the year. Within the EMA cluster, several drivers led the volume increase. In Turkey, our sales volume increased significantly, driven by strong industry volume, including a favorable comparison against the weaker industry volume last year. In addition, global travel retail volume recovery continued as travel resumed.The volume increase was stronger in Asia, where COVID restrictions were lifted later than in other geographies. Lastly, several emerging markets within the cluster continued their strong momentum. Also, our market share in key markets increased, especially in Japan, we continue to capture down trading and also to increase our market share within the combustibles category, especially in the value price segment. I will come back on Japan in a later slide. These positive contributions outweighed negative factors such as the impact of lower industry volume in several key markets, including the Philippines and the U.K., as well as the ongoing business disruption in Sudan.RRP volume increased 8.2% year-on-year despite one-off items impacting 2023, such as the discontinuation of Ploom S sales in Russia. Most of the RRP volume growth came from HTS. Our strategic priority, fueled by volume increases in Japan as Ploom X share gains continued and incremental volume generated by the new launches of Ploom X in a number of key cities in Europe.Turning to the financial performance of the tobacco business on Slide 6. We continue to achieve strong top line growth driven by solid pricing contributions in a number of markets, including Philippines, Russia and the United Kingdom. This top line growth has enabled us to maintain steady profit growth even under the increased input costs, driven by inflationary pressure, such as high raw material prices, distribution and utility costs, as well as the higher indirect costs, such as labor costs, investments towards both combustibles and RRP continued, notably to fund the geo expansion of Ploom X outside of Japan. While total volume increased, the volume contribution to AOP was negative, as shown on the lower left-hand side graph. This was due to a lower market mix, resulting from a reduced volume composition from high-margin markets, such as the U.K. Similar to the consolidated financial results, Currencies had a negative impact on reported AOP. This was mainly due to the appreciation of the Japanese yen against several local currencies, including the Russian ruble.Slide 7 describes the performance of the 3 clusters within the tobacco business. The graphs on the slide show year-on-year changes in total volume, core revenue and AOP on a reported basis for each cluster. Let me start with the Asia cluster, that includes the key markets of Japan, the Philippines and Taiwan. Total volume in this cluster was essentially flat year-on-year as the impact of lower industry volumes in the Philippines and Taiwan was offset by the increased market share in the combustibles category in Japan, the Philippines and Taiwan, as well as the growth of Ploom X in Japan.For the financial results, the strong pricing contribution in Philippines was more than offset by a negative product mix due to downtrading in Japan and the Philippines. The incremental investment in Japan towards growing our share in the HTS segment is also one of the growth limiting factors. As a result, revenues and earnings declined, also impacted by unfavorable currency movements.Next is Western Europe, including the key markets of Italy, Spain and the U.K. Despite market share gains in most markets, total volume in this cluster decreased by 4.2%. This volume decline was mainly driven by the continued industry volume contraction in several markets, most notably in the U.K. I will cover the U.K. in more details on the next slide.Financial results reported an increase in both revenue and AOP. Pricing contributions, especially in the U.K. more than offset the negative volume variance, higher supply chain costs and increased investment in Ploom X launches. In addition, favorable currency movements supported the organic performance.Moving on to EMA, which hosts the key markets of Romania, Russia and Turkey. Despite the impacts from the ongoing business disruption in Sudan and the lower total industry volume in Russia, total volume in this cluster increased by 5.4% year-on-year. As I mentioned earlier, main drivers of volume performance were a higher industry volume in Turkey, the growth in global travel retail, especially in Asia and the momentum in several emerging markets. Financial performance was driven by strong pricing contributions in Canada, Poland, Romania, Russia, Turkey and other markets, as well as the positive volume contribution already mentioned, which more than offset the impact of higher supply chain costs. Currency movements were unfavorable in this cluster, mainly due to the Russian ruble.On Slide 8, I would like to provide some additional details behind the business environment and our performance in the key markets of Japan and the U.K. First is the Japan market. Total industry volume for combustibles and RRP combined remained flat year-on-year. Our total volume increased year-on-year fueled by the growth of Ploom X. In the combustibles category, our volume was slightly up by 0.3% versus prior year as market share gains enabled us to offset the impact from the industry volume contraction estimated at 4.8%. After a year in the market, Camel Craft continued to steadily gain market share in the value price segment where demand is growing. As such, Camel Craft was a key contributor to our combustibles market share increase of 3.1 percentage point. In addition, Mevius-E series in the mid-price segment also supported the growth of our market share in the combustibles category.I will detail an overview of RRP category and our Ploom X performance in Japan on the next slide.Turning to the U.K. market. Total industry volume declined by 16.4% year-on-year. Due to multiple tax-driven price increases since the second half of 2021, easing of travel restrictions and a significant inflationary pressure on consumers' disposable income. In addition, downtrading has accelerated, fueled by intensified competition in the value cigarette price segment and in fine cut. In this challenging operating environment and despite a slight market share loss, we have stabilized our leading positions in the U.K. and have grown revenue, driven by strong pricing contribution.Slide 9 describes the performance of Ploom X in Japan. Market share of Ploom X in the HTS segment continued to grow despite an increasingly competitive environment with competitors actively introducing new products and sales promotions, as well as price reductions on certain products. I am pleased to report that for the first time, our market share in the HTS segment crossed the double-digit mark reaching 10.5% in the third quarter. On an offtake basis, our HTS share also shows stable performance.Since the nationwide launch of Ploom X in August 2021, Ploom X has been the fastest-growing brand in the HTS segment in Japan, outpacing the average annual growth rate of total HTS industry volume. We have achieved steady growth for Ploom X through various sales activities, as well as the rollout of consumable sticks utilizing both Mevius and Camel brands, discount campaigns and price revisions for the device.In addition, as announced yesterday, the new Ploom X device model, Ploom X ADVANCED will be introduced nationwide in a sequential manner from November 21. Ploom X ADVANCED is available for pre-sale at the CLUB JT online shop from today, October 31. This new device includes a new heating technology, which will improve the flavor satisfaction compared to the current model, as well as an automatic heating function that starts heating simply by inserting a tobacco stick. With the launch of Ploom X ADVANCED, we aim to further acquire and retain users.Turning to the geo expansion progress of Ploom X on Slide 10. We are on track [ to achieve our ] plan, shared during our May tobacco investor conference and expect to be present in 28 markets by the end of 2024. Since the last second quarter results briefing, sales have already begun or will soon start in the pie market listed in the table on the left on this slide. As you can see, all of these markets have a certain level of HTS industry competition, meaning that the consumer awareness regarding the heated tobacco products already exist. Therefore, we can focus our investment on building a Ploom equity rather than on creating awareness on HTS. In addition, we are available, a lower tax burden on HTS burden versus combustible is likely to generate higher margins than combustibles. As we have done in other markets, we will start in selected cities initially, and we will continuously work on strengthening our sales network towards the national launches within the market. In markets where the Ploom X is already sold, we have received very positive feedback from Ploom users regarding the amount of vapors, the device heating speed and the usable time per stick and its price. We continue to leverage our global knowledge gained in each market to attract and retain users.Slide 11 shows the results of the pharmaceutical and processed food businesses. First is the pharmaceutical business. Revenue grew year-on-year due to the one-time income from the licensing of patented JT components and the sales increases in the areas of skin diseases and allergens at our subsidiary, Torii Pharmaceutical. AOP increased year-on-year as the revenue growth exceeded the increase in R&D expenses. As a reference, I would like to update you on some clinical developments relative to our products. As shown in this slide, we filed the new drug application for JTE-061 cream, a therapeutic aryl hydrocarbon receptor agonist for separate indications in atopic dermatitis and plaque psoriasis in September.Moving to the processed food business. Revenue was almost flat year-on-year despite the revenue loss resulting from the transfer of the bakery business as the top line in food service products grew fueled by the recovery in demand for food services in addition to price revisions implemented in 2022 and '23 in the frozen and ambient food segment. AOP increased year-on-year, driven by the price revisions implemented in 2022 and '23, as well as top line growth in the food service products, which offset the significant increase in raw material cost.From the next slide, I'll guide you through our revised forecast for fiscal year 2023. Please refer to Slide 13, which shows a consolidated revised forecast. Both revenue and AOP having revised upward, most on constant currency and reported basis. Core revenue at constant currency has been revised upward by JPY 63 billion from the previous forecast, mainly to reflect the strong top line in the tobacco business and as a result, is expected to increase by 5.6% compared to the previous fiscal year. AOP forecast is now revised upward by JPY 34 billion from the previous forecast, which had been kept unchanged, resulting in a 5% increase from the previous fiscal year due to the upward revision from the tobacco business, as well as the upward region in the pharmaceutical and processed food businesses.The forecast for the revenue and AOP on a reported basis, including the foreign exchange rates have been revised upward by JPY 85 billion and JPY 38 billion, respectively, from the previous forecast to reflect a weaker Japanese yen against many currencies. There is no significant change in the foreign exchange impact on AOP from the previous forecast. This is due to the fact that the depreciation of several local currencies, such as the Russian ruble are expected to be offset by the weaker Japanese yen.Operating profit has been revised upward by JPY 45 billion from the previous forecast due to the upward revision of AOP and expected upward revision of gains on sales of retail real estate in the adjusted items. Profit forecast has been revised upward by JPY 7 billion from the previous forecast as the upward revision of operating profit is expected to be partially offset by higher financial cost and an increase in income tax. Free cash flow is expected to be JPY 25 billion, higher than the previous estimate due to the increase in AOP and increase in gains on sales of real estate and a decrease in capital expenditures, partially offset by the deterioration in working capital.Slide 14 and onward, we'll detail the revised forecast for each business segment. We start with the tobacco business. Regarding the volume forecast, combustibles and RRP combined total volume has been revised upward to reflect the stronger industry volume trend in several markets across the EMA cluster, including Turkey, as I have explained before. The continued share momentum in most markets, and a solid recovery in global travel retail, largely driven by Asia. As a result, total volume is now expected to increase by approximately 1.5% year-on-year despite softness still expected in the last quarter due to the slowdown in the growth of the industry volume.Turning to the financials. Core revenue on a constant currency basis is expected to increase by JPY 63 billion against the previous forecast, reflecting the stronger pricing contributions and upward revision of total volume. AOP is expected to increase by JPY 33 billion from the previous forecast following the upward revision of core revenue, partially offset by the additional investment on Ploom X. On a reported basis, including the impact of exchange rates, we have revised our views for some currencies towards the stronger Japanese yen such as the Russian ruble. But overall, we have kept our assumptions towards a weaker Japanese yen. As a result, as shown on the slide, both core revenue, AOP have been revised upward from the previous forecast.Slide 15 explains the revised forecast for the pharmaceutical and the processed food businesses. Regarding the pharmaceutical business, we have revised up our forecast for revenue by JPY 2 billion from the previous forecast due to an expected increase in net sales at Torii Pharmaceutical and upward revision of overseas royalty income due to the Japanese yen depreciation. AOP is also revised upward by JPY 2 billion, in line with the upward revision of revenue.Moving to the processed food business. Revenue was revised downward by JPY 2 billion from the previous forecast, taking into account the sales situation of products for household use in the frozen and ambient food business. Despite the lower revenue forecast, AOP has been revised upward by JPY 500 million to account for the more precise projection of utility and other costs.Finally, please turn to Slide 17. As we have explained, thanks to our strong business performance, we have been able to accelerate growth while increasing investment in both combustibles and RRP. We are confident that we will achieve our revised full year forecast. While it is too early to talk about 2024, I still want to share some very high-level directions that could play a role in the plan for the next fiscal year and beyond. We intend to continue our efforts to build our presence in RRP by driving the geographic expansion of Ploom X. As per our plan, we tend to have the presence in 28 markets by the end of 2024. Obviously, we remain agile in our implementation by continuously assessing the trends in each market where we plan to launch Ploom X to enhance the accuracy of our projection. We continue to strive for efficiency in our supply chain and via the competitive cost base. Supply chain costs, including raw materials, logistics, energy costs have increased significantly in 2023, although the inflation has picked out in the second half of 2022, we be -- there be a certain time lag for the inflation to be fully reflected in our supply chain costs. As a result, the rate have increased will be slightly moderating in 2024, but we expect that cost will remain a headwind. Finally, like we have always done, we assessed the impact associated with geoportical risks and the global economic situation, changes in excise tax environment and foreign exchange movement.In closing, I'd like to discuss the shareholder returns. We have not altered our forecast for the annual dividend from our initial projection of JPY 188 per share. Based on the revised profit forecast, our payout ratio for fiscal 2023 will be approximately 72%, which I believe is on a level that is in line with our shareholder return policy.This concludes my presentation. Thank you very much for your attention.
Let me introduce you to the speakers who will answer your questions today. Hiromasa Furukawa, CFO of the JT Group and Koji Shimayoshi, JTI, Deputy Chief Executive Officer.[Operator Instructions] The first question comes from Mr. Saji, Mizuho Securities.
I have 1 question then. On Page 13, you have the revised forecasts available on a consolidated basis, JPY 45 billion OP is up and JPY 7 billion up for profit. So, where corporate tax has been increasing, and there is also a negative impact from financial income. So regarding your net profit or profit, it seems that you have revised it by a smaller magnitude. So can you give me more detail of the items in between operating profit and profit?
So your question was about revised forecast on Page 13 and the difference in the revisions between operating profit and profit. Mr. Furukawa, our CFO, will take your question.
This is Furukawa speaking. Saji-san, thank you for your question. So profit has been revised up by JPY 7 billion. And regarding this, overall, financial expenses and tax expenses. At the end of the fiscal year, there are some items that are uncertain, and we have accounted for that in our updated forecast. And what we mean by this is in emerging markets, there are some FX losses that we are assuming in our forecast. And other than that, the hyperinflation accounting, monetary losses are anticipated to increase. That's another negative factor. And furthermore, due to higher ETR, corporate taxes are likely to increase. And, of course, FX is likely to impact us as well. So that is -- those are considerable negative factors between operating profit and profit. So profit that is -- that is why profit is only revised up by JPY 7 billion compared to the previous forecast.
For dividend outlook, it has a material impact. So, my question is for these items, is the probability of these items to materialize high? Or are you just accounting for some risks? Can you give me a flavor?
Well, regarding FX losses, you will never know until we end the period. But looking at the past trends, we do expect this magnitude of FX losses to come through. And for hyperinflation accounting and monetary gains and losses, FX has an impact. So for -- FX impact does have an impact by a certain magnitude. And for the increase in ETR, regarding its certainty, I can't say that it's 100% going to come through. But our outlook is, around the fourth quarter, we should account for this amount. That's where we're coming from. So it's really hard to give you a probability figure. But in forecasting our performance, we do believe -- if we do believe that we need to acknowledge it, we have accounted for it in our assumptions.
Now, we'd like to take the next question Mr. Fujiwara from Nomura Securities, please.
I'm Fujiwara of Nomura Securities. I have 1 question. I have a question about the Ploom X global development. As was mentioned before, there is some market which was already launched, and you had a very good feedback in those markets. And I'd like to give -- have a more detailed explanation. For example, there is some forerunner like IQOS. Are you going to compete against those? What is your feedback and the confidence?
So the global deployment of the Ploom X and how we are going to compete against the competitors. Shimayoshi will respond to your question.
This is Shimayoshi of JTI. Thank you for your question all the time, Mr. Fujiwara. For the Ploom X for the global market and feedback from the customers, how positive they were and also, how we can fare against the IQOS? First of all, let me start with the qualitative comment from the consumers that the vapor volume and also the speed of heating and also the time per stick and also the kicks and flavors, we have received a very good feedback. So I think that we had a very strong startup. And compared with the competitors, of course, there are various viewpoints in terms of the marketing. For example, with regard to the kicks, when we compare ourselves, we think we can compete against the IQOS in our analysis.And with regard to the device, the shape of the device, the Ploom X is the tandem type and IQOS is the holder type. So when the consumer use that, it is like the cigarette-like types. So it depends on the customers' preference. So we cannot say which is better, clearly. But in the case of the device design of the Ploom X, that is based on the ergonomic. That is not this clear, but we use the round shape and also we have the class image, and they were highly appreciated. However, that said, this is a very qualitative comment. So when we compare our service with the IQOS, of course, that is a formidable competitor. So in terms of the marketing and also in sales, we have the combination of the initiatives and try to catch up with the forerunner. And that's all from me.
And a follow-up question in Japan. You are gaining share solidly in Japan and device or the sticks and the kicks have been highly appreciated in Japanese market. But in overseas market, when you are trying to gain shares from the other companies and you are the follower, then in terms of the price competition, the device and sticks of the IQOS, when those are lowered, then you may have to counter that. And do you feel that the competition is more intensified in the global market? Would you comment on that, that increasing the pricing, the competitive environment?
Let me talk about the price environment first. Let me give you the overview, first of all, for the RRP stick type, in many markets, when we compare that with the combustibles, that is more favorable in terms of the tax. Therefore, from the manufacturer's viewpoint, there is some room for us to reduce the price compared with the combustibles in many markets. And in those markets, every company is trying to gain shares. PMI, BAT are the cases as well. So this is a share gain. So this is a very aggressive pricing happening in those markets. So price reduction, Japan and Italy are the prominent cases. But in other markets, they are more disciplined in terms of the price competition. For example, in the case of Italy, the HTS profit approval size is comparable with that of the combustible. They have growth that much. So we need to be watchful for the regulatory development. But this is a high time for us to try to gain more shares. And then after the other companies are trying to gain shares, and we are the late starters. So we can have the longer viewpoint. In Italy, that we are trying to take those initiatives. That is just one example. But in each market, the competitive environment varies and also the segment share of HTS is different. So we need to adjust our pricing by market. So this may not be very clear answer to you, but that's all from me.
The next person is Mr. Morita from Daiwa Securities.
This is Morita from Daiwa. My question is about the U.K. Use-related regulations are set to be submitted as a bill. So what are your thoughts around this? Whether it be the U.K. or New Zealand or in Europe, what are you thinking about the risks of this kind of them becoming a standard? And over the medium- to long-term, what kind of countermeasures are you considering?And for HTS or the RRP category, you're talking about investing JPY 300 billion over the next 3 years. I think you should accelerate this investment plan, but what are you thinking about making any changes to your management plan?
Your question was about the U.K. and our thoughts around the bill towards the younger generation, as well as the rollout to other European markets, as well as our thoughts on that. So this is Shimayoshi speaking. In the U.K., so that's a generation ban for minors. And regarding our perspective on that, as well as our outlook on our future business is, what I'm going to answer about. Right now, the consultation process is still underway. So I'm not able to talk about any details. From 2027 January, they are talking about increasing the smoking age by 1 year every year. And there's still some time until 2027. So we're not expecting any material financial impact for the time being. However, in the U.K., there are also some market-specific circumstances. First of all, for example, non-duty vape, including -- non-duty paid or illicit trade, volume has been growing. So just because they have a generation plan in place, we're not sure whether the U.K. government is going to be able to see a positive impact that they're anticipating. We can tell from the example in New Zealand, but we'll continue to have dialogue with the government. And for data that we can provide, we should -- we would like to do so.One more thing in the U.K., that's a trend is E-Vapor. For E-Vapor, disposable E-Vapor for products have been penetrating the market quite a lot. So disposable E-Vapor, unlike global tobacco manufacturers, it's more about the small- to medium-sized players that are in this space. So when it comes to marketing -- how should I put it? When it comes to rules, so we've been doing a lot of things that are sound in measures so that we can prevent minors from smoking, for example. But when it comes to the smaller players, they are not as disciplined. So for the cigarette generation ban, in conjunction with that, how the government regulates E-Vapor, meaning access for miners, how they regulate that? Depending on what the government does, I think our countermeasures will start to change because they're not saying that disposable E-Vapor is bad, but when it comes to business integrity, for those players that don't adhere to a disciplined market. And if the market becomes undisciplined, we would not know what to do. So if -- of course, we're going to lobby to have a disciplined approach to the market. It's not clear where HTS is going to fall into category wise, but we will think about countermeasures to address what happens in the market accordingly.So for non-U.K. markets and if there's going to be a ripple effect, let's say, it ripples out to the EU, whether it is going to ripple out to the EU, let's say, for Germany. There's still a lot of medium- to small-sized tobacco manufacturers in the market and who are in the [ legit ] business that is. But government needs to continue to protect the market in a disciplined way. So including Germany, as well as the EU, I think the probability of a generation ban spreading out to the market is low at this moment. It's not high. But if the U.K. or has an intention and the Commonwealth Nations like Australia and New Zealand, there's quite a lot of regulations there, but now it's a matter of what's going to happen in Canada. And we would like to monitor what develops in the market going forward. That's it for me.
So I'm sorry, this may have been your reply, but for RRP countermeasures, do you have -- are there any changes to your strategy? Or are you going to wait and see?
Well, HTS is our priority and RRP right now and E-Vapor and oral, including nicotine patches is an area that we would like to probe into and also new generation products, which we can't really specifically talk about. That will be another area we will probe into. So although the size is small, we have been repeating tests for nicotine patches, as well as E-Vapor. So in the U.K., for example, if the business environment for E-Vapor is implemented, we would like to focus more on E-Vapor in the U.K. That is a possibility. So aside from whether it's going to become a global trend or not, we may accelerate efforts in growing E-Vapor in the U.K. when necessary. So globally HTS being the fastest-growing category is our outlook, and we don't think we need to change our investment posture, but we may need to add additional resources to focus on other areas where necessary.
Next, we'd like to take next question from Morgan Stanley MUFG, Ms. Miyake, please.
This is Miyake of Morgan Stanley. I'd like to ask about the results for the third quarter and also the future trend. There are some expenses -- there might be some expenses which is already budgeted and you are not spent yet. And is there any time lag? Because originally, for the upcoming 3 years, you expect net profit growth will be rather slow. However, this time, it seems to be around 5% year-on-year. So is there any buffer included or not, I'd like to have the clarification on that? And also for the next year, geopolitical risk and FX, there are many things that you need to monitor. But as of today, is there any things, major things, the features already materialized, which may give the great impact in the next year, could you comment on that please?And basically, [Technical Difficulty], also RRP will be enhanced, but more [Technical Difficulty] so for the next year, if you can have the very good pricing, I think you'll be able to increase the profit. So is it a fair expectation? Can I have that expectation?
May I confirm your question? The first one, the time lag, are you asking about the sensitivity within this year?
Well, that expense -- the budget, the expenses, which was initially planned, but there is something which may not be able to use that. So -- and then if such a case happens or if this year is particularly good, regardless not our budgeted expenses. The first one is, is there any delayed expenses? And is that the cause of the profit increase? And also next year, is there any materialized risk for the next year? That was the second question.
Mr. Shimayoshi will respond to that.
This is Shimayoshi. Thank you very much for your question. I think your question was about the tobacco business. So I'd like to respond to your question. For example, for the delay of the expenses? And is there anything happening in the of Q4? Yes, we have scrutinized the projection for the result and because there are some ongoing factors, but rather than the delay or the postponing, as you may know, that the Q3 results are very good. So we are thinking about the possibility of additional investment. And as a result, we had such a result for the Q3. So the -- rather than the delay of the spending budget, but we are trying to increase the momentum and RRP and also combustibles has been also accelerated.And for the next year -- talking about the next year's projection, as you know, we are now making a plan for the next year. And in the February meeting, we are going to announce the plan. And the top line and cost factor, will be the major factor in the plan. But as of today, I can only comment on the general matters.With regard to the top line for the RRP, especially for the HTS, the share competition is intensifying in each country. And as JTI, especially for the HTS and RRP, we are going to make it as the profit growth driver for the medium-term. So we're going to secure the enough investment for the RRP. And that will be coming from the combustibles business. So the volume and mix should be combined, and that should be covered by the pricing. And then that should create some more room for the investment. And then we need to be watchful for the key markets. And that process is now ongoing.And with regard to the pricing environment, there will be no major change from the '23 and that continued to be [ vigilant ]. But, of course, we need to be watchful for the tax increase calendar and also regulatory change and affordability. And when we have the price leadership, we need to look at the recent trend as well. And when we don't have the leadership, we need to be watchful for our competitors' moves. And also in Japan, for the tax increase, we continuously have our keen eye. And also at the end of the year, we are going to see the result from the tax consultation. And then tax is peaked out -- and there will be some time lag. In '24, we're going to see the increase of the cost year-on-year basis. So we're going to secure the RRP investment. And then by having the resource from our combustibles, we're going to see the price growth for the JTI as a whole. But the results will be shown or the specific plan be shown in the February meeting.And talking about the risk in the geopolitical risks include, as of today, whether that is materialized or not, we don't expect to see further materialization of those risks. For example, in the Middle East, in October, there was the risks, whether that would be spread to the other areas, for the Gulf areas or for the Iran, one of our key markets, whether that would be spreading to those areas used to be watchful. And then within the fiscal year or before making the plan, we need to manage those risks. But putting all together, we'd like to have the fair managed to come to the plus or the positive profit growth.
Now, basically, not taking the pricing, that you're going to offset the cost and that remains unchanged. And also, you haven't seen any material risk so far. But for the RRP market, that the competition will be more intensified. And then the unit price might be -- are some of the risks. Is that a fair understanding?
Yes. The positive impact on the RRP and the top line will take more time. So we will take some more time for the investment for that RRP. So we need to accept the -- our competition for the share gain.
So basically, you are taking the pricing and the third quarter result was very good. And also you seem to have the very strong management. You seem to have a very strong confidence in the management. Is that right?
Yes, indeed.
Let me introduce the next person. Goldman Sachs Securities, Mr. Miyazaki.
I am Miyazaki from Goldman Sachs. My question is also about towards next year. This time around for OP and profit and the roads in between, you were talking about expenses that are going to weigh on profit. So the revised forecast for OP and net profit was different when it comes to the magnitude of the revision. So for -- after -- because the third quarter closed, are there some items that materialized after closing Q3 and in anticipation of 2024, are these trends going to be ongoing? For 2024, hypothetically for OP, even if it doesn't grow that much for net profit, are the concerns you have for this year going to resolve? And if that's the case, for next fiscal year, is it going to drop off as a risk factor, meaning are there -- is there potential net profit to be moving upwards due to the absence of these items next year? Can you give us more flavor on that?
So your question was about net profit and operating profit and the items in between. Is that a trend that we started to see in Q3? And is it going to impact next fiscal year? Mr. Furukawa, our CFO, will answer your question.
This is Furukawa speaking. Thank you very much for your question, Mr. Miyazaki. Talked about FX impact earlier, but let me sort things out a little bit more. We accounted for more negative factors upon looking at Q3 results. We thought that we do need to account for this additional negative factor upon finishing the third quarter, and there were various multiple items around that. And when you think about uncertain expense items and what they are, I might be a little bit redundant. So bear with me. So FX losses in emerging markets, this one, it has actually affected us already, especially due to the weaker currency in emerging markets. So even for this fiscal period, we do believe we need to account for it. So that's the first point.Secondly, in hyperinflationary accounting losses are likely to account -- expand because where inflation is headed, as well as how FX is likely to be. And for this fiscal year, we are expecting this kind of impact, and that is why we have accounted for it in our forecast.Regarding tax expenses and ETR adjustments. One factor is FX and the tax accounting. And also regarding other taxes, there are some that are materializing. So for this fiscal year, we have come up with some assumptions and accounted for in our forecast. And whether this is going to last until next year? If FX were to stay constant, something similar may occur, but inflation, as well as the FX trends are going to impact us. So at this point in time, we're not sure if the same thing is going to occur. But if the factors are going to be the same? Obviously, we will see similar things materialize. So this is not a straight answer, but that is how we put together the outlook. So for next year, we are not able to say anything definitive at this point. We're just talking about this year's forecast when it comes to the numbers. That's it for me.
Now, we'd like to close the Q&A session. And with that, I'd like to conclude the financial meetings for the third quarter 2023. Thank you very much for participating.[Statements in English on this transcript were spoken by an interpreter present on the live call.]