Japan Tobacco Inc

TSE:2914

Earnings Call Transcript 2022-Q1

[Nobuya Kato, executive]

I am Nobuya Kato, Chief Financial Officer of the JT Group. Thank you for joining us for the JT Group 2022 First Quarter Financial Results Briefing.

I would like to share some of the efforts put forward by the JT Group to provide emergency humanitarian aid in response to the war in Ukraine. Please look at Slide 3. Let me reiterate again that our #1 priority is the safety of our employees and their families. The JT Group has been supporting Ukrainian employees and other nationality employees as well as their families to relocate to safer areas, including to places outside the country. In addition, we committed to donation of approximately $5 million to support access to medical, food and daily necessities in Ukraine and in surrounding countries.

The response from JTI entities has been overwhelming, not only across Eastern Europe, like in Poland and Slovakia, but also in other entities in Europe and Asia. They all have contributed to medical institutions and several humanitarian and organizations in the area. In addition, we have implemented a matching donation program through which the company will match the same amount of donation from employees within the group. We will continue to support local needs, including funding humanitarian aid and consider implementing additional necessary aid to the area.

Let's start on Slide 4, with the situation in the Russian market and the potential impacts on our 2022 full year consolidated forecast. Please see Slide 4. On March 10, we have announced the suspension of all new investments in marketing activities as well as the planned launch of Ploom X in the Russian market. For now, we continue operating in Russia, and we currently have around 2 to 3 months of inventories of raw materials. However, we cannot exclude the risk of facing supply chain constraints related to availability of raw materials. There is also a risk related to difficulties in terms of international payment, cash repatriation. Therefore, we cannot deny the risk of these factors affecting our business operation. Given the challenging and unpredictable environment, the JT Group has continued to evaluate various options for its Russia business, including the potential transfer of ownership outside of the JT Group. No decision has been made so far on the potential next steps or on any specific timing. We will ensure that any future actions comply with all applicable legislations and regulations.

Turning to the financial impact and potential implications on our full year earnings guidance. While we expect a short-term favorable impact from the suspension of the Ploom X launch due to lower marketing expenses, we believe most of these benefits will be offset by several other cost increases, such as global energy price hikes and cost increases related to import/export expenses. Considering the aforementioned uncertainties, we have decided to maintain our 2022 full year earnings forecast for the time being. Any revision of forecast will be communicated along with the second quarter financial results or later. For reference, our Russian market accounts for approximately 8% of revenue and 15% of adjusted operating profit and the forecast of 2022 consolidated financials, which we have disclosed on 14th of February 2022. Also, Russian ruble has been unstable since February this year. When Russian ruble moves 1% against Japanese yen, it will have approximately JPY 1.5 billion impact on our adjusted operating profit.

Moving to the situation on the cash side. Regarding the repatriation of funds from Russia, the impacts of foreign exchange fluctuations is partially mitigated with periodic repatriation and some forward exchange contracts. Even if the currency declines or the repatriation of funds cannot be implemented, the impact on JT Group's financial capacity and financing is expected to be limited as we have a substantial positive cash position, and we maintain a large committed line and other large funding methods.

Let us move to Slide 5, which summarizes the consolidated financial results for the first quarter of 2022. Adjusted operating profit at constant FX, our primary performance indicator has increased by 4.5% compared to the previous year, driven by increases across all our businesses. The profit growth was mainly driven by strong pricing contribution in our tobacco business. Revenue, adjusted operating profit and operating profit increased by 6.2%, 9.4% and 11.4%, respectively, fueled by top line growth in each of our businesses and favorable FX impact due to the depreciation of Japanese yen and the tobacco business. Profit increased driven by an increase in operating profit, partially offset by a higher corporate income tax.

Moving on to Slide 6. I would like to review the performance of our tobacco business. As announced in February this year, we have combined our Japanese domestic and international tobacco businesses from 2022. The results shown on this slide represent this new combined business structure. Let me first touch on volume. The figures shown are the total volume and its breakdown in combustibles, which includes mainly cigarettes and fine cut and RRP volume, including HTS, Infused, E-Vapor and oral. Total volume increased by 1.2% compared to previous year, driven by increased sales, including in emerging markets and global travel retail and formerly called duty-free markets.

As for COVID impacts, we have witnessed the effects of eased travel restrictions in several markets, notably in global travel retail. In some high-margin markets, where we saw industry volume growth during the pandemic due to travel restrictions, industry volume resumed its decline trend. On the other hand, we have seen industry volume recovery in some markets where purchases from neighboring countries had declined due to travel restrictions. Although the pace of recovery has exceeded our initial expectations in some markets, such as within the duty free in Europe, the overall trend is generally in line with our initial expectations. We will continue to monitor the situation closely as we have not yet fully returned to the levels prior to the COVID pandemic and the situation is different across markets. Market share gains continued across many geographies, including the key markets of Italy, the Philippines, Romania, Spain, Taiwan and Turkey. RRP volume has increased significantly compared to previous year, mainly fueled by Ploom X growth in the Japan market.

Next, with Slide 7, I will review the financial results of our tobacco business. Driven by strong pricing contribution, mainly in Japan and Turkey, both core revenue and adjusted operating profit for the year were both up by 3.4% year-on-year at constant FX. The positive effects to the industry trends in some high-margin markets are gradually tapering off due to the eased travel restrictions, resulting in a weaker market mix. Therefore, despite the total volume growth year-on-year, we saw a negative volume contribution on both core revenue and adjusted operating profit. On a reported basis, both core revenue and adjusted operating profit increased compared to previous year. And it had increased, respectively, by 6.1% and 8.3%. The depreciation of the Turkish lira were offset by the significant weaker yen.

Moving to the performance drivers in our key markets within each cluster on Slide 8. The slide highlights the revised cluster breakdown based on 3 newly defined geographic clusters from 2022. The 3 clusters are Asia, including Japan; Western Europe, including the U.K. and Spain; and EMA or EMA, including Eastern Europe, the Middle East, Africa, Turkey, the Americas and global travel retail.

First, about Asia, where volume declined, core revenue and AOP decreased. In Japan, we saw an increase in RRP volume, partially offset by the decrease in combustible volume. In combustibles, we have seen continuous down-trading following the excise tax increase in October 2021 and consumer conversion to RRP. I will detail the performance of Ploom X in Japan in a later slide.

Next is Western Europe. Volume declined due to industry volume contraction, while core revenue and AOP increased driven by pricing. In the U.K., total volume declined due to industry volume contraction, resulting from the gradual unwind of COVID trends. Combustible market share remained at the same level as previous year despite competition in the fine cut segment.

Last is EMA, where volume, core revenue and AOP grew strongly. In Russia, total volume decreased due to a decline in combustibles industry volume. Our market share was at the same level as previous year as our own brands, notably Camel captured down-traders. Ploom also grew market share within the HTS segment. Regarding global travel retail, it has not yet recovered to the pre-COVID level. However, we have seen signs of recovery compared to previous year due to the gradual unwind of COVID travel restrictions. You can find the results of other markets on this slide and detailed performance by cluster in our earnings report.

On Slide 9, I would like to introduce the performance of Ploom X in the Japan market. In Japan, market share of Ploom X has been growing steadily since the nationwide sales expansion in August 2021. As of the first quarter 2022, we reached a 7.2% market share within the HTS segment. Our market share in the whole RRP category also shows steady growth, thanks to our ability to win back customers from competitors as well as consumer shifting within our own brands. Early April offtake data shows steady market share growth within the HTS segment.

Regarding the impact due to the shortage of semiconductors, we have secured supply of devices up to the first half of 2022. However, some uncertainties remain for the second half of 2022 due to the volatile and challenging environment. We intend to initiate various sales promotion measures at the right time, while keeping an eye on semiconductor supply and demand, and we will also implement initiatives to improve retention of existing users. In addition to that, we will allocate resources, including devices appropriately. As announced earlier, we decided to suspend the launch of Ploom X in Russia. As a result, we will prioritize Japan, where Ploom X already launched and European markets where we will launch in the future.

With Slide 10, I will explain the performance of the pharmaceutical and processed food businesses. First, the pharmaceutical business. Revenue increased compared to previous year, driven by CORECTIM Ointment in the area of skin diseases and CEDARCURE, Japanese Cedar Pollen Sublingual Tablets in the area of allergens at our consolidated subsidiary, Torii Pharmaceutical. Adjusted operating profit increased 8%, driven by the increase in Torii Pharma's revenue offsetting the R&D cost at JT.

Next is processed food business. Revenue has increased compared to previous year, driven by growth in frozen and ambient foods segment. Adjusted operating profit has increased. Top line growth partially offsets the sharp rise of raw materials costs and negative FX impact. In addition, a favorable comparison from a onetime impairment loss related to a fire accident recognized last year drove the increase.

In closing, please look at Slide 11. To summarize the first quarter results, we performed strongly across all businesses. Within the tobacco business, although the extent and scale of the gradual unwind of COVID trends varied from market to market, it has been observed in several markets, but pricing effects contributed in line with the initial full year forecast. For the full year earnings forecast for 2022, we have decided not to revise our forecast, given the challenging and unpredictable environment in Russia and Ukraine. We will revise the forecast in the second quarter or later when necessary. We will continue to carefully monitor the situation.

Lastly, back in February, we announced that we would hold a Tobacco Investor Conference on the 19th of May, with the intent of introducing the mid- to long-term strategy for both RRP and combustible. Unfortunately, considering the suspension of the Ploom X launch in Russia, which was a key HTS market and the situation evolving very rapidly with high uncertainty, we have decided to change the date of this event. We will announce the new dates when possible.

Thank you very much for your attention.

[Operator]

Thank you very much. We would now like to move on to the Q&A session. Let me introduce you the speakers who will answer your questions today. Nobuya Kato, CFO of the JT Group; and Koji Shimayoshi, JTI Deputy CEO. Next, I will show you how to ask questions. If you have questions, click, raise your hand on your screen. When your name is called, unmute yourself and ask your questions. [Operator Instructions] Apologies if we cannot answer to all your questions.

Thank you very much for waiting. I would like to present the first question from Citigroup, Mr. Miura.

[Nobuyoshi Miura, analyst]

This is Miura from Citigroup Global Markets, Japan. My question relates to the operations in Russia. You've mentioned in the presentation, you have given us a really detailed explanation. I was quite touched with all the comments you have mentioned. So you mentioned about evaluating various options, including the potential transfer of ownership outside of JT Group. So what are some of the cases you have in mind? What are some of the simulations, case studies? If you can share with us more details, that would be helpful.

[Operator]

Mr. Miura, the question relates to the Russian business relating to the option, including the potential transfer of ownership. So Mr. Shimayoshi, the Deputy CEO from JTI, would answer.

[嶋吉 耕史, executive]

This is Shimayoshi. As for the business in Russia, what are some of the cases that we have in study we have in mind related to the option, including the potential transfer? Basically, our business is still ongoing. But as we announced on the 10th of March, going forward, and when there are some unexpected situations, we may opt to suspend the operation. That is what we have announced back then under such contingencies. So of course, we cannot give you the detail as to what that specifically mean in terms of temporarily suspending the operation. But obviously, we have been cautiously monitoring what other companies are doing through media and what they are doing in Russia. And as you know, some of the companies have already opted to take actions.

Also, if we were to temporarily suspend our operation, what will become of our business and what would become of our brand equity? What sort of impact would it pose? That is the area that we are closely monitoring or perhaps a better option could be is to transfer our ownership. Basically, a third party outside of JT Group may actually succeed the business that we have. That may be one of the other options as well. So without going into details, we can opt to continue the business and also secure the employment under such an option. In any case, we haven't finalized on our decision yet. We would like to make sure that we can address different circumstances. So we are addressing different possibilities.

[Nobuyoshi Miura, analyst]

So under such a challenging situation, the fact that you were able to answer to my question, I'm very grateful. If you can share with us one figure number, please. In Russia, how big is the asset in Russia and also in tangible fixed asset, how much is included in there? If there were to be impairment, how much would that entail? If you can just give me a rough number, that will be very helpful.

[Operator]

So about asset in Russia, so Mr. Shimayoshi will continue to answer your question within the Russian market.

[嶋吉 耕史, executive]

So the question was relating to the balance sheet situation in Russia. As we speak, inclusive of the option to transfer of ownership, nothing has been decided, as I have mentioned. So in order to give any misleading information, we would hope not to explain the impact on the balance sheet at this juncture. So included goodwill and other assets in Russia, it really depends on the management decision, and we will be consulting the auditors to decide on the situation. And in any case, if you were to make that final decision and if we are able to finalize the scheme, yes, we would like to share those with you. So I hope you can bear with us with that answer.

[Operator]

We'd like to take the next question. Please allow us to introduce Mr. Fujiwara from Nomura Securities.

[Satoshi Fujiwara, analyst]

This is Fujiwara from Nomura. So I would also like to ask about Russia, if I may. I think Mr. Shimayoshi just gave us a thorough explanation. Philip Morris, BAT, Imperial, all 3 companies have decided to basically exit Russia. They have made the decision. But currently, as of today, JT Group has not made such a decision yet. But I'm wondering what kind of decision-making process are there? Are there any bottlenecks in the decision-making process? Because maybe the speed is a little bit slower compared to your peers. Is there any hampering that is going on? And also related to Russia, you said that you cannot answer that question regarding how big the asset is. But if you were to see the business and you were to remove some of the assets from your balance sheet, I wonder if it would impact the dividend?

[Operator]

So regarding your first question, regarding the tobacco business in Russia and our decision-making process, I would like to ask JTI Deputy CEO, Mr. Shimayoshi, to answer. The second question regarding dividend policies, Mr. Kato, CFO, please.

[嶋吉 耕史, executive]

This is Shimayoshi. Regarding our decision-making process, some of the key points, yes, we do have the 4S model, which is really the key to our business management for our daily operation and also mid- to long-term decisions, too. This 4S model that I've just mentioned is for the customers, the shareholders, the society and our employees. These are the 4 stakeholders that we are focusing on. So in Russia, in Ukraine, yes, these stakeholders are very much involved in this decision-making process. But not only the stakeholders in Russia and Ukraine, it involves everybody in the world. So what are the key impact elements that we need to consider? Well, basically, it is on the western side of Japan, the western countries who are already giving sanctions to Russia.

So what does that mean to our business operations? Is it feasible that we can continue with this business or not is one decision-making point. The second point is our corporate reputation and the third one would be regarding the sanctions in the West. There may be a consideration on the side of Russia to counteract on the sanction. I know that there is nothing that has been decided yet, but we need to monitor the situation carefully as the information unfolds on the media and the press. Maybe there might be some kind of administrator that will be dispatched from the outside of the company. There are these kind of rumor-based talks that we hear in the press. So these 3 are the key points that we are focusing on to determine what is right for us. So in any sense, we're thinking this through based on the 4S model. Yes, I'll stop here with my answer.

[Operator]

Yes. Let's move on to the second part of the question regarding dividends. Mr. Kato, CFO, please?

[Nobuya Kato, executive]

Yes, regarding the dividend. Our thought process regarding this is we have our policy for shareholder return, and we will basically make decisions in line with our shareholder return policy. So first of all, regarding the changes in the profit during the fiscal year, it will be reflected -- we will consider whether that will be reflected or not in the dividend at the end of the fiscal year. So for the final dividend, absolute yen amount, it will reflect the nature of the fluctuation of the profit during the fiscal year and also the impact to the next fiscal year. Is it based on the business performance? Is it a onetime thing? Will it have an impact in the future?

These are the questions we will ask ourselves and also confirm the profit plans for the next fiscal year and on and make sure that we make a decision in the range of 70% to 80%. As Shimayoshi just explained, this time, if hypothetically, there is a transferring of the business to a third party, specifically, how we handle this technically on the accounting side and the impact -- the financial impact on our overall business performance cannot be determined yet. So ultimately, we will see the actual amount, the numerical impact of this and reflect that into the year-end performance results.

[Operator]

I would like to introduce the next question from Mizuho Securities, Mr. Saji.

[Hiroshi Saji, analyst]

I'd just like to confirm related to the question of Fujiwara-san. So first of all, Shimayoshi mentioned about the 3 axes on which you will make the decision. So mentioned about whether it is -- the business continuity is feasible or not. I'd like to confirm on that particular area. So right now, in terms of FX, also if you're sourcing through dollars? Also, if the current situation were to continue on a practical basis, is there a possibility that business may not be feasible for continuation? So what are some of the risks that you have in mind that the business may not continue? Also, the second point in terms of finance, if there's an impairment of the goodwill, could we consider this as a one-off issue? So those are the 2 points I'd like to confirm.

[Operator]

Related to the first question related to business continuity, Mr. Shimayoshi would answer. And the second point, in terms of the handling of goodwill, Mr. Kato, CFO, will answer.

[嶋吉 耕史, executive]

This is Shimayoshi. I'd like to answer related to the business continuity issue, whether it is feasible or not. To give you the conclusion, right now, at this very juncture, the business is operational. We can continue the business right now. As we continue to manufacture in Russia, we need to import a lot of raw materials. So in terms of sourcing of the raw materials and also the payment for those raw materials and also logistics to enable the transportation of the raw materials. All these are feasible. They are in operation. Now of course, it is very difficult to forecast the future. I cannot actually comment with full confidence. But whether the current situation will continue or not? It is uncertain. That's what I can tell you.

So with the war in Ukraine, how that may progress going forward and beyond that, would there be some additional actions taken from Japan and also the Western countries. And as a result, would not pose any risk that may actually hamper our continuation of the business. But at this very juncture, yes, we can continue our business. This is a question. So if you were to -- so the payment is conducted in the dollar, and that is feasible right now. But generally speaking, we have been hearing risks related to U.S. dollar-denominated payment. But in your case, this in terms of sourcing of the raw materials, inclusive of payment, it is going okay then. It is operational right now. Answer to that to give you the exact situation at our local subsidiaries in Russia in terms of -- so we -- after observing all the financial sanctions and so forth, the subsidiaries can operate under the current regulation. Thank you.

May I add on to this. So related to these financial sanctions, basically, the large Russian banks outstood from SWIFT and also the overseas, the payment on overseas subsidiaries, those were under consideration. Now in terms of -- we are not the direct subject of sanctions. For instance, the shipping companies, the shipment to Russia, depending on their own decision, they may have suspended or basically ended all those transportation depending on the country -- the companies. So for those imports and exports related issues, we are able to find alternatives at this point to continue our business. So that is all from my end.

[Operator]

Related to the second part of your question, CFO, Kato, would answer about the handling of the goodwill.

[Nobuya Kato, executive]

So your question relates to the impairment of goodwill. So how would that impose impact on the shareholders' return, the dividend. So that is how I translate your question. So in terms of the impairment of the goodwill, whether that would occur or not, that in itself -- it really depends on whether we make that decision to transfer the business. And it really depends on what form and scheme that we would adopt with the transfer of the business. So we need to consult with the accounting firms and also the auditor to confirm on the final figure.

Therefore, depending on the conclusion and depending on the consultation and just to reiterate myself from my previous comment, ultimately, these financial impact needs to be considered in a comprehensive manner to decide on the final dividend amount. Needless to say, shareholders and also for the investors, we will make sure that the process under which we decide on the dividend amount and also the rationale behind such decision, we would make sure that we can make a clear explanation, that is our intent at this point.

[Operator]

We would like to take the next question. This one is from Mr. Morita from Daiwa Securities.

[Makoto Morita, analyst]

This is Morita from Daiwa Securities. I want to ask about Russia again, if I may. So you talked about reputational risk earlier. Could you please elaborate on that? Your peers basically have exited or they are considering the exit, but your message is delayed, and that is my understanding. For example, regarding the operation in Russia, I'm wondering whose reputation you care about? Is at your customers? Is it the government? I don't know, there are various stakeholders. But who are the key stakeholders that you care about? Where are they? Who are they?

And what kind of feedback are you getting from them? Because I want to hear the clarification as to which reputation you care about. And in the case of your competitors, the global brands like Marlboro will not be able to operate in Russia maybe, that is the current situation right now. And you talked about the transfer of ownership, but what are your ideas regarding the GFB if you can answer that, too?

[Operator]

So I understand that you have 2 questions regarding Russia. The first one is regarding our thoughts for reputational risk and the second one is regarding our thoughts regarding GFB. I'd like to have Mr. Shimayoshi address both of them, please.

[嶋吉 耕史, executive]

Yes. This is Shimayoshi speaking. Regarding our reputation, specifically how well, how should I put this? How we segment the stakeholders? And our perception really about this, I think, is what you are asking. Reputation has a broad meaning, and I understand it truly makes sense why you're questioning this. So first of all, we placed 4S in the core, the center and one of the 4S stakeholders is our consumers, how they think of JT really is one important decision-making point. It's not just about Russia, Ukraine. It's about the Japanese consumers and every consumer around the globe, actually, and we care about how they perceive us continuing our business in Russia. This is the most important point for one.

And another one, and I guess, we really are not ready to give you the details on this either. But we are actually analyzing the case studies of our peers today and regarding the consumer goods, there are some other companies who have announced that they will continue the business. But in just several days, they have decided to halt and suspend the business. There were some companies that did that, too. And so we are looking into the background to this. Who were the influencers, what pushed them to change their mind in just a few days. We actually not only look into the matter, but talk with some of the stakeholders involved in these events and to gain more knowledge on this, we are actually continuing our engagement activity with these parties. I cannot disclose who the stakeholders are and who we are engaging with. I'll stop here.

[Makoto Morita, analyst]

I understand that you cannot disclose the details, but how about the consumers, you said that this is one of the most important points, and you still care about the reputation amongst your consumers. So are you feeling any change in your reputation from the consumers? Or maybe it's irrelevant to the current situation? I don't know. What are your thoughts about the current state and the future as well?

[嶋吉 耕史, executive]

Can you clarify your question? You mean like compared to the other fast-moving consumer good companies and tobacco, the difference?

[Makoto Morita, analyst]

Well, that again makes us give away some of the details as to what we are analyzing. But -- so I hesitate to speak more on this, but regarding this war that is going on between Russia and Ukraine is, it involves various elements, for example, social media for one, and it has a very strong impact on reputation.

[嶋吉 耕史, executive]

So one thing we can say generically is that we are looking at social media and what people are saying on the media, we hear some very sharp opinions that are given towards us, and we are monitoring what people are saying on the social media. And then looking at the other company's cases, we know that sometimes these discussions and comments on the social media can fire up very quickly. So we have a sense of crisis here. So well, are you okay for now? Yes. Our understanding is that we are okay for now, and that's why we're continuing our business, yes.

Okay. And then, yes, to your second question about GFB, Yes. So regarding the Marlboro brand from PMI, this is really about another company, which we will refrain from making a comment on. It is not for us to say. But as we continue our business in Russia, regarding the asset because I recognize that you have had -- we've received some questions regarding asset. And Mr. Kato tried to address that, but it includes the asset, the brands as well. Brand is an asset, too. Now we have Winston, and we know that if we make a mistake in how we deal with this situation, we might have Winston, Camel with lower brand equity because of our mistake. We have a very keen sense of crisis that we must not make a mistake here. And it might not be just limited to Russia, it might spread outside that country. So brand equity needs to be guarded with care. That also is one of the key points that we have in mind as we consider the options for the future. In any sense, we'd like to make sure that we would like -- we guard the brand equity. That is the basic policy.

[Operator]

Next question from JPMorgan Securities, Ms. Yoshida.

[Ami Yoshida, analyst]

This is Yoshida from JPMorgan. First question relates to RRP strategy and also your mid- to long-term strategy for the RRP. So at the beginning of this fiscal term, you were expecting to launch Ploom X in Russia. Within the first half of the year, I believe that was the main initiatives for this fiscal term, but that has been suspended. And it is not clear as to when that activity will be resumed. So perhaps on a midterm basis, there will continue to be a shift towards RRP. So given that into perspective, Russia within this RRP strategy, if you can share with us your strategy within Russia related to this RRP?

Second question relates to -- so if you look at the calculation for Q4, in EMA, the pricing has been quite strong. And the -- so which country specifically was it strong for the pricing? So I believe Russia has been the main driver for pricing in the past. But going forward, if Russia's business will no longer be part of the group, of course, you have the #1 market share in Russia. So what sort of impact would it pose in terms of pricing potential?

[Operator]

First question relates to RRP, the midterm strategy, given the Russian/Ukraine situation and also the second question in EMA, who and where would be the main pricing driver. So Mr. Shimayoshi would answer both questions.

[嶋吉 耕史, executive]

So as of mid-February, at the time of the results announcement, we made our clear statement that we will actually push forward in Russia. But on the 24th of February and on the 10th of March after the invasion had started on the 10th of March, we had to announced the suspension of the business. So it is quite unfortunate perhaps we were not able to see through the situation back then. Now in terms of the midterm strategy for RRP, the basic story still stands. No change whatsoever from what we have announced back in February. HTS will be the main entity, and it will continue to be the main pillar for the profit growth. So for the next 3 to 5 years, we will continuously focus our investment into those particular category. Now for Russia, we have announced the suspension and postponement of the launch.

So the question is when would our activities be resumed? Or would that not happen at all? At this point, we cannot actually give you a clear answer. But we have shared with you back in February was the fact that our key markets is Japan, Europe and these important markets in mid-teens, we would like to gain the share -- the market share. So while we have no change in terms of the target that we have. Also by 2027, RRP, especially for HTS business, we'd like to reach breakeven. That is another target that we have in mind. So in Russia, so we have suspended investment into Ploom X, so of course, we don't have to spend that particular amount for investment. But at the same time, the revenue and profit that we were expecting cannot be cultivated. So we need to review all these numbers and also revisit this time frame of 2027, whether that would pose any changes to the story that we have shared with you. So when appropriate time comes, we would like to share those with you accordingly. So that is related to midterm strategy for RRP. That was my answer towards the first part of your question.

Also another point I'd like to share with you towards Russia, what we have prepared so far are the devices for HTS. So we are in the process to reallocate those into other markets for these devices. But there are some fine-tune activities required for individual markets. In the fine-tuning activities, perhaps it would take until the end of the first half of the year. So when we consider the rollout plan for the first half of the year, we really need to consider the semiconductor supply situation for 2023. So just because the Russian operation is suspended, we cannot simply conclude that other markets, we shall see a ramp-up because of the supply constraints of the semiconductors.

Now the second part of the question related to EMA market, the pricing, which country -- which market was the main driver for Q1, I believe that was the nature of your question. Turkey is one of them. Romania, Turkey, Romania and GTR, global travel retail, so-called worldwide duty-free. So we're seeing resuming of the travels after easing of the travel restrictions. So we are seeing increase in the volume, hence increase in the profit. So that is all from my end.

[Ami Yoshida, analyst]

Can I just ask additional question related to RRP? So if you are going to focus on the European market, you're looking at U.K. and Italy have been the key markets so far. So no change in terms of the key markets for HTS, no change?

[嶋吉 耕史, executive]

Indeed. So U.K. and also Italy, Ploom S, it has been introduced, albeit at a small volume. So there has been some upfront investment already. So those 2 markets -- 2 countries will be the highest priority market within Europe.

[Operator]

We'd like to take the next question. The next one is from Mr. Takagi from SMBC Nikko Securities.

[Naomi Takagi, analyst]

This is Takagi. So in terms of shareholder return policy, I have a question, please. And this is a hypothetical question, I'm sorry to say. But going forward, if your business portfolio changes drastically and maybe you decide to sell your Russian business, I'm wondering how will that impact your shareholder return policy? Your payout ratio, which is 75%. Do you have any plans to revise this? Or are you going to maintain this? Do you know that? And if you are to revise this, what are some of the key factors that you will consider, please?

[Operator]

In terms of -- this was a question regarding the possibility of the revision of the shareholder return policy. Mr. Kato, CFO, please?

[Nobuya Kato, executive]

Currently, in JT Group, how are you going to deal with this Russian market and this whole issue here? We have not made any clear decisions yet. And so in terms of your question regarding how specifically we may or may not revise the shareholder policy, we are sorry to say that we do not have a clear answer ready as of today. But having said that, I mean, obviously we have our fiscal forecast, which we have decided not to change as of the end of Q1. So going forward, we may update our fiscal year outlook as needed.

And also for the fiscal year, next fiscal year and on and also in relation to today's midterm plan, we have always said that we would like to have mid-single-digit growth in AOP and also in the mid- to long-term growth, we are going to look for a mid- to high-digit growth, and that is the basic thinking that will be confirmed as soon as we get a better visibility on how we will be and how our business state would be. And it's all something that we need to consider going forward. And according to that, we may have to revise our shareholder policy may or may not really. And whether that is not decided. And therefore, we cannot answer how we may change our policy.

[Naomi Takagi, analyst]

So putting aside whether you will or not revise your shareholder policy, I would like to still ask if, hypothetically, you were to do that, what kind of key elements would you be focusing on?

[Nobuya Kato, executive]

Yes. For example, the 75% guideline for our payout ratio, which we have communicated in the past, I mean, we are benchmarking ourselves to other global FMCG company's shareholder return levels and making sure that our payout ratio is also at a competitive level. And as of today, we have concluded that level is around 75%. So we will continue to compare ourselves to that benchmark. And also, our business strategy going forward will also be relevant because we will always prioritize investment in our own business growth. And so taking that into consideration, we still believe that 75% is the optimal level. So going forward, we will continue to monitor whether that 75% is a good level or not, and that decision will be made according to the benchmarking that we've always done and also estimating the level of investment in our own business that we will need to do.

[Operator]

We're approaching the end of the Q&A session. So the next will be the final question. So from Goldman Sachs, Mr. Yamaguchi.

[Keiko Yamaguchi, analyst]

So this is Yamaguchi from Goldman Sachs. I'm curious to know the underlying business right now. So Page 7 of the presentation material, this is the page I'm looking at. So the revenue, perhaps, on an FX basis, it is stronger than the full year plan. But in terms of profit, it is in line with the sales growth, the revenue growth. So perhaps it is not quite up to the expectation, that was my impression. So if you can actually evaluate the current status in terms of the revenue as well as for the profit.

[Operator]

So this is for the -- your question relates to the progress of the underlying business. This is on a company-wide basis. This is for Page 7 for tobacco business only. So this is the progress of the underlying business for tobacco business. So Shimayoshi from JTI Deputy CEO, would answer that question.

[嶋吉 耕史, executive]

So could I just confirm your question? So this is Page 7. So you're talking about the core revenue increased by 6.1%. However, the adjusted OP increased by 8.3%. So is the nature of your question, what is the current balance. No, actually, it's 3.4% and 3.4% at constant FX because I'm pretty sure there is an impact from weaker yen. So this is more on a constant FX basis.

In terms of how we assess and evaluate the current state. So for Q1, vis-a-vis your initial guidance or initial plan in the key markets and other markets, we're able to exert positive volume performance across the board. Also in terms of pricing, except for some markets in the major key markets, in fact, there were some additional pricing conducted that was not factored into the initial plan. So the underlying momentum is favorable. So the pricing, in some cases, we were not able to capture in some markets, but actually, the overall impact was larger than initial expectation. Also in terms of revenue, Turkey, Philippines and the U.K. So in major key markets, we were able to exert on the price/mix effect. So on a constant FX basis, we were able to increase the profit by 3.4% as shown here.

And also, just to add on, the volume is increasing. In Japan and U.K., especially in the high-margin market, we are seeing decline in the volume. So that is a negative factor. And because of that negative market mix, the overall volume impact was negative. Now on the cost side, we have the JTI transformation initiatives, those are underway. And because of that, we are benefited cost-wise, steady benefit from transformation. And we continue to increase our investment towards RRP, especially centered on HTS. Also as part of the menu for transformation strategy, we have launched our GBS, and we are recruiting more personnel because of this initiative. So we are seeing an increase in the personnel cost. Also, inflation is underway in different markets. So accordingly, we would need to adjust the wages of the employees. And because of that, the operating expenses has been on the increase, and that is contributing to the increase in the cost. So that is why Q1, we have seen growth by 3.4%. That is all from my end.

[Keiko Yamaguchi, analyst]

So there are some costs that is actually growing more so than expected. But because there are markets that are able to have additional pricing, so you were able to grow overall for the sales.

[嶋吉 耕史, executive]

Yes, that is true.

[Operator]

So it is now time to close. So with this, we would like to conclude the meeting. Thank you so much for your participation.