Japan Tobacco Inc

TSE:2914

Earnings Call Transcript 2021-Q3

[Naohiro Minami, executive]

I am Naohiro Minami, Chief Financial Officer of the JT Group. Thank you for joining in this briefing on our third quarter earnings results.

I will start by covering the highlights of our consolidated financial results for the 9 months of 2021. Please take a look at Slide 4. Our adjusted operating profit at constant currency, which is our performance indicator, increased by 21.9% year-on-year driven by continued robust momentum in the tobacco business.

We can attribute this robust performance through a strong pricing effect and continued share momentum in the international tobacco business as well as a solid industry volume in various markets. Revenue was up year-on-year due to strong top line performance in the tobacco business, despite lower sales in the pharmaceuticals and processed food businesses.

In addition to good top line performance, favorable ForEx conditions, specifically the weaker Japanese yen and other currencies against the U.S. dollar, boosted those operating profit and adjusted operating profit on a reported basis. Based on higher operating profit and lower financing costs, profit attributable to the owners of the parent company increased.

Let me move to the results for each business. Please turn to Slide 5. So let's look at volume performance in the Japanese domestic tobacco business. Total RMC industry volume decreased year-on-year due to growth in the RRP category and the impact of price revisions in 2020 in addition to natural decline.

On the other hand, total RRP industry volume shows another year-on-year increase. RRP market size from January to September 2021 was 29.5%, up year-on-year, but on a par with size estimated at the end of the second quarter. We project that the temporary demand surge ahead of our price revision in October 21, which I will expand on later, was about the same as in 2020. With this said, there is no significant impact on comparatives year-on-year.

Next, let me discuss JT's volume performance. RMC sales volume was down year-on-year as consumer preferences have shifted from combustibles to and RRP and competition in the value segment products has intensified as a result of down trading.

RRP sales volume has been growing steadily, thanks in large part to the introduction of Ploom X. Our RRP market share slightly declined due to limited temporary demand surge for our products as a result of competitors' products having higher demand than that of ours and relatively limited price revisions for some of our products in October in light of the tax hike.

Now I'd like to turn to the financial performance. Our core revenue grew by 2.6% year-on-year with the positive effects of the RMC price revision in October 2020, exceeding the impact of the sales volume decrease. Adjusted operating profit increased as in the previous quarter, although, the growth was moderate than that in the first half, due to the start of investment in sales promotion following the nationwide rollout of Ploom X.

Next, let me give our analysis of the demand surge ahead of our October price revision this year, summarized at lower right in the slide. We estimate the volume of the demand surge as roughly the equivalent of 0.4 months, about the same as that after the price revisions in October 2020. The demand surge was particularly high for little cigars because the tax hike on this product segment was greater compared to other products. At the same time, we understand that there was no significant surge in demand for RRP products such as Camel brand refills for Ploom X, on which we did not adjust prices in October because the tax hike on that segment was relatively low.

The backlash from the demand surge somewhat continues. So while I believe it is premature to summarize the effects of the latest price revisions at this time, we have confirmed that market share for Ploom X products has grown since October, mainly Camel brand 6, which we did not change the prices for.

On Slide 6, let me explain the latest performance of Ploom X, the HTS device we recently introduced. As planned, we began selling the products in Ploom shops nationwide on August 3, expanding to convenience stores and tobacco retailers across Japan on August the 17th.

Sales of the devices have been strong. As I mentioned, we raised the prices on some Ploom X refills including the SKU of the Mevius brand by JPY 30, but held those for the Camel brand unchanged. Because of this, the surge in demand anticipating the price revisions was limited for the Camel brand and some others. And as shown by the graph, although, JT's share of the RRP market dipped in late September, it grew following the price revisions despite the introduction of competitors' new products. We will continue putting active effort into sales promotion to build our market share.

In the previous briefing on second quarter results, I told you about our plan to market the devices in Russia by the end of 2021. However, short supplies of semiconductors have become a serious issue globally, making it difficult for us to secure a necessary number of devices to expand markets as we planned. Therefore, we have decided to postpone the expansion to Russia within the year, and instead, put priority on procuring all devices to the Japan market, where Ploom X is already launched. Although, we project it is possible for us to launch Ploom X in Russia in the first half of 2022 at this point, the plan might be altered depending on the degree of supply shortages of semiconductors.

Next, let me explain our results in the international tobacco business. Please look at Slide 7. Let me start with volume performance. Growth in JT total shipment volume in the third quarter was moderate than that in the first 6 months of fiscal 2021. That said, total shipment volume between January and September grew by 5.7% year-on-year because industry volume in the last 9 months increased year-on-year in several markets and JT's share of several key markets continued to grow.

Next, let me explain the financial performance for our international tobacco business. We again recorded a high growth rate for core revenue due to a confident volume variance contributed mainly by Russia and the U.K. as well as pricing effects mainly in the Philippines, Russia and the U.K. Driven by top line growth, adjusted operating profit is up both at constant currency and on a reported yen basis. The ForEx conditions were positive as well.

Let me briefly touch on the performance trends in our key markets. In Russia, illicit trade has declined due to reduced cross-border travel during the pandemic. This situation is continuing. Industry volume in the first half was at the same level as last year due to the favorable impact of lower illicit trade as well as the lockdown in the second quarter in 2020. Therefore, it was difficult to analyze the impact of the excise tax increase passed on in isolation.

However, by the third quarter, lower illicit trade trend has made its lap. And most of the products at revised price have been distributed. Therefore, the impact of the excise tax increase passed on could be directly observed on the industry volume. As a result, industry volume decline accelerated in this third quarter versus first half, although, it is still stronger than pre-pandemic levels. With this business environment, JT share increase as brands like Camel captured the down trading trend and RRP shipment volume is up steadily as well.

In the U.K., total volume has been declining every year prior to the pandemic. In 2020 however, the industry volume trends turned upward due to travel restrictions. In the third quarter this year, total volume continuously remained solid despite a year-on-year decrease following the easing of travel restrictions. As the down trading trend continues as well, we are seeing significant growth in the fine cut category, where we market several brands to secure high market share.

With Slide 8, let me explain the financial results for our Pharmaceutical business. Revenue was down due to a drop in overseas royalty income. Although, Torii Pharmaceutical, JT's consolidated subsidiary, reports growth in the allergen and dermatological markets. Adjusted operating profit fell with the revenue decrease and increases in R&D expenditures and sales promotion costs at Torii Pharmaceutical.

Let's move on to the results for the processed food business. Revenue was down by 1.8% compared to the corresponding period in 2020 when demand for household products increased significantly due to the pandemic. The top line for food service products was impacted mainly by the declaration of the state of emergency and still has not returned to the pre-pandemic levels.

Adjusted operating profit grew despite the revenue decrease as a result of lower SG&A expenses, including reduced depreciation costs compared to 2020 when impairment losses were allocated for the factories and stores in the bakery business, as well as a fire insurance claim payment related to a fire accident at our manufacturing subsidiary in January 2021.

With the next slide and onwards, let me speak on our revised forecast for fiscal 2021 results. On Slide 10, I will explain our consolidated revised forecast. We have revised our previous projections upward on all financial indicators reflecting the continued robust performance of international tobacco business into the entire third quarter. All the financial indicators are projected to surpass the actual performance for fiscal 2020.

For adjusted operating profit at constant currency, our group-wide performance indicator, we revised our projection upward by JPY 62 billion or 11.9% from the previous forecast based mainly on the upside of the international tobacco business projecting a significant increase of 19.9% year-on-year.

We significantly revised our projected revenue and adjusted operating profit for fiscal 2021 upward, reflecting robust business performance and adjustments in currency assumptions. This includes the easing of negative currency impacts of the Russian ruble and the other currencies, as well as the yen remaining weaker against the U.S. dollar.

As a result, we've revised projected operating profit and profit attributable to the owners of the parent company for the year upward by JPY 76 billion and JPY 58 billion, respectively, shifting our initial projection of profit from a year-on-year decrease to an increase.

With the upward revision in our operating profit projection and review of our capital expenditures, we have reviewed -- revised our projected free cash flow upwards by JPY 72 billion to JPY 455 billion. This will likely decrease year-on-year, however, due to the unfavorable comparison of the income from real estate sales that we accounted last year.

With Slide 11, I'll explain our volume assumptions for the Japanese domestic tobacco business and revisions based on them. As we saw a robust industry performance through September, we have revised our forecast for total tobacco industry volume and RMC volume upward as shown in the slide. However, our forecast for RRP market share remains unchanged.

Next, let me explain our shipment volume forecast. Our forecast for RMC shipment volume has been revised upward, reflecting the performance of the September and the upward revision in our total RMC industry volume forecast that I just mentioned. Our RRP shipment volume forecast of over 4.5 billion sticks equivalent remains unchanged.

Let me explain our financial forecast now. While RMC shipment volume is projected to improve, we have decided not to revise our previous forecast for core revenue because of the need to carefully monitor the competitive environment after the October price revisions, including the major tax hike on little cigars. We are also not changing our forecast for adjusted operating profit. We will work to achieve our initial forecast while undertaking necessary investment, mainly in sales promotion for Ploom X.

Now I'd like to turn to a review of our projected volume assumptions and revised forecast for the international tobacco business. Please look at Slide 12. First, I'll explain volume assumptions. We've made an upward revision in our full year volume assumptions as shown in the slide, so reflecting our robust performance up to September, upward revisions and assumptions of total industry volumes in our key markets and continued favorable share momentum.

Let me elaborate the reasons for the revision in volume assumptions. At the previous investor meeting, I explained that in the second half of this year, we project the industry volume trends experienced a significant negative impact in high-margin markets on a year-on-year basis and a slower performance growth compared to the first half of 2021. These assumptions were a result of considering that the positive impact on the industry volume trends associated with travel restrictions in some high-margin markets would have lapped by the third quarter and that the pandemic-related travel restrictions would have eased in the second half of this year.

Examining the actual performance from July to September, however, we did not observe weaker total industry volume as we anticipated. Given this observation, we have revised assumptions of total industry volume in our key markets positively for the remaining 3 months in 2021.

Our share momentum also remains favorable. And therefore, we have decided to revise volume assumptions upward. In Europe, although cross-border travels have gradually resumed, it has not returned to the pre-pandemic level and other regions are still under restrictions on cross-border traffic. Under these conditions, total industry volume has continuously been robust.

Taking this into consideration, it would be possible that the backlash on total industry volume will be very slow rather than the immediate and traffic return to the pre-pandemic level as we previously anticipated. With that said, it is difficult to determine exactly when our business environment will return to its pre-pandemic state at this time.

Next are the revisions to our financial forecast. As shown in the slide, we have made an upward revision in our forecast for core revenue at constant currency and adjusted operating profit due mainly to the higher projected volume I spoke of previously. We have also revised our forecast of the same on a reported yen basis upward because several local currencies have proven stronger than our initial forecast and the yen is far weaker against the dollar.

Moving to Slide 13. Let me explain our revised forecast for the Pharmaceutical business first. We have made an upward revision to our previous forecast for revenue and adjusted operating profit, both by JPY 3 billion, projecting higher growth in overseas royalty income, revenue growth at Torii Pharmaceutical and deferred spending on research and development.

Next, let me move to our revised forecast for the processed food business. We have revised our revenue forecast downward due to a slower-than-projected recovery of the top line in food service products and bakery businesses, despite sales growth in household products in the frozen and ambient food business. Adjusted operating profit has been revised upward by JPY 0.5 billion as a result of efficient cost management as well as our fire insurance claim that I mentioned in the consolidated results.

Lastly, please look at Slide 15. As I have explained today, we have made upward revisions to our forecast for fiscal 2021 results, reflecting our powerful business performance so far. Given the global semiconductor supply shortage, we will focus our resources related to Ploom X on the Japanese market for the rest of the year to secure our share of the domestic HTS market.

In writing our business plan for the coming year and onwards, we need to deeply understand the influences of uncertain factors, which we list in the middle of this slide. It is difficult to predict when pandemic-related travel restrictions will ease, and the impacts may last longer than we predict. However, we will work to quickly understand market trends worldwide and to see process changes in our business environment more precisely.

Although, uncertainty in our business environment, including around the progress of negotiations on tax hikes and tighter regulations in various countries, as well as exchange rate fluctuations remain high, we will keep an eye on how this influence our profits for the year.

On a separate note, I would like to inform you about the progress in our initiatives to combining our tobacco businesses and ways to strengthen our competitiveness in the Japanese market. We do not anticipate any significant changes in the forecast for expenses related to the series of initiatives, and we are making progress in line with our initial expectations overall.

Let me end my presentation by commenting on our returns to shareholders. As I've explained in this presentation so far, the upward revision of our profit is mainly due to strong performance of our business. I would like to reiterate that 2021 being the first year since we've revised our shareholder return policy, the initial dividend [ payout ] ratio was approximately 96%. However, the level of the profit has been revised significantly upward from the initial forecast and the dividend payout ratio would be slightly below the range of 75%, that's a plus or minus 5%. Therefore, we decided to revise annual dividend guidance upward.

Based on our shareholder return policy, we would like to revise the annual dividend guidance upward by JPY 10 to JPY 140. The year-end dividend guidance has been revised upward by JPY 10 from the previous forecast of JPY 65 to JPY 75, bringing the total dividend forecast for the year including the interim dividend already paid to JPY 140.

Thank you very much for your attention.

[Operator]

Now we would like to start the Q&A session. In addition to Mr. Minami, Chief Financial Officer; we have Mr. Maeda, CFO of Japanese Tobacco Business; and Mr. Shimayoshi, JTI, Deputy CEO, will answer your questions. [Operator Instructions] If you're joining this call in English line and want to ask questions, please send us an e-mail. The e-mail address is [e-mail], that's written in the invitation e-mail that we sent the other day. Thank you for waiting. Mr. Miura from Citigroup Securities.

[Nobuyoshi Miura, analyst]

This is Miura from Citigroup Securities. Can you hear me all right?

[Naohiro Minami, executive]

Yes, we can hear you clearly.

[Nobuyoshi Miura, analyst]

So you have conducted a dividend hike as promised. We are very happy to see the situation. So I'd like to ask Mr. Minami for next fiscal term for FY 2022 ending December, roughly, what are some of the factors that may increase the profit or decrease the profit, especially as the [ AOP ] adjusted OP level. If you can give us the major items that may contribute or perhaps dampen the profit outlook? If you can tell us what you know at this moment.

[Naohiro Minami, executive]

Thank you very much for the question. This is perhaps one of the most difficult, the most challenging question to answer at this point. So hopefully, you can take that into consideration. But as I mentioned in the final page of the presentation, we are in the midst towards the end of December to explore what would be the business plan for next year and also for the next 3 years. So we are in the process of doing so. Therefore, unfortunately, we cannot give you the concrete details at this point.

As mentioned in the presentation, perhaps I could start with the tobacco business. So in terms of adjusted OP, it really depends on the business performance. And it really depends on how we perceive those into next year onwards. And as I have mentioned in the final page of the presentation, it really relates to what would be our assumption. That would definitely decide and highlight. And that will be the most important item for next year's plan.

So for the domestic tobacco business, obviously, the price revision is an important element. And the fact that we have had a fairly large market share in the little cigar segment. So there has been a fairly significant price hike in that specific category. So we need to monitor the trends going forward. So we need to really take this event under consideration. And so based on that, various players and competitors will be introducing various products accordingly.

[Nobuyoshi Miura, analyst]

So what sort of assumptions are we going to factor in?

[Naohiro Minami, executive]

That will be one of the key items for the next year's plan.

[Nobuyoshi Miura, analyst]

Also in somewhat of a longer outlook, so the fact that we are seeing shortage of semiconductors, the question is how many devices and to what degree can we deploy those devices in the international tobacco business, for instance, Russia? So in line with the business momentum, can we really supply the device and at what timing can we supply those device?

[Naohiro Minami, executive]

So when we look at next fiscal year, that is from January to December, we need to take that time frame into consideration. Also, to what is -- depending on when we can supply, obviously, to what extent the consumers can put their hands on and try the other products. So at this point, there is no clarity as to how the COVID-19 may subside and how the regulations may unwind. So I believe it is -- this is true for all the industry, the different players within the society. So in terms of assumption for this fiscal term, perhaps we shall not see an immediate easing. So we do not expect to see a sharp change.

Initially, actually, that was our assumption. We expected to see a sudden easing, that was our initial assumption. But in fact, after the first 9 months is over, we do not see a sudden easing of the deregulation, and we did not experience a sharp recovery in the economy that has been experienced.

[Nobuyoshi Miura, analyst]

So the question is, how are we going to factor those in and next year's assumption?

[Naohiro Minami, executive]

That will be the most decisive factor. In any case, as far as JT is concerned, you've mentioned dividend hike. In fact, to be to put it in a correct way, we were initially expecting a dividend cut. But in fact, in the end, we have decided to increase the dividend per share. So we need to really take this and look at this squarely. So obviously, we continue to invest so we can grow into the future. So those would be also be put in under consideration for next year's plan.

In terms of the adjusted OP, as shared already, so all the initiatives that we are planning. So for instance, in the domestic front. So in terms of the retirement plans and so forth, and also some of the assistance money for the leaf tobacco growing, those will not be paid next year. So that will be an upside for next fiscal term.

Also another point, we are making our operation more efficient and making it more strong. So we have been taking transformation initiatives for both domestic and international tobacco business. So we shall see the impact realized for next fiscal term as well, a fairly significant impact. So I apologize perhaps I'm not giving you all the details, but that is our current outlook.

[Nobuyoshi Miura, analyst]

May I confirm one point, please? In the rest of the world, the CIS+, especially in the Philippines and so forth. The momentum has been fairly strong, there has been a fairly strong recovery. So it is likely that this will be continued for next year. Now the -- you had mentioned the travel restrictions may become eased or more moderate. So perhaps we may see more of an upside for the rest of this year. What about next year then? So at the time of giving the guidance for the full year, is there a risk? Or, actually, I believe that we have a very limited risk to expect a decline in the profit. What is your take as a CFO?

[Naohiro Minami, executive]

So in terms of the net income, all the way to the bottom line last year, there were definitely factors to more than JPY 100 billion inclusive of the ForEx impact, that was in existence for last year. Those were the forces to push down the profit. So right now, of course, that is absent right now, unlike last year's situation. Therefore, for next year, we'll just be straightforward in terms of our assumptions. So we will be and clearly looking at the current operating environment.

So in terms of the absolute amount, from top all the way to the bottom line, that will be reflected in our guidance. So in terms of the details of the Philippines and so forth, perhaps Mr. Shimayoshi will be the right person to ask. But as far as the Philippines is concerned, last year, because of the lockdown, there has been -- basically a lockdown of the metropolitan area that has posed an impact. So in comparison, we are seeing a much improved performance.

Also in the pre-pandemic Philippines market, that was indeed in line with our strategy. And our strategy really worked. And because of that, we have been able to deliver a very good performance. But now under the pandemic and now we shall see less of a noise from the pandemic. So indeed, it really depends on what sort of initiatives that we have been taking. And based on that, how far can we grow our business. We need to take those into consideration when making decisions for new initiatives and new challenges. That's all from me.

[前田 勇気, executive]

So Miura-san, this is Maeda from the -- the CFO from the Japanese tobacco business. So one point I'd like to add about the domestic tobacco business. So for Japan, so I think you have a fairly good understanding as to how we are generating profit. One point towards next year, there is a factor that is normally not in existence. That is related to little cigars. The tax benefit would no longer be in place for next year, that is what Mr. Minami mentioned. So structurally, this will be a negative factor for next year.

So in reality, of course, the brand mix and so forth will have its impact. So we need to closely look at this. The listed sales, as an estimate in Q4 of this year is the digital figures tax benefit. The absence of that, so this is at the top line level, about JPY 6 billion will be the impact that we would see from the absence of the tax benefit. So next year, so we have 3 quarters worth of impact coming from that tax revision. So that amount that I've just mentioned, multiplied by 3, that could be the possible the one-off factor for next fiscal term.

[Nobuyoshi Miura, analyst]

If that's the case, then little cigar, about half of little cigar would be reduced, 50% would be reduced? Is that the assumption?

[前田 勇気, executive]

So for little cigars volume, we do expect to see a significant decline because it has been one of the lowest price segment. And of course, that benefit will no longer be in place.

In terms of RMC, the combustibles just for your information, the current -- the value segment, and if you compare that with the little cigars, the value segment, the margin is much higher for little cigars. Therefore, we shall see deterioration of the mix.

So for JPY 100 increase, the price increase was conducted. But even with that, the little cigars margin would be slightly declined. So we do have that impact from big duration of the mix. And of course, we need to take the competition into consideration, what brands will be put into value segments and so forth. But if you just do a simple calculation, that was the amount that I just mentioned, that will be the impact.

[Nobuyoshi Miura, analyst]

So in terms of the -- there is a pretty strong brand. So the price elasticity tends to be low for those very solid brands. But still, you are still expecting 50% volume declines in for little cigars then?

[前田 勇気, executive]

For little cigars, so we increased the pricing by JPY 100. And we shall see more people converting to the value segment of RMC away from little cigars. That is our expectation.

[Operator]

Now, Mr. Fujiwara from Nomura Securities, the next person.

[Satoshi Fujiwara, analyst]

This is Fujiwara from Nomura Securities. I have a question about RRP. You have launched Ploom X and IQOS launched ILUMA. Compared against competitor products, how do you evaluate the competitiveness of your product? That's one of my questions. And on Slide 6, you talk about RRPs share, which was around 10% that went up to 12%. So I believe that Ploom X has been contributing. So for this share, how high do you think you can go? And how are you feeling in the response you're getting?

[Naohiro Minami, executive]

Regarding Ploom X performance and share related questions, Mr. Maeda, CFO of the domestic tobacco business will take your question.

[前田 勇気, executive]

Fujiwara-san, thank you very much for your question. Regarding Ploom X performance. As you know, Ploom X was launched in e-commerce channel in advance from July 26. And in Ploom shops from August 3 on a limited basis. Then it went nationwide from August 17. So regarding feedback from customers, they are talking about the design as well as the vaping experience. And it seems that they evaluate our product pretty high. So I think we're off to a good start, and we are getting good response. So we are very encouraged by the trends we're seeing.

To go into detail a little bit more. For the e-commerce, limited sales that we did in advance, we were doing various things. By using customer IDs, we were having linkage with campaigns in running sales promotions, and we feel that it has really good impact. So in the advanced period, the device sales were solid and I think other promotions turned out to be successful. And as you rightly pointed out, for refills too.

Because we were building on device sales, we were able to increase share of refills, too. So if you just look at Ploom X, as it was shown on Minami-san's slide, for high-temperature HTS category, the growth rates are close to double what we've been seeing before. So we are feeling good response.

But I mentioned the time lines earlier, so we went nationwide in August and in September. The run rate is anticipatory demand and we're expecting a run rate of -- in October, where it's just going to be a rebound. So I think it's going to take a little bit of more time to try to identify the strengths of this product. So I think actually that's the part of your question that you would like to learn about. But for now, I would say that we are off to a good start, and we are feeling good response. I'd like to keep my comments there. Thank you very much.

[Satoshi Fujiwara, analyst]

Well, because of the shortage of semiconductors, you are having problems with supplying the devices, I believe. But originally, in your sales promotions, how far are you able to carry out the sales promotions you were planning for?

[前田 勇気, executive]

For semiconductors, as you know, the market is in the current conditions as you know. So it is a risk factor in procuring devices. That is true. And with that as a backdrop, our global procurement people are working hard, and we were able to go nationwide in August as a fact. And we truly appreciate it -- our people's efforts and we believe we can feel proud of that. We should be proud of that.

And also for the Japanese market, as Mr. Minami mentioned and introduced earlier, we want to prioritize on a global basis. And on a global scale, Japan is having the sales in advance, and we would like to prioritize in allocating those devices to Japan. So within this year, we are not expecting any concern. And at least for another 6 months, we should be able to secure a sufficient volume, and we are -- have gained visibility on that.

So with that in place, of course, if we had more devices, we may have been able to do more. So when you think about the potential, if you start thinking into that direction, maybe that is right. But in the current sales promotions that we are running, we are not facing any issues that we are not able to run certain pieces of sales promotions just because we don't have enough inventory of devices.

[Operator]

Next from Mizuho Securities, Saji-san please.

[Hiroshi Saji, analyst]

I have a question related to the international tobacco business, the adjusted OP under constant currency. I'd like to confirm the sustainable momentum. So this fiscal term, they have increased JPY 900 million to JPY 4 billion. So that was the number you had mentioned. Perhaps it was much better than now too better -- much better than the initial expectation. So you have JPY 200 million in the first quarter. So you have about JPY 700 million on a full annum basis?

So I'd like to talk about Philippines, Russia and Ukraine. You have been taking positive pricing initiatives. Is that sustainable for next year? Or are you going to face some challenges in some markets? So this pricing momentum for JPY 700 million, is that sustainable for next year? That is the question.

Also, the second point, the volume, it was increased by JPY 300 million. That was the volume positive impact. So that has been -- so, of course, that would not disappear all of a sudden for next year. But do we expect to see a much tougher condition in terms of volume? So about JPY 4 billion or so. If it increased by 10%, we are looking at JPY 200 million. And if it's 20% increase, then we shall be looking at JPY 800 million or so. So what is the momentum with pricing? And what are some of the possible impact from rebound, for instance?

[Naohiro Minami, executive]

So in terms of our international tobacco business, JTI, Deputy CEO, Shimayoshi will answer.

[嶋吉 耕史, executive]

So this is Shimayoshi. Thank you for that question. Can you hear me all right?

[Naohiro Minami, executive]

Yes, we can hear you.

[嶋吉 耕史, executive]

And just combustibles, the profit growth sustainability. That was your question. So just to reiterate, this year, it was quite an exceptional performance. So the traditional combustible model, basically pricing would offset the volume decline. So the pricing has more than offset the volume decline. So that is why we have been able to grow the profit. Now for this fiscal term because of the illicit trade and also the increase in the domestic market because of the travel restriction. So actually, the volumes have actually played a positive impact. Now next fiscal term onwards, but it's too early to judge at this point. So I can give you more of a qualitative outlook in terms of pricing impact.

As we have seen in the past, we will continue to play a positive impact in terms of profit growth. Now for this year, especially in the first half of the year, the volume have trended at the high level. The question is how is that going to trend going forward. So Q3 onwards, U.K., Russia, in these key markets, the industry -- the demand or volume has been trending negative on a year-on-year basis. So we are seeing negative trend in terms of volume. And in terms of pricing, we expect to see a positive.

So we do have a model. We are gradually getting back to the traditional model. So pricing would offset the volume decline. So given the current operating environment, we are gradually getting back to the traditional model that we have for combustibles that is. So combustibles, just to repeat, gradually, we will get back to our original business model. So this year, it has been an exceptional year. It has been uplifted because of the volume factor.

[Hiroshi Saji, analyst]

So whether this will be continuing for the rest of the year or as we see the lifting of the restrictions and travel restrictions, are we going to see more increase in the illicit trade? So would that actually pose a negative impact on the volume as we have seen in the past?

[嶋吉 耕史, executive]

So we need to confirm that until the very last minute of this fiscal year. So in any case, we shall look at combustibles and also RRP. So JT has been lagging behind in the RRP category. So we will be investing in sales promotion for Ploom X. And also, we'll be investing in the capabilities. So we will continue to do so. So investment into RRP category in order to generate that, we have to make sure and we need to really maximize the profit growth for the combustibles.

[Hiroshi Saji, analyst]

Thank you very much for touching upon the increase in the investment for RRP. So for the first half of next year, you will be launching Ploom X in the international markets then?

[嶋吉 耕史, executive]

So it has been pushed out to next year.

[Hiroshi Saji, analyst]

So I was looking at several hundred millions in terms of the cost increase. Should we expect that for next year? So since you have mentioned about RRP, I'd like to ask that.

[嶋吉 耕史, executive]

So is your question related to investment into RFP for next year onwards for international tobacco business?

[Hiroshi Saji, analyst]

Yes, that is right.

[嶋吉 耕史, executive]

I think that really depends on how many devices we can sold. So next year onwards, we shall see. Let's just say, a fairly strong sales promotional expense. It really depends on the sourcing of the device. So if the demand improves, we will definitely spend more on the sales promotion without any hesitation since we are lagging behind both in domestic and the international tobacco business.

[Operator]

Next is Mr. Morita from Daiwa Securities.

[Makoto Morita, analyst]

This is Morita from Daiwa. Going back to the international RRP business, I'd like to learn about more details. So including competition, for your main markets in Russia involving Europe, how are they doing? How do you analyze the situation? And going forward in the first half of next fiscal year, you have plans to launch the product in Russia? Are you going to be able to establish a good position in the RRP category? So what kind of response are you currently getting? And how do you view your positioning right now?

[Naohiro Minami, executive]

So the competitive landscape for the international business for RRP will be responded to -- by Mr. Shimayoshi. Mr. Shimayoshi?

[嶋吉 耕史, executive]

Thank you, Mr. Morita for your question. Regarding the situation in the international market, first of all, I'd like to talk especially about Russia. We learned about the Japanese market first. We studied the market, but what's important is that the market exponentially grows. And when it's in that phase, we need to have products available to ride on the wave. If not, it will hurt us. So that happened in Japan with IQOS taking the lead.

So in Russia. At the end of last year, I believe the Russian market for this category increased suddenly to about 10%. So we introduced Ploom S, but we weren't able to catch up. Unfortunately, we are going to delay the launch of Ploom X in Russia. But when you look at competitors, they are also struggling apparently with the sourcing of devices.

So for HTS in Russia, when you look at the market share, from last year and going into this year, the second of our RRP hasn't really increased in share. So fortunately, or unfortunately, as the market is not growing exponentially right now. So for the time being, and the market should stay calm. And during this phase, we would like to ensure we are able to source the devices.

As for Europe, like the growth in Italy has been quite significant. HTS is being sold at low levels, taking advantage of the preferential taxation. So we look at it as a promising market. But our share for RMC is not as high as Russia. So I think we still have some time for our RMC customers. We don't expect the conversion to be that large. So I think we still have some time when you're looking at the Italian market.

As for the U.K., it is another important market after Japan and Russia. Because of the attributes of the customers, fine cut and full flavor cigarettes, and there's many customers who would prefer these types of products. Our competitor has been launching HTS products, but the market has not expanded substantially yet. So looking at the circumstances in each of the markets, including Japan, we have been deciding that Japan will be the priority for devices, followed by Russia. Then it would be the EU, excluding the U.K. That will be our priority for the launch of devices.

Another important market for us is Taiwan. Regulation-wise, the HTS market hasn't opened yet. And when -- we are interested in learning when the market is going to be deregulated. And if the market of Taiwan were to open up, we will review the priorities and consider how we should respond to the Taiwanese market.

[Makoto Morita, analyst]

For Russia, I'd like to learn a little bit more about Russia. You were saying that category shares about -- I think that your share is about 10%. So the reason why category share is not rising, is it because of the semiconductor shortages or is it more on the consumer side that is putting a cap on the increase of category share? You haven't been able to establish a position in Russia yet. So I think the gap in share is probably 10%. So you're going to launch Ploom X going forward, but do you think you'll be able to make it? I think you face challenges in Japan because of the different and the gap you have between your competition. But what about Russia? What are your thoughts?

[嶋吉 耕史, executive]

For Russia, well, there's seasonality factors, too. Because during the summer, people were more active, they go outside. So RMC tends to have a high share. But now we're going to enter the winter season. We don't really have that much data on seasonality changes. So we'll have to wait and see. But once again, just to repeat, the market -- when the market is growing exponentially, we need to supply the market with products. That is critical. So currently, the market is going sideways and it's stagnant. And when you look at HTS customer profiles, they do convert from RMCs and we do have strong RMC brands. So we would like to protect our franchises well. We also guide our customers to HTS products as well. And we do believe we will be able to catch up in the market. That's all from me.

[Operator]

Thank you very much, Mr. Morita. It is time. With that, we would like to conclude the results announcement for Q3 for FY 2021. Thank you all for participating today.