IDENTITY

MATERIALITY andSUSTAINABILITY

BUSINESS andSTRATEGIESGOVERNANCE

FINANCIAL INFORMATION /OTHERS

Message from the CFO“E ven in a highly uncertain business environment, we are working to maintain a firm
financial foundation and accelerate investment to secure profit growth over the medium and long terms and increase shareholder returns.

”

Nobuya Kato
Senior Vice President, Chief Financial Officer

As Senior Vice President in charge of finance and corporate communications, I construct financial
and capital strategies to fulfill the JT Group Purpose and help build corporate value through dialogue
with all stakeholders, including the capital markets.

Overall assessment of 2022 financial results
From revenue to profit, our all-financial results for 2022
exceeded our initial targets, rising to record highs.
We achieved profit growth in 2022 despite a difficult
business environment marked by significant inflation andsurging prices for resources worldwide. Our adjusted operating profit at constant currency, which is our profit index forthe entire Group, grew by 9% year on year. In particular we
attribute this to the tobacco business, which showed strong
volume momentum and positive pricing effects through theyear.
Our medium- and long-term KPI goal is mid to high single
digit growth in adjusted operating profit at constantcurrency. Over the past three years, we have been delivering
steady year on year growth in adjusted operating profit,
even as we continue to lag behind our competitors in termsof RRP (Reduced-Risk Products) market share amid overall
industry volume growth.

Revenue on a reported basis grew by 14.3% year on year, to2,657.8 billion yen, thanks to growing momentum in the tobacco business, the positive exchange effects of the weaker
yen, and revenue growth for both the pharmaceutical andprocessed food businesses. Our adjusted operating profit
was also up year on year, by 19.2% to 727.8 billion yen, due
to revenue growth and positive exchange effects.
Operating profit increased significantly, by 31.0% year onyear to 653.6 billion yen, because adjusted operating profit
grew and the cost of initiatives to reinforce the foundationsof the tobacco business operation and for reducing leaf-tobacco farmland were non-recurring, accounted only in 2021.
As a result, operating profit growth outpaced rising financial
costs, making our profit for the term 442.7 billion yen, up
30.8% year on year.
Despite this major increase, free cash flow dropped by 99.1
billion yen from the 2021 figure due to increases in working
capital, higher corporate income tax and payments related
to initiatives to reinforce our tobacco operations in Japan.

Operating environment outlook 2023-2025
We predict that current trends will continue in our tobacco
business, in both RRP and combustibles, over the course of
our current business plan. The RRP segment is developing
into the core pillar of business growth for the future,with demand continuing to increase, especially for HTS.
Combustibles will likely continue to experience downtrading and contraction in demand, but we believe they cancontinue to reliably deliver profit by seizing appropriate
pricing opportunities and building market share.
At the same time, we have to keep an eye on the influenceof growing geopolitical risk on the world economy, rising

inflation worldwide, leading to surging interest rates andoverall costs, and tax hikes worldwide under governmental
policies to secure funds, tighten regulations and increase
bureaucratic complexity.
Despite these risks, while we aim for top-line growth using
pricing and share growth, we are working to grow profits
through initiatives to raise efficiency, such as in production
and R&D in the combustibles segment, projecting costsavings of about 20 billion yen in 2023 and 2024 combined.
Please see Business Plan 2023 (P. 48) for details.

Financial policy
The JT Group draws up and executes its financial plans inline with our two core values of resilience and flexibility.
Resilience means the ability to maintain business despite
significant or unexpected risk, such as economic crisis.
Flexibility means promptly responding to attractive investment opportunities.

Currently we are further reinforcing our financial base byworking to secure ample liquidity and fix liabilities for thelong term, seeing it as more important than ever to bebetter prepared for future risk as our business environment
grows less predictable and financial markets more volatile.

Cash flow management
In our cash flow management, we put highest priority on
stable cash generation from top-line business growth. We
are also undertaking initiatives to reduce foreign exchange
impact and optimize operating capital.
In the tobacco business, particularly in emerging markets,
we are working to optimize our businesses for local levels ofeconomic growth and build the value of our businesses inlocal currency over the medium and long terms. We pursue
cash creation via top-line growth, made possible both by, on
the one hand, pricing that takes into consideration tax hikes
and inflation, and on the other, share gains building on thestrength of our brand portfolio, enhanced with a long-term
strategic investment view. Pricing is a profit-growth driverfor our tobacco business, but it’s done with consideration forvarious factors and from all angles, including brand equity,competition, consumer* behavior and acceptance, and theeconomic environment. In some markets, temporarily or
for short periods, our retail prices may fall behind inflation
growth, but we have been generally successful in raising
prices to meet inflation rates over the medium and longterms.
Currently exchange risk is rising, due mainly to changes in
the financial policies of leading nations to cope with inflation worldwide. To reduce foreign exchange impact in thecurrent environment, we use natural hedging, by which wemean matching incoming and outgoing currencies, as wellas hedging using exchange forwards and other derivatives,
except for certain currencies. In principle, foreign-currency
credits and debts are fully hedged. We also hedge 25-90% of
future cash flow, and in some cases apply hedge accounting*Adult consumers. Minimum legal age for smoking varies in accordance with the legislation in each country. In Japan, smoking is not permitted for those under 20 yearsof age

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IDENTITY

MATERIALITY andSUSTAINABILITY

BUSINESS andSTRATEGIESGOVERNANCE

FINANCIAL INFORMATION /OTHERS

Message from the CFO

to reduce foreign exchange risk, taking into account possible impact on the profit-and-loss statement.
To optimize operating capital, we continuously improve
our cash-conversion cycle, reviewing terms for receivables
and payables and applying methods such as liquidation ofreceivables and supplier finance, while optimizing inventory
levels.
As a result of these initiatives, we have been reliably generating free cash flow of about 400 billion yen per year overthe past 10 years, excluding the temporary impact of M&A
and so forth.

Profitability of capital and market evaluation

FCF (BN JPY)
6000

455.4
4000
2000

316.0

503.9 482.0
404.2

386.7

382.9

212.6
72.6

105.6

0-2000-4000-316.2
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
(LfL)

Investment distribution
There has been no change in our two key policies for
management resource allocation: give top priority to investment and balance profit growth resulting from investment
with shareholder returns. Based on the 4S model, ourmanagement principle, and the JT Group Purpose, we will
put top priority on investments leading to sustainable profit
growth, especially in the tobacco business. We continue
to designate the pharmaceutical and the processed foodbusinesses as complementary to our core business, assisting
profit growth for the entire Group.
Our benchmark payout ratio has been 75% since February
2021. This is based on the resource allocation policy as
described above. Monitoring trends in shareholder returns
among global FMCG firms, we have confirmed this asa competitive level in terms of capital markets in Japanand abroad. During the term of the current business plan,we will invest about 300 billion yen, particularly in HTS, acategory where further investments will be needed in thefuture. As for shareholder returns, we work to increase themby continuing to grow adjusted operating profit at constantcurrency, which is our foundation for profit growth over themedium and long terms, while maintaining a target payout
ratio based on the policy I outlined earlier.
In discussing whether to buy back our own shares and inwhat quantities, in addition to financial prospects for thecurrent fiscal year we carefully consider the medium- andlong-term prospects of our environment; our FCF, balance
sheet and the like; and levels of profit and progress withinvestments and initiatives.

In drawing up a business plan, we calculate and examine
our capital costs and report them to the Board of Directors.
We check and confirm that our return on equity is well
above capital costs. We set up a hurdle rate, taking into
consideration risks associated with each country in which
we operate, as well as inflation and other external risks, anduse that as our baseline for profitability. By maintaining thatdiscipline, we make sure our ROE is always above capitalcosts. The JT Group uses adjusted operating profit at constant currency as a key performance indicator,* which excludes the effects of exchange rate fluctuations that can besubstantial due to temporary factors, as well as depreciation
costs related to M&A activities for the previous year. We work
to grow profit, including for the current term, by achieving
mid to high single digit growth in the KPI over the medium
and long terms. We also believe it leads to improved ROE.
A comparison of our total shareholder returns, including
dividends, with the TOPIX (total return) shows that ours werebelow the TOPIX over the long term due to the trend followed by our share prices, but they outperformed the TOPIX
during the period between pre-pandemic late 2019 andthe end of 2022, thanks to profit growth during the period
and a higher dividend for 2022. Continuous profit growthis important to the medium- and long-term stability of ourequity value. We also believe that increasing quantitative
corporate value through profit growth, while fostering an
understanding of the JT Group through enhanced information disclosure from a qualitative perspective, will lead tohigher TSR.
* Supplemental note: Why we use adjusted operating profit at constant currencyas the primary index for performance management•W e use adjusted operating profit to show our business results for the current
year in a way that’s easy to understand, excluding the effects of depreciation
costs related to any acquisitions in the previous year.
• S tarting with our Business Plan 2014, to manage business investments andreturns more appropriately, we changed our key performance indicator fromadjusted EBITDA to adjusted operating profit, which does not require adding
back depreciation or amortization costs, which fluctuate with investment scale
for the year.
•W e use figures at constant currency, believing we can show the true strength ofour businesses much more clearly by disregarding exchange rates, which canfluctuate substantially over short periods due to geopolitical risks and otherfactors not directly related to our businesses.

IR activities
The JT Group appropriately discloses timely information,
both financial, as with business results, and non-financial,
such as management strategy, ESG factors and the statusof each business segment, and engages in active dialogue
with shareholders and institutional investors to ensure clear
understanding. Our IR teams in Tokyo and Geneva, where JT
and JTI are respectively headquartered, meet with securities
analysts and institutional investors to discuss recently
announced financial results and other disclosed information,
as well as conduct individual meetings on ESG matters. Our
plan for investor-focused events is in process.

These IR events are still held mostly online, as in 2022, when
we held some 370 individual conferences. IR representatives
participate in conferences hosted by securities houses andmeet with domestic and overseas institutional investors.
On some of these occasions, the CEO, the executive vicepresident in charge of finance and myself are present.
In meetings specifically focused on ESG we sometimes seek
investor opinion, including assessments of our Integrated
Reports. We will actively continue this kind of dialogue,
making the most of the opportunities we have created.
The investor opinions we obtain through these IR efforts

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IDENTITY

MATERIALITY andSUSTAINABILITY

BUSINESS andSTRATEGIESGOVERNANCEFINANCIAL INFORMATION /OTHERS

Message from the CFO

are reported to our Board of Directors twice a year alongwith information related to market trends, including shareprice, and are shared with all executive officers and related
divisions as a quarterly report.
We consider investor opinions when we improve and review

our ongoing initiatives and continue working to reflect theirviews and expectations appropriately in our strategies andoperations, so they will better understand our results andinitiatives.

Dialogues with investors in 2022

Number of meetings
Meeting participantsMeeting formats

About 370
• A wide variety of stock and debt investors, both active and passive, in Japan and abroad• Analysts, fund managers, ESG managers, and responsible personnel for voting rights• Mainly virtual, online• One-on-one meetings and participation in conferences hosted by securities houses
CEO, executive vice president in charge of finance, CFO, senior vice president in charge ofJT personnel responsible communications, senior vice president in charge of sustainability management, amongBetter communication with debt investors
The JT Group is also working to enhance communications
with bond investors. In compliance with the Japan Tobacco
Inc. Act, on which our company was founded, the Japanese
government is obliged to hold at least one-third of corporate equity at all times. Following this rule, the government
must also accept one-third of any new shares issued forfunds procurement. So debt finance is our primary methodof funds procurement from the standpoint of fund maneuverability. Corporate bonds are a particularly importantmeans for procuring funds to help achieve sustainablegrowth. To reliably procure funds even in an unstable financial environment, we are endeavoring to broaden our scopeof communications with domestic and overseas bond investors. To create more opportunities for dialogue with themand facilitate better understanding of the JT Group, we
regularly hold non-deal roadshows in addition to those heldat the time of bond issuances. These roadshows have been
held in Europe, the Middle East and Asia since 2018, and weplan to introduce them in other regions to reach more bondinvestors and increase opportunities for communication.
In addition to these initiatives to enhance dialogue withbond investors, we are strengthening engagement withorganizations that make ESG assessments widely referenced
in the capital markets as we work to improve our ESG scores.
We believe that we can further strengthen our relationships
with bond investors by helping them better understand andappreciate our ESG initiatives.

others• Financial performance

Increasing corporate value in line with the JT Group Purpose• Medium- and long-term strategies

Main discussion themes• Capital policies• Environment, Social, Governance (ESG)• Integrated report

Internal sharing ofinvestor opinions
Examples referencing
investor opinions

054• Report to the Board of Directors twice a year
• Quarterly report to directors, executive officers and related divisions on the status of IRefforts and investor opinions• Enhancement of disclosures• Start of ESG-related talks• Review of KPIs related to remuneration

Japan Tobacco Inc. Integrated Report 2022

With a year now past since the new corporate structure began and the domestic and international tobacco businesses
unified, we created the JT Group Purpose to show theevolutionary direction we want the entire Group to take forlong-term, sustainable operations. In addition to discussing
specific strategies to realize the JT Group Purpose, we will be
freshly examining our current financial and capital strategies
to determine whether there is anything we should change
in our methods. An important challenge for our future will
be designing strategies with the JT Group Purpose in mind
and including non-financial factors like climate change andhuman capital. The JT Group Purpose is our new expressionof who we are to investors. I think we have a responsibility tobuild up our practices of careful communications so investors and stakeholders can better understand the Purpose,
reinforcing trust.

Rising to these difficult, high-level challenges, we are working to build a structure and formulate measures to resolve
them. Since 2022 the Group Treasury has been operating ona single report line, unifying the financial divisions of JT andJTI and eliminating duplicate work. The JT Group humanresources management philosophy offers every JT Group
employee opportunities for personal growth, and the Group
Treasury is focusing effort on employee career development
in all regions. For better communications, we are improving
the content of our Integrated Report and holding Tobacco
Investor Conferences as opportunities to inform investors
about our tobacco business strategy for the medium andlong terms.
With my personal commitment to enhancing these initiatives, we are confident that we will continue to measure up
to the expectations of all investors and stakeholders.

Japan Tobacco Inc. Integrated Report 2022055