Tobacco Segment: 89% weight in revenue, 100+% weight in adj. operating profit in H1 2024
Top-line & Bottom-line Results – Tobacco Segment Only1
Excluding Pharmaceuticals and Processed Food Segments; adjusted, at constant currencies
Revenue: +7.6% in Q2 2024, driven by positive price/mix variance from all clusters and RRP-related revenue growth (+40.1%), partially offset by volume decline in Asia and Western Europe clusters
Operating profit: +5.6% in Q2 2024, driven by core revenue growth and partially offset by higher investments towards heated tobacco and higher supply chain costs
Total Volume: +2.0% (combustible volume +1.6%; RRP volume +25.7%)
RRP weight – Q2 2024: 1.9% by volume and 3.6% by revenue (the same as Q1 2024)
Note on FX: Unfavorable impact on operating profit driven by depreciation of emerging market currencies and appreciation of cost-related currencies more than offsetting the positive impact of a weaker JPY
RRPs: Ploom X (heated tobacco)
– RRP volume growth (+25.7%), driven by continued momentum in Japan and increasing contributions from the other markets
– RRP volume contribution: 4.2Bn Japan + 1Bn other markets in H1 2024 (still 81% Japan vs. 34% for PMI in FY23)
– Ploom X is now available in 21 markets: steady increase in RRP volume in overseas markets driven by the geographical expansion and continuous consumer & trade marketing activation in launch markets
– Japan: Solid market share gains in an increasingly competitive market due to aggressive promotions and price reductions by competitors: Ploom volume increased by +36%, exceeding HTS market growth rate. RRP category now makes up 42.1% of the total tobacco industry volume. Japan Tobacco (JT)’s total category share reached 13.5% (i.e. 11.4% Ploom + 2.1% infused tobacco capsules) in Q2 2024
– Other markets: Steady growth since the launch (fueled with expansion in distribution), reaching between 1.5% (Italy) and 4.4% (Portugal) segment share in different markets
– Heated tobacco share of segment estimated at 8.2% (in a subset of launch markets) as of June 2024: on track towards 2028 ambitions to reach mid-teen segment share
Combustibles
– Combustibles volume growth (+1.6%) driven by the Global Flagship Brands (GFB) and the EMA cluster (mostly, Turkey and Russia)
– GBP volume: +4%, driven by Winston (+5%) and Camel (+9.5%)
– EMA: Volume +5.1%, Core Revenue +15.1%, Adjusted Operating Profit +19.1%
– Resilient industry volume overall: Strong momentum in emerging markets and Global Travel Retail, mainly in Asia
– Continued combustibles industry volume decline in the UK (-15% in H1 2024), Japan and the Philippines => JT’s cluster volume decline: Asia -1.2%, Western Europe -2.8%
– Continued positive variance driven by pricing and total volume growth, partially offset by the impact of
negative product mix due to downtrading and unfavorable geographic mix
FY24 Forecast
– Consolidated revenue and profit forecasts revised up (ranging from +1% to +4%), both at the reported and constant FX level
– Tobacco volume: revised up to “0%” from “a decrease of -0.5% to 1.0%” vs. 2023
– Tobacco segment (at constant FX): core revenue +5.1%, adjusted operating profit +5.4%
– Basic EPS: ¥267.5. Based on the share price at the time of writing (¥4,153), JT now trades at 15.5x 2024EPS (- well below the 18x peak multiple reached in June 2024)
Our Recollection
Overall, combustible volume growth (+1.6%) combined with pricing/mix improvements helped deliver mid-single digit revenue & operating profit increase in Q2 2024. Thanks to the geographical expansion of Ploom X and progressive category share gains in Japan, year-on-year RRP volume growth accelerated: from only +4% in H1 2023 to +25.5% in H1 2024. Nevertheless, the progress achieved in heated tobacco doesn’t seem to be proportional with the outsized ¥450Bn ($2.9Bn) investment (over the three-year period from 2024 to 2026, mostly in commercial initiatives). We will continue to closely watch Ploom X’s performance in the expansion markets (i.e. whether the segment share is progressively increasing towards the mid-teens).
In February 2023, we noted: “In the League of Laggards to the transformation to RRPs (Altria, Imperial, JT), we clearly favor JT due its size/scale, higher emerging market exposure (supporting the combustible volume), very low indebtedness and strong focus on expanding its presence in the heated tobacco category”.
JT shares doubled since our call (i.e. correction from an overly undervalued level, further fueled by the general market interest in Japanese equities) and traded as high as ¥4,600 in June 2024. For further details: Japan Tobacco: Share Price Surge.
Following JT’s Q1 2024 results, we noted: “Although we still favor JT over Altria and Imperial Brands (in terms of business strength & growth), we need to underline that the strong price momentum – rather than the strength in business fundamentals – is driving the JT shares up at this stage (recall: JT now trades at a premium to the industry leader, PMI, despite RRPs having less than 4% weight in its total revenue)”. For further details: Japan Tobacco: Q1 2024 Results.
The long overdue correction in JT shares has taken place after our note above: JT shares are now trading 10% below its most recent highs. For further appreciation in the share price, JT needs to demonstrate that its outsized RRP investment will result in a more sizable RRP franchise that complements its strength in the cigarette category (i.e. a more balanced & sustainable business mix).
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