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Japan-Update

Japan Tobacco sees profit steadying in 2018

Heated tobacco and overseas sales to offset shrinking domestic market

Ploom Tech-brand heated tobacco products are helping Japan Tobacco soften the impact of declining cigarette sales in its home market.

TOKYO -- Japan Tobacco continues to face declining cigarette sales in its home market, but expects earnings to improve slightly this year as its heated tobacco and overseas businesses expand.

The partially government owned company said Tuesday that group net profit for the year ending next December likely will edge up from a year earlier to about 394 billion yen ($3.61 billion). That would mark the first profit rise in three years.

"We are fighting a battle that we must win no matter what," President and CEO Masamichi Terabatake said, expressing his determination to narrow the gap with Philip Morris International of the U.S. and other major players in the heated tobacco market.

JT targets a 4% sales increase to 2.22 trillion yen for the year. The Tokyo-based company expects domestic sales of cigarettes to drop nearly 20% on a volume basis, but growth in heated tobacco and overseas businesses will be enough to offset that decline. Sales of Ploom Tech-brand heated tobacco products are projected to surge from 10 billion yen last year to 70 billion yen to 80 billion yen.

With research and development investment and other spending expected to go up, the company sees operating profit remaining mostly unchanged at 561 billion yen.

The company is working to release a new product late this year or early next that can heat tobacco to around 300 C to catch up with rival offerings.

"By tapping into demand from consumers who seek richer taste and a more enjoyable smoking experience, we will take market share away from our competitors," Terabatake declared.

One major concern for JT's future earnings is tobacco tax increases in Japan. A pack of 20 cigarettes carries a roughly 240 yen tax, with the tax on a pack of five Ploom Tech cartridges running to about 34 yen. The government plans to hike tobacco taxes by 3 yen per cigarette over the four years starting in October. Taxes on heated tobacco products are also expected to be lifted gradually over five years. Depending on how upcoming discussions on the tax rate for heated tobacco go, the impact on JT's earnings could be severe.

This means that overseas operations will become even more important for JT going forward. Last year, sales in the company's overseas tobacco business grew 3% to 1.23 trillion yen, roughly double the company's domestic sales.

JT expects its market share in Russia to recover this year. In the U.K., "we will consider raising prices" if the market condition is favorable, Terabatake noted.

For the current year, the company's overseas sales are forecast to increase 7% to 1.32 trillion yen.

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