ANNUAL REPORT 2010 For the Year Ended March 31, 2010

Transcription

1 ANNUAL REPORT 2010 For the Year Ended March 31, 2010

2 JAPAN TOBACCO INC. Annual Report 2010 The JT Group MISSION & The JT Group WAY The JT Group MISSION The mission of the JT Group is to create, develop and nurture its unique brands to win consumer trust, while understanding and respecting the environment, and the diversity of societies and individuals. The JT Group WAY In achieving this, we are committed to fulfilling the expectations of our consumers and behaving responsibly, striving for quality in everything we do, through continuous improvement, and leveraging diversity across the JT Group.

3 JAPAN TOBACCO INC. Annual Report 2010 Contents Feature & Management 2 Feature Financial Highlights To Our Stakeholders CEO Interview Analysis of the Results of FY 3/ Feature & Management Feature To Our Stakeholders CEO Interview Unless the context indicates otherwise, references in this report to we, us, our, Japan Tobacco, JT or the JT Group are to Japan Tobacco Inc. and its consolidated subsidiaries. References to JTI are to Japan Tobacco International, JT Group s international tobacco business, and those subsidiaries of JT Group s international tobacco business. FORWARD-LOOKING AND CAUTIONARY STATEMENTS This report contains forward-looking statements about our industry, business, plans and objectives, financial condition and results of operations that are based on our current expectations, assumptions, estimates and projections. These statements discuss future expectations, identify strategies, discuss market trends, contain projections of results of operations or of our financial condition, or state other forward-looking information. These forward-looking statements are subject to various known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from those suggested by any forward-looking statement. We assume no duty or obligation to update any forward-looking statement or to advise of any change in the assumptions and factors on which they are based. Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation: 1. health concerns relating to the use of tobacco products; 2. legal or regulatory developments and changes, including, without limitation, tax increases and restrictions on the sale, marketing and usage of tobacco products, and governmental investigations and privately imposed smoking restrictions; 3. litigation in Japan and elsewhere; 4. our ability to further diversify our business beyond the tobacco industry; 5. our ability to successfully expand internationally and make investments outside of Japan; 6. competition and changing consumer preferences; 7. the impact of any acquisitions or similar transactions; 8. local and global economic conditions; and 9. fluctuations in foreign exchange rates and the costs of raw materials. Unless otherwise specified in this annual report, the information herein is as of June 24, Business & History 21 At a Glance Review of Operations Japanese Domestic Tobacco Business International Tobacco Business Pharmaceutical Business Food Business History of the JT Group Responsibility 40 Corporate Governance Activities Contributing to the Environment and Society Business Environment & Risk 55 Business Environment for the JT Group Major Risks of Businesses Financial Information 63 Consolidated Eleven-Year Financial Summary Management s Discussion and Analysis of Financial Condition and Business Results Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Independent Auditors Report Fact Sheets 118 Financial Data Japanese Domestic Tobacco Business International Tobacco Business Pharmaceutical Business Food Business Number of Employees General Information 143 Shareholder Information Members of the Board, Auditors, and Executive Officers Corporate Data Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 1

4 JAPAN TOBACCO INC. Annual Report 2010 Feature In this special feature, we introduce readers to our tobacco business. Our tobacco business is the core source of profit and the driving force of profit growth for the Group. We have been growing through our geographical expansion, enhancing and developing our brand portfolio and improving our productivity and technology. In addition to satisfying the demands of tobacco consumers around the world, we believe that we have a responsibility to the public and that our continued existence relies on initiatives that build trust in JT Group by respecting all members of society. 2

5 1 Business activities in 120 countries around the world 36,000 employees worldwide in the tobacco business 3 Community clean-up events held 1,000 times in Japan 2 JT and Japanese municipalities jointly set up 835 smoking areas in public places 5 Planting trees covering 6,100 hectares in Malawi and Tanzania JT Group and governments fighting against illicit trade 4 6 Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 3

6 JAPAN TOBACCO INC. Annual Report 2010 Feature JT Group Sales Volume (Billions of cigarettes) * 2010* Japanese Domestic (Years ended March 31) Overseas (Years ended December 31) * Sales volume in the international tobacco business from FY 3/2009 onward includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products JT Group Share in Global Cigarette Market (2009) 10.4% JT Group Source: Euromonitor Tobacco Business JT Group s Core Source of Profits and Driving Force for Profit Growth 1 Business activities in 120 countries around the world JT Group operates in more than 120 countries around the world, which includes manufacturing, marketing and selling tobacco brands. JT Group has expanded its tobacco business through the acquisitions of RJR Nabisco s non-us tobacco operations and Gallaher Group Plc, as well as through organic growth. 4

7 South & West Europe 64.5 (Billions of cigarettes) Rest of the World (Billions of cigarettes) North & Central Europe 47.5 (Billions of cigarettes) Number of Employees (As of March 31) (Employees) 60,000 40,000 20,000 31,476 33,428 23,738 23,935 CIS (Billions of cigarettes) 2 36,000 employees worldwide in the tobacco business People are our most valuable asset. As part of our commitment to employees, we actively improve workplace environments, provide training for personal development, and give opportunities for international assignments within the Group. 47,459 33,872 47,977 49,665 34, ,033 Japan (Billions of cigarettes) JT Group sold billion sticks of tobacco products in FY 3/2010 worldwide, with global tobacco market share of 10.4% in JT Group Total Tobacco Business Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 5

8 JAPAN TOBACCO INC. Annual Report 2010 Feature Japanese Domestic Tobacco Business Laying a Stable Business Foundation as the Core Source of Profits Maintained a market share of 64.9%, the same level as in the previous fiscal year, amid difficult business conditions Key brands* commanded a strong market share of 45.1%, thanks to effective brand measures Introduced new products and conducted sales promotion activities Renewed product designs with a view to enhancing brand value Continued efforts to build an even more cost-efficient operating structure JT share 64.9% down 0.2ppt Share of key brands* 45.1% up 0.3ppt Total sales volume billion cigarettes down 5.0% EBITDA billion down 5.4% The Japanese domestic tobacco market has continued to contract mainly because of Japan s aging population with fewer births, growing public consciousness of the health risks associated with smoking, and public debate on a future hike in the tobacco excise tax. An increasingly fierce competitive landscape, compounded by these changes in the business environment, means that the Japanese domestic tobacco business the JT Group s core source of profits is actively engaged in the development and introduction of new products centered on its key brands, and in sales promotion activities, in order to maintain and expand its market share. Furthermore, JT closed two Japanese domestic tobacco factories at the end of March 2010 as part of our efforts to build an optimum operating structure. JT Share and Total Share of Key Brands* (Years ended March 31) (%) EBITDA in the Japanese Domestic Tobacco Business (Years ended March 31) (Billions of yen) JT Share Total Share of Key Brands* * Mild Seven, Seven Stars, Pianissimo (The market share figure for key brands is inclusive and retrospective of market share figures for icene and Lucia, which were integrated into the Pianissimo family in January 2010) Community clean-up events held 1,000 times in Japan JT developed the Pick Up and You will Love Your City initiative in May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at community festivals and other public events in various regions across Japan and is conducted in cooperation with many different stakeholders from local governments, companies, and volunteer organizations. Since these activities began in May 2004, community cleanup events have been held a total of 1,000 times throughout Japan as of April 17, To date, approximately 1,040,000 people, including 1,987 registered professional and nonprofessional organizations, have taken part. 6

9 The Japanese Domestic Tobacco Business Brand Portfolio Mild Seven, Seven Stars, and Pianissimo are our key brands in the Japanese market. We strive to enhance the value of each brand by actively engaging in the development and introduction of new products, and by vigorous sales promotion activities Mild Seven Family The Mild Seven family has won numerous loyal customers since its launch in June As Japan s major cigarette brand, Mild Seven has consistently commanded the No.1* share of the Japanese domestic market for more than 30 years since Today, the Mild Seven Family encompasses 24 products (as of April 30, 2010), reflecting its evolution in step with the changing times and brand expansion. * Source: TIOJ Mild Seven Brand Share (Years ended March 31) (%) Mild Seven 100 s Box and Mild Seven Light 100 s Box launched (June 2009) Mild Seven Impact One Menthol Box launched (February 2010) 15 core products forming the backbone of the Mild Seven brand redesigned (February 2010) Shibuya-Ku Hachiko-mae Smoking Space Seven Stars Family Launched in 1969, Seven Stars featured Japan s first domestically produced charcoal filter in pursuit of better taste. Since its launch, Seven Stars has consistently offered unique value in terms of taste, aroma, and product design. The Seven Stars family comprises a lineup of 12 products (as of April 30, 2010) centered on Seven Stars, which recorded the top* performance by brand in the fiscal year ended March The Seven Stars family continues to capture a growing share of the market. * Source: TIOJ Seven Star Brand Share (Years ended March 31) (%) Pianissimo Family Market share 32.1% (Change: 0.2ppt down) Market share 9.6% (Change: 0.3ppt up) Market share* 3.4% (Change: 0.1ppt up) Seven Stars Black Charcoal Menthol Box launched (August 2009) Seven Stars Black Impact Box launched (April 2010) Composition Rate of Key Brands in Sales Volume In August 1995, the Pianissimo family saw the launch of Japan s first 1 mg-tar menthol cigarette product featuring reduced odor and smoke*. Pianissimo, an FSK (Filter Super King) slim menthol product, has continued to achieve growth after undergoing the Japanese tobacco market s first integration of brands in the fiscal year ended March The Pianissimo family, a core JT tobacco franchise, features a diverse lineup of 7 products (as of April 2010), centered on Pianissimo One, the No. 1** 1mg menthol product. * Reduced smoke: Less smoke is released from the tip of the cigarette based on a visual comparison with conventional JT cigarette products. ** Source: TIOJ Pianissimo Brand Share* (Years ended March 31) (%) Pianissimo Icene Menthol One launched (December 2009) Integrated the icene and LUCIA brands into the Pianissimo family (January 2010) * The market share figure for Pianissimo brand is inclusive and retrospective of market share figures for icene and Lucia, which were integrated into the Pianissimo family in January JT and Japanese municipalities jointly set up 835 smoking areas in public places Smoking areas in public places were set up in order to respect the wishes of smokers and nonsmokers, and to reduce cigarette butt litter. The first smoking area was established in August 2003 in the Shimbashi Station Plaza (Tokyo), and as of March 2010, a total of 835 areas have been created in cooperation with 185 municipalities in Japan. 69% Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 7

10 JAPAN TOBACCO INC. Annual Report 2010 Feature International Tobacco Business the Driving Force for Profit Growth Achieved double-digit growth in dollar-based EBITDA at constant rates of exchange Strong brand portfolio drove market share gains in key markets Good geographic mix of mature and emerging markets Enhancement of leaf procurement Total sales volume* GFB sales volume billion cigarettes billion cigarettes down 2.5% down 0.9% EBITDA billion down 26.1% Japan Tobacco International (JTI), which carries out the international tobacco business, conducts business operations in over 120 countries. The international tobacco business remains the profit growth engine of the Group. JTI continues to focus on sustainable quality top-line growth through enhancing its brand portfolio and brand equity. EBITDA at constant rates of exchange $3,967 million up 14.9% * Total sales volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products Geographic Mix of Mature and Emerging Markets (2009) (%) 69 Sales Volume EBITA 64 EBITDA of International Tobacco Business (Years ended December 31) (Billions of yen) Mature Emerging 5 Planting trees covering 6,100 hectares in Malawi and Tanzania Across the world the JT Group is committed to both forest preservation and tree-planting. Four years ago JT and JTI began an ambitious reforestation and social program in Malawi and Tanzania, since which time 6,100 hectares have been planted. In addition, JT and JTI have complemented this work by improving the standard of living for local communities with programs such as installing wells for clean drinking water and irrigation systems, and training farmers in agricultural techniques. In Japan, JT is also committed to protecting and regenerating forests. Launched in 2005, the JT Forest project has expanded its activities to eight locations nationwide. 8

11 The International Tobacco Business Brand Portfolio JTI possesses a portfolio of Global Flagship Brands (GFB) comprising Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, and Glamour. JTI is leveraging its GFB brand equity in key markets around the world. Engine Winston and Camel are the Engine brands driving JTI s growth. First introduced in 1954, Winston has proven its status as JTI s key growth driver, becoming in 2007 the 2nd* largest cigarette brand in the world. After almost a decade of strong momentum, Winston further accelerated its sales volume growth in South & West Europe and North & Central Europe in Winston s performance has been strengthened by Super Slims brand extensions and ongoing product innovation. * Source: Euromonitor, combined with R.J. Reynolds s sales volume First introduced in 1913, Camel is the originator of American Blend. Sold in over 100 countries, Camel is the 6th* largest cigarette brand in the world. Sales volume growth has been achieved in South & West Europe and North & Central Europe in 2009.The launch of Camel Essential Flavor and other line extensions contributed to Camel s performance. * Source: Euromonitor, combined with R.J. Reynolds s sales volume Global Flagship Brand Portfolio Composition Rate of GFB in Sales Volume 6 JT Group and governments fighting against illicit trade 56% The JT Group is protecting both its consumers and its business interests and fighting ever harder against the growing problem of illicit trade through close cooperation with law enforcement authorities around the world. A comprehensive approach The JT Group continues to invest in its international tobacco business programs to effectively prevent illicit trade. The initiatives span from detailed screening of customers and vendors, to controls on money collections, to applying security features allowing key brands to be traced back from the first purchaser to the manufacturing site. The international tobacco business has concluded agreements with a growing number of law enforcement authorities to cooperate more closely and efficiently in disrupting the flow of counterfeit and contraband tobacco products. This is the case in particular with the European Union and its twenty-seven Member States where JT Group has agreed to contribute US$400 million over 15 years to support anti-smuggling and anti-counterfeiting initiatives in the European territory. JT Group is taking initiatives to raise awareness among the public and consumers of the risks associated with illicit trade and consumption of such products. Moreover, dedicated teams are specialized in collecting intelligence that can be used by law enforcement authorities to fight illicit trade. JT Group is constantly developing new security features to better protect its brands from illicit trade and supports investigations and seizures of counterfeit tobacco products. Note: Financial data disclosed here in Feature are rounded. Stronghold Four stronghold brands have a significant presence in their respective regions increasing the competitive power of JTI s portfolio. Originating in Japan and launched in 1977, Mild Seven is the top-selling premium charcoal brand and is the 3rd* largest cigarette brand in the world. Its key markets outside Japan are Taiwan, Korea, Russia and Malaysia. * Source: Euromonitor Originally created for the Prince of Wales in 1873, Benson & Hedges has a proud British heritage. Today, JTI owns the Benson & Hedges trademark in EU markets (excl. Baltics) where it is a leading Virginia premium brand. Benson & Hedges is continuously evolving its portfolio and brand extensions to reflect its consumers needs. Launched in 1963, Silk Cut established itself as one of the leading brands in the Virginia segment, both in the UK and Ireland. JTI owns the Silk Cut trademark throughout the EU with the core markets being the UK, Ireland and Greece, where the brand enjoys a significant market share in the premium segment. LD was launched in 1999 as a midprice proposition in the Russian market. The brand achieved immediate success and is accepted as a credible international proposition. Since 2007 LD has grown continuously, expanding its presence to more than 30 countries across all regions supported by its constant portfolio expansion in response to consumer aspirations. Future potential Sobranie and Glamour have strong future growth potential. Sobranie is one of the world s oldest tobacco brands and has been synonymous with luxury cigarettes since This heritage, exquisite style and the best selected tobaccos have made Sobranie one of the most prestigious brands in the world. In 2009 innovative propositions were launched in Russia. Glamour is JTI s leading Super Slims brand. Since its introduction in 2005, Glamour has achieved remarkable growth consolidating its No. 1 position as a Super Slims brand in several CIS+ markets. Glamour is constantly expanding its geographical presence and evolving portfolio in the growing Super Slims segment. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 9

12 JAPAN TOBACCO INC. Annual Report 2010 Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / FY 3/2010 Business Scale JT Group Sales Volume Japanese Domestic Tobacco Business151.9 Billions of cigarettes International Tobacco Business Billions of cigarettes JT Group Share in Global Cigarette Market (Source: Euromonitor) 10.4 % Net Sales Including Excise Taxes 6,134.7 Billions of yen Adjusted Net Sales Excluding Excise Taxes* 1 1,981.0 Billions of yen EBITDA Billions of yen Profitability EBITDA Margin* % ROE 8.6 % Per Share Data Diluted EPS 14,449 yen up 12.2% Diluted EPS (excluding the impact of goodwill amortization) 24,621 yen up 3.0% Stability Free Cash Flow Billions of yen D/E Ratio 0.53 times Return of Profits to Shareholders The Per Share Dividend 5,800 yen The Dividend Payout Ratio 40.1 % 23.6% (Excluding the Impact of Goodwill Amortization) Business Scale: The JT Group s total tobacco sales volume in Japan and abroad comes to approximately 587 billion cigarettes per year, accounting for around 10% of the global market. In addition to the domestic and international tobacco businesses, the JT Group engages in the pharmaceutical and food businesses, and its annual consolidated sales including excise taxes stand at approximately 6,130 billion, adjusted net sales excluding excise taxes at more than 1,980 billion and consolidated EBITDA at more than 520 billion. Profitability: Because of the high profitability of the tobacco business, the ratio of EBITDA to adjusted net sales excluding taxes comes to around 27% and ROE stands at between 8% and 9%. Per Share Profits: Although net sales as well as most profit figures, including EBITDA, operating income and recurring profit, declined in FY 3/2010, per-share EPS grew as a result of an increase in net income due to an improvement in extraordinary income. Stability: Free cash flow came to approximately 250 billion due to a stable cash flow generated by the tobacco business. D/E Ratio is about 0.5 times. Return of Profits to Shareholders: The pershare dividend was set at 5,800, including interim and term-end dividends as well as a commemorative dividend to mark the 25th anniversary of the incorporation of JT. The dividend payout ratio excluding the impact of goodwill amortization rose to 23.6%. * 1 Japanese domestic tobacco; excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise tax and revenue from distribution, private label, contract manufacturing and other peripheral business. * 2 EBITDA margin on Adjusted Net Sales excluding excise tax (1,981.0 billion yen as of FY3/2010) Financial data disclosed herein are rounded. 10

13 Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31 Net Sales Including Excise Taxes (Billions of yen) 8,000 6, ,000 6, , ,000 5,000 4, , ,000 3,000 2,000 1, Operating Income and Net Income (Billions of yen) Operating Income Net Income Free Cash Flow (Billions of yen) ,200 1, Net Sales Excluding Excise Taxes (Billions of yen) 2,500 2,000 1,500 1, ,500 2,000 1,500 1, , ,000 80,000 60,000 40,000 20,000 1, , Please see Note 2 on page 12. 1, , , Total Equity and ROE (Billions of yen/%) EPS (Yen) Total Equity 2, , ROE , , , , ,001 24,916 23,895 24,621 12,880 14, EPS (excluding the impact of goodwill amortization) EPS EBITDA (Billions of yen) Interest-bearing Debt and D/E Ratio (Billions of yen/times) 2, ,500 1, , Interest-bearing Debt D/E Ratio Cash Dividends Applicable to the Year (Yen) 8,000 5,800 6,000 5,400 4,800 4,000 4,000 3,200 2, Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information Note: A 5 for 1 stock split went into effect on April 1, 2006 Financial data disclosed herein are rounded. 11

14 JAPAN TOBACCO INC. Annual Report 2010 Financial Highlights Japan Tobacco Inc. and Consolidated Subsidiaries / Years ended March 31 Millions of U.S. dollars Millions of yen (Note 1) For the year: Net Sales Including Excise Taxes 4,637,657 4,769,387 6,409,727 6,832,307 6,134,695 $65,936 Japanese Domestic Tobacco 3,405,281 3,416,274 3,362,398 3,200,494 3,042,836 32,705 International Tobacco 881, ,658 2,639,969 3,118,319 2,633,636 28,306 Pharmaceutical 49,257 45,452 49,064 56,758 44, Food 278, , , , ,653 4,242 Others 23,553 21,449 21,876 20,770 19, Net Sales Excluding Excise Taxes (Note 2) 1,596,151 1,633,186 2,068,368 2,243,146 1,980,970 21,292 Japanese Domestic Tobacco 760, , , , ,991 6,688 International Tobacco 484, , ,989 1,080, ,756 9,845 Pharmaceutical 49,257 45,452 49,064 56,757 44, Food 278, , , , ,653 4,285 Others 23,553 21,449 21,876 20,770 19, EBITDA (Note 3) 433, , , , ,702 5,661 Japanese Domestic Tobacco 305, , , , ,646 2,769 International Tobacco 94, , , , ,869 2,686 Pharmaceutical (1,803) (8,197) (6,269) 4,890 (9,651) (104) Food 11,869 12,018 8,353 17,030 14, Others 22,140 21,586 22,055 13,150 13, Elimination/Corporate 1, , Depreciation and Amortization (Note 3) 126, , , , ,197 2,474 Operating Income 306, , , , ,505 3,187 Japanese Domestic Tobacco 220, , , , ,339 2,186 International Tobacco 71,031 81, , , ,127 1,173 Pharmaceutical (5,057) (11,207) (9,644) 1,020 (13,593) (146) Food 6,325 6, (11,451) (13,696) (147) Others 8,673 9,331 10,448 9,695 10, Elimination/Corporate 5, ,375 1, Net Income 201, , , , ,448 1,488 Free Cash Flow (FCF) (Note 4) 145, ,007 (1,493,717) 240, ,742 2,695 At year-end: Total Assets 3,037,379 3,364,663 5,087,214 3,879,803 3,872,596 41,623 Interest-bearing Debt (Note 5) 216, ,269 1,389, , ,330 9,397 Liabilities 1,217,306 1,340,047 2,932,585 2,255,515 2,149,317 23,101 Total Equity 1,762,512 2,024,616 2,154,629 1,624,288 1,723,279 18,522 Ratios: Return on Equity (ROE) 12.4% 11.3% 11.8% 6.8% 8.6% Return on Assets (ROA) 10.4% 10.7% 10.5% 8.4% 7.8% Equity Ratio 58.0% 58.3% 40.8% 40.0% 42.6% Amounts per share: (in yen) (Note 6) Net Income (Note 7) 21,017 22,001 24,916 12,880 14,449 Total Equity 183, , , , ,140 Cash Dividends Applicable to the Year 3,200 4,000 4,800 5,400 5,800 Notes: 1. Figures stated in U.S. dollars in this report are translated at the rate of per $1, as of March 31, : Excluding imported tobacco in the Japanese domestic tobacco and distribution business in the international tobacco, respectively : Excluding the imported tobacco, domestic duty free, the China Division and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, private label, contract manufacturing and other peripheral businesses in the international tobacco business. 3. EBITDA = operating income + depreciation and amortization Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill 4. FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From cash flow from operating activities : Dividends received / interest received and its tax effect / interest paid and its tax effect From cash flow from investing activities : Cash outflow from purchase of marketable securities / proceeds from sales of marketable securities / cash outflow from purchases of investment securities / proceeds from sales of investment securities / others (but not business-related investment securities, which are included in the investment securities item) 5. Interest-bearing Debt includes lease obligation after FY On April 1, 2006, a 5 for 1 stock split went into effect. Amounts per share for the year ended March 2006 is on the assumption that this stock split took place at the beginning of fiscal year. 7. Diluted net income per share. 8. Financial data disclosed herein are basically rounded. 12

15 JAPAN TOBACCO INC. Annual Report 2010 To Our Stakeholders As its long-term vision, the JT Group is committed to global growth by providing consumers with diversified value that is uniquely available from us. To realize this vision, we have adopted JT-11, a medium-term management plan which covers the three years ending in March In fiscal year 2009, the first year of the plan, our consolidated results exceeded the initial forecasts as we devoted efforts to appropriate management of business operations, although we suffered a decline in overall demand mainly in the Japanese domestic tobacco business, and unfavorable foreign exchange rates in the international tobacco business. As for the outlook on fiscal year 2010, while there are signs of recovery in some sectors, the global economy is still recovering and we expect a significant drop in demand at the Japanese domestic tobacco business due to a tax increase of an unprecedented scale. However, we will strive to realize our long-term vision and achieve the objectives under JT-11 by exploring opportunities for future growth and further strengthening our business foundation in this difficult business environment. June 2010 Yoji Wakui Chairman of the Board Yoji Wakui Chairman of the Board Hiroshi Kimura President and CEO and Representative Director Hiroshi Kimura President and CEO and Representative Director Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 13

16 JAPAN TOBACCO INC. Annual Report 2010 CEO Interview Q Points Financial Results for FY3/2010 (fiscal year 2009) International Tobacco Business: Situation of Major Markets Planned Actions in FY3/2011 (fiscal year 2010) Human Resource Development Plan for Use of Cash Financial Results for FY3/2010 Hiroshi Kimura President and CEO and Representative Director Q What is your assessment of the financial results for fiscal year 2009 that ended in March 2010? Each business division maintained its own momentum or made progress in strengthening its business foundation, although net sales as A well as most profit figures, including EBITDA, operating income and recurring profit declined. In the Japanese domestic tobacco business, EBITDA surpassed the initial forecast of 246 billion despite weaker industry volumes than assumed. In fiscal year 2009, we strived to further develop existing brands and introduce new products, mainly under our key brands, and continued efforts to build a cost-efficient operating structure. In the international tobacco business, we increased our market share in most key markets, and achieved an increase of approximately 15% in US dollar-based EBITDA driven by favorable pricing at constant rates of exchange. The momentum of the international tobacco business, which is the profit growth engine of the JT Group, remains steady. For the moment, the pharmaceutical and food businesses do not make significant contributions to the JT Group s overall financial results. However, in our pharmaceutical business we are steadily strengthening the development pipeline, as shown by the advance of JTK-853, an anti-hepatitis C drug, currently in the clinical development stage. In the food business, we continued to strengthen our business foundations in the three business areas of beverages, processed foods and seasonings. In April 2009 we completed the integration of JT s former food business into Katokichi Co. Ltd. The food subsidiary, following acquisition, changed its name from Katokichi to TableMark in January 2010, and aims to achieve a higher level of profitability as a result of business integration. In fiscal year 2009, the first year of the JT-11 medium-term management plan, EBITDA came to billion on a consolidated basis, exceeding the initial target of 475 billion. Adjusted Net Sales Excl. Excise Tax* in Japanese Domestic Tobacco Business (Billions of yen) EBITDA** in Japanese Domestic Tobacco Business (Billions of yen) FY3/ FY3/ FY3/ FY3/ Adjusted Net Sales Excl. Excise Tax* in the International Tobacco Business (Millions of US dollars)*** EBITDA** in the International Tobacco Business (Millions of US dollars)*** FY3/ ,445 FY3/2009 3,452 FY3/2010 at constant rates of exchange 11,192 FY3/2010 at constant rates of exchange 3,967 FY3/2010 9,682 FY3/2010 2,965 5,500 6,500 7,500 8,500 9,500 10,500 11,500 1,500 2,000 2,500 3,000 3,500 4,000 * Japanese domestic tobacco business, excluding revenue from imported tobacco, domestic duty-free, the China Division, and others. International tobacco business, excluding revenue from distribution, private label, and contract manufacturing. ** EBITDA=operating income+depreciation and amortization *** The US dollar is the reporting currency for our international tobacco business. Financial data disclosed in CEO interview are rounded. 14

17 Q Changes in Dividend Payout Ratio Excluding the Impact of Goodwill Amortization and Dividend per Share (Yen) (%) 6,000 5,000 4,000 3,000 2,000 1,000 Could you explain how currency fluctuations significantly affected the financial results? As a result of currency fluctuations on the international tobacco business, we had declines in net sales, EBITDA and operating income. A Specifically, the results were affected by the depreciation of local currencies in our key markets against the US dollar (which is the reporting currency for our international tobacco business). This negative impact on EBITDA amounted to $1 billion. There was further erosion when converted into yen as a result of the yen s appreciation. Q How much will be paid in annual dividend for fiscal year 2009? We have announced that the year-end dividend was increased to 3,000 per share, made up of 2,800 common dividend and 200 commemorative dividend. The annual dividend, together with the half-year dividend of 2,800, was increased to 5,800 per share. A We have made consistent efforts to increase our dividend with the goal of achieving a dividend payout ratio of 30% on a consolidated basis, excluding the impact of goodwill amortization. In fiscal 2009, the dividend payout ratio came to 23.6%, surpassing the previous year s 22.6%. (Years Ended March 31) ,200 1, ,600 2, ,800 2, International Tobacco Business: Situation of Major Markets Q ,000 2, Year-end dividend per share Half-year dividend per share Dividend payout ratio How could the international tobacco business increase its market share in fiscal year 2009 in almost all key markets? In many key markets, overall demand declined and the down-trading trend accelerated because of the recession and sharp increases in A tobacco excise taxes. Despite those negative factors, the international tobacco business managed to increase its market share in almost all key markets because of its well-balanced brand portfolio, which is strong in the sub-premium and mid-price segments, and its efforts to enhance brand equity and strengthen sales promotion activities. For example, in Russia we increased both our sales volume and market share despite a decline in overall demand, because Winston continued to maintain the largest market share and also because the growth of LD, our mid-price brand, rose sharply since this product captured the down-trading trend. In the UK market, the sales volume and market share of Sterling, our value brand, expanded as the product attracted the accelerated trend of down-trading customers and acted as our growth driver. In the Italian market, Camel, in the sub-premium segment, and Winston, in the popular-price segment, drew strong demand, posting a rise in both their sales volumes and market shares. The sales volumes and market shares of our brands also grew in Turkey where Winston maintained its position as the leading brand and Monte Carlo, in the popular-price segment, and LD, in the value segment, also attracted strong demand. I also believe that our continued active investments in enhancing brand equity in each market made significant contributions to the increases in market shares. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 15

18 JAPAN TOBACCO INC. Annual Report 2010 CEO Interview Planned Actions in Fiscal Year 2010 Q As the business environment continues to be difficult in Japan and abroad, what actions will the JT Group take? Will there be any change in the objectives under JT-11? Regarding the Japanese domestic tobacco business, we will maintain our solid position by strengthening efforts to enhance brand equity, A introducing innovative products, pursuing appropriate pricing and continuing cost reduction efforts, although the business environment is expected to become more difficult due to such factors as an unprecedented tax increase and the strengthening of restrictions on smoking spaces. For example, as a measure to enhance brand equity, we renewed the package design of Mild Seven, which is the No.1 brand in Japan, in early February In mid-may 2010, we launched Zerostyle Mint, an entirely new type of smokeless tobacco product, in Tokyo. There will be no change in our objective of keeping the profit (EBITDA) in fiscal year 2011 at the level of fiscal year In fiscal year 2010, profits from the Japanese domestic tobacco business are expected to decline compared with the previous year due to an accelerated downward trend in consumption. Increases in expenses related to strengthening of retail store sales and R&D that are intended to ensure quality and services commensurate with the retail price, and a one-time cost related to the retail price revision will also have an impact. With regard to the international tobacco business, we expect that some of our key markets will begin to show signs of a moderate recovery in the latter half of 2010, and therefore, we do not expect volume growth in full-year Meanwhile, we will aim to achieve growth in both net sales and profits by continuing investments to strengthen business operations and brand equity, and seizing the opportunity for price increases. Our objectives of the international tobacco business, the pharmaceutical business and the food business will remain the same as we committed to in JT-11. (Actual results may differ materially from those estimated in these statements as a result of a number of factors, including, but not limited to, those described in Major Risks of Businesses. ) Human Resource Development Q As you expand your business operations globally, how are you developing human resources? The continuing expansion of our global business operations makes it all the more important to develop human resources. We benefit from A the diversity of our employees regardless of nationality and social background. We promote interaction of personnel and create mechanisms to ensure the company-wide sharing of best practice. For example, the Exchange Academy, a human resource development program managed jointly by JT and JTI, brings together trainees from countries around the world, providing an opportunity to experience unfamiliar cultures while at the same time acquiring skills necessary to manage global operations. 16

19 Plan for Use of Cash Q How does the JT Group, which can expect a stable cash flow from the tobacco business, plan to use the cash? Will there be no change in the objective of JT-11 related to the return of profits to shareholders? We will use the cash mainly for business investment, return of profits to shareholders, and repayment of interest-bearing debts. A In fiscal year 2009, the JT Group s free cash flow was billion. As we believe that there is still room for the JT Group to expand business operations both at home and abroad, investment to further strengthen the business foundation is an important usage of cash. Such business investment is intended to promote innovation, improve product quality and enhance customer satisfaction. Furthermore, we will continuously look for external growth opportunities. We also place priority on the return of profits to shareholders as an important usage of cash. There will be no change in our objective under the JT-11 medium-term management plan of raising the consolidated dividend payout ratio (excluding the impact of goodwill amortization) in the medium term to 30%. We will proceed with the repayment of interest-bearing debts while taking care to ensure an appropriate debt ratio. June 2010 Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 17

20 JAPAN TOBACCO INC. Annual Report 2010 Analysis of the Results of FY 3/2010* 1 * 1 International tobacco business: Year ended Dec and Year ended Dec Actual results Decrease Increase (Decrease in case of expense) Net Sales* 2 (Billions of yen) FY3/2009 Japanese domestic tobacco International tobacco Pharmaceutical Food , Others FY3/ , ,650 1,750 1,850 1,950 2,050 2,150 2,250 Net sales in the international tobacco business were affected by the depreciation of local currencies in our key markets against the US dollar. There was further erosion when converted into yen as a result of the yen s appreciation. Net sales declined in the food business due to the withdrawal from the chilled processed food business and the exclusion of some subsidiaries from the consolidated results due to the change of ownership. Net sales fell in the Japanese domestic tobacco business, reflecting a decline in sales volume. Net sales declined in the pharmaceutical business due to the absence of the upfront fee revenue and milestone revenue that boosted the previous year s results. * 2 Japanese domestic tobacco; excluding excise tax and revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. International tobacco; excluding excise tax and revenue from distribution, private label, contract manufacturing and other peripheral business. EBITDA (Billions of yen) FY3/2009 Japanese domestic tobacco International tobacco Pharmaceutical Food Others FY3/ EBITDA in the international tobacco business was affected by the depreciation of local currencies in our key markets against the US dollar. There was further erosion when converted into yen as a result of the yen s appreciation. EBITDA declined in the Japanese domestic tobacco business mainly as a result of a drop in sales volume. EBITDA dropped in the pharmaceutical business mainly due to the absence of the upfront fee revenue and milestone revenue that boosted the previous year s results. Despite marginal EBITDA growth in the key business* 3 segments due to lower raw materials prices and cost reduction, EBITDA for the overall food business decreased due to one-time losses in the fishery product business. * 3 Key business segments are: Beverages, Processed foods and Seasonings Operating Income (Billions of yen) FY3/2009 EBITDA Depreciation and amortization FY3/ Operating income fell less steeply than EBITDA because of decreases in the amortization expense in Japanese domestic tobacco business due to the completion of the amortization of the trademark rights taken over from the former RJRI, and because of decreases in the goodwill amortization expense in the international tobacco business due to the yen appreciation impact. Financial data disclosed herein are rounded. 18

21 Recurring Profit (Billions of yen) FY3/2009 Operating income Non-operating income/loss FY3/2010 As the non-operating balance improved because of a decrease in interest payments caused by the redemption of bonds, repayments of borrowings and lower interest rates, recurring profit fell less steeply than operating income. Recurring profit is calculated by combining operating income with profits and losses arising from financing activities and other non-operating profits and losses, except for nonrecurring profits and losses or those on prior years adjustment. Net Income (Billions of yen) FY3/2009 Recurring profit Extraordinary income/loss, Income taxes, etc. FY3/ Net income increased, while profits from the sale of fixed assets decreased, and extraordinary income improved because of the absence of some expenses incurred in the previous year, including; expenses related to a change in the operating model in the Philippines; expenses associated with the demolition and removal of company housing; and the cost of introducing vending machines with the adult identification function. In addition the reversal of liability on a fine levied under UK competition law also contributed to the increase in net income. Breakdown of Net Sales FY3/2009 (Billions of yen) FY3/2010 Net sales including excise taxes* 1 6, ,134.7 Japanese domestic tobacco 3, ,042.8 International tobacco* 1 3, ,633.6 Adjusted net sales excl. excise taxes* 1 * 2 * 3 2, ,981.0 Japanese domestic tobacco* International tobacco* 1 * 3 1, Pharmaceutical Food Others * 1 International tobacco business: Year ended Dec and Year ended Dec * 2 Excluding revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. * 3 Excluding revenue from distribution, private label, contract manufacturing and other peripheral businesses. Average Exchange Rate 2008 Jan. to Dec. Average 2009 Jan. to Dec. Average YEN/USD RUB/USD GBP/USD EUR/USD EBITDA by Business Segment* 4 (Billions of yen) FY3/2009 FY3/2010 Consolidated EBITDA Operating income Depreciation and amortization* Japanese domestic tobacco EBITDA Operating income Depreciation and amortization* International tobacco EBITDA* Operating income Depreciation and amortization* Pharmaceutical EBITDA Operating income (loss) Depreciation and amortization* Food EBITDA Operating income (loss) Depreciation and amortization* Others EBITDA Operating income Depreciation and amortization* * 4 EBITDA = operating income + depreciation and amortization * 5 Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill * 6 International tobacco business: Year ended Dec and Year ended Dec Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information Financial data disclosed herein are rounded. 19

22 JAPAN TOBACCO INC. Annual Report 2010 Analysis of the Results of FY 3/2010 Consolidated Balance Sheets (Assets) (Billions of yen) Mar. 31, 2009 Cash and deposits/short-term investments Inventories Trade notes and account receivables Trademarks Goodwill 3, Other assets 39.5 Mar. 31, , ,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000 On the asset side, inventories increased while the value of goodwill declined. The increase in inventories reflected a rise in raw materials costs and an increase in procurement. Consolidated Balance Sheets (Debt and Equity) (Billions of yen) Mar. 31, 2009 Bank Loans 3, Commercial paper Bonds Tobacco excise tax payable Other liabilities Retained earnings Foreign currency translation adjustments Other equity Mar. 31, , ,600 3,650 3,700 3,750 3,800 3,850 3,900 3,950 4,000 On the liability side, although CP increased, borrowings and bonds decreased. Financial data disclosed herein are rounded. 20

23 JAPAN TOBACCO INC. Annual Report 2010 Feature & Management Business & History At a Glance Review of Operations Japanese Domestic Tobacco Business International Tobacco Business Pharmaceutical Business Food Business History of the JT Group Note: Financial data disclosed herein are rounded Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 21

24 JAPAN TOBACCO INC. Annual Report 2010 At a Glance JT Group The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group. The business environment is becoming increasingly difficult due to a decline in overall demand in the domestic market and intensifying competition. Under such a business environment, the Japanese domestic tobacco business continues to explore opportunities for top-line growth and at the same time to build an optimum operating structure. The international tobacco business is actively exploring opportunities for top-line growth so that it can continue to act as the JT Group s profit growth engine. In the pharmaceutical business, JT will continue to build world-class, unique R&D capabilities and reinforce its market presence through innovative drugs by devoting efforts to increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline. In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, implementing measures to establish the highest standard of safety management and striving to further strengthen our business foundation for future growth. Japanese Domestic Tobacco Business (Years ended March 31) Overwhelm the competition in the home country market as the core source of profits. see page 24 Total Market (Billions of cigarettes) Sales Volume (Billions of cigarettes) Net Sales Including Taxes (Billions of yen) ,000 3,000 3, , , , , , , Source: TIOJ Net Sales Excl. Excise Tax (Billions of yen) EBITDA/Operating Income (Billions of yen) 1, Note: : Excluding revenue from the imported tobacco : Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous EBITDA Operating Income see page 32 Pharmaceutical Business (Years ended March 31) Pursuing high value-added business by developing world-class innovative drugs Net Sales (Billions of yen) EBITDA/Operating Income (Loss) (Billions of yen) EBITDA Operating Income (Loss) 22

25 Net Sales Breakdown by Business Segment (FY 3/2010) Pharmaceutical Business 2.2% International Tobacco Business 45.8% Sales Volume (Billions of cigarettes) Net Sales (Billions of yen) Note: 2008 : Including cigars, pipe tobacco and snus, but does not include private label and contact manufactured products Net Sales Excl. Excise Tax (Billions of yen) 1, , Note: : Excluding revenue from distribution : Excluding revenues from distribution private label, contract manufacturing and other peripheral business GFB Sales Volume (Billions of cigarettes) Note: GFB in : Winston, Camel, Mild Seven, Salem GFB in 2007 : Winston, Camel, Mild Seven, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour EBITDA/Operating Income (Loss) (Billions of yen) Other Business % Food Business 19.9% Japanese Domestic Tobacco Business 31.1% Note: Japanese Domestic Tobacco Business and International Tobacco Business are Adjusted Net Sales Excl. Excise Tax EBITDA/Operating Income (Billions of yen) EBITDA Operating Income EBITDA Operating Income (Loss) JT Group Share in Global Cigarette Market (2009) Net Sales Including Taxes (Billions of yen) 4,000 3,000 2,000 1, % Source: Euromonitor ,640.0 see page 28 International Tobacco Business (Years ended December 31) Attain a sustainable leadership position in profitability and/or market-share within a growing number of markets, and continue to be the driving force for profit growth. 3, Food Business (Years ended March 31) Increasing profits by achieving sustainable growth based on the combined strength of group companies with worldclass competitiveness 2,633.6 see page 34 Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 23

26 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations Japanese Domestic Tobacco Business The Japanese domestic tobacco business is positioned as the core source of profits for the JT Group. Competition for market share is becoming increasingly intense as total tobacco demand continues to decline, due to factors such as the aging of Japanese society, growing awareness about the health risks associated with smoking and the tightening of smoking-related regulations. Moreover, in the fiscal year ending in March 2011, a significant drop in demand is expected as a result of a steep tax increase decided for October. In this difficult business environment, JT is resolved to boost the value of its Japanese domestic tobacco business in the medium term by simultaneously pursuing a strategy for sales growth and enhancing productivity. FY 3/2010 Business Performance Summary Sales volume billion cigarettes down 5.0% Adjusted net sales excluding tax* billion down 5.1% EBITDA billion down 5.4% Operating income billion up 8.0% * Adjusted net sales excluding tax do not account for revenue from the imported tobacco, domestic duty free, China Division and other miscellaneous. Mitsuomi Koizumi President, Tobacco Business Amid a difficult business environment, the share of JT products remained stable compared with the previous year, with the share of key brands growing steadily. Implemented measures to enhance the brand equity and conducted sales promotion with a particular focus on key brands launched new products that captured market needs Net sales and profits declined but EBITDA exceeded initial forecasts of billion. Adjusted net sales excluding tax dropped due to a volume decline. EBITDA declined as an increase due to the revision of the royalty rate was offset by the volume decline and increased raw materials costs. Operating income grew due to the completion in April 2009 of the amortization of the trademark rights taken over from the former RJRI and a drop in the depreciation and amortization costs related to vending machines. Japanese Domestic Tobacco Business Adjusted Net Sales Excluding Tax* (Billions of yen) Japanese Domestic Tobacco Business EBITDA (Billions of yen) FY 3/ FY 3/ Volume effect 24.8 Volume effect 32.8 Price and product mix effect 0.1 Price and product mix effect 0.1 Cost increase Leaf tobacco reappraisal gain/ loss Sales promotion and others FY 3/ * Excluding revenues from the imported tobacco, domestic duty free, the China Division, and other miscellaneous. FY 3/

27 JT Share (Years ended March 31) (%) Total Share of Key Brands* (Years ended March 31) (%) Feature & Management * Mild Seven, Seven Stars, Pianissimo (The market share figure for key brands is inclusive and retrospective of market share figures for icene and Lucia, which were integrated into Pianissimo family on January 2010) As JT implemented measures to enhance the brand equity, including the launch of new products that captured market needs, and conducted sales promotion activities with a particular focus on key brands, the market share of overall JT products remained stable while the share of key brands grew steadily. Launch New Products Centered on Key Brands New Products Launched in FY 3/2010 June 09 Mild Seven 100 s Box December 09 Pianissimo Icene Menthol One (D-spec) June 09 Mild Seven Lights 100 s Box February 10 Mild Seven Impact One Menthol Box August 09 Seven Stars Black Charcoal Menthol Box March 10 Camel Menthol Mini October 09 Winston Lights Box Mild Seven 100 s Box Mild Seven Lights 100 s Box Mild Seven Impact One Menthol Box Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information Seven Stars Black Charcoal Menthol Box Pianissimo Icene Menthol One (D-spec) Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco products or encourage smoking by consumers. 25

28 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations Strategies and Specific Measures Optimizing our Marketing Mix toward Sustainable Growth through the Provision of Quality and Services Commensurate with the Price Product Strategy From now on, our product strategy will focus on enhancing the brand equity so as to provide value commensurate with the price, and building a brand portfolio that offers a wider selection of products. Through this strategy, we will maintain and expand our market share. Enhancing the brand equity to provide value commensurate with the price Enhancing product innovation (enhancing R&D capability) Expanding the product lineup Strengthening programs to improve taste, package design and other features of products Brand Portfolio Offering a Wide Selection Japanese Domestic Tobacco Business: Prices of Major Brands (application basis) ~ Sep Cabin Prestige Peace Infinity Pianissimo Camel Salem Mild Seven Cabin Seven Stars Peace Hope Winston Caster Hi-Lite (Yen per pack) Oct ~ (Yen per pack) Distribution Strategy To achieve top-line growth, the greatest challenge for our distribution strategy is to secure overwhelming superiority in product exposure at retail stores. Specifically, we will strive to secure product exposure in ways suited to the characteristics of each store type through suggestions regarding sales space and the introduction of display boxes. As for sales through vending machines, we will strive to make efficient allocation while making investments necessary for increasing the attractiveness of our products Cabin Prestige Peace Infinity Pianissimo Camel Salem Seven Stars Peace Hope Mild Seven Cabin Caster Hi-Lite 400 Winston Marketing Strategy Our marketing force, the vast size of which eclipses the marketing teams of our competitors, satisfies the multitude and variety of needs of retailers scattered across the country. We will continue to engage in efficient and effective marketing activities in ways linked to our product and distribution strategies, while complying with regulations and rules such as restrictions on tobacco advertising and prevention of youth smoking. Improving Quality and Productivity We will implement measures to maximize customer satisfaction, including constantly improving product quality and strengthening the shipment assurance system. In addition, in line with the planned price revisions in October, we will make capital expenditures in order to provide quality commensurate with the price and to meet the increasingly diverse needs of customers. Productivity improvement is a critical challenge for any manufacturing company. As part of its effort to improve productivity, JT closed two factories at the end of March 2010 so as to optimize our tobacco production capacity and restructure the Japanese domestic tobacco business in ways to make it more competitive. In addition, we will close one factory at the end of March 2011; after that, we will have 6 factories in Japanese domestic operation in April We will continue to strive toward an even more cost-efficient operating structure. Fulfilling Our Responsibility as the Market Leader We will continue to fulfill our responsibilities as the leading tobacco company in the Japanese market by endeavoring to achieve a harmonious coexistence between smokers and nonsmokers. We will also engage in initiatives to improve smoking manners and strive harder to secure and create space and opportunity for smoking, for example by helping to provide comfortable smoking areas. As a Core Source of Profits for the JT Group We will ensure that the Japanese domestic tobacco business continues to serve as the JT Group s core source of profits by overcoming challenges in the Japanese domestic market, such as the continuing decline in total tobacco demand and intensifying competition. 26

29 Topics Zerostyle Mint: Innovative Smokeless Tobacco Product Developed in Quest to Meet Diverse Customer Needs Feature & Management History of Tobacco Enjoyment with a Great Variety of Choice Tobacco has a rich history and is available in a large number of varieties. In different parts of the world, smokeless tobacco including snuff and chewing tobacco are consumed in addition to cigarettes. While the majority of consumers in Japan are smoking cigarettes, demand is increasing for tobacco products designed to be used in places where consideration needs to be given for nearby nonsmokers as well as products with better taste and flavor. Zerostyle Mint : Innovative Smokeless Tobacco Product Zerostyle Mint is a new type of snuff tobacco product. It does not need a flame to light it, and thus is smokeless, allowing consumers to use it in a variety of locations while giving consideration to neighbors at the same time. Through the introduction of the new menthol product, JT believes that it is expanding the opportunity for consumers to use tobacco by providing consumers with a wider selection of tobacco categories to choose from. As conventional snuff products are relatively new to Japanese consumers, the body of Zerostyle Mint is designed so as to accommodate a replaceable cartridge which contains tobacco leaves. Sales beginning exclusively in Tokyo in mid-may 2010 Commitment to Better Customer Satisfaction Tobacco is favored among adults as a product that provides mental relaxation and helps to achieve mental concentration, for example. To help customers enrich their life with tobacco, JT is committed to meeting their diverse range of needs by developing a broad range of cigarettes and other tobacco products as well as by improving taste and flavor. Following the launch of Zerostyle Mint, we will pursue our quest for innovation with an open mind so that we can better satisfy our customers. Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco products or encourage smoking by consumers. Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 27

30 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations International Tobacco Business Japan Tobacco International (JTI), JT Group s international tobacco business, has a solid business foundation due to its geographic profile and its competitive edge in both brands and people. In 2009 JTI gained market share in its key markets due to our strong brand equity and portfolio despite an adverse economic environment. JTI strengthened its foundation further by acquiring leaf suppliers in order to secure supply of quality leaf. While the business environment continues to be challenging, JTI remains committed to investment in its people and brands so as to further enhance its competitiveness. FY 3/2010 Business Performance Summary Total sales volume* billion cigarettes down 2.5% GFB sales volume billion cigarettes down 0.9% Adjusted net sales excluding excise taxes** $9,682 million down 7.3% EBITDA $2,965 million down 14.1% Pierre de Labouchere President & CEO, Japan Tobacco International [At constant rates of exchange] Adjusted net sales excluding excise taxes** $11,192 million up 7.2% EBITDA $3,967 million up 14.9% * Total volume includes cigars, pipe tobacco and snus, but does not include private label and contract manufactured products ** Adjusted net sales excluding tax do not account for revenue from distribution, private label, contract manufacturing and other peripheral businesses JTI achieved 15% growth in dollar-based EBITDA at constant rates of exchange.* Market share gains in key markets were achieved by well-balanced GFB (Global Flagship Brands) portfolio, and continued investment in brands. Pricing as a driver of EBITDA growth at constant rates of exchange. * Based on the assumption that the exchange rate of the previous year is applied. Despite strong business performance, Adjusted net sales and profits declined on a reported basis due to adverse currency impacts. Strong business performance was fully offset by the US dollar appreciation against our major currencies. The yen s appreciation against the dollar further eroded yen-based earnings. International Tobacco Business Adjusted Net Sales Excluding Tax* (Millions of US dollars)*** International Tobacco Business EBITDA Before Royalty Payments to JT (Millions of US dollars)*** FY 3/ ,445 FY 3/2009 3,452 Volume effect Price/product mix effect 2009 at constant rates of exchange Forex impact** ,192 1,510 Volume effect Price/product mix effect Others 2009 at constant rates of exchange Forex impact** +19 3,967 1, FY 3/2010 9,682 FY 3/2010 9,200 9,400 9,600 9,800 10,000 10,200 10,400 10,600 10,800 11,000 11,200 2,965 * Adjusted Net sales excluding tax do not account for revenue from distribution, private label, contract manufacturing and other peripheral businesses. ** The forex impact represents the fluctuation between US dollar and other currencies. *** The US dollar is the reporting currency for our International Tobacco Business. 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400 28

31 Market share gain in key markets Our competitiveness has been enhanced through continued investment in brands, including product improvement and effective marketing initiatives. Our strength in the sub-premium and mid-price segments drove market share growth. Feature & Management 2008* 2009* ppt change Sales Volume Performance by Cluster South & West Europe Russia 35.7% 36.8% 1.1 France 14.2% 14.8% 0.6 Italy 17.1% 18.5% 1.4 Spain 20.5% 20.6% 0.1 UK 39.1% 40.4% 1.3 Turkey 17.0% 18.8% 1.8 Taiwan 38.7% 38.0% (0.7) * twelve months moving average (Unit: billions of cigarettes) 2009 Year-on-year change Total sales volume % GFB sales volume % JTI increased its total sales volume and GFB sales volume, despite the accelerated industry volume decline. Camel achieved 1.6% sales volume growth, driven by strong performance in Italy. Winston achieved 6.1% sales volume growth, and continued as the fastest growing cigarette brand in Italy and France. North & Central Europe Rest of the World 24.9% North & Central Europe 10.9% South & West Europe 14.8% (Unit: billions of cigarettes) 2009 Year-on-year change Total sales volume % GFB sales volume % Total sales volume grew due to strong performance in the UK. In the UK, while the down-trading trend accelerated, industry volume increased due to reduced overseas travel from the country. As a result, Sterling, our value brand, performed strongly. The GFB sales volume grew, driven by LD in Poland and by Benson & Hedges, Winston and Camel in Austria. Source: AC Nielsen, Core EPOS and JTI Internal Data Sales Volume Performance by Cluster CIS+ (Unit: billions of cigarettes) 2009 Year-on-year change Total sales volume % GFB sales volume % The overall CIS+ industry size was reduced, and consumers began downtrading to mid-price and value products. The GFB sales volume remained stable as LD captured consumer downtrading from the sub-premium price category. In Russia, LD and Glamour contributed to continued sales volume growth, and JTI demonstrated its market leadership with a competitive pricing strategy. Rest of the World CIS+ 49.3% (Unit: billions of cigarettes) 2009 Year-on-year change Total sales volume % GFB sales volume % Excluding the impact of specific events in Iran and the Philippines, JTI s total sales volume and GFB sales volume grew strongly, driven by Turkey and the Middle East. In Turkey, Winston, Monte Carlo and LD all increased market share, driving JTI s volume growth ahead of its competitors. Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 29

32 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations Strong GFB Portfolio GFB Sales Volume Comparison between 2009 and 2008 (excl. specific events*) Price segment Volume/Year-on-year growth (Unit: billions of cigarettes) 2008 Act specific events* (7.8) 2008 excl. specific events* 237.7* Brands % of total volume Year-on-year change Prestige (0.9) Sobranie 0.3% (37.5%) Premium (1.8) Camel, Mild Seven, Benson & Hedges, Silk Cut 17.3% (2.4%) Sub-Premium 3.1 Winston, Glamour 30.4% 2.4% Mid/Value 5.3 LD 7.9% 18.2% 2009 Act Total GFB 56.0% 2.4% * For the purpose of comparison, the table above takes into account specific circumstances in Iran and the Philippines, therefore 2009 specific events are excluded from 2008 total volume correspondingly. GFB achieved 2.4% growth in adjusted total sales volume. LD, our mid-price/value brand, drove GFB growth, performing strongly in Russia, Poland, Ukraine and Turkey. Winston and Glamour, our sub-premium brands, achieved 2.4% growth in adjusted total sales volume. In South & West Europe, Winston performed strongly due to enhanced packaging and new product launches. Glamour achieved 7.9% growth, driven by Russia. Prestige and premium brands struggled due to the accelerated down-trading trend. However, JTI continues to invest in these brands to ensure that they are well positioned for the long term. Security of Quality Leaf Supply The acquisition of leaf suppliers improved JTI s business fundamentals by providing enhanced capabilities from leaf to finished products. The integration of suppliers is proceeding according to schedule. Security of Quality Leaf Supply Direct Relationship with Tobacco Growers Improved Quality of Leaf Enhanced Talent Pool In 2009, JTI decided to improve its leaf supply and strengthen its capability to procure Brazilian, African and US leaf through two acquisitions in Brazil, one in Africa, and a joint venture in the US. Key Benefits Actively manage the leaf-tobacco supply chain in anticipation of increased regulation in the sector. Work directly, and build relationships with farmers and other related parties, leading to further improvements in the quality of leaf tobacco. enhance the JT Group s talent pool and expertise in the area of leaf tobacco procurement. 30

33 Strategies and Specific Measures Quality top-line growth is JTI s overriding priority. JTI remains committed to deploying its key strategies under the guiding principle of continuous improvement. 5,000 4,000 3,000 2,000 1,000 Build and nurture outstanding brands Continue to enhance productivity Sharpen focus on responsibility and credibility Develop human resources as a cornerstone of growth JTI s strong foundation will lead sustained mid- to long-term growth. In 2009, our commitment to top-line growth enabled JTI to overcome the challenging economic environment and deliver another solid set of results, achieving 15% EBITDA growth at constant rates of exchange. Our strong brand portfolio will enable us to grow market share, and we will continue to invest in GFB particularly, in order to ensure long-term growth. Given the current economic uncertainties, we will continue to monitor the economic situation closely in 2010 and are prepared to adapt as we see necessary. JTI will accelerate its growth by making the most of its strong business foundation supported by its geographic profile and competitive edge in brands and people. We will continue to be the JT Group s profit growth engine, aiming to achieve the target under the JT-11 medium-term business plan of EBITDA growth of at least 10% CAGR at constant rates of exchange. EBITDA and EBITDA Margin Growth Rate (Millions of US dollars) 10% EBITDA EBITDA Margin * Based on the assumption that the exchange rate of the previous year is applied. 27% CAGR 1, , ,452 35% 3,967 At constant rates of exchange * 31% 2, (%) 8 Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 31

34 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations Pharmaceutical Business In the pharmaceutical business, JT will continue to build world-class, unique R&D capabilities and reinforce its market presence through innovative drugs by devoting efforts to increasing and advancing compounds in a late phase of clinical trial and enhancing the R&D pipeline, so that it can pursue a high-value added business based on the development of world-class innovative drugs. FY 3/2010 Business Performance Summary Net sales 44.1 billion down 12.7 billion EBITDA 9.7 billion down 14.5 billion Operating loss 13.6 billion down 14.6 billion Noriaki Okubo President, Pharmaceutical Business Net sales and profits in FY 3/2010 declined due to the absence of the upfront fee revenue and milestone revenue that boosted the results of FY 3/2009. One-time revenues in FY 3/2009 Upfront fee revenue related to anti-osteoporosis drug JTT-305, which was licensed to Merck & Co. of the United States in FY 3/2009 Milestone revenue associated with progress in the development of anti-dyslipidemia compound JTT-705, which was licensed to Roche of Switzerland in FY 3/2005 Torii Pharmaceutical Co., Ltd. posted a rise in both net sales and profits. Sales of the Futhan protease inhibitor declined. Sales of REMITCH CAPSULES, an anti-pruritus drug for hemodialysis patients, started in March 2009 Sales of anti-hiv drug Truvada and anti-emesis drug Serotone grew. Pharmaceutical Business Net Sales (Billions of yen) Pharmaceutical Business EBITDA (Billions of yen) FY 3/ FY 3/ Torii Pharmaceutical Co., Ltd. (non-consolidated) Royalty income, etc R&D expenses (non-consolidated) Operating income of Torii Pharmaceutical Co., Ltd. (non-consolidated) Royalty income, etc FY 3/ FY 3/

35 R&D Status Some progress was made in the reinforcement of the R&D pipeline in the first year of JT-11. Anti-hepatitis C drug JTK-853 advanced to the clinical development stage abroad, bringing the number of drugs under clinical development to 10, and one more drug moved to a higher stage. Feature & Management Clinical Development (as of April 28) Code Key Indication Stage Rights JTT-705 (oral) Dyslipidemia Phase 2 (Japan) Roche (Switzerland) obtained the rights to develop and commercialize the compound worldwide, with the exception of Japan. (Development stage by Roche: Phase 3) JTT-130 (oral) Dyslipidemia Phase 2 (Japan) Phase 2 (Overseas) JTK-303 (oral) HIV infection Phase 1 (Japan) Gilead Sciences (US) obtained the rights to develop and commercialize this compound worldwide, with the exception of Japan. (Development stage by Gilead Sciences: Phase 3) JTT-302 (oral) Dyslipidemia Phase 2 (Overseas) JTT-305 (oral) Osteoporosis Phase 2 (Japan) Merck (US) obtained the rights to develop and commercialize this compound worldwide, with the exception of Japan. JTS-653 (oral) Pain Overactive bladder Phase 1 (Japan) JTT-654 (oral) Type 2 diabetes mellitus Phase 1 (Japan) Phase 2 (Overseas) JTK-656 (oral) HIV infection Phase 1 (Overseas) JTT-751 (oral) Hyperphosphatemia Phase 2 (Japan) JT obtained the rights to develop and commercialize this compound in Japan from Keryx Biopharmaceuticals (US) (Developed jointly with Torii) JTK-853 (oral) Hepatitis C Phase 1 (Overseas) Strategies and Specific Measures To strengthen the capability for clinical development, including late-stage development, and the capability for drug discovery research To strengthen the capability for clinical development in order to keep up with the progress in clinical development To enhance the capability for drug discovery research in order to reinforce the R&D pipeline To continue concentrating R&D resources mainly on the following four areas: glucose and lipid metabolism; virus research; immune disorders and inflammation; and bone metabolism To enhance licensing activity and strengthen relationships with foreign partners To explore strategic opportunities for licensing agreements in order to rapidly increase the value of the pharmaceutical business. To further develop Torii Pharmaceutical s expertise in its areas of strength To further expand sales of REMITCH CAPSULES and Truvada Tablets To develop expertise in the field of allergens. Out-Licensing Deals FY Code Company 3/2005 JTT-705 (anti-dyslipidemia drug) Roche (Switzerland) 3/2005 JTK-303 (anti-hiv drug) Gilead Sciences (US) 3/2007 Pre-clinical trial stage new compound GlaxoSmithKline (UK) 3/2007 Pre-clinical trial stage anti-body drug candidate MedImmune (US) 3/2009 JTT-305 (anti-osteoporosis drug) Merck (US) Pursuit of Innovative Drugs In-Licensing Deals FY Code Company 3/2004 Three anti-hiv drugs Gilead Sciences (US) 3/2008 JTT-751 (anti-hyperphosphatemia drug) Keryx Biopharmaceuticals (US) We are engaged in an unceasing quest to develop innovative and globally competitive drugs, which we regard as the most critical mission for our pharmaceutical business. The development of new drugs is a tough challenge, which we are tackling with a sense of pride and high motivation. We are endeavoring to make the kinds of achievements that we alone can realize and make available drugs that we alone can offer, so that we may deserve the respect and appreciation of patients and medical staff around the world. Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 33

36 JAPAN TOBACCO INC. Annual Report 2010 Review of Operations Food Business In the food business, we are striving to provide delicious foods that people can consume safely while wishing to provide products that your loved ones want to eat. We will continue to devote our efforts to the three business areas of beverages, processed foods and seasonings, aiming to retain the trust of customers by serving the people s daily lives through our offering of food products. FY 3/2010 Business Performance Summary Net sales billion down 41.3 billion EBITDA 14.5 billion down 2.5 billion Operating loss 13.7 billion down 2.2 billion Mutsuo Iwai Executive Vice President in charge of Food Business Factors behind the net sales decline The net sales decline was mainly due to the withdrawal from the chilled processed food business and the exclusion of some subsidiaries from the consolidated results. Factors behind the EBITDA decline ebitda increased slightly from the previous year in the key business segments* due to a drop in raw materials prices and cost reduction efforts. However, EBITDA for the overall food business declined as a result of one-time losses** in the fishery product business. * Key business segments: Beverages, processed foods and seasonings ** One-time losses: Recording of loss provisions related to delays in the collection of some accounts receivable and valuation losses due to a steep drop in market prices of some products Factors behind the operating income decline Operating income was dragged down mainly due to the decrease in EBITDA. Amortization of goodwill related to the acquisition in June 2009 of additional shares in Green Foods Co., Ltd. by Katokichi Co., Ltd. (now renamed TableMark Co., Ltd.), a JT subsidiary. Food Business Net Sales (Billions of yen) Food Business EBITDA (Billions of yen) FY 3/ FY 3/ Beverage Business 1.2 Beverage Business 0.4 Processed food Business, etc. Chilled foods (Withdrawal in Nov, 2008) Processed food Business, etc. Overhead costs FY 3/ FY 3/

37 In the food business, we are devoting our efforts to the three business areas of beverages, processed foods and seasonings, implementing measures to establish the highest standard of safety management and striving to further strengthen our business foundation for future growth. Beverages Business Number of Vending Machines (Years ended March 31) (Machines) 300, ,000 Business & History Implementing measures to strengthen profitability To strengthen the Roots flagship brand, which is acclaimed for its authentic taste of coffee created by JT s original technology, to mark the 10th anniversary of the brand. To enhance our sales networks led by Japan Beverage Inc., a JT subsidiary responsible for operating vending machines nationwide, and to strive to provide conscientious services. To establish a solid profit base by pursuing entire business efficiency. Feature & Management Strategies and Specific Measures 250, , , , , , Responsibility Business Environment & Risk Processed Foods and Seasonings Businesses Financial Information Convert to high value business To expand the business volume by strategic concentration in staple food products (frozen noodles, frozen and packed cooked rice, frozen breads) and yeast products in seasonings, as high-value products, for which we can make maximal use of acquired technology and product development power in the TableMark group. To strengthen profitability by establishing a strong business foundation, while striving to strengthen the value chain in the whole business process, from procurement, to manufacturing, and production of sales, coupled with acceleration of costcompetitiveness. * The company name of Katokichi was changed to TableMark as of January 1, Food Safety Control Strengthening the institutional capability Established the Tokyo Quality Control Center on the premises of the Food Development Center which is an R&D base Actively incorporating diverse knowledge and viewpoints into food safety control by seeking assessment and advice from outside experts appointed as food safety advisers, and reflecting these in business 35 General Information Improving consumer response Strived to enhance the system that enables collection of customer feedback on a 365-day-per-year basis and quick and appropriate group-wide sharing of the feedback and to actively disseminate information useful for customers, while positively disclosing production plants of products as well as the main origin of raw materials. Fact Sheets Actions for reducing risks Implementing strict audits on factories and promoting the acquisition of the ISO certification (frozen processed food factories of the JT Group and factories in commission acquired the ISO certification) for food safety management systems as well as devoting increased efforts to food defense against external purposeful attack. Enhancing inspection items, and double-check inspection of agricultural chemicals for imported processed foods from China, in China as well as in Japan.

38 JAPAN TOBACCO INC. Annual Report 2010 History of the JT Group Before 1985 JT is a joint stock corporation that was incorporated in April 1985 under the Commercial Code of Japan, pursuant to the Japan Tobacco Inc. Law, or the JT Law. JT s history in Japan dates back to 1898, when the government formed a monopoly bureau to operate the exclusive sale of domestic leaf tobacco. The JT Group s overseas history began with the founding of Austria Tabak in Roughly 70 years later, Tom Gallaher started out in business in Northern Ireland, laying the foundations for Gallaher Group. Meanwhile, R.J Reynolds Tobacco Co. (RJR), which would subsequently create the Camel and Winston brands, was established in 1874 in the US. In this manner, the current JT Group can trace its origins to many different countries and regions such as Austria, Northern Ireland, the US and Japan. The JT Group has a long history and extensive experience in the tobacco business. History in Japan from the early 20th century to 1984, when the Japan Tobacco Inc. Law was enacted. Our history in Japan dates back to 1898, when the government formed a monopoly bureau to undertake the exclusive sale of domestic leaf tobacco. In the early 1900s, the government extended this monopoly to all tobacco products in Japan and to the domestic salt business. On June 1, 1949, the bureau was established and duly named the Japan Tobacco and Salt Public Corporation, or JTS. This corporation helped to ensure the stable supply of tobacco and secure fiscal revenues for the government l Austria Tabak is founded by Emperor Joseph II. l Tom Gallaher sets up his business (Londonderry, Northern Ireland) l The Moscow-based Ducat factory is founded. l The Japanese Monopoly Bureau is established for the sale of domestic leaf tobacco l The Monopoly Bureau becomes the Japan Tobacco and Salt Public Corporation. l Winston launched l HOPE (10) launched as Japan s first domestically produced filter cigarettes. l Silk Cut launched l Mild Seven launched (Japan). l Mild Seven launched internationally. 36

39 The growth in demand for cigarettes in Japan began to slow in the mid-1970s as the result of demographic trends and growing concern about health risks associated with smoking. This trend continued, such that growth in industry sales essentially stopped. In addition to the structural change, the domestic tobacco market was substantially opened to foreign tobacco suppliers, triggering competition between domestic and foreign tobacco products in Japan, and foreign countries stepped up pressure on Japan to take further market-opening measures that were difficult to implement within the framework of the monopoly tobacco sales system. Amid such pressure as well as moves toward the reform of government-run public corporations, a government panel was established in March 1981 to conduct research on the public corporation system. In its third report (July 30, 1982), the panel proposed drastic reform of the monopoly system and the public corporation system. In response to this proposal, the government conducted a comprehensive review of these systems and drafted bills to: l Abolish the tobacco monopoly law in order to liberalize tobacco imports and establish a tobacco business law in order to make necessary adjustments related to the tobacco business. l Abolish the JTS law, reorganize JTS as a joint stock corporation so as to enable it to pursue rational corporate management as much as possible and establish the Japan Tobacco Inc. Law, which provides for a necessary minimum level of regulation in light of the corporation s need to compete with foreign tobacco companies on an equal footing in the domestic market following the liberalization of tobacco imports. These bills were enacted on August 3, 1984 in the 101st session of the Diet and promulgated on August 10 of the same year. In April 1985, JT was founded as an entity that took over the whole of the business operations and assets of JTS l RJR is founded by Richard Joshua Reynolds in Winston, North Carolina. l Camel launched. l Gallaher acquired by the American Tobacco Company l Benson & Hedges is acquired by Gallaher. l Japan Tobacco Inc. Law enacted l Sobranie is registered in London, to become one of the oldest cigarette brands in the world. l Cellophane is introduced by RJR in order to preserve the freshness of tobacco. l Salem launched. l Seven Stars launched, featuring Japan s first domestically produced charcoal filter. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 37

40 JAPAN TOBACCO INC. Annual Report 2010 History of the JT Group In and After 1985 The corporate history of JT is as shown in the table below. As for the international tobacco business, the history before JT s acquisitions of RJR Nabisco s non-us tobacco operations and Gallaher is included. The operating environment for JT changed drastically in just two years after the foundation of the company, as represented by the yen s upsurge following the Plaza Accord in 1985, a tobacco tax hike in 1986 and the abolition of tariffs on imported cigarettes in Amid the yen s upsurge, a price increase for JT products due to the tobacco tax hike coupled with price cuts for imported cigarettes attributable to the tariff abolition eliminated the price advantage of JT products over imported products, which had stood at around 60 to 80 when JT was founded in As a result, competition between JT and foreign tobacco makers intensified in the Japanese market, leading to a decline in JT s market share from 97.6% in fiscal 1985 to 90.2% in fiscal To cope with the rapid deterioration of the operating environment, JT carried out rationalization measures to enhance its cost-competitiveness and pursued diversification while implementing measures to strengthen its marketing capability April l Japan Tobacco Inc. established. (Japanese tobacco market opened to foreign tobacco manufacturers.) l The Business Development Division established to promote new businesses. l The Business Development Division is later reorganized into operational divisions engaged in the food and pharmaceutical businesses, finishing in July April l Import tariffs on imported cigarettes abolished September l The Central Pharmaceutical Research Institute established to enhance in-house research capabilities. October l Government releases first tranche of outstanding JT shares for initial public offering (394,276 shares offered at 1,438,000 yen apiece). l JT stock listed on the first sections of stock exchanges in Tokyo, Osaka and Nagoya. November l JT stock listed on stock exchanges in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. l Acquisition of Yelets (Russia). May l Head office moved back to Minato-ku from Shinagawa-ku following completion of new head office building. l Peter I launched (Russia) May l JT acquires the non-u.s. tobacco business of RJR Nabisco Inc. July l JT acquires the food business of Asahi Kasei Corporation, including Asahi Foods and seven other subsidiaries. October l Under a business tie-up between JT and Torii Pharmaceutical Co., Ltd., the two companies R&D operations related to medical pharmaceuticals are concentrated at JT, while their promotion operations are combined at Torii Pharmaceutical. l LD launched (Russia). l Acquisition of Liggett-Ducat (Russia). l Acquisition of Austria Tabak April l JT terminates a licensing contract under which it had exclusive rights to produce and sell Marlboro brand products in Japan and use the Marlboro trademark in the country. June l Acquisition of CRES Neva Ltd. (Russia). April l JT implements a five-for-one stock split in order to expand the investor base, effective April 1, May l Acquisition of AD Duvanska Industrija Senta in Serbia. April l JT acquires all outstanding shares of Gallaher Group Plc. l Glamour launched (Russia, Ukraine, Kazakhstan). 38

41 in order to maintain the domestic sales volume. In the 1990s, JT s competition with foreign rivals in the Japanese market heated up further. Furthermore, overall cigarette demand in Japan peaked out in the latter half of the 1990s due to a contraction of the adult population and growing concern about health problems associated with smoking. Amid the increasingly difficult operating environment for the domestic tobacco business, JT took additional rationalization steps, pursued consolidation of operations in its areas of business diversification and expanded the international tobacco business, thereby strengthening its business foundation. JT significantly strengthened the international tobacco business by acquiring RJR Nabisco s non-us tobacco operations in 1999 and Gallaher in With its international sales volume exceeding its domestic sales volume, the JT Group continues to grow as a global tobacco company. The international tobacco business is the engine of the JT Group s profit growth through its comprehensive brand portfolio which includes Winston, Camel and Mild Seven as well as Benson & Hedges, Silk Cut, LD, Sobranie and Glamour October l JT communication name introduced. June l Government releases second tranche of outstanding JT shares (272,390 shares offered at 815,000 yen apiece). l Acquisition of Tanzanian tobacco production facility. January l JT acquires a majority stake in Katokichi Co., Ltd. through a tender offer. April l JT acquires a majority stake in Fuji Foods Corporation. July l JT concentrates its processed food operations, including frozen food operations and seasonings operations, at the Katokichi Group April l JT ends its salt monopoly business in line with abolition of the salt monopoly system. l The Tobacco Mutual Aid Pension scheme integrated into the Employees Pension scheme. l American Brands spins off Gallaher which becomes Gallaher Group Plc and is listed on the London and New York stock exchanges October l JT repurchases 45,800 own shares to increase its management options May l JTI celebrates its 10th anniversary. June l JTI Leaf Services (US) LLC established. October l Acquisition of leaf suppliers Kannenberg & Cia. Ltda. (Brazil) and Kannnenberg, Barker, Hail & Cotton Tabacos Ltda. (Brazil). November l Acquisition of leaf suppliers Tribac Leaf Limited (UK). l Acquisition of Manchester Tobacco Company Ltd. l Acquisition of AS-Petro (Russia). April l JT signs an agreement with Unimat Corporation (Currently, Japan Beverage Inc.) on a tie-up regarding beverage business. l JT later acquires a majority stake in Unimat. December l JT acquires a majority stake in Torii Pharmaceutical Co., Ltd. through a tender offer. June l Government releases third tranche of outstanding JT shares (289,334 shares offered at 843,000 yen apiece), reducing its stake in JT to the minimum level allowed under law. November March 2005 l JT repurchases 38,184 own shares to increase its management options. January l Katokichi Co., Ltd. was renamed TableMark Co., Ltd. May l Smokeless tobacco product Zerostyle Mint launched (Exclusively in Tokyo) Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information Note: l Main topics of the JT Group. l Main topics of RJR Nabisco s non-us operations before participating in the JT Group. l Main topics of Gallaher before participating in the JT Group. 39

42 Japan Tobacco Inc. Annual Report 2010 Responsibility Corporate Governance Activities Contributing to the Environment and Society

43 Japan Tobacco Inc. Annual Report 2010 Corporate Governance I Basic Concept of Corporate Governance and Basic Information Including Capital Structure and Corporate Attributes 1. Basic Concept JT recognizes that prompt and proper decision-making and business execution are vital to increasing our corporate value and responding appropriately to new challenges to come in the future, as the business 2. Capital Structure Combined equity stakes of foreign shareholders: between 20% and 30% Major Shareholders as of March 31, 2010 Name No. of shares held Equity stake (%) The Minister of Finance 5,001, Japan Trustee Services Bank, Ltd. (Trust Account) 280, The Master Trust Bank of Japan, Ltd. (Trust Account) 219, State Street Bank and Trust Company (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 188, Mizuho Trust and Banking Co., Ltd., re-trusted to Trust & Custody Services Bank, Ltd., as retirement benefit trust assets 169, State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 111, Mellon Bank N.A. as Agent for Its Client Mellon Omnibus U.S. Pension (Standing Agent: Mizuho Corporate Bank, settlement division) 86, Bank of Tokyo-Mitsubishi UFJ 71, Morgan Stanley & Co. Inc. (Standing Agent: Morgan Stanley Securities Ltd.) 64, HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 62, Total 6,255, (Note) In addition, 419,903 own shares are held by JT. 3. Corporate Attributes and social environments change. Based on this recognition, JT has been striving hard to enhance corporate governance as a top management priority. Listed on: First sections of the Tokyo Stock Exchange, the Osaka Securities Exchange and the Nagoya Stock Exchange and the major sections of the Sapporo Securities Exchange and the Fukuoka Stock Exchange Closing month of the annual account book March Business sector Foods Number of employees (consolidated basis) 1,000 or more Net sales (consolidated basis) 1 trillion or more Presence or absence of parent company None Number of consolidated subsidiaries Between 100 and Other Factors which May Materially Affect Corporate Governance The Japan Tobacco Inc. Law (the JT Law ) obligates the government to hold JT shares. As of the end of March 2010, the government held 50.01% of all outstanding JT shares. The Minister of Finance has the authority to supervise JT under the JT Law and Tobacco Business Law. Torii Pharmaceutical Co., Ltd. (hereinafter referred to as Torii Pharmaceutical), which engages in the pharmaceutical business, is a consolidated subsidiary of JT and is listed on the Tokyo Stock Exchange. While JT is responsible for R&D, Torii Pharmaceutical undertakes production and sales. In order to perform these different functions efficiently, the two companies maintain a cooperative relationship. JT respects the need to ensure a certain degree of independence for Torii Pharmaceutical by refraining from undermining the company s business judgment. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 41

44 Japan Tobacco Inc. Annual Report 2010 Corporate Governance II Status of Business Management Organization Concerning Business Decision-Making, Execution and Supervision and Other Corporate Governance Systems 1. Matters Concerning the Organizational Structure and Organizational Management Form of organization Matters concerning directors Chairman of the Board of Directors Number of directors 9 Number of outside directors A company with auditors Chairman None The reason for the adoption of the current organizational system: While there is no outside director, JT selects persons suitable for the post of director in light of the candidates personality, judgment and experiences. In addition, in order to ensure the appropriate exercise of the function of providing advice from the perspective of an outsider that is expected of an outside director, JT has established the Advisory Committee, which comprises 5 outside experts and advises the management team from a broad perspective with regard to how the company should operate in the medium to long term, and other issues of similar importance. In addition, JT has established an objective and neutral management monitoring system based on audits conducted by auditors (the majority of the auditors are outside auditors (all of the three auditors have the status of an independent executive)) from an independent and fair standpoint. There are also the Compensation Advisory Panel and the Compliance Committee, both of which include outside members with expert knowledge. In light of the above, we believe that the existing systems enable adequate monitoring of the execution of business. Our Corporate Governance System Although JT does not have any specific plan to appoint an outside director at the moment, it will continually consider the usefulness of an outside director and the qualifications of candidates. Member of Advisory Committee Hiroyuki Itami Professor, Graduate School of Management of Science and Technology, Tokyo University of Science. Kazuo Inamori Founder and Chairman Emeritus, Kyocera Corporation Sakutaro Tanino Former Japanese Ambassador to India and China /Acting President, Japan-China Friendship Center Tomijiro Morita Chairman of the Board, The Dai-ichi Life Insurance Company, Limited Sakue Mizukoshi President, SEVEN & i Publishing Co., Ltd. (The appointment is effective July 1, 2010.) Matters concerning auditors Presence or absence of Audit Board Number of auditors 4 The Audit Board is in place. Cooperation between auditors and an independent auditor: While auditors and the independent auditor (Deloitte Touche Tohmatsu LLC) conduct audits individually, they endeavor to enhance their cooperation in order to ensure appropriate audits, for example by sharing information on the results of their respective audits and, as necessary, exchange information and opinions with each other. General Meeting of Shareholders Selection or dismissal of members Selection or dismissal of members Selection or dismissal of members Independent Auditors Accounting audit Audit report Report Operational Review and Business Assurance Division Advisory Committee five members (outside members) Report/ Proposal Advice Board of Directors nine members President and Chief Executive Officer Executive Committee Supervision of the performance Introduction of compliance-related matters Review of the policy and the rule relating to compensation for board members and executive officers Compensation Advisory Panel five members (including two outside members ) Accounting audit/operating audit Compliance Committee eight members (including two outside members) Compliance Office Audit Board four members (including three outside auditors) Auditor s Office Lawyers Advice Internal audit Executive Officers Departments Accounting audit/operating audit Group audit Group Companies 42

45 Cooperation between auditors and the internal audit division: While auditors and the Operational Review and Business Assurance Division conduct audits individually, they endeavor to enhance their cooperation in order to ensure appropriate audits, for example by sharing information on the results of their respective audits and, as necessary, exchange information and opinions with each other. Information concerning outside auditors Appointment of outside auditors Number of outside auditors 3 There are outside auditors. There are three outside auditors at JT. Those outside auditors are appointed in light of their experiences and broad perspective in their respective backgrounds. Although one of them, Mr. Koichi Ueda, is the representative director of the Resolution and Collection Corporation, this corporation does not have any business relations with JT. Therefore, Mr. Ueda himself has no direct interest in JT. As well, neither of the other two outside auditors has any direct interest in JT. At JT, auditors including outside auditors exercise an objective and neutral management monitoring function based on audits conducted from an independent and fair standpoint. JT has designated all of the three outside auditors as independent executives based on its judgment that in light of the attributes of them and their close relatives, there is not any risk of conflicts of interest arising between them and ordinary shareholders. Name Supplementary information Reason for appointment Hisao Tateishi Joined the Ministry of Finance in April Appointed director-general of the Kanto-Koshinetsu Regional Taxation Bureau in July Appointed deputy director-general of the Personnel Bureau in July Appointed deputy director-general of the Personnel and Pension Bureau of the Ministry of Internal Affairs and Communications in January Appointed managing director of the Japan Foundation for Regional Vitalization in July 2001, Appointed managing director of the Federation of National Public Service Personnel Mutual Aid Associations (KKR) in July Appointed senior managing director of KKR in September Appointed standing auditor of JT in June 2007 (this appointment remains in effect). Also designated as independent executive. Takanobu Fujita Joined Japan Broadcasting Corp. (NHK) in April Appointed a news commentator at NHK in June Retired from NHK in January Appointed professor at Kansei Gakuin University, School of Policy Studies in April Appointed visiting professor at Kansei Gakuin University, School of Policy Studies (this appointment remains in effect). Appointed auditor of JT in June 2005 (this appointment remains in effect) Also designated as independent executive. Koichi Ueda Enrolled as a student of the Judicial Research and Training Institute in April Appointed public prosecutor in April Appointed Superintending Public Prosecutor of the Tokyo High Public Prosecutors Office in June Retired as public prosecutor in December 2006 at the mandatory retirement age. Registered as an attorney-at-law in January Appointed professor at Meiji University, Law School in April 2007 (this appointment remains in effect). Appointed as representative director of the Resolution and Collection Corporation (RCC) in January Appointed as representative director and president of RCC in March 2009 (this appointment remains in effect). Appointed auditor of JT in June 2009 (this appointment remains in effect). Also designated as independent executive. Other matters concerning major activities of outside auditors: In FY 3/2010, Mr. Tateishi and Mr. Fujita attended all of the 18 meetings of the Board of Directors and the 16 meetings of the Audit Board, and Mr. Ueda attended all of the 13 meetings of the Board of Directors and Mr. Tateishi s appointment is based on the judgment that he is qualified to serve as an outside auditor of JT because of the experiences and broad perspective acquired through his many years of service for the government and on the board of the Federation of National Public Service Personnel Mutual Aid Associations. He was also designated as an independent executive based on the judgment that in light of the attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders. Mr. Fujita s appointment is based on the judgment that he is qualified to serve as an outside auditor of JT because of the experiences and broad perspective concerning political and economic affairs that were acquired through his tenures as a news commentator at NHK and as a university professor. He was also designated as an independent executive based on the judgment that in light of the attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders. Mr. Ueda s appointment is based on the judgment that he is qualified to serve as an outside auditor of JT because of the experiences and broad perspective acquired through his service in the judicial field. He was also designated as an independent executive based on the judgment that in light of the attributes of him and his close relatives, there is not any risk of conflicts of interest arising between him and ordinary shareholders. all of the 12 meetings of the Audit Board since his appointment on June 23, Those outside auditors adequately performed their duties as auditors by asking questions and making statements as necessary. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 43

46 Japan Tobacco Inc. Annual Report 2010 Corporate Governance Matters concerning incentives Provision of incentives for directors Officers eligible for stock option grants Introduction of a performance-linked remuneration system and a stock option scheme Directors, Executive Officers Supplementary information concerning incentives: Remuneration for directors is linked to JT s business performance for each year and the company s medium- and long-term corporate value. Specifically, remuneration for directors who concurrently serve as executive officers comprises basic monthly compensation and an annual bonus linked to the company s business performance in the relevant year, and stock options, the value of which is linked to the medium to long term corporate value of JT, as they are expected to achieve targets of their assigned business through their daily execution of business. Remuneration for directors who do not concurrently serve as executive officers comprises basic monthly compensation and stock options, as they are required to participate in decision-making regarding companywide business strategies aimed at increasing the corporate value of JT and to perform their audit-related duties. As part of remuneration for directors and executive officers, JT introduced a stock option scheme in order to enhance the motivation to contribute to an increase in the corporate value and boost corporate morale. Matters concerning remuneration for directors Means of disclosure Disclosure status Annual securities report, business operation report (business report), etc. The total amount and its breakdown of remuneration payments to all directors is disclosed. The total amount of consolidated remuneration payments to persons who received consolidated remuneration of 100 million or more each. Information concerning remuneration for senior officers: The remuneration payments to senior officers made in FY 3/2010 are as follows: <Total remuneration amount by officer type and by remuneration type and the number of officers concerned> Officer type Total remuneration amount (in millions of yen) Total remuneration amount by remuneration type (in millions of yen) Basic pay Executive bonus Stock option grants Number of officers concerned Directors Auditors (excluding outside auditors) Outside officers Total (Note 1) The amount of executive bonus is the amount of executive bonus that will be paid to directors. (Note 2) The amount of stock option grants is the total amount of stock option grants that was given to directors within FY 3/2010. The following information is disclosed in the 25th annual securities report. Total amount of consolidated remuneration paid to persons who received consolidated remuneration of 100 million or more each. <Policy concerning the remuneration amount and the remuneration calculation method and the method of determining the policy> JT s basic concept of executive remuneration for senior officers is as follows: Setting the remuneration at a level sufficient to secure personnel with superior capabilities Linking the remuneration to business performance so as to motivate senior officers to enhance performance. Linking the remuneration to medium and long-term corporate value Ensuring transparency through the implementation of deliberation at the Compensation Advisory Panel that includes outside experts, introduction of quantitative schemes (annual remuneration quotas and the upper limit on stock option grants) and continuous monitoring based on objective data. In accordance with the above concept, remuneration for senior officers comprises basic monthly compensation and a bonus linked to the company s business performance in the relevant year, and stock options, the value of which is linked to the medium to long term corporate value of JT. Based on deliberation by the Compensation Advisory Panel, whose members include outside experts, the amount of compensation for directors is determined in consultations held by the Board of Directors and that for auditors in consultations held by the Audit Board within the limit approved by the General Meeting of Shareholders. The amount of executive bonuses is determined at a meeting of the Board of Directors in light of the business performance in the relevant business year, based on deliberation by the Compensation Advisory Panel and within the limit approved by the General Meeting of Shareholders. Unlike remuneration for directors, a large portion of which is linked to the business performance of the company, remuneration for auditors comprises only basic monthly compensation in light of the main role of auditors, which is to audit the status of compliance with laws and regulations. 44

47 Support for outside auditors JT is striving to develop an appropriate environment for audits by allocating sufficient staff to the Auditor s Office as an organization supporting the auditors in performing their duties and establishing an adequate information communication system so that auditors, in their capacity as independent agents with a mandate from shareholders, can adequately audit the execution of business by directors and executive officers in order to ensure sound and sustainable growth and maintain and enhance public trust in the company. When directors and executive officers detect any matter that may cause substantial damage to the company, they are due to report it to the Audit Board. Moreover, when directors and employees detect any evidence of malfeasance in financial documents or serious breaches of laws or the company s articles of incorporation, they are due to report it to the Audit Board, along with other relevant matters that could affect the company s management. Auditors are allowed to attend not only meetings of the Board of Directors but also other important meetings. When directors and employees are asked by auditors to compile important documents available for their perusal, to accept field audits and to submit reports, they are due to respond in a prompt and appropriate manner. Directors are due to cooperate with audits and ensure the provision of funds necessary for covering audit-related expenses so as to secure their effectiveness. The Operational Review and Business Assurance Division and the Compliance Office maintain cooperation with auditors by exchanging information. 2. Matters Concerning Functions such as the Execution of Business, Audit and Supervision, Nomination, etc. The Board of Directors meets once a month in principle and on more occasions if necessary, in order to make decisions with regard to the matters specified by laws and regulations and other important matters, to supervise business execution and to receive reports from the directors on the status of business execution. In order to maintain a high quality of business execution, JT has adopted the Executive Officer System, under which executive officers appointed by the Board of Directors execute business in their respective areas of responsibility, in accordance with a companywide business strategy decided by the Board, by exercising the authority delegated to them. In addition, the Chairman of the Board has been positioned as a non-executive director in order to concentrate on the function of supervising management. Moreover, as part of its efforts to enhance corporate governance, JT has established the Advisory Committee, which comprises five outside experts and advises the management team from a broad perspective with regard to how the company should operate in the medium to long term, and other issues of similar importance. Meanwhile, the Executive Committee, comprising the company s President and other members appointed by the President, discusses important management issues particularly management policy and basic plans regarding overall business operations in addition to matters to be referred to the Board of Directors. JT has adopted the Audit Board System, under which auditors, in their capacity as independent agents with a mandate from shareholders, examine the performance of duties by directors and executive officers in order to ensure sound and sustainable growth and maintain and enhance public trust in the company. It should be noted that Mr. Gisuke Shiozawa, one of the auditors, has a significant level of knowledge concerning financial and accounting affairs due to his experience as the head of JT s financing division. The Operational Review and Business Assurance Division, which is responsible for overseeing internal audits, examines and assesses the system for internal management, including the management of group companies, from its objective standpoint as an organization independent from the organizations involved in business execution with due consideration of such viewpoints as relevance, legal compliance, and risk and submits reports and proposals to the President. The division also reports to the Board of Directors. Furthermore, the division is promoting efforts to enhance the audit system for the entire JT Group by cooperating with group companies both in Japan and abroad. JT has employed Deloitte Touche Tohmatsu LLC (DTT) as its independent auditor, and DTT has conducted audits based on the Company Act and the Financial Instruments and Exchange Act. The certified public accountants who audited JT s financial statements for FY 3/2010 and the persons who assisted the auditing work are as follows: (Certified public accountants) Tatsuo Igarashi (five years), Shuichi Momoki (five years), Satoshi Iizuka (three years) * Figures in parentheses represent the number of consecutive years in which the certified public accountants have engaged in the accounting audit of JT. (Assistants for the audit work) Certified public accountants: 11 persons, Junior accountants: 12 persons, Others: 9 persons While auditors, internal audit organizations including the Operational Review and Business Assurance Division, and independent auditors conduct audits individually, they endeavor to enhance their cooperation in order to ensure appropriate audits, for example by sharing information on the results of their respective audits. As for the nomination of candidates for the posts of director and auditor, the Board of Directors makes a decision by taking into consideration the personality, judgment and experiences of the candidates, and then the nominated candidates are proposed at a General Meeting of Shareholders. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 45

48 Japan Tobacco Inc. Annual Report 2010 Corporate Governance III Implementation of Measures Related to Shareholders and Other Interested Parties 1. Status of Efforts to Invigorate General Meetings of Shareholders and Facilitate the Exercise of the Voting Right Sending the notice of a General Meeting of Shareholders at an early date Avoiding scheduling a General Meeting of Shareholders for a date on which many other companies shareholders meetings are concentrated Allowing the exercise of the voting right through electromagnetic means Supplementary information The notice of a General Meeting of Shareholders for 2009 was sent on June 1 of the year and that for 2010 was sent on June 2 of the year. A General Meeting of Shareholders for 2009 was held on June 23 of the year and that for 2010 on June 24 of the year. JT not only allows the exercise of the voting right via the website designated by the company (E-voting) but also participates in an electronic platform for the exercise of the voting right for institutional investors that is operated by ICJ, Inc. 2. IR-Related Activities Periodic briefings for individual investors Periodic briefings for analysts and institutional investors Periodic briefings for overseas investors Publication of IR materials on the website Establishment of a division (appointment of an officer) in charge of IR Supplementary information JT participates in a convention of earnings briefings sponsored by securities exchanges and other organizations several times every year. JT holds briefing sessions after the announcement of earnings at its offices or neighboring facilities. JT holds teleconferences for overseas investors after the announcement of earnings, and JT officials visit overseas investors several times every year to provide briefings. JT publishes information concerning earnings, other timely disclosure materials, materials used at earnings briefings, annual securities reports or quarterly securities reports, and notices of invitation to General Meetings of Shareholders. JT has appointed an officer dedicated to IR at the Media & Investor Relations Division who reports to the executive in charge of communications. Presence or absence of a briefing by the representative director. Not provided Provided Provided Provided 3. Status of Efforts to Respect the Standpoint of Stakeholders Establishment of internal rules, etc. concerning the respect of the standpoint of stakeholders Implementation of environment protection activity, CSR activity, etc. Formulation of the policy concerning the provision of information to stakeholders Supplementary information The JT Group has set itself the mission of creating, developing and nurturing its unique brands to win customer trust, while understanding and respecting the environment and the diversity of societies and individuals, and there is a group-wide consensus on the mission. From the viewpoint of achieving the JT Group Mission, JT engages in such activities as reducing the burden on the environment, making contributions to local communities, tree-planting and forest preservation, and youth education and development, and it publishes the contents of those activities through an annual CSR report. In order to clarify the authorities and responsibilities concerning the handling of various corporate information, JT has established rules concerning information disclosure and strives to ensure timely and appropriate information disclosure. 46

49 IV Basic Concept of the Internal Control System and Development of the System JT has been endeavoring to ensure appropriate business operations through efforts to enhance compliance, internal audits and risk management, and implementing measures to ensure the effectiveness of audits, such as improving arrangements and procedures for reporting the necessary matters to auditors, as is required of a company adopting the Audit Board System. We will continue these efforts while reviewing and revising the current system as necessary, and ensure appropriate business execution by taking the following steps: 1. System to Ensure that Directors and Employees Perform their Duties in Accordance with Laws, Regulations and the Company s Articles of Incorporation With regard to the compliance system, JT has established the Guidelines for Conduct based on internal rules concerning compliance in order to ensure that directors and employees comply with laws, regulations, the company s articles of incorporation, social norms, etc., and set up the Compliance Committee as an organization responsible for ensuring thorough compliance. This committee, headed by the company s Chairman, includes outside experts among its members and reports directly to the Board of Directors. Meanwhile, the Compliance Office is charged with overseeing efforts to improve the company-wide compliance system, identify compliance problems and enhance the effectiveness of the compliance system by enlightening directors and employees about compliance through various compliance education programs. Regarding the internal reporting system (whistle-blower system), JT has a counter through which employees may report any misconduct they have detected. The Compliance Office is charged with investigating reported cases and implementing company-wide measures to prevent the recurrence of misconduct after holding consultations with the departments and divisions concerned. Matters of particular importance shall be referred to the Compliance Committee for deliberation. In order to ensure the reliability of its financial reporting, JT is operating a relevant internal control system that it has established in accordance with the Financial Instruments and Exchange Act. By allocating a sufficient level of staff to the task of evaluating financial results and reporting them, the company is striving to maintain and improve the reliability of its financial reporting. The internal audit system is overseen by the Operational Review and Business Assurance Division, which examines and evaluates systems for supervising and managing the overall operations of the company and the status of business execution from the viewpoints of legality and rationality, in order to protect the company s assets and improve management efficiency. 2. Procedures and Arrangements for Storage and Management of Information on the Performance of Duties by the Directors JT makes sure to properly store and manage the minutes of Annual General Meetings of Shareholders, meetings of the Board of Directors, and meetings of the Executive Committee, in line with laws, regulations and internal rules. Information on other important matters relating to business execution and decision-making are stored and managed by the relevant departments and divisions as specified by internal rules on the allocation of responsibilities and authorities (hereinafter referred to as the Responsibilities/Authorities Allocation Rules ), in accordance with rules on the supervision of the processes of decision making, procurement and accounting. 3. Rules on Management of Risk of Loss and Procedures/Arrangements for Other Matters JT has established internal rules on the management of risk of loss relating to monetary and financial affairs, and ensures that relevant reports are made to the Executive Committee on a quarterly basis. With regard to risk of loss relating to other affairs, the relevant departments and divisions specified by the Responsibilities/Authorities Allocation Rules conduct proper management, identifying risk and reporting it to the Executive Committee or referring it to the Committee for deliberation, depending on the importance of the identified risk. JT has assigned sufficient staff to the Operational Review and Business Assurance Division, which functions as the company s internal audit organization. This division examines and evaluates the internal control systems of JT and JT Group companies in light of the importance of internal control procedures and arrangements and the risks involved from an objective viewpoint, in its capacity as an entity independent of the organizations responsible for business execution, and reports its findings and present proposals to the President, as well as reporting to the Board of Directors. To prepare for possible emergencies, JT has produced a manual for crisis management and disaster response. In the event of an emergency or a disaster, JT is ready to establish an emergency project system under the supervision of the Corporate Strategy Division, and make prompt and proper responses under the leadership of senior management and through close cooperation between the relevant departments and divisions. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 47

50 Japan Tobacco Inc. Annual Report 2010 Corporate Governance 4. System to Ensure that Directors Perform their Duties Efficiently The Board of Directors meets once a month in principle and on more occasions as necessary, in order to make decisions with regard to the matters specified by laws and regulations and other important matters and to supervise business execution. Meanwhile, the Executive Committee, comprising the company s President and other members appointed by the President, discusses important management issues, particularly management policy and basic plans regarding overall business operations of the company, in addition to matters to be referred to the Board of Directors. JT has adopted the Executive Officer System, under which executive officers appointed by the Board of Directors execute business in their respective areas of responsibility, in accordance with a company-wide business strategy decided by the board, by exercising the authority delegated to them. Moreover, in order to ensure that business operations are managed in ways that contribute to the business efficiency and flexibility of the company as a whole, basic matters concerning the company s organization, allocation of duties to officers and staff and the roles of individual divisions are specified by the relevant internal rules. Meanwhile, in order to enable prompt decision-making, the departments and divisions responsible for business execution are specified by the Responsibilities/Authorities Allocation Rules. 5. System to Ensure the Appropriateness of Business Operations within the JT Group The JT Group has set itself the mission of creating, developing and nurturing its unique brands to win customer trust, while understanding and respecting the environment and the diversity of societies and individuals, and there is a group-wide consensus on the mission. We have specified the functions and rules necessary for group management based on a group management policy, in order to optimize the operations of the JT Group as a whole. Moreover, we have been enhancing our systems for compliance (including the internal reporting system), internal audits, financial affairs management, etc. in cooperation with JT Group companies. 6. System for Assisting Auditors and Reporting to Auditors, and Other Systems to Ensure Effective Auditing JT has allocated sufficient staff to the Auditor s Office as an organization supporting the auditors in performing their duties. In addition, the company makes sure to review and reform the staffing structure as necessary based on consultations with the Audit Board. The Audit Board is involved in the selection of personnel of the Auditor s Office in order to ensure the office s independence from directors. When directors or executive officers detect any matter that may cause substantial damage to the company, they are due to report it to the Audit Board. Moreover, when directors and employees detect any evidence of malfeasance in financial documents or serious breaches of laws or the company s articles of incorporation, they are due to report them to the Audit Board, along with other relevant matters that could affect the company s management. As auditors are allowed to attend not only meetings of the Board of Directors but also other important meetings, they usually attend meetings of the Executive Committee. When directors, executive officers or employees are asked by auditors to compile important documents available for their perusal, to accept field audits and to submit reports, they are due to respond to the request in a prompt and appropriate manner. Furthermore, directors are due to cooperate with audits and ensure the provision of funds necessary for covering audit-related expenses so as to secure their effectiveness. The Operational Review and Business Assurance Division and the Compliance Office maintain cooperation with auditors by exchanging information. Meanwhile, JT s basic concept on the exclusion of anti-social elements and its efforts to exclude such elements are as follows: 1) Basic concept on the exclusion of anti-social elements JT is resolved not to have any relations with, and to fight against, anti-social groups and organizations that pose a threat to the order and safety of civil society, and organizations involved in tobacco smuggling or counterfeiting. The company will also never engage in practices that would promote the activities of antisocial elements. If it faces a problem involving such elements, JT will devote company-wide efforts to dealing with it. 2) Efforts to exclude anti-social elements The concept on the exclusion of anti-social elements described above is specified and fully communicated to all employees as part of the company s code of conduct. With the General Administration Division at JT s headquarters assuming the responsibility for supervising efforts to exclude anti-social elements, the officers in charge of those efforts have been assigned to branch offices across Japan, and are cooperating with police, lawyers and other relevant organizations and parties to gather and share information in order to deal with such elements in an organized way. The measures to be taken by JT in response to unjust and unreasonable demands from anti-social elements are specified in the company s manual for corporate defense, which is available for reference at all offices and plants. JT also consistently educates employees, including those working for its affiliates, about the importance of excluding antisocial elements by providing relevant training as necessary. 48

51 Japan Tobacco Inc. Annual Report 2010 Activities Contributing to the Environment and Society The JT Group strives to make contributions to society through a variety of corporate activities. We work to find harmony with our business environment and global environment, and aim to coexist with society as a good corporate citizen. We conduct continuing activities from this viewpoint. Our Approach to Protecting the Global Environment Protecting the global environment is critical to our efforts to fulfill our social responsibility and is a top priority for our corporate management. In accordance with the JT Group Environmental Charter, the JT Group has acted as a good corporate citizen in all of the countries and regions in which it operates and promoted company-wide initiatives to further reduce the environmental impact of its corporate activities. Moreover, we established the JT Group Environmental Action Plan ( ) as a medium-term plan for concrete environmental protection activities, with the aim of realizing the philosophy outlined in the JT Group Environmental Charter. The operational divisions of JT, as well as subsidiaries and affiliates, have been striving to achieve the targets set forth under this medium-term plan. Group Environmental Management The JT Group recognizes that in order to deal with challenges with which the international community as a whole is confronted, such as the preservation of the environment and sustainable utilization of resources, we have to further enhance environmental management of the entire JT Group. Therefore, under the JT Group Environmental Action Plan ( ), we have expanded the scope of environmental Trends in Greenhouse Gas Emissions JT/Japanese subsidiaries (1,000t-CO2) JT (Years ended March 31) Twenty-five Japanese subsidiaries Trends in Water Usage Amount JT/Japanese subsidiaries (1,000 m 3 ) 8,000 6,000 4,000 2,000 7,211 6,579 2,303 2,139 1,977 6, JT (Years ended March 31) Twenty-five Japanese subsidiaries management to cover all consolidated subsidiaries, both in Japan and abroad, and have gradually been introducing an environmental management system. In addition, we have made all consolidated subsidiaries subject to major environmental management targets reduction targets for the emission of greenhouse gases, the water usage and the generation of waste and aim to steadily achieve them. Fight Against Global Warming By setting the target of reducing overall greenhouse gas emissions by 10% in 2012 compared with 2007, we are making active reduction efforts. In 2009, JT achieved a 40.8% reduction compared with 1995 in Japan. Our subsidiaries in Japan achieved a 6.9% reduction compared with 2007 by reducing electricity usage through renewal of refrigeration equipment and introduction of EcoCute systems as well as efforts to make air conditioning management more efficient at Plants and Laboratories. Effective Use of Resources In order to preserve the limited natural resources available, the JT Group is striving to reduce the water usage and the generation of waste and is promoting the reuse and recycling of used materials. Trends in CO2 Emissions per Million Cigarettes JTI (t-million cigarettes) (Years ended December 31) Trends in Waste Generation and Recycling Rate JT/Japanese subsidiaries (1,000 t) (%) Waste Generation Amount for JT Recycling Rate (Years ended March 31) Waste Generation Recycling Rate Amount for twenty-five Japanese subsidiaries Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 49

52 Japan Tobacco Inc. Annual Report 2010 Activities Contributing to the Environment and Society Toward Better Smoking Manners and a More Favorable Smoking Environment (This section only describes activities in Japan.) We aim to help create a society in which smokers and nonsmokers can coexist in harmony. Enshrined in this goal is our wish to see our valued customers fully enjoy smoking at their own discretion and, at the same time, to make sure they avoid causing discomfort to nonsmokers. By engaging in various initiatives, we will fulfill our social responsibility as a tobacco company. Examples of the Various Initiatives Setting Up Smoking Areas We work closely with local governments and facility managers in setting up smoking areas in public facilities such as railway stations and airports, in order to promote coexistence between smokers and nonsmokers. Public smoking area in front of Sakai Station, Osaka TAMAPLAZA TERRACE Smoking Area Campaign Advertising Community Clean-up Event JT has been engaged in the Pick Up and You will Love Your City initiative since May 2004 in an effort to eradicate public littering by raising awareness of the problem and organizing rubbish collection. This initiative is aimed at occasions such as community festivals and other public events and conducted in cooperation with local governments, companies, and volunteers. Since these activities began in May 2004, community clean-up events have been held a total of 1,000 times in all of Japan s prefectures as of April 17, 2010, bringing the number of participating parties to 1,987 and the number of participants to approximately 1.04 million. Advice on Separation of Smoking and Nonsmoking Areas We provide consultation on how to separate smoking and nonsmoking areas within public facilities, commercial facilities and offices in a manner suited to the characteristics of the facilities and the needs of users. In our consulting service, which is free of charge, we offer our know-how and put forward proposals to achieve the kind of separation that would satisfy smokers while giving due consideration to the concerns of nonsmokers. Community Clean-up Event Pick Up and You will Love Your City Smoking Manners Campaign Advertising Since JT believes that improving the smoking manners of individuals is essential to improving those of society as a whole, we are constantly engaged in a campaign to raise awareness about the need for appropriate smoking manners, under the slogan Pay attention, and you can change your manners. The advertisements used in this campaign describe specific everyday situations in which smokers are supposed to show good manners, in order to prompt them to pay attention, think, and act appropriately. For further information about JT s efforts to improve the smoking environment, please access the Smokers Style website. URL: Smokers Style website 50

53 JT Group s Social Contributions The JT Group has strived to make contributions to society in all the countries and regions in which we operate, building our relationship with local communities by acting as a good corporate citizen. We have established various key areas for social contribution activities in the JT Group Social Contribution Policy. 1. JT Group s Social Contributions Policy The JT Group will fulfill its corporate responsibility through making sustained contributions to the communities in which it operates. As a good neighbor, the JT Group will support the regeneration and revitalization of local communities, focusing on: Social Welfare Arts and Culture Environmental Protection Disaster Relief The JT Group will contribute to the development of the local communities in which we operate by selecting the most critical of these four priority areas for each and providing support. Based on this policy, the JT Group will engage in a variety of activities that contribute to society, so that we can build and maintain harmonious relations with local communities while encouraging employees to be involved in such activities themselves. 2. Contributions to Japanese Society Social Welfare As part of our efforts to contribute to the regeneration and revitalization of local communities as a good neighbor, the JT Group is implementing a variety of social welfare programs. The JT Group s major activities in the field of social welfare are as follows: Implementing the NPO Support Projects for Youth Development Providing the Scholarships for Students from Asia Sponsoring the JT Shogi Japan Series Tournament for Kids Sponsoring the JT Honobono concert Organizing Volleyball coaching Making company-owned facilities available for public use The Scholarships for Students from Asia The Volleyball Workshop Arts and Culture The JT Group engages in activities that contribute to the development and advancement of arts and culture. The JT Group s major activities in the field of arts and culture are as follows: Operating the Tobacco & Salt Museum Supporting the training of musicians Operating the Affinis Arts Foundation Operating the JT Biohistory Research Hall Organizing the JT Forum cultural events The Affinis Arts Foundation (Photo: K. Miura) Reforestation and Forest Preservation Activities The Tobacco & Salt Museum Environmental Protection In appreciation of what our natural environment brings to our business and out of consideration for its preservation, the JT Group engages in environmental protection activities such as reforestation, forest preservation and street cleanup campaigns. The JT Group s major activities in the field of environmental protection are as follows: Conducting reforestation and forest preservation activities Organizing the Pick Up and You will Love Your City community cleanup campaign Conducting local community cleanup activities Disaster Relief The JT Group conducts disaster relief activities by providing assistance to the affected areas through group-wide cooperation. Such activities are conducted through the JTI Foundation. Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information 51

54 Japan Tobacco Inc. Annual Report 2010 Activities Contributing to the Environment and Society 3. Social Contributions Abroad The JT Group engages in a variety of philanthropic activities around the world, contributing to the development of the local communities in which it operates. JTI, the international tobacco business arm of the JT Group that controls tobacco production, marketing and sales in more than 120 countries, plays the central role in our worldwide philanthropic activities. In addition to its own philanthropic activities, JTI helps to tackle critical challenges faced by local communities as part of group-wide initiatives such as the reforestation and forest preservation programs that are underway in Africa. JTI Corporate Philanthropy JTI s Corporate Philanthropy programs enable the voluntary contribution of resources financial, material and human to causes that are of general benefit to society and address a specific need. There are three main focus areas for JTI s programs: providing social welfare to disadvantaged groups; arts and cultural support; and disaster relief. Initiatives in the first two categories tend to be local and are led and funded by individual markets. The third is more international in scope response to disasters anywhere in the world and is normally funded by the JTI Foundation. The programs highlighted below are broadly representative of engagements undertaken by the Company and its employees in Social Welfare Many JTI entities have initiated programs that benefit disadvantaged groups. The needs and opportunities vary by country and community but there are common themes. For example, JTI Belgium is active in this area, working closely with the United Fund for Belgium to provide free meals and other forms of assistance to the elderly and underprivileged throughout the country. JTI Russia has partnered with local authorities in Moscow, Yelets, and St. Petersburg, to support pensioners and World War II veterans. The Silver Spring and Autumn of Hope initiatives provide food, clothes and other durable goods to its elderly citizens. JTI also assists in developing social and cultural events for the elderly, and such activities will spread to the other regions of Russia during On the other side of the world, JTI Malaysia has similar projects that contribute both financially and via other assistance to 16 elderly welfare homes that provide shelter for those no longer able to look after themselves. This activity also provides JTI employees with the opportunity to volunteer their time as part of their contribution of giving back to the communities in which they work. JTI UK supports Crisis UK. a charity that helps single homeless people to develop and acquire qualifications in order to reintegrate them into society. This support enables the charity to run an extra 800 educational classes a year in numeracy, literacy and IT skills. Education of underprivileged groups is one recurring theme in JTI s social welfare agenda. Promoting social diversity is another appropriate for a Company that takes pride in its ability to assimilate talent from every corner of the world. In Spain, JTI Iberia created and launched a new project called HERMES in close cooperation with UNED, the Spanish Government s Open University. This is a national initiative to promote the social and workforce integration of immigrant groups in a country where over 11% of the population is non-native. The intent is to remove barriers that adult newcomers face in settling-in and enable them to become productive members of the community by helping validate college degrees from their own countries or complete their studies in Spain. Social Shop workers supported by JTI Belgium Crisis students with their tutor in a JTI UK supported class 52 JTI Malaysia supports 16 elderly welfare homes JTI Iberia supports adult educational program with UNED

55 Arts and Culture In the UK, JTI is an important partner in bringing exhibitions of artistic, historical and academic importance to UK audiences through its long term support of exhibitions in the Sackler Galleries at the Royal Academy of Arts. In autumn 2009, JTI UK also supported an exhibition of the work of Anish Kapoor, one of the most influential and pioneering artists of his generation. The exhibition attracted a record number of visitors and was the largest ever devoted to a living artist at the Royal Academy. In Russia, JTI helps national heritage stay alive by funding the creation of an Internet-based digital library of art treasures held in the renowned Pushkin State Museum in Moscow. Space constraints allowed only a very small proportion of its huge 750,000 piece collection to be on display at any one time. In 2008 through 09, JTI s support enabled the uploading of 1,200 paintings that can now be viewed on-line. JTI put considerable resources into making music more international and accessible in Examples include JTI Russia s long-term cooperation with the Mariinsky Theater led by Maestro Valery Gergiev. The company provides support to the Theater as well as to two major programs run by the Mariinsky: the annual Moscow Easter Festival and Stars of the White Nights Festival. Both events have become highlights of the cultural calendar in Russia and beyond. In addition, JTI France supported a concert at the renowned Théâtre des Champs Elysées in Paris by the International Music Academy of Switzerland, an institute that attracts and develops young artists from all over the world that is led by Japanese conductor Seiji Ozawa. JTI Italy, a partner of the Teatro alla Scala in Milan, supported La Scala Japan Tour 2009 during which the world famous opera house staged operas and concerts at two of Tokyo s leading theatres. In Canada, JTI-Macdonald Corp. partners with the Japanese Canadian Cultural Centre to celebrate the joint heritage of Canada and Japan. The cultural and historical links between the two nations date back to the 1880s and more than 100,000 people of Japanese descent live in Canada today. JTI-Macdonald Corp. has supported the Centre for five years and its contributions fund a rich mix of traditional events, musical performances and film screenings, art and history exhibitions and language classes. JTI UK supported an exhibition of the work of Anish Kapoor JTI France supported the IMAS concert conducted by Seiji Ozawa in 2009 JTI Russia supports the Mariinsky Theater led by Maestro Valery Gergiev JTI Italy was a partner of the Teatro alla Scala Japan Tour in 2009 Feature & Management Business & History Responsibility Business Environment & Risk Financial Information Fact Sheets General Information JTI-Macdonald s partnership with the Japanese Canadian Cultural Centre in Canada 53

56 Japan Tobacco Inc. Annual Report 2010 Activities Contributing to the Environment and Society Disaster Relief The Swiss-based JTI Foundation is an important channel for the Company s support for victims of natural disasters. It works closely with governments, NGOs and emergency relief organizations around the world. The Foundation made substantial contributions to some of the worst disasters to befall the global community in In Italy, it assisted the government in a twelve month restoration and reconstruction program to help the population of the Abruzzo region recover from the devastating earthquake that struck in April. In September, it donated funds for two leading relief organizations to provide immediate support to people displaced by the typhoon that struck the Philippines. It also supported procurement and distribution of relief goods after monsoon rains took a heavy toll on human life and extensively damaged property in India. The Foundation puts a focus on proactive initiatives with a long-term perspective. It is a principal supporter of the Turkish-based GEA search and rescue service, usually among the first to respond to international appeals for help when disaster strikes. JTI Foundation also signed a four year partnership agreement with the ETH Zürich (Swiss Federal Institute of Technology Zurich) to support creation of a uniform independent standard for measuring earthquake hazards in the Middle East, Caucasus and North Africa. The goal is to combine advances in scientific, engineering and information processing capabilities to improve prediction and risk assessment in ways that will enable national governments and other institutions in the region to take additional steps to protect lives and infrastructure in the event of major incidents. JTI Foundation and JTI Philippines supported typhoon victims in the Philippines 54