JAPAN TOBACCO INC.

Business Overview

From Four Business Segments to Two

In the fiscal year ended December 31, 2021 (FY2021), Japan Tobacco Inc. (JT) reported 4 business segments: the Domestic Tobacco Business, International Tobacco Business, Pharmaceutical Business, and Processed Food Business.

In 2021, JT itself handled manufacturing and sales in the Domestic Tobacco Business, while companies including TS Network were responsible for distribution. The International Tobacco Business was centered on JT International S.A. and operated globally. In the Pharmaceutical Business, JT mainly conducted research and development, while Torii Pharmaceutical Co., Ltd. handled manufacturing, sales, and promotion. In the Processed Food Business, companies including TableMark Co., Ltd. handled frozen and shelf-stable foods, seasonings, bread, and other products. (Annual Securities Report, 2021)

Of these 4 businesses, the Domestic Tobacco Business and International Tobacco Business were integrated into the Tobacco Business from 2022. The 2021 Annual Securities Report stated that the businesses would be unified from the following year to strengthen JT's response to changes in the business environment and pursue sustainable growth.

As a result, from 2022 to 2024, JT operated through 3 business segments:

Tobacco Business, Pharmaceutical Business, and Processed Food Business

Following the integration, the Tobacco Business was reorganized into a global operation centered on JT International S.A., spanning the previous domestic and international classifications. (Annual Securities Report, 2022)

Expansion of the U.S. Tobacco Business in 2024

In 2024, JT acquired Vector Group Ltd. (VGR), which operates a tobacco business in the United States, and made it a wholly owned subsidiary in October. VGR markets brands including Montego and Eagle in the U.S. discount segment. (Annual Securities Report, 2024)

The number of reportable segments remained at 3, but the Tobacco Business significantly expanded its operating base in the United States.

Divestiture of the Pharmaceutical Business in 2025

In 2025, JT divested its Pharmaceutical Business, further changing its business portfolio.

In May, JT reached an agreement with Shionogi & Co., Ltd. on the succession of the Pharmaceutical Business and the transfer of its shares in Torii Pharmaceutical Co., Ltd. JT transferred all of its Torii Pharmaceutical shares in September and completed the divestiture of the Pharmaceutical Business in December. (Annual Securities Report, 2025)

As a result, JT's reportable segments for FY2025 were reorganized into 2 categories:

Tobacco Business and Processed Food Business

(Annual Securities Report, 2025)

Across the five years, the business structure changed as follows:

Domestic Tobacco / International Tobacco / Pharmaceutical / Processed Food
→ Tobacco / Pharmaceutical / Processed Food
→ Tobacco / Processed Food

Within the Tobacco Business, JT first integrated its domestic and international operations and then expanded its U.S. business through the acquisition of VGR. The Pharmaceutical Business was subsequently transferred outside the Group. These changes in the business portfolio are also reflected in the management strategy and financial figures discussed below.

Business Environment and Strategy

Management Policy and Business Environment

Throughout the five-year period, the 4S Model remained the foundation of JT's management approach. It is based on balancing responsibilities to 4 stakeholder groups—consumers, shareholders, employees, and society—with consumers at its core, while prioritizing business investments that contribute to sustainable profit growth over the medium to long term. In FY2021, the Tobacco Business was already positioned as the core and driver of profit growth. (Annual Securities Report, 2021)

In 2022, JT also introduced the JT Group Purpose, “Fulfilling Moments, Enriching Life,” as a common Purpose for the Group. The Tobacco, Pharmaceutical, and Processed Food businesses also established their own respective Purposes. (Annual Securities Report, 2022)

While maintaining these fundamental policies, the focus of growth investment became increasingly concentrated on reduced-risk products (RRP), products with the potential to reduce health risks associated with smoking. In FY2022, JT identified heated tobacco as a future growth area and set out to accelerate the global expansion of Ploom X. In FY2023, it explicitly announced large-scale strategic investment in heated tobacco sticks (HTS), and by FY2025 it had advanced to a strategy of establishing Ploom as a global brand and expanding its category share. (Annual Securities Reports, 2022, 2023, and 2025)

The key external uncertainties also changed over the period. In FY2021, COVID-19, the international political situation, and exchange-rate fluctuations were among the major uncertainties. In later years, geopolitical risk, hyperinflation, foreign exchange, inflation, interest rates, and business continuity risks in certain regions became more prominent. (Annual Securities Reports, 2021, 2023, and 2025)

The basic approach centered on the 4S Model remained unchanged, while growth investment shifted more clearly toward heated tobacco. At the same time, management's view of the operating environment shifted from the COVID-19 pandemic toward geopolitical risks, inflation, foreign exchange, and related issues.

Sustainability Approach and Initiatives

For FY2023, JT identified material issues based on the 4S Model and the JT Group Purpose and established the JT Group Sustainability Targets. It also disclosed a framework in which material matters are addressed by the Board of Directors and considered under the leadership of the Chief Sustainability Officer. (Annual Securities Report, 2023)

For climate change, JT set targets including net-zero greenhouse gas emissions across its value chain by 2050 and carbon neutrality in its own operations by 2030. (Annual Securities Report, 2023)

JT maintained the same framework in FY2024. By FY2025, disclosure had expanded to include mechanisms for reporting target updates and performance to the Board of Directors, responses to the Corporate Sustainability Reporting Directive (CSRD) and Sustainability Standards Board of Japan (SSBJ) standards, and management of non-financial data. (Annual Securities Report, 2025)

Note: A dedicated section on sustainability approach and initiatives was newly introduced in Annual Securities Reports following revisions to Japan's disclosure rules in January 2023.

Business Risks

Across the five years, JT's business risk disclosures covered a wide range of risks characteristic of a global company, including its tobacco-centered earnings structure, regulations and taxation in various countries, foreign exchange, litigation, business expansion, natural disasters, and supply chains.

Among these, dependence on major markets and risks specific to the Tobacco Business remained particularly important.

In FY2021, JT noted that tobacco revenue from major markets such as Japan, Russia, and the United Kingdom made a significant contribution to Group performance. It therefore identified risks arising from declining tobacco demand, tax increases, regulation, changes in political, economic, social, and legal systems, and events such as riots, terrorism, and war that could affect these markets. (Annual Securities Report, 2021)

This basic assessment remained unchanged in later years. The 2024 Annual Securities Report also explicitly cited dependence on major markets such as Japan, Russia, and the United Kingdom, together with country risks from changes in local political, economic, social, and legal systems and from riots, terrorism, and war.

RRP Uncertainty Added to Demand and Regulatory Risks

For combustibles, including cigarettes, declining demand, tax increases, tighter regulation, and price competition remained ongoing risks.

RRP was positioned as a growth area, but also as a business affected by regulation and taxation, product development, consumer preferences, and the pace of market growth.

The 2025 Annual Securities Report stated that tighter regulation was also spreading to products that do not use tobacco leaf, including E-Vapor and Modern Oral products. JT also recognized that RRP market growth is affected by product innovation, consumer preferences, regulation, and taxation. (Annual Securities Report, 2025)

For JT, RRP is both a focus of growth investment and an area with uncertainty regarding future market size, the competitive environment, and the direction of regulation.

Geopolitical, Foreign-Exchange, and Continuity Risks

With a large share of its operations conducted overseas, JT remained exposed to fluctuations in foreign exchange rates and interest rates.

The results, assets, and liabilities of overseas subsidiaries are translated into yen, so exchange-rate movements affect the consolidated financial statements. Interest-rate movements also affect finance costs, financial assets and liabilities, and pension-related items. (Annual Securities Report, 2024)

Geopolitical risks also became more prominent over the five-year period.

At the time of filing the 2021 Annual Securities Report, JT had temporarily suspended new investment and marketing activities in the Russian market in response to the Russia-Ukraine situation. It also referred to the possibility of temporarily suspending manufacturing if the business environment did not improve.

Subsequent Annual Securities Reports continued to identify country risks, including war and political instability, as well as disruption to supply chains and distribution networks.

Litigation Risk Resulted in a Major Actual Loss

Litigation related to tobacco products has long been an important risk for JT.

In FY2021, litigation concerning smoking and tobacco products was ongoing in multiple jurisdictions, including Canada. (Annual Securities Report, 2021)

The 2023 Annual Securities Report also discussed lawsuits alleging damages from smoking, the marketing of tobacco and e-cigarette products, and exposure to tobacco smoke.

This risk resulted in an actual financial impact in FY2024, when JT recorded a loss of JPY 375.6 billion for settlement costs related to litigation involving its Canadian subsidiary. This was the year in which litigation risk moved beyond disclosure of a future possibility and became an event that significantly affected profit.

Acquisitions and Business Expansion Also Carry Risks

Corporate acquisitions and business expansion are also among the significant risks identified by JT.

If an acquired business fails to achieve the expected results, or if unforeseen problems emerge after an acquisition, earnings may be adversely affected and goodwill or intangible assets may become impaired.

The acquisition of VGR in 2024 expanded JT's U.S. business, while also involving risks related to the acquisition price, integration, future earnings, and impairment.

Non-Financial Risks Across Operations and Supply Chains

Because JT manufactures and sells tobacco and food products around the world, its disclosures also cover a broad range of business continuity risks.

Natural disasters, infectious diseases, infrastructure outages, political instability, fires, and explosions may affect manufacturing sites, distribution networks, and supply chains. (Annual Securities Report, 2024)

JT also identifies the possibility that environmental or human-rights issues and legal violations in its supply chain could affect its social credibility and business performance. (Annual Securities Report, 2023)

These disclosures show that JT's risk coverage extends beyond conventional financial and market risks to business continuity and social responsibility as a global company.

Risk Management Became More Explicit as ERM

JT already had an integrated risk management framework in place in FY2021.

By FY2024, the process was disclosed more explicitly as enterprise risk management (ERM), covering risk identification, assessment of impact and likelihood, selection of key risks, response planning, and monitoring.

Across the five years, the main risks remained contraction and regulation of the tobacco market, dependence on major markets, geopolitical and foreign-exchange risks, litigation, acquisitions, and business continuity. These were joined by regulatory and market uncertainties associated with RRP growth, as well as supply-chain and human-rights issues.

On the management side, the integrated risk management approach that had already been in place was presented more explicitly as ERM.

Management's Analysis of Financial Position, Results, and Cash Flows

In addition to financial measures defined under IFRS, JT consistently used non-GAAP measures such as adjusted operating profit and indicators on a constant-currency basis. Across the five years, the underlying approach was consistent: to assess business performance excluding foreign-exchange effects and temporary or special factors. (Annual Securities Reports, 2021–2025)

Management's explanations repeatedly distinguished reported profit from profit movements excluding foreign-exchange effects. Adjusted operating profit at constant currency increased by 22.9% in FY2021, 9.0% in FY2022, and 5.2% in FY2023. However, the effect of foreign exchange differed by year: it was positive in FY2021 and FY2022, while some currencies had a negative effect in FY2023. As a result, adjusted operating profit including foreign-exchange effects remained broadly unchanged year on year in FY2023. (Annual Securities Reports, 2021–2023)

In FY2024, adjusted operating profit at constant currency increased by 7.5%, while adjusted operating profit including foreign-exchange effects increased by 3.3%, indicating profit growth on an underlying business basis. However, after JT recorded settlement costs related to smoking-and-health litigation involving its Canadian subsidiary, operating profit decreased by 51.9% and profit attributable to owners of the parent decreased by 62.8%. (Annual Securities Report, 2024)

In FY2025, higher revenue in the Tobacco Business and Processed Food Business lifted revenue to JPY 3,467.7 billion, while adjusted operating profit at constant currency increased by 24.9%. Adjusted operating profit including foreign-exchange effects also increased by 21.5% to JPY 902.2 billion, although foreign exchange continued to have a negative effect. Operating profit increased by 175.9%, reflecting both the increase in adjusted operating profit and the absence of the prior year's provision for Canadian litigation losses. (Annual Securities Report, 2025)

Management thus separated changes by business from foreign-exchange effects and temporary factors such as litigation. In FY2025, the Pharmaceutical Business was classified as a discontinued operation, and the 2025 Annual Securities Report therefore restated the 2024 operating results on a continuing-operations basis. (Annual Securities Report, 2025)

Material Agreements

From 2021 through 2023, JT reported that there were no applicable material management agreements. (Annual Securities Reports, 2021–2023)

This changed in 2024, when JT disclosed the acquisition of VGR to expand its presence in the U.S. market. In 2025, this was followed by the succession of the Pharmaceutical Business to Shionogi & Co., Ltd. and the transfer of JT's shares in Torii Pharmaceutical Co., Ltd. (Annual Securities Reports, 2024 and 2025)

The expansion of the U.S. Tobacco Business in 2024 and the divestiture of the Pharmaceutical Business in 2025 show that JT's business portfolio changed significantly over a short period.

Research and Development Activities

Group-wide research and development expenses increased as follows from FY2021 through FY2024:

JPY 65.0 billion → JPY 70.8 billion → JPY 75.1 billion → JPY 78.6 billion

(Annual Securities Reports, 2021–2024)

In FY2024, the breakdown was JPY 30.4 billion for the Tobacco Business, JPY 33.9 billion for the Pharmaceutical Business, and JPY 900 million for the Processed Food Business. The total also included JPY 13.5 billion in research and development expenses for D-LAB and other activities.

For FY2025, JT reported JPY 52.4 billion in research and development expenses from continuing operations, including JPY 34.0 billion for the Tobacco Business and JPY 800 million for the Processed Food Business. (Annual Securities Report, 2025)

The decrease from JPY 78.6 billion in FY2024 to JPY 52.4 billion in FY2025 was affected by the classification of the Pharmaceutical Business as a discontinued operation. The figures therefore cannot be compared simply as a reduction in research and development investment.

Financial Overview

The financial discussion focuses mainly on the consolidated financial statements, which show movements for the Group as a whole. The non-consolidated financial statements are supplemented only for items where reviewing the parent company alone is meaningful, such as dividends.

Consolidated Statement of Financial Position

Total assets increased from JPY 5,774.2 billion in FY2021 to JPY 8,419.2 billion in FY2025. The largest movement occurred in FY2024, when total assets increased from JPY 7,282.1 billion in the previous year to JPY 8,370.7 billion. (Annual Securities Report, 2025)

JT acquired VGR in 2024, and the resulting expansion of the consolidation scope was also reflected in the statement of financial position. Total equity increased from JPY 2,886.1 billion in FY2021 to JPY 4,115.4 billion in FY2025.

The ratio of equity attributable to owners of the parent decreased from 54.07% in FY2022 to 45.00% in FY2024, before recovering to 48.54% in FY2025. (Annual Securities Report, 2025)

Total liabilities decreased by JPY 218.2 billion from the end of the previous year in FY2025. JT cited factors including a decrease in provisions following the initial payment under the Canadian litigation settlement. Equity increased against the backdrop of higher retained earnings from profit for the year and foreign currency translation differences for foreign operations. (Annual Securities Report, 2025)

Consolidated Income Statement

Revenue increased over the five-year period, but profit did not follow the same pattern.

In FY2024, JT recorded JPY 375.6 billion in losses related to Canadian litigation in connection with settlement proceedings involving its Canadian tobacco subsidiary. (Annual Securities Report, 2024)

As a result, operating profit and profit for the year declined sharply even though adjusted operating profit had increased.

In FY2025, operating profit and profit for the year recovered substantially, partly reflecting the absence of the previous year's litigation-related loss.

The major profit movements from FY2024 to FY2025 were therefore strongly affected not only by ordinary business activities but also by this large one-time loss.

The Pharmaceutical Business was also classified as a discontinued operation in FY2025.

In the “Key Financial Indicators” section of the 2025 Annual Securities Report, revenue and profit before income taxes for FY2024 and FY2025 were presented on a continuing-operations basis. (Annual Securities Report, 2025)

Accordingly, FY2024 revenue of JPY 3,149.8 billion as reported in the 2024 Annual Securities Report differs in scope from FY2024 revenue of JPY 3,056.7 billion presented as comparative information in the 2025 Annual Securities Report.

Consolidated Statement of Cash Flows

Cash flows from operating activities remained positive throughout the five-year period:

JPY 598.9 billion → JPY 483.8 billion → JPY 566.3 billion → JPY 630.0 billion → JPY 514.1 billion

(Annual Securities Report, 2025)

In FY2024, profit for the year decreased substantially, while cash flows from operating activities reached JPY 630.0 billion, the highest level in the five-year period.

Cash flows from investing activities were:

-JPY 97.5 billion → -JPY 101.8 billion → -JPY 125.4 billion → -JPY 439.8 billion → -JPY 265.0 billion

(Annual Securities Report, 2025)

The significant increase in cash outflows in FY2024 reflected the acquisition of VGR, including JPY 265.7 billion in payments for business combinations. (Annual Securities Reports, 2024 and 2025)

In FY2025, JT also recorded JPY 42.8 billion in proceeds from the divestiture of the Pharmaceutical Business. (Annual Securities Report, 2025)

The changes in JT's business portfolio were therefore also reflected in cash flows: acquisition-related outflows in 2024 and divestiture-related inflows in 2025.

Financing Activities and Cash Balance

Cash flows from financing activities were:

-JPY 353.1 billion → -JPY 306.2 billion → -JPY 270.5 billion → -JPY 94.9 billion → -JPY 475.5 billion

(Annual Securities Report, 2025)

In FY2025, JT repaid long-term borrowings and paid dividends while also raising funds through bond issuances and other financing activities. (Annual Securities Report, 2025)

Cash and cash equivalents at the end of each year were:

JPY 721.7 billion → JPY 866.9 billion → JPY 1,040.2 billion → JPY 1,084.6 billion → JPY 831.1 billion

(Annual Securities Report, 2025)

The balance increased continuously from FY2021 through FY2024 before declining in FY2025.

Major Changes Reflected in the Notes

Over the five-year period, major changes in the financial statements were closely linked to the notes explaining their background. In 2024, the notes covered the business combination resulting from the VGR acquisition and the losses related to Canadian litigation. In 2025, they covered the divestiture of the Pharmaceutical Business and its classification as a discontinued operation.

These events were directly reflected in movements in assets, profit, and cash flows.

Dividend Policy

JT's shareholder return policy did not change materially over the five-year period.

In FY2021, JT stated that under its resource allocation policy based on the 4S Model, it would give top priority to business investments that contribute to sustainable profit growth over the medium to long term, while emphasizing a balance between profit growth from business investment and shareholder returns.

While maintaining a solid financial foundation, JT aimed to improve shareholder returns through medium- to long-term profit growth. For dividends, it used a payout ratio of approximately 75%, with a range of about ±5% as a guideline. The company stated that share repurchases would be considered based on its financial position in each year and medium-term funding needs. (Annual Securities Report, 2021)

From 2022 onward, the JT Group Purpose was added alongside the 4S Model as a basis for this shareholder return policy. However, there was no major change in the approach of prioritizing business investment while balancing it with shareholder returns, or in the policy of using a dividend payout ratio of approximately 75% as a guideline.

For FY2024, JT continued to state that it would maintain a solid financial foundation, seek to improve shareholder returns through medium- to long-term profit growth, use a dividend payout ratio of approximately 75% as a guideline, and assess share repurchases in light of its financial position and funding needs. (Annual Securities Report, 2024)

The basic policy remained the same in FY2025, including the practice of making 2 dividend payments per year, consisting of an interim dividend and a year-end dividend. (Annual Securities Report, 2025)

Annual Dividend per Share Increased from ¥140 to ¥234

The annual dividend per share changed as follows:

The annual dividend increased from ¥140 per share in FY2021 to ¥188 per share in FY2022 and then to ¥194 per share in FY2023. It remained unchanged in FY2024 before increasing to ¥234 per share in FY2025. (Annual Securities Report, 2025)

For FY2025, JT planned an annual dividend of ¥234 per share, consisting of an interim dividend of ¥104 per share and a year-end dividend of ¥130 per share. (Annual Securities Report, 2025)

Dividends Increased While the Return Policy Was Maintained

JT maintained its policy of giving top priority to business investments that contribute to medium- to long-term profit growth while using a dividend payout ratio of approximately 75% as a guideline. Even as it made large-scale investments such as the VGR acquisition in 2024 and investment in RRP, its approach of balancing business investment and shareholder returns remained unchanged.

Under this policy, the annual dividend per share from FY2021 to FY2025 was:

¥140 → ¥188 → ¥194 → ¥194 → ¥234

The dividend per share increased over the five-year period without a major change in the underlying policy.

Key Financial Indicators

The 2025 Annual Securities Report presents 5 years of consolidated financial indicators from 2021 through 2025.

Revenue and Assets Expanded

Revenue increased from JPY 2,324.8 billion in FY2021 to JPY 3,467.7 billion in FY2025.

However, because the figures from FY2024 onward were restated following the classification of the Pharmaceutical Business as a discontinued operation, the five-year figures are not fully comparable on the same basis.

Total assets also increased from JPY 5,774.2 billion to JPY 8,419.2 billion. The increase was particularly large in FY2024, when the VGR acquisition affected the scale of JT's assets.

Profit Changed Significantly in 2024

Profit attributable to owners of the parent was:

JPY 338.5 billion → JPY 442.7 billion → JPY 482.3 billion → JPY 179.2 billion → JPY 510.2 billion

The decline in FY2024 and recovery in FY2025 were significantly affected by the loss related to Canadian litigation and the absence of that loss in the following year.

Basic earnings per share (EPS) followed a broadly similar pattern:

¥190.76 → ¥249.45 → ¥271.69 → ¥100.95 → ¥287.36

Operating Cash Flow Remained Positive

Cash flows from operating activities remained positive in all 5 fiscal years.

In FY2024, profit for the year decreased substantially, while operating cash flow reached JPY 630.0 billion, the highest level in the five-year period.

Cash inflows from operating activities therefore remained at a high level even in the year when profit declined sharply.

Investing Outflows Increased Significantly in 2024

Investing cash outflows were around JPY 100 billion per year from FY2021 through FY2023, but increased to JPY 439.8 billion in FY2024.

The VGR acquisition had a significant effect on this increase.

In FY2025, investing cash outflows decreased to JPY 265.0 billion, while the divestiture of the Pharmaceutical Business also generated cash inflows.

Five-Year Review

From 2021 through 2025, JT maintained its fundamental management policy centered on the 4S Model while significantly changing its business portfolio.

In 2022, JT integrated its previously separate domestic and international tobacco businesses and expanded investment in RRP, particularly heated tobacco. It then acquired VGR in 2024 to expand its U.S. business base and divested the Pharmaceutical Business in 2025.

Financially, revenue and total assets increased. Profit, however, did not rise in a straight line: it declined significantly in FY2024 because of losses related to Canadian litigation and recovered substantially in FY2025 after that effect was no longer present. Following the divestiture of the Pharmaceutical Business, the scope of comparative figures also changed in the 2025 Annual Securities Report.

The most notable developments over the five years were the integration of the domestic and international tobacco businesses, expansion of the Tobacco Business including in the United States, and the divestiture of the Pharmaceutical Business. Without materially changing its fundamental policy, JT changed the composition of its businesses and allocation of management resources, and these changes were reflected in both its business structure and financial figures.

Source: Japan Tobacco Inc. Annual Securities Reports, 2021–2025.