Masamichi Terabatake: I am Masamichi Terabatake, the President and CEO of Japan Tobacco. Thank you for taking time out of your busy schedule to attend today's financial results briefing. I am grateful for your continued support and encouragement. Please move to Page 3. I would like to begin with an overview of fiscal year 2020, followed by outlining our business plan for 2021.

Then I will explain the management policy for each of our businesses before discussing our policy for allocating management resources. Later, Eddy Pirard, CEO of JTI, will give a presentation on our international tobacco business. Following that, now Naohiro Minami, Chief Financial Officer of the JT Group will be providing details on our consolidated financial results for 2020 as well as the outlook for 2021. First, let's take a look at an overview of 2020. Please move on to Page 5.

2020 was a year in which the entire world was severely impacted by the COVID-19 pandemic. Unfortunately, even in 2021, the situation continues to change dramatically in ways we have never experienced as infection spread and lockdowns are put in place. Never before have we experienced a situation that has had had this significant impact on a global level. Even under these challenging circumstances, we were able to quickly formulate and implement business continuity plans and prioritizing the safety of our employees and our -- and other stakeholders, we also continue our efforts to minimize the impact of the pandemic on the group's businesses and finances. As a result of these efforts, our adjusted operating profit at constant currency and our profit exceeded our initial guidance for 2020, announced last Friday -- February.

We are planning to pay a dividend of ¥154 per share for 2020, as initially announced. Since assuming the position of group CEO, I have continued to encourage a consumer-centric mindset as the starting point for all of our actions. Maximize the use of resources across the group and put in place systems, both tangible and intangible, that allow us to smoothly move from considering a measure to executing it in a more agile and flexible manner. Last year, we also launched CLUB JT, a new online platform, designed to enable two-way communication with consumers, globally integrated our strategy planning functions across the whole tobacco businesses. And our quality assurance operations, to further ensure product safety and reliability, also continue to make substantial progress on transformation initiatives within JTI.

Furthermore, in 2020, we also made steady strides toward organizational improvement. Including the relocation of our Tokyo headquarters, with the aim of encouraging flexible thinking and ways of working, regardless of location or department. In the RRP category, we leveraged the lessons we have learned thus far to launch new improved devices in our key markets, and we have worked to strengthen our competitiveness. Looking back on 2020, I believe that it was a year in which we achieved our initial goals in spite of major changes in the business environment and made steady progress in our initiatives toward future growth. Next, I'd like to introduce our Business Plan 2021, a 3-year plan starting this year.

Please move on to Page 7. Under Business Plan 2021, we will remain committed to pursuing sustainable profit growth over the mid to long term. We will continue to aim for mid- to high single-digit annual average growth of adjusted operating profit at constant FX. Please move on to Page 8. I'd like to begin by talking about our operating environment, which is prerequisite for planning.

In terms of the macroeconomic outlook, although we expect a gradual recovery in all countries, a high degree of uncertainty remains in the business environment. The COVID-19 pandemic has caused volatile global economic situations. Lockdowns and travel restrictions, which makes it even more difficult to predict the future. As for the impact of the pandemic on our tobacco business, we recognize that there will be a certain amount of residual impact on consumers' purchasing power as well as on their consumption and purchasing behavior as the COVID-19 pandemic abates or even after it ends. However, we do not expect any significant impact in the medium term.

Meanwhile, as I mentioned earlier, I believe that we must pay close attention to changes in our operating environment going forward. In terms of the operating environment and the tobacco business for 2021 to 2023, as you can see on this slide, we believe that the trends we have seen thus far in both the combustibles and RRP categories will continue to accelerate. Even with an awareness of this environment, these roles of each category remains unchanged. RMC, or combustibles, is a source of cash generation and we are confident that it will be possible to increase the profit pool from the industry as a whole through pricing, even looking well beyond the current business plan. In terms of our sales volume, we recognize that the gap with our competitors is narrowing, and we will further increase this momentum.

RRP is positioned as a pillar of future business growth. And we will be proactively allocating the necessary resources after taking a thorough look at our current position. Please move on to Page 9. Based on this awareness of our operating environment, it was an eye on the long-term business environment. We have redefined investment prioritization categories with the aim of increasing our competitiveness and profitability in order to achieve sustainable growth.

Specifically, we will prioritize our management resources on our key category, namely the Heated Tobacco Sticks, HTS, and combustibles by mobilizing resources within the JT Group to provide products and services that exceed the needs and expectations of our consumers. Of these, our top priority for resource allocation is HTS, JT and JTI have been working together on the global development of next-generation products in this category, and we will be both introducing and expanding these on a global scale. We will also work to increase profitability and grow our market shares through effective investment in combustibles, which is a source of cash generation. Now I would like to spend some time discussing the background to these decisions. In terms of scale, we are falling short behind our top 2 competitors.

What's more, those companies are both fully leveraging the global resources on the RRP battery field. As competition is expected to intensify even further in the future, we must consider how to, thus use our resources in a flexible and efficient manner in order to outperform our competitors. Up to this point, we had sought to work with our RRP group comprising HTS infused and E-Vapor. And we have prioritized this grouping as we focus on expanding the number of markets we serve. However, it is now clear that we have reached the stage where we need to identify the products and markets on which we should concentrate our investments going forward.

On the next slide, I will explain how we will strengthen our business management structure in the tobacco business to achieve these goals. First of all, I'd like to cover the consolidation of our business management structure in the tobacco business. We have reinforced the business foundation for attaining stronger competitiveness on a global basis through the initiatives such as the integration of Japanese and international R&D functions and RRP organizations as well as the transformation restructuring in the international tobacco business, which have brought us clear improvements. To accelerate these initiatives and compete against our competitors globally in the RRP category, we have decided to consolidate the existing tobacco businesses into one tobacco business. We will challenge the competition as a single united organization without any distinctions between JT or JTI or between domestic or international by clarifying the prioritization of business investments making full use of global resources and establishing the structure where we would be more effectively and efficiently offer products and services, which exceed consumers' needs and expectations.

Next, I would like to explain how we plan to establish our business foundation in order to increase our competitiveness in the Japanese market. The Japanese market accounts for approximately 1/3 of the JT Group's profits and is the largest HTS market, so it remains our most important market. In light of the difficult situation in Japan, where profits have been declining since 2016, we have decided to undertake several initiatives in order to achieve sustainable growth in the future. First, we will strengthen both our digital and face-to-face marketing activities in order to communicate more effectively with our consumers. I'll be discussing our digital efforts more on the next slide.

But in terms of face-to-face marketing activities, although we must continue to assess the COVID-19 pandemic situation, we will be establishing sales office with planning functions in all 47 pre factors across the country to increase our market share by addressing the local needs of the consumers in each region. We will also work to strengthen our activities at the locations where consumers purchase and use our products as these constitute our points of contact with our consumers. Meanwhile, we will also be revising our organizational structure in response to the decrease in sales volume, resulting from the decline in the industry volume, while ensuring that we remain competitive. In addition to reorganizing our sales organization, which I just covered, we will be closing some tobacco and filter factories to eliminate unutilized manufacturing capacity. Following these, we will offer voluntary retirement programs and early retirement packages.

For details pertaining to these measures, please consult yesterday's press release. Please move on to Slide 11. As explained earlier, we will invest our resources in HTS preferentially to bring RRP up to be the core pillar of our business growth in the long term. In 2021, as one of concrete initiatives, we are preparing for the launch of a next-generation HTS device in Japan, the largest HTS market in the early second half of 2021. And Russia and other global markets will follow.

This new device showcases not only improvements in basic specifications, such as heating time, number of usable sticks per charge and device compactness. But also offers significantly enriched vaping experience, which had been a challenge for us. We successfully increased vaping experience, largely through evolution of the sticks not just a device, and we have plans to expand our flavor portfolio to meet the diverse needs of our consumers. In addition to the advancements on the functional side that I've just outlined, we also want to enhance our marketing through the use of digital technology and face-to-face ways to increase consumer product recognition. This is -- this will be a means to ensure the permanent retention of JT users.

Toward that goal, we will expand our connections with external platforms based on club JT, which we launched last year. We believe that the acquisition of consumers' identity data is the key to connecting with and understanding our consumers. And we will continue to improve the quantity and quality of this information. It utilize that database to actively communicate with each consumer. In addition, as a trial to enhance consumer experience by linking devices with smartphones, we have incorporated IoT functionality in the new device, and we are in the process of developing a variety of related features.

Please move on to Slide 12. Next, I'd like to move on to look at our pharmaceutical business and processed food business. Let's consider the pharmaceutical business first. In the pharmaceutical business, we expect the business environment to remain challenging as drug prices are expected to continue to decline in both domestic and international markets due to reductions in medical expenses related to the financial pressure felt in many countries. We also expect a gradual decline in royalty income related to anti-HIV drugs.

Meanwhile, Torii Pharmaceutical sales in the areas of allergies and skin diseases are robustly growing. In addition, our pipeline is steadily progressing, including the launch of a CORECTIM Ointment and ENAROY tablets in 2020. We are also witnessing the steady results of business restructuring at Torii Pharmaceutical. In addition to maximizing the value of both products under development and those already on the market, we will continue to actively search for in- and out-licensing opportunities to enhance our business space. Now let's move on to our processed food business.

The processed food business in which JT mainly operates has been expanding in the long term. On the other hand, we recognized that it is essential to continue to monitor the impact of the COVID-19 pandemic. Given this environment, we are making a steady progress in optimizing manufacturing capabilities in addition to taking steps such as strengthening sales of more profitable products in our core frozen and ambient foods business. The press release, rebuilding the manufacturing capabilities of the group that TableMark announced yesterday, clarify the intention of enhancing these initiatives and increasing further productivity. We continuously will work on strengthening the foundation for sustainable profit growth and proceeding initiatives.

Next, let me turn to Page 13. Now I will explain our resource allocation policy. From this year, we are revising the shareholder return policy taking into consideration the key components of our resource allocation policy, prioritizing business investments and balancing profit growth and shareholder returns. From a business continuity perspective, maintaining a strong financial basis more than ever before, a priority to withstand any major disruptions to the operating environment, like those caused by Lehman Chuck or the more recent COVID-19. Considering this, we revised our shareholder return policy, which, up until now, prioritized stable and sustainable dividend per share growth.

To a policy which, from this year, we target a dividend payout ratio of about 75%. We aim to enhance shareholder returns by realizing mid- to long-term profit growth while targeting this dividend payout ratio. To do so, we will continue to pursue growth in adjusted operating profit at constant currency which will contribute to the necessary growth in net income in the mid to long term and ultimately enhance shareholder returns. Please turn to Page 14. Now let me talk about our 2021 business investments and shareholder returns in detail.

As I explained earlier, we have redefined our investment prioritization categories to realize sustainable profit growth in the tobacco business. While realizing steady profit growth through combustibles, our current source of earnings, we will strengthen our investments in RRP, the pillar of our future business growth. We expect highly uncertain business environment, even after COVID-19 to continue to impact earnings. However, we will continue to aim for growth in adjusted operating profit at constant FX through business investment. As mentioned earlier, this growth in adjusted operating profit at constant FX in turn, will contribute to mid to long-term growth and net income.

On the other hand, there is a certain time lag before investments contribute to profit growth. Therefore, we believe that it's necessary to secure room for investment during this period as well. In light of these circumstances, we have revised our annual dividend forecast for 2021 to ¥130 per share, which exceeds the target dividend payout ratio of 75%, as explained in the shareholder return policy. In order to avoid a substantial decline in dividends per share, we have set it at a level at which the dividend payout ratio will not exceed 100%, and the dividend can be returned to our shareholders to the maximum extent possible based on our resource allocation policy. Going forward, by realizing profit growth through business investment, we will strive to strike a balance between profit and shareholder returns, under the 4S model guided resource allocation policy.

Please turn to Page 15. So far, I've discussed the strategies and resource allocation policies for each business. It goes without saying that sustainability initiatives that support long-term business growth are also very important. And I believe that they share a deep affinity with our management principle, the 4S model. Sustainability has always been at the core of our management initiatives, including our stipulation in the JT corporate governance policy, which has been effective since 2016 that the Board of Directors will proactively work on sustainability initiatives and our potmen of a director in charge of sustainability in 2019.

The JT Group sustainability strategy is formulated based on the identification of materiality or priority issues that the group must address in order to grow sustainably along with society. The strategic focus areas and goals for each business are set upon 3 absolute requirements for sustainability of the JT Group, which are essential for business continuity and the features of each business. And JT Group will contribute to the achievement of 9 SDG's goals in the slide through our business activities. These JT Group initiatives are positively evaluated from external organizations, such as CDP, the leading international NPO that assesses environmental disclosure. As you can see, in fact, that we've been recognized on CDP's prestigious A list for climate change and water security for the second consecutive year.

We also have been selected for the seventh consecutive year as a member of the DJSI Asia Pacific, which is the worldwide stock index, evaluating the sustainability of companies from

3 perspectives: economy, environment and society. Please turn to Page 16. I, myself, am aware of that our stakeholders are highly interested in the sustainability of our main business, which is the tobacco business through the engagement with those in capital markets. Let me introduce some of the various initiatives that we've been working on in order to develop with the society in a sustainable way. We have set clear goals, concrete initiatives and milestones in the JT Group environment plan 2030, which we formulated in 2019.

These initiatives, you can see in the slide, taking to contribute to the realization of the decarbonized society are one example of them. We have endorsed the TCFD recommendations in December 2020. Following this, we will reinforce further understanding and disclosure regarding risks and opportunities that the climate change might cause in our business activities with utilizing the existing scenario analysis on the climate change that JT has already made. We also have been making proactive efforts to secure safe and optimal work environment for tobacco leaf farmers. We will implement our agricultural labor practices program in all sourcing countries by 2025.

ALP consists of

3 pillars: tackling child labor, respecting workers' rights and ensuring workplace health and safety. And we believe RRPs offer real benefits to consumers and the society. We are responsible to continuously develop and launch RRPs that meet consumers' expectations and to provide information on them. Based on this belief, we will diversify consumers' choices in this category. And of course, we continue improving corporate governance since it's the foundation of all businesses.

I, as the CEO of the JT Group and the Board of Directors, formulate strategies and are committed to achieving these targets, being involved in this set of PDCA process, for instance, by monitoring our progress in each area on an annual basis to increase the effectiveness of each strategy. We will continue to actively promote sustainability initiatives which are indispensable for not only the long-term growth of the JT Group but also the sustainable existence and development of society. Finally, I'd like to share with you my thoughts on management. Please turn to Page 18. I'd like to call out that the year ahead will be the inflection point since the founding of the JT Group.

Today, I have explained new measures for sustainable growth into the future, such as redefining the priority investment categories in the tobacco business and changing the business operating model. With the progress we have made for the last 3 years, we have decided to consolidate our Japanese and international tobacco businesses. Taking advantage of these changes, which have been made by our own, well, as a driver of further growth. We will get off to a new start in 2022 to be truly one global company in name and reality. I also talked about rebasing of the shareholder returns.

After ensuring the flexibility of our future business strategies, we will aim to enhance shareholder returns in line with profit growth over the mid to long term. Based on our management philosophy of pursuing the 4S model, we're confident that we can maximize the value offered to each stakeholder by sustainable profit growth through business investment. The starting point for all of our efforts is facing our consumers with sincerity since they are at the heart of our 4S model. In order to continue producing products and services that exceed our consumers' expectations and to continue to be a valued presence for consumers, shareholders, employees and society, I remain strongly committed to working toward the continued evolution of the JT Group. This brings me to the end of my presentation.

Thank you very much for your attention. Now I'd like to invite JTI's CEO, Eddy, to present updates on the international tobacco business.

Eddy Pirard: Thank you, Terabatake-san. Good afternoon, ladies and gentlemen. I'm pleased to present the 2020 international tobacco business full year results and outlook for 2021.

Let me start with 2020's most commented topic and how we have approached it in JTI. We were fortunate to experience limited impacts from the pandemic. Indeed, our Group 4S principles were key enablers in ensuring JTIs continue to strengthen its business fundamentals during these challenging times. This is reflected in our full year 2020 results and our 2021 forecast. Very early on, it was clear that our #1 priority was to protect our people.

Very high sanitary measures were implemented on a global basis. Combined with the extraordinary commitment and dedication of our employees worldwide, we have been the -- who have been the corner stone of our growth since 1999. We were able to minimize the impacts of end-to-end supply chain, be it manufacturing, sales or leaf origins. In parallel, building on our strong working relationships, we engage with our suppliers and treat partners to ensure ongoing business continuity. In certain markets, we had to adapt our distribution routes to account for lockdown situations.

In others, we supported retailers with specific programs and initiatives to address rapidly changing consumer buying patterns. Our sustained strategic investment behind the equity of our global flagship brands, in both cigarettes and fine-cut tobacco was also beneficial. Combined with our well-balanced geographic footprint, it enabled us to mitigate many of the impacts of the COVID-19 pandemic. Although in some markets, our performance was lower than anticipated, this was more than offset by other exceeding expectations. Moving to our 2020 performance on Slide 4.

Building on the strong momentum from 2019, we continued to gain market share across our top 30 markets. As a result, our total shipment volume declined 2.3%, an improvement versus the initial guidance set for the year and a solid outperformance of the industry decline rate of circa 4%. Even more so when excluding unfavorable inventory movements, bringing our total shipment volume performance to minus 1.7%. The volume performance was driven by the sixth consecutive year of global flagship brands growth increasing shipment volume by 1.8% year-on-year or an additional 5 billion units. Key drivers were the performance of Winston, or #1 tobacco brand growing 2.4% to almost 160 billion units and our LD, our #1 value brand, which increased by 4.2%.

Camel volumes were broadly stable, while Mevius was negatively impacted by lower duty-free volume. Currency-neutral core revenue increased by 7%, driven by a solid price mix contribution from all clusters, combined with the market's mix improvement following strong volume contribution from above-average margin markets. Our strong top line growth drove currency-neutral adjusted operating profit by an impressive 16.8%. Such growth was achieved while increasing our level of investment notably in the area of RRP. Importantly, 2020 marked the tenth consecutive year of double-digit earnings growth at constant currency.

Over the next few slides, I will detail the main drivers of our growth in 2020 before taking a deeper dive on our business focusing on Europe and Russia. On Slide 5. As I have just mentioned, we once again outperformed the industry decline through continued market share gains. While COVID-19 disrupted the industry volume in several markets. Overall, the industry decline remained broadly in line with historical trend of minus 3% to minus 5%.

The different government's measures implemented to slow the progress of the pandemic, notably travel restrictions and lockdowns had a negative impact on our duty-free business, which came largely to a halt. Some emerging markets suffered from a temporary acceleration of industry volume decline rates, driven in part by pressures on consumer disposable income, confidence levels and route-to-market disruption. These impacts were partially offset by the strong momentum witnessed in several developed markets where lower levels of nondomestic duty-paid volumes led to favorable industry volume trends. In spite of these changes and such increased temporary volatility, JTI's relentless focus on strengthening its core business resulted in continued market share gains notably in 27 of our top 30 markets. Impressive market share growth was achieved in the key markets of France, Italy, Spain, Taiwan and the U.K.

as well as in Germany, around the Philippines and Poland, just to name a few. Turning to Slide 6. As I hinted at earlier, the redistribution of volume across our market footprint also contributed to a top line growth. Travel restrictions resulted in lower illicit trade and nondomestic duty-paid volume consumption in markets where JTI enjoys a higher-than-average margin. Across our business, we saw a net margin improvement, with total volume shipped in higher-than-average margin markets, increasing 6 percentage points versus 2019, reaching 54% of total shipment volume.

Beneficiary markets include France, Ireland, the U.K. and Taiwan. In these four markets alone, our shipment volume increased by over 6 billion units year-on-year, leveraging the continued market share gains mentioned earlier. Another strong contributor to top line, of course, was pricing. As you can see on Slide 7, we recorded a total price mix variance of USD 770 million in 2020, with positive contributions from all clusters.

Encouragingly, pricing gains were generated across the business with the key markets of France, Russia, Taiwan and the U.K. represent close to 40% of the total pricing, significantly complemented by the contribution for [indiscernible] markets as well, such as Bangladesh, Canada, Germany, Indonesia, Iran, Kazakhstan, the Philippines, Romania, Sudan and Ukraine. Our 2020 price mix benefit was above our 5-year average demonstrating the continued resilience of the tobacco pricing model, a performance that highlights the merit of consistently investing and growing in the sizable combustible business. Looking at this performance in another way. Within JTI's top 30 markets, the combined cigarette and fine-cut industry retail value grew over 6% at actual currency rate, with JTI improving its share of value by 1.7 percentage points to 27.4%.

Turning now to a deeper dive on Europe and Russia. Slide 8 focuses on one of JTI's recurring success stories, Europe, where despite the shift in volume between markets, we strengthened JTI's business across the region. JTI consistently grew market share across the region, reaching record levels in 26 of its 32 markets. This performance was driven by Winston and Camel across Continental Europe, and I believe in Benson & Hedges in the U.K. and Ireland, all great examples of the strength and benefit of our sustained investment behind our combustible portfolio.

Pricing contribution was positive, with notable increases in France, Germany, Hungary, Ireland, Sweden and the U.K., which combined with market share gains, fueled our top line growth and enhanced our market mix, as previously stated. Before moving to Russia, I'd like to highlight the performance of the U.K., our largest market in the region. During 2020, COVID changed the U.K. industry performance dynamics. Mainly the result of travel restrictions, non-U.K.

duty-paid volumes were repatriated to the domestic market, mostly boosting the fine-cut category, which now represents 46% of industry volume. Thanks to a well-balanced portfolio, built around strong equity brands, 2020 was another record year in terms of market share achievements, not only for JTI overall, our total share of market reached 45%, but also in specific product categories, where JTI outperformed competition. In fine-cut tobacco and [indiscernible] in Sterling now lead the category, whereas in ready-made cigarettes, B&H Blue became the #1 brand. Of course, we also directed our efforts and strategies to the emerging RRP category. In early November, we strengthened our presence in potentially reduced risk products with the introduction of Ploom S.

This enabled JTI to offer consumers one of the largest arrays of RRP products in the market, covering E-Vapor, the largest RRP category, Heated Tobacco Sticks and nicotine patches. Presence of Ploom S is limited to London for the time being as we build knowledge of consumer insights in the still embryonic U.K. Heated Tobacco Sticks segment before engaging into further expansion. And now to Slide 9 for a deep dive on Russia, our largest international market. Here also, COVID-related restrictions had a favorable impact on domestic industry volume.

As a consequence of a lockdown early in the second quarter as well as border closures, illicit trade volume reduced in 2020 and contributed to a better-than-expected cigarette industry volume contraction, estimated at minus 5%. In parallel, the pricing environment was strong with 3 in-market price increases during the year, driving the average pack price up by RUB 8. At less than USD 2 equivalent per pack and despite ongoing trading, tobacco products remain affordable. JTI's overall market share remained solid at 38.4%, driven by GFBs. In the fourth quarter, share momentum accelerated versus the same period last year, with GFB market share increasing to 26.3%.

Winston remained the #1 tobacco brand in Russia, with close to 15% share of market. The Value segment, now representing over 70% of total industry volume, is a very competitive segment to operate in. Importantly, following the integration of Donskoy Tabak's portfolio, JTI consolidated its leading position in the value segment. LD, our value brand grew market share strongly, reaching 9.7% at the end of the fourth quarter. This performance was driven by compelling and innovative offers, notably in the flavor-on-demand sector.

In 2020, we also strengthened our position in value with the introduction of Camel Compact. This new offering, introduced in September, was very well received by consumers increasing Camel's share of market to 2.2% in the last quarter. Moving to Slide 10. 2020 marked the long-awaited international rollout of our Heated Tobacco Sticks offer, combined with our Ploom S device. We started distributing Ploom S and Winston sticks in Moscow from mid-March but rapidly, which were just on the commercial strategies as lockdowns were imposed as of early April.

We pivoted quickly to a new digital-led commercial strategy. The ability of our team in Russia to rapidly adopt was critical in enabling the continued rollout of Ploom S. Early adoption rates in Moscow gave us the confidence, the confidence to rapidly expand our presence in Heated Tobacco Sticks to other large cities in Russia. Once the initial launch was successfully secured, we then focused on key accounts, to accelerate the visibility and availability of Ploom to Russian consumers. In December, Ploom S reached a 2.6% share of the Heated Tobacco Stick category.

This translated into over 300,000 devices and 160 million sticks sold since March. Importantly, more than 60% of the stick sales did not include a device, indicating an encouraging level of repeat purchases by consumers. We are only at the beginning of this journey, and we are still together with the Japan market, building our know-how and expertise with these new products. We will continue to monitor progress, embed our ongoing learning and ramp up as we see appropriate. Slide 11.

As you have seen, we exited 2020 with a very solid combustible momentum and are excited by the development of our Heated Tobacco Stick business. Let me briefly share our 2021 views for Russia. While we anticipate that the large excise tax increase will create challenges in 2021, it represents, on average, RUB 18 per pack. We remain confident about our performance outlook for the country. We've already partially incorporated the excise tax increase in our retail prices and expect to fully pass on the cost to the consumer during the course of the year.

As we look forward, regulatory changes from the second half of 2021 should be favorable, improving predictability in the market. As of April, Russia will implement a minimum retail selling price, or MRSP, at RUB 108. Including the 3-month inventory depletion grace period, the effects should become visible from July, preventing future price gaps opening at the bottom of the market. In addition, as some of you might be aware, retail prices are printed on the packs in Russia, and there is a possibility for retailers to offer a discount on the retail price up to 25%. While from April, the regulation will change and will remove retailers' ability to discount within prices, which we also see as a favorable development.

This year, after taking into account, the retail price changes. We expect the industry volume to decline above recent averages of minus 6% to minus 8%, including a likely rebound in illicit trade volume. But all in, we remain confident in JTI's ability to continue growing share of market and share of value in Russia, leveraging our strong GFB-led combustible portfolio and growing our presence in Heated Tobacco Sticks. Slide 12 focuses on our assumption for 2021. As explained in the earlier slides, JTS business fundamentals strengthened in 2020, and we expect this to continue into 2021.

Market share gains will continue across our footprint, driven by strong global flagship brands and their activation. Pricing contribution will remain solid, offsetting volume declines across markets with few exceptions. In addition, the transformation initiative, which started in 2019, will deliver accelerated efficiencies as we benefit from the ramp-up of the global business service centers in Warsaw, Manila and St. Petersburg. I'm proud to say that despite the COVID-19 pandemic, we were able to onboard more than 800 new GBS recruits and provide them necessary training qualitatively and on schedule.

In line with the redefined investment priorities, we will rebalance our resources and prioritize investments behind Heated Tobacco Sticks. As Terabatake-san stated in his remarks, we will be introducing a new device internationally in the second half, increasing our competitiveness in this growing category. However, we cannot ignore that the operating environment will remain challenging this year. Although it is unclear as to when the impacts from the pandemic will begin to lift, in assessing our top line performance for 2021, we have taken into consideration the partial reversal of market mix and the excise tax impact on Russia volumes. In closing, let me summarize our 2021 guidance.

We forecast our total, and GFB shipment volumes will outperform the industry volume contraction, declining slightly more than 3% versus a minimum industry decline of 4%. Core revenue, at constant currency, will increase 1%, supported by strong share of market momentum and pricing, more than offsetting the impact from the anticipated partial reversal of market mix benefits and the larger-than-average shipment volume decline in Russia due to the excise, which I've explained. Currency-neutral adjusted operating profit will grow 8%, driven by top line growth and accelerated efficiencies from our transformation initiative. In line with the midterm plan 2021 presented by Terabatake-san, we will continue investing behind both combustible and Heated Tobacco Sticks to improve our competitiveness. In conclusion, we are very confident that the international tobacco business will continue to deliver sustainable profit growth for the group as it has been the case in the years passed.

This confidence is reinforced by the future opportunities arising from the combination of the Japanese domestic and international tobacco businesses. Ladies and gentlemen, thank you for your attention and interest in JTI. I will now hand over to Minami-san for the review of the JT Group financial results.

Naohiro Minami: Hello. I am Naohiro Minami, Chief Financial Officer of the JT Group.

I would like to explain financial results for fiscal 2020 and the forecast for fiscal 2021. First, I would like to begin with consolidated financial results for 2020. Please move on to Slide 4. Adjusted operating profit at constant currency, which is indicative of our business performance, grew by 5.5% year-on-year. Higher performance of the international tobacco business boosted profit for the entire company at constant currency despite the impact of the pandemic.

Our consolidated revenue decreased year-on-year despite positive momentum in the international tobacco business, due to negative ForEx impact and reduced revenues in the Japanese domestic tobacco, pharmaceutical and processed food businesses. We estimate COVID-19 negative impact on the top line of the tobacco and processed food businesses in 2020 as about ¥61 billion. Adjusted operating profit on a reported basis shows a year-on-year decrease due to negative ForEx impact on the international tobacco business and profit decreases in the Japanese domestic tobacco business and processed food business. Operating profit and profit for the year were down due to the negative factors mentioned in the slide, despite some positive factors like proceeds from the sale of the former JT Head Office building accounted in the fourth quarter. Our businesses have been stably generating cash despite the pandemic.

Adding the temporary cash inflow from the sale of the former JT Head Office building, our free cash flow stood at ¥503.9 billion. Let me review our performance highlights for each business. Please look at Slide 5. I'd like to start with volume performance in the Japanese domestic tobacco business. Combustible industry volume decreased year-on-year with the impact of the COVID-19 pandemic, natural decline, price hikes, title regulations on indoor smoking, effective in April 2020, and an increase in RRP consumer applications.

We are seeing only limited impact of the pandemic on demand, although there was a transitory drop following the declaration of state of emergency last year. After the peak in April and May, the impact diminished, although it continued on lower levels with limited effect for the rest of the year. We estimate that RRP market size grew to approximately 26% over the year, partly due to the COVID-19 pandemic. Our combustible sales volume decreased with the lower industry volume and year-on-year share decline from ongoing competition in the value segment. As for RRP, we are able to report steady year-on-year growth in both sales volume and market share due to market growth and the contribution of Ploom S 2.0, which we introduced in July.

Please look at the right bottom of the slide concerning what happened before and after October 2020 price hike. The temporary surge in demand before the price hike, as I mentioned previously, is equivalent to about 4/10 of 1-month volume. The backlog from that have more or less subsided by the end of the year. We have recognized no major change from the existing trend at this point in terms of further down-trading after the price hike or consumer behavior. Please look at Slide 6.

Let me move to the financial results for our Japanese domestic tobacco business. Our core revenue fell year-on-year despite the positive combustible price contribution, as shown in the fourth quarter and the increase in sales volume of RRP refills, because sales volume for combustibles and RRP devices and accessories decreased year-on-year. We estimate the COVID-19 negative impact on the top line is approximately ¥30 billion, over half in the domestic duty-free business and China business. Adjusted operating profit was down but the impact of the pandemic on profit was partially offset by efficient cost management in the correct priority order and other efforts. Meanwhile, we focus on making necessary investments in 2020, mainly in RRP and digital marketing.

Now let me explain the results of our international tobacco business on Slide 7. Eddy has explained the business performance of the segment in detail. So I will provide analysis of the numbers in yen on a reported basis. Despite the positive momentum, our core revenue and adjusted operating profit on a reported basis were both flat year-on-year due to the influence of the adjustments in hyperinflationary accounting, depreciation of the Iranian Rial and Russian Ruble and appreciation of the yen value. The negative foreign currency impacts in 2020 was ¥90.1 billion in core revenue and ¥57.6 billion in adjusted operating profit.

Next, I'd like to explain the results from the pharmaceutical and processed food business in Slide 8. Revenue in the pharmaceutical business fell mainly due to lower overseas royalty income. Adjusted operating profit increased due to lower R&D expenditures post completion of clinical testing as well as profit growth at Torii Pharmaceutical, both of which outweighed the negatives. The processed food business lost both revenue and profit as negative factors in the pandemic environment outweighed positive factors. Demand has decreased in the frozen and ambient foods and seasoning products for the food service industry as well as in the bakery business.

Business entered a recovery trend in June when the state of emergency and voluntary stay-at-home order were lifted. With the impact from the third viral wave in November, however, we believe demand has not yet returned to the pre-COVID levels. Frozen and ambient foods for home consumption showed robust performance in June onward. In view of the continued severe business environment and pandemic impact, we have accounted impairment losses from the factories, stores and other assets of the bakery business. We estimate the COVID-19 negative impact on the top line, and the processed food business is approximately ¥11 billion for the entire year.

Now let's move on to the business forecast for fiscal 2021. Please turn to Page 10. Let me start with our outlook for the pandemic, which is a prerequisite for our financial outlook. As COVID-19 continues to substantially impact the world economy, society and lives, it's hard to predict the end at this time. Despite its continuing impact on the global economy, the economy of each nation is projected to make a moderate recovery.

We predict the impact of the pandemic on demand for tobacco and processed foods and our businesses in 2021 will continue to a certain degree, but the effects will be limited. I will discuss the outlook for each business sector later. The consolidated financial outlook will feature continuing strong growth momentum in the international tobacco business, in concert with contribution by the Japanese domestic tobacco business this year. The result is projected 5.1% year-on-year increase in our adjusted operating profit at constant currency. On a reported basis, we project that revenue will remain at the 2020 level, and adjusted operating profit will fall due to unfavorable currencies in the international tobacco business and revenue decrease in the pharmaceutical business.

We project decreases in both operating profit and profit for the year despite lower financing costs because real estate revenue will shrink from that of 2020, in which the sale of the former JT Head Office building was a onetime event. And costs associated with initiatives to strengthen competitiveness in the Japanese domestic tobacco business were accounted, as we announced yesterday. Here, I'd like to explain the effect from these initiatives. Combined with the JTI's transformation initiative, part of those effects have already been seen this year, the total cost reduction in our tobacco business overall is being realized in stages, and we project an annual cost reduction of approximately ¥40 billion in 2023 compared to 2019 when none of these initiatives hadn't been taken. We project consistent free cash flow from our businesses that continuously generate stable cash.

At the same time, free cash flow will show a year-on-year decrease because cash inflow from the sale of the former JT Head Office building was a one-time event in 2020 and investment increases due to partial change in 2020 caused by the pandemic. Let me discuss our Japanese domestic tobacco business on Page 11. First, as a precondition for our plan for 2021, as I explained with the performance slide, we predict that limited impact of the pandemic on demand will continue in the coming year as it has since June 2020. However, we do not project to see transitory impact on demand on a scale similar to that during the state of emergency in 2020. We, instead, see the pandemic impact for the coming year as limited.

As for the situation since the second state of emergency was declared in January, we do not anticipate major change in consumer behavior at this time. We project that duty-free sales will grow year-on-year, with the increase in tourist traffic currently assumed for the second half of fiscal year 2021. With that in mind, the slide shows projected volume for 2021. We assume there will be no major change in the demand trend for either RMC or RRP. And the RMC category, we will work to increase market share by enhancing promotions or products in the value segment.

In the RRP category, we project a continuous increase in industry volume and market size. As for sales volume for 2021, we project over 4.5 billion units for the entire year by increasing share with the launch of new HTS devices in 2021, as Mr. Terabatake explained previously. Next, let me explain our financial outlook. We project an increase in core revenues due to increasing sales of RRP-related products, such as refills and devices and partial recovery of duty-free sales in addition to the positive price/mix effects of the October 2020 price revision on RMC.

Here, the influence of the pricing contribution includes under certain conditions, the revision scheduled for October 2021 as well as that for October 2020. We project that adjusted operating profit will increase with our top line increases despite enhanced sales promotions mainly for the HTS set for release this term and projected growth of indirect cost from the low levels, we experienced under pandemic conditions in 2020. Let's move on to the international tobacco business. As Eddy explained previously, we project robust performance by our international tobacco business in 2021 despite the continuing impact of the pandemic. We project that both core revenue and adjusted operating profit on a reported basis will decrease year-on-year in 2021, despite the solid price/mix contribution and market share gains in each nation because the negative ForEx impacts are stronger.

Although the negative ForEx impact will likely diminish substantially this year from that 2020, we project depreciation of certain currencies, including the Iranian rial and Russian ruble, leading to a negative forecast. We project a stronger yen against the U.S. dollar, which will negatively affect our profits. Now, I will explain the outlook for our pharmaceutical and processed food businesses on Page 13. We project a drop in revenue for the pharmaceutical business, mainly due to lower overseas royalty income, despite Torii Pharmaceutical's revenue growth and a nonrecurring onetime income from the licensing of patented JT.

We project a decrease in adjusted operating profit due to an increase in R&D expenditures, alongside the expansion of development pipelines in addition to lower revenue. Here is our outlook for the impact of the pandemic on our processed food business in 2021. Demand for food service products will recover slowly, though not to pre-pandemic levels. The robust trend for household products since the latter half of 2020 will continue, though, we won't project the recurrence of the demand surge we experienced in the second quarter. These projections include the impact of the second state of emergency declaration in January on certain preconditions.

But we believe its effects will be limited compared with what we experienced in the second quarter of 2020. As a result, we project revenue growth in the processed food business in 2021, as sales will likely recover in foodservice products and the bakery business, which were negatively impacted by the pandemic in 2020. We project ¥3 billion in adjusted operating profit with growth of top line sales, mainly foodservice products and bakery business, along with favorable comparison of impairment losses in bakery business. We have decided to close 3 factories and to change the functions of some factories in and after 2021 as a part of initiatives to optimize manufacturing capabilities in Tablemark Group since 2017. Following these initiatives, we will reallocate the workforce and offer voluntary retirement programs towards a part of our employees.

Finally, on Page 14, as I've been explaining, with the COVID-19 pandemic, 2020 brought major change to our business environment. Nevertheless, we adapted to the changes and took flexible and quick action to minimize the impact on our top line, while efficiently managing costs in the correct priority order. The consequence of these efforts can be seen in our solid results. This fiscal year, we project our Japanese domestic tobacco business will return to profit growth, and our international tobacco business will maintain its robust business. Meanwhile, our business environment is increasingly uncertain due to the pandemic.

To realize sustainable profit growth, over the mid to long term, in this difficult environment, we will undertake high level investment in the tobacco business. To our shareholders, we plan to pay an annual dividend of ¥154 per share for 2020, as we announced at the beginning of the year. For 2021, as Mr. Terabatake previously explained, we plan to pay ¥130. This concludes my presentation.

Thank you very much for your attention. Unidentified

Company Representative: Thank you very much. Now we would like to start the Q&A session. Let me introduce the speakers who will answer your questions. Mr.

Terabatake, CEO of JT Group, Mr. Minami, CFO of JT Group; Mr. Fukuchi, CEO of Japanese domestic tobacco business; Mr. Eddy Pirard, CEO of JTI; and Mr. Vassilis Vovos, CFO of JTI.

The operator will now explain to you how to raise questions.

Operator: [Operator Instructions]. The first question comes from Mr. Miura from Citigroup Securities.

Nobuyoshi Miura: This is Miura from Citigroup Securities.

So I have a question to Mr. Terabatake. Can you hear me?

Masamichi Terabatake: Yes. Yes, we can hear you clearly.

Nobuyoshi Miura: I have a question to Mr.

Terabatake. About the top line growth expectations, what would be the concrete initiatives to ensure the top line growth? So this year, this year will be the bottom in terms of the performance. And as Mr. Minami mentioned, next year and also the year after, up until 2023, there will be a lot of self-help initiatives. And of course, we understand that you will be generating cash on a stable basis.

But now you have more flexibility in the next 2 years or I should say, next 3 years, there will be more flexibility within the management. So getting those into consideration, how are you going to realize the top line growth? So inclusive of global international as well as the Japanese domestic business, if you can share with us your intent, that would be helpful. Unidentified

Company Representative: So this question will be answered by Mr. Terabatake.

Masamichi Terabatake: Thank you very much for that question.

How are we going to grow the top line? That was the question. As I have mentioned in my presentation, as far as the tobacco business is concerned, 2022 onwards, we would start to see integration of the tobacco business. So we would like to enhance our capability in a solid manner. So we will work as 1 business unit. We would converge our management resources and use those on a global basis under 1 single strategy.

So that is a major structural change we expect to see. So based on that change, we would need to drive the top line for the tobacco business. So the baseline initiatives, of course, the combustibles will be the core axis. But of course, we will be focusing specifically on heated tobacco sticks. So that is the way to drive the top line.

As far as tobacco business, first the combustibles, as Eddy had already explained, we continue to see strong momentum. And there is still room to grow the top line. So in terms of the major markets, especially in the developed markets, we will continue to grow our market share. And also, in the emerging countries, we will continuously increase our volume. So those initiatives will be continued.

At the same time, for the next 3 years, RRP, especially HTS, heated tobacco sticks, we will strengthen the level of investment. When -- back in 2018, when I assumed the position of CEO, President, RRP, ¥100 billion of investment was the number we have shared. And in fact, within the 3 years, we were be able to execute that amount. Now in the past 3 years, we focus on CapEx. So CapEx took up the largest part of the investment in the past 3 years.

Now in the next 3 years, for 2021 to 2023, I wouldn't say ¥100 billion, but let's just say, several tens of billions, highs of several tens of billions, we will continuously invest for the next 3 years. And especially, we will be focusing on HTS and the global market. So in terms of the content of the investment, it will be different from the last 3 years. We will be focusing on closer areas to the consumers, R&D and also digital marketing. Those will be the main area that we will be focusing on the investment.

As you may be aware, in the second half of this year, we will be launching a new device in the Japanese domestic market. And also, we will go on introducing those into Russia. So on a global perspective, HTS, this is definitely a new area for JT Group. Therefore, in the next 3 years, we will still not be able to recoup the investment that we have made. It would still be in the initial phase.

But it will be a stage to sow the seeds into the future. So you mentioned, yes, we will be paying a lot, but we are making sure that we will manage the cost in an appropriate manner. And that is why in terms of dividend, we have decided to rebase the level of dividend. So now we have more flexibility in the management from investment. So we would like to make sure that we can recoup whatever investment that we will make in the next 3 years.

That is our strategy.

Nobuyoshi Miura: So Mr. Terabatake, this year, the share price has come down. I think it is partly because of the dividend cut. But in terms of HTS, heated tobacco sticks, perhaps there is some skepticism, or let's just say, some anxiety towards the outlook for this product.

That could be the reason why the share price had come down. So the market concern is there are some leaders in this area, the competitors, and they already deployed this product in a global basis. So now for JT, you are trying to catch up by launching this device in the second half of this year. But the question is, what could be the possible scenario? What should happen that -- so that you can actually grow your market share? So of course, in this goal, it is a growing market. But -- so therefore, this device should contribute to the sales.

But what exactly the differentiating factor of this new device, for instance, with IQOS? Unless you execute several of other initiatives, perhaps you will not be able to realize the picture you like to have in 5 years, 10 years out. So if you can give us some more color for this new device and also your outlook?

Masamichi Terabatake: I will continue to answer your question. We fully understand the intent of your question, and we are aware of the situation. So given this year, Japanese domestic market under COVID-19, the consumers are selecting more RRP. That tendency has become more apparent.

So JT has been able to grow our share. But at the same time, the larger competitor, the IQOS, they have also been able to grow their share as well. We are fully aware of this situation. Now in order for us to change this foundation, we do understand that it takes time. So that is why we would like to strengthen the level of investment.

So enhancement of capability from that perspective. Historically, we have been making investment. And what we have invested in the past, there is a large differentiation. So for instance, how much insights we have consumers and also some of the scientific insights and also data collection, so forth. Also, let's just say, pipeline, that is the technological pipeline, inclusive of patients, how full the pipeline is.

Perhaps, to be honest with you, we have been lagging behind the competitor. So the question is how well can we steadily fill that gap? And how can we incorporate the external resources to fill that gap and in a speedy manner and try to catch up in a much more accelerated agile manner. That is exactly where we like to invest this time and around within the R&D. So our capability, how we can enhance our capability. Again, we will be working as 1 unit, integration.

We believe this will pose a significant impact. I myself back in 2020, I have been heading the tobacco business. For this year, in terms of the next-generation device, I have been leading the project since the second half of 2019. So I was heading the tobacco business, the President of tobacco business for -- then of course, JT and JTI, we had our P&L responsibility for those markets. And there were 2 separate management for JT and JTI.

So I myself, as the head of the tobacco business, I had to really lead the direction. So I felt that this is indeed a managerial issue that JT Group is facing. And I knew we had to overcome this barrier. Otherwise, we will not be able to grow in a mid- to long-term basis. We have not been able to bring ourselves to parity to the competitors.

That was the true realization. So we need to overcome these barriers. And of course, this needs to be conducted in a speedy manner. So of course, we have been taking measures. In 2022 onwards, we believe we should be able to launch this new organization.

Now as far as the next-generation device is concerned in comparison to IQOS, how is that different? So in terms of the product, we are very confident of the qualification of the device. So in terms of -- we have evolved the sticks, the specifications have been changed or will be changed. And also, looking at the data, the vapor experience is enhanced. And likewise, with nicotine data. So in terms -- according to our data, we are at parity, if not better than the competitors.

But of course, you have the product capability. But you have to multiply that with marketing capability as well because we need to have the consumers take our products up and experience the product. So again, we need to have face-to-face and also digital marketing to enhance the take-up. So we need to address all those. So it's like Othello game, let's just say.

We try to turn the game around. It may take time, but we are -- we will focus on making that happen. And unless we do that, we cannot gain market share. So now we identify the organizational issue, and we will be focusing our investment to address those issues.

Nobuyoshi Miura: So this may be a fairly tricky question or a short-term situation.

I start to, let's just say, respiratory issue, could be because of age. It's not COVID, but -- and I'm starting to cough, I'm a smoker. But let's just -- I'm just wondering perhaps for HTS, you can have -- if you're considering developing next-generation of devices, could there be a functionality to make your lungs clearer?
Unidentified

Company Representative: So Mr. Miura, I think there are many other questions, people waiting for questions. So that would be your last question, which will be answered by Terabatake-san.

Masamichi Terabatake: At this point, for next-generation or let's just say the next device, no, we do not consider such functionality. So it will be more stronger vapor experience, stronger delivery and also more flavor offerings. That would be the nature of the next device.

Operator: The next question is from Nomura Securities, Mr. Fujiwara.

Satoshi Fujiwara: This is Fujiwara from Nomura Securities. With regards to international and RMC business, Eddy explained earlier that price/mix was more than ¥700 million and was very strong, and it's promising. So for this fiscal year, there's going to be a big excise tax hike in Russia. So the price/mix impact may not be as large. But over the medium term, what are your thoughts around price/mix? Meaning, in other words, when there's a huge tax hike in markets such as Russia, there's higher uncertainty.

And in the future, I was wondering if you can realize price/mix impact that is equally as strong, as you've seen this year. If so, from which regional cluster do you think you're going to get strong price/mix impact? Please let us know your thoughts. Unidentified

Company Representative: So with regards to your price/mix strategy question for JTI, the CFO from JTI, Vassilis Vovos will take your question.

Vassilis Vovos: Thank you very much for the question. This is Vassilis.

And let me just give a few comments about the price/mix. Correctly, as you said, 2020 has been a very strong pricing year, and we saw it in the presentation of Eddy before. But overall, we consider that pricing will continue to be a very significant element of our top line growth and revenue growth. And you mentioned Russia and the uncertainty. If we look at the 2021 picture, answer is basically the exception where we have a significant excise tax increase.

And in all our global footprint, we are seeing that taxes are evolving in line with the historical level, and we are able to count on pricing, which is pretty much in line with our historical level. And as I mentioned before already, we consider that in the strong pricing, we will see again in 2021, 60% of that almost is secured at this moment as we speak. So as we are looking in the future, let me address a little bit the Russian question because I think it's a big market. Eddy mentioned that the tax increase in Russia is a big one this year. It's about 20%.

But the Russian government plan is to go back to gradual tax increases in '22 and '23. They have been already announced to be in the area of 4% every year, which is in line pretty much with inflation at this moment. So we will, of course, be passing the excise tax of 2021. We have already started doing that in the first cycle in November, December, and we will -- we have already announced the second part. So we'll fully pass the tax increase in the coming weeks and months.

And when we look at the other markets, we pretty much see that our capacity to continue generating revenue and top line growth linked to pricing is intact. We are pretty much confident that the revenue line after the distortion between '20 and '21 can go back to the historical level of 5% or in the area of mid-single-digit number, especially given our big geographical footprint and the possibility to get growth from very different areas across the globe.

Satoshi Fujiwara: I would like to ask a follow-up comment. According to your explanation, for Russia, it seems that you'll be able to get pricing once again. But when you compare the four regional clusters, over the medium to long term, which region do you believe is the most promising from a pricing point of view.

Are there any specific clusters from which you are expecting good pricing to come through in the future?
Unidentified

Company Representative: Thank you very much for your additional question. Once again, from JTI, the CFO, Vassilis, will take your question once again.

Vassilis Vovos: Well, I think when we look at the big positions we have created in the clusters that today we call rest of the world, which comprises markets like Philippines, Taiwan, Canada, Iran, Turkey, I think we will be looking at this cluster as one that is helping us generate a significant top line growth. And already in this year, as we mentioned, you may have seen already that we have taken a price increase in Philippines in November last year, so it will carry over into this year. You may have seen also that we have increased our prices in Canada.

In Q4, we have announced the price increase in Taiwan for our mid-price portfolio. You may have noticed that in Turkey, we had a reduction of tax, which is equivalent to the price increase. Iran, we've taken price increases successfully last year, including in Q4. So all these sources of pricing and growth that are located in the cluster of rest of the world, I think, would be one area of focus for revenue growth in the future. But I don't want to underestimate the importance of markets like Russia or other European markets to continue to grow value and revenue.

And I think what is happening this year in Russia, as I mentioned, is a little bit the exception to the rule of gradual tax increases that allow us to pass the one into our prices and take further pricing. So I don't want to single out. But the cluster of rest of the world, I think, is the one that is giving us the most promising areas of revenue growth.

Operator: So let's move on to the next question, from Mizuho Securities, Mr. Saji, please.

Hiroshi Saji: This is Saji from Mizuho. So I have one question. So you have announced the dividend hike. And also, you changed the dividend policy. So now if you can give us more color into futures target? So as you make those investments, if you give us more details? So because you are expecting certain picture in terms of the future, therefore, we need to endure the dividend cut.

That is the message we received. So from that perspective, so what is the time frame? Should we get the returns for the investment? Or let's just say, the sales or profit will be what sort of level in the future? And because there is certain picture you have in mind, that is why you need to use the cash right now. So if you can give us more the expectation on a quantitative basis? So for instance, the RRP, it is -- they have ¥900 million, but now a -- ¥90 billion for PMI, but now we have JT is ¥4 billion. And also in terms of the contribution, is 23% for JT. So these are all the numbers.

So what is the kind of future you envisage? And what would that be -- how can you actually persuade the shareholders by giving the dividend cut? If you can give us those explanation, that would be helpful. Unidentified

Company Representative: So in terms of shareholders' return, I'd like to turn the microphone to Mr. Terabatake.

Masamichi Terabatake: Thank you very much for that question. So in terms of dividend cut, we have made a decision to cut the dividend.

So last fiscal year, I have mentioned clearly that we are not considering dividend cut. But this time around, we had to make that decision. And I do feel responsible for this. So since the listing of the company, this is the first time we had to cut our dividend amidst the COVID-19. In the Japanese domestic market, we are conducting initiatives to rationalize our operation.

So we are definitely causing issues for many of the stakeholders of the company. So also, we are cutting the remuneration for the directors of the Board as well. Now the background to reaching this decision to cut the dividend. So 5 points I'd like to mention. First point, last year, in an unexpected manner, let's just say, 2 years ago, in a fairly unexpected manner, and also last year, the COVID-19 pandemic had spread.

So in terms of the cash position and balance sheet, we looked at it on a short-term and midterm basis, we had to make them sound, and we have to address these risks. That is the first point. So for the time being for 2020, in the domestic Japanese market, we have ¥100 billion CP and also EUR 10 billion of subordinate debt has been issued. So on a global basis, we are also working with the distributors, key accounts and suppliers. So we have reevaluated the value chain to prepare ourselves for the worst-case scenario.

So we thought that was necessary as management is concerned. Another point, amidst COVID-19, again, more than expected, the economies in the emerging countries have deteriorated and because of that, the local currency had weakened. So we have ¥57 billion worth of negative FX impact from the profit. Unfortunately, this situation, given the fact that COVID-19 is still in place, this will still remain up until 2021, in some cases, even 2022. Third point, given all these assumptions, we are executing these initiatives in the Japanese domestic market.

So unless we rebase the dividend base, the payout ratio would exceed overly 100%. Fourth point, we talked about RRP. So in order to grow the profit into the future, HTS will be our main focus. But in any case, for the next couple of years, the investment phase would continue. Fifth point.

So, of course, we need to ensure the flexibility as management is concerned, especially after COVID-19 is subsided. We have been organically investing in RRP. But going forward, in order to grow our business, we may consider M&A, and we need to be more flexible in addressing those initiatives. So give more free your hand, flexibility. So these are the rationale within our heads.

And we believe it is necessary to rebalance our dividend level. And hence, a dividend cut was announced. So this RRP investment, that is not the only reason why we have decided to make this decision. In fact, RRP, as I mentioned, for the next 3 years, we would be -- in the high tens of billions of investment will be made, and you may ask what the return of that would be. Now for the tobacco business as a whole, for 2021 plan, mid- to high single-digit growth is expected.

So that is the plan we have for the business -- tobacco business as a whole. So on a midterm basis, we have the cash generated from combustibles. And those will be used and invested in an efficient manner to carry out the business. So first, how can we maximize the cash generated from combustibles? That is the first point. And second, we also need to restructure the cost structure.

And given the dividend cut in place, we would like to ensure the investment capability. So what will be the picture? 3 years and 5 years out? Are we going to turn the entire business in profit or not? At this point, we are not at this stage to commit to that statement. As you mentioned, in terms of sticks, it's more than 20-fold of difference in comparison to the competitor. So we need to really concentrate and focus our investment into the market and to be selective. So we do not have the capability to invest across the board to all the markets.

So you would like to enhance U.K., Italy, and Ploom S, where we have been introducing. So we will be focusing our investment into those prominent markets. Of course, we still have to compare ourselves with IQOS. We are definitely a couple of years lagging behind. But for the time being, we will make such solid investment.

And make the track record. We believe that is the only way we can meet the expectations of our stakeholders. So we will make sure combustibles and also the cost management, we will be quite rigorously watching those to secure the mid- to high single-digit growth. So that is the kind of environment we'd like to develop. And we would hope that we can regain the trust from the shareholders.

That is all. Thank you.

Hiroshi Saji: So it's not just the RRP then. And also, so the investment, it's not just 3 to 5 years, but more of a mid- to long-term basis. That is the horizon we should look at?

Masamichi Terabatake: Yes, that is right.

Operator: The next question is from Ms. Tsunoda from JPMorgan.

Ritsuko Tsunoda: This is Tsunoda from JPMorgan. I wanted to ask a question to President Terabatake. So the dividend payout ratio, 75% that you said, with regards to financial KPI, it's on a constant currency basis.

So when are you going to be able to grow your revenue and profit level on a reported basis? So this time around, it was 96% of a dividend payout ratio. So I think there was no other choice to reduce it to 75%. But the cost coming down by ¥37 billion. I would like to look at it as a one-off factor, but you still cut dividends. So how do you view your future profit growth? From 2022 and the tobacco businesses consolidation, in accordance with that, what kind of changes can we expect from your performance? On a constant currency basis, I do understand you are striving for mid- to high single-digit growth.

But based for dividends, profit growth is the prerequisite in assumption. So how are you going to manage profit growth going forward?
Unidentified

Company Representative: For that question, the President, Mr. Terabatake will answer it.

Masamichi Terabatake: Thank very much for your question. Well, it was a quite diverse question.

So I'm trying to sort it out. So with regards to impact from consolidation as well as the dividend payout ratio of 75% and our commitment and how are we going to ensure profit growth on -- accounting for FX? So first of all, the impact from consolidation of our tobacco business. The benefits would be, JT and JTI will be able to remove the wells between the 2 entities. And we'll be able to make swift decisions under 1 strategy, and we'll be able to be far faster. And we'll be able to do a flexible resource allocation.

So what this means is that, for example, for competitors towards the Japanese market, they are doing intensive marketing, not being that mindful about the P&L because they think that now is the time to bid on the market. In our case, we have a domestic tobacco business and international tobacco business, and we respectively manage and disclose the P&L. So for the domestic tobacco business, we were binded to a certain extent. And we weren't able to be that drastic when making investments into the market. But on an overall tobacco business basis, we're going to strive for mid- to high single-digit growth.

So from 2022, we will be able to make bigger investments into the Japanese market, and that will be made possible compared to the past. With respect to what kind of disclosure we're going to do, it's something we'll think about. But disclosing the P&L on a Japan stand-alone basis is something we are probably not going to do in the future. So with regards to best practices as well, domestic and international both will be working under 1 single process. So we believe that we'll be able to accelerate the speed of our business far faster than before.

And also for the next-gen product that's currently being developed and associated to that the marketing as well as digital ecosystem developments, this all will be unified. So we'll be able to be faster. And with regards to quality, I think we'll be able to work on it at a far faster speed compared to before. As for the 75% dividend payout ratio, part of your question, first of all, for the payout ratio and 75% as well -- and its level, our take is that it is pretty much the highest when you compare ourselves against Japanese companies. And if you compare us against FMCGs in the world, we do believe the payout ratio is at a competitive level, too.

So with that as a backdrop, there was a question from Mr. Saji earlier around this as well. And I did answer 5 reasons why we decided to cut dividends this time around. But going forward, with respect to profit growth, first of all, for AOP on a constant currency basis, we will be striving for mid- to high single-digit growth, and we believe this is possible. As for FX impact, currently, for 2021, whether we are going to have it under control, unfortunately, for this year, once again, around ¥37 billion of an impact is what we are expecting, which will be negative.

So constant currency basis and accounting for FX, reported these results will be different. And ultimately, that will hit our net income, to your point. And for currency rates. There will be parts, we will be able to hedge, naturally hedge through transactions, and we already have been working on that. But for currency translation parts, on our performance, there aren't measures available at this moment, unfortunately.

Emerging market currencies, if they start to pick up and recover, then for the first time, constant currency and accounting for FX performance will become steady. However -- but we believe we need a little bit of more time, and this will be a medium-term view, but we will work on things that we can at the time -- for the time being.

Naohiro Minami: This is Minami, the CFO speaking. With regards to managing net income, and how we are going to -- our view is on net income and managing it going forward? I'd like to follow up on the President's point. So one of the big reasons for a decrease in profit in the past was due to the domestic tobacco business.

Ever since 2016, it used to generate profits worth ¥250 billion. However, in the past fiscal year it was ¥170 billion. And in the current fiscal year, it is expected to exceed ¥170 billion. So it's expected to become higher compared to last fiscal year. But this uptrend is something we need to continue on with.

Because we report on a yen basis, and working of that assumption, we believe this is one of the challenges we need to overcome. From that point of view, we need to enhance the presence of RRP and ensure we have a rich pipeline. And as a result, our competitors are also working on their devices and sticks on a daily basis. They're making improvements, modifications, and they will continue to upgrade their products and will continue to make those launches. But we also need to ensure that we'll be able to respond and catch up with them.

And in order to establish that kind of organization, we need time as well as investments. However, as an assumption, with regards to managing net income, it's a matter of the domestic tobacco business and ensure that we have steady profit increases every year. Of course, there may be fluctuations, but it's a matter of how we can bring profits up in the domestic tobacco business. This will be a prerequisite for us. In addition to that, earlier, we talked about emerging market currencies.

So for emerging market currencies and currency rate fluctuations, there are various factors that affected. But like we've been saying from before, theoretically speaking, economic growth or inflation are factors that affect the currency rate fluctuations. So geopolitical risks, events may move currencies, but this is something that is not predictable. But for the theoretical part, we would like to ensure that we offset the negative impact. And we would like to strive for profit growth that matches up with the GDP growth that is anticipated for that given country when we do our demand forecasting.

And also, we would like to have a good balance in our currency portfolio. And if we would like to match up the markets to this portfolio and also attempt to go into new markets, if we believe that is fit. So it's about growth in the respective countries we're in and striving for growth in an appropriate manner. So we believe the issue can be resolved according to these 2 factors. Of course, on a single year basis and the budget, where the budget we have, raising the hedge ratio is something we should continue to work on.

However, at the base of all of this, would be what I've just explained. It's a matter of the yen. This is 1/3 of profits. So it's a matter of how we could turn the performance steady, and for the volatile portion, we need to address the factors. And think about this as good inflation.

We need to ensure that we are able to exert good performance in this part of our business. That concludes my remarks.

Ritsuko Tsunoda: So for the investors, they do look at the payout ratio when they invest into your company. So 75% being top class, I do agree to your point that it's a high dividend payout ratio. But continuing dividend growth is another area that investors are paying attention to is what I wanted to say.

Operator: Next question come from Daiwa Securities, Morita-san, please.

Makoto Morita: This is Morita from Daiwa Securities. I have a question related to HTS. I'd like to confirm what sort of capability you have. So 3 perspectives I'd like to raise.

First, what is the inherent strengths of JT related to HTS? So I think according to Miura-san's picture vis-à-vis PMI, there are areas that you lag behind and you want to catch up. But first thing first, I'm not quite sure what exactly the strengths of JT Group is? So could you focus on the strengths that you have? Second point, about the goal you have in mind. So for HTS, the next 3 to 5 years, what is the goal you have in mind? So do you have any specific goals or let's just say, KPIs? So on a quantitative basis, if you can share with us a target you have in mind, that would be helpful. Third point, in the next 3 years, you will be investing in several tens of billions. So several tens of billions, what was the rationale behind deciding on that number? Of course, it is not a small number.

But of course, if this is going to be a very important year, then perhaps you should be able to invest more than ¥100 billion, if it's such an important field to invest in. So why are there several tens of billions? Why have you decided on that amount in terms of the investment? So those are the three questions I have. Unidentified

Company Representative: This question will be answered by Mr. Terabatake.

Masamichi Terabatake: Thank you very much for that.

So on inherent strengths of JT Group, to be honest with you, as far as device is concerned, it is not as if we had capability or strength. So we are still in the learning phase as far as the device is concerned. Gradually, our capability has been enhanced. Now our strength is really what we have learned from tobacco business, refills and also consumables development. That's where the strength of JT lies.

So for instance, what sort of a strong kick, flavor experience we can provide through tobacco. But of course, if you go to add that with the device, unfortunately, we have not been able to reach a level that is satisfactory to the consumers. We are aware of this. And of course, we are quite frustrated with this. But in terms of the development, as I have mentioned, we have been focusing on the heat stick.

The stick itself, the specifications will be changed. So we believe we should be able to leverage on our inherent strengths going forward. And of course, now the question is, how can we actually integrate that with the device as to how can we enhance the vapor experience to provide better nicotine delivery. So we would like to achieve these functions. So now several tens of billions, this investment amount -- this is not an absolute amount.

This is the incremental amount. So this is the delta amount that we are going to increase in terms of investment. So this is not the total amount. So well, actually, in terms of the total amount, we do not disclose the total amount of investment. But when I talk about several tens of billions, that is the delta amount.

Now in terms of quantitative goals, as far as JT Group is concerned, we do not have any specific target for, let's just say, market share on a global basis. We are still not at that phase. But let's just talk about the Japanese domestic market. In 3 years' time, we would like to contribute to the profit. So of course, it is still contributing to the profit, but we would like to turn the business into black for the Japanese domestic market in a couple of years out.

Now for international tobacco business, of course, these are all new products to be launched. So we need to consider how well could the heat -- HTS will be accepted, and how much of a market share can we grow? We will still need to explore all those elements in the respective markets. So as you rightly mentioned, PMI, there are several tens of billions of sticks that they sell. So -- and how many years out, when can we catch up? And what is the sticks we you have? We don't have the visibility right now. So for the time being, we would like to enhance our capability, conduct our investment in a focused manner.

And to be selective and also enhance our market share and build a foundation organization to enable all these to happen. So once we have that visibility, then we should be able to explain to the shareholders more than details. So of course, we will be devising the integration plan for the next 12 months. So as we reorganize our strategy into one, we should be able to identify more of a concrete targets. So that is the plan we have.

So for this fiscal term, we will not have any concrete ideas that we can share with you at this point, unfortunately. But next fiscal term, perhaps, we should be able to give you more visibility into the future.

Makoto Morita: Just one point I'd like to confirm about the HTS product capability. So this new device, if you were to look at the product basis, would it be at parity? Or would it be better than IQOS? Was that the expectation we should have? Of course, the competitor at IQOS would also evolve as well on a day-to-day basis. But do you believe there would be continuous waves of new product launch? What is your current take?

Masamichi Terabatake: As you rightly mentioned, what is available in the market, the competitors' markets, if you were to make the comparison.

And if you look at the data of the existing offerings, our data shows that our device is at parity, or actually exceeds the competitors' data. But of course, the evolution is happening every day. So this year, of course, JT will be launching the device. But of course, we need to consider what would happen next year. So we need to have that portfolio within the R&D.

So this improvement of the products will be continuous.

Operator: So the next person will be the last question. From Goldman Sachs Securities, Ms. Yamaguchi.

Keiko Yamaguchi: I am Yamaguchi from Goldman.

For the consolidation of the tobacco business and your capabilities, I'm sorry, I'm persistent, but can you talk a little bit of more specifics as to why the competitiveness of each of the businesses are likely to rise and be enhanced due to the consolidation? Because of these circumstances, the P&L of the domestic business may become worse is what you were saying, which was one of the reasons of the consolidation, but that seems really trivial because you are going to make investments. And you're talking about the headquarter functions in JTI. But is there something that you leverage from JTI in the domestic tobacco business, which is the reason why you decided to do the consolidation? Can you give me a little bit of more specific examples? So Morita-san earlier asked about KPIs. So that would be my question, too. When you consolidate the businesses together, how are you going to set the KPIs? So mid- to high single-digit growth is what you are striving for, and that will be the same as before.

So is that okay? For international, you are yet to launch the product, and you will also be investing into Japan. So maybe the KPIs can even change and not be the same as before. So I think it was a big decision to make to integrate the two together. So can you give me more specific examples?
Unidentified

Company Representative: So for that question, Mr. Terabatake, the CEO, will take it.

Masamichi Terabatake: Thank you very much for your question. For the P&L in Japan, that's, of course, not the sole reason why we're going to do this. It's hard to give specific examples at this point in time. But it's not accompanied by an M&A, but this will be an integration process. So towards the integration, we did the transformation at JTI first.

And what we achieved is what we are poised to do in Japan this year in reinforcing the foundation so that Japan also changes its work process to follow suit of JTI. And we will have the division for tobacco business in Geneva. But -- and we will transfer the functions of the tobacco business. And Japan will be one of the markets going forward, and it will be treated as a region and will fall under the global tobacco business in the future. So up until now, China, Taiwan as well as Macau was overseen by JT.

But from 2022, it will be integrated into the AP region of JTI. And for Japan, China and duty-free businesses, they will go into JTI's worldwide duty-free business. So for the integration, we have each function, markets, duty free, and we also have systems, IT systems and personnel systems. There's about close to 20 projects that are concurrently running right now. And in the next 100 days, the integration plan should be formulated, and by summer this year, everything will be put together and will be approved.

And then going into the second half of the year, we will have a pseudo-integrated management employees, which will all start to test so that we can put -- start to work on the plans for next year. And then from January 2022, we will have complete integration in place in managing the entity. So for the domestic tobacco business, the processes will largely change and global JTIs will be absorbing the functions. So we're going to be working under a single management single processes, and we'll be operating the structure globally. So everything will be faster and it will be more efficient.

And that is why we worked on the transformation of JTI first, and we decided to apply what has been achieved into Japan this time around. So for the capabilities of RRP, whether it be for global or for Japan, the capabilities of RRP, of course, Japan has the capabilities more at this moment, but it will be applied globally. So this will be a case where a lot of things will be replicated from Japan to overseas. But what happens when the entities are integrated, how are we going to set the KPIs? Basically, the tobacco business will be in an integrated manner, strive to grow AOP, adjusted operating profits, on a constant currency basis by mid- to high single digit basis. But for the RRP KPI, obviously, we will probably set KPIs.

And we'll have it internally, but whether or not, we are going to disclose it externally, we will like to put together a plan with substance during 2021, like I've been explaining earlier. I hope that answers your question.

Keiko Yamaguchi: So on an integrated manner, you're going to strive for mid- to high single-digit growth for the tobacco business, and this is a target that is unchanged, is that correct? Or is there a chance that it may be changed?

Masamichi Terabatake: That target itself is not going to change. It is going to be as we had before.

Naohiro Minami: This is Minami speaking.

Let me add one point. We, on a combined basis, meaning the two businesses added together, we are looking at the 3-year plan. And we are currently striving for mid- to high single-digit growth on a company-wide basis. But going forward, once the entity is integrated, we will be working on a new budget. We'll be brushing up the current ones we have.

And like Mr. Terabatake mentioned earlier, the several highs, several tens of billions of investments that we are planning, expenses that hit the P&L, the weight is going to be higher compared to typical CapEx. After that burden, on a combined basis, we will be more creative and the two businesses will be able to complement one another. And through that, our hypothesis now is we're going to aim for mid- to high single-digit growth. But if our measures are successful, it's a matter of whether that goal should be perpetual.

We will question that once again. But for the time being, after accounting for all kinds of investments, we would like to ensure that there is solid growth in place. So that is what we are considering based off our current budget, which is a theme. Thank you very much, Ms. Yamaguchi.

Operator: With that we would like to conclude the conference for 2020 full year results at Japan Tobacco Inc. Thank you very much for your participation. Please make sure that you disconnect your line.