Annual Report 2013 - Japan Tobacco InternationalJapan Tobacco Inc. Annual Report 2013 Japan Tobacco Inc. A nnual Report 2013 Year ended March 31, 2013 2-1, Toranomon 2-chome, Minato-ku,

Japan Tobacco Inc.Annual Report 2013

Japan Tobacco Inc. A

nnual Report 2013

Year ended March 31, 2013

2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, JapanTel: (81) 3-3582-3111Fax: (81) 3-5572-1441URL: http://www.jt.com/

This annual report is printed using ink that contains less than 1% Volatile Organic Compounds (VOCs).

Printed in Japan

Japan Tobacco Inc.

Management

001 Financial Highlights004 At a Glance006 Consolidated Five-year Financial Summary009 Message from the Chairman and CEO010 CEO Business Review012 Management Principle, Resource Allocation

Policy and Strategic Framework013 Business Plan 2013014 Performance Measures

Operation & Analysis

020 Industry Overview 020 Tobacco Business 022 Pharmaceutical, Beverage and

Processed Food Business024 Review of Operations 024 Role of Tobacco Business 026 International Tobacco Business 032 Japanese Domestic Tobacco Business 036 Role of Pharmaceutical, Beverage

and Processed Food Business 038 Pharmaceutical Business 042 Beverage Business 046 Processed Food Business050 Risk Factors054 Corporate Social Responsibility058 Corporate Governance

Financial Information

076 Financial Review084 Financial Statements and Notes

Fact Sheets

142 Fact Sheets

Shareholder Information

170 Shareholder Information

Other Information

174 History of the JT Group178 Regulation and Other Relevant Laws182 Litigation 184 Members of the Board, Audit & Supervisory

Board Members, and Executive Officers185 Corporate Data

For more information, please visit www.jt.com

Head Office

2-1, Toranomon 2-chome,

Minato-ku, Tokyo 105-8422, Japan

Tel: 81-3-3582-3111

Fax: 81-3-5572-1441

URL: http://www.jt.com/

Date of Establishment

April 1, 1985

Paid-in Capital

¥100 billion

JT International S.A.

1, Rue de la Gabelle CH-1211 Geneva 26,

Switzerland

Tel: +41(0)22-7030-777

Fax: +41(0)22-7030-789

URL: http://www.jti.com/

Members of JT International Executive Committee (As of June 1, 2013)

Paul Bourassa

Senior Vice President Legal, Regulatory

Affairs and Compliance

Martin Braddock

Regional President CIS+

Stefan Fitz

Regional President Asia Pacific

Roland Kostantos

Senior Vice President Finance, Information

Technology and Chief Financial Officer

Paul Neumann

Senior Vice President Global Leaf

Howard Parks

Senior Vice President Consumer &

Trade Marketing

Fadoul Pekhazis

Regional President Middle East, Near East,

Africa, Turkey and World Wide Duty Free

Eddy Pirard

Regional President Western Europe

Michel Poirier

Regional President Americas

Jörg Schappei

Senior Vice President Human Resources

Bill Schulz

Senior Vice President Global Supply Chain

Takehisa Shibayama

Senior Vice President Research &

Development

Vassilis Vovos

Regional President Central Europe

Frits Vranken

Senior Vice President Business

Development and Corporate

Communications

Pierre de Labouchere

President and Chief Executive Officer

Masamichi Terabatake

Executive Vice President and Deputy CEO

Thomas A. McCoy

Chief Operating Officer

Japan Tobacco Inc. AnnuAl RepoRt 2013 185

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contents corporate Data(As of March 31, 2013)

Adjusted EBITDA(JPY BN)

622.1 +7.8%Dividend Payout Ratio(%)

37.6 +7.9ppt

Adjusted EPS(JPY)

173.65 +13.8%

Unless the context indicates otherwise, references in this Annual Report to “we”, “us”, “our”, “Japan Tobacco”, “JT Group” or “JT” are to Japan Tobacco Inc. and its consolidated subsidiaries. References to “JT International” are to JT International Holding B.V., our consolidated subsidiary, and its consolidated subsidiaries. References to “TableMark” are to TableMark Co., Ltd. and its consolidated subsidiaries. References to “Japan Tobacco Inc.” are only to Japan Tobacco Inc. and references to “JT International Holding B.V.” are only to JT International Holding B.V. References to “audit & supervisory board” are to “kansayaku-kai” (as defined in the Companies Act of Japan) that performs certain supervisory functions through its monitoring and audit activities within the overall scheme of corporate governance pursuant to the Companies Act of Japan. References to “audit & supervisory board member” are to a member or members of an audit & supervisory board, also referred to in Japanese as “kansayaku” (as defined in the Companies Act of Japan).

Forward-looking statements

This report contains forward-looking statements. These statements appear in a number of places in this report and include statements regarding the intent, belief, or current and future expectations of our management with respect to our business, financial condition and results of operations. In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “would”,“expect”, “intend”, “project”, “plan”, “aim”, “seek”, “target”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or the negative of these terms or other similar terminology. These statements are not guarantees of future performance and are subject to various risks and uncertainties. Actual results, performance or achievements, or those of the industries in which we operate, may

differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. In addition, these forward-looking statements are necessarily dependent upon assumptions, estimates and data that may be incorrect or imprecise and involve known and unknown risks and uncertainties. Forward-looking statements regarding operating results are particularly subject to a variety of assumptions, some or all of which may not be realized.

Risks, uncertainties or other factors that could cause actual results to differ materially from those expressed in any forward-looking statement include, without limitation:1. decrease in demand for tobacco products in key markets;2. restrictions on promoting, marketing, packaging, labeling and

usage of tobacco products in markets in which we operate; 3. increases in excise, consumption or other taxes on tobacco

products in markets in which we operate;4. litigation around the world alleging adverse health and financial

effects resulting from, or relating to, tobacco products;5. our ability to realize anticipated results of our acquisition

or other similar investments;6. competition in markets in which we operate or into which we

seek to expand;7. deterioration in economic conditions in areas that matter to us;8. economic, regulatory and political changes, such as nationalization,

terrorism, wars and civil unrest, in countries in which we operate;9. fluctuations in foreign exchange rates and the costs of raw materials;

and10. catastrophes, including natural disasters.


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Financial Highlights(Year ended March 31, 2013)

Please be reminded that this section is intended to explain the business operations of JT to investors, but not to promote sales of tobacco produce to encourage smoking by consumers.

004 At a Glance006 Consolidated Five-year Summary009 Message from the Chairman and CEO010 CEO Business Review012 Management Principle, Resource

Allocation Policy and Strategic Framework

013 Business Plan 2013014 Performance Measures

Our “4S” model continues to deliver strong business results and shareholder return improvements Our unique “4S” model, resource allocation policy and strategic framework continue to deliver strong business results and shareholder return improvements.

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The JT Group is a leading international tobacco company with operations in over 70 countries. Our products are sold in over 120 countries and our internationally recognized brands include Winston, Camel and Mild Seven – MEVIUS. We also have pharmaceutical, beverage and processed food businesses which allow us to diversify our sources of profit and achieve future sustainable growth.

International tobacco business will continue strengthening its role as JT Group’s profit growth engine.

International tobacco business generates more than 50% of our consolidated profit2. In addition to acquisitions, our pursuit of organic top-line growth with a focus on our Global Flagship Brands (GFB), investment in brand equity and pricing have contributed to the strong growth of our international tobacco business. Our portfolio is well balanced, allowing us to capture consumers in both up-trading and down-trading environments.

Priorities:• Quality top-line growth:

– Continue to strengthen brand equity with a focus on GFBs. – Grow or maintain market share in key markets.

• Broaden the earnings base: – Expand geographical presence. – Develop emerging product categories.

• Continuous cost improvement.

Total shipment volume Year-on-year change (BnU)

436.5 +2.5%

GFB shipment volume Year-on-year change (BnU)

268.8 +4.8%

Core Revenue Year-on-year change (US$ MM)

11,817 +5.4%

Adjusted EBITDA Year-on-year change (US$ MM)

4,302 +9.1%

The role of the Japanese domestic tobacco business continues to be a highly competitive platform of profitability.

We are the market leader in Japan with nearly 60% market share. Our Japanese domestic tobacco business continues to be a significant profit contributor to the JT Group, generating over 45% of our consolidated profit2. In the year ended March 2013, we offered more than 85 products on the Japanese market. The three core brands are MEVIUS, Seven Stars and Pianissimo.

Priorities:• Quality top-line growth:

– Continue to strengthen brand equity with a focus on our core brands.

– Further increase market share. – Develop emerging product categories.

• Continuous cost improvement.

Sales Volume Year-on-year change (BnU)

116.2 +7.2%

Core Revenue Year-on-year change (JPY BN)

654.0 +6.9%

Adjusted EBITDA Year-on-year change (JPY BN)

281.3 +7.3%

004 Japan Tobacco Inc. AnnuAl RepoRt 2013

at a GlanceOur Businesses

International Tobacco business

Business Performance Summary:

Japanese Domestic Tobacco business


(Year ended March 31, 2013)1

Revenue breakdown by business segment

Others

0.7%Processed food

8.0%International tobacco

47.7%

Beverage

8.7%Pharmaceutical

2.5%Japanese domestic tobacco

32.4%

We will strive to establish a stronger profit platform while remaining R&D oriented.

Priorities:• Strive for rapid and efficient market launch of compounds

in late phase of clinical trials.• Maximize value of each product.• Promote R&D for next generation of strategic compounds,

seek optimum timing for out-licensing.

We expect our beverage business to strengthen its business foundation for future growth in order to make further profit contribution to the JT Group.

Priorities:• Continue brand equity investment in ‘Roots’. • In addition to ‘Roots’, foster ‘Momono Tennen-sui’

as a second pillar brand.• Strive further for a high quality vending machine operation.

Our processed food business will strive to achieve operating profit margin on par with or above industry average to grow its profit contribution to the JT Group.

Priorities:• Continue to focus on staple food products to steadily

improve profitability.• Combine our own technology with consumer needs

to enhance product strength.• Minimize the effect of rising raw material cost and weak yen.

Revenue Year-on-year change (JPY BN) (JPY BN)

53.2 +5.8


185.5 -3.3


168.7 -1.9

Adjusted EBITDA Year-on-year change (JPY BN) (JPY BN)

-12.7 -2.7


12.4 -2.2


7.4 +1.9

1 Year ended December 31, 2012 for international tobacco business.2 Consolidated profit: consolidated adjusted EBITDA.


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pharmaceutical business

beverage business

processed Food business




Billions of yen

2009 (JGAAP)

2010 (JGAAP)

2011 (IFRS)

2012 (IFRS)

2013 (IFRS)

For the year:

Net sales/Revenue (Note 1) 6,832.3 6,134.7 2,059.4 2,033.8 2,120.2

International Tobacco 3,118.3 2,633.6 963.5 966.3 1,010.7

Japanese Domestic Tobacco 3,200.5 3,042.8 665.8 646.2 687.1

Pharmaceutical 56.8 44.1 44.1 47.4 53.2

Food 436.0 394.7 367.5 359.4 –

Beverage 188.8 185.5

Processed Food 170.7 168.7

Others 20.8 19.5 18.5 14.6 15.0

Adjusted net sales/Core revenue (Note 2)

International Tobacco 1,080.8 906.8 887.8 894.6 943.1

Japanese Domestic Tobacco 648.8 616.0 632.2 611.9 654.0

Operating income/Operating profit (Note 3) 363.8 296.5 401.3 459.2 532.4

International Tobacco 174.8 136.9 225.9 252.4 289.5


Pharmaceutical 1.0 (13.6) (13.3) (13.5) (16.2)

Food (11.5) (13.7) (3.6) 2.0 –

Beverage 4.5 2.4

Processed Food (2.5) (5.8)

Others 9.6 10.5 (9.9) 9.0 21.2

EBITDA/Adjusted EBITDA (Note 3/4) 646.2 526.7 522.0 577.1 622.1

International Tobacco 338.0 277.7 277.9 314.8 343.3


Pharmaceutical 4.9 (9.7) (9.8) (10.0) (12.7)

Food 17.0 14.5 17.7 20.0 –

Beverage 14.6 12.4

Processed Food 5.4 7.4

Others 13.1 13.3 (11.0) (9.8) (9.6)

Depreciation and amortization (Note 4) 282.4 230.2 118.0 118.8 116.5

Net income/Profit (attributable to owners of the parent) (Note 5) 123.4 138.4 243.3 320.9 343.6

Free cash flow (FCF) (Note 6) 240.2 250.7 300.4 451.3 316.0


consolidated Five-year Financial Summary Japan Tobacco Inc. and Consolidated Subsidiaries

(Years ended March 31)

1. (JGAAP): Including the tobacco excise taxes. (IFRS): Excluding tobacco excise taxes and revenue from agent transactions.

2. (JGAAP): Excluding revenue from the imported tobacco, domestic duty free, the China Division, and other miscellaneous items in the Japanese domestic tobacco business, in addition to the distribution, private label, contract manufacturing, and other peripheral businesses in the international tobacco business. (IFRS): Excluding revenue from distribution business of imported tobacco, among others, in the Japanese domestic tobacco business, in addition to the distribution, private label, contract manufacturing, and other peripheral businesses in the international tobacco business.

3. 2010-: The method used to compute operating income was changed from the years ended March 31, 2010. The operating income for these periods does not account for payment of royalty fees by the international tobacco business to the Japanese domestic tobacco business. Also partially change the allocation method of overhead cost and CAPEX.

4. (JGAAP): EBITDA = Operation income + depreciation and amortization Depreciation and amortization = depreciation of tangible fixed assets + amortization of intangible fixed assets + amortization of long-term prepaid expenses + amortization of goodwill. (IFRS): Adjusted EBITDA = Operating profit + depreciation and amortization ± adjustment items (income and costs). Adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.

5. (IFRS): Under IFRS, profit is presented before deducting non-controlling interests. For comparison, we show the profit attributable to the owners of the parent company.

6. FCF = (cash flow from operating activities + cash flow from investing activities) excluding the following items: From “cash flows from operating activities”: Dividends received/interest received and its tax effect/interest paid and its tax effect. From “cash flows from investing activities”: Purchase of securities/proceeds from sale and redemption of securities/payments into time deposits/Proceeds from withdrawal of time deposits/others (but not business-related investment securities, which are included in the investment securities item).

7. Including lease obligation.8. (JGAAP): Return on equity.

(IFRS) Return on equity (attributable to owners of the parent).9. ROA = (Operating income + financial profit)/Total assets.10. (JGAAP): Equity ratio.

(IFRS) Equity ratio (attributable to owners of the parent).11. (IFRS) Based on profit attributable to owners of the parent company.12. A 200-for-one share spilit is done, effective as of July 1, 2012.

Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011).

13. (JGAAP): Dividend payout ratio before goodwill amortization. (IFRS) Based on profit (attributable to owners of the parent).

14. Financial data disclosed herein is basically rounded.

Billions of yen

2009 (JGAAP)

2010 (JGAAP)

2011 (IFRS)

2012 (IFRS)

2013 (IFRS)

At year-end:

Total assets/Assets 3,879.8 3,872.6 3,655.2 3,667.0 3,852.6

Interest-bearing debts (Note 7) 996.1 874.3 709.1 502.4 327.2

Liabilities 2,255.5 2,149.3 2,053.9 1,952.4 1,960.6

Net Assets/Equity 1,624.3 1,723.3 1,601.3 1,714.6 1,892.0

Major Financial Ratios

ROE (Note 8) 6.8% 8.6% 15.3% 20.3% 20.0%

ROA (Note 9) 8.4% 7.8% 10.9% 12.7% 14.3%

Equity Ratio (Note 10) 40.0% 42.6% 41.7% 44.6% 46.9%

Amounts per share: (in yen)

Diluted EPS (Notes 11/12) 12,880 14,449 25,407 168.44 180.99

Book value per share/Book value per share (attributable to owners of the parent) (Note 12) 162,088 172,140 160,180 858.09 993.75

Dividend per share (Note 12) 5,400 5,800 6,800 50 68

Dividend payout ratio before goodwill amortization/Dividend payout ratio (Note 13) 22.6% 23.6% 26.8% 29.7% 37.6%

Notes:


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Hiroshi KimuraChairman of the Board

Mitsuomi KoizumiPresident and CEO and Representative Director

We are pleased to share with you the achievements of the JT Group by delivering the annual report for the year ended March 2013. This past year was special, as we had the opportunity to welcome new shareholders after the success of a secondary share offering.

Successful share placementSome 333 million shares, or approximately 17% of the Company’s equity, were released by the Government of Japan. In conjunction with the offering, we executed a share buy-back program worth ¥250 billion aiming at improving shareholder return and capital efficiency, as well as mitigating the potential negative impact on the equity market. Consequently, the offer was worth nearly ¥750 billion and well received by the market, despite the large scale of the transaction. As a result, the number of shareholders at the fiscal year end more than tripled compared with the previous year, reaching a total of approximately 190 thousand.

This successful offering shows a widespread support for our management principle and our strategies as well as our commitment to sustainable profit growth. We remain determined to meet, and even exceed, the expectations of this wider shareholder base.

Strong business performanceDuring the past year, the Group’s business performed strongly once again, with a 15.1% growth in adjusted EBITDA at constant rates of exchange, or 7.8% including the impact of unfavorable currency movements. This performance was driven by our tobacco business, which achieved top-line growth by leveraging its strong brand portfolio and broadening its earnings base. In the pharmaceutical business, we launched for the first time in our history a drug containing our original compound. In the beverage business, our sales volume reached a record high. In the processed food business, we confirmed our top-line growth momentum in the staple food category.

Shareholder return improvementReturn to shareholders also improved. Dividend payout ratio reached 37.6%, up 7.9 percentage points from the previous year, exceeding the target set at the beginning of the fiscal year. Importantly, this was attained along with higher earnings than forecast. With the aim to achieve the target, we revised our dividend per share forecasts twice, increasing dividend per share by ¥18 or 36%. As a result of profit growth, adjusted EPS grew 27.3% at constant rates of exchange, or 13.8% on a reported basis.

Strengthening corporate governanceWe have been striving to enhance corporate governance as a global company. The most notable initiative in the previous year was the appointment of two independent outside Board members, Motoyuki Oka and Main Kohda. Their expertise has contributed to further increasing the quality and transparency of Board decisions.

Our efforts to enhance communication with capital markets continue. We are now preparing the harmonization of the accounting periods throughout the Group to a January-to-December basis, starting from January 2015, subject to the Board’s decision and shareholders’ approval. This initiative will allow our reporting to become more timely and integrated.

Furthermore, the JT Group is re-emphasizing its commitment to corporate responsibility. By enhancing our contribution to society, we will keep reinforcing our foundation in the community.

Looking aheadThe JT Group is proud of its accomplishments during the past year. These could not have been achieved without the dedication of each and every employee and without the support of all our other stakeholders. We are grateful for that.

The global business environment remains uncertain. Economies are still fragile and geopolitical tensions are strong. In our industry, regulatory pressure is mounting, consumers’ needs are increasingly diverse and competition is intensifying. Despite these challenges, we are confident that the JT Group will achieve sustainable profit growth in the mid- to long-term, by leveraging its ability to adapt to a changing environment. Our track record speaks for itself. With this level of confidence in our business performance, we have decided to accelerate the improvement of shareholder return. We now aim to reach a dividend payout ratio of 50% for the year 2015, one year earlier than previously communicated.

We are committed to continue delivering strong performance in the years ahead, increasing the Company’s value for you and all stakeholders through sustainable profit growth.


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Message from the chairman and cEo

Mitsuomi KoizumiPresident and CEO and Representative Director

The JT Group delivered a robust performance in a difficult operating environment as we continued to invest in our business.

Performance overview Our “4S” model is a unique management principle in that it aims to strike a balance between the interests of all stakeholders – consumers, shareholders, employees and wider society – while keeping them fulfilled. I believe that this “4S” model, with its comprehensive approach, is a source of sustainable competitive advantage.

Our strategic framework and resource allocation policy are long-term oriented, in line with our pursuit of sustainable profit growth. Over the years, we have remained committed to this approach, and the investments that we have made in the past continue to pay off. During the year ended March 2013, our strategic emphasis on quality top-line growth resulted in another strong business performance. At the same time, we stayed true to our mid- to long-term perspective and did not compromise on investments in the business and in our people. The end result was a strong achievement, exceeding initial forecasts in all key profit indicators, while, more importantly, reinforcing future growth potential.

Accomplishment by business segmentIn the international tobacco business, our continued efforts to enhance brand equity and expand the earnings base led to a year-on-year total shipment volume increase. This was achieved in a context of industry volume declines in many markets where we operate. Once again, our competitive strength was demonstrated by share gains in most of our key markets. In addition to our positive volume performance, pricing gains drove revenue and profit growth. Furthermore, we successfully completed two important acquisitions, Gryson and Nakhla, which complement our already solid platform, both in terms of products and markets. These acquisitions will contribute to fuel our future growth.


cEo business Review

In the Japanese domestic tobacco business, our market share has steadily recovered from the loss caused by the devastating earthquake. On a 12-month basis, it reached 59.6%, up 4.7ppt from the previous year, while the monthly shares in February and March reached the 60% threshold. Our core brands performed well, supported by brand equity investments and trade marketing excellence, resulting in a shipment volume increase despite continued industry volume decline. Volume growth also drove increased profits.

Aiming to achieve future growth, our tobacco business embarked on a bold and promising initiative: the evolution of Mild Seven to MEVIUS. The objective is to develop MEVIUS to the number one global premium brand in the future, and further strengthen our global brand portfolio. In addition to the change in brand name, we have introduced new sophisticated package designs as well as innovative line extensions. The implementation of this strategy in Japan, where the Mild Seven brand has commanded the top-selling position for decades, started in February. Initial response from consumers has been encouraging, with solid performance since the launch. Building on this, we will continue to enhance the brand equity of MEVIUS to achieve global success.

In the pharmaceutical business, we made significant progress in establishing a profitable business platform, by launching for the first time in our history a drug, “Stribild®”, containing JTK-303 which is our original compound. “Stribild®”, an anti-HIV single-tablet regimen, was approved in the U.S. and launched by our license partner. The same drug was approved also in EU and other countries as well as Japan, where we have been marketing it since May 2013. Furthermore, New Drug Applications of our compounds for hyperphosphatemia, Japanese cedar pollinosis and MEK inhibitor (trametinib) were filed during the past fiscal year. In May 2013, our license partner announced that MEK inhibitor (trametinib) was approved in the U.S.

In the beverage business, we celebrate the achievement of a record sales volume, led by ‘Roots’, one of the popular brands in the canned coffee segment in Japan. ‘Roots’ is the core brand of our beverage business, and as such we have provided intensive support, through extension launches and trade marketing initiatives to enhance its brand equity.

In the processed food business, we have sharpened our focus on staple food products. This strategy is proving to be successful, as evidenced by a robust 12.4% revenue growth in the staple food category. Driven by this performance, the profit margin of the processed food business has been improving steadily.

OutlookOur strong performance in the past year further reinforces my confidence in our “4S” model as a driver of sustainable profit growth. Our management principle, resource allocation policy and strategic framework remain unchanged, as they are the foundation of our track record. Keeping these management principles and our strategy in mind, each business will strive to achieve its targets in the mid- to long-term.

The international tobacco business is well-positioned to continue driving the profit growth of the Group, leveraging its robust brand portfolio and well-balanced geographical footprint. The Japanese domestic tobacco business remains a solid profit generator, underpinned by its strong market share leadership. The pharmaceutical, beverage and processed food businesses are strengthening their platforms to contribute to the Group profit in the mid-term. I will ensure that, as each business fulfills its role, the JT Group continues to deliver strong results in the mid- to long-term.


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Shareholders

Consumers

Employees Society

We will balance the interests of consumers, shareholders, employees and wider society, and fulfill our responsibilities towards them, aiming to exceed their expectations

Introduction Our unique “4S” model, resource allocation policy and strategic framework continue to deliver strong business results and shareholder return improvements. We are confident that pursuit of the “4S” model and business investments enable sustainable profit growth, and thus continuously increase the Company’s value in the mid- to long-term.

Management principle

The “4S” modelOur management principle is the “4S” model and this unique model defines who we are.

Pursuit of the “4S” model means that we will balance the interests of consumers, shareholders, employees and wider society, and fulfill our responsibilities towards them, aiming to exceed their expectations.

This management principle can drive our growth in the mid- to long-term by continuously offering additional value to consumers. Therefore, business investments to create additional value for our products and operations will not be compromised. We firmly believe that the pursuit of the “4S” model increases the Company’s value through sustainable profit growth and is consequently in the best interests of all stakeholders.

Business investmentWe expect that the international tobacco business drives the Group’s profit growth, while the Japanese domestic tobacco business continues to solidify its profitable platform. Therefore, investment to enhance the competitiveness of our tobacco business is our primary focus in our resource allocation.

Investments in our pharmaceutical, beverage and processed food businesses at this stage are intended for fundamental buildings to strengthen future profit contribution.

Shareholder returnStrong emphasis is placed on shareholder return improvement. In particular, we focus on dividend payout ratio as well as adjusted EPS growth rate and set targets for these two indicators to drive the improvement.

Our benchmark for dividend payout ratio is global FMCG players in a variety of sectors. We aim for a dividend payout ratio comparable to them. It is our intention to grow adjusted EPS through business growth; however, we may consider introducing share buy-back programs, if necessary, in order to achieve the target.

Strategic framework The JT Group employs a strategic framework with three key components to support sustainable profit growth. Each business develops specific strategies consistent with this framework.

Quality top-linegrowth

Competitivecost base

Robust business foundations

A greater emphasis is placed on “quality top-line growth”. In order to achieve it, we concentrate our resources in key brands and product categories, which are growing or have a potential to grow, to increase value-added offerings.

We strive to reinforce our “competitive cost base” by establishing an efficiently operating organization to enhance profitability and cash generation capability. To this end, we seek to optimize both operational and corporate costs without compromising quality.

“Robust business foundations” will be established through continuous improvement. In addition, the JT Group invests in employees, who are the cornerstone of our success, and encourages collaboration among diversified human resources.

Resource allocation policyIn allocating our resources, our priority is business investment which underpins sustainable profit growth in a most efficient manner. At the same time, we are committed to improving shareholder return and willing to use our funds for this purpose. It is our intention to strike an optimal balance between these two objectives.


Management principle, Resource allocation policy and Strategic Framework

Dividend payout ratio forecast for the year ending March 2014

40.3%

1Pursuing the “4S” model, Business Plan 2013 aims for sustainable profit growth in the mid- to long-term

•We will fulfill our responsibilities towards stakeholders by: – Creating and delivering additional value for consumers

– Achieving competitive shareholder return – Offering development opportunities to employees Expanding CSR activities for society.

•The JT Group continues to aim for sustainable profit growth in the mid- to long-term.

•Our resource allocation policy and strategic framework are unchanged.

2Enhancing our ability to adapt to the changing environment is the key for continuous success

•The business environment remains uncertain due to economic volatility, geopolitical risks and regulatory pressure, among others.

•By further enhancing its adaptability to the changes, the JT Group reinvents itself to overcome challenges as it did in the past.

3Business plan 2013 targets reflect management intention for growth and commitment to shareholder return improvement

•Group profit target remains unchanged from Business Plan 2012, our previous mid-term plan.

•Shareholder return improvement will be accelerated, as we aim to achieve a dividend payout ratio of 50%, one year earlier than previously planned.

Group profit targetAdjusted EBITDA growth rate at constant rates of exchange:•Mid to high single-digit growth per annum over

the mid- to long-term.

Shareholder return targetsConsolidated dividend payout ratio:•40% for this fiscal year, then aiming to reach 50%

for the fiscal year 2015.

Adjusted EPS growth rate at constant rates of exchange:•High single-digit growth per annum over the mid-

to long-term.

The JT Group’s management plan is an annual rolling plan with a three-year term. It means that we revise our mid-term plan every year reflecting changes in our business environment. However, there is one thing that does not change: our management principle. Business Plan 2013, a management plan starting from the year ending March 2014, was developed based on the “4S” model with the following key features.

4Forecast new record earnings for the year ending March 2014

•Adjusted EBITDA to grow 6.1% at constant rates of exchange.

•Reported adjusted EBITDA to reach new record level.•Shareholder return to continuously improve.

Group profitActual for the year ended March 2013

Forecastfor the year ending March 2014 Growth

Growth at constant rates of exchange

Adjusted EBITDA (JPY BN) 622.1 730.0 +17.3% +6.1%

Shareholder returnActualfor the year ended March 2013

Forecastfor the year ending March 2014 Growth

Dividend payout ratio 37.6% 40.3% +2.7ppt

Dividend per share (JPY) 68 92

+24(+35.3%)


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business plan 2013

International tobacco (BnU)

20112010

Calendar year basis

2012

428.4 425.7

436.5

GFB shipment volume (BnU)

20112010 2012

249.8256.5

268.8

Calendar year basis

Japanese domestic tobacco (BnU)

FY3/2012FY3/2011 FY3/2013

134.6

108.4116.2

Tobacco sales volume

GFb shipment volume

+2.5% to 436.5 BnU

+4.8% to 268.8 BnU

+7.2% to 116.2 BnU

For the international tobacco business, total shipment volume which includes Fine Cut, cigars, pipe tobacco and snus, but excludes contract manufactured products and waterpipe tobacco products.

Shipment volume of GFBs, namely Winston, Camel, MEVIUS (Mild Seven), B&H, Silk Cut, LD, Glamour and Sobranie, in the international tobacco business.

For Japanese domestic tobacco, total sales volume which excludes sales volume of Japanese domestic duty free and the China business.

In our Business Plan 2013, targets are set for adjusted EBITDA growth rate at constant rates of exchange, as well as consolidated dividend payout ratio and adjusted EPS growth rate at constant rates of exchange. While they are mid- to long-term targets, we also monitor the performance measures introduced here annually.

In our strategic framework to achieve adjusted EBITDA growth rate, the JT Group places a particular emphasis on “quality top-line growth”, while, at the same time, focusing on building a “competitive cost base” and “robust business foundations”. In line with our strategic emphasis, the measures to review our business performance are skewed towards top-line related. As for shareholder return, we have selected three indicators to monitor the improvement.


performance Measures

Revenue (JPY BN)

2,059.42,033.8

2,120.2

FY3/2012FY3/2011 FY3/2013

Japanese domestic tobacco (JPY BN)

632.2

611.9

654.0

FY3/2012FY3/2011 FY3/2013

International tobacco (US$ MM)

2010 2011 Business 2012 atconstantcurrency

FX 2012

10,113

11,211

1,412

12,623

-806

11,817

Calendar year basis

Revenue

Core revenues

The following financial figures are based on IFRS.

+12.6% at constant rates of exchange to US$ 12,623 MM

+5.4% including currency impact to US$ 11,817 MM

+4.2% to JPY 2,020.2 BN

+6.9% to JPY 654.0 BN

For the international tobacco business, US dollar based core revenue excludes revenues from distribution, contract manufacturing and other peripheral businesses.

Revenue on a consolidated basis which, for the avoidance of doubt, excludes excise and other similar taxes, as well as sales from transactions in which the JT Group acts as an agent.

For the Japanese domestic tobacco business, core revenue which excludes revenue from distribution of imported tobacco in Japan, among others.

JAPAN TOBACCO INC. ANNUAL REPORT 2013 015

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Dividend payout ratio (%)

26.829.7

37.6

FY3/2012FY3/2011 FY3/2013

Adjusted EBITDA (JPY BN)

FY3/2011 FY3/2012 Business FY3/2013 atconstantcurrency

FX FY3/2013

522.0577.1

87.1

664.2

-42.2

622.1

adjusted EbITDa

Dividend payout ratio

+15.1% at constant rates of exchange to JPY 664.2 BN

+7.8% including currency impact to JPY 622.1 BN

+7.9pp to 37.6%

Operating profit excluding depreciation, amortization and adjustment items (income and expenses).*

* Adjustment items (income and expenses) are impairment losses on goodwill, restructuring related income and expenses and others.

Dividend per share divided by profit attributable to owners of the parent company per share.

250bnshare buyback (yen)



performance Measures continued

Adjusted EPS (diluted) (JPY)

FY3/2011 FY3/2012 Business FY3/2013 atconstantcurrency

FX FY3/2013

129.5

152.7

41.7

194.3

20.7

173.7

Dividend per share (%)

34

50

68

FY3/2012FY3/2011 FY3/2013

adjusted EpS (diluted)

+27.3% at constant rates of exchange to JPY 194.3

+13.8% including currency impact to JPY 173.7

Adjusted EPS is calculated as follows:

Adjusted EPS = (Profit or loss attributable to owners of the parent company ± adjustment items (income and costs)* ± tax and minority interests adjustments) / (weighted-average common shares + increased number of ordinary shares under subscription rights to shares).

* Adjustment items (income and expenses) are impairment losses on goodwill, restructuring related income and expenses and others.

Dividend per share

+36% to JPY 68

The sum of interim and year-end dividends per share, the record dates of which fall in the relevant fiscal year.

caGR26%dividend per share growth over the past five years



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Continuous investment in our brands for quality top-line growth delivered strong results Our strategic emphasis on top-line growth resulted in another strong business performance. We stayed true to our mid- to long-term perspective and did not compromise on investments in our business and in our people. The end result was a strong achievement, exceeding our initial forecast while reinforcing future growth potential.

020 Industry Overview024 Review of Operations050 Risk Factors054 Corporate Social Responsibility058 Corporate Governance

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Tobacco industry

Market dynamicsThere are many types of tobacco products available in the marketplace. Cigarettes remain the most popular choice of consumers, while cigars, pipe tobacco, snuff, chewing tobacco and other product varieties continue to draw consumers’ interest, with some of these product categories increasing their volume worldwide.

Approximately 5.8 trillion cigarettes are consumed around the world. China is by far the largest market, which accounts for nearly one third of global consumption, but it is almost exclusively operated by a state monopoly. Russia, the U.S., Indonesia and Japan are the next four largest markets, according to a survey conducted in 2012.*

In general, market dynamics are distinctively different between mature and emerging markets.

In mature markets, industry volume tends to decline reflecting various factors such as limited economic growth, tax increases, tightening regulations, and demographic changes, among others.

In addition, down-trading is prevalent in these markets. Consumers are inclined to seek more value as they feel tobacco products become less affordable in the context of limited disposable income growth.

Recently, these trends have been especially notable in the EU countries, as weak economic conditions accelerate industry contraction and down-trading.

In emerging markets, on the other hand, total consumption tends to increase driven by population growth and economic development, particularly in Asia, the Middle East and Africa.

As their disposable income increases, consumers look for quality and trade up to products in higher price bands.

Overall, when we exclude China, global industry volume has been slightly decreasing. However, more importantly, industry value continues to grow even in the current difficult operating environment, mainly driven by price increases. This is a sign of the resilience of the industry. These trends – decline in volume and increase in value – are expected to continue in the years ahead.

* Source: Euromonitor.

RegulationsThe regulatory environment continues to be more restrictive for the tobacco industry. Restrictions on promotions and advertisements are the most common around the world. An increasing number of markets are introducing bans on smoking in public places, and health warnings on packages are required in numerous countries with, in some cases, a pictorial format.

Recent regulations are focusing more on the product itself. Specifically, plain packaging has been discussed in the UK, Ireland and New Zealand after being implemented in Australia. Further, regulators are becoming more aggressive by restricting ingredients and emissions, following the guidelines on these attributes proposed by the Framework Convention on Tobacco Control. These moves to commoditize tobacco products could undermine healthy competition among tobacco manufacturers trying to meet increasingly diverse consumer preferences. Worse, they could result in an undesired increase in illicit trade, as commoditized products with less uniqueness are easier to counterfeit and more difficult to detect when smuggled.

Excise taxes were raised in various markets during the past year, but there was no disruptive tax increase in our key markets as Governments have become aware that repeated tax increases in a short period of time, or steep tax increases, could be detrimental to tax revenues, due to a large decline in industry volume and, most likely, an increase in illicit trade.

CompetitionExcluding China, two thirds of world industry volume is produced by four major global tobacco companies, namely Philip Morris International Inc., British American Tobacco Plc., Japan Tobacco Inc. and Imperial Tobacco Group Plc.

The competition within the industry is intense and, as consumers’ needs and preferences continue to diversify, a strong portfolio with established brands is increasingly important to support market share gains. Therefore, major global companies are focusing on brand equity enhancement to strengthen their brand portfolios by introducing innovative products. In addition to the pursuit of organic growth, M&A is an effective way to supplement growth opportunities in this industry.


Industry overviewTobacco

Top 10 countries by volumeBillion units

Country 2008 2009 2010 2011 2012

China 2,143.1 2,229.2 2,316.7 2,406.2 2,477.9

Russia 393.5 390.0 383.1 375.1 374.1

U.S. 353.0 320.7 309.1 299.1 287.1

Indonesia 167.7 173.8 181.6 191.8 203.1

Japan 248.8 235.1 217.9 195.9 197.5

India 97.6 98.7 98.6 102.8 102.1

Philippines 99.5 94.8 101.4 97.4 100.5

Vietnam 81.0 89.9 95.3 97.7 99.7

Turkey 107.9 107.5 93.4 91.2 95.3

South Korea 94.2 94.2 90.5 89.9 89.0

Source: Euromonitor.

Top market playersShare of market (%)

2008 2009 2010 2011 2012

Philip Morris International Inc. 22.3 22.8 24.9 25.3 25.5

British American Tobacco Plc 18.6 18.7 19.0 19.2 19.1

Japan Tobacco Inc. 15.4 15.2 14.8 14.0 14.5

Imperial Tobacco Group Plc 7.2 7.1 7.0 6.9 6.7

Source: Euromonitor and JT estimate.Excluding China National Tobacco Corp (CNTC).

Top brandsBillion units

Brand Company 2008 2009 2010 2011 2012

Marlboro • Philip Morris International Inc. • Altria Group Inc. 428.8 414.5 412.8 406.6 400.9

Winston • Japan Tobacco Inc. • Reynolds American Inc. 122.4 122.1 122.4 122.4 129.7

Pall Mall • British American Tobacco Plc • Reynolds American Inc. 74.0 85.6 94.6 96.8 95.8

Mild Seven/MEVIUS • Japan Tobacco Inc. 107.4 103.7 95.1 80.5 85.8

L&M • Philip Morris International Inc. 85.2 84.0 82.1 84.1 83.5

Kent • British American Tobacco Plc 61.7 60.6 59.6 62.6 66.7

Camel • Japan Tobacco Inc. • Reynolds American Inc. 78.5 69.7 64.8 61.2 61.4

Gudang Garam • Gudang Garam Tbk PT 47.4 48.8 52.3 53.7 57.8

Fortune International • Philip Morris International Inc. • Fortune Tobacco Corp 42.5 43.8 50.1 47.6 52.5

Gold Flake • ITC Ltd • British American Tobacco Plc 48.7 47.4 47.1 47.9 47.6

Source: Euromonitor. Excluding China National Tobacco Corp (CNTC)


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Pharmaceutical industry

Market dynamicsThe global pharmaceutical market continues to grow, reaching approximately US $950 billion in 2011 according to IMS Health.

In emerging countries, demand for modern medicine is rapidly growing due to multiple factors including growing consciousness of health, increase in population, and development of public healthcare systems, among others.

Mature countries also see a market value increase, though the pace of growth is moderate. Facing an ageing society and a fiscal deficit, the Governments in these markets try to contain healthcare costs through mandated price cuts and wider promotion of generic drugs. In addition, patents of commercially successful drugs have been expiring during recent years.

Despite the limited growth, mature markets hold majority of share in global pharmaceutical markets. North America is the largest market and accounts for 36% of the worldwide market, followed by Europe and Japan, representing 28% and 12%, respectively.

Japan, the main market for our pharmaceutical business, is a typical mature market with a moderate industry growth. In an ageing population, this trend is expected to continue at a CAGR of 1% to 4% from 2012 through 2016, according to IMS Health.

Prescription drugs comprise the majority of the Japanese pharmaceutical market in terms of net sales. The Japanese generic drug market for prescription drugs is still small compared with the generic drug market in the U.S. and Europe, but the generic drug market has been expanding more recently due in part to the government promotion of generic drugs in order to control medical care expenses.

In light of these factors and consistent with the global trend towards industry consolidation, Japanese pharmaceutical companies have been actively involved in mergers, acquisitions and other business alliances. In addition to industry consolidation within Japan, cross-border mergers, acquisitions and other business alliances involving Japanese pharmaceutical companies are also expected to increase.

CompetitionThe pharmaceutical industry is highly competitive worldwide. Our pharmaceutical business focuses on building a R&D-led operational platform. Based on this platform, original compounds are developed and marketed as leading products in major global markets. As such, we face competition with Japanese and multinational pharmaceutical companies. These companies are also pursuing to enforce their research and development pipeline.

Japanese beverage industry

Market dynamicsSales volume of the Japanese beverage market was approximately 1,810 million cases for 2012, up 3% year-on-year. The increase was due to the increase in demand for mineral water for stocking as well as the summer heat wave and Indian summer. (Source: Inryo Soken Inc. Data of packaged products including cans, PET bottles and glass bottles). In general, sales volume is significantly affected by weather conditions including temperature, as well as by economic conditions.

Popular beverage categories in Japan include tea-based drinks, coffee, carbonated drinks and mineral water. In 2012, sales volume of most categories increased year-on-year. In particular, the sale of cola drinks, designated as Food for Specified Health Uses, contributed to the strong growth of carbonated drinks. Tea-based drinks and coffee, the mainstay categories, grew steadily.

Key sales channels in Japan include vending machines, supermarkets, convenience stores and other channels, with share of sales volume standing at 37%, 32%, 20%, and 11% respectively (Source: Inryo Soken Inc. Data of packaged products including bins, cans and PET bottles). In general, supermarkets frequently offer price discounts, while vending machines and convenience stores maintain regular prices. However, the consumer down-trading trend has led to the emergence of vending machines offering discounts and to the growing popularity of private-label products, causing price competition to intensify. Price competition is also driven by wholesalers and retailers.


Industry overview continuedPharmaceutical, Beverage and Processed Food

CompetitionMany companies, both domestic and international, are selling beverages in Japan, including the JT Group, Coca-Cola Group, Suntory Foods, Kirin Beverage, ITO EN and Asahi Soft Drinks. The competition is increasingly intensive. These companies are competing in various areas including price, brand equity, distribution reach among others.

Japanese processed food industry

Market dynamicsJT focuses on frozen and ambient processed foods, freshly baked bakery items sold in stores and seasoning through our subsidiary TableMark Co., Ltd., which plays a central role in our processed food business.

Processed foods sold in Japan include grain-based food such as noodles or packed rice, bread, meat and fish. Seasoning products include raw seasonings, such as yeast and other extracts, basic seasonings, such as soy sauce and miso, and processed seasonings such as mayonnaise and other condiments.

Frozen food is a key segment in TableMark’s processed food business. The size of the Japanese frozen food market in 2012 on a consumption basis including imports was ¥895.1 billion, up 4.2% year-on-year (Source: Japan Frozen Food Association). This was due to an increase in household consumption of frozen food as we saw stronger preference for eating in – demand for ready-made frozen food also remained solid. Processed frozen food products constitute approximately 85% of frozen food products produced domestically in Japan (by volume/Source: Japan Frozen Food Association). Frozen udon noodles constitute approximately 11% of frozen food products produced domestically in Japan in 2012 and this category grew by more than 3% year-on-year in 2012 (by volume/Source: Japan Frozen Food Association).

The business environment for the Japanese processed food business is challenging, as prices of raw materials such as wheat are rising in spite of the prolonged economic stagnation in Japan. The processed food business is also significantly impacted by developments in the wholesale and retail sales channels particularly by their consolidation. We will continue to monitor the development of these channels, especially in the area of M&A.

CompetitionTableMark is competing against major players like Nichirei, Ajinomoto, Maruha Nichiro Foods and Nissui as well as a multitude of mid-or small-scale producers. As a consequence of the consolidation among the major wholesale or retail players, the competition in the processed food industry is increasing.


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MEVIUS, a bold and promising initiative• With the evolution from Mild Seven to MEVIUS,

we aim to transform it into the number one global premium brand in the future.

• When we look at the composition of our GFBs, the high price brands constitute about 20% of the portfolio. We believe that, by reinforcing our premium segment offerings, we can further strengthen our brand portfolio for sustainable mid- to long-term profit growth.

• In selecting a brand to enhance our premium segment offerings, we examined various options. Early in the process, we recognized the potential of Mild Seven with its smooth taste and clean finish, thanks to its unique tobacco leaf blend and the use of a charcoal filter. Mild Seven already has a strong presence in several markets, especially in Asia. We therefore came to the conclusion that Mild Seven has the strongest potential for cultivating demand in global markets.

• To ensure the success of this evolution, we needed to address some hurdles through a unified brand image and quality for all markets and further enhanced brand equity. This led to: – Changing the package design to better represent global premium quality.

– Expanding the product portfolio through high value-added extensions in order to meet diverse consumer needs.

– Renaming the brand to grow its geographic reach and address the ban of descriptors in certain markets, such as in the EU where terms such as “mild” or “light” are not allowed on cigarette packs.

Mid- to long-term target:• As the core business and profit growth engine of the JT Group,

grow adjusted EBITDA at mid to high single-digit rate per annum – Japanese domestic: highly competitive platform of profitability – International: strengthen its role as the Group’s profit growth engine.

MEVIUS in international markets• MEVIUS name change rolled out to all markets

by end 2013• Singapore was the first market to launch the

MEVIUS name while South Korea was the first market to release the new name and design

• Our objective is not only to retain and expand our share in existing markets but also to achieve further geographical expansion.

MEVIUS in the Japanese market• A new package design was introduced

in November 2012• We successfully proceeded with the name

change from Mild Seven to MEVIUS in February 2013, as the first step towards becoming the number one global premium brand – Market share of the MEVIUS family remained steady throughout the transition

• Going forward, we will continue to invest to strengthen the brand equity.



Review of operationsRole of Tobacco Businesses

Value Chain

R&D procurement Manufacturing Marketing Sales & Distribution

Expand product availability by leveraging our trade marketing excellence

Support top-line growth by delivering quality products

Enhance equity of key brands

Ensure stable supply of quality tobacco leaf

Create value for the business through innovation and quality

R&D

Create value for the business through innovation and quality

• We focus on fundamental research and product technology development, taking advantage of our global research platform, in close collaboration with other functions. In particular, focus areas in our R&D activities are:

– Develop product and analytical capabilities in line with market needs and our anticipation of regulatory trends.

– Maintain existing product to comply with regulatory changes. – Develop new technologies and improve production processes

to maintain competitiveness and increase efficiency. – Drive product innovation to enhance brand equity from various

aspects, including tobacco leaves, blends, filters, printing techniques and packaging.

Procurement

Ensure stable supply of quality tobacco leaf

• Tobacco leaf is the most important material for our products, and we dedicate our efforts to strengthen our capability to ensure a stable supply of quality leaf in the long-term.

– Increase the proportion of internally sourced leaf from our procurement bases in Africa, Brazil and the U.S.

– Enhance sustainability of tobacco farming by helping farmers to improve productivity as well as taking initiatives to support their communities.

– Maintain good relationships with external suppliers to ensure sufficient supply at competitive prices.

Manufacturing

Support top-line growth by delivering quality products

• Our emphasis on product quality is increasing to meet consumer expectations for innovative offerings. In addition, we consistently pursue an optimal manufacturing footprint which ensures efficient and timely product deliveries to markets.

– Ensure high quality of products and enhance flexibility in the manufacturing process, overcoming complexity in manufacturing due to an increase in number of products.

– At the same time, seek efficiency by containing cost increases through continuous improvement and reviewing manufacturing footprint for further optimization.

Marketing

Enhance equity of key brands

• Our strategic focus is placed on our Global Flagship Brands and we strive to enhance their equity through effective communications with consumers.

– Allocate appropriate resources to support GFBs’ equity building. – Reinforce non-GFBs, where necessary, to complement our

brand portfolio in a market. – Implement effective marketing programs, in compliance

with applicable laws and regulations as well as our own marketing code.

Sales & Distribution

Expand product availability by leveraging our trade marketing excellence

• There are various sales channels for tobacco products such as supermarkets, convenience stores, street and train station kiosks, small independent retailers and vending machines. Key channels are different depending on market and we develop win-win relationships with them to increase the availability of our products.

– Strengthen relationship with key accounts, leveraging our trained sales forces.

– Develop trade marketing initiatives for each market, taking into account the channel development as well as consumer trends and competitors’ actions.


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Core Revenue grew, driven by pricing, volume and improved mix.

2011 Volume Price/Mix 2012 atconstantcurrency

FX 2012reported

11,211

311

1,101

12,623

-806

11,817

+12.6%* +5.4%

Adjusted EBITDA grew 22.5% at constant currency.

2011 Volume Price/Mix 2012 at constant currency

Other FX 2012reported

3,944

173

1,094

4,830

-528

4,302

+22.5%* +9.1%

-381

JT International (JTI) represents the international activities of JT Group’s tobacco business. JTI manufactures and sells more than 90 brands of tobacco products in more than 120 countries. It is the profit growth engine of the Group driven by its diversified geographic profile and the strength of its brands and people.

“JTI continued to deliver strong results in 2012, achieving double-digit growth in both our revenue and profits, at constant rates of exchange, despite the ongoing challenges in our operating environment.

Our solid performance was driven by robust pricing and volume growth, and I am pleased to say that our strategy of continuous investment in our Global Flagship Brands has resulted in share gains in most of our key markets.

In addition, we continue to secure our future growth by expanding JTI’s presence in other tobacco categories. This includes Fine Cut tobacco, with the acquisition of Gryson, and water pipe tobacco, following the acquisition of Nakhla. These and other opportunities will help us to further broaden our earnings base.

Looking to the future, despite ongoing economic and regulatory challenges, I am confident that the professionalism and dedication of our people, combined with our strategy, will continue to deliver solid performance.”

Pierre de Labouchere President & CEO, JT International


Total Shipment Volume1 Year-on-year change (BnU)

436.5 +2.5%

Core Revenue2 Year-on-year change (US$ MM)

11,817 +5.4%

GFB Shipment Volume Year-on-year change (BnU)

268.8 +4.8%

Adjusted EBITDA3 Year-on-year change (US$ MM)

4,302 +9.1%

• Total shipment volume grew 2.5% driven by our success in broadening the earnings base, through acquisitions as well as organic growth in newly developed geographies.

• Within our total shipment volume growth, GFB shipment volume grew 4.8% driven by our continued and solid investment in brand equity.

• Revenue grew 12.6% on robust pricing and mix in key markets including Russia, Taiwan and the UK, or 5.4% including unfavorable currency exchange movements.

* 12.6% includes approximately 2ppt of pricing taken to mitigate the effect of a currency with substantial devaluation.

* 22.5% includes approximately 6ppt of pricing taken to mitigate the effect of a currency with substantial devaluation.

• Strong volume and price/mix drove our 22.5% profit growth.

• Product cost increase was moderate (+1.5%) linked to product and packaging innovation and compliance with European LIP regulation.

• Reported profit was impacted by unfavorable currency exchange movements.

1 Includes Fine Cut, cigars, pipe tobacco and snus, but excludes contract manufactured products.2 Includes revenue from Fine Cut, but excludes revenues from distribution, contract manufacturing and other

peripheral businesses.3 Operating profit + depreciation and amortization ± adjustment items (income and costs)*

* adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.


Review of operations continuedInternational Tobacco Business (Year ended December 31, 2012)

Winston shipment volume growthBnU, growth %

139.4

2009 2010 2011 2012

121.2 125.0 130.7

+6.7%-4.1% +3.1% +4.5%

+3.1%

+7.8%

+13.5%

-2.3%

Winston shipment volume by cluster (growth 2012 vs. 2011) Growth %

South & West Europe

North & Central Europe

CIS+

Rest-of-the-World

First introduced in 1954, Winston is one of our key growth drivers. The second largest cigarette brand worldwide since 2007, Winston is currently sold in more than 100 markets. 2012 was a landmark year for Winston, achieving record performance. Winston’s growth rate continued to accelerate, reaching its highest level of +6.7%. 2012 shipment volume surpassed all previous records to reach 139.4bn units.

Our GFBs form the core of our brand portfolio. Among this portfolio, Winston and Camel are our Engine brands and the main drivers of top-line growth.

Growth was driven by both pillars of the newly established portfolio architecture: Winston Core and XS.

• Our Core pillar delivers an authentic, high quality, premium smoking experience. It continues to grow steadily driven by mainstream products: Winston King Size, Winston Super Slims and Winston Fine Cut.

• The XS pillar offers a more style focused product, created specifically to open up new segments and territories to Winston. 65% of overall Winston growth in 2012 was attributed to this portfolio pillar, and despite being one

In 2012, rejuvenation and innovative line extensions drove Camel shipment volume and market share growth.

• Camel shipment volume grew by 200 million units vs. prior year, driven by Camel Activate, Camel Black & White (now available in 34 markets) and Fine Cut line extensions.

• Camel Curve drove share gains in most of Camel’s top 10 markets, such as The Netherlands, Belgium, Italy and Spain.

of the newer players in emerging segments, XS has grown to become No. 1 in the King Size Super Slim segment and No. 2 in Fat Slims globally.

• Sales have grown across most of the clusters. This growth was driven by expansion in new geographies and roll-out of new initiatives in several markets: XSmicro, the slimmest cigarette in the world; XSpression, the first innovative menthol capsule in Fat Slims format and Winston Make Your Own, deployed in a variety of new formats/configurations in Europe.

In 2013, we celebrate the 100 years anniversary

of a global icon• Launched in 1913 and originator of the American

blend, Camel has stood the test of time. It is sold today in 110 countries and is one of the top five premium brands in many of our key markets. Even after 100 years, with its strong heritage and genuine taste, Camel continues to successfully reinvent itself.

• We are celebrating Camel’s 100 years of inspiring creativity by reinterpreting stories from some of the brand’s iconic moments and making them relevant and unique today through special edition packs and point of sales campaigns.



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Winston

Camel

Global Flagship brands (GFb) portfolio

Our strategies:As in previous years, our strategic priorities are to achieve quality top-line growth and broaden our earnings base. JTI is committed to deploying its key strategies under the guiding principle of continuous improvement.

Our key strategies are:• Build and nurture outstanding brands• Enhance productivity continuously• Maintain focus on responsibility and credibility• Strengthen human resources as a cornerstone

of growth.

Operating performance• JTI gained total share in most key markets. Our

portfolio is well balanced, allowing us to capture consumers in both up-trading and down-trading environments, supported by superior trade marketing capabilities.

• Total shipment volume grew 2.5% to 436.6 billion units driven by market share gains, despite the context of global industry contraction.

Share of market (12-month moving average)

Change vs. last year (ppt)

Markets 2012 Total Excl. Gryson

France 17.4% +1.4 +0.3

Italy 21.4% +1.0 +0.9

Russia 36.5% -0.6 -0.6

Spain 20.8% +0.6 +0.2

Taiwan 38.9% +0.7 +0.7

Turkey 26.3% +2.2 +2.2

UK 39.3% +1.0 +1.0

Note: Market shares include cigarettes and Fine Cut.Source: Nielsen, Logista, Altadis.

GFB shipment volume performance

256.5

9.0

3.8

-0.4

268.8

60.2%

% Totalshipment

volume

Year-on-year

change

41.3%

17.8%

2.5%

61.6%

+2.6%

+5.2%

+5.1%

-3.2%

+4.8%

2012 GFB shipment volume Year-on-year variation (BnU)

2011

Engine (Winston/Camel)

Stronghold (LD/Mild Seven/Benson & Hedges/Silk Cut)

Future Potential (Glamour/Sobranie)

2012

In 2012, GFB shipment volume grew 4.8% to 268.8 billion units, a clear acceleration from the 2.6% growth in the prior year. GFB now represent 61.6% of our total

shipment volume, up 1.4ppt from the year before. This shows again the success of our ongoing investments to enhance the equity of our portfolio and launch innovative propositions.

Our Engine brands performed strongly, driven by both Winston and Camel. Engine brands’ weight in our total portfolio increased by 1.1ppt vs. the prior year.

Our Stronghold brands achieved solid growth, driven by the performance of LD as a result of stronger equity and the successful launch of the innovative LD Club Lounge.

Cluster performance

Cluster breakdown

Shipmentvolume

CoreRevenue

AdjustedEBITA

14%

11%

45%

29%

18%

17%

34%

31%

18%

21%

38%

23%

Rest-of-the-World CIS+ North & Central Europe South & West Europe

South & West Europe

2012Year-on-year change

Total shipment volume (billion units) 62.7 +3.1%

GFB shipment volume (billion units) 54.0 +0.9%

The economic outlook throughout 2012 remained challenging and fiscal pressures have affected consumer behavior, leading to significant industry contractions and down-trading, especially in France, Italy and Spain.

Nevertheless, we have successfully grown shipment volume and market share across our key markets as a result of brand equity building initiatives and GFB product innovations, as well as the Gryson acquisition.

In Italy, JTI reached the No.2 position by market share. Furthermore, JTI was the only player growing market share in both the cigarette and the Fine Cut categories.

The pricing environment has also remained robust. Price increases, together with our strong volume performance, drove Core Revenue growth of 4.4% and Adjusted EBITA growth of 2.8%, at constant rates of exchange.


Review of operations continuedInternational Tobacco Business continued

Our other GFBs include Mild Seven – MEVIUS, Silk Cut, Benson & Hedges and LD which hold strong positions in their regions and complement our Engine brands. There are also Sobranie and Glamour, positioned as “future potential” brands with strong growth expected in the future. Below is a more detailed description of these GFBs.

Originally established in 1873, Benson & Hedges has a proud British heritage as a leading brand. Today, JT International owns the B&H trademark in 27 EU markets (excluding Baltics) and is continuously evolving its three-pillar based portfolio to adapt to consumers’ lifestyles. B&H carries 21 different SKUs and continues to broaden its reach with the introduction of the B&H Progressive range in Cyprus, Denmark, Portugal, Slovenia and Sweden, as well as B&H London in Switzerland. B&H enjoys the No.2 position in the UK’s sub-premium segment and in France’s Virginia segment.

Stronghold

LD was launched in 1999 as a mid-price brand in the Russian market. The brand achieved immediate success and is now recognized as a compelling international brand, ranked No.2 globally in the Value segment. Since 2007, LD has grown continuously in all clusters, reaching 33 countries. LD has constantly expanded its portfolio to meet consumer aspirations, including in Fine Cut. In 2012, the LD Club family grew shipment volume by 105% driven by the success of LD Club Lounge. LD enjoys segment leadership in various markets including Azerbaijan, Kazakhstan, Poland, Serbia and Turkey.

Launched in 1964, Silk Cut established its credentials as one of the first low tar brands in the 1970s, long before it became the norm for other manufacturers. JTI owns the Silk Cut trademark throughout the EU. In total, Silk Cut has presence in 16 markets with the core markets being Greece, Ireland and the UK, where the brand continues to grow share in the premium segment. Silk Cut comprises a portfolio of 17 different SKUs.

Launched in 1977 in Japan, Mild Seven is the top-selling premium charcoal brand.

Outside Japan, it is present in 16 countries with its key markets being Korea, Malaysia, Russia and Taiwan, where it is market leader. The brand is built around three pillars and 21 different styles. In 2012, Mild Seven benefited from the success of our unique Less Smoke Smell technology.

In 2013, following our brand name change announcement in August 2012, Mild Seven will progressively become MEVIUS and aim to become the highest value-added global premium brand.

Sobranie is one of the world’s oldest tobacco brands and has been synonymous with luxury cigarettes since 1879. This heritage, exquisite style and the best selected tobaccos have made Sobranie one of the most prestigious brands in the world. Sobranie has presence in 23 markets and its portfolio includes 15 SKUs. In 2012, Sobranie launched a number of products such as Super Slims in Kazakhstan, Romania, Russia and Ukraine and King Size Super Slims in Azerbaijan.

Glamour is JTI’s leading Super Slims brand. Since its introduction in 2005, Glamour has achieved remarkable growth, consolidating its position as a Super Slims brand in several CIS+ markets. Glamour is constantly expanding its geographical presence, now covering 29 markets. Glamour is developing its portfolio in the growing Super Slims segment around three main families. Glamour holds the No.1 shipment volume position in several segments including in Austria, Kazakhstan, Russia, Slovenia and Ukraine.

Future Potential


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Global Flagship brands portfolio continued

North & Central Europe




Total shipment volume growth was driven by Poland, Germany, Hungary and the Czech Republic. In these markets, investments in GFBs are generating positive returns as LD, B&H and Camel all gained share of market.

In the UK, in spite of the weak economic environment, JTI has continued to increase its share of market. We also implemented a price increase in September, which more than offset strong down-trading, and enabled continued profit growth.

Core Revenue and Adjusted EBITA grew 5.6% and 16.3% respectively, at constant rates of exchange. Adjusted EBITA margins also improved by 3.9ppt to reach 41.8%.

CIS+


Total shipment volume (billion units) 197.4 -0.2%


The impact of industry contractions in Russia and Ukraine was offset by our growing volume base in the Caucasus and Central Asia markets, and the recovery in Belarus.

GFB shipment volume continued to increase driven by strong performance from Winston and LD.

Our approach to pricing remained disciplined, seizing pricing opportunities mainly in Kazakhstan, Romania, Russia and Ukraine.

In Russia, GFB growth and robust pricing continued to strengthen our share of value leadership.

Core Revenue grew 14.2% and Adjusted EBITA grew by 32.2% at constant rates of exchange. Profitability in the cluster grew, with Adjusted EBITA margin up to 37.8%, driven by pricing gains and an improvement in mix.

Rest-of-the-World




Total shipment volume grew driven by solid performances in Sudan, Turkey and markets across the rest of the Middle East and Africa. This offset the impact of the suspension of our business in Syria.

We achieved strong pricing gains in Canada, Malaysia, the Middle East and Africa, and Taiwan.

In Turkey, during 2012, JTI reached the No.2 position by market share, growing shipment volume and further consolidating its #2 position by share of value.

Core Revenue and Adjusted EBITA grew by 13.0%* and 17.3%*, respectively, at constant rates of exchange. Adjusted EBITA margin increased by 0.9ppt*. This illustrates the ability of this cluster to significantly contribute to JTI’s overall profitability, as a result of our growing business scale.

OutlookJTI will keep delivering on its solid track record of growth.

In 2013, we aim to demonstrate once again the solidity of our business fundamentals, the capabilities of our people and the soundness of our strategic focus on top-line growth and broadening the earnings base.

While the economic and regulatory environments will remain challenging, we are highly confident in our ability to continue double-digit Adjusted EBITDA growth at constant rates of exchange.

* These numbers exclude pricing taken to mitigate the effect of a currency with substantial devaluation.


Review of operations continuedInternational Tobacco Business continued

Sudan

In July 2011, we announced the acquisition of Haggar Cigarette & Tobacco Factory, the leading tobacco manufacturer in Sudan and South Sudan, with 80% market share and the No.1 brand in the market.

We continue to focus our efforts on strengthening the brand portfolio, via the strong local brand Bringi, enhancing the route-to-market, modernizing production facilities, increasing product quality to JTI standards and enhancing workforce capabilities.

Performance in Sudan has been strong since the acquisition, with shipment volume increasing 0.9 billion units to 5.5 billion units in 2012.

Ploom

In December 2011, we announced our partnership with Ploom Inc. Our partnership has come a long way since then and we have jointly developed a new, upgraded device, which is now battery powered.

We also developed a range of tobacco blends to be used in the device, including a number of JTI Global Flagship Brands. Unlike the so-called “e-cigarettes”, Ploom pods allow the consumer to savor the full taste of real tobacco, but with no combustion, producing only vapor.

JTI and Ploom continue to work jointly on the development of other products, including new devices.

In May 2013, Ploom was launched in Austria, and our aim is to roll out Ploom to several other markets during the course of 2013.

Nakhla

In March 2013, we completed the acquisition of Nakhla, one of the world’s leading manufacturers of water pipe tobacco, based in Egypt. With this acquisition, we entered a new category, estimated at over 100,000 tons in the Middle East and Africa.

This acquisition offers several strategic advantages:

• allowing JTI to satisfy consumer needs in a different product category, while remaining close to our core competencies;

• an opportunity to develop this category by improving product quality and applying JTI’s marketing and distribution capabilities; and

• combining JTI’s competencies with Nakhla’s platform will enable us to distribute our cigarette brands in Egypt, a market of approximately 64 billion units.

Nakhla’s shipment volume in 2012 was 5,200 tons in Egypt and 18,000 tons for export to 97 countries.

In line with our strategy to broaden our base for future growth, over the past years we have carried out several acquisitions and entered into partnership to extend our geographic reach and expand our portfolio.

Gryson

The Fine Cut category is growing rapidly in several European markets, driven by the down-trading currently seen in the region due to the difficult economic environment.

Over the years, JTI has developed a strong position in this category, through GFB and specific Fine Cut brands, such as Amber Leaf, which is now the largest tobacco brand in the UK.

In August 2012, we acquired Gryson, a leading European Fine Cut manufacturer. This makes us the No.2 Fine Cut manufacturer in Europe. Furthermore, we are now the category leader in France, in addition to Ireland. We are also a strong No.2 player in Spain and the UK.

By combining Gryson’s portfolio of products and countries as well as manufacturing capacity with JTI’s marketing and distribution capabilities, this acquisition gives us new growth opportunities.

Fine Cut shipment volume grew 30% in 2012 (+5 billion units in cigarette equivalents). Gryson represented 38% of this increase.



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new opportunities

Core Revenue1 Year-on-year change (JPY BN)

654.0 +6.9%

Adjusted EBITDA2 Year-on-year change (JPY BN)

281.3 +7.3%

1 Excluding revenues from distribution, contract manufacturing and other peripheral business. 2 Adjusted EBITDA = Operating profit + depreciation and amortization + impairment losses on goodwill ±

restructuring-related income and costs.

Akira SaekiPresident, Tobacco Business

In the year ended March 2013, industry volume was 195.1 billion units in Japan, which is one of the largest markets in the world. We own 9 of top 10 selling products in such a large market. We are the undisputed market leader in Japan with nearly 60% market share.

In the year ended March 31, 2013, revenue and profits of the Japanese domestic tobacco business grew from an increase in the sales volume driven by a steady recovery of market share, compared with the prior year when sales volume dropped steeply due to the impact of the Great East Japan Earthquake.

The industry volume in Japan, however, has been declining over the past years. In this challenging environment, we prioritize top-line growth through investing in brand equity enhancement and launching new products to meet consumers’ needs. In the year ended March 2013, we launched 13 new products with a focus on key brands, and expanding the menthol segment, resulting in market share recovery. For further growth, we also aim to create innovative new product categories with unique value propositions to supplement our main focus on conventional cigarettes to meet diversified consumers’ needs.

In February 2013, we completed successfully the name change of Mild Seven to MEVIUS in Japan as the first step toward becoming the number one global premium brand. Market share of MEVIUS has been robust since the completion of name change initiative.

We continue to be a significant profit contributor to the JT Group by further quality top-line growth. In order to achieve this goal, we will not compromise investments to build brand equity.

Business results (vol./financial performance)• Revenue and profit growth driven by sales volume

increase from market share recovery: – Sales volume increased 7.2% year-on-year to 116.2 billion units driven by market share recovery, compared with the prior year when sales volume declined steeply due to the impact of the Great East Japan Earthquake.

Sales volume(BnU)

108.4116.2

+7.2%

FY3/2012 FY3/2013

– Core revenue increased 6.9% year-on-year to ¥654.0 billion due to sales volume increase.

– Adjusted EBITDA also increased 7.3% year-on-year to ¥281.3 billion.

FY3/2012 FY3/2013 FY3/2012 FY3/2013

611.9 654.0

262.3 281.3

+7.3%+6.9%

Core Revenue and Adjusted EBITDA(JPY BN)


Review of operations continuedJapanese Domestic Tobacco Business (Year ended March 31, 2013)

• Our leading brand in Japan is MEVIUS, evolved from Mild Seven. MEVIUS inherits Mild Seven’s strong consumer base which has commanded the No.1 share in the Japanese domestic market for more than 30 years since 1978*.

• In February 2013, two of the Mild Seven menthol series, the Aqua and the Impact Menthol, were merged into the Mevius Premium Menthol series. This new Mevius Premium Menthol offering uses menthol which is 100% natural.

• In May 2013, we launched “Mevius Premium Menthol Option” featuring the “aroma-changing capsule”. The three new products from the Mevius Premium Menthol series meet the diversified consumers’ needs.

• The MEVIUS family encompasses 27 products (as of May 31, 2013), reflecting the evolution that it has undergone in step with the changing times and brand expansion.

• Launched in 1969, Seven Stars featured Japan’s first domestically produced charcoal filter in pursuit of better taste.

• Since its launch, Seven Stars has consistently offered unique value in terms of taste, aroma and product design.

• The Seven Stars family comprises a line-up of ten products (as of May 31, 2013) built around ‘Seven Stars’, the best selling stand-alone product by market share in the year ended March 2013*.

• In August 1995, the Pianissimo family saw the launch of Japan’s first 1mg-tar menthol cigarette product featuring reduced odor and smoke**.

• The Pianissimo brand, mainly comprising the Super King Size Slim menthol format, continues to achieve growth after integrating two other brands in the year ended March 2010.

• The Pianissimo family, a core JT tobacco franchise, features a diverse line-up of nine products (as of May 31, 2013). Pianissimo Aria Menthol is the leading product in the 1mg-tar menthol segment.

* Source: TIOJ** Reduce smoke: Less smoke is released from the tip of the cigarette based on a visual comparison with conventional JT cigarette products

MEVIUS (changed from Mild Seven)

Seven Stars

Pianissimo


Extension initiatives

• Mevius Premium Menthol series – 100% natural menthol.


• Limited edition package introduced in January 2013.


• Limited edition package starting in June 2013.


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Expansion initiatives with a focus on key brands

Business results (market share performance)• Steady recovery of market share through brand

equity enhancement: – Share of market recovered by +4.7ppt year-on-year – 60% market share achieved for the months of February and March supported mainly by the launch of MEVIUS, among others.

• Continue with efforts to increase market share by further enhancing brand equity of our key brands.

Share movementFull year

FY3/2012 FY3/2013

59.6%54.9%

Share movement Monthly

59.1%

60.0%

Apr2012

May2012

Jun2012

Jul2012

Aug2012

Sep2012

Oct2012

Nov2012

Jan2013

Dec2012

Feb2013

Mar2013

MEVIUS share movementMonthly

Jan2013

Mar2013

Feb2013

32.2%31.9%

30.2%

Note:Market share for January 2013 is for Mild Seven.

Our strategies:In the Japanese market, as a feature of mature markets, industry volume has been declining due to various factors such as demographic changes, tighter regulations among others. Compared to other markets, the distinctive feature of the Japanese market is the limited impact of up or down-trading due to its narrow price range. Under this circumstance, we focus on quality top-line growth and continuous cost improvement to maintain competitiveness and to deliver profits.

• Priority on quality top-line growth: – Continue to strengthen our brand equity, with a focus on our key brands

– Further increase market share – Develop emerging product categories.

OutlookWe cannot be too optimistic about our growth for the year ended March 2013, which was fueled by the recovery from the unfavorable impact of the earthquake in 2011.

With the declining industry volume and intensifying competition, the operating environment will remain challenging. Even under such circumstances, the Japanese domestic tobacco business is committed to fulfilling its role as a highly competitive platform of profitability. This will be achieved by quality top-line growth through market share gains as well as further pursuit of a competitive cost base.

1 Excludes sales volume of domestic duty free and the China business.2 Excludes revenue from distribution of imported tobacco in the Japanese

domestic tobacco business, among others.3 Operating profit + depreciation and amortization ±adjustment items

(income and costs)*. * adjustment items (income and costs) = impairment losses on goodwill ±

restructuring income and costs ± others.


Review of operations continuedJapanese Domestic Tobacco Business continued



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Strive to achieve operating profit margin on par with or above the industry average to grow its profit contribution to the JT Group

Strive to establish a stronger profit platform through the rapid and efficient market launch of compounds in the late phase of clinical trials and through maximization of each product value

Strengthen the business foundation for future growth in order to make further profit contribution to the JT Group


Review of operations continuedRole of Pharmaceutical, Beverage and Processed Food Business

pharmaceutical business

beverage business

processed Food business

Role and priorities of each business

JT commenced the pharmaceutical business in 1987. Its mission is to build world-class, unique R&D capabilities and reinforce its market presence through innovative drugs. The pharmaceutical business focuses on the development, production and sale of prescription drugs. The business has been expanding steadily, with the establishment of the Central Pharmaceutical Research Institute in 1993, the acquisition of a majority of the

Pharmaceutical Business

The beverage business started its operation in 1988. Our beverage products are sold in Japan. The flagship brand is ‘Roots’ and it is one of the leading brands in the canned coffee category in Japan. Another key brand is ‘Momono Tennen-sui’, a well-known long-selling beverage product in Japan. Japan Beverage Holdings Inc. (Japan Beverage), the vending machine operator, became our subsidiary in 1998 and collaboration within the Group centered on Japan Beverage will be pursued to enhance our sales network.

Our processed food business is operated by TableMark Co., Ltd. (TableMark), a 100% subsidiary of JT. The business started in 1998 and has been expanding through organic growth as well as through M&A and strategic partnerships. In 2008, we acquired Katokichi Co., Ltd. (Katokichi), a major frozen food manufacturing company in Japan, through a tender offer. The JT Group’s processed food business was transferred over to Katokichi as part of the integration. In 2010, Katokichi’s corporate name was changed to TableMark, to pursue synergies and foster a sense of unity within the group. TableMark operates mainly in Japan producing frozen and ambient processed food,

In addition to the Tobacco Business, our core business, JT operates: Pharmaceutical, Beverage and Processed Food.

Beverage Business

Processed Food Business

outstanding shares in Torii Pharmaceutical Co., Ltd. (Torii Pharmaceutical) in 1998 and the addition of a clinical development function to our U.S. subsidiary, Akros Pharma Inc., in 2000. In order to establish and strengthen our earnings base, we are enhancing our research and development pipeline, exploring opportunities for strategic in- or out-licensing and strengthening collaboration with license partners.

mainly staple food products such as frozen noodles, frozen rice, packed cooked rice and frozen baked bread. The company’s business also includes bakery chain outlets, mainly in the Tokyo metropolitan area, as well as seasoning including yeast extracts and oyster source. TableMark’s frozen noodles, particularly frozen ‘Sanuki-Udon’ noodles is a household name in Japan. The bakery chain business is operated mainly under ‘Saint Germain’ brands. Products for the seasoning business include “Vertex”, a yeast extract seasoning, which is used in various foods such as instant noodles or snacks.


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Adjusted EBITDA1 (JPY BN)

-2.7

-10.0-12.7

FY3/2012 FY3/2013

Revenue (JPY BN)

47.4

53.2

+5.8

FY3/2012 FY3/2013


53.2 +5.8Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN)

-12.7 -2.71 Adjusted EBITDA = Operating profit + depreciation and amortization + impairment losses on goodwill ±

restructuring-related income and costs

Performance overview:We made significant achievements in the year ended March 2013:• Stribild, an anti-HIV single-tablet regimen

containing our original compound (JTK-303) – Launched in the U.S. by our license partner, Gilead Sciences, Inc. (May 2013: Marketing approval obtained in Europe).

– Manufacturing and marketing approval was obtained by us in Japan. (May 2013: Launched in Japan).

• MEK inhibitor trametinib (melanoma) – NDA/MAA filed in the U.S. and EU by our license partner, GlaxoSmithKline. (May 2013: Marketing approval obtained in the U.S.).

• NDA filed by us in Japan for two compounds – JTT-751 (hyperphosphatemia) – TO-194SL (Japanese cedar pollinosis) by Torii Pharmaceutical.

Strategy: • Rapid and efficient market launch of

compounds in late phases of clinical trials.• Value maximization of each product.• Promote R&D for next generation of strategic

compounds and seek optimum timing for out-licensing.

Glossary

NDA – New drug application for marketing approval

MAA – Marketing Authorization Application

In the pharmaceutical business, we aim to build a unique, world-class pharmaceutical business driven by R&D, and to increase our market presence through original and innovative drugs. We strive to strengthen the profit base through the rapid and efficient market launch of compounds in the late phases of clinical trials and value maximization of each product.

Muneaki FujimotoPresident, Pharmaceutical Division

Business results (financial overview):• Revenue grew driven by continued growth in sales

of Remitch Capsules and Truvada Combination Tablets by Torii Pharmaceutical and the increase in milestone revenue for JT as a result of progress in the development of out-licensed compounds.

• Adjusted EBITDA decreased due to the increase in R&D investments from progress in compound development at both JT and Torii Pharmaceutical.


Review of operations continuedPharmaceutical Business (Year ended March 31, 2013)

Value Chain

R&D Manufacturing Sales & promotion

Continue to strengthen R&D capability, a cornerstone of our pharmaceutical business

Ensure a reliable supply of quality products

Build marketing competence on our MRs

R&D

Continue to strengthen R&D capability, a cornerstone of our pharmaceutical business

A particular emphasis is placed on research and development in line with our mission to establish a unique R&D oriented business model which can compete on a global basis. By focusing our resources on specific areas, we efficiently strengthen our R&D capability which enables us to create innovative drugs. In addition, we strive to accelerate market launches of our compounds in pursuit of a profitable business base.

• Focus mainly on the fields of glucose and lipid metabolism; virus research; and immune disorders and inflammation to best leverage our expertise.

• Allocate adequate resources in R&D in light of the increasingly complex, time-consuming and therefore costly development process due to stringent regulations.

• Aiming at discovery of “first-in-class” compounds, enhance pre-clinical research capability and build development strategies tailored to accomplish the objective.

Manufacturing

Ensure a reliable supply of quality products

For pharmaceutical products, quality and safety must be assured, and our manufacturing operations ensure these key responsibilities are fulfilled. We also pursue efficiency in our manufacturing arrangements; products marketed in Japan are mainly produced by Torii Pharmaceutical to maximize intra-Group synergies, while outsourcing to contract manufacturers where appropriate.

• Remain focused on quality assurance and safely control.

• Maintain optimal manufacturing arrangements.

• Continuously strive to reduce environmental impacts, as evidenced by the ISO 14001 certificate obtained by our Sakura plant.

Sales & Promotion

Build marketing competence on our MRs

In the pharmaceutical industry, medical representatives (MRs) play a crucial role in successful sales and promotion by providing medical and scientific knowledge with clients. At the same time, they collect valuable information from the medical front which could be reflected in the ongoing or future R&D activities. Torii Pharmaceutical is marketing our products in Japan through 460 highly-trained MRs. Outside Japan, we do not have a sales function. As such, instead of directly marketing our products, we receive royalties based on sales performance from our license partners for the compounds for which we out-license the right to develop and market.

• Provide extensive training programs to MRs and expand their knowledge to earn trust from our clients.

• Strengthen our marketing capabilities by leveraging the marketing support system, which integrates clients’ information including their needs spread across functions.

• Build a sales and marketing strategy to meet the existing and future market needs in the changing business environment.


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Licensed compounds

Compound(JT’s code) Licensee Mechanism Note

elvitegravir(JTK-303) Gilead Sciences

HIV Integrase inhibitor

Integrase inhibitor which works by blocking integrase, an enzyme that is involved in the replication of HIV

Elvitegravir: U.S. and EU marketing approvals submittedStribild: EU marketing approval submittedNew Single Tablet Regimen: Phase 3

trametinib GlaxoSmithKlineMEK inhibitor

Inhibits cellular growth by specifically inhibiting the activity of MAPK/ERK Kinase (MEK1/2)

Metastatic melanoma: U.S. and EU marketing approvals submittedMetastatic melanoma, trametinib+ dabrafenib: EU marketing approval submitted

dalcetrapib(JTT-705) Roche

CETP modulator

Decreases LDL (bad cholesterol) and increases HDL (good cholesterol) by modulation of CETP activity

Roche announced the termination of the development of dalcetrapib on May 7, 2012.

Anti-ICOS monoclonal antibody MedImmune

ICOS antagonist

Suppresses overactive immune response via inhibitation of ICOS which regulates activation of T cells

Japan Tobacco Inc. Clinical Development (as of April 25, 2013)

In-house development

Code(Generic name)

Potential Indication/ Dosage form Mechanism Description Location Phase 1 Phase 2 Phase 3 Preparing to file Filed Origin

JTK-303(elvitegravir) HIV infection/Oral HIV Integrase inhibitor

Integrase inhibitor which works by blocking integrase, an enzyme that is involved in the replication of HIV Japan In-house

JTT-705(dalcetrapib) Dyslipidemia/Oral CETP modulator

Decreases LDL (bad cholesterol) and increases HDL (good cholesterol) by modulation of CETP activity Japan In-house

JTT-302 Dyslipidemia/Oral CETP inhibitorDecreases LDL and increases HDL by inhibition of CETP Overseas In-house

JTT-751(ferric citrate) Hyperphosphatemia/Oral Phosphate binder

Decreases serum phosphorous level by binding phosphate derived from dietary in the gastrointestinal tract Japan

In-license (Keryx Bio pharma ceuticals) Co-development with Torii

JTT-851Type 2 diabetes mellitus/Oral

G protein-coupled receptor 40 agonist

Decreases blood glucose by stimulation of glucose-dependent insulin secretion

JapanOverseas In-house

JTZ-951Anemia associated with chronic kidney disease/Oral HIF-PHD inhibitor

Increases red blood cells by stimurating production of erythropoietin, an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD


JTE-051Autoimmune/allergic diseases/Oral

Interleukin-2 inducible T cell kinase inhibitor

Suppresses overactive immune response via inhibition of the signal to activate T cells related to immune response Overseas In-house

JTE-052Autoimmune/allergic diseases/Oral JAK inhibitor

Suppresses overactive immune response via inhibitation of Janus kinase (JAK) related to immune signal. Japan In-house

[* Based on the first dose]


Review of operations continuedPharmaceutical Business continued

Japan Tobacco Inc. Clinical Development (as of April 25, 2013)

In-house development

Code(Generic name)

Potential Indication/ Dosage form Mechanism Description Location Phase 1 Phase 2 Phase 3 Preparing to file Filed Origin

JTK-303(elvitegravir) HIV infection/Oral HIV Integrase inhibitor

Integrase inhibitor which works by blocking integrase, an enzyme that is involved in the replication of HIV Japan In-house

JTT-705(dalcetrapib) Dyslipidemia/Oral CETP modulator

Decreases LDL (bad cholesterol) and increases HDL (good cholesterol) by modulation of CETP activity Japan In-house

JTT-302 Dyslipidemia/Oral CETP inhibitorDecreases LDL and increases HDL by inhibition of CETP Overseas In-house

JTT-751(ferric citrate) Hyperphosphatemia/Oral Phosphate binder

Decreases serum phosphorous level by binding phosphate derived from dietary in the gastrointestinal tract Japan

In-license (Keryx Bio pharma ceuticals) Co-development with Torii

JTT-851Type 2 diabetes mellitus/Oral




JTZ-951Anemia associated with chronic kidney disease/Oral HIF-PHD inhibitor

Increases red blood cells by stimurating production of erythropoietin, an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD


JTE-051Autoimmune/allergic diseases/Oral


Suppresses overactive immune response via inhibition of the signal to activate T cells related to immune response Overseas In-house

JTE-052Autoimmune/allergic diseases/Oral JAK inhibitor

Suppresses overactive immune response via inhibitation of Janus kinase (JAK) related to immune signal. Japan In-house

[* Based on the first dose]


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Revenue (JPY BN)

FY3/2012 FY3/2013

188.8

185.5

-3.3


14.6

12.4

-2.2

FY3/2012 FY3/2013


185.5 -3.3Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN)

12.4 -2.21 Adjusted EBITDA = Operating profit + depreciation and amortization ± adjustment items (income and costs)*

* adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others

Goichi MatsudaPresident, Beverage Division

Performance overview:• Record high volume performance of our

Company products.• Sales volume of bottle can type ‘Roots’,

our flagship brand, and the long-selling brand ‘Momono Tennen-sui’ both increased.

Strategy: Strengthen the business base for future growth in order to make further profit contribution to the JT Group. • Top-line growth: Enhance brand equity with a

focus on the flagship brand ‘Roots’, and foster ‘Momono Tennen-sui’ as the second pillar brand.

• Strengthen trade marketing capabilities: Strive further for a high quality vending machine operation.

Business results (volume performance): • Sales volume of our Company products for bottle

can type ‘Roots’ and ‘Momono Tennen-sui’ increased, resulting in record high sales volume of 32,250,000 cases for the year ended March 31, 2013.

We would like to deliver our beverages to “those that matter to us most”. With this aspiration in mind, the beverage business strives to offer products that are “safe and tasty” to drink. We aim to earn the continuous support of our consumers through ‘food’, which forms the basis of our everyday life. We strive to enhance our brand equity with focus on ‘Roots’ and ‘Momono Tennen-sui’ and strengthen our cost competitiveness, as we move forward to reinforce our profit generating ability.

Business results (financial performance):• In spite of increase in sales volume of company

products, revenue was affected by decline in revenue from cup vending machines.

• Adjusted EBITDA declined year-on-year, affected by decline in revenue and change in distribution channel composition, among others.


Review of operations continuedBeverage Business (Year ended March 31, 2013)

‘Roots’ is the flagship brand of JT’s beverage business. It was first offered in the year 2000 and, ever since then, the theme of the brand has been to offer ‘genuine, tasty coffee for all occasions’.

In particular, ‘Aroma Black’ in screw top bottle cans, first sold in 2003, firmly captured the increase in demand for this type of beverage product. As a result, ‘Aroma Black’ in bottle cans is now a signature product of JT’s beverage business. The product’s roasty aroma and rich taste have been favored by many consumers. Since 2011, ‘Aroma Black’* has been awarded with Monde Selection, Gold prize, for three years in a row, as it continues to lead the bottle can coffee segment.

The product was most recently renewed in April 2013 and it uses JT’s own roasting technology ‘aqua roast’ which utilizes the patented technology of Key Coffee. JT and Key Coffee jointly develop. By using water at the start of the roasting process, this new technology enables us to effectively exclude bitterness or any other odd flavors. As a result, we can extract the smooth original flavor of the beans giving the product a clean body and taste.* Roots Aroma Black 300g bottle can offered in 2010, 2011 and 2012 received the award.

‘Momono Tennen-sui’ is a long-selling product of JT. First offered in 1996, it became popular with consumers in their teens and has been popular ever since. The product uses transparent peach juice* and natural water – the characteristic of this beverage is that it is moderate in sweetness and has a clear, fresh aftertaste.

The product was most recently renewed in March 2013. While leaving the clear, fresh aftertaste the same, it is now offered in ‘screw bottles’ which is reminiscent of squeezing a fruit. The package has been rejuvenated by using bright pink colors while retaining the feeling of transparency – the package also shows that it contains peach juice. * Clear fruit juice is extracted by removing insoluble components such as dietary fibers from the fruit juice.

‘Roots Aroma Revolut’ was first offered in 2009 as a coffee beverage with ‘overwhelming roasting aroma’. The product is a coffee beverage with milk and sugar.

‘Enjoyable aroma’ is the characteristic of ‘Aroma Black’ and, as part of the family, ‘Aroma Revolut’ offering an overwhelming roasting aroma became instantly popular.

The name ‘Aroma Revolut’ shows that this product is ‘revolutionary aromatic’ and takes inspiration from the word ‘REVOLUTION’.

The latest version of Roots ‘Aroma Revolut, low sugar’ is made by using the ‘aqua roast’ technology of ‘Aroma Black’. The product is a coffee beverage with milk and low sugar.

‘Momono Tennen-sui Sparkling’ has a fresh taste, just like the original ‘Momono Tennen-sui’. With its refreshing taste, this calorie off drink has earned many fans.

The product was renewed at the same time as ‘Momono Tennen-sui’ as part of the ‘Tennen-sui (natural water)’ family.

Its popular flavor has been left unchanged, while the refreshing aftertaste has been upgraded. The package design has been rejuvenated and we have used illustrations of large peaches surrounded in bubbles to show its refreshing flavor as a carbonated beverage.

Roots Aroma Black

Roots Aroma Revolut

Momono Tennen-sui

Momono Tennen-sui SPARKLING


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Key brands

Value Chain

R&D procurement production

Food Safety control

Marketing Sales & Distribution

Increase penetration to retail outlets

Prioritize safety and follow established quality control procedures

Ensure safety control at all levels of the value chain

Implement effective communication tools tailored for targeted consumers

Ensure procurement of safe and quality raw materials

Strive to develop innovative products to meet consumers’ needs

R&D


• Search for new materials, development of new products and renewal of existing brands including ‘Roots’.

• Development of new containers and production technology*.

Procurement


• When we select raw materials, we review the quality assurance certificates submitted by our suppliers. Moreover, inspect and monitor agrochemical residues while conducting regular inspection at processing plants, in compliance with JT Group’s internal standards, the Food Sanitation Act and other relevant laws.

Production


• JT Group is pursuing the adoption of ISO 9001, the HACCP system and FSSC22000 in our and business partners’ factories.

• Production of beverages is outsourced to domestic partner factories (except for certain bottled drinking water), under strict monitoring of the production process and product quality.

• Strong partnership with our partner factories to retain competitive production capabilities and stable supply.

* HTST method: For our flagship brand ‘Roots’, we adopted the high temperature, short-time (HTST) method for the production of canned coffee. JT was the first company to use this method for canned coffee. The method considerably reduces the time needed for heat sterilization, thereby limiting flavor loss and making it possible to replicate the taste of freshly baked coffee at home.

Marketing

Implement effective communication tools tailored for targeted consumers

• By examining numerous data and research, target consumers, price-range and sales channels are set, while the most suitable and original marketing plan is construed.

• As for sales promotions, mass media is used for advertising – in-store promotions are also conducted.



• Products are sold in vending machines primarily through our Group company Japan Beverage, one of the leading vending machine operators in Japan. Our products are also sold in convenience stores and supermarket chains.

• Promotions in each of these channels are offered in order to enhance our sales volume.

Food Safety Control


• We have an independent food safety management division responsible for overall safety control to ensure that consumers can continue to enjoy our products safely.

• Cross functional food safety initiatives within the JT Group are promoted – for example, the beverage business utilizes the function of TableMark’s Tokyo Quality Control Center.


Review of operations continuedBeverage Business continued


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Revenue (JPY BN)

FY3/2012 FY3/2012Excl. Fishery

business

FY3/2013 FY3/2013Excl. Fishery

business

170.7147.7

168.7152.6

+4.9


5.4

7.4

+1.9

FY3/2012 FY3/2013

Miyoharu HinoPresident & CEO TableMark

Performance overview:• Steady top-line growth driven by continued

performance of staple food products*.• Closure of the unprofitable processed fishery

product business to concentrate on core business.

Strategy: • Continue with a focus on staple food products

for top-line growth, in order to achieve steady improvement in profitability.

Business results (financial performance): • Revenue remained more or less flat year-on-year

at ¥168.7 billion. Excluding the processed fishery product business which was discontinued during the year ended March 2013, revenue grew by ¥4.9 billion to ¥152.6 billion.

• Profitability continued to improve, driven by the performance of staple food products. Adjusted EBITDA increased by ¥1.9 billion to ¥7.4 billion, as the increase in raw material costs was more than offset by the absence of expenses incurred in the same period in the prior year.

If we are going to prepare food for those who matter to us most, we wish to do so cordially with care. This is our desire when running our business at TableMark. From 2010 onwards, TableMark began its operation as a food manufacturer with frozen and ambient processed food, bakery items and seasoning as our business pillars. In particular, we strive to provide high value-added products by focusing on staple food such as frozen noodles, frozen rice, packed cooked rice and frozen baked bread.


168.7 -1.9Adjusted EBITDA1 Year-on-year change (JPY BN) (JPY BN)

7.4 +1.91 Adjusted EBITDA = Operating profit + depreciation and amortization ± adjustment items (income and costs)*

* adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.

* Staple food products: frozen noodles, frozen rice, packed cooked rice and frozen baked bread.


Review of operations continuedProcessed Food Business (Year ended March 31, 2013)

Frozen Udon Noodles

Frozen udon noodles are one of TableMark’s key products in which the company has a leading market share in Japan. In particular, frozen ‘Sanuki Udon’ noodles for household use is a well-known product in Japan.

The texture of udon noodles is determined by the moisture level. The outside layer of the noodles has a different moisture level from the inside layer, and this forms the key to the overall texture of the noodles. After boiling, TableMark’s frozen udon noodles are ‘quickly frozen’, enabling us to maintain the texture as well as the flavor of freshly cooked noodles. This is the key to the tastiness of the product.

We have a wide range in our line-up including ready-to-eat noodles. TableMark’s frozen noodles are popular as a regular food stock for everyone’s freezer.

Packed Cooked Rice

Packed cooked rice has become widely popular in recent years. It is easy to prepare and, with the increase of single-person households and an ageing population, coupled with people stocking food post earthquake, the demand for the product is growing.

TableMark operates a factory located in Uonuma, a location well known for its rice production and water quality. ‘Takitate Gohan’ is one of TableMark’s packed cooked rice products that enables you to enjoy the taste of freshly cooked rice. The line-up includes, among others, products that use ‘Koshihikari’ branded rice from the Niigata-prefecture.

Frozen Baked Bread

The market size of baked bread in Japan is growing and approaching the consumption level of rice* – demand for ready-to-eat and genuine bread products is increasing.

After baking, TableMark’s frozen baked bread is quickly frozen and this process maintains the moisture balance of the bread. By re-heating the product for a short period of time using a microwave or a toaster, you can enjoy the crunchy and fluffy texture of freshly baked bread.

Moreover, with TableMark’s original production technique, the dryness that can come from defrosting the product has been improved.* In monetary terms.


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Staple Food products

R&D


• Leveraging our own know-how, we aim to develop value-added products to meet diversified consumers’ needs.

• Frozen baked bread products have been developed which allow consumers to enjoy the taste of freshly baked bread at home. TableMark’s original techniques for fermentation, baking and freezing recreate and preserve the taste and texture of fresh bread.

Procurement


• Review of quality assurance certificates submitted by our suppliers.

• Inspections and monitoring of agrochemical residues and regular inspection at processing plants, in compliance with JT Group’s internal standards, the Food Sanitation Act and other relevant laws.

• Examination of safety of production sites for raw materials sourced abroad.

• As for agricultural farms, inspections are made not only for soil and water but also in terms of how products are cultivated and how agrochemicals are handled. Breeding farms are also inspected.

Production


• JT Group is pursuing the adoption of the HACCP system and ISO 22000 in our and business partners‘ factories. Under the ISO 22000 standard, continuous improvements are made following effective rules to control sanitation and other key issues. These rules are based on the HACCP concept, and their effectiveness is tested using scientific evidence.

• All of JT Group’s 27 factories in and outside Japan, as well as our business partners’ factories that produce frozen foods, have achieved the ISO 22000 certification.

Marketing

Strive for effective marketing to improve product awareness

• We analyze the market from consumers’ point of view and, by combining the technology owned by TableMark, we strive to provide products with new values to increase our place in the market. We strive for effective marketing in order to improve consumer awareness of our products.



• Strive to enhance profitability through our initiatives to increase our presence in supermarkets and convenience stores, by offering a wider range of products while also seeking better shelf space.

• TableMark products are also sold to restaurants and other public facilities.

Value Chain

R&D procurement production

Food Safety control

Marketing Sales & Distribution




Strive for effective marketing to improve product awareness




Review of operations continuedProcessed Food Business continued

Food Safety Control


• Independent food safety management division is responsible for overall safety control, ensuring that consumers can continue to enjoy our products safely.

• Cross-functional food safety initiatives within the JT Group are promoted.

• External food safety experts provide assessment and advice regarding our initiatives – their knowledge and viewpoints are actively incorporated into our business.


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Considering such circumstances, we have put in place a risk management framework. Under the framework, relevant divisions are assigned to carefully monitor the development of events that may adversely impact the JT Group and prevent their materialization where possible. When these risks are materialized, we promptly respond in order to minimize their unfavorable impacts. In reviewing risks, the magnitude of potential impact and likelihood of occurrence are most prudently assessed among other factors. Material risks, which could have a significant impact on our sustainable profit growth and business continuity, are reported to the Executive Committee. Countermeasures are also proposed and implemented once approved by the Committee.

The following section describes certain risks which potentially have a material impact on our business operations and financial results, but is not intended to be an exhaustive list of the risks we face. In addition, it is possible that risks that are currently considered immaterial or even unknown could turn out to be material in the future, as the business environment changes.

This section should be read together with the forward-looking and cautionary statements contained in this annual report.

The JT Group operates diverse businesses, namely tobacco, pharmaceutical, beverage and processed food. In addition, we conduct our business on a global basis, extending to Europe, CIS countries, Africa, the Middle East and others. Due to this diversity and these changing environments, we are exposed to various risks.

1. Disruptive tax increasesTobacco products are subject to excise or similar taxes in addition to value-added tax. Excise taxes are increasing in most markets where we operate as governments seek to secure their revenue or promote public health. In general, value-added tax is also increasing. As a general principle, we fully pass on any tax increase to consumers by adjusting our sales prices. In addition, to the extent possible, we increase our prices more than the tax increase, considering the financial impact of an expected volume decline. A tax increase within a reasonable range is manageable through such a price increase as well as our efforts to support top-line and pursue efficiency. Most governments are aware that a substantial tax increase or repeated tax increases can reduce their revenue and they take a rational approach. However, in the past we have experienced such tax increases in some markets, which have disrupted our business.

Risk description and potential impactA disruptive tax increase on tobacco products could result in a large legitimate industry volume decline due to lower consumption and, in many cases, increased illicit trades. In addition, down-trading to lower priced products could be initiated or accelerated. Our shipment volume, revenue and profit could decrease due to these negative reactions by consumers.

Measures to address the risk• Promote the understanding of relevant authorities

that a disruptive tax increase does not necessarily serve their purpose.

• Optimize our product offerings to capture the potential changes in consumer preference.

• Enhance our geographical portfolio to limit the negative impact of a disruptive tax increase in a specific market.

• Further improve efficiency to protect earnings.• If a disruptive tax increase takes place, find an

optimal price for each product which minimizes the unfavorable influence in the market.


Risk Factors

2. Pressure from illicit tradeIllicit trade is a major concern not only for the tobacco industry, but for wider society. For the tobacco industry, it undermines the legitimate tobacco business. For society, illicit trade reduces excise revenue for the government, often fuels organized crime, and may increase health concern due to poor manufacturing standards and improper product handling. The tobacco industry has been fighting against illicit trade, which takes the forms of contraband, counterfeit and illicit whites. Illegally traded products in a market tend to increase after a steep tax increase. Regulatory actions seeking to commoditize packages and products could also trigger the acceleration of illicit trade because such commoditization could make counterfeit manufacturing easier and detection of illicit products more difficult.

We take a zero tolerance approach towards all these criminal activities with an emphasis on eliminating contraband products.

Risk description and potential impactAn increase in illicit trades could reduce the legitimate industry volume, leading to a decline in our shipment volume, revenue and profit. In addition, the industry bears the cost to combat illicit trades, giving pressure to its earnings. Furthermore, it is possible that low quality counterfeits and improperly handled smuggled products damage the credibility of the genuine brands, as well as the reputation of their owner.

Measures to address the risk• Engage with the governments, regulatory bodies and

law enforcement agencies to eradicate illicit trades.• Ensure we buy from and sell to only reputable business

partners following our rigorous compliance initiatives.• Raise awareness among individual consumers of

the negative consequences of purchasing illegally traded products.

Working together with authorities:

In 2007, JT International Holding B.V. and JT International S.A.,

JT Group subsidiaries, entered a cooperation agreement with

the European Commission, the executive branch of the European

Union (EU), and 26 EU Member States as part of efforts to combat

illicit trades. In 2009, the United Kingdom joined the agreement.

Under the terms of the agreement, the JT Group contributes

US $50 million annually in the first five years from its execution

and US $15 million annually in the subsequent 10 years. This

financial contribution is to be used to support anti-smuggling and

anti-counterfeiting initiatives led by the EU or EU Member States.

In 2010, JTI-Macdonald Corp., a JT Group Canadian subsidiary,

also signed a similar agreement with the Government and

Provinces of Canada.

Glossary

Contraband – genuine products smuggled from abroad.

Genuine products diverted from the legitimate supply chain

and sold in a country different from the intended market of

retail sale and without domestic duty paid in that country.

Counterfeit – fake products appearing to be a genuine brand.

Products protected by intellectual property rights which are

manufactured without authorization from the right’s owners

and with the intent to copy the genuine brand to deceive the

consumer, also sold without duties being paid.

Illicit whites – legitimately manufactured brands intentionally

sold on the illicit market. Brands manufactured legitimately

in one country but smuggled into another country to provide

consumers with cheap brands, also without duties being paid.


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3. Tightening tobacco regulationsThe tobacco industry is highly regulated in various aspects, and regulations could influence our business performance and financial results.

Among the regulations on products, for example, we may incur additional costs in order to comply with the requirements for ingredient and packaging. Furthermore, the regulatory attempt to commoditize tobacco products could lead to an increase in illicit trades and negatively influence our legitimate business.

Business activities of tobacco companies are also restricted. With more prohibitive regulations on communication with consumers, our ability to effectively market products becomes further limited, and our top-line performance may be adversely impacted.

As a responsible organization, the JT Group abides by the laws and regulations wherever we operate. That said, we believe that laws and regulations should differ country by country, reflecting its legal, social and cultural background. We encourage governments, regulators and stakeholders to take a reasonable and balanced approach towards tobacco regulation.

(Risk description and potential impact)Further tightening of tobacco regulations on marketing activities could undermine our strategy for top-line growth as we lose opportunities to enhance brand equity. Moreover, certain regulations may impose on us additional compliance costs. These may negatively influence our volume, revenue and profit.

(Measures to address the risk)• Identify ongoing regulatory initiatives as early as

possible by promptly collecting accurate information.• Engage with the governments, regulators and

stakeholders, as necessary, to develop reasonable and balanced regulations that meet their objectives.

4. Country risksOur tobacco business has consistently expanded our earnings base to secure long-term growth by making acquisitions, entering new markets and increasing share in markets where we had limited presence. Such a geographical expansion increases our exposure to country risks. In a market where we operate, we may face economic, political or social turmoil which may negatively affect our operations and financial results.

Risk description and potential impactPolitical instability, economic downturn, social unrest or other unfavorable developments in a certain market could disrupt our business, leading to a lower volume, revenue and profit in the market.

Measures to address the risk• Avoid overdependence on a small number of markets

as sources of profits by expanding the pool of highly profitable markets.

5. Instability in the procurement of key materialsAcross the businesses, the JT Group procures raw and processed materials for product manufacturing. In particular, we strive to procure key materials in the required quantity and at reasonable costs. Our key materials include agricultural products; most notably, tobacco leaf for the tobacco business, grains for the processed food business, and natural flavors for the beverage business. Availability of agricultural products is often affected by natural phenomena including climate. In addition, there is a growing concern that agricultural production costs may increase, as a result of the high demand in energy resource and other inputs due to a global population increase as well as economic growth in emerging countries.

Risk description and potential impactInsufficient supply of key materials could lead to inability to manufacture our products, subsequently resulting in the loss of revenue and profit. Furthermore, the increase in procurement costs driven by higher production costs for agricultural products would directly pressure our earnings.

Measures to address the risk• Reinforce ability to procure key materials through

building a strong relationship with suppliers. In the case of tobacco leaf, further promote internal sourcing.

• Promote efficient use of materials by continuously reviewing the manufacturing process and product specifications where possible.

6. Unfavorable development in litigationJT and some of its subsidiaries are defendants in lawsuits filed by plaintiffs seeking damages for harm allegedly caused by smoking. As of March 31 2013, 28 smoking and health-related cases were pending in which one or more members of the JT Group were named as defendant or for which JT may have certain indemnity obligations pursuant to the agreement for JT’s acquisition of RJR Nabisco Inc.’s overseas (non-U.S.) tobacco operations. We believe that we have


Risk Factors continued

valid grounds to defend the claims in such lawsuits; however, we cannot predict the outcome of any pending or future litigation.

Risk description and potential impactA decision unfavorable to us could materially affect our financial performance due to the payment of monetary compensation. Critical media coverage of such lawsuits may reduce social tolerance of and strengthen regulations on smoking. Such media coverage may also prompt the filing of a number of similar lawsuits against JT or its subsidiaries, resulting in increased litigation costs.

Measures to address the risk• Continue to build well-organized teams

coordinating with external legal counsel to defend ourselves against these lawsuits.

• Continue legitimate and appropriate business operations.

7. Natural disastersOur operations may be disturbed by natural disasters such as earthquakes, typhoons, floods, volcano eruptions and others.

Japan is one of the most important markets for the JT Group’s businesses and subject in particular to various natural disasters. The Great East Japan Earthquake was devastating. The impacts on the JT Group included casualties among our employees, physical damage to our factories, and shortage of supply for certain material for tobacco products. Our tobacco business was forced to temporarily suspend product shipment and limit shipment volume for an extended period.

We have developed a Business Continuity Plan to minimize the impact of such disasters, with a particular emphasis on the optimization of the global supply chain.

Risk description and potential impactNatural disasters could cause damage to the JT Group as well as our suppliers, trades and consumers, leading to disruption of our business and negatively impacting financial results.

Measures to address the risk• Continuously review the Business Continuity Plan

and revise it as necessary.• Carry out emergency drills to increase employees’

preparedness against disasters.• Insure key assets such as buildings, machinery,

equipment and inventory to recover financial losses as appropriate.

8. Currency fluctuationsAs the JT Group is operating globally, we are exposed to the risks associated with currency fluctuations.

The reporting currency of the JT Group consolidated financial statements is Japanese yen, while the financial statements of our international subsidiaries are reported in other currencies such as Russian ruble, euro, British pound, Taiwanese dollar, U.S. dollar, and Swiss franc. Therefore, exchange rate fluctuations of these currencies against Japanese yen influence the Group’s reported financial results. As for the financial reporting of the international tobacco business, JT International Holding B.V. consolidates the financial results of the international tobacco subsidiaries and reports its consolidated financial statements in U.S. dollars. We often communicate the financial performance of our international tobacco business in U.S. dollars, which is affected by exchange rate fluctuations against the U.S. dollar. We do not hedge these risks which arise from the translation of financial statements.

In addition, many Group companies make transactions in currencies other than their reporting currencies for day-to-day operations. Such transactions also involve the risk of exchange rate fluctuations. We mitigate these transaction risks through hedging activities; however, it is not possible to completely eliminate them.

Furthermore, if we liquidate or sell our Group subsidiary which we acquired in a currency other than Japanese yen or impair a substantial value of such a subsidiary, the gain or loss from the transaction includes the currency fluctuation impact. Specifically, the impact comes from the difference in the exchange rates of the relevant currency against Japanese yen at the time of the acquisition and at the time of such transaction.

Risk description and potential impactFluctuations of exchange rates against Japanese yen affect the JT Group’s reported financial results. Reported financial results of our international tobacco business in U.S. dollars are similarly influenced by the fluctuations of exchange rates against the U.S. dollar. In addition, we are exposed to the exchange rate fluctuation risks when a Group company makes a transaction in a currency other than its reporting currency.

Measures to address the risk• Mitigate the risk through hedging activities such

as derivative contracts or debts in a key currency for cash inflow.


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Corporate Social Responsibility forms an essential part of business and companies are expected to conduct business in an ethical and responsible manner. The pursuit of sustainable profit growth cannot be achieved without meeting this expectation. As a globally recognized company, it is our responsibility to operate with integrity and help address social concerns, thus contributing to the sustainable development of society.

Seven core subjects on social responsibility (ISO 26000)We have adopted the ISO 26000 guidelines on social responsibility as a reporting framework. The guidelines comprise seven core subjects on social responsibility. These are: Human Rights, Labor Practices, The Environment, Fair Operating Practices, Consumer Issues, Community Involvement and Development, and Organizational Governance.

Human RightsThe JT Group reinforces the importance of human rights, in all areas of its business activities and workplaces. Policies are employed to ensure that no employee is subjected to discrimination or exploitation, and is treated fairly and appropriately at all times. The Group procures a wide variety of raw materials through a complex supply chain that spans the world. Accordingly, all suppliers are expected to observe the sanctity of human rights in their business operations. These standards are set out clearly in the JT Group’s Responsible Procurement Policy and all business partners are held to the same stringent standards.

ARISE ProgramIn February 2012, JTI began a program called ARISE (Achieving Reduction of Child Labor in Support of Education). The purpose is to help eliminate child labor in the communities where it purchases tobacco leaf. This program is currently active in Malawi, Zambia and Brazil.

ARISE Program

054 JAPAN TOBACCO INC. ANNUAL REPORT 2013

Corporate Social ResponsibilityBelow is a brief summary of the JT Group CSR Report 2013. To learn more about the JT Group’s approach towards corporate social responsibility and specific programs, please visit http://www.jt.com/csr/report/index.html.

Labor PracticesThe health, safety and well-being of its workforce are of paramount importance to the JT Group. It has established policies and standards beyond its statutory requirements, which safeguard the interests of all employees.

Recognizing the importance of dialogue with staff helps to create an understanding of how the JT Group can be a better employer. To this end, employee surveys are conducted and the result is a two-way communication between the Group and its employees, who cooperate to create rewarding business environments.

Employee Engagement Survey (EES)Between 2008 and 2009, the JT Group piloted an Employee Engagement Survey in 12 countries across its CIS+ region. The aim of the Survey was to gather employees’ suggestions on how to improve business practices and discover what issues they may have. The scope of the EES was subsequently extended in 2010, and in 2012 the first Group-wide survey took place.

Employees

46,729Countries

72Response rate

93%Languages

38

The EnvironmentThe JT Group utilizes agricultural products worldwide and recognizes that its global activities have an environmental impact. From the procurement of raw ingredients and materials, to the manufacturing and distribution of products, the aim is to lessen this impact by promoting sustainability.

Minimizing the environmental impact, and the promotion of the efficient use of resources, is achieved through focusing activities on lowering greenhouse gas (GHG) emissions and reducing water consumption and waste generation. Biodiversity conservation and consideration of local ecosystems are also addressed in a number of ways.

The JT Group’s environmental principles and policies are set out in its Environmental Charter, which has led to the implementation of numerous programs that reduce environmental impact across the entire value chain.

Reducing greenhouse gas emissionsThe JT Group aims to reduce GHG emissions through efficient energy use and a shift to low carbon fuels. In 2012, the scope of measuring GHG emissions was expanded across its entire value chain to monitor the environmental effects of energy use. GHG emissions have decreased by 10% compared with 2007.

Lessening environmental impact


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Fair Operating PracticesThe JT Group connects to a global market place where ethics, fairness and transparency in business are increasingly central to the way companies are expected to operate.

Achieving and maintaining high standards of ethical business conduct is something the JT Group takes very seriously. Employees across all Group entities must be aware of and adhere to the relevant Code of Conduct for their business. All commercial partners must also recognize the values embodied in these business standards and act accordingly at all times. Failure to do so results in serious consequences, including the termination of a partner’s commercial relationship with the JT Group.

Another important area that falls within the area of Fair Operating Practices is the fight against illicit trade in the tobacco supply chain. Here, the JT Group cooperates with government actors such as law enforcement agencies and customs authorities. It also works closely with retailers and consumers to prevent the proliferation of illicit tobacco products. To that end, the JT Group has participated in global product awareness campaigns to inform retailers and consumers about these issues. It also has a number of robust compliance programs in place to monitor its commercial partners.

Consumer IssuesConsumers today are faced with great choice. Making a purchasing decision is a complex combination of factors, and the way in which a company communicates regarding its products is an integral part of enabling consumers to make fully informed choices.

The JT Group informs and educates consumers in a transparent, responsible and proactive manner. This includes disclosing ingredients on tobacco products, engaging in dialogue, listening to customers’ needs and responding openly to complaints and opinions.

The Group’s pharmaceutical business develops, manufactures and markets prescription drugs that are strictly regulated and comply with the highest national and international standards. Additionally, internal systems have also been established to ensure safe, high-quality drugs.

To ensure the integrity of its beverages and processed foods, the JT Group applies rigorous quality processes. From the sourcing of ingredients to the manufacture, packaging and sale of food products, safety controls and standards are observed at every stage. On all products, ingredients are extensively disclosed and traceability information provided.

Food safety control


corporate Social Responsibility continued

Community Involvement & DevelopmentThe JT Group helps to address social needs in local communities, often in relation to the elderly and those at an economic disadvantage.

Activities aim to improve people’s lives, alleviate suffering and complement the efforts of local systems providing services to the underprivileged. This often includes partnering with charities, non-governmental organizations and non-profit organizations.

Food bank in SpainThe Madrid Banco de Alimentos Foundation is a nonprofit charity dedicated to improving the quality of life of people with limited resources facing poverty. Its mission is to collect and distribute food among more than 400 officially registered NGOs in the Madrid community.

In 2012, JTI Spain contributed to the work of the Foundation, helping it build a new food bank facility in the southern part of Madrid, creating a new point for the collection and distribution of food. This new bank will dramatically increase the number of soup kitchens and service centers that receive food daily.

Restoring forests in JapanJT Forest is an initiative that was first established in 2005. Today it includes a program of activities in nine forests throughout Japan. This involvement provides necessary support for forest developers, and engages with local communities, authorities and experts.

Organizational GovernanceThe JT Group structures its corporate governance to enable prompt, high-quality decision-making and proper business conduct.

Please refer to page 58 for detail of Corporate Governance.

JT ForestFood bank in Spain


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Our corporate governance system

General Meeting of Shareholders

Board ofDirectors

Executive Committee

Executive O�cers

Departments

Group Companies

Auditor’s O�ceCompliance O�ce

President andChief Executive

O�cer

Audit & SupervisoryBoard

Independent Auditors

Lawyers

four members (including two outside Audit & Supervisory

board members)

nine members (including two

outside directors)

ComplianceCommittee

five members (including three

outside members)

CompensationAdvisory Panel

five members (including two outside

directors and two outside Audit &

Supervisory Board members)

Advisory Committee

Operational Reviewand Business

Assurance Division

six members (four outside

members and two outside directors)

Selection or dismissal of membersSelection or dismissal of members Selection or dismissal of members

Introduction of compliance-related matters

Review of the policy and the rule relating to compensation for board members and executive o�cers

Supervision of the performance

Advice (to Representative Directors)Accounting

audit

Advice

Report/Proposal

Internal audit

Groupaudit

Accounting audit/Operating audit

Accounting audit/Operating audit

Report

Audit Report

OverviewIn our belief, enhancement of corporate governance is one of the critical management initiatives in order to achieve sustainable profit growth under the uncertain business environment. We have enhanced our corporate governance aiming at “quality and prompt decision-making”, “efficient business execution” and “rigorous supervisory and advisory function”.

We believe that our current governance framework is effective and contributes to the increase in company value. Our governance framework consists of the Board of Directors responsible for the resolution of important matters including the Group strategy as well as supervision of business execution; the Executive Officer System for the purpose of efficient business execution; the Audit & Supervisory Board to perform both accounting and operating audits in collaboration with the external accounting auditors and our internal audit division; and three committees (the Compensation Advisory Panel, the Compliance Committee and the Advisory Committee) which provide advice to the Board of Directors and the representative directors. We will continue to improve this framework to further strengthen our corporate governance.

Initiatives to enhance corporate governance

Rigorous advisory functionQuality and prompt decision-making/Rigorous supervisory function Efficient business execution

Set up the Compliance Committee(In the year ended March, 2001)

Reduced number of directors(In the year ended March, 2001)

Introduced executive officer system(In the year ended March, 2002)

Set up the Advisory Committee(In the year ended March, 2002)

Promote the delegation of business execution to the executive officers(In the year ended March, 2001, 2009 and 2012)

Set up the Compensation Advisory Panel (In the year ended March, 2007)

Invited outsider directors(In the year ended March, 2013)


corporate GovernanceDecision-Making, Business Execution, Supervision

General Meeting of ShareholdersA general meeting of shareholders resolves the matters stipulated by law and our Articles of Incorporation. Under the Companies Act, certain matters are required to be resolved at a shareholder meeting including, most notably, the appointment and dismissal of the directors, audit & supervisory board members and external accounting auditors, dividend amount, loss compensation, as well as change in the Articles of Incorporation. Our Articles of Incorporation do not stipulate any additional matter to be resolved at our shareholders’ meeting other than matters legally required. The annual general meeting of shareholders is held in June, and a special meeting of shareholders shall be called by the Board of Directors, as necessary. The President chairs the shareholders’ meetings.

Within the extent as permitted by law, requirements for resolutions at our shareholders’ meeting were lowered by amending our Articles of Incorporation. A resolution at a general meeting of shareholders can be adopted by a majority of the voting rights present or represented at the meeting. A resolution for the appointment of the Company’s director and audit & supervisory board members additionally require a quorum, which is one-third of the total number of voting rights. A special resolution as stipulated under Section 2, Article 309 of the Companies Act, such as amendment to the Articles of Incorporation, requires the quorum of one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights present or represented at the meeting. Certain matters resolved at our shareholders’ meetings need further approval by the MOF in Japan.

The Japan Tobacco Inc. ActJT was established pursuant to the Japan Tobacco, Inc. Act (“the JT Act”) for the purpose of managing businesses related to the manufacturing, sale and imports of tobacco products. The JT Act provides that the Japanese Government must continue to hold over one-third of all of the issued shares except for the class shares, which have no voting right against all matters that can be resolved at our shareholders’ meeting. The JT Act also states that the issuance of new shares and stock acquisition rights requires the approval of the MOF. In the case of a share-for-share exchange, the same approval is required for issuance of new shares, stock acquisition rights and bonds with stock acquisition rights. Under the JT Act, subject to the approval by the MOF, JT is allowed to engage in businesses other than manufacturing, sales and imports of tobacco products or tobacco-related business, provided that our engagement in such businesses serves the purpose of the Company. JT is also required to obtain approval from the MOF for certain matters, including the appointment or dismissal of directors, executive officers and audit & supervisory board members as well as amendment to our Articles of Incorporation, distribution of surplus (excluding loss compensation), merger, corporate split, or dissolution. In addition, within three months after the end of each fiscal year, we are required to issue a statement of financial position, a statement of income, and a business report to the MOF.

The supplementary provisions of the Reconstruction Financing Act*, which came into effect on December 2, 2011 states that the Government shall study by the year ending March 31, 2023 the possibility of full disposal of government-owned JT shares by reassessing the Government’s holding in JT shares considering the Government’s involvement in the tobacco-related industries based on the Tobacco Business Act.

* Act on Special Measures for Securing Financial Resources Necessary for Reconstruction from the Great East Japan Earthquake.


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The Board of DirectorsThe Board of Directors assumes responsibility in making decisions for important issues including the Group strategy as well as supervising all the activities of the Group. Currently, we have nine directors including two independent outside directors.

A board meeting, in principle, is held every month and a special board meeting may be called, as necessary. The Board of Directors decides those matters required to be resolved by the Board of Directors under the Companies Act, such as important business plans, disposal or acquisition of important assets, significant amount of borrowings, conclusion of important agreements. For the purpose of supervising the Company’s activities, the Board of Directors requires directors to deliver a report on the progress of operations at least on a quarterly basis. In year ended March 2012, we had 16 board meetings to discuss important issues including the management plan.

Capacity to supervise the Company’s activities has been further strengthened, since outside directors joined the board in 2012. The two outside directors also invigorate the board meeting by actively engaging in the discussions from broad perspectives based on their experience and expertise.

The directors marked with * are also the executive officers.

Hiroshi Kimura

Chairman of the Board

Date of birth: April 23, 1953

Term of office: Two years since June 2012

Number of shares held: 28,600

April 1976 Joined the Company (Japan Tobacco and Salt Public Corporation)

January 1999 Vice President of Corporate Planning Division

May 1999 Senior Vice President in Tobacco Business Planning Division, Tobacco Business Headquarters; Executive Vice President, JT International S.A.

June 1999 Member of the Board

June 2001 Retired from the Board

June 2005 Member of the Board

June 2006 President, Chief Executive Officer and Representative Director

June 2012 Chairman of the Board (Current Position)

March 2013 Member of the Board (outside director), ASAHI GLASS CO., LTD. (Current Position)


corporate Governance continuedDecision-Making, Business Execution, Supervision continued

Yasushi Shingai*

Representative Director and Executive Deputy President

Date of birth: January 11, 1956




July 2001 Vice President of Financial Planning Division

June 2004 Senior Vice President, and Head of Finance Group, Vice President of Financial Planning Division

July 2004 Senior Vice President, and Chief Financial Officer

June 2005 Member of the Board, Senior Vice President, and Chief Financial Officer

June 2006 Member of the Board, Executive Vice President, JT International S.A.

June 2011 Member of the Board, Senior Vice President, and Executive Vice President in charge of International Tobacco Business

June 2011 Representative Director and Executive Deputy President (Current Position)

Noriaki Okubo*


Date of birth: May 22, 1959




April 2000 Vice President of Business Development Dept., Pharmaceutical Division

June 2002 Vice President of Business Planning Dept., Pharmaceutical Division

June 2004 Member of the Board, Senior Vice President, and President, Pharmaceutical Business

June 2006 Member of the Board, Executive Vice President, and President, Pharmaceutical Business

June 2009 Member of the Board, Senior Executive Vice President, and President, Pharmaceutical Business

May 2010 Member of the Board, Senior Executive Vice President, and President, Pharmaceutical Business, Vice President of Business Planning Dept., Pharmaceutical Division

January 2011 Member of the Board, Senior Executive Vice President, and President, Pharmaceutical Business


Mitsuomi Koizumi*

President, Chief Executive Officer and Representative Director





June 2001 Vice President of Corporate Planning Division

June 2003 Senior Vice President, and Head of Human Resources and Labor Relations Group

June 2004 Senior Vice President, and Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters

June 2006 Executive Vice President, and Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters

June 2007 Member of the Board, Executive Vice President, and Head of Marketing & Sales General Division, Tobacco Business Headquarters

July 2007 Member of the Board, Executive Vice President, and Chief Marketing & Sales Officer, Tobacco Business Headquarters

June 2009 Representative Director and Executive Deputy President

June 2012 President, Chief Executive Officer and Representative Director (Current Position)


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Member of the Board

Date of birth: November 26, 1965

Term of office: One year since June 2013


April 1989 Joined the Company

July 2005 General Manager, Secretary’s Office

July 2008 Vice President of Corporate Strategy

June 2011 Senior Vice President, Chief Strategy Officer and Assistant to CEO in Food Business, Vice President, Corporate Strategy

March 2012 Senior Vice President, Chief Strategy Officer and Assistant to CEO in Food Business

June 2012 Senior Vice President, Chief Strategy Officer

June 2013 Member of the Board, Executive Vice President, JT International S.A. (Current Position)

Hideki Miyazaki*

Member of the Board and Executive Deputy President

Date of birth: January 22, 1958



April 1980 Joined Nomura Securities Co., Ltd.

July 2005 Joined the Company (Japan Tobacco Inc.)

January 2006 Deputy Chief Financial Officer

June 2008 Senior Vice President, and Chief Financial Officer, Vice President, Tax Division

October 2009 Senior Vice President, and Chief Financial Officer

May 2010 Senior Vice President, and Chief Financial Officer, Vice President, Treasury Division

June 2010 Executive Vice President and Chief Financial Officer, Vice President, Treasury Division

July 2010 Executive Vice President and Chief Financial Officer, Vice President, Treasury Division and Vice President, Procurement Planning Division

August 2010 Executive Vice President and Chief Financial Officer

June 2012 Member of the Board and Executive Vice President (Current Position)

Akira Saeki*


Date of birth: August 25, 1960



April 1985 Joined the Company (Japan Tobacco Inc.)

June 2005 Vice President of Corporate Strategy Division

June 2007 Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters

May 2008 Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters, Head of China Division, Tobacco Business

June 2008 Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters, Chief Corporate, Scientific & Regulatory Affairs Officer, Tobacco Business, Head of China Division, Tobacco Business

July 2008 Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters, Chief Corporate, Scientific & Regulatory Affairs Officer, Tobacco Business

July 2009 Senior Vice President, Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters, Chief Corporate, Scientific & Regulatory Affairs Officer, Tobacco Business

June 2010 Executive Vice President, and Vice President of Tobacco Business Planning Division, Tobacco Business Headquarters



corporate Governance continuedDecision Making, Business Execution, Supervision continued

Motoyuki Oka

Member of the Board (Outside director)

Date of birth: September 15, 1943


Number of shares held: 0

April 1966 Joined Sumitomo Corporation

June 1994 Director, Sumitomo Corporation

April 1998 Managing Director, Sumitomo Corporation

April 2001 Senior Managing Director, Sumitomo Corporation

June 2001 President, Chief Executive Officer, Sumitomo Corporation

June 2007 Chairman of the Board of Directors, Sumitomo Corporation

June 2012 Advisor, Sumitomo Corporation. Member of the Board, the Company (Current Position)

Main Kohda

Member of the Board (Outside director)




September 1995 Started independently as Novelist (Current Position)

January 2003 Member of Financial System Council, Ministry of Finance Japan

April 2004 Visiting Professor, Faculty of Economics, Shiga University

March 2005 Member of the Council for Transport Policy, Ministry of Land, Infrastructure, Transport and Tourism

November 2006 Member of the Tax Commission, Cabinet Office, Government of Japan

June 2010 Member of the Board of Governors, Japan Broadcasting Corporation (Current Position)

June 2012 Member of the Board, the Company (Current Position)

June 2013 Member of the Board (outside director), LIXIL Corporation (Current Position)

The directors marked with * are also the executive officers.


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The Audit & Supervisory BoardEntrusted by shareholders and ensured of its autonomy, the Audit & Supervisory Board conducts accounting audits as well as operating audits. Currently, we have four audit & supervisory board members including two independent outside audit & supervisory board members. Collectively, they have experience in management, legal, finance and accounting among other areas. Audit & supervisory board members have various statutory rights in order to accomplish their roles and responsibilities, including making requests to deliver reports to the directors, executive officers and employees, issuing an injunction to prevent illegal activities by directors, and representing the Company in case of litigation between any director and the Company. In addition, the Audit & Supervisory Board has a right to dismiss the auditing firm which conducts accounting audit. The Audit & supervisory board members’ report containing the results of both the accounting and operating audits is submitted to the annual general meeting of shareholders.

If directors and executive officers find any issue that may cause a substantial damage to the Company, they are obliged to report it to the Audit & Supervisory Board, along with other relevant matters that could affect the Company. Audit & supervisory board members are authorized to attend the meetings of the Board of Directors and other important meetings. Our directors and executive officers respond in a prompt and appropriate manner, when requested by audit & supervisory board members to deliver documents for their inspection, to arrange field audits and to submit reports. The Operational Review and Business Assurance Division, which conducts internal audits, as well as the Compliance Office, exchanges necessary information and works together with audit & supervisory board members.

Futoshi Nakamura

Audit & Supervisory Board Members

Date of birth: November 23, 1957

Term of office: Three years since June 2012



July 2004 Head of Procurement Planning Division

September 2005 Senior Manager of Operational Review and Business Assurance Division, JT International Holding B.V. Vice President

July 2009 Senior Manager of Accounting Division

July 2010 Head of Operational Review and Business Assurance Division

June 2012 Audit & Supervisory Board Members, the Company (Current Position)



Tomotaka Kojima


Date of birth: December 19, 1953



Apr 1976 Joined Ministry of Finance

Jul 2000 Director of the Fukuoka Local Finance Branch Bureau

Jul 2002 Deputy Head of Finance Group of the Company

Jul 2004 Deputy Director General of Employee Welfare Bureau, Secretariat of National Personnel Authority

Apr 2007 Deputy Director General for Administrative Policy Matters, National Personnel Authority

Jan 2008 Director General of Equity and Investigation Bureau, Secretariat of National Personnel Authority

Aug 2009 Executive Director, National Hospital Organization

Mar 2010 Retired from Executive Director, National Hospital Organization

October 2010 Adviser, Japan Association of Corporate Directors

Nov 2010 Secretary General, Japan Association of Corporate Directors


Koichi Ueda

Audit & Supervisory Board Members (Outside Audit & Supervisory Board Members)


Term of office: Four years since June 2011


April 1967 Judicial Apprentice

April 1969 Appointed as Public Prosecutor

June 2006 Superintending Public Prosecutor, the Tokyo High Public Prosecutors Office

December 2006 Took mandatory retirement

January 2007 Registered as an attorney at law

April 2007 Specifically Appointed Professor of Meiji University Law School (Current Position)

January 2009 Representative Director, The Resolution and Collection Corporation

March 2009 President and Representative Director, The Resolution and Collection Corporation


Yoshinori Imai

Audit & Supervisory Board Members (Outside Audit & Supervisory Board Members)


Term of office: Four years since June 2011


April 1968 Joined Japan Broadcasting Corporation

June 1995 Bureau Chief of General Bureau for Europe

May 2000 Director General, Planning & Broadcasting Department

June 2003 Executive Editor and Program Host

January 2008 Executive Vice President

January 2011 Retired from Executive Vice President

April 2011 Visiting Professor, Ritsumeikan University (Current Position)



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Independence of Outside Directors and Outside Audit & Supervisory Board Members JT reports to the securities exchanges on which it is listed that the two outside directors and two outside audit & supervisory board members are designated as independent executives. We have a criteria list to assess the independence of an executive. Based on the criteria, the independence of the four executives has been confirmed. Motoyuki Oka and Main Kohda, who are outside directors, also serve as members of the Compensation Advisory Panel and the Advisory Committee, while Koichi Ueda and Yoshinori Imai, who are outside audit & supervisory board members, also serve as members of the Compensation Advisory Panel.

Criteria list for independence of an executiveA person who fits any of the following descriptions is not designated as an independent executive.1. A person who belongs or belonged to JT

or an affiliate or sister company of JT2. A person who belongs to a company or any

other form of organization of which JT is a major shareholder

3. A person who is a major shareholder of JT or who belongs to a company or any other form of organization which is a major shareholder of JT

4. A person who is a major supplier or customer of JT (if the supplier or customer is a company or any other form of organization, a person who belongs thereto)

5. A major creditor of JT including a major loan lender (if the creditor is a company or any other form of organization, a person who belongs thereto)

6. A certified public accountant who serves as an accounting auditor or an audit advisor of JT, or a person who belongs to an auditing firm which serves as an accounting auditor or an audit advisor of JT

7. A person who receives a large amount of fees from JT in exchange for providing professional services for legal, financial and tax affairs or business consulting services (if the recipient of such fee is a company or any other form of organization, a person who belongs thereto)

8. A person who receives a large amount of donation from JT (if the recipient of such donation is a company or any other form of organization, a person who belongs thereto)

9. A person who has fit any of the descriptions in 2 to 8 above in the recent past

10. A close relative of a person who fits any of the following descriptions:(a) A person who fits any of the descriptions

in 2 to 8 above (if such descriptions apply to a company or any other form of organization, a person who performs important duties thereof)

(b) A director, audit & supervisory board member, audit advisor, executive officer or employee of JT or an affiliate or sister company of JT

(c) A person who has fit the descriptions in 1 or 2 in the recent past

Support for Outside Directors and Outside Audit & Supervisory Board MembersWe provide supports to outside directors and outside audit & supervisory board members. The Corporate Strategy Division or Secretary Division explains the agendas for board meetings in advance, submits requested documents and delivers necessary information to outside directors for them to contribute to the quality of board discussion. As an independent body entrusted by shareholders, the Audit & Supervisory Board is expected to monitor the performance of the directors and executive officers, with an aim to underpin the Company’s healthy and sustainable growth as well as increase its credibility. For outside audit & supervisory board members to perform their expected roles, we are supporting them by making necessary information available and allocating adequate human resources to the Auditor Office which assists audit & supervisory board members.

Executive Officer SystemJT employs the Executive Officer System to ensure effective and efficient management by promptly responding to the changing environment, and thus aims to increase its company value. Executive officers are appointed by the Board of Directors. At the same time, the board assigns certain responsibilities and delegates relevant authorities to the executive officers in accordance with the Rules Defining the Extent of Responsibility and Authority.

The Executive Committee has been established to consult with the President who is our Chief Executive Officer. Comprising the President, the Chairman, Deputy Presidents, as well as executive officers and other participants designated by the President, this Committee is, in principle, held on a weekly basis.



The agendas for the Executive Committee include the issues to be discussed at the board meetings as well as the matters delegated to the Committee by the Board of Directors. Important management issues are also discussed at the Executive Committee, including management policies and fundamental strategies of the Group. Considering its significance, a full-time audit & supervisory board member attends the Committee to monitor the discussion.

Please refer to page 184 for the list of executive officers.

Advisory CommitteeThe Advisory Committee provides advice from a broad perspective concerning JT Group’s mid- to long-term direction and other subjects of similar importance. This Committee is comprising four external individuals with ample managerial or international experience and two outside directors. Based on the information shared by the Company, the Advisory Committee reviews various topics such as management strategies, management plans and financial results, and then provides advice to our representative directors. During the year ended March 2013, the Advisory Committee was held three times and discussed various issues including the regulatory environment of our tobacco business. The Committee members also made a field trip to one of TableMark’s factories.

Members of Advisory Committee

Member Kazuo InamoriFounder and Chairman Emeritus, Kyocera Corporation

Member Sakutaro Tanino

Former Japanese Ambassador to India and China/Vice President, Japan-China Friendship Center

Member Tomijiro MoritaSenior Advisor, The Dai-ichi Life Insurance Co., Ltd.

Member Sakue MizukoshiCorporate Advisor, Seven & i Holdings Co., Ltd.

Associate Member Motoyuki Oka JT’s outside director

Associate Member Main Kohda JT’s outside director


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Internal control framework

The Board of Directors External Auditors

Compliance Policy and the Compliance

Implementation Plan

Financial risks/Credit exposure

Crisis management/Disaster response

Internal audit plan/Internal audit report

Internal control report

Internal control audit

Reporting Monitoring

OverviewJT devotes its efforts to ensure appropriate business operation by reinforcing internal control such as compliance, internal audit and risk management among other matters. The developments of these internal control focuses are reported regularly to the Board of Directors. In addition, we have the Auditor Office, a department dedicated to support the Audit & Supervisory Board, for our audit & supervisory board members to effectively perform their duties. Collaboration among the Group companies is encouraged to strengthen the framework for compliance (which includes the internal consultation and reporting), reliable financial reporting, internal audit and risk management.

ComplianceA Code of Conduct has been created based on our internal guidelines approved by the Board of Directors. Under the Code of Conduct, all directors and employees are expected to fully comply with applicable laws, our Articles of Incorporation, social norms and other compliance standards. In addition, the Board of Directors has established a fair and effective compliance framework as described below.• Set up the Compliance Committee, which reviews

and discusses compliance related matters, then directly reports to the Board of Directors

• Assign responsibility for compliance to a director (who also serves as an executive officer)

• Assign responsibility for compliance to an executive officer without directorship

• Assess and approve the Compliance Policy as well as the Compliance Implementation Plan

• Review the implemented compliance initiatives.

The Compliance Office is in charge of improving the compliance framework, while identifying any issue in the framework. The Compliance Office also promotes compliance by offering training programs to directors and employees.

The JT Group has both internal and external hotlines through which employees may consult or report any misconduct they suspect to be taking place. The Compliance Office is responsible for investigating consulted or reported cases and implementing Group-wide measures to prevent the recurrence of misconduct after discussing it with the divisions concerned. Material cases are reviewed by the Compliance Committee, and further reported to the Board of Directors as necessary.

The Compliance Committee is headed by the Chairman, and external members comprise the majority. The Compliance Committee met five times in the year ended March 31, 2013, and discussed initiatives to strengthen compliance throughout the Group among other matters.

External members of the Compliance Committee

Rokuro Tsuruta TSURUTA ROKURO LAW OFFICE

Makoto Matsuo Attorney at Law, Momo-o, Matsuo, & Namba.

Hideo KojimaCertified Public Accountant, Hideo KojimaCertified Public Accountant Office


corporate Governance continuedInternal Control System & Risk Management System

Reliable financial reportingIn order to ensure the reliability of its financial reporting, JT has introduced a relevant internal control system in accordance with the Financial Instruments and Exchange Act and other standards. In addition, a dedicated division has been created which reviews the internal control system and reports the result of the assessment. Reliability of our financial reporting is confirmed by the external accounting auditor who makes an assessment of our internal control system based on the Internal Control Report prepared by us.

Risk management

Financial risk managementJT has put in place the internal guidelines for financial risk management. The executive officer in charge updates the status of financial risks together with the countermeasures against these risks at the Executive Committee on a quarterly basis. The director in charge reports the status of financial borrowings and credit exposures to the Board of Directors on a quarterly basis to ensure that the board is aware of any risk in these areas.

Crisis management and disaster controlIn order to deal with possible crises or disasters, JT has produced a manual for crisis management and disaster control so that we can make a proper initial response. In the event of a crisis or a disaster, a project team led by the President is immediately assembled. In the project team, the Corporate Strategy Division assumes the key role to support the President. Under the leadership of the President, we respond promptly and properly, ensuring close cooperation across the organization. The director in charge reports crisis or disaster incidents to the Board of Directors on a quarterly basis.

Management of other risksIn accordance with the Rules Defining the Extent of Responsibility and Authority, management of other risks is delegated to relevant divisions, which identify and monitor the risks in their areas of responsibility. Significant risks are reported to the Executive Committee, together with the request for approval to implement countermeasures against them, where necessary.

Please refer to page 50 for our risk factors.

Internal audit systemJT has an Operational Review and Business Assurance Division, which is thoroughly independent of other JT Group divisions and organizations engaging in operations. Under such a capacity, it conducts internal audits and directly reports to the President. The Operational Review and Business Assurance Division has unlimited access to all activities, records and employees Group-wide to accomplish its roles and responsibilities. The head of the division is required to report to the President the results of internal audits along with their analysis and assessment, and also reports to the Board of Directors. The head of the division has the right to contact the management of JT and the Group companies regularly and as frequently as needed.


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OverviewRemuneration for our directors is determined by resolution at the Board of Directors, taking into account discussion at the Compensation Advisory Panel. Remuneration for our audit & supervisory board members is determined through the deliberations of the Audit & Supervisory Board. The aggregate remuneration of directors and audit & supervisory board members cannot exceed the respective ceilings approved at a general meeting of shareholders. In determining remuneration, we refer to research management remuneration conducted by a third party, and benchmark Japanese manufacturing companies operating globally with a scale or profit comparable with ours.

The Compensation Advisory PanelThe Compensation Advisory Panel has been established as an advisory body to the Board of Directors with an aim to increase the objectiveness and transparency of our executive remuneration. The Compensation Advisory Panel comprises the Chairman, two outside directors and two outside audit & supervisory board members. Upon request, the Panel reviews and provides advice on the policy, framework and calculation method for remuneration of our directors and executive officers. It also monitors whether our executive remuneration level is reasonable. During the past fiscal year, the Compensation Advisory Panel met twice to discuss the level of remuneration among other matters.

Based on the recommendation by the Compensation Advisory Panel, the key policy for our executive remuneration is as follows:• Set the remuneration at an adequate level to retain

personnel with superior capabilities• Link the remuneration to company performance

so as to motivate executives to achieve their performance targets

• Link the remuneration to company value in the mid- to long-term

• Ensure transparency by implementing an objective and quantitative framework.

Structure of executive remunerationIn accordance with the above policy, remuneration for our executive comprises (1) “base salary” paid monthly, (2) “executive bonus” linked to our business performance in the relevant year, and (3) “stock option grants”, the value of which is linked to our mid- to long-term company value. In 2007, JT introduced a stock option program as an incentive linked to the mid- to long-term company value. The Companies Act requires a special resolution at a shareholders’ meeting if stock options are granted under particularly advantageous terms or at particularly advantageous prices. This is not the case with our stock option program, as our stock options are compensation for the executives who perform their duties, and the options are granted in exchange for certain considerations.

Remuneration for the directors and audit & supervisory board members are structured as follows:

Remuneration for the directors who also serve as executive officers comprises “base salary”, “executive bonus” and “stock option grants”. “Executive bonus” is included, as they are responsible for the achievement of assigned annual targets through their day-to-day management.

As for the president or each executive deputy president, the combined amount of “executive bonus” at a 100% grant basis and “stock option grants” is targeted at slightly less than 80% of respective annual base salary. The same scheme is introduced to set “executive bonus” and “stock option grants” for other directors, while the combined amount is targeting approximately 70% of respective annual base salary. Excluding outside directors, remuneration for the directors not serving as executive officers comprises “base salary” and “stock option grants”, as they focus on decision-making on the Group strategies in addition to supervision of business and corporate activities. Remuneration for outside directors consists solely of “base salary” and does not include performance linked compensation from the perspective of sustaining their independence.


corporate Governance continuedExecutive Remuneration

Remuneration for the audit & supervisory board members is also composed of “base salary” alone, in light of their key responsibility to conduct audits.

The maximum amount of the annual aggregate remuneration excluding “stock option grants” for the directors and audit & supervisory board members was approved at our 22nd Annual General Meeting of Shareholders held in June 2007. The maximum remuneration for all the directors combined is ¥870 million and ¥190 million for all the audit & supervisory board members combined. In addition, the ceiling for annual “stock option grants” for the directors was approved at the same shareholders’ meeting. The ceiling is 800 options in number and ¥200 million in value. The number of the stock options granted to the directors and the executive officers who are not directors is decided each year by the Board of Directors.

The remuneration payments to the directors and audit & supervisory board members for the year ended March 2013 are as follows.

Category

Total remuneration and other payments(million yen)

Total amount of remuneration and other payments by type (million yen)Number to be paid (people)Basic remuneration Director’s bonus1 Stock option grants2

Directors (excluding Outside Directors) 627 324 198 105 10

Audit & Supervisory Board member (excluding Outside Audit & Supervisory Board members) 36 36 – – 2

Outside Directors and Outside Audit & Supervisory Board members 83 83 – – 5

Total 746 442 198 105 17

1 Amounts to be paid.2 Total amounts granted for the year ended March 2013.

The remuneration payments to the directors and the audit & supervisory board members whose total remuneration exceeds ¥100 million for the year ended March 2013 are as follows.

Name Category Company

Amount of consolidated remuneration and other payments by type (million yen)

Total (million yen)Basic remuneration Director’s bonus Stock option grants

Mitsuomi KoizumiRepresentative Director JT 67 64 25 156

The stock options granted for the year ended March 2013 are as follows:

Resolution date September 21, 2012

Positions and number of people grantsDirectors seven personsExecutive officers (excluding persons serving as Directors) 17 persons

Number of shares65,600 shares to Directors80,200 shares to Executive officers; total 145,800 shares (200 shares per stock acquisition right)


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Deloitte Touche Tohmatsu LLC (Tohmatsu) conducts accounting audits in accordance with the Companies Act and the Financial Instruments and Exchange Act. The Certified Public Accountants who audited the JT Group’s consolidated financial statements for the year ended March 31, 2013 and the number of people who assisted the auditing work are as follows:

Audit partners responsible for the Group accounting audit:Yasuyuki Miyasaka Satoshi Iizuka Koji Ishikawa

Assistants for the audit:Certified public accountants: 13 persons Junior accountants: 7 persons Others: 10 persons.

Policy to determine audit feeThe audit fee is determined after sufficient negotiations with external accounting auditors based on the audit plan and fee estimates proposed by them. During the process, we confirm that the proposed audit hours properly reflect the scope of audits or reviews, taking into account the focus audit areas under the audit plan and the additions or subtractions of the Group companies among other factors. We also analyze the variance between the actual and planned auditing hours in the prior audits. With these and other information being considered, the audit fee is agreed.

Consent from the Audit & Supervisory Board is acquired before final agreement on the audit fee to ensure the independence of external auditors.

Audit and non-audit feesIn addition to the accounting audit fee, the JT Group pays fees to Tohmatsu for its services unrelated to the accounting audit. Fees paid to Tohmatsu for the year ended March 31, 2012 and the year ended March 31, 2013 are as follows:

Classification

Year ended March 31, 2012 Year ended March 31, 2013

Fees for audit attestation services (million yen)

Fees for non-audit services (million yen)



JT 310 1341 320 242

Consolidated subsidiaries in Japan 188 2 171 5

Total 498 136 491 28

1 Includes the fee for the advisory service concerning IFRS adoption.2 Includes the fee for the issuance of the comfort letter in relation to the share offering.


corporate Governance continuedExternal Accounting Auditors and Audit Fee

Our subsidiaries outside Japan receive accounting audits mainly by the member firms of Deloitte Touche Tohmatsu Limited, which Tohmatsu belongs to. In particular, the fees paid by the JTIH Group for the accounting audits of their financial statements and the non-audit services are material. Fees paid to the member firms of Deloitte Touche Tohmatsu Limited for the year ended March 31, 2012 and the year ended March 31, 2013 are as follows:

Classification

Year ended March 31, 2012 Year ended March 31, 2013





JTIH Group 679 368 682 324


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Our quest for better communication with the financial community In the year ended March 31, 2012, we adopted IFRS with the aim of improving international comparability of financial information in the capital markets. In the following year, we split the former food business into two segments, the beverage business and processed food business, to improve transparency of our business. We will continue with our efforts to improve our disclosure and communication with the financial community.


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Revenue2

(billions of yen)

2,033.8

+44.3

+0.1

+41.0

+5.8

-3.3

-1.9

+0.5

2,120.2

FY3/2012

International tobacco at constant US$ vs JPY

International tobacco US$/Yen Forex E�ect

Japanese domestic tobacco

Pharmaceutical

Beverage

Processed Food

Others

FY3/2013

Adjusted EBITDA3

(billions of yen)

577.1

+70.7

-42.2

+0.0

+19.1

-2.7

-2.2

+1.9

+0.3

622.1

FY3/2012

International tobacco at constant currency

Japanese domestic tobacco

International tobacco Local Currency vs US$ Forex E�ect

International tobacco US$ vs Yen Forex E�ect

Pharmaceutical

Beverage

Processed Food

Others

FY3/2013

Operating Profit(billions of yen)

459.2

+45.0

+28.2

532.4

FY3/2012

Adjusted EBITDA

Adjustment total

FY3/2013

•Revenue increased ¥86.4 billion or +4.2% year-on-year to ¥2,120.2 billion. •This was mainly the result of robust pricing and mix as well as an increase in total shipment volume in the international tobacco business and an increase

in sales volume in the Japanese domestic tobacco business from the prior fiscal year which was affected by the earthquake disaster.

2 Excludes tobacco excise taxes and agency transactions.

•Adjusted EBITDA increased ¥45.0 billion or +7.8% year-on-year to ¥622.1 billion, driven mainly by the tobacco business.• In the international tobacco business, adjusted EBITDA grew driven by strong volume and price/mix, which more than offset the increase in costs

and unfavorable currency exchange movements. • In the Japanese domestic tobacco business, adjusted EBITDA grew, as the increase in costs was more than offset by the increase in sales volume

and the absence of the earthquake related costs incurred in the prior fiscal year.•Adjusted EBITDA at constant rates of exchange grew +15.1% year-on-year.

3 Operating profit + depreciation and amortization ±adjustment items (income and costs)*. * adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± others.

•Operating profit increased ¥73.2 billion or +15.9% year-on-year, driven by an increase in revenue in the international tobacco business and the Japanese domestic tobacco business, and the absence of a cooperation fee for terminating leaf tobacco farming incurred in the prior fiscal year.


Financial ReviewAnalysis of the Results for year ended March 20131

1 Consolidated results: Year ended March 2012 and year ended March 2013. International tobacco business: Year ended December 2011 and year ended December 2012.

Actual Results Decrease Increase (Decrease in case of expense)

Profit4

(billions of yen)

320.9

+73.2

-5.0

-45.5

343.6

FY3/2012

Operating profit

Financial income/financial cost

Income tax/Profit attributable to non-controlling interests

FY3/2013

•Profitincreased¥22.7billionor+7.1%year-on-yearto¥343.6billion,astheincreaseinoperatingprofitmorethanoffsettheworseninginfinancialincome/financialcostandtheincreaseinincometax/profitattributabletonon-controllinginterests.

•Financialincome/financialcostdecreasedyear-on-year,asthedecreaseininterestexpensescouldnotoffsettheincreaseinforeignexchangelosses.•Incometaxincreased(decreasedasintheabovegraph),intheabsenceoftheeffectofthelossonthevaluationofinvestmentsinsubsidiariesintheprior fiscal year.

4Profitattributabletoownersoftheparent.

Billionsofyen

YearsendedMarch31 2012 2013

Consolidatedoperatingprofit 459.2 532.4

Adjustmenttotal8 118.0 89.8

Consolidated:AdjustedEBITDA 577.1 622.1

Internationaltobacco:Operatingprofit9 252.4 289.5


Internationaltobacco:AdjustedEBITDA 314.8 343.3

Japanesedomestictobacco:Operatingprofit 209.3 241.3


Japanesedomestictobacco:AdjustedEBITDA 262.3 281.3

Pharmaceutical:Operatingprofit (13.5) (16.2)


Pharmaceutical:AdjustedEBITDA (10.0) (12.7)

Beverage:Operatingprofit 4.5 2.4


Beverage:AdjustedEBITDA 14.6 12.4

ProcessedFood:Operatingprofit (2.5) (5.8)


Processedfood:AdjustedEBITDA 5.4 7.4

Others/Elimination:Operatingprofit 9.0 21.2

Adjustmenttotal8 (18.9) (30.7)

Others/Elimination:AdjustedEBITDA (9.8) (9.6)

•Foranalysisofrevenue,corerevenueandadjustedEBITDAofeachbusinesssegment,pleaserefertosection“ReviewofOperation”.

8 Depreciationandamortization±adjustmentitems(incomeandcosts)****Adjustmentitems(incomeandcosts)=impairmentlossesongoodwill±restructuringincomeandcosts±others.

9 Internationaltobaccobusiness:YearendedDecember2011andyearendedDecember2012.

Adjusted EBITDA and Operating Profit by business segment

Billionsofyen

YearsendedMarch31 2012 2013

Revenue 2,033.8 2,120.2

Internationaltobacco5 966.3 1,010.7

Corerevenue6 894.6 943.1

Japanesedomestictobacco 646.2 687.1

Corerevenue7 611.9 654.0

Pharmaceutical 47.4 53.2

Beverage 188.8 185.5

ProcessedFood 170.7 168.7

Others 14.6 15.0

5Internationaltobaccobusiness:YearendedDecember2011andyearendedDecember2012.

6 Excludesrevenuesfromdistribution,contractmanufacturingandotherperipheralbusinesses.

7 ExcludesrevenuefromthedistributionofimportedtobaccointheJapanesedomestictobaccobusiness,amongotherfactors.

Jan-Dec2011

Jan-Dec2012

YEN/US$ 79.80 79.81

RUB/US$ 29.40 31.07

GBP/US$ 0.63 0.63

EUR/US$ 0.72 0.78

Revenue by business segment

Average Exchange Rate


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Consolidated Balance Sheet (Assets)(billions of yen)

3,667.0

-262.0

+60.1

+26.4

+206.4

+30.3

+52.8

+71.7

3,852.6

March 31, 2012

Cash and cash equivalents

Trade and other receivables

Inventories

Goodwill

Trademark

Property, plant and equipment

Other assets

March 31, 2013

Consolidated Balance Sheet (Debt and Equity)(billions of yen)

3,667.0

-93.5

-83.3

+14.1

+35.7

+135.3

+201.2

+215.8

-239.6

3,852.6

March 31, 2012

Borrowings

Bonds

Trade and other payables

Tobacco excise tax payables etc

Other liabilities

Retained earnings

Exchange di�erences on translation of foreign operations

Other equity total

March 31, 2013

•Total assets increased ¥185.6 billion to ¥3,852.6 billion, as the decrease in cash and cash equivalents was more than offset by the increase of goodwill from forex impact and acquisitions, among other factors.

•Cash and cash equivalents decreased from share buy-back, acquisitions and investment in the next generation raw material processing lines in the Japanese domestic tobacco business.

•Total liabilities increased ¥8.2 billion to ¥1,960.6 billion. Borrowings decreased from repayment of loans and bonds decreased from redemptions. However, these were not sufficient to offset the increase in tobacco excise tax payables etc and the increase in retirement benefit liabilities and income tax payables in the international tobacco business.

•Total equity increased ¥177.4 billion to ¥1,892.0 billion, mainly as retained earnings increased and exchange differences on translation of foreign operations increased, which more than offset the decrease in equity from share buy-back.


Financial Review continuedAnalysis of the Results for year ended March 2013 continued

1. Significant Accounting PoliciesHaving acquired RJR Nabisco’s non-U.S. tobacco operation in 1999 and Gallaher Group Plc. in the UK in 2007, the JT Group has been growing steadily as a global company with operations in over 70 countries and with our products sold in over 120 countries. In this context, the JT Group has adopted IFRS from the year ended March 31, 2012 to improve international comparability of financial information in capital markets and to diversify the Group’s sources of financing through international capital markets.

While the year end of our consolidated financial results is for March 31, the year end for our international tobacco business is December 31. For further details of the reporting period for our international tobacco business, please refer to Note 2 (6) to the consolidated financial statements.

For further details of significant accounting policies, please refer to Note 3 to the consolidated financial statements.

2. Non-GAAP financial measuresThe JT Group discloses certain additional financial measures that are not required or defined under IFRS. These measures help grasp underlying performance of each business and are used for internal performance management. We believe that they are useful information for users of our financial statements to assess the Group’s performance.

For our international tobacco business, its consolidated financial statements reported in US dollars are internally reviewed and therefore revenue and adjusted EBITDA are externally communicated in US dollars. These non-GAAP financial measures should be treated as supplementary information, rather than alternative measures to corresponding financial numbers prepared in accordance with IFRS.

Core revenueFor the tobacco business, core revenue is disclosed additionally as a breakdown of revenue. Specifically, the core revenue for the Japanese domestic tobacco business is presented after deducting revenue accounted for distribution of imported tobacco products, among other things, from revenue, while core revenue for the international tobacco business is presented after deducting the revenue accounted for the distribution business and contract manufacturing, among other areas, from revenue.

Adjusted EBITDAIn order to provide useful comparative information on our business performance, adjusted EBITDA is presented as operating profit less depreciation, amortization and adjustment items (income and costs). Adjustment items (income and costs) are impairment losses on goodwill and restructuring income and costs, and others items.

Furthermore, for the international tobacco business, adjusted EBITDA at constant rates of exchange which excludes foreign exchange effects, is also presented as additional information. Adjusted EBITDA at constant rates of exchange for a relevant period in the international tobacco business is calculated using the foreign exchange rates of the prior year.

Adjusted EPSIn order to provide useful comparative information on our shareholder return, adjusted EPS (diluted) is presented after making certain adjustments to dilute EPS. For the adjustments made for the adjusted EPS (diluted), please refer to Note 32 to the consolidated financial statements “Earnings per share”.

Consolidated dividend payout ratioThe consolidated dividend payout ratio is calculated by dividing the annual dividend per share for the relevant year (total of interim dividends and year-end dividends for which the record dates are included in the relevant year) by basic earnings per share.

Change in segments

In the second quarter ended September 30, 2012, the JT Group split the former “Food Business” into two segments, the “Beverage Business” and the “Processed Food Business”. For details, please refer to Note 6(1) to the consolidated financial statements.

3. Analysis of consolidated financial results for the year ended March 31, 2013

1. Consolidated financial results for the year ended March 31, 2013For analysis of “Revenue”, “Adjusted EBITDA”, “Operating profit” and “Profit attributable to owners of the parent company”, please refer to page 76-77. For analysis of “Assets”, “Debt” and “Equity”, please refer to page 78.

For analysis of financial results by business segment, please refer to “Review of Operations”.


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2. Adjusted EPSAdjusted profit for the year ended March 31, 2013 increased ¥38.9 billion year-on-year to ¥329.7 billion. Adjusted EPS (diluted) for the year ended March 31, 2013 increased ¥21.00 or +13.8% year-on-year to ¥173.65.

Adjusted diluted earnings per shareBillions of yen

Year ended March 31,

2012

Year ended March 31,

2013

Profit used for calculation of adjusted diluted earnings per share 320.9 343.6

Adjustment items (income) (29.9) (34.2)

Adjustment items (costs) 29.0 7.5

Adjustments on income taxes and non-controlling interests 2.0 12.8

Adjustments on income taxes related to losses on valuation of investments in subsidiaries (31.2) –

Adjusted profit for the year 290.8 329.7

Weighted-average number of diluted ordinary shares during the year (thousands of shares) 1,905,040 1,898,553

Adjusted diluted earnings per share (yen) 152.65 173.65

In calculating adjusted EPS, the effect of the share split conducted at a ratio of 200 shares to one share, with July 1, 2012 as the effective date, has been reflected.

4. Results and plans of capital expendituresCapital expenditure include outlays on property, plants and equipment such as land, buildings and structures; machinery; vehicles and others; and intangible assets such as goodwill, trademark, software and others that are necessary for enhancing the productivity of our factories and other facilities; strengthening our competitiveness, and operating in various business fields.

Billions of yen, %

Years ended March 31 2012 2013 ChangeRates of Change

Capital expenditure 119.0 137.4 +18.5 +15.5%

International tobacco* 39.1 37.5 -1.6 -4.2%

Japanese domestic tobacco 56.2 71.2 +15.0 +26.7%

Pharmaceutical 3.9 5.8 +1.9 +47.8%

Beverage 8.1 12.0 +3.9 +48.5%

Processed Food 7.3 4.6 -2.7 -37.1%

Other/Elimination and corporate 4.3 6.3 +2.0 +46.3%* International tobacco business: FY ended December 2011 and FY ended December 2012.

Total capital expenditure amounted to ¥137.4 billion in the year ended March 31, 2013. In the international tobacco business, capital expenditure amounted to ¥37.5 billion which was spent on expanding production capacity, maintenance and replacement of facility, and on improvement of product specifications. In the Japanese domestic tobacco business, capital expenditure amounted to ¥71.2 billion which was spent on initiatives to streamline manufacturing processes, to strengthen our ability to respond flexibly to supply and demand fluctuations with an increasingly diverse range of products, and to develop new products. In the pharmaceutical business, capital expenditure amounted to ¥5.8 billion which was spent on the development and reinforcement of R&D capabilities. In the beverage business, capital expenditure amounted to ¥12.0 billion, which was spent on maintaining and renewing the vending machine network, among other areas. In the processed food business, capital expenditure amounted to ¥4.6 billion, which was spent on enhancing and maintaining the production capacity. These capital expenditures were internally funded through cash generated by operations.


Financial Review continued

Plans for new installations and disposal of facilities

Regarding the mid-to long-term resource allocation of the JT Group, we will place top priority on business investments that will lead to sustainable profit growth in the mid- to long-term based on our management principles. We position the international and Japanese domestic tobacco business as the core business and profit growth engine and place top priority on business investments that will lead to their sustainable profit growth. Meanwhile, regarding the pharmaceutical business, beverage business and processed food business, we will strive to strengthen foundations that will lead to future profit contribution, and we will make investments to that end. Based on this policy, we plan capital expenditures totaling ¥195.0 billion for year ending March 31, 2014. As JT and JT Group companies have wide-ranging plans for capital expenditure, figures are disclosed by segment. Our actual capital expenditures may differ significantly from the planned figures mentioned above as a result of a number of factors, including those discussed in “Risk Factors”.

Billions of yen

Capital Expenditure plan for the year ending

March 31, 2014 Main purpose of investment Funding

International tobacco business 94.0

Investment for improvement of product specifications, expansion of production capacity, maintenance and upgrading of facilities Internally funded

Japanese domestic tobacco business 63.0

Investment in production and sales facilities for the purpose of brand equity enhancement Same as above

Pharmaceutical business 4.0 Investment for the maintaining and reinforcing of R&D Same as above

Beverage business 12.0 Investment for the maintenance and reinforcing trade marketing Same as above

Processed food business 8.0 Investment for enhancing and maintaining production capacity Same as above

5. DividendsThe year-end dividends for the year ended March 31, 2013 were ¥38 per share. The total annual dividends per share, including the interim dividends per share of ¥30 per share, were ¥68 per share, with a consolidated payout ratio of 37.6%.

The year-end dividends related to the current year are recognized in the following year for accounting purposes. The year-end dividend related to the year ended March 31, 2012 (record date of March 31, 2012) and the interim dividends for the year ended March 31, 2013 (record date September 30, 2012) are recorded in the financial statements for the year ended March 31, 2013. For more details, please refer to Note 26 to the consolidated financial statements “Dividends”.

6. Capital managementThe JT Group’s management principle is pursuit of the “4S” model: ensuring that in all our activities, we satisfy and fulfill our responsibilities towards our consumers, shareholders, employees and wider society, while balancing the interest of these key stakeholder groups.

The JT Group believes that sustainable profit growth in the mid- to long-term based on this principle will increase the JT Group’s value in the mid- to long-term, and is consequently in the best interest of all stakeholders, including our shareholders.

In order to achieve sustainable growth, the JT Group understands that financing capacities sufficient enough to make agile business investments when there are opportunities, such as the acquisition of external resources for business growth, are required. For that reason, the JT Group aims to maintain a well-balanced capital structure by ensuring sound and flexible financial conditions for future business investment as well as an appropriate return on equity.


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The JT Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital (the part attributable to the owners of the parent company). The amounts as of each year end are as follows:

Billions of yen

As of March 31, 2012


Interest-bearing debt 502.4 327.2

Cash and cash equivalents (404.7) (142.7)

Net interest-bearing debt 97.6 184.5

Capital (equity attributable to owners of the parent company) 1,634.1 1,806.1

Share buy-back:A repurchase of our shares requires cash outlays. As of March 31, 2013, we held 182,510,100 shares of common stock as treasury stock, amounting to 9.13% of the total number of shares issued.

In order to repurchase our shares in a flexible manner, we amended the Articles of Incorporation at the general meeting of shareholders held on June 24, 2004 so that we could make repurchase based on a resolution made by the Board of Directors.

We may continue to hold the repurchased shares as treasury stock or use them for other purposes. Stock repurchase provides our management with an additional option for increasing flexibility and speed in capital management in order to adopt to a rapidly changing business environment.

7. Financial activities Our Group Treasury Division provides Group-wide support to enable secure and efficient financing activities. JT Group is exposed to financial risks (credit risks, liquidity risks, foreign exchange risks, interest rate risks, and market price fluctuation risks). Treasury operations are conducted pursuant to a set of group-wide financial risk management policies and results are reported quarterly to the Executive Committee and, as appropriate, the Board of Directors of JT. For more details on financial risk management, please refer to ”(2) Financial Risk Management” to “(7) Market Price Fluctuation Risk” of Note 35 to the consolidated financial statements “Financial Instruments”.

1. Cash Management SystemsTo maximize the total Group cash efficiency, we give first priority to utilizing internal financing mainly by the Cash Management Systems (CMS) within our Group, where legally permissible and economically viable.

2. External financingShort-term working capital needs are normally financed through short-term borrowings from financial institutions or through commercial paper, or a combination of both; mid- to long-term financing is done through long-term borrowings from financial institutions, bond or equity, or a combination of those. For secure and efficient financing, we continue to diversify our financing means as well as the financial institutions, and set up secure financing means, such as committed facilities. The status of the debts owed by Group is quarterly reported to the Executive Committee and, as appropriate, the Board of Directors of JT.

3. External investmentsOur financial investments are always made taking into account safety, liquidity and optimal yield. Speculative dealings in pursuit of profit margin are not allowed. The results of the financial investment are quarterly reported to the Executive Committee and, as appropriate, the Board of Directors of JT.

8. Results of cash flows

Year ended March 31, 2013 and year ended March 31, 2012Cash and cash equivalents at the end of the year ended March 31, 2013 decreased by ¥262.0 billion from the end of the prior year to ¥142.7 billion. Cash and cash equivalents at the end of the prior year were ¥404.7 billion.

Note:Tobacco excise tax is paid monthly, one month in arrears, at the end of each month in Japan. Since March 31, 2012 and March 31, 2013 were both holidays for financial institutions in Japan, we did not pay the tobacco excise tax for the previous month’s tobacco sales in Japan on those fiscal year ends. The amounts of excise taxes paid on the business days immediately following March 31, 2012 and March 31, 2013 were ¥143.5 billion and ¥136.6 billion, respectively.

Cash flows from (used in) operating activitiesNet cash flows from operating activities during the year ended March 31, 2013 were ¥466.6 billion. The main factors were the generation of a stable cash inflow from the tobacco business. As a result of holidays for financial institutions, the amount of tobacco excise tax paid for the prior year in Japan was for 11 months, while the amount for the year ended March 31, 2013 in Japan was for 12 months. Net cash flows from operating activities were ¥551.6 billion for the year ended March 31, 2012.

Cash flows from (used in) investing activitiesNet cash flows used in investing activities during the year ended March 31, 2013 were ¥147.9 billion. This was mainly due to the purchase of property, plant and equipment and the purchase of shares of Gryson NV and Nakhla. Net cash flows used in investing activities were ¥103.8 billion for the year ended March 31, 2012.


Financial Review continued

Cash flows from (used in) financing activitiesNet cash flows used in financing activities during the year ended March 31, 2013 were ¥569.5 billion. This was mainly due to the buy-back of shares, the increase of dividends per share, repayments of borrowings and the redemption of bonds. Net cash flows used in financing activities were ¥279.1 billion for the year ended March 31, 2012. 9. LiquidityWe have historically had, and expect to continue to have, significant cash flows from operating activities. We expect that cash generated from operating activities will continue to be stable and cover funds needed for ordinary business activities. On March 31, 2013, we had approximately ¥444.6 billion in committed lines of credit for major financial institutions both domestic and international, of which 100% was unused. In addition, we have a domestic commercial paper program, uncommitted lines of credit and a domestic bond shelf registration.

1. Long-term debtBonds issued (including the current portion) as of March 31, 2012 and March 31, 2013 accounted for ¥320.5 billion and ¥237.2 billion respectively and long-term borrowings as loans from financial institutions (including the current portion) accounted for ¥127.5 billion and ¥53.6 billion respectively. Annual interest rates applicable to yen-denominated long-term borrowings outstanding as of March 31, 2012 and March 31, 2013 ranged from 0.93% to 5.30% and 1.15% to 5.30% respectively. Annual interest rates for long-term borrowings denominated in other currencies ranged from 0.43% to 9.00% for those outstanding as of March 31, 2012 and 0.43% to 5.90% for those outstanding as of March 31, 2013. Long-term lease obligations accounted for ¥6.9 billion as of March 31, 2012 and ¥8.2 billion as of March 31, 2013. Maturities of interest-bearing debts are shown in the table below.

As of March 31, 2013, our long-term debt was rated Aa3 by Moody’s Japan K.K. (Moody’s), A+ by Standard & Poor’s Ratings Japan K.K. (S&P), and AA by Rating and Investment Information Inc. (R&I), with a ‘stable’ outlook from Moody’s, a ‘positive’ outlook from S&P and a ‘stable’ outlook from R&I. These ratings are among the highest ratings for international tobacco companies.

These ratings are affected by a number of factors such as developments in our major markets, our business strategies and general economic trends that are beyond our control. The ratings may be withdrawn or revised at any time. Each rating should be evaluated separately from other ratings. Under the Japan Tobacco Inc. Act, the bondholders of JT can enjoy statutory preferential rights over unsecured creditors in seeking repayment, with the exception of national and local taxes and other statutory obligations.

2. Short-term debt Short-terms borrowings totaled ¥43.5 billion as of March 31, 2012 and ¥23.8 billion as of March 31, 2013, of which borrowings denominated in the currencies other than Japanese yen were ¥32.0 billion and ¥20.7 billion, respectively. There was no commercial paper outstanding as of March 31, 2012 and March 31, 2013. Annual interest rates applicable to yen-denominated short-term borrowings ranged from 0.48% to 2.20% as of March 31, 2012, and from 0.46% to 2.10% as of March 31, 2013. Annual interest rates applicable to short-term borrowings in other currencies ranged from 1.60% to 27.00% as of March 31, 2012, and from 1.07% to 41.00% as of March 31, 2013. Short-term lease obligations totaled ¥3.9 billion as of March 31, 2012 and ¥4.3 billion as of March 31, 2013.

Billions of yen

Year ended March 31, 2013 Book ValueDue within

1 year

Due after 1 year

through 2 years

Due after 3 years

through 4 years

Due after 3 years

through 4 years

Due after 4 years

through 5 years

Due after 5 years

Short-term borrowings as loans 23.8 23.8 – – – – –

Short-term lease obligations 4.3 4.3 – – – – –

Long-term borrowings as loans (current portion) 20.5 20.5 – – – – –

Long-term borrowings as loans 33.2 – 1.2 31.1 0.1 0.1 0.6

Bonds 237.2 – 157.3 40.0 – 20.0 20.0

Long-term lease obligations 8.2 – 3.1 2.1 1.4 0.8 0.8

Total 327.2 48.6 161.7 73.2 1.5 20.9 21.4


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Consolidated Financial StatementsConsolidated Statement of Financial PositionJapan Tobacco Inc. and Consolidated Subsidiaries

Assets(As of March 31)

Millions of yen

2012 2013

Current assets

Cash and cash equivalents (Note 8) ¥ 404,740 ¥ 142,713

Trade and other receivables (Note 9) 327,767 387,837

Inventories (Note 10) 446,617 473,042

Other financial assets (Note 11) 27,361 29,103

Other current assets (Note 12) 123,163 177,858

Subtotal 1,329,649 1,210,552

Non-current assets held-for-sale (Note 13) 1,401 2,594

Total current assets 1,331,050 1,213,146

Non-current assets

Property, plant and equipment (Notes 14, 21) 619,536 672,316

Goodwill (Notes 7, 15) 1,110,046 1,316,476

Intangible assets (Note 15) 306,448 348,813

Investment property (Note 17) 67,387 58,995

Retirement benefit assets (Note 24) 14,371 14,825

Investments accounted for using the equity method (Note 18) 18,447 22,940

Other financial assets (Note 11) 67,548 71,781

Deferred tax assets (Note 19) 132,174 133,348

Total non-current assets 2,335,957 2,639,493

Total assets ¥3,667,007 ¥3,852,639

084 Japan TobaCCo InC. AnnuAl RepoRt 2013

Liabilities and equity(As of March 31)

Millions of yen

2012 2013

Liabilities

Current liabilities

Trade and other payables (Note 20) ¥ 298,663 ¥ 312,741

Bonds and borrowings (Note 21) 211,766 44,301

Income tax payables 42,501 85,714

Other financial liabilities (Note 21) 8,039 8,550

Provisions (Note 22) 5,686 5,256

Other current liabilities (Note 23) 590,717 656,305

Subtotal 1,157,373 1,112,867

Liabilities directly associated with non-current assets held-for-sale (Note 13) 101 101

Total current liabilities 1,157,474 1,112,968

Non-current liabilities

Bonds and borrowings (Note 21) 279,750 270,399

Other financial liabilities (Note 21) 20,994 18,844

Retirement benefit liabilities (Note 24) 315,020 343,095

Provisions (Note 22) 4,448 4,786

Other non-current liabilities (Note 23) 92,235 113,226

Deferred tax liabilities (Note 19) 82,460 97,309

Total non-current liabilities 794,906 847,658

Total liabilities 1,952,380 1,960,627

Equity

Share capital (Note 25) 100,000 100,000

Capital surplus (Note 25) 736,410 736,411

Treasury shares (Note 25) (94,574) (344,573)

Other components of equity (Note 25) (376,363) (155,462)

Retained earnings 1,268,577 1,469,749

Equity attributable to owners of the parent company 1,634,050 1,806,125

Non-controlling interests 80,576 85,887

Total equity 1,714,626 1,892,012

Total liabilities and equity ¥3,667,007 ¥3,852,639

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Japan TobaCCo InC. AnnuAl RepoRt 2013 085

Consolidated Statement of IncomeJapan Tobacco Inc. and Consolidated Subsidiaries


Millions of yen

2012 2013

Revenue (Notes 6, 27) ¥2,033,825 ¥2,120,196

Cost of sales (Notes 15, 24) (892,034) (899,392)

Gross profit 1,141,791 1,220,804

Other operating income (Note 28) 48,512 42,165

Share of profit in investments accounted for using the equity method (Note 18) 2,047 2,775

Selling, general and administrative expenses (Notes 7, 13, 14, 15, 17, 24, 29, 34) (733,169) (733,385)

Operating profit (Note 6) 459,180 532,360

Financial income (Notes 30, 35) 5,603 5,493

Financial costs (Notes 24, 30, 35) (23,429) (28,292)

Profit before income taxes 441,355 509,560

Income taxes (Note 19) (112,795) (158,042)

Profit for the year ¥ 328,559 ¥ 351,518

Attributable to:

Owners of the parent company ¥ 320,883 ¥ 343,612


Profit for the year ¥ 328,559 ¥ 351,518

Earnings per share

Basic (Yen) (Note 32) ¥ 168.50 ¥ 181.07

Diluted (Yen) (Note 32) 168.44 180.99

Reconciliation from “Operating profit” to “Adjusted EBITDA”

Millions of yen

(Years ended March 31) 2012 2013

Operating profit ¥459,180 ¥532,360

Depreciation and amortization 118,845 116,462

Adjustment items (income) (29,932) (34,234)

Adjustment items (costs) 29,039 7,536

Adjusted EBITDA (Note 6) ¥577,132 ¥622,124


Consolidated Statement of Comprehensive IncomeJapan Tobacco Inc. and Consolidated Subsidiaries


Millions of yen

2012 2013

Profit for the year ¥ 328,559 ¥351,518

Other comprehensive income

Exchange differences on translation of foreign operations (Note 31) (130,331) 216,118

Net gain (loss) on derivatives designated as cash flow hedges (Note 31) (166) 121

Net gain (loss) on revaluation of financial assets measured at fair value through

other comprehensive income (Notes 31, 35) 4,750 4,799

Actuarial gains (losses) on defined benefit retirement plans (Notes 24, 31) (10,669) (28,200)

Other comprehensive income (loss), net of taxes (136,416) 192,838

Comprehensive income (loss) for the year ¥ 192,143 ¥544,356

Attributable to:

Owners of the parent company ¥ 185,425 ¥536,068


Comprehensive income (loss) for the year ¥ 192,143 ¥544,356

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Consolidated Statement of Changes in EquityJapan Tobacco Inc. and Consolidated Subsidiaries

Millions of yen

Equity attributable to owners of the parent company

Other components of equity

(Years ended March 31) Share capital Capital surplus Treasury sharesSubscription

rights to shares

Exchange differences on translation of

foreign operations

Net gain (loss) on derivatives

designated as cash flow hedges

Net gain (loss) on revaluation of available-for-sale

securities

As of April 1, 2011 ¥100,000 ¥736,410 ¥ (94,574) ¥ 763 ¥(257,262) ¥ — ¥ 5,754Cumulative effect of applying a new accounting standard — — — — (142) (5,754)

Profit for the year — — — — — — —Other comprehensive income (loss) — — — — (129,966) (166) —

Comprehensive income (loss) for the year — — — — (129,966) (166) —Acquisition of treasury shares (Note 25) — — — — — — —Disposal of treasury shares (Note 25) — — — — — — —Share-based payments (Note 34) — — — 265 — — —Dividends (Note 26) — — — — — — —Changes in the ownership interest in a subsidiary

without a loss of control — — — — — — —Transfer from other components of equity to retained earnings — — — — — — —Other increase (decrease) — — — — — — —

Total transactions with the owners — — — 265 — — —As of March 31, 2012 100,000 736,410 (94,574) 1,028 (387,228) (309) —

Profit for the year — — — — — — —Other comprehensive income (loss) — — — — 215,845 121 —

Comprehensive income (loss) for the year — — — — 215,845 121 —Acquisition of treasury shares (Note 25) — — (250,000) — — — —Disposal of treasury shares (Note 25) — 1 1 (2) — — —Share-based payments (Note 34) — — — 247 — — —Dividends (Note 26) — — — — — — —Changes in the ownership interest in a subsidiary

without a loss of control — — — — — — —Transfer from other components of equity to retained earnings — — — — — — —Other increase (decrease) — — — — — — —

Total transactions with the owners — 1 (249,999) 245 — — —As of March 31, 2013 ¥100,000 ¥736,411 ¥(344,573) ¥1,274 ¥(171,383) ¥(187) ¥ —

Millions of yen

Equity attributable to owners of the parent company

Other components of equity


Net gain (loss) on revaluation of

financial assets measured at fair

value through other comprehen-

sive income

Actuarial gains (losses) on

defined benefit retirement plans Total

Retainedearnings Total

Non-controlling interests Total equity

As of April 1, 2011 ¥ — ¥ — ¥(250,745) ¥1,034,054 ¥1,525,145 ¥76,166 ¥1,601,311Cumulative effect of applying a new accounting standard 5,551 — (344) 97 (247) 47 (201)

Profit for the year — — — 320,883 320,883 7,676 328,559Other comprehensive income (loss) 4,684 (10,009) (135,458) — (135,458) (958) (136,416)

Comprehensive income (loss) for the year 4,684 (10,009) (135,458) 320,883 185,425 6,718 192,143Acquisition of treasury shares (Note 25) — — — — — — —Disposal of treasury shares (Note 25) — — — — — — —Share-based payments (Note 34) — — 265 — 265 — 265Dividends (Note 26) — — — (76,172) (76,172) (2,138) (78,310)Changes in the ownership interest in a subsidiary

without a loss of control — — — (366) (366) (137) (503)Transfer from other components of equity to retained earnings (89) 10,009 9,920 (9,920) — — —Other increase (decrease) — — — — — (80) (80)

Total transactions with the owners (89) 10,009 10,185 (86,458) (76,273) (2,355) (78,628)As of March 31, 2012 10,146 — (376,363) 1,268,577 1,634,050 80,576 1,714,626

Profit for the year — — — 343,612 343,612 7,906 351,518Other comprehensive income (loss) 4,691 (28,201) 192,456 — 192,456 382 192,838

Comprehensive income (loss) for the year 4,691 (28,201) 192,456 343,612 536,068 8,288 544,356Acquisition of treasury shares (Note 25) — — — — (250,000) — (250,000)Disposal of treasury shares (Note 25) — — (2) — 0 — 0Share-based payments (Note 34) — — 247 — 247 — 247Dividends (Note 26) — — — (114,258) (114,258) (4,061) (118,319)Changes in the ownership interest in a subsidiary

without a loss of control — — — 17 17 (522) (505)Transfer from other components of equity to retained earnings (2) 28,201 28,199 (28,199) — — —Other increase (decrease) — — — — — 1,606 1,606

Total transactions with the owners (2) 28,201 28,444 (142,439) (363,993) (2,977) (366,970)As of March 31, 2013 ¥14,835 ¥ — ¥(155,462) ¥1,469,749 ¥1,806,125 ¥85,887 ¥1,892,012


Consolidated Statement of Cash FlowsJapan Tobacco Inc. and Consolidated Subsidiaries

Millions of yen


Cash flows from operating activities

Profit before income taxes ¥ 441,355 ¥ 509,560


Impairment losses 7,013 3,213

Interest and dividend income (3,646) (5,137)

Interest expense 14,377 10,134

Share of profit in investments accounted for using the equity method (2,047) (2,775)

(Gains) losses on sale and disposal of property, plant and equipment, intangible assets and investment property (22,444) (29,218)

(Increase) decrease in trade and other receivables (30,207) (24,118)

(Increase) decrease in inventories 27,388 10,791

Increase (decrease) in trade and other payables (5,365) 1,576

Increase (decrease) in retirement benefit liabilities (9,686) (15,350)

(Increase) decrease in prepaid tobacco excise taxes (1,785) (31,377)

Increase (decrease) in tobacco excise tax payables 148,260 12,802

Increase (decrease) in consumption tax payables 14,807 (3,093)

Other (13,002) 16,334

Subtotal 683,863 569,804

Interest and dividends received 6,181 6,764

Interest paid (16,006) (8,703)

Income taxes paid (122,464) (101,258)

Net cash flows from operating activities 551,573 466,608

Cash flows from investing activities

Purchase of securities (5,697) (19,161)

Proceeds from sale and redemption of securities 21,622 3,426

Purchase of property, plant and equipment (95,705) (114,240)

Proceeds from sale of investment property 34,545 33,425

Purchase of intangible assets (18,252) (18,611)

Payments into time deposits (46,648) (26,647)

Proceeds from withdrawal of time deposits 34,854 45,665

Purchase of investments in subsidiaries (Note 7) (33,622) (54,128)

Proceeds from sale of investments in subsidiaries 730 —

Other 4,369 2,343

Net cash flows from investing activities (103,805) (147,928)

Cash flows from financing activities

Dividends paid to owners of the parent company (Note 26) (76,165) (114,236)

Dividends paid to non-controlling interests (2,138) (4,009)

Capital contribution from non-controlling interests 629 216

Increase (decrease) in short-term borrowings and commercial paper (2,408) (23,012)

Proceeds from long-term borrowings — 518

Repayments of long-term borrowings (59,879) (81,165)

Redemption of bonds (133,333) (92,466)

Repayments of finance lease obligations (5,268) (4,814)

Acquisition of treasury shares — (250,000)

Payments for acquisition of interests in subsidiaries from non-controlling interests (503) (505)

Other — 0

Net cash flows from financing activities (279,064) (569,473)

Net increase (decrease) in cash and cash equivalents 168,704 (250,793)

Cash and cash equivalents at the beginning of the year 244,240 404,740

Effect of exchange rate changes on cash and cash equivalents (8,204) (11,235)

Cash and cash equivalents at the end of the year (Note 8) ¥ 404,740 ¥ 142,713

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Notes to Consolidated Financial StatementsJapan Tobacco Inc. and Consolidated Subsidiaries / As of March 31, 2012 and 2013

1. Reporting Entity

Japan Tobacco Inc. (hereinafter referred to as the “Company”) is a

joint stock corporation under the Companies Act of Japan, pursu-

ant to the Japan Tobacco Inc. Act, with its principal places of

business located in Japan since its incorporation. The addresses

of the Company’s registered head office and principal business

offices are available on the Company’s website (http://www.jti.

co.jp).

The details of businesses and principal business activities of

the Company and its subsidiaries (hereinafter referred to as the

“Group”) are stated in “6. Operating Segments.”

The Group’s consolidated financial statements for the year

ended March 31, 2013, were approved on June 21, 2013 by

Mitsuomi Koizumi, President and Chief Executive Officer, and

Naohiro Minami, Chief Financial Officer.

2. basis of preparation

(1) Compliance with IFRSThe Group’s consolidated financial statements are prepared in

accordance with International Financial Reporting Standards

(hereinafter referred to as “IFRS”).

(2) Basis of MeasurementExcept for the financial instruments, stated in “3. Significant

Accounting Policies,” the Group’s consolidated financial state-

ments are prepared on the historical cost basis.

(3) Functional Currency and Presentation Currency

The Group’s consolidated financial statements are presented in

Japanese yen, which is the functional currency of the Company.

The units are in millions of yen, and figures less than one million

yen are rounded to the nearest million yen.

(4) Early Adoption of New Accounting StandardsThe Group has early adopted IFRS 9 “Financial Instruments”

(revised in October 2010) (hereinafter referred to as “IFRS 9”) from

the beginning of the year ended March 31, 2012 (April 1, 2011).

IFRS 9 replaces IAS 39 “Financial Instruments: Recognition

and Measurement” (hereinafter referred to as “IAS 39”) and pro-

vides two measurement categories for financial instruments:

amortized cost and fair value. Changes in fair value of financial

assets measured at fair value are recognized in profit or loss.

However, changes in fair value of investments in equity instru-

ments, except for equity instruments held for trading purposes,

are allowed to be recognized in other comprehensive income.

(5) Changes in Method of Presentation(Consolidated statement of cash flows)

In the previous fiscal year, ended March 31, 2012, “Proceeds from

sale of property, plant and equipment” were presented separately in

“Cash flows from investing activities.” However, in this fiscal year,

ended March 31, 2013, they are included in “Other” in “Cash flows

from investing activities” due to their immateriality. In order to

reflect this change in presentation method, the consolidated finan-

cial statements for the previous fiscal year have been reclassified.

Accordingly, ¥1,919 million that was previously shown as

“Proceeds from sale of property, plant and equipment” in “Cash

flows from investing activities” in the previous fiscal year has been

reclassified and is shown as “Other.”

(6) Reporting Period of JT International Holding B.V. and its Subsidiaries

The fiscal year end date of JT International Holding B.V. and its

subsidiaries (hereinafter collectively referred to as the “JTIH

Group”), which operate the Group’s international tobacco busi-

ness, is December 31, hence the Group consolidates financial

results of the JTIH Group for the period from January 1, 2012 to

December 31, 2012 into the Group’s consolidated the financial

results for the year ended March 31, 2013.

Under the consolidation process of the Group, consolidation for

the JTIH Group (sub-consolidation) is conducted first, and then,

the process of consolidation for the whole Group is performed.

The JTIH Group is a unified business operation unit operating the

Group’s international tobacco business and manages budgets and

actual results on a sub-consolidation basis, and as a unified finan-

cial reporting unit, takes a major role in ensuring the accuracy and

quality of the Group’s consolidated financial reporting. Under such

a consolidation process, in order to unify the financial reporting

periods across the whole Group, maintaining the same level of

quality of the Group’s consolidated financial reporting and satisfy-

ing the statutory schedule prescribed under the Companies Act of

Japan, it is required to shorten the current closing schedule fur-

ther across the Group. To achieve this objective, it is necessary to

review and improve the closing processes and systems for the

consolidation and change the structure across the Group, such as

conducting the process of subconsolidation of the JTIH Group,

changing the reporting process to the Company, restructuring the

processes of consolidation and preparation of consolidated finan-

cial statements, including notes to financial statements, carrying

out the proper assignment of personnel resources and developing

talents and reviewing the approval process for financial reporting.

Due to the aforementioned reasons, the management of the

Company concludes that it is currently difficult and impracticable

to unify the reporting periods.

However, the Group is aiming to achieve the unification of

reporting periods at the earliest possible date through promoting a

groupwide effort in order to enhance and improve the efficiency of

the closing and management systems.

Although there is a three month difference between the fiscal

year end of the JTIH Group and that of the Company, since sea-

sonal and periodical fluctuations of the performance of the

Group’s international tobacco business have been relatively small,

the impact from such mismatch of the reporting periods on the


Group’s consolidated financial position and operating results is

limited. With respect to significant transactions or events occur-

ring during the time gap, the Group makes necessary adjustments

and appropriate arrangements in order to assist the users of finan-

cial statements to properly understand and assess the consoli-

dated financial position and results of operations of the Group.

3. Significant accounting policies

(1) Basis of ConsolidationThe consolidated financial statements include financial statements

of the Company and its subsidiaries, and interests in investments

in associates and joint ventures.

A. Subsidiaries

A subsidiary is an entity that is controlled by the Group and con-

trol is the power to govern the financial and operating policies of

the entity so as to obtain benefits from its activities. The acquisi-

tion date of a subsidiary is the date on which the Group obtained

control of the subsidiary, and the subsidiary is included in the

consolidation from the date of acquisition until the date on which

the Group loses control.

In cases where the accounting policies applied by a subsidiary

are different from those applied by the Group, adjustments are

made to the subsidiary’s financial statements, if necessary.

All intergroup balances, transactions, income and expenses are

eliminated on consolidation. Comprehensive income for subsidiar-

ies is attributed to owners of the parent company and

non-controlling interests even if this results in the non-controlling

interests having a deficit balance.

The consolidated financial statements include the financial

statements of subsidiaries whose fiscal year end date is different

from that of the parent company since it is impracticable to unify

the fiscal year end date. The difference between the fiscal year

end date of the subsidiaries and that of the parent company does

not exceed three months.

In cases where the financial statements of subsidiaries used for

preparing the consolidated financial statements have different

fiscal year end dates from that of the Company, necessary adjust-

ments are made for the effects of significant transactions or

events occurring between the fiscal year end dates of the subsid-

iaries and that of the Company.

B. Associates

An associate is an entity of which the Group has significant influ-

ence over its financial and operating policy. Investments in associ-

ates are accounted for using the equity method from the date on

which the Group has the significant influence until the date on

which it ceases to have the significant influence.

The consolidated financial statements include investments in

associates with different fiscal year end dates from that of the

parent company since, primarily due to relations with other share-

holders, it is impracticable to unify the fiscal year end dates.

Necessary adjustments are made for the effects of significant

transactions or events occurring between the fiscal year end dates

of the associates and that of the Company.

C. Joint Ventures

A joint venture is a contractual agreement whereby two or more

parties undertake an economic activity that is subject to joint

control. Joint ventures are accounted for using the equity method.

(2) Business CombinationBusiness combinations are accounted for using the acquisition

method. Consideration transferred in a business combination is

measured as the sum of the acquisition-date fair value of the

assets transferred, the liabilities assumed and equity instruments

issued by the Company in exchange for control over an acquiree.

Any excess of the consideration of acquisition over the fair value

of identifiable assets and liabilities is recognized as goodwill in the

consolidated statement of financial position. If the consideration

of acquisition is lower than the fair value of the identifiable assets

and liabilities, the difference is immediately recognized as profit in

the consolidated statement of income. If the amount of initial

accounting for a business combination is not determined by the

end of the reporting period in which the combination occurs, the

provisional amounts for the items for which the accounting is

incomplete are reported and are adjusted during the measurement

period, which is one year from the acquisition date. Acquisition-

related costs incurred are recognized as expenses. The additional

acquisition of non-controlling interests after obtaining control is

accounted for as a capital transaction and no goodwill is recog-

nized with respect to such transaction.

(3) Foreign Currency TranslationConsolidated financial statements of the Group are presented in

Japanese yen, which is the functional currency of the Company.

Each company in the Group specifies its own functional currency

and measures transactions based on it.

Foreign currency transactions are translated into the functional

currency at the rates of exchange prevailing at the dates of trans-

actions or an approximation of the rate. Monetary assets and

liabilities denominated in foreign currencies are translated into the

functional currency at the rates of exchange prevailing at the fiscal

year end date. Differences arising from the translation and settle-

ment are recognized as profit or loss. However, exchange differ-

ences arising from the translation of financial instruments

designated as hedging instruments for net investment in foreign

operations (foreign subsidiaries), financial assets measured at fair

value through other comprehensive income, and cash flow

hedges are recognized as other comprehensive income.

The assets and liabilities of foreign operations are translated

into Japanese yen at the rates of exchange prevailing at the fiscal

year end date, while income and expenses of foreign operations

are translated into Japanese yen at the rates of exchange prevail-

ing at the dates of transactions or an approximation to the rate.

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The resulting translation differences are recognized as other com-

prehensive income. In cases where foreign operations are dis-

posed of, the cumulative amount of translation differences related

to the foreign operations is recognized as profit or loss in the

period of disposition.

Among subsidiaries, the JTIH Group’s fiscal year end date is

December 31, and an exchange rate used for the translation is

based on its fiscal year end date.

(4) Financial InstrumentsA. Financial Assets

(i) Initial Recognition and Measurement

Financial assets are classified into financial assets measured at

fair value through profit or loss, fair value through other compre-

hensive income, and amortized cost. The Group determines the

classification at initial recognition.

Financial assets are classified as financial assets measured at

amortized cost if both of the following conditions are met.

Otherwise, they are classified as financial assets measured at fair

value.

• The asset is held within a business model whose objective is to

hold assets in order to collect contractual cash flows

• The contractual terms of the financial asset give rise on specified

dates to cash flows that are solely payments of principal and

interest on the principal amount outstanding

For financial assets measured at fair value, each equity instru-

ment is designated as measured at fair value through profit or loss

or as measured at fair value through other comprehensive income,

except for equity instruments held for trading purposes that must

be measured at fair value through profit or loss. Such designa-

tions are applied consistently.

All financial assets are measured at fair value plus transaction

costs that are attributable to the financial assets, except for the

case of being classified in the category of financial assets mea-

sured at fair value through profit or loss.

(ii) Subsequent Measurement

After initial recognition, financial assets are measured based on

the classification as follows:

(a) Financial Assets Measured at Amortized Cost

Financial assets measured at amortized cost are measured at

amortized cost using the effective interest method.

(b) Other Financial Assets

Financial assets other than those measured at amortized cost are

measured at fair value.

Changes in the fair value of financial assets measured at fair

value are recognized as profit or loss.

However, changes in the fair value of equity instruments desig-

nated as measured at fair value through other comprehensive

income are recognized as other comprehensive income and the

amount in other comprehensive income is transferred to retained

earnings when equity instruments are derecognized or the decline

in its fair value compared to its acquisition cost is significant.

Dividends on the financial assets are recognized in profit or loss

for the year.

(iii) Derecognition

Financial assets are derecognized when the rights to receive

benefits from them expire or are transferred, or when substantially

all the risks and rewards of the ownership are transferred.

B. Impairment of Financial Assets

In accordance with IAS 39, the Group assesses at the end of each

reporting period whether there is any objective evidence that

financial assets measured at amortized cost are impaired.

Evidence of impairment includes significant financial difficulty of

the borrower or a group of borrowers, a default or delinquency in

interest or principal payments, and bankruptcy of the borrower.

The Group assesses whether objective evidence of impairment

exists individually for financial assets that are individually signifi-

cant and collectively for financial assets that are not individually

significant.

If there is objective evidence that impairment losses on finan-

cial assets measured at amortized cost have been incurred, the

amount of the loss is measured as the difference between the

asset’s carrying amount and the present value of estimated future

cash flows.

When impairment is recognized, the carrying amount of the

financial asset is reduced by an allowance for doubtful accounts

and impairment losses are recognized in profit or loss. The carry-

ing amount of financial assets measured at amortized cost is

directly reduced for the impairment when they are expected to

become uncollectible in the future and all collaterals are imple-

mented or transferred to the Group. If, in a subsequent period, the

amount of the impairment loss provided changes due to an event

occurring after the impairment was recognized, the previously

recognized impairment losses are adjusted through the allowance

for doubtful accounts.

C. Financial Liabilities

(i) Initial Recognition and Measurement

Financial liabilities are classified into financial liabilities measured

at fair value through profit or loss and financial liabilities measured

at amortized cost. The Group determines the classification at initial

recognition.

All financial liabilities are measured at fair value at initial recog-

nition. However, financial liabilities measured at amortized cost are

measured at cost after deducting transaction costs that are

directly attributable to the financial liabilities.

(ii) Subsequent Measurement

After initial recognition, financial liabilities are measured based on

the classification as follows:

(a) Financial Liabilities Measured at Fair Value through Profit

or Loss

Financial liabilities measured at fair value through profit or loss

include financial liabilities held for trading and financial liabilities

designated as measured at fair value through profit or loss at

initial recognition.

(b) Financial Liabilities Measured at Amortized Cost

After initial recognition, financial liabilities measured at amortized

cost are measured at amortized cost using the effective interest

method. Amortization under the effective interest method and

gains or losses on derecognition are recognized as profit or loss in

the consolidated statement of income.


After initial recognition, financial guarantee contracts are mea-

sured at the higher of:

• The best estimate of expenditure required to settle the obligation

as of the end of the fiscal year, and

• The amount initially recognized less cumulative amortization.

(iii) Derecognition

Financial liabilities are derecognized when the obligation is dis-

charged, canceled or expired.

D. Offsetting of Financial Instruments

Financial assets and financial liabilities are offset and presented as

a net amount in the consolidated statement of financial position

only when there is a legally enforceable right to set off the recog-

nized amounts and the Group intends either to settle on a net

basis or to realize the asset and settle the liability simultaneously.

E. Derivatives and Hedge Accounting

The Group utilizes derivatives, including forward foreign exchange

contracts and interest rate swap contracts, to hedge foreign

exchange and interest rate risks. These derivatives are initially

measured at fair value when the contract is entered into, and are

subsequently remeasured at fair value. Changes in the fair value

of derivatives are recognized as profit or loss in the consolidated

statement of income. However, the gains or losses on the hedging

instrument relating to the effective portion of cash flow hedges

and hedges of net investment in foreign operations are recognized

as other comprehensive income in the consolidated statement of

comprehensive income.

At the inception of the hedge, the Group formally designates

and documents the hedging relationship to which hedge account-

ing is applied and the objectives and strategies of risk manage-

ment for undertaking the hedge. The documentation includes

identification of hedging instruments, the hedged items or trans-

actions, the nature of the risks being hedged and how the hedg-

ing instrument’s effectiveness is assessed in offsetting the

exposure to changes in the hedged item’s fair value or cash flows

attributable to the hedged risks. Even though these hedges are

expected to be highly effective in offsetting changes in fair value

or cash flows, they are assessed on an ongoing basis and deter-

mined actually to have been highly effective throughout the finan-

cial reporting periods for which the hedges were designated.

Hedges that meet the stringent requirements for hedge

accounting are classified in the following categories and

accounted for in accordance with IAS 39.

(i) Fair Value Hedge

Changes in the fair value of derivatives are recognized as profit or

loss in the consolidated statement of income. Responding to

changes in the fair value of hedged items attributable to the

hedged risks the carrying amount of the hedged item is adjusted

and the change is recognized as profit or loss in the consolidated

statement of income.

(ii) Cash Flow Hedge

The effective portion of gains or losses on hedging instruments is

recognized as other comprehensive income in the consolidated

statement of comprehensive income, while the ineffective portion

is recognized immediately as profit or loss in the consolidated

statement of income.

The amounts of hedging instruments recognized in other com-

prehensive income are reclassified to profit or loss when the

transactions of the hedged items affect profit or loss. In cases

where hedged items result in the recognition of non-financial

assets or liabilities, the amounts recognized as other comprehen-

sive income are accounted for as adjustments in the original car-

rying amount of non-financial assets or liabilities.

When forecast transactions or firm commitments are no longer

expected to occur, any related cumulative gain or loss that has

been recognized in equity as other comprehensive income is reclas-

sified to profit or loss. When hedging instruments expire, are sold,

terminated or exercised without the replacement or rollover of other

hedging instruments, or when the hedge designation is revoked,

amounts that have been recognized in other comprehensive

income are continued to be recognized in other comprehensive

income until the forecast transactions or firm commitments occur.

(iii) Hedge of Net Investment in Foreign Operations

Translation differences resulting from the hedge of net investment

in foreign operations are accounted for similarly to a cash flow

hedge. The effective portion of gains or losses on hedging instru-

ments is recognized as other comprehensive income in the con-

solidated statement of comprehensive income, while the

ineffective portion is recognized as profit or loss in the consoli-

dated statement of income. At the time of the disposal of the

foreign operations, any related cumulative gain or loss that has

been recognized in equity as other comprehensive income is

reclassified to profit or loss.

F. Fair Value of Financial Instruments

Fair value of financial instruments that are traded in active finan-

cial markets at the fiscal year end refers to quoted prices or dealer

quotations.

If there is no active market, fair value of financial instruments is

determined using appropriate valuation models.

(5) Cash and Cash EquivalentsCash and cash equivalents consist of cash on hand, demand

deposits, and short-term investments that are readily convertible to

known amounts of cash and subject to insignificant risk of change

in value and due within three months from the date of acquisition.

(6) InventoriesThe cost of inventories includes all costs of purchase, costs of

conversion and other costs incurred in bringing the inventories to

their present location and condition.

Inventories are measured at the lower of cost or net realizable

value, and the costs are determined by using the weighted-average

method. Net realizable value is determined as the estimated selling

price in the ordinary course of business less the estimated costs of

completion and estimated costs necessary to make the sale.

Leaf tobacco which is stored for more than 12 months before

being used for production is included in current assets since it is

held within the normal operating cycle.

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(7) Property, Plant and EquipmentProperty, plant, and equipment is measured by using the cost

model and is stated at cost less accumulated depreciation and

accumulated impairment losses.

The acquisition cost includes any costs directly attributable to

the acquisition of the asset and dismantlement, removal and resto-

ration costs, as well as borrowing costs eligible for capitalization.

Except for assets that are not subject to depreciation such as

land, assets are depreciated using the straight-line method over

their estimated useful lives. The estimated useful lives of major

asset items are as follows:

• Buildings and structures: 38 to 50 years

• Machinery and vehicles: 10 to 15 years

The estimated useful lives and depreciation method are

reviewed at each fiscal year end and if there are any changes

made to the estimated useful lives and depreciation method, such

changes are applied prospectively as changes in estimate.

(8) Goodwill and Intangible AssetsA. Goodwill

Goodwill is stated at acquisition cost less accumulated impair-

ment losses.

Goodwill is not amortized. It is allocated to cash-generating

units that are identified according to locations and types of busi-

nesses and tested for impairment annually or whenever there is

any indication of impairment. Impairment losses on goodwill are

recognized in the consolidated statement of income and no sub-

sequent reversal is made.

B. Intangible Assets

Intangible assets are measured by using the cost model and are

stated at cost less accumulated amortization and accumulated

impairment losses.

Intangible assets acquired separately are measured at cost at

the initial recognition, and the costs of intangible assets acquired

through business combinations are recognized at fair value at

the acquisition date. Expenditures on internally generated intan-

gible assets are recognized as expense in the period when

incurred, except for development expenses that satisfy the capi-

talization criteria.

Intangible assets with finite useful lives are amortized using the

straight-line method over their estimated useful lives and are

tested for impairment whenever there is any indication of impair-

ment. The estimated useful lives and amortization method of

intangible assets with finite useful lives are reviewed at each fiscal

year end, and the effect of any changes in estimate would be

accounted for on prospective basis.

The estimated useful lives of major intangible assets with finite

useful lives are as follows:

• Trademarks: 20 years

• Software: 5 years

Intangible assets with indefinite useful lives and intangible

assets that are not ready to use are not amortized, but they are

tested for impairment individually or by cash-generating unit

annually or whenever there is any indication of impairment.

(9) LeasesLeases are classified as finance leases whenever substantially all

the risks and rewards incidental to ownership are transferred to

the Group. All other leases are classified as operating leases.

In finance lease transactions, leased assets and lease obliga-

tions are recognized in the consolidated statement of financial

position at the lower of the fair value of the leased property or the

present value of the minimum lease payments, each determined

at the inception of the lease. Lease payments are apportioned

between the financial cost and the reduction of the lease obliga-

tions based on the effective interest method. Financial costs are

recognized in the consolidated statement of income. Leased

assets are depreciated using the straight-line method over their

estimated useful lives or lease terms whichever is shorter.

In operating lease transactions, lease payments are recognized

as an expense using the straight-line method over the lease terms

in the consolidated statement of income. Contingent rents are

recognized as an expense in the period when they are incurred.

Determining whether an arrangement is, or contains, a lease is

based on the substance of the arrangement in accordance with

IFRIC 4 “Determining Whether an Arrangement Contains a Lease,

“even if the arrangement does not take the legal form of a lease.

(10) Investment PropertyInvestment property is property held to earn rentals or for capital

appreciation or both.

Investment property is measured by using the cost model and

is stated at cost less accumulated depreciation and accumulated

impairment losses.

(11) Impairment of Non-financial AssetsThe Group assesses for each fiscal year whether there is any

indication that an asset may be impaired. If any such indication

exists, or in cases where the impairment test is required to be

performed each year, the recoverable amount of the asset is esti-

mated. In cases that the recoverable amount cannot be estimated

for each asset, it is estimated by the cash-generating unit to

which the asset belongs. The recoverable amount of an asset or a

cash-generating unit is determined at the higher of its fair value

less costs to sell or its value in use. If the carrying amount of the

asset or cash-generating unit exceeds the recoverable amount,

impairment losses are recognized and the carrying amount is

reduced to the recoverable amount. In determining the value in

use, estimated future cash flows are discounted to the present

value, using pretax discount rates that reflect current market

assessments of the time value of money and the risks specific to

the asset. In determining the fair value less costs to sell, the

Group uses an appropriate valuation model supported by available

fair value indicators.

The Group assesses whether there is any indication that an

impairment loss recognized in prior years for an asset other than

goodwill may no longer exist or may have decreased, such as any

changes in assumptions used for the determination of the recover-

able amount. If any such indication exists, the recoverable amount

of the asset or cash-generating unit is estimated. In cases that the

recoverable amount exceeds the carrying amount of the asset or


cash-generating unit, impairment losses are reversed up to the

lower of the estimated recoverable amount or the carrying amount

(net of depreciation) that would have been determined if no

impairment losses had been recognized in prior years.

(12) Non-current Assets Held-for-SaleAn asset or asset group the value of which is expected to be

recovered through a sale transaction rather than through continu-

ing use is classified into a non-current asset or disposal group

held-for-sale when the following conditions are met: it is highly

probable that the asset or asset group will be sold within one year,

the asset or asset group is available for immediate sale in its pres-

ent condition, and the Group management commits to the sale

plan. In such cases, the non-current asset is not depreciated or

amortized and is measured at the lower of its carrying amount or

its fair value less costs to sell.

(13) Employee Retirement BenefitsThe Group sponsors defined benefit plans and defined contribu-

tion plans as employee retirement benefit plans.

The Company is obligated to bear pension expenses for a

mutual assistance association incurred with respect to services in

or before June 1956 (prior to the enforcement of the Act on the

Mutual Aid Association of Public Corporation Employees). Such

obligations are calculated and included in liabilities related to the

retirement benefits.

For each plan the Group calculates the present value of defined

benefit obligations, related current service cost and past service

cost using the projected unit credit method. For a discount rate, a

discount period is determined based on the period until the

expected date of benefit payment in each fiscal year, and the

discount rate is determined by reference to market yields for the

period corresponding to the discount period at the end of the

fiscal year on high-rating corporate bonds. Liabilities or assets for

defined benefit plans are calculated by the present value of the

defined benefit obligation, deducting unrecognized past service

cost and the fair value of any plan assets (including adjustments

for the asset ceiling for defined benefit plan and minimum funding

requirements, if necessary). Expected return on plan assets and

interest costs are recognized as financial costs.

Actuarial gains and losses are recognized in full as other com-

prehensive income in the period when they are incurred and trans-

ferred to retained earnings immediately. Past service costs are

recognized as an expense using the straight-line method over the

average period until the benefits become vested. In cases where

the benefits are already vested immediately following the intro-

duction or amendment of the defined benefit plan, it is recognized

as profit or loss in the period when it is incurred.

The cost for retirement benefits for defined contribution plans

is recognized as an expense at the time of contribution.

(14) Share-based PaymentsThe Company has a share option plan as an equity-settled share-

based payment plan. Share options are estimated at fair value at

grant date and are recognized as an expense over the vesting

period in the consolidated statement of income after considering

the number of share options that are expected to be eventually

vested. The corresponding amount is recognized as an increase in

equity in the consolidated statement of financial position.

(15) ProvisionsThe Group has present obligations (legal or constructive) resulting

from past events and recognizes provisions when it is probable

that the obligations are required to be settled and the amount of

the obligations can be estimated reliably.

Where the effect of the time value of money is material, the

amount of provisions is measured at the present value of the

expenditures expected to be required to settle the obligations. In

calculating the present value, the Group uses the pretax discount

rate reflecting current market assessments of the time value of

money and the risks specific to the liability.

In accordance with IAS 37 “Provisions, Contingent Liabilities

and Contingent Assets,” the Group recognizes a provision for

restructuring when it has a detailed formal plan for the restructur-

ing and has raised a valid expectation in those affected that it will

carry out the restructuring by starting to implement that plan or

announcing its main scheme to those affected by it. Restructuring

provisions include only the direct expenditures arising from the

restructuring, which meet both of the following criteria:

• necessarily entailed by the restructuring;

• not associated with the ongoing activities of the entity.

(16) RevenueA. Sale of Goods

The Group mainly engages in the sale of tobacco products, pre-

scription drugs, beverages and processed foods. Revenue from

the sale of these goods is recognized when the significant risks

and rewards of ownership of the goods transfer to the buyers, the

Group retains neither continuing managerial involvement nor

effective control over the goods sold, it is probable that the future

economic benefits will flow to the Group, and the amount of

revenue and the corresponding costs can be measured reliably.

Therefore, revenue is usually recognized at the time of delivery of

goods to customers. In addition, revenue is recognized at fair

value of the consideration received or receivable less discounts,

rebates and taxes, including consumption taxes.

Since the amount of turnover where the Group is involved as an

agency, including tobacco excise taxes, is deducted from revenue,

the Group recognizes only the economic benefit inflow, excluding

such amount as revenue in the consolidated statements of income.

B. Interest Income

Interest income is recognized using the effective interest rate

method.

C. Dividend Income

Dividend income is recognized when the shareholder’s right to

receive payment is established.

D. Royalties

Royalties are recognized on an accrual basis in accordance with

the substance of the relevant agreement.

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(17) Government GrantsGovernment grants are recognized at fair value when there is a

reasonable assurance that the Group will comply with the condi-

tions attached to them and receive the grants.

In case that the government grants are related to expense

items, they are recognized in profit or loss on a systematic basis

over the period in which the related costs for which the grants are

intended to compensate are recognized. With regard to govern-

ment grants for assets, the amount of the grants is deducted from

the acquisition cost of the assets.

(18) Borrowing CostsWith respect to assets that necessarily take a substantial period of

time to get ready for their intended use or sale, the borrowing

costs that are directly attributable to the acquisition, construction

or production of the assets are capitalized as part of the acquisi-

tion cost of the assets. Other borrowing costs are recognized as

an expense in the period when they are incurred.

(19) Income TaxesIncome taxes in the consolidated statement of income are

presented as the total of current income taxes and deferred

income taxes.

Current income taxes are measured at the amount that is

expected to be paid to or refunded from the taxation authorities.

For the calculation of the tax amount the Group uses the tax rates

and tax laws that have been enacted or substantively enacted by

the end of the fiscal year. The current income taxes are recognized

in profit or loss, except for taxes arising from items that are recog-

nized in other comprehensive income or directly in equity and

taxes arising from business combinations.

Deferred income taxes are calculated based on the temporary

differences between the tax base for assets and liabilities and the

carrying amount at the fiscal year end. Deferred tax assets are

recognized for deductible temporary differences, carryforward of

unused tax credits and unused tax losses to the extent that it is

probable that future taxable profit will be available against which

they can be utilized. Deferred tax liabilities are recognized for

taxable temporary differences.

The deferred tax assets or liabilities are not recognized for the

following temporary differences:

• the initial recognition of goodwill

• the initial recognition of assets or liabilities in transactions that

are not business combinations and at the time of transaction,

affect neither accounting profit nor taxable profit or tax loss

• deductible temporary differences arising from investments in

subsidiaries and associates, and interests in joint venture to the

extent that it is probable that the timing of the reversal of the

temporary difference in the foreseeable future and it is not prob-

able that future taxable profits will be available against which

they can be utilized

• taxable temporary differences arising from investments in sub-

sidiaries and associates, and interests in joint venture to the

extent that the timing of the reversal of the temporary difference

is controlled and that it is probable the temporary difference will

not reverse in the foreseeable future.

Deferred tax assets and liabilities are measured at the tax rates

that are expected to apply to the fiscal year when the asset is

realized or the liability is settled, based on tax rates that have been

enacted or substantively enacted by the fiscal year end.

(20) Treasury SharesTreasury shares are recognized at cost and deducted from equity.

No gain or loss is recognized on the purchase, sale or cancellation

of the treasury shares. Any difference between the carrying

amount and the consideration paid is recognized in capital

surplus.

(21) Earnings per ShareBasic earnings per share are calculated by dividing profit and loss

attributable to ordinary shareholders of the parent company by the

weighted-average number of ordinary shares outstanding during

the year, adjusted by the number of treasury shares. Diluted earn-

ings per share are calculated by adjusting the effects of dilutive

potential ordinary shares.

(22) DividendsDividend distributions to the shareholders of the Company are

recognized as liabilities in the period in which, for year end divi-

dends, the Annual Shareholders Meeting approves the distribu-

tion and, for interim dividends, the Board of Directors’ Meeting

approves the distribution.

(23) ContingenciesA. Contingent Liabilities

The Group discloses contingent liabilities in the notes to consoli-

dated financial statements if it has possible obligations at the

fiscal year end, whose existence cannot be confirmed at that date,

or if the obligations do not meet the recognition criteria of a provi-

sion described in “22. Provisions.”

B. Contingent Assets

The Group discloses contingent assets in the notes to consoli-

dated financial statements if an inflow of future economic benefits

to the Group is probable, but not virtually certain at the fiscal year

end.

(24) Adjusted Financial MeasuresThe adjusted financial measures are calculated by adding certain

adjustment items to the non-adjusted financial data or by deduct-

ing the items from the non-adjusted financial data.

The adjustment items are determined by management’s judg-

ment, taking into consideration the nature and frequency of the

income and costs such that they provide effective comparative

information on the Group performance and that they reflect the

way of managing our business appropriately. Adjusted financial

measures are presented in the consolidated statement of income,

“6. Operating Segments” and “32. Earnings per Share.”

The adjusted financial measures are not defined under IFRS and

are not comparable with equivalent indicators for other entities.


4. Significant accounting Estimates and Judgments

Preparation of consolidated financial statements of the Group

requires management estimates and assumptions in order to

measure income, expenses, assets and liabilities, and disclose

contingencies as of the fiscal year end date. These estimates and

assumptions are based on the best judgment of management in

light of historical experience and various factors deemed to be

reasonable as of the fiscal year end date. Given their nature,

actual results may differ from those estimates and assumptions.

The estimates and assumptions are continuously reviewed by

management. The effects of a change in estimates and assump-

tions are recognized in the period of the change or the period of

the change and future periods.

Among the above estimates and assumptions, the following

are items that may have a material effect on the amounts recog-

nized in the consolidated financial statements of the Group:

A. Impairment of Property, Plant and Equipment, Goodwill,

Intangible Assets and Investment Properties

With regard to property, plant and equipment, goodwill, intangible

assets and investment properties, if there is any indication that the

recoverable amount declines below the carrying amounts of the

assets, the Group performs an impairment test.

The important indications include significant changes with

adverse effect on the results of past or projected business perfor-

mance, significant changes in the use of acquired assets or in

overall business strategy, and significant deteriorations in industry

trends and economic trends. With regard to goodwill, the impair-

ment test is conducted at least once a year, regardless of any

indication of the impairment, in order to ensure that the recover-

able amount exceeds the carrying amount.

The impairment test is performed by comparing the carrying

amount and the recoverable amount of assets. If the recoverable

amount declines below the carrying amount, impairment losses

are recognized. The recoverable amount is mainly calculated

based on the discounted cash flow model. Certain assumptions

are made for the useful lives and the future cash flows of the

assets, discount rates and long-term growth rates. These assump-

tions are based on the best estimates and judgments made by

management; however, there’s a possibility that these assump-

tions may be affected by changes in uncertain future economic

conditions, which may have a material impact on the consolidated

financial statements in future periods.

The method for calculating the recoverable amount is

described in “14. Property, Plant and Equipment,” “15. Goodwill

and Intangible Assets” and “17. Investment Property.” With

regard to goodwill, the sensitivity analysis is described in “15.

Goodwill and Intangible Assets.”

B. Employee Retirement Benefits and Mutual Pension

Benefits

The Group has various types of retirement benefit plans, includ-

ing defined benefit plans. In addition, the mutual pension benefits

plan of the Company is one of the public pension systems under

the jurisdiction of the government of Japan and the Company is

legally obligated to bear a part of the pension costs of the plan.

The present value of defined benefit obligations on each of

these plans and the related service costs are calculated based on

actuarial assumptions. These actuarial assumptions require esti-

mates and judgments on variables, such as discount rates and the

long-term expected return on plan assets.

The Group obtains advice from external pension actuaries with

respect to the appropriateness of these actuarial assumptions

including these variables.

The actuarial assumptions are determined based on the best

estimates and judgments made by management; however, there

is a possibility that these assumptions may be affected by

changes in uncertain future economic conditions, or by the publi-

cation or the amendment of related laws, which may have a mate-

rial impact on the consolidated financial statements in future

periods.

These actuarial assumptions and related sensitivity analysis are

described in “24. Employee Benefits.”

C. Provisions

The Group recognizes various provisions, including provisions for

asset retirement obligations and restructuring, in the consolidated

statement of financial position.

These provisions are recognized based on the best estimates of

the expenditures required to settle the obligations taking risks and

uncertainty related to the obligations into account as of the fiscal

year end date.

Expenditures required to settle the obligations are calculated

by taking possible results into account comprehensively; however,

they may be affected by the occurrence of unexpected events or

changes in conditions which may have a material impact on the

consolidated financial statements in future periods.

The nature and amount of recognized provisions are described

in “22. Provisions.”

D. Income Taxes

The Group operates business activities around the world, and it

recognizes current tax liabilities and income taxes as the esti-

mated amounts to be paid to the tax authorities, based on the

estimation in accordance with their laws and regulations.

Calculating current tax liabilities and income taxes requires

estimates and judgment on various factors, including the interpre-

tation of tax regulations by taxable entities and the tax authority in

the jurisdiction or the experience of past tax audits.

Therefore, there may be differences between the amount rec-

ognized as tax liabilities and income taxes and the amount of

actual tax liabilities and income taxes. These differences may have

a material impact on the consolidated financial statements in

future periods.

In addition, deferred tax assets are recognized to the extent

that it is probable that taxable income will be available against

which deductible temporary differences can be utilized.

In recognizing the deferred tax assets, when judging the pos-

sibility of the future taxable income, we reasonably estimate the

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timing and amount of future taxable income based on the busi-

ness plan.

The timing when taxable income arises and the amount of

such income may be affected by changes in uncertain future

economic conditions. Therefore, this may have a material impact

on the consolidated financial statements in future periods.

The content and amount related to income taxes are described

in “19. Income Taxes.”

E. Contingencies

With regard to contingencies, any items that may have a material

impact on business in the future are disclosed in light of all the

available evidence as of the fiscal year end date and by taking into

account the probability of these contingencies and their impact on

financial reporting.

The content of contingencies is described in “38. Contingencies.”

5. new accounting Standards not Yet adopted by the Group

By the date of approval of the consolidated financial statements,

new accounting standards, amended standards and new interpre-

tations that have been issued, but have not been early adopted by

the Group are as follows.

The implications from adoption of these standards and inter-

pretations are assessed by the Group; however, we evaluate that

none of them will have a material impact on our operating results

and financial condition.

IFRSMandatory adoption (From the year beginning)

To be adopted by the Group Description of New Standards/Amendments

IFRS 1 First-time Adoption of International Financial Reporting Standards

January 1, 2013Fiscal year ending March 2014

Exemption related to government grants

January 1, 2013 Fiscal year ending March 2014

Provision related to reapplication of IFRS 1


Exemption related to adjustment of borrowing costs recognized before the application of IFRS

IFRS 7 Financial Instruments: Disclosures


Disclosure related to offsetting of financial assets and liabilities

IFRS 10 Consolidated Financial Statements


Amendment for definition of control, elements of control and basis of existence of control to be applied, regardless of the nature of the investee

IFRS 11 Joint Arrangements January 1, 2013 Fiscal year ending March 2014

Regarding arrangements of which two or more parties have joint control, provide the classification of a joint arrangement based on legal form, contractual arrangement on assets or liabilities and other facts and conditions, not based on only legal form of the arrangementProvide accounting treatment for each classification

IFRS 12 Disclosure of Interests in Other Entities


Expansion of the scope of the disclosure of ownership of interests in other entities, including unconsolidated structured entities

IFRS 13 Fair Value Measurement January 1, 2013 Fiscal year ending March 2014

Guidance of fair value measurement to be applied by all standards and unify the definition of fair value which was previously provided separately in each standard

IAS 1 Presentation of Financial Statements

July 1, 2012 Fiscal year ending March 2014

Revision to the presentation of items in other comprehensive income


Provision for comparative information. When it is disclosed though not required under IFRS, related notes of that period are required

IAS 16 Property, Plant and Equipment


Clarification of treatment related to servicing equipment

IAS 19 Employee Benefits January 1, 2013 Fiscal year ending March 2014

Revision to recognition and presentation of actuarial gains and losses, past service cost, interest cost and others, and revision to disclosure of retirement benefits

IAS 27 Separate Financial Statements


Transfer of the provisions regarding consolidation to IFRS 10

IAS 28 Investments in Associates and Joint Ventures


Amendments based on IFRS 10, IFRS 11 and IFRS 12

IAS 32 Financial Instruments: Presentation


Clarification of accounting treatment of income taxes related to dividend paid to the equity financial instruments holder


Clarification of conditions on offset disclosure and addition of guidelines

IAS 34 Interim Financial Reporting


Clarification of conditions on segment disclosure on interim financial reporting

IAS 36 Impairment of Assets January 1, 2014 Fiscal year ending March 2015

Amendment for recoverable amount disclosures for non-financial assets

IFRIC 20 Stripping Costs in the Production Phase of a Surface Mine


Accounting treatment for waste removal costs that are incurred in surface mining activity during the production phase of the mine (Not applicable for costs incurred during the development phase)

IFRIC 21 Levies January 1, 2014 Fiscal year ending March 2015

Clarification of the accounting for levies

IFRS 10 Investment Entities January 1, 2014 Fiscal year ending March 2015

Accounting treatment for the investments held by investment entities (measure their investments at fair value through profit or loss instead of consolidating them)

IFRS 12

IAS 27


6. operating Segments

(1) Outline of Reportable SegmentsThe reportable segments of the Group are determined based on

the operating segments that are components of the Group about

which separate financial information is available and are evaluated

regularly by the Board of Directors in deciding how to allocate

resources and in assessing performance.

The Group is mainly engaged in the manufacture and sale of

tobacco products, prescription drugs, beverages and processed

foods. With respect to tobacco products, operations are managed

separately for domestic and overseas markets. The reportable

segments of the Group are composed of five segments:

“Domestic Tobacco Business,” “International Tobacco Business,”

“Pharmaceutical Business,” “Beverage Business” and “Processed

Food Business.” They are determined by types of products, char-

acteristics, and markets.

The Group changed its organizational structure effective July 1,

2012, and the “Beverage Business” and the “Processed Food

Business,” which were previously combined in “Food Business,”

became individual reportable segments used by management in

deciding how to allocate resources and in assessing performance.

Accordingly, separate segment disclosures for the “Beverage

Business” and the “Processed Food Business” have been included

in the segment information since the second quarter ended

September 30, 2012. The comparative segment information for

the year ended March 31, 2012 is retrospectively adjusted.

The “Domestic Tobacco Business” manufactures and sells

tobacco products in domestic areas (which include duty-free

shops in Japan and markets in China, Hong Kong, and Macau

where the Company’s China Division operates). The “International

Tobacco Business” manufactures and sells tobacco products

overseas mainly through JT International S.A., which controls

manufacturing and sales operations. The “Pharmaceutical

Business” consists of research and development, and the manu-

facture and sale of prescription drugs. The “Beverage Business”

consists of the manufacture and sale of beverages. The

“Processed Food Business” consists of the manufacture and sale

of frozen and room-temperature processed foods, bakery products

and seasonings.

(2) Revenues and Performances for Reportable Segments

Revenues and performances for reportable segments are as fol-

lows. The Board of Directors assesses the segment performance

and determines resource allocation after reviewing revenues and

adjusted EBITDA. Since financial income, financial costs and

income taxes are managed by the Group head office, this income

and these expenses are excluded from the segment performance.

Transactions within the segments are based on mainly the prevail-

ing market price.

For the year ended March 31, 2012

Millions of yen

2012

Reportable Segments

Domestic Tobacco

International Tobacco (Note 2) Pharmaceuticals Beverage

Processed Food Total Other (Note 3) Elimination Consolidated

Revenue

External revenue (Note 4) ¥646,187 ¥966,255 ¥ 47,407 ¥188,768 ¥170,652 ¥2,019,269 ¥14,556 ¥ — ¥2,033,825

Intersegment revenue 28,115 27,497 — 85 770 56,467 9,257 (65,724) —

Total revenue ¥674,303 ¥993,752 ¥ 47,407 ¥188,853 ¥171,422 ¥2,075,736 ¥23,813 ¥(65,724) ¥2,033,825

Segment profit (loss)

Adjusted EBITDA (Note 1) ¥262,257 ¥314,755 ¥(10,031) ¥ 14,584 ¥ 5,416 ¥ 586,981 ¥ (8,852) ¥ (997) ¥ 577,132

Other items

Depreciation and amortization ¥ 39,567 ¥ 55,227 ¥ 3,465 ¥ 10,092 ¥ 7,436 ¥ 115,788 ¥ 3,376 ¥ (319) ¥ 118,845

Impairment losses on other than financial assets 314 4,610 — — 413 5,336 1,677 — 7,013

Reversal of impairment losses on other than financial assets 5 — — — 77 82 — — 82

Share of profit (loss) in investments accounted for using the equity method 31 1,922 — — 13 1,966 81 — 2,047

Capital expenditures 56,224 39,141 3,897 8,102 7,308 114,671 4,321 (0) 118,992

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Millions of yen

2013

Reportable Segments

Domestic Tobacco



Revenue

External revenue (Note 4) ¥687,138 ¥1,010,655 ¥ 53,158 ¥185,478 ¥168,747 ¥2,105,177 ¥15,019 ¥ — ¥2,120,196

Intersegment revenue 28,402 31,029 — 108 647 60,186 9,398 (69,583) —

Total revenue ¥715,541 ¥1,041,683 ¥ 53,158 ¥185,586 ¥169,394 ¥2,165,362 ¥24,417 ¥(69,583) ¥2,120,196

Segment profit (loss) Adjusted EBITDA (Note 1) ¥281,320 ¥ 343,304 ¥(12,720) ¥ 12,429 ¥ 7,357 ¥ 631,691 ¥ (8,971) ¥ (595) ¥ 622,124

Other items

Depreciation and amortization ¥ 41,074 ¥ 51,101 ¥ 3,440 ¥ 10,072 ¥ 7,141 ¥ 112,828 ¥ 3,947 ¥ (313) ¥ 116,462

Impairment losses on other than financial assets 14 322 — — 1,248 1,584 1,629 — 3,213

Reversal of impairment losses on other than financial assets — — — — — — — — —

Share of profit (loss) in investments accounted for using the equity method 48 2,685 — — (11) 2,722 54 — 2,775

Capital expenditures 71,238 37,504 5,761 12,029 4,596 131,128 6,527 (206) 137,450

Reconciliation from “Adjusted EBITDA” to “Profit before income taxes”


Millions of yen

2012

Reportable Segments

Domestic Tobacco



Adjusted EBITDA (Note 1) ¥262,257 ¥314,755 ¥(10,031) ¥ 14,584 ¥ 5,416 ¥ 586,981 ¥ (8,852) ¥(997) ¥577,132

Depreciation and amortization (39,567) (55,227) (3,465) (10,092) (7,436) (115,788) (3,376) 319 (118,845)

Adjustment items (income) (Note 5) — 564 — — — 564 29,368 — 29,932

Adjustment items (costs) (Note 5) (13,426) (7,737) — — (434) (21,597) (7,443) — (29,039)

Operating profit (loss) ¥209,265 ¥252,355 ¥(13,497) ¥ 4,492 ¥(2,454) ¥ 450,160 ¥ 9,697 ¥(677) 459,180

Financial income 5,603

Financial costs (23,429)

Profit before income taxes ¥441,355



Millions of yen

2013

Reportable Segments

Domestic Tobacco



Adjusted EBITDA (Note 1) ¥281,320 ¥343,304 ¥(12,720) ¥ 12,429 ¥ 7,357 ¥ 631,691 ¥ (8,971) ¥(595) ¥ 622,124

Depreciation and amortization (41,074) (51,101) (3,440) (10,072) (7,141) (112,828) (3,947) 313 (116,462)

Adjustment items (income) (Note 5) 1,200 395 — — — 1,595 32,639 — 34,234

Adjustment items (costs) (Note 5) (154) (3,057) — — (6,039) (9,250) 1,714 — (7,536)

Operating profit (loss) ¥241,292 ¥289,541 ¥(16,160) ¥ 2,357 ¥(5,822) ¥ 511,208 ¥21,434 ¥(282) 532,360

Financial income 5,493

Financial costs (28,292)

Profit before income taxes ¥ 509,560

(Note 1) For adjusted EBITDA, the depreciation and amortization, and adjustment items (income and costs) are excluded from operating profit (loss).

(Note 2) The foreign subsidiaries group, which includes the core company of JT International S.A., that is part of the “International Tobacco Business” segment has December 31 as its

fiscal year end date and the profit or loss for the period from January 1 to December 31 is included in the years ended March 31, 2012 and 2013, respectively.

(Note 3) “Other” includes business activities relating to rent of real estate and corporate expenses relating to corporate communication and operation of the head office.

(Note 4) Core revenue as part of the “Domestic Tobacco Business” and the “International Tobacco Business” is as follows:

Millions of yen


Domestic tobacco ¥611,925 ¥654,000

International tobacco 894,636 943,094

(Note 5) “Adjustment items (income)” include restructuring income of gains on sale of real estate.

“Adjustment items (costs)” include restructuring costs of the closing down of a factory, the effect of revision to laws and regulations related to the mutual pension benefits

plan, the cooperation fee for terminating leaf tobacco farming and the adjustment amount of ceasing classification as non-current assets held-for-sale.

The breakdown of restructuring income is described in “28. Other Operating Income.” Restructuring costs included in “Cost of sales” and “Selling, general and administrative

expenses” are ¥2,445 million and ¥9,366 million, respectively, for the year ended March 31, 2013. The breakdown of restructuring costs in “Selling, general and administrative

expenses” is described in “29. Selling, General and Administrative Expenses.”

The breakdown of “Adjustment items (costs)” for each fiscal year is as follows:

Millions of yen


Restructuring costs ¥14,052 ¥11,811

Effect of revision to laws and regulations related to the mutual pension benefits plan — (4,279)

Cooperation fee for terminating leaf tobacco farming 12,469 4

Adjustment of ceasing classification as non-current assets held-for-sale 2,518 —

Adjustment items (costs) ¥29,039 ¥7,536

Restructuring costs for the year ended March 31, 2012 include costs of closing down of the Hofu Factory in the “Domestic Tobacco Business” and the Hainburg factory in the

“International Tobacco Business.”

Restructuring costs for the year ended March 31, 2013 include costs of rationalization measures in the “International Tobacco Business” and the dissolution of the processed

fishery products business in the “Processed Food Business.”

(3) Geographic InformationThe regional breakdown of non-current assets and external revenues as of each fiscal year end is as follows:

Non-current Assets

Millions of yen

(As of March 31) 2012 2013

Japan ¥ 556,102 ¥ 577,208

Overseas 1,547,315 1,819,391

Consolidated ¥2,103,417 ¥2,396,599

(Note) Non-current assets are segmented by the location of the assets, and financial instruments, deferred tax assets and retirement benefits assets are excluded.

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External Revenue

Millions of yen


Japan ¥1,051,702 ¥1,089,661

Overseas 982,123 1,030,535

Consolidated ¥2,033,825 ¥2,120,196

(Note) Revenue is segmented by the sales destination.

(4) Major Customers InformationThe “International Tobacco Business” of the Group sells products to the Megapolis Group that engages in distribution and wholesale

business in Russia and other countries. The external revenue from the group is ¥236,050 million (11.6% of consolidated revenue) for the

year ended March 31, 2012 and ¥268,566 million (12.7% of consolidated revenue) for the year ended March 31, 2013.

7. business Combination

Acquisition of Gryson NV, V.D.M. Invest, Disprotab S.L. and Gryson Deutschland GmbH (hereinafter collectively referred to as “Gryson”)

(1) Summary of Business CombinationOn August 14, 2012, the Group acquired 100% of the outstanding shares of Gryson NV, V.D.M. Invest and Disprotab S.L. as well as 50%

of the outstanding shares of Gryson Deutschland GmbH. Gryson has established an important presence in the Roll Your Own (“RYO”) and

Make Your Own (“MYO”) market across several European countries including France, Belgium, Luxembourg, Spain and Portugal, as well

as in a number of other countries. Through this acquisition, the Group obtained further opportunities to enhance its presence in the grow-

ing RYO/MYO market.

(2) Financial Impact on the GroupSince the acquisition date, the acquired business has contributed to consolidated revenue of ¥3,032 million and consolidated operating

profit of ¥125 million. Had the business been acquired on January 1, 2012, the Group estimates that total consolidated revenue would

have increased by ¥5,627 million to ¥2,125,823 million and total consolidated operating profit would have increased by ¥2,084 million to

¥534,444 million.

(3) Consideration and Detail (Aggregated total of the acquisition)The consideration was ¥54,857 million and it was paid in cash.

(4) Cash Out for the Acquisition of Subsidiaries (Aggregated total of the acquisition)Millions of yen

Cash consideration ¥54,857

Cash and cash equivalents in subsidiaries acquired (3,525)

Net cash out for the acquisition of subsidiaries ¥51,332

(5) Fair Value of the Assets Acquired and Liabilities AssumedMillions of yen

Current assets ¥10,483

Non-current assets 9,696

Total assets acquired ¥20,179

Current liabilities (1,106)

Non-current liabilities (4,202)

Total liabilities assumed ¥ (5,308)

Total equity ¥14,871

Goodwill ¥39,986


Goodwill of ¥39,986 million represents integration synergies including future economic benefits from enhanced business scale in the RYO/

MYO market. Transaction costs of ¥71 million were expensed as incurred and recognized in “Selling, general and administrative expenses.”

Other Acquisition

In addition to the above, the Group acquired other entities through business combination for the year ended March 31, 2013, which are

omitted as they are immaterial both individually and in aggregate.

8. Cash and Cash Equivalents

The breakdown of “Cash and cash equivalents” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Cash and deposits ¥108,797 ¥121,753

Short-term investments 295,943 20,960

Total ¥404,740 ¥142,713

Cash and cash equivalents are classified as financial assets measured at amortized cost.

Included in “Cash and cash equivalents” as of March 31, 2013 is ¥14,929 million (IRR 5,561 billion) held by the Group’s Iranian subsid-

iary, JTI Pars PJS Co. Due to international sanctions and other factors imposed on Iran, the subsidiary’s ability to remit funds outside of

Iran is restricted.

9. Trade and other Receivables

The breakdown of “Trade and other receivables” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Note and Account receivables ¥311,803 ¥367,951

Other 17,693 21,470

Allowance for doubtful accounts (1,729) (1,584)

Total ¥327,767 ¥387,837

Trade and other receivables are presented net of the allowance for doubtful accounts in the consolidated statement of financial position.

Trade and other receivables are classified as financial assets measured at amortized cost.

10. Inventories

The breakdown of “Inventories” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Merchandise and finished goods (Note 1) ¥112,477 ¥133,144

Leaf tobacco (Note 2) 294,813 292,043

Other 39,327 47,855

Total ¥446,617 ¥473,042

(Note 1) For imported tobacco products (merchandise) that are sold by TS Network Co., Ltd., a subsidiary of the Company, commissions solely from wholesale are included in revenue.

The amount of imported tobacco products (merchandise) that the company holds at the end of each fiscal year is included in inventories and presented as “Merchandise and

finished goods.”

(Note 2) Leaf tobacco includes those products that will be used after 12 months from the end of each fiscal year, but they are included in inventories since they are held within the

normal operating cycle.

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11. other Financial assets

(1) The breakdown of “Other financial assets” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Derivative assets ¥ 1,941 ¥ 4,077

Equity securities 39,106 46,699

Debt securities 8,835 15,676

Time deposits 24,306 5,347

Other 34,858 38,181

Allowance for doubtful accounts (14,137) (9,096)

Total ¥ 94,909 ¥100,884

Current assets ¥ 27,361 ¥ 29,103

Non-current assets 67,548 71,781

Total ¥ 94,909 ¥100,884

Other financial assets are presented net of the allowance for doubtful accounts in the consolidated statement of financial position.

Derivative assets are classified as financial assets measured at fair value through profit or loss excluding that to which hedge account-

ing is applied, equity securities are classified as financial assets measured at fair value through other comprehensive income, and time

deposits and debt securities are classified as financial assets measured at amortized cost.

(2) Names of major securities held as financial assets measured at fair value through other comprehensive income and their fair values as

of each fiscal year end are as follows:

Company name(As of March 31)

Millions of yen

2012 2013

KT&G Corporation ¥16,700 ¥18,609

Seven & i Holdings Co., Ltd. 2,094 2,664

Mizuho Financial Group, Inc. 1,721 2,545

Mitsubishi UFJ Financial Group, Inc. 1,447 2,010

DOUTOR∙NICHIRES Holdings Co., Ltd. 1,437 1,846

Mitsubishi Shokuhin Co., Ltd 1,269 1,772

Equity securities are held mainly for strengthening relationships with investees. Therefore, they are designated as financial assets

measured at fair value through other comprehensive income.

In order to pursue the efficiency of assets held and to use them effectively, financial assets measured at fair value through other com-

prehensive income have been sold (derecognition).

The fair value at the time of sale and cumulative gain or loss that is recognized in equity through other comprehensive income for

each fiscal year is as follows:

Millions of yen


Fair Value ¥695 ¥38

Cumulative gain or loss recognized in equity as other comprehensive income (Note) (89) (2)

(Note) The cumulative gain or loss recognized in equity as other comprehensive income is transferred to retained earnings when equity instruments are sold or the decline in its fair

value compared to its acquisition cost is significant.


12. other Current assets

The breakdown of “Other current assets” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Prepaid tobacco excise taxes ¥ 87,261 ¥130,348

Prepaid expenses 10,736 9,546

Consumption tax payables 6,702 10,580

Other 18,465 27,384

Total ¥123,163 ¥177,858

13. non-current assets Held-for-Sale

The breakdown of “Non-current assets held-for-sale” and “Liabilities directly associated with non-current assets held-for-sale” as of each

fiscal year end is as follows:

Breakdown of Major Assets and Liabilities

Millions of yen

(As of March 31) 2012 2013

Non-current assets held-for-sale

Property, plant and equipment ¥ 302 ¥ 112

Investment property 1,098 2,482

Total ¥1,401 ¥2,594

Liabilities directly associated with non-current assets held-for-sale

Long-term guarantee deposits ¥ 101 ¥ 101

Total ¥ 101 ¥ 101

“Non-current assets held-for-sale” as of March 31, 2012 are

mainly rental properties and idle properties which are currently

actively marketed for sale. Long-term guarantee deposits related

to the rental properties are included in “Liabilities directly associ-

ated with non-current assets held-for-sale.”

With regard to such assets and assets sold, impairment losses

of ¥243 million are recognized in “Selling, general and

administrative expenses” in the consolidated statement of income

for the year ended March 31, 2012.

“Non-current assets held-for-sale” as of March 31, 2013 are

mainly rental properties and idle properties which are currently

actively marketed for sale. Long-term guarantee deposits related

to the rental properties are included in “Liabilities directly associ-

ated with non-current assets held-for-sale.”

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14. property, plant and Equipment

(1) Schedule of Property, Plant and EquipmentThe schedules of the carrying amount, acquisition cost, and accumulated depreciation and accumulated impairment losses of “Property,

plant and equipment” are as follows:

Millions of yen

Carrying Amount (Years ended March 31)

Land, buildings and structures

Machinery and vehicles

Tools, furniture and fixtures

Construction in progress Total

As of April 1, 2011 ¥304,242 ¥252,094 ¥ 53,887 ¥29,101 ¥639,324

Individual acquisition 15,207 34,579 22,750 26,417 98,952

Capitalization of borrowing costs (Note) — — — 23 23

Acquisition through business combinations 767 908 21 85 1,781

Transfer to investment property (5,152) (18) (20) — (5,191)

Transfer to non-current assets held-for-sale (966) (2) (2) — (969)

Depreciation (14,922) (48,959) (18,993) — (82,874)

Impairment losses (2,709) (2,052) (78) — (4,840)

Reversal of impairment losses 77 5 — — 82

Sale or disposal (716) (4,051) (445) (253) (5,464)

Exchange differences on translation of foreign operations (6,011) (11,674) (1,041) (1,524) (20,250)

Other 3,632 18,370 (311) (22,729) (1,037)

As of March 31, 2012 293,449 239,199 55,768 31,120 619,536

Individual acquisition 17,583 45,367 26,432 22,766 112,148

Capitalization of borrowing costs (Note) — — — 72 72

Acquisition through business combinations 1,386 1,945 61 — 3,391

Transfer to investment property (2,452) (6) (23) — (2,482)

Transfer to non-current assets held-for-sale (384) (0) (6) — (389)

Depreciation (14,759) (44,587) (20,178) — (79,524)

Impairment losses (570) (202) (88) — (860)

Sale or disposal (282) (4,762) (462) (115) (5,621)

Exchange differences on translation of foreign operations 9,129 14,570 1,928 1,677 27,303

Other 4,233 19,684 1,822 (26,998) (1,259)

As of March 31, 2013 ¥307,332 ¥271,207 ¥ 65,256 ¥28,522 ¥672,316

(Note) The capitalization rates calculating the borrowing costs for capitalization are 3.7% for the year ended March 31, 2012 and 3.5 % for the year ended March 31, 2013, respectively.

Millions of yen

Acquisition CostLand, buildings and structures




As of April 1, 2011 ¥617,438 ¥690,412 ¥152,580 ¥29,101 ¥1,489,531

As of March 31, 2012 593,988 670,645 155,232 31,120 1,450,985

As of March 31, 2013 615,682 720,165 171,351 28,522 1,535,719

Millions of yen

Accumulated Depreciation and Accumulated Impairment LossesLand, buildings and structures




As of April 1, 2011 ¥313,196 ¥438,318 ¥ 98,693 ¥— ¥850,207

As of March 31, 2012 300,539 431,446 99,464 — 831,449

As of March 31, 2013 308,350 448,958 106,095 — 863,403


The carrying amount of property, plant and equipment as of each fiscal year end includes the carrying amount of the following leased

assets:

Millions of yen

Land, buildings and structures


Tools, furniture and fixtures Total

As of April 1, 2011 ¥ 227 ¥3,170 ¥8,569 ¥11,966

As of March 31, 2012 279 2,875 6,749 9,902

As of March 31, 2013 1,378 3,364 6,798 11,540

(2) Impairment LossesThe grouping of property, plant and equipment for impairment test

is the smallest cash-generating unit that independently generates

cash inflow.

The Group recognized impairment losses of ¥4,840 million for

the year ended March 31, 2012 and ¥860 million for the year

ended March 31, 2013 in “Selling, general and administrative

expenses” in the consolidated statement of income.

Impairment losses recognized in the year ended March 31,

2012, represent the losses incurred to reduce the carrying

amounts to the recoverable amounts of the buildings, structures,

machinery and vehicles which were closed down or individually

selected for demolition.

The recoverable amounts of these assets are calculated mainly

by their value in use, which is set at “zero.”

Impairment losses recognized in the year ended March 31,

2013 represent the losses incurred to reduce the carrying amounts

to the recoverable amounts of the buildings, structures, machinery

and vehicles due to closure of businesses or individual selection

for demolition.

The recoverable amounts of these assets are calculated mainly

by their value in use, which is set at “zero.”

15. Goodwill and Intangible assets

(1) Schedule of Goodwill and Intangible AssetsThe schedules of carrying amount, acquisition cost, and accumulated amortization and accumulated impairment losses of “Goodwill” and

“Intangible assets” are as follows:

Carrying Amount(Years ended March 31)

Millions of yen

Goodwill Trademarks Software Other Total

As of April 1, 2011 ¥1,176,114 ¥286,632 ¥18,828 ¥24,734 ¥1,506,308

Individual acquisition 29 292 5,982 13,347 19,651

Acquisition through business combinations 29,352 6,947 — — 36,298

Amortization (Note) — (21,141) (7,567) (5,894) (34,602)

Impairment losses — — (64) (0) (65)

Sale or disposal (49) (41) (92) (1,195) (1,377)

Exchange differences on translation of foreign operations (95,378) (15,544) (210) (176) (111,309)

Other (22) 206 883 522 1,589

As of March 31, 2012 1,110,046 257,349 17,760 31,339 1,416,494

Individual acquisition 3 325 14,149 10,228 24,704

Acquisition through business combinations 46,509 13,240 1 1 59,750

Amortization (Note) — (20,767) (7,721) (5,815) (34,303)

Impairment losses — — (61) (3) (64)

Sale or disposal — — (359) (214) (573)

Exchange differences on translation of foreign operations 159,918 37,255 394 310 197,877

Other — 221 7,707 (6,524) 1,404

As of March 31, 2013 ¥1,316,476 ¥287,622 ¥31,869 ¥29,321 ¥1,665,289

(Note) The amortization of intangible assets is included in “Cost of sales” and “Selling, general and administrative expenses” in the consolidated statement of income.

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Millions of yen

Acquisition Cost Goodwill Trademarks Software Other Total

As of April 1, 2011 ¥1,176,201 ¥679,127 ¥ 94,122 ¥75,392 ¥2,024,842

As of March 31, 2012 1,110,046 663,875 97,314 86,792 1,958,027

As of March 31, 2013 1,316,476 733,745 111,640 87,671 2,249,531

Millions of yen

Accumulated Amortization and Accumulated Impairment Losses Goodwill Trademarks Software Other Total

As of April 1, 2011 ¥87 ¥392,495 ¥75,294 ¥50,658 ¥518,534

As of March 31, 2012 — 406,526 79,553 55,453 541,533

As of March 31, 2013 — 446,122 79,770 58,350 584,242

The carrying amount of intangible assets as of each fiscal year end includes the carrying amount of the following leased assets:

Millions of yen

Software

As of April 1, 2011 ¥38

As of March 31, 2012 11

As of March 31, 2013 5

(2) Material Goodwill and Intangible AssetsGoodwill and intangible assets recognized in the consolidated

statement of financial position are mainly composed of goodwill

and trademarks in the JTIH Group. The carrying amounts of good-

will as of March 31, 2012 and 2013 were ¥1,067,544 million and

¥1,273,971 million, respectively. The carrying amounts of trade-

marks as of March 31, 2012 and 2013 were ¥254,543 million and

¥284,861 million, respectively.

The majority of the goodwill and trademarks was recognized as

a result of acquisitions of RJR Nabisco’s non-U.S. tobacco opera-

tions in 1999 and Gallaher in 2007.

The trademarks are amortized using the straight-line method

and the remaining amortization period is mainly 14 years.

(3) Impairment Test for GoodwillFor the year ended March 31, 2013, the carrying amount of the

majority of goodwill is allocated to the international tobacco cash-

generating unit of ¥1,273,971 million (¥1,067,544 million for the

year ended March 31, 2012) and the processed food cash-gener-

ating unit of ¥25,368 million (¥25,368 million for the year ended

March 31, 2012). Details of the result of impairment tests are as

follows:

A. International Tobacco Cash-Generating Unit

The recoverable amount is calculated by the value in use based on

the three-year business plan that was prepared by reflecting past

experiences and external information and that was approved by

management. After the three-year business plan, the Group sets a

growth rate that decreases gradually from 5.4% in the fourth year

(2012: 6.6%) to 4.2% in the ninth year (2012: 4.0%), and the same

growth rate as the ninth year from the tenth year as a continued

growth rate for inflation.

The discount rate before taxes is 11.9% (2012: 11.8%). The

value in use sufficiently exceeds the carrying amount of the cash-

generating unit. Therefore, even in cases where the discount rate

and growth rate used in calculating the value in use fluctuate

within reasonable ranges, the Group assumes that the value in

use will not become less than the carrying amount.

B. Processed Food Cash-Generating Unit

The recoverable amount is calculated by the value in use based on

the three-year business plan that was prepared by reflecting past

experiences and external information and that was approved by

management. After the three-year business plan, the Group sets a

growth rate that decreases gradually from 3.2% in the fourth year

(2012: 3.6%) to 1.1% in the ninth year (2012: 0.3%), and the same

growth rate as the ninth year issued from the tenth year as contin-

ued growth rate for inflation. The discount rate before taxes is

4.7% (2012: 5.4%). The value in use exceeds the carrying amount.

If the discount rate increases by 2.7%, impairment losses would

be recognized. In case that growth rate fluctuates within a reason-

able range, the Group assumes that the value in use will not

become less than the carrying amount.


16. Lease Transactions

The Group leases vehicles, vending machines and other assets as a lessee. Some of the lease contracts have renewal options or escala-

tion clauses. There are no restrictions on additional debt and further leasing imposed by the lease arrangements.

(1) Present Value of Finance Lease ObligationsThe total of future minimum lease payments for leased assets recognized based on the finance lease contracts, their present value and

future financial costs as of each fiscal year end are as follows:

Millions of yen

(As of March 31) 2012 2013

Not later than 1 year

Total of future minimum lease payments ¥ 4,161 ¥ 4,590

Future financial costs 216 289

Present value 3,945 4,301

Later than 1 year and not later than five years

Total of future minimum lease payments 7,102 8,010



Later than 5 years

Total of future minimum lease payments 248 879


Present value 215 817

Total

Total of future minimum lease payments 11,511 13,480



(2) Future Minimum Lease Payments under Non-cancellable Operating LeasesThe total of future minimum lease payments under non-cancellable operating leases as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Not later than 1 year ¥ 7,706 ¥ 6,624

Later than 1 year and not later than 5 years 12,821 12,948

Later than 5 years 1,384 5,383

Total ¥21,912 ¥24,955

(3) Total of Minimum Lease Payments and Contingent RentsThe total of minimum lease payments and contingent rents of operating lease contracts recognized as an expense for each fiscal year is

as follows:

Millions of yen


Total of minimum lease payments ¥7,863 ¥9,132

Contingent rents 2,628 1,056

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17. Investment property

(1) Schedule of Investment PropertyThe schedule of the carrying amount of “Investment property” for each fiscal year is as follows:

Millions of yen


Balance at the beginning of the year ¥ 36,477 ¥ 67,387

Expenditure after acquisition 367 525

Transfer from property, plant and equipment 5,191 2,482

Transfer from non-current assets held-for-sale 32,784 —

Adjustment from ceasing classification as non-current assets held-for-sale (2,518) —

Transfer to non-current assets held-for-sale (1,053) (5,491)

Transfer to property, plant and equipment (360) (493)

Depreciation (1,368) (2,634)

Impairment losses (1,866) (2,289)

Sale or disposal (340) (506)

Exchange differences on translation of foreign operations 8 8

Other 65 8

Balance at the end of the year ¥ 67,387 ¥ 58,995

Acquisition cost at the beginning of the year ¥ 79,922 ¥144,976

Accumulated depreciation and accumulated impairment losses at the beginning of the year 43,445 77,589

Acquisition cost at the end of the year 144,976 127,493

Accumulated depreciation and accumulated impairment losses at the end of the year 77,589 68,498

(2) Fair ValueThe carrying amount and fair value of investment property as of each fiscal year end are as follows:

Millions of yen

2012 2013

(As of March 31) Carrying amount Fair value Carrying amount Fair value

Investment property ¥67,387 ¥177,642 ¥58,995 ¥145,348

The fair value of investment property is determined based on a valuation conducted by an external real estate appraiser. The valuation

is made in accordance with the appraisal of the country where the investment property is located and based on market evidence of trans-

action prices for similar assets.

(3) Income and Expenses from Investment PropertyThe rental income from investment property and direct operating expenses for each fiscal year is as follows:

Millions of yen


Rental income ¥4,395 ¥9,704

Direct operating expenses 3,476 6,674


(4) Impairment LossesThe grouping of investment properties for impairment test is

based on the smallest cash-generating unit that independently

generates cash inflow. Idle properties are grouped individually.

The Group recognized impairment losses of ¥1,866 million for

the year ended March 31, 2012, and ¥2,289 million for the year

ended March 31, 2013 in “Selling, general and administrative

expenses” in the consolidated statement of income.

Impairment losses recognized for the year ended March 31,

2012 represent the difference between the recoverable amount

and the carrying amount of land and buildings as idle properties

which were individually selected for demolition.

The recoverable amount is calculated based on value in use

basis which is zero for buildings due to the decision of demolition,

and the recoverable amount of other properties is calculated by

the fair value less costs to sell.

Impairment losses recognized for the year ended March 31,

2013 represent the difference between the recoverable amount

and the carrying amount of land and buildings as idle properties

which were individually selected for demolition.

The recoverable amount is calculated based on value in use

basis, which is zero for buildings due to the decision of demoli-

tion, and the recoverable amount of other properties is calculated

by the fair value less costs to sell.

18. Investments accounted for Using the Equity Method

Condensed financial information of associates as of each fiscal year end and for each fiscal year is as follows:

Millions of yen

(As of March 31) 2012 2013

Statement of financial position

Total assets ¥147,592 ¥167,788

Total liabilities 124,112 141,483

Total equity 23,480 26,306

Millions of yen


Statement of income

Revenue ¥1,415,412 ¥1,359,534

Expense 1,407,548 1,352,423

Profit for the year 7,864 7,111

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19. Income Taxes

(1) Deferred Tax Assets and Deferred Tax LiabilitiesThe breakdown and schedule of “Deferred tax assets” and “Deferred tax liabilities” by major causes of their occurrence for each fiscal

year are as follows:


Millions of yen

Deferred Tax AssetsAs of

April 1, 2011 Recognized in

profit or loss

Recognized in other compre-

hensive income Other (Note 1)


Fixed assets (Note 2) ¥ 36,093 ¥ 7,216 ¥ — ¥ (810) ¥ 42,500

Retirement benefits 105,451 (11,740) 837 (689) 93,859

Carryforward of unused tax losses 53,941 7,572 — (1,783) 59,731

Other 80,418 (6,122) 10 (1,569) 72,737

Subtotal 275,903 (3,074) 847 (4,850) 268,826

Valuation allowance (68,877) 3,988 2,256 954 (61,679)

Total ¥207,026 ¥ 914 ¥3,103 ¥(3,896) ¥207,148

Millions of yen

Deferred Tax LiabilitiesAs of


profit or loss




Fixed assets (Note 2) ¥(129,350) ¥ 21,491 ¥ — ¥ 70 ¥(107,789)

Retirement benefits (2,379) (436) (1,139) 37 (3,917)

Other (22,421) (24,273) (1,628) 2,594 (45,728)

Total ¥(154,150) ¥ (3,217) ¥(2,767) ¥2,701 ¥(157,434)


Millions of yen

Deferred Tax AssetsAs of


profit or loss




Fixed assets (Note 2) ¥ 42,500 ¥ (2,036) ¥ — ¥ 2,612 ¥ 43,075

Retirement benefits 93,859 (5,992) 9,333 2,234 99,434

Carryforward of unused tax losses 59,731 2,564 — 3,277 65,572

Other 72,737 1,438 (107) 3,295 77,363

Subtotal 268,826 (4,026) 9,226 11,417 285,444

Valuation allowance (61,679) (8,104) (148) (1,899) (71,829)

Total ¥207,148 ¥(12,129) ¥9,079 ¥ 9,518 ¥213,615

Millions of yen

Deferred Tax LiabilitiesAs of


profit or loss




Fixed assets (Note 2) ¥(107,789) ¥ (736) ¥ — ¥(10,413) ¥(118,937)

Retirement benefits (3,917) 1,511 184 (1,218) (3,440)

Other (45,728) (1,254) (2,472) (5,744) (55,198)

Total ¥(157,434) ¥ (479) ¥(2,289) ¥(17,375) ¥(177,576)

(Note 1) “Other” includes exchange differences on translation of foreign operations.

(Note 2) “Fixed assets” include property, plant and equipment, goodwill, intangible assets and investment property.


The deferred tax assets are recognized by taking taxable tem-

porary differences, future taxable profits plan and tax planning

into account. The carryforward of unused tax losses, for which

the deferred tax assets are not recognized, was ¥42,145 million

(including ¥35,615 million, for which the carryforward expires

after five years) as of March 31, 2012, and ¥51,621 million

(including ¥37,128 million, for which the carryforward expires

after five years) as of March 31, 2013. Tax credits, for which the

deferred tax assets are not recognized, were ¥3,228 million

(including ¥2,593 million, for which the carryforward expires after

five years) as of March 31, 2012, and ¥3,601 million (including

¥2,907 million, for which the carryforward expires after five years)

as of March 31, 2013.

(2) Income TaxesThe breakdown of “Income taxes” for each fiscal year is as follows:

Millions of yen


Current income taxes ¥110,493 ¥145,434

Deferred income taxes 2,303 12,608

Total income taxes ¥112,795 ¥158,042

Deferred income taxes increased by ¥3,021 million for the year ended March 31, 2012 and decreased by ¥2,070 million for the year

ended March 31, 2013, due to the effect of changes in tax rates in Japan and other countries.

(3) Reconciliation of the Effective Tax RateThe breakdown of major items that caused differences between the effective statutory tax rate and the average actual tax rate for each

fiscal year is as follows:

The Company is subject mainly to corporate tax, inhabitant tax, and enterprise tax, and the effective statutory tax rate calculated

based on these taxes for the year ended March 31, 2012 and 2013 was 40.35% and 37.78%, respectively. In this fiscal year, ended March

31,2013, the tax rate for corporate tax was lowered and special corporate tax for reconstruction was imposed. Foreign subsidiaries are

subject to income tax at their locations.

%


Effective statutory tax rate 40.35 37.78

Different tax rates applied to foreign subsidiaries (11.65) (9.60)

Non-deductible expenses 1.38 1.57

Losses on valuation of investments in subsidiaries (7.07) —

Overseas withholding tax 1.06 1.46

Valuation allowance (0.78) 1.91

Uncertain tax position on income taxes 2.42 (0.85)

Other (0.17) (1.25)

Average actual tax rate 25.56 31.02

20. Trade and other payables

The breakdown of “Trade and other payables” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Note and account payables ¥165,427 ¥173,458

Other payables 71,736 71,325

Other 61,500 67,959

Total ¥298,663 ¥312,741

Trade and other payables are classified as financial liabilities measured at amortized cost.

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21. bonds and borrowings (including other Financial Liabilities)

(1) Breakdown of Financial LiabilitiesThe breakdown of “Bonds and borrowings” and “Other financial liabilities” as of each fiscal year end is as follows:

Millions of yen %

(As of March 31) 2012 2013

Average interest rate

(Note 1) Due

Derivative liabilities ¥ 5,133 ¥ 3,816 — —

Short-term borrowings 43,486 23,847 9.74 —

Current portion of long-term borrowings 78,219 20,454 1.70 —

Current portion of bonds (Note 2) 90,061 — — —

Long-term borrowings 49,277 33,163 0.57 2014–2028

Bonds (Note 2) 230,473 237,236 — —

Other 23,900 23,577 — —

Total ¥520,548 ¥342,094

Current liabilities ¥219,805 ¥ 52,851

Non-current liabilities 300,743 289,243

Total ¥520,548 ¥342,094

(Note 1) The average interest rate is calculated using the interest rate and outstanding balance as of March 31, 2013.

Derivative liabilities are classified as financial liabilities measured at fair value through profit or loss excluding those which hedge

accounting is applied to, and bonds and borrowings are classified as financial liabilities measured at amortized cost.

There are no financial covenants that have a significant impact on the Group on bonds and borrowings.

(Note 2) The summary of the issuing conditions of the bonds is as follows:

Millions of yen %

Company Name of bond Date of issuance

2012 2013Interest

rate Collateral Date of maturity(As of March 31)

Japan Tobacco Inc.

4th Domestic straight bond

July 24, 2007 ¥ 59,992(59,992)

¥ — 1.68 Yes July 24, 2012

Japan Tobacco Inc.

5th Domestic straight bond June 3, 2009 99,913 99,953 1.13 Yes June 3, 2014

Japan Tobacco Inc.

6th Domestic straight bond December 9, 2010 40,000 40,000 0.53 Yes December 9, 2015

Japan Tobacco Inc.


Japan Tobacco Inc.


JTI (UK) Finance Plc

Straight bond in GBP

February 6, 2003 29,919(29,919)

[GBP 250 mil.]

— 5.75 Non February 6, 2013

JTI (UK) Finance Plc

Straight bond in EUR

October 2, 2006 50,359[EUR 500 mil.]

57,283[EUR 500 mil.]

4.50 Non April 2, 2014

Other bonds 350(150)

—(—)

Total ¥320,534(90,061)

¥237,236(—)

(Note 1) Figure in parentheses ( ) represents the amount of the current portion of the bond.

(Note 2) Figure in parentheses [ ] represents the amount of the foreign currency-denominated bond.


(2) Assets Pledged as Collateral for LiabilitiesA. Pursuant to the provisions of Article 6 of Japan Tobacco Inc. Act, the Company’s properties are pledged as general collateral for bonds

issued by the Company. Bondholders are entitled to claim satisfaction in preference to unsecured creditors of the Company properties

(with the exception of national and local taxes and certain other statutory obligations).

B. Assets pledged as collateral by some subsidiaries and their corresponding debts as of each fiscal year end are as follows:

Assets Pledged as Collateral

Millions of yen

(As of March 31) 2012 2013

Land, buildings, and structures ¥ 9,231 ¥6,149

Machinery and vehicles 571 —

Other 998 24

Total ¥10,800 ¥6,173

Corresponding Debts

Millions of yen

(As of March 31) 2012 2013

Short-term borrowings ¥ 130 ¥ 20

Current portion of long-term borrowings 901 275

Long-term borrowings 1,311 1,072

Other 350 —

Total ¥2,692 ¥1,367

22. provisions

The breakdown and schedule of “Provisions” for each fiscal year are as follows:


Millions of yen

Asset retirement provisions

Restructuring provisions

Provisions for sales rebates Other provisions Total

As of April 1, 2011 ¥1,357 ¥ 1,078 ¥ 3,458 ¥2,802 ¥ 8,696

Provisions 288 4,217 3,938 2,565 11,008

Interest cost associated with passage of time 17 — — — 17

Provisions used (2) (4,406) (3,384) (965) (8,757)

Provisions reversed — (205) (74) (238) (518)

Exchange differences on translation of foreign operations — (67) — (245) (312)

As of March 31, 2012 ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135

Current liabilities ¥ 2 ¥ 612 ¥ 3,938 ¥1,135 ¥ 5,686

Non-current liabilities 1,659 6 — 2,784 4,448

Total ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135

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Millions of yen

Asset retirement provisions

Restructuring provisions

Provisions for sales rebates Other provisions Total

As of April 1, 2012 ¥1,660 ¥ 618 ¥ 3,938 ¥3,919 ¥10,135

Provisions 114 3,951 4,073 292 8,431

Interest cost associated with passage of time 31 — — — 31

Provisions used (49) (3,945) (3,811) (255) (8,061)

Provisions reversed (62) (226) (126) (583) (997)

Exchange differences on translation of foreign operations — 53 — 451 503

As of March 31, 2013 ¥1,695 ¥ 450 ¥ 4,073 ¥3,824 ¥10,043

Current liabilities ¥ 3 ¥ 446 ¥ 4,073 ¥ 734 ¥ 5,256

Non-current liabilities 1,692 5 — 3,090 4,786

Total ¥1,695 ¥ 450 ¥ 4,073 ¥3,824 ¥10,043

A. Asset Retirement Provisions

In order to settle the obligation of restoring and of removing haz-

ardous substances from plant facilities and premises that the

Group uses, the probable amount to be paid in the future is recog-

nized based on past performances. These expenses are expected

to be paid after one year or more; however, they may be affected

by future business plans.

B. Restructuring Provisions

These provisions are mainly related to business integration and

measures for the rationalization of international tobacco business.

The timing of the payment may be affected by future business

plans.

C. Provisions for Sales Rebates

These provisions are for contracts which reward the customers

with discounts when the sales volume or sales amount in a given

period exceeds specified volume or amount. They are expected to

be paid within one year.

23. other Liabilities

The breakdown of “Other current liabilities” and “Other non-current liabilities” as of each fiscal year end is as follows:

Millions of yen

(As of March 31) 2012 2013

Tobacco excise tax payables (Note) ¥240,532 ¥285,765

Tobacco special excise tax payables (Note) 15,052 14,473

Tobacco local excise tax payables (Note) 191,377 182,375

Consumption tax payables 83,182 85,388

Bonus to employees 39,739 45,461

Employee’s unused paid vacations liabilities 18,560 19,815

Other 94,509 136,255

Total ¥682,952 ¥769,531

Current liabilities ¥590,717 ¥656,305

Non-current liabilities 92,235 113,226

Total ¥682,952 ¥769,531

(Note) Tobacco excise tax payables, tobacco special excise tax payables and tobacco local excise tax payables as of March 31, 2012 and 2013 include those unpaid due to bank

holidays at each fiscal year end.


24. Employee benefits

(1) Employee Retirement BenefitsThe Group sponsors funded/unfunded defined benefit plans and

defined contribution plans as employee retirement benefit plans.

The benefits on defined benefit plans are provided based on con-

ditions, such as points that employees acquired in compensation

for each year of service, the payment rate, years of service,

average salary in their final year of service before retirement, and

others.

Special termination benefits may be provided to employees on

their retirement before the usual retirement date under certain

circumstances.

A. Schedule of Defined Benefit Obligations

The schedule of the defined benefit obligations is as follows:

Millions of yen

(Years ended March 31) Japan Overseas Total

As of April 1, 2011 ¥236,471 ¥278,108 ¥514,579

Current service cost 11,455 4,793 16,249

Interest cost 3,878 14,033 17,911

Contributions by plan participants — 1,000 1,000

Actuarial gains and losses 6,445 4,947 11,392

Benefits paid (20,467) (14,058) (34,525)

Past service cost 51 199 250

Special termination benefits — 1,991 1,991

Closure of the plans (curtailment or settlement) — (52) (52)

Exchange differences on transition of foreign operations — (16,355) (16,355)

Other 57 313 370

As of March 31, 2012 237,890 274,918 512,808

Current service cost 12,152 5,151 17,304

Interest cost 3,201 12,923 16,123

Contributions by plan participants — 875 875


Benefits paid (18,538) (15,906) (34,443)

Past service cost (67) (456) (523)

Special termination benefits — 799 799

Closure of the plans (curtailment or settlement) — (49) (49)

Exchange differences on transition of foreign operations — 44,462 44,462

Other 49 204 252

As of March 31, 2013 ¥258,498 ¥365,299 ¥623,797

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B. Schedule of Plan Assets

The schedule of the plan assets is as follows:

Millions of yen

(Years ended March 31) Japan Overseas Total

As of April 1, 2011 ¥96,440 ¥210,726 ¥307,166

Expected return on plan assets 2,366 11,193 13,559

Actuarial gains and losses (1,522) 1,119 (404)

Contributions by the employer 3,424 8,299 11,723

Contributions by plan participants — 1,000 1,000

Benefits paid (8,539) (10,653) (19,193)

Exchange differences on translation of foreign operations — (11,789) (11,789)

Other — 20 20

As of March 31, 2012 92,168 209,914 302,082

Expected return on plan assets 2,205 8,915 11,120


Contributions by the employer 3,115 9,204 12,319

Contributions by plan participants — 875 875

Benefits paid (7,996) (10,845) (18,842)

Exchange differences on translation of foreign operations — 34,897 34,897

Other 56 1,857 1,914

As of March 31, 2013 ¥107,590 ¥264,835 ¥372,425

The Group plans to pay contributions of ¥12,930 million in the year ending March 31, 2014.

C. Reconciliation of Defined Benefit Obligations and Plan Assets

The reconciliation of the defined benefit obligations and plan assets to the liabilities and assets on retirement benefits recognized in the

consolidated statement of financial position as of each fiscal year end is as follows:


Millions of yen

2012

Japan Overseas Total

Funded defined benefit obligations ¥107,451 ¥ 208,727 ¥ 316,178

Plan assets (92,168) (209,914) (302,082)

Subtotal 15,283 (1,187) 14,096

Unfunded defined benefit obligations 130,439 66,191 196,630

Unrecognized past service cost — 129 129

Net amount of liabilities and assets recognized in consolidated statement of financial position ¥145,722 ¥ 65,133 ¥ 210,855

Retirement benefit liabilities ¥145,722 ¥ 79,504 ¥ 225,226

Retirement benefit assets — (14,371) (14,371)

Net amount of liabilities and assets recognized in consolidated statement of financial position ¥145,722 ¥ 65,133 ¥ 210,855



Millions of yen

2013


Funded defined benefit obligations ¥ 120,505 ¥ 275,539 ¥ 396,044

Plan assets (107,590) (264,835) (372,425)

Subtotal 12,915 10,704 23,619

Unfunded defined benefit obligations 137,993 89,760 227,753

Unrecognized past service cost — 84 84

Net amount of liabilities and assets recognized in consolidated statement of financial position ¥ 150,908 ¥ 100,548 ¥ 251,456

Retirement benefit liabilities ¥ 150,912 ¥ 115,369 ¥ 266,281

Retirement benefit assets (4) (14,821) (14,825)

Net amount of liabilities and assets recognized in consolidated statement of financial position ¥ 150,908 ¥ 100,548 ¥ 251,456

D. Major Breakdown of Plan Assets

The breakdown of plan assets by major category as of each fiscal year end is as follows:

%


(As of March 31) 2012 2013 2012 2013 2012 2013

Equities 33.4 16.4 38.9 41.1 37.2 34.0

Bonds 21.7 21.2 50.3 46.2 41.6 39.0

Real estate — — 1.6 1.6 1.1 1.1

General account of life insurance companies 44.3 44.6 — — 13.5 12.9

Other 0.6 17.7 9.2 11.1 6.6 13.0

Total 100.0 100.0 100.0 100.0 100.0 100.0

(Note) The specified assumed interest rate and principal for the general account of life insurance companies is guaranteed by the life insurance companies.

The investment strategy for the Group’s major plans is as

follows:

(Japan)

The Company’s pension fund is managed in accordance with the

internal policy for securing stable profits in the middle- and long-

term in order to ensure the redemption of the plan liability.

Concretely, setting target rate of return and composition ratio of

plan assets by asset category within the risk tolerance that is

annually assessed, the Company invests plan assets consistently

with the composition ratio. When reviewing the composition ratio,

the Company considers introducing an asset investment which

has high correlation with the liability.

In the case where an unexpected situation occurs in the

market environment, it is temporarily allowed to make an adjust-

ment on weight of risk assets complying with the policy.

(Overseas)

The investment strategy for the foreign subsidiaries’ funded pen-

sion plans is decided locally by the trustee of the plan or manage-

ment according to local legislation. The Company’s objective for

the foreign subsidiaries’ funded pension plans is to achieve a

return on assets in excess of the movement in the value of the

defined benefit obligation, while managing risk relative to the

obligation.

Plan assets have significant allocations to liability matching

bonds and the remaining assets are invested to target long term

growth, predominantly in equities.

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E. Matters Related for Actuarial Assumptions

The major items of actuarial assumptions as of each fiscal year end are as follows:

%

2012 2013

(As of March 31) Japan Overseas Japan Overseas

Discount rate 1.4 2.5–5.5 1.0 1.5–4.4

Expected long-term return on plan assets 2.5 2.8–4.4 — —

Inflation rate — 1.5–3.1 — 1.5–2.9

(Note) The valuation of defined benefit obligations reflects a judgment on uncertain future events. The sensitivities of defined benefit obligations due to changes in major assumptions

as of each fiscal year end are as follows. Each of these sensitivities assumes that other variables remain fixed; however, in fact, they do not always change independently.

Negative figures show a decrease in pension plan obligations, while positive figures show an increase.

Millions of yen

2012 2013

(As of March 31) Change in assumptions Japan Overseas Japan Overseas

Discount rate Increase by 0.5% ¥ (9,438) ¥(17,195) ¥(10,223) ¥ (24,121)

Decrease by 0.5% 10,153 19,130 11,022 27,001

Inflation rate Increase by 0.5% — 12,547 — 18,082

Decrease by 0.5% — (11,340) — (17,726)

F. Experience Adjustments Based on Results of Defined Benefit Obligations and Plan Assets

Experience adjustments based on results of defined benefit obligations and plan assets as of each fiscal year end are as follows:

As of March 31, 2011 Millions of yen

2011


Defined benefit obligations ¥ 236,471 ¥ 278,108 ¥ 514,579

Plan assets (96,440) (210,726) (307,166)

Undefined benefit obligations ¥ 140,031 ¥ 67,381 ¥ 207,412

Adjustment based on actual results (Defined benefit obligations) ¥ 5,264 ¥ (1,274) ¥ 3,990

Adjustment based on actual results (Plan assets) 524 (8,183) (7,659)


2012


Defined benefit obligations ¥237,890 ¥ 274,918 ¥ 512,808

Plan assets (92,168) (209,914) (302,082)

Undefined benefit obligations ¥145,722 ¥ 65,004 ¥ 210,726

Adjustment based on actual results (Defined benefit obligations) ¥ (235) ¥ (7,509) ¥ (7,744)

Adjustment based on actual results (Plan assets) 1,522 (1,119) 404


2013


Defined benefit obligations ¥ 258,498 ¥ 365,299 ¥ 623,797

Plan assets (107,590) (264,835) (372,425)

Undefined benefit obligations ¥ 150,908 ¥ 100,464 ¥ 251,372

Adjustment based on actual results (Defined benefit obligations) ¥ 13,902 ¥ 5,431 ¥ 19,333

Adjustment based on actual results (Plan assets) (18,042) (10,019) (28,060)

(Note) The experience adjustments are the effects of differences between the previous actuarial assumptions and what has actually occurred of the actuarial gains and losses for each

fiscal year.


G. Profit and Loss Related to Retirement Benefits

The profit and loss related to retirement benefits for each fiscal year are as follows:

For the year ended March 31, 2012 Millions of yen

2012


Current service cost ¥11,455 ¥ 4,793 ¥ 16,249

Interest cost (Note 1) 3,878 14,033 17,911

Expected return on plan assets (Note 1) (2,366) (11,193) (13,559)

Past service cost recognized in the year 51 179 231

Special termination benefits — 1,991 1,991

Losses or gains on closure of the plans (curtailment or settlement) — (52) (52)

Total ¥13,018 ¥ 9,752 ¥ 22,770

Actual return on plan assets ¥ (843) ¥(12,312) ¥(13,155)

For the year ended March 31, 2013 Millions of yen

2013


Current service cost ¥ 12,152 ¥ 5,151 ¥ 17,304

Interest cost (Note 1) 3,201 12,923 16,123

Expected return on plan assets (Note 1) (2,205) (8,915) (11,120)

Past service cost recognized in the year (67) (515) (581)

Special termination benefits — 799 799

Losses or gains on closure of the plans (curtailment or settlement) — (49) (49)

Total ¥ 13,081 ¥ 9,394 ¥ 22,475

Actual return on plan assets ¥(20,247) ¥(18,937) ¥(39,184)

(Note 1) The net amount of interest cost and the expected return on plan assets are included in “Financial costs.” Other expenses are included in “Cost of sales” and “Selling, general

and administrative expenses.”

(Note 2) The cost of the required contributions to the defined contribution pension plans is ¥5,506 million for the year ended March 31, 2012 and ¥4,959 million for the year ended

March 31, 2013. This cost is not included in the above.

(2) Obligation of Mutual Pension BenefitsThe Company is obligated to bear pension costs for a mutual assistance association incurred with respect to the costs in or before June

1956 (prior to enforcement of the Act on the Mutual Aid Association of Public Corporation Employees). Such obligations are recognized

as liabilities at their present value using the actuarial valuation method and included in retirement benefit liabilities.

A. Schedule of Mutual Pension Benefits Obligations

The schedule of mutual pension benefits obligations is as follows:

Millions of yen


Balance at the beginning of the year ¥97,577 ¥89,794

Interest cost (Note 1) 1,171 718

Actuarial gains and losses 583 (529)

Benefits paid (9,536) (8,891)

Past service cost (Note 2) — (4,279)

Balance at the end of the year ¥89,794 ¥76,814

(Note 1) The interest cost is included and presented in “Financial costs.”

(Note 2) “The Act for Partial Revision of the Employees’ Pension Insurance Act, etc. for unifying employees’ pension insurance systems,” (Law No. 63 in 2012), was promulgated on

August 22, 2012 and the liabilities included in retirement benefit liabilities are expected to decrease in the future, due to the fact that the pension costs for the mutual assis-

tance association that the Company is obligated to bear are expected to decrease. As a result, past service cost relating to this revision is recognized in the year ended March

31, 2013.

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B. Matters Related to Actuarial Assumptions

The actuarial assumptions for each fiscal year are as follows:

%

(As of March 31) 2012 2013

Discount rate 0.8 0.6

(Note) The valuation of obligation of mutual pension benefits reflects a judgment on future uncertain events. The sensitivities of mutual pension benefits obligations due to changes in

major assumptions as of each fiscal year end are as follows. Negative figures show a decrease in obligation of mutual pension benefits, while positive figures show an increase.

Millions of yen

2012 2013

(As of March 31) Change in assumptions Effect of the change Effect of the change

Discount rate Increase by 0.5% ¥(2,863) ¥(2,372)

Decrease by 0.5% 2,963 2,501

(3) Schedule of Actuarial Gains and Losses included in “Other comprehensive income” in the consolidated statement of comprehensive income

Actuarial gains and losses included in “Other comprehensive income” in the consolidated statement of comprehensive income for each

fiscal year are as follows:

Millions of yen


Balance at the beginning of the year (cumulative total) ¥(34,461) ¥(45,131)

Accrued during the year (10,669) (28,200)

Balance at the end of the year (cumulative total) ¥(45,131) ¥(73,331)

(4) Other Employee Benefits Expense The employee benefits expense other than employees’ retirement benefits and mutual pension benefits that are included in the consoli-

dated statement of income for each fiscal year are as follows:

Millions of yen


Remuneration and salary ¥213,412 ¥215,369

Bonus to employees 62,590 69,161

Legal welfare expenses 37,075 39,982

Welfare expenses 22,194 22,662

Termination benefits 3,270 2,737

25. Equity and other Equity Items

(1) Share Capital and Capital SurplusA. Authorized Shares

The number of authorized shares as of March 31, 2012 and 2013 is 40,000 and 8,000,000 thousand ordinary shares, respectively.

B. Fully Paid Issued Shares

The schedule of the number of issued shares and share capital is as follows:

Thousands of shares Millions of yen

(Years ended March 31)Number of ordinary

issued shares Share capital Capital surplus

As of April 1, 2011 10,000 ¥ 100,000 ¥ 736,410

Increase (Decrease) — — —

As of March 31, 2012 10,000 100,000 736,410

Increase (Decrease) (Note 2) 1,990,000 — 1

As of March 31, 2013 2,000,000 ¥100,000 ¥736,411

(Note 1) The shares issued by the Company are non-par value ordinary shares that have no restriction on any content of rights.

(Note 2) The number of ordinary shares issued increased by 1,990,000 thousand shares for the year ended March 31, 2013 due to the 200-for-one share split conducted, with basis

date of June 30, 2012 and effective date of July 1, 2012.


(2) Treasury SharesThe schedule of the number of treasury shares and its amount as of each fiscal year end is as follows:

Thousands of shares Millions of yen

(Years ended March 31) Number of shares Amount

As of April 1, 2011 479 ¥ 94,574

Increase (Decrease) — —

As of March 31, 2012 479 94,574

Increase (Decrease) (Notes 2, 3) 182,032 249,999

As of March 31, 2013 182,510 ¥344,573

(Note 1) The Company adopts share option plans and utilizes treasury shares for delivery of shares due to its exercise. Contract conditions and amount are described in “34. Share-

Based Payments.”

(Note 2) The number of treasury shares purchased based on the resolution made by the Board of Directors was 86,806 thousand shares and the total purchase cost was ¥250,000

million for the year ended March 31, 2013 including 80,071 thousand shares that were acquired from the Minister of Finance in Japan for ¥230,606 million. The number of

shares delivered upon exercise of share option is 1 thousand shares for the year ended March 31, 2013.

(Note 3) The number of treasury shares increased by 95,227 thousand shares for the year ended March 31, 2013 due to the 200-for-one share split that was conducted, with basis date

of June 30, 2012 and effective date of July 1, 2012.

(3) Other Components of EquityA. Subscription rights to shares

The Company adopts share option plans and issues subscription

rights to shares based on the Companies Act. Contract conditions

and amount, are described in “34. Share-based Payments.”

B. Exchange differences on translation of foreign operations

This is a foreign currency translation difference that occurred

when consolidating financial statements of foreign subsidiaries

prepared in foreign currencies.

C. Net gain (loss) on derivatives designated as cash flow

hedges

The Company uses derivatives for hedging to avoid the risk of

fluctuation in future cash flow. This is the effective portion of

changes in the fair value of derivative transactions designated as

cash flow hedges.

D. Net gain (loss) on revaluation of financial assets measured

at fair value through other comprehensive income

This is the valuation difference in the fair value of financial assets

measured at fair value through other comprehensive income.

E. Actuarial gains (losses) on defined benefit retirement plans

Actuarial gains (losses) are the effects of differences between the

actuarial assumptions at the beginning of the year and what has

actually occurred, and the effects of changes in actuarial assump-

tions. Actuarial gains (losses) are fully recognized when occurred

as other comprehensive income and are transferred immediately

from other components of equity to retained earnings.

26. Dividends

Dividends paid for each fiscal year are as follows:


2012

Millions of yen Yen

Class of shares Total dividends Dividends per share Basis date Effective date

(Resolution)

Annual Shareholders Meeting (June 24, 2011) Ordinary shares ¥38,086 ¥4,000 March 31, 2011 June 27, 2011

Board of Directors (October 31, 2011) Ordinary shares 38,086 4,000 September 30, 2011 December 1, 2011


2013

Millions of yen Yen


(Resolution)


Board of Directors (October 30, 2012) Ordinary shares 57,129 30 September 30, 2012 November 30, 2012

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Dividends per share for which the basis date falls before June

30, 2012 do not reflect the effect of the 200-for-one share split

conducted, with basis date of June 30, 2012 and effective date of

July 1, 2012.

Assuming the share split coming into effect at the beginning of

the year ended March 31, 2012 (April 1, 2011), dividends per

share resolved at the Annual Shareholders’ Meeting on June 24,

2011, the Board of Directors’ Meeting on October 31, 2011, and

Annual Shareholders’ Meeting on June 22, 2012, would have

been ¥20, ¥20 and ¥30, respectively.

Dividends, for which effective date falls in the following fiscal year, are as follows:


2012

Millions of yen Yen


(Resolution)



Millions of yen Yen


(Resolution)

Annual Shareholders Meeting (June 21, 2013) Ordinary shares ¥69,065 ¥38 March 31, 2013 June 24, 2013

27. Revenue

The reconciliation from “Gross turnover” to “Revenue” for each fiscal year is as follows:

Millions of yen


Gross turnover ¥ 6,610,757 ¥ 6,673,222

Tobacco excise taxes and agency transaction amount (4,576,932) (4,553,027)

Revenue ¥ 2,033,825 ¥ 2,120,196

The tobacco excise taxes and other transactions in which the

Group is involved as an agency are excluded from revenue. The

inflow of economic benefits after deducting the tobacco excise

taxes and other transactions is presented as “Revenue” in the

consolidated statement of income.

Gross turnover is an item that the Group discloses voluntarily

and is not “Revenue” as defined by IFRS.

28. other operating Income

The breakdown of “Other operating income” for each fiscal year is as follows:

Millions of yen


Gains on sale of property, plant and equipment, intangible assets and investment properties (Note 1, 2) ¥30,134 ¥35,195

Other (Note 2) 18,378 6,970

Total ¥48,512 ¥42,165(Note 1) Mainly from sales of old factory site, warehouse and company housing.

(Note 2) The amount of restructuring income included in each account for each fiscal year is as follows:

Millions of yen


Gains on sale of property, plant and equipment, intangible assets and investment properties ¥29,368 ¥34,229

Other 564 5

Total ¥29,932 ¥34,234


29. Selling, General and administrative Expenses

The breakdown of “Selling, general and administrative expenses” for each fiscal year is as follows:

Millions of yen


Advertising expenses ¥ 21,530 ¥ 20,566

Promotion expenses 128,007 137,480

Shipping, warehousing expenses 27,920 27,092

Commission 40,963 41,157

Employee benefits expenses (Note 2) 235,060 241,420

Research and development expenses (Note 1) 51,461 56,860


Impairment losses on other than financial assets (Note 2) 7,013 3,213

Losses on sale and disposal of property, plant and equipment, intangible assets, and investment property (Note 2) 11,454 9,265

Cooperation fee for terminating leaf tobacco farming 12,469 4

Other (Note 2) 138,743 137,235

Total ¥733,169 ¥733,385(Note 1) All research and development expenses are included in “Selling, general and administrative expenses.”

(Note 2) The amount of restructuring costs included in each account is the following.

Millions of yen


Employee benefits expenses ¥ 4,651 ¥3,835

Impairment losses on other than financial assets 5,837 3,076

Losses on sale and disposal of property, plant and equipment, intangible assets, and investment property 3,342 1,258

Other 222 1,197

Total ¥14,052 ¥9,366

30. Financial Income and Financial Costs

The breakdown of “Financial income” and “Financial costs” for each fiscal year is as follows:

Financial Income


Millions of yen

2012 2013

Dividend income

Financial assets measured at fair value through other comprehensive income ¥1,280 ¥1,365

Interest income

Financial assets measured at amortized cost

Cash and deposits, and bonds 2,366 3,772

Other 1,958 356

Total ¥5,603 ¥5,493

Financial Costs


Millions of yen

2012 2013

Interest expenses

Financial liabilities measured at amortized cost

Bonds and borrowings (Note 2) ¥13,962 ¥ 9,688

Other 415 446

Foreign exchange losses (Note 1) 2,738 11,285

Employee benefits expenses (Note 3) 5,523 5,721

Other 791 1,153

Total ¥23,429 ¥28,292(Note 1) Valuation gain (loss) of currency derivatives is included in the foreign exchange loss.

(Note 2) Valuation gain (loss) of interest rate derivatives is included in interest expenses.

(Note 3) The employee benefits expenses are the net amount of interest cost and the expected return on plan assets related to employee benefits.

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31. other Comprehensive Income

Amount arising during year, reclassification adjustments to profit or loss and tax effects for each component of “Other comprehensive

income” for each fiscal year are as follows:


Millions of yen

2012

Amount arisingReclassification

adjustmentsBefore tax

effects Tax effects Net of tax effects

Exchange differences on translation of foreign operations ¥(130,331) ¥ — ¥(130,331) ¥ — ¥(130,331)

Net gain (loss) on derivatives designated as cash flow hedges (556) 317 (239) 73 (166)

Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income 6,248 — 6,248 (1,498) 4,750

Actual gains (losses) on defined benefit retirement plans (12,379) — (12,379) 1,709 (10,669)

Total ¥(137,017) ¥317 ¥(136,700) ¥ 284 ¥(136,416)

For the year ended March 31, 2013Millions of yen

2013

Amount arisingReclassification

adjustmentsBefore tax

effects Tax effects Net of tax effects

Exchange differences on translation of foreign operations ¥216,140 ¥ (22) ¥216,118 ¥ — ¥216,118

Net gain (loss) on derivatives designated as cash flow hedges 4,102 (3,914) 188 (66) 121

Net gain (loss) on revaluation of financial assets measured at fair value through other comprehensive income 7,344 — 7,344 (2,545) 4,799

Actual gains (losses) on defined benefit retirement plans (37,600) — (37,600) 9,400 (28,200)

Total ¥189,986 ¥(3,936) ¥186,050 ¥ 6,789 ¥192,838


32. Earnings per Share

(1) Basis of Calculating Basic Earnings per ShareA. Profit Attributable to Ordinary Shareholders of the Parent Company

Millions of yen


Profit attributable to owners of the parent company ¥320,883 ¥343,612

Profit not attributable to ordinary shareholders of the parent company — —

Profit used for calculation of basic earnings per share ¥320,883 ¥343,612

B. Weighted-Average Number of Ordinary Shares Outstanding During the Year

Thousands of shares


Weighted-average number of shares during the year 1,904,295 1,897,636

(2) Basis of Calculating Diluted Earnings per ShareA. Profit Attributable to Diluted Ordinary Shareholders

Millions of yen


Profit used for calculation of basic earnings per share ¥320,883 ¥343,612

Adjustment — —

Profit used for calculation of diluted earnings per share ¥320,883 ¥343,612

B. Weighted-Average Number of Diluted Ordinary Shares Outstanding During the Year

Thousands of shares


Weighted-average number of ordinary shares during the year 1,904,295 1,897,636

Increased number of ordinary shares under subscription rights to shares 745 918

Weighted-average number of diluted ordinary shares during the year 1,905,040 1,898,553

(3) Adjusted Diluted Earnings per Share Millions of yen


Profit used for calculation of adjusted diluted earnings per share ¥320,883 ¥343,612

Adjustment items (income) (29,932) (34,234)

Adjustment items (costs) 29,039 7,536

Adjustments on income taxes and non-controlling interests 2,025 12,772

Adjustments on income taxes related to losses on valuation of investments in subsidiaries (31,207) —

Adjusted profit for the year ¥290,808 ¥329,687

Adjusted diluted earnings per share (yen) ¥ 152.65 ¥ 173.65

The weighted-average number of ordinary shares and the weighted-average number of diluted ordinary shares during the year reflect

the effect of the share split conducted at a ratio of 200 shares to one share with June 30, 2012 as the basis date and July 1, 2012 as the

effective date.

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33. non-cash Transactions

Significant Non-cash Transactions

The amount of assets acquired under finance leases was ¥2,977 million for the year ended March 31, 2012 and ¥4,756 million for the

year ended March 31, 2013, respectively.

34. Share-based payments

The Company adopts share option plans. Share options are

granted by the resolution of the Board of Directors based on the

approval at the Annual Shareholders Meeting.

The outline of the share option plan is as follows:

(1) Share Option Contract Conditions Positions of persons granted : Directors and Executive

Officers

Settlement : Issuance of share

Effective period of granted share option : 30 years after the date

of grant

Vesting conditions : None

Conditions related to the exercise of share options are as

follows:

(a) The subscription rights to shares become exercisable when a

holder of a subscription right to shares no longer holds a position

as a director, an audit & supervisory board member or an execu-

tive officer. In the subscription rights to shares allocation contract

with holders of such rights, it is provided for that the rights

become exercisable from the date following the date on which

one year has elapsed after leaving their positions (however, the

rights become exercisable even within one year after leaving their

positions only in the case where the Board of Directors find it to

be unavoidable).

(b) In the case where any holders of subscription rights to shares

waive such rights, they cannot exercise them.

(2) Changes in the Number of Share OptionsShares

2012 2013

(Years ended March 31) DirectorsExecutive

Officers Total DirectorsExecutive

Officers Total

Balance at the beginning of the year 1,524 1,557 3,081 1,875 2,244 4,119

Effect of share splits — — — 373,125 446,556 819,681

Granted 514 524 1,038 65,600 80,200 145,800

Exercised — — — — (600) (600)

Transfer (163) 163 — (116,200) 116,200 —

Balance at the end of the year 1,875 2,244 4,119 324,400 644,600 969,000

Exercisable balance at the end of the year — 430 430 — 138,200 138,200

(Note 1) The number of share options is presented as the number of underlying shares.

(Note 2) All share options are granted with an exercise price of ¥1 per share.

(Note 3) Share options were granted to 8 directors and 15 executive officers for the year ended March 31, 2012, and 7 directors and 17 executive officers for the year ended March 31, 2013.

“Transfer” included in the “Changes in the Number of Share Options” represents the number of share options for persons granted whose management position changed

during the year.

(Note 4) The weighted-average fair value per share of share options granted during the year was ¥277,947 for the year ended March 31, 2012 and ¥1,600 for the year ended March

31, 2013.

(Note 5) The weighted-average share price of share options at the time of exercise during the period was ¥2,924 for the year ended March 31, 2013. No share options were exercised

for the year ended March 31, 2012.

(Note 6) The weighted-average remaining contract year of unexercised share options at the end of the year was 27.8 years for the year ended March 31, 2012 and 27.3 years for the

year ended March 31, 2013.

(Note 7) The Company conducted the 200-for-one share split, with basis date of June 30, 2012 and effective date of July 1, 2012.


(3) Method of Measuring Fair Value of Share Options Granted During the YearA. Valuation Model

Black-Scholes Model

B. Main Assumptions and Estimation


Share price ¥367,000 ¥2,238

Volatility of share price (Note 1) 35.5% 36.0%

Estimated remaining period (Note 2) 15 years 15 years

Estimated dividends (Note 3) ¥6,800/share ¥50/share

Risk free interest rate (Note 4) 1.48% 1.30%

(Note 1) Calculated based on daily share prices quoted for the past 15 years.

(Note 2) With difficulty in reasonable estimation due to insufficient data, the remaining period is estimated based on the assumption that share option rights would be exercised at a

midpoint of exercise period.

(Note 3) Based on the latest dividends paid.

(Note 4) The yield of government bonds for a period of the expected remaining period.

(4) Share-Based Payments ExpensesThe cost for share options included in “Selling, general and administrative expenses” in the consolidated statement of income is ¥265

million for the year ended March 31, 2012 and ¥247 million for the year ended March 31, 2013.

35. Financial Instruments

(1) Capital ManagementThe Group’s management principle is pursuit of the “4S” model:

balancing the interests of consumers, shareholders, employees

and wider society, and fulfilling our responsibilities towards them,

aiming to exceed their expectations.

The Group believes that sustainable profit growth in the mid- to

long-term based on this principle will increase the Group’s value in

the mid- to long-term, and is consequently in the best interest of

all stakeholders, including our shareholders.

In order to achieve sustainable growth, the Group under-

stands that financing capacities sufficient enough to make agile

business investments when there are opportunities, such as the

acquisition of external resources for business growth are

required. For that reason, the Group aims to maintain a well-

balanced capital structure by ensuring sound and flexible finan-

cial conditions for future business investment as well as an

appropriate return on equity.

The Group manages net interest-bearing debt, where cash and cash equivalents are deducted from interest-bearing debt, and capital

(the part attributable to the owners of the parent company). The amounts as of each year end are as follows:

Millions of yen

(As of March 31) 2012 2013

Interest-bearing debt ¥ 502,368 ¥ 327,242

Cash and cash equivalents (404,740) (142,713)

Net interest-bearing debt 97,628 184,530

Capital (equity attributable to owners of the parent company) 1,634,050 1,806,125

There are specific rules for shares of the Company under the

Japan Tobacco Inc. Act as follows:

The Japanese government shall hold more than one-third of all

of the shares issued by the Company (excluding the type of

shares, for which it is stipulated that voting rights may not be

exercised on any matters that can be resolved by Annual

Shareholders Meeting)(Article 2 (1)).

In cases where the Company intends to solicit persons to

subscribe for shares to be issued or subscription rights to shares

or where the Company intends to deliver shares (excluding trea-

sury shares), subscription rights to shares (excluding subscription

right to own shares) or bonds with subscription right to shares

(excluding bonds with subscription rights to shares) when

exchanging with shares, the Company shall obtain the approval of

the Minister of Finance (Article 2 (2)).

Disposal of shares owned by the Japanese government shall

be within the limits on the number of shares decided by the Diet

in the relevant annual budget (Article 3).

The Group monitors financial indicators in order to maintain a

well-balanced capital structure by ensuring sound and flexible

financial conditions for future investment as well as an appropriate

return on equity. We monitor credit ratings for financial soundness

and flexibility, and ROE (return on equity) for profitability, while

focusing on changes in the domestic and overseas environment.

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(2) Financial Risk ManagementThe Group is exposed to financial risks (credit risks, liquidity risks,

foreign exchange risks, interest rate risks, and market price fluc-

tuation risks) in the process of its management activities; and it

manages risks based on a specific policy in order to avoid or

reduce said risks. The results of risk management are quarterly

reported by the treasury division to the Executive Committee of

the Company.

The Group policy limits derivatives to transactions for the pur-

pose for mitigating risks from transactions based on actual

demand. Therefore, we do not transact derivatives for speculation

purposes or trading purposes.

(3) Credit RiskReceivables, such as note and account receivables, acquired from

the operating activities of the Group are exposed to customer

credit risk.

The Group holds mainly debt securities for surplus investment

and equity securities of customers and suppliers to strengthen

relationships with them; those securities are exposed to the issu-

er’s credit risk. In addition, through derivative transactions that the

Group conducts in order to hedge foreign exchange fluctuation

risks and interest rate fluctuation risks, we are exposed to the

credit risk of the financial institutions which are counterparties to

these transactions.

In principle, the Group sets credit lines or transaction condi-

tions with respect to trade receivables for counterparties based on

the Credit Management Guidelines in order to control the credit

risk relating to counterparties. In addition, the receivable balances

of counterparties with high credit risk are monitored. The Treasury

Division of the Company regularly monitors the status of the

occurrence and collection of bad debts, and reports them to the

Executive Committee of the Company. There is no overconcen-

trated credit risk for a single customer.

With regard to the investment of cash surpluses and deriva-

tives, the Group invests in debt securities and other financial

instruments with a certain credit rating and transacts with finan-

cial institutions with a high credit rating in principle in order to

prevent credit risks from occurring and based on the Group

Financial Operation Basic Policy. In addition, the Treasury Division

of the Company regularly monitors the performances of these

transactions and reports the results to the Executive Committee of

the Company.

The maximum exposure pertaining to credit risks for financial

assets is the carrying amount after considering impairment in the

consolidated financial statements.

The analysis of the aging of financial assets that are past due but not impaired as of each fiscal year end date is as follows:

The financial assets include amounts considered recoverable by credit insurance and collateral.


Millions of yen

2012

Amount past due

Total Within 30 daysOver 30 days,

within 60 daysOver 60 days,

within 90 days Over 90 days

Trade and other receivables ¥2,635 ¥2,376 ¥60 ¥8 ¥191

Other financial assets 285 — — — 285

As of March 31, 2013Millions of yen

2013

Amount past due

Total Within 30 daysOver 30 days,

within 60 daysOver 60 days,

within 90 days Over 90 days

Trade and other receivables ¥6,709 ¥6,494 ¥120 ¥20 ¥ 76

Other financial assets 351 — — — 351

The Group reviews collectability of trade receivables depending on the credit conditions of counterparties and recognizes allowance for

doubtful accounts. The schedule of the allowance of doubtful accounts is as follows:

Millions of yen



Addition 514 1,444

Decrease (intended use) (8,795) (6,016)

Decrease (reversal) (2,120) (922)

Other (55) 309



(4) Liquidity Risk The Group raises funds by borrowings, commercial paper and

bonds; however, these liabilities are exposed to the liquidity risk

that we would not be able to repay liabilities on the due date due

to the deterioration of the financing environment.

In accordance with the Group Financial Operation Basic Policy,

the Group establishes a finance plan based on the annual

business plan and the Treasury Division of the Company regularly

monitors and collects information on the balance of liquidity-in-

hand and interest-bearing debt and reports it to the Executive

Committee of the Company. In addition, the Group keeps neces-

sary credit facilities to manage liquidity risk by having commit-

ment lines with several financial institutions.

The financial liability balance (including derivative financial instruments) by maturity as of each fiscal year end is as follows:


Millions of yen

2012

Carrying amount

Contractual cash flow

Due within one year

Due after one year through

two years

Due after two years

through three years

Due after three years

through four years

Due after four years

through five years

Due after five years

Non-derivative financial liabilities

Trade and other payables ¥298,663 ¥298,663 ¥298,663 ¥ — ¥ — ¥ — ¥ — ¥ —

Short-term borrowings 43,486 43,486 43,486 — — — — —

Current portion of long-term borrowings 78,219 78,219 78,219 — — — — —

Long-term borrowings 49,277 49,277 — 20,593 1,103 27,158 23 401

Current portion of bonds 90,061 90,109 90,109 — — — — —

Bonds 230,473 230,583 — 100 150,483 40,000 — 40,000

Subtotal 790,179 790,337 510,477 20,693 151,586 67,158 23 40,401

Derivative financial liabilities (Note)

Foreign exchange forward contract 1,630 1,630 1,630 — — — — —

Interest rate swap 152 152 48 38 37 28 — —

Cross currency swap 3,350 2,472 (47) (94) (200) 2,813 — —

Subtotal 5,133 4,254 1,632 (56) (163) 2,841 — —

Total ¥795,311 ¥794,591 ¥512,109 ¥20,637 ¥151,423 ¥69,998 ¥23 ¥40,401(Note) Figure in parentheses ( ) represents the amount of the cash receipt.


2013

Carrying amount

Contractual cash flow

Due within one year

Due after one year through

two years

Due after two years

through three years

Due after three years

through four years

Due after four years

through five years

Due after five years

Non-derivative financial liabilities

Trade and other payables ¥312,741 ¥312,741 ¥312,741 ¥ — ¥ — ¥ — ¥ — ¥ —

Short-term borrowings 23,847 23,847 23,847 — — — — —

Current portion of long-term borrowings 20,454 20,454 20,454 — — — — —

Long-term borrowings 33,163 33,163 — 1,217 31,145 107 109 584

Bonds 237,236 237,298 — 157,298 40,000 — 20,000 20,000

Subtotal 627,441 627,504 357,042 158,515 71,145 107 20,109 20,584

Derivative financial liabilities

Foreign exchange forward contract 3,614 3,614 3,614 — — — — —

Interest rate swap 202 200 83 66 50 — — —

Subtotal 3,816 3,814 3,698 66 50 — — —

Total ¥631,258 ¥631,317 ¥360,740 ¥158,582 ¥71,195 ¥107 ¥20,109 ¥20,584

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The total of commitment lines and withdrawal as of each fiscal year end are as follows:

Millions of yen

(As of March 31) 2012 2013

Total committed line of credit ¥513,525 ¥444,597

Withdrawing 76,933 —

Unused balance ¥436,592 ¥444,597

(5) Foreign Exchange RiskThe Group operates businesses globally and, therefore, is exposed

to the following risks due to foreign exchange fluctuation:

(i) The risk where the profit or loss and cash flow in each func-

tional currency of the Group is influenced by foreign exchange

fluctuation as a result of external transactions and intergroup

transactions, including the payment and receipt of dividends,

in currencies that are different from each functional currency

of the Group.

(ii) The risk that the equity of the Group is influenced by foreign

exchange fluctuation when equity denominated in each func-

tional currency of the Group is translated into Japanese yen

and consolidated.

(iii) The risk that the profit or loss of the Group is influenced by

foreign exchange fluctuation when profit or loss denominated

in each functional currency of the Group is translated into

Japanese yen and consolidated. The Group hedges against risk

(i) using derivatives or foreign currency-denominated interest-

bearing debts when future cash flow is projected or when

receivables and payables are fixed.

The Group hedges against risk (ii) using foreign currency-

denominated interest-bearing debts and part of these are desig-

nated as net investment hedges. The Group does not hedge

against risk (iii) in principle.

In order to mitigate risks mentioned above resulting from the

foreign exchange fluctuation, in accordance with the Group

Financial Operation Basic Policy, the Group establishes a foreign

currency hedge policy based on the current conditions and fore-

cast of the foreign exchange market, implement the aforemen-

tioned hedges under the supervision of the Financial Risk

Management Committee of the Company, and the Treasury

Division of the Company regularly reports the performances to the

Executive Committee of the Company.

The breakdown of currency derivatives is follows:

Derivative transactions to which hedge accounting is not applied

Millions of yen

2012 2013

(As of March 31) Contract amount Over one year Fair value Contract amount Over one year Fair value

Foreign exchange forward contract

Buying ¥ 87,143 ¥— ¥(1,227) ¥318,342 ¥— ¥ 2,298

Selling 35,091 — 350 157,921 — (2,585)

Total ¥122,235 ¥— ¥ (877) ¥476,263 ¥— ¥ (287)

Foreign currency-denominated bonds and borrowings are designated as hedging instruments for consolidated subsidiaries in order to

reduce fluctuation risk of foreign currency translation differences that are incurred by translating net investment in foreign operations into

the reporting currency.

Bonds and borrowings that are designated as hedging instruments are as follows:

Millions of yen

2012 2013

(As of March 31) Carrying amount Due Carrying amount Due

Bonds in EUR ¥50,359 2014 ¥50,995 2014

Borrowings in EUR 13,226 2012 — —

Borrowings in GBP 48,592 2012 — —

Foreign Exchange Sensitivity Analysis

In cases where each currency other than the functional currency

that denominates the financial instruments held by the Group as

of each fiscal year end increases by 10% in value against the

functional currency, the impact on profit before income taxes in

the consolidated statement of income is as follows:

The impact from the translation of functional currency-

denominated financial instruments, and assets, liabilities, income

and expenses of foreign operations into Japanese yen is not

included. Also, it is based on the assumption that currencies other

than the currencies used for the calculation do not fluctuate.

Millions of yen

(As of March 31) 2012 2013

Profit before income taxes ¥1,178 ¥(118)


(6) Interest Rate RiskInterest rate risk within the Group arises from interest-bearing

debts after deducting cash equivalents. Borrowings and bonds

with floating rates are exposed to interest rate fluctuation risk.

In accordance with the Group Financial Operation Basic Policy,

the Group establishes an interest rate hedging policy based on the

current condition and the forecast of the interest rates to reduce

the interest rate fluctuation risk related to borrowings and bonds,

implement the hedges using derivatives under the supervision of

the Financial Risk Management Committee of the Company and

the Treasury Division of the Company regularly reports the perfor-

mances to the Executive Committee of the Company.

The descriptions of interest rate derivatives are as follows:

(i) Derivative transactions to which hedge accounting is not applied

Millions of yen

2012 2013

(As of March 31) Contract amount Over one year Fair value Contract amount Over one year Fair value

Interest rate swap

Fixed rate receipt and floating rate payment ¥29,959 ¥ — ¥1,187 ¥ — ¥ — ¥ —

Floating rate receipt and fixed rate payment 1,814 1,814 (150) 2,063 2,063 (202)

Interest rate cap

Buying 29,959 — 0 — — —

Total ¥61,732 ¥1,814 ¥1,037 ¥ 2,063 ¥2,063 ¥(202)

(ii) Derivative transactions to which hedge accounting is applied

Millions of yen

2012 2013

(As of March 31) Contract amount Over one year Fair value (Note) Contract amount Over one year Fair value (Note)

Interest rate swap

Floating rate receipt and fixed rate payment ¥ 198 ¥ 58 ¥ (2) ¥ 58 ¥ — ¥ (0)

Cross currency swap

Floating rate receipt and fixed rate payment 30,000 30,000 (3,350) 30,000 30,000 750

Total ¥30,198 ¥30,058 ¥(3,352) ¥30,058 ¥30,000 ¥749

(Note) Recognized at fair value in the consolidated statement of financial position by application of cash flow hedge.

Interest Rate Sensitivity Analysis

In cases where the interest rate of financial instruments held by

the Group as of each fiscal year end increase by 100bp, the

impact on profit before income taxes in the consolidated state-

ment of income is as follows:

The analysis is subject to financial instruments affected by

interest rate fluctuation and based on the assumption that other

factors, including the impacts of foreign exchange fluctuation, are

constant.

Millions of yen

(As of March 31) 2012 2013

Profit before income taxes ¥1,061 ¥458

(7) Market Price Fluctuation Risk With respect to securities, the Group regularly assesses the fair value and financial conditions of the issuers, and each relevant depart-

ment reviews the portfolio held by taking into account the relationship with counterparty entities as necessary.

(8) Fair Value of Financial Instruments The carrying amount and fair value of financial instruments as of each fiscal year end are as follows:

Millions of yen

2012 2013

(As of March 31) Carrying amount Fair Value Carrying amount Fair Value

Long-term borrowings (Note) ¥127,496 ¥127,844 ¥ 53,617 ¥ 53,624

Bonds (Note) 320,534 328,767 237,236 245,334

(Note) Current portion is included.

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With regard to short-term financial assets and short-term finan-

cial liabilities measured at amortized cost, their fair value approxi-

mates the carrying amount.

The fair value of long-term borrowings is calculated based on

the present value which is obtained by discounting the total of the

principal and interest by the interest rate assumed in a case where

the same loan is newly made.

The fair value of bonds issued by the Group is based on the

market price for those having market prices, and based on the

present value that is obtained by discounting the total of principal

and interest by the interest rate, for which the remaining period

and credit risk of such bonds are taken into consideration.

The fair value hierarchy of financial instruments is categorized as follows from Level 1 to Level 3:

Level 1: Fair value measured at the quoted price in the active market

Level 2: Fair value that is calculated using the observable price other than categorized in Level 1 directly or indirectly

Level 3: Fair value that is calculated based on valuation techniques which include input that is not based on observable market data


Millions of yen

2012

Level 1 Level 2 Level 3 Total

Derivative assets ¥ — ¥1,941 ¥ — ¥ 1,941

Equity securities 35,712 — 3,394 39,106

Other 71 — 945 1,016

Total ¥35,783 ¥1,941 ¥4,339 ¥42,063

Derivative liabilities ¥ — ¥5,133 ¥ — ¥ 5,133

Total ¥ — ¥5,133 ¥ — ¥ 5,133


2013

Level 1 Level 2 Level 3 Total

Derivative assets ¥ — ¥4,077 ¥ — ¥ 4,077

Equity securities 43,052 — 3,646 46,699

Other 120 — 978 1,098

Total ¥43,172 ¥4,077 ¥4,625 ¥51,874

Derivative liabilities ¥ — ¥3,816 ¥ — ¥ 3,816

Total ¥ — ¥3,816 ¥ — ¥ 3,816

The schedule of financial instruments that are classified in Level 3 is as follows:

Millions of yen



Total gain (loss)

Profit or loss (Note 1) (337) 36

Other comprehensive income (Note 2) 333 231

Purchases 20 42

Sales (206) (24)


(Note 1) Gains and losses included in profit or loss for the year ended March 31, 2012 and 2013 are related to financial assets measured at fair value through profit or loss as of the

fiscal year end date. These gains and losses are included in “Financial income” and “Financial costs.”

(Note 2) Gains and losses included in other comprehensive income for the year ended March 31, 2012 and 2013 are related to financial assets measured at fair value through other

comprehensive income as of the fiscal year end date. These gains and losses are included in “Net gain (loss) on revaluation of financial assets measured at fair value through

other comprehensive income.”


36. Related parties

Based on the Japan Tobacco Inc. Act, the Japanese government shall hold more than one-third of all of the shares issued by the Company

(excluding the type of shares, for which it is stipulated that voting rights may not be exercised on any matters that can be resolved by

Annual Shareholders Meeting). As of March 31, 2013, the Japanese government held 33.35% of all outstanding shares of the Company.

(1) Related-Party Transactions Related-party transactions are conducted under the same conditions as regular business transactions. The details of acquisition of trea-

sury shares are described in “25. Equity and Other Equity Items.”

(2) Remuneration for Directors and Audit & Supervisory Board MembersRemuneration for directors and audit & supervisory board members for each fiscal year is as follows:

Millions of yen


Remuneration and bonuses ¥762 ¥880

Share-based payments 133 114

Total ¥895 ¥994

37. Commitments

(1) Commitments for the Acquisition of Assets Commitments for the acquisition of assets after fiscal year end date are as follows:

Millions of yen

(As of March 31) 2012 2013

Acquisition of property, plant and equipment ¥32,541 ¥78,802

Acquisition of intangible assets 8,183 2,108

Total ¥40,724 ¥80,909

(2) Procurement of Domestic Leaf TobaccoWith regard to the procurement of domestic leaf tobacco by the

Company, based on the Tobacco Business Act, the Company

enters into purchase contracts with domestic leaf tobacco grow-

ers every year, and the contracts determine the area under

cultivation by type of tobacco and the prices by type and quality

of tobacco leaf. Under the contracts, the Company is obligated to

purchase all domestic leaf tobacco produced pursuant to such

contracts, except for any domestic leaf tobacco not suited for the

manufacture of tobacco products.

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38. Contingencies

Contingent LiabilitiesThe Company and some of its subsidiaries are defendants in law-

suits. Provisions are not accounted for in matters it is not prac-

tiable to reasonably estimate the final outcomes. The Company

believes that our allegations on these lawsuits are based on sub-

stantial evidence and implement the system for response to action

with the assistance of external lawyers.

(1) Smoking and Health Related Litigation

The Company and some of its subsidiaries become defendants in

lawsuits filed by plaintiffs seeking damages for harm allegedly

caused by smoking, the marketing of tobacco products, or expo-

sure to tobacco smoke. As of March 31, 2013, there were a total

of 28 smoking and health related cases pending in which one or

more members of the Group were named as a defendant or for

which the Company may have certain indemnity obligations pur-

suant to the agreement for the Company’s acquisition of RJR

Nabisco Inc.’s overseas (non-U.S.) tobacco operations.

The major ongoing smoking and health related cases are as

follows:

a. Individual Claim

There is one individual case brought against the Company’s

indemnitee in South Africa.

South Africa Individual Claim (Joselowitz):

The individual claim was brought against the Company’s indemni-

tee in South Africa in October 2000. Plaintiff seeks compensatory

and punitive damages, alleging that the Company’s indemnitee

marketed products which it knew to be dangerous to health,

manipulated nicotine content to foster addiction, failed to comply

with South African labeling requirements and participated in a

clandestine worldwide operation to encourage children to smoke.

This case has been dormant since February 2001.

b. Class Actions

There are eight ongoing class actions in Canada against the

Company’s subsidiary and/or indemnitees.

Canada Quebec Class Action (Cecilia Letourneau):

This class action was brought in September 1998 against three

Canadian tobacco manufacturers including JTI-Macdonald Corp.

(hereinafter referred to as “JTI-Mac”), the Company’s Canadian

subsidiary. Plaintiffs are seeking compensatory and punitive dam-

ages for class members of approximately ¥1,648.6 billion (CAD

17.8 billion) without specifying any individual amount or percent-

ages among the defendants. The class was certified by the court

in February 2005. The trial commenced in March 2012. The defen-

dants filed a third-party claim against the government of Canada

seeking contribution and indemnity on the grounds that the

Canadian government was highly involved in the tobacco industry

in respect of smoking and health related matters. The Court of

First Instance denied the government of Canada’s motion to dis-

miss such third-party claim in February 2012. The Court of Appeal

thereafter granted the government of Canada’s appeal of the

decision of the Court of First Instance in November 2012. The

defendants did not appeal that decision, which dismissed the

government of Canada as a defendant in the case.

Canada Quebec Class Action (Conseil Québécois sur le tabac et la

santé):

This class action was brought in November 1998 against three

Canadian tobacco manufacturers including JTI-Mac. Plaintiffs are

seeking compensatory and punitive damages for class members

of approximately ¥476.7 billion (CAD 5.1 billion) without specifying

any individual amount or percentages among the defendants. The

class was certified by the court in February 2005. The trial com-

menced in March 2012. The defendants filed a third-party claim

against the government of Canada seeking contribution and

indemnity on the grounds that the Canadian government was

highly involved in the tobacco industry in respect of smoking and

health related matters. The Court of First Instance denied the

government of Canada’s motion to dismiss such third-party claim

in February 2012. The Court of Appeal thereafter granted the

government of Canada’s appeal of the decision of the Court of

First Instance in November 2012. The defendants did not appeal

that decision, which dismissed the government of Canada as a

defendant in the case.

Canada Saskatchewan Class Action (Adams):

This class action was brought against tobacco industry members

including JTI-Mac and the Company’s indemnitees in June 2009.

Plaintiffs are seeking unspecified compensatory and punitive

damages on behalf of class members who allege to be or have

been addicted to the nicotine contained in cigarettes manufac-

tured by the defendants. The preliminary motions are pending. The

case is currently dormant.

Canada Manitoba Class Action (Kunta):






tured by the defendants. The statement of claim was served on

the Company’s indemnitees but not on JTI-Mac. The class action

is currently dormant.

Canada Nova Scotia Class Action (Semple):






tured by the defendants. The statement of claim was served on

the Company’s indemnitees but not on JTI-Mac. The class action

is currently dormant.

Canada British Columbia Class Action (Bourassa):




damages for class members. The preliminary motions are pend-

ing. The case is currently dormant.

Canada British Columbia Class Action (McDermid):





damages for class members. The preliminary motions are pend-

ing. The case is currently dormant.

Canada Ontario Class Action (Jacklin):




damages for class members. The class action has been dormant

since the date it was served on defendants.

c. Health-Care Cost Recovery Litigation

There are nine ongoing health-care cost recovery cases in Canada

pending against the Company’s subsidiary and indemnitees

brought by the Provinces of British Columbia, New Brunswick,

Ontario, Newfoundland and Labrador, Manitoba, Quebec, Alberta,

Saskatchewan and Prince Edward Island. These provinces filed

lawsuits under their own provincial legislation which was enacted

exclusively for the purpose of authorizing the provincial govern-

ment to file a direct action against tobacco manufacturers to

recoup the health-care costs the government has incurred and will

incur, resulting from “tobacco related wrongs.”

Canada British Columbia Health-Care Cost Recovery Litigation:

This health-care cost recovery litigation was filed by the Province

of British Columbia in January 2001 against tobacco industry

members including JTI-Mac and the Company’s indemnitees

based on its provincial legislation, the “Tobacco Damages and

Health-Care Costs Recovery Act.” The claim amount is unspeci-

fied. In 2001, several defendants challenged the legislation’s con-

stitutionality, which was ultimately rejected by the Supreme Court

of Canada in September 2005. The action remains pending in the

first instance. The defendants further filed a third-party claim

against the government of Canada seeking contribution and

indemnity on the grounds that the Canadian government was

highly involved in the tobacco industry in respect of smoking and

health related matters. In July 2011, the Supreme Court of Canada

ultimately dismissed the defendants’ third-party claim against the

government of Canada. The pre-trial discovery process is ongoing.

A trial date is not yet scheduled.

Canada New Brunswick Health-Care Cost Recovery Litigation:


of New Brunswick in March 2008 against tobacco industry mem-

bers including JTI-Mac and the Company’s indemnitees based on

legislation similar to that introduced in the Province of British

Columbia. The claim amount is unspecified. The pre-trial discovery

process is ongoing. A trial date is not yet scheduled.

Canada Ontario Health-Care Cost Recovery Litigation:


of Ontario in September 2009 against tobacco industry members

including JTI-Mac and the Company’s indemnitees based on


Columbia. The statement of claim in this case contains allegations

of joint and several liabilities among all the defendants but does

not specify any individual amount or percentages within the total

claimed amount of ¥4,629.0 billion (CAD 50.0 billion). The pre-trial


Canada Newfoundland and Labrador Health-Care Cost Recovery

Litigation:


of Newfoundland and Labrador in February 2011 against tobacco

industry members including JTI-Mac and the Company’s indemni-

tees based on legislation similar to that introduced in the Province

of British Columbia. The claim amount is unspecified. The pre-trial


Canada Manitoba Health-Care Cost Recovery Litigation:


of Manitoba in May 2012 against tobacco industry members



Columbia. The claim amount is unspecified. The pre-trial process

is ongoing. A trial date is not yet scheduled.

Canada Quebec Health-Care Cost Recovery Litigation:


of Quebec in June 2012 against tobacco industry members includ-

ing JTI-Mac and the Company’s indemnitees based on legislation

similar to that introduced in the Province of British Columbia. The

statement of claim in this case contains allegations of joint and

several liabilities among all the defendants but does not specify

any individual amount or percentages, within the total amount of

the claim ¥5,615.7 billion (CAD 60.7 billion). The pre-trial process


Canada Alberta Health-Care Cost Recovery Litigation:


of Alberta in June 2012 against tobacco industry members includ-

ing JTI-Mac and the Company’s indemnitees based on the legisla-

tion similar to that introduced in the Province of British Columbia.

The statement of claim in this case contains allegations of joint

and several liabilities among all the defendants but does not spec-

ify any individual amount or percentages, within the total claimed

amount of at least ¥925.8 billion (CAD 10.0 billion). The pre-trial


Canada Saskatchewan Health-Care Cost Recovery Litigation:


of Saskatchewan in June 2012 against tobacco industry members



Columbia. The claim amount is unspecified. The pre-trial process


Canada Prince Edward Island Health-Care Cost Recovery

Litigation:


of Prince Edward Island in September 2012 against tobacco

industry members including JTI-Mac and the Company’s indemni-

tees based on legislation similar to that introduced in the Province

of British Columbia. The claim amount is unspecified. The pre-trial


In addition, there is 1 ongoing health-care cost recovery case

pending against the Company’s subsidiaries in Spain.

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(2) Other Litigation

The Company and some of its subsidiaries are also named as

defendants in other litigation such as commercial and tax dis-

putes. One major case is pending:

Commercial Litigation

Japan Compensatory Damages Claim:

In February 2010, a former President & CEO of Katokichi Co., Ltd.

(renamed as TableMark Co., Ltd. after acquisition by the

Company) filed a claim against TableMark Co., Ltd. and its subsid-

iary seeking damages allegedly incurred by the plaintiff from an

asset purchase agreement between the plaintiff and Katokichi Co.,

Ltd and a joint and several guarantee provided by the plaintiff. The

plaintiff argues the invalidity of the asset purchase agreement.

(Note) The amount of damages sought denominated in foreign currencies is translated

into Japanese yen at the rates of 31 March 2013.

39. Subsequent Events

No items to report

Consolidated Supplementary InformationA. Quarterly Information for the Year ended March 31, 2013

Millions of yen

Q1 From April 1, 2012

to June 30, 2012

Q2 From April 1, 2012 to September 30, 2012

Q3From April 1, 2012 to

December 31, 2012

2013From April 1, 2012 to

March 31, 2013

Revenue ¥512,108 ¥1,057,391 ¥1,608,399 ¥2,120,196

Profit before income taxes for the period (year) 124,391 252,106 392,042 509,560

Profit for the period (year) 86,406 171,836 268,633 351,518

Basic earnings per share for the period (year) (yen) 44.38 88.62 138.48 181.07

Q1 From April 1, 2012

to June 30, 2012

Q2 From July 1, 2012 to September 30, 2012

Q3 From October 1, 2012 to

December 31, 2012

Q4 From January 1, 2013

to March 31, 2013

Basic earnings per share for the quarter (yen) ¥44.38 ¥44.24 ¥49.85 ¥42.57

(Note 1) Quarterly information from the second quarter to the fourth quarter is provided based on the “Cumulative differences method.”

(Note 2) The Company conducted the 200-for-one share split, with basis date of June 30, 2012 and effective date of July 1, 2012. Basic earnings per share are calculated assuming that

the share split was conducted at the beginning of the year ended March 31, 2013.

B. Significant Lawsuits

The significant lawsuits of the Group are as stated in “38. Contingencies” in the notes to consolidated financial statements.


To the Board of Directors of Japan Tobacco Inc.:

We have audited the accompanying consolidated statement of financial position of Japan Tobacco Inc. and its consoli-

dated subsidiaries as of March 31, 2013, and the related consolidated statements of income, comprehensive income,

changes in equity, and cash flows for the year then ended, and a summary of significant accounting policies and other

explanatory information.

Management’s Responsibility for the Consolidated Financial StatementsManagement is responsible for the preparation and fair presentation of these consolidated financial statements in accor-

dance with International Financial Reporting Standards, and for such internal control as management determines is neces-

sary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due

to fraud or error.

Auditor’s ResponsibilityOur responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted

our audit in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and

perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from

material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated

financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of

material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assess-

ments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated

financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose

of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appro-

priateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as

evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

OpinionIn our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consoli-

dated financial position of Japan Tobacco Inc. and its consolidated subsidiaries as of March 31, 2013, and the consoli-

dated results of their operations and their cash flows for the year then ended in accordance with International Financial

Reporting Standards.

June 21, 2013

InDEpEnDEnT aUDIToR’S REpoRT

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JT Group is a leading international tobacco company with our products sold in over 120 countriesOur internationally recognized brands include Winston, Camel and Mild Seven-MEVIUS. We also have pharmaceutical, beverage and processed food business which allow us to diversify our sources of profi t to achieve future sustainable growth.

142 Financial Data 152 International Tobacco Business154 Japanese Domestic Tobacco Business 165 Pharmaceutical Business 166 Beverage Business & Processed Food Business167 Number of Employees / Subsidiaries and Affi liates

FAC

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0

1,000

2,000

3,000Billions of yen IFRS

0

250

750

500

1,000Billions of yen

Net Sales Excluding Excise Taxes/Revenue

(Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

Total 2,008.7 2,051.0 2,587.3 2,827.1 2,514.1 2,432.6 2,547.1 2,059.4 2,033.8 2,120.2

International Tobacco Business 484.3 550.3 1,057.7 1,243.3 1,039.1 963.5 966.3 963.5 966.3 1,010.7Japanese Domestic Tobacco Business 1,173.2 1,147.2 1,122.2 1,070.3 1,016.7 1,027.9 1,147.5 665.8 646.2 687.1

Pharmaceutical Business 49.2 45.4 49.0 56.7 44.0 47.0 50.6 44.1 47.4 53.2

Food Business 278.3 286.5 336.4 435.9 394.6 375.0 367.0 367.5 359.4

Beverage Business 188.8 185.5

Processed Food Business 170.7 168.7

Other Business 23.5 21.4 21.8 20.7 19.5 19.2 15.7 18.5 14.6 15.0

Adjusted Net Sales Excluding Excise Taxes*1/Core revenue*2

International Tobacco Business 1,080.8 906.7 887.8 894.6 887.8 894.6 943.1

Japanese Domestic Tobacco Business 648.8 615.9 617.9 596.8 632.2 611.9 654.0

*1 Excluding the imported tobacco, domestic duty free, the China Division and other peripheral businesses in the Japanese domestic tobacco business, in addition to the distribution, contract manufacturing and other peripheral businesses in the international tobacco business

*2 Excluding revenue from distribution business of imported tobacco in the Japanese domestic tobacco business, in addition to distribution, contract manu-facturing and other peripheral business in the International tobacco business.

SG&A Expenses

(Years ended March 31) 2006 2007 2008 2009 2010 2011 2012

SG&A 596.6 592.6 750.2 914.1 815.5 788.3 786.2

Personnel*1 150.8 158.5 206.0 231.5 216.0 217.1 222.6

Advertising and General Publicity 23.9 23.4 22.9 25.6 21.9 20.9 20.4

Sales Promotion 142.1 128.0 163.6 162.3 143.7 140.8 141.2

R&D 37.5 41.2 45.1 47.2 49.6 53.3 53.6

Depreciation 53.4 57.4 80.3 113.0 72.5 60.9 56.5

*1 Personnel expense is the sum of compensation, salaries, allowances, provision for retirement benefits, statutory benefits, employee bonuses and accrual of employee bonuses

Fact SheetsFinancial Data


0

20

40

60Billions of yen IFRS

0

250

750

500


(Years ended March 31) 2011 2012 2013

SG&A 727.1 733.2 733.4

Advertising expenses 21.4 21.5 20.6

Promotion expenses 131.5 128.0 137.5

Shipping, warehousing expenses 28.0 27.9 27.1

Commission 42.2 41.0 41.2

Employee benefits expenses 231.2 235.1 241.4

Research and development expenses 48.9 51.5 56.9

Depreciation and amortization 61.7 58.5 59.1

Impairment losses on other than financial assets 6.2 7.0 3.2

Regulatory fine in Canada 12.8 — — L osses on sale and disposal of property, plant and equipment, intangible assets,

and investment property 10.0 11.5 9.3

Cooperation fee for terminating leaf tobacco farming — 12.5 0.0

Other 133.2 138.7 137.2

R&D Expenses


R&D 37.5 41.2 45.1 47.2 49.6 53.3 53.6 48.9 51.5 56.9 International Tobacco Business 0.9 1.3 3.3 3.8 6.1 5.0 5.2 5.0 5.2 5.8 Japanese Domestic Tobacco Business 15.1 15.1 15.8 17.7 18.9 19.5 20.2 19.1 20.0 19.0

Pharmaceutical Business 19.9 23.4 24.4 23.8 23.1 27.2 26.7 23.4 24.9 30.7 Food Business 0.8 0.7 0.7 1.1 0.7 0.8 0.6 0.8 0.6

Beverage Business 0.0 0.0 Processed Food Business 0.6 0.6

Note: The aforementioned research and development expenses includes 0.7 billion yen (FY3/2013, IFRS) relating to basic research not affiliated to any seg-ment (plant biotechnology related research, etc.) and conducted by JT corporate division.

SG&A Expenses(IFRS)


FAC

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0

250

500


0

200

400


EBITDA/Adjusted EBITDA


EBITDA/Adjusted EBITDA 433.3 464.6 602.0 646.2 526.7 542.6 581.1 522.0 577.1 622.1

International Tobacco Business 94.0 112.6 270.7 337.9 277.6 293.0 312.6 277.9 314.8 343.3 Japanese Domestic Tobacco Business 305.7 326.4 306.7 272.2 257.6 257.7 272.5 247.2 262.3 281.3

Pharmaceutical Business (1.8) (8.1) (6.2) 4.8 (9.6) (13.3) (12.3) (9.8) (10.0) (12.7)

Food Business 11.8 12.0 8.3 17.0 14.4 17.3 21.5 17.7 20.0



Other Business 22.1 21.5 22.0 13.1 13.3 (12.1) (13.3) (11.0) (9.8) (9.6)

Note: EBITDA = operating income + depreciation and amortizationAdjusted EBITDA = operating profit + depreciation and amortization ± adjustment items (income and costs)*

* Adjustment items (income and costs) = impairment losses on goodwill ± restructuring income and costs ± othersFrom FY3/2011, “Other Business” means “Others/Elimination and corporate.”

Operating Income/Operating Profit


Operating Income/Operating Profit 306.9 331.9 430.5 363.8 296.5 333.2 374.7 401.3 459.2 532.4


Pharmaceutical Business (5.0) (11.2) (9.6) 1.0 (13.5) (17.4) (16.1) (13.3) (13.5) (16.2)

Food Business 6.3 6.7 0.6 (11.4) (13.6) (9.4) (6.3) (3.6) 2.0


Processed Food Business (2.5) (5.8)

Other Business 8.6 9.3 10.4 9.6 10.5 (16.9) (17.9) (9.9) 9.0 21.2

Note: From FY3/2011, “Other business” means “Others/Elimination and corporate.”


0

5

15

25

20

10

30

Billions of yen IFRS

50

25

–25

–75

0

–50

Billions of yen

0

100

300

200

400Billions of yen

Financial Income and Expenses (IFRS)

(Years ended March 31) 2011 2012 2013

Financial Income 9.9 5.6 5.5

Financial Expenses (25.9) (23.4) (28.3)

Non-Operating Income and Expenses


Non-Operating Income and Expenses (9.1) (19.9) (67.8) (56.2) (41.1) (20.2) (11.9)

Non-Operating Income 12.6 16.0 21.5 30.3 15.6 12.0 16.2

Financial Income*1 5.9 12.1 13.4 12.2 6.9 3.0 4.3

Non-Operating Expenses 21.7 35.9 89.4 86.5 56.7 32.2 28.1

Financial Expense*2 5.7 6.9 42.0 51.3 26.3 17.3 14.3

*1 Financial income is the sum of interest income, interest on marketable securities, interest on investment securities, dividend income, profit on redemption of securities, etc.

*2 Financial expense is the sum of interest expense, bond interest paid, loss of redemption of securities, etc.

Recurring Profit


Recurring Profit 297.8 312.0 362.6 307.5 255.3 313.1 362.7


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–60

–30

0

30Billions of yen

0

200

300

100


0

90,000

60,000

30,000

120,000

0

150

100

50

200Yen Yen

168.50181.07

IFRS

Extraordinary Profit and Loss


Extraordinary Profit and Loss 3.1 25.1 9.9 (45.4) 20.6 (31.9) (17.7)

Extraordinary Profit 65.4 50.8 68.9 48.3 58.5 20.6 41.1

Gain on Sale of Property, Plant and Equipment 60.0 47.5 66.7 46.4 32.3 12.2 30.3

Extraordinary Loss 62.3 25.7 59.0 93.8 37.8 52.5 58.8

Loss on Sale of Property, Plant and Equipment 24.8 3.1 3.2 2.1 4.2 0.9 1.0

Loss on Disposal of Property, Plant and Equipment 12.2 10.4 6.3 11.5 6.3 7.3 8.5

Business Restructuring Costs 8.0 — 6.4 24.3 9.9 4.3 8.7

Impairment Loss 11.4 2.7 3.8 16.3 6.0 5.3 4.2

Introduction Costs for Vending Machines with Adult Identification Functions 0.1 5.7 12.8 13.4 — — —

Regulatory Fine in Canada — — — — — 12.8 —

Write-down of Investment Securities — — 11.1 7.0 1.4 1.0 —

Damages Related to the Great East Japan Earthquake — — — — — 11.0 15.2

Net Income/Profit (attributable to owners of the parent company)


Net Income/Profit (attributable to owners of the parent company) 201.5 210.7 238.7 123.4 138.4 145.4 227.4 243.3 320.9 343.6

Earnings per Share (EPS)/Basic Earning per Share


EPS/Basic Earning per Share 105,084 22,001 24,916 12,880 14,451 15,184 23,883 25,414 168.50 181.07

Diluted EPS 12,879 14,448 15,179 23,873 25,407 168.44 180.99

Notes: A 5 for 1 stock split went into effect on April 1, 2006.A 200 for 1 stock split went into effect on July 1, 2012.Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011).FY2012 and FY2013 refer to the right hand scale in the graph.


0

20

10

30

IFRS%

0

5.0

20.0

15.0

10.0

25.0

IFRS%

0

10

5

15

IFRS%

Operating Income Margin/Operating Profit Margin


Operating Income Margin/Operating Profit Margin 6.6 7.0 6.7 5.3 4.8 13.7 14.7 19.5 22.6 25.1

Return on Equity (ROE)/ROE (attributable to owners of the parent company)(Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

ROE/ROE (attributable to owners of the parent company) 12.4 11.3 11.8 6.8 8.6 9.3 15.0 15.3 20.3 20.0

Return on Assets (ROA)


ROA 10.4 10.7 10.5 8.4 7.8 9.1 10.8 10.9 12.7 14.3

Note: ROA = (Operating Income + Financial Income) / Total Assets [average of beginning and ending figure for the period]


FAC

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–1,500

0

250

750


0

50

100


0

100

200


Free Cash Flow (FCF)


FCF 145.5 223.0 (1,493.7) 240.1 250.7 299.7 452.4 300.4 451.3 316.0

Note: FCF is the total of cash flows from operating activities and investing activities excluding the following items:Cash flows from interest / dividends received and its tax effect / interest paid and its tax effect in operating activities; andCash flows from purchase of short-term investment securities, proceeds from sale and redemption of short-term investment securities, purchase of investment securities, proceeds from sale of investment securities, payments into time deposits, proceeds from withdrawal of time deposits and others in investing activities (those from purchase/sale of securities held for business operation are not included here).

Capital Expenditure (CAPEX)


Capital Expenditure 98.9 102.1 129.5 134.2 137.1 146.0 119.5 148.4 119.0 137.4



Food Business 4.5 4.8 6.0 23.2 23.4 25.0 15.5 25.0 15.4



Other Business 19.3 8.0 14.7 1.1 0.3 1.2 4.7 0.9 4.3 6.3

Note: From FY3/2011, “Other Business” means “Others /Elimination and corporate.”

Depreciation & Amortization


Depreciation & Amortization 126.4 132.6 171.5 282.4 230.1 209.4 206.4 118.0 118.8 116.5



Food Business 5.5 5.3 7.6 28.4 28.1 26.7 27.8 16.5 17.5



Other Business 13.4 12.2 11.6 3.4 2.7 4.8 4.6 3.5 3.1 3.6

Note: Depreciation & Amortization = Depreciation of Tangible Fixed Assets + Amortization of Intangible Fixed Assets + Amortization of Long-Term Prepaid Expenses + Amortization of GoodwillIFRS=depreciation of tangible fixed assets + amortization of intangible fixed assetsFrom FY3/2011, “Other Business” means “Others /Elimination and corporate.”


0

200,000

600,000

800,000

400,000

1,000,000Yen

0

200

600

800

400

1,000Yen

858.09

993.75IFRS

0

2,000

4,000


0

500

1,500

2,000

1,000

2,500

30

40

60

70

50

80%Billions of yen IFRS

Book Value per Share (BPS)/Book Value per Share (attributable to owners of the parent company)(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

BPS/Book Value per Share (attributable to owners of the parent company) 919,780 204,617 216,707 162,087 172,139 156,997 160,571 160,180 858.09 993.75

Notes: Total Equity in FY3/2006 excludes Minority Interests.A 5 for 1 stock split went into effect on April 1, 2006.A 200 for 1 stock split went into effect on July 1, 2012.Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011).FY2012 and FY2013 refer to the right hand scale.

Total Assets

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

Total Assets 3,037.3 3,364.6 5,087.2 3,879.8 3,872.5 3,544.1 3,472.6 3,655.2 3,667.0 3,852.6 Japanese Domestic Tobacco Business 1,131.7 1,180.3 847.1 788.6 782.2

International Tobacco Business 994.8 1,275.0 3,804.4 2,700.0 2,765.9

Pharmaceutical Business 117.9 106.1 111.4 111.5 114.0

Food Business 141.4 158.8 353.2 332.6 311.1

Other Business 194.4 249.6 90.0 87.4 85.0

Total Equity and Equity Ratio/Total Equity and Equity Ratio (attributable to owners of the parent company)(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

Total Equity 1,762.5 2,024.6 2,154.6 1,624.2 1,723.2 1,571.8 1,610.5 1,601.3 1,714.6 1,892.0Equity Ratio/Total Equity and Equity Ratio (attributable to owners of the parent company) 58.0 58.3 40.8 40.0 42.6 42.2 44.0 41.7 44.6 46.9

Note: Total Equity in FY3/2006 excludes Minority Interests.


FAC

T SH

EE

TS

0

300

900

1,200

600


0

0.2

0.6

0.4

0.8

IFRSTimes

0

20

40

60

IFRSTimes

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

Liquidity*1 979.6 1,185.6 218.8 169.8 167.3 276.6 431.2 276.6 431.2 168.3

Interest-Bearing Debt*2*3 216.6 219.2 1,389.2 996.0 874.3 708.7 505.2 709.1 502.4 327.2

*1 Liquidity = Cash and deposits + Marketable securities + Securities purchased under repurchase agreements*2 Interest-bearing debt = short-term bank loans + CP + bonds + long-term borrowings + lease obligation*3 Interest-Bearing Debt includes lease obligation from FY3/2009.

Liquidity and Interest-Bearing Debt

Debt/Equity Ratio

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2011 2012 2013

Debt / Equity Ratio 0.12 0.11 0.67 0.64 0.53 0.47 0.33 0.46 0.31 0.18

Interest Coverage Ratio


Interest Coverage Ratio 54.9 49.9 10.6 7.3 11.5 19.4 26.5 15.9 19.9 19.0

Note: Interest Coverage Ratio = (Operating Income + Financial Income) / Financial Expense


0

4,000

12,000

8,000

16,000Yen

0

20

60

40

80

50

68

Yen

%

10

30

40

0

50

20

IFRS

Annual Dividends per Share

(Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Annual Dividends per Share 16,000 4,000 4,800 5,400 5,800 6,800 10,000 68

(Retroactively Adjusted) — — — — — — 50

Notes: A 5 for 1 stock split went into effect on April 1, 2006.A 200 for 1 stock split went into effect on July 1, 2012.Calculated on the assumption that this share split was conducted at the beginning of the previous fiscal year (April 1, 2011).FY2012 and FY2013 refer to the right hand scale in the graph.

Dividend Payout Ratio on a Consolidated Basis


Dividend Payout Ratio 15.2 18.2 19.3 41.9 40.1 44.8 41.9 26.8 29.7 37.6

Goodwill Amortization Adjusted*1 18.0 19.0 22.6 23.6 27.9 30.7

*1 Payout Ratio before goodwill amortization


FAC

T SH

EE

TS

Tobacco Shipment Volume (by Brand)

Tobacco Shipment Volume (by Cluster)

0

300

200

100

400

500Billions of cigarettes

(Years ended December 31) 2005 2006 2007 2008 2009 2010 2011 2012

Total 220.3 240.1 385.6 452.3 434.9 428.4 425.7 436.5

GFB Total 133.8 149.1 203.2 245.5 243.4 249.8 256.5 268.8

Winston 76.4 93.9 111.0 126.4 121.2 125.0 130.7 139.4

Camel 35.2 35.4 38.6 42.3 41.6 42.2 40.5 40.7

Mild Seven/MEVIUS 17.5 17.5 16.8 18.8 18.2 19.3 18.9 18.9

Benson & Hedges 8.3 11.2 10.7 10.7 10.6 10.3

Silk Cut 3.9 5.2 4.8 4.4 4.0 3.5

LD 17.5 29.0 34.3 36.4 40.5 45.1

Sobranie 1.2 2.3 1.4 1.3 1.3 1.8

Glamour 5.9 10.3 11.1 10.7 10.0 9.1

Other Brands 86.5 91.0 182.4 206.8 191.5 178.6 169.3 167.7

Notes: Total shipment volume: includes fine cut, cigars, pipe and snus but excludes contract manufactured products and China Division (China, Hong Kong, and Macau)In FY2005, FY2006 and FY2007, cigars, pipe and snus were not included in total shipment volume.GFB in FY2005–2006: Winston, Camel, Mild Seven, SalemGFB after FY2006: Winston, Camel, Mild Seven/MEVIUS, Benson & Hedges, Silk Cut, LD, Sobranie, Glamour

0

300

200

100

400


(Years ended December 31) 2005 2006 2007 2008 2009 2010 2011 2012

Total 220.3 240.1

Asia 33.5 29.1

Europe 39.2 44.1

Americas 9.3 8.8

CIS & Others 138.3 158.0

Total 240.1 385.6 452.3 434.9 428.4 425.7 436.5

South & West Europe 40.1 55.2 64.0 64.5 63.2 60.8 62.7

North & Central Europe 5.7 39.3 50.8 47.5 49.0 49.1 49.9

CIS+ 108.6 195.1 219.7 214.6 203.6 197.8 197.4

Rest-of-the-World 85.7 95.9 117.7 108.4 112.7 118.0 126.5

Notes: Total shipment volume: includes fine cut, cigars, pipe and snus but excludes contract manufactured products and China Division (China, Hong Kong, and Macau)In FY2005, FY2006 and FY2007, cigars, pipe and snus were not included in total shipment volume.

International Tobacco Business


0

10

20

30

40

Canada

USA

Brazil

Russia（Yelets,Lipetskaya Oblast）

Germany

Romania

Serbia Ukraine

Poland

Switzerland

Turkey

Russia（Moscow）Russia（Leningradskaya Oblast）Russia（Saint Petersburg）

Sweden

UK（Northern Ireland）

Andorra

TunisiaSpain（Canaries）

Kazakhstan

Jordan

Egypt (Cairo)

Republic of Sudan（Khartoum）Egypt (Shebin El-Kom)

South Sudan（Juba）

TanzaniaMalaysia

South Africa

Malawi

Belguium

Number of International Factories

International Tobacco Manufacturing-related Factory Location

Tobacco Tax Structure (in Russia)

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

International Cigarette andOTP Manufacturing Factories 15 15 15 29 28 24 23 25

Other Tobacco-related Factories 1 2 2 2 2 5 5 5

(RUB) 20112012

Jan–Jun Change*12012

Jul–Dec Change*2

Minimum Tax (ths. cg.) 360.00 460.00 28% 510.00 11%

Ad valorem tax (to retail price) (%) 7.00% 7.50% 7% 7.50% 0%

Specific tax (ths. cg.) 280.00 360.00 29% 390.00 8%

VAT (%) 18.00% 18.00% 0% 18.00% 0%

Note 1. A comparison of the tax system of 2011 and January to June 2012.Note 2. A comparison of the tax system of January to June 2012 and July to December 2012.

[To weighted average price per pack] (RUB) 2011 2012 Change

Weighted average retail price 29.71 35.02 18%

Ad valorem tax 2.08 2.63 26%

Specific tax 5.60 7.50 34%

VAT 4.53 5.34 18%

Weighted average retail price before tax 17.50 19.55 12%

Note: JTI estimates

(As of March 31, 2013)

Cigarette and OTP manufacturing factories Other tobacco-related factories


FAC

T SH

EE

TS

0

100

300

200

Billions of cigarettes

0

50

150

200

100

40

50

60

70

80%Billions of cigarettes

0

1

3

2


Total Domestic Market


Total Domestic Market 285.2 270.0 258.5 245.8 233.8 210.2 197.5 195.1

Source: Tobacco Institute of Japan

JT Sales Volume and JT Share


JT Sales Volume 189.4 174.9 167.7 159.9 151.8 134.6 108.4 116.2

JT Share 66.4 64.8 64.9 65.1 64.9 64.1 54.9 59.6

Sales Volume of China Division and Domestic Duty-Free


Sales Volume 3.2 3.4 3.5 3.6 3.6 3.6 3.7 3.1

Note: China Division covers China, Hong Kong, and Macau markets.

Japanese Domestic Tobacco Business


%

0

40

20

60

80Market Share by JT Brand Family

Top 20 Selling Products in Japan by Market Share (FY ended March 31, 2013)


Mild Seven/MEVIUS 32.2 31.6 32.0 32.3 32.1 31.8 29.5 31.2

Seven Stars*1 8.7 9.0 8.9 9.4 9.9 9.4 7.4 7.7

Pianissimo*2 2.8 3.1 3.2 3.3 3.4 3.6 2.6 3.2

Caster 6.3 6.0 5.9 5.9 5.7 5.4 4.2 4.6

Cabin 4.0 4.0 4.0 3.8 3.9 3.5 2.7 2.9

Peace 2.9 2.8 2.8 2.8 2.7 2.5 1.8 2.0

Hope 2.1 2.0 2.0 2.0 2.0 1.9 1.4 1.5

Frontier*3 1.7 1.5 1.4 1.2 1.1 1.0 0.4 0.2

Other Brands 5.7 4.8 4.7 4.5 4.4 5.2 5.1 6.3

*1 Retrospective of figures for “Alaska,” which was integrated into the Seven Stars family in October 2011.*2 Retrospective of figures for “icene” and “Lucia,” which were integrated into the Pianissimo family in January 2010.*3 “Frontier” was integrated into the Caster family in August 2012.

Product Brand Owner Share (%)

1 Seven Stars JT 4.3

2 Mevius Super Lights JT 3.6

3 Mevius One 100's Box JT 3.4

4 Mevius Lights JT 2.9

5 Mevius JT 2.6

6 Mevius Extra Lights JT 2.5

7 Marlboro Lights Menthol Box PMJ 2.3

8 Echo JT 2.0

9 Seven Stars Box JT 1.9

10 Wakaba JT 1.9

11 Caster Mild JT 1.7

12 Mevius Super Lights 100’s Box JT 1.6

13 Caster One 100's Box JT 1.5

14 Marlboro Ks Box PMJ 1.5

15 Kent 1 100's Box BATJ 1.5

16 Mevius One JT 1.4

17 Mevius Extra Lights Box JT 1.4

18 Cabin Mild Box JT 1.4

19 Mevius Extra Lights 100’s Box JT 1.4

20 Marlboro Ice Blast Ks Box PMJ 1.2



FAC

T SH

EE

TS

%

0

20

80

60

40

100

%

0

20

60

40

80

%

0

5

15

10

25

20

Market Share by Tar Level (Market Share in

Top 100 Sales Products)


1 mg 19.9 21.2 22.7 24.0 24.3 23.6 24.7 24.5

2–3 mg 7.4 7.0 8.2 8.5 8.6 8.7 8.2 8.2

4–6 mg 23.2 23.4 23.0 22.4 21.0 20.8 18.9 19.8

7–13 mg 37.7 36.3 34.1 32.9 33.6 33.8 35.2 33.1

14 mg or Higher 11.9 12.1 12.1 12.2 12.5 13.2 13.0 14.3


Market Share by Tar Level (JT Products)


1 mg 11.7 12.9 14.0 14.7 15.1 15.4 13.2 14.3

2–3 mg 6.6 6.7 6.7 6.9 7.0 7.1 5.6 6.3

4–6 mg 14.5 13.9 14.2 14.2 13.6 12.8 10.8 12.3

7–13 mg 22.0 19.7 18.5 17.8 17.7 16.8 13.6 14.0

14 mg or Higher 11.6 11.6 11.5 11.5 11.5 12.0 11.7 12.6

Menthol Products Market Share


Menthol Products*1 17.2 17.4 19.3 19.8 19.8 21.0 22.0 21.6

Menthol JT Products 7.0 6.8 7.4 7.6 8.0 8.3 5.8 7.6

*1 Market Share in top 100 sales productsSource: Tobacco Institute of Japan


%

0

3

9

6

15

12

3,800

4,400

5,000

5,600Yen

%

0

20

80

60

40

100

Products Priced at ¥440 or more per pack and D-spec Products Market Share


JT Products Priced at ¥440 or more per pack*1 6.3 5.5 5.4 5.2 5.1 9.3 13.4 14.6

D-spec Products*2 1.72 4.04 4.59 4.96 5.21 10.7 8.5 9.7

*1 ~ Jun. 2006: ¥300 or more, Jul. 2006 ~ Sep. 2010: ¥320 or more*2 D-spec products, reduced odor segment products (known as “Less Smoke Smell” products abroad), incorporate the company’s

odor reducing technology in response to customer demands for a reduction in the unpleasant smell of smoke.

JT Net Sales per Thousand Cigarettes/Revenue per Thousand Cigarettes


JT Net Sales Per Thousand Cigarettes/Revenue per Thousand Cigarettes 3,864 3,990 4,057 4,057 4,056 4,582 5,502 5,502

Note: JT Net sales per thousand cigarettes/Revenue per thousand cigarettes = (retail price sales – retailer margins – consumption tax – national tobacco excise tax – local tobacco excise tax – national tobacco special excise tax) / sales volume X 1,000

Composition of JT Products by Price Range


Products Priced at ¥440 or more per pack*1 9.5 8.5 8.3 8.0 7.9 14.7 24.3 24.6

Products Priced at ¥410 per pack*2 30.7 63.2 78.7 79.2 79.5 74.6 69.1 68.1Products Priced at ¥400 or less per pack*3 59.8 28.3 13.1 12.8 12.6 10.7 6.6 7.3

*1 ~ Jun. 2006: ¥300 or more, Jul. 2006 ~ Sep. 2010: ¥320 or more*2 ~ Jun. 2006: ¥280, Jul 2006 ~ Sep. 2010: ¥300*3 ~ Jun. 2006: ¥270 or less, Jul. 2006 ~ Sep. 2010: ¥290 or less


FAC

T SH

EE

TS

0

5

15

10

0

30

90

60

120

New Product Launches and Sales Area Expansion

Year ended March 31, 2013 (13 products)(D-spec: one product, Menthol: eight products, Tar 1mg: three products, Products at ¥440 or more per pack: four products)

Date Product D-spec MentholTar

(mg)Nicotine

(mg) Price Sales Region

May-12 Hi-Lite Inazma Menthol 8 Box 8 0.7 410 Nationwide

May-12 Hi-Lite Inazma Menthol One Box 1 0.1 410 Nationwide

Jul-12 Pianissimo Precia Dia’s Menthol 6 0.4 440 Nationwide

Sep-12 Seven Stars Menthol Snap Box 7 0.7 440 Limited areas

Oct-12 Zerostyle Drive Concept 300 Nationwide

Oct-12 Zerostyle Off Concept 300 Nationwide

Oct-12 Zerostyle Night Concept 300 Nationwide

Jan-13 Camel Black Box 10 0.8 440 Nationwide excl. Okinawa

Jan-13 Camel White Box 6 0.5 440 Nationwide excl. Okinawa

Feb-13 Mevius Premium Menthol One 100’s 1 0.1 410 Nationwide

Feb-13 Mevius Premium Menthol One 1 0.1 410 Nationwide

Feb-13 Mevius Premium Menthol 5 5 0.4 410 Nationwide

Mar-13 Mevius Premium Menthol 8 8 0.7 410 Nationwide

Number of New Products Launches

Number of JT Cigarette Products


Number of New Products Launches 14 9 3 6 7 8 7 13

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Number of JT Cigarette Products 117 106 94 96 98 96 79 83


%

10

20

30

40

50

0

10

40

30

50

20

%

Smoking Rate (by gender)

Smoking Rate (by age)

(At the time of survey) 2005 2006 2007 2008 2009 2010 2011 2012

All Adults 29.2 26.3 26.0 25.7 24.9 23.9 21.7 21.1

Male 45.8 41.3 40.2 39.5 38.9 36.6 33.7 32.7

Female 13.8 12.4 12.7 12.9 11.9 12.1 10.6 10.4

Note: The survey method, along with the sample number, was modified from 2006, resulting in a lack of comparability with results prior to 2006.

Source: JT “Japan Smoking Rate Survey”

(Survey in 2012) Total 20s 30s 40s 50s over-60s

Male 32.7 31.5 40.4 39.0 39.0 23.5

Female 10.4 11.4 15.4 15.9 12.2 5.5

Source: JT “Japan Smoking Rate Survey”


FAC

T SH

EE

TS

List price ¥400 per pack List price ¥410 per pack List price ¥440 per pack

Consumption Tax ¥ 19.0 4.76% ¥ 19.5 4.76% ¥ 21.0 4.76%

Retailer’s Margin ¥ 40.0 10.00% ¥ 41.0 10.00% ¥ 44.0 10.00%

Total Tobacco Excise Tax ¥244.9 61.22% ¥244.9 59.73% ¥244.9 55.65%

National Tobacco Excise Tax ¥106.0 26.51% ¥106.0 25.86% ¥106.0 24.10%

Local Tobacco Excise Tax ¥122.4 30.61% ¥122.4 29.86% ¥122.4 27.83%

National Tobacco Special Excise Tax ¥ 16.4 4.10% ¥ 16.4 4.00% ¥ 16.4 3.73%

JT’s Proceeds ¥ 96.1 24.02% ¥104.6 25.51% ¥130.2 29.58%

Breakdown of Price Levels per Cigarettes Package

All tobacco products sold in Japan are subject to the national

tobacco excise tax, the national tobacco special excise tax, and

local tobacco excise tax. The national tobacco excise tax is set at

¥5,302 per thousand cigarettes, the national tobacco special excise

tax at ¥820 per thousand cigarettes, and the local tobacco excise

tax is set at ¥6,122 per thousand cigarettes. In addition, under the

Taxation

Consumption Tax Law, a 5% consumption tax is imposed as with

other goods and services. All tobacco excise taxes and consump-

tion tax are imposed not only for tobacco products manufactured in

Japan but also for imported tobacco products. From April 1987, no

customs duties apply to imported tobacco products.

Changes of Tobacco Excise Taxes

Item

Tobacco Consumption Tax Tobacco Excise Tax

Apr-1985 May-1986 Apr-1989 Apr-1997 Dec-1998 May-1999 Jul-2003 Jul-2006 Oct-2010

Ad valorem(%)

Specific(¥/1,000

units)

Ad valorem*

(%)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

Specific(¥/1,000

units)

National Tobacco Excise Tax 23.0 582 23.0 1,032 3,126 3,126 3,126 2,716 3,126 3,552 5,302

National Tobacco Special Excise Tax — — — — — — 820 820 820 820 820

Local Tobacco Excise Tax 22.4 550 22.4 1,000 3,126 3,126 3,126 3,536 3,946 4,372 6,122

Total Excise Tax 45.4 1,132 45.4 2,032 6,252 6,252 7,072 7,072 7,892 8,744 12,244

Consumption Tax — — — — 3.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

Tobacco Regulation Changes

• Tobacco Consumption Tax was introduced

* ¥1,000 was deducted from tax base for Ad valorem

• Tobacco Consumption Tax was increased

• Consump-tion Tax was introduced

• Tobacco Consump-tion Tax was renamed Tobacco Excise Tax

• Consump-tion Tax was increased

• National Tobacco Special Excise Tax was introduced

• Review of budget allocations in line with a revision of laws

• Tobacco Excise Tax was increased



(Reference)

Retail Price of Mild Seven/MEVIUS per pack ¥200 ¥220 ¥220 ¥230 ¥250 ¥250 ¥270 ¥300 ¥410

Tax Incidence of Mild Seven/MEVIUS per pack (incl. Consumption Tax) 56.7% 59.7% 59.7% 59.1% 61.3% 61.3% 63.2% 63.1% 64.5%

Net sales excluding excise taxes

Net salesincluding excise taxes

Retail pricesales


Domestic leaf tobacco

Consumer

Threshing

Retailer

Drying

Packing

Packing into a case

Making

Storing

Flavoring

International leaf tobacco

Cutting Blending

Leaf processing factory

Decompose leaves into mesophyll and vein.

Dry leaves to adjust moisture content appropriate for storing and ripening.

Pack cigarettes into parcels or cartons and cardboard boxes.

Pack dried-leaves in an appropriate portion for storing and transporting.

Roll cigarettes.

Ripen leaves for a certain period.

Add aromatic essences called top dressing.

Cut leaves into smaller pieces.

Blend several leaves.

Cigarette manufacturing factory

Cigarette manufacturing factories: 6

Other tobacco-related factories: 3

Koriyama factory

Kita-Kanto factory

Tomobe factory

Kansai factory

Hiratsuka factory

Tokai factory

Hamamatsu factory

Okayama printing factory

Kyushu factory

0

12

8

4

Tobacco Manufacturing System

Tobacco Manufacturing-related Factory Location(As of March 31, 2013)

Number of Domestic Cigarette Manufacturing Factories

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Domestic Cigarette Manufacturing Factories 10 10 10 10 9 7 6 6


FAC

T SH

EE

TS

Thousands of stores

0

80

160

320

240

0

200

400

600

800Thousands

Tobacco Sales System

Number of Tobacco Retailers

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Tobacco Retailers 304 302 298 293 289 279 274 271

Source: Ministry of Finance

Number of Tobacco Vending Machines

(As of December 31) 2005 2006 2007 2008 2009 2010 2011 2012

Total Tobacco Vending Machines 616 565 520 424 405 367 328 304

Source: Japan Vending Machine Manufacturers Association

approval

imports

licensing requirement for selling

requirement for the approvalof retail price

approval

approval

registration notification

requirement for the approval of retail price

registration requirement for registered importers

by way of wholesalers or direct sales

registration forthe wholesale

sales

direct salesJT

Consumers

The Minister of Finance

Foreign Tobacco

Registered Importers

WholesalersRetailers


0

100

200

300

0

5

15

10

20

0

5

15

10

20

0

20

60

40

80

Thousands

Thousands of growers Thousands of ha

Thousands of tons

Number of Tobacco Vending Machines (JT Tobacco Vending Machines)

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

JT Tobacco Vending Machines 243 228 207 196 185 150 103 86

Number of Domestic Tobacco Growers and Area under Domestic Leaf Tobacco Cultivation(Years ended March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Number of Domestic Tobacco Growers 15 14 14 13 12 11 9 6

Area under Domestic Leaf Tobacco Cultivation 19 19 18 17 16 15 13 9

Volume of Domestic and International Leaf Tobacco Purchase


Domestic 47 38 38 38 37 29 24 20

International 39 61 69 74 72 58 53 57


FAC

T SH

EE

TS

0

25

75

50

100

0

500

1,500

1,000

2,000Billions of yen Yen

–10

0

5

–5

10Billions of yen

Value of Domestic Leaf Tobacco Purchase and Price per 1 kg

Leaf Tobacco Reappraisal Profit/Loss


Amount 84.3 68.6 69.3 69.4 68.1 54.2 44.0 38.5

Price per 1 kg 1,801 1,818 1,833 1,803 1,859 1,849 1,865 1,957


Leaf Tobacco Reappraisal (9.5) 9.5 4.1 4.1 4.1 — — —

Note: ( ) indicates reappraisal loss.Reappraisal of leaf tobacco was terminated in FY3/2007. Reversal of reappraisal loss was allocated evenly over three years.


0

10

20

30Billions of yen

Clinical Development(As of April 25, 2013)

(In-house development)Code(Generic Name)

Potential Indication/Dosage Form Mechanism Phase Origin

JTK-303(elvitegravir)

HIV infection/oral HIV Integrase inhibitor


Preparing to file (Japan)

In-house

JTT-705(dalcetrapib)

Dyslipidemia/oral CETP modulator


Phase 2 (Japan)

In-house

JTT-302 Dyslipidemia/oral CETP inhibitor

Decreases LDL and increases HDL by inhibition of CETP

Phase 2 (Overseas)

In-house

JTT-751(ferric citrate)

Hyperphosphatemia/oral

Phosphate binder

Decreases serum phosphorous level by binding phosphate derived from dietary in the gastrointestinal tract

NDA filed (Japan)

In-license(Keryx Biopharmaceuticals)

Co-development with Torii

JTT-851 Type 2 diabetes mellitus/oral



Phase 2 (Japan)

Phase 2 (Overseas)

In-house

JTZ-951 Anemia associated with chronic kidney disease/oral

HIF-PHD inhibitor

Increases red blood cells by stimulating production of erythropoietin, an erythropoiesis-stimulating hormone, via inhibition of HIF-PHD

Phase 1 (Japan)

Phase 1 (Overseas)

In-house

JTE-051 Autoimmune/allergic diseases/oral


Suppresses overactive immune response via inhibition of the signal to activate T cells related to immune response

Phase 1 (Overseas)

In-house

JTE-052 Autoimmune/allergic diseases/oral

JAK inhibitor Suppresses overactive immune response via inhabitation of Janus kinase (JAK) related to immune signal

Phase 1 (Japan)

In-house

*Based on the first dose

R&D Expense on a Non-consolidated Basis


R&D Expense on a Non-consolidated Basis 19.3 21.9 22.9 23.2 21.9 21.7 22.3 24.5

(Licensed compounds)Compound (JT’s code) Licensee Mechanism Note

elvitegravir (JTK-303)

Gilead Sciences

HIV Integrase inhibitor


Elvitegravir: U.S. and EU marketing approvals submitted

Stribild: EU marketing approval submittedNew Single Tablet Regimen: Phase 3

trametinib GlaxoSmithKline MEK inhibitor

Inhibits cellular growth by specifically inhibiting the activity of MAPK/ERK Kinase (MEK1/2)

Metastatic melanoma:U.S. and EU marketing approval submittedMetastatic melanoma, trametinib+dabrafenib:EU marketing approval submitted

dalcetrapib (JTT-705)

Roche CETP modulator


Roche announced the termination of the development of dalcetrapib on May 7, 2012

Anti-ICOS monoclonal antibody

Medlmmune ICOS antagonist

Suppresses overactive immune response via inhibitation of ICOS which regulates activation of T cells

Pharmaceutical Business


FAC

T SH

EE

TS

0

50,000

150,000

100,000

200,000Machines

0

100

200

400

300


Net Sales/Revenue

Number of Marking/Combined Vending Machines


Food Business Net Sales/Revenue 278.3 286.5 336.4 435.9 394.6 375.0 367.0 367.5 359.4

Beverage Business 185.3 190.7 194.9 187.3 186.1 192.4 196.3 185.8 188.8 185.5

Processed Food Business 93.0 95.7 141.4 248.6 208.5 182.6 170.6 181.7 170.7 168.7


Vending Machines 237,000 250,500 257,000 254,000 257,000 265,000 265,000 262,000

JT-Owned 40,500 38,000 35,500 32,000 33,000 33,000 35,000 39,000

Combined 61,500 66,000 71,500 76,500 82,000 83,000 84,000 83,000

Note: Number of vending machines includes machines operated by JT’s affiliates and cup vending machines. Combined vending machines focus on JT brand beverages but also sell non-JT brand beverages.

Beverage Business & Processed Food Business


0

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40,000

20,000

50,000Employees

Number of Employees

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Total 31,476 33,428 47,459 47,977 49,665 48,472 48,529 49,507

Tobacco Business

International 11,943 12,401 22,324 23,227 24,751 23,902 24,237 24,397

Japanese Domestic 11,795 11,534 11,548 11,281 11,282 11,191 11,092 11,043

Pharmaceutical Business 1,532 1,554 1,569 1,616 1,634 1,664 1,693 1,744

Food Business 5,232 7,084 11,169 10,975 11,143 10,864 10,646

Beverage Business 4,912

Processed Food Business 6,563

Other Business 604 461 441 429 352 — — —

Corporate 370 394 408 449 503 851 861 848Note: Number of employees is counted at working basis, unless otherwise indicated.

(As of March 31) 2006 2007 2008 2009 2010 2011 2012 2013

Number of Employees (parent company) 8,855 8,930 8,999 8,908 8,961 8,928 8,936 8,925

Number of Employees Based on Enrollment (parent company) 9,931 9,984 10,010 9,973 9,883 9,842 9,824 9,687

Note: The number of employees in the international tobacco business is calculated based on the number of employees as of December 31 of each year.

Status of Subsidiaries and Affiliates

Name LocationCapital

(Millions of yen) Principal businessHolding rate of voting rights (%)

TS Network Co., Ltd. Taito-ku, Tokyo 460 Japanese domestic tobacco 74.5

JT Logistics Co., Ltd. Shibuya-ku,Tokyo 207 Japanese domestic tobacco 100

Japan Filter Technology Co.,Ltd. Shibuya-ku,Tokyo 461 Japanese domestic tobacco 87.6

Fuji Flavor Co., Ltd. Hamura-shi,Tokyo 196 Japanese domestic tobacco 100

JT Engineering Inc. Sumida-ku,Tokyo 200 Japanese domestic tobacco 100

JT International Group Holding B.V. Netherlands thousands USD 1,800,372 International tobacco 100

JT International Holding B.V. Netherlands thousands USD 1,800,372 International tobacco 100 (100)

JT International S.A. Switzerland thousands CHF 1,215,425 International tobacco 100 (100)

Gallaher Ltd. U.K. thousands GBP 172,495 International tobacco 100 (100)

JTI Marketing and Sales CJSC Russia thousands RUB 108,700 International tobacco 100 (100)

LLC Petro Russia thousands RUB 328,439 International tobacco 100 (100)

Liggett-Ducat CJSC Russia thousands RUB 260,366 International tobacco 100 (100)

JT International Germany GmbH Germany thousands EUR 37,394 International tobacco 100 (100)

JTI Tütün Urunleri Sanayi A.S. Turkey thousands TRY 148,825 International tobacco 100 (100)

JTI-Macdonald Corp. Canada thousands CAD 535,021 International tobacco 100 (100)

Torii Pharmaceutical Co., Ltd. Chuo-ku,Tokyo 5,190 Pharmaceutical 54.5

Akros Pharma Inc. U.S.A. thousands USD 1 Pharmaceutical 100 (100)

JT Beverage Inc. Shinagawa-ku,Tokyo 90 Beverage 100

Japan Beverage Holdings Inc. Shinjuku-ku,Tokyo 500 Beverage 67.6

TableMark Co., Ltd. Chuo-ku,Tokyo 47,503 Processed food 100

Notes: In addition to the above, JT has 210 consolidated subsidiaries and 12 companies accounted for by the equity method.The figures in parentheses in the “Holding rate of voting rights" column are indirect holding rates included in the figures outside the parentheses.

Number of Employees / Subsidiaries and Affiliates


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Strong emphasis on shareholder return improvementWe are targeting competitive shareholder return comparable to global FMCG players. In order to drive shareholder return improvement, we have set targets for dividend payout ratio and adjusted EPS growth rate.


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Composition of Shareholders (Year ended March 31) (%)

20132012201120102009

33.3

50.050.050.050.0

15.0

13.514.415.015.2

33.5

27.426.626.526.1

15.97.57.87.27.4

1.2

1.10.60.60.5

1.1

0.50.70.70.8

Common StockNote: A 200 for 1 stock split was completed on July 1, 2012

Authorized: 8,000,000,000

Issued: 2,000,000,000

Number of shareholders: 189,301

Administration of the Registry of ShareholdersThe Mitsubishi UFJ Trust and Banking Corporation4-5, Marunouchi 1-chome, Chiyoda-ku, Tokyo

Stock Exchange ListingsFirst Sections of Tokyo Stock ExchangeFirst Sections of Osaka Securities Exchange

Principal Shareholders

Name Shares held

The Minister of Finance 666,933,800

State Street Bank and Trust Company (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 52,667,589

Japan Trustee Services Bank, Ltd. (Trust Account) 52,047,200

The Master Trust Bank of Japan, Ltd. (Trust Account) 45,316,400

Trust & Custody Services Bank, Ltd. as trustee for Mizuho Bank, Ltd. Retirement Benefit Trust Account re-entrusted by Mizuho Trust and Banking Co., Ltd. 33,800,000

State Street Bank and Trust Company (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 31,006,706

Goldman Sachs and Company Regular Account (Standing Agent: Goldman Sachs Japan Co., Ltd.) 25,167,031

JPMorgan Chase Bank 380055 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 19,666,814

State Street Bank and Trust Company 505223 (Standing Agent: Mizuho Corporate Bank, Ltd., settlement division) 19,539,365

HSBC BANK PLC A/C THE CHILDRENS INVESTMENT MASTER FUND (Standing Agent: Hongkong and Shanghai Banking Corporation, Tokyo branch) 19,247,400

Individuals and others Foreign institutions and others Other institutions Securities companies Financial institutions Japanese government

Shareholder Information(As of March 31, 2013)

170 JApAN TobAcco INc. AnnuAl RepoRt 2013

Stock Price Range and Trading Volume (Yen)

(Points)

All Time HighDec. 21, 2007: ¥3,540(Pre-split: ¥708,000)

All Time LowApr. 7, 2003: ¥644

(Pre-split: ¥128,800)

ReferenceTOPIX (right)

‘13/3‘12/3‘11/3‘10/3‘09/3‘08/3‘07/3‘06/3‘05/3‘04/3‘03/3‘02/3‘01/3‘00/3‘99/3‘98/3‘97/3‘96/3‘95/3‘94/10

500

1,000

1,500

2,000

2,500

3,000

3,500

500

1,000

1,500

2,000

2,500

3,000

3,500

Offering JT Shares by Government1st Offering

Method Offering by Bids Offering by non-Bids

Offer Price(Pricing Date)

Bid Price: From ¥1,362,000 to ¥2,110,000 Weighted Average Price: ¥1,438,000 (August 29, 1994)

¥1,438,000 (August 31, 1994)

Number of Offering shares

229,920 shares 164,356 shares

Offering Term From August 15 to 18, 1994 From September 2 to 8, 1994Note: The Listing date October 27, 1994: First Sections of Tokyo Stock Exchange, Osaka Securities Exchange, and Nagoya Stock Exchange. November 7, 1994: Other Stock Exchanges.

2nd and 3rd, 4th Offering

2nd Offering 3rd Offering 4th Offering

Method Offering by Book-Building formula Offering by Book-Building formula Offering by Book-Building formula

Offer Price (Pricing Date)

Bid Price: ¥815,000 (June 17, 1996)

¥843,000 (June 7, 2004)

¥2,949 (March 11, 2013)

Number of Offering shares

Japan: 237,390 shares, International: 35,000 shares (Total: 272,390 shares)

Japan:198,334 shares, International: 91,000 shares (Total: 289,334 shares)

Japan:145,625,500 shares, International: 107,636,300 shares (Total: 253,261,800 shares)

Offering Term From June 18 to 19, 1996 From June 8 to 10, 2004 From March 12 to 13, 2013


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Note: Due to a 5 for 1 stock split on April 1, 2006, and a 200 for 1 stock split on July 1, 2012, stock prices reflect post-split levels.

JT’s history dates back to 1898 when the Japanese government formed a monopoly bureau to operate the exclusive sales of domestic tobacco leafSince then, the company has undergone four government share offerings, diversified into pharmaceutical, beverage and processed food business, and executed two large acquisitions, extending our global platform and our position as a leading international tobacco company.

174 History of the JT Group178 Regulation and Other Relevant Laws182 Litigation 184 Members of the Board, Auditors,

and Executive Officers185 Corporate Data

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JT’s history in Japan dates back to 1898, when the Government formed a monopoly bureau to operate the exclusive sale of domestic tobacco leaf.

The JT Group’s overseas history began with the founding of Austria Tabak in 1784. Roughly 70 years later, Tom Gallaher started out in business in Northern Ireland, laying the foundations for the Gallaher Group. Meanwhile, R.J. Reynolds Tobacco Co. (RJR), which would subsequently create the Camel and Winston brands, was established in 1874 in the U.S. In this manner, the current JT Group can trace its origins to many different countries and regions such as Austria, Northern Ireland, the U.S. and Japan. The JT Group has a long history and extensive experience in the tobacco business.

History in Japan from the early 20th century to 1984, when the Japan Tobacco Inc. Act was enacted. Our history in Japan dates back to 1898, when the Government formed a monopoly bureau to undertake the exclusive sale of domestic leaf tobacco. In the early 1900s, the Government extended this monopoly to all tobacco products in Japan and to the domestic salt business. On June 1, 1949, the bureau was established and duly named the Japan Tobacco and Salt Public Corporation, or JTS. This corporation helped to ensure the stable supply of tobacco and secure fiscal revenues for the Government.

The growth in demand for cigarettes in Japan began to slow in the mid-1970s as a result of demographic trends and growing concern about health risks associated with smoking. This trend continued, such that growth in industry sales essentially stopped. In addition to the structural change, the domestic tobacco market opened up substantially to foreign suppliers, triggering competition between domestic and foreign tobacco products in Japan.

Foreign countries stepped up pressure on Japan to take further measures to open the market that were difficult to implement within the framework of the monopoly tobacco sales system. Amid such pressure as well as moves toward the reform of Government-run public corporations, a Government panel was established in March 1981 to conduct research into the public corporation system. In its third report (July 30, 1982), the panel proposed drastic reform of the monopoly and public corporation systems. In response to this proposal, the Government conducted a comprehensive review of these systems and drafted bills to:

•Abolish the tobacco monopoly law to liberalize tobacco imports and establish a tobacco business law to make necessary adjustments related to the tobacco business.

•Abolish the JTS law, reorganize JTS as a joint stock corporation so as to enable it to pursue rational corporate management as much as possible and establish the Japan Tobacco Inc. Act, which provides for a necessary minimum level of regulation in light of the corporation’s need to compete with foreign tobacco companies on an equal footing in the domestic market following the liberalization of tobacco imports.

These bills were enacted on August 3, 1984 in the 101st session of the Diet and promulgated on August 10 of the same year. In April 1985, JT was founded as an entity that took over the whole of the business operations and assets of JTS.


History of the JT GroupBefore 1985

JT is a joint stock corporation that was incorporated in April 1985 under the Commercial Code of Japan, pursuant to the Japan Tobacco Inc. Act, or the JT Act.

1784Austria Tabak is founded by Emperor Joseph II.

1857Tom Gallaher sets up his business in Londonderry, Northern Ireland.

1874RJR is founded by Richard Joshua Reynolds in Winston, North Carolina.

1879Sobranie is registered in London, to become one of the oldest cigarette brands in the world.

1891The Moscow-based Ducat factory is founded.

1898The Japanese Monopoly Bureau is established for the sale of domestic leaf tobacco.

1913Camel is launched.

1931Cellophane is introduced by RJR in order to preserve the freshness of tobacco.

1949The Monopoly Bureau becomes the Japan Tobacco and Salt Public Corporation.

1954Winston is launched.

1955Benson & Hedges is acquired by Gallaher.

1956Salem is launched.

1957HOPE (10) is launched as Japan’s first domestically produced filter cigarettes.

1964Silk Cut is launched.

1968Gallahar is acquired by the American Tobacco Company.

1969Seven Stars is launched, featuring Japan’s first domestically produced charcoal filter.

1977Mild Seven is launched (Japan).

1981Mild Seven is launched internationally.

1984Japan Tobacco Inc. Act is enacted.


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1985April Japan Tobacco Inc. is established. (Japanese tobacco market opened to foreign tobacco manufacturers). The Business Development Division is established to promote new businesses. The Business Development Division is later reorganized into operational divisions engaged in the food and pharmaceutical businesses, finishing in July 1990.

1987April Import tariffs on imported cigarettes are abolished.

1988October JT communication name is introduced.

1992Acquisition of Manchester Tobacco Company Ltd. Acquisition OF AS-Petro (Russia).*

1993September The Central Pharmaceutical Research Institute is established to enhance in-house research capabilities.

1994October Government releases first tranche of outstanding JT shares for initial public offering (394,276 shares offered at ¥1,438,000 apiece). JT stock is listed on the first sections of stock exchanges in Tokyo, Osaka and Nagoya. November JT stock is listed on the stock exchanges in Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo. Acquisition of Yelets (Russia).*

1995May Head office is moved back to Minato-ku from Shinagawa-ku following completion of new head office building. Peter I is launched (Russia).*

1996June Government releases second tranche of outstanding JT shares (272,390 shares offered at ¥815,000 apiece). Acquisition of Tanzanian tobacco production facility.*

1997April JT ends its salt monopoly business in line with abolition of the salt monopoly system. The Tobacco Mutual Aid Pension scheme is integrated into the Employees’ Pension scheme. American Brands spins off Gallaher which becomes Gallaher Group Plc and is listed on the London and New York stock exchanges.**

1998April JT signs an agreement with Unimat Corporation (currently, Japan Beverage Holdings Inc.) on a tie-up regarding beverage business. JT later acquires a majority stake in Unimat. December JT acquires a majority stake in Torii Pharmaceutical Co., Ltd. through a tender offer.

1999May JT acquires the non-U.S. tobacco business of RJR Nabisco Inc. July JT acquires the food business of Asahi Kasei Corporation, including Asahi Foods and seven other subsidiaries. October Under a business tie-up between JT and Torii Pharmaceutical Co., Ltd., the two companies’ R&D operations related to medical pharmaceuticals are concentrated at JT, while their promotion operations are combined at Torii Pharmaceutical. LD launched (Russia).**

2000Acquisition of Liggett-Ducat (Russia).**

2001Acquisition of Austria Tabak.**

2003October JT repurchases 45,800 of its own shares to increase its management options.

2004June Government releases third tranche of outstanding JT shares (289,334 shares offered at ¥843,000 apiece), reducing its stake in JT to the minimum level allowed under law. November-March 2005 JT repurchases 38,184 of its own shares to increase its management options.

2005April JT terminates a licensing contract under which it had exclusive rights to produce and sell Marlboro brand products in Japan and use the Marlboro trademark in the country. June Acquisition of CRES Neva Ltd. (Russia). Glamour is launched (Russia, Ukraine, Kazakhstan).**

2006April JT implements a five-for-one stock split in order to expand the investor base, effective April 1, 2006. May Acquisition of AD Duvanska Industrija Senta in Serbia.

2007April JT acquires all outstanding shares of Gallaher Group Plc.

* Topics of RJR Nabisco's non-US operations before participating in the JT Group.** Topics of Gallaher before participating in the JT Group.


History of the JT Group continuedIn and after 1985

The corporate history of JT is summarized in the table to the left. For the international tobacco business, the history before JT’s acquisitions of RJR Nabisco’s non-US tobacco operations and Gallaher is included.

The operating environment for JT changed drastically in just two years after the foundation of the Company, with the yen’s strong appreciation following the Plaza Accord in 1985, a tobacco tax hike in 1986 and the abolition of tariffs on imported cigarettes in 1987. Amid the yen’s upsurge, a price increase for JT products due to the tobacco tax hike coupled with price cuts for imported cigarettes attributable to the tariff abolition eliminated the price advantage of JT products over imported products, which had stood at around ¥60 to ¥80 when JT was founded in 1985. As a result, competition between JT and foreign tobacco makers intensified in the Japanese market, leading to a decline in JT’s market share from 97.6% in fiscal 1985 to 90.2% in fiscal 1987.

To cope with the rapid deterioration of the operating environment, JT implemented rationalization measures to enhance its cost-competitiveness and pursued diversification while taking measures to strengthen its marketing capability. In the 1990s, JT’s competition with foreign rivals in the Japanese market intensified further. Furthermore, overall cigarette demand in Japan peaked in the latter half of the 1990s due to a contraction of the adult population and growing concerns with health problems associated with smoking. Amid the increasingly difficult operating environment for the Japanese domestic tobacco business, JT took additional rationalization steps, pursued consolidation of operations in its areas of business diversification and expanded the international tobacco business, thereby strengthening its business foundation.

JT significantly strengthened the international tobacco business by acquiring RJR Nabisco’s non-U.S. tobacco operations in 1999 and Gallaher in 2007. With its international sales volume exceeding its domestic sales volume, the JT Group continues to grow as a global tobacco company. The international tobacco business is the engine of the JT Group’s profit growth through its comprehensive brand portfolio which includes Winston, Camel and Mild Seven – MEVIUS as well as Benson & Hedges, Silk Cut, LD, Sobranie and Glamour.

2008January JT acquires a majority stake in Katokichi Co., Ltd. through a tender offer. April JT acquires a majority stake in Fuji Foods Corporation. July JT concentrates its processed food operations, including frozen food and seasonings operations, at the Katokichi Group.

2009May JTI celebrates its 10th anniversary. June JTI Leaf Services (U.S.) LLC is established. October Acquisition of leaf suppliers Kannenberg & Cia. Ltda. (Brazil) and Kannenberg, Barker, Hail & Cotton Tabacos Ltda. (Brazil). November Acquisition of leaf suppliers Tribac Leaf Limited (UK).

2010January Katokichi Co., Ltd. is renamed TableMark Co., Ltd. May Smokeless tobacco product Zerostyle Mint is launched.

2011March JT repurchases 58,630 of its own shares, as part of its shareholder return measures. November Acquisition of Haggar Cigarette & Tobacco Factory Ltd. (North Sudan) and Haggar Cigarette & Tobacco Factory Ltd. (South Sudan).

2012July For the purpose of enlarging Company’s investor base, a 200-for-1 stock-split is conducted. At the same time, JT adopts the share unit system, setting a share trading unit at 100 shares. August Acquisition of Gryson NV, a Belgium Fine Cut maker.

2013February The name change of Mild Seven to MEVIUS in Japan. Government releases fourth tranche of outstanding JT shares (333,333,200 shares offered). On February 27, JT repurchases 86,805,500 shares through ToSTNeT-3, including 80,071,400 shares from the Government. Excluding the share repurchased by JT, 253,261,800 shares are offered by the Government in March. March Acquisition of Al Nakhla Tobacco Company S.A.E. and Al Nakhla Tobacco Company – Free Zone S.A.E., a leading Egyptian water-pipe company.


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Tobacco business

Regulation in the international marketsThe World Health Organization (WHO) adopted the Framework Convention on Tobacco Control (“FCTC”) at its 56th World Health Assembly held in May 2003. It came into force in February 2005 (Japanese Government accepted in June 2004). Since then, there has been a rising trend in regulations regarding sales promoting activities and the marketing of tobacco products and smoking in the international markets where JT Group's tobacco products are sold.

The purpose of the FCTC is to continuously and substantively control the proliferation of smoking. Its provisions include, among others, price and tax measures to reduce tobacco demand, non-price measures to reduce the demand for tobacco (such as protection from exposure to tobacco smoke, regulation of contents and emissions of tobacco products, regulation of disclosure of tobacco products, regulations on packaging and labeling of tobacco products, regulations on tobacco advertising, promotion and sponsorship), and measures relating to the reduction of the supply of tobacco (such as prevention of illicit trade and prohibition of sale of tobacco products to minors). Moreover, in November 2012, the protocol to eliminate illicit trade in tobacco products was adopted at the fifth session of the Conference of the Parties. As a general obligation, signatories to the protocol are to formulate, adopt, periodically update and review strategies, plans and programs for tobacco regulation. However, the content, scope and method of specific controls undertaken in these nations are ultimately legislated by each respective nation and are not necessarily unambiguous.

Regulation by country or region

In the EU, “EU Tobacco Product Directive (EU TPD)” came into effect in July 2001 by which all laws, regulations and ordinances of EU member countries regarding the amount of tar, nicotine and carbon monoxide, warning labels on individual packages and outer wrappers, ingredients appearing on individual packages and descriptive expressions such as “mild,” “light,” etc. would be harmonized in the EU region. Moreover, in December 2012, the European Commission adopted a proposal to revise EU TPD. The proposed revised legislation includes, among other aspects, regulation on packaging and labeling, restriction on the use of additives, and restriction on products which are similar to tobacco products.

This proposal will require approval by the European Parliament and the Council of Ministers, and any final proposal including amendments is anticipated to be adopted in 2014, coming into effect from 2015 or 2016.

One of the most notable regulations adopted recently is the plain packaging (PP) legislation in Australia. In Australia, individual packages of tobacco products must be of a prescribed color, and product names must be displayed on the packages in a prescribed location, font size, color and style. In addition, visual warning labels must take up 75% of the front side and 90% of the reverse of packages. The legislation was passed in 2011 and came into effect in December 2012. Although we, along with several other tobacco manufacturers, challenged this PP legislation on constitutional grounds, the High Court of Australia upheld the constitutionality of the legislation in August 2012. A number of other countries are considering the implementation of similar measures.

The UK, one of our key markets, is currently considering PP regulation that would standardize tobacco packaging by prohibiting the use of logos, colors or brand images, leaving only brand and product names displayed in a uniform color and font, in addition to health warnings. Laws including “Restrictions on the in-store display of tobacco products” and “Ban on sale of tobacco products through vending machines” are already enforced in the UK.

In Russia, another of our key markets, legislation was passed in February 2013, which includes protection from exposure to tobacco smoke and other matters related to tobacco consumption. The legislation is expected to come into effect from June 2013 and to be implemented through to 2017. It contains a number of provisions including a display ban, restrictions on sales of tobacco products in certain retail stores, a ban on advertising, sponsorship and promotions, and the introduction of minimal pricing or a ban on smoking in public places.

Although it is impossible to predict the content of future laws, regulations and industry guidelines relating to sales activities, marketing and smoking, the JT Group expects regulations like the above and new regulations (including those of local governments) to spread across Japan and other countries where the Group sells its products.


Regulation and Other Relevant Laws

Regulation in JapanThe Tobacco Business Act, related acts and statutes and voluntary standards set forth the regulations for the sale and promotion activities of tobacco products in Japan that include the indication of warning labels on tobacco product advertisements and packages that urge caution over the relationship between the consumption of tobacco products and health.

In November 2003, the Ordinance for Enforcement of the Tobacco Business Act was revised including the wording of the cautions over the relationship between the consumption of tobacco products and health indicated on tobacco product packages and, starting in July 2005, all tobacco products sold in Japan have been in conformity with the revised regulations. In addition, the Japanese Minister of Finance has indicated a “Guideline for Advertising of Tobacco Products” based on the Tobacco Business Act which, in March 2004, was revised with tougher language. The Tobacco Institute of Japan has established voluntary standards regarding the advertising and sales promotion activities for tobacco products. All member companies, including JT, comply with these standards.

Recently, cases where smoking in public areas including restaurants and office buildings has been restricted by laws and regulations and the like are on the rise in Japan. From the perspective of passive smoking prevention, various measures are being implemented and promoted by the Government and governing bodies. Ministry of Health, Labor and Welfare established the Health Promotion Act, which imposes on the facility manager the obligation to make efforts to prevent passive smoking as well as the “Guidelines for Measures on Smoking in the Workplace” dealing with efforts at the workplace. We expect this trend to continue in the future.

Tobacco Business Act

Importers and wholesalers of tobacco products must register with the Minister of Finance. Retailers of tobacco products must obtain approval from the Minister of Finance. The Minister of Finance oversees all retail sales prices for tobacco products manufactured by JT and imported tobacco products. The Minister of Finance must approve the filed retail sales prices unless otherwise considered unfairly prejudicial to consumers. Subsequently, tobacco retailers are only permitted to sell tobacco products at the appropriate prices.

The Tobacco Business Act requires JT to annually enter into purchase contracts with tobacco growers regarding the aggregate cultivation area for specific varieties of leaf tobacco and the prices for leaf tobacco by variety and grade. JT must purchase all leaf tobacco produced pursuant to such contracts, except for any not suited for the manufacture of tobacco products. When JT decides the aggregate cultivation area and the prices of leaf tobacco for its contracts with tobacco growers, it is required to respect the opinion of the Leaf Tobacco Deliberative Council (hatabako shingi kai), which consists of members appointed by JT with the approval of the Minister of Finance from among the representatives of domestic leaf tobacco growers and academic appointees. Much like many other agricultural products in Japan, production costs for domestically-grown leaf tobacco are higher than those of foreign-grown leaf tobacco to the extent that the purchasing price for the former (before re-drying) is approximately four times that of the latter (after re-drying).

Prohibition of “mild,” “light” and other descriptive labeling

The aforementioned FCTC includes provisions regulating descriptive labeling such as “mild” and “light.” They stipulate that signatory countries must, within three years after entry into force within their country, adopt and implement effective measures to prevent promotion of tobacco products by any means that could create an erroneous impression about the characteristics, etc. of tobacco products including the use of terms, among others, that create a false impression that a particular tobacco product is less harmful than other tobacco products (these may include terms such as “mild” and “light”). Each signatory country is establishing various measures required by the FCTC.

Measures vary among signatory countries including prohibiting the use of target words or expressions such as “mild” or “light” specifically enumerated or illustrated, or the use of words that would create a false impression without specifying target words or expressions. In the future, measures over descriptive labeling, etc. such as “mild” and “light”, which would include the measures to comply with the requirements under the FCTC, may prohibit the use of the word “mild” or “light”.


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With respect to Japan, in accordance with the Ordinance for Enforcement of the Tobacco Business Act revised in November 2003, all tobacco products bound for the domestic market labeled with “mild,” “light,” etc. after July 2005 are subject to certain necessary measures. The JT Group plans to continue using words like “mild” and “light” in Japan in accordance with the above Ordinance.

Self-regulation on marketing

Prevention of youth smoking

Youth smoking prevention is an issue which must be addressed by society as a whole. The JT Group has a voluntary code, “Global Tobacco Products Marketing Standard”, to govern its business and marketing activities in support of youth smoking prevention. The JT Group are working with the Government, and other relevant organizations to take steps towards preventing youth smoking in the countries in which it operates. For further details, please refer to the following website pages:

Initiatives taken in Japan:http://www.jti.co.jp/corporate/enterprise/tobacco/responsibilities/activity/index.html

Initiatives taken in the international markets:http://www.jti.com/how-we-do-business/regulating-tobacco-products/youth-smoking-prevention/

Global Tobacco Products Marketing Standards

The JT Group complies with all the national regulation and has implemented a “Global Tobacco Products Marketing Standard”, a self-regulatory code, which governs the marketing of its tobacco products in every country. The key provision include “Strict minimum guidelines applicable to advertise tobacco products”, and “Indication of health warnings in ads and other media”, “Restrictions on sponsorships”, among others.

Please refer to the following link for more information regarding the Global Tobacco Products Marketing Standards of JTI:http://www.jti.com/how-we-do-business/regulating-tobacco-products/jti-global-marketing-standard/

Pharmaceutical BusinessThe pharmaceutical industry operates in a highly regulated environment. In many countries, R&D, manufacturing and sales activities are strictly regulated. Moreover, in recent years, the approval process for new drugs has been tightening due to the increased requirements to promote public health and safety. Today, compared with the past, pharmaceutical companies are required to spend more time to examine pharmaceutical safety issues and conduct a greater number of clinical trials on subjects to collect more data on the efficacy of new pharmaceuticals. Consequently, clinical trials are growing in scale, cost and time.

In Japan, marketing of pharmaceutical products is subject to the supervision of the Ministry of Health, Labor and Welfare, or MHLW, primarily under the Pharmaceutical Affairs Law, while part of its supervisory authority is undertaken by the relevant prefectural governor. Under the Pharmaceutical Affairs Law, in order to conduct the marketing business of pharmaceuticals, a person is required to obtain from the MHLW a renewable, generally five-year marketing business license. In addition, under the Pharmaceutical Affairs Law, in order to market pharmaceuticals, it is necessary to obtain marketing approval from the MHLW for each kind of product.

The national health insurance system covers virtually the entire Japanese population. To sell a pharmaceutical product in Japan, a marketing business license holder of pharmaceutical products must first have a new pharmaceutical product listed on the National Health Insurance Pharmaceutical Price List for coverage under the national health insurance system. Generally, prices on the price list are subject to revision once every two years as part of the Government’s policy to control healthcare spending.


Regulation and other Relevant Laws continued

Beverage and Processed Food BusinessAs a producer and seller of food products, the JT Group’s beverage business and processed food business are subject to regulations mainly under the Food Safety Basic Act, the Food Sanitation Act and the JAS Act.

The Food Safety Basic Act requires food-related companies to take necessary measures to ensure food safety in each process of the supply chain, as well as to make efforts to provide accurate information about foods and food-related goods in an appropriate manner. The Food Sanitation Act concentrates on prevention of sanitary problems arising from consumption of foods and beverages. This Act requires food companies to take necessary measures under their own responsibility to ensure the safety of foods, additives, appliances and packages. The measures discussed in the Act include the acquisition of knowledge and skills, assurance of the safety of raw materials and voluntary inspection. The JAS Act provides the quality standards, the so-called JAS Standards, for agricultural and forestry products including foods and beverage products, as well as standards for food composition and production, and distribution methods. The JAS Act also sets the quality labeling standards which define the labeling requirements to indicate quality-related items such as materials and origin. Manufacturers and others must comply with the standards in preparing their product labels.

The JT Group is striving to establish a high level of food safety control from the four perspectives – “food safety”, “food defense”, “food quality” and “food communication” – in addition to complying with these laws and regulations and ensuring thorough awareness of them.


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JT and some of its subsidiaries are defendants in lawsuits filed by plaintiffs seeking damages for harm allegedly caused by smoking, the marketing of tobacco products, or exposure to tobacco smoke. As of the fiscal year end date, there were a total of 28 smoking and health-related cases pending in which one or more members of the JT Group were named as defendant or for which JT may have certain indemnity obligations pursuant to the agreement for JT’s acquisition of RJR Nabisco Inc.’s overseas (non-U.S.) tobacco operations. We believe it is possible that other similar smoking and health-related lawsuits may be filed in the future.

In addition, JT and some of its subsidiaries are also defendants in lawsuits other than the smoking and health-related cases. Please refer to “Note 38” to the consolidated financial statements (Contingencies Contingent Liabilities) for major lawsuits to which JT and some of its subsidiaries are named as defendants. Similar lawsuits involving us may be filed and contested in courts in the future.

To date, we have never lost a case or paid any settlement award in connection with smoking and health-related litigation. However, we are unable to predict the outcome of currently pending or future lawsuits. If a court ruling is unfavorable to us, whether the lawsuits are smoking and health-related or not, our financial results, production, sales and imports/exports of tobacco products may be adversely affected.

In recent decades, numerous, large-scale, smoking and health-related cases have been brought against tobacco product manufacturers in the United States of America, and some of the cases resulted in verdicts with massive damage awards.

For example:• in Florida’s Engle class action in 2000, a first

instance court issued a punitive damages award of approximately US$ 145 billion in favor of the plaintiffs. At a higher court, the verdict was subsequently dismissed and the plaintiff’s class was decertified in 2006 although common findings to be applied in individual cases were upheld. Individual Engle progeny lawsuits have been filed by over 7,000 former Engle class members in Florida, of which fewer than 100 lawsuits have been fully adjudicated at the trial court level and most such lawsuits are still subject to appeal.

• in a “lights” case in Illinois in which the class members alleged that use of the term “lights” constituted fraudulent and misleading conduct, an award was made of damages totaling approximately US$ 10 billion in 2003. While the tobacco product manufacturer won a reversal of this verdict in 2005, the courts have upheld the timeliness of the plaintiff’s petition to re-open the prior judgment sought by the plaintiff in 2011. The case is still ongoing. A number of other “lights” cases have also been filed in the United States.

We believe that these cases partly reflect the unique nature of the judicial system in the United States of America arising from the jury trials, class actions, punitive damage awards and contingency fee arrangements for attorneys. While neither JT nor any of its subsidiaries is a defendant in any of the lawsuits mentioned above nor subject to any indemnity claims with respect to them, we continue to monitor closely these developments in the United States of America with particular attention. The tobacco business which JJT acquired from RJR Nabisco Inc. did not include brands in the United States of America and, even now, our current tobacco business scale in the United States of America remains very small. Accordingly, we consider its exposure to smoking and health-related litigation in the United States of America to be low, and we thus believe that situations under litigation in the United States of America will not materially affect our businesses in the near future. As of the fiscal year end date, there is no smoking and health-related litigation in the United States of America in which JT or any of its subsidiaries is named as a defendant or with respect to which any indemnity claims have been made against JT or any of its subsidiaries.

There are nine ongoing healthcare cost recovery cases in Canada pending against JTI-Macdonald Corp. and JT’s indemnitees (RJR Nabisco Inc.’s affiliate), brought by the Provinces of British Columbia, New Brunswick, Ontario, Newfoundland and Labrador, Manitoba, Quebec, Alberta, Saskatchewan and Prince Edward Island. These provinces filed lawsuits under their own provincial legislation which was enacted exclusively for the purpose of authorizing the provincial government to file a direct action against tobacco manufacturers to recoup the healthcare costs the Government has incurred and will incur resulting from “tobacco-related wrongs”. In addition, there are eight pending class actions in Canada including two brought in Quebec in which the class was certified by the court in February 2005. The trial began in March 2012 and no decision is yet made as to the liability of the defendants.


Litigation

As for other jurisdictions, generally speaking, the smoking and health-related litigation is of a smaller scale in terms of the number of lawsuits and the amounts claimed compared with those in the United States of America and Canada. We do not believe that litigation such as in the United States of America will spread around the world in the near future since it developed in a unique judicial environment involving jury trials, class actions, punitive damages awards, and contingency fees for attorneys.

However, the business environment surrounding the global tobacco industry has become more severe due to smoking and health issues and because of the tighter regulations resulting from such issues. Considering the relationship between the tobacco industry and society, we, as a tobacco product manufacturer, continue to closely monitor the developments and trends of the litigation involving tobacco companies in the United States of America, Canada and elsewhere, with particular interest and attention.


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Members of the Board

Chairman of the BoardHiroshi Kimura

Representative DirectorsMitsuomi Koizumi

Yasushi Shingai

Noriaki Okubo

Akira Saeki

Members of the BoardHideki Miyazaki


Motoyuki Oka*

Main Kohda*

* Outside Directors under the Companies Act of Japan.


Futoshi Nakamura

Tomotaka Kojima

Koichi Ueda*

Yoshinori Imai*

* Outside Audit & Supervisory Board Members under the Companies Act of Japan.

Executive Officers

PresidentMitsuomi Koizumi

Chief Executive Officer

Executive Deputy PresidentsYasushi Shingai

Compliance, Strategy, HR, General

Administration, Legal and Operation

Review & Business Assurance

Noriaki Okubo

Pharmaceutical, Bevarage, and

Processed Food Business

Akira Saeki

President, Tobacco Business

Hideki Miyazaki

CSR, Finance and Communications

Senior Executive Vice PresidentsKenji Iijima

Chief Marketing & Sales Officer,

Tobacco Business

Ryoji Chijiiwa

Compliance and General Affairs

Mutsuo Iwai

Chief Strategy Officer

Executive Vice PresidentShinichi Murakami

Head of Domestic Leaf Tobacco General

Division, Tobacco Business

Senior Vice PresidentsKazuhito Yamashita

Chief Corporate, Scientific & Regulatory

Affairs Officer, Tobacco Business

Yasuyuki Yoneda

Chief R&D Officer, Tobacco Business

Masahiko Sato

Head of Manufacturing General Division,

Tobacco Business

Atsuhiro Kawamata

Head of China Division, Tobacco Business

Junichi Fukuchi

Head of Tobacco Business Planning

Division, Tobacco Business

Muneaki Fujimoto

President, Pharmaceutical Business

Junichi Haruta

Head of Central Pharmaceutical Research

Institute, Pharmaceutical Business

Ryoko Nagata

Chief CSR Officer

Chito Sasaki

Chief Human Resources Officer

Naohiro Minami

Chief Financial Officer

Haruhiko Yamada

Chief General Affairs Officer

Kiyohide Hirowatari

Chief Legal Officer

Shigenori Ohkawa

Chief Science Officer, Central Pharmaceutial

Research Institute, Pharmacentical Business

Goichi Matsuda

Head of Bevarage Business

Yuki Maeda

Chief Communication Officer


Members of the board, audit & Supervisory board Members, and Executive officers(As of June 21, 2013)

Management

001 Financial Highlights004 At a Glance006 Consolidated Five-year Financial Summary009 Message from the Chairman and CEO010 CEO Business Review012 Management Principle, Resource Allocation

Policy and Strategic Framework013 Business Plan 2013014 Performance Measures

Operation & Analysis

020 Industry Overview 020 Tobacco Business 022 Pharmaceutical, Beverage and

Processed Food Business024 Review of Operations 024 Role of Tobacco Business 026 International Tobacco Business 032 Japanese Domestic Tobacco Business 036 Role of Pharmaceutical, Beverage

and Processed Food Business 038 Pharmaceutical Business 042 Beverage Business 046 Processed Food Business050 Risk Factors054 Corporate Social Responsibility058 Corporate Governance

Financial Information


Fact Sheets

142 Fact Sheets

Shareholder Information


Other Information

174 History of the JT Group178 Regulation and Other Relevant Laws182 Litigation 184 Members of the Board, Audit & Supervisory

Board Members, and Executive Officers185 Corporate Data

For more information, please visit www.jt.com

Head Office

2-1, Toranomon 2-chome,

Minato-ku, Tokyo 105-8422, Japan

Tel: 81-3-3582-3111

Fax: 81-3-5572-1441

URL: http://www.jt.com/

Date of Establishment

April 1, 1985

Paid-in Capital

¥100 billion

JT International S.A.

1, Rue de la Gabelle CH-1211 Geneva 26,

Switzerland

Tel: +41(0)22-7030-777

Fax: +41(0)22-7030-789

URL: http://www.jti.com/

Members of JT International Executive Committee (As of June 1, 2013)

Paul Bourassa

Senior Vice President Legal, Regulatory

Affairs and Compliance

Martin Braddock

Regional President CIS+

Stefan Fitz

Regional President Asia Pacific

Roland Kostantos

Senior Vice President Finance, Information

Technology and Chief Financial Officer

Paul Neumann

Senior Vice President Global Leaf

Howard Parks

Senior Vice President Consumer &

Trade Marketing

Fadoul Pekhazis

Regional President Middle East, Near East,

Africa, Turkey and World Wide Duty Free

Eddy Pirard

Regional President Western Europe

Michel Poirier

Regional President Americas

Jörg Schappei

Senior Vice President Human Resources

Bill Schulz

Senior Vice President Global Supply Chain

Takehisa Shibayama

Senior Vice President Research &

Development

Vassilis Vovos

Regional President Central Europe

Frits Vranken

Senior Vice President Business

Development and Corporate

Communications


President and Chief Executive Officer


Executive Vice President and Deputy CEO

Thomas A. McCoy

Chief Operating Officer


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contents corporate Data(As of March 31, 2013)

Japan Tobacco Inc.Annual Report 2013

Japan Tobacco Inc. A

nnual Report 2013

Year ended March 31, 2013

2-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8422, JapanTel: (81) 3-3582-3111Fax: (81) 3-5572-1441URL: http://www.jt.com/

This annual report is printed using ink that contains less than 1% Volatile Organic Compounds (VOCs).

Printed in Japan

Japan Tobacco Inc.

Annual Report 2013 - Japan Tobacco InternationalJapan Tobacco Inc. Annual Report 2013 Japan Tobacco Inc. A nnual Report 2013 Year ended March 31, 2013 2-1, Toranomon 2-chome, Minato-ku,

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