Ladies and gentlemen, I am Aaron Lee, Head of Investor Relations at KT&G. Thank you for joining us for KT&G's 2026 third quarter earnings release and Capital Markets Day. Please allow me to share with you today's agenda. We will first announce our third quarter earnings, and then our CEO, Mr. Kyung-man Bang, will share with you KT&G's mid-to-long-term growth strategies and shareholder return plans. It will be followed by a fireside chat on today's presentation. This event will be held in Korean, and English simultaneous interpretation will be provided. You can also download all materials on the KT&G website. With that, we will now begin with the 2026 third quarter earnings release.
Please be advised that the results we are presenting today have yet to be audited by our external auditors and may be subject to change during the audit process. The presentation also includes forward-looking information based on our current expectations. Actual future results may differ from these expectations. Now, our CFO and COO, Mr. Sang-hak Lee, will present the key highlights of our 2026 third quarter results.
Ladies and gentlemen, I am Sang-hak Lee, CFO and COO of KT&G. Thank you for joining KT&G's 2026 third quarter earnings presentation. Let me begin with the key highlights for the quarter. KT&G maintained solid growth in the third quarter, achieving new quarterly records in both revenue and operating profit. Consolidated revenue increased 4.3% year-on-year to KRW 1,905.2 billion. Operating profit rose 13.9% to KRW 530.1 billion, exceeding KRW 500 billion in a single quarter for the first time.
In the tobacco business, growth in CC and NGP, together with improved costs, drove both revenue and operating profit to new quarterly records. The operating profit margin reached 32.6%. International CC delivered growth in volume, revenue, and operating profit for the 10th consecutive quarter, with volume and revenue reaching new quarterly records. Volume increased 6.2% year-on-year, revenue rose 10.5%, and operating profit grew 21.9%, significantly improving profitability. In Korea NGP, stick volume increased 6.8%, and our market share reached 49.1%. A greater share of high-ASP sticks supported continued growth in the quality of our earnings. on September 15, we launched lil Tonino Lamborghini, featuring a preheating time of just three seconds, and we will further strengthen our market leadership by expanding sales nationwide in November. International NGP also delivered growth in volume, revenue, and operating profit, with strong performance in key markets.
Finally, in the health functional food business, revenue and operating profit increased 3.4% and 12.2% year-on-year, respectively. In Korea, both premium and value brands posted strong sales. Internationally, revenue growth in Greater China and cost efficiencies improved profitability. In the U.S., we are continuing our pilot test for energy drinks with Altria Group, and for the ingredients B2B business, we are pursuing strategic partnerships with global F&B and beauty companies. Uncertainty in the external business environment, including exchange rates, continues into the fourth quarter. We will focus on growing our core businesses and improving profitability, making every effort to achieve our full-year guidance. We look forward to the continued interest and support of our shareholders and the members of the capital market. Thank you. I will now take you through our 2026 third quarter results in more detail. Please turn to page four.
In the third quarter, growth in our tobacco business drove consolidated revenue and operating profit to new quarterly records. Consolidated revenue increased 4.3% year-on-year to KRW 1,905.2 billion. Operating profit rose 13.9% to KRW 530.1 billion, reflecting continued profitability-led growth. Net income decreased 75.1% year-on-year to KRW 104.1 billion. This mainly reflected lower valuation gains on foreign currency assets due to the differences in exchange rates movements during the quarter. Earnings per share were KRW 1,022. EBITDA increased 12.2% year-on-year to KRW 606.2 billion, with an EBITDA margin of 31.8%. Next, let us look at the key drivers of the change in consolidated operating profit on page five. Let me begin with the tobacco business. An improved product mix and pricing contributed KRW 23.7 billion to operating profit. Higher international CC and NGP stick volumes added KRW 12.8 billion.
Cost improvements, including COGS, contributed KRW 9.7 billion, while foreign exchange movements added KRW 7.5 billion. Together, these factors increased operating profit in the tobacco business by KRW 53.7 billion. Operating profit also increased by KRW 8.7 billion in health functional food and KRW 4.1 billion in real estate. As a result, consolidated operating profit increased 13.9% year-on-year to KRW 530.1 billion. I will now discuss the results by business in more detail. Please turn to page six. First, the tobacco business. Supported by growth in both CC and NGP, revenue increased 6% year-on-year to KRW 1,306.5 billion, exceeding KRW 1.3 trillion in quarterly revenue for the first time. Operating profit also reached a new quarterly record, rising 14.4% year-on-year on revenue growth and improved costs. The operating profit margin was 32.6%.
The share of international sales by volume increased to 64.8%, driven primarily by growth in international CC volume. Let me now take you through each part of the tobacco business, starting on page seven. First, international CC. International CC maintained its triple growth in volume, revenue, and operating profit in the third quarter. Volume increased 6.2% year-on-year to 19.57 billion sticks, while revenue rose 10.5% to KRW 579 billion. Both volume and revenue reached new quarterly records. In particular, revenue growth and cost improvements drove operating profit growth that outpaced revenue growth. Next, please turn to page eight for Korea CC results. Total Korea CC market volume decreased 5.4% in the third quarter, reflecting a high base from demand brought forward ahead of the Chuseok holiday in the same quarter last year.
We limited the decline in revenue by increasing our market share and the contribution from high-ASP duty-free channel. Our volume decreased 5.3% year-on-year to 10.12 billion sticks, while revenue declined 3.8% to KRW 429.7 billion. Next, please turn to page nine for NGP results. In Korea NGP, stick volume increased 6.8% year-on-year. A greater share of high-ASP sticks for lil AIBLE improved the product mix and supported continued profitability-led growth. International NGP delivered growth in volume, revenue, and operating profit, supported by strong sales in key markets. I'll now discuss our Korea and international NGP results in more detail. Please turn to page 10. In Korea, HNB market penetration increased, while growth in stick volume led by lil AIBLE helped us achieve a market share of 49.1%. Internationally, volume continued to grow moderately as new stick and device launches supported sales in key markets, including Russia.
Next, please turn to page 11 for the health functional food business. In the third quarter, revenue in the health functional food business increased 3.4% year-on-year to KRW 372.2 billion. This was driven by strong sales of premium and value brands responding to changing consumer trends. Operating profit increased 12.2% year-on-year to KRW 80.1 billion as profitability improved across all international regions. Moving on to the domestic and international results respectively, please turn to page 12. in Korea, stronger demand for our brands drove growth, particularly in department stores, duty-free stores, and online channels. Revenue increased 3.9% year-on-year to KRW 316.7 billion. International revenue rose 0.7% year-on-year to KRW 55.5 billion, supported by growth in Greater China, including China and Taiwan. Next, please turn to page 13 for the real estate business.
Revenue in the real estate business decreased 13.3% year-on-year to KRW 186.7 billion. As small and medium-sized development projects approach completion, the amount of revenue recognized based on the percentage of completion declined. Operating profit increased 19.8% year-on-year to KRW 24.8 billion as the completion of the Mia and East Daejeon development projects reduced cost and SG&A expenses. This concludes our 2026 third quarter earnings presentation. We will begin the KT&G 2026 Capital Markets Day shortly. Please stay with us for a moment.
Now, we will begin the 2026 KT&G Capital Markets Day. Our CEO, Mr. Kyung-man Bang, will present to you our growth strategies based on the changes and progress made so far, as well as our new shareholder return plan. Please be advised that the business forecast and shareholder return plan presented today includes forward-looking information based on today's assumptions and expectations, and the actual results may differ in the future based on changes in business environment. With that said, we will now invite Mr. Bang to share with us the future KT&G plans to build.
Ladies and gentlemen, I am Kyung-man Bang, CEO of KT&G. Thank you for joining us for the 2026 KT&G Capital Markets Day. Over the past three years, we have redirected our growth path and laid the foundation for a new leap. Now, we will build on this foundation to generate greater earnings and translate it into stronger shareholder value. Turning earnings into value per share and continuously compounding that value over time is KT&G's new value creation strategy, Compound 2030, which I will share with you today. KT&G's growth trajectory has changed over the past three years. We went beyond simply increasing sales to reshape our structure to focus on core competitiveness and profitability. The numbers speak for themselves. We expect group revenue for 2026 to reach a record KRW 7 trillion, with operating profit marking KRW 1.5 trillion, which is about 28% higher compared to 2023.
The most important change of all is the quality of our earnings. The share of real estate business in our revenue that used to be 14% in 2021 has now come down to 8%, with our core business taking its place. KT&G is now a company that grows profit faster than revenue, driven by our core businesses. We have also honored our commitments to shareholders while investing for the future. Our overseas revenue share of the tobacco businesses has surpassed 50%, overseas production capacity has more than doubled, and our NGP revenue has grown at an annual rate of over 15%. As a result of active shareholder value enhancement, we reached over 100% in total shareholder return ratio on average in the past three years, with total outstanding shares down by 24% versus the end of 2023.
Over the past three years, KT&G has delivered on promises through tangible results. We will continue to accelerate growth and work to ensure that the benefits flow through to shareholder value. Let me begin with our business strategy, which is the starting point for growth. KT&G's future growth will go beyond just selling more. We will use the strengths we have built to capture greater market opportunities. By increasing the value of our products and business models, we will build a structure in which growth delivers higher earnings. KT&G's future growth will be led by three growth engines. First, the international cigarette business is our cash cow. Through global expansion and a more sophisticated profit structure, we will reinforce its role as a core source of earnings and cash generation. Second, NGP is our next pillar of growth.
We will turn our accumulated technology and platform innovation into global business expansion, developing NGP into a powerful growth engine. Third, the health functional food business will support higher valuation multiple for KT&G going forward. Our differentiated brand and competitiveness in raw materials will open up opportunities for long-term growth beyond the nicotine space. Strengthening the core competitiveness in each business, expanding our markets, and advancing our business models, this is KT&G's growth algorithm. Let me turn first to our international CC business. The first growth driver is pricing and product mix improvement. In the global cigarette market, consumer preferences are diversifying towards super slim, capsules, and flavored products. This is precisely the growth segment in which KT&G has built product and brand competitiveness over many years.
Our flagship brand, ESSE, is the world's leading super slim brand with a market share of at least 35% and brand equity valued at approximately $2.1 billion. Our task is clear, converting this brand power into higher prices and better product value. In key markets, ESSE has room to raise prices relative to competing products. In Indonesia, new capsule-related products have already demonstrated the possibility of improving mix towards more premium segments. Building on this brand strength, we will drive quality growth in international CC through strategic price increases and a larger share of premium products. The second growth driver is volume expansion. KT&G's overseas growth is no coincidence. In the past five years, more than half of our overseas CC revenue growth came from only 14 markets where we operate local subsidiaries.
We have already demonstrated our ability to establish direct presence in new markets and develop them into sources of growth. There is still substantial room to grow in our existing markets. We will expand distribution coverage from around 50% today to at least 70% by 2030, unlocking further sales potential. We will also enter new markets. Drawing on our global production network and experience in establishing local operations, we will enter more than 30 new countries to target a potential addressable market of over 500 billion sticks. By deepening our presence in existing markets and broadening our reach into new ones, we will further accelerate the volume growth in our international CC business. The third driver is translating growth into higher profitability. Expansion of subsidiary business is about more than just volume.
This business model gives us greater control over local distribution, pricing, and product strategy, enabling us to capture more profit across the entire value chain. Building on these strengths, we will increase revenue from subsidiary business by at least 50% between 2026 and 2030. This will also be reinforced with greater cost competitiveness. We will raise the share of overseas production to at least 70%. By optimizing our global production network and pursuing company-wide cost innovation, we will deliver cumulative cost savings of at least 550 billion won over four years. Brand-led pricing and mix, volume growth through global market expansion, and structural cost competitiveness. Together, these three drivers will deliver double-digit compound annual growth in both revenue and operating profit in our international cigarette business through 2030. Next is NGP, which is KT&G's second pillar of growth.
At the heart of NGP competitiveness is the ability to innovate ahead of changing consumer needs. Through efficient R&D focused on core technologies, KT&G has built differentiated platform capabilities and filed approximately 9,500 patent applications to date. Our platforms have continued to evolve from lil SOLID, lil HYBRID, and lil AIBLE to our recently introduced fourth-generation lil Tonino Lamborghini. This latest product uses new microwave technology that reduces preheating time to just three seconds. We will continue to improve the efficiency of our R&D investment by focusing on consumer needs and commercial potential while bringing further innovation to the user experience. Looking beyond heat-not-burn and nicotine pouches, we will also explore new nicotine delivery technologies and expand our pipeline of next-generation products to come. We are focusing on platform innovation because the way the HNB market grows is changing.
As the market moves beyond its early growth stage and matures, consumer needs become more segmented across price, performance, and design. In Korea, KT&G has consistently introduced platforms with distinct features to meet these changing needs. As a result, we expect our domestic market share to reach approximately 50% in 2026. Our experience in Korea has demonstrated one thing clearly: a multi-platform strategy that meets diverse consumer needs is a powerful competitive advantage. We will now take this proven strategy to global markets. We will pursue two tracks in our global HNB business: partnerships and direct market entry. Through global partnership, we will bring our latest platforms to key markets quickly. At the same time, in markets we enter directly, we will fully roll out a multi-platform strategy tailored to each market's maturity and consumer preferences. KT&G already has an important advantage in expanding HNB globally.
The local business foundations and market operating experience we have built through our international cigarette business. We will begin in markets such as Kazakhstan, Indonesia, and Taiwan, where our subsidiaries have established distribution networks. Based on local consumer response and sales performance, we will then expand into major markets, including Europe. By 2030, we will deploy our multi-platform strategy in at least 15 countries. Combining the strengths of our global partnership and direct operations, we aim to become one of the world's top two HNB players. Nicotine pouches represent another new growth opportunity for KT&G. We have differentiated product development capabilities, strong IP, production infrastructure in Sweden, and expertise in managing global supply chains. By 2028, we will establish a product portfolio that addresses a wide range of consumer preferences and expand capacity to build a foundation for global growth. We will expand our market presence in stages.
First, we will strengthen our existing business in the three Nordic markets. We will then enter key markets across regions, including the U.K., the UAE, South Africa, Korea, and Japan. Building on proven results in these markets, we will expand into neighboring markets with growth potential. Entering the U.S., the world's largest nicotine pouch market, and commercializing our products there will also be a key mid-to-long-term priority. By combining our Northern Europe business base with KT&G's ability to develop new markets, we aim to enter about 70 countries and secure a global market share of at least 5% of the industry by 2030, becoming a top five global player in nicotine pouches. Our final growth engine is health functional food. Over the past few years, this business has focused on improving underlying profitability rather than expanding revenue.
We have increased the share of online sales and improved the efficiency of our product portfolio, production, and inventory management. As a result, we expect the operating margin to rise from approximately 6% in 2022 to around 10% in 2026. The business now has stronger fundamentals. This is the starting point for our next phase of growth. We will now build on this recovery in profitability to generate new growth in global markets. Our global strategy for health functional foods is also evolving. Building on the strength of the CheongKwanJang brand and our differentiated red ginseng ingredients, we will add a new B2B ingredients business as a growth pillar alongside our existing B2C business. We are already conducting technical reviews and evaluating product applications with leading global food and beverage and beauty companies. We will develop these activities into joint development projects and commercial partnerships.
The key is to create a virtuous cycle. Through B2B partnerships, we will raise global awareness of red ginseng and broaden its applications. In B2C, we will launch localized product formats for each key channel, translating these gains into stronger brand competitiveness and sales growth. Through these efforts, we will increase the share of revenue generated from overseas to at least 30% by 2030. Our three growth engines will deliver two key changes. The first is sustained earnings growth. By improving the profitability of our international cigarette business and expanding NGP, we will deliver mid-to-high single-digit compound annual growth in group operating profit from 2026 to 2030. The second is a shift in our business portfolio.
By 2030, we will increase the overseas share of cigarette revenue to at least 70%, and we will raise the NGP share of tobacco revenue and overseas share of HFF revenue to at least 30%. We will also maximize the value of our existing global partnership while actively broadening the range of partners and areas covered by our strategic alliances. As we reshape our portfolio around global businesses and NGP, KT&G will become a company that delivers larger earnings year after year. The strategies I've outlined today will enable KT&G to generate greater earnings, but our ambition extends beyond earnings growth. What matters is how much of those earnings we convert into cash and how effectively we use that cash to increase value per share. This is the essential link between our growth algorithm and our value algorithm.
Let me now explain how KT&G will convert earnings into cash and the principles that will guide our allocation of that cash. KT&G will allocate capital according to the following three principles. First, shareholder returns will take priority in allocating cash generated by our businesses. All remaining cash after funding necessary recurring investments, or core cash flow, will be returned to shareholders in full. This will make our regular shareholder returns more predictable and sustainable. Second, we will be selective about new growth investments and apply strict investment discipline. We will invest only in opportunities that align with our business strategy and have demonstrated the ability to deliver returns above our cost of capital and enhance value per share. Third, we will consider additional special returns flexibly based on their potential to enhance shareholder value.
We will assess our intrinsic value and our shares' valuation relative to global peers at the given time and consider asset divestment and use of leverage if appropriate. In line with these principles, we will strengthen our regular shareholder return policy. First, we will structurally raise dividends. By 2030, we will increase our dividend payout ratio to at least 75%, bringing our dividend policy into line with our global peers. Alongside higher dividends, we will continue share buyback and cancellation. Over the next four years, we will carry out a cumulative KRW 1.2 trillion in share repurchases and cancellations and execute year-round repurchases. KT&G's shareholder returns will advance in both scale and structure. We will increase the scale of regular shareholder return by 25% from approximately KRW 4 trillion over the past four years to KRW 5 trillion over the next four years.
In the previous period, total returns, including special returns, amounted to KRW 4.4 trillion. Going forward, our regular shareholder returns alone will exceed that amount. This represents more than an increase in scale. It means that KT&G's shareholder returns are evolving into a more stable and predictable framework. Let me close with our commitments to shareholders. First, we will increase our DPS for 2026 to KRW 8,000, which is up 33% compared to last year. This is a meaningful first step towards a dividend policy that is on parity with global peers and a clear expression of KT&G's commitment to shareholder returns. By 2030, we will raise our dividend payout ratio to at least 75% and deliver a total of KRW 5 trillion in regular shareholder returns over the next four years. We will also remain flexible in considering additional special returns when we see opportunities to enhance shareholder value.
Respected shareholders, over the past three years, KT&G has reshaped its business, laid the foundation for future growth, and delivered on its commitments through tangible results. Over the next four years, we will accelerate that growth. We will strengthen our earnings power, convert those earnings to cash, and compound the results in the form of higher value per share. The power of compounding grows over time. This is the promise KT&G makes to you through Compound 2030. We will continue to earn your trust through execution and results. Thank you.
Thank you for the presentation, Mr. Bang. We will now proceed to the fireside chat for some Q&As on today's presentation. Ms. Jane Kim, who is the Head of Cash Equity Sales at JP Morgan Korea, will moderate the fireside chat. Over to you, Jane.
Mr. Bang, thank you for the presentation. It's a great pleasure to sit down with you again this year following our conversation last year.
Thank you. It's a pleasure to see you again as well.
Now, over the past three years, KT&G has laid the foundations for the next phase of growth. It seems you are now well-positioned to build on those foundation. I would like to discuss in more detail how the earnings generated by that growth will translate into greater shareholder value.
Certainly. I would be happy to discuss this more openly and in greater depth, focusing on areas I could not fully cover during the presentation and some questions our investors might have.
Great. Let us begin with the third quarter results you presented earlier. Both revenue and operating profit reached record high this quarter. Which aspect of these results do you consider most significant?
Well, once again, the tobacco business led overall growth in the third quarter. These results confirmed that our efforts over the past three years to strengthen our core competitiveness have built us the ability to execute and deliver results. Our overseas cigarette business delivered growth in volume, revenue, and operating profit for the 10th consecutive quarter. Growing revenue and profit alongside volume for more than two years demonstrates, I believe, that our business strategy and execution have been on the right track.
Also, in domestic heat-not-burn business, we have maintained our number one position by continuing to launch innovative and new platforms. Our market share lead over the second player is also widening, showing that our multi-platform strategy has been effective in strengthening our competitive advantage. The most significant takeaway from this quarter, in my view, is that we confirmed our ability to sustain growth in overseas cigarettes and to stay ahead of the competition in domestic heat-not-burn business.
Yes, that greater ability to execute seems to show just how much stronger KT&G's fundamentals have become. Could we say this underlying strength is a result of the efforts you began three years ago to strengthen the company's core competitiveness?
Y es, that is right. The most important step in strengthening our core was to establish a locally integrated business structure.
When the entire value chain operates locally, from supply chain management and procurement to production and distribution, we can respond more effectively to market needs and become more competitive across the business, including in profitability. That is where our strength comes from. We began by building our capabilities in direct overseas operations and strengthening our subsidiary businesses. At the same time, we needed to establish a manufacturing base, even if that meant bearing cost upfront, so we invested KRW 2.4 trillion in CapEx, and as promised to our shareholders, we recently completed our global manufacturing footprint spanning five locations. That enables more cost-efficient production. With the key foundations now in place, our focus is on translating those capabilities into earnings and cash generation. Our experience executing this initiative over the past three years also gives us confidence.
Perhaps that explains the targets you have presented earlier for double-digit compound annual growth in both revenue and operating profit in overseas cigarette. Yet the global cigarette market is generally considered to be mature. Are those targets achievable?
Yes, the cigarette market is mature, but we should not lose sight of the fact that it still remains a large market with many areas that KT&G has yet to reach. For us, that means the global cigarette market still offers considerable opportunity and potential. We have extensive experience of success in overseas business. We have demonstrated turning opportunity to results as we entered new markets and expanded our subsidiary business. Going forward, we will expand our distribution coverage in countries where we already have presence and leverage competitive brands such as ESSE to execute pricing strategies. Also, our new manufacturing structure will add to strengthening our cost competitiveness.
Thus, our double-digit growth targets are based on these capabilities, and we believe they are well within reach.
That helps clarify three growth drivers for overseas cigarettes that you outlined earlier. I would like to focus on pricing. Since prices can directly affect sales volume, I would like to know as to what factors you consider when deciding when to raise prices and by how much.
As you say, pricing requires a carefully calibrated approach that takes account of both the competitive environment and the consumer acceptance in each market. We will consider, therefore, our brand competitiveness, consumers' purchasing power, and potential impact on sales volume in each market when determining the timing and the size of the increases. There are, however, limits to how much pricing alone can improve profitability.
Another important part of our strategy is, therefore, to introduce differentiated, innovative products that consumers recognize as offering greater value, and to increase the share of premium product in our mix.
The approach you have just described ultimately depends on that locally integrated business structure. You have invested significantly in subsidiary operations and overseas factories. What changes do you now expect to see going forward?
As many of our shareholders are expecting, it is now time to realize the returns on those investments. What matters is how much profit and cash we can generate from the subsidiary operations and manufacturing base we have expanded over the past three years. Over the past five years, 14 subsidiaries accounted for more than half of the growth in overseas cigarette revenue. This shows that the ability to manage and operate business locally is a key driver of overall growth.
We will therefore continue expanding our subsidiary operations, tailoring pricing strategies and product portfolios to each market, and strengthening our distribution competitiveness in order to deliver sustained profit growth. Also, as a more cost-efficient production system becomes fully operational, it will further enhance our cost competitiveness. We plan to achieve at least KRW 550 billion in cost savings over the next four years through company-wide cost innovation, including raising the share of overseas production to at least 70% and lowering fixed cost per unit.
Now, let's turn to HNB business. You've demonstrated success in Korea, but what gives you confidence that you can build on that success overseas?
Our experience in Korea has shown us that fulfilling consumers' needs can change markets' competitive dynamic and put us in a leading position.
As the heat-not-burn market matures, consumer demand becomes more segmented in terms of price, performance, and design, and KT&G has the ability to develop platforms that meet those different needs and bring them to market effectively. Of course, each overseas market requires its own strategy, reflecting its stage of development and consumer preferences. We have the innovative technology to meet those needs, as well as the local operating experience we've built over the years through our overseas cigarette business. Combining these capabilities will allow us to succeed in overseas HNB market as well.
Your approach combines global partnership with direct operations. Investors may wonder whether expanding direct operations will also change the role of the existing partnership. How should they think about the relationship between the two?
We are pursuing both a global partnership and direct operations so that we can choose the most effective approach.
Our focus is quite clear: speed and effectiveness. The global partnership draws on an established business network, allowing us to introduce our latest platforms quickly in key markets, so it makes sense to continue strengthening the partnership going forward. Direct market entry allows us to tailor our multi-platform strategy more precisely to local demand. We can also draw on the local infrastructure and experience established through our overseas cigarette business. So these are complementary growth strategies, not substitutes for one another. By using the approach best suited to each market, we will broaden our growth opportunities and improve profitability and business value.
Next topic is nicotine pouch. Global expansion, once again, is a key priority for nicotine pouch as well. To translate your goal of entering around 70 countries, including the U.S., into actual revenue and profit, what will you need to validate first?
I believe the key to global expansion is building a profitable business model rather than simply increasing the number of countries we enter. Building on the product development capabilities and manufacturing base we've established in Northern Europe, we plan to enter key markets in each region first. In those markets, we will rigorously test the competitiveness of our products, pricing, and distribution. We will assess commercial viability based on repeat purchases, sales productivity per store, and actual profitability after costs, rather than initial sales alone. We will focus resources on products and channels that demonstrate competitiveness and quickly extend proven business models into neighboring markets to increase both the pace and efficiency of growth. Given the importance of the U.S. market in particular, we will keep the necessary regulatory and commercial preparations on track. We will share more specific details when we are ready to do so.
Wow, there are a lot of topics. Moving on to health functional food. You said that health functional food business would pursue global growth following its recovery in profitability. Overseas growth has been an ongoing priority for some time. What would be different this time?
Prioritizing overseas growth is nothing new. What is new is our approach to achieving it. Until now, we have focused on promoting and selling CheongKwanJang products overseas. Going forward, we intend to start by building global demand for red ginseng itself. Through B2B, we will broaden its application and the way consumers encounter it. We will then translate that into sales growth for CheongKwanJang through B2C products tailored to local markets. We are already conducting technical reviews with global F&B and beauty companies to assess product application. Alongside ingredient supply, we are exploring a range of potential collaborations, including co-branding and joint product development.
Ultimately, the key is to deliver tangible business results. We will expand the market for red ginseng through B2B and translate that into actual revenue and profit growth for CheongKwanJang through B2C. We have discussed so far the growth direction of each business.
Let me now turn to group's overall targets. You are targeting a double-digit growth in overseas cigarettes, but mid-to-high single-digit growth in group operating profit. How should we understand the relationship between the business level growth targets versus group target?
This reflects the differences in each business's current scale, stage of growth, and role within the group. While the domestic cigarette business provides stable support for group performance, overseas cigarettes can grow earnings and cash generation rapidly through market share gains, pricing and mix improvements, and cost savings.
NGP offers significant growth opportunities, but it is also at a stage where investment is needed to expand our market presence. We intend to grow the business while balancing the expansion of our sales base with profitability. In health functional food, we will pursue global growth on the back of an improved earnings structure and increase the business's contribution to group profit. The group target reflects these different stages of growth and roles. It represents our commitment to deliver steady earnings growth for the group as a whole while continuing to invest for the future.
Thank you. Let us now turn to shareholder returns. Regular shareholder returns alone have been increased to KRW 5 trillion over the next four years. Does this represent a further step forward in both the scale and structure of shareholder returns?
Yes, it does. At the heart of Compound 2030 is the aim to translate earnings growth into per-share value and to keep building that value over time.
That is why we have raised the level of regular return shareholders can expect. Previously, returns amounted to around KRW 4.4 trillion, including special returns. Going forward, we plan to deliver KRW 5 trillion in regular returns alone. Those returns are supported by the cash flow generated by our business. The central principle of our capital allocation is to return all core cash flow to shareholders, which is cash remaining after necessary maintenance CapEx. Under this principle, we intend to raise our dividend payout ratio to at least 75% by 2030. Alongside these higher dividends, we also plan to repurchase and cancel KRW 1.2 trillion worth of shares. This policy increases the scale of returns and sets out a clear approach to both dividends and share buybacks.
Could you explain more specifically what dividends and share cancellation mean for shareholders in your return plan?
As you may know better than I do, dividends return value to shareholders in cash, while share cancellation increases per-share value by reducing the number of shares. In terms of our plan, it is to repurchase and cancel KRW 1.2 trillion in shares over the next four years. Based on current figures, I guess this would reduce the share count by approximately 6%. Obviously, the actual reduction will depend on future prices. By steadily increasing dividends while reducing the share count, we will strengthen the link between the company's earnings growth and shareholder value. Above all, I would emphasize that we will continue both as part of our regular shareholder return policy, and this is not including special returns.
You've also left open the possibility of special returns in addition to the regular shareholder return program. What criteria will guide those decisions, and how far would you be prepared to go if needed?
We intend to take a flexible approach to special returns based on how much shareholder value they can create at a given time. We will consider both our intrinsic value, reflecting our growth prospects, and our share price valuation relative to global peers. If we determine that the share price does not adequately reflect the company's value, we will actively pursue additional share repurchases and cancellations. While maintaining financial soundness, we will also remain flexible in considering asset divestment or the use of leverage as needed.
Mr. Bang, thank you for sharing both your plans and the principles behind your decisions today. To close, is there anything you would like to say to investors as they continue their journey with KT&G?
First, I would like to thank our shareholders for following KT&G's progress and supporting us through these changes. We feel a strong responsibility to ensure that the investments and changes we have pursued over the past three years translate into tangible shareholder value. We will continue to demonstrate progress in earnings growth, cash generation, and per-share value. We will explain our results and the factors behind them transparently. Where we fall short of our plans, we will also explain how we intend to improve. We will continue listening closely to our investors' views. KT&G still has further room to grow. We will demonstrate through execution that this growth translates into value for our shareholders.
Thank you, Mr. Bang, for such an open conversation today, and thank you to all the investors who have joined us. Thank you.
Thank you, Mr. Bang and Ms. Kim, for the interesting discussion, and thank you all investors and members of the capital market for joining us today. KT&G is committed to executing the plans communicated today and will continue to share the progress with you as we go. If you have any further questions regarding today's presentation and event, please feel free to reach out to our investor relations team. This concludes today's program. Thank you once again for joining us.