Thank you for participating in the third quarter financial results briefing of Japan Tobacco Inc. today. Now, Mr. Minami, the Chief Financial Officer, will explain third quarter results.
Good evening, and thank you for joining today's call. I'm Naohiro Minami, Chief Financial Officer of the JT Group. I will take you through the third quarter earnings results. I will start with our consolidated financial results for the first nine months of 2020. Please look at slide 4. As a note, the nine-month results and revised full-year forecasts for 2020, which I will explain today, include effects of the application of hyperinflationary accounting in Iran and Sudan. Revenue fell by 2.5% year-on-year to JPY 1 trillion 592 billion, reflecting decreases in the Japanese domestic tobacco, pharmaceutical, and processed food businesses despite growth in the International Tobacco business.
In the International Tobacco business, revenue increased on a reported basis. The negative impact of the pandemic is expected to be about JPY 45 billion over these nine months. Next, adjusted operating profit at constant currency grew by 6.3% year-on-year.
While the tobacco and Processed Food businesses continued to see COVID-19 disruptions, increases in the international tobacco and Pharmaceutical business drove AOP growth at constant currency. On the other hand, currency headwinds expanded. Consequently, adjusted operating profit on a reported basis decreased 2.2% year-on-year despite solid currency-neutral performance. Operating profit and profit attributable to the owners of the parent company declined for the reasons outlined on the slide. Let me now review performance highlights for each business. Please turn to slide 5 for volume performance in the Japanese Domestic Tobacco Business. Overall, the tobacco industry was down over 1% year-to-date as the effects of the pandemic, revised regulations in April 2020, price revisions in October 2019, and natural decline were partially offset by a transitory surge in demand ahead of the October 2020 price revision.
In the previous quarter, when I explained how the pandemic-related disruptions have affected the Japanese Domestic Tobacco Business, I mentioned two main impacts, the first being a significant transient drop in the RMC industry volume due to temporary closure of designated public smoking areas, the other being the lasting effects of smoking cessation and reduction. Our analysis indicates that the effects of cessation and reduction continue. However, the magnitude of the impact in the third quarter was less than that in the second quarter when both these impacts were prevalent.
The performance of RMC industry volume and RRP industry size are shown in the slide. While the RRP category size continues to expand, partly due to the effects of COVID-19, RMC industry volume continues to decline. Having said this, the overall trend for the tobacco industry in both RMC and RRP combined has been more resilient than anticipated.
Looking at our volume performance, RMC shipment volume was down 5.9%. We attribute this to a lower nine-month share year-on-year, led by intense competition in the value segment, as well as a drop in RMC industry volume. However, the July-September quarterly share was up year-on-year. RRP sales volume was up year-on-year, in line with our initial business plan. Ploom S 2.0, introduced in July, has shown a solid start. As a result, the RRP category share on a sell-out basis reached a level of about 11% this quarter. Our analysis shows that RRP category growth also contributed to our RRP volume increase. As shown in the reference note at the bottom right, I would like to briefly cover the transitory demand increase that occurred ahead of the October 2020 price revision.
We estimate the demand increased to an equivalent of a 0.4-month volume and expect that the impact of this demand will be neutralized by the year-end. Although we do not anticipate any major surprises in the consumer trend after the price revision, we believe it is too early to draw any conclusions in terms of its impact as the demand is yet to return to normal. Slide 6 shows the financial results for the Japanese Domestic Tobacco Business.
Lower volume and negative price variances affected the top line for RMC. However, the transitory demand increase alleviated the impact of the decline in volume in the third quarter compared to the first and second quarters. RRP-related revenue also declined year-on-year, mainly due to lower sales of devices and accessories, as well as the tax hike absorption in selected brands in October 2019 when the tax regime for RRP was revised.
COVID-19 negatively impacted the top line by around JPY 20 billion over these nine months. We attribute over half of this impact to the Japan Duty Free and China businesses. Now, I'd like to talk about the impact of the domestic market besides duty-free. As I mentioned in the previous slide, the trend of smoking cessation and reduction continued to negatively affect consumer demand from July to September. However, its magnitude was relatively limited compared to the last quarter. Resulting core revenue is as shown in the slide. Adjusted operating profit was down 16% year-on-year to JPY 139 billion due to a decrease in the top line and increase in investments, notably in RRP. These impacts are partially neutralized by significant cost savings due to lower indirect expenses, as well as efficient cost management and investment on high-priority activities.
Please turn to slide 7, where I will cover our performance in the International Tobacco business. Our volume performance in the International Tobacco business was resilient, with a decline of only 2.6%. We saw solid share momentum in markets including Europe, mainly for GFB, and volume temporarily remained on the upside in markets with higher unit prices like in the U.K., France, and Taiwan. These factors were essentially due to lower cross-border travels related to COVID-19.
The solid volume performance alleviated the impact of lower volume in Russia and Bangladesh, as well as the duty-free business and emerging markets affected by the pandemic. Let me briefly comment on Russia. As I mentioned in the previous quarter, industry volume continued to decline at a high rate for the reasons shown on the slide. We are carrying out portfolio adjustments to enhance our price competitiveness as a response to the share decline.
Regarding Ploom Model S, which we introduced in Moscow in March, we are expanding the launches in new cities through additional key accounts. We will continue to respond with agility to enhance our RRP presence in Russia. As mentioned in the final bullet, the Russian government passed and enacted the bill to expand the tax increase, and we will closely monitor how this larger excise tax hike will play out in our future business.
Moving to the next slide covering financial results for the International Tobacco business. Top line performance was solid over these nine months, driven by pricing gains from the markets shown on the slide, as well as continuing temporary volume expansion in markets with higher unit prices, notably Europe, as I explained in the previous slide. Consequently, as depicted on the slide, core revenue grew both on a currency-neutral basis and on a reported yen basis.
We estimate the COVID impact on core revenue over these nine months as unfavorable by about JPY 17 billion . While I reported in our second quarter announcement that the impact in the first half was around JPY 20 billion , the impact reduced year-to-date. This can be attributed to volume growth in markets with higher unit prices due to higher domestic consumption under pandemic conditions. Adjusted operating profit grew on both a constant currency basis and a reported yen basis, driven by robust top line performance. Despite lower costs under COVID-19 restrictions, net costs increased due to the establishment of our global business service centers and enhanced RRP investments. As mentioned at the beginning of this presentation, in accordance with the requirements stipulated in IAS 29, we have applied hyperinflationary accounting in Iran and Sudan.
The financial results in the table and graph on the slide include adjustments for hyperinflationary accounting, except where they are presented on a constant currency basis. For further details, please refer to the third quarter earnings report. Moving on, I will explain our performance in the Pharmaceutical business. Revenue decreased mainly due to lower overseas royalty income.
On the other hand, adjusted operating profit grew by JPY 4.8 billion year-on-year to JPY 12.6 billion. This increase was a result of lower R&D expenses marked by the successful clinical trial completions, as well as profit growth for Torii Pharmaceutical. With regard to progress of clinical development in the third quarter, JT received manufacturing and marketing approval in Japan for ENAROY Tablets 2 mg and 4 mg, a new drug for the treatment of anemia associated with chronic kidney disease, as announced in September.
This will be listed on the Japanese National Health Insurance drug price list in November. Under pandemic conditions, Processed Food business continues to see impact from lower demand for food service products in the frozen and ambient food, as well as the seasonings businesses. We have also seen lower demand in our own bakery business. These impacts exceeded the positive effects observed in household commodities in the frozen and ambient food business. Consequently, revenue and adjusted operating profit were down by JPY 6.2 billion and JPY 2 billion, respectively.
Regarding the trend after the state of emergency had been lifted, impacts from COVID-19 have improved, but situations have not fully restored. Over these nine months, COVID impacted the top line negatively by about JPY 7 billion. Now, I will talk about the revised forecast for 2020 from the next slide. Slide 11 explains the revised consolidated forecast announced today.
In an ongoing COVID-impacted environment, we have revised our revenue upward by JPY 60 billion based on better top line performance in the International Tobacco business, as well as an increase in overseas royalty income in the Pharmaceutical business. Adjusted Operating Profit, both at currency-neutral and on a reported basis, are revised upward, driven by the upward revision in the Japanese domestic and International Tobacco businesses, as well as the Pharmaceutical business. While the exchange rate assumptions have been revised unfavorably, the scale of the impact is limited. Operating profit and profit attributable to the owners of the parent company have been revised upward by JPY 42 billion and JPY 24 billion, respectively, as a result of the upward revision of Adjusted Operating Profit, as well as the upside of proceeds from the sales of real estate.
We have concluded the sales contract for the former JT head office, JT Building, and the proceeds are scheduled to be recognized in the fourth quarter of this year. Free cash flow has been revised upward by JPY 65 billion, notably driven by upward revision of operating profit and improved working capital. Ever since we announced our initial forecast in February this year, it goes without saying that the COVID-19 disruptions and its protracted impact, as well as the currency fluctuation, have changed our business environment drastically.
However, by minimizing these impacts through efficient cost management and focusing investments on high-priority activities, we now expect that our revised forecast for adjusted operating profit and profit attributable to the owners of the parent company will exceed our initial outlook. Next, I would like to explain our forecast by business segment. Please see slide 12 for details of the Japanese Domestic Tobacco Business.
Based on results up to the third quarter, our volume assumptions have been revised, as shown on the slide. We expect that the decline rates for total tobacco and RMC industry volume will improve. This is because, considering the trend to date, we have revised our assumptions of the effects derived from regulatory changes in the pandemic and fine-tuned our estimates of the impact from the actual price revision in October 2020.
In particular, we now expect to see less impact from the pandemic than we anticipated. RRP market size guidance remains essentially unchanged but is expected to be toward the high end of the previous estimate. The outlook for JT RMC shipment volume has been revised downward because we have reconsidered our assumptions, taking into account the increased competition in the lowest price segment among the manufacturers with new product introductions.
Apart from expanding our offerings in the little cigar categories, we have also launched super slim products from the Mevius line at a lower price point, enhancing our efforts to capture downtrading consumers, mainly from Mevius. The RRP shipment volume guidance of over 3.5 billion stick equivalent remains essentially unchanged but is expected to be toward the high end of the previous estimate, considering the performance of Ploom S 2.0 and RRP category growth.
As shown in the graph below, Ploom market share within the category has continued to expand since the introduction of Ploom S 2.0 in July. We will continue our efforts to strengthen our presence within the category. Examples include the launch of Ploom TECH+ with, which will be sold in Tokyo and on our online shop from November. Based on these volume assumptions, we have revised our financial forecast, as shown on Slide 13.
Despite the impacts of contraction of Japan duty-free and China businesses due to protracted COVID disruptions, as well as the downward revision of the RMC volume outlook, these impacts were neutralized by factors including the RRP volume increase. As a result, core revenue remains unchanged. However, the cost savings exceeded these negative impacts. Most notable within the cost savings are factors such as lower indirect costs under the pandemic conditions, as well as effective cost execution in order of priority.
As a result, we have revised adjusted operating profit upward by JPY 6 billion- JPY 166 billion, an 11.3% decline year-on-year. Next, I will explain the revised forecast for the International Tobacco business. Please turn to slide 14. First, let me focus on the volume outlook. Total and GFB shipment volume have been revised to about a 4% decrease and about a 1% increase, respectively.
These upward revisions are driven by stronger volume performance, particularly in Europe. This performance was supported by reflecting higher domestic consumption, mainly in the U.K. and Taiwan, as well as continuing share momentum by capturing downtrading consumers in markets like the U.K. In the third quarter, the pandemic impact has been limited relative to our previous assumptions, which also contributed to this upward revision. Though with that said, this revision was partly offset by lower volume, mainly in emerging markets like Bangladesh, as well as the contraction of duty-free business with fewer people traveling. Turning to the financial forecast, we have revised core revenue on both a constant currency and reported yen basis upward by $500 million and JPY 60 billion, respectively, mainly due to the positive volume assumption mentioned earlier.
With the top line revision, we have also revised the adjusted operating profit on both a currency-neutral and reported yen basis upward by $170 million and JPY 15 billion, respectively. Even excluding contributions from hyperinflationary markets, we estimate that adjusted operating profit on a currency-neutral basis will grow by double digits. Forecasts on a reported basis are revised upward, as we expect that the robust currency-neutral performance will exceed continuing unfavorable currency headwinds. With the next slide, I would like to explain the revised forecast for the Pharmaceutical business. As you can see in the slide, our forecasts for revenue and adjusted operating profit have been revised upward by JPY 2 billion and JPY 3 billion, respectively.
Expansion of overseas royalty income led the core revenue to an upward revision, while we revisited adjusted operating profit based on improved top line, as well as lower costs attributed by pandemic-related operational restrictions. Turning to the Processed Food business, the revenue forecast is revised downward by 2 billion JPY. This reflects a delay in recovery compared to the outlook in the second quarter, affecting some product categories for the food service industry and the frozen and ambient food business. On the other hand, our forecast for adjusted operating profit remains unchanged, and we remain hopeful of achieving our targets, mainly by taking cost-saving initiatives to alleviate top line contraction. Finally, please refer to slide 17.
As I have explained today, our forecasts are revised upward following the strong year-to-date performance, as well as efficient cost management, while we continue to invest in high-priority activities, and we have confidence in achieving the revised forecast. Having said this, to develop future business plans, we must consider the potential risks, like those shown on the slide. We monitor a wide range of factors, such as the discussion regarding potential tax increases, weak recovery of the duty-free business, market-specific risks including Brexit and economic sanctions against Iran, the impact of COVID-19 on consumer affordability and behavior, and other risk factors we may discover outside our current scope.
As mentioned on the slide, there are no changes in our capital resource allocation policy and business investment prioritization. Future allocations will be considered in light of profit levels for the next year onward.
From the business investment perspective, in 2021, we will strengthen investments in RRP and prepare for the launch of new heated tobacco products. Furthermore, given the highly uncertain business environment and foreign currency fluctuations, we will closely monitor their impacts on our profits. Thank you for your attention.
We will now move on to Q&A. Mr. Minami, our CFO, will take your questions together with Mr. Maeda, CFO of the Japanese Tobacco Business, and Mr. Shimayoshi, JTI Deputy CEO.
This is Miura from Citigroup.
How has COVID-19 impacted the consumption in your major markets? How are the recent trends?
This is Maeda, CFO of the Japanese Tobacco Business. There was a temporary drop in demand in the domestic Japanese market during the state of emergency in April and May. However, as of this moment, although the slight weak trend continues today, demand has recovered to the pre-state of emergency level.
Due to the changes in consumers' lifestyle, RRP is gradually gaining its category share within the expected range. For your information, COVID-19 has not accelerated the downtrading trend in the domestic market. There have been virtually no consumers in the market for the Japanese duty-free April onwards, and it is difficult to foresee when this situation may improve. Initially, back in the summertime, we expected to see some recovery by the end of the year. However, Q3 figures now incorporate the expectation that the current state may continue until the end of the year, and concerns remain for next year.
This is Shimayoshi, Deputy CEO of JTI. As for major market trends, I will start by reviewing the markets with higher unit prices, namely the U.K. and Taiwan. We continue to see an uplift in domestic demand due to travel restrictions.
In Taiwan, consumers who used to purchase at the duty-free markets are returning to the domestic market. Therefore, premium brands have slightly benefited from this shift. In the U.K., year-on-year demand increased during the period from the previous lockdown to the summertime. Therefore, the positive impact on the industry demand was quite significant. There was some downtrading, and now that U.K. is under the second national lockdown, we shall closely monitor GDP growth and fiscal measures carried out by the government, since they may lead to the decline in consumers' purchasing power. However, as we speak, year-on-year demand is still positive. The second lockdown has recently been declared in France, Italy, and Spain, preventing us from fully assessing the situation. Specifically, in France, the demand had recovered significantly from the start of the first lockdown to the summer season.
Historically, the trend decline in industry volume has been around 5%-6% on a full-year basis. However, the most updated trend line is flat on an annualized basis. In Italy and Spain, after the declaration of the first lockdown this past spring, borders were closed, customs clearance was stalled, and the monthly inventory levels became very volatile. As a result, the trend decline in the industry volume is back to the historical level, that is, 5%-6% decline on a full-year basis. In Germany, the inventory level was also volatile. The demand surged towards the summer, and the year-to-date volume is trending positive from the previous year.
This is Miura speaking again. Your presentation seemed to convey the message that the impact of COVID-19 was negative to the recent JT Group's earnings.
However, if you were to consider the upward revision of GFB shipment volume to approximately 1% positive, effective cost reduction, and volume growth in markets with higher unit prices, perhaps you could argue that the impact of COVID was positive on JT results on a net-net basis. I know it is a tough question, but could you comment?
This is Minami speaking. It is true that we have revised upward the expected growth rate of adjusted operating profit at constant currency and the net income, since they have made a recovery to a slightly better level than initially expected at the beginning of the year. However, this assessment applies only to the period between January to December this year. Demand surged in markets with higher unit prices.
Efficient cost management was in place to postpone or reduce expenses, and therefore, for the current January to December period, we managed to bring our results to the level initially expected at the beginning of the year. If the impact of COVID-19 is expected to be prolonged, the economic fundamentals of various countries, including Japan, will be extensively damaged, which in turn would lower the disposable income of consumers. In Russia, initially 4% annual excise tax hike was planned, yet due to strains on fiscal conditions to support the economy, a larger-than-expected excise tax hike, i.e., 20%, was determined for 2021. Massive fiscal spending is done to support the economy. Therefore, we shall face a backlash after COVID subsides.
In the medium term, it is questionable whether this year's trend will continue into next year and beyond, because we are bound to see a rebound brought about by COVID influencing the level of disposable income and may directly translate into a tobacco excise tax hike due to fiscal constraints. We believe the impact of COVID-19 should not be judged on a single-year basis. After COVID subsides, our management needs to determine whether the economy will get back to its original state, observe the process, and take measures accordingly. In this regard, the next three years is extremely uncertain, and we will need to address this situation appropriately.
This is Miura speaking. I would also like to ask about the factors that improve the efficiency of free cash flow generation.
This is Minami speaking.
We have revised upward the operating profit by JPY 42 billion, which includes the gains from the sales of former JT building. Since this free cash flow is at the end of December, no tax implications are considered, and full benefits will be received. Working capital will also improve towards the end of the year, as determined by various factors.
This is Miura again. Were the improvements realized through your own effort, or is it due to COVID-19?
This is Minami speaking. Operating profit improvement of JPY 42 billion was realized through our own effort. As for working capital improvement, while it was challenging to foresee the full-year trend, some aspects turned positive by chance, while some other aspects were realized through our conscious effort to manage towards the end of the year.
Next question is from Ms. Tsunoda from JPMorgan Securities.
This is Tsunoda from JPMorgan Securities.
My question relates to the Japanese domestic tobacco market, where your competitor is planning to launch Korean-made product, lil. I believe their prices are set lower than the conventional RRP products. Please share your insights given the downtrading trends happening in the Japanese domestic tobacco market. What is the outlook specifically for RRP price mix? In fact, next year, excise tax for little cigars will be hiked, leading to the overall price increase in the value segment. Do you expect the prices to drop at once, then subsequently hike? Please explain the current state. Also, in the closing remarks in page 17, you prepare for launch of new heated tobacco products in 2021. Could you give us more color on this product and your strategy? Would this have the potential to become a game changer for JT?
If you can comment on how extensive your pipeline is, your initiatives on RRP for next year, and what would be the impact on the competitor's pricing on JT's price mix, that would be helpful.
This is Maeda speaking. PMI is planning to launch the HNB product lil based on the alliance with South Korean KT&G Corporation and several markets, including Japan. The deployment in Japan is still in the planning phase, and test marketing sales have been conducted in limited areas such as Fukuoka and Miyagi prefectures. We shall closely monitor the development. As RRP category gains higher presence, perhaps we should consider the downtrading in RRP as similar to RMC. The respective players in the market have been building the portfolio based on various price segments, as JT has done with Mevius and Camel.
With the price hike in October, we are bound to see a certain level of downtrading in the market. However, due to the residual impact of last-minute demand, detailed analysis needs to be conducted on the actual run rate. Therefore, we cannot draw a concrete conclusion right now. Having said that, downtrading may occur in the RRP category, so we will need to build a brand portfolio based on prices and other factors, as we have done with RMC. Also, we have given you a teaser on the new heated tobacco products in the presentation.
We have high hopes for this new line of products under development, which is planned to be launched next year. Next year's budget will include investment related to this project. We hope to make next year a critical year to bring the business momentum to a higher ground.
This is all I can share with you at this moment.
This is Tsunoda speaking again. Your comment gave me the impression that this new product launch will bring an opportunity to further expand the RRP market. How should we understand the price mix in RRP products, that is, the balance between the volume and revenue?
This is Maeda speaking. Going forward, it is possible for us to set discount pricing to gain volume in RRP as a strategy. However, to put it in a larger context, we expect to see similar competitive climate evolving in RRP as RMC. When pricing opportunities arise, down traders may appear, then each player would need to build a robust brand portfolio to receive this trend. The competition lies in winning the SOM under this environment.
This is Tsunoda again. How would this expansion in RRP impact RMC next year onwards?
This is Maeda speaking.
We do not expect to see the acceleration of RRP growth and the decline in the share of RMC, as we have seen three years ago. As shared in previous communications, we believe there will be a slow yet steady expansion of RRP category going forward. The key question is, how well will we be able to compete in this expanding market?
This is Tsunoda again. With next year's RRP tax revision, I was under the impression that headwinds against RMC may lessen. What is your thought on this?
This is Maeda. Based on the current visibility of the tax system, each player is conducting various initiatives. Although the so-called program tax hike will be over next year, we do not expect to see sudden tailwinds for RMC.
Discussions have not been conducted as to what the tax regime would be after the program tax hike, but we are exploring various initiatives based on the premise that the tax hike will be over next year.
The next question is from Mr. Saji from Mizuho Securities.
This is Saji speaking. What are your pricing and branding policies in Russia? How do you plan to respond to the significant 20% tax hike next year? In particular, with regard to pricing policies, in Russia, you raised prices in January this year but lowered them in May because other companies did not follow suit. However, you increased prices again in July, so apparently, there are some price movements that are happening. Under these circumstances, what strategy will the company take when the tax hike comes into effect?
Also, what is the situation for relatively inexpensive brands such as Winston, LD, and Donskoy, ahead of next year's large tax hike? What kind of branding policy are you going to adopt?
This is Shimayoshi, JTI Deputy CEO. First, let me talk about the overall situation in Russia. The rate of decline in total RMC industry volume for January through September was 5.6%. This is in line with JT's assumptions. However, due to the effects of travel restrictions and border closures, the impact of illicit trade was not as expected. On the other hand, demand was sluggish due to economic weakness. As you mentioned, we raised prices by about RUB 5 at the beginning of fiscal year 2020, but competitors kept their prices unchanged, so in response, we reduced prices of some brands in May.
Later, when we confirmed that competitors had raised their prices, we raised prices again by about RUB 5 in July. With regard to RMC, JT is the leading manufacturer in Russia in terms of share, and we believe that maintaining price leadership is important for medium to long-term profit growth. Therefore, we intend to take a firm leadership role in raising prices in response to the tax hike, but we will monitor what competition is doing and respond flexibly to price changes over the short term to boost the profit pool for the industry as a whole, whilst we maintain our share and grow our profits. We are currently assessing the impact of next year's major tax hike.
The key issue will be how to capture downtrading. The idea of improving Donskoy's brand equity and capturing downtrading opportunities through the Donskoy brands remains the same.
This is Saji again.
I have a follow-up question. In this year's budget, are you accounting for anticipatory temporary demand in Q4 due to the tax hikes in Russia?
This is Shimayoshi again. We have not accounted for it yet. Inventory buildup due to the first wave of COVID-19 in early spring of this year has yet to be resolved. The inventory buildup is expected to be resolved in Q4, and there may be a chance that this inventory situation may continue. We will respond by closely monitoring demand trends.
The next question is from Mr. Fujiwara of Nomura Securities.
This is Fujiwara speaking. You have said from before that mergers and acquisitions are one of the growth strategies in the overseas tobacco business. In emerging countries, which are JT's target for M&As, there is white space still available, but you can easily assume that they are experiencing financial difficulties due to COVID-19.
Given this situation, are there any changes in your M&A strategy?
This is JTI Deputy CEO Shimayoshi speaking. Since JT is the world's third-largest tobacco manufacturer, we believe that there is still a lot of white space in the market available over the medium to long term. JT's approach to these markets, including the acquisition of external resources, has not changed. However, in the short term, macroeconomic conditions are currently deteriorating, especially in emerging countries, and volatile conditions continue and make it hard to do accurate valuations. Therefore, our medium to long-term policy remains unchanged, but in the short term, we need to take a closer look at the macroeconomic situation. On the other hand, in order to further expand investments in RRP, we will monitor how much resources we have as we consider future M&A opportunities.
This is Fujiwara again. I have a follow-up question.
I am concerned about whether the rest of the world, mainly emerging markets, will be able to grow profits in the next fiscal year and beyond. Can you please share your thoughts on this?
This is Shimayoshi again. Assets acquired since 2017 include the Philippines, Indonesia, Ethiopia, Donskoy in Russia, and Bangladesh. For the Philippines and Russia's Donskoy, as post-acquisition market share is above a certain level, specifically about 30% in the Philippines and close to 40% in Russia, their performance is contributing to the P&L. In the Philippines, JTI brand awareness was originally high, but sales volume was small in comparison. However, by acquiring not only the brands but also a distribution network through M&A, Winston's share increased to 9% in Q2, and brands such as Mevius and Marvels, which were acquired through the acquisitions, have been able to capture the downtrading that occurred as a result of COVID-19.
In addition, as the company has been able to take pricing steadily, while the contribution of this market to JTI's profits was extremely limited when it was first acquired, it is now a market that is critical to JTI's growth. For Donskoy in Russia, two years have passed since the acquisition, and as I mentioned earlier, we have been able to capture downtrading demand in the wake of COVID-19. We are struggling a little in Bangladesh.
There was a tax hike in June 2019 that was detrimental to JT's portfolio. We had put together a marketing plan to make up for this. However, sales volume has been lower than expected due to a delay in the execution of the plan due to COVID-19 lockdowns. We will monitor the COVID-19 situation in Bangladesh and will strive for recovery from next year onward.
In Indonesia, our share of sales after the acquisition is less than 2%, so we think it will take more time to grow the business than what we initially thought.
The next question is from Mr. Morita of Daiwa Securities.
What is the profit pool for the overseas tobacco market over the next three years or so? There is a strong possibility that other countries other than Russia will raise taxes. Will you be able to expand your profit pool by using tax hikes as a pricing opportunity, as you have done in the past? Specifically, will it be possible to raise prices further in markets with high unit prices? Will the company be able to keep up with the tax hike in the event of a major tax hike like the one in Russia?
This is Shimayoshi speaking.
We are right in the process of drawing up a budget and plan for the next three years. I can't give you any details, but I can tell you that, first of all, we're expecting high volatility next year. The question is, with the second wave of COVID-19 hitting us, are governments going to take aggressive fiscal stimulus measures or not? What kind of impact will we see on consumer consumption trends, especially on unemployment rates and disposable income? If governments take fiscal stimulus measures, the pressure to raise taxes is likely to be stronger. Looking at the major markets such as the U.K., Taiwan, and Russia, for example, to see what will happen to profit pools after COVID-19 subsides, we believe there may be a possibility that downtrading will accelerate.
Over the medium to long term, RRPs have already been rolled out in Russia, but RRP volume in the UK is low, and the market has not yet opened in Taiwan. So when thinking about the overall profit pool, it's necessary to fully assess each country to determine whether RRP will expand, remain flat, or contract compared to RMC. In Italy, for example, the profit pool for RMC is on a slight downward trend, but the tax regime for heat-not-burn is favorable, so the market as a whole is expected to expand its profit pool.
On the other hand, with our conventional RMC fine-cut share at over 20%, we see an opportunity to expand the profit pool through RRPs. We will plan for the next year by taking into account the taxation regimes in each country and the situation of our RMC businesses.
This is Morita again.
I have a follow-up question. Depending on the tax regimes, should we assume that the profit pool may become smaller in some countries?
This is Shimayoshi again. The way we think about this differs depending on whether it's over the medium or long term. In the medium term, there are many countries that have a favorable tax regime for heat-not-burn and RRPs compared to RMCs. In the long term, there is a trend that RRP tax regimes converge to RMC levels as the RRP market expands. In the medium term, we will seize opportunities to expand our profit pool, including RRPs.
This is Morita again. I have a follow-up question. Regarding RRP, you explained that 2021 is going to be a critical year for the domestic business. What about the RRP business overseas?
This is Shimayoshi again.
In JT Group's overall market portfolio, Russia is equally as important, a prioritized market after Japan. Although there may be a difference in timing, we intend to roll out next-generation products by looking at the priorities of the markets as a whole, including Japan.
This is Morita again. I have a follow-up question. Can we consider next year to be a critical year for your overseas tobacco business as well?
This is Shimayoshi again. Yes, you can think about it that way.