Good evening, and thank you for joining today's call relative to JT's 2021 first quarter results. I am Naohiro Minami, Chief Financial Officer of the JT Group. First, let me explain the consolidated results from January to March. Adjusted operating profit at constant currency, the main indicator of our business performance, increased by 27.2% year-on-year, driven by strong momentum across our tobacco businesses.
This is largely above our projection for the period. In addition to the strong business momentum, contributing factors included the effects of the pandemic in the international tobacco business, such as demand growth in some high-margin markets derived from travel restrictions that continues through the entire three-month period this quarter, in contrast to just one month in the first quarter of fiscal 2020.
Our consolidated quarterly revenue was up year-on-year due to sales growth in the international tobacco business that outweighed the sales declines in Japanese domestic tobacco, pharmaceutical, and processed food businesses. Adjusted operating profit and operating profit were positive year-on-year on both constant currency and reported basis, despite the negative Forex impact on the international tobacco business.
Our quarterly profit was up due to reduced financial costs in addition to growth in operating profit. The impact of the pandemic on each business remained in line with the trend shown for the second half of fiscal 2020. We think that the duty-free business will need more time to recover because the number of travelers will be slow to return to pre-pandemic levels. Let me move on to the results specific to each business, starting with volume in the Japanese domestic tobacco business. Please turn to Page Two.
Total RMC industry volume was down year-on-year again due to the combined effects from the growth of the RRP category, the October 2020 price revision, and the restrictions related to the pandemic, in addition to the natural volume decline. RRP market size stood at 29.7% in the first quarter of 2021 due to changes in consumer behavior and the pandemic environment since last year. Our RMC sales volume was down mainly due to lower industry volume and a decline in JT market share due to shifting consumer preferences from RMC to RRP, as well as intensified competition in the low-price segment triggered by downtrading. RRP sales volume and our market share showed steady year-on-year growth, helped by Ploom S 2.0, introduced in July 2020, and nationwide sales of Ploom TECH+ with since February 2021, as well as overall category growth.
For the first quarter of 2021, industry volumes for the total tobacco market and RMC, as well as JT sales volume for each, were weaker than the projection we made in February for the full fiscal year 2021. This is due to the additional time in which our business was impacted by the pandemic. In 2020, we see that COVID-19 started having negative effects on consumer behavior in Japan only from March, while in 2021, the entire quarter was impacted. In forecasting the second quarter and onwards, we project that business in April and May will be stronger than that of the previous year, when demand plummeted after a declaration of the state of emergency, and the pandemic impact will lap in June. I'd like to explain our financial results. For RMC, the positive effects of the price revision in October 2020 offset the volume decrease.
Our adjusted operating profit increased by 11.1% year-on-year, supported by volume increase in RRP refills despite a decrease in duty-free sales. We are steadfastly making needed investment in digital marketing and the RRP category as a whole, Ploom TECH+ with in particular. Sales promotion costs for the quarter are down year-on-year, due mainly to delays in some measures initially planned for the quarter. These contribute positively to our profit. This year, we plan to invest more in the second half with the introduction of Ploom X, our next-generation device for heated tobacco sticks, and we expect to fully execute that plan. Let's move on to the international tobacco business. Please turn to Page Five. Total shipment volume was up by 5.8% year-on-year, driven by strong momentum in our key markets.
This robust result comes from strong market share momentum and, as I mentioned earlier, steady industry volume derived from travel restrictions, mainly in high-margin markets such as Taiwan and the U.K., as well as the COVID-19 impact timing differences between the first quarter of 2020 and 2021. Excluding positive adjustment of transitory inventory, as in Russia, the volume growth was 5.2%. A positive volume shift resulted from volume growth in Taiwan and the U.K., both of which are high-margin markets, Russia, and the Philippines.
Combined with the positive effects of pricing, mainly in Iran, the Philippines, and Russia, our core revenue grew double-digit, as shown on the slide. Adjusted operating profit grew at constant currency and on a reported basis as well, supported by top-line growth. Costs are down in general because sales promotion costs fell due to the pandemic, with expenses deferred to the second quarter and onward. Meanwhile, we are enhancing sales promotion for RRP, especially heated tobacco sticks. The cost-saving effects of the transformation are steadily appearing. The effects of foreign exchange between local currency and the U.S. dollar and between the U.S. dollar and the yen were negative. First quarter results were much stronger in comparison with our projections for the entire fiscal year, evident in volume increases in some markets. The impact of the pandemic will complete one full year cycle by April in many markets.
We will continue watching the trend in all markets as the business environments are uniquely different for each. Next, let me explain our results in the pharmaceutical and processed food businesses. Please turn to Slide Six. Pharmaceuticals revenue was down, mainly due to decreases in royalty income from abroad. Adjusted operating profit also declined due to revenue decreases in the sector, as well as lower profit from our consolidated subsidiary, Torii Pharmaceutical. For your reference, we will update you on new pharmaceuticals that were granted approval during the first quarter. As shown on the slide, we received approvals of two new drugs in this quarter. We have been making steady progress in our R&D. Next comes the processed food business. Both revenue and profit declined over the year, due mainly to lower sales of frozen and ambient products.
With a persistent pandemic, processed food sales to food services dropped year-on-year, as did those for home consumption, as the effect of increased demand was lower this year versus last amid the initial impact of COVID-19. Sales to bakeries and seasonings for food services also show a year-on-year decline as demand continued to be low due to the pandemic. In addition to these negative top-line effects, greater distribution costs, despite partial improvement with cost reduction, pushed profit down. In closing, please look at Slide Seven. As I have explained already, our first quarter performance was robust, thanks to momentum in the tobacco businesses. Our RMC shares continue to grow in many markets, while RRP is showing steady volume growth in Japan, the world's largest HTS market. Combined with temporary impacts related to the pandemic restrictions, we delivered very strong results.
Early in the second half of FY 2021, we plan to launch Ploom X, our next generation of heated tobacco sticks devices, as announced in February. As we have indicated on jt.com, we plan to introduce a new line of improved heated tobacco sticks in June, aiming to maximize flavor and aroma sensorial experiences. A quick word on the tight supply of semiconductors. While this situation may limit the supply of next-generation devices, we are working to mitigate the impacts in order not to alter our planned RRP sales volume for Japan this year. For the remainder of the year, we expect the situation will continue to be highly volatile. We will closely examine possible impacts on our business and financials going forward. Therefore, for the time being, we will not adjust our forecasts for the fiscal year despite the strong first quarter results.
The Forex trend is positive in relation to our initial projections. If exchange rates hold at current levels, we project that adjusted operating profit will be up by over JPY 20 billion. As announced earlier, we are making progress as planned to combine our tobacco businesses. Thank you very much for your attention and your interest in the JT Group.
Thank you very much. We would like to start the Q&A session. Mr. Minami, Chief Financial Officer, and Mr. Shimayoshi, JTI Deputy CEO, will answer your questions. If you have questions, please press one following the star key on your phones. If you want to cancel your request, please press two following the star key. Please ask your questions when your names are called. I'm afraid there is a limit of one question per person. If you're joining this call on the English line and want to ask questions, please send us an email. The email address is jt.ir@jt.com, as written in the invitation email that we sent the other day. Thank you very much for waiting. I'd like to call upon Miura-san from Citi to pose the first question.
Hello, this is Miura from Citi. Can you hear me all right?
Yes, we can hear you clearly.
Thank you very much for this opportunity. Thank you very much. I'd like to ask about the international tobacco business. The overall picture, recently, the market share for JT in major markets, I believe the market share has been on the rise. I think that has been the most updated situation. Why exactly is that the case? If you can give us the background, what is the reason behind you seeing an enhancement of your market share?
This question will be answered by Mr. Shimayoshi, JTI Deputy CEO.
This is Shimayoshi from JTI. Thank you very much for that question. In our major markets, our market share has been on the rise. On a global basis, of course, we cannot explain it in simple sentence. Let's just say in major markets, take for instance, U.K., we have been steadily increasing our market share.
The U.K., as you know, downtrading has been ongoing. The consumers for downtrading, because of price and also product mix, we've been able to capture those consumers. Taiwan, as an example. Of course, we have been fairly strong in the premium brands. Again, we are experiencing downtrading. Middle price and in the value segment, the market volume has been shifting. Our portfolio has been accommodating that shift in the market. We can capture the taste and the demand within the market. I believe that is one of the reasons why we are seeing that trend in Taiwan. Another point, this might be from our perspective, because of the COVID pandemic, we have been communicating ongoing with our personnel.
For instance, for employment, we have actually announced internally that we will not lay off our people because of the pandemic. Although we have been conducting the sales activities on a remote basis, this might have actually played a positive impact on the activities of our staff. Of course, indirectly, we do hear comments from the employees from their competitors. In any case, we have been able to manage the crisis situation in a positive manner. That is our take in terms of the reasoning behind the enhancement of the market share.
Thank you very much for that answer. Shimayoshi-san, in a nutshell, in the global environment, of course, we are seeing downtrading across the board. The JT portfolio is capturing the downtrading. There's no need for repositioning. Is that the proper way to look at the current situation?
You've mentioned about repositioning of the brands. For instance, take, for instance, Russia, Camel Compact has been introduced below the base. We have the brand equity, and we have the pricing segment. We consider those. We are leveraging on our portfolio for combustibles. Yes. We have been effectively making use of the portfolio.
Apologies, this may sound somewhat rude. Apologies for that. This time around, in Russia, for the first time, HTS, heated tobacco sticks, you have the number inclusive of HTS for the first time. HTS in Russia, how was the sales volume for the first quarter?
Ploom X in Russia, last March, we have launched this in Russia. Initially, we deployed it in 3,000 stores in Moscow. Now we have key accounts of 48,000 stores that we are deploying our products.
Right now, our market share, it is not that significant to disclose it to you. Within the category, perhaps 2% - 3% is the most recent share that we have within the category. By monthly basis, sometimes we may have campaigns revised, and we may see absent of that. Obviously, the number differs according to the month. In terms of the volume, by no means it is significant at this point. As far as internal plan is concerned, we are progressing as expected. Of course, in comparison to the initial trend of the competitors, we definitely do not lag behind either. As mentioned in the presentation, the next generation device will be launched in the second half of this year, starting with Japan. Russia, likewise, we believe we can launch those within the Russian market in the second half.
We would like to make that migration from the current device to the next generation device, so we can continuously invest in HTS. That is all from me.
Thank you very much. Ploom X, actually, this is the first time I've heard of this term. In terms of the kick or the consumer satisfaction, could you give us more explanation on some of the smoking experience? Because obviously, I never had these before.
This is Thotakura from IR. There are many others waiting for questions. This will be the last question from you, Miura-san. As far as Ploom X, Minami-san will answer the question.
This is Minami, CFO. Basically, for our strategy. What we have launched already, Ploom S 2.0. This is our existing product. Some of the experience, perhaps, we have not been able to satisfy or realize.
We have conducted dialogue with the consumers. We have identified some of the issues, and we have tried to resolve that in this new device. In terms of the specifications, in terms of the heated time, and also the number of sticks that could be enjoyed per charge basis, and also the compactness of the device. We will be able to realize these in the next device. Also, in terms of the smoking experience, stronger kick and so forth. Of course, we try to pursue that from the device perspective. In addition to that, we would also be evolving the sticks themselves. Those will be conducted together. We believe the overall experience should be significantly improved. As far as the sticks are concerned, it would be common with Ploom S 2.0.
By June onwards, we would conduct the renewals of the sticks in terms of the flavor and taste. Lamina, this is the kind of tobacco leaf. We blend these in, which is known to have the most significant aroma. We have been making improvement in the blending of the leaf tobaccos. We believe the taste is much improved in terms of a much deeper, a stronger satisfaction it provides. In terms of sticks, the flavor line or the lineup of flavors will be expanded for the sticks, so we can capture various needs of the consumers. As for the device, IoT functionality will be equipped. That will give more convenience to the consumers. We are developing various content to enhance the user experience. First, it will be introduced in Japan, the largest market for HTS.
Beyond that, we would like to make our way into the global market as well. The first thing first, Japan will be our litmus test. The marketing will be conducted both from digital and non-digital basis. We believe this will be the main driver to enhance the market share for this RRP. These are some of the initiatives underway towards the launch of this product.
I look very much forward to the launch. That is all for me.
Thank you.
Thank you very much, Ms. Miura.
The next question is from Nomura Securities. Mr. Fujiwara, please.
Good evening. This is Fujiwara from Nomura. Thank you for this time. Thank you. Regarding the second quarter and beyond, I'd like to ask about the business performance and your concept behind it. Obviously, due to COVID, the impact is lapping. I understand that that is one element, we're not going back to where we were completely. It's not going to be the same. Overseas demand is stronger, I suppose. I wonder, to your plan, against your plan, you might have some upsides. You have some investments into your products, too. I want to just confirm, what is the ultimate conclusion? How do you think you will end up financially, and how will you operate your business?
Yes, I think I, Minami, should answer overall, and then if there's anything to add about the international business, Shimayoshi will also speak. First and foremost, this fiscal year, in first quarter and second quarter, again, we assume, and by again, I mean the noise versus 12 months ago. It's really about the comparison to 12 months ago and how that was and how the comp is. I think that really will end, this lap will end at the end of second quarter, maybe, and then we will be able to have a good comparison. Like I said, for the domestic business, last year in April and May, that was when we had the first declaration of state of emergency. If we were to compare this versus last year, it's about a decline of 15%, give or take, in consumption at that time.
This year, we don't see that kind of situation. There is no lack of opportunity. There is no weakening in the purchasing power. We believe that this will become an upside. In the domestic business, the first quarter and second quarter will be evened out with this kind of versus last year effect.
In various ways, the regulations on travel, really, when will we be able to travel? When will the restrictions be lifted? These are all very uncertain questions. We need to concretely implement this into our plans, get our plans ready, really. According to that timing that we schedule, also taking into consideration the launch of new products, figuring out when people will start to be active and on the move again, traveling, we need to come up with the optimal initiative according to the time. That is really key. This fiscal year, by quarter one, it's a quarter where we've been able to save up a lot.
I think that's the way you perceive this quarter one results, too. It's really about going forward, how we can play out our business, how we can brush up our business plan, and improve our initiatives. That all really ends up to how well we can end this fiscal year. In quarter two, usually when quarter two ends, we always give a comprehensive update on our forecast. Yes, at this point, again, this year, we would like to talk about our forecast from second quarter end and beyond at that time. We will communicate that when the time comes. In any sense, it's really about meticulous planning so that our business operation is matching to the market situation and also in locksteps together with the lifting of various restrictions. That was ambiguous, but that is my answer.
This is Shimayoshi. I'd like to just add a few words. One of our key markets, U.K., is a good example where quarter one versus last year was a very rough quarter. I'm saying this because there was a very tough lockdown in the middle of March last year, or end of March. What happened after that is that the consumers in U.K. who love traveling overseas could not travel, and so there was a lot of domestic demand building up while they could not travel. Now, by the way, last year, compared to FY 2019, the total demand was up by 11%, something that was unprecedented in U.K. in recent years. This phenomenon from second quarter started.
That means in FY 2021, from second quarter and on, just even looking at the country of U.K., the effect of that travel restriction will now be evened out. That is one. The other cash cow business in Taiwan is another good example. It's another country where you cannot travel internationally. It was 6.4% versus last year in total volume. If you look at the single month of June, every month versus last year, the total volume is different by double-digits. Again, this effect that we had in Taiwan will be evened out every lap a year. Now the share is good, the consumption behavior is impacted by, first and foremost, whether you can travel or not, really. As Mr. Minami said earlier, it's about international travel. When will the restrictions be lifted?
For example, in U.K., it says from May 17th, according to U.K. government, that they will allow international traveling. The Health Service Bureau is saying that, "that is too early." It is too early; people will be coming back with more viruses. There seems to be still various arguments here; we need to make sure that we have a clear grasp of what is actually happening as we put the plan together. Thank you.
Thank you, Mr. Minami and Mr. Shimayoshi. Since it's a great opportunity, may I also ask about Russia in the same context, please?
Yes. Regarding Russia, actually, the distribution stock became a big noise here. At the end of last year, in the second half, Russia last year, there was the COVID lockdown that people forecasted, and that's why there was a lot of stock up in the channels. That inventory in the channel has now been adjusted and evened out. That is what happened in the channels. This fiscal year, what happened is that there was the minimum retail price introduced from April, and the discount at the stores are banned now. Now we will have, again, more stock-up in the channel because of this. You can see how this inventory level went up and down. It was quite volatile. Quarter one in Russia, the numbers grew because of this situation.
Business as normal is, first of all, we have that big tax hike in January. These products with the new tax included will be distributed from the second quarter. Again, we need to continue to monitor how that will affect the consumption behavior from second quarter and on. Also, Winston, our core brand, pre-tax hike last year in October and November, we already hiked the price in October and November with the tax hike in January in our price already. We're looking for that effect as well. Thank you.
Thank you very much, Fujiwara-san. Next, from Mizuho Securities, Saji-san, please.
Thank you very much. I'd like to ask about the domestic tobacco business. Last year, you have conducted the price increase in October. I'd like you to evaluate the trend, the progress so far. Looking at the combustible so far, you have seen there has been a decline by 13%. And of course, the impact of price revision, of course, RRP shift, and also the pandemic impact have played an impact. I believe you have vis-à-vis the outlook for the combustibles. The market seemed to be weaker than your initial expectation. How do you evaluate this? Also, 27.6%, that was the share for Mevius. It's down by 1.3% in terms of the share. Do you believe your price revision played well? Hopefully, there could be another price increase this come October.
Given those into consideration, how do you evaluate the price increase from last October?
This question will be answered by Mr. Minami, CFO.
Thank you very much for that question. How do we assess the price hike from last year? What we have planned and the price hike was realized enough to offset the volume decline. That is our first point. As you mentioned, Mevius and our major brands have experienced drop in the market share. From that point of view, so I should say Mevius, and according to our internal analysis, why the market share has dropped, is because we have this more transition to affordable price to Mevius. Some of them, we have seen that shift. Also, our competitors have switched to more of a lower price segment, or some of the consumers have shifted to RRP.
These were some of the trends that were happening. Given this into consideration, if you were to look at the entire market from the perspective of competition, we believe our portfolio perhaps is not fully functioning in order to have our competitive edge. This is indeed initiative that is still ongoing for us to leverage our brand equity and our portfolio. As mentioned in the past, price increase obviously denotes the total volume will come down. There will be a wider gap within the price band. Whether we can capture that downtrading, that will be a key. Also, perhaps RRP presence will be stronger. Some consumers may shift horizontally, some may shift to a lower price. In any case, we like to capture those changes in consumers' demand by our own brand. We believe that is the most important factor.
To leverage on the full effect of price increase, we need to develop our portfolio accordingly. Of course, initiatives are still underway. We still need to make such effort to develop our portfolio in the most optimum manner. In other words, pricing for this volume decline, we do believe we have dealt with. However, within the competition within the market, perhaps we have not been able to fully benefit from the effect of price revision. That's how we assess the current situation. Going forward, this fiscal term, for instance. This would be the last year of the tax hike. Of course, RRP, there will be another round for next year. Combustibles, last round for this year. For little cigars as well, there would be a tax regime change.
For this particular category, we have already forecasted at the beginning of the year. Based on our certain assumptions, we do incorporate that within our plan. Of course, because this is a really important part of the competition, obviously, we cannot give you all the details related to our pricing strategy. Basically, as mentioned from before, we will pass on the tax hike portion, and we will try to accommodate or offset the volume decline. We do expect to see some deterioration of the mix as well. Given that, we would like to ensure that we can persuade the consumers that they will be happy with the taste and flavor that we provide. No change in terms of our general policy from last year. We will progress with various ideas incorporated into our strategy. That is all.
Do you expect to see increase in profit domestically then? Basically, there's no concerns at this point. Is that true?
Of course, we are always concerned. We do try to address these issues at all times. The point we like to make is we clearly look at our current position and take the optimum measures going forward. Of course, ultimately, the most important factor is how can we win the competition. That is all. Thank you.
Thank you, Mr. Saji. Next, we would like to hear from Mr. Morita from Daiwa Securities.
This is Morita from Daiwa Securities. Hello?
Hello.
I'd like to ask a question regarding this previous question's context regarding RRP. This RRP going forward in the Japanese market, will it be supporting the value zone to some extent? Is there a possibility that this would happen? Last year in October, when you executed that price increase, the IQOS, Marlboro price did not hike as much. I'm wondering if there was a share shift. Was there a dramatic shift in the share because of this? In this flow of players accumulating the demand for RRP, maybe this price hike did not have a big impact on the recent consumers' purchasing trend. I'd like to hear about these things regarding RRP trend. The other thing is the semiconductor situation, where Minami brought up the concern in his presentation.
I know that you haven't changed the guidance, but maybe there is a risk regarding lack of semiconductors. Was that one of your messages? Maybe it would be difficult for you to reach the number that you guided, or are you saying that it will be difficult to deliver upsides?
Yes, Minami will answer that question.
Yes, that's a very difficult question. Thank you very much. Let's see. In order to give a proper and good answer, we need to see how things go over more time, and we need to monitor how the market really plays out. Otherwise, I will not be able to give you any definitive answer. As a possibility, I can mention the following. Not our wishful thinking, not our aspiration, but the facts.
We can say, regarding RRP, first of all: "Are we going to position that so that it supports the value segment?" To that question, I guess there's two elements. One is the device, the price of the device. It would mean the upfront investment or the initial investment on the customer's part. Currently in the market, the so-called older devices that have been launched a while ago are sold in very affordable prices, and also for the sticks. These are really different from RMC in the sense that there are a lot of creativity imbued in this, improvements, and special features, really. The sticks, of course, works together with the devices. It's different from RMC, that actually the COGS of the sticks can be quite variable. Also in Japan, there is the relationship between the tax policies.
Depending on whether it is a foreign brand or a domestic brand, the tax rate alters. These are all of the moving parts that resides in this product. There is a possibility that it would be supported in the volume zone, but are the makers willing to position it in the volume zone is another completely different discussion. For example, when we look at the competitors' trend, they have very affordable prices for both their device and the refills. That means we do need to be very keen about the competitors' movements and looking at what the authorities approve and take actions accordingly. We're also competing in the capital market too. When you think about that, it is the type of product that we cannot expand the volume just with our own effort.
We need to make sure that we do not damage our profit base by trying to go into the volume zone. That is what we should not do. These are all about decision-making matters, and to make such a decision like that, we need to have a very bold decision made. I know that is vague, but that is my thoughts. Also, to your next question, again, this is a very difficult question, too. For example, two years ago, when we intentionally absorbed the tax hike and provided the product to the customers with no price increase. Well, if you say that is our initiative, that is true. One hypothesis we learned from that is that the users who prefer RRP, compared to RMC, have a different sensitivity to the price of the RRP. We do know that by experience.
On the other hand, when you look at the total market, yes, the competitors are growing their business. Again, we cannot say that it has no impact at all. Exactly as you mentioned in your question, it is for us, going forward, to look at our own HTS RRP products, looking at our competitors' movements, and studying our consumers' preferences, and also the price sensitivity. It is a very important and key decision that we need to make. Your second question regarding semiconductor demand, will that be positive or negative in its impact? Currently, we can say that, regarding RRP overall for business, or when you look at the mix, we can say that for this fiscal year, the estimated figures will be achieved somehow.
That's why, as I have mentioned, we are going to try to launch Ploom X as early as possible, as Shimayoshi has mentioned. That's why we emphasize that point. As of today, that is what we think. Going forward, as we progress through this fiscal year, there may be another timing where we look at the demand- to- supply situation, and there may be a possibility that the semiconductor situation creates a negative impact on our device. It's really about how much we can work on our device, and also the refills that are being used in the Ploom S 2.0. It's really about how much we can get the customers to understand how good it is with our wisdom and also our reaction to the market trends, including the semiconductor situation, creating our sales floor, and delivering our products.
By making sure that these business parts are managed well, I believe that we can achieve our figures. Whether we can create more upside on top of these guided numbers, that will be quite difficult.
I'd like to confirm once again whether it will be positioned in the value zone or not. You said that it's a very difficult decision. What if your competitors do position their products in the value zone? Would you be able to address this change in the market? Are you prepared?
I guess it's too early to answer to that extent, because this is really about how we set our COGS in the global manufacturing platform that we have. Yes, I think I should refrain from answering at this point.
Apologies. Understood. Thank you.
Thank you very much, Morita-san. Next from UBS, Kawasaki-san, please.
This is Kawasaki from UBS. Hello. Thank you very much. I'd like to ask about Russia. You've talked about the market inventory, you mentioned about the inventory level has been somewhat rough. That was the comment. In Q3 onwards, what is the real demand level that you anticipate? Given this tax hike in January, what was the impact? Have you been able to control? I believe you have been able to control the impact from tax hike so far. The total demand for the March quarter, if you were to include the impact of the inventory, still, the demand has come down by 1.5%. In terms of the real demand basis, what was the trend for the total demand for Q1 and also Q2 onwards?
After the price hike is reflected, you start to see products with the increased tax. Will there be a differential between your expectation as opposed to the real demand, inclusive of the inventory?
For that question, Mr. Shimayoshi from JTI, our Deputy CEO, would answer that.
This is Shimayoshi. First of all, let's look back at Q1, the demand in Russia. Excluding the inventory level, what was the impact? I believe that was the nature of your question. Also, the second part is what is the outlook for Q2? That was my understanding of the question.
Yes. That is the correct understanding of my question.
Let's start off with the impact of the inventory. Let me just confirm the number. The real demand in the market. This is excluding the inventory. Q1 is parity on a year-on-year basis. The market in itself year-on-year, was almost flat, excluding the impact of inventory. Maybe 80%-90% has been the actual impact from the inventory. That has impacted the Q1 number. Now, Q2 onwards, the outlook, of course, we do have assumptions within the plan.
We have the price elasticity, also we do have certain expectation of the volume. Of course, it was an unprecedented level of tax hike in Russia. Therefore, we need to assess correctly the reaction from the consumers. So far, the competitors are following suit with our price level, of course, we need to continuously watch how they will proceed. Russia, the impact from COVID-19, of course, we will start to have more vaccination, and the border control may be somewhat more lenient going forward. So far, we've been able to control the illicit trade so far because of the border control. Of course, once that is lifted or somewhat lifted, that may actually pose an impact on illicit trade as well. Q2 onwards, it's hard to tell how it would pan out in Russia.
Perhaps at the next occasion, we'd like to give you a more of a detailed explanation. That is all.
I couldn't quite hear some of the comments. You mentioned Q1 was almost flat. Did you say it was flat for Q1 for the real demand?
Yes. Indeed. Q1 on a year-on-year basis, the real demand was almost flat. Whatever number that we do see, a majority of that comes from the inventory impact.
You mentioned about the inventory impact. You're saying the incremental that you've seen, that it's all inventory?
Let me give you the numbers for Q1. Volume year-on-year, it was increased by 3 billion sticks or so. The inventory accounted for 70% of that volume increase.
Understood. Thank you very much. Q2 onwards then. Since you mentioned the old demand is almost flat, that is fairly high, I believe.
Of course, the decline in the illicit trade was that the main reasoning behind that?
First of all, the market total demand and the JT volume, we need to consider those separately. For the industry volume, we are seeing decline in the illicit trade, and the impact of tax hike will start to be realized in Q2 onwards. We believe the market, the industry demand as a whole should be flat. For JT volume, of course, there's an adjustment of the inventory, transitory inventory, and we have been able to capture the market share. In fact, in the first half of last year, we have struggled in terms of the market shares. Beyond that, we have the Camel Compact has been introduced. Inclusive of the heated sticks, Q4 onwards from last year, gradually the market share has been on the rise. JT's share has been quite brisk.
Thank you very much. Just one confirmation. In terms of volume, this increase of just over 3 billion, so this is total industry demand? When you said about 3 billion.
No, that is the sales volume. Sales volume for us.
Understood. Thank you very much.
Thank you, Ms. Kawasaki. Since time is pressing, we would like to take one last question. From JPMorgan Securities, Ms. Yoshida.
Yes, this is Yoshida from JPMorgan. Thank you very much for your time. Thank you. You talked about the transformation, the structural reform at the end of FY 2020. For the domestic tobacco business, you said that you will have the expense of JPY 37 billion that you will spend, but JTI will be digital, and you will have restructuring in domestic business. By FY 2023, you will have the effect of JPY 40 billion, and that will feed into increased profit. How are you doing on that plan as of quarter one end? Also, what is your forecast going forward? This fiscal year, you have the effect of JPY 10 billion. Will you be able to pull that forward a little bit or not?
Yes, thank you very much. When we announced our results in February, we talked about the transformation and the domestic business and mentioned the number, over JPY 40 billion. When we did this last year, we've already had some effects last year, but this fiscal year, 30% of that JPY 40 billion will be spent. That is basically for JTI. For next fiscal year, that will be FY 2022, ending December, it would be 80% of the JPY 40 billion that will be realized. Now, to your question about whether we can pull this forward or not is, well, most of this is the so-called early retirement of the employees or relocation of jobs. It's about replacement and shifting of people and their jobs. That is the primary target of this spending. It will be quite difficult to pull any of these schedules forward, really.
Even in Japan, we are going through prompt negotiations with the labor union. From that perspective, too, I would answer that, again, that this would have to progress on schedule, and it will not be pulled forward, really. I hope you understand. I will stop here.
Thank you. Finally, I'd like to ask about the expense in domestic business. You said JPY 37 billion you will spend for a structural reform, but when we look at the operating profit line, it doesn't seem like this cost is recorded. Will this only be realized going forward?
Yes, I mentioned earlier that this is something that, as we speak, we are considering the conditions, the scale, and the numbers, really, going into prompt and formal negotiations with the labor union.
This negotiation has to be concluded before we can present the conditions to our employees, and then we need to give them time to respond. When we ultimately get the response from the employee, then we are finally ready to use the allowance and also will be able to record the figures for the retirement packages. Of course, we will be in time by the end of the fiscal year, but really, that would be the timing. It requires time. End of fiscal year? Regarding the JPY 37 billion in Japan, there are some plants that we will close, and there will be some impairment accounting that we are going to include, but that's very slight. The remaining part, which would be regarding our allowance for the retirement, will not be pulled forward.
Thank you very much.
Thank you, Ms. Yoshida. This concludes our call today.
Thank you very much for participating in our conference call for 2021 first quarter results at Japan Tobacco.