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Japan Tobacco Swings To 4Q Net Profit, Sees Tough Year Ahead On Tax Hike

Japan Tobacco Inc. (2914.TO) Wednesday said it swung into a net profit in its fiscal fourth quarter, but it expects a tough year ahead as it hikes prices to absorb a looming government-mandated tobacco tax hike.

The world’s third-largest tobacco company by sales volume after Philip Morris International Inc. and British American Tobacco PLC, said it generated a Y31.5 billion group net profit in the January-March quarter, considerably better than a year-earlier loss of Y8.0 billion. The company attributed the improvement in its bottom line to increased tobacco sales in overseas markets that offset a sales drop at home.

It also booked a special profit of Y16.7 billion, reflecting smaller penalties that its U.K. tobacco units Gallaher Group Ltd. and Gallaher Ltd. will pay the U.K. Office of Fair Trading. The special profit mirrors the discrepancy between the provision already set aside for the penalties, and the actual payments.

In the just-ended fiscal year, the company, commonly known as JT, posted revenue of Y1.483 trillion for the quarter, down 0.2% from Y1.486 trillion in the previous year. Group operating profit rose 29% to Y43.9 billion from Y34.1 billion.

Separately, JT said it will raise prices for tobacco products sold in Japan effective Oct. 1, with the magnitude of the hikes differing by the type of tobacco. JT plans to raise the price of its popular Mild Seven and 32 other brands by Y110, or 37%, per pack of 20 cigarettes, bringing the price of tobacco to Y410 per pack. A pack of its Seven Stars brand and 13 other brands will cost Y440 compared with the current Y300.

“The planned tobacco tax hike is unprecedented so we are projecting a steep decline in demand,” said Hiroshi Kimura, JT president and chief executive. “We will keep making efforts to cut back costs, but the impact of the tax hike is not something that such efforts alone can cancel out.”

Expecting the initial rush of consumers stocking up on cigarettes to give way to a steep fallback, JT expects domestic sales of tobacco in terms of volume to tumble by 16%, or 24.3 billion cigarettes, for this fiscal year ending March 2011.

That would siphon off Y74 billion from JT’s profit from its domestic tobacco business on an earnings before interest, tax, depreciation and amortization basis for this fiscal year. Even after taking into account improved profit margins as a result of the price hike and other factors, JT estimates its EBITDA to be pulled down by about Y32 billion on a net basis.

The Japanese government will hike tobacco taxes by Y3.5 per cigarette effective Oct. 1, or Y70 on a pack of cigarettes — the first tax hike since July 2006 and marking a much steeper pace of increase when compared with previous hikes. Tobacco taxes already make up 63% of tobacco prices with a cost of Y300 per pack.

While the Japanese government has increased its tobacco tax three times since 1998, limiting the magnitude of the tax hike to about Y1 per cigarette each time, tobacco has continued to generate about Y2 trillion in tax revenue annually.

But Japan’s new administration, led by Prime Minister Yukio Hatoyama, called for greater consideration of the health impact of cigarettes, leading to the steeper pace of tax increases.

For the current fiscal year, the company expects a net profit of Y133 billion, down 3.9%. Revenue is pegged at Y5.980 trillion, down 2.5%.

In addition to the debilitating effect of the tobacco tax hike, the company said it will book Y13.8 billion special loss for the July-September quarter to reflect a payment made by Canadian unit JTI-Macdonald Corp. to settle a longstanding dispute over alleged cigarette smuggling.

JT has been in a legal dispute with the authorities in Canada, which in 2004 claimed JTI-Macdonald had profited from contraband trade in cigarettes, and that it didn’t pay tax on those profits between 1990 and 1998.

JT obtained the unit via the 1999 purchase of the international operations of RJR Nabisco.

Japan Tobacco compiles its earnings based on Japanese accounting standards.

By Hiroyuki Kachi, Dow Jones Newswires

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