Steep declines in the Russian ruble have dealt a blow to Japan Tobacco’s (JT) earnings, as the global cigarette company does a brisk business in the country and surrounding region. With its overseas operating profit falling nearly 10%, the company’s vulnerability to the ups and downs in emerging economies is clearly visible in its latest results.
“A weaker ruble and other foreign exchange-related issues brought a negative impact worth about ¥100 billion (US$841 million),” said president Mitsuomi Koizumi during an earnings briefing.
JT reported ¥565.2 billion in operating profit for the year through December 2015. Straightforward comparison with the year-earlier results is not possible because the company’s previous fiscal year had only nine months due to a change in its fiscal-year end.
JT’s tobacco business in Japan delivered a 37% profit increase, but the dramatic depreciation of the ruble caused significant damage, as the Russian currency’s average exchange rate against the US dollar fell nearly 40% on the year to ₽61 to the dollar.
Helped by a series of large-scale acquisitions, JT now holds the position of No. 1 cigarette seller in Russia, controlling a little more than 30% of the market. With its mainstay brands, such as Winston and LD, enjoying strong popularity, the company generates about 30% of its worldwide tobacco sales in the “CIS-plus” region, which includes Russia, former Soviet republics and Eastern Europe.
Capitalizing on its dominant market position, JT raised prices four times in Russia last year. This led to a drop in sales volume, but operating profits in the CIS-plus region would have recorded a 14% rise, had the ruble’s exchange rate remained unchanged.
“Russia will continue to be a growth engine, since we still have much room for price increases,” Koizumi said. However, JT anticipates the Russian currency to remain weak, assuming an exchange rate of ₽80 rubles to the dollar for this year.
With the euro, Turkish lira and other currencies of its key markets projected to fall against the greenback, JT estimates operating profit for its overseas tobacco business will sink 20% to ¥278 billion in the current year.