Nippon Telegraph & Telephone (NTT)

We will now start the briefing session of NTT's financial results of fiscal year 2020. Thank you very much for participating today despite your busy schedules. I am Fujiki from the IR office and will be serving as today's facilitator. It is very nice to meet all of you today. I would like to introduce today's attending members. First of all, from NTT, we have Mr. Sawada, representative member of the board, president. Mr. Shimada, representative member of the board, senior executive vice president. Mr. Nakayama, executive officer, senior vice president, head of finance and accounting. Mr. Taniyama, executive officer, senior vice president, head of corporate strategy planning. And from NTT DoCoMo, we have Mr. Hiroyi, representative member of the board of directors, senior executive vice president. Today's briefing session will be streamed live on the internet. This will also be distributed on demand basis on a later date, so we kindly seek your understanding. Today's presentation materials are posted on our company's IR website under presentation materials. On the first page of the presentation materials, points to be considered are stated, so we kindly ask you to please read through them. After this, Mr. Sawada, the President, will explain the outline of the results and others, followed by opening the floor for questions. Mr. Sawada, please.

Thank you very much. My name is Sawata, the President and CEO. Thank you for joining us at this presentation. Despite your busy schedule, before we start with the financial results, allow me to express my heartfelt sympathy to those who have been affected by the spread of COVID-19. Also, if I may, I would like to talk about our response to the recent occurrence, if I may. Regarding the recent occurrence in which members of management dined with ministry officials, we sincerely apologize for causing great inconvenience and concern to our customers, our shareholders, and all related parties. Allow me to share with you the current status. On March 9th, NTD established a special investigations committee, including external experts to clarify facts. And this has been conducted by this committee. The recent occurrence was a result of lack of awareness on the part of members of the management. And NTD deeply regrets that members of management who should set an example to employees have caused such a situation. Going forward, in order to strictly prevent the reoccurrence of such an incident and to regain the trust of our customers, shareholders, and all related parties, NTT will undertake a review of its internal rules and will implement thorough initiatives to prevent any reoccurrence. Further initiatives will be announced in the future after the Special Investigations Committee presents the results of its investigation. I would now like to go on to talk about the overview of fiscal year 2020 consolidated results. So this shows you the highlights of the consolidated results. Operating revenues, operating income, and profits all increased across the board. Operating revenue and profit set new record high. As for operating revenue, there was decline due to a drop in Docomo's handset sales, roughly As for operating sales, there was decline due to drop in Docomo's handset sales and overseas system integration revenue from impact of COVID-19, as well as from the impact of change in accounting at Entity Limited. But this was offset by increase at Docomo's smart life business revenue, roughly more than 80 billion yen, as well as domestic system integration increase. So operating revenue increased by 44.6 billion yen year on year. Turning now to operating income, the impact of COVID-19 and increase in electricity procurement costs at ENET was offset by increase in revenue, as well as cost reduction among group companies. So, therefore, operating income increased 109.2 billion yen year-on-year. Turning now to profit, there was increase linked to increase in operating income, roughly 55 billion yen, as well as 40 billion yen linked to minority interest as a result of making Docomo a wholly owned subsidiary firm. So, profit increased by 60.9 billion yen year-on-year. Turning now to overseas sales, there was decline due to change in accounting, roughly 90 billion yen, as well as impact from COVID-19. But overseas operating income margin improved due to streamlining at Entity Limited. Operating revenue, operating income, and profit all exceeded our initial projection and guidance. As I mentioned earlier, The impact from COVID-19 on financial results is roughly $20 billion in terms of revenue and $50 billion in terms of profit. As for initial projected impact, due to smaller impact related to NTD data sovereignty system integration revenue, Docomo's handset sales, the level of impact on revenue shrunk by $150 billion and impact on profit shrunk by $20 billion. Next page shows you the contributing factors by segment. Mobile communication segments saw increase in both revenue and profit. Impact from expanded customer revenue and declining mobile communication revenue due to drop in international roaming was there, but this was offset by increased smart life business and improved efficiency of marketing cost. Smart business increased by 44 billion, and also efficiency marketing cost was also there. So, therefore, operating income increased in the segment, regional communication segment. This segment experienced an increase in both revenue and operating income for the first time since 2010. And this was the first time for NTT West to experience increase in operating revenue. But NTT East and West enjoyed increase in revenue from strong net addition in fiber sales, as well as system integration, as well as cost reduction. Increase in system integration was brought on by the strong demand for remote work, so both operating revenue and income increased. Turning now to long-distance and international communication business, there's declining revenue due to change in accounting and entity limited, as I talked about earlier, as well as from the impact of COVID-19. But then due to improved profit from structural reform overseas taking place in the previous year, operating revenue declined, but operating income increased. As for data communication in business, this was already announced by NTD Data in their financial results. They experienced both increase in operating revenue and operating income. Due to increase in revenue domestic public sector, social infrastructure, and finance sector, as well as from reduction in unprofitable transaction, there was increase in both revenue and income. Also, impact of COVID-19 outside Japan was not as much as expected. That was another positive factor. As for others, other business, there was impact from the spin-out of, there was impact from spinning of this business roughly 47 billion in terms of impact on revenue and 8 billion impact on operating income. So, and there was also increase in procurement cost of , so both revenue and income declined in this sector. Let me now talk about the forecast for fiscal year 2021. Operating revenue and operating income and profit will all increase across the board. and they're expected to reach record high levels. And profit is expected to exceed $1 trillion for the first time. While there's still the impact of COVID-19, there's also decline in revenue from launch of AHAMO and expanded the impact of customer return program from GigaHall and Premier at Docomo. But then, on the other hand, there is also increased system degradation due to strong demand for digitalization. And based on strong digital demand and expanded smart life business, as well as structural reform effect in our overseas business, as well as cost reduction at various companies, We believe that operating revenue and operating income will increase year on year. That is the guidance that we have set. As for profit, on top of increase expected linked to increase in operating income, there is also the impact from turning Docomo into a wholly owned subsidiary firm. That's a positive impact of 160 billion yen. So, as a result, the profit is expected to increase by $168.8 billion. EPS will be $300 billion. As for meeting term financial targets, I will talk about this later on in the course of my presentation. So, that is the target which we will aim for. Now, let me now talk about forecast summary by segment. As for mobile communication segment, yes, increase in both operating revenue and operating income. The $60 billion impact from customer return program expansion, but then increases in our life business is close to $60 billion. So, we'll also be exercising cost reduction. So, we believe that we'll be able to see increase in both operating revenue and operating income as a result. Turning now to regional communication business. Last year, we had significant impact in system integration, so in reaction, operating revenue will be coming down. But then there is also increasing fiber, and so there is also cost reduction. So while operating revenue will decline, we'll expect an increase in operating income. Long distance and international communication business. increase in both operating revenue and operating income year on year. This is due to increase in revenue from expanded added value service at entity limited as well as structural reform effect. As for data communication business, this was already announced by Entity Data. They're expecting increase in both operating revenue and income. Next, I would like to talk about the overview of the meeting term financial targets. With regard to the review of the medium-term financial targets, we were scheduled to announce them in the month of May. But as I mentioned at the beginning, because of the incident involving dining with ministry officials and also the Minister of Internal Affairs and Communications, they've set up a study meeting on an ideal way of ensuring fair competition. So as a result, We decided to wait until the report of the study meeting on ideal way of ensuring fair competition is announced. The timetable for the announcement of the report is not yet clear. So until we wait for that report from this study meeting, there could be some implications in terms of the overall society. So we want to not announce the status of the financial meeting term financial targets at this time. Once the report of the study meeting is made clear, we will review meeting term management strategy and announce them. Now, as far as the status of the meeting term financial targets are concerned, this is indicated in this slide. So, areas where there's strong progress is indicated in dark green color. In white letter, what would be cost reduction targets? In 2021, we were scheduled to have 840 billion in cost reduction. That is already anticipated. So, in 2023, we were anticipating 800 billion yen. So, that target has been brought forward by two years. It can be achieved two years ahead of the original target year. In terms of capex sales, we are aiming for 13.5 percent in fiscal year 2021. That was the original target for 2021. So we believe that, as scheduled, we'll be able to achieve 13.5 percent this fiscal year. So the green-colored and the white-colored letter portion, this is achievable targets. As for three other green-colored boxes, EPS, for example, In fiscal year 2020, we had 248, and this will increase to 300 yen in 2021. And the target was 320 yen for fiscal year 2023. It will make efforts so that this could be achieved one year ahead of schedule. As for medium-term target is concerned, as I mentioned earlier, we will be studying all these items separately. As for overseas operating income margin, in fiscal year 2020, this improved by 0.8 percent. In fiscal year 2021, NTD Data and NTD Limited will experience increase in operating income. So that indicates we believe that the overseas operating income margin will double up to 6 percent, 6 percent in fiscal year 2021. So this will bring us closer to the 7 percent target for 2023. As for overseas sales, there is a change in the accounting system. So that being the case, we are aiming for $19 billion in fiscal year 2021. 25 billion fiscal 2023, there seems to be some gap at this time. As for return on operating income, investor capital is very strong. We are aiming for 7.4% in fiscal year 2021. So 8% in 2023 is now within our sights, I believe.

Regarding the topics, I would like to briefly go over them. First is regarding enhancing the R&D. The Ion Innovation Center, we would like to newly establish it this July. This is for the photonic discovery computing infrastructure, utilizing the photon as electronic convergence technologies and also integration mobile and fixed and network and computing is what we would like to further enhance. And we are going to appoint Mr. Hidehiro Otsukano to be head of the Ion Integrated Innovation Center. where it will be more of an R&D that will be utilizing NTT's fundamental R&D. And also, regarding the midterm management strategy, we have said that we are going to make an investment of 2 trillion yen in five years. And this is going to – this is progressing as planned, that fiscal year 2021, we are planning to have 500 billion yen in scope. And next is aiming for the lab concept of natural world. And this is to translate and disseminate a new image of society created by the ION concept into information that can be felt by ordinary people at an individual level of their own. We are going to collaborate with the Infocom Research and Hakuhodo with an alliance, and we would like to combine the science-based knowledge and the humanities-based knowledge. And regarding enhancing the governance structure, we would like to activate the board of directors by introducing the outside member of the board and executive officer system to major subsidiaries. And we would like to review the directors of compensation. For the holding companies, EPS, but for the major subsidiaries, we are going to set KPI and newly implement the stock compensation system. What is currently 30% is linked to the performance, and we would like to reflect the midterm and long-term results more in the incentive and the compensation for the directors. and aiming for realizing the remote world. We have a cloud-type contact center service, and also we have the remote access service that is secured. We have already started to provide it in April. Regarding the remote world, due to the COVID-19, which is still a severe situation, but even post-COVID-19, in that environment, the remote work is going to be indispensable is what we think. And as for the progress of the medium-term management strategy initiatives, it is summarized in the next slide. It is quite in detail, so I'd just like to point out some key points. First of all is the B2B2X project. The fiscal year 2021 was 100 projects, but fiscal year 2021 end of March was 104 projects. So we have achieved the target a year ahead. and also for the medley which is the online medicine and with the alliance with the Mitsubishi UFHJ Bank and also Smart Life with the Smart City MOU with New South Wales with Australia. And also, we have gone into local corporation for Israel for creating new businesses. And regarding the dividend forecast for fiscal year 2021, We will increase it to 110 yen per share, an increase of 5 yen from fiscal year 2020, and this was resolved in today's Board of Directors meeting. So this means that dividends are expected to increase for the 11th consecutive year since fiscal year 2011. That is all from my side.