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EarningCall_0 | Now it's time for us to start Tokyo Electron Financial Announcement for the Third Quarter of Fiscal Year Ended on March 31, 2023. Thank you very much for joining us today despite your busy schedule. I am Yatsuda of IR department acting as a moderator for today's session. Now I'd like to introduce today's attendees Mr. Toshiki Kawai, Representative Director, President and CEO; next, Mr. Hiroshi Kawamoto, Vice President and General Manager, Global Business Platform Division Finance Unit. Prior to the presentation, let me explain the flow of today's conference. First of all, Mr. Kawamoto and Mr. Kawai will make presentation. After that, until 6:30 Japan Time, where we'll have a question-and-answer session where we take questions from the audience. This meeting will use two channels on Webex for the simultaneous interpretation to Japanese and English. As we explained in our e-mail, you are kindly requested to use apps on PCs or mobile terminals, if you plan to ask questions. But if you are not going to ask questions, you can use telephone. In addition, since this conference is intended for the institutional investors and analysts, we would appreciate your understanding that we receive questions only from institutional investors and analysts. We will post the audio contents of this conference in Japanese and English on our website within a couple of days. It will be appreciated if you could also visit our website. So now I would like to present financial summary of the third quarter. In the third quarter, we generated net sales of JPY467.8 billion, 34.0% decline from the previous quarter. By segment, SPE net sales were JPY458.8 billion. FPD net sales were JPY8.9 billion. Gross profit was JPY203.9 billion and operating income was JPY114.7 billion. Since the manufacturing -- sales was rather high in the second quarter. Therefore, compared with the previous year sales was declined relatively speaking. The manufacturing cost to sales ratio increased. As a result, gross profit margin was 43.6% declined by 2.7 percentage points from the previous quarter. Operating profit margin was 24.5%, declining by 8.3 percentage points due to the increase of manufacturing cost sales ratio and SG&A sales ratio. This is the graphic representation of financial summary of the previous page. Really appreciate if you take a look at it. This slide shows segment information. For SPE, we generated net sales of JPY458.8 billion and delivered segment profit margin of 29.5%. Just like the overall company results, since manufacturing cost to sales ratio and SG&A sales ratio increased along with the decline of net sales, segment profit margin should decline from the previous quarter. For FPD net sales were JPY8.9 billion and segment profit margin was minus 3.7%. As for the composition of net sales in the third quarter, SPE sales accounted for 98%, while FPD sales accounted for 2%. This shows the SPE sales by region. As you can see, the SPE sales declined from the previous quarter, mainly in China, the pink portion; North America, purple portion and Japan, the blue color. Next slide, please. This slide shows SPE new equipment sales by application. On the right, the third quarter. From the bottom of this chart, sales to logic manufacturers accounted for 69%. Non-volatile memory accounted for 16% and DRAM accounted for 15%. Proportion of sales to non-volatile memory manufacturers declined while that of logic and others showed an increase. This slide shows Field Solutions sales. In the third quarter, sales amounted to JPY117.5 billion. The sales declined from the previous quarter, which is attributed to decreased sales of used equipment modifications and also drop of part sales due to the lower utilization of our customers' fabs. On the other hand, sales of the service in Field Solutions remained strong. Next, this slide shows the balance sheet. The total assets were JPY2,092.7 billion. Cash and cash equivalents were JPY389.4 billion, accounts receivable and contract assets were JPY454.4 billion. Inventories were JPY632.0 billion showing an increase from the previous quarter due to strategic procurement and manufacturing doubling. Liabilities was JPY658.3 billion, net assets were JPY1,434.3 billion. The equity ratio was 68.0%. Now you can see the cash flow. The cash flow from operating activities was JPY53.2 billion. The cash flow from investing activities was minus JPY13.8 billion due to the investment to the fixed assets. And cash flow from financing activities of minus JPY134.6 billion, primarily due to the dividend payment. The free cash flow was JPY39.3 billion. This was all about the consolidated financial summary of the third quarter. Finally, this slide shows the announcement of stock split that we announced today. I'd like to briefly touch upon this issue. On the record date of March 31, Friday 2023, Tokyo Electron split the shares of common stock with the proportion of one share into 3 shares. The purpose of this stock split is to create the environment to encourage more investment by lowering minimum investment in order to expand our investor base. For giving comprehensive consolidation to various factors, including the trend of stock market, our shelf life, share distribution and shareholder composition, we intend to pursue a proper unit of investment for us to further enhance our corporate value. As for the dividend, through this record dated March 31, 2023, we will pay the year-end dividend based on the number of shares issued before the stock split since the effective date of this stock split is April 1, 2023. Good afternoon. I am Kawai once again. So now I'd like to talk about business environment and financial estimates. First of all, let me start with the business environment. Driven by progress of digital shift in the society, the WFE market has grown from $65 billion in 2020 to $92 billion in 2021 and about $100 billion in 2022. Though the WFE market is currently under adjustment due to the impact of macro economy and geopolitical developments, such as inflation, interest rate, COVID-19, utility costs and sluggish final demand, we expect that the WFE market will start coming from the second half of this year and reach about $80 billion in the full year of 2023. Beyond 2024, the WFE market is expected to enter the stage of further growth driven by emergence of new CPUs and data centers, which are likely to be put with the advanced DRAM, DDR5 and 3D NAND with three access layers including more memory capacity. It is also expected that the data centers built in around 2017 and 2018 will be replaced by adopting innovative semiconductor devices with higher energy efficiency. Growth of Metaverse starting full-fledged service in 2025 and beyond, spread of electric vehicles and recovery of smartphone demand are expected to strongly drive expansion of the WFE market. Next, this slide shows business progress in the third quarter of fiscal year ending in March 2023. As for SPE in calendar 2022, our SPE business generated net sales of JPY2,161.1 billion on a calendar year basis, hitting the record high. Our new equipment sales recorded an annual growth of 22%, outperforming the WFE market, which grew by 8%. I believe such positive results were achieved by the maximum effort we made to address the customers' demand, supported by our resilient and strong supply chain despite the lingering procurement uncertainty and disruption of logistics. The maturation of our strategic products and acquisition of PORs in the customers' development line, which leads to our future growth have been on course well-aligned with midterm management plan. In SEMICON Japan held last December, we released a new single wafer cleaning system, CELLESTA MS2. This new equipment is able to simultaneously clean both surfaces of the wafer without reversing it, which realized higher productivity and lower running costs. Conventionally, during cleaning process pure water or gas was used to protect the wafer surface, which has not been cleaned. CELLESTA MS2 has eliminated such needs of water or gas, which also contribute to the lower environmental footprint. We are determined to strive for development of technologies to address our customers' needs. And we have decided to reform our organizational structure in an attempt to promote technology development for application-specific semiconductor devices, which have grown considerably in recent years and expected to grow further in the future and to expand business opportunities furthermore. Application, leveraging such application-specific semiconductor devices include Metaverse, Autonomous Mobility, Green Energy, IoT & information and Communication. Our company calls these applications MAGIC market in short and will place more focus on these areas. Key elements in MAGIC market includes semiconductors such as power device, CMOS image sensor, and RF, devices embedded into semiconductors, such as Waveguide, micro LED and silicon photonics and also displays. For evaluation those key elements, broad range of technology innovation is essential. Leveraging the leading-edge technology, we have developed so far and experienced based on wealth of installed base, where we enhance our responsive capability. In the domains of MAGIC, displays play extremely important lows interface in order to enhance our technology innovation capability and seamless customer responsiveness by leveraging our know-how for optical devices, and we have cultivated through FPD manufacturing. Commencing April 1, 2023, we will merge Field Solutions Business Unit and FPD Business Unit to newly established Diverse Systems and Solutions Business Unit, or DSS BU for further business expansion by efficiently mixing resources to MAGIC market where significant growth is expected, which will maximize business opportunities. As for the FPD business, Capital investment in FPD fabrication equipment, TFT array process is expected to decline by 30% to 40% in calendar 2023, as a round of large amount of investment to LCD and OLED was completed. As for the future FPD business, we will focus on high value-added areas such as etching. For the inkjet printing system, we have suspended the development project by taking account of its growth potential. For the inkjet printing system, our technology is advantageous, particularly in large-size OLED, and we have evaluating the technology together with leading FPD customers over the past few years, along with the difficulties caused by COVID-19 spread, however, need for [IT] (ph) mobile display, rather than need for life flat TV have grown recently. And accordingly, our customers have revised their products strategy. Consequently, our customers are shifting their focus of capital investments to micro LED, micro OLED and [ITOLED] (ph). This micro-OLED is one of the devices in the MAGIC domains that I explained before. Based on these backgrounds, we have decided to reallocate our resources to those areas with faster growth potential so that we can maximize profits. As I said earlier, Field Solution business unit and FPD business unit will be merged in fiscal 2024. And accordingly, we will not disclose financial performance, specific to FPD segment because those two business will operate altogether. Next, I will present the financial estimate for fiscal year ending in March 2023. In November 2022, we revised fiscal 2023 financial estimate. This time, we scrutinized the results of the third quarter and estimates of the fourth quarter again, and we are going to revise the financial estimate upward by JPY70 billion. On a full year basis, we expect net sales of JPY2,170 billion, gross profit of JPY946 billion, operating income of JPY580 billion and net income attributed to owners of parent of JPY433 billion. This slide shows SPE new equipment sales forecast in the fourth quarter. Compared with the third quarter, there's little change in application mix and slight growth is expected in sales. As I said earlier, SPE new equipment sales in calendar 2022 from January through December were JPY1,689.6 billion, growing by about 22% on a year-on-year basis. On a fiscal year basis, we also expect about 11% growth. In calendar 2023, we will work hard aiming to outperform the market again. This shows our plan for R&D expenses and CapEx. The plan remained unchanged. As we announced before, over the five years to go, we plan to invest more than JPY1 trillion in R&D and spent more than JPY400 billion for capital investment, mainly in evaluation tools. To achieve the midterm management plan we will continue proactive R&D and capital investment. My last slide shows dividend forecast. For interim dividend, we paid JPY857, which is record high interim dividend, along with the revision of our financial estimates year-end dividend is expected to be JPY531. As I said in the previous meeting, while celebrating our 60th anniversary this year, we are planning to -- planning a commemorative dividend of JPY200 per share at the end of this fiscal year with our sincere gratitude to the shareholders who have warmly supported our growth. I'm Nakamura. For WFE market, I would like to learn about how to look at the WFE market 2023? That's about 20%. The second half is you expect recovery in the market. So what sort of application will drive the recovery in the WFE market first? And 2024, you have any forecast for 2024? In the previous meeting 2024 will exceed the result of 2022. That's what you've said in the previous meeting. As of today, what sort of latest viewpoint you have for the 2024 market? For WFE market is $80 billion, around $80 billion. So our present adjustments are just being conducted. We are just in the middle of adjustment period. So 20% is what we can -- 20% decline in this year. But actually, we are very close to the bottom. So we can see the sharp increase from now on. As a result, we can achieve $80 billion. That's how we view the WFE market. So memories are now under adjustment as we presented in previous meeting and that condition remain unchanged. So proportion up until recently, last year or two years ago, with the proportion was about 64%, Logic, 60%, and memory 40%. That is the kind of proportion between logic and memory. But last year, from the second half of last year, 72% to 30% and investment in the first half of this year, namely investment will be reduced. Maybe 80% is divided into 80% to 20% between logic and memory. That's how we view the WFE market. So in the recovery -- so in the second half next year, especially the fourth quarter, we expect some recovery in memory. As for the [indiscernible] of the recovery, actually, customers are now reducing their utilization ratio of their fab. So because that may have some impacts on the balance between supply and demand so slightly DRAM might be a bit earlier than NAND in terms of recovery. But depending on the utilization ratio of customers' fab DRAM and NAND may recover at the same time. So this is our view for the WFE market. For 2024, the direction in 2024, as you know, there are various factors. We need to closely recap. By 2024 and 2025, the recovery trend will continue. That focus remains unchanged. In particular, high-speed CPUs and DDR5 -- 300 they are three times layers 3D NAND and 2025 already, we have seen some emergence of the Metaverse and Metaverse will start full-fledged servicing near 2025. So new servers in low-power consumption devices with high speed were coming out. So 2016, 2017, we hit the bid. So data center will be replaced with the new innovative semiconductors with high energy power efficiency not only 2024, but 2025, you can see the growing trend. Last year, WFE market hit the maximum almost the same or more than last year WFE market will grow that much in 2025 in our viewpoint, I can say our view doesn't change. In that sense, 2024 and 2025, the COVID-19 impact. We had the strong demand for PC or mobile, we had the strong demand during COVID, in COVID spreads, and we may see some replacement demand for the PC and mobile phone as well. I am Yoshida from CLSA Securities, Japan. So for this year's guidance, so now you revise the financial estimate upward. So now you have the new equipment -- Field Solution. I think your focus is upward, especially for Field Solution. What sort of background are there to increase your focus? As for new equipment. By application, maybe the logic and DRAM increases and NAND dropped a little bit. So I want to see, which was the driver to revise your financial estimates upward? Thank you very much for your question. About your question, JPY70 billion upfront revision was made. And your question is what is the major reason for that upward revision of JPY70 billion. Is my understanding correct? So partially, for logic, next fiscal year, April and onward, we had some expectation of sales. But actually, those orders are put forward to this fourth quarter of this fiscal year in the two companies in logic area, two logic manufacturers and also the America China trade conflict. So the October 7 last year, the American Government announced their export control and customers -- American two vendors are not able to deliver to the China customers, and we incorporated the impact of first trade export controlled at maximum level. Of course, the export control had some impact but compared to the worst scenario, there was not so much drastic change in the China customers, the CapEx plan. So that is the reason why we made the upward revised by JPY70 billion. So for China, in particular, as you said earlier, so DRAM is from China -- China's impact mainly. Is that correct understanding? So all of the items covered by the American Government export control, I wonder maybe the customers' CapEx plan might be changed, actually, not only DRAM. Actually, I want to just give you some overall answer rather than specific to the DRAM. So how about Field Solution? Maybe you have revised the financial estimate for Field Solution upwards as well. So what is the major reason for that upward revision for the Field Solution? In the previous meeting, there have been no changes in principle. So Kawamoto San just answer that because of the microphone, by and large, for Field Solution, there have been no changes in our financial estimates. I am Hirakawa from BofA Securities. My question is a kind of follow-up question of previous question. So 2022 and 2023, WFE market so the impact of the American trade regulation, what is the proportion of the impact of the American regulations and Tokyo Electron calendar year 2023 and/or fiscal year 2023? What sort of impact are you suffering from that can you say, regulation imposed by the American Government? So geopolitical issues are hot topic right now. So as one company, we are very careful making some comments, honestly speaking. So as a company, I would like to refrain from making specific comments on those issues. Last year, we reported some facts and based on that, WFE should be $80 billion. That's our current prospect that we want to report to you this time. So I would like to ask some questions. So in the second quarter, you revised the second half financial estimate by 20% and 50%, 50% between the China market and the memory adjustment, so now 10%. Half of that, less than 10% impact is smaller than 10%. Is that correct understanding? Well, there are still many factors which have some influence, and we do not see the clear direction in the future. So if we receive some new information, we try to respond to that new information appropriately. As for your question, we didn't conduct such kind of calculations. So please allow me to refrain from answering that question. Thank you very much, Mr. Hirakawa, for your question. Next question is from Mr. Wadaki of Mitsubishi UFJ Morgan Stanley Securities. I am Wadaki. I have one question. So toward next year, 2023, 20% digitalization is expected. And I think the drastic decline might be expected depending on some tool [indiscernible] developer or diffusion furnace. For those decline do you expect for each one of those tools, equipment? For memory, and logic proportion, I said 80% to 20% between logic and memory. That's what I said earlier. In that sense, for example, 3D NAND will use the long etching processes. The investment in that area compared with last year will be decreasing. On the other hand, for logic, in the case of our company, in particular, last year, about 55% increase was recorded for logic sales last year. In that sense, DRAM and 3D NAND as well as logic, you can see a very good balance in orders that we received so far. Therefore, by product, there is no drastic drain. We don't -- we have very limited impact because there is a good balance in orders among different products. So there is no big change in the proportion of the applications among our -- within ourselves. So for other two vendors, for example, ASML, so they are very bullish [indiscernible] good. And also [indiscernible] made a great announcement on the cleaning is very good. On the other hand, NAND research as well as the others 3D NAND is not so good. So the diffusion furnace might be very difficult. Don't you feel that sort of impression? So for 3D NAND, you can see some significant effect and for logic, we do have high share in the logic area, and that area is growing. Therefore, we don't see the drastic kind of increase or drastic decrease for some of the products. Mr. Wadaki, thank you very much for your question. Next question is from Mr. Shimamoto of Okasan Securities. Mr. Shimamoto, please. I am Shimamoto from Okasan Securities. So 2023 -- second half of 2023, you can expect some recovery in the market. So I see vendors also mentioned to the very similar perspective for the future. And the accuracy probability of our forecast so application, you said smartphone demand will be increasing, but there are some risks in 2023. There are any areas which might have slower recovery in 2023? Are there any concerns or are you prepared for some of the negative estimates? On the current situation, now you can look at the macro-economy, inflation, geopolitical development, which increases the energy or utility costs. And memory inventory is now under adjustment -- so these factors are there and also PC and smartphone replacement demand. We also have the problem or impact of the energy cost increase. So the consumers are not so much active in replacing their PCs or smartphone. Interest rates, generally speaking, I think interest rate might have some kind of a mild change and industry adjustment, mainly manufacturers are very aware of the inventory -- so there might be some acceleration. So we need to closely watch the condition of macro-economy and adjustments in the market. Having said that however, last week, the SEMICON Korea was held last week and now I have many opportunities to talk with various customers, taking those opportunities. So in the second half of this year, the memory market will start recovering and accordingly, the new [indiscernible] trend of the investment will start from memory as well. So now we have [indiscernible] era and we must pay attention. So we cannot ignore the situation of United States, China trade conflict. So by and large, we need to take consideration of those risks and maybe $80 billion should be the appropriate number for the refi market. There might be some increase or decrease, and we should look at the progress to make adjustment to that amount. But as for now, $80 billion should be the appropriate number. So 2024 and 2025, the market trend will be increasing. We are now in the middle of the bottom. So we should be prepared for the positive change in the future. We may see surge start-up. We must be prepared for the very prompt recovery in the market. That's what we need to give more attention closely, and we are now focusing on that area. Thank you very much, can you hear me? I have a question regarding WFE market. In the previous meeting, Kawai San made comment the second quarter should be the bottom in the market and from the third quarter, some recoveries stands. That's what Kawai San said, and we agreed each other. But now earlier, Mr. Kawai said, we compared with the initial financial estimates, the utilization rate of the wafer fab has been declining. So therefore, certain increase, what recovery is expected in the future. And you said you need to prepare for the certain recovery in the market. So if you said that, so then when you look at memory market and memory market is deteriorating, and many of the manufacturers are now very close to below the breakeven point. So right now, the utilization rate of customers' fab as a whole, how much decline do you see? And from Mr. Kawai's viewpoint, when you can see some surge in the recovery of the market? So that's what we are trying to locate the timing. We try to find out the right timing. And not only our company, but also our customers are very careful to find out when the markets start recovering precisely. But roughly speaking, the memory imbalance maybe in June and onward. Memory is expected to recover little by little in June and over it, that is a general trend. So we have some increasing CapEx accordingly, not only the demand, supply-demand balance, maybe you can see innovation or generation replacement takes place every 1.5 years to two years, and we can also expect some investment to prepare for the next generation. But the quarter level, for example, calendar year third quarter or fourth quarter in the calendar year or in the fiscal year -- would it be in the second quarter or third quarter? The quarter-based estimation is a bit difficult to be conducted. But what we can say is now you can see some increasing trends in the future. Therefore, we must be prepared for the future recovery trend. So procurement should be properly done because we know what sort of products are sure to be delivered. So we need to have some inventory for that area to have a good procurement. When the COVID-19 pandemic started, we increased inventory to some extent. And similarly, now, we are now preparing for the future growth. So the utilization rate in the industry, how much decline do you see in the utilization rate of the wafer fab? And are there any technology innovation going on in parallel to eliminate or offset the utilization rate decline, so 20% WFE. So maybe you can see the V shaped recovery from the bottom. That is the presumption you have. So you haven't changed your market forecast. What slight changes in the market forecast? Actually, our focus hasn't been changed drastically. We just -- if that is the case, so maybe the V-shaped recovery starts from the July to September. I wonder whether that is starting from July to September or next quarter. It's a bit difficult for us to say something precisely now. But three months -- we shouldn't can we say, jump by quarter-by-quarter, and we need to think about the leveling of the manufacturing to be prepared. We can see this increase. We don't know when, which month the recovery starts -- rather than pinpoint when -- which month you barista we should come up with big picture when we run the company. I'm Nakanomyo from Jefferies Japan Limited. I have similar questions. I'm very sorry for that. Once again, the second half of next year, you can see -- expect demand recovery. But now you have some -- you take orders in accordance with your production lead time. So if in July to September rather than recovery -- I think that in terms of shipment, if you can see some increase in shipment in July-September period, then you may see some increasing trend of orders now -- this is my understanding. So this time, there is no clear change in the orders. In some cases, some projects are pushed out or orders are not certainly increases in all of sudden, that's what I feel personally, but how do you view the recovery trend? So now there were some disruptions in logistics. So customers are now preparing for the future recovery. Some customers are doing that. And on the other hand, there are some customers putting their foot on the break, all of sudden. So utilization rate of sales has been declining in some of our customers. So there are varied situation -- situation is varied from one customer to another. So even if you ask us when to recover, specifically, I would like to refrain from giving you some specific answer, but we are now facing the bottom in the market, and you can see some recovery trend in the second half of this year, so we must be prepared for that future recovery. So memory, the balance in memory, we must take a close look at the balance of memory, but we don't change our view that the markets start recovering from the second half of this year. So we will report it once again. So we will see some trend of recovery in the future. One more question, may I ask? So 2023, the memory proportion declined drastically. That's what you said. So far, relatively speaking, your sales in -- the memory manufacturers is rather big. By 2022, memory customers purchase decreased to 2023, again, the drop on memory demand might have some impacts, but still you can outperform the market. Yes. As I said earlier, last year -- as for last year for logic, accounted for 55% -- sorry, logic growth grew by 55%. Logic grew 55%, coater/developer also increased and etching sales also increased. So a broad range of our products are purchased by the logic lines, logic manufacturers and cleaning equipment and metallization -- metal disposition area, you can see some increase in demand, so you can have a good balance in receiving orders. So now even if the proportion between memory, logic and memory changes from 60 to 40, 70 to 30 by 80 to 20, that sort of difference or change in proportion does not have a big impact on our sales. One -- now you can see the proportion of our sales over the past one year or two years, our sales proposition, as you know, the logic foundry is dominant compared to these memories. So compared with other competitors, our sales is well balanced. So memory proportion is not so high. I understand that point. By 2021, when you compare with 2021, I think your proportion is higher than the market average. So this is determined by the customers' CapEx, proportion of customer and CapEx. And our sales composition is determined by customers' proportion investment. And as you can see, that is a very good balance. I'm Yasui. For China, the sales to China 2023, WFE, how do you view the sales to Chinese customers? Could you share your idea? For example, Samsung, China factory that should be the [indiscernible] companies in China and also local China customers, do you see some increased logistic trend in the Chinese market in 2023? So as for financial estimate, we don't announce the financial aspect by region, but 26% for China for a full year basis. In the first half of this year, about 80% is for the local Chinese customers and 20% is the global customers in China. So over the past few years, the capital investment by the global players decreases in China. And next year 2023, so as for the financial estimates, we do not announce or present the financial estimate by region. So please allow us refraining from answering to your question specifically. I am Shibano from Citigroup Global Markets. As for the profitability, I would like you to share your idea with us, up until third quarter, now the net sales declined. Against that, you have maintained relatively high profitability. But when you look at next fiscal year, WFE will decline by 20%. So along with the market trend, your sales are expected to decline several percent. So when it comes to profitability, for example, this fiscal year 2023, do you see profitability will decline in fiscal 2024 or do you have any potential to maintain the profitability in next fiscal year? Could you share your idea with us, please? So as for budget, we are now reviewing or discussing the budget right now for next fiscal year. Therefore, I would like to make some announcement in next quarterly review meeting -- quarterly meeting for financial announcement. We need to closely look at the current status, and we prepare the appropriate plan for next fiscal year. And we'd like to announce that plan in the next meeting for financial announcement. So short term, now we are in the bottom, and we will see some recovery. So preparation for recovery is what we are working on right now. So we need to take comprehensive consolidation, we must make appropriate action. My second question is about -- I'm sorry, I'm so persistent -- year 2024 WFE market trend. So far, you said memory demand will recover from the second half of next year, this year. Now 2023, now we said the forecast for next fiscal year. So memory top vendor is a bit bullish compared with some expectation in terms of capital investment plan because now there might be some prolonging balance utilization. In 2024, there might be some decline in the capital investment toward year 2024. So we discussed with our customers strictly exchange information with our customer. As I said earlier, many of our customers are now trying to find out the right timing for recovery. That means many of our customers expect the recovery in the market. So Gartner, Semi, many organizations are reporting WFE financial estimates. And many of them announced the recovery trend in the WFE market compared with last year, what happened in next year. As far as we are concerned, we think equivalent or better. That's how we view the market in the future, equivalent, more better. And that view does not change -- remain unchanged. So now I -- this is my second question. So I want to ask a question about Rapidus. I want you to give us some comments. So your former Chairman, Mr. Higashi is now the Chairman of Rapidus. So now the semiconductor -- so from the viewpoint of the Korea IC vendors, Rapidus should be the competitor. So I think your position is rather sensitive. So from the customers, what would you do to take care of those different customers? So Mr. Kawai, how -- what sort of things do you think? And how do you answer to your competitive vendors? So Rapidus and Tokyo Electron are independent each other, nothing linked between two. The Tokyo Electron is a global manufacturer as you know, our sales, 80% of our sales are from outside of Japan. So we should remain fair all the time, and we -- the basic position remain unchanged. So Rapidus is one of the very important customers, and we will address the important customers. So far, we have cultivated the relation of trust. And that trust relationship will remain unchanged. And Tokyo Electron is trusted by our customers. Our turnover ratio is rather small. So Tokyo Electron is trusted by our customers because we have very high levels of information security, and we maintained the high level of information security from now onwards as well. Mr. Higashi is Chairman of Rapidus and Mr. Higashi has used to be our Chairman, but in the history. So there is no special relationship between our company and Rapidus and we are expanding global business. So Rapidus is one of our important customers, overseas customers, Korea, Taiwan and American customers. So all those customers are trusting us. So now since there seems to be no more questions, we'd like to conclude today's financial announcement. Lastly, we'd like to continuously improve our IR activities based on your precious feedback. So we appreciate your kind cooperation in heading up question before you accept your Webex. Thank you so much for taking time to join this conference despite your busy schedule today. Thank you very much. |
EarningCall_1 | Now I would like to present to you the results for the fourth quarter of 2022. First, please refer to Page 3. This is a summary for Q4 2022. There are five key points to share with you today. The like-for-like net sales, which excludes the impact from FX and all business transfers was an increase of 1% year-on-year. EMEA, Americas, and Travel Retail recovered the continued uncertainty from COVID in China. Even though the Chinaâs shipment sales trended low in Q4, impacted mainly from the market slowdown of Double 11, the market share experienced solid growth. In Japan, the recovery of mid-price range continued its recovery trend, yet the sluggish first half affected the full year result to keeping flat to last year. By brand, Cle de Peau Beaute and NARS, as well as fragrance remained strong. E-commerce was impacted by the slowdown of the Double 11 market, yet the overall performance sustained its positive growth, primarily due to high prestige brands and product lines. E-commerce sales ratio continues to grow at 33%. Core operating profit was up by JPY8.8 billion. For sustainable growth in the mid to long-term, the company has executed additional strategic investments already showing positive impacts in certain areas. Also, the continued company-wide agile cost management production of fixed costs from structural reforms and FX impact from yen depreciation all contributed to the positive profit. In terms of transformation, the company is capturing steadfast progress. The business transfer of professional business has been completed and the transfer of personal care manufacturing businesses in Kuki and Vietnam are also on track for closing in 2023. The net debt to equity ratio was a multiple of 0.05, keeping the sound financial position for growth. Next is Page 4, executive summary of P&L. The core operating profit was JPY51.3 billion, up by JPY8.8 billion. On the other hand, the operating profit was JPY46.6 billion or minus JPY54 billion versus last year. This is mainly due to the non-recurrent items a minus JPY62.8 billion versus previous year. Last year, there was profit of JPY58 billion from transfer of personal care business. However, this year, the impairment loss from transfer of the personal care manufacturing business is partially offset by the profit from professional business transfer, resulting the non-recurrent item to be minus JPY4.8 billion. Profit before tax was JPY50.4 billion from finance income and share profit of investment accounted for using equity method. The profit attributable to owners apparent was $34.2 billion or minus JPY12.7 billion versus last year. Also the EBITDA was JPY102.4 billion, an increase of JPY7.9 billion versus last year. The EBITDA margin is about 10%. Next is Page 5, performance by brand. On an annual basis, many skincare brands struggled due to the China lockdowns, market slowdown impacts and saw recovery of Japanese market. However, Cle de Peau Beaute, NARS and Fragrance captured strong growth. Cle de Peau Beaute captured stable sales within China's high prestige market by strengthening the appeal of product efficacy throughout the year. Even though the Double 11 in China had a slow trend in Q4, the brand continued to grow -- continued to the growth led by the holiday collection. New products from NARS and narciso rodriguez continued to perform well driving the growth. Elixir continues to have strong growth with the new lotion and emulsion that was launched in September. However, the sluggish performance in Japan's mid-price range market and a tough market environment in China in the first half impacted the whole year to end in a minus. For the year, Drunk Elephant was a slight minus, but it had a significant shipment growth in Q4, shrinking its negative number. On consumer purchase basis, the brand continues to have a very strong growth momentum from Q3 that we predict the shipment to have stronger recovery in 2023. Next is Page 3 (ph), the net sales year-on-year. The like-for-like for the year is an increase of 1%. In the two regions that have the high sales ratio, Japan was flat to last year and China was a double-digit negative. The growth in other regions offset the overall sales to result in positive growth. As you can see on a quarterly basis, Q3 had positive growth driven by shipments from the renewed Elixir in Japan, as well as EMEA in Travel Retail. However, the fourth quarter was highly affected by the slowdown of the China market and suspension of shipment to Russia in the EMEA region, resulting in minus 1%. Compared to 2019, the global performance for the year was minus 6%. Japan still has a big negative, but since the second half, the negative is improving. Asia-Pacific turned into a positive in Q4 from the recovery in Taiwan. Also globally, Q4 turned into a positive showing our solid reached trend. Next is Page 7 about Japan business. Now please be noted that the underlying numbers are numbers for the full year and numbers without an underline are the three months of Q4. First, in Q4 for Japan, the low price range continued to grow driving the overall growth. The mid-price range is sustaining modest recovery trend from Q3. In such environment, the high priced Prestige brands expanded its share, contributed by Cle de Peau Beauteâs 40 anniversary holiday collection, Shiseido's holiday collection, a new product launch from Bio-Performance Series, and skin filler with the state-of-the-art hyaluronic acid technology. For Elixir, the renewed products in September have been successful, bringing in new users from low price and high price range capturing many new trial users resulting in high-single digit growth. Brands such as PRIOR continue strong with new product launches contributing to the overall recovery trend of the overall mid-price range. E-commerce sales was a mid-single digit growth for the year. The member service app that launched in September, Beauty Key, has exceeded the number acquisition target and continuing to grow already proving contribution to sales through app and CRM. We will continue to grow the number of app downloads, build loyalty user base and evolve to strengthen the OMO platform. Next is Page 8 on China. Despite lifting up the zero COVID policy in December, the marketing environment continued to be tough, including the subsequent confusion in the market. In addition to the impact from intermittent lockdowns in many cities and logistics infusion, the overall market slowed down more than expected in Double 11, the biggest selling season. Amid such business environment, our market share increased with continuous solid sales of high Prestige category, including Cle de Peau Beaute [indiscernible] series and Shiseido Future Solution, bought by additional strategic investment among other factors. E-commerce sales were down in the fourth quarter due to slowdown in Double 11 market and also a shift of investment to normal times in order to enhance brand equity. However, on a full year basis, e-commerce sales recorded positive growth. We will continue to aim at increasing sales driven by brand values. Next, Page 9 on other regions. In the Americas, market expansion continued in all categories and our sales also continued to be strong, driven particularly by NARS. In EMEA, market growth continued in all categories, and we maintained strong momentum centered on fragrance. In Travel Retail, despite slight slowdown of Hainan Island, the recovery trend continued in the Americas, EMEA and in Japan showing good signs backed by recovery in the number of travelers globally. In Asia Pacific, Taiwan continued to face difficulties amid COVID-19 until the third quarter, but turned to the recovery trend in the fourth quarter contributing significantly to growth. Next Page 10 on COGS ratio. The COGS ratio in fiscal year 2022 was 30.3%, but excluding impacts from MSA and impairment losses on business transfers, the like-for-like COGS ratio was 23.6% year-on-year improvement of 1.5 percentage points due to favorable product mix from business transfers, as well as lower inventory write-offs from improved accuracy, inventory management despite increasing cost due to launch of Fukuoka Kurume factory and higher raw materials and logistic costs. Next, Page 11 shows core operating profit by segment. Japan core operating profit decline mainly due to the impact of personal care business transfer. In China, despite agile cost control in response to the market trend, core operating profit decreased due to lower margins from declining sales. Americas and EMEA, core operating profit increased, thanks to higher margins from sales growth and lower fixed costs due to a structural reform. Travel Retail achieved core operating profit growth due to higher margins on increasing sales. Decrease of core operating profit in other is mainly attributable to decreased shipment from headquarters in line with lower sales in China as well as enhanced investment in new factories and DX. Finally, Page 12 on cash flow management. Free cash flow for the year was JPY5.4 billion. Excluding the impact from the income tax paid in 2022 associated with the personal care business transfer in 2021, free cash flow would have been exceeded JPY50 billion. We continued capital investment for future growth such as investment into Fukuoka Kurume Factory in Japan and investment into IT and DX, while maintaining strong financial positions. DSI, one of our KPIâs decreased from 200 days in 2021 down to 150 days, which reflects the impact from product supply after business transfers and impairment. Excluding those impacts, on a like-for-like basis, DSI is around 210 days, we are making steady progress against the 200 day target. Thatâs it from me. Hello, everybody. I would like to take this time to reflect back on the past two years as we've pursued WIN 2023. I will begin with achievements. For the company to thrive and to grow again amid the uncertain times, we have decided to execute selection and concentration in areas such as skin care in consideration of profitability and what our strengths are. To divest or the goal of businesses that continued negative performances or that did not have very high priority resulted in a difficult structural reform about JPY200 billion in size. But we had -- what we had planned for 2020, we thoroughly executed. It resulted in big improvement in the long struggling EMEA and Americas business contributing to the consolidated results of the company. Also, the sales ratio of brands such as skincare brands exceeded 70% strengthening the profit base for the future. And in the past, we have had inventory shortage. But in order to avoid the opportunity loss by inventory shortage, again, we built three domestic factories and Kansai Logistics Center even during COVID, which was a total of about JPY150 billion in investment, which was completed on schedule. We actively improved the productivity with use of investments. We strengthened the financial base by repaying debt from cash generated by business transfers. On the other hand, what remains a challenge is the Japan business. There is so considerable delay in the growth recovery than initially planned. Of course, there are reasons that caused the hardship. COVID impact was more than two years longer in the Japan market compared to the EMEA or the Americas than what we predicted. And wearing masks have become a norm from the Japanese people and inbound have significantly decreased. However, we are aware that this cannot be the excuse for the Japan business to continue negative performance for three years. Fortunately, we have been seeing light of recovery through some of the enhanced activities from last year such as Elixir. But we will be looking into the -- to reviewing the main brands, other main brands and continuous market execution, channel strategy, a cost structure such as SG&A and thorough organization structure and culture and will do a fundamental reform so that we can generate profit over JPY50 billion in 2025 three years from now and in order to realize a sound and healthy company foundation where the employees are motivated. As for China, as mentioned earlier, after China suddenly changed the policy, we hope to see the bringing the back -- bringing back of the economic activities as much as the infected numbers coming down in international travel making a full comeback. But we should know more in another month or two to see what this trend will look like. About a year ago, the war that started in Ukraine, the war still continues. And there continues to be significant uncertainties in the world, unknown to all of us, what kind of challenges it may bring to us. We have always targeted the core operating profit of 15%, which we felt was an important profitability benchmark to be a good leading global company. This number is something that we will continue to target as confirmed with the Board of Directors and for all of us to continue to aim for. However, we do have to face the reality in front of us that I have just mentioned. And once again, we will position the next few years for foundational business reform once again. We will look at the next three years to build a concrete path by proactively investing competitively, having structural reforms. We will have details explained by Fujiwara-san after this. The big vision for the business strategy is to become a personal skin beauty and wellness company. So it will be a company that will provide a comprehensive skin beauty and wellness. Of course, our strength is skin care. And this skincare, as you can see here, there's various segments and it continues to evolve. And we want to touch upon all these segments when we say skincare. And furthermore, for sun care, we want to achieve number one in the world. And for makeup and skincare, will we ignore those segments? That's not that -- we've had that discussion in the company, but that's not what we are thinking. Of course, all of the comprehensive skin beauty value will include makeup and fragrance as well. And furthermore, when we develop this, we will look into developing more of the inner beauty business, meaning the internal care, sleep and stress which affects our skin and physical health. So that we can capture synergy with the existing businesses. To ensure this horizon expansion, we will build a digital platform in order to improve better consumer experience and more excitement. And we've touched upon makeup as part of skin beauty. Well, there has been a very big hit product that leveraged the accumulated technology learned from skin beauty into a makeup product that's the NARS light reflecting foundation, which has been a global hit. And it has ranked number one sales in the Americas Prestige beauty category last year. So with this in mind, NARS as a brand exceeded JPY1.2 billion or about JPY150 billion in sellout, significantly growing to a profitable global brand. From 2023, we will shift from defense to offense, making proactive investment for top line growth. We will make strategic investment in three focus areas, which are brands, innovations and people. As for brands, we will establish our portfolio Shiseido, Cle de Peau Beaute, NARS, Drunk Elephant. These four brands, we make them global focused brands in all regions. In Asia, Elixir, Anessa, which is number one in Japan, we will geographically expand those brands -- centered on those brands. The mega brands era is set to be over, but consumers are diversifying. And also, we are seeing localization among consumers. So paying attention to such aspects bound (ph) from Japan, natural sustainability oriented brand and Ule from Europe have been developed locally and available on guest marketing basis. So we will enhance a development capability of original headquarters. Furthermore, we will target men's market in a multifaceted approach in anticipation of a huge potential growth and develop men's skincare and makeup markets. So to enhance equity of these brands and achieve organic growth, we will make additional marketing investment exceeding JPY100 billion cumulatively over the next three years. In addition, in areas where we cannot fill with our own development or when we need speed, we will explore M&A opportunities selectively like what we hit down with [indiscernible] last year based on the conditions that they fit with our strategy and return on investment can be expected. To fully leverage our development capabilities in the world, basic researches enhanced at global innovation center of Japan headquarters and at the same time, development centers of each regional headquarters will be expanded to further strengthen the R&D global network. For this purpose, we will continuously make investment into R&D at 3% of sales, which is roughly JPY30 billion per annum. Another important thing, which is a high quality from Japan, we will further improve Japan's high quality and to enhance productivity and cost efficiency. We will increase utilization at three factories in Japan with the use of IoT and robots in the state-of-the-art Kurume Factory is improving productivity of production lines by 300%. We will roll it out to other factories. As explained earlier, transfers of Kuki factory and Vietnam factory to CBC on track. Next, on talent development. We will fully pursue people first management philosophy globally and further strengthen our efforts for global competitive advantage. This global leadership team is our global management team, as you see on this slide. As you can see, we value diversity with female accounting for 43% and non-Japanese for 39%. We will further evolve and aim at being an enterprise that attracts global excellent talent regardless of gender, nationality and race. To accelerate our efforts as a project to commemorate the 150 year anniversary. Renovation is underway to convert our headquarter building in Ginza into Shiseido Future University, a human resource development center. It's going to be a unique city where our people are able to learn about Shiseido heritage, [indiscernible] and human capacity as leaders among others. It's going to be a base to develop people who will read the next 150 years. It's also intended for Japanese young talents to be inspired by having contact with the world view. I will also serve as President of the University, which is scheduled for opening in autumn this year. I will briefly touch on our mission purpose and ESG initiatives. Based on our mission, beauty innovations for a better world. We will proactively engage in solving environmental and social issues through our main business. We are targeting to be recognized as the most trusted beauty company in the world by promoting activities on sustainability. We are making steady progress against the CO2 reduction and water consumption targets. And an important initiative, which is a refill, which account for 60% or more for Elixir (ph) now. And plastic usage will be decreased by 85% and CO2 reduction of more than 80%. This is a very fantastic practice in Japan, which was introduced also in China two years ago. And we are now seeing 6% of refill penetration. We would like to expand such efforts globally And we are announcing today to start demonstration test in April for an extremely innovative circulation model of plastic packaging, BeauRing. From the beginning, we wanted other cosmetic companies to join this project because it aims at making contributions to the whole industry and the Japanese society. Pola Orbis Holdings agreed to support the model and agreement was signed to jointly promote this project. In addition to this project, we together with an Pola Orbis will explore various collaborations in the area of sustainability. This demonstration test will be done in Yokohama. And after demonstration tests, we plan to open up the door for many other cosmetics companies to join us. Next, diversity, equity and inclusion. Pressing ahead with promoting diversity, equity and inclusion or more strongly is an extremely important challenge for the country as Japan ranks this honorable 116th position in the world in a gender gap index. Creating a friendly workplace for women should be considered as having a good workplace for men and anyone. From a viewpoint of eliminating in equity women at management level at Shiseido headquarters and in Japan, account for 38% now, which we aim at improving up to 50% before 2030. I often talk to top management of different companies at various locations. And I get the impression that there is still lack of understanding why diversity is necessary. So I think that companies need to know the value created by promoting diversity. So with that in mind to do research and make presentations on the calls and in fact relationship, Shiseido D&I Lab was established. As a Chair at 30% Club, we called for other Japanese companies to join, and now 33 companies have participated in the club to share best practices with active engagement of the top management. Among these companies, the ratio of women on the board has improved up to 22% on average against 8% or 9% on average for other companies in Japan and achieving 30% is in sight. And moreover, now please take a look at the image video of Shiseido Future Beauty touched upon earlier. That brings me to the end of the presentation. My name is Fujiwara, and I have been appointed COO from this January. Now I would like to present the mid-term business plan. Our company runs our brand business and in order to achieve sustainable growth in such uncertain market environment, I believe it extremely important to establish a business model that can create an even higher added value through proactive and continuous investments in brand innovation and people just as Uotani-san has mentioned. With these as a driver, we will aim to achieve 15% in core operating profit in 2027. In order to reach this target in the next three years, we will grow the core business and realize a value added base management model by 2025, so as to build a cost structure that generates investment fees and to achieve core operating profit ratio of 12%. This year 2023, the first year of this three year plan, we will make it a year to build a firm base for growth momentum and to make investments for the mid-term growth. We will target like-for-like sales of plus 11%, net sales of JPY1 trillion and profit rate of 6%. By completely executing the plans in 2023, the profit generated from growth will directly contribute to the company profit in 2024. Therefore, we believe that the operating profit ratio of 9% can be realized. On the other hand, the investments and restructuring to evolve with the environmental changes have almost been completed in WIN 2023. As a result, along with the profit growth, we will continue to realize improvement in EBITDA margin, the power to generate cash. In order to pursue this target of continued stable growth and conversion into a high profit structure, the point of focus will be to recover the growth momentum in Japan. The most important market for the company and to restructure the profit base. Next, to increase the share with the significant size market of the Chinese people, to expand the business size. Furthermore, position Americas and EMEA, the world's number one beauty markets as the next growth pillar and build the growth foundation. We will also proceed to develop new markets for the future to realize the growth of our global businesses. In terms of value added base management model, we have intangible assets such as global brands, innovation and high quality services. We aim to elevate these assets by further enhancing these values that is unique and cannot be found elsewhere and continue the uncompromised quality and safety, allowing us to realize high gross margin and premium pricing. In order to do this, we will innovate the value creating organization and processes and structure a company-wide KPI setting and monitoring system, which will enable us to build the value added base management model for the regional businesses and brand holders to perform together as one team. In detail, on top of the financial targets, we will set a common KPI for brand value for the brand holders and regional businesses. That will allow a definitive direction for the company in mid to long-term, enabling us to hold constructive discussions between brands and region so that the company can continue to grow both sales and brand value. The most important market Japan cannot expect a big growth of the market size itself, but we are seeing positive tailwinds to further push the growth of the company this year. On top of the growth in share in our core competing target, the premium price range, the mid-price range has started to recover and inbound is starting to come back. Also, as the mask regulation will be relaxed in Japan soon, this should encourage consumers to actively go out and have more socializing occasions. We will make sure to capture these opportunities strengthen our activities to support and encourage consumers for more happiness as a beauty company. Japan will shift to aggressive marketing. Proactive investment to skin beauty will be made and we will especially strengthen the value of innovation to expand the loyal user base for expansion in sales and share. We will also continue to create new business opportunities and beauty propositions by capturing the new consumer needs and demands. In terms of profitability, we will watch the balance of growth and profitability realizing the optimal brand and channel mix to maximize the gross profit margin. Also along with these growth realizations, we will make continuous efforts to reduce cost to achieve a cost structure with low 60% in SG&A. We see the inbound market recovery to be additional profit contribution and we will make sure to seize the opportunity when it comes. On the other hand, not just to pursue efficiency for growth, I believe it's necessary to fundamentally review the cost items for Japan business, which has been experiencing continued negative performance. In 20 23, Japan will be proactive to market launches with various innovations for growth. For the mid-price range, the renewal of Elixir performed well, proving that if we can build value higher than the price growth is possible. The power of R&D that enables products with higher value than the price matched up with optimized marketing power to communicate to the consumers, we were able to acquire new consumer base from the low price range, promoting an active trade up. Therefore, this year, we will continuously launch innovation that exceeds the price expectations to drive growth. For Prestige brands, along with innovation of the core skincare, we will enhance the makeup category to acquire new loyal users as we aim for the non-mask society ahead of us. Also, the brightening market, in which we excel greatly in technology, we have plans to launch innovative products that uses the latest research results, so please look forward to the announcements. In the mid-term, we will continue to research changes in consumer sentiments and behaviors and launch product innovations proactively in the core business. As the next growth category, we will make enhancements into Pure & Derma, and new market creation through inner beauty. Through fulfilling the skin beauty portfolio, we will build a structure where the personal beauty partners can provide authentic wellness proposals to consumers. And to support we will pursue building a digital platform to support their activities as well as to provide a seamless beauty experience between online and offline. Along with this digital platform and the company's R&D technology, we can realize new beauty lifestyle proposals to be a new growth engine for the Japanese market. In terms of cost, structural reform that generates investment funds on top of concentrating on skin beauty to maximize gross margin. We will reduce returns and excess inventory as well as lower inventory and warehouse fees by shortening manufacturing lead time. Also, we will review the logistic costs with items such as delivery efficiency improvements, and we will aim to contribute to sustainable society along with cost reduction. For maximizing human capital, we will reorganize the offices, implement focus, reform work style and process to promote efficiency. We will also continue selection and concentration to ensure profit improvement. As a result, we will target to build a cost structure with the low 60% in SG&A in 2025. The turnaround of Shiseido Japan's cost structure, I feel it to be one of the highest priorities for the growth and profitability of the future of Shiseido group. Along with Japan business CEO, Tadakawa-san, I will learn about what is really happening and even consider a fundamental structural reform if needed. Now in China, the market situation is not stable yet after the lifting of zero COVID policy. But stable growth is expected over a medium to long term perspective due to policies aimed at achieving an economic recovery driven by consumption. The competition in the cosmetics market continues to be intense and also market continues to undergo dramatic changes such as diversification and consumer needs. Additional platforms along with price competitions and rise of local brands. Although, China is a market which is difficult to predict without being dependent on changes in the market, we remain committed in implementing marketing reforms that I will explain using the following slide to realize growth in China and strive to grow an improved profitability by cross-border marketing across regions including China, Japan and Travel Retail. The key element of marketing reform is brand building. To be honest, we have been a short sighted and based on a short-term ROI, we had concentrated our investment on driving traffic and doing marketing centered on top products and driving sales growth in large scale promotions. From the second half of 2022, we started to change our marketing activities with an eye on increasing loyal users for our brand and generate returns on a medium term perspective. Some of the examples include strengthening brand experience, developing the second and third star and hero items under the same brand, developing a product exclusively for China and implementing CRM utilizing company's own consumer data pool. As a result, our market share increased in Q4 following Q3. By controlling excessive investment in large scale promotions, our sales decreased year-on-year in Double 11. However, we achieved the overall market share gains due to driving growth through activities at normal times. We will keep pushing ahead marketing reforms in an effort to build a foundation for sustainable growth. As enhancement of brand equity in China will lead to overall growth and profitability improvement across regions, we will continue to make proactive investment. But we will also work on reducing the COGS ratio by strengthening high priced skincare products and expand the fills, while benefiting from economies of scale. We will push ahead with digitalization to improve profitability. We will utilize -- and we will improve marketing ROI by using data such as consumer skin data. We will also lower costs by improvement of inventory management capabilities with focus that went live as of January this year. We will also optimize offline basis in stores and improve a beauty consultants productivity by digitalization. By further consolidating distribution centers and centrally doing indirect material procurement we will improve profitability. And in 2025 compared against 2022 at achieved a 5 points improvement in the core operating profit margin like-for-like, excluding the impacts from transfer pricing and others. With respect to brand portfolio, we have introduced these brands from 2021 in response to diversifying consumer needs. To further solidify the skin beauty area, we will work on capturing new domains over medium term, like medical beauty, sensitive skin and inner beauty, while at the same time, nurturing a new brand that were launched. From here, I will walk you through our strategy for other regions. Starting with Asia Pacific, we will build a business foundation seeing Asia Pacific as promising market. In this market, economy is growing centered on Southeast Asia, India is experienced growth with a huge population and e-commerce channel is expanding. We will work on establishing a business foundation for the future in this promising market by strengthening a Prestige brand portfolio developing business in response to [indiscernible] in diverse multicultural markets. We have also decided to roll out NARS in India from the second half of this year. Travel Retail business is expected to grow in step based recovery in travelers. In particular, since Hainan Island has become established as a shopping destination with expectations for further development, we will strengthen efforts to appeal travel retail as test points for brand experience and aim at achieving business expansion by stimulating consumers -- consumption of travelers with limited edition and differentiated products meeting the needs of travelers. In the Americas, the world's biggest beauty market structure reforms were completed and going forward, we will move ahead with building a foundation for future growth, for America to be the next growth pillar. The market is recovered from COVID-19 and achieved double-digit growth, in all categories, including skin care, makeup and fragrance in 2022. Although there is a risk of recession, we anticipate Prestige market in which we do our business will be resilient. Together with [indiscernible] or NARS and Drunk Elephant, whose home market is United States. Those brands are positioned as core brands, and we will focus on further developing those brands and promote local innovations. Moreover, using cutting edge digital environment, we will evolve consumer engagement led by the Americas. EMEA also achieved substantial profitability improvement with the completion of structural reforms. We predict that the market will be solid. And as interest in sustainability is high in EMEA, we believe efforts in responses as interest will create growth opportunities. We will drive growth by continuously positioning Brand Shiseido and NARS as core brands and by strengthening Drunk Elephant, and Cle de Peau Beaute to enrich our skincare portfolio, while pressing ahead with expanding sales and profit contribution of the fragrance business, including brands like narciso rodriguez. New brands Ule and Gallinee, which were developed in response to growing interest in sustainability are still small in business size. But in anticipation of potential growth in the future, we will invest in those brands to cultivate our new skincare domains and aim at developing them to become global brands in the future. We will continue to accelerate DX globally by leveraging digital and innovating beauty check experiences, we will provide optimal beauty experiences for each individual consumer. In 20 25, we target to achieve 40% of sales generated from e-commerce globally. We anticipate upside potential in regions, including China, Japan and Asia Pacific. Digital ratio in the media spend will be kept at 90% with a focus in Japan and EMEA. We will put efforts in enhancing digital illiteracy of our people globally by encouraging them to take part in the Digital Academy, academy particularly targeting people at headquarters in Japan. We have been steadily accumulating consumer data and by utilizing them, we will realize more personalized CRM. For instance, we will build a beauty wellness platform to support not only AI driven skin diagnosis and skin care, but also support inner beauty, through DX, we will work on expanding business opportunities. This brings us introduction of a global unified ERP system. The project started from 2019. Forecast had already been introduced in the Americas, Asia and China. Forecast introduction is slated for completion in all regions by the first half of 2024. And with that, data process and system standardization will be completed globally. Furthermore, in Focus 2.0, we will proceed with introduction Focus at all factories and R&D facilities by the end of 2025 in a bit to globally integrate the value chain. In areas where Focus is introduced, we expect to see a wide ranging effect such as inventory optimization reduction of inventory write-off due to improved accuracy in demand supply planning and finance supply chain and marketing. Cost reductions due to streamlined operations at three globally standardized processes, better data visibility and enhancement marketing ROI. Now I would like to talk about the financial strategy. First is a summary of financial targets. The overall direction will be to improve profitability empowered to generate cash through sales expansion by strategic growth investments in cost reduction. Net sales will be based on the 2022 sales of existing businesses excluding the business transfers at JPY0.9 trillion as a starting point. The three years to 2025 will aim for CAGR of 8% and two years after that will aim for 6% in growth. By 2025, we assume that the market growth will be normalized after high growth rate post COVID recovery in Japan and China. The company will aim to acquire market share above market growth in the next five years. With the strong sales growth along with the cost reduction initiatives explained by Fujiwara-san earlier, the core operating profit ratio targets 12% in 2025, 15% in 2027 and for EBITDA margin 18% and 20% respectively. The core operating profit ratio of 15% from WIN 2023 will continue to be our target. Now onto the financial target and improving the capital efficiency. We have reduced interest bearing debt with cash generated by the large scale structure reform and built a strong financial base for regrowth. And now is the time to utilize the sound financial foundation to drive further growth. Based on that thinking, the 2025 targets are as follows: the most prioritized KPI for capital efficiency in our company is the ROIC and we will aim for 12% in ROIC by profitability improvement. We will target 14% in ROE. Free cash flow is JPY100 billion after a cycle of big investments for structural reform and manufacturing factories. In terms of sound financial position, we target approximately 0.2 for net debt equity and 0.5 for net debt EBITDA. We do not change the policy to keep A rating in order to procure financing for necessary growth investments at a low cost and in a timely manner. We will carefully watch over capital efficiency and manage the optimal leverage level. Next is cash allocation. With profitability improvement through growth investments, to our value creation drivers, namely brand, innovation and human capital. We target a total of JPY400 billion cash inflow in three years. Cash generated will be used for CapEx for focus, IT, DX and energy saving equipments in factories as well as M&A and new business areas. We will also build a positive cycle to further accelerate the profitability improvements. Based on the principle of stable cash dividend for shareholder returns, we will continue enhancement of returns along with profit improvement. In parallel, we will take appropriate measures for optimal financial leverage. Page 47 shows the sales growth contribution by region. The CAGR to 2025 is 8% driven by Japan, China and Travel Retail. On top of this, the business scale expansion in EMEA, Americas and Asia will generate additional sales. The market assumptions for the sales targets are as follows: Japan will grow through recovery post-COVID in both local and inbound. China will transform into stable growth from the rapid growth it had in the past, but China being a huge scale market with growth stays unchanged. In the short term, we assume the COVID recovery to happen from Q2 of 2023. Other regions assume a stable market trend. Next on the cost structure. In 2025, by lowering the COGS at 21% and SG&A at 67% we will achieve the core operating profit margin of 12%. The COGS ratio will come down to 21%, 2.6 points improvement from 23.6% in 2022. By improved accuracy of inventory management through the introduction of Focus, we will reduce returns and inventory write-offs and further improvement in product mix, productivity improvement with cutting edge facilities, reduction in outsourcing ratio, reorganization of supply networks are major drivers. SG&A remains flat from 2022 at 67%. The marketing investment ratio will be increased by additional investment exceeding JPY100 billion cumulatively over a three year period from 2023 to 2025 to enhance brand equity. On the other hand, we will strive to reduce personnel expenses and other SG&A through productivity and efficiency improvement with focus and reduction and optimization of fixed costs. Finally, I will go over the outlook for 2023. We are forecasting net sales to be JPY1 trillion, up 11% like-for-like. By enhancing marketing investment in each region, we plan to expand our market share and outperform the market growth. Core operating profit, which is the most important profitability KPI for us is forecast to be JPY60 billion, up JPY8.7 billion year-on-year. In 2023, to ensure the growth momentum, we will enhance marketing investment and for medium to long-term growth, investment is also made for Forecast and other areas with a view to building a foundation for bigger profit growth in 2024 and beyond. Profit attributable to owners of parent is forecast to decrease by JPY6.2 billion year-on-year due to a plan to record non-recurrent losses of JPY16 billion associated with the transfer of personal care production business. EBITDA is forecast to be JPY120 billion. We plan to increase ordinary dividend by JPY10 year-on-year, up to JPY60 per share, which is at the same level as pre-COVID 2019. Allow me to provide supplementary explanation to the core operating profit. The year-on-year increases JPY8.7 billion. However, excluding the impact from losses related to brand transfers, the like-for-like profit growth is around JPY20 billion. There are special product profit decreasing factors from 2022 to 2023. First, sale for brands to be transferred JPY180 billion in 2022 will decrease down to JPY20 billion double in 2023. As a result, we will incur an impact as cost for resources, which was allocated to those brands in the past, to be reallocated to continuing operations. Second is a cost increase due to IT investment hitting peak in line with Focus introduction and increase in salary along with record high inflation. Our plan is to realize around JPY20 billion profit growth from continuing operations by offsetting these negative factors by higher gross profit from increased sales. 2024 and 2025 due to the absence of such major cost increase factors profit growth is expected to be higher. 2023 is a year of shift, changing gear from the structure reform more to growth. Capacity of our people and resources, which had been allocated to push ahead structural reforms and realized smooth business transfers will now be allocated to solidify -- to solidly achieve increasing sales. To establish a gross momentum for 2023 to 2025 while realizing reduction in SG&A ratio. Furthermore, we will reduce costs by more than JPY10 billion over the next three years and worked toward achieving the core operating profit margin of 12% in 2025 and 15% down the road. That's it from me. Thank you. Hello. This is Hiroshi Saji from Daiwa Securities. One thing, I just want to confirm some numbers and maybe you could share with us in the mid-term plan. Page 27, in 2024, you're aiming for 9% of OP margin. In 2025 is 12% and CAGR was 8%. And if we calculate this, calculated starting at JPY900, but 20%, 25%. I think we're looking at about JPY136 billion in profit. If in 2024, CAGR is 8%, I think it's about JPY95 billion. So I think this year, top line is about JPY60 billion but in the next fiscal year, JPY95 billion and then the following year, JPY136 billion. Is this the right assumption? I won't go into the detailed numbers necessarily, but as the sales grow as plant, the like-for like-sales continues to grow. The 12% will happen in 2025. But the normal -- if we can't -- this is a number that we cannot capture with the normal growth in sales and profit. So that's why we need to have a cost reduction about JPY10 billion in order to achieve this 12% CAGR or 12% margin. The risk factor, of course, I want you to achieve this number, but what will be the risk factors that could avoid you from reaching this target? With management, of course, we have discussed various risk scenarios. For example, if there is a huge recession in the Americas, kind of like the financial crisis, the Lehman Shock. If that happens, of course, that could change something. We don't have that into our assumption. The assumption we have in place is, if there is a small scale recession, as Fujiwara-san has explained earlier, if it is a short term recession, the beauty market could stay resilient. And looking at last year's December or January, the beauty market, beauty market has been quite resilient. So in that sense, if it's a short term, we don't see a big impact. However, if there is a big so we have not incorporated a big geopolitical factor. So if any of these happen, that could be the big risk factor. I know I'm not supposed to ask too much, but so the numbers you presented here, you're quite confident that it is achievable? Okay. So you're determined. Thank you. Anything from the CEO or COO in terms of the target that you have on the mid-term plan, if you can? Well, no, we have these numbers to commit to it. The management commits to this. It is true that if you calculate like you have done, yes, we do understand that and we have than that. So it's 15%. We wanted to aim that for 2023, but we've had to push that back a little bit. But we will continue to target this 15% and if we look at the target that can allow us to go to 15%. We have come up with these numbers looking at the reality of now. External factors and risks, that's something that we cannot control and we don't know what could happen. Like COVID, nobody had expected that. But in an external factor, aside from that, I think it's all about innovation and we're trying to do a lot of investments, proactive investments, but how much can we do that and execute that for growth? Japan, which is seen to be a difficult market, we are growing as in certain brands and that's something that all the brands and companies are experiencing. So we want to make sure to compete and focus on to make sure we can grow in this market. Thank you. This is Kuwahara from JPMorgan. Thank you very much for the presentation. Looking at the all cost structure, without the recovery in Japan, there won't be sustainable growth for Shiseido. Based on that, , I'd like to have a -- I have a question regarding the speed of reform. We do a math and calculation based on numbers. The sales of JPY240 billion, the loss is JPY113 billion. It can be possible in the cosmetics business to that JPY50 billion. How much losses do you expect to reduce in Japan? Do you expect to achieve breakeven? And with the sales scale and losses, I think that you can't wait to reduce fixed costs. And by the end of this year, can we expect to see progress in fixed cost reductions? So those are my two questions. Thank you. The reform of Japan, as you pointed out, of course, we can't wait. Looking at numbers with the level of sales, and you might question why the profit is so small. But as for last year, there were some factors including personal care, business transfer, et cetera. So you can interpret the last year's number as our real capability. But looking at last year's numbers, bit by bit, the efficiency is improving. It's day on day for instance has improved by 2 points or 3 points. So internally, we have done whatever we could. But without growth, we can't see acceleration So this year, as I explained earlier, we'd like to put business on a growth momentum. And eventually achieve profitability improvement. Having said that, that's not enough. So we will review all cost items to find optimization and efficiency improvement and we will work on them immediately. So this year, we like to make sure to achieve profitability in Japan. As you explained, we can't expect much of the market growth in Japan, then creating markets or creating new category, I think, is necessary. So looking at your investment in the past and investment going forward in Japan, what changes do you expect to see in terms of how do you intend to create new categories? Do you have any clues? Thank you for your question. Well creating market is something that we need to work on is the job we need to tackle. But looking at the growth short-term, as I explained earlier, [indiscernible] is a good example. Mid-price segment, there was a question mark regarding the growth of the mid-price segment, but from last year, by delivering value, in this price segment, we have seen the shift from 40% of the customers shift from lower price segment to the mid-price segment. And we learned lessons that we are able to create markets. And last year, even though it's not a new product, new retinol, with new retinol through new communication, we were able to achieve growth. So we learned that with -- new communication, we're able to drive growth. So in the mid-price segment, and also in Prestige, we will work on innovation and also in brightening. So we will make sure to communicate values to consumers. And over a short period of time, we expect to drive sales. And in terms of creating markets, that's something that I would like to work on. Well, there'll be relaxation of restrictions of wearing masks and what that means for consumers when we will consider -- we will get insights to be -- so that we are able to propose new beauty habits. And under -- based on skin beauty, not only skin care, but inner beauty and new beauty solutions, will be combined to be a personal beauty company to continue evolving. My name is Wakako (ph) from the Mitsubishi UFG Trust. Thank you for your presentation. One thing, I want to ask about the ROIC. In the midterm plan, as I look at your mid-term strategy, the marketing costs grow the top line, reduce the cost and improve the OP margin, is how I read it. So efficiency, and as an important KPI, you've mentioned ROIC. But your investment -- return on investment, looking back in the past two, is really efficient. That's something that I'm personally skeptical about. So including the management of the returns, how are you going to improve the efficiency of the investment. And in order to achieve the ROIC target, by area, I'm sure there are areas that would not meet the ROIC target. But for those areas, would you consider taking further measures? And is that your view to managing ROIC So I just want to hear more about how you manage and how you assess your ROIC. The target for ROIC by region, we do not give each region a ROIC target. So we have the ROIC [indiscernible] and each have their levers. So for example, the supply chain will be trying to reduce the inventory, et cetera. There's key KPIs within the ROIC, within these division, and they will target that. And then what about fixed asset? What about investments? If it's from a certain price point and above -- will be raised to myself or Fujiwara-san or Uotani-san. They we'll look at the business case and see if it makes sense what's the payback within how many years the payback, is there enough returns? And that's how we will assess if it turns into a certain level and above. For marketing ROIC, what we see from the head office to the marketing investment, how much sales were we able to generate. That will be the granularity of what we see at the head office. But if by brand and by country or region, by doing that such an activity, how much marketing KPI could increase or improve And would it lead to the actual purchases? Each of the regions and divisions will do that, but we don't manage to that level of detail at the head office. But that is what we do within the whole company to look at the ROI. Thank you. Uotani-san, can I get a comment from you in terms of how you see the marketing efficiency? Maybe looking at reflecting back on the last three years. You've done a lot of different investments and you've change the way of investment is including in China. So how do you feel the results or the impact of these investments? I think there's two things. One is the direct, what we need to see in a quantitative manner. For example, what's the -- so we increase the marketing advertisement fee by this. And then awareness grew up by this, the trial grew by that and the sales grew and they continue to be users and that we can see, for example. So we can see it from that fiscal year, for example. But as you know, marketing, when we invest in marketing for the consumers, you can't just see it for that fiscal year. It's an accumulation of it. It's an impact that continues on and some of the impact carries over to the next year. So it's hard to say, if we cut in investment cost this year, that it will impact us next year and onwards, for example. So in the short term, just like Yokota-san has mentioned, if we do something in certain region, each of the P&L is managed by each of the regions. So by this brand, your region has this profit. And that's something that we always, of course, track. So if we increase something in investment, then we will see with something grew, the gross margin goes the bottom grows, et cetera. If there's a certain reason and if it makes sense, we can push through and execute even if the bottom line turns negative. But anyways, we will try to balance. But it is true that the impact of the overall return on investment cannot be seen in the short-term. And so it has to be planned. It takes few years to see the actual results of something that we invest in and that's something that we continue to track. Just as an opinion, since you are raising the 2020 â since you are looking at these numbers, if you could see more details of the ROIC and if the company can continue to look more in detail of the ROI so that we can have a clearer view of the return on investments. Very true. You have a point there. But unlike the mass business, this business is especially in the Prestige area. It's a very high margin business. So that's why we have organized the brand portfolio and that's why we focused on brushing up on the brand portfolio. For example, in order to get 100 million in sales, what is that? And then the gross margin will be JPY800 million, for example. And some are within 60% et cetera. And in order to graze the top line, what kind of impact does that come, what does that impact the margin? And that is the important activity that each of the region is responsible for. This is Kawamoto from UBS. I have questions regarding Japan and the recovery of the mid-price segment. October to December, I'm sure that you have seen the fruit contribution from the renewal of Elixir, which is in the Premium segment. On a full year basis, it was on par with the previous year and Q3 it was also flat year-on-year. So it looks that the Q4 was also flat. So other products in the mid-price segment, I think we're not growing outside of Elixir, right? And I think that Elixir attains high margin. So in Q4, I expected margin to improve in Q4, but the profit was negative JPY6.1 billion and how should we look at this number? You plan to increase 16% in Japan year-on-year this year. Could you share with us your assumptions? Other than Elixir, other premium brands, your question was regarding other brands in premium segment, right? Other brands in the medium price segment outside of Elixir, to be honest, yes, we are struggling a bit. For instance, a REVITAL and BENEFIQUE, in Q4, they struggled. But Elixir and MAQuillAGE makeup brand have trended steadily. And this category has high penetration in the market. So brand margin is high. So as I explained, putting these brands on a growth trajectory will contribute to profitability. Elixir, is a big brand for lotion and milk, renewal was quite successful. And other areas, other brands are seeing some negative trends, so they are offsetting each other. But we will take measures this year for two to three, we need to spend two to three years to develop a nurture brand. So we can't adjust the overall trend just by looking at the last year's number. China was negative and that represents the overall figure for global. But Elixir in China where I used to base. China saw a negative growth, slightly because Tier 3, Tier 4 recovery was lagging behind. So it's true that we have struggled a little. But based on a quantitative survey, Elixir mid-price segment at around JPY3,000. What we've focused most is that leveraging collagen technologies, et cetera., in promoting Elixir. It's three months and since the relaunch, based on value, the prices are attractive against value. Because much of technologies are incorporated in the product. So customers really understand that aspect. So for other products and brands, we will renew this year, next year to nurture our brands over the next few year period. Question again, in Q4, what's the reason for profit decline against the sales growth? What's your assumptions and what's your assumption for inbound for the New Year in Japan business? As for inbound, as you may know, from October 1, last 2022, travel restrictions were lifted, and we started to see inbound tourists in Japan. And the inbound sales has been growing low-teens percent in Q4. Chinese travelers have not entered Japan yet. So we expect to see continuous trend of inbound sales going forward. As for Chinese tourists, we expect them to start coming back from the second quarter to gradually make sales contributions, so that's our assumption. Those are our assumptions. Answer is that in total, we are forecasting 16% sales growth. As for local consumer growth, we are forecasting high-single digit percent, and inbound, we are forecasting 70% growth year-on-year. Mitsui Sumitomo Asset Trust Management, [indiscernible]. For myself, I'm going to step aside from this performance? And maybe ask more about the new structure of the CEO, COO. In the press conference that was -- that had announced of this new -- the management structure, I want Mike (ph) to hear -- I would like to hear once again from the CEO and COO structure. In the website, in order to change to the offense. The two of you will work hand in hand with partnership to lead the company for further growth. So I would like to hear from Uotani-san directly, what you have in mind? I'm sure there are things you will do together. There are things that you each of you will do separately in Elixir in separate ways. And so I would like to hear that from Uotani-san. And for Fujiwara-san, you have been selected to two takeover to be the COO and President. What would you like to continue doing? What would you like to further develop? And with yourself, with your new leadership, what would you like to achieve? Thank you for your question. As have been expressed, I said it's â this structure will be the next two years. This is year one. So this year and next year, I'm sure that how we get involved to make change. And I want to make sure that after the two years, I can completely hand over to Fujiwara-san, so that he can plan things in the next two years. But for this year, for year one, he was overlooking just Japan sorry, just China region. So he's not had much involvement in the Japan business and America's Travel Retail and those businesses used to report to me, myself directly. So to learn about the global business or the reality of the global business currently is something that Fujiwara-san needs to focus on and to learn from. And of course, we have the and for myself, I don't need to attend these monthly meetings with the regions. And of course, there's a big reason and big problem. Of course, I would need to be involved. But if there's a really good news, of course, I want to hear immediately. But even with the Japan region, Fujiwara-san is talking with Tadakawa-san directly to figure out the real challenges and what kind of problems they have. And I want them to really run this feet and learn about what is happening in reality of the global business. And so for myself, I look at more of the longer term. For example, skin beauty in the longer term was mentioned in the presentation. But these segments that will come in when we talk about skin beauty, we going to develop? Is there going to be further R&D? And what kind of investments? What kind of M&As can we look at? So I want to look more from the longer perspective in terms of business planning for the company. And I mentioned a little bit about sustainability, and that is something that is common between myself and Fujiwara-san. And it's not an activity that only myself is doing because I'm thinking about it, but of course, we need to actually implement it into the company. So that's something we work together. Corporate governance and Board of Directors meetings and related corporate governance, Fujiwara-san your grandson has not had much experience in that. So that's something he will continue to learn from myself. And so in that sense, I will continue to lead these corporate governance structure and gradually build the experience and expertise and knowledge. And so the next year I can hand over many of the things I work on in terms of corporate governance Fujiwara-san as well. And for myself, as a new COO, the global company that represents Japan or to be a global company, I believe, can be one of the companies that represents Japan. And I myself have been very touched by those phrases, and that's what I had been focusing on while I was the head of the China business. I believe this company has the ability to be a leading company that represents Japan in the world. And I think this beauty company has that ambition and that has that vision is a very aspiring thing. And we I'm sure that with that great vision, we can bring in great talent too. And that those words are also very some -- those words are very touching to the overseas regional heads too. And they believe that we as a company can be even a bigger company in on a global stage. So that's something that we will continue and I personally will continue to pursue. And one thing that I will want to make sure that -- what I would like to make sure to be focused on is what could -- what is the challenge now? What could be a problem in the future? I don't want to leave the issues and challenges and problems to the next generation as much as possible. And that's something -- and that's a key phrase that we talk about, not just myself, but within the management team, the executive team right now. Any of the challenges that we have, we want to try to resolve it so that what we hand over to the next generation, we are able to hand over a great company and quality of a company. Thank you very much. It's very difficult to hand over such a big role. And a lot of companies struggle to hand over to the next generation. So I look forward to the a great handover. And Fujiwara-san and I are the same generation, so I look forward to a lot of activities. Well, myself and Fujiwara-san were really next door in the office and we feel that communication is very important. We can knock on the door and we go to lunch together. And I know a lot of different companies and company leaders too. But, it's very different when you work by yourself and you carry the information by yourself, it's often easier to share the information. And as the company members would know, I love seeing people in my emails so that we all know what is happening. I think it is important for one person not to hog all the information, but that all this information is shared upon each other. It is almost time, so we would like to move on to the last question. This is Miyasako from Jefferies. Medium term management plan you presented today, sales and profit by region, I can't really see sales and profit by region. China, you only expecting 5 percentage points improvement. What kind of profit improvements and growth you're forecasting? And at the time of normalization in 2025 or 2027, how do you view your business and growth? Well, as for China, In 2022, against last year, more than 5 percentage points improvement is forecasted by 2025. To realize that, we will -- we need to generate marketing fund to -- and we will improve efficiency, SG&A to fund for marketing investment to drive top line growth. So that's the basic thinking. That goes for all the regions basically, gross is a key. And to fund marketing investment, we need to cut costs in other areas. And enhance marketing investment to drive top line growth. So similar thinking compared against Vision 2020. As we explained earlier and as Uotani-san explained, JPY50 billion in Japan or more, we will generate by 2025 in Japan and by 2025, in the [indiscernible] just by cutting costs, we can't achieve a 12% margin. So we will be saving costs by more than JPY10 billion globally. There are many reasons to believe like global one IT and IT cost reductions and the biggest factor that project focus. Finally, in Q4 2023 or first half of 2024, Focus will be introduced in all regions, linking all the regions and data visibility and integrated planning will become possible. And the processes will be changed to be more efficient to reduce cost. We need to work on that. Otherwise, it's going to be difficult to achieve 12%. Once we work on those, in 2027, assuming that the beauty market to grow 5% globally. By taking market share, we achieved 6%. Then naturally, we can expect to see 15% margin. So those are the assumptions for our medium term management plan. It's not 5 percentage point by segment. We expect to achieve high profitability also in China. Basically, the basic thinking is that in each region, against the market growth, we will outstrip by 1 percentage points or 2 percentage points against the market. So that we enjoy and achieve the market share gains. By 2025, in principle, we will focus on core brands and core businesses and we will outperform the market growth. In terms of size, as you can see, Japan, China, Travel Retail represent bigger share incrementally. And in our medium-term management plan, creating new markets. We'd like to take on new challenges. For those initiatives over the next three year period, we will explore where opportunities lie. And if possible, we will do incubation so that they start to blossom (ph) after 2025. And we will invest some to those new areas to ensure profitability after 2025. We will be closing today's earnings announcement. After this, IR team will be sending a questionnaire. Please fill in the question note, so that we can improve our IR activities. ESG, HR and people, are very important factors for Japanese companies to compete globally. And we really appreciate feedback on those points as well. Thank you very much. |
EarningCall_2 | Before we begin, please take a moment to review the Safe Harbor disclosure on Slide 2 of the presentation which is available on our website, along with the earnings release. Now during the presentation, we will be referencing non-IFRS measures and we define these on Slide 3 and we provide reconciliation tables to the nearest IFRS metric in the earnings release and on our website. Let's go straight to the highlights for the year, starting on Slide 5. On the left, you will recognize the value creation framework that we presented at our Investor Day almost 1 year ago today. Back then, the global economy was bouncing back strongly from the pandemic and the economic outlook was quite positive. That changed quickly after Russia invaded Ukraine, energy prices spiked and inflation and interest rates moved up sharply. Despite this abrupt change, we have stayed the course and continue to execute on our plans. We're actually quite used to executing and delivering through uncertain times. And that's what we did in 2022. We delivered on our objectives with a good outturn for the year, as you will see during today's presentation. Operationally, we focused even more on our customers and we invested further in our networks and into our people. All of this produced strong financial results. Organic OCF growth was a strong 8.4% and equity free cash flow all in was $171 million. All of this is consistent with our plans. And as we said we would, we used that cash flow to reduce leverage. Our leverage was down to 3x at year-end. We also made very significant progress in our plans to carve out our Towerco portfolio and remain on track for a transaction later this year. Tigo Money continued to execute on its own plans to accelerate growth which we expect will generate interest among potential investors who can bring expertise and capital to help the business flourish and get to the next level on its own. And finally, 2022 was a big year for us on ESG. Our science-based targets were validated formally and we also made important commitments towards diversity and inclusion. These and many other actions have further strengthened our Tigo culture and are helping us cement our position as an employer of choice in the region. In 2022, we ranked number 2 in Latin America and number 5 in the world in the Great Place to Work survey, alongside other global household names like DHL, Hilton, Cisco and Salesforce. So we're entering 2023 from a position of strength and with great confidence on the strategic plans we laid out a year ago. So let's get to some detail. Please turn to Slide 6 for a look at service revenue in 2022. Service revenue grew 2.3% during the fourth quarter and 3.5% for the full year. As expected, growth slowed in the second half with the change in macroeconomic conditions. When you look at the full year picture on this page, you can appreciate how strong our business is with every business line and almost every country growing despite a much more challenging macro environment. As I mentioned last quarter, there are some shifts in the way we're achieving our growth and this is consistent with the general trends in our markets with slower growth in home, offset by stronger growth in mobile. And we believe that this is at least partly related to increased mobility and less dependence on home broadband as kids have gone back to in-person learning and parents have returned to their offices. And this is happening in the context of a weaker economy where consumers are having to cut some of their spending. And yet, meanwhile, B2B continues to perform very, very well, as you can see in more detail on the next slide. Service revenue from our B2B business grew more than 5% in 2022, accelerating from only 1% in 2021. As a reminder, we revamped our B2B team, our strategy and refocus our product offering for Tigo businesses just a few years ago. And with a pandemic now behind us, this is paying off with stronger customer growth, especially in the SME area and very rapid revenue growth, with about 40% coming from high-end digital services that make up close to 20% of our overall B2B business now. This part of our business has continued to perform strongly in the second half of the year. We have created a strong pipeline of new projects which gives me a lot of confidence that we can continue to drive solid growth in B2B going forward. Now let's look at our mobile business on Slide 8. As I mentioned earlier, our consumer mobile business grew more than 3% for the year and postpaid has been the main driver of this growth. We added 0.25 million new postpaid subscribers during last year and this drove 9% service revenue growth for the year. About half of these customers are migrations from our prepaid base. We do this with selective segmentation and based on consumption relos and payment histories and we will continue to increasingly use data to drive our personalized offerings to drive our postpaid penetration. Note that postpaid still accounts for only 16% of our overall mobile customer base but it now contributes 35% to our mobile service revenue and 20% to our overall total service revenue. Final point I want to make on mobile is that we continue to implement price increases in most of our markets to catch up with inflation and we're encouraged by the competitive response so far. We're starting to see this translate into our improvements in some countries. ARPU improvements indeed will be a very important area for our focus in 2023. Now let's talk a bit more about home on Slide 9. As I said earlier, the softer net adds that we saw in Q3 continued in Q4. This was caused by: one, the post pandemic shift in demand from home back to the office, as I described earlier; two, the more difficult macroeconomic environment, importantly, including civil strikes in Bolivia during the quarter and throughout the year; and three, we're choosing to remain disciplined on price. We continue to implement price increases and to charge installation fees even if some competitors do not. This dampens net adds in the short term but builds a much better and stronger business for the long run which is what we're all about because we remain very optimistic about the long-term growth potential for residential broadband in our markets. And that's why we continue to invest to expand our network and to strengthen our content offering. As you can see on this page, this year, we accelerated our home build to add more than 800,000 homes passed and about 40% of those were FTTH. On the content side, we told you last quarter about a deal with ViX which gives us access to Spanish LaLiga sports content. We're very satisfied by the early results we're seeing, particularly now that the World Cup is overrun our customers focused shift back to the local and international soccer leagues. Now let's look at 2 of our largest markets. Starting with Guatemala on the left, we continue to invest in sales, marketing, content and our network to maintain our market share, especially in the prepaid market, where competition picked up some intensity last year. We're very pleased with our results. Our prepaid market share remained unchanged from a quarter ago. And meanwhile, all of our subscription businesses, postpaid Home and B2B continued to perform very well, showing acceleration in the quarter compared to Q3 and we also had some positive help from the World Cup this quarter. So overall, another year of solid performance from our largest operation with very robust and sustained market share positions and strong free cash flow generation. In Colombia, the story hasn't changed much since Q3. We continued to gain share in mobile, especially in postpaid. The shift in mix to postpaid is driving ARPU higher. And the good news is that ARPU for our prepaid segment is now also growing nicely and contributing to the 15% mobile service revenue growth we're now seeing in Colombia. As we saw in Q3, the growth in mobile more than offset the softer trends in Home, as we discussed previously. And overall, service revenue growth was almost 7% for the year in Colombia, a strong performance considering the challenging macro environment we have been facing. Now please turn to Slide 11 for a summary of our network investment in 2022 and the recent years. On the left, you can see that we have now upgraded and modernized all of our mobile networks that all of our markets are now 5G and SA ready. And in fact, we already launched 5G in Guatemala during the year. Because of this, as we have said before, launching 5G SA in our markets when that happens, will be within our existing CapEx envelope, as we just in Guatemala over the past year. On the fixed side, our network is very new and fiber deep and increasingly so. We now have over 12 million home passes with HFC, already including 730,000 of we passed with FTTH across 6 of our markets. And last week, we announced the completion of a new fiber network that connects Paraguay and Bolivia. Importantly, this provides a new key fiber route linking the Pacific and Atlantic oceans. This is a combination of a multiyear project that will improve quality and lower the cost of connectivity in South America. All of this investment has been undertaken within our stated CapEx embed of about $1 billion per year which translates into a healthy CapEx to sales ratio of around 18% on average over the last 3 years. Now look at TigoMoney on Slide 12. 2022 was a breakthrough year for this business. Over the past 2 years, we've invested in the business, first, by building a strong team and bringing new and expert in tech talent. During the past year, the team was very busy redesigning, rebuilding a new, more robust digital armband fully scale. We launched a new app and have been rolling it out across the footprint to drive adoption and we're now starting to see the results. Digital users, that is those people who transact online using the new app almost tripled and we're monetizing that growth. Revenue from these detailed users more than double. It is still early days and our digital user base is still small but we're very satisfied by the early take. Meanwhile, we're also working on driving increased engagement with our digital user base, rolling out our new merchant platform. And in the last several months, we have signed up about 45,000 new merchants. That's up from close to zero,1 year ago and expect to add a lot more merchant in 2023, leveraging our Tigo business relationships. Over the last several months, we have been piloting our new lending business, originating more than $100,000 in annual loans. The average loan size is about $40 to $50 and the average maturity is only about 20 days. Clearly, there's a big opportunity for us in this area and we're using this pilot to fine-tune their algorithms before being this out more broadly later this year. And finally, we also signed an alliance with Visa, giving TigoMoney customers access to the Tipo Money Visa card, allowing them to use their TigoMoney wallet balances anywhere Visa accept. Now please turn to Slide 13 to review the progress of our Tower company carve-out. By now, you all know the reasons why are doing this can create a lot of shareholder value. We've made a ton of progress over the past year and the key message here is that we're on track with the timetable we shared with you 1 year ago. We continue to expect the transaction towards the end of this year. The project and the company now has a name as it's coming to life. It's late [ph] which will see the light of day very soon. Last but not least, I want to take a moment to comment on the important progress we made on the ESG front during 2022, as you can see on Slide 14. On societal programs, we continue to focus on providing tools for employment in the digital economy, training key socioeconomic sectors such as women, children and teachers. On the environmental side, we validated and announced our science-based targets, committing to reducing Scope 1 and 2 greenhouse gas emissions by 50% by 2030 and to achieve net zero over the long term. Our achievements in 2022 were made possible for the dedication and the effort of our 20,000 employees and I have no doubt that the continued hardware will contribute to even more success for our business in 2023. We continue to closely monitor the macroeconomic situation in our countries. On the left, you can see how inflation has been tracking over the past year or so. It peaked at 8.5% in July and has fallen to about 8% in December. And on the right, you can see the latest GDP growth forecast from the World Bank. Our markets on average are expected to grow about 3%, with all of our largest cash generative markets in excess of 3%. This is faster than regional peers like Mexico and Brazil which are expected to grow less than 1% which I think speaks to the resiliency of our markets in the face of a potential global recession. Now, let's look at our Q4 performance, beginning on Slide 17. Service revenue was $1.3 billion in the quarter. That's up nearly 11% year-on-year due to the Guatemala acquisition. Excluding the acquisition and the impact of FX, organic growth was 2.3%. Our mobile business grew just over 2.5% and contributed about 2/3 of the overall growth in the quarter. And for a second consecutive quarter, all of the mobile growth came from postpaid which has had its best performance of the year, growing at 9.6%. Investments we've made to some of our mobile businesses and networks in recent years, especially in Colombia continued to yield positive results. Adverse FX trends impacted our revenue growth negatively this quarter and largely due to the Colombian peso which depreciated 18% on average during the quarter compared to a year ago as well as the Paraguayan Pirani which depreciated about 5%. Drilling down further on Slide 18 to service revenue by country. Mauricio already talked about Colombia and Guatemala, so I won't cover those again. Elsewhere, our performance in most of our other markets was solid. El Salvador continued its strong performance during 2022 and was up 7.5% in the quarter, with every business line contributing to this growth. Nicaragua also maintained their strong momentum with growth of about 5%. Paraguay grew for a seventh consecutive quarter and was up 4% with solid performance in mobile and B2B. Panama had flat growth against a tough comparison due to some large B2B contracts in Q4 of last year. Bolivia was down 4.5% as we felt the impact of a change in regulation on mobile overage rates that went into effect in August as well as a strike in Santa Cruz region which impacted economic activity and our install capabilities during the quarter. Honduras which we don't consolidate, had its strongest quarter of the year, growing almost 5% with growth across all business units. Okay. Turning to EBITDA on Slide 19. EBITDA of $548 million was up 19% year-on-year due to the consolidation of Guatemala. Organically, EBITDA was up 1.8% as revenue growth was partially offset by the net effect of higher direct costs and lower OpEx. Direct costs increased due to the higher content costs related to items such as soccer rights, both our new agreements with ViX and the World Cup. And we also saw our bad debt expense increase over the past year as this largely reflects growth in our postpaid and B2B subscription businesses. Operating expenses declined due to lower selling and marketing spend which offset the impact of inflation on our energy and labor costs. Now looking more closely at EBITDA performance by country on Slide 20. And El Savador and Nicaragua both had very strong EBITDA growth from operating leverage and we saw margins expand roughly 200 basis points over the past year. Paraguay returned to positive growth this quarter, posting an almost 7% growth. As Mauricio mentioned previously, Guatemala had a stronger Q4 with EBITDA growth of 2.6%, although revenue from the World Cup contributed to some of the sequential improvement. Colombia was up 4% and margins were just shy of 31% which is our highest level since the entrance of the new competitor in Q2 of 2021. We remain very focused on improving profitability in our second largest market. We continue to gain scale in mobile and we are also taking steps to adjust to our cost structure and mitigate the effect of the 16% increase in minimum wage that went into effect in January in that country. Panama EBITDA was down slightly in Q4. Again, this is because of some large B2B contracts in Q4 of 2021. Our full year performance is more representative of the trends we are seeing there. And on a full year basis. Panama EBITDA was up more than 6% which was a good result in the year where our main competitor was not allowed to raise prices under the terms of their merger approval and our OCF increased over 20% during the year in a dollar-raise market. Bolivia EBITDA declined almost 12% as we saw a full quarter impact of the regulatory change from last quarter which dropped straight to the EBITDA line. Additionally, results were impacted by the strike in the Santa Cruz region, with slow commercial activity during the quarter. Honduras which we do not consolidate, had impressive growth of 13%, reflecting both improved revenue trends in Q4 of 2022 and an easy comparison against a muted performance in Q4 of 2021. Honduras is the one country where we recently upgraded our mobile network, as Mauricio outlined earlier and we have seen revenue growth accelerate nicely in the second half of the year in this market. Looking at EBITDA margins on Slide 21. Margins were broadly stable and even improved compared to last year's Christmas selling season of Q4 of 2021. We achieved this despite the investments in our carve-outs and the tougher macro situation. Energy costs were up almost 11% on average during the quarter. We have seen higher minimum wage increases in our footprint given the inflationary environment. We continue to invest in preparing the carve-outs of our Tigo Money and Tower call businesses, although this impact moderated somewhat in Q4 as we begin to lap some of the earlier investments in Tigo Money in particular. Meanwhile, we continue to implement price increases across our businesses in Q4 and we will continue to focus on price increases in 2023. Finally, we are starting to implement our efficiency program, Project Everest which we expect will help us achieve our financial targets. Let me spend a moment providing more details on Everest. As you can see from this slide, Everest is a very broad-based efficiency program that will touch every part of the business and in every country, including our headquarters. This will include revenue initiatives around convergence, commercial OpEx savings from improved churn and customer base management and truck roll costs, network OpEx savings from energy optimization and not consolidation, IT savings from simplifying platforms and CapEx avoidance with improved reverse logistics. So this is not simply a cost-cutting exercise but improving the way in which we operate. We have been working on this for the past several months and the program is the result of a very detailed bottom-up assessment of all of our operations and we are now implementing Phase 1. We expect savings from Project Everest to ramp up to an annual run rate of more than $100 million by the end of 2024. So it will be a key pillar of our EBITDA and OCF growth over the next couple of years as we focus on delivering our equity free cash flow targets. Moving to Slide 23. You can see our operating cash flow, that is EBITDA less CapEx performed in 2022 compared to 2021. OCF more than doubled during the year to $1.264 billion mainly due to the consolidation of Guatemala. Organic OCF growth was 8.4% which adjusts for both the acquisition of Guatemala as well as for the OCF that we spent in Africa prior to exiting in April 2022. Excluding the one-offs we called out in the previous quarters in both '21 and '22, organic OCF growth would have been 8.6%. This organic growth was due to organic EBITDA during the year as well as lower CapEx as we completed some key investment projects that began during the pandemic. Slower home customer growth also means that we spend less than expected on installs and customer premise equipment which typically is one of the biggest components of our annual CapEx spend. Now let's look at equity free cash flow on Slide 24. As Mauricio outlined, we generated $171 million during the year, in line with the guidance that we gave you during our third quarter call. This was the first year that we provided guidance on the metric. So I wanted to provide you a bit more visibility on all the main line items that go into our equity free cash flow which reshow describes as being after everything. Starting with EBITDA of $2.25 billion. We then deduct cash CapEx of about $960 million. This was a bit below our guidance of around $1 billion which reflects the variable nature of a portion of our CapEx related to CPEs for customer home additions. There was about $1 billion of fixed charges for financing, leases and taxes. There's another $200 million for working capital and spectrum and these items can vary somewhat from year-to-year. Finally, we add back repatriations from our Honduras joint venture which was just north of $80 million in 2022. I should point out that we own Tanzania through early April. So all the numbers above include about 3 months of Africa. So we removed the net effect of that down at the bottom to give you equity free cash flow from our current footprint. Now please turn to Slide 25 for our usual debt bridge. Net debt is down $1 billion in 2022, with a reduction of more than $200 million in Q4 due to the very strong equity free cash flow generation during the quarter. We ended 2022 with $5.8 billion of net debt and net debt to EBITDA after leases of 2.94x. This is down more than 30 basis points from 3.28x at the end of 2021. if we include lease obligations of just over $1 billion, our leverage was 3.04x at the end of Q4, well aligned with our deleveraging targets. Thanks, Sheldon. We'll now move to the Q&A portion of the call. [Operator Instructions] As most of you are aware, we published a press release on January 25, in which we confirm that we are having discussions with Apollo Global Management and Cloud Group about a possible or potential acquisition of all outstanding shares in Millicom and that there is no certainty that a transaction will materialize nor as to the terms timing or form of any potential transaction. And we have no new updates on this topic today. And for legal reasons that should be clear to most of you, we cannot and will not be taking any questions on this topic. So you mentioned the Everest project efforts to increase prices across the regions. We wanted to understand what are the key levers for the further free cash flow acceleration into next year? What is the main source of that acceleration? And if we could expect a similar seasonality as the one that we saw in 2022? And the second question would be if you could give additional color on the competitive environment in Guatemala mobile market and what has the impact been on prices? Thank you, Froy. Michael, you scared me more than all the lawyers or the last a few days with those comments. So we got a CFO here who's been around now for a pre year. So we can fully tackle number 1, Froy and they don't talk a little bit about Guatemala how about that? First of all, just on our equity progression, we're not giving guidance specifically on for 2023 versus 2024 in our 3-year range. So I think what you picked on what's underlying or underpinning our 3-year equity cash flow target is ultimately sort of our 10% organic OCF growth that we expect over that 3-year period. And the key levers there. I think you hit pick that one of the most, at least what can we do on the top line or what we expect on the top line price increases will be a big component of that. It's something we started introducing in the second half of 2022. It's something that's going to be a big focus in 2023 and beyond. So that will be a key piece of driving that as well as that approach how we drive margins. Project Everest is going to be a big component of that. We'll get to, as I said, exiting 2024 at 100 -- in excess of $100 million of benefits. 2023 will be ramping towards that now. I wouldn't say it's exactly a straight line ramp. The recent one-off costs, probably a bit more in the beginning part of this exercise versus what you'll probably see in 2024. So it will be exactly a straight line to that $100 million exit but that will be a big contributor for both years and [indiscernible] 10% organic OCF growth over the 3-year period. All right. And then on the beautiful country of Guatemala, you get history provide the context, of course, as you all know, for the pandemic period, we took a lot of market share. We were just active on investing as we did the acquisition of the asset have about 15 months or so in row, we had expected that our competitor would launch some of that back. So compared to the value for that, we invested through sales and marketing and network and launch 5G policy to make sure that in Guatemala remains healthy as we are now. So the updates on that. If I can take them holistically Froy this is your specific question is none, Q4, so no deterioration much water in a competitive environment being prepaid, as you know, specifically your question. That's a result of the way I think we have built the value for the year. So the market remains in Q4, stable on prepaid. I believe the way we responded work smart and presenting long-term health of the business but it also allowed our competitor to not be in a position or they needed to escalate and they have not so we return to a more stable prepay market there as we imagine. The second point, the other businesses called them the subscription businesses on postpaid, they all continue to grow. And although there are now out of bases in Guatemala, they're growing very, very well. Point number 3 which is, I think, from this kind of important to bring up since this is a year-end call. just kind of take stock of the year working as a whole. And it's also been about 15 ranks it seems really about 100% of it. So it's a good time to kind of figure out how we're doing. Point number one is that sessions -- we've sustained market share, same market share we obviously. Number two, it's actually improved our number to a better network than the day before. We launched 5G throughout the year where the first room strictly to do that. It's NSA 5G as I've said a number of times, so it doesn't change the CapEx in the normal CapEx envelope to create a capital in -- we've actually improved a spec position. We were able to impair 700 spectrum. We have bought from model on. A lot of us the wide options 100. So we now have to say market share, better able to improve spectrum position and most importantly, sustained equity cash flow, as you just show out of Guatemala with our ability to do more debt down which, of course, is increasing equity in Guatemala. So we are very, very happy with the key outcomes in Guatemala. And there's 3 things that are also important for the long-term nature. We like 90% of the tower portfolio there. So that makes actually be reliable; two, as you've seen, our day-to-day business is something our emphasis on and now it is about Guatemala portfolio because the great the product streams to 100% of it. And we're relaunching all money in Guatemala again, easier when you understand the business and it can be incorporated everything or stream. And all of those things were part of the acquisition plan, also say, 15 years -- 15 months into this, it's all working out according to the acquisition of plan. So that's Guatemala the offshore manner. Stephan. So I had -- hopefully, can hear my question. I was going to talk to the -- build our plans. You have clearly accelerated the practical buildup. We had 800,000 homes passed which is a target of around 1 million homes did have not taken off way lower than the target overall. I know there is some heightened back-to-work defects in order to accelerate the -- and without better would you consider slowing down your network build until demand peaks up. I'll stop with that and then I can go short questions. I think our -- the connection was not helping. And as good as my Swedish is right now, your English is far better, Stefan. So I think the connection was not helping out. But I think we got a gist of the question, this around whole build, the penetrations, our commitment long term. So I think we got most of that. So kind of short term sort of what we're seeing this year and why be the slowdown in the net adds and how that makes sense in the context of us continuing to build for the long term. So the slowdown, we think, is due to one macro. And you can see that because the slowdown out in terms of the second half of the year. That makes sense to us. People are watching their consumption every -- and number two, that's also consistent with what I call [indiscernible] mobile versus home and context coming out of the pandemic the demand shifted from their own towards the office and that's consistent as people are in the context of number one, slower macro volumes. And there's also some specific country issues which relate to Bolivia where the strikes were not just the last quarter throughout the year, they were going to be minor in or to sell install -- is kind of really the a few are on 20,000 were. And the most important one of all of these is we've been extremely price-disciplined -- whereas some of our competitors, we may have not quitting price increases, we have. Whereas some of our competitors may have not postal installation costs we have. And we think this is a serve as a long-term healthy mix of if we take some short-term pain but we have to explain to you on the net adds in conservative body areas mix going forward. And that gives you an idea of why indeed we keep the tons because we think that it alone will look on home than you normally do on our businesses because those penetration will come. The underlying factors for that build partition population, adopting digital household formation, middle class formation and low penetration would all generate increasing demand for broadband services and in long term and we want to build the network as we have been doing that cater to that and fulfill that demand. So we're very happy with it to build. Now do we need to abjure according to the demand. Yes, in the short term, yes, we need to slow down according to the demand. So we don't need a lot of capital. We don't cut it off out there, it's something for media news. But overall, you'll see, as you have seen now for a few years that we will manage the business so that we sustain the economic of the residential program which is 30% to 35% network penetration. And we're always in just to try to get there and I'm going to have ourselves or behind it ever since. And we're happy with what we're seeing in terms of deploying that network, 800,000 is a good rating. 40% of that is already fiber. It's a pretty good number with in. We've done the logistics to work. That's not an easy thing -- etiologists to work in 6 of our markets, we will not be any tier. And of course, as we've said, think going forward, will be to ramp up the percentage of that fiber till we get to the 90's very quickly. All of this simply to say, we remain extremely volition company and deploying fiber and residential broadband services is directly for the business. I won't even go into FMC which will remain growing levels as a company. I didn't get it Danielle's going to have to go on. I think give us as sort of where we are in AFS revenues as we're seeing this year versus what we've been talking about historically of $50 million. Is that the question? Yes. Okay. Okay. So we haven't disclosed the numbers but we're growing at sort of high single digits to low double digits year-over-year. At this point in time, I think the important point to note around MPS is we've essentially spent a lot of this year as recently say in the prepared comments on establishing the new platform and rolling out the new platform this year. That rollout was really happening in the second half, frankly, the latter part of the second half of the year. So a lot of the benefits from that, it hasn't really been never to realize at this point in time. But I think it's -- we've been encouraged by sort of the digital adoption and the like on this platform but it hasn't sort of translated into sort of within your revenues in 2022 or something amort. This is why where I would have wanted to give you Q4 numbers but we would have been really persistent and everybody during the presentation to be like how doing talking about full year in Q4 because it's really in Q4 actually November, December and you see the runout that MFS is high because you see the digital subscribers coming in, the merchants coming the revenue coming and significantly, the NPS really staying on very, very high in some really, really good results on our trials or through the entering. Sorry, submissions with the new patent here in Stockholm. So no, I was only going to ask questions on the acquisition but Michele's scared me a bit to here, so I'm going to avoid that. But you Compliance guys give me your med card. And you have those over line, you just showed it and I was like, okay, that works... It's a good gesture, I think, for sure. A couple of follow-ups, I guess, on Stefan's question on the CapEx levels. So I mean, you had cash CapEx of roughly $960 million in 2022. You guided for $1 billion previously. I guess that's been the kind of headline numbers, I guess. And that's kind of despite inflation being what it is to a certain degree and just the impact that, that is having. So I guess it's partly due to a slowing momentum in home during this year. But I think with Project Everest, I mean you're guiding for kind of additional CapEx cuts. But then on the flip side, you still want to invest in the home business. Could you maybe talk about some of the kind of puts and takes within the CapEx older? Is this a sustainable level in the long term? Or what should we be expecting in absolute CapEx spend over the next few years? So I'll give you some color and maybe Sheldon can bring it down to ones just to some more specific in a time -- we've been investing, as we showed in the presentation, we usually see around $1 billion, just to give that lack of a number. Obviously, we're coming in below that number with under names an extremely healthy CapEx-to-sale ratio CapEx intensity over the last 3 years. And that's because [indiscernible] investing a bit in the business cost in sale of the group to the board, we're coming out of a big investment cycle. Most of the big things that are not variable in nature are behind us. That's important. So what are those things? We modernized the down, will show you, all of them in the last 3 years. We put 5G [indiscernible], I'm talking about now and the same quarter in every operation. And that's important, not only the current port there but also because it is our view that 5G would be any same in the meeting. That's a very important point because it means that the CapEx associated with it, is similar to consistent with what you would expect us doing on priority mortgages [ph]. We've also spent the last few years expanding average. That 80% coverage is important because what it means is going forward is less coverage finance on a more variable happens for capacity CapEx, if you will, should have traffic revenue associated from here. And of course, as you surely know, we are almost done with the Colombia 700 that were built which is in the past. And on fixed, we actually had a bit of a tag with Stefan's question. Our bill continues to be heavy immune fixed. We're now almost 13 million passes, 700 million of those are already fiber and we have the ability to build high working many patients. The most important thing that we said in our Investor Day is that -- our existing network is fiber dip with deep, deep capacity. All of the copper upgrades, remember those are done. We've got maybe 200,000, 300,000 homes still with copper that we just get tricky in a trickle manner with our radio. So on fixed, it's really -- and we've ramped up the FTH for the FTTH machine which means we're going to get our reverse logistics to start to be better. So all of the -- for lack of fixed heavy lifting, if you will, on CapEx is sort of behind us. And from year on, it becomes a lot more variable. We even did this year with [indiscernible] fiber which we're very happy about. It's not only relevant for us -- but first in the network on the business. I would just add a little on project net risk. I mean from a CapEx perspective, I would expect to see a lot of savings on the CapEx side, at least in terms of what ends up in terms of being our bottom line number that we're reporting. I mean, there's some opportunities around CapEx. I think that also just need sort of more from what we're spending than actually a reduction in spend. So we'll be getting more -- I think, more bang for our dollar on the CapEx side. And then just the other point of CapEx kind of we've been mentioning kind of throughout the call. I think the other variable on our spend for next year is going to really come down to the demand and pace of our home net adds. That was a little bit lower this year, therefore, anisole spend on that in terms of what we reported this year. And Everest is all about doing things more efficiently, better or digital is what you would expect us to be doing over the long term. It's not about cuts, it partly but it's about efficiency going forward. All right. No, very good. And then just a quick follow-up also on that side but the other line, I guess, on the spectrum and licenses part because there you're also tracking a bit lower than what we were kind of expecting since the CMD. Is this the kind of full level? Or again, what should we kind of expect on that side? I think we said spectrum under our Investor Day we track 100 to 150 kind of where we were from a were before. I'll tell you as the structure is very lumpy. Any given year, you have depends on whether something and didn't happen -- didn't get delayed. So don't read too much into any given year and rather take the averages and go back some time. I'm sure part of your question has to do with the Colombia spectrum. I would imagine there's a large chunk of that. And just the question is going to come up later and use yours is a good segue to go into it. We're in the middle of those negotiations this year as you're very well aware. So I'd rather not comment too much, only to say that we're not really expecting enterprises against our targets over the long term because we've been conservative in that regard as we should be. It does not need to say class that spectrum prices in rodent we mean how we should be for international began. It just means that we are conservative and realistic in our approach to forecasting as a result. We don't expect surprises. So I had 3 questions, please. The first one was if you could give a bit of color in terms of your pricing activity in the different markets. You've talked about some of them already. But when I take a step back, look at the inflation, look at your service revenue growth, it seems that it's hard to catch up with inflation. So maybe if you could help us understand a bit more how that's playing out? Are the price increases front book, back book, are you seeing spin-down? So that's the first question. The second question was on Everest. I just wanted to clarify that the $100 million annual savings, that's something that should enable you to reach the guidance or potentially even go above the guidance. And within that, although it's maybe not part of Project Everest, I imagine that the higher financing costs due to the high interest rates could also have an impact on your free cash flow. So maybe you can comment on that. And then the last question which may give Mauricio the opportunity to use its threat card; I feel a bit safe [ph]. But the question is when you consider the deal, are you -- do you need to follow the U.S. rules, the Swedish rules, both? How is the context there? Definitely, that is going to be used for that fourth well. We're not going to be going there. But the first 3 are good for you, Mauricio. All right. So I'm going to hand over the ends to our Everest expert. Right? Give me actually in that time at risk by the way. So we'll hand one and I'll take the pricing one right after that. I'm not sure what third one was? Just on [indiscernible] does that kind of propel us, I think, beyond sort of what we're talking about the network free cast range? Or I think I kind of mentioned some of the earlier comments, that hops underpin the 10% organic operating cash flow growth that we've been talking about. So that is -- that just help support the company that targets not to the supplemental to that target. With regard to the interest expense cost, look, from that perspective, I comment quite rightly, we're pretty well positioned in this environment of increasing interest rates. More than 80% of our debt is fixed rate. So we have a very low one that's actually floating and exposed to that. We don't have a lot of debt maturities here in the near term which you've shown in our maturity profile. So there's not a lot of need for us to be going out the repricing destinies current environment. So we thought that's positive. And then of course, even better than that, we've generated some good cash here that were going to be used to reduce leverage and you would probably even reduce our need to go out and the capital markets for financing. So on a deleveraging standpoint which is a positive from that perspective too. So we think we're pretty insulated and well positioned in the strategic issue. So let me let me try the pricing math in a constructive manner with a little bit of detail and also some big pictures to share with that. So let's split the question in the segment. So you get a better feel for what's going on state whether you're doing prepaid favor, residential broadband book. So prepaid because it's dynamic pricing at on a daily basis or as some as our new top office fans and comprise market, it largely is done, of course, on the gross basis. In most of the markets, we've been adjusting as much as we can. And they should there, of course, is price sensitivity. And as one elasticity with the exception of also market where we've been more careful like I already talked about, of course and Bolivia, where our competition has kept competition significant on prepaid. We've not been able to do that. So with the exception of those 2 markets, everywhere else, we will be pricing up to the new offer as much as we can in general terms. When you look at postpaid, the same is true, we focus with the price increases on the new offers rather than under base, we're a lot more careful with the days because you don't want to create a big massive difference between the two. And generally, we've been very good at doing that, particularly in El Salvador, Paraguay and we see in the results. We're actually being able to do that in Guatemala as well. And we've held back in Panama, the reasons that I think Sheldon mentioned. And we're also being a little bit more careful for the same reasons [ph]. So that gives you an idea on that. And then on home, I talked about has been very price spin. So we've been slowly putting price increases. And we do this on a poll, right? We don't do it to everyone in the same day. We do a small regime. And this is across the region in a measured way with some delay in Bolivia to get the position back to do. Now your question had an element to okay, what's the mismatch, I think it is a word you use of this one I wrote down, there's a [indiscernible]. So inflation which is part of your question, it hits the cost base immediately it hinges that and we've shown you the impact on energy which we've been able to observe on labor which we've been able to observe on the bottom line but we're not able to pass on inflation on pricing with the same level of experience in terms of timing. So there's a mismatch in time and as I think I showed them referred to us managing ARPU a little more into next year. That's part of managing that site. Now being careful with expectation, we all know that this using does not have elastic [ph] inflation into customers. There's some screen or some of varieties, et cetera. And that's just part of this initiative. So I hope not giving me a lot of color point on the timing of it and some expectations on it's difficult to base. Absolutely. Just a follow-up on the home, just to make sure I understand clearly, you are also increasing the front book and the back book, both. I have a couple of questions. So it's been a year since you went to the Investor Day and gave some guidance. So I wanted to understand where we stand on a couple of issues there. First, we expect -- at the time, we expected that organic service revenue growth would be mid-single digit. Is it still viable now? Or is it that the project are would offset any weakness there? The second one is, I know we saw that the share buybacks would be expected to commence in 2023 was what we had received at the time. Is that in the plan? Or it's still too early to say anything -- so I'll ask other questions later. I think just the first year just as in sort of the underlying -- some of the targets we had at the Capital Markets Day and sort of are we reiterating that. I think that's the key one we mentioned were just the one in the press release and we mentioned earlier in the call, right, the operating cash flow of organic cash flow growth of 10% over the 3 years year. And then of course, the debt free cash flow over the 3 years of $800 million to $1 billion. So those are the ones that targets we've pointed to. There's also the deleveraging target. There will also be bioscience 2.5x by year. This is by 2025 and then down to 2x thereafter. We did comment at the Capital Markets Day about an intention to do share buybacks in 2023. I would say that's still our ambition. Clearly, a lot has changed in the world over the last 12 months and we're now operating in a higher risk environment, kind of tougher capital markets and higher interest rates and the like. But February, let's see how the year plays out. And in the immediate term, we're going to continue to prioritize deleveraging and paying down our debt because we think that's the appropriate allocation of capital for the business to ensure we meet those deleveraging targets but near-term buybacks remain our ambition. My soccer coach used to say never forget that soccer games have 90 minutes. Holidays a little bit more on the new rules and make sure you play all the way until the end So the other question that I had is regarding the repatriation from Honduras. I mean it's kind of making more than 50% of your equity free cash flow. I think you had $88 million of repatriation from Honduras, I believe. So is that sustainable going forward? Or what is in your target for the next couple of years? Well, look, we're not giving guidance for revaluation for specific segments. I would point out but I think your comment is about 50% of our equity free cash flow. But we've talked about in the past that Guatemala actually generates $450 million plus of equity free cash flow. So that's -- you can't, I think, isolate one single country's contribution because there's also interest costs and cost essentially in the center of the center that needs to be absorbed. So I just want to caution you against that point to try to think that's part of our great cash flow is not really dependent on Honduras which is that's not big. It only looks that way because of the accounting, right, on those in reality, a countries are contributor, as you know, exception in Colombia and they will give them ten and they all came on twit headquarter costs. And then we do it looks like that nicely, right? That's just the way looks not reality of 30% of our initiation -- it's 10% of other I think the question to help us clarify that. We're been worried on whereby the way, looks -- thank you for your question. And just a final question on the fixed competition. As you said that the competition is not responding to your price increases. Is there any specific market that is not responding? Or is it a broad-based kind of a response from the operators? Any specific markets or competitors? Yes. Just if you have more questions on our board, if I'm good. So we talked about what the area Colombia which is very important, we will talk about this, the market has in now. And I already talked about 6 in Colombia. So mobile in Colombia has been recomposing in pricing significantly over the last few quarters. And you see that our prepaid ARPU in local currency is up our memory up 6%. And postpaid is also up. And both of those lines and businesses, prepaid and postpaid are now contributing to our mobile in Colombia which is growing 13%, 15%. That's more volume but also pricing soaring in Colombia is being recomposed. That's an important element of that. You see on [indiscernible]. There's a fair amount of good behavior in the market which is consistent with the notion that it's a 2-player market in which market shares are healthy for it. We expect that like Guatemala and Panama, that will be to say a healthy market share market. We talked about Panama as well in the same that there have been a pullback on any price movements in we monetize our sell market. So we'll see what 2023 as to earn our regard. Paraguay, very constructive in nomadic and also reconstructing on one pricing or nature pricing. We've seen that now Paraguay had now 6 or 7 consecutive orders of service revenue growth, margin expansion and restructuring of this cements -- and what am I missing olive talked about, so I don't think any go back there. So I think I'll cover them all. Okay, that's it. We had an investor call about a year ago, we laid out a number of initiatives. And as you do point out, we gave a 3-year outlook that is composed of 3 key targets, 10% of rating cash flow both in average for that period derivative equity free cash flow of $1 billion and reducing leverage to 2.5 by 2025 2x by long term. All I need to say is that the first year that consists on track. And that's really the summary on this. The second point is we've made a couple of big acquisitions over the last few years, both Guatemala and Anima. Both are working. As I hope you can see, after a year Guatemala and about 2 years Panama that they are on track to our acquisition plans in [indiscernible]. |
EarningCall_3 | Good afternoon, ladies and gentlemen and thank you for waiting. We would like to welcome everyone to Bradesco's Fourth Quarter 2022 Earnings Conference Call. This call is being broadcast simultaneously through the Internet in the Investor Relations website, bradescori.com.br/en. In that address, you can also find the presentation available for download. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Banco Bradesco's management and on information currently available to the company. They involve risks, uncertainties and assumptions because they relate to future events and therefore, depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions industry conditions and other operating factors could also affect the future results of Banco Bradesco and could cause results to differ materially from those expressed in such forward-looking statements. Hello, everyone. Thanks for joining our call for the fourth quarter 2022. We have here in the room Octavio de Lazari Jr., our CEO; Cassiano Scarpelli, Executive Vice President and CFO; Moacir Nachbar Jr., Executive Vice President in charge of Risk; Oswaldo Fernandes, Executive Director; Carlos Firetti, IRO; and Ivan Contijo, Bradesco Insurance Group CEO. Thank you. Hello, good afternoon, everyone. Thank you for joining our conference call for the fourth quarter '22 results. We posted a net profit of BRL20.7 billion in 2022. BRL23.7 billion excluding the impact of the full provisioning for a specific large client. These numbers are below the levels we want to deliver and below what we consider to be the recurring levels Bradesco is able to show. We are certainly not satisfied with them. Our investors can be sure that we are working to change it as soon as possible. We are confident that we can return to levels of performance we used to produce in the past. Our goal is to return to a sustainable ROE above 18%. The dip in profit and returns in 2022 can be explained mainly by 3 factors; the negative impact from the fast Selic-rate hikes on our asset liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies, and additionally, provisions amounting BRL4.9 billion in [Technical Difficulty]. Okay. Sorry, we were temporarily disconnected. So returning here, the dipping profits and returns in '22 can be explained mainly by 3 factors. The negative impact from the facility rate hikes on our asset and liability management positions, an increase in delinquency in the retail segment, both for individuals and small companies and Additionally, provisions amounting BRL4.9 billion in the fourth quarter related to 100% of our exposure to a specific wholesale clients. In our expected performance for 2023 reflected in our guidance. The main effect on our results still comes from the increase in loan losses provisions. In the Retail segment, credit provisions should be higher in the first half of the year and should decline in the second half, growing full year in line with the loan book. Provisions in the wholesale segment will remain low but we are not going to have reversals as occurred in 2022. Part of the recovery in the bank's return will occur naturally and gradually up to the end of 2023 with improvements in market NII and cost of risk. Asset liability management results is rebounding with the renewal of the fixed rate loan portfolio with new loans at rates adjusted to the current scenario, leading to improved results throughout the year. In terms of delinquency, we adopted the necessary measures to control the behavior of the individual and small companies' portfolios revisiting models and our risk appetite. Consequentially, provision expenses shall reduce in the second half '23. Looking back it seems clear that we should have tightened our credit policy and risk appetite earlier on the retail portfolios. Elevated inflation since mid-'21 has led to much faster and stronger income loss for our clients over '22 than we expected, mainly with the rising food and fuel prices. Bradesco has historically had an important exposure to low-income and small business segments as a result of our regional positioning and by serving all segments of individuals and companies. We believe that this market positioning is correct from a strategic point of view, even if at this point in this cycle, we are suffering more from nonperforming loans. We think that it will prove once again correct in the mid- to long term. Another part of the improvement in performance and returns will come from implementing measures focused on efficiency and expansion in areas that we consider strategic. We continue with the process of optimizing our branch network and we will maintain our personnel and administrative expenses growth in line or even below inflation. The bank's digital transformation continues in a fast pace. Bradesco is now above all, also a digital bank presenting growth in the number of transactions, credit origination and in all products and service we offer digitally. Due to the clear changes in the business environment, we are seeking efficiency in our digital initiatives, promoting higher integration with the bank looking for cost efficiency and potential consolidation of initiatives. Our focus is on client profitability. We are leaders in wholesale banking and are among the top investment banking market, a business with a high return on capital. We will continue to develop, invest and grow in these areas. In hindsight, we also remain focused on the purpose of delivering the best experience to our clients with a complete portfolio of products and with a pleasant and simple journey. Our investments specialists are focused on advisory, understanding and respect in the moment of life and needs of our customers. Finally, we highlight our strong focus in all levels of our organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Moving to Slide 3, we present our key numbers. We reported net income of BRL20.7 billion in 2022, a decrease of 21.1% compared to the previous year. The expanded portfolio grew 9.8% in the year. Tier 1 capital closed at 12.4%. I will go for more details in these lines ahead. Turning to Slide 4, we illustrate our main impact in the earnings performance in '22. The main positive is in client NII, followed by insurance and fees. The negative impact comes from higher credit provisions, market NII and the provision for the large corporate clients. On Slide 5, the expanded loan portfolio grew 9.8% in the last 12 months, 1.5% in the quarter and companies growth was 7.9% year-on-year, with 9.7% in the corporate portfolio. For SMEs, loan growth reduced to 4.6%, mainly as a result of the slowdown in small companies due to lower risk appetite and focus on lower rate of operations. For cards, quarterly growth can be explained by seasonal effects in the period. The annual growth of 20.5% is still strong but pointing to a slowdown. In credit originations, we can see an increase in corporates and a decrease in individuals and small companies as a result of tighter credit policies to control delinquency. Turning to Slide 6 now. Credit provisions expenses without the amount related to the client from the wholesale segment reached BRL10 billion in the fourth quarter, representing 4.5% of the portfolio in that quarter. Considering total provisions, it reached BRL14.9 billion in the fourth quarter or 6.7% of the total portfolio. We should remain with high cost of risk throughout the first half of '23, with reductions expected for the second half '23. Our night days NPL coverage ratio remains healthy at 204%. On Slide 7, you can see that our 90 days delinquency ratio showed an increase of 40 bps with 40 bps in individuals and 8 bps for SMEs. Large companies remain with a very low delinquency. 15 to 90 days delinquency ratios rose 50 bps with an impact mainly from small companies. NPL creation in the quarter reached BRL8.1 billion. We continue to provisioning well above the NPL creation. We are now showing delinquency information considering the index without the effect of portfolio sales. As shown in the chart, over 90 days would be higher but the trend is similar to the one without sales. In fourth quarter, we sold portfolios totaling BRL2.8 billion. The rationale for selling portfolios is purely economic. We are able to sell at values above our recovery estimate and free up time of our staff to work more on portfolios with higher probability of recovery. Turning to Slide 8. We made material revisions in our risk appetite, making changes in the credit policy throughout 2022 which reduced our approval rates. Comparing to the new loan approval rates, we had a reduction throughout the year of about 33% between December '21 and December '22. As a result, 30 days delinquent for cohorts 4 months on the book have already reduced in the last data available by 38% compared to cohorts of December 31. We see similar trends in most of individuals' credit lines. In our internal estimates, we still expect NPLs under pressure in the first half '23. Now we turn to Slide 9 on which we present a breakdown of provisions expenses between retail and wholesale. Total provisions reached BRL32.3 billion in 2022, including BRL4.9 billion related to the provision for the wholesale clients. Without this amount, it would be BRL27.4 billion at the top of our guidance. We had BRL33.2 billion in provisions for retail, while in the wholesale, we had reversals of BRL5.7 billion. In the last years, the Corporate segment has presented a very good performance in terms of credit quality which allowed the release of part of the excess provisions in the segment. In 2023, we expect a growth of provisions in retail in line with the portfolio growth higher in the first half than in the second half, as we said and partial normalization in wholesale provisions. We expect cost of risk in '23 to reach 4%, considering the guidance compared to 3.2% in '22 without the provision for the specific clients. We turn now to Slide 10. The renegotiated portfolio represented 5.2% of the loan book growing 10 bps in the quarter. Provisions for this portfolio represented 63% of total renegotiated loans. On Slide 9, we show that total NII grew 3.8% year-on-year in 2022 with a strong growth in client NII of 22%. On the other hand, market NII was negative in the year. As we can see in the chart, our total NII has inversed tied to the movement of interest rates, it's liability sensitive. The current sensitivity points to an increase of BRL1.58 billion total NII for reductions of 100 bps in interest rates and a similar reduction in NII for rate increase. The sensitivity refers to the NII variation in 12 months after a parallel shock interest rates and are based on our Pillar 3 report. Turning to Slide 12. Our market NII has a history of positive results as you can see in the chart on the bottom left, no net less in '22, it posted a negative result of BRL1.4 billion due to the effects of rising Selic on our asset liability management positions. Our portfolio has an average maturate of 1.5 years and reprices itself in that period. what contributes for the improvement of this line in '23, especially in the second half of '22. On Slide 13, a we discussed our fees and commission income. It grew 4.7% in the annual comparison, primarily driven by cards, mostly it change. The other lines remain under pressure. We have important initiatives in molding these lines and hope to revert the trends so. Card transactions continued to grow, reflecting the increased penetration of cards in the high-income segments and inflation in client spending. We reached 77.1 million cards, a growth of 3 million cars in the year. We believe that our ongoing strategy of strengthening the high income segment will produce growth in fee lines as one of the key benefits despite other important initiatives. Turning to Slide 14. Total costs grew 4.7%, well below inflation. The other net operating expenses line contributed to a reduction due to less provisions and some reversals. Our costs have demonstrated growth well below inflation since 2020, as you can see in the chart in the bottom left. In '23, other net operating expenses will negatively impact total expenses, mostly due to the low base of comparison we had in 2022. On the other hand, personnel and administrative expenses should continue to run in line or below inflation as we will continue looking for gains in efficiency. On Slide 15, we present data from our insurance group. Premiums grew 16.7% year-on-year with the improved operational performance, income from insurance operations expanded 28.9% and net income grew 27.2% year-on-year despite the claims ratio challenges and service costs. We highlight the performance in administrative efficiency ratio and the financial results. The insurance group continues to grow and improve its operational performance with keeping its disciplined in terms of underwriting. Now we turn to Slide 16. We bring the discussion on capital. Tier 1 capital remains at 12.4%, a very comfortable level. The reduction this quarter was primarily driven by the normalization of the treatment of trucks credits arising from our hedge of assets abroad, greater prudential measures the payment of interest on capital that amounted BRL10.2 billion. Additionally, the provision for the specific clients reduced earnings and therefore, impacted capital by almost 30 bps. We see capital ratios spending throughout 2023. On Slide 17, we present figures on our footprint. The growth in digital channels and client service platform helped us to continue our optimization efforts. We have reduced our footprint by 1,400 points of presence since 2018. In 2023, we plan to reduce between 200 and 250 service points. Today, 70% of our clients are predominantly making transactions digitally. We also -- we are also focused on optimizing our digital initiatives, making them more connected to ensure that the experience continues evolving. We turn now to Slide 18. We have created a new structure for the high income segment in Bradesco, what we call which we call Bradesco Global Wealth Management, led by [indiscernible] with extensive experience in this segment. We combine our local and U.S. investment platforms, investment distribution and our banks in U.S. and Europe, aiming to deliver a complete investment and banking experience for our clients. Clients will be covered by relationship managers and financial advisers. Today, we have close to 2,000 financial advisers and both of them will work together, the relationship managers and financial advisers. We have also advanced in the unification of the content available to our customers with investment recommendations aiming to align risk profile and financial goals. We turn now to Slide 19. In 2022, we performed within the reviewed guidance range, except for insurance on which we were above. In credit provision expenses, excluding the specific clients, we were at the top of the range. For '23, we have the following expectations. We expect loan growth between 6% and 9.5%. For NII, we now provide guidance for total NII. We expect growth for the line between 7% and 11%. In fees, we expect a growth between 2% and 6%. Operating expenses should grow between 9% and 13%. But in personnel and administrative expenses, we expect to grow only around inflation or less. The line order should bring the negative impact in total expenses for 2023. The line of insurance operations will grow between 10% and Finally, for credit provision expenses, we expect to be between BRL36.5 million and BRL39.5 billion. We believe this guidance still implies a return that is below our potential. As we stated before, our strategic objectives to once again reach a level of return on pace with our track record or at least 18%. We understand the bank's ability to generate recurring returns remain intact. So we believe we can go back to those levels we reached before. As we pointed, part of the recovery in the bank results will come from the normalization some lines. Other parts will come as a consequence of the execution in topics we highlighted such as the expansion in high-income segment, efficiency and innovation initiatives. Finally, we highlight our focus in all levels of the organization in placing customers at the center of all actions, a strategy that reinforces our purpose and create even stronger links with our clients. We will continue in this path. Placing customers at the center is a key topic in our strategy focused in the long-term sustainability of the organization. With that, I conclude my presentation. Thank you for your attention and we will now move to the Q&A session. Thank you. A couple of questions actually. I guess, first, just help us understand what's -- what do you need to see or what needs to happen to get back to that 18% ROE and time frame that it would take to get there? I mean, do you need interest rates to come down? Obviously, some normalization in terms of asset quality, do you need NPLs to come down? Even expenses and I know it's part of it, the other expenses given the expense guidance above inflation but just to help us think about the path to returning back to those normalized ROEs? What it would take to get there? And then the second question, just to understand a little bit on the provision guidance. You said cost of risk to grow kind of -- or provisions grow in line with the retail portfolio growth and I know corporate provisions are kind of normalizing. But does that -- do you expect the deterioration that we've seen in the retail portfolio to continue at the same pace that we've seen sort of the last 2 quarters? I know part of it is your exposure to lower income segments. But when does that -- I know you said it will peak in 2Q but when do you think that starts to sort of deteriorate at a slower pace? Just to help us think about the evolution of that. Okay. Tito, thank you very much for the question. I think the path for the recovery in ROE is the one I mentioned in the presentation. We believe that part of the reduction is related to things that will improve with time for sure, considering the actions we have taken, I mean, the asset liability management results that are included in the NII. This will improve throughout the year with the repricing or renewal of our loan book, especially the fixed rate loan book and it is already happening. The internal rate of our books is improving. And as the time goes by, it will take this rate closer and closer to Selic and this will drive the market NII upwards. It's -- today, the results and the asset liability management are still on the negative and we see them going to close to 0 at some point in the second half. The other part is the normalization in NPLs. We are at a moment in the cycle where NPLs are already higher than we believe is the more normalized level they should be through the cycles. And the cost of risk is already high. So this is something that will take our ROEs closer to 18%. I'm not -- we are not even at this discussion counting on actually going back to material gains in the asset billet management. But also, we think in parallel, we will be running and we are running some initiatives in terms of efficiency. We have been moving many initiatives in business areas like, as I mentioned, the investment initiatives in the high income segment. So I think altogether is behind these views, I would say, a meaningful part are related to the first 2 items I mentioned. In terms of time, I would say we believe we will close the year already with a higher level of return than what we have right now, maybe not exactly the -- what we think is the sustainable levels and we'll keep progressing in '24. I would say, at some point in '24 on a quarterly basis, it's possible we can get to those levels. That's what we view. Regarding the deterioration. As we pointed in the presentation, we have already seen the performance of new vintages of loans, especially in the consumer, consumer loans, retail loans improved, improving materially. We believe that keep going with those trends considering we have tightened meaningfully our credit policies, it will lead to a stabilization in NPLs as we pointed probably at the end of the first half, second quarter, let's call it and I think this is kind of the trend we expect. Okay, great. That's helpful. Maybe just one follow-up, if I may. And just to understand a little bit on the deterioration and I know part of it is your lower income exposure but just thinking of other peers that have perhaps a similar exposure, the deterioration hasn't seemed as severe, at least until now. I mean, we're still getting more data on that. But just kind of curious, if there was anything specific to Bradesco that had your deterioration at least looking worse than peers in the industry? Tito, we believe we have more exposure to low income. We have -- we are -- given our presence, given our historical positioning, we think we are fairly well-positioned in this segment. And we think this is a strength and I mentioned even at this moment, we are suffering given the cycle. But it is a segment that we believe have very high prospects in the future. The low-income segment in small companies, in our view, suffered more than any other segment in Brazil and considering that probably we are more exposed with suffered more. We admit that probably we took longer than we should for tightening our credit policies. Probably that made us to suffer a little bit more than we should. But anyway, I think we have more exposure to the sectors than our peers. I think there are some peers that are expanding their exposure but we are already there. We are already playing with small companies. We have credit limits with low-income individuals. We are a bank that has a strong presence there. I think that's probably the difference. But again, the message here, Tito, is really that we see the trends in credit quality already improving. And we believe we're going to make this path soon. So 2 questions. Can you share with us the macro outlook that you have for 2023 and what is driving, right, like so that we get a better sense for your guidance, if you can share GDP growth and employment, inflation, that would be helpful. And then finally seeing the impact of that on the corporate. So if you could make some comments on how do you see corporates in general? I know you talked about like you don't expect to have reversals of provisions but if you can help us understand like if there are any specific sectors that you're most concerned about or should we get -- start getting concerned about like a more significant, more pronounced deterioration in the corporate segment in Brazil? Mario, regarding our economic forecast, actually, we have recently increased a little bit our forecast. For 2023, we expect 1.5% GDP growth right now, IPCA inflation around 5.7%. Selic at the end of the year at 12.25%. So I think these are the main figures. In terms of unemployment, fortunately, I don't have it here in front of me but no major changes in the trends in terms of unemployment. I think this -- I'd say, even when we talk about unemployment, we can say that over the past year, unemployment has really improved. But what we see is basically in this segment, especially low-income segments and small companies, this was not really a driver that really changed the trends. I would say the low income, the loss of real income was probably the main factor. In terms of the small companies I would say it was possibly a continuation of the trends that started with the pandemic, remembering the lockdowns and all the suffering that some small companies had during that time. In terms of corporates, we still see what's going on as more like specific cases than a big trend. We believe companies in general or large companies in general have enjoyed a long period without any major CapEx programs with a big liquidity in the market, in the bond market, actually low spreads for some -- for many years and also no Selic for some time during the pandemic. So we think, in general, they are in a healthy position. So most of the cases we see are sometimes cases that somehow we're already in the radar or had some other best pest problems or in this -- in the case of the specific client, it was totally out of the radar. So I think the good news is we have a very strong level of provisions in our balance sheet for corporates. The coverage ratio for corporates, if we dividend put it in the presentation because it's like 7,000%. Basically, as you know, it's -- it doesn't make much sense because delinquency in corporates is more based on some one-offs than really something more continues. So we don't see a trend. We see some cases after a period and we didn't have any major case. Some of them might be related more to the kind of reduced liquidity we have seen capital markets for the past year than actually the level of interest, interest rates. Okay. No, that's helpful. So just let me follow up then on your loan growth guidance of 6.5% to 9.5%. It basically reflects no real loan growth than in 2023. Can you specify or give us a little bit more color on what kind of growth are you expecting for each segment, like broken down between individuals, corporates and SMEs. We will grow less than the average implicit in the guidance for SMEs, especially because we have tightened the origination model or the credit policies more in small companies. And I would say most of our SME book is made of small companies. We should grow more or less at the same pace in individuals and corporates. But individuals, comparing to the recent test, there is a change. We should grow less in clean credit lines and more in other collateralized lines. Actually, I just have one. I was following the conference call in Portuguese and I just wanted basically to shift the conversation here to the regulatory front in Brazil. First, I would like to hear from you about the FGTS loans because A lot of noise emerged during these recent weeks related to the termination of the products. So I just wanted to hear from you about what does the bank, I mean, think about the future of this product, the cash loans? And if you could share with us what is the market share of Bradesco in terms of origination of this product, it would be helpful. And a follow-up on this. I would like to know more about the government program called Disney Hall, I mean I just wanted to hear from you as well what does Bradesco understand about how will be the shape of this program, the format of this program for renegotiating loans from loan income segments? Okay. Olavo [ph], related to the loan. I'd say, in theory, it was a good product but there is not much at all much to say. I think there was a regulatory change. It will not existing more. We haven't played in this segment on a material way. We have some loans in Digio but it's a very, very small portfolio. So it's not operations which we have done anything in the bank. And as I said, our portfolio considering what Digio was doing and what is very small. Can you remind me about your second question is renegotiation? Yes. We still have to hear more about what is the final shape of this program. It's still under discussions. I think the banks are talking with the government. But probably the program involves more than only banking loans. It probably will involve utility bills and other debt. We believe it is potentially a good idea. And the fact that there would be some sort of guarantee to create an incentive for doing it if it is well structured. So we are looking at it and we think it's an interesting idea but still not much in concrete to talk about, I would say. I had a couple of follow-ups, first, on allowances. You mentioned that they should be more firm low higher in the first half. Can you give us a sense of that magnitude like how much should we expect, say, in the first quarter? Gilberto, I'd say we're not going to provide quarterly or partial guidance on the provisions. I think, overall, I think it was fair to give this guidance but that view of what would be kind of the flow of these provisions. But as I said, it should be more in the first half than in the second half. Also because, as I said, we believe NPLs might be peaking around the second half [indiscernible] other part of the provisions happening in the first half. Okay. No, that's fair. And on market NII. As you mentioned, it is moving in the right direction. Do you expect it to be positive for the full year? Again, we moved our guidance to total NII, Gilberto. The idea is really focusing on the total NII. As I said, we have the guidance for total NII between 7% and 11%. What is implicit there and is that market NII improves throughout the year with the asset liability management, getting bad getting improving in the second half but I will not provide guidance for the parts of the margin anymore. But as I said, we are going to continue reporting them. But just for modeling and for the analysts to follow it. Okay. Understood. And a last one, if I may, on your guidance for expenses, it's significantly above what you have been posting the last years. Is this more of a sort of catch up? Or is it more about projects that could help you come back to lower expenses in the next years? The main reason for the range for the guidance in expenses is the line other net operating expenses. In this line, we have a low base of comparison in 2022, considering that we had some reversions of provisions, mostly related to things like lawsuits and other events. And this reduced the line in '22. So the causes of its variation in '23 is a normalization. If we isolated the personnel and administrative expenses line. we would see this group growing like inflation or even below inflation. We have important efforts to reduce costs there. So the driver is the other line. My question was actually also related to market NII. So you may not be able to answer so maybe let me paraphrase it separately. Can we assume that the negative -- the most negative from market was in Q3 and that once we start to see interest rates being cut that will be turn positive just given that sees showed of the 1.5 billion per 100 basis point move? So whatever you can say would be great. Yes, Brad, the market NII line is composed by a few components. One of them is the working capital of the bank. Also the treasury business like trading, flow trading, mostly flow trading, not really risk-taking positions and the asset liability management. There, this line is based to the net fixed rate exposed of our balance sheet funded by the regular cost of funding of the bank that is mostly floating. That is what makes it liability-sensitive as shown in the sensitive analysis from what we published. So it shows 400 bps reduction in rates. Our NII increases BRL1.58 billion. It's looking to the trends. We -- even if we don't have a reduction in rates, the market NII should the asset liability management continues repricing, given that old loans mature, new loans come at the rates already adjusted. So we believe by the end of the year, this component of the asset liability management will be already zero in terms of results on a quarterly basis, looking during the quarters. And it would benefit if interest rates go down at any moment after that. Thank you very much for the question here as well. A little bit on OpEx, please. Guidance for 9% to 13% year-over-year. I realize that's got some other effect in it. But I wanted to see if you guys have given some thought to maybe boosting up the profitability lever via efficiency if there's room within personnel all the digital bank initiatives that you guys have done to understand your combining brands and looking to downsize some stuff? Anything there that could help us understand a little bit what you can do maybe for profitability via costs, OpEx would be much appreciated. Thank you for the question, Pedro. We are always very attentive to opportunities in terms of cost efficiency. As you mentioned some, we are really looking to our digital initiatives. We think we can extract some synergies there basically in terms of as I said, combining and even merging some of these initiatives are making especially then closer to Bradesco, taking advantage of marketing of client acquisition and other benefits we can get. But also, we mentioned in some points of our presentation, one of the key things for us going forward is really a reduction of the cost of serving our clients. We think we have to get more and more efficient on that. We have -- we still believe the brains are useful, brains are a very good vehicle for doing business to contact clients but they certainly will be different and probably less costly in the future. So that's where we have a big focus right now in reducing the cost of serve our clients. I think this is really a big point we have been exploring a lot here in the bank. My question is related to the competition in the low-income individual segment. So can you talk about how you see the competition in this segment now? And how this compares to what was happening in 2020 and 2021, 2022? And also, what is your expectation for how the competitive environment may evolve in 2023 and 2024? And what opportunities that they have for you? Okay, Juan. I think the competition in the low-income segment or is very strong. We have not only traditional banks but especially digital banks. We believe we have some advantage. We position ourselves in a more complete way. We still believe that our position with points of contact with the clients with brains has value in that process. We believe also that having corporate relationships and relationships with entities where we can have the payroll of companies, of and have a stronger relationship with these clients from the beginning is an advantage for Bradesco. And also the credit relationship. This is exactly right now is kind of a pain in the sense that we are suffering with NPLs. But we have this relationship through credit as our one of our strengths in the relationship with clients. And we believe this will continue even if we have temporary adjustments in our credit policies. So this is the way we play in positioning ourselves in the market. And one more question but this one is related to capital and dividend. So given the current level of capitalization and the expectation for earnings for 2023. What can we expect in terms of the payout ratio in 2023? Juan, we're not going to commit specifically with the payout ratio. But as we had said in the Portuguese call, we expect to pay the interest on capital IOC at full. For sure, we're going to look at capital, we're going to monitor but we believe, considering our expectations that our capital will grow even with the payment of interest on capital. And that will take the payout to a relatively high level if it happens. We think in our estimate, as I said, even with that event, we would see capital still growing in 2023. Thank you. Excuse me, ladies and gentlemen, since there are no further questions, I would like to invite the speakers for their closing remarks. So, thank you all for the participation in our conference call. Our Investor Relations team is available for any further questions you might have. Thank you very much. Have a good afternoon. That does conclude Bradesco's conference call for today. Thank you very much for your participation. Have a great rest of your day. |
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