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Edited Transcript of 4021.T earnings conference call or presentation 15-May-19 6:15am GMT

Full Year 2019 Nissan Chemical Corp Earnings Presentation

Tokyo Jun 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Nissan Chemical Corp earnings conference call or presentation Wednesday, May 15, 2019 at 6:15:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Junichi Miyazaki

Nissan Chemical Corporation - CFO, Head of Finance & Accounting Dept., Senior EVP - Corporate Strategy & Coordination and Director

* Kojiro Kinoshita

Nissan Chemical Corporation - President, CEO & Representative Director

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Presentation

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Junichi Miyazaki, Nissan Chemical Corporation - CFO, Head of Finance & Accounting Dept., Senior EVP - Corporate Strategy & Coordination and Director [1]

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I will explain financial results for FY '18 and outlook for FY '19. As Page 3 and 4 show, in the second half, operating profit remained unchanged from the previous year. And compared with the outlook, it was below by JPY 1 billion. Biggest factor was substantially underperforming the fourth quarter. From Page 15 to 18, quarterly sales and operating profit are shown for your reference.

Page 5 (sic) [Page 3] shows results in FY '18. For full year, sales were JPY 204.9 billion. Operating profit is JPY 37.1 billion, and net income was JPY 29.4 billion. OP increased 6% year-on-year. As shown in the red square, OP and ordinary income have renewed record highs for 5 consecutive years and net income for 6 consecutive years, and all of them exceeded FY '18 goals of the mid-term plan.

As for shareholder returns for this fiscal year, dividend is JPY 82 per share and payout ratio is 41.5%. They were in line with the outline presented in November. We repurchased our shares of JPY 9 billion and canceled 2 million shares for a year. And as a result, total payout ratio was 72%, which also exceeded our mid-term plan target of 70%.

Please turn to Page 11 for balance sheet. Total asset were JPY 247 billion. Net assets were JPY 182.1 billion. And equity ratio was 73% for March 2019.

As shown on Page 12, outlook for FY 2019 shows that sales are JPY 210.5 billion; OP, JPY 38.7 billion; and net income is JPY 30.2 billion as of today. As shown at the bottom of Page 12, in FY '19, OP varies widely from the first to the second half. In the first half, it is down JPY 1.6 billion year-on-year with decrease of JPY 2 billion in the first quarter, increase of JPY 0.4 billion in the second quarter and up JPY 3.2 billion in the second half. And in the full year, it is up JPY 1.6 billion. Major factor of variance is shipment timing of Fluralaner.

Page 13. As for factors for variance, JPY 1.6 billion increases in OP will be achieved. And in chemicals and Agrochemicals, profit will grow. In Performance Materials, Pharmaceuticals and trading will be flat. As a result, ROE is 16.3% and net income renew record high.

As for shareholder return in FY '19, dividend will be JPY 88 per share, and payout ratio will be 42.8%. We announced a share repurchase of JPY 6 billion today. Total payout ratio will be 72.5%. And President Kinoshita will elaborate on how we will further promote our policy of total payout ratio later.

Page 15 to 18 show sales and operating profit by segment for your reference. And please turn to Page 19 to 21. These show future growth engines that we began to present from the previous year. As shown on Page 20, in FY '18, these growth engines attributed total sales of approximately JPY 4.6 billion.

Page 21 shows that we expect the strong growth of sales, JPY 9.4 billion. In particular, one notable sales growth of GRACIA in Agrochemicals is highly expected compared with the previous outlooks.

Now let me explain by segment. Skipping pages, please turn to Page 31 for Chemicals. Both in Fine Chemicals and Basic Chemicals in the fourth quarter, due to sluggish domestic demand in China, Chinese lower-priced product, especially in melamine and TEPIC, massively flowed into Asia market, and market price declined substantially. As a result, as shown in the table of Fine Chemicals, in the second half FY 2018 actual, total sales year-on-year were minus 1%, and for the full year, it was minus 2%. Initial outlook was plus 6%. For FY '19, we expect sales will be up 14% due to increased production and sales based on the present market prices.

Page 32 for Basic Chemicals. Table shows the similar trend. And in the second half, year-on-year growth was 4%, and outlook was 14%. And for the full year, growth was 4%, which was below the outlook of 9%. In the first half of FY '18, as shown at the bottom, #2, due to troubled ammonia plant, we suffered about JPY 0.38 billion of opportunity losses.

Page 33 and 34 show profit overview of chemicals segment. While they offer a detailed analysis, I will comment on second half FY '18 results vis-à-vis the outlook, FY '18 review and FY '19 outlook on Page 34. As for the second half FY '18 review versus outlook, for total segment, sales were down JPY 2.1 billion and OP was down JPY 0.9 billion with underperforming results both in Basic and Fine Chemicals.

For the full year results year-on-year, as shown on the left bottom, sales were up JPY 0.8 billion and OP was down by JPY 0.4 billion. As for FY '19 outlook, as shown on the right, both our Fine and Basic Chemicals will increase profit, and sales will be up JPY 3.3 billion and OP will be up JPY 1 billion.

Performance Materials on Page 36. Sales distributions of Display Materials, semi material and the inorganics are shown on Page 36. Their mix almost remains unchanged from FY '17 to '19.

As for Display Materials, on Page 37, alignment materials business had a difficult time in the second half or fourth quarter in FY '18. But finally, second half sales were plus 5% year-on-year, and for the full year, sales were up 7%, just in line with the outlook.

In the fourth quarter, 1 customer in Taiwan, CPT, filed for restructuring, and that negatively affected sales by JPY 0.3 billion. But despite that impact, we achieved the sales in line with the outlook. As for sales outlook for FY '19, total SUNEVER sales will be flat as shown here. Photo will continue to grow, but rubbing will be down due to CPT's restructuring. And VA will increase sales. Combining them all, total sales will be flat.

Next, I will move on to Semiconductor Materials on Page 39. The decline in sales for the total Semiconductor Materials in the fourth quarter was more significant than in Display Materials. If you can take a look at this table, sales in the fourth quarter dropped by 6% year-on-year and increased by 6% in the second half as compared to 9% in the outlook, and it grew by 11% for the full year. In fiscal 2019, assuming that there will be a recovery in the second half, we expect the first half to remain unchanged year-on-year, a rise of 5% in the second half and an increase of 3% for the full year.

Next, SNOWTEX, Organo sol and other inorganic materials. In the second half, as shown in the bottom line of the table that says total inorganic materials, again, we fell short and posted a decline of 1%, resulting in 3% growth for the full year, underachieving the 7% increase expected in the outlook. Especially, oilfield materials are underperforming, affected by unexpected efforts to cut back on investments by customers in the U.S. In fiscal 2019, we expect a recovery from there and forecast a 5% year-on-year increase.

Let us move on to the profit overview of the Performance Materials segment on Page 41 and 42. If you look at the second half of fiscal 2018 review versus outlook as of November 2018 on Page 42, as indicated in the last sentence, sales fell short by JPY 800 million and operating profit by JPY 300 million with all subsegments falling behind. Just as shown in the left bottom, in fiscal 2018, sales went up by JPY 4.2 billion and operating profit by JPY 800 million year-on-year with increased profit for Display and Semiconductor Materials and decrease for Inorganic Materials.

Fiscal 2019, we anticipate sales to increase and operating profit to remain flat with Display Materials remaining almost unchanged; Semiconductor Materials seeing an increase; and Inorganic Materials, a decline.

Next, let's take a look at Agrochemicals on Page 43 and 44. Page 44 shows a table for main products listed in a descending order of the fiscal 2018 sales amount. In fiscal 2018, Fluralaner was the largest in sales, listed at the top, and it's growth was 50% in 2017 and 25% in 2018, which was in line with the outlook. And in 2019, inventory adjustments for BRAVECTO has been assumed, resulting in an outlook of a slight decline of 2%.

As for other materials, a major item is GRACIA, a new insecticide launched in Korea in 2018 and is scheduled to be launched in this month in Japan, is expected to grow significantly in sales. As shown in the left bottom, sales in fiscal 2019 were expected to jump by more than sevenfold from fiscal 2018 and ultimately become a blockbuster product with JPY 10 billion in sales expected in and outside of Japan.

Please take a look at Page 45 and 46. The pipeline of Agrochemicals, as shown in the table on Page 45, has not changed for GRACIA and 2 other items scheduled to be launched in 2022 and 2024, respectively.

On Page 46, I have a comment to make on Fluralaner. If you can take note of the fourth bullet point in the box for Fluralaner, it is about the compound patent. We have been saying that it will expire in March 2025, and royalty income will stop coming in, but many countries have a patent term extension system. In some EU countries, including France and Germany, the patent has already been extended to February 2029, while in U.S. and U.K., applications for extension are currently under examination. In other words, in the countries which together account for 70% of the sales, patent extension system is available.

I would also like to draw your attention to Fluralaner quarterly sales at the right bottom. The purple shows the sales breakdown for fiscal 2019, where you can see the first quarter expected to be a lot smaller while the fourth quarter much larger. Therefore, in the first quarter, the profit also is expected to fall year-on-year.

Please turn to Page 47 and 48, Agrochemicals profit overview. In the second half of fiscal 2018, sales and profits were mostly in line with the outlook. Sales went up by JPY 4.6 billion and operating profit by JPY 2 billion for the full year of fiscal 2018 from a year before. In fiscal 2019, although inventory adjustments for Fluralaner are expected, significant growth is forecast for GRACIA and ROUNDUP, among others, leading to a year-on-year increase of JPY 1.5 billion in sales and JPY 600 million in operating profit.

Next, moving on to Pharmaceuticals. On Page 50, you can see a table showing sales of LIVALO, which posted JPY 4.3 billion in our domestic and export API sales, down JPY 200 million from the outlook. In Japan, there was a serious impact by generics, resulting in inventory adjustments in the domestic end market.

The pipeline for Pharmaceuticals has remained unchanged as shown on Page 51. Custom chemicals, as shown in the bar chart on Page 52, are seeing the sales grow steadily from about JPY 1.2 billion in 2013 to almost double in 2018, partially making up for the lost revenue in LIVALO.

With regard to profit in Pharmaceuticals, please turn to Page 56. In the second half of fiscal 2018, the operating profit fell short of the outlook by JPY 200 million, representing a year-on-year decline of JPY 200 million. In fiscal 2019, both sales and operating profit are expected to remain flat year-on-year.

I would now like you to jump to Page 59, where you see the comparison to mid-term plan announced in May 2016. As shown in red here, we have mostly achieved the targets. The new mid-term plan is described on Page 61 and 62, but this will be elaborated by Kinoshita later.

Moving on to Page 63 or ESG. As indicated on the third bullet point, on April 1, 2019, nomination and remuneration advisory committee was established as an optional advisory body of the Board of Directors, which consists of 2 outside directors and Kinoshita. Moreover, we're planning to introduce a performance-linked stock compensation plan for members of the Board of Directors, et cetera, which is subject to the approval at the next Ordinary General Meeting of Shareholders. We will also add 1 more outside director, resulting in the Board of Directors consisting of 3 outside and 6 internal directors with 1/3 represented by outside directors.

Last but not least, please go to Page 69, which describes share repurchase. As you can see in the table titled share repurchase program, in 2018, we carried out the repurchase twice, JPY 5 billion and JPY 4 billion worth, respectively. In 2019, JPY 6 billion worth is expected as announced in May.

That concludes my presentation of the fiscal 2018 financial results and the outlook for fiscal 2019.

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Kojiro Kinoshita, Nissan Chemical Corporation - President, CEO & Representative Director [2]

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Good afternoon, ladies and gentlemen. I'm Kojiro Kinoshita, President and CEO. Thank you very much for joining us in financial results and business plan meeting today. I will talk on the Stage 2, second half of the mid-term business plan Vista 2021, starting from this April for 3 years. I will follow the table of contents.

As for the result in Stage 1 for the first 3 years, let me walk you through the results in the final year of FY 2018 in comparison with the plan. Sales were down JPY 12.1 billion. OP was up JPY 2.1 billion. Ordinary income was up JPY 3.5 billion, and net income was up JPY 2.3 billion. In OP, ordinary income and net income, we achieved the plan 1 year ahead of the plan in FY 2018 in the Stage 1.

The breakdown of OP growth of JPY 2.1 billion over the plan by segment is shown here. In Chemical segment, nitric acid, melamine export, sulfuric acid products were above the target, but the demand in high-purity ammonia decreased. And the extra demand by new TEPIC were below target, and the result was down JPY 1 billion.

In Performance Materials, photo-alignment IPS, Display Materials increased mainly for smartphone applications. And rubbing IPS multilayer process materials and the new products were below target and the fixed cost increased. As a result, OP was down JPY 0.4 billion.

In Agrochemicals, active ingredients for veterinary pharmaceuticals, Fluralaner; paddy rice herbicide, ALTAIR; and a nonselective leaf treatment herbicide, ROUNDUP, have been robust. And fixed cost was less than forecast. OP was up JPY 5.5 billion.

In Pharmaceuticals, Custom Chemical was in line, but a decrease in anticholesterol drug LIVALO and less milestone payments led to down JPY 1 billion. And others were down JPY 1 billion with below-target trading businesses.

As for allocation of resources, R&D expenses were below plan due to careful examination and review of the plan. CapEx was down also due to review of the plan and a delay in part of that plan. Researchers in charge of new products development increased. Progress of businesses shown as source of growth in Stage 1 and their sales growth rate from 2015 to '18 are shown here. Please take a look later.

This slide shows the same contents. As you can see here, Display Materials for photo-alignment IPS and Fluralaner, active ingredients for veterinary pharmaceuticals, increased way above the target in Stage 1. In all financial indicators set in the Stage 1, we achieved the target.

Next, I will explain implementation of measures based on basic strategies. As for the first one, maximizing the profit from existing products. MSDs or products which contain Fluralaner, active ingredients for veterinary pharmaceuticals, are sold in 100 countries in the world. BRAVECTO of MSD is expanding through chewable tablet for dogs, spot-on solution for dogs and cats. And the launch of products for livestock drugs for poultry red mite are sold in Europe, expanding active ingredients business.

In order to respond to demand growth, construction for in-house production facility was implemented in another plant, and production started in November 2018. Photo-alignment IPS Display Materials are expanding sales through new customer acquisitions in China and Taiwan. ROUNDUP expanded consumer use AL Series. In addition to the AL II is immediate effect, [drawable-type AL III] were launched, and they had been firm. ALTAIR sales expanded steadily with effective differentiation strategy to appeal the competitive advantage of a fix on perennial leaves to the market. As for cost reduction, various efforts were made, including the conversion of raw materials and fuels in Toyama Plant, and they delivered result.

As for the second point, improving marketing power, overseas offices in the U.S., Brazil, India and China were established. And through the collection of cutting-edge technologies, evaluation, customer service and technical support, we served close to customers and established a network to grasp the market needs promptly.

On the third point, enhancing R&D capabilities, we succeeded in developing new insecticide, GRACIA, a great promise in Agrochemicals. And following Korea in 2018, it was launched in Japan today, May 15. I think development code number of this product, NC-515, indicates that the sales and marketing department have a special feeling to the launch date of May 15.

As for Performance Materials, we promoted development of Display Materials for photo-alignment IPS to meet customers' needs and launched 3D packaging process materials and EUV underlayers and obtained customers' [POL] to be qualified as standard materials. We also improved evaluation capacity to respond to miniaturization of semiconductors by aggressively investing management resources. In Pharmaceuticals, we are working on to establish proprietary liquid-phase synthesis technology toward the development of medium molecule drugs and business of CMOs.

Stage 1 has been proceeding smoothly, but in order to ensure further growth, we need to address following issues, such as skewed profit generation to a part or products, delayed development and commercialization of a new product and lack of preparedness to potential risks to growth.

Now I'll explain the overview of Stage 2, second half -- 3 years of mid-term business plan. As for positioning of Stage 2, in the long-term business plan compiled in 2016, taking account of the projected future business environment, we worked out a 2030 vision, aiming to achieve net sales of JPY 300 billion and OP of JPY 50 billion. We regard Stage II as a checkpoint to the company vision in 2030 and describe the ideal situation in 2021 as follows. Performance Materials and Agrochemicals are driving businesses, and next growth engines are created. Organization and corporate culture that enjoy challenges are realized, and a diverse human resources fulfill their potentials in achieving goals. Business activities make contribution to social sustainable development.

As basic strategies to solve the issues in Stage 1 and to realize ideal situation in 2021, we worked out the following 3 strategies: increase profitability of products that serve as sources of growth, strengthen ability to create new products and improve ability to adapt to social and market changes. As for financial targets, we aim for net sales of JPY 235 billion; OP, JPY 43 billion; ordinary income, JPY 44 billion; and net income, JPY 33 billion. EPS will be JPY 230, and ROE will be 16% or higher. Compared with 2018, sales will be up by JPY 30.1 billion; OP will be up JPY 5.9 billion; and EPS will be up by JPY 32.

When we compare sales by segment between 2018 and '21, all segments will achieve sales growth, led by Performance Materials and Agrochemicals. As for comparison of OP by segment, between 2018 and '21, profit in Agrochemicals, Performance Materials and chemicals will increase, but Pharmaceuticals and others will be down. Profit in other segment will be down due to R&D expenses for new products. As for allocation of resources, R&D expenses and CapEx to obtain competitive advantages will increase from JPY 89 billion in 3 years in Stage I to JPY 102.7 billion in Stage II with continuous aggressive investment.

As for cash flows, total cash flows in the latest 3 years period from 2016 to '18 and the plan for 3 years from '19 to '21 are shown here. Total payout to shareholders will increase from JPY 55.6 billion in 3 years in Stage 1 to JPY 70 billion in Stage 2.

As for financial indicators, targets for 2021 are above 18% of OP margin and above 16% of ROE. We will strive to achieve 42.5% of payout ratio in FY 2019 and sustain 45% in the following years. And total payout ratio will be 72.5% in FY 2019 and sustain 75% in the following years by expanding shareholder returns farther.

Let me now explain about basic strategy 1, to increase profitability of products that are sources of growth. In chemicals segment, our goal is to maximize profits by maintaining high rate of operation and quickly adapting to environmental changes. Based on the strong global demand and rising social pressure, we will focus on expanding sales of isocyanuric acid, HI-LITE and TEPIC. Major investment plans include production capacity increases to expand sales of isocyanuric acid and TEPIC electronic materials. Furthermore, to ensure safe and stable operations, IoT, AI and other digital technologies will be further introduced into the plants. In so doing, we hope to enhance productivity to prepare ourselves to labor shortage, which is likely in the future as well as to ensure a robust maintenance system.

The outlook for sales growth rates for major products is shown here. In Performance Materials segment, our goals are to expand market share by turning key themes into actual demand and create multiple new products that will become future engines of growth. We will capture the increased demand due to development of [ICC] sector. As business opportunities, we look to develop and launch new products, improve existing products and expand their applications, and seek to strengthen expertise in evaluation technologies. We also plan to expand businesses by making alignment materials for TV and oilfield materials as sources of growth. Please take a look at the sales growth rates for major products at your leisure.

In Agrochemicals segment, in response to the anticipated continuous expansion of global market, we hope to expand sales to overseas markets and double agricultural chemicals and to establish production system in anticipation of overseas demand and reduced manufacturing costs. In domestic business, we will strengthen initiatives for large farms and corporations and for general consumers.

We will focus on GRACIA, Fluralaner and ROUNDUP as sources of growth and expect to post increases in both sales and profit. I would like you to take a look at sales growth rates for major products later at your leisure.

GRACIA was launched today in Japan following its launch in Korea and is expected to become widely used going forward. As you can see, we forecast a significant growth from this year. When you regard the sales in 2018 as 100%, we expect to achieve more than 800% in fiscal 2021 and to further grow the business by increasing the countries where GRACIA is registered or by increasing production capacity.

After fiscal 2021, as a source of growth, its sales target is a total of JPY 10 billion in and outside of Japan, as I said earlier. As for Fluralaner, sales are expected to fall in fiscal 2019 due to end market inventory adjustments but to recover and grow from fiscal 2020.

In Pharmaceuticals segment, our goals are to create pipeline and enter new generic drugs and medium molecule drugs by creating development candidates and moving them to the next stage as well as by expanding Custom Chemicals business and improving its profitability.

In terms of sales growth in fiscal 2021, as compared to fiscal 2018, export of LIVALO is forecast to post a negative growth due to the adverse impact of patent expiration. On the other hand, Customs Chemicals are expected to increase in sales in anticipation of increased CMO business for generic drugs.

As for in-house pharmaceutical products, in addition to the 2 development candidates we have been referring to previously, there are multiple themes where safety tests are underway as development candidates. In terms of collaborative research, we are conducting small molecule drug discovery programs with several companies, including Shionogi; and started oligonucleotide drug discovery programs with some companies, including Luxna Biotech, thus putting in our utmost efforts to improve pipeline and create new drugs.

In Basic strategy 2 or strengthen ability to create new products, cutting-edge technological information, in and outside of Japan. As for the sales and intellectual property information will be utilized to plan, promote and manage research themes in order to advance R&D, in anticipation of future businesses. Furthermore, in response to expected progress in overseas agricultural chemicals, displays and semiconductor markets, overseas research infrastructure will be enhanced to improve the analysis, evaluation and development function so that more business opportunities can be captured. In developing new businesses, we will seek to establish new technologies and standardize materials through participation in national projects and aim to accelerate creation of actual demand for new products through early stage teamwork between R&D and manufacturing departments.

As part of our efforts in areas other than existing segments, in order to create products that will lead to the establishment of new businesses in the future such as regenerative medicine, beauty and health, and environment and energy, management resources allocation will be prioritized to facilitate development. In fiscal 2018, actual sales of future growth engines totaled JPY 4.6 billion, including all segments. In fiscal 2021, by strengthening the ability to create new products, we will work to grow sales of future growth engines, especially for those circled in red, expected to become sources of growth in each of the segments.

Sales by segment are JPY 600 million for chemicals; JPY 7.9 billion for Performance Materials, including alignment materials for TV and oilfield materials; JPY 7.8 billion for Agrochemicals, including GRACIA, ROUNDUP AL series; JPY 2.7 billion for Pharmaceuticals, including CMO business for Eldecalcitol, a generic API for osteoporosis drugs and active ingredients for peptide drugs; and JPY 600 million for new fields with focus on turning into actual demand functional cosmetic materials and 3D cell culture medium. In total, we expect to achieve JPY 19.6 billion.

Let me next explain about basic strategy 3, to improve ability to adapt to social and market changes. First of all, as priorities for corporate survival, we will focus on the following 3 areas: To strengthen corporate governance, we established nomination and remuneration advisory committee in April this year. In addition, we will add one new outside director after resolution at the Ordinary General Meeting of Shareholders scheduled in June 2019 to make 1/3 of the board represented by outside directors. We will continue to work to improve the full soundness and transparency of the management.

In order to help solve social issues and realize company vision at 2030, we will strengthen our initiatives to address 3 material issues or materiality. Specifically, we will set the fiscal 2021 goals for '19 factors of materiality, shown on Page 41 to 42, and ensure the steady implementation of the plans. Under the category 1, provision of new value for helping to enrich new -- people's lives. As a contribution to solution of health issues and improvement of quality of life, we will launch new medical materials and help spread the use of disinfectant for drinking water.

Under the Category 2, strengthening of Nissan group's business space, in addition to enhancement of R&D capabilities and improvement of product quality, you will also see creation of a pleasant working environment and promotion of diversity to improve talent and other intangible assets so that we can sharpen the sources of competitiveness and, thereby, ensure steady survival and development of the businesses. And under Category 3, continuous improvement of responsible care activities, we will continuously work to make sure environmental protection and labor safety so that we can contribute to the sustainable development of society.

As initiatives for beyond Stage 2, as shown in this slide, we will aim to enter on the full-scale, the areas where continued demand growth is expected by focusing on development of new products and new businesses. We are determined to contribute to resolution of social issues, continue to grow in any business environments and take on challenges to create new values for our future leap forward.

This is my last slide. To express the passion I referred to earlier, we have chosen as a slogan for Stage 2: strive for perpetual growth and become a company that opens a path for the future. In order to go beyond sustainable growth and rise to the next level of perpetual growth, what we need to do is not just to continue to launch new products and race into the market, but we want to share the awareness within our group that the top priority is to develop new businesses with an eye on the future. By putting our utmost efforts into realization of the slogan, the entire group will be united to strive forward in order to meet expectations from stakeholders.

I would like to ask for your kind support going forward. Thank you for your attention.