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Edited Transcript of 6752.T earnings conference call or presentation 31-Jul-19 10:59am GMT

Q1 2020 Panasonic Corp Earnings Presentation

Kadoma, Osaka Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Panasonic Corp earnings conference call or presentation Wednesday, July 31, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hirokazu Umeda

Panasonic Corporation - CFO, Managing Executive Officer & Director

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Conference Call Participants

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* Kota Ezawa

Citigroup Inc, Research Division - MD and Analyst

* Masahiro Ono

Morgan Stanley, Research Division - Research Analyst

* Yasuo Nakane

Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst

* Yu Okazaki

Nomura Securities Co. Ltd., Research Division - Research Analyst

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Presentation

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Hirokazu Umeda, Panasonic Corporation - CFO, Managing Executive Officer & Director [1]

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Good afternoon, ladies and gentlemen, thank you very much for attending despite your very busy schedule and despite very warm weather outside. I would now like to present Panasonic's consolidated financial results for the first quarter of fiscal 2020. This is the consolidated financial results for the first quarter of FY '20. Overall sales were JPY 1,891.1 billion, down 6% year-on-year, due mainly to impacts of lower sales in China and revised presentation in certain transactions.

Overall, operating profit was JPY 56.4 billion, down by JPY 43.6 billion due to impact of lower sales in China, and revised presentation in certain transactions. Overall operating profit was JPY 15.4 billion, down by JPY 43.6 billion due to lower sales in China mainly at Industrial Solutions, increased development expenses at automotive solutions, sluggish TV sales and the impact of gains from the sale of land in the previous year despite steady housing-related business in Japan.

Overall net profit was JPY 49.8 billion, down by JPY 7.6 billion despite improvements in income taxes due to one-off effect resulting from the reorganization of subsidiaries.

Now various analysis on sales and operating profit by segment. For Industrial Solutions and Connected Solutions, sales and profit decreased due to lower sales impacted mainly by weakening market conditions in China.

For automotive, sales increased due to growth in automotive batteries but profit decreased overall due to increased development expenses mainly for the existing issues with automotive solutions in Europe. For Appliances, sales and profit decreased due to sluggish TV sales mainly in Europe despite steady air conditioner sales and consumer electronics sales in Japan.

On the other hand, for Life Solutions, the sales and profit increased with the steady housing-related business in Japan. As a result, profit generated from business decreased by JPY 19.2 billion. Overall, operating profit decreased by JPY 43.6 billion due to factors including impact of onetime gains in the previous year for other income and loss. This is the results by segment. I will explain the details from the next slide.

First, I look at Appliances based on consolidated production and sales. Sales decreased by 4% from the previous year in real terms, excluding the effect of exchange rates. In heating and cooling solutions, sales increased due to steady sales of room air conditioners taking opportunity of higher demand from good weather in Asia as well as expanded sales of large-scale air conditioners in Japan, China and Europe.

On the other hand, in Smart Life network, sales decreased due to sluggish sales of TVs, such as OLEDs in Europe, where we are shifting to high value-added products and, in Asia, where we could not manage to cope with price declines of entry models. Overall, operating profit decreased. We achieved increased profit for Consumer Electronics in Japan thanks to sales increase of air conditioners and washing machines and the recovering profitability of refrigerators, however, overseas profit decreased due to lower TV sales mainly in Europe.

For the TV business, we are carrying out structural reform, including a review of production sites, in addition to improving production cost structure. We will implement drastic measures toward improving profitability. We aim to improve overall profitability through stable sales of consumer electronics in Japan, mainly white goods and favorable sales of air conditioners mainly in Asia.

Next, Life Solutions. Sales increased by 5% year-on-year at constant exchange rates. In Energy Systems, sales increased due mainly to favorable sales of home use distribution panel boards and wiring devices. In Housing Systems, sales increased due to sales growth of new models for water-related products and building materials. In Panasonic homes, sales increased due mainly to sales increase of new construction orders and remodeling businesses. Operating profit increased due to higher sales as well as streamlining initiatives. We'll continue to generate profit mainly through these stable businesses.

Next is Connected Solutions. Sales decreased by 6% year-on-year in real terms, excluding the ForEx impact. In Process Automation, sales decreased significantly due to the postponed investments associated with weak Chinese market conditions and reduced investments by automotive component manufacturers in response to lower sales of new cars in China and Europe.

In Avionics, sales decreased due mainly to the reduced investment by certain airlines. On the other hand, in PSSJ, sales increased due to the stable sales of PCs resulting from the demands related to replacement associated with the end of support for Windows 7 and movements toward the work-style reform, in addition to Olympic-related project orders. Operating profit decreased due to the significant impact of the lower sales of Process Automation and Avionics despite the higher profit in PC business.

Going forward, lower sales in Process Automation will be offset by other businesses of Connected Solutions as well as implementing effective cost management, including assessment of upfront investments based on market conditions.

Next is Automotive. Sales increased by 7% year-on-year in real terms, excluding ForEx impact. For Automotive Solutions, sales decreased despite the expansion of the growth-expected products, such as IVI, which could not offset the impacts of deteriorating automobile market conditions in China and decreased sales due to the product cycle trend.

For Automotive Battery, sales increased due to the effect of investments to expand production for both prismatic and cylindrical. Operating profit for Automotive Solutions decreased due to the overall development expenses peaking in fiscal '20 along with increased development expenses for the existing issues in Europe, although these are in line with the forecast as of the beginning of fiscal '20.

For fixed costs, including development expenses, a list of reduction measures has been drawn up and are factored into the forecast. Looking toward the improved profitability areas of focus will be clarified for region, customers and products.

Profit for Automotive Batteries was the same as last year's level due to lower sales of cylindrical types from our factory in Japan despite higher sales of prismatic types as well as cylindrical types from the North American factory.

Going forward, with a view to enhancing the competitiveness of prismatic types, investments will be made according to plan to expand production of factories in Dalian, China; and Himeji, Japan. In addition, we aim to improve the profitability of cylindrical types by improving productivity at the North American factory.

Finally, the Industrial Solutions. Sales decreased by 10% year-on-year in real terms, excluding ForEx impact, significantly influenced by the deteriorated market conditions in China, such as trade friction between U.S. and China. Sales decreased for systems due to lower sales of portable rechargeable batteries by strategically shifting our applications to industrial-related areas, leading to reduced ICT usage sales. Sales of the motors and other products were also sluggish due to weakening demand for capital investments in China.

Sales decreased for Devices due to lower sales of capacitors, resistors and automotive components. Operating profit decreased with the significant impact of the lower sales, which were partially offset by efforts in fixed cost reduction and raw material rationalization. As the Chinese market continues to be uncertain, efforts will be made to expand sales in Europe and emerging markets as well as to improve profitability mainly through fixed cost reduction. That's all about segments.

Next, I'd would explain the progress made in business portfolio reform, which was announced at the beginning of this fiscal year. First, improving competitiveness through cocreation with partners.

Our automotive prismatic battery business, as explained before, we are investing in production capacity expansion in preparation for future business expansion. In our town development business, we are steadily working to establish a joint venture during the Q4 of this fiscal year with a preparatory committee discussing the new company.

In further measures to improve profitability, we are making steady progress, particularly in our Semiconductor and solar businesses. Going forward, we will accelerate our business portfolio management such as structural reform of the TV business, which is already in progress.

For fiscal 2020, we have forecast a decreased profit for full year by factoring in business risks in addition to costs related to business structural reform. For Q1, profit decreased due mainly to lower sales in China, increased development expenses for Automotive Solutions and sluggish TV sales.

Toward achieving the full year forecast, we will carefully monitor changes in the business environment, including China's market conditions, and carry out the necessary measures. Specifically, we will review investments and control costs based on the particular business situations and the competitive environment as well as continue generating profits from our stable businesses. Furthermore, we will work to improve profitability, our top-priority issue through steady progress in our business portfolio reform, our pillar for fiscal 2020.

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Questions and Answers

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Yu Okazaki, Nomura Securities Co. Ltd., Research Division - Research Analyst [1]

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Okazaki from Nomura Securities. My first question is the progress of the first quarter against the full year forecast. I think there are differences from segment to segment. So can you elaborate on the progress for each segment? The second question is with regards to the restructuring of the TV business. You said that you are going to focus on areas and categories. Anything that you can elaborate on that approach, please.

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Unidentified Company Representative, [2]

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May I? Thank you for your questions. First, the first quarter of progress against the full year forecast. On May 9, we made the earnings report from the -- for the previous year, JPY 300 billion operating profits is the basis. And in the last fiscal year, we saw the impact of the Chinese economy on the second half. And so it's not really going to be very helpful to compare year-on-year basis. But usually, the first quarter costs were about 20% in that sense on the adjusted operating profit against JPY 300 billion full year. We are on track to achieve that target overall. But as you have correctly described, there are differences from segment to segment. The way I see it, broadly IS and CNS and Automotive AM, they are in line with the projection.

Whereas Appliances, Smart Life Network, digital products division, including smartphones. That division was way below our forecast. So that, on one hand, Life Solutions, the housing-related business in Japan, did much better than we had expected. And between the 2, overall, we saw the results, as I just said. So overall, we are on track. And in terms of positives and negatives, was just as I have explained.

Your second question with regard to the business reform of TV business. Maybe many of you in this room are concerned how long we are going to continue with the TV business. Now looking at the European, the OLEDs for the high-end product, the prices are really plummeting, and the entry models in Asia are also opposing very difficult business environment for us in terms of price. So maybe everyone is suffering in this industry.

But we don't intend to continue the TV business while incurring losses. So given the current situation, we will be revisiting the production sites as well as regions. And they aren't anything that are final yet, but we will be taking similar actions so as to control cost and to cater to regions in a better way.

Now TVs for the Japanese market, doing very well, strong, very popular amongst the Japanese consumers. So the issue is Europe, the European TV business, which hurt the performance. And therefore, we are going to take very straightforward actions to make sure we have better results.

Now I would like to move on to the next question. The gentlemen in the middle, the first row.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [3]

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Ezawa from Citigroup Securities. I have 2 questions. Now this performance after listening to your presentation, I'm a bit confused. So this earnings profit, the earnings are down or the sales are down and the profit are also down in many segments. But you said that it's still in line with your plan and you're not revising your plan and the CapEx and R&D budget are not changed either. So you said that they will be narrowed down, the investment, but you have not changed any plans. So if you -- I look at the supplementary information, it does not appear that you are taking any additional measures.

So as of now, the business performance is not so good. Any new measures that you're working on? So for example, the business portfolio restructuring those measures are already announced. So any new measures that you can introduce to us?

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Unidentified Company Representative, [4]

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If you look at the numbers, it mentions all the regions, but as for Japan, the sales profit are increasing or are higher. So fiscal '19, in the Q4, the sales number -- the sales were revised significantly. And because of that in Q1, there was an adjustment and excluded in that, the domestic market sales have increased. So AP, Appliances, and LS, Life Solutions, for those companies we did well, based on those numbers. But for other markets, for example, China, was tough. So Tesla battery is starting up in North America. So sales are not down, but in other regions, we had the difficult numbers.

As for the CapEx, the revision and so forth, we are internally working on that. So for the full year forecast, we have not yet reflected this. But as for China, there are still uncertainties, so we are prioritizing them so that we are working on revisiting and reviewing the CapEx as well as the cost reduction.

One change I can mention is that -- the fixed cost reduction. This is not something that we can boast about in Q1. Fixed cost is down year-on-year. And fiscal '16 and since the Q4, we have reduced the fixed cost. So we are making that changes.

In fiscal 2020, what we would do is the business portfolio reform, as we mentioned. So already mentioned, yes. But as for the progress, we will continue to communicate that to you. The ones that are not yet announced are also going on, but we are afraid that those are not something that we can disclose till now. So if you ask if there are any new additional measures. There are some, but we cannot disclose them. So we will make sure that we make good progress. So I hope you understand.

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Kota Ezawa, Citigroup Inc, Research Division - MD and Analyst [5]

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Another question is about TV, so it's in red, and you mentioned that you will continue this business and looking for the opportunity, and you don't intend to be in red for long time. But for example, since -- you mentioned that it's in red and that you are considering changing the production sites. But as for the fundamental strategy for the TV is a bit difficult for us to understand. So when the market worsens, you would restore from that market. But other than that, what is your strategy? What are the areas that you go into? And what are the areas that you would restore interest in the fundamental strategy?

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Unidentified Company Representative, [6]

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As for TV business, what we have done so far, for example, we rationalized the regions. So U.S., China, in those major markets, we do not sell our TVs. So those are the markets which as we suffered. So for the low end or commoditized TVs, we've reduce [ODM], and so we procure those TVs so that we can reduce our fixed cost.

But as for Japan, our products are highly valuated. And the profit -- it is profitable in Japan. So this is not the market that we are likely to restore from. But as for Europe, we cannot generalize Europe. There are different countries in Europe, and the distribution platform is also quite different. So at this time, there was a decrease of the prices and the -- almost all the manufacturers are not competing well. So that market is somewhere that we might be [restoring].

But as for Japan, especially at the high end of TVs or high value-added products, we will continue to make sure that we have a good business in Japan with TV. So Europe, because of the lower prices or price erosion, it is possible that you might [restore] if the deficit continues that is not sustainable. So we're not talking about the restore from European market, but we would like to watch what would happen and consider what we should do about the European TV business.

The next question, please. The gentlemen on the third row.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [7]

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From Mizuho Securities my name is Nakane. I have 2 questions. First, on AM, automotive equipment. Sales about JPY 240 billion and Automotive Batteries, about JPY 290 billion, and operating profit is minus JPY 10 billion. So can you give us a breakdown, if possible? That's my first question.

And for the Automotive Batteries, the prismatic would be mainstay. So could you give us a breakdown there, the sales trends, especially the plants in Japan for Model X. I think that demand is declining. So can you give us an update on where you are today?

And regarding the pricing, I think you are negotiating with Tesla. So anything you can share with us, we appreciate that.

Now my next question is not in the materials, but the China and U.S. So what is the operation today? What is the resources? What is the target for this year?

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Unidentified Company Representative, [8]

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Thank you. AM sales, JPY 377.4 billion operating profit or operating loss of JPY 10 billion and JPY 8.5 billion decline year-on-year. This loss, the absolute amount, the majority are related to Tesla business. And the year-on-year difference of JPY 8.5 billion, most are in relation to the automotive battery. So as absolute value, Tesla business-related loss is still sizable, but on a year-on-year basis, the automotive equipment is a big difference. That is the structure of profit of the AM business.

In terms of the trend, the Tesla business? You asked about Tesla business. I can't really give the sales volume. But 20% or so -- or over 20%. Tesla business accounting for over 20% within AM, and sales increase is becoming more sizable and the profit or loss.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [9]

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Why is there a loss -- operating loss?

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Unidentified Company Representative, [10]

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Looking at the production capacity today is now up to 28 gigawatts; as of the end of March, 24 gigawatt. And originally, the full capacity for Tesla is 35 gigawatt, meaning that we are seeing increasing capacity. And so there is a cost associated with that, and there are issues that we need to address the cost of which we need to bear. That's what happened in the first quarter.

So with the capacity increasing for Model 3 in the U.S., we are seeing profit coming from expanded sales, and that has been compensated for by Model S/X as has been announced by Tesla. 18680 manufactured in Japan. This prismatic battery is seeing lower sales, affecting the overall result, resulting in a flat growth year-on-year. That is the situation of the Tesla business today.

Now going forward, of course, the market price and various battery delivery price to be negotiated with Tesla would be the factors, up to 35 gigawatt.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [11]

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And we still have the production loss, that's for sure. And Model S/X, it declined this summer, right? Is it going to go down further? Or is it going to bottom out?

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Unidentified Company Representative, [12]

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I will do the question. So for the second half, loss associated with the Tesla business, we believe, would be improved -- addressed. As for the prismatic battery, in next year, a joint venture will be established. And in the meantime, we do have the responsibility to the foundation, and investment needed for that will be executed.

And as for the Automotive Solutions, why year-on-year decline, as we've been saying, in Japan and the Japanese company's global business, there is no issue there. The issue is solely with Europe. The development peak in Europe was this -- is this fiscal year, fiscal 2020. So in terms of profitability, we see a big decline year-on-year for Automotive Solutions. And for the second quarter, the development expenses associated with this would be sizable. And therefore, the loss in the Automotive Solutions are expected to continue in fiscal 2020, large development expenses. That's the nature of the Automotive Solutions.

So that's for AM and Tesla business and about the pricing. Of course, we can't comment on that. China and U.S. companies. In U.S., the Tesla and Hussmann is in the U.S. company. That's a purely U.S. company, Hussmann. The U.S. local human resources are increasing. Hussmann is really almost 100% American servers shared services and procurement, standardization and the increased speed addition thanks to the local management is being felt and the top management meeting between Tsuga -- Mr. Tsuga and the local management would be very important, but anything local would be led by the local management to be supported by the management here in Japan. That is the significance of having the U.S. company. As for China, we have many operating sites and resources in China. In terms of business, that's the axis along which we do the operation.

Now for the first time, Mr. Homma is looking at life science and other areas. But at the same time, he is the General Manager for the -- or the Managing Director of the China operation as well. And this is the first time that we are looking at the China business as one business. So Mainland China, Hong Kong, Taiwan and Korea as well, if we include those regions as well. In other words, China and Northeast Asia. Mr. Homma is responsible for a China company, JPY 700 billion, and not just Mainland China but Greater China.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [13]

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How much business?

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Unidentified Company Representative, [14]

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JPY 2 trillion is the size of our business in the Greater China area, which means that this is really a sizable business. And amongst the Japanese companies operating in China, we will be one of the largest. So we have just embarked on our Chinese business and with this new approach. So materials procurement, the indirect -- the back-office functions as well as shared services, these are becoming a reality. So China company and to look at the Chinese operation to be represented by one Managing Director. I think that will mean a great room for growth for us. Now [Shino-san] of AP and Life Solutions and Michiura-san are responsible for the global businesses. So the global businesses and the local focal areas, Homma-san is responsible for China in that respect.

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Yasuo Nakane, Mizuho Securities Co., Ltd., Research Division - Global Head of Technology Research & Senior Analyst [15]

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But if you look at Chinese figures, would that mean anything for a global business?

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Unidentified Company Representative, [16]

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So as far as communication is concerned, we are looking at the global businesses based on 5 different segments.

Next question. The Gentlemen, in the second row.

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [17]

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Ono from Morgan Stanley. Simple 2 questions. Earlier, Mr. Umeda talked about the strength and weaknesses among the different segments. So the higher sales or lower sales, if you look at the graph, part of it -- for example, compared to the plan that you announced at the beginning of the fiscal year, there are some opposite trend. For example, Lighting, there is -- you expected a little plus, but it's minus. Process Automation especially is negative, also Media and Entertainment. Those are the 3 ones that I noticed that they are showing the different or opposite direction. So business sizes are big. So you are likely to be influenced by the market conditions, but maybe you're feeling the impact of the China market, we are starting to see that probably. So how do you evaluate that? That's my first question.

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Unidentified Company Representative, [18]

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Yes. For Media and Entertainment and Lighting, yes, if you look at the first quarter, it's lower. But as for Lighting, the shift to LED is happening and the installation equipment, not only in Japan but in Asia, we are seeing the weakness in the replacement. So there are signs of recovery, but in Q1, the Lighting was down.

As for other LS, Life Solutions, this is mainly Japan business, but mostly, it's up or increasing. The major difference you mentioned is the Process Automation. Last year, up to Q4, Process Automation, the mounting equipment, there was a question why we are not seeing the impact from China, and we said that we have virtually no ICT. It's automotive and also the automotive electronic manufacturers. So China's impact is shifting from ICT to automobile. So now that the sales of the cars in China is faced with a headwind, so especially European car manufacturers go into China and especially the automotive electronic manufacturers are reducing the CapEx. So the Process Automation, we have seen the shift from the ICT to automotive, but we're now seeing the impact on the Automotive.

So in Q1, the lower sales and lower profit were recorded, and that was the major change. But the impact of China in IS, the motors, capacitors, we are seeing the impacts in those businesses. So we, of course, expected some impact from our Chinese market conditions. And we said that the lower sales and lower profits are in our forecast. So in that sense, the impact of our Chinese market or the risks are already discounted or incorporated in our forecast. So of course that we will start to see the actual numbers. But as a whole, I think we are on track where we are in line with our forecast.

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [19]

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My second question, on Page 9, the business portfolio of the organization. And you mention reform, rather. You mentioned in May that the feedback from the market and the direction that you're heading toward is not very clear. I think that was the major feedback that you received. But -- so how do you show your changes to outside? What are the things that you keep in your mind? And of course, that you won't be able to talk about the specific examples, but what kind of -- or the types of the actions you can talk about so that you can show you're making progress. So what kind of changes do you expect? And maybe you can give us some ideas.

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Unidentified Company Representative, [20]

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So if you look at the total picture, of course, we would look at ROIC. So we are trying to increase the competitiveness of prismatic battery or talent development business. Those businesses are the businesses that we would be making investments. And also, we have some capital invested. So that's -- well, that's why we made a decision about the town development.

And as for the prismatic batteries, for example, for example for the EV and hybrid cars, those are the batteries that we can use. So for example, Chinese government policy according to the mass media has shifted not only the EV but that they can also go for hybrid. So that means that the Toyota can lead so that as a car manufacturer, they have their own time frame and they make their own decisions. So from our perspective as battery manufacturers, automotive batteries, EV batteries and hybrid batteries, they are quite different in terms of the capacity and investment are also very different. So I think this will be led by the car manufacturer. And this is how we need to make an investment in appropriate way. And so again, we are very much focused on the ROIC.

And the remaining 3. Improving the profitability. There are specific examples. Also, there are some going home or in process or something that we cannot yet announce. So ROIC improvement and also improving the profitability is something that we are trying to realize.

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Masahiro Ono, Morgan Stanley, Research Division - Research Analyst [21]

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Thank you. We're running out of time, but just one request. The reason I asked the question is that, in May, you talked about the 3 segments, core growth, revitalization and cocreations. The market is focused upon -- well, JPY 4.2 trillion is shown for the first one, but the others were blank. So from the market perspective, what would be the image in 3 years, 5 years? Are we going to see the increased sales or increased profit? So quarterly, if possible, if you can show this -- show us that, the progress that you're making in relation to those 3 business classifications, that would be helpful.

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Unidentified Company Representative, [22]

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Thank you very much.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]