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Edited Transcript of 8303.T earnings conference call or presentation 14-Nov-19 1:30am GMT

Q2 2020 Shinsei Bank Ltd Earnings Presentation

Tokyo Nov 28, 2019 (Thomson StreetEvents) -- Edited Transcript of Shinsei Bank Ltd earnings conference call or presentation Thursday, November 14, 2019 at 1:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hideyuki Kudo

Shinsei Bank, Limited - President, CEO & Representative Director

* Hiroshi Ishii

Shinsei Bank, Limited - Head of IR

* Shouichi Hirano

Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance

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Conference Call Participants

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* Akira Takai

Daiwa Securities Co. Ltd., Research Division - Chief Analyst

* Katsuhito Sasajima

Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst

* Rie Nishihara

JP Morgan Chase & Co, Research Division - Head of Japan Bank Team

* Shinichiro Nakamura

Goldman Sachs Group Inc., Research Division - Research Analyst

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Presentation

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [1]

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Good morning, ladies and gentlemen. My name is Ishii, General Manager of the Group IR and Corporate Communications Division. 2019 interim results will be presented today. We'd like to thank you very much for your attendance. It's a rush of announcements of business results. And we are, therefore, extremely grateful that you have come.

With regard to the presentation session through the Internet, both Japanese and English will be -- presentations will be available through live streaming. And there are cameras behind you, images will also be on the website. And we would like to upload this on the website, so you can have a look at the video as soon as possible.

We have the blocked seats in front of the speakers to avoid persons from being caught on camera. After things have settled down with regard to business results, we would like to send you e-mails. On the afternoon of 20th of February, we are scheduled to have Shinsei IR day. And as we normally explain, not Mr. Kudo and Mr. Hirano, but the director responsible for business will talk about the progress rate of the medium-term management plan. So please pencil this in your diary.

So we'd like to ask the Representative Director, President and CEO of Shinsei Bank, Mr. Kudo; and Mr. Hirano, our Chief Officer of Group Corporate Planning and Finance, to present. So over to you, sir, Mr. Kudo.

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Hideyuki Kudo, Shinsei Bank, Limited - President, CEO & Representative Director [2]

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Good morning, ladies and gentlemen. My name is Kudo from Shinsei Bank. So I'd like to start right away. If you will look at the key points, I'd like to point out the key things and the details will be referred by Mr. Hirano. First point, JPY 28.1 billion of net income. And that's 2% over -- year-on-year and 53% progression toward the full year net income forecast.

So pretty satisfactory and smooth progress rate is what we're seeing. The second point, share buyback progressed 49%. And share buyback, if that is included (sic) [excluded], the EPS grew at 2%. If we include share buyback, it's 5%.

On the 15th of May, we announced the share repurchase of JPY 23.5 billion of total shares resulting in a total ratio of 50% over the previous year. So we've come halfway, approximately. And EPS, the medium-term management strategy within a strategy average of 2% or more. That is what the strategy provides for. In this interim period, we have just hit that figure.

Third point. In August, we did a secondary offering of shares. The lead shareholder, JCF Fund, has exited. And the total amount -- offering amount is JPY 63.3 billion, and the number of shares, 45 million shares. So in view of our size, it was a fairly large size secondary offering, mainly overseas institutional investors. Domestic individual private investors have bought and we have successfully completed the process. The secondary offering, when this was announced, right after that, there were some concerns about the supply-demand concerns, we believe, and the stock prices dropped largely.

To say a few things. The secondary offering was neutral to value per share. And so the value per share, if we look at the denominator, there was no dilution in terms of the transaction and the numerator, on the numerator, JCF is, to begin with, a fund. And there was no synergy with our business. So this does not, in fact, impact our business. And secondly, the governance impact. We are originally such that we have a diverse outside director-centered Board. And so Chris Flowers' contribution, we do not say there was no contribution, but whether he's here or not, it will not change things in a major way. And as a result, to the secondary offering, there was a large number of applicants. And we -- JCF had to exit at some point in time, and the overhang issue was resolved, but we've restored the share prices to the level it was before the announcement of the secondary offering.

And now I'd like to turn to Mr. Hirano to give you the details.

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Shouichi Hirano, Shinsei Bank, Limited - Managing Executive Officer & Chief Officer of Group Corporate Planning and Finance [3]

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My name is Hirano, Chief Officer, Group Corporate Planning and Finance. So let me talk about the financial results and the core strategic businesses. Page 4, that's the first half financial results summary.

With regard to revenue year-on-year, 6% is the increase to the full year plan, 50% is the progress rate. So the progress rate is what we had envisaged initially. With regard to noninterest income, treasury ALM plan, credit was sold. And from corporate business, shares were sold. Retail Banking fees and commissions have reduced. So year-on-year, there was an increase in income.

With regard to expenses year-on-year, 4% was the increase. New computer system has increased, and system expenses have increased, but project and system-related expenses will be posted on the second half. So the progress rate stopped at 49% for the whole year. The expenses is as we envisaged at the initial period. And with regard to net credit costs, increase of 15% for the full year, 47% is the progress rate.

And unsecured loans, security quality improved and collection improved. These are the factors. Previous year, structured finance had a large credit reversal, but this factor is absent. And in this term, Shinsei Financial, APLUS Financial -- of note, APLUS Financial saw a reduction. And as to Kabarai, there was a reversal. There is a 1.5 percentage reversal -- 1.2% reversal.

So net income was JPY 28.1 billion. Year-on-year, it's a 2% increase, and the progress rate is 53%.

Skipping a page to Page 6. Let's just explain the net interest income. Structured finance, through the smooth growth of operating asset balance, the net interest income increased. Unsecured loans reflect a lower average loan balance and now constitutes 52% of total in net interest income. So net interest income was a slight decrease.

On net interest margin, 2.48%, a continuous improvement. Major factors, structured deposits and other campaign deposits -- campaigns reduced the yield on interest-earning assets. 2.34% is a level which has been maintained.

Page 8. That's the noninterest income. This has been explained when an overview was given. Noninterest income, 13% year-on-year, large increase. Major factors, corporate businesses stocks selling and treasury ALM business and bonds selling. And -- but from APLUS and Showa, there has been an increase. And there has been in season commissions increase. There has been a contribution due to these. Please refer to these.

Page 9. That's expenses. The midterm expense was JPY 73.8 billion. Profit ratio -- or expense ratio was 60.8%. And projects and systems-related expenses will go to the second half. For the entire year, we expect to land where we initially fund. SHINKO LEASE and Finance lease have been acquired. That's due to increase in personnel expenses. There has been a depreciation due to new computers, and that has been an added factor.

Page 10, net credit costs. Unsecured loans, Lake business has increased the collection and the quality of credit has improved, and there has been a reduction in guarantee to regional banks. JPY 4.9 billion is the reduction -- JPY 6.9 billion is the reduction. APLUS Financial had provisioning, but that is no longer there. So there's a reduction to JPY 7.1 billion. Structured finance, temporary factors led to reversal of reserves. And there has been a profit due to that.

Page 12, please. That's excess interest repayment. The disclosure claims is leveled because APLUS claims has seen us moving a moderation of reduction, but the overall interest repayment is a 20% decrease year-on-year. And the coverage of the provision is 5 years.

On improvement of productivity, productivity enhancement initiatives, Page 14, please. This fiscal year, various projects will realize the plans. And in the medium-term plan, new policies will be introduced, and we will verify and do some additional planning and the IT department, where we have reduced integration efforts, we will renew our efforts toward integration. IT bases will be integrated on systems, will be shifted to cloud. And Lake's digital strategy in alignment with that, we will optimize unmanned branches for respective business. RPA and AI and digital tools, we will positively introduce.

Page 16. On Lake ALSA. Small-scale finance. At Lake ALSA, to induce digital applications, the 60-day interest-free through web and the smartphones, we have made this a regular product. There has been a reduction over the year-on-year, but -- compared to the previous term, there has been a decrease, but there's an increase over 27 -- year-on-year 27%. And 28% over -- year-on-year. And as for approval rate, that's 30% and remains stable.

On Page 17. Shinsei Bank Smart Money Lake for DOCOMO. On the 28th of August, it started. And mail magazine, in addition, d-point leverage campaigns, marketing policies are being used to improve recognition. Second half results will be looked at. And we will, later on, reduce -- announce the entire year results. And skipping a few pages.

Page 20. Small scale finance. APLUS payment is what I would like to explain here. Payment business of APLUS is for code settlement, the StarPayAplus is being provided to -- will be provided to merchants. Smartphones and tablets will be installed -- will be used to install apps by merchants. And by so doing, the settlement is -- can be completed by identifying each of the Japanese and overseas brand codes, harmonizing merchants' customer needs who want to diversify and needs settlement methods and improved convenience. And the volume is steadily increasing, transaction volume is steadily increasing.

On Page 22, please. That is business with institutional investors. Project finance is what I'd like to explain. Domestic project finance, due to the revision of the FIT system in 2018, we are taking more time to consider new projects. So we had slow progress in the first half. However, since we have multiple highly reliable deals in our pipeline, so we will expect to build the deals momentum back in the second half by executing these deals.

Page 23, real estate finance. The domestic real estate finance had the new loan disbursements, were robust in the first half of the fiscal year, reflecting the progress made involving large-scale logistics facilities that incorporate sell-downs and new asset types such as warehouses.

In the second half, we will continue to make selective efforts with an awareness of outstanding properties and outstanding sponsors as pipelines are also accumulated.

Finally, I would like to summarize the highlights of the financial results of this interim term. As explained, financial performance was favorable. Business, we started initiative for value co-creation in areas of consumer -- small-scale finance and the contribution from the SHINKO LEASE and Financial Japan were quite also studied. And in terms of capital, there were many shareholders who participated in the secondary offering. As a result, we increased new shareholders, addressed share ownership. To meet the expectation of stakeholders, we will steadily implement our medium-term management strategy and endeavor to deliver investor financial results. That -- this concludes my presentation regarding financial results of the first half.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [4]

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So this concludes a brief presentation. Now I would like to open the floor for questions. So if you have questions, please raise your hand.

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Questions and Answers

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Shinichiro Nakamura, Goldman Sachs Group Inc., Research Division - Research Analyst [1]

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Nakamura with Goldman Sachs. I have 2 questions. One, the current unsecured loan market, so the moneylender is increasing. But in overall, I think there is slowdown in the long-term growth potential. What is your view? Under such circumstances, is Shinsei's position will change in the future. And the number of the disclosure claims also declining. So including that issue, I would like to hear your view. That's my first question. And second question is regarding DOCOMO lending platform on Page 17. So this just started the end of August. So it may be too early, but after launching the business, what is the current situation? So rather, could you please provide your view on the qualitative perspective and -- including potential? And is there any overlapping with the existing customers of the personal loan business? So what is your view? And also, do you have any other similar businesses in your pipeline?

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Unidentified Company Representative, [2]

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Thank you. First, to your first question. And first and second questions are correlated in terms of explanation. First, unsecured loans market, overall market, situation has not changed much. Because bank players are slightly controlling, so they're not in a mode to aggressively grow the business. But there is the strong or steady demand. And as such, demand is inflow into money lenders, and that area is growing moderately. And that situation is continuing. And we are a part -- one of the money lenders. So for the time being or for some time, we think that we can enjoy that advantage. On the other hand, I have been saying this, the pure unsecured loan market will reach some kind of saturation at some point. So we have been aware of that. So we have -- do not have the overexpectation on growth. However, at this point, in next 2 or 3 years, we have -- do not have concern that the growth will stop in the next 2 or 3 years. In the traditional unsecured loans or the stand-alone business, other than the business, there are a lot of initiatives going on in society, including the lending using data or a lot of initiatives including many fintech players. So developing new customers will be promoted going forward.

And our strategy is, we have relatively strong brand and advantage for the money lenders for the credit decision and operation, IT and collections. So we have the top-class platform in the Japanese market. So using some of them, by separating or splitting some of them and to offer as such the functions, the platform to other players, we are considering that also. And we are discussing with many players currently. And basic assumption for that discussion is like there is the wallet-type platform. And on top of the platform, we do have the small-scale finance and payment to -- so that we can add or remove such functions. Such platform is being built. And in the next several months, we believe that we can launch the platform. And one of the products that will be used on top of the platform includes small-scale finance.

So in a broad sense, as a part of such initiatives, we have the alliance with DOCOMO. So, as you said, between DOCOMO and us, the traditional unsecured customers, of course, there is an overlapping, but they're quite different. So in a sense, we are reaching or approaching new customer segments. So honestly speaking, it just started. So we don't -- not in the situation to report some quantitative data, but we are developing new customers. So we are really feeling that we are developing new customers. So we have expectations. And at the same time, not only giant players like DOCOMO, but for the medium-sized players, which have the unique customer base, we are also working alliance with such players in parallel. So in that sense, this small-scale finance for individual customers has been focusing on a particular segment. That is my impression. But in order to respond to various needs of various people such -- there is room for growth. So in such a market platform, we do not necessarily need to show our signboard in front, but we would like to play in such a market. That is all.

Sorry, I answered 2 questions together. The number of disclosure claims, that was a question, it's slowing down a little. It's, I mean, getting close to be flat. By sector, unsecured loans over the money lenders, rather than them, the law firms are focusing on cards or the credit installment or (inaudible) fund companies because they are more cumbersome, and the average balance or unit price is small. So they have been focusing -- law firms have been focusing on money lenders. However, because there is no such -- much room there, so they are slightly shifting their target. This may sound a little weird, but they are continuing their sales efforts or customer development efforts at some law firms. So this may going to be a little longer problem. But the number is unlikely to increase. So on a consolidated basis, we maybe could decide by the account, if I had to say abundant, but we have reasonable amount of reserves. So I -- we don't think we should have a great concern on this.

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Akira Takai, Daiwa Securities Co. Ltd., Research Division - Chief Analyst [3]

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Takai from Daiwa Securities. One question, please. Through the secondary offering, shareholder composition and makeup will largely change so that, including individual investors, it's been diversified to smaller size ones. And the lead manager will change. So with the change in composition, in terms of business management, do you intend -- do you plan to see changes? Or will you be changing your focus and emphasis through shareholder returns? Share buybacks have been called for by Mr. Flowers, and he is now no longer a shareholder. So starting next year, there may be a receding attitude on your part toward share buybacks? Are there are comments to this effect? Could you comment on that, please?

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Unidentified Company Representative, [4]

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JCF is no longer a shareholder and the representative of JCF, Chris Flowers, is no longer a director. And what does that mean? We've been receiving various questions, both positive and negative, as mentioned before. In terms of business, there's the factor, no impact. In terms of governance, Chris Flowers did not take the initiative in trying to enhance shareholder returns. So in that sense, it doesn't have too much of an impact. And attitude towards the shareholder returns, how is that determined? The major management issue is returning public funds. And towards this end, there are various schemes and -- a series of that schemes. But even before we talk about that, we have to raise the stock prices first and foremost. And that is something that I have always been explaining. And so steadily to increase the share prices, we believe this is a decent policy that we have to pursue towards this end. And also that policy, we need to pursue stable profits is one factor. It's the 3 factors. And through that increased valuation on the market and -- one of the factors in relation to this is to maintain high level of shareholder returns. The most recent profits to the most recent income, it's 50%. So compared to the average bank, the level is pretty high already, and we will keep this level in mind to enhance further. Our stance will not change. So just because of Chris Flowers is no longer there, we will not weaken or recede in terms of our stance.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [5]

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Any other questions?

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Katsuhito Sasajima, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [6]

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Sasajima, Mitsubishi UFJ Morgan Stanley. I have 2 questions. One, the impact of the U.S. interest rate reduction, including new project finance, what will be the impact on your lending? Whether that will be lead to the shrink of spread? And on Page 20, payment business. The account transfer or prepay cards and various things, which is growing most? And from this volume, the profit from this volume, the fee income, what's the level? And how much is the fee income?

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Unidentified Company Representative, [7]

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First, let me answer your first question. The second question, please prepare any quantitative data, if you have any. The U.S. interest rate reduction. Our overseas business or foreign currency-based business, most of them is structured within the scope of the structured finance, which includes project finance and real estate finance. So it's based on spreads. So the base rate reduction does not necessarily have the direct impact on those businesses. However, there are many deals in overseas, but the competition among financial institutions has been becoming more hard -- aggressive. So the spread is tightening in the environment. So whether that is the effect of interest rate reduction, partially, yes. But the background of this, for example, the struggling for the investment, I think that is more reflected in the current situation, I think.

And on Page 20, we don't have too specific information at the moment. Do you have any? We do not disclose a breakdown, but there is a payment transaction volume. So this is what we disclosed now, and we do not disclose breakdown.

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Katsuhito Sasajima, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [8]

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Is that all? Don't you have any more information?

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Unidentified Company Representative, [9]

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So you see increasing according to this volume. So according to this chart, fee income or fee, in a broad sense, are growing together for this -- the payment using this payment accounts, yes, the fees are increasing.

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Katsuhito Sasajima, Mitsubishi UFJ Morgan Stanley Securities Co., Ltd., Research Division - Senior Analyst [10]

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And can you tell the breakdown and which part is growing? Or do you have any comments?

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Unidentified Company Representative, [11]

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I may not tell this to you. We will take this offline, and we will respond to you separately. Sorry.

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Rie Nishihara, JP Morgan Chase & Co, Research Division - Head of Japan Bank Team [12]

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Nishihara, JPMorgan. 2 questions. Our first question is the following. Your unsecured loans, your main line of business, it's not the demand season. So CFO has said that new customers are on the decline. For several past quarters, new customers were on the rise. But from your guidance, compared to your guidance, it's slow. So compared to other players, the second quarter market share increase and the seasonal demand and other players are the same or are other players on the decline as well? Can you give us a relative evaluation of your stance? And the larger-size loans per borrower, could you comment on that? And the approval rate of 30% of the value track, when do you think you can deviate from this trend? Could you give us your present projections? And second point, improvement of -- productivity enhancement, you are working on special measures to derive effects from 2020 and thereafter. Optimization of unmanned branches, I think this is an area where there's much potential. What extent of expense reduction is involved? It's very hard to see, it's very nebulous, your planning at the moment. But what is the amount of impact? And what is the time frame? And then I believe this will be on your medium-term business plan, the present image and the cloud investment, additional factors, when will the effects be felt? Could you comment on these, please?

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Unidentified Company Representative, [13]

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Thank you. These are very insightful and sharp questions. On unsecured loan business, last fiscal year, more than we envisaged. We struggled to put the business on track. On Page 16, for example, as you pointed out earlier, we gave priority to balance. Unit price is going up. And we are conducting risk control in doing this. And the approval rate improvement is in the back burner at the moment. And going forward, the approval rate -- to improve the approval rate is a policy that we will be introducing, and that is the general thought. As for seasonal factors, other companies or our competitors' most recent term situation has not been analyzed by ourselves. So we can't give you the details, but we don't believe we're the only ones suffering from very special reasons, special factors. There are fluctuations, but we're not overly concerned. It's diverse and detailed approaches that we have accumulated to come this far. The balance has finally reversed to be on the increase. And last, we give emphasize -- emphasis to average balance. The next approach would be focusing on what I've just mentioned.

Application, there's a lot of application in terms of volume. We need to introduce policies to improve quality. And as is stated here, web smartphones to induce customers to use that, we would do that. And the 60-day interest free is something that we may -- we intend to make a regular product. Rather than doing a lot of commercials, we believe that this approach is by far more effective. So through these approaches, we want to continue. And frankly speaking, it took us much longer to get on track in relation to my expectations, but we are in the direction of going on track.

And on productivity enhancement, to look back on the figures, previous medium-term business plan, JPY 8 billion approximately of reduction in the expense base. That is what we aimed in terms of our policy. In the coming 3 years, JPY 6 billion and in total, on a consolidated basis, 10% of our expenses to be reduced. That is what we're addressing going forward. Unsecured loans, unmanned branches, there are 700 of these approximately. Broadly speaking, if there's a large decrease, it will have its cost effect. It's necessarily the same -- is the same as retail manned branches. As a channel, this is very high quality in terms of acquiring customers. Good quality customers do not use web -- the web, but they come to the branches, unmanned branches. So just to focus on costs -- to reduce is not what we're doing. That's why we use the word optimization. The major flow is such that the web and smartphones, there will be a shift to that. Bearing this in mind, however, the issue of cost and acquisition of customers and the quality of customers, we need to strike a balance between these factors. A lot of cost effect is not what we're expecting at the moment. The largest theme is data center integration and using the cloud, IT-related factors. It -- these are themes that require some time. But the effect is that much greater. In terms of CapEx, it's not a large amount that is required.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [14]

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Any other questions?

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Unidentified Company Representative, [15]

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It is true that the, not only the first quarter but the second quarter, we didn't have any major surprises, either positive or negative. So it is within your expectation, those financial results. So yesterday, at the call, we were asked, what should we ask. But this is a good opportunity. So we would like to receive more questions if you have any. Oh, they're busy, so you don't mind. Well, if you have any, yes, please. But we will not force you to stay. And yesterday, there were the financial results announced by megabanks. So I understand you're busy.

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Unidentified Analyst, [16]

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(inaudible) of Jefferies Securities. I have one question. The regional banks are in the regional revitalization and like they got SBI. While doing the business, they were making investments and -- to revitalize the corporate value, then they can gain upside as well. So there is actually a collaboration of regional banks emerging. So your traditional network with regional banks to expand your business, so as is recently seen, gain in your upside or the equity investment from Shinsei will be the possible option for you?

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Unidentified Company Representative, [17]

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Yes, of course, that will be possible. As you're aware, regional financial institutions, they have been very important customers for us. And even today, we have multifaceted collaborations, including project finance, syndications or loan guarantees. So with many regional banks, we are already transacting with them. There is no reason to eliminate the option for the investment. But that's not something to force them. So the needs need to be considered and to solve their problems as one of the tools if that is useful. And if that will be -- can enjoy advantage or merit for those, then that could be possible. And in reality, about 6 months ago, between Suruga Bank, when we had the business partnership, the business partnership itself is being discussed at the field level. In the other day, we had an announcement for the institutional area but the capital partnership is not eliminated as an option. So that is not limited to the Suruga. But in general, we are considering such options.

Let me give you the trend of the volume of the payment business. It's great. So payment for this first half, the profit, the rent service is JPY 1.27 billion and collection agent, JPY 5.27 billion. Same first half of the 2018 was JPY 1.2 billion and JPY 4.47 billion. So the both are increasing. So that is the overall profit.

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Hiroshi Ishii, Shinsei Bank, Limited - Head of IR [18]

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Are there no more questions? Then thank you very much for giving us your time.

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