Hiroo Unoura, President and CEO
Also in attendance:
Hiroshi Tsujigami, Senior Vice President of Corporate Strategy Planning Department
Takashi Hiroi, Senior Vice President, Director of Finance and Accounting Department
The following are the key points of comments given at the conference.
I hereby commence the announcement of the financial results for the fiscal year ended March 31, 2015 (hereafter, “FY2014”) and the financial forecasts for the fiscal year ending March 31, 2016 (hereafter, “FY2015”) for Nippon Telegraph and Telephone Corporation. Today’s conference will also include an explanation of the “Towards the Next Stage 2.0” strategy.
(Hiroo Unoura, CEO)
Financial Results for FY2014 and Financial Forecasts for FY2015
First, I would like to explain the financial results for FY2014 and the financial forecasts for the current business year.
The highlights of FY2014’s financial results are as follows.
Our operating revenues increased by 1.6% year-on-year to ¥11.0953 trillion, driven by the growth of overseas business and posting an increase for the fifth consecutive year. With regards to our operating income, while regional and data communications business saw growth, profits from our mobile communications business decreased by ¥181.5 billion, leading to an overall year-on-year decline of 10.6% to a total of ¥1.0846 trillion. This equates to a year-on-year profit decrease of approximately ¥130 billion. Due to the effects of NTT DOCOMO’s new billing plan, we announced revised financial forecasts in fall of last year, but unfortunately figures fell ¥10 billion short of the revised forecasts.
As I have mentioned to you all on a number of occasions, with the markets for fixed-line and mobile communications reaching a stage of maturity, about two and a half years ago NTT announced its “Towards the Next Stage ” medium-term management strategy. Within that strategy, we put forth NTT’s aim to reform its competitive model and business model. FY2014 was a year of unprecedented initiatives, including our “new billing plan” and “Hikari Collaboration Model.” As a result, the year ended up being a transitional period due to these new initiatives and can be summarized as being very difficult financially. However, I believe that the choice we made was a necessary one for continued growth in the future, and that the drop in profits was unavoidable.
Next, I would like to explain the revised medium-term strategy, as well as the financial forecasts for FY2015—the first year in which the new strategy will be implemented.
We expect operating revenues to reach a total of ¥11.35 trillion thanks to continued growth of overseas business. This would mean not only a six-year consecutive increase, but also the highest sales figure since the privatization of NTT. Incidentally, the current record for sales is ¥11.0955 trillion, posted in FY2003. For operating income, we expect a 10.6% increase (¥115.4 billion) for a recovery to ¥1.2 trillion. This forecast comes from plans to put NTT DOCOMO back on the track to recovery and from expected increased profits from NTT East/West and NTT DATA.
For net income in FY2015, we expect a 21.6% (¥111.9 billion) year-on-year increase to ¥630 billion. This prediction of a substantial increase is a result of factors such as the expected recovery of operating income, as well as decreased corporate taxes thanks to tax reforms that lowered tax rates. Please note that while net income for FY2014 had decreased significantly compared to the preceding year, the drop was in part a reflection of the fact that figures from FY2013 included profit accrued from the revised valuation of the Teishin Building.
Next, I would like to provide an overview of financial forecasts by segment.
At previous conferences I explained only actual results regarding performance of individual segments, but starting with this conference, we have decided to disclose our forecast for each segment as well. Explanations regarding individual forecasts will be omitted this time.
Continuing on, I would like to cover shareholder returns.
With regards to share buybacks, we repurchased 51 million shares worth ¥338.1 billion, primarily from the Japanese government. Dividends in FY2014 saw a year-on-year increase of ¥10 for an annual ¥180 per share.
Dividends for this business year will see interim and year-end dividends increased by ¥10 yen each (a ¥20 increase overall) for a total of ¥200 per share annually. For many years after NTT’s privatization, dividends remained at ¥50 per share, but starting with the first increase to ¥60 in FY2004, dividends have now increased fourfold in a period of 12 years. Additionally, at the board of directors’ meeting held today, it was decided that each share would be split into two shares, effective as of July 1, 2015. This move is intended to create an environment more facilitative to investment by lowering the amount of money required per unit of investment. Its implementation aims to expand the range of investors and serves to mark the 30th anniversary of NTT’s privatization. With regards to share buybacks for this fiscal year, we intend to consider the matter from July 1st onward, after the stock split takes place.
This concludes the explanation of financial results and forecasts.
“Towards the Next Stage 2.0”
Moving on, I would like to explain the “Towards the Next Stage 2.0” strategy.
At the announcement of mid-term financial results in November of last year, I provided an explanation regarding the core points of and thoughts behind this strategy. The timing of last year’s mid-term financial results was also when there were revisions for the large loss in profits by NTT DOCOMO. At that time, I said that as a company we would make a stop, clear open a new route, and then restart our upward climb toward the goal of growth in income and growth in EPS (Earnings Per Share).
With regards to our medium-term management strategy, I spoke of making a revised version that places focus on recreating our EPS objective and increasing profit, which serves as the numerator for EPS. Based on these core points, our Group companies carried out numerous discussions of the strategy. Today we announce the summary of the results of these discussions.
In the previous medium-term management strategy announced two and a half years ago, “ESP growth of 60% or more” was set as a key financial objective. A number of other financial objectives were set as milestones to achieve this goal. I will explain the progress of such as I cover the objectives of “Towards the Next Stage 2.0.” By and large, financial objectives are progressing favorably.
Next, I will explain the new medium-term management strategy.
The new strategy is similar to the prior one in its basic concept—“accelerate self-transformation towards a ‘value partner’ and embark on a profit growth track”—as well as in having two pillars within this concept—“accelerate profit generation of ‘global cloud services’” and “enhance profitability of ‘network services’.” However, the expressions used have been revised to “accelerate profit generation” and “enhance profitability.”
The second key point, “develop new markets by further promoting the B2B2X model,” is also the same as when it was announced alongside the mid-term financial results in fall of last year.
The third key point is the newly reestablished EPS growth objective. It was previously “60% or more,” but has been revised to a specific amount objective of “¥700 or more.”
Next, I will explain the financial objectives of the strategy.
The previous medium-term management strategy’s objectives were set to be achieved across a period of three years. The new objectives, however, are now all set to be achieved in the fiscal year ending in March 2018. The reason for this is that we intend the “New Stage” to be from FY2018 onward.
Also, we set the objectives to be achieved in the fiscal year ending March 2018 (i.e., FY2017) with the desire to complete the preparation for the “New Stage” by the end of FY2017—that is, during the time frame of this new medium-term management strategy.
Firstly, in order to achieve increased EPS of “¥700 or more,” we have set a consolidated operating income objective of ¥1.4 trillion.
The next objective is overseas sales and operating income for overseas business. In the previous medium-term management strategy, we had set a target figure only for overseas sales, at $20 billion. In the new strategy, we have added an objective for operating income as well. Our goal is to increase sales to $22 billion and achieve operating income of $1.5 billion by FY2017.
The other two objectives of “streamlining capital investment” and “cost reductions” are similar to the previous year’s medium-term strategy, but the way we have set the goals is slightly different, so I will explain them a little bit later.
First, I will once again explain the goal of EPS growth.
In the previous medium-term management strategy, the objective was to have EPS—which stood at ¥367 in FY2011—grow by 60% or more by the end of FY2015. Thanks to all those who have supported us, assuming we accomplish our business plans this fiscal year, EPS is expected to reach 62% growth, or ¥595, meaning we will be able to reach our objective.
In our new management strategy, we have set a new EPS objective; our reestablished goal is for EPS, which was at ¥474 as of FY2014, to grow to ¥700 or more within three years.
The previous strategy set a goal of 60% in four years; the new objective, when converted into a percentage from the base amount of ¥474, is equivalent to a 50% increase in three years. In order to achieve this, we have set what I consider to be two extremely challenging goals—consolidated operating income of ¥1.4 trillion and overseas business operating income of $1.5 billion that I just mentioned. Our plan is to focus efforts chiefly on profit growth. We plan to implement a variety of initiatives with regards to EPS denominators in line with the level of profit, such as share buybacks.
Carrying on, I will once again provide an explanation of overseas sales and operating income.
The previous medium-term management strategy set forth an overseas sales objective of $20 billion. This objective was set to be achieved by the end of FY2016—not this fiscal year, but the next. However, we have implemented a rolling revision of the objective to increased sales of $22 billion by the end of FY2017. We fully intend to do all we can to achieve this target, through M&A and organic growth.
Meanwhile, operating income of our overseas business for this fiscal year is $700 million, which equates to an operating income ratio of 4.5%. In the new strategy, we plan to increase operating income by $800 million over three years to a total of $1.5 billion, for an increased operating income ratio of 6.8%.
This, too, is an exceptionally aggressive objective, but our overseas group companies are extremely motivated to achieve it, and it is an objective that I, too, would personally like to endeavor to achieve.
In endeavoring to achieve profit creation in our global business, our overseas group companies will take the lead and form Group-wide Projects divided into a number of themes within three major categories. The Global Business Strategy Committee to be held this month will decide upon Group-wide Projects to be created, and the plan is for them to begin functioning immediately.
A number of Group-wide Projects have already been created through previous efforts, and we plan to continue to strengthen their initiatives.
I will avoid going into a detailed explanation, but of the three categories of Group-wide Projects, one is “delivering steady growth of sales,” and another is “thorough cost optimization.” Of the planned $800 million increase in operating income, we intend to achieve $500 million through this “thorough cost optimization.”
With regards to streamlining capital investment, to date we have carried out optimization of our domestic network business. The objective in the previous medium-term management strategy was to achieve “Capex to Sales”—the ratio of capital investment to sales—of 15% by FY2016. I believe that at its highest point, this ratio was over 20%, and even as of FY2012 it was at 18.1%. However, for this fiscal year’s business plan, the ratio is set to be 14.9%, meaning that we expect to achieve the “capex to sales” objective set in the previous medium-term strategy.
In the new “Version 2.0” of the strategy, this objective does not specify the ratio of sales to capital expenditure. Due to the continued difficult operating environment of our domestic network business, we intend to strive toward a new objective of streamlining capital expenditure by an amount equaling ¥200 billion or more. Capital expenditure in the previous fiscal year totaled at ¥1.7 trillion, ¥1.4 trillion of which was capital investment in our domestic network business. Our goal is to decrease this latter figure to ¥1.2 trillion, which translates to a 15% reduction.
In streamlining capital investment, we plan to focus on the three main goals of improving capital utilization efficiency, reducing procurement costs, and enhancing/optimizing IT systems in order to achieve the new objective.
As for our cost reduction objective, with the previous medium-term management strategy we implemented cost reductions of over ¥650 billion and achieved our target. For the next three years, we plan to continue and strengthen this initiative in a similar fashion. We will endeavor to achieve cost reductions of ¥600 billion or more with relation to fixed-line and mobile access.
In any case, I believe that our domestic network business will continue to face a very difficult operating environment in the future. Thus, we will implement these cost reductions while also make improvements to user services, price, and various other aspects of service. The new strategy also puts forth that we will establish simple, highly efficient business operations in line with environmental changes. Namely, our plan is to take FLET’S Hikari—the major product offered by NTT East/West—and through shifting to the “Hikari Collaboration Model” implement further business revisions in order to achieve optimization. At the same time, we plan to continue to examine initiatives aimed at optimizing our business operation systems for NTT DOCOMO as well. Based on these planned efforts, we set our cost reduction objective of “¥600 billion or more.”
Next, I would like to explain our endeavors geared toward the goal of “sustainable growth.”
In order to achieve sustainable growth for our domestic business, I believe that it is necessary not only to focus on cost efficiency, but also to enhance earning capacity.
As I have mentioned before, we will accelerate the migration to the B2B2X model by making good use of the opportunities presented by the Tokyo Olympics/Paralympics and the government’s “vitalization of local economies” initiative. In fact, a project for this very purpose was launched in April of this year. Specifically, we have started an LLP through contributions from various NTT group companies.
The plan is for NTT Corporation to take charge of a fund of ¥1.5 billion and promote partnering with wide-ranging business entities while also enhancing cooperation with municipalities utilizing ICT.
Through such initiatives we will collaborate with a diverse variety of partners to create new services with high added value and to establish new business. We would like to serve as a catalyst in supporting efforts toward the vitalization of local economies.
I believe that an extremely important aspect of vitalizing local economies is inter-region and inter-industry cooperation. ICT is a powerful tool and in achieving such, and thus I believe we can take on the role of catalyst.
Note that currently we have not set a numerical value regarding this objective of sustainable growth; I believe that we will be able to do so once we have reached the “New Stage.” For this three-year period, I think it is essential that we actualize a number of projects and establish precedents for the future.
Finally, I will explain the “mid-term agendas to be addressed.”
I think you can understand that the title “mid-term agendas to be addressed” was one that I had some trouble deciding. It refers to addressing mid-term agendas within the medium-term management strategy. It encompasses the following two specific points.
The first main point is “the state of universal services.”
In November 2010, NTT East/West announced their “General Outlook on PSTN Migration.” In reconsidering this general outlook, we intend to create a specific directionality during this three-year period.
Regarding universal services, last year’s 2020-ICT Infrastructure Policy Task Force organized by the Ministry of Internal Affairs and Communications stated, “For the time being, it is appropriate to maintain fixed-line telephones via the Universal Service Fund System.” I believe that it is time to commence full-fledged discussions on exactly how long “for the time being” refers to, as well as what will actually be done when thinking 10 to 20 years into the future.
While I do not believe that the Universal Service Fund System will change significantly during this three-year period, I do consider clarifying directionality to be an extremely important theme for business operations of NTT East/West after said period. We plan to offer more detailed discourse regarding such around fall of this year. Against this backdrop, our first theme to tackle will be moving on to the “next step” based on the opinions of parties including the government, other businesses, and all of our customers.
The second main point is “considering application of IFRS (International Financial Reporting Standards).”
Our plan is to switch over to IFRS starting from the 1st quarter of FY2018—the fiscal year following the end of the three-year period stipulated in the current medium-term management strategy—and thus we will commence considerations toward that goal. We already employ SEC standards (standards used in US accounting) for consolidated financial results for the NTT Group, but our domestic companies utilize Japanese standards. Meanwhile, around 40% of our companies—mostly overseas corporations—have already implemented IFRS. This means that accounting work becomes quite the difficult task; the process first requires conversion from SEC standards, and then changing back again. This creates the issue of announcement of our financial results occurring at this time of year.
Additionally, another factor behind plans to implement IFRS in FY2018 is the fact that the globalization of our business has advanced considerably. We utilize SEC standards in our consolidated results base, so the methods are not exceedingly different; the largest difference is that we calculate depreciation via a fixed percentage method. Towards our goal of introducing IFRS, we plan on switching over to a straight-line method. This switch is currently planned to take place earlier than FY2018. I will provide updates on developments, including the shift to straight-line method depreciation, at another time.
I would like to mention that the objectives of the new medium-term management strategy have been created with the financial accounting system that we have used to date. A change in the financial accounting system will cause numbers to change somewhat, but we intend to view these strategic objectives based on the system we have been using thus far.
This concludes my explanation of today’s report.