NEC Corporation (6701) Earnings Call Transcript & Summary

Hello, everyone. I am Osamu Fujikawa, CFO of NEC. Thank you very much indeed for joining us today. We are happy to see so many of you with us today. This is the third briefing on ESG. Once every year, we talk about our efforts, and this is an opportunity to have a dialogue with you about ESG. Every time, we receive your feedback, and that is indispensable for the improvement of our efforts. We would like to thank you for your feedback in advance and welcome your frank opinions this time. Thank you very much. Today, I'd like to first talk about why nonfinancial strategy is incorporated in the financial strategy of Mid-term Management Plan 2025 and also explain the efforts that we are making right now. After me, Mr. Shigeki Shimizu, Chief Supply Chain Officer and Sustainability Promotion Division Manager, will talk about NEC's efforts in the area of environment that are especially drawing attention recently among ESG activities. Now let me explain development of robust financial and nonfinancial measurement methodologies for sustainable growth. First, I'd like to once again show you the slide of Mid-term Management Plan 2025. In this plan, we are committed to realize the purpose or NEC's raison d'être by combining strategy and culture. The role of CFO is to promote financial strategy, to maximize long-term profit and to optimize short-term profit; and to promote solid finance for sustainable growth; and at the same time, maintain and strengthen nonfinancial measurement methodologies based on the strategy. In rapidly changing and uncertain era of VUCA, we believe that managing finance, which is performance indicator; and nonfinance efforts, which generate performance in an integrated manner, will lead to maintaining short-term, medium- and long-term sustainable growth and corresponding to business environment changes without missing opportunities. In this midterm management plan, ESG-based key themes or materiality of 2018 were redefined from the perspective of risks and opportunities according to business and societal changes. Also, we decided to pursue being continuously incorporated in ESG indices by managing finance and nonfinance in an integrated manner. This is based on the thinking that when the materiality is at the core of endeavor, as the progress reaches the level that can be externally evaluated, it will be included in ESG indices, and therefore, will have positive impact on financial performance. NEC is included in all major ESG indices, including the ones shown here. For example, we announced recently that NEC was included in World Asia Pacific of Dow Jones Sustainability Indices last month, 2 years in a row. Although steady progress is being made toward being continuously included in ESG indices, as you know, many evaluation aspects of ESG indices are currently based on risk management, and we believe there are issues in evaluating company's efforts to link ESG and sustainability with opportunities and growth. Also, it is not possible to measure how nonfinancial efforts directly impact our financial performance. From this fiscal year, we started to try to visualize impact of nonfinancial efforts on finance. Based on the results of the analysis, we will try to improve and enhance nonfinancial efforts. Reflecting your feedback on our efforts, we will build strong and resilient financial and nonfinancial measurement methodologies in medium to long term. Let me introduce our efforts to analyze impact with ABeam Consulting, which is one of our group companies. ABeam Consulting has digital ESG data analytics as a system to support ESG management. Using this, we analyzed correlation between NEC Group's 273 nonfinance indicators during 5 to 10 years and PBR. Results show that 25 out of 273 contributed to improved PBR. 15 of 25 were human capital-related indices. This is one of the examples. NEC monitors the number of female department heads or higher to see the progress of diversity. The results show that 1% increase of female managers led to 3.3% improvement of PBR in 7 years. As for training days per employee, 1% increase brought 7.24% higher PBR in 5 years. With regard to human capital, using NEC's proprietary AI-based solution Causal analysis, we are trying to visualize the relationship between different indicators. By entering seemingly related data, we can understand not only causality but also the strength and direction of causality. It's an excellent solution to understand the causal relationship between different factors. With this solution, in November this year, NEC received the Grand Prix Award in the People Analytics category of the Digital HR Competition 2021 held by the People Analytics and HR Technology Association. Let me briefly explain the initiative. First of all, as shown on the left-hand side chart, from the employee engagement survey conducted every year, we knew that we had to improve employee engagement if we are to motivate employees to take initiatives proactively on their own discretion. To understand the factors behind this program, we conducted a Causal analysis using manager behaviors shown on the right-hand side that employees want their managers to use according to the 360-degree survey. The results are shown on the right-hand side. Sorry for the busy chart, but we were able to confirm that individual discretion can be improved by giving psychological safety to subordinates, and psychological safety can be secured when managers are able to communicate emphatically with subordinates; or in other words, if they are able to show a clear direction of the team and interact with subordinates in a way that promotes subordinates' talent development. These results are consistent with what the company is trying to do: empowering and delegating to people by articulating job descriptions under the new job forecast employment system. We will use these analysis results in formulating measures to improve managers' communication capabilities as well as employee engagement. In addition, having confirmed that our causal analytics technology, which is fully automated and handles a large amount of data at high speed, is effective in answering nonfinancial questions which are usually qualitative and difficult to quantify, we will continue to utilize this solution to develop more effective initiatives going forward. Based on these analytics results as well as the ESG index assessment results, we have decided to implement the following initiatives focusing on human capital and natural capital. First, with regard to human capital, our Chief HR Officer, CHRO, and his team, will identify drivers for improvement and develop and implement effective measures to achieve an engagement score of 50%, which is the target for the medium term. In addition, the analysis is conducted this time focused only on the parent company. But in the future, we would like to promote nonfinancial analysis of the entire NEC Group on a global basis. In addition, with regard to natural capital or environmental initiatives, we will be verifying the impact of those on financial performance through visualization of CO2 emissions and other measures, which Mr. Shimizu will elaborate later. The methodologies to measure the impact of nonfinancial initiatives or financial performance explained today are yet to be verified and completed at this point in time. We will continue to share these concepts and the methodologies with our investors so that with your input and feedback, we can identify those nonfinancial initiatives that can truly enhance our corporate value and allocate adequate investment to such initiatives. As you can see from the results of the analysis conducted with ABeam Consulting, it takes time for nonfinancial initiatives to have an effect on financial performance and to be managed in an integrated manner with financial initiatives. However, building a solid nonfinancial base will not only help building a strong and resilient financial base over the medium to long term, but is also necessary for NEC to continue to create value for society. By providing value for society and otherwise by embodying our purpose, we believe we can contribute to the sustainable growth of not only our company but also of society as a whole. In order to flexibly respond to rapid changes in society and build a nonfinancial base that supports sustainable growth, in April this year, we have established a sustainability promotion division as a corporate planning function. The division is responsible for nonfinancial activities while focusing on materiality to enhance corporate value over the medium to long term. In particular, climate change is a serious social issue that requires an urgent and effective global response. As we promote nonfinancial initiatives, it's imperative for us not only to reinforce our internal initiatives but also to promote the environmental business, utilizing internal experience as reference cases. In addition, the environment is a theme that should be considered for a long-term perspective, such as for 2030 and 2050. And it's an area we must address in order to create empathy for the future, as stated in our midterm management plan. NEC's environment initiatives will be shared with you later in this meeting by our Chief Supply Chain Officer and Sustainability Promotion Division Manager, Mr. Shimizu. This concludes my part. Thank you very much for your kind attention.

This is Shimizu speaking. Efforts for environment include not only climate change but also transition to circular economy, conservation of biodiversity and many other themes. NEC, for example, provides solutions for disaster response and management and others to adapt to climate changes. Today, I'd like to focus on our efforts to realize carbon neutrality, which is a global target vis-à-vis climate change. As you know, there's a strong demand for companies to show commitment and disclose information to realize global low-carbon society. To keep the average temperature rise below 1.5 to 2 degrees centigrade from preindustrial levels by 2050 in addition to SBT 1.5 degrees centigrade and RE100, target of zero emission from entire supply chain is being included in the commitment, and financial sector is more focused on company's climate change countermeasures and is demanding information disclosure. Since setting the environmental target more than 20 years ago toward decarbonization, NEC has continuously disclosed our progress. In 2000, we formulated environmental vision to balance CO2 emission from business activities and reduction of CO2 emission from customers and society and achieved targets early in 2009. In 2010, target to increase contribution in CO2 reduction 5x that of our own CO2 emission was established and achieved in 2019. In 2017, target to reduce our CO2 emission to net zero by 2050 was set up and this year, we updated this target. And in the midterm management plan announced this year, carbon neutrality-related businesses are positioned as growth businesses. Today, I'd like to talk about carbon-neutrality efforts of NEC and its supply chain and contribution to carbon neutrality of customers and society through business activities. Through these 2 efforts, we will realize living harmoniously with the earth to secure the future stated in NEC 2030 vision. Let me introduce efforts for carbon neutrality of NEC and its supply chain. In FY '21, as you see on this slide, we reviewed and enhanced our long-term targets to reduce CO2 emission from NEC and our supply chain. As for SBT, we revised it from well below 2 degrees centigrade to 1.5 degrees centigrade and was recertified. NEC joined RE100 targeting to achieve 100% renewable energy used in all our operations in 2050. And we signed business ambition for 1.5 degrees centigrade. And now we are committed to reduce CO2 emission from the entire supply chain to net zero in 2050. Let me specifically show how the conventional CO2 emission-reduction targets changed significantly. Until now, target was to reduce Scope 1 and Scope 2, that is direct and indirect CO2 emission from NEC, down to net zero. Now this target is expanded to entire supply chain. Revised target is to reduce CO2 emissions from the entire supply chain to net zero. In order to achieve a 2050 target, 2030 milestone is SBT 1.5 degrees centigrade. SBT 1.5 degrees centigrade for NEC means 55% reduction of Scope 1 and 2 emissions and 33% reduction of Scope 3 emissions compared to fiscal 2017. More specifically, in order to reduce Scope 1 and 2 emissions, we are working to improve efficiency, introduce more renewable energy facilities and purchase green electricity. For Scope 3 reduction, we promote suppliers' effort through engagement to decrease CO2 emission from upstream Category 1 procured goods. As for downstream Category 11, CO2 emission in use of products, we are promoting the development of more energy-efficient products. In reducing Scope 1 and 2 emissions, we are introducing more renewable energy facilities. We have decided to install solar panels on all the roofs of NEC Group facilities and promoting the expansion of installation. We plan to install the total of about 8-megawatt solar power generation by fiscal 2023. As for purchasing green electricity, we decided to use 100% renewable energy for headquarters building as well as for operation of our cloud platform services, NEC Cloud IaaS, from fiscal 2022. Through these efforts, we will steadily reduce CO2 emissions from our businesses. In order to reduce Scope 3 emissions for upstream Category 1, we would enhance and expand engagement with suppliers by making NEC's action policy known to all suppliers and through supplier award system, seminars and workshops, case study presentations and provision of know-hows. For downstream Category 11, our target is to improve energy efficiency by 5% every year based on FY 2013 level and to reach 90% in FY 2025. These efforts have been well received by those outside of the company. The CDP results for the current fiscal year were just released the other day. And for climate change and water, the company received an A-list rating for the third year in a row. Next, I will talk about the business activities that can contribute to the carbon-neutral initiatives of our customers and society. In the midterm management plan formulated this year, carbon neutrality-related business is positioned as a growth business. And as a specific example, we will extend the NEC Resource Aggregation business to related businesses to realize our contribution to a decarbonized society. For the mid- to long term, we will promote greening of the core businesses defined by the midterm management plan while reinforcing and expanding the Resource Aggregation and other carbon neutrality-related businesses, as discussed earlier. Let me take you through some of these initiatives on next pages. First, let's take a look at the existing carbon neutrality-related businesses. The diagram shows NEC's comprehensive solutions for customers' decarbonization efforts. Starting with the visualization of CO2 emissions, we clarify the areas and issues that the customer needs to address and provide total support from the planning to goal setting to progress management. Let me explain 3 of these solutions. One is functional enhancement of Green Globe X, which enables visualization of CO2 emissions. Another is NEC Cloud IaaS to reduce CO2 emissions from customers' information systems. And resource aggregation service, which supports electricity balancing, is essential for the future expansion of renewable energy. First, Green GlobeX is a solution that collects and analyzes environmental impact data from each customer site and supports external reporting and information disclosure. The solution has been widely adopted by customers in the manufacturing sector. As for CO2 emissions, we were able to capture only Scope 1 and Scope 2 emissions in the past. But with the ongoing functionality enhancement, we should be able to manage the entire supply chain going forward, including Scope 3. In addition to CDP, we have also enhanced the functionality to help customers responding to various ESG surveys, greatly improving the efficiency of compiling and disclosing environmental information, which will be increasingly important in the future. Next, NEC Cloud IaaS is a cloud infrastructure service provided by NEC. The service will be provided using 100% renewable energy. For example, customers who are shifting from on-premise to cloud services can use NEC Cloud IaaS at 100% renewable energy cloud service and reduce scope 2 emissions without increasing Scope 1 or Scope 3 emissions since the service is based on 100% renewable energy. Thus, the service can greatly contribute to the decarbonization of customers. The third service is RA Cloud Service launched in October this year. This service allows customers to participate in the electricity balancing market by managing and controlling their distributed power sources, while the NEC itself is also participating in the balancing market as a resource aggregator. At present, we are beginning to study the feasibility of electricity reading service, which uses the same technology as the Resource Aggregation service to effectively utilize customers' distributed power sources. Starting in FY 2022, we will begin a demonstration at our Abiko factory. In this way, through the Resource Aggregation business, we hope to promote the rationalization and optimization of surplus electricity being wasted in society and contribute to carbon neutrality of society. In addition to enhancing the functionality of these existing solutions, we are also strengthening efforts to create new businesses. In Denmark, an environmentally advanced country in Europe, we are combining the solutions of KMD, which has a track record in energy management and CO2 visualization with more than 150 corporate clients with NEC's latest artificial intelligence, to create a new business of green digital government. We plan to commercialize this business not only in Europe but also in other countries, including Japan. We are also working to make our ICT infrastructure greener. In addition to the energy saving, O-RAN and ICT infrastructure, we are working also on the development of innovative infrastructure and devices, such as the IOWN concept together with industry and university partners. In this way, NEC is steadily promoting carbon neutrality within the group to achieve the goal of coexisting with the planet earth defined as part of the 2030 vision and is contributing to the carbon neutrality of society as a whole by providing solutions based on our own experiences. As Mr. Fujikawa explained at the beginning, we will build a strong financial and nonfinancial basis and promote carbon-neutrality initiatives in order to improve corporate value and realize NEC's propose. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]