Sojitz Corporation (2768) Earnings Call Transcript & Summary

Thank you for attending Sojitz IR Day today. In the second quarter, financial results of the fiscal year ending March 31, 2023, announced earlier this month, we revised upward the full year forecast to JPY 110 billion. Despite the impact of various external factors, we are confident that we are moving into a new profitable stage, adopting local, market-oriented initiatives, collaborating proactively in and outside Sojitz and striving for speed that do set forth in the current medium-term management plan 2023, which have steadily penetrated within our group. We will continue to move forward without slowing down as we aim to become a general trading company that constantly cultivate new businesses and human capital by taking change as an opportunity to promote transformation of our organization and human resources. Today, in order to show how we are moving ahead in transforming our company, we hold this Sojitz IR Day with the theme of delivering the real voices from the front lines regarding our value creation story, digital transformation and governance, which is the foundation that supports value creation. The first part is our Energy Solutions strategy, which is an example of our value creation story. The integrated report published in September 2022 also focuses on this as a story of value creation. Sojitz has formulated the sustainability challenge, our long-term vision for 2050 based on the key issues of sustainability and on the concept of 2 values, value gained by Sojitz and value gain by society. We believe it is important to focus on creating businesses that contribute to CO2 emission reductions during this major social change as an opportunity. Furthermore, as you all know that one of the focus areas of our investment strategy for growth is the social infrastructure and healthcare area. The transition and future prospects of our Energy Solutions business towards the realization of a decarbonized society will be presented by Mr. Nishikawa, Executive Officer and COO, leading the Infrastructure & Healthcare Division, who was also featured in the integrated report. We hope that everyone will be able to experience even if only a little, the strength of our company, the way our personnel with diverse backgrounds are creating new businesses with free ideas. And the Sojitz corporate culture that supports this growth. Then we will take up the issue of digital transformation. The digital transformation strategy is key to Sojitz's goal of becoming a general trading company that constantly cultivate new businesses and human capital by 2030. We have appointed Ms. Tomomi Arakawa, who served as the first CDO of IBM Japan as our CDO and accelerating creation of new businesses and implementation of digitalization that lead to the transformation of business models while also promoting the development of digital human capital. Today, Mr. Kanetake, Executive Officer and COO of Automotive Division will join CDO, Arakawa to show how we are transforming our company and working towards the creation of new value by crossing digital technology in the front lines. To conclude this event, as corporate governance to support this transformation, our external directors Mr. Otsuka, Ms. Saiki, Mr. Shu and Ms. Kokue will introduce our governance structure and [ yesterday ] has corporate value in the form of a panel discussion. Actual cases or Board of Directors involvement will be shared and questions from you will be answered directly so as to show the current status of support and oversight extended to our executives. We hope this will be an opportunity for you to deepen your understanding of our company. Thank you very much for your attention.

My name is Takefumi Nishikawa, and I'm the Head of Infrastructure & Healthcare Division. I'm honored to speak to you today. Let me introduce myself. When I joined Sojitz, my first job was to export power and industrial infrastructure equipment to Southeast Asian countries and financing arrangement. Around the middle of the year 2010, I worked on IPP power generation businesses in Southeast Asia, the Middle East and Americas and managed various projects. After that, I was transferred to Corporate Planning division. I took the current post in this fiscal year after I gained corporate-wide experiences. Next, I would like to introduce my division. It consists of 5 departments here, an Nissho Electronics, LNG Japan and other group companies. 3 departments themes are what the mid-term business plan calls essential Infrastructure business. The 3 departments from the left are working on transition to no carbon energy. They are in charge of renewable energy, thermal power generation, energy saving and midstream and downstream energy business, hydrogen and ammonia. The third and fourth departments on the left are working on the theme of communication city development and the social infrastructure. They are in charge of industry park, urban development, ICT Infrastructure and nuclear power-related businesses. The Healthcare department on far right is working on the theme of healthcare. It is in charge of PPP projects, peripheral services at private healthcare facilities. This slide shows the past and the current mid-term business plans, their main businesses and features. The bottom row shows investment made during the 2017 mid-term business plan from 2015 to 2017. The role above that shows the 2020 mid-term business plan. The top row shows the 2023 mid-term business plan and the investment already made or to be made. Figures shown there are from the left, the total investment amount during each mid-term plan period, outstanding investment forecast at the end of the current fiscal year and the earnings contribution forecast during the period of the 3 plants to be booked in this mid-term period and the average ROI. The average ROI for the 2023 plan is lower than others. This is the cause of return on investment in building new infrastructure assets, such as in IPP project is recognized after the completion of construction. It will, therefore, take time for the average return on investment for 2023 plan to improve. Meanwhile, we work to record more returns by withdrawing from loss-making or low-profit businesses, improving our earning power and margins in existing projects promoting business type investment, which I will explain in a minute. On the far right, you will see features of each business. You can see changes in our forecast in response to changes in our competitive landscape and more calls for decarbonization. Look at the top row and the major businesses in the 2023 plan, we are participating in the Spanish electricity retail business. Renewable energy projects are attracting long-term low-cost financing because of more calls for decarbonization and stable income expected from such projects. As a result, competition has intensified, and it has become difficult to undertake renewable projects. That's why we are vertically integrating the Spanish company, its power retailing with our power generation business rather than undertaking a straightforward renewable project on our own. This complex renewable energy power generation business would enhance our value and gain our competitive edge. While IPP infrastructure and asset type investments, such as renewable energy projects can generate stable returns, they have limited upside for business growth and value enhancement. We are also focusing on investments where we have deeper involvement. Our ESCO business initiative in the U.S., shown in the major business column is the case in point. In this business, we have a sensible ownership as a majority investor. We are also taking advantage of our partners' existing business and customer relationships to create a new business. This is what we call business type investment. I'll come back on this point with more detail when I speak to our local staff in the U.S. Next, I would briefly talk about consolidated net income for our division. Our initial forecast for our division's consolidated net income was about JPY 9 billion. It has been revised upward to JPY 12 billion when we released an earnings report. This is due to the sale of a portion of our ICT business and upswing in revenue due to soaring gas prices. We aim to earn about JPY 20 billion in the next mid-term business plan through improvement in profitability of existing businesses and adding new businesses. We introduced the theme beyond Energy Solutions in our value creation story section of our group report. We would like to elaborate on the theme, giving you a story about what's really happening on the ground. I hope you will have a time to read the value creation story in our group report. I will briefly touch upon part of the story related to the themes that we are working on. As is shown in the slide, our roles in Energy Solutions business has been changing in line with the changing trend of the times and the social needs. Starting from the bottom left, we had the role of delivering gas, coal and other resources from overseas to Japan since the height of rapid economic growth to help our resource potential, thinking the time when Japanese companies expanded overseas, we leveraged our trading house network, technological and financing capabilities to sell equipment in collaboration with Japanese energy and engineering companies. More recently, our role has shifted to that of organizing power and renewable energy IPP businesses using our global network, equipment, procurement and financing and partnering capabilities with Japanese power companies. I believe that our company's mission has been to provide high value by outgoing our previous roles so that we can respond to changes, evolution of business environment and the growth of our partner companies. In the process, we have gained a solid culture of change, and we are going ahead with changes without fear. Environment surrounding energy has changed dramatically over the past decade. During the past year, the Russian invasion of Ukraine has triggered a fundamental review of energy policies in many countries. We are being asked to cultivate our roles and business model as a company, advocating decarbonization. The way we involved in projects and the business is also changing in the ESCO business in the U.S., by investing in majority stake, we are working with the company we invested in and its management team as a business partner rather than merely an investment partner. What's more addition of our unique value helps create a new business. In this business, we use the information provided by the inner circle of our local partner to identify new needs and business opportunities in the energy field. We will harness strong trust between our partner and its customers to develop and propose a new business. These initiatives are already underway and bearing fruit. We are later joined by 2 people at the forefront of the U.S. ESCO business who are working on in close collaboration with the local management team, their stories will tell you about why we got involved and what they are working on. Before that, let me give you a brief overview of McClure Company. McClure is our partner in the U.S. ESCO business. It's based in Pennsylvania. It is an engineering company and ESCO, specializing in HVAC, heating and cooling equipment and electricity. Last year's revenue was about $200 million or JPY 28 billion. It employs about 130 people. Its main customers are municipalities, universities, schools, hospitals and pharmaceutical companies, mostly in Pennsylvania. It offers a full range of services from energy conservation consulting, designing and instillation to maintenance. It has solid relationships with local customers, thanks to its technological advantages. It posts a leading market share for the K to 12 or kindergarten to 12 grade schools and hospital segment. The chart describes our business model. For schools, we'll first determine to what extent energy efficiency can be improved in a district to our prospective client, then we estimate how much the client can save in energy cost in mid- to long-term. We did propose a design and work schedule along with the estimate. Specific items we offer include a highly energy-saving LEDs, boiler, air conditioning and piping. After receiving the order, we will develop a design -- detailed design, procure equipment from makers and suppliers install them and receive payments from clients. This is a simple business model of engineering companies. In recent years, follow up our generation project, taking advantage of subsidies from the U.S. government have become part of our work. We'd like to briefly talk about the U.S. ESCO market using Slide 14. This bar chart on the lower left gives you an idea of what the ESCO market is like. You can see the U.S. ESCO market is much larger than Japan's. Next, look at the 3 encircled numbers in the center. The figures represent per capita energy consumption. The U.S. energy consumption is 7.7 tons which is much higher than Japan and the average of the industrial donations of OECD. Therefore, you can say that United States can save much more energy and has an ESCO market with large potentials. Energy saving businesses are expected to flourish going forward. It is against this backdrop that Washington is providing general subsidies to ESCO businesses. For example, when the solar system is to be introduced to a school, subsidies are provided upfront to cover initial CapEx. We believe we will continue to see robust growth of the ESCO business. This slide summarizes McClure's competitiveness. It's strengths lies slide in its ability to make a proposal that is aligned with the needs of schools and other customers, and to offer a comprehensive package of services from consulting, designing, installation and after-sales services. But McClure had weakness in financing before we got involved, as shown in the bottom of this slide. Because of financial constraints, McClure had been reluctant to take on projects that require additional financing or projects whose contract prices exceed certain levels. It had also avoided projects where it had to contribute capital or to own assets. As I mentioned earlier, it has been focusing on businesses where it sells out the package of services from designing, construction and maintenance. When we teamed up with McClure, we discussed the company's growth strategy with the management team. We then determined further growth would require an expansion in the business scale and the development of solar power generation as a business rather than a limited time engagement that ends with a sellout. We felt necessary to embark on a business that may come with a temporary funding burden or ownership of assets for establishing businesses. After a series of discussions, we agreed and started to work for proposing high-value solutions for customers so that company can grow further. Now I'd like to talk to people in the U.S. who are actually engaged in the business. Before starting conversation with them, I will play an introductory video of the company. While I play that video, you can take a glance at it. At this point, I will introduce to you Mr. Toshinori Kawahara, Chief Development Officer at McClure. He is seconded to the company; and Mr. Shu Takeoka, who is in charge of McClure at Sojitz Corporation of America. Kawahara-san, briefly introduce yourself.

Hello, everyone. My name is Toshinori Kawahara. I currently work at McClure. When I joined Sojitz in 1995, I was initially in charge of accounting related to plant exports and supported filing tax returns with tax authorities of host nations. After that, in 2001, I was transferred to a department for electric power projects and have stayed in this field until today. I was then transferred to New York in May 2017, then Huston. I started working at McClure in August 2020. Thank you very much for your time today.

Thank you. Next, Takeoka-san. Please introduce yourself.

Yes. I'm Shu Takeoka from Sojitz Corporation of America. Like Kawahara-san, I have 12 years of experience in the electric power field, including EPC businesses in the Middle East and IPP businesses in the U.S. Currently, I'm in charge of new business development in the area of energy transition, mainly ESCO businesses.

Thank you. First of all, I would like to ask you to explain why Sojitz suddenly got involved in ESCO businesses overseas? Sojitz have not done the ESCO business even in Japan, let alone overseas. Could either of you tell us why?

I will briefly talk about the background and the challenges at the time. As I said earlier, I have been working in the U.S. since 2017. My main responsibility at that time was promoting investment in infrastructure, especially power generation and similar infrastructure. Later, Mr. Takeoka was assigned to New York. We were considering an expansion of IPP. In the United States, compared with investment in assets, the bar was a lot lower for investors to put money in packaged projects by the nature of their structure. We were feeling that the competition was heating up every year in this field. At the time, we thought we should explore a business model that makes use of infrastructure rather than making money from infrastructure. So our team narrowed down themes to power retailing and energy saving and we decided to conduct research on such prioritized themes. Takeoka-san took initiative in research on U.S. ESCO business and spearheaded study. Takeoka-san, please feel free to add anything to what I just said.

When I researched the ESCO business, I found that used electric power on both the generation and consumption side. And on the consumption side, electricity is used in areas such as air conditioning and lighting. Just as the generation side the consumption side have issues like the need for financing when installing the equipment, the need to identify the optimal power supply configuration and the need for a backup power supply despite the lack of CapEx. That is very similar to the business we have been doing and found it a quite interesting field.

Thank you very much. When I was working in the U.S., I was in the same team and found that the business environment and the power generation side was becoming increasingly competitive. And I also felt that we might be able to leverage something that was unexpectedly similar to what we had done in the past on the demand side as well. At the time, Shell gas was on the rise and gas prices were falling. On the generation side, there were, of course, businesses such as long-term PPAs, but there were also quite a few IPP type businesses that made money on gas margins. And when gas prices fell it's business environment became a bit difficult. So at that time, it was difficult for them to pursue the IPP business locally, and they were wondering how they should make changes. The other day I was talking with them about it and in the demand or consumption side, the company does not experience tough situation so much or prices do not fall. So I remember there was some discussion about investigating the not so much worse environment or less volatile environment than the generation side. With this background in mind, while we continue to pursue IPP project as asset type business when we find a good project. But now we have just begun to focus on the ESCO business.

Next, I would like to hear from both of you about the appeal of McClure.

I have been working at McClure since August 2022 officially on secondment but physically, I have been in charge of PMI and various other tasks at McClure since February of this year, which is about 10 months ago. Initially, I had an image of McClure as a U.S. company, where competition among employees and staff was intense with a high turnover rate. But actually, in this company, everybody is always smiling. There are serious at work, of course, but they always have a smile on their faces and it is very common to be with the company for 20 years and the President and the senior management worked for 30 years or even 40 years. It can be described as a homey feel and everyone works with loyalty to McClure and the great pride. These features characterize their atmosphere or culture. Another point is that although it is an ESCO company, its original business is a mechanical contractor. As Mr. Nishikawa explained earlier, the company's strength lies in its ability to provide everything like design, construction and maintenance services in an integrated manner. It is a company with a long history, but I feel that it is a very homey company with a good atmosphere.

It is a little surprise that its employees have been working for the company for so long but many people are doing so in Pennsylvania. And also many of engineers are graduate of the engineering department of universities in Pennsylvania. So it is a company with deep roots in the local community. They have about 650 customers, and I feel that their business model is very unique and not easily shaken as they emphasize on relationships with the local community and customer contracts and have a strong technological capabilities.

Now I would like to go a little deeper into the new business that I mentioned earlier. I explained that the solar power generation business has been added and more value will be created by our participation. Can you introduce some of your current initiatives to increase the value of solar power business after the acquisition?

Okay. I'll go first. The power capacity of the state of Pennsylvania is about 30 gigawatts, but even today, they have installed solar power equipment for about 600 to 700 megawatts only. The state has mainly focused on coal and gas-fired power generation. Therefore, it was lagging behind other states like California or New York. Originally, when we joined their business, McClure had installed equipment for 7 megawatts and 2 deals for high schools. But we told McClure that Sojitz would support them to provide financing to customers. So now the pipeline has expanded to about 75 megawatts. We expect to start construction for 25 megawatts of that by the end of FY 2023. In fact, there are 500 school districts with 3,000 school buildings, so we hope to increase the growth rate of the pipeline at a higher pace going forward.

Let me add one more point. The numbers mentioned now indicate the scale of the potential business for the state of Pennsylvania. As Mr. Takeoka just explained, the latest data in Pennsylvania for 2021 shows that there are only 108 schools that have installed solar power system. The total capacity is a little over 28 megawatts. As Mr. Takeoka said, we plan to start construction for 23 or 25 megawatts by the end of FY 2023. And I think you can tell how large the scale is. Thank you.

We have such potential. But considering the current situation, there will be more competition in the future, so we need to act quickly. Also, as I mentioned earlier, the company has a very close relationship with school districts based on the technical reliability. With that, we are now making better proposals from the customers' perspective. Some school districts accept proposals rather than bid. So we are developing this business with a sense of speed. With our participation, we are now moving forward with a business model in which we are not only selling out, but also with an IPP-type business model, that is to own assets or bear a certain level of financial burden and pass those assets on to the successes. In addition, I'd like to know about business models or businesses using McClure's customer base that you are currently considering. Will you explain what your future prospects are and what kind of business seeds you have in mind? Mr. Takeoka you go first.

First, for schools. The U.S. government is making great efforts to convert school buses to EVs. And in Pennsylvania, 79 electric buses have recently been provided free of charge. Electric buses and vehicles were originally designed only to be charged, but we are now proposing a solution for schools that goes one step further so-called vehicle-to-grid or V2G, in which the buses are discharged during their standby time. School buses are out of service, 90% to 95% of the year. And during the summer, when demand for electricity is at the highest, schools are not open due to summer vacation. We are currently working on the shift of the business model from paying money to the grid for charging to earnings revenue from the grid through participation in the frequency adjustment market by discharging electricity to the grid or arbitrage of daytime and nighttime electricity.

I'm not sure how much potential there is for buses. As I hear, the price of EVs is quite high. So I don't know if they can be completely replaced in a short time. In terms of potential, what is the number of school buses in Pennsylvania right now?

About 30,000 buses are registered for 3,000 schools. With such potential in Pennsylvania, we'll propose the conversion to electric buses in the combined effort with such as solar power generation with the government support and offering various solutions. As storage batteries, 30,000 buses would be equivalent to several or 4 gigawatt hours, I suppose.

Yes, it is 4.5 gigawatt hours. That is the potential scale of this business by bringing them together. We are not looking for a small business but rather a next business of renewable energy to be conducted in a large scale as we use such a platform. We have engaged in the storage battery business for stand-alone batteries in Japan and overseas. However, it is difficult to see clearly how much electricity will be sold for or purchased for but by utilizing the idle time of electric buses in this way, we could create new business patterns. We have not fixed our plan yet, but Sojitz is now looking for such businesses in the field.

Now let me change the subject a little I'd like you to briefly talk about the partnership with the management team at McClure. What kind of difficulties you are facing? And what do you think is going well? We are talking about ideas for new projects, but I wonder if the management team at McClure will agree with those ideas so easily. What kind of relationship do you have now for the cooperation with the management and the staff who have been with the company for a long time?

As I said earlier, I personally have been working at McClure for about 10 months. They do have a certain degree of trust in Sojitz as they have accepted our investment. However, I am viewed as a former employee of Sojitz sometimes even though I work as an employee of McClure. Therefore, in our daily conversations, I always say, for the benefit of McClure to show how much we consider the benefit of McClure in making various proposals. By making concrete proposals as we keep in mind that we represent the interest of McClure. We win the trust of each and every individual. I believe this will further strengthen the trust in Sojitz as a whole. So we conduct dialogues with an awareness of making concrete proposals on a daily basis.

Mr. Takeoka, do you have anything else?

Originally, it was an engineering company. But as for the employees in their 40s, their interest do not lie only in construction work. As they listen to the voices of the customers, they are interested in various other aspects of businesses such as solar business, Energy-as-a-Service, EVs and digital. They are busy in their daily work, but they have a strong desire to try new things. I think there was some resistance at first to working with a Japanese company, but when I told them that the Japanese company actually owns, for example, my favorite maker's mark, they started to feel an affinity with us and I think we are gradually building mutual trust.

Thank you. As you heard in the introduction, they have been involved in technical fields for a long time. And I think this makes it easier for them to talk about technology. And that is why the hands-on approach has been relatively working well. This was not mentioned, but in the hands-on process in majority investment, for example, the governance of a company is often taken as a topic of discussion. In this regard, the automotive division has engaged in the dealership business in the U.S. for a long time, and they have experiences of integrating the culture of a company and its rules and regulations. As Mr. Takeoka sometimes says, I suppose they have been able to successfully integrate those things by referring to such cases in the past, and this makes it possible to have good conversations about governance and rules, growth and so on. We have run out of time. So I would like to end our conversation here. That is all from us.

I found your story about McClure quite interesting. If possible, could you give me the idea of the scale of this business? You told me net sales in 2021 was about $200 million. What was the margin like? You also said when you first approach the company for investment deal, the company had the capacity of only 7 megawatts and could not take on large projects because of financial constraints. But you also said it now has a capacity of 75 megawatts in the pipeline. And by 2023, it will have a capacity of 25 megawatts. Am I right to assume that profit levels will take off in 2023 or 2024? I'd appreciate you could answer my questions. Thank you.

Thank you for your questions. In terms of profit levels, although we cannot say specific numbers for net income at this point, its margin is at reasonable levels. The company is growing at 10% or so as we speak. There is no reason why we cannot expect this kind of growth rate next fiscal year, considering calls for decarbonization and generous U.S. federal subsidies. Its solar power business has about 75 megawatts in the pipeline. To give you an idea of the scale of the business, we believe the business would require JPY 5 billion in additional investment to cover all expenses and costs involved. If we can create a business model in which the business will generate recurring profits, or the project that can be sold after recouping investments that will make it more efficient, we can expect additional profit from there. It may take a little more time for the electric bus business to take off but I think there are various other cross-selling opportunities as well.

Looking at the chart on Slide 16, I guess the blue part is the company's market share. From what I heard today, the ESCO market has shown a rapid growth. In McClure shares shown in the chart, when the company had capacity of just 7 megawatts of solar power?

That's right. Solar power is a new business for McClure.

If a company's share earned by its HVAC and LED equipment businesses, mainly for schools. Schools generally renew their HVAC systems every 20 years or so. So they have recurring type business and can gain this sizable share. Does the business contract include maintenance? Is it renewed every year?

Yes. We continue to deliver maintenance services to our clients, but the recurring revenue is limited if we cannot get once in 15-year contract for renewal. In that sense, this is a traditional business.

I see. Do you have anything to add from the U.S. side?

Yes, I have a supplementary comment regarding the company's finance. As Nishikawa-san said earlier, the company has had reasonable margins for many years. It has financial strength. The thing is that the business practice peculiar to the U.S. called pass-through requires the company to return on surplus cash to stockholders every year, so the company does not have much surplus cash left when it closes books for the year.

I'd like to ask one question about the perspective of value creation of the infrastructure and the Healthcare division as a whole since I do not fully understand about it. On Page 5, each department is covered, and we can check the news releases of the Infrastructure & Healthcare Division by project. But I still don't understand, for example, from what perspective they are moving toward the future. Of course, I understand that to contribute to energy transition is your key theme. But when we try to understand your future direction, by combining the growth potential, profitability and your strength, what areas do you see as promising for future investment of your management resources? Could you tell us a little more about your perspective on how to create value for the future?

Thank you for your question. I think there are two major points. One is that we would like to continue to pursue the conventional and stable infrastructure type businesses and renewable energy is one such example. And although thermal power plant will be subject to some restrictions because of the trend of decarbonization, we'll continue to pursue such businesses as well. Infrastructure businesses should be paid back in 20 or 30 years by securing exclusivity, in return, we will continue businesses that promise solid and stable cash flow. That is the first point. On the other hand, we are now focusing on growing businesses. One of the reason is, of course, the market is growing. I did not talk much about the Healthcare business as it is out of the scope for the presentation today but the Healthcare business is one of the core businesses that this division is pursuing, and I believe that we will be able to create new businesses in the future in this field. We cannot do everything in the Healthcare industry, but there are areas where we can do our part. Not only the PPP business and the Turkish business that we have done so far, but also the private Healthcare business and the clinic chain. And we can also work on other business models that will lead to the prevention of diseases, which are expected to grow in the future. The population will increase and efforts to extend healthy life expectancy are expected to emerge in the future. And in developing countries, the number of middle income households will increase. We want to secure the cash or wallets in those areas, and we'll engage in businesses in which we can promote health and expect growth. For example, in the case of Healthcare or McClure, we have just explained, the market for energy conservation is growing rapidly. And when we find any areas which we can add to our business portfolio, we will go into that business. Well, it could be a business which we have never been involved before, we would prefer to do business in areas where we can leverage what we have done so far, existing network or our experiences we have gained in other businesses like our IPP business. We would like to work on such initiatives. In addition, we also need to work on digital technology and innovation, which will be presented later, and there are some areas that cannot be done only by extension of the status quo. This may be done by trial and error, but we will make sure to look at them closely.

If that is the case, I cannot tell its current composition. For instance, in the current investment balance in the Infrastructure & Healthcare Division, I would like to know about the rough ratio for the conventional type part and the part you position with growth potential, which I assume will probably increase in 5 to 10 years from now. Can you clarify such an image? Also, in comparison with other divisions, the cash ROIC level is low at 3% due to the nature of the business. Can I assume to increase the 3% and the value creation line can be achieved by increasing the ratio of growth type businesses?

Regarding the composition of our assets, I cannot tell you about specific percentage now. But roughly speaking, businesses with companies like Nelco and LNG Japan which we have been engaged in for a long time, account for about a quarter or 1/5 and the rest are in the solar business, new businesses, and other businesses that we have invested in over the past 10 years. As I mentioned earlier, the figure for growing businesses is still very small. We will make this bigger and it could JPY 300 billion or so, anyway, the amount has increased due to the depreciation of the yen. But I believe that increasing the ratio of such businesses will lead to the improvement of CROIC as you suggested. Regarding the point that the CROIC improvement is slow, we should consider we have many projects under construction now, and they will become profitable. This is expected to increase CROIC while we will exit from projects that do not increase CROIC much. And in fact, we have had a very difficult time in the upstream concessions, but we have been able to exit a large part of them, and we'll continue to exit from the remaining ones and we expect to improve the efficiency of cash collection in these areas.

Just briefly about what you have said now. You're now going downstream as you shift from the conventional type to the growth type. And I'm wondering if this scale your business. I suppose it will be easier to see a return of profit for infrastructure projects because of the large amount of money involved. But for example, for the ESCO business, it is said that you can increase the number of cases for solar power and recurring revenue type businesses, but each project is small. So I wonder if it is something that can be quickly expanded to other states from Pennsylvania to scale the business? For example, I have an image that although this is a growing area, the growth potential will be slower than before. If you have any thoughts on this, please share them with me.

Although this is not a direct involvement, the amount of investment in the ESCO business or McClure is not that different from other IPP-type infrastructure businesses. So you can understand that is the scale of the business. It will not be so easy to expand the business horizontally from Pennsylvania to other states considering the relationship with local communities mentioned earlier. We explained about the commercialization of the solar business and additional investment of about JPY 4 billion to JPY 5 billion and assume we will be able to maintain such a scale of business. It is possible to horizontally expand from Pennsylvania or to integrate similar businesses in neighboring states, even though we do not have any specific projects yet. And I believe that there are still opportunities in the ESCO business even outside of the U.S. The scale of business is just, as I said now, and we do not target businesses, which required to invest JPY 1 billion to generate a profit of JPY 100 million. So I appreciate if you can see it in this way.

Hello, everyone. I'm Arakawa from Sojitz. I am the Chief Digital Officer. The President has kindly introduced me and my career, but allow me to reiterate and introduce you to my career myself. I was with IBM for more than 30 years, working first as an SC, in charge of building systems for our clients and I was in charge of brands and digital sales as a leader of IBM's sales team that utilizes advanced digital technology later as Chief Digital Officer, I was responsible for developing a digital business model around the world. I joined Sojitz in December last year and have been working for Sojitz, a Japanese company with a global presence to value up its business by utilizing digital technology and to develop digital human resources who will be leading in the future. Now I would like to talk about Sojitz digital technology and strategy. This will be the first time for me to do so in front of investors. First of all, our DX promotion system is described in the integrated report. The President serves as the Chair of the DX Promotion Committee and the committee practice digital utilization in tandem with the management. This DX promotion committee was launched in April last year. And since I assumed the position of CDO in December, we have been discussing a wide range of projects for co-creation with the sales division for about a year now, mainly through the DX Promotion Committee. Today, I would like to talk about specific examples of how we are creating business value through the use of digital technology. Together with Mr. Kanetake from the Automotive division, who has joined me on this stage. The CISO side, the security side are also working to promote company-wide DX, including governance and security. The vision that Sojitz is aiming for in 2030, which is written as vision in English, is the ideal image of Sojitz in 2030 and the DX strategy is to realize this image by using the power of technology. As the President explained earlier, in order to achieve this growth, Digital implementation will be essential to create value and to continue working on your transformational business model. So we are promoting our digital strategy in dispositioning. Thank you very much. Next, this chart briefly describes Sojitz digital strategy in one page. This chart is actually the chart that President Fujimoto presented as part of Sojitz's DX strategy when we announced the first half financial results on November 2. The business model transformation as you see on the left is a lifeline of a trading company. As we transform our portfolio to create more value and create value through actual business implementation from the portfolio and projects in which we have invested. We will achieve this through the digital means. Later, I would like to talk a little more specifically about how this is done within the overall sales team, and as I mentioned earlier, using the example of automotive division. Another important strategic framework is the development of digital human capital. I will also explain this in more detail later. But broadly speaking, data analysis' human capital are called data science, I think, in the world. Those who can utilize data will be nurtured. We have divided human resources into 2 major types: human resources who can use data to the extent that data science can do and business designers who can digitally implement it in business. We are currently in the midst of developing a human capital strategy in the form of re-skilling and adding skills to our employees. I would like to discuss this in more detail later. This is our business model. As you all know, Sojitz has 7 business divisions and 7 sales teams, and we are promoting business models by utilizing digital technology in the projects of each sales team. The same applies to the examples of the automotive division that I will discuss today. For example, in the field of the consumer industry and agriculture business division, currently, in Southeast Asia, we are building an agricultural platform and supporting farming through agricultural DX. We are also working on connecting this to the supply chain. In addition, in the Retail and Consumer Services division, it is currently developing a plan for the tuna aquaculture business in Takashima, which Sojitz continues to operate to create added value through this aquaculture business, which can be used for the entire marine products industry. And to expand the Marine Products wholesale business such as Marine Foods, which Sojitz acquired through M&A. Later, I would like to explain this implementation in concrete terms using the example of the automotive division. This shows the development of digital human capital. Using this chart, I would like to talk a little more concretely. The Sojitz divide the skill levels of its digital human capital into 5 levels. The first level is introductory, the second level is basic, and then there are 3 levels of advanced; experienced, expert and then the thought leaders. Since skills in the digital field, our new field and new skill, we are developing educational programs tailored to each stage and are currently deploying them to our employees so that they will be able to apply them to the specific business through study and repeated practical sessions such as case exercises. When we were developing this digital human capital training program, we also considered outside parties but it was essential to develop digital human capital that are suited to the business of a trading company. Of course, we get the help of our partners, but we are developing human capital in data analysis and business design by using case examples in a way that is closely related to the business of a trading company. We are seeing progress. And as for Level 1, including those in general employment, we have a plan to have all employees complete this level by the end of this midterm plan. And currently, the achievement rate is 57%. And Level 2 consists of about 22 e-learning courses of which 24% are completed by those who have completed the entire course and 51% by those who have completed each course. Since the number of cases is very large, and they are to be completed by the end of this mid-term plan. As a result, we have achieved 51% offered courses. So we can say that we are seeing a good progress. In the view of advanced human resources, we have started training, including hands-on training in data analysis in order to develop a human capital who will be responsible for the company's business. I would like to report that 48% of the 200 employees to be trained during this mid-term plan have been completed and that these human capital have started value-up activities using data in their actual businesses. As a slight digression, there is no standardized level setting like this among Japanese companies. The Ministry of Economy Trade industry, METI, and various other organizations have defined skill sets through the IPA, but there are no definitions that can actually be used. Some private companies have come together and have set up 5 levels and some 4 levels. But CTOs are working together to bring these levels in line with each other. For example, volunteers from Asahi Kasei, Yokogawa Electric, Vico and others gather together to set their own levels trying to bring the digital skills of the private sector to Japanese standards. I think the most difficult part of digital experts is that though they may be called digital human resources or DX Human Resources, DX means digital and transformation. In other words, transformation needs to happen on the business side. This combined form of business and digital parts will create added value by bringing about transformation, which is the most difficult. I believe transformation can only be realized by the business themselves. In other words, for a trading firm, transformation human resources or development of human resources of the trading firm itself. And teaching digital technologies does not necessarily mean that they will be able to implement transformation. As digital technologies are merely one of the tools of transformation. Therefore, as shown here, Sojitz is further enhancing the value of the skills of its employees by providing them with digital technologies and what will be done for transformation is to build on the business skills originally cultivated as a trading from employee including business acumen for portfolios and accumulation of practical experiences and add the ability to make use of technologies so they can become Sojitz's digital experts. Now COO, Kanetake of the Automotive division and I would like to explain what kind of business is being conducted specifically. First, Kanetake will give you the overview of the Automotive division.

I am Kanetake from the Automotive division. I participated in IR Day last year, and this will be my second year in a row to stand on the podium. First, I would like to briefly walk you through the growth strategy of the Automotive division. I already discussed this last year, so I will be very brief. There are 3 business areas: distributor business, auto financing business and the service business. There are 3 key words in the growth strategy, functions, characteristics and transformation. We must strengthen our functions, develop businesses with distinctive characteristics that set us apart from other companies and continue to carry our transformation. There are 3 points in these functions and the third one is digital technologies. First, we will implement digital technologies into existing businesses to create structural transformation. Then the second is to use digital technologies to build new businesses that are innovative or disruptive. This includes efforts to solve social issues, their initiatives to transform the industry. As an example of one of these initiatives, I would like to talk about the secondhand vehicle distribution, DX. Let me first explain about the secondhand vehicle market and then the challenges of the market. I would like to focus a bit on the Japanese domestic market. It is estimated that 7.5 million vehicles get registered annually. Of these, 2.5 million are distributed via retailers and sold to consumers. In monetary terms, the total market is about JPY 10 trillion, of which the consumer market is about JPY 4 trillion. This difference is mainly due to transactions between different vendors. More than 100 auto auction venues through which about 30,000 secondhand vehicle sellers engaged in transactions in Japan. In addition to this, there are many other players such as new vehicle sellers, exporters, leasing companies, dismantling service providers, among others, involved in transactions and the number of vehicles that actually reach the consumers or the users is about 1/3 to 1/2 of the total number of transactions. The distribution structure is such that consumers purchase vehicles through these vendors. We have listed 3 issues with this distribution structure. As I have just explained, many more players are involved in transactions and the number of vehicles in actual demand that reach the consumers. There are many intravendor transactions and each one of these transactions entails the transportation of vehicles. This means that logistics and other costs are incurred. Then the second issue is the processing of each one of this large volume of vehicles which has performed manually, one at a time. In particular, there is considerable variation and lack of transparency in the assessment of the quality and prices of the vehicles. Thirdly, while the overall secondhand vehicle market is fairly large, the business catchment area for each of the many vendors, including small and medium-sized companies, is small, limiting the opportunities for both vendors and consumers to choose from. If we are to use digital technologies to solve these issues, what we should ultimately aim for, our to be status is to create new platforms and provide convenience and other benefits to both vendors and consumers, thereby transforming distribution and society. These platforms are expected to facilitate transactions, such as B2B or vendor to vendor, B2C or retail sales, C2B, vendors purchases from consumers as well as C2C, transactions between individuals, although there are still very few in Japan. So we have started our efforts to working on these initiatives.

Let me talk a little more about what Kanetake explained from a digital perspective. The secondhand vehicle platform is based on a business model that will guide the entire industry and society to the direction of transformation by digitizing a single particular field in the industry. I would like to ask you to understand a little bit about that. First of all, I would like to show you the digital twin technology, which is specifically where the secondhand vehicle information is converted into digital data. Please take a look at the video. [Presentation]

Now we are creating a Digital Twin model of the real car which has data identical to that of a real car or an exact copy of the real car. By utilizing difficulty with the scanner you can convert the exterior and interior information and all the other information necessary to access the secondhand vehicle into digital data in a very short period of time. At the same time this scanner can also be used to scan a digital data, such as a number of times the vehicle has been repaired, which is not easily identified by the human eyes and the condition of scratches on the underside of the vehicle. Are there any additional comments?

No. Our explanation may have drawn your attention to this particular technology alone, but this happens to be the technology we ended up using a tool as part of our overall effort.

Well, thank you for your additional comment. As he said, so far, what we have done is to just scan the vehicle and make the information into data format, which is called digitalization in the digital world. We have not even got to the point of digitization. Nearly converting the information into data by itself will not lead to any transformation in the business model, but it is the starting point for DX. This is not about this product out solution, but a major transformation expected will be that after this conversion into data, the data will be used to enable transactions in the market with highly transparent price information. Also, taking photos of the vehicle is very time consuming. Furthermore, I had not been aware until I heard from Kanetake that in the secondhand vehicle industry, there are more sales transactions between vendors than sales to consumers, because the catchment area is too small to sell all the vehicles that they bought and they need to look for further customer contacts via another secondhand vehicle seller with a different service area. Unfortunately, it is self-evident that this will eventually bounce back and be passed on to the consumers price or the final price. So this kind of overall industry-wide transformation will be of great benefit to the secondhand vehicle sellers as well as to the end purchaser or the consumer. So that DX is committed to these industry transformations and other beneficial activities for society. In addition, in terms of technologies, the system can be used repeatedly. And since the process of importing these data is automated, it will be significantly labor saving. It is very difficult for the average consumers to understand the quality of secondhand vehicles. And even if they bring in their own vehicle, for example, it is very difficult to determine whether the price offered is a fair price or not. This platform will allow us to collect data on standard prices and to determine the appropriate price from among market transactions. So due to this, Automotive Division is leading the way in these efforts. And we are now working with the industry to make this transformation. Any further additional comments?

Well, the first initiative will naturally require capital investments since we need to have equipment in place. The most efficient way to increase the number of installed units is to install them and auction sites where vehicles are distributed the most frequently. At an auction, the Digital Twin will be already made available when someone wins the bid in this system. Whereas at present, typically, the secondhand vehicle seller would actually receive the vehicle only after winning the bid. Take it's photos there, upload the data to their website and start selling it. However, with this technology, these data are already available to the bidder when they win the bid, which should allow them to immediately start marketing activities. This has the advantage of reducing time and facilitating inventory turnover as well as reducing the effort required to actually take photos, which is very time consuming.

Thank you. This is one of the automotive businesses that Sojitz is trying to undertake, not from a product out perspective, but from a market in perspective, that is how to solve the problems of the industry and the market. As I mentioned earlier, with the example of the automotive business, we are working on various projects while consulting with our general managers as to where we should focus on for similar business model transformations to be performed in all of our businesses. We believe that the transformations like the one that you have just seen as a specific example, will create value and create a new Sojitz portfolio. I have just briefly discussed our overall digital strategy and how we can create value with our business divisions. Digital transformation is not something magical. It is not something that if we do something, and if you do design thinking or if you think agilely, something will come out of it. But it is something that you steadily build on the value of the businesses as they currently exist, which actually requires quite low profile and down-to-earth efforts. Although digital technologies tends to be often highlighted for the last year aspects, I would like to work with each of the business divisions to create a business model for the year 2030 by implementing these things one by one, which will surely lead to very large business and social transformations. I have spoken briefly today about Sojitz' digital strategy. Thank you for your attention.

From Ms. Arakawa's point of view, I am guessing that the trading company is a treasure of opportunities to improve efficiency as much as possible. So I would like to ask two questions. One is the money you can actually spend on this DX. I think there are many cases where system development is too agile and the cost will inflate. Of course, I think Mr. Arakawa's point of view focuses on the best judge of the cost, but how much money should a company spend as a whole? I would like to know how you think about spending money on DX. And the other question is, I understand very well the point about human capital, including re-skilling employees. When developing the system, I think it is natural for the on-site staff to be involved in defining requirements, but who actually does the development work? We see cases in which other trading companies pay a lot of money and hire as many specialized people as possible. So I wonder if your company will be able to develop human resources who can actually have hands on to develop systems or in fact, hire such a group of people from the outside the same way as other companies do? What kind of implementation is going to be done by human resources?

Thank you very much for your questions. First of all, -- regarding your first question, the implementation of digital and digital transformation will be done together with each sales team of the different divisions. One is to do it within the budget for the sales team. But on the other hand, we can have the investment of Sojitz as a whole. And Sojitz as a whole has committed to a non-financial investment of about JPY 30 billion in the current mid-term plan, which includes the development of digital human capital. Personally, I would like to use most of it or more than half of it for digital. I'm still not sure if they will allow me to do so. I can see directors in charge of corporate planning sitting in front of me, so I do not know yet. But -- as for your second question, as committee says, there are 2 main types of digital technology, offensive and defensive. The CDL's job is more of an offensive one to lead to value creation. So one needs to be a business expert first. As you saw earlier, when we talked about the competition within the Automotive Division. We will create value by mixing up the ability to utilize digital technology with competitive edge. Such human capital, we would like to nurture within the company as much as possible. As for the defensive IT and digital transformation, I will also serve as the CIO from January of next year. So it is necessary to create an integrated data infrastructure for the entire company that can be used for such purposes, for example. Japanese companies as well as trading companies basically do not have the ability to produce it in-house. So we have various partnerships in the industry, and we would like to work together with these partners to help create such a system. I would also like to foster personnel who understand what we are asking for rather than leaving it entirely up to the IT vendor. I believe that this can be done without 100% understanding of the technical details. But just with the basic understanding of, for example, structures and designs, we would like to develop such personnel in a robust manner and would consider mid-career hires as well. Thank you.

I would like to ask this question to Ms. Arakawa. Earlier, you said DX is being implemented partly with the budget of that particular business division and partly by some if not 1/2 of JPY 30 billion earmarked to the headquarters. Has the headquarters been fairly proactively providing some of its budget at the discretion for the business division to spend on DX for more proactive strategies already or are they planning to? My second question has to do with the automotive example you shared with us, which I found was quite interesting. And I felt this is truly a new technology that could change the industry. But for example, you invest in the equipment to be installed in one of these auction sites, how are you going to monetize the business?

To answer your first question, among the initiatives currently being co-created with business divisions, there are some for which we spend part of the budget of CDO office. But basically, we want to use the budget of each of the business divisions. This is because we want to make it clear that it is that business division, who is committed to the initiative with its consent that it is going to be a viable business. And it will be best to implement the initiative within the budget of the business division. In order to prevent a digital team from getting ahead of themselves unilaterally, we need to ensure it will work out plans with business divisions with their commitment and carry out the plan as part of the profit targets to be achieved under the current medium-term management plan.

To answer the second question, as I explained when I talked about the strategies. In the Automotive Division, one of the functions to be enhanced is the Digital Technologies. And therefore, we are putting a lot of emphasis on that within our budget. Obviously, we are working to shore up the levels of digital capabilities of the personnel at headquarters. So there are some who are already quite well versed in digital technologies. Now the headquarters have established a program for the whole company for this purpose, but we had been working on this already prior to that on the trial and error basis. On top of the enhancement of the skills of the personnel of the headquarters, we have been hiring a variety of digital experts, again, on a trial-and-error basis, some as contract workers and others as mid-career hires, including programmers, web designers and marketers. By employing those people who we had expected to see some improvement in the levels of headquarter personnel as well. Moreover, we have been making investments on a company that has developed the system, which is located in Germany to the order of hundreds of millions of yen. As a result, we have acquired exclusive distribution rights in Japan. But that is not all, but what is more important is the data and who owns the data. We actually have the co-ownership of the data. Therefore, we can utilize the data for monetization. Now to answer your question on how we're going to make money on this business model. There are 2 ways. First, we do not sell the equipment. Instead, we lease the equipment and have it installed in the auction site, so it can be used there. We have yet to decide the price to use the equipment to make a Digital Twin of one vehicle through scanning, but it costs about JPY 10,000 to take photos of one vehicle. As you can see by looking at the website, there are 50 or 80 photos posted on the website to be searched for secondhand vehicles. The price we have in mind is what will be equivalent to that JPY 10,000 that would have caused you to take those photos. It all started with the idea that we wanted to acquire this technology to sell vehicles ourselves. Our main business is to sell vehicles, and that is how we make profits. And we wanted to start selling them on the Internet instead of at physical stores. Selling vehicles on those EC or electronic commerce sites, it's not uncommon with EC platforms available practically everywhere. But what is used there is only photos. If you want to buy a secondhand vehicle, you would look at those photos only to choose, but there is a barrier in that you feel you need to see actual vehicles directly in order to decide which one to buy. But if the photos are changed to those 3D images, the deal could materialize without the buyer even looking at the vehicle in person or without seller physically placing the actual vehicle on the site. That was the whole idea behind this effort. Therefore, in terms of the 2B status mentioned earlier, or the ultimate goal that we would want to out reach, once the platform is built, just like on Amazon or Mercari, every time a vehicle is sold on that platform, a commission can be received. But as we hold inventories over on to sell vehicles, we ourselves can sell them on the platform first and foremost. Furthermore, even as a step before we carry out our own sales, by scanning vehicles using this equipment, we will be able to sell the data. Thus, we will be able to make money on our vehicles as far as on the data. But while these are some of our future dreams, we will need to generate profit for the near term as well. And therefore, we hope to materialize each of these different elements, one at a time, so we can monetize this business model. And by accumulating all of these, we want to achieve what we are aiming for as our ultimate goal.

May I chime in a bit. Creating Digital Twins itself will become a commercial business. First, replacing photos. We want to make a viable business model out of this idea because all these data gathered such as, which type of vehicle, in which model year, with what levels of scratches, should allow you to make a standardized assessment of the value of each of the vehicles and ultimately, to build a large platform, which must become essential for any transactions to be made in the market, as the purchase amount will be determined by referring to the data available on the platform. This would eventually lead to a transformation of the entire industry into the one where one would not be able to carry out the appraisal of a vehicle without using the platform. Once we are in that status, the platform could exist as a business model viable completely across the industry. The number of secondhand vehicles in the market is about 7.5 million in Japan, which should give you a large enough volume of business for a trading firm based on the cost of photos mentioned earlier. And you can deploy this business, not just in Japan, but in other countries as well. Thank you.

Again, you can obviously expect to see an improvement in efficiency in selling your own secondhand vehicles and in turnover of your inventories, but I feel there is much greater potential in turning it into a platform and transforming the whole industry. But I'm wondering how conductors are doing on that front? Are they also developing such businesses, are in direct competition to you? Or you're much more advanced than your peers?

We don't believe we can go it alone. And so we hope to see co-creation. Different companies are taking different approaches. And our first partner is an auction company. As we announced in the press release, it is a company based in Gifu Prefecture, where we are supposed to have the equipment installed. We are also engaged in discussions with one of our peers, a major secondhand vehicle selling company. So we definitely are hoping to take a leading position in the entire industry.

That means there are substantive discussions gradually underway, doesn't it?

Yes.

I have just one question I would like to ask. Well, regarding the used car distribution explained earlier, I don't have the impression that your company has strength in the used car distribution area so far. In terms of DX projects as a whole, how will they be made visible? For example, the Digital Twin project is a partnership with a company that possesses cutting-edge technology. I think you will have more of an advantage by maintaining such a strong network there. The reason why you selected this project is because it is one of the earlier projects. Is that correct? Or would you be in a position to create such a platform as an independent company? Or will the company as a whole be in a position to categorize a number of projects as digital in your areas of strength going forward? I just feel that this Digital Twin seems to be a standalone story. I think there are many projects out there right now, but which field and what kind of strategy will you be pursuing? If there are DX products that stand out and have an edge, are you going to take an approach to consider doing something with it? Or are you going to use digital technology in your company's network to develop it on your own?

One of the first things I looked at is the market, how much potential are there, what fields are there. And the next thing, we are looking at Sojitz's current operations to create something from scratch in a place where there is no existing businesses, means that we are an amateur in that field. Since DX is accompanied by business, I don't think it will be easy to succeed in fields such as Layfield. Like Mr. Kanetake and his team, they were originally involved in the automotive business and originally involved in providing financing business for automobiles and so on, not just selling and exporting automobiles, but adding with to their business. And so I had seen firsthand how value will be added to the used car business, and as for new cars, for example, we are considering the creation of a new CX offering VR and AR experiences to customers without having to create a physical showroom. In short, we are working on value enhancement of the current business first. Also, although I didn't touch on it today, I often talk about the Southeast Asian Agricultural platform externally. And as we look at the possibilities of Agricultural DX, we have a fertilizer company in Thailand, TCC Fertilizer company, which has a very large footprint in the region. Therefore, we are not selling fertilizers based on this platform, but rather, we are working from the perspective of what Sojitz can do to make contribution to agriculture and create a new platform. Therefore, my answer would be, we are starting from the potentiality of the market and the strength of the current businesses and its potential for growth. That is how we think about this business. I hope that answers your question.

Hello, everyone. I am Endo, and I have the honor to serve as the facilitator for today. First, let me introduce the panelists, starting with Mr. Otsuka. I think all of you are aware of his background, but he served as the President and Chairman of NSK and has been an Outside Director of our company since 2018. Next is Ms. Saiki. She served at the Ministry of Foreign Affairs and retired in 2019. From 2020, she has been our Outside Director. The third panelist is Mr. Shu. He has been an Outside Director since 2021. He has worked at high-ranking positions at major foreign securities companies. Last but not least, Ms. Kokue. She has been approved as an Outside Director at this year's General Shareholders Meeting this June. She formally worked at Mitsui Chemicals.

Hello, everyone. I'm Otsuka. As introduced, it has been about 4 years since I joined the Board of Sojitz in 2018. Back at that time, the composition of the Board was out of 6 directors, 4 were internal and 2 were outside directors. 4 years later, as of now, the Board consists of 8 members, 4 each for internal and external directors. In terms of the members of the Board of Directors, we have 5 audit and supervisory board members, which means out of the 13 members of the Board, 6 are internal and 7 are outside. This means putting aside whether these members will vote or not, in terms of debates and discussions, outside directors are the majority and exchanging a variety of opinions. During these 4 years, I have the impression that the Board has focused on initiatives to strengthen corporate governance, at least one for each year. An example is that it used to be the case that out of 6 directors, they were 4 internal directors versus 2 outside, but now it is 4 versus 4. I have been the Chairman of the Board for a full 2 years going into the third year. Back in 2020, it was decided that the outside director will be the Chairman. And of course, this has been a huge responsibility for me. But I think it was a major decision for President Fujimoto back at that time. Based on this, I have the impression that we had been doing these things that will contribute to the enhancement of corporate governance every year one by one. For example, we tried to visualize the annual schedule of the Board meeting as much as possible. At the end of June, every year, when the General Shareholders Meeting is held, we will take time to discuss the schedule and topics to focus on our discussions. We run the Board meetings so that outcomes will serve to enhance the effectiveness of our activity and think how this can lead to the enhancement of the corporate value of Sojitz. So I think it is safe to say that in terms of the stages of development in corporate governance, we have to come to a certain level. The question is, what will be the next stage for the corporate governance of Sojitz? Actually, discussions about this matter have already started at the Nomination Committee, which consists of the President and the 4 outside directors. What will be the next governance structure that we should aspire for? We have started discussing about this very important topic. Although it is too soon to announce this in front of you in terms of what is going to happen, please understand that we are discussing about this matter earnestly with the President. As Ms. Endo has said, the 4 outside directors have diverse backgrounds. Gender-wise, we are diverse. In terms of age, I am the oldest and there is more than a 10-year age gap between me and the youngest member. I think it's quite rare that there is a 10-year age difference among outside directors. So taking these things into account, I think it is safe to say that we are becoming quite diverse in terms of the makeup of the Board. With this in mind, we would like to continue discussions about what we should aim for next.

Hello, everybody. My name is Naoko Saiki. The question was, what type of discussion is being made about the skill matrix. Mr. Otsuka has mentioned about the diverse composition of the Board of Directors, which is apparent in terms of gender, age and background. He also made a point about the number of outside directors increasing compared to the past as they are currently 4 each for internal and outside directors. In addition, I think when you consider the composition of the Board, it is not only at a gender background or age. It is especially important to have a diverse skill set from the viewpoint of enhancing the effectiveness of the Board. Looking back, I remember it was around 2019. So this was before I joined Sojitz as an outside director. The company started discussions about the skill matrix seriously taking into account voices from the market. Throughout the fiscal year of 2020, there were active discussions mainly at the Nomination Committee and how the skill matrix should be. As a result, and I am sure you remember this, in June 2021, at last year's General Shareholders Meeting, the skill matrix was disclosed for the first time on the convocation notice. Maybe I need to refresh your memory, but there are 10 skill areas for the Sojitz skill matrix. One is global because, of course, Sojitz is a traded company, overseas experience and expertise, business management, corporate planning, legal, risk management, M&A investment loans and financial markets, finance and accounting, internal control and environment and social. Does this make this 10? I forgot an important one, it's human resources. This makes 10. If you look at this convocation notice for this year, you can confirm that for all the 10 items, it is well balanced and complementary among the internal directors, outside directors in both internal and outside audit and supervisory board members. As for the skilled matrix, needless to say, the reason that it exists is to disclose the composition of the Board of Directors or the Board of auditors. By doing so, the management of the company will become more transparent and facilitate more meaningful discussions with various stakeholders. So from the viewpoint of enhancing corporate governance, it is very important. Well, generally speaking, I think it is very important to visualize things. The skill matrix is a typical example of how important visualizing things are. Based on what I have said, I have 2 points to mention. One is that you have to constantly review this. Second is that the skill matrix is not comprehensive. Ms. Endo raised the question of what will be our future direction. The external environment is dramatically and rapidly changing and Sojitz has to change to survive in that environment. The 10 skill sets that I have explained is quite standard, and many companies have adopted these. And these within themselves have a rationale. That said, what is Sojitz is going to do from now? What kind of management, human resources and business strategy are we going to build? We have to constantly keep reviewing the skills that are necessary in this context. That's point number one. Point number two is that the skill matrix is not comprehensive. Let me take myself as an example. I used to work at the Ministry of Foreign Affairs and have been engaged for a long period of time in international legal affairs, environment and society among the ESG theme and human resource development. These areas are considered where I should specifically focus on in terms of management oversight and checks have been put against these items in the skill matrix. Of course, I will continue to utilize the knowledge nurtured through my experience to the highest extent, and conduct management oversight in my areas of expertise and offer advice when necessary. However, allow me to say that my area of concern will not be limited to those items, not confined within the scope of expertise in overseeing an adviser at Sojitz, I should be proactively engaged with Sojitz in a more comprehensive and broad manner. I will offer advice to the full extent possible within my capability and be fully engaged in overseeing the management. My takeaway from working for a long time in the foreign ministry and I think this goes the same for corporate management as well is that ultimately is the human quality of the person that is important. It's not just a sum of fragmented subject matter expertise, but ultimately, there will be a situation where the whole comprehensive human quality of a person will come into question. So as an outside director, maybe my impact will be not that large, but I want to proactively be engaged not only in my areas of expertise, but in other areas as well, based on the experience that have been able to cultivate during my career. This is the reason why I said that the skill matrix is not comprehensive as my second point. In the Nomination Committee, the skill matrix is an important issue, and Mr. Otsuka has raised a topic about corporate governance. So we are candidly and vigorously conducting discussions about this matter. I will pause here for now. Thank you very much. For Sojitz to grow sustainably, what type of human resources are required? It is to allocate the necessary human resources to important positions that is directly linked to the management of the company in a timely and appropriate manner. So of course, the potential capability, experience, the track record achieved through the experience and the ambition and the attitude of the candidate should be considered. But most important above all is that what Sojitz is requiring is necessary for each position. What are the requirements for Sojitz to grow sustainably? These are very important points, and we are currently conducting in-depth discussions about this. Actually, I think it was 1 or 2 years ago among the management, the requirements for Sojitz is Section Manager, General Manager, COO, was identified and was shared among all the employees. This was a very important step. In addition, the Nomination Committee is conducting active discussions about what are the requirements for President. Please understand that I cannot disclose the details of the discussions, but allow me to give you an example. The internal and external environment is very unclear and fluid. Against this backdrop, I think it is natural that to lead Sojitz this leader should have the visions about the future in terms of thinking how the future will transpire, what type of challenges will there be, and how should Sojitz act to solve these challenges. Furthermore, the leader should be able to boldly make decisions when necessary based on this vision. In a sense, the ability to make decisions will be a very important criteria. Of course, making decisions is not the end of the story. You have to put that into action and realize it. This type of capability is also important. Another point is that Sojitz cannot survive by just living on from yesterday to today to tomorrow, just following President. But prior to transform by listening to the market in this dramatically changing world and thinking what is the reason to trade of Sojitz, this is also very important. These are the things that the Nomination Committee is discussing from various viewpoints. Mr. Fujimoto, the CEO, is also the member of the Nomination Committee with the 4 outside directors. So it is also important to discuss what Sojitz aims to become, and what are the necessary requirements to realize this vision. And what type of human resources we will be choosing and developing? Developing people is absolutely important. So we are discussing deeply about succession planning from this perspective.

From this fiscal year, I am also serving as the Chairman of the Remuneration Committee. We have incorporated elements of ESG in our remuneration system. More specifically, we have mainly discussed about the KPIs that we should be choosing. Investors and shareholders have pointed out that although they appreciate ESG being considered, they feel the weighting is not sufficient. So I agree about this point. However, we are in a transitional stage, so please understand that this is the first step for us, and we will continue to update the system by going through the PDCA cycle. Taking up one of the issues of ESG, there are debates about why ESG is important in the first place. There is an argument that compared to market cap or profit, that is the basis that can be considered as economic or financial value. How does this relate to ESG? We are still in the nascent stage of discussions about this matter. And I think this discussion will deepen and various viewpoints will be sorted out. By further deepening our discussions, we will strive to update the system. Another point I want to make is about the overall remuneration system, not limited to ESG. There are discussions that we should increase the portion of remuneration that is performance linked or paid by stocks. The reason I say this is that if we compare Japanese and overseas companies from the viewpoint of creating corporate value, unfortunately, Japanese companies are slightly lagging behind. If that is the case, I think the thinking is that the remuneration system should be considered taking into account examples from overseas companies. However, what is important to bear in mind is not just adapt the system out a formality saying that this is the global way. I think a full discussion should be conducted within the company with everyone's consensus in terms of the meaning or the effect of incorporating these systems, especially our company is focusing on transformation and business and management reform. So we have to consider whether our remuneration system is really supporting transformation or management reform. Specifically, when considering management reform, this does not mean just increasing the amount of profit. I think there is an understanding that we have to increase the proportion of stable earnings. So there is this understanding that the remuneration system should be changed so that it promotes the change in the business composition and drive qualitative improvements of profit and at the same time, strike a balance between these two. So in this context, I think the discussion should be conducted in a more concrete manner such as how the allocation of the performance-linked portion should be, what should be the KPIs, and what should we do when we are using stocks for remuneration. Discussions about remuneration tends to be technical. But what I am saying is that we should prioritize these matters within our next mid-term plan. When we think about the direction of our company, then the viewpoint would be what will be the system that truly will promote the execution of management reform taking into consideration about the priorities. Then I hope you can go into the PDCA process and further deepen our discussions.

Hello, I am Kokue. 6 months can be both short and long. But in any case, at Sojitz, there is a dedicated organization called Board Meeting Operation Office. They offer various and substantive support, all in one organization. As for the Board meetings under the leadership of Chairman Otsuka, I feel it is conducting a very frank and active discussion. And following Mr. Otsuka, Ms. Saiki has been on the Board for 3 years, and Mr. Shu, 2 years, so the tenure of the Board members at Sojitz is different by a year. I am a new comer. But due to the setup, I really appreciate the support I get, because I can freely ask everybody about matters. At Sojitz, the material of the Board meeting is paper free. We can view the material in our box apps online. Of course, full security measures are in place, but analysts reports are shared, and I can reach prospectively with the past reports. This is very helpful. Regarding the effectiveness of the BOD, agenda items are appropriately selected and the documents are circulated almost 1 week earlier. Then a briefing session for outside directors and others is given 2 days prior to a BOD meeting. When we are dealing with major investment or M&A projects, directors as well as auditors have numerous items to confirm and ask risk-related questions. We usually dedicate an entire briefing session to ask questions in such case. Furthermore, major portfolio transforming projects and capital policy as well as shareholders' return are included in the agenda. Therefore, there is a lot to discuss during the briefing. It is the briefing session that gives us opportunities for directors to confirm, sort things out, gain better understanding and deliberate issues in preparation for the actual BOD. So I regard it as an important process. The assessment of effectiveness of BOD is reviewed annually. Based on last year's assessment, we decided to invite division heads to report us on the progress of medium-term management plan, 2023 right after the monthly BOD. That affords us an opportunity to learn details of the progress from the materials we have provided, but also a glimpse into the level of passion and stance of division heads who are presenting their materials. Each presentation ends with ideas and ways to develop HR. This characterizes the presentations. To promote a dialogue with the executives, we have an Information Sharing Forum, where President, General Manager of Corporate Planning Department and the 4 outside directors meet about monthly. This is for information sharing as well as open and honest discussions on management issues, although the contents are not submitted to BOD. Moreover, I have the opportunity to attend both the finance and investment deliberation council and the summer session as an observer. Therefore, I have the honor of attending those decision-making processes, including the Finance and Investment Deliberation Council, where I'm given the chance to participate in vigorous debate. The company, therefore, provides outside directors an access to documents openly and encourages us to attend meetings. This is only made possible because of President Fujimoto's personality and policies, which I am grateful for. That is all I have to say.

The Information Sharing Forum, which Ms. Kokue mentioned earlier, is organized by Corporate Planning department and held every quarter after our financial results briefing. That is where I report on market reaction of our financial performance and update the members on road shows overseas. We had the most recent meeting last Friday. So we have a forum where our report details, including voices of the market to the outside directors.

During the formulation of the current MTP 2023, the executive side proposed an ambitious target of PBR 1.0x. We wondered whether it is right to pledge something that is out of our control as an MTP target. However, the management and executives suggested that to be included as an MTP target and demanded us to discuss the matter at BOD, including us, outside directors. That is a testament to their determination of future management focusing on capital market shareholders and investors. That in itself should be rated highly. That is why the current MTP includes PBR 1.0. Quantitatively, after 1.5 years, as we passed the halfway point of the current MTP, we fortunately surpassed our targets, thanks to the external environment. Then where are we in terms of PBR 1.0? As you are aware, we are struggling. It is not just numbers that affect our stock price. We are cognizant that there are many other factors than just numbers. I am sure many of you would agree that the company is actively disclosing non-financial information. Such disclosure plays an important role in promoting interactive communications with shareholders. In turn, it will further raise our share price. However, the stock price is yet to reach the target level. So we are reminded that further efforts will be required going forward. At BOD and Management Committee last week, we discussed the path towards achieving MTD targets, which were compiled mainly by corporate planning. We are determined to do our utmost in the remaining 1.5 years. There are many inadequacies. However, investments to Sojitz have been made at the speed and scale we initially expected. That is great. And this was in line with maintaining a certain fiscal discipline. In that sense, we learned the lessons in the past when the company was extremely financially strained. We thus remain self-restrained even with the current improved profit levels. The company upholds the principle of making necessary investments for growth, while maintaining a certain level of fiscal discipline. That is very good. Compared to other general trading firms, we are smaller. To generate an adequate return with our relatively small size, it is my personal view that each business division must prioritize more and focus more. We must decide where to spend and where to invest. This requires a thorough assessment of our strengths and weaknesses as well as market opportunities and threats. This is an area of improvement. I think we need to clarify more to make the right investment decisions. That is my view, and I convey that at BOD another forum. To what extent that will be realized during the period of current MTP and how much it will be reflected in the next MTP will be determined by our future discussions. Honestly speaking, however, it certainly takes time for an organization to add value to business and generate profit. We must, therefore, remember it will take time for the investments made during the current MTP 2023 to produce results and select and concentrate our finite resources, including HR, on future investment and business development going forward. That is my strong opinion. I look forward to continuing the dialogue with corporate planning personnel.

Although, I do not form a clear cap and a firm opinion here, but as Mr. Otsuka mentioned earlier that the company is committed to raising corporate value. This is reflected in a PBR of 1x prescribed in the MTP. Even though I was appointed as a Board member after the MTP formulation, I think that the PBR target warrants appraisal. So I'd like to take this opportunity to convey that message first. Half of listed companies have PBR of less than 1.0x. Moreover, most general trading firms have PBR of less than 1.0x. However, the company does not turn away from inconvenient truth nor excuses itself just by trying to solve social issues and other causes. Rather, it is determined to fulfill its responsibility to its shareholders, stakeholders. I think that the PBR target epitomizes that attitude. In that sense, I'm comfortable with the company's commitment for raising corporate value, how it identifies challenges and set its directions as a Board member. I think the company's awareness and efforts are adequate in general. Then what is our challenge? The challenge is to thoroughly examine and pinpoint where to focus our efforts. We should focus on a shift from trading business to business investment and management. This transition has not been advocated not just by us but also other training firms. The objective of that is, of course, to generate and accumulate stable revenue streams out of business investments. I'd like to raise 3 challenges we currently face to achieve that objective. First, the selection of projects should be more stringent. We usually examine either strategic significance or financial benefit when we determine whether to go ahead with business investment. Rather, both strategic significance and financial benefit should be achieved. However, delivering financial results is very difficult. Investment on a good business certainly cost us a lot. In order to gain return on costly investment, we must work on value creation of our target company after purchase or investment. And that is not easy. Because it is not an easy choice, we should not just look at its strategic significance or strategic relevance. We rather need to convince ourselves, whether it is strategically essential for us to make the investment, i.e., whether it would add value to our story and plan over the long term. We need to deploy more of such perspective when we select projects. Second, after making an investment and becoming an owner, we must inevitably lead the reform of the target company to improve their business performance for our own value creation. We should, therefore, carefully consider whether we can be not just the best partner but also a best owner for the company when we consider possible investments. That is why post-investment management reform matters. To be a best owner, we must possess skills and experiences of business owners. I am impressed by the number of former Sojitz employees who successfully lead other companies. I hope that there will be more employees who successfully lead investee companies. They can in turn contribute to the betterment of our business performance as well as quality of profit in the future. Third, to raise the entire level of business performance in order to meet expectations of shareholders and investors, we should decide both where to invest and where to discontinue. So we can improve both the level and quality of profits. Therefore, we should always consider where to invest and where do we straw as a pair of wheels. This way, we can contribute updating our portfolio going forward.

President Fujimoto always says that the core capital, which underpins sustainable corporate value enhancement is human capital. I completely agree with him. Needless to say, human resources matter at any organization. However, you can never be overemphasized that human capital is the most important asset for Sojitz as a general trading firm. I'd like to raise two issues. First, although it is important to improve our system and structure for us to have human capital management, tweaking our system and structure loan does not enable a genuine human capital management. What does that mean? To have a genuine human capital management, we need to transform our corporate culture, not just collectively, but also individually. I just stated that this is one of our issues. However, on this particular item, we are already aware of the problem. We try to discern what constitutes our corporate culture. Moreover, without being constrained by our current DNA, internal discussion continues to decide how to upgrade our corporate culture in the future. I became an outside director with the approval of the General Meeting of Shareholders in June 2020. Right after the appointment, I was invited to attend a roundtable discussion with the other outside directors. I remember that I made a following statement. Corporate culture matters. Therefore, I'd like to learn Sojitz's corporate culture. That was the statement I made. My view remains unchanged since then. We should thoroughly discuss corporate culture. That is the first issue. Second, we often talk about evidence-based or data-driven nowadays between where we would like to be and where we are at, there lies a gap. To bridge the gap, we must gather evidence-based data to pay the scientific build to formulate a strategy. That involves structural improvement, mindset reform and corporate culture enhancement, as I indicated earlier. Then comes monitoring. I understand that relevant departments are keenly aware of the problem to address the matter. Progress is being made. However, there may still be inadequacies with HR-related data. Furthermore, there may be room to further utilize HR-related data. Doing so will enable us to engender a more effective and more accelerated human capital management. That is the second issue. Thank you for your kind attention.

The company is seriously committed to realizing a decarbonized society. It undergoes PDCA cycle and discloses the progress. Pertaining to non-financial information, we often agree, in general, but disagree in the details of target setting and disclosure timing when we discuss the matter internally. Thus, this area needs a top-down approach. Under the supervision of President Fujimoto with the understanding of and speedy decision-making at the management level, relevant departments, including business and functional divisions have close communications to build consensus around new businesses, clarify future direction and share information for the execution. That should be properly recognized. As our performance improves, there is a virtuous cycle between financial and non-financial elements. We should continue implementing our undaunted policy in our operation and future developments, so that we can ensure quality disclosure for our stakeholders. For that, I'd like to make every effort to do my part.

Thank you very much for attending our event. As you witnessed today, BOD provides a forum for the members, including the 4 outside directors who are on the podium today to openly and honestly speak their opinions. As Ms. Kokue indicated earlier, 1 or 2 days prior to a BOD meeting, outside directors as well as audit and supervisory board members are briefed where we say whatever we want to say, if I can put it that way. We give out token opinions to the executives, presenters and exponents. We then restate only the key points at BOD. We make our endeavor to create a welcoming environment to invite comments at BOD. As you can see, 4 of us have their own opinions and do not hesitate to state their opinions. Therefore, fortunately, active discussions are taking place at BOD. The question is whether we can help achieving tangible results, such as MTP targets and business value enhancements. Our role here is to provide a robust governance, which then serves as a base to allow the executives to exert their full potential for business growth and expansion. We remain committed to doing our part. For that, we'd like to solicit your opinions and advice. Thank you very much for your kind attention today.

And that concludes our session. Thank you very much.