Nippon Telegraph and Telephone Corp

TSE:9432

Earnings Call Transcript 2023-Q4

[Takuro Hanaki, Head of Investor Relations]

Thank you for joining us despite the busy schedule. We'd like to start the presentation of financial results ended March 2023 as a financial forecast for the fiscal year ending March 2024, as well as the outline of the new midterm plan, which was announced today. I'll be serving as the moderator today my name is Hanaki of IR office. Thank you so much for your cooperation.

I'd like introduce the attendees from our side. First Representative Member of the Board and President to CEO Mr. Shimada.

[Akira Shimada]

Thank you. Shimada is my name.

[Takuro Hanaki, Head of Investor Relations]

Representative Member of the Board Senior Executive Vice President Mr. Hiroi.

[Takashi Hiroi, Senior Executive Vice President]

Hiroi is my name. Thank you very much.

[Takuro Hanaki, Head of Investor Relations]

Senior Vice President, Head of Finance and Accounting; Mr. Nakayama; Senior very President and Head of Corporate Strategy Planning Mr. Taniyama. These are the attendees from our side.

Today's distribution of the video and also audio will be available over our website. For those who joined the meeting today will be residential materials that are uploaded on our IR site.

Also on page 1 there is a statement about forward-looking statements we appreciate you reading through the page 1. Also with regard to the supplementary data that's announced at 13:00 hours today there was a typo on Page 1. So we would like to correct the typo. On page 1, there's reference to EBITDA margin. And under the column put EBITDA margin column that projection should be scripted to ¥3,039 billion. So we would like to make the correction at this juncture. And also we made the rectification to TSC back at 16:30 hours. Please confirm this at a later date. Thank you.

So now I would like to invite Mr. Shimada to talk about the financial highlights after, which we'll take questions from the floor. So Mr. Shimada the floor is yours.

[Akira Shimada]

Thank you. My name is Shimada, I'm the President and CEO. Thank you so much for joining us this morning, we appreciate your interest in our company. So first of all, let me share with you the finance results for 2023, as well as financial forecast for fiscal year 2023.

Now, we'd like to take as many questions as possible. So I will actually skip -- I will be very brief in my initial presentation. So please turn to page 4. Operating revenue and operating income profit all increased year-on-year. This is the fiscal year 2023 consolidated results highlights. And all of them reached record high levels. As for operating revenue this grew ¥979.7 billion year-on-year and reached ¥13,136.2 billion, due to increase in Global Solutions business revenue an increase from revenue from electricity business.

The impact of foreign currency was ¥280 billion. The operating income increased ¥60.4 billion year-on-year up to ¥1,829 billion as increase in [indiscernible] was offset by increase in operating revenue and cost reduction.

As our profit decreased ¥32 billion and reached ¥1,213.1 billion from increase in operating income. As for overseas operating income margin this improved 0.9 point [ph] up to 7.2% due to an increase in profit based on increased revenue as well as cost reduction driven by structural transformation and we achieved medium-term financial target of 7% one year ahead of the original schedule.

Now page 5. This relates to contributing factors by segment. Integrated ICT business segment, there was negative impact from price reduction in consumer communications segment, but this was covered by increase in revenue in enterprise business as well as Smart Life business as well as cost reduction. So this recorded increase in both operating revenue and operating income year-on-year. As the regional communication business there was the one-off cost increase factor in the previous fiscal year is no longer present.

But on top of more than expected increase in associated cost and the delay cost reduction at entities due to worsened due to large-scale malfunction in August both operating revenue and operating income dropped year-on-year.

As for Global Solutions Business segment, operating revenue and operating income increased year-on-year due to increase in revenue from robust demand for digital services as well as increased value-added service entity limited. In Other segment, due to increase in revenue from electricity business reflecting jump in the fuel price the entity and its operating revenue and operating income both increased.

So let me now turn to the forecast for fiscal year 2023. Operating revenues will decrease year-over-year while operating income and profit will increase year-on-year. That is the forecast summary for fiscal year 2023.

Operating income and profit will continue to reach record high levels. And we'll aim to reach EPS of ¥370 although the impact of [indiscernible] cost is uncertain. As operating revenue is expected to decrease year-on-year due to foreign exchange in declining revenue from electricity business, but our plan is to aim for increase in revenue in main business segments after excluding this impact.

As for operating income, well, the impact from rising associated cost is uncertain, we expect operating income will increase in ¥12 billion year-on-year based on increase in profit in group companies such as DOCOMO as for profit, but despite the increase in interest payments, profit will increased ¥41.9 billion year-on-year based on the increase in operating income.

Turning now to forecast summary by segment for fiscal year 2023. Let me start by mentioning, integrated ICT business segment. On top of growth in Enterprise business and Smart Life business, downward pressure on revenue was eased due to increase in the number of users signing up to medium to large data bucket plan in the consumer communications business, as well as cost efficiency. So DOCOMO, as a whole will see an increase in both operating revenue and operating income.

Turning now to the Regional Communications segment. We expect increase in both operating revenue and income and cost efficiency measures that were delayed will not be implemented at NTT West, as well as expanded growth business at NTT East and West and cost efficiency. As for Global Solutions business segment, well, there's negative impact from currency, operating revenue and operating income is expected to grow year-on-year from robust demand for digital services and also cost reduction through structural transformation.

As for the Others business, operating revenue is expected to decline year-on-year, as a result from drop in revenue from the business based on more appropriate sales volume at NTT in it. Although, decline will be pushed down on operating income, we expect operating income will increase year-on-year due to increased profit in Others Solutions business. And we're making very strong progress against the medium-term plan. As for EPS this reached ¥348 as of fiscal year, which will exceed the planned ¥340. We aim to reach EPS of ¥370 which is the financial target for this year will be achieved.

Now by expanding the new medium term management strategy, we will shift to new financial targets and the current target excluding EPS who [indiscernible] targets containing the new strategy plan. Now this is their first material. This is self-explanatory, so I will not explain this page.

So, let me now go on to talk about the new medium-term management strategy, which is entitled as follows. New value creation and sustainability 2027, powered by ION. This is the subtitle of our new medium-term management strategy. This will be a five-year plan covering fiscal year 2023, up until fiscal year 2027. It is a five-year plan. The fundamental principles of the new plan are as follows. Innovating a sustainable future for people and planet. That will be the principle for this new strategy.

Next page, please. In order to achieve the aforementioned, we will increase our investment in growth areas. We will invest ¥8 trillion in growth areas over the next five years, an increase of 50% from the previous level. Therefore, we must also generate the cash capability for the future. The EBITDA which has been flat so far is targeted to increase by 20% to approximately ¥4 trillion in fiscal year 2027.

Next, I'd like to talk about the various pillars. The first pillar is NTT as a creator of new value and accelerator of a global sustainable society. The second and third pillar, the framework to support the first pillar. The second pillar is upgrading the customer experience and the first pillar is improving the employee experience, the nine initiatives that comprise these pillars will now be explained.

First is NTT as a creator of new value and accelerator of a global sustainable society. The first initiative is creation of new value through IOWN. As a solution to the increasing power consumption resulting from the expanding use of AI NTT will establish NTT Innovative Devices Corporation in June 2023 with the aim of accelerating the commercialization of the photonics electronic convergence devices. The company will start with a capital injection of JPY 30 billion and will consider increasing gradually.

In addition to accelerate IOWN R&D and commercialization including succeed we will invest JPY 100 billion in fiscal year 2023 for IOWN R&D as a whole. In addition the company will continue to invest funds to accelerate the commercialization of services and digital twin computing. The second initiative is data-driven creation of new values in order to strengthen our personal business centered on individual customers we will strengthen DOCOMO's SmartLife Business and aggressively invest more than JPY 1 trillion over the next five years in growth areas.

For example, we will expand and upgrade services in various fields, such as finance healthcare and medical services and analyze various data obtained through these services to provide more personalized and optimized services.

Next, I would like to talk about the strengthening of the use of DX and data in society and industry. We will globally deploy solutions services and platform services for corporate customers utilizing technologies, such as AI robotics, IOWN [indiscernible] and the security to transform the industries that support our daily lives and society. We will invest more than JPY 3 trillion in this field over the next five years.

Next is the expansion and upgrading of data centers, which are important platforms for data driven society. NTT Group will further expand its data center infrastructure which is currently the world's third largest and they introduced IOWN technology. To this end we'll invest more than JPY 1.5 trillion over the next five years to double our data center capacity from the current 1,100 megawatts.

Next page please. The third initiative is realization of cyclic economy society, we will promote the green solutions realized through the combination of green energy and ICT and invest approximately JPY 1 trillion over the next five years. In addition to expand our renewable energy and power generation business, we will realize a stable supply of locally produced optimized and efficient delinquency for local consumption by utilizing storage battery EMS and other technologies.

Next let me talk about creating circular economy-oriented business. On top of renewables we'll pursue recycling of waste of various industries. So we'll be able to realize sustainable society through recycling of materials. Also based on leverage of IOWN 5G, IoT, AI robot, we will contribute to improved efficiency and value addition in primary industry as well as industrial development and regional revitalization as well.

Please -- let me now talk about progression towards Net Zero. Looking ahead 2040 with regard to NTT Green innovation for 2040, we would like to expand this to Scope 3 on top of expanding into Scope 1 and 2.

The fourth pillar relates to further strengthening of business foundations. We'd like to leverage our production from lessons from the past failures. We will make our network systems more resilient towards large-scale failures [indiscernible] as in order to and local infrastructure. And also we will be enhancing our [indiscernible] distort ever-intensifying severe natural disasters. We'll be investing roughly JPY 160 billion by fiscal 2025 toward this area.

Next pillar relates to upgrading the customer experience. We let the photocofusion of research and development with a market focused strategy. We will be combining and certain -- our R&D capabilities with our market analysis and alliance capabilities. It will create R&D marketing strategy division under NTT Holding company structure. On top of product oriented R&D reinforcement we will also be collaborating various customers and partners globally and we'll be covering all the way from R&D up until product delivery and also pursue alliance with various partners going forward that is our plan.

This initiative relates to strengthening of services that emphasize customer experience. We will see stakeholders as potential customers and we'll be placing importance of customer experience first. So we'll track customer journey. We'll also be providing agile service. We'll be conducting proven update services and we would like to offer new experiences and impressions that will exceed customer expectations so that NTT group will – expected by the customers.

Next pillar relates to improving employee experience or ES. So the seven releases, related to open and innovative corporate culture. We'll place emphasis on customer, first. But at the same time, we will be pursuing a culture for just open collaboration and trial and error. And also we will continue to reinforce our initiation to diversity and inclusion as well.

It relates to supporting career growth. We will be supporting employee growth and increased investment in human capital, to drive business growth. For example, based on the personal systems, based on expertise, we've just introduced in April last year or this year, we will support employee acquiring external qualifications, as well as expand many of training programs in 18 years as well as, strengthen careers, consulting functions that provide career design advice. We will also support total career development through support related to various life events including child birth, childrearing and nursing as well.

Finally the ninth initiative is to -- is global benefits for employees and their families. In the unfortunate event of our employees death, we will expand the program to support a portion of the educational expenses of the employees' children until they graduate from college.

In Japan, we have been supporting educational expenses for children in a certain event since 1988. NTT group [ph] will consider the introduction of a similar support system for the approximately 150,000 employees working for the group and consider the introduction from next fiscal year.

Next, I would like to talk about the medium-term financial targets. As explained earlier, we have set a target of a 20% increase in EBITDA in fiscal year 2022. In the growth areas, that will be the drivers of the growth in addition to the 40% increase in EBITDA in fiscal year 2022, we will also set a target of a 10% overseas operating margin in fiscal year 2025, for each of the global businesses that will focus on the growth areas.

Initially we set target for 10% in EBITDA, versus fiscal year 2022. In addition, we will set a target of a 10% increase in EBITDA versus fiscal 2022, and the target of 9% ROIC to improve capital efficiency. In addition, we will set three sustainability-related indicators percentage of newly appointed female managers and greenhouse gas emissions and employee engagement rate, based on the sustainable charter.

Strengthening our ability, to generate cash flow growth, as you can see here. As you can see both, we will continue to aim for sustainable growth and shareholder returns and aim for growth that is at the same level of the past. While the demand for funds will increase, as we expand the scale of investments to achieve further growth, and we will also pay attention to capital efficiency to maintain and lower the debt-to-EBITDA ratio to 2 times.

Regarding the fundamental policy of the shareholder returns, we will remain as we have done in the past the company's -- and continue to increase dividends while flexibly implementing share buybacks to improve capital efficiency. This is the end of the explanation of the new medium-term management strategy.

And next, I would like to talk about the shareholder returns, stock split and organizational changes. First of all, regarding shareholder returns and stock split, the Board of Directors have decided JPY125 per share for fiscal year 2023, an increase of JPY5 over the previous year. This will be taking consecutive year of dividend increase since fiscal year 2011, the Board of Directors also resolved today to implement, a stock split by conducting a 25:1 stock spilt effective July 1st and significantly reducing the investment unit, we have to create an environment that makes investing in our company's share ACM, to expand the investor base among the wide range of generations, who share NTT group's commitment to sustainable growth.

We will now proceed to talk about the new organization of the holding company. As I explained, on the new medium-term management strategy, we will establish R&D and marketing headquarters, the R&D -- marketing strategy revenue will be established under the marketing planning and analysis department and analysis -- alliance department who will be established, and the research and planning department in order to strengthen our research and development -- in order to strengthen our global marketing and promotion centered on CX.

We will separate public relations office from the corporate strategy planning department to establish public relations department under the direct control of the President. We will also establish a legal office within the General Affairs department. In addition, sustainability office will be established within the corporate strategy planning department to accelerate the implementation of the sustainability charter initiatives. That is all for me. Thank you.

[Takuro Hanaki, Head of Investor Relations]

Thank you very much, Mr. Shimada. We’d now like to go on to the Q&A session. During the questions, we will take questions from those of you who are here on site, and also take questions from those of you who are connected to the phone conference beforehand. [Operator Instructions]

So the first questions from those of who are here on site. We'd like to start with the gentleman in the front row in the center.

[Satoru Kikuchi, SMBC Nikko Securities]

Thank you. SMBC Nikko Securities, Kikuchi is my name. Thank you for this opportunity. I want to ask two questions if I may. First question relates to EPS. Two questions about EPS. This fiscal year the JPY370 for this fiscal year, well if I do the calculation, the number of stocks are probably smaller than the number of shares right now. I think that seems to be the assumption. So if you take a look at EPS growth and there's a difference in the growth of EPS as well as the net growth, net profit. So thank you. Balance calculated based on smaller number of shares. That is because you are envisioning ship repurchase -- is it target based on a certain level of share buyback program? That's my first question.

And the other question related to EPS. So the new target in the new medium-term strategy. I think in the earlier page, I think you said that you're visioning similar growth up until now. When you see similar growth up until now, are you talking about the growth under the current medium-term plan, which has just ended? Now you're talking about a new five-year plan and I will do the calculation. I think in the new five-year plan you've vision of 41.6%. So can you really increase EPS by 40% over the five-year plan? Is that the message that you're trying to send? So if you could please elaborate on the EPS growth? Thank you for your question.

[Akira Shimada]

Thank you for your question. First with regard to EPS. So JPY370, the target, which we have set for this fiscal year. In principle, well, as far the standards are concerned, well, it's difficult to say but I think we will probably carry out some level of share buyback along the way.

Now the number we have based on our number of shares during the meeting of this previous move. So that is where the gap lies, because we are placing ourselves on the number of shares in the middle of the period as for the EPS target for the new medium-term management strategy.

As you mentioned, Mr. Kikuchi, yes, that's the level that we want to increase, which means around 7% or so. Up until now, I think the past EPS growth rate was hovering around 5% to 6%. So we are beginning for similar level of growth. That is the intention. That is our wish. But this time around though, the main indicator will be cash generation abilities. That is the main message of our plan.

So that is why EPS -- as far as EPS is concerned, we can do the calculation based on annual guidance. So we make sure that the EPS will be clear. But we have not set a long-term EPS target this time around. So directly we have set target that relates to EBITDA estimated to our financial target. So that is the situation.

Yes, shareholder return is very important for us. So we will continue to do a very robust shareholder return program. Thank you.

[Satoru Kikuchi, SMBC Nikko Securities]

Thank you. So I think the drop in share price after 1 p.m., Akira, is because of the realization with share repurchase. But I understand the assumption.

[Akira Shimada]

Yes, that is the assumption. That is why we provided the caveat on this page. We talk about making -- we'll continue to resets to the growth and we'll continue to make shareholder return compatible, and we'll also continue with EPS growth. But again, EBITDA has been set is a direct target this time around. And this is linked with the bonus for the executives. And for this fiscal year -- as far as this fiscal year is concerned, tension around yen in the previous plan is there. So this fiscal year within the KPI for extended bonus EPS is included. So that is how we'll be treating EPS numbers.

[Satoru Kikuchi, SMBC Nikko Securities]

I see, thank you. Second question, there are couple of investments, and EBITDA this time around you're talking about investing ¥12 trillion. In particular, you want to invest ¥8 trillion in the new business areas. So, the term new business. I think these are also by the revenue extend that strong at this juncture. So to what extent are you going to make investment in advance of increasing sales? How much investment can you tolerate before you can actually generate sufficient revenue growth going forward?

Take a look at the track record so far. You did not take a case. I don't think you were involved in real pre-welding type of investment. You do not carry out growth initial investment. I think you'll be focused on P&L. So can we take a little continue to be cautious in your investment in advance of your sales growth?

And also with regard to data centers, we heard the financial presentation of financial results from NTT DATA yesterday. I think Data confirms the ¥50 billion. So already they are making a very strong plan for data center growth at NTT DATA. It is true that as far as data center is concerned you are going to invest in data centers EBITDA will be growing. But still in regard to operating income in the Q&A session for NTT DATA, as I [indiscernible] reset here such investment. And they said that they get just because of operating margin, but they were very careful -- they were very concerned about the potential increase in interest rate going forward. So, on a net basis, can you really sustain profit in the sector? That is our concern. So in terms of data center investment, be it EBITDA or be it the operating margin, should you really measure the growth of data center business based on such indicators just do not include interest rate calculation as well?

So ¥1.5 trillion investment is over the five-year period. This will part be borne by the shareholders of NTT DATA in reality. So maybe that is going to wipe away the financial profit for NTT DATA, if the interest rate were to increase down the line that is our concern. So, EPS growth, you have said that as the target. I think at the end of the day these -- there will be reasonable. But when it comes to data center investment, especially outside Japan, you will be dollar-based capital procurement. So we're concerned about the financing of the data center business at your group.

So group finance or DOCOMO have a strong cash -- maybe should create a mechanism whereby you'll be able to finance this type of investment our NTT group. So we're concerned about this matter. So, how much overall investment are you going to do? And what about the investment for data centers, we're concerned about this later. So if you could please talk about the overall investment into data center?

[Akira Shimada]

Yes. Okay. With ¥8 trillion investment, this will be down the capital investment and also, will -- but as you're aware, network business is now part of the existing area. So in the commercial existing area, business area, capital investment will continue to be conducted. Now data center will be included in the growth center.

But as you pointed out, yes we do need some investments in advance in the area that you mentioned. Now this picture, it shows the five-year plan. But this year, I think the investment will be heavily skewed towards the first couple of years, so that we'll be able to generate return.

As far as data center is concerned, what about the investment in the data center. I think that was your question. As you pointed out, the interest rate burden need to be recouped. That is of course essential. And as a matter of fact, right now, why is it that we are making such investment into data center. In the previous fiscal year we have made a significant investment of ¥280 billion into data center. If we included the third-party investment, it will exceed ¥200 billion.

We have a lot of orders. We're getting a lot of demand for data centers. We talk about construction of new data centers. Naturally, because of the interest rate rising, the product the customers are actually paying for this. We need to collect the payment from the customers.

So, going forward, we're going to establish new data centers going forward, which should be based on such recouping of interest rate. Even then there's very strong demand for data centers from customers. Now, what about the interest rate payment for the past investments that we've already made. That’s something that we need to consider.

As far as the general financing mechanism is concerned it will be as the NTT financing. We'll be using NTT Group finance. That basic policy will not change. So, we'll let you data do direct financing that is not the case. So, I think we'll be very careful and we will be making very good consortiums in this matter.

[Satoru Kikuchi, SMBC Nikko Securities]

Thank you for that. NTT Limited has more than ¥1 trillion interest-bearing burden. Interest payment is start increasing. Next year it could be double the current ¥320 billion. So, the interest rate payment at NTT Limited will be very heavy. Are you going to lower this? I know you cannot talk specific, but are you going to make efforts to reduce interest rate payment on the part of NTT Limited going forward?

[Akira Shimada]

It depends on the situation in the marketplace. But if the interest rate payment is going to be very high going forward, well we need to consider how we can lower the interest rate payment for the past investments. That's something that we need to consult with data. But for the future, we should be able to recoup that through profit. That is the model which will be viable. I still think that will be a viable model.

[Satoru Kikuchi, SMBC Nikko Securities]

Okay. Thank you very much. That is all from my side. Thank you.

[Akira Shimada]

If I could add further, of course, if the interest rate would increase even further down the road, then we need to give you a further consideration to possible measures. I just want to add that. Thank you.

But in any event I think eventually interest rate should plateau out eventually. And long-term, it should be on a downward track that is -- so I think in principle with regard to new investments, I think we'll be able to collect the payment of interest rates from the customers. Thank you. I just wanted to add that. Thank you. Next question.

[Daisaku Masuno, Nomura Securities]

Daisaku Masuno from Nomura Securities. Let me ask two questions. First relates to the medium-term financial targets. With regard to share price evaluation yes that they allow people use EPS. So, that being the case, using EBITDA and net debt control, I think that will be one indicator.

Up until now operating profit and EPS and shareholder returns, these numbers were actually followed and tracked by the market -- participants in the marketplace. So, it's not just EPS, when you invest, depreciation will increase and have an impact on operating income. That is the flow -- that is taking on our part.

So, what about operating income EPS? And also if the depreciation and amortization will increase this pressure down. Operating income this will have a downward pressure on EPS. So, can you share with us your thoughts about these indicators? How do you intend to address these indicators because these are all under the EBITDA? These indicators have relevance to EBITDA. So, if you can share with us your thoughts about the three indicators that I just mentioned?

[Akira Shimada]

I think I already responded to this earlier with regard to EPS. It's not part of the major indicator for the new plan. But having said that I think we want to maintain the same level of growth in EPS that we have indicated in the past. So, that I think we have been able to point it out in so that there's any concern about EPS should be eliminated. Mr. Hiroi, CFO would you like to respond?

[Takashi Hiroi, Senior Executive Vice President]

Hiroi here. Let me respond. So, we took EBITDA trend and operating income trend, they are not that desperate. I think they're probably not that different.

[Daisaku Masuno, Nomura Securities]

So, we talked about NTT investment earlier. So, to what extent would that be spent as capital investment? And how much of that will be done through equity investment?

[Takashi Hiroi, Senior Executive Vice President]

That breakdown will have to be considered. I cannot give you the details about the breakdown between these two elements. But as far as our thinking is concerned, we want to maintain the same level of trend. We hope that the same -- we'll be able to see the same level of our trend. And that is assumption behind our setting EPS target.

[Daisaku Masuno, Nomura Securities]

Thank you. Very clear. My second question I want to ask about the investment. That is a question that I am here to ask. It all boils down to your investment. For example, accumulated ¥5 trillion increase was there. So if you do that for a five-year period, nine-year period your depreciation and amortization will significantly grow because of the increase in the investment. So among the ¥12 trillion I think equity investment will account for a very large part. For example, when you look at the CapEx you're talking about ¥2 trillion for CapEx. So it's not ¥2.4 trillion.

So if that is the case then the CapEx of roughly ¥2 trillion as a basis is that the base assumption for CapEx, or do you -- there has been some change in -- or increase in CapEx. That's my question about CapEx overall. So with regard to data center yes this is a growth area if you invest there's return. So I think you should invest. I'm in favor of your investment in data centers. What about other such as smart life, data-driven green solutions.

[Takashi Hiroi, Senior Executive Vice President]

We do not have the concrete image of projects in the aforementioned areas. So maybe I should ask this DOCOMO later on.

[Daisaku Masuno, Nomura Securities]

But can you give us some concrete picture? What type of projects are you expecting? If you could share with us some concrete projects that we have great help? Thank you.

[Takashi Hiroi, Senior Executive Vice President]

Well, thank you. As far as DOCOMO is concerned I hope you direct your questions to our colleagues from DOCOMO later on. But I believe as far as DOCOMO is concerned they are trying to expand their Smart Life business. They're also going to be investing in Smart Life. I think for details you should ask President Mr. Akira. As for green solutions we have given you the Energy and Environment division and we will aim for carbon neutral in 2040. That is what we mentioned in our vision.

And of this 50% will be done through the ION project. We want to cover 50% through power saving at ION and the remaining 50% will be done by using renewables. Now at that well right now what we have in mind is as follows. We have invested in FIT power source feed-in tariff power system. So we've been very active in this area. So in the case of FIT power source as you're probably familiar the return is quite high.

So after the FIT Fit is over it will happen. This contribution can be used to cover power consumption for NTT Group. So that being the case for the time being, we will continue with procurement of green energy source.

Also in conjunction with that if we're able to confirm that then we'll be able to engage in local power generation and local power consumption projects. Unless the storage battery comes down in price it will not be viable as a business because we cannot generate high return. But over the next couple of years, I believe that storage battery will probably be coming down in prices. So in line with that we hope that we'll be able to carry out some business opportunities there.

[Daisaku Masuno, Nomura Securities]

Thank you. Is the image of CapEx in ¥2 trillion roughly this is very accurate or going to ramp up CapEx more than on same ¥two trillion?

[Takashi Hiroi, Senior Executive Vice President]

Very difficult to respond, but we don't expect a rapid dynamic increase in CapEx.

[Daisaku Masuno, Nomura Securities]

Thank you. Thank you for that. I think -- so if you put up the number ¥8 trillion that we associate that with ¥1 trillion CapEx. So it's good to hear. So one more thing. With regards to data center Digital Reality in Equinix Funds from operations is the defense of operation. If you could discuss like their [indiscernible] that would be great because we can talk about after tax and after interest rate. So it's not so much EBITDA but the FFO four is probably a better indicator for your disclosure. I hope that we'll discuss this matter eventually? Thank you.

[Unidentified Company Representative]

Thank you. We take out of your suggestion and we would like to give this matter consideration. Thank you very much.

[Operator]

Thank you very much. We will take the next question. The person in the middle row please.

[Maki Tanaka, Mitsubishi UFJ Morgan Stanley Securities]

Mitsubishi UFJ Morgan Stanley Securities. My name is Tanaka. Now regarding the photonics electronic convergence I believe that it is electronics and ¥200 billion in terms of revenues will be the target for the future. Now when ¥200 billion is achieved first of all at what timing can it be realized? And what is going to be the impact on profit? Is there a breakeven point? Please elaborate? Currently, it may be difficult to give details. But mass production going forward is that something that is already visible. Please elaborate?

[Unidentified Company Representative]

¥200 billion has been written by the Nikkei newspaper in the afternoon, because I received a question in the press conference and it was talking about 230 -- ¥200 billion for the period ending March 2030, but if you just get look at device that could be at the scale of revenue. However, using the device for example white box can be created. And digital train can be established.

If these initiatives are implemented they will be considered a separate business. Obviously, whether we want to internalize this or are we going to be working with the conventional vendors to manufacture the equipment is not being decided. But I think there is opportunity for us to be directly involved, but it is not the juncture in which we should make a decision yet. Ion 2.0 is by 2025.

Now, the photonic electronic conversions in the board is what we would like to realize first and foremost. ¥200 billion is inclusive of no revenues. And therefore, in reality for the photonics and electronics device, it's likely to sell from down to 3.0 ION 3.0. So at the time of 2.0 from 2025 the business of in -- by 2027 period it is not likely to be significant revenues. Now manufacturing is poised for around 2029 [indiscernible] and therefore at the time of 2027, we have to establish a good structure. But in terms of deployment that is our plan.

[Hideaki Tanaka]

In that regard no revenues how large is that today? Do you have -- about ¥40 billion currently?

[Unidentified Company Representative]

All right. So, it seems that -- in the midterm for this business the -- it's not really a profit impact. So investment will have to proceed before profit can be posted. But full-fledged investment is likely to be around 2027. Therefore, until 2026, the investment amount is likely not to be very significant. For the time being, we will consider the plan going forward? Is it going to be fables, or are we going to have our own line and make inroads into manufacturing is a decision that has not been made yet. It is likely that we will go fabless under normal circumstances. But even if you go in fabless to manufacture new devices a certain level of the investment as well as fund assistance may be required. We need to consider this further going forward.

[Hideaki Tanaka]

Thank you.

[Operator]

Please go ahead with your question, sir.

[Yoshio Ando, Daiwa Securities]

My name is Ando with Daiwa Securities. I would like to ask two questions, if I may. My first question is actually a confirmation as well as a request. First of all, the financial targets for the old midterm plan you mentioned a similar level as past. You mentioned 7% -- no that should be 5%, or 6% okay. So that's I just want to go from 5% or 6% in the past okay. That's fine. Thank you. Now Mr. Hiroi, you mentioned that as first operating income is concerned, you mentioned that you are making similar average growth as EBITDA. Is that what you mentioned? Could I confirm what you mentioned? Is that what you said? Okay. You're nodding. Okay. So you're nodding? Okay. Thank you. That is the case. I just want to confirm that. Thank you. Now so the growth rate applicable for the final year of the plan. But in the meantime, along the way, we're talking about the straight-line trend? Is that what you're visioning, what type of pattern for the vision?

[Takashi Hiroi, Senior Executive Vice President]

I don't think it will be – it's clearest whether we can have a straight-line trend. It will depend on the timing of investment. It will hinge on the potential timing for potential acquisitions. Next we want to make sure that we do a very strong performance. So let me see.

Again, this relates to the other parties, it's very difficult to say what type of pattern this will follow. But at the end of the day we want to achieve that – that we want to make sure that we achieve that target at the end of the day – at the end of the plan. In terms of the middle of the plan, it's very difficult to give an echo picture of what type of pattern that is good paint.

[Yoshio Ando, Daiwa Securities]

Okay. Thank you. I now have a request. So the points that I just confirm right now, if you could please kindly express that more concretely. If you could – unless you could communicate that message based on text, inclusive of myself, because we're not smart. We do not fully understand your strategy in thinking unless you explain that. So I just want to avoid – if you want to avoid a misconception? Well, we understand the EBITDA is the primary indicator for your new plan. But if you could please add additional information on top of that it could be a footnote. If you could print that then I think this will give a sense of comfort to the investor community. So that's my request.

Now my second question. This relates to Page 24. Interest rate debt and EBITDA interest rate to EBITDA, you have to make sure that it's around 2%. You want to reduce that. So if we backtrack interest rate bearing debt will remain the same. Is my understanding correct? And also furthermore, what about free cash flow? If you can give us some indicators, so that we can calculate free cash flow?

[Kazuhiko Nakayama, Head of Finance & Accounting]

Okay. Yes, when we consider the potential growth trend for EBITDA going forward. As you just pointed out, the interest rate bearing debt will not go down in absolute terms. I think the interest rate bearing debt will probably remain flat.

[Yoshio Ando, Daiwa Securities]

For – in terms of – you talked about improved asset efficiency. Is that included?

[Takashi Hiroi, Senior Executive Vice President]

Well, in terms of asset efficiency improvement. These factors are not factored in in the calculation. Naturally, of course this must be considered of course. So that's a separate factor. We want to add that as a separate factor.

[Yoshio Ando, Daiwa Securities]

Okay. Thank you.

[Operator]

Thank you very much. The gentleman.

[Unidentified Analyst]

I have a similar question to Ando San's question. Now it's like working on a puzzle in terms of the midterm strategy. I have three questions. First question is regarding the growth areas ROIC. What is the outlook going forward? You said that for existing areas is around 9%. It will increase to 9%. And for the growth area ROIC, please talk about the current level and five years down the road as well as 10 years down the road. And please elaborate further.

I think I'll just ask all the questions I have. It seems that this is many capital intensive business but you don't want to increase that. then a kind of level of external financing are you going to use according to your model, third-party joint venture funds could be utilized for example. The third area is regarding capital-intensive business to be pursued. That means that in terms of capital allocation, it seems that shareholder return ratio will be undermined will decrease. If that is not the case, please give us your explanation?

[Kazuhiko Nakayama, Head of Finance & Accounting]

Now, the two pages after this one is showing, that the diagram looks as if debt-to-EBITDA ratio is going directly from 2.5 times to two times, but the process in between accrued increase therefore, the interest-bearing debt could increase somewhat. But ultimately, we hope to contain it to the level of two times, ultimately. It is a reflection of our intention.

But in the process between the two for this year it's going to be around the same. But for next fiscal year we could have a different plan. Ultimately, this will have an impact on the EBITDA growth which will require investment. Therefore, there could be temporary increases during this journey.

[Unidentified Analyst]

ROIC, for the growth area and five years and 10 years down the road, please?

[Kazuhiko Nakayama, Head of Finance & Accounting]

It's difficult to answer.

[Unidentified Analyst]

Regarding ROIC, in terms of capital ultimately that is not going to increase according to our plan. So EBITDA growth will be promoted. That means that the profit that we earn every year, how much can be provided as a shareholder return? You probably have an image in your mind. And for this area there is no change in our posture, but in terms of the actual amount.

[Kazuhiko Nakayama, Head of Finance & Accounting]

Well, if you ask specific numbers it's very difficult for us to give you a clear answer. We cannot give you specifics. That is what -- how much we can say. Thank you.

[Operator]

Thank you very much, any other questions? We'll go to the gentleman, in the front row.

[Unidentified Analyst]

Thank you very much. [indiscernible] Thank you so much for this opportunity. This is a very vague and biggest question I apologize. When you go about this new medium-term management strategy what was your thinking behind this plan? Mr. Shimada this is-- you created this new medium plan.

The first that your plan is an extension of the past strategies or when you consider the external environment, do you believe that you're at a training point and they decided to push the accelerator. So what is -- so how do you characterize the new medium-term management strategy?

You just have to accelerate your activities because we believe that this is a turning point. What prompted you to see this as a turning point? What changes do you see? If you could please share with us how you see the nature and the characteristics of the new plan. Thank you so much.

[Akira Shimada]

Well, thank you for the question. Is it the same as the past plans? That's probably not the case. It's probably identical to the past strategies and plans. So, why we decided to generate cash by fiscal year 2027?

Earlier, we talked about the IOWN for example. The IOWN, we want to see mass reduction of new photonics, electronics converged devices. That will require substantial cash. So at the juncture of fiscal year 2027, we need to increase our cash-generating capability so that we can pave the way for investment into new growth areas.

So we wanted to consider creating such a cycle. If that is the case then we needed to set such a target to enable that. Unless, we set the targets we'll not be able to reach our goal and our thinking.

Naturally, we don't want to recklessly -- we don't want to be reckless in our activities. That's part of our management. So that we'll be mindful of the preventive circumstances and the management conditions and based on that, we should make investment decisions so we should not be reckless in our investment.

[Unidentified Analyst]

Thank you very much for that.

[Akira Shimada]

Thank you.

[Operator]

Thank you. Any other questions, people at the venue or people participating, remotely any further questions? It seems not. Yeah. Therefore, we would like to bring this meeting to a close. Thank you very much for your attendance today.