Ladies and gentlemen, thank you for attending the call today. Now, I'll begin the conference call for KT&G's 2024 third quarter earnings report. After the presentation from KT&G, there will be a Q&A session with the participants of the call. If you wish to participate with a question, please press the asterisk sign and the number one. We will now begin with KT&G's presentation. Ladies and gentlemen, I am Kate Park, Head of Investor Relations at KT&G. Thank you for attending KT&G's 2024 third quarter earnings report. Today, we will begin with the third quarter earnings report, and then we will move on to announce our corporate Value-up Plan. We will take questions after our announcements for the earnings and the Value-up Plan. Please allow me to introduce the KT&G management team in attendance today. With us today, we have Mr. Sang-hak Lee, Chief Finance Officer, Mr.
Heo Chang-gu, Chief of Strategy and Planning, Mr. Park Seong-sik, Chief of Real Estate Business, Mr. Kwon Min-seok, Chief of Global Business, Mr. Lim Wang-seop, Chief of NGP, Mr. Yoon Young-chan, Chief of Marketing, Mr. Kim Young-beom, Head of Finance Office, and Mr. Jung Jong, Chief of Strategy at KGC. Please be advised that the earnings we are about to present today have yet to be audited by the outside auditor. Therefore, are subject to change in the audit process, and any forward-looking information discussed in the call today may differ from the actual results to be reported in the future. Now, we will present to you KT&G's 2024 third quarter results. We will begin with key items from our consolidated results and then move on to each business segment, starting with the key takeaways from our Q3 results.
In the third quarter of 2024, the tobacco business reached another record high revenue, with revenue up 7.7% and operating profit up 23.7%. Our global cigarette business posted yet another growth trifecta of volume, revenue, and operating profit, breaking the record for volume and revenue for two consecutive quarters. Higher sales and price increase led to growth of 10.1% volume, 30.5% revenue, and 167.2% operating profit. As for our NGP business, growth was again more profit-centered, with higher stick share in the revenue mix, leading to 18.9% operating profit growth. Based on such growth trend, Global CC, NGP, and Health Functional Food, or the three core businesses, delivered revenue beyond KRW 1 trillion combined in a single quarter for the first time. I'll now move on to Q3 consolidated results.
Q3 consolidated revenue was supported by strong growth in the tobacco business, but due to unfavorable comparison against last year in the real estate business, revenue was down 3.1% to KRW 1.6363 trillion. Q3 operating profit benefited from revenue growth in Global CC and NGP, as well as improved per-unit profitability to rise 2.2%, reaching KRW 415.7 billion. As for net income, despite growth in operating profit, currency-related losses led by FX movement within the quarter drove net income down by 28% to KRW 239.9 billion and EPS down by 16.9% to KRW 2,251. EBITDA rose by 2.5% to KRW 479.2 billion, with EBITDA margins at 29.3%. Moving on to reasons behind movement in earnings. In the tobacco business, COGS and expenses pulled down profits by KRW 24.4 billion, but improved product mix and pricing supported profits up by KRW 54 billion.
Impact from appreciation of the dollar against the won was plus KRW 10 billion. Higher sales volume centered around Global CC led to KRW 23.9 billion additional profits, surmounting to a total plus KRW 63.5 billion in tobacco. HFF also had positive impact from better economics in the overseas business, led to KRW 8.1 billion profit increase. However, the real estate business that suffers unfavorable comparison after the completion of large development projects dragged down profits by KRW 63.6 billion. All in all, consolidated operating profit grew by 2.2% versus the previous year. Moving on to earnings per business segment, starting with the tobacco business. Q3 tobacco revenue had upsides of Global CC, posting another record quarter revenue, and higher domestic NGP revenue to rise all in all 7.7% YoY to KRW 1.0478 trillion.
For Q3 operating profit, Global Cigarettes and NGP's profitability continued to improve, leading to 23.7% YoY profit growth to KRW 333 billion. Meanwhile, share of global operation for the quarter in tobacco with robust Global CC sales grew by 2.5 percentage points to reach 60.4%. Let's look at each segment of the tobacco business. First, in domestic cigarettes. Q3 domestic cigarettes saw a 5.6% decline in market volume. However, we continued to launch new products catering to consumer needs, continuing to grow market share that rose 0.6 percentage points YoY to 67.4%. For Q3 domestic CC revenue, we saw a 7.6% increase in DFS sales and an uptake in premium segment products that drove up the ASP, but the structural decline in market scale ultimately led to revenue decline. Moving on to Global Cigarettes.
Q3 Global CC grew in both volume and revenue to reach record high quarterly numbers for two quarters in a row. Sales volume saw increase in both export and subsidiaries, growing 10.1% to 16.32 billion sticks. In the top line, volume growth combined with continuous pricing led to a 30.5% revenue growth, which stood at KRW 419.7 billion. Global subsidiary revenue, mainly in Indonesia, saw volume growth as well as pricing effect to grow 33% year-on-year to KRW 197.2 billion. As for the export business, robust export in APAC and new markets led to volume and ASP growth, driving up revenue by 28.5% to KRW 222.5 billion. Next is NGP. The top line for NGP in the quarter, despite domestic revenue growth, impact from inventory adjustment of overseas devices that come with high unit prices suppressed revenue to KRW 193.2 billion, slightly lower than last year.
When it comes to the core growth driver of the NGP business, domestic and overseas sticks, volume grew by 4.4% cumulatively in the third quarter to 10.75 billion sticks. Diving deeper into our NGP numbers. Domestically, as competitors continued to launch new products and engage in aggressive marketing, the HNB category gained more traction, with market penetration moving up 1.8 percentage points YoY to 20.8%. Our domestic stick market share was supported by stronger device competitiveness centered around the lil Hybrid, as well as new stick launches, to continue with its upward trend to reach 46%. The global business, as we prepare for the launch of new platform overseas. We have been strategically adjusting sales of existing devices, which in turn had an impact to our stick sales, limiting its growth. However, with higher share of sticks in the revenue mix, the profitability of the business continued to improve.
Next to HFF. In Q3 HFF, despite growth in our international business, a subdued domestic HFF market and reduced discount promotions drove down revenue by 1.7% YoY to KRW 405.8 billion. For operating profit, profitability improvements in and outside Korea led to 13.3% growth in operating profit to KRW 68.8 billion. With our global expansion strategy leading to overseas HFF revenue growth, global revenue share in Q3 HFF rose by 5.8 percentage points to 21%. Breaking down the revenue to domestic and global. Upon analysis of domestic revenue by channel for Q3, our strategy focusing on high-growth platforms bore fruit, leading to higher revenue in strategic channels, including e-commerce.
However, a slow economy has led to reduced demand for gifts in the Chuseok holiday, and adjustments to large-scale promotion led to reduced revenue from large distribution channels and stand-alone stores, with domestic revenue down by 8.4% to KRW 320.5 billion. The global business revenue, seeing balanced growth across all major markets, including China and Japan, grew 35.6% to KRW 85.3 billion. Lastly, on our real estate business, Q3 revenue in real estate was still impacted by completion of Suwon and DNC development projects, as well as recalibration of our mid to long-term real estate business direction that led to reduced new investments, falling by 56.2% to KRW 98.5 billion. Q3 operating profit, with unfavorable comparison against Suwon and subsidiary development projects like DNC Deok-eun, declined by 83.4%, recording KRW 12.7 billion.
This concludes our presentation on KT&G's Q3 earnings report, and now I would like to hand over to Mr. Sang-Hak Lee, our CFO, who will present to you KT&G's corporate Value-up Plan. Ladies and gentlemen, this is Sang-Hak Lee, CFO at KT&G. I'd like to begin by extending my gratitude to all the interest and support you have given to our company. Back in November 2023, even before the government launched the Value-up program, KT&G preemptively announced our mid- to long-term business vision, as well as the three-year shareholder return plan spanning from 2024 to 2026, to enhance our corporate value, and today, one year later from that announcement, I'd like to share with our shareholders and investors KT&G's new and upgraded corporate Value-up Plan.
KT&G's new leadership has been trying to take the company to a global top-tier level by reinforcing core competitiveness and focusing on advancing the group's financial structure, setting both as major management initiatives, and under this strategy, we have strengthened our main business structure, focusing on our global operations, and reshuffled our asset portfolio with speed. As a result, we have been making tangible results in the business. Our Q3 Global CC revenue and volumes reached record numbers, and the operating profit from our global tobacco business in 2024 is expected to grow by 50% year-on-year on an annual basis. Supported by robust results from our main business, our annual ROE is expected to make a turnaround to 11%. With stronger fundamentals, our stock price rose by 19.3% despite a slow stock market outperforming the KOSPI index. Please allow me to elaborate further on our management strategy.
Top priority is the ROE enhancement project. In order to reach the 15% ROE target by 2027, the company has been executing ROE improvement initiatives in all domains, with profitability improvement, asset efficiency, and finance optimization as the three pillars. With the three core businesses at the center, we have been launching into new markets, advancing our price policy, and reducing costs to improve profitability. We have also been divesting non-core assets with low-profit contribution and rationalizing our inventory and working capital to enhance our asset efficiency. Lastly, we are attempting to break away from our historically conservative capital policy by strategically taking out leverage and advancing our capital allocation policy, and in turn, optimizing our financial structure.
Further improved profitability in our main business, with Global CC, NGP, and HFF, the three core businesses as the pillar, we have further segmented our focal points within each business, achieving business performance through continuous expansion, a three-by-three strategy, if you will. The top management of KT&G is also swiftly restructuring the company's low-yield non-core assets. Upon our review, the scope of assets for reshuffling includes 57 real estate properties and 60 financial assets, totaling to 117. Across four years, we are aiming to rationalize our assets to generate a total of approximately KRW 1 trillion worth of cash, and the resources will be utilized for growth investment and shareholder returns, helping to improve our capital efficiency. We are also innovating our CapEx investment strategy for higher efficiency in the investment.
The scale of the five-year CapEx investment plan from 2023 to 2027 has been revised down to KRW 2.4 trillion, streamlined by 31%. Despite such dramatic revisions to the investment, our capacity expansion plan for cigarettes remains the same, as well as the expected rate of returns. The company's recent track record and shareholder return is as the following. From 2021 to 2023, we fully executed our shareholder return of KRW 2.75 trillion in dividend and share buyback to reach total shareholder return rate of 99% in 2023. Also, for 2024 to 2026, we preemptively announced a three-year shareholder return plan that includes a KRW 1.8 trillion dividend and KRW 1 trillion share buyback, plus share cancellation of 15% of outstanding shares. As per this plan, so far in 2024, we have canceled KRW 700 billion worth of treasury shares, or 5.3% of outstanding shares, or 7.11 million shares.
Today, we wish to announce our Value-up Plan with an upgraded mid to long-term shareholder return. Starting with our baseline shareholder return plan, we are aligning our existing shareholder return plan down to 2026 with the timeline for our ROE enhancement target by 2027 by extending the return plan with upgraded scale. So the plan now is that from 2024, for four years down to 2027, we will execute cash returns of KRW 3.7 trillion. The cash returns will take the form of KRW 2.4 trillion dividend and KRW 1.3 trillion share buyback. On top of this, when we have resources from divesting non-core assets, we intend to use them for additional shareholder return, which is what we're calling a KT&G Plus Alpha program. As for the form of the additional shareholder return, we will prioritize share buyback and cancellation.
As a demonstration of our willingness, we will begin the KT&G Plus Alpha program immediately. After the launch of our new leadership, we have so far divested 36 assets, local real estate, and non-core assets combined. Utilizing the funds generated, we have decided to execute additional shareholder returns of 150 billion KRW for the year, and our board of directors have resolved today the buyback and cancellation of 1.35 million treasury shares. The share buyback will begin tomorrow in the market, and we plan to cancel the amount in full by the end of the year. Soon after gaining approval from our board and the AGM, we also plan to execute a year-end dividend that is higher than last year. When this is complete, KT&G will have executed shareholder returns of 1.4 trillion KRW for the year, putting our total shareholder return rates beyond 100%.
Also, in just a single year of 2024, we will have canceled 6.3% of total outstanding shares, or 8.46 million shares. I would like to briefly summarize the KT&G new Value-up objectives. Under new leadership, KT&G will do its utmost to reach 15% ROE by 2027, under the model of KT&G Plus Alpha value creation, along with the board of directors. Also, by 2027, we will execute cash returns of at least KRW 3.7 trillion, as well as cancel 20% of treasury shares. Moreover, when we have funds generated by divesting non-core assets, we will execute additional shareholder returns. With these efforts, KT&G will create corporate value at top level globally that could satisfy all of our stakeholders. I ask for your unwavering support for KT&G going forward. Thank you. With that, we conclude the KT&G corporate Value-up presentation, and we are now happy to take your questions.
[Foreign language] Now Q&A session will begin. Please press star one, that is, star one if you have any questions. Questions will be taken according to the order you have pressed, star one. For cancellation, please press star two, that is, star two on your phone. [Foreign language] The first question will be presented by Jung-wook Kim from Meritz . Please go ahead with your question.
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Yes, thank you for the opportunity. I have three questions. First question is about the performance of overseas subsidiaries and export. The outcome and the results are really outstanding. Could you provide more details and breakdowns per different markets and geographies? And to a certain extent, because you have record high performance in this quarter, it might serve as high base, a high comparison base for the next quarter and the next year as well. So in lieu of this base effect, can you provide some projection for the fourth quarter of this year and next quarter? Second question is on your real estate and property business.
Many of your projects are in suspension or in the process of being revisited and reviewed. Can you provide some updates? Third question is about total shareholder return. Thank you very much for your presentation on the topic. Can you provide more details and elaborate on the measures and initiatives that you're going to do to manage TSR rate in a long-term basis?
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Yes, thank you for the question. I am Kwon Min-seok, Chief of Global Business. To answer your first question, thanks to the increased export to Asia Pacific and new markets and increase in the sales volume in overseas subsidiaries, including Indonesia.
Following up on the second quarter, this year we have also record high quarterly performance, and in terms of sales and volume increase, we had quite a bit of outstanding outcome. The volume increased and price increase also factored in. We improved product mix, and there was also a synergetic effect of inflation in foreign exchange rate, so following up on the second quarter, we had again broke the record in terms of quarterly revenue, and at the same time, in terms of operating profit, ASP increased and volume increased, and that also uplifted the cost rate ratio in terms of improving it, and SG&A ratio got also improved, so overall, the operating profit increased 167% year- on- year. For the fourth quarter projection and next year's projection, we're also going to aggressively pursue more active operation in overseas markets.
We're going to try to revitalize existing geos and expand into new geographies, conducting and implementing more aggressive seeding strategies to accelerate the business and growth. We're going to implement differentiated pricing strategy for different markets in view of amplifying our profitability. So growth trajectory that had been seen until third quarter of this year is expected to continue through the year end, through two-digit growth rate and differentiated pricing strategy for different markets. We are looking to improve and even more maximize revenues and operating profit as per our guidance.
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Yes, let me answer the second question. I am Chief of Real Estate Business, Park Seong-sik. In order to improve the ROI across the entire group, we're going to liquidate low-yield rental real estate and business purpose idle site and any inventory assets that are not yet sold. In order to protect our profitability and stability in our business and to minimize impact on our profitability on a consolidated basis, we're going to continue on our real estate business, focusing more on profitability, centering around development initiatives that are done on the sites that are owned by KT&G.
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Yes, I am Chief of Strategy and Planning, Heo Chang-gu. Let me answer your third question. In 2023, the total shareholder return rate was 99%, and this year it's going to hover above 100%. Of course, numbers might be different depending on the net income of the different quarters, but our continuous strategy will have a higher TSR rate going forward, and we're going to implement more upgraded TSR-related initiatives. So in the future, the high rate of total shareholder return rate will be sustained and with greater and expanded efforts to maximize shareholder return.
[Foreign language] Morgan Stanley [Foreign language] . The next question will be presented by Hyun Kim from Morgan Stanley. Please go ahead with your question.
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Yes, I am Kim Hyun from Morgan Stanley. I also have three questions.
Thank you for the opportunity. First question is about raw material. You provided the guidance about the cost of raw material in the third quarter, saying that there are more stabilizing. Going forward, what are your projections for raw materials of tobacco, leaf, and other ancillary materials? Second question is about HFF. In the third quarter, the profitability of health functional foods improved. So going forward, can you also share what are your long-term plans, mainly for higher profitability for HFF? Third question is about your Value-up initiative. I appreciate your move to generate KRW 1 trillion of resources by rationalizing your non-core assets. So in the process, I was wondering what are the criteria according to which you're going to categorize non-core assets? And there must be some system set up inside the organization as to the disposition of these non-core assets.
So can you share more details about them?
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Yes, I am Kim Young-beom, Head of Finance Office. So let me provide the answer to your first question, which is about the cost of tobacco leaf and other materials. To brief you on the current status, the prices of tobacco leaf are constantly increasing. The trend sustained this year. In 2024, our foreign-produced tobacco leaf purchase unit cost increased 15.6% YoY. But because we are purchasing more volumes per unit, processing cost is decreasing, and our initiatives and efforts to reduce our cost are coming to fruition. So the entire manufacturing cost for CC and sticks is decreasing compared to the previous year. When it comes to projection, the speed of price increase for tobacco leaf is slowing down, and NTM prices are relatively stable compared to 2023.
Taking these into account on the long-term basis, cost burden will be alleviated going forward, and by pursuing more projects for cost reduction and by expanding highly lucrative and high profitability product sales, and by implementing different strategies for pricing in global markets, we're going to protect and improve our profitability continuously going forward.
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Yes, I am Chief of Strategy at KGC, Jung Jong.
In order to improve our profitability, we're going to focus on optimizing BRE and rationalizing our loss-making SKUs and decreasing channel commissions and fees. We are also looking to diversify our materials bought from global markets and bring more efficiency to our overseas subsidiary operations, thereby decreasing our entire SG&A expenses. We're going to implement more automation at the factory and manufacturing facility level, increasing yield, and overall costs will be decreased. We are also looking to decrease and reduce stock weight inventories and raw material inventories and optimize work in progress. By implementing all of these actions, we're going to improve our profitability, and our target and goal is to improve our OP margin to 11% by the year 2027.
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Yes, I am Heo Chang-gu, Chief of Strategy and Planning.
To answer your third question, which is about categorization and criteria for non-core assets and the process of disposition, in order from the perspective of overall ROE improvement and the alignment of our corporate strategy and its contribution to elevating our corporate value, we're looking at 57 different low-yield properties and assets and financial assets of 60 numbers to see if we can bring more rationalization and optimization to them. We are looking to liquidate them in sequence by prioritizing them. By 2027, by all of these efforts, we are expecting that we will be able to create KRW 1 trillion of excess cash. Of course, depending on different types of assets, it's quite difficult to predict the amount of disposition and liquidation that we're going to gain. Depending on the market condition and transaction condition terms and conditions, everything can be really liquid.
So we cannot provide any details at this point in time. And depending on the size of the asset, the process will include a resolution from the board of directors.
[Foreign language] The next question will be presented by Young-h oon Joo from NH Investment & Securities. Please go ahead with your question.
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Yes, I am Joo Young-h oon from NH Investment & Securities. Thank you for the opportunity. I have two questions. First one is that you have mentioned that additional cash of KRW 1 trillion will be generated from the sales of non-core properties. But I was wondering if this excess cash will only be used for shareholder return or will it be also utilized to improve your financial position? So can you share where the utility of this cash will be? Second question is about CapEx. You mentioned that your CapEx plan is diminished. And you also mentioned that it will not impact output. And what is the mechanism behind it?
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Yes, I am Chief of Strategy and Planning, Heo Chang-gu. About the KRW 1 trillion resources, it will be mainly used for shareholder return. We're looking at non-core property of 57 and financial assets of 60, and we're going to dispose them and liquidate them to create KRW 1 trillion of excess capital within four years. This fund will be mainly used for growth investment and shareholder return. There is also KRW 150 billion of additional measures we're going to take to buy back our stock and retire them. Regarding the second question on CapEx, even after the adjustment in our CapEx plan, there will not be any change to our existing capacity. This is mainly attributable to our manufacturing partnership we have with PMI and other OEM companies. The level of capacity will be sustained at the previous level.
The CapEx rate of return that we have already shared will be at the same level for the coming five years.
[Foreign language] The next question will be presented by Seong-ho Lee from CLSA. Please go ahead with your question.
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Yes, I'm Lee Seong-ho from CLSA.
So KT&G is already at the highest level in terms of total shareholder return. And again, you are further expanding the efforts and I appreciate that. I have two shareholder return-related questions and one operation-related one. First one, you mentioned that CapEx plan will be further strengthened. And from the February and November, from February to November of this year, the CapEx plan has decreased quite a lot and there is almost KRW 330 billion of CapEx plan going forward. So in three coming years, there is only the half of an amount compared to the past level. So with expected reduction in CapEx plan, CapEx investment of over KRW 1 trillion, does this mean that your leveraging and financing from external sources will decrease as well? And you mentioned NGP production will continue to expand despite CapEx reduction.
I believe there used to be a breakdown of information regarding where CapEx is being used. Can I construe this, interpret this as the CapEx will be only decreased for HFF business division? And second question is you shared with us your buyback plan and cancellation until 2027. And of course, it's again very far away, but many investors might be curious as to what's going to happen after 2027. You can also share your long-term perspective on total shareholder return. There are many different vehicles to return to shareholders. There can be special dividend and CapEx investment for future growth. And why did you decide on treasury stock purchase and cancellation? And you mentioned that KRW 1 trillion will be used mainly for shareholder return. The entirety of KRW 1 trillion of resources will be used for treasury stock repurchase and cancellation.
Can I get your confirmation on that? Third question is about NGP, particularly your overseas stick volume is showing a general and gradual decrease. So from the first quarter of last year, it stood at about 2 billion sticks and it started to ebb away and show gradual reduction quarter on quarter since then more pronouncedly this recent quarters. So you mentioned during the last quarter's earnings call that there are a plan for new products and I understand you also made inroads into many different markets already. So future potential for growth can be only from new markets. So that is my first part of the question. And the second part of the question is it is known that PMI is going to go into the U.S. market after related conflicts have been resolved. So is KT&G will go into the U.S. market along with PMI?
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Yes, I am Head of Finance Office Kim Young-beom to answer your first question. As of third quarter of 2024, our debt leverage is at KRW 1.2 trillion, and of which KRW 900 billion is financed through corporate bond. And we have additional plan to issue KRW 300 billion of corporate bond in the mid and long-term debt initiative, including KRW 1.2 trillion of corporate bond on a consolidated basis. The debt leverage is expected to stand about at KRW 1.5 trillion. We're going to continue to strive to establish more balanced and robust financial position and financial structure by strategically leveraging the debt opportunity. And based on the consolidated basis, KRW 1.2 trillion debt, the annual interest rate interest-related cost will be about KRW 40 billion-50 billion.
If we consider the operating cash and other business opportunities the company has, it is not at all burdensome to the company. The interest rate is about 3%-4%. It is quite stable level, and it is not an excessive level compared to our peers.
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Yes, Chief of Strategy and Planning Heo Chang-gu, to answer your question regarding why we decided to go for share buyback and cancellation, because it is widely known that it's the best way to achieve shareholder return, because it elevates value per share, and it also has a direct impact on stock prices. So based on our capital allocation currently, we can safely say its expected return is higher than the expected return of dividend. And we will consider dividend propensity and other shareholder return-related elements to see if buyback and cancellation will stay the optimal measure for shareholder return. But our main goal will be, of course, to maximize shareholder return.
Regarding your second part of the question, which is about the usage of excess resources, the excess resource of KRW 1 trillion can be used, of course, mainly for shareholder return, but it also can be invested for future growth drivers. Decision-making regarding these topics will be done according to the market situation and other management and business landscape.
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Yes, I am Chief of NGP Lim Wang-seop. You asked two different questions, one being stagnant sales of stick in the overseas market. So lil SOLID is available in 34 different countries centering around the European continent, and all of these countries account for about 80% of the global market, and currently, there is slight stagnation in terms of stick sales.
The reason being is because we are planning for the launch of a new platform next year. So we are currently adjusting inventory and stock weight of existing devices in the market, and this is impacting the sales of stick. But once the new platform is available next year, the revenue will be normalized, and I believe there will be further chance for future growth. The second question has to do with the U.S. market. As you know, to make inroads into the U.S. market, we need to get approval, PMTA approval from FDA. And this PMTA process takes a long time. The window of processing this PMTA approval is about three years. So, as was disclosed and announced by the company recently, we have signed an MOU with PMI to conduct joint research and prepare accordingly in conjunction with PMI for PMTA approval from FDA.