Sojitz Corp

TSE:2768

Earnings Call Transcript 2019-Q1

[Seiichi Tanaka, executive]

Good afternoon. Thank you very much for joining us for the earnings briefings for the quarter that ended June 30, 2018, for Sojitz Corporation. This is Seiichi Tanaka, CFO.

Today, I'd like to use 2 landscape-format sheets. One is titled the Highlights of Consolidated Financial Results. The other is titled the same but also says Supplementary Material. Both have been made available on our website beforehand.

First, on the business environment, as described under the results highlights, which is the leftmost column, this is the first year of the medium-term management plan 2020. And in the first quarter of that financial year, the global economy proved firm due to growth in developed countries with strong consumption as well as in emerging countries. Resource prices such as coal prices were higher, and therefore, we made a very good start.

Now moving to the middle chunk, which states consolidated statements of profit or loss. First, on the top line, until FY 2017, we showed JGAAP sales as top line. But from this financial year, we are now showing the revenue under IFRS as the top line. So for the revenue in Q1, the figure came to JPY 467.9 billion. That's up JPY 35.5 billion from the same period previous year. Gross profit came to JPY 59.9 billion. That's up JPY 8.3 billion year-on-year. So both figures were up year-on-year, and the reasons for the difference are shown in the right-hand side.

Metals & Mineral Resources was the #1 contributor. As I mentioned earlier, prices of coal and other resources stayed high. As a result, Metals & Mineral Resources segment increased JPY 29.4 billion in revenue and rose JPY 4.3 billion in gross profit.

The other major contributor was the Automotive segment. This is thanks to the U.S. automotive parts inspection business that we acquired in the previous financial year as well as to the domestic dealership business. And so the Automotive business increased JPY 18 billion in revenue and by JPY 3.1 billion in gross profit.

Now going down to total SG&A. The total expenses came to JPY 42.7 billion. Expenses increased year-on-year by JPY 4.2 billion. And personnel expenses and non-personnel expenses combined increased by JPY 3.6 billion. Those are the top 2 lines in this box. And these are tied to that newly acquired automotive subsidiary that is now consolidated.

Total of other income and expenses came to net income of JPY 4.9 billion, and that is an improvement year-on-year by JPY 3.9 billion. A major contributor here is the gain on sale of subsidiaries and associates, and this is related to the sale of an automotive-related company and a solar power generation business company. More specifically, the automotive-related company is the automotive assembly and marketing business in the Philippines, and we unloaded the holdings we had in that. The solar power generation business is one in Europe.

Further down, the financial income and costs came to net expenses of JPY 400 million. That is an improvement of JPY 500 million year-on-year. Further down, the share of profit and loss of investments accounted for using the equity method came to JPY 5.6 billion. That's down JPY 300 million year-on-year. The steel products marketing business under Metals & Mineral Resources division was steady. But as I mentioned earlier, now that, that automotive operations in the Philippines has been excluded, the figure has been brought down.

Profit before tax came to JPY 27.3 billion. That's up JPY 8.2 billion year-on-year. After income tax expenses, profit for the period came to JPY 21.4 billion. The profit attributable to owners of the company came to JPY 19.8 billion. That's up JPY 5.2 billion or by 35%.

Towards the right, we are showing the percentage achieved against the full year forecast. The full year forecast is JPY 63 billion, and Q1 results came to 31% of that figure.

Now let's move further right to the rightmost chunk that says Consolidated Statements of Financial Position. At the end of June 2018, total assets came to JPY 2,366.8 billion. That's an increase from the end of March by JPY 16.4 billion. The major changes are highlighted -- or circled, and as described towards the right, these are related to the application of the new IFRS standard and the reclassification of account items.

And as written under the Results Highlights column to the left, this is related to the inventories associated with transactions for which we only act as an agent and therefore not exposed to risk. So these inventories are now reclassified from inventories to advances paid, which comes under trade and other receivables. And this reclassification amounted to JPY 234 billion at the end of June.

Now moving down to liabilities. Total liabilities came to JPY 1,736.9 billion, up JPY 11.6 billion from the end of March. Trade and other payables have come down by JPY 85.5 billion. And as you may know, the tobacco tax hike is scheduled for the 1st of October, and ahead of that, we had accelerated purchases at the end of the previous period. And then a lot of settlements of such bills happened in Q1, and to fund that, we have increased borrowings and bonds.

Further down to equity. First, let's look at total equity attributable to owners of the company. At the end of June, this came to JPY 589.6 billion. That's an increase from the end of March by JPY 3.2 billion. Retained earnings have increased by JPY 11.6 billion. As I explained earlier, this is profit for the period less dividends paid.

And then further, one line up, the other components of equity, this has come down by JPY 8.4 billion. And this is related to the currency depreciation of the Brazilian real and the Australian dollars, and that resulted in the foreign currency translation differences for foreign operations coming down. And so with all that, the total equity attributable to owners of the company came to only an increase of JPY 3.2 billion.

Further down, we are showing key financial indicators, 6 of them. The third from the top, the net-debt-to-equity ratio came to 1.24x, which is up 0.21x from the end of March, and that's related to increased borrowings for tobacco.

Now for the cash flows. We are actually now showing 2 new line items, and these are core operating cash flow and core cash flow. And the definition of those 2 new line items are shown further to the left.

Now cash flows from operating activities came to a net outflow of JPY 98.3 billion for Q1. As I mentioned earlier, we increased working capital for the tobacco business. Cash flows from investing activities came to a net outflow of JPY 8.4 billion. In Q1, we executed new investments and loans in the amount of about JPY 25 billion.

Free cash flows came to a net outflow of JPY 106.7 billion. Now after this, we subtract -- or add the difference in the working capital, and that will give us the core operating cash flow, which came to a net inflow of JPY 20.8 billion. And further, with adjustments to reflect the adjusted investment cash flow and dividend paid, this gives us the core cash flow, which came to a net inflow of JPY 5.5 billion.

Now let's look at the second sheet, which says Supplementary Materials. Let's start with the top left table, which says Operating Results. After the Q1 results, we decided to maintain the forecast for the full year that we presented back in May.

Now let's look at the breakdown by segment and particularly focus on profit for the period. I'd like to highlight the segments that have deviated largely from 25% with regard to the progress made against the full year forecast or where there is a large year-on-year difference. First, let's look at Automotive. The quarterly profit came to JPY 3.1 billion. That's up JPY 300 million year-on-year, and this figure is 56% of the full year forecast of JPY 5.5 billion.

As I explained earlier, in Q1, we unloaded our holdings in the automotive assembly business in Philippines, and that's contributed to this apparently high figure. But this has actually been factored in from the beginning in the full year forecast, so over time, this will converge to the original forecast level.

With regard to Energy & Social Infrastructure, the profit for the quarter came to JPY 200 million, unchanged year-on-year, but this figure is only 4% of the full year forecast and therefore rather low. But as described under the Progress Overview column, we are expecting, in the second half of the fiscal year, earning contributions from domestic and overseas power generation businesses and from energy-related affiliates, and so this should not cause any downside concerns.

Metals & Mineral Resources has increased year-on-year by JPY 4 billion, with profit coming to JPY 8.2 billion or almost double, and the figure is actually 40% of the full year forecast of JPY 20.5 billion. As I mentioned earlier, this is related to higher prices particularly for thermal coal and increased transaction volumes.

Foods & Agriculture Business. For this segment, the profit came to JPY 1.2 billion, which is 27% of the full year forecast of JPY 4.5 billion. This figure is down year-on-year by JPY 900 million. And this is related to higher material costs in Q1, which actually has persisted from before that. And so that's why the figure is down year-on-year, but again, this has already been factored in when we came up with the full year forecast.

Last but not least, I'd like to draw your attention to the lower left-hand table that says Financial Position. Again, we have maintained the forecast for the full year that we presented back in May.

Now if you look at the end of June figure, the net interest-bearing debt came to JPY 728.3 billion and the net D/E ratio to 1.24x. This is rather high compared with the full year forecast, but as I explained earlier when we looked at the balance sheet, this is related to the borrowing to fund temporary working capital needs related to the tobacco business, and therefore, this will come back to -- or come down to the forecast level by the end of the year.

This completes my presentation. Thank you very much for your kind attention.