Sojitz Corp

TSE:2768

Earnings Call Transcript 2020-Q2

[Masayoshi Fujimoto, executive]

I am the President CEO, Fujimoto. Now I would like to explain the financial results for the First Half ended September 30, 2019. The result of the first half saw profit for the period of JPY 29.5 billion, a 41% progress against full year forecast. Our forecast has a tendency to be weighted more in the second half. So this is in line with our plan. Factors, such as global economic slowdown and falling resource prices made the business environment much more difficult than we anticipated at the beginning of the year. And we see this difficult business environment to continue in the second half. Amid such environment, we are vigorously working on measures, such as cost revisions, investment and loan during the MTP 2020, and asset replacement with impacts beginning to take effect in the second half. Thus, there is no change to the initial full year profit for the year forecast of JPY 72 billion. Interim dividend is maintained at JPY 8.50 per share, as planned, and annual dividend is unchanged at JPY 17 per share. Next, allow me to explain the measures we are advancing for accomplishing the full year forecast. First, exhaustive review of costs. It goes without saying that we will review SG&A, interest rates and tax. But in addition, we will aim for greater efficiency of operating cost of resource interest, continue to monitor status of improvements at unprofitable companies, reaffirmed the feasibility of the projects planned at the beginning of the year and nonessential nonurgent costs. Next, we revised our schedule for investment in non-execution and asset replacement during the period of MTP 2020. We are striving to achieve this fiscal year's forecast by implementing the ones that will see maximization of profit of our assets, and plan to implement investment and non-execution with realistic composition. Lastly, steady generation of profits from executed investments and loans. Because environment is difficult, we will continue to monitor the progress of investment and loans executed and advance the degeneration of profits and link them to steady growth of our company. With the results of the first half, we have revised the full year forecast of a number of segments. In light of the current resource prices, the Metals & Mineral Resources, it was revised down from JPY 25 billion to JPY 23.5 billion. The Food & Agriculture Business revised down from JPY 4.5 billion to JPY 2 billion because of poor performances of fertilizer business and domestic fisheries business. On the other hand, for Energy & Social Infrastructure, divestiture of all interest and the new businesses, including renewable energy business are steadily making earnings contributions. Thus, we have revised upward our forecast from JPY 5.5 billion to JPY 8 billion. Next, the purpose of earnings contributions from investments and loans executed during the previous MTP and current MTP. The earnings contributions from investments and loans executed during MTP 2017 and MTP 2020 comes to approximately JPY 5 billion, mainly from non-resource businesses, showing progress in line with plan, reflecting our efforts. We see similar progress in the second half, with full year earnings contributions to come to JPY 14 billion as planned. We have executed JPY 37 billion new investments and loans showing progress as planned for the cumulative 3 years. We will continue to maximize earnings contribution of executed projects to continue investments for steady and further growth. Now I would like to talk about the management's efforts in the mid to long term. This slide shows the changes in the profit portfolio. The earnings contributions from non-resources after the start of the previous MTP is highlighted in red, with the earnings contribution from new investments and loans in orange, showing steady growth. To be more specific, as can be seen from the trend of the performance for this fiscal year, the renewable energy business in and outside of Japan is steadily making earnings contribution with Sojitz establishing a new revenue model of development revenues, operation revenue and capital gain. As for existing businesses, dependent on the environment, results vary, but the building of stable revenue basis is continuing. From here, I would like to highlight some cases of value creation towards sustainable growth, leveraging our strengths and capabilities. This slide is about our renewable energy business. The slide pretty much speaks for itself, but I would be happy to entertain any questions in the Q&A session after the presentation. The second case is our Australian coking coal business. Our strength lies in operation and rehabilitation of coal mines, building on our experience, mostly in Australia and Indonesia. In March this year, we acquired coking coal interest in Gregory Crinum coal mine, which started production and shipments in October. Planned production during FY 2019 is for 1 million tons, starting next year, there will be earnings contribution for the full year. Slide 9 describes cash flow management. Under MTP 2020, we are to execute growth investments and shareholder returns within the cash generated from earnings during the period and asset replacement. In the first half, we had good core operating cash flow and investment recovery from asset replacement. So that both free cash flow and core cash flow were strong and positive. Our investment and loan plan for JPY 300 billion over the 3-year period stands unchanged. And at the same time, we will maintain a positive core cash flow. Slide 10 describes our dividend policy, which remains unchanged. We will continue to focus on stable, continuous dividend for a target consolidated payout ratio of 30%, under MTP 2020. For the first half of FY 2019, the interim dividend per share is JPY 8.5, just as planned. We maintained the full year dividend forecast of JPY 17 per share. Slide 11 describes the recent change in third-party ratings. We are happy that our stable earnings has been positively viewed, and that JCR upgraded us from BBB+ to single A-. S&P has changed their outlook from stable to positive. We will continue efforts toward further steps. As shown on Slide 12, we are also happy that our ESG efforts are recognized. We will continue to reinforce our business foundation on both financial and nonfinancial aspects, so as to realize sustainable growth. Last but not least, let me draw your attention to the timely disclosure material in the handout on share repurchase. This is to prepare for the anticipated sale of our company stock held by listed nonfinancial companies, as they may accelerate reducing their strategic shareholding in response to the revised corporate governance code. Given the amount of shares currently owned by nonfinancial companies, we have, this time, authorized a repurchase of up to 30 million shares. Of course, part of the reason for the decision this time is that we believe our shares are currently undervalued in the market. This is only a one-off temporary measure. Our shareholder return policy remains consistent with the MTP, which calls for a consolidated payout ratio of 30%. This concludes my presentation. Thank you very much for your kind attention.

[ Next is CFO, Tanaka. ]

[Seiichi Tanaka, executive]

Thank you very much. Yes, using the material titled highlights of consolidated financial results, I would like to give you an overview of the results for the first half ended September 30, 2019. I will start with consolidated statements of profit or loss in the middle of the page. The revenue corresponds to sales in Japanese accounting standards. With lower transaction volumes of plastic resins in Asia, et cetera, Chemicals divisions saw revenue down JPY 30.7 billion year-on-year. And in Metals & Mineral Resources division, with fall in prices of coal and other resources, it was down JPY 23.3 billion year-on-year. And as a whole, revenue was down JPY 48 billion year-on-year to JPY 893.8 billion. As for gross profit, the fall in resource prices had a big impact on Metals & Minerals Resources division, down JPY 8 billion year-on-year. And for Food & Agriculture Business, impacted by drought in Thailand, fertilizer business was impacted and lower agricultural produce prices, including rice also had an impact. And as a whole, it was down JPY 2 billion, and gross profit was down JPY 11.2 billion year-on-year to JPY 109.7 billion. As for selling, general and administrative expenses, just to note, as we explained at the first quarter briefing, with the application of IFRS 16 this fiscal year, operating leases, which was included in nonpersonnel expenses before, is now accounted as depreciation of these efforts. Total SG&A came to JPY 85.6 billion. The other income expenses includes nonrecurring income and expenses. And in the first half, we saw sales of small-scale businesses and exit from oil and gas interest. Net other income and expenses came to plus JPY 100 million. During the same period of the previous year, we saw sales of automobile company in the Philippines and sales of solar power business overseas and resulting in total other income and expenses down JPY 5.5 billion year-on-year. Next is the financial income and costs. With slight decline in dividends received, it was down JPY 0.8 billion year-on-year, with a net financial cost coming to JPY 2.1 billion. Share of profit, loss of investments accounted for using the equity method, with higher oil prices, increasing profit of LNG-affiliated company and increase in sales of industrial estate overseas, it was up JPY 13 billion year-on-year to JPY 13.2 billion, as a result, income tax expenses came to JPY 3.7 billion, and profit before tax came to JPY 35.3 billion, resulting in profit for the period of JPY 31.6 billion. Highlighted in blue, show profit attributable to owners of the company, which was down JPY 76 billion to JPY 29.5 billion. And on the right is the forecast for fiscal year 2019, JPY 72 billion, with percentage achieved of 41%. Now let's look at the consolidated statements of financial position, which is the right-hand side block on that same sheet. At the end of September 2019, total assets came to JPY 2.3212 trillion that is up JPY 24.1 billion from the end of March. Lower transaction volumes of plastic resins led to a decrease in trade and other receivables. But on the other hand, as was mentioned earlier, we adopted a new IFRS standard for leases, and therefore, we have now booked these assets in specific -- to be specific usage rights assets in the amount of JPY 77.8 billion. And therefore, total assets increased by JPY 24.1 billion. On the liabilities side, again, there was a reduction in trade and other payables, but an increase in lease liabilities. Total liabilities at the end of September came to JPY 1.6811 trillion, that's up JPY 45.5 billion from the end of March. Going down to the equity section. If you could look at the underlined line item, which is total equity attributable to owners of the company. At the end of September, the figure came to JPY 597.2 billion, down JPY 21 billion from the end of March. Retained earnings is a net of the profit for the period in the first half and the interim dividends paid out, and that was an increase in JPY 14.5 billion. Other components of equity decreased by JPY 35.7 billion due to the change in foreign exchange rates and stock prices. Further down, we show 6 key indicators. The third item, the net debt-equity ratio at the end of September came to 0.94x, that is almost unchanged from the end of March. And further down, and a little to the left, let's look at cash flows. Cash flow from operating activities was a net inflow of JPY 51.4 billion, thanks to steady positive core operating cash flow and working capital recovery. Cash flows from investing activities was a net outflow of JPY 21.3 billion, that is a net of JPY 37 billion in new investments and loans, executed in the first half and investment recovery through asset replacement. As a result, free cash flows was a net inflow of JPY 40.1 billion. Now let's look at the second sheet, which says supplementary material. As our CEO mentioned earlier, the forecast for the profit attributable to owners of the company remains unchanged at JPY 72 billion. Now please look at the block that says operating results. If you look at line-by-line, there have been some changes. With regard to gross profit, the initial forecast was JPY 260 billion for the full year. But as we explained earlier, when we explained the PL, due to the fertilizers and Metals & Mineral Resources, we have downward revised this forecast from JPY 260 billion to JPY 250 billion, down by JPY 10 billion. SG&A and financial income and costs have also been revised, reflecting the first half results. Profit before tax has now been downward revised. The forecast now is JPY 94 billion, down JPY 3 billion from the initial JPY 97 billion forecast. But nevertheless, as I have mentioned earlier, the forecast for profit attributable to owners of the company remains unchanged at JPY 72 billion. Please turn to the right-hand side, where it says the segment performance. Given the time limitation, and given that our CEO has explained this partly, I would like to just focus on the segments where we have changed the forecast. First, the fourth item from the top, Energy & Social Infrastructure. This segment recorded profit that was up JPY 700 million year-on-year, came in at JPY 3.4 billion. This is due to asset replacement of upstream resource interest in the first half and the tax effect accounting related to completion of an exit from oil and gas interest for which we had booked a provision and increased revenue from selling electricity as domestic and overseas solar power operations, thanks to efficiency improvements. As a result, we have upgraded the -- or upward revised initial forecast from JPY 5.5 billion to JPY 8.0 billion by JPY 2.5 billion. Metals & Mineral Resources were down year-on-year by JPY 6.4 billion in the first half came in at JPY 9.8 billion. This was due to the fall in resource prices and, in particular, coal prices. We have downward revised this segment, now the forecast is JPY 23.5 billion, down JPY 1.5 billion from the JPY 25 billion initial forecast. With regard to Food & Agriculture Business, the overseas fertilizer business suffered from unseasonable weather and shortage of rain, particularly in Thailand and sluggish prices for agricultural produce, particularly rice. We also booked impairment loss on fixed assets related to domestic tuna farming operations. As a result, we have downward revised this forecast. The initial forecast was JPY 4.5 billion. The new forecast is JPY 2.0 billion, down JPY 2.5 billion. Last but not least, let's look at the financial position, which is to the lower left-hand portion of the sheet. With regard to total assets, the initial forecast for the end of the financial year was JPY 2.4 trillion. But given the potential impact of market fluctuation on asset valuation and the reduction of working capital, we have downward revised this by JPY 50 billion to JPY 2.350 trillion. A total equity, the initial forecast was JPY 660 billion, but we have downward revised the forecast to JPY 620 billion, down by JPY 40 billion. This is related to reduced foreign currency translation adjustment, due to the stronger yen and the share buyback. With regard to net interest-bearing debt and the net D/E ratio, we have maintained the forecast. This completes my presentation. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]