Sojitz Corp

TSE:2768

Earnings Call Transcript 2022-Q2

[Masayoshi Fujimoto, executive]

This is Masayoshi Fujimoto speaking. Let me explain Sojitz Corporation's results up to the second quarter of the fiscal year ending March 2022.

In the first half of the fiscal year, profit for the period was JPY 39.4 billion, our highest ever for a first half. This is thanks to the economy recovering from the pandemic in United States and China in particular; recovery in materials-related businesses such as steel, chemicals and automobiles; as well as higher market prices of coal, et cetera.

Core operating cash flow was a net inflow of JPY 49.3 billion, exceeding the initial forecast. We are thus successfully generating profit and cash flow.

Based on those results, we have upward revised the full year forecast for profit for the period from JPY 53 billion to JPY 70 billion. Also in conjunction, we are increasing interim dividend from JPY 7 per share to JPY 9 on a pre-consolidation basis. The year-end dividend forecast after the 145 share consolidation is based from JPY 35 to JPY 45 per share.

The company's basic policy remains focused on stable and continuous dividends for a consolidated dividend payout ratio of around 30%.

Slide 3 shows the forecast revisions by segment. We have this time upward revised 3 segments: the Automotive segment with year-on-year sales volume increase in overseas automotive businesses; Metals, Mineral Resources and Recycling segment with higher-than-expected prices for metals resources such as coal; and Chemicals with solid performance from methanol and plastic resins.

We have also downward revised other segments. We have downward revised Aerospace and Transportation Project, Consumer Industry and Agriculture business and Retail and Consumer service for the impact of the pandemic and the delay in recovery. We have also downward revised Infrastructure and Healthcare for the delay of earnings contributions from new and ongoing projects. Further details will be provided later from our CFO, Seiichi Tanaka. We might also follow up during the question-and-answer session. In the next slide, there is a summary of the revision and progress made against the new forecast segment by segment.

Slide 5 shows cash flow management. Core operating cash flow has come in better than initially expected. We are successfully generating profit and cash inflow. With regard to new investments, when we announced MTP or the Medium-Term Plan 2023, we announced a plan for JPY 330 billion in 3-year total, including nonfinancial investments. This financial year, we are planning for JPY 150 billion. In the first half, we executed about JPY 40 billion. This is rather small for a year. But over the full year basis, we intend to be in line with plan. With regard to the core cash flow, it should be net positive on a 6-year cumulative basis as was initially planned. There will be more on cash flow later from our CFO.

Slide 6 shows earnings contributions from new investments starting from MTP 2017. MTP 2017 investments are delivering earnings contribution of JPY 5 billion in the first half. For the full year, we are expecting about JPY 8 billion, mostly from non-resource businesses. This figure is higher than what was initially planned.

With regard to MTP 2020 investments, we have about JPY 2 billion in earnings contribution, mostly from coking coal business in Australia. For the full year, we are expecting around JPY 8 billion, excluding possible impact of market conditions. Again, this figure is higher than what was initially planned.

With regard to investments under MTP 2023, they have yet to make a significant earnings contribution as of the first half. Compared with the plan, there are some delays with regard to execution of investments. We intend to accelerate this starting from the second half and going forward. This will include some larger investments. We intend to expedite earnings contribution from those investments, too. The next slide describes those investments in further details, including progress made so far and plans during the MTP 2023 period. Slide 7 describes major investment projects and progress.

As for MTP 2023 investments, we have investment -- invested in gas-fired IPP and desalination projects in the Middle East, renewable energy project in Australia and electricity retail business in Spain. In the second half, we will continue with more, and we are working vigorously to do so, including traveling overseas for direct negotiations so as to execute JPY 150 billion over the full year.

With regard to MTP 2020 investments, there was earnings contribution from natural gas-fired power project in the United States and Australian coking coal business as the coking coal prices rose and full-fledged sales activities began. There are uncertainties in market conditions going forward, but we expect steady earnings for the full year, too.

As a result of various efforts, the paper manufacturing business in Vietnam, also part of MTP 2020 investments, achieved single-month profitability in March, April and May this year. Since September, the business has suffered from the resurgence in COVID-19 and related restrictions on activity, including a temporary shutdown, but operations are now resuming in stages. We will continue to implement various improvement measures in anticipation of improved profitability as the external environment recovers.

As for MTP 2017 investments, we had solid earnings contributions from the hospital project in Turkey and renewable energy projects, which we expect to continue for the full year.

Regarding investments in ASEAN retail, the 4-temperature control logistics and food wholesale business already achieved profitability during the MTP 2020 period. The convenience store business in Vietnam suffered from the pandemic. To ensure earnings growth, once the external environment improves, we are working with partners on business strategy and are reducing procurement costs.

This slide shows the investments and asset replacement. The investments are shown by priority business area. The total new investment was JPY 40.3 billion as the execution of some of the planned investments were postponed. In terms of asset replacements, progress in divestitures of various businesses and cross shareholdings led to a recovery of JPY 9.4 billion.

The next slide is about our press release on our new initiative. At 3:00 p.m. today, Japan time, we disclosed information on our planned commencement of tender offer for shares of JALUX Inc. By conducting a joint tender offer bid with Japan Airlines, JALUX Inc. will be delisted. By sharing the strengths of each of the parties as general trading company, JALUX, airline-related trading company; and JAL, an airline, to the fullest, we will seek to maximize the corporate value. For details, please take a look at the press release to your leisure as well, but I just wanted to take this opportunity to share the information with you.

Our policy of paying stable and continuous dividends remains unchanged, and we maintained the target consolidated payout ratio of about 30% during the period of the current MTP. At the time of earnings announcement for the first quarter of the year ending March 2022, the interim dividend for the fiscal year would be JPY 7 per share based on the price before the share consolidation and year-end dividend of JPY 35 per share based on the price after the share consolidation. Given the upward revision to the earnings forecast, however, the interim dividend will be increased by JPY 2 to JPY 9 based on the pre-share consolidation price and the year-end dividend by JPY 10 to JPY 45 based on post-share consolidation price. We will continue to focus on growth investments and capital efficiency and strive to enhance shareholder value through accumulation and effective use of retained earnings.

The next slide shows changes in our company's share prices as compared to TOPIX. As of the end of September, our stock price has been solid, rising by 60% since the beginning of the year and outperforming the TOPIX in terms of the return by 48%. On the other hand, the PBR stood at 0.67 as of the end of September, but we will continue to run on business with the stock price very much in mind.

We are putting efforts into enhancement of the disclosure of our nonfinancial initiatives. As shown here, the information disclosed has been introduced as good practices by external parties. We will continue to work to improve our dialogues with stakeholders through different initiatives.

Last but not least, although we demonstrated our steady earnings power in the first half of the year, ending March 2022, countries around the world are still being affected by the COVID-19 pandemic. With the mission of a general trading company of providing goods and services to those who need them engraved in our heart based on the foundation of strong partnerships with our customers, we would like to continue to meet the expectations from all the stakeholders. We're determined to turn changes into our opportunities by transforming ourselves and seek to embrace dialogues with all of you.

With that, I would like to conclude my presentation. Thank you for your attention.

[Seiichi Tanaka, executive]

This is a Seiichi Tanaka, CFO. Let me explain Q2 results and the forecast referring to the sheets titled Highlights of Consolidated Financial Results for the First Half of the Year Ending September 30, 2021 and the one that also says Supplementary Material.

Let us go through the middle section where it says consolidated statements of profit or loss. Revenue, which corresponds to JGAAP net sales increased, thanks to 3 segments.

Metals, Mineral Resources and Recycling segment was up JPY 87.7 billion to JPY 258.8 billion, thanks to higher prices of coal and other resources and demand recovery.

Chemicals segment was up JPY 77.1 billion year-on-year to JPY 260.6 billion, thanks to increased transaction volume of plastic resins in Asia and higher prices of the mainstay methanol, together with increased transaction volume.

Automotive segment revenue increased by JPY 49.4 billion. In the same period last year, overseas automotive businesses were hard hit by lockdowns, and the reactionary increase more than offset the impact of the semiconductor shortage.

Consolidated revenue came to JPY 1,007 trillion, up JPY 256.1 billion year-on-year. Gross profit came to JPY 117.7 billion, up JPY 33.2 billion year-on-year, thanks to contribution from the same 3 segments. SG&A expenses increased by JPY 4.8 billion to JPY 83.8 billion. Increased transaction volume pushed up personnel expenses. Non-personnel expenses increased as new investments and loans led to due diligence-related outsourcing costs. Newly consolidated companies also pushed up SG&A. There was also a provision of allowance for doubtful accounts.

Other income and expenses include nonrecurring items. The total was a net income of JPY 1.9 billion from the sale of an overseas industrial machinery-related company.

Among financial income and costs, net interest expenses came to JPY 2.3 billion, which is an improvement of JPY 900 million year-on-year, thanks to lower market interest rates of the U.S. dollar. On the other hand, dividends received was JPY 1.9 billion, slightly up from a year ago. The total was net cost of JPY 200 million, an improvement of JPY 1.6 billion year-on-year.

Share of profit or loss of investments accounted for using the equity method came to JPY 16.9 billion, up JPY 12.3 billion, thanks to a large increase in profit from a steel operating company.

With all that, profit before tax came to JPY 52.5 billion, up JPY 40.5 billion year-on-year. After income taxes, profit for the period came to JPY 41.5 billion. Profit attributable to owners of the company, highlighted in blue, was up JPY 30.3 billion year-on-year and came to JPY 39.4 billion. This figure is 56% of the revised full year forecast of JPY 70 billion.

Moving on to the right and the statement of financial position. Total assets at the end of September came to JPY 2,450 trillion, up JPY 149.9 billion from the end of March. Trade and other receivables increased in relation to higher market prices of resources and plastic resins as well as increased transaction volumes of tobacco and wheat. Other factors include new investments and loans executed and higher stock prices leading to higher valuation of owned securities as well as aircraft-related transactions.

As for liabilities, likewise, with the increase in trade receivables, trade payables have increased. And with the execution of new investments and loans, we have taken interest-bearing debt, resulting in the balance of liabilities of JPY 1,758.9 trillion, up JPY 133.3 billion from the end of March. As for total equity, please look at the second line item from the bottom in parenthesis, Total Equity Attributable to Owners of the Company.

The consolidated net assets as of the end of September was JPY 657.6 billion, up JPY 38.6 billion from the end of March. In the first half, due to purchase of treasury stock, assets declined by JPY 14.5 billion. But as explained, profit increased in the first half. And other component of equity including valuation gains on investment securities due to rising stock prices, increase in foreign currency translation adjustment has made up for the decline by the purchase of treasury stock.

Below that, our 6 financial indices shown, and due to new investment and loans, net interest-bearing debt increased by JPY 73.9 billion from the end of March. But as I said, due to the increase in net assets, as shown in line 3, net debt equity ratio increased by 0.05 points from the end of March to only 1.04.

Please take a look at cash flow status further below at the left. Cash flow from operating activities resulted in a net cash inflow of JPY 29.6 billion, as was explained by the President, due to the steady increase in core operating cash flow to JPY 49.3 billion. Cash flow from investing activities ended up with JPY 67.1 billion in net cash outflow due to the new investment and loans. Consequently, we had a net negative free cash flow of JPY 37.5 billion.

Let me now turn to the supplementary materials. Here, I will focus on the middle part that says The Profit for the Period by the Segment. For all 7 segments, we have revised our forecast for the full year made at the beginning of the fiscal year. So let me briefly explain about each segment.

Starting from the top in Automotive segment. The first half posted JPY 3.4 billion, up JPY 4.9 billion year-on-year due to the absence of the lockdown measures taken by different countries in the first half of the previous year. For the full year forecast, we have assumed a slight slowdown due to the demand running its course and shortage of semiconductors and made a limited upward revision from JPY 5 billion by JPY 500 million to JPY 5.5 billion.

As for Aerospace and Transportation Project, JPY 1.4 billion was recorded, up JPY 1.7 billion year-on-year. Because of the increase in profits due to strong marine vessel-related business and higher profits in aircraft-related transactions but delay in recovery in some aircraft-related businesses, such as parts-out business, the initial full year forecast of JPY 4.5 billion was reduced to JPY 4 billion.

As for the Infrastructure and Healthcare, profit decreased due to the absence of gains from asset replacement in power generation business posted in the previous year.

Regarding the full year forecast, the oil price increase is expected to push up the profits of LNG Japan. But due to prolonged impact by the COVID-19, earnings contributions of new and ongoing projects have been delayed. So we have made downward revision of JPY 1 billion from JPY 7.5 billion to JPY 6.5 billion.

In Metal, Mineral Resources and Recycling, as was explained, due to a significant rise in coal prices and the recovery in the demand for steel, the profit increased by JPY 18.2 billion year-on-year to JPY 16.2 billion. For the second half, we expect a slight softening of the market, but we have raised the initial forecast of JPY 12 billion by a significant JPY 19 billion to JPY 31 billion.

In Chemicals, in the first half, the recovery of methanol prices and strong performance of plastic resins pushed up the profit by JPY 5.5 billion to JPY 6.8 billion. As for the full year forecast, considering the results in the first half, the initial forecast of JPY 10.5 billion was revised upward by JPY 1.5 billion to JPY 12 billion.

As for Consumer Industry and Agricultural business, the mainstay business of overseas fertilizers due to steady rainfall and increase in the prices of raw materials passed onto the product prices showed progress in line with expectations.

In the first half, due to the rise in lumber prices, Construction Materials business was also performing well, resulting in JPY 800 million increase in profit to JPY 4.8 billion. But for the full year, papermaking business in Vietnam was affected by the closure of the factory due to the lockdown in September. And therefore, the forecast was revised downward by JPY 1 billion from JPY 5 billion to JPY 4 billion. As was explained by the President, the papermaking factory in Vietnam has already resumed the operation.

Finally, as for the Retail and Consumer services, sales volume of U.S.-made imported beef was strong. But due to absence of gains from sale of shopping mall posted in the previous year, profit in the first half dropped year-on-year. For the full year, considering expected delay in recovery of Southeast Asian retail business, among others, the initial forecast of JPY 5 billion was reduced by JPY 1 billion to JPY 4 billion.

Let me now explain about the financial position shown at the left bottom. Considering the actual results in the first half and the revised forecast for the full year, total assets forecasted at the beginning of the year at JPY 2,450 trillion has been raised by JPY 50 billion to JPY 2,500 trillion, and the total equity has been raised by JPY 40 billion from JPY 640 billion to JPY 680 billion. The forecast for net interest-bearing debt and net DE ratio has been left unchanged. That's all for me. Thank you for your attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]