Sojitz Corp

TSE:2768

Earnings Call Transcript 2021-Q3

[Masayoshi Fujimoto, executive]

[Interpreted] Good afternoon. Thank you very much for joining us for the earnings briefing of Sojitz Corporation for the first half of the financial year ending March 2021. This is Masayoshi Fujimoto, CEO. I'm joined by our CFO, Seiichi Tanaka, who will speak later. later.

Profit for the period attributable to owners of the company in the first half was JPY 30 billion or 30% of the full year forecast. In the first half, some of the restrictions placed on movement of people and commodities in response to COVID-19 were lifted and economic activities reopened. However, recovery to pre-pandemic levels have yet to come, and there are lingering concerns over possible further stagnation due to a second wave of infections.

In the second half, there are still uncertainties associated with the U.S. presidential election, increasing tension between China and the United States, and resurgence of COVID-19 cases in some countries, prompting moves to reinstitute restrictions. The business environment is, therefore, expected to remain challenging.

Against that backdrop, progress against the full year forecast differs among geographical regions and segments, but we are maintaining the consolidated earnings forecast of JPY 30 billion for the full year. More details by business segment will follow later.

The interim dividend will be JPY 5 per share as originally planned. The annual dividend forecast remains unchanged at JPY 10 per share. Slide 3 shows a breakdown by segment. Let us go through the segment forecast revisions.

Aerospace & Transportation segment is downward revised from a JPY 6 billion forecast to JPY 5 billion. It reflects the decline in aircraft parts demand due to prolonged travel restrictions and delays in railroad construction project in India due to the lockdown. Retail & Lifestyle business is also downward revised from JPY 5.5 billion to JPY 4 billion, reflecting the impact of closure of commercial facilities and stores due to COVID-19 and prolonged stagnation in domestic consumer demand.

On the other hand, Machinery & Medical Infrastructure is upward revised from JPY 3.5 billion to JPY 4.5 billion, reflecting strength in industrial machinery transactions in China in the first half. Foods & Agriculture business is also upward revised from JPY 3 billion to JPY 4.5 billion, reflecting strong first half performance, thanks to overseas fertilizer business.

Slide 4 summarizes the impact of COVID-19 on our business during the first half and what we assume for the second half. With regard to SG&A, cost reduction is progressing as planned. In the second half, we expect some cost increase compared with the first half as travel restrictions are eased, but cost reduction efforts will continue in earnest.

We are currently seeing moves to reinstate lockdowns in Europe in response to an apparent second wave of infections. At this moment, we do not expect this to have a direct and material impact on our earnings, but we will continue to carefully monitor the situation.

Slide 5 describes cash flow management. Core cash flow in the first half was positive and aggregated core cash flow during the current 3-year medium-term management plan, or MTP 2020, is positive, too. As shown in the slide, we intend to maintain that positivity for the whole of the 3-year period.

MTP 2020 seeks to achieve steady growth. As part of it, investments and loans for the current year is budgeted at JPY 90 billion. This will bring the 3-year total to around JPY 260 billion. JPY 240 billion has already been executed or formally approved.

Slide 6 shows earnings contributions from initiatives under the previous MTP or MTP 2017 and from the current MTP 2020. This financial year, we expect total contribution from investments and loans in the amount of JPY 9 billion centered around nonresource businesses. Let me explain this further on the next slide.

Slide 7 shows how we expect contributions from investments and loans this year. We expect steady earnings contribution from investments and loans executed under the previous MTP 2017 in infrastructure-related projects, including renewable energy and the hospital project in Turkey. The difference from the JPY 12 billion planned back when we announced MTP 2020 comes from contributions recognized ahead of schedule in FY 2019.

From investments and loans under MTP 2020, we expect a contribution of JPY 2 billion. Contributions to earnings, so far, are mixed. Renewable energy project and natural gas-fired power plant business in the United States are already contributing. And we are partially selling down shares in these operations, according to plan, to keep turning the sustainable growth cycle.

On the other hand, the coking coal business in Australia and the paper manufacturer in Vietnam are experiencing delays in starting up and, therefore, are behind schedule in terms of earnings contribution. Efforts are underway to address issues and accelerate profitability.

Slide 8 is on dividends. Our policy remains unchanged, with a focus on stable and continuous payouts for a consolidated payout ratio of around 30% during this MTP period. After Q1, we announced an annual dividend forecast of JPY 10 per share, in line with which we have now decided on an interim dividend of JPY 5 per share.

From Slide 9, we discuss our forward-looking initiatives. We are currently observing a big change around trading companies like ours, including digitization, the environment and changing values. Our response is to expand into new business areas that utilize emerging technologies, such as artificial intelligence and IoT, and to acquire and strengthen functions. Some examples are shown on the slide, such as telemedicine and healthcare, decentralized energy development, automobile part quality inspection and agricultural platform.

Another important focus is on human resources, which drives the creation of new value. We have begun what we call the Hassojitz project. Hassojitz is a cross between Hasso, the Japanese word for idea, and the company name Sojitz. Young people work in teams, free up their minds and develop fresh ideas and turn them into reality, working across departmental lines and generations, using a backcasting approach, starting from what kind of a trading company we want to be in 2050 and working towards that.

Slide 10 shows initiatives for sustainability. Guided by the sustainability challenge, which is our long-term vision, we are making various efforts to contribute to a low-carbon or decarbonized society. We are proud of the third-party recognitions we have received, some of which are shown on the slide.

Under the new normal, we are flexibly accommodating our workforce's needs to allow for working either at the office or from home, providing a work environment in which diverse people can leverage their capabilities in full and thereby contributing to corporate value. Let me close by hoping for an early end to the COVID-19 situation and wishing all our stakeholders good health.

Thank you very much for your attention. Now I will give the microphone to our CFO.

[Seiichi Tanaka, executive]

[Interpreted] Good afternoon. This is Seiichi Tanaka, CFO. I'd like to use 2 documents, as usual, one titled, Highlights of Consolidated Financial Results for the first half ended September 30, 2020, IFRS; and the other that says, Supplementary Materials. Let's begin with the middle block of the first sheet, where it says Consolidated Statements of Profit or Loss.

Revenue, which corresponds to JGAAP sales during the first half, was JPY 744.6 billion, down JPY 149.2 billion year-on-year. The main difference came from the segments shown in the column to the right.

The Automotive segment was down due to a major decline in the number of cars sold due to COVID-19-related lockdowns across the world. The Chemicals segment was hit by lower methanol prices and decline in synthetic resin sales volume in Southeast Asia. Metals & Mineral Resources segment was hit by the decline in coal prices.

For gross profit, again, the decline in the 3 segments of Automotive, Chemicals and Metals & Mineral Resources were significant. Gross profit came down by JPY 25.2 billion year-on-year to JPY 84.5 billion. SG&A came down year-on-year by JPY 6.6 billion to JPY 79 billion. Over the full year, we are planning to reduce SG&A by JPY 8 billion year-on-year. Reductions in the second half may be smaller than the first half as we resume business travel, but we are continuing steady progress here.

Moving down to other income and expenses, which are nonrecurring items. In the first half, we booked gain on sale of assets owned by an affiliate. We also booked in Q1 gain on partial sale of a natural gas-fired projects company in the United States. Thanks to these, the total of other income and expenses came to a net income of JPY 3.7 billion.

With regard to financial income and costs, interest expenses improved by JPY 800 -- rather JPY 800 million year-on-year, but dividend received came down so that the net total of financial income and costs only improved by JPY 300 million to a net cost of JPY 1.8 billion. Share of profit or loss of investments accounted for, using the equity method, came down by JPY 8.6 billion to JPY 4.6 billion due to significantly lower profit from a steel operating company.

Profit before tax came to JPY 12 billion. After income tax expenses, profit for the period came to JPY 10.5 billion, down by JPY 21.1 billion year-on-year. The line item highlighted in pale blue, profit attributable to owners of the company, came down JPY 20.4 billion year-on-year to JPY 9.1 billion. Against the full year outlook of JPY 30 billion, this figure stands at 30%.

Now let's move to the right-side block under Consolidated Statements of Financial Position. At the end of September, total assets came to JPY 2,154.7 billion, which is down JPY 75.6 billion from the end of March. Most of the difference comes from the decline in transaction volume for Chemicals and Automotive, which significantly brought down trade and other receivables.

Going down to the liabilities section. Total liabilities at the end of September came to JPY 1,547.3 billion, down JPY 61.1 billion from the end of March due to the decrease in trade and other payables for the same reasons as total assets.

Down to the equity section. Total equity attributable to owners of the company came down from the end of March by JPY 9.6 billion to JPY 569.5 billion. That's due to profit for the period in the first half of JPY 9.1 billion, dividend payments and the share buyback in Q1.

Further down, and there are 6 key performance indicators. The net debt-to-equity ratio came to 0.93, down by 0.13 from the end of March due to the decrease in net interest-bearing debt.

At the bottom of the page, we show cash flows. As we explained earlier, trade and other receivables decreased, and cash flow from operating activities was a net inflow of JPY 96.9 billion.

Cash flows from investing activities came to a net outflow of JPY 4.3 billion as, in the first half, new loans and investments only amounted to around JPY 18 billion. The resulting free cash flows came to a net inflow of JPY 92.6 billion. Further down, we have 2 lines showing core operating cash flow and core cash flow, both of which are net inflows.

Now let's turn to the second sheet, which says, Supplementary Materials. I will focus on segments for which we have revised the full year forecast, reflecting first half results and the current outlook, or those that posted significant year-on-year declines or whose progress against the full year forecast is notably low.

First, the Automotive segment. In the first half, sales came down as a result of COVID-19 and associated lockdowns forcing sales locations to be closed down. The segment posted a loss of JPY 1.6 billion. However, in Q2, there was significant recovery at dealers in North America, in Puerto Rico and Thailand, and quarterly results turned profitable. We, therefore, maintained the full year forecast of JPY 1 billion.

For Aerospace & Transportation project, as in the case of Automotive, COVID-19 had a significant impact. Air travel plunged and wiped out aircraft-related demand. The segment posted a loss of JPY 300 million in the first half.

In the second half, negotiations are continuing for the large deals that have significant impact on full year results, and we do not see any need to discount them at this point in time. However, demand for the part-out business for aircraft has plunged as fewer aircraft are being operated due to lower travel demand. And the delay in freight railroad construction project in India caused by the lockdown will be very difficult to make up for. We have, therefore, downward revised the full year forecast by JPY 1 billion to JPY 5 billion.

On the other hand, for the Machinery & Medical Infrastructure segment, the hospital PPP project in Turkey is delivering stable earnings. And the Chinese economy is recovering ahead of other parts of the world so that infrastructure-related businesses, such as semiconductor manufacturing equipment and bearings, were strong. Profit for the first half came in at JPY 2.2 billion, up from the same period last year. We have, therefore, upward revised the full year forecast by JPY 1 billion from JPY 3.5 billion to JPY 4.5 billion.

Two lines down to Metals & Mineral Resources. As we wrote in the column titled, Main Factors Behind Difference, steel demand declined such as for use in automotive, the coal market stagnated and transaction volume fell. The segment posted a loss of JPY 2 billion, down JPY 11.8 billion from the same period last year.

After Q1, we downward revised the full year forecast for this segment from JPY 13 billion to JPY 3 billion. In the latter half of Q2, steel demand showed a rapid recovery and the coal market also bottomed out. We are, therefore, maintaining this full year forecast of JPY 3 billion.

Another 2 lines down to Foods & Agriculture business. Unlike last year, there was good rainfall during the fertilizing season, and raw material prices were stable so that overseas fertilizer business was strong. The segment posted a profit of JPY 4.3 billion, up JPY 3.1 billion year-on-year.

The second half is a low-demand season for fertilizer business so that we cannot expect further growth here. But at the same time, we do not see any particular concerns either. We have, therefore, upward revised the full year forecast from JPY 3 billion to JPY 4.5 billion to reflect the strong performance in the first half.

One line down to Retail & Lifestyle business. In the first half, there was gain on sale of shopping mall owned by an affiliate, thanks to which the year-on-year decline in profit was limited to JPY 200 million. However, due to COVID-19, the domestic consumption is sluggish and that impact is material.

In the second half, we are still planning for some gain on asset replacement, but there are uncertainties about the speed and strength of recovery in consumption. We are, therefore, downward revising the full year forecast by JPY 1.5 billion to JPY 4 billion.

Last but not least, let's look at Industrial Infrastructure & Urban Development. In the first half, this segment posted a loss of JPY 600 million, but this was only because we wrote off some losses related to sluggish condominium sales in Japan in an expedited manner. We are still on track to achieve the JPY 500 million full year forecast, particularly as this year, 90% of deliveries of overseas industrial parks are to take place during the second half.

With this, I conclude my part of the presentation. Thank you very much for your kind attention.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]