Sojitz Corp

TSE:2768

Earnings Call Transcript

[Seiichi Tanaka, executive]

Thank you for joining us for the earnings briefing for Sojitz Corporation for the results of Q3 FY 2018. This is CFO, Seiichi Tanaka.

I'd like to use two pages that are in landscape format. One is titled highlight of consolidated financial results for the third quarter ended December 31, 2018, and the other page also says supplementary material. Both of them have been available on our website.

Let's begin with the business environment during the first 3 quarters. If you could look at the top part of the left-hand side, which says results highlights. During the first 3 quarters, thanks to the high resource prices and the large transaction volume in the first half, as well as to the earnings contribution from the investments and loans made during the previous medium-term management plan, both gross profit and profit for the period came above 75% of the full year forecast that we published after Q2. However, as you are all aware, the trade friction between the United States and China has led to the slowdown in the Chinese economy and resource prices are also seeing some disturbances so there are more risk factors, and the environment is more complicated and therefore, that warrants caution. Now if you could learn to the middle part where it says consolidated statements of profit or loss. By the way, with regard to the full year forecast, we have not revised the consolidated figures but with regard to the breakdown by segment, we have actually revised the figures yet again from the previous forecast that we announced in November after Q2. We'll come to that later. First, revenue, which corresponds to sales in JGAAP. Revenue increased by JPY 57 billion to JPY 1,410.6 billion. Metals & Mineral Resources revenue increased by 55.2%, thanks to high coal and resource prices and larger transaction volume as well as a strong transactions in industrial minerals. Automotive also increased by JPY 47.8 billion, thanks to the new business acquired in the previous financial year.

Gross profit increased by JPY 12.9 billion to JPY 181.8 billion, as was the case with revenue, Metals & Mineral Resources and Automotive contributed and that more than offset the -- we actually decline in Machinery & Medical infrastructure due to the development gain that was recorded in the previous financial year.

Down to SG&A. Total SG&A increased by JPY 8.9 billion to JPY 128.1 billion. This mostly comes to the acquisition of new consolidated subsidiaries for the Automotive operations.

Down to other income and expenses, which are about nonrecurring items. In Q3, we did not have any major new item. Back in Q1, we booked gain on sale of automotive assembly and sales business in the Philippines as well as on a sale of international or overseas renewable energy operations. In Q2, we booked gain on sales of oil and gas interests. And those more than offset the loss on sale of a ferroalloy operation. Total other income and expenses improved by JPY 6.8 billion and came to a net income of JPY 4.2 billion. Financial income and costs, interest earned increased, thanks to infrastructure-related transactions or loans extended for that, dividends received increased too. The net came to -- expenses of JPY 2.5 billion, that's an improvement of JPY 900 million year-on-year. Share of profit or loss of investments accounted for using the equity method increased by JPY 1.7 billion to JPY 18.8 billion. Higher resources prices for Metals & Mineral Resources added JPY 2 billion to this and higher oil prices meant LNG Japan performance was firmed, and that more than offset the negative impact of losing that Auto operation contribution from the Philippines.

With all that, profit before tax increased year-on-year by JPY 13.4 billion and came to JPY 74.2 billion. After income tax expenses, profit for the period came to JPY 57.6 billion. Profit attributable to owners of the company, which is highlighted in light blue, came to JPY 53.7 billion, up JPY 8.9 billion from the same period a year before.

Toward the right, we are showing the full year forecast, which is JPY 70 billion. Against this figure, the Q3 figure stand at 77%. Now let's look at the rightmost column, which is about consolidated statements of financial position or the balance sheet. At the end of December 2018, total assets stood at JPY 2,322.8 billion, that is down JPY 27.6 billion from the end of March

Major changes were concentrated in 4 accounting items as circled in the table. Trade and other receivables and inventories, the changes here are explained after -- as explained after Q2. From this year, we have adopted IFRS 15, and that means inventories associated with transactions in which the company acts as an agent are now recorded as advances paid under trade and other receivables and therefore, there has been a lot of reclassification here. Total liabilities came to JPY 1,681.4 billion, that's down JPY 43.9 billion from the end of March. Total equity, if you could look at the second bottom line item, which says total equity attributable to owners of the company, at the end of December, this figure came to JPY 598.4 billion, that's up JPY 12 billion from the end of March.

One line up. And retained earnings increased by JPY 35.4 billion, that is profit for the period less dividends. But then -- one line up again, the other components of equity decreased by JPY 22.8 billion from the end of March. This is due to the lower stock prices and that means valuation loss of our own stocks and weaker Australian dollar and the Brazilian real among other emerging economy currencies that led to the negative impact for foreign currency translation adjustments at foreign subsidiaries. Further down, we are showing 6 key indicators. Third from the top, net debt-to-equity ratio at the end of December, this ratio came to 1.09x, that is higher by 0.06% from the end of March. Now if you could look at the cash flows statement below. Cash flows from operating activities came to a net inflow of JPY 16.9 billion, cash flows from investing activities came to a net outflow of JPY 32.5 billion. This is because up to Q3, we came to -- or we executed new investments and loans in the amount of JPY 70 billion, that's a cumulative figure. Free cash flows, therefore, came to a net outflow of JPY 15.6 billion. Core operating cash flow and core cash flow were both net positive. Now I'd like to discuss dividends. If you could go to the bottom part of the results highlights column to the left, please. We've already made a disclosure on this review on the cash dividends per share. So according to our outlook for the full year and according to our dividend policy, we intend to raise the year-end dividend to JPY 9.50 per share from the previous plan of JPY 7.50 per share. And obviously, that is pending the approval at the general shareholders meeting this year in June. But if that is approved, the planned annual dividend will come to JPY 17 per share from the previous JPY 15 per share, and that would bring the payout ratio to 30.4%.

Now let's look at the other sheet where it says supplementary material. In the interest of time, I would not cover everything on the sheet. I would like to just focus on the segments for which we have revised the forecast. And then, I'd also like to come back to the financial position, which is in the lower left-hand corner. As I mentioned at the beginning, we have maintained the overall forecast for consolidated profit for the period. But if you look at the breakdown by segment, if you could look at the fifth row that is Metals & Mineral Resources, thanks to higher prices of coal and other resources and larger transaction volume. After Q3, the profit has come to 83% of the previous forecast of JPY 28.5 billion. We have 2 more months to go and as we look at the prospects of new contracts that we are to sign and the existing contracts for which final figures are yet to be fixed, we decided to upward revise the forecast from JPY 28.5 billion to JPY 29.5 billion by JPY 1 billion. And the column -- or the row below, which is for Chemicals, the previous forecast was for JPY 10.5 billion for the full year, but given the Chinese economic slowdown associated with the trade friction between the United States and China and the prices coming down particularly for synthetic rubber and the reduction in transaction volumes and there's also a onetime loss associated with an overseas project in Q3, and we decided to downward revise this figure by JPY 1 billion to JPY 9.5 billion. And that would mean that we are currently at 74% of the new forecast for Chemicals. And one more segment that I'd like to refer to. We have not revised the forecast for this one, but if you could look at the second from the bottom Industrial Infrastructure and Urban Development. The Q3 profit is at JPY 200 million in loss but the forecast remains unchanged at a profit in the amount of JPY 1.5 billion. This is because a lot of profit for this segment comes from overseas industrial park business. And in fact, the 75% of the deliveries we expect for this financial year are concentrated in Q4 and therefore, we believe this forecast is doable.

Now let me move to the financial position section to the lower left-hand side. Given the latest environment and what we know now, we have downward revise the forecast for total assets, total equity and net interest-bearing debt. The previous forecast for total assets stood at 2.3 -- JPY 2.4 trillion. So previously, up JPY 2.4 trillion that has been downward revised to JPY 2,320 billion. Total equity has been downward revised from JPY 630 billion to JPY 610 billion. As I said earlier, there is weakness in the currencies, including Australian dollars, the Brazilian real and other emerging economy currencies. Net interest-bearing debt has also been downward revise from JPY 650 billion to JPY 620 billion. With all that, the net debt-to-equity ratio still comes to 1.0x, so that forecast is maintained. Thank you very much for your kind attention. This concludes my presentation.