Mitsui & Co Ltd

TSE:8031

Earnings Call Transcript 2019-Q1

[Takakazu Uchida, executive]

Good afternoon, my name is Takakazu Uchida, Chief Financial Officer. Thank you for joining us today despite your busy schedule. I will start by reviewing our results for the first quarter.

The financial year got off to a strong start with profit from non-resources areas exceeding JPY 60 billion and a steady performance from Resources & Energy businesses. Please turn to Page 3 of the presentation material. In the first quarter of the fiscal year ending March 2019, the global economy experienced an upturn compared to the temporarily weak growth in the previous 3 months period and continued to be resilient, particularly in developed countries supported by a recovery in spending and investment. Amid this operating environment, Mitsui Q1 profit increased JPY 7.6 billion year-on-year to JPY 118.4 billion, taking us to 28% of our plan for the current fiscal year.

Core operating cash flow was JPY 154.5 billion, 27% of the full year plan, and we are seeing progress in our efforts to build a robust profit base.

Free cash flow, which excludes the effects of changes in working capital and time deposit, was in surplus at JPY 47.1 billion. In growth areas, we have been steadily making deals with the U.S.-based MBK Real Estate, known as MRE, acquiring senior living properties. And Mitsui reaching an agreement on equity participation in Adelnor, an agricultural input distributor in Mexico.

The global economy is expected to follow a trend of general recovery going forward. However, there is an increased uncertainty and a careful watch is needed on a range of circumstances that include the escalation of geopolitical risk surrounding the Middle East; the future prospects for the European and U.S. economies, which have shown signs of maturity in some parts; the impact of the Federal Reserve Board's monetary tightening on the economics of emerging countries; and the growing intensity of trade friction as a result of U.S. trade policy.

We will continue to take heed of the business environment in which we operate, paying attention to commodity market conditions and currency movement and work towards achieving our targets. Please turn to Page 4. Next, I would like to discuss the progress of the key initiatives of our medium-term management plan, build a robust profit base and thoroughly strengthen existing businesses.

Total profit from our core areas of Resource & Energy, Infrastructure & Machinery and Chemicals was JPY 81.9 billion and accounted for nearly 70% of our total profit.

Resources & Energy profit for the period was JPY 56.8 billion due to a steady performance in the Energy business, aided by market factors and cost reductions.

Core operating cash flow showed strong progress, reaching JPY 101.2 billion. We are pushing forward with initiatives to build a robust profit base, including completion of the takeover bid for an Australian oil and gas company, AWE, and making the decision to develop South Flank iron ore mine also in Australia.

In Machinery & Infrastructure, although the progress to our profit target was 18%, influenced by seasonal factors at equity method invested in truck leasing and other businesses, the progress to our cash flow target was 25%, which is in line with our plan.

In the quarter under review, we have been strengthening the profit base through initiatives such as newly investing in an FPSO vessel in Brazil.

In Chemicals, we made steady progress to plan, with the strong performances by the methanol businesses as a primary factor. In April this year, we invested in a coating materials business and will further expand our business base. Please look at Page 5. Next, I will talk about the results of cash flow allocation, asset recycling and investment and loans in the first quarter. From the current fiscal year, certain lease transactions, which had previously been recorded as changes in working capital, are recorded as investment cash flow and have been excluded from the calculations in this table.

In asset recycling, we achieved JPY 95 billion in cash inflows, primarily due to a business transfer to Nippon Steel and Sumikin Bussan. Together with core operating cash flow of JPY 155 billion, total cash inflows for the period came to JPY 250 billion. Investment and loans accounted for JPY 200 billion in cash outflows with a result that we had a free cash flow surplus of JPY 50 billion. Main investment and loan items were a takeover bid for AWE in Australia and investments in ETC Group and a Chilean operating lease and car rental business. We will continue to maintain investment discipline and realize well-balanced cash allocation across core and growth areas to achieve medium to long-term growth while strengthening our financial base through the generation of positive free cash flow after returns to shareholders. Please look at Page 6. Next, I will discuss the balance sheet as of the end of the first quarter. Net interest-bearing debt increased JPY 94.5 billion from the end of March 2018 to JPY 3.2 trillion. Shareholders' equity increased JPY 81.6 billion to JPY 4.1 trillion. As a result, net DER was 0.78x.

That ends my presentation. Now Kimiro Shiotani, Global Controller, will discuss the details of our quarterly results.

[Kimirou Shiotani, executive]

Thank you, I am Kimiro Shiotani, Global Controller. I will provide details on our quarter results.

Please look at Page 8. First, I would explain year-on-year comparison of profits by segment. Profit increased JPY 7.6 billion to JPY 118.4 billion.

In Minerals & Metal Resources, profits decreased by JPY 14.7 billion to JPY 39.7 billion. This was primarily the result of the temporary factors, including the incorporation of Valepar into Vale in Q2 of the previous fiscal year, which resulted in the absence of earnings from Valepar recorded under the equity method in Q1 of the previous fiscal year and the absence of reversal of impairment losses at the copper mining operations in Chile, which occurred in the first quarter of the previous fiscal year.

Energy profits increased JPY 800 million to JPY 17.1 billion. Despite valuation losses related to derivative contracts for physical trading in U.S. oil business, profit at Mitsui Oil Exploration increased significantly, mainly due to increase in the price of the oil and gas and cost reductions. Chemicals profits were up JPY 3.4 billion to JPY 9.7 billion, mainly due to strong performance in the methanol business. In the Iron & Steel Products, the absence of onetime increase in volume seen during the first quarter of fiscal year March 2018 was offset by an increase in profit from the consolidation of Nippon Steel and Sumikin Bussan as an equity method investee. As such, profits declined just JPY 100 million to JPY 6.8 billion. Lifestyle profits increased by JPY 11.1 billion to JPY 17.5 billion. The main factor was an increase in profit from the partial reversal of provisions associated with the withdrawal from Multigrain recorded in the previous fiscal year.

Innovation & Corporate Development profits increased by JPY 5.1 billion to JPY 10.9 billion, mainly due to FVTPL gain on valuation and sale. Turning to Page 9. I will now explain the year-on-year changes in core operating cash flow by segment. Overall, Mitsui achieved core operating cash flow of JPY 154.5 billion, a decrease of JPY 900 million. In Mineral & Metal Resources, core operating cash flow decreased JPY 22.1 billion to JPY 48.3 billion, mainly due to the seasonal factors, including a delay in dividends from the Australian iron ore business and a change in the timing of the dividend received due to a new dividend policy at Vale. In Energy, core operating cash flow increased JPY 8.9 billion to JPY 52.9 billion supported by an increase in gross profit and dividends received due to an increase in the price of oil and gas.

In Iron & Steel Products, core operating cash flow decreased JPY 5.6 billion to JPY 600 million, mainly due to the absence of an increase in volume of onetime transactions seen during the first quarter of the previous fiscal year.

In Lifestyle, core operating cash flow increased JPY 7.1 billion to JPY 8.8 billion. This was supported by absence of losses recorded in Q1 of the previous fiscal year due to the withdrawal of Multigrain and strong performance in Xingu. Turning to Page 10. Here, we look at the main factors influencing year-on-year changes in quarterly profit. Base profit contributed an increase of approximately JPY 5 billion compared to the previous Q1 supported by FVTPL gains, an increase in profit from Nippon Steel and Sumikin Bussan after it became an equity method investee and an increase in profit in the U.S. methanol business, which more than offset the absence of equity earnings of Valepar. Equity method profit and loss from Valepar has not been recorded since the incorporation of Valepar into Vale in Q2 of the previous fiscal year. However, profit from Vale is expected to exceed the previous year due to the recording of the dividend income from Vale from Q2 onward of the current fiscal year. Resource-related cost and volume contributed an increase of approximately JPY 1 billion compared to the previous Q1 period, due to the increased iron ore production and increasing our holding in our Chilean copper mine, which resulted in increased share of volume and despite the higher cost of coal associated with changes to the mining plan.

Asset recycling was a factor in a decline of approximately JPY 6 billion due to the absence of profit recorded in Q1 of the previous year for the sale of a warehouse in Japan and partial dilution of our stake in Marcellus and despite gains from the sale of land by affiliate company in the period under review.

Commodity prices and ForEx contributed an increase of approximately JPY 3 billion due primarily to the higher oil and gas prices.

Valuation gains and losses contributed an increase of approximately JPY 5 billion, mainly due to the gain on partial reversal of provisions for Multigrain withdrawal described earlier and despite the valuation loss on derivative contracts for physical trading in the U.S. oil business. That concludes my presentation.