Mitsui & Co Ltd

TSE:8031

Earnings Call Transcript 2020-Q2

[Tatsuo Yasunaga, executive]

Ladies and gentlemen, I am Tatsuo Yasunaga, President and CEO. Thank you very much for joining us today.

I will start by reviewing our operating results for the first half of the year and our forecast for the full year. Then I will hand over to Tetsuya Shigeta, Global Controller, who will speak in more detail.

In the first half of the year, we saw steady performance in Resources & Energy, while Machinery & Infrastructure progressed largely in line with the plan. Other areas, such as Chemicals, Lifestyle and Iron & Steel products saw some impact from the economic slowdown, but overall profit and core operating cash flow were on track.

Now please turn to Page 3 of the presentation material. I will now summarize our operating results for the first half of the fiscal year.

Profit for the first half of the fiscal year was JPY 234.2 billion, up JPY 11.3 billion year-on-year. And core operating cash flow was JPY 346.4 billion, up JPY 30 billion year-on-year, with progress to full year targets of 52% and 54%, respectively.

We have left our full year forecast unchanged after considering factors such as an increasing sense of global economic slowdown and the second half outlook for each business area. We, therefore, continue to forecast record profit for the full year of JPY 450 billion and core operating cash flow of JPY 640 billion.

As a result of reviewing our cash flow allocation, we have decided to provide additional shareholder returns of JPY 50 billion through share buyback.

The global economy during the first half of the year continued to exhibit slowing growth attributable to a more moderate pace of economic expansion in the U.S. and ongoing deceleration in China. We will continue to work toward achieving our full year targets, paying close attention to factors impacting our business environment, including the direction of U.S.-China trade negotiations, policy trends of major economies, commodity market conditions and currency movements.

Please turn to Page 4. I would like to discuss on our progress in the key initiatives of our medium-term management plan, starting with building a robust profit base and thoroughly strengthening existing businesses.

In the core areas of Resources & Energy, Machinery & Infrastructure and Chemicals, combined profit for the first half of the fiscal year was JPY 208.2 billion, accounting for nearly 90% of our total profit.

In Resources & Energy, profit for the period and core operating cash flow showed strong progress, reaching JPY 167.5 billion and JPY 243.4 billion, respectively, due to a solid market for iron ore and good trading performance in energy.

In addition, we made steady progress in initiatives to further strengthen our profit base with a focus on LNG projects, including FIDs for Area 1 in Mozambique and Arctic LNG 2 in Russia and the start of production at Cameron in the U.S.

In Machinery & Infrastructure, profit for the first half of the fiscal year was JPY 36 billion and core operating cash flow was JPY 41.4 billion. Progress toward full year target was 40%, but earnings from automotive, gas distribution and power generation businesses were largely in line with plans.

In Chemicals, the market environment has been worsening, influenced by factors such as the fall in prices of -- for basic chemical products. We will continue making efforts to optimize our results amid an increasingly unclear market outlook.

Please turn to Page 5. On this slide, I will review progress on our action plan for the year ending March 2020, which we announced together with the business plan. We have been accelerating our initiatives in the areas of environment and health, which we believe have high potential for growth.

In the area of environment, in addition to FIDs for Area 1 in Mozambique and Arctic 2 in Russia and the start of production at Cameron in the U.S., we're progressing with renewable energy and next-generation power, such as ForeFront in the U.S.

In the area of health, as the largest shareholder in IHH, we are actively engaging with management to pursue comprehensive measures to increase corporate value. Further, we are building on the IHH's business platform with the launch of a health care fund for the China market.

We have been continuing measures to raise the quality of our portfolio through strategic asset recycling, for example, by deciding to divest our stake in Columbia Asia Healthcare, which is a hospital management group targeting the middle class, and selling part of our investment in Recruit Holdings.

Based on this progress, we will further streamline the 4 growth areas outlined in our current medium-term management plan and put efforts to build concrete earnings pillars in our next medium-term management plan. We're also increasing our focus on improving capital efficiency.

Please turn to Page 6. I will discuss the results and outlook for cash flow allocation.

In the first half of the year, in addition to securing core operating cash flow of JPY 350 billion, we undertook asset recycling of JPY 90 billion for a total cash-in of JPY 440 billion. We implemented investments and loans totaling JPY 220 billion which, in combination with JPY 70 billion in interim dividend payments, gave a total cash out of JPY 290 billion. As a result, we produced a free cash flow surplus after shareholder returns for the period of JPY 150 billion.

We paid close attention to the status of current investment projects during the period, and following a review of cash flow allocation decided to implement additional shareholder returns through share buyback.

Please turn to Page 7 for an explanation of the balance sheet at the end of this period. Compared to the end of March 2019, net interest-bearing debt has decreased by JPY 120 billion to JPY 3.5 trillion. Shareholder equity has decreased approximately JPY 50 billion to JPY 4.2 trillion. As a result, net DER stands at 0.82x.

Please turn to Page 8. As I said at the start of my presentation, although the economic slowdown is having an impact on the performance in Chemicals, Lifestyle and Iron & Steel products, solid performance in Resources & Energy means that we have not made any change to our full year forecast of JPY 450 billion in profit and JPY 640 billion of core operating cash flow.

Please turn now to Page 9. I would like to conclude by talking about our plan on shareholder returns. The year ending March 2020 brings us to the final year of our current medium-term management plan, and we have allocated additional cash flow to shareholder returns in the form of JPY 50 billion share buyback.

Our forecast annual dividend remains JPY 80 per share, with an interim dividend of JPY 40 per share. This means that total returns to shareholders for this year will be approximately JPY 190 billion, with forecast cumulative shareholder returns over the 3 years of the medium-term management plan of JPY 500 billion.

Looking ahead, we aim to continue increasing the total dividend payout in alignment with business performance improvements while pursuing a higher level of capital efficiency.

That brings me to the end of my presentation. I will now hand over to Tetsuya Shigeta, our Global Controller, to explain the details. Thank you for your attention.

[Tetsuya Shigeta, executive]

Thank you. My name is Tetsuya Shigeta, Global Controller. And I will now provide details of our operating results.

Please look at Slide 11. I will first review our year-on-year comparison of profits by segment. Profit for the first half of the year increased JPY 11.3 billion to JPY 234.2 billion.

In Mineral & Metal Resources, although there was no dividend from Vale, solid market prices for iron ore contributed to JPY 12.8 billion increase of profit to JPY 101.9 billion.

In Energy, profit increased JPY 29 billion to JPY 65.6 billion. In addition to recording a deferred tax asset for the Mozambique Area 1 FID, we achieved good trading performance at Mitsui Energy Trading Singapore and others.

In Machinery & Infrastructure, profit decreased JPY 1.1 billion to JPY 36 billion.

In Chemicals, profits decreased JPY 11.7 billion to JPY 4.7 billion, reflecting lower earnings at businesses amid an economic slowdown, along with weaker trading performance.

In Iron & Steel Products, profits decreased by JPY 5.2 billion to JPY 2.7 billion due to the absence of gain on sale of land at an affiliate, which was included in the same period of the previous fiscal year, along with lower earnings at businesses amid an economic slowdown.

Lifestyle segment profits decreased by JPY 3.1 billion to JPY 16.9 billion. Although there was a reduction in corporate income tax associated with the partial sale of the investment in Recruit Holdings, profits were impacted by factors such as FVTPL appraisal loss, lower earnings at businesses amid economic slowdown and the absence of a gain on reversal of provision related to withdrawal from the Multigrain business, which included -- which was included in the previous comparable period.

In Innovation & Corporate Development, profits decreased JPY 7.7 billion to JPY 1.6 billion due to FVTPL valuation loss and the absence of valuation gain that contributed to profit in the previous comparable period.

Please turn to Slide 12. Core operating cash flow for the first half of the fiscal year increased JPY 30 billion to JPY 346.4 billion. Machinery & Infrastructure cash flow increased JPY 10 billion to JPY 41.4 billion, reflecting receipt of project development fees for IPP and the other business and the impact of a change in the accounting standards for leases.

In other segments, core operating cash flow was mainly influenced by the same factors I just outlined for profit by segment. So I will not go into further details here.

Please turn to Page 13 for a look at the main factors influencing year-on-year changes in first half profit.

Base profit was positively impacted by higher profit at Mitsui Energy Trading Singapore and other businesses in Energy, but decreased approximately JPY 21 billion overall due to such factors as FVTPL valuation loss associated mainly with the fall in the share price of listed shares along with decreased profits from methanol businesses in a weaker market.

Resources-related costs/volume was a factor in decline of JPY 6 billion compared to the previous period. Although production and sales were strong at Australian iron ore and coal operations, overall costs were impacted by higher cost in coal mining associated with less favorable mining conditions and higher depreciation and operating costs in oil and gas development.

Asset recycling contributed to an increase of JPY 16 billion, reflecting lower income tax arising from the partial sale of investment in Recruit Holdings.

Commodity prices/ForEx contributed an increase of JPY 30 billion, primarily due to a solid market for iron ore.

Valuation gain/loss contributed to a decrease of JPY 8 billion. Although our deferred tax asset was recorded in accordance with the Mozambique Area 1 FID, the overall outcome was impacted by the absence of a gain on reversal of provision related to withdrawal from Multigrain business included in the previous comparable period and the absence of dividend from Vale.

Please look at Page 14 for an explanation of asset recycling, investment and loans in the first half of the year.

In asset recycling, in addition to implementing a partial sale of our investment in Recruit Holdings, initiatives planned for the second half of the year mean that we are making steady progress.

In investments and loans, total cash out was JPY 220 billion. The main projects were an investment in Minh Phu, a shrimp producer and processor in Vietnam, execution of a loan for an IPP in the Middle East and the decision to invest in the Russian Arctic LNG 2 project.

Looking ahead, we will continue to maintain close adherence to our investment discipline in pursuit of a balanced allocation of cash to core and growth businesses, with the aim of achieving medium and long-term growth while strengthening our financial foundation.

Please turn to Page 15. Here, I will explain by operating segments the factors contributing to the revised forecast noted earlier by CEO Yasunaga.

In Mineral & Metal Resources, we forecast an increase of JPY 15 billion due to solid iron ore prices. And in Energy, we also forecast an increase of JPY 15 billion in light of higher oil and gas production volumes and strong trading performances.

On the other hand, in Chemicals and Lifestyle, an economic slowdown and other factors have contributed to a decrease in forecast by JPY 10 billion, respectively.

Please turn to Page 16. Our full year forecast for core operating cash flow is unchanged at JPY 640 billion. In Machinery & Infrastructure, we have revised forecast down by JPY 10 billion due to an accumulation of small onetime losses. In other segments, factors influencing our forecast for core operating cash flow and largely -- are largely in line with the explanation for the profit. So I will refrain from repeating that information.

That completes my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]