Mitsui & Co., Ltd. (8031.T) Earnings Call Transcript & Summary

Simultaneous interpretation is provided by third-party interpreters for the convenience of non-Japanese speakers. While reasonable efforts are made to provide accurate interpretation, portions may be incorrect. In case of any discrepancy, the original Japanese shall prevail. We will upload the summary of this session shortly in Mitsui's home page in English for your review.

It is time. So we'd like to commence Mitsui & Company's financial results briefing for the second quarter of the fiscal year ending March 2026. Thank you very much for joining us today despite your busy schedules. Today's session is being held as hybrid event for institutional investors and analysts accessible via the venue, Zoom webinar and online streaming. President Hori and General Manager of Global Controller Division Kurihara will provide approximately 15 minutes of explanation. Afterwards, we will take questions from the audience. Additionally, to enable individual investors to review the earnings briefing in real time, we are providing a live stream. Please refrain from unauthorized reproduction or use of images or audio from today's presentation. Please note that today's presentation is being recorded and will be available on demand on the Mitsui & Company website at a later date. Now allow me to introduce today's presenters. President and Chief Executive Officer, Kenichi Hori; Executive Vice President and CFO, Tetsuya Shigeta; Global Manager of Global Controller Division, Masao Kurihara. I am Konishi from IR department serving as a moderator. Thank you for your cooperation. We will now begin the briefing. President Hori, please.

Hello, I'm Kenichi Hori, President and Chief Executive Officer. Thank you for joining us today. First, I will speak on the progress of the Medium-term Management Plan, MTMP. I will then hand over to Masao Kurihara, General Manager of the Global Controller division, who will speak on the details of the financial performance. Let me start with an overview of the first half of this fiscal year and our initiatives for the second half. For the first half, both core operating cash flow, COCF, and profit progressed steadily at 55% against the business plan. When we formulated the plan, we incorporated a certain level of conservatism regarding uncertainties over U.S. tariffs and associated macroeconomic conditions. However, the direct impact of U.S. tariff in the first half was limited. We're seeing solid growth in base profit through our middle game initiatives. We have also made progress in bolstering our long-term earnings base, steadily proceeding with carefully selected investments for growth, such as Rhodes Ridge iron ore, Ruwais LNG and Blue Point low-carbon ammonia. Additionally, for mainstream which has continued to make losses, we have made impairments in accordance with the narrowing down of the development plan, thereby reducing the book value of investments and loans on an accounting basis. Based on this progress in the first half and the latest outlook of the second half, we have made an upward revision for our full year forecast for COCF by JPY 80 billion and profit by JPY 50 billion. We will, however, target achieving further upside exceeding these new targets. We have also decided to allocate the entire remaining management allocation to investments for growth and shareholder returns and have decided to make JPY 200 billion of share repurchases. During the current MTMP period, we expect investments for growth to have a total JPY 2.5 trillion and total shareholder returns to have totaled JPY 1.6 trillion. In the second half of this fiscal year, we'll continue to put emphasis on our integrated risk management, considering geopolitical risks and the financial landscape. We'll continue to work on improvement measures for our remaining challenges and further expansion of base profit to enhance ROE. Next, I will give an overview of our financial performance for the first half of the fiscal year. COCF decreased by JPY 89.6 billion year-on-year to JPY 448.5 billion, while first half profit increased by JPY 11.9 billion year-on-year to JPY 423.7 billion. Both progressed steadily against the business plan. The main reason for the year-on-year decrease in COCF was the absence of large LNG dividends recorded in the previous period, which were from FY March 2024, but the timing of receipt was delayed into the following fiscal year. Excluding this impact, COCF is at a similar level compared to the previous fiscal year. Given the solid progress in the first half and the outlook for continued solid performance in the second half, we decided to make an upward revision compared to the business plan. The full year forecast will be revised up to JPY 900 billion for COCF, an increase of JPY 80 billion, and JPY 820 billion for profit, an increase of JPY 50 billion. As mentioned earlier, we will target achieving further upside and intend to finish strong through to the end of the MTMP. Based on solid cash flows and review of the cash flow allocation, we have decided to make share repurchases of JPY 200 billion, which is to be completed by March 19, 2026. In order to continuously improve our value per share, we will cancel all shares acquired in this repurchase by the end of March 2026. Next, I will give an overview of the full year forecast for COCF. Based on strong progress and outlook in each segment, such as capitalization of interest expenses associated with the acquisition of Rhodes Ridge, an increase in dividends from equity method investees in Mineral & Metal Resources, LNG-related items in Energy and dividends from equity method investees in Machinery & Infrastructure, we have made an upward revision to the full year forecast by JPY 80 billion to JPY 900 billion. The full year forecast for profit has been revised upward by JPY 50 billion to JPY 820 billion, reflecting strong progress and outlook in Mineral & Metal Resources, Energy and Machinery & Infrastructure. I would like to provide an update on the impact of U.S. tariffs and policy changes. Profit from our business in the Americas in the first half was around JPY 170 billion, of which profit from the U.S. was around JPY 110 billion. When divided into 3 business types, domestic operations, exports and imports and sales, the share of profit from domestic operations remain the largest, and the direct impact of tariffs was limited. In the second half, we will continue to enhance our awareness to changes in the business environment and take agile measures as needed. Cash inflows during the current MTMP period are expected to increase by JPY 60 billion from JPY 4.37 trillion announced this May to JPY 4.43 trillion. Since our last update in May, the management allocation expanded from JPY 400 billion to JPY 460 billion. Taking into consideration our current investment pipeline and enhancement of capital efficiency, JPY 260 billion of this has now been allocated to investments for growth and JPY 200 billion to shareholder returns, meaning the entire management allocation for the current MTMP has now been allocated. However, we will continue to manage this in a flexible manner. Next, I will speak on the cash flow allocation results for the first half. In the first half, we executed investments for growth aligned with the key strategic initiatives, including LNG, European tank terminal business, ITC Antwerp which was made a 100% subsidiary and phased investment in the low-carbon ammonia business, Blue Point. We also made steady progress in asset sales, including our stakes in several listed companies. Although not included in the first half results, in October, we began to deploy capital for the acquisition of the interest in the Rhodes Ridge iron ore project. Cash inflows totaled JPY 562 billion, comprising COCF of JPY 449 billion and asset recycling of JPY 113 billion. Cash outflows totaled JPY 498 billion, comprising investments and loans of JPY 339 billion and shareholder returns of JPY 159 billion. Many projects executed during the current MTMP that started contributing to near-term earnings have further strengthened profitability, elevating base profit. There are several projects that have undergone concrete progress this fiscal year. The Waitsia natural gas project in Australia is scheduled to start commercial production soon. The Taiwan offshore wind power project has begun operations in stages and started contributing to earnings, progressing within budget and on schedule towards full commercial operation in 2026. The Sneha broiler business in India has also started contributing to earnings. Investments for growth that fortify the long-term earnings base are also progressing steadily. In October, we started deploying capital for the Rhodes Ridge iron ore project and expect to complete the acquisition of our 40% interest soon and are on track for first ore by 2030. The Tatonka shale gas upstream project in Texas is scheduled to start production this calendar year. We expect a good productivity and earnings contribution from fiscal year March 2027. The JPY 2.5 trillion investment for growth during the current MTMP will significantly bolster the depth of our earnings base. Steady progress in these projects will significantly enhance our earnings ability, enable us to absorb market fluctuations and provide us the edge to compete at a higher level. For FY March 2027 and beyond, we will continue to enhance our earnings base by executing new investments for growth, carefully selected from our abundant investment pipeline while maintaining our strict investment discipline. We will significantly enhance our cash generation capability based on a variety of competitive high-quality assets. Next, I will speak on our progress in enhancement of base profit. We calculate base profit by excluding items such as onetime factors from profit based on assumptions for commodity prices and exchange rates at the FY March 2026 levels we have set when we announced the current MTMP in May 2023. The target was to enhance base profit by JPY 170 billion over the 3 years of the MTMP period. And although there has been some variation within the breakdown of this total, we have made steady progress towards achieving this target. For strengthening existing businesses, we are steadily pushing ahead with middle game initiatives in mobility, chemicals and innovation and corporate development. We expect a cumulative base profit enhancement of around JPY 75 billion, which exceeds the target of JPY 70 billion. For efficiency improvements and turnarounds, while efforts continue in businesses such as coffee trading, we have progressed with tools from loss-making businesses and performance improvements in multiple affiliate companies and expect a cumulative base profit enhancement of around JPY 40 billion, in line with our target. For new businesses, in addition to those that we invested in the previous fiscal year that will contribute to earnings throughout the year such as the truck auction business in the U.S. and shrimp farming in Ecuador, multiple projects such as the Taiwan offshore wind power project and the broiler business in India have started contributing to earnings this fiscal year. We expect a cumulative base profit enhancement of around JPY 55 billion against a target of JPY 60 billion. Next, I will go over our shareholder returns policy. As mentioned earlier, based on solid cash flows, we have decided on making a JPY 200 billion share repurchases to be completed by March 19, 2026. As a result, the ratio of shareholder returns as a percentage of COCF during the current MTMP is expected to exceed 54%. Beyond current MTMP, we will maintain our progressive dividend policy, and we'll continue to make dividend increases from the highly recurring portion of COCF which we will continue to enhance. Together with this, we intend to make share repurchases flexibly using additional cash flows from commodity price upsides and asset recycling as sources of funds. In addition, we intend to continue to cancel treasury stock associated with repurchases. Through these measures, we'll continuously enhance our value per share. That concludes my explanation. I will now hand over to Mr. Kurihara for some more details on the operating results.

I'm Masao Kurihara, General Manager of the Global Controller division. I'll speak on details of operating results. COCF for the first half decreased by JPY 89.6 billion year-on-year to JPY 448.5 billion. In the Mineral & Metal Resources segment, there was a decrease of JPY 29.9 billion to JPY 162.2 billion, mainly due to lower metallurgical coal and iron ore prices. In the Energy segment, there was a decrease of JPY 83.7 billion to JPY 100.8 billion, mainly due to the absence of LNG dividends received in the previous period. These dividends were from FY March 2024, but the payments were delayed into the following fiscal year. In the Machinery & Infrastructure segment, there was an increase of JPY 21.8 billion to JPY 95.6 billion, mainly due to the absence of taxes paid in the previous period due to asset sales. In the Chemicals segment, there was an increase of JPY 12.7 billion to JPY 55.2 billion, mainly due to the reversal of provision and higher demand in Europe for crop protection. In the Iron & Steel Products segment, there was an increase of JPY 5 billion to JPY 6.5 billion, mainly due to trading and dividends from equity method investees. In the Lifestyle segment, there was a decrease of JPY 19.4 billion to minus JPY 5 billion, mainly due to intersegment transactions and lower profit in coffee trading. In the Innovation & Corporate Development segment, there was a decrease of JPY 0.8 billion to JPY 19.5 billion. Other, Adjustments & Eliminations recorded an increase of JPY 4.7 billion to JPY 13.7 billion, mainly due to an intersegment transaction with the Lifestyle segment. First half profit increased by JPY 11.9 billion year-on-year to JPY 423.7 billion. In the Mineral & Metal Resources segment, there was a decrease of JPY 47.2 billion to JPY 114.3 billion, mainly due to lower metallurgical coal and iron ore prices. In the Energy segment, there was an increase of JPY 37.6 billion to JPY 102.9 billion, mainly due to LNG-related profit and higher gas prices despite weaker oil trading. In the Machinery & Infrastructure segment, there was a decrease of JPY 46.2 billion to JPY 102 billion, mainly due to the absence of asset recycling gains recorded in the previous period and onetime losses at mainstream despite FVTPL valuation gains from an IPO of Firefly and higher profit in the automotives and IPP businesses. In the Chemicals segment, there was an increase of JPY 21.4 billion to JPY 43.5 billion, mainly due to a valuation gain on ITC Antwerp and the absence of impairment losses recorded in the previous period. In the Iron & Steel Products segment, there was an increase of JPY 4 billion to JPY 11.3 billion, mainly due to trading despite the absence of asset sale gains recorded in the previous period. In the Lifestyle segment, there was an increase of JPY 0.8 billion to JPY 20.8 billion, mainly due to asset sale gains despite lower profit in coffee trading. In the Innovative & Corporate Development segment, there was an increase of JPY 7.3 billion to JPY 25.3 billion, mainly due to FVTPL valuation gains. In Others, Adjustments & Eliminations, there was an increase of JPY 34.2 billion to JPY 3.6 billion, mainly due to the absence of an amendment to the retirement benefit system, which occurred in the previous period. This page provides a summary of year-on-year factor comparisons for the first half. Base profit increased by JPY 88 billion, mainly due to higher earnings related to LNG, IPP, automotives and iron and steel products despite lower profits in oil trading and coffee trading. In particular, large LNG dividends being recorded in the second quarter for the fiscal year was a major factor. Resources cost volume decreased by JPY 12 billion, mainly due to higher costs and lower volumes in the copper business. And commodity prices increased by JPY 4 billion in oil and gas, but decreased by JPY 20 billion in mineral and metal resources due to lower metallurgical coal and iron ore prices, resulting in net decrease of JPY 16 billion. ForEx decreased by JPY 17 billion due to yen appreciation. Overall, commodity prices and exchange rates decreased by JPY 33 billion. Asset recycling decreased by JPY 55 billion due to the absence of large asset sales recorded in the previous period. Valuation gains, losses and onetime factors increased by JPY 24 billion, mainly due to the absence of losses recorded in the previous period and valuation gains on ITC Antwerp despite onetime losses at mainstream. Here, we compare the full year forecast with the business plan by factor. Base profit is forecast to be JPY 10 billion higher than previous expectations, mainly due to higher profit related to LNG, capitalization of interest related to the investments in Rhodes Ridge, automotives as well as FVTPL gains and other factors despite lower earnings in coffee trading, chemicals and oil trading. Resources cost volume are expected to improve by JPY 12 billion, mainly due to lower depreciation in upstream energy and higher volumes in iron ore. Commodity prices and ForEx are expected to improve by JPY 38 billion, mainly due to higher iron ore, copper and metallurgical coal prices and depreciation of yen. For asset recycling, there were sales of a portion of the overseas retail business and fixed assets in the retail business in Japan recorded in the first half. In the second half, we are expecting to make several asset sales, and so there is no change to the business plan. Valuation gains, losses and onetime factors are expected to decrease by JPY 10 billion, mainly due to onetime losses at mainstream. Also, in relation to our recent announcement by JA Mitsui Leasing regarding the risk of collection of certain account receivables at one of their group companies, we have included a negative impact of around JPY 3 billion into this full year forecast. Factor comparison is that we compare the FY March 2025 results and the FY March 2026 full year forecast by factor. I will not go over the details now, but please refer to this information as needed. Finally, I will speak on the balance sheet as of the end of the first half. Net interest-bearing debt was JPY 3.3 trillion, the same as at the end of March 2025. Shareholder equity increased by JPY 0.5 trillion to JPY 8 trillion compared to March 2025. As a result, net DER was 0.42x. That concludes my explanation.

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