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

Good evening. My name is Takakazu Uchida, Chief Financial Officer. Thank you for joining us today. I will start by discussing our operating results for the third quarter and the forecast for the full year. Then I will hand over to Tetsuya Shigeta, Global Controller, who will speak in more detail. Summing up our financial results for the third quarter of the fiscal year, I would say Resources & Energy was strong overall despite recording impairment losses for Mozambique coal and infrastructure projects. While in non-resource areas, we made steady progress primarily in Machinery & Infrastructure, which were in line with the forecast. Please turn to Page 3. I will now explain the summary of our operating results for the third quarter of the fiscal year. Mitsui's profit for the period declined by JPY 15 billion year-on-year to JPY 335.1 billion, and core operating cash flow increased by JPY 24.7 billion to JPY 516.8 billion. Progress towards full year targets for profit and core operating cash flow, announced in October 2019, has been steady at 74% and 81%, respectively. For our full year forecast, we left the profit forecast of JPY 450 billion unchanged. We have downwardly revised forecast core operating cash flow by JPY 40 billion to JPY 600 billion, reflecting corporate pension contributions planned for the fourth quarter. However, our underlying capacity to generate cash continues to grow steady as planned. There's also no change to our planned annual dividend of JPY 80 per share. In the period under review, the global economy continued to show slowly in growth with the pace of U.S. economic expansion easing and continuation of ongoing economic slowdown in China. There are general indications that economic momentum is slowing, affected by the spreading impact of the novel coronavirus and other factors, so we will continue to pay close attention to our business environment while working to reach our targets for the full financial year. Please turn to Page 4. A key initiative of our Medium-term Management Plan is to build a robust profit base and thoroughly strengthen existing businesses, so allow me to review our progress in this area. In our core areas of Resources & Energy, Machinery & Infrastructure and Chemicals, profit for the year-to-date was JPY 309.9 billion, accounting for nearly 90% of Mitsui's overall profit. In Resources & Energy, progress was sound, although we recorded impairment losses of approximately JPY 22 billion for Mozambique coal and infrastructure projects. This was offset by interest on equity from Vale, strong performance in crude oil trading and other areas was the result that profit reached JPY 233.4 billion, and core operating cash flow, JPY 365.5 billion. With regard to the Mozambique coal and infrastructure projects along with Vale, we will be conducting large-scale improvements to lift productivity from March and working hard to -- on measures to improve long-term value of the project. In Machinery & Infrastructure, profit for the third quarter of the fiscal year was JPY 59.9 billion, and core operating cash flow was JPY 65.6 billion, taking us to 67% and 69% progress, respectively, over our previous forecast. We are continuing to accumulate steady profits from businesses such as power generation, automotive, gas distribution and others. In Chemicals, we progressed largely in line with plan despite continued impact from a weaker market for basic chemicals and other products. Please look at Page 5. Next, I'll talk about the results and outlook for cash flow allocation. In the period under review, we achieved core operating cash flow of JPY 520 billion. Together with cash inflows from asset recycling of JPY 130 billion, total cash inflow for the period came to JPY 650 billion. Investment and loans accounted for JPY 320 billion in cash outflows. And together with a total of JPY 90 billion from an interim dividend amount of JPY 70 billion and a share buyback already implemented of JPY 20 billion, total cash outflows came to JPY 410 billion. As a result, free cash flow after shareholder returns was JPY 240 billion. I should also note that due to the lag of some asset recycling projects and our continued strict discipline for new investments, we forecast a reduction of JPY 50 billion from previous forecast on a 3-year cumulative basis in both asset recycling and investments and loans. Please look at Page 6. Next, I will discuss the balance sheet as of the end of the third quarter of the fiscal year. Net interest-bearing debt was largely unchanged from the end of March 2019. Net DER was 0.83x as a result of approximately JPY 75 billion increase in shareholders' equity. Please see Page 7. I'd like to conclude by talking about shareholder returns. There's no change to our plan announced at the start of the fiscal year to pay an annual dividend for the fiscal year ending March 2020 of JPY 80 per share. For the period of the current 3-year Medium-term Management Plan, we plan total shareholder returns of JPY 500 billion, representing a total shareholder return of 27% against total core operating cash flow. Looking ahead, we'll continue to pursue sustainable increase in shareholder returns in alignment with improved business performance while working to optimize capital efficiency. This concludes my part of the presentation. I will now hand over to my colleague, Tetsuya Shigeta, our Global Controller, to explain the details.

Thank you. My name is Tetsuya Shigeta, Global Controller, and I will now provide details of our operating results. Please look at Page 9. First, I will explain the main changes in profit by segment compared to the same period last year. For the third quarter period, profits decreased JPY 15 billion to JPY 335.1 billion. Mineral & Metal Resources profit increased JPY 8.3 billion to JPY 135.9 billion due to a strong iron ore market and despite a decrease in the price of coal and an increase in costs as well as impairment loss for Mozambique coal and infrastructure projects. Energy segment profits increased JPY 10.6 billion to JPY 97.5 billion. The main factors were the recording of deferred tax assets associated with the Mozambique area 1 FID and strong trading performance by Mitsui Energy Trading Singapore, which offset the decline in crude oil and gas prices and the decrease in dividends received. Machinery & Infrastructure profits increased JPY 4.4 billion to JPY 59.9 billion due to contributions from power generation, automotive and gas distribution businesses. Chemicals segment profits decreased JPY 7.1 billion to JPY 16.6 billion. The main factors were lower earnings at businesses amid an economic slowdown along with weak trading performance. Iron & Steel Products profits decreased JPY 6.7 billion to JPY 3.5 billion. The main factors were the absence of a gain on sale of land by affiliated company which was included in the same period of the previous year, along with lower earnings at businesses amid an economic slowdown. Lifestyle segment profits decreased JPY 15.5 billion to JPY 18.1 billion due to the absence of gain on reversal of provision related to withdrawal from Multigrain business and the absence of gain on deemed sale of IHH, both included in the same period of the previous fiscal year, FVTPL valuation loss and impairment loss at Accountable, a health care staffing business in the U.S. These negative factors offset the decrease in corporate income taxes resulting from the partial sale of investment in Recruit Holdings. Innovation & Corporate Development profits increased JPY 0.2 billion to JPY 6 billion. Please turn to Page 10. Core operating cash flow for the third quarter was JPY 516.8 billion, a year-on-year increase of JPY 24.7 billion. Changes to core operating cash flow largely reflect differences in profit already explained, so I will not go into further detail here. Turning now to Page 11. We will look at the main factors influencing year-on-year changes for the third quarter profit. Base profit was a factor in a decline of approximately JPY 22 billion. Despite strong trading at Mitsui Energy Trading Singapore and increased profits at IPP businesses, gas distribution businesses and IHH, there were negative factors, such as an FVTPL valuation loss associated with the decline in the price of listed securities and the decrease in profits from trading businesses in segments resulting from deteriorating market conditions. Resource-related costs/volume was a factor in a decline of JPY 11 billion due to an increase in the cost of coal associated with unfavorable mining conditions and an increase in depreciation and operating costs in oil and gas development businesses. And despite increased production volume at the Australian iron ore business and MOECO oil and gas project in offshore Thailand. Asset recycling continued to an increase of JPY 20 billion mainly due to a decrease in corporate income taxes due to the partial sale of investment in Recruit Holdings. Commodity prices ForEx contributed to an increase of JPY 20 billion mainly due to a strong iron ore market and despite a decline in crude oil and gas prices. Valuation gain/loss and special factors was a factor in a decline of JPY 22 billion due to impairment losses at Mozambique coal and infrastructure projects and Accountable, a health care staffing business in the U.S. as well as the absence of a gain on reversal of provision related to withdrawal from multigrain included in the same period of the previous fiscal year and despite the recording of deferred tax assets associated with the Mozambique area 1 FID. Please turn to Page 12 for an explanation on asset recycling, investment and loans during the third quarter of the fiscal year. In asset recycling, as a result of the partial sale of our investment in Recruit Holdings and others, cash inflow for the period was JPY 130 billion. Cash outflow from investment and loans, meanwhile, totaled JPY 320 billion. Major investment and loan activities during the third quarter included investment in our U.S. distributed power generation business and Mozambique area 1 along with CapEx expenditure at a sugar manufacturing business in Thailand. Looking ahead, we will continue to employ strict investment discipline, pursuing a balanced allocation of cash to realize medium to long-term growth while also strengthening our financial base. Now please look at Page 13, where I will explain the factors behind revisions made to each business segment. Forecast profit after tax for the full year remains unchanged from the figure announced in October 2019 of JPY 450 billion. In Energy, we have revised estimates up JPY 10 billion in light of strong trading at Mitsui Energy Trading Singapore. While at Innovation & Corporate Development, we have also lifted the estimate by JPY 10 billion to reflect good performance at the Mitsui Knowledge Industry and other areas, along with improvements in FVTPL. On the other hand, we have downwardly revised our forecast for Mineral & Metal Resources due to impairments at Mozambique coal and infrastructure projects. Please turn to Page 14. The company's full year core operating cash flow forecast has been revised downward by JPY 40 billion to JPY 600 billion. All others, adjustments and eliminations has been revised downward by JPY 55 billion primarily due to an upcoming corporate pension contribution of JPY 40 billion. Changes to core operating cash flow in other segments largely reflect differences in profit already explained, so I will not repeat those explanations here. That concludes my presentation. Thank you.