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

Good afternoon. My name is Tatsuo Yasunaga, CEO. Thank you very much for joining us today despite your busy schedule. I'll begin by reviewing progress on the medium-term management plan 2023, while giving a summary of the first half operating results and forecast for the full year. I will then hand over to our Global Controller, Tetsuya Shigeta, for details of our operating results. This fiscal year began amid immense changes to Saudi and people's behavioral patterns with the spread of COVID-19. During the second quarter, we saw a clear recovery of production activity in China and an improving trend in employment and consumption in the U.S. There was also a recovery of economic activity in other regions. Although there is a view that the worst is behind us in Europe and elsewhere, we are seeing renewed spread of the virus. So the situation remains deeply uncertain. Recovery pace to normalization is likely to be gradual commonly in the whole world and full economic resurgence cannot be expected until next year or later. At Mitsui, Our performance has been underpinned by our iron ore business, supported by solid demand in China and our trading business where we have achieved higher results than the initial plan by demonstrating our comprehensive strengths to capture the market needs. At the same time, in terms of businesses, such as primary materials, which is facing decline in demand and impacted by weak commodity markets as well as business areas, of which the impact of COVID-19 is likely to be prolonged and severe such as mobility, lifestyle, et cetera, we will allocate certain amount of our management resources to defense as we strive for the earliest possible recovery towards the growth trajectory. On the other hand, our intention is not to focus only on defense, but also to show positive stance for offense, meaning to look for opportunities arising from the pandemic and continue to manage the company to realize the corporate strategy that we outlined in the new medium-term management plan announced in May, believing that this will lead to increase our corporate value. Please now turn to Page 3, and I will summarize our operating results for the first half of the year. Core operating cash flow for the first half decreased by JPY 42.9 billion year-on-year to JPY 274.1 billion, and profit for the period decreased by JPY 124.2 billion year-on-year to JPY 110 billion, representing progress to a full year target of 69% and 61%, respectively. Due to the prolonged widespread impact of COVID-19 and the decrease in oil, gas and coal prices, our results were lower year-on-year. However, we are progressing steadily toward plan, supported by factors such as high iron ore prices, revenues from asset recycling, including FVTPL profit and trading business. For our full year forecast, we have upwardly revised core operating cash flow by JPY 80 billion to JPY 480 billion, reflecting steady cash generation. On the other hand, as mentioned at the beginning, our forecast for the profit for the year remains unchanged. Considering that we intend to reevaluate existing businesses and review our portfolio as there are business areas that suffer from a deeper and more sustained impact from COVID-19. The annual dividend forecast also remains unchanged at JPY 80 per share, with an interim dividend of JPY 40 per share. Please turn to Page 4. Here, I will cover progress in our core business areas outlined in the medium-term business plan of Resources & Energy, Machinery & Infrastructure and Chemicals. Total first half profit from core businesses was JPY 101.7 billion, accounting for more than 90% of consolidated group profit for this period. In Resources & Energy, core operating cash flow for the period was JPY 157.4 billion, and profit was JPY 67.6 billion. Although there was an additional impairment loss of JPY 19.5 billion from Moatize coal mining associated with revised 5-year production plan in the second quarter, which followed an impairment loss of JPY 5.1 billion in the first quarter. Overall progress was steady, supported by a strong iron ore market and dividend from Vale. In Machinery & Infrastructure, core operating cash flow for the period was JPY 26.3 billion, and profit was JPY 23.4 billion. Profits from multiple operating companies mainly in the mobility sector decreased, impacted by COVID-19, but with support from asset recycling, profit for the first half reached a high 67% of the full year plan. In Chemicals, progress was largely in line with plan with basic Chemicals trading and agricultural supply businesses performing soundly. Please turn to Page 5 for an explanation of cash flow allocation in the first half of the year. For the period, in addition to core operating cash flow of JPY 275 billion, cash-in was supplemented by asset recycling of JPY 55 billion for total cash-in of JPY 330 billion. Investments and loans for the period was JPY 265 billion, which combined with shareholder returns of JPY 110 billion, meant total cash out was JPY 375 billion. The business environment remains severe, and we will continue to manage the company with a continued focus on strict discipline for post-FID investment and maintenance CapEx. And at the same time, we will pursue new challenges that would contribute to accelerating transform of our company. Let's now turn to Page 6 and review the first half balance sheet. Compared to the end of March 2020, net interest-bearing debt decreased by approximately JPY 70 billion to JPY 3.4 trillion. Shareholders' equity increased by approximately JPY 120 billion to JPY 3.9 trillion. And as a result, the net DER ratio was 0.87x. Please look now at Page 7. This page covers the impact of COVID-19 on the first half results and the full year outlook. Although the economy in most of the developed markets have begun to recover, there is still a lot of uncertainty in areas such as Central and South America, Southeast and Southwest Asia. If you look at each business segment, while some have adapted to stay-at-home demand and changes in consumer behavior and are performing well, in mobility and related materials, along with consumer businesses, the downward pressure on business has been more intense than anticipated. Although it is under recovery trend, we expect that certain negative impact will remain through the second half. To manage this situation, we will continue with damage control measures, while we are appraising existing businesses in light of the different business environment and changes in social structure. At the same time, we'll manage the company by paying close attention to search for signs of new business opportunities. Please turn to Page 8 where I will review our progress on the action plan we announced at the start of the period. Regarding ensured safety and minimized damage amid COVID-19, we adopted guidelines with comprehensive measures to prevent the spread of infection, while gradually restarting operational activities. We closely managed financial liquidity in each business during the peak period of the pandemic. And as a next step, We are under evaluation of how we could build an ideal business portfolio, considering various risks, including credit risk. We're also pursuing more progress in operational efficiency and cost reductions through further digitalization. Regarding steady implementation of business plan, the full-scale operations have begun at the Cameron LNG liquefaction plant and Fukushima natural gas power plant. The Mozambique Area 1 project has progressed with the securing of project finance, and we have been implementing trading contracts and addressing demand from stay-at-home consumers. Regarding acceleration of business reinforcement and transformation, there were progress in reorganization of sugar-manufacturing industry and consolidating intermediary distribution subsidiaries, merger and pursuing reorganization and restructuring of existing businesses. And our aim will continue to be the leader -- continue to be leaner company group as a whole. Page 9 to 11 will be explained shortly by our Global Controller, so please turn now to Page 12. As I mentioned earlier, we will upwardly revise our forecast core operating cash flow for the full year to JPY 480 billion. This reflects good iron ore pricing and maximizing FVTPL portfolio companies after boosting their corporate value. Please turn to Page 13. Our full year profit and tax forecast is unchanged at JPY 180 billion. Downward pressure on profits has been less than initially expected due to contribution from iron ore business, improvement of FVTPL in Innovation & Corporate Development segment and strong trading in chemical products and other areas. However, the operating environment has been harsh for the Mineral & Metal Resources, Energy and Machinery & Infrastructure segment. And there are substantial impact to some businesses in those areas. We held the strategy meetings, again, with each business unit first time since the beginning of the fiscal year and came to a conclusion that we need to thoroughly evaluate the existing businesses and review the portfolio taking into consideration mid- and long-term improvement of corporate value. By doing the above, we're not able to preclude the possibility of recording onetime profit and loss, thus determined to maintain the fear of the initial business plan. Please now look at Page 14 for an explanation of cash flow allocation and shareholder returns. In reviewing our full year forecast for the year to March 2021, we also reviewed the medium-term management plan announced in May this year. Although there is continuous downward pressure to our asset recycling, we are working on thorough cost reduction in the existing businesses in addition to upward revision to our core operating cash flow. As a result, we determined that there is no outstanding changes to our cash generation capacity. Thus, we have not changed the cash flow allocations contained in our 3-year plan. As mentioned earlier, the forecast annual dividend is unchanged at JPY 80 per share, with an interim dividend of JPY 40 per share. Looking ahead, we aim to implement a highly flexible strategic allocation of available cash for growth investment focused on capital efficiency. That completes my presentation today. So I will now hand over to our Global Controller, Tetsuya Shigeta, for details of first half performance.

Thank you. My name is Tetsuya Shigeta, Global Controller. And I will now provide details of our operating results for the first half. Please turn to Page 9. First, I will explain the main changes in core operating cash flow by segment compared to the first half of the previous fiscal year. Core operating cash flow for the first half of the year was JPY 274.1 billion, a year-on-year decrease of JPY 42.9 billion. In Mineral & Metal Resources, core operating cash flow decreased by JPY 22.6 billion to JPY 97.2 billion, mainly due to a decrease in the sale price of coal at Australian coal mining operations. In Energy, core operating cash flow decreased by JPY 56.2 billion to JPY 60.2 billion, due to a decrease in oil and gas prices and the decrease in LNG dividends received. In Machinery & Infrastructure, core operating cash flow decreased by JPY 11.5 billion to JPY 26.3 billion, mainly due to a decrease in dividends from equity method affiliates. Chemicals achieved core operating cash flow of JPY 22.7 billion, a year-on-year increase of JPY 9.4 billion, which was mainly due to a onetime factor at an overseas affiliate. In Iron & Steel Products, core operating cash flow was down JPY 0.1 billion to JPY 0.5 billion. In Lifestyle segment, core operating cash flow was JPY 1.3 billion, down JPY 1 billion. Innovation & Corporate Development achieved core operating cash flow of JPY 30.9 billion, up JPY 36.6 billion, mainly due to strong commodities trading and the absence of FVPTL loss recorded in the first half of the previous year in addition to FVTPL profit. Other factors comprising expenses, interest, taxes, et cetera, not allocated to business segments totaled JPY 36 billion. Please turn to Page 10. I will now explain the main changes in profit by segment compared to the first half of the previous fiscal year. Profit for the quarter decreased JPY 124.2 billion to JPY 110 billion. In Mineral & Metal Resources, profits decreased JPY 30.6 billion to JPY 71.3 billion due to an impairment loss at Moatize coal mine business and a decrease in the sale of price of coal at Australian coal mining operations. In Energy, profit decreased by JPY 68.3 billion to negative JPY 3.7 billion due to a decrease in the price of oil and gas, decreased LNG dividends and an absence of deferred tax assets associated with the FID for Mozambique Area 1 recorded in the same period of the previous fiscal year. In Machinery & Infrastructure, profit decreased by JPY 13.6 billion to JPY 23.4 billion due to impairments at Moatize coal mine business and at the rolling stock leasing business. In Chemicals, profit was up JPY 6 billion to JPY 10.7 billion, mainly due to a onetime factor at an overseas affiliate company, strong trading performance in basic chemicals and agricultural input business. In Iron & Steel Products, profit was down by JPY 8.5 billion to negative JPY 5.8 billion, mainly due to a decline in demand for steel for the automotive industry and the decline in operation rate. In the Lifestyle segment, profit decreased by JPY 28.8 billion to negative JPY 11.9 billion due to the absence of reduction in corporate income tax burden recorded in the first half of the previous fiscal year and the impact of decline in dining out and purchasing demand on affiliated companies in food, retail and fashion. Innovation & Corporate Development achieved profit of JPY 24 billion, a year-on-year increase of JPY 22.4 billion, mainly due to strong commodities trading and the absence of FVTPL loss recorded in the first half of the previous year, in addition to FVTPL profit. Turning now to Page 11. Here, we will look at the factors influencing year-on-year changes in the first half profit. Base profit declined by approximately JPY 6 billion. Also, FVTPL recovery and Vale dividends were positive factors. The impact of COVID-19 contributed to a decline in profit of approximately JPY 38 billion, primarily in non-resources areas. Next, in resource-related cost volume, the deterioration of mining conditions resulting in lower volumes and higher costs contributed to a decline in profit of approximately JPY 5 billion. In Energy, while cost benefits from the capitalization of Metals contributed to a profit increase of approximately JPY 2 billion, production decline in MOECO/Thai offshore was the main factor in the decrease in profit of JPY 10 billion. Asset recycling contributed to a decline of approximately JPY 16 billion due to the absence of reduced corporate tax burden included in the same period of the previous fiscal year and despite a gain on sale of power generation businesses in North America. In commodity prices, ForEx, a decrease in the price of oil and gas was the main factor in a decline in profit of approximately JPY 24 billion, while decreasing the price of coal was behind a decline of approximately JPY 16 billion. In ForEx, Australian dollar appreciation against the U.S. dollar was the main contributor to a decline in profit of approximately JPY 8 billion. Finally, valuation gain, loss and special factors contributed to a decline of approximately JPY 42 billion due to the absence of deferred tax assets associated with the FID for Mozambique Area 1, included in the same period of the previous fiscal year, impairment loss at Moatize coal mine business this first half and other factors. Page 12. I will now explain the factors by segment in the full year forecast described earlier by Mr. Yasunaga. The full year forecast for core operating cash flow has been revised upwards to JPY 480 billion. The strengthening of the price of iron ore was the main factor in an upward revision of JPY 70 billion in Mineral & Metal Resources. While the greater-than-expected recovery in oil and gas prices was the main factor in an upward revision of JPY 10 billion in Energy. FVTPL profit and strong commodities trading contributed to an upward revision of JPY 20 billion in Innovation & Corporate Development. Conversely, the impact of decline in dining out and purchasing demand on affiliated companies in food, retail and fashion were the main factors in a downward revision of JPY 10 billion in the Lifestyle segment. Please turn to Page 13. The full year forecast for profit after tax remains unchanged at JPY 180 billion. FVTPL profit and strong commodities trading contributed to an upward revision of JPY 20 billion in Innovation & Corporate Development, while strong trading in basic chemicals and strong performance in the agricultural input business contributed to an upward revision of JPY 5 billion in Chemicals. Conversely, the impact of decline in dining out and purchasing demand on affiliated companies in food, retail and fashion were the main factors in a downward revision of JPY 15 billion in Lifestyle segment, while the decline in demand for steel for automotive industry and decreased operation rate contributed to a downward revision of JPY 10 billion in Iron & Steel products. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]