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

Good afternoon. I'm Tetsuya Shigeta, CFO. Thank you for joining us today. First, I will explain the results for fiscal year March 2023, give overviews of medium-term management plan 2023 and of the business plan for fiscal year March 2024. Then I will hand over to Masao Kurihara, Global Controller, who will speak on the results and business plan in more detail. A separate explanation of the new medium-term management plan will be presented by CEO Hori at a briefing to be held next week on May 9. I will begin by summarizing our operating results for fiscal year March 2023. On a year-on-year comparison, core operating cash flow increased by JPY 46.8 billion to JPY 1,205.5 billion and profit increased by JPY 215.9 billion to JPY 1,130.6 billion, both of which exceeded forecast and hit new record highs. Regarding shareholder returns, we plan to raise a year-end dividend to JPY 75 per share, JPY 5 higher than what we announced in February, bringing the full year total to be JPY 140. Furthermore, approximately JPY 270 billion in share repurchases were made, including approximately JPY 30 billion of the JPY 100 billion in additional share repurchases also announced in February that were executed by the end of March. Based on this, shareholder returns for the year were approximately JPY 490 billion in total. ROE reached 18.9% due to an increase in earning power and an improvement in capital efficiency. Now I will provide an overview of the medium-term management plan, which ended in March 2023. Core operating cash flow increased significantly over the 3-year period. In fiscal year March 2023, it had more than doubled compared to fiscal year March 2020, which was the final year of the previous medium-term management plan. In the Mineral & Metal Resources segment and Energy segment, we were able to significantly capture the upside of commodity prices through a portfolio transformation. Furthermore, earnings power increased across all segments due to our trading functions and the strengthening of businesses such as automotive and health care. -- like core operating cash flow, profit increased significantly. And in fiscal year March 2023, it had nearly tripled compared to fiscal year March 2020, which was the final year of the previous medium-term management plan. I will now look back on the qualitative aspect of the previous medium-term management plan. We made steady achievements by transforming the business portfolio and strengthening the management base to realize, transform and grow in line with our corporate strategy. In strengthened business, management capabilities and earnings power, we demonstrated trading functions for stable supply and steadily capture the upside of commodity prices and business environment. Furthermore, we improved earnings power and ROE through deeper ROIC management. In evolve financial strategy and portfolio management, we executed strategic cash allocation through management allocation using our strong cash flow as a source of funds. In particular, for shareholder returns, we continue to increase dividends and flexibly made share repurchases. Furthermore, we strengthened our financial position given the highly uncertain business environment. In human resources strategy, we implemented measures such as development of capable individuals, diversity and inclusion and appropriate allocation of human resources and also realize value creation and improvement of productivity through promotion of new work styles. In strategic focus, pursue new businesses, we made progress with initiatives such as LNG, hydrogen, ammonia and renewable energy for the realization of a decarbonized society, the expansion of earnings within the health care business and the creation of businesses related to disease prevention. Furthermore, we also accumulated the growth investment pipeline aimed at the new medium-term management plan. In sustainability management and evolution of ESG, we formulated and executed a road map for climate change action and increase the disclosure of nonfinancial information. Furthermore, we established a new stock-based remuneration plan for directors using ROE and ESG elements as KPIs and engage the improvement of the effectiveness of the Board of Directors. I will now discuss the results of cash flow allocation. Cash in was JPY 3,815 billion, comprising COCF of JPY 3,023 billion and asset recycling of JPY 792 billion, such as the sale of Australian metallurgical coal business, SMC, real estate business, financial assets measured at FVTOCI, power generation business and the Caserones, a copper mine in Chile. Cash out was JPY 2,623 billion, comprising investments and loans of JPY 1,584 billion and shareholder returns of JPY 1,039 billion. I will explain about the main investments and loans. In the Energy Solutions area, we made investments, such as those in mainstream a renewable energy developer and climate friendly, which is the developer of emissions credits on the large-scale renewable energy projects in India as we pushed ahead in reshaping our portfolio. We also subscribed convertible bonds of CT Corp's holding company. In this section, I will discuss the results of management allocation. While cash inflow through asset recycling was JPY 790 billion, core operating cash flow was JPY 3,020 billion, significantly exceeding our target as we achieved strong cash generation. As for cash outflow, there were JPY 1,300 billion in total investments and loans and dividends increased to JPY 530 billion, backed by strong cash generation. As a result, the management allocation came out to be JPY 1,980 billion. Of this JPY 1,980 billion in the management allocation under strict investment discipline, we allocated JPY 280 billion to carefully selected growth investments and flexibly allocated cash captured from the upside of commodity prices and implemented JPY 510 billion of share repurchases. As a result, we executed shareholder returns, including dividend payout in excess of JPY 1 trillion over 3 years. Of the JPY 100 billion in additional share repurchases announced in February, the amount executed by the end of fiscal year March 2023 were approximately JPY 30 billion. The portion of approximately JPY 70 billion unexecuted will be managed by including it as part of the cash flow allocation under the new medium-term management plan. We're steadily accumulating projects in our growth investment pipeline, actually, pipeline projects with a high probability of execution that will see cash outflows in fiscal year March 2024 total approximately JPY 400 billion, including, for example, making AIM Services, our wholly owned subsidiary for approximately JPY 70 billion, the tender offer and business integration with Lia for approximately JPY 60 billion. This JPY 400 billion will be managed by inclusion in the cash flow allocation for the new medium-term management plan. Unallocated management allocations are temporarily distributed to strengthening our financial position to address a highly uncertain business environment, but we will flexibly consider future allocations, including those for growth investments and shareholder returns, taking into account the future business environment. I will explain shareholder returns. We continue to increase dividends in line with expansion of cash generation with a full year dividend per share of JPY 140, JPY 5 higher than what we announced in February and up JPY 55 from the JPY 85 in fiscal year March 2021. Furthermore, we flexibly implemented share repurchases as we captured the upside of commodity prices. As a result, shareholder returns as a percentage of core operating cash flow for the 3 years of the medium-term management plan reached 34%. I will now explain the quantitative targets in the business plan for the fiscal year March 2024. Commodity prices are expected to revert, and we expect core operating cash flow of JPY 870 billion and the profit of JPY 880 billion. However, despite a given business environment, we project that core operating cash flow and profit will significantly improve compared to fiscal year March 2021, the first year of the previous medium-term management plan. Furthermore, we aim for continued growth during the new medium-term management plan. That completes my part of the presentation today. I will now hand over to Global Controller, Masao Kurihara for details of performance in fiscal year March 23 and our new business plan.

I am Masao Kurihara, Global Controller. I will now provide details of our operating results for the current year and the business plan for fiscal year March 2024. First, I will explain the main changes in core operating cash flow by segment compared to the previous fiscal year. Core operating cash flow for the year increased by JPY 46.8 billion to JPY 1,205.5 billion. In Mineral & Metal Resources, metallurgical coal prices were higher, but COCF decreased by JPY 116.1 billion to JPY 436.7 billion, mainly due to the decline in IO prices and the falling dividend from Vale. In Energy, COCF increased by JPY 139.4 billion to JPY 419.6 billion, mainly due to increase in oil and gas prices and LNG trading. In Machinery & Infrastructure, COCF increased by JPY 38.9 billion to JPY 182.9 billion, mainly due to higher dividend income from associated companies, primarily in automotive and commercial vehicles related businesses. In Chemicals, although prices and sales volumes performed well, mainly for fertilizer and fertilizer raw materials, COCF decreased by JPY 4.3 billion to JPY 89.5 billion, mainly due to falling prices and rising costs in the U.S. methanol business. In Iron & Steel Products, COCF increased by JPY 5.6 billion to JPY 18 billion, mainly due to higher dividend income from associated companies. In Lifestyle, although grain trading, et cetera, performed well, COCF decreased by JPY 4.1 billion to JPY 31.1 billion, mainly due to the valuation loss on the fair value of the Drug Discovery Support Fund. In innovation and corporate development, COCF was JPY 46.6 billion. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segments totaled an outflow of JPY 18.9 billion. Next, I will explain the main changes in profit by segment compared to the previous fiscal year. Profit increased by JPY 215.9 billion to JPY 1,130.6 billion. In Mineral & Metal Resources, metallurgical coal prices were higher, and there was a gain on the sale of the Australian metallurgical coal business, SMC, but profit decreased by JPY 58.8 billion to JPY 438.8 billion, mainly due to the decline in iron ore prices and the falling dividends from Vale. In Energy, profit increased by JPY 195.4 billion to JPY 309.4 billion, mainly due to increase in oil and gas prices and LNG trading. In Machinery & Infrastructure, profits increased by JPY 51.1 billion to JPY 171.9 billion mainly due to good performance of automotive and commercial vehicle businesses and the ship-related business. In Chemicals, although we recorded a decline in the U.S. methanol business due to falling sales prices and rising raw material costs. Profits increased by JPY 2 billion to JPY 70.9 billion as a result of solid performance in prices and sales volumes, mainly for fertilizer and fertilizer raw materials. In Iron & Steel Products, profits decreased by JPY 4.4 billion to JPY 22.5 billion, mainly due to a fall in steel prices. In Lifestyle, although grain trading, et cetera, performed well, profits decreased by JPY 6.7 billion to JPY 54.8 billion, mainly due to the absence of the gain on fair value of the fashion business in the previous fiscal year. In innovation and corporate development, profits increased by JPY 9.1 billion to JPY 66.7 billion, mainly due to gains on sales in the real estate business. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segments totaled a loss of JPY 4.4 billion. This page shows the main factors influencing year-on-year changes in profit. Base profit declined due to decreases in dividends from the iron ore business and due to a fair value valuation loss of a drug discovery support fund. However, trading of LNG, chemicals grain commodity derivatives, et cetera, together with the automotive and ship businesses drove performance. Excluding onetime items, profit was almost unchanged year-on-year. Although costs were reduced in the Energy Upstream business due to lower depreciation, there was the impact of lower volumes in the Mineral & Metal Resources business, which also led to an increase in unit costs as well as increases in fuel and labor costs. That resulted in a decrease in profit by JPY 44 billion under resources-related cost volume. Asset recycling resulted in an increase of approximately JPY 75 billion, mainly due to the sale of the Australian metallurgical coal business, SMC, and gains from the sale of assets in real estate business. In commodity prices, ForEx, profit increased by approximately JPY 236 billion. For commodity prices, despite the JPY 73 billion decline in profit caused by falling iron ore prices, higher oil and gas prices resulted in a contribution of approximately JPY 116 billion, and increases in metallurgical coal prices contributed approximately JPY 40 billion. In foreign exchange, the weaker yen resulted in an increase in profit of approximately JPY 159 billion. Finally, valuation gain/loss and special factors contributed to a decrease of approximately JPY 33 billion due to impairment losses on some projects in machinery and infrastructure. Now let's take a look at the balance sheet as of the end of the previous fiscal year. Compared to the end of March 2022, net interest-bearing debt decreased by approximately JPY 100 billion to JPY 3.2 trillion. Meanwhile, shareholder equity increased by approximately JPY 800 billion to JPY 6.4 trillion. As a result, net DER fell to 0.5x. That's all for fiscal year March 2023. I will now move on to our business plan for fiscal year. First, I will explain core operating cash flow by segment in the plan for fiscal year March 2024 by comparing with the results of fiscal year March 2023. COCF is expected to decrease by JPY 335.5 billion to JPY 870 billion. In Mineral & Metal Resources, COCF is expected to decrease by JPY 116.7 billion to JPY 320 billion, mainly due to the impact of a projected fall in metallurgical coal prices and iron ore prices and a decrease in dividends from associated companies. In energy, COCF is expected to decrease by JPY 189.6 billion to JPY 230 billion, mainly due to a projected fall in oil and gas prices and LNG trading. In Machinery & Infrastructure, COCF is expected to decrease by JPY 42.9 billion to JPY 140 billion, mainly due to a percent decrease in cash gains through asset sales and an increase in tax payments. In Chemicals, although an increase in profit is expected due to a projected drop in costs in the U.S. methanol business, COCF is expected to decrease by JPY 9.5 billion to JPY 80 billion, mainly due to an expected fall in sale prices of fertilizer and fertilizer materials that performed well in the previous fiscal year. In Iron & Steel Products, COCF is expected to decrease by JPY 8 billion to JPY 10 billion, mainly due to a decrease in dividend income from associated companies. In Lifestyle, COCF is expected to increase by JPY 18.9 billion to JPY 50 billion due to a recovery in coffee trading in addition to rebound from the valuation loss on the fair value of the drug discovery support fund recorded in the previous fiscal year. In Innovation & Corporate Development, COCF is expected to decrease by JPY 6.6 billion to JPY 40 billion. In Others, due to COCF expected to increase by JPY 18.9 billion, mainly due to expenses, interest, taxes, et cetera, allocated business segments. We're not forecasting any significant cash flow there or here. Next, I will explain profit by segment and the plan for fiscal year March 2024 by comparing with the results for fiscal year March 2023. Profit is expected to decrease by JPY 250.6 billion to JPY 880 billion. In Mineral & Metal Resources, profit is expected to decrease by JPY 148.8 billion to JPY 290 billion, mainly due to the impact of a projected fall in metallurgical coal prices and iron ore prices and the absence of the gain from saleable Australian metallurgical coal business, SMC, that was present in the previous fiscal year. In the energy, profits are expected to decrease by JPY 179.4 billion to JPY 130 billion, mainly due to projected fall in oil and gas prices and LNG trading. In Machinery & Infrastructure, although profits are expected to fall in automotive, commercial vehicle and ship-related businesses, profit is expected to increase by JPY 68.1 billion to JPY 240 billion, mainly due to asset recycling gains. In the chemicals, although an increase in profit is expected due to a projected drop in raw material prices in the U.S. methanol business, profit is expected to decrease by JPY 10.9 billion to JPY 60 billion, mainly due to an expected fall in sales prices of fertilizer and fertilizer materials have performed well in the previous fiscal year. In Iron & Steel Products, profit is expected to decrease by JPY 2.5 billion to JPY 20 billion. In Lifestyle, profit is expected to increase by JPY 35.2 billion to JPY 90 billion, mainly due to the revaluation gain on existing holdings of AIM Services. In an Innovation & Corporate Development, profit is expected to decrease by JPY 6.7 billion to JPY 60 billion, mainly due to the absence of the good performance of commodity derivatives trading recorded in the previous year. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segments expected a total loss of JPY 10 billion. Here, we have a comparison of plan for fiscal year March 2024 and the results of fiscal year March 2023 with a summary of the factors involved. Base profit is expected to decrease by JPY 159 billion, mainly due to a decrease in trading of LNG, chemicals and gain, grain, et cetera, a decrease in the mobility business due to the impact from changes in the operating environment and a decrease in profit from the Australian metallurgical coal business, SMC, which was sold. Although an increase in volume is expected in the Mineral & Metal Resources business, resources-related cost volume is expected to show a decrease of JPY 68 billion, mainly due to a decrease in production volume in LNG business, increases in depreciation expenses in energy upstream business and increase in labor expenses and fuel expenses in copper operations and iron ore operations. Asset recycling is expected to increase profit by approximately JPY 41 billion due to the anticipated sale of multiple interests, including the power generation business. Commodity prices, ForEx is expected to reduce profit by approximately JPY 155 billion. Following revisions to the outlook for market prices, commodity prices are expected to drive decreases in profit of approximately JPY 80 billion for oil and gas, JPY 31 billion for metallurgical coal and approximately JPY 25 billion for iron ore. In foreign exchange, a decrease in profit of approximately JPY 17 billion is expected, mainly due to expectation of a stronger yen. Finally, valuation gain loss and special factors expected to increase profit by JPY 88 billion, mainly due to onetime valuation gains in multiple instances, including AIM Services. That concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]