Sojitz Corporation (2768) Earnings Call Transcript & Summary

Good afternoon. This is Seiichi Tanaka, CFO, Sojitz Corporation. Thank you very much for joining us for the earnings briefing for the third quarter of the financial year ending March 2020. In this briefing, I'd like to use 2 landscape format sheets. Both of them have been available on the website. One is titled highlights of consolidated financial results for the third quarter ended December 31, 2019. The other has the same title, but also says supplementary material. Let me now begin. With regard to the business environment, as we described in the results highlights, with regard to the trade friction between the United States and China, the 2 countries did agree on a Phase 1 trade deal, but the slowdown continues for the Chinese economy as well as for the Southeast Asian emerging economies, which are greatly affected by the Chinese economy. In addition, there is the spread of novel coronavirus, and we do not know yet when it will be contained and how much impact there will be. So the business environment is getting further challenging. Results up to December 2019 were greatly affected by sluggishness in the core industries such as automotive and steel. The percentage achieved against the full year forecast is much below where it usually would be. After Q2, we revised the forecast for some of the segments but maintained the total consolidated figures. This time, however, given the results so far and the decline in the business environment, we have downward revised the full year forecast for profit for the year from JPY 72 billion to JPY 66 billion. That is a downward revision by 8% or by JPY 6 billion. In conjunction, we have also downward revised on other figures, such as gross profit or profit before tax, as is shown towards the lower half of the results highlights section. Let us now move further right and let us look at the consolidated statements of profit or loss. First, revenue that is equivalent to JGAAP net sales. Chemicals revenue was down by JPY 47.8 billion due to lower transaction volumes of plastic presence in Asia and declines in price of methanol. Metals & Mineral Resources segment was also down by JPY 31.2 billion due to the falling sales prices in overseas coal business and reduction in transaction volume. As a result, revenue was down JPY 92 billion from the same period previous year, came in at JPY 1,318.6 billion. Gross profit was also down. Metals & Mineral Resources was down JPY 13.8 billion due to the fall in resource prices. Gross profit was down year-on-year by JPY 22.4 billion, came in at JPY 159.4 billion. SG&A. Total SG&A increased by JPY 1.8 billion due to expenses associated with a new consolidated company, and, therefore, it came to JPY 129.9 billion. Further down, other income and expenses. This is about nonrecurring items. The net of total other income and expenses came in at a net income of JPY 1.3 billion, thanks to the sale of fixed assets, including real estate. In the previous year, we booked a gain on sale of Automotive assembly business in the Philippines and a sale in the overseas total power generation business, and that means we are down year-on-year by JPY 2.9 billion as a reaction. Further down the financial income and costs. Because of the improvement in the interest expenses, but that was canceled or offset by dividends received, the result was a net cost of JPY 2.5 billion, unchanged year-on-year. Further down, the share of profit or loss of investments accounted for using the equity method. We benefited from the increase in earnings from the LNG-related company and an increased sales in overseas industrial park, but there was a reduction in the earnings from a steel-related company, which is also affiliate, and therefore, the figure was down JPY 300 million, came in at JPY 18.5 billion. Profit before tax came in at JPY 46.8 billion. After income tax expenses, profit for the period came to JPY 40.8 billion and that attributable to owners of the company came in at JPY 37.5 billion, that's down JPY 16.2 billion year-on-year. This figure of JPY 37.5 billion is 57% of the revised forecast of JPY 66 billion. Further to the left and let's look at the balance sheet. At the end of December 2019, total assets came in at JPY 2,352 billion, that's up JPY 54.9 billion compared with the end of March. Total liabilities at the end of December was JPY 1,699.3 billion, that's up 63.7% -- rather JPY 63.7 billion from last March. And those differences are mostly due to the recognition of lease assets and lease liabilities under the new IFRS standards. Further down to the equity section. If you could look at 2 lines up from the total equity line, that's the total equity attributable to owners of the company. At the end of December, this figure came to JPY 607.8 billion, that's down JPY 10.4 billion from the March 2019 figure. Retained earnings increased by JPY 12.5 billion, but other components of equity decreased by JPY 20 billion. That is due to the foreign currency translation adjustments related to the weaker U.S. dollar, Australian dollar and Brazilian real against the Japanese yen. Treasury stocks also came down by JPY 3 billion. That's due to the buyback program. Further down, we have a table that shows 6 key financial indicators. If you could look at the third one from the top, that's net debt-to-equity ratio. At the end of March, it stood at 0.95; now we are at 0.98. So that's not much changed. Further down and to the left, let's look at cash flows. Cash flow from operating activities came to a net inflow of JPY 54.5 billion. That's due to income from business earnings and reductions in working capital. Cash flows from investing activities was a net outflow of JPY 35.2 billion. There was a newly executed investment and loans in the amount of JPY 52 billion, but there was also some recovery. Free cash flows came to a net inflow of JPY 19.3 billion. And if you could return to the left-most part and that says results highlights towards the bottom. As you can see, this time, we have downward revised the full year forecast for the profit for the year from JPY 72 billion to JPY 66 billion, but the cash dividend per share remains unchanged. We still intend to pay out JPY 8.50 per share. That means JPY 17 per share per year. Now let's look at the second sheet, which says supplementary materials. First, let's look at the operating results to the left. As I mentioned, we have downward revised our forecast. And we have updated the figures for gross profit, profit before tax as well as profit for the period attributable to owners of the company. Let's look at the other line items. SG&A. After Q2, our forecast was JPY 17.8 billion for the full year. At this time, we have reduced the expenses estimate by JPY 300 million. So now the forecast is JPY 17.5 billion. With regard to other income and expenses, the previous forecast was a net 0. But in Q3 and Q4, we are expecting onetime gains related to asset replacement. And therefore, now, we are expecting net income of JPY 6 billion. And please also refer to the financial income costs and share of profit or loss of investments accounted for using the equity method. Now let's move to the right-most part, and I'd like to discuss segment performance with regard to profit for the period and particularly the segments that have been downward revised. The first line is Automotive. Profit for the period came in at JPY 1.3 billion. That's 24% of the previous forecast of JPY 5.5 billion. But given the current environment and particularly the sluggishness in the Automotive sales in Thailand as well as squeezed profit margins, have led us to downward revise the figure by JPY 3.5 billion. So the revised forecast now is JPY 2.0 billion. If you could go 4 lines down, Metals & Mineral Resources. After Q2, we did downward revise this from JPY 25 billion to JPY 23.5 billion. However, out of consideration for delays in the commencement of new businesses and sluggish steel demand, which is affecting the earnings at our affiliates, we are further downward revising the forecast figure to JPY 21.5 billion. One line down and the Chemicals segment. Again, we are downward revising this due to faltering plastic resin demand and lower methanol prices. The previous forecast was JPY 11 billion. We have downward revised it by JPY 1.5 billion to JPY 9.5 billion. Thank you very much. This concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]