Sojitz Corporation (2768) Earnings Call Transcript & Summary

[Interpreted] Good afternoon. This is Seiichi Tanaka, CFO of Sojitz Corporation. Thank you very much for joining us for the earnings briefing of Sojitz Corporation for the first quarter. I'd like to begin using the 2 landscape sheets titled highlights of consolidated financial results for the first quarter ended June 30, 2020, and another one that says supplementary materials. This material has been made available on our website. First, the business environment. Initially, we were expecting that the impact of COVID-19 on the economy would be under control within 3 months. However, we do see some difference in the impact and the degree to which it is controlled, depending on the geographical region and segment. In China and parts of Southeast Asia, things are relatively under control and the economies are reopening. But in the U.S. West Coast and Latin America and in Japan, the situation warrants caution. Given that and given the Q1 results, we have revised the earnings forecast for the full year, as is shown towards the bottom part of the results highlights column. We made the initial forecast that we published at the end of April when we announced full year results of the previous year, but we have now published a revised forecast. With regard to cash dividends, if you see further down, we have also made announcement, and after my presentation, our President and CEO, Masayoshi Fujimoto, will discuss that. So now let's move to the middle part, which says consolidated statements of profit or loss. Revenue, which is equivalent to JGAAP sales. This is significantly down. Automotive sales was significantly down due to the lockdown everywhere across the globe. Revenue was down 60%, only JPY 24.6 billion. Chemicals was also down due to metal prices and the synthetic resin transaction volumes down in Southeast Asia. Metals & Mineral Resources were also down due to coal market prices, and the revenue was down JPY 88.1 billion rather and 20% year-on-year to JPY 349.3 billion. Gross profit, again, Automotive, Metals & Mineral Resources as well as Chemicals were the 3 segments that had the most impact. Gross profit was down year-on-year by JPY 15.9 billion at JPY 39 billion. With regard to SG&A, the total was less JPY 4 billion at JPY 38.8 billion. With regard to other income and expenses, which are the nonrecurring items, in Q1, thanks to gain on partial sale of natural gas-fired thermal power company in the United States, the net was an income of JPY 1.6 billion. Further down, financial income and costs. The interest expenses. The net was almost unchanged year-on-year. The expense was in the amount of JPY 2 billion, but the dividends received were down, and therefore, the total net was an expense of JPY 900 million. That was down JPY 300 million year-on-year. Share of profit or loss of investments accounted for using the equity method was JPY 1.7 billion, down JPY 5.1 billion year-on-year. This is due to lower profit from steel operating company, which was a major reason for the downward revision. With all that, profit before tax came to JPY 2.6 billion. After income tax expenses, profit for the period came to JPY 2.7 billion. Profit attributable to owners of the company, which is highlighted in light blue, came to JPY 2.4 billion. This is down JPY 11.9 billion year-on-year. Against the revised full year forecast of JPY 30 billion, this figure stands at 8%. Further to the right, let's look at the balance sheet, where it says consolidated statements of financial position. At the end of June, total assets stood at JPY 2,208 billion, that's down JPY 22.3 billion from the end of March. Total liabilities came to JPY 1,602.6 billion, down JPY 5.8 billion from the end of March. This is due to Automotive and Chemicals for which the decline in transaction volume pushed down trade and other receivables as well as payables. To the equity section. If you look at the total equity attributable to owners of the company, which is underlined, the figure came to JPY 567.1 billion at the end of June, which is down JPY 12 billion from the end of March. The difference -- this difference is due to 2 figures that are circled above. One is the purchase of treasury stock, the other is about dividend payment. Further down, we are showing 6 KPIs. If you look at the third from the top, that net debt equity ratio at the end of June, it stood at 1.08, that's up 0.02 from the end of March. Now if you could turn to the bottom of the sheet where we are showing cash flows. Cash flows from operating activities in Q1 was a net inflow of JPY 15.7 billion. Cash flows from investing activities was a net inflow of JPY 2.9 billion, thanks to progress in asset replacement. The resulting free cash flow came to a net inflow of JPY 18.6 billion. Further down, core operating cash flow came to a net inflow of JPY 10.9 billion. Core cash flow, however, came to a net outflow of JPY 3.5 billion. That is due to the purchase of treasury stock and dividends paid. Now please turn to the second sheet, which says supplementary material. I would like to look at segment performance, focusing on profit for the period. I would particularly focus on segments where there is a large year-on-year difference. First, Automotive. Profit for the period was down JPY 3.3 billion, came to a loss of JPY 1.8 billion. In Q1, a lot of dealership outlets were closed here and there, and there was a great impact of that. However, compared with the initial outlook, there was some upside. Particularly, there was a positive contribution from the U.S. West Coast dealership of BMW cars, where the online sales were strong. In Q2 and onwards, we are expecting results from the Thai motor show, and we're also expecting recovery in Puerto Rico where the dealerships are opening. And therefore, we believe that this full year forecast of JPY 1 billion is achievable. Next, Aerospace & Transportation Project. Profit for the period was down JPY 700 million, came in at a loss of JPY 500 million. This Q1 result was in line with initial expectation. If you look at the progress overview column, we have been negotiating this large scale project, and we have a higher likelihood of winning that deal. And therefore, with regard to this JPY 6 billion full year forecast, we have not revised it. Skip one line and go to Energy & Social Infrastructure. This was up JPY 1.5 billion year-on-year, JPY 1.8 billion is the profit for the period, which is 51% of the full year forecast. From the beginning, we were expecting asset replacement. A lot of that happened in Q1, and that's why the percentage against the full year is apparently high, but it will come down to the natural level over time. Next is Metals & Mineral Resources. This was the driver for the downward revision this time. This segment posted a loss of JPY 2 billion, that's down JPY 9.1 billion year-on-year. The coal market was stagnating and the steel demand was also hard-hit, both in terms of pricing and volume. One line down, in Chemicals segment, profit was down JPY 2.3 billion year-on-year. Q1 results were breakeven level. In Q1, the methanol price was much lower than initial expectation. But in the China area, the economy is early -- it's reopening ahead of others, and we are expecting recovery in the transaction volume of synthetic resin. And we were expecting a loss in Q1 anyway, so that's better than expected. With regard to the JPY 5 billion full year forecast, the methanol prices are now showing trends of recovery. And we are expecting increased revenue from rare earth and green plastics, and therefore, we are not concerned about this forecast level. With regard to Foods & Agriculture Business. The profit came in at JPY 2 billion, that's up JPY 1.3 billion year-on-year against the JPY 3 billion full year forecast, the profit for the quarter was 67%. So this is doing strongly. The 3 businesses of overseas fertilizers are posting volumes that are in line with initial expectation, and raw material prices are stably low. Retail & Lifestyle Business. This was down JPY 500 million year-on-year. Q1 results are 11% of the full year forecast. The first quarter profit was JPY 600 million. Personal spending was down, so textile and apparel was down and rent income was also down from tenants as the commercial facilities were closed. But as we discussed in the progress overview column, the performance is expected to be in line with forecast as a result of projected asset replacement activities. In other words, this JPY 5.5 billion figure is doable. So that would be all from myself. I would now like to yield the floor to our President and CEO, who would like to discuss the revision of the forecast and the dividend announcement.

Good afternoon. This is Masayoshi Fujimoto, President and CEO. Once again, thank you very much for joining us this afternoon. I'd like to discuss the revised forecast and the annual dividend outlook. First, with regard to the revised forecast, we announced back in the 30th of April, the full year profit forecast of JPY 40 billion. This time, we have revised that to JPY 30 billion. That is because of the COVID-19 impact. The impact on the steel demand and the resource prices, including that of coal, was larger than what we expected initially, and we expect this to continue further. The Metals & Mineral Resources segment has a forecast revised from JPY 13 billion to JPY 3 billion. This JPY 10 billion breakdown is JPY 5 billion from steel products due to the demand decline, which comes from Metal One. And the resource prices declined, including that of coal, accounts for another JPY 5 billion. For other segments, as our CFO just explained, there has been some difference by geographical region in segment. But as a whole, they are generally in line. We will continue to make sure we minimize costs and achieve the revised forecast. Now with regard to dividend. Given the Q1 results and the current outlook that we just discussed, we have made an announcement for JPY 10 per share on an annual basis. This will bring the consolidated payout ratio to 40%. Our dividend policy has long been about stable and continued payout. This time, we believe that the impact of COVID-19 on our business performance is only temporary and not permanent. And we also take into consideration the fact that we had announced, for a full year, profit of JPY 40 billion. And that's why we have made an announcement for JPY 10 per share on an annual basis this time. With this, I conclude my presentation. Thank you very much for your kind attention. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]