Sojitz Corporation (2768) Earnings Call Transcript & Summary

Let us review the financial targets of the Medium-Term Management Plan 2020, which started in April 2018. In MTP 2020, we aimed to achieve in year 3 over JPY 75 billion of profit of the year at 3% or higher ROA and 10% or higher ROE. Although we had a good start in 2018 with JPY 70.4 billion profit of the year, in 2020, which is the final year of the plan, in addition to being largely impacted by COVID-19, a pandemic, we also front-loaded responses for a part of thermal coal interest and oilfield interest, with an eye on shift towards decarbonization. Thus, we underachieved the target with JPY 27 billion profits of the year, 1.2% ROA and 4.5% ROE. Though single year ROE was below the target, the average in the 3 years of MTP was around 9%, which is above our shareholders' equity cost of 8%. Core cash flow, net DER and shareholder return, did achieve our target even under the COVID calamity, thanks to the disciplined financial management. Next, allow me to explain about the investments and the contribution to earnings. The total amount of investment made during the 3 years of MTP 2020 is JPY 260 billion, which is behind the plan. The shortfall is due to the outbreak of global pandemic in 2020, which caused delays in negotiation. New investments executed in 2017 includes the renewable energy business, the hospital project in Turkey, automotive dealership business, all of which contributed to earnings. In addition, reallocation of asset portfolio also generated profit. In 3 years, the cumulative earnings stood at JPY 29 billion, basically in line with the plan. Turning to the new investments made in 2020. While some projects such as natural gas-fired power plant business contributed to earnings, delays in achieving profitability due to the deterioration of the market conditions and/or the impact of COVID were seen in coking coal business in Australia and paper manufacturing in Vietnam. The 3-year cumulative earnings contribution was limited to JPY 4 billion, which, is far below the plan. Right now, we are exerting utmost efforts to strengthen operational structure and sales activities to improve earnings. Next, I would like to talk about the Medium-Term Management Plan 2023, Start of the Next Decade, which starts this fiscal year; first about the external environment and the recognition of the current situation. As for the external environment, the impacts of the pandemic on the global economy and the heightened uncertainties are likely to continue. On the other hand, the impact of such mega trends has accelerated digital transformation. Higher awareness for ESG and diversification of values and needs on corporate activities is expected to become even bigger. Against such backdrop, as we reviewed a while ago, we are aware that we were not fast enough in switching from resource-dependent to non-resource-dependent earnings foundations and responding to deteriorating profitability. Therefore, we strongly feel that we must strengthen our initiatives for transforming our business model to the ones that better address social challenges and customer needs and more market oriented. As we face such major transformation, we set the objective to become the trading company that constantly fosters new business and human resources as a vision of how we want to be in 2030. By this we mean, while we fulfill our mission as a general trading company to deliver goods and services to those who need them, we will increase corporate value by continuously creating businesses, values and talent that will meet the market needs and solve social issues. In order to achieve this, we must think out of the box. And by implementing thoroughly market-oriented initiatives, ensuring co-creation and sharing in and out of the company and pursuit of speed, we will propose solutions for market needs and social issues, which will help us grow and become more competitive. Accordingly, we will reform organization and human resources to realize this vision. As the first step, we formulated MTP 2023, Start of the Next Decade. As its subtitle tells you, this MTP aims to carry out reforms towards 2030. First of all, the main financial targets are as stated on the slide. During this MTP period, by achieving JPY 80 billion of the average core operating cash flow target and JPY 65 billion of net profit of the year, 10% ROE or higher can be achieved. Investments for growth is to be JPY 300 billion, plus JPY 30 billion for investing in human resources and digital. Regarding cash flow, we will implement disciplined cash flow management so that core cash flow for MTP 2020 and MTP 2023 combined will be positive. As a result, net DER will be controlled to be around 1. As for the shareholder return, consolidated dividend payout ratio shall be around 30%. And in MTP 2023, 4% DOE on market value basis is set as the floor for dividend. With these financial targets, we will strive hard to achieve a PBR of 1. This slide shows our thoughts for achieving financial targets of MTP 2023. We aim to create value in the journey to achieve the vision of how we want to be in 2030, and in this MTP, we will focus on realizing growth based on sustainable management. To be more specific, we will continue to make new investments on one hand and drastically reform existing business on the other and actualize growth based on the strategy, which emphasizes pursuit of competitive edge and growth markets by thoroughly implementing market-oriented initiatives, promoting co-creation and sharing with internal and external communities and increasing speed. To that end, we will boldly reform organization and human resources. And the growth strategy is stipulated in the MTP 2023 based on the concept of creating values by pursuing both value for Sojitz and value for the society in response to market needs and social issues. Taking into account the mega trends, we will strive hard to uphold the realization of the following: using digital and new technologies through internal and external co-creation and sharing developed by essential infrastructure to solve social challenges and provide services; promote circular business to reduce, reuse and recycle; strengthen retail initiatives in the growth markets such as Southeast Asia and India; create values through such initiatives as revitalization of domestic industries and local communities. To implement this growth strategy, we are also working on reorganization to reduce the number of divisions from 9 to 7. Based on the growth strategy I have just explained, in MTP 2023, we will focus our efforts on infrastructure and health care, market-oriented initiatives in such growth markets as Southeast Asia and India and materials and circular economy and concentrate human and financial resources in these 3 areas. With respect to JPY 300 billion of new investments, as shown here, we plan to invest JPY 120 billion to JPY 150 billion in infrastructure and health care business, JPY 100 billion to JPY 120 billion in market-oriented initiatives in growth markets and JPY 30 billion to JPY 50 billion in materials and circular economy. Regarding new investments, we will allocate JPY 200 billion out of JPY 300 billion to the areas where we have expertise and aim to achieve profitability by making proactive investment with scale. We will invest JPY 70 billion for acquiring new business areas and functions with growth potential and JPY 30 billion for sowing seeds for the future, inclusive of investments in innovative technology to enable sustainable growth. In addition to these, we will invest JPY 30 billion in nonfinancial areas for HR and organizational transformation such as HR development and digital solutions. Next is about expected contribution from investments to earnings. Regarding MTP 2017 investments, as I explained at the outset, we continue to expect a solid contribution from hospital project in Turkey, domestic solar power project, automotive dealership business, et cetera. which is estimated to be around JPY 8 billion in 2023 with average ROI in 3 years being 7% or so. As well, the MTP 2020 investments, sales volume and selling prices of coking coal project in Australia are expected to finally get on track. Paper manufacturing business in Vietnam is likely to improve from loss-making situation, thanks to strengthened sales activity and improved operational cost. And growth is expected in automotive, assembly and selling business in Asia. All of which combined, contribution in 2023 is estimated to be JPY 12 billion with 3-year average ROI of 7%. MTP 2023 investments are expected to make JPY 15 billion of contribution in 2023 with 3-year average ROI of 4%, driven by power generation business and infrastructure division, automotive business in growth market and M&A in retail and health care. Materials and circular economy-related investments are expected to start making full contribution beyond MTP 2023. The cash flow projections for March 2022 and MTP 2023 period are as stated on the slide. Inclusive of the share buyback announced today, we will manage cumulative core cash flow for MTP 2020 and MTP 2023 to keep it positive. This slide shows balance sheet and cash flow management that we have already explained. By continuously managing balance sheet and cash flow in a disciplined manner, we will create high-quality profit and cash from excellent assets and use it for growth investments and shareholder return. As I said previously, based on MTP 2023, we aim to achieve growth and increase corporate value by making new investments and drastically reforming the existing business. To increase corporate value, we set the target of 10% or higher ROE with around 8% equity capital cost, and to increase feasibility of this, we introduced for each division cash ROIC, which is ROIC based on cash return as a management index. In other words, a minimum average cash ROIC level to be achieved by each division in 3 years period was set as threshold for value-creation purpose, and due attention will be paid to this cash ROIC to ensure achievement of 10% or higher ROE. We also decided to introduce a framework to raise company-wide awareness for increasing corporate value by monitoring whether ROIC or cash ROIC is 5% or higher in business investments and whether earnings bigger than the capital cost is generated in existing investments to make sure our values are created by such investments. We will set KPIs for nonfinancial areas as well. This slide explains about HR-related initiative as one example. And KPIs will be set for securing and developing talent, the activity level, the ratios of female employees, young employees and digital technology specialists, the ratio of local people in managerial positions in overseas entities. And the achievement level of such KPIs will be measured. This slide explains the business investment-related monitoring. In order to increase the probability of success and profitability of new investments that are essential for growth and existing investments, we are strengthening validation process at the investment review phase and monitoring after the execution of investment. Next, I will talk about the nonfinancial initiatives. Regarding sustainability, fulfilling Sojitz group statement, 2 types of values and materiality are the prerequisites for deciding initiatives to work on in the sustainability challenge as a long-term vision towards 2050. The focus is on challenges for the decarbonization and protection of human rights. As for the decarbonization, as shown on the next slide, we announced in March our thoughts and the plan to strive towards achieving carbon neutrality in 2050. I would like to give you more details, taking another opportunity. In addition to the decarbonization, we will also tackle with human rights issues, including those within our supply chain as well as water risk in a systematic manner. We are having discussions with the executives of each division so that we will be able to firmly capture business opportunities while paying close attention to external movements such as taxonomy. This slide shows our policy for responding to decarbonization. Although it is not written here, regarding power generation business and coal interest business, we monitor the risk of our assets becoming stranded by conducting a TCFD-based scenario analysis. Besides making steady efforts to achieve the reduction target, we also see opportunities in the shift towards a carbon-neutral society. Capitalizing on which, we intend to grow a relevant business, not just the concept of internal carbon pricing and the like. We will also introduce a framework to promote the related business by positively evaluating contribution to reducing CO2 emission by measuring it as scope 4. This slide shows the reduction in our coal, oil and gas interest we actually realized. In particular, we are aiming to halve a thermal coal interest by 2025 and to make it 0 in March 2021, and we are making steady progress as shown in the graph. We made the decision to close down a thermal coal mine 3 years ahead of the schedule. Next, I will touch upon human resources aspect. As we aim to become a general trading company that constantly fosters new businesses and human resources, we will work on various HR-related initiatives with a theme of making diversity our strengths. In the next 3 years, to create teams of diverse and autonomous individuals, we identified 3 pillars of HR strategy to focus on, namely: capacity to run business, capacity to create and actualize new ideas on business and capacity to involve others and complete tasks. More specifically, we are working on creating a framework to provide our employees with diverse work-style choices and career path from the time they join the company so that they can proactively choose how they want to work. One example of this is the establishment of a new company that introduced job-specific work style which allows 35 years old or older employees to have side jobs. And for instance, they may work for Sojitz 3 days a week and spend the rest of the week doing whatever they want to do. When they are not working for Sojitz, they can prepare for starting their own business, work for other company, study, care for family or whatever they wish to do. We also created a system to support employees who want to start their own business by providing them with funds and loans. In April, Sojitz Alumni was founded, which is an organization of former employees of Sojitz, including its predecessors, Nichimen and Nissho Iwai. I hope this will help create a venue for providing young Sojitz employees with advice for starting business, managing business and for people-to-people exchange. In this way, we intend to develop autonomous talent by creating a cycle of encouraging employees to take on new challenges and letting them realize their growth. With regards to the governance, we will submit through Annual Shareholders Meeting such proposals as increasing the ratio of outside directors to 50% and increasing the ratio of variable part of the officer remuneration linked to medium to long-term performance and enterprise value. We will also work on initiatives to reduce cross-holding of shares, to review governance of overseas entities and to increase ratio of local people in the management team. Regarding digital transformation, we will make company-wide efforts as this is critical precondition for connecting customer and social needs to achieve value creation. In business divisions, we are already working on various initiatives for transforming existing businesses and creating new business. As for HR, in addition to introducing digital tools for HR management, we have also begun training for all employees on data analysis to enable them to use digital technology effectively in their workplaces. We will check progress and effectiveness of these initiatives at Digital Transformation Promotion Committee, which I chair. Turning to risk management. We will continue to strengthen a thorough operation. It is needless to say that in this MTP period, against the backdrop of heightened uncertainties, we will reemphasize the importance of risk management in each line of business. As we plan to thoroughly implement market-oriented approach, we expect to have more interfaces and contacts with our customers in each business area. Thus, we intend to make our quality control and information management even more rigorous so that our customers will be able to feel safe in doing transactions with us. In the process of working on the initiatives I have explained thus far, we have a policy to have close dialogues with stakeholders to communicate to them our intention to endeavor, to keep raising corporate value by reducing capital costs and increasing transparency of our nonfinancial initiatives. As a result which, as I said, at the outset, we hope to achieve one of the financial targets of MTP 2023, that is PBR of 1 or higher. Turning to our dividend policy. Sojitz' dividend policy for MTP 2023 remains the same as the previous MTP, basically to keep 30% consolidated payout ratio. Until PBR 1 is achieved, market value-based DOE of 4% on the basis of previous years' average share price shall be set as the floor. This means that based on the average share price, minimum dividend yield will be around 4%. In accordance with this policy, dividend payout planned for FY 2021 will be JPY 14 for full year, JPY 7 for interim and year-end dividend, respectively. If share consolidation proposal to be submitted to the AGM scheduled to be held on June 18 is approved, full year dividend payout will be JPY 70 and year-end payout will be JPY 35. Lastly, financial targets for fiscal year 2021. The profit of the year is expected to increase JPY 26 billion to JPY 53 billion. ROE target is 8.4%. The budget for the new investments is around JPY 150 billion, and I have given an instruction to front load the plan whenever possible. This slide shows how we plan to achieve JPY 53 billion of profit, increasing from 2020's actual result of JPY 27 billion. In addition to the absence of one-off events such as structural reform costs and improvement in coal and metal prices, we also expect that existing investment projects will begin generating solid profit and that existing business will improve. Our CFO, Tanaka, will give you more details in his presentation as well as during Q&A. For your information, concurrently with today's announcement of financial results and Medium-Term Management Plan 2023, we have also made a timely disclosure about share repurchase, submission of proposals to AGM for share consolidation and revision of officer's remuneration system for you to review. This concludes my presentation. Thank you for listening. [Statements in English on this transcript were spoken by an interpreter present on the live call.]