Sojitz Corporation (2768) Earnings Call Transcript & Summary

Good afternoon. This is Masayoshi Fujimoto speaking. Thank you very much for taking time out of your busy schedule to join us today. Let me start off with an overview of the financial results up to Q2 and progress of our medium-term management plan 2023 before our CFO, Makoto Shibuya, explains financial results in further detail. Please turn to Page 5. Consolidated profit for the first half came to 50% against the full year forecast of JPY 95 billion. This is very much in line, thanks to a firm coal market and solid retail business. In an increasingly complex economic environment, the degree of progress varies by region and business. Nevertheless, we expect to achieve our initial full year forecast of JPY 95 billion, even with changes in market conditions and exchange rates going forward. The revisions in segment forecast will be explained later by our CFO. Core operating cash flow was a net inflow of JPY 57.7 billion. We have thus been steadily generating cash. In spring 2021, we made PBR above 1 as one of the KPIs also Medium-term Management Plan. With only 5 months remaining in the current 3-year period, we intend to keep moving forward past the PBR equals 1 mark into the next stage of growth. The entire Sojitz Group will work together to take on the challenge of achieving further growth and accumulate tangible results so that we can conclude the medium-term period on a positive note. We increased investment plan expected at the beginning of MTP 2023 from JPY 300 billion to about JPY 500 billion. Major investments conducted in the first half and the amounts are shown on this page. In the current MTP, basics of the growth strategy is to focus our management resources to where we can pursue competitive edge and growth mat. We believe it is important to take a big picture perspective to broaden and build upon our operations and thereby achieve further growth. We would enhance our functions and networks, which will lead to the next developments. We are sowing seeds and generating synergies, and we believe we are making steady progress. In Vietnam, with its biggest dairy producer and our partner, Vinamilk Group, we are promoting the business of raising cattle, processing and selling beef. By capturing rising beef consumption in Vietnam, we aim to build the largest comprehensive beef business in the country. By utilizing our retail business knowledge fostered in Vietnam, we invested in RIPPLR, which is a wholesale and distribution business of consumer goods using its digital strength in India. We are nearly entering into the growing Indian distribution industry. In Japan, in order to capture the global demand expansion of the processed marine products following the Marine Foods Corporation, we acquired all shares of TRY Inc., which procures, processes and sells frozen tuna. In addition to the tuna aquaculture and processing abroad, we have now broadened our capability by adding processing in Japan. By combining their customer base and high quality and price competitive processed marine products and our global network, we aim to expand the size of the revenue. In infrastructure and health care, we entered in the U.S. energy conservation services business in 2021. We believe that the demand for energy conservation will rise and grow in mainly developed nations. That is why we entered into the Australian energy conservation services business and also made additional investments in U.S. business. We will constantly implement growth strategy to generate value by strengthening our existing networks functions and by widening of the scope. This shows the progress of returns from the new investments from MTP 2017 and onwards. Although there are differences in terms of expected ROI and the progress as of now, we have proactively disposed some unprofitable assets to realize further growth in the next MTP even under changing external environment to enhance cost competitiveness and to build lean assets and resilient portfolio. On the front line, we are working on improvement measures precisely, and we'll make efforts toward monetization. In MTP 2023, pandemic delayed monetization of some projects. However, some new projects in focus areas are bringing revenue, and we see some positive developments in retail business in Japan. Rather than investing in the brand new business areas, we will invest to enhance and expand the business domains, which are already showing some results so that the cluster of revenue [indiscernible] before start. As a concrete example of our chunk of revenue, we'd like to share our retail initiatives in Vietnam with you. Even before we became the first Western company to open a representative office in 1986, we have been engaged in various businesses, including natural resources and infrastructure in Vietnam, as the country was economically developing. Since the 2000s, we have been actively investing in the retail sector in anticipation of future construction growth. And by investing in Huong Thuy, our food and wholesale company with which we had a relationship through traditional trade transactions, we began participating in the retail business. Subsequently, in addition to the wholesale business, we entered the retail field through convenience stores with Ministop Co. Ltd. We also participated in the logistics business by owning delivery and warehousing functions for retail stores and participated in the daily delivery and side dish manufacturing business, such as rice bowls and sandwiches sold at retail stores in response to the market growth, we have been building a value chain of food products. This year, we launched a beef production and sales business together with Vinamilk, the largest dairy manufacturing in Vietnam. We'll continue to expand earning opportunities by further reinforcing the value chain we have built for the measures and by expanding the scope of our business. We'll continue to pursue a stable and sustainable dividend policy targeting consolidated dividend payout ratio of approximately 30% during the current medium-term management plan period with a minimum annual dividend of JPY 130 per share for the fiscal year ending March 31, 2024. The acquisition and cancellation of treasury stock in fiscal year 2023 was completed at the end of September 2023. Although the outline of the next medium-term business plan, which will begin in the next fiscal year, is still being formulated, we'll strive to improve Sojitz's competitiveness in shareholder value with a view to further growth based on the sustainable earnings base that we have steadily built up to date. All of the KPIs set forth at the beginning of the formulation of the Medium-term Management Plan 2023 have been achieved ahead of schedule with the exception of PB ratio of over 1x. Currently, we're discussing the next stage of growth with a view to reaching the JPY 100 billion level of net income in the next medium-term investment plan. As a starting point, we'll continue to take steps toward the creation of value that is uniquely Sojitz by implementing measures for steady growth toward the leap ahead. We'll also aim to achieve the remaining PB ratio of more than 1x and further increase corporate value and continue to earnestly engage in dialogue with everyone, including the stock market. Thank you. Next is our CFO on more details of Q2 results and the outlook.

Good afternoon. This is Makoto Shibuya, CFO. Thank you very much for joining us today. Let me provide an overview of Q2 results and outlook for the full year. I will be using the part titled to financial results for the first half ended September 30, 2023, and full year forecast of fiscal year ending March 31, 2024. Slide 12 shows a summary of profit or loss. As our CEO explained, consolidated profit for the first half came to JPY 47.9 billion, which is 50% of the full year forecast of JPY 95 billion announced at the beginning of the financial year. Compared with the same period previous year, this is down by about 40%. Against the backdrop of elevated geopolitical risk and associated uncertainties, persistent inflation in developed countries and monetary tightening by central banks in response and the slower-than-expected recovery of the Chinese economy, the company is delivering financial results in line with its expectation overall, although some segments are up and others are down. The main reasons for the year-on-year decline are relatively lower coal prices and the slowdown in chemical business. Gross profit for the first half declined year-on-year by JPY 24.8 billion to JPY 157.4 billion. This mainly comes from metals, mineral losses and recycling due to the lower coal prices. SG&A expenses increased by JPY 9.6 billion from a year ago. About 40% of this increase is due to subsidiaries either newly consolidated or deconsolidated. The remaining 60% or so comes from inflation and the weaker yen. Share of profit or loss of investments accounted for using the equity method amounted to JPY 18.3 billion, down JPY 6.6 billion from the same period last year. Earnings of a steel trading company declined due to the steel market in the America remaining depressed. Losses were booked in relation to replacement of infrastructure-related assets. With all that, profit for the period came to this JPY 47.9 billion. Our full year forecast remains unchanged at JPY 95 billion. However, we have reviewed the breakdown by segment. I will come to that later. Pages 13 and 14, summary of balance sheet. As you can see on Page 13, total assets increased about JPY 110 billion from the end of March '23. Aircraft-related transactions decreased trade and other receivables. Goodwill and investment increased with new investments. But the biggest factor of higher assets was the foreign exchange rate. Yen weakened by about JPY 16 to the dollar from the end of March to the end of September, pushing up the assets and liabilities of overseas subsidiaries in terms of local currencies. ForEx impact was about JPY 100 billion. As for liabilities, despite some fluctuations of each item, ForEx impact is about the same as the overall increase. Profit from the period and the dividend paid, plus share repurchase were about the same amount. Total equity attributable to owners of the company increased by JPY 50 billion to JPY 888.5 billion due to higher foreign currency translation. Page 14 shows the results of key financial indicators and forecast for full year. Page 15 is a summary of cash flow. Cash flow from operating activities steadily grew to the inflow of JPY 85.2 billion. Although cash flow from investing activities were up with new investments, there were inflow of JPY 46.2 billion from aircraft-related transactions and sale of cross shareholdings. As a result, free cash flow grew to JPY 131.4 billion major net. Pages 16 to 18 are the results and forecast of profit by segment. Today, I'd like to explain based on the profit for the period. Page 17 shows the year-on-year comparison. Trends of increase and decrease are the same as explained in Q1. Biggest reason behind the lower profit is decrease in metals, mineral resource and recycling, impacted by declining prices coal and others. This accounts for about 3/4 of overall drop. Infrastructure & Healthcare profit was down due to the absence of gain on asset sale in the previous year. Chemicals profit was down due to the demand slowdown and onetime loss from recovery concerns. Consumer industry and agricultural business profit decreased as building materials-related business and fertilizer business in the Philippines were strong in the previous year. Retail and consumer service profit grew significantly due to the recovery of domestic retail business and negative goodwill recorded in association with the new investment. Page 18 shows the full year forecast for profit by segment. The forecast for the entire company remains unchanged at JPY 95 billion, but revisions have been made for each segment based on the business environment and the progress made in the first half. I would like to focus on the segments that have been revised. First of all, let me start with the automobile segment. As is true of the dealership business in general, the overall dealer business has been negatively impacted by used car prices and sales volume due to the elimination of the semiconductor shortage and the improved supply of new cars as well as rising interest rates. In addition, the automobile sales business in the Philippines suffered from weak sales due to the depreciation of the peso against the U.S. dollar. We have revised our forecast downward to take into account the cost of implementing drastic reforms in response to this. We're taking action in the Philippines to prevent the slump from continuing into the next fiscal year and beyond. In Metals, Minimal Resources & Recycling, we have revised our outlook upward factoring in the recent strength of the coal market. As shown on Page 21, we have revised our second half coking coal price assumption to $250 per tonne, which is lower than the current price. The downward revision in the Chemicals segment takes into account the impact of the current progress and the revision of the new material procurement contract for the methanol business in Indonesia. In the consumer industry and agriculture business segment, the forecast has been revised downward slightly, taking into account the progress of the fertilizer business in the first half of the year. In the fertilizer business in Thailand, we explained at the time of the first quarter that we expected a recovery in the fertilizer business since it started raining from mid-July through August. But the rainfall became less in September and the peak of sales has ended without much -- as much recovery as we expected. As explained earlier, we have revised up our forecast for retail and consumer service based on the progress made in the first half of the year and the recovery of our domestic retail business, although the progress rate of Aerospace & Transportation projects and Infrastructure & Healthcare is below 50%, the portfolio is expected to contribute to earnings in the second half of the year, so the forecast is unchanged from the beginning of the fiscal year. Page 19 and 20 explain the status of cash flow movement and investment in asset replacement. At the beginning of this fiscal year, we revised our 3-year investment plan from JPY 330 billion to JPY 500 billion, and new investments and asset replacement are progressing in line with our initial plan made at the beginning of the fiscal year. As for new investments, we have made JPY 100 billion in new investments by the second quarter. And we have been able to steadily accumulate assets for future growth, although the timing of contributions to projects currently under negotiation is also a factor. We believe that we are well prepared to make investments of around JPY 500 billion in the current Medium-term Management Plan or at least to make preparations for such investments. Page 21 shows actual market conditions for commodities, foreign exchange rates and interest rates, as well as the assumptions for our forecast. Page 22 shows a breakdown of our earnings structure by resource and nonresource business. And Page 23 shows the status of our portfolio management. Page 24 and beyond provide detailed segment information and supplementary data. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]