Sojitz Corporation (2768) Earnings Call Transcript & Summary

Hello, everyone. I took office as the new President in April. My name is Kosuke Uemura. Thank you very much for taking the time out of your busy schedule to join us today. First of all, I'd like to present the Medium-term Management Plan 2026 set for next stage. And then our CFO, Makoto Shibuya, will present the FY '23 financial results as well as FY '24 forecast. Let's look at the MTP 2023 first. Since April 2021, we started the previous midterm plan, and our vision for 2030 is to become a company that constantly cultivate their businesses and human capital, and the previous midterm plan was the first step towards that. With the strong belief in the ongoing improvement of the corporate value, we have achieved the profit for the year exceeding JPY 100 billion for the 2 years in a row. We achieved all the quantitative targets. In MTP 2023, the PBR, which is an indicator to evaluate corporate value from the stock market, was included in KPIs. And through the dialogue with the market participants, we have expanded the earning power and improved ROE and improved the transparency of our initiatives, including nonfinancial side, and tried to lower the cost of capital. And as for the shareholder return, in addition to the stable and continuous dividend payment using the surplus cash flow, we have flexibly conducted share repurchases. As a result, we achieved the PBR of over 1x in March as the transition point to the next stage. Next, let me talk about the quantitative targets. The results are shown here. There was a positive impact of the [ core ] market. And as I mentioned, we reached or exceeded all the targets. Also, the surplus cash inflow was allocated to increase new investments. We have expanded the foundation for growth in the new MTP. Let me now explain the results of new investments and their returns since MTP 2017, which will support our revenue growth. Some businesses showed better-than-expected results, and others are being delayed in to make progress. But the investment returns of MTP 2017 and 2020 exceeded the level that we announced at the MTP 2023. The businesses which are being delayed, we have been taking the proactive measures to dispose unprofitable assets and have made the preparation so that they can start to contribute at early stage in the next MTP. And execution and monetization of the investments are being delayed in some cases due to the pandemic. But in the final year of the MTP, we are seeing the improvement of the profitability, and we'll make sure that we will increase the profitability in MTP 2026, and we would try to make the attractive investments and asset rotation so that we can improve our cost competitiveness and build the lean assets and resilient business portfolio. Now let me talk about MTP 2026 set for next stage. In this MTP '26, based upon the results of the MTP 2023, we will start the [ city ] progress towards the vision for 2030. We would have a specific quantitative targets for the next stage and make sure that we establish and enhance the business foundations in the MTP, and we call this MTP 2026 set for next stage as a sub heading. If I may explain this further, our revenue is above JPY 100 billion and total equity is close to JPY 1 trillion. The next target is to double the corporate value. In order to reach that level, the key message is that to realize the Sojitz growth story. In order to continuously realize the Sojitz growth strategy, we will reinforce the base of growth and enhance the human capital through the aggressive investments. This slide shows the profitability trend from 2015 toward the next stage, showing the profit for the year and core operating cash flow. Due to the pandemic, 2020 number was down, but both profitability and cash generation steadily improved. And during a few years of MTP 2023, we have executed investments of JPY 450 billion, exceeding our plan. In each era and phase, we try to utilize our creativity to hone our Sojitz functions and added values. And by doing so, we gained the growth patterns. And now we have earnings of JPY 100 billion or more in a stable manner. And using this as a base for the next growth, we would try to double our corporate value and achieve JPY 200 billion profit for the year, ROE of 15% and market cap of JPY 2 trillion. In MTP 2026, we maintained -- in terms of the balance sheet, we maintain the health of the financial base and execute a continuous asset replacement and new investments. In addition, we have steadily increased our revenue. The total equity in FY 2014 at the end was JPY 550 billion and it increased to JPY 920 billion at the end of this term. Without increasing the total assets significantly, almost doubled the ROE compared to 10 years ago. We also improved the profitability much higher, and we will continue to work on the asset rotation without any exceptions and continue to improve the profitability. First, we will try to improve the total equity to above JPY 1 trillion level. In new investments, we would also increase the number of the strategic options, including the aggressive growth investment, which is sizable. And there have been some [ fees ] sold during the MTP 2023. We'll make sure that we nurture them and cultivate them and harvest them and -- so that we can improve the profitability. We would also take some board resource allocation as an option to take the courageous initiatives for the growth and to create a cluster of attractive businesses and expand our expectations and increase the market cap to JPY 2 trillion level, which is double. And let me now talk about quantitative targets. Let me focus on the update since we announced the [ basic ] policy in November last year. As for the investment and financial discipline under the continued disciplined cash management policy, we would execute the investment of about JPY 600 billion, which is JPY 100 billion higher than what we announced in November last year. And the 3-year average financial targets is that [ 12% ] or higher for ROE and the profit for the year of JPY 120 billion. As I mentioned, starting with JPY 100 billion next target -- target -- next stage target is JPY 200 billion. As for the shareholder returns, about 30% of the 3-year cumulative core operating cash flow will be used for the return of the -- for the shareholders. And dividend policy, as we announced in [ November ] last year, the 4.5% of the DOE, or dividend-on-equity, ratio and progressive dividend will be paid. As for the share repurchase, based on the cash allocation policy, we will be conducting flexibly and in an agile manner. Through achieving these quantitative targets, the EPS average, which was JPY 428 in the previous MTP, we would like to increase it to JPY 570 as an average. And this means that the annual growth rate will be about 10% for EPS. Now how can -- are we going to realize those Sojitz growth story by achieving those quantitative targets? This shows the basic concept. In order to realize the Sojitz growth story, we must leverage our unique strength and competitive edge and focus on the competitive edge, and this is indispensable, and also enhance the growth foundation and the human capital. The first point is to enhance our growth foundation. We will maximize earning power by refining existing businesses. We have so many businesses as a trading company. We will connect the dots and combine them so that we can create [ katamari ], a cluster of the businesses. And the second point is to enhance the human capital, which is our biggest weapon in capital. For the next phase of growth, we will make sure that we proactively invest in the human capital so that we can realize the value creation and value-up capabilities. And also, the digital is going to be dispensed -- indispensable to accelerate value creation. We will utilize the power of digital technologies both for businesses and talent and make sure to earn with digital in all. And also, we will deepen sustainability and ESG management, which are the key foundation supporting value creation. Through this, we will create multiple Sojitz growth stories. And this is our basic concept for the next stage. Next about the -- our commitment to the ongoing improvement of the corporate value. This will continue in MTP '26, especially during this midterm management plan. By realizing Sojitz growth story, we will try to enhance our market expectation and [ PER ]. As you can see on this page, by expanding the earning power and the improvement of the capital efficiency, we would improve the ROE and improve the expected -- growth expectation as well as [ PER ] and enhance governance and make the management more transparent and lower the cost of capital and make sure that we have a steady shareholder return and -- so that the [ PER ] will always be more than 1 to improve the corporate value. Our mission is delivering goods and services where there is a need. This is not something new. This is the consistent mission that was passed down to us from our predecessors more than 100 years ago. And with time, necessary goods and services change. But in order to realize our mission, our predecessors try to forecast the future and transform themselves and challenge themselves in different areas and the regions. They try to change themselves in different businesses and create the new paths and values. We are still a young company, 20 years since the foundation. But this Sojitz business-creation DNA stays the same as a foundation and origin. So based on the Sojitz DNA inherited from our predecessors, we continue to work on those 5 factors: speed, co-creation, sharing, marketing approach, [ global ] partnership, human capital. And by honing those 5 factors, we would continuously evolve our unique capabilities and strengths and use them as a source of competitiveness to realize sustainable growth. So here is showing the value-creation process. We have various business foundations, including talent and networks. By utilizing our DNA and unique capabilities, 7 business divisions engaged in the cross-industry activities with insights will be organically aligning emerging talent, goods and ideas and continuously create values that competitors do not have. We will realize growth with continuously evolving business model and keep creating value sustainably. As a concept or a framework for growth strategy, Kachi model was established. It is read Kachi in normal alphabet. Kachi in Japanese means value and win. The vertical axis shows functions and services and horizontal axis, markets and regions in the [ full ] quadrant. The bottom left shows an area where we already have business initiatives and knowledge, probability of success is the highest, and we can exert our strength. It consists of businesses with large-scale revenue [ or ] clusters of businesses. Its [ key ] dimension of [ Katamari ]. Existing functions and services are developed in new markets additionally in [ a dimension ] of addition on the bottom right. Our functions and services are transformed in [ 3 ] dimension of transformation on the top left. In these 3 areas, forming Katamari, centering around [ key ] dimension, we can establish a winning pattern and competitive advantages with high probability of success. These are focus areas in the next MTP 2026. The other side of ambidexterity management, exploration is also valued. But for differentiation from other areas, it is defined as innovation [ I ] space. To find value-creation [ fees ] from unseen infinite business areas, we continue to allocate appropriate resources from company-wide perspectives. With -- regarding external environment, with enhanced uncertainty of global conditions, we selected 6 Sojitz business themes, including carbon neutrality, DX, growth markets, food value chain, essential infrastructure and supply chain stability. Regarding strategic focus area, this strategic focus area in the current MTP, we defined 3 focus areas of the previous MTP based on our track record, strength and changing external environment. Firstly, essential infrastructure, generating the base to support well-being of society for living. Secondly, food value chain, including food-related production, material supply, processing, distribution sales and use of waste. Thirdly, energy and material solutions to secure energy and materials essential for production and social activities and contributing to their stable supply and effective use. To strengthen these focus areas, we will reinforce indispensable DX digital transformation and [ GX ] green transformation cross-functionally. For expansion into growth markets, we will expand initiatives in growth markets being established in Vietnam with our strengths. In a digital development period in the previous MTP, we prepared for DX including reform of awareness and developmental experts. Under the title of digital in all, in the current MTP 2026, we will build structure from specific projects and develop experts further to use digital for all businesses. There are 3 pillars for DX strategy. Firstly, monetization of digital business itself. Through business alliance with SAKURA Internet announced the other day, we will capture growth. Sojitz group digital operating company, [ Nissho ] Electronics, will be renamed to [ Sojitz Innovation ] to reinforce functions and enhance profitability further in July. By also using other M&As, we will aim at Katamari on revenue in digital business. Secondly, through co-creation with 7 business divisions by combining existing businesses and digital, we will enhance profitability, value and competitiveness. Third, reinforcement of company-wide IT infrastructure through expansion of digital experts and use of data and generative AI and others. Green transformation next. To balance business activities and reduction of various environmental impacts, sustainability initiatives are one of priorities in our corporate management. As usual, we will accelerate initiatives to achieve decarbonization goals, setting a long-term [ vision ] of sustainability challenge. Besides, under the direct control of the management, in January this year, we established a specialized organization by allocating resources proactively to [ GX ] contributing businesses. We will aim at balancing realization of carbon-neutral society, sustainable world and expansion of our profit and corporate value. For decarbonization, there are various [ ways ], areas and methods. Technology readiness level, required invested capital, implementation timing and time to reach economic efficiency is different in each. Therefore, based on the actual situation with our strength to build value chain and provide solutions will form and promote portfolio for optimum resource allocation. Next, human resources strategy. Reading value creation and value up is a very important pillar of strategy. Also in the current MTP 2026, to realize Sojitz's growth story is vision for 2030. Becoming a company that constantly cultivates business and human capital as an outcome, we will develop and reinforce organizations and human resources or human capital capable of leading value creation and value up. First, maximize diverse teams of employees, who take on new challenges and achieve growth. Second, strengthen [ middle ] management. Third, flexibly allocate human resources. With these as HR strategy, we will refine human capital capable of value creation and value up. Also, to accelerate the improvement of corporate value as a company-wide initiatives, we plan to set up a stock incentive program for awarding employees upon achievement of the current MTP. I will talk about the Sojitz growth story. I will explain some of them. A growth pattern or growth story is seen in capturing growing markets, which is being realized in retail businesses in Vietnam, where we have strength. In this story, we make new investments in promising markets, where we have knowledge intensively and through collaboration and from each business, capture market needs and growth. We form such growth model beyond Vietnam and [ AMAC ] growth in line with the growth of each country and region. Our policy is also to focus on India. Next, the Sojitz growth story ever evolving business models through a marketing approach, we've been transforming various businesses to meet social needs. For example, in energy business, starting from import trade of oil and gas to export of power generation, plant development and operation of large bulk plants. Recently, we've achieved transformation into Energy-as-a-Service, combining renewable energy and energy saving with the times. It is one growth story where we leverage our DNA future forecasting and innovative transformation and Sojitz strength such as marketing approach and partnership. We continue transformation and growth in each business area and market, going forward. The last growth story is optimizing the value chain portfolio. With progress of information technologies and globalization in various value chains, functions of intermediate industries are declining. The [ social ] value is shifting to upstream and downstream in many cases. As a general trading company, we've been mainly [ lending ] trading business. But by expanding our businesses in high value-added areas in value chain beyond existing frameworks with knowledge and contact points in broad industries and markets, we continue to transform our business portfolio and maximize added value. Next, investment policy. For new investments, we plan JPY 600 billion over the 3 years of MTP. It is an increase of JPY 150 billion from the previous MTP, and we want to allocate funds for active [ rate ] to growth investments to reach the next stage. By using Kachi model explained earlier, we realize optimal investment allocation. Out of JPY 600 billion, 50% or JPY 300 billion will go to -- as investment to strengthen and sustain our business portfolio. This investment increase strengthens [ attainable stable ]. And the remaining 50% to ex investment, investment for transformation. We plan to invest with a sense of speed and scale beyond conventional frameworks. This amount includes about JPY 100 billion of investment in DX and [ GX ]. In addition to JPY 600 billion, we also invest in human capital proactively. Only from this investment newly made in MTP 2026, 3-year cumulative profit of JPY [ 24 ] billion and average ROI of 4% are planned. As for earnings from investments made in MTP 2023, we expect improvement on profitability as each business is becoming more stable compared to each start-up phase. Next, cash flow management. As for cash flow management by using core operating cash flow and proceeds from asset sales as a source of funds, we continue to implement growth in; human capital investment and shareholder returns with discipline. We also set new cash allocation policy of allocating approximately 70% of core operating cash flow to growth in human capital investment and [indiscernible] 30% to shareholder returns. Allocation in MTP 2026 is as described here. In the current MTP, core cash flow will be minus JPY 140 billion. However, this negative cash flow will be managed with a cumulative positive core cash flow from previous MTP and MTP before that. Next, measurement and evaluation of value creation. Aiming an ROE of 15% in next stage, we set cash ROIC value creation targets, each business division share [ AMAT ], and we'll monitor numbers and take measures for improvement. To achieve company ROE of 13% to 14%, CROIC level, each business division should achieve [ or set these ] value-creation targets. Please refer to assumptions for MTP 2026 targets as well. Deepening of governance. As for corporate governance to strengthen the supervisory function of the Board of Directors and speed up decision-making through delegation of authority to executives, we plan to transition to a company with Audit and Supervisory Committee. The objective of this transformation is enhancement of quality and state of management decision-making and achievement of our sustainable growth. The 2% of the Board of Directors will continue to be an independent, outside director. We enhance the effectiveness of monitoring and auditing conducted by the Board of Directors and Audit and Supervisory Committee to deepen governance further. Executives will strengthen and deepen internal control system. Sound enhancement of corporate value will be secured through management and appropriate risk management on site. Lastly, let me talk about shareholder return policy. On top of policy, a progressive dividend based on shareholder equity DOE, announced in MTP 2026 guidance in November last year, we decided to allocate 30% of core operating cash flow to shareholder returns. Through shareholder equity DOE, stability and predictability of dividends will be enhanced, and amount of dividends will be progressive. We will implement share buybacks flexibly according to core operating cash flow in 3 years of MTP. On the following pages, [ quantitative ] targets for FY 2024 and others are shown. The details will be explained by CFO, Shibuya in his presentation for the forecast. That concludes my presentation on MTP 2026.

Thank you. This is Shibuya speaking. Already, the MTP 2026 was presented to you. So I'd like to just give you the highlights of the financial results. Please refer to the presentation materials for financial results for the year ended March 31, 2024 and the full-year forecast of fiscal year ending March 31, 2025. On Page 4, we are showing the FY '23 summary and '24 forecast. In FY '23, the profit for the year was JPY 100.8 billion, same as the revised forecast at the end of Q3. The cash flows were solid. At the end of the term, PBR was 0.94x. During March, it exceeded 1x. The year-end dividend as planned or -- is at JPY 70 per share. For a full year, it is JPY 135. As our President explained at the outset, our quantitative targets in MTP 2023 were achieved or exceeded. FY '24 forecast of the profit for the year is JPY 110 billion, about a 9% increase. The dividend is based upon the new shareholder return policy and MTP 2026. And the 4.5% of the equity at the end of March '24 will be used, and we plan to pay JPY 150 per share per year, so JPY 15 increase. Page 5 shows the summary of profit or loss. For each item, we are showing the business results, difference as well as FY '24 forecast. This is for your reference. Later on, I would explain the profit for the period by segment. In FY '23, the yen weakened significantly from JPY 136 to JPY 145.3 to the dollar as an average. Compared with the previous exchange rate, the positive impact of the yen's depreciation on the profit for the period was about JPY [ 3 ] billion. Page 6 shows the balance sheet comparing March 31, '23 and '24. Total assets was JPY 2,886.9 billion, up JPY 226.1 billion year-on-year. Major reason for the growth is the acquisition of the new consolidated subsidiaries, additional investments for the equity method companies and the ForEx impact same as PL. And the impact of the weaker yen and the higher assets of the overseas affiliate was about JPY 130 billion. Half of that is for the U.S. dollar-denominated companies. Total liabilities was JPY 1,931.3 billion, up JPY 147.1 billion year-on-year. The reasons behind this is mostly same as the asset side. ForEx impact was JPY [ 73 ] billion, half of the asset side. Total equity attributable to owners of the company after the share buybacks and the dividend payment increased by JPY 86.4 billion year-on-year to JPY 924.1 billion, with higher profit for the year and foreign exchange rate. Page 7 shows the major indicators, showing the FY '23 results and FY '24 forecast. The shareholder equity basis for the next year's dividend is JPY 724.9 billion. In FY '24 forecast, total assets were expected to be JPY 3,100 billion; total equity, JPY 960 billion. The JPY 200 billion investments and other asset increase are included in assets, and the profit accumulation and the dividend payment are factored into the total equity. The forecast is based on the assumption that the yen will appreciate that it'll -- net DER is slight increase of 0.9x. But as I mentioned, in MTP '26, we will continue with the disciplined cash flow management. As a result, at the end of the MTP, we expect the net DER to reach 0.75x, which is the same as end of FY '23. ROE, ROA are expected to be 11.7% and 3.7%, respectively. Page 8 is the cash flow for your reference. As I mentioned, the cash flow and cash allocation of the MTP '23 are shown on Page 9. With a strong profit growth with cash, we used the core operating cash flow and asset replacement, including the sale of the cross shareholdings, for new investments for further growth and to expand the shareholder return, leading to a substantial positive core cash flow over the 6 years. Positive cash -- core cash flow will be allocated to investments for further growth in MTP 2026. We will continue to maximize the core operating cash flow. The main points of new investments and asset replacement are shown on Page 10, so please take a look. I'll explain status by segment based on profit for the period. First, for results of FY 2023, please go to Page 12. In total, profit was down JPY 10.4 billion or about 9% to JPY 100.8 billion. The biggest factor for the decrease was a decline in the market prices and increased cost in [ coal ] business. Profit decreased JPY 19.2 billion in Metals, Mineral Resources & Recycling. To deal with the cost increase, reduced production volume in FY '23 shifted to low-cost mining areas and expect improvement in FY '24. Profit also decreased in Automotive, Aerospace & Transportation projects and Chemicals. In Automotive, in addition to withdrawal from Thai distributionship business, sluggish performance in the Automotive sales business in the Philippines had a negative impact on profit. For Automotive sales business in the Philippines to avoid continued negative trend for '24 and after inventory reduction and cost reduction are being accelerated. Besides the newly acquired used car sales business in Australia, sales volume has been sluggish as downward trend of used [ car ] market in the country has been continuing for a long time. Profit of Aerospace & Transportation project decreased due to lower aircraft-related transactions and disposal of inventories and revaluation of [ part-out ] business, which has been sluggish since the COVID pandemic. Chemicals has almost no change from the explanation after the third quarter. The profit decreased due to slowdown in demand of chemical products, including plastic resins, impact of change in conditions for raw material, gas procurement contract in methanol business and onetime losses recorded in the first half. On the other hand, profit of Retail & Consumer Service increased significantly due to recovery in domestic retail business and asset replacement [ through ] shopping malls. Continued increase in profit is expected even without onetime factors. Profit of Infrastructure & Healthcare increased significantly due to absence of revaluation of assets recorded in the previous year. Profit also increased in energy saving service business in the U.S., in Australia and others. Profit in Consumer Industry & Agricultural Business increased due to improvements in profit margin and increase in sales volumes in Thai fertilizer business. On Page 13, I'll explain FY '24 forecast by segment. FY '23 figures for Aerospace, Transportation & Infrastructure, Energy Solution & Healthcare and Others were restated due to the organizational reforms in April 2024. In Automotive, earnings contribution from investments conducted under the previous MTP fee is expected. Compared to the previous year, earnings contribution from business in [ Panama ] will increase. Used car sales business in Australia is steadily improving. Not in line with the initial forecast, we expect significant year-on-year improvement. In Aerospace, Transportation & Infrastructure, we expect profit to increase in aircraft lease business and aircraft-related transactions and the absence of disposal of inventories and valuation also [ part out ] business booked in the previous year. Profit of Energy Solutions & Healthcare will increase due to growth expected in energy savings service and other existing businesses. In Metals, Mineral Resources & Recycling, we expect profit to decrease, given current coal market conditions, although production and sales volume of coking coal is expected to increase. For general market prices of coking coal, we assume $230 compared to $287 on average in FY '23. For Chemicals, although we cannot be optimistic about the business environment, profit will increase partly due to absence of onetime losses recorded in FY '23 and profitability improvement of each business. In Consumer Industry Agriculture Business, we expect solid earnings contribution. From overseas fertilizer business in Retail & Consumer Service profit will decrease due to absence of gain and negative goodwill on profit from replacements of shopping malls booked in FY '23. But we expect earnings growth of domestic and overseas retail, in particular, in Vietnam and recovery in seafood business. Page 14 shows result, evaluation and analysis of cash return on invested capital by segment. Please take a look. As was explained in MTP 2026 in initiatives and results by segment, we will look at profitability and capital efficiency [ carefully ] to enhance company total value. Shareholder return is as described on Page 15. As it was already explained today in various parts, I'll skip that. Please refer to Page 16 for commodity prices, foreign exchange and interest rate. The delivered materials include segment information and summary of data. Please take a look when you have time. That concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]