Sojitz Corporation (2768) Earnings Call Transcript & Summary

Thank you very much for joining us today. I appreciate it very much. My name is Kosuke Uemura, the President of Sojitz Corporation. So from my side, I would like to, first of all, explain the fiscal '24 first half results as well as the progress of Medium-term Management Plan 2026. Later on, Shibuya, our CFO, will give you the details of the business results. In the first half, the profit progress was 40% against the full year forecast of JPY 110 billion. Despite the market impact, the negative impact, the steady progress was made mainly in aerospace, energy saving service business and chemical products trading. Although there are some differences depending on the divisions, we expect to achieve the overall forecast of JPY 110 billion. Our CFO will explain the results and forecast by segment later on. Core operating cash flow showed a solid trend. We plan to continue to expand the profits accompanied by cash. As for shareholder return, on September 27, in addition to the dividend, we announced the share repurchase of up to about JPY 25 billion. We decided on the flexible share repurchase considering the share price level and others. Details will be explained later. Next, let me explain the progress of new investments return after MTP 2020. Total 3-year earnings contributions from S investments during MTP 2026 is expected to be JPY 24 billion. Average ROI forecast is 4%. In the first half results, results are mostly on track. As for earnings contributions from investments under MTP 2023, businesses have started up and stabilized. So we expect earnings to improve in line with the plan. As for the investments under MTP 2020, due to the lower market prices in coking coal business in Australia and worsening production cost, fiscal year '24 forecast was lowered. Based on the KATI Model of MTP, we try to maximize ROI and to create a Sojitz growth story. Once again, we announced MTP 2026 in May this year. And I'd like to show you that page once again. In order to double our market cap in the next stage, we would establish and strengthen the business base during MTP 2026. By honing our uniqueness and the strength and focusing on the competitive edge and winning, we will create the Sojitz growth story and improve the corporate value, especially PER. Next, as part of the Sojitz growth story in the current MTP, we are focusing on organically connecting the many dots of our businesses drawing lines, expanding them into planes and creating attractive Katamari clusters for businesses that are unique to Sojitz. Here, following on from the first quarter's Vietnam Rail and Marine product business case introductions, we will introduce some more parts of Sojitz growth story. First, in the Energy & Healthcare division, we acquired McClure in the United States in 2021, and this time, Freestate Electric. In order to meet the growing energy demand and to build a decarbonized society, we are steadily increasing our earnings by providing solution services to customers centered on energy conservation. We also acquired Ellis Air Group in Australia last year. We will also expand our energy saving service business functions and customer base in Australia. Because they are very regional and for building Katamari, we would like to pursue organic growth, but also conduct M&A to quickly build a strong business foundation. We will further accelerate these efforts in the future, and we will not only expand in the U.S. and Australia, but also in strategic markets and work to strengthen as one large cluster. Secondly, in this slide, it shows an example of how we expanded earnings in our high-grade chemical fertilizer businesses, which boast one of the top market shares in Southeast Asia. For 50 years, we have been developing a fertilizer manufacturing and sales business in Thailand. And as a similar fertilizer business, the total profit of the 3 companies, including the Philippines and Vietnam was approximately JPY 7.5 billion at the end of fiscal year ending March '24, already established a cluster. In order to take further expansion measures in a flexible manner, TCC was delisted privatized in FY 2023. So we will move from sales business to a whole agricultural business, and we will try to create bigger clusters. And in Thailand, we will be establishing an agricultural platform in Thailand and are promoting a business that provides farming support services using digital and finance. Starting with our existing fertilizer business, we are building our own unique business by combining digital technology, et cetera, and are aiming for further expansion as a Southeast Asian agricultural business. Finally, I will explain our shareholder returns policy. Under the cash allocation policy of MTP 2026, we have committed to allocating approximately 30% of the cumulative core operating cash flow over the 3-year period to shareholder returns. We have set the dividend payout ratio at 4.5% of shareholders' equity, achieving improvements in the stability and predictability of the dividends and the progressive dividend. We are planning to pay an annual dividend of JPY 150 per share for the current fiscal year. As mentioned earlier, 27th of September 2024, we announced share repurchase of up to JPY 25 billion. We have set a target of PBR of consistently over 1x for some time. And in the current management plan as well, we are demonstrating our commitment to continuous improvement in corporate value. In addition, we believe that the implementation of this plan in the first year of the MTP 2026 will also be effective in achieving the EPS growth target set, and we will continue to work to further expand shareholder returns by growing our core operating cash flow source of shareholder returns. We are in process of changing gears in order to achieve further growth and reach in the next stage. We will strengthen our business and human resource base and aim to improve our corporate value by communicating in a convincing manner to our shareholders, the Sojitz growth story. With that, I'd like to conclude my explanation.

Thank you. This is Shibuya. I'd like to use the presentation material to give you the details. On Page 11, we're showing the summary of profit or loss. Gross profit was JPY 165.6 billion, up JPY 8.2 billion year-on-year. Page 15 shows the breakdown of segment. Profit of Metals, Mineral Resources and Recycling declined on lower coal prices. But in Automotive, Energy Solutions & Healthcare, Retail and Consumer Service, newly consolidated businesses contributed to push up the profit. In Aerospace, Transportation, Infrastructure and Chemicals and Consumer Industry and Agricultural business, the profit increased, thanks to the expanded revenue from existing businesses and some revenue brought forward. SG&A expenses were up JPY 14.1 billion year-on-year. More than half are due to the acquisition of new consolidated subsidiaries and 1/4 is due to weaker yen. Other income and expenses include onetime factors. gain on changes in the equity following the public offering of SAKURA internet was booked. As negative goodwill had been booked last year in the same period, the profit decreased slightly. Share of profit of investments under equity method was JPY 21.2 billion, up year-on-year. As a result, the profit from the -- for the period was JPY 44.3 billion, down JPY 3.6 billion year-on-year. Despite the partial revisions of the gross profit and others, we expect to achieve the full year profit forecast of JPY 110 billion. From the beginning of the fiscal year, we have expected the first and second half ratio to be 40-60, which is on track. But when you consider the positive factor of the yen's depreciation versus the plan, we believe that the overall progress has been a little slow. Pages 12 and 13 are the summary of balance sheet. As shown on Page 12, the total assets increased about JPY 35 billion from the end of previous fiscal year. In addition to investment-related increase, working capital was higher in retail and aerospace. Yen appreciated from the end of the last fiscal year, which led to about a JPY 25 billion decline in assets due to the ForEx translation of overseas affiliates. Total liabilities are mostly unchanged. Trade and other payables decreased due to the impact of a holiday on the last day of the previous fiscal year. Borrowings increased for capital increase -- working capital rather. Total equity was JPY 959.6 billion, up JPY 35.5 billion from the end of last fiscal year. Despite lower dividend payment, higher profit pushed up the total equity. Page 13 shows the main management indicators as well as the forecast for the end of FY '24. This is for your reference, and the forecast remains unchanged. 14 shows the summary of cash flow. Although the core operating cash flow increased, higher working capital led to the negative operating cash flow of JPY 55.2 billion. With new investment, cash flow from investing activities was minus JPY 36.6 billion. As a result, free cash flow was minus JPY 91.8 billion. Pages 15 to 17 show the results and forecast for each segment in terms of the P&L. I will skip the explanation of gross profit on Page 15. But based on the progress in the first half, we have revised the forecast for the company as a whole and for some segments. Page 16 shows a year-on-year comparison based on net income for the current period, and Page 17 shows the full year forecast and the current situation. On Page 16, year-on-year comparisons show increased profits in the Aerospace, Transportation and Infrastructure, Chemicals and Consumer Industry and Agriculture business segments. In the Aerospace Transportation and Infrastructure segment, profits increased due to an increase in business jet operations and defense system-related business as well as the forward booking of earnings and asset sales in overseas industrial park. And of course, for Chemicals, of course, there was an increase and also for based on asset sales in overseas Industrial Park. In Chemicals, profits increased due to a rebound from the one-off losses incurred in the same period of the previous year as well as an increase in the volume of overseas regional trade. And in Consumer Industry & Agriculture business, profits increased in the overseas Fertilizer business. On the other hand, profits decreased in Metals, Minerals, Resources and Recycling, Retail and Consumer Services and Automotive. The Metals, Mineral Resources and Recycling segment saw a decrease in earnings due to factors such as declines in market prices in the core businesses. In the Retail and Consumer Services business was the earnings contribution of commercial food wholesale in Vietnam and the domestic retail business performed strongly, there was a decrease in earnings due to factors such as a negative goodwill and the absence of gains of the sale of commercial facilities in Japan recorded in the same period of the previous year. In the Automotive segment, while there was a contribution in earnings from the automotive business in Panama, there was a decrease in earnings due to factors such as the delay in the improvement of the used car sales business in Australia and a decrease to sales volume in Americas. With regard to Chinese car sales business in Philippines, we are on track to withdraw from the business by the end of the year. And on Page 17, we have provided the full year profit forecast by segment and the current situation based on the first half progress and the current situation, we have revised the full year forecast for each we have made upward revisions for Aerospace, Transportation and Infrastructure, Energy Solutions and Healthcare, Chemicals and Other segments and downward revisions for the Automotive, Metals & Mineral Resources and Recycling segments. The downward revision for the Automotive segment reflects the fact that it will take a little longer to see progress in the first half and improvement in the Australian used car sales business. We expect to see a certain recovery in sales volume in the Americas. Aerospace, Transportation and Infrastructure segment was revised up due to strong processing up to the first half. Although the rate of progress in the Energy Solutions and Healthcare segment appears to be a little low, we have made an upward revision based on the fact that in addition to the energy saving service business continuing to generate solid earnings as in the first half, earnings from LNG business companies and other businesses will be more significantly higher in the second half. And Metals, Mineral Resources and Recycling segment has been revised downwards, reflecting a change in the market price assumptions for the coking coal in the second half of the year from USD 230 to USD 200 as well as a delay in improving production costs. The Chemicals segment has been revised upwards, reflecting the strong performance in the first half of the year. Page 18 shows the status of cash flow management with our first half results and full year forecast. We are making steady progress with our core operating cash flow and are on track to achieve plan. New investment in the first half was JPY 38 billion, and we expect it to be about JPY 150 billion for the full year. Regarding the shareholder returns, the President explained earlier, and we are forecasted to do to acquisition of JPY 25 billion of own shares in the second half of the year. In any case, we are managing cash flow in accordance with the policies of our medium plan. On Page 19, investment and asset replacement results and Page 20, commodity prices, exchange rates and interest rate, market results are assumptions as shown and we have permitted document 3 and 4 for your reference. Finally, I mentioned earlier that we are evaluating the first half results as slow progress, but as the President explained, we are steadily taking steps to achieve the Sojitz' growth strategy set out in MTP 2026. We will continue to work towards sustainable improvement in business value and improvement in PER while steadily achieving the initial forecast for net income for the current period and allocating the cash we have earned to growth investments based on the KATI Model and shareholder returns. Thank you for your attention.