Marubeni Corp

TSE:8002

Earnings Call Transcript 2020-Q2

[Masumi Kakinoki, executive]

I am Masumi Kakinoki, CEO of Marubeni Corporation. Thank you for being here today.

First, I'll present our consolidated results for the 6-month period ended September 30, 2019, and the fiscal year forecast, both of which were announced on November 5. CFO Nobuhiro Yabe will then give a more detailed explanation.

Please refer to the figures on Slide 1 and the explanation on Slide 2. Net profit was JPY 111.8 billion, down JPY 40.2 billion or 26% from the same period last year. Adjusted net profit, which excludes onetime items, was JPY 123 billion, a decrease of JPY 8 billion or 6%. Progress against the yearly forecast was 47% for net profit and 51% for adjusted net profit.

Breaking down the JPY 8 billion decrease in adjusted net profit. There was a JPY 15 billion decrease in non-resources, mainly Power Business, Forest Products and Chemicals. In resources, profit increased JPY 10 billion, mainly driven by Metals & Mineral Resources. We'll cover details for each segment later.

Next, as shown on Slide 2, onetime items in profit and loss totaled negative JPY 11 billion this year compared to positive JPY 21 billion last year, which is a JPY 32 billion swing. Key factors were the absence of a gain on the sale of a power generation business in Japan which took place last year and an impairment loss in the oil and gas development business in the first quarter of the current fiscal year.

For the fiscal year ending March 2020, we are projecting consolidated net profit of JPY 240 billion and adjusted net profit of JPY 242 billion, both of which are unchanged from our initial forecast announced in May. However, the components have changed. In adjusted net profit, the forecast for non-resources is down JPY 9 billion from our initial forecast mainly due to the impact of lower pulp prices in Forest Products and of U.S.-China trade friction and adverse weather in early spring on the Agri Business. In resources, the forecast is JPY 11 billion higher than our initial forecast, largely in Energy where the trading business is performing strongly.

Moving on. Core operating cash flow was JPY 183.5 billion. Free cash flow after delivery of shareholder returns was negative JPY 22.5 billion. As a result, the net D/E ratio was 0.91x, which is basically the same level as the end of the previous fiscal year. In the full year forecast, there is no change from the previous forecasts for cash flow and net D/E ratio. And we expect to achieve our principal target for strengthening our financial foundation, a net D/E ratio of about 0.8x by the end of the fiscal year.

As our net profit forecast is unchanged, we are maintaining the dividend forecast at JPY 35 per share as announced at the beginning of the year. We're setting this as the minimum dividend.

Next, Slide 6 reviews new investments and divestment. I want to go into a little more detail about new investments.

Through the end of the 6-month period, new investments totaled JPY 38.4 billion. Progress against the yearly plan is still very low, but there was a major investment I will talk about later. And the new investment pipeline is gradually taking shape, so we're leaving the yearly plan at JPY 170 billion set at the beginning of the period as is.

We'll continue to look for excellent potential investments based on the SPP, or strategy, prime, platform, business policies in our medium-term management strategy. We want to tighten our investment criteria to make sure we maintain the financial discipline that has served us well in the past. In fact, out of the various proposals that have been presented to the Investment and Credit Committee, a number were rejected after strict reviews. I would like to emphasize the rigor of our approach and that we do not intend to rush into investments for the sake of it.

Our medium-term management strategy introduces the concept of horizon three. And there has been a significant increase in submissions of relevant, new investment proposals, which I believe reflects a change in the way of thinking in the company. Highly tenuous situations such as U.S.-China relations, Brexit and in the Middle East are becoming increasingly frequent, and there is a general wait-and-see atmosphere. On the other hand, we cannot survive as a company by doing nothing. So in this atmosphere, we have to take a certain degree of risk to pursue the right investments at the right time. After half a year as President of Marubeni, my feeling is that determining an appropriate risk appetite is becoming extremely difficult.

That ends my summary, but I will just briefly talk about the acquisition of an additional stake in the U.S. aircraft leasing company Aircastle Limited, which was announced at 8:30 this morning. A copy of the press release is included in the reference materials.

We have first invested in Aircastle in 2013. And now with this additional investment, we will acquire 100% of its shares together with Mizuho Leasing company of the Mizuho Financial Group. Moving forward, we'll continue to pursue further growth in the aircraft leasing business, where demand is expected to continue expanding strongly. This year, we unified our finance and leasing businesses, which had been divided among product sales departments, as the new Finance & Leasing Business division. We formed this organization so that we can focus on developing our finance and leasing businesses into a growth field and focal area. To further ensure the viability of that strategy, we entered into an alliance with Mizuho Leasing in February.

This acquisition is our first such joint overseas investment. By increasing our stake in Aircastle, we will be able to participate more actively in its management. Up to this point, as the largest shareholder with a 28.8% stake, we held seats on the Board of Directors and participated in management, but now all of Aircastle's shares will be delisted. And between Marubeni and Mizuho Leasing, we'll participate more actively in the leasing business and aircraft leasing. We intend to progressively tap into the growth of the aircraft leasing market with Aircastle as the platform. Aircastle will continue as a listed company until the closing of the transaction. In accordance with our confidentiality obligations under the agreement, I cannot provide any more information at this time beyond what is in the press release.

With that, I conclude my presentation. Next is CFO Nobuhiro Yabe with a breakdown of profit by segment.

[Nobuhiro Yabe, executive]

I'm CFO Nobuhiro Yabe. I'll explain the results by segment, starting with 6-month results and a comparison with last year, followed by the full year outlook, including changes to our forecast at the beginning of the year.

First, Slide 8. I'll focus on the segments where there were large increases or decreases in adjusted net profit as shown in the bottom graph.

In Forest Products, profit fell in the pulp business, especially at the Musi Pulp project in Indonesia, because of the drop in pulp prices. Also, our equity in the profit of a pulp business in Canada which we sold last year was removed from consolidation this year. Because of these factors, profit decreased by JPY 4 billion to JPY 4 billion.

In Food, we recorded a loss related to grain trading in the previous year. And the rebound from that, plus increased profit from Creekstone Farms, resulted in a JPY 4 billion profit increase to JPY 11 billion. In Agri Business, profit fell JPY 2 billion from the previous year to JPY 13 billion mainly because of a profit decline in Gavilon's fertilizer business due to adverse weather in early spring in the U.S. Gavilon recorded a onetime loss of about JPY 4 billion. This is a nonrecurring item that is not included in adjusted net profit. In grain trade to Europe, as a result of inappropriate transactions in the past quarters, we recognized a loss of JPY 3.9 billion this year as a onetime item in the form of prior period adjustments.

Next, Chemicals. Profit declined in the first quarter in petrochemical product trading; and this was a drag on profit for the 6-month period, which decreased by JPY 3 billion to JPY 3 billion. The Power Business posted profit of JPY 14 billion, a decrease of JPY 9 billion. Factors included the absence of profits from a business that was sold last year and a decrease in fee revenue in IPP projects. Energy recorded profit of JPY 8 billion, a decrease of JPY 4 billion, with main factors including lower oil and gas prices in the oil and gas development business and a decrease in profits from LNG interests. Metals & Mineral Resources posted profit of JPY 36 billion, an increase of JPY 15 billion mainly because of the rise in iron ore prices.

Slide 9 shows the full year forecast. For certain segments, contributing factors are the same as those I just explained. I'll focus on large differences between the current forecast and that announced in May.

First, Forest Products. The profit forecast is JPY 5 billion, down JPY 5 billion from our earlier forecast as we sharply lowered our price assumptions basically because of sustained low pulp prices, as I mentioned in the 6-month results. In Agri Business, the forecast is JPY 25 billion, down JPY 5 billion. This is because, when we made the original forecast, we factored in a partial easing of U.S.-China trade friction. Adverse weather in early spring also had an impact.

Energy profit is projected to be JPY 22 billion, up JPY 7 billion from the original forecast as trading-related profit has been stronger than expected. Metals & Mineral Resources profit is projected to be JPY 58 billion, up JPY 4 billion, mainly reflecting iron ore prices.

That concludes my presentation.