Mitsui & Co Ltd

TSE:8031

Earnings Call Transcript 2020-Q1

[Takakazu Uchida, executive]

Good afternoon. My name is Takakazu Uchida, Chief Financial Officer. Thank you for joining us today despite your busy schedule.

I will start by reviewing our results for the first quarter of the fiscal year to March 2020. The financial year got off to a strong start with a steady performance in Resources & Energy. Machinery & Infrastructure, Chemicals and Lifestyle segments are showing progress largely in line with the plan.

Please turn to Page 3 of the presentation material. I will now explain the summary of our operating sales -- or results for the first quarter of the fiscal year, which is profit for the period increased by JPY 6.6 billion year-on-year to JPY 125 billion, representing progress to a full year target of 28%. Core operating cash flow was JPY 155.9 billion, representing progress to a full year target of 24%. Free cash flow, which excludes the effects of changes in working capital and time deposits, was positive at JPY 53.9 billion. In growth areas, we are steadily promoting initiatives to strengthen our profit base such as our investment in Vietnamese company, Minh Phu, the world's largest shrimp producer and processor; and an agreement with China Resources Group and HOPU Investments to establish a health care fund for the Chinese market.

The sense of a slowdown in the global economy is deepening. And while consumer spending in the U.S. continues to be resilient on the back of a favorable environment for employment and employee income, the pace of economic expansion is expected to decline as the stimulus effect of tax cuts lingers. In China, the government policy is providing a certain level of support, but with the impact of trade friction with the U.S. and other factors, the country's economic downturn is expected to continue. We'll continue to take heed of the business environment in which we operate, paying attention to commodity market conditions and currency movements and work towards achieving our targets.

Please turn to Page 4. Next, I would like to discuss the progress of a key initiative of our medium-term management plan, build a robust profit base and thoroughly strengthen existing businesses. Total profit from our core areas of Resources & Energy, Infrastructure & Machinery and Chemicals was JPY 110.8 billion and accounted for nearly 90% of our total profit.

In Resources & Energy, profit for the period and core operating cash flow showed strong progress, reaching JPY 89.9 billion and JPY 119.7 billion, respectively, due to a strong market for iron ore and good trading performance in Energy. In addition, we made steady progress in initiatives to further strengthen our robust profit base with a focus on LNG projects, including production start at Cameron in the U.S., FID in Mozambique Area 1 and participation into Arctic 2 in Russia.

In Machinery & Infrastructure, although the progress to our full year profit and core operating cash flow targets was 19%, influenced by seasonal factors at automotive and other businesses and a lag in booking revenue from an aircraft-related business, we're making steady progress in line with our plan. Furthermore, in the quarter under review, we have been strengthening the profit base through initiatives such as investing in a new FPSO vessel for Mexico.

In Chemicals, while some businesses fell slightly short of targets, progress was largely in line with expectations. We will continue to monitor the increasingly uncertain market environment while aiming to achieve our business plan targets.

Please look at Page 5. Next, I will talk about results of cash flow allocation, asset recycling and investment and loans in the first quarter. In asset recycling, we achieved JPY 20 billion; and in core operating cash flow, we achieved JPY 155 billion, bringing total cash inflows for the period to JPY 175 billion. Investment and loans accounted for JPY 120 billion, and cash outflows was the result that we had a free cash flow surplus of JPY 55 billion. Main investment and loan items were an investment in the aforementioned shrimp producer and processor, Minh Phu, in Vietnam and a loan execution to our Middle East IPP business. We will continue to maintain investment discipline and realize well-balanced cash allocation across core and growth areas to achieve medium- to long-term growth while strengthening our financial base through the generation of positive free cash flow after returns to shareholders.

Please look at Page 6. Next, I will discuss the balance sheet as of the end of the first quarter. From the current fiscal year, in accordance with changes to lease accounting standards, the balance sheet table shows long- and short-term debt, including lease liabilities. Long- and short-term debt that excludes lease liabilities is shown as interest-bearing debt and presented in main balances/changes from March 2019. From the current fiscal year, lease liabilities are excluded from the net DER. Net interest-bearing debt increased JPY 28.8 billion from the end of March 2019 to JPY 3.6 trillion. Shareholders' equity decreased JPY 29.3 billion to JPY 4.2 trillion. As a result, net DER was 0.86.

That ends my presentation. Now Tetsuya Shigeta, General Manager of Global Controller Division, will discuss the details of our quarterly results.

[Tetsuya Shigeta, executive]

I am Tetsuya Shigeta, General Manager of Global Controller Division. I would like to explain the details of our operating results. Please see Slide 8 for the year-on-year comparison of profits by segment.

Profit increased JPY 6.6 billion to JPY 125 billion this quarter. In Mineral & Metal Resources, profits increased by JPY 9.3 billion to JPY 49 billion. This was primarily the result of strong market conditions of iron ore. Energy segment profits increased by JPY 23.8 billion to JPY 40.9 billion mainly due to the recording of deferred tax assets resulting from Mozambique Area 1 FID and the strong trading performance by METS. Machinery & Infrastructure profits increased by JPY 1.5 billion (sic) [ JPY 1.4 billion ] to JPY 16.8 billion. In Chemicals, profits decreased by JPY 5.8 billion to JPY 4.1 billion. This is primarily due to a decrease in profits at businesses due to weak market conditions and the absence of onetime profits included in the same period of the previous fiscal year.

In Iron & Steel Products, profits decreased by JPY 5.3 billion to JPY 1.5 billion due to the absence of gain on sale of land at an affiliate, which was included in the same period of the previous fiscal year, and weak market conditions. Lifestyle profits decreased by JPY 10.1 billion to JPY 7.6 billion. This is primarily due to the absence of gain on reversal of provisions related to withdrawal from Multigrain included in the same period of the previous fiscal year. Innovation & Corporate Development profits decreased by JPY 8.4 billion to JPY 2.1 billion mainly due to FVTPL valuation loss and the absence of FVTPL gains from valuation and sale included in the same period of the previous fiscal year.

Turning now to Page 9. We will look at the main factors influencing year-on-year changes in core operating cash flow by segment. Core operating cash flow for the first quarter of the year was JPY 155.9 billion, a year-on-year increase of JPY 1.4 billion. In Mineral & Metal Resources, core operating cash flow increased by JPY 9.6 billion to JPY 57.9 billion, backed by strong market conditions of iron ore. In Energy, core operating cash flow increased by JPY 8.9 billion to JPY 61.8 billion mainly due to strong trading and an increase in dividends received. In Lifestyle, core operating cash flow increased JPY 3.1 billion to JPY 11.6 billion mainly due to changes in lease accounting standards.

Turning now to Page 10. We will look at the main factors influencing year-on-year changes in profit. Base profit was impacted by the absence of the FVTPL gain on valuation and sale included in the same period of previous fiscal year, but strong trading by METS and our truck lease and rental businesses were positive factors.

Next, in resource-related costs and volume, costs rose by approximately JPY 4 billion against a backdrop of increased royalties due to a rise in the sales price of iron ore. In Energy, volumes declined mainly due to decreasing production at the Vincent/Enfield oil fields and was a negative factor of approximately JPY 3 billion.

Asset recycling contributed to an increase of approximately JPY 3 billion due to recycling profit in Lifestyle and Innovation & Corporate Development despite the absence of recycling profit from the sale of land of an affiliate company included in the same period of the previous fiscal year.

Commodity prices/ForEx contributed to an increase of approximately JPY 30 billion primarily due to the increase in the sales price of iron ore. Valuation gain/loss contributed to an increase of approximately JPY 6 billion due to the recording of a deferred tax asset for Mozambique Area 1 FID despite the absence of the partial reversal of the provisions related to Multigrain included in the same period of the previous fiscal year.

That concludes my presentation. Thank you.

[Takakazu Uchida, executive]

Now we'd like to begin Q&A session.

[Unknown Analyst]

One question at a time or can we ask questions -- 2 questions at a time?

[Tetsuya Shigeta, executive]

Please ask 2 questions at once.

[Unknown Analyst]

Okay. The first question is about cash flow. It's been only 3 months, but after the first quarter was over as a summary of the financial results, at the beginning of the fiscal year, at the earnings briefing meeting, the stable cash flow level of 600,000 -- JPY 600 billion, whether you can achieve that or not, will be something that you will be watching. And after the first quarter is over, what is your thought on this stable cash flow level? And if things go as they are, the cash flow that you can gain from iron ore will be on the upside obviously, but investment amount after the 3 months may not have made that much progress compared to the full year plan, but you may not be able to reach the amount that you expected to sell. Or are you in line? So with the cash flow being fluctuated, what is the direction that you expect to happen in terms of sale of the assets? That's the first question about cash flow.

And the second question is about loan resources. In Machinery & Infrastructure, there is a seasonality in automotive sales and also aircraft-related ones. And also, Chemicals impact, what are they? And also, Lifestyle and Steel Products, including those, the core operating cash flow or base profit, the progress seems to be slow. So in the different segments of nonresources, it's just a seasonality factor after the first quarter is over. So what is the future path for each segment in achieving the full year target? What is your thought at this moment?

[Tetsuya Shigeta, executive]

Thank you for the question. So let me answer the question -- Mr. Uchida, CFO, will answer those questions.

[Takakazu Uchida, executive]

Thank you. With regard to cash flow, at the beginning of the fiscal year, our core operating cash flow should be stabilized at around JPY 600 billion. That is how we would like to operate this fiscal year. So JPY 640 billion, the target -- with regard to that target, there is a JPY 50 billion positive from lease accounting standard change. So excluding that, JPY 590 billion. So excluding the iron ore prices being high, this JPY 590 billion could be achieved after the first quarter is over. That probability has been certainly heightened.

And with regard to our investments, including recycle of assets, we are in line with the plan for the fiscal year. There are various changes in the environment and things could change, but as far as the -- at the end of first quarter is over, the -- including the recycle of assets, we're expecting things to go in line with the plan.

With regard to nonresources, overall, against the first quarter plan for the whole nonresources segments, we are more or less in line with the plan. But if you look at each of the segments, there are some pluses and minuses. So progress may seem to slow but -- because FVTPL loss recorded for Lifestyle and Steel Products made slow start. And even though there's FVTPL loss recorded, the ITC or related companies performance is good. And also, there is a seasonality that is factored in. So for the full year, we are expecting to be -- expecting the things to be in line with the plan.

As for the Steel Products in China, the automotive sales are slowing down in Gestamp business and Steel Products prices in the U.S. is declining compared to the last year. So steel tech is a bit underperforming, so we are behind the plan slightly.

As with regard to Chemicals, firstly, nervous because the methionine prices in the market has not improved since the last time, so we are still struggling. And also for electronic parts, because of the overall economic slowdown, that has been reflect -- deflected in the electronic parts stock moving -- movement. In our upstream business, supplying products has been slowing down. And also basic chemicals, because of the overall economic slowdown, the market is softening. However, as for Chemicals, as against the plan, there are some positives and negatives, but as far as first quarter is -- was over -- or is concerned, we have been mostly in line with the plan. And for the whole fiscal year, JPY 195 billion is the full year plan. And against that, we are in line. That is from our understanding.

Does that answer your questions?

[Unknown Analyst]

Additional question. As for Lifestyle, can you explain more about Lifestyle segment as well?

[Takakazu Uchida, executive]

As for Lifestyle segment, compared to the first quarter in the previous year, there was a onetime factor of a reversal of provision for Multigrain. So there is a decline from the year before, but that was a onetime factor. But in Lifestyle, in the second quarter or second half, there will be more increased profits expected. So in that sense, we're in line.

[Unknown Analyst]

I'd like to ask 2 questions, please. The first question, please refer to Page 10, the year-on-year factor comparison. FVTPL seems to be a big negative factor and base profit has not increased year-on-year. In the past, balloon charge were used to talk about different contributions made from different investments in the past. But of course, with the accumulation of nonresources, how long do you need to wait for it to turn positive? I'm sure there are projects working at the moment, but when will it appear positive going forward? If you have any ideas, please share with us.

And the second question. Of course, market is weak in different areas. However, iron ore is very strong. In China, the production is a little low. However, import is very low. And in Brazil, production is recovering. Of course, this is macroeconomics, but can you talk about the outlook for iron ore market going forward? If you have any information from the field, please share with us.

[Tetsuya Shigeta, executive]

Thank you very much for your questions. CFO, Uchida, will answer the 2 questions.

[Takakazu Uchida, executive]

Thank you. First, about the base profit. When compared to the previous year, FVTPL absence of the gain is quite big. And of course, this has impacted the base profit. However, if we exclude this, of course, there will be a delay compared to the second quarter. Therefore, it may be difficult to see. However, we are seeing the base profit power to be strengthened. We cannot tell when it will appear -- start to appear. However, we hope it will start to appear after the second quarter. If we can explain it in an understandable way going forward, it will be appreciated.

And as for the iron core -- iron ore price, as I mentioned earlier, there was a Vale dam incident. There were some supply concerns. And of course, there was a cyclone in Australia as well. And they were factors that needed to be considered. And of course, China production, that is strong and demand is strong. And because of those factors, the price has increased to the current level. There has been concerns against the supply. When it will be diminished is something that we need to be careful of. And in China, the infrastructure business which supports the economy is very important. Whether that infrastructure demand can be sustained is going to be a key factor going forward. Whether the current level can be sustained, I don't think that is an outlook we can look forward to. So we need to look at the movement towards second quarter to come up with an outlook. We'd like to make an appropriate adjustment in the middle of the year. There has been a lot of uncertainties that we need to consider, and I don't think this current level is sustainable at the moment.

[Unknown Analyst]

There are 2 questions. Firstly, second quarter and onward, what will be your forecast? This is just a general comment, but you said the Machinery & Infrastructure and Chemicals, the progress ratio has not reached 25%. But after the second quarter onward you can catch up. So this is in line with the full year plan. That's what you said, I believe. But more specifically, the infrastructure-type projects may start up. Or as for Chemicals, what would be the contributing factors for profitability in the second quarter as compared to first quarter? If there are any specific factors, can you share that with us? And as for Cameron, the first quarter result and the full year -- as against the full year target, what was the comparison? Can you answer that question? That's the first one.

And secondly, I think according to the reports in -- around second quarter, you will review the returns to the shareholders as well, as the CFO has said at some opportunities like press conferences. I think I have read that. If CFO may have referred to the share buyback or some returns to shareholders and some opportunities, then please elaborate on that.

[Tetsuya Shigeta, executive]

CFO Uchida will answer that question.

[Takakazu Uchida, executive]

So Machinery & Infrastructure, as was explained, automotive-related businesses, because of seasonality, is always slow in the first quarter. And in the second quarter and onward, they can catch up in terms of progress against the full year. And as for aircraft-related businesses, the -- what was supposed to be realized in the first quarter has been deferred to the second quarter. And also, IPP-related businesses are starting up. And in the first quarter, there was some contribution, but there will be more going forward. So mostly, the businesses are in line with the plan. That's how we see those businesses.

And as for Chemicals, on the other hand, in the first quarter, we were in line. But generally speaking, if you look at the business environment, the market is somewhat softening and the total market may have some downside pressure -- or we are under downside pressure somewhat. And from the past, with regard to trading business, we have been shifting to a business model, which are strong in protecting downside risk. So that's why we are performing not bad in the first quarter and we are working very hard and performing well in the first quarter. But business sentiment and also depending on economic trend, we may have to be, of course, be watching the situation.

And as for Cameron, the first train in May was started. And initially, including the ramp-up period, the profit contribution may be done gradually. But for the second train in the first quarter in 2020 and third train, second quarter in 2020, those are the time frame that we're looking at. We can't say the specific numbers, but those 3 trains, once they start production on a full-scale basis, then profit to the order of more than JPY 10 billion can be expected. So ahead of that, we are expecting the contribution to go up gradually.

And as for returns to the shareholders, I don't think I have expressed anything special -- different. The JPY 80 per share is the guidance. And stable cash flow and also progress in the businesses, we are closely watching those. And if possible, in the cash flow allocation, there may be additional returns to the shareholders to be considered. So I have just repeated what we have been saying always in the earnings report.

And then iron ore prices are higher-than-expected now, but if you look at the market condition for other commodities, they are in line or somewhat declining, and macro economic uncertainty is getting stronger. So in the second quarter, we have to review the full year performance and then come up with a plan.

Does that answer your question?

[Unknown Analyst]

Just for clarification. The IPP-related business, for something -- some things have started contributing in the first quarter, but there are things that are started up in second quarter. So you're not worried about Machinery & Infrastructure. Is that a correct understanding?

And as for the third train in Cameron, second quarter of which year, did you say? Can you say that again, please?

[Takakazu Uchida, executive]

As for Machinery & Infrastructure, your understanding is correct. And as for Cameron, the third train, this is going to be started in the second quarter of April to June in 2020.

[Unknown Analyst]

I have 2 questions. The first question, please refer to Slide 10. You talked about resource-related costs and volume. Of course, metals related cost is going up. What is the -- what are the factors? And against the plan, how is it trending? That is my first question.

Second question is about asset recycling. In the first quarter, asset recycling was about JPY 20 billion. Is this in line with plan? And looking at the next medium-term management plan, the contribution of asset recycling, we believe, may go down. Or is it going to be as strong as the previous asset recycling, please?

[Tetsuya Shigeta, executive]

Thank you very much for the questions. The first question about the iron ore cost and the second question about asset recycling will be answered by CFO Uchida.

[Takakazu Uchida, executive]

About the cost related to iron ore, as has been mentioned, iron ore cost or price has gone up. And there is a formula and we need to pay royalties, and that is a cost that was incurred at the beginning of the year, and that led to increase in the cost.

And as for the second question about asset recycling, in the first quarter, it was JPY 20 billion. For the annual basis, looking at projects from the second quarter and onwards, it will be accumulated and we believe it is in line with our plan.

And as for next fiscal year and onwards, of course, asset efficiency needs to be improved. So a business portfolio review is being conducted. And of course, we need to improve the quality of the existing projects. Portfolio enhancement and any measures to improve the quality of the assets will be conducted. So it is not as if we are going to stop everything, but we will be more positive so that we'll be able to improve the quality of the portfolio and asset recycling will be considered to meet that goal.

[Unknown Analyst]

I have 2 questions. First is about tank terminals, ITC, in the U.S. As far as you can speak, please update us the current operating status and the restart forecast. ITC is regarded as 0 for this fiscal year. I think that's what you said in the last time. If there is any change from that, can you share it with us?

And the second question is about Chemicals again. Novus is still in a bad shape. And the expansion plan was scratched last time, that's what you said. If there is any update or change since then, can you share that with us today?

[Tetsuya Shigeta, executive]

Thank you very much for the questions. CFO Uchida is going to answer those questions.

[Takakazu Uchida, executive]

With regard to ITC, with regard to the status of operation, part of the tanks that were damaged -- excluding those that were damaged, ITC has started the operation with the permission gained from the authority. And the difference from the last time, in the first quarter, some estimated costs were reviewed and recorded. And in regard to insurers -- insurance benefit claims, there's some profit recorded partially, but in terms of impact, there is no materiality. Therefore, we are expecting 0 fear for ITC. And there is no material deviation from that. And investigations into the causes are being done. [ Engle ] Corporation was the authority. And it seems to take more time, so that will be closely being watched and appropriate action will be taken. And so for the first quarter, there is no material significance with regard to this issue.

And with regard to Novus, the -- if you look at the market, compared to 3 months before, there's not much change. Some major players are increasing the prices. So the market may have been bottoming out, but last time, I said that the supply/demand situation will not improve for the short term and that's how we view it. And as what's said last time, large-scale project has been reconsidered. And what can be done now is something that we're considering and studying.

Does that answer your questions?

[Unknown Analyst]

Yes, I see.

[Unknown Analyst]

I'd like to understand the Energy figures. I believe there has been some deferred tax liabilities.

[Tetsuya Shigeta, executive]

I'm sorry. There has been some technical problem. Can you talk a bit louder, please?

[Unknown Analyst]

So this is a question regarding Energy. Of course, the market is strong. And of course, the progress seems to be higher because of that. I want to ask about the profit and loss going forward. AWE contribution from its gain is shown as negative, but the market condition, if the current level is sustained, will the outlook remain the same? That is my first question.

And the second question, you talked about iron ore, including Vale, earlier. So this is your perspective that I want to understand. Vale will need to go through some litigation process going forward. The operation will restart going forward. Looking at mid- to long term, dividend payment will start. What is your perspective? Please share information as much as possible with us.

[Tetsuya Shigeta, executive]

Thank you very much for your questions. CFO Uchida will answer your questions.

[Takakazu Uchida, executive]

Thank you very much for the question. First of all, about Energy, in the first quarter, there was some delay factors, and Mozambique Area 1 DTA recording was mentioned. And with Mozambique, the investment subsidiary and the affiliated company, there has been changes in the classification and adjustments were made. So the first quarter results seem a little bit larger.

But on the other hand, the trading METS realized in the first quarter, this is a trading business, was very strong and cost reduction was made, and that was a onetime factor that contributed to the figures. So currently, I believe there has been some weakness against the plan. The first quarter progress was strong. However, up to now, we believe that against business plan, we will be able to see better results in the plan. So that is a perspective from our side.

[Unknown Analyst]

And as for AWE, can you talk about revenue? Or can you talk about the short-term outlook, please?

[Takakazu Uchida, executive]

As for AWE, for a while, I believe the current situation will be sustained.

And as for Vale in this period -- this year, we are not looking for any dividend payment. Iron ore price is very strong at the moment, and Vale will gradually -- I'm not sure about the speed. However, it will gradually recover production. And at a certain stage, dividend payment will start. Financially speaking, I'm sure there will be some uptake. However, measures against incident and some measures to be taken in the local area -- local community will be necessary, but at the moment, we do not think that we can give a clear outlook for dividend payment from Vale.

[Unknown Analyst]

I have one question. The establishment of growth areas include the participation in the business in Vietnam, having stake in the business. In your business, I think you have done some business. So the initiative so far and the future businesses in Vietnam, what are the differences? And as for the business scale or size, what sort of profit you are targeting at in the future perhaps?

[Tetsuya Shigeta, executive]

Thank you for the question. Uchida, CFO, will answer that question.

[Takakazu Uchida, executive]

Thank you. The Minh Phu that you mentioned, in June, the shrimp producer and processor, we have obtained a stake of 35.1%. But originally, in 2013, Minh Phu Hau Giang, one of the factories under the umbrella of Minh Phu, we had a stake in that business, and Minh Phu itself, the aquaculture of the shrimp and also it produce and process the shrimp and export the shrimp to Japan. And in the -- we are participating in the business of processing of the shrimp and getting involved in internal control and risk management or as to market prices and inventory management, we're cooperating with them to provide functions. And that's what we have been doing with the business that we had already a stake in.

And also, we are participating in the Minh Phu business. And we have sold the shares of the processor company at the same time. And as we have done with the processor company, we are trying to capture the sales expansion of Minh Phu so that corporate value can be improved.

And with regard to impact on the performance, once we reach the size that is large enough, we would like to explain as an individual business.

Does that answer your question?

[Unknown Analyst]

Yes.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]