Mitsui & Co Ltd

TSE:8031

Earnings Call Analysis

Q1 FY2025 Highlights

In Q1 FY2025, profit rose by JPY 23.2 billion to JPY 276.1 billion while core operating cash flow fell by JPY 40.1 billion to JPY 215.8 billion. Major gains came from asset sales in the Machinery & Infrastructure segment, achieving JPY 126 billion in profit. Our power generation portfolio hit a 30% renewable energy ratio ahead of schedule. The Ruwais LNG project in the UAE is set to boost LNG production by 12% by 2028, with an expected positive impact on earnings. We've executed JPY 76.8 billion of a JPY 200 billion share repurchase plan, aiming to complete it by September 20.

Strong Performance Amid Economic Challenges

During the first quarter of fiscal year March 2025, the company navigated through various economic uncertainties, including global monetary tightening and a sluggish real estate market in China. Despite these challenges, the company reported a profit increase of JPY 23.2 billion, reaching JPY 276.1 billion. This performance was bolstered by strategic growth investments and asset recycling.

Profit Changes by Segment

The Mineral & Metal Resources segment saw its profit rise by JPY 2.6 billion to JPY 80.5 billion. In contrast, the Energy segment experienced a decline of JPY 7.5 billion, ending at JPY 19.2 billion, attributed mainly to lower gas prices. Machinery & Infrastructure was a significant contributor with a JPY 73.4 billion increase to JPY 126.0 billion, primarily due to asset sales. However, the Lifestyle segment's profit dropped significantly by JPY 46.3 billion, mainly due to the absence of previously recorded fair value gains.

Core Operating Cash Flow

Core operating cash flow (COCF) decreased by JPY 40.1 billion to JPY 215.8 billion. The segments of Mineral & Metal Resources and Energy also saw declines in COCF, mainly due to lower dividends and higher taxes. However, the Chemicals segment managed a JPY 4.9 billion rise due to improved profit margins. The overall decrease in COCF underscores the need for efficient cash flow management.

Asset Recycling and Share Repurchases

Asset recycling brought in JPY 244 billion in cash inflows, predominantly from the sales of the Paiton power generation business and VLI. This aligns with the company's medium-term management plan. Additionally, the company has carried out JPY 76.8 billion worth of share repurchases out of the planned JPY 200 billion, projecting to complete the repurchase by September 20.

Renewable Energy Milestone

A significant highlight is achieving a 30% renewable energy ratio in the power generation portfolio ahead of the 2030 target. This milestone was reached through strategic asset sales and underscores the company's commitment to decarbonization and reducing greenhouse gas emissions.

Strategic Growth Investments

The company is focusing on strategic growth investments to strengthen its business portfolio. Notable among these is the Ruwais LNG project in UAE, which promises to enhance the company's LNG business and trading portfolio. This project is expected to contribute to earnings once production starts in 2028, leveraging green power for lower carbon LNG production.

LNG Trading and Production

The company's LNG trading volumes have reached an annual level of 10 million tons, equivalent to 15% of Japan's imports. This is a significant area of high earnings potential. The Ruwais LNG project will further boost this segment, with the company participating in 11 LNG projects across 8 countries, increasing LNG production capacity by 12%.

Enhanced Shareholder Returns

In alignment with its progressive dividend policy, the company executed a 2-for-1 share split and announced a full-year dividend of JPY 100 per share for FY March 2025, up by JPY 15 from the previous fiscal year. This move is part of the company's strategy to offer stable and flexible shareholder returns.

Future Outlook

The company anticipates increased contributions from various segments in the second half of the fiscal year. For example, the Energy segment is expected to benefit from the LNG business, while the Lifestyle and Innovation segments will see more substantial contributions from Q2 onwards due to seasonal factors.

Earnings Call Transcript 2025-Q1

[Tetsuya Shigeta, executive]

Good afternoon. I'm Tetsuya Shigeta, CFO. Thank you for joining us today. I will begin by giving a summary of the FY March 2025 Q1 operating results. I will then hand over to Masao Kurihara, General Manager of the Global Controller Division, who will speak on the details of our operating results.

During Q1, the U.S. economy showed overall strength despite ongoing monetary tightening, but there are still many uncertainties in the economic environment, such as geopolitical risks and a sluggish real estate market in China. Even in this environment, we executed growth investments and asset recycling and are steadily moving forward with initiatives aimed at enhancing the quality of our business portfolio.

I will summarize our operating results for quarter 1. Core operating cash flow, or COCF decreased by JPY 40.1 billion year-on-year to JPY 215.8 billion, and profit increased by JPY 23.2 billion to JPY 276.1 billion, which we consider to be in line with our expectations. Furthermore, regarding the share repurchase of up to JPY 200 billion announced in May, we had carried out JPY 76.8 billion of this as of the end of June. Today, we separately announced the amount that we have carried out in July, and we expect to complete the repurchase as planned by September 20, the end of the repurchase period.

This slide indicates the progress rate of each segment against the full year business plan. In the first quarter, we made steady progress overall against the business plan. From Q2 onward, we expect multiple segments to make larger contributions. For example, in the Energy segment, we expect the contribution from the LNG business in the second half. In the Lifestyle and Innovation & Corporate Development segment, our full-fledged contribution is not expected until Q2 onwards due to seasonal factors and the timing of profit recorded.

In this section, I will discuss cash flow allocation for the first 3 months. In the first quarter, we steadily executed growth investments and carried out asset recycling, including some large-scale deals in line with the medium-term management plan, or MTMP. Cash inflows for the period was JPY 460 billion, comprising COCF of JPY 216 billion and asset recycling of JPY 244 billion, including the sale of the Paiton power generation business and the partial sale of VLI. Cash outflows was JPY 330 billion, comprising investments and loans of JPY 253 billion and share repurchases of JPY 77 billion.

Furthermore, following the completion of the sale of Paiton, we have now reached our renewable energy ratio target of 30% for our power generation portfolio. This has been a climate change-related target by 2030, which we were able to achieve ahead of schedule. We will continue to push forward with decarbonization initiatives in each of our businesses while reconfiguring our portfolio and taking actions to reduce GHG emissions.

I will now talk about progress being made in our growth investments. In the 3 key strategic initiatives, we executed and made decisions on multiple growth investment opportunities unique to Mitsui. This was achieved by leveraging collaboration with partners with whom we have built up trust over a long period of time, experience that we have accumulated over many years through business and combining cross-industry functions and expertise. We are making progressing initiatives to further bolster our areas of strength and to enhance our business portfolio.

One of these is the Ruwais LNG project in the UAE, an overview of which is shown on the next slide. As announced last month, together with the 3 international energy majors, we have invested in the Ruwais LNG project being led by Abu Dhabi National Oil Company, or ADNOC, which has been a partner of ours in the LNG business for 50 years. Our investment in the project will strengthen both our LNG business portfolio and our trading portfolio, leading to stable long-term growth in our earning base. Specifically, we are participating in 11 LNG projects in 8 countries and our equity share of LNG production capacity will increase by 12% to 9 million tonnes a year, including Ruwais LNG.

In terms of LNG trading, volumes have reached an annual level of 10 million tons. This volume is equivalent to approximately 15% of Japan's annual imports. Within our business portfolio, LNG is an area with high earnings power. For the Ruwais LNG project, in addition to receiving dividend income from the LNG business, we will pursue upside through the trading business. We will work with our various partners ahead of the production startup in 2028 in order to further bolster our areas of strength. Furthermore, this project is scheduled to use green power to produce lower carbon LNG, which will also lead to broadening of our options for achieving the decarbonized society.

As I explained just now, we are executing carefully selected growth investments. The project shown on this slide is both, have already started to continue to earnings. As you can see, many of the projects in which we invested during Q1 are already contributing to earnings, showing that in terms of growth investments, we are successfully striking a balance between near-term profitability and building a long-term earning base.

We carried out a 2-for-1 share split with an effective date of July 1, 2024. The full year dividend for FY March 2025 will be JPY 100 per share, JPY 15 higher versus the previous fiscal year. This will be the minimum as part of the progressive dividend. There has been no change in our policy of enhancing shareholder returns that offer the stability and flexibility in accordance with the expansion of cash inflows.

That completes my presentation today. So I will now hand over to General Manager of Global Controller Division, Masao Kurihara, for the details of performance in Q1.

[Masao Kurihara, executive]

I am Masao Kurihara, General Manager of the Global Controller Division. I will now provide details of our operating results for Q1.

First, I'll talk about the main changes in COCF by segment compared to the previous period. COCF for the period was JPY 215.8 billion, a year-on-year decrease of JPY 40.1 billion. In Mineral & Metal Resources, COCF decreased by JPY 2.9 billion to JPY 88.2 billion. In Energy, COCF decreased by JPY 2.6 billion to JPY 52.7 billion. In Machinery & Infrastructure, COCF decreased by JPY 35.8 billion to JPY 24.4 billion, mainly due to an increase in taxes due to asset sales and decrease in dividends from associated companies.

In Chemicals, COCF increased by JPY 4.9 billion to JPY 25.2 billion, mainly due to improved profit margin at Novus. In Iron & Steel Products, COCF decreased by JPY 0.5 billion to JPY 2.0 billion. In Lifestyle, COCF decreased by JPY 14.5 billion to JPY 7 billion, mainly due to a decrease in dividends from associated companies and valuation loss at a drug discovery support fund. In Innovation & Corporate Development, COCF increased by JPY 0.4 billion to JPY 7.5 billion. Other factors such as expenses, interest rate, interest, taxes, et cetera, which are not allocated to business segments totaled JPY 8.8 billion.

I will now talk about the main changes in profit by segment compared to Q1 of the previous fiscal year. Profit increased by JPY 23.2 billion to JPY 276.1 billion. In Mineral & Metal Resources, profit increased by JPY 2.6 billion to JPY 80.5 billion. In Energy, profit decreased by JPY 7.5 billion to JPY 19.2 billion, mainly due to lower gas prices. In Machinery & Infrastructure, profit increased by JPY 73.4 billion to JPY 126.0 billion, mainly due to asset sales from the sale of Paiton and the partial sale of VLI.

In Chemicals, profit increased by JPY 2.7 billion to JPY 18.2 billion, mainly due to FVTPL profit related to Eu Yan Sang, traditional Chinese medicine business in Singapore. In Iron & Steel Products, profit increased by JPY 0.4 billion to JPY 6 billion. In Lifestyle, profit decreased by JPY 46.3 billion to JPY 14 billion, mainly due to the absence of a fair value gain on Aim Services recorded in the previous fiscal year. In Innovation & Corporate Development, profit decreased by JPY 1.9 billion to JPY 6.2 billion. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segments totaled a profit of JPY 6 billion.

This page shows the main factors influencing year-on-year changes in fiscal year March 2025 Q1 profit versus the previous period. Base profit decreased by approximately JPY 19 billion. This was mainly due to lower profit at PTL and decrease in LNG dividends, lower profit in food-related trading and the absence of profit from Paiton as well as Kaikias field following their sale in the previous fiscal year.

On the other hand, there are also many positive factors, including LNG trading, contributions from new businesses, ships, a turnaround at Novus, improved performance at IHH and Chemicals trading. When I say new businesses here, I'm referring to those businesses that started to contribute to earnings in the near term, primarily those related to mobility, protein and functional food ingredients. Resources cost and volume resulted in an increase of approximately JPY 5 billion, mainly due to an increase in sales volume in the iron ore business.

Asset recycling resulted in an increase of approximately JPY 76 billion, mainly due to the gain on the sale of Paiton and VLI. In commodity prices and ForEx, due to a decrease in commodity prices, profit decreased by approximately JPY 16 billion in total, including JPY 7 billion for oil and gas and JPY 5 billion for copper and others. For ForEx, profit increased by approximately JPY 23 billion, mainly due to weaker yen. Valuation gains, losses and onetime factors decreased by approximately JPY 46 billion, mainly due to a swing back from the previous year.

Now let's take a look at the balance sheet as of the end of the first 3 months of the current fiscal year. Compared to the end of fiscal year March 2024, net interest-bearing debt increased by approximately JPY 0.1 trillion to JPY 3.5 trillion. Meanwhile, shareholder equity increased by approximately JPY 0.4 trillion to JPY 7.9 trillion. As a result, the net DER fell to 0.44x. That concludes my presentation.

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