Mitsui & Co Ltd

TSE:8031

Earnings Call Transcript 2023-Q2

[Kenichi Hori, executive]

Good morning. I'm Kenichi Hori, CEO. Thank you for joining us today. I will begin with an overview of the operating results for the first half and full year forecast. I will then hand over to Masao Kurihara, Global Controller, who will speak on the results in more detail.

Results for the first half of the current fiscal year show that we remain capable of generating robust profits from our globally competitive business portfolio. Results for the same period of the previous year recorded significant growth, but this fiscal year profit has risen even further, setting a new record for the first half.

The medium-term management plan 2023 has only 5 months remaining, but we will work on achieving concrete results through our pursuit of continuous transform and grow.

I will now summarize our operating results for the first half of this fiscal year. Core operating cash flow, COCF increased by JPY 84.6 billion to JPY 611.5 billion year-on-year, while profit for the period increased by JPY 134.5 billion to JPY 539.1 billion, representing solid progress towards the business plan. In light of this solid progress, we have revised up our full year forecast. Compared to the business plan, we have increased our forecast for the COCF by JPY 180 billion to JPY 1.13 trillion and profit for the year by JPY 180 billion to JPY 980 billion.

We have also increased the interim and year-end dividend to JPY 65 per share respectively, an increase of JPY 10 per share in total to make minimum yearly dividend of JPY 130 per share. Furthermore, we have decided to implement an additional share repurchases of up to JPY 140 billion. While the Japanese yen is weakening, we also take the U.S. dollar into consideration as the key currency to make our management decisions with a global perspective.

In fact, We have USD 1 billion in mind regarding the share repurchase of JPY 140 billion to deal with the overall cash flow allocation framework.

As for the business plan, most segments achieved solid progress. With regard to individual businesses, trading of raw and processed materials, steel and other products, the automotive business and the health care business, which showed significant growth in the previous period or continue to record solid performance. Furthermore, commodity market conditions and foreign exchange have positively impacted our performance.

The global controller will provide some supplementary information later on the Energy segment, where the progress was somewhat slow, but this was due to recognizing profit loss, et cetera, for hedging LNG trading in advance. On the other hand, we are expecting the profit to exceed the business plan due to profit from physical delivery corresponding to hedging transactions as well as the impact of the increase in the offtake volume from Cameron LNG.

Next, I will discuss progress on key initiatives in the business plan. First, we have strengthening of base profit. The LNG, chemicals and grain trading business, et cetera, demonstrated advanced capabilities all over the world and maintained solid levels of profitability. We strengthened profitability in a wide range of regions and industries, leveraging business portfolio including LNG, automotive and health care. Especially in U.S., business portfolio such as automotive and commercial vehicles of Penske Group, natural gas and LNG business centered on Cameron LNG, and tank terminal, et cetera, made strong profit contribution.

With regard to the Sakhalin 2 LNG project, we have decided to undertake the ownership in the new operating company established by Presidential Decree. LNG manufacturing and shipment operations are proceeding more or less in line with plans. On the other hand, the LLC member composition of the operating companies is yet to be finalized, and uncertainties remain. Please refer to Page 26 of our presentation for details of the financial impact of the Russian LNG business.

Next, as a reconfiguration of the business portfolio, we completed the sale of the Australian coking coal business, SMC. This was not foreseen as part of the business plan, but negotiations were brought to close the deal in a short period of time, with the sale completion in early October after the agreement being concluded in August this year. We expect to record a gain on this sale in the third quarter. We also made progress in establishing a new earnings base from opportunities in climate change-related areas. In the first half of the current fiscal year, we decided and executed a series of investments in the energy solutions domain. We are promoting projects and driving initiatives to enhance corporate value.

Progress was also made in low carbon production business. We are now considering a final investment decision within this year on low carbon ammonia production business, which is a new initiative with ADNOC to start low carbon ammonia production of 1 million tons per year in the United Emirates in 2025. In the U.S., we continue to accelerate initiatives targeting to a final investment decision in 2023 and beginning production of 1 million tons of clean ammonia yearly from 2027 with CF Industries. By establishing a new earnings space in this way, we will address the global scale issue of climate change and strive to achieve sustainable growth.

As I mentioned at the start of my presentation, we have revised up our full year forecast of COCF to JPY 1.13 trillion. Energy was revised up by JPY 90 billion, mainly due to the FX impact increases in LNG trading profit. Machinery & Infrastructure was revised up by JPY 50 billion as a result of higher dividend income from associated companies primarily in automotive and commercial vehicles related businesses and Mineral & Metal Resources were revised up by JPY 40 billion, mainly due to the FX impact. COCF for the company as a whole was revised up by JPY 180 billion compared to JPY 950 billion in the business plan.

We have also revised up our full year profit forecast to JPY 980 billion. As a result of upward revisions in the Mineral & Metal Resources by JPY 70 billion, mainly due to FX impact on the sale of Australian coking coal business SMC, in energy by JPY 70 billion, mainly due to FX impact and higher profit in LNG trading, in the Machinery & Infrastructure by JPY 15 billion, mainly due to good performance in the automotive and commercial vehicles related businesses and FX impacts. And the innovation and corporate development by JPY 15 billion, mainly due to gain on sale in real estate business, profit for the year was revised up by JPY 180 billion for the company as a whole, compared to JPY 800 billion in the business plan.

In this section, I will discuss cash flow allocation results for the first half. Cash-in for the period was JPY 759.5 billion, comprising COCF of JPY 611.5 billion and asset recycling of JPY 148 billion, including the sale of properties in the U.S., et cetera. Cash-out was JPY 536 billion, comprising investments and loans of JPY 336 billion and returns to shareholders of JPY 200 billion. The main investments and loans were for mainstream, the large renewable energy project in India and climate friendly. And in terms of CapEx for existing projects, there were cash outflows for oil and gas projects as well as iron ore and coal operations in Australia.

Reflecting the upward revisions to the full year forecast that I mentioned earlier, we have updated cash flow allocation for the 3 years of the medium-term management plan. We're expecting expansion in cash inflow and revising up COCF to JPY 2.95 trillion. We will allocate JPY 1.5 trillion to investments, JPY 510 billion to shareholder returns, reflecting the increase in the yearly dividend to JPY 130 per share, with a management allocation of JPY 1.74 trillion.

We assume management allocations for shareholder returns, growth investments and strengthening of our financial position to address a highly uncertain business environment. As shown in the graph on Page 11, based on the newly decided JPY 140 billion in share repurchases and the increase in the yearly dividend to JPY 130 per share, returns to shareholders over the 3-year period of medium-term management plan are expected to be approximately JPY 1 billion, likely to reach the total shareholder return target of 33% as a percentage of COCF.

Next, I will address growth investments. This fiscal year, I have had more opportunities for business trips and having done the rounds of business frontlines all over the world and obtained confirmation with my own eyes, I got a real view for the robustness and effectiveness of our project pipelines. These pipelines cover investment for bolt-on and peripheral areas for securing suppliers and strengthening functions in order to contribute to stable supply of Mineral & Metal Resources, LNG, automotive, et cetera, as well as for strategic focus areas. In strategic focus areas, we are deepening the initiatives of the current medium-term management plan. In Energy Solutions, we are engaging in initiatives for renewable energy, next-generation fuels such as ammonia and hydrogen and their peripheral projects and accelerating the formation of business clusters.

In Healthcare & Nutrition, in addition to strengthening the health care business, we will promote the construction of our strategic nutrition value chain in food, nutrition and its related industries, stretching from upstream seeds, fertilizer and crop protection to downstream health food and other products and services.

While maintaining strict discipline, we will execute our investments with the optimal timing. At the same time, we will secure short-term liquidity to strengthen our financial position in light of a highly uncertain business environment, which include higher interest rates and heightened market volatility. As we update the outlook for management allocation going forward, we will continuously consider the necessity for further additional shareholder returns.

That completes my part of the presentation today. I will now hand over to Global Controller, Masao Kurihara for details of performance in the first half.

[Masao Kurihara, executive]

I am Masao Kurihara, Global Controller. I will now provide details of our operating results for the first half. First, I will explain the main changes in COCF by segment compared to the first half of the previous fiscal year. COCF for the period was JPY 611.5 billion, a year-on-year increase of JPY 84.6 billion. In Mineral & Metal Resources, COCF increased by JPY 28.9 billion to JPY 269.5 billion, mainly due to higher coal prices despite the impact of a downturn in iron ore prices. In energy, COCF increased by JPY 37.7 billion to JPY 124.8 billion, mainly due to increases in oil and gas prices.

In Machinery & Infrastructure, COCF increased by

JPY 15.5 billion to JPY 92.6 billion, mainly due to higher dividend income from associated companies, primarily in automotive and commercial vehicles related businesses. In Chemicals, COCF increased by JPY 7.4 billion to JPY 50.9 billion, mainly due to good sales performance in the fertilizer products and raw material trading and business.

In Iron and steel products, COCF increased by JPY 1.9 billion to JPY 7.3 billion, mainly due to solid trading. In Lifestyle, COCF declined by JPY 3.1 billion to JPY 19 billion, mainly due to the absence of the good performance in the previous period caused by the sale of Colombia Asia's business in India. In Innovation and Corporate Development, COCF decreased by JPY 8.4 billion to JPY 18.2 billion, mainly due to the absence of FVTPL gain recorded in the previous period. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segments totaled JPY 29.2 billion.

Please turn to Page 14. I will now explain the main changes in profit by segment compared to the first half of the previous fiscal year. Profit for the period increased by JPY 134.5 billion to JPY 539.1 billion. In Mineral & Metal Resources, there was a positive impact from higher coal prices, but the decline in iron ore prices and the fall in dividends from Vale led to decrease in the profit by JPY 23.8 billion to JPY 247.2 billion.

In Energy, profits increased by JPY 60.2 billion to JPY 55.4 billion, mainly due to increases in oil and gas prices. As Hori explained, we are expecting the profit to exceed the business plan on a full year basis. Please refer to Page 27 for details of fluctuations in profit and loss during the fiscal year. As LNG is yet to develop in terms of liquidity and commoditization, and thus there are situations where deviations occur between physical deliveries and derivatives, we are highly sensitive to market trends and thoroughly manage our risk. As the timing of profit loss recognition for hedging transactions and physical commodities differs, following the requirements of accounting standards, there are cases when losses need to be recognized prior to the delivery of physical commodities.

It resulted in recording of the large amount of expenses in advance during the first half of the current fiscal year, which have seen more price fluctuations than in the past. However, we expect to eliminate quantitative impact from the discrepancy on a yearly basis.

In Machinery & Infrastructure, profits increased by JPY 36.8 billion to JPY 89.7 billion, mainly due to strong automotive and commercial vehicles related businesses, primarily in North America. In Chemicals, profits increased by JPY 11.7 billion to JPY 39.3 billion, mainly due to good sales performance in the fertilizer and raw material trading and business.

In Iron & Steel Products, profits increased by JPY 2.1 billion to JPY 14.3 billion, mainly due to solid trading. In Lifestyle, profits increased by JPY 4.8 billion to JPY 25.7 billion, mainly due to a gain on valuation of R-Pharm put option, higher profits in the solid healthcare business and good performance in grain trading, et cetera, while there was increase in cost of hedging operation for coffee trading.

In innovation and corporate development, profits increased by JPY 4.7 billion to JPY 35.5 billion, mainly due to gains on sale in the real estate business. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to the business segments totaled JPY 32 billion. This page shows the main factors influencing year-on-year changes in profit. Despite performance being driven by solid trading in multiple businesses, including automotive and Erdos, the decrease in dividend from iron ore operations, the advanced recognition of a valuation loss related to derivative transactions for hedging LNG trading, et cetera, and the absence of FVTPL profit recorded in the previous period resulted in base profit falling by approximately JPY 45 billion.

Although costs were reduced in Energy upstream business due to lower depreciation and exploration costs, there were increases in unit costs as a result of lower volumes caused by inventory adjustments in iron ore operations in Australia, tight labor conditions and bad weather in the coal operations in Australia as well as increase in fuel costs. It resulted in a decrease in profit by JPY 15 billion and the resources related costs, volume. Asset recycling resulted in an increase of approximately JPY 26 billion, mainly due to gains from the sale of assets in the real estate business in the U.S. and Singapore.

In commodity prices, ForEx Profit increased by approximately JPY 147 billion. From market conditions, despite the JPY 54 billion decline in profit caused by falling iron ore prices, higher coal prices resulted in a contribution of approximately JPY 47 billion, and increases in oil and gas prices contributed approximately JPY 60 billion. In ForEx, profit increased by JPY 93 billion, mainly due to the weaker yen.

Finally, valuation gain loss and special factors contributed to increase of approximately JPY 21 billion, mainly due to valuation gain in lifestyle. Here, we have a comparison of full year forecast and business plan with a summary of the factors involved. Base profit is expected to increase JPY 20 billion, excluding temporary factors. Although lower dividends from LNG business is expected, trading has been solid and multiple businesses are expected to contribute to performance, including automotive and healthcare, if temporary factors have been reflected is expected to decline by JPY 18 billion. Although cost improvement in depreciation and exploration expenses in the Upstream Energy business and increase in production volume in some LNG businesses are expected, tight labor conditions in Australian coal and iron ore operations and lower volumes caused by bad weather as well as an increase in unit costs arising from lower volumes are expected to result in resources-related cost volume, driving a JPY 23 billion decrease in profits.

Asset recycling is expected to result in an increase of approximately JPY 40 billion in profits, affecting the first half results and the sale of Australian coking coal business, SMC. Commodity prices, ForEx is expected to generate a profit increase of approximately JPY 171 billion. Following revisions to the outlook of market prices, market conditions are expected to drive increases in profit approximately JPY 29 billion for coal, approximately JPY 25 billion for oil and gas and approximately JPY 13 billion for iron ore. And in ForEx, an increase in profits of approximately JPY 108 billion is expected, mainly due to the weaker yen.

Valuation gain loss and special factors expected to contribute an increase of approximately JPY 10 billion, mainly due to a valuation gain in lifestyle. Now let's take a look at the balance sheet as of the end of the first half of the current fiscal year. Compared to the end of March 2022, net interest-bearing debt increased by approximately JPY 400 billion to JPY 3.7 trillion. Meanwhile, shareholder equity increased by approximately JPY 400 billion to JPY 6 trillion. As a result, the net DER was 0.62x. That concludes my presentation. [Statements in English on this transcript were spoken by an interpreter present on the live call.]