Mitsui & Co Ltd

TSE:8031

Earnings Call Analysis

Mitsui Raises Full-Year Forecast Despite Slowing Economy

Amid a global economic deceleration, Mitsui's diverse business portfolio produced earnings that surpassed their May business plan expectations. With core operating cash flow (COCF) at 475.1 billion yen and profit at 456.3 billion yen, both figures down from the previous year but ahead of their plan, Mitsui revised their full-year forecast. They've upped their COCF outlook by 90 billion to 960 billion yen, and their profit projection by 60 billion to 940 billion yen, optimistic about their cash flow resilience and growth investments.

Strategic Investments and a Path to Enhanced Profit

The company has embraced strategic growth by investing in new ventures and improving the efficiency of existing businesses. Notable moves include an investment in a shrimp farming business in Ecuador with an eye on diversifying assets and a commitment to an offshore wind power project in Taiwan, anticipating green energy's upward trajectory. Looking forward from FY March 2023 to FY March 2026, the company is forecasted to increase its base profit by ¥170 billion, with improvements of ¥110 billion from existing businesses in mobility, health care, and retail sectors. Efforts are underway to enhance profitability through operational improvements in previously loss-making units, like the coffee business. Exiting several unprofitable ventures also contributed to the financial betterment. The narrative of growth through strategic initiatives is reinforced as the company reported that approximately half of the ¥60 billion profit contribution from new businesses is already materialized as of the current progress.

Financial Performance Highlights and Challenges

The company's first-half cash operating cycle flow (COCF) saw a decline of ¥136.4 billion year-on-year, settling at ¥475.1 billion. This was primarily due to decreases in commodity prices, particularly metallurgical coal and iron ore, and lessened dividend income. Despite posting higher profits in sectors like Machinery & Infrastructure through asset sales, a fall in profit by ¥82.8 billion to ¥456.3 billion was reported compared to the first half of the previous fiscal year. This was particularly noticeable in Minerals & Metal Resources and Energy segments, with the latter also affected by maintenance costs and decreased dividends from the liquid natural gas (LNG) business. Nonetheless, Lifestyle sector profits surged owing to valuation gains on investments and strong North American processed food business performance.

Looking Ahead: Projections and Commitment to Shareholders

The company signaled confidence in their future performance and commitment to their shareholders by increasing the interim dividend by ¥10 to ¥85, with a total annual hike of ¥20 to ¥170. This reflects the company's robust cash flows and progress in asset recycling, which has also led to a share repurchase initiative of approximately ¥50 billion. This notion of rewarding shareholders remains a priority with the plan to continue bolstering returns while aiming for a sustainable increase in return on equity (ROE). Projections for the full fiscal year have signaled an increase in base profit and a forecasted growth in profits from foreign exchange earnings due to a weaker yen, alongside gains from asset recycling.

Financial Health and Debt Position

As of the end of the first half of the fiscal year, there was an uptick in net interest-bearing debt by approximately ¥200 billion, reaching ¥3.4 trillion. However, shareholders' equity rose more substantially by about ¥700 billion, totaling ¥7.1 trillion, demonstrating an overall strengthening balance sheet. The net debt-to-equity ratio (net DER) has been maintained at 0.48 times, reflecting prudent financial management and an acceptable level of financial leverage.

Earnings Call Transcript 2024-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 first half operating results and the full year forecast. And I will then hand over to Masao Kurihara, General Manager of the Global Controller Division, who will speak on this in more detail.

During the first half, the overall global economy continued to slow. Even in such an environment, Mitsui has been able to generate earnings exceeding the figures laid out in our business plan that we announced in May through our global business portfolio that spans across a wide range of industries.

I will now summarize our operating results for the first half of this fiscal year. Core operating cash flow, COCF, decreased by JPY 136.4 billion year-on-year to JPY 475.1 billion, and the profit decreased by JPY 82.8 billion to JPY 456.3 billion. However, both made solid progress against the business plan. In light of this progress, we revised up the full year forecast. Compared to the business plan, we have increased our forecast for COCF by JPY 90 billion to JPY 960 billion, and profit by JPY 60 billion to JPY 940 billion. Furthermore, as we were able to reconfirm the robustness in our cash flow, which was enhanced through the previous medium-term management plan, MTMP, we have raised the full year dividend by JPY 20 per share to JPY 170, which will be the new minimum level during the current MTMP ending in fiscal year March 2026. In addition, as we made progress with several asset sales, including a large scale one, we have decided to implement additional share repurchase of up to JPY 50 billion.

I will now explain our progress against the business plan. In the Machinery & Infrastructure segment, there was a gain on sale of the electric locomotive leasing business in Europe and good performance in the automotive business. In the Lifestyle segment, a reevaluation gain on previously held equity in Aim Services was recorded. These and other factors have led to these segments maintaining a high rate of progress against the business plan.

In the Chemicals and Iron & Steel Products segments, the rate of progress was low due to the decrease in demand associated with the slowing of the global economy and the impact of the falling prices. In the Energy segment, profit contribution from LNG trading and dividends will be weighted towards the second half. And on a full year basis, we expect earnings to be above those set out in the business plan.

As I mentioned at the start of my presentation, we have revised up our full year COCF forecast to JPY 960 billion. Mineral & Metal Resources segment was revised up by JPY 30 billion, mainly due to an increase in dividends from associated companies. Energy, Machinery & Infrastructure and Lifestyle segments were each revised up by JPY 10 billion. COCF for the company as a whole is now forecasted to be JPY 90 billion higher compared to JPY 870 billion in the business plan.

We have also revised up our full year profit forecast to JPY 940 billion. Based on the progress in the first half, the revised forecast for Iron & Steel Products segment is lower than the business plan, whereas it is higher for Machinery & Infrastructure, Energy and Lifestyle segments. COCF for the company as a whole was revised up by JPY 60 billion compared to JPY 880 billion in the business plan.

In this section, I will discuss cash flow allocation for the first half. In the first half, we steadily made growth investments in line with the key strategic initiatives set out in the MTMP and also had major asset sales. Cash in for the period was JPY 758 billion, comprising COCF of JPY 475 billion and asset recycling of JPY 283 billion.

Out of the asset recycling carried out in the first half, in particular, we view the electric locomotive leasing business in Europe, MRCE, as a well-timed large-scale asset sale that will also contribute to ROIC improvement. Cash out will be JPY 771 billion, comprising investments and loans of JPY 572 billion and shareholder returns of JPY 199 billion. The main investments in loans in the first half included growth investments such as acquisition of shares in Nutrinova, which manufactures and sells functional food ingredients; Aim Services becoming a wholly owned subsidiary; and completing the additional acquisition of shares in Relia. There was a business integration between Relia and KDDI Evolva and a new company known as Altius Link was formed on September 1.

As I just mentioned, Mitsui is actively executing growth investments in the key strategic initiatives specified in MTMP. The start of contribution to profit by these new projects is also progressing as planned. The project shown on this slide in bold have started to contribute to profit. As you can see, most of the new projects that were scheduled to start contributing to profit in FY March 2024 have already been implemented. Furthermore, for projects that are expected to start contributing to profit from FY March 2025 onwards, investment executions or investment policy decisions have also been proceeding as planned. In the second quarter, we announced investment in the shrimp farming business, IPSP, in Ecuador and a final investment decision on an offshore wind power project in Taiwan.

Next, I would explain the progress on enhancement of base profit as laid out in the MTMP. This slide shows the FY March 2023 profit, excluding the onetime factors and adjusted for commodity prices and exchange rates based on our FY March 2026 assumptions. Based on these assumptions, we will increase the base profit by JPY 170 billion over the 3 years of MTMP.

With regard to the enhancement of base profit from existing businesses, we aim to improve this by JPY 110 billion over the 3 years of MTMP. Specific initiatives aimed at strengthening existing businesses are progressing mainly in mobility, health care and retail. As an example of enhancement of base profit through efficiency improvements and turning business around is the steady progress being made in improvement of operations in the coffee business that recorded a loss in the previous fiscal year. Furthermore, progress was also made in initiatives aimed at exiting of several loss-making businesses.

As explained earlier, growth investments in new businesses are proceeding according to plan in each key strategic initiative. Based on the current progress, we have already accounted for around half of the JPY 60 billion contribution to profit from the new businesses expected in FY March 2026.

Regarding our shareholder returns policy, as we were able to reconfirm the robustness in our cash flow, we will raise the interim dividend by JPY 10 to JPY 85, raising the minimum full year dividend by JPY 20 to JPY 170 throughout the period covered by the current MTMP. Furthermore, as part of our flexible shareholder returns based on the progress made in asset recycling, we have decided to make additional share repurchase of about JPY 50 billion. We will continue to consider the enhancement of shareholder returns, offering both stability and flexibility with a view to sustainably increasing ROE.

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

[Masao Kurihara, executive]

I am Masao Kurihara, General Manager of the Global Controller Division. I will now provide details of our operating results for the first half. First, I would explain the main changes in COCF by segment compared to the first half of the previous year. COCF for the first half was JPY 475.1 billion, a year-on-year decrease of JPY 136.4 billion. In Minerals & Metal Resources, COCF decreased by JPY 91.7 billion to JPY 177.8 billion mainly due to the decline in metallurgical coal and iron ore prices and the fall in dividends from associated companies and Vale.

In Energy, although there was an absence of valuation loss on derivatives that was recorded in LNG trading in the previous fiscal year, COCF decreased by JPY 47.3 billion to JPY 77.5 billion, mainly due to the impact of oil production facility maintenance as well as the drop in oil and gas prices and decrease in LNG dividends.

In Machinery & Infrastructure, although taxes associated with the asset sales increased, COCF increased by JPY 23.1 billion to JPY 115 7 billion mainly due to a higher dividend income from associated companies.

In Chemicals, COCF decreased by JPY 26.6 billion to JPY 24.3 billion, mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives.

In Iron & Steel Products, COCF decreased by JPY 6.1 billion to JPY 1.2 billion, mainly due to the lower dividend income from associated companies.

In Lifestyle, COCF increased by JPY 10.7 billion to JPY 29.7 billion, mainly due to higher dividend income from associated companies. In Innovation & Corporate Development, COCF increased by JPY 1 billion to JPY 19.2 billion. Other factors such as expenses, interest, taxes and others, which are not allocated to business segments, totaled JPY 29.7 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 first half decreased by JPY 82.8 billion to JPY 456.3 billion. In Minerals & Metal Resources, profit decreased by JPY 112.6 billion to JPY 134.6 billion due to the fall in prices of metallurgical coal and iron ore. The decrease in profit contribution following the sale of SMC, the metallurgical coal business in Australia in Q3 of the previous fiscal year and the impairment losses on copper business in Chile.

In Energy, although there was an absence of the valuation loss on derivatives that was recorded in LNG trading in the previous fiscal year, profit decreased by JPY 29.4 billion to JPY 26 billion, mainly due to the impact of oil production facility maintenance as well as a drop in oil and gas prices and a decrease in LNG dividends.

In Machinery & Infrastructure, profit increased by JPY 74.7 billion to JPY 164.4 billion, mainly due to the gain on sale of European electric locomotive leasing business and good performance of multiple businesses such as ships, VLI and Construction Machinery.

In Chemicals, although valuation gain was posted, profit decreased by JPY 25 billion to JPY 14.3 billion, mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives.

In Iron & Steel Products, profits decreased by JPY 11.3 billion to JPY 3 billion, mainly due to impairment loss in associated companies and lower demand.

In Lifestyle, although there was an absence of the valuation gain on R-Pharm put options recorded in the same period of the previous fiscal year, profits increased by JPY 43.7 billion to JPY 69.4 billion, mainly due to valuation gain on the fair value of Aim Services and good performance of the processed food business in North America.

In Innovation & Corporate Development, although a valuation gain on the fair value for Altius Link was recorded, profits decreased by JPY 9.4 billion to JPY 26.1 billion, mainly due to a year-on-year decrease in profit from asset sales. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segment, totaled JPY 18.5 billion.

This page shows the main factors that impacted year-on-year changes in profit. Base profit decreased by approximately JPY 61 billion. Although there was absence of the derivative valuation loss in the previous fiscal year in LNG trading and performance improvements in IPP business as well as coffee trading, there was an increase in interest expenses, a decrease in profit contribution following the sale of SMC in the previous fiscal year and lower profit from trading mainly in Chemicals. Resources cost volume decreased by approximately JPY 32 billion, mainly due to a decrease in production volume resulting from maintenance of some production facilities as well as an increase in exploration cost in energy upstream businesses and increases in fuel and labor costs in Mineral & Metal Resources business.

Asset recycling resulted in an increase of approximately JPY 62 billion, mainly due to gains from the sale of MRCE, our European electric locomotive leasing business.

In commodity process and ForEx, profit decreased by approximately JPY 53 billion. For commodity prices, profit decreased by approximately JPY 41 billion due to lower oil and gas prices and JPY 40 billion due to a fall in metallurgical coal, iron ore and copper prices, which resulted in profit decrease by approximately JPY 81 billion in total. For ForEx, profit increased by approximately JPY 28 billion, mainly due to the weaker yen.

Finally, for valuation gain loss and special factors, although there was an impact of impairments in the copper business in Chile and the renewable energy business, there were also valuation gains through new growth investments leading to an increase of approximately JPY 1 billion.

Here, we have a comparison of a newly announced full year forecast against the business plan announced in May with a summary of the factors involved. Base profit is expected to increase by JPY 12 billion. Although we expect lower dividends from the LNG business, good performance in the automotive business as well as contribution from LNG trading and the ship-related business should lead to a higher profit. For resources cost volume, although we anticipate cost improvements in exploration and other areas in the Upstream Energy business, inflation in Australia and Chile is continuing and there has been lower production volume in the Australian iron ore business. Mainly due to the above factors, we expect a JPY 4 billion decrease.

For asset recycling, we expect an increase of approximately JPY 39 billion, mainly due to an increase in gains from the sale of MRCE, a European electric locomotive leasing business, as well as timely sale of Thorne HealthTech, among others. Commodity prices ForEx is expected to generate a profit increase of approximately JPY 67 billion. In ForEx, an increase in profit of approximately JPY 64 billion is expected, mainly due to the weaker yen.

Finally, for valuation gain loss and special factors mainly owing to impairments in the first half, we expect a decrease of approximately JPY 54 billion.

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 2023, net interest in bearing debt increased by approximately JPY 200 billion to JPY 3.4 trillion. Meanwhile, shareholder equity increased by approximately JPY 700 billion to JPY 7.1 trillion. As a result, net DER is 0.48x. That concludes my presentation.