Mitsui & Co Ltd

TSE:8031

Earnings Call Transcript 2023-Q3

[Tetsuya Shigeta, executive]

Good afternoon. I'm Tetsuya Shigeta, CFO. Thank you for joining us today. I will begin with an overview of the operating results for the first 9 months and full year forecast. I will then hand over to Masao Kurihara, Global Controller, who will speak on the results in more detail.

In the first 9 months of the current period, Mitsui continued to generate strong earnings and posted record profit and core operating cash flow, or COCF, both on the single quarter and 9-month accumulated basis through our globally diversified business portfolio. Based on this good performance, we are revising upward our full year earnings forecast to JPY 1.08 trillion. We are constantly aiming for healthy growth of shareholder returns, and we'll be making an additional JPY 100 billion share repurchase, and we'll also be raising the dividend.

Please turn to Page 3 of the presentation materials. I'll provide a summary of operating results for the first 9 months. COCF increased by JPY 98.3 billion year-on-year to JPY 961.2 billion, while profit for the period increased by JPY 207.5 billion year-on-year to JPY 840.8 billion. Furthermore, it resulted in solid progress from the previous forecast announced at the time of the second quarter financial results.

In light of this solid progress, we have revised upward our full year forecast. Compared to the previous forecast, we have increased our forecast for COCF by JPY 70 billion to JPY 1.2 trillion and profit for the year by JPY 100 billion to JPY 1.08 trillion. For shareholder returns, the year-end dividend is planned to be raised to JPY 70 per share, bringing the full year dividend to JPY 135. Furthermore, we plan to set a minimum full year dividend of JPY 140 per share next fiscal year based on the JPY 70 year-end dividend plan for this fiscal year.

In addition to the JPY 140 billion share repurchase currently in progress, we have decided to make an additional JPY 100 billion share repurchase and extend the buying period. We will also steadily progress with the cancellation of these treasury shares.

Please turn to Page 4. As you can see, each segment achieved solid progress toward the previous forecast. With regard to individual businesses, trading overall and process materials and other products, automotive business and Healthcare business all continue to record solid performance. LNG trading in the Energy segment recognized losses related to derivative transactions for hedging and other factors in the first half in advance. During the third quarter, physical deliveries corresponding to hedging transactions were realized and timing differences were resolved, and the business returned to the black.

Please turn to Page 5. As I mentioned at the start of my presentation, we have revised upward our full year forecast for COCF to JPY 1.2 trillion. We revised upward our forecast for the Energy segment by JPY 60 billion mainly due to LNG trading in which offtake volume from Cameron LNG increased. For the company as a whole, COCF was revised upward by JPY 70 billion from the previous forecast of JPY 1.13 trillion.

Please turn to Page 6. We have also revised upward our full year profit forecast to JPY 1.08 trillion. We revised our forecast for the Energy segment up by JPY 80 billion mainly due to LNG trading in which offtake volume from Cameron LNG increased and for the Mineral & Metal Resources segment by JPY 15 billion mainly due to commodity prices. For the company as a whole, the forecast has been revised upward by JPY 100 billion from the previous forecast of JPY 980 billion.

Please turn to Page 7. In this section, I will explain the cash flow allocation for the first 9 months. Cash in for the period was JPY 1.268 trillion, comprising COCF of JPY 961 billion and asset recycling of JPY 307 billion, such as from the sale of Australian metallurgical core business, SMC, financial assets measured at fair value through other comprehensive income in the Machinery & Infrastructure and Lifestyle segments and the Falcon power generation business in Mexico. Cash out was JPY 790 billion, comprising investments in loans of JPY 491 billion and shareholder returns of JPY 299 billion.

Please turn to Page 8. Reflecting the upward revision to the full year forecast that I mentioned earlier, I will give an update on the cash flow allocation for the 3 years of the Medium-term Management Plan. We are revising upward COCF to JPY 3.02 trillion and are expecting expansion in cash inflow. We expect we will have allocated JPY 1.5 trillion to investments, JPY 520 billion to the dividend, which reflects the increase in this fiscal year's full year dividend to JPY 135 per share and JPY 1.78 trillion to the management allocation.

The management allocation of JPY 1.78 trillion will be allocated in a balanced manner towards shareholder returns, growth investments and strengthening our financial position. For shareholder returns, in addition to the decided share repurchase totaling 100 -- excuse me, totaling JPY 480 billion up until the end of the third quarter of this fiscal year, we have decided to make an additional repurchase of JPY 100 billion. Of this JPY 100 billion, the portion repurchased by March 31 will be designated as shareholder returns within the current Medium-term Management Plan.

I will now explain growth investments. The globally diversified business portfolio is a source of Mitsui's profitability. Leveraging this business portfolio, accumulated knowledge through growing and expanding existing businesses and collaboration with trusted partners, we are promoting bolt-on type investments to existing projects and investments in adjacent areas. We're positioning such type of investments as core of growth investments.

The allocation to growth investments during the period covered by the current Medium-term Management Plan is expected to be accumulated total of JPY 280 billion. Furthermore, there has been progress in investment pipeline projects, and we expect to have cash outflows in the next fiscal year. As already announced, we plan to invest approximately JPY 70 billion in making AIM SERVICES, our wholly-owned subsidiary, and approximately JPY 60 billion in the tender offer and business integration of Relia.

In addition, those pipeline projects that are present and negotiations have progressed and have a certain level of [indiscernible] probability, we also have items related to energy transition, strengthening of natural gas value chain, strengthening healthcare and the creation of food and nutrition value chain. We believe growth investments that fully utilize Mitsui's strengths, such as knowledge and networks accumulated over the years, will directly lead to the strengthening of our business foundation and the formation of business crafters with adjacent businesses with a high probability of success. Also, we plan to temporarily allocate funds to enhance short-term liquidity in order to strengthen our financial position based on higher interest rates and increasing market volatility.

Please turn to Page 10. With regard to growth investments, I will explain the decision to make AIM SERVICES, a Japanese contract food service provider, a wholly owned subsidiary as announced. AIM SERVICES is a contractor food service company established as a joint venture between Mitsui Group and U.S.-based Aramark Corporation in 1976. The company has expanded its business from contractor services for offices and factories to contractual services and facility operations support for hospitals, other medical facilities, stadiums and entertainment facilities.

At present, it has approximately 3,900 business sites across Japan and provides approximately 1.3 million meals per day. Net sales were approximately JPY 170 billion in the fiscal year ended March 31, 2022, and on a net sales basis is ranked first in workplace dining and second for hospitals and other medical facilities. This additional purchase of JPY 70 billion of shares to make the company a wholly-owned subsidiary will further strengthen and accelerate the expansion of its core contract food services business and contribute to the enhancement of health and well-being through providing delicious and nutritious food. Furthermore, we will promote the formation of our wellness business cluster by combining the contract food service business with Nutrition and Healthcare businesses.

Please turn to Page 11. Regarding the share repurchases and raising of the full year dividend I just mentioned, total shareholder returns as a percentage of COCF for the 3-year period for the current Medium-term Management Plan is expected to reach our target of 33%. We will aim to continue to increase the dividend and also carry out share repurchases in a flexible manner, corresponding to the stable improvement of our cash-generating ability.

That completes my part of the presentation today. I will now hand over to Global Controller, Masao Kurihara, for details of the performance in the first 9 months.

[Masao Kurihara, executive]

I am Masao Kurihara, Global Controller. I will now provide details of our operating results for the first 9 months. Please turn to Page 13. First, I will explain the main year-on-year changes in COCF by segment. COCF for the period was JPY 961.2 billion, a year-on-year increase of JPY 98.3 billion. In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices, but COCF decreased by JPY 77.5 billion to JPY 355.5 billion mainly due to the decline in iron ore prices and the fall in dividends from Vale.

In Energy, COCF increased by JPY 123 billion to JPY 275.9 billion mainly due to an increase in oil and gas prices and LNG trading in which offtake volume from Cameron LNG increased. In Machinery & Infrastructure, COCF increased by JPY 45.5 billion to JPY 158.7 billion mainly due to higher dividend income from associated companies, primarily in the automotive and commercial vehicles-related businesses.

In Chemicals, COCF increased by JPY 600 million to JPY 72.5 billion. In Iron & Steel Products, COCF increased by JPY 6.2 billion to JPY 15.4 billion mainly due to higher dividends from affiliated company. In Lifestyle, although grain trading and other areas performed well, COCF decreased by JPY 2.3 billion to JPY 31.2 billion mainly due to the valuation loss on the fair value of the Drug Discovery Support Fund.

In Innovation & Corporate Development, COCF decreased by JPY 700 million to JPY 34.4 billion. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segments, totaled JPY 17.6 billion.

Please turn to Page 14. I will now explain the main changes in profit by segment compared to the first 9 months of the previous fiscal year. Profit for the period increased by JPY 207.5 billion to JPY 840.8 billion. In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices and a gain from the sale of SMC, an Australian metallurgical coal business. But profit decreased by JPY 15.5 billion to JPY 355.4 billion mainly due to the decline in iron ore prices and the fall in dividends from Vale.

In Energy, profits increased by JPY 162.5 billion to JPY 190.8 billion mainly due to an increase in oil and gas prices and LNG trading in which offtake volume from Cameron LNG increased. In Machinery & Infrastructure, profits increased by JPY 38.9 billion to JPY 131.1 billion mainly due to good performance of the automotive and commercial vehicles businesses primarily in North America.

In Chemicals, although profits were reduced due to falling prices and rising costs in the North American methanol business, profits increased by JPY 3.1 billion to JPY 54.7 billion as a result of prices and sales volumes centered on fertilizer and fertilizer raw materials performing well. In Iron & Steel Products, profits decreased by JPY 1.8 billion to JPY 19.5 billion.

In Lifestyle, profits decreased by JPY 500 million to JPY 42.3 billion. In Innovation & Corporate Development, profits increased by JPY 7.5 billion to JPY 49.7 billion mainly due to gains on sales in the real estate business. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segments, totaled a loss of JPY 2.7 billion.

Please turn to Page 15. This page shows the main factors influencing year-on-year changes in profit for the third quarter of this fiscal year. Despite performance being driven by trading, such as LNG, commodity derivatives, chemicals, grain, et cetera, and the automotive and ship businesses, base profit declined by JPY 23 billion due to decreases in dividends from iron ore and LNG businesses and the absence of profit from fair value through profit or loss that was present in the previous fiscal year.

Although cost decrease in the energy upstream business due to lower depreciation and a reduction in its exploration costs, there was a decrease in volume in iron ore and coal operations in Australia and copper operations in Chile and an increase in unit costs as a result of that volume decrease as well as increases in fuel and labor costs. This resulted in a profit decrease of JPY 41 billion under resources-related costs and volume.

Asset recycling resulted in an increase of approximately JPY 62 billion mainly due to the sale of the Australian metallurgical coal business, SMC, and gains from the sale of assets in the real estate business in the United States and Singapore. In commodity prices and ForEx, profit increased by approximately JPY 207 billion.

For market conditions, despite the JPY 65 billion decline in profit caused by falling iron ore prices, higher metallurgical prices resulted in a contribution of approximately JPY 45 billion, and increases in oil and gas prices contributed approximately JPY 97 billion. In foreign exchange, there was an increase in profit of approximately JPY 133 billion mainly due to weaker yen. In valuation gain and loss, profit increased by approximately JPY 2 billion.

Please turn to Page 16. Here, we have a comparison of full year forecast and the previous forecast with a summary of the factors involved. Base profit is expected to increase by JPY 122 billion mainly due to trading of LNG and commodity derivatives, good performance of the ship business and the increased dividends from the LNG business. Resources-related costs and volume is expected to reduce profit by approximately JPY 10 billion mainly due to a decrease in volume owing to factors such as tightening of the labor market and bad weather in the Australian coal and iron ore operations, an increase in unit costs arising from lower volumes and increased labor and fuel costs.

Asset recycling is expected to decrease by approximately JPY 7 billion. Commodity prices and ForEx is expected to increase by approximately JPY 13 billion. Following revisions to the outlook for commodity prices, market conditions are expected to drive increases in profit of approximately JPY 8 billion for coal, approximately JPY 6 billion for iron ore and approximately JPY 3 billion for oil and gas. In ForEx, a decrease in profit of approximately JPY 8 billion is expected mainly due to the stronger yen. Valuation gain and loss is expected to decrease by JPY 18 billion mainly due to the impairment of fixed assets in the Brazilian freight railway business.

Please turn to Page 17. Now let's take a look at the balance sheet as of the end of the third quarter of the current fiscal year. Compared to the end of March 2022, net interest-bearing debt increased by approximately JPY 200 billion to JPY 3.5 trillion. Meanwhile, shareholder equity increased by approximately JPY 500 billion to JPY 6.1 trillion. As a result, the net DER fell to 0.57x.

That concludes my presentation.

[Unknown Analyst]

There are 2 questions. Firstly, Page 9, just for clarification, the management allocation, the philosophy is what I would like to ask about. Earlier, the balanced allocation was considered to explain about this weight. That's how I heard. So JPY 1.78 trillion will be evenly divided on third -- 1/3 basis and JPY 100 billion for each. And the JPY 100 billion difference was for repurchase -- share repurchase. And the management allocation for the 3-year period is now over. Is that what I understood correctly? That's just for clarification.

And Page 16 is the second question. The JPY 110 billion, excluding one-time factor, just for 3 months, JPY 110 billion in profits earnings power accumulated. And of that JPY 80 billion is from Cameron. That's how I understood. So what is the background for Cameron? And also this base profit earnings power, the blue part business, including those, can you explain about the background? And also sustainability of this base profit accumulation is something that I'd like to ask about. How long would it last?

[Unknown Executive]

So CFO Shigeta, will answer that question.

[Tetsuya Shigeta, executive]

Well, to answer the second question, Global Controller will supplement my answer after myself. And for the first question, what you understood is correct. But just for -- just to be on the safe side, I would say that shareholder returns, JPY 100 billion was added for share buyback. That has been decided. But in the Medium-term Management Plan or by the end of March, what we can achieve is -- of course, this is up to the brokerage firms and discretionary for them. So there is something that is not -- that can't be told.

But if you look at the proportionate portion, JPY 25 billion to JPY 30 billion will be probably implemented by the end of this fiscal year. And in this -- as you can see in the footnote in start, this is the cash flow -- this is the performance in the cash flow allocation for this fiscal period.

And as for growth investment, what we can expect to be achieved is JPY 280 billion, that it can be completed by the end of this fiscal year. And as for philosophy, so there are things that we wanted to complete by this Medium-term Management Plan, but some carried over to the next period. So that would be probably JPY 400 billion approximately. That's in the pipeline. So that's how we are supposed to understand. And then the remaining portion will be in the short-term liquidity.

And to answer your second question, so from the base profit accumulation from the second quarter earnings forecast, so the forecast at the time of second quarter earnings briefing proved to be conservative a bit. And maybe this has been reflected in this earnings power or profit -- base profit accumulation.

And as for LNG trading, Cameron, the liquefaction or tolling business, there is a constant fee based on the volume that can be obtained. And what is coming out from that will be sold in the market. And that is the trading business. But as the demand-supply situation becomes tight, the production needed to be increased as much as possible, and we focused on that. And so production progressed more than expected. And as a result, the offtake for us increased, and the gross margin has directly resulted in the base profit increase. And also LNG dividend has increased as well.

And the LNG projects that we are responsible for, each of those projects has been performing well, and dividends has increased for each. And that's the second part. So LNG business has been -- Energy business has been revised upward, and that -- those are the 2 factors behind that.

Global Controller will add some comments.

[Masao Kurihara, executive]

So as was explained, that's a major factor, LNG trading and LNG dividend. Those are the 2 major factors. But in addition, commodity trading -- in the commodity trading, the market volatility has been reflected properly in the business opportunity or revenue opportunity, and it has enhanced the profits.

In the ship-related business, the tanker market has been quite strong, which has increased our profits. And in the onetime factor, in the tax return -- refund was done in the food and grain collection business in Brazil. There was a onetime tax refund that was made. And the coffee trading has recovered, and grain trading has been also performing quite well. That's all. Thank you.

[Unknown Executive]

Did that answer your question?

[Unknown Analyst]

Well, there's a follow-up question. So you talked about tolling businesses made more progress than expected, and your profit has increased as a result. And based on that, in the Investor Day, the other day, the LNG trading volume in March 2022, it was close to 10 million tonnes, and the tolling businesses progressed. So the volume has just simply increased from that. That's how I understood.

So what about the durability -- sustainability? Of course, if the tightness of the supply demand of LNG, if it discontinued, then this level of volume, do you think that this can be maintained? So can you give us your thoughts on how sustainable this would be?

[Unknown Executive]

Well, for the near term, if you look at the geopolitical risks that are manifested themselves. LNG selling prices have been normalized for the short term, but they had been maintained at the higher levels. But for example, in Cameron business, this -- the gas -- base gas is a Henry Hub price. And even if you add tolling cost, the Asian prices have also followed the European prices. But the spot prices between Europe and Asia have expanded.

And how long would it last? How sustainable would it be? Well, if the current situation in this year, whether it will be continued for long, that is quite unimaginable. But it is not a profitable situation. But if the geopolitical risks continues that we are facing and the supply chain changes derived from those risks and energy market volatility increase, if those continued, then there will be a frightened needs for global supply-demand adjustment. So that's what we assume.

And then the LNG trading business opportunity for us would be increased. And our strength is that we own LNG ships and ship both in tonnage allocation, and also users' requests can be accommodated. And there are business subsidiaries there. So if you look at the margin itself, whether we can enjoy as much margin as we have enjoyed this year, we're not -- cannot tell. But continued profit opportunities will be there, and we can assume that.

[Unknown Analyst]

I have 2 questions. First question is on LNG once again. The profit is more than what we had expected. In the fourth quarter, I believe derivatives will progress and advance. And as you have been explaining, Henry Hub, the low gas price. And with LNG, there was a difference that was resolved. And spot price is going back to the normal price range. And if that continues, timing-wise, from the start of next fiscal year, I think you need to look at the price difference all. I may be asking the same question once again, but we do not know how the prices will fluctuate. So of the contracts and its transactions are complete. And should we expect it to go back to the previous price range? And what -- when would the timing be? That would be my first question.

And my second question, the output revision was announced this time. And in the fourth quarter, you are looking at about JPY 240 billion. So you are looking at higher prices. I mean energy prices are high. So what would be actual ability will be a question, but there may be some dark spots as well. I don't think there are any ducts ports, except resources. For example, in the U.S., you have a lot of businesses, and I don't think you are seeing it going down. So is that the correct perception?

[Unknown Executive]

Thank you very much for your question. First of all, the timing difference resulting from derivative transactions was resolved in the third quarter completely. And at the end of fourth quarter, there will not be any phasing that will go into the next fiscal year. That would be my additional comment I'd like to make here. When it comes to the fourth quarter, the actual realization, the volume, there may be some seasonal factors, but it is quite large. So the fourth quarter outlook is being included as a profit, and the fourth quarter profit outlook compared to other quarters is quite large when it comes to profit.

And E&P and Mining business and Metals business is volume times market price. That is not how we calculate the profits, but we need to look at demand and supply and do trading on the spot. Therefore, how much of a profitability opportunity they will be and how much they will be when it comes to volatility, and the frequency of profit-taking is going to defer. So it's very difficult to do the calculation, but a stable profitability. If the management requires that, the traders may have to take the risks, and unexpected risks may be put on the traders. So that is something that we want to avoid. So how much we will be able to take the opportunity to turn them into profit is something that we would like to consider so that we can reap the profits.

I'm sorry, I can't explain this well. However, I do believe they -- this will not bring us big losses. However, for the sustainability of the profit that we have shown this quarter, I don't think that we have the same confidence that it will be sustainable. But there may be some contracts that is going to give us profit at a certain time. But that is not something that we have. We have a spot trading, and also increasing production may increase spot trading. And how we can reap the profits in the market is something that we need to consider. So it's very difficult to comment on sustainability in that sense.

And when it comes to the fourth quarter, whether we see any darkness in the outlook, of course, in the trades and also in the prices being very high for raw materials. For it to normalize, I think we are seeing some progress in those areas. However, to maintain the supply chain and looking at it globally by region or by product, there may be supply chain disruptions and there may be some difficulties of maintaining the status. And many customers are having a difficult time. So in the next fiscal year, we would like to continue with initiatives so that it will be included in the profitability base.

In the U.S., for the fourth quarter outlook, automobiles is strong. That is something that we expect to continue. And as I explained earlier, of course, there will be some adjustments when it comes to prices like in Chemicals trading or in the manufacturing businesses compared to the previous quarters, the margins will be suppressed.

So as a whole, we don't see darkness, however -- as a whole, but the margin may be suppressed to a degree in some segments. And what will happen in the long term, of course, we need to contribute to maintaining the supply chain so that we'll be able to utilize the ability of our companies so that we'll be able to turn them into profits in a continuous manner.

[Unknown Analyst]

I have also 2 questions. Firstly, as was asked, Page 9, management allocation. I'd like to ask for more. For the 3 years, JPY 1.78 trillion management allocation budget is there. And earlier, what you explained is the following. In the shareholder returns, JPY 480 billion will be in the allocation, but JPY 100 billion is just for March, and that is included. And gross investment, JPY 280 billion will be included, but the one at the bottom will be in the next fiscal year.

So the shareholder return of JPY 480 billion and JPY 20 billion in March probably and JPY 280 billion, if you add all these up and the management allocation of JPY 1.78 trillion, only JPY 0.78 trillion will be allocated for this fiscal year and the remaining JPY 1 trillion will be in the short-term liquidity for the time being. So what does this for the time being mean? That's my first question.

And second question, the iron ore, the short-term increase or near-term increase, how do you see this increase in iron ore for the near term?

[Unknown Executive]

Well, thank you very much for your questions. First, how you should look at these numbers, I -- you understand this exact and correct. So for the time being means that -- so the -- there is uncertainty in recent months and for the near term. So we have to have more liquidity at hand for the short term. And once that situation is resolved and alleviated, then the funds can be allocated for growth investment or shareholder returns. So that's how we are planning to do. And that's the meaning behind the term for the time being or once.

For example, net DER is 0.57x, which is quite low. We have reduced this down to this small number. So this can be further reduced or leverage can be increased, but that's not what we're doing. But if you look at the current situation, and this is the decision that we've made. And once the situation is gone, then we will consider how the fund can be used. That's the idea behind this.

As for the shareholder returns, JPY 25 billion or JPY 30 billion is this incorporated in this Medium-term Management Plan. And the goal, the core operating cash flow, 33% of that can be achieved, but the balance will be carried over as you correctly understood. And as for growth investment, we wanted to complete all the gross investment by the end of this March. But about JPY 400 billion will be carried over. That's how I explained.

And as for iron ore prices, in China, there's COVID-19 -- or Zero COVID-19 policy was completed. And this was also the reason partially. But if you look at the supply-demand balance in the third quarter, if you look at the movements in the market that -- each of the producers, there is cost incurred. And given all these, to some extent, in terms of prices, there might be some downward trend. That's how we are looking at the market. And so going forward, the Zero COVID-19 -- if China sticks with Zero COVID-19, while the COVID -- Zero COVID-19 policy was maintained, the prices did not decline that much. But going forward, once the Chinese economy recovers, then there's a certain level of increase in the market prices that can be expected.

But on the other hand, in the next medium-term plan assumptions to be incorporated will be discussed going forward. And depending on the timing of the disclosure, we would like to decide which price levels to be incorporated.

[Unknown Analyst]

For the first question, management allocation, I have a follow-up question. In this Medium-term Management Plan, the 33% of the core operating cash flow was target. And actually, the calculation shows that it was 34%. But management allocation, there is extra of JPY 1 trillion. That will be in the liquidity for the time being, and then this will be allocated to share buyback or shareholder return or growth investment.

And then in the next Medium-term Management Plan, the management -- the shareholder return will be 30 -- more than 33%. But what about the one that is carried over from this fiscal year to the next fiscal year? How do you look at that? And how do you treat that?

[Unknown Executive]

Well, in this Medium-term Management Plan and the next Medium-term Management Plan, there is a draw -- a line drawn. We would like to separate the -- between these 2. So in the next Medium-term Management Plan, is this fund from the previous term or from this term? I think that question or discussion could be quite unclear. So we just draw a line for this fiscal -- for this Medium-term Management Plan, and then we'll start afresh. And 33% for this Medium-term Management Plan, whether it was sufficient or not, that's -- or in the next Medium-term Management Plan how we should treat that 33% based -- in addition to that topic of discussion, the financial position and liquidity at hand will be looked at. And what will be the extra part that can be allocated to shareholder return? We need to start our discussion, assuming that there should be some that can be allocated for shareholder return.

Well, but after the 3-year period was over, the free cash flow is JPY 1 trillion. So net debt will be reduced. But liquidity will be increased because of these profits every year. So ROE, if we are to maintain ROE at a certain level, then in the next Medium-term Management Plan, you have to have a certain level of shareholder return.

[Unknown Analyst]

ROE -- in order to increase ROE, are you having any discussions in that direction to increase ROE?

[Unknown Executive]

Well, the perspective that you just said with us is something that we are looking at internally in depth. And we have been repeating our discussions. And another perspective is that we have to have our satisfaction for the growth investment level that can make sense to you. And also the level and value, the scale of the growth investment that can make sense and which should be prioritized is something that we are discussing internally. And in terms of capital efficiency, ROE is one important index or indicator. So we shouldn't just focus on any single metrics in our discussion.

[Unknown Analyst]

I also want to ask about management allocation about the contents of investments. From this fiscal year, you made explanation. You talked about the bolt on of the existing investments and also investments in adjacent businesses. So at the start of the MTMP period, as a strategic focus, you talked about the 3 areas when it comes to management allocation. And when it comes to allocation, when it comes to growth investments, expanding the existing business will be the core.

So I think the tone of your explanation has changed regarding these investments. I believe there is an impact on the investments going forward. In the management allocation, the explanation given around investments, so retail collected for investments, I believe, are covered by the explanation. And the weighting may change going forward. So the stance of your investments may change and may have changed. So can you talk about your investment policy as a whole, please?

And upward revision was announced and progress rate was also mentioned. And when it comes to cash flow and also for net profit, I think adjustments or revisions were made on a rounded manner. So if you reflect the progress rate, what will be the gap between the announcements that you have made so far? That is my second question.

[Unknown Executive]

Shigeta will answer the first question. And the second question will be answered by Kurihara.

[Tetsuya Shigeta, executive]

As for your first question about the strategic focuses, the Energy Solutions or Healthcare and Nutrition and market Asia, these are our focuses that we have announced. And during this MTMP, we have maintained that focus. How they are tied to the next MTMP, whether they will be sustained, that is still under discussion. There may be some changes, but they are still our focus when it comes to strategic investment.

And as for growth investments, each of the projects, as we explained them from the angle of strategic focus, instead of explaining from that angle, we want to talk about success probability or the pattern of winning. By showing you the rationale, we talked about bolt-on investments and adjacent businesses. And from the existing partnership, we have deepened our trusting relationships so that we'll be able to rely more on our partners. And from that perspective, the expectations of such investment was explained starting this fiscal year.

So it is not as if the angle -- the perspective on investment has changed. But there are projects that are selected over the period from the point of profitability and growth for the future, et cetera. So that is how we have made the sophistication of investments. And maybe we were off balance when we provided the explanation, but we believe that the core focus has not changed.

[Masao Kurihara, executive]

I'd like to answer your second question. If you look at Page 4 of the presentation material, please. So when we look at the progress rate for Mineral & Metal Resources, the progress for the profit is 89%. For the fourth quarter, of course, we have revised the annual profit forecast. But SMC sales, there was JPY 30 billion on sales. So that had made a big contribution to the progress rate. And as for iron ore and metallurgical coal, we are going to see deceleration. So that is why we are looking at this figure. And as for Energy, we have given an explanation. So I will skip. Machinery & Infrastructure, 75% progress. So it is progressing steadily. So this has been maintained.

Next, Chemicals, 78% progress have been made. So it is progressing well as well. As for Iron & Steel Products, electromagnetic steel plates for EV and transformers, the sales decline is included and volume decline is also included. So the progress rate is quite high. However, the forecast is maintained.

As for Lifestyle, onetime profit up to the third quarter came from tax refund I mentioned earlier. That is included. And grain trading was very steady. However, it is normalizing now. And when it comes to fashion and retail distribution here in Japan, there will be a decline that is forecasted.

[Unknown Analyst]

I have one question. Page 15 and Page 16, resource cost. And this is reason for profit decrease, and this is a reason for the downward revision. So what will be the resource cost trend? Are you taking the royalty into account? And also, what has been incorporated in this price?

[Unknown Executive]

Well, thank you very much. So it's a general answer that I can give you. The volume has declined, and the cost per unit has increased. So cost and volume could become the factors for profit decline.

In terms of geography, in Europe, for example, the labor shortage has been observed. So there's an influence or impact from the inflation. Fuels and labor cost has increased. And whether that would continue in the next fiscal year is a question. And we talked about iron ore prices and future market prices. But as a producer and operator, we -- they would like to lead this to sales as a result. Net margin or in terms of impacts on the business performance, we like to keep close eye on that. That was a simple answer that I was able to give. Thank you.

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