Mitsui & Co Ltd

TSE:8031

Earnings Call Analysis

Company Posts Lower Profits Amid Market Challenges

Over the first 9 months, the company faced a JPY 192.1 billion decrease in cash flow from operating activities (COCF) to JPY 769.1 billion, particularly due to lower commodity prices and reduced dividends from associated firms. Net profit fell by JPY 114.4 billion to JPY 726.4 billion. Profit dropped significantly in Mineral & Metal Resources due to decreased metallurgical coal prices and arising from the sale of SMC. Declines were also seen in Energy, due to lower oil and gas prices and Arctic LNG provisions, although some sectors like Machinery & Infrastructure saw profit increases from asset sales. The company revised its full-year profit forecast accordingly, with base profit expected to increase by JPY 28 billion, albeit with downward revisions in other areas, anticipating net gains elsewhere. Shareholder equity rose to JPY 7.1 trillion, with a modest increase in net interest-bearing debt to JPY 3.3 trillion, resulting in a stable net DER of 0.47x.

Executive Summary of the Financial Performance

The company took strides in enhancing its business portfolio and securing earnings opportunities, leading to a cooperative cash flow (COCF) of JPY 769.1 billion and a profit of JPY 726.4 billion over the first 9 months. This performance exceeded previous forecasts. Due to higher than anticipated results, especially from Mineral & Metal Resources, Energy, and Mobility businesses, the full year forecast has been revised up. The new forecast sets COCF at JPY 1 trillion, a JPY 40 billion increase, and profit at JPY 950 billion, a JPY 10 billion increase.

Segment Performance Insights

While the overall results were robust, segment-by-segment performance varied. The Mineral & Metal Resources segment revised its COCF projection upwards by JPY 50 billion due to higher iron ore prices and increased dividends from Vale. The Energy segment's forecast increased by JPY 10 billion, primarily due to profitable LNG trading operations and one-off profits. The Machinery & Infrastructure segment saw an upward revision of JPY 20 billion, attributed to higher dividends from associated companies and deferred tax payments. The revised profit forecast in the Mineral & Metal Resources and Energy segments also reflected the higher iron ore prices and LNG trading gains. However, there were impairments in the power generation and railway businesses, mitigated by robust performance in automotive, industrial machinery, and ships.

Cash Flow Allocation and Executive Structural Change

During the first 9 months, cash inflow reached JPY 1.211 trillion, with JPY 769 billion from COCF and JPY 442 billion from asset recycling. The company has executed strategic asset sales, including stakes in the power generation business in Australia, a high-functionality supplement and testing kit business, and an oil field in the U.S. Cash outflow totaled JPY 1.003 trillion, combining investments, loans, and shareholder returns. In light of evolving business challenges, the company has refined its executive structure. This includes affirming the Executive Committee's role, reducing the number of directors to encourage more effective management, and introducing a General Counsel position, emphasizing legal oversight in management from April 2024.

Detailed Financial Performance and Outlook

COCF saw a year-on-year decrease of JPY 192.1 billion, with the Energy sector experiencing the largest drop due to reduced oil and gas prices and operational maintenance. The profit for the period, however, fell by JPY 114.4 billion, with Mineral & Metal Resources showing a significant decline after the sale of a metallurgical coal business and lower commodity prices. The Machinery & Infrastructure sector exhibited a contrasting increase in profit, propelled by successful asset sales and strong business returns in various subsectors like ships and industrial machinery. The forecast for the full year anticipates an increase in base profit due to improved performance in automotive and LNG trading and higher iron ore prices, despite a projected profit decrease from deferred asset sales and anticipated impairments.

Earnings Call Transcript 2024-Q3

[Tetsuya Shigeta, executive]

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

I will provide a summary of operating results for the first 9 months. During the first 9 months, we were able to take advantage of earnings opportunities by improving the quality of our business portfolio, which globally spans a wide range of industries. As a result, cooperating cash flow or COCF was JPY 769.1 billion, and profit was JPY 726.4 billion. Generating earnings outpacing the previous forecast announced at the first half financial results, which were revised up from the forecast announced at the start of the fiscal year. In light of the strong progress we have revised up our full year forecast again. Compared to the previous forecast, we have revised up our forecast for COCF that forms the basis for the shareholder returns by JPY 40 billion to JPY 1 trillion.

Furthermore, although the timing of a large-scale asset sale is expected to be shifted to next fiscal year, we have revised up the forecast for profit by JPY 10 billion to JPY 950 billion due to the good performance of the Mineral & Metal Resources, Energy and Mobility businesses. I will now explain our progress against the previous forecast. COCF progressed at a high rate due to the upside of the iron ore prices in the Mineral & Metal Resources segment and an increase in dividends from associated companies in the Machinery & Infrastructure segment.

Furthermore, in the Energy segment, our assessment is that progress is now steady due to LNG-related business contributing to earnings in the second half. Meanwhile, segments impacted by demand decrease, lower commodity prices and other factors associated with the slowing of the global economy had a relatively slower rate of progress against the previous forecast. We have revised up our full year forecast for COCF in FY March 2024 to JPY 1 trillion. In the Mineral & Metal Resources segment, we made an upward revision of JPY 50 billion, mainly due to the rise in iron ore prices and an increase in dividend income from Vale. In the Energy segment, we made an upward revision of JPY 10 billion, mainly due to LNG trading and onetime profit.

In the Machinery & Infrastructure segment, we made an upward revision of JPY 20 billion, mainly due to an increase in dividend income from associated companies and a decrease in tax payments due to an anticipated shift in timing for the sale of the Paiton Power Generation business to next fiscal year. We have also revised up our full year profit forecast to JPY 950 billion.

In the Mineral & Metal Resources segment, we made an upward revision of JPY 35 billion, mainly due to the rise in the iron ore prices and an increase in dividend income from Vale. In the Energy segment, we made an upward revision of JPY 20 billion, mainly due to LNG trading and onetime profit. In the Machinery & Infrastructure segment, we anticipate the sale of the Paiton Power Generation business being shifted to next fiscal year, and we recorded impairment losses in the power generation and railway businesses. However, automotive, industrial and construction machinery and the ships businesses drove performance linking the downward revision to JPY 15 billion.

In this section, I will discuss cash flow allocation for the first 9 months. Cash-in for the period was JPY 1.211 trillion, comprising COCF of JPY 769 billion, and asset recycling of JPY 442 billion. There were numerous asset sales made in Q3, including the sale of shares and International Power Australia Holdings, which operates a power generation business and the power and gas retail business in Australia, the sale of shares in Throne HealthTech, which operates a high-functionality supplement and testing kit business and the sale of our interest in the U.S. Kaikias oil field.

Cash out was JPY 1.003 trillion, comprising investments and loans of JPY 769 billion and returns to shareholders of JPY 234 billion. We will continue to execute carefully selected growth investments in line with the key strategic initiatives specified in the medium-term management plan, or MTMP and the start of contribution to profit from new projects is progressing as planned. In Q3, partial operation of the large-scale renewable energy project in India started, and Nutrinova, which manufactures and sells functional food ingredients also started to contribute to profit. Furthermore, we acquired 60% of shares in Komatsu Mining Corporation Peru which sells and services machinery for open pit and underground mining, and this has started contributing to earnings. This year, it will merge with KMMP, which we have invested in since 1996, and will provide an even wider range of products and services to customers to support the stable operation of mining machinery and contribute to global copper production.

Investment decisions and pipeline expansion have progressed smoothly in the past 4 months, and I will introduce a few major projects. In Industrial Business Solutions, in January, we invested in Quantinuum, which is a leading global quantum computing company and signed a distributorship agreement. We have already started studying specific joint projects. As a technology with the potential to have a significant impact on the wide range of industrial sectors, we will consider its utilization in each business in the context of digital transformation and accelerate value offerings to customers and society.

Furthermore, in Wellness Ecosystem Creation, in November, we decided to invest in Wadi Poultry, which operates an integrated business in Egypt, encompassing broiler production and processing and processed food manufacturing sales and the procurement of feed grain. Demand for chicken is expected to continuously rise with increasing population and economic growth. It is also positioned as our focus area because it has the highest feed efficiency of all animal proteins, has a short breeding period and can be provided at a relatively low cost.

We will continue to expand our pipeline and execute carefully selected growth investments in line with the key strategic initiatives established in the MTMP. I will explain about our shareholder returns policy. There are no changes to our previous explanation of the shareholder returns policy. We will maintain shareholder returns at around 37% of the 3-year cumulative total of COCF and a minimum full year dividend of JPY 170 for the duration of the MTMP.

Furthermore, the repurchases of up to JPY 50 billion of shares announced last October was completed on January 31, and all shares acquired will be canceled on February 15. We'll continue to consider the enhancement of shareholder returns offering both stability and flexibility with a view to increasing our ROE.

Now I will explain the impact of Arctic LNG 2 project on our financial results. Last November, the operating company of Arctic LNG 2 project was sanctioned by the U.S. After having reassessed the investments, loans and guarantee obligations, taking into consideration this sanction, we have booked an additional provision of JPY 13.6 billion. This includes JPY 12.3 billion that impacts the income statement.

As shown in the table on the Page 12, balance after deducting the provision includes Mitsui's guarantees of specific J-Arc liabilities undertaken for 100% share of J-Arc in excess of Mitsui's equity share, and is the gross amount before deducting potential insurance claims. We're taking appropriate measures to protect our interest, observing the rights and obligations of Mitsui under relevant agreements. We'll comply with laws and regulations, including sanctions imposed by the international community and will take appropriate measures in cooperation with stakeholders, including the Japanese government.

As recently announced, Mitsui has revised the positioning of the BOD and the Executive Committee. Regarding the Board of Directors, following the Ordinary General Meeting of Shareholders scheduled in June 2024, the number of directors will be reduced from 15 to 12. The aim of this change is to establish a personnel composition that will enable the Board to engage in deeper and more effective deliberations, while the Board's primary focus will remain on management oversight by the directors. The number of External Directors will remain unchanged at 6. This will raise the percentage of External Directors to 50%.

We have also reviewed our executive structure with the purpose of allowing a more agile response to an increasingly complex business environment and surrounding risks and to ensure the steady realization of our management strategies. We have reaffirmed the role of the Executive Committee as a management leadership team. In addition, we will newly establish the position of General Counsel, who will serve as a Member of the Executive Committee from April 2024 and execute management from a legal perspective.

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

[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 9 months. First, I will explain the main changes in COCF by segment compared to the previous period. COCF for the period was JPY 769.1 billion, a year-on-year decrease of JPY 192.1 billion. In Mineral & Metal Resources, COCF decreased by JPY 44.2 billion to JPY 311.3 billion, mainly due to the decline in metallurgical coal prices and the fall in dividend income from associated companies.

In Energy, although we recorded a gain in LNG trading and a gain on asset recycling, COCF decreased by JPY 107.8 billion to JPY 168.1 billion, mainly due to a decrease in oil and gas prices as well as the impact of oil production facility maintenance a decrease in dividends from associated companies and recording of provisions related to Artic LNG 2.

In Machinery & Infrastructure, COCF decreased by JPY 11.6 billion to JPY 147.1 billion, mainly due to lower dividend income from associated companies and an increase in taxes associated with asset recycling. In Chemicals, COCF decreased by JPY 26.6 billion to JPY 45.9 billion, mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives and lower dividend income from associated companies.

In Iron & Steel Products, COCF decreased by JPY 11.6 billion to JPY 3.8 billion, mainly due to lower dividend income from associated companies. In Lifestyle, COCF increased by JPY 18.4 billion to JPY 49.6 billion, mainly due to higher dividend income from associated companies and the swing-back of the loss in coffee trading recorded in the same period of the previous fiscal year.

In Innovation & Corporate Development, COCF decreased by JPY 9.2 billion to JPY 25.2 billion, mainly due to a decline in profit from commodity derivatives trading compared to the strong performance recorded in the same period of the previous fiscal year. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segments totaled JPY 18.1 billion.

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 decreased by JPY 114.4 billion to JPY 726.4 billion. In Mineral & Metal Resources, profit decreased by JPY 113.3 billion to JPY 242.1 billion, due to a decrease in profit contribution following the sale of SMC, a metallurgical coal business in Australia in the third quarter of the previous fiscal year and the fall in prices of metallurgical coal.

In Energy, although we recorded a gain in LNG trading and a gain on an asset sale, profit decreased by JPY 95 billion to JPY 95.8 billion, mainly due to a decrease in oil and gas prices as well as the impact of oil production facility maintenance and a recording of provisions related to Arctic LNG 2. In Machinery & Infrastructure, although there was an impairment loss from Mainstream, profit increased by JPY 79.1 billion to JPY 210.2 billion, mainly due to the gain on sale of our European electric locomotive leasing business and multiple IPP businesses and good performance of multiple businesses such as VLI, ships and industrial and construction machinery.

In Chemicals, although a gain on asset sales was recorded, profit decreased by JPY 17.6 billion to JPY 37.1 billion, mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives. In Iron & Steel Products, profits decreased by JPY 12 billion to JPY 7.5 billion, mainly due to impairment loss at an associated company and a lower demand. In Lifestyle, also there was a swing-back of the valuation gain on R-Pharm put options recorded in the same period of the previous fiscal year. Profit increased by JPY 43.2 billion to JPY 85.5 billion, mainly due to valuation gain on the fair value of Aim Services and good performance of the processed oil food business in North America.

In Innovation & Corporate Development, also a valuation gain on the fair values for Altius Link was recorded, profits decreased by JPY 12.7 billion to JPY 37 billion, mainly due to a year-on-year decrease in profit from asset sales and the decline in profit from commodity derivatives trading compared to the strong performance recorded in the same period of the previous fiscal year. Other factors such as expenses, interest, taxes, et cetera, which are not allocated to business segments totaled JPY 11.2 billion.

This page shows the main factors influencing year-on-year changes in profit. Base profit decreased by approximately JPY 53 billion. Although there were performance improvements mainly in the U.S. Automotive business and LNG 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 costs/volume resulted in a decrease of approximately JPY 40 billion, mainly due to a decrease in production volume resulting from maintenance of a production facility in Energy upstream businesses an increases in fuel and labor costs in the Mineral & Metal Resources businesses. Asset recycling resulted in an increase of approximately JPY 52 billion, mainly due to gains on the sale of MRCE, which is a European electric locomotive leasing business and the U.S. Kaikias oil field and real estate. Commodity prices and ForEx resulted in a decrease of approximately JPY 68 billion. For commodity prices, profit decreased by approximately JPY 78 billion due to lower oil and gas prices and JPY 25 billion due to a fall in metallurgical coal prices, which resulted in a decrease of approximately JPY 103 billion in total.

For ForEx, profit increased by JPY 35 billion mainly due to weaker yen. Finally, for valuation gain/loss and special factors, profit decreased by approximately JPY 5 billion, mainly due to the impairment of Mainstream and additional provision for Arctic LNG 2.

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 28 billion, although we made a downward revision relating to Chemicals due to the influence of a slowing of the economy, the automotive, industrial and construction machinery and ships businesses as well as the LNG trading has been conservatively estimated in the previous forecast and the additional dividend income from Vale in Q3 should lead to higher profits.

For resources costs/volume, we expect profit to decrease by about JPY 6 billion, mainly due to the decrease in production volume in iron ore operations in Australia. In asset recycling, although there was a gain on the sale of our interest in the U.S. Kaikias oil field profit is expected to decrease by JPY 19 billion, mainly due to the shift in timing of sales for the Paiton Power Generation business. Commodity prices, ForEx is expected to generate a profit increase of about JPY 21 billion, mainly due to an increase in iron ore prices. Finally, for valuation gain/loss and special factors mainly owing to impairments in the first 9 months, we expect a decrease of about JPY 14 billion.

Now let's take a look at the balance sheet as of the end of the first 9 months of current fiscal year. Compared to the end of March 2023, net interest-bearing debt increased by about JPY 0.1 trillion to JPY 3.3 trillion. Meanwhile, shareholder equity increased by about JPY 0.7 trillion to JPY 7.1 trillion. As a result, net DER was 0.47x.

That concludes my presentation.

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