Mitsubishi Corp

TSE:8058

Earnings Call Transcript 2019-Q2

[Kazuyuki Masu, executive]

I am Kazuyuki Masu, CEO (sic) [ CFO ] of Mitsubishi Corporation. So I'd like to share with you the operating results of the second quarter of 2018 as well as the revised forecast for the full year guideline and dividends.

So please refer to the handout results for the 6 months ended September 2018, Page 2. I would like to highlight these 3 main points. First of all, the consolidated net income for the second quarter of 2018 has increased by JPY 55.3 billion to JPY 309.3 billion. And also, the second point, the full year guidance, which was announced back in May, was revised upwards from JPY 600 billion to a record high of JPY 640 billion.

Finally, in terms of the full year guidance for dividend, which was announced back in May, it was revised upwards from JPY 115 to JPY 125, increased by JPY 10. So in terms of the consolidated net income for the second quarter was JPY 309.3 billion, increased by JPY 55.3 billion. So this is a record-high number for the second quarter cumulative number.

Also, if you can move to the bottom-left box. In terms of the business-related sector, net income was increased by JPY 3.8 billion to JPY 171.8 billion year-on-year. As we have announced on October 31, our equity-based affiliate, Chiyoda Corporation, had revised down the forecast growing -- because of the growing cost for construction. And the related loss was approximately JPY 55 billion. However, this was offset by the strong performance of LNG and Asia automotive business.

Now moving on to market-related sector. Because of the sales price increase of the Australian coal business, net income increased by JPY 39.5 billion to JPY 124.8 billion.

Going to the full year forecast, going to the lower right-hand side box. As I said before, there has been a major one-off losses, but whether it be the business-related sectors or the market-related sectors, our base income has been very steady from the initial forecast we have, JPY 600 billion. This would be an increase of JPY 40 billion to JPY 640 billion. This is a record-high level. And with the upward revision of the operating results forecast, our forecast for the full year cash dividends will be raised to JPY 125 per share. This again will be a record-high level.

Next, I will review the results by segment. I would like to give you 3 -- the major points. Please look at Page 3 of the presentation material. First, the Global Environmental & Infrastructure Business Group recorded a segment net loss of JPY 36.1 billion, a JPY 50.1 billion reversal from a segment net income of JPY 14 billion because this would be attributable to one-off losses related to Chiyoda Corporation.

In the Energy Business Group, segment net income stood at JPY 51.7 billion, up JPY 42.7 billion from JPY 9 billion. This was mainly due to absence of losses attributable to the reshuffling of E&P assets in North America in the previous fiscal year as well as increases in the equity earnings in affiliates and cash dividends paid to the owners of the parent, both were in the LNG-related business.

In the Metals Group, segment net income totaled JPY 136.5 billion, up JPY 29.8 billion to (sic) [ from ] JPY 106.7 billion. This is mainly due to the rise in earnings and equity in affiliates reflecting such factors as higher market prices in the Australian coal business.

In the Machinery Group, segment net income was JPY 64.3 billion, up JPY 25 billion from JPY 39.3 billion. This was mainly due to the recording of one-off gains from the tax effect accounting in the ship business, growth in equity earnings in affiliates in Asia automotive business and posting of equity earnings in affiliates resulting from the inclusion of Mitsubishi Motors Corporation into the scope of the equity method affiliates.

So in terms of the revised forecast for full year segment results is on Page 5. Please look at it later. Next, please turn to the cash flows on Page 4.

Please have a look at the graph on the left, which indicates the cash flow for the first 2 quarters of fiscal 2018. The operating cash flow in the green bar was positive JPY 286.5 billion. The investment cash flow in orange was a spending of JPY 155 billion. And as a result, the free cash flow was positive JPY 131.5 billion.

Internally, we manage the business with underlying operating cash flow, which is operating cash flow adjusted for impact of the working capital. Indicated by the gray bar, it was JPY 505.9 billion. So on a year-on-year basis, we have been able to steadily increase our cash generation capability.

The investment cash flow is shown with the box on the right. While gaining proceeds from the sales of thermal coal operation in Australia and noncurrent asset for the aircraft leasing business, we had spending in the acquisition of the interest for the Quellaveco Copper Mine, the shale gas business, the Australian coal business and the convenience store business. So net-net, the investment was spending of JPY 155 billion. So the results of that are shown by the blue box on the right, the sum of the underlying operating cash flow and the investment cash flow was positive JPY 350.9 billion.

And in summary, I'm pleased to announce that we were able to offset the impact of one-off losses with the earnings power in the business-related sector. Furthermore, our performance in the market-related sector was firm, too. These factors, I believe, contributed to a record-high consolidated net income for the first 6 months. Looking ahead, we will strive to bring the final year of the Midterm Corporate Strategy 2018 to a successful finish and secure further growth in the fiscal 2019 and beyond. To this end, we will endeavor to achieve the best results we can in the remaining 6 months.

Thank you very much.

[Hiroshi Takehisa, executive]

Thank you very much, Mr. Masu. So now Mr. Kakiuchi, our CFO (sic) [ CEO ], President, will explain about the Midterm Corporate Strategy 2021. So Mr. Kakiuchi, please.

[Takehiko Kakiuchi, executive]

Thank you. I would now like to share with you our ideas relative to Midterm Corporate Strategy 2021. Already, we have the materials and also my message has been included in the materials. So I would just like to share with you some of the points, the highlights, and I would like to entertain your questions later.

So for the devising of the midterm corporate strategy, I'd like to share with you our outlook on the external environment. So the global economy as a whole continues to be brisk. That is our assumption. And needless to say, that is helped by the digital technology advancement. We are seeing this wave of digitization. AI, IoT has been contributing and also in the automobile, power and telecom and various payments, e-commerce, retail and also health care. So everywhere, we are seeing this trend prevalent.

So we are still midway through in this journey. So this is indeed a certain level of industrial revolution that we are going through. So in terms of the economic fundamentals, we believe it continues to be strong. And that is our basic assumption for the strategy.

Now in terms of information. As you may be aware, as has been published in media and so forth, especially in Europe, it is really important to protect the information and the information we own. And that will continue to be under discussion. So this may be perceived as a negative factor amidst this trend.

But however, these technical issues, we'll be able to -- we can overcome with innovation. So it seems somewhat of an against wind, but we should be able to overcome this as a whole. Whatever the cost is, we need to overcome this. And I believe there is definitely fundamentals strong enough to overcome it. So just because the way we protect and manage the information become more stringent, that doesn't necessarily mean that it will pose a negative impact on the fundamentals of the economy.

Now what has been a keen interest on this, the trade friction. And I would not go into details here, but I believe this will not actually require an intrinsic discussion. So in terms of the trade balance and the rectifying of the trade balance through the use of tariffs, you may have -- this is a really dynamic initiative, but it is as if something flows from higher ground to the lower ground. I think, in the end, the supply chain will be shifted. And in the end, we should be able to absorb this as a system in the end. And whatever is necessary, it will be shifted elsewhere.

So in reality, we have conducted various simulations and calculations. But in terms of the impact of the global economy, perhaps it will be around 0.1% or 0.2% at the most. That is the impact that we simulate. Therefore, the current trade frictions, whether they would pose downside pressure on the economy, that is not our expectation. So for the next 3 years or the next 4 years or so, which is the scope of our midterm strategy, so we do not expect to see a major downward trend on the global economy.

Having said that, the essence of this issue is, needless to say, is really the political and also economic framework difference between the United States and China or, in other words, it is leading to geopolitical competition or geopolitical conflict. So the question is, how are we going to see this dissolved or how are we going to see this realized? We need to watch this carefully. So this geopolitical competition or conflict, whether it would be fully realized or not, we believe it will take some time. So maybe 10 years or it could be 15 years ahead of us, it's hard to say.

But China, of course, about 2050 or so, they still have leeway for another 50 years or so. And chances are, there may be some adjustment even before 2025 -- 2050 in China. So of course, this is not the occasion to estimate on the timing of that. But needless -- whichever the case, we need to watch the next couple of years. So in order for us to make decisions, we need to watch the situation carefully. Of course, this situation will be different if we were to see some incidental conflicts as a worst-case scenario, but those would need to be incorporated in the way we proceed forward to manage our strategy. But unlike how the media has been raising concern, we do not see it as a dramatic issue, we're not.

Now in terms of the business portfolio strategy is 2 numbers. There are a couple of points I'd like to highlight. First, again, needless to say, this business portfolio has been under discussion internally within the company. So within these 12 sectors, how we perceive this and where exactly are we going to emphasize, this sort of discussion has been carried out. Whichever the case, we need to take our own risk. So we will continue to structure and build our portfolio. And we have actually accumulated our expertise and know-how, and we will continue to hold on to those into the future.

Now for the next 3 years in the midterm strategy, so the operating cash flow worth JPY 3 trillion is expected. So the question is, how are we going to manage this operating cash flow? That is really the important point of this strategy. Now on the left-hand side -- or top left, rather, we have -- so we have this inverted. The 6 sectors that are not within the yellow box, so it's outside of the inverted L-shape box. So this is our core business that has been generating majority of our profit.

Now the -- where it's circled within the yellow box, so for instance, so we have the downstream operation in the living sector. We have the retail sector located on the bottom left. So we do have a portfolio in the downstream operation. But going forward, we need to focus even further to develop the downstream operation. And likewise with mineral resource and motor vehicles, again, they need to actually move their way towards the downstream operation. Likewise with natural gas, LNG, power generation, they would also need to shift towards to B2C business such as distributed power generation.

Now the vertical on the right-hand side, we have the communications, data assets and e-commerce and so forth, we haven't really touched upon this sector at all. So the question is, how are we going to approach these sectors? That is the kind of decision we need to make in the next 3 years.

So this is going to Page 4. I would like you to turn to Page 4. It's about the value-added cyclical growth model, and I have mentioned this multiple times with just one word. So we'll have to cultivate the potential growth sources and make it into growth drivers and then make it into core businesses. So Mitsubishi Corporation has been doing this before, and this is a recap of what we had been doing.

On top of that, at Mitsubishi Corp., if there are businesses that we cannot enhance the business value even more however how much effort we put into it, and we decide that we'll not be able to add value to this business or with this business domain, we won't be able to give them support. We will not be able to enhance the corporate value. In those cases, they will be put out from our business portfolio. They will be diverted from my business portfolio. We have to be aware of this. So we have to be very aware of this cycle. And then we confirm within our company that we should grow through the cycle.

On the other hand, in terms of the M&A projects, basically, there's a lot of cases that we buy with a premium and in terms of the risk of paying a goodwill, including how we're going to trade it off. So if we consider that we can expect growth even with us being involved, including the older projects, we would like to consider divesting them. And then in those cases, we can get capital gain. So this kind of value-added cyclical growth model for the investors, I think this is a very rational methodology that we're taking.

So going to Page 5, this is about the reorganization. So there has been a change in the world. Specifically, the borders between industries have become very vague. So it used to be the case that for a very long period of time, we had this group organization. But these 2 or 3 or 4 groups, this fusion of the groups is actually happening in the real economy. But in our case, we have this kind of traditional classic groups within our company, meaning that the walls of the group is becoming thicker and thicker. So this is not a reflection of the actual economy and the organization -- and it's not in line with our organization. So we have decided that we will reorganize all of the group companies. There has been 7 businesses. We're going to reorganize them into 10 business groups.

So the societal -- the economy has been changed, it has been fused and want to be in line with that change. So I think it basically meant maybe the business - so we want to change it for the growth for the company, and that must have been the kind of a priority. And I think -- well, that has been the basic initiative. So 6 out of the 10 groups, actually, is very clear in this policy. There are 6 of these business groups. And we -- this is in one group: that will be natural gas, mineral resources, automotive and mobility, food industry, consumer industry and power solutions, these 6.

And the remaining 4, this will be seeking for synergy, a little bit of synergy or maybe looking at the -- redefining the business within the industry or this will be whether we'll be able to get a growth potential for the next generation.

And for the businesses that we cannot seek any group, we will have to reorganize or restructure. So they will have to come face to face with very difficult challenges. So in that sense, as I talked about the 6 groups and these 4 groups that the business are different. But I have decided that for each of the groups -- and this is going to Page 6, each of the groups will be assigned new missions. So when they're wondering what to do, I hope the company members would be -- group members would be able to revisit these missions.

And going to Page 7. And in terms of the business -- this is Page 7. This is about the new business concepts and digital strategies. And we will have a Chief Digital Officer, CDO. And below him, we will have 150 people that is doing the Digital Strategy Department. We would like to reorganize that. And each of the group will have a digital strategy person in charge.

So in our company, so the executive under the President's office, we have the Investment Committee and have HRD, Human Resources Development Committee and equivalent to this. So this committee will have the same importance of these committees. So this will be the Digital Strategy Committee, and the President will directly be in charge of this. So the Business Creation Office will be set up. This is basically trying to find out the growth potentials. And each of the groups will have a Business Creation Office in charge.

And on Page 8 is the new HR management system. And today, I will not be able to unveil the details. And it will be difficult for us to unveil the details today, but we have organized our thoughts in the new HR management system so I will be able to entertain your questions. Also, we'd like to enhance the speed of developing talent for management professionals through various experiences. And secondly, we want to focus on meritocracy and optimal talent appointment. And thirdly, we want to leverage on the management talent for the overall group in the company.

So based on these pillars, we have been working on this reform for the past 3 years. And for the first time in 20 years, this is going to be a major reform that we will be implementing. And it will take a few years for us to actually enjoy the outcome of this, but we will endeavor with this reform. So from the age of 30 years old, this system will enable young people to be appointed to the management professional roles. And with that, the compensation can be increased by 50% or even be doubled. So there will be a new compensation system as well.

And last but not least, the important thing is for the supervisor, who will be evaluating the employees, to see as a highest critical mission to follow up with the performance of the employees so that the employees will be supported by the company and the supervisor for career and talent development, because the growth of the employees' skills is going to be an important framework for the company. And this is because the environment is rapidly changing, and we will have to have the employees accommodate to those changes and grow their skill sets. And the company must provide support for the employees to be able to facilitate their career development. So we have overhauled the HR management system to achieve that goal.

Thank you very much for your attention. This will be the conclusion of our midterm strategy plan as well.