Mitsui & Co., Ltd.
Q1 2022 Earnings Call Transcript

Published: 7 Aug 2021

[Takakazu Uchida:]

Good afternoon. I'm Takakazu Uchida, CFO. Thank you for joining us today. I will begin by giving a summary of the first quarter operating results and yearly forecast. I will then hand over to our Global Controller, Tetsuya Shigeta, for details of our operating results. The global economy continued to rebound during the first quarter of this fiscal year, driven mainly by the U.S. and China. Our operating results for the period was significantly higher year-on-year as we continued steady performance, and our strong global business network steadily captured demand arising from the economic recovery. And as a result, we made considerable progress against annual plan. Please now turn to Page 3, and I will summarize the operating results for the first quarter. Core operating cash flow for the period increased by ¥159.1 billion to ¥269.9 billion, and profit for the period increased by ¥128.7 billion to ¥191.3 billion year-on-year. Both results represent higher progress rate against the business plan and set a new record for quarterly results. These outcomes were supported by strong prices in the iron ore business, along with good results in global trading and automobile-related business. Although we do not normally review our yearly forecast at the first quarter, we will upwardly revise our full year forecast for Mineral & Metal Resources and Energy segments this time, reflecting the strong commodity prices. Core operating cash flow and profit forecasts were upwardly revised by ¥220 billion to ¥900 billion and by ¥180 billion to ¥640 billion, respectively. With the aim of enhancing shareholder returns and improving capital efficiency, we decided to conduct share buyback to a maximum of ¥50 billion. The repurchasing period will be from August to October this year. Please turn now to Page 4. Steady progress was seen in most segments during the first quarter, and we achieved 40% against core operating cash flow plan and 42% against profit plan for the year. Trading businesses in Chemicals, Steel Products and Food was steady, and Lifestyle is showing recovery through growth in COVID-19-related services and cost reduction in IHH. Please turn to Page 5, where I will discuss progress during this quarter. While steadily capturing the global demand recovery in each of our business areas, we have continuously taken initiatives to strengthen competitiveness and to improve resilience against downward pressure in our existing businesses. In terms of capturing global demand recovery, strong prices for iron ore and other commodities have contributed to an upswing in performance. While automotive and commercial vehicle businesses, supported by strong pent-up demand as well as trading businesses in Chemicals, Steel Products, Food and others, which coped with growing demand, and various restricted factors in supply have also contributed to strong business performance. Regarding improvement in profitability and resilience against downward pressure, we have continued to enhance profitability and competitiveness of our existing businesses. We have steadily advanced in projects such as launching operations at South Flank and acquiring new interest in Western Ridge in Australian Iron Ore business and execution of loan agreements for Waitsia in oil and gas projects. Moreover, we have continued efforts from the previous period to optimize our business portfolio through reorganization and business restructuring. There was progress in initiatives in -- such as Mineral & Metal Resources and Chemicals segments. Looking ahead, we will pay close attention to the impact if COVID-19 infection rates begin to climb again while looking to strengthen and expand our high-quality business clusters, with a keen awareness of changes in the environment as the new normal takes hold. We will now turn to Page 6 and look at the results of cash flow allocation. Cash-in for the period was ¥360 billion, comprising core operating cash flow of ¥270 billion and asset recycling of ¥90 billion, including loan collection in the copper business. Cash-out was ¥220 billion, comprising investment and loans of ¥145 billion and share buybacks of ¥75 billion. Main investment and loans included subscription to convertible bonds of PT CT Corpora, the holding company of CT Corp, along with the cash-out for LNG projects under development as well as maintenance CapEx in existing projects, such as oil and gas projects and Australian iron ore and coal business. Turning to Page 7. We will now look at the balance sheet at the end of the first quarter. As compared to the end of March 2021, net interest-bearing debt and shareholder equity increased ¥0.1 trillion to ¥3.4 trillion, and ¥0.2 trillion to ¥4.8 trillion, respectively. As a result, the net DER became 0.71x. Please turn to Page 8. As I mentioned earlier, we are upwardly revising our full year core operating cash flow and profit forecast to ¥900 billion and ¥640 billion, respectively. In Mineral & Metal Resources and Energy segments, we have revised forecasts mainly due to changes in the commodity price assumptions. As for the other segments, we will review forecasts when we announce the results of the second quarter of this fiscal year, as usual. That concludes my presentation today. So I will now hand over to our Global Controller, Tetsuya Shigeta, for details of the first quarter performance.

[Tetsuya Shigeta:]

Thank you. I am Tetsuya Shigeta, Global Controller, and I will now provide details of our operating results for the first quarter. Please turn to Page 10. First, I will explain the main changes in core operating cash flow by segment compared to the first quarter of the previous fiscal year. COCF for the period was ¥269.9 billion, a year-on-year increase of ¥159.1 billion. In Mineral & Metal Resources, COCF increased by ¥85.5 billion to ¥127.4 billion, mainly due to higher sales price of iron ore operations in Australia. In Energy, COCF increased by ¥10.8 billion to ¥47.2 billion, mainly due to increase in oil and gas prices. In Machinery & Infrastructure, COCF increased by ¥25.1 billion to ¥38 billion, mainly due to increase in dividend from equity method affiliates. In Chemicals, COCF increased by ¥8.8 billion to ¥24.5 billion, mainly due to steady trading business, primarily in East Asia, and commodity market. In Iron & Steel Products, COCF increased by ¥2.2 billion to ¥3.8 billion. In Lifestyle, COCF increased by ¥13 billion to ¥16.6 billion, mainly due to sale of Columbia Asia's business in India, recovery of fashion and domestic retail businesses and strong food trading business. In Innovation & Corporate Development, COCF decreased by ¥0.6 billion to ¥12.1 billion. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segment, totaled ¥0.3 billion. Please turn to Page 11. I will now explain the main changes in profit by segment compared to the first quarter of the previous fiscal year. Profit for the period increased by ¥128.7 billion to ¥191.3 billion. In Mineral & Metal Resources, profits increased by ¥86.8 billion to ¥119 billion due to factors such as higher sales price at Australian iron ore and Chilean copper operations as well as increase in dividend from Vale. In Energy, profits decreased by ¥4.7 billion to negative ¥1.2 billion, mainly due to a decrease in revenue related to LNG and oil trading. In Machinery & Infrastructure, profits increased by ¥10.7 billion to ¥29.2 billion, mainly due to strong automotive and commercial vehicles businesses, primarily in North America. In Chemicals, profits increased by ¥9.6 billion to ¥15.9 billion, mainly due to steady trading business, primarily in East Asia, and commodity market. In Iron & Steel Products, profits increased by ¥8 billion to ¥6.7 billion, mainly from steady performance in steel processing and trading business, driven by steady steel market. In Lifestyle, profits increased by ¥19.5 billion to ¥13.9 billion due to factors including increased profit in the hospital and health care business and in Wilsey Foods. In Innovation & Corporate Development, profits decreased by ¥0.1 billion to ¥10.4 billion. Other factors such as expenses, interest, taxes, et cetera, which were not allocated to business segments, totaled negative ¥2.6 billion. Please turn to Page 12. This page shows main factors influencing year-on-year changes in profit. Base profit increased by approximately ¥65 billion, mainly due to increasing dividend received from Vale and Australian iron ore business and strong performance of several segments such a Machinery& Infrastructure, Lifestyle and Chemicals. Looking at resource-related costs/volume, profit decreased by approximately ¥3 billion in terms of volume, mainly due to the impact of bad weather in Australian iron ore operation. Asset recycling resulted in a decline of approximately ¥3 billion, mainly due to the absence of sale of power generation business in North America as occurred during the same period of the previous year. In commodity prices/ForEx, profit increased by approximately ¥48 billion due to steady iron ore prices and ¥5 billion due to oil and gas prices. In ForEx, Australian dollar appreciation against U.S. dollar resulted in decline in profit of approximately ¥1 billion. Finally, valuation gain/loss and special factors contributed to increase of approximately ¥9 billion, mainly due to the absence of impairment loss at Mozambique coal business incurred in the same period of the previous year. Thank you. Let's turn to questions.

[A - Tetsuya Shigeta:]

Now let me invite the first person to ask questions. Thank you very much. Thank you for your explanation. I have two questions. This time, you heard a very business good performance, but for the full year, especially when they were little resources ¥160 billion is the full year plan. What is the breakdown? You may not be able to say that, but how much percentage should be the iron award? For example, if the iron ore was the main reason for the upward revision, then the market price assumption may have been improved, to some extent. So what are the plans for the breakdown of this full year plan? That's my first question. And the second question before your timing this is two, but from the first quarter, you're making revisions to the full year forecast and share buyback. And what you have been advocating to being agile? I think you are really being agile, that's my impression. But in quarters like this at early stage in the full year, in the year, the revision of the forecast. Could be down going forward? For example, you said that you're going to review the resources in the second quarter? So at the earliest stages in the full year, you may be changing into the Company that can come up with a revision of the forecast. Is that good for understanding? That's my second question. Thank you very much for questions. For both questions, Uchida the CFO will answer the questions.

[Takakazu Uchida:]

Thank you. As for the upper division, the Mineral & Mineral resources, they assume the prices have been reviewed. Obviously iron ore and copper have been reviewed. And core has been reviewed. And as for the size, we cannot say that, but with regard to the price range in any case, compared to the selling prices, the iron ore prices have increased. And this is related to the iron ore prices mainly, and as for the revision of the forecast in the first quarter, it's fairly seamless. Since coming up with the full year forecast at the beginning of the fiscal year, as the internal process, we are maintaining the policy of not changing our forecast. So, in every quarter, we're going to review the full set of focus, no, that's what our policy, but this time, what is assumed in the beginning of the fiscal year, especially iron ore and metrological crude and crude oil. They are settling or maintained at the higher level and this could have a huge impact and that has been taken into consideration. And also, we may have to change the revision which is the guidance, so in terms of the guidance, we would like to respond to the expectations of the market. And if the direction is correct, then we should come forward with the guidance as early as possible. So, for the first quarter, they assume prices, market prices have been changed, including the dividends that we can expect to receive. So for mineral resources and energy segments, we have reviewed our forecast because of that, and also share buyback as we review the guidance, especially the core operating cash flow will be revised in upward manner in significantly. So, ahead of the interim earnings report, of course, there will be an expectation that will be heightened from the market, we can respect that. And rather than waiting for a long time, we can get ahead of expectations. And considering the actual results of cash flow and the range of the cash flow, we decided that we should revise the forecast in the first quarter. Therefore, it really depends on the situation. So, it is not the case that as we have few things, we will review the focus every quarter because the range of the revision could impact. That's why we decided it would be wiser to come forward with regardless of earlier stage. That's all thank you.

[Tetsuya Shigeta:]

Thank you very much for the question. Now we'd like to our next question. Thank you very much for taking my question. And thank you very much for the explanation. I would like to ask two questions. The first question is about our cash flow allocation. The cooperating cash flow has been revised up to ¥900 billion. And you may not be reviewing this, but for the three year for the medium term management plan. The update is not shown in the slides or the presentation material. When it comes to asset recycling or investments, what is the direction going forward? That is my question. And this from investment was ¥1.5 trillion for the three years from April of this year. If recycling is not going to change, maybe the management range is going to expand further. So, I may be early but when it comes to our share buyback. What is duration going forward? That is my first question. And the second question, you may not have reviewed the resources or non-resources, but, other than resources, the progress has been high against the plan. For each of the segments, to the full year plan, the first quarter has been very strong. Is it sustainable from the second quarter? Do you think each of the segments will be sustainable in the performances? Can you talk about them briefly? And of course, base profit to be a cost. This is going to be directly to payment. How confident are you including the introduction of So what is your perspective on that point for you? So, please answer my two questions. Thank you.

[Takakazu Uchida:]

Thank you very much. CFO, Uchida will answer your questions. When it comes to the cash flow allocation for the next three years, as we have indicated, we did not review them on this occasion. The last time when we talked about the plan and also, when we announced the results for the fiscal year. From the actual results, there are not major increases or changes. There has been up dividend for cooperating cash flow, but for investments, there is no major change. Of course, we will review them for the half year results. But, ¥50 billion yen of buyback is addition to the shareholder returns that we talked about last time. So, this is an additional return, and this is something that we will consider and review carefully towards the half year. And when it comes to non-resources, of course, we have looked at them very carefully and in the first quarter and the second quarter, there are some phasing factors that are included. But we believe that the value is not that big as an impact. So for business operations, we believe, is sustainable or is continued and Machinery & Mobility especially North America when it comes automotive and commercial vehicles, these are businesses that are very, very strong, and we believe that, these are the highlights in the results. When it comes to, vessel trading, they are very strong as well. When it chemicals, compared to the previous fiscal year, the global production is improving. So, the trading is a very strong and when it comes to August, the final price is recovering more than we had expected and RTC is normalizing as well. And they are very strong in general. When it comes to food, grain trading is a strong, when it comes to retails and fashion, they are showing some recovery from COVID-19 and some are not showing any recovery at all. But we believe that they are in a recovery mode and when comes to wellness, as I mentioned earlier, IHH compared to the previous fiscal year, we are seeing rapid recovery. And this is including PCR testing and also the actual hospital consultation numbers are increasing as well. We have been working on cost reduction so far. And when it comes to the net profit, we're seeing expedited recovery PSC medical devices to support COVID-19 vaccination, these also contributing to property. And also as you have indicated, we are seeing increases in demand in segments. And because of different factors, there has been some supply limitations. And for example, there were shortages in containers. And in February in North America, there was a bad weather, and that caused some confusion and supply chain was disrupted. And with that kind of limiters shows we were able to utilize logistics and marketing capabilities to the full and we were able to lead them to profitability. So, in the financial markets, we are seeing some takeout and we do understand that. So it will continue going forward, it is something that we are monitoring with interest. But in the first half, there are some creating factors as well. So for July to September period, we believe that we'll be able to continue to see results and that is my personal opinion, business operation and environment, it will be sustainable, I believe it's a risk factor. So we will monitor it very carefully going forward. And also, so far, in the existing businesses, we wanted to enhance its quality. And also we wanted to improve the profitability of the businesses. So investment thing to existing and new business, this is something that we have been focusing on. And the profitability or earning base of the existing business I believe is being elevated. And that is my expectation. And with that, how much the base profit can be elevated. That is something that we want to confirm. And we will also take into account the business environment and make the necessary evaluations. Thank you.

[Tetsuya Shigeta:]

We'll move to the next question. Thank you very much. I have two questions. First of all, it's related to it has already been discussed earlier. Trading is performing low and life style, in the first quarter, you can expect this performance to continue, the trading is doing well. Because market prices are going up or if there's a pent up demand, I think those factors are specifically pushing up the market or the performance. Or this trend is expected to continue for some time to come. So, it's not categorized as usual one time factor, but when the economy picks up, you're going up into performance and most of the factors are concentrated in the first quarter is that what is seen? Or it seems you have been improving your profitability foundation? And then this is the result that you are now seeing, is that what you think, and trading, life style are especially seems to be performing well, so can you give us more details or elaborate on that? That's my first question. And as well Mineral & Mineral resources, I have a question. That's the second one. The onetime profit, if it is excluded, then you can see the real earnings power from the first quarter last year 36 billion, 66 billion, 48 billion, 103 billion and then this quarter 413 million. So, if you look back for the past quarters, with the market price increasing in the iron ore, your profit seems to be increasing. And from the third quarter to fourth quarter last year, I think the profits have increased. And in Q4 and Q1, there was an increase of about ¥10 billion. So, are there any other factors that can explain about this, like dividends from Vale or dividends from copper business, and have looked at the past quarterly changes? And are we supposed to just look at the market price changes going forward to see your business's results or dividends from Vale or dividends from copper could also have an impact in the fluctuations in your profits. So, the past changes in the factors, how they have affected your business results. Can you give us a recap, so that they can predict going forward?

[Takakazu Uchida:]

Thank you for the question. CFO, Uchida will answer the question. First quarter, trading business, the steel products and chemicals and food, the factors are different from segment-to-segment slightly. But there's a strong pent up demand that may have manifested itself tentatively. But there was some supply restrictions seen, so there was high volatility that we've seen and at least the higher volatility, then the margin could also go up and we have been able to capture this in our trading successfully. It's very difficult to answer your question of, whether this will be sustainable. The business environment, how the current business environment is expected to continue, that's the key. But so far, we have been looking at the financial results and picking up the information. And so far, we don't see that sort of information for the short-term at least. There are weather factors, climate factors or geopolitical factors or global supply chain, could be changed into regional ones. So, we are looking at the various possibilities and giving some thoughts. I can't say, this is the clear factor, or a clear factor. But there could be some structural changes compared to the past. This is just a simple personal view, but this is what I can say. As for the Mineral & Metal Resources, the price of iron ore remains a big factor. And if you look at the sensitivity of iron ore as per the dividends from valley, that is not included in a sensitivity analysis, and dividend policy is that exclude from CapEx for the EBITDA and then 30% of the remaining amount is distributed as a dividend. But, for the short-term because of the market price increase, there has been rich cash flow in and they have expressed more dividends to be distributed and this could be a fluctuations factor. And if you look back to cost performance, there was no dividends. So, you have to take that into account and as for the coal and copper, if you look at the sensitivity and also our assumptions, they are not large relatively speaking compared to the iron ore. So, there is not that much of factor, but we have to look at the prices coal and copper prices and linkage with these spices. I can't think of any special factors that we now have other than that. Thank you.

[Tetsuya Shigeta:]

So, I'm sorry. I have asked her a lot of questions, but thank you very much for answering those.

[Takakazu Uchida:]

Thank you very much. We will take our next question questions.

[Unidentified Analyst:]

Thank you very much for the explanation today. I have one question. First about iron ore, the upwards revision of ¥160 billion, majority is from iron ore and security is not included for -- but you have given us an iron ore assumption price. So, what was the difference from the original forecast, or what major change the forecast, and what is your perspective going forward? Can you give us the updated information, please?

[Unidentified Company Representative:]

When it comes to iron ore, the assumption it is not disclosed and it's very difficult to answer the specific. I am sorry about that. But we have not really changed the assumption in a major way. At the beginning of the year, that the explanation we had given in the first quarter. The iron ore price, they have been quite different from our original assumptions, or the normal level. And the beginning of the year forecast, I believe, is going to uphold in other words, a process will continue to decline towards the end of the year. But in the first quarter, we had seen a big increase. And in the past months, it has been reversed. And we believe our trend has changed. However, in other words, we have no change or outlook for the future. So we expect the process will normalize going forward. However, in the past three months, we have seen an upward height. And we believe that has been a phasing phenomenon that is going on. And also the assumption the strong focus that we are seeing currently with, because of changes in the situation, they have continued, that our assumption has not changed. But we believe that our assumption at the beginning of year is now being delayed by three months.

[Unidentified Analyst:]

When you talk about iron ore, you believe that it is going to go down gradually going forward, and you have no changes at outlook. But in the first quarter, it was more than $200. So by, how much it is going to go down. Do you think the pace of decline will be gradual? Or is it going to be stronger than what you had expected?

[Unidentified Company Representative:]

Of course, looking at the institution's announcing their forecast of the market prices, I think the liquidity is quite large. So we have to look at what our forecast of the future market is going to bring. However, we believe that it will normalize accordingly. You may think that we are very conservative, but we believe that towards the end of March next year, we believe that it is going to gradually go down to the normal levels. Thank you very much.

[Unidentified Analyst:]

And I'd like follow-up question on energy. So ¥20 billion revision for energy, I believe the majority will come from increasing oil prices. But you said that gas price is assumed to go up as well. Is it being included in this revision?

[Unidentified Company Representative:]

Gas is also included in a revision.

[Operator:]

Now let's move to the next question.

[Unidentified Analyst:]

Thank you for that explanation. I have two questions. First of all, it may not be appropriate to ask this question at this moment, but for the next fiscal year compared to your initial plan, now research is expected to increase profits. And then you have overall increase in profits. But from this fiscal year to next fiscal year, have you not changed that focus or the focus increase factor may have moved the moves up in this fiscal year? So, you're not supposed to maintain that forecast for the next fiscal year, is that what you're just saying? That's my first question. And as the second as CFO, what are the concerns that you have, one of the factors. Is it COVID-19 or global economy? If there's any specific concern that you might have can you share that with us?

[Takakazu Uchida:]

Thank you for the question. CFO, Uchida will answer the question. At the beginning of the fiscal year, as for the March 2023 focus, there's no major change that is necessary. That's our understanding. As per the market prices, there's a fluctuation and we will be affected. But as you said, in the new resources area, there's a steady growth that we're being incorporated and we like to achieve that. And in the market prices, we have reviewed our assumptions to this upper division and if you look at the progress from the full-year, maybe at the interim report, we can take a look at this. So, we don't need to change the focus for the next fiscal year. So, what's the next question and first question is concerned. In the near term in the Asian region is a re-expression of COVID-19 and so it is in the U.S. And this could affect the economic recovery. What would be the impact? There is some sense that of great concern. And if you look at the business environment and sentiment, to what extent it wouldn't be continued. That is one of the big issues and there is a heightened volatility and commodity prices are going up. And on one side in the project, there could be a increase in costs because of that, in EPC and in project, the cost management should be done and also commodity prices. Well, in the near-term, there were some things that have softened the prices, but this could lead to productivity risks and there is such concern internally because we -- and so we are just cautioning the people in the Company. So, in terms of the short-term business performance for this fiscal year, those are the concerns but for the mid to long-term, if you have a overall view in ESG trend. The business portfolio of our company, how we should change that portfolio, that is one of the major challenge. And there are various social needs that are undergoing changes and in response to that, how are we going to cooperate that? That is expected to continue to be a challenge for us. Thank you.

[Unidentified Company Representative:]

Thank you very much. We'd like to take the next questions.

[Unidentified Analyst:]

Thank you very much. Can you hear me?

[Unidentified Company Representative:]

Yes. We can hear you. Please go ahead.

[Unidentified Analyst:]

Thank you very much. When it comes to Mineral & Metal Resources and Energy, the changes in the market have been shown in the waterfall chart that provided. So, the cost is not a major factor here. But, going forward, they will recover. And when it comes to volume, of course, the copper and also research and production, what are the impacts coming from them? Or is there any concern on the cost side? So, can you talk about that impact on the business please? And you talked about COVID-19 impact, and there are positives and negatives, but currently Indonesia and Thailand, they seeing expansion of COVID-19. What are the areas in which you're seeing impact from those? Is there any area that you are very concerned about when it comes to COVID-19 risks please?

[Unidentified Company Representative:]

Thank you very much. I'd like to answer the first question. Second question would be answer by Uchida. The first question about Mineral & Metal Resources and other factors that are not related to market, the negative factors include iron ore, and that is cost related. As a market increase, the sales commission is going to increase as well, and of course the production volume recover because of a flooding and hitting rains it was infected, and of course some construction work, that was needed and that led to a decline. And when it comes to the cost in the first quarter, it was about negative ¥4 billion, and for volume for iron ore, it was negative ¥2 billion. I think these were the factors. When it comes to coal or copper in the first quarter, there were no major factors. Uchida will answer your second question.

[Takakazu Uchida:]

Yes. When it comes to COVID-19 impact, we are seeing increasing cases in Asia and there are several serious situations that we're seeing. And the Japanese personnel who working in those areas have been coming back home, and we have to of course secure the safety of personnel. But when it comes from businesses and operations, there are no trends that are negatively impacting businesses. Of course, we have to monitor the impact on business going forward, but remote work operation is improved since last year. And of course, when it comes to recovery, especially in demand North America and China were the centers of recovery. So Southeast Asia and in Asia, they have seen diminishing demand, but they are not of major concerns that we will monitor the situations going forward. Thank you very much.

[Operator:]

If there are no questions, we'd like to close the Q&A session. And that concludes the briefing and this will be broadcasted in IR achieve of the website of the Company and you can get access up anytime you want. And this concludes our conference call. Thank you very much for your attendance.