Edited Transcript of 2768.T earnings conference call or presentation 1-May-20 10:59am GMT

Tokyo May 5, 2020 (Thomson StreetEvents) — Edited Transcript of Sojitz Corp earnings conference call or presentation Friday, May 1, 2020 at 10:59:00am GMT

Masayoshi Fujimoto, Sojitz Corporation – President, CEO & Representative Director [1]

This is Masayoshi Fujimoto, CEO. Thank you very much for joining us for our earnings briefing. Today, we will discuss FY 2019 results and progress of the medium-term management plan after year 2 as well as the outlook for FY 2020.

In the year that ended March 31, 2020, the business environment remains challenging. Substantial economic slowdown was seen across the world after trade friction intensified between the United States and China, and market prices deteriorated. Against that backdrop, we worked hard to achieve our targets, and we’re on track to deliver the revised forecast that we published after Q3, which was JPY 66 billion in profit for the year attributable to owners of the company. However, after the unexpected and sharp deterioration in the environment towards the year-end due to the COVID-19 pandemic, we came in at JPY 60.8 billion. We will discuss further details later.

Slide 4 shows where we stand against target figures. With regard to FY 2020, the spread of COVID-19 is still causing a rapid deterioration in the business environment, bringing activities to a hold for a number of business areas. There are further uncertainties ahead, too.

While the environment may be challenging as such, we at Sojitz will continue to pursue steady growth from increased earnings generated through investments and loans. We will continue to accumulate quality assets, take up new challenges in new fields and reinforce our human resources so that we are capable of generating new ideas and coping well with emerging situations.

Slide 5 summarizes FY 2019 results and the breakdown by segment. Later, our CFO, Seiichi Tanaka, will walk you through the balance sheet, profit and loss statement and cash flows.

Slide 6 breaks down the year-on-year difference in profit for the year. During the year, stemming from the trade friction between China and the United States, the business environment remains challenging. Material-related businesses such as chemicals and steel-related operations were sluggish. Automotive and fertilizer businesses were hard-hit, too. Market conditions also deteriorated.

In response and to keep us on track for delivering our targets, we conducted in the second half exhaustive reviews of costs and the timing at which earnings would materialize. Thanks to steady earnings contribution from hospital projects and asset replacement involving thermal coal interests and power generation making progress as scheduled or even ahead of schedule. Profit for the year did, in fact, reached the JPY 66 billion revised forecast when excluding extraordinary factors that were reflected through year-end impairments.

This, despite the COVID-19 pandemic, causing some of what was expected in FY 2019 to be pushed back to the next year. At the year-end, however, impairments due to the rapid decline in oil and gas prices had to be taken. Additional tax costs related to the downward revision of expected FY 2020 earnings also had to be reflected. As a result, the final profit for the year attributable to owners of the company came to JPY 60.8 billion.

Let us now look at the outlook for FY 2020. The forecast for profit for the year attributable to owners of the company is JPY 40 billion. This is a guidance figure and assumes that the situation around COVID-19 will be under control by the end of June 2020. We have also factored in JPY 5 billion in structural reform expenses. This involves reviewing and revamping loss-making or low-efficiency operations as well as enhancing resilience to volatilities. The impact of COVID-19 will be discussed further when we get to the next slide.

We may not be able to achieve the target figure of JPY 75 billion as stated in the medium-term management plan. However, we will surely improve value of investments and loans and also proceed with asset replacement, so as to realize the steady growth called for in the plan.

Slide 8 shows our analysis of the impact of COVID-19 pandemic on our business and the underlying assumptions. Across the globe, lockdowns or stay-at-home measures as well as business shutdowns have been implemented, causing some of our operations to be halted or delayed.

As described in the slide, most hard-hit are automotive, material-related operations as well as retail business due to closures of commercial facilities and stores. Assuming the current situation continues for the first 3 months of the financial year, the impact on our earnings is estimated to be JPY 23 billion.

The same assumption applies to the JPY 40 billion guidance figure for profit for the year. It calls for 20% of sales to be generated in the first half and 80% to be generated in the second half. Should the situation be prolonged for another month, that may have an additional impact of JPY 8 billion.

The group is also trying to help society cope with the situation. For example, we are mobilizing our domestic subsidiaries to produce surgical masks. Our overseas hospital projects are making part of their facilities available for accepting COVID-19 patients.

To protect our workforce and to prevent further spread of the coronavirus in society, we have made working from home the norm. The percentage of those working from home has stayed above 80% since the first of April, which was before the Japanese government declared a state of emergency.

This slide shows the forecast for the full year of fiscal year 2020, the profit for the year for fiscal year 2019, reflecting the rebound from the year-end impairment of JPY 66 billion. As a start, market fluctuation of JPY 9 billion rebound from asset replacement of JPY 6 billion and delay in large projects, review progress in existing projects and exhaustive review of the costs will be incorporated.

We will implement investments and loans of the improved value of close to JPY 100 billion in fiscal year 2020 to accumulate value of revenue. As a result, the real profit for fiscal year 2020 is expected to come to JPY 68 billion. But with the assumption that impact of COVID-19 will last until the end of June, coming to JPY 23 billion and measures necessary to adopt the changes of the business model, review of loss-making businesses and structural reform expenses to enhance resistance to volatility of JPY 5 billion will give us a profit forecast of JPY 40 billion for fiscal year 2020.

To repeat, we have JPY 23 billion forecasted as coming from impact of COVID-19, but this is extremely difficult to foresee. This is a guidance figure assuming COVID-19 pandemic will end at the end of June, requiring us to be very cautious in determining the progress of the business performance going forward.

This slide shows results and forecast of earning contributions from investments and loans from medium-term management plan 2017 and 2020.

As for the earning contributions for the year ended March 31, 2020, we came to JPY 14 billion, in line with forecast at the beginning of the fiscal year, but the majority coming from the earning contributions from MTP 2017. The earning contributions of MTP 2017 was projected to come to JPY 8 billion for the first year, JPY 12 billion for the second year, giving us JPY 20 billion in total. But with concrete contribution from overseas hospital projects and asset replacement of power generation businesses and profit from sales of interest in resources seen earlier than forecast resulted in a considerable difference in the result from the forecast.

On the other hand, as for MTP 2020, earning contributions for fiscal year 2020, the original forecast was of JPY 6 billion. However, due to delay in start of coking coal business in Australia and weak market conditions for paper manufacturing in Vietnam, we saw considerably lower numbers relative to the forecast, but we are expecting improvements in revenue for fiscal year 2020.

As a result, the earning contributions for fiscal year 2020 will come to JPY 12 billion, inclusive of COVID-19 impact, JPY 6 billion from MTP 2017 and JPY 6 billion from MTP 2020. There is no change to our policy of aiming for continued growth through investments and loans.

The core operating cash flow is kept positive at the end of the second year of the MTP, both for fiscal year 2019 and for aggregate 3-year total of MTP 2020. On this slide, the future outlook is shown, maintaining a policy of managing positive cash flow for the cumulative 3-year period. As for the status of the cash flow and securing liquidity, CFO Tanaka, will elaborate later.

Now I would like to turn my attention to nonfinancial initiatives. For fiscal year 2019, based on the long-term vision: Sustainability Challenges, we have taken concrete steps, including reducing the assets of thermal coal to achieve decarbonization and a low-carbon society. Initiatives undertaken has been highly evaluated as shown by a number of external recognitions gained by Sojitz.

Sojitz has been selected 4 years in a row as a Nadeshiko brand, first by a trading company. To introduce diversity and empowerment of women in workplace, we newly established family support paid vacation for the purpose of parenting and providing care in fiscal year 2018. We also introduced a system to support early back-to-work from maternity leave.

With the declaration of a state of emergency in response to COVID-19 pandemic, to avoid employees forced to take paid vacation to look after the family not to be put in a position to lose paid vacation in fiscal year 2020, we established what we call corona special paid vacation system. We will continue to be mindful of providing an environment in which diverse employees continue to maximize their performance to bring about improvements of corporate value.

Sojitz has strived to strengthening corporate governance since its establishment and continue to work on it during the period covered by MTP 2020. Aiming to elevate transparency of management and further enhancement of corporate governance at the shareholders’ meeting scheduled on June ’18, we are planning to submit a list of candidates for outside directors, including 1 additional female director.

Lastly, on the dividend policy. Basic dividend policy is shown on this slide. Sojitz recognizes that paying stable and continuous dividend is a priority together with enhancing shareholder value and boosting competitiveness through the accumulation and effective use of retained earnings. During the period, under MTP 2020, our policy is to target consolidated payout ratio of about 30%.

We have not decided on the annual dividend forecast for fiscal year 2020 as the end of the COVID-19 pandemic is uncertain. And the outlook of fiscal year 2020 is a guidance based on certain assumptions.

In line with the guidance given today, if consolidated payout ratio of 30% is applied, the annual dividend for fiscal year 2020 will come to JPY 10. Once the revenue outlook become clear with time after the end of COVID-19 pandemic, the annual dividend will be disclosed promptly based on our basic policy.

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Seiichi Tanaka, Sojitz Corporation – Executive VP, CFO & Representative Director [2]

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Let us now go through the material titled: Highlights of Consolidated Financial Results and Review FY 2019 Results as well as the FY 2020 Outlook.

First, please look at the middle block of the first page where it says consolidated statements of profit or loss. First, on revenue, which corresponds to net sales in JGAAP. Total revenue fell significantly by JPY 101.4 billion year-on-year to JPY 1,754.8 trillion. By segment, the largest contributor was chemicals, which fell by JPY 58.7 billion due to lower transaction volume of plastic resin for Asia and declines in the price of methanol. Metals & Mineral Resources was also down by JPY 32.7 billion due to the decline in sales prices and reduced sales volume of coal.

Gross profit also fell by $20.5 billion to JPY 220.5 billion. Again, the decline mostly came from the 2 segments of chemicals and Metals & Mineral Resources. Total SG&A came to JPY 173.2 billion, almost unchanged. Newly consolidated subsidiaries pushed up expenses by JPY 2.6 billion, but we were able to almost offset that increase through exhaustive cost reviews. The net of other income and expenses, which reflects nonrecurring items, was a net income of JPY 7.5 billion. This is thanks to gain on sale of thermal coal interests in Australia and office buildings.

The gain outweighs the impact of impairment loss related to oil and gas due to the price declines as well as impairment loss related to company-owned ships due to the decline in charter rates. The net of financial income and costs came to a net cost of JPY 4.2 billion, down JPY 1.3 billion year-on-year.

Net interest expenses was JPY 8.3 billion, almost unchanged, but dividends received from overseas investments decreased by JPY 1 billion. Share of profit or loss of investments accounted for using the equity method was JPY 24.9 billion, down JPY 2.9 billion from the previous year due to reduced profit from a ferroalloy-producing company and a steel-operating company. As a result, profit before tax came to JPY 75.5 billion. After income tax expenses, profit for the year came to JPY 64.6 billion.

Profit for the year attributable to owners of the company, which is highlighted in blue, was JPY 60.8 billion, down JPY 9.6 billion year-on-year. This figure is 92% against the downward revised full year forecast of JPY 66 billion that we published after Q3.

Now to the right-side block where it says consolidated statements of financial position. Total assets at the end of March 2020 stood at JPY 2,230.3 trillion, down JPY 66.8 billion from a year ago. Trade and other receivables were down JPY 52.6 billion due to the decline in transaction volume of tobacco and chemicals.

Investments accounted for using the equity method was down JPY 42.6 billion due to divestiture and revaluation due to change in stock prices and foreign exchange rates. Total liabilities at the end of March stood at JPY 1,608.4 billion, down JPY 27.2 billion from a year ago.

Moving down to the equity section. Here, I would like to draw your attention to the line item, total equity attributable to owners of the company, which is underlined, 1 — 2 lines above total equity. At the end of March, this figure came to JPY 579.1 billion, down JPY 39.1 billion from a year ago.

This can be broken down into the 3 figures just above. Retained earnings increased by JPY 28.5 billion. On the other hand, other components of equity decreased by JPY 57.8 billion. This came from foreign currency translation adjustments, reflecting depreciation in currencies of resource-producing countries as well as emerging economies. A decline in stock prices is also reflected here. An additional JPY 10 billion negative impact came from treasury stock purchase.

The table just below the balance sheet shows 6 KPIs. Net debt equity ratio, which is the third line from the top, came to 1.06 and rose by 0.11 from a year ago due to the decline in total equity and the increase in net interest-bearing debt.

Cash flows are shown at the bottom middle of the page. Cash flows from operating activities was a net inflow of JPY 40.5 billion, thanks to the steady net core operating inflow of JPY 80.2 billion. Cash flows from investing activities was a net outflow of JPY 35.7 billion, which is a net of JPY 80 billion in new investment and loans executed and asset replacements. Total free cash flow was a net inflow of JPY 4.8 billion. Core cash flow was a net inflow this year again in the amount of JPY 1.3 billion.

Now please turn to the second page, which says Supplementary Material (1). Here, I would like to discuss segment performance with a focus on those with relatively large year-on-year difference.

First, let us look at the Automotive segment. Profit for the year in fiscal year 2018 was JPY 6.4 billion, but in FY 2019, it was JPY 2.4 billion, down JPY 4 billion year-on-year. Total automotive demand fell in Thailand due to the economic slowdown. In Puerto Rico, there was a reactionary decline after the reconstruction demand. In March, COVID-19 resulted in closure of stores.

In addition, there is an artifact of the gain on sale of an automotive business company in the Philippines in FY 2018. One line below, and the Aerospace & Transportation project was also down year-on-year by JPY 2.2 billion. The sharp decline in charter rates has resulted in impairment losses on company-owned ships. There is also an artifact of the gain on sale of aircraft in the previous year.

On the other hand, Energy & Social Infrastructure, 2 lines below, recorded a large increase of JPY 3.8 billion year-on-year despite year-end impairment losses of oil and gas upstream interests due to deteriorating energy market with gains on equity in solar power generation business in Japan. Metals & Mineral Resources, one line down, was down by a considerable JPY 10.4 billion despite sales of overseas thermal coal interests due to lower coal and aluminum prices and decreased sales and decreased gain on equity related to lower profit at Metal One, a nickel-producing company, with gross profit coming to JPY 20.1 billion.

Please turn the page to Supplementary Material (2). I would like to focus on areas where we expect large differences between the results of fiscal year 2019 and the outlook for fiscal year 2020. As for Automotive segment, on top, we expect profit to be down by JPY 1.4 billion as COVID-19 impacts all areas of this business through the second quarter with a recovery only expected after the third quarter.

Aerospace & Transportation Project is expected to be up JPY 4.2 billion year-on-year to JPY 6 billion in fiscal year 2020. The airline industry has been hit extremely hard with dropping passenger traffic. But we will see increased profit due to benefits of large-scale aircraft business projects delayed from the previous year and absence of impairment losses recorded on company-owned ships in the previous year, together with cost-reduction measures.

Energy & Social Infrastructure segment, 2 lines below, is expected to come to JPY 3.5 billion, down JPY 6.1 billion year-on-year due to rebound from asset replacement activities in the previous year and COVID-19 tax incentives in the U.S.

Metals & Mineral Resources, 1 line down, is expected to come to JPY 13 billion, down JPY 7.1 billion year-on-year due to sluggish steel demand, poor coal market and absence of gain on sales of overseas thermal coal assets recorded in the previous year despite factors pointing to recovery, such as lower production costs due to cheaper Australian dollar and increased sales of coking coal.

We expect that large reduction in profit is unavoidable. Chemicals, 1 line down, is expected to come to JPY 5 billion, down JPY 4.3 billion due to lower methanol price and impact of suspension of factory operations in automotive and home appliance sectors.

As for others at the bottom, which is expected to come to minus JPY 1 billion, down JPY 5.1 billion as structural reform expenses are incorporated into the corporate forecast.

With the time remaining, I would like to explain the cash flows, middle bottom. Under the basic policy of positive cash flow for the cumulative 3-year period covered under the NDP. We saw both core operating cash flow and free cash flow for the first 2 years have been positive by JPY 60 billion. As for fiscal year 2020, due to contribution of funding to projects already decided, we see negative cash flow for the single year, but positive cash flow for the 3-year period will be maintained.

From the perspective of scaring liquidity total of JPY 250 billion commitment line for yen and U.S. dollar, and we are in the process of changing short-term line of credit or LOD to long-term with the relevant financial institutions. At the end of March 2020, the consolidated cash in bank is JPY 280 billion. So there are no issues with the current liquidity. That is all for myself.

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Masayoshi Fujimoto, Sojitz Corporation – President, CEO & Representative Director [3]

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This is CEO Fujimoto again. The world is facing an unprecedented crisis that is COVID-19 pandemic. This is the time in which we can exercise existential value as a trading company to provide various values to stakeholders by utilizing diverse functions, know-how and human resource network. There is a possibility that with this pandemic, values of people may change. One example is expansion of teleworking. It will dramatically change the way people work, thus changing the consumption behavior of the people. I have told my employees that pre-COVID-19 and post COVID-19 will not be the same. Post COVID-19 will find a society that will see another industrial revolution, the fourth industrial revolution, and we will be expected to adopt.

Sojitz have always adapted to rapid changes by fostering functions and know-how. We need to seize the changes as opportunity and put all our efforts in elevating our corporate value further.

I ask for your continued support, and I’ll be praying for an early end of the pandemic and health of all our stakeholders. Thank you very much for your attention.

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