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Edited Transcript of 2768.T earnings conference call or presentation 1-Aug-19 6:30am GMT

Q1 2020 Sojitz Corp Earnings Net Conference

Tokyo Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Sojitz Corp earnings conference call or presentation Thursday, August 1, 2019 at 6:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Seiichi Tanaka

Sojitz Corporation - Executive VP, CFO & Representative Director

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Presentation

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Seiichi Tanaka, Sojitz Corporation - Executive VP, CFO & Representative Director [1]

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Thank you very much for joining us for the earnings briefing of Sojitz Corporation for the quarter that ended June 30, 2019. This is Seiichi Tanaka, CFO.

I'd like to use two sheets. One is titled Highlights of Consolidated Financial Results for the First Quarter Ended June 30, 2019, IFRS. The other has the same title but also says Supplementary Material. Both of them have been made available on our website beforehand.

Let me now begin on the first sheet and to the left column. This is about the business environment. Uncertainties are increasing and diversifying in the global environment, such as the trade friction between United States and China as well as the deceleration of the Chinese economy that arose due in part to this and the situation in the Middle East. As a result, resource prices are on a declining trend and the business environment is increasingly challenging.

Let's look at the middle chunk, which says the consolidated statements of profit or loss. We'll start from the top. Revenue is equivalent to the JGAAP-based sales. Metals and mineral resources was hard-hit due to the lower prices of coal and other resources, and revenue fell year-on-year by JPY 14.7 billion.

Chemicals segment was also down by JPY 11.4 billion due to lower methanol prices and plastic resin transactions declining in volume. As a result, our revenue came to JPY 437.4 billion, down JPY 30.5 billion year-on-year. Gross profit came to JPY 54.9 billion, down JPY 5 billion. Metals & Mineral Resources was again hard-hit by resource prices and was down JPY 2.2 billion year-on-year.

Foods & Agricultural business was hard-hit because of the low rainfall and sluggish agricultural prices. Retail & Lifestyle Business was also down due to the sluggishness in the imported plywood's prices, which is part of buildings' materials operations.

Total SG&A came to JPY 42.8 billion, which is almost unchanged year-on-year. There are two items that we have highlighted and by circling that, that's due to the effect of applying the new IFRS 16 for leases. As a result, some of the lease expenses that we use to account for as nonpersonnel expenses are now accounted for as depreciation of lease assets, and that's why there is this difference.

Further down, other income and expenses, this is where your account for nonrecurring items. In Q1, there was no such major recurring -- nonrecurring item. And therefore, the only difference year-on-year is due to an artifact of the sale of an automotive-related company in the Philippines and the sale of solar power generation business company in FY 2018. The total was a net expenses of JPY 200 million. That's down JPY 5.1 billion year-on-year.

With regard to financial income and costs, again, it's almost unchanged. The net expenses were JPY 600 million. Share of profit or loss of investments accounted for using the equity method was up JPY 1.2 billion year-on-year and came in at JPY 6.8 billion. That's thanks to the strong performance at the LNG-related business.

All in all, profit before tax came to JPY 18.1 billion, down JPY 9.2 billion year-on-year. After income tax expenses, profit for the period came to JPY 15.4 billion. Profit attributable to owners of the company came to JPY 14.3 billion. That's down JPY 5.5 billion year-on-year. Against the full year forecast of JPY 72 billion, this quarterly figure is 20%.

Let's move to the right-hand chunk, which says consolidated statements of financial position. At the end of June 2019, total assets stood at JPY 2.3485 trillion, up JPY 51.4 billion from the end of March. A major increase comes from the IFRS 16, as I explained earlier under SG&A. And so we are now accounting for the lease assets that is in the amount of JPY 59.8 billion (sic) [JPY 69.8 billion]. Down to liabilities, total liabilities came to JPY 1.7029 trillion. That's up JPY 67.3 billion from the end of March. Again, the major reason for the difference is the IFRS 16.

If you go to the total equity section, I'd like to draw your attention to total equity attributable to owners of the company. The figure at the end of June came to JPY 601.7 billion, that's down JPY 16.5 billion from the end of March. Retained earnings is a profit for the period less dividends and that was up year-on-year. But the other component of equity, this was down due to the mark-to-market valuation and the yen appreciating against the Australian dollar, the pound sterling and the U.S. dollar. So this is a reflection of the foreign currency translation adjustments. Further down, and we are showing 6 key indicators. And I'd like to draw your attention to the third line, net debt equity ratio that increased by 0.05:1.00 at the end of June.

Now please look at the cash flow statements. The cash flow from operating activities was a net inflow of JPY 6.3 billion. If you could turn to the core operating cash flow further down, that was JPY 22.2 billion, a net inflow of there is, and that's related to the scheduled consumption tax hike on October 1 and the associated rush demand for tobacco expected. We have increased our inventories, and that required working capital.

Cash flows from investing activities was a net outflow of JPY 9.7 billion. As we wrote towards the right, we have executed new investments and loans in the amount of JPY 18 billion in Q1, including this investment in wind power generation business in Taiwan. As a result, free cash flows came to a net outflow of JPY 3.4 billion.

We are also showing core cash flow towards the bottom of this table. That is core operating cash flow plus adjusted net investment cash flow, less dividends paid. And that figure at the end of Q -- that figure in Q1 was a net outflow of JPY 5.6 billion.

Now let's look at the other sheet that says Supplementary Material, and I'd like to discuss the results by business segment. In the interest of time, I would only like to highlight where there's a major change year-on-year or when -- where the profit levels are low with regards to the percentage achieved against the full year forecast.

Let's begin with the Automotive segment. The quarterly segment profit was down JPY 1.6 billion year-on-year. As I mentioned earlier, this is an artifact of the gain on sale of an automobile-related company in the Philippines in the previous equivalent period. Automotive sales in Thailand and Puerto Rico are -- remained strong, and this profit figure is 27% of the full year forecast. So this segment is doing well.

Aerospace & Transportation Project, Q1 profit was JPY 200 million, which is only 4% of the full year forecast. And this is related to the timing of the revenue recognition, the aircraft business, including part-out business, and the freight rail business in India. They have revenue recognized in the second half, and that's why this figure looks low, but we have no concern for the full year results.

Machinery & Medical Infrastructure, the quarterly segment profit is only JPY 300 million. That's 7% of the full year forecast. Just like the previous segment, again, the revenue at subsidiaries and affiliates and particularly related to industrial machinery, mostly comes in the second half, and that's why it looks like this.

Further down in Energy & Social Infrastructure segment. The quarterly segment profit is JPY 300 million, only 5% of the full year forecast. As is the case with this segment every year, the results from LNG Japan and Nissho Electronics, those affiliates are mostly concentrated in the fourth quarter. So this year is no exception and we are not concerned about this.

Let me skip two segments and go to Foods & Agriculture Business. The quarterly segment profit was JPY 700 million, 16% of the full year forecast. If you look at the column and the descriptions there, their key business is overseas fertilizer business. And particularly, in Thailand and in Vietnam, there was a low rainfall and agricultural prices are sluggish as a result of the demand for fertilizer is not coming up, and that's why they're falling short.

With regard to that rain, particularly in Thailand, it started raining last weekend. And there's now the seventh typhoon of the season, and we are expecting more rainfall from this weekend. And so we will keep an eye on whether we can make up for the shortfall in Q1 there.

Retail & Lifestyle Business, again, this segment posted a profit of only JPY 1.1 billion. That's 15% of the full year forecast. This is related to the beef prices falling as the U.S. beef exports to China has decreased and that has affected our margins, too. Another factor is the building material, operational suffering from lower import building material prices.

Last, but not least, Industrial Infrastructure & Urban Development. The profit for this segment has fallen year-on-year by JPY 700 million. In Q1, there was no delivery at the industrial park at Indonesia and domestic condominium deliveries were also low in Q1, and that's why the figures are down year-on-year. But there is continued strong demand for industrial parks, and the condominiums in Japan will eventually have deliveries at the same level of last year. So we are not changing the full year forecast at this point in time.

With this, I'd like to close my presentation. Thank you very much for your kind attention.

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