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Edited Transcript of 2768.T earnings conference call or presentation 2-May-17 1:00am GMT

Thomson Reuters StreetEvents

Full Year 2017 Sojitz Corp Earnings Presentation

Tokyo May 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Sojitz Corp earnings conference call or presentation Tuesday, May 2, 2017 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Seiichi Tanaka

Sojitz Corporation - CFO and Managing Executive Officer of Finance & General Accounting

* Yoji Sato

Sojitz Corporation - CEO, President and Representative Director

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Presentation

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Yoji Sato, Sojitz Corporation - CEO, President and Representative Director [1]

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I would like to begin with a PowerPoint presentation, and I will be followed by our CFO, Seiichi Tanaka, and he will discuss more details about the results of FY 2016 year-on-year difference as well as a breakdown by segment. I would like to try to be simple and avoid any duplication.

If you could turn to Slide 4, please. This slide shows the FY 2016 summary. With regard to the overall business environment in that financial year, in retrospect, I think we can say that the global economy maintained relatively stable growth, thanks to the consistent growth in the U.S. economy and the tapering of the slowdown among the emerging economies.

So against that backdrop, let's look at the results of Sojitz Corporation in FY 2016. On the top of the slide, we are showing gross profit. We were able to achieve the FY 2016 forecast, and the percentage achieved is therefore slightly above 100%. The gross profit came in at JPY 200.7 billion, and this is the first time in 5 years that we have hit the JPY 200 billion mark.

With regard to profit for the year, again, we have been able to post year-on-year growth. So basically, things have come in line with the expectations we have had. Obviously, if you look at the details, there are ups and downs, but I think we can leave those details for later.

So overall, our view is that we were able to post year-on-year growth for the profit figures. So that's for the profit and loss part.

And then if we could turn to the balance sheet part, total assets increased over the year by JPY 81.8 billion. Total equity increased by JPY 30 billion or so. And because the profit for the year came in at JPY 40.8 billion, the ROA came to 1.9% and ROE to 7.6%. So these figures are well on track towards the target levels of 2% in ROA and 8% in ROE under the current medium-term management plan.

Let us now turn to the next slide. Slide 5 attempts to show the comparison against the forecast. I've already discussed the year-on-year difference. And this time, I'd like to look at the difference from the forecast.

Gross profit has come in at JPY 200.7 billion, that's above the forecast of JPY 200 billion. And the profit for the year came in at JPY 40.8 billion against a forecast of JPY 40 billion, so both figures beat forecast.

To add some information about the breakdown by segment, the year began amidst a sluggish market with low resource prices, but in the second half, saw a significant recovery, particularly for coal. And as a result, profit for the year for the metals and coal segment came in very strong.

Other than that -- and again, I will leave the details to the CFO. But for the Aerospace & IT business, the Aerospace business has been strong. In addition, the IT business this time benefited from the conversion of business subsidiary into affiliate through partial sale, which was in conjunction with a public offering for capital increase. And we were able to book some gain on sales.

With regard to Food & Agriculture business, the industrial fertilizer business is part of this and has been strong. But unfortunately, there was a downside coming from the Brazilian grain collection operations. We do not expect this loss to be recovered in a short term, so we decided to take a fundamental review. And we decided to record impairment loss in FY 2016 rather than putting it off or holding it off for later. The amount was rather large, but we did it anyway. And again, the CFO shall probably provide more details on this.

So there were some negative spots, but all in all, I think we can say that all the segments have a more stable earnings base now.

So yes, there are ups and downs. But the fundamental earnings space has become much stronger in FY 2016. That would be my summary of the FY 2016 and how the results fare against the forecast.

Next, let's turn to Slide 6 on investments and loans, and I believe this would be one focus of many questions later today. So far, we have executed JPY 157 billion over the past 2 years. This figure may appear small against the JPY 300 billion figure for the 3 years. But as for the remaining JPY 150 billion or so, if you could look at the right-hand side column of the slide, it shows that we actually have large figures planned for different types of businesses. So actually, we already have almost JPY 150 billion worth of projects that have almost completed the internal decision-making process. Therefore, in this financial year, the challenge on us is to fully and surely implement these investments and loans because we have made that commitment. So it is really about following up on and delivering the commitments made once the final decision is made.

So with regard to the JPY 300 billion target figure, we are very much on track. And as for further specifics, please refer to the slide. We have written in some specific projects for the different lines of businesses.

Turning to Slide 7 now. From here, we would like to discuss the outlook for FY 2017 by segment, including the investments and loans that I just discussed, and this goes over 3 slides starting from Slide 7.

First for Automotive. As you know, we have been expanding the U.S. dealership business, which is growing very well. And BMW is also very happy about our operations. And thanks to this success, we are now receiving other offers or invitations to similar deals outside of the United States. So we are considering expansion of this dealership business in other markets, such as in Asia or in South America.

So for this dealership business for automotive, it is a big focus. And we already have specific target projects in mind as we speak, but that alone is not the whole picture. We are also looking at other lines of business, and not that we are not focusing on the existing distributorship. We will continue to work on that in Asia as well as seeking opportunity to expand into other markets. But we are also trying to add something more new.

So as to expand our overall offering related to automotive, and one such project is related to what we have been already doing. And that is about offering various automotive-related services, such as vehicle inspection. And this may involve acquisitions. So there are various initiatives in the piping, and I believe that there would be more news to share with you all later in the financial year.

Moving on to Aerospace & IT business. As you're well aware, our core business would be with Boeing as well as Bombardier for smaller aircraft. And then in this medium-term management plan, we have focused on a new field, which is a part-out business, and this is also going very well and growing into a major business pillar for us. So we intend to make it a new or additional business asset for us.

In addition to that, we are working on the airport terminal operation business. The idea is to build on the experience and expertise we have built with the aircraft business. It's not that we can do everything on our own, so the idea is to seek opportunities where we can leverage our expertise. And we are seeking opportunities to join hands with partners and we are making proposals, not just in Japan, but also outside of Japan. So this is another field that we intend to grow.

In addition, the current relationship we have with Boeing is pretty much focused in Japan, but we are seeking opportunities to extend this outside of Japan as well.

Moving on to Infrastructure & Environment business, which I call the habitual offender in terms of missing the deadline and missing the budget. For the second consecutive year, this business missed the target. It's not that the projects have disappeared. Rather, negotiations are taking more time than expected. And I believe in third time lucky, and I trust that this business will live up to the expectations this fiscal year.

The IPP business, solar power IPP and renewable energy IPP business, are doing well and same for IPP business in Indonesia. And we are to embark on semi-merchant plants in the U.S. So we are doing well in those areas. The problem is with others, meaning Plant business. Plant business proves to be difficult because it's not the time -- type of business that constantly generates stable profit. Rather, it's simply win or lose. So it's very difficult to project in terms of budget. But we want to implement measures to level the revenue stream, so we are going to go into new fields in the Infrastructure business. So building on stable profit businesses is the key policy for this part of the business.

Next, energy. We are expecting profit this fiscal year for the first time in a while. So we have seen progress. Centering on LNG, we want to leverage the positives. As for new investments in LNG, for the time being, no investments being planned on new interests. Rather, we will focus on medium and downstream businesses, primarily LNG receiving basis, electric power and power generation. And by linking to LNG receiving basis, we want to lead to fuel trading business. So we will go into new fields that are different from our conventional areas of business. And we hope to see tangible results this fiscal year.

Metals & Coal. We've been pushing for a shift from thermal coal to coking coal. And we've been trying to exit from thermal coal business to shift to coking coal. And as we embarked on this shift, prices of coking coal soared. That's where we stand today. Some of exits have been executed, but we see slow progress in terms of securing new sources of coking coal. But it's not that we're just sitting here doing nothing. In addition to conventional reserves, we are looking for new reserves for the coking coal. And we are trying to develop new forms of trade business to enhance trade transactions by looking for new form and new routes. And we are going to enhance our business in Russian coal. And we are thinking of trying new forms of business transactions, trade transactions as well. So we do expect increase this fiscal year, including thermal coal. And we are thinking of investing in those other areas as well.

In Chemicals, this is the most stable division of the 9 divisions that we have. Representative products are methanol and industrial salt. For those 2, for methanol, in particular, in addition to KMI, we are thinking of having one more or 2. And we are seeking new opportunities, but this may take some time.

For industrial salt, we are trying to secure development interests to make this a very solid business.

In addition to this representative product, we are looking for other opportunities. There are many materials, including functional chemicals. In general, this is the area in which the traditional strength of a trading firm can be leveraged. So in fiscal 2016, we acquired a sales company in Europe. And in addition, we are seeking more M&A opportunities in this field. Not just in Europe, but in North America and other areas as well, we are seeking new opportunities.

This is a business in which price -- when the prices are increasing, we see positive impact on the business. And so compared to the beginning of fiscal 2016, we are seeing prices increasing gradually. So compared to the beginning of fiscal 2016, in chemicals overall, in terms of price, we see better business environment.

The remaining question is the impact of exchange rates. Of course, weaker yen would be an upside for us, whereas slight appreciation would work against us.

Foods & Agricultural business. We recorded loss on our business in Brazil last year, so we will focus on traditional mainstay of fertilizer business. We now have office in Myanmar to increase sales volume. In fact, sales volume is increasing each year. For this fiscal year, we are aiming at 80,000 tons or so. TCCC currently in Thailand has about JPY 1.1 million. So compared to that, JPY 80,000 is small. But given that we started from scratch, we can expect contribution. So we want to broaden our fertilizer business.

In Retail and Lifestyle business, we have textile and construction materials. We have divisions that have been traditionally strong. We expect firm business in this field. And tobacco business is included in this segment [because] the heat-not-burn cigarettes are doing very well. So we expect that the target can be achieved.

Industrial infrastructure and urban development, this is formerly real estate, the condominium and REIT businesses. What's different is that we are going to focus more on the urban development. So we're not just going to look at the individual condominium project, but we'll be focusing more on urban development projects. So in addition to individual condominium projects, we will be shifting more on larger-scale infrastructure development based on master plans. And so it is with that intent that we have organized this new headquarters or division. So these are the initiatives by segments.

And on Page 10, you can see the numerical representation of what I just explained.

On Page 11, you can see the profit of the year -- or the profit growth in terms of existing business, new businesses and others.

On Page 12, you can see the cash flow statements. For fiscal 2016, cash flow was negative. And in fiscal 2017 as well, with aggressive investments, free cash flow would be in the negative. I believe that the CFO will explain this in more detail later.

Page 13, profit for the year. As was mentioned at the outset, we are seeing gradual increase in terms of profit for the year and ROA improving accordingly.

Page 14, dividend policy, which is one of the frequently asked questions. We are forecasting a profit for this fiscal year of JPY 50 billion. And by applying 25% payout ratio, the dividend for this fiscal year is projected to be JPY 10 per share. As for the dividend policy for the current medium-term management plan period, we are to maintain this policy during this 3-year period, and this year would be the final year of this management plan. So stable continued dividend with a payout ratio at 25%. That will remain unchanged, as you can see there.

And with that, I conclude my presentation. Thank you for your attention.

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Seiichi Tanaka, Sojitz Corporation - CFO and Managing Executive Officer of Finance & General Accounting [2]

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This is Seiichi Tanaka, CFO. I'd like to use the A3 landscape sheet titled, Highlights of Consolidated Financial Results. I'd like to discuss the results for FY 2016 as well as the FY 2017 forecast.

Let me begin with the middle part of sheet 1, which is consolidated statements of profit or loss. Net sales on a JGAAP basis has come down year-on-year by JPY 261.1 billion to JPY 3,745,500,000,000. Towards the right-hand side, we are showing the major reasons for the difference.

The bottom segment is the Lifestyle Commodity & Materials business, which has had a conspicuous year-on-year increase contribution, and that is thanks to the strong sales of heat-not-burn cigarettes. Other than that, a major impact on net sales was the stronger yen. If you compare the average rate between FY 2016 and the previous year, the yen is stronger by 10%, and that means the dollar-denominated portion of sales is actually smaller when converted into the Japanese yen. And that has had a negative impact.

Moving on to gross profit. Gross profit was up JPY 20 billion year-on-year, came in at JPY 200.7 billion. Metals and coals have benefited from market recovery starting from Q3. Another contributor was Aerospace & IT business, where Aerospace business was strong. And in IT subsidiary, which is dealing with network-related equipment, also enjoyed an increase in transactions.

Food & Agriculture business also benefited from the strong overseas fertilizer business, which managed to keep sales price levels despite the decline in raw material costs.

Moving on to SG&A. SG&A improved by JPY 1.4 billion and came to an expense of JPY 153.0 billion. There was an additional consolidated subsidiary, which pushed up SG&A, but the stronger yen meant that the SG&A spent outside of Japan was smaller when converted into the Japanese yen.

Further down and other income and expenses. The total came to a net income of JPY 3.9 billion. And major factors are highlighted above in that block. There is JPY 10.4 billion in gain on sale of subsidiaries and associates. As described towards the right-hand side, this is related to a conversion of IT business subsidiary into an affiliate through partial sale. And it has been accompanied by a change in ownership category. And therefore, we have conducted revaluation of fair value.

And then there is JPY 8.2 billion in loss on reorganization of subsidiaries and associates. This is related to what was mentioned earlier by our CEO, the grain collection business in Brazil, which is struggling. And we determined that the invested capital is not recoverable for the time being, and we decided to take impairment losses. And we have made a disclosure on this ahead of this earnings. The total amount booked here in this column is JPY 6.7 billion.

Operating profit came to JPY 51.6 billion, that's up JPY 22.4 billion year-on-year. Financial income and costs came to net cost of JPY 6.3 billion, that's an improvement year-on-year by JPY 1.8 billion. And this is mainly related to the cash management system at the overseas subsidiaries, which have fully rolled out last year. And that led to cash efficiency and also reduction in the average balance of outstanding borrowings. The decline in interest rates also helped. As a result, interest expenses improved by JPY 1.9 billion.

Share of profit or loss of investments accounted for using the equity method came down by JPY 10.5 billion to JPY 12.7 billion. Again, the impact of the grain collection business is here. There was operation-related loss for the year in the amount of JPY 6.1 billion.

Another factor was that in the previous year, we booked some gain on sale of land, which was formerly used for automotive-related operations. And this is not the case in FY 2016, and that is another negative factor. As a result, profit before tax came to JPY 58 billion, up JPY 13.7 billion. After income tax expenses, profit for the year came to JPY 44.1 billion. Profit attributable to owners of the company, which is highlighted in light blue, came to JPY 40.8 billion, that is up JPY 4.3 billion year-on-year.

If you could look at the right-hand side of the same block, we are showing that the FY 2016 forecast was 40%. Against that figure, the actual result was 102%.

Further down, core earnings came to JPY 54.2 billion, up JPY 12.6 billion, thanks to the increase in gross profit.

Moving on to consolidated statements for financial position shown on the right-hand side. Total assets as of the end of March 2017 was JPY 2,138,500,000,000, up JPY 81.8 billion year-on-year. Major reasons for increase are highlighted in circles. Those are related to tobacco business. Trade receivables and inventories increased. Towards the end of the fiscal year, there was an increase in handling volume and receipt of goods, resulting in these increases.

Liabilities totaled JPY 1,560,500,000,000, up JPY 53.5 billion year-on-year. The reasons for increase was the same as in assets. With an increase in trade receivables, trade payables increased. That was the main reason.

As for equity, I'd like to draw your attention to total equity attributable to owners of the company, which totaled JPY 550.5 billion, up JPY 30.2 billion. The reason was an increase in retained earnings, which is a profit for the year less dividend, as was explained in relation to profit and loss.

There are some financial indicators shown at the bottom, the third line. Net debt-to-equity ratio compared to the end of March 2016, improvement was 0.01 point to 1.11x. As a result, as was explained by the President, for fiscal 2016, ROA was 1.9%; ROE, 7.6%, getting close to medium-term management plan targets of 2% and 8%, respectively.

Moving on to cash flows. Operating cash flows were plus JPY 900 million and investing cash flows were minus JPY 32.2 billion. Free cash flows were minus JPY 31.3 billion net outflow. Operating cash flows decreased significantly year-on-year. The reason is in relation to tobacco business as was explained in relation to balance sheet.

Balance [between] receivables and payables increased by JPY 40 billion in relation to tobacco business. At March 2015, with the announcement from Philip Morris that the European plant closure will be made, we increased the inventory in our tobacco business. And therefore, as of March 2016, cash flow was a surplus of JPY 10 billion. So comparing March 2016 and March 2017, with tobacco business alone, the working capital increased by JPY 50 billion.

In addition, during fiscal 2015 in relation to Venezuela automotive business, it was claimed for compensation on export insurance. And therefore, compared to March 2016, operating cash flow decreased significantly.

I'd like to move on to forecast for fiscal 2017 using supplementary material #2. I'd like to draw your attention to the left-hand side of that sheet. Net sales based on Japan GAAP are projected to be JPY 4.1 trillion, up JPY 354.5 billion. Operating profit up JPY 3.4 billion at JPY 55 billion. Profit before tax up JPY 11 billion and JPY 69 billion. And profit for the year attributable to owners of the company up JPY 9.2 billion at JPY 50 billion. We believe that these forecasts are rather solid as they are based on firm projections.

Conventionally, as asset replacement cost, we were including a buffer of about JPY 5 billion. But with the progress in portfolio improvement, the amount has been reduced in this forecast.

In light of volatility in market prices and exchange rates for Infrastructure & Environment business, Metals & Coal and Chemicals, we have stressed forecasts.

That concludes my presentation. Thank you for your attention.