Earnings Call: Q1 2022

Aug 3, 2021

Good afternoon. I'm Takakazu Chida, CFO. Thank you for joining us today. I will begin by giving a summary of the Q1 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 Q1 of this fiscal year, driven mainly by the U. S. And China. Our operating results for the period were significantly higher year on year as we continued steady performance and a 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 Q1. Core operating cash flow for the period increased by 159,100,000,000 yen to 269,900,000,000 yen and profit for the period increased by 128,700,000,000 yen to 191,300,000,000 yen 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 Q1, we will upwardly revise our full year forecast for Mineral and Metal Resources and Energy segments this time, reflecting the strong commodity prices. Core operating cash flow and profit forecasts were upwardly revised by 220,000,000,000 yen to 900,000,000,000 yen and by 180,000,000,000 yen to 640,000,000,000 yen respectively. With the aim of enhancing shareholder returns and improving capital efficiency, we decided to conduct share buyback to a maximum of 50,000,000,000 yen. 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 Q1, 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 were steady, and lifestyle is showing recovery through growth in COVID-nineteen 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 restricting 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 and metal resources and chemicals segments. Looking ahead, we will pay close attention to the impact if COVID-nineteen 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 360,000,000,000 yen comprising core operating cash flow of 270,000,000,000 yen and asset recycling of 90,000,000,000 yen including loan collection in the copper business. Cash out was 220,000,000,000 yen comprising investment and loans of 145,000,000,000 yen and share buybacks of 75,000,000,000 yen Main investment and loans included subscription to convertible bonds of PTCT 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 100,000,000,000 yen to 3,400,000,000,000 yen and 200,000,000,000 yen to 4,800,000,000 yen respectively. As a result, the net DER became 0.71 times. Please turn to Page 8. As I mentioned earlier, we are upwardly revising our full year core operating cash flow and profit forecast to 900,000,000,000 yen 640,000,000,000 yen respectively. In Mineral and Metal Resources and Energy segments, we have revised forecasts mainly due to changes in commodity price assumptions. As for the other segments, we will review forecasts when we announce the results of the Q2 of this fiscal year as usual. That completes my presentation today. So I will now hand over to our Global Controller, Tetsuya Shigeta, for details of the Q1 performance. Thank you. I am Tetsuya Shigeta, Global Controller, and I will now provide details of our operating results for the Q1. Please turn to Page 10. First, I will explain the main changes in core operating cash flow by segment compared to the Q1 of the previous fiscal year. COCF for the period was 269,900,000,000 yen a year on year increase of 159,100,000,000 yen In mineral and metal resources, COCF increased by 85,500,000,000 yen to 127,400,000,000 yen mainly due to higher sales price of iron ore operations in Australia. In energy, COCF increased by 10,800,000,000 yen to 47,200,000,000 yen mainly due to increase in oil and gas prices. In machinery and infrastructure, COCF increased by 25,100,000,000 yen to 38,000,000,000 yen mainly due to increase in dividend from Equity Method Affiliates. In Chemicals, COCF increased by 8,800,000,000 yen to 24,500,000,000 yen mainly due to steady trading business, primarily in East Asia and commodity market. In Iron and Steel Products, COCF increased by 2,200,000,000 yen to 3,800,000,000 yen. In lifestyle, COCF increased by 13,000,000,000 yen to 16,600,000,000 yen mainly due to sale of Colombia Asia's business in India, recovery of fashion and domestic retail businesses and strong food trading business. In innovation and corporate development, COCF decreased by 600,000,000 yen to 12,100,000,000 yen Other factors such as expenses, interest, taxes, etcetera, which were not allocated to business segments, totaled €300,000,000 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 128,700,000,000 yen to 191,300,000,000 yen In mineral and metal resources, profits increased by 86,800,000,000 yen to 1,119,000,000,000 yen 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 4,700,000,000 yen to negative 1,200,000,000 yen mainly due to decrease in revenue related to LNG and oil trading. In machinery and infrastructure, profits increased by 10,700,000,000 yen to 29,200,000,000 yen mainly due to strong automotive and commercial vehicles businesses primarily in North America. In chemicals, profits increased by 9,600,000,000 yen to 15,900,000,000 yen mainly due to steady trading business, primarily in East Asia and commodity market. In iron and steel products, profits increased by 8,000,000,000 yen to 6,700,000,000 yen mainly from steady performance in steel processing and trading business driven by steady steel market. In lifestyle, profits increased by JPY19,500,000,000 to JPY13,900,000,000 due to factors including increased profit in the hospital and health care business and in wealthy foods. In innovation and corporate development, profits decreased by 100,000,000 yen to 10,400,000,000 yen Other factors such as expenses, interest, taxes, etcetera, which were not allocated to business segments, totaled negative 2,600,000,000 yen Please turn to Page 12. This page shows main factors influencing year on year changes in profit. Base profit increased by approximately JPY 65,000,000,000 mainly due to increase in dividend received from Vale and Australian Iron Ore Business and strong performance of several segments such as machinery and infrastructure, lifestyle and chemicals. Looking at resource related cost volume, profit decreased by approximately 3,000,000,000 yen in terms of volume, mainly due to the impact of wet weather in Australian iron ore operation. Asset recycling resulted in a decline of approximately yen 3,000,000,000 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 48,000,000,000 yen due to steady iron ore prices and 5,000,000,000 yen due to oil and gas prices. In ForEx, Australian dollar appreciation against U. S. Dollar resulted in decline in profit of approximately 1,000,000,000 yen Finally, valuation gain loss and special factors contributed to increase of approximately 9,000,000,000 yen mainly due to the absence of impairment loss that more than be the coal business incurred in the same period of the previous year. Thank you. We'd like to go into the questions. Now we'd like to invite the first person to ask questions. Thank you very much. Thank you for your explanation. I have two questions. This time, you had a very good business performance. But for the full year, especially, Mineral and Metal Resources, 100 and 60,000,000,000 yen is the full year plan. What is the breakdown? You may not be able to say that, but how much percentage would be the iron ore, 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? [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] That's my first question. And the second question, at the full year timing, this is true, but from the Q1, you are making revisions to the full year forecast and share buyback. And what you have been advocating, 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 done going forward. For example, you said that you're going to review the resources in the second quarter as well. So after earlier stages in the full year, you may be changing into the company that can come up with the revision of the forecast. Is that correct understanding? That's my second question. Thank you very much for your questions. For both questions, Uchida, the CFO, will answer the questions. Thank you. As for the upward revision of mineral and metal resources, they assume the prices have been reviewed. Obviously, iron ore and copper have been reviewed and or metallurgical coal 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 assumed prices, the iron ore prices have increased. And so this is related to the iron ore prices mainly. And as for the revision of the forecast, in the Q1, it's been only 3 months since coming up with the full year forecast at the beginning of the fiscal year. As an internal process, we are maintaining the policy of not changing the forecast. So in every quarter, are we going to review the full set of forecasts? No, that's not our policy. But this time, what is assumed in at the beginning of the fiscal year, especially iron ore and metallurgical coal and crude oil, they are plateauing 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 or change 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 at earliest stage possible. So for the Q1, they assumed prices market prices have been changed, including the dividends that we can expect to receive. So for Mineral and Metal Resources and Energy segments, we have reviewed our forecast because of that. And as our share buyback, as we review the guidance, especially the core operating cash flow, will be revised in an upward manner in significantly. So ahead of the interim earnings report, of course, there will be expectation that will be heightened from the market. We can expect that. And rather than waiting for a long time, we can get ahead of that expectation. 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 Q1. Therefore, it really depends on the situation. So it is not the case that, as we have been saying, we will review the focus every quarter because the range of the revision could have a huge impact. That's why we decided it will be wiser to come forward with the guidance at earlier stage. That's all. Thank you. Thank you very much for the question. Now we'd like to take the next question. Thank you very much for taking my question, and thank you very much for the explanation. I would like to ask 2 questions. The first question about the cash flow allocation. The core operating cash flow has been revised up to 900,000,000,000 yen And you may not be reviewing this, but for the 3 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 if investments was $1,500,000,000,000 for the 3 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 Agile share buyback, what is the direction going forward? That is my first question. And the second question, you may not have reviewed the resources or non resources, but segments other than resources, the progress has been high against the plan. For each of the segments to the full year plan, the Q1 has been very strong. Is it sustainable from the Q2 onwards? Do you think each of the segments will be sustainable in their performances? Can you talk about them briefly? And of course, base profit to be encased, this is going to lead directly to dividend payment. How confident are you, including the introduction of ROIC? So what is your perspective on that point, please? So please answer my two questions. Thank you. Thank you very much for the questions. CFO, Chida, will answer your questions. When it comes to cash flow allocation for the next 3 years, as you 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 just ended, from the actual results, there are no major increases or changes. There has been up revision for core operating cash flow. But for investments, etcetera, there is no major change. Of course, we will review them for the half year results. But JPY 50,000,000,000 of buyback is addition to the shareholder returns that we talked about the 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 closely. And in the Q1 and the Q2, there are some phasing factors that are included, but we believe that the value is not that big as an impact. So the business operation, we believe, is sustainable, is continued. And machinery and mobility, especially in North America, when it comes to automotive and commercial vehicles, these businesses are very, very strong. And we believe these are the highlights in the results. When it comes to vessel trading, they are very strong as well. When it comes to chemicals, compared to the previous fiscal year, the global production is improving, so the trading is very strong. And when it comes to novice, methionine price is recovering more than we had expected. And ITC is normalizing as well, and they are very strong in general. When it comes to food, lifestyle, grains trading is strong. When it comes to retail and the staying in fashion, they are showing some recovery from COVID-nineteen and some are not showing any recovery at all. But in all, we believe that they are in a recovery mode. And when it 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 are seeing expedited recovery. PSC, medical devices to support COVID-nineteen vaccination, These are also contributing to our profit. And also, as we have indicated, we are seeing increases in demand in some 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 bad weather, and that caused some confusion. And supply chain was disrupted. And with that kind of limitations, we were able to utilize our logistic and marketing capabilities to the full, and we were able to lead them to profitability. So in the financial markets, we are seeing some peak outs, and we do understand that. So whether it will continue going forward is something that we are monitoring with interest. But in the first half, there are some phasing factors as well. So for July to September period, we believe that we'll be able to continue to see strong results, and that is my personal opinion. Business operation and environment, whether 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 investments into existing and new businesses 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. Evaluations. Thank you. Thank you very much. Thank you very much. We'll move to the next question. Thank you very much. I have two questions. First of all, it is related to what has already been discussed earlier. Trading is performing well, and the lifestyle in the Q1, how you can expect this good performance to continue? The trading is doing well because market prices are going up or if there is 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 are going up in the performance and most of the factors are concentrated in the Q1. Is that what you see? Or since 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 and lifestyle are especially seems to be performing well. So can you give us more details elaborate on that? That's my first question. And as for Mineral and Metal 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 Q1 last year, 36,000,000,000, 56,000,000,000, 48,000,000,000, 103,000,000,000, and then this quarter, 113,000,000,000 yen. So if you look back for the past quarters, the Western market price increasing in the iron ore, your profit seems to be increasing. And in from the Q3 to Q4 last year, I think the profit has had increased. And in Q4 and Q1, there was an increase of about 10,000,000,000 yen. So were there any other factors that can explain about this, like dividend from Vale or dividend from copper business? I 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 results or the dividend from Vale or dividend 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 I can predict going forward. Thank you for the questions. CFO, Uchida, will answer those questions. First, for the Q1, trading business, the steel products and chemicals and food, the factors are different from segment to segment slightly, but there is a strong pent up demand that may have manifested itself tentatively. But there was some supply restriction seen. So there was high volatility that we've seen. And with 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 various possibilities and giving some thoughts. I can't say this is the clear factor or something is 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 metal resources, the price of iron ore remains a big factor. And if you look at the sensitivity of iron ore, as for the dividend from Vale, that is not included in the sensitivity analysis. And dividend policy of Vale is that you exclude CapEx from 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 is has been a rich cash flow in the valley, and they have expressed more dividends to be distributed. And this could be a fluctuation factor. And if you look back the past performance, there was a tailing dam instant and there was a period when there was no dividend. So you have to take that into account. And as for the coking coal and copper, if you look at the sensitivity and also difference from our assumption, they are not that large, relatively speaking, compared to the iron ore. So there is not that much of a factor, but we have to closely look at the prices of coking coal and copper price and linkage with these prices. I can't think of any special factors that I am aware of other than that? Well, I'm sorry I have asked a lot of questions, but thank you very much for answering those. Thank you very much. We would like to take the next question. Thank you very much for the explanation today. I have one question. First about iron ore. The upward revision of yen160,000,000,000 Majority is from iron ore. And of course, sensitivity is not included for Vale. But you have given us a iron ore assumption price. So what was the difference from the original forecast? What major changed the forecast? And what is your perspectives going forward? Can you give us the updated information, please? When it comes to iron ore, the assumption, it is not disclosed. And it's very difficult to answer the specifics. I'm sorry about that. But we have not really changed the assumption in a major way. At the beginning of the year, at the explanation we had given, in the Q1, the iron ore price, they have been quite different from our original assumption or the normal level. And the beginning of the year forecast, I believe, is going to uphold. In other words, our prices will continue to decline towards the end of the year. But in the Q1, we have seen a big increase. And in the past months, it has been relaxed, and we believe the trend has changed. However, in other words, we have not changed our outlook for the future. So we expect the prices will normalize going forward. However, in the past 3 months, we have seen an upward hike, and we believe that has been a phasing phenomenon that is going on. And as for the assumption, the strong prices that we are seeing currently, whether because of changes in the situation, they have continuing, but our assumption has not changed. But we believe that our assumption at the beginning of year is now being delayed by 3 months. When you talked about iron ore, you believe that it is going to go down gradually going forward, and you have not changed that outlook. But in the Q1, 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 have expected? Of course, looking at the institutions announcing their forecast of the market prices, I think the liquidity is quite lax. So we have to look at what 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. And I'd like to ask a follow-up question on energy. The yen 20,000,000,000 revision for energy, I believe the majority will come from increasing oil prices. But you said that the gas price is assumed to go up as well. Is it being included in this revision? Gas is also included in our revision. Thank you. Thank you very much. Understood. Thank you very much. Thank you. Let us move on to the next question. Thank you for the 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, non resource is expected to increase profits, and then you will have overall increase in profits. But from this fiscal year to next fiscal year, have you not changed that forecast? Or the profit increase factors may have moved being moved up in the fiscal year, so you don't you are not supposed to maintain that forecast for the next fiscal year. Is that what you're saying? That's my first question. And as a second question, as CFO, what are the concerns that you have? What are the factors? Is it COVID-nineteen or global economy? If there is any specific concern that you might have, can you share that with us? Thank you for the questions. CFO Uchida will answer those questions. At the beginning of the fiscal year, as for the March 2023 forecast, there is no major change that is necessary. That's our understanding. As for the market prices, there is a fluctuation and we will be affected. But as you said, in the non resources area, there is a steady growth that will be incorporated, and we would like to achieve that. And in the market prices, we have reviewed our assumptions to do this upper division. And if you look at the progress from the full year, maybe at the interim report, we can take a relook at that. So we don't need to change the focus for the next fiscal year. So what was the next question the first second question, the concern? Well, in the near term, in the Asian region, there's a re expansion of COVID-nineteen and so is the in the U. S. And this could affect the economic recovery. What would be the impact? That is some things that of great concern. And if you look at the business environment and sentiment, to what extent would it be continued? That is one of the issues, big issues. And there is a heightened volatility and commodity prices are going up. And on one side, in the project, there could be increase in cost because of that. In EPC and in projects, the cost management should be done. And also, commodity prices, well, in the near term, there were some things that have softened in the prices, but this could lead to counterparty risks. And there is such concern internally because we 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 an 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 we can cope with that, that is expected to continue to be a challenge for us. Thank you. Thank you very much. We'd like to take the next question. Thank you very much. Can you hear me? Yes, we can hear you. Please go ahead. Thank you very much. When it comes to mineral and metal resources and energy, the changes in the market have been shown in the waterfall chart provided. So the cost is not a major factor here. But going forward, Vale will recover. And when it comes to volume, of course, the copper and also reserves and production, what are the impacts coming from them? Or is there any concerns on the cost side? So can you talk about the impact on the business, please? And you talked about COVID-nineteen impact and their positives and negatives. But currently, Indonesia and Thailand, they are seeing expansion of COVID-nineteen. What are the areas in which you are seeing impact from those? Is there any areas that you are very concerned about when it comes to COVID-nineteen risks, please? Thank you very much. I'd like to answer the first question, and the second question will be answered by Uchida. The first question about mineral and metal resources and other factors that is not related to market. The negative factors include iron ore, and that is cost related. As the market increase, the sales commission is going to increase as well. And of course, the production volume, river, because of flooding and heavy rain, it was impacted. And of course, some construction work that was needed, and that led to a decline. And when it comes to the cost in the Q1, it was about negative yen 4,000,000,000 And for volume, for iron ore, it was minus or negative JPY 2,000,000,000. I think these were the factors. When it comes to coal or copper in the Q1, there were no major factors. Uchida will answer your second question. Yes. When it comes to COVID-nineteen impact, we are seeing increasing cases in Asia, and there are some several serious situations that we are seeing. And the Japanese personnel who are working in those areas have been coming back home, and we have to, of course, secure the safety of our personnel. But when it comes to businesses and operations, there are no trends that are negatively impacting businesses. Of course, we have to monitor the impact on our business going forward, but remote work operation is in force 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, there has been diminishing demand, but they are not of major concerns. But we will monitor the situations going forward. Thank you very much. Did that answer your question? Yes. Thank you very much. Thank you. If there are no questions, we'd like to close the Q and A session. And that concludes the briefing. And this will be webcasted in IR archive of the website of the company, and you can get access at any time you want. And this concludes the conference call. Thank you very much for your attendance.