Earnings Call: Q1 2021

Aug 13, 2020

Hello. This is Kazuyuki Masu, CFO. Thank you for participating in our financial results call today despite your busy schedules. First, I will walk you through the overview and then Mr. Noji, General Manager of the Corporate Accounting Department will provide details. There are 3 key points that I would like to explain. First, consolidated net income for the Q1 decreased by JPY 124,500,000,000 year on year to JPY 36,700,000,000. 2nd, the consolidated net income forecast for fiscal 2020 has been set at JPY 200,000,000,000, which includes the impact of COVID-nineteen. The third point is that there will be no change to the annual dividend forecast of JPY 134 announced in May. Now please refer to Page 1 of the material entitled Results for the 3 Months ended June 2020 and Forecast for the Year Ending March 2021. First of all, I will explain the outline of the financial results for the Q1 of 2020. Please refer to the box at the bottom left. Q1 financial results were challenging as we were severely affected by COVID-nineteen, mainly due to a large drop in automobile demand and a decline in metallurgical coal prices. In addition to the pickup of losses from Mitsubishi Motors, profits decreased in the automotive related business and LNG related business. In addition, due to a decline in equity income in the Australian metallurgical coal business and a decrease in dividends received in the copper business against the backdrop of the slump in resource prices, consolidated net income for the Q1 of 2020 compared to the same period of the previous year decreased by JPY 124,500,000,000. I will now share the forecast for the year ending March 2021. Please look at the bottom right box. While in the middle of a state of emergency, we announced financial results in May. The extent of the impact timed with the conversions of COVID-nineteen prevented a rational outlook and we elected to refrain from the releasing forecast. As no one can predict with certainty when the new coronavirus will subside or its impact on each business. After considering the Q1 results, we are announcing the FY 2020 consolidated net income forecast at JPY 200,000,000,000. This factors in JPY 300,000,000,000 as the estimated annual impact from COVID-nineteen, including the effect of stagnant resource prices. The dividend forecast of JPY 134, as announced on May 8, is not expected to change. To summarize the above, we faced a very tough start with 3 business groups in the red amid an unprecedented business environment surpassing the global financial crisis. As the business environment continues to be uncertain, we cannot be optimistic and we will continue to work with a sense of crisis toward achieving guidance. This has been the general explanation. Next, Yuzo Noichi, General Manager of the Corporate Accounting Department, will explain the details, focusing on the situation by segment. This is Noichi, General Manager of the Corporate Accounting Department. I will provide some details on some points. Please turn to Page 2, where I will start by explaining 1st quarter results by segment. I will focus mainly on the major changes. First of all, for natural GAAP, net income decreased by JPY 21,300,000,000 from JPY 28,500,000,000 year on year to JPY 7,200,000,000. This was due to a decrease in equity earnings and dividend income in the LNG related business. Industrial Materials decreased by JPY 12,000,000,000 year on year from JPY 11,400,000,000 to a loss of JPY 600,000,000. This was due to a decrease in business profit in the carbon business and equity earnings in the steel business. Next, for mineral resources, which is 2 rows down, was JPY 20,000,000,000, a decrease of JPY 39,000,000,000 year on year from JPY 59,000,000,000. This is due to decreased market prices in the Australian metallurgical coal business. Next, I will proceed to the right half of the slide. Automotive and mobility declined JPY 40,100,000,000 from JPY 17,400,000,000 year on year to a loss of JPY 22,700,000,000 due to impairment losses in Mitsubishi Motors as well as decreased equity earnings from Mitsubishi Motors and the Asian Automotive Business. Next, please turn to Page 3. Now let me explain cash flow. Please refer to the right side of the bar graph where fiscal 20 2Q1 cash flow is shown. Underlying operating cash flow in gray was JPY 114,900,000,000 and investing cash flows in orange was JPY 123,900,000,000 resulting in an outflow of JPY 9,000,000,000 adjusted free cash flow. The breakdown of main items comprising investing cash flow are raised in the section highlighted in orange in the middle of the table on the right. Outflow was JPY 227,500,000,000, which includes investments in HERE Technologies, which develops location data services, the acquisition of retail electricity customer base in the European Integrated Energy Business as well as sustaining investments and financing for the Australian metallurgical coal business and copper business. On the other hand, sales in collection was JPY 103,600,000,000 due to the sale of listed stocks. Net investing cash flow was an outflow of JPY 123,900,000,000. Next, please turn to Page 4. As I explained initially, we have set a full year consolidated net income forecast of JPY 200,000,000,000. First, I will explain this assumption. Although differentiated by business areas and regional environment, the impact of COVID-nineteen continued during the first half of the year. We decided to factor in the estimated annual impact of approximately yen 300,000,000,000 yen assuming that the economic environment will gradually recover in the second half of the year. Next, the bottom half of the slide shows the summary of the significant impacts by segment. We will specifically focus on the segments that have a larger ratio comprising the impact. Automotive and Mobility is expected to be significantly affected by a decrease in sales volume due to a substantial decline in global auto demand. Also, the mineral resources and natural gas below will be greatly affected by sluggish market conditions, such as falling prices for the metallurgical coal and crude oil due to a decrease in demand for steel products and petroleum. While some segments are negatively impacted by decreased global demand, demand stayed solid in segments centered on lifeline related business. Please turn to Page 5. Next, regarding the segment forecast for FY 2020, compared with the actual results for FY 2019, we will provide additional information primarily for the segments with significant changes in the operating income. First of all, natural gas is forecast to reach JPY 18,000,000,000, a decrease of JPY 52,300,000,000 from JPY 70,300,000,000 in the previous year. This change was due to a decrease in earnings and dividend income in the LNG related business. In Industrial Materials, we forecast JPY 3,000,000,000, a decrease of JPY 23,100,000,000 from JPY 26,100,000,000 in the previous year. This decrease was mainly due to the decline in business profit in the carbon business and the drop in earnings in the steel products Next, regarding Mineral Resources, which is 2 rows below, we forecast a profit of JPY 63,000,000,000, a decrease of JPY 149,300,000,000 from JPY 212,300,000,000 in the previous year. There was a rebound of JPY 76,700,000,000, which was a reaction to the one off gains recorded in the previous fiscal year due to the reorganization of Chilean copper business. The decline in market price in the Australian metallurgical coal business also posed an impact. Next, please look at the right hand side of the slide. Automotive and Mobility on the upper right is expected to reach JPY 50,000,000,000 in profit, down JPY 69,600,000,000 from JPY 19,600,000,000 in the previous year. This shift was due to a decrease in earnings in the Mitsubishi Motors and Asian Automotive Business. Next, for the consumer industry, which is 2 rows below, we forecast JPY 7,000,000,000, a decrease of JPY 15,700,000,000 from JPY 22,700,000,000 in the previous year. The main factors was the decrease in earnings in convenience store business and apparel related businesses. Finally, in the lower right urban development is forecast to reach JPY 25,000,000,000, a decrease of JPY 9,300,000,000 from JPY 34,300,000,000 in the previous year. This development was mainly due to a decrease in earnings in the airport related business and leasing business. Please return to Page 6 for reference information that summarizes the assumptions on market conditions. My explanation is now complete.