MITSY - Mitsui & Co. Ltd. (MITSY) Q2 2024 Earnings Call Transcript
2023-11-06 07:27:02 ET
Mitsui & Co., Ltd. (MITSY)
Q2 2024 Earnings Conference Call
October 31, 2023 09:00 PM ET
Company Participants
Kenichi Hori - President and Chief Executive Officer
Masao Kurihara - General Manager of Global Controller Division
Conference Call Participants
Presentation
Kenichi Hori
Good morning, I'm Kenichi Hori, CEO. Thank you for joining us today. I will begin with an overview of the First Half Operating Results and the Full-Year Forecast. And I will then hand over to Masao Kurihara, General Manager of the Global Controller Division, who will speak on this in more detail.
During the first half, the overall global economy continued to slow. Even in such an environment, Mitsui has been able to generate earnings exceeding the figures laid out in our business plan, that we announced in May, through our global business portfolio that spans across a wide range of industries.
I will now summarize our operating results for the first half of this fiscal year. Core operating cash flow COCF decreased by JPY136.4 billion year-on-year to JPY475.1 billion, and profit decreased by JPY82.8 billion to JPY456.3 billion, however both made solid progress against the business plan.
In light of this progress, we revised up the full-year forecast. Compared to the business plan, we have increased our forecast for COCF by JPY90 billion to JPY960 billion and profit by JPY60 billion to JPY940 billion.
Furthermore, as we were able to reconfirm the robustness in our cash flow which was enhanced through the previous Medium-term Management Plan MTMP, we have raised the full-year dividend by JPY20 per share to JPY170, which will be the new minimum level during the current MTMP, ending in fiscal year March 2026. In addition, as we made progress with several asset sales, including a large-scale one, we have decided to implement additional share repurchases of up to JPY50 billion.
I will now explain our progress against the business plan. In the Machinery & Infrastructure segment, there was a gain on sale of the electric locomotive leasing business in Europe and good performance in the automotive business. In the Lifestyle segment a revaluation gain on previously held equity in Aim Services was recorded. These and other factors have led to these segments maintaining a high rate of progress against the business plan.
In the Chemicals and Iron & Steel Products segments, the rate of progress was low due to the decrease in demand associated with the slowing of the global economy and the impact of the fall in prices.
In the Energy segment, profit contribution from LNG trading and dividends will be weighted towards the second half and on a full-year basis we expect earnings to be above those set out in the business plan.
As I mentioned at the start of my presentation, we have revised up our full-year COCF forecast to JPY960 billion. Mineral & Metal Resources segment was revised up by JPY30 billion mainly due to an increase in dividends from associated companies. The Energy, Machinery & Infrastructure, and Lifestyle segments were each revised up by JPY10 billion. COCF for the company as a whole is now forecasted to be JPY90 billion higher compared to JPY870 billion in the business plan.
We have also revised up our full-year profit forecast to JPY940 billion. Based on the progress in the first half, the revised forecast for Iron & Steel Products segment is lower than the business plan, whereas it is higher for the Machinery & Infrastructure, Energy, and Lifestyle segments. COCF for the company as a whole was revised up by JPY60 billion compared to JPY880 billion in the business plan.
In this section, I will discuss cash flow allocation for the first half. In the first half, we steadily made growth investments in line with the key strategic initiatives set out in the MTMP, and also had major asset sales. Cash-in for the period was JPY758 billion, comprising COCF of JPY475 billion and asset recycling of JPY283 billion. Out of the asset recycling carried out in the first half, in particular, we view the electric locomotive leasing business in Europe, MRCE, as a well-timed large-scale asset sale that will also contribute to ROIC improvement.
Cash-out will be JPY771 billion, comprising investments and loans of JPY572 billion and shareholder returns of JPY199 billion. The main investments and loans in the first half included growth investments such as the acquisition of shares in Nutrinova, which manufactures and sells functional food ingredients, Aim Services becoming a wholly-owned subsidiary, and completing the additional acquisition of shares in Relia. There was a business integration between Relia and KDDI Evolva and a new company known as Altius Link was formed on September 1.
As I just mentioned, Mitsui is actively executing growth investments in the key strategic initiatives specified in the MTMP. The start of contribution to profit by these new projects is also progressing as planned.
The projects shown on this slide in bold have started to contribute to profit. As you can see, most of the new projects that were scheduled to start contributing to profit in FY March 2024 have already been implemented.
Furthermore, for projects that are expected to start contributing to profit from FY March 2025 onwards, investment executions or investment policy decisions have also been proceeding as planned. In the second quarter, we announced investment in a shrimp farming business, IPSP, in Ecuador, and a final investment decision on an offshore wind power project in Taiwan.
Next, I will explain the progress on enhancement of base profit as laid out in the MTMP. This slide shows the FY March 2023 profit, excluding the one-time factors and adjusted for commodity prices and exchange rates based on our FY March 2026 assumptions. Based on these assumptions, we will increase the base profit by JPY170 billion over the three years of MTMP.
With regard to the enhancement of base profit from existing businesses, we aim to improve this by JPY110 billion over the three years of the MTMP. Specific initiatives aimed at strengthening existing businesses are progressing mainly in mobility, healthcare and retail.
As an example of enhancement of base profit through efficiency improvements and turning businesses around is the steady progress being made in improvement of operations in the coffee business that recorded a loss in the previous fiscal year. Furthermore, progress was also made in initiatives aimed at exiting of several loss-making businesses.
As explained earlier, growth investments in new businesses are proceeding according to plan in each key strategic initiative. Based on current progress, we have already accounted for around half of the JPY60 billion contribution to profit from new businesses expected in FY March 2026.
Regarding our shareholder returns policy, as we were able to reconfirm the robustness in our cash flow we will raise the interim dividend by JPY10 to JPY85, raising the minimum full-year dividend by JPY20 to JPY170 throughout the period covered by the current MTMP. Furthermore, as part of our flexible shareholder returns, based on the progress made in asset recycling, we have decided to make additional share repurchases of up to JPY50 billion. We will continue to consider the enhancement of shareholder returns offering both stability and flexibility, with a view to sustainably increasing ROE.
That completes my part of the presentation today. I will now hand over to General Manager of the Global Controller Division, Masao Kurihara, for details of performance in the first half.
Masao Kurihara
I am Masao Kurihara, General Manager of the Global Controller Division. I will now provide details of our operating results for the first half. First, I would explain the main changes in COCF by segment compared to the first half of the previous year. COCF for the first half was JPY475.1 billion, a year-on-year decrease of JPY136.4 billion.
In Mineral & Metal Resources, COCF decreased by JPY91.7 billion to JPY177.8 billion mainly due to the decline in metallurgical coal and iron ore prices and the fall in dividends from associated companies and Vale.
In Energy, although there was an absence of the valuation loss on derivatives that was recorded in LNG trading in the previous fiscal year, COCF decreased by JPY47.3 billion to JPY77.5 billion mainly due to the impact of oil production facility maintenance, as well as a drop in oil & gas prices and a decrease in LNG dividends.
In Machinery & Infrastructure, although taxes associated with asset sales increased, COCF increased by JPY23.1 billion to JPY115.7 billion, mainly due to higher dividend income from associated companies.
In Chemicals, COCF decreased by JPY26.6 billion to JPY24.3 billion mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives. In Iron & Steel Products, COCF decreased by JPY6.1 billion to JPY1.2 billion, mainly due to lower dividend income from associated companies.
In Lifestyle, COCF increased by JPY10.7 billion to JPY29.7 billion, mainly due to higher dividend income from associated companies. In Innovation & Corporate Development, COCF increased by JPY1 billion to JPY19.2 billion.
Other factors, such as expenses, interest, taxes, and others which are not allocated to business segments, totaled JPY29.7 billion.
Please turn to page 14. I will now explain the main changes in profit by segment compared to the first half of the previous fiscal year. Profit for the first half decreased by JPY82.8 billion to JPY456.3 billion. In Mineral & Metal Resources, profit decreased by JPY112.6 billion to JPY134.6 billion due to the fall in prices of metallurgical coal and iron ore, the decrease in profit contribution following the sale of SMC, a metallurgical coal business in Australia, in the Q3 of the previous fiscal year, and the impairment losses on copper business in Chile.
In Energy, although there was an absence of the valuation loss on derivatives that was recorded in LNG trading in the previous fiscal year, profit decreased by JPY29.4 billion to JPY26 billion mainly due to the impact of oil production facility maintenance, as well as a drop in oil & gas prices and a decrease in LNG dividends.
In Machinery & Infrastructure, profits increased by JPY74.7 billion to JPY164.4 billion mainly due to the gain on sale of a European electric locomotive leasing business and good performance of multiple businesses such as ships, VLI, and construction machinery.
In Chemicals, although a valuation gain was posted, profit decreased by JPY25 billion to JPY14.3 billion mainly due to a fall in prices of fertilizers, fertilizer raw materials and feed additives.
In Iron & Steel Products, profits decreased by JPY11.3 billion to JPY3 billion, mainly due to impairment loss in associated companies and a lower demand. In Lifestyle, although there was the absence of the valuation gain on R-Pharm put options recorded in the same period of the previous fiscal year, profits increased by JPY43.7 billion to JPY69.4 billion, mainly due to valuation gain on the fair value of Aim Services and good performance of the processed food business in North America.
In Innovation & Corporate Development, although a valuation gain on the fair value for Altius Link was recorded, profits decreased by JPY9.4 billion to JPY26.1 billion, mainly due to a year-on-year decrease in profit from asset sales.
Other factors, such as expenses, interest, taxes, et cetera, which are not allocated to business segments, totaled JPY18.5 billion.
This page shows the main factors that impacted year-on-year changes in profit. Base profit decreased by approximately JPY61 billion. Although there was absence of the derivative valuation loss in the previous fiscal year in LNG trading, and performance improvements in IPP business as well as coffee trading, there was an increase in interest expenses, a decrease in profit contribution following the sale of SMC in the previous fiscal year, and lower profit from trading mainly in Chemicals.
Resources costs/volume decreased by approximately JPY32 billion mainly due to a decrease in production volume resulting from maintenance of some production facilities, as well as an increase in exploration costs in energy upstream businesses, and increases in fuel and labor costs in the Mineral & Metal Resources business.
Asset recycling resulted in an increase of approximately JPY62 billion mainly due to gains from the sale of MRCE, a European electric locomotive leasing business.
In commodity prices and Forex, profit decreased by approximately JPY53 billion. For commodity prices, profit decreased by approximately JPY41 billion due to lower oil & gas prices, and JPY40 billion due to a fall in metallurgical coal, iron ore, and copper prices, which resulted in profit decrease by approximately JPY81 billion in total. For Forex, profit increased by approximately JPY28 billion mainly due to the weaker.
Finally, for valuation gain/loss and special factors, although there was the impact of impairments in the copper business in Chile and the renewable energy business, there were also valuation gains through new growth investments leading to an increase of approximately JPY1 billion.
Here we have a comparison of the newly announced full-year forecast against the business plan announced in May, with a summary of the factors involved. Base profit is expected to increase by JPY12 billion. Although we expect lower dividends from the LNG business, good performance in the automotive business as well as contribution from LNG trading and the ship related business should lead to higher profits.
For resources costs/volume, although we anticipate cost improvements in exploration and other areas in the upstream energy business, inflation in Australia and Chile is continuing and there has been lower production volume in the Australian iron ore business. Mainly due to the above factors, we expect a JPY4 billion decrease.
For asset recycling, we expect an increase of approximately JPY39 billion mainly due to an increase in gains from the sale of MRCE, a European electric locomotive leasing business, as well as a timely sale of Thorne HealthTech, among others.
Commodity prices/forex is expected to generate a profit increase of approximately JPY67 billion. In forex, an increase in profit of approximately JPY64 billion is expected, mainly due to the weaker yen.
Finally, for valuation gain/loss and special factors, mainly owing to impairments in the first half, we expect a decrease of approximately JPY54 billion.
Now let's take a look at the balance sheet as of the end of the first half of the current fiscal year. Compared to the end of March 2023, net interest-bearing debt increased by approximately JPY200 billion to JPY3.4 trillion. Meanwhile, shareholder equity increased by approximately JPY700 billion to JPY7.1 trillion. As a result, net DER is 0.48x.
That concludes my presentation.
Question-and-Answer Session
Q -
A - Unidentified Company Representative
Now, we'd like to open the floor for questions. I have two questions. First is on Slide 10. Base profit earnings power expansion. As President Hori said, on the right, the new projects contribution to profit JPY60 billion, and you said that half of them has already been accounted for, but it is somewhat difficult. Looking from outside to see the green portion on the left, how you would make this look? Of course, efficiency improvement and turnaround, JPY110 billion. To what extent you are making progress? I do understand that it's difficult to quantify the progress. But if it is difficult, then you may have mentioned specific examples like coffee business, but with how much certainty you can have a dialogue with the share market? I think that would be reflected in your real earnings power and also dividend in the future. So at this moment, including specific examples, how much progress have you made at this moment on the green portion? If you can share that with us that would be appreciated.
And the second question is just for clarification, the philosophy behind shareholder returns. At the outset, as President said, the dividend increase has been based on the cash flow and also share buyback has been also considered. But you have made this decision, by looking at the past, but what about forward-looking prospects? Well, for example, base profit, earnings profit power is increasing because of new projects. You are also taking that into account to make decision on dividend increase. For example, if you are in trouble in the future. If you can confirm that you can also earn profits in the projects, we can expect a dividend increase to remain valid. For example, the share buyback. If the python is going well as planned, then the share buyback is also one of the options. So the additional share buyback and also forward-looking shareholder return. If you can, also share that with us, that would be appreciated.
Kenichi Hori
Thank you for the question. For the first question on Slide 10, on the left the existing business, improving efficiency and turnarounds, the strengthening existing business and improving efficiency and turnarounds, the progress that we have made, so as you said, to explain on a quantitative basis is, maybe integrated. We explained this on a quarterly basis. If we explain on a full-year basis, then the accuracy maybe better. But as we completed the first half as far as we can say, for example in the retail and the food there is a Ventura in the U.S., and if you look at the existing business in the most recent performance, the business has been strengthened certainly. But aside from the core business, whether the profit can be sustained in the future, whether you can come up with actual profits in the future. So we have part of the business sold. So the remaining business is more certain to continue to have sustainable profit. So the investee companies within our group as associate companies and including business restructuring is easier to understand.
But the trading business that we do as a parent company basis, the coffee, you reduce the management resources to increase return. So you reduce risks and increase the return. So that's what we are seeing in this fiscal year. So there's ingenuity in the business field. And so this is going to be one of the steady factors to achieve JPY110 billion. But to what extent it is certain. Our progress has been made. We, at the end of the fiscal year, it would be better to share the information at that point because of bureaucracy.
But in healthcare, in IHH, aside from the core business, the educational business is also part of the – but that has been sold out. And if you look at the whole IHH business, the business foundation as a whole has been more organized. This is one of the investee companies, but that's what has happened. And dividend income from IHH is expected to increase because of that. So these are one of the fundamental projects, which is part of one of the examples of JPY110 billion in worth of improvement on a full-year basis.
And as for mobility business, the existing business strengthening is what we are doing. And in the Medium-Term Management Plan announcement, we have shared with you the business cluster strategy was shown for mobility and in the peripheral businesses of what we do. That is what is happening as part of the progress. So we like to make steady progress in these fields. So after six months, if you ask me if I'm satisfied, well, there has been a certain progress made, that's for sure. But there are several more initiatives that has already been agreed internally to be executed. And so we'd like to execute them steadily. And on the interval that I just mentioned, we like to keep you posted on the progress.
And as for the second question, for the shareholder return policy, throughout the MTMP period, the philosophy has not going to be changed. So on the core cash, operating cash flow is 37%, is going to be achieved, and that should be achieved in the span of three years, and that is the basic. And sometimes we use share buyback or we produce a dividend study, and hopefully, we'd like to increase the dividend. So that's the combination that we have in mind.
And whether dividend is decided based on the past performance or with a forward-looking perspective, well, the progress toward a cash flow increase in the Medium-Term Management Plan, that is what we are looking at. And also, JPY60 billion contribution with the new projects on the right. There's many projects that have immediate profit contribution. So by accumulating those, how much we can achieve throughout the span of the Medium-Term Management Plan is what we are looking at.
So the minimum dividend could be increased to increase dividend, whether we have the actual foundation to be able to do that. That is what we're looking at before we make announcements on the potential dividend. And both investment and asset recycling projects, there are numerous. And in this quite difficult to foresee business environment, the strengths of balance sheet matters. So that is always taken into account in deciding share buyback.
So if there is any good projects, then we would do the share buyback. No, not that sort of direct linkage. So if there's a divesture, a good opportunity for us. We have to take a comprehensive judgment. And if we decide that this is appropriate to fund the share buyback compared to other testing items. If we decide that this is significant or this sound in terms of business management, then we make decisions. So we are making such comprehensive decisions, and that's what I like you to understand. Thank you.
Unidentified Company Representative
I have two questions. First, this time, the announcement, Q2 in energy, there was a decline. And if you only look at Q2, there are segments which are in red. So because of the Forex situation, it's very difficult to see the underlying profit. And you changed the revised JPY170 billion. So what is the level of that profit or quarterly profit or others excluding the one-time? I think that the underlying profit is about JPY245 billion level. So what is the current level of the underlying profit at this moment, if you have such understanding or image?
My second question is kind of overlapping. So chemicals and iron and steel products, we are seeing some weaknesses. On Page 16, you have changed the forecast. So I think that the [2 billion] is the change. And you mentioned, so there are some differences among the segments. So what I would like to know is that some weakening segments, are you clearly seeing them? Are you seeing some slowing down? If you only look at the numbers, it gives me the impression that there are some slowing down. So are there any segments which we need to be more careful about? Do you see such a tendency? That's my second question.
Kenichi Hori
Thank you for your questions. You asked multiple questions about our underlying profit. If I may talk about the macroeconomic situation, I think that the tendency is going to intensify. I think that when you look at our earnings as a whole logistics distribution, and also that we have investees and group companies and trading, and we steadily increased the flow business. And also by replacing the portfolio there could be some profit and in some cases through exiting. There are probably pluses and minuses, but we have to look at the net number.
And as for the business model, rather than the earnings, while we are holding, we can also get the profit through exist. And we already have a model of that. So if you look at the comprehensive picture, I think, you really need to look at this overall base profit. It's becoming more and more complicated. So I think we have to make sure that we have a very good communication with you. So as a trading company, especially in our case, we have a trading and investing and others. So I think we really need to have a comprehensive perspective.
So you are asking us our underlying profit looking at the latest numbers. In energy, and the difference between the first half and second half are becoming clearer. And if I may explain that, so in trading with the delivery at the realized profit just happens that in the second half we have a higher concentration. So the dividend from the associated companies and also if you look at the timing of the exiting and so forth, there are positive for the full-year. In energy as our underlying profit, I think you really need to look at the full-year plan or budget.
In the area of the mobility, the second half, well, there's a similar tendency in infrastructure as well. But the second half, when you look at the world economy and U.S. economy, there's a tendency that the trend will come down in the second half, that is in our assumption. So to a certain extent, when it sustains there could be some upside.
So including all that, and in relation to your second question, more recently the Chinese economy has been slowing down. So in consideration for that, our forecast in the second half or the second half updated forecast. And if you include the one-time factors, you will be able to see the foundational capability that we have. And that is what you were asking in your question. I think I have answered to your first question. So in that sense, in the second half, JPY480 billion is expected, and that's your true capability.
Well, you have to exclude the one-time factors. And then the first half and second half, there are some differences, and you have to average that based on the fiscal year, and you get to the closer number. I want to answer to your question more, specifically as possible. So as I mentioned at the outset, the revenue model that we have, there are different patterns and I would like you to get them comprehensively, and that is also very important.
Point of clarification for this year, the asset recycling and the MTMP, you also mentioned that, and we see that in the first half. And is this something that is not going to continue? It is higher this year, right? Yes, slightly higher. There is an impression, but we are replacing the portfolio steadily so that the business foundation based on our future plan is strengthened. So in the process of that, the portfolio replacement, rather than looking – sorry, more than the past, it's increasing. So we have to be disciplined at the same time. And by having the longer term, there are some projects that we need to have a longer timeframe. So there are some differences depending on the projects.
And to your second question, the chemicals and the iron and steel products. In chemicals, the logistics and the distribution, in China, we are down in the second quarter. And I think we are starting to see the bottom emerging. So in the second half, we expect the recovery in iron and steel products. The export from Chinese mill is increasing, so the China hitting the bottom economy, and also the Chinese government stimulating the economy. If you look at all of those factors, the economy in China will bottom out. So we would like to look at that and continue to discuss.
As for the full-year forecast of iron and steel products, that is due to the gas dump impairment loss. And that is how I would like you to understand. And at the same time, in chemicals, there are several loss making projects, and we exited from some of them, they're minor, but there have been multiple. So as you can see in Q2, we'd like to make sure that we continue to do so to increase the flow earnings. So that is also a factor.
So if you look at all of them, the full-year forecast, I think that would be the basics. But as you said, that chemicals and iron and steel products closer to the materials, especially the situation of the different regions in the world. So I think this could be a leading indicator. So we are very closely watching what would happen to those segments in Q3 and Q4. We will be sharing with you our observations on those. I hope that answers your question. Thank you.
Unidentified Company Representative
I would like to ask two questions. My first question about the cash flow allocation. As a result, you have announced our shareholder returns. And for this fiscal year, the total return is about 39%. So because of big divestments, you are able to increase that rate. But looking at the base profit power and the cash flow, I think it is exceeding the plan. In other words, the cash flow that can be used is increasing. Are you going to increase the budget for investment? Or are you going to increase shareholder returns? Maybe you will be able to increase shareholder returns in order to keep ROE at a high level that maybe needed. So maybe you are making considerations in that direction. Can you tell us your feeling first? And my second question about LNG, their important projects three of them. One is Sakhalin II, and one is Arctic LNG and the other is Mozambique, please. Thank you.
Kenichi Hori
Thank you very much for your question. As for your first question, for example, in the six months, the new investments made and the investments in the pipeline, they are quite good and stable. So we do have many project candidates. On Page 10, we are showing on the right hand side the projects. And these are something that we have been working on since the COVID-19 outbreak. And after investments are made, what are the value plan that we can formulate is something that we talk with our partners. If that is not completed, we cannot go into the projects. But these projects are new and they do embody such thoughts. So they are small, mid, and large projects in the pipeline.
But discipline wise, I think it is working well. So in reality, the hurdle or risk return profile, the demand from the company is becoming stronger. So in order to have a good flow of cash, we need to be creative to make it possible. So if there are project that is going to exceed our expectation, I think we'll be able to go into these projects and will be able to utilize the management allocation. When it comes to the core cash flow, if you can gather from the announcements made, I think, it is very solid. Therefore, we believe that there is a core cash flow, which we can multiply by, and we'll be able to see the shareholder returns, and they may become the sources for the returns going forward. So we like to make a good balance in order to move forward.
But, of course, we are conscious of ROE to the investments we need to be enhancing the discipline against the projects. So if a good projects are not realized, of course, in order to improve the capital efficiency, of course, we need to improve the ROE by moving to better shareholder items. Of course, in order to improve the discipline, of course, we need to look at the directly improving the ROE. So we are closely monitoring these items. So it is not as if we are tending towards either, but improving ROE is a basis for us from both sides. So we would like to be disciplined in these projects.
And as for your second question. You talked about Sakhalin and R2, both of them. We need to monitor the geopolitical situation closely, and of course, we need to follow the sanctions of various countries as well. So in order to have a stable supply of energy, these are very important projects. So we need to look at the current picture as well as the future prospects. As for Sakhalin, of course, we have been able to work with the related parties, and we have been having discussions with them, and of course, with joint venture partners and with different countries, we are continuing the discussion, so that we'll be able to have stable supply for the users in our country.
And as from Mozambique. The other day, I actually went to Mozambique myself. The security situation has improved drastically. And the Area 1, an area close to Area 1, the people living there had to move from that area, however, now they're returning back to that area, and the administrative services, et cetera, have been recovered. And the basic infrastructure, including food or services, is very important for the people. But that is progressing very well. And the operator total and the related parties, we are having discussions with at the moment.
But as soon as possible, we'd like to restart the construction and the outlook is now more clear. But I want to give you an accurate information. So I cannot give you the timing for the moment. However, we believe the conditions for the restart is now being accumulated, so we hope that we'll be able to restart in a timely manner. Thank you very much.
Unidentified Company Representative
Thank you. Next question, please. I have two questions. First, I would like to also, ask about JPY110 billion in increase in base profit. In the Medium-Term Management Plan, in terms of directions that you're working on. It's not just simple accumulation of numbers, but you are trying to change the mechanism inside, that is also part of that, including DX or GX. So the results of those initiatives are also part of the harvesting of the MTMP. I think that that has been also accounted for. So you may not be coming up with the numbers including those, I understand. But in this initiative, in the case of DX, it covers a lot of ground in different segments, and you're expecting results from all these. But in the GX, new projects and also project portfolio replacement maybe involved. But in the first six months, how much contribution can we expect from this, the quality of the projects businesses, or aside from the simple combination accumulation of numbers, what you have intended initially has been started off as you expected whether or not that was the case. That's my first question.
And second question, of course, the performance has been steady, but there's also a concern in the market for the uncertainty. And in order to be on the safe side, you are actually, about JPY55 billion upside, but that has been reduced to 10 – 16 billion, 1 billion, in the second half. So how much downside do we have to take into account looking at this number? Is there any protective measures that would be necessary like cost reduction down the road? How are you looking at those aspects as well?
Kenichi Hori
Thank you for the questions. For the first question. Slide 10, on the right, the profit contribution from new projects, this is accumulation of specific projects and contribution has been accumulated. And you mentioned GX and DX as well. So I'd like to also cover that. The digital transformation or DX using the tools for that, we have to enhance competitiveness of the whole company, and that's what we're doing on a company-wide basis. And it's not explicitly included in this profit contribution from new projects. However, if parent company project promotion headcounts have not been changed while running the larger portfolio or projects with better quality, that is what we are trying to do. DX will be directly effective in that. So company operation level has to be enhanced using DX. That is one of the targets. So it's not included in profit contribution from new projects, but of course, we can double what we can produce without changing a number of headcounts. That's where it matters.
And so the number of headcounts have to be made clear with accountability so that with the DX, you can do this at less, that has to be made clearer to everybody inside the company, and that's how we are doing. And somewhere down the road, we'd like to share that with you. And as for energies, JPY60 billion for new projects, energy transition will take time. So probably on the third year of MTMP, part of that will be leaped, but maybe the rest will be beyond that timing. So the timeframe may have to be a bit shifted in looking at this.
But in energy transition, what is critical in terms of materials, and if there is already a market for that, then the scarcity is something that we like to maintain as a professional. So if the project investment in that area gets successful because there is a market, and the business is viable, then there's immediate result that we can expect. In the renewable business, it may take time, for example, but in terms of materials, there could be some projects that would have sooner effect. And so we'd like to combine all these different types of projects.
To answer your second question on the whole economy, in the second half, the evaluation gain or loss, there is a certain model that has been provided to you. So what's inside? So rather than business sentiment, loss making businesses need to be sorted out and there are many measures to be taken, and sometimes there's no other choice, but to charge the evaluation loss. But then that would certainly improve the flow. And you can actually use that management resources to some other – for some other purposes.
And there are some steady progress made in the projects – some projects. We cannot disclose what's inside, but it's not necessarily related to the business sentiment. But the problems that we had already been having needs to be resolved. That's what we are doing. And as for economy-related initiative, we are on a high alert or that's what we are telling the whole company to be in, especially in order to respond to cost inflation, pricing strategies have to be considered how much pricing power and price increase power do we have, and how much of value we can increase.
And in the cost increase on the increased interest rate environment, how we can respond to that in the mobility in North America, if the interest rates go up, with the combination of the existing businesses that we have, how we can deploy that in the services and products. That ingenuity is really what it counts. And that is what we are doing on a whole company basis. And of course, we are certainly cautious about the whole economy, but the operation level has to be enhanced. That is the basis, and that is what we are doing as a whole company-wide initiative. Thank you.
Unidentified Company Representative
I have two questions. First, as the President Hori mentioned, the price strategy vis-à-vis the changing costs were mentioned. So when the economy is uncertain, the cost management becomes very important. So from that perspective, when you look at the results, the SG&A is up by 20% year-on -year. So in Q1, year-over-year, 18% increase, I think. So for Q2, it seems that this has accelerated slightly. So including the inflation and also the Forex, the prices are rising. I think those are the reasons. So from the cost perspective, is this as you expected or is it manageable or is it higher? So you need to take some additional initiatives. So I'd like you to explain on costs in general. That's my first question.
The second question is about the cash flow allocation. Again, so on Page 8, so growth investment from Q1, it's increasing. So for the full-year vis-à-vis the target of MTMP exclude the management allocation in six months, I think that the progress has been about 50%. So for your company from [indiscernible] on investments creating the kind of a cluster of companies. I think that's something that was included in MTMP. And the size of those, are they becoming bigger or is this just a matter of timing? If you can explain that. Thank you.
Kenichi Hori
Yes, thank you for your questions. So to your first question, the SG&A increasing, there are several reasons behind that. Of course, the inflation is clearly one of the factors and overseas businesses due to the Forex. The SG&A has been increasing based on yen. So, of course, that the revenues are up due to the Forex. So that is one thing. And there are several things that are examples of the consolidated basis. For example, other some companies which are consolidated from the equity method. So that will be included in SG&A. So that is another factor.
And as a core business, the positioning could be changed and also the gross profit, everything will be accounted for. So that is how we would like you to look at. But as I said earlier, when adding the value to the projects and the employees at the headquarters or each business or projects, cost management and also improving the leverage of the operation, those are the things that we like to work on steadily.
To your second question about the capital allocation, the growth investments. So especially when there are a lot – well, it is not the case that we are seeing a lot of projects which are increasing in scale. It is always the case that we have candidates of those projects, but some of them are the ones that we don't actually do or choose not to work on. So there have been those projects like that in the past multiple years. So we will scrutinize and we will come up with the different alternatives and verify that. And when we feel confident in promoting and proceeding with it, we will be making announcement to you. So we are very selective and we continue to be selective.
And for the future, in order to have a good basis for the earnings. Continuously, we need to pursue the different projects and also, we want to be disciplined to scrutinize each one of them. And we are in the various businesses at the same time. So whether the businesses or projects are good and at certain time, we need to continuously monitor. And I think we have a mechanism to do so because there are so many candidates. So in that sense, the growth investment need to be managed by the management team. I hope that answers your question. Thank you very much.
Unidentified Company Representative
Any other question? I would like to ask two questions. My first question is on Page 15 about increases and decrease. So I believe that, of course, the interest is something that is impacting. So, of course, the sensitivity and how much of an rising interest rate is going to impact the business. If you could explain that, it would be appreciated. And in addition, it was explained earlier with the rising interest rate. How would you be able to enhance the earning power in order to improve that net profit? That is a question.
And the second question about Sakhalin II, I think it was in July or August of this year, there has been some kind of maintenance after Shell has been excluded from the project. And it happens every two years. If there were no issues, that's fine. However, if there are any implication from the maintenance, please let us know.
Masao Kurihara
Thank you very much for the question. Well, the foreign exchange sensitivity will be answered by the CFO later, but when the cost for interest rate goes up, how are we going to transfer that to the business, I believe is your question. Well, dependent on the industry, I think, how they do it is different. However, recently, it is going well in the mobility business and that is being maintained. But the product mix, I think will be the deciding matter, lease, the rental, the management of the fleets, so we are in contact with the consumers through that business. So credit given is something that we need to look at as well.
So we have to have variety of menus and where do we put the weight is going to be very important. Where should we have the actual assets is going to be very important as well. Therefore, we need to have a flexible decision making and we need to have the tools necessary. I think that is very important. And also when we make investments, the interest rate cost is going to be higher. And if that is the case, the M&A with debt, I think that is possible. However, we need to have a good return analysis, whether that is being done and against that debt, we need to take safe measures for that business. So in other words, long-term stability, that needs to be looked at very carefully. So I think we need to look at all these ideas. And of course, the CFO unit and business units are working closely together to make that possible.
Can you talk about sensitivity, please? Yes. I want to talk about procurement of the company. So it's a long-term procurement, and the interest rate is variable. That is a basis. So this is just a rougher calculation that we do have. In yen it's a 0.1%, before tax, I think it's about JPY2 billion plus or minus. And in U.S. dollars, basically for foreign currency loans, it'll be based on U.S. dollars 0.1%, and before tax about 2.5 billion. That is a test calculation that we have.
But as a President said, of course, with the interest rate going up, there maybe some impact on the Forex and of course, price transfer. And also transferring to business is something that we need to look at as factors. And as a waterfall chart showed, if we look at the items, it'll be shown on the top left on that page. But, of course, the fact is allocated to different areas. So for each of the factors we are seeing increases and decreases. Therefore, I hope you'll be able to consider those factors in total.
And as for your second question. Of course, we had maintenance period, but through the maintenance, I didn't see any issues. Well, this is regarding the operation, so I will not be specific, but we can say that there were no major issues. But the operation has been going on for a long time. Therefore, we have expertise from different partners’ efforts from the past, and the expertise has been accumulating at the field. So that is how we are responding. Thank you. And about the sensitivity, I mentioned, this is about the payer side, so please look at our numbers from the payer side. Thank you very much.
Unidentified Company Representative
Thank you very much. Are there any other questions? I have two questions. The downside protection for the profit. As I listened to your presentation, there are management efforts to strengthen that. But at present, what are your thoughts on that? Can you just share that with us?
Second question is about share buyback, JPY50 billion up to January is what you said. And this is based on cash flow probably. But, after that, on the continuous basis, more specifically, by the end of this fiscal year, there could be one more round. Potentially if you can also comment on that would be appreciated.
Kenichi Hori
Thank you for the questions. In today's Q&A as for the downside of protection, I mentioned, several times, so I'm not going to repeat that. But as for the downside system, it is the mindset of the managers that matters in the company. Especially, there are so many unexpected events happening around the world, so you have to be agile and you always have to be ready with alternatives all the time. And you cannot say that this is enough. So you have to be always be ready for responding to those challenges.
And in autumn, the whole portfolio is now being re-looked at. In the spring, the business plan is being put together, but after six months in autumn, we will revisit each one of those business projects in the business portfolio in the company. And as for the downside risk, is there anything that we can do? Or is there any concern that we have in terms of scenario analysis? We're talking to corporate functions and that is exactly where we are now at this time of the year.
But because of this business environment and in this Asian era, we are strengthening that effort. And so those efforts have to be accumulated. So fundamentally, you have to keep enhancing the fundamental power of each business. That is what we have – have to have as a mindset. And bad news has to be communicated soon. And if you see that bad information, you have to take action. So you have to always have a higher awareness, and that is what we need to continue to do.
And with regard to the shareholder return, to your second question, the share buyback was announced, but beyond that, we're not in a position to tell anymore. So in the whole framework that we have shared with you, we would like to continue to give more thoughts. And on a timely basis, as soon as we are ready, we would like to share that information with you. So throughout the future dialogues with you, we'd like to give you the information. So I don't think it's appropriate to give you any preview today. So we just confirmed a whole framework and the progress that we've made, and that is what we are going to continue to do. Thank you.
Unidentified Company Representative
Any other questions? No other questions. It seems that there are no additional questions. So we would like to end the Q&A session now.
Lastly, as we announced via email on the November 30, Thursday from 3:00 PM, we have our Investor Day. Our President, Hori; CFO, Shigeta; CSO, Sato; and Daikoku, Senior Executive Managing Officer, will make presentations and the Director Uchiyamada and Audit and Supervisory Board Member, Tamai; and President Hori; and Vice President, Takemasu will be in the panel discussion on human capital. It'll be held at Otemachi Mitsui Hall, it'll be the hybrid event, and we wait for your participation.
And with that, we'd like to end today's briefing. Thank you for your participation.
For further details see:
Mitsui & Co., Ltd. (MITSY) Q2 2024 Earnings Call Transcript