MITSF - Mitsui & Co. Ltd. (MITSY) Q3 2023 Earnings Call Transcript
Mitsui & Co., Ltd. (MITSY)
Q3 2023 Earnings Conference Call
February 3, 2023 2:00 A.M. ET
Company Participants
Maroshi Tokoyoda - Investor Relations
Tetsuya Shigeta - Chief Financial Officer
Masao Kurihara - Global Controller
Conference Call Participants
Presentation
Maroshi Tokoyoda
We will now begin the financial results briefing for the first nine months of the fiscal year ending March 31, 2023 for Mitsui & Co. Thank you very much for taking time out of your busy schedule to join us today. Today’s presenters are Tetsuya Shigeta, the CFO; and Masao Kurihara, Global Controller Division; and I, the Head of IR, Tokoyoda will be moderating this session. CFO, Shigeta and Global Controller Kurihara will spend the next 15 minutes giving you a presentation. Then we will open up for Q&A. Presentation material is available on Mitsui & Co. website, investor information page for your reference.
Before we begin, we would like to inform you that copy right of today’s audio belong to us and our management company. Please refrain from reproducing or diverting all or part of the audio without permission for any purpose. Today’s meeting will be recorded and will be available on demand on Mitsui’s website at a later date.
Now, we would like to begin the presentation. First, CFO Shigeta.
Tetsuya Shigeta
Good afternoon, I’m Tetsuya Shigeta, CFO. Thank you for joining us today. I will begin with an overview of the operating results for the first nine months and full-year forecasts. I will then hand over to Masao Kurihara, Global Controller, who will speak on the results in more detail.
In the first nine months of the current period, Mitsui continued to generate strong earnings and posted record profit and Core Operating Cash Flow or COCF, both on a single quarter and nine-month accumulated basis, through our globally diversified business portfolio. Based on this good performance, we are revising upward our full-year earnings forecast to JPY1.08 trillion.
We are constantly aiming for healthy growth of shareholder returns, and will be making an additional JPY100 billion share repurchase, and will also be raising the dividend.
Please turn to Page 3 of the presentation materials. I will provide a summary of operating results for the first nine months. COCF increased by JPY98.3 billion year-on-year to JPY961.2 billion, while profit for the period increased by JPY207.5 billion year-on-year to JPY840.8 billion. Furthermore, it resulted in solid progress from the previous forecast, announced at the time of the second quarter financial results.
In-light of this solid progress, we have revised upward our full-year forecast. Compared to the previous forecast, we have increased our forecast for COCF by JPY70 billion to JPY1.2 trillion and profit for the year by JPY100 billion to JPY1.08 trillion. For shareholder returns, the year-end dividend is planned to be raised to JPY70 per share, bringing the full-year dividend to JPY135.
Furthermore, we plan to set a minimum full-year dividend of JPY140 per share next fiscal year based on the JPY70 year-end dividend planned for this fiscal year. In addition to the JPY140 billion share repurchase currently in progress, we have decided to make an additional JPY100 billion share repurchase and extend the buying period. We will also steadily progress with the cancellation of these treasury shares.
Please turn to Page 4. As you can see, each segment achieved solid progress toward the previous forecast. With regard to individual businesses, trading of raw and processed materials, and other products, automotive business, and healthcare business all continued to record solid performance.
LNG trading in the Energy segment recognized losses related to derivative transactions for hedging and other factors in the first half in advance. During the third quarter, physical deliveries corresponding to hedging transactions were realized and timing differences were resolved, and the business returned to the black.
Please turn to Page 5. As I mentioned at the start of my presentation, we have revised upward our full-year forecast for COCF to JPY1.2 trillion. We revised upward our forecast for the Energy segment by JPY60 billion, mainly due to LNG trading in which offtake volume from Cameron LNG increased. For the company as a whole, COCF was revised upward by JPY70 billion from the previous forecast of JPY1.13 trillion.
Please turn to Page 6. We have also revised upward our full-year profit forecast to JPY1.08 trillion. We revised our forecast for the Energy segment up by JPY80 billion, mainly due to LNG trading in which offtake volume from Cameron LNG increased, and for the Mineral & Metal Resources segment by JPY15 billion, mainly due to commodity prices. For the company as a whole, the forecast has been revised upward by JPY100 billion from the previous forecast of JPY980 billion.
Please turn to Page 7. In this section I will explain the cash flow allocation for the first nine months. Cash-in for the period was [JPY1.268 trillion] [ph], comprising COCF of JPY961 billion, and asset recycling of JPY307 billion, such as from the sale of the Australian metallurgical coal business, SMC, financial assets measured at fair value through other comprehensive income in the Machinery & Infrastructure and Lifestyle segments, and the Falcon power generation business in Mexico.
Cash-out was JPY790 billion, comprising investments and loans of JPY491 billion and shareholder returns of JPY299 billion.
Please turn to page 8. Reflecting the upward revision to the full-year forecast that I mentioned earlier, I will give an update on the cash flow allocation for the three years of the medium-term management plan. We are revising upward COCF to JPY3.02 trillion, and are expecting expansion in cash inflow. We expect we will have allocated JPY1.5 trillion to investments, JPY520 billion to the dividend, which reflects the increase in this fiscal year’s full-year dividend to JPY135 per share, and JPY1.78 trillion to the management allocation.
The Management Allocation of JPY1.78 trillion will be allocated in a balanced manner towards shareholder returns, growth investments, and strengthening our financial position. For shareholder returns, in addition to the decided share repurchases totaling JPY480 billion up until the end of the third quarter of this fiscal year, we have decided to make an additional repurchase of JPY100 billion. Of this JPY100 billion, the portion repurchased by March 31 will be designated as shareholder returns within the current medium-term management plan.
I will now explain growth investments. The globally diversified business portfolio is the source of Mitsui’s profitability. Leveraging this business portfolio, accumulated knowledge through growing and expanding existing businesses, and collaboration with trusted partners, we are promoting bolt-on type investments to existing projects and investments in adjacent areas.
We are positioning such type of investments as core of growth investments. The allocation to growth investments during the period covered by the current medium-term management plan is expected to be accumulated total of JPY280 billion. Furthermore, there has been progress in investment pipeline projects and we expect to have cash outflows in the next fiscal year.
As already announced, we plan to invest approximately JPY70 billion in making AIM SERVICES a wholly-owned subsidiary, and approximately JPY60 billion in the tender offer and business integration of Relia. In addition, as pipeline projects that at present negotiations have progressed and have a certain level of executional probability, we also have items related to energy transition, strengthening of natural gas value chain, strengthening healthcare and the creation of food and nutrition value chain.
We believe growth investments that fully utilize Mitsui’s strengths such as knowledge and networks accumulated over the years, will directly lead to the strengthening of our business foundation and the formation of business clusters with adjacent businesses, with a high probability of success.
Also, we plan to temporarily allocate funds to enhance short-term liquidity in order to strengthen our financial position based on higher interest rates and increasing market volatility.
Please turn to page 10. With regard to growth investments, I will explain the decision to make AIM SERVICES, a Japanese contract food service provider, a wholly-owned subsidiary as announced. AIM SERVICES is a contract food service company established as a joint venture between the Mitsui Group and US-based Aramark Corporation in 1976.
The company has expanded its business from contract food services for offices and factories to contract food services and facility operation support for hospitals, other medical facilities, stadiums and entertainment facilities. At present, it has approximately 3,900 business sites across Japan, and provides approximately 1.3 million meals per day.
Net sales were approximately JPY170 billion in the fiscal year ended March 31, 2022, and on a net sales basis, is ranked first in workplace dining and second for hospitals and other medical facilities. This additional purchase of JPY70 billion of shares to make the company a wholly-owned subsidiary will further strengthen and accelerate the expansion of its core contract food services business, and contribute to the enhancement of health and wellbeing through providing delicious and nutritious food.
Furthermore, we will promote the formation of a wellness business cluster by combining the contract food service business with nutrition and healthcare businesses.
Please turn to Page 11. Regarding the share repurchases and raising of the full-year dividend I just mentioned, total shareholder returns as a percentage of COCF for the three-year period for the current medium-term management plan is expected to reach our target of 33%. We will aim to continue to increase the dividend and also carry out share repurchases in a flexible manner corresponding to the stable improvement of our cash generating ability.
That completes my part of the presentation today. I will now hand over to Global Controller Masao Kurihara for details of the performance in the first nine months.
Masao Kurihara
I am Masao Kurihara, Global Controller. I will now provide details of our operating results for the first nine months. Please turn to Page 13. First, I will explain the main year-on-year changes in COCF by segment. COCF for the period was JPY961.2 billion, a year-on-year increase of JPY98.3 billion.
In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices, but COCF decreased by JPY77.5 billion to JPY355.5 billion, mainly due to the decline in iron ore prices and the fall in dividends from Vale.
In Energy, COCF increased by JPY123 billion to JPY275.9 billion, mainly due to an increase in oil and gas prices, and LNG trading in which offtake volume from Cameron LNG increased.
In Machinery & Infrastructure, COCF increased by JPY45.5 billion to JPY158.7 billion, mainly due to higher dividend income from associated companies, primarily in the automotive and commercial vehicles related businesses.
In Chemicals, COCF increased by JPY600 million to JPY72.5 billion. In Iron & Steel Products, COCF increased by JPY6.2 billion to JPY15.4 billion, mainly due to higher dividend from affiliated company.
In Lifestyle, although grain trading and other areas performed well, COCF decreased by JPY2.3 billion to JPY31.2 billion, mainly due to the valuation loss on the fair value of the drug discovery support fund.
In Innovation & Corporate Development, COCF decreased by JPY700 million to JPY34.4 billion. Other factors, such as expenses, interest, taxes, etc., which are not allocated to business segments, totaled JPY17.6 billion.
Please turn to Page 14. I will now explain the main changes in profit by segment compared to the first nine months of the previous fiscal year. Profit for the period increased by JPY207.5 billion to JPY840.8 billion.
In Mineral & Metal Resources, there was a positive impact from higher metallurgical coal prices, and a gain from the sale of SMC, an Australian metallurgical coal business, but profit decreased by JPY15.5 billion to JPY355.4 billion, mainly due to the decline in iron ore prices and the fall in dividends from Vale.
In Energy, profits increased by JPY162.5 billion to JPY190.8 billion, mainly due to an increase in oil and gas prices, and LNG trading in which offtake volume from Cameron LNG increased.
In Machinery & Infrastructure, profits increased by JPY38.9 billion to JPY131.1 billion, mainly due to good performance of the automotive and commercial vehicles businesses, primarily in North America.
In Chemicals, although profits were reduced due to falling prices and rising costs in the North American methanol business, profits increased by JPY3.1 billion to JPY54.7 billion as a result of prices and sales volumes centered on fertilizer and fertilizer raw materials performing well.
In Iron & Steel Products, profits decreased by JPY1.8 billion to JPY19.5 billion. In Lifestyle, profits decreased by JPY500 million to JPY42.3 billion. In Innovation & Corporate Development, profits increased by JPY7.5 billion to JPY49.7 billion, mainly due to gains on sales in the real estate business. Other factors, such as expenses, interest, taxes, etc., which are not allocated to business segments, totaled a loss of JPY2.7 billion.
Please turn to Page 15. This page shows the main factors influencing year-on-year changes in profit for the third quarter of this fiscal year. Despite performance being driven by trading such as in LNG, commodity derivatives, chemicals, grain, etc. and the automotive and ship businesses, base profit declined by JPY23 billion due to decreases in dividends from iron ore and LNG businesses, and the absence of profit from fair value through profit or loss that was present in the previous fiscal year.
Although costs decreased in the energy upstream business due to lower depreciation and a reduction in exploration costs, there was a decrease in volume in iron ore and coal operations in Australia and copper operations in Chile, and an increase in unit costs as a result of that volume decrease, as well as increases in fuel and labor costs. This resulted in a profit decrease of JPY41 billion under resources-related costs and volume.
Asset recycling resulted in an increase of approximately JPY62 billion, mainly due to the sale of the Australian metallurgical coal business, SMC, and gains from the sale of assets in the real estate business in the United States and Singapore. In Commodity prices and Forex, profit increased by approximately JPY207 billion.
For market conditions, despite the JPY65 billion decline in profit caused by falling iron ore prices, higher metallurgical prices resulted in a contribution of approximately JPY45 billion and increases in oil and gas prices contributed approximately JPY97 billion.
In foreign exchange, there was an increase in profit of approximately JPY133 billion, mainly
due to weaker yen. In valuation gain and loss, profit increased by approximately JPY2 billion.
Please turn to Page 16. Here we have a comparison of full-year forecast and the previous forecast, with a summary of the factors involved. Base profit is expected to increase by JPY122 billion, mainly due to trading of LNG and commodity derivatives, good performance of the ship business, and increased dividends from the LNG business.
Resources related costs and volume is expected to reduce profit by approximately JPY10 billion, mainly due to a decrease in volume owing to factors such as tightening of the labor market and bad weather in the Australian coal and iron ore operations, an increase in unit costs arising from lower volumes, and increased labor and fuel costs.
Asset recycling is expected to decrease by approximately JPY7 billion. Commodity prices and Forex is expected to increase by approximately JPY13 billion. Following revisions to the outlook for commodity prices, market conditions are expected to drive increases in profit of approximately JPY8 billion for coal, approximately JPY6 billion for iron ore and approximately JPY3 billion for oil and gas.
In Forex, a decrease in profit of approximately JPY8 billion is expected, mainly due to the stronger yen. Valuation gain and loss is expected to decrease by JPY18 billion, mainly due to the impairment of fixed assets in the Brazilian freight railway business.
Please turn to Page 17. Now, let’s take a look at the balance sheet as of the end of the third quarter of the current fiscal year. Compared to the end of March 2022, net interest-bearing debt increased by approximately JPY200 billion to JPY3.5 trillion. Meanwhile, shareholder equity increased by approximately JPY500 billion to JPY6.1 trillion. As a result, the net DER fell to 0.57x.
That concludes my presentation.
Question-and-Answer Session
A - Maroshi Tokoyoda
Now we would like to open the floor for questions. [Operator Instructions] There are two questions. Page 9, [just for clarification] [ph], management allocation is [indiscernible] what I like to ask about, earlier, the balanced allocation was considered to explain about this [range] [ph], that's how I heard. So, 1.78 trillion, I will be evenly divided on one-third basis, and JPY100 billion for each and the JPY100 billion difference was for share repurchase, and the management allocation for the three-year period is now over. Is that what, [indiscernible] that's just for gratification.
And Page 16 is the second question. The JPY110 billion, excluding one-time factor, just for three months, JPY110 billion is [crossing] [ph] earnings power cumulated. And of that JPY80 billion is from Cameron, that's how I understood. So, what is the background for Cameron, and also this base profit earnings power, the blue part business, including those can explain about the background? And also, sustainability of this base profit accumulation is something that I like to ask about, how long would it last?
CFO, Shigeta will answer that question.
Tetsuya Shigeta
Well, to answer the second question. Global controller will supplement my answer after myself. And for the first question, what you understood is correct. But just to be in the safe side, I would say that shareholder returns JPY100 billion was added for share buyback, that has been decided, but in the medium-term management plan or by the end of March, what we can achieve is, of course, this is up to the brokerage firms, and discretionary for them. So, there's something that is not – that can't be told, but if you look at the proportionate portion 25 billion to 30 billion will be probably implemented by the end of this fiscal year. And in this, as you can see in the footnote in start, this is the cash flow. This is the performance in the cash flow allocation for this fiscal period.
And as for [growth investment] [ph], what we can expect to be achieved is JPY280 billion, that it can be completed by the end of this fiscal year. And as [indiscernible], so there are things that we wanted to complete by this medium-term management plan, but some are carried over to the next period. So that would be probably JPY400 billion approximately that's in the pipeline. So that's how we are supposed to understand and then the remaining portion will be in the short-term liquidity. And to answer your second question, so from the base profit accumulation from the second quarter earnings forecast.
So, the focus at the time of second quarter earnings briefing proved to be conservative a bit and maybe this has been reflected in this earnings for base profits accumulation and as for LNG trading Cameron, liquefaction or tolling business there is a constant fee based on the volume that can be obtained, and it's coming out from that will be sold in the market and that is the trading business. But as the demand supply situation becomes tight, the production needed to be increased as much as possible, and we focused on that.
And so, the tolling production progress more than expected. And as a result, the offtake for us increased and the gross margin has resulted in the base profit increase and also LNG dividends has increased as well. And the energy projects that were responsible for each of those projects has been performing well. And dividends has increased each. And that's the second part. So, LNG business has been revised upwards and those are the two factors behind that. Global Control, will add some comments.
Masao Kurihara
So, as was explained, as a major factor, LNG trading, and LNG dividend, those are the two major factors. But in addition, commodity trading – in the commodity trading, the market volatility has been reflected properly in the business opportunity or revenue opportunity. And it has enhanced the profit. In the ship related business, the tanker market has been quite strong, which has increased profits. And a one-time factor in the tax refund was done in food and grain collection business in Brazil there was a one-time tax refund that was made, and in a coffee trading has recovered. And green trading has been also performing quite well. That's all. Thank you.
Tetsuya Shigeta
Does that answer your question.
Maroshi Tokoyoda
Well, there's a follow up question. You talked about tolling businesses made more progress than expected. And your profit has increased as a result, based on that in Investor Day, the other day, LNG trading volume in March 2020, it was close to 10 million tons and tolling businesses progress. So, the volume has just simply increased from that. That's how I understood. So, what about the durability of sustainability? Of course, if the tightness of the supply demand of LNG is continued, then this level of volume, do you think that this can be maintained? So, can you give us your thoughts on how sustainable this will be?
Tetsuya Shigeta
Well, for the near-term, if you look at the geopolitical risks that are manifesting themselves, LNG selling prices have been normalized for the short-term, but they have been maintained at the higher levels. But, for example, in Cameron business, the base gas is a [Henry Hub] [ph] price and even if you add tolling costs, the Asian prices have also followed the European prices, but spot prices between Europe and Asia has expanded and how long would it last? How sustainable would it be?
Well, the current situation in this year, whether it will be continued for long, that is quite unimaginable, but it is not the preferrable situation, but if the geopolitical risks continues, that we are facing and the supply chain changes derived from those risks, and energy market volatility increase, if those who continued then there will be heightened needs for global supply demand adjustment.
So, that's what we assumed and then the LNG trading business opportunity for us would be increased and our strength is that we own LNG ships and the shipper bottom tonnage allocation, and also users request can be accommodated. And there are business opportunities there. So, if you look at the margin itself, whether we can enjoy as much margin as we have enjoyed this year, but cannot tell, but continued profit opportunities will be there, and we can assume that.
Maroshi Tokoyoda
Next question, please.
Unidentified Analyst
Thank you very much for taking my question. I have two questions. The first question is on LNG once again. The profit is more than what we had expected. In the fourth quarter, I believe the derivatives will progress and advance. And as we have been explaining, [can you have] [ph] the low gas price, and with LNG there was a difference that was resolved, and spot price is going back to the normal price range, and if that continues, timing wise, from the start of next fiscal year, I think you need to look at the price difference or I may be asking the same question once again, but we do not know how the prices will fluctuate. So, after the contracts, and its transactions complete, and should we expect it to go back to the previous price range? And when will the timing be? That was to be my first question.
And my second question, the upward revision was announced this time. And in the fourth quarter, you are looking at about 240 billion. So, you're looking at higher prices. I mean, energy prices are high. So, what will be at your ability will be a question, but there may be some dark spots as well. I don't think there are any dark spots except resources. For example, in the U.S., you have a lot of businesses. And I don't think you are seeing it going down. So is that the correct perception?
Tetsuya Shigeta
Thank you very much for your question. First of all, after the second quarter until the end of the first half, we had phase differences and that has been solved in the third quarter. And at the end of fourth quarter, there will not be any phasing that will go into the next fiscal year. That will be my additional comment I'd like to make here. When it comes to the [fourth quarter] [ph], the actual realization that volume there may be some seasonal factors, but it is quite large.
So, the [fourth quarter] [ph] outlook is being included as a profit and the [fourth quarter] [ph] profit outlook group compared to other quarters is quite large when it comes to profit. And E&P and mining business amongst those businesses volume, time market, that is not how we calculate the profits. But we need to look at demand and supply and do trading on the spot.
Therefore, how much of a profitability opportunity there will be and how much there will be when it comes to volatility, and the frequency of profit taking is going to differ so it's very difficult to do the calculation. But stable profitability if the management requires that the traders may have to take the risks and unexpected risks may be put on the trader. So that is something that we want to avoid. So, how much we will be able to take the opportunity to turn them into profit is something that we'd like to consider so that we can reap the profits.
I'm sorry, I can't explain this well. However, I do believe this will not bring us big losses. However, for the sustainability of the profit that we have shown this quarter, I don't think that we have the same confidence that it will be sustainable, but there may be some contracts that is going to give us profits at a certain time, but that is not something that we have. We have a spot trading and also increasing production may increase spot trading, and how we can reap the profits in the market is something that we need to consider. So, it's very difficult to comment on sustainability in that sense.
And when it comes to the fourth quarter, whether we see any darkness in the output, of course, in the trades, and also in the prices being very high for raw materials, for it to normalize, I think we are seeing some progress in those areas. However, to maintain the supply chain, and looking at data globally, by region or by product, there may be supply chain disruptions, and there may be some difficulties of maintaining the status. And many customers are having a difficult time.
So, in the next fiscal year, we would like to continue with initiatives so that it will be included in the profitability base. In the U.S., for the fourth quarter outlook, automobiles is strong. That is something that we expect to continue. And as I explained earlier, of course, there'll be some adjustments when it comes to prices, like in chemicals trading, or in the manufacturing businesses. Compared to the previous quarters, the margins will be suppressed.
So, as a whole, we don't see [darkness] [ph] ever as a whole, but that margin may be suppressed to a degree in some segments. And what will happen in the long-term, of course, we need to contribute to maintaining the supply chain so that we’ll be able to utilize the ability of the companies so that we'll be able to turn them into profits in a continuous manner. Thank you.
Maroshi Tokoyoda
Next question, please.
Unidentified Analyst
Thank you. I have also two questions. Firstly, as was asked, Page 9, management allocation. I like to ask for more. For the three years JPY1.78 trillion management allocation [indiscernible] and earlier, what you explained the following. In the shareholder returns JPY480 billion will be in the allocation, but JPY100 billion is just for March and that is included and gross investment 280 billion will be included, but the only at the bottom will be in the next fiscal year.
So, the shareholder return JPY480 billion and [20 billion] [ph] in March probably, and 280 billion if you add all these up, and the management allocation of 1.78 only points [indiscernible] will be allocated for this fiscal year and the remaining 1 trillion will be in that short-term liquidity for the time being. So, what does this for the time being mean? That's my first question. And second question, the iron ore, the short-term increase or mid-term increase how do you see this increase in iron ore for the near-term?
Tetsuya Shigeta
Well, thank you very much for your questions. First, how you should look at these numbers. Your understanding is exact and correct. So, for the time being means that there is uncertainty in recent months, and for the near-term, so we have to have more liquidity at hand for the short-term. And once the situation is resolved and alleviated, then the funds can be allocated for growth investment or shareholder returns. So, that's how we are planning to do. And that's the meaning behind for the time being [or once] [ph].
For example, net DER is 0.57 times, seven times, which is quite low. We have reduced this down to this small number. So this can be further reduced or leverage can be increased, but that's not what we're doing. But if you look at the current situation, and this is the decision that we’ve made, and once the situation is gone, then we will consider how the funds can be used. That's the idea behind this.
As for the shareholder returns, [25 billion or 30 billion] [ph] is incorporated in this medium-term management plan and the goal, the core operating cash flow 33% of that can be achieved, but the balance will be carried over as you [indiscernible] and for growth investment, we wanted to complete all the growth investment by the end of this March, but the JPY400 billion will be carried over.
That's how I explained. And as for what iron ore prices, in China, there's COVID-19 or zero COVID-19 policy was completed, and this was also the reason partially, but if you look at the supply demand balance in the third quarter, if you look at the movements in the market that – with each of the producers there is cost incurred and given all these, to some extent in terms of prices, there might be some downward trend. That's how we are looking at the market.
And so going forward, the zero COVID-19, if China sticks with the zero COVID-19, while the zero COVID policy was maintained, the prices did not decline that much. But going forward, once the Chinese economy recovers, then there is a certain level of increase in the market prices that can be expected, but on the other hand in the next medium-term assumptions to be incorporated will be discussed going forward and depending on the timing of the disclosure, we would like to decide which price levels to be incorporated. Thank you.
Unidentified Analyst
For the first question, management obligation I have a follow-up question. In this medium-term plan, a 33% of the operating cash flow was target and actually the calculation shows that it was 34%, but management allocation there is an extra of [indiscernible] that will be in the liquidity for the time being and then this will be allocated to share buyback or shareholders [and our] [ph] growth investment. And then in the next medium-term management plan, the management the shareholder return will be more than 33%. But what about the one that is carried over from this fiscal year to the next fiscal year? How do you look at that, and how do you treat that?
Tetsuya Shigeta
Well in this medium-term management plan and the next medium-term management plan there is a line drawn, we would like to separate between these two. So, in the next medium-term management plan, is this plan from the previous term or from this term? I think that question or discussion could be quite unclear. So, we just do align for this fiscal, for this medium-term management plan, and then we'll start a fresh, and 33% for this medium-term management plan brand, whether it was sufficient or not that – or in the next medium-term management plan, how we should treat that 33%.
In addition to that topic of discussion, the financial position and liquidity at hand will be looked at and what will be the extra part that can be allocated to shareholder return, we need to start our discussion assuming that there should be some that can be allocated for shareholder return. Well, but after the three-year period was over, the free cash flow is [indiscernible] yen, so, net debt will be reduced, but liquidity will be increased because of these profits every year.
So, ROE – if we are to maintain ROE at a certain level, then in the next medium-term management plan you have to have a certain level of shareholder return, ROE, in order to increase ROE are you having any discussions in that direction to increase ROE? Well, the perspective that you just shared with us is something that we are looking at internally in that and we have been repeating our discussions. And another perspective is that we have to have satisfaction or the gross investment level that can make sense to you.
And also, the level and value, the scale of the growth investment that can make sense. And which should be prioritized is something that we are discussing internally and kept in terms of capital efficiency. ROE is one important index or indicator. So, we shouldn't just focus on any single metrics in our discussion.
Unidentified Analyst
Thank you very much for the detailed information.
Maroshi Tokoyoda
The next question, please.
Unidentified Analyst
Thank you very much for taking my question. I also want to ask about management application about the contents of investments. From this fiscal year you made explanation, you talked about the bolt-on of the existing investments and also investments into adjacent businesses. So, at the start of the [indiscernible] as a strategic focus, you talked about the three areas when it comes to management, allocation, and when it comes to allocation, when it comes to gross investment, expanding the existing business will be the core. So, I think the turn of your explanation has changed and regarding these investments.
I believe there is an impact on the investments going forward. In the management allocation, the explanation given around investments. So, returns corrected for investments are covered by the explanation and the weighting may change going forward. So, the status of your investments may change and may have changed. So, can you talk about your investment policy as a whole please? And upward revision was announced and progress rate was also mention and when it comes to cash flow and also for net profit, I think adjustments or revisions were made on a rounded manner. So, if you reflect the progress rate, what will be the gap between the announcements that you have made so far? That is my second question.
Maroshi Tokoyoda
Shigeta will answer the first question. And the second question will be answered by Kurihara.
Tetsuya Shigeta
As for your first question, [indiscernible]. The energy solution or healthcare nutrition and [market Asia] [ph], these are focuses that we have announced. And during this MTMP we have maintained that focus. How they tied to that next MTMP whether they will be sustained, that is still under discussion, there may be some changes, but they are still our focus when it comes to a strategic investment. And as for gross investments, each of the projects as we explain them, from the angle of strategic focus, instead of explaining from that angle, we want to talk about successor probability or as a pattern of winning.
By showing user rationale, we talked about bolt-on investments and adjacent businesses. And from the existing partnership, we have deepened trusting relationships so that we'll be able to rely more on our partners and from that perspective, the expectations of such investment was explained starting this fiscal year. So, it is not as if the angle, the perspective on investment has changed, but the projects that are selected over the period from the point of profitability and growth for the future, et cetera.
So, that is how we have made the sophistication of investments. And maybe we were off balance when we provided an explanation, but we believe that the core focus has not changed.
Masao Kurihara
I like to answer your second question. If you look at Page 4 of the presentation material please. So, when we look at the progress rate for Mineral & Metal Resources, the progress for the profit is 89%. For the fourth quarter, of course, we have revised the annual profit forecast, but SMC sales there was a JPY30 billion or sales. So that had made a big contribution to the progress rate and as far as iron ore and metallurgical coal, we are going to see deceleration. So, that is why we are looking at this figure and as for energy, we have given the explanation. So, I will skip.
Machinery & Infrastructure, 75% progress. So, it is progressing steadily. So, this has been maintained. Next Chemical, 78% progress have been made. So, it is progressing well as well. As for iron and steel products [EV] [ph] and the volume decline has been included here. So the progress rate is a high at 98%. However, we maintain the original forecast.
As for lifestyle, one-time profit up to the third quarter that came from tax refund, I mentioned earlier that is included. And grain trading was very steady. However, it is normalizing now. And when it comes to fashion and retail distribution here in Japan, they will be declined that is forecasted, that is all. Thank you.
Maroshi Tokoyoda
Thank you very much. Considering the time to end this discussion, we like to take one last question. The last questioner please.
Unidentified Analyst
Thank you. I have one question. Page 15 and Page 16 [indiscernible], this is the reason for participation and this is the reason for the downward revision. So, what will be the resource cost trend, are you taking this royalty into account? And also what has been incorporated in this [price] [ph]?
Tetsuya Shigeta
Well, thank you very much. So, it's a general answer that I can give you. The volume has declined and the cost per unit has increased. So, cost and volume could become the factors for profit decline. In terms of geography, in Europe, for example, the labor shortage has been preserved.
So, there's an influence or impact from the inflation, [fuel] [ph] and labor costs has increased. And whether that would continue in the next fiscal year is a question and we talked about iron ore prices and future market prices, but as a producer and operator, they would like to – we'd like to leave this to sales. So, as a result in the net margin or the – in terms of impact on the business performance we like to keep close eye on that. That was a simple answer I would just give you. Thank you.
Maroshi Tokoyoda
Thank you very much. So, it is time. We would like to end the financial results briefing for today. Thank you very much for taking your time out of your busy schedule to join us today. Thank you.
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Mitsui & Co., Ltd. (MITSY) Q3 2023 Earnings Call Transcript