Mitsubishi Corporation (OTCPK:MSBHF) Q3 2023 Earnings Conference Call February 6, 2024 3:15 AM ET
Company Participants
Takuma Okamoto – GM, Corporate Communications Department
Shigetaka Akamatsu – GM, Investor and Shareholder Relations Department
Katsuya Nakanishi – President and Chief Executive Officer
Yuzo Nouchi – EVP and Chief Financial Officer
Kenji Kobayashi – SVP and CSEO
Yoshihiro Shimazu – SVP and GM of Corporate Accounting Department
Conference Call Participants
Akira Morimoto – SMBC Nikko Securities
Yasuhiro Narita – Nomura Securities
Hideaki Kuribara – Tokai Tokyo Research Center
Masayuki Nagano – Daiwa Securities
Harunobu Goroh – UBS Securities Japan
Yu Shirakawa – Morgan Stanley MUFG Securities
Takuma Okamoto
Thank you very much for taking time out of your busy schedule to participate in Mitsubishi Corporation’s Financial Results Briefing for the Third Quarter of Fiscal 2023. I am Okamoto from Corporate Communications Department, and I will be your moderator today. We now have journalists, investors, and analysts joining this session, both at the venue and online. At 3 p.m. Tokyo time today, we announced the financial results for the third quarter of fiscal year 2023 on the website.
Also today, first, we will have Mr. Nakanishi, President and CEO; and Mr. Nouchi, our CFO, present on the results, which will be followed by a Q&A session with the press until 5.50 p.m. and with the investors after break and analysts until 6.20 p.m.
Now let me introduce the representatives from the company. The second gentleman from your right is Katsuya Nakanishi, Representative Director, President and CEO. To his left is Yuzo Nouchi, Representative Director, Executive Vice President and CFO. To Mr. Nakanishi’s right is Kenji Kobayashi, Executive Officer, CSEO. At the far left is Yoshihiro Shimazu, Executive Officer and General Manager of Corporate Accounting Department.
So first, it will be the presentation. [Operator Instructions] Now we’d like to get started. I’ll hand over to Mr. Nakanishi.
Katsuya Nakanishi
Good afternoon, ladies and gentlemen. This is Nakanishi, President and CEO. Thank you very much for taking time out of your busy schedule today to attend your financial results briefing for the third quarter of FY2023. Together with the financial results release, we just announced our largest-ever share buyback program of ¥500 million, as well as the capital business partnership agreement between Lawson and KDDI. I’d like to explain these two important news before I dive into the overview of the financial results.
First, on the shareholder return. With a little over a year left under the Midterm Corporate Strategy 2024, underlying operating cash flow is exceeding the initial forecast at the start of the midterm plan, thanks to the solid business performance. Furthermore, good progress in investment return fueled by steady execution of the value-added cyclical growth model has led us to believe that we have approximately ¥1 trillion of additional funds available for growth investments and shareholder returns during the current midterm plan.
Based on the current investment pipeline, we’ve reassessed the amount of funds to be invested for growth during the remaining period of the midterm plan. After considering factors such as financial soundness and market expectations, we have decided at this time to allocate ¥500 billion out of the ¥1 trillion to additional shareholder returns. In May last year, we did a buyback worth ¥100 billion as part of the shareholder return for this fiscal year, and also in November, announced a 1-for-3 stock split, as well as a dividend hike to ¥70 per share.
If we add the ¥500 billion share buyback announced today, the total payout against the full-year guidance is expected to be approximately 94%. On the other hand, investment for growth has so far amounted to ¥1.6 trillion, or ¥2.1 trillion, including what’s been committed, out of the ¥3 trillion set forth in the current midterm business plan. We will carefully select opportunities from our investment pipeline and steadily execute quality investments in the final year of our midterm business plan.
We will determine, during the course of the current midterm business plan, whether to allocate the remaining ¥500 billion out of the ¥1 trillion to growth investment or shareholder returns, based on the progress of future investments, cash flow trends, and other factors.
Next, I would like to talk about Lawson’s capital business partnership alliance with KDDI. We already presented at the press conference earlier, so I will skip the details. Since our initial investment in Lawson in 2000 and turning it into a subsidiary in 2017, we have been supporting Lawson’s growth as a shareholder and also as a parent company. Now we have decided to invite KDDI, a telecom carrier with a strong customer base and digital capabilities, to join as a partner.
We are committed to leveraging the respective strength of three companies, ourselves, KDDI, and Lawson, to further grow Lawson’s business and the corporate value of the company.
As part of our organizational reform for fiscal year 2024, we announced in December last year the establishment of the SLC Group with the mission of building a value-creating platform mainly in the midstream and downstream domains with the aim of creating a smart life and better living. Lawson, with its network of more than 14,000 stores, can serve as an infrastructure that supports the lives of local residents and as a touch point that directly connects with consumers.
Lawson is positioned as an essential business platform for the newly established SLC Group in realizing its strategic objective of building a value-creation platform through the fusion of real and digital. While executing investment for future growth, we will pursue strategic capital opportunities such as the transaction that we announced today to bring a new growth story to existing businesses and create a virtual cycle of mid-to-long term growth and value creation.
With that, I’d like to conclude my remarks and hand over to Mr. Nouchi, our CFO, to walk you through the financial results.
Takuma Okamoto
Next we have Mr. Nouchi, CFO.
Yuzo Nouchi
Thank you. I am Nouchi, CFO. I’d like to now explain the overview of results. Please turn to Page 3 of your presentation material. Consolidated net income of the first nine months of FY2023 was ¥696.6 billion, which is the second highest ever following the year before. Due to the previous year’s soaring resource prices, profit decreased by ¥259.2 billion year-on-year, but we are steadily accumulating profits in each business. Profits are trending at high levels.
As for forecast for FY2023, we are making steady progress of 73% against ¥950 billion forecast announced in November. As for the shareholder returns, Mr. Nakanishi already explained, we would implement up to ¥500 billion additional share buybacks. As a result, FY2023 total payout will be about ¥890 billion, highest ever, and total payout ratio is expected to be 94%.
Next let me explain the first nine month progress of Cash Flow Allocation Plan under the Midterm Corporate Strategy 2024. Please turn to Page 4. During the term, cash in includes ¥904.9 billion underlying operating cash flow and ¥644.1 billion cash flow from divestments. As for cash out, ¥706.5 billion investments were executed. Adjusted free cash flow was ¥842.5 billion positive.
The cumulative results under Midterm Corporate Strategy 2024 to-date are ¥2.2 trillion underlying operating cash flow, ¥1.3 trillion cash flow from divestments. We are making solid progress against the forecast. As for cumulative investments, they were ¥1.6 trillion including the projects that we are committed to. The cumulative adjusted free cash flow was ¥1.9 trillion.
Please turn to Page 5. It shows the cash allocation under Midterm Corporate Strategy 2024 as a background of the additional return. Already, Ms. Nakanishi explained this to you, so I’m going to skip this.
With that, I’d like to end my presentation. Thank you.
Takuma Okamoto
Thank you very much. That concludes the two presentations. Now we’d like to take questions from the media, but there’s no translation available. [Music]
Question-and-Answer Session
A – Shigetaka Akamatsu
Thank you very much. Now we take questions from investors and analysts. So, I’d like to be the MC. I am Akamatsu from IRSR. [Operator Instructions] We are sorry to say that our President Nakanishi will need to leave 20 minutes after 6 p.m. So please keep that in your mind. We plan to end this session at 40 minutes past 6 p.m.
So now I’d like to take questions. Please raise your hand when you have — if you have a question. So Morimoto-san from SMBC Nikko. Please unmute yourself and turn on the camera and ask your question.
Akira Morimoto
Yes, this is Morimoto from SMBC Nikko. Can you hear me?
Shigetaka Akamatsu
Yes, we can.
Akira Morimoto
I have two questions. First, it’s been just one month after the start of the year, but I thought you gave us a very exciting news today. First of all, thank you for that good news. Also regarding the capital allocation, earlier you presented, Nakanishi-san, that the strategic M&A you would like to do EX and DX and I think you also mentioned US as the keywords for your strategic M&A. So to the extent possible, can you elaborate on what kind of direction you’re trying to pursue with strategic M&A and you have roughly ¥500 million of extra cash. Is the M&A going to be similar to that size? And regarding the shareholder return policy, you mentioned that you need to revisit that. So can you also explain what you meant by that? So that’s my first question.
The second question is regarding Lawson. So you have chosen KDDI as a partner for the digital and the telecommunication capability and you can create additional value. And I understand that. And in terms of really enhancing the value, I was also listening to your press conference and I was a little bit concerned about the speed. So converging digital and the real, I think you have been saying that from October of 2019, so you have been mentioning those keywords. And after a few years, I think with KDDI increasing the stake from 2.1%, they will be more engaged. But can you also explain about the speed of how they will be involved? And I thought that the ¥123.3 billion is going to be next year. And if you look at the non-cash ¥123 billion, how are you going to treat that? So this is a non-cash item, but that’s my second question.
Katsuya Nakanishi
Yes, thank you for your questions. Also, Morimoto-san, you said that you were really excited about the news. But you said it in a positive way. So I will not dive into that further. And regarding capital allocation and for strategic M&A’s, as you can imagine, I cannot elaborate any further but it’s going to be quite sizable. And that’s something that we would like to challenge ourselves to execute. At this point, I cannot comment, and I cannot be ahead of myself to talk about this. But as an image, with the MCSV, we want to co-create value. And I guess it’s a concept that’s a little bit hard to understand. But I think now, as an image, you get a better feel.
So you have the piece in the center and something that connects to that core element in the center. Do we have that or not? So previously, we had the peripheral businesses. Our 10 business groups have converged into eight groups. But out of that, I will not say all of them but what’s in the core? If we have that piece out of that eight, so maybe six businesses can get engaged and we can build up the vertical capability. And so it’s not like a platform, but we want to create a domain that we can be strong in. And we want to challenge ourselves to pursue that opportunity as a hypothesis, not just in the U.S. but also in other regions like Europe for any sizable deal. I think it will be overseas, particularly Europe or U.S.
So not just one single deal, but we will be looking at both U.S. and Europe. And those opportunities have started to pop up in the last two years for ourselves. So for us, how much earnings capability do we have today? And so, it’s like a chicken and egg story, but that will determine the size of the potential transactions. Also, at this point, I will not be able to offer you any details. So I may be a little bit abstract, but I’m trying to convey my message. And so I hope that suffices your question.
And regarding shareholder return, it’s almost two years since my appointment as the President and CEO. And one of the big topic for the second year was to change the organization. So through our IR and SR activities, what I understood was, and you may say that this is like textbook thing, but the growth and return is important. Also, I already talked about the growth opportunity and for shareholder return, how do we optimize dividend and share buybacks? Also, even from your perspective, I guess I will say it’s hard to see what we’re trying to achieve for shareholder return.
For example, in FY22, last fiscal year, we first said dividend payout will be 30% to 40%, we thought our payout will be 30% to 40%. And at the end, we did the share buyback of around just ¥170 billion. And this fiscal year, we raised the dividend to ¥210 or to ¥70 after the stock split. And we first did the ¥100 billion of share buyback. And then in addition to that, we are going to do another buyback of ¥500 billion. So while monitoring the progress of the project and our investment, we have been able to raise the earnings capability.
Also, for the cash flow and the cash inflow, how are we going to use these proceeds? And also, we have the rise in the share price. Also, do we have the right balance for the dividend ratio with the higher stock price? We have to look into all of those details to consider the action to be taken.
So that’s the immediate challenge for us. And from the IRSR perspective, when we talk to the stakeholders, I think this is a very important element. And so, we are considering that. And hopefully, we will be able to present that to you in a simple way.
And also, on the second point about the speed of execution, I know when you say that, how many years have we been talking about these keywords? So, at this point, we have now concluded that we cannot get the answer from within. So there was a question from the freelance journalist, are you going to dilute your engagement? That is not the case, regarding the strategic M&A, just like that, we wanted to get the missing part. First, though we tried to do it by ourselves, but we were not able to achieve that, so we will have to rely on someone else as a partner.
And with that collaboration, I think other companies will be better. So, in that sense, we found a partner who can execute with speed, and we can have that amplifying impact through this collaboration. So this is going to be something different from what we have been doing in the past. So that’s why we have invited this new partner.
And the third point will be answered by Mr. Nouchi.
Yuzo Nouchi
Yes, so for Lawson, the valuation is non-cash. How do we position that against the total payout? Well, the total payout, when we consider that, we look at the cash flow. And in the Midterm Corporate Strategy, we have committed to a total payout of roughly 40%. This is based on the profit and loss statement. And so, if we have some non-cash item, we will not be changing our policy.
Akira Morimoto
I see. Thank you very much.
Shigetaka Akamatsu
Thank you, Mr. Morimoto. Next is from Nomura Securities. We have Narita-san. So please turn on your microphone and camera and ask your question. Narita-san, I think you are on mute. We still cannot hear you. Okay, so please check. I’d like to move on to the next question. Thank you.
So we’ll come back to you, Narita-san.
So let us move on. From Tokai Tokyo Research Center, we have Kuribara-san. Please turn on your microphone and camera and ask your question. Nagano from Daiwa Securities.
Masayuki Nagano
Yes. May I ask my questions?
Shigetaka Akamatsu
Yes. Thank you very much.
Masayuki Nagano
So about this ¥500 billion shareholder return and also the new transformation together with Lawson, I would like to thank you for this news. As top management of the listed company, I think you’re very professional and it’s — in as a capital market, I think it’s quite impressive. So I’d like to say thank you. The first question, in this December, you announced the reorganization in relation to Lawson, SLC Group was also mentioned. So it’s been two years since you became the President and you’re in the middle of it. So what kind of issues did you have in your mind to make such reorganization? If you can give us any specific issues, for example, you were faced with this particular challenge and you want to change it. Could you comment further on the reorganization? That’s my first question.
Second question is about investments. So as of now, ¥3 trillion is maintained and other trading companies are expanding the investment budgets. And I think you’ve been more disciplined. So the investment pipeline, I’m sure that you have a lot of projects in the pipeline. And do you have a very strict way of having this discipline or in some of the investments that you have made the decision on, I think that there are many with the high ROI. So are you satisfied with them? So if you can comment on that as well.
Katsuya Nakanishi
Yes. Thank you for your questions. First, the challenges or issues that we were aware of. First of all, as I mentioned earlier, 2024, the Midterm Corporate Strategy, that was issued in May 2022. So in February-March timeframe of 2022, we started to formulate it. So May 2022, we announced it. So assumptions that we had at that time have changed and the stage that we are in have changed. That’s the first point. That is to say our earning power and also our value added cyclical growth model and cash inflow, cash-in capability has increased. And we strongly feel that. So we have more capability to defend our businesses. So at a different stage, where do we go, is something that we need to think about.
So in the first year after becoming a President, of course, that I do say what I want to achieve in the midterm plan. But we were — we could not — I could not express it fully. And in the past two years, as an experience is accumulated. Of course, we create this strategy every three years. But as I said, now things have changed. And the — of course, we are not going to talk about the next Medium Term Corporate Strategy, but we have to understand the current situation and we have to think how we can survive in coming four years. And of course, it’s three plus three.
But in May, when I look forward to coming up with such strategy, so having those eight groups, so 10 groups plus two used to be the case and by connecting and linking and having the competitive values. In addition to not calling us a trading company, we are a comprehensive trading company. Ten plus two is too many. So I think that we should be better through the consolidation and that would lead to the stronger competitive value. And based on that, we reorganized ourselves. So we are not making such changes very frequently. Based on our determination, we created these eight groups and nominated the leaders accordingly.
And as for the second question, the ¥3 trillion, the medium term plan was created in ’21 and at that time, the pipeline was more than ¥3 trillion. And there is a tendency that the new investments draw a lot of attention. But when you look at the breakdown of ¥3 trillion, ¥1.2 trillion related to EX, ¥0.8 trillion related to DX, and also the new areas. And ¥1 trillion, the updating investments. That is, we have to make sure that we have such investments to update ourselves, which are not really drawing a lot of attention but only with this, we can have earning power. So as you can see on the screen, so in relation to the resources and the growing growth areas, we have to have a good discipline. And we approve and execute. And that’s what we have been doing.
And what about the — in addition to this? It’s in ¥1 trillion level and we would have such opportunities in the future. So as I mentioned in response to Morimoto-san, it’s not interesting just to see the extension of what we have. So we want to have a sizable expansion so that we can accelerate the speed of such growth. But of course, that as you know, we are a very conservative company. So we are not going to ignore the returns. So we have to be disciplined. So CFO and others will handle it like that. So that’s how I would like you to understand this.
Masayuki Nagano
Thank you. So the past investments, projects, are you seeing some of them very satisfactory as President?
Katsuya Nakanishi
Well, in general, yes. Of course, the transfer of authority is something that we have been doing. And of course, it will come back to me ultimately. But if it’s below ¥10 billion, I would delegate and what kind of project we have and so forth. Finally, ultimately, I look at them. So startups and new technology areas, we are taking the necessary initiatives. And thanks to that, we can do the strategic opportunity like the one that we announced today.
Masayuki Nagano
Thank you very much.
Shigetaka Akamatsu
Thank you, Nagano-san. As I mentioned earlier, apologies, but Mr. Nakanishi will have to excuse himself.
Katsuya Nakanishi
I am sorry, but I have another engagement. So I apologize, but I would like to respond to your questions at a different opportunity. But we will have Nouchi-san, Kobayashi-san, and also Shimazu-san, who will remain here to answer your questions. So please feel free to continue to ask your questions.
So apologies, but I will excuse myself. Thank you for your attendance today.
Shigetaka Akamatsu
Thank you. So we would like to continue with the Q&A session. So Mr. Nouchi, our CFO, and Mr. Kobayashi, CSEO, and Shimazu-san, the GM of Accounting Department will respond. So, we would like to get the question from Kuribara-san from Tokai Tokyo Research Center. Please unmute yourself and turn on the camera to ask a question.
Hideaki Kuribara
Hi, this is Kuribara from Tokai Tokyo Research Center. I have one question. I want to get a better image. So in your case, you have been growing thanks to a very strong vertical capability. What is the image of connecting horizontally? But you had a very vertical organization. But would you be able to function well when you have that kind of horizontal structure or the cross-functional structure? And by connecting horizontally, what’s the profit upside?
I’m thinking that there’s going to be some earnings upside. If we have the strategic M&A going forward, or would we have a better understanding of the earnings upside from this reorganization?
Yuzo Nouchi
Yes, Kuribara-san, thank you for that question. This is Nouchi speaking. I will take that question. Yes, like you asked, as an organization, we were very strong in the vertical structure. But from the past, we have also recognized the importance of the horizontal structure. And with Mr. Nakanishi becoming the CEO in the current midterm plan, we talk about MCSV. So first, we’ll have that strong vertical structure. But on top of that, we also want to have the new horizontal layer so that we can create the incremental profit.
And also, in reality, looking at the business environment and also the businesses that we are operating, for example, energy, power, looking at one business, it’s not just one project to be completed, but we make the investment into the project for power generation. For example, we will have the conventional, the thermal power plant, and then we shift to new energy. And then there will be peripheral business opportunities where we already have some business engagement. So for example, in the U.S., that could be LNG and power. So as a business environment, this horizontal seamless connection is required.
And in a new investment, it’s not just about that, but we would also have the traditional business model that we will continue to invest. But in the new investment project, we will be pursuing that capability. And based on that, we already have made some decisions to commit. And so, it hasn’t surfaced as a completed deal yet, but we are starting to see those business opportunities rise in front of us.
So is that mainly in EX? I guess that will be a typical example. Yes, typical example will be EX related, that might be the case. But for example, for the urban development in the traditional business model, for that kind of business, there will be some relevant peripheral businesses to that. So we are going to take a very broad approach. So EX might be a typical example that’s easy to understand, but we also are trying to apply this new concept to the other businesses as a whole.
Hideaki Kuribara
Thank you very much.
Shigetaka Akamatsu
Thank you, Mr. Kuribara. Next, from Nomura Asset Management, [Ohata]-san. Please unmute yourself and turn on your camera and ask your questions.
Q – Unidentified Analyst
Ohata from Nomura Asset Management, thank you. I turned on my camera, but it’s not showing, sorry. One question, please. This time, Lawson, the listed subsidiary, you made some changes. So the listed subsidiary or equity method companies, did anything change or is the Lawson just an exceptional case? Maybe you can share with us a way of thinking toward the next corporate strategy or next term. Thank you.
Yuzo Nouchi
Ohata-san, thank you very much for your questions. Well, this time, concerning Lawson, it was not our purpose to consider this as a listed subsidiary, but rather, in order to increase the value of, corporate value of the Lawson, we tried to think how we can do it. So not just working on our own, but to invite the new partner, we believed it’s the best way. So that’s how we made a decision. And as a result, for the TSE listed subsidiary, and also we have to consider this as an example of that. So until now or in the past, the equity method company or listed subsidiary, whether that is the best way or not, we have been verifying and validating. And of course, I’m not talking about which company should be which, but that does not mean that this policy has greatly changed.
Unidentified Analyst
I see. Thank you very much. That’s all the questions I had.
Shigetaka Akamatsu
Thank you, Ohata-san. And I’d like to call upon Narita-san from Nomura Securities to see if he can get his audio through. Please unmute yourself and turn on the camera and ask your question.
Yasuhiro Narita
Can you hear me now?
Shigetaka Akamatsu
Yes, we can.
Yasuhiro Narita
Apologies for the inconveniences. So t his is Narita from Nomura. I have two questions. My first question is related to Lawson. It was a bit of surprise because you always wanted to do it with your own capability. But looking at the press conference, this collaboration, I guess for KDDI, there is a benefit because they have the AU ecosystem. But for you, I guess the main intention was to enhance the corporate value of Lawson, but it will be deconsolidated and it will be a 50/50 ownership and it will be your equity affiliate. So for the Lawson’s peripheral business, like something is in digital, would you be able to co-invest into the project to monetize together? So was that the discussion that took place for you to get bigger opportunity to also enjoy the opportunity in the peripheral services? Or is the main intention to enhance the corporate value of Lawson?
And the second question is regarding the leverage. So as Lawson will be deconsolidated, I think the profit and debt will come down. I think your leverage ratio target was 25% to 35% in the past. Are you going to go back to that level? And are you going to do a share buyback of ¥500 billion? And so what is going to be your leverage after that? So it’s a bit murky, so can you comment to the extent possible?
Yuzo Nouchi
Yes. So regarding your first question on Lawson, also as you have seen at the press conference and as you have pointed out, from our side, the primary intention is to enhance the corporate value of Lawson through this collaboration. So that was the main intention. And obviously, with KDDI and the peripheral businesses, aside from that, we also see opportunity to broaden the business opportunity and for specific opportunities we’ll be considering as needed. But this collaboration was not intended to get the business opportunities in the peripheral domain. So the core intention was to use digital for the retail Lawson’s business. And we alone were not capable enough on the digital side. So by inviting the optimal partner, we believe that we can enhance the corporate value of Lawson from the current level. So that is the main intention behind this collaboration.
And also, with Lawson, they become an equity affiliate. And with that, I think your question was, are we going to change the investment leverage ratio? Well, at this point, we are not going to change what we are doing just because of the transaction of Lawson. Because to begin with, we were seeing 40% to 45% of Lawson being consolidated for investment leverage ratio, but over the medium to longer term, we will aim to be close to that leverage ratio target. And with this change in the organization, there might be some fine tuning required, and we will do so as needed. But at this point, we do not have any specified numerical target just because of the Lawson transaction.
Yasuhiro Narita
So, on Lawson, for the retail, I think for DX, you were collaborating with NTT for DX. Is the Lawson transaction going to change your collaboration with NTT for DX? So, in your DX strategy, I think you were working together with NTT to reduce the overall cost for the retail business. So, I think that is underway for Mitsubishi Food or Lawson? I think your collaboration with NTT was to reduce the cost for those entities and try to apply that to the other retail businesses. So, it’s just going to be a different story.
Yuzo Nouchi
Yes, also that will be separate from the collaboration we announced today. So, we have industry one with which we were collaborating with NTT, and for the other investment, we were working together with NTT. So, that’s a separate project.
Kenji Kobayashi
And one other point, if I may, this is Kobayashi speaking, regarding KDDI and Lawson’s relationship. And KDDI has their own ecosystem and what is going to be Lawson for us? As Nouchi-san explained earlier, our primary intention is to further enhance the corporate value of Lawson by having KDDI as the shareholder. Also, we will get a different perspective to raise the corporate value of Lawson. That is the primary intention. But as Nakanishi-san mentioned earlier, we have the new group called SLC group. For that, Lawson will serve as the core part of that. And SLC is trying to pursue a business model which is not totally equal to the KDDI’s economic ecosystem, but we would like to create a customer-focused or customer-oriented business model. So, the transaction is not simply intended for enhancing the corporate value of Lawson, but through this relationship between KDDI and Lawson and also with what we are doing with NTT by comprehensively putting them together, we believe within the strategy of SLC Group, we will be able to capture a new growth opportunity. So, that is the strategy behind what we did with Lawson.
Yasuhiro Narita
I see. Thank you.
Shigetaka Akamatsu
Thank you, Mr. Narita. Next, UBS Security, we have Mr. Goroh. Please turn on your camera and unmute yourself.
Harunobu Goroh
This is Goroh of UBS Securities. Thank you very much. I have two questions. First, about this new agreement with Lawson, so, you are very aggressive about the investments and cross-organizational direction is something that I understand. So, I’m sure that there are a lot of investment candidates in the pipeline. And to visualize the return or effectiveness of the investments and how to estimate it, we are still trying to digest that. So, this time, today’s announcement in the current corporate strategy, medium term, the asset replacement or to make a progress in the value-added cyclical growth model and toward the next fiscal year at the target of ¥100 billion, those were the targets. But to accelerate what you have been doing, today’s announcement, of course, this is something we cannot see the effect in a single year. But the actual synergy or actual results showing the quantitative milestone, is that something that you’ll be doing? That’s my first question.
And the second is at the end of the Q2, the new investment candidates were shown in the pipeline. And one of the areas was the EX-related. So, when you look at some of the specific examples, it seems that they are long term. So, sometimes greenfield probably is high in terms of percentage. So, the future investments and how to realize the return, and it seems that there is a gap between the two. And it was mentioned that you have been very conservative, but are there any ideas to make it more visible? So, for example, enhancing the existing business was mentioned in relation to the future investment. So, how do you try to strike the good balance and if you can talk about the kind of time frame, if you can make any additional comments on that?
Yuzo Nouchi
Thank you for your questions. About the first point, the return on investments, what are our views and how do we show that? Well, at the time of the Q2, the promotion of the value-added cyclical growth model and to improve the profitability, we talked about the outlook and we have focused our explanation on that. So, in that sense, nothing has changed. And including Lawson, about all the companies’ improvement of the profitability, or if we are not the best owner, we would replace or change.
So, about the Lawson, of course, this is not a replacement. But if you look at the Lawson itself, the results up to Q3, and they have been making improvements in terms of profitability. And, of course, there has been a tailwind in the external factor, but the Lawson itself tried to improve its profitability and has been trying to update the highest record numbers. So, of course, we have been providing support for them. And if you look at our investment, the profitability of Lawson has already exceeded our return level or criteria, has recovered to that. So in the value-added cyclical growth model, of course, that we are on track in terms of improving the profitability.
And having said that, in order to grow this further, rather than keeping it as is to invite KDDI, we’ll stimulate further growth. So, in the Midterm Corporate Strategy, we have been trying to improve the efficiency of the asset, and we are making steady progress for that purpose. And as for the status of the progress, we would continue to show it to you as we did at Q2.
Also, the timeframe or schedule of the investments and what is in the pipeline, that was another question that you asked. So, the investments which could become the foundation of our profits, as Mr. Nakanishi said, expanding the existing businesses, the steady efforts that we can make. And so, for example, LNG or the development of the natural resources, after the FID, it takes a long time. But like Cermaq salmon farming, getting the license of the farming to get the additional license, so it’s the kind of horizontal expansion. So, since the beginning of the investment, the flow is relatively short.
So, it is a mixture of the two. So, in that sense, the investments for updating, as I said, is important. By investing for the expansion and updating, for example, we can realize the improvement of the profitability in the short term, and the new projects will be longer term. But that would be the seed for the future profit. So, we want to be well balanced between the two. So, as of now, I think we are on track in this investment, and that is my understanding.
Harunobu Goroh
Thank you very much.
Shigetaka Akamatsu
Thank you, Mr. Goroh. Also, I’m conscious of the time, so I would like to take, we would like to take the last question, Shirakawa-san from Morgan Stanley MUFG. Please unmute yourself and turn on the camera and ask your question. Mr. Shirakawa from Morgan Stanley MUFG, can you hear me?
Yu Shirakawa
Yes. So, I know the time is pressing, so I will ask just one question. Within the food industry, in Q3, you had the impairment loss. What was the impairment loss about? And another question is for Cermaq from EC, I think there was the statement of objections. What is the background behind this? Can you elaborate to the extent possible regarding this issue with Cermaq?
Yoshihiro Shimazu
Yes, thank you for the question. This is Shimazu, I will take those questions. So, for the food industry, in Q3, we did an impairment loss. This is for the overseas food business. For this, we saw the change in the enterprise value, and the asset value was re-evaluated, and we took an impairment loss. But this impact, these are the main outlook. We have already incorporated that, so the impact on the full year guidance is minimal.
Also, regarding the statement of objection for violating the competitive issue in East Europe, this is still under investigation. So, apologies, but at this point, we will not be able to offer you any comments.
Yu Shirakawa
I see. And regarding Cermaq, in Q3 or Q4, by receiving the statement of objections, are you seeing any impact on the actual business?
Yoshihiro Shimazu
Sorry, that’s all. We have not seen any material impact on the business. Thank you very much.
Shigetaka Akamatsu
And so Shirakawa-san, thank you. So, with this, we would like to conclude the Mitsubishi Corporation’s Q3 financial results briefing session for fiscal year ending in March ’24. Thank you very much for joining despite your busy schedule.
Read the full article here
