01.VALUE CREATION
MC's Sustainable Value Creation Story
02.SUSTAINABILITY
Management Platform Supporting Value Creation
- Sustainability Promotion Framework
- Risk Management
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Stakeholder Engagement
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Corporate Governance
03.DETAILED FACTS
Reference Information
- Members of the Board and Audit & Supervisory Board Members
- Executive Officers
- Organizational Structure
- Business Groups at a Glance
- Global Network (Countries and Regions)
- Balance of Risk Money Outstanding in 12 Countries
- Financial Highlights
- ESG Data
- Corporate Information
- Shareholder Information
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Description of Business Activities: Business Groups
Realizing stable returns through
investments, asset replacement
and progressive dividends while
maintaining financial discipline
A review of the fiscal year ended March 31, 2021 and a look toward the final year of Midterm Corporate Strategy 2021.
A Steady Recovery on the Heels of an Extremely Harsh Financial Result
MC's consolidated net income for the fiscal year ended March 31, 2021 was an extremely harsh result of 172.6 billion yen, a decrease of 362.8 billion yen from the previous fiscal year. Against a backdrop framed by the impact of the COVID-19 pandemic and falling resource prices, our performance was negatively affected by several factors: a steep drop in profitability starting with the Australian metallurgical coal business, one of MC's strengths, and extending to the LNG- and automotive-related businesses; a rebound in one-off gains recorded in the previous fiscal year in connection with the restructuring of the Chilean copper business; and impairment losses on goodwill to Lawson, Inc. and its intangible assets recorded in the latest full fiscal year.
We take these harsh results very seriously and will apply the lessons learned to future initiatives. Meanwhile, we must also correctly acknowledge factors including that: (1) operating income exclusive of transient income such as impairment losses was maintained at a scale of 300 billion yen despite the challenging business environment; (2) even with the impact of the COVID-19 pandemic, businesses including meat and petroleum, as well as the Thailand automotive business, buoyed earnings with year-on-year profit growth; and (3) certain mineral resources businesses such as copper and iron ore have started to grow their profits through initiatives to restore and lift market conditions.
In addition, in the fourth quarter of the fiscal year ended March 31, 2021, operating income—which excludes transient gains and losses—was 122.6 billion yen for the three-month period. Even when factors such as seasonal effects and the divesting of power generation assets are excluded, this still amounts to roughly 100 billion yen, representing a steady recovery in consolidated net income for the quarter.
Cash Flows Continue to Evolve Steadily
While consolidated net income declined sharply by 362.8 billion yen compared with the previous fiscal year, cash flow from operations was 625.2 billion yen, a decrease of only 46.9 billion yen from the previous fiscal year. Among the factors behind the decrease in consolidated net income were non-cash-related losses, which included the impairment charges for Lawson. Meanwhile, the inclusion of Eneco in consolidated financial reporting started to generate a positive contribution to cash flow. Cash flow for investment consisted of 803.4 billion yen in outflow, including an equity investment in HERE Technologies as well as capital investments in the European renewable energy businesses and LNG-related businesses. Meanwhile, MC took steps to maintain financial discipline such as proceeding with divestment of strategic shareholdings and selling off properties in the North American real estate business. This resulted in the recovery of 446.1 billion yen, yielding a net outflow of 357.3 billion yen. Consequently, even while consolidated net income fell, once cash flow from operations and cash flow for investment were taken into account, free cash flow after adjustment was 267.9 billion yen.
Anticipating a Certain Level of Resilience even in a Declining Resource Price Scenario
Our earnings outlook for the fiscal year ending March 31, 2022, predicts a year-on-year increase of 207.4 billion yen to 380.0 billion yen. Although this outlook anticipates increased income for eight Business Groups, we recognize that we are still in a recovery period. Against this backdrop of continued uncertainty in the external environment, we have set an outlook that anticipates a certain level of resiliency even if resource prices decline.
Nevertheless, our first quarter results show a consolidated net income of 187.6 billion yen, which represents a 49% attainment of the full-year earnings forecast of 380.0 billion yen. This result was achieved due to improvements in our operating environment. As economic activity resumes worldwide, this has led to a recovery in demand for the automobile-related business and higher prices for mineral resources such as copper and iron ore, which has contributed to steady profits in these businesses. Based on these results, our full-year earnings will likely exceed the 380.0 billion yen forecast. However, in estimating how far it will exceed this figure, factors including the impact of the recent resurgence of the COVID-19 pandemic, especially in Southeast Asia, and highly volatile resource prices must also be analyzed carefully. We plan to continue assessing the situation through the second quarter.
Also, looking to the fiscal year ending March 31, 2023 and beyond, we see many investments that are expected to start contributing to profits. Among MC's larger projects in particular, the Quellaveco copper mine in Peru plans to enter production during the fiscal year ending March 31, 2023, and LNG Canada is slated to start operations in the latter half of this decade. Moreover, there are numerous other projects that could have a significant impact on our performance. Among these are the expansion of the data center business, the release of new car models in the ASEAN region by Mitsubishi Motors Corporation, and the Tangguh LNG extension. In order for these investments to continue contributing toward steady profits, we will promote each of them with careful consideration.
Furthermore, while the consolidated net income target of 900 billion yen for the fiscal year ending March 31, 2022, presented in Midterm Corporate Strategy 2021, was predicated on certain assumptions, it will be difficult to meet the target this year—a matter which we take seriously. Besides factors such as highly volatile resource prices and the impact of the COVID-19 pandemic, one of the key differences is the effect of having placed priority on maintaining financial discipline in light of these changing conditions. While strengthening our foundation by reducing costs and thoroughly reorganizing loss-making companies, we will work to transform our business in response to changing business conditions in order to generate new value. Along with this, we will move forward with the Value-Added Cyclical Growth Model presented in the Midterm Corporate Strategy 2021, which we are confident will deliver results.
- *1 Adjusted Free Cash Flows: Total of underlying operating cash flows (after repayments of lease liabilities) and investing CF
- *2 Underlying operating cash flows (after repayments of lease liabilities): Operating cash flows excluding changes in working capitals (= Net income (including non-controlling interests) - DD&A - profits and losses related to investing activities - equity in earnings of affiliated companies not recovered through dividends - allowance for bad debt, etc. - deferred tax) while including repayments of lease liabilities
Investment and Capital Strategy in Midterm Corporate Strategy 2021
With the second year of Midterm Corporate Strategy 2021 having come to an end, how would you evaluate the progress of the Value-Added Cyclical Growth Model presented in the strategy?
A. The Value-Added Cyclical Growth Model is continuing to permeate within the Company, and we have replaced assets of about 1 trillion yen over two years, including capital gains.
In the past, the term "investment for growth" was used, with the notion that if you do not invest, you will not grow, and that if you do invest, you will make a profit. However, since two years ago, we have been communicating internally to fundamentally change this way of thinking. Against this backdrop, we have been seeing an increase in "brown field" projects. "Green field" projects, through which businesses are cultivated from scratch, can have large yields when successful, and expanding investment and achieving growth have been seen as two sides of the same coin. However today, as the market matures and liquidity increases, these types of projects are decreasing. Instead, "brown field" projects are on the rise, and while their risk levels are comparatively low because they involve entering the market after the business has progressed up to a certain point, they also require payment of a reasonable premium for entry, which lowers the investment yield. To compensate for this decrease, earning capital gains through divestment becomes the key to success. In other words, at the stage where there is low potential for further growth from our involvement in a particular business, even if it is profitable, we will divest and recover our investment funds to reinvest new growth sectors. Within this cycle, what is important is to steadily accumulate capital gains.
In order to promote this value-added cycle, in addition to having each Business Group set divestment targets, we have compiled a list of projects with slower growth trajectories as candidates for divestment and requested the Business Groups to determine which ones to sell in order to achieve those targets. This policy is permeating widely, and we have carried out asset replacements amounting to approximately 1 trillion yen over two years, including capital gains.
In light of the results for the fiscal year ended March 31, 2021, will MC be changing its capital allocation or investment strategy?
A. Our basic policy remains unchanged, and we are strengthening cash flow management based on rigorous financial discipline.
Since our current management system was put in place in the fiscal year ended March 31, 2017, we have adhered to a basic policy of paying progressive dividends within the scope of adjusted free cash flow and have not raised interest-bearing liabilities. To ensure financial soundness, we set 40-50% as the appropriate range for the investment leverage ratio (ratio of total capital covered by investment balance), but at the end of the fiscal year ended March 31, 2021, this ratio had risen above the appropriate range to 54%. This was mainly a result of an investment balance that grew quite large due to large-scale investments such as the acquisition of Eneco, followed by a significant decrease in consolidated net income, leading to a decline in capital augmentation. As a result of restrictions on net investment, through continued promotion of proactive asset replacement and a recovery in consolidated net income, we are endeavoring to restore the leverage ratio to its appropriate range by the end of the fiscal year ending March 31, 2022. Moreover, with restrictions in place on net investment, we are seeking for the necessary funds for investment to be generated through revenues from the sale of existing assets. As such, from a financial discipline perspective, we are supporting the promotion of the Value-Added Cyclical Growth Model.
In addition, although MC is focusing on digital transformation (DX) and energy transformation (EX) as key issues for the future, this will not involve directing extreme amounts of funding toward specific areas. It could be said that one of MC's strengths is that it develops businesses across a diverse range of industries, providing opportunities to discover New Seeds of Growth in a wide variety of fields. The key to whether we succeed or fail will be how well we can carefully select the best projects from among these, we will execute investments as a result of this selection process. Without changing our capital allocation or investment strategy, we will continue to move forward based on rigorous financial discipline.
By proceeding with asset replacement and further promoting the Value-Added Cyclical Growth Model, we will continuously make investments and return capital to shareholders while maintaining financial soundness.
In recent years, impairments have continued in business-related segments. What do you view to be the cause of this?
A. Investment timing is one major element. We are taking care to not simply follow investment trends.
Looking back at our recent investments, we see large impairment charges incurred for investments outside of the resource area, and we take this very seriously. The timing of the investment is one of the biggest factors. In other words, I believe this stems from investing when earnings are climbing. The biggest takeaway here is that although in the resources segment investment decisions were made based on reflections of past performance, in the end this was not achieved in the business-related segment. Capitalizing on this finding, I think it is important not only to make investments based on trends, but also to bear this in mind.
In the past, we practiced decentralized management, whereby in order to accelerate asset replacement, we set up a scheme to manage the cash flow of our Business Groups. This meant we had a structure in which the more profits our Business Groups earned, the more investments they could make. In actuality, it was a system that encouraged simply following trends. Striking the right balance between centralized and decentralized management is a difficult challenge with no absolute solution. In our current Midterm Corporate Strategy, rather than assign an investment limit to each Business Group in accordance with the cash flow it has earned, decisions on large-scale investments such as Eneco are made within a companywide investment discipline.
The fiscal year ended March 31, 2021 saw a substantial year-on-year decline in profits. Please tell us about your action plan toward earnings recovery.
A. By thoroughly reorganizing loss-making companies, we will work to strengthen our foothold.
As earnings deteriorated during the fiscal year ended March 31, 2021, we began reorganizing loss-making companies as a measure toward future earnings recovery. As we move to reorganize these companies, one-time losses will be incurred such as those on sale of assets and reserve provisions. If we only look at net income for a single fiscal year, there will be cases where the one-time losses outweigh the positive effect of the operating deficit disappearing. Measuring the effect may be difficult at times, but the point of our efforts will be to avoid carrying deficits into the future. Among the loss-making companies, two-thirds have already decided on an action plan. For the remaining one-third, we must urgently determine a path forward, reduce the amount of future losses and build a solid foundation for future growth.
Are there any changes to your policy on shareholder returns, particularly dividends?
A. We plan to maintain the progressive dividend scheme, and for the fiscal year ending March 31, 2022, we are planning on dividends of 134 yen per share, the same as the year before.
For the fiscal year ending March 31, 2022, we are planning on dividends of 134 yen per share, the same as the year before. Although we saw a significant drop in profits for the year, cash flows have been on the rise, and we have also been able to maintain our financial soundness. In line with the commitment we made in our current Midterm Corporate Strategy, without cutting dividends, we will maintain our "progressive dividend scheme." Moreover, the earnings outlook for the fiscal year ending March 31, 2022 will continue to be considered through the second quarter to determine the extent to which we expect profits to increase. Looking ahead, in order to meet the expectations of our shareholders, we will examine our dividend policy with an eye on changes in the internal and external environments.
Regarding share buybacks, while giving consideration to investment leverage, no changes will be made to our policy, but we will consider flexible response measures if leverage falls below an appropriate level.
In terms of the next Midterm Corporate Strategy, which will start from the fiscal year ending March 31, 2023, although we can make no concrete assurances at this time, we will put emphasis on dialogue with shareholders and investors.
By steadily reorganizing loss-making companies, we aim to increase their ROE through the continued promotion of our Value-Added Cyclical Growth Model while thoroughly solidifying our footing. In addition, it will be essential to reduce capital costs in response to the expectations of capital market participants in order to improve the confidence they place in us. To achieve this, we will strive to gain the understanding and support for our business and management policies by engaging with our shareholders and investors and enhancing our disclosure materials. At the same time, we will be able to gain an accurate grasp of the expectations and demands of the capital market toward MC, which we will apply to the formulation of our next Midterm Corporate Strategy.
