Message from CFO
Improving the success rate of our investments by solving problems through in-depth analysis while continuing to maintain stable financial foundations.
Impact of the COVID-19 pandemic
Steadily exercising our capability so we can maintain stable financial conditions even in the COVID-19 crisis
In FY2020, we expect market demand to shrink due to the impact of the COVID-19 pandemic, and therefore our core operating cash flow temporarily decrease. Even in such an environment, I believe that there are no concerns on the financial front for the Sojitz Group. Our profit for the year in FY2019 remained at ¥60.8 billion, less than the previous year. However, from the perspective of ensuring liquidity we can secure cash reserves of ¥300.0 billion and a commitment line of ¥100.0 billion and U.S.$1.6 billion. We are also going ahead with shift to long-term borrowings with short-term borrowing limits. In terms of risk management, since the financial crisis in 2008 we have promoted enhanced management systems, including those to manage inventory positions and exchange, which has enabled us to minimize losses.
In order to continue quickly responding to the changing circumstances, we have adopted a policy through which we are managing our financial conditions as we maintain an adequate funding capacity and cash reserves for expected risks, and are also securing funds in an appropriate manner from, for example, major correspondent financial institutions with whom we maintain a good business relationship. Of course, we will hold on to positive cumulative core cash flow and free cash flow over the three years of MTP 2020, which will mean that our fundamental policy of maintaining financial stability will not change.
Looking back at the second year of MTP 2020 (FY2019)
Continuously maintaining positive core cash flow through disciplined balance sheet and cash flow management
This year was the second year of MTP 2020, and we ensured that our core cash flow was positive and our net DER was 1.06 times; we managed our investments within the scope of the cash flow generated, and were able to implement disciplined balance sheet and cash flow management. As a result, over the past two years we have generated a surplus of around ¥60.0 billion in total together with our core cash flow and free cash flow. FY2020 will be the final year of MTP 2020, and during this single year we anticipate a negative core cash flow due to our funding of business projects; however, I foresee that we will be able to reach our goal of “maintaining a positive three-year core cash flow.” We also expect a net DER of 1.1 in as of March 31, 2021, and even if our total equity does fall due to a strong yen and declining stock prices, I believe that we can continue to maintain sufficient financial health.
During FY2019, we announced Balance Sheet and Cash Flow Management for Each of Our Divisions (summary of investments and loans and asset replacement (recovery)) as part of the improved information disclosure that we have historically conducted. Our aim is to communicate how each of our nine divisions builds a suitable portfolio by implementing well-balanced, continuous asset replacement in each division, without being dependent on specific sectors. We will strive to disclose information continuously and proactively so we that can reduce the knowledge gap between us and our investors, enabling our share value to be accurately evaluated.
Investment and loans policy
Steadily building up cash-generating assets by thorough market analysis and further strengthening of post-merger integrations
The Sojitz Group had achieved stable growth by increasing profits for seven years in a row up to FY2018. We also made investments of ¥81.0 billion during FY2019, mainly in the automotive, airport operations, and renewable energy fields. “Making investments and loans worth ¥300.0 billion in cumulative over the 3 years” is the goal set out in MTP 2020, but considering the tough circumstances in which we find ourselves, we anticipate that our investments and loans in FY2020 will come to around ¥100.0 billion, meaning that the total for the three years of MTP 2020 will be around ¥260.0 billion — somewhat lower than planned. However, our plan is ¥100.0 billion of investment and loans in the final year of MTP 2020, and I want to approach this in a flexible manner. We must take into account the delayed negotiations that have resulted from the COVID-19 crisis, and, although we need constant investment for future growth, I don’t believe that there must be a strict target amount.
On the other hand, to increase our rate of success in investments and loans and achieve further profitable growth it is important that we establish a business plan based on thorough market analysis and multifaceted hypotheses. Then, we can proceed by ascertaining the functions that Sojitz should provide based on market needs, and verify the feasibility of our plan. I think that the only way to succeed in business investment is to earnestly consider the question of what people want, carry out thorough analysis of trends in demand, and carefully establish key performance indicators (KPI) and key goal indicators (KGI). In particular, market analysis and post-merger integration (PMI) are becoming more and more important due to a shift from resource-centric portfolios to non-resource-based portfolios. We will continue to construct a corporate system that can properly support business projects and ensure that our criteria for investments and loans are reasonable. Additionally, in new areas of business such as digital transformation, which is subject to remarkable market changes, we will promote the transfer of authority to the COOs of business divisions, in order to advance decision-making with a sense of speed to ensure that we do not miss any chances.
In addition, the key to increasing the value of investment and loan projects is skilled PMI work. The M&A Management Office is promoting a more efficient investment and loans process through due diligence. It is also proceeding with the establishment of ideal PMI in collaboration with the Controller Offices within our business divisions through a series of trial and error. We are also systematically focusing our efforts on disseminating and teaching PMI skills by repeatedly holding information sessions based on a M&A playbook in which our M&A know-how has been compiled.
Aiming for increased shareholder value by reducing the risk premium
Sojitz’s cost of capital is 7–8%. I acknowledge that initiatives to bring down our risk premium, one of our equity costs, are essential in an environment in which it is difficult to significantly increase our ROE. Rather than irresponsibly increasing leverage to make our ROE seem bigger, we will ensure sound financial health with thorough risk management accomplished through disciplined balance sheet and cash flow management, as we steadily focus on reducing costs in individual projects and business divisions. Of course, we will, carry out initiatives to enhance our information disclosure to our investors and other stakeholders, and I also wish to hold close dialogues with our stakeholders and focus our efforts on strengthening our resistance to volatility and on steady income growth rather than panicking at the dramatically-changing external environment.