adminMitsubishi Corporation (OTCPK:MSBHF) Q3 2023 Earnings Conference Call November 2, 2023 ET
Company Participants
Yuzo Nouchi – Chief Financial Officer
Katsuya Nakanishi – President & Chief Executive Officer
Conference Call Participants
Unidentified Company Representative
Ladies and gentlemen, thank you very much for coming to the Fiscal 2023 Q2 Results Press Conference and Briefing. Despite your busy schedule, I’ll be your MCE [ph] today. I’m Okamoto [ph] from Corporate Communications at Mitsubishi Corporation. At 1 p.m. today, on November 2, Thursday, we disclosed our results for Q2 fiscal ’23. We will first have an explanation from our President, as well as the CFO, to present about the results. Then after, we will have our Q&A session with the press. After a 15 minute break from 2:15 p.m. We will have a Q&A session with investors and analysts. We have people from the press investors and analysts are participating in this meeting in person in the room, as well as from online.
First, let me introduce who’s here today. Second person from the right is our Representative Director, President & CEO, Katsuya Nakanishi; to Mr. Nakanishi’s left, we have our Representative Director, Executive Vice President and CFO, Yuzo Nouchi. To the right of Mr. Nakanishi is our Executive Officer and CSEO, Kenji Kobayashi. And at the very left is our Senior Vice President and GM of Corporate Accounting, Yoshihiro Shimazu. And I am Okamoto from Corporate Communications.
So talking about the flow for today, we will first have Mr. Nakanishi, our CEO talk about the outline of Q2 fiscal 2023 results, and also an update on our Midterm Corporate Strategy 2024. Then after details will be presented by Mr. Nouchi, our CFO. Then we will get questions from the press. For investors and analysts, we will have a Q&A session from 2:15 p.m. And just to give out some instructions out to the media. [Operator Instructions] So now, we will explain the deck entitled results for the first six months of fiscal year 2023 presentation material. We have distributed the material for those who are in the room, and if you are online, we have sent you through email, and we will also project it on the screen through Zoom. Mr. Nakanishi, over to you.
Katsuya Nakanishi
I am Nakanishi, President and CEO. Thank you very much for taking time out of your busy schedule today to join our company’s fiscal 2023 Q2 results meeting. First, I’ll give you an overview of the financial results, and also an update on Midterm Corporate Strategy 2024. Then our CFO, Mr. Nouchi, will explain the detailed FY23 Q2 results and the outlook for fiscal year 2023. Now, please refer to presentation material Page 3.
First, consolidated net income for fiscal year ’23 Q2 was JPY466.1 billion, the second highest ever first half results following the previous fiscal year. Although net income decreased by JPY253.9 billion year-on-year, mainly due to the drop-off of soaring resource prices etcetera; each business steadily accumulated profits maintaining high levels.
Next, I will explain the full year forecast for fiscal year 2023. We have revised up the full year forecast from JPY920 billion announced in May to JPY950 billion. We are revising up our forecast now because segments such as natural gas, automotive and mobility, industrial materials and consumer industry are trending steadily and we have been able to confirm the firmness of profit levels going forward. Moreover, the revised full year forecast includes additional losses from items of concern which were not anticipated at the beginning of the fiscal year. In light of changes in the business environment, the JPY900 billion forecast accounts for this item. I will also talk about shareholder return later but the full year dividend forecast has been increased by JPY10 per share to JPY210.
Next, I would like to talk about the progress of Midterm Corporate Strategy 2024. Please turn to Page 4 shown on the bottom right. Here is an update on the cash flow allocation plan raised in midterm plan 2024. As of Q2 fiscal 2023, cash inflows during the period amounted to JPY608.2 billion in underlying operating cash flow and JPY467.9 billion in divestments. Cash outflows included JPY434 billion in investments, resulting in adjusted free cash flow of JPY642.1 billion. As for the cumulative results under midterm plan 2024, underlying operating cash flow was JPY1.9 trillion, and cash flow from divestments was JPY1.2 trillion showing steady progress against the forecast. The cumulative total of investments amounted to JPY1.3 trillion, which has been building up steadily, including committed projects. We expect a cumulative total of JPY1.1 trillion worth of shareholder return based on what has already been announced.
Now, please turn to Page 5. We created this new page for your better understanding of the progress of value-added cyclical growth model. The current Midterm Corporate Strategy aims to optimize the business portfolio by implementing the value-added cyclical growth model that investments for future growth are made by redeploying the management resources. As announced, we have divested our real estate management company last fiscal year, and a company in the food industry group this fiscal year. Through such strategic rebalancing of the business portfolio we are promoting to reallocate the management resources.
To promote this model, we have established a policy of either divesting or keeping the business; screening the list of business with — where ROIC is underperforming the industry average or those achieving only low growth using our business management systems. The aim is to improve capital efficiency by reducing losses through independent asset replacement and improving the profitability of companies we continue to hold. The profit improvement through these asset replacements and efforts to turnaround the EVA of companies we kept to positive was approximately JPY30 billion in FY22 compared to FY21. And we will continue the asset replacement and value enhancement to the businesses we keep to increase this amount to roughly JPY100 billion by FY24; the final year of the Midterm Corporate Strategy.
We will redeploy the management resources generated from executing the value-added cyclical growth model for growth investment to nurture the seeds and pillars for further growth.
Next, on Page 6 I will provide a breakdown of the investment plan and their progress. We are steadily investing in a variety of opportunities in each of the areas outlined in the midterm plan. We are expanding the investment pipeline as well, and the current Midterm Corporate Strategy calls for an investment of over JPY3 trillion, including the investments already made. Having said that, the goal is not just about achieving this number; we’ll continue to closely monitor the markets to carefully select opportunities while maintaining the investment discipline.
Please turn to Page 7. Past investments are starting to make steady earnings contributions, and the investment pipeline expected to contribute to earnings during their next Midterm Corporate Strategy is also building up. With our eyes on further growth, we will invest in businesses to create a future core [ph] businesses.
Page 8 summarizes the shareholder returns. In light of the upward revision of the full year guidance, expectations for sustainable profit growth to the future and stock market expectations, we are raising our annual dividend guidance by JPY10 per share to JPY210 per share. In addition to the dividend hike, we will also implement the stock split as announced today. Mitsubishi Corporation stock has been trading at around JPY700,000 for the past few months, above the JPY500,000 mark, which is the level suggested as a desirable investment unit by Tokyo Stock Exchange.
With the Japanese government advocating Japan to stand as an asset management nation and setting a policy goal to grow the retail investor base, we believe that we should also play our part in creating a more market friendly environment. During the conclusion to conduct a 3-for-1 stock split effective January 1, 2024. As a result, the annual dividend of JPY210 per share will be JPY70 per share after adjusting for the stock split. This fiscal year is positioned as the year to execute the Midterm Corporate Strategy. We will steadily carry out our growth strategy and implement the value-added cyclical growth model to further enhance our corporate value.
The progress against the quantitative target under the midterm strategy is summarized on Page 9; so please refer to the slide at your convenient time. We are now halfway through the Midterm Corporate Strategy 2024 and are now at the stage of accelerating the execution of investment plans and other measures to achieve our goals. At the same time, we must be fully cognizant of the rising uncertainties in the external environment, and we’ll brace ourselves in the remaining period under the Midterm Strategy to strive for our goals.
With that, I will end my explanation and hand over to Mr. Nouchi, the CFO, to cover the details of the FY2023 second quarter results and the guidance for the full year. Thank you for your attention.
Yuzo Nouchi
I am Nouchi, the CFO. I would like to add some comments. I will start with Q2 results by segment. So, please turn to Page 11 shown on the bottom right of the page. I will talk about segments that exhibited significant changes on a year-over-year basis.
Starting from the top left; regarding the top, Natural Gas. Due to the absence of trading losses in the LNG sales business in the previous year, net income increased by JPY35 billion from JPY46.4 billion to JPY81.4 billion. As for Mineral Resources, the fourth from the top; mainly due to lower prices in Australian metallurgical coal business — mainly due to lower prices in Australia metallurgical coal business, net income decreased by JPY187.4 billion from JPY321.5 billion to JPY134.1 billion year-over-year. Next, on the right hand side of the slide, the first segment on the top right; Automotive & Mobility decreased by JPY23.8 billion from JPY89.4 billion to JPY65.6 billion year-on-year, mainly due to decreased equity and earnings of Russia related and ASEAN automobile businesses.
The next segment below, Food Industry, was up by JPY21.5 billion to JPY63.6 billion from JPY42.1 billion year-over-year, mainly due to gains on sales of shares in an affiliated company. In Urban Development, at the very bottom, net income decreased by JPY102.5 billion from JPY114.6 billion for the same period of the previous year to JPY12.1 billion, mainly due to the absence of gains on sales of a property management company recorded in that same period of a previous year, and lower equity and earnings in a property business in North America.
I’ll now explain fiscal year 2023 full year forecast by segment, please turn to Page 12 at the bottom right. As explained by Mr. Nakanishi earlier, we have revised up the initial full year guidance announced in May by JPY30 billion to JPY950 billion. Six out of the 10 segments were revised up. I will focus on the three segments with the largest revisions. Starting with Natural Gas at top left. Thanks to the trading profit in the LNG sales business and higher earnings from the LNG related businesses, we revised up the initial forecast by JPY24 billion to JPY170 billion. Below that, in the Industrial Materials segment; earnings from the plastic building material business in North America increased leading to an upward revision of JPY11 billion to JPY57 billion from the initial forecast.
Moving to the top right on the slide, in Automotive & Mobility; higher earnings for Mitsubishi Motors among others led to an upward revision of JPY18 billion from the initial guidance to JPY128 billion. Best [ph] return illustrates reference information summarizing the assumptions for market conditions. Please have a look at a convenient.
Time this will conclude my explanation.
Question-and-Answer Session
A – Unidentified Company Representative
So this will conclude the explanation from the company, and we will now move into Q&A session. With the media, as I explained earlier, the question-and-answer session with the investors and analysts will start later at 2:15 p.m. You may continue to be connected.
Ladies and gentlemen, as time has come, we will like to now start the Q&A session for investors and analysts. The MC for this session will be myself, the GM of IR and SR; my name is Okamatsu [ph]. [Operator Instructions] We plan to end at 3:00 p.m. our time. Thank you. Now, we’d like to get started from Nomura Securities. Mr. Narita [ph], over to you. Please turn your mic and camera on, and go ahead with your question.
Unidentified Analyst
Hello, this is Narita [ph]. Thank you for taking my question. I have two questions. The first one is regarding the first half results in the second quarter; I presume the numbers were weak. Especially for BMA and the MDP part in Q2, profits declined. I think it’s because of volume but can you walk us through the factors why you saw decline in Q2 relative to Q1? And you — for this segment, Mineral Resources, you kept your forecast as it is but regarding your assumptions around prices and volumes, can you comment on that as well? So that’s my first question.
Second question is, on Page 5 this time around, you talked about the update on the value-added cyclical growth model, and it was a new chart that you’ve added in. Raising capital efficiency due to replacement and so forth, you were saying that it was JPY30 billion last fiscal year as an impact and it will move up to JPY100 billion. But what is the source of this? Are you going to withdraw from the loss-making businesses; is that the prime part? Or for the challenging businesses; are you going to improve it’s profitability? Can you give us a detailed explanation because it states here JPY30 billion; so I was wondering what area has been contributing and how it’s going to expand? So if you have any specific examples, please share that with us. That’s the second question. Thank you.
Katsuya Nakanishi
This is Nakanishi speaking. Regarding MDP the first question, it’s about volume. Originally, first half numbers, metallurgical coal prices were relatively low. And due to scheduled inspections, during the maintenance period volume dropped off. And towards the latter half of the year, we were assuming that prices will increase, and in reality prices are increasing; so that’s our assumption. And Mr. Nouchi will give a detailed explanation for number one, as well as for your second question.
Yuzo Nouchi
Nakanishi-san [ph], I will then take this question. For Q2 relative to Q1, as you rightly said, originally, for the second quarter compared to the past relative to Q1 earnings-wise; it is a quarter where earnings tends to drop-off. First regarding MDP, regular inspections usually takes place during this period. So like we mentioned earlier, the impact was mainly from volume; so the volume factor was the reason why. But we have assumed this from the beginning of the fiscal year, and also from the beginning of the year, there were some items that we did not anticipate such as suspension of operations for short period of time, as well as greater costs. So that’s the reason why Q2 was lower than Q1. But overall, we saw operations in line with our expectations. Although there were some items that were not anticipated. So up until the second quarter including Q1, overall I can say that we are on-track.
Furthermore, for replacements and details, track record-wise we have been able to show some results. And regarding what we’ve been doing lately, we’ve been looking at EVA, meaning for negative added value of businesses, we’ve been striving to replace them or improve its earnings; so we’ve been working on both parts. Right now at this point in time, it is hard to raise a specific company name but there are some loss-making businesses — there were some loss-making businesses. So the reduction of negative EVA was one a positive impact, as well as improvement in earnings or profits which led to replacing and reducing losses had a greater impact.
So regarding asset replacement and a review on value-added cyclical growth; since last year since we started this plan we’ve been doing these reviews. And as we show on this material as well, starting from this year we have a dedicated monitoring team in place, and they monitor on a monthly basis to see whether the boost in earnings can be in line with our expectations. That concludes my remarks. Thank you very much.
Unidentified Analyst
Just to confirm, so it says 80 companies and the progress is 40 for replacement. For the remaining 40, is the loss amount together quite substantial or not really? So JPY100 billion of a single year profit improvement is quite significant. So which is greater, profit improvement or reducing losses?
Yuzo Nouchi
So account — it’s not just accounting losses or negative EVA, it’s something that we would like to turn positive as well. And regarding improving profitability, we are accounting for a considerable amount of improvement. So going forward, we’re improving profits for items that we will continue to hold if we believe that is going to be greater than what we have now. So every year we review the plans we have formulated so that we could come up with measures to turn EVA positive, so we update the plan accordingly. And each of the divisions have been touching base with us, and we track the progress on a monthly basis. So, we do believe a considerable impact from — will come from improving our profitability from holding assets as well.
Unidentified Company Representative
Thank you, Mr. Narita. So the next question is for Mr. Morimoto-san from SMBC [ph]. Mr. Morimoto from SMBC [ph], please turn on your camera and unmute yourself.
Unidentified Analyst
This is Morimoto from SMBC [ph]. Thank you for your explanation today. I have two questions. On Page 3, regarding the upward revision of JPY30 billion, you showed the waterfall chart. But earlier in the media Q&A session this was asked but I would like to grab the overall situation. So that’s where my question is coming from. The FX impact is how much? I think of it when you said — when you answered that question, you mentioned JPY50 billion was the FX impact. And I think this is impacted by the cross rate of Australian dollar because overall the mineral resources did not really change but if you look at the details, I think there was some positive impact. So including the cross rate of currency, what was the impact of FX from JPY920 billion to JPY950 billion? What was the impact of FX including close rate?
And you also mentioned that they have dealt with some uncertainties over potential losses in the second half when you came up with your budget revision. So can you elaborate on those moving parts? And when you mentioned the provisioning of the concerns in the next step in the second half; is that a proactive allowance so that you can have a positive implementation of the value-added cyclical growth model? Or is it something that is deteriorating an existing business that you need to deal with? So can you elaborate on this on how you’re dealing with the potential loss for the second half? So that’s my first question. Sorry, if I have put a lot of things in one question, but that’s my first question.
And the second question is regarding the value-added cyclical growth model on Page 5. I think this is the way for us to judge our business performance, which will not be lying on the business cycles. So I think you also did the review last year, and I think you’ve also done the annual review for this fiscal year. So after doing the actual reviews of the asset replacement, what kind of learning did you have Mr. Nakanishi? Are you seeing a bit of progress on plant? Or can you share with us some of your findings after doing two reviews of this value-added cyclical growth model?
And also on Page 5 at bottom right, in FY2023, the quantity of improvement does not have any figure. So, I am interested in how much improvement you’re going to make in revenue from FY2023 to FY2024? So what is going to be the accretive impact from this fiscal year to the next with the value-added cyclical growth model?
Katsuya Nakanishi
Yes. So first time the quantitative impact; let me first shadow [ph] response to that question. So first, regarding the FX. This is inclusive of the impact on the Australian dollar; and that is roughly JPY50.
Unidentified Analyst
I see that’s very clear. Thank you for clarifying that.
Katsuya Nakanishi
And I say overall, for dealing with the potential concerns going forward. This is something we did with multiple businesses in consideration with the changes we’re observing in the external environment. Of course, as we implement the value-added cyclical growth model, we aren’t happy to book loss by reserving ever the potential loss in the future. And because that’s something that will be essential or to carry out in a value-added cyclical growth model. So inclusive of that, they were all — last past year or the year before that, we have done this and for any businesses with concerns, we have maintained our strategy to deal with those concerns reactively. So that is our behavior towards dealing with the potential loss in the future.
Yuzo Nouchi
I would like to add from Nakanishi. So on your second point, Mr. Morimoto, last fiscal year around October or in our small meeting, I mentioned about the numerical target since it was a small meeting. So this year we decided to disclose the new core target at this large meeting, and just buy something that’s really important. I mentioned this in the previous Q&A session with the media but we have 160 companies and I do realize that we are making good progress; of course, I cannot mention any specific name but there are three factors that I can note. One is that the loss making EVA but in terms of P&L we may be generating profit but the expected return is not achieved. So for those companies our effort is to streamline the business so that we reduce the OpEx for individual companies; so that’s the first point that we do.
And the second point is that, for the loss making of businesses we have to be wise in using grow [indiscernible]. Also, we want to divest from the loss making business, if there is growth, it’s okay but we don’t want to continue to invest in loss making businesses where there is no growth. Even if with the P&L or segment, there is a profit; and if there is no growth or we do not want to stick to that business for a long time; so we want to be confident and make a bold decision to diversify. If there is no potential future for the business, we would like to rather take a capital gain of these businesses. By combining those factors in FY2022, we had an impact of JPY30 billion. And by carrying out those initiatives in FY2024, we expect that figure on the slide to be achieved.
So FY2022 was hopefully JPY30 billion. And I think your question was how this is going to progressing in FY2023 and FY2024? So we’re still in the middle of FY2023 and in terms of the projection, this target is not about [indiscernible] in the mid-term business plan. So for FY2023, on top of what we have already achieved in FY2022, we will have a positive impact as that is deployed in our business plan. As we review the value-added cyclical growth model and discuss with the group companies; our projection is that for FY2023, there will be a descent improvement. So the target rate for FY2024 is JPY100 billion and track-record in FY2022 was JPY30 billion. As in FY2023, there will be a positive impact accordingly. So that’s how we see the impact for FY2023.
I see it will be close to JPY30 billion in FY2022 plus the incremental impact you will be achieving in FY2023; I see.
Unidentified Analyst
So the capital gain is not included in this figure is that right?
Yuzo Nouchi
Well, the capital gain after the asset replacement is included in this figure. As if that is the case, so in Q1 of next fiscal year, you will be closing the cells of the two minds and does not include that right; so that is not included in this number. So sorry for the complication because of some of the numbers were not included and some are included. So I apologize for that confusion. But for the two minds, that is not included in this target at number.
Unidentified Company Representative
Next person is from Daiwa Securities, Mr. Nagano [ph]. Please turn your camera and mic on and go ahead with your question.
Unidentified Analyst
This is Nagano from Daiwa Securities. Can you hear me?
Unidentified Company Representative
Yes, we can hear you.
Unidentified Analyst
Thank you for the opportunity. I have two questions. First one is about investments. Update on investment is what I’m interested in on page seven, as well as on page six, you raised some information here for trading companies overall, including yourselves; investments have been increasing and I think you’re relatively on the cautious side. But for the investment projects, when it comes to it’s ROI do you feel that you have been able to secure a good ROI because in the area of EX? There are some projects that have low ROI because it’s a red ocean. Do you have to tolerate that as you make investments lately? Can you give me some flavor on that? That’s my first question.
And my second question is about full year forecast. You raised upto JPY950 billion from JPY920 billion, and when you look at this by segment; there are two areas where I would like additional commentary on. One is regarding mineral resources; if you think about FX impact, I think the outlook should be rising but it hasn’t so can you break it down into detail? The other one; adjustments on a consolidated basis and other items. You were talking about JPY30-something [ph] billion; I presume that provisions are included in here. Apart from that, is there nothing else?
Katsuya Nakanishi
Regarding investments, I will take that question. And for the second question, for numbers, Mr. Nouchi you will take that question. For the first question, on Page 6. On the right hand side, on the very right of this page, we have the squares that are in white as well as in black; so this is our pipeline in order to in EX, DX, as well as the other areas. For EX related, as well as maintaining standard earning space; so the EX related are shown in this pipeline. And for the white areas, there are some areas where we have made investments or we’re close to making investments. Because we’re disclosing this information, it means that it’s probably going to happen presumably during this year or next year, some are beyond next year; but we have gained visibility and that is why we have decided to disclose this information. Of course, because I’m originally from the Energy business, in the past, even yesterday there has been some news around withdrawing from the offshore wind business in the U.S. but we don’t want to sacrifice our profitability to go ahead with projects because we are extremely conservative as you think; we are a conservative, so we try to have that mentality when we make decisions.
So we think about contingencies when we were thinking about generating our OE [ph], so we are asking our people to be creative; and that’s a prerequisite. As a result, there may be some dips along the way but compared to where we made the investment decision and compared to when we are actually operating the project, there may be some disparities but we would like to continue to make efforts so that we can pursue our value-added cyclical growth model. So we don’t want to just leave the projects as they are; after we make the investments we will continue to well monitor the progress, that’s the system we have. Whenever we make an investment and when we make a final investment decision, we will continue to look at it in detail and even after we start operating, we will continue to scrutinize.
Yuzo Nouchi
So now regarding your second question, I will take it. This is Nouchi speaking. So for Mineral Resources, we haven’t changed the outlook from the beginning of the year. And for met coal prices, prices have been increasing lately and the weekend will impact us positively and we are aware of that. On the other end, in Q2, there were scheduled maintenances that was assumed — it was accounted for but there were some factors that were unexpected and also production efficiency were sent, as well as cost increases hit us partially. And we have accounted for that in formulating the outlook and as a result of the forecast is as it is. Moreover for the others segment; at the beginning of the year for the other segment we were stating negative JPY20 billion as a buffer. Now as six months have passed for the fiscal year, we have taken out JPY10 billion of the JPY20 billion in the second half. We have reversed JPY10 billion and currently we are anticipating minus JPY10 billion for the year.
So — and also, like we’ve been explaining due to loss concerns of multiple projects, we have accounted for that in our updated forecast. And also, there are some corporate overall adjustments that have been accounted for but the prime reasons are what I’ve just mentioned and the details are provided by segment. That’s it from me. Thank you.
Unidentified Analyst
Thank you. For Mineral Resources; if you can elaborate a little more. Earlier for this segment, the profit plan did it change because of the coal business? So for the coal business, for scheduled maintenance it was originally planned for but they were also factors that were unexpected, as well as cost increases occurred and that was revised and updated. So that’s probably going to offset the positive benefit from currency rates. But even so, when you think about the assumptions of coal prices in the second half of the year compared to your beginning of your assumptions, it seems that you haven’t really raised your assumptions. So can you give us a sense of what you’re actually doing here?
Katsuya Nakanishi
Well, for my coal price outlook, like we’ve always been saying, due to various constraints we are not able to clearly — explicitly tell you how much but like I mentioned at the beginning, recent prices have been increasing, which we have accounted for by a certain degree. So I hope you can understand where we’re coming from. Thank you.
Unidentified Analyst
Got it. Thank you.
Unidentified Company Representative
Thank you, Mr. Nagano [ph]. So next question is [indiscernible] from Nomura Asset Management. Please turn on your camera and unmute yourself to ask your question.
Unidentified Analyst
This is [indiscernible]. Can you hear me?
Unidentified Company Representative
Yes, we can.
Unidentified Analyst
I have one question. How is other recent rate hike impacting your P&L? Looking at the financial report, the interest cost is changing from negative JPY42.9 billion to negative JPY91.8 billion. So I think that is a substantial impact from a rate hike. Also, but you’re grossed up — sorry, the financial profit is improving and I think with the trade businesses I hope you’ll be able to regain that negative impact from the rate hike? Also, we said the U.S. rate going up and also potential yen rate can also go up; so what is the impact of the rate type to your business?
Katsuya Nakanishi
I think you hit the sun [ph]. Also, I am Nouchi and I will be responding to your question. So the U.S. rate is increasing and the yen rate is also moving with the BOJ [ph] or nearly abolishing the [indiscernible]; it is going up gradually. So in terms of the interest payment, it is increasing as a cost that. But like you said, Ohato-san [ph], on the asset side we also got incremental profit accordingly; so that is also quite substantial. So with the rate hike, the servicing cost would go up but the impact on our profit is very limited in that sense. Going forward, however, we continue to tighten the monetary policy and continue to increase the rate. I know that FRB is still maintaining their technique stance and this is probably because the U.S. economy is still very strong; and if the rate stays at a higher level for a longer time, it may be impacting the businesses and that could lead to a deterioration in the economic sentiment in the U.S. And that’s something that we will continue to close monetarily [ph], and that may have an impact on our business. So that was that was your all questions?
Unidentified Analyst
Yes. Thank you very much. That’s all my question.
Unidentified Company Representative
Thank you very much. Next person is from UBS Securities. Mr. Goro [ph]. Please turn your mic and camera on and go ahead with your question.
Unidentified Analyst
This is Goro [ph] from UBS. Thank you for taking my question. My first question is about cash flow allocation on Page 4 where you talk about progress on investments; I just wanted to check your perspective. As a long list, you were saying you have an extensive pipeline and that was easy to understand. But you were also explaining that you’re going to proceed with recycling. So as a result for free class flow or at net investments or the two quarters that have just passed for this fiscal year, I think divestments have exceeded investments. So in your long list during this period, if you’re going to invest more; how should we look at free cash flow generation? Of course, I’m sure you have your original plan but the yen has been weakening even more and the numbers may become inflated. So — and also, there might seem some surplus cash and you might have to take action against that. So can you talk about the deviance against your plan, and the actuals?
And also on Page 5, in your original business models, you had several tens of billions of yen as a result of the recycling model. But this time around, you gave us specific numbers and you were saying that you would like to bring this single year profit improvement worth JPY100 billion. But what is its sustainability for capital gain? If you’re going to — is JPY100 billion going to be a peak? And then, is it going to be a trough work [ph] left than after? Or are you trying to say that the single year profit improvement is going to be lasting and we should expect this level going forward?
Katsuya Nakanishi
This is Nakanishi. I will take the question first and then after Mr. Nouchi may add some comments. For your first question, I talked about this on Page 6 when we talked about our pipeline. It’s not just what’s mentioned on this page; for the items that are shown here, they are actually moving right now, in reality. But other than what has been listed, after a year and half in my position, I am now in a position where the EX/DX strategy compared to when we set that forth new areas, in order to create joint value are areas where we’ve been able to gain more insight into after a near half. So finally, we have been able to identify certain opportunities; so we have another year and a half during the current midterm plan, we may be able to execute on some of our ideas and the seeds of growth.
As President, I am finally starting to feel what kind of seeds of growth we are facing. So in free cash flow, it’s a matter of how we manage free cash flow with that in mind. And of course, divestments are making more progress at this moment. And by promoting — it’s because we’re promoting the value-added cyclical growth model but of course, we need to do the divestments and investments in a balanced manner. And of course, we don’t want to stretch ourselves to make investments forcefully just for the sake of making investments so that we could hit our numbers. We may allocate some for shareholder return, and that stance is unchanged as well. So that’s the answer to your first question.
And for the second question, I explained this to Modimoto-san [ph] as well, and it may have been a little bit misleading but regarding capital gains, as you can see on Page 5, we stated strategic rebalancing of business portfolios and we have two cases here — examples here, where we were able to recognize the capital gain. And of course, sometimes we could treat it as one-off or developed to sell maybe a business model that’s sustainable, not necessarily a one-off business; so capital gains may fall under this category. And it might be hard to understand but when I was answering Modimoto-san’s [ph] question, I was saying three but what are the three is; for businesses where we can’t expect growth, for businesses that may slow down — that do generate profit, but however, are not expected to growth or maybe as Mitsubishi Corporation, we may have completed our role. In that case we may think about recognizing capital gain by recycling the business.
So for this JPY100 billion number, are we constantly going to be able to generate JPY100 billion or not? Under the value-added cyclic group growth model, like you’ve been pointing out from before — you were pointing out that we have a lot of loss making businesses, what are you going to do about its transparency? Because of that track record and because of your feedback — well, it’s not necessarily just because of your feedback, we were aware about these challenges. Therefore, in any case, when we do FIDs, we look at EVA. So we try to check and ensure that the EVA is in place and verify the EVA so that it definitely exceeds the internal return targets we have; so we basically want to operate in a lean manner. So the single year profit improvement is probably not going to continue to go up in a linear way but we would like to create an optimal business portfolio.
Yuzo Nouchi
Just one more thing I would like to add from my site. As Mr. Nakanishi explained; originally, last year when we set forth the midterm plan or when we were formulating the midterm plan that was issued last year, we wanted to improve asset efficiency increasingly. So the value-added cyclical growth model in a sense where we talk about under number two, increasing capital efficiency through asset replacement and earnings improvement. This goes back to the start of last fiscal year, we thought that asset efficiency was insufficient and this was one tool in order to enable us to improve asset efficiency. So apart from whether this number is going to continue to improve, we would like to continue to work on improving the profits of our business, and I believe it’s my job to look over this. So we would like to continue our efforts; that’s my point.
Unidentified Analyst
Thank you very much.
Unidentified Company Representative
Thank you, Mr. Goro [ph]. And next question is from Shirakawa-san [ph] from Morgan Stanley MUFG. Please turn your new camera and unmute yourself.
Unidentified Analyst
Hi, this is Shirakawa [ph] from Morgan Stanley. Can you hear me?
Unidentified Company Representative
Yes, go ahead.
Unidentified Analyst
I have two questions. The first one is regarding the investment over the future of yen; and that is in your plan. I think there is increasing uncertainties over the business environment and the yen is weakening as it’s becoming more challenging to make investments. So as you have made your upward revision; regarding risk, how are you actively dealing with the potential risks? But regarding your behavior, on investment over the short-term or medium-term, would you be less willing to take risk in your investment activities? So, it’s been a year and a half and against your plan over JPY3 trillion investment, the progress is a little less than 50%. Just thoughts for investment change with the rising uncertainties? And my second point is regarding the medical [ph] business. As you mentioned that there were some things that were just not anticipated in September with BHP; I think there was an issue and the operation was suspended. So this impact already fully reflected in the first half or the impact of volume decline or the cost increase reflected in your outlook for the second half? Those are my questions.
Katsuya Nakanishi
Regarding the first question, I, Nakanishi, will take that. Our investment plan is JPY3 trillion as you can see on Page 6, and this was the plan that we said at the outset of the year. And in the May result meeting, I mentioned that we have been able to enhance our earnings capability. The yen is becoming weaker than expected, so for the overseas opportunities it’s more challenging and the CapEx is increasing. So there are some things that were not expected but not just for the JPY3 trillion of the investment plan, if we see good opportunity or we believe that we can invest above on this plan, looking at the free cash flow from FY2022, and the free cash flow from this year and the cumulative free cash flow as you can see on the slide; so we will be proactive in risk taking because we want to grow, so we have to have an offensive and defensive plan to grow. We will be active but achieving the figure is not the sole intention.
And on your second point regarding other medical business, Mr. Nouchi will respond to that question.
Yuzo Nouchi
Regarding the outlook and specific features including volume, I will not be able to show that but going back to your question; the impact is already fully reflected in the first half numbers.
Unidentified Analyst
So, that’s all from me. Thank you.
Unidentified Company Representative
Thank you, Mr. Shirakawa [ph]. So we’re drawing near the end of the session. So the next question will be the final question from Tokai Tokyo Research Center, Mr. Kudibayaka [ph]. Please turn your mic and camera on, and go ahead with your question.
Unidentified Analyst
This is Kudibayaka [ph] from Tokai Tokyo Research Center, I have one question for DX and growth investments. JPY0.8 trillion is the budget and so far, you’ve made progress of JPY0.1 trillion. So how do you view this? And for EX/DX investments, are there any areas where you’re already seeing any effect or impact coming from your investments? Thank you.
Katsuya Nakanishi
For growth investments for DX there are two categories; JPY0.8 trillion and JPY0.1 trillion. JPY0.8 trillion is the budget and JPY0.1 trillion is the progress made for DX and growth related. And I think you were trying to say that we’ve only made this amount of investments so far. So for DX, I think it’s can be broken down into two; one is digitalization in order to reduce costs, and leveraging data in order to provide new services. And during COVID, under main items are the data center business is key says here domestic part. We’re not just looking at domestic part, we are also interested in overseas businesses as well. And running a data center business, we basically are — we have a building, and it’s kind of urban development like, but we build a data center and the power sources. And because it becomes hot when processing is done, it’s a matter of how you offer cooling.
So, we’re not a cloud business operator but in various parts of the market, data centers are being built; we need to source land, as well as have good capabilities to develop the data centers and do generative AI with more processing in place. We believe that the demand for data centers are going to be ever increasing, and therefore we are seeing significant growth rates right now. So that’s why we are starting to see some projects appear overseas as well, not just in Japan. And because we have strength in urban development originally, the data center business is an extension of that. So during this medium-term plan in the remaining period, we do have a good pipeline in place; so we’d like to go after good returns and be proactive in developing this business.
Apart from that by leveraging digital, we have MC Digital and Industry One [ph] our subsidiaries, and we would like to work through them in order to operate more efficient so that we could aim for better returns and yields. So, we’re not seeing as much of a cash out but we will be working on this so that for urban development, the cash out is not that substantial but we are working on these projects, as I’ve mentioned. And also in the area of urban development, smart cities, smart towns which is leveraging digital to develop neighborhoods; we are starting to get a considerable number of projects of that nature. It only says some urban management here but we are starting to see two of these projects specifically occur overseas; so these numbers are likely to the budget where the investments are likely to rise going forward. That’s all for me. Thank you.
Unidentified Company Representative
Thank you, Mr. Kudibayaka [ph]. So, this concludes our company’s fiscal year 2023 Q2 press conference and briefing. Thank you very much for participating despite your busy schedule. Thank you.
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