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            <div class="doc-title doc-data">Q2 2018 Mitsui &amp; Co Ltd Earnings Presentation</div>
            <div class="doc-date doc-data">Nov 06,2017</div>
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        <div class="doc-holder fl" style="overflow-y:auto"><div class="regular-view"><html><body content_type="html" doc_type="tt" ><p>Q2 2018 Mitsui &amp; Co Ltd Earnings Presentation</p><p>Tokyo Nov 29, 2017 (Thomson StreetEvents) -- Edited Transcript of Mitsui &amp; Co Ltd earnings conference call or presentation Monday, November 6, 2017 at 10:59:00am GMT</p><p>TEXT version of Transcript</p><div class="trans_heading_h3"><p>Corporate Participants</p></div><p>&nbsp;&nbsp;&nbsp;*  Keigo Matsubara</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Mitsui &amp; Co., Ltd. - Senior Executive Managing Officer, CFO &amp; Representative Director</p><p>&nbsp;&nbsp;&nbsp;*  Kimiro Shiotani</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Mitsui &amp; Co., Ltd. - Managing Officer &amp; GM of Global Controller Division</p><p>&nbsp;&nbsp;&nbsp;*  Tatsuo Yasunaga</p><p>&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;&nbsp;Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director</p><div class="trans_heading_h3"><p>Presentation</p></div><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [1]</p></div><p>&nbsp;Good morning. My name is Tatsuo Yasunaga, President and CEO. Thank you for joining us today.</p><p>&nbsp;I'll start by reviewing our results for the first half and the outlook for the full year. I'll then hand it over to my colleague, Kimiro Shiotani, our Global Controller, to explain the details.</p><p>&nbsp;To summarize the results for the first half, profit and core operating cash flow both trended very positively, supported by strong performance in each of our core businesses and also in steel products. At the same time, I believe we made good progress addressing a number of key issues and establishing a foundation in which to strengthen our future profit base.</p><p>&nbsp;Please turn to Page 3, which captures the main outcomes. The global economy during the first half of the financial year was generally sound, with both developed and emerging markets showing recovery, creating a favorable environment for our business. Amid this favorable business environment, first-half profit after tax increased JPY 116.3 billion to JPY 238.3 billion, and core operating cash flow increased JPY 123.3 billion to JPY 304.6 billion, taking us to 74% and 61%, respectively, of our original business plan for the current fiscal year.</p><p>&nbsp;In addition to solid performance in Mineral &amp; Metal Resources, Energy and Machinery &amp; Infrastructure, strong results in steel products and a recording of a valuation gain associated with the restructuring of Valepar also contributed.</p><p>&nbsp;At the same time, amid a clear worsening of the operating environment for the grain distribution business in Brazil, we recorded a loss related to our Multigrain operations. In order to secure flexibility for the future, we have calculated and provided for the maximum loss that could be reasonably envisaged at this point in time.</p><p>&nbsp;Our efforts to build a robust earnings foundation are accelerating. For example, by strengthening our steel product supply chain through our tie-up with Nippon Steel and Sumikin Bussan Corporation.</p><p>&nbsp;During Q2, we made an additional investment in Penske Truck Leasing as part of steps we are taking to expand our business in mobility and other growth areas. We also undertook strategic asset recycling and, as a result, achieved positive free cash flow of JPY 206.7 billion for the period.</p><p>&nbsp;Based on our first half performance, we are upwardly revising our full year forecasts, raising our profit forecast by JPY 80 billion to JPY 400 billion and forecast core operating cash flow by JPY 100 billion to JPY 600 billion.</p><p>&nbsp;Although we need to pay close and ongoing attention to geopolitical risks, we believe that the global economy is likely to continue showing a gradual overall recovery. While monitoring commodity markets, currency movements and other key elements of our business environment, we will do our utmost to achieve the forecast numbers.</p><p>&nbsp;Please now look at Page 4. The first key initiative in our medium-term management plan is to build a robust profit base and thoroughly strengthen existing businesses, so allow me to review our progress in this area. Combined first-half profit in our 3 core areas of Resources &amp; Energy, Machinery &amp; Infrastructure and Chemicals was JPY 269.7 billion with combined core operating cash flow of JPY 267.2 billion.</p><p>&nbsp;In Resources &amp; Energy, first-half profit was JPY 209.8 billion and grew at a very high pace, supported by good performance at our Australian iron ore and coal operations, cost reductions in our various Energy businesses and a valuation gain recorded from Valepar restructuring. Core operating cash flow also progressed steadily, reaching JPY 194.4 billion for the period.</p><p>&nbsp;In Machinery &amp; Infrastructure, first-half profit of JPY 47 billion and core operating cash flow of JPY 47.4 billion were driven by sound performance in the business overall, along with the sale of our interest in a U.K. pumped-storage hydroelectric operator.</p><p>&nbsp;In Chemicals, first-half profit lagged somewhat at JPY 12.9 billion. This reflected lower earnings at Novus from a delay in the recovery of methionine prices, although this was covered by contributions from our methanol business and trading income. Core operating cash flow proceeded in line with plan at JPY 25.4 billion.</p><p>&nbsp;We also worked to strengthen our trading business in the first half, achieving good results by focusing on our sales capabilities in Machinery &amp; Infrastructure, Chemicals and steel products. Moreover, we made meaningful progress in our efforts to improve the competitiveness of our existing businesses and build a robust profit base. This included the recent announcement of our enhanced tie-up with Nippon Steel and Sumikin Bussan Corporation, through which we are enhancing our supply chain and creating a structure to develop new businesses derived from Mitsui's comprehensive capabilities.</p><p>&nbsp;Please turn to Page 5. I would like to briefly discuss our key efforts to achieve the second initiative, establish selected new growth areas. In mobility, we acquired an additional 10% equity interest in Penske Truck Leasing, PTL, a full-service truck leasing, rental and logistics business for approximately JPY 48 billion, increasing our total equity share in the business to 30%. In the United States, where PTL is headquartered, there's expected to be sustainable population growth and increases in cargo transportation. Together with the growing need for technology equipment that meets new environmental regulations, demand is steadily growing for transportation services. Leveraging our comprehensive capabilities, Mitsui will continue to offer partner companies and affiliates high-level solutions through PTL, including fleet management and supply chain optimization.</p><p>&nbsp;In healthcare, in Asia, where the health care market is expected to expand, we are working to establish an ecosystem that combines the 5 essential elements of places, people, products, services and information. It has now been decided that blood glucose meters manufactured by Panasonic Healthcare will be used at 3 hospitals owned by Colombia Asia, the hospital group which we have invested in. We continue to accelerate efforts to achieve tangible synergy within the overall healthcare ecosystem, including planning for all Colombia Asia hospitals to adopt a drug medical information service offered by MIMS, a company jointly acquired by Mitsui &amp; Co. 2 years ago. In Asian emerging markets, where the population is predicted to both grow and age, and chronic diseases are expected to increase as income levels improve, Mitsui will continue to contribute to improvements in the quality of medical care and management of costs through the provision of convenient and efficient health care.</p><p>&nbsp;Please turn to Page 6. Next, I'll talk about our third key initiative, cash flow focused management and strength in financial base. In asset recycling, we saw steady progress. Together with the initiatives implemented in the first quarter, during the first half, we achieved a combined total of JPY 185.0 billion in cash inflows due to factors including the recovery of loans from an IPP business and the sale of a U.K. pumped-storage hydroelectric operator in the Machinery &amp; Infrastructure segment. In loans and investments, there was a total outflow of JPY 285.0 billion, which is basically in line with our plan.</p><p>&nbsp;In addition to items continuing from the first quarter, items in our core areas included outflows due to progress with an FPSO project in Ghana. Items in growth areas included additional investment in PTL, the acquisition of a U.S. healthcare staffing business and the tender offer for shares of Soda Aromatic Co., Ltd.</p><p>&nbsp;Next, I'll talk about cash flow allocation performance in the first half of the fiscal year. During the first half, we achieved core operating cash flow of JPY 305 billion. Together with asset recycling, total cash inflows came to JPY 490 billion. Investments and loans accounted for JPY 285 billion. And combined with our interim dividend of JPY 52.5 billion, outflows totaled JPY 337.5 billion. The result is that we had a free cash flow surplus after shareholder returns of JPY 152.5 billion, which represents steady progress.</p><p>&nbsp;Please turn to Page 8. Next, I'll discuss the balance sheet for the first half of the fiscal year. Net interest-bearing debt was on par with the end of March 2017 at JPY 3.3 trillion. Shareholders' equity increased JPY 233.5 billion to JPY 4 trillion. The key factor was an increase in retained earnings, together with an increase in the foreign currency translation adjustment account mainly due to the strengthening of the Australian dollar. As a result, net DER declined 0.06 points to 0.82x, and we achieved further progress in the strengthening of our financial base.</p><p>&nbsp;Please turn to Page 9. Now, based on our results for the first half of the fiscal year, I will explain our full year earnings forecasts. We have upwardly revised our profit forecast for the year by JPY 80 billion to JPY 400 billion. The main operating segments in which revisions have been made are Mineral &amp; Metal Resources, which have been revised upwards by JPY 100 billion due to factors including a valuation gain resulting from the restructuring of Valepar and an increase in the price of coal; and Machinery &amp; Infrastructure, which has been revised upwards by JPY 20 billion due to factors including the recycling of an IPP business. At the same time, the Lifestyle segment has been revised downwards by JPY 50 billion due to factors including the loss related to Multigrain operations.</p><p>&nbsp;Please turn to Page 10. Here, I'll explain our core operating cash flow forecasts. Forecast core operating cash flow has been revised upwards by JPY 100 billion to JPY 600 billion. Main segments in which revisions have been made are Machinery &amp; Infrastructure, which has been upwardly revised by JPY 70 billion due to factors including the cash recovery from an IPP business; and Energy, which has been upwardly revised by JPY 10 billion, partly due to cost reductions. We have also upwardly revised Iron &amp; Steel Products by JPY 10 billion due to factors including an increase in gross profit resulting from a recovery in the market and an increase in volume handled.</p><p>&nbsp;Please turn to Page 11. I'll now explain our shareholder returns. Our planned annual dividend for the fiscal year ending March 2018 remains at JPY 60 per share, and we will pay an interim dividend of JPY 30 per share. Additionally, as explained today, we are seeing core operating cash flow being generated at a level above our initial plan for the current fiscal year. We'll continue to monitor the situation and make a comprehensive judgment regarding additional returns to shareholders. This ends my section of the presentation.</p><p>&nbsp;I'll now hand this over to Mr. Shiotani, our Global Controller, to explain the details.</p><div class="trans_heading_h4"><p>&nbsp;Kimiro Shiotani,  Mitsui &amp; Co., Ltd. - Managing Officer &amp; GM of Global Controller Division   [2]</p></div><p>&nbsp;My name is Shiotani, Head of the Global Controller division. I'll now provide further details on the first half results.</p><p>&nbsp;Please turn to Page 13. First, I'll explain the main changes in profit by segment compared to the same period last year.</p><p>&nbsp;For the first half period, profit increased JPY 116.3 billion to JPY 238.3 billion. Mineral &amp; Metal Resources profit increased JPY 142.2 billion to JPY 186.7 billion. The main factors were valuation gains on Valepar restructuring, profit growth at Australian coal and iron ore operations due to an increase in the price of coal and iron ore and the reversal of impairment losses at copper mining operations in Chile.</p><p>&nbsp;Energy segment profits increased JPY 23.2 billion to JPY 23.1 billion. This was supported by higher LNG dividends and an increase in MEPUSA profits due to the increase in gas prices and the partial dilution of its stake in Marcellus.</p><p>&nbsp;In Machinery &amp; Infrastructure, profit increased JPY 14.4 billion to JPY 47 billion. The main factor was the sale of a stake in a U.K. pumped-storage hydroelectric operator.</p><p>&nbsp;In Chemicals, lower profits at Novus due to a fall in the price of methionine was the main factor in profit decreasing JPY 4.4 billion to JPY 12.9 billion.</p><p>&nbsp;In Iron &amp; Steel Products, profit increased JPY 7.4 billion to JPY 11.1 billion, supported by factories (sic) [factors] such as a recovery of market conditions, an increase in handling volume and the consolidation of Gestamp.</p><p>&nbsp;In Lifestyle, losses related to Multigrain operations and the partial dilution of our stake in IHH in the same period of the previous year led to a year-on-year decrease in profit of JPY 60.0 billion to minus JPY 36.9 billion.</p><p>&nbsp;In Innovation &amp; Corporate Development, profits decreased JPY 3.8 billion to JPY 1.6 billion. The main factor was a valuation loss based on the fair value of shares in a mobile data network operator in developing countries, despite profits from the sale of warehouses in Japan.</p><p>&nbsp;Please turn to Page 14. I'll now explain year-on-year changes in core operating cash flow by segment, focusing on factors different to those that cause profit changes.</p><p>&nbsp;Core operating cash flow for the first half was JPY 304.6 billion, a year-on-year increase of JPY 123.3 billion. In Mineral &amp; Metal Resources, core operating cash flow increased JPY 48.6 billion to JPY 113.0 billion, supported by higher gross profit due to an improvement in market conditions.</p><p>&nbsp;In Energy, core operating cash flow increased JPY 27.2 billion to JPY 81.4 billion, supported by increased dividends received and higher gross profit due to an improvement in market conditions.</p><p>&nbsp;In Chemicals, core operating cash flow decreased JPY 2.7 billion to JPY 25.4 billion. While covered in part by strong trading, the primary factor was lower gross profit due to a fall in the price of methionine at Novus.</p><p>&nbsp;In Lifestyle, core operating cash flow increased JPY 2.2 billion to JPY 4.5 billion. This was supported by a recovery of gross profits at Xingu, which was affected by drought in the same period of the previous year.</p><p>&nbsp;Turning now to Page 15, we'll look at the main factors influencing year-on-year changes in first-half profit. Please note that, just as in the first quarter, we have changed the order of presentation in the waterfall chart, so that the 3 items over which we can exert management influence are shown on the left.</p><p>&nbsp;First, base profit, which includes all the variable factors over which we have more control, excluding those captured in the resource-related costs in volume and asset recycling categories. This category contributed to a decrease of approximately JPY 10 billion compared to the first half of last fiscal year, despite increased dividends from LNG and higher revenue Iron &amp; Steel Products. Key influences included a decrease in profits from Valepar due to deconsolidation accompanying the company's restructuring, as well as decreases in profits at Novus and Multigrain. Under resource-related costs and volume, we recorded an increase in profit of JPY 4 billion due to reductions in Energy costs, despite higher costs associated with the change in coal mining plans.</p><p>&nbsp;Under asset recycling, although impacted by a sale of shares in the first half of the previous fiscal year, a profit increase of JPY 17 billion was recorded largely due to the sale of a U.K. pumped-storage hydroelectric operator as well as the sale of warehouses in Japan. Under commodity prices and ForEx; increases in the price of coal, iron ore, oil and gas contributed to a gain of JPY 71 billion.</p><p>&nbsp;Finally, under valuation gains and losses, we have recorded a provision related to Multigrain as a result of reviews of various contracts under an unfavorable business environment. Devaluation gains on Valepar restructuring and the reversal of impairment losses at copper mining operations in Chile contributed to a profit increase of JPY 34 billion.</p><p>&nbsp;That completes my presentation. Thank you.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [3]</p></div><p>&nbsp;Now we would like to take questions.</p><div class="trans_heading_h3"><p>Questions and Answers</p></div><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [1]</p></div><p>&nbsp;I would like to ask 2 questions. Upward revision of gross profit and core operating cash flow was just announced. Machinery was revised up by JPY 70 billion out of a total core operating cash flow revision of JPY 100 billion. Asset recycling was mentioned earlier as a factor, but it is not included in investment cash flow. Could you explain asset revision is quite substantial? Also metals and, especially, coal showed strong performance. However, the forecast remains unchanged. Have you had discussions about why higher commodity prices are not translating into cash? And my second question is on dividend. The CEO mentioned that he will monitor the situation and will be positive about additional returns to shareholders. Why was dividend not raised this time, despite core operating cash flow generated exceeding plan by 20%? Mitsui has always focused on free cash flow and it is hard to see from the outside if there is a KPI that is linked to the dividend. Please explain.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [2]</p></div><p>&nbsp;CEO Yasunaga will first answer the second question.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [3]</p></div><p>&nbsp;Thank you for your question. I will ask Shiotani or Matsubara to make additional comments later. But as for the IPP business, as we have been saying, we are looking at a steady develop-and-sell business model with decision to sell whole or in part or conduct an IPO when the profit from development is at its peak. When a part of the business is sold, we receive dividends from equity-accounted companies. This is part of the reason why core operating cash flow was larger than PAT. This develop-and-sell model does not guarantee completion of development to fall within a calendar year, so we aim to match the development cycle to the longer mid-term plan. But this year, it just happened to fall during this fiscal year. Having said that, next year, many of the projects will be in the final stages of development with projects in Morocco and Oman projected to be initiated sometime around the end of next fiscal year into early into the following fiscal year. So we need more time leveling it over the period of 3 years. Related to your second question, we need to be conscious of lower leverage if the interest rates start to go up. We are proceeding with investment in projects in the pipeline with some requiring further investment in the second half for growth, so it will be better to take a long-term view to make decisions regarding increased free cash flow and allocate in a balanced manner to shareholders' return, investment into growth areas and repayment of debt. Once we have better picture of the average free cash flow over the period of 3 years, we will consider the amount of shareholders' return. That is the reason for decision not to raise a dividend this time. We will make the necessary review for the full year.</p><div class="trans_heading_h4"><p>&nbsp;Keigo Matsubara,  Mitsui &amp; Co., Ltd. - Senior Executive Managing Officer, CFO &amp; Representative Director   [4]</p></div><p>&nbsp;Allow me to add comments on the first question. Forecast core operating cash flow has been revised upwards by JPY 100 billion. Core operating cash flow related to Machinery &amp; Infrastructure is expected to go up due to asset recycling, as you have rightly pointed out. But this is recovering of investment from affiliated companies through dividend. This is matter of how you define it, but dividend income is included in core cash flow related to operating activities and not to investing activities. The question was coal prices trending higher, while the cash flow is not going up in tandem. It is correct that there is positive impact from higher coal price. But regarding iron ore business in Australia, due to the higher Australian dollar, cash generated is suppressed due to this netting effect. Did that answer your question?</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [5]</p></div><p>&nbsp;I understand that dividend will be decided on a full year basis. Should investors expect dividend to go up in accordance with higher core operating cash flow?</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [6]</p></div><p>&nbsp;Whether to opt for higher dividend or share buyback, of course we are planning to consider shareholders' return accordingly with any surplus. As of now, we still have not made the decision to increase the dividend. I am still not satisfied with the current stock price leaving us with a possibility of a share buyback. Together with other parameters I mentioned earlier, we will make a comprehensive judgment regarding full year shareholders' return.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [7]</p></div><p>&nbsp;My first question, looking at the base profit in the waterfall chart in the handout material, the Valepar deconsolidation weighs heavily with overall reduction coming to JPY 10 billion and mobile data network operator valuation loss related to MTM, marked-to-market, or FVTPL also having a negative impact. But it being [comparably] new as a business, can you explain your take on such new businesses? And my second question, investment seems to be going in line with plan. In light of the current stock prices, I believe what is marketable will be expensive. So do you see any additional risks in conducting investments according to plan in the current environment? If you have concerns, please let us know.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [8]</p></div><p>&nbsp;Thank you for your question. Yasunaga will answer both questions.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [9]</p></div><p>&nbsp;As for our take on the base profit, I believe Mitsui's earning power is made up not only of measures such as aforementioned constant profit generation through develop-and-sell model for IPP and asset recycling, but also from production cost reduction related to resources and increased production volume. Furthermore, with ratio of resources and energy being high, the effect of the current strong market is bigger. But by strengthening downstream projects such as ITC and Novus, when the hydrocarbon price go up, it will lead to higher profit upstream. And when it goes down, we will make profit downstream. I believe aiming for good balance is also important for a strong base profit. Novus is now showing supply increases leading to a weaker market. But price hike policy is steadily being penetrated towards the second half, and demand is showing solid growth with increased chicken consumption. As for raising production capacity, as I mentioned before, it will go up in steps. And accordingly, market will weaken temporarily as supply increase and vice versa. So to have a business with different cycle from oil and gas, it's necessary for Mitsui to have a well-balanced earnings power, and strengthening of such businesses is advancing steadily. And related to your second question, we are now more diligent with investment discipline. Corporate staff division is not only playing the role of the gatekeeper, but they support the sales division as we call companies from the initial shortlisting of the potential businesses through formulation of the businesses, so that the hurdle is met much higher to enable better selection and outcome. I said that the projects already committed to are progressing in line with schedule. But we will continue to work on investments, especially energy-related investments, mindful of further cost reductions as well as lower operational costs, while increasing productivity, always vigilant of CapEx and OpEx. Investment is as planned at the beginning of the year on the surface. But we are working more aggressively with these contents, brushing up on our ability to raise the top line by making necessary cost reductions depending on the situation.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [10]</p></div><p>&nbsp;Let me confirm your stance on capital allocation. It was explained before that additional investments are going well with constant reductions of costs. And I believe JPY 900 billion worth of projects were approved at the time of the start of the New Medium-Term Management Plan. Since 6 months have passed since then, please update us on its progress. And with Mr. Sam Walsh joining as the External Director, what kind of discussions is he involved in on this matter? Also please share the current situation of LNG business in Mozambique, accomplished milestones, if any, and your outlook on FID.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [11]</p></div><p>&nbsp;The CEO will answer both questions.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [12]</p></div><p>&nbsp;As for the JPY 900 billion worth of projects that had already been approved by the management at the beginning of the New Medium-Term Management Plan, which make up a large part of the plan, at the beginning of this fiscal year, are progressing well. And as I mentioned earlier, we are choosing carefully the ones that can reduce CapEx and, as a result, lower the OpEx, continuing to demand strongly efforts on the part of the vendors and contractors for more cost reductions as well as review of the scope of work. Our investments, especially energy, are showing fruits of our efforts in terms of cost reduction, and the numbers reflect that. On the other hand, as for Penske Truck Leasing, as the business was stronger than expected, the 10% additional acquisition of a stake cost us a little more. The EBITDA multiple came down after negotiations. But as the business was strong, EBITDA was higher, increasing the corporate value. So there were such ups and downs, but we are on track. Six months have passed since Mr. Sam Walsh joined Mitsui as an External Director. We have not had cases in which we had heated discussion on capital or portfolio allocation. But during the board meeting, importance of raising profitability against working capital was strongly indicated. Also, recommendations were given not only in formal setting, but informally as well, pointing out the need to review the cost structure of our company. I believe he has Western notion of optimization of cost structure on his mind, but we need to be mindful of limitations we face as a Japanese company, as we explore together to further his advice on enhancement of our corporate value. As for your second question on Mozambique, LNG Producer-Consumer Conference 2017 was held here in Japan last month. Minister of Mineral Resources &amp; Energy of Mozambique announced that processes to secure legal stability to propel the LNG project forward was completed. I understand that resettlement of residents living in the proposed site of the new LNG plant will begin before the end of the year. This site will be codeveloped by Area 1, which we jointly hold with Anadarko Petroleum; and Area 4, which is operated by Eni of Italy and its joint venture partner, ExxonMobil of the U.S. We have been working with not only the government of Mozambique, but with stakeholders as well as operators of Area 1 and Area 4, and agreement has been reached. As for the EPC contract, we have already selected a consortium led by Chiyoda Corporation as a preferred bidder. But we believe there is still room for optimization of scope of work, prices, et cetera. So we will further consider cost reduction measures within a certain upper limit. Challenges, of course, with marketing, as they already know, there are LNG projects in Australia and in the U.S. related to shale gas, which will start operation in the next year or 2, causing a deterioration of the market. However, in China, Xi Jinping administration has begun working on plans to switch coal-fired thermal power plants to gas thermal power plants, starting in coastal cities such as Shanghai and Beijing, under the lead of the Communist Party. In Southeast Asia, South Asia and India, there are strong signs pointing to increased demand. PTT, Thai's national oil and gas company, has already decided to purchase more than 2 million tons, just waiting for approval from the government of Thailand. Negotiations with Japanese potential buyers are at its height. And we hope to have buyers set during the first half of next calendar year. And considering the timeline required for project financing, we are aiming for FID by the end of next fiscal year.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [13]</p></div><p>&nbsp;Were there any additional projects newly approved by the management during the first half?</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [14]</p></div><p>&nbsp;There are certain projects which cannot be disclosed yet. But everything falls within the planned cash outflow at the beginning of the year.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [15]</p></div><p>&nbsp;I would like to ask 2 questions. First, please update us on the projects included in the medium-term management plan, focusing on Machinery &amp; Infrastructure. We saw an upward revision with strong progress against plan for this fiscal year with asset recycling taking place, but is this slightly ahead of the medium-term management plan or in line with it? And how about Cameron? Is it lagging behind in schedule? Please explain the LNG situation, including prospects of marketing. It was explained that the shareholders' return will be decided on a full year basis, taking on the average over the period of 3 years. But at the time of announcement of the first quarter results, my impression was that you will be positively considering payout ratio as well as free cash flow. So with that as an assumption at the end of the first quarter and with the first half completed, when you say you want to shift your attention to the full year, I cannot help but think that you may have backpedaled since the last quarter. Is this because of such things as lower-than-expected iron ore prices or lagging behind of schedule of contributions by new projects in the machinery sector? With such uncertainties, why were you not able to make decision in the first half as to increase shareholders' return? Please explain.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [16]</p></div><p>&nbsp;Thank you for your questions. CEO Yasunaga will answer both questions.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [17]</p></div><p>&nbsp;As for Machinery &amp; Infrastructure, as I mentioned earlier, we had to negotiate with our potential buyers chosen through tenders. But many of the cases do not necessarily fall in the period of one year, causing slippages as to the timing of the sales. There are cases in which we needed to expedite sales procedure in light of the future interest rates. So having said that, I think we are steadily executing almost all that are in the 3-year New Medium-Term Management Plan. Looking at projects one by one, I can say that each sales have been exceeding expectations. However, whether this good trend will continue into the second year, we would like to expand the horizon and look at it in the span of 3 years, and cycles of sales and development will be uneven. As for Cameron LNG, unlike Mozambique, we have fixed most of the 4 million tons of LNG that we have the right to market on a long-term contract basis, so there is no issues with marketing. But as you know, there was impact from Hurricane Harvey. And since the start of the Trump administration, the situation regarding what is called common or local labor in the respective markets is deteriorating. Regulation on immigration and other factors have affected numerous planned construction sites, which resulted in loss of quality labor. But in order to catch up, we are making various efforts such as increasing labor, changing project management structure and increasing project managers. With such measures, although there is a slight delay, construction is progressing well toward our target of latter half of next year to early into the following year. We are trying to catch up on the delay as we move forward. As for shareholders' return, there may have been several different messages conveyed. But I myself regard free cash flow as the most important KPI. And as many of our projects recover capital on a mid- to long term, we will basically keep to the framework of 3 years in considering shareholders' return, investments into growth areas and debt repayment, and that has not changed. We will not make decisions every 3 months or 6 months. We feel it appropriate to make decisions about capital allocation for the year, a little later in the year, looking comprehensively over the period spanning 3 years. I have no doubts about the second half outlook. And I believe targets of JPY 400 billion and JPY 600 billion is well achievable.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [18]</p></div><p>&nbsp;My first question is about Multigrain. You said the business performance markedly deteriorated and the base profit declined by about JPY 4.9 billion in the first half. Could you elaborate more on the local business environment? I also understand you have been exploring the option of partnership strategies and looking for partners. And I'd like you to update us on where it stands at present. The second question may be going into details, but it is about Page 9, where revised full year forecast for the profit after tax and the reasons for revisions are shown. Could you give us supplementary comments on Energy and Iron &amp; Steel Products?</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [19]</p></div><p>&nbsp;The first question will be answered by the President and the second by the CFO.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [20]</p></div><p>&nbsp;With regard to Multigrain, since I took office as President with the awareness that this is the biggest management challenge, we have been promoting visualization of projects, gaining insights on where problems occurred and coming up [there] solutions, while at the same time, with the realization that the business model has been impaired, exploring how to implement partnership strategies in parallel. Now let me discuss more about how the business model has been impaired. When we originally started this business, we were right in our judgment that Brazil was the world's largest supplier and producer of grains. But the number of competitors, which is only 10 or so back then, is now increased to close to 50, among which there are no winners and everyone is engaged in a war of attrition, which is the first point I wanted to make. Secondly, since there are stakeholders involved in discussions and negotiations that are ongoing, I can only speak in general. But farmer's capability to get access to information and to make arrangements for logistics by themselves has been upgraded significantly. Originally, in Brazil, logistics was the biggest bottleneck, regardless of inland transportation or processing at the border for exports. Therefore, addressing the logistics issue early on was our weapon in establishing our business of origination and trading. But now, port capacities and inland transportation routes can be secured much more than we had expected. Furthermore, for the past decade, due to the considerable changes in oil prices, the structure of the freight for the seaborne trading was also changed significantly. And the routes from Brazil to Far East and South Asia have been also changing dramatically and do not necessarily match our logistics channels any longer. Therefore, the business is not structurally profitable anymore, partly due to these reasons. Then we're seeking several partnership strategies, and scenarios have already been narrowed down significantly, but are still under negotiation. In some cases, the existing contracts may have to be terminated. Some of the existing contracts, if terminated, could bring about unfavorable consequences, though I cannot specify which one. And by incorporating all those factors, we are resolved to make a final solution on this matter by the end of this fiscal year by taking more drastic measures. And the figures shown do reflect all these factors and therefore include a reversal of deferred tax assets as well. Let me emphasize once again that we have accounted for the maximum losses we can foresee in this business at this moment. And the Board of Directors has discussed this issue and showed support to the idea of bringing this matter to an end by the end of this fiscal year. All the necessary provisions were accounted for in the financial statements of this quarter. And we believe we can respond in a more agile fashion and that there is no possibility for any more losses to be incurred.</p><div class="trans_heading_h4"><p>&nbsp;Keigo Matsubara,  Mitsui &amp; Co., Ltd. - Senior Executive Managing Officer, CFO &amp; Representative Director   [21]</p></div><p>&nbsp;To answer your second question on the full year forecast asking for more comments on Energy and Iron &amp; Steel Products, as for Energy, we're assuming a significant amount of cost reductions throughout the year as well as an increase in dividends received from LNG projects, both of which are positive factors. Furthermore, prices are assumed to be lower in the second half compared to the first half. Given all these factors, we have made an upward revision to the profit forecast by JPY 5 billion. As for Iron &amp; Steel Products, in the first half, a large scale pipeline sales for Mexico was completed. Moreover, due to a recovery seen in the market, Mitsui and Co. Steel Ltd., a domestic Iron &amp; Steel Products subsidiary, has been showing a strong performance. And the subsidiary producing pipes in the U.S., which had been suffering for long, has become profitable this time. This has resulted in an increase of JPY 5 billion over the forecast made at the beginning of this fiscal year.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [22]</p></div><p>&nbsp;You said you're going to make investments of around JPY 900 billion on pipeline projects. You also said cost reductions would be pursued in CapEx and OpEx. Does that mean your medium-term management plan had some allowance incorporated? Or is it the case that there were some unused portions, which you are going to fill by adding more projects? Are there any differences in directions of your original plan and the directions of your current efforts? What are you now shooting for? These will be related to the allocation of management resources that I want to ask about next, so I would appreciate if you can comment on this. My second question is on reinforcement of base profit. In non-resources segment, the original plan was to build up the profits to reach JPY 60 billion for the next 3 years. As you started out, positive factors included city progress in sowing seeds for future investments. However, some areas are posting unexpected negative figures as well. In that sense, it will be necessary to make sure that net accumulated amount would be a positive figure, watching both offensive and defensive measures. Therefore, perhaps milestones might be important to stay on track for 3 years by setting a target for year 1 and 2 has returned to be ambiguous when we are talking about mid to long terms. Therefore, if you can share with us where you are against the target for this fiscal year and what are some of the measures you have against possible delay in progress. It will be appreciated.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [23]</p></div><p>&nbsp;Both questions will be answered by the President.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [24]</p></div><p>&nbsp;It was not the case that we incorporated an allowance in coming up with the estimate of JPY 900 billion. Even before the development of the current medium-term management plan, efforts had been made to reduce OpEx and CapEx. For the past 2 to 3 years, in oil and gas and mining projects, the system of preventive maintenance has been well established, where instead of conducting maintenance activities on a planned basis, you predict the parts likely to fail and perform maintenance on those parts in a preventive manner. So the amount of savings expected from such initiatives is marginal now compared to the first 1 or 2 years. Given the size of the assets, we believe there is still more room to reduce OpEx and CapEx by adding up all these marginal amounts. In that sense, it is fair to say that we have been able to capture the benefit of progress in AI and IoT. But the amount is so marginal that it will not be enough to allow us to consider where else we would spend the savings achieved. Furthermore, as a result of our efforts to reduce OpEx, replacement of the equipment has also been postponed. For some of those pieces of equipment, as a routine cycle, investments are now required. In any case, our mindset is not that extra fund generated out of the efforts to reduce costs can be spent as part of the additional budget for investment. As I said, even among the projects in the pipeline, if they did not meet a certain level of standard, they will be screened out at the stage of qualification. With some more rigorous criteria for investments, rather than being slowed down in progress, we could end up with only quality projects to work with, which could result in the extra cash flow in our hands. Then in this context, how can you make sure the profit is accumulated as planned to achieve the milestone? It was rather difficult for us at this timing to make it so clear, so we would like to spend the next 3 months or, in some cases, 6 months at the latest, to sort this out and explain to you in the third quarter as to how we actually go about doing this. In any case, though I'm repeating myself, we are confident that we can achieve JPY 400 billion in profit after tax and JPY 600 billion in core operating cash flow. Therefore, after taking into account the potential ups and downs we might see during the period of current medium-term management plan, if we expect to generate any incremental cash flow, we would like to consider options, including additional returns to shareholders.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [25]</p></div><p>&nbsp;There are 2 questions. First, I would like to ask for more clarification on the progress you made in terms of cash flow on Page 7. It says the core operating cash flow is JPY 305 billion and if you multiply this figure by 6, you will get JPY 1.8 trillion, which I could assume will mean that you have made, more or less, steady progress against the 3-year plan. But you -- your view on future prices of iron ore could affect this figure. Do you assume that, as long as you keep generating the current average level of cash flow, you'll be able to achieve the 3-year plan? Would you assume a certain amount of decline in the price of iron ore? Another factor that could impact the cash flow, I think, is the Mozambique project, which was asked about earlier. Suppose the project reaches FID in the next fiscal year, how would that change the 3-year cumulative investments and loans of JPY 1.7 trillion to JPY 1.9 trillion indicated here? Lastly, it has been half a year since you started your New Medium-Term Management Plan and some tangible results were achieved, including the enhanced accuracy and efficiency in investment projects, as you told us. But from your perspective as President, if there are any areas where you find more problems than you expected and like to see more improvements, could you share those with us?</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [26]</p></div><p>&nbsp;Both questions will be answered by the President.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [27]</p></div><p>&nbsp;If you look at prices of iron ore, as we move into the second half, due to the expected usual decline in production of steel in the winter, they have been trending weaker. Our take on this is as follows. Xi Jinping administration in China has been advocating the policy of weeding out domestically produced iron ore of poor quality, mainly due to the environmental issues in the country. And as far as environmental issues are concerned, we believe there will not be a setback. Therefore, our plan being worked out currently assumes that the prices of the iron ore that we own, which are of high quality, may not see a dramatic increase in demand, but are likely to slowly move upward with some ups and downs, depending on the fluctuations in supply and demand between now and 2020. Therefore, though the performance in the first half was strong, we're not that optimistic. But looking at the second half, we're not that pessimistic, either. Having said that, as you pointed out, with regard to the question of whether we will be able to achieve this plan if iron ore prices go down, our strategy is to develop solid projects in areas other than mineral resources and energy. But it is not as if this would change the world and bring about totally new sources of revenue. And therefore, we will make dedicated efforts to step up the performance of each of the 500 affiliates. This is beginning to produce tangible results in Machinery &amp; Infrastructure segment. But we believe that in Lifestyle, there are still issues to address and we have begun to allocate significant human resources to those projects. By assigning personnel in what we defined as growth areas in the medium-term management plan, the healthcare, nutrition, agriculture and retail services, so as to encourage them to compete and learn from each other, increase the number of projects and enhance the quality of the projects. And I see this as an ongoing challenge, and I believe I answered your last question. With regard to Mozambique, based on the current situation, we expect FID to take place sometime in the next fiscal year. And therefore, any major cash outflow that could occur during the period of the current medium-term management plan will be only in the final year or year 3, and that is incorporated in this budget for investment and loans. Lastly, in terms of strengthening the Lifestyle segment, in particular, I'd like to comment on the areas I particularly see as not doing a good job. For the past 10 years, we have allocated our resources with the goal of developing not Japanese domestic market, but emerging markets very much in mind. However, in the current medium-term management plan, we realized that we need to refocus on the domestic businesses to [shore] them up. Aside from the issue of striking the balance between resource and non-resource businesses, we need to see if we are not excessively skewed to emerging countries and identify what we have to do in developed countries such as the U.S., Europe and Japan. In the U.S, we have been able to engage in a lot of different businesses, but the issue is how we can bring those in and replicate them in Japan.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Analyst,    [28]</p></div><p>&nbsp;I have one major question, which has to do with what sort of discussions Mr. Sam Walsh, newly appointed Director, is having with the President. The first part of the question is about the optimization of the cost structure, which you mentioned earlier, as it was a bit difficult for me to picture in my mind specifically what you are referring to. Mr. Walsh was particularly known for his skills in cost reductions. And so I'm interested to know if he has made any suggestions along this line. If you can share some of the discussions you had with him, that will be appreciated. The second part is on what sort of suggestions he is making to the President as to how to make use of Multigrain going forward. In both those questions, I'm curious as to what kind of discussions are taking place between your company and an External Director.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [29]</p></div><p>&nbsp;The President will answer the question.</p><div class="trans_heading_h4"><p>&nbsp;Tatsuo Yasunaga,  Mitsui &amp; Co., Ltd. - President, CEO, Head of Crisis Management Headquarters &amp; Representative Director   [30]</p></div><p>&nbsp;In terms of the cost structure, one of the comments that he frankly made was that the headquarters is too large in scale. We had an in-depth discussion on this issue. It turns out that what he meant by headquarters being too large was that it was too large as a cost center. It is a bit difficult to explain, but our headquarters in Marunouchi is functioning with the major part of it working as a profit center, having a sales business unit in it. After launching a new project, in order to figure out how to maximize the profit gained from our investments in the project, should we place this function centrally in the headquarters or in the front line of each relevant business? Or in what way are we going to source a project, enhance its quality and harvest the profit? For these issues, Mr. Walsh is strongly oriented toward a distributed organizational structure. According to him, the corporate staff assigned in the headquarters should be kept minimal, so that we will have more human resources available to be assigned to the actual business operations. But that may work in the mining sector, but that doesn't in our case. Having said that, however, there is an issue of whether the current ratio of corporate staff is right. With the progress in IoT and AI, as being discussed among banks and brokerage firms, so handling money and commodities may be different, conventional trading operations themselves may change. Going forward, as AI and IoT advance more in bookkeeping and risk management operations, the question will be how much value human workers can add. Those sorts of discussions get triggered by Mr. Walsh every time we meet, which gives me a good opportunity to do mental exercises. In any case, he has experienced senior management positions in Nissan Motors, General Motors and Rio Tinto and successfully enhanced the corporate value, so we very much hope he will share lessons he learned from those experiences with us. And if there are any that can work better in our company, we would like to make the best use of them. With regard to Multigrain, he has just grasped the current situation. And what he said so far is minimizing the maximum loss in the interest of shareholders is important. However, in terms of a basic direction, as I said, the Board of Directors, including Mr. Walsh, has agreed to the idea that there is no possibility to continue the business in its present form. As to exactly how to implement the task, we will have more thorough discussions for the next weeks or month based on the narrowed-down scenarios, make a decision and execute the one selected by the end of this fiscal year.</p><div class="trans_heading_h4"><p>&nbsp;Unidentified Company Representative,    [31]</p></div><p>&nbsp;Does that answer your question? Thank you. We are running out of time, so if there are no more questions, we would like to conclude this session.</p></body></html>
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