Message from the President
In fiscal 2009 (ended March 31, 2010), the first year of our FOCUS'10 medium-term management plan, net income totaled ¥155.2 billion, greatly exceeding our initial target of ¥115.0 billion, even though the financial crisis impacted market conditions and led to a drop in commodity prices. This performance reflected profits from our silver-zinc-lead mining project in Bolivia and in other areas in mineral resources & energy that were better than we originally assumed. In addition, earnings from Asian and other emerging countries and the positive effect of the proactive replacement of assets also contributed to our performance.
The initial target of ¥115.0 billion for fiscal 2009 was only around half of net income in fiscal 2008. When setting this target, we gave first priority to building a firm earnings base in order to establish a business model capable of generating consistent growth after the global financial crisis. In this process, we also considered possible losses regarding withdrawal from low-profit business. Given the challenging conditions, I believe the level of net income in fiscal 2009 was satisfactory.
In regard to our policy on shareholder returns, for the two-year FOCUS'10 period, we have set the dividend payout ratio at around 20%, because we will make active investments to raise our corporate value over the medium and long term, as well as strengthen our financial soundness. Based on this policy, we paid annual dividends of ¥24 per share for fiscal 2009.
Net income for fiscal 2009 and 2010 represents net income attributable to Sumitomo Corporation, and is the same as net income which had been used until fiscal 2008.
FOCUS'10: Policies
We are executing a selective & focused growth strategy through FOCUS'10, as the engine of growth in the global economy shifts from developed countries to emerging countries and financing conditions change. Through this strategy, we aim to build a corporate framework and growth model capable of maintaining sustained growth in any environment.
We have already established business foundations on a global scale, with seven product-based business units and regional organizations in Japan and overseas encompassing a broad range of industries and regions. Based on these foundations and functions developed through each business, we are constructing solid pillars of profit by advancing selective & focused activities in anticipation of future growth fields. In particular, under FOCUS'10, we will allocate business resources to fields such as mineral resources & energy, infrastructure, and media that offer numerous investment opportunities and where we can leverage our strengths. Regionally, business resources will be focused primarily on emerging countries.
Another goal is to further reinforce financial soundness and efficiency by promoting balance sheet management. In the process, we aim to restore positive free cash flow, and curtail interest-bearing debt, while securing investment capital so that we can continue to invest in our growth in any financial and economic environment.
FOCUS'10: Progress and Plan
Fiscal 2009 Progress
Based on the above policies, in fiscal 2009, we focused on strengthening our foundations in the business fields of mineral resources & energy, and infrastructure, and regionally we concentrated on emerging countries. We executed investment and finance of around ¥200 billion (¥90 billion in risk assets) in these areas. Regarding balance sheet management, we reduced assets according to the plans of each business segment, recovering cash of about ¥120 billion. Through these measures, we achieved results that were in line with initial plans or better in terms of the key financial indicators established as quantitative targets.
Based on steady progress with strengthening our financial soundness through balance sheet management and the upturn in recent investment conditions, we have raised our investment and finance plan over the two years by ¥100 billion, from ¥500–600 billion initially (¥200 billion in risk assets) to ¥600–700 billion (¥260 billion in risk assets).
Fiscal 2010 Plan
FOCUS'10 has entered its second year. When we initially formulated the plan, we expected the pace of the global economic recovery to proceed at a slightly faster pace in the second year. However, looking at actual conditions, we believe that the pace of recovery is slightly slower than originally anticipated. Still, the pace of the recovery varies significantly depending on the business field and region. By region, conditions have remained severe in the tubular products business in the Americas and in automobile and construction equipment businesses in Europe. In contrast, emerging regions such as China and Southeast Asia are regaining their former strength on the whole. Looking ahead, we intend to capture the strong demand in these regions to fuel our own growth on a company-wide basis.
Against this backdrop, we will execute investment and finance of ¥400–500 billion (around ¥170 billion in risk assets) in fiscal 2010, principally in the fields of mineral resources & energy, infrastructure and media, while regionally we will maintain our focus on emerging countries. In mineral resources & energy, we will acquire new upstream interests as we prepare to begin production at the Ambatovy nickel project in Madagascar. In infrastructure, we will focus on an expansion project at the Tanjung Jati B (TJB) coal-fired thermal power plant in Indonesia, in addition to expanding IPP/IWPP businesses and wind power/water infrastructure businesses.
In the maturing domestic market, we will actively allocate business resources to media, where expansion is anticipated. In April 2010, we increased our equity stake in Jupiter Telecommunications Co., Ltd. (J:COM), our core media business, to 40.1% (voting rights), through additional share purchases. We will accelerate J:COM's growth as its largest shareholder. At the same time, together with KDDI Corporation, which became a major shareholder of J:COM, we will build a cooperative business relationship in order to enhance the corporate value of J:COM.
In fields other than infrastructure and mineral resources, we are expanding businesses that take full advantage of our strengths in growing newly emerging markets. For instance, we are investing in tubular products manufacturing in Brazil as well as conducting mining equipment sales businesses in Mongolia and Russia.
In order to create future growth foundations, we established the New Industry Development & Cross-function Business Unit in April 2010. The environment and new energy businesses have been consolidated in the New Business Development & Promotion Division, which is part of the new business unit. Our goal is to capture growing earnings opportunities by accelerating company-wide efforts to develop these businesses. In other fields, the Value Integration Committee, which is in charge of incubating new businesses company-wide, has been strengthening its activities to construct new pillars of profit from a medium-and long-term perspective.
Fiscal 2010 Outlook
Through these initiatives, we are targeting net income of ¥160 billion in fiscal 2010. We expect total assets to be on target at ¥7,350 billion at the fiscal year-end, mostly the same level as when FOCUS'10 was formulated. We are forecasting a Risk-adjusted Return Ratio* (two-year average) of about 11% and free cash flow (total over two years) of ¥250 billion.
We plan to maintain a dividend payout ratio of 20% in fiscal 2010 and pay annual dividends of ¥25 per share for fiscal 2010, provided net income reaches our ¥160 billion target. In addition, given that our financial soundness is improving, and for the purpose of returning the benefits of our enhanced earnings power to shareholders, we will consider raising the dividend payout ratio.
* Risk-adjusted Return Ratio = net income/risk-adjusted assets (maximum possible losses). It is an indicator of profitability against quantified risk.
I believe that our strengths lie in having our own global business foundations and in our ability to conduct many different businesses in various regions worldwide. Another major advantage is our ability to create new value by capturing changing business conditions and the needs of our customers. In this regard, our efforts to construct solid pillars of profit in FOCUS'10 will lead to the accumulation of strengths, and will be key to realizing sustained growth in the future.
Until now, we have worked to build a balanced business portfolio capable of withstanding changes in business conditions, but the financial crisis and its ensuing volatility have had some serious repercussions. This does not mean, however, that our policies were fundamentally misguided. I believe that it means that we still have issues to address in terms of how we have executed business until now.
Based on this understanding, we plan to steadily build-up our strengths by achieving the goals of FOCUS'10. Our ability to demonstrate our extensive strengths in as many situations and businesses as possible may depend on our ability to nurture and enhance our human resources on a global scale. In other words, I believe that global human resources development is a top priority for achieving sound growth in the future. Looking ahead, therefore, we intend to actively allocate business resources to human resources development.
By further enhancing our functions and demonstrating them across our diverse business foundations, we are confident that our initiatives in growth fields and expanding regions will foster growth for our company. I invite you to expect the very best from us in the years ahead.
Susumu Kato
President and CEO
July 2010
