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Executives

Joji Okada – Executive Managing Officer and CFO

Keigo Matsubara – General Manager and Global Controller Division

Kenichi Hori – General Manager, IR

Mitsui & Co Ltd (OTCPK:MITSY) F1Q13 Earnings Conference Call August 2, 2012 ET

Joji Okada

Good evening and I welcome everyone to the first quarter Earnings Conference Call. Let me begin with your overall results of the three month period ended June 30th 2012. Please refer to page one of the presentation material on our website. The operating environment during the quarter was broadly in line with the expectation we had when we originally put together the annual budget for the current fiscal year.

Growth momentum has moderated as expected in major emerging economies, such as China and Brazil, mainly due to the sluggish economy in Europe. On the other hand, implementation of monetary easing and economic stimulus measures are taking place globally and we are closely monitoring whether such measures can lift the economic activities, in the remainder of the year.

As for the situation in Europe, although there were some positive developments such as the longer term refinancing operations by the European Central Bank and the recent agreement in the EU summit, which provides some hope for our recovery, the downside risks in the European financial market remain elevated, and we continue to monitor the situation with extreme care.

While short term uncertainties exist in China, our view is that coordinated policy implementation and active public investment programs should stimulate internal demand in China and drive a reasonably high growth rate in the medium term. In a global economy that continues to face increased risk aversion and uncertainty in growth, we are pleased to report to you that we got off to a solid start.

Net income attributable to Mitsui was ¥104.4 billion for the quarter, an increase of ¥10.1 billion from the fourth quarter of the previous fiscal year. Compared with the first quarter of the previous fiscal year, when the metal resources prices were at very high levels, it was a decline of ¥28.3 billion.

The performance of mineral and metal resources is generally on track and achieved solid volume numbers for iron ore in the first quarter. Energy had a good first quarter owing to the high level of oil prices applied in the earnings of this period and strong dividend income from its LNG projects. Its oil and gas operations performed well, including new profit contribution from the Eagle Ford Shale oil and gas project, and additional production volume in Thailand by Moeco.

Turning to machinery and infrastructure, its motor vehicles and construction machinery business demonstrated earnings growth over the same period of the previous year. The business also entered into an agreement to participate in the mining equipment rental business in Australia.

IT has recovered from a weak fourth quarter of the previous year and the consumer service unit continues to make progress in the healthcare service area with additional contribution from the IHH healthcare business in Asia in the first quarter.

From the viewpoint of enhancing our portfolio, Mitsui’s continued commitment in accumulating high quality reserves in its resource portfolio achieved another step forward with additional natural gas discovery offshore Mozambique. Furthermore, during the first quarter, we reached an agreement to acquire BP’s interests in oil and gas conceptions in the UK North Sea.

We also agreed to participate in the Browse LNG project off the coast of Western Australia. Our expansion projects for iron ore are progressing as planned, and will lead to strengthening of our earnings pace. We continue to advance our Greenfield manufacturing projects in the chemical sector together with our partner DAU.

Although we have only completed just one quarter of the year, as CFO, I’m pleased with the overall progress we are making on all these fronts as we actively implement the respective strategies in each of our business areas. Our deal flow for potential new investments is quite extensive and we will continue to implement the balanced and disciplined allocations of capital to achieve an effective portfolio among the six business areas.

While we regard the first quarter results overall as a smooth start to our new medium term management plan, we have to be well aware that the global recovery remains at risk with a larger potential downside. The situation in the Euro area remains precarious with potential spillover effect on the Asian economies including China, and hence negatively affecting commodity prices.

Job creation has been weak in the US, and we need to be careful of the underlying loss of momentum in the recovery of economic activities. Together with the prolonged depreciation of the Yen, these factors will continue to challenge our operating environment. With such underlying risk factors as a backdrop, I believe our strategy of capturing the growth opportunities in the emerging economies and simultaneously sourcing new leads for innovation in various geographical areas, including Japan, continues to be valid.

With that as closing, I would like to turn to the General Manager of the Global Controller Division, Mr. Matsubara.

Keigo Matsubara

Let us turn to the key line items of the statement of consolidated income for the three month period ended June 30th 2012. Please refer to page two of the PowerPoint presentation and pages two and three of the data book. All amounts are pre-tax numbers.

Gross profit was ¥ 201.9 billion, a decline of ¥15.1 billion compared with the same period of the previous year. Mineral and metal resources posted a decline of ¥13.9 billion due to a decline in iron ore prices. On the other hand, energy reported an increase of ¥4.9 billion, mainly due to a positive effect associated with a higher market price for oil and in increase in sales volume which was partially offset by a decline in core prices.

Operating income was ¥72.0 billion, a decline of ¥16.6 billion compared with the same period of the previous year, reflecting a decline in gross profit. Equity and earnings of associated companies was ¥60.1 billion, a decline of ¥14.1 billion compared with the same period of the previous year. Valepar posted a decline in earnings by ¥13.1 billion, mainly due to a reversal effect of the gain on divestiture of its aluminum assets and declined iron ore prices.

The overseas power production business posted a decline in earnings due to a decline in mark to market valuation such as those on power derivative contracts. Now I would like to explain about the other items which impacted net income. All amounts are pre-tax numbers as well.

Dividend income was ¥35.4 billion, an increase of ¥13.9 billion over the same period of the previous year, which was mainly driven by the increased dividend income from LNG projects including the Sakhalin-2 project. Impairment losses on securities was ¥11.3 billion, a deterioration of ¥7.8 billion compared with same period of the previous year. Due to a decline in share price, an imperilment loss was recorded for Nippon’s deal. As a result, net income contributable to Mitsui was ¥104.4 billion. A decline of ¥28.3 billion compared with the same period of the previous year.

I will now explain the performance of our individual operating segments, compared with the net income in the same period of the previous year. Please turn to page three of the presentation. For the net income of major subsidiaries and associated companies, please refer to pages 12 and 13 of the data book. The amount I will refer to from now on are all after-tax figures.

Mineral and metal resources posted a net income of ¥30.3 billion, a decline of ¥29.6 billion compared with the same period of the previous year. There were positive impacts of the increases and sales volume led by a reversal effect of unseasonably wet weather that affected the operation of Rogue River joint venture and the effect of an incremental capacity brought by the expansion project of the joint ventures with BHP Billiton.

However, these positive impacts were more than offset by a negative effect of declines in iron ore prices. Energy posted a net income of ¥56.3 billion, an increase of ¥17.8 billion over the same period of the previous year. While a decline in coal price had a negative impact, a positive effect associated with an increase in dividend income from LNG projects including the Sakhalin-2 project, a higher market price for oil and an increase in sales volume contributed to the results.

Please turn to page four of the presentation. This page shows the breakdown of the change in net income between the three-month period ended June 30th, 2012 and the same period of the previous year. I will start with the onetime reversal effect column. There was a net reversal effect of minus ¥2 billion overall. In the three-month period ended June 30th of the previous year, there were gains on divestitures of securities including T Gaya of ¥10 billion. While there were also impairment losses on securities of ¥9 billion including that of Moshi Moshi hotline.

I will now move on to the divestiture and evaluation profit and loss column. The repulsive effects of ¥3 billion in total, including gains on divestitures of securities and T Gaya and gains related to equity dilution of IHH shares. On the other hand, we posted impairment losses of ¥6 billion in total including loses on listed securities of Nippon Steel and preferred shares of Valepar. As a result, the net overall effect was minus ¥6 billion. With regards to market and commodity prices factors, it was an overall decline of ¥40 billion in total, mainly due to lower prices of iron ore and coal, while the increase in oil and gas prices had some offsetting effects. As for costs in metals and energy, there was a cost increase ¥4 billion mainly in depreciation costs. In miscellaneous, factors such as increases in volume of mineral and metal resources and energy of ¥11 billion are included.

Please turn to page five. Let’s look out our balance sheets and cash flows. Total assets declined by ¥350 billion from that of March 31st, 2012 to ¥8.6 trillion. Shareholders equity showed a net decline of ¥100 billion from that of March 31st, 2012 to ¥2.5 trillion.

The increase in retained earnings was more than offset by a net decline in foreign currency adjustments, reflecting depreciation of the Australian dollar and the Brazilian Real against the Japanese Yen, as well as a decline in unrealized holding gains unlisted securities. Net debt to equity ratio has been lifted to 0.84 times from the level of 0.81 times as of March 31st, 2012. Net cash provided by operating activities were ¥134 billion and net cash used in investing activities was 100 ¥8.8 billion mainly for expansion related expenditures in metals and energy. As a result, free cash flow was a net inflow of ¥25.2 billion.

I will now briefly explain on page six the progress we have made in investments and loans. During the first quarter, we implemented investments and loans in the amount of ¥150 billion. I will explain the breakdown. In metals, we invested ¥35 billion mainly Australian iron ore expansion and copper mine development. We invested ¥30 billion in machinery and infrastructure, mainly in FPSO rolling stock for leasing and IPP projects. In energy we invested ¥65 billion in total in Shale gas and oil projects as well as expansions of other oil and gas and coal projects.

On the other hand, we collected ¥40 billion through redemption of preferred shares in Valepar and through divestiture of shares and collection of loans. As a result, net cash outflow for investments and loans was ¥110 billion. We expected an investment in each business area will further accelerate from the second quarter onwards. So overall we are generally on track with our plan.

That is all from me and thank you for your attention.

Question-and-Answer Session

Operator

Questions and answers now.

Unidentified Analyst

I understand that substantial dividend income including that Sakhalin-2 boosted Q1 results for energy and I know that you won’t tell us the exact contribution from Sakhalin-2. But it appears that even without it, you would still be in a pretty good shape. Can you explain more about other factors, not just oil prices such as production volume and exploration expenses please? And I know that a number of subsidiaries have posted very strong results.

Keigo Matsubara

As you rightly said, for energy, even excluding Sakhalin-2 income figures were up thanks to higher oil prices and increased production volume. Subsidiaries such as Moeko or Mitsui oil exploration, MEP ME or Mitsui E&P Middle East and MEP AU or Mitsui E&P Australia have enjoyed the benefit of both factors.

Unidentified Analyst

Does that mean production levels were higher than planned levels and would that continue?

Keigo Matsubara

Yes, production volume remains firm.

Unidentified Analyst

At the beginning on the operating environment, you said that you still expect reasonably high growth in China. On the other hand, your steel products and chemicals performance appear to be weaker than planned levels. How is that now and do you currently see any signs of change such as a drop in steel making material shipment perhaps?

Keigo Matsubara

Indeed steel products, chemicals, transportation logistics are weak. Steel products have been directly hit by lower prices with the main impact coming from China. Chemicals have also suffered a trading loss due to soft demand in China in particular for basic chemicals. We are looking forward to stimulus measures and monetary easing measures by the Chinese government. Iron ore prices have fallen to around $120 US and although we do not disclose what assumptions we made at the beginning of the year, current levels are lower. Chinese crude steel production is driven by the downstream steel product demand so we are keeping an eye on that and currently demand and prices are both down. This situation however will only be short lived. Over the longer term the effort to bridge the economic gap between the inland and coastal areas would have to continue. Consequently, there should be solid demand within China led by infrastructure developments.

Unidentified Analyst

Would the iron ore price levels in Q1 have an impact on your full year plan?

Keigo Matsubara

Should current market conditions continue for an extended period that may be the case.

Unidentified Analyst

I understand that dividend from Sakhalin-2 was substantial in Q1. Can you confirm that that was dividend based on their January to March cash flow? As I recall the dividend income booked in Q4 was based on their October to December quarter. And what would their cash flow and your dividend income be like down the road?

Joji Okada

For the Sakhalin-2 joint venture, dividend decisions are made based on a number of factors, including the status of capital, planned CapEx and cash position. A resolution must be made by the joint venture partners for each dividend payout before we can receive the payments and book income. Forecasting is therefore difficult as we have explained previously. Dividend income from this project last year was certainly substantial and exceeded our forecast. Our budget therefore does not expect the same levels to continue this year. Again, it is difficult to anticipate what will happen down the road. It maybe that our investment is paid back more in the form of capital redemptions, but we can’t say anything for sure.

Unidentified Analyst

Next, can you explain the increase in net interest expenses please? I wonder why this is the case when your net interest bearing debt has not changed very much.

Joji Okada

The year on year increase in net interest expenses is a result of multiple factors. One is a decrease in interest income from Valepar because of progress in the ongoing redemption of preferred shares. Another is the impact of Multigrain AG become a 100% owned and therefore a consolidated subsidiary in Q2 last year. As a result, we have booked interest expenses that were not booked in too long last year, as the company was only an associated company back then. Other factors include higher US dollar interest rates and increased borrowings in foreign currencies.

Unidentified Analyst

Can you tell us more about road machinery which posted a rather large earnings increase among your subsidiaries? What led to that and what is the outlook?

Keigo Matsubara

Road Machinery LLC sells construction equipment in the United States in a number of States such as California and Texas. It also sells mining equipment in Mexico. Business is strong in both countries, particularly in the field of after-market business including maintenance and parts supply.

Unidentified Analyst

Can you also tell us more about IHH which had an IPO in late July? Would this result in any accounting profit in Q2 or later?

Keigo Matsubara

Yes, with the IPO, our share in the company was reduced, and therefore we will book again on equity dilution. In fact, we booked some in 212.

Unidentified Analyst

I would like to know more about Multigrain. The subsidiary is still in the red in Q1. After that good soy harvest last year, what is happening now? What can we expect from Q2 onwards?

Keigo Matsubara

Multigrain was made a 100% subsidiary last year and we have been working hard since to turn it around as soon as possible. As we have previously explained, we have been improving inland transport that had been a bottleneck, closed down under performing operations, strengthened governance and reduced costs. We will also reinforce the sourcing and marketing operations in inland areas, improve infrastructure in those areas too and newly develop farmland as well as conduct soil improvements. Having said so, for this financial year, there are droughts in Brazil as well as in the United States, which means a much smaller harvest after a good one in the previous years and therefore probably lower profit levels for the agricultural production business.

Unidentified Analyst

On your oil and gas operations, I understand that the volume of your equity share of production has increased and that it’s mostly natural gas. Can you tell us about the status of Shale gas developments?

Keigo Matsubara

On Shale gas developments in North America, we are currently moderating the speed of development for natural gas as was originally planned. Our current focus is on the oil rich Eagle Ford, as liquids offer a better profit margin. We intend to ramp up production there as quickly as possible. In short, we are maintaining a good balance between oil and gas in North America just as we had planned.

Unidentified Analyst

When you explained earlier that production was in line, were you referring to oil?

Keigo Matsubara

Those oil and gas production are in line with what we initially planned. It means that the oil side is being accelerated while the gas side is being moderated.

Unidentified Analyst

I have a question about your investments in mineral resources. We hear comments from, or reports on some of your joint venture partners suggesting that they may be putting off investments. Would that have an impact on your investment plans such as for the iron ore or development project in Australia? Would there be an impact on this year or next year’s investment plans, or would it rather only affect the next round further down the road?

Keigo Matsubara

At this point in time, no decision has been made to the effect that expansion would be delayed on those joint venture projects. We are assuming that things will go ahead as planned.

Unidentified Analyst

My second question. Recently we see big drops in resource prices and you’ve explained that if this trend continues, it may have a negative effect on your performance. Do you expect imperilment loss on the resource assets that you’ve invested in, if the current price trend continues? Do you see any risks in the near or further future?

Keigo Matsubara

No, the resource related assets we own have been acquired quite early when the cost was low. So we do not see that risk.

Unidentified Analyst

Related to the previous questions, I would like to ask about the Eagle Ford Shale oil project. Looking at the performance of subsidiaries, we do see profit to a certain extent on a pre-tax basis. Can we understand that from the second quarter onwards production will increase and that further profits will be gained? That is my first question.

Keigo Matsubara

As for the Eagle Ford project, our plan is to gradually increase production. However, we cannot say at this point if that will be actualized on a quarterly basis. We do aim to increase production and profits, so we will check our performance every quarter.

Unidentified Analyst

My second question is about Bussan Auto Finance. In the first quarter it is still in the red. But I do understand that structural reform is taking place. Could you elaborate on the progress of the reform and on the performance prospects?

Keigo Matsubara

As you know, now there is a new regulation on down payments in Indonesia, but we believe this will increase a favorable environment for Bussan Auto Finance. Until recently, we were involved in an excessive competition where the down payment requirement was low. But Bussan Auto Finance is able to do business with customers who are able to pay a higher down payment.

Although sales may somewhat decrease, we will also see a decline in irrecoverable debt. We still see some negative effects of deals with low down payments from last year and therefore we will continue to record provision for doubtful receivables. Although it may take some time, we expect this to decrease and that some may be reversed. Although it may be difficult to expect this business to gain big earnings as we’ve seen in the past, we are continuing efforts to make sure we have a stable profit structure in place. And we are sure we will see the results of our efforts in the near future.

Unidentified Analyst

I also have two questions. The performance of NCH in the first quarter seems positive. But is it because some temporary costs such as those incurred and expanding pits are no longer a factor? That is my first question.

My second question is on IHH. Is it correct to understand that equity dilution have all been recorded in the first quarter and that we will not see similar equity dilution in the second quarter?

Keigo Matsubara

I’d like to answer the first question. NCH or the Australian coal business, we have explained that we’ve done pre-stripping in the first quarter of the last fiscal year. In the first quarter we see reduced costs but market prices are not very good. So we have continued efforts to make sure we will have an advantage in terms of product mix and that is incurring some cost. And the performance we’ve announced is the result of our efforts. Volume wise, we see steady progress that prices are declining.

Joji Okada

On your second question on IHH, in the first quarter IHH has acquired a hospital in Turkey. And for IHH, this has been like a capital increase. When the acquisition took place, part of the payment has been made, not in cash but in IHH stocks. So before the capital increase, the stake we had in IHH was 30% but with the addition of the hospitals in Turkey our stakes was diluted to 26.6%. The difference between the diluted portion of the shareholder’s equity and the increased shareholder’s equity due to the issuance of new share is recognized as equity dilution. For the second quarter, since new shares have been issued when IHH was listed in Singapore and Malaysia, we expect a similar dilution will take place and equity dilution will be recorded.

Unidentified Analyst

My first question is about the equity dilution by IHH in the first quarter and the second quarter which we expect to be rather high. Have these been considered when you compiled your business fund for the whole year? That is my first question.

Keigo Matsubara

Yes, we have included that under certain assumptions.

Unidentified Analyst

Were the results better than your initial assumptions? Were your assumptions rather conservative?

Keigo Matsubara

We cannot comment at this point.

Unidentified Analyst

My second question is on energy. As the previous person indicated, volume has increased and you are gaining dividends from Sakhalin-2. Were the factors included in the full-year plan? If you just look at the first quarter results, was it better than expected?

Keigo Matsubara

We always compile our plans for the full fiscal year. So, for dividends, if you average out the whole year plan, the first quarter results was higher than that. However, production is progressing as expected in the first three months of this fiscal year.

Unidentified Analyst

My third question is about metal resource. Concerning iron ore and copper, just looking at the first quarter, how are things going compared to your plans? And although I do understand you do not disclose your assumptions for iron ore prices, based on your assumptions for the whole year, could you indicate whether you have expected prices to be flat through the first to fourth quarters.

Keigo Matsubara

On the situation of copper and iron ore in the first quarter and how we consider prices, we look at the price situation at the time of compiling our plan and we also make assumptions on how prices can fluctuate throughout the year. Of course, prices may differ from quarter to quarter, so we include that in our assumption when we compile our budget and decide on a figure.

As for the first quarter, production volume for iron ore was good and the price trended within our assumption. There were no major surprises. As for copper, there were some quality issues in Koza Wasi [ph] so the Joint Venture is now taking measures to improve the situation. So, volume-wise we understand that it is at a lower level than last year in the first quarter.

Unidentified Analyst

Another question on iron ore. I believe that the ratio of contracts based on spot prices has increased from the third quarter of last year. Do you see any drop in the ratio of such contracts?

Keigo Matsubara

We are still carrying out a detailed analysis, but contracts based on spot prices still seem to be the majority. And basically, the ratio has not changed between the fourth quarter of last year and this first quarter.

Unidentified Analyst

My question is on the production increase in the project off the coast of Thailand. Could you indicate what your current production is and how you expect production to grow in the future?

Keigo Matsubara

As for gas production, including production in North America, we can say that production is increasing smoothly as planned, although we are not disclosing the actual production amount.

Unidentified Analyst

My second question is on Novus. I believe you tend to give a rather conservative outlook at the beginning of the term, but after the first quarter, do you see nay discrepancies between your initial projection and the actual results?

Keigo Matsubara

Throughout the year, we have expected that the price of methionine will decrease. Our budgets have been compiled on the assumption that it is appropriate to project the global supply and demand situation in that way. However, looking at the results from April through June, the price has not decreased that much. So, we may say that things are better than we initially projected. However, for Novus, there were some price deterioration in products other than methionine although temporary, and we have to review our inventory and it affected our bottom line. But, for methionine, we may say it exceeded our initial plan.

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