Earnings Transcript for 8001.T - Q2 Fiscal Year 2022

Keita Ishii: Hello everyone. This is Keita Ishii, President and COO. Thank you very much for joining us today despite the bad weather. First of all, I will briefly explain the outline of the Financial Results for the First Half of Fiscal 2022 and then Mr. Hachimura, CFO will explain the details. Now, please refer to the slide presentation of the financial results that we disclosed. Please refer to page two for the summary of the financial results for the first half. The consolidated net profit for the first year reached record high of ¥500.6 billion, the highest ever for the first half of the fiscal year, even approaching the full year high of ¥501.3 billion for fiscal 2020. The historic first half financial result were excellent. In the first half of the fiscal year, other factors such as the historic selling prices of iron ore and realization extraordinary gains concentrated during the first half in addition to the recovery of overseas business following the resumption of economic activities in China, Europe, and United States, the current situation is the result of steady accumulation of efforts based on principle, earn, cut and prevent. We believe that we have achieved very well balanced earning growth by steadily increasing core profits in Consumer Lifestyle business, Basic Industries, and Natural Resources segments. In addition, based on the result of the first half, we have revised our full year forecast for consolidated net profit upwards to ¥750 billion. As a company with strength related to the area of domestic consumption, we will secure the ¥750 billion in light of the recovery in domestic consumption due to lifting restrictions on activities and will steadily proceed with our business operation, aiming for further accumulation profit in the second half this year against the backdrop of the recovery of overseas economy overcoming the impact of COVID-19 China -- led by China and other countries unexpected a soaring of resources spaces, actual numbers of business result of general trading business sector became significantly favorable in terms of how to make money. However, I think the differences among companies had become more apparent. Our company's basic policy is to build up our brands business in the non-resource field, which has been our strength. We place a great importance on strengthening and involving a well-balanced and stable earning base steadily. In the first half of the year, I believe we have been able to make a steady growth and evolve the business that is typical to ITOCHU which is what we're aiming for. In particular, ICT and financial business company, which our peers do not have has been working for digitalization of the world as a pioneer, and is making inroads into the fields of mobile communications, IT systems, and Fintech. The company has a momentum to jump up to the number one company in our non-resource business sector with its annual profit after tax of ¥100 billion. We aim to make the company grow so that it can become a major source of stable earnings for non-resource businesses. I will explain about the status of -- the core operating company of the textile company. We took a strategy to increase our stake through additional purchase, which was rather challenging. The first successful hostile TOB in the Japanese secutiry market was realized became a historic case that pioneered hostile TOBs that had been carried out in large numbers since the success of TOB. We have undergoing a transformation from Korea-focused profit structure, which had been the management issue into a balanced profit structure focusing Japan, China and Korea for chronically a loss-making Japanese business, Descente brand was renewed, resulting in a launch of many new products that have been well received by customers. We have improved the brand value and have already achieved profitability. In addition in China business, the new Descente, China was launched, coordinating a partnership with Anta a leading global sportswear company in China. Our business performance has grown significantly, and is now achieving rapid growth beyond the plan. Though – through those initiatives, we have realized a well balanced profit structure with these pillars and a new Descente, China has stood at a starting line aiming for further growth a trajectory regarding the outlook for net profit, the current fiscal year Descente have already announced two revisions upwards. As a result of those measures, the share price rose from ¥ 2,800 at the TOB price to an all time high at present, and this way you're achieving remarkable improvements in the enterprise. Also, we have announced our new dividend policy for the current mid-term management plan in response to various comments we have received from the market regarding shareholder returns. Please refer to Page 9 of the material, the dividend per share for the current fiscal year will be ¥110, an increase of ¥22 from the previous year. And this will be the minimum limit in addition the progressive dividends during the medium-term management plan will be clarified again and the lower limit of ¥120 per share will be committed for fiscal 2023. The lower limit of ¥130 will be paid in fiscal 2024, as a step up minimum dividend. Furthermore, we're committed to achieving a dividend payout ratio of 30% in the final year of the mid-term management plan. Regarding shareholder returns, we have been receiving comments from the market, whether our payout ratio is behind others. We have been discussing this issue in depth internally. The new dividend policy shows our willingness to sincerely listen to the voices from the market, clarified the path towards a payout ratio of 30%. There is no change, whatsoever in our concept of linking shareholder returns to the enhancement of enterprise value from the mid-term to a long term perspective. The status of our initiatives of thermal coal interest of following the sale of Drummond, a coal mine a large thermal coal interest, we have recently decided to sell Ravensworth North coal mine and other thermal coal interest in Australia. Currently, we discussed at COP26 efforts towards decarbonized society will continue to accelerate going forward. With these new values, I believe the general trading companies must not be bound by immediate profits, but must promote Sampo-Yoshi initiatives. Good for sellers, buyers and the society and contribute to the international community and aim for sustainable business and management. I would like to conclude my remarks by stating our strength in non-resources and our core profits are growing beyond our target. We – our expected – your expectations will never be betrayed your continued support. Next, Hachimura, CFO will explain the details.

Tsuyoshi Hachimura: This is Hachimura, CFO. Thank you for joining us despite the bad weather. I will explain the financial results, the first half results, annual forecast, which was revised upwards and the revised policy on shareholder returns that Mr. Ishii just explained. Please refer to the overall summary on the second page of the financial summary. The net profit attributable to ITOCHU YPY500.6 billion in the first half is comparable to JPY501.3 billion full year, all time high in fiscal 2020. And also against 2020 pre-COVID-19 the profit grew by 70%, very favorable result was obtained. The industry as a whole was favorable as well. But here I would like to say that for all the segments, even compared with pre-COVID-19 and after the impact, segments were able to enjoy a better profit and also non-resources related business accounted for 74%. In the first half, we were benefited by the tail wind of soaring resource prices, but non-resources related business was able to attain favorable level of profit at around 70%, which is record high. And also, the extraordinary gain was JPY122 billion, which was all-time high. But the core profit without extraordinary gain amounted to JPY378.5 billion, resource related business was favorable and there was extraordinary gain. But all the segments were able to overcome the effect of pandemic and were able to post profit, especially in metals and mineral and genuine products and royalty, ICT and financial business, machinery posted highest profit. And there are many asterisks here, one asterisks mean that compared with any half year, first or second, the figure was the record height. And two asterisks means that as the first half of the year, the figure was the highest. And moving on to page 21, the replacement of assets will be referred to as you see here on gross basis, JPY155 billion of major investment was made, while exits were JPY237 billion. The net investment amount or the recovery was JPU82 billion. So, recovery is an advanced and there is no change in our policy that we are making active investment and we have surplus fund. So, that we will be able to make investment and large investments are concentrated in the second half. In page 6 and 7, cash flow and the balance sheet, because of the favorable operating activities, net cash inflow was JPY400 billion and because of the inflow of the cash through recovery, we have surplus cash in hand. And as a result, a net interest bearing debt has declined by JPY300 billion from the end of last fiscal year. And also because of the high level of profit, the total shareholders equity has increased by JPY450 billion, as is shown by the asterisks, compared with the Zaibatsu group companies or ratio of shareholders equity to total asset was said to be inefficient and we have the target of achieving JPY4 trillion and 30% ratio of shareholders equity. But we are moving steady tours of that objectives. And about our NET DER on mid to long term basis, our target was 0.7 to 0.8 times and NET DER now is at 0.61 times, the best possible level. On mid and long term basis, ROE was targeted at 13% to 16% after tax profit was extremely favorable. It is likely that in fiscal yearend ROE maybe quite high. And page 3, gives detail descriptions of all the segments. I'm not going into details. The largest contribution was made by the metal and minerals supported by high resources prices and soaring prices of iron ore in the business in North America. The second was General products & Realty, that was a gain on sale of Japan Brazil; Paper & Pulp Resources Development. Building Material business is North America was extremely strong. The European Tyre related company ETEL was positive and also pulp business in Europe as well. The third is ICT and financial business including, CTC, digital transformation covering wide area and also expansion; in the services of 5G and this is a company which is approved to conduct fund management. They're able to produce good result and PayPal’s large scale acquisition was made so there was a gain on sale of PayD reflected on PL. The fourth is a Pay company, FamilyMart is commemorating 40th -- 40 years anniversary and they're now shifting their direction. The daily sales of FamilyMart is recovering and partial gain on sale of Taiwan FamilyMart is included in JPY50.5 billion. The fifth is the Machinery business, JPY45.5 billion record height. Sales in the NSA has been extremely strong and dealer sector and exports from Japan was quite positive and shipping business was quite strong. The sixth is Food. Although the contribution may not be significant. Our grain business in North America, elevator business were quite strong and also wholesale business in Japan has returned. Nippon access is a wholesale business having transaction with JMS, convenient stores and drug stores, the business transactions has returned and Dole is making a recovery from last year and in the first half of the year other showing positive figure and ENEX Energy and chemicals based upon the increase in crude oil price it seems to be rather conservative. And there was a temporary loss from a fair value of futures transactions. But supported by the increase in crude oil prices, Azerbaijan is positive and also dividend is increasing and chemical transaction is quite strong. And as for textiles, finally, were able to hit the bottom. Cutting the cost is showing effectiveness and as was mentioned by Mr. Ishii, shown by Descente business, the textile business is making a recovery. And apparel business is still impacted by COVID-19, but still on the way towards recovery. And annual forecast, page four, details are mentioned from page 12 to page 20. And roughly speaking, all the segments and companies were examined after the first quarter of initial closing and as a result, for textiles and food. We have not changed our forecast for profit. But we have revised the figures upwards by JPY200 billion in total for other segments. And then, we have set the target at JPY750 billion. The first is Metals & Minerals, supported by sourcing [ph] iron ore and ICT financial business, JPY30 billion, general products and royalty JPY27 billion and machinery JPY12 billion and The 8th Company JPY18 billion and others JJPY31 billion. And this included of JPY30 billion of buffers. But actually, this JPY30 billion was reallocated among all the segments and in the revised forecast, JPY81 billion and does not include the buffer of CITIC and CPP business performance, plus JPY31 billion is included. And in the annual forecast, a non-resource business is scheduled to account for 74% and this is the same as the first half. And for the resource prices, demand/supply situation may be improved and our concept is to have conservative view towards the second half. But our concept is to let the favorable business continue with metals and minerals. The assumption for the revision to JPY750 billion are that a yen getting weaker by JPY5 from JPY105 to JPY110 and for U.S. dollar interest rate, this is LIBOR three months, increased by 0.2% from 0.3% to 0.5% and Brent oil price to be $75. And for iron ore, we cannot disclose the details because of the agreement with the partners, but we're looking at lower prices than the current price. And for extraordinary gain and loss in the first half, please come back to page two in the middle. It says JPY122 billion in the first half. In the second half, we're looking at a JPY2 billion increase to JPY124 billion for the full year. In the second half of the year, each company has major investment projects in the pipeline. This week, we have three meetings of investment and consultative committees. We have so many things to discuss. We will be making a decision on each case. We are not going to relax or a policy and expand the views towards possible investment and the balance between the first half and the second half. In the second half of the year, it seems that the figure is lower by ¥250 billion. And in the first half of the year extraordinary gain of ¥120 billion was there, and excluding the buffer this is conservative by ¥100 billion and the resource price may decline and we are having an assertive view towards the business activities of each company. Therefore, we are rather conservative in terms of the figures for the second half. Lastly, I would like to refer to dividend policy once again. As Mr. Ishii mentioned, fiscal 2022 our plan was to have ¥94 per share and ¥16 increase to ¥110. In 2024, we will make the commitment that our payout ratio will be 30%. And we made commitment to increase its dividend for nine consecutive year. At the time of brand new deal announcement in 2017, we have shown you our dividend policy and we would like to make a return to the shareholders by raising the dividend. Since then, we have been accumulating dialogue with shareholders, stakeholders and others. And relatively speaking, we receive a comment that our payout ratio may be lower, and also tours are a growth, projection, we receive a comment around the market that it is not quite clear and we may not have a confidence in making that growth. Based upon this economic environment and COVID-19 impact, it is rather difficult to make a commitment to the bottom line. But the management is making a commitment to make a step-up dividend and in order to make sure that we will have the stage of ¥600 billion. We are making every effort to however the market has a view that it is not enough in convincing them. So in order for the market to understand our level of commitment, we will raise the minimum limit of the dividend from ¥110 to ¥120 and ¥130. And it is going to be ¥650 billion, I suppose a share price is 100 -- dividend is ¥130 per share. But more than your calculation on our part with regards to our future growth, we're confident enough and even there is a distraction from our plan, at least over the next three years we will make a shareholders return and we will make every commitment that this step up dividend payment will be implemented. With regards to our financial policy, I've been stating that pre-balance would be a very important investment for growth, shareholders’ returns and debt control. And there's no change in the major concept. And free cash flow should be positive after deducting shareholders’ returns. Through a growth every year, EPS will grow, and suppose this year we achieve ¥750 billion, EPS will be as low as 500 in three years span, it was ¥200 in the mid-term plan one before last and next ¥300. With a stable increase, we believe that we'll be able to attain ¥600 billion. Our concept is to show the market that we are attaining steady growth. That is the basis of our financial policy.

End of Q&A: