Earnings Transcript for 8001.T - Q3 Fiscal Year 2022

Tsuyoshi Hachimura: This is Tsuyoshi Hachimuram CFO of ITOCHU Corporation. Thank you very much for joining us. I would like to be brief, as much as possible. There are four points that I like to communicate to you. First is the business results up to Q3. Second, this time we have made upward revisions. I'd like to talk about that. The third is about the shareholder return. We continue to buy back our shares. I'd like to explain the background and futures. And number four, the other day there was an announcement of the positive watch for upgrades. So I'd like talk about our financial status. I will be using the PowerPoint presentation material which is available from our website. Please turn to Page 3. This is a summary of financial results. Nine months net profit attributable to ITOCHU was ¥ 678.9 billion, up 86% year-on-year. This was higher than the annual record. In November, we made upward revision. And compared to ¥ 750 billion, this was the progress rate of 91%. Especially in Q3, the iron ore price has come down but stayed at a high level. And with the high price of the oil and gas, there was a strong resource-related business. But we have a very well balanced non-resource centric defensive portfolio. And a percentage of the resource sector business stays at 25%. In general products and Realty ICT financial business and machinery and in all other segments we achieved year-on-year growth and the record high number in Q3. And talking about extraordinary gains and losses, which are shown on Page 5. Up to Q3, the total amount, nine month extraordinary gains and losses was ¥129 billion. At the end of the first half, I mentioned that there are no major ones in second half. And if you look at the Q3 extraordinary gains and losses, as you see at the bottom, this was ¥7 billion. Major ones, there are three points. First is the gain from the changing ownership ratio of the lithium ion batteries company. This is 24 m. And this gain is included. And also revaluation gain due to the conversion of mega solar companies into consolidated subsidiaries, in ITOCHU ENEX which was ¥1.5 billion. And also the gain on sale of fixed assets in Itochu Techno Solutions, ¥1.5 billion, so total of ¥7 billion. And if you look at nine month core profit, this was ¥550 billion, which was a record high number. I'm back on page three. And I would explain this later. Now ¥678.9 billion, based on the revised forecast, this was 83% progress. The ¥550 billion that is the core profit this was about 80% of the revised forecast of ¥686 billion. The ratio of the Group companies reporting profits was 87.1%, was at a record high. And the core operating cash flow with the very strong operating revenues was ¥612 billion, which was a record high. On the next page, we have the segment results. And let's take a look at the percentage of the non-resource business. As you can see the third bar from the right this shows the Q1, Q3 results. You see the non-resource percentage is 75%. Based on our revised forecast, we have reviewed some of the resource-related business, but still the percentage of non-resources is 72%. Based on that, let me talk about the very strong cash flow on Page 6. In Metals and Minerals, The 8th Machinery and Energy and Chemical Companies, operating revenues showed stable performance and cash flow from operating activities was ¥572 billion. The natural resources and commodity prices were high and through the active operating activities are the receivables and inventories were high. So working capital increased. Excluding that, the core operating cash flow was ¥612 billion which was all-time high. Right below there, you see the net investment cash flow, which was ¥73 billion. This is in EXIT. And if you turn to page 21, which shows the investments, on the right hand side, we are showing the nine month results. In Q3 the major investments include at the top investment in NISHIMATU CONSTRUCTION. This is a partnership and the more than 10% equity or share was obtained. So cash bought out of ¥14.7 billion. And the major ones include in the ICT and financial business, the investment in the SUPER SKY, which is the information security company. And also ITOCHU ENEX related investment. This is solar power related. So the total major new investment in Q3 was ¥90 billion, including new investment of ¥44 billion, and CapEx of ¥46 billion. And EXIT in Q3 was at ¥81 billion. The major ones include the PayPal acquisition or Paidy. And for us, it was the exit of ¥48.9 billion and there was also a sale of data center of CTC ¥ 81 billion exit, and in terms of the net Q3 investment was a cash out of ¥9 billion. Up to Q2, we had a major cash in so nine month results was ¥73 billion. So based on that, let's look at the balance sheet on Page 7. Under those circumstances, the shareholders equity was ¥3,936.7 billion, which is close to ¥4 trillion that I believe is the transitional point. So steadily, we are enhancing our financial position. And we're showing good results. As of now, there are some changes in the FRB [ph] policies and other uncertainties. We have to make sure that we have a good debt control. And net interest bearing debt was reduced about ¥300 billion from the end of March, which is at about the ¥2.3 trillion level. We need to prepare ourselves for the future changes and fluctuations of the economies. And as a result net DER was the lowest level which was 0.59 times. It does not mean that we are avoiding the leverage, but rather we are making the active buy investments, but we are handling those investments with cash. So the DER has come to the low level. And the ratio of the shareholders equity to total assets was 33.5% which is close to the end of September. If I may talk about the credit rating on Page 9, as we improve our financial strength, I have been talking about three major balances. First is to invest for the growth, second is to return for the shareholders and also to control debt. And steadily we have been implementing those measures in 2017, 2018. We have come close to the top rating. And after four years, Moody's announced a positive watch for us. The time period for the positive watch will probably take about a year. But they evaluated our fiscal or financial discipline, and also the ability to generate cash and also our well-distributed balanced portfolio, which is not dependent on the resources. So if it's upgraded from A3 positive, this will be the highest rating among trading companies. Next, what I would like to explain is the status of each segment. Going back to Page 4. Now in terms of the contribution, the biggest contribution came from Metals and Minerals, ¥180.2 billion. As you know, this was due to the higher iron ore prices and also coal prices. Although smaller in volume and was very strong in EMEA and others and Marubeni-Itochu Steel showed the strong sales of sheet metal in North America. So they're having the record high numbers. The second major contribution comes from General Products and Realty, ¥91.9 billion. There was a gain on sale of Japan Brazil Paper and Pulp. The American -- North American construction material business had been strong and there was a tail wind of pulp price. And in Europe, UK higher wholesale and retail business, ETEL was also strong. So that led to ¥91.9 billion, very good performance. The third is ICT and Financial Business, ¥88.6 billion. The listed company, the CTC and also one of the characteristic of this business is the fund operation and there was a revaluation and also the mobile phone business was strong. Another major point is the machinery ¥65.9 billion. As a machinery business, this is a record high number. The trend remains the same. YANASE is showing a very strong performance. Automobile-related business also showed strength and ship-related companies, was also strong. And in North America, the electricity price went up and IPP-related business therefore was strong. Some concerns are for aircraft business and aircraft leasing business. Number five is Energy and Chemicals, ¥64.7 billion, reflecting the high oil and energy prices. Those have been our tailwind and the trading transactions have been strong. In addition, in chemicals, one of the subsidiaries, the ships trading business of chemicals have been solid. And also the trading business in the United States was strong. In retail, unfortunately, Sanipak they're struggling because they cannot really reflect the cost to their selling prices. Number six is The 8th Company, mainly FamilyMart, ¥55.8 billion. In Q3, the daily business improved and the unit price per customer also increased steadily. We are seeing the improvement of attractiveness of the products and the stores of FamilyMart. There are recording good performance. But we have not yet reached the pre-COVID-19 level. So we are behind, but we are making good progress. As for the seventh that is Food, ¥44.8 billion. We are making steady improvement in profit. So the trading is good and North American grain-related companies are showing strength. And all business up to Q3 was strong, while at the same time the pork prices have been high and also the feed prices are up, and the market condition in China has deteriorated somewhat. So Prima Meat Packers and also High Dive in Canada are struggling slightly. Next is Textile ¥16.6 billion. Textile was most affected by COVID-19. But we are making the steady recovery from it, Lydian [ph], EDWIN those brands, the major ones have turned positive year-over-year, so toward the target of ¥23 billion. We are making steady improvements. Now CITIC, in others and adjustment and eliminations, CITIC is showing the stable and good earnings up to Q2 and equity pickup has increased. Also C.P. Pokphand, as I mentioned the pork prices have been lower in Vietnam and China, and also the chicken prices in China. Due to this, they're struggling somewhat. So that's about segment. And based on that I'd like to talk about the upward revision that we made. And let me explain the background. In November, we announced the first half results, and we made the upward revision to ¥750 billion, up ¥200 billion. And I mentioned that we reviewed all segments and based on the conservative assumptions that is not dependent on the resources, we made the revision. And at that time, we had the buffer of ¥30 billion, which was allocated to each segment. And the high -- extremely high natural resource prices would not last forever. There will be adjustment in terms of the supply and demand. And we looked at the forecast, and the natural resource prices have gone up in Q3, iron ore price has come down somewhat but then went up again. And in Q4 as we mentioned that there will be no major items of the extraordinary gains and losses. And in each segment we are seeing the strength of the businesses. So we try to think about to what extent we would revise the forecast and the resource-related businesses are going so well. And also considering the increase in business performance we have decided to make ¥70 billion upward revision. Please turn to Page 10. This is the changes from the previous forecast. As I mentioned we have revisited or reviewed the buffer that we allocated to each segment. The biggest impact is the Metals and Minerals reflecting the higher natural resource prices. Of course iron ore and coal prices are not disclosed. But we have looked at the latest numbers and we have changed this by ¥27 billion. And next is the General Products and Realty, up by ¥15 billion. The construction material business in Japan and abroad are strong. And in Europe, the top rated business have been benefiting from the tailwind. Also there are some other minor ones. So ¥15 billion plus. So this company is forecasting ¥105 billion. Next is the Energy and Chemicals, up by ¥13 billion. And there are some positives in the electricity and others, but the higher oil and LNG prices are reflected. Concerning this the assumptions are shown on Page 8. The Brent oil price was changed from $75 to $77. That was included here. And next is the machinery up by ¥6 billion. In each segment, we saw the strength and the YANASE and North American IPP related business showed stable performance. Next is food, up by ¥4 billion. This reflects the stable performance of the North American grain related business. ICT Financial business up by ¥3 billion. CTC, mobile business and fund operation we have scrutinized those and reached this conclusion of ¥3 billion. We are keeping Textile and The 8th Company forecast unchanged. Textile is recovering from the COVID-19 but DESCENTE and RADIUM and EDWIN those major businesses are doing well. So we have good expectations. But we are not yet ready to make the upward revision. But first we need to achieve the ¥23 billion target. As for The 8th Company we are making the steady progress up to Q3 but with the Omicron variant Q4 trends we need to look at them conservatively and carefully. And in terms of seasonality convenience store, the Q4 is the low season and also we expect some impairment loss toward the end of the term. So we are keeping The 8th unchanged. So based on those as a result of the review of all the segments we have come to ¥820 billion, up by ¥70 billion. Lastly, I'd like to talk about the shareholder return, dividend increase and also the medium term shareholder return were already talked about in November increasing the second half a dividend and also the minimum dividend level and also the payout ratio of 30% was announced for FY24 And on page 23, we have been trying to be proactive and at the end of December we have formulated, we have closed our books and tried to look at the cash level. And there are -- we have not yet observed the cash out from the major investments in Q3. But do we recognize that we have sufficient surplus cash. So we decided to go ahead with the buyback and we made announcement on the 19th of January. So we purchased at the maximum of 20 million shares for ¥60 billion by the end of March. And on the first of February we announced the progress. So ¥11.3 billion and 19% progress rate so far. As you see on this page, we have continuously bought back our shares and we have shown clearly that we continue to actively and continuously execute the share buybacks. Why this timing? We announced that we will actively and continuously execute share buybacks in our medium term business plan. And we also mentioned that we would evaluate the surplus cash at the end of the term and try to allocate that. And based on the current evaluation, we have decided that we would buy back the shares at this time. And FY22 we have tried to further enhance the return to the shareholders. And we have already announced a dividend increase and the payout ratio commitment, and regardless of the upward revision, by conducting the share buyback, we wanted to improve the overall shareholder return for FY22. Thirdly, in October 2018, we announced a medium to long term shareholder return policy and 400 million shares and ¥200 billion were mentioned. And we mentioned that this could probably go beyond the medium term business plan and there was a non-executed portion of ¥56.5 billion, which we wanted to move forward. So based on that, we have decided to buy back shares and execute this in Q4. We are unable to do multiple things at one time. So by one by one, we would like to see a carefully the balance of the cash level. And as for the investments, there are some investments major ones announced, but we have not yet seen the cash out. So in Q4, there is a high possibility of investments. If you turn to page 21, you see the investments which I believe I explained earlier and for example on this page the partnership with Hitachi Construction Machinery and to obtain the 26% equity together with a ship is not included. And there are other major as well as smaller investments planned in the second half. So we are right to see and to make the evaluation at the end of the fiscal year. Thank you. That concludes my presentation.

End of Q&A: