Itochu Corp

TSE:8001

Earnings Call Transcript 2019-Q1

[Tsuyoshi Hachimura, executive]

This is Tsuyoshi Hachimura from ITOCHU. Thank you very much for coming out of your busy schedule today. I'd like to get started to go through the financial results for Q1 on FY 2019. Let me go through the overview first. The consolidated net profit was JPY 113.4 billion. Excluding extraordinary gain, the core profit recorded highest ever. Non-resource profit recorded highest as well. Year-on-year, growth was 5%, and our company returned to have a concentration of profit in the latter half of the year, so right now, we made 25% progress for the year, which was quite high. So at the beginning of the year, we budgeted JPY 450 billion, which was the highest number ever, and we actually have a momentum to go beyond this level. By different segment, excluding Machinery, all the segments grew in profits year-on-year.

So please take a look at Page 3 of the presentation. We have less than 4 major points in the top half. So the net profit went up by 5%, by JPY 5.2 billion to be JPY 113.4 billion. So we had the highest profit in 2015 of JPY 121.5 billion. By then, roughly JPY 53 billion was an extraordinary gain driven by the withdrawal of shale gas business, also the sales of the construction material-related business in the United States. So comparing to the core profit, excluding such extraordinary gain, we recorded the highest this year. Because we had extraordinary gain of JPY 4.5 billion, our core profit ended up to be JPY 109 billion. So we posted record high profit for 3 years in a row, and we recorded over JPY 100 billion for 2 years in a row.

When it comes to non-resource profit, it increased by JPY 4 billion year-on-year, it came out to be JPY 93.1 billion, this was also highest ever for Q1. And there was also incremental of the resource-related profit. And pretty much in all segments, we had pretty good starts in Q1. And when it comes to the profits/losses of group companies, it came out to be JPY 110.9 billion, that was the highest ever in Q1.

For the last several years, we have been working on improving the profitable group company ratio, and we have taken various activities to boost up the profitable level of different companies, and that is going also well so far. The beginning of the year tends to have more spendings because of launch of new businesses, so the ratio contributing to the profitable businesses was only 85% at the beginning of the year. So it normally tends to be lower at the beginning of the year, but we are on track towards the last year's 91% level.

So let me also touch on some of the details on the bottom half. Gross trading profit grew by JPY 24 billion. It came out to be JPY 300.4 billion, and this is driven by consolidating Yanase, also strong business for automobile-related business, especially in trade business. Also, we had the strong business in Construction and Machinery business in North America, and also in North America, this fence company, called Alta Forest, which was acquired to be a subsidiary last year along with supply company, CIPA Lumber were also strong. And SG&A increased by about JPY 23 billion, and that is mainly due to the new consolidated companies such as Yanase and Panama Automobile subsidiary in North American fence business. So there are now fully consolidated to see the increase in expenses.

For equity in earnings of associates and joint ventures, I will give you more details by segment later on, but increased by JPY 11.3 billion year-on-year to be JPY 59 billion. IFL and JBP, those pulp-related businesses and final subsidiary in oil gas-related businesses, Japan [indiscernible] oil business, and UNY FAMILYMart, those contributed to see this number.

Income tax expenses. Last year, we did have the impact of the taxes related to JBP, and now we saw a reaction to this number -- to see the slight increase in the taxes. Extraordinary gains and losses in net profit and profits, losses of group companies and share of group companies reporting profits were all mentioned. The profit/losses of group companies had a substantial growth by JPY 12.7 billion year-on-year. And let me give you the major contributions. The biggest one is UNY FAMILYMart, followed by ITOCHU FIBER LIMITED, this is a pulp company, then followed by MISI Marubeni-Itochu Steel and then CIECO, Azerbaijan, then Japan Brazil Paper & Pulp JBP, those 5 contributed worth JPY 9.8 billion year-on-year.

And let me also go over negative impacts year-on-year. So the Orchid, which is covering CITIC contribution. At the same time of last year, CITIC Limited posted extraordinary gain, but that no longer exist, and that showed a decline in profit, but the business of CITIC Limited itself, although they are not disclosing on the quarter results, but according to the disclosed documentations and information and numbers, they are on track towards the full year contribution of JPY 60 billion. Also, another weak business was Dole.

The Asian Fresh business was going strong, but -- and worldwide packaging food business, especially the pineapple can business driven by the weaker raw material prices, this drove a decline in profit. But towards the end of the year, it is expected to recover.

In addition, ITOCHU Orico Insurance Service and Yanase, those were slight impacts, and I-Power Investment had also slight negative impact.

Let me continue on the net profit by segments. Machinery saw a slight weakness, but all the other segments showed a strength, mainly driven by the Metals & Minerals and Food and General Products, and Realty showed a growth year-on-year. The middle bar chart showing the Q1 results for F1 2019, the biggest box is from Metals & Minerals contributing by JPY 22.4 billion, it grew by JPY 1.4 billion year-on-year. As you can read in the comment, there was a mention about a decreased profit due to the change of structure for investment in certain stakes of iron ore. In Western Australia, we had joint ventures with BHP for the iron ore business, and one of the joint venture was now changed from unincorporated venture over to cooperative venture, and because of that, they are no longer fully consolidated, and now it's actually contributing to dividend revenue. So that is causing the posted timing change. And of course, we are affected by the price increases, and we are supported by the increase of coal price, and there was a cost improvement at the same time.

At MISI, Marubeni-Itochu Steel, the pipe business mainly focused on OCTG is now recovering. And this -- and also the construction material-related business in the United States was also strong and they stayed to be strong. And so this year, now we see a bigger contribution. So because of them, the Metals & Minerals are making 37% progress against the budget.

Second biggest contribution was from Food, with JPY 20.2 billion. The Dole I mentioned earlier had a slight decline in profit, but UNY FAMILYMart equity profit increased, and also, there was strong business by other subsidies, so it's making 25% progress against the budget. And this is also still driving our profit.

The third contribution is coming from the General Products & Realty with JPY 16.6 billion. It increased by JPY 2.2 billion year-on-year. So it is now making 24% progress towards the year. Last year, we had an extraordinary gain of the sales of listed company, there was a special impact, but this is no longer existing in this year.

So basically, very strong pulp related market supported this result. We have the Finland business and Brazil business and pulp business, they were all strong. And European Tire business was going strong. Also construction material business and facility material-related business in North America went strong at the same time. So overall, General Products & Realty performed stronger than expected in Q1.

Other segments. Textile grew by JPY 1.3 billion year-on-year. The apparel-related businesses are exposed to tough conditions still now, but subsidiary such as SANKEI, Royne and Converse, and they are performing strong so far. They are turning around their business by reducing their expenses.

The Machinery segment, it went down by JPY 500 million year-on-year because of the weak business of Yanase. We have more detailed information by segment in our later pages about Yanase. Usually Yanase tends to make a loss in Q1, they see the declined number of sales for new units, and they see the lowered margin for the used car business. And so they -- seems like the negative number is bigger than what we saw last year. That is because last year it was equity method company, and now that they become a subsidiary, now we see a bigger negative impact. But at the same time, roughly 50% of the gross profit is coming from parts sales business and maintenance business, which we will focus on more. And those business have been enjoying a very good start so far at the beginning of the year.

So Yanase should be trending in line with the plan towards the end of the year, that's why we haven't revised the number. General Automobile business are going well, supported by Mazda, Isuzu business through trades. And other Machinery businesses such as aircraft business are going strong. And the vessel business and construction machinery business, industrial machinery business are going well just like last year. So we are not in a situation to be concerned too much about this Machinery business. So Machinery is making steps towards JPY 63 billion, of course it's having a slow start, but we do not have major concern about this business at this point.

Energy and Chemicals business. It grew by JPY 2.2 billion year-on-year, and this is, of course, affected possibly by the oil prices. In Japan, [indiscernible] Oil business had a huge contribution as well. And also the Azerbaijan business turned around to have a positive impact as well. We had a loss in Energy Trading business due to the field operation, but now that business has come back to the healthy level, so that is also sustaining the strengths of Energy business.

In the Chemical business, the overseas trade business on a nonconsolidated basis are going well so far. The domestic subsidiaries may be showing weak numbers at the beginning so far, but overall Chemical businesses are showing strong numbers.

ICT & Finance Business. So it's making 19% progress and grew by JPY 1.4 billion year-on-year. The core subsidiaries tends to post more profit in the second half including CTC. So we are having pretty good start so far, CTC, Conexio, their business are going well. And mobile phone-related business are going strong so far.

Finance-related companies are supported by the strengths of the domestic finance business, and we also have consumer finance business in overseas, they are making a solid positive results. Others, Adjustments & Eliminations, we have CITIC and CP Group business. So CP-related business, let me explain this first. So last year, it was negative JPY 100 million contribution, this year it was minus JPY 500 million, so the negative impact increased by JPY 400 million. There is posting timing difference. Basically the profit from March quarter is posted as Q1. And since last year, there has been a weak pulp market in Vietnam. So since it was a listed company, they issued a profit warning. This profit warning was now taken back and that is resolved on 13th of July. So the first half, we will be consolidating from January to June numbers. In June quarter, especially, the pulp market came back in Vietnam. So we believe this should turn positive number during the first half.

CITIC related business. So we have this Orchid company who cover the CITIC business. Last year, it was a contribution of a JPY 17 billion, and this year, it came down to JPY 12.6, billion down by JPY 4.4 billion. In CITIC Limited hasn't disclosed the first quarter results, but CITIC Corporation results are out. Also there is disclosed listed company's number by CITIC Bank, so mainly around the finance business -- at this point, we are forecasting the contribution to be JPY 60 billion from CITIC, we still maintain the same idea of achieving this number from CITIC. And the weakness in Q1 was due to the extraordinary gain on the sales of a special business last year, and that is no longer existing in this -- Q1 -- the cost drop of JPY 4.4 billion. CITIC business itself, despite their stock price being below $11, but their business itself is going solid so far.

Next is cash flow, on Page 5. So there was an increase in working capital in Machinery and General Products & Realty, but our plan is to go over JPY 500 billion as core operating cash flow for the year, and so far, we achieved a little less than JPY 90 billion, the highest ever in Q1, so we did have a really good start.

So cash flow from investing activity came out to be JPY 29 billion, negative figure. This is actually deducting the cash and deposit, so deducting JPY 16 billion worth of cash and deposit from this number. So towards the bottom, you see the net investment cash flow saying JPY 45 billion, the gap is due to the cash and deposits. And there will be more details in the appendix later on. So in Q1 investment wise, the gross investment was JPY 60 billion. Exit amount was JPY 15 billion. On net basis, it came out to be JPY 45 billion. So we are controlling cash flow. On a free cash flow basis, we try to make sure to have availability of cash. So the free cash flow at hand is progressing as planned. That is giving flexibility in cash allocation.

On Page 6, let me go through financial position. Total assets, as you can see at the far right, we expect to go beyond JPY 10 trillion, by acquiring FAMILYMart UNY as a subsidiary for the first time. And towards that number, now we're achieving JPY 8.9 trillion in total asset with an increase of JPY 200 billion. And this is mainly due to the seasonal factors in Food distribution-related companies with the acquisition of the automobile distributor in Latin America and also FX impact.

Net interest-bearing debt. Since we had investment into FamilyMart UNY, it came out to be JPY 2.4 trillion. Total shareholders' equity excluding the dividend cash out, the equity increased by about JPY 52 billion, to be JPY 2.7 trillion. Right now, we are still in the middle of the year. Shareholders' equity ratio and net DER, as you can see on the slide, and we are not seeing any major problems towards the end of the year. Return on equity should be maintained at the high level of a little less than 16%, just like the regular years.

Thank you very much for your attention.