Itochu Corp

TSE:8001

Earnings Call Transcript 2023-Q1

[Tsuyoshi Hachimura, executive]

I am Tsuyoshi Hachimura, CFO of ITOCHU Corporation. Thank you very much for joining us. I'd like to now present the business results for the Q1 of FYE 2023.

We have already made the material available from our website. So I'll be using the PowerPoint presentation material, starting with Page 3. This is a summary. Net profit attributable to ITOCHU was JPY 230.6 billion, making a strong progress toward the forecast of JPY 700 billion, achieving 33%. In Q1 last year, we had a record high number of JPY 267.5 billion. And this time, we have a second highest net profit number.

There is a positive impact of the high resource prices. But our strength, which is the nonresource businesses, our revenue and profit grew steadily despite the weaker yen and inflation. The percentage of the nonresource business is about 70% based upon our portfolio.

The core profit, excluding extraordinary gains and losses, we renewed all-time high in every single quarters, both in nonresource and resource sectors. At the bottom of this page, we are showing the asterisks and single asterisk means the record high number in all the quarters and double asterisk signified the record high for the Q1 results in consideration for the seasonality.

If I compare the year-on-year revenue, gross trading profit, operating income and equity earnings, they are all higher than the year before. But the extraordinary gains and losses of the previous year was very high. And this number was lower by JPY 68 billion. And as a result, the net profit was JPY 36.8 billion decrease. That is the 13.8% year-on-year decline.

Profits increased in Energy & Chemicals and Food, but in other companies, it seems there was a major extraordinary gains in the previous year, the profit declined. Now the key point of the Q1 is as follows: We are the last trading company to be reporting the business results. Our numbers are not true from buoyant, but they are very steady settlement numbers.

And there are 3 points. The progress was 33%, which is very strong. And the second point is that the core profit, excluding the extraordinary gains and losses were highest in terms of the quarter and is up by 17% year-on-year and ended at JPY 211 billion.

The third point is that based on the net profit, the nonresource businesses account for 70% of the total. So the nonresource businesses are making major contributions. And among the nonresource businesses, there have been some differences at the beginning of the fiscal year. So those were the 3 characteristics of the Q1.

Now going to Page 5. It is a detailed explanation. And usually, we only show the year-on-year differences. But in order to make year-on-year comparison, we have to really clarify our core profit because there are many extraordinary gains and losses.

So we are showing the extraordinary gains and losses number. So for example, in Textile, year-on-year change was JPY 1.2 billion. And including extraordinary gains and losses, it's down by JPY 2 billion. That means that -- in terms of the -- based on the net number, the core profit was JPY 0.8 billion.

As for the details of each segment, they are shown from Pages 12 to 20. They provide you with the details, and there for your reference. And we mentioned all the progress numbers.

So please take a look at the progress number. In Metals & Minerals, there was high coal prices and a strong steel products business and the progress rate was 38%. In General Products & Realty, there was a high pulp prices and a strong domestic and foreign construction material business, and there was also a gain on sales of the properties, especially in North America and the progress was 37%.

So those 2 companies were the major drivers. In Machinery, there was a favorable shipping market, which led to the charter income and a higher dividend from automobile-related investments and the strong dealer business. And in Energy & Chemicals, the oil prices were high, and there was a profitability in the energy trading, which improved.

And also in Food, North American grain-related companies were very strong and the gain on group reorganization in North American oils and fat companies were seeing. And the progress rate was about 26%. And in The 8th, FamilyMart, despite the cost increase have improved the profitability, the earning power steadily and the progress rate was 23%. Those 4 companies are showing the good growth.

In Textile and ICT & Financial Business, the progress was above 10%, but they are stronger in the second half of the year.

Going to Page 4. This analyzes the core profit. The positive impact of the high resource prices continued, but we saw a steady growth in nonresource. The core profit was JPY 141.5 billion. And the resource core profit was JPY 67 billion. So those are both record high quarterly numbers.

The core profit grew by JPY 31 billion year-on-year. The oil prices, coal prices were higher, and the resource trading was strong. And those accounted for about 45% or JPY 14 billion in resource sector. And in nonresource, the highest record was achieved in General Products & Realty and Machinery. So that increased about JPY 9 billion. The difference is about JPY 8 billion. That includes the tax and expenses and foreign exchange evaluation. The top half shows the extraordinary gains and losses, which was JPY 87.5 billion last year, and it's JPY 19.5 billion in Q1 this year.

And you can go to Page 6. Those are the major items. The first is in April, there was an announcement that CITIC Securities became the subsidiary of the CITIC Limited, and that led to the JPY 20 billion revaluation gain and also the impairment losses on the aircraft leased to Russian airlines, which is related to the ACG subsidiary of the Tokyo Century was JPY 8.5 billion.

Third is a gain on the group reorganization in North American oils and fats companies, JPY 3.5 billion. And also the reversal of the allowance for the overseas risk assets, JPY 3 billion. So total extraordinary gains and losses was JPY 19.5 billion. In comparison to last year's JPY 87.5 billion, the number is much smaller.

Now core profit changes. Throughout the quarters, the highest numbers were achieved in Metals & Minerals, General Products & Realty and Machinery. And also the Energy & Chemicals had JPY 6.9 billion and the energy sector is JPY 6.6 billion. This is due to the higher oil and LNG prices. Textile core profit was up by JPY 0.8 billion.

Finally, we have seen the recovery of the apparel sales after the alleviation of the COVID-19 impact. But unfortunately, our strength which is Food, ICT, Financial Business and the 8th, those 3 segments are stronger in the second half. So they made a slow start.

In ICT and Financial business, announced their earnings the other day, their profit level is strong, and they are increasing the backlog, but they had higher expenses. So the progress was a bit lower, but they are likely to achieve the JPY 38 billion target.

As you know, the FamilyMart, for them, the summer time is crucial. So we have expectation from Q2 and Q3. And in The 8th company, the core profit was minus JPY 3.6 billion and JPY 3.3 billion negative number is due to the FamilyMart.

But as for the FamilyMart under the new management team, their earning power is steadily improving. And daily stores per shoppers shop is up 3.6% year-on-year. But at the same time, their utility cost, personnel cost and system costs are increasing. So this year cost was shown on the Q1 results and the impact of the lockdown in China and also the impact of the COVID-19 in Taiwan.

So the equity pickup of overseas was lower. And also, we regularly do the impairment losses on stores. 2 years ago, we have aggressively worked on this. And in comparison to that, last year's impairment also was smaller. So this impairment loss was higher this time. So the Q1 number of The 8th and the FamilyMart was down.

As for the ICT and Financial business, it's down by JPY 8 billion. And I already talked about the CITIC. And in Conexio, which is a listed company, there was a decline in sales volume. And also the support value of -- from NTT was revised. This slowed us down.

And also Hoken No Madoguchi and overseas consumer finance business, there were lower commission levels. And last year, we had a major gain on the management of the venture capital fund, and this was much lower. And also, there were some increase of the temporary expenses. So unfortunately, the net profit of ICT & Financial Business was JPY 10.6 billion.

Now another concern is a Food segment. The pork-related businesses such as HyLife and Prima Meat Packers, they are suffering from lower prices and higher costs. So they are showing some weaknesses. As for Dole, in the packaged global food business, they are suffering from the higher logistics cost.

And in Asia, banana and pineapple production cost is rising. So lower profit were recorded. So those 3 companies are expected to improve in the second half. So we are currently making efforts to enable that.

I'd like to talk about the assumptions. Page 9, assumptions are not changed. But now the Q1 is over, you see the sensitivities are lower than the original assumptions or original announcement. So for example, out of the JPY 31 billion profit, JPY 16 billion is due to the weaker yen.

And as you can see on this page, the average exchange rate was 124.89 to the dollar. Compared to the year before, it is -- yen has weakened by 15.96. So this was an impact and for EMEA and Orchid, which invests in CITIC, those account for about JPY 10.6 billion or 2/3. Other than that, we have smaller ones, which are related to the foreign exchange translation from the overseas businesses.

Now going back to cash flow, Page 7. So net -- we had a net cash inflow of JPY 236 billion due to the stable performance in operating revenues in Minerals -- Metals & Minerals, the 8th and General Products & Realty companies.

On this page, you see the cash flows from investing activities was minus JPY 55.7 billion. And if you take a look at Page 21, we have the comparison of the investments in FYE '23, Q1. The total of the major new investments was JPY 88 billion, exit was JPY 15 billion, net investment amount JPY 73 billion.

Out of JPY 88 billion, CapEx was about JPY 56 billion. So the new investment is about JPY 32 billion. The biggest 1 is shown at the top, additional investment in ITOCHU Techno-Solutions, which was JPY 13 billion. As for the investments, excluding CapEx, so new investments stay at JPY 32 billion.

But in some cases, the timing of the cash out is delayed from Q1 to Q2 or some of the investments were deferred to the later timing. And if you look at the current pipeline, comparing the end of March and the end of June, we are not seeing the major changes.

And based on that, if I may go back to Page 7, again, so after deducting the changes in the working capital, the net -- we had a net cash inflow of JPY 211 billion, which was the all-time high in the first quarters. And the core free cash flow resulted in the net cash inflow of JPY 138 billion.

As for the status of the cash, and the investments, there are some things that we are not seeing clearly yet, and we are not changing the forecast of the JPY 700 billion per year.

Concerning this number, we have not yet used the JPY 30 billion buffer. And based on the fact that our progress rate is 33%. You might say that this is conservative. But there are a lot of uncertainties in the business environment. So based on that, we would like to closely watch the progress in Q2.

Now concerning the balance sheet, you see the many asterisks on Page 8. The highest number were achieved. As for the total shareholders' equity, it was JPY 4.535.6 trillion, the record high number.

The impact of the weaker yen was JPY 217 billion and net DER 0.53x and the ratio of the shareholders' equity to total assets, 34.8% were a record high. Under the uncertain environment, we have to make sure that we have a strong shareholder equity. So we are strengthening our financial structure steadily.

On Page 10, we are explaining the credit ratings. On the 27th of July, JCR upgraded to ITOCHU to AA plus. This is the first time since August 2018. And we had the review meetings with the rating companies in July.

And R&I is currently reviewing our rating based on our financial results, and they would give us the result of the review in August time frame. And in January this year, the Moody's changed our rating to A3 Positive. And last month, we had a review meeting.

So in this way, despite uncertain business environment, the rating companies are evaluating our financial structure and strength and the capital strategies as well as strong earning power and cash generation power. So under those circumstances, we'd like to make sure that we can enhance our financial position and also focus on the return to the shareholders and the growth investments.

We'd like to make sure that we work on a -- and our strength or attractiveness is the high efficiency management or high ROE. And we want to make sure that we keep the ROE at high level.

So resource prices are staying at a high level and our business results do not fluctuate very much, it does not go up and down, but we are steadily accumulating our profits. As for the each segment, I did not go through the details, but those information are for your reference.

Thank you for your attention.