Itochu Corp

TSE:8001

Earnings Call Analysis

Mixed Performance Across Segments with Notable Gains and Losses

The company experienced a mixed financial performance this quarter. The Machinery segment reached a record high of JPY 34 billion, while the Metals & Minerals segment fell by JPY 3.7 billion. Energy & Chemicals revenue dropped by JPY 19.6 billion due to a lack of extraordinary gains compared to last year. Food services saw a minor drop of JPY 1.8 billion, but core profit rose by JPY 1.7 billion. General Products & Realty grew by JPY 1.4 billion, boosted by strong domestic sales. Overall, core profit increased by JPY 12 billion, despite challenges in foreign exchange and resource prices.

Introduction to Q1 Results

The CFO began by discussing the overall financial performance for Q1. Net profit for the quarter was JPY 206.6 billion, which is a slight decline from JPY 213.2 billion the previous year, mainly due to a decrease in extraordinary gains and losses by JPY 18.5 billion . Core profit, however, saw an increase from JPY 190 billion to JPY 202 billion, representing a growth rate of 6.3%, reflecting that the company is on track with its 10% annual growth target .

Share Buyback and Tender Offers

Significant announcements were made regarding a JPY 150 billion share buyback and two Tender Offer Bids (TOBs) totaling JPY 220 billion . These actions show the company's committed strategy towards enhancing shareholder value. The buyback is scheduled to be completed by the end of the fiscal year, with an effort to avoid potential violations of insider trading regulations .

Segment Performance Overview

In terms of segment performance, the company showed steady results in several areas. The non-resource businesses such as Machinery, Food, ICT, and Financial Businesses performed well, contributing positively to overall results. In contrast, Metals & Minerals and Energy segments showed some weakness due to market conditions .

Detailed Segment Analysis

Textile segment profits increased by JPY 0.6 billion to JPY 5.3 billion, driven by strong performance in Japan and overseas markets . Machinery segment achieved a record high of JPY 34 billion, up JPY 2.4 billion, supported by gains in aerospace and auto-related transactions . However, the Metals & Minerals segment saw a decline by JPY 3.7 billion due to lower prices of iron ore and coal, despite a JPY 700 million profit from a weaker yen . Energy & Chemicals segment suffered a significant drop of JPY 19.6 billion mainly due to last year’s extraordinary gains not repeating this year .

Investment Activities

The company made notable investments totaling JPY 118 billion in Q1, with significant portions allocated to consumer-related sectors and a North American electric power project . Exits totaled JPY 20 billion, leading to a net investment amount of JPY 98 billion. The announced TOBs would additionally increase the investment value to JPY 330 billion, showing a strong commitment to growth through strategic investments .

Cash Flow and Profitability

Operating cash flow reached JPY 207.8 billion, reaching a record high in core operating cash flow at JPY 238.8 billion, an increase of JPY 66 billion year-on-year . The company remains optimistic about the profitability of its group companies, aiming for 90% of profit-making companies by year-end, and signaled that 160 of the 264 companies increased their profits in Q1 .

Concluding Remarks

Overall, the company started the fiscal year strong, managing to navigate a volatile market with strategic moves geared towards growth and shareholder value. Despite some setbacks in certain sectors, the diversified business model provided a stable profit base, ensuring a positive outlook for the remaining year .

Earnings Call Transcript 2025-Q1

[Tsuyoshi Hachimura, executive]

Thank you. This is Hachimura, CFO. Thank you very much for taking the time out of your busy schedule and especially on the day when the market was so volatile. At 3:00 p.m. today, we made multiple announcements and Q1 business results for the first part and at the same time, we made announcements about JPY 150 billion share buyback and also tender offer for shares in C.I. Takiron and Descente.

So I'd like to go through all of them. First, starting with the Page 3 of the material that you have in front of you. Q1 results, the net profit was JPY 206.6 billion. Last year, it was JPY 213.2 billion. So compared to that, it's down by JPY 6.6 billion. Last year, there was a major extraordinary gains and losses. And extraordinary gains and losses are down this time by JPY 18.5 billion. So core profit increased by JPY 12 billion year-on-year.

Also the core profit changed from JPY 190 billion to JPY 202 billion this quarter. So this is the growth of 6.3%. At the beginning of the fiscal year, we said that we aim for 10% growth, and half of that comes from the organic growth and the remaining is the additional, including the new investments. And of course, that the new investment part will not appear in Q1. So about 6% growth rate is within the expectations that we had.

As for the progress compared to our forecast of JPY 880 billion, was 23%. It appears a little bit low, but JPY 880 billion is not evenly in spread. So we are above the budget level. So we made a good start. And we made announcement of 2 TOBs, the total of the investment is JPY 220 billion. And first quarter gross investment appears a little bit low, but this is due to the timing difference of the cash out. And we said that no growth without the investments, and we have had the full discussion, and we are making preparation for the execution.

And about JPY 150 billion buyback of our shares at the beginning of the fiscal year ending '25, we mentioned that the cash allocation will be split half for the shareholder return and half for growth investments and to achieve the total shareholder return of 50%, so JPY 200 per share or a 30% dividend payout ratio, either of the higher ones. So JPY 150 billion buyback, concerning this, as we disclosed today, we have been having the discussion about the TOB. And we, of course, needed to avoid violating the insider trading regulations.

Now since we made these announcements of the TOB, we wanted to announce the JPY 150 billion buyback at the early timing. And in Q2 and onwards, it's possible that we once again have the timing to potential -- potentially violate the insider trading regulations. So we wanted to avoid that. So towards the end of the fiscal year, we will be executing this buyback.

As for the business results, Yamaura will explain the details by each segment, but overall trend is not so different from the Q4 trend of the previous year. So CITIC profit growth as well as the improvement of the performance of the CPP, although it is in red still, the machinery, food, ICT and financial business and The 8th Company, the nonresource businesses did well, while the Minerals -- Metals & Minerals and Energy showed some weakness. And General Products & Realty, ITOCHU Fiber Limited still has some red figure, which will be explained later. But about the resource businesses, there are some difficulties remaining.

And as for the segment information, I would ask Mr. Yamaura to give you the details.

[山浦 周一郎, executive]

Thank you. I am General Manager of Accounting. My name is Yamaura. I'd like to go through the net profit by segment. Please go to Page 4. Also, Page 12 to 20, give you the details of each segment. Starting with the textile company. Q1 results were JPY 5.3 billion, up JPY 0.6 billion. The strength continues. Apparel-related companies were strong in Japan and abroad, especially in Hong Kong and China.

Machinery, JPY 34 billion, up JPY 2.4 billion. This is the record high number. There is an extraordinary gain of the Australian infrastructure company, JPY 2 billion. And excluding that, the core profit was up by JPY 400 million. Yanase and auto-related and also the leasing related, especially the aerospace transactions were strong. And as for North American electric power related business, the profitability deteriorated.

Metals & Minerals. The results were JPY 52.5 billion, down by JPY 3.7 billion. In Australia, EMEA, the prices of the iron ore and coal decreased, but with the weaker yen, the profit increased by JPY 700 million. The trading ITOCHU metals, nonferrous related transaction and companies were strong. Marubeni-Itochu Steel earnings were down, deterioration in profitability of North American business, and as a company as a whole, it was down by JPY 3.7 billion.

Energy & Chemicals results were JPY 17.8 billion, down JPY 19.6 billion. The extraordinary gains last year was JPY 18.5 billion. In terms of core profit, it was down by JPY 1.1 billion. In Chemicals, the profit increased by JPY 2.7 billion. But Energy & Trading deteriorated and as a whole, the results came down.

As for food, the results were JPY 19 billion, up -- sorry, down by JPY 1.8 billion year-on-year. Excluding the extraordinary gain, core profit increased by JPY 1.7 billion. Food distribution-related companies such as Nippon Access were strong and the meat product-related company, HyLife in North America improvement was observed, which were the driver.

As for the General Products & Realty, the results was JPY 18.8 billion, up by JPY 1.4 billion. The core profit was about the same as the previous year. As mentioned, the earnings of IFL, the European pulp-related company was lower, resulting from the higher material costs. DAIKEN was converted into the consolidated subsidiary and its equity stake increased and the domestic business were strong. Also, the real estate sales of ITOCHU Property Development was also strong.

ICT & Financial Business, the results was JPY 16 billion, up by JPY 1.6 billion. The strength continues. CTC, there was an increased stake and the transactions were strong. The performance was strong. And also overseas retail finance related companies and mobile phone-related companies lower earnings were offset.

The 8th, Q1 results was JPY 10.9 billion, up by JPY 0.3 billion. Despite the higher cost, FamilyMart daily sales increased resulting from the enhancement of product appeal and sales promotion. And it was the profit increased by JPY 700 million.

Other adjustments and eliminations improved by JPY 12.2 billion year-on-year. Concerning CPP, there was an improvement of the market conditions in Vietnam and the lower feed cost. This was a JPY 3.4 billion improvement and CITIC Limited profit also increased by JPY 6.7 billion.

Now going to Page 5 shows the core profit trend. As a whole, the core profit increased by JPY 12 billion, JPY 15 billion ForEx, down JPY 1.1 billion in interest and JPY 4.5 billion in resource prices and net was JPY 2.5 billion. As for the ForEx impact.

Page 10. If you look at the assumptions. In Q1, the average was JPY 155.85 to the dollar. The yen has weakened by JPY 21.2. And on the after-tax profit, the impact was JPY 15 billion, especially the impact was big in Metals & Minerals and Machinery. As for the extraordinary gains and losses, the total was JPY 4.5 billion, small impact, unlike last year's major extraordinary gains and losses.

Next is cash flows. The 8th and General Products & Realty, already, we talked about the sale of the condominiums by the ITOCHU Property Development and operating revenue increasing and also the dividend from -- quickly pickup in the Metals & Minerals and the cash flow from operating activities was JPY 207.8 billion. The core operating cash flow was a record high at JPY 238.8 billion, JPY 66 billion increase.

Going to Page 21, Investments. This shows the last year's results and this year's results. In Q1, total major new investments were JPY 118 billion. The major one is shown at the top in consumer-related sector, the investment in WECARS, JPY 18.8 billion. In basic industry-related sector, the investments in North American electric power related company and Energy from Waste project company. This is a little less than JPY 20 billion, environment related, others are CapEx related.

The new investments, JPY 118 billion. As for exit, JPY 20 billion, we did not have a major sale of assets this time and the net investment amount is JPY 98 billion. If you only look at this number, you might think that the investment amount is small. But as we announced, we have 2 TOBs, which amount to JPY 220 billion. So if you add that up, that would be JPY 330 billion. And we are making a steady progress in investments.

Concerning the group companies, out of 264 companies on Page 25. The percentage of the profit-making company is 84.5%. Usually, the number in Q1 is low. And of course, we try to achieve 90% throughout the year. What is not written here is that compared to last year, 160 companies increased the profit in Q1. And also 181 companies had higher numbers than the plan. So those companies are growing steadily in their profits.

And with that, I would like to end my presentation. Thank you very much for your attention.