Itochu Corp

TSE:8001

Earnings Call Transcript 2022-Q2

[Keita Ishii, executive]

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 '22. 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 2 for the summary of the financial results for the first half. The consolidated net profit for the first year reached record high of JPY 500.6 billion, the highest ever for the first half of the fiscal year, even approaching the full year high of JPY 501.3 billion for fiscal 2020. The historic first half financial results were excellent.

In the first half of the fiscal year, there were factors such as the historic soaring prices of iron ore and realization of 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 the United States. The current situation is the result of steady accumulation of efforts based on the principle kakeibo, earn, cut and prevent. We believe that we have achieved very well balanced earning growth by steadily increasing core profits in consumer and lifestyle business, basic industries and natural resources segments.

In addition, based on the results of the first half, we have revised our full year forecast for consolidated net profit upwards to JPY 750 billion. As a company with strength related to the area of domestic consumption, we will secure this JPY 750 billion in light of the recovery in domestic consumption due to the lifting of restrictions on activities and we'll steadily proceed with our business operation, aiming for further accumulation of 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 soaring of resources prices, 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 have become more apparent.

Our company's basic policy is to build up our business in the nonresource field, which has been our strength. We place a great importance on strengthening and evolving 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 & 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 the momentum to jump up to the #1 company in our nonresource business sector with its annual profit after tax of JPY 100 billion. We aim to make company grow so that it can become a major source of stable earnings for nonresource businesses.

I will explain about the status of Descente, 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 security markets was realized. It became a historic case that pioneered hostile TOBs that have been carried out in large numbers since the success of TOB. We have undergoing transformation from Korea-focused profit structure, which had been the management issue into a balanced profit structure focusing Japan, China and Korea.

For chronically 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.

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 new Descente China has stood at starting line aiming for further growth trajectory.

Regarding the outlook for net profit, the current fiscal year, Descente have already announced 2 revisions upwards. As a result of those measures, the share price rose from JPY 2,800 at the TOB price to an all-time high at present. In this way, you're achieving remarkable improvement in the enterprise.

Also, we have announced our new dividend policy for the current midterm management plan in response to various comments we have received from the market regarding shareholders' returns. Please refer to Page 9 of the material. The dividend per share for the current fiscal year will be JPY 110, an increase of JPY 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 JPY 120 per share will be committed for fiscal 2023. The lower limit of JPY 130 will be paid in fiscal '24 as a step-up minimum dividend. Furthermore, we're committed to achieving a dividend payout ratio of 30% in the final year of the midterm 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 a midterm to a long-term perspective.

The status of our initiatives of thermal coal interest, following the sale of Drummond coal mine, a large thermal coal interest, we have recently decided to sell Ravensworth North coal mine, another thermal coal interest in Australia. Currently, we discussed at COP 26 efforts towards a 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 nonresources and our core profits are growing beyond our target. We -- our expectations -- your expectations will never be betrayed and your continued support.

Next Hachimura, CFO, will explain the details.

[Tsuyoshi Hachimura, executive]

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 JPY 500.6 billion in the first half is comparable to JPY 501.3 billion full year all-time high in fiscal 2020. And also against 2020, pre-COVID-19, the profit grew by 70%, a 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 nonresources-related business accounted for 74% in the first half. We were benefited by the tailwind of soaring resource prices, but nonresources-related business was able to attain a favorable level of profit at around 70%, which is record high. And also the extraordinary gain was JPY 122 billion, which was all-time high, but the core profit without extraordinary gain amounted to JPY 378.5 billion.

Resource-related business was favorable, and there was extraordinary gain, but all the segments were able to overcome the effect of pandemic, and we're able to post profit, especially in Metals & Mineral and General Products & Realty, ICT & Financial Business, Machinery posted highest profit. And there are many asterisks here. One asterisk mean that compared with any half year, first or second, the figure was a record high. And 2 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 a gross basis, JPY 155 billion of major investment was made, while exits were JPY 237 billion. The net investment amount or the recovery was JPY 82 billion. So recovery isn't advanced. And there's 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.

On Page 6 and 7, cash flow and the balance sheet. Because of the favorable operating activities, net cash inflow was JPY 400 billion. And because of the inflow of the cash through recovery, we have surplus cash in hand. And as a result, net interest-bearing debt has declined by JPY 300 billion from the end of last fiscal year. And also because of the high level of profit, the total shareholders' equity has increased by JPY 450 billion, as is shown by the asterisks. Compared with the zaibatsu group companies, our ratio of shareholders' equity to total asset was said to be inefficient, and we have the target of achieving JPY 4 trillion and 30% ratio of shareholders' equity, but we are moving steady towards that objectives.

And about our NET DER on mid- to long-term basis, our target was 0.7x to 0.8x, and NET DER now is at 0.61x, 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 year-end, ROE may be quite high.

And Page 3 gives detailed descriptions of all the segments. I'm not going into details. The largest contribution was made by the Metal & Minerals, supported by high resources prices and soaring prices of iron ore and the business in North America. The second was General Products & Realty. There was a gain on sale of Japan Brazil Paper and Pulp Resources Development.

Building material business in North America was extremely strong. The European tire-related company, ETEL, was positive and also pulp business in Europe as well. The third is ICT & 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 were able to produce good result. And PayPal's large-scale acquisition was made. So there was a gain on sale of Paidy reflected on PL.

The fourth is the 8th Company. FamilyMart is commemorating 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 JPY 50.5 billion. The fifth is the Machinery business, JPY 45.5 billion, record high. Sales in Yanase 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, 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 GMS, convenience stores and drug stores, their business transactions has returned. And Dole is making a recovery from last year. And in the first half of the year, they're showing positive figure.

And next is Energy & Chemicals. Based upon increase in crude oil price, it seems to be rather conservative. And there was a temporary loss from 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, we're able to hit the bottom. Cutting the cost is showing effectiveness. And as was mentioned by Mr. Ishii, as shown by Descente business, the textile business is making a recovery. In apparel, business is still impacted by COVID-19, but still underway towards recovery.

And annual forecast, Page 4. 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 JPY 200 billion in total for other segments. And then we have set the target at JPY 750 billion.

The first is Metals & Minerals, supported by soaring iron ore. And ICT & Financial Business, JPY 30 billion; General Products & Realty, JPY 27 billion; Machinery, JPY 12 billion; and the 8th Company, JPY 18 billion; and Others, JPY 31 billion and this included JPY 30 billion of buffers. Actually, this JPY 30 billion was reallocated among all the segments. And in the revised forecast JPY 81 billion, and does not include the buffer, but CITIC and CPP business performance, plus JPY 31 billion is included. And in the annual forecast, nonresource 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 JPY 750 billion are that yen getting weaker by JPY 5 from JPY 105 to JPY 110. And for U.S. dollar interest rate, this is LIBOR 3 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 2. In the middle, it says JPY 122 billion in the first half. In the second half, we're looking at a JPY 2 billion increase to JPY 124 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 3 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 our 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 JPY 250 billion. And in the first half of the year, extraordinary gain of JPY 120 billion was there. And excluding the buffer, this is conservative by JPY 100 billion. And the resource price may decline, and we are having a conservative 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 '22, our plan was to have JPY 94 per share and JPY 16 increased to JPY 110. In 2024, we will make a commitment that our payout ratio will be 30%. And we made commitment to increase its dividend for 9th 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 received a comment that our payout ratio may be lower. And also towards our growth projection, we received a comment over in the market that it is not quite clear. And we may not have 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 JPY 600 billion, we are making every effort. 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 JPY 110 to JPY 120 and JPY 130. And it is going to be JPY 650 billion suppose share price is -- dividend is JPY 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 3 years, we will make 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 3-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 growth every year, EPS will grow. And suppose this year we achieve JPY 750 billion, EPS will be as large as JPY 500.

In 3-year span, it was JPY 200 in the midterm plan one before last and next JPY 300. With a stable increase, we believe that we'll be able to attain JPY 600 billion.

Our concept is to show the market that we are attaining steady growth. That is the basis of our financial policy.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]