Itochu Corp

TSE:8001

Earnings Call Transcript 2023-Q2

[Keita Ishii, executive]

Greetings, ladies and gentlemen. I'm President, Ishii. Thank you for gathering here today. I will now give you an overview of the financial results for the first half of FY '23. Please refer to the disclosed presentation materials.

First, here is a summary of the financial results for the first half of FY '23. Please refer to Page 2 of the document. Consolidated net profit for the first half was JPY 483 billion, the second highest level after last year's record JPY 500.6 billion. The first half post-tax profit of JPY 483 billion implies 69% of progress rate against the initial full year guidance of JPY 700 billion. Progress rate against the upward revised guidance of JPY 800 billion announced on October 4 is also at a high level of 60%. On a quarterly basis, Q2 generated JPY 252.4 billion in profit in comparison with JPY 230.6 recorded in Q1, indicating enhancement of the underlying earnings power capability as well as continuation of the trend of strong momentum.

Although profits in the first half declined year-on-year due to the large onetime gains recorded in the same period last year, core earnings, which indicates our underlying earnings capability, reached a record high of JPY 430 billion, and progress rate against the initial guidance of approximately JPY 710 billion is 61%. With the upward revision, the core profit guidance is set to record a historical high of JPY 770 billion. Progress rate against this is 56%, which demonstrates steady enhancement of our earnings power.

Next, I'll explain segment performance for the first half as well as the revised guidance and progress. Please refer to Page 3. First, Machinery as well as Energy & Chemicals companies posted record profits in the first half. Metals & Minerals and General Products & Realty performed solidly. While Textile, Food and The 8th company were more or less in line with the initial plan. ICT & Financial Business were the only company behind in terms of the progress rate. I will explain the first half results of each company in the order progress rate against the initial full year guidance.

First is Machinery company, which drove our first half performance. In addition to strong performance in all businesses. Including marine- and automobile-related businesses due in part to a onetime gain from the sale of maintenance business in North America, Machinery company achieved a record high first half profit of JPY 71.4 billion, which implies 98% progress rate against the initial guidance.

Next is General Products & Realty company. Pulp prices remain more elevated than we expected. In addition, the North American building materials-related business, which is run in a hands-on fashion, is performing well. Moreover, there is a revaluation gain from the reorganization of the housing-related business in North America. As a result, the company profit was JPY 63 billion with progress rate of 87%.

Next is The 8th company. Daily sales of FamilyMart are improving due to new product development as well as eye-catching promotions such as bigger volume campaigns. In addition, optimization of inventory and delivery route through digitalization has resulted in cost reductions. As a result, we booked JPY 19.5 billion of profit, representing 81% progress rate against the initial guidance. This is in line with our expectation as summer is a peak season for the convenience store business, pushing the progress rate to a high level for the first half.

Moving on to our Metals & Minerals company. Although the market price of iron ore is on a downtrend, the price in the first half was higher than expected. And the price of coal price remained elevated, resulting in strong earnings at an Australian resource development company. Also, the steel products business continued to perform well, especially in North America. Therefore, the company booked profit of JPY 134.7 billion and securing progress rate of 68%.

Next, the Energy & Chemicals company posted a record JPY 48.5 billion in the first half of the year, achieving a particularly high level progress rate of 56% given this company's usually -- given the company is usually skewed to the second half. The strong performance was driven by all businesses, including the energy chemicals and electronic power domains as they capture the benefit in the face of soaring market prices.

In textile company, Descente has established a well-balanced structure between Japan, China and Korea for profit generation. And apparel-related businesses, such as Leilian and EDWIN, recovered due to a recovery in demand, accompanying the easing of mobility restrictions. This resulted in a profit of JPY 11.6 billion with a progress rate of 45%.

Next is Food company. High raw material and logistics costs and the yen depreciation caused profitability deteriorate in the fresh food-related businesses in Japan and overseas. However, the grain business in North America and the domestic food distribution business remained strong, resulting in JPY 27.7 billion of profit and a 40% progress rate, generally in line with expectations.

Lastly, ICT & Financial business. The ICT sector, BPO and other related businesses performed well. However, the fund-related business, which had enjoyed strong performance last year, is suffering from a deterioration in valuation gains on stocks due in part to sluggish equity market. Moreover, the mobile phone-related business saw a decline in profits. In addition, the replacement of assets has been slower than initially planned. Given this company earnings structure, it tends to be skewed to the second half, the company profit was JPY 25.4 billion, resulting in a progress rate of 30%.

CITIC, which is included in the Other segment, is making strong progress due to the impact of yen depreciation and a onetime gain related to the revaluation of its securities business.

Next, I will explain our full year guidance. As I mentioned at the recent press conference announcing the upward revision, we have examined all segments and operating companies more closely than ever in this uncertain business environment. As a result, we have upwardly revised our guidance by JPY 100 billion from the initial forecast. The upward revision consists of JPY 60 billion for the core earnings due to steady profit growth, mainly in the non-resource sector; JPY 30 billion for an increase in onetime gains, such as the reevaluation of CITIC Securities; and JPY 10 billion for the -- for a reduction in the loss buffer.

In each segment, as I explained earlier, we have revised our guidance in line with the progress of the segments. We have made an upward revision to the following 4 companies to historical high levels: Machinery by JPY 27.5 billion, Metals & Minerals by JPY 36.5 billion, Energy & Chemicals by JPY 11.5 billion, General Products & Realty by JPY 22.0 billion. The guidance for Textile, Food and The 8th company remain unchanged. ICT & Finance business, which has been behind, must revise down by JPY 22 billion. The 8th company had businesses that were cross held with other companies up until the first half, but we have decided to terminate them at the end of the first half as we believe the initial aim for strengthening FamilyMart-related businesses of other companies through The 8th company has been achieved. Going forward, The 8th company will focus on the development of new businesses from the market-oriented perspective if FamilyMart has the access of the intercompany called functional framework.

Please refer to Page 6 for cash flow. As a result of solid performance in Machinery, Metals & Minerals, Energy & Chemicals, core operating cash flow was JPY 467 billion, a record high as a semiannual performance. In terms of operating cash flow, we achieved the second highest in our history. Net investment cash flows amounted to JPY 244 billion of outflow mainly due to proactive investments into businesses such as Hitachi Construction Machinery as well as housing-related these products in North America. As illustrated by the table at the bottom of this page, the financial standing was further strengthened with shareholders equity increasing approximately by JPY 670 billion, a record high of approximately JPY 4,870 billion. Other indicators also reached new highs. As shown on Page 9, we have received high evaluations from credit rating agencies.

Next, please refer to Page 7 for the assumptions for the upward revision. As noted above, in light of the historical weak yen and high resource prices in the first half, we have revised our forecast for the exchange rate from JPY 120 to JPY 135; the U.S. dollar interest rate to 3.5%, up 1 percentage point from our initial assumption; and the crude oil price to us $95 per barrel. Although we are unable to disclose iron ore prices due to a contractual agreement, we are conservative in our key assumptions, taking into account changes in the business environment in the second half of the fiscal year.

Finally, I'd like to talk about our shareholder returns policy. Please take a look at Page 8. As we announced on October 4, in conjunction with our upward revision, we have increased the dividend per share to JPY 140, which is up by JPY 30 from JPY 110 in the previous year, up JPY 10 from the JPY 130 announced at the beginning of the fiscal year.

We have also come out with a share repurchase program for the seventh consecutive year with a budget of JPY 35 billion. As of the end of October, approximately 30% of the total amount has been repurchased as disclosed on the 1st of November. Again, we will continue to commit to the incremental increases to the minimum dividend if you're in the period of our medium-term plan, brand-new deal 2023. We also commit to a dividend payout ratio of 30% by FY '24, the final year of the medium-term plan.

As we will continue to take into account the progress of the financial results and this sincerely to the market's opinion and in order to meet investors' expectation, we will continue to address our shareholders' return policy from the medium to long-term perspective to enhance our corporate value.

Into the second half of this year, the situation is clearly different from the past few years, making it more difficult for governments around the world to steer its economic policies. There is high likelihood the global economy will head into a shock recession. It is in such an environment that we believe ITOCHU can demonstrate its strength by achieving steady profit growth through our strength of disciplined cost management and resilience against market conditions and achieving a solid earnings base of JPY 800 billion. I believe such a demonstration will be appreciated by the market, and this concludes my presentation.

Next, we would like to show video. ITOCHU believes it's important to continuously evolve workstyle, which can lead to enhancement of labor productivity. Today, we have implemented a series of measures in this video titled Measures of Workstyle Reforms to Support Earnings Growth. We have compiled those measures. Please take a view.

[Presentation]

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