Itochu Corp

TSE:8001

Earnings Call Transcript 2019-Q3

[Tsuyoshi Hachimura, executive]

Ladies and gentlemen, thank you very much for joining us today. I am Tsuyoshi Hachimura, CFO of ITOCHU Corporation.

We have 3 press releases. I'd like to explain each one of them. First is the Q3 business results, the second is the announcement about the repurchase of own shares, and the third is the conversion of the subsidiaries through the simplified share exchanges. I'll be mainly using the PowerPoint presentation material.

First of all, the net profit attributable to ITOCHU from Q1 to Q3 was JPY 397.6 billion. In terms of the progress against our target of JPY 500 billion, it was 80% and 11% year-on-year growth. We renewed the record in the 4 years in a row.

In Q1, the profit growth was 5% year-on-year. From first to second quarter, it was 6.4% growth. From the first to the third quarter, the growth was 11%. So it has been growing. And toward our fiscal 2019 target of JPY 500 billion, if we can achieve that, the growth will be 25% year-on-year growth, and we're making the steady progress. What is very clear is that we grew in all segments.

If you look at the core profit, excluding the extraordinary gains and losses, all segments grew. Now the extraordinary gains and losses in first to third quarter, there was JPY 39.5 billion. Excluding that, net profit was JPY 358 billion. So that was increase of 18% year-on-year, the record high number in 3 years in a row. The percentage of resource business was about 20%, which was similar to last year. So our business portfolio is not dependent on the resources.

Next Page shows the net profitable attributable to ITOCHU by segment, comparing fiscal '18 and '19. We are also showing you the fiscal 2019 forecast on the right-hand side. Those numbers include extraordinary gains and losses. So it might be difficult for you to see, but if you refer to the appendix, which shows the detailed number by segment, you will be able to see more details and you can also see the core profit in the appendix.

Now if you make a year-on-year comparison based on the core profit, if I may talk about the -- in the order of higher core profit year-on-year growth, the number one was the General Products & Realty, the second is Energy & Chemicals, the third is ICT & Financial Business, the fourth is Machinery, fifth is Textile, sixth is Food, and seventh is Metals & Minerals. In all segments, we saw year-on-year growth.

In each segment, we have strong operating companies. For example, in Textile, SANKEI was strong for business for UNY Group and IPA in trading with VINATEX, and ITS, which is in the trading business in China and also better expense and better profitability was seen in EDWIN and ROYNE was also strong.

In Machinery, the aircraft leasing as well as the defense-related business grew. Also, car export to overseas increased. Now in the first half, Yanase struggled. However, their new car sales recovered, and they are likely to turn around. MACHINE-TECHNOS as well Multiquip, which is in the construction machinery business in North America, they also show strength.

In Metals, ITOCHU Mineral Energy Australia (sic) [ ITOCHU Minerals & Energy of Australia ], IMEA, and the ICA, this is the core business, they had year-on-year decline but the North American steel business by Marubeni-Itochu Steel was strong, and it offset the other businesses.

In Energy & Chemicals, in Q3, there was a gain on sales of WIDP. Also, with the higher oil prices, there was a positive impact. And Japan [indiscernible] and West Qurna profit increased.

In Chemicals, chemical frontier, which does business of the trading of the polymer material as well as for functional materials show strength.

In Food, there profit from FamilyMart UNY increased through the consolidation. Their expenses improved for CVS and also other businesses such as Dole, HyLife declined, but FamilyMart UNY profit increase offset this decline.

In General Products & Realty, the paper pulp and construction material businesses showed strength and also logistics warehouse development and sales also did well.

In terms of the operating companies, in Finland, there's a pulp business, IFL, and also the pulp business in Brazil, JBP. And last year, we acquired the fence business in North America, Alta. And the wood processing of CIPA as well as PWC, all those businesses showed growth.

In ICT & Financial business, in addition to CTC, BELLSYSTEM and Conexio, we saw strength in overseas consumer finance such GCT in Thailand and POCKETCARD in Japan. Also, the technology ventures was also strong in terms of the profit. The mobile phone protection services were also strong.

So as you can see, in all segments, we saw the contribution from the different business areas. As you can see at the bottom left, from Q1 to Q3, the percentage of the nonresource was 79%. But toward the end of our fiscal year, it is likely to reach up to 82%.

Turning to next page, which is cash flow. We are starting to see the expansion of the core free cash flow each quarter. The bottom portion shows the core operating cash flow, excluding the working capital. From first to third quarter, as you can see, it was JPY 360 billion, which is highest, and we renewed the record in the past 3 years. In Q1, it was JPY 90 billion; in Q2, it was JPY 120 billion; and in Q3, it was JPY 150 billion. So we are steadily increasing this number. And if you look at the cash flow from investing activities, you see the number JPY 69.3 billion.

As for the details of the investments, if you turn to Page 12, you see the investments made from Q1 to Q3. Net investments were JPY 185 billion. In Q3, as I mentioned, those are gains on sales of WIDP. So the exit amounted to about JPY 100 billion. As a result, there was a $40 billion cash-in. So we accelerated the asset we shuffle.

Going back to Page 5. As a result of all these, the core free cash flow was JPY 175 billion. And as I mentioned, cash flow from investing activities was JPY 69.3 billion. So this is different from the net investments of JPY 185 billion. Now this difference is due to the accounting. FamilyMart UNY and POCKETCARD, which became the subsidiaries, there was an adjustment of their cash and deposits, which amounted to JPY 260 billion. So if you include that, you come to the cash flow from investing activities of JPY 69.3 billion.

Now right next to JPY 175 billion, you see the number which was mentioned on the 2nd of November. And actually, what we are trying to do is to strike a good balance among the different stakeholders and to enhance our shareholders' capital and to investing for the growth and make the debt repayment and pay dividends. So we would like to strike a good balance among those. And the basis for that is the core free cash flow. And after dividend payment and return to the shareholders, we would like to keep it positive.

So up to third quarter, we achieved JPY 175 billion. And we try to look at the investment pipeline for the fourth quarter. As we did that, now the core operating cash flow is very strong. And if you look at the fourth quarter investments, there will be a even higher upside to this number. So instead of JPY 140 billion, we now have JPY 160 billion plus alpha or plus some upside. This means that the dividend payment of the JPY 83 per share and if you add that to the share buyback of JPY 30 billion, it would come to JPY 160 billion. And we still have some upside. So we believe that we can now allocate JPY 100 billion for the share buyback. So that's why we announced the maximum of the buyback of 55 million share or the maximum amount of JPY 100 billion, which would start tomorrow and continue until the end of June.

Now looking at the balance sheet. The total assets is JPY 10 trillion and JPY 800 billion, which is higher. But in Q4, there will be a sale of UNY from FamilyMart UNY. So UNY's assets and debts will be gone. So that means that our expectation, original expectation of JPY 10,300 billion and net interest-bearing debt of JPY 2,550 billion are achievable. And at the end of third quarter, the total shareholders' equity is record high of JPY 2,871.1 billion. And with the accumulation of the profits, we are likely to achieve JPY 3 trillion at the end of the fiscal year.

And NET DER, which has temporarily worsened with the lower interest-bearing debt of UNY, we are likely to achieve the 0.85x. And also our strength or our ROE, which has been highly valuated by the market is going to be 17.6%, and we believe that we can achieve that number.

On the following page, we are talking about the extraordinary gains and losses. As I mentioned in Q3, the second item from the top, there is a gain on sales of the North Sea oilfields development company, which is JPY 19.5 billion. So in Q3, there was JPY 25.5 billion. So if you include that extraordinary gains and losses from Q1 to Q3, it was JPY 39.5 billion. As for the major indicators, after the end of the first half, we have not made any changes for the fiscal 2019. And based on the Q3 results, we changed our sensitivities.

And lastly, I would like to make a comment on the share exchanges. We will be using about 5.5 million shares of ITOCHU. We will deliver 5.3 million shares to MEGMILK SNOW BRAND in exchange for NIPPON ACCESS shares. Similarly, we provide 140,000 shares to the shareholder of ITC LOGISTICS and 40,000 shares to the shareholder of Leilian and 10,000 shares to the shareholder of IPD so that those 4 companies can become 100% wholly owned subsidiaries of ITOCHU. And this is the tax-qualified share exchanges.

So consolidated taxable income can be increased by increasing the number of consolidated taxation subsidiaries. So for the shareholders of those 4 companies, there are advantages. For example, they do not need to do the valuation of the market value as well as the fact that there would be no cash-in or cash-out, and they can also convert their nonlisted shares to ITOCHU shares. So those shareholders of the 4 companies have agreed to these share exchanges.

And that concludes my presentation. Thank you for your attention.