Itochu Corp

TSE:8001

Earnings Call Transcript 2021-Q3

[Tsuyoshi Hachimura, executive]

This is Tsuyoshi Hachimura, CFO of ITOCHU Corporation. Thank you very much for joining us today.

I'd like to talk about 3 major points. First, Q1 to Q3 net profit was JPY 364.3 billion. Progress was 91%. Excluding extraordinary gains and losses, core profit improved gradually from Q1 to Q2 and Q3. There are some differences among segments, but we had very good business results.

Second, we also disclosed the fact that we have decided to withdraw from Drummond in Colombia, which has more than 80% production volume of thermal coal. And for the first time among the trading companies, we're preparing for the issuance of SDG bond. On the 13th of January, we have mentioned the engagement with SDG in our outline of the medium-term management plan. So I will talk about that secondly.

Third, is about the FamilyMart after the deconsolidation. For the first time, we disclosed the business results of the Q3 on the 13th of January.

Let me start. The Q1 to Q3 result was JPY 364.3 billion in net profit. That is 15% decline year-on-year. The progress was 91%. The JPY 43 billion extraordinary gains and losses are included. So excluding the JPY 43 billion extraordinary items, the core profit was about JPY 321.5 billion. So based on our budget of Q1 to Q3, that is JPY 285 billion. The progress was 128%. With FamilyMart, there was an impairment loss. So aside from the 8 company, in 7 companies, we exceeded our budget. Also, we have not yet used a buffer of JPY 50 billion that we said at the beginning of fiscal year.

Looking at the Q3 only, net profit was JPY 111.8 billion. Extraordinary items were minus JPY 6.5 billion. So core profit was JPY 118.3 billion. In Q1, the core profit was JPY 88.5 billion. In Q2, it was JPY 114.5 billion. In Q3, it was JPY 118.5 billion. Every quarter, we increased the core profit. If you only look at the Q3, we had the record high number. The ratio of group companies reporting profits was 73.4% in Q1, 76.5% in Q2 and 82% in Q3. Every quarter, we improved this number.

As for the core operating cash flows, the cumulative number was JPY 417 billion. This was down by JPY 35 billion year-on-year. But with the recovery of economies under the COVID-19 in Q1, it was down by JPY 52 billion year-on-year. In Q2, was down by JPY 7 billion. But in Q3, it improved by JPY 24 billion year-on-year. So October to December, we exceeded the previous year's level. So core profit, core operating cash flows and the ratio of group companies reporting profits, tell us that our results from Q1 to Q3 were higher than what we expected.

Later, I will talk about the strong areas, including chemicals, power and environment, food, construction, real estate, financial, insurance, iron ore, CPP and CITIC related. We saw weaknesses in 8 company, including FamilyMart and the core related area, including Drummond, export of automobiles and the aircraft business in machinery and apparel in textile, and pulp and tire in General Products & Realty.

Concerning balance sheet, I'd like to say just one thing, total assets were JPY 11 trillion. In comparison to the March 2020, there was an increase of JPY 200 billion. With higher trade receivables, investments, total assets grew. Total shareholder equity was about JPY 3 trillion. FamilyMart becoming 100% subsidiary. There was a decline. And also there was a shareholder return. But with the higher profit, this has increased by JPY 100 billion from the end of last fiscal year.

Moving on to Page 19 about the investments. Total of major new investments was JPY 435 billion. Exit was JPY 55 billion. Net investment amount was JPY 380 billion. The major one is JPY 180 billion or higher with FamilyMart TOB and CapEx in 3 areas, that was more than JPY 120 billion. In Q3, the major investments include on this page, investment from Master-Halco, mainly in North America was the major one, which is included in this table. Also, the fixed asset related investments are included.

From the top of this table, in Q3, first, there was an investment in PPIH in fixed asset in North America related and fixed asset and 2 capital expenditures in resource-related sector. Those were in Q3. As for CapEx, we have them every term. So we have small numbers, but we have them every term.

As for the extraordinary gains and losses on Page 7. In Q3, the total was JPY 43 billion. It was minus JPY 6.5 billion in Q3. The impact from COVID-19 from Q1 to Q3 was JPY 47 billion. So this was mostly offset. Among those items of extraordinary gains and losses, the major ones in Q3 is FamilyMart-related, JPY 11 billion. This is the impairment loss. We have made the criteria for the impairment loss for stores more stringent. At the very bottom, you see the higher tax expenses related to a natural resource project. I will talk about Drummond later. This led to about JPY 4 billion, hitting our profit and loss.

Aside from those, something that is not written here is the -- with the exit from the thermal coal in Australia. There were some losses. In relation to COVID-19, you do not have the details, but from Q1 to Q3, the overall impact was JPY 47 billion. In Q1, about JPY 20 billion. In Q2, about JPY 20 billion. So a total of JPY 40 billion in first half. Full year forecast was increased from JPY 50 billion to JPY 60 billion. This forecast remains the same.

In Q3, there was about JPY 7 billion impact, which was alleviated. Now out of this JPY 7 billion impact, the FamilyMart related. In 8 company, there was JPY 4 billion. In machinery, about JPY 2 billion. In textile, there was JPY 1 billion. With the state of emergency declared, the domestic consumption is not very optimistic. But full year forecast of JPY 60 billion remains the same. From Q1 to Q3, we start to see the improvements of the COVID impact. From now on, based on the results up to Q3, whether the improvements will continue or the business models are changing in different areas. And how do you calculate the value? That is something that we'd like to do as we look at Q4, concerning the variation of the different businesses.

Now the percentage of the nonresource, as usual, up to Q3 was about 80%. Price of iron ore is up, the price of hard coking coal is down and the Brent oil price is down. The details and the actual numbers of the major indicators are shown on Page 8 for your reference.

Let me now talk about individual businesses. First of all, the strong businesses are as follows: with higher pork prices, mainly in Vietnam, CPP business, net profit, it's up by JPY 9.5 billion; in Australia, EMEA, the profit is up by JPY 6.3 billion with higher price of iron ore; in North America, construction material business, with the expansion of the do-it-yourself business as people stayed at home; the Master-Halco including fence business, was up by JPY 2.3 billion; highlight is the pork business based in Canada with higher prices and the increase of the export to China, this was up by JPY 1.7 billion. Unlike Q1 and Q2, Yanase has become strong, so it was up by JPY 1.4 billion. Used cars and new cars sales have been strong. The -- also in relation to the strong demand of people staying at home, Prima Meat Packers were strong, which was up by JPY 1.3 billion. Those companies are included in the different segments. And if you refer to the disclosed numbers, you will see the differences.

As for the weak businesses, FamilyMart, is down by JPY 36.2 billion. I will talk about this later. Concerning the CITIC, equity pickup from CITIC, was down by JPY 10.3 billion. Up to Q3, the major CITIC Bank provision for the bad debt was increased. As a result, the equity pickup declined but concerning this, the other day, CITIC Limited, announced a full year forecast. At least, they are trending upward. That was their explanation. They expect more than 3% growth at minimum. So they said HKD 51.2 billion before. So with 3% increase, $55.5 billion. Bank and securities are going well, and they have a lower provision, and they are benefiting from the IPO, and they also have securities companies under them. So with these, as for CITIC, it is possible that there is a major positive figure for full year. However, up to Q3, the results have not been very favorable year-on-year.

Other big numbers, Brazil Japan Iron Ore, with the absence of special dividend of last year, down by JPY 5.4 billion. And ITOCHU Coal America, or ICA, investing in Drummond, which withdraw, there is an expense of the ICA, so it's negative. CIECO Azer with lower oil prices, down by JPY 3.9 billion. C.I. Takiron, last year, there was a gain from sale of land. So without it, it was down by JPY 3.8 billion. ETEL sale of tire in U.K. in Q1 and Q2, they were impacted from the lockdown. And they made efforts to turn it around in Q3, but it was down by JPY 3.7 billion. And even in Q4, lockdown continues. So a tough environment for them.

So those are the different businesses. Now the percentage of the China-related business is something that I always mention, including trade. When we have end users in China, this is included here. And total was JPY 128 billion. This is the China-related business. The economy recovered first in China. So this has been reflected here. So this JPY 128 billion is about 35% or 1/3 of the first quarter to third quarter. And this seems to be a consistent trend. It's not too high, not too low.

As for domestic Chinese business, it was JPY 73 billion. This includes CITIC. So with that, it is about 20% of the total. Excluding CITIC, it is JPY 82 billion. So 1/4 of the total. Iron ore from Australia's final destination is China. And with higher pork prices, the pork business via Hong Kong has been strong. So those 2 were major items in relation to China business.

Before I explain about Drummond, I would like to say some more about different segments. You see the comments by segment year-on-year differences. First, in textile, the cost reduction and reduced expenses. And we also worked activity on e-commerce. But due to COVID-19, apparel-related business was heavily impacted, both in Japan and in Europe and U.S. The core profit has been damaged, and we are currently reviewing the existing businesses drastically. In machinery, there was a reduction of expenses and Yanase has been recovering. But looking at the car export and dealer business overseas and aircraft-related businesses, those have been weak. So core profit is down by about JPY 10 billion.

In Metals & Minerals, in order to address GHGs greenhouse gases, we have decided to withdraw from the Drummond in Colombia. And with that, this is included in the Q3 business results, which was the major point. But with the higher price of the iron ore, EMEA iron ore profit increased by JPY 13.1 billion. But with lower coal price and the reduced steel products, year-on-year profit declined also with the lower dividend of the Brazil iron ore.

In Energy & Chemicals, the overseas chemical trade, this includes the rubber gloves and the rubber bags for households, those business have been strong, and they have been reducing the expenses and the chemicals business have been strong. As for new power environment solution, the storage battery and power business have been strong, but with lower oil prices, with lower Brent oil price. Profitability of oil exploration related business was down. And also C.I. Takiron, we had a gain on sale of our land last year. And net profit was down, but the core profit increased by JPY 3.8 billion. Based on the forecast, the progress is already 101%.

In food, due to COVID-19, restaurants and business for convenience store have been weak. So NIPPON ACCESS and ITOCHU Food sales and marketing profit were down and fruits in Asia, including bananas and pineapples, with lower volume and increased cost, those profit is down. At the same time, since people stayed at home, Prima Meat Packers and HyLife, meat-related businesses and North American grain elevator business were strong, both net profit and core profit increased.

In General Products & Realty, real estate transaction was strong, ITOCHU Property Development and the hygiene product profit increased in China. And we saw the benefit of the reduced expenses, but with lower pulp price, the pulp business in Brazil and Finland were lower in profit. And due to the lockdown, the ETEL business in Europe was down, and the progress is 32%. This does not include the sale of JBP to OG Paper. Construction and real estate, the progress is 104%.

Now in ICT & Financial, in response to the remote working demand and 5G commercial launch, CTC is strong and BELL Connection, Hoken No Madoguchi, the consumer finance business in U.K. and Hong Kong have been strong. Also, the eGuarantee, there was an extraordinary gain booked in Q1 so profit increased. In finance and insurance, the progress was 124%. In others, CPP and CITIC are included. The equity pickup of CPP is 25%. And from Q1 to Q3, it was JPY 11.4 billion. The previous year, it was JPY 1.9 billion. So significant increase. This is related to the high pork prices in Vietnam. There was an announcement about the reorganization of the pork business in China, which is not yet included.

As for the equity pickup of CITIC, 10% from Q1 to Q3 was JPY 45.6 billion. In the previous year, it was JPY 56.2 billion. And the plan is JPY 62 billion. The core of Q3 that is the CITIC Bank provision was up and CITIC Limited said that they are going to increase by at least 3% and so equity pickup from them is expected to be higher.

Now let me move on to the second topic. That is about Drummond. We have announced that we will withdraw from this business. The impact on net profit is not significant. And this strong one has been deconsolidated and has become the general investment company. And this has been already calculated as a loss in terms of the shareholder equity. So again, the impact on the net profit consolidated is small. So it does not affect our target of JPY 400 billion or JPY 88 per share dividend. But on the nonconsolidated basis, we booked JPY 88.6 billion extraordinary losses. If you look at the details, you see the FBTOCI, which was JPY 12.3 billion positive at the end of December. This is improvement of JPY 44.3 billion year-on-year. This includes the major losses from the withdraw. And this can be offset by other expenses of other listed companies. So this is a major cost, but the thermal coal interest at ITOCHU is about 7.4 million tons and more than 80%, that is 6.2 million tons is that of Drummond, and we're withdrawing from it right away.

And in May, the remaining, a little less than 20% thermal coal, we would like to dispose this asset as soon as possible. So as you see in the outline, we would like to completely withdraw from this business.

SDGs is the core of our medium-term management plan. People say that we should have a perspective of backcasting when we consider SDGs. But at the same time, we have to clearly show the specific measures. How we try to engage the issue of greenhouse gases or global warming. We, the management, believes it is important to do so. So this is very unique to ITOCHU to show you the specific measure.

So with this, as we discuss with the investors. In the past several years, when we talk about global warming, the biggest concern among the ITOCHU assets was the Drummond. So Drummond will be gone, and this would have a major impact.

So the way of thinking is as follows: in 2011, we invested in this. At the time, we are in the natural resources super cycle. So from the perspective of energy mix, it was -- thermal coal was very competitive. And supplying that to Japan and Asia was a good thing. And for trading companies, it was a source of profit. In 2011, 58% of our profit came from resources. FY 2011 after-tax net profit was JPY 161.1 billion. When we made a decision in FY 2012, after-tax net profit was JPY 300.5 billion. So the natural resources, the profit was JPY 149.2 billion or 48%. And gradually, we reduced exposure from natural resources. And in addition to not making the additional investments, when thermal coal became depleted, we would not replace them. So that's how we handle this.

So in terms of the asset level, early 2010, about 30% of the asset was natural resources, but now it is down to 10%. And the profit from natural resources have changed from 58% to 48%, now down to 20%. So we have been actively engaging with the SDGs. And rather than taking a long time, we would like to take quick measures. In order to handle or address the greenhouse gases, this is very important to show our determination. Also, in relation to SDGs, at the end of April and toward May, when we talk about the medium-term management plan. In addition to the withdraw from the Drummond in order to show a determination, we plan to issue the SDG bond for the first time among the trading company and insurance will be in overseas. We're currently making preparation. We want to get the approval from the fixed income investors who are leading the ESG investments. And this will lead to the replacement of the portfolio. The details we disclosed in the future and we hope that this will contribute to the replacement of the business portfolio.

Now concerning FamilyMart. On the 13th of January, we disclosed the business results on our website. Q1 to Q3 net loss was JPY 19.9 billion, JPY 65.9 billion in red in comparison to the year before. Major impact was from the more stringent criteria for impairment loss for the stores of FamilyMart. We have revised them. After-tax basis, the additional impairment loss is booked at JPY 42 billion. In first half, it was JPY 24.4 billion and JPY 17.6 billion in Q3, total of JPY 42 billion. The impact of COVID-19 is JPY 29.8 billion on profit. In the first half, it was JPY 20.7 billion. In Q3, it was JPY 9.1 billion minus. So total is JPY 29.8 billion. The lower revenue from FamilyMart stores and lower royalty and consolidation payment, those were the factors that led to the declines. As you know, the daily sales up to Q3 has been 91.5% year-on-year.

Starting with the Q3, economic activities started to restart and there were some recovery of businesses. So early January, we started to see the signs for improvement. But as the state of emergency was declared again, daily sales started to decline. At the same time, as people stayed home, we are starting to see the demand for daily food. Sales is increasing. So margin of FamilyMart is gradually recovering. So toward the end of Q4, we see the declining daily sales but spend per customer is on the rise. We hope to see some improvements. But as you know, there is a impact of COVID-19 and severe competition against the other convenience stores as well as supermarket and drug stores.

And consumers' lifestyle has been changing, and we need to address that. And there is an issue of 24-hour labor and the contract with franchisees and how to address SDGs. There are so many issues. But as we announced under the new management and the President Hosomi, we would seek reshaped recovery and ITOCHU will support this wholeheartedly. Already, we are trying to improve the attractiveness of stores and products. We are working and consulting with other ITOCHU companies so we can improve the efficiency of the logistics. And also, we are considering the beginning of the new businesses.

So as for the details of those, we would like to touch upon them as we announce the next medium-term management plan from FamilyMart and ITOCHU side. Thank you.