Itochu Corp

TSE:8001

Earnings Call Transcript 2022-Q3

[Tsuyoshi Hachimura, executive]

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

I would like to be brief as much as possible. There are 4 points that I'd like to communicate to you. First is the business results up to Q3. Second, this time, we have made upward revisions. I'd like to talk about that. The third is about the shareholder return. We continue to buy back our shares. I'd like to explain about ground and futures. And number four, the other day, there was an announcement of the positive watch for upgrades. So I'd like to talk about our financial status. I will be using the PowerPoint presentation material, which is available from our website.

Please turn to Page 3. This is a summary of financial results. 9-month net profit attributable to ITOCHU was JPY 678.9 billion, up 86% year-on-year. This was higher than the annual record. In November, we made upward revision. And compared to JPY 750 billion, this was the progress rate of 91%. Especially in Q3, the iron ore price has come down, but stayed at the high level. And with the high price of the oil and gas, there was a strong resource-related business. But we have a very well-balanced non-resource centric defensive portfolio. And the percentage of the resource sector business stays at 25%. In General Products & Realty, ICT & Financial Business and the Machinery and in all other segments, we achieved year-on-year growth and a record high number in Q3.

And talking about extraordinary gains and losses, which are shown on Page 5. Up to Q3, the total amount, 9-month extraordinary gains and losses was JPY 129 billion. At the end of the first half, I mentioned that there are no major ones in second half. And if you look at the Q3 extraordinary gains and losses, as you see at the bottom, this was JPY 7 billion.

Major ones, there are 3 points. First is the gain from the change in ownership ratio of the lithium-ion batteries company, this is 24M. And this gain is included and also revaluation gain due to the conversion of mega-solar companies into consolidated subsidiaries in ITOCHU NX, which was JPY 1.5 billion. And also the gain on sale of fixed assets in ITOCHU Techno-Solutions, JPY 1.5 billion, so a total of JPY 7 billion. And if you look at 9-month core profit, this was JPY 550 billion, which was the record high number.

I'm back on Page 3. And I would explain this later. Now JPY 678.9 billion. Based on the revised forecast, this was 83% progress. The JPY 550 billion that is the core profit, this was about 80% of the revised forecast of JPY 686 billion. The ratio of the group companies reporting profits was 87.1%, close to the record high. And core operating cash flow with the very strong operating revenues was JPY 612 billion, which was a record high.

On the next page, we have the segment results. And let's take a look at the percentage of the non-resource business. As you can see, the third bar from the right, this shows the Q1, Q3 results. You see the non-resource percentage is 75%. Based on our revised forecast, we have reviewed some of the resource-related business. But still, the percentage of non-resource is 72%.

Based on that, let me talk about the very strong cash flow on Page 6. In Metals & Minerals, The 8th, machinery and energy and chemical companies, operating revenues showed stable performance and cash flow from operating activities was JPY 572 billion. The natural resources and commodity prices were high and through the active operating activities, the receivables and inventories were high. So working capital increased. And excluding that, the core operating cash flow was JPY 612 billion, which was all-time high. Right below there, you see the net investment cash flow, which was JPY 73 billion. This is an exit.

And if you turn to Page 21, which shows the investments. On the right-hand side, we are showing the 9-month results. In Q3, the major investments include the top investment in Nishimatsu Construction. This is a partnership and the more than 10% equity or share was obtained. So cash out of JPY 14.7 billion. And the major ones include in the ICT and financial business, the investment in the SilverSky, which is the information security company. And also ITOCHU ENEX-related investment. This is solar power related.

So the total major new investment in Q3 was JPY 90 billion, including new investment of JPY 44 billion and CapEx of JPY 46 billion. And exit in Q3 was JPY 81 billion. The major ones include the PayPal acquisition of Paidy. And for us, it was the exit of JPY 48.9 billion. And there was also a sale of data center of CTC, JPY 81 billion exit. And in terms of the net, Q3 investment was a cash out of JPY 9 billion. Up to Q2, we had a major cash in. So 9-month results was JPY 73 billion.

So based on that, let's look at the balance sheet on Page 7. So under those circumstances, the shareholders' equity was JPY 3,936.7 billion, which is close to JPY 4 trillion that I believe is a transitional point. So steadily, we are enhancing our financial position, and we are showing good results.

As of now, there are some changes in the FRB policies and other uncertainties. We have to make sure that we have a good debt control. And net interest-bearing debt was reduced about JPY 300 billion from the end of March, which is at about JPY 2.3 trillion level. We need to prepare ourselves for the future changes and fluctuations of the economies. And as a result, NET DER was the lowest level, which was 0.59x. It does not mean that we are avoiding the leverage but rather we are making the active investments, but we are handling those investments with cash. So DER has come to the low level. The ratio of the shareholders' equity to total assets was 33.5%, which is close to the end of September.

If I may talk about, the credit rating on Page 9. As we improve our financial strength, I have been talking about 3 major balances. First is to invest for the growth. Second is to return for the shareholders and also to control debt. And steadily, we have been implementing those measures. In 2017, 2018, we have come to close to the top rating. And after 4 years, the Moody's announced the positive watch for us. The time period for the positive watch will probably take about a year, but they evaluated our fiscal financial discipline and also the ability to generate cash and also well distributed balanced portfolio, which is not dependent on the resources. So if it's upgraded from A3 positive, this will be the highest rating among trading companies.

Next, I would like to explain is the status of each segment. Going back to Page 4. Now in terms of the contribution, the biggest contribution came from Metals & Minerals, JPY 180.2 billion. As you know, this was due to the higher iron ore prices and also coal prices, although smaller in volume, and it was very strong in IMEA and others. And Marubeni-Itochu Steel showed the strong sales of sheet metal in North America. So they are having the record high numbers.

The second major contribution comes from General Products & Realty, JPY 91.9 billion. There was a gain on sale of Japan Brazil Paper & Pulp. The American -- North American construction material business had been strong, and there was a tailwind of pulp price. And in Europe, in U.K., tire wholesale and retail business, ETEL, was also strong. So that led to JPY 91.9 billion, very good performance.

The third is ICT & Financial business, JPY 88.6 billion. The listed company, the CTC and also one of the characteristics of this business is the fund operation, and there was a revaluation and also the mobile phone business was strong.

Another major point is the machinery, JPY 65.9 billion. As a Machinery business. This is the record high number. The trend remains the same. Yanase is showing the very strong performance. Automobile-related business also show strength. And ship-related companies was also strong. And in North America, the electricity price went up and IPP-related business, therefore, was strong. Some concerns are for aircraft business and aircraft leasing business.

Number 5 is Energy & Chemicals, JPY 64.7 billion, reflecting the high oil and LNG prices, those have been our tailwind and trading transactions have been strong. In addition, in chemicals, one of the subsidiaries, the CIPS trading business of the chemicals have been solid. And also the trading business in the United States was strong. In retail, unfortunately, Sanipak, they are struggling because they cannot really reflect the cost to their selling prices.

Number 6, The 8th Company, mainly FamilyMart, JPY 55.8 billion. In Q3, the daily business improved and the unit price per customer also increased. Steadily, we are seeing the improvement of attractiveness of the product and the stores of FamilyMart. They are recording good performance. But we have not yet reached the pre-COVID-19 level. So we are behind, but we are making good progress.

As for the seventh, that is Food, JPY 44.8 billion. We are making steady improvement in profit. So the trading is good. And North American grain-related companies are showing strength. And Dole business up to Q3 was strong. While at the same time, the pork prices have been high and also the feed prices are up, and the market condition in China has deteriorated somewhat. So Prima Meat Packers and also HyLife in Canada are struggling slightly.

Next is Textile, JPY 16.6 billion. The textile was most affected by COVID-19, but we are making the steady recovery from it. Leilian, EDWIN, those brands, the major ones have turned positive year-on-year. So toward the target of JPY 23 billion, we are making steady improvements.

Now CITIC in others and adjustment and eliminations, CITIC is showing the stable and good earnings up to Q2 and equity pickup has increased. Also C.P. Pokphand, as I mentioned, the pork prices have been lower in Vietnam and China and also the chicken prices in China. Due to this, they are struggling somewhat.

So that's about segment. And based on that, I'd like to talk about the upward revision that we made, and let me explain the background.

In November, we announced the first half results, and we made an upward revision to JPY 750 billion, up JPY 200 billion. And I mentioned that we reviewed all segments. And based on the conservative assumptions that is not dependent on the resources, we made the revision. And at that time, we had a buffer of JPY 30 billion, which was allocated to each segment. And the high -- extremely high natural resource prices would not last forever. There will be adjustment in terms of the supply and demand. And we looked at the forecast and the natural resource prices have gone up in Q3. Iron ore price has come down somewhat, but then went up again.

And in Q4, as we mentioned that there will be no major items of the extraordinary gains and losses. And in each segment, we are seeing the strength of the businesses. So we try to think about to what extent we would revise the forecast and the resource-related businesses are going so well. And also considering the increasing business performance, we have decided to make JPY 70 billion upward revision.

Please turn to Page 10. This is the changes from the previous forecast. As I mentioned, we have we revisited or reviewed the buffer that we allocated to each segment. The biggest impact is the Metals & Minerals reflecting the higher natural resource prices. Of course, that iron ore and coal prices are not disclosed, but we have looked at the latest numbers, and we have changed this by JPY 27 billion.

And next is the General Products & Realty, up by JPY 15 billion. The construction material business in Japan and abroad are strong. And in Europe, the pulp-related business have been benefiting from the tailwind. Also, there are some other minor ones. So JPY 15 billion plus. So this company is forecasting JPY 105 billion.

Next is the Energy & Chemicals, up by JPY 13 billion. And there are some positives in the electricity and others, but the higher oil and LNG prices are reflected. Concerning this, the assumptions are shown on Page 8. The Brent oil price was a change from $75 to $77, that was included here.

And next is the Machinery, up by JPY 6 billion. In each segment, we saw the strength and Yanase and North American IPP-related business showed a stable performance.

Next is Food, up by JPY 4 billion. This reflects the stable performance of the North American grain-related business. ICT & Financial Business, up by JPY 3 billion. CTC mobile business and fund operation, we have scrutinized those and reached this conclusion of JPY 3 billion.

We are keeping the textile and The 8th Company forecast unchanged. Textile is recovering from the COVID-19, but Descente, and Leilian and EDWIN, those major businesses are doing well so we have good expectations, but we are not yet ready to make the upward revision. First, we need to achieve the JPY 23 billion target. As for The 8th Company, we are making the steady progress up to Q3, but with the Omicron variant, Q4 trends. We need to look at them conservatively and carefully. And in terms of seasonality, convenience store, the Q4, is a low season. And also, we expect some impairment loss toward the end of the term, so we are keeping The 8th unchanged. So based on those as a result of the review of other segments, we have come to JPY 820 billion, up by JPY 70 billion.

Lastly, I'd like to talk about the shareholder return. Dividend increase and also the medium-term shareholder return were already talked about in November about increasing the second half dividend and also the minimum dividend level and also the payout ratio of 30% was announced for FY '24.

And on Page 23, we have been trying to be proactive. And at the end of December, we have formulated -- we have closed our books and try to look at the cash level. And there are -- we have not yet observed the cash out from the major investments in Q3. But we recognize that we have a sufficient surplus cash. So we decided to go ahead with the buyback, and we made announcement on the 19th of January to repurchase of the maximum 20 million shares or JPY 60 billion by the end of March. And on the first of February, we announced the progress. So JPY 11.3 billion and 19% progress rate so far.

As you see on this page, we have continuously bought back our shares, and we have shown clearly that we continue to actively and continuously execute the share buybacks. Why at this timing? We announced that we will actively and continuously execute share buybacks in our medium-term business plan. And we also mentioned that we would evaluate the surplus cash at the end of the term and try to allocate that. And based on the current evaluation, we have decided that we would buy back the shares at this time.

And in FY '22, we have tried to further enhance the return to the shareholders. And we have already announced the dividend increase and the payout ratio commitment. And regardless of the upward revision, by conducting the share buyback, we wanted to improve the overall shareholder return for FY '22.

Thirdly, in October 2018, we announced a medium- to long-term shareholder return policy and 100 million shares and JPY 200 billion were mentioned. And we mentioned that this could probably go beyond the medium-term business plan. And there was a non-executed portion of JPY 56.5 billion, which we wanted to move forward. So based on that, we have decided to buy back shares and execute this in Q4. We are unable to do multiple things at one time. So one by one, we would like to see carefully the balance of the cash level. And as for the investments, there are some investment, major ones, announced, but we have not yet seen the cash out. So in Q4, there is a high possibility of investments.

If you turn to Page 21. You see the investments, which I believe I explained earlier. And for example, in this page, the partnership with Hitachi Construction Machinery, and to obtain the 26% equity together with JIP is not included. And there are other major as well as smaller investments planned in the second half. So we'd like to see and make the evaluation at the end of the fiscal year.

Thank you. That concludes my presentation.