Itochu Corp

TSE:8001

Earnings Call Analysis

ITOCHU Maintains Steady Progress

ITOCHU Corporation remains on track to achieve its full-year net profit target of JPY 800 billion, echoing the strong performance of the previous year at JPY 800.5 billion. The company has seen a net profit attributable of JPY 611.7 billion, marking a 76% progress rate towards the annual goal, despite facing operational challenges, particularly in the Dole and HYLIFE segments. Forex changes resulted in a positive impact of JPY 15 billion whereas interest rate hikes led to a negative impact of JPY 28 billion. The energy and chemical sectors experienced a downturn, while the food sector showed resilience with a JPY 27 billion increase, mainly driven by the recovery of Dole and strong performance in the grains business in the United States. Cash flow from operations stood strong at JPY 626.3 billion, though the company faced a cash outflow of JPY 419 billion in investing activities. Looking ahead, the company aims to sustain and exceed the net profit achievement of the prior year, supported by steady earnings across various segments, including Food, ICT, Financial Business, and 'The 8th' segment.

Overview of Financial Performance

ITOCHU Corporation presented their Q3 business results, projecting a confident stance with a net profit of JPY 611.7 billion, representing a steady progression at 76% towards their unchanged full-year target of JPY 800 billion. The non-resource segment performance was especially notable, comprising 77% of the total, and despite last year's challenges in some businesses, the company is optimistic about surpassing the previous year's JPY 800.5 billion result.

Segment Breakdown and Profitability

Highlights of profitability across business segments included significant increases in profits for The 8th (JPY 16.8 billion), Food (JPY 27 billion positive, with strong performance in grains business and logistics improvements in Dole), and ICT & Financial Business (JPY 15.7 billion, driven by the strength of CTC and HOKEN NO MADOGUCHI). While some segments like Energy & Chemicals and Metals & Minerals faced headwinds with lower trading profits and forex impact, Machinery demonstrated growth, benefiting from the recovery of semiconductor and automobile businesses. Textile's core profit improvement at 57% and Machinery's at 84% were promising, even as some segments struggled with lower pulp prices and increased costs.

Foreign Exchange and Interest Impact

ITOCHU's financials showed a positive foreign exchange impact of JPY 15 billion, contributed to by a weakening yen, which increased total assets and shareholder equity. Nonetheless, higher U.S. interest rates adversely impacted the interest expense by JPY 28 billion, affecting dollar-related working capital streams significantly.

Cash Flow and Investment Activities

Operating cash flow was strong at JPY 626.3 billion, reflecting robust activities across 8th, Food, and General Products & Realty segments. However, there were considerable cash outflows from investing activities, largely due to new investments related to CTC and the acquisition of DAIKEN.

Looking Ahead: Q4 Forecasts and Strategic Moves

The management remains unfazed, keeping the Q4 forecast of JPY 800 billion intact, following an increase from their previous estimate in November. With some businesses not meeting expectations, they remain watchful but without significant concerns, relying on a strategic buffer and careful fair value evaluation of projects. Progress in The 8th reached a remarkable 122%, outpacing other segments.

Earnings Call Transcript 2024-Q3

[Tsuyoshi Hachimura, executive]

This is Hachimura speaking. Thank you very much for joining us. Let me now present the Q3 Business Results. I will be using the PowerPoint presentation material that you have. First of all, the net profit attributable to ITOCHU was JPY 611.7 billion. In November, we revised the forecast from JPY 780 billion to JPY 800 billion. And as expected, we are making steady progress. The progress rate is 76%. As you can see on the following page, the percentage of the Non-Resource was 77%. The full year target of JPY 800 billion is unchanged. And I will touch upon this later.

This fiscal year is the last year of the medium-term management plan. And last year, the results was JPY 800.5 billion, and we have not yet used the buffer. And last year, from Q3 to Q4, the Dole and HYLIFE faced difficulties. And as of now, we believe that the bottom figure of the medium-term management plan will be JPY 800.5 billion. And based on that, we would like to make plans for the next fiscal year. As for the detailed number by segment, Mr. Yamaura, the General Manager of Accounting will present later.

Let me now explain briefly on the core profit on Page 4. First of all, higher profits were recorded in 3 companies, including The 8th, Food, and ICT & Financial Business. Though core profits increased in 5 companies, including Food, 8th, Machinery, ICT & Financial Business, and Textile. The high progress rate were achieved in 8th, Food, Machinery, and Energy & Chemicals. And lower profits and lower core profits were recorded in 3 companies, including Metals & Minerals, Energy & Chemicals, and General Products and Realty. In terms of the low progress rate, Textile was also low because of the fact that we could not execute extraordinary gains and losses up to Q3.

Now going back to the core profit. The total was JPY 583.5 billion, which is down by JPY 50.5 billion or 8% year-on-year. The reasons behind that was that ForEx impact was JPY 15 billion positive. Interest was JPY 28 billion minus, and resource prices was JPY 26 billion minus. So the net was JPY 11.5 billion. The Non-Resource part core profit on this page shows JPY 443 billion, down JPY 25 billion or 5% year-on-year. Most of that is due to higher interest rates. The interest impact -- excuse me, the ForEx impact was JPY 4 billion positive, but the interest was minus JPY 30 billion. So net impact was JPY 1 billion positive.

In Food, last year, the Dole struggled and there was a recovery from that. And NIPPON ACCESS continues to be strong and grains business in United States also show strength. So the total was JPY 27 billion positive. And second largest was in The 8th company, JPY 14 billion. This is because of the FamilyMart related. And Machinery, JPY 14 billion positive. And this is mainly due to the recovery of the semiconductor and the automobile dealer business or export business and also the IPP business in North America, which faced a very hot summer last year, and there was a start of the equity pick-up from Hitachi Construction Machinery. So JPY 14 billion positive.

And as for the JPY 13 billion in ICT & Financial Business, major factor was CTC and also with more people moving around, the HOKEN NO MADOGUCHI showed strength. As for the negative side, Energy & Chemicals, the energy trading, especially LNG and chemical-related trading transactions, including sulfur were lower. And in General Products & Realty, the lower pulp prices led to the lower IFL. It was generating profit, but the number was quite poor.

As for the ForEx impact, overall impact was JPY 15 billion. In comparison to the end of December, yen weakened by JPY 8.3, and out of this JPY 15 billion ForEx impact, 2/3 is in Metals & Minerals related to EMEA. And the weaker yen pushed up the total assets by JPY 300 billion, and the shareholders' equity by JPY 135 billion.

Now talking about the interest, negative impact of the interest was JPY 28 billion. This is mainly due to the higher interest rate based on the U.S. dollars. The impact was big where the working capital is in dollars, such as CITIC, equity company [indiscernible], and Marubeni-Itochu Steel, Dole, ETEL, and North American-related businesses.

As you can see on Page 8, the exchange rate and other assumptions as shown here. So Iron Ore price was up by 2% year-on-year. Thermal coal was down by 62%. Coking coal, down by 13%. In Non-Resources, hardwood pulp was down by 17%. Those are influencing the natural resource prices in others shown on Page 4.

Now turning to extraordinary gains and losses on Page 5. In Q3, the major one was the FUJI OIL equity company, Blommer in North America, the impairment loss was booked, and our negative number was JPY 6.5 billion. Yes, this business faces some difficulty. I also visited there. In Q3, there was a conversion of the DAIKEN into a consolidated subsidiary and sale of the business related to the senior delivery services. And net results was minus JPY 1.5 billion. From Q1 to Q3, the extraordinary number was JPY 28 billion plus. And in Q1, there was a major impact of JPY 16.5 billion in relation to 24M.

Cash flow on Page 6 with the brisk operating activities, the operating cash flow was strong in 8th, Food, and General Products & Realty, JPY 626.3 billion. Looking only at Q3, the core operating cash flow was JPY 240 billion. So we are generating cash steadily. As for the cash flow from the investing activities, this does not include CTC or DAIKEN. So looking at the core operating cash flow, it was the cash out of JPY 419 billion. Concerning this, Page 19 shows some details. The net investment cash flow was the net cash outflow of JPY 419 billion. In Q3, there was a DAIKEN TOB, and out of the JPY 419 billion, excluding CapEx, the 3/4 of the new investment was related to CTC and DAIKEN TOB. Now I'd like to hand the microphone to Mr. Yamaura to talk about the segment numbers.

[山浦 周一郎, executive]

This is Yamaura speaking. Let me now explain the net profit by segment. Please refer to Page 3 which shows a net profit attributable to ITOCHU by segment. Also, Pages 10 to 18 show details for your reference. Starting with Textile, the extraordinary gains on partial sale of the Industrial Materials business was booked in the previous year. And other net profit declined slightly by JPY 0.6 billion. But we have seen a stable performance in apparel-related companies and the core profit increased year-on-year. Progress was 57%.

Next is machinery. Last year, there were extraordinary gains and losses of the sale of the North American medical device maintenance business. So compared to that, the profit went down slightly, but the earnings were high in North America electric power-related business and also the start of the equity pick-up of the Hitachi Construction Machinery, the core profit improved significantly. The progress was 84%. In Metals & Minerals, due to the lower coal prices and lower earnings in Marubeni-Itochu Steel, resulting from the absence of the favorable performance in North American steel pipe business, the profit declined by JPY 33.9 billion. The progress was 69%.

In Energy & Chemicals, there was a favorable performance in energy trading transactions and chemical-related transactions last year, and the lithium-ion battery company 24M, there was a revaluation gain, but still the profit declined by JPY 11.3 billion. The progress was 80%. In Food, there was an improvement in logistics cost in Dole, and the food distribution business, NIPPON ACCESS continued to be strong. And there was an improvement in earnings of North America meat product-related company. And in Q3, there was an impairment loss in relation to the FUJI OIL. And as a result, the profit increased by JPY 14.6 billion. The progress was 90%.

Next is General Products & Realty, the domestic construction materials-related company and overseas real estate business were strong last year, and there was extraordinary gain for the North American business last year. Also, the pulp prices became low, which affected the pulp-related company in Europe. So as a result, the core profit declined by JPY 34.4 billion. The progress was 64%.

ICT & Financial Business, CTC continued to show strength, and there was a higher agency commission in HOKEN NO MADOGUCHI GROUP, and the improvement of remeasurement gains and losses for fund held investment and extraordinary gains on the sale of overseas companies. The profit increased significantly by JPY 15.7 billion, the progress 69%.

The 8th, the FamilyMart cost increased in various ways. But through the enhancement of product appeal and sales promotion, the number of customers spend per customer and daily sales increased, and external gain on the sale of the domestic company was made. And as a result, the profit increased significantly by JPY 16.8 billion. The progress reached 122%.

Others, Adjustments & Eliminations at CITIC, the Comprehensive Financial Services segment was strong. However, the increase in interest expense with higher U.S. dollar interest rate and lower earnings in C.P. Pokphan resulting in the lower pork prices led to the decline of the profit by JPY 36.6 billion. Due to the lower market prices and higher interest rates, profits were lower in some companies. But the higher profit was recorded in Food, ICT & Financial Business, and 8th. And excluding the extraordinary items, core profits increased in Textile, Machinery, Food, ICT & Financial Business, and The 8th. So earnings have been quite steady.

Let me add some comments on the forecast for Q4. Concerning the forecast of JPY 800 billion, we are not changing the detailed numbers, and we increased the forecast from JPY 780 billion to JPY 800 billion in November, increase of JPY 20 billion. We are doing well, but we still see the mixed performance. Some companies are still lower than expectation, but it doesn't mean that we have any concerns. If you go back to last year, our outlook was JPY 800 billion. And at the end of Q3, the progress was 85%. And at that time, towards the end of the year, we already explained that there were some concerns about the Dole and HYLIFE. And due to the rapid deterioration or deterioration of those businesses, we booked the extraordinary loss of JPY 27 billion in Q4. As a result, the extraordinary number came down by JPY 35 billion, and the overall results ended at JPY 800.5 billion. And right now, the progress is 76%, and we have a buffer, and we do not have many concerns.

Of course, toward the end of the fiscal year, it is necessary to evaluate the fair value of all the projects. But currently, we do not have any concerns. But of course, the market declines and some of the upsize that we expect could be postponed to the next year, because this happened in the past. But we do not expect to go lower than JPY 800.5 billion. So in terms of medium-term management plan, when we move to the next fiscal year, we do not expect any downward or parallel trend. That concludes my presentation. Thank you for your attention.

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