Earnings Call: Q4 2021

May 12, 2021

Hello, everyone. I am Keita Ishii, COO of Itauji Corporation. Thank you very much for joining us today. We will present fiscal 2021 business results and also explain overview of fiscal 2022 to 2024 medium term management plan brand new deal 2023. Please refer to the documentation of the presentation. Starting with the summary of the financial results for fiscal 2021, Please turn to Page 2. By minimizing the COVID-nineteen impact And eliminating the management issues and preparing the structure for fiscal 2022, We exceeded the consolidated net profit target 400,000,000,000 yen set at the beginning of the year and reached 401,400,000,000 yen Despite tough business environment where other companies saw major year on year declines In their profits, once again, we showed our strength of our earnings base that is well distributed in terms of the business areas and resistant to the economic changes. Looking at the balance sheet, Net DER was 0.78x. We continue to maintain our solid financial position as we executed large Slice Investments. Despite the pandemic, ROE was about 13% and ratio of profitable group companies was kept high above 80%. Our strength, High efficiency management was effective, and we have steadily implemented commitment based management Even under the rapid changes of the business environment in fiscal 'twenty one, We became number 1 general trading company in terms of the market cap and stock price for the first time in history in fiscal 2021. And also number 1, based on the consolidated net profit for the first time in 5 years, winning a Triple Crown. This is a result of the profit growth of the past 10 years and efforts made by the United team of group companies. This is the proof of our honest and steady businesses that we have built up as merchants who have customers' perspectives. The most important thing is to continue this modest attitude. Now let me briefly explain brand new deal 2023, our new medium term management plan. Please refer to Page 9. Under basic policy, Quantitative target is to aim to achieve consolidated net profit of 600,000,000,000 and growth strategy to realize business transformation by shifting to a market oriented perspective and to enhance our contribution to and engagement with the SDGs. Global spread of COVID-nineteen brought major changes in our society. Some businesses in consumer sector, which is our fault, were significantly impacted. Trend of SDGs is moving faster than our expectations and it's starting to influence state of the business. We believe Itochu Group needs to flexibly respond to the changes in the environment and achieve new growth by promoting business transformation based on the market oriented perspective and SDGs. Trading company as water, The essence of the merchants is to be able to change its shape to circle or square like water according to the customer needs. What is essential as a trading firm is to quickly capture changes in the society and to build businesses. I think there are many things that we can challenge and realize because of the major changes happening around us. Now please turn to Page 15. Our consolidated Net profit plan for fiscal 2022 is set at record high of 5.50 1,000,000,000 yen In order to make sure the return to the growth trajectory beyond the pre COVID-nineteen profit level, We would like to overcome the pandemic and start our journey toward growth once again. Now please turn to Page 16. Fiscal 2021 yearly dividend is per share as announced. As for fiscal 'twenty two, Through steady increases, we have set a minimum dividend per share of We would increase the dividend if we make an upward revision during the fiscal 2022. We also aim to reach a dividend of per share During the medium term management plan, As for share buybacks, we will continue our policy to actively and continuously execute share buybacks as appropriate in consideration of the cash allocation situation. That's all from me. Next, Our CFO, Hachimura, will give you the details of fiscal 2021 business results and next medium term management plan. This is Tsuyoshi Hachimura, CFO. Thank you very much for joining us. Now let me start my presentation. First, I'd like to give you a summary of business results for fiscal 'twenty one and highlight of the medium term management plan and also fiscal 'twenty two plan. Now looking at the fiscal 'twenty one, We needed to take some major accounting measures in relation to the impact of the COVID-nineteen as well as the reduction of of GHGs. But as we did so, we achieved our commitment target. And 600,000,000,000 yen net profit, First time among the trading companies and changing the business models, but keeping the financial policy. Those are included in the brand new deal 2023. And for Fiscal 'twenty two, by maximizing our non resource businesses, We would like to achieve the 37% profit increase and achieve 550,000,000,000 yen Now as for the Business results of fiscal 'twenty one. Net profit attributable to Itauchu was 401,400,000,000 yen But during the medium term management plan, we would like to achieve 600,000,000,000 yen and for fiscal 'twenty two, Our target is 550,000,000,000 yen and we also see the upward revision in sight. As for the dividend in fiscal 'twenty one, as we committed JPY88 per share, the dividend increase in 6 years in a row. And during the medium term management plan, we would like to aim for per share. But this is not the upper limit and we will continue with the progressive dividend policy. So based on this year's target, yen 94 per share is the lower limit that is up by per share. And if we make the upward revision, we would increase the dividend further. One of our strength is ROE. Last year, the share price was higher than Our expectations and yen was weaker. And as a result of those, the ROE was below 13% at 12.7%. But in the medium term management plan, we believe that the range of 13% to 16% of ROE is possible and we would like to aim for the upper limit of this range. Now let me go into the details of the financial results of fiscal 'twenty one. So net profit was 401,400,000,000 yen as for the core profit, It was 452.5000000000. There was Minus 51,000,000,000 yen extraordinary gains and losses. In Q4, there was a 94,000,000,000 yen net based extraordinary loss. For the full year, it was JPY51 1,000,000,000. We have conservatively reevaluated our assets in the long term And for fiscal 'twenty two, we expect a reshaped recovery. As for the dividend, we complied with the commitment and we also maintain the fiscal or financial discipline. And as the President mentioned or COO mentioned in terms of the net profit and stock price and market cap, we became number 1 in our segment. And also, we delisted the Family Mart. That was a major achievement. Now looking at the difference between the results and the forecast, As for the 'twenty one plan, the start of the core profit was 500,000,000,000 Yan. And the commodity evaluation was done conservatively. So that was down by 55,000,000,000 yen And we expected about 10% of the impact from COVID-nineteen, so that was JPY 50,000,000,000. And extraordinary Gains were expected about JPY 50,000,000,000 and their buffer JPY 50,000,000,000 So The plan was 400,000,000,000 yen So what were the results? Now starting with the 500,000,000,000 yen The commodity price actually was pushed up by 10,000,000,000 yen So that gap was 65,000,000,000 yen As for the COVID impact, it was 56,000,000,000 yen so it was about the same as our plan. As for the extraordinary gains and losses with the major accounting measures, The extraordinary loss was minus 50,000,000,000 yen. So the gap of 100,000,000,000 was here and we used all the buffers. So among other segments, There are some differences of the core profit levels, but natural resource price is up and by using the buffer, we made the preparation for the fiscal 'twenty two and onwards. Going to Page 3, showing the net profit by segment. There was a major extraordinary loss booked in Q4. So excluding CP and CIDX, in all segments, profits declined. In terms of our core profit, You'll find the details on the following pages by segment. The positive core profit This year on year was shown in the Metals and Minerals and Energy and Chemicals and CP and SiC. As you can see on this page, the results in fiscal 'twenty one as shown here and we expect fiscal 'twenty two to increase this way. Now looking at the others, which is 1,111,100,000,000 yen concerning SITC was 72,500,000,000 yen up 9% year on year. China business was strong, especially in Q4 with the recovery of the economy. The bank business, Citibank was also strong. As for CPP, JPY40,200,000,000 there was a reorganization of the China business. So extraordinary gain of JPY24.5 billion is included. Pork price in Vietnam was high and the bulk business was strong. As for metals and minerals, iron ore price increased significantly. That was a major impact. The withdrawal from the thermal co in relation to Colombia and Australia. Those are also included. Because of this, If you look at the bottom left, the percentage of the non resource Came down to 73%. The usual is 82.20%, but There was an extraordinary loss and that led to the higher resource percentage, but it's basically 3 fourth of the overall business that is a non resource. Next major contribution came from Energy and Chemicals, especially in chemicals. The trade of the commodity chemical and electricity were positive. With lower oil prices, there was an impairment loss in relation to the long term contract. So numbers are negative, but those businesses were strong. And next is the ICT and Financial business, which was almost flat. Mobile phone, CTC and ICT related were strong. In finance, Hokkieno Madobuchi was positive, But there was an impairment loss of Orient Corporation and because of this, it was almost flat compared to the previous year. Now going to Page 6, extraordinary gains and losses. The details are shown on this page. Net loss was JPY51 1,000,000,000. In terms of the gross basis, the loss was JPY156.5 billion. In Q4, net number was JPY94,000,000,000 Gross number was JPY 125,000,000,000 As I said In preparation for the business environment with the COVID-nineteen impact and also the reduction of the GHG And to prepare for the changes of the profit structure, we have conservatively reevaluated our assets at the end of the term. With the goodwill and intangible assets we evaluated. We believe that we now have more resilient assets. On the stand alone basis, extraordinary gains and losses was 416,800,000,000. As a result, fiscal 'twenty one for the first time after fiscal 2004, We booked a net loss of 71,300,000,000 yen This is based on the Japanese standard. So CIDIC, JPY242,700,000,000 and also the loss in relation to the DRAMON JPY94,800,000,000 for included. As for the CIDIC impairment, Based on the standalone evaluation, we have to look at the book value visavishe stock price at the end of the term. So at the end of March, the stock price was $7.36 So it's above the 50% of the purchase price, but they did not hit the 30%. So because of this, we incurred the impairment loss. But the CIDIC itself, the profit has been increasing in 6 terms in a row and CIDIC Corporation numbers are strong. And also Siric Limited in fiscal 'twenty two and onwards, they have the new 5 year plan to double the profit. And based on those, silica share price has started to increase. In January 2020 started to have a long term decline, but $5.5 was the bottom at the end of the year and then it has recovered to a little less than $9 per share. So as we make the calculation, We believe that there is a sufficient value exceeding the book value. Now in relation to the COVID-nineteen impact, 56,000,000,000 yen was the impact. The inventory of the apparel and lower car trade And also the aircraft business was weaker. And as you know, the CBS and Restaurants business were impacted, Especially the 8th company, the impact was about 20,000,000,000 yen in machinery, 16,000,000,000 yen was an In textile, it was JPY8.5 billion. Turning to the cash flow page. The asterisks represent the record high numbers. Cash flows from operating activities for JPY 895,900,000,000 which is the record high with the delisting of the FamilyMart. On the net basis, There was an outflow of 516,900,000,000 yen And if you look at the bottom of this slide, you see the core free cash flow. And net investment cash flow It's minus JPY755 1,000,000,000 which is a record high number. After the shareholder return, I'd like to turn the core free cash flow positive and we had a negative number in the previous year, but we I have reviewed the fiscal 'nineteen 'twenty where we did not make the major investments and we believe that these are the numbers that we can commit to. Please turn to Page 30. In relation to the shareholder return, Although the free cash flow was negative, we made major investments and we increased the Dividend payment by 3 yen per share to 0.88 yen per share. So the dividend has been increasing in the past 6 years in a row. With investments and higher dividend and high stock price. The share buyback was 5,200,000 Shares and 13,500,000,000 yen Our target is to spend 200,000,000,000 yen to buy back 100 1,000,000 shares and the progress is 71%. Now going to Page 29, The investments on the right hand side, you see the total major new investments of JPY850,000,000 based on the growth and net investment amount of 755,000,000,000 yen And out of this, about 86% or almost 90% are in the consumer sector. Major one is the additional investments of the Fami Mark that is 516,900,000,000 yen and also the CapEx in different Segments, the total is 165,000,000,000 yen Next is the additional investments in the listed subsidiaries. Based on the market trend, we provide the support of the management. So For example, we made additional investments for Tokyo Sentry and Fuji Oil. And Next was additional investment in PPIH, Don Quijote by FamilyMart. As for exit, We have conducted asset replacement and about half of the JPY95 billion was in the consumer sector. Now going back to the balance sheet. We did have a major impairment loss, but we maintained the financial health. As for the some of the challenges, we would like to increase the shareholders' equity further. And we have taken measures for the goodwill and intangible assets. But in our balance sheet, we need to continuously watch the goodwill and intangible assets. Total shareholders' equity is about 3,300,000,000,000 yen and this is a record high number. This is up by more than 300,000,000,000 yen and this includes 170,000,000,000 yen impact from the weaker yen And higher net profit and higher stock price and also the shareholder return are included. And the loss in relation to the DRAMOND was absorbed. And as a result, the shareholder equity increased. The ratio of the shareholder equity to total asset is below 30% and net DRO is 0.7 8% and ROE is below 13%. Now let me explain the next the medium term management plan, brand new deal 2023. Now after achieving the Record high net profit number. We would like to aim to achieve the consolidated net profit of 600,000,000,000 yen and also Go move toward the net zero GHG emission in 2,050. So we have the 2 major targets that is to realize the business transformation by shifting to the market oriented perspective and also focus on the SDGs. As for the GHGs, if we depend on the businesses where there is a lot of emission, We would need to find the alternative profit source and that was very challenging to do. So since our strength is in the consumer sector, We would like to take the preemptive measures to reduce the GHGs. So in the consumer sector, we would like to take advantage of our strength so that we can reduce the GHGs in the supply chain that is in scope 3. So by doing so, our stakeholders will evaluate our efforts and we can differentiate ourselves from our peers. And Page 1011 shows the growth strategy. Those are for your reference. Moving on to Page 12, that is about the GHG she emission reduction. So this is a roadmap in achieving the net zero GHG emission by 2050 to comply with the Japanese government target to reduce it by 40% in 2,030 and reduce by 75% by 2,040. Now the highlight here is that the GHG emissions of the Itochu Corporation. In addition to Scope 1, 2 and 3, we asked a third party to To calculate our fossil fuel interest of affiliates and general investments GHG emissions. And we would completely withdrawn from the ThermoCore business in fiscal 'twenty four. So we'd like to achieve the GHG reduction fastest and also We like to be the lowest emission company. And here on this page, it shows the offset CO2 to 0 by 2,040. This means that reduction effect compared with the emission volume in terms of the net contribution should be higher. So this would include the renewable energy using in the power generation and to replace The products with decarbonized products and the use of the hydrogen, ammonia, clean energy and the storage battery. So who those Measures, it would be very challenging to try to achieve those targets, but that's our plan. Moving on to Page 13. The GHG emission in fiscal 2019 was 37,000,000 tonnes. And with the withdrawal from the DRAMONT, we spent about 100,000,000,000 yen But with this, We could reduce the emission by £60,000,000. And in fiscal 'twenty two, half of This GHG emission is coming from our interest in the area of the coal, including the coking coal. So during the medium term management plan, this 37,000,000 tons can be halved. Now during the 3 years of the brand new deal 2023, there are uncertainties including to what extent the COVID-nineteen impact would continue and what would be the ESG cost and also The risk of bursting of the resource bubble. But we like to make sure that we achieve the target of 600,000,000,000 yen of the net profit and per share dividend payment during the 3 years. Now going on to the quantitative targets. By increasing the profit of the known resources, we'd like to achieve the 37% profit increase to achieved a JPY550 1,000,000,000 profit. And if we are to make the upward revision during the year, We will be increasing the dividend payment from the minimum level of per share. Now On Page 17, we have some assumptions. The exchange rate of 105 yen to the dollar And crude oil Brent is $60 per barrel. And as for the iron ore price, we have a conservative view. And there is a strong demand for iron ore in China and crude steel is very brisk. But Since that the government is controlling this strongly and in terms of the supply and demand, we expect some increase in the supply from the Vale in Brazil. So gradually, we expect some loosening of the balance between the Demand and supply. So this is a very conservative view. So this impact is plusminus 1,200,000,000 yen Per dollar, now Unless the iron ore price comes down drastically, probably there will be some additional contribution from the resource business. But the percentage of the known resource will remain at around 3 quarters. Now another way of looking at this is that beginning of core profit this year Well, last year, there was more than JPY 50,000,000,000 extraordinary losses. So the core profit started with JPY 450,000,000,000 and we expect about JPY60 1,000,000,000 increase. In Metal and Minerals, JPY19 1,000,000,000,000 improved JPY11 1,000,000,000 ICT and Finance, dollars 8,000,000,000 Art Textile, dollars 7,000,000,000 Machinery, dollars 7,000,000,000 and the 8 company, dollars 6,000,000,000 Those are the breakdown of the JPY 60,000,000,000 profit increase. And Based on the higher commodity price, probably about half of the JPY60 1,000,000,000 comes from that, including the iron ore, coal, oil, gas, Pop and others. So those are included in this number. In addition to the 60,000,000,000 yen profit increase, there is 50,000,000,000 yen extraordinary gain expected. Page 20 to 28 shows the segment details and there are major showing gains expected in the General Products and Realty as well as the aid company. As for the COVID-nineteen impact, We expected similar level of the impact in fiscal 'twenty two. Last year, it was 50 6,000,000,000 yen and we expect about 20,000,000,000 yen improvement, so about the 40,000,000,000 yen impact is included. So including the buffer of 30,000,000,000 yen 550,000,000,000 yen is our number. And other Quantitative targets concerning the balance sheet during the medium term management plan And our image or the concept is to turn the core free cash flows positive after deducting the shareholder returns. So by increasing the operating cash flow steadily, we believe that we can turn the free cash flow to positive. But Similar level of the growth or net investments as the fiscal 'twenty are expected and we would accelerate the replacement of the assets in fiscal 'twenty two. So even after the dividend increase, This 3,300,000,000,000 yen shareholders' equity, we expect it will continue to increase. Net DRL will be lower and as for ROE, we believe that higher Limit of this ROE can be achieved. As for the shareholder return, as I mentioned, 94 yen per share that is up by 6 yen per share is planned. And if we make the upward revision during the year, we would increase this. And we have made our upward revision 3 times in the past 10 years and each time we increase the dividend payment. First, we would like to realize the increase of the dividend payment 7 years in a row And also about the dividend, during the medium term management plan, we would like to realize the yen per share. This is not the upper limit and we will make sure that we continue to have a progressive dividend payment. We would like to focus on the higher dividend as well as the sustainable growth of the EPS. And with that, I would like to end my presentation. Thank you for your attention.