Earnings Call: Q1 2022

Aug 3, 2021

This is Tsuyoshi Hachimura. Thank you very much for your time. Now I'd like to present the Q1 business results of Itauji Corporation. I have been the CFO for a long time, and this is the best Q1 results. And also as a quarter, this is the best results that we achieved. This is the highest ever numbers that we achieved. In all segments, the profits grew. I think we can call it unstoppable momentum. The results were very strong. Net profit attributable to Itochu was 267,500,000,000 yen This includes JPY 87,500,000,000 extraordinary gains and losses. Excluding that, core profit was JPY 180,000,000,000 which is a record high number. JPY 267,500,000,000 is a little less than 2.6 times higher than the year before. So the increase is 155%. The record high in the past was fiscal 2021 in Q2, which was JPY 147,700,000,000. But actually, this JPY 180,000,000,000 core profit is It's 2 times higher than the year before. The highest record until now was the fiscal 2020 and the full year results was 500,000,000,000 yen In Q2, we achieved 137,500,000,000 yen And this time, it is 1.3 times higher. And considering the special factors last year In comparison to the pre COVID fiscal 2020, excluding the textile, well, textile still is in the recovery, and we have not yet fully recovered. But in all other segments, the profits grew year on year. Due to the high iron ore prices, the Natural Resources segment was strong. But Non Natural Resources segment was highest record. And also in the Resource segment, the quarterly number Now when we consider the environment of the business, Last year, there was a major impact in Japan as well as in the world. And unlike last year, in the Q1 of this year. We do still have some remaining impact from the COVID-nineteen. But in all the industries where we do business, we saw the recovery, and we have captured the opportunities of the recovery. And also, we have accumulated Our capability to generate core profit until fiscal 2020. So we have grown that further, especially in Chemicals, ICT and Financial Business and Machinery and the Construction Material in North America and Food, Those businesses in comparison to pre COVID, they are all strong and the record high numbers were achieved. Of course, there was a tailwind of the high resource prices. And Q1 extraordinary gain was higher than the full year forecast. We have accelerated asset replacement. Those were all the positives that in Q1. So both net profit and core profit were record high in terms of the quarterly number. As for the forecast for this fiscal year, JPY 550,000,000,000 is not yet revised. But at the end of the Q1, we have already achieved 49% of the full year. So when we made announcement in May, We said that there could be some upward revision during the fiscal year. And I think we can commit to making that forward revision. Now in our case, the Target number that we announced are our commitment regardless of the changes in the environment. So we'd like to see the progress in Q2 and decide how much upward revision that we would make. As for the forecast for this fiscal year and also The shareholder returned that you're interested in. If you have any questions, I would like to answer them later. As for the focus for the full year, when we calculated the target of JPY 5 The 1,000,000,000 yen core profit growth was JPY 60,000,000,000 and extraordinary gains and losses, JPY 50,000,000,000 that is the gain side. And the COVID impact will be alleviated, So the improvement of JPY 20,000,000,000 and including the buffer, JPY 550,000,000,000. So if you look at the Q1 results, I think you can see At which level that we are right now? And during the 3 years of the medium term management plan, We said that we would like to achieve 600,000,000,000 yen, but we are likely to significantly exceed that. Now of course, you are interested in any concerns that we might have, The external factors. Unless there is a rapid change of the environment, there are no major concerns that we have. Even if We have made major changes. We are not going to lower after making the upward revision. One of the things that we have to keep in mind is that IMF, from April, they have lowered the growth prospect by 0 point 5%. And now the 2.8% growth is expected. In the second half, we are not too optimistic. There is a resurgence of the COVID-nineteen. So it is possible that there is a delay for the recovery of the Consumer Service Industry. And despite the progress of the vaccination, it is also true that there is some risk for the re Surgeons of the COVID-nineteen in Japan and all in the world. And this could lead to the decline of the consumption and trade and so forth. And considering our position right now. There are no major concerns. In your PowerPoint presentation material, I will talk about each segment later on. So before I do so, I did touch upon the extraordinary gains and losses, which is shown on Page 7 by company. Last year, I mentioned the gain on the partial sale of the e guarantee in ICT and Financial Business, which was JPY 12,000,000,000 And there was no such gain this year in this company. So it seems negative, but business was very brisk. So if you look at the Q1 results this year, It was JPY 87,500,000,000. For the full year, we expected about JPY 50,000,000,000. So what was included, 1st of all, is the gain on sale of the Japan Brazil Paper and Pulp to Oji Paper. And in Q1, the deal was closed And this was 32,000,000,000 yen Also, there was a gain of on the partial sale of Taiwan Family Mart, JPY 29,500,000,000 We did not expect this number to be so high, but those 2 were already included. And other than that, other factors are not included for the full year. Now In relation to the Taiwan Family Mart, in 2018, when we made Family Mart into our subsidiary, We reevaluated all assets. And About the Taiwan business of the FamilyMart, there was a capital reorganization with PPIH. And we did receive some questions about the impact on Itochu. And our answer at that time was no major impact because we have already evaluated the fair value of the Taiwan Family Mart Business. But then after that, The Taiwan dollar appreciated. And they are listed company, and their share price increased More than what we expected. So this was not something that we expected. So from last year to This year, this number was larger than what we expected. And Other than that, Metals and Mineral, there was a deconsolidation of Hitochu Co Americas. Last year in Q3, we mentioned that in order to promote the reduction of the GHG, We will be exiting from Thermal Core Business. And Compared to when we made investment, yen weakened. And through this deconsolidation, We needed to realize the foreign exchange gains, and this was 22,000,000,000 yen Also in machinery, there was a gain on the sale of the water utility company in IEI and also gain on sale of fixed assets in Edwin in Textile. So through the replacement of assets, We had the results of JPY 87,500,000,000 in Q1. In relation to the COVID-nineteen impact, to what extent can we recover? It would be difficult to completely recover. That is our assumption. But in Q1 last year, The negative impact was about 22,000,000,000 yen Now this in this quarter, 1st quarter, The negative impact was JPY 13,500,000,000. We continue to see the impact in apparel, convenience stores and aircraft. But last year, major impact was seen in Automobile And also tire business in Europe. But we started to see the recovery more than the expectations. So For this fiscal year, the impact from the COVID-nineteen, Last year, it was 56,000,000,000 yen and we expected a little less than 40,000,000,000 yen So as of now, including the 13,500,000,000 yen in Q1, For the full year, about 32,000,000,000 yen is expected. So 10,000,000,000 yen improvement compared with our initial plan. So we continue to see the impact in convenience store and apparel, which is about twothree of the 32,000,000,000 yen. So the impact will remain in Q2. But in the second half, we expect major improvement. Turning to cash flow. Core operating cash Flow was 177,000,000,000 yen which is 84% improvement year on year. In relation to FamilyMart, there was a higher account receivables And resource prices increased. This led to the higher inventory and higher inventory prices. And also the working capital increased as a result. But in each business, the collection of the cash was Going well. So the cash generation was very strong. If you look at this page, Including the working capital, last year, it was JPY 254,100,000,000 and now it's down to JPY 181,700,000,000 But last year was kind of special because The end of the month was holiday. And because of that, the working capital was smaller in relation to Family Mart. And there was also a debt collection in Energy. And also in General Products and Realty, There was a positive in terms of the transaction of the real estate. So I think it will be better to Look at the core operating cash flow. Concerning investments, You'll find the Investments page on Page 19. Now the gross investments for Q1 was JPY 97,000,000,000 The major ones Include, for example, in basic industry related sector, the machinery overseas and IPP related And also the HOKENOMADOGUCHI Group additional investment. In addition to these, there were major ones of the capital expenditures. And the total was JPY 97,000,000,000 gross investments. And through the promotion of asset replacements, there was a gain on sale of Japan Brazil Paper and Pulp And also the FamilyMart Taiwan. And total of the exit was JPY 127,000,000,000. So net investment amount is minus 30,000,000,000 yen. Going back to the beginning, one of our strength is operating companies. And looking at the percentage of the companies reporting profit Last year, there were many companies which did not report profit, especially in textile. But This has improved to 80% in Q1. We have 280 companies consolidated, and 81.4% of companies are reporting profit. Last year, it was 73.4%. At this time last year, there were 72 companies in red, but now only 47 companies. Toward the end of the fiscal year, we expect to see further improvements. Now small scale operating companies lower than 2,000,000,000 yen We try to provide a hands on support within their portfolio. That's something that we have been doing. Despite the involvement of last year, 46 companies recorded the highest profit. And for this year, 33 companies plan to achieve the highest profit. 15 companies out of them are actually renewing their records. So major ones include CDC, Dou, Yanase, NX, FamilyMart and CIDX. So in all the segments, those are the core companies, and they are likely to renew the highest Profit record, and we are steadily making improvements. Now going to the financial position. The total assets remained consistent compared to the end of 2021 due to the increase in inventories and rise in the fair value of the investments. And as for the net interest bearing debt, It was about JPY 2,500,000,000,000. It has come down to that level. This is due to the stable performance in operating revenues and collection of the investments. So net interest bearing debt is coming down. As for the shareholders' equity, We exceeded 3,500,000,000,000 yen And as I mentioned in May, we are focused on strengthening our balance sheet. So at least, we have been saying that the 30% equity ratio, and we have exceeded that At 31.6 percent, so we are increasing this number steadily. Now with this higher shareholders' equity, Net DER is at the lowest level, 0.71x. We do not have a subordinate Bonds issued and net DER is now down to 0.71 times. Now let me talk about this segment. On Page 4, we have Overall year on year comparison. Details of each segment are shown on Pages 10 2018. First, in terms of the year on year comparison, Metals and Minerals, The progress was 56% Year on year increase of JPY 55,100,000,000 was achieved. Now the full year forecast of 138,000,000,000 yen So we are making a very good progress. It's higher than 50%. In Q1, JPY 78,000,000,000 was achieved. In addition to this, no resource is JPY 199,400,000,000 and the progress is 73 sorry, the non resource percentage is 73%. That is our Onabara strength. The general products and Ryo Tea was JPY 51,800,000,000 Of course, there was a gain on sale of JBP. And in North America, The Construction Material business centering around Master Haoico, we are increasing the size through the acquisition. And because of the strong economy in the United States, they are showing the very strong numbers. Also, the pulp price has recovered. Therefore, the Metafiber profit earnings have improved in Europe. And e tail business also recovered from the impact from lockdown last year. Now looking at the actual number in Q1, you see the negative number, but it's because of the Tax reform planned in UK. So we considered the corporate tax increase. So excluding that, it should be the positive. So we are making a good recovery. Next major one is the 8th company. There was a gain on sale of the Taiwan Family Mart, JPY 29,500,000,000. Excluding that, Daily sales are improving. Of course, it has not yet recovered to the COVID pre COVID-nineteen level. About 90%, but gradually, we are making improvements. Now last year, The equity pickup was 50.2%, but now it is about 100%. Next major one is the machinery, JPY 26,200,000,000. There was a being on sales of the water utility company in U. K. But the bigger factor was Yanase, Yanasa's recovery. They sell high end luxury cars, And demand in Japan has been extremely strong. Until last year, Rather than increasing the top line, they were focused more on the cost reduction. So Securing profit through the structural reform was what they did. But if you look at the unit sales of the new car, Used car and also the after sales services, they are all growing steadily. Their profitability is improving. And now they employed a special talent to deal with the cost improvement. And the full year forecast is was JPY 7,700,000,000 on the stand alone basis. But in Q1, they already achieved 4,100,000,000, 53%. So they are likely to exceed the budget. In Q2 and Q3, because of the shortage of the semiconductor, we are starting to be concerned that Maybe we will not receive the sufficient number of the vehicles. But for Yanase, there is We have not yet made upward revision. I touched upon the eGuaranty sales, which happened last year in ICT Financial Business, CTC, mobile phone business, Bell24, Connexio, the Information ICT businesses are strong in for 5 gs and digital transformation. We are seeing the increase of the backlog. And the Profit from the fund operation was higher, And we believe that ICT and Financial Business will be the driver for us, and it's going strong. Consumer Finance Business, Both in Japan and abroad are steadily increasing. So this is another strength that we have. Next major one is food, JPY 16,200,000,000. This is up by JPY 7,500,000,000 year on year. The progress is 28%. It seems a bit low, but In especially the fresh food, including fish and other business is increasing. And the transaction of the major manufacturers is increasing. So trade is increasing. And also, the grain business in North America, usually, there are fluctuations in Q1. But without it, they are harvesting the grain as planned. And also dough, Both pineapple and banana production is going well and the prices are also at a good level. So highest profit is likely to be achieved. Now Nippon Access, there was a drop of the Business for convenience stores, which was not fully offset by supermarket and drug stores. That's what we talked about last year. But they are recovering steadily. So Nippon Access is doing well. So I have been saying only the good things, but Energy and Chemicals, the progress is 26%, relatively low. But in Energy, the evaluation of the derivative, the Loss is included. So it seems low, but actually, it is positive. NCA Go Azel is also good. And right now, the oil price is assumed to be $60 and it's going in line with our plan. Now the Chemicals, the record high numbers are achieved. Itochu Plastics, Shiitakeiron, Chemical Frontier And trade business overseas, JPY 400,000,000 to JPY 800,000,000 increase in profit It's being achieved. So Chemical business is going very well. And unfortunately, I must say that the textile, The progress is 23%. Of course, it's higher than last year. And we have been promoting the tech restructuring. And we sold the building of the headquarters, and we are doing many other things. And we are seeing the Positive numbers from Lady Anne and Edwin. Since last year, We have not yet absorbed the negative COVID-nineteen impact. Under Others, the CILIC, The equity pickup was JPY 19,600,000,000, up JPY 5,000,000,000 year on year. And CILIC, in the first half, expect The higher profit and they have made upward revision. So major positive figures are expected. On 29th June, they announced made the earnings call, and they said that the first half Results are likely to grow by 160% year on year.