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Edited Transcript of 8001.T earnings conference call or presentation 2-Aug-19 10:59am GMT

Q1 2020 Itochu Corp Earnings Net Conference

Tokyo Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Itochu Corp earnings conference call or presentation Friday, August 2, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Tsuyoshi Hachimura

ITOCHU Corporation - CFO, Senior Managing Executive Officer & Director

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Presentation

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Tsuyoshi Hachimura, ITOCHU Corporation - CFO, Senior Managing Executive Officer & Director [1]

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This is Tsuyoshi Hachimura, CFO of ITOCHU. Thank you very much for joining us despite very hot weather outside.

Now I'd like to present the Q1 business results for FY 2020. Please turn to Page 2, which shows the summary of Q1 financial results for fiscal 2020. There are 5 major points.

First, net profit attributable to ITOCHU increased JPY 33.9 billion or 30% to JPY 147.3 billion. This is the quarterly net profit, which is the highest in the history. So in terms of the progress against our fiscal year forecast, it was about 30%. So the business results were very strong. I think we can say that ITOCHU is indeed doing very well.

When we have too much concentration on the particular businesses or particular regions, we would suffer when there are a lot of uncertainties. And that's something that we learned in fiscal 2016 as a general trading company. So we have been focused on "Earn, Cut, Prevent". So that we can do better than the market expectation in each of our businesses. So that we can achieve the high records. And as a result, we achieved the record-high number in the first quarter.

We are not complacent, but we are making sure that we achieve our target, and we are doing very well. And as a management team, we remain calm despite this record-high number, and we continue to have uncertainties about the market environment. So I think we can say that we have a very healthy sense of crisis.

And now turning to the core profit, excluding the extraordinary gains and losses, although there was extraordinary gains of JPY 30 billion, the core profit increased to JPY 117 billion, which is the record-high first quarter number, and this showed a growth of JPY 8 billion year-on-year.

So we can say that our core profit is growing. Profit and losses of our group company reached JPY 126.3 billion, which is the record high 3 years in a row. And the 84.9% or about 85% of the companies are making profit. At the beginning of -- at the end of the last year, it was 90%, so it's slightly higher. But we can say that the 292 consolidated companies exist in our group and 85% of them are profitable. And 70% are the small- and medium-sized businesses, which is below JPY 2 billion. The ones that exceeds JPY 10 billion is, first of all, IMEA, iron ore business in Australia and Orchid, which is the investment company for the CITIC. So we can say that the small-, medium-sized businesses are doing very well.

As for the core operating cash flows, this was also a record-high number at JPY 148 billion. EPS, which we have started to focus since last fiscal year was about JPY 98, which is also a record-high number.

Now let's look at each segment on Page 3. Profit increased by JPY 33.9 billion year-on-year. Out of the 7 division companies, 5 achieved higher profit. The highest increase was achieved in the General Products & Realty, the increase of JPY 16.2 billion. Metals & Minerals increased by JPY 11.5 billion. ICT & Financial Business also grew, and Energy & Chemicals also grew. The decline was recorded in Food and Textile.

As for Food, I would explain this later, but negative factors included Dole and grains elevator business in the United States. So those are the 2 negative factors. As for Textile, there was extraordinary gains recorded last year. So there was a change from that. So actual terms, there was a growth. So division companies showed strength.

Now in Metals & Minerals, which show the actual highest growth, JPY 34 billion profit increase. This is related to the iron ore business and the IMEA operation in Australia was very strong. Also, Brazil Japan Iron Ore Corp., the CM iron ore business was very strong. Therefore, the dividend came earlier. And because of this -- the JPY 34 billion profit was achieved in Metals & Minerals.

The General Products & Realty, JPY 32.8 billion. In fiscal 2019, there was a pulp price decline. And we started our forecast for this fiscal year with that factor included. But actually, we have plan -- we have been planning to replace some of the assets. We sold CIPA and PWT in North America. And in U.K., the tire retail and wholesale manufacturer ETEL; in North America, Alta, which is the wood fence business; and ITOCHU Property Development, the condominium sales business in Japan, have done well.

As for the Food business, which had the profit of JPY 19 billion. And FamilyMart UNY profit was JPY 9.2 billion. And equity earning increased JPY 3.6 billion. Compared with the last year, our equity holding increased by 9%, which pushed up our profit. And through the reorganization of the FamilyMart UNY, there was a tax advantage and the cost improvement effect. Those are the positive factors. And the sale of UNY led to the lower profit of the UNY part. And last year, there was a sale of the UNY Hong Kong. And as the FamilyMart UNY became the subsidiary, there was a booking of a PPA. Including all of them, there was a positive change of JPY 3.6 billion. So in Food, driven by the FamilyMart UNY, the NIPPON ACCESS and Canadian pork business, HyLife, as well as ITOCHU Sugar, increased their profits.

At the same time, Dole profit declined year-on-year and grains elevators business in America declined, not because of the U.S.-China trade friction, but due to the weather and lower profit in relation to the insurance. So these were the negative factors in Food.

ICT & Financial Business profit was JPY 17.1 billion. And there was a gains on sale of Wellness Communication and CTC Conexio POCKETCARD. And overseas consumer finance business were strong. At the same time, Orient Corporation struggled. As we saw in last year, the burden of the system expenditure, the depreciation was quite heavy.

Now the Machinery, the profit improved by JPY 2 billion year-on-year. Tokyo Century will be announcing their results soon, and we hear that they are doing well. The IPP operations in Central Java and export of the machinery plant, ITOCHU Plantech and also North American IPP and the environmental business in Europe, profits increased. Yanase is recovering in terms of profit. But there are some red number remaining. So we still see some weakness in this business.

The Energy & Chemicals is the next, the profit of JPY 11 billion, which is almost flat year-on-year -- increase of JPY 0.2 billion year-on-year. The earnings in Azerbaijan, the number of the vessels increased from 1 to 2, and profit expanded. And in Japan, the CHEMICAL FRONTIER did well and South Sahara (sic) [South Sakha], a project in Russia, did well and ITOCHU ENEX also shows strength.

Last is Textile, JPY 7 billion. EDWIN, Converse and small-sized, but the apparel company's improvements in profits were shown. And Descente and SANKEI and JOIX showed some weaknesses.

At the very bottom of this slide, you see the others and adjustments and eliminations. Equity in earnings of the CITIC Limited, which is still doing very well in financial sector and the equity in earning was JPY 13.4 billion in Q1. And CPP, which is listed in Hong Kong, this is the livestock agricultural company, the equity in earnings was JPY 0.6 billion. And those were the positive increase year-on-year.

So as I mentioned, the increase of the 30% profit, that is the JPY 33.9 billion, half of that, JPY 16.2 billion, is in the General Products & Realty. And 1/3, JPY 15.5 billion, is in Metals & Minerals in relation to iron ore, and the remaining 11%, JPY 5 billion, is ICT & Financial Business.

In terms of different regions, out of the 30% growth, 22% was in Japan and 5% in Brazil and 5% in Australia. Those are iron ore related. So we have our distribution in terms of the regions.

Concerning core profit, on Page 6, you see the JPY 30 billion extraordinary gains. And I'm not going into the details, and you can see the details at the back of the presentation material. But a simple presentation is that the core profit increased by JPY 8 billion year-on-year. Out of the 7 division companies, 5 division companies increased in profit. The biggest was Metals and followed by Machinery, Energy & Chemicals, Textile and ICT & Financial Business. The decline was shown in Food. As I mentioned, Dole was negative. Also in North America, the 2 elevator businesses came down. As for the General Products & Realty, the pulp prices were very high last year, and there was a reaction to that this year.

As for the extraordinary gains and losses on Page 6, out of the JPY 30 billion total, the gains related to investments is JPY 20 billion. Gains on partial sales of the foreign companies is JPY 16 billion. This is the CIPA and PWT sale in North America. And JPY 4 billion is the sale of the Wellness Communications.

As for the gains related to property, gains on sales of logistic warehouses, ITOCHU LOGISTICS and ETEL in U.K. And the sales of the headquarter building of EDWIN is included.

As for the income tax expense, the decrease in tax expenses relating to the group restructuring in FamilyMart UNY, which was about JPY 5 billion. So total is JPY 30 billion. This extraordinary gains number of JPY 30 billion, is third-highest quarterly figure. However, as I mentioned, our core profit is not declining. Our core profit also grew by JPY 8 billion year-on-year.

Now turning to cash flow. There are a lot of asterisks on this page. First of all, the operating activity cash flow is highest at the JPY 153.7 billion. The impact of IFRS 16 is JPY 52 billion. So half of the JPY 100 billion is due to the impact of the IFRS 16. And also, the core operating cash flows, as I -- as it was, as I mentioned, more than JPY 550 billion. But in the Q1, it was JPY 148 billion, the progress was about 26%, which was a very good number for us because our results are larger in the second half. So actually, the -- out of the increase of the JPY 59 billion, more than half comes from the consolidation or making the FamilyMart subsidiary. And also, the higher prices of the iron ore of IMEA in Brazil Japan Iron Ore and also the POCKETCARD.

Now the net investment cash flow of JPY 30 billion. If you turn to Page 19. On the right-hand side, you see the JPY 90 billion as a total of the major net new investments and exit of JPY 60 billion and net investment amount of JPY 30 billion. The consumer-related sector, there was a fixed asset investment of the FamilyMart UNY and Dole. So that was about JPY 50 billion. And the major factor was FamilyMart UNY. In basic industry-related sector, there was a fixed asset investment of ITOCHU ENEX and C.I. Takiron. There was a purchase of the share, energy-related, which is JPY 8.3 billion. So ITOCHU ENEX was quite active.

As for the resource related, the CapEx of IMEA and ACG including replacement was JPY 10 billion in total. We are making a good progress in terms of exit out of the JPY 60 billion, mainly in the consumer-related sector. In North America, the construction material as well as the sale of the subsidiary, of the [remuneration] to the FamilyMart. And the sale of the warehouses in LOGISTICS and collection of the investment in Textile and the sale of the Wellness Communications. The total, it is JPY 60 billion exit.

Net investment amount is about JPY 30 billion. Free cash flow and EPS on Page 20. The core free cash flows after the deduction of the shareholders' return was about JPY 56 billion, and we will continue to make a disciplined investment when there are good candidates, but we will continue to have a good discipline in the area of the investments.

And in Q1, JPY 62 billion, the share buyback was included and the total cash -- free cash flow remaining was JPY 56 billion. And we still have an investment pipeline for this fiscal year, and we would try to maintain the positive number for this core free cash flows after the deduction of the shareholders' return, as we mentioned before.

And as for the EPS, record high JPY 98 was achieved.

Going back to the balance sheet. Page 5. Because of the strong yen, there was an impact of the ForEx. And due to the effects of the application of the new accounting standards, IFRS #16, the total assets increased to JPY 11 trillion, which is an increase of about JPY 850 billion year-on-year.

And in Food, there was a lease liability increase of about JPY 700 billion in relation to the FamilyMart. As for the net interest-bearing debt, this is almost flat. As for the lease liabilities, this is separate from the net interest-bearing debt. Due to the introduction of the new accounting standards, we did not want to lose consistency. So again, the lease liabilities are not included in the net interest-bearing debt and all the general trading companies apply the same treatment.

Now as for the shareholders' equity, you see the decrease of the JPY 72 billion. Net profit was JPY 147.3 billion. And there was a cash-out through the dividend payment of JPY 70 billion. And also the cash out through the share buyback of JPY 62 billion. And the IFRS standard change led to the decline of the surplus by JPY 26.5 billion. And there was a foreign exchange-related negative of JPY 30 billion and impact of the FVTOCI financial assets, which lowered equity by JPY 20 billion. But we will continue to accumulate the profit in second, third and fourth quarter. So the shareholders' equity ratio and the net DER, we would try to achieve the fiscal 2020 forecast, which are shown on the right-hand side.

Now turning to Page 8, which shows the fiscal 2020 annual forecast. We just ended the Q1, which showed very strong results, and we'll make sure that we would execute the JPY 500 billion that we committed. And again, we start to -- we continue to see the uncertainties in the market. So we have not yet revised our forecast. And on the 1st of July, we established The 8th Company. So this company will be within the framework of JPY 500 billion. And we will try to build the foundation of our retail platform. So we are shifting some of the numbers to The 8th Company, for example, JPY 1 billion from Machinery, JPY 2 billion from Energy & Chemicals, and JPY 24 billion from Food and JPY 8 billion from ICT & Financial Business. And with this, The 8th Company, the revised forecast is JPY 30 billion.

And if you turn to Page 28 of the material, you see the breakdown of our profits and losses from major group companies. Out of JPY 30 billion that I mentioned earlier, as you see, FamilyMart UNY Holdings, all of them will go to The 8th Company and others, you see the shares of The 8th Company ranges from 40% to 5%, so 8th Company will be trying to build the retail platform. And we calculated all of those businesses which are related to the retail platform, so that we came up with this share of The 8th Company.

Now about this 8th Company, there's an explanation on this page. And the other day, the one of the President of the Food company at their earnings call said the following. With digitization, the structure of the retail is changing. The mass brand is struggling. So only the small mass will survive. So the various products and small lot, and you have a wide range of assortment, you might have a very high inventory level. And that will not be beneficial for the trading company business model.

So instead of looking at it from the product side, we would like to have a market-oriented perspective, to think about what is needed by the consumers, utilizing e-commerce or big data. We would like to overcome these challenges. So building the new retail platform is what The 8th Company is trying to do.

Out of the number, you see that the -- FamilyMart UNY, 100% is shifted to The 8th Company. The mission of The 8th Company is not to work in the area of the routine businesses. For example, in the case of FamilyMart, instead of ITOCHU working alone, we work via NIPPON ACCESS. So we are trying to build the new businesses or new projects. And this The 8th Company will be working with FamilyMart UNY to build such platform and creating those new projects is the mission of The 8th Company.

So in order to generate the new businesses based on the framework that we have, we are starting this 8th Company. We have a little more than 40 people in this company. So we are not focusing on the just regular routine business. But rather, we are trying to expand into the new businesses, and rather than talking about the conceptual thing, we would like to start to show the results from this 8th Company.

And with that, I would like to end my presentation. Thank you for your attention.