Q2 2020 Itochu Corp Earnings Presentation
Tokyo Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Itochu Corp earnings conference call or presentation Wednesday, November 6, 2019 at 1:00:00am GMT
TEXT version of Transcript
* Tsuyoshi Hachimura
ITOCHU Corporation - CFO, Senior Managing Executive Officer & Director
* Yoshihisa Q. Suzuki
ITOCHU Corporation - President, COO & Director
Yoshihisa Q. Suzuki, ITOCHU Corporation - President, COO & Director 
[Interpreted] Hello, everyone. This is Yoshihisa Josh Suzuki, the President and COO of ITOCHU Corporation. Thank you very much for joining us today. We finalized fiscal 2020 Q2 business results and announced them on the 1st of November. So I'd like to make some comments.
Now looking at the first half business results. As you see on Page 3, consolidated net profit was JPY 289.1 billion, up JPY 31.1 billion or 12% year-on-year. Progress against our annual forecast was 58%. We made a good progress. Despite global uncertainties and stronger sense of stagnation and deceleration of global economy, we renewed the record-high first half profit 3 years in a row. This once again proves that we are quite resistant to the economic fluctuations.
Our consolidated business results are supported by the contributions from group companies. As you see in the middle, profit and loss of group companies was JPY 261.2 billion, which was a record high 4 years in the row. Share of group companies reporting profits was 87%, up 2 points year-on-year. We are making progress steadily. This is a result of our continuous effort to reshuffle low-efficiency and nonprofitable businesses as needed and cut and prevent all the time, just like the Toyota's Kaizen efforts. Through the award program for the group companies and the dialogue at the top level, we try to understand each other between the headquarters and group companies and take the proactive measures vis-à-vis the challenges.
Since the time when the commodities cycle much talked about, we were the first among trading companies to try to continuously expand the earning base from non-resource business. As you see at the bottom left of the Page 4, the non-resource sector profit was JPY 224.9 billion, up JPY 13.8 billion year-on-year. This is the 9 years in a row renewal of the highest profit of the non-resource sector. Our consolidated results are of course supported by the contribution of the resource sector, such as iron ore, but I hope you understand that these good results are due to the good performance of the group companies and supported by the stable earning of the non-resource sector.
As you see on Page 5, we renewed the high first half results of the core profit as well as core operating cash flows. We are enhancing our earning power with cash generation. And in September, our stock price reached a peak since the IPO, first time in about a year. This was the result of the high evaluation of our earnings base, which is resistant to the economic fluctuations; and recent strong business results; and steady execution of shareholder return policy announced in October last year.
At the same time, in view of recent U.S.-China trade friction and unstable Middle East situation, management environment is far from optimistic. Our commitment-based management is evaluated by the market. But if it is interrupted once, we would lose the grip credibility. So in the second half, we will continue to have this sense of crisis so that we will continue to make improvements in the corporate value to respond to your expectations.
The other day, in the management meeting, we reconfirmed that we will go back to the basics, and we will work, first of all, on cut and prevent rather than earn. And we have given the instructions to do so. In order to achieve the annual target, we need to eliminate the unnecessary expenses and also continuously prepare for the potential bad debt or impairment loss risks. So we make sure that this is well understood among the managers.
As for the investment for the future, to earn, we'll make sure that we will not be tempted by the next-generation investment boom, but rather focus on the investments to polish up our strength. As for the next-generation investment, in the second half, we will selectively but boldly invest in projects with high business viability and clear return or revenue plan. That is going to be our policy for the second half, and we make sure that all the managers understand this.
For the fiscal 2020, consolidated net profit forecast remains at the same level as JPY 500 billion. We would try to create a new vision of what the trading company can achieve and execute strategies steadily one by one toward the next level of targets.
That concludes my remarks. Now Hachimura, our CFO, will give you the details of the Q2 results for fiscal 2020.
Tsuyoshi Hachimura, ITOCHU Corporation - CFO, Senior Managing Executive Officer & Director 
[Interpreted] Thank you. This is Tsuyoshi Hachimura, CFO. Thank you very much for joining us today. As our President explained, with the tailwind of other resources businesses that each business accumulated, there are good results and we had very strong business results. I'd like to explain the details of the business results. It was not the specific businesses showing the spectacular results, but rather, we saw a profusion of flowers blooming inside our company. So let's now look at Page 3 to explain the differences from the first half of last year.
Last year, under the extraordinary gains and losses, there was a JPY 14 billion and the UNY -- FamilyMart became the subsidiary. And with that, JPY 141.2 billion extraordinary gain was booked. And also, there was the impairment loss in relation to the CITIC, which was JPY 143.3 billion. In comparison to that, on the net base, the extraordinary gains and losses was JPY 34.5 billion. I will explain the details later.
One of the characteristics of fiscal 2020 first half was that the consolidation of the FamilyMart and POCKETCARD was reflected, and also the introduction of the international accounting standard for the leases was introduced in April. And The 8th Company was established, and thereby, this was separated as a segment.
Going to the next page. Looking at each segment, I'd like to make a short comment, starting with Textiles. Converse, EDWIN and Leilian showed a very strong performance. And we offset the extraordinary gains of the last year, and net profit of the Textile was JPY 15 billion.
As for the Machinery, it was JPY 28.8 billion, which was the highest level. The export of the cars was very strong. And also in Japan, the construction machinery and the vessels, or ships, dealers were successful. And also U.S. IPP business was very strong. And as a result, we had the highest profit of JPY 28.8 billion in Machinery.
Now going to Metals & Minerals. It was JPY 61.3 billion, with the high iron ore prices. IMEA and Brazil Japan Iron Ore Corporation showed a strong performance.
In Energy & Chemicals, the net profit was almost flat at JPY 22 billion. As you know, in the first half, oil prices were weak. And offsetting that, we saw the higher loading volume in Azerbaijan. And also the hedging operation was done in an appropriate manner. And energy trade cost reduction was also conducted. And also the chemicals subsidiary showed a strong performance. So the profit was almost flat.
As for Food, it was JPY 19.6 billion, which is almost flat year-on-year. In fact, Dole and North American grain elevators declined in their profits, but this was offset by NIPPON ACCESS and FUJI OIL and Prima Meat Packers.
As for General Products & Realty, as you know, in the first half, the pulp prices plunged. And because of this, the pulp business in Europe and Brazil worsened quickly. And this was offset by asset replacements of the wood processing business overseas and construction material business North America and the logistic business as well as the condominium sales in Japan. And the net profit ended at JPY 45.7 billion.
And also in the ICT & Financial Business, CTC, BELL24, Conexio and consumer finance in and outside of Japan showed strength. And the net profit, we have JPY 32 billion.
And The 8th Company was established recently. And this was based on the market-oriented perspective, and it showed JPY 21.4 billion as net profit.
Under the others, adjustments and eliminations, last year, there was an impairment loss in relation to the CITIC, and the equity in earnings of the CITIC was JPY 41.2 billion. And as for CITIC, excluding the extraordinary items, the core profit grew by JPY 3.3 billion. CITIC Bank was a main part, and Sino Iron and special steel were also strong.
The left-bottom of this page. As President mentioned, in terms of the net profit, it shows that resource sector was about 22%. But in terms of the asset, it was only 9%. So the asset of the resource sector is not growing, but with the higher iron ore prices, the percentage of the resource sector increased. Non-resource net profit was JPY 224.9 billion, which was a record high, as the President mentioned.
Now going to Page 7, talking about the extraordinary gains and losses. If you refer to the right-hand side, you can see the fiscal 2020 first half results. In Q1, already JPY 30 billion was booked. In Q2, the new ones are the 2 at the bottom. First of all, the decrease in tax expenses related to the natural resource projects, JPY 2.5 billion; and the gain on cash collection for a specific overseas project, which was JPY 1 billion. And as for the JPY 30 billion buffer, we have not yet utilized this.
Now going back to Page 5, looking at the cash flow. The cash flows from the operating activities and core free cash flow, both of them were a record high. We are generating rich cash. And from the first half, the FamilyMart and POCKETCARD became the subsidiary, so they are now counted as cash flows from operating activities. And with the high iron ore prices, IMEA and Brazil Japan iron ore made the major cash contribution. For the full year, our core operating cash flow, our target is to achieve JPY 580 billion or higher. The progress so far has been 56%. So good progress has been made.
Going to Page 21. I'd like to show you the details of the cash flow. The core free cash flows after deducting shareholders' return at the end of the first half was JPY 75 billion. And now we have a rich capital for the potential project investment in the second half and also for the growth investment and rich shareholders' capital and also debt control and shareholders' return, we have to have a good balance. And our way of thinking, to have a positive core free cash flows after deducting shareholders' return, is going well.
Now as I mentioned, the investments, going back to Page 20. In Q1 fiscal 2020, the net investment was JPY 30 billion. And for the first half, it is JPY 125 billion. The new investment on a gross basis is JPY 205 billion. In Q1, it was JPY 90 billion. So Q2 is JPY 115 billion. Major ones are, for example, the FamilyMart investment, in the Pan Pacific International Holdings, and Dole, FamilyMart, ENEX, C.I. Takiron, IMEA and ACG. So mainly CapEx-related. Others were next-generation growth investments, which were minor.
The second from the bottom is exit in the first half, JPY 80 billion. And we disclosed that it is JPY 60 billion for Q1. So JPY 20 billion for Q2. So Q2 number was relatively small, including the partial sales of the assets that we hold.
Going back to the balance sheet, Page 6. Total assets was JPY 10.8 billion. Net interest-bearing debt, JPY 2.3 trillion. Total shareholders' equity is less than JPY 3 trillion, which is the highest -- record-high number. Net DER is the lowest at 0.77x. The impact of this is that with the yen's appreciation, total assets declined. But with the new accounting standard of the leases, there was an impact, and I will talk about that later. And as I mentioned at the beginning of the fiscal year, we are improving our financial strength.
Now talking about leasing accounting. At the end of September, the total assets increased by JPY 1 trillion. And this is mainly for the FamilyMart. We have many small retail stores and the cash flows from operating activities increased by more than JPY 100 billion. Cash flows from financing activities declined by more than JPY 110 billion. Finance lease is not included as interest-bearing debt but rather as lease liabilities. And the financial expenses are now included under the SG&A in terms of profit and loss. There's -- so there is no major impact on the profit and loss.
And going to Page 8. The average exchange rate has not changed so much. In terms of the net profit, the impact of the exchange rate was minus JPY 5 billion. Now the next row shows the closing exchange rate. There was a strengthening of the yen by JPY 3, so it pushed down the total assets by JPY 140 billion and pushed down the total shareholders' equity by JPY 77 billion.
As for the share buyback program, in Q1, we executed JPY 62 billion and it was 0 in Q2. But as we announced, we will continue to use up to JPY 70 billion until June 2020 and we will continue to buy back 14 million shares. And as we announced in October 2018, we are making a progress of 65% vis-à-vis 100 million share buyback.
Now as for China, including the secondary, the fundamentals in China are worsening, but pulp, natural rubber and the fresh food and pork had some impacts. But with the higher iron ore prices and strong sales as ITOCHU group as a whole, the profit from China, excluding the increased profit of the CITIC, increased. But we are starting to see some business partners suffering or struggling with the financing. So in the second half, we will focus more on the credit management.
Now 2 things that I'd like to mention on the impact of the fiscal results, I'd like to mention the consumption tax increase in the U.S.-China trade friction. First of all, I'd like to say that there were no major impacts from those 2 factors.
Concerning the consumption tax increase. For example, the alcoholic beverages for which lower tax is not applied; and also in the repair and remodeling of the houses, there were some increases. Also the increase in the mobile phones and some daily necessities, this was the last-minute surge before the increase of the consumption tax. But there were no major impacts.
In comparison to the September last year, there was a report that the consumption of the luxurious goods at the department store is increasing. But last year, there was a series of disasters, the torrential rain in the West and also earthquakes in Osaka and Hokkaido. So there were some impacts from that.
And the luxury cars of Yanase did not see the major impact of the surge before the consumption tax hike. And also no impact on the ITOCHU property development condominium sales. And convenience stores sales also did not show major impact with the cashless payment and so forth. And we'll be watching the impact in the second half closely.
As for the U.S.-China trade friction, on the first half, we try to avoid a major impact by reducing the purchase price and increasing the sales price and changing the suppliers. And there are some minor businesses, such as the export of machinery components and parts to China, and also the insulation tapes for electric and electronic products. Also, the products made in China, the machinery parts exported to U.S. was affected with a higher tariff. And also, the -- as China banned the U.S. soybeans import, there was an impact on the grain elevator business. But all of them are minor impacts, and we'll be watching the impact in the second half closely.
With that, I'd like to end my presentation. Thank you for your attention.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]