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Edited Transcript of 8001.T earnings conference call or presentation 5-Feb-20 10:59am GMT

Q3 2020 Itochu Corp Earnings Net Conference

Tokyo Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Itochu Corp earnings conference call or presentation Wednesday, February 5, 2020 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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[Interpreted] This is so Tsuyoshi Hachimura, CFO of ITOCHU Corporation. Thank you very much for joining us today. Please refer to the PowerPoint presentation material. Starting with Page 3. This is the summary of financial results.

Net profit attributable to ITOCHU was again a record high JPY 426.7 billion. Non-resource sector accounts for 80% of our business, which was very strong. And we renewed the highest record, 5 years in a row. This number was 7% higher than the year before, and the progress was 85% vis-à-vis the 2020 forecast.

The iron ore prices were high and pulp prices were low. Of course, there was a major contribution from the resource sector, but our strength is non-resource sector, whose profit reached JPY 335.3 billion, which is the highest record, 10 years in a row.

Also, we have a widely diversified businesses. And we have 288 companies consolidated, 87.5% of them are profitable. And we have been making the improvement 5 years in a row. And 4 companies are above JPY 10 billion and 2/3 are below JPY 2 billion. That trend continues to be the same.

We are seeing the changes of the speed of the improvement of the profit. In comparison, Metals & Minerals, General Products & Realty, ICT & Financial Business, Food and Textile are slowing down. But we are seeing the progress in terms of the lean structure of other various businesses. As for the extraordinary gains and losses, our forecast for full year is JPY 42 billion. Up to Q3, we had JPY 64 billion. And excluding those extraordinary numbers, core profit was JPY 362.5 billion, the record high 5 year -- 4 years rather in the row.

Now looking at the Q3. Prima Meat Packers and Hoken No Madoguchi were converted into the consolidated subsidiaries. And vis-à-vis FY '20 forecast higher than 75% progress was achieved by Metals & Minerals. The 8th, General Products & Realty and ICT & Financial Businesses. And since the other second half of fiscal 2019, the FamilyMart and POCKETCARD were consolidated. And in FY 2020, we started to apply the new accounting standards. And the impact from them are also included as we did in the first half.

In comparison to our forecast for full year, Metals & Minerals, Energy & Chemicals and ICT & Financial Business were stronger. And Textile and Food, General Products & Realty showed some weaknesses.

Now let me go to the next page to talk about net profit by segment. Starting with the larger businesses. The biggest one is the Metals & Minerals. The profit was JPY 84.5 billion. The iron ore prices were high. And also, there was an increase in dividends received in a Brazilian iron ore company.

At the same time, core business, the steel products business and ITOCHU metals, which trade the nonferrous products as well as scraps were weaker.

The second biggest was General Products & Realty, which had a profit of JPY 58 billion.

As you know, the pulp prices went down drastically. In Q3, we expected this to stop, but it has not yet recovered. Also last year, there was a sales of the logistic facilities. And we did not have that this year. As I mentioned in the first half, in North America, there were replacements of assets in the area of the construction material, which I will talk about later.

And so in General Products & Realty, the housing business in North America was strong. A newly acquired company, Alta Forest, and also fence manufacturer, Jamieson, we can have expectation for the future contribution. Also in U.K., a tyre distributor, also partly in the Netherlands, ETEL is doing well.

In Japan, ITOCHU PROPERTY DEVELOPMENT condominium sales and ITOCHU LOGISTICS business have been strong. And Metsa Fibre in pulp as well as JBP, those numbers are lower and those are related to pulp prices.

The third biggest is the ICT & Financial Business now. Now CTC has received the orders from 3 major carriers in relation to 5G. And also there has been strong demand from the small, medium-sized companies in the AI and ICT -- IOT, rather. So CTC sales. The products of Cisco Systems, not Huawei products. So that has been a tailwind for their business. BELL24 and Conexio also showed strong numbers. In addition to these, in the retail consumer finance business, the business in Japan has been strong. The POCKETCARD, also the consumer finance business, UAF, mainly in Hong Kong, and in Thailand, EASY BUY, and in U.K., Fast Response, those have been very strong.

And Hoken No Madoguchi also showed some strength. And last year, in relation to the IPO of the Mericari, there was a gain for Technology Ventures fund, and we did not have that this year.

The next biggest is the Machinery company, which had a profit of JPY 44.1 billion. Here it says that's negative JPY 2.9 billion year-on-year. There was one sale of a operating company outside of Japan. And that was the major reason behind this decline. But the core profit has been growing steadily. So we are making a good progress toward the year target of JPY 61 billion.

In trading in ships, aircrafts and automobile, we saw stable performance. In North America, IPP business has been solid. In addition, IEI, European water environment-related business has shown increase of profit year-on-year. At the same time, the negative numbers are seen in the small-sized businesses. For example, the auto-related operating company in Panama, that we invested in, is one of the examples.

Next is Food. Saw increase of JPY 6.3 billion year-on-year. Progress number is relatively low.

NIPPON ACCESS, FUJI OIL and HyLife, which is the pork business in Canada, up to Q3 numbers were not very strong, but we have had a strong tailwind. So we expected to see recovery or improvement for the full year.

In Food, we have 2 grain elevator businesses in North America, which are in red. So this is one of the concerns. Another is Dole. We expect about JPY 10 billion for full year. But banana and pineapple, the sales prices due to the seasonality have been declining. So because of that, looking at the results up to Q3, we are seeing some difficulties.

Next biggest is Energy & Chemicals, JPY 39.4 billion. So it's much lower than the year before. This is due to the decrease -- due to the absence of the gains of sales of North Sea oil fields development company last year. And also the chemical logistics and C.I. Takiron gain on sales of the fixed assets is included.

So in terms of the businesses, in Azerbaijan, oil business, trading business has been strong. And at the same time, the methanol production outside of Japan is not very strong.

Now The 8th. This is the decrease due to the absence of the extraordinary gains last year. So it's not the apple-to-apple comparison. But FamilyMart business performance has been trending well. So The 8th is in charge of project development, and they are focused on, for example, the inbound business for which they made announcement and also robotic business using AI is another announcement that they made to outside of the company.

Now last company is Textile. So this is minus JPY 2.7 billion year-on-year. Last year, there was an extraordinary gain on sale of the North American business. So excluding that, core profit is positive. If you look at the -- some details, you will see that. But even if this is positive, strong businesses, for example, include Converse and also the uniform business and also the reduction of the expenses are done by all the companies, and those are contributing.

But turning to Japan, that the apparels or the clothings are not selling very well. So this Textile business, we expect a very difficult business environment in Q4.

Now at the very bottom of this page, we are showing the Others, Adjustments & Eliminations. This include CITIC. So last year, there was a impairment loss of CITIC. And excluding that, last year's equity in earnings was JPY 48.6 billion. And for this year, JPY 56.2 billion is included. This is mainly CITIC Bank, financial sector, which is doing very well. So these numbers are reflected.

On the following page, this is the cash flow. Now turning to cash flows. FamilyMart, Prima Meat Packers and Hoken No Madoguchi were converted into consolidated subsidiaries and also high iron ore prices were positive. And also good trading from the companies. As a result, the cash flows from operating activities was a net cash inflow of JPY 619.8 billion. And the impact of the new accounting standards was JPY 160 billion. And excluding working capital, core operating cash flow was JPY 452 billion, JPY 100 billion higher than the year before.

I will talk about the investments later. The cash and deposits from the subsidiaries we acquired was about JPY 33 billion. And net investment cash flows was JPY 185 billion. And core free cash flows were record high at JPY 267 billion.

Now turning to Page 21 in the Appendix. The cash -- core cash -- free cash flow after deducting shareholders' return was up by JPY 50 billion year-on-year to reach JPY 142 billion. As for the share buyback, there has been no progress after the announcement in the first half. The progress rate is 65%.

Since September last year, fortunately, our share price has been quite high due to the high evaluation, and we updated the record-high share price 19x since that time. So we have not acquired additional shares. And as you see on Page 21, the core free cash flow after deducting shareholders' return in FY 2019, the result was about JPY 300 billion. And with the profit in fiscal 2020, and we need to consider how to allocate our capital. And also we need to consider our growth investment, but we will do so when we see the actual results. This way of thinking, rather than allocating a certain percentage of the expected cash flow, which is not certain, we would like to rather combine the capital that we have at hand and allocate from that for the future investment. This is our way of thinking. As we strengthen our financial structure, we will make sure that we secure the capital so that we can invest in the promising projects. So this is something that we can explain to outside as we make the growth investments.

Now going back to Page 20, explains the investments. As we disclosed at the first half, now first of all, the total investments increased by JPY 125 billion and reached JPY 330 billion. EXIT increased JPY 65 billion and reached JPY 145 billion. As a result, net investment amount increased JPY 60 billion and reached JPY 185 billion.

In Q3, Moody added investments include in consumer-related sector, WingArc 1st and North American facility materials-related company, it's Jamieson, fence manufacturing company, and Prima Meat Packer and Hoken No Madoguchi, those are included. Similarly, FamilyMart continues to buy Pan Pacific Holdings, so this has been a increase.

In a similar way, Dole and FamilyMart CapEx increased from Q2. Now the Q3 consumer-related sector investment was JPY 80 billion, which is 2/3 of the overall investments. And the cumulative number from Q1 to Q3, JPY 220 billion, is also 2/3 of the total. In basic industry-related sector and the resource-related sector, the major ones are CapEx.

As for EXIT, in Q3, JPY 65 billion and the cumulative number of JPY 145 billion. Now looking only at Q3, there was a reorganization of the sites of the C.I. Takiron and sale of the shares owned by FamilyMart. Also, the smaller-sized real estate fixed asset sales were done. So we're making a good progress in the area of the asset replacements.

So as a result, net investment amount was JPY 185 billion, which is about the same as the previous year.

Turning to balance sheet. Going back to Page 6. Just 2 points. Total assets reached JPY 11.3 trillion, up JPY 1.3 trillion year-on-year. New accounting application impact was JPY 970 billion, and the consolidation of the Prima Meat Packers and Hoken No Madoguchi pushed up the assets by JPY 150 billion. And the total shareholders' equity exceeded JPY 3 trillion level for the first time at the end of Q3. There was a cash out of JPY 200 billion dividend payment as well as the buyback. But total shareholders' equity increased by JPY 135.3 billion from the end of last fiscal year. And NET DER was 0.76. And ROE, we are making good progress, although we do not have a specific number as ROE.

Now let's go to extraordinary gains and losses on Page 7. Q1 to Q3 result out of the total of JPY 64 billion. Q3 only is JPY 29.5 billion. So this is higher than JPY 42 billion. In comparison to last year, this is an increase of JPY 24.5 billion.

Gains related to investments, as you see the revaluation gain accompanying the conversion of Prima Meat Packers, JPY 8 billion, and also JPY 3 billion revaluation gain accompanying the conversion of the domestic insurance-related company, and JPY 2.5 billion gain accompanying the restructuring of pharmaceutical-related company.

As for Q3, gain related to property sales and so forth, JPY 4.5 billion in relation to C.I. Takiron. And income tax expense and others, decrease in tax expenses related to natural resource projects, approximately JPY 11 billion.

In Machinery, similar -- in a similar manner, gain on cash collection for specific overseas project has been JPY 1.5 billion approximately. For the full year forecast, as we closed Q3, we saw stronger numbers, but we'd like to make sure that we achieved a full year target of JPY 500 billion. We will be doing our best. As for the dividend increase, we would make a judgment as we see the final results.

The final page shows major indicators. There has been the impact from the iron ore prices. As of now, the iron ore prices due to the new coronavirus has been weaker. And if you look at the sensitivities, here it says plus/minus JPY 0.12 billion. At the end of first half, it was JPY 0.41 billion, and now it is JPY 0.12 billion. At the end of January, to some extent, at the high level, though before the decline, we -- data hedging. So as of now, this sensitivity is very close to 0. So the market of iron ore is going to be weak. So from that perspective, we do not expect a major impact from the iron ore prices.

Lastly, since you might be asking questions, I'd like to mention our view on the management environment, the impact from China. As for the business environment, after closing the first half business results, the deceleration of the global economy and geopolitical risks existed, we -- there were a lot of uncertainties. And we said that we try to achieve the lean structure and focus on earn, cut and prevent. And now we are faced with the new coronavirus issue in China, which no one expected and the impact from it for the Q4 is not -- it's not possible to forecast. And so we will make sure that we earn, cut and prevent. And we try to make sure that we achieve our target. That is our policy, which is unchanged.

And at the very end of my presentation, since there is a lot of attention about this new coronavirus. I would like to mention something else. Now in ITOCHU Group, including the Chinese staff members, we have no one infected from this new virus. In China, we have 14 sites in our group. Out of the 288 companies, which are consolidated, 34 exist in China. Including Chinese national staff, we employ about 7,000 people, the people dispatch from Japan and expatriates account for about 150. Wuhan office is run by national staff. There are 3 people. Operating company, there's one in logistics and second company in the steel-related company.

So our Chinese operation under the Chinese government will be resuming the operation on the 10th of February. But even when we are closed, the banks are open. So payment work. It needs to be done by our Chinese staff. Many of the expatriates are working from home in Japan.

And in CFO Group, as we open our offices, 50% of the people will be working and rest will be supported from Japan. As our countermeasure against the virus, the business trip going to Hubei is forbidden, and also from all over the world, going to China is also forbidden unless absolutely necessary, and from China to other countries and regions, business trips, are basically forbidden. So there needs to be some application necessary for the emergency cases.

As for the quantitative impact, it's very difficult to forecast. The New Year holidays extended and due to the limitation of the moving, there has been the interruption of the supply chain and also the interruption of the payment procedures. And that will be the negative impact on the inbound tourism in Japan, which is unavoidable. And there has been some criticism as to the slow countermeasure from China at the beginning, but they are taking measures and Japanese government as well. So we are, of course, hoping for the resolution soon. But if it is -- takes longer, China is very influential as a global supply chain. So it could become the major negative impact on our economy as a whole. And 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.]