Itochu Corp

This is Tsuyoshi Hachimura, CFO of Itochu Corporation. Thank you for joining us today. Let me now present the business results. Please refer to the PowerPoint material as I present. Starting with the summary of the financial results on page 3. And also I will refer to the quarterly segment information on pages 27 and 28. So please refer to those pages as well. First, Net profits attributable to Itochu for the fiscal year 2021 first half was 252.5 billion yen, which was the third highest despite the COVID-19 impact, especially the Q2. The results was 147.7 billion yen, which was the highest quarterly number. This quarterly number for Q2 is an increase year-on-year. The first quarter was minus 30% or a little less, so compared to that there was a major recovery or improvement. In this number, 49.5 billion yen extraordinary gains and losses are included. Q1 number was 16 billion and Q2 number was 33.5 billion yen. I would talk about those numbers later. Excluding those extraordinary numbers, in the first half, the core profit was approximately 203 billion yen, which was also a third highest. Q1 Core profit was 88.8 billion yen. The core profit itself in Q2 increased by 30%. So we are steadily improving our core profit numbers. Now we had the COVID-19 impact and we think it's very important to compare the actual with the forecast. At the end of the Q1, we mentioned that it was 70 billion yen. That was 150% out of the forecast. The first half of the forecast was 178 billion yen. Second half was 222 billion yen. So in comparison to 178 billion yen, the actual results were 142%. And the yearly forecast is 400 billion yen and achievement rate is 63%. We have not used a buffer of 50 billion yen. The impact from the COVID-19 for the first half is about 40 billion yen. This is the major impact, but each segment showed strong recovery and resilience, and we thoroughly worked on cutting and preventing. And a diversified portfolio is supported by the strong core profits, so we showed a very strong tolerance against economic volatility. Excluding the machinery, seven companies showed higher profit in comparison to our forecast in the first half. Now, year-on-year comparison for four companies, including the eight, ICT and financial results and food and energy and chemicals increased. As for the ICT business in Japan and the meat business and housing business in North America, as well as chemical business and trading in Asia, China and Japan were strong. As for the negative businesses that were affected by the COVID-19 and also the challenged area in terms of the business model include textile or apparel and cars and CVS, which showed a lower profit. What were the reasons behind the strong numbers for the first half? I think that those numbers were better than the consensus. And as you can imagine, in metals and minerals, The iron ore prices were high, and this was already expected. The new factor is in eighth company, the family mart delisting, which was not included in the original forecast. There was a removal of the deferred tax liability, and there was an extraordinary gain of 30 billion yen. And those two factors are very major ones, which might be difficult for you to understand, but excluding those extraordinary factors in textile, machinery, energy and chemicals and general products and beauty and food and ICT and financial business, in all of those six companies, they have accumulated profit and they have lowered the losses. And as a total, there was a growth of about 20 billion yen core profit. and in September and October we have reviewed our first half results and we have seen the upsize each time that we review those numbers. Going to page 5, that is the cash flow. The cash flow from operating activities was the net cash inflow of 459.1 billion yen And the core cash flow from operating activities was a net cash inflow of 266 billion yen. Free cash flow was the net cash outflow of 59 billion yen. Looking at the Q2, the iron ore prices were higher and there was a COVID-19 impact. So the generation of the free cash flow was 170 billion yen, up 74 billion yen from Q1. And net investment cash flows was up by 200 billion yen at 325 billion. We have had the Family Mart TOB in order to change the business model and invested in the listed subsidiaries and affiliates where their market values are undervalued in order to support their management. In the second half, we expect a large cash out in relation to the delisting of the family mart. But we keep our basic principle that is to selectively invest based on the financial and fiscal discipline. The result of that net investment cash flow or core free cash flow is minus 59 billion yen. 71 billion is the dividend and share buyback. And after this number, there will be a negative of 130 billion yen, and I will talk about this later. Turning to balance sheet on page 6, the most important thing on this page is the total shareholder's equity, which increased to 3 trillion and 176 billion yen. Net DER improved to 0.74 times. Also, the total assets, which was about the same as the end of March, at 10 trillion and 900 billion yen. Due to the COVID-19, the trade receivables were down, but there was an increase of the fair value of stocks and higher investments, so it offset each other. Net interest-bearing debt, with Family Mart TOB and dividend payment increased by about 100 billion yen and reached 2,354 billion yen. Now let's look at the investments on page 20. On this page, Total of the major new investments was 360 billion yen. Q1 was 110 billion, so Q2 number was 250 billion yen. As for exit, in Q1 it was 15 billion, so the total is 35 billion here. That means that Q2 was 20 billion. Including all of them, the first half net investment amount was 325 billion yen. Now, cash flows from the investing activities was 138 billion yen, so the difference is 187 billion yen. And the additional investments for the family mark is considered to be a capital transaction, and this explains the big difference. On this page, or going to page 24, which shows the major items of the cash flows. So if you do not find the numbers on page 20, you will be able to find them on page 24, new investments. In relation to the Family Mart TOB is 180 billion, and the investment of Family Mart to PPIH was 25 billion yen. And there was additional investment in Tokyo Century, 23 billion yen. And there are other fixed assets investment in other areas. Now, major exits include... The asset replacement that we have been doing actively for the business innovation, the Q1 included the partial sales of the e-guarantee and also the food related exit overseas are also included. And those are included in 35 billion. Last month, we announced that the sale of Japan, Brazil paper and POC, which has not been realized, so it's not included here. Now for the full year forecast. on page 8 you see the major indicators which are not changed and net profit forecast of 400 billion remains the same so our yearly target of 400 billion that is 178 billion in first half and 220 billion in second half We believe that there will be some recovery from the COVID-19 impact, so we expect a higher profit in the second half. So in the original plan, we mentioned the extraordinary gains of about 50 billion, which includes the Japan-Brazil paper and pulp, and also the extraordinary gains of the family market in Taiwan. Those are not yet realized, so not included. And also at the beginning of the year, we mentioned 50 billion yen buffer, which we have not yet used. And so this is a very strong start despite the COVID-19 impact. Now, in terms of the business confidence toward the second half, Based upon the forecast of the BOJ and also other forecasts, overall economy still is tough, but we see some recoveries. But at the same time, there are a lot of uncertainties in Europe and also part of the U.S. are seeing the second wave of COVID-19, and we see the volatility of the international politics. So there are some downside risks of the economy. And we are very much focused on the commitment-based management and through this we have gained trust of the market. So we'd like to make sure that we achieve our target of 400 billion yen profit and therefore we have not revised our target. Despite the second half management environment, we'd like to make sure that we deliver on this commitment of 400 billion yen and 80 yen per share dividend. And looking at what happens after Q3 and onwards, we'd like to be able to make the judgment in a flexible manner. Now, as for the uncertainties or concerns for the second half, As we already made the commitment as to achieving the 400 billion and 88 yen per share, those are not affected. But we have to say that there are some weaknesses in textile, machinery and family mart business. And also, we need to make some improvements in terms of the percentage of the profit-making companies, which is 76.5%. And we have achieved higher than $500 billion in profits. fiscal 20, and we said that this year we are taking a year off, but in order to go back to the growth track, we need to come up with the next medium-term management plan, starting with the FY22. We will make sure that we look at the asset replacement as well as the business model and work on the earn, cut, and prevent. Now let's go to page 22. 88 yen per share dividend remains unchanged. And also, we have a policy to improve the DPS every year. And even if the profit decreased, we increased the dividend this year. And as for the share buyback, On page 21, we have the numbers of the share buyback, that is 5.6 billion yen. In the first half, we bought back 2.4 million shares. And we announced additional buyback of 1.7 million shares. Now concerning the buyback, the share price has been very high. but we will be aware of the share price floor, and if we judge that market price is low, we will follow the rule and conduct the buyback effectively. And then, next, let me talk about the extraordinary gains and losses. It seems that we have large numbers. Please refer to page 7. Q1, the external gain was 16 billion, as I said, and Q2 is 33.5 billion yen, so 50 billion for the first half. So the profit was generated as a result, but I must say that our management team has a very strong sense of crisis, and we have been actively replacing assets to innovate our business models. That includes the delisting of the family mart, as well as the sale of Japan, Brazil paper and pulp. The major positive factors include lower tax expenses related to family mart, which is 35.5 billion yen you see on this page. This is a major factor. Now, looking at each company, there are different items. In textile, the partial sales of the overseas business was 1 billion yen gain. And the machinery, there was a collection of the specific credits and 1 billion profit or gain. In food, there was a reorganization of the distribution, which led to 2.5 billion increase. And the sale of the grain-related business in U.S., led to 1 billion yen gain. In general products and realty, there was 1.5 billion yen. In Japan and ICT and financial business, the gain on e-guarantee was about 12 billion yen. In 8th company, the reversal of the family law deferred tax liabilities was 35.5 billion yen. So there was an impairment loss as well for the family mart. 12.5 billion is also included. Now, as others, CITICS, the investment in the affiliated company, that is McDonald's, there was also a gain here is included in those numbers. Now, let me talk about the COVID-19 impact. For the four-year plan, we expected about 40 to 50 billion yen impact from the COVID-19. At the end of Q1, we had 20 billion yen impact. And we tried to make the four-year impact forecast. and for the Q1 the family mart COVID impact was not included so our forecast for the full year was increased to 60 billion yen now at the end of the first half So far, the COVID-19 impact, we believe, is about 40 billion yen. In machinery and eight companies, higher than 10 billion impact was observed. And the next biggest one is textile, as well as a civic bank. Provision for the bad debt was increased. So those are included. And the general products and the realty are also some negative. But for the first half, in Japan and North America, automobile and construction and industrial machinery, those were affected greatly by COVID-19. In urban areas, people stayed home, and that led to the lower sales. And also the domestic apparel sales declined and investment, sorry, inventories increased. So in textile segment, we see loss-making companies. As for convenience stores and restaurants and wholesale food business, there was an impact from COVID-19. And due to the lockdown, our tire business in UK was affected in first half. And we are starting to see some recovery there. But that was an impact. As for the automobile sales, which struggled and still demand were also lower. As for the full year, there are some differences depending on the segments as a whole. The second half impact is not as strong as the first half. So we keep the full year impact of 60 billion yen unchanged. Some of the concerns is the negative impact on the family mart, which might linger, and also the domestic agrarial business might continue to suffer to have higher inventories, and the order in the next year might stagnate. And also the aircraft, airline business is affected. So the COVID-19 impact, about 70% is in Japan. Now lastly, let me talk about each company and make some comments. Year-on-year comparisons are shown on page 4 and also from page 10 to page 19. We have more details for each segment. Starting with textile, it was down by 6.7 billion at 8.4 billion yen. There are some loss-making companies. In addition to the lower expenses, receiving the subsidies in relation to the COVID-19 happened. But the sales of apparel-related business was very poor, and overall transactions suffered. Itoji Modopao and Converse and ITS in Hong Kong were better than the forecast, but others, apparel companies, there are many well-known names, there are, have been struggling. Going to machinery, The cars and aircraft, airlines, those businesses were damaged due to the COVID-19. So 12.1 billion yen down and the net profit was 16.7 billion yen. Car manufacturers export declined. So the machinery segment, we believe we are bearish. More recently, the Yanase was strong in September-October. We saw some recovery. And at our car trade, we start to see some moderate recovery. But this difficult environment continues for this fiscal year. For the metals and minerals... The iron ore prices were strong, but in comparison to the year before, the major companies such as EMEA in Australia and iron ore company in Brazil and the sales company in Brazil and Drummond and a company in Colombia, they are all in negative. 62% is the achievement rate and the iron ore price stays at the high level. The demand in China is strong, so this could be a driver, but gradually this is likely to stabilize and the production is expected to increase in ballet, so prices will come down, but it's possible that the prices stay at the high level. So we are bullish in this segment because of the iron ore prices. Energy and chemicals, the results was 23.5 billion yen, that is up by 1.4 billion. Probably this is the strongest segment. Energy, compared to the year before, this is 8 billion, down by 23 billion. And the shipment in Azerbaijan increased In comparison to the year before, the oil prices were lower, so that was the negative impact, but we gradually see the recovery. The chemicals were very strong, especially China, Asia, and Japan. The synthetic resin-related businesses were strong. The power and environmental solution division was established from this year to capture the stay-at-home demand, so energy trading contributed. Now, among the strong major group companies, IPC Singapore, and the synthetic resin trading company in Shanghai, and also the Sunny Pack making the plastic packs. Those were stronger than the year before. In comparison to our forecast, energy-related companies exceeded their forecast. So we are bullish here. Now turning to food. so increase of 4.2 billion the result was 23.8 billion yen there was an extraordinary gain due to the asset replacement and also the people stayed at home and that led to the strong demand high life and prima meat packers meat related businesses showed strength but as for dough in comparison to the forecast it's positive But especially in the United States, the packaged food, food war was strong since people stayed at home. But due to the cold weather, Asian fresh banana and pineapple in the Philippines, the production was weak. So... it's lower than the year before but it's higher than the forecast so 2.3 was the result for the first half and we would reduce the cost reduction and we believe that we can achieve the forecast of 7.4 billion for the full year next is general products and realty and There was a major negative number, and you might think that this is concerning, but toward the end of the year, we are likely to achieve our yearly target. Now, 27.7 billion yen down at 18.1 billion, that is the result. Last year, in North America, construction material housing related business there was a partial sales of that and as you know the pulp market price declined and despite the recent recovery there were lockdowns so e-tail business So that led to the negative performance. But strong companies include the housing material in North America because of the active do-it-yourself activities. and Master Hauko Aruta, those businesses were strong. For the four year, you might say that we will not be able to achieve the target, but the sales or gain from the sales of Japan Business Paper and pulp will be included here, and then The construction material and the logistics business in North America is strong, so we are likely to achieve the forecast of 60 billion yen. Next is ICT and financial business. We are bullish in this segment, so we are positive on the four-year forecast. 37.1 billion was the actual results. It was up by 5.1 billion yen. In Q1, there was a partial sale of the e-guarantee. That was a special factor. But ICT, there's no question that this is a growing area. CTC, Connexio, and Bell, those major group companies are showing solid performance based on the strong demand. And also the insurance and financial business and the retail business, we see strong performance. As for the future, ICT will have a 5G and also digital transformation. There will be a new demand in the ICT, or ICT is the key policy for the new Japanese administration. So there will be a lot of opportunities there. In financial business and insurance, we see the development of the cashless payment and other payment methods. So there is a high expectation from this segment. So we expect that we will be able to exceed our forecast. The eighth company, the family mart daily business is down and there was additional impairment loss. So this is the lower equity in earnings, but With the reversal of deferred tax liabilities, there was an increase of 8.7 billion yen and the net profit of 30 billion was the result. And we are working on the delisting of the family mark and including the COVID-19. There are still concerns for this segment. So in terms of achieving the forecast, we believe that this could be challenging. Lastly, Last segment includes others. This includes CITIC and the CP. So equity in earnings in the first half was 34.7 billion for CITIC, and that was down by 6.4 billion yen. There was a higher provision for the loan for CITIC as well as the negative resource business. Our four-year forecast is 62 billion yen. And the achievement rate was 56%. As for CP, the pork business in Vietnam was very strong. So at least 7.4 billion yen in combination, CDIC and CP. The first half was about the same as the year before. And that is the conclusion of my presentation. Thank you for your attention.