Itochu Corp

This is Tsuyoshi Hachimura, CFO of Itochu Corporation. Thank you very much for joining us today. I'd like to talk about three major points. First, Q1 to Q3 net profit was 364.3 billion yen. Progress was 91%. Excluding extraordinary gains and losses, core profit improved gradually from Q1 to Q2 and Q3. There are some differences among segments, but we had very good business results. Second, we also disclosed the fact that we have decided to withdraw from Drummond in Colombia, which has more than 80% production volume of thermal coal. And for the first time among the trading companies, we're preparing for the issuance of SDG bond. On the 13th of January, we have mentioned the engagement with SDG in our outline of the medium-term management plan. So I will talk about that secondly. Third is about the family mart after the deconsolidation. For the first time, we disclosed the business results of the Q3 on the 13th of January. Let me start. The Q1 to Q3 results was 364.3 billion yen in net profit. That is 15% decline year on year. The progress was 91%. The 43 billion yen extraordinary gains and losses are included. Excluding the 43 billion yen extraordinary items, the core profit was about 321.5 billion yen. Based on our budget of Q1 to Q3, that is 285 billion, the progress was 128%. With Family Mart, there was an impairment loss. So, aside from the 8 companies in 7 companies, we exceeded our budgets. Also, we have not yet used the buffer of 50 billion yen that we set at the beginning of fiscal year. Looking at the Q3 only, net profit was 111.8 billion yen. extraordinary items were minus 6.5 billion so core profit was 118.3 billion yen in Q1 the core profit was 88.5 billion yen in Q2 it was 114.5 billion yen in Q3 it was 118.5 billion yen every quarter we increased the core profit. If you only look at the Q3, we had the record high number. The ratio of group companies reporting profits was 73.4% in Q1, 76.5% in Q2, and 82% in Q3. Every quarter we improved this number. As for the core operating cash flows, the cumulative number was 417 billion yen. This was down by 35 billion year-on-year. But with the recovery of economies under the COVID-19 in Q1, it was down by 52 billion yen year-on-year. In Q2, it was down by 7 billion yen. But in Q3, it improved by 24 billion yen year-on-year. So October to December, we exceeded the previous year's level. So core profit, core operating cash flows, and the ratio of a group company's reporting profits tell us that our results from Q1 to Q3 were higher than what we expected. Later, I will talk about the strong areas, including chemicals, power and environment, food, construction, real estate, financial, insurance, iron ore, CPP, and silicon-related. We saw weaknesses in eight companies, including Family Mart, and the core-related areas, including Drummond, export of automobiles and the aircraft business in machinery and apparel in textile and pulp and tire in general products and realty. Concerning balance sheet, I'd like to say just one thing. Total assets were 11 trillion yen, In comparison to the March 2020, there was an increase of 200 billion yen. With higher trade receivables investments, total assets grew. Total shareholder equity was about 32 billion yen. Family mob becoming 100% subsidiary. There was a decline and also there was a shareholder return. But with the higher profit... This has increased by 100 billion yen from the end of last fiscal year. Moving on to page 19 about the investments. Total of major new investments was 435 billion yen. Exit was 55 billion yen. Net investment amount was 380 billion yen. The major one is 180 billion yen or higher with Family Mart TOB and CapEx in three areas that was more than 120 billion yen. In Q3, the major investments include on this page. Investment from Master Haruko mainly in North America was the major one which is included in this table. Also the fixed asset related investments are included from the top of this table in Q3 First, there was an investment in PPIH and fixed asset and North America-related and fixed asset and two capital expenditures in resource-related sector. Those were in Q3. As for CapEx, we have them every term. So we have small numbers, but we have them every term. As for the extraordinary gains and losses on page 7, In Q3, the total was 43 billion yen. It was minus 6.5 billion yen in Q3. The impact from COVID-19 from Q1 to Q3 was 47 billion yen. So this was mostly offset. Among those items of extraordinary gains and losses, the major ones in Q3 is family mart related, 11 billion yen. This is the impairment loss. We have made the criteria for the impairment loss for stores more stringent. At the very bottom, you see the higher tax expenses related to a natural resource project. I will talk about Drummond later. This led to about 4 billion yen, hitting our profit and loss. Aside from those, Something that is not written here is with the exit from the thermal core in Australia, there were some losses. In relation to COVID-19, you do not have the details, but from Q1 to Q3, the overall impact was 47 billion yen. In Q1, about 20 billion. In Q2, about 20 billion. So total of 40 billion in first half. Four-year forecast was increased from 50 billion to 60 billion. This forecast remains the same. In Q3, there was an about 7 billion yen impact, which was alleviated. Now, out of this 7 billion impact, the family mart related, in 8 companies there was 4 billion, in machinery about 2 billion, in textile there was 1 billion. With the state of emergency declared, the domestic consumption is not very optimistic, But four-year forecast of 60 billion remains the same. From Q1 to Q3, we start to see the improvements of the COVID impact. From now on, based on the results up to Q3, whether the improvements will continue or the business models are changing in different areas and how do you calculate the value, that is something that we'd like to do as we look at the Q4 concerning the variation of the different businesses. Now, the percentage of the non-resource as usual, up to Q3, was about 80%. Price of iron ore is up, the price of hot cooking coal is down, and the Brent oil price is down. The details and actual numbers of the major indicators are shown on page 8 for your reference. Let me now talk about individual businesses. First of all, the strong businesses are as follows. With higher pork prices, mainly in Vietnam, CPP business net profit is up by 9.5 billion yen. In Australia, EMEA, the profit is up by 6.3 billion yen with higher price of iron ore. In North America, construction material business with the expansion of the do-it-yourself business as people stayed at home. The master halko, including fence business, was up by 2.3 billion. High Life is the pork business based in Canada with higher prices and the increase of the export to China. This was up by 1.7 billion yen. Unlike Q1 and Q2, Yanase has become strong, so it was up by 1.4 billion. The used cars and new cars sales have been strong. Also, in relation to the strong demand of people staying at home, Prima meat packers were strong, which was up by 1.3 billion yen. Those companies are included in the difference fragments, and if you refer to the disclosed numbers, you will see the differences. As for the weak businesses, Family Mart is down by 36.2 billion yen. I will talk about this later. Concerning CITIC, the equity pickup from CITIC was down by 10.3 billion yen. Up to Q3, the major CITIC bank provision for the bad debt was increased. As a result, the equity pickup declined. But concerning this, the other day, CITIC Limited announced a four-year forecast. At least, They're trending upward. That was their explanation. They expect more than 3% growth at minimum. So they said 51.2 billion Hong Kong dollars before. So with 3% increase, 55.5 billion dollars. Bank and securities are going well and they have a lower provision and they are benefiting from the IPO. And they also have securities companies under them. So with these, as for CITIC, It is possible that there is a major positive figure for a full year. However, up to Q3, the results have not been very favorable year on year. Other big numbers, Brazil, Japan are on oar. with the absence of special dividend of last year down by 5.4 billion and ito to call america or ica investing in drummond which withdrawal there is expense of the ics so it's negative sieko azel with lower oil prices, down by 3.9 billion yen. CI Takiron shared there was a gain from sale of land, so without it, it was down by 3.8 billion. ETEL, sale of tire in UK. In Q1 and Q2, they were impacted from the lockdown. and they made efforts to turn it around in Q3, but it was down by 3.7 billion. And even in Q4, lockdown continues, so tough environment for them. So those are the different businesses. Now, the percentage of the China-related business is something that I always mention, including trade. When we have end users in China, this is included here and total was 128 billion. This is the China related business. The economy recovered first in China. So this has been reflected here. So this 128 billion is about 35% or one third of the first quarter to third quarter. And this seems to be a consistent trend. It's not too high, not too low. As for domestic Chinese business, it was 73 billion. This includes CITIC. So with that, it is about 20% of the total. Excluding CITIC, it is 82 billion, so one-fourth of the total. iron ore from Australia's final destination is China, and with higher pork prices, the pork business via Hong Kong has been strong. So those two were major items in relation to China business. Before I explain about Drummond, I'd like to say some more about different segments. You see the comments by segment here on ear differences. First in textile, the cost reduction and reduced expenses. And we also worked actively on e-commerce. But due to COVID-19, apparel-related business was heavily impacted, both in Japan and in Europe and U.S., the core profit has been damaged, and we are currently reviewing the existing businesses drastically. In machinery, there was reduction of expenses, and Yanase has been recovering. But looking at the car export and dealer business overseas and aircraft-related businesses, those have been weak, so core profit is down by about 10 billion. In metals and minerals, In order to address GHG, greenhouse gases, we have decided to withdraw from the Drummond in Colombia. And with that, this is included in the Q3 business results, which was the major point. But with the higher price of the iron ore, EMEA iron ore profit increased by $13.1 billion. But with lower coal price and reduced steel products, year-on-year profit declined, also with the lower dividend of the Brazil iron ore. In energy and chemicals, the overseas chemical trade, this includes the rubber gloves and rubber gloves. Bags for households, those businesses have been strong and they have been reducing the expenses and chemicals business have been strong. As for new power environment solution, the storage battery and power business have been strong but with lower oil prices, with lower Brent oil price. Profitability of oil exploration related business was down. and also CI Takiron we had a gain on sale of our land last year and net profit was down but the core profit increased by 3.8 billion yen based on the forecast the progress is already 101% in food Due to COVID-19, restaurants and business for convenience, convenience store have been weak. So, Nippon Access and Itto to food sales and marketing profit were down and fruits in Asia. including bananas and pineapples, with lower volume and increased costs, though profit is down. At the same time, since people stayed at home, Prima Meat Packers and High Life Meat-related businesses and North American grain elevator business were strong. Both net profit and core profit increased. In general products and realty, real estate transaction was strong due to property development and the hygiene product profit increase in China. And we saw the benefit of the reduced expenses but with lower pulp price. The pulp business in Brazil and Finland were lower in profit. And due to the lockdown, the retail business in Europe was down and the progress is 32%. This does not include the sale of JPP to OG paper. Construction and real estate, the progress is 104%. Now, in ICT and financial, in response to the remote working demand and 5G commercial launch, CDC was strong, and Bell Connexia, Hokkaido Madoguchi, The consumer finance business in UK and Hong Kong have been strong. Also, the e-guarantee, there was extraordinary gain booked in Q1, so profit increased. In finance and insurance, the progress was 124%. In others, CPP and CIDIC are included. The equity pickup of CPP is 25%, and from Q1 to Q3 it was 11.4 billion. The previous year it was 1.9 billion, so significant increase. This is related to the high pork prices in Vietnam. There was an announcement about the reorganization of the pork business in China, which is not yet included. As for the equity pickup of CITIC, 10% from Q1 to Q3 was 45.6 billion yen. In the previous year, it was 56.2 billion yen. And the plan is 62 billion yen. The core of Q3, that is the SILIC bank provision was up, and SILIC Limited said that they are going to increase by at least 3%, so equity pickup from them is expected to be higher. Now let me move on to the second topic, that is about Drummond. We have announced that we will withdraw from this business. The impact on net profit is not significant and the digital bond has been deconsolidated. and has become the general investment company, and this has been already calculated as a loss in terms of the shareholder equity. So again, the impact on the net profit consolidated is small. So it does not affect our target of 400 billion yen or 88 yen per share dividend. But on the non-consolidated basis, we booked 88.6 billion yen extraordinary losses. If you look at the details, you see the FVTOCI. which was 12.3 billion yen positive at the end of December. This is improvement of 44.3 billion yen year-on-year. This includes the major losses from the withdrawal and this can be offset by other expenses of other listed companies. So this is a major cost but the thermal core interest at Itochu is about 7.4 million tons, and more than 80%, that is 6.2 million tons, is that of Drummond, and we're withdrawing from it right away. And in May, the remaining a little less than 20% thermal core, we would like to dispose this asset as soon as possible. So as you see in the outline, we would like to completely withdraw from this business. SDGs is the core of our medium-term management plan. People say that we should have a perspective of backcasting when we consider SDGs. But at the same time, we have to clearly show the specific measures, how we try to engage the issue of greenhouse gases or global warming. We, the management, believe it is important to do so. So this is very unique to Itochu to show you the specific measure. So with this, As we discussed with investors in the past several years, when we talk about global warming, the biggest concern among the Itochu assets was the Drummond. So Drummond will be gone, and this would have a major impact. So the way of thinking is as follows. In 2011, we invested in this. At that time, we are in the natural resources super cycle. So from the perspective of energy mix, thermal coal was very competitive, and supplying that to Japan and Asia was a good thing. And for trading companies, it was a source of profit. In 2011, 58% of our profit came from resources. FY 2011 after-tax net profit was 161.1 billion yen. When we made a decision in FY 2012, after-tax net profit was 300.5 billion yen. So the natural resources, the profit was 149.2 billion yen or 48%. And gradually we reduced exposure from natural resources. And in addition to not making the additional investments, when thermal coal became depleted, we would not replace them. So that's how we handle this. So in terms of the asset level, early 2010, about 30% of the asset was natural resources, but now it is down to 10%. and the profit from natural resources have changed from 58 to 48, now down to 20. So we have been actively engaging with SDGs, and rather than taking a long time, we would like to take quick measures. In order to handle or address the greenhouse gases, this is very important to show our determination. Also, in relation to SDGs, at the end of April and toward May, when we talk about the medium-term management plan, in addition to the withdrawal from the Drummond in order to show a determination, We plan to issue the SDG bond for the first time among the trading company and insurance will be in overseas. We're currently making preparation. We want to get the approval from the fixed income investors who are leading the ESG investments. And this would lead to the replacement of the portfolio. The details will be disclosed in the future, and we hope that this will contribute to the replacement of the business portfolio. Now concerning family mart. On the 13th of January, we disclosed the business results on our website. Q1 to Q3 net loss was 19.9 billion, 65.9 billion yen. In red, in comparison to the year before, major impact was from the more stringent criteria for impairment loss for the stores or family mart. We have revised them. After tax basis. The additional impairment loss is booked at 42 billion. In first half, it was 24.4 billion and 17.6 billion in Q3. Total of 42 billion. The impact of COVID-19 is 29.8 billion yen on profit. In the first half, it was 20.7 billion. In Q3, it was 9.1 billion minus, so total is 29.8 billion. The lower revenue from family mart stores and lower royalty and consolation payment, those were the factors that led to the declines. As you know, the daily sales up to Q3 has been 91.5% year-on-year. Starting with the economic activities started to restart, and there were some recovery of businesses. So early January, we started to see the signs for improvement, but as the state of emergency was declared again, daily sales started to decline. At the same time, people stayed home we are starting to see the demand for daily food sales is increasing so margin of family mart is gradually recovering so toward the end of Q4 We see the declining daily sales, but spend per customer is on the rise. We hope to see some improvements. But as you know, there is an impact of COVID-19 and severe competition against the other convenience stores as well as supermarket and drug stores. And consumers' lifestyle has been changing, and we need to address that. And there is an issue of 24-hour labor and the contract with the franchisees and how to address SDGs. There are so many issues. But as we announced under the new management under President Hosomi, we would seek V-shaped recovery and Itochu will support this wholeheartedly. Already, we are trying to improve the attractiveness of stores and products. We are working and consulting with other Itochu companies so we can improve the efficiency of the logistics. and also we are considering the beginning of the new businesses. So as for the details of those, we would like to touch upon them as we announce the next medium-term management plan from Family Mart and Ito Chuside. Thank you.