Itochu Corp

Hello, everyone. I am Keita Ishii, COO of Itochu Corporation. Thank you very much for joining us today. We will present fiscal 2021 business results and also explain overview of fiscal 22 to 24 medium term management plan brand new deal 2023. Please refer to the documentation of the presentation. Starting with the summary of the financial results for fiscal 2021, please turn to page 2. By minimizing the COVID-19 impact, and eliminating the management issues and preparing the structure for fiscal 2022, we exceeded the consolidated net profit target 400 billion yen set at the beginning of the year and reached 401.4 billion yen. Despite a tough business environment where other companies saw major year-on-year declines in their profits, once again, we showed our strength of earning space that is well distributed in terms of the business areas and resistant to the economic changes. Looking at the balance sheet, net DER was 0.78 times. We continue to maintain our solid financial position as we execute large-sized investments. Despite the pandemic, ROE was about 13%, and ratio of profitable group companies was kept high, above 80%. Our strength, high efficiency management, was effective, and we have steadily implemented commitment-based management even under the rapid changes of the business environment in fiscal 2021. We became number one general trading company in terms of the market cap and stock price for the first time in history in fiscal 2021, and also number one based on the consolidated net profit for the first time in five years, winning a triple crown. This is a result of the profit growth of the past 10 years and efforts made by the united team of group companies. This is the proof of our honest and steady businesses that we have built up as merchants who have customers' perspectives. The most important thing is to continue this modest attitude. Now let me briefly explain Brand New Deal 2023, our new medium-term management plan. Please refer to page 9. Under basic policy, quantitative target is to aim to achieve consolidated net profit of 600 billion yen and growth strategy to realize business transformation by shifting to a market-oriented perspective and to enhance our contribution to and engagement with the SDGs. Global spread of COVID-19 brought major changes in our society. Some businesses in consumer sector, which is our fault, were significantly impacted. Trend of SDGs is moving faster than our expectations and is starting to influence state of the business. We believe Itochu Group needs to flexibly respond to the changes in the environment and achieve new growth by promoting business transformation based on the market-oriented perspective and SDGs. trading company as water. The essence of the merchants is to be able to change its shape to circle or square like water according to the customer needs. What is essential as a trading firm is to quickly capture changes in the society and to build businesses. I think there are many things that we can challenge and realize because of the major changes happening around us. Now please turn to page 15. Our consolidated net profit plan for fiscal 2022 is set at record high of 550 billion yen in order to make sure the return to the growth trajectory beyond the pre-COVID-19 profit level. We would like to overcome the pandemic and start our journey toward growth once again. Now please turn to page 16. Fiscal 2021 yearly dividend is 88 yen per share as announced. As for fiscal 2022, through steady increases, we have set a minimum dividend per share of 94 yen. We would increase the dividend if we make an upward revision during the fiscal 2022. We also aim to reach a dividend of 100 yen per share during the medium term management plan. As for share buybacks, we will continue our policy to actively and continuously execute share buybacks as appropriate in consideration of the cash allocation situation. That's all from me. Next, our CFO, Hachimura, will give you the details of fiscal 2021 business results and next medium-term management plan. This is Tsuyoshi Hachimura, CFO. Thank you very much for joining us. Now let me start my presentation. First, I'd like to give you a summary of business results for fiscal 21 and highlight of the medium term management plan and also fiscal 22 plan. Now, looking at the fiscal 21 we needed to take some major accounting measures in relation to the impact of the COVID-19 as well as the reduction of GHGs. But as we did so, we achieved our commitment target. And 600 billion yen net profit first time among the trading companies and changing the business models but keeping the financial policy those are included in the brand new deal 2023 and for fiscal 22 By maximizing our non-resource businesses, we later achieved a 37% profit increase and achieved 550 billion yen. Business results of fiscal 21, net profit attributable to Itochu was 401.4 billion yen. But during the medium-term management plan, we would like to achieve 600 billion yen. And for fiscal 22, our target is 550 billion yen. And we also see the upward revision in sight. As for the dividend, in FY21, as we committed, ¥88 per share, the dividend increase in 6 years in a row. And during the medium term management plan, we would like to aim for ¥100 per share. But this is not the upper limit, and we will continue with the progressive dividend policy. So based on this year's target, 94 yen per share is the lower limit that is up by 6 yen per share. And if we make the upward revision, we would increase the dividend further. One of our strengths is ROE. Last year, the share price was higher than our expectations and yen was weaker. And as a result of those, the ROE was below 13% at 12.7%. But in the medium-term management plan, we believed that the range of 13% to 16% of ROE is possible and we would like to aim for the upper limit of this range. Now let me go into the details of the financial results of fiscal 21. So net profit was 401.4 billion yen. As for the core profit, it was 452.5 billion yen. there was minus 51 billion yen extraordinary gains and losses. In Q4, there was a 94 billion yen net-based extraordinary loss. For the full year, it was 51 billion yen. We have conservatively revaluated our assets in the long term. And for fiscal 22, we expect a V-shaped recovery As for the dividend, we complied with the commitment, and we also maintained the fiscal or financial discipline. And as the president mentioned, or CEO mentioned, in terms of the net profit and stock price and market cap, we became number one in our segment. And also, we delisted the family march. That was a major achievement. Now looking at the difference between the results and the forecast. As for the 2021 plan, the start of the core profit was 500 billion yen and the commodity evaluation was done conservatively. So that was done by 55 billion yen. And we expected about 10% of the impact from COVID-19. So that was 50 billion yen. and extraordinary gains were expected about 50 billion yen and buffer 50 billion yen so the plan was 400 billion yen so what were the results now starting with the 500 billion yen The commodity price actually was pushed up by 10 billion yen. So the gap was 65 billion yen. As for the COVID impact, it was 56 billion yen. So it was about the same as our plan. As for the extraordinary gains and losses, with the major accounting measures, the extraordinary loss was minus 50 billion, so the gap of 100 billion was here, and we used all the buffers. So among the segments, there are some differences of the core profit levels. but natural resource prices are up, and by using the buffer, we made the preparation for the fiscal 22 and onwards. Now going to page 3, showing the net profit by segment. There was a major extraordinary loss booked in Q4, so excluding CP and CDIX, In all segments, profits declined. In terms of core profit, you will find the details on the following pages by segment. The positive core profit increase year-on-year was shown in the metals and minerals and energy and chemicals and CP and CDIC. As you can see on this page, the results in fiscal year 2021 are shown here and we expect fiscal year 2022 to increase this way. Now, looking at the others, which is 111.1 billion yen, concerning CITIC was 72.5 billion yen, up 9% year-on-year. China business was strong, especially in Q4 with the recovery of the economy. The bank business, CITIC Bank, was also strong. As for CPP, 40.2 billion yen, There was a reorganization of the China business, so extraordinary gain of 24.5 billion is included. Pork price in Vietnam was high, and the pork business was strong. As for metals and minerals, iron ore price increased significantly. That was a major impact. The withdrawal from the thermal coal in relation to Colombia and Australia, those are also included. Because of this, if you look at the bottom left, the percentage of the non-resource came down to 73%. We usually say 80 to 20%. But there was an extraordinary loss and that led to the higher resource percentage. But it's basically three-fourths of the overall business that is a non-resource. Next major contribution came from Energy and chemicals, especially in chemicals. The trade of the commodity chemical and electricity were positive. With lower oil prices, there was an impairment loss in relation to the long-term contract, so numbers are negative, but those businesses were strong. And next is the ICT and financial business, which was almost flat. Mobile phones, CDC, and ICT-related were strong. In finance, Hokken no Madoguchi was positive, but there was an impairment loss of Orient Corporation, and because of this, it was almost flat compared to the previous year. Now going to page 6, Extraordinary gains and losses. The details are shown on this page. Net loss was 51 billion yen. In terms of the gross basis, the loss was 156.5 billion yen. In Q4, net number was 94 billion, gross number was 125 billion yen. As I said, in preparation for the business environment with the COVID-19 impact and also the reduction of the GHG, and to prepare for the changes of the profit structure, we have conservatively re-evaluated our assets at the end of the term. With the goodwill and intangible assets re-evaluated, we believe that we now have more resilient assets. On the standalone basis, extraordinary gains and losses was 416.8 billion yen. As a result, fiscal 21, for the first time after fiscal 2004, we booked a net loss of 71.3 billion yen. This is based on the Japanese standard. So, CITIC at 242.7 billion yen and also the loss in relation to the Drummond, 94.8 billion are included. As for the CITIC impairment, Based on the standalone evaluation, we have to look at the book value vis-à-vis the stock price at the end of the term. So at the end of March, the stock price was $7.36. So it's above the 50% of the purchase price, but it did not hit the 30%. So because of this, we incurred the impairment loss. But the CITIC itself, the profit has been increasing in six terms in a row, and CITIC corporation numbers are strong. And also CITIC Limited, in fiscal 22 and onwards, they have the new five-year plan to double the profit. And based on those, CITIC share price has started to increase. In January 2020, it started to have a long-term decline, but $5.5 was the bottom at the end of the year, and then it has recovered to a little less than $9 per share. So as we make the calculation, we believe that there is a sufficient value, exceeding the book value. Now, in relation to the COVID-19 impact, 56 billion yen was the impact. The inventory of the apparel and lower car trade and also the aircraft business was weaker. And as you know, the CVS and restaurants business were impacted. Especially the eighth company, the impact was about 20 billion. In machinery, 16 billion was an impact. In textile, it was 8.5 billion. Turn into the cash flow page. The asterisks represent the record high numbers. Cash flows from operating activities were 895.9 billion yen, which is the record high. With the delisting of the family mart on the net basis, there was an outflow of 516.9 billion yen. And if you look at the bottom of this slide, you see the core free cash flow and net investment cash flow is minus 755 billion yen, which is a record high number. After the shareholder return, like to turn the core free cash flow positive and we had the negative number in the previous year but we have reviewed the fiscal 19 and 20 where we did not make the major investments and we believe that these are the numbers that we can commit to. Now please turn to page 30 in relation to the shareholder return. Although the free cash flow was negative, we made major investments and we increased the dividend payment by 3 yen per share to 88 yen per share. So the dividend has been increasing in the past six years in the row. With investments and higher dividend and high stock price, the share buyback was 5.2 million shares and 13.5 billion yen. Our target is to spend 200 billion yen to buy back 100 million shares, and the progress is 71%. Now going to page 29, the investments, on the right-hand side, you see the total major new investments of 850 billion yen based on the gross and net investment amount of 755 billion yen. And out of this, about 86% or almost 90% are in the consumer sector. Major one is the additional investments of the family mark, that is 516.9 billion yen. and also the capex in different segments. The total is 165 billion yen. Next is the additional investments in the listed subsidiaries. Based on the market trend, we provide the support of the management. So, for example, we made additional investments for Tokyo Century and Fuji Oil. And next was additional investment in PPIH Don Quixote by Family Mart. As for exit, we have conducted asset replacement and about half of the 95 billion was in the consumer sector. Now going back to the balance sheet. We did have a major impairment loss, but we maintained the financial health. As for some of the challenges, we would like to increase the shareholders' equity further, and we have taken measures for the goodwill and intangible assets, but in our balance sheet, we need to continuously watch the goodwill and intangible assets. Total shareholders' equity is about 3.3 trillion yen, and this is a record high number. This is up by more than 300 billion yen, and this includes 170 billion yen impact from the weaker yen. And higher net profit and higher stock price and also the shareholder return are included. and the loss simulation to the Drummond was absorbed, and as a result, the shareholder equity increased. The ratio of the shareholder equity to total assets is below 30%, and net DER is 0.7%. and ROE is below 13%. Now, let me explain the next medium-term management plan, brand new deal 2023. Now, after achieving the record high net profit number, we would like to aim to achieve the consolidated net profit of 600 billion yen and also move toward the net zero GHG emission. in 2050 so we have the two major targets that is to realize the business transformation by shifting to the market oriented perspective and also focus on the sdgs as for the ghgs if we depend on the businesses where there is a lot of emission we would need to find the alternative profit source and that was very challenging to do so since our strength is in the consumer sector we would like to take the preemptive measures to reduce the GHGs. So in the consumer sector, we would like to take advantage of our strength so that we can reduce the GHGs in the supply chain that is in scope three. So by doing so, our stakeholders will evaluate our efforts and we can differentiate ourselves from our peers. And page 10 and 11 shows the growth strategy. Those are for your reference. Moving on to page 12 that is about the GHG emission reduction. So this is a roadmap in achieving the net zero GHG emission by 2050 to comply with the Japanese government target to reduce it by 40% in 2030 and reduce by 75% by 2040. Now the highlight here is that the GHG emissions of the Itochu Corporation, in addition to Scope 1, 2, and 3, we asked the third party to calculate our fossil fuel interest of affiliates and general investments GHG emissions. and we would completely withdraw from the thermal core business in fiscal 24. So we would like to achieve the GHG reduction fastest, and also we would like to be the lowest emission company. And here on this page, it shows the offset CO2 to zero by 2040. This means that the reduction effect Compared with the emission volume in terms of the net, the contribution should be higher. So this would include the renewable energy using in the power generation and to replace the products with the decarbonized products and the use of the hydrogen, ammonia, clean energy and the storage battery. So through those measures, it would be very challenging to try to achieve those targets. But that's our plan. Moving on to page 13. The GHG emission in fiscal 2019 was 37 million tons. And with the withdrawal from the draw month, we spent about 100 billion yen. But with this, we could reduce the emission by 16 million tons. And in fiscal 2022, half of This GHG emission is coming from our interest in the area of the coal, including the coking coal. So during the medium-term management plan, these 37 million tons can be halved. Now, during the three years of the brand new deal 2023, there are uncertainties, including to what extent the COVID-19 impact would continue and what would be the ESG cost and also the risk of bursting of the resource bubble. but we would like to make sure that we achieve the target of 600 billion yen of the net profit and 100 yen per share dividend payment during those three years. Now, going on to the quantitative targets, by increasing the profit of the non-resources, We might achieve the 37% profit increase to achieve the 550 billion yen profit. And if we are to make the upward revision during the year, we will be increasing the dividend payment from the minimum level of 94 yen per share. Now, on page 17, we have some assumptions. The exchange rate of 105 yen to the dollar and crude oil Brent is $60 per barrel. And as for the iron ore price, we have a conservative view and there is a strong demand for iron ore in China and crude steel is very brisk. But since that the government is controlling this strongly and in terms of the supply and demand, we expect some increase in the supply from the valley in Brazil. So gradually we expect some loosening of the balance between the demand and supply. So this is a very conservative view. So this impact is plus minus 1.2 billion yen per dollar. Now, unless the iron ore price comes down drastically, probably there will be some additional contribution from the resource business, but the percentage of the known resource will remain at around three quarters. Now another way of looking at this is that the beginning of core profit this year or last year there was a more than 50 billion yen extraordinary losses so the core profit started with the 450 billion yen and we expect about 60 billion yen increase. In metal and minerals 19 billion. In fruit, 11 billion. ICT and finance, 8 billion. Textile, 7 billion. Machinery, 7 billion. And the eighth company, 6 billion. Those are the breakdown of the 60 billion profit increase. And Based on the higher commodity price, probably about half of the 60 billion comes from that, including the iron ore, coal, oil, gas, pulp, and others. So those are included in this number. In addition to the 60 billion yen profit increase, there is 50 billion yen extraordinary gain expected. Page 20-28 shows the segment details, and there are major extraordinary gains expected in the general products and realty as well as the aid company. As for the COVID-19 impact, we expect that similar level of the impact in fiscal 22. last year it was 56 billion yen and we expect about 20 billion yen improvement so about the 40 billion yen impact is included so including the buffer of 30 billion 550 billion is our number and other quantitative targets concerning the balance sheet during the medium term management plan and our image or the concept is to turn the core free cash flows positive after deducting the shareholder returns so by increasing the operating cash flow steadily we believe that we can turn the free cash flow to positive but Similar level of the gross or net investments as the fiscal 20 are expected and we would accelerate the replacement of the assets in fiscal 22. So even after the dividend increase, this 3.3 trillion yen shareholder's equity, we expect it will continue to increase. Net DRR would be lower and as for ROE, we believe that higher limit of this ROE can be achieved. As for the shareholder return, as I mentioned, ¥94 per share that is up by ¥6 per share is planned. And if we make the upward revision during the year, we would increase this. And we have made upward revision three times in the past 10 years. And each time, we increase the dividend payment. First, we would like to realize the increase of the dividend payment seven years in a row. and also about the dividend. During the medium-term management plan, we would like to realize the 100 yen per share. This is not the upper limit, and we will make sure that we continue to have a progressive dividend payment. We would like to focus on the higher dividend as well as the sustainable growth of the EPS. And with that, I'd like to end my presentation. Thank you for your attention.