Itochu Corp

Thank you very much for your time. Now I'd like to present the first quarter business results of Itochu Corporation. I have been the CFO for a long time and this is the best Q1 results and also as a quarter this is the best results that we achieved. This is the highest ever numbers that we achieved. In all segments, the profits grew. I think we can call it unstoppable momentum. The results were very strong. Net profit attributable to Itochu was 267.5 billion yen. This includes 87.5 billion yen extraordinary gains and losses. Excluding that, core profit was 180 billion yen, which is a record high number. 267.5 billion yen is a little less than 2.6 times higher than the year before, so the increase is 165%. The record high in the past was fiscal 21 in Q2, which was 147.7 billion, and this time it is 1.8 times higher. As for the core profit, you might say that there was extraordinary gain, which was high. But actually, this 180 billion core profit is two times higher than the year before. The highest record until now was the fiscal 20, and the full year results was 500 billion yen. In Q2, we achieved 137.5 billion yen, and this time it is 1.3 times higher. And considering the special factors last year, in comparison to the pre-COVID fiscal 20, excluding the textile, well, textile still is in the recovery, and we have not yet fully recovered. But in all other segments, the profits grew year on year. Due to the high iron ore prices, the natural resources segment was strong, but non-natural resources segment was highest record. And also in the resource segment, the quarterly number was the best number. Now, when we consider the environment of the business, last year there was a major impact in Japan, as well as in the world. And unlike last year, in the Q1 of this year, we do still have some remaining impact from the COVID-19, but in all the industries where we do business, we saw the recovery, and we have captured the opportunities of the recovery. And also, we have accumulated our capability to generate core profit until fiscal 2020. So we have grown that further, especially in chemicals, ICT and financial business, and machinery, and the construction material in North America and food. Those businesses, in comparison to pre-COVID, they are all strong and the record high numbers were achieved. Of course, there was a tailwind of the high resource prices, and Q1 extraordinary gain was higher than the four-year forecast. We have accelerated asset replacement. Those were all the positives in Q1. So both net profit and core profit were record high in terms of the quarterly numbers. As for the forecast for this fiscal year, 550 billion is not yet revised, but at the end of the Q1, we have already achieved 49% of the full year. So when we made announcement in May, we said that there could be some upward revision during the fiscal year. I think we can commit to making the upward revision. Now, in our case, the target number that we announced are our commitment, regardless of the changes in the environment. So we'd like to see the progress in Q2 and decide how much upward revision that we would make. As for the forecast for this fiscal year and also the shareholder return that you're interested in, If you have any questions, I would like to answer them later. As for the forecast for the full year, when we calculated the target of 550 billion yen, the core profit growth was 60 billion yen, and the extraordinary gains and losses, 50 billion yen. That is the gain side. the COVID impact will be alleviated for the improvement of 20 billion and including the buffer, 550 billion. So if you look at the first quarter results, I think you can see at which level that we are right now. And during the three years of the medium-term management plan, we said that we would like to achieve 600 billion, but we are likely to significantly exceed that. Now, of course, you're interested in any concerns that we might have, the external factors. Unless there is a rapid change of the environment, there are no major concerns that we have. Even if we have major changes, we are not going to lower after making the upward revision. One of the things that we have to keep in mind is that IMF from April, they have lowered the growth prospect by 0.5%, and now the 2.8% growth is expected. In the second half, we are not too optimistic. There is a resurgence of the COVID-19, so it is possible that there is a delay for the recovery of the consumer service industry. And despite the progress of the vaccination, it is also true that there is some risk for the resurgence of the COVID-19 in Japan and in the world. And this could lead to the decline of the consumption and trade and so forth. So there are risks for the further delay of the economic recovery in the second half. But based on our results in the Q1 and considering our position right now, There are no major concerns. In your PowerPoint presentation material, I will talk about each segment later on. So before I do so, I did touch upon the extraordinary gains and losses, which is shown on page seven by company. Last year, I mentioned the gain on the partial sale of the e-guarantee in ICT and financial business, which was 12 billion yen. And there was no such gain this year in this company. So it seems negative, but this was very brisk. So if you look at the Q1 results this year, it was 87.5 billion yen for the full year. we expected about 50 billion yen so what was included first of all is the gain on sale of the Japan Brazil paper and pulp to OG paper and in Q1 the deal was closed and this was 32 billion yen also there was a gain on the partial sale of Taiwan Family Mart, 29.5 billion yen. We did not expect this number to be so high, but those two were already included. And other than that, other factors are not included for the full year. Now, in relation to the Taiwan Family Mart, in 2018, When we made a family mart into our subsidiary, we re-evaluated all assets. And about the Taiwan business of the family mart, there was a capital reorganization with PPIH. And we did receive some questions about the impact on Itochu. And our answer at that time was no major impact. because we have already evaluated the fair value of the Taiwan Family Mart business. But then after that, the Taiwan data appreciated and their listed company and their share price increased more than what we expected. So this was not something that we expected. So from last year to this year, this number was larger than what we expected. And other than that, metals and minerals, there was a deconsolidation of the Dochukuo Americas. Last year in Q3, we mentioned that in order to promote the reduction of the GHG, we will be exiting from thermal coal business. And compared to when we made the investment, yen weakened. And through this deconsolidation, we needed to realize the foreign exchange gains. And this was 22 billion yen. Also in machinery. there was a gain on the sale of the water utility company in IEI and also a gain on sale of fixed assets in Edwin in textile. So through the replacement of assets, we had the results of 87.5 billion yen in Q1. In relation to the COVID-19 impact, to what extent can we recover It would be difficult to completely recover. That is our assumption. But in Q1 last year, the negative impact was about 22 billion yen. Now, in this first quarter, the negative impact was 13.5 billion yen. We continue to see the impact in apparel, convenience stores, and aircrafts. But last year, major impact was seen in automobile and also tire business in Europe. But we started to see the recovery more than the expectations. So for this fiscal year, the impact from the COVID-19, last year it was 56 billion yen, and we expected a little less than 40 billion yen. So as of now, including the 13.5 billion yen in Q1, for the full year, about 32 billion is expected. So 10 billion yen improvement compared with our initial plan. So we continue to see the impact in convenience store and apparel, which is about two-thirds of the 32 billion. So the impact will remain in Q2, but in the second half, we expect major improvement. Turning to cash flow, core operating cash flow was 177 billion yen, which is 84% improvement year-on-year. In relation to Family Mart, there was a higher account receivables and resource prices increased This led to the higher inventory and higher inventory prices, and also the working capital increased as a result. But in each business, the collection of the cash was going well, so the cash generation was very strong. If you look at this page, including the working capital, last year, It was 254.1 billion yen, and now it's down to 181.7 billion yen. But last year was kind of special because at the end of the month, it was holiday, and because of that, the working capital was smaller in relation to family mart, and there was also a debt collection in energy. And also in general products and realty, there was a positive in terms of the transaction of the real estate. So I think it will be better to look at the core operating cash flow. Concerning investments, you find the investments page on page 19. Now, the gross investment for Q1 was 97 billion yen. The major ones include, for example, in basic industry-related sector, the machinery overseas and IPP-related, and also the Hokken Nomadoguchi Group additional investment. In addition to these, there were major ones of the capital expenditures, and the total was 97 billion yen gross investments. And through the promotion of asset replacements, there was a gain on sale of Japan-Brazil paper and pulp, and also the family mart Taiwan, and the total of the exit was 127 billion. So net investment amount is minus 30 billion yen. going back to the beginning one of our strengths is operating companies and looking at the percentage of the companies reporting profit last year there were many companies which did not report profit especially in textile but This has improved to 80% in Q1. We have 280 companies consolidated and 81.4% of the companies are reporting profit. Last year, it was 73.4%. At this time last year, there were 72 companies in red, but now only 47 companies. Toward the end of the fiscal year, we expect to see further improvements. Now, small-scale operating companies lower than 2 billion yen. We try to provide a hands-on support within their portfolio. That's something that we have been doing. Despite the involvement of last year, 46 companies recorded the highest profit. And for this year, 33 companies plan to achieve the highest profit. 15 companies out of them are actually renewing their records. So major ones include CDC, DOH, Yanase, NX, FamilyMart, and CITICS. So in all the segments, those are the core companies, and they are likely to renew the highest profit record, and we are steadily making improvements. Now, going to the financial position, the total assets remained consistent compared to the end of 2021 due to the increase in inventories and rise in the fair value of the investments. And as for the net interest-bearing debt, it was about 2.5 trillion yen. It has come down to that level. This is due to the stable performance in operating revenues and collection of the investments. So net interest-bearing debt is coming down. As for the shareholders' equity, we exceeded 3.5 trillion yen. And as I mentioned in May, we are focused on strengthening our balance sheet so at least we have been saying that the 30% equity ratio and we have exceeded that at 31.6% so we are increasing this number steadily now with this higher shareholders equity Net DER is at the lowest level, 0.71 times. We do not have a subordinate bond issued, and Net DER is now down to 0.71 times. Now, let me talk about each segment. On page 4, we have overall year-on-year comparisons Details of each segment are shown on pages 10 to 18. First, in terms of the year-on-year comparison, metals and minerals, the progress was 56%. year-on-year increase of 55.1 billion yen was achieved now the full year forecast of 138 billion yen so we are making a very good progress it's higher than 50% in Q1 78 billion was achieved. In addition to this, non-resource is 199.4 billion and the progress is 73, sorry, that the non-resource percentage is 73%. That is one of our strengths. The general products and realty was 51.8 billion yen. Of course, there was a gain on sale of JVP. And in North America, the construction material business centering around Master Hauko, we are increasing the size through the acquisition. And because of the strong economy in the United States, they are showing very strong numbers. Also, the pulp price has recovered. Therefore, the meta-fiber profit or earnings have improved in Europe. And retail business also recovered from the impact from lockdown last year. Now looking at the actual number in Q1, you see the negative number, but it's because of the tax reform planned in UK. So We considered the corporate tax increase. So excluding that, they should be positive. So we are making a good recovery. Next major one is the eighth company. There is a gain on sale of the Taiwan Family Mart, 29.5 billion. Excluding that, daily sales are improving. Of course, it has not yet recovered to the pre-COVID-19 level. It's about 90%, but gradually we are making improvements. Now, last year, the equity pickup was 50.2%, but now it is about 100%. Next major one is the machinery, 26.2 billion yen. There was a gain on sales of the water utility company in UK, but the bigger factor was Yanase. Yanase's recovery. They sell high-end luxury cars, and demand in Japan has been extremely strong. Until last year, rather than increasing the top line, they were focused more on the cost reduction so securing profit through the structural reform was what they did but if you look at the unit sales of the new cars used car and also the after sales services they are all growing steadily the profitability is improving and now they employed a special talent to deal with the cost improvement And the four-year forecast was 7.7 billion yen on the standalone basis, but in Q1, they already achieved 4.1 billion, 53%, so they are likely to exceed the budget. In Q2 and Q3, because of the shortage of the semiconductor, we are starting to be concerned that maybe we will not received the sufficient number of the vehicles. But for YANASE, we have not yet made upward revision. I touched upon the e-guarantee sales, which happened last year in ICT and financial business. CTC, mobile phone business, Bell24, Connexio, the information or ICT businesses are strong. For 5G and digital transformation, we are seeing the increase of the backlog. And the profit from the fund operation was higher, and we believe that ICT and financial business will be the driver for us, and it's going strong. Consumer finance business, both in Japan and abroad, are steadily increasing. So this is another strength that we have. Next major one is food, 16.2 billion yen. This is up by 7.5 billion yen year on year. The progress is 28%. It seems a bit low, but especially the fresh food including fish and other business is increasing and the transaction of the major manufacturers is increasing so trade is increasing and also the grain business in North America usually there are fluctuations in Q1 but without it there are harvesting the grain as planned and also dough both pineapple and banana production is going well and the prices are also at a good level so highest profit is likely to be achieved. Now Nippon Access there is a drop of the business for convenience stores which was not fully offset by supermarkets and drug stores. That's what we talked about last year. But they are recovering steadily, so Nippon Access is doing well. So I have been saying only the good things, but energy and chemicals, the progress is 26% relatively low, but in energy, The evaluation of the derivative, the loss is included. So it seems low, but actually it is positive, and CAO as well is also good. And right now the oil price is assumed to be $60, and it's going in line with our plan. Now the chemicals, the record high numbers, are achieved. Itochu Plastics, CI Takiron, Chemical Frontier, and trade business overseas. 0.4 to 0.8 billion yen increase in profit is being achieved. So chemical business is going very well. And unfortunately, I must say that the textile industry The progress is 23%. Of course, it's higher than last year. And we have been promoting the tech restructuring. And we sold the building of the headquarters, and we are doing many other things. And we are seeing the positive numbers from Lelian and Edwin since last year. We have not yet absorbed the negative COVID-19 impact. Under others, the CITIC, the equity pickup was 19.6 billion yen, up 5 billion yen year on year. And CITIC in the first half expect the higher profit and they have made upward revision. So major positive figures are expected. On 29th of June, they announced made at an earnings goal, and they said that the first half results are likely to grow by 160% year-on-year.