Itochu Corp

I am Tsuyoshi Hachimura, CFO of Itochu Corporation. Thank you very much for joining us. I'd like to now present the business results for the Q1 of FIE 2023. We have already made the material available from our website, so I'll be using the PowerPoint presentation material starting with page 3. This is the summary. Net profit attributable to Itochu was 230.6 billion yen. making a strong progress toward the forecast of 700 billion yen, achieving 33%. In Q1 last year, we had the record high number of 267.5 billion yen, and this time we have a second highest net profit number. There is a positive impact of the high resource prices, but our strength, which is the non-resource businesses, Our revenue and profit grew steadily despite the weaker yen and inflation. The percentage of the non-resource business is about 70% based upon our portfolio. The core profit, excluding extraordinary gains and losses, we renewed all-time high in every single quarter, both in non-resource and resource sectors. At the bottom of this page, we are showing the asterisks. And single asterisk means the record high number in all the quarters. And double asterisk signify the record high for the Q1 results in consideration for the seasonality. If I compare the year on year, revenue, gross trading profit, operating income, and equity earnings, they are all higher than the year before. But the extraordinary gains and losses of the previous year was very high. And this number was lower by 68 billion yen. And as a result, the net profit was 36.8 billion yen decrease. That is the 13.8% year-on-year decline. Profits increased in energy and chemicals and food. But in other companies, since there was a major extraordinary gains in the previous year, the profit declined. Now the key point of the Q1 is as follows. We are the last trading company to be reporting the business results. Our numbers are not too flamboyant, but they are very steady settlement numbers. And there are three points. The progress was 33%, which is very strong. And the second point is that the core profit, excluding the external gains and losses, were highest in terms of the quarter and is up by 17% year-on-year and ended at 211 billion yen. The third point is that based on the net profit, the non-resource businesses were account for 70% of the total. So the non-resource businesses are making major contributions. And among the non-resource businesses, there have been some differences at the beginning of the fiscal year. So those were the three characteristics of the Q1. Now going to page 5. It is a detailed explanation, and usually we only show the year-on-year differences. But in order to make year-on-year comparison, we have to really clarify the core profit because there are many extraordinary gains and losses. So we are showing the extraordinary gains and losses number. So, for example, in textile, year-on-year change was 1.2 billion yen, and including extraordinary gains and losses, it's down by 2 billion yen. That means that, based on the net number, the core profit was 0.8 billion yen. As for the details of each segment, they are shown from pages 12 to 20. They provide you with the details, and they are for your reference. And we mention all the progress numbers. So please take a look at the progress number. In metals and minerals, there was high coal prices and a strong steel product business. and the progress rate was 38%. In general products and realty, there was a high pulp prices and a strong domestic and foreign construction material business, and there was also a gain on sales of the properties, especially in North America, and the progress was 37%. So those two companies were the major drivers. In machinery, there was a favorable shipping market which led to the charter income and a higher dividend from automobile-related investments and the strong dealer business. And in energy and chemicals, the oil prices were high and there was a profitability in the energy trading which improved. And also in food, North American game-related companies were very strong and the game on group reorganization in North American oils and fat companies. and the progress rate was about 26%. And in the eighth, the family mart, despite the cost increase, have improved the profitability, the earning power steadily, and the progress rate was 23%. Those four companies are showing good growth. In textile and ICT and financial business, the progress was above 10%, but they are stronger in the second half of the year. Going to page 4, this analyzes the core profit. The positive impact of the high resource prices continued, but we saw a steady growth in non-resource. The core profit was 141.5 billion yen, and the resource core profit was 67 billion yen. So those are both record high quarterly numbers. The core profit grew by 31 billion yen year-on-year. The oil prices, coal prices were higher and the resource trading was strong. Those accounted for about 45% or 14 billion yen in resource sector. And in non-resource, the highest record was achieved in general product and realty and machinery. So that increased about 9 billion yen. The difference is about 8 billion yen that includes the tax and expenses and foreign exchange evaluation. The top half show the extraordinary gains and losses, which was 87.5 billion yen last year, and it's 19.5 billion yen in Q1 this year. And if you can go to page six, those are the major items. The first. In April, there was an announcement that the CITIC securities became the subsidiary of the CITIC Limited, and that led to the 20.5 billion yen revaluation gain. And also, the impairment losses on the aircraft, at least to Russian airlines. which is related to the ACG subsidiary of the Tokyo Century, was 8.5 billion yen. Third is a gain on the group reorganization in North American oils and fats companies, 3.5 billion yen. And also the reversal of the allowance for the overseas risk assets, 3 billion yen. So total external gains and losses was 19.5 billion yen. In comparison to last year's 87.5 billion yen, the number is much smaller. Now, core profit changes. Throughout the quarters, the highest numbers were achieved in metals and minerals, general products and realty, and machinery. And also, the energy and chemicals had 6.9 billion yen, and the energy sector is 6.6 billion yen. This is due to the higher oil and energy prices. Textile, the core profit was up by 0.8 billion yen. Finally, we are seeing the recovery of the apparel sales after the alleviation of the COVID-19 impact. But unfortunately, our strength, which is food, ICT, financial business, and the aid, those three segments are stronger in the second half. So they made a slow start. In ICT and financial business, CTC announced their earnings the other day. Their profit level is strong, and they are increasing the backlog, but they have higher expenses today. so the progress was a bit lower. But they are likely to achieve the 38 billion yen target. As you know, the family mart, for them, the summer time is crucial. So we have expectation from Q2 and Q3. And in the eighth company, The core profit was minus 3.6 billion yen, and 3.3 billion negative number is due to the family mart. But as for the family mart, under the new management team, their earning power is steadily improving, and daily stores per shop is up 3.6% year-on-year. But at the same time, their utility cost, personnel cost and system cost are increasing. So this higher cost was shown on the Q1 results and the impact of the lockdown in China and also the impact of the COVID-19 in Taiwan. So their equity pickup of overseas was lower. And also, we regularly do the impairment losses on stores. Two years ago, we have aggressively worked on this, and in comparison to that, last year's impairment loss was smaller. So this impairment loss was higher this time. So the Q1 number of the 8th and the Family Mart was down. As for the ICT and financial business, It's down by 8 billion yen. And I already talked about the CDC. And in Conexio, which is a listed company, there was a decline in sales volume and also the support. value from NTT was revised. This slowed us down. And also the Hokken no Madoguchi and overseas consumer finance business, there were lower commission levels. And last year, we had a major gain on the management of the venture capital fund, and this was much lower. And also, there were some increase of the temporary expenses. So, unfortunately, the net profit of ICT and financial business was 10.6 billion yen. Now, another concern is the food segment. The pork-related businesses such as High Life and Prima, meat packers, they are suffering from lower prices and higher costs. So they are showing some weaknesses. In the package, the global food business, they are suffering from the higher logistic cost. And in Asia, banana and pineapple production cost is rising. So lower profit were recorded. So those three companies are expected to improve in the second half. So we are currently making efforts to enable that. I'd like to talk about the assumptions. Page 9. Assumptions are not changed. But now the Q1 is over. You see the sensitivities are lower than the original assumptions or original announcement. So, for example... Out of the 31 billion yen profit, 16 billion is due to the weaker yen. And as you can see on this page, the average exchange rate was 124.89 to the dollar. Compared to the year before, yen has weakened by 15.96. So this was an impact and For IMEA and OKIT, which invest in CITIC, those account for about 10.6 billion yen, or two-thirds. Other than that, we have smaller ones, which are related to the foreign exchange translation from the overseas businesses. Now going back to cash flow, page 7. So we had a net cash inflow of 236 billion yen due to the stable performance in operating revenues in minerals, metals and minerals, the eighth, and general products and realty companies. On this page, you see the cash flows from investing activities was minus 55.7 billion yen. And if you take a look at page 21, We have the comparison of the investments in FIE23Q1. The total of the major new investments was 88 billion yen. Exit was 15 billion yen. Net investment amount 73 billion yen. Out of 88 billion yen, CAPEX was about 56 billion yen, so the new investment is about 32 billion yen. The biggest one is shown at the top, additional investment in Itochu Techno Solutions, which was 13 billion yen. As for the investments, excluding CAPEX, So new investments stay at 32 billion yen, but in some cases, the timing of the cash out is delayed from Q1 to Q2, or some of the investments were deferred to the later timing. And if you look at the current pipeline, comparing the end of March and the end of June, we are not seeing the major changes. And based on that, if I may go back to page 7 again. So after deducting the changes in the working capital, we had the net cash inflow of 211 billion yen, which was the all-time high in the first quarters. And the core free cash flow resulted in the net cash inflow of 138 billion yen. As for the status of the cash and the investments, there are some things that we are not seeing clearly yet. And we are not changing the forecast of the 700 billion yen per year. concerning this number, we have not yet used the 30 billion yen buffer, and based on the fact that our progress rate is 33%, you might say that this is conservative, but there are a lot of uncertainties in the business environment. So based on that, we would like to closely watch the progress in Q2. Now, Concerning the balance sheet, you see the many asterisks on page 8. The highest number were achieved. As for the total shareholder's equity, it was 4,535,6 billion yen, the record high number. The impact of the weaker yen was 217 billion yen. and net DER 0.53 times, and the ratio of the shareholders' equity to total assets, 34.8%, were record high. Under the uncertain environment, we have to make sure that we have a strong shareholder equity. So we are strengthening our financial structure steadily. On page 10. We are explaining the credit ratings. On the 27th of July, JCR upgraded Itoju to WA+. This is the first time since August 2018. And we had the review meetings with the rating companies in July. And R&I is currently reviewing our rating based on our financial results. And they would give us the result of the review in August timeframe. And in January this year, the Moody's changed our rating to A3 positive. And last month we had a review meeting. So in this way, despite the uncertain business environment, the rating companies are evaluating financial structure and strength and capital strategies, as well as strong earning power and cash generation power. So under those circumstances, we like to make sure that we can enhance our financial position and also focus on the return to the shareholders and the growth investments. We like to make sure that we work on all of those three. And our strength or attractiveness is the high efficiency management or high ROE. And we want to make sure that we keep the ROE at high level. So resource prices are staying at the high level, and our business results do not fluctuate very much. It does not go up and down, but we are steadily accumulating our profits. As for each segment, I did not go through the details, but those information are for your reference. Thank you for your attention.