Itochu Corp

Ladies and gentlemen, I am President Ishii. Thank you for gathering here today. I will now give you an overview of the financial results for the first half of FIE23. Please refer to the disclosed presentation materials. First, here is a summary of the financial results for the first half of FY23. Please refer to page 2 of the document. Consolidated net profit for the first half was 483 billion yen, the second highest level after last year's record 500.6 billion yen. The first half post-tax profit of 483 billion yen implies 69% of progress rate against the initial four-year guidance of 700 billion yen. Progress rate against the upward revised guidance of 800 billion yen announced on October 4th is also at a high level of 60%. On a quarterly basis, Q2 generated 252.4 billion yen in profit in comparison with 230.6 billion yen recorded in Q1, indicating enhancement of the underlying earnings power capability as well as continuation of the trend of strong momentum. Although profits in the first half declined year-on-year due to the large one-time gains recorded in the same year last year, core earnings, which indicates an underlying earnings capability, reached a record high of 430 billion yen, and progress rate against the initial guidance of approximately 710 billion yen is 61%. With the upward revision, the core profit guidance is set to record a historical high of 770 billion yen. Progress rate against this is 56%, which demonstrates steady enhancement of our earnings power. Next, I'll explain segment performance for the first half as well as the revised guidance and progress.

Please refer to page 3.

First, machinery as well as energy and chemical companies posted record profits in the first half. Metals and minerals and general products and reality performed solidly, while textile, food, and the eighth company were more or less in line with the initial plan. ICT and financial business was the only company behind in terms of the progress rate. I will explain the first half results of each company in the order of progress rate against the initial full year guidance. First is machinery company, which drove our first half performance. In addition to strong performance in all businesses, including marine and automobile related businesses, Due in part to a one-time gain from the sale of maintenance business in North America, Machinery Company achieved a record-high first-half profit of 71.4 billion yen, which implies 98% progress rate against the initial guidance. Next is General Products & Realty Company. Pulp prices remain more elevated than we expected. In addition, the North American building materials related business, which is run in a hands-on fashion, is performing well. Moreover, there is a revaluation gain from the organization of the housing related business in North America. As a result, the company profit was 63 billion yen with progress rate of 87%. Next is the eighth company. Daily sales of Family Mart are improving due to new product development as well as eye-catching promotions such as bigger volume campaigns. In addition, optimization of inventory and delivery route through digitalization has resulted in cost reductions. As a result, we booked 19.5 billion yen of profit representing 81% progress rate against the initial guidance. This is in line with our expectation as summer is a peak season for the convenience store business, pushing the progress rate to a high level for the first half. Moving on to metals and minerals company. Although the market price of iron ore is on a downtrend, the price in the first half was higher than expected. and the price of coal price remained elevated, resulting in strong earnings at an Australian resource development company. Also, the steel products business continued to perform well, especially in North America. Therefore, the company booked profit of 134.7 billion yen, securing progress rate of 68%. Next, the energy and chemicals company posted a record 48.5 billion yen in the first half of the year, achieving a particularly high level of progress rate of 56%, given the company is usually skewed to the second half. The strong performance was driven by all businesses, including the energy, chemicals, and electronic power domains, as they captured the benefits in the face of soaring market prices. In textile company, Descent has established a well-balanced structure between Japan, China, and Korea for profit generation, and apparel-related businesses such as Lillian and Edwin recovered due to a recovery in demand accompanying the easing of mobility restrictions. This resulted in a profit of 11.6 billion yen with progress rate of 45%. Next is food company. High raw material and logistics costs and the yen depreciation caused profitability deteriorate in the fresh food related businesses in Japan and overseas. However, the grain business in North America and the domestic food distribution business remained strong, resulting in 27.7 billion yen of profit and a 40% progress rate, generally in line with expectations. Lastly, ICT and financial business. The ICT sector, BPO, and other related businesses performed well. However, the fund-related business, which had enjoyed strong performance last year, is suffering from a deterioration in valuation gains on stocks due in part to sluggish equity market. Moreover, the mobile phone-related business saw declining profits. In addition, the replacement of assets has been slower than initially planned. Given this company's earnings structure, it tends to be skewed to the second half. The company's profit was 25.4 billion yen, resulting in a progress rate of 30%. CITIC, which is included in the other segment, is making strong progress due to the impact of yen depreciation and a one-time gain related to the revaluation of its securities business. Next, I will explain our four-year guidance. As I mentioned at the recent press conference announcing the upward revision, we have examined all segments and operating companies more closely than ever in this uncertain business environment. As a result, we have upwardly revised our guidance by 100 billion yen from the initial forecast. The upward revision consists of 60 billion yen for the core earnings due to steady profit growth, mainly in the non-resource sector. ¥30 billion for an increase in one-time gains such as the re-evaluation of city securities, and ¥10 billion for a reduction in the loss buffer. In each segment, as I explained earlier, we have revised our guidance in line with the progress of the segments. We have made an upward revision to the following four companies to historical high levels, machinery by 27.5 billion yen, metals and minerals by 36.5 billion yen, energy and chemicals by 11.5 billion yen, general products and realty by 22.0 billion yen. The guidance for textile, food, and the eighth company remained unchanged. ICT and finance business, which has been behind, was revised down by 22 billion yen. The eighth company had businesses that were cross-held with other companies up until the first half, but we have decided to terminate them as of the end of the first half. as we believe the initial aim for strengthening Family Mart-related businesses of other companies through the 8th company has been achieved. Going forward, the 8th company will focus on the development of new businesses from the market-oriented perspective with Family Mart as the axis of the intercompany cross-functional framework. Please refer to page 6 for cash flow. As a result of solid performance in machinery, metals and minerals, energy and chemicals, cooperating cash flow was 467 billion yen, a record high as a semi-annual performance. In terms of operating cash flow, we achieved the second highest in our history. Net investment cash flows amounted to 244 billion yen of outflow, mainly due to proactive investments into businesses such as Hitachi Construction Machinery, as well as housing-related products in North America. As illustrated by the table at the bottom of this page, the financial standing was further strengthened, with shareholders' equity increasing approximately by 670 billion yen to a record high of approximately 4,870 billion yen. Other indicators also reached new highs. As shown on page 9, we have received high evaluations from credit rating agencies. Next, please refer to page 7 for the assumptions for the upward revision. As noted above, in light of the historical weak yen and high resource prices in the first half, we have revised our forecast for the exchange rate from 120 yen to 135 yen, the U.S. dollar interest rate to 3.5 percent, up one percentage point from our initial assumption, and the crude oil price to U.S. $95 per barrel. Although we are unable to disclose iron ore prices due to a contractual agreement, we are conservative in our key assumptions, taking into account changes in the business environment in the second half of the fiscal year. Finally, I'd like to talk about our shareholder returns policy. Please take a look at page 8. As we announced on October 4, in conjunction with our revision, we have increased the dividend per share to ¥140, which is up by ¥30 from ¥110 in the previous year, up ¥10 from the ¥130 announced at the beginning of the fiscal year. We have also come up with a share repurchase program for the seventh consecutive year with a budget up to 35 billion yen. As of the end of October, approximately 30% of the total amount has been repurchased as disclosed on the 1st of November. Again, we will continue to commit to the incremental increases to the minimum dividend during the period of a medium term plan brand new deal 2023. We also commit to a dividend payout ratio of 30% by FIE24, the final year of the medium term plan. We will continue to take into account the progress of the financial results and listen sincerely to the market's opinion. In order to meet investor expectations, we will continue to address our shareholders' return policy from a medium- to long-term perspective to enhance our corporate value. Into the second half of this year, the situation is clearly different from the past few years, making it more difficult for governments around the world to steer its economic policies. There is high likelihood the global economy will head into a sharp recession. It is in such an environment that we believe Itochu can demonstrate its strength by achieving steady profit growth through our strength of disciplined cost management and resilience against market conditions and achieving a solid earning space of 800 billion yen. I believe such a demonstration will be appreciated by the market. And this concludes my presentation. Itochu believes it's important to continuously evolve work style, which can lead to enhancement of labor productivity. Today, we have implemented a series of measures. In this video, titled Measures of Work Style Reforms to Support Earnings Growth, we have compiled those measures. Please take a view. In order to realize a challenging but rewarding company to work for, we have clearly defined our human resource strategy as one of our management strategies, aiming to maximize the potential of employees' ability through the embodiment of SampoYoshi, strengthening of the frontline capabilities, as well as an emphasis on diversity. In order to compete successfully, especially given we have the most streamlined workforce among the five trading companies, we believe increasing employee labor productivity is the source of our competitiveness. Today, I'd like to introduce the evolution of our work style reform that has supported the recent expansion of our company's business performance. The essence of work style reform is not about creating an employee-friendly working environment. Along with the reform of employees' mindset, reform of business operations through efforts such as reducing paperwork and becoming selective about meetings is essential, making the determination of top management crucial. Since 2010, we have implemented five measures to reform the way we work. As shown in the graph, we believe that each of these measures has had a positive impact on our business performance, leading to the establishment of a solid foundation of work styles that support our current profit scale of 800 billion yen. of all the reforms to date, the one that was met with the most opposition from employees is the abolition of the flex time system. Even in an emergency situation, when the Great Japan Earthquake hit, employees would still show up at work at 10 a.m. Although we are a company with strength in the consumer sector, upon seeing this, the management immediately decided to abolish the system. FedEx system, which was introduced in 1991, had become a vested right of employees, making negotiations with labor unions extremely difficult. First, the 9 a.m. start time was called for mainly targeting general managers, followed by a six-month trial period. Then, in October 2012, it was abolished. The following year, we introduced a morning-focused working system. This initiative aims to increase work efficiency by eliminating overtime work after 8 p.m. and shifting it to the morning. As an incentive to work early in the morning, employees are paid the same extra wage as late-night overtime for work done in the morning, and a variety of snacks are provided for free are charged on a daily basis. Through such granular efforts, we saw its impacts immediately. overtime hours were reduced by about 15%, overtime after 8 p.m. was reduced from 30% to 5%, and late-night overtime after 10 p.m. was reduced from 10% to almost zero. Alongside, we saw a significant drop in power consumption as well as taxi expenses. We have focused on health management, which is the driving force of employees. Among these, we are focusing on support measures for balancing cancer care and work. cooperation with National Cancer Center Research Institute for assistance for expense of advanced cancer treatment, schooling and work support for bereaved family members, incorporation of balance between treatment and work in individual performance evaluations. In 2017, an employee fighting with cancer passed away with these words. For me, Itoju is the best company. Chairman and CEO Okafuji sent an email to all employees with a title to make his words come true. Don't let cancer beat you. This story has generated tremendous response and empathy both internally and externally. Since the incident rate of cancer is higher among women of working age, the promotion of support for balancing cancer care and work is contributing to greater advancement of women. In the years since 2003, when we began supporting advanced men and women, we focused on creating an employee-friendly working environment, particularly in the area of childcare. However, the systems were not being utilized as intended, nor did they lead to the retention of female employees. What became a breakthrough was the morning-focused working system which changed the way all employees worked and encouraged them to change their mindsets. As one of the proofs of this, child birth rate of our employees has continued to rise since FYE 2014 when we introduced the morning-focused working system and recorded 1.97 in FYE 2022 which is far higher than Japan's birth rate of 1.3. This confirms that we have created an environment in which employees can balance work and child-rearing. In addition, the in-house daycare center established in 2010 was introduced in response to the concerns of female employees, which was that it was difficult for them to plan their return to work after child care leave. Hence, the management decided to establish the daycare center in a nearby location for convenience. Here is a case study of a day in the life of a female employee. Trains are not crowded in the morning, so it's helpful especially because I ride with a child. These days, male employees split chores with their wives. They show up early at office and leave work early in the afternoon to pick up kids. I see these cases more frequently. is located right next to the office, so it's reassuring because I know I can go there immediately in case of an emergency. Nursery staff are very understanding about work and provide great support. With kids around, mornings are very hectic, and I don't have time to have breakfast. So I appreciate I can have breakfast at work. Menus are well thought out from a nutritional balance angle. Menus change seasonally, which is something I look forward to. I picked up a yogurt, a chicken salad wrap, and tea. Breakfast is free of charge after three items. I can start working before my customers get started so I can work at my schedule with no interruptions and concentrate in formulating presentations so I can start the day fresh. She's working as a deputy manager and she's in a position to lead the team. We have high expectations for her so I hope that she can pursue her career. Under the previous work style, I couldn't imagine leaving work in broad daylight. I get to leave work early under the morning focused flex system, although there are days I stay at work late. The company has very supportive system so schedule can be accommodated flexibly. I can work out my own schedule. Leaving work early means I can spend more time at home. I can spend more time with kids if they go to bed early. I can study for an MBA program because I'm enrolled in a graduate study program, so it's been very helpful. In October 2021, Itochu established the Women's and Advanced Committee as an advisory committee to the Board of Directors. With the management commitment, the committee is steadily beginning to produce results, including an increase of 11 female employees holding senior managerial positions as of April 22. In May 22, as Itochu entered the second stage of work style reform, in order to respond to the diversification of values in the EBA employees' work, we decided to introduce a morning-focused flex time system that allows employees to leave work early after 3 p.m. as well as a work-from-home system for all employees in addition to the existing two no overtime after 8 p.m. in principle and morning work before 8 a.m. According to the survey conducted six months after the introduction of the system to measure the effectiveness, 80% of employees responded that the new work style is being utilized in the workplace, suggesting that the system is likely to contribute to the business performance through greater penetration. Our consistent goal throughout the reform was to increase labor productivity. Since the reforms were implemented, labor productivity calculated by dividing consolidated net profit by the number of non-consolidated employees has increased approximately five times by the end of FY23 compared to FY2011. In addition, in company rankings among job-seeking university students, we have made great strides since 2010, ranking first among trading companies in all seven major media, and first among all the industries in foreign media surveyed. In addition, in the recently announced human capital ranking by Sustainable Lab, we received the top ranking, which signifies steady execution of a series of work-style reforms to date. In this era of uncertainty in the business environment, we believe it is important for us to return to the fundamental business principle of earn, cut, and prevent. We will continue to strive to further enhance our corporate value through work style reforms.