ITOCHU Corporation

This is Tsuyoshi Hachimura, CFO of ITOCHU Corporation. Thank you for joining us today.

Let me now present the business results. Please refer to the PowerPoint material, as I present, starting with the summary of the financial results on page three and also I will refer to the quarterly segment information on pages 27 and 28.

So, please refer to those pages as well. First, net profit attributable to ITOCHU for the fiscal year 2021 first half was ¥252.5 billion, which was the third highest despite the COVID-19 impact.

Especially, the Q2 result was ¥147.7 billion, which was the highest quarterly number. This quarterly number for Q2 is an increase year-on-year.

The first quarter was minus 30% or less, so compared to that there was a major recovery or improvement. In this number, ¥49.5 billion extraordinary gains and losses are included.

Q1 number was ¥16 billion and Q2 number was ¥33.5 billion. I will talk about those numbers later.

Excluding those extraordinary numbers, in the first half, the core profit was approximately ¥203 billion, which was also a third highest. The Q1 core profit was at ¥88.8 billion.

The core profit itself in Q2 increased by 30%. So, we are steadily improving our core profit numbers.

Now, we had the COVID-19 impact and we think it's very important to compare the actual with the forecast. At the end of Q1, we mentioned that it was ¥70 billion that was 150% that was the forecast.

The first half forecast was ¥178 billion; second half was ¥222 billion. So, in comparison to ¥178 billion, the actual results were 142%.

And the yearly forecast is ¥400 billion and achievement rate is 63%. We have not used the buffer of ¥50 billion.

The impact from the COVID-19 for the first half is about ¥40 billion. This is the major impact, but each segment showed strong recovery and resilience.

And we very worked on cutting and preventing, and a diversified portfolio is supported by the strong core profits. So, we showed a very strong tolerance against economic productivity.

Excluding machinery seven companies showed higher profit in comparison to our forecast in the first half. Now, year-on-year comparison for four companies, including the eight ICT international resorts and food and energy and chemicals increased.

As for the ICT business in Japan and the meat business and housing business in North America, as well as chemical business and trading in Asia, China and Japan were strong. As for the negative businesses that were affected by the COVID-19, and also, the challenged area in terms of the business model include Textile, apparel, and cars and CBS, which showed a lower profit.

One of the reasons behind the strong numbers for the first half, I think that those numbers were better than the consensus and as you can imagine in metals and minerals, the iron ore prices were high and this was already expected. The new factor is in 8th Company, the FamilyMart delisting, which was not included in the original forecast.

There was a removal of the deferred tax liability. Then there was an extraordinary gain of ¥30 billion.

And those two factors are very major ones, which might be difficult for you to understand, but excluding those extraordinary factors in Textile, Machinery, Energy and Chemicals, in general products and beauty in food and ICT and Financial Business, in all of those six companies, they have accumulated profit and they have lowered the losses. And as a total, there is a growth of about ¥20 billion core profit.

And in September and October, we have reviewed our first half results, and we have seen the upside each time that we review those numbers. Going to page 5, that is a cash flow.

The cash flow from operating activities was the net cash inflow of ¥459.1 billion, and the core cash flow from operating activities was a net cash inflow of ¥266 billion. Core cash -- free cash flow was the net cash outflow of ¥59 billion.

Looking at Q2, the iron ore prices were higher and there was COVID-19 impact. So the generation of the free cash flow was ¥170 billion, up ¥74 billion from Q1.

And net investment cash flows was up by ¥200 billion at ¥325 billion. We have had the FamilyMart TOB in order to change the business model, and invested in the listed subsidiaries and affiliates where the fair market values are undervalued in order to support their management.

In the second half, we expect large cash out in relation to the delisting of the FamilyMart. But we keep our basic principle that is to selectively invest based on the financial and fiscal discipline.

The result of the net investment cash flow or core free cash flow is minus ¥59 billion, ¥71 billion is the dividend and share buyback. And after this number, there will be a negative or ¥130 billion and I will talk about this later.

Turning to balance sheet on page 6. The most important thing on this page is the total shareholders equity, which increase to ¥3.176 trillion.

Net DER improved to 0.74 times, also, the total assets, which was about the same as the end of March at the ¥10.9 trillion. Due to the COVID-19 the trade receivables were down, but there was an increase of the fair value of stocks and higher investments, so it offset each other.

Net interest-bearing debt with FamilyMart TOB and dividend payment increased by about ¥400 billion and reach ¥2,354.0 billion. Now let's look at the investments on page 20.

On this page, total of other major new investments was ¥360 billion, Q1 was ¥110 billion, so Q2 number was ¥250 billion. As for exit, in Q1, it was ¥15 billion.

So the total is ¥35 billion here. That means that Q2 was ¥20 billion, including all of them, the first half net investment amount was ¥325 billion.

Now, cash flows from the investing activities was ¥138 billion, so the difference is ¥187 billion. And the additional investments for the FamilyMark is considered to be a capital transaction and this explains a big difference.

On this page or going to page 24 which shows the major items of the cash flows. So if you do not find the numbers on page 20, you will be able to find them on page 24.

New investments in relation to the FamilyMart TOB is a ¥180 million and the investment of FamilyMart to PPIH was ¥25 billion and there was additional investment in Tokyo Century ¥23 billion and there are other fixed assets investment in other areas. Now major exits include the asset replacement that we have been doing activity for the business innovation, the Q1 included the partial sales of the eGuarantee and also the food related exit overseas are also included.

And those are included in ¥35 billion. Last month, we announced that sale of Japan, Brazil paper and pulp, which has not been realized, so it's not included here.

Now for the full year forecast, on page 8, you see the major indicators, which are not changed and net profit forecast of ¥400 billion remains the same. So our yearly target of ¥400 billion, that is ¥178 billion in first half and ¥220 billion in second half.

We believe that there will be some recovery from the COVID-19 impact. So we expect a higher profit in the second half.

So in the original plan, we mentioned the extraordinary gains of about ¥50 billion, which includes the Japan, Brazil paper and pulp, and also the external gains of the funding market in Taiwan. Those are not yet realized, so not included.

And also, at the beginning of the year, we mentioned ¥50 billion buffer, which we have not yet used. And so, this is a very strong start despite COVID-19 impact.

Now, in terms of the business confidence toward the second half, based upon the forecast of the DOJ and also other forecasts, overall economy is still -- is tough, but we see some recoveries. But at the same time, there are a lot of uncertainties.

In Europe and also part of the U.S. are seeing the second wave of COVID-19.

And we see the volatility of the international politics. So there are some downside risks of economy.

And we're very much focused on the commitment based management. And through this, we have gained trust of the market.

So I’d like to make sure that we achieve our target of ¥400 billion profit. And therefore, we have not revised our target.

Despite the second half management environment, we'd like to make sure that we deliver on this commitment of ¥400 billion and ¥80 per share dividend. And looking at what happens after Q3 and onwards, we'd like to be able to make the adjustment in a flexible manner.

Now, as for the uncertainties or concerns for the second half, as we already made the commitment, as to achieving ¥400 billion and ¥88 per share, those are not affected. But we have to say that, there are some weaknesses in Textile, Machinery and FamilyMart business.

And also we need to make some improvements, in terms of the percentage of profit making companies, which is 76.5%. And we have achieved a higher than ¥500 billion, in fiscal 2020.

And we said that this year we are taking a year off, but in order to go back to the growth track, we need to come up with next medium-term management plan, starting with the FY 2022. We will make sure that, we look at the asset replacement as well as the business model and work on to Earn, Cut, Prevent.

Now let's go to page 22. ¥88 per share dividend remains unchanged.

And also we have a policy to improve the EPS every year. And even if the profit decreased, we increase the dividend this year.

And as for the share buyback, on page 21, we have other numbers of the share buyback, that is ¥5.6 billion. In the first half, we bought back 2.4 million shares.

And we announced additional buyback of 1.7 million shares. Now concerning the buyback, the share price has been very high.

But we will be aware of the share price floor. And if we judge that the market price is low, we will follow the rule and conduct the buyback effectively.

And then next, let me talk about the extraordinary gains and losses. It seems that we have large numbers, please refer to page seven.

Q1, the extraordinary gain was ¥16 billion, as I said in Q2 is ¥33.5 billion, so ¥50 billion, for the first half. So, the profit was generated as a result.

But I must say that, our management team has a very strong of crisis and we have been actively replacing assets to innovate our business models. That includes the delisting of the FamilyMart, as well as the sale of Japan, Brazil paper and pulp.

And the major positive factors include lower tax expenses related to FamilyMart, which is ¥35.5 billion you see on this page, this is a major factor. Now looking at each company, there are different items.

In Textile, the partial sales of the overseas business was a ¥1 billion gain, and the Machinery, there is a collection of the specific credit and ¥1 billion profit or gain in food. There was a reorganization of the distribution, which led to ¥2.5 billion increase and sale of the gain related business in U.S.

led to ¥1 billion gain in General Products & Realty, there was a ¥1.5 billion in Japan and ICT & Financial Business. The gain on eGuarantee was about ¥112 billion.

In 8th Company, the reversal of the FamilyMart deferred tax liabilities was ¥35.5 billion. So on – there was a impairment loss as well for the FamilyMart ¥12.5 billion is also included.

Now as others, CITIC, the investment in the affiliated company that is a McDonald's, there was also a gain here is included in those numbers. Now, let me talk about COVID-19 impact.

For the full year, or for the full year plan, we expected about the ¥40 billion to ¥50 billion impact from the COVID-19. At the end of Q1, we had the ¥20 billion impact.

And we try to make the full year impact forecast. And for the Q1, the FamilyMart COVID impact was not included.

So our forecast for the full year was increased to ¥60 billion. Now at the end of the first half, so far the COVID 19 impact, we believe is about ¥40 billion in Machinery and 8th Company higher than ¥10 billion impact was observed.

And the next biggest one is Textile as well as CITIC Bank provision for the bad debt was increased. So those are included.

And other General Products & Realty, also some negative. But for the first half in Japan and North America, automobile and construction and industrial machinery, those were affected greatly by COVID-19.

In urban areas, people stayed home and that led to the lower sales and also the domestic apparel sales declined in the investment – inventories increased. So Textile – in Textile segment, we see a loss making companies.

As for convenience stores and restaurants and wholesale food business, there was an impact from COVID-19. And due to the lockdown, our Tire business in U.K.

was affected in first half and we are starting to see some recovery there, but that was an impact. As for the automobile sales, which struggled and steel demand are also lower.

As for the full year, there are some differences depending on the segments. As a whole, the second half our impact is not as strong as the first half.

So, we keep a full year impact of ¥60 billion and changed. Some of the concerns is the negative impact on the FamilyMart, which might linger and also the domestic apparel business might continue to suffer to have higher inventories and the order in the next year might stagnate.

And also the aircraft -- airline business is affected. So, the COVID-19 impact, about 70% is in Japan.

Now, lastly, let me talk about each company and make some comments. Year-on-year comparisons are shown on page four and also from page 10 to page 19; we have a more details for each segment.

Starting with textile, it was down by ¥6.7 billion at ¥8.4 billion, there are some loss-making companies. In addition to the lower expenses receiving the subsidies in relation to the COVID-19 happened, but sales of apparel related business was very poor and overall transactions suffered.

Itochu Modepal and Converse, and ITS in Hong Kong were better than the forecast, but others apparel companies, there are many well-known names, there are -- have been struggling. Going to machinery, the cars and aircraft -- airlines those businesses were damaged due to the COVID-19, so ¥12.1 billion down and the net profit was ¥16.7 billion.

Car manufacturer’s exports declined. So, the Machinery segment, we believe we are bearish.

More recently, the NSA was strong in September, October. We saw some recovery and our car trade, we start to see some moderate recovery, but this difficult environment continues for this fiscal year.

For the metals and minerals, the iron ore prices were strong, but in comparison to the year before, the major companies such as India, in Australia, and iron ore company in Brazil and the sales company in Brazil and Drummond, a company in Colombia, they are all in negative. 62% is the achievement rate and iron ore price stay at the high level.

Now the demand in China is strong, so this could be a driver. But gradually, this is likely to stabilize and the production was expected to increase in valet.

So prices will come down. But it's possible that the prices stay at the high level.

So, we are bullish in this segment because of the iron ore prices. Energy & Chemicals, the results was ¥23.5 billion that is up by ¥1.4 billion, probably this is the strongest segment.

Energy compares to the year before, this is ¥8 billion, down by ¥23 billion, and the shipment in Azerbaijan increased in comparison to the year before. The oil prices were lower, so that was the negative impact.

But we gradually see the recovery. The Chemicals were very strong, especially China, Asia, and Japan.

The synthetic resin related businesses were strong. The Power & Environmental solution division was established from this year to capture the stay-at-home demand so energy trading contributed.

Now among the strong major group companies, IPC Singapore and the synthetic resin trading company in Shanghai, and also the Sunnypack making the plastic packs. Those were strong than the year before.

In comparison to our forecast, Energy-related companies exceeded their forecast. So, we are bullish here.

Now turning to Food, so increase of ¥4.2 billion, the result was ¥23.8 billion. There was a extraordinary gain due to the asset replacement, and also the people stayed at home and that led to the strong demand.

Highlife and Prima Meat Packers meat related businesses showed strength. But as for dough in comparison to the forecast, it's positive.

But, especially in the United States, the packaged food, food board was strong since people stayed at home. But due to the cold weather, Asian fresher, banana and pineapple in the Philippines, the production was weak.

So, it's lower than the year before, but it's higher than the forecast. So, ¥2.3 billion was the result for the first half.

And we reduce the gross reduction, and we believe that we can achieve the forecast of ¥7.4 billion for the full year. Next, is General Products & Realty, there was a major negative number.

And you might think that this is concerning, toward the end of the year, we are likely to achieve our yearly target. Now, the ¥27.7 billion, down at ¥18.1 billion, that is the result last year.

In North America, construction material housing related business there was a partial sales of that and as you know, pulp market price declined. And despite the recent recovery or lockdowns, so retail business was affected by that.

So that led to the negative performance. The strong companies include the housing material in North America and because of the active, do it yourself activity and [indiscernible] those businesses are strong.

For the full year, you might think -- you might say that, we’ll not be able to achieve the target, but sales or gain from the sales of Japan business paper and pulp will be included here. And then the construction material and the logistical business in North America is strong.

So we are likely to achieve at a forecast of ¥60 billion. Next is ICT & Financial Business.

We are bullish in this segment. So we are positive on the full year forecast, ¥37.1 billion was the actual results, was up by ¥5.1 billion.

In Q1, there was a partial sale of the eGuarantee that was a special factor. But ICT, there's no question that this is a growing area.

CTC, CONEXIO and Bell those major group companies are showing the solid performance, based on the strong demand and also the insurance and financial business. In the retail business, we see strong performance.

As for the future, ICT will have a 5G and also digital transformation, there will be a new demand and in the ICT or ICTs their key policy for the new Japanese administration. So there'll be a lot of opportunities there.

In financial business and insurance, we see the development of the cashless payment and other payment methods. So, there is a high expectation from this segment.

So we expect that we will be able to exceed our forecast. The eight company, the FamilyMart daily business is down and there was additional impairment loss.

So this is the lower equity in earnings. But with the reversal of deferred tax liabilities, there was an increase of ¥8.7 billion and net profit of ¥30 billion was the result and we are working on the delisting of the FamilyMart and including the COVID-19, there are still concerns for this segment.

So in terms of achieving the forecast, we believe that this could be challenging. Mostly that segment includes others.

This includes CITIC and CP. So earnings in -- equity in earnings in the first half was ¥34.7 billion for CITIC and that was down by ¥6.4 billion.

There is a higher provision for that loan for CITIC, as well as the negative visuals business. Our full year forecast is ¥62 billion, and the achievement rate was 56%.

As for CP, the pork business in Vietnam was very strong, so ¥37.4 billion yen in combination CITIC and CP. The first half was about the same as the year before.

And that is the conclusion of my presentation. Thank you for your attention.