Itochu Corp

TSE:8001

Earnings Call Transcript 2018-Q3

[Tsuyoshi Hachimura, executive]

Hello. I am Hachimura, CFO at ITOCHU Corporation. Thank you very much for coming over here on the occasion of the presentation of the third quarter business results for fiscal year 2018. May I suggest that you please refer to the presentation material, PowerPoint materials, titled FY 2018 3rd Quarter Business Results Summary.

If you go to Page 3 of the presentation, summary of daily performance. As recorded here, the asterisk indicate record highs accomplished. For instance, net profit attributable to ITOCHU increased by 19% year-on-year at JPY 357.1 billion. We were unable to renew the previous high. Metals & Minerals, the price increases, of course. But as we explained at the closure of the first half, all across the segments, we were able to have very strong kind of positive net performance, the trend, which continued through the third quarter. They saw, in particular, strong earnings in the Forest and Products and general merchandise, ICT, Food and Metals & Minerals sectors. ITOCHU progressed 89% towards the FY 2018 forecast of JPY 400 billion. We did not happen to show any of the guidance.

By the way, for the extraordinary gains and losses, as I quoted, had a number of JPY 42 billion by the third quarter, so we closed the third quarter, but it was JPY 53.5 billion. And in the background, there was about JPY 10.5 billion, where as in the -- from U.S. tax reform related impact.

Our net profit attributable to ITOCHU after deducting extraordinary gains and losses, the JPY 304 billion, again, at a record high. They saw, indeed, it was not owing from the 2 one-off items we were able to show under this new strength of our business operations.

And for the share of group companies reporting profits, the 4 year in the forecast with a target of 90% through the disclosure of the third quarter, it was 86.4%, so I'd say that, group wide, the companies performed [ enduring ].

As to cash flow status, I would just say that core operating cash flows, it was quite the favorable, JPY 315 billion, again, the record high before the first and the third and the quarter result. Ratio of shareholder's equity, the total assets was 30.5%, which was the highest indeed in our history. NET DER, who was in 0.78x, having come down from 0.9x at the end of the previous year.

Now going to page 4, I would like to say more about net profit attributable in ITOCHU and by segment. FY 2018 forecast at JPY 400 billion, which we did not change. Through the third quarter, however, we recognized that the 100 -- that the percentage marks had been accomplished already in segments such as Metals & Minerals and also in Food. Therefore, before your forecast for the Metals & Minerals sector has increased from JPY 55 billion to JPY 70 billion, and for the Food segment, it's been up from JPY 77 billion to JPY 85 billion.

This whole segment totaled, if we tally those up, it is the additional JPY 23 billion in the full year forecast. And what we did, and there was -- and we made adjustment in the others adjustments and eliminations and segmenting by deducting JPY 23 billion.

Why we did not have to make the adjustments or the changes into our forecast? Well, already, we showed a strong performance at the closure of the first half. We recognize that we are on the business operations collectively and there was a heavier emphasis in the second half of -- under the business operation, and which is reflected in the third quarter result.

So as we have been advocating, JPY 400 billion for the 12 months period, if we were, hypothetically, have to make an effort in guidance, then by how much we discussed internally, and we also discussed internally that by making the guidance change, then that would automatically send all the other renewals that would also imply the increase in dividend. Speaking of dividend increase, back in December, we already made the increase in the minimal guarantee pressured dividend from JPY 64 per share to JPY 70 per share. So we did that back in December, and here we are in the month of January or the beginning of February, are we to make a round of effort in the forecast and the changes, and under by what margin would not be so drastically large. And also even on the stronger performance that we may perhaps look to you between now and the end of the fiscal year. So we decided that one-off adjustments and the treatments that we can make can wait. Until the end of the fiscal year when we would be looking at all of the numbers, then we would confirm the excess cash, which is becomes available to us. And then to decide whether or not that excess cash is possibly to use to further increase pressured dividend or share buyback and so on. So that was our decision.

Now back to the -- on Page 4, Metals & Minerals sector, JPY 32.4 billion additional. They saw -- this was the key driver in the overall on the driver of the corporate-wide performance. And the second line, dividends from a core related investment, I go back to the explanation that I gave at the end of -- under the first half, the results performance announcements. On the Colombian operation, the management change, they saw it is recognizable by now to see in what dividend, and so that is reflected here.

And by the way, they saw -- we saw on the contributions in our overall operations, seems rather high after all. However, if you take a look at the non-resource side of it, it's 85%, and that's really quite high. We saw on the [indiscernible] resources on the business and the contributions were strong. This was incoming from non-resources side as well.

And also, on the Food on the segment at JPY 20.8 billion plus -- on the plus progress of 99%, FamilyMart UNY Holdings in fresh-food related and provisions related transactions and NIPPON ACCESS, ITOCHU, the additional [indiscernible] or the provisions business, HyLife.

So I'd say, the strong performance, indeed in deferred segment. Now therefore, in the other -- the materials, the general products and realty segment, as cited here, had stronger natural rubber related prices, as well as for pricing. However, it is not owing to the market, the supply and demand and balance favored us. Be it, in the Indonesian natural rubber, the demand or on the pulp business in Brazil and/or in Finland. This all how the true strengths transpired in the actual performance result.

And centering in North American Market, Housing related business operations, Master-Halco [ Asipa ] have been doing well. So basically, yearly, JPY 15 billion increase year-on-year. ICT and Financial business, the sector, the ICT, in particular, the CTC, the mobile phone business, Conexio, on automation and others, such as CRO business related companies, all having done very well. And also, include the Hong Kong and Thai-based, non-secured personal loan business. And so all having performed favorably, and they saw nearly JPY 10 billion increase year-on-year.

By coming up on this chart, machinery, the minus JPY 0.2 billion, so negative year-on-year change. However, the aircraft related and plant related companies operated very well.

And finally, Textile segment, year-on-year, plus. However, there has been tone of slowdown of the target market and also apparel related companies. We mean to say that headwind exactly in its operation. That was a little bit stagnant.

So in particular areas under the slowness that prevails, but in other particular areas, some positives were revealed as well. So all in all, all combined positive JPY 1.1 billion year-on-year.

And finally, others adjustments and eliminations. The negative number year-on-year. Because of the adjustments that I explained about is included here, but at the same time, at the CITIC and CPPs, the earnings are included.

JPY 54.9 billion or JPY 55.5 billion otherwise from CITIC, the year-on-year increase by JPY 1.4 billion. CPP's number was minus JPY 0.4 billion. At the end of the first half of under the FY 2018, we already explained in the [ fork ] related business operations in Vietnam. The market was toning down, and the earnings was declining. We saw that continued through the third quarter as well.

Now leaving this page, I'm moving on to Page 5 to talk about cash flows. And I would say that the JPY 185 billion, that was a very strong number for core free cash flows at the end of the third quarter. In the beginning of the fiscal year, we said core FCF target would be over JPY 100 billion plus alpha. And right at the beginning of the fiscal year, we were even implying as high as JPY 200 billion. However, the JPY 185 billion, very strong.

We also explained that cash flows from investing activities, they do portray a situation where we made cash out associated with investment activities, and they too grow further in existing the company operations.

So on such as on -- for FUJI OIL and our additional stake holding, the [indiscernible] card. They also have the -- in the final quarter of fiscal year 2018, we are scheduled to make disbursement from the cash, which will be the cash outlay, such as the quarter 1 on the investment or U.S. housing related investments.

They saw cash out had a real -- had come about in your final quarter as well. So under the overall, the situation is that whereas we had put much emphasis on the preservation of strong core free cash flow in order to return to our shareholders among others, but at the same time, we will make this year investments, as necessary, for our future business.

Page 6 describes financial position, total assets, seasonality at play and NIPPON ACCESS, ITOCHU Sakhalin and ForEx effect of JPY 100 billion, but already know total assets further increased by almost JPY 900 billion to reach JPY 8,975.9 billion. Net interest bearings debts, nearly at the same level compared with much in 2017 at the JPY 2,394.3 billion, the good use of cash available. And total shareholders' equity, the ratio of shareholders' equity to total on the assets and DER exactly as is shown here.

Now leaving this main presentation book, I would like to ask you to take a look at appendix volume. Please take a look at Page 19, which is the investment of the discussion page. On the right-hand side, FY 2018 first and third quarter results. Major new investments, total of major new investments and gross amount of JPY 205 billion instead of 75. Net investment amount was JPY 130 billion, cumulative over the 9 months periods. For the third quarter alone, JPY 60 billion here was the total of the new investment, under was the exit of JPY 35 billion.

Next page, Page 20 of the Appendix section, core on the free cash flows. I would repeat at annual on per share the dividend payout of JPY 70, the guaranteed as a minimum, as announced in December to confirm that.

Page 22, extraordinary gains and losses. The right-hand side, FY 2018 first and third quarter result in the middle, 20.5 number. To the right, it says U.S. tax reform approximately JPY 10.5 billion.

Machinery, and for the segments, therefore, the third quarter results included JPY 11.5 billion before the U.S. tax reform, that number, so mainly in reference to these segments. I just wanted to confirm what numbers were tracked here. Thank you very much.