ITOCHU Corporation (8001) Earnings Call Transcript & Summary

Now let us start investors meeting for operating segments on the Power and Environmental Solutions division of ITOCHU Corporation. Thank you very much for joining us today. Also, I'd like to take this opportunity to thank you for your patronage. My name is Suguru Amano from IR division, I would act as a moderator today. Let us now introduce the participants from our side. First, we have Mr. Keita Ishii, Senior Managing Executive Officer and President of Energy & Chemicals Company and the Chief Operating Officer of Power & Environmental Solution Division. Mr. Ishii will become the President and COO on the 1st of April. Next, we have Mr. Isao Nakao, the Junior Executive Officer and General Manager of Planning & Administration Department. Next, we have Mr. Keiichi Imamura, General Manager of Power & Utility Department. Then we have Mr. Hiroaki Murase, General Manager of Sustainable Energy Business Department. We also have Mr. Kenji Takai, CFO of Energy & Chemicals Company. As an observer, we have Mr. Tsuyoshi Hachimura, the Senior Managing Executive Officer and CFO of ITOCHU Corporation. Today, first, Mr. Ishii will talk about the overview of Power & Environmental Solution Division, giving you the background of this establishment of this new division as well as business status and future visions; which will be followed by Mr. Imamura and Murase's presentations on the future growth strategy, talking about the next-generation Power business. I'd like to call upon Mr. Ishii.

Hello, everyone. I'd like to, first of all, thank you for your support and thank you very much for joining us at this Investors' meeting for operating segments. I'm not used to speaking in front of you. This is the first time that I meet you, so I went to cut my hair at the barber on Saturday to prepare for this. Aside from that, let me start my presentation. Starting with the business environment of the power industry. With the revision of the Electricity Business Act in 1995, the retail business of the electricity was deregulated and the transmission and power generation were separated. And now we are moving toward the era of carbon neutral. Environment of the power business is going through major transformation. In order to capture business opportunities in this area, ITOCHU has established Power & Environmental Solution Division from this fiscal year. Discussions held separately on renewable power generation and enhancement of contact with electricity users in the downstream, providing a wide range of power and battery solutions based on the market-oriented perspective, pursuing potential cooperation with various industries and align with the power DX, those are combined through the integration of the 3 sales department that belonged to the Machinery company and Energy Chemicals Company. More specifically, Renewable Energy power generation that belonged to power generation team of Machinery company, power trading that belonged to Energy Division of our company and Energy Storage Business that belonged to Chemicals Division of our company are now integrated and made a fresh start as an independent division. In this new division, there are 2 departments and 3 sections. As of February 2021, we have 49 selected personnel. In order to make sure that we can break away from the siloed organization, we made those 49 people move completely to this new division. They become the new family, so to speak, and I will be heading this division. In order to realize the low-carbon society in Japan, we need to combine low-carbon power source as well as reduced power consumption by consumers. We believe that the role of our division is very important. Two general managers will give you more specifics later on. But if I may touch upon the overview of this new division. First, with the Power & Heat Business section, the major business is the wholesale power trading and is also responsible for aggregating ITOCHU Group's power demand. At Aoyama Energy Service, which is a consolidated subsidiary, we provide heat supply. We are trying to expand our businesses with the combination of power and heat supply. In Renewable Energy Business section, the main business is development and operation of renewable power sources, such as solar, biomass and wind. Recently, in December last year, Ichihara Biomass Power Plant started its commercial operation and will be gradually realizing some of those renewable energy businesses that are planned now. We also focused upon the distributed power supply business. Operating company, VPP Japan is currently expanding the distributed solar power-generation business using third-party rooftops. In addition, we sell the biomass fuel to the biomass power generators. In Energy Storage Business section, it is expanding its business mainly in the manufacturing and sales of AI-powered proprietary energy storage system. We are also focused upon the reuse and recycle business of automotive batteries, trying to create a circular battery business in Japan and abroad. Also, we invest in 24M, which does the research and development of the semisolid lithium-ion batteries. So we are making investments for the future technologies. This is the integration of the departments, which were already generating profit. So we will have a certain level of basic earning capabilities, and we'll be building up on that. As a synergy effect, we are promoting the horizontal alignment with the customers with whom we only had a siloed open relationship, namely the major power companies, chemical companies, logistics players, homemakers, energy companies, engineering companies and financial services companies. We are now able to provide unique and comprehensive new proposals in the area of energy to wide-ranging customers. Also, the sales team have a responsibility of making investments in alliance into the start-ups and new companies. So we will be able to make the new comprehensive and combined proposals to generate synergies to the partners that each team have developed, and we will also refer to the partners each other. We have been successful in creating stimulating and innovative relationship. Next is about the vision for the future. As I mentioned, recently, we have seen the expansion of the innovations happening in the downstream of our industry. Our new division is trying to realize circular society. At first, we believe the core of the growth is AI-powered storage system. Other companies are also enhancing the solution business surrounding the power industry and there, we are reorganizing or creating new organization. In that sense, we believe we have a uniqueness in our structure. Other companies would start from the upstream, that is from the power-generation side. But in our case, we form multiple network from the side of the users. That is to say the distributed renewable energy network to be connected to the upstream power sources and renewable energy. This is market-oriented perspective. As you know, we used to have a one-way power grid. But with the development of the distributed power sources such as solar, we are starting to see the transition to the multilateral 2-way grids. By developing this trend, there will be a small and medium 2-way power grid, where power consumption needs to be managed appropriately without waste within grids. With the right management, it would be possible to control the power consumption and peak power. And this is where the ESS, or energy storage system, plays an important role, especially our own AI-powered storage system. With the energy management on the consumption side, rapidly increasing electrification demand from the EVs and others can be controlled and can alleviate excessive burden on the power generation side. As for the profit-making in each field, those will be explained by 2 heads of departments. But as a division as a whole, alignment with the renewable power grid and solar TPO and identifying and utilizing environmental value, development of new-generation battery and reuse and recycling of the batteries as well as building the network to using the blockchain technology and connection with the EVs, we are making all of those preparations. As for building power network in the downstream, in addition to controlling power consumption, this can make people's lives more safe and secure through digitization and evolve into a life service platform in the near future. Also, this can be combined with our DX strategy. Someone said that someday in the future, there will be 1 ESS per house, and ESS will play a role of router for digital life. Last slide from my side. Next fiscal year, we will start the next 3-year medium-term management plan. As announced, basic policy for the plan include realizing business transformation by shifting to a market-oriented perspective and enhancing our contribution to and engagement with the SDGs through business activities. The details of the plan will be announced at the business results briefing next fiscal year and our new division will be realizing those 2 basic policies. And our target is to become the new source of profit of ITOCHU by fiscal 2024. The next is presentations from Mr. Imamura and Mr. Murase.

This is Imamura speaking. Thank you very much. Now I'd like to explain the overview of our business strategy. On this slide, we are showing the specific businesses and achievements. The vertical axis shows the time, starting from the bottom, that is past and where we are and next generation. The horizontal axis starts from the left, power generation and supply-demand adjustment and the users of downstream market. First is the power trading utilizing the surplus grid power. As you see on far right, by aggregating corporate demand, mainly in ITOCHU Group and business partners, we become large-scale user, and it can supplement the function of the major power companies based upon the market-oriented perspective. In sales, in addition to fuel adjustment hedging from users' perspective and product customization, we already handle more than 5 billion-kilowatt hour per year. By providing functions of supply/demand adjustment, we provide combined demand to the division with appropriate level of margin. For households, through multiple business partners and affiliates such as ITOCHU ENEX, which has unique contact with customers, hundreds of thousands of accesses to users are already established, which can expand from now on. Also, we cooperate with TEPCO Group in heat supply and corporate energy service business. Bringing this business to abroad is also in sight. In power generation, we own more than 600-megawatt assets, both existing and in development of the renewable FIT power sources, including solar, biomass and wind. For the next-generation non-FIT PB model for self-consumption is offered through investees. For renewable power generation as carbon-free biomass fuel trading, flexible function with multiple sources is provided. Toward the carbon neutral in 2050, we plan to capture the needs of mixed combustion from power generators and development of carbonized fuel. In energy storage, we have global access to related companies with battery material business and AI-powered storage system. We have invested overseas in reuse and next battery technology from the -- for the next generation. By utilizing real-time data, we are ready to start the next-generation model, with TRENDE, one of our investees and others. As you know, in corporate demand aggregation, we have already realized certain size in power trading. Through collaborating with multiple major and new partners, we would offer next-generation energy storage products, materials and related services to mainly users in ITOCHU. We intend to bring the power business to the next level. We will listen to the voice of users one by one and work with partners on the supply side in home, product design and services with unique improvements from supply/demand perspective. This positive cycle is and continues to be the key to our strategy. When we consider future growth strategy, as mentioned in the government green strategy announced at the end of December last year, the key in realizing carbon neutral in 2050 is the combination of use of renewables in power generation and electrification on the user side. As renewable power source and distributed resources increase, we need to deal with fluctuations due to the weather and uneven regional distribution. Power transmission distribution side alone cannot fully handle this. Major power companies are struggling and making efforts to alleviate these burdens, while supply/demand adjustment on the demand side, not just in terms of volume, but flexibility in output and capability to provide it is needed more than before. In our division, we will improve functions and skills such as forecasting renewables, renewable power-generation volume in balanced unit price as well as trade risk management and demand response so that we can firmly connect distributed renewable resources of demand side to the grid and complement the grid-wide control. Together with the supply/demand adjustment function of demand side, we plan to expand our trading businesses further in these fields. Users who are crucial are searching for answers amid rapid changes. We are receiving many more inquiries from them. As more options are needed, we have started to handle renewable-based electricity utilizing non-fossil fuel value in Japan. We will specifically respond to next-generation needs and expanding demand from electrification. As mentioned, 29 years of intermittent changes are expected until the carbon neutral is achieved in 2050. This is a task and challenge for the future. This is also a task that we must tackle and overcome for many users and stakeholders. It is not meaningful for us, a trading company to talk about ideals. We have already secured a certain level of profit, but we will expand our businesses by securing resources for growth. Based on the market-oriented perspective, we will propose specific solutions to manufacturers, corporate users in commercial area, households, former general electric utilities and power generators. These are our initiatives and business strategy. Next, Mr. Murase will talk about energy storage, which will be spearheading these endeavors.

This is Murase speaking. Thank you very much. Now let me talk about specific initiatives. First, this slide shows the nationwide distributed power network that we own. As for distributed solar power generation using third-party rooftops, VPPJ, our partner, has a leading market share in the commercial area, mainly in supermarkets and logistic warehouses. Another partner we have is TRENDE, which has a leading market share in the household area. So we are making steady progress in proceeding with the collaboration project. For the ESS for household use, we have a joint venture called NF Blossom Technologies, which develops and manufactures the Smart Star series, its unique brand and sells them. Right now, we have installed more than 40,000 of them in Hokkaido in the North and also Ishigakijima island of Okinawa in the South. This ESS captures household power data every minute and AI-based software grid share controls in an optimal manner. Based on our experiences and achievements in Japan, we are making preparation to apply this outside of Japan, including the United States. Our goal is to create a society with the virtuous cycle between environment and economy. I'd like to now share with you the specific initiatives using those 6 key words. First is distributed renewable power generation business. We would like to show a video message from the President Akita of VPP Japan, talking about our initiatives and collaboration with ITOCHU. [Presentation] So that was the message from Mr. Akita. Core of our energy storage business is lithium-ion battery surrounded by a whole chain of parts and materials and sale of vinyl products. As you know, the EVs are becoming more widely available in Europe and China. The global sale of EV and PHEV in 2020 was 3.2 million. According to a report of a research company, that number will increase to 4.6 million in 2021 and 12.8 million in 2025. The growth will accelerate. In promoting our energy storage business, the biggest risk is whether we can secure the lithium-ion batteries. In order to tackle this, we have taken 2 approaches since 2018. First is the reuse of automotive batteries to stationary storage system and access to next-generation lithium-ion battery technology. First, about the reuse and recycle business of batteries. Based on our experience in battery parts and material business, we have studied how smoothly and cost competitively we can go through the battery removal and reconfiguration after batteries are assembled and used for EVs for reuse. In addition, rare metals such as nickel and lithium and parts and materials are collected from the used batteries as much as possible and return to our chain of battery parts and materials. We are working to complete truly circular systems. Our capital and business alliance with Pandpower, which is the family company of BYD, started in 2019. There are 3 reasons behind this. One is that it's possible to obtain use history information of the batteries that are not disclosed by the car manufacturers, so we can understand the health and we can forecast the life of batteries precisely. And also, the shape of the automotive battery is rectangular. So it's easy to reconfigure. This will lead to improved space efficiency and better cost competitiveness. And the third is that the application of those BYD batteries are mainly for buses and taxis. So we can estimate when those batteries can be reused. This will lead to high-quality and competitive and stable procurement. The photo here shows a first system of NF Circuit plant in Yamaguchi Prefecture that would start to operate next month. One 20-feet container is about 1 megawatt hour. The batteries inside would be for 5 buses. Those buses were utilized as a public transport mutation in Shenzhen from 2015 to 2020. By analyzing the status of the battery, we can reconfigure it for the next application. And we are getting very specific inquiries from the customers in and outside of Japan. So we will gradually expand this business. Next is next-generation battery. We invested in the 24M, which is the MIT spin-off, which manufactures the semi-solid batteries in 2018. There are 4 major characteristics. One is we redefined the production process from the beginning. And by doing this, we can significantly simplify the production process, and we can reduce the CapEx to 1/3 of the conventional lithium-ion battery. And the space in plant can be reduced to 1/10 in battery cell production. Second reason is the reduction of parts and materials by 25%. Those would contribute mainly to the competitiveness of product. The third characteristic is the high safety. It does not use the liquid electrolyte. And it is sometimes called clay-type battery. So clay-like electrodes are used. So as you can see in the photo on the left, under strong shock, it would deform and secure the safety. The fourth characteristic is high recyclability. By reducing the parts and materials, this can be recycled in a much better way. The EU from now on will be setting the guideline for the recyclability of the batteries. In that sense, the 24M semi-solid battery technology is superior. And the biggest characteristic of this technology is that it's not in the research phase. It is starting to become the mass production phase. Kyocera, for example, will be soon starting the mass production as reported. GPSC, the power company of PTT Group in Thailand would also start the mass production this year. Innovation company, FREYR for a year also uses 24M technology and will utilize this for hydropower generation and start to manufacture batteries in 2023. There are other multiple companies which license 24M technologies, which are not mentioned here. And the global network is being formed. We will pursue the licensees and supply parts and materials and procure batteries and also use this technology for our own energy storage system. In the society, where a distributor renewable power generation and energy storage system are widely available for users, efficient use of green energy and maximization of economics become important. And because of this, peer-to-peer electricity trading using blockchain is drawing a lot of attention. Capital tie-up with TRENDE started in 2020. Together with Toyota and Tokyo University, TRENDE conducted the demonstration of power trading for 1 year among 20 households. Results were very promising, generating economic advantages for all the households. Next is video message from President Senoo of TRENDE. [Presentation] That was a message from President Senoo. As blockchain-based peer-to-peer business is in sight, we are now adding the Smart Star 3 into the series of Smart Star products. This is the new model launched today. In addition to continuous function even during the power failure, and AI control, which have been highly evaluated in the market, capacity and output increased based on the market needs analysis. Furthermore, we provide platform to measure environmental value for the first time in the world for the household and to convert it into points. It also has the charging function to EVs, which is expected to penetrate also in Japan. This would make the electricity supply to EV more green. I'd like to show you the video to introduce the Smart Star 3 as well as the society that we envisage. [Presentation] As you saw, so far, in distributed renewable power generation, we have partners, including VPP Japan and TRENDE. And we can comprehensively control the energy storage network for households connected to AI software called Grid Share. In the near future, when the TRENDE's peer-to-peer technology is implemented and the batteries with the 24M technology is mounted on EV and it's controlled and integrated under the Grid Share, what would be possible. Also, we would embed the such circular flow based on the reuse and recycling of the EV batteries. Platform that converts environmental value to points, which is brought by Smart Star 3 will connect households, convenience stores, supermarkets and companies and EVs and will create a community. This is the last slide shows our future vision. This slide shows all the hardware, softwares and technologies and business models that were discussed today. There are hurdles and challenges that we have to overcome, but this is not a dream. We will start from small-scale projects, which will be organically connected and aligned and create a community and develop into a smart city. That is our belief. That is when the virtuous cycle between environment economy can be created in true sense and realize society where we can realize the decarbonization. Based on that, we will continue to work with our partners. Thank you for your attention. That concludes our presentations.