ITOCHU Corporation (8001) Earnings Call Transcript & Summary

Now we would like to start the Investors' Meeting for operating segments of ITOCHU Corporation, digital strategy in the ICT and Financial Business Company and The 8th company. Thank you very much for joining us today. I'd like to also thank you for your patronage for ITOCHU Corporation. I would like to act as a moderator. I am Amano of IR division. As continuous DX demand is expected, we would explain our ICT and Financial Business Company and The 8th company, which are unique to ITOCHU. Also, in terms of the corporate value, we will focus upon the improvement of the growth rate. Let me introduce the speakers. From ICT and Financial Business Company, Managing Executive Officer, President of ICT and Financial Business Company, we have Mr. Tatsushi Shingu. Next, Executive Officer, COO of ICT Division, Mr. Hiroshi Kajiwara. General Manager of Planning and Administration Department, Mr. Atsushi Hashimoto. Next, participants from The 8th Company. Executive Officer, President of The 8th Company, Mr. Shuichi Kato. Next, General Manager of The 8th Company, Mr. Hiroshi Nakamoto, General Manager of Planning and Administration section, Mr. Tetsuya Mukohata. As an observer, we have Mr. Tsuyoshi Hachimura, Member of the Board and Executive Vice President and CFO. First, Mr. Shingu, the President of ICT and Financial Business Company, will print the overview and the growth strategy. and Mr. Kato, the President of the company, will talk about the 8th Company growth strategy utilizing FamilyMart's business foundation. Then we take your questions. Now Mr. Shingu, please.

Hello. My name is Shingu, President of ICT and Financial Business Company. Before I talk about the growth strategy, I'd like to give you the overview. This page shows organization and business overview. Our company was newly established in FY 2017 to integrate ICT and Financial business. We are a relatively young company in ITOCHU. We are seeking to capture the new markets and expand by combining the ICT division's business development functions with the Financial and Insurance Business Division's customer network. I am the President and under me there are ICT division: Financial and Insurance business division, so two divisions. In under ICT division, there is, first of all, information technology business department, including IT solutions, digital marketing, BPO, venture investment, health care and others. Space and Satellite, media content, mobile-related services are under communication and mobile business department. So we have two departments. Now as the nature of the business and revenue expanded for ICT division. From the first of April this year, we are establishing another department, including the venture business, health care and media business. The name of this new department will be Frontier business. So we will have three departments, and we would like to further increase the revenue and other businesses. Next, about the Financial & Insurance business division. Credit card, consumer credit business and fintech services as well as retail finance businesses are under financial business development. Retail insurance distribution, insurance agency and brokerage and others are under insurance business department. So there are 2 departments. Number of the group companies is 34. Number of employees, nonconsolidated, is 339. This is the trend of the financial highlights. We started in FYE 2017 and earning base increased through the asset expansion. In terms of total assets in FYE '17, as you see in the blue bars, total assets were about JPY 700 billion. For FYE '22, we expect the total assets to be around JPY 1.3 trillion. As for the green bars showing the consolidated net profit in FYE '17, it was around JPY 40 billion, and we expect about JPY 103 billion for FYE '22, including one-off gains. Looking from the ITOCHU Group, the total asset is about 11% of the total and core profit is about 12% of the total. Now in the ICT and financial business companies, we are enhancing the group company management. We have strong operating companies. In IT services, recently, we have a strong tailwind of the digital transformation, or DX, and CTC has been pushed by this tailwind. And about 3 years ago, WingArc1st was commercialized, and this is Japan's top market share in business form solutions. And in relation to BPO, we have BELLSYSTEM24, one of Japan's largest contact center operators. In healthcare service, A2 Healthcare is one of Japan's foremost CROs. In media, as you might know, one of Asia's largest satellite communications player, SKY Perfect JSAT and in communication and mobile, Japan's #2 mobile phone sales agent CONEXIO is in ICT division. In the Financial & Insurance Business Division's, with the credit card, we have seen the stable revenue from Orient Corporation. And later on, there will be explanation that we issued, the Famima card by POCKET CARD and overseas retail finance in Hong Kong and Thailand, consumer financing business is providing us a very stable revenue, for example, UAF and Easy Buy HOKEN NO MADOGUCHI was -- became the consolidated subsidiary recently. And now the Life insurance sales channel has been shifting to the distributors carrying the insurance products of multiple insurance companies. This page shows the areas of the focus. In ICT division, there is a IT or digital transformation. And then mobile-related business, including CONEXIO, and also the retail finance and insurance. Those are the three major areas of focus for our company. Today, we are focused upon the digital strategies. So what is shown in red at the top, we are focusing on the DX area and talk about the growth strategies. Now let me explain the ICT and Financial Business Company growth strategy, grow by providing market-oriented services aligned with accelerating business environment changes and diversifying customer needs. You might say that this is kind of big and you don't understand what we are trying to do. Simply put, so-called GAFA, Google, Amazon, Facebook, Apple, those are the major IT platformers, providing the various digital services at very reasonable prices. I'm sure that you all know this. So for example, in the area of the e-commerce, using a smartphone with one click, you can get the delivery of the product that you want the next day. So this has already become the reality. So under those circumstances, existing businesses have to go through the digital transformation. That is one of the realities that we are facing. So we are one of the companies who are faced with that. So digitization is an urgent thing that we have to do. But for us, the ICT and Financial Business Company, we are strong in digitization and DX. So we believe that these environmental changes are opportunities for us so that we can generate businesses. So this is one of our core growth strategy. More specifically, there are three things which are listed on this slide. First, is to contribute to profits by strengthening and expanding DX support businesses to generate synergies with existing businesses and company-wide DX promotion. So according to the trend of the digitization, the DX-related business demand is expanding. So we will start with digitization of the ITOCHU Group. So we will support the digitization. And then we would accumulate the know-how so that we can sell those products and services to outside of the company. That's the first point. Second, in the digital society, the importance of the startups and venture businesses are becoming more and more important. So for example, [indiscernible] are some of the examples. And I think that they have become a part of our daily lives. So as ICT and Financial Business Company, through the investments to the venture businesses and also through creating the synergies, we want to have an access to cutting edge innovation and secure stable capital gains. This is the second part of our growth strategy. Third, as I said, IT platformers have emerged and also with the penetration of the smartphones. Various businesses are being born and disappear and they grow and change. We have seen that happening, and we believe that trend will accelerate further. So on a daily basis, we are seeing the new business models being generated. So for us, the ICT and Financial Business Company, we want to generate the new business. So this is what I call innovation. So I want to make sure that we have an ongoing and continuous new business development so that we can accelerate growth. So that's the third pillar of our growth strategy. Now let me explain those three, starting with the expanding profit through DX support businesses. CTC is one of our major business. And also in contact center, we have BELLSYSTEM24. So when we consider the digital transformations, we need to have SI and BPO and other various companies to respond to the various needs. So as a company, we would like to have a wide ranging lineup of services and products so that we can provide solutions to respond to the various needs of digitization of the companies. So in the area of the business consulting and management consulting, we collaborate with U.S. company, AKQA and SIGMAXYZ -- is the company that we have a capital tie-up with in Japan for the IT business consulting. And for the digital consulting, we work with the BrainPad for the data analytics and others and also WingArc (sic) [ WingArc1st ] Digital marketing and promotion, we have worked with ITOCHU Interactive. And in addition, we work with FreakOut and Google-based cloud system integrator, GI Cloud. And also, we have a DentSu retail marketing, the joint venture with Dentsu which was commercialized. So we want to be able to respond seamlessly to all the DX-related needs to generate synergies among those businesses and companies. Now let me give you some specific examples. In promoting the DX support businesses, we will start with the group-wide DX support. For example, NIPPON ACCESS. They used to issue so many invoices for the retailers and the food manufacturers they need needed to exchange those paper with their customers and mail them. But using the WingArc1st technology, we can digitize those invoices to improve efficiency. Another example is also of NIPPON ACCESS. Ordering system used to depend upon the professional people using their intuition to place orders. But using AI engine, we can digitize it so that you can place an order and also reduce inventory and enhance the efficiency. So this is an example of our "cut" principle. And as for the example of the "earn" principle, we are working on the food data as a project with the food company. So here, we are talking about taste, for example, convenience stores or retailers even they actually developed new products almost every month. So for example, bitterness or sweetness or sourness, those tastes were expressed in the analog manner only. But by digitizing this, this would be helpful for the new product development. So this is the service that was developed, and we are selling this service. So those are the examples. So each example, the revenue from them are not so large. But what we want to achieve is to, for example, from the consultation business, data analytics or digital design. Through those processes, we want to capture the needs for the DX so that we can hand them over to CTC or BELLSYSTEM24. So those existing businesses can expand their revenues and profits. So we believe that this type of synergy is possible. Second point of the growth strategy is to secure profit opportunities through venture businesses. In the ICT and Financial Business Company since 1990s, we have secured access to the cutting innovation and business model through the investment through the top-tier funds, starting with Silicon Valley companies in 1990s and Tel Aviv. In Tokyo, we operate our own venture capital. And more recently, London, Hong Kong, Singapore and Estonia, we have expanded the investment. The amount of the investment has increased to about 5x from FYE '12 and the return has increased to 7x. So what kind of opportunities do we have through the venture businesses? For this fiscal year, there is a special case of the sale of Paidy. Ultimately, the fintech major player, PayPal of the United States bought this company at JPY 300 billion. And in 2016, when fintech or BNPL were not discussed in Japan, through the top-tier we see which invested in Affirm and Klarna, we received the information so that we decided to fund Paidy. And then we dispersed the personnel from the Financial & Insurance Business Division, and also we enhance their credit with the ITOCHU's, and we wanted to foster this as an operating company. And in 2018, we made additional investments and make this into a company under equity method. And if possible, we wanted to operate this as an operating company. But ultimately, PayPal wanted to acquire this company and their conditions were considered to be a good one. So we decided to sell all the shares to PayPal. So this brings us about JPY 30 billion extraordinary gain after tax. So this is a special case. So M&As, IPOs and commercialization, through those, we can secure profit opportunities through venture businesses. The third is the innovation or new business development and grow through the ongoing new business development. What does this mean? I think you all know this, but there are various business models for the general trading companies. It started with the trade moving products and services from left to right. And then we experienced a period of hardship. And so we started to invest. And the gains from the investment supported the to ITOCHU Group. But in the case of ICT and Financial Business Company, in addition to trade and investment, we need to go to a new market or services brought by new technology. We have to be very proactive to start from the scratch to generate the new businesses. This is what I call new business development. So trading and investment and in addition to this, the third pillar is the new business development, which will bring us on to a new growth stage. More specifically, some of the examples are listed here as a track record of the past initiatives, for example, CTC and CONEXIO. Those were the spin-off operations from the line of trade at the headquarters. So in addition to trade, CTC added system integration, development and maintenance to create the current business model and has become one of the major business at our ICT and Financial Business Company. So it's not just CTC and CONEXIO, but also the Asurion, which is the mobile after service business started as a joint venture and portal site Excite, and eGuarantee and KABU.com. Those are the examples. As for the current initiatives shown at the bottom, in the area of the DX, the AKQA U.S. digital consulting business, we are working together to develop business in Japan and Google cloud-based SI business, is GI Cloud and Docquity. This is an SNS platform for doctors in Asia. And remote diagnostic support business, Mnes and the Belong secondary phone distribution business and RBA, Asia-targeted license business and Money Communications, salary prepayment business and Gardia retail guarantee business and PDP, Indonesia P2P lending. So there are tens of those examples. And of course, not all of them will go well, but some of them will be supporting the revenue and profit of ICT and Financial Business Company in the future. So I quickly went through the business overview as an ICT and Financial Business Company and talked about the growth strategies. I talked about three things. One is the DX support businesses; the second is venture business; third is business incubation or new business development. On the right-hand side of the slide, we are showing the lead times and expected revenue? Is it short term or long term? Or how much revenue can be expected? I'm showing them in the different colors. But after we finished this slide, I noticed that there are no numbers. So let me talk about some numbers. As of now, for this fiscal year, as I said, in addition to the JPY 30 billion gain in relation to Paidy, we expect consolidated net profit to be JPY 103 billion in FYE '22. But by FYE '26, we want to achieve the JPY 100 billion in core profit and total assets. which was JPY 700 billion in FYE '17 and increased JPY 1.3 trillion. With the new investments and others, we want to increase that up to JPY 2 trillion. So that's the type of the image that we have for the balance sheet so that we can achieve the core profit of JPY 100 billion as a company. Thank you very much. That concludes my presentation of ICT and Financial Business Company. Thank you for your attention.

Hello. I am Kato, President of The 8th Company. So I'd like to talk about the growth strategy of The 8th Company, utilizing the basis of the FamilyMart business. The 8th Company was established. In July 2019, 2 years and 9 months ago, to shift to the market-oriented perspective and further revitalize the organization and personnel throughout the company, which has the strength in non-resource, especially the retail business. We have three advantages or strength as follows. First is the physical store network of FamilyMart 16,600 stores. and also the business foundation with the strength in consumer-related sector and also personnel with diverse background because people came from different companies and ameba-like organization with high morbidity. The third strength is the culture to flexibly generate businesses based on the market-oriented perspective, not restricted by the specific products or services depending on how you count, but the number of employees is a little less than 50%. We are working on more than 10 projects under 4 general managers. There are three major initiatives. First is to thoroughly strengthen ITOCHU's core business, FamilyMart business. to improve the three basics of the convenience store business, that is the product appeal, convenience and familiarity. In addition, we try to improve and make the supply chain more sophisticated. So we are working on the expansion of the profit base as family mark. Second, by using the store network of FamilyMart, 16,600, and also the capability to attract customers, 15 million customers per day. We are trying to generate the new businesses. and also to promote the demonstrations of those new businesses at The 8th Company. And when we prove or test the effectiveness of those new businesses. Those services and technologies will be rolled out nationwide to the other -- to all the FamilyMart stores and to other retailers and business categories. And thirdly is to expand the customer contact point through the external collaboration, increased data volume and maximize the revenue from finance, advertising and media and to invest new profits to the convenience store business to further improve our capability to attract customers to stores. This page shows our initiatives in relation to FamilyMart. Now the population is declining. We have a shortage of labor and convenience store market is maturing, and we are faced with the intense competition with other format of the businesses such as drug stores. And we are seeing the social and environmental changes due to the COVID-19. In order to resolve those challenges, we are trying to improve the base of our revenue. So we are focused on the basics of the convenience store business and try to utilize the digital technologies at the maximum level, so that we can create the new convenience store to realize the different growth. More specifically, together with the sustainable growth of the FamilyMart, we want to become indispensable for community and society and strengthen the base for the convenience store business and create new businesses. So those are the two axis of this growth cycle. On this slide, on the right-hand side, we are showing the increase of the customers to the stores and day sales by using the technologies and also supporting the store operation and diversify stores and reduce workload and strengthen the base of the convenience store business. On the left-hand side, we are showing the new businesses. As I mentioned, there are 5 million per day customers and 16,600 store network nationwide. So we want to make sure that we earn the new revenue from the new businesses such as finance, advertising and media business, and reinvest the profits from them for the convenience store business so that we can create a virtuous cycle and create the new story lines. Next, let me talk about the specific digital-related businesses. First, I'd like to talk about FamiPay. Some of you might be using this. Now for the digital touch point, FamiPay app was launched in July 2019. In November last year, we achieved 10 million downloads. And number of downloads is increasing. Now using the FamiPay app, we can expand the digital touch points. And we can combine this with the purchase data of 15 million per day, enhancing the existing businesses and generating new businesses. As for the existing businesses, shown on the right-hand side, through FamiPay, we can provide unique benefits and convenience and also enhance customer relation management, or CRM, through data analytics. So based upon the purchase data, we can work on the sales promotions, distributing coupons, stamps and others that would make our customers happy. In addition, we are currently working on the new loyalty program. And through those measures, we want to increase the daily sales and increase the customer traffic. Bottom right shows the new businesses. I will talk about the advertising and media businesses later on. And in the financial business, among the major convenience stores, we are the only one which has the -- our own payment function. In September last year, we started the FamiPay next month payment in the case of a shortage of the e-money balance. In December, we started the FamiPay loan. This is the small-scale financial service. We have customers coming to the convenience stores with diverse needs. So we want to respond to those needs and we will be increasing those functions gradually from now on by utilizing digital customer touch point. For example, you can pick up the products, which are not always available in the store where you can use the convenience store as a locker and others. So we are currently verifying some of the new services. Second is that this is the first new business that The 8th Company generated called Data One. In October 2020, 4 companies, including ITOCHU and FamilyMart having 55% NTT docomo having 40% and CyberAgent 5%. So those 4 companies started the data on for the digital ads distribution business and ad agency business, utilizing the purchase data of retailers. So by combining or synchronizing the FamilyMart purchase data and d POINT member data of NTT docomo, we hold about 20 million advertising ID, which is the biggest in Japan until now. As for the digital ads, it was difficult to understand the effectiveness of the advertising to understand how consumers sold the advertising before making a purchase. Digital advertising of Data One, based on the purchase data, can distribute the advertising, which the customers might be interested in for each ID -- based on the ID. So it is possible to evaluate advertising at the point of conversion, finding out how the customers came to purchase which products in FamilyMart stores. So this can be highly valued by the advertisers. And also, it's possible to measure, purchase behavior of users who received ads. So by having the multiple patterns of the video included other advertising, included in the social media or YouTube video, you can actually evaluate the creative and verify, which creative was more effective for the conversion. Next is about the media business, Gate One. We had 1-year demonstration at 50 stores in Tokyo and 50 stores in Okinawa, and we launched Gate One in September 2021, 6 months ago. The equity stake is 70% FamilyMart, 30% ITOCHU. This is the media business using digital signage. We established this company to promote this as a new company -- new business. In February last month, we completed installation of the signages to 1,000 FamilyMart stores. And as a next step, we plan to increase it to 3,000 stores by June. And this signage is installed 90 degrees from the customer queues. So 50% to 60% of the customers will look at the signage, and will have a certain impression of the signage. And we could confirm this with the AI camera and exit research. And advertisers are already evaluating this as a new media. In addition, we can show the commercials of the products, which are offered by the stores. So that would also have a positive impact on the sales of the stores. The major pillar of the revenue is, of course, ad revenue or commercial revenue. But if we only show the commercials, people will get tired of it and lose interest. So in this business, I think that the content shown on the signage must be attractive so that customers come into FamilyMart would want to watch and listen to what we show on the signage screen. So for example, the promotional programs and also the original interviews for the TV shows and movies are shown and we have popular actors and actresses appearing. And also, there is a promotional video of this. And people who become popular through TikTok and YouTube are introduced through Famima vision. And by doing this, when the customers go to FamilyMart, naturally, they would look at the FamiPay Famima vision. And in between those content, they will see the commercials. And there would also be some content, for example, about the rice ball ranking top 5. So through this, the value of the signage in the store as a media will be higher. And the value of the advertising can be increased as a result. So this is the cycle that we want to create. So this Famima vision by Gate One can also localized. So in the near future, this can be utilized as a media, which is tailored to the different localities. So we plan to install the signage to 3,000 stores by June. So that would be about the reach -- the same reach as the local TV station. And if we installed this to 12,000 stores, that will be the equivalent of the key TV station in Tokyo. So within 3 years, we want to introduce the signages to older stores, 16,600 stores, where possible. So that this will become the third media after the TV and Internet. That's kind of like a dream. This is a slide showing the business schemes by synchronizing the Data One targeted advertising services with Gate One's media business, utilizing our nationwide FamilyMart store network, we provide new added value to advertisers. Now in the world of advertising, as you see on this slide, 20% to 30% of the revenues go to agency and distribution cost and 70% to 80% go to the media owner. Of course, among the media revenue, in some cases, media need to pay to create the creative. So sometimes there is an explanation. It is usually the percentage of 20%-20%-60%. But for us, by doing both of them, we can maximize the advertising and media business revenues. In the future, by utilizing Data One's purchase data, we are considering the integrated marketing of online and offline, distributing the digital ads and family coupons, FamiPay coupons to people who sold signages at stores. Next is about the humanoid AI assistant. The 8th Company is currently developing this. In 2019, we started the capital tie-up with the Couger Inc. which is a start-up company, developing AI. Couger has knowledge of gaming AI that can express the human like emotions and technology to make AI reliable with blockchain and world-class technology in image recognition AI to understand the human expression and gestures. The President of this company actually gives presentations for the Stanford University. So by combining all of those technologies, we are currently co-developing the humanoid AI assistant to support the store operation of FamilyMart efficiently and give up advice to the store managers. In comparison to the voice AI equipment, humanoid AI has a higher response to inquiries or questions, and this would be invigorate and activate the communication and information delivery. We have done the demonstrations at about 40 stores. Right now, based upon the past store performances, such as sales and disposals and campaign information, weather and the day of the week and also based upon the behavior data of the store manager and personality, we are trying to build the effective communication model so that we can give advice to the store manager about the store operations. It's still a pilot stage, only 40 stores. But the in-stores, where there is a daily communication with the AI assistant, we are starting to see the changes of the behavior of the store manager, their purchasing improved. So their sales also improves. So there are positive impact, and we want to expand this into other FamilyMart stores. But of course, unless many store managers want to use this on a daily basis, the effectiveness would be limited. So we want to make it possible so that the store managers want to use this humanoid AI. So we are currently making such improvements. Next, as for the initiatives with the ICT and Financial Business Company, BELLSYSTEM24 Holdings in addition to providing the contact center for FamilyMart, they provide BPO operations in the various areas. Group companies such as DENTSU RETAIL MARKETING, MyVoice Communications and others, they collaborate with us in doing various experiments based upon the base of the stores of the FamilyMart. As an example of the venture investments, TELEXISTENCE, has a beverage automatic display robot to reduce the store personnel. So we are working on those new initiatives using the technology. By using the robotics and AI technology, instead of the store staff, the robot can handle the display of 1,000 cans and bottles per day, 24 hours a day, so that store workers do not have to leave their store floor to provide customer service and higher value-added work. Also, ICT and Financial Business Company cooperate with us in providing personnel in various areas, loaning their people to digital and finance financial business department of FamilyMart or finance people to FamilyMart Digital One and ICT people to Data One. As for the 3- to 5-year medium-term growth trajectory, as we promote and strengthen the existing business of the convenience store, by using the technology or know-how of ITOCHU Group, we'll be working on generating new businesses in advertising, media and finance and tested services and technologies will be rolled out to other retailers and other industries, so that we can expand businesses. In advertising, we will form alliances with non-convenience store retail operators in other industries so that we can improve the breadth and quality of purchase data. And Data One, we try to target the sales of JPY 10 billion in fiscal year ending 2016. In Media business, as I said, that we plan to introduce a signage in older stores within 3 years. And in FYE '26, we tried to achieve the advertising sales of JPY 20 billion to JPY 30 billion. In Financial business, we would utilize the capability of FamilyMart to attract customers and also the payment function included in the company's app or embedded finance and roll out the various insurance and financial services. Total of the three businesses, we plan to achieve JPY 5 billion to JPY 10 billion profit after tax in FYE '26. The 8th company will proactively invest in start-ups, such as Couger, so that we can utilize the technologies and services of the investees to the FamilyMart and we will roll out the solutions tested at the FamilyMart and try to secure revenue for ITOCHU. Thank you for your attention.