Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2019-Q1

[Toshiaki Sagishima, executive]

My name is Sagishima of Idemitsu Kosan. Thank you for your attendance today. I would like to provide an overview of our financial results for the first quarter fiscal year 2018 and our revised earnings estimates for fiscal year 2018. I would like to begin with an overview of our financial results for the first quarter of fiscal year 2018. This slide shows trends in crude oil prices. The red line shows the trend in fiscal year 2018, while the blue line shows the trend in fiscal year 2017. The average Dubai crude oil price in the first quarter was $72.2 per barrel, representing a year-on-year increase of over $20 per barrel. The crude oil prices also increased relative to the end of March 2018, leading to inventory valuation gains. We assume an average of $70 per barrel in our earnings forecasts from July onward. This slide shows trends in the yen per U.S. dollar foreign exchange rate. As in the last slide, the red line shows the trend in fiscal year 2018, while the blue line shows the trend in fiscal year 2017. The average exchange rate in the first quarter was JPY 112.1 per U.S. dollar, representing a yen appreciation of about JPY 2 per U.S. dollar. We assume an exchange rate of JPY 110 per U.S. dollar in our earnings forecasts from July onward. A summary of the fiscal year is presented here for your reference at a later time. I would like to start with a summary of the income statement for the first quarter of fiscal year 2018. Crude oil prices and exchange rates are as explained on Pages 2 and 3. Brent crude oil and thermal coal prices in the top chart are results from January to March reported from consolidated overseas resource companies. Average Brent crude oil increased by $13 per barrel year-on-year to $66.8 per barrel. Thermal coal also increased by $19.4 per barrel year-on-year to $102.6 per ton. The bottom chart is a summary of the consolidated income statement. Net sales increased by JPY 173 billion year-on-year to JPY 1,004,700,000,000. Operating income increased by JPY 36.9 billion to JPY 71.5 billion. As there was a positive inventory impact of JPY 22.5 billion, operating income, excluding inventory impact, increased by JPY 8.4 billion to JPY 49 billion. Nonoperating income increased by JPY 5.7 billion to JPY 10.1 billion, mainly due to an increase in income from equity method affiliates with the largest increase coming from Showa Shell.

We reported ordinary income of JPY 81.6 billion and extraordinary income of JPY 2.9 billion. As a result, we reported net income attributable to owners of the parent of JPY 55.1 billion. Here, I would like to explain extraordinary income and losses in more detail. Other extraordinary income of JPY 6.3 billion arose as a result of the termination of premium payments to Statoil, which led to the elimination of oilfield premium liabilities and oilfield premium assets from our balance sheet. Extraordinary losses includes JPY 3 billion in impairment losses on company-owned assets in the back office. As a result, we reported net extraordinary income of JPY 2.9 billion. This slide shows a breakdown of operating income by segment. All segments reported a year-on-year increase in operating income with the exception of coal, et cetera. I would like to explain factors causing changes in operating income in each segment. The largest change in the petroleum products segment came from the JPY 28.5 billion increase in inventory valuation gains from a loss of JPY 6 billion in the first quarter of the previous fiscal year to a gain of JPY 22.5 billion.

Improved domestic product margins led to a JPY 21.2 billion increase. Gasoline, kerosene, diesel fuel and heavy oil A margins improved by an average of JPY 5.5 per liter year-on-year, leading to an increase of JPY 21.3 billion. On the other hand, decreased sales volume led to a JPY 1.1 billion decrease, which was offset by a JPY 1 billion increase from alliance synergies with Showa Shell. These factors led to a net increase of JPY 21.2 billion in operating income. Increased refinery fuel oil and other costs led to a JPY 16.3 billion decrease year-on-year. Refinery fuel oil costs increased by JPY 1.4 billion due to a year-on-year increase in crude oil prices and cost increases resulting from the crude oil pricing formula and troubles at Aichi refinery had a JPY 14.9 billion negative impact for a total decrease in operating income of JPY 16.3 billion. As a result of the above, the petroleum products segment reported a JPY 33.4 billion increase in operating income. Next is the petrochemical products segment. Increased margins in the sales volume led to a JPY 3.3 billion increase in net sales. Product margins led to a JPY 1.9 billion increase due to improvement, particularly in styrene monomers margins, offset in part by a year-on-year decrease in paraxylene margins. Sales volume increased by about 140,000 tons year-on-year, leading to an increase of JPY 1.4 billion for a combined increase of JPY 3.3 billion.

Manufacturing fuel and other costs increased by JPY 0.6 billion due to an increase in crude oil and naphtha prices. Furthermore, exchange rate fluctuations led to a JPY 0.3 billion decrease in operating income for a combined year-on-year decrease of JPY 0.9 billion. In the resources segment, oil exploration and production reported a JPY 2.1 billion increase. Pricing and sales volume had a net JPY 3 billion positive impact. Brent crude oil price increased by about $13 per barrel year-on-year, leading to a JPY 5.4 billion positive impact from pricing. Production volume decreased by about 1.4 million barrels year-on-year due to the sale of IPUK and reduced production resulting from natural depletion in the Norwegian North Sea, having a negative impact of JPY 2.4 billion. These factors combined had a net positive impact of JPY 3 billion. Exploration costs, foreign exchange and other factors had a net JPY 0.9 billion negative impact. Exploration costs increased by JPY 0.7 billion. Operating costs decreased by JPY 1 billion, mainly due to the sale of IPUK. With respect to foreign exchange factors, the appreciation of the Norwegian krone against the U.S. dollar had a JPY 1.2 billion negative impact. These factors had a combined negative impact of JPY 0.9 billion. Coal, et cetera, reported a JPY 1.4 billion decrease in operating income. Pricing and sales volume factors had a JPY 1.1 billion positive impact. With respect to pricing, coal prices in October-December, which are indicators of our sales price in January-March, increased by around $4 per ton, leading to a JPY 1.9 billion increase. With respect to sales volume, a onetime year-on-year decline in production of Boggabri mines had a JPY 0.8 billion negative impact. On the other hand, the appreciation of the Australian dollar relative to the U.S. dollar led to a JPY 2.5 billion decrease in operating income. Finally, while other businesses segments and reconciliation showed a JPY 0.3 billion increase, coal, et cetera, and other businesses segments reported a combined JPY 1.1 billion decrease. I would like to go over our balance sheet before moving on to our revised earnings forecast for fiscal year 2018. Total assets as of June 30, 2018, decreased by JPY 66.2 billion year-on-year to JPY 2,854.1 billion. Current assets decreased by JPY 29.6 billion, while fixed assets decreased by JPY 36.6 billion. Our inventory assets increased due to an increase in crude oil prices. Current assets decreased mainly due to a decrease in receivables due to decreased sales after the winter when demand is strong. With respect to fixed assets, other fixed assets decreased by JPY 32.1 billion, as oilfield premium assets, explained on Page 15, are no longer consolidated. Similarly, other fixed liabilities decreased by JPY 39.2 billion due to the absence of oilfield premium liabilities. Current liabilities decreased by JPY 46.4 billion due to a decrease in payables resulting from reduced procurement and the decrease in taxes payable. While appreciation of the Japanese yen against the U.S. dollar led to a decrease in foreign translation adjustments, leading to a decrease in other comprehensive income, net assets increased by JPY 22.5 billion due to an increase in net income, which led to an increase in shareholders' equity. While we reported interest-bearing debts of JPY 933.5 billion and a net debt equity ratio of 0.96, our equity ratio increased relative to March 2018 to 31.3%. Next, I would like to provide an overview of our earnings forecasts. Our price assumptions for crude oil and other resources are shown here. Our assumptions for July onward are shown in the chart on the right-hand side. As explained earlier, we assume a Dubai crude oil price of $70 per barrel and Brent crude oil price of $73 per barrel. While our assumption for thermal coal is $109 per ton, this is a relatively conservative forecast given that the current price is fluctuating above $115 per ton. We revised our net sales forecast upward by JPY 380 billion to $4.28 trillion. Our operating income forecast is JPY 220 billion, which includes JPY 22.5 billion in inventory valuation gains, extrapolating first quarter results through the remainder of fiscal year. Thus our forecast for operating income excluding inventory impact is JPY 197.5 billion. This represents a JPY 66 billion upward revision in operating income and a JPY 43.5 billion upward revision in operating income excluding inventory impact. We revised our nonoperating income forecast upward by JPY 14 billion to JPY 30 billion, as we revised our forecast for equity method investment income upward by JPY 12 billion and our forecast for dividend income, et cetera, by JPY 2 billion. The increase in equity method investment income mainly comes from increased earnings from Showa Shell. We forecast ordinary income of JPY 250 billion and extraordinary losses of JPY 18 billion. This reflects an estimate of business restructuring costs, which may arise during the fiscal year in connection with the management integration with Showa Shell. Finally, we revised our forecast for net income attributable to owners of the parent upward by JPY 37 billion to JPY 140 billion. With respect to operating income forecast by segment, we expect operating income to exceed the previously announced forecast across all segments. I would now like to explain factors contributing to changes in our operating income forecasts for each segment. The JPY 41 billion increase in the petroleum products segment includes a JPY 22.5 billion increase from inventory valuation. We forecast the JPY 31 billion increase from improvements in product margins. Relative to the previous announcement, we revised our margin forecast for gasoline, kerosene, diesel fuel and heavy oil A by JPY 1.8 per liter. On the other hand, an increase in the crude oil price assumption led to a JPY 3 billion decrease from increased refinery fuel oil costs, and expected cost increases resulting from the crude oil pricing formula led to a JPY 9.5 billion decrease for a total decrease of JPY 12.5 billion. We made a JPY 5 billion upward revision in our operating income forecast for the petrochemical products segment. We made a JPY 6 billion upward revision in anticipation of improvements in product margins, mainly of styrene monomers. On the other hand, like the petroleum products segment, an increase in pricing assumptions led to a JPY 1 billion decrease from increased manufacturing fuel costs for a net increase of JPY 5 billion. In the resources segment, we expect an JPY 8 billion increase in oil exploration and production. We expect a JPY 6.5 billion increase from pricing and other factors. An increase in the crude oil price assumption by about $13 per barrel led to a JPY 6 billion increase from pricing factors. Production volume is forecasted to be 60,000 barrels higher than the previous forecast, leading to a JPY 0.5 billion increase for a total increase of JPY 6.5 billion. A delay in exploration costs is expected to reduce costs by JPY 1.5 billion during the current fiscal year. In coal, et cetera, we forecast a JPY 12 billion impact from increased coal prices. While sales volumes revised slightly upward due to a delay in the timing of the sale of Tarrawonga mines, this increase will be offset by the impact of the appreciation of the Australian dollar against the U.S. dollar. As a result, the expected increase from pricing factors will be reflected directly in the upward revision. Forecasts for other business segment and reconciliation remained largely unchanged. I would like to close with a brief explanation on shareholder returns. As announced previously, we plan to pay total dividends of JPY 100 per share in fiscal 2018. Combined with the acquisition of Treasury Shares of up to 12 million shares announced on July 10, the total shareholder return ratio in fiscal year 2018 will be approximately 50%. As of July 31, we had acquired 1.153 million shares.

That concludes my presentation. Thank you.