Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2020-Q1

[Toshiaki Sagishima, executive]

My name is Sagishima of Idemitsu Kosan. I would like to provide an overview of our financial results for the first quarter of fiscal year 2019.

I would like to make 2 comments before I begin. First, in today's explanation, fiscal year 2018 figures are an estimate of the total of Idemitsu and Showa Shell on a 100% consolidation basis. Second, segment information means the total of operating income and equity income. Fiscal year 2018 figures are also provided on the same basis to facilitate comparison.

I would like to begin on Page 3, which shows trends in crude oil prices. The red line shows the trend in fiscal year 2019, while the blue line shows the trend in fiscal year 2018. The April-June average was $67.4, decreasing by $4.7 from $72.1 in April-June of the previous fiscal year. During the quarter, crude oil peaked in April before decreasing in May and June. This resulted in a negative time lag effect.

Page 4 shows trends in foreign exchange rates. Again, the red line shows the trend in fiscal year 2019, while the blue line shows the trend in fiscal year 2018. The April-June average was JPY 109.9 to the U.S. dollar, with the Japanese yen depreciating slightly by JPY 0.8 to the dollar from JPY 109.9 to the dollar in April-June of the previous fiscal year.

A brief summary of the first quarter is presented on Page 5 for your reference at a later time.

Fiscal year 2019 forecast is shown on Page 12 and remain unchanged from forecast announced on May 15.

Page 6 provides an overview of market conditions and our consolidated income statement. Dubai crude oil prices and foreign exchange rates are as stated earlier. Brent crude oil and thermal coal prices are averaged from January-March, which have decreased on a year-on-year basis.

Next, I would like to provide an overview of our consolidated income statement. Net sales decreased by JPY 187.9 billion to JPY 1,476.3 billion. Operating income plus equity income decreased by JPY 83.6 billion year-on-year to JPY 32.7 billion. As inventory impact was JPY 1.7 billion, operating income plus equity income, excluding inventory impact, decreased by JPY 48.7 billion year-on-year to JPY 31.1 billion. Details of operating income plus equity income will be provided later on.

Ordinary income was JPY 34.6 billion and extraordinary gain was JPY 17.9 billion. As a result, we reported net income of JPY 36 billion while extraordinary income increased by JPY 20.7 billion year-on-year, improving significantly due to gain from step acquisition. Please refer to Page 15 for details on extraordinary items at a later time.

Page 7 summarizes changes in each segment. Details will be explained using the step chart on the next page. The step chart begins for the fiscal year 2018 first quarter result of JPY 79.7 billion and illustrates changes leading to the fiscal year 2019 first quarter result of JPY 31.1 billion.

Income from petroleum segment decreased by JPY 32.9 billion, with a JPY 35.9 billion negative impact from decreased refining margins and sales volume. The negative sales volume impact was JPY 4.8 billion, and details on sales volume are provided on Page 18.

First quarter 4 major oil products demand was 99.1%, while the sales was 96%, falling below demand due to continued efforts to make profitable sales. The remaining negative impact of JPY 31.1 billion mainly resulted from time lags following the weakening of the crude oil market. As time lag had a negative JPY 11 billion impact and asset had a positive impact of JPY 22 billion in the previous year due to a temporary surge in crude oil prices, this effect alone led to a JPY 33 billion year-on-year decrease.

Next, integration synergies and equity income led to a JPY 3 billion year-on-year increase. Integration synergies led to a JPY 6 billion increase as synergies were achieved with relative ease in April-June due to the major shutdown maintenance in Chiba refinery as well as minor maintenance conducted in Yokkaichi and Seibu Oil. The upswing from the absence of the negative impact of terminated Aichi refinery trouble in the previous fiscal year was partially offset by the negative inventory impact in Seibu Oil and Fuji Oil for a net positive impact of JPY 2.8 billion.

Goodwill amortization had a JPY 3.4 billion negative year-on-year impact. Equity losses led to a JPY 2.4 billion decrease, mainly due to investment losses from Nghi Son Refinery in Vietnam.

In the basic chemicals segment, product margins led to an JPY 8.9 billion decrease. While paraxylene sales volume and margins were both similar to previous year levels, styrene monomer margins fell by about $260 due to reduced demand following a slowdown of the Chinese economy, leading to the JPY 8.9 billion decrease.

Sales volume decreased slightly because of shutdown maintenance in Chiba, leading to a negative impact of JPY 1.2 billion.

In the functional materials segment, the main reason for the JPY 2.7 billion decrease was a decrease in polycarbonate margins. This was also as a result of decreased demand following the slowdown in the Chinese economy. While first quarter shipment of OLED materials increased on a year-on-year basis, earnings remained unchanged. We believe this is the result of a stricter market environment following a slowdown in smartphone demand.

Power and renewable energy segment showed a JPY 0.4 billion year-on-year increase. Income from the ES business improved by JPY 0.4 billion due to cost reductions, despite a decrease in the sales volume of solar panels and the decrease in the average unit selling price. The electric power business remained flat year-on-year, with goodwill amortization arising from the integration, offset by the shift to retail power sources at the Mizue power plant and by increased sales.

In oil exploration and production segment, production volume decreased by about 400,000 barrels due to oilfield depletion and troubles at some smaller oil fields, leading to a JPY 1.8 billion decrease in operating income due to reduced sales volume. Pricing led to a JPY 1.2 billion decrease with Brent crude price decreasing by $3.60 year-on-year. The JPY 0.7 billion increase from exploration costs, et cetera, mainly resulted from the depreciation of the Norwegian krone.

Finally, income from the coal segment decreased by JPY 1.4 billion. Income increased by JPY 1.1 billion due to pricing factors, with selling prices in January-March increasing on a year-on-year basis despite the downward trend in the coal market, following the peak in July 2018.

Sales volume decreased due to the 100,000 ton decrease in production, following the sales of interests to Tarrawonga mine in April 2018, resulting in a negative impact of JPY 2.4 billion. Foreign exchange had a JPY 0.1 billion negative impact for a total decrease of JPY 2.5 billion.

That concludes the breakdown of factors effecting operating plus equity income in each segment.

Next, I would like to briefly explain our balance sheet on Page 16. Note that the latest figure is compared to April 1, 2019, which was the date of the integration with Showa Shell. Total assets as of June 30, 2019, decreased by JPY 79.2 billion to JPY 4,071.2 billion. Receivables and inventory assets decreased due to the decrease in oil prices.

On the other hand, net assets increased by JPY 8.2 billion to JPY 1,317 billion. Gain from step acquisition accounted for JPY 17.2 billion of the JPY 36 billion in net income. And no changes reported as such income was already included in net assets as of April 1. Net assets only increased by JPY 8.2 billion. Interest-bearing debt increased by about JPY 100 billion to JPY 1,185.3 billion mainly due to the impact of on-balance sheet lease accounting, retirement benefit obligations and other integration-related costs and increased demand for working capital at overseas subsidiaries. Capital-to-asset ratio was 31.1%, while our net debt-equity ratio was 0.84x.

That concludes my presentation. Thank you.