Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2019-Q2

[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 second quarter fiscal year 2018. I would like to begin with a summary of our financial results for the second 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. Crude oil prices had been stable since April, but increased in September. As a result, the average Dubai crude oil price in the second quarter was $73.2 per barrel, representing a year-on-year increase of over $20 per barrel. On the other hand, prices began to fall in late October, recently decreasing to approximately $65 per barrel. This slide shows trends in the Japanese 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 second quarter was JPY 111.3 per U.S. dollar, representing a slight Japanese yen appreciation. A summary of the second quarter financial results is presented here for your reference at a later time. Our financial forecast for fiscal year 2018 remained unchanged from the figures announced on August 14. Specifically, we continue to forecast operating income of JPY 220 billion, ordinary income of JPY 250 billion and net income of JPY 140 billion. Now I would like to start with a summary of the income statement for the second 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 results from January to June reported from consolidated overseas resource companies. Average Brent crude oil increased by $18.8 year-on-year to $70.6 per barrel. Thermal coal also increased by $21.6 year-on-year to $103.4 per ton. The bottom chart is a summary of the consolidated income statement. Revenues increased by JPY 416.6 billion year-on-year to JPY 2,114 billion, mainly due to an increase in crude oil prices. Operating income increased by JPY 47.6 billion to JPY 133.7 billion. As there was a positive inventory impact of JPY 36.3 billion, operating income, excluding inventory impact, increased by JPY 5.3 billion to JPY 97.4 billion. Nonoperating income increased by JPY 16.7 billion to JPY 20.1 billion, mainly due to an increase in income from equity method affiliates with the largest increase coming from the increase in investment income from Showa Shell shares. We reported ordinary income of JPY 153.8 billion and extraordinary income of JPY 2.2 billion. As a result, we reported net income attributable to owners of the parent of JPY 103.5 billion. Here I would like to explain extraordinary income and losses in more detail. Other extraordinary income of JPY 6.2 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. This was already recorded in first quarter financials. Extraordinary losses includes JPY 3.2 billion in impairment losses, arising with respect to company-owned assets in the back office section, which were also reported in the first quarter financials.

This slide shows a breakdown of operating income by segment. Factors causing changes in operating income in each segment will be detailed in the step chart on the next slide. This step chart illustrates changes in operating income from JPY 86.1 billion, reported in the second half of fiscal year 2017, to JPY 133.7 billion, reported in the second half of fiscal year 2018, broken down into various factors in each segment, beginning from petroleum products. In the petroleum segment, the largest impact came from the JPY 42.3 billion increase from inventory valuation from a loss of JPY 6 billion to a gain of JPY 36.3 billion. Improved domestic petroleum product margins led to a JPY 27.3 billion increase. Gasoline, kerosene, diesel fuel and heavy oil margins improved by an average of JPY 3.6 per liter year-on-year, leading to an increase of JPY 28.4 billion. On the other hand, decreased sales volume led to a JPY 3.1 billion decrease, which was offset by a JPY 2 billion increase from alliance synergies with Showa Shell. These factors led to a net increase of JPY 27.3 billion in operating income. Next, increased refinery fuel costs and other costs led to a JPY 23.9 billion decrease year-on-year. Refinery fuel costs increased by JPY 3.4 billion due to a year-on-year increase in crude oil prices. Troubles at Aichi refinery in the first quarter and halting of operations at the Hokkaido refinery following the September earthquake had a combined negative impact exceeding JPY 10 billion. The remaining decrease in operating income came from cost increases resulting from the crude oil pricing formula. These factors led to the total decrease in the operating income of JPY 23.9 billion. Combined with the increase from inventory valuation, the petroleum products segment reported a JPY 45.7 billion net increase in operating income. Next is the petrochemical segment. Increased margins and sales volume led to a JPY 2.2 billion increase in operating income. Increased paraxylene and styrene monomer margins led to a JPY 1.4 billion increase. Sales volume increased by about 110,000 tons year-on-year, leading to an increase of JPY 0.8 billion for a combined increase of JPY 2.2 billion. Manufacturing fuel costs and other costs increased by JPY 2.8 billion due to an increase in crude oil and naphtha prices. Exchange rate fluctuations led to a JPY 0.3 billion decrease in operating income for a combined year-on-year decrease of JPY 3.1 billion. In the resources segment, oil exploration and production reported a JPY 0.8 billion increase. While pricing and sales volume had a net JPY 1.9 billion positive impact, pricing factors alone had a JPY 9.9 billion positive impact due to the Brent crude oil price increasing by about $19 per barrel year-on-year. Sales volume decreased by about 2.4 million barrels year-on-year due to the sale of a British-affiliated company and reduced production resulting from natural depletion in the Norwegian North Sea, having a negative impact of JPY 8 billion. These factors combined had a net positive impact of JPY 1.9 billion. Exploration costs, foreign exchange and other factors had a JPY 1.3 billion negative impact. Exploration costs increased by JPY 1.7 billion. Operating costs decreased by JPY 1.5 billion, mainly due to the sale of the British-affiliated company. With respect to foreign exchange factors, the appreciation of Norwegian krone against the U.S. dollar had a JPY 1.1 billion negative impact. These factors had a combined net negative impact of JPY 1.3 billion. Coal, et cetera, and other businesses reported a JPY 2.8 billion increase in operating income. Pricing factors had a JPY 7.1 billion positive impact as coal prices in October to March, which are indicators of our sales price in January to June, increased by about $12 per ton. On the other hand, depreciation of the Australian dollar relative to the U.S. dollar led to a JPY 4.3 billion decrease in operating income. Finally, other segments and reconciliation showed a JPY 0.5 billion decrease. And as a result, coal, et cetera, and other businesses and reconciliation reported a combined JPY 2.3 billion increase in operating income. I will now move onto shareholder returns. We decided to pay interim dividends of JPY 50 per share and plan to pay fiscal year-end dividends of JPY 50 per share for a total of JPY 100 per share in fiscal year 2018. The lower half of the slide shows the status of the acquisition of Treasury Shares. We acquired shares from the upper limit of 12 million shares in JPY 55 billion. We ultimately acquired 10,439,700 shares at a total of slightly below JPY 55 billion.

As disclosed previously, this acquisition of Treasury Shares has been completed.

I would like to conclude with an explanation of our balance sheet.

Total assets as of September 30, 2018, increased by JPY 48 billion from the end of March 2018 to JPY 2,968.2 billion. Current assets increased by JPY 66.7 billion, mainly due to the JPY 97.4 billion increase in inventory assets as a result of the increase in crude oil prices. Fixed assets decreased by JPY 18.8 billion. On the other hand, short-term borrowings increased by JPY 88.7 billion, as a result of this increase in working capital. While we reported net income of about JPY 100 billion, shareholders' equity only increased by JPY 66.6 billion due to the acquisition of Treasury Shares of about JPY 28 billion.

Interest-bearing debt increased to JPY 974.8 billion in part due to the increase in short-term borrowings. While the net debt to equity ratio increased slightly to 0.98 relative to the end of March. The shareholders' equity ratio improved to 31%. That concludes my presentation. Thank you.