Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2018-Q3

[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 third quarter financial results and explain our revisions for our earnings forecasts. I would like to begin with an overview of our third quarter results for fiscal year 2017. This slide shows trends in crude oil prices.

For red line shows the trend in fiscal year 2017, while the blue line shows the trend in fiscal year 2016. Dubai crude oil price increased steadily since July 2017. The average Dubai crude oil price from April to December 2017 was $53.2 per barrel, increasing by $8.3 per barrel on a year-on-year basis.

This slide shows trends in yen per U.S. dollar foreign exchange rate. As in the last slide, the red line shows the trend in fiscal year 2017, while the blue line shows the trend in fiscal year 2016. The April to December 2017 average was JPY 112.7 per U.S. dollar, which represents a yen depreciation of JPY 5.1 per U.S. dollar year-on-year from JPY 107.6 per U.S. dollar in April to December 2016.

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 third quarter of fiscal year 2017. 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 September reported from overseas resource companies. Average Brent crude oil increased significantly by $10.1 to $51.9 per barrel. Thermal coal also increased significantly by $29.1 to $85.7 per ton.

The bottom chart is a summary of the consolidated income statement. Net sales increased by JPY 403.5 billion year-on-year to JPY 2,664.4 billion. Operating income increased by JPY 72.8 billion to JPY 156.4 billion. As there were inventory valuation gains of JPY 23.4 billion, operating income excluding inventory impact was JPY 133 billion, representing a JPY 58.5 billion year-on-year increase. Nonoperating income increased by JPY 12.5 billion to JPY 13.4 billion due to increases in income from equity method affiliates, mainly Showa Shell and the LPG business subsidiary.

Ordinary income increased by JPY 85.3 billion year-on-year to JPY 169.9 billion. We reported net extraordinary income of JPY 11.6 billion as a result of gains on the sales of shares in an oil exploration and production company located in the British North Sea. Net extraordinary income, therefore, increased by JPY 12.7 billion year-on-year. As a result, net income attributable to owners of the parent increased by JPY 84.5 billion year-on-year to JPY 145.1 billion. Note that sale of shares in the British North Sea oil exploration and production company led to the recognition of past impairment losses, reducing corporate tax by approximately JPY 22 billion and increasing net income attributable to owners of the parent by the same amount.

This slide shows a breakdown of operating income by segment. Year-on-year growth was seen in each segment. Resources business segment reported the largest increase of JPY 41.4 billion from JPY 5.5 billion in the previous fiscal year to JPY 46.8 billion. Within the resources business segment, operating income from oil exploration and production increased by JPY 15.2 billion year-on-year to JPY 18.3 billion, while operating income from coal et cetera increased by JPY 26.2 billion year-on-year to JPY 28.5 billion. Next, operating income from the petroleum products segment increased by JPY 27.2 billion. The operating income, excluding inventory impact, grew by JPY 12.8 billion year-on-year to JPY 53.9 billion. Petrochemical products segment grew by JPY 3.1 billion to JPY 30.1 billion, while other businesses segment grew by JPY 2 billion to JPY 5.4 billion. Overall, operating income after reconciliation grew by JPY 72.8 billion year-on-year to JPY 156.4 billion. On this slide, we will take a closer look at factors causing changes at operating income in each segment. In the petroleum products segment, increased domestic petroleum product margins et cetera led to an increase of JPY 30.5 billion. Margins on gasoline, kerosene, diesel fuel and A heavy oil improved by an average of JPY 2.6 per liter, leading to a JPY 33.1 billion increase in operating income. On the other hand, sales volume decreased leading to a JPY 2.6 billion decrease for a net increase of JPY 30.5 billion. Cost increases from refinery, fuel oil et cetera led to a JPY 17.7 billion total decrease in operating income.

First, the year-on-year increase in the crude oil price led to a JPY 5.9 billion decrease. Second, an increase in external product procurement and in procurement prices led to a JPY 6 billion decrease. Finally, the remaining JPY 5.8 billion decrease comes from cost increase relating to the crude oil price formula and increased crude oil unloading volume after an increase in crude oil prices as a result of planned maintenance at the Aichi refinery in October, November.

Inventory impact had a JPY 14.4 billion positive impact due to the continued increase in crude oil prices.

Next, operating income in the petrochemical segment increased by JPY 5.6 billion due to increases in product margins and sales volume. With respect to product margins, the decrease in paraxylene margins was more than offset by increased margins of other products, particularly styrene monomers, for a net increase of JPY 2.1 billion. Sales volume increased by 59,000 tons year-on-year, leading to an increase of JPY 2.1 billion. The depreciation of the yen also had a JPY 1.4 billion positive impact for a total of JPY 5.6 billion. On the other hand, manufacturing fuel costs and other costs increased due to increases in crude oil and naphtha prices for a negative impact of JPY 2.5 billion.

In the resources segment, oil exploration and production reported a JPY 15.2 billion increase in operating income. While pricing and volume-related factors had a JPY 14 billion positive impact, pricing alone led to a JPY 14.8 billion increase as the Brent crude oil price increased by about $10 per barrel year-on-year. Production volume decreased by about 840,000 barrels year-on-year, leading to a JPY 0.8 billion decrease. A decrease in exploration costs and foreign exchange led to increases of JPY 0.5 billion and JPY 0.7 billion, respectively, for a combined increase of JPY 1.2 billion.

Next, coal et cetera and other businesses segment reported a JPY 27.2 billion increase. As in the oil exploration and production segment, the increase in coal prices was the major driver of operating income growth. There was an average year-on-year increase of over $30 per ton in the selling price, leading to a JPY 26.7 billion increase. Reduced sales volume and foreign exchange led to JPY 0.5 billion decrease for a net increase of JPY 26.2 billion. Finally, other businesses segment and reconciliation showed a JPY 1 billion increase mainly due to an increase in operating income from the electronic materials business mainly consisting of OLED materials business.

I would now like to explain our balance sheet before moving on to our earnings forecasts. Total assets increased by JPY 263.6 billion from the end of March 2017 to JPY 2,905.3 billion as of the end of December 2017. On the other hand, total liabilities basically remained unchanged. Net assets increased by JPY 262.7 billion, mainly due to the JPY 254.7 billion increase in shareholders' equity, resulting from third quarter earnings as well as capital increase by the public offering in July. As a result, interest-bearing debt increased by JPY 88.3 billion from the end of March 2017 to JPY 964.1 billion. The equity ratio improved 29.1% and the net debt-equity ratio improved to [ 0.94 ] demonstrating our progress in improving our financial position.

Next, I would like to provide an overview of our earnings estimates. In the top chart, the column furthest to the right shows assumptions for crude oil prices et cetera from February onward. We assume a Dubai crude oil price of $60 per barrel and an exchange rate of JPY 110 per U.S. dollar. The earnings forecasts are followed based on these assumptions.

We forecast net sales of JPY 3.65 trillion and operating income of JPY 206 billion. As a result of an increase in the crude oil price assumption, we expect a JPY 28 billion profit from inventory valuation gains. Thus, our operating income forecast excluding inventory impact is JPY 178 billion. Our nonoperating income forecast was also revised upward by JPY 8 billion to JPY 24 billion, reflecting an expected increase in income from equity method affiliates. We expect increased profits from petrochemical, LPG and coal affiliates.

Our ordinary income forecast is JPY 230 billion. Our extraordinary income forecast was revised upward by JPY 3 billion with a JPY 12.1 billion gain on sale of shares in a British North Sea oil exploration and production company being offset by JPY 5 billion in impairment losses relating to the Australian coal business and JPY 4.1 billion in other extraordinary losses. As a result, net income attributable to owners of the parent was revised upward by JPY 60 billion from our earnings forecasts announced on November 14, to JPY 160 billion.

A segment breakdown of the JPY 46 billion upward revision in operating income is provided here. The largest increase comes from the JPY 34 billion upward revision in the petroleum products segment, of which JPY 28 billion resulted from a review of the inventory impact. Thus, the increase including such inventory impact was JPY 6 billion. Operating income from the petrochemical products segment was revised upward by JPY 2 billion, while operating income from the resource business segment increased by JPY 9 billion, with oil exploration and production accounting for JPY 7 billion, and coal et cetera accounting for JPY 2 billion of the increase. Combined with the JPY 1 billion increase from other businesses segment, our operating income forecast was increased by a total of JPY 46 billion.

A segment breakdown of revisions in operating income is provided here. The JPY 34 billion increase in the petroleum products segment mainly comes from the JPY 18 billion increase based on improved product margins. This represents an average improvement of about JPY 1 per liter over the fiscal year compared to the previous forecast. On the other hand, we expect a JPY 12 billion decrease due to cost increases associated with refinery fuel oil et cetera composed of JPY 2 billion from increased refinery fuel oil costs; JPY 4 billion from increased external product procurement volume and procurement prices; and JPY 6 billion from cost increases associated with the crude oil price formula et cetera.

The JPY 2 billion increase in the petrochemical products segment mainly comes from a JPY 2 billion increase in product margins. We also expect a JPY 1 billion increase due to foreign exchange offset by the JPY 1 billion expected increase in manufacturing fuel costs for a total upward revision of JPY 2 billion.

In the resources business segment, we expect a JPY 7 billion increase in the oil exploration and production business. This is mainly due to a decrease in operating costs. A decrease in exploration costs and foreign exchange also contributed to the JPY 7 billion increase. In coal et cetera and other businesses segment, factors relating to the coal price led to a JPY 2 billion upward revision. Another JPY 1 billion upward was made in operating income from other businesses segment, mainly due to an expected increase in income from the electronic materials business.

While that concludes our overview of our third quarter financial results and our revisions for our earnings estimates, I would like to make 2 additional reports. First, I would like to provide an update on our progress with regards to Nghi Son Refinery in Vietnam. After completion of construction work at the end of April 2017, we had unloaded crude oil from Kuwait in August and conducted various device tests. Despite such efforts, shipment of petroleum products initially planned within the end of March is expected to be postponed to April or beyond. Second, we plan to announce our medium-term business plan in late March. That concludes my presentation. Thank you.