Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2019-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 financial results for the third quarter of fiscal year 2018.

I would like to begin with a summary of our financial results for the third 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 third quarter was $71.3 per barrel, representing a year-on-year increase of $18.1 per barrel. On the other hand, prices peaked out in October when the average monthly price was $79.4 per barrel and subsequently fell sharply in November and December.

The crude oil price decreased by $22.1 per barrel during these 2 months to $57.3 per barrel. Prices have since recovered slightly to $59.1 per barrel in January and fluctuating in the low $60 per barrel in February. We forecast an average price of $60 per barrel for January-March.

This slide shows trends in the yen-to-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 third quarter was JPY 112.1 to the dollar, representing a slight yen appreciation but remaining basically unchanged from the same period in the previous fiscal year. A summary of the fiscal year is presented here for your reference at a later time.

Now I would like to start with a summary of the income statement for the third 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 September reported from consolidated overseas resource companies. Average Brent crude oil increased by $20.2 per barrel year-on-year to $72.1 per barrel. Thermal coal also increased by $22.3 year-on-year to $108 per ton.

The bottom chart is a summary of the consolidated income statement. Net sales increased by JPY 675.7 billion year-on-year to JPY 3,340.1 billion.

Operating income decreased by JPY 13.2 billion to JPY 143.2 billion. As there was a positive inventory impact of JPY 15.3 billion, operating income, excluding inventory impact, decreased by JPY 5.1 billion to JPY 127.9 billion.

Nonoperating income increased by JPY 2.6 billion to JPY 16 billion mainly due to an increase in interest and dividends received. Ordinary income decreased by JPY 10.6 billion to JPY 159.3 billion. Extraordinary income decreased by JPY 9.6 billion year-on-year to JPY 20 billion.

Net income attributable to owners of the parent decreased by JPY 43.3 billion to JPY 101.8 billion. The JPY 145.1 billion in net income attributable to owners of the parent reported during the same period in the previous fiscal year included around JPY 22 billion in refunds of past corporate taxes arising from the sale of a subsidiary company. This explains a portion of the year-on-year decrease.

Here, I would like to explain extraordinary income and losses in more detail. Extraordinary income fell sharply as extraordinary income in the last fiscal year included JPY 12.1 billion from a gain on sale of affiliate stock in connection with the sale of a subsidiary company's shares. The remaining JPY 6.8 billion mainly 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, as reported previously in first quarter financials.

Extraordinary losses includes JPY 3.3 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. As a result of the above, we reported net extraordinary income of JPY 2 billion.

This slide shows a breakdown of operating income by segment. Factors causing changes in operating income in each segment will be detailed in the next slide.

In the petroleum segment, improved domestic petroleum product margins led to a JPY 12.3 billion increase. Gasoline, kerosene, diesel fuel and heavy oil A margins improved by an average of JPY 1.1 per liter year-on-year, leading to an increase of JPY 14 billion. On the other hand, decreased sales volume resulting from the relatively warm weather in October-December led to a JPY 4.7 billion decrease, which was offset by a JPY 3 billion increase from alliance synergies with Showa Shell. These factors led to a net increase of JPY 12.3 billion in operating income.

Next, increased refinery fuel oil and other costs led to a JPY 29.6 billion decrease year-on-year. Refinery fuel oil costs increased by JPY 4.6 billion due to a year-on-year increase in crude oil prices. There was also a cost increase of about JPY 8 billion associated with the crude oil pricing formula. The remaining profit decrease came from troubles at Aichi refinery in the first quarter and the suspension of operations at the Hokkaido refinery following the September earthquake. These factors led to the total decrease in operating income of JPY 29.6 billion. Combined with the JPY 15.3 billion increase from inventory valuation, the petroleum products segment reported an JPY 8.1 billion net decrease in operating income.

Next is the petrochemical segment. Decreased margins, et cetera, led to a JPY 2 billion decrease in operating income. Changes in product margins also showed a net decrease due to the costs related to naphtha price increase and styrene monomers, which could not be sufficiently reflected in the selling price, leading to decreased margins. Refinery fuel oil and other costs increased by JPY 3.3 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 3.6 billion.

In the resources segment, oil exploration and production reported an JPY 11.5 billion increase in operating income. While decreased sales volume resulting from a year-on-year decrease in production volume of about 11,000 barrels per day led to an JPY 8.1 billion decrease, pricing factors had a JPY 19.7 billion positive impact due to the Brent crude oil price increasing by about $20 per barrel year-on-year.

Changes in exploration and operating costs and foreign exchange fluctuations basically offset each other. Exploration costs increased by JPY 1.2 billion. Operating costs decreased by JPY 2.5 billion mainly due to the sale of a subsidiary company. The appreciation of the Norwegian krone against the U.S. dollar had a JPY 1.4 billion negative impact. Coal, et cetera, reported a JPY 7.3 billion increase in operating income. Pricing factors had a JPY 14.1 billion positive impact as coal prices in October-June, which were indicators of our sales price in January-September, increased by about $16 per ton. On the other hand, decreased sales volume resulting from the sale of Tarrawonga mine led to a JPY 2.8 billion decrease. The appreciation of the Australian dollar relative to the U.S. dollar led to a JPY 3.9 billion decrease in operating income.

Other businesses segment showed a JPY 1 billion decrease with a slight decrease in profits from the OLED materials business. While sales volume increased on a year-on-year basis, operating income decreased due to prior investments in R&D and FX expenses from the Chinese factory currently under construction.

I would now like to explain our balance sheet. Shareholders' equity increased by JPY 26.9 billion relative to the end of March to JPY 729.8 billion. As explained earlier in the overview of our income statement, the JPY 100 billion increase in net income was offset by JPY 55.5 billion used for share buyback and JPY 18.5 billion in dividend payments for a net increase of JPY 26.9 billion.

Liabilities increased by JPY 124 billion mainly due to an increase in short-term borrowings for the increase in working capital. Interest-bearing debt increased JPY 223.7 billion relative to the end of March to JPY 1,117.3 billion.

The shareholders' equity ratio and net debt-to-equity ratio deteriorated to 28.8% and 1.15%, respectively. While we aim to improve these figures towards the end of the fiscal year, we think it is difficult to expect a significant improvement in light of the downward revisions in earnings estimates to be explained next.

Here, I would like to explain our revised earnings estimates for fiscal year 2018. We assume a Dubai crude oil price of $50 per barrel, a naphtha price of $522 per ton and an exchange rate of JPY 110 to the U.S. dollar from January onward. Each figure is very close to the current level.

Next, I would like to explain our income statement forecasts. Our net sales forecast was revised downward by JPY 10 billion from the previous forecast announced on August 14 to JPY 4.27 trillion.

Our operating income forecast was revised downward by JPY 51 billion to JPY 169 billion. As we assume 0 inventory impact, our operating income forecast, excluding inventory impact, is also JPY 169 billion, representing a downward revision of JPY 28.5 billion.

Our nonoperating income forecast was revised down sharply by JPY 36 billion to a loss of JPY 6 billion. This is due to the more than JPY 20 billion decrease in Showa Shell earnings and downward inventory valuation, et cetera, of over JPY 10 billion at the refinery project in Vietnam resulting from the sharp decline in the crude oil price.

As has been already announced, the refinery project in Vietnam commenced commercial operations in November. We included inventory valuation losses as crude oil was processed during September and October when the crude oil price was higher and subsequently made sales beginning in November when crude oil prices fell. We therefore revised our ordinary income forecast downward by JPY 87 billion to JPY 163 billion. We also revised extraordinary income downward by JPY 22 billion to a loss of JPY 40 billion.

We forecast impairment losses of JPY 10 billion on fixed assets in the oil exploration and production segment, in addition to forecasted business restructuring expenses. Other losses of about JPY 10 billion were also forecasted from cost relating to the problem resolution in connection with the business integration. As a result of the above, we revised our forecast for net income attributable to owners of the parent company by JPY 80 billion to JPY 60 billion.

While we forecast a JPY 51 billion decrease in operating income relative to the previously announced forecast, JPY 50 billion of this decrease is expected to come from the petroleum products segment. The JPY 5 billion decrease in the petrochemical products segment is forecasted to be offset by the JPY 5 billion increase in resources segment for a net 0 impact.

In the petroleum products segment, we forecast a JPY 22 billion decrease from reduced product margins and other factors, of which reduced product margins account for JPY 14.4 billion. We revised our forecasted domestic petroleum refinery sales margin downward by 0.7 per liter.

As we forecast a sales volume reduction of over 400,000 kiloliters, we forecast a decrease of JPY 7.6 billion. The 2 factors combined account for the JPY 22 billion downward revision.

We forecast a JPY 5.5 billion decrease from increases in refinery fuel costs, et cetera. While we forecast a JPY 1 billion decrease in refinery fuel costs due to a reduction in the crude oil price assumption, we also forecast a JPY 6.5 billion increase in supply costs resulting from suspension of Hokkaido refinery operations following the earthquake for a net downward profit revision of JPY 5.5 billion.

While we included JPY 22.5 billion in inventory valuation gains in the previously announced forecast, our new forecast includes no valuation gain or loss based on our assumption of $60 per barrel from January onward.

Next, we revised our profit forecast in the petrochemical segment downward by JPY 5 billion due to reduced margins from styrene monomers, among other products. In the oil exploration and production segment, we increased our forecast by JPY 3 billion, with JPY 2 billion coming from a decrease in exploration costs and JPY 1 billion from changes in foreign exchange rates.

In coal, et cetera, we forecast a JPY 4.4 billion increase from pricing factors and a JPY 2.7 billion decrease from decreased sales volume combined with other factors for a net increase of JPY 2 billion. We forecast a JPY 1 billion decrease from other segments mainly due to a downward revision of earnings from the OLED materials business. In light of reduced smartphone production in China and South Korea due to the global economic slowdown, we revised our earnings forecast downward to a level similar to the previous fiscal year.

That concludes my presentation. Thank you.