ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2019-Q1

[Tsutomu Sugimori, executive]

Good afternoon. Thank you for joining us at the earnings briefing despite rough weather outside with a major typhoon approaching.

I would also like to extend my sincere gratitude to our shareholders and investors to their continued support and guidance to the business activities of the JXTG Group.

I am Tsutomu Sugimori, Representative Director and the new President of JXTG Holdings. It is with great sense of responsibility and commitment that I assumed this position to steer the entire JXTG Group. Your continued support and understanding is appreciated.

Please refer to the PowerPoint slides entitled 1Q18 Financial Results. In this first fiscal year under the medium-term management plan, we are off to a good start amid favorable business environment in addition to realizing integration synergies ahead of schedule. However, we are still in the middle of this endeavor, and we must strive towards achieving the goals not to be affected by short-term results.

As stated in the basic policy under the medium-term plan, we will strive to enhance the profitability of core businesses through thorough business transformation centered on Energy business and strengthen ROIC management, promote management focusing on cash flow and capital efficiency through careful selection of capital investment. In addition, we will strengthen management foundation such as human resources development, that supports its realization. Through these efforts, we will establish a profit base and a financial basis adaptable to changing business environment while also seeking to enhance shareholder returns.

For this fiscal year, we will increase dividend by JPY 1 to JPY 20. We are also executing the share buyback program of up to JPY 30 billion as planned. We will continue to aim for further shareholder return in accordance with the progress in management targets based on the policy of stable dividends.

Next, I will describe the business strategy by segment. First, in the Energy business, we aim to make a leap forward to become one of the most prominent comprehensive energy companies in Asia through thorough business transformation. More specifically, we will strive to maximize and realize integration synergies at an early date and work towards thorough efficiency and competitiveness strengthening in petroleum refining and sales and petrochemicals business, including feasibility study on cooperative project with Petrolimex utilizing Marifu Refinery and service station brand integration under ENEOS brand. We will also develop and strengthen businesses that will be the mainstays of the future such as electric power and gas, hydrogen, overseas and technology-based businesses.

In the Oil and Natural Gas E&P business, we will ensure thorough selection and concentration to establish a strong structure that can realize steady profits even with lower oil prices. We will ensure steady progress on projects under development such as Mariner Oil Field and Culzean Gas Field to generate cash flow.

In the U.S., the CO2-EOR has been in operation since last fiscal year, which is project in which CO2 is injected in older oil fields for increased production of crude oil. This project is the core of the technology strategy in the field of oil exploration. We will work on improving profit and loss and accumulate expertise and technology.

In the Metals business, we aim to enhance the competitiveness of our major businesses and developing and strengthening businesses that will be the mainstays of the future. For the Caserones Copper Mine in Chile, we have established the Caserones division with a view to strengthening its foundation. We will work on earliest improvement of its profitability by establishing more flexible and united management structure.

In the midstream and downstream businesses, we will increase the production capacity of rolled copper foil and sputtering targets for semiconductors to meet demand expansion and customer needs in the future. We acquired H.C. Starck, which develops, manufactures and sell tantalum and niobium products. We will realize integration synergies at an early date. I will explain the highlights of the first quarter of FY '18. Details will be explained later by Ouchi. The group's operating income excluding inventory effects was JPY 185.2 billion, up JPY 111.6 billion year-on-year. All 3 core businesses have grown compared with the same period last year. We have not revised the full year forecast since the first quarter has just been completed and the crude oil and resource prices trends are unclear. In order to meet the annual forecast announced in May, we will continue our efforts in second quarter and beyond.

I will talk about the future at the end of my presentation. The business environment surrounding the group is facing unprecedented changes such as the global accelerated movement towards a low-carbon society, as seen in the Paris agreement; the rapid evolution of our innovation in IoT and AI; the rising social momentum to focus on corporate management represented by ESG and SDGs. The speed and progress of these changes are difficult to predict.

Against such background of uncertainty, we plan to formulate a long-term vision before the end of this fiscal year to serve as a compass for our group to survive in the future and to be needed by society, describing the ideal status of who we want to be as a group 10 to 20 years down the line, including concepts such as low-carbon society, ESG management and discovery of new business that can become a pillar of the next generation.

As a milestone towards this long-term vision, we will formulate the next medium-term management plan for FY '20 through '22 in FY '19, which will include concrete measures to be executed without fail. In order to formulate our future growth strategy, we have to transform the entire group so that it will be suited to the current changes and future direction of business, ranging from corporate culture to employee awareness. In order to drive this, the management team has declared to take the lead in new initiatives and to decide with a sense of speed.

Transformation requires building relationships of trust with our shareholders, customers, employees and others. In order to build that trust, day-to-day dialogue is [ necessary ]. By actively having the opportunities of dialogue day in and day out, we will strengthen the relationship of trust and address various challenges.

Last year, we faced the challenge of integration, which was combination of heterogeneous entities. Each had its very unique corporate culture, history, approach to business and thought process. We believe that combination of these heterogeneous entities, in fact, made it easier to see each other's differences. Through dialogue, we strive for the best solution, resulting in the positive outcome of synergy from integration.

As the business environment continues to undergo dramatic changes, yesterday's approach to survival will no longer help us today and tomorrow. I am convinced that change, dialogue and challenge are the key words for building the future of the group. I will take the lead in putting these words into practice.

Now Ouchi will explain the financial results.

[Yoshiaki Ouchi, executive]

I will go over the financial results for the first quarter.

Business environment. I will skip Page 6, resource prices and foreign exchange rate, and go to Page 7, petroleum products and paraxylene margins. In the first quarter, margins for the 4 petroleum products, namely gasoline, kerosene, diesel fuel and fuel oil A, were at a high level of close to JPY 14 per liter, with some time lag in reflecting the rising crude oil price. This represents a significant improvement compared to the same period of the previous year. The graph shows up to July. In July, the time lag result and the margin was about JPY 12 per liter. It is now moving at a stable level.

Paraxylene margins. The paraxylene price has been generally in line with the price of crude oil. In June, the spread compressed based on the forecast for weakened supply and demand balance due to new paraxylene facility constructions in Vietnam and Saudi Arabia. Since the beginning of July, with the operational troubles at some new facilities in Asia, the spread has recovered.

Page 8, profit and loss. For the first quarter, operating income was JPY 227.3 billion. Inventory valuation impact of JPY 42.1 billion was posted due to the rise in crude oil prices. Operating income excluding inventory valuation was JPY 185.2 billion, an increase of JPY 111.6 billion year-on-year. This includes the gain on the sale of the cell culture material business totaling JPY 77 billion.

Financial profit and loss was net minus JPY 10.1 billion, a deterioration of JPY 3.1 billion from the same period of the previous year mainly due to the depreciation of the yen this year from March to June, which resulted in a loss on the currency conversion difference of dollar-denominated borrowings. The profit attributable to the owner of the parent, the bottom line, was JPY 145.1 billion, up JPY 126.1 billion year-on-year. This represents a progress of 47% against the full year forecast of JPY 310 billion.

Moving on to changes in operating income and loss by segment. Please turn to Page 10. Operating income of Energy business increased JPY 83 billion year-on-year to JPY 136.2 billion. From the left side of the step chart, the sale of the cell culture material business was plus JPY 77 billion. Sales volume was minus JPY 2.8 billion, mainly coming from a decline in 4 petroleum products. This was mainly due to unseasonable weather during the Golden Week holidays as well as thorough pursuit of profitable sales, which resulted in our sales declining by 4% against a domestic demand decline of 1.7%. Year-on-year, volume reduction totaled 1.32 million kiloliters, of which 4 petroleum products were down 0.54 million kiloliters; export, down 0.56 million kiloliters; and the rest, electricity and others. Integration synergies, margins and other, plus JPY 9.7 billion, although the rise in oil prices resulted in poor profitability of non-oil-linked products and an increase in external purchase expenses and others. These were made up for by progress in integration synergies and the improvement of petroleum products margins of about JPY 3.

For petrochemical products, operating income was down JPY 0.9 billion year-on-year at JPY 26.5 billion. Sales volume, down JPY 1.1 billion. Production decline was mainly due to paraxylene as a result of maintenance turnaround at Kashima and Oita. Margins and others, plus JPY 200 million. The deterioration in paraxylene and benzene were roughly offset by improvements in propylene and ethylene and others and reduced expenses.

Page 11, integration synergies. Results for the first quarter of fiscal 2018 were JPY 17.3 billion, up JPY 12 billion year-on-year. Following on from the last fiscal year, we see steady progress and outcome in each item.

This year, we have introduced a mechanism to make use of the knowledge and expertise of the engineers of the predecessor companies regarding maintenance work at refineries so as to share best practices to bring about reduction in maintenance and repair cost. We will continue to work on maximization and early realization of integration synergies.

Next, Page 12. Oil And Natural Gas E&P increased by JPY 14.2 billion to JPY 17.3 billion. Improvement was due to the rise in crude oil price and cost reduction. Minus JPY 3.7 billion due to sales volume. The actual sales volume is 95,000 B/D. Due to the impact of Canada's oil sand project sold last year and the earthquake in Papua New Guinea, it decreased by 12,000 B/D.

Oil price had a positive impact of JPY 7.6 billion. As shown in the balloon, the project unit price rose with the rise of the oil price. Expenses and other were up by JPY 10.3 billion, including gains on the sale of interest in the U.K. North Sea and expenses such as amortization and operating expenses.

Page 13. Metals business posted operating income of JPY 20.7 billion, up JPY 13.2 billion from the previous year, including upstream improvement of JPY 13.8 billion. Caserones was up JPY 11.3 billion, which, in absolute terms, was changed from minus JPY 8.2 billion to positive JPY 3.1 billion.

Operating income was positive in the first quarter. In addition to the rise in copper price, operation has stabilized. The operational situation will be explained later. Operating income improved significantly year-on-year due to better weather conditions compared to the previous year and a decrease in amortization expenses due to impairment.

Equity pickup worth JPY 2.5 billion comes from the 2 Chilean mines now since the sales of interests in Collahuasi last year. This figure includes the rise in the copper price and the absence of a strike in Escondida, which occurred in the previous year.

Smelting and refining decreased by JPY 1.4 billion to JPY 5.8 billion. Although there was increased sales of a Pan Pacific Copper electrolytic copper, the profit declined due to the absence of some factors that occurred in the previous terms such as the tax refund of LS and the gains on sales of marine subsidiary's shares.

Electronic materials, recycling and environmental services increased by JPY 800 million to JPY 8.8 billion. As in last year, it is due to increased sales of semiconductor targets and rolled copper foils in the electric materials business.

Page 14 shows the situation of Caserones. In March, we changed the management structure, including the establishment of the Caserones division. Now the headquarters, local management and the field force are all operated as one. Due to the trouble at the end of March, operation was suspended until the beginning of April, but it was offset in May and June, finally achieving the initial volume plan.

[ Mine ] processing improved. Measures against bad weather in winter of April through June were also successful. Operation continues to go smoothly in July and August. As stated in the initial plan, the company plans to further improve production and reduce costs to make it profitable in the second half.

Page 15 shows balance sheet and cash flow, starting with the cash flow on the right. Operating cash flow was JPY 47.7 billion cash-out due to seasonal payments such as an increase in working capital due to rising resource prices and payment of corporate tax, among others. Investment cash flow was cash-out of a JPY 39.7 billion. Capital investment includes M&A of stock. Asset sales includes approximately JPY 80 billion of sales of a cell culture material business. Payment of dividends and share buyback advanced, resulting in net cash-out of JPY 139.4 billion. With the exception of the increase in the working capital due to rising resource prices, it is generally in line with the original plan.

The balance sheet is as shown in the table on the left. Interest-bearing debt increased on a net basis by JPY 160.7 billion compared to the end of March mainly due to net cash flow, as explained. Resulting net DE ratio was 0.65x, and the equity ratio attributable to the owners of the parent was 31%. This month, one of the Japanese rating agencies has upgraded our stock by 1 notch, indicating an improvement in our financial health.

That concludes my presentation. Thank you very much.