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Edited Transcript of 5019.T earnings conference call or presentation 14-Nov-19 8:30am GMT

Q2 2020 Idemitsu Kosan Co Ltd Earnings Presentation

Tokyo Jan 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Idemitsu Kosan Co Ltd earnings conference call or presentation Thursday, November 14, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Shunichi Kito

Idemitsu Kosan Co.,Ltd. - CEO, President & Representative Director

* Toshiaki Sagishima

Idemitsu Kosan Co.,Ltd. - Managing Executive Officer of Accounting & Finance

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Presentation

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Toshiaki Sagishima, Idemitsu Kosan Co.,Ltd. - Managing Executive Officer of Accounting & Finance [1]

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My name is Sagishima of Idemitsu Kosan. I would like to provide an overview of our financial results for the second quarter of fiscal year 2019, which were announced today as well as our earnings forecast for fiscal year 2019. Today, I would like to go over our financial results for the second quarter of fiscal year 2019, our earnings forecast for fiscal year 2019 and our plans relating to shareholder returns.

I would like to begin with an overview of our financial results for the second quarter of fiscal year 2019. This slide shows trends in crude oil prices. The red line shows the result in the second quarter of fiscal year 2019, while the blue line shows the result from fiscal year 2018. Despite the decision to postpone reduction of production by OPEC Plus and increased geopolitical risk in the Middle East, the prolonged U.S.-China trade friction gave rise to concerns for global economic slowdown, putting downward pressure on crude oil prices. As a result, the average crude oil price for the second quarter decreased by $8.90 year-on-year to $64.30. We assume an average of $60 per barrel in our earnings forecast for the second half of fiscal year 2019.

With respect to the exchange rate, the average yen-dollar exchange rate for the quarter was JPY 108.6 to the U.S. dollar. We assume an exchange rate of JPY 105 to the U.S. dollar in our earnings forecast for the second half of fiscal year 2019. A brief summary of the fiscal year is presented here for your reference at a later time.

Next, I would like to explain our financial results for the second quarter of fiscal year 2019. The top chart shows crude oil prices and foreign exchange rates, which I have already explained. The bottom chart is a summary of our income statement. Net sales decreased by about JPY 500 billion to JPY 3 trillion. Operating income decreased by JPY 165 billion to JPY 48.7 billion. As there is a negative impact of JPY 21 billion from inventory valuation, operating income, excluding inventory impact, plus equity income decreased by JPY 87.4 billion to JPY 69.7 billion. Major reasons for the decrease include the JPY 38 billion negative impact from time lag relating to petroleum product margins in the petroleum segment and increased equity loss associated with facility troubles at the Vietnam Nghi Son refinery and deterioration of petrochemical market conditions.

Extraordinary income increased by JPY 20 billion year-on-year to JPY 15.8 billion, mainly due to gains on the step acquisition in the integration with Showa Shell Sekiyu. As a result, net income attributable to owners of the parent decreased by JPY 90.2 billion year-on-year to JPY 45.3 billion.

Next, I would like to go over operating income plus equity income in each segment. Factors causing year-on-year changes are illustrated in the step chart on the next slide. We begin with the fiscal year 2018 second quarter results on the far left. I will begin with the petroleum segment.

With respect to demand, gasoline demand decreased year-on-year due to the unfavorable climate, while middle distillate demand remained unchanged. With respect to sales, sales fell short of demand due to our focus on profitability rather than market share, leading to an JPY 8.9 billion year-on-year decrease. Next, refining margins fell by JPY 1.9 per liter. While time lags following the fall in crude oil prices led to a decrease of JPY 38.2 billion, margins, excluding this impact, exceeded those of last year, demonstrating a favorable market environment. The net negative impact was JPY 33.1 billion. Integration synergies led to a JPY 13 billion increase, which was more than offset by the JPY 18.3 billion decrease from goodwill amortization and increased equity loss. As a whole, the segment reported a JPY 60.3 billion year-on-year decrease.

The basic chemicals segment reported a JPY 14.1 billion decrease. Decreased margins had a JPY 12.9 billion negative impact, mainly resulting from reduced spreads on styrene monomers. Reduced sales volume had a JPY 2.4 billion negative impact, while reduction in manufacturing fuel oil costs had a JPY 1.2 billion positive impact.

Next, the functional materials segment reported a year-on-year decrease due to weakness in performance chemicals following a slowdown in PC market conditions.

Operating income from the power and renewable energy segment remained largely unchanged.

The oil exploration and production segment reported a JPY 6 billion decrease due to reduced sales volume resulting from natural depletion in the Norwegian North Sea and equipment troubles at Snorre oilfield as well as a decrease in crude oil prices.

The coal segment reported a JPY 4.8 billion decrease due to reduced selling prices and reduced production volume in Australia.

Next, I would like to move on to our earnings forecast for fiscal year 2019. This slide provides an overview of our earnings forecast for fiscal year 2019. In light of recent trends in crude oil and resource prices, we reviewed our assumptions for October 2019 onward and revised our forecasts previously announced on May 15. We revised our assumptions for crude oil price to $60, the foreign exchange rate to JPY 105 per dollar and Brent crude oil, naphtha and thermal coal prices, as shown here.

Moving on to our income statement forecast. Net sales forecast has been revised downward to JPY 6.1 trillion. Operating income plus equity income forecast was reduced by JPY 80 billion to JPY 140 billion. We forecast a negative inventory impact of JPY 28 billion. The extraordinary income forecast remains largely unchanged at JPY 9 billion. As a result, our net income forecast has been revised downward by JPY 60 billion to JPY 100 billion. As the revision mainly reflects a change in assumed crude oil and coal prices, decreases are mainly seen in the fuel oil and resources segments.

Factors leading to reduction from the JPY 220 billion forecast in the previous announcement to the current JPY 168 billion forecast are illustrated in this step chart. The petroleum segment forecast was reduced by JPY 19 billion, an upward revision of JPY 13.3 billion resulted from factors relating to refining margins and sales volume. Refining margins were revised upward by almost JPY 1 in light of current market conditions. Volume-related factors had a negative JPY 6.8 billion impact, resulting from our focus on the sales profitability and from offsetting reduced domestic sales with exports. The equity income forecast was reduced by JPY 32.3 billion due to facility-related troubles at the Vietnam Nghi Son Refinery and deterioration of petrochemical market conditions.

In the basic chemicals segment, a decrease in margins for products, such as PX, was offset by a reduction in manufacturing fuel oil costs, leading to a minimal change in the segment forecast.

We revised our forecast for the functional materials segment downward by JPY 80 billion, reflecting the expected decrease in income from performance chemicals due to the prolonged U.S.-China trade friction and from the OLED materials business due to a slowdown in smartphone demand. We revised our forecast for the power and renewable energy segment downward by JPY 6 billion as the fire at the Keihin biomass power plant in April gave rise to downtime, requiring an increased procurement on the market and creating the need to incur costs to dispose of wood and pellets that can no longer be used.

In the oil exploration and production segment, we reduced our forecast by JPY 7 billion due to the change in the crude oil price assumption and reduced sales volume resulting from natural depletion in the Norwegian North Sea and equipment troubles at Snorre oilfield. In the coal segment, we reduced our forecast by JPY 12 billion, mainly due to a $17.50 per ton reduction in our coal price assumption from $93 per ton to $75.5 per ton. As a result of these factors, our operating income plus equity income forecast for fiscal year 2019 is JPY 168 billion.

Finally, I would like to speak briefly on shareholder returns. We plan to pay dividends of JPY 160 per share in fiscal year 2019, consistent with our announcement in May. In addition, we plan to execute a share buyback and retirement of up to 4.8 million shares or up to JPY 12 billion.

That concludes my presentation. Thank you.

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Shunichi Kito, Idemitsu Kosan Co.,Ltd. - CEO, President & Representative Director [2]

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My name is Kito of Idemitsu Kosan. Now I would like to describe the medium-term management plan for the 3-year period from 2020 through 2022. Please have a look at Page 5. In formulating this plan, we first envisioned the business environment of 2050, and next formulated the vision of the ideal form of us in 2030 and then we considered what we should do during the period of this medium-term management plan based on that vision.

As an energy company, climate change will have a major impact on our management and the sustainability of our businesses. Accordingly, we began our discussions by looking at the kind of future that awaits us in our long-term target of the year 2050, the target year of the Paris Agreement. However, energy conditions and other environmental factors that we face are varied and diverse. For this reason, we formulated the plan by envisioning multiple scenarios through 2050 and then developing a vision for 2030 in order to be a resilient group.

Moving to Page 6. This time, we prepared 4 long-term scenarios ranging from a case in which petroleum demand continues to increase, to one in which decarbonization advances rapidly. Basic policies and priority topics have been assumed from scenario 3 prism, which requires a stronger adaptation to the environment by the company. Moreover, petroleum demand in scenario 3 prism is positioned at the middle point between IEA's new policy scenario and sustainable development scenario.

Next, let me explain our vision for 2030 on Page 10. We have prepared basic policies for the run-up to 2030. The first one calls for realizing a resilient business portfolio. This policy includes 3 priority topics: first, structural reforms to core revenue-generating businesses. We believe that it will be vital to secure steady cash flow over the coming decade in our core petroleum business. Main initiatives for doing so include maximizing the integration synergies and making our refineries more competitive and reliable. We would also like to enable the Nghi Son refinery in Vietnam to contribute to profits quickly. The second is expansion of growth businesses. We will strive to grow the scale and domains of our businesses in growth areas such as the functional materials segment. Our goals are to increase the ratio of functional materials business to 30% and to increase total power generated overseas centered on renewable energy to 5 gigawatts. The third is creation of next-generation businesses.

The second basic policy constitute building a business platform suited to the needs of society. Priority topics under this basic policy are harmony with the global environment and society, progress in governance and acceleration of digital innovations.

The next page shows our quantitative targets for fiscal year 2030. We aim to achieve operating income plus equity income from affiliates of JPY 300 billion in fiscal year 2030 and to reduce overreliance on the petroleum business by reviewing the portfolio from various perspectives.

Next, I would like to describe our GHG reduction targets. As shown on Page 12, we will aim to reduce our scope 1 + 2 emissions by 15% versus 2017 in 2030. This is equivalent to a reduction of 2 million tons of CO2. To accelerate GHG emissions, we employ the 2 monitoring indicators of low-carbon energy supply and degree of decarbonation of company-wide revenues.

Let me move on to management objectives on Page 14. We will aim for cumulative totals during the period of the medium-term management plan of JPY 480 billion in net income and JPY 720 billion in operating income plus equity income from affiliates. We also will secure ROE of at least 10%, and FCF of JPY 400 billion.

This slide shows income by segment. We will aim to secure a profit of JPY 260 billion in fiscal year 2022. This is mainly coming from the functional materials segment centered on lubricants and growth in overseas power generation in addition to maximization of total integration synergies and improving the earnings of the Nghi Son Refinery in Vietnam.

Next, let's look at the cash balance on Page 16. First of all, we will secure cumulative cash inflows of JPY 1.03 trillion over the 3-year period. We project cash outflows of JPY 630 billion on investments and free cash of JPY 200 billion after returns to the shareholders. Allocation of this free cash would be decided. The purpose of this cash includes strategic investment in growth fields, strengthening our financial foundation and returns to shareholders in fiscal year 2022 and later based on comprehensive consideration of matters such as the states of revenues and expenditures.

Next, I would like to describe our investment plans. Please have a look at Page 17. During the period of this plan, we will allocate a certain amount to investment in operational maintenance and in strengthening business infrastructure in order to stabilize operations in the petroleum business to advance structural reforms to core revenue-generating businesses. At the same time, we intend to carry out the growth strategic investment in the field of functional materials. We also will consider M&A activities in growth fields, both carefully and with boldness.

Finally, let me explain our shareholder returns. In fiscal year 2019 to 2021, we will implement returns to the shareholders with a total payout ratio of 50% or higher. The minimum dividend is JPY 160 per share and at least 10% of returns to shareholders will be allocated to share buyback. As for the return policy of fiscal year 2022 and later, we will decide in fiscal year 2021 based on comprehensive consideration of the cash balance.

That concludes my presentation. Thank you.