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Edited Transcript of 5020.T earnings conference call or presentation 7-Aug-19 7:00am GMT

Q1 2020 JXTG Holdings Inc Earnings Presentation

Tokyo Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of JXTG Holdings Inc earnings conference call or presentation Wednesday, August 7, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Tsutomu Sugimori

JXTG Holdings, Inc. - President & Director

* Yoshiaki Ouchi

JXTG Holdings, Inc. - Director & Managing Executive Officer

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Presentation

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Tsutomu Sugimori, JXTG Holdings, Inc. - President & Director [1]

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Good afternoon. This is Sugimori. Let me take this opportunity to thank our shareholders and the investors for their support and advice on JXTG Group business activities.

Please turn to Slide 2. First of all, for the first quarter of fiscal year 2019, operating income, excluding inventory valuation, was JPY 69 billion, down JPY 116.2 billion year-on-year. The details will be explained later by Mr. Ouchi.

For the first quarter, operating income declined year-on-year. In the Energy business, there was a reversal of the JPY 77 billion gain on sale of the cell culture material business in the previous year, and the petrochemical margin deteriorated due to concerns about softening supply and demand.

In the Oil and Natural Gas E&P business and the Metals business, crude oil and copper prices declined against the backdrop of U.S.-China trade friction. Excluding the reversal of gain on sale of the cell culture material business, operating income was down JPY 39.2 billion year-on-year. On the other hand, the full year forecast for fiscal year 2019 is kept unchanged from the plan announced in May with operating income of JPY 500 billion, excluding inventory valuation.

As I mentioned earlier, crude oil prices, copper prices and the petrochemical margins are below expectations at the beginning of the fiscal year. But gasoline, kerosene, diesel fuel and fuel oil A margins, Caserones production and integrated synergies are exceeding expectations. Therefore, we have determined that there is no need to revise the earnings forecast. We will make every effort to create synergies and thoroughly reduce costs in order to achieve the operating income, JPY 500 billion, which is the target for the final year of the current medium-term management plan. In addition, we will continue to pursue thorough investment management and pursue cash flow creation to further return profits to shareholders.

Next, I will explain the progress of each business. Slide 3, please. First, in the Energy business, the unification of service stations into ENEOS brand was completed at the end of June. Furthermore, a full-scale start of Goi Thermal Plant Replacement Plan, consideration of the LNG business in Vietnam and acceptance of surplus electricity purchases for residential photovoltaic power generation systems were implemented. In addition to improving the efficiency and competitiveness of oil refining and the sales, we will continue to develop businesses that will become the next-generation pillars.

Next, in the Oil and the Natural Gas E&P business, we started production of natural gas at the North Sea Culzean gas field in June. During the current fiscal year, we will also start production at the Mariner field in the U.K. North Sea, and we'll make steady progress in each project.

Finally, in the Metals business, the Caserones Copper Mine in Chile continues to operate stably, and the production volume has exceeded the plan. We have achieved an operating surplus even under the low copper prices in April, June, and we'll continue to improve productivity and reduce costs.

Please turn to Slide 4. I'll explain the progress of the integration. One of the important measures of the current medium-term management plan is to establish an optimum operation, production and supply chain based on the consolidation of refineries and the plants.

First of all, we announced in September 2017 that we would stop production at Muroran Plant, which was implemented in April this year. Subsequently, in April 2018, we announced the possibility of collaboration with Petrolimex at the Marifu Refinery, and we are continuing with the discussions. In September 2018, we announced the unification of the Kawasaki Refinery and the Kawasaki Plant. This was also implemented in April this year. We also announced new initiatives last month. As the business environment has become more challenging, we have examined the functions and the characteristics of each refinery in the group and have established a refinery operated by Osaka International Refining Company, a joint venture with PetroChina International (Japan). An agreement was reached to change the Osaka Refinery to the Chiba Refinery because of their further collaboration.

In addition, in October 2020, we decided to suspend the refinery function of the Osaka Refinery and turn it into an asphalt-fueled electric power facility using the existing facilities. In order to strengthen the competitiveness of the entire supply chain in the petroleum products and the petrochemical business, which is our core businesses, and to quickly build a foundation that can overcome international competition with Asian countries, we have been reducing our current crude oil processing capability and capacity of 1.93 million barrels while promoting the construction of an optimal production and supply system on the premise of stable supply.

Next, Mr. Ouchi will explain.

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Yoshiaki Ouchi, JXTG Holdings, Inc. - Director & Managing Executive Officer [2]

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Let me explain the details of the financial results for the first quarter of fiscal year 2019.

Please turn to Slide 5. With regards to resource prices, due to concerns about the global economic slowdown triggered by trade disputes between the U.S. and China, Dubai crude oil prices declined from about $70 in April to about $60 in June, and the copper prices also declined from about $2.90 in April to $2.65 in June. Dubai crude oil price increased in the first quarter of the previous fiscal year and then decreased in the first quarter of this fiscal year leading to deterioration in inventory valuation as well as a time lag between selling price and cost due to 1-month period for crude oil transportation.

Please go to Slide 6. Gasoline, kerosene, diesel fuel and fuel oil A margins deteriorated during the quarter, first quarter fiscal year 2019, as shown in a pink bar graph. Although it deteriorated year-on-year due to the time lag, as explained earlier, without the time lag factor, it remained unchanged from the previous year. In July, in addition to brisk market conditions, the crude oil price started to rise resulting in a positive time lag and a significant improvement in performance. We maintain our perception of a stable domestic oil environment.

In addition, the paraxylene margin has deteriorated significantly due to concerns about the weakening supply and demand trend driven by the launch of new facilities in China. Although not shown here, the benzene margin has deteriorated also due to continued supply overload due to troubles with the derivative facilities. In July, both paraxylene and the benzene margins improved, although at low levels.

Please refer to Slide 7 for income statement. Operating income for the first quarter of fiscal year 2019 was JPY 49.3 billion. The negative inventory valuation of JPY 19.7 billion was recorded due to the decline in crude oil prices. Operating income, excluding inventory impact, was JPY 69 billion, a decline of JPY 116.2 billion year-on-year. This includes a negative JPY 77 billion due to the reversal of gain from sale of the cell culture material business in the previous fiscal year. As a result, profit attributable to owners of the parent decreased by 88% year-on-year to JPY 17.4 billion.

Please turn to Slide 8. This shows the variance for each major segment. I will make supplementary comments on the variance analysis.

Please turn to Slide 9. The Energy business. The business was JPY 31.7 billion, a decrease of JPY 104.5 billion year-on-year. As explained earlier, this includes the impact of the JPY 77 billion gain on sale of the cell culture material business in the previous year, excluding which deterioration is JPY 27.5 billion year-on-year.

The sales volume of petroleum products improved JPY 1.6 billion year-on-year due to an increase in export volume compared with the previous year when volume was affected by travels. Although margin and other were affected by the time lag, there was an increase in integration synergies and improvement due to fewer troubles this year. Integration synergies are listed in the middle of the table. The actual results for the first quarter of fiscal year 2019 were JPY 27.4 billion, a year-on-year increase of JPY 10.1 billion. We are making steady progress toward achieving our annual goal of JPY 114 billion.

Volume impact of petrochemical products is due to the year-on-year difference in regular maintenance. It is up JPY 1.7 billion due to increased sales volume of paraxylene and others.

Margin on other declined by JPY 26.6 billion due to deterioration in the market conditions of paraxylene and benzene arising from concerns about the weakening demand and supply trend triggered by the launch of new facilities in China.

Please move to Slide 10. The Oil and Natural Gas E&P business was JPY 13.2 billion, a decrease of JPY 4.1 billion year-on-year. Sales volume increased by 4,000 B/D year-on-year to 99,000 B/D. It improved by JPY 2 billion due to the rebound from sales decline in the previous fiscal year, brought about by the earthquake in Papua New Guinea. Crude oil prices deteriorated JPY 2.8 billion due to the decline in crude oil prices. Other declined JPY 3.3 billion due to the absence of profits associated with the sale of interest in the North Sea in the previous fiscal year.

Please move to Slide 11. The Metals business was JPY 16.3 billion, a decrease of JPY 4.4 billion year-on-year. From the left, in resource development, although there was a decline of about JPY 7 billion due to a drop in copper prices, production increased at the Caserones Copper Mine and Los Pelambres Copper Mine. The segment remained flat year-on-year.

As stated in the balloon, the production volume of the Caserones Copper Mine is steady, increasing by 8,000 tons per year to 40,000 tons. Electronic material and other were negative factors. They deteriorated due to a decline in sales due to the impact of trade friction between the U.S. and China and the sluggish demand for smartphones.

Please turn to Slide 12. First, I will explain the consolidated cash flows on the right. There are 2 cash flow numbers, but I will explain the numbers, excluding the impact of IFRS 16 lease accounting, as shown in blue. Operating cash flow was a cash inflow of JPY 122.5 billion due to a decrease in working capital caused by a decline in resource prices in addition to operating income. Investment cash flow was a cash outflow of JPY 106.8 billion due to investment in offshore wind power generation in Taiwan announced in April and the regular maintenance-related investments. Free cash flow was cash inflow of JPY 15.7 billion.

The first quarter is usually a period when there is large cash flow due to tax payments and increase in gasoline inventories. However, this year, we had a net cash inflow due to a decrease in working capital caused by a decline in resource prices. Net cash flow was minus JPY 61.1 billion with the addition of minus JPY 76.8 billion, including payment of external dividends and stock acquisition costs.

The balance sheet is shown in the table on the left. Interest-bearing debt increased JPY 51.6 billion on a net basis, excluding cash on hand. The main factor is the net cash flow explained earlier. As a result, the net D/E ratio as of the end of June was 0.62x and the shareholders' equity ratio was 30.6%.

The full year forecast is shown on Page 13. It is unchanged, and we have put some assumptions behind it. As for sensitivity, the impact of crude oil price fluctuations, exchange rates and the copper prices are summarized in the reference materials.

This is the end of my explanation. Thank you for your kind attention.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]