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Edited Transcript of 5020.T earnings conference call or presentation 8-Nov-19 7:00am GMT

Q2 2020 JXTG Holdings Inc Earnings Presentation

Tokyo Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of JXTG Holdings Inc earnings conference call or presentation Friday, November 8, 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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I'm Sugimori, President of JXTG Holdings. For shareholders and investors, thank you very much for your continued support and cooperation for the business activities of JXTG Group.

Please turn to Page 2. Operating income, excluding inventory valuation for the second quarter FY 2019 was JPY 170.2 billion, down JPY 170.9 billion year-on-year.

Since the launch of JXTG 2 years ago, gasoline, kerosene, diesel fuel and fuel oil A margin have been steady, backed by improved supply-demand balance in domestic fuel oil market and creation of integration synergies. However, in this first half, due to negative time lag in oil products caused by falling resource prices, led by crude oil price, profit decreased and profit in Oil and Natural Gas E&P business and upstream copper business deteriorated.

In petrochemical products, supply-demand balance continued to be soft due to increased supply, with launches of new equipment in China and margin deteriorated substantially, in particular, in paraxylene.

In the electronic materials, mainly due to smartphone-related demand adjustment caused by economic slowdowns backed by U.S.-China trade friction, among others, sales volume stayed sluggish. Furthermore, reversal of gain of JPY 77.7 billion on cell culture material business in the previous year affected, and operating income declined year-on-year.

As for the operating income full year forecast, excluding inventory variation, it was revised down from JPY 500 billion to JPY 350 billion, considering the fall in resource prices and worsening petrochemical margin.

As for free cash flow, impact by the downward revision in profit forecast is absorbed by a reduction of working capital backed by resource prices declines, selective capital investment and the review of timing to post expenses.

Accordingly, free cash flow will be up JPY 19 billion from the previous announcement to JPY 60 billion. This indicates steady improvement in our free cash flow generating capability.

Please turn to Page 3. As for assumed prices for the second half forecast, Dubai crude oil is $60 per barrel, copper is $2.60 per pound, and the exchange rate is JPY 105 to $1.

Due to crude oil price drop, inventory valuation is expected as minus JPY 70 billion. As a result, profit attributable to owners of the parent will be JPY 155 billion for the full year.

Please turn to Page 4. Operating income, excluding inventory valuation in FY 2018 was JPY 515.7 billion, topping JPY 500 billion, but in FY 2019, it will be JPY 350 billion.

As for cumulative operating income from FY 2017 to '19 for 3 years, it will be JPY 1.2383 trillion, which is almost equivalent to the planned cumulative target for 3 years.

As for other indices, cumulative targets of the 3-year medium-term management plan will be achieved and the free cash flow, in particular, will substantially overachieve the target by hitting JPY 809.3 billion.

Next, let me discuss shareholder returns for fiscal year 2019. Page 5, please. As for shareholder returns for fiscal year 2019, in May this year, we had announced an increase in full year dividend by JPY 1 per share to reach JPY 22 per share, along with the share buyback program of purchasing up to 100 million shares or JPY 50 billion in total. The buyback program has been completed in September. We have acquired 100 million shares worth JPY 48.9 billion. We have already canceled all of the 100 million shares, following the decision made at the Board meeting held today.

Total shareholder return ratio for the current medium-term is projected at 38%. As defined by the existing policy, we will aim for additional shareholder return, depending on the progress of management targets.

Please turn to Page 6. Major initiatives carried out during the first half of fiscal year 2019. For enhancing profitability of core businesses, the company concluded a basic agreement to consider continuing collaboration, including a potential location transfer of the petroleum refinery operated by the joint venture with PetroChina International (Japan) from the Osaka refinery to the Chiba Refinery. And decided to terminate the operation of the refinery of function in the Osaka refinery by around October 2020 and turn it into asphalt-fueled electric power facility. The Oil and Natural Gas E&P business commenced production of the Culzean Gas Field in the U.K. North Sea in June and the Mariner Oil Field in August this year. For developing and strengthening businesses that will become mainstay businesses of the future, the company decided to participate in Taiwan's largest offshore wind power project for operation until December 2021, as well as in the CO2-free Hydrogen Energy Supply-chain Technology Research Association in Australia as a private sector member to carry out proof of concept and commercialization studies of the supply chain to liquefy and transport CO2-free hydrogen all the way to Japan. This initiative may allow us to build an important base for the future, new energy infrastructure.

Page 7, please. I will recap on the status of the Caserones Copper Mine integration synergy, a key initiative under the midterm management plan. Integration synergy generated for the first half of fiscal year 2019 was JPY 54.6 billion, which is JPY 17 billion higher than a year ago. The full year projection of JPY 114 billion, which is in excess of JPY 100 billion of the midterm target, is kept unchanged. We will continue with the efforts to maximize and accelerate integration synergy. The production volume of the copper mine for the first half was 81,000 tons. The 20% growth year-on-year suggests a highly stable nature of the operations despite the tough winter season in Chile. The full year forecast is 164,000 tons. The consistent upward trend shown by the chart is sustained as a result of stable operation and a continuous improvement in productivity. We will continue with stable operation and try to improve productivity and efficiency further.

For the second half, despite the tough business environment, we will make sure a steady execution of key initiatives in order to further enhance earnings while promoting cash flow for cost management.

Next, Mr. Ouchi will give you more details on the financial results and forecasts.

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

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Now I will explain the financial results for the second quarter FY 2019 and the full year forecast. As for the business environment, please turn to Page 9. Due to future uncertainty caused by U.S.-China trade friction and others, crude oil price fell from $70 at the beginning of fiscal year to $60 per barrel in June, down by $10. Temporarily due to geopolitical risks in Middle East, it rose. But currently, it has been steady around $60. In the previous fiscal year, due to oil price increase from $68 in April to $77 in September, we posted inventory valuation gain of around JPY 100 billion. But in this fiscal year, in the downtrend, there was an inventory valuation loss by JPY 38 billion. In petroleum products, negative time lag was observed.

Copper price also fell from $2.90 in April to around $2.60 latest and the Metals segment suffered negative impact.

For petroleum product margin, please turn to Page 10. In this fiscal year, as for petroleum margin, despite negative time lag caused by crude oil price decline, domestic market prices have been firm since the integration, sustaining the petroleum margin of more than JPY 10. Paraxylene margin has been sluggish due to eased supply-demand balance caused by supply increase with the construction of new machinery equipment.

Page 11 shows outline of financial results. Operating income in the first half FY 2019 was JPY 130.9 billion. Due to crude oil price drop, we incurred losses on inventory valuation by JPY 39.3 billion. Operating income excluding inventory valuation was JPY 170.2 billion, down JPY 170.9 billion year-on-year.

Finance income and costs were minus JPY 13 billion, with the improvement of plus JPY 4.1 billion year-on-year. This is due to foreign exchange translation difference in debt denominated in dollar, caused by appreciation of yen in this fiscal year. As for the bottom line, profit attributable to owners of the parent, it was JPY 71 billion, down 75% year-on-year.

Next, I will explain changes in operating income by segment. Please turn to Page 13. Operating income, excluding inventory valuation of the entire group, was JPY 170.2 billion, down JPY 170.9 billion from JPY 341.1 billion in the previous year. Breakdown by segment is shown on the bottom right.

In Energy business, operating income decreased substantially by JPY 156.8 billion to JPY 87.3 billion. But excluding the gain on series of cell culture material business in the previous year, JPY 77.7 billion, decrease was JPY 79.1 billion. Major factors include minus JPY 56.2 billion in petrochemicals due to deteriorated petrochemicals margin, mainly in paraxylene, and minus JPY 22.8 billion in petroleum products. And volume decline in petroleum and others due to unseasonable weather and profitability-focused sales approach, and margin decline resulted in minus JPY 17.6 billion. There was a negative time lag in petroleum and export products margin deterioration. And excluding the factor, margin has been steady. Positive factors such as steady progress in integration synergy and this refinery troubles are included.

In Oil and Natural Gas E&P business, operating income decreased by JPY 10.8 billion. Major impact was given by oil price impact of minus JPY 7.7 billion, and volume decline and expenses increase resulted in minus JPY 3.1 billion. As for the sales volume, due to production volume increase with the production launches in Culzean Gas Field and Mariner Oil Field and contract expiration for a part of fields, it was 93,000 BOED, down by 4,000 BOED year-on-year.

In Metals business, copper price decline in upstream business in Caserones and others affected minus impact of JPY 8.8 billion, but it was offset by stable operation and cost reduction.

In copper smelting and refining business, due to market price improvement of sulfuric acid, profit increased JPY 3.1 billion, but in electronic materials business, sales decline for smartphone led to a profit decline of JPY 6.8 billion. In Metals business as a whole, operating income decreased JPY 3.7 billion to JPY 36.4 billion.

I will skip the waterfall charts on next page onwards. Please turn to Page 17, balance sheet. I will explain cash flow on the right-hand side first. Based on the figures indicated by the blue dotted line, cash flow from operating activities was JPY 140.2 billion inflow, reflecting operating income of JPY 170.2 billion; depreciation expense of JPY 127.4 billion; and the corporate income tax and the petroleum taxes, JPY 157.4 billion. Cash flow from investing activities was JPY 186.6 billion outflow. As a result, free cash flow was JPY 46.4 billion outflow.

Balance sheet is shown to the left. There was a JPY 148 billion increase in interest-bearing debt, excluding cash and cash equivalents. As a result, net D/E ratio as of the end of September was 0.65x, and equity ratio attributable to owners of the parent was 31.2%.

Please turn to Page 18 for full year cash flow projection. For fiscal year 2019, cash flow from operating activities is projected at JPY 470 billion, a decrease of JPY 71 billion from the May forecast due to the downward revision of the full year earnings which canceled out the benefit of reduced working capital amid the falling resources prices.

Cash flow from investing activities is projected at JPY 410 billion outflow. An improvement of JPY 90 billion is expected through selective capital investments and optimized payment timings. As a result, free cash flow should improve JPY 19 billion from the May forecast to reach JPY 60 billion. And total free cash flow for the 3 years until 2019 is projected at JPY 809.3 billion, exceeding the previous guidance. Our plan is to offset the lower earnings for the year with tighter management of inventory, working capital and CapEx.

Please turn to Page 19 for full year forecast. Assumptions are as indicated here. Yen-dollar rate is JPY 105. Crude oil price is $60, copper price is $2.60. For margin calculation, we used actual margin until October for petroleum products and until November for chemical products.

Please turn to Page 20. Based on the revised assumptions, full year forecasts are as follows. Operating income is JPY 80 billion, JPY 270 billion below the previous forecast. Operating income, excluding the impact of inventory valuation is JPY 350 billion, JPY 150 billion below the previous forecast. Profit attributable to owners of the parent is JPY 155 billion, JPY 165 billion below the previous forecast.

For operating income breakdown by segment, please refer to Page 22. For Energy business, JPY 195 billion is projected, down JPY 100 billion, reflecting the decrease of JPY 78 billion in petrochemicals and JPY 22 billion in petroleum products. Continuous deterioration of paraxylene margin and the volume decline due to the weather and other factors are anticipated. For Oil and Natural Gas E&P business, JPY 55 billion is projected, down JPY 22 billion, partially offsetting the JPY 24.9 billion impact from falling crude oil and nat gas prices, with the reduced expenses following the decrease in production output of some oil fields.

For Metals business, JPY 50 billion is projected, down JPY 33 billion from the previous forecast due to falling copper prices and declining electronic materials sales, despite higher Caserones volume and cost improvement. Caserones is expected to see positive profit, not only for the first half, but for the full year. I will skip the waterfall charts on next pages. Please refer to Page 26 and 27 later for assumptions and sensitivity analysis.

This concludes my presentation. Thank you for your kind attention.

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