Idemitsu Kosan Co Ltd

TSE:5019

Earnings Call Transcript 2021-Q1

[Noriaki Sakai, executive]

My name is Sakai of Idemitsu Kosan. I would like to explain our first quarter results, which were announced today.

I would like to start with our summary on Page 2. Earnings in the first quarter fell significantly by about JPY 130 billion year-on-year, mainly due to inventory impact losses, decreased demand for petroleum products and equity losses relating to NSRP in Vietnam.

Our consolidated forecasts remain unchanged from our announcement on May 26. We forecast interim dividends of JPY 60 per share and fiscal year-end dividends of JPY 60 per share for an annual total of JPY 120 per share.

The next slide shows the key topics for the quarter. With respect to the impact of the COVID-19 pandemic, the 4 core petroleum products fell sharply year-on-year in April and May, followed by a modest recovery in June. Jet fuel has particularly suffered due to the impact of a drop in international flights and prospects for recovery remain unclear. The impact of other factors, such as weak basic chemicals market and a fall in resource prices, have also materialized.

With respect to the Nghi Son Refinery in Vietnam, capacity utilization has been stable since the shutdown maintenance conducted last year. However, first quarter performance decreased significantly year-on-year, mainly due to inventory impact resulting from the sharp fall in crude oil prices in January to March and the impact of time lags.

Page 4 illustrates the inventory impact, which was a major cause of reduced earnings. The graph uses Arabian light crude oil as an example to demonstrate pricing trends since January. Reversal of inventory accumulated in March, when crude oil price was high relative to April to June, led to inventory impact losses of JPY 94.4 billion. However, these losses are expected to reverse if crude oil prices remain at current levels.

Page 5 illustrates the operating environment with graphs of the Dubai crude oil price, the Australian spot coal price and the foreign exchange rate. Crude oil and Australian coal prices have fallen sharply relative to last year.

The next slide shows our consolidated income statement. Revenues fell sharply to JPY 982.8 billion, mainly due to the fall in resource prices. Profits decreased at each level as shown in the summary provided here. Extraordinary gains decreased by JPY 22.3 billion to a loss of JPY 4.4 billion. The reversal of gains from stepwise acquisition in the previous fiscal year had a JPY 17.2 billion impact, while other factors included losses on disposal of refineries and service stations and losses reported at an overseas subsidiary.

Page 7 summarizes income by segment. Profits fell year-on-year in each segment, particularly in the Petroleum segment. A step chart is provided on Page 8. An explanation of changes in operating income in each segment is provided from Page 9 onward.

The Petroleum segment reported a JPY 12.9 billion year-on-year decrease. A decrease in sales volume of the 4 core products led to a JPY 9.6 billion decrease.

The graph on the left is a year-on-year comparison. Total sales of the 4 core products amounted to 87.8% of the first quarter in the previous fiscal year, with gasoline falling to 80.6%. The graph on the right shows domestic spot prices and crude oil margins. The solid line shows product margins, including impact of time lag, while the dotted line shows product margins, excluding impact of time lag. Arabian light crude oil is used for crude oil figures.

The graph shows that margins in the first quarter remained largely unchanged from last year, increasing by JPY 0.4 per liter for a positive impact of JPY 2.8 billion. The JPY 6.1 billion decrease from equity losses, et cetera, can be broken down as follows: losses from Nghi Son Refinery in Vietnam had the largest impact, leading to a decrease of JPY 24.4 billion. Fuel costs led to a JPY 7.5 billion decrease, while profits from affiliates led to a JPY 7.8 billion increase. Reduced jet fuel sales led to a JPY 6 billion decrease, while improvements in sea heavy oil and naphtha margins led to an increase of JPY 9 billion.

Moving on to basic chemicals. Profits decreased by JPY 5.7 billion year-on-year, mainly due to reduced margins. Profits in functional materials decreased by JPY 1.7 billion mainly due to reduced demand for lubricant sales, particularly from the automotive sector. Power and renewable energy reported a JPY 0.8 billion decrease. Profits in the power business remained flat due to a steady increase in retail power sales. The solar business reported decreased profits due to a fall in panel sales as well as a fall in selling prices.

In the Resources segment, oil exploration and production reported a decrease of JPY 4.5 billion. The bar graph shows production volume, while the line graph shows Brent crude oil prices. Volume decrease resulting from oil field depletion led to a JPY 1.3 billion decrease, while a fall in Brent crude oil prices led to a JPY 3.2 billion decrease.

Profits from the coal business decreased by JPY 8.5 billion, mainly due to the decrease of about $30 per ton in coal prices.

That concludes our analysis of factors affecting profits in each segment.

I would like to explain our financial position on this last slide. Total assets at the end of the quarter decreased by JPY 251.3 billion relative to the end of the previous fiscal year to JPY 3.6356 trillion. The decrease in working capital resulting from the fall in crude oil prices was the largest reason for the decrease.

Shareholders' equity decreased by JPY 123 billion due to reported net losses as well as dividend payments and foreign translation adjustments. Interest-bearing debt increased by JPY 93.6 billion in order to secure cash on hand in light of uncertainties resulting from the COVID-19 pandemic as well as to pay dividends, et cetera.

That concludes my explanation. Thank you for your attention.