Idemitsu Kosan Co Ltd
TSE:5019
Idemitsu Kosan Co Ltd
In the bustling economic landscape of Japan, Idemitsu Kosan Co., Ltd. stands as a pillar of the nation's energy and chemical industries. Founded in 1911 by Sazo Idemitsu, the company has carved out a significant presence, evolving from a modest lubricant sales venture into a diversified powerhouse. At its core, Idemitsu is an integrated oil company, meaning it is involved in almost every aspect of the petroleum industry. It extracts, refines, and sells oil products, ensuring a supply chain that covers everything from exploration to the distribution of energy resources. Refineries serve as the beating heart of Idemitsu's operations, where crude oil is transformed into a plethora of products such as gasoline, diesel, and other petrochemicals, which are then distributed across Japan and other markets.
Complementing its primary focus on petroleum, Idemitsu has also made significant strides in the chemical industry, tapping into the growing demand for high-value chemical products. Its chemical division produces and markets a vast array of products, including lubricants, performance chemicals, and bitumen, effectively catering to industries worldwide. Throughout its operations, Idemitsu places a strong emphasis on innovation and research, seeking sustainable avenues to expand its energy portfolio. It invests in renewable energy and new technologies to address the global shift toward greener alternatives. Thus, Idemitsu Kosan not only relies on the traditional revenue streams from oil and chemicals but also strategically positions itself for future growth through diversification and a commitment to environmental sustainability.
Earnings Calls
In the latest earnings call, the company reported a significant year-on-year decrease in segment profits, primarily driven by inventory losses totaling JPY 59.4 billion. Excluding these impacts, profit dropped to JPY 72.8 billion. However, an upward revision of JPY 60 billion for the earnings forecast was announced, now projecting net income of JPY 15 billion for the fiscal year. Sales of core fuel products surged by 98.8% as the market recovers from COVID-19, and a growth rate of 98.2% is expected in the upcoming quarter. The company is also focusing on ESG initiatives as part of its long-term strategy.
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My name is Sakai. I would like to explain our financial results using our presentation materials.
The first slide is a summary of our financial results. Segment profits in the third quarter of financial year 2020 decreased by JPY 74.1 billion year-on-year to JPY 13.4 billion. The significant remaining inventory impact losses of JPY 59.4 billion were a major factor in the year-on-year decrease. Profit, excluding inventory impact, decreased by JPY 23.9 billion year-on-year to JPY 72.8 billion due to reduced income from the resources segment, among other factors. We also reported a significant year-on-year decrease in net income to a net loss of JPY 7.5 billion.
This slide shows our forecast for the fiscal year. This time, we revised our crude oil price assumption upward to $51 in light of the recent uptrend and performed a review of our operating environment. And as a result, we revised our earnings forecast upward by JPY 60 billion.
The profit forecast, excluding inventory impact, was revised upward by JPY 20 billion to JPY 65 billion. No change has been made to the interim and fiscal year dividend forecast of JPY 60 per share each for a total annual dividend of JPY 120 per share.
The next slide provides additional information on inventory impact. Price trends of Arabian light oil are shown. The crude oil price remained basically flat from second quarter to third quarter. And third quarter inventory impact losses of JPY 59.4 billion were also similar to the level reported in second quarter. As a result of the increase in the crude oil price in fourth quarter, inventory impact losses for the full fiscal year are expected to decrease to JPY 10 billion.
I would now like to move on to our key topics for the fiscal year. First is the impact of COVID-19. Third quarter sales of the 4 core fuel oil products increased relative to the first half due to recovery from COVID-19 effects with a growth rate of 98.8%. Continued recovery from COVID-19 is expected in fourth quarter with an expected growth rate of 98.2%. Jet fuel is forecasted to continue to face a difficult environment.
In other segments, demand for some functional materials and resource prices are recovering due to recovery in automotive production, in line with economic normalization in various countries worldwide. On the other hand, the international markets for petroleum and basic chemicals remain extremely challenging.
At NSRP, refinery utilization continues to be stable. However, earnings performance continues to struggle due to weak product markets in Singapore as well as time lags in inventory impact from the sharp fall in the crude oil price in January-March 2020.
Please turn to the next slide. Other topics include the planned launch of the new service station brand, apollostation in 2021, and the construction of a new high-efficiency naphtha cracking furnace at Tokuyama plant, which is set to commence operations in February 2021.
In December 2020, we were selected to become part of MSCI Japan ESG Select Leaders Index, which is a stock index for ESG investments. We will continue to strengthen our ESG initiatives in order to contribute to a sustainable society going forward.
The operating environment is summarized on the next slide. Crude oil price, Australian coal spot price and exchange rates are shown here. The current year is shown in red, while the previous year is shown in gray. Please refer to this slide at a later time.
Our income statement is summarized on Page 8. Net sales decreased by JPY 1,349.4 billion year-on-year, mainly due to a fall in the Dubai crude oil price. With respect to changes in operating plus equity income, which was explained at the beginning, NSRP played a major role in the JPY 15.2 billion year-on-year decrease in equity income. Extraordinary income decreased by JPY 20.5 billion year-on-year to a loss of JPY 9.1 billion, mainly due to reversal of step acquisition gains from the business integration.
Segment information is provided on the next slide. Specific figures are as shown here.
Page 10 shows a step chart. A breakdown of changes in each segment is provided in the next several slides.
First is the petroleum segment. The bar graph on the left represents sales volume. Sales volume decreased by about 1.8 million kiloliters in the first half on a year-on-year basis, for a total impact of JPY 19.8 billion. The right graph shows refining margins, with margins, including impact of time lag shown in red and excluding such impact shown in gray. A year-on-year improvement of JPY 0.9 per liter was observed for a positive impact of JPY 20.7 billion.
Other factors, including synergies and affiliates had a positive impact of JPY 38 billion. A breakdown is provided as follows: JPY 9.7 billion increase from integration synergies; JPY 15.5 billion increase from affiliates; JPY 11.2 billion decrease from equity income; JPY 16.5 billion decrease from reduced jet fuel sales volume; and JPY 40.5 billion increase from internal fuel costs, et cetera. Internal fuel costs can be further broken down into JPY 19.6 billion from a decrease in internal fuel costs due to a decrease in oil prices and JPY 18.7 billion from cost reductions.
Next is the basic chemicals segment. Income from basic chemicals decreased by JPY 19 billion year-on-year, mainly due to pricing factors resulting from reduced margins. Margins for each product are as shown here.
The functional materials segment reported a JPY 10.7 billion decrease, mainly due to reduced lubricant demand due to the COVID-19 pandemic and a decrease in polycarbonate margins.
Power and renewable energy reported a JPY 1.2 billion decrease, mainly due to reduced sales in the solar business and pricing factors.
Please turn to the next slide. Profits from oil exploration and production fell by JPY 7 billion. The decrease was mainly due to the JPY 10.5 billion decrease from the fall in the Brent crude oil price and time lags relating to sales volume.
Profits from coal decreased by JPY 23 billion, mainly due to a JPY 19.2 billion negative impact from the fall in the coal price.
Our balance sheet is provided on Page 14. Total assets decreased by JPY 15.7 billion year-on-year to JPY 3,871.2 billion. Net assets decreased by JPY 46.8 billion due to net losses and dividend payments, amid a decrease in working capital due to decreases in accounts receivable and inventory as a result of a fall in the crude oil price.
The decrease in interest-bearing debt only fell by JPY 8.3 billion as increases from dividend payments and working capital provided to NSRP were offset by a decrease in working capital from a decrease in the crude oil price.
Our summary of earnings forecast begins on Page 15. We increased our Dubai crude oil assumption to $51.5 from January onward. The foreign exchange rate assumption remains unchanged at JPY 105 to the dollar.
Next is the income statement. The net sales forecast was revised upward by JPY 200 billion to JPY 4.5 trillion. The operating income forecast is JPY 95 billion, while forecasted inventory impact was reduced by JPY 40 billion to a loss of JPY 10 billion.
As equity losses are forecasted at JPY 40 billion, segment income has been revised upward by JPY 60 billion to JPY 55 billion, which amounts to an upward revision of JPY 20 billion when excluding inventory impact.
Extraordinary loss was revised downward by JPY 18 billion, factoring in impairment losses in the resources segment, resulting from a review of long-term price assumptions. As a result of the above, net income was revised upward by JPY 35 billion to JPY 15 billion.
The next slide shows profits by segment. An overview of changes in each segment will be explained using the step chart on Page 17. Segment income in the petroleum segment was revised upward by JPY 23 billion, excluding inventory impact.
First, a review of forecasted sales volume led to a JPY 2.6 billion increase. Affiliates expenses and other factors led to a JPY 20.4 billion increase. This can be broken down into JPY 11.3 billion from cost reductions, JPY 5.6 billion from upward revision of affiliates profits and the remainder from an increase in jet fuel sales volume, et cetera.
Basic chemicals was revised upward, mainly due to expected expansions of SM margins, while functional materials was revised upward by JPY 1 billion due to anticipated recovery in demand for performance chemicals, particularly from automotive production.
On the other hand, power and renewable energy was revised downward by JPY 7 billion due to a surge in GE PX prices following a crunch in power supply.
No revisions have been made to the forecast in the oil exploration and production and coal segments.
That concludes our overview for our third quarter results and earnings forecasts. Thank you for your attention.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]