ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2018-Q3

[Katsuyuki Ota, executive]

Good afternoon, ladies and gentlemen. Katsuyuki Ota, Director, Senior Vice President of JXTG Holdings. I would like to thank the shareholders and investors for their continued support and cooperation to the JXTG Group. Without further ado, let me start the briefing on the results for the third quarter using the PowerPoint slides. There is a page number in the lower right corner of each slide.

First, page 2, the business environment. Since you must be very familiar, I will be very brief. Left-hand side, Dubai crude oil. On average, about $8 higher, year-on-year. With higher average selling price, this contributed to an increase in profit from the upstream business. Continuing from the last fiscal year, the price is rising, resulting in a positive inventory valuation in the Energy business. As for copper price, shown at the center, strong demand continuing in China resulted in the situation, that you know, rising to be on $3 in the October/December period. Exchange rate, more or less, stayed around JPY 110 to JPY 113 to the U.S. dollar. On average, the Japanese currency depreciating by JPY 5.

Page 3, margins. On the left-hand side, margins of 4 white petroleum products, gasoline, kerosene, diesel fuel and fuel oil A. The graph shows the spread between the spot price and All Japan Crude CIF. For your information, this is not our price spread, but the trend is generally similar. Continuing from the second quarter, the margin remained strong in the third quarter. In addition to rather favorable exports, crude oil price was on a rising trend, which helped to maintain the strong margin. As for the margin of paraxylene, shown on the right-hand side, demand was strong for downstream polyester. But partly due to derivative PTA factory maintenance turnaround and disruptions, margins was smaller than in the previous year. But for benzene and other petrochemical products not shown here, margin improved.

Moving on to page 4, outline of financial results. Operating profit, excluding inventory valuation, was JPY 365.5 billion, about 1.7x the previous year's level with an increase of JPY 145 billion. As stated in May, when the JXTG started, target for operating profit, excluding inventory valuation, was set at JPY 350 billion. The medium-term management plan envisions JPY 400 billion in the second year and JPY 500 billion in the third year. In the first 9 months, we already exceeded the full year target of JPY 350 billion. Details will be given later. As you can see in this graph, the major factor was a profit increase in the Energy business by over JPY 100 billion.

In terms of sales volume, profit sales matching the demand are continuing. So despite a 5% or so year-on-year decline, profit increased, thanks to strong margin and integration synergy, which is calculated to have generated an effect of JPY 33.8 billion by the end of the third quarter. At the November briefing, we forecasted the full year effect to be around JPY 34 billion. So we are proceeding ahead of schedule.

In the Oil and Natural Gas E&P business, sales volume was down year-on-year as will be explained in more detail later. But thanks to higher crude oil price, profit increased. In the Metals business, high copper price greatly contributed to the profit increase. In terms of sales volume at Saganoseki Smelter & Refinery between late September and early December, the largest scale period repair in 44 years was conducted which was completed as scheduled. This had an impact on lower volume and higher expenses. But in the electronic materials, as was the case in the first half, advanced features of smartphones and others helped to increase the volumes significantly.

Page 6, outline of financial results for the third quarter. Net sales increased by over JPY 800 billion, thanks to higher selling prices. Operating income, including inventory valuation, was JPY 411.5 billion. In 9 months, we exceeded the full year target of JPY 400 billion envisioned in November. Operating income, excluding inventory valuation, was JPY 365.5 billion, representing 89% of the full year plan. Profit attributable to owners of the parent already exceeded the full year forecast of JPY 250 billion.

Next, variance analysis of operating income by segment.

Page 8. Energy Business, up by about JPY 110 billion. I will go over the factors starting from the left-hand side. Special factors, minus JPY 24 billion or so. At the previous briefing, I mentioned the decision to stop the production at Muroran petrochemical plant, which resulted in recording a close to JPY 8 billion impairment loss.

In addition, during the third quarter, we decided to adopt a single brand, ENEOS, for the retail fuels business in Japan. In relation to that brand integration, an JPY 18 billion provision was made.

Next, sales volume. In addition to 4 white petroleum products, fuel for power generation volume decreased. In the meantime, export volume increased. Net result was close to JPY 7 billion minus. Integration synergy margin and others plus JPY 127 billion. Petroleum product margins, export and heavy OC were strong. And our sales subsidiaries enjoyed increase in profit.

Overall, petroleum products generated a margin improvement effect totaling JPY 97 billion, of which JPY 74 billion was from gasoline, kerosene, diesel fuel and fuel oil A. Remaining JPY 30 billion was a result of lower expenses, dividend received and improvement on foreign exchange gain or loss.

Integration synergy is included in volume and margin factors. So it's hard to analyze, but is accounted for here in terms of improvement in fuel cost and cost of sales.

Petrochemicals, sales volume plus JPY 6.8 billion. Last year, we shutdown Kawasaki, Oita and Chita plant for a maintenance turnaround. In the absence of such measures, we are aiming at maximizing production and sales this year.

As for margins, paraxylene was minus, but benzene and propylene more than made up for that, resulting in a slight improvement overall.

Page 9, the Oil and Natural Gas E&P business.

Profit was up by about JPY 10 billion year-on-year. Sales volume, as shown, was 9000 B/D lower year-on-year. In some projects in Southeast Asia, planned disruptions and maintenance turnaround delay in post-maintenance start up resulted in lower sales volume. Level wise, volume increasing each quarter, recovering to 117,700 B/D in the third quarter. Impact of crude oil price and gas prices were JPY 17 billion plus. Expenses in others were about the same level as in the previous year. Exploration expenses were not as much as in the previous year. But as was reported at the first quarter briefing, there were issues in Canada and others pushing up repair expenses. All in all, expenses and others were about the same level as in the previous year.

Page 10. The Metals business, up by about JPY 25 billion. Resources development improved from a loss of JPY 23.4 billion last year to a profit of JPY 2.7 billion, an improvement of over JPY 26 billion. This is mostly attributable to copper price, JPY 23.7 billion. Excluding copper price impact, positive JPY 2.4 billion. Project wise, Caserones posted an improvement of JPY 12.8 billion year-on-year. But it is still in the red. So this means the amount of loss was reduced from over JPY 23 billion last year to over JPY 10 billion.

For the first half, I said, a loss of around JPY 9 billion. For the October/December period, we were expecting a profit of several hundred million yen, but the actual was a loss of about JPY 1.5 billion. At Caserones, operation rate is about 90%, on par with the projection and concentrate processing is proceeding as planned. But there is a lingering issue of not being able to respond properly to changes in the crude ore property, for example higher fraction of clay or higher iron content or a mixture of oxides and sulfides. Thus, the project is not yet able to recover sufficient copper in the recovery phase. We have yet to see improvements there. Reduction in loss of JPY 12.8 billion was mostly in relation to copper price. Volume declined totaled minus JPY 1.4 billion, made up for through expense factors. Thus, effect of copper price increase was retained.

Smelting and refining minus JPY 10 billion. There were two special factors. One was that, in 2016, LS-Nikko in Korea was ordered to pay back taxes on value-added tax. And then in the ensuing court battle, our argument was upheld, and we received a refund last year totaling JPY 4.4 billion. There was a rebound from this factor.

The other was that, as was mentioned earlier, Saganoseki underwent a large scale repair works, which resulted in volume decrease and expense increase and the total impact was over JPY 3 billion. Downstream electronic materials processing, JPY 8.6 billion. Continuing from the second quarter, business was strong in the third quarter. Sales expanded for materials where we enjoy strength, such as precision rolled products, treated rolled copper foil and semiconductor targets.

Page 11, consolidated balance sheet and consolidated statement of cash flows. On the right-hand side, cash flows for the April/December 9-month period. Operating cash flows, positive JPY 340 billion. Special factors, such as holidays at the end of December, had an impact of JPY 120 billion. Excluding this, on a constant comparable basis, the amount was JPY 220 billion. During this period, cash outflow in working capital and others increased to JPY 230 billion. With crude oil and copper price underwriting trend, working capital burden increased. In addition, toward the end of the calendar year, seasonal factors, including inventory buildup, pushed up working capital. Cash used for investing activities totaled JPY 170 billion and free cash flow was JPY 170 billion. Seasonality is believed to have an impact of, at least, JPY 150 billion. So towards March, improvement is expected. We believe that free cash flow of JPY 270 billion, as announced in November, is achievable despite slightly higher crude oil price.

Lower left, consolidated balance sheet. Debt-to-equity ratio 0.78%, progressing steadily towards the target 0.7%.

Lastly, but not least, forecast for fiscal 2017, page 12. Crude oil price assumption has been raised from $50 to $60. Only net sales and inventory valuation forecast has been revised.

Operating income, excluding inventory valuation up to the end of the third quarter has progressed to 90% of the full year total, as was mentioned earlier. But given that there are a number of variation factors, we have retained the previous forecast.

After detailed analysis when we have a better visibility, we hope to share the latest guidance with you, hopefully, in March.

As shown here, movements in the resource prices, of course, will impact inventory and others. Crude oil assumption is $60, but was as high as $65 to $66 at one point, now slightly moderated, but that should impact inventory and others and so would petroleum margins. And there are Caserones Copper Mine operations, earlier I explained the situation for the third quarter. We have to take all these factors into consideration. Every year towards the fiscal year-end in March, we conduct an asset valuation for the upstream business. We plan to do the same this year.

In addition, we are working on reorganization and restructuring of the business portfolio and asset sales, mainly in the upstream business.

We are trying to identify whether that they will be completed within this fiscal year or partly continue into the next fiscal year. We hope to update you, hopefully, in March.

For now, inventory valuation has been revised by JPY 80 billion for the operating income of JPY 480 billion and profit attributable to owners of parent of JPY 300 billion.

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