ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2019-Q3

[Tsutomu Sugimori, executive]

This is Tsutomu Sugimori, Representative, Director, and President. I would like to thank the shareholders and investors for their continued support to and advice on the business activities of JXTG Group.

Please turn to Slide 2. Dubai crude oil price, which started fiscal 2018 in April at the upper $60 level rose to $80 in October before falling to $50 in December. This significant drop dealt a heavy blow to the inventory valuation and margins for clean oil products namely gasoline, kerosene, diesel fuel, and fuel oil A. Copper price softened due to continuing uncertainty over the U.S., China trade conflicts. Year-on-year, the average copper price roughly remained the same but between the beginning and the end of the fiscal year, the price rose in the previous year while it declined in the current year, resulting in a year-on-year profit decline in relation to copper concentrate price adjustment. The exchange rate during October, December was around JPY 113 to the dollar. Slide 3 Clean Oil and Paraxylene margins. Domestic clean oil margins remained at a firm level in the first half on a mildly rising crude oil price but the crude oil price began to fall sharply in November causing a time lag between the selling price and the recognized cost of crude oil price and the margins deteriorated drastically. Currently the decline in crude oil price has subsided and the margins are recovering. The paraxylene margins are kept at a firm level due to the equipment failures at multiple paraxylene facilities in Asia. They are not in the slide but benzene margin worsened as demand weakened due to troubles at derivatives facilities. Slide 4 we'll review the results for the first 9 months and the full year forecast. Operating income for the first 9 months was JPY 459.3 billion and profit attributable to owners of the parent was JPY 278.3 billion. Year-on-year profit was higher owing to the progress in integration synergies and the improved profitability at Caserones Copper Mine, as well as one-off profits such as gain on the sale of the cell culture material business.

The full year forecast reflects the deterioration of inventory valuation and clean oil margins due to lower crude oil price and others with operating income projected at JPY 500 billion and profit attributable to owners of the parent at JPY 300 billion.

Slide 5, the operating income excluding the inventory valuation was JPY 440 billion up JPY 74.5 billion. In the Energy business, profit was about JPY 60 billion lower for October, December due to the time lag in clean oil margins resulting from the lower crude oil price, lower sales volume of kerosene due to warm winter and deterioration of benzene market price and others. But for the cumulative 9 months, the profit was up JPY 19.3 billion to total JPY 282 billion due to integration synergies and gain on the sale of the cell culture material business. Profit for the Oil and Natural Gas E&P business rose JPY 34.9 billion at JPY 58 billion due to the rising crude oil price and cost reductions. The Metals business posted a profit increase of JPY 13.3 billion to total JPY 59.1 billion due to improvements in the Caserones operation and others. All businesses posted higher profit year-on-year. The overview of the full year forecast is shown in Slide 6. The assumptions for January to March are, crude oil price $60 per barrel or $10 lower compared to the forecast announced in November, the copper price $2.75 per pound and the exchange rate JPY 110 to the dollar. Operating income excluding inventory valuation is forecast to be JPY 500 billion, a decrease of JPY 90 billion from the November forecast. We anticipate a decline of JPY 85 billion in the Energy business and JPY 6.5 billion in the Oil and Natural Gas E&P business assuming a decline in crude oil price and lower sales volumes. In the Metals business, we expect an increase of JPY 3 billion through an improvement at Caserones and others.

Next, status of integration synergies and Caserones operation, which are the important things in the medium-term management plan. Integration synergies for 9 months totaled JPY 60.3 billion. In light of the steady progress, we anticipate a full year total to be JPY 82 billion, which is JPY 2 billion higher than the November forecast. We hope to achieve JPY 100 billion as soon as possible and aim at a further increase. Production volume at Caserones proceeded as planned in October, December and an operating profit was achieved despite the softening of the copper price during this period. Profit is projected on a full year basis as well. We will work to further improve productivity and thoroughly improve efficiency. Slide 8, progress of Management Targets. Full year operating income excluding inventory valuation is projected to be JPY 500 billion, exceeding the target under the medium-term management plan. Free cash flow is projected to total JPY 682 billion between fiscal years 2017 and 2018 cumulative, exceeding the mid-term plan target of JPY 500 billion. With improvements in profit and cash flow net debt-to-equity ratio and ROE are also expected to exceed the targets. Slide 9, Shareholder Return. Our basic policy is to work on maintaining stable dividends based on the understanding that the return of profits to shareholders is a material management task. We aim for additional shareholder return depending on the progress, degree of progress in achieving management targets. While we have revised downward our forecast for this fiscal year. The mid-term plan as a whole has been progressing well, represented by growing effects of integration synergies and stabilization of the operation at Caserones, initiatives to strengthen the profitability of core businesses are steadily delivering results. Also, through careful selection of capital investment and progress in asset sales, free cash flow is exceeding the mid-term plan. Considering such factors as business environment, progress of the mid-term plan and capacity efficiency and others, we now forecast a dividend for fiscal 2018 at JPY 21 per share or JPY 1 higher than the May forecast. We have also decided to implement share buyback with the upper limit of 60 million shares for JPY 30 billion. We will continue to promote management that focuses on cash flows and capital efficiency, which is the basic policy of mid-term plan and make group-wide efforts to establish an earnings and financial base that can adapt to changes in the business environment. Now, I give the floor to Senior Vice President, Yoshiaki Ouchi, for the details of the financial results and full year forecast.

[Yoshiaki Ouchi, executive]

This is Ouchi speaking, I will first go over the results for the 9 months ended December 31. Please turn to Slide 11. Most items have been covered by President, Sugimori earlier. So I will just comment on one point. The second row from the bottom, financial income and cost worsened by JPY 5.8 billion year-on-year. This was due to the rise in U.S. interest rates and the increase in interest expenses resulting from the depreciation of the yen. Slide 12. Details by business are explained in subsequent slides. The Other business increased by JPY 7 billion, mainly coming from gain on sale of real estate owned by JXTG Holdings. Slide 13. The Energy business posted a profit increase of JPY 19.3 billion year-on-year at JPY 282 billion. Please look at the step chart. Petroleum products were plus JPY 35.5 billion, compared to the previous year. As you can see in the step chart below, gain on sale of cell culture material business was plus JPY 77.7 billion.

Regarding sales volume, clean oil was down 4% year-on-year due to structural demand decline and the impact of thorough implementation of profitable sales after the integration. As well as lower sales of gasoline due to unseasonable weather during the golden week holidays and lower sales of kerosene during the October, December quarter due to warm winter. Exports declined due to typhoons and plant troubles and other factors. Overall sales volume had a negative impact totaling JPY 20.6 billion. In integration synergies, margins and others, despite a margin improvement for coke, clean oil margins were on par with the previous year as higher margins in the first half of the year was canceled out by the impact of a time lag due to the sharp drop in crude oil during this period. Export margins also deteriorated by about JPY 10 billion due to the declining overseas market prices. In Others, positives included a year-on-year improvement coming from the nonrecurrence of one-off losses recorded in the previous year such as provision for brand integration expenses. While negatives included an increase in expenses including repair costs associated with a plant trouble at Kawasaki and regular maintenance. The total impact amounted to minus JPY 21.6 billion. Petrochemicals declined by JPY 16.2 billion year-on-year. Sales volume was minus JPY 2.7 billion coming from lower production due to regular maintenance mainly for paraxylene operations. Margins in Others were down JPY 13.5 billion. While paraxylene margins improved over the previous year, benzene margins were down due to regular maintenance and plant troubles in derivatives operations in Asia. That is the overview for the Energy business. Slide 14, Oil and Natural Gas E&P business. Operating income totaled JPY 58 billion up JPY 34.9 billion despite a decrease in sales volume owing to the increase in crude oil price and decrease in expenses. The sales volume totaled 105,000 barrels per day, a decrease of 13,000 barrels per day due to the sale of Canada's oil sand business in fiscal 2017 and the impact of an earthquake in Papua, New Guinea, and Others. This decline in value amounted to JPY 7.8 billion. On the other hand, the oil price impact was plus JPY 28.5 billion. This was due to the rise in crude oil price as described in the speech below. Expenses in Others were plus JPY 14.2 billion, of which plus JPY 8.9 billion came from the sale of the Canadian oil sand business and a part of the interest in the U.K. North Sea operations and plus JPY 5.3 billion from decreases in operating expenses and depreciation expenses. Slide 15, Metals business. Operating income for the Metals business was up JPY 13.3 billion at JPY 59.1 billion due to increased production at Caserones and higher sales of electronic materials. Resources development increased by JPY 13.2 billion to JPY 15.9 billion. The operating income of the Caserones business in October and December totaled JPY 800 million on increased production. Profit for 9 months totaled JPY 4 billion, an improvement of JPY 14.7 billion year-on-year. Negatives such as copper concentrate price, negative adjustment due to copper price fluctuations during the period were more than made up for by such positives as the increase in sales volume coming from stable operation, reduction in expenses, decrease in depreciation expenses following the recording of impairment loss and other factors. Equity and earnings of affiliated companies and others was minus JPY 1.5 billion due to the copper price impact and others. Smelting and Refining increased by JPY 600 million year-on-year to JPY 11.1 billion. This was mainly due to a year-on-year increase in sales volume. As last year, there was a large scale regular maintenance at Saganoseki Smelter. Electronic materials and recycling in environmental services and Others posted a decrease of JPY 500 million at JPY 32.1 billion. In the electronic materials, despite a sense of slowing down for some products, the 9-month total was positive JPY 1.5 billion, owing to increased sales of such products as semiconductor targets and treated rolled copper foils. Others were minus JPY 1.7 billion due to one-off integration related expenses in the Tantalum, Niobium operations and Others. Slide 16, Consolidated balance sheets and cash flows. First, the consolidated cash flows shown on the right. Operating cash flow was a net cash out of JPY 122.9 billion. Main items in working capital increase and decrease, totaling approximately JPY 750 billion were seasonal factors amounting to JPY 370 billion such as additional kerosene inventory specific to the winter season and the tax payment of JPY 240 billion including corporate income taxes. Investing cash flow was cash out of JPY 208.5 billion as a net of capital investment totaling JPY 285.4 billion, including regular investment at refineries and cost of acquiring a Tantalum, Niobium business and the gain on the sale of the cell culture material business and real estate. With payment of dividends and the purchase of treasury stock of JPY 30 billion, net cash flow was cash out of JPY 438 billion. The consolidated balance sheets were as shown on the left of the slide. Mainly due to the net cash flow I just mentioned, net interest-bearing to increase by JPY 457.9 billion. The net debt-to-equity ratio at the end of December 2018 was 0.73x and the equity ratio attributable to the owners of the parent was 30.5%. As for the cash flow for the full year, free cash flow is expected to be JPY 70 billion by resolving seasonal factors mentioned earlier such as through reversal of inventory. Slide 17, Main assumptions for the full year forecast for full for fiscal 2018. Assumptions for January to March are, crude oil price $60 per barrel or $10 lower than the forecast announced in November. The exchange rate and copper prices remain unchanged from the November forecast at JPY 110 to the dollar and $2.75 per pound, respectively. Margins for clean oil reflect actual level up to the end of January and for chemicals up to February.

I will skip Slide 18 and move to Slide 19. Full Year Forecast for Fiscal 2018 by business. Using this slide, I'll explain the changes in operating income excluding inventory valuation by business comparing to the forecast announced in November. I will skip explanation on subsequent slides showing step charts by business. The forecast for the Energy business in orange has been lowered by JPY 85 billion from forecast announced in November to JPY 305 billion, of which petroleum products are lowered by JPY 70 billion to JPY 200 billion. In addition, to the decline in sales volumes of kerosene and others due to warm winter totaling JPY 9 billion, we expect a decrease of JPY 61 billion coming from the deterioration of clean oil margins and export margins resulting from the third quarter time lag impact. Petrochemical products are expected to be JPY 15 billion lower at JPY 105 billion due to the deterioration of the vending market price and others. The Oil and Natural Gas E&P business in purple, expect a decrease of JPY 6.5 billion at JPY 68.5 billion, owing to a decline in crude oil price. The Metals business expects the profit to be JPY 3 billion higher at JPY 68 billion due to cost reduction at Caserones and others. With the Other business being JPY 1.5 billion lower, operating income excluding inventory valuation for the entire group is expected to be JPY 500 billion or JPY 90 billion lower than the forecast announced in November. Slide 23 shows Key Assumptions and Slide 24 shows the Sensitivity Analysis for your information.