Inpex Corporation (1605) Earnings Call Transcript & Summary

Hello, everyone. This is Yamada. And today, I would like to talk about the FY 2023 IFRS-based financial results. So this is IFRS-based result. Now, we have submitted the securities report today. And the second page. So we have started to apply IFRS on a voluntary basis and there are a couple of reasons. First is, enable international comparability of the financial information. And as you are well aware, many of the global majors have already adopted IFRS. And so to enable better comparison, we have decided a voluntary adoption of IFRS. And the second reason, as you are well aware, Ichthys, which accounts for a majority of our business is already operating under IFRS. And so there is a rationality for the Japanese entities to also match IFRS. So the efficient settlement account or more fair assessment of the financial result. And so we wanted to improve the group business management in that regard. And now moving on to Page 3. This is the slide that explain the highlights of the consolidated financial result for the year ended December 2023. And the section surrounding the black box is what we have submitted the earnings result based on IFRS. And the profit attributable to owners of parent are shown midway through the page. We ended up at JPY 498.4 billion in FY 2022. On this occasion, then we have filed, based on net profit of JPY 321.7 billion, which is JPY 176.7 billion in decline year-on-year. So likewise JGAAP, if you look at the situation up above, the average crude oil price and the average exchange rates are shown. And as for the brent, against last year approximately $17 lower at $82. That was the brent average for the year. For the exchange rate, yen weakened at JPY 140 and these external factors had a large impact towards our earnings result. And if you can look at the bottom of the slide, net DE ratio 0.314, which is 31.4%. And what we have indicated has been financial discipline. We are nearing the lower end of the ratio. Leverage has come down significantly. In other words, our financial position has undergone an improvement. Moving to Page 4. And we are comparing the IFRS-based result between FY 2022 and FY 2023 in a waterfall chart. So JPY 498.4 billion on the left, JPY 321.7 billion. And so the decrease is JPY 176.7 billion. It comprises business activity factors and one-off factors. And for the business activity factors around JPY 20 billion of decrease, one-off factors, more than JPY 150 billion of decrease. And if you could look at the left, the revenue and cost of sales and income tax, we have 3 major factors. In terms of revenue, the oil price came down from $99 to $82. And so the impact of the decrease in unit price was about JPY 316.7 billion. FX depreciated but in total, JPY 151.6 billion of impact. In terms of cost of sales, improved by JPY 10.2 billion income tax. And because a large portion of our product comes from crude oil in Middle East, so a decrease in revenue meant that income tax came down. And so JPY 151.6 billion, JPY 10.2 billion and JPY 130.7 billion, if we net all these numbers on a business activity factors, decrease was around JPY 10 billion. And if we go to the right time for the one-off factors. Now first, impairment issue, there is a divestment issue and abandonment expenses. And previously, we show these analysis based on JGAAP and the situation remains essentially the same but significant change in tax and also the foreign exchange gain and loss. As for tax, the JPY 49.2 billion of negative impact and that is mainly due to the fact that based on IFRS, there is a taxation -- transition to group tax sharing system and tax effect on loss on valuation of investment in subsidiaries. And so we've booked some of these in 2022, which has now disappeared and minus JPY 36.9 billion in regards to foreign exchange gain, that this is somewhat complex. As you know, between JGAAP and IFRS, there is a difference in accounting practice based on JGAAP for us. We have a Northern Caspian Sea company. So then this is the -- accounted for yen but with the dollar debt. And so when the yen depreciate, we end up with large amount of exchange loss. And to make up for this, IFSS, which is a Singaporean financial subsidiary, this is a company in dollar but by having a yen debt, then so when the yen depreciate, we are able to book a gain. So lost in North Caspian and IFSS, the gain, these 2 are used to make the adjustment previously. But since we have moved to IFRS, this North Caspian, the functional currency become the yen to dollar. And so the foreign exchange loss will be canceled and IFSS, the exchange gain was realized. That was the case last year. But for this year, between IFSS and North Caspian, whether it be for JGAAP, whether it be for IFRS, we were able to address the situation together. So last year, the gain last year that we booked last year but that disappeared this year. And that's the reason we ended up with a significant foreign exchange loss, on this occasion JPY 36.9 billion and revaluation of financial assets and this is mark-to-market of the debt for Ichthys. And the last year -- this year, we're seeing the interest rate increase and it's structure is such that we end up with a revaluation [ loss ]. But the increase in the rate was lower this year, so negative -- so lesser negative in comparison to last year, so plus [ 3.2% ] and we ended up with JPY 321.7 billion, which was a decline of JPY 176.7 billion in total. And going to the next page, this is the comparison between the 2 accounting the standards. And so you can see the JGAAP-based numbers. And for December 2023, net income was JPY 371.5 billion but this becomes 321.7 billion based on IFRS. And so the difference is JPY 49.8 billion due to the fact that the accounting -- the practice has changed and we have business activity factor, which accounted for JPY 6 billion positive one-off factor and had a negative effect of JPY 55.8 billion. And when you net the 2, it's JPY 49.8 million negative. So on left far, the production-related costs and impact of the foreign exchange gain is plus JPY 4.2 billion. If you break this down, as you know, in the fiscal year ending December '22, we started to adopt the IFRS accounting. And so on the 1st of January 2022 and so JGAAP to IFRS balance sheet was moved to IFRS. And so the fixed asset that we had at that point in time was not based on JGAAP but on IFRS, we've done the impairment testing. And so impairment loss was about JPY 200 billion at that point in time. But that is something reflected directly into the balance sheet and it doesn't go through the P&L statement. So based on IFRS, in comparison to JGAAP, so the book value of fixed asset is JPY 200 billion less and that is how we have started. And the return from depreciation is about JPY 40 billion per year and that is a positive factor. But as for the negative factor based on JGAAP, we have adopted the PSM accounting. But based on the IFRS, it all changed to concession accounting. And so PS accounting to concession accounting, there is a loss registered, which is about JPY 30 billion. And this is also somewhat technical but based on IFRS, oh sorry, based on JGAAP or based on PS accounting, we recognized recoverable accounts under production sharing as cost of sales and we registered the foreign exchange loss or gain in PL and yen was depreciating quite significantly. So there was significant -- the foreign exchange loss on the PL. But when we go to the concession accounting, then it will hit the balance sheet [ metric ]. So we don't have the FX, the losses. And as for the interest rate and for the PS accounting, we were capitalizing it. But when we go to concession accounting, we expense it. So there is a difference. As for exploration, the expenses, we have introduced the successful effort -- method to capitalize, which ended up with a positive impact. And based on IFRS, goodwill is not amortized. And when we merged Teikoku Oil, we recognized a goodwill. Based on JGAAP we were amortizing this but based on IFRS, we don't have to amortize. So that's positive and minus [ JPY 20.4 billion ] in terms of taxes. And so our business activity factors in total, plus JPY 6 billion. So one off factors. It is mainly due to recognition or timing difference and JPY 39.7 billion negative. Now what this is, is that, whether it be the foreign exchange gain or loss or onetime tax expense based on JGAAP in 2023, December, these were recognized but based on IFRS, it was reflected in December 2022. And so it's about JPY 40 billion negative due to the timing difference. And so in total, one off factors accounted for JPY 55.58 billion. And -- but mainly due to the timing difference. So on a -- the more permanent basis, the amortization is quite large. So in general, IFRS should show slightly better number in comparison to JGAAP. Moving to Page 6. And this is the revenue based on different product, not much difference to the JGAAP. So you can look at this in your own time later. Next page is the forecast for December 2024. JPY 330 billion is the forecast. On the 9th of February, we released our earnings and announced our forecast at that time, December 2023 was JPY 3030 billion (sic) [ JPY 330 billion ] and then the new number is JPY 330 billion. So the numbers are flat. That was our expectation. But this time, for December 2023, under IFRS accounting, this year's initial forecast is plus JPY 8.2 billion increase in profit and you can see the ROIC and ROE on the page. The next page, please. Next page shows the forecast, the analysis into the increase and decrease factors. The other day, JPY 330 billion, December 2023, net profit forecast and these numbers are about the same but the external environment factors included the crude oil price lower and JPY 138 to $1 and then the production volume decrease in domestic business. Those are the factors impacting and also the business factors and also one-off factors disappear. So all in all, JPY 8.3 billion increase in profit that's the budget at the beginning of this year. The next page, please. Next, it shows a breakdown of cash flow. No major change. What you see is the investment area for December 2024 term, the growth investment, please take a look at the growth investment. JPY 330 billion for December 2023 and then JPY 550 billion for December 2024. So we're accelerating growth investment. But if you look at the investment cash flow for December 2023, [ JPY 580 billion ], then next year, [ JPY 310 billion ]. That means a JPY 250 billion or so, the reduction. If you look at the lines below the growth investment, end of December 2023, we acquired securities. That was a U.S. investment for December 2024. These are U.S. bond treasuries, investments that are sold and the proceed is used for growth investment. So for the remaining cash, about JPY 200 billion. The next page, segment by segment ROIC. As you see here, this is under IFRS, the ROIC and by segment for December 2023, on a consolidated basis, 8.4% ROIC. And December 2024, based upon our forecast on a consolidated basis, 6.8% is the ROIC. The second row from the top, so majority comes from Ichthys on the right-hand side, December '24, Ichthys, JOY JPY 4 trillion of investment, out of JPY 6 trillion, JPY 4 trillion is for Ichthys. So the consolidated profit for [ 120 ] out of that Ichthys represented [ 170 ]. So the ROIC is greatly influenced by Ichthys. So that's the same as in JGAAP. And finally, Page 12, the balance sheet. So balance sheet, there is not a major change in balance sheet. However, one thing, the exchange rate translation adjustment. So we touch upon it every time we announce our earnings, under JGAAP about JPY 1 trillion of exchange translation takes place. But in our statement, IFRS exchange rate adjustment on account is about JPY 700 billion. That means January 1st 2022, that's the transition date. The JPY 150 to $1, that was exchange rate. So from the investment timing to JPY 115, the -- so Japanese yen -- weak Japanese yen translated into profit. So current exchange rate, JPY 114 and JPY 115, that weakening yen, that's reflected in the FX translation account impact of JPY 694 billion. And risk on accounting and on balancing, that's inflating our balance sheet but other than that, there is no -- unchanged. So that's a simple explanation for December 2023 IFRS-based results. Thank you.

We will now like to take questions, if you have a question.

So 1 question. So apologies for the question not being succinct. Now in February, [ net ] income for that December 2023, JPY 330 billion based on IFRS but it's JPY 320 billion or slightly higher. But -- so you did it like this. And you actually looked at the breakdown, so it's not all that different from was -- and expected. But when you close the books on IFRS, there were some differences. And so there was the JPY 320 billion or so. And so how should we think about the actuals?

So it's the first time for us to close the books based on IFRS. So we weren't too familiar with some of the [ data ] in the IFRS accounting. We did actually expect some difference but there was a difference of about JPY 8.3 billion. And why was this the case? Please understand this being more technical in nature. And so the scope of consolidation change, so nonconsolidated subsidiary, we did have some of those based on JGAAP but based on IFRS, there is no nonconsolidated subsidiaries, so all are consolidated. And so the nonconsolidated, they had the -- retaining the earnings of about JPY 8 billion or so. Now based on the accounting, we had to actually go through a P&L. And so that was a positive JPY 8.3 billion. That was a positive factor but negative factor, we actually took impairment on Prelude, which I think you're well aware of. And then the FX rate for taking the impairment for Prelude, JGAAP we use is average rate. But we thought that we could use this average rate for IFRS as well. But the accountant said that we have to do this on an incurred basis. So it's JPY 149. So we had to take the impairment JPY 9 less and that was about JPY 5 billion of negative impact as a result. And another factor was also quite technical. But based on JGAAP, so the corporate tax on a quarterly basis, so we use a effective tax rate to close the book. But based on IFRS from the start of the year to the third quarter, we actually make estimates for the corporate tax. It's only in the fourth quarter that you've used the effective tax rate for the year, for the [indiscernible] account. And so 86% to 88% was the effective rate. And so about 2% difference between estimate, actual, so there was more than JPY 10 billion of loss, so on a net basis was JPY 8.3 billion or so. And so we will be using IFRS to close our books going forward and we should be able to accumulate know-how going forward. And so the difference between estimated and actual should be narrowed going forward. But despite saying that it's the first time we did this, then we are in the process of accumulating experience. And so there could be the difference between estimate and the actual for JPY 8.3 billion, the breakdown was as I explained.

So regarding the continuation of the conversation to the previous answer. So there might be a continuous deviation. So JPY 330 billion. That forecast has remained unchanged. But the possibility of deviation or change -- possibility of changes to your forecast, should we be aware of that possibility?

Since the starting point changed, so for December 2024, numbers may change. And I suppose you are wondering about that possibility. But as mentioned, scope of the consolidation change and the tax rate assumption changed and then the translation rate difference applied to the impairment. All these factors come to an end in December 2023. So no change. There is no change on that number for December 2024. The numbers will not be affected by these factors. So JPY 330 billion, it may deviate due to the crude oil price or exchange rate but under JGAAP, the actual and estimate difference, the similar difference may happen under IFRS, so JPY 330 billion of initial year forecast, that's not changed, as we file. And the crude oil price and exchange rate -- crude oil price is at a high level and yen is weak. So there will be some fluctuation. But it's not going to be a major change that will affect the underlying assumption.

So one question. I'd like to ask about impairment. Based on JGAAP and IFRS, in IFRS, I understand it's easier to impair. And so when you make judgment about impairment, do you discount from the start or based on JGAAP do you make comparison as it is? But IFRS is easier to impair in comparison to JGAAP. Now to what extent will this impact your -- the earnings result going forward. I think when you get used to it, you probably get better sense. But the hurdle will become lower and you will end up taking more impairment. Or do we not need to think about this much? That's all.

Well, it becomes easier to impair but the impairment generation risk is higher, yes. And I did explain on Page 5. And so this is the accounting difference between JGAAP and IFRS and towards the middle, as part of the one-off factors, our impairment loss between the JGAAP and IFRS, there is a difference of about JPY 20 billion. And this is mostly due to -- well, this is going to be the IFRS based impairment amount. So you apply the discount rate to start with. And so the tendency is to -- is easier to see impairment. And this is mainly to do with the renewable energy. And the goodwill amortization was done in IFRS essentially. The fact that there is impairment is not something that we are scared of because it's not a cash out situation. So not having impact on the earnings. But whether it be a JGAAP gap for us, we need to manage our asset so that we are able to settle account in appropriate way. Based on the accounting standard, we may end up with impairment. And for this fiscal year, there was a JPY 20 billion or so of difference between the different accounting standards.

And sorry, this is kind of an initial question. But when you think about that, are you going to increase goodwill? Or are you going to increase intangible asset? So are you going to increase intangible tax that you don't have to -- be it amortize or so what is your thoughts in that regard? Are you going to do this on a as is basis going forward?

It's difficult. It's not the case that we want to -- we have create -- we have goodwill because we want our goodwill. Is it better to have the goodwill? Is it better to have asset that can be appreciated. So if we do M&A or if we acquire the participating stake, we may end up with goodwill or not. In some other instances based on the project cash flow and based on accounting you still have to apply the appropriate accounting process. It's not something that we are able to intentionally choose.

I have 1 question. Regarding the first quarter result, when you announced it, the previous year's first quarter, IFRS is going to be announced at the same time.

For December 2023, first quarter settlement is done. So for December 2024, when we announced first quarter result, we made comparison against the first quarter of December 2023 and that's how we are planning to report to you.

Okay. Then we are waiting for it.

And you provided an explanation on Page 5 comparing the JGAAP and IFRS. Now on the left side -- and you talk about the cost and the FX impact. When you did the analysis, the FX test -- the impairment test was done and JPY 200 billion of impairment and that hit the PS directly and the depreciation also decreased. I think that was the explanation. But when you did the impairment, is the JPY 200 billion, the details, the asset that it comprised, can you explain some?

Well, I am unable to explain everything in detail but we have number of oil-related assets. And, of course, Ichthys is not part of this but we took impairment on a number of assets. And at the end of December 2021, so the discount rate at the December 2021 was used to take the impairment and that was about JPY 200 billion. And we were able to do this directly on the balance sheet without going through the P&L statement. And so on a relative basis, we kind of made effort to come up with the impairment with the JPY 200 billion and so there was about JPY 40 billion of return from depreciation. And that in terms of profitability, it has nothing to do with cash flow but this should support us in terms of the profitability. And the difference between JPY 40 billion and JPY 4 billion is about JPY 35 billion. But as I said before, we have moved from PS accounting to concession accounting. This is just one-off on this occasion. And so it's not something that would apply from next year. And so in the difference to JGAAP, this was reflected on this occasion. I hope this was appropriate. And we don't disclose the details of the impairment. So I hope that is okay.

So with that, we'd like to conclude the analyst meeting. Thank you all for your participation in spite of your busy schedule today. Thank you. And whether it be the earnings announcement or the forecast, we will continue to update you. And so I ask for your continued support. But everyone, thank you for joining on this call today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]