Supporting Material for Second Quarter Results 2014 · Supporting Material for Second Quarter...

1Showa Shell Sekiyu K.K.

Supporting Material for Second Quarter Results 2014

5 August 2014

Showa Shell Sekiyu K.K.

Showa Shell Sekiyu K.K. 2

This document contains forward-looking statements concerning the

results of operations and businesses of Showa Shell Sekiyu K.K..

Forward-looking statements are statements of future expectations that are

based on management’s current expectations and assumptions and

involve known and unknown risks and uncertainties that could cause

actual results, performance or events to differ materially from those

expressed or implied in these statements.

Notes


Jan-Jun 2014 OverviewJan-Jun 2014 Results � Both CCS operating and ordinary income

decreased YoY, though 2Q itself grew YoY.

� Energy Solution Business profits improved YoY, while Oil Business deteriorated.

� Cash flow from operating activities reflects working capital timing differences versus year end.

Highlights (Oil) � CCS operating income in 2Q improved YoY mainly

due to substantial domestic fuel margin recovery.

� Domestic fuel sales volume growth higher than industry average.

� Group refineries operated at higher run rate than industry average; scheduled maintenance at Keihin refinery completed as planned.

� OP improved YoY.

� (Solar) OP improved YoY in line with our plan.

� (Solar) Production cost reduction in line with plan.

� (Power) Improvement in customer mix and efficient plant operation contributed to stable profits.

Highlights (Energy Solution)

(Note) Others and adjustment is included in the Oil Business.

* CCS: Current Cost of Supply

Jan-Jun2013

Jan-Jun2014

Billion yen

Oil Business operating income (CCS*) 17.4 1.4

Energy Solution Business operating income 4.8 11.1

CCS* operating income 22.2 12.5

Ordinary income 43.9 17.3

CCS* ordinary income 22.9 12.9

Net earnings 30.0 14.0

Net earnings per share, yen per share 79.7 37.1

Cash flow from operating activities 45.6 -32.7

Dividend per share (yen/share) 18.0 19.0


Business Environment - Crude Oil and Foreign Exchange

Dubai crude oil Exchange rate (USD) Crude oil CIF Japan

Source: Trade Statistics of Japan

100.8

106.2 106.8

104.4

106.1

85

90

95

100

105

110

115

120

4 5 6 7 8 9 10 11 12 1 2 3 4 5 6

98.8 98.9

100.4 102.8 102.2

80

85

90

95

100

105

110

4 5 6 7 8 9 10 1112 1 2 3 4 5 6

66.5 66.8

70.6

72.4

70.6

55

60

65

70

75

4 5 6 7 8 9 10 11 12 1 2 3 4 5 6

2013

4Q

2013

2Q

2013

3Q

2014

1Q

2014

2Q

USD/bbl JPY/USD yen/L

2013

4Q

2013

2Q

2013

3Q

2014

1Q

2014

2Q

2013

4Q

2013

2Q

2013

3Q

2014

1Q

2014

2Q


Margin Environment - Oil Business

� Domestic fuel margins in 2Q significantly recovered from 1Q mainly due to improvement in supply/demand balance caused by industry refining capacity reductions and shutdown maintenance, and changes in pricing to better reflect underlying crude prices.

� Mixed xylene margins declined further but remained profitable. Benzene and propylene margins remained relatively high. We maintained max petrochemical production.

※ Domestic spot prices minus crude oil CIF ※ Spot prices minus Dubai spot price

Asia Far East petrochemicals margins Japanese refining margins


Business Environment - Solar Business

� Solar power facilities qualified for the second year of feed-in-tariff at 36 yen/kWh amounted to 45.7 GW, more than double the preceding year.

� Given the ratio of approvals to installations, expectation is that solar panel demand in Japan will continue to be strong.

Source: Ministry of Economy, Trade, and Industry(Note) The figures do not contain solar facilities that have not applied for feed-in-tariff system.


Highlights of Financial Results, Jan-Jun 2014� Crude oil price & exchange rate

� Highlights of financial results

【Notes】CCS ordinary income（ordinary income on Current Cost of Supply basis）:

Ordinary income based on costs excluding inventory valuation effects.

2013 Results 2014 ResultsJan - Jun Jan - Jun

Sales 1,415,903 1,540,033 + 124,130 +8.8%

Operating income 43,255 16,885 - 26,370 -61.0%

Non-Operating income 721 420 - 300 -41.7%

Ordinary income 43,976 17,305 - 26,671 -60.6%

　 ※Inventory valuation 21,025 4,340 - 16,684 -79.4%

　　※CCS ordinary income 22,951 12,965 - 9,986 -43.5%

Extraordinary income 2,726 769 - 1,957 -71.8%

Net income 30,031 14,000 - 16,030 -53.4%

Changes vs. 2013 (％) (Million yen)

2013 Results 2014 ResultsJan-Jun Jan-Jun

Dubai crude oil price （USD/bbl） 104.4 105.3

（\/USD） 95.7 102.5

（\/EUR） 125.6 140.4 Exchange Rate


・Oil Business: Manufacturing and sales of oil products, such as gasoline, naphtha, kerosene, diesel oil, fuel oil, lubricants, LPG, bitumen, and chemicals

・Energy Solution Business: Manufacturing and sales of solar modules and electricity

・Others: Leasing and administration of properties, construction works, sale and lease of auto accessories, etc.

Information by Business Segment, Jan-Jun 2014


Oil Business 37,821 5,169 - 32,652 -86.3%

　 ※Inventory valuation 21,025 4,340 - 16,684 -79.4%

　　※Oil Business CCS OP 16,796 828 - 15,968 -95.1%

Energy Solution Business 4,812 11,114 + 6,302 +130.9%

Other 628 578 - 49 -7.9%

Adjustment -7 22 + 30 -

Total Operating Income 43,255 16,885 - 26,370 -61.0%

　　※Total CCS operating income 22,230 12,544 - 9,685 -43.6%

Changes vs. 2013 (%) (Million yen)

� Sales

� Operating income


Oil Business 1,346,005 1,470,068 + 124,063 +9.2%

Energy Solution Business 65,710 65,882 + 171 +0.3%

Other 4,187 4,082 - 104 -2.5%

Total sales 1,415,903 1,540,033 + 124,130 +8.8%



Jan-Jun 2014 Earnings Performance

Oil Business Energy Solution Business

� OP in 2Q on CCS basis significantly improved both QonQ and YonY driven by fuel margin recovery backed by tight supply/demand balance.

� Inventory valuation effects boosted OP in 2Q as well but to a limited extent.

� OP in 2Q increased YoY.

� While GENEX conducted planned maintenance, Ohgishima Power maintained stable and efficient operation, delivering steady profits.

� Profits from Solar Business increased YoY on target. Continuous focus on domestic sales and on-target production cost reduction contributed.

Quarterly operating income Quarterly operating income


Ordinary Profit 1-2Q2013 vs. 1-2Q2014

(Unit: Billion yen)

1-2Q 2013 1-2Q 2014* CCS: Current Cost of Supply

** Including the effect of lower of cost or market value method for Oil

Oil BusinessEnergy Solution Business

Ordinary Income

*CCS Ordinary Income

Oil Products

Refinery cost and

M&A

Subsidiaries Solar Business

Power Business

Others etc.

Non-ope.

*CCS Ordinary Income

Ordinary Income

Petro-chemicals


Oil Business Operational Performance in Jan-Jun 2014

� Utilization of group refineries in 2Q declined QoQ, mainly due to planned shutdown maintenance at Keihin refinery, but still held above industry average. Refining capacity for export purpose at Yokkaichi refinery was not fully utilized due to relatively weaker export margins in 2Q.

� Sales volume growth in 2Q continued to exceed industry average in higher added-value 4 products, such as gasoline, kerosene, and gas oil.

� We maintained max petrochemical production and conducted as much fuel export as economics allowed in 2Q. Both petrochemicals and fuel export volumes exceeded 1H of last year.

Source of Industry: Petroleum Association of Japan Source of Industry: Statistics by METIIndustry in 2Q is based on flash report.

* 4 products: Gasoline, Kerosene, Gas oil, A-type fuel oil

Domestic sales volume growth YoY(4 products total*)

Refinery utilization


Crude Oil Refined and Sales Volume, Jan-Jun 2014� Crude oil refined & utilization rate

2013 Results 2014 ResultsJan-Jun Jan-Jun

Crude oil refined (thousand KL) 10,784 11,001

Refinery utilization rate (%) 94.9% 87.4%

2013 ResultsJan-Jun Jan-Jun

Gasoline 4,289 4,203 - 2.0%

Jet Fuel 934 880 - 5.8%

Kerosene 1,503 1,498 - 0.3%

Diesel Oil 2,513 2,661 + 5.9%

Fuel Oil A 852 957 + 12.3%

Fuel Oil C 712 604 - 15.2%

Chemicals*(thousand MT) 470 540 + 14.8%

Others 1,559 1,437 - 7.8%

Total Domestic sales 12,833 12,779 - 0.4%

Export 532 1,006 + 89.2%

Grand Total 13,364 13,785 + 3.1%

vs. 2013 (%)　　(Thousand KL) 2014 Results

*Chemicals: Mixed xylene, benzene, propylene

� Sales volume by products

[Note]The numbers for crude oil refined and utilization rate are based on Keihin, Yokkaichi, and Yamaguchi Refineries


Solar Business Operational Performance in Jan-Jun 2014

� Module shipment volume grew both QonQ and YoY in 2Q as strong domestic demand continued.

� In line with strategy, we continue to focus on more profitable domestic market and over 90% of total shipments consequently went into Japan in 1H.

� Selective international sales in view of mid- to long-term business strategy continued.

� Both Kunitomi and Miyazaki No.2 Plants continued to operate at full capacity, except for planned maintenance at Kunitomi Plant over 2Q.

� Production cost per watt at Kunitomi Plant was in line with our plan.

Quarterly module shipment volume Module regional allocation


Business Strategy Progress in Jan-Jun 2014

14

Oil Business “Become the most profitable oil company in Japan”

(Note) Showa Shell defines “ORGANIC GROWTH” as the strategy to further improve the efficiency of its core business and increase earning power, and “STEP CHANGE” as the strategy that is making value-enhancing investments for the future.

Mid-Term Business Action Plan Strategies implemented in 1H2014

ORGANIC GROWTH

� Sustaining domestic sales size� Increasing margin through value

creation� Cost reduction including supply chain

improvements

� Starlex Card renewed with more attractive cash-back rate applied to strengthen customer base.

� Prepared for new differentiated premium gasoline “Shell V-Power” sales launch in July.

� Structural cost competitiveness improvement plan:- At least ¥26b improvement from 2013-2015 (vs. 2012)- Implemented from Jan2013 to Jun2014: ¥21.3B .

STEP CHANGE

� Expand petrochemical business

� Partnerships with other companies

� Took FID for TDP unit at Yokkaichi refinery to increase petrochemical products.

� Promote activities for mutual optimization in oilproduct supply with TonenGeneral.

� LPG business integration with Cosmo, Sumitomo Co., and TonenGeneral; in progress.

15Showa Shell Sekiyu K.K.

Structural Cost Competitiveness Improvement Moving Ahead

� Structural cost competitiveness improvement of ¥7.8B achieved in 1H2014 and cumulatively amounting to ¥21.3B within the past 1.5 years relative to 2012.

� Good progress on gross basis, working to identify further opportunities to mitigate offsets and maximize bottom line impact.

Progress and breakdown of structural cost reduction vs. 2012 from Jan2013 to Jun2014

Refiningcost and

M&A

Materialcost

Value creation

Total

Supply 5.0 10.3 1.8 17.1

Marketing 1.9 0.5 0 2.4

Administ-ration 1.6 0.2 0 1.8

FY2013-1H2014

Total8.5 11.0 1.8 21.3

FY2013-2015Total

26.0 bil+α

2H2014-2015

4.7 bil+α

Unit: Billion yen yen

(Note) Despite the achievement above, structural cost reduction effects were partly offset in refining cost and M&A by one-off cost elements and costs for growth strategy when looking at accounting performance.


Business Strategy Progress in Jan-Jun 2014

16

Mid-Term Business Action Plan Strategies implemented in 1H2014

Solar Business “Become a global leader”

� Winning in Japan

� High added value business model

� Technology development for growth

� CIS global platform

� Unit production cost reduced in line with annual target of 10%.

� SF’s CIS adopted for smart house installation by Sekisui Heim and Toyota Home.

� Tohoku Module Plant construction commenced as planned.

� Joint feasibility study on CIS R&D and module plant construction agreed with State University of NY.

� Efficiency record of 20.9% on 0.5cm² cell for CIS thin-film technology.

Electric Power Business “Expand business scale and sources of power generation”

� Business scale expansion to 1GW

� Diversify sources of power generation

� Construction of Ohgishima Power Unit 3 and solar power plants proceeding on target: 21MW JV Solar IPP with Ube Industries started in July.

� Ohgimachi biomass power plant construction commenced as planned.

Energy Solution Business


Projects 2013 2014 2015 2016 2017

■ Structural cost competitiveness improvement

■ LPG business integration

■ MX capacity addition

■ Overseas petrochemical opportunities

■ Business alliance for supply rationalization

17

Progress of Key Projects

Oil Business

☆☆☆☆

Evaluation & implementation

☆☆☆☆

MOU☆☆☆☆ Business integration

21.3B achieved

4.7B to be completed

☆☆☆☆

FS completed Operation

Feasibility study

Energy Solution Business

■ (Solar) Tohoku Plant

■ (Power) Ohgishima Power Unit 3

■ (Power) Biomass power plant

☆☆☆☆

FID

Construction

Operation

Operation

Const-ruction

☆☆☆☆

FIDConstruction Operation

☆☆☆☆

FIDConstruction

JV firm

MOU


Major Topics in 2Q2014

18

Oil Business Energy Solution Business

In July 2014, Showa Shell launched a new premium gasoline for the first time in 12 years.Shell V-Power has been developed through the long-term technical partnership between Shell and Ferrari. Since its first launch in Hong Kong in 1998, it has been continuously improved in tandem with developments in engine technology. Shell V-Poweris now a major brand offered in 67 countries including Japan.

Its most differentiated feature is Shell’s original “Clean & Protect Technology,” helping automobiles realize their full potential by removing valve deposits inside engines and protecting engines

from dirt and rusting.

Shell V-Power will satisfy the needs of motorists who want to maximize automobile lifetime.

Shell V-Power launched Solar Frontier and State University of NY Investigate Potential Joint R&D and Manufacturing

Solar Frontier and the State University of New York College of Nanoscale Science and Engineering have signed a memorandum of understanding to conduct a technical and economic feasibility study for potential joint R&D and manufacturing of CIS thin-film modules in Buffalo, New York.

This project has the potential to become a cornerstone for Solar Frontier, which aims to become a global leader in the solar sector, to develop overseas module plants in line with the Mid-Term Business Action Plan.

Solar Frontier is now constructing the Tohoku Plant, which will introduce new CIS technology and be a blueprint for future development of overseas plants. Solar Frontier is advancing strategies for medium-to long-term business growth.


Cash flow from operating activities

19

Cash Allocation and Shareholders Return

� Managing cash cycle to:

• Fund investment for future growth

• Maintain strong balance sheet and credit rating

• Pay stable and attractive dividend

� 1H CFFO and gearing reflect working capital

timing impacts versus year end; expect positive

FCF on FY basis.

� JCR A Rating confirmed; strong demand for

recent bond issuance, competitive pricing

achieved.

Operating cash performance

InvestmentDividend pay-out

Balance sheet

Cash flow and gearing ratio

*Gearing Ratio: Net interest-bearing debt / (Total shareholders' equity + net interest-bearing debt)

2010 2011 2012 1-Capital expenditure (including investment and loan)Dividend payout

Cash flow gain/out


Shareholders Return

5-year forecast of operating cash flow/allocation under the Mid-Term Business Action Plan

Unit: Yen 2012 2013 2014

Full-year dividend per share 18 36 38 (Forecast)

Interim dividend per share 9 18 19

� 2014 forecast dividend

increased to 38 yen/share.

Interim increased to 19 yen.

� Despite current margin

uncertainties, cash flow forecast

robust to fund business strategy

including increased dividend on

sustainable basis.


<Key factors for forecast>

� Oil Business:

� Profit forecast maintained, including inventory valuation effects.

� Both domestic fuel and petrochemical margins stay around the current level, continued cost reduction efforts.

� Energy Solution Business:

� Profit forecast maintained.

� Ongoing efforts for cost reduction and more added-value marketing in solar business continue. Panel selling prices gradually come down. Stable profit contribution from power business continues.

21

Forecast of Full Year Results for 2014

� Forecast of consolidated full year results 2014

� Crude oil price & exchange rate

*2014 forecast for “Others and adjustment” is included in the Oil Business.

Operating Income by segment

Announced in Feb Announced in Aug

Dubai crude oil price（USD/bbl） 103 106 3

（JPY/USD） 105 102 -3

（JPY/EUR） 130 130 0Exchange rate

Changes2014

Announcing in Feb Announcing in Aug

Net sales 3,150,000 3,150,000 -

Operating income 53,000 53,000 -

　　※Inventory valuation 0 5,000 + 5,000

　　※CCS operating income 53,000 48,000 - 5,000

- Oil business 34,000 29,000 - 5,000

- Energy solution business 19,000 19,000 -

- Others and adjustment* - - -

Ordinary income 53,000 53,000 -

　　※CCS ordinary income 53,000 48,000 - 5,000

Net income 37,000 37,000 -

(Million yen) Changes2014


Data Book


Highlights of Financial Results, Apr-Jun 2014� Crude oil price & exchange rate

� Highlights of financial results

【Notes】CCS ordinary income（ordinary income on Current Cost of Supply basis）:

Ordinary income based on costs excluding inventory valuation effects.

2013 Results 2014 ResultsApr-Jun Apr-Jun

Sales 656,628 729,539 + 72,911 +11.1%

Operating income 6,045 10,163 + 4,118 +68.1%

Non-Operating income 1,378 89 - 1,289 -93.5%

Ordinary income 7,424 10,253 + 2,828 +38.1%

　 ※Inventory valuation 2,366 494 - 1,871 -79.1%

　　※CCS ordinary income 5,058 9,758 + 4,700 +92.9%

Extraordinary income -126 -1,149 - 1,022 -

Net income 5,420 7,188 + 1,768 +32.6%

Changes vs. 2013 (％) (Million yen)


Dubai crude oil price （USD/bbl） 100.8 106.1

（JPY/USD） 98.8 102.2

（JPY/EUR） 129.0 140.1 Exchange Rate


・Oil Business: Manufacturing and sales of oil products, such as gasoline, naphtha, kerosene, diesel oil, fuel oil, lubricants, LPG, bitumen, and chemicals

・Energy Solution Business: Manufacturing and sales of solar modules and electricity

・Others: Leasing and administration of properties, construction works, sale and lease of auto accessories, etc.

Information by Business Segment, Apr-Jun 2014

2013 Results 2014 ResultsApr - Jun Apr - Jun

Oil Business 3,078 4,927 + 1,849 +60.1%

　 ※Inventory valuation 2,366 494 - 1,871 -79.1%

　　※Oil Business CCS OP 711 4,432 + 3,721 +523.%


Other 264 281 + 17 +6.5%

Adjustment -16 10 + 26 -

Total Operating Income 6,045 10,163 + 4,118 +68.1%

　　※Total CCS operating income 3,679 9,669 + 5,989 +162.8%


� Sales

� Operating income

2013 Results 2014 ResultsApr - Jun Apr - Jun

Oil Business 625,804 693,529 + 67,725 +10.8%


Other 2,114 1,843 - 270 -12.8%

Total sales 656,628 729,539 + 72,911 +11.1%



Crude Oil Refined and Sales Volume, Apr-Jun 2014� Crude oil refined & utilization rate


Crude oil refined (thousand KL) 5,133 5,153

Refinery utilization rate (%) 89.8% 80.0%

2013 ResultsApr-Jun Apr-Jun

Gasoline 2,151 2,068 - 3.8%

Jet Fuel 439 463 + 5.6%

Kerosene 322 347 + 7.6%

Diesel Oil 1,259 1,357 + 7.8%

Fuel Oil A 346 443 + 28.0%

Fuel Oil C 280 312 + 11.3%

Chemicals*(thousand MT) 225 283 + 25.8%

Others 734 615 - 16.2%

Total Domestic sales 5,756 5,889 + 2.3%

Export 231 456 + 97.3%

Grand Total 5,987 6,344 + 6.0%

vs. 2013 (%)　　(Thousand KL) 2014 Results

*Chemicals: Mixed xylene, benzene, propylene

� Sales volume by products

[Note]The numbers of crude oil refined and utilization rate based on Keihin, Yokkaichi, and Yamaguchi Refineries


Quarterly Trend of Ordinary IncomeBillion yen


Quarterly Trend of Operating Income by Business SegmentBillion yen


(USD/bbl)

Crude Oil Price (Platt’s Dubai)


(JPY/USD)

Exchange Rates (JPY/USD TTM)


(JPY/EUR)

Exchange Rates (JPY/EUR TTM)


国内国内国内国内マーケットのマーケットのマーケットのマーケットの状況状況状況状況①①①①（（（（ガソリンガソリンガソリンガソリン））））

Regular Gasoline (Domestic Spot Price)

Crude & Product price ¥/L Spread ¥/L

2012 2013

Crude CIF

Domestic Market (1) : Regular Gasoline

Spread (Domestic spot price-CIF)

2014

※CIF of July, 2014 is provisional.


Domestic Market (2) : Diesel Oil

Spread ¥/L

2012

Diesel Oil (Domestic Spot Price)

2013

Crude CIF

Crude & Product price ¥/L



2014


Domestic Market (3) : Kerosene

Spread ¥/L

2012

Kerosene (Domestic Spot Price)

2013

Crude CIF

Crude & Product price ¥/L



2014


Global Market (1) : Diesel Oil

$/bbl Spread $/ bbl

Diesel Oil (Asian Spot Price)

Dubai

20132012

Spread (Spot price – Dubai)

2014


Global Market (2) : Mixed Xylene

2012

$/MT Spread $/MT

Mixed Xylene (Asian Spot Price)

2013

Dubai

Spread (Spot price – Dubai)

2014

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