Idemitsu Kosan Co.,Ltd. Q2 FY2026 earnings call

Macro & Geopolitical Context

• Management had high initial concerns over Trump administration tariff impacts on the global economy, but have not observed material adverse effects to date, and see the global economy remaining relatively resilient.
• Middle East geopolitical risk remains highly uncertain: a temporary ceasefire holds after the June Iran-Israel military conflict, but progress toward a final peace agreement between Israel and Hamas remains uncertain, keeping oil market volatility elevated. Dubai crude is currently trading around $65 per barrel.
• Management is monitoring the policy direction of Japan's new Kishida administration, and expects it to pursue more realistic energy policy focused on economic security.

Completed Operational Milestones

• Completed the tender offer for Fuji Oil, turning it into a wholly owned consolidated subsidiary.
• Reached the original production target 3 years after launch for the Vietnam black pellet project, enabling the declaration of commercial operation.
• Reached basic agreement among the 3 NSRP (Nghi Son Refinery and Petrochemical) sponsors (Kuwait Petroleum International, Petrovietnam, Idemitsu) to lower financing costs by changing the sponsor loan interest calculation from compound to simple interest, which will significantly compress NSRP's deficit. All closing procedures are expected to be completed this fiscal year, with lower rates taking effect next fiscal year.
• Refinery utilization improvement efforts are now delivering tangible results after years of unplanned outages: actions include cross-facility sharing of troubleshooting cases to reduce repeat incidents and advanced maintenance management. Management continues to refine processes to sustain high utilization long-term, and will highlight this initiative in the next medium-term management plan.
• Reached basic agreement for integration of the domestic polyolefin business, and will proceed with detailed planning with partner firms.

Next Medium-Term Management Plan (to be announced next spring)

• The overall commitment to decarbonization remains unchanged, but the speed and timeline for carbon neutrality targets are being revised to align with actual timing of next-generation fuel demand and commercial social implementation, based on close input from off-takers.
• Strategic focus will be on maximizing profit from existing core businesses, plus exploring new adjacent revenue sources around existing operations rather than only pursuing entirely new carbon neutrality sectors.
• Will reaffirm the core capital efficiency targets: early achievement of 1x PBR and sustained 10% ROE.

Capital Return

• Maintained stable dividends at 18 yen per share for interim and full year, 36 yen annual total. Approved a new 30 billion yen share repurchase program following the upward full-year guidance revision. The cumulative total return over the current 3-year medium-term plan reaches 339.8 billion yen, for a total return payout ratio of 74%.

All figures below are for the first half (H1) of the fiscal year, on an actual basis excluding inventory impact:

1. Fuel Oil: 70.5 billion yen profit, +7.7 billion yen year-over-year (YoY). Even with a 25.5 billion yen negative headwind from large scheduled maintenance at 2 refineries, narrowed time lag impacts and strong domestic margins drove a net increase. Full-year forecast (excluding inventory impact) for operating profit + equity gains is 140 billion yen, up 50 billion yen from the May guidance.
2. Basic Chemicals: -11.2 billion yen YoY, driven by weak product market conditions. Structurally oversupplied paraxylene (due to Chinese polyester inventory build and new capacity) and styrene monomer (due to weak Chinese end demand and excess supply) pressured results. Full-year forecast is a 16 billion yen decrease from May guidance, due to combined one-off factors including naphtha price lag impacts and production disruption from an unexploded bomb at the Tokuyama facility.
3. High-performance Materials: +3.0 billion yen YoY. Functional chemicals saw margin pressure from Chinese capacity expansion, but lubricants gained from strong overseas sales, and the Agri-Life business gained from the profit contribution of newly acquired Agro Kaneshō.
4. Power & Renewable Energy: +5.1 billion yen YoY, driven by resolution of 2024 power generation equipment issues at Toa Oil and higher selling prices for overseas gas-fired power projects.
5. Resources: -25.6 billion yen YoY, primarily due to falling coal market prices and lower production volumes from adverse weather.

• Full-year fiscal 2025 (ending March 2026) guidance was upward revised: Net sales are projected at 7.95 trillion yen, an increase of 50 billion yen from the May forecast.
• Operating profit plus equity investment gains (excluding inventory impact) was upward revised by 28 billion yen to 175 billion yen. Net income (excluding inventory impact) was upward revised by 25 billion yen to 145 billion yen.
• After excluding one-off factors (crude price decline lag impacts and the Tokuyama facility production disruption from the unexploded bomb), adjusted ROE is expected to reach 10%, matching the company's target.
• Full-year capital expenditure guidance was cut by 113 billion yen to 333 billion yen, driven by some M&A deals pushed to future years and more deliberate decision-making for new decarbonization-related investments.
• Underlying assumptions for the second half: $65 per barrel Brent-equivalent crude, $105 per ton coal, and an exchange rate of 145 JPY/USD.

• Persistent structural oversupply in basic chemical markets (paraxylene, styrene monomer) in China, driven by new capacity additions and weak end demand, continues to pressure segment profitability.
• NSRP (Vietnam refinery joint venture) will not achieve break-even by the end of the current medium-term plan as originally targeted, with high financing costs remaining the primary barrier to profitability. While a clear path to break-even around 2030 has been agreed with co-sponsors, the project will remain unprofitable until interest cost reductions take full effect.
• Geopolitical instability in the Middle East creates significant uncertainty for crude oil prices, which can drive sharp volatility in refining margins and inventory valuations.
• One-off operational risks, such as the production disruption from an unexploded ordnance found near the Tokuyama facility, create near-term profit declines.
• Uncertainty over the direction of Japanese energy policy under the new administration creates long-term planning uncertainty for core operations.

No questions and answers were included in the provided transcript excerpt.