ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2021-Q4

[Katsuyuki Ota, executive]

I am Ota, President of ENEOS Holdings. I'd like to express my gratitude for support and advice provided regularly by shareholders and investors for the business of ENEOS Group. Now let me start the explanation with the presentation slides.

Please turn to Page 3. This slide is about the financial results highlights. First, I will explain about financial results for FY 2020. Operating income excluding inventory valuation effect was JPY 215.5 billion, up about JPY 119 billion year-on-year. This is not described on the slide, but in the previous fiscal year, we recognized inventory valuation effect of about minus JPY 210 billion due to the plunge of the oil price. And profit attributable to owners of the parent was about minus JPY 188 billion in FY '19. This means it was improved by about JPY 300 billion for FY 2020. We were severely affected by a decline in sales volume caused by COVID-19. And domestic fuels such as gasoline declined by about 10% year-on-year, and export faced quite a difficult situation and decreased about 60% year-on-year.

On the other hand, oil price, which was weak at the beginning of the fiscal year, turned to go up, and this generated positive time lag effect. And this is one of the reasons for the improvement of domestic petroleum product margins. Also, copper price rose to the highest level in 10 years. And in petroleum development, we had absence of impairment loss on upstream assets which was recorded in the previous fiscal year due to the plunge of oil price. And we made much efforts of cost reduction to address the pandemic.

With these factors, we could achieve profit increase. We decided and executed restructuring of refineries and plants as well as suspension of some facilities. And as a result, we posted structural reform loss in FY 2020 including impairment loss on refineries.

Regarding forecast for FY 2021, we expect only a slight profit increase as we estimate operating income excluding inventory valuation effect as JPY 230 billion. Recovery in sales volume will be limited as COVID-19 impact continues. While there will be an absence of a onetime loss associated with restructuring of refineries and plants, the absence of a positive time lag occurred in FY 2020 will deteriorate domestic margins.

Please turn to Page 5. I'll touch upon our 3-year Medium-Term Management Plan based on the results of FY 2020 and the forecast for FY 2021. The Second Medium-Term Management Plan was announced as operating income excluding inventory valuation effect of JPY 970 billion and free cash flow of JPY 150 billion. But in this plan, the impact of COVID-19 was reflected only for the first half of FY 2020. Our latest forecast is based on the current assumption that the impact of COVID-19 will continue until the end of FY 2022. And cumulative operating income is estimated as JPY 760 billion, and free cash flow is 0.

We estimate the negative impact of COVID-19 in 3 years as about JPY 500 billion, and about half of it is decreased sales volume. Export margins will not be as secured as we expected. And margins of coke and jet fuel will be significantly worse than the Medium-Term Management Plan. Operations in Caserones Copper Mine will be restricted to some extent as well. These are the assumptions of the negative impact of JPY 500 billion. On the other hand, cost reduction is expected to be JPY 90 billion, and preferable copper price and improvement in domestic production market will compensate some of the negative impact.

I'll touch upon the investment plan later, but the plan to spend JPY 1.5 trillion for 3 years will remain unchanged. The current direction, such as reviewing our portfolio, fostering new businesses, et cetera, will be maintained. And we decided not to reduce the total amount of investment this time.

As cash flow is expected to deteriorate due to profit decline, we intend to sell additional assets including a review on portfolio. Return policy is not changed from the current policy in the plan. For capital policy, we plan to issue hybrid bonds with a cap of JPY 300 billion, as announced May 12, to maintain stable financial structure.

Please turn to Page 6. This slide shows major management indicators in this Medium-Term Management Plan. Operating income and free cash flow are as explained earlier. Regarding net D/E ratio, which indicates financial health, we set the target to maintain 0.8x or lower in the Medium-Term Management Plan. And this target is expected to be maintained as is even though profit decline is forecasted and investment plan will remain unchanged. Although ROE is estimated to improve toward FY '22, our current forecast is 7%, which is less than the target of 10% in the Medium-Term Management Plan.

Page 7 is about cash flow and return policy. As I mentioned, despite a decrease of cash flows from operating activities, we are determined to promote fostering new businesses and restructuring portfolio, so we will maintain the current plan to spend JPY 1.5 trillion for capital investment. Asset sales are estimated as JPY 220 billion in the current forecast. In addition to sale of real estate and securities, we will also review our business portfolio.

Upstream assets of petroleum development and coal businesses are also described here. Regarding petroleum development, we have been reviewing the rights in this business regularly, and we intend to sell part of the rights. Although coal business does not account for a large part in our business, we decided to sell all our rights to withdraw from the business. With this additional sale of assets, we want to make sure to secure free cash flow of at least 0.

Shareholder return policy has not changed, as described on the right. As we closely watch 3-year cumulative situation, we will maintain the total payout ratio as 50% or more of net income excluding inventory valuation effects. Also, regardless of profit situation, we will maintain dividend no lower than the current level of JPY 22 per share at least for FY '21 and '22.

Page 8 is about capital investment plan. We will make effective investments within the total amount of JPY 1.5 trillion. Compared to the previously announced Medium-Term Management Plan, strategic investment is increased by JPY 30 billion to JPY 860 billion. We will allocate more money for strategic spending by reducing investment for business maintenance and facility renewal.

As for major decided/ongoing investment projects are listed on the right. For next-generation energy, we'll focus on investment in renewable energy and electric power businesses. For materials, acquisition of elastomer business, which was announced May 11, as well as enhancement of production capacity for electronic materials, that is performing well.

For your reference, Page 9 is about issuance of publicly offered hybrid bonds I mentioned earlier. We believe this will be an effective tool to support funding for strategic investment as well as maintaining a strong financial base.

From the next page on, I'd like to explain about progress of the Second Medium-Term Management Plan. Please turn to Page 11 for a general overview. Currently, establishing decarbonized, recycling-oriented society is a big theme in society, and we believe we can make contribution in various areas for the supply chain in this initiative. This slide illustrates the overall picture of our idea.

Renewable sources will be used for power generation and, combined with storage batteries or electric vehicles, will promote energy management. Its demonstration is successfully progressing. Also, by utilizing overseas renewable energy at lower cost, we can generate CO2-free hydrogen or produce synthetic fuel and transport them to our refineries by sea for effective use as we expand investment in new type fuel using biofuel, biochemicals or waste plastic or recycling currently done for metals for better contribution. And as described at lower left, CCS, CCUS can be implemented utilizing our knowledge in upstream business. As such, we want to work on various opportunities as our business opportunities and contribute to solving global environmental issues.

Let me explain more details about each point. Page 12 is about CO2-free electricity. We assume supply of off-the-grid electricity produced and consumed locally, including renewable energy, will be the main focus in the future. As we utilize storage batteries and EVs, we will establish an energy supply platform utilizing energy management system. We already started VPP demonstration at the service station, refinery, central technical research laboratory and other places.

And based on the results of these demonstrations, in FY '22, we expect to realize commercial use of energy management system. Also, we are discussing with some local governments to collaborate for regional development. For instance, we announced last year about the community development plan with Shimizu City, Shizuoka Prefecture, which is centering on the area around the site of our former refinery, will contribute to establishment of energy supply platform in this project.

Next on Slide 13, I will explain about our electric vehicle strategy. Amidst the rapid shift towards EVs, rather than just the EV charging services, our strategy consists comprehensive lineup of mobility, such as EV car sharing and car leasing and maintenance services, as well as bundled services with ENEOS Denki. As you can see on the left, in basic recharging, ENEOS Denki has launched a plan in March to supply virtually 100% renewable energy-driven electricity to new purchases of EVs, PHEVs and FCVs. Route charging is not just a physical space offering, it is rather an EV charging network which we are planning to build with other companies for the time being.

We are focusing on the installation of quick chargers mainly at ENEOS' service stations. Mobility means adding EVs in our car sharing service currently being tested as well as in our car leasing service already launched in April at service stations nationwide. As you can see at the bottom right, we are conducting demonstration using used batteries as storage systems.

On Slide 14, I will explain initiatives to establish a CO2-free hydrogen supply chain. Our focus on hydrogen as next-generation energy source has been proven to be valid by recently expanding interest in this resource. Hydrogen is definitely one of the pillars of the company's business going forward. We will use the refineries as hubs for imported hydrogen and the service stations as hubs for CO2-free hydrogen in towns and supply clean hydrogen to power plants, factories, homes and mobility users.

Overseas hydrogen will be transported in the form of MCH, liquified hydrogen, ammonia or other substances. And we are involved in all of these 3, as you can see on the slide. For example, with MCH, our existing refinery facilities, port facilities, chemical tankers, tanks and plants are suitable for handling it. And we believe that we have an advantage in this area. In addition, our proprietary direct MCH technology allows us to produce low-cost MCH.

We are currently conducting demonstration at the moment. Rather than our own, this requires a wide range of alliance. As announced the other day, we will play a role of supplying clean hydrogen in Toyota's Woven City Project announced the other day. In overseas, with Saudi Aramco and Malaysia, for clean hydrogen transportation and supply, we have started joint feasibility studies.

On Slide 15, I'll explain about CO2-free fuel. Based on the existing fuel infrastructure, including tanks and service stations, we can handle CO2-free fuel without major modification, which makes hydrogen a highly attractive business for the company.

As for biojet, we have started a feasibility study on the production of jet fuel from waste plastics and bio raw materials in anticipation of increasing demand. However, for biojet and recycling of waste plastics and other materials, there are some restrictions in terms of raw material supply, so there may be some limitation in terms of expansion in volume. In that sense, for the long term, renewable synthetic fuels or new energy are a viable option for the company, and we are focusing on this area as well.

Of course, it's important for us to lower the production cost of hydrogen and the cost of CO2, but we will focus on the development of catalysts as well as optimization of production processes. That will be an area where we can contribute. So as you can see on the left, we have succeeded in the development of ultra-high-speed AI molecular simulator in collaboration with Preferred Networks. We believe that we can commercialize this while using this for the development of new catalysts.

On Slide 16, I will explain the initiatives of CCS and CCUS, mainly promoted by our upstream business group. Currently, as you know, we are working on a CCUS project in the United States, where we are recovering CO2 from coal-based thermal power stations to inject it into oil wells. We are accumulating the know-how on the quantity and timing of CO2 injection. By using this expertise in Southeast Asia, including Indonesia and Malaysia, we are participating in the feasibility studies of CCS and CCUS.

As for metal recycling, as shown in the lower panel, we are accelerating this. By integrating smelting and recycling operations, we are trying to drive efficiency. In order to increase the percentage of recycled materials in our portfolio, we are expanding our smelting capacity and installing logistics facilities in the Oita Port and expanding our recycling capacity in Taiwan at the moment.

That was my brief explanation of our initiatives related to carbon-free products or circular economy. Many of them have a long lead time, while some of them can be commercialized in a short period of time.

What is shown on Slide 17 is a profit contribution opportunity in a short period of time. We have competitive advantage in the functional materials, thin metal materials and others business, whose main products are rolled copper foil and semiconductor targets. These products are showing strong sales against the backdrop of increased demand due to the penetration of telework, EVs and DX. And we are expanding production capacities as well.

Also, as shown in the lower panel, we are also exploring and nurturing next-generation new materials by investing in start-ups who have the expertise in gallium oxide crystals, which are expected to be used in the next-generation power devices, and the knowledge about materials which are expected to be used to control the heat generated by increasing number of electronic devices.

Slide 18, please. As announced the other day, the company agreed to acquire JSR's elastomer business and signed a contract. The details are available in the press release. JSR has expertise in performance products including high-quality synthetic rubber technology, while we have expertise in fuel supply and R&D. By combining these advantages, we would like to reinforce the portfolio of our materials business. That is the purpose of the arrangement.

Specifically, JSR is spinning off the elastomer business, and we are investing into it. The target closing date is April 2022, 1 year away from now. And we will be making necessary preparations by then. In the meantime, JSR is supposed to promote the restructuring measures that they had agreed to implement.

With this elastomer business as a core, we will be reviewing the existing performance materials business as well as the R&D structure. We would like to share the details of our structural reform plan with you as soon as we are ready. As a high-performance materials manufacturer, we are aiming to quickly establish a worldwide business scale and presence.

Last but not least, on Slide 19, I will explain our initiatives to enhance base businesses. As shown on the left, as already announced, we have rationalized 4 refineries, making decisions and executing plans to close down or partially stop the refineries. We have been accelerating the timings of these actions.

As shown on the right, we are introducing DX in the entire supply chain including refineries. In refineries, we will use AI to realize automatic operations. In addition, we are introducing digital twin to enhance the competitiveness of refineries for the long term. For the supply chain, we will set up an Optimizer's Room at the head office to optimize the supply chain by centralizing all the information on shipment, vessel arrangement and production. So in the base businesses, we are promoting aggressive rationalization and enhancement of competitiveness.

This concludes my part of the presentation. Next, Mr. Tanaka will take you through the details of financial results and the forecast.

[Tanaka Soichiro, executive]

I am Tanaka. I will explain about the financial results for FY 2020 and forecast for FY 2021.

Please turn to Page 21 for prices of resources. Crude oil price was $21 per barrel at the beginning of FY 2020 due to lower demand affected by COVID-19. However, it rose to $63 due to cooperative production cut by OPEC+ as well as expectation for demand recovery with reopening of economic activity. However, the average price of FY 2020 was $45 per barrel, $15 lower year-on-year. The assumption for FY '21 is $60 per barrel.

Copper price dropped at one point due to concerns about demand decline affected by COVID-19. But afterwards, demand recovered in China, and the supply from copper mines in South America decreased. Then the price rose from $2.17 per pound at the beginning of FY 2020 to $4.01 per pound at the end of the fiscal year. In FY '21, considering the recent copper price, our assumption is $4.00 by the end of June and $3.20 from July onward.

Please turn to Page 22. As for petroleum products on the left, margins have been steadily higher than the previous fiscal year due to the positive time lag associated with rising oil price. Paraxylene margin has continued to be weak, affected by increased supply by start-up of new facilities in China and slow demand growth due to COVID-19. However, we are seeing a slight recovery along with tighter supply-demand balance owing to start of operations in production facilities of petrochemical derivatives, PTA.

Now I will explain about the details of financial results. Please turn to Page 25. Operating income of FY 2020 was JPY 254.2 billion. Inventory valuation was JPY 38.7 billion. And operating income excluding inventory valuation was up JPY 118.8 billion year-on-year to JPY 215.5 billion. Profit attributable to owners of parent was up JPY 301.9 billion year-on-year to JPY 114 billion.

Please turn to Page 26. This slide shows operating income by segment. I will explain details with waterfall charts from next page onward.

Please turn to Page 27. In Energy segment, operating income excluding inventory valuation was JPY 82.4 billion, up JPY 38.7 billion year-on-year; while sales volume of petroleum products decreased by JPY 33.2 billion, as indicated in the balloon, due to decreased sales with lower demand in Japan and overseas affected by COVID-19. Margins increased JPY 182.5 billion due to stable petroleum product margins including time lag and cost reduction. We also recognized a onetime loss of JPY 32.5 billion for restructuring and production efficiency improvement of refineries. Despite the slight improvement of margins, petrochemicals was down JPY 6.8 billion year-on-year due to sales volume decrease affected by COVID-19 and a onetime loss for production improvement of refineries same as petroleum products.

Electric power decreased JPY 38 billion year-on-year. While electric power sales volume increased by expanding sales area of ENEOS Denki, the price for external procurement increased as the wholesale price of electricity rose sharply from December to January due to cold weather. The difference from the impact of minus JPY 20 billion calculated for Q3 results announcement in February is due to subsequently decided imbalance charges. Going forward, we will try to minimize the procurement risk in wholesale electricity by increasing the ratio of our own power source and utilizing negotiation-based procurement. Materials recorded a decrease of JPY 33.3 billion year-over-year mainly due to sales volume decline of needle coke and deteriorated margins.

Please turn to Page 28. Operating income of oil and natural gas E&P segment improved by JPY 41.6 billion year-over-year to JPY 2.8 billion mainly due to the absence of impairment loss from FY '19. In FY 2020, impairment loss of JPY 17.4 billion was recognized as a result of reviewing the assumptions for evaluating reserves and long-term oil price.

Regarding other operational activities, sales volume increased by starting production in new projects such as Mariner and Culzean in the U.K. worked positively. However, declined resource prices led to a profit decrease. Increase in expenses is due to increased operation and depreciation expenses for projects in the U.K.

Next, please turn to Page 29. Operating income of Metals segment was JPY 78.1 billion, up JPY 30.2 billion year-on-year. From the left, functional materials, thin film materials and others increased by JPY 16.6 billion year-on-year owing to sales volume increase by higher demand for data communications. Mineral resources had a positive factor of JPY 53.8 billion owing to the higher copper price. However, it was affected by negative factors such as production decrease at the copper mine in Chile and expense increased due to stronger Chilean peso to the dollar, and operating income increased just JPY 20.2 billion year-on-year. FY 2020 result includes onetime factors such as impairment loss of Caserones Copper Mine of JPY 69.4 billion gain on elimination of debt, et cetera.

Despite deterioration of sulfuric acid market and smelting margins, smelting and recycling increased by JPY 4.4 billion year-on-year owing to higher price of precious metals. Non-allocated corporate expenses and others decreased JPY 11 billion year-on-year because of elimination of consolidated internal transaction of unrealized profit related to the sales from Caserones Copper Mine to the smelting division of the group.

Next, Slide 30 shows the balance sheet and cash flow. Please take a look at the consolidated cash flow on the right-hand side. After repayment of lease liabilities, operating cash flow as of March 2021 were JPY 601.9 billion, reflecting operating income excluding inventory valuation of JPY 215.5 billion, depreciation and amortization of JPY 249.7 billion and a positive contribution from the timing differential of gasoline tax payment due to holidays. Cash flow from investing activities was JPY 325.7 billion mainly due to the delay in progress of capital investment and financing caused by the pandemic.

As a result, free cash flow was net cash inflow of JPY 295.1 billion. As shown in the balance sheet on the left, as of the end of fiscal 2020, net interest-bearing debt excluding cash at hand was JPY 1,617.9 billion, as shown in the upper-right box. The net D/E ratio is 0.59x, as shown at the bottom line.

From the next slide, I will explain our full year forecast for fiscal year 2021. Please refer to Slide 33. As for assumptions, we have exchange rate of JPY 105 to the dollar, crude oil price of $60 and a copper price of $3.40. The copper price is set at $4.00 for the period from April to June and $3.20 from July onward. Taking into account of the current high price, operating income is projected at JPY 260 billion and operating income excluding inventory valuation at JPY 230 billion. Net income attributable to owners of the parent is projected at JPY 140 billion, up JPY 26 billion year-on-year.

Slide 34 shows operating income forecast by segment. I will explain the details on next slides.

Please refer to Slide 35. Operating income of the Energy business excluding inventory valuation is projected at JPY 75 billion. I'll explain the breakdown by subsegment. Petroleum products assumes some recovery in sales volume, which had declined due to COVID-19. So sales volume is JPY 34.1 billion higher, while the margins is JPY 104.3 billion lower than the previous year mainly due to the elimination of the positive time lag that occurred during the crude oil price hike last year. Petrochemicals is JPY 28.8 billion higher than the previous year due to an increase in sales volume mainly in paraxylene and an improvement of margins. Electric power is JPY 38.2 billion higher due to the reversal of the impact of the increase in procurement prices caused by the sharp rise in the wholesale electricity prices in the previous year. Materials is JPY 4.2 billion lower due to the elimination of the time lag in lubricant margins.

Moving on to Slide 36. Operating income in the Oil and Natural Gas E&P segment is projected at JPY 45 billion, up JPY 42.2 billion year-on-year, including JPY 17.4 billion due to the reversal of impairment losses and JPY 41.4 billion due to the recovery of crude oil prices. The lower volume is due to the impact of regular maintenance at the project in the U.K. and the decline in production at other oil fields, while the increase in expense is due to an increase in depreciation expenses due to the declining reserves at the project in the U.K.

Slide 37 shows operating income in the Metals segment, being JPY 18.1 billion lower at JPY 60 billion. From the left, other businesses within functional materials, thin film materials and others is up JPY 4.9 billion year-on-year mainly due to the higher sales in titanium and tantalum and niobium. Mineral resources is down JPY 2.9 billion despite some positive factors such as the reversal of onetime factors, increased production at Caserones and lower depreciation and amortization. It's down due to the decline in copper price from $4.01 at the beginning of the year to $3.20 instead of continuous rise like in the last year.

Smelting and refining is down JPY 9.3 billion due to lower smelting margins and higher expenses associated with the regular maintenance of the Saganoseki Smelter & Refinery. Non-allocated corporate expenses and other is down JPY 10.8 billion despite the positive impact of reversal from the previous year's elimination due to internal transactions. The decline is due to onetime environmental debt cancellation expenses.

Please move on to Slide 38. As for operating cash flow, operating income is expected to be at the same level as the previous fiscal year, but cash flow is expected to be limited to JPY 230 billion due to the negative impact of holidays of JPY 110 billion and a payment of income taxes. Cash flow from investing activities is expected to be a net outflow of JPY 500 billion. As a result, free cash flow is expected to be JPY 270 billion cash outflow. As explained by Mr. Ota, in order to maintain free cash flow above 0 for the cumulative total of 3 years of the Medium-Term Management Plan, we will plan further improvement measures, such as additional asset sales in businesses and real estate.

This concludes my explanation of the full year forecast. Slide 39 onwards are for your reference only, including assumptions and sensitivities.

This concludes my presentation.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]