ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2022-Q4

[Takeshi Saito, executive]

Hello. My name is Saito, President of the ENEOS Holdings. I would like to express my sincere gratitude to our shareholders and investors for their continued support and advice for the business activities of ENEOS Group. Today, I would like to discuss our progress of second medium-term management plan as well as our new carbon neutrality plan first, and then Senior Vice President, Tanaka will explain the fiscal 2021 financial results and the outlook for the fiscal 2022.

So let me start by referring to the handout. Please refer to Page 1 for the key points of today's presentation. First, on our financial performance. We expect to achieve 3-year medium-term plan cumulative operating income target, excluding inventory valuation of JPY 970 billion. We were impacted by COVID-19. However, owing to upstream business profit improvement caused by soaring resource prices, we now see the target achievable. And in anticipation of that, we have decided on JPY 100 billion share buyback program as additional shareholder return. On our business performance, in addition to measures to strengthen competitiveness of our base business, such as optimization of production and supply network, we have steadily executed development and strengthening of growth businesses and business portfolio strategy, including M&A and asset disposals such as the acquisition of Japan Renewable Energy and sales of U.K. upstream business. The third point is on carbon neutrality. In May 2020, we have announced our environmental vision, which set out carbon neutrality by 2040. Since then, the international standard for carbon dioxide emission control made progress and the fact that we now see concrete ways in which we can reduce carbon dioxide emission have led us to formulate new carbon neutrality plan. I will discuss that in detail later.

Please refer to Page 4. This is the highlights of our financial results. Operating income, excluding inventory valuation effect is JPY 971.1 billion against the 3-year cumulative target under the medium-term management plan of JPY 970 billion. So we are in a situation that we are likely to achieve the target. On one hand, we were negatively impacted by the material decline in oil demand due to COVID-19 and incurred onetime loss related to production and supply network optimization. On the other hand, resource prices rose sharply, margin improved with a positive time lag and sales and profit increase for advanced materials for data communication applications. In addition, we have proactively implemented cost reduction measures from the first year of the medium-term plan to cope with the challenging business environment, which helped us to push our expectation marginally above the target. We are expected to achieve the main financial targets, which we set forth in the medium-term plan, which are: ROE of 11% on a 3-year average, net D/E ratio of below 0.8x at the end of FY 2022.

Please refer to Page 5 on shareholder return. As I mentioned at the beginning, a decision was made to implement share buyback program of up to JPY 100 billion, and the announcement has been made today. It was decided at this timing based on our belief that we must reaffirm our determination to achieve the target for FY 2022, which is the final year of our medium-term plan as well as to show our commitment to shareholders. Please look at our plan for FY 2022. We expect to post 3-year cumulative net income, excluding inventory valuation of JPY 541.7 billion. Against this, total return a model combining JPY 22 per share annual dividend payment and JPY 100 billion share buyback will be JPY 310 billion. The total shareholder return ratio is 57%, which is in line with the medium-term plan return policy of at least 50%.

Next, on Page 6 on cash flow in the medium-term plan. As explained earlier, operating income excluding inventory valuation is in line with the plan. However, operating cash flow is expected to decline by JPY 300 billion compared to the plan as working capital increased substantially due to the rise in oil prices. In terms of investing cash flow, we have executed strategic investment, including large-scale M&A. Current 3-year cumulative capital investment plan is JPY 1.6 trillion, which likely to exceed medium-term plan by JPY 100 billion, factoring in the investment plan for acquired JRE. However, as we accelerate sales of noncore assets and added JPY 210 billion of sales proceeds Net cash out will be declined by JPY 110 billion. Consequently, free cash flow is expected to be negative JPY 40 billion. It will be a decline of JPY 190 billion compared to the medium-term plan, but is mainly due to the increase in working capital.

Please refer to Page 8. Let me discuss our strategic investment. As I explained earlier, by incorporating the investment plan of the acquired entity, the total strategic investment for 3-year total will be JPY 960 billion, an increase of JPY 130 billion versus the medium-term plan. On the right-hand side of the page is the list of key projects finalized and executed under the second medium-term plan. For renewable energy, the acquisition of JRE led us to achieve our medium-term plan target of 1 gigawatt renewable energy generation capacity. Going forward, we aim to leverage on the superior business development capability of JRE to further build up generation capacity. For advanced materials, we will continue to invest in production capacity expansion of sputtering targets for semiconductors and treated rolled copper foil to capture increasing demand expected for data communication and other high-performance IT applications. As for petrochemical and other materials, we have acquired the elastomer business of JSR. We aim to strengthen development and sales of environmentally friendly high value-added products by creating synergies with an elastomer-related technology. We are factoring in over JPY 10 billion profit contribution from the elastomer business for FY 2022 forecast.

Please refer to Page 9 on business strategies. We have positioned acceleration of structural reform as an issue to be solved in the second medium-term plan. And accordingly, we are strengthening the competitiveness of our base business, developing our growth business and executing portfolio strategy that includes M&As and asset sales. We have also decided to withdraw and divest from the businesses that are regarded as noncore, such as coal business and a part of upstream businesses in view of the transition to decarbonized society as well as our response to human rights and other social issues. We have also taken NIPPO, our listed subsidiary, private. In base businesses, in order to strengthen our competitiveness while ensuring stable supply, we have made a decision to rationalize production and supply system ahead of schedule. We also promoted utilization of digital technologies such as automatic operation using AI to our petrochemical plants, where operation requires expertise based on many years of experience. In addition, for us to become a resilient cost structure company in even more challenging business environment, we have begun a drastic review to thoroughly reduce waste in our operation process. In material business, as I mentioned, we have acquired elastomer business and decided to production capacity expansion of advanced materials such as sputtering targets for semiconductors and treated rolled copper foil. For next-generation energy, environmentally conscious businesses, apart from JRE acquisition, we are progressing with building of hydrogen supply chain, feasible study for SAF, sustainable aviation fuel and collaborative studies on CCS and recycling. We aim to achieve our long-term vision by the successful achievement of business structure reform and transition, which can be realized through the investment execution, balancing the risk return, short- and long-term monetization timing.

Please turn to Page 11. Let me talk about carbon neutrality. As you are aware, there is a global movement towards decarbonization. With the release of the special report on global warming of 1.5 degrees Celsius by IPCC in 2018 and the adoption of the Glasgow Climate Pact at COP26 held last year, the importance of the 1.5 degrees Celsius effort target is increasing and discussions on certain targets based on scientific findings through SBTi are also progressing. In Japan, in 2020, then Prime Minister, Suga announced the declaration of carbon neutrality by 2050. And in response, the Sixth Strategic Energy Plan was decided. Our road map for CCS is also being compiled by a government panel. Based on these developments, we formulated a plan with the following 3 key points. The first is the revision of Scope 1 and 2 targets. At new KPI, a 46% net emission reduction in fiscal 2030 has been set, which is consistent with the government's reduction target in the global warming countermeasure plan. While the carbon neutrality target for fiscal 2040 remains unchanged. The target has been revised to take into account the SBTi approach mentioned earlier with regard to CO2 target management and removal measures. The second is Scope 3 target setting. Until now, we have not set any specific targets but we aim to achieve carbon neutrality in fiscal 2050 through concerted efforts with the government and other companies. The third point is that scope of CO2 removal methods has been changed. In line with the SBTi approach, the plan is now limited to direct removal of CO2 from the atmosphere only.

Please turn to Page 12. To begin, I will explain the plan regarding Scope 1 and 2. There are 2 key points. First, CCS is indispensable for achieving the fiscal 2030 goal. This is because CC2 is expected to be commercialized relatively quickly as a CO2 reduction measure. Second, to become carbon neutral by 2040, we must not only work on self-help and CCS, but also on various methods such as force absorption.

Let me now go over the graph. The ENEOS Group Scope 1 and 2 CO2 emissions are 30 million metric tons in fiscal 2013, 28 million metric tons in fiscal 2019 and 24 million metric tons in FY 2020. This decrease is mainly linked to demand for petroleum products and includes a decrease in fiscal 2020 due to the COVID impact. In the future, it is assumed that the volume will decline to 19 million metric tons in FY 2030 and 16 million metric tons in FY 2040 due to lower crude oil throughput resulting from further declining demand. In contrast, in fiscal 2030, we plan to reduce emissions by 3 million tons through CCS in addition to self-help efforts such as energy conservation and fuel switching. Netting this 3 million tons emissions in FY 2030 will be 16 million tons, achieving the target of 46% reduction compared to FY 2013. In FY 2040, we aim to achieve carbon neutrality by expanding the scale of CCS and combining it with force absorption and other CO2 removal measures. For Scope 3, we aim to achieve carbon neutrality by 2050 by working in step with the government and other companies. In addition to expanding renewable energies, we intend to realize early commercialization of CO2-free energy sources such as hydrogen, SAF and synthetic fuels and strongly promote energy transition.

Please turn to Page 13. And for a description of the CCS initiative. I explained earlier that CCS will be essential for achieving 2030 target. We intend to promote this validation with the support of the government and with a wide range of partners. With regard to CCS, our subsidiary, JX Nippon Oil & Gas Exploration Corporation has already commercialized a project in the United States to increase crude oil production by injecting CO2 recovered from the exhaust gas of coal-fired power plants into the ground. Through our participation in this project, we've accumulated technologies for evaluating geological formations and injecting CO2s into the ground. In addition, we have announced a collaboration with J-Power on May 10 in which we will combine our knowledge of CCS with the know-how of our external partner to minimize CCS costs by scaling up the project and further developing the technology with the aim of commercializing the project in fiscal 2030. We will then work to achieve carbon neutrality by steadily advancing energy transition towards FY 2040 while maintaining a stable energy supply base.

Please move on to Page 14. Here is an overview of the U.S. CCS project in which we've been participating since 2016. To date, we've injected approximately 4 million metric tons of CO2. And through our work on this project, we've accumulated CCS technology, which is one of our strengths.

Page 15 shows information regarding financing that we plan for implementing the transitions we have mentioned. For details, please see the press release issued today.

That is all from me. So now Senior Vice President, Tanaka, will continue his presentation on financial results and outlook.

[Tanaka Soichiro, executive]

Hello, my name is Tanaka. I would like to present ENEOS' financial results for FY 2021 and outlook for FY 2022.

Please turn to Page 17. For the FY 2021 financial results, operating income increased by JPY 200.1 billion from the previous year to JPY 415.6 billion. Absence of onetime loss we booked last year related to the optimization of petroleum product production and supply network, better profitability in our upstream business with a rise in resource prices, temporary improvement in clean fuel and export margin owing to a positive time lag and steady sales of advanced material all contributed to substantial increase in profit. The lower side of the page is our forecast. For FY 2022, positive time lag for margin due to soaring resources price will disappear, and gain from the U.K. upstream business will fall off, which lead us to expect a decline in profit. However, we anticipate recovery in refinery operation and copper production volume as well as profit contribution from the elastomer business, which we acquired from JSR. Therefore, we believe the actual profitability is improving.

Please turn to Page 18 on index first. Dubai crude oil prices continued its upward trend on the back of expectation for economic recovery due to the progress of COVID-19 vaccinations. At the beginning of the fiscal period, the crude oil price started to rise from $62 per barrel and towards the end of the period, they surged to $128 due to the growing international tensions arising from Russian invasion of Ukraine. Currently, the oil prices are trading at above $100 level, but our assumption for FY 2022 is $90 per barrel. Copper prices rose from $4.01 per pound at the beginning of the fiscal year, and the prices remain firm on the back of global monetary easing and the expectation for the rise in demand as the economy recovers in China, the largest copper consumer. As a result, copper prices reached a record high at $4.87 at one point and traded at $4.69 as of end of March. Currently, it is trading at $4.10 level. Our assumption for FY 2022 is $4.50 for April - June quarter and $4.10 for July onwards.

Next, on to Page 19. Because of COVID-19 impact, domestic demand is still not fully recovered. However, clean fuel margin index remained firm. In March clean fuel margin expanded substantially because of a positive time lag as oil prices rose sharply. Perhaps the margin index while correlating to the demand supply situation centering in China improved year-on-year on an annual average basis. However, we are not yet on a full-fledged recovery mode and the index remained at lower level.

Please refer to Page 21. I would like to give you details of our financial performance. Operating income for FY '21 was JPY 785.9 billion, and the inventory valuation effect owing to the surge in oil prices amounted to JPY 370.3 billion. Operating income, excluding valuation effect increased JPY 200.1 billion compared to the previous year to record JPY 415.6 billion. Net income attributable to owners of the parent was up JPY 423.1 billion from the previous year to JPY 537.1 billion.

On Page 22, we show operating income by segment. The detail will be discussed using step chart from the next page onward. The right-hand side column on this slide shows the revised forecast we announced in March. Compared to the revised forecast of JPY 410 billion, operating income, excluding inventory valuation, the actual figure was JPY 5.6 billion higher.

Please refer to Page 23. Operating income, excluding inventory valuation for the energy segment was up JPY 24.8 billion year-on-year to JPY 107.2 billion. The subsegment breakdowns are shown here. Petroleum products was up JPY 2 billion year-on-year. The sales volume declined JPY 2.1 billion as domestic sales marginally due mainly to lower kerosene sales impacted by higher temperature in early spring and autumn while export increased. Absence of onetime loss, which we incurred last year due to the reorganization of refineries resulted in positive JPY 53.9 billion. And as for margin and expense-related items, it was negative JPY 49.8 billion. This is because our clean fuel export margin improved, owing to a positive time lag. It was negatively impacted from refinery operation travel in the first half and increases in expenses.

Next on petrochemicals, operating income increased by JPY 19 billion year-on-year. The volume impact was positive JPY 1.6 billion. As for margin and expenses, while margins for the paraxylene deteriorated, benzene improved and expense declined versus last year to record positive JPY 17.4 billion. For electric power, increased power volume sales for the residential use and the rise in fuel cost adjusted unit price were the positive factors. Furthermore, while JEPX price rising further from the previous year, we have increased direct and negotiated procurement ratio and lowered the dependency on it allowing us to see JPY 8.2 billion improvement year-on-year. We used JEPX pricing for the internal transfer prices. Therefore, rising JEPX price is reflected positively on refinery power generation side and included in petroleum products subsegment, but partially offset in overall energy segment. For materials, operating income declined JPY 4.4 billion year-on-year as lubricants margin deteriorated temporarily due to mainly to time lag effect.

Please turn to Page 24. Operating income in E&P segment was JPY 97 billion, an increase of (sic) [ from JPY 94.2 ] billion year-on-year. Resource price impact, the main factor behind the income increase was positive JPY 52.4 billion due to higher oil and gas prices. Profit and loss related to the sale of the U.K. business was the positive JPY 52.2 billion including foreign currency translation adjustments in addition to the amount finalized up to the third quarter. The sale price was calculated using the end of March 2021 as the base date and finalized at the end of March 2022.

Please turn to Page 25. Operating income in the metals segment was JPY 158.2 billion, an increase of JPY 80.1 billion year-on-year. From the left, in factual materials, thin film materials and others, Sales volume of advanced materials increased by JPY 23.4 billion, mainly due to increased demand for data communications. In mineral resources, production volume at the Caserones and other mines in which we hold concessions decreased, but prices of copper and other resources rose sharply, resulting in an increase of JPY 37.2 billion. Smelting and recycling posted an increase of JPY 13.7 billion, mainly due to higher metal prices and sulfuric acid prices as a byproduct.

Please see Page 26. Balance sheet and cash flow. First, cash flow. Please see the dotted line on the right-hand side, excluding the impact of lease accounting. Operating cash flow for 2021. Operating income, excluding inventory valuation, was JPY 415.6 billion and depreciation and amortization was JPY 252.2 billion, while working capital and other was negative JPY 538.1 billion, mainly due to an increase in working capital caused by soaring resource prices and yen depreciation. This resulted in a cash inflow of JPY 129.7 billion. Investing cash flow was a net cash outflow of JPY 349.9 billion due to investments such as Japan Renewable Energy acquisition, resulting in a free cash flow of JPY 220.2 billion. Net cash flow, including dividend payments was a net cash outflow of JPY 446.8 billion.

Next is the balance sheet. Please take a look at the table on the left. Net interest-bearing debt, which is interest-bearing debt minus cash and cash equivalent as of the year-end in the upper right dotted balloon increased JPY 567.1 billion from the end of the previous year to JPY 2,185 billion, reflecting a negative net cash flow of JPY 446.8 billion mentioned earlier and the succession of debt from the acquisition of Japan Renewable Energy. As a result, the net debt-to-equity ratio increased to 0.68x from 0.59x. At the end of the previous period, the net debt-to-equity ratio would be 0.6x if the equity nature of the hybrid bond issued last June were taken into account. I will now present our full year forecast for fiscal 2022.

Please turn to Page 29. The prices are based on Dubai crude oil price of $90 and a copper price of $4.50 from April to June, $4.10 from July onwards and $4.20 for the full year. Exchange rate is assumed to be JPY 120. Based on these index figures, we have set our full year operating income forecast for fiscal 2022 at JPY 340 billion, down JPY 445.9 billion from the previous year. Excluding inventory valuation impact, we have set our operating income forecast at JPY 340 billion, down JPY 75.6 billion. Net income attributable to owners of the parent is projected at JPY 170 billion, a decrease of JPY 367.1 billion.

On Page 30, we show operating income by segment. More details are provided in the step chart starting on the next page.

Please turn to Page 31. Excluding inventory valuation impact in the Energy business, operating income is projected at JPY 90 billion, a decrease of JPY 17.2 billion from the previous year. First, petroleum products is expected to be down by JPY 43.2 billion compared to last year despite a volume increase, mainly exports and an improvement in refinery utilization from last year due to the significant time lag seen last year has been eliminated. Next, in petrochemicals, we expect a JPY 4.8 billion increase due to an increased sales volume. In electric power, we expect a decrease of JPY 4.8 billion, taking into account the current high level of procurement costs. As mentioned earlier, the increase in the JEPX price assumption due to internal transfer pricing is included in petroleum products as a positive impact. In Materials, we expect an increase of JPY 28.2 billion due to the contribution to earnings of JPY 11.5 billion from the elastomer business acquisition in addition to the increased earnings due to better margins in lubricants and needle coke.

Please turn to Page 32. Operating income in E&P business is expected to improve by JPY 33.2 billion due to higher resource prices. But the segment as a whole is expected to decrease by JPY 27 billion year-on-year to JPY 70 billion, mainly due to the reversal of gains related to the sale of the U.K. business.

Next, on Page 33. Operating income in the metals is expected to decrease by JPY 28.2 billion from last year to JPY 130 billion. First, functional materials, thin film materials and other is expected to increase by JPY 2.5 billion due to factors such as increased sales resulting from firm data communication demand. In Resources, we assume a copper price decline from $4.69 at the beginning of the year to $4.10, but we expect a JPY 7.9 billion increase by restoring annual production at the Caserones to 152,000 tons, the pre-COVID level. The smelting and Recycling segment is expected to post a JPY 9 billion year-on-year decline mainly due to lower prices for copper and precious metals. In addition, we expect an increase in expenses of approximately JPY 30 billion due to onetime expenses not incurred in the previous fiscal year and other factors.

Let me go over operating cash flow for 2021 on Page 34. Please see figures excluding the IFRS 16 impact circled by the dotted line on the right. We project a cash inflow of JPY 510 billion due to operating income of JPY 340 billion, excluding inventory valuation impact and a decreased working capital by lower resource prices. Cash outflow for investment is estimated at JPY 620 billion. As a result, free cash flow is expected to be JPY 110 billion in cash outflow. Net cash outflow is expected to be JPY 330 billion, including JPY 100 billion for share buybacks.

Please refer to Page 35 and beyond later for reference, which includes assumptions, sensitivities and topics for fiscal 2021.

This concludes my explanation. Thank you for your attention.