ENEOS Holdings Inc
TSE:5020
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ENEOS Holdings Inc
Earnings Call Analysis
Q4-2024 Analysis
ENEOS Holdings Inc
In fiscal 2023, ENEOS Holdings significantly improved its financial performance. The year saw a remarkable increase in operating income excluding inventory valuation, climbing by JPY 146.7 billion to reach JPY 393.2 billion. This surge was driven by improved margins for petroleum products and petrochemicals, as well as the reversal of negative time lags in petroleum product pricing. Looking ahead to fiscal 2024, the company anticipates that operating income will remain flat despite expected growth in positive time lags and export margins due to efforts in improving refinery operations and procurement strategies in the electricity segment.
ENEOS has made strides in reducing unplanned capacity loss (UCL) in its refinery operations. Despite missing the 5% target with a 7% UCL for fiscal 2023, the company saw improvement in the fourth quarter, achieving a 4% UCL which it aims to maintain in fiscal 2024. Concurrently, business process reengineering (BPR) initiatives are advancing, aiming to solidify an earnings foundation and expand equity spreads.
ENEOS is making significant progress in its energy transition initiatives. One notable development is the selection of a limited liability company represented by ENEOS Renewable Energy to produce offshore wind power in Happo town and Noshiro City, Akita Prefecture. These efforts are key steps in establishing ENEOS as a leader in the renewable energy sector.
The company has undertaken significant governance reforms starting in April. It dissolved the substantive business holding structure and introduced a group Chief Officer System. By June, ENEOS plans to increase the ratio of outside directors to over 70%, with the Board Chairman to be chosen from among them. These changes aim to strengthen business collaboration, optimize resource allocation, and enhance portfolio management while ensuring progress on essential ESG issues.
CFO Tanaka provided a detailed financial analysis for fiscal 2023 and forecasts for fiscal 2024. The average price of Dubai crude oil dropped to $82 per barrel, down from the previous year's $93. LME copper prices also fell slightly to $3.79 per pound. Despite these declines, the petroleum products margin index showed robust year-on-year improvement due to enhancements in margin trajectories free from the negative time lag effects of fiscal 2022.
The energy segment saw an increase in operating profit, excluding inventory valuation, by JPY 165.1 billion, driven primarily by petroleum products and chemicals. Renewable energy also reported improvements, with a positive impact of JPY 26.8 billion. On the downside, the electricity segment faced challenges with a JPY 19.7 billion decline due to operational issues at Muroran Biomass and lower JEPX prices.
ENEOS has focused on optimizing its balance sheet, improving its net debt-to-equity ratio to 0.46x by the end of March 2024 through asset efficiency and capital structure adjustments. The company announced a JPY 200 billion share buyback, achieving a forecasted total return ratio of 126% for fiscal 2024, reflecting its commitment to shareholder returns.
Despite the improved ROE in fiscal 2023, ENEOS acknowledges the need for continuous efforts to create equity spreads. This involves strengthening earnings power, optimizing capital structures, and advancing energy transition initiatives. These steps are paramount for gaining shareholder and investor trust, thereby enhancing corporate value. The company remains dedicated to presenting the outcomes of these efforts transparently to its stakeholders.
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This is Miyata, the Representative Director, CEO of ENEOS Holdings. I would like to express my sincere gratitude to all our shareholders and investors for your continued support and advice regarding ENEOS Group's business activities.
So now let's dive into the materials. Please turn to Page 4. Highlights of FY '23 results and FY '24 forecast. In fiscal 2023, in addition to the reversal of the negative time lag for margins in petroleum products and export margins improved actual margins for petroleum products and petrochemicals resulted in operating income excluding inventory valuation to go up by JPY 146.7 billion year-on-year to reach JPY 393.2 billion.
In fiscal 2024, our positive time-lag in petroleum products and export margins is expected to be grown, but operating income, excluding inventory valuation, will most likely remain flat year-on-year, mainly due to improvements in refinery troubles and procurement portfolio review in the electricity segment.
Next is the progress and outlook of the third midterm management plan. Please turn to Page 6. Let me go over UCL, the unplanned capacity loss, a slowdown of refineries, and they were covered last year and again this year. The UCL performance for the fiscal 2023 was 7% failing to accomplish a target of 5%. Up until now, we have categorized programs into 4 clauses and have continuously implemented troubleshooting measures. As a result, we were able to significantly reduce operational induced troubles that have been an issue in the second quarter.
And you see our performance in the fourth quarter alone improved to 4%, which is maintained in April and even after the Golden Week holidays. We'll do our best to achieve our 4% target for fiscal 2024. Please see the bottom of the Page 6. We are also making good progress in BPR, business process reengineering, and we are reinforcing the activities again this year to make further progress. These efforts to establish a solid earnings foundation will contribute to the expansion of the so-called equity spread. We'll continue to promote and strengthen these efforts.
Please go to Page 7. This is the progress of initiatives to realize energy transition. This slide summarizes what we previously announced in the press releases for your reference. As highlighted in the center of the slide, a limited liability company represented by ENEOS Renewable Energy has been selected as an offshore wind power producer in Happo town and Noshiro City in Akita Prefecture. In this way, we are steadily moving forward with each project to establish ourselves as a leading player in the industry.
Please turn to Page 8. Now I will cover the progress on our nonfinancial targets. First is the enhancement of our governance. Starting in April of this year, we dissolved the substantive business holding company structure between the holdings and the ENEOS and established the group Chief Officer System. Under the strong leadership holdings company, we will promote the growth of each business by strengthening collaboration between major operating companies, optimizing resource allocation and promoting portfolio management.
In addition, as a new structure after the General Meeting of Shareholders in June of this year, we'll increase the ratio of outside directors on the board to 70% or more, and the Board Chairman will be elected from among the outside directors. In addition, in order to carefully select and execute investments for realizing energy transition and to ensure progress on important ESG issues, including [ TERO ] measures to prevent recurrence of the recent scandal, we reorganized our skills required for our directors and selected applicable candidates. Please read Slide 37 for more details later.
Our Board of Directors, which is comprised of highly skilled directors will monitor our business to strengthen governance, improve corporate value and promote the realization of our long-term vision.
Please go to Page 9. This slide explains our efforts to reduce greenhouse gas emissions for your reference, and we are making steady progress towards the goals setting a carbon neutral basic plan. Please read through the slides for more details. In addition, in order to improve employee engagement in response to the recent scandal, we are making good progress as declared to rebuild an environment where employees can work with peace of mind and pride.
We analyze the true causes of harassment through employee interviews and questionnaires and set goals and actions to be taken in each short, medium and long-term time frame. We have also given feedback to our employees and that we have repositioned this issue as an important management issue that must be seriously addressed and have promised to make changes from the top management. We'll rebuild an environment that is comfortable and rewarding to work and by having repeated dialogues with employees and making decisions that are better for the company based on diverse opinions.
We plan to continue to use opportunities such as integrated reports to explain the progress of our initiatives to our stakeholders.
Please go to Page 10. Now let me move on to our financial target results and forecasts. All financial targets are on track to be achieved in the final year of the third medium-term management plan. On the other hand, we also recognize that there are challenges to further improve profitability and increase corporate value.
Now on Page 11, and this is ROIC results for fiscal 2023 and the forecast for fiscal 2024 for each business. In fiscal 2023, ROIC was lower than WACC in the high-performance materials, electricity and renewable energy segments. We are currently proceeding with strategies that suit each business characteristics and business cycle. High Performance Materials business has been continuously exposed to difficult situations due to factors such as the deterioration of the external environment, but will prioritize our return improvements by improving selling prices and cost reductions.
Electricity ROIC is expected to exceed WACC as Goi thermal power plant coming into operation in fiscal 2024, which allows low-cost power generation in addition to the measures we've taken to improve profitability. Renewable energy is in a growth period of its business cycle. And as depreciation costs are large, ROIC is expected to be lower than WACC for the time being.
However, as described in the slide, profits, excluding depreciation costs and EBITDA, are surely generated, which gave us confidence in growth. However, as the electricity and renewable energy business have incurred large impairment losses considering the size of the segment, we believe that we need to review our investment discipline as a holding company, which I will explain later.
In the Petroleum Products & Metals segment, we will, of course, proceed with initiatives from the perspective of not only growing the return in the numerator, but also reducing the denominator, I see the invested capital.
Please see Page 12 for cash flow and investment plans. In fiscal 2023, we reviewed our business and own assets for asset efficiency and portfolio and the amount of asset sales reached JPY 184.9 billion, which exceeded the amount planned in the medium-term management plan. In particular, metal business has accelerated the transformation from a machine industry company to a technology-based company. Please refer to the medium- to long-term business growth strategy and business targets announced by JX Advanced Metals today for details.
Furthermore, in terms of capital investment, we follow investment disciplines that match the business characteristics of each company, and we also conduct cold eye reviews for large and important projects.
ENEOS investment discipline is described on Slide Page 38, and we are currently reviewing our investment discipline as a holdings company based on the review of our group management structure and past impairment losses.
Please turn to Page 13. Balance sheet management. As I explained earlier, we are working to review our business portfolio for asset efficiency as well as pursue an optimal capital structure and lower capital costs. And let me skip details of the main initiatives for fiscal 2023, as they are described in the slides, but on the left side of the balance sheet, we'll increase the ratio of business assets with higher asset efficiency.
On the right side, we are pursuing the optimization of the balance between debt and equity. And through the efforts described in the slide, the net debt-to-equity ratio has improved by about 10 basis. By continuing to promote balance sheet management, we'll strive to balance financial softness and business growth and improved corporate values.
Please go to Page 15. As explained so far, we have improved our financial position in fiscal 2023 through the pursuit of capital efficiency and portfolio replacement and our net debt-to-equity ratio at the end of March 2024 became 0.46x. So we have decided to conduct the share buyback was JPY 200 billion today.
Please also see today's disclosure document for detailed schemes. As a result, the total return ratio for fiscal 2024 alone is expected to be 126% and the average total return ratio for fiscal '23 and fiscal '24 is expected to be 85%. Going forward, we'll continue to position the return of profits to our shareholders as an important management issue, and we'll continue to engage in dialogue with our shareholders while maximizing our corporate value over the medium and long term.
Please turn to Page 17. As far as the progress goes with initiatives aimed at enhancing corporate values, a large part is already covered when we explain the progress of the third midterm management plan. Although ROE has improved significantly since last year, still some issues are remaining for continuous creation of equity spread. And as a result, our analysis shows that price-to-book ratio remains to stay below 1x.
We believe it is important to create equity spreads continuously by strengthening our earnings power and pursuing an optimal capital structure and by steadily progressing our efforts towards the energy transition and promoting dialogue with the market to reduce the cost of capital and improve the expected growth rate in order to gain the trust of our shareholders and investors.
As the CEO of Holdings, I will lead efforts to improve corporate value by achieving the KPIs in our third midterm management plan, promoting governance reform and strength in human capital and presenting the results to stakeholders.
This is all for my presentation. Next, let me pass the floor to CFO, Tanaka, for the details of the financial results.
This is Tanaka. I will explain financial results for the fiscal year 2023 and forecast for the fiscal year 2024. Please refer to Page 19. For fiscal '23, the full year average price for Dubai crude oil shown by the red dotted line was $82 per barrel, down $11 from the previous year. The price for LME copper shown by the yellow line was $3.79 per pound, down $0.09. The average exchange rate for fiscal '23 was JPY 145 to the dollar, a depreciation of JPY 10 from the previous year.
Please see Page 20. The left chart shows the Petroleum Products margin index. Excluding the effect of the reverse negative time lag that occurred in fiscal '22, the margin trajectory remained strong, showing the year-on-year improvement of about JPY 3. The Paraxylene margin index on the right shows a slight improvement from the previous year as the impact of COVID-19 has abated.
Pages 22 and 23 show an overview of financial results and operating income by segment.
I will provide further details with waterfall charts from Page 24. For energy, operating profit, excluding inventory valuation increased JPY 165.1 billion from the previous year to JPY 181.3 billion. By subsegment, from the left, Petroleum products posted an increase of JPY 167.4 billion from the previous year.
Sales volume decreased JPY 27.7 billion year-on-year mainly for exported products. Margins expenses increased JPY 195.1 billion. The breakdown is as follows. First, the time lag for petroleum and exported products had a positive impact of JPY 93 billion. Excluding this, the margin improved by JPY 158 billion, mainly in petroleum and chemical products. Also, the absence of the gain on the sale of land, which we recorded in the previous year, resulted in a negative onetime impact of JPY 39 billion.
High Performance Materials decreased JPY 9.4 billion year-on-year, mainly due to the absence of onetime profit we recorded in the previous year. Electricity deteriorated by JPY 19.7 billion due to the trouble and impairment losses at Muroran Biomass and the decline of JEPX. Renewable energy improved by JPY 26.8 billion, mainly due to the reversal of the impairment losses recorded in the previous year.
Please turn to Page 25. Operating profit for oil and natural gas E&P was JPY 91.5 billion, down JPY 22.5 billion from the previous year. From the left, sales volume increased JPY 8.2 billion. The main driver was Tangguh LNG project in Indonesia, where we completed the capacity expansion and the commenced shipments. Resource prices had a negative impact of JPY 35.4 billion due to the lower oil and gas prices. Foreign exchange expenses and others had a positive impact of JPY 4.7 billion. Included in this number are yen depreciation and onetime accounting effect of the acquisition of Japan Drilling Company.
Please see Slide 26. Operating profit for metals increased JPY 12.4 billion to JPY 81.1 billion. And that for semiconductor materials and ICT materials decreased year-on-year, mainly due to volume decline resulting from inventory adjustments with declining IT demand. In Metals and Recycling, despite the absence of the gain from the sale of Caserones Copper Mine and the valuation loss with the partial sale of shares in Pan Pacific Copper profit increased due to favorable ForEx impact and reversal of valuation loss recorded in the previous year associated with the decision to sell Caserones.
On Page 27, I will explain the balance sheet and cash flows. Starting with cash flows on the right. Please take a look at the numbers circled by the dotted line, which excludes IFRS 16 leases. Operating cash flows for fiscal '23 resulted in a cash-in of JPY 838.9 billion, excluding the impact of holidays. Please note that other includes JPY 120 billion of net advance tax payment for consumption tax related to subsidies for petroleum products. Investing cash flows resulted in a cash out of JPY 241 billion. JPY 158.7 billion of other includes proceeds from the sale of interest in Caserones Copper Mine and assets in Energy business.
As a result, free cash flows resulted in a cash-in of JPY 691.1 billion, or JPY 597.9 billion, excluding the impact of holidays. Net cash flows with dividend payments factored in, resulted in a cash-in of JPY 577.1 billion. With these reflected, as shown in the balance sheet on the left, net interest-bearing debt, excluding cash on hand, was JPY 2 trillion, a decrease of JPY 760.1 billion from the end of the previous term, a net D/E ratio improved to 0.46x.
Next, I will explain forecast for fiscal '24. Please refer to Page 29. Our assumptions include Dubai crude oil price of $80 per barrel, LME copper price of $3.80 per pound and exchange rate of JPY 145 to the dollar. Based on these assumptions, we're focusing operating income of JPY 400 billion, excluding inventory valuation and net profit attributable to owners of the parent of JPY 210 billion.
Next, I will explain changes in segments following the separation of companies. Please see Page 30. With the spin-off of ENEOS Corporation's 3 businesses, High-Performance Materials, Electricity and Renewable Energy, these subsegments under Energy segment will be elevated as segments starting fiscal '24. Please read through the details when you have time.
I will skip Page 31 as the overlaps with the following pages with waterfall charts.
Please turn to Page 32. We forecast operating income for petroleum products to be JPY 190 billion, on par with the previous year level due to unwinding positive time lag impact from the previous year and deterioration of export market conditions, offset by suppression of refinery problems and export volume growth. We expect operating income for High-Performance Materials to increase by JPY 3.7 billion year-on-year to JPY 11 billion due to a recovery in volume and growth of functional materials despite an increase in expenses in elastomer business.
Please turn to Page 33. We expect operating income for Electricity to increase by JPY 12.1 billion year-on-year to JPY 6 billion, driven by a reform of procurement portfolio and reduction in procurement costs with the launch of Goi thermal power plant, while we expect some negative impact of fuel adjustment costs. Operating income for renewable energy is expected to improve by JPY 8.6 billion year-on-year to a loss of JPY 3 billion due to expansion of power generation capacities and unwinding of the negative impact of impairment losses recorded in the previous year despite an expected increase in operating expenses for the power plant.
Please see Page 34. Operating income for oil and natural gas E&P is expected to decrease by JPY 11.5 billion to JPY 80 billion, while capacity expansion in Tangguh, Indonesia, will make a full year contribution driving the sales volume up. The expansion will also drive higher operating expenses, equipment and labor costs.
Operating income for Metals is expected to decrease by JPY 11.1 billion to JPY 70 billion, though we expect a recovery in volume with inventory adjustments coming to an end in supply chains of semiconductor and ICT materials. We expect production cutbacks at copper mines we invested in and higher operating costs and the absence of the gain from the sale of shares in Pan Pacific Copper.
Page 35 shows cash flows forecast for fiscal '24. Please take a look at the numbers circled by the dotted line that exclude the effect of IFRS leases. We are forecasting operating cash flows for fiscal '24, excluding the impact of holidays to be a cash-in of JPY 697.2 billion and investment cash flows to be a cash out of JPY 454 billion due to planned capital investments of JPY 493 billion. As a result, free cash flow is excluding the impact of holidays, to be a cash-in of JPY 243.2 billion, a negative JPY 300 billion of dividends and other includes a negative JPY 230 billion for the purchase of treasury stocks.
This concludes my explanation. For your reference, Page 36 and the following pages provide skill metrics of the director nominees to be proposed at Annual General Meeting in June, our investment policy, key assumptions and sensitivity analysis. We hope you will find it useful. Thank you for your attention.