Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2021-Q1

[Takayuki Uematsu, executive]

Let me start my presentation on the financial results for the first quarter of fiscal 2020.

This is the agenda. In the next page is the discussion on the impact of the COVID-19 pandemic. The upper part shows measures taken by the company. In summary, we are maintaining smooth operations at refineries and others and experienced no major impact from COVID-19.

The lower part shows impact on the market. There are 3 points. The crude oil market kept rising, as you are all aware, from $20 in April to $30 in May and $40 in June. For the petroleum product market, please refer to the line chart below. The blue line shows the gasoline demand. After bottoming out in April and May, the gasoline demand entered a recovery phase in June and the upward trend is maintained so far in July and August. In the meantime, the jet fuel demand, shown by the red line, remained at around the bottom in April through June. It has gone up slightly since June, however, it is far from a full-fledged recovery.

For the petrochemical market, we are showing the spread between paraxylene and naphtha. Although the demand has been gradually recovering since the market remained in oversupply, the spread deteriorated significantly.

Now let me move on to the earnings forecast. First and foremost, we have kept the full year forecast unchanged this time. First, compared to the full year plan, there were both positive and negative factors. Positive factors included an increase in sales volumes of the 4 major petroleum products and a rise in crude oil prices in the oil exploration and production business. And the negative factor included the deteriorated market conditions in the petrochemical business.

Second, since the resolution of the COVID-19 pandemic has yet to be seen, the outlook is unclear. As such, the company has decided not to revise the earnings forecast at this time. The table below shows the company's forecast of the full year consolidated ordinary income announced at the previous analyst meeting. As shown here, consolidated ordinary profit is projected at JPY 30 billion and the profit attributable to owners of the parent is projected at JPY 14.5 billion, as shown on line 6. Those are unchanged from the previous announcement. The table on the right shows the assumptions of the forecast. The crude oil assumption was $29 on average, and the exchange rate assumption was JPY 105 to the dollar.

Now let me move on to the financial results for the first quarter. For the first quarter, due to our regular maintenance, the utilization of the Chiba Refinery was slightly less than 72%. I will give you the detailed results later. And so on this page, I will just give you a general summary. First, the impact of inventory valuation was negative JPY 34.2 billion. Second, despite the declining demand, our sales volume of 4 major products was up 11% year-on-year, driven mainly by expanded supply to Kygnus Sekiyu. Jet fuel sales declined year-on-year but our sales were kept at 50% of the previous year's level, whereas the market demand was only 34% of the previous year level on a nationwide basis. Although passenger flights were extremely sluggish, we had a higher exposure to cargo flights instead of passengers, so we were less affected by the current situation compared with the overall market. The capacity utilization rate, on a streaming day basis, was kept at a high level of 92%, as mentioned earlier.

Next is the results by segment. Starting with the petroleum business, ordinary profit, excluding the impact of inventory valuation was JPY 2.5 billion. Despite the reduced demand for jet fuel, following the spread of COVID-19 thanks to the expanded supply to Kygnus Sekiyu and increased sales of 4 major products as well as the improvement of in-house fuel cost, ordinary profit was up year-on-year.

The petrochemical business saw a decrease in ordinary profit to negative JPY 6.7 billion year-on-year, due to the weakening of the paraxylene market as well as the reduced sales volume caused by the regular maintenance of Maruzen Petrochemical.

The oil E&P business saw a decrease in ordinary profit to JPY 6.7 billion due to the decline in crude oil prices. The other segment saw an increase in ordinary profit of JPY 3.4 billion, owing to consolidated accounting and other factors.

I would like to recap on the P&L numbers on the next page. For the first quarter of fiscal year 2020, operating profit on line 2 was negative JPY 28 billion, down JPY 45 billion year-on-year. Ordinary income on line 4 was negative JPY 28.3 billion, down JPY 49.1 billion. Profit attributable to owners of the parent on line 8 was negative JPY 26 billion, down JPY 40.8 billion year-on-year. Impact of inventory valuation on line 9 was negative JPY 34.2 billion. As a result, ordinary profit, excluding the impact of inventory valuation on line 10, was JPY 5.9 billion, down JPY 12.7 billion year-on-year. Dubai crude oil price for the April to June quarter on line 11 was $31. Dubai crude oil price for the January-March quarter on line 13 was $51.

I will skip Page 7. Outline of consolidated ordinary profit by business segment.

Please refer to Page 8. The waterfall chart shows various analysis of consolidated ordinary profit. Starting with the petroleum business, we had JPY 1.1 billion for margin and sales volume and JPY 200 million for expense and others. The breakdown for margin was negative JPY 2.1 billion, which is broken down to negative JPY 1.5 billion for the 4 major products and a negative JPY 600 million for other products.

Margin dropped due to the decline in crude oil prices in April. The impact was not absorbed through June, that's why the margin for 4 major products was down JPY 1.5 billion, including the impact of time lag. For other products, margin dropped by JPY 600 million due to a decline in jet fuel volume as well as in pricing.

The sales volume factor was positive JPY 5.1 billion, mainly driven by the 4 major products, which grew 11% from the previous year. Imports and purchases increased by JPY 700 million due to the regular maintenance at the Chiba Refinery, while the exports decreased by JPY 1.2 billion, which were both negative factors for ordinary profit, also due to the regular maintenance of the Chiba Refinery. All together, the margin and the sales volume factor was positive JPY 1.1 billion. Expense and others was positive JPY 200 million.

In terms of the breakdown, in-house fuel cost was positive JPY 3.4 billion, thanks to lower crude oil prices and a lower throughput due to the regular maintenance. Expenses were negative JPY 3.2 billion, reflecting an increase in depreciation expenses and the reward points for cashless payments.

Moving on to the petrochemical segment. Ordinary profit was negative JPY 6.7 billion, down JPY 12.3 billion year-on-year. As for the breakdown, pricing was negative JPY 9.5 billion, as the sluggish petrochemical market affected both HCP and the Maruzen Petrochemical, who suffered from negative growth year-on-year. Volume was negative JPY 3.9 billion, mainly caused by the regular maintenance of Maruzen Petrochemical. Including expense and others, ordinary profit for the petrochemical business was negative JPY 12.3 billion.

Ordinary profit for the oil E&P business is down JPY 2.5 billion from JPY 9.2 billion to JPY 6.7 billion. Pricing was negative JPY 6.8 billion. This is due to the crude oil price declining $13 from $64 last year to $51 this year. Volume was positive JPY 5.2 billion due to the special factor of time lag from the previous year. Including expense and others, the oil E&P business, ordinary profit was down JPY 2.5 billion year-on-year. The other segment, which includes Cosmo EcoPower, was positive JPY 800 million.

Please turn to Page 9, outline of consolidated balance sheet. Line 4, net worth ratio was 13.3%, down 1.3 percentage points from the end of the previous fiscal year. Line number 6, net D/E ratio was 3.09, which is a deterioration of 0.68 from the end of the previous fiscal year.

Next, Page 10 shows the results of consolidated capital expenditures. The table on the right shows the results by the business segment for the first quarter of fiscal year 2020. There was a year-on-year increase for the petroleum and the petrochemical businesses shown on line 1 and line 2, respectively, caused by the regular maintenance. There was an increase in the other segment as well due to the EcoPower-related investments.

Next, Page 11 shows the forecast for full year consolidated capital expenditures. We are disclosing this for the first time because we couldn't share this forecast at the beginning of the fiscal year. The total CapEx for all segments is projected to be JPY 98.5 billion. That's the total for line 1 through line 5. The changes from the previous year are explained by the same factors as for the first quarter. For this fiscal year, we have minimized and delayed the timings of our CapEx plans wherever possible, especially the large-sized CapEx plan related to the water injection project of the Hail Oil Field that was postponed to a later year.

Another CapEx, which is pushed back, was ERP-related investments. Although we have minimized expenditures for this fiscal year in terms of cash flow, though, since many investments were carried out already in the previous year, we cannot reduce investing cash flow so dramatically within this fiscal year. I should also mention the ongoing group-wide cost reduction efforts, which are also reflected on the full year forecast just discussed.

With this, I would like to conclude my presentation. Thank you.