Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2019-Q2

[Hiroshi Kiriyama, executive]

Good morning. Thank you very much for joining us for our presentation on the results for second quarter of fiscal 2018 despite your busy schedule. I'd like to explain about the financial results for FY 2018. Please turn to Page 2.

In the first half of fiscal 2018, although we were affected by regular maintenance at Chiba Refinery and a petroleum plant, profitability improved by securing an appropriate margin of petroleum products and increasing crude oil production of Hail Oil Field. As a result, consolidated ordinary profit, consolidated ordinary profit excluding the impact of inventory valuation and quarterly net profit renewed record highs, respectively, in this second quarter under review.

By segment basis, in petroleum business, while proper margin was secured, regular maintenance at a refinery and the suspension of equipment caused by a trouble affected the results, and ordinary profit excluding the impact of inventory valuation was JPY 12.6 billion, down JPY 7.7 billion year-on-year. Petrochemical business enjoyed a strong market. However, the sales volume decreased due to the regular maintenance at a plant and recognized ordinary profit of JPY 12 billion, down JPY 4.7 billion year-on-year. While oil exploration and production business was affected by ESP pumps troubles in existing oil fields, the crude oil price rose and Hail Oil Field has continued production at full capacity since January 2018. And its ordinary profit was JPY 28.5 billion, up JPY 19.5 billion year-on-year. As a result, we could record consolidated ordinary profit of JPY 78.7 billion, up JPY 35.3 billion year-on-year. And consolidated ordinary profit excluding the impact of inventory valuation was JPY 56.5 billion, up JPY 7.2 billion year-on-year. Net profit of the second quarter was JPY 40.4 billion, up JPY 18 billion year-on-year. All items achieved record highs for second quarter results.

Let me explain our policy for second half of FY 2018 by business category. In petroleum business, we will maintain an appropriate margin and raise competitiveness by pursuing high operating ratio at refineries. In addition, we will further increase our earning power through alliances with refineries of other companies, et cetera. In petrochemical business, we will operate highly competitive ethylene production equipment at full capacity. In oil exploration and production business, we will increase earnings by maintaining maximum production at the Hail Oil Field. In wind power generation business, we will promote the development of wind farms for Watarai second phase in Mie Prefecture and for Himekami in Iwate Prefecture to start operations in FY 2019. Our business in FY 2018 is performing successfully with favorable business environment and our self-help efforts.

Page 4 is about revision of full year earnings forecast and the dividend for FY 2018. The full year forecast of FY 2018 was revised based on the actual results of the first half. The assumption we used for the second half forecast is Dubai crude oil price is $75 per barrel and the exchange rate is JPY 110 to the dollar. And we estimate consolidated ordinary income excluding the impact of inventory valuation as JPY 133 billion, and net profit is JPY 83 billion. And both items are expected to post record highs.

As for dividend, although the full year earnings forecast is estimated to exceed the announcement in May this year, we plan to pay a dividend of JPY 50 per share based on the comprehensive consideration of the group's financial position, investment strategy and other factors.

We intend to improve our financial position as soon as possible and return to our shareholders based on our group profitability and financial status and strive for further growth. We will continue our efforts to improve our financial position and competitiveness of each business as we aspire for a good company employees feel proud of and a sustainable company with continuous growth. We’re determined to achieve the target for this fiscal year with company-wide efforts.

That is all for my part of explanation.

[Unknown Executive]

Thank you, Mr. Kiriyama. Next, Mr. Uematsu, our Senior Executive Officer, will take over.

[Takayuki Uematsu, executive]

Now I'd like to start my explanation of results for second quarter of FY 2018 and overview of full year forecast for FY 2018. Page 6 shows consolidated income statements. Operating profit grew JPY 41 billion year-on-year to JPY 79.1 billion, as indicated at line 2. And ordinary profit at line 4 was up JPY 35.3 billion year-on-year to JPY 78.7 billion. Profit attributable to owners of parent, described at line 8, increased JPY 18 billion year-on-year to JPY 40.4 billion. Ordinary profit excluding the impact of inventory valuation at line 10 grew JPY 7.2 billion year-on-year to JPY 56.5 billion mainly due to increased profit in oil exploration and production business.

Please turn to Page 7. This page shows breakdowns of ordinary profit excluding the impact of inventory valuation for each segment. I will elaborate more with the waterfall chart on the next page.

Please move on to Page 8. I will explain about the analysis of year-on-year increase of JPY 7.2 billion by segment for consolidated ordinary profit excluding the impact of inventory valuation. Petroleum business is indicated by green, and it declined by JPY 7.7 billion. This is because regular maintenance at a refinery and suspension of equipment caused by a trouble despite proper margin was secured in this segment. As indicated above, margins and sales volume increased by JPY 7.2 billion, and its breakdowns are JPY 15.4 billion by improvement of margin or JPY 2.4 improvement from the previous year for 4 main products. Negative JPY 8.2 billion was recognized because of the impact from increased import and purchase by regular maintenance at Chiba Refinery as well as decreased export due to suspension of equipment.

Expenses and others are negative JPY 14.9 billion, and this is mainly because of increased fuel consumption cost with higher crude oil prices, regular maintenance expenses for Chiba Refinery and allowance for future regular maintenance cost we started to post in the second quarter.

Petrochemical business, in yellow, reduced its profit by JPY 4.7 billion due to decreased sales volume affected by the regular maintenance of a plant. Profit of oil exploration and production business, in orange, increased by JPY 19.5 billion because of higher crude oil prices and production volume increase attributable to the Hail Oil Field despite ESP pump failures in some existing oil fields. Others, including wind power generation business, recorded JPY 0.1 billion increase, and this is mainly from the profit increase of EcoPower.

Let me move on to Page 9. Page 9 shows the outline of consolidated cash flows and consolidated balance sheet. In consolidated cash flow statement, line 1 is for cash flows from operating activities. While inventory was built up for rising demand in winter, positive quarterly net income was posted in this item to record JPY 14.1 billion in total. Line 2 is cash flows from investing activities, and it was negative JPY 42 billion mainly due to facility renewal implemented during regular maintenance at a refinery and a petrochemical plant. As a result, free cash flow balance turned negative, but cash flows from financing activities, indicated at line 4, was recognized as JPY 30.4 billion, and this compensated the negative free cash flow.

Next is about consolidated balance sheet. Total assets increased by JPY 108.5 billion to JPY 1,796.8 billion as a result of higher crude oil prices, increased inventory, acquisition of tangible fixed assets by regular maintenance, et cetera.

Net worth grew JPY 36.3 billion to JPY 275 billion mainly due to posting of quarterly net profit. Net worth ratio was improved by 1.2 points to 15.3%. Net DE ratio was improved by 0.2 point to 2.1. We will continue to make efforts to improve our financial status.

Please turn to Page 10 for the overview of consolidated capital expenditures. Capital expenditures in the second quarter of FY 2018 decreased by JPY 14.3 billion year-on-year to JPY 36.9 billion as we completed large-scale investments such as the Hail Oil Field project.

Let me explain by segment. In petroleum and petrochemical businesses, facility renewal and capital investment for future growth were implemented during regular maintenance, and this increased capital expenditures year-on-year in these segments. Oil exploration and production business decreased capital expenditures year-on-year as we completed the development of Hail Oil Field. Others recognized a relatively large year-on-year decrease of JPY 10.4 billion, and this is because IPP-related investments completed in the previous fiscal year.

This concludes my explanation on the financial results of the second quarter of FY 2018. Now I'd like to move on to the overview of the full year forecast for FY 2018. Page 12 shows the revised forecast for FY 2018. Ordinary income excluding the impact of inventory valuation at line 1 is estimated as JPY 133 billion, with an increase of JPY 12 billion from the previous announcement. Consolidated ordinary income is estimated to increase by JPY 36 billion from the previous announcement to JPY 157 billion, including the impact of inventory valuation of JPY 24 billion. I will explain more details of ordinary income excluding the impact of inventory valuation by segment with a waterfall chart on the next page. Profit attributable to owners of parent is estimated as JPY 83 billion, increased by JPY 26 billion from the previous announcement. Please refer to line 8 and after for precondition and sensitivity.

Now please turn to Page 13. Page 13 shows a waterfall chart to explain the difference of JPY 12 billion from the previous announcement by segment for consolidated ordinary income excluding the impact of inventory valuation. Petroleum business expects JPY 5 billion increase by efforts to secure proper margin by improving supply-demand relationship in domestic market despite expected impact from equipment failures and allowance for future regular maintenance. Petrochemical business estimates JPY 2 billion increase from the previous announcement mainly because of declined repair expenses. Oil exploration and production business plans to decrease production volume from the previous announcement, but current estimate is to increase by JPY 5 billion due to rising crude oil prices. Others, including wind power generation, is expected to be unchanged from the previous announcement.

That is all for the brief explanation of results of second quarter of FY 2018 and the full year forecast for FY 2018.