Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2021-Q2

[Hiroshi Kiriyama, executive]

Good morning. Thank you for taking the time out of your busy schedules to attend our financial results briefing for the second quarter of fiscal year 2020.

The topics I would like to cover today are: impact of COVID-19 pandemic, progress of the sixth consolidated medium-term management plan and the business environment and initiatives for the wind power generation business.

Please turn to Page 2. Here is a brief summary of my presentation. First, while the COVID-19 pandemic has not affected our operations or other aspects of business continuity, the decline in crude oil and product prices are going to have an impact on the financial results this year, though the company still expects to generate a certain level of profit.

Second, we are making a steady progress in implementing the initiatives under the medium-term management plan. Despite the crude oil price at the moment being lower than initial forecast, even in this environment, we expect to see an increase year-on-year in net income and continue to aim at achieving the targets of the mid-term business plan.

Finally, the third point, the company will promote wind power generation as a new business that will drive the growth in the next stage with the aim of becoming a leading company in the area of offshore wind power generation. I will give you more details on these 3 points, starting from next page.

Page 4, please. Let me elaborate on the impact of COVID-19, first, on business continuity and operations. The company has been implementing thorough crisis management in accordance with the company's crisis management regulation. As a result, there is no impact so far on business continuity, including refinery operations at this time. In addition, the Chiba and Yokkaichi refineries have completed their regular maintenance as just planned.

Next, let me explain the impact on market demand. The Dubai crude oil price has recovered since May due to OPEC+ production cuts. But since actual demand is still weak, it's hovering around $40 per barrel.

As for petroleum products, the domestic four-product markets have remained stable. National gasoline demand was 90% of the previous year's level. On the other hand, the jet fuel market has fallen sharply, mainly due to a significant drop in passenger demand. Demand has been slow to recover, falling to about 40% of the previous level nationwide.

As for petrochemical products, the market for aromatics, mainly paraxylene and benzene has fallen sharply. The supply-demand imbalance, which was disrupted due to the start of new capacities coming online in China has further deteriorated.

Lastly, we estimate that the impact on earnings will be negative in the first half of fiscal year 2020 at approximately JPY 45 billion, negative for the full year at approximately JPY 72 billion. Despite the significant impact, we expect to post ordinary profit, including inventory effect of JPY 27 billion and net profit of JPY 8.5 billion, including the impact of inventory valuation for the full year. Mr. Uematsu will give you more details later in his presentation.

Please move on to Page 6. We are making steady progress in implementing the various structural improvement measures of the medium-term management plan. We will continue to reinforce profitability, mainly in the oil refining and the distribution business and promote new businesses, mainly in the renewable energy business.

Page 7, please. In comparison with the medium-term management plan, we believe that there are both positive and negative factors for our earnings. First, factors that will increase profits. When the medium-term management plan was formulated, we assumed that the domestic petroleum product market would gradually decline, but it's been maintained at an adequate level due to changes in the supply demand environment, having a significant effect positively on both ordinary and net profit.

Next, factors that will reduce profits. When the medium-term management plan was formulated, we assumed that crude oil prices will continue to rise, but they have fallen and remained at a low level. This will have a large impact on ordinary profit. But the decline in net profit will be smaller due to the foreign corporate tax rate. Although there are some under -- unpredictable risks such as the prolonged impact of COVID-19, we believe that the factors just explained will contribute to higher profits on a net income basis.

Please move to Page 8. I would like to explain the outlook on capital expenditures and financial position. We will strictly manage the CapEx plan to achieve a cumulative total of JPY 360 billion, despite factors such as the second phase of Hail Oil Field development. As shown in the light blue bar graph, the first 3 years of the plan shows larger investments. And the second 2 years, smaller investments due to the effects of the scheduled regular maintenance and asset sale during the first 3 years. Whereas in the latter 2 years, the CapEx will be in line with the depreciation expenses generating a large free cash flow. In addition, due to the factors that increased net profit, mentioned earlier, the net D/E ratio shown in line graph is expected to reach the mid-term target of 1 to 1.5x.

Page 10, please. We believe that the environment surrounding our wind power generation business is changing for the better. The other day, Prime Minister clearly stated the goal of carbon neutrality by 2050. The next basic energy plan, which is under review at the moment is expected to include further expansion of renewable energy sources. The potential for wind power generation is particularly substantial, and we believe it will provide a tailwind for the promotion of our wind power generation business.

Please go to Page 11. The current capacity of our wind power generation is 263,000 kilowatts, which represents about a 7% market share. In addition, construction and development is underway at 4 onshore sites and 1 offshore site. Furthermore, we also have project participation in 3 sites in the general sea area: One in promotion zone, another in the promising zone and the other in the preparation stage zone. We are steadily expanding the scale of our business.

Page 12, please. As I mentioned earlier, we are already participating in a number of projects in offshore wind power, which is the main battlefield going forward. We expect offshore wind turbines alone to generate more than 600,000 kilowatts of power by FY 2030, which, when combined with onshore turbines, will reach 1 million to 1.5 million kilowatts.

In order to further expand the scale of our business, we are considering participation in a number of new projects, mainly offshore. And we aim to build a wind power generation business of more than 3 million kilowatts in the future to be a leading company in offshore wind, achieving sustainable growth.

In conclusion, we will continue to make the United effort to make our company a good company that employees can be proud of and a sustainable company that we can grow continuously. That's all I have.

[Takayuki Uematsu, executive]

Good afternoon. This is Uematsu. Please turn to Page 14, where I will discuss the financial results for the second quarter of fiscal year 2020. Consolidated ordinary profit, excluding the impact of inventory valuation for the second quarter of FY 2020 was JPY 19.1 billion, a decrease of JPY 16.9 billion year-on-year due to the negative impact of inventory valuation of JPY 12.6 billion. Consolidated ordinary profit was JPY 6.5 billion, a decrease of JPY 22.7 billion year-on-year.

Net income was minus JPY 0.9 billion, a decrease of JPY 15.8 billion year-on-year. The estimated impact of COVID-19 and other factors in the second quarter is negative JPY 45 billion, including lower crude oil prices, deteriorating petrochemical prices, deteriorating jet prices and reduced demand for petroleum products.

On the other hand, in response to tighter IMO regulations, we have been expanding the supply of low sulfur C fuel oil, achieving an increase of JPY 3.4 billion in profit. By segment, in the petroleum business, ordinary profit, excluding inventory valuation, was JPY 17.7 billion, up JPY 12.8 billion year-on-year, despite the deterioration in profitability caused by lower jet fuel oil prices due to the pandemic. Thanks to improved domestic product prices, increased sales of petroleum projects -- products with large supply to Kygnus Sekiyu and improved in-house fuel cost.

In the petrochemical business, ordinary profit was negative JPY 8.8 billion, down JPY 15.4 billion year-on-year. Due to the decrease in sales volume during Q1 caused by deterioration in paraxylene prices, regular maintenance at Maruzen Petrochemical and the time lag related to naphtha delivery.

In the oil E&P business, the decline in crude oil prices resulted in ordinary profit of JPY 4.5 billion, down JPY 15.1 billion year-on-year. Ordinary profit in the other business was JPY 5.7 billion, up JPY 0.8 billion year-on-year, mainly due to consolidation accounting.

Page 15, please, an overview of the consolidated income statement. Line 2, operating income declined by JPY 17.5 billion to JPY 8.7 billion. Line 4, ordinary profit is down JPY 22.7 billion to JPY 6.5 billion. Line 8, profit attributable to owners of the parent was negative JPY 0.9 billion, down JPY 15.8 billion year-on-year. Line 9, inventory valuation deteriorated by JPY 5.8 billion to a negative JPY 12.6 billion. Line 10, ordinary profit, excluding the impact of inventory valuation, was JPY 19.1 billion, a decrease of JPY 16.9 billion from the same period last year.

Next, Page 16 is a breakdown of ordinary profit, excluding inventory effects by segment. I will give you the details on Page 17, which shows variance analysis.

Page 17, please. Ordinary profit, excluding inventory factors, declined by JPY 16.9 billion from the same period last year. Let me explain the factors by segment. The factors for the JPY 12.8 billion increase in the petroleum business highlighted in green are shown in the green box. Margin and sales volume is up JPY 3.9 billion, of which margin for 4 petroleum products is up JPY 1.9 billion, and the margin for other products is down JPY 3.6 billion. The total is down JPY 1.7 billion.

Sales volume is up JPY 6.2 billion, thanks to increased supply to Kygnus Sekiyu. Imports and purchases is up JPY 0.7 billion. Export is down JPY 1.3 billion. Expense and other is positive JPY 8.9 billion, thanks to an improvement of in-house fuel cost. Improvement in SG&A, decrease in promotion expenses, entertainment expenses and travel and transport expenses as well as an increase in depreciation and amortization expenses.

The impact of COVID-19 is estimated at negative JPY 10.3 billion, including a decline in the volume of 4 products, excluding supplies to Kygnus Sekiyu, a deterioration in the profitability of jet fuel and an improvement in in-house fuel cost.

Next, the petrochemical business, shown in yellow, is down JPY 15.4 billion. As shown in the yellow box, price is negative JPY 12.4 billion due to deterioration in paraxylene prices and the timing of the delivery of naphtha.

Volume is negative JPY 4.9 billion due to a decrease in volume caused by the regular maintenance of Maruzen Petrochemical during the first quarter. Expense and other was positive JPY 1.9 billion. The impact of COVID-19 is estimated at negative JPY 12.4 billion, including a decline in petrochemical prices.

Indicated in orange is the oil E&P business, which is down JPY 15.1 billion year-on-year. As shown in the orange box, prices, negative JPY 23 billion due to decline in crude oil prices. Volume is positive JPY 4.1 billion due to the time lag. Expense and other is positive JPY 3.8 billion.

The impact of COVID-19 was due to a decline in crude oil prices. It's estimated at minus JPY 23 billion. Lastly, the increase of JPY 0.8 billion in others, including wind power generation, is mainly due to the consolidation accounting process.

Please move on to Page 18, outline of consolidated cash flow and the balance sheet. Here is an overview. First, I will discuss the consolidated statement of cash flow. Line 1, cash flow from operating activities is positive JPY 38.1 billion due to an increase in net profit before taxes. Line 2, cash flows from investing activities is negative JPY 50.6 billion, mainly due to the renewable work associated with the regular maintenance of refineries and petrochemical plants. Line 3, free cash flow was negative JPY 12.5 billion. Line 4, cash flow from financing activities was positive JPY 22.7 billion.

Next, I will explain the consolidated balance sheet. Line 1, total asset has decreased JPY 35.5 billion from the end of previous year to JPY 1,604.3 billion. Line 3, net worth was down by JPY 10.1 billion to JPY 229.7 billion. Line 4, net worth ratio deteriorated 0.3% to 14.3%. Line 6, net D/E ratio deteriorated 0.17x to 2.58x from the end of the previous fiscal year.

Page 19, highlights of consolidated capital expenditures. Capital expenditures for the second quarter increased JPY 8.6 billion from the same period of last year to JPY 39.8 billion, mainly due to maintenance CapEx related to the regular maintenance conducted at the Chiba Refinery and Maruzen Petrochemical. Depreciation and amortization expenses decreased by JPY 2 billion to JPY 28 billion. That was the explanation of the financial results for the second quarter of fiscal year 2020.

Starting on Page 21, I will explain the revised full year forecast for fiscal year 2020. First, the crude oil price recovered to the $40 per barrel level from June and is expected to remain at the current level through the second half of the year.

On the other hand, as shown in the graph on the lower right, the crude oil price at which we expect to receive in March 2021 is to be lower than what was previously announced, mainly due to Saudi Arabia's price adjustments, freights and other factors resulting in the inventory appraisal losses incurred during Q1, likely to remain at a certain level.

As a result, our full year forecast for fiscal year 2020 have been revised on the assumptions of Dubai crude oil $40 for the second half and $38 for the full year. And the exchange rate, JPY 105 to the dollar for the second half and JPY 106 for the full year. As shown for the first line of the table on the left, consolidated ordinary income, excluding inventory valuation effect, is JPY 42 billion, up JPY 12 billion from the previous announcement. Due to the assumed negative inventory back of JPY 15 billion, consolidated ordinary income is expected to be JPY 27 billion, a decrease of JPY 3 billion from the previous forecast. And net income attributable to owners of the parent shown on line 7 is expected to be JPY 8.5 billion, a decrease of JPY 6 billion from the previous forecast. Line 8, dividend is unchanged from the previous announcement.

Please see Page 22. Ordinary income, excluding inventory effects, increased by JPY 12 billion from the previous forecast. I would like to explain the factors behind that by segment. The petroleum business shown in green is up JPY 4 billion due to an increase in the sales volume of 4 products and improvement in the profitability of other products, such as naphtha. As shown in the green box, margin and sales volume is up JPY 6 billion, of which margin for full products is up JPY 1 billion, and the margin for other products is up JPY 3.5 billion, totaling JPY 4.5 billion. Sales volume is up JPY 5.4 billion, given the current base surpassing the initial forecast.

On the other hand, imports and purchases is down JPY 2.5 billion. Export is down JPY 1.4 billion, resulting in JPY 6 billion. Expense and other is negative JPY 2 billion, consisting of expense and other of positive JPY 2.8 billion and in-house fuel cost of negative JPY 4.8 billion.

Next, the petrochemical business shown in yellow is down JPY 10.0 billion from the previous announcement. Price is negative JPY 11.7 billion due to sluggish pricing of paraxylene and benzene and the technical factor related to the acceptance timing of naphtha at the Maruzen Petrochemical. Volume factor is negative JPY 1.8 billion. Expense and other is positive JPY 3.5 billion. Oil E&P shown in orange is looking at an increase of JPY 15 billion. Price is positive JPY 12.3 billion due to the rise in crude oil prices. Volume is positive JPY 1 billion. And expense and other is positive JPY 1.7 billion. The other businesses shown in blue is expected to be JPY 3 billion higher, driven mainly by Cosmo Eco Power as well as consolidation accounting process.

Please turn to Page 23. Consolidated capital expenditure plan for the full year. As a result of further reductions and the postponement of capital investment, the CapEx plan for the full year was reduced by JPY 3.5 billion compared to the previous announcement to JPY 95 billion. By business segment, the petroleum business is down JPY 1.8 billion, mainly due to a review of maintenance CapEx. The oil E&P business is down JPY 2.3 billion due to the reduced investment in the existing oil fields.

That was my brief summary of the financial results for the second quarter of fiscal year 2020 and the forecast for the full year. Thank you.