Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2022-Q2

[Hiroshi Kiriyama, executive]

Thank you for taking time out of your busy schedules to participate in our earnings call for the second quarter of fiscal year 2021.

My presentation will cover highlights of Q2 FY 2021 results, progress on the 6th consolidated medium-term management plan and update on the renewable energy business.

Please refer to Page 3. Financial results for Q2 FY 2021 and full year forecast for FY 2021. For the second quarter, profit increased sharply due to the rising crude oil prices, the improvement of various market conditions and an increase in the sales volume of petroleum products. Profit attributable to owners of the parent is up JPY 52.9 billion to JPY 52 billion. Both ordinary profit and net profit reached record highs for second quarter.

Next, as for the upward revision, please refer to the FY 2021 forecast, on the right-hand side. Ordinary profit, excluding inventory valuation on the third line, is projected at JPY 113 billion, and net profit on the fourth line at JPY 93 billion. These are record highs for our full year period. The sixth line shows net worth. We expect to achieve the midterm management plan target of JPY 400 billion in FY 2021. The 8th line shows the net D/E ratio. As of the second quarter of this fiscal year, the net D/E ratio is already in the midterm target range of 1.0 to 1.5x, and it is expected to reach 1.2x by the end of this fiscal year.

In anticipation of achieving the medium-term targets, we plan to pay a dividend of JPY 100 per share for fiscal year 2021, an increase of JPY 20 from the previous announcement.

Next slide, Page 5. I would like to explain the progress in structural reform under the midterm management plan. In the fourth year of the 5-year sixth medium-term management plan, structural reform is progressing steadily. Major improvements and investments during this midterm plan, such as the actions to ensure compliance with the IMO regulations in the petroleum business have been already completed. In the renewable business, 3 offshore wind projects were designated as high potential areas in September. And the project operators for the project of the Coast of Yurihonjo City is scheduled to be selected in the fall or winter this year.

Next, Page 6, please. I would like to explain about the improvement in the financial position. In the graph below, the blue bar shows the net worth trend, and the orange line shows the net D/E ratio trend. The accident related to the Great East Japan earthquake in 2011 caused a serious temporary damage to our financial structure. Thereafter, however, we have made significant improvements in our financial position. By the end of FY 2021, we expect to achieve our mid-term targets for net worth and net D/E ratio and approach the record high levels achieved back in FY 2007.

Next is Page 7. I will explain about the improvement in our earning power, which was an enabler of the improvement in the financial position. The graph in the middle shows the trends in net profit, excluding the impact of inventory valuation. Profitability has been strengthened mainly in the petroleum business, which is the source of our earning power. And especially in the current period of the sixth midterm plan, there was a significant improvement.

Please take a look at the graph on the lower left, which shows the year-on-year change in the sales volumes of 4 major products. The blue line represents the full product sales volume vis-à-vis the previous year. And the orange line represents national average. Since we started the supply to Kygnus Sekiyu back in FY 2019, our sales volume started to exceed the national average with a large margin.

Next, please take a look at the chart on the lower right, which shows the trend in utilization. The blue line shows refinery's operating ratio, and the orange line shows the national average. Here, again, since the start of the supply to Kygnus Sekiyu, we have a short position with relatively lower supply volume compared to sales volume. That enabled us to maintain a high operating ratio that far exceeds the national average, even under the COVID-19 pandemic. These efforts have strengthened our profitability, especially in the petroleum business, and as a result, significantly improved our financial position.

Next, Page 9, please. I will explain the progress in the renewable energy business. The table in the middle shows the pipeline of the onshore wind power generation sites owned by our company. As indicated in the red box, we have acquired an FIT, FIT certification for the 3 new sites of Shimamaki, Aizuwakamatsu and the Kakegawa.

As shown in the yellow box, the total potential is more than 60,000 kilowatt, including sites in operation, sites under construction and sites with FIT certification. The lower table shows the list of offshore wind power generation sites. As indicated by the red box, in September, central sea area near Akita, offshore near Yuza, Yamagata and offshore north of Niigata were designated as high potential areas.

Next steps are the selection of operators for offshore Yurihonjo and the designation of offshore northwest of Aomori as a promotion area. Steady progress of each project is expected. We will continue to focus on the renewable energy business, which will be the main pillar of the new category of the midterm management plan, Oil & New. That was my brief remarks. Thank you very much.

[Takayuki Uematsu, executive]

I would like to start with Page 11. A summary of the impact of the COVID-19 pandemic. First, impact on business continuity and operations. In accordance with the group's crisis management regulations, we have promoted our business and the business continuity, including the operation of refineries is not so far affected.

In terms of impact on the market, Dubai crude oil prices have improved significantly due to the expected global economic recovery. Petroleum products saw the domestic market remaining strong during Q2, while demand remained flat from the previous year. As for jet fuel, the market is currently on a recovery trend, but demand is still sluggish.

As for petrochemical products, the paraxylene price recovered temporarily, but it is currently sluggish. The benzene price, on the other hand, remains at a high level, but there is some softness at the moment. Going forward, the impact of COVID-19 is expected to subside towards the end of the fiscal year, and the market for the 4 major products is expected to remain firm, except that jet fuel demand is expected to take some time to recover as in overseas markets.

Please turn to Page 12. I'd like to take you through the FY 2021 Q2 financial results. Consolidated ordinary profit, excluding the impact of inventory valuation, was up JPY 42 billion year-on-year to JPY 61.1 billion, with a positive inventory valuation of JPY 33.9 billion, consolidated ordinary profit is up JPY 88.5 billion to JPY 95 billion. Profit attributable to owners of parent was up JPY 52.9 billion to JPY 52 billion.

By segment, in the petroleum business, ordinary profit, excluding inventory valuation, was up JPY 13.8 billion to JPY 31.5 billion due to higher margins for the 4 major products due to higher crude oil prices, growth in sales volumes resulting from the recovery of the COVID-19 pandemic and high utilization of refineries due to the absence of regular maintenance that we had in the previous year.

In the petrochemical business, ordinary profit was up JPY 17.8 billion to JPY 9 billion due to the improvement in the benzene market, the absence of the regular maintenance at Maruzen Petrochemical and the absence of the naphtha time lag, which we had last year.

The oil E&P business, ordinary profit was up JPY 12.7 billion to JPY 17.2 billion due to the rising crude oil prices despite a decrease in sales volume. In the renewable energy business, ordinary profit was down JPY 0.4 billion to JPY 0.5 billion due to upfront costs associated with the offshore wind power generation development at Cosmo Eco Power.

Please refer to Page 13. I will now explain the summary of the income statement. First, Line 2, operating profit was up JPY 84.7 billion to JPY 93.4 billion. Line 4, ordinary profit was up JPY 88.5 billion to JPY 95 billion. Line 8, net profit attributable to owners of parent was up JPY 52.9 billion to JPY 52 billion. Line 9 is inventory impact. It has improved JPY 46.5 million to JPY 33.9 billion. Line 10, therefore, ordinary profit, excluding inventory valuation factors, was up JPY 42 billion to JPY 61.1 billion.

Next, Page 14 shows the breakdown of ordinary profit, excluding inventory valuation factors by segment. Let me explain details on next page.

Page 15, please. I will explain the factors behind the JPY 42 billion increase in ordinary profit, excluding the impact of inventory valuation from JPY 19.1 billion to JPY 61.1 billion. First of all, the petroleum business, shown in green, is JPY 13.8 billion. This is a positive JPY 13.8 billion. Let me give you the breakdown. Margins and sales volume is up JPY 20.2 billion. As you can see on the slide, the 4 products is up JPY 8.8 billion, and other products is down JPY 0.4 billion, resulting in a total increase of JPY 8.4 billion. Thus the improvement in margins.

In terms of volume, thanks to the recovery from COVID-19, the 4 products is up JPY 6.7 billion, and the other products is up JPY 3.1 billion for a total increase of JPY 9.8 billion. In addition, imports and purchases was helped by the absence of regular maintenance and is up JPY 2.1 billion, while exports is down JPY 0.1 billion.

Expense and others is negative JPY 6.4 billion, including negative JPY 7.4 billion due to the deterioration of in-house fuel costs, positive JPY 0.5 billion due to the termination of the cashless point program and positive JPY 0.5 billion due to other factors, which makes the total JPY 6.4 billion.

Next is petrochemical business, shown in yellow. The total profit is up JPY 17.8 billion year-on-year. As mentioned earlier, prices increased by JPY 13.6 billion due to an improvement in the petrochemical market and the absence of the impact of the delayed acceptance of naphtha by Maruzen Petrochemicals as we had last year.

Volume increased by JPY 5.1 billion due to the absence of the impact of the regular maintenance at Maruzen Petrochemicals and expense and other was down JPY 0.9 billion. The oil E&P business, shown in orange, is up JPY 12.7 billion year-on-year. The factors are, as shown here.

Volume is down JPY 2.8 billion due to the time lag in the previous year. The factors behind the JPY 0.4 billion decline in the renewable energy business, shown in blue are as discussed earlier. Other segment is down JPY 1.9 billion. This is attributable to the consolidation process.

Please refer to Page 16. I will now explain the consolidated cash flow and the consolidated balance sheet. First, on the consolidated statement of cash flow, line 1, cash flows from operating activities was positive JPY 55.3 billion. Line 2, cash flows from investing activities was negative JPY 44.2 billion, mainly due to capital expenditures. As a result, line 3, free cash flow was positive JPY 11.1 billion.

Next is the consolidated balance sheet. Line 1, total assets were JPY 1.849 trillion, an increase of JPY 140 billion from the end of the previous fiscal year. Net worth is JPY 371 billion, an increase from the end of the previous fiscal year was mainly due to an increase in net profit. Line 4, the net worth ratio improved 1.1% to 20.1%. Line 6, net D/E ratio improved by 0.24x to 1.35x.

Please refer to Page 17, which shows the results of capital expenditures. Capital expenditures in the second quarter of fiscal year 2021 decreased by JPY 18.3 billion from the same period last year to JPY 21.5 billion, mainly due to the absence of the regular maintenance conducted in the previous year. Depreciation and amortization increased to JPY 28.5 billion. So CapEx was contained within the range of depreciation and amortization.

Please refer to Page 18, which summarizes the ESG topics. So please refer to them. With regards to the promotion of the environmental measures, E, we are currently conducting TCFD scenario analysis and are steadily preparing for disclosure. In order to strengthen the government system, which is G, we have established the sustainability strategy council chaired by the President himself in April 2021 and are strengthening the promotion system. That was my explanation of the financial results for the second quarter of fiscal year 2021.

Let me now take you through the revision to the full year forecast. We expect the full year results for fiscal year 2021 to be significantly higher than previously announced, mainly in the petroleum business due to improved margins for petroleum products, resulting from the rise in crude oil prices. Consolidated ordinary profit for the full year is expected to be JPY 155 billion, an increase of JPY 67 billion from the previous forecast. Consolidated ordinary profit, excluding inventory valuation factors, is expected to increase by JPY 33 billion to JPY 113 billion, and net profit is expected to increase by JPY 53 billion to JPY 93 billion. As for dividends, we plan to increase dividend payment, as was explained by our President earlier in this briefing.

Please refer to the waterfall chart on Page 21 for the details of the upward revision by segment. Please refer to Page 21. The chart shows ordinary profit, excluding inventory valuation factors, I will now explain the factors behind the JPY 33 billion increase compared to the previous forecast.

First of all, petroleum business, shown in green, upward revision is JPY 20 billion. Let me give you the breakdown. Margins and sales volume is up JPY 19.9 billion. This includes JPY 13.4 billion for the 4 products and JPY 4.5 billion for other products, in total, JPY 17.9 billion.

Volume is up JPY 2.3 billion for 4 products and JPY 1.3 billion for other products, in total, JPY 3.6 billion. Imports and purchases is down JPY 1.2 billion, and exports is down JPY 0.4 billion. Expense and other is up JPY 0.1 billion on a net basis, the deterioration in in-house fuel cost is negative JPY 3.8 billion. On the other hand, profits of subsidiaries is positive JPY 1.8 billion. Depreciation expenses is positive JPY 0.7 billion. Other factors are positive JPY 1.4 billion. That's the breakdown.

Next is petrochemical business in yellow. Overall, upward revision is JPY 6.5 billion, mainly due to the improvement in benzene prices. Next is oil E&P, shown in orange. It is revised up by JPY 8 billion. The main factor is the rise in crude oil prices. It is a price factor, for the price is up $8 from $60 to $68.

Please turn to Page 22. This is the last page of my presentation. The CapEx plan is reduced by JPY 5.6 billion compared with the previous announcement to JPY 66.4 billion. As a result of efforts to save investment and control procurement prices, we were able to reduce the CapEx plan.

With this, I would like to conclude my presentation on the financial results for Q2 FY 2021 and the full year forecast of FY 2021. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]