Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2023-Q2

[Hiroshi Kiriyama, executive]

Thank you very much for taking time out of your busy schedules to participate in our briefing for the second quarter of fiscal year 2022. I would like to take you through the highlights of the Q2 results and the full year forecast, the progress on the 6th consolidated midterm management plan, the progress on the renewable energy business, and the purchase of euro-yen convertible bonds due 2022 with the stock acquisition rights.

Please turn to Page 3. I will explain the financial results for Q2 FY 2022 and the full year forecast. First of all, for Q2 FY '22 results, as shown in Line 3 below, ordinary profit, excluding inventory valuation increased by JPY 20.9 billion year-on-year to JPY 82 billion. And profit attributable to owners of parent, or net profit, shown in Line 4, increased by JPY 42.9 billion year-on-year to JPY 94.9 billion. Due to the rise in crude oil prices, both ordinary profit and net profit have surpassed the record highs set in FY 2021.

Next, regarding the revision of the earnings forecast, please see the FY 2022 forecast on the right-hand side of the table. The third line shows the forecast for ordinary profit, excluding inventory valuation of JPY 150 billion, and the fourth line shows the forecast for the net profit of JPY 115 billion. In terms of shareholder return, we plan to pay a dividend of JPY 150 per share, an increase of JPY 50 from the previous year, as announced in May in view of the financial targets of the management plan. The company has also implemented a share buyback program totaling JPY 20 billion.

Next, please turn to Page 5. I would like to explain the progress of structural improvement under the midterm management plan. Fiscal year 2022 will be the final year of the 6th midterm management plan, and the main measures of the plan have already been implemented. In the petroleum business, we have maintained high capacity utilization based on the short position strategy, which is making a significant contribution to the earnings. In the renewable energy business, the business is steadily expanding with the first offshore wind power sites in Japan, the Akita, Noshiro onshore wind farm in addition to the Kamiyuchi and Oita onshore wind farms expected to start operation in the second half of the fiscal year.

Please see Page 6. I would like to explain the progress in terms of the goal of the midterm management plan. As of the end of FY '21, we have achieved all of the management goals set forth in the midterm plan ahead of schedule. In addition, we have obtained a single A- rating from a rating agency as a result of strengthening profitability. We will continue to improve our ratings, aiming to obtain a single A rating.

Please turn to Page 8. I will explain the progress of the wind power generation business. The areas where we had progress from Q1 are circled in red. Onshore, we obtained F-I-T, FIT certification for Yokohama-machi in Aomori Prefecture and onshore announced an environmental statement for offshore Shimamaki in Hokkaido. In addition, we are preparing for bidding for 2 projects in the Central Sea area near Akita and offshore north of Niigata, which were designated as promotional areas in September 2022.

Page 9, please. I will explain the trends in Cosmo Eco Power's electricity sales volumes. The electricity sales volume for the first half was JPY 209 million kilowatt hour. Although there was no change in the installed capacity, electricity sales decreased due to wind conditions. In the second half, we plan to start operation of 3 sites, Akita-Noshiro offshore wind farm, Kamiyuchi onshore farm, and Oita onshore farm, and we expect electricity sales for the full year to be in line with the previous year's level.

Please move to Page 10. Initiatives for the expansion of clean energy. First, regarding the expansion of next-generation energy, we have established a joint venture company, SAFFAIRE SKY ENERGY, together with JGC Holdings and REVO International to realize Japan's first large-scale production of SAF using waste cooking oil as raw material. The joint venture will construct a SAF production facility in our Sakai refinery and start operations sometime between the second half of FY '24 and early FY '25.

In addition, we have started a joint study with Mitsui & Company for the production of supply by FY '27 of 220,000 kiloliter per year using ethanol as an input. We will continue to accelerate our efforts to achieve our SAF supply target of 300,000 kiloliter per year by 2030.

Next, on clean energy. In October this year, we began supplying Cosmo Denki Business Green to public facilities in Yokosuka City and Zushi City, Kanagawa Prefecture. The cumulative supply locations of Cosmo Denki Business Green through the Ministry of the Environment, the Ministry of Defense and other ministries and agencies as well as corporations has topped 1,000 already, and we will continue to focus on expanding this business.

Page 12, please. I would like to explain the repurchasing of convertible bonds announced yesterday. As shown in the bar graph on the right, as a result of strengthening profitability in the current midterm plan, our financial position has improved significantly since 2018 when the CB was issued. While further improvement of our financial position is essential, we have decided to repurchase the CB after comprehensively assessing the impact of recapitalization and stock dilution at this point in time. As explained in the material, we have already executed the repurchase yesterday and the final face value amount was JPY 24.150 billion. We will continue to focus on financial soundness while aiming to maximize enterprise value.

That concludes my explanation. Thank you.

[Takayuki Uematsu, executive]

This is Uematsu. I will now explain the overview of the financial results for the second quarter of fiscal year 2022. Please refer to Page 14. I will explain the detailed earnings on next page, so let me cover the segment summary here. By segment, for petroleum business, while the margins for the 4 products and overseas market conditions improved. Ordinary profit, excluding inventory effects, was JPY 30.8 billion, down JPY 0.7 billion year-on-year due to the impact of refinery troubles and higher in-house fuel costs and energy costs such as electricity, LNG and bioethanol.

Next is petrochemical business. Ordinary profit was JPY 7.8 billion, down JPY 1.2 billion year-on-year due to the decrease in sales volumes caused by the weak olefin market and the zero COVID policy of the Chinese government despite the improvement in the MEK market. In the oil E&P business, ordinary profit was JPY 41.1 billion, up JPY 23.9 billion year-on-year due to higher crude oil prices as well as the yen's depreciation. In the renewable energy business, ordinary profit was negative JPY 0.1 billion, down JPY 0.6 billion year-on-year due to deteriorating wind conditions at Cosmo Eco Power and upfront costs incurred in connection with the offshore wind power development.

Please refer to Page 15. I will explain the summary of consolidated P&L. Line 4, ordinary profit was JPY 173.8 billion, up JPY 78.8 billion year-on-year. Line 8, profit attributable to owners of parent is up JPY 42.9 billion year-on-year to JPY 94.9 billion. Line 9, impact of inventory valuation is JPY 91.8 billion, an improvement of JPY 57.9 billion year-on-year. As a result, Line 10, ordinary profit, excluding inventory valuation, is up JPY 20.9 billion year-on-year to JPY 82 billion.

Next, Page 16. This page shows the breakdown of ordinary profit, excluding inventory valuation by segment. So please go to the next page with variance analysis of ordinary profit with that of the previous year. I will explain the factors behind the JPY 20.9 billion year-on-year increase in ordinary profit, as I said earlier, excluding inventory valuation by segment. First of all, the petroleum business, shown in green, is down JPY 0.7 billion year-on-year. Margin and the sales volume is positive JPY 33.4 billion. The breakdown is, for the 4 products, it is up JPY 23.3 billion. And for other products, it is up JPY 11.7 billion, for a total of an increase of JPY 35 billion.

For sales volume, the sales volume for the 4 products is up JPY 2 billion, thanks to the lifting of pandemic-related restrictions. However, the sales volume for other products is down JPY 2.8 billion, resulting in a negative impact of JPY 0.8 billion. In addition, imports and purchases is positive JPY 2.6 billion and exports is positive JPY 10.1 billion due to the export of diesel oil in response to improved overseas market conditions. Another factor is the impact of refinery troubles, whose impact is negative JPY 13.5 billion in total.

Expense and others is negative JPY 34.1 billion. The breakdown is a negative JPY 11.6 billion due to the deterioration of in-house fuel costs, a negative JPY 9.2 billion due to an increase in variable costs such as LNG and electricity costs, a negative JPY 8.6 billion due to an increase in fixed costs such as reserves for shutdown maintenance and repair and maintenance costs, and a negative JPY 4.7 billion due to price increase of bioethanol and other materials.

Next is petrochemicals, which is down JPY 1.2 billion year-on-year. Price is positive JPY 1.2 billion due to higher MEK prices, as I mentioned earlier. Volume is negative JPY 5.9 billion due to the decrease in export volumes of Maruzen Petrochemical due to the worsening olefin market. Expenses and others is up JPY 3.5 billion.

Next, as for the factors behind the JPY 23.9 billion increase in the oil E&P business. As shown in orange, price is positive JPY 24.6 billion due to higher crude oil prices and the weaker yen. The volume is negative JPY 0.3 billion, and expenses and others is negative JPY 0.4 billion. Next, the blue box, the JPY 0.6 billion decrease in the renewable energy business is mainly due to the impact of wind conditions mentioned earlier and increase in upfront cost.

Next is Page 18, outline of consolidated cash flows and the balance sheet. The red box on the left shows the highlight. During the first half, we experienced a significant deterioration in working capital. As shown on the slide, higher crude oil prices and a weaker yen caused the working capital to decline and deteriorate. Excluding this factor, in terms of cash flows from operating activities, as shown here, it is around JPY 57 billion.

Line 2, cash flows from investing activities was negative JPY 41.2 billion, mainly due to capital expenditures. As a result, Line 3, free cash flow is negative JPY 98.9 billion. Next is the consolidated balance sheet. Line 1, total assets increased JPY 369.5 billion from the end of last fiscal year due to higher oil prices and the yen's depreciation. On the other hand, net worth increased JPY 85.7 billion to JPY 541.9 billion. So net worth has increased. However, due to the increase in total assets, net worth ratio is unchanged from the end of the previous year at 23.5%. Line 6, net debt equity ratio is 1.08x.

Next is consolidated capital expenditures. Page 19, please. Capital expenditures for the second quarter of FY 2022 were JPY 29.8 billion, up JPY 0.83 billion from the same period last year, mainly due to the construction of an onshore wind farm site in the renewable energy business.

Please turn to Page 20. The slide shows our sustainability and DX initiatives from May 2022 to the present. From the left-hand side, following the Chiba refinery in the first half of this year, in August 2022, the Yokkaichi refinery has been recognized as a certified super business operator. As for DX initiatives in July, we became a certified DX business operator, recognized by the Ministry of Economy Trade and Industry. We are promoting DX with the participation of all employees, including data scientists training for approximately 5,200 employees.

That was my explanation of the financial results for the second quarter of fiscal year 2022. Please turn to Page 22. I will now explain the revised full year earnings forecast for FY 2022. Consolidated ordinary profit, excluding inventory valuation, is expected to remain almost unchanged year-on-year, while ordinary profit and net profit are expected to exceed the previous forecast significantly, mainly due to the positive impact of inventory valuation resulting from the yen's depreciation.

Consolidated ordinary profit is revised up, JPY 38 billion from the previous forecast to JPY 228 billion, and the consolidated ordinary profit, excluding inventory valuation, is down JPY 5 billion to JPY 150 billion. Net profit is up JPY 2.2 billion to JPY 115 billion. The assumptions for the second half are as shown in red on the right-hand side slide table. Crude oil assumption is $90 per barrel and exchange rate assumption is JPY 145 to the dollar. Please refer to Page 23. The chart shows variance of full year ordinary profit with the previous forecast. First of all, the petroleum business ordinary profit is revised down JPY 14 billion. Margin and sales volume is up JPY 24.2 billion. Out of that, margin is up JPY 19.9 billion, of which margin for 4 products is up JPY 30 billion, and the margin for the other products is down JPY 10.1 billion, mainly due to naphtha.

Sales volume is up JPY 11.8 billion, of which sales volume for the 4 products is up JPY 6.8 billion, and the volume for other products is up JPY 5 billion. So the total is as shown here. Imports and purchases is down JPY 3.1 billion and exports is up JPY 6.1 billion. In addition, we have factored in the impact of refinery troubles, which is expected to reduce the profit by JPY 10.5 billion in total. The breakdown of JPY 38.2 billion decrease in expenses and others is as follows: JPY 3.4 billion decrease due to the deterioration of in-house fuel cost, JPY 5 billion decrease due to an increase in variable costs such as LNG and electricity cost, JPY 11.3 billion decrease due to an increase in fixed costs such as provision for shutdown maintenance, and JPY 18.5 billion decrease due to price increases of ethanol and other materials.

The petrochemical business is up JPY 1 billion from the previous forecast. Price is positive JPY 4.3 billion, mainly due to the improvement in benzene and MEK market. Volume is down JPY 7.3 billion due to a decrease in capacity utilization resulting from the deterioration of olefin market conditions in the first half of the year. And expense and others is positive JPY 4 billion. Oil E&P is up JPY 8 billion, mainly due to the price impact of JPY 11 billion due to the yen's depreciation. The renewable energy business and other remain unchanged from the previous forecast, respectively.

Page 24 shows an outlook on the consolidated cash flows and the balance sheet. As mentioned earlier, cash flows from operating activities, excluding onetime factors, or working capital, is approximately JPY 123 billion. Projected full year cash flows from operating activities is down from the previous year at JPY 71 billion due to a rise in crude oil prices as well as in-house fuel costs, which are onetime factor decreasing the cash flow.

As for financial indicators, shareholders' equity increased JPY 110.3 billion from the end of the previous fiscal year to more than JPY 560 billion. The equity ratio is 27.5%. Net D/E ratio is less than 1x at around 0.9x, exceeding the targets of the midterm management plan.

Lastly, on capital expenditures on 25, there is no major change on this, and I would like to skip my explanation. So that was my brief explanation. Thank you.