Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2018-Q3

[Kenichi Taki, executive]

My name is Taki. Thank you.

Please open Page 1. For Q3 2017, in the midst of an improving business environment, including the domestic supply-demand balance, we enhanced our earnings strength primarily through high-operating ratios at refineries and petrochemical plants. By segment, starting with Oil Refining and Sales: In addition to safe operation and high utilization of refineries despite shrinking spot markets, the business saw a recovery of affiliated operators and realization of our profit margins. As a result, operating income excluding the impact of inventory valuation increased JPY 28.9 billion year-on-year to JPY 230.2 billion (sic)JPY 30.2 billion.

Next, Petrochemical. In addition to the firm market conditions, the sales volume increased, thanks to the absence of an impact of regular maintenance at Maruzen Petrochemical. As a result, ordinary income excluding the impact of inventory valuation increased JPY 13 billion year-on-year to JPY 25.1 billion.

Next, Oil Exploration and Production. The business saw a rise in crude oil prices as you are aware. As a result, ordinary income was JPY 12.6 billion, up JPY 3.6 billion year-on-year. Please also note that the Hail Oil Field started the production in November 2017, with production ramping up to full scale in January 2018.

All in all, consolidated ordinary income was JPY 86.9 billion, up JPY 36.8 billion year-on-year, while quarterly net income was JPY 48.7 billion, up JPY 25.3 billion year-on-year.

As you can see at the bottom, income excluding the impact of inventory valuation was JPY 72.8 billion, up JPY 45.1 billion year-on-year. These 3 metrics represent record high results since the company started third quarter disclosure 10 years ago. As a result, the net worth ratio was 12.3%, an improvement of 1.5 points from the end of the previous year and net D/E ratio 3.1x, an improvement of 0.5 point from the end of the previous fiscal year.

Please turn to Page 2. I will take you through revision of full-year earnings forecast and dividend for fiscal year 2017. Starting with the revision of earnings forecast. The assumption, crude oil price and the currency exchange rate for the fourth quarter from January to March are set at JPY 65 per barrel and JPY 110 to the dollar in consideration of the current market conditions. On a full-year basis, we expect JPY 120 billion in consolidated ordinary income, and JPY 70 billion in net income. Consolidated ordinary income excluding the impact of inventory valuation is expected to be JPY 100 million. We expect the net worth ratio to be around 14% level and the net D/E ratio to be less than 2.5x. For your information, preconditions are shown on the right-hand side. Dividend policy is shown at the bottom. Although the full year earnings forecast will exceed the previous announcement in November, we plan to keep the full year dividend of JPY 50 per share unchanged in comprehensive consideration of the Group's financial position, investment strategy, et cetera.

Please turn to Page 3. I will discuss consolidated income statements for Q3. Line 1, net sales, JPY 1,816,006,000,000, up 11.7% or JPY 191 billion year-on-year. Line 2, operating income, JPY 83.8 billion, up JPY 27.2 billion year-on-year. Line 4, ordinary income, JPY 86.9 billion, a significant increase of JPY 36.8 billion or 73.5% year-on-year. Line 8, at the bottom, profit attributable to owners of parent, JPY 48.7 billion, a significant increase of JPY 25.3 billion year-on-year. Line 10, ordinary income excluding impact of inventory valuation, JPY 72.8 billion, another significant increase of JPY 45.1 billion year-on-year. Line 11 onward are market-related figures for your reference.

Please turn to Page 4, which shows an outline of consolidated ordinary income excluding the impact of inventory valuation by business segment and changes from Q3 FY 2016. I will explain this using the step chart on the next page.

Please turn to Page 5. Consolidated ordinary income excluding the impact of inventory valuation increased JPY 45.1 billion year-on-year. I will explain the key factors by segment. Starting with petroleum business at the top, profits increased due to the achievement of safe operation and utilization refineries as well as appropriate profit margins realized through improved domestic supply-demand balance. The lower box shows the breakdown of JPY 28.9 billion. At the top, margin and domestic sales volume plus JPY 28.4 billion, export minus JPY 2 billion and other plus JPY 2.5 billion. If I split between margin and domestic sales to volume, JPY 26.8 billion is for margin and JPY 1.6 billion for sales volume. If I breakdown margin further, 28 -- JPY 21.8 billion for full oil products, JPY 5.1 billion for other oil products and minus JPY 100 million for others. The margin was more than JPY 2 higher than in the previous year, it was also more than JPY 2 billion higher than the budget. So the total is JPY 28.4 billion. Sales volume increase of JPY 1.6 billion represents an increase of 1.9%, or 179,000 kiloliters compared to the previous year. Please refer to Page 15 later for more details.

Next, export is down JPY 2 billion. Volume is down from 920,000 kiloliters last year to 530,000 kiloliters this year. So export volume is down 390,000 kiloliters. The unit price is slightly up without which, the volume impact would have been JPY 3.7 billion, which means the impact of the higher unit price is positive JPY 1.7 billion. The net figure is minus JPY 2 billion. Please refer to Page 15 for more details. Other was a positive JPY 2.5 billion, which is broken down into the increase in refinery cost and other. Regarding the increase in refinery cost, JPY 3 billion is for the improvement of operating ratios as explained in the previous quarter. This was due to the completion of troubleshooting that had happened last year. The improvement in operating ratios, which we explained in the second quarter was JPY 3 billion. This time around, we have a larger negative figure, one factor is refinery fuel cost, which was $45 last year and it went up to $53 for third quarter this year. The impact of this is minus JPY 1.1 billion. Another factor is an increase in purchases from other companies. This is mainly because of the reduction of nominal capacity for the October, December period. Throughput declined while sales increased because of the -- recovery of affiliated operators. The difference was covered by purchases from other companies. The impact was minus JPY 2.1 billion. The remaining impact is JPY 3 billion, which is mainly because of the delay in trial operation of IPP, as you may be aware. The impact is about minus JPY 1.5 billion. We also have a negative JPY 1.5 billion, which was caused by an increase in personnel cost and variable cost due to the guidance from Qatar on salary increase and bonus payment. The impact of these is about JPY 1.5 billion negative. Other is positive. As I told you in the second quarter, this is due to Gyxis our stake in the company increased and so did the company's revenue. So the equity method gain increased by about JPY 5 billion.

Moving on to petrochemical, shown on the right. It was positive JPY 13 billion. Almost all of this came from earnings growth of Maruzen Petrochemical, almost 100% growth from Maruzen.

Next is Oil E&P positive JPY 3.6 billion. It's broken down into 3 factors: positive JPY 8.8 billion is from the pricing factor due to the increase in oil price, negative JPY 2.4 billion due to volume decline. This is because of the trouble we explained to you in the second quarter. Negative JPY 2.8 billion is others including the impact of foreign exchange rates and the increase in OpEx. Next item is other, minus JPY 400 million. This is attributable to consolidation accounting. That's all my comments on this page.

Next page is 6. This is the outline of consolidated balance sheet. Line 1, total assets increased JPY 203.3 billion from the end of the last fiscal year to JPY 1,729,000,000,000 due to the acquisition of tangible fixed assets amidst the rising oil price and development of the oil -- Hail Oil Field. Line 3, net worth increased JPY 48.5 billion to JPY 213.2 billion, thanks to the profit booked for Q3. Net worth ratio improved 1.5 points to 12.3%. I do not want to sound complacent, however, in comparison to 7% or 8%, recorded some time ago, we feel that we are making a good progress. Lastly, line 6, net D/E ratio was 3.1x, an improvement of 0.5 point from the end of the last fiscal year. We will continue to improve our financial structure.

Please turn to Page 7, highlights of consolidated capital expenditures. During Q3, we steadily carried out growth investments as you can see in the box. The Hail Oil Field, Chiba JV and other large-scale investments are expected to drastically decrease from FY 2018.

Specifically, we expect the total investment will be 50% to 70% of what it is today. Capital expenditures by business segment are shown on the right. For petroleum, we had regular maintenance and other construction work. For Petrochemical, expenditures are down due to Maruzen Petrochemical regular maintenance being skipped. For Oil E&P, expenditures are mainly for the development of the Hail Oil Field. For others, we had a new site development for wind power generation, IP (sic) [IPP] upgrade construction and others. That was my brief explanation about the financial results for Q3 FY 2017.

Next, I'd like to take you through the forecast for fiscal year 2017 full year performance. Please turn to Page 9. Page 2 (sic) [Page 9] revised full-year earnings forecast. On top of the performance for Q3, in view of the ongoing market conditions, we have revised our forecast for the full year compared to initial forecast, in particular in the petroleum business ordinary income excluding the impact inventory valuation has been revised up by JPY 10 billion to JPY 100 billion. I will explain the details of ordinary income excluding effect of inventory valuation on next page. Line 6, profit attributable to owners of parent has been revised up by JPY 27 billion to JPY 70 billion. On top of JPY 10 billion in ordinary income, the inventory appraisal loss that was anticipated in last quarter of JPY 10 billion, has been updated to an inventory appraisal gain of JPY 20 billion. The net effect, therefore, is JPY 30 billion. In the petroleum business, there was a loss carried forward, which kept the tax rate low, excluding that the upward revision to net income is JPY 27 billion, and the new forecast is JPY 70 billion. This will be a record high on a full year basis if we can achieve it. Preconditions are shown on line number 8 onward. Please refer to them later.

Turning to Page 10. Variance analysis consolidated ordinary income, which was revised from JPY 90 billion in the previous announcement to JPY 100 billion in the revised forecast. Starting with the petrochemical business, JPY 6 billion, which is broken down into JPY 12.4 billion for margins and domestic sales volume and minus JPY 6.4 billion for other. As you are aware, the margin environment has further improved since the last announcement. If I breakdown JPY 12.4 billion, JPY 11.8 billion is attributable to margins and JPY 6 million -- JPY 600 million is for other. If I break down JPY 11.8 billion, JPY 11.6 billion is for full oil products, which is nearly JPY 1 higher than the previous announcement on a full year basis and minus JPY 400 million is for other oil products, and a very small but positive number for other subsidiaries. The total is JPY 11.8 billion. The sales volume is up slightly by 45,000 kiloliters compared to the previous announcement. The impact is JPY 600 million. Others is minus JPY 6.4 billion is -- that is due to the higher refinery cost, because this year oil cost is $56 whereas our assumption was $50 per barrel. The net effect is minus JPY 1.9 billion. Also as I said, there is purchase from other companies, the unit price has gone up, causing minus JPY 700 million impact. The remaining JPY 5 billion is due to the defect of refinery equipment such as the FCC at Yokkaichi and the Coker at Sakai, the impact of which was about JPY 1 billion. Another factor was an increase in personnel cost such as salaries and bonuses. The impact is minus JPY 1 billion. The delay in trial operation of IPP, which I explained earlier, has an impact of about JPY 8 million. That's the breakdown of JPY 5 billion. Please note that there were some positive factors, such as Gyxis. Altogether, minus JPY 64 billion.

Next is petrochemical, plus JPY 4 billion. As I mentioned, during the explanation of Q3, thanks to the strong market conditions, most of this is attributable to the margin growth of Maruzen Petrochemical.

Next is Oil E&P, plus JPY 2 billion. Compared with Q3, oil prices are higher. The breakdown is JPY 3 billion for price, JPY 300 million for volume and minus JPY 1.3 billion for cost, et cetera, including foreign exchange. The total is JPY 2 billion for Oil E&P.

Lastly, other is negative JPY 2 billion. This includes impact of consolidation accounting and others. There are some expenses incurred, which were not in the original forecast. That's the reason for JPY 2 billion. All in all, the revised forecast is JPY 100 billion, JPY 10 billion higher than the previous forecast.

With that, I would like to conclude my presentation on the financial results for Q3 and full year forecast for fiscal year 2017. Thank you for your kind attention.