Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2020-Q3

[Takayuki Uematsu, executive]

Good morning. I would like to take you through the third quarter fiscal 2019 financial results. And since this time, we have revised the full year forecast, I would like to take you through the details. The figures have already been announced yesterday, so I will try to focus mainly on the forecasts.

Please open Page 3, Consolidated Income Statements - Changes from Q3 2018. I will touch upon some figures shown on the table just briefly.

First, line 8, profit attributable to owners of the parent was JPY 19.8 billion, a decrease of JPY 9.4 billion year-on-year. This includes the penalty payment for the breach of the Gyxis shareholders agreement.

Line 10, ordinary profit, excluding the impact of inventory valuation was JPY 58.7 billion, a decrease of JPY 22.2 billion year-on-year.

On the right-hand side, shown is the revised forecast for fiscal year 2019. If you compare line 8, profit attributable to owners of the parent, JPY 2.5 billion, and line 10, ordinary profit, JPY 74 billion, the downward revision is much more significant for line 8, profit attributable to owners of the parent, with a 96% reduction from the previous announcement.

As explained several times in the past, we have losses carried forward recognized for the petroleum business, the business which is most influential, resulting in a significant downward revision for profit attributable to owners of the parent.

The oil E&P business, on the other hand, has a smaller contribution in terms of profit after foreign income tax deduction as well as our equity stake being smaller. Another factor is the impairment recognized for Qatar Petroleum Development. Those are the factors decreasing profit attributable to owners of the parent. That's all supplementary comments.

Please skip Page 4 and turn to Page 5. The waterfall chart summarizes our analysis of the year-on-year comparison. From the left, JPY 80.9 billion is the results for Q3 of last year. The petroleum business contribution was minus JPY 4 billion, which is broken down to plus JPY 4.9 billion for margins and sales volumes and minus JPY 8.9 billion for expenses and others. On margins and sales volumes, margins was minus JPY 5.2 billion, of which products other than the 4 main petroleum products, accounted for minus JPY 7.4 billion, which was the main factor behind the weak results.

Let me give you the breakdown. Naphtha, minus JPY 3.9 billion; jet fuel, minus JPY 1.8 billion; C fuel oil, JPY 1.3 billion. This is attributable to the increased sales as a result of the IMO regulations, sales volumes was plus JPY 5.6 billion, an increase of 13% year-on-year. Imports, purchases and exports was positive JPY 4.5 billion mainly driven by the absence of the technical trouble we had experienced last year at the Sakai Refinery. Expenses and others was negative JPY 8.9 billion, which is rather significant and comprised of the following factors. First, regular maintenance, negative JPY 1.7 billion; depletion expenses of Chiba pipeline and others, negative JPY 900 million; impairment expenses, negative JPY 1.4 billion; cashless payment compensation, negative JPY 800 million. There were other expenses such as for repair work of damages caused by a typhoon. All of these factors explain the rather large increase of expenses by JPY 8.9 billion.

Next, the petrochemical business was negative JPY 4.9 billion. The price factor was negative JPY 3.3 billion, mainly related to ethylene and benzene prices. The volume factor was positive JPY 1.9 billion, mainly related to the absence of regular maintenance at Maruzen Petrochemical. Expenses and others are mainly attributable to foreign exchange rate translation and consolidation adjustment.

Next is oil E&P business, negative JPY 13.9 billion. The price factor of negative JPY 7.5 billion is due to the decline from $70 to $64. The volume factor of negative JPY 5.8 billion is due to the production control at the Hail Oil Field. Expenses and others was positive JPY 600 million. That's the breakdown for oil E&P.

Now let me skip some pages to go to Page 9 to take you through the revision of the full year forecast.

Despite the positive impact from improved market conditions for low-sulfur C fuel oil as a result of tightened IMO regulations, due to the ongoing downtrend of crude oil prices as well as coronavirus outbreak, we have decided to revise down the forecast, reflecting the following items: declining oil prices, leading to negative time lag and inventory appraisal loss; deteriorating prices in overseas markets, especially due to coronavirus outbreak affecting jet fuel prices; weakening gas-oil prices; and slowing economic conditions to a certain extent. These factors all affected the spread and are factored into the forecast.

As for assumptions, Dubai crude oil of $55 per barrel and exchange rate of JPY 110 to the dollar are used for February and March, while actual figures are used up to January. As a result, as you can see, line 5, ordinary profit excluding the impact of inventory valuation is projected at JPY 74 billion. Line 6, impact of inventory valuation, is minus JPY 21.5 billion, making ordinary profit, JPY 52.5 billion. Line 8, profit attributable to owners of the parent is projected at JPY 2.5 billion due to the factors I have just explained.

I suppose that there are questions about Q3 figures vis-à-vis the previous forecasts, so let me give you the detailed figures, which are not shown on this table. For the first 9 months vis-à-vis budgeted figures, petroleum business, minus JPY 10.3 billion; petrochemical business, minus JPY 5.3 billion; oil E&P business, plus JPY 4.1 billion; other, minus JPY 1.5 billion. Ordinary profit, excluding the impact of inventory valuation, minus JPY 13 billion. That's the progress up to the third quarter.

The downward revision for the fourth quarter alone is JPY 14.7 billion for the petroleum business out of JPY 25 billion shown on the table, and JPY 6.7 billion for the petrochemical business, meaning we made a major downward revision for the fourth quarter numbers by revising down the outlook for February onward.

Now let me move on to the next part. Page 14 shows a waterfall chart, which is comparing the revised forecast with the previous announcement of JPY 106 billion, excluding the impact of inventory valuation. I will explain how profit decreased from there. The petroleum business, negative JPY 25 billion, consisting of margins and sales volume, negative JPY 16.6 billion, and expenses and others, negative JPY 8.4 billion. Specifically, margins was negative JPY 9.7 billion, of which JPY 8 billion is due to the time lag in February and March and JPY 4.9 billion is related to the 4 petroleum products, JPY 4.7 billion to the other products and JPY 0.1 billion to others.

The breakdown of the other products, that is JPY 4.7 billion, it is as follows: jet fuel, minus JPY 6.4 billion; naphtha, minus JPY 2.3 billion.

As for low sulfur fuel oil C, the new regulations implemented in January 2020, that is expected to generate a positive impact of JPY 5 billion for the full year, making a total fuel oil C contribution of JPY 6.9 billion. We are fully benefiting from increased production of low sulfur fuel oil C, which is our competitive advantage.

Including other oil products of minus JPY 2.9 billion, the total of the other products was negative JPY 4.7 billion.

Sales volume is positive JPY 700 million, an increase of 0.3% from the previous announcement. Imports and purchases are revised down JPY 3.2 billion due to the impact of a typhoon, slightly delayed start-up of the Sakai Refinery and power outage at the Yokkaichi Refinery or Chubu Electric Power Company, incurring extra costs for imports, purchases and exports. Imports and purchases, JPY 3.2 billion; and exports, JPY 4.4 billion. These factors had a more severe negative impact than we had originally anticipated. Expenses and others, minus JPY 8.4 billion, due to various different expenses, though we are being conservative immediately before the end of fiscal year in March.

Regular maintenance expenses was minus JPY 1.7 billion, cashless compensation was minus JPY 1.7 billion, repair expenses for typhoon damage and [ water ] losses are also included.

Next is the petrochemical business, which is revised down by JPY 12 billion, mainly due to the deterioration of ethylene and benzene prices, which is minus JPY 10.4 billion. Sales volume is down JPY 1.1 billion, caused by the intentionally lowered utilization at the Maruzen Petrochemical starting in January 2020 in response to weakening market prices.

Including expenses and others, the petrochemical business is revised down by JPY 12 billion. The oil E&P business is revised up by JPY 4 billion. Prices are down following the revised oil price assumption from $65 to $64 for the full year.

Sales volume was revised up by JPY 4.1 billion, supported by increased production from the existing mines. Including expenses and others, the oil E&P business is revised up by JPY 4 billion.

The other segment is revised up by JPY 1 billion, supported by the commencement of operations at the Himekami and Watarai Phase 2 of Cosmo Eco Power.

Next, Page 15 is just for your reference. Please refer to it later.

Page 16 is an outline of consolidated capital expenditures. Capital expenditures by business segment are shown on the right-hand side. The petroleum business is down JPY 5.3 billion from the previous announcement. As a result of scrutinizing the acceptance timing, we have confirmed that the net amount will be JPY 5.3 billion less. The oil E&P business is revised down by JPY 7.4 billion, mainly related to the conversion of some CapEx items into OpEx as part of our accounting process, resulting in reduced net amount of CapEx.

With this, I would like to conclude my remarks. That was my brief explanation of the major downward revision we made to the full year forecast.

Ordinary profit was revised down by JPY 58.5 billion from the previous announcement, on a gross basis, out of JPY 58.5 billion, that is the difference from the previous announcement, JPY 51.5 billion is attributable to the petroleum business.

The breakdown is as follows: I have explained about the JPY 25 billion decrease in ordinary profit, excluding the impact of inventory valuation. On top of that, inventory valuation was revised down by JPY 26.5 billion mainly driven by declining oil prices in January, March period. Meaning that once the market conditions are normalized, we can surely recover this amount.

In addition, out of JPY 25 billion decrease in ordinary profit, JPY 8 billion to JPY 9 billion is attributable to the time lag effect of crude oil, which is also caused by crude oil price fluctuation.

While product spread is deteriorating, we are trying to figure out how this is going to end up when the supply/demand balance is normalized, possibly in March or April. We will monitor carefully, but we believe that this is possible that product spread may recover all the way to the normalized level.

With this, I will conclude my remarks. Thank you.

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