Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2022-Q3

[Takayuki Uematsu, executive]

This is Uematsu. Thank you very much for your attendance today. Let me start my presentation following the presentation material.

Page 1 is the agenda. I will start with the highlights of the fiscal year 2021. The third quarter financial results shown on Page 3.

First, the company maintained a refinery utilization rate based on a short position strategy as shown at the first bullet point. Profit increased sharply year-on-year, mainly due to an increase in sales volume of petroleum products and the rise of crude oil prices. We enjoy a positive cycle of supply and demand situation at the moment in support of the positive performance. So we have decided to revise the fiscal year 2021 full year forecast upward because most of the targets announced so far have already been achieved as of the third quarter and oil price assumptions set earlier are turning out to be too conservative compared to the current trends.

While keeping the dividend forecast unchanged from the November announcement at JPY 100 per share, up JPY 20 year-on-year. The table at the bottom shows key financial metrics. Net worth on line 6 is JPY 397.2 billion, with net worth ratio on line 7 of 20.4% and net DE ratio on line 8 of 1.28x compared with the FY 2021 forecast shown on the right-hand side. JPY 433 billion in net worth, 24.1% in net worth ratio, 1.12x in net DE ratio, 30.3% in ROE and JPY 1,373 in EPS. These medium-term targets have been achieved 1 year ahead of time.

Please turn to Page 5. We have quantified the progress of our wind power generation business. First, our long-term vision remains unchanged. Second, following the tender results of the Yurihonjo-shi offshore project, we are reassessing the entire supply chain, including construction, O&M and distribution of power, to dramatically strengthen the cost competitiveness of the project. We need to fundamentally review the strategy and come up with a new business plan that encompasses the entire market or the supply chain.

We will continue to promote the existing offshore projects while trying to expand the scale of onshore sites, including non-firm type.

Page 6, please, for the progress of the wind power business. Onshore, other than 2 sites under construction and 5 under development, we are securing several other sites, including non-firm type. Although we tend to focus more on offshore sites, we are slowly but steadily making progress on onshore locations. Offshore, we have 6 sites, including those under construction. The offshore northwest of Aomori project is expected to be designated as a high potential area going forward.

Page 7 shows progress of projects under construction. Please refer to it later.

Page 8 shows changes in the electricity sales volume just for your information.

I will now take you through the outline of the financial results for the third quarter of FY 2021. Page 10 summarizes the impact of the COVID-19 pandemic. As for the impact on the market, please take a look at the impact on petroleum products shown in the middle of the slide. The domestic price trend for the 4 major products remain strong with national average demand at 99% of the previous year and 93% of the year before, meaning, that the demand has come back almost to the pre-COVID level. That is the current situation.

On the other hand, the jet fuel price has already come back to the pre-COVID level, but the demand is 141% of the previous year and still 55% of the year before. So there still is a long way to go. As for petrochemical products, the paraxylene price has recently weakened as shown in the chart below. It doesn't seem to recover at the moment yet.

On the other hand, the benzene price is maintaining the pre-COVID level despite the temporary contraction at the moment. So jet fuel demand and the petrochemical pricing require careful monitoring going forward.

Page 11, please. The slide shows the third quarter fiscal 2021 review. The second bullet point says the company recorded an extraordinary loss of around JPY 1.4 billion for the third quarter due to the impact of losing the bid for the offshore Yurihonjo-shi project. The loss is incurred mainly by the feasibility study costs, and no more expenses should be incurred going forward.

In terms of the results by segment. The petroleum business is in a favorable condition, as discussed earlier. Ordinary profit, excluding inventory valuation, is up JPY 22.6 billion to JPY 54.5 billion. Petrochemical business increased its profit supported by improvement in the benzene market and absence of the impact of regular maintenance at Maruzen Petrochemical and the negative impact of naphtha time lag, which we had last year. The profit is up JPY 21.8 billion year-on-year. Oil E&P is up JPY 19.1 billion year-on-year on the back of rising crude oil prices, offsetting the impact of lower sales volume. Renewable energy business is down JPY 0.5 billion year-on-year due to the upfront costs incurred for offshore wind development.

Next, Page 12 is the income statement. I won't go into details because the results are already announced. But let me mention line 11, crude oil price for April, December is $72, up $33 from the previous year, and the exchange rate is JPY 111; meaning, yen's depreciation of JPY 5 against the dollar. These represent cost increases for the company.

Just for your information, Q1 oil price was $66, which is $25 higher than last year. The CDU operating ratio was 93% on a calendar basis and 99.2% on an FTE basis, meaning, that we had a high level utilization.

Page 13 shows ordinary profit by segment. To avoid repetition, I will skip this page.

Page 14 is the variance analysis of Q3 ordinary profit. From your left, petroleum business is up JPY 22.6 billion. In terms of breakdown, margins and sales volumes was positive JPY 24.8 billion, which consists of margins being positive JPY 11.9 billion and the sales volume, positive JPY 11.9 billion. As for margins, 4 products was positive JPY 0.8, of which JPY 0.4 was the time lag effect. As for sales volume, 4 products was positive JPY 7.9 billion, and other products was positive JPY 4 billion. Most of that comes from the volume recovery of jet fuel. The remaining JPY 1 billion is attributable to the supply and demand balance.

As for expenses and others of negative JPY 2.2 billion, in-house fuel cost was negative JPY 8.7 billion despite the improvement in margins. While repair cost and others was positive JPY 6.5 billion, thanks to lower repair cost.

Next is petrochemicals. For reasons I mentioned earlier, price was positive JPY 17.4 billion, reflecting improved market conditions. Volume was positive JPY 3.5 billion due to the absence of regular maintenance. Oil E&P was already discussed earlier in my presentation, so I will skip this.

Please go to next page. I will skip Page 15 since it was already discussed at the beginning.

Page 16 is the highlights of capital expenditures. As already mentioned several times in the past, capital expenditures are JPY 24.6 billion, lower in the previous year. It was lower than in the previous year due to the end of a major investment cycle, as shown on the left-hand side table.

Let me move on to the full year forecast for FY 2021, which has been revised upward. As mentioned earlier, the full year results are expected to be significantly higher than the previous forecast, mainly in the petroleum business as of the third quarter, reflecting positive time lag amid rising oil prices, favorable market conditions and greater inventory valuation effects. Please refer to the preconditions shown on the right-hand side in the table.

Dubai crude oil on line 14 is $84 for the January-March period, reflecting actual for January and a forecast for February and March of $85. It was revised from $75 of the previous announcement. Exchange rate on line 15 is JPY 115, revised by JPY 5 from JPY 110 of the previous announcement. As a result, as the second bullet point shows, the full year consolidated ordinary profit is revised up JPY 40 billion to JPY 195 billion. Ordinary profit, excluding inventory impact, is revised up JPY 20 billion to JPY 133 billion. And profit attributable to owners of the parent is revised up JPY 22 billion to JPY 115 billion. The company plans to pay a dividend of JPY 100, unchanged from the last announcement.

The main reason for the upward revision is the positive time lag amid rising oil prices and other market conditions. The dividend of JPY 100 is unchanged from the November announcement.

Page 19, please. The slide shows the variance from the previous announcement. From the left, petroleum business is revised up by JPY 13.5 billion. As for breakdown, margins and sales volumes, positive JPY 14.4 billion, of which margins was positive JPY 15.1 billion. As for the breakdown of margins, 4 products was positive JPY 9.2 billion, which was significant, and other products, positive [ ZAR 5.9 billion ], which was also significant because overseas market conditions turned out to be stronger than expected. Naphtha, jet and C heavy oil prices and spreads are higher than expected. As for sales volume, it was positive JPY 0.7 billion. The balance is the supply-demand balance, which is negative JPY 1.4 billion.

For petrochemical, the breakdown is as shown on the slide for price, volume, et cetera. Price was positive mainly due to olefin. Next, oil E&P is revised up JPY 4.5 billion. Price was positive JPY 1.5 billion. Volume was negative JPY 0.3 billion. Expense and other was positive JPY 3.3 billion, which accounted for most of the impact. Since the segment had a December closing, most of the expenses had already been included in the forecast. The only change was expenses, which was better than expected.

For Page 20, I do not have any additional comments. With this, I would like to conclude my presentation. Thank you very much.