Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2023-Q3

[Takayuki Uematsu, executive]

Good morning. This is Uematsu speaking. Thank you very much. Let me start my presentation, starting with Page 3. This slide shows the Q3 financial results and the forecast for the full year. Regarding the Q3 results, the figures have already been announced. So I'm sure that you are aware of those. So let me just give you the highlights.

We have revised down our forecast for the full year. This is due to the slowdown of revenues in the petroleum and petrochemical businesses from Q2 to Q3. So reflecting this, we have revised the full year forecast. Petroleum segment, there was a negative time lag as well due to the drop in crude oil prices, and the appreciation of the yen, which are mainly technical factors.

So we have revised down the forecast. As for petrochemicals, reflecting the deteriorating market prices, we have revised down the forecast as well. On top, inventory impact also deteriorated, which is also reflected in the revised forecast.

Third, as for the shareholder return, we have implemented a share buyback program of up to JPY 20 billion. Although we have revised earnings forecast downward, we plan to pay shareholder dividends as announced in May, which included annual dividend of JPY 150; interim dividend, JPY 75 and year-end dividend, JPY 75. The resulting total payout ratio is expected to exceed 50% of net income, excluding inventory impact, as announced in May.

Now I will go through some figures on Page 13. So Page 13, please. This is a review of the Q3 results by segment. You can see the breakdown by segment. In the petroleum business, product margins improved. However, ordinary income, excluding inventory valuation, was JPY 30.7 billion, down JPY 23.8 billion year-on-year due to the impact of refinery troubles, in-house fuel costs and higher energy costs.

In the petrochemical business, ordinary income was JPY 7.2 billion, down JPY 7.2 billion year-on-year due to a decrease in sales volume caused by deterioration of the olefin market. In the oil E&P business, ordinary income increased by JPY 42.2 billion to JPY 69.4 billion due to higher crude oil prices.

In the renewable energy business, ordinary income was JPY 1.1 billion, a decrease of JPY 0.7 billion due to the deterioration of wind conditions and the prior investment for offshore wind development. So the summary of consolidated profit and loss is shown on Page 14.

I would like to check the numbers. This is the outline consolidated P&L. Please take a look at the table. Line 4 is ordinary profit, JPY 158.7 billion, up JPY 11.7 billion year-on-year. Line 8 is profit attributable to owners of parent, JPY 62.1 billion. This is a decrease of JPY 17.8 billion year-on-year. Line 9, impact of inventory valuation is JPY 45 billion. So Line 10, ordinary profit, excluding inventory valuation, is JPY 113.7 billion, up JPY 10.9 billion year-on-year.

Crude oil price and exchange rate assumptions are as shown on the table. Line 15, CDU operating ratio was 97.1% on CD basis. Now please turn to Page 15. This shows consolidated ordinary profit by segment. Let me give you the details on next page.

I would like to talk on the variance analysis chart. Next page, please. You can see the year-on-year changes in ordinary profit. First, petroleum business. This is minus JPY 23.8 billion from JPY 54.5 billion to JPY 30.7 billion this year. So it is the JPY 23.8 billion. The breakdown is margin on the sales volume, JPY 13.9 billion. Expense and others minus JPY 37.7 billion.

In terms of [indiscernible], it was plus JPY 14 billion. If I break down further, it is 4 products, JPY 8.5 billion and other products, JPY 5.5 billion. The 4 products crude oil margin is up JPY 0.7 year-on-year. For other products, there was a margin improvement, mainly for jet fuel oil and heavy oil C.

For sales volume, it was plus JPY 3 billion for 4 products and minus JPY 3 billion for other products, meaning the same level as the last year in total. For imports and purchases, it was plus JPY 2.7 billion and export was JPY 10.7 billion positive from the export of diesel oil.

Impact of refinery trouble this year was minus JPY 13.5 billion because the trouble this year happened in the first half. Next is expense and others, minus JPY 37.7 billion, which is relatively high. The breakdown is in-house fuel cost, minus JPY 14.4 billion. Most of the remaining JPY 23.3 billion is attributable to LNG purchase cost, electricity cost reserve for shutdown maintenance, which increased due to inflation and purchase cost for bioethanol. So these are included in JPY 23.3 billion.

Next is petrochemical. For this segment, price is minus JPY 1.8 billion, and volume is minus JPY 7.7 billion. Mainly for price -- this is mainly due to the deterioration of profitability of ethylene export for Maruzen Petrochemical. For volume, this is due to reduced production output at Maruzen Petrochemical in response to the deterioration of the market prices.

So on the other hand, because of the lower production level, expense and others improved by JPY 2.3 billion. Oil E&P profit was up JPY 42.4 billion. Price is positive JPY 45.5 billion due to higher crude oil prices and a cheaper Japanese yen.

So next, I would like to move on to the renewable energy business. From JPY 1.8 billion to JPY 1.1 billion, there was a deterioration of JPY 0.7 billion. So JPY 0.5 billion is attributable to the poor wind conditions and the rest to the labor cost and the development cost associated with the new offshore facilities, which we have discussed in the past.

So that explains the deterioration of JPY 0.7 billion from JPY 1.8 billion to JPY 1.1 billion. Now let's move on to Page 17. Here is the consolidated balance sheet. As we have mentioned in the past, the end of December is a very special time of the year. So this is due to purely technical factors at the end of the year. So I don't believe that it makes so much sense for me to discuss the details of the balance sheet because of the special time of the year.

But the Line 4, net worth ratio is 22.5%. This is a 1% deterioration from the previous year. However, looking at the total assets in Line 1, it is due to the expansion caused by the oil price and the deterioration of the yen value. So that is the reason for the deterioration.

For your reference, net worth in the third line shows an increase of JPY 65 billion. Also, net interest-bearing debt is 1.03x. This is the result of considering 50% of the JPY 30 billion hybrid loan as equity.

Page 18, please. As for the summary of consolidated capital expenditures, I don't have additional comments here. As we said in the past, we just executed the investments based on the plan. And for the renewable business, there was an investment of JPY 11.7 billion. On the fourth line, this represents an investment share of just under 30% of the total portfolio.

Now I would like to move on to the revision of the earnings forecast. Page 20, please. The table shows the revisions to the financial results -- financial forecast. As you can see in the table, ordinary profit is JPY 172 billion, and consolidated ordinary profit excluding the impact of inventory valuation, is JPY 140 billion, meaning inventory valuation is JPY 32 billion.

Comparison to the previous year -- sorry, comparison to the previous forecast is shown to the right, right next to the previous forecast amounts. Ordinary profit is down JPY 56 billion from the previous forecast, and it is down JPY 10 billion, excluding inventory valuation. So the inventory impact is down JPY 46 billion. So we reduced the impact of -- positive impact of inventory valuation. So the positive effect of inventory valuation was revised down. As for JPY 10 billion reduction in profit, excluding inventory impact, this comprises JPY 6 billion for petroleum and JPY 4 billion for petrochemical business.

As for assumptions, on the right-hand side table, you can see the assumptions. The Dubai crude oil price on Line 15 is $82 for January-March period. The exchange rate is JPY 130 for January-March as compared to the previous forecast of crude oil price, $90 and an exchange rate of JPY 145.

Page 21, please. This shows the variance analysis from the previous forecast. So this is about the JPY 10 billion downward revision of profit. Petroleum business is minus JPY 6 billion. Margin and the volume is minus JPY 9.9 billion, and expense and others is plus JPY 3.9 billion. The petroleum margin impact is minus JPY 9.8 billion, of which 4 products is minus JPY 12.5 billion and others is plus JPY 2.7 billion.

This reflects the negative time lag coming from crude oil price and yen's appreciation. For other products, naphtha market prices were not as bad as we had expected. So this was a positive factor. Sales volume is plus JPY 1.3 billion, of which 4 products plus JPY 1.5 billion; and others, JPY 0.2 billion negative, minus JPY 0.2 billion. Imports, purchases and exports is minus JPY 1.4 billion.

Expense and others of plus JPY 3.9 billion is mainly due to in-house fuel cost, which is positive due to lower procurement price of crude oil. Petrochemicals. Price factor is minus JPY 3 billion and volume factor is minus JPY 3 billion.

Overall market prices deteriorated more than in the previous forecast. So the recovery of China is lagging behind. And for the petrochemical, this is the impact. And that's the main reason. And we do not have a clear outlook on market price recovery yet.

On the other hand, expenses improved due to lower utilization. This is a positive factor. So that's all for Page 21. Please go to Page 22, forecast on consolidated cash flows. Cash flows from operating activities is JPY 47 billion, which is relatively low. This includes the onetime impact of the JPY 44 billion fuel subsidy to carb extreme prices increases.

So Line 2, cash flows from investing activities should be evaluated over multiple years. There were some items carried over from the previous year. So this is 1 impact. The underlying level is slightly lower, although this is a relatively high level for a year. So the base level is a little bit lower than this.

As a result, in terms of the indicators, net worth is JPY 527 billion. This is an increase of JPY 70.8 billion year-on-year. Net worth ratio is 26.2%, an improvement of 2.7%. Net D/E ratio is 1.05x. If I could explain the factors behind this, there was an impact of special subsidy. So excluding that, the net D/E ratio should have been 0.97x.

Page 23 is the summary of capital expenditures. I do not have any more comments to add. So let me skip this page. If you could go back to the renewable energy business on Page 5. That shows some of the major titles. That's on Page 5. This is the same chart as we have shown to you in the past, showing the time line for wind power generation sites, commencement of operations.

As you can see, Kamiyuchi and Oita sites are coming online within this year. Please refer to the status for our other sites, which are coming online later in timing. Page 6 shows progress of the wind power generation business. As you can see, the Akita Port and Noshiro Port offshore wind farms, which are very fast large-scale farms in Japan came into operation.

Please refer to the outline on this page. Page 7 shows Cosmo Eco Power's electricity sales volume trends on the usual chart. Page 8 shows our initiatives on carbon neutrality, which has been mostly covered already in the past, except for the last 1 at the bottom, we have concluded a basic agreement with Toda Kogyo for the commercialization of environmental technologies.

We are discussing the use of their technologies for the production of hydrogen from the methane generated in their manufacturing processes and reducing their CO2 emissions using their CO2 separation and capturing technologies.

Page 9, please, topics for carbon neutrality. These additional topics, as shown at the bottom, we have signed an MoU with other companies for the realization of a carbon-neutral industry complex. So these are new initiatives that we are working on.

This concludes my explanation. Thank you for your kind attention.