Cosmo Energy Holdings Co., Ltd. (5021) Earnings Call Transcript & Summary

Good morning. Thank you for taking the time out of your busy schedules to attend our financial results briefing for fiscal year 2019. My presentation today will cover FY 2020 macroeconomic outlook and our response, FY 2020 full year forecast, progress of the sixth medium-term management plan and the dividend policy. Please open Page 2. I will explain macroeconomic trends and outlook for crude oil supply, demand and pricing. Please take a look at the chart at the bottom. The blue line shows global crude oil demand, and the orange line shows global crude oil supply. The gap between the supply and demand which appeared during the fourth quarter this year has been expanding at the moment. In response to the supply-demand gap, Dubai crude oil rise, shown by the red dotted line, fell sharply towards the first quarter of fiscal year 2020. The gap is expected to be closed as a result of concerted production cuts by OPEC+, voluntary production cuts by other oil-producing countries and the resumption of economic activity. We expect Dubai crude oil prices to recover gradually from the second quarter to $40 per barrel by the fourth quarter. Please turn to Page 3. I will discuss macroeconomic trends and outlook on product demand and operating ratio. In the bottom chart, the blue line shows global gasoline demand and the orange line shows global jet fuel demand. Both are expected to decline sharply going forward. On the other hand, the gray and the yellow dotted lines show our gasoline and jet fuel demand assumptions, respectively; actual demand for FY '19 and projected demand for FY '20. We forecast the average demand for gasoline and jet fuel to be 84% and 56%, respectively, of the previous year's levels, declining equal to or greater than the market outlook. Although a gradual recovery in product demand is expected from the second quarter, we believe that maintaining refinery operations will be a major challenge as refinery operations are reduced globally, with operating ratios in Chinese and South Korean refineries falling by approximately 30%. Page 4, please. I will take you through our response and assumptions for fiscal year 2020. Please see the red box on the left side of the table. As explained on the previous page, while demand is expected to decline, mainly for gasoline and jet fuel, the company plans to increase sales of gasoline and 4 major products by 15% and 10%, respectively, to 99% and 101% of the previous year's levels. And we will do this by expanding the supply to Kygnus Sekiyu. Sales forecast of fuel oil, including jet fuel, is kept almost unchanged from the previous year at 96%, which is 7% higher than the demand forecast. As a result, the company expects to remain in a short position where sales volumes exceed production volumes. As you can see on the right chart, jet fuel demand is expected to decline for full year to 56% of the previous year's level. However, since our jet fuel is sourced not only by in-house production but also by imported products, we can respond to a decline in demand by pushing back imported products. And therefore, we believe that the impact on the in-house production is fairly limited. As a result, you can see in the red box on the left-hand side of the slide we expect to maintain a high operating ratio of 86% on a CD basis and 95% on [ SD ] basis for full year FY '20. Please turn to Page 5. I will take you through our forecast for full year FY '20. Although it is extremely difficult at this point to make reasonable assumptions for the full year, we've tentatively planned, based on factors that can be assumed at the moment, the forecast for FY 2020 in light of the impact of COVID-19 pandemic. According to our forecast for FY '20, consolidated ordinary income, excluding the impact of inventory valuation, will be JPY 30 billion. And profit attributable to owners of the parent will be JPY 14.5 billion. Next, I would like to explain the factors that contributed to the increase or decrease in ordinary income, excluding inventory effects, for each business. In the petroleum business, we expect an increase of JPY 22.6 billion to JPY 27 billion due to the absence of the disadvantageous time lag we had last year, the effect of increased sales by expanding the supply to Kygnus Sekiyu and the absence of refinery troubles. In the petrochemical business, operating income is expected to decline JPY 7.7 billion to 2.5 billion (sic) [ negative JPY 2.5 billion ], mainly due to the declining prices in the market, the declining sales volumes due to the regular maintenance at Maruzen Petrochemical, among other factors. The oil exploration and production or E&P business is expected to post a decrease of 4 billion to 49 billion (sic) [ JPY 49 billion to negative JPY 4 billion], mainly due to the impact of falling crude oil prices. Other income is expected to decrease by JPY 4.4 billion to JPY 9.5 billion due to the consolidation and other factors. Please turn to Page 6. I will explain the progress of the sixth consolidated medium-term management plan. By FY '19, we had steadily implemented initiatives of our medium-term management plan such as preparation for IMO regulations, supply to Kygnus Sekiyu and entry into offshore wind farms. All the more because of the recent changes in the environment, we will maintain our policy of Oil & New, secure profitability and make appropriate investments for the future. Page 7, please. I will explain our dividend policy. Although our financial position deteriorated slightly in FY '19, as shown by the blue bar in the bottom chart, our ordinary income excluding the impact of inventory valuation remained positive. Thus, for FY '19, we are planning to pay a dividend of JPY 80 per share, as originally announced at the beginning of the year. For fiscal year '20, we are planning to maintain a dividend of JPY 80 per share. Our intention is to increase the weight on shareholder returns while considering a relative balance with the financial position. I will conclude my remarks by stressing our continuous and united efforts to become a respectable company that our employees can be proud of and a sustainable company that will continue to grow. Thank you.

Please turn to Page 9. I would like to take you through the outline of financial results for fiscal year 2019. Consolidated ordinary profit excluding the impact of inventory valuation was JPY 68.5 billion, down JPY 38.9 billion year-on-year. Net income was negative JPY 28.2 billion, down JPY 81.3 billion year-on-year. We have raised JPY 30 billion in a new subordinated loan and made an early repayment of the JPY 60 billion borrowed in FY '15. For your information: The new subordinated loan provides a return of interests clause. By segment, the petroleum business benefited from the supply newly started to Kygnus Sekiyu and the higher prices of low-sulfur C fuel oil triggered by stricter IMO regulations. On the other hand, due to the disadvantageous time lag caused by a sharp decline in crude oil prices; the lower prices of the 4 major products, especially the naphtha and jet fuel prices; the increase in expenses, ordinary income excluding the impact of inventory valuation was JPY 4.4 billion, down JPY 20.5 billion from FY '18. In the petrochemicals business, ordinary income was JPY 5.2 billion, down JPY 10.1 billion year-on-year due to the deterioration in prices in spite of the increased sales volume supported by the absence of power outage experienced last year at Maruzen Petrochemical. In the oil E&P business, ordinary income was JPY 45 billion, a decrease of JPY 11.9 billion year-on-year due to the impact of reduced production volumes at the Hail Oil Field and the lower crude oil prices despite the recovery of production volumes at the existing oil fields. In other businesses, ordinary income was JPY 13.9 billion, up JPY 3.6 billion year-on-year mainly due to the start of operation at new sites, namely Himekami and Watarai phase 2 of Cosmo Eco Power. Page 10 shows a summary of the consolidated results. Line 2, operating income was JPY 13.9 billion, up (sic) [ down ] JPY 80.8 billion year-on-year. Line 4, ordinary income was JPY 16.3 billion, down JPY 80.4 billion year-on-year. Line 8, profit attributable to owners of the parent was negative JPY 28.2 billion, down JPY 81.3 billion year-on-year. Line 9, impact of inventory valuation was down JPY 41.5 billion year-on-year to negative JPY 52.2 billion. Line 10, ordinary income excluding inventory valuation was JPY 68.5 billion, a decrease of JPY 38.9 billion year-on-year. Page 11 shows the breakdown of ordinary income by segment excluding the impact of inventory valuation. The waterfall chart on the next page explains this in more detail. Page 12, please. By segment, I will now explain the factors behind the JPY 38.9 billion decrease in ordinary income excluding the impact of inventory valuation. The petroleum business, shown in green, enjoyed an increase in profit due to the start of supply to Kygnus Sekiyu, but a negative time lag effect from the decline in crude oil prices resulted in a decrease in profit by JPY 20.5 billion. The green box shows a breakdown of JPY 4.5 billion decrease in margin and volume. Volume was up JPY 9.1 billion mainly due to an increased sales volume from the start of supply to Kygnus Sekiyu. In addition, due to the absence of the Sakai Refinery trouble that occurred in the previous year, import and purchase was up JPY 3.5 billion and export was down JPY 1.3 billion. Expenses and others were a negative JPY 16 billion due to an increase in repair expenses; and increases in depreciation and amortization, reward points for cashless payment; and an increase in variable sales expenses. The petroleum business, shown in yellow, is down JPY 10.1 billion due to the deterioration of paraxylene and other petrochemical prices despite the improvement in sales volume, supported by the absence of regular maintenance we had last year at petrochemical plants. The oil E&P business, shown in orange, is down JPY 11.9 billion due to the impact of falling oil prices and production cutbacks in the Hail Oil Field. Lastly, the others, including the wind power generation business, was positive JPY 3.6 billion, mainly due to the start of operations at new sites of Cosmo Eco Power. On Page 13, I would like to explain the consolidated cash flows and balance sheet. First, consolidated statement of cash flows. Cash flow from operating activities, on the first line, was JPY 111.7 billion due to the recording of income before income taxes and an improvement in the revenues due to the decline in oil prices. Cash flow from investing activities, on the second line, was an outflow of JPY 84.2 billion mainly due to repair and renewal work at the refineries and petrochemical plants. Free cash flow, on the third line, was positive JPY 275 billion (sic) [ JPY 27.5 billion ]. Next, I would like to explain the consolidated balance sheet. Shareholders' equity is down JPY 41.3 billion to JPY 239.8 billion due to a recognition of net loss, with an equity ratio of 14.6%, down 1.9% year-on-year. Net D/E ratio was 2.41x, reflecting the partial repayment of hybrid loans. We will continue to improve our financial position. Page 14 is an overview of consolidated capital expenditures. Capital investment in the Hail development and other large investments have been almost completed, while the coker capacity expansion required for the IMO regulations was still necessary. This increased CapEx for FY '19 by JPY 7.5 billion year-on-year to JPY 87.9 billion. This concludes my brief explanation of the financial results for fiscal year 2019. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]