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 2020. Today, I will cover the following content: highlights of the results and forecast, progress on the 6th Medium-Term Management Plan, dividend policy, Renewable Energy business and sustainable management. Please turn to Page 3, highlights of fiscal year 2020 results and fiscal year 2021 forecast. First, throughout fiscal year 2020, it remained critically important to properly respond to COVID-19. The company, as an energy supplier, managed to maintain a stable supply of energy while taking thorough countermeasures against the infection. As for the financial results, profit in the Oil E&P business fell due to the fall in crude oil prices. Overall, ordinary profit, excluding inventory valuation, however, rose JPY 8.1 billion year-on-year to JPY 76.6 billion due to increased sales of 4 major products as a result of expanded supply of Kygnus Sekiyu and improved margins by positive time lag. Profit attributable to owners of parent increased JPY 114.1 billion from the previous year to JPY 85.9 billion, a new record high, partly due to the tax effect. As for the forecast for fiscal year 2021, while the positive time lag is expected to disappear, ordinary income, excluding inventory effects, is expected to increase by JPY 3.4 billion to JPY 80 billion due to the rise in crude oil prices and the recovery of fuel oil demand. The impact of pandemic during fiscal year 2021 is expected to be limited only to weak jet fuel demand and other factors. Mr. Uematsu, Senior Managing Executive Officer, will explain more about this later. Please move to Page 5. I will now explain the progress on the structural improvement measures under the Medium-Term Management Plan. We are steadily implementing various measures under the midterm plan. In terms of current topics, the Chiba Refinery has been certified by the Ministry of Economy, Trade and Industry as a specified authorized business operator as the ninth plant in Japan with an excellent level of safety. We will continue to ensure safe and stable operations going forward. In the Renewable Energy business, the Chuki onshore wind farm site started operation in April. In the second half of the fiscal year, an operator of the Yurihonjo offshore wind farm will be selected. Please refer to Page 6 for outlook on the financial position and dividend policy. In the graph below, the blue bar shows profit attributable to owners of parent, the orange bar shows shareholders' equity and the yellow bar shows the net D/E ratio. The company's financial position is steadily improving, with the net debt-to-equity ratio falling between 1 to 1.5x as of the end of fiscal year 2021 as anticipated under the Medium-Term Management Plan. On the other hand, we need some more time to achieve the midterm target of JPY 400 billion in net worth. And we'll continue to work on the improvement of the balance sheet. We plan to distribute a dividend of JPY 80 per share for FY 2020 and keep the same level for FY 2021 while trying to increase the return to shareholders and improve the financial soundness in line with the basic policy of the midterm management plan. Please refer to Page 8 for the Renewable Energy business. Starting with this quarter, we are disclosing the information on the Renewable Energy business as a separate segment, along with the Petroleum, Petrochemicals and Oil E&P segments. The segment consists of Cosmo Eco Power, which is engaged in wind power generation, and CSD solar, which is engaged in solar power generation. The chart shows the trend of the installed capacity and ordinary profit in the wind power generation business. The green bar shows the plant capacity of onshore wind. The blue bar shows the plant capacity of offshore wind power generation and the yellow bar shows ordinary profit trends. The plant capacity is based on the company's share of investment. The plant capacity of onshore wind is currently about 300,000 kilowatt, but we have already obtained FIT for 500,000 kilowatts onshore wind farm, and we expect to start operation of new sites study in the future. In addition, with the start of non-firm connection, we are currently conducting surveys with the aim of further expanding the scale of our operations. We plan to start operation of offshore wind sites in the second half of 2020, reaching a total capacity of more than 1.5 million kilowatts combined with onshore wind power sites by FY 2030. In terms of ordinary profit, we achieved JPY 5 billion in FY 2019 due to the commencement of operations at new onshore wind sites such as Himekami and Watarai second phase. At present, upfront costs are being incurred such as development costs and personnel costs. But once new offshore sites are operational in the latter 2020s, we should be able to recover the cost and generate significant profits. Because the fundamental earning power is already in place in terms of installed capacity and other factors, by disclosing the information as a stand-alone segment, we can make sure that this new business gets sufficient attention in our medium-term management plan, Oil & New. On Page 9, I'd like to explain the progress on the Renewable Energy business. The Goto-hassakubana onshore site commenced operation in March and the Chuki onshore site in April 2021. Currently, we have 3 projects under construction, 2 projects under development and several other projects under investigation. On Page 11, I would like to explain Cosmo Energy Group's declaration of net zero carbon emissions. The group has declared that we will achieve net zero greenhouse gas emissions from its business operations by fiscal year 2050. As part of our future efforts, we will conduct the scenario analysis under the TCFD in fiscal 2021 and set milestones to achieve our long-term goal. In addition, in the seventh consolidated medium-term management plan starting from fiscal year 2023, we will formulate a management plan that integrates financial and nonfinancial aspects aiming for sustainable growth of the Customer Energy Group. This concludes my part of the presentation. Thank you.

This is Uematsu. I will now explain the outline of our full year results for fiscal year 2020. Please turn to Page 13, impact of COVID-19 pandemic. First, in terms of business continuity and operation, in accordance with the group's crisis countermeasures meeting regulations, we have established a Crisis Response Council and are implementing thorough crisis management. There has been no impact on business continuity at this time, including the operation of refineries. Next is the impact of markets. Dubai crude oil prices have improved significantly due to Saudi Arabia's voluntary production cut and the OPEC+ agreement on production cut. As for petroleum products, gasoline demand has been recovering with robust market conditions since the second quarter. On the other hand, demand for jet fuel has been sluggish throughout the year with weakened market conditions. As for petrochemical products, the paraxylene market has recovered to the level before the outbreak, but the market is still sluggish. While the benzene market has been higher than the level before the outbreak. So as a summary of the impact of the pandemic, various markets and product demands were affected significantly in the first quarter of fiscal year 2020. Although the situation improved from the second quarter onward, the national average jet fuel demand and the gasoline demand were approximately 40% and 90% at the previous year's level, respectively. In fiscal year 2021, we expect demand to continue to decline, especially for jet fuel. Let me now take you through the financial results for fiscal year 2020 on Page 14. For fiscal year 2020, Consolidated ordinary profit, excluding inventory valuation effect, was JPY 76.6 billion, an increase of JPY 8.1 billion versus the previous year. And with the positive impact of inventory valuation of JPY 20.8 billion, consolidated ordinary profit was JPY 97.4 billion, an increase of JPY 81.1 billion versus the previous year. And the profit attributable to owners of parent was JPY 85.9 billion, an increase of JPY 114.1 billion versus the previous year. Due to the slump in crude oil prices and petrochemical prices, each business segment, except for the Petroleum business, saw a decrease in profit. But the Petroleum business saw a significant increase in profit due to the increased sales volumes of 4 major products supported by full scale supply to Kygnus Sekiyu as well as positive time lag. With the accumulation of record high income, the net debt-to-equity ratio improved by 0.82 from the end of the previous year to 1.59x, and our financial position improved significantly. By business segment, in the Petroleum business, ordinary profit, excluding inventory effects, was JPY 53.3 billion, an increase of JPY 48.9 billion versus the previous year mainly due to the increased sales of 4 major products supported by the expanded supply to Kygnus Sekiyu and a positive time lag caused by the rising crude oil prices, although earnings deteriorated due to the decline in jet fuel prices and sales volume. In the Petrochemical business, ordinary profit was negative JPY 3.3 billion, a decrease of JPY 8.5 billion from the previous year due to the deterioration of the paraxylene market, a decrease in sales volume caused by the regular maintenance at Maruzen Sekiyu during the first quarter, and the time lag in the acceptance of naphtha. In the Oil E&P business, ordinary profit was JPY 13.9 billion, a decrease of JPY 31.1 billion from the previous year due to the impact of decline in crude oil prices. In the Renewable Energy business, ordinary profit was JPY 4.1 billion, a decrease of JPY 0.8 billion, mainly due to the upfront costs associated with the offshore wind power development at Cosmo Eco Power. Next, Page 15 shows the consolidated income statement. Operating profit on the second line increased JPY 87.4 billion to JPY 101.3 billion. Ordinary profit on the fourth line increased JPY 81.1 billion to JPY 97.4 billion. And profit attributable to owners of parent on the eighth line increased JPY 114.1 billion to JPY 85.9 billion. The inventory impact on the ninth line improved JPY 73 billion to JPY 20.8 billion. Ordinary profit excluding inventory valuation effects on the 10th line was JPY 76.6 billion, an increase of JPY 8.1 billion from the previous year. Next, Page 16 shows ordinary profit, excluding inventory valuation effects by segment. I will explain in detail in the waterfall chart on Page 17. Page 17, please. I'll explain the factors behind the JPY 8.1 billion increase in ordinary profit excluding inventory effects by segment. The factors behind the JPY 48.9 billion year-on-year increase in ordinary profit in the Petroleum business are shown in green. As in the box, margin and sales volume is up JPY 38.2 billion. I will give you the breakdown. Margin is up JPY 31.6 billion, which consists of JPY 26.4 billion for the 4 major products and 5.2% for non-four major products. Sales volume is up JPY 1.9 billion, which consists of plus JPY 13.7 billion for the 4 major products due to increased supply to Kygnus Sekiyu and minus JPY 11.8 billion for non-four major products due to lower jet fuel demand. Imports and purchases is positive JPY 6 billion, exports is negative JPY 1.3 billion. Expenses and others is positive JPY 10.7 billion due to improvement in in-house fuel costs, decrease in sales promotion, travel and transportation expenses and the decrease in variable selling expenses due to the pandemic as well as termination of cashless point program. Petrochemical is down JPY 8.5 billion, as shown in yellow. Price is down JPY 10.2 billion due to the deterioration of the paraxylene market and the delay in the acceptance of naphtha by Maruzen Petrochemicals in the first quarter. Volume is down JPY 2.8 billion due to the decrease in sales volume caused by the regular maintenance of Maruzen Petrochemicals in the first quarter and expenses and others are positive JPY 4.5 billion. Oil E&P is down JPY 31.1 billion, as shown in orange. Price is negative JPY 39.6 billion due to the decline in crude oil prices. Volume is up JPY 1.3 billion due to the time lag. Expenses and others is positive JPY 7.2 billion. Renewable Energy is down JPY 800 million, as shown in blue, due to an increase in personnel expenses and development and research expenses associated with the offshore wind power development at Cosmo Eco Power. Next, Page 18 shows consolidated cash flow and the balance sheet. First, I would like to explain the consolidated statement of cash flows. Cash flow from operating activities on the first line is positive JPY 167.4 billion. Cash flow from investing activities in the second line is negative JPY 84.6 billion mainly due to the implementation of regular maintenance at refineries and petrochemical plants. Free cash flow in the third line is positive JPY 82.8 billion. Please note that the actual amount was around JPY 50 billion due to the difference in the timing of tax payment caused by holidays. Cash flow from financing activities on the fourth line is a negative JPY 80.6 billion. Next, I would like to explain the consolidated balance sheet. Shareholders' equity on the third line is JPY 324.9 billion, an increase of JPY 85.1 billion from the end of the previous year. The net worth ratio on the fourth line improved 4.4% to 19%. The net debt-to-equity ratio on the sixth line improved by 0.82x to 1.59x. Moving on to Page 19, consolidated capital expenditures. CapEx for FY 2020 is down JPY 8.3 billion to JPY 79.6 billion, mainly due to the impact of the completed investment in IMO requirements. Depreciation and amortization is almost unchanged from the previous year. Page 20 shows key ESG topics. As for E, promotion of environmental measures following the recent announcement of TCFD and net zero carbon, we decided to switch to 100% renewable energy-based electricity at all directly operated service stations as explained by the press release. In the area of S, the enhancement of human rights and social contribution measures, we were selected as a constituent stock of the MSCI Japan Empowering Women Index. As for the G of strengthening corporate governance structure, we have structured our sustainable management promotion system. That was my brief overview of the fiscal year 2020 financial results. From Page 22, I'll explain our full year forecast for fiscal year 2021. Consolidated ordinary profit, excluding inventory effects, is expected to increase due to improved crude oil prices and recovery of fuel oil demand, while the positive time lag effect of the previous year is expected to disappear. Consolidated ordinary profit for the full year is expected to be JPY 88 billion, a decrease of JPY 9.4 billion versus the previous year. Consolidated ordinary profit, excluding inventory valuation effect, is expected to be JPY 80 billion, an increase of JPY 3.4 billion versus the previous year. And the net income attributable to owners of parent, JPY 40 billion, a decrease of JPY 45.9 billion versus the previous year. We expect the net debt-to-equity ratio is in the low 1x range or the range between 1 and 1.5x due to the improvement of our financial position by the accumulation of shareholders' equity. As for segment information, I would like to explain on next page onward. Page 23, please. This shows fiscal year 2021 assumptions. Dubai price is $60 and the exchange rate is JPY 105 to the dollar. As for ordinary profit by segment, without inventory effects, I'll explain it on Page 24. Page 24, please. I'll explain the factors behind the JPY 3.4 billion year-on-year increase in ordinary profit by segment, excluding inventory valuation factors. First, the factors behind the decline of JPY 21.3 billion from the previous year in the Petroleum business are shown in green. Margins and sales volumes down JPY 14 billion. I will give you the details. Margins are expected to decrease by JPY 16.6 billion for the 4 major products due to the absence of the positive time lag and JPY 10.1 billion for the non-four major products due to the margin deterioration of C-heavy fuel and others. So the total decrease is JPY 26.7 billion. Sales volume is expected to increase by JPY 4.7 billion for the 4 major products due to the recovery of crude oil prices and by JPY 4.1 billion for non-four major products for a total increase of JPY 8.8 billion. We expect an increase of JPY 3.1 billion in imports and purchases because full capacity operation is expected and an increase of JPY 0.8 billion in exports. The breakdown of the minus JPY 7.3 billion in expenses and others is expected to be minus JPY 6 billion due to deterioration in in-house fuel costs. The Petrochemical business is up JPY 5.8 billion year-on-year. JPY 1.5 billion increase in price is due to the absence of the delayed acceptance of naphtha at Maruzen Petrochemicals as we did in the previous fiscal year. Sales volume is up JPY 3.2 billion, mainly due to the impact of the difference in the scale of scheduled maintenance at Maruzen Petrochemicals in the previous and current fiscal year. Expense and others increased profit by JPY 1.1 billion. Oil E&P is up JPY 19.1 billion, as shown in orange. Price is up JPY 27 billion due to the rise in crude oil prices. Sales volume is down JPY 2.8 billion due to the absence of the positive time lag we had last year. Expense and others is negative JPY 5.1 billion. The Renewable Energy business is down JPY 0.8 billion, as shown in blue. While the new onshore wind power site is expected to start operation at Cosmo Eco Power, we expect to incur upfront cost of offshore wind power development. Page 25 shows consolidated capital expenditures planned for fiscal year 2021. Capital expenditures for the full year of fiscal year 2021 are expected to decrease to JPY 72 billion. By segment, we expect a decrease of JPY 8.6 billion in the Petroleum business due to the decrease in maintenance CapEx and a decrease of JPY 3.1 billion in the Petrochemicals business. In the Oil E&P business, we expect an increase of JPY 6.1 billion, assuming an investment in secondary oil recovery in the Hail Oil Field. Investment securities are expected to increase by JPY 10.5 billion year-on-year mainly due to the increased investment in offshore wind development. Depreciation and amortization is expected to increase by JPY 5.6 billion, but it means that we are better positioned to generate cash flow from operations. With this, I would like to conclude my presentation. Thank you. [Statements in English on this transcript were spoken by an interpreter present on the live call.]