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

Thank you very much for taking time out of your busy schedule to attend our fiscal year 2021 full year financial results briefing. I would like to explain the highlights of our financial results for FY 2021 and the forecast for FY 2022, progress of the sixth consolidated medium-term management plan, shareholder return policy and progress of the Renewable Energy business. Please turn to Page 3. I will now explain the financial results for FY 2021 and the forecast for FY 2022. First, on financial results. Capacity utilization for FY '21 was as high as 99.3% on an SD basis, due to the short position strategy where production volume is kept lower than sales volume. Positive time lag in full product margins due to higher crude oil prices resulted in a large increase in profit. Ordinary income, excluding inventory effects on line 3 of the table at the bottom, increased JPY 84.2 billion to JPY 160.8 billion. Net income shown on line 4 increased by JPY 53 billion to JPY 138.9 billion. Both ordinary income and net income have renewed the highest record achieved in FY 2020. Please refer to the right side of the table for forecast for FY '22. Ordinary income, excluding inventory effects on line 3 is JPY 155 billion. Net income on line 4 is JPY 93 billion. We expect to achieve all targets of the sixth medium-term management plan shown to the lower right. Next, on Page 5, I will explain the progress of structural improvement under the medium-term management plan. As of FY '22, final year of the midterm plan, most of the initiatives have already been completed. The petroleum business made a significant contribution to earnings through the initiated supply to Kygnus Sekiyu, the main initiative of the midterm plan and the maintenance of high capacity utilization through safe and stable operation. In the renewable energy business, we are steadily expanding the scale of onshore wind power sites through the start of non-firm connections. In the second half of FY '22, the Akita Port and Noshiro port offshore wind farm, the first offshore wind farm in Japan is scheduled to start operation. On Page 6, I will discuss key topics of FY 2021. In March 2022, our major shareholder MIC sold its stake in the company. Our company accepted the sale in line with mix, new strategic direction and in view of the fact that the strategic alliance has already yielded certain results. Although the capital relationship has been terminated, the mutual trust and the relationship with the Emirate of Abu Dhabi, which started more than 50 years ago, will remain unchanged. We will continue to deepen our relationship with the Emirate through exploration in the new Block 4 collaboration in the renewable energy sector and cooperation in CCS and CCUS. On Page 7, I would like to discuss how we are enhancing earning power. The graph in the middle shows trends in net income, excluding inventory effects. We are strengthening our earning power, especially in the main source of earnings petroleum business and making a significant improvement, especially during the sixth midterm plan period. As part of our efforts to strengthen profitability in addition to the restructuring of the supply system, including the closure of the Sakaide Refinery in the previous midterm period, we began to supply to Kygnus Sekiyu in FY '19, which enabled us to establish a short solution with lower production relative to sales. The graph on the lower right shows trends in utilization. The blue line shows our utilization and the orange line, the national average. As mentioned earlier, our refineries have a higher utilization than the national average because of our short position. The efforts have significantly improved our earnings power, especially in the petroleum business. Please turn to Page 8. The slide shows our financial position. On the chart at the bottom, the blue bar shows net worth, and orange bar shows the net D/E ratio. As of the end of FY 2021, both net worth and net D/E ratio have achieved the goals of the midterm plan, shown by the red dotted line ahead of schedule. We expect further improvement by the end of FY 2022, and our financial strength is expected to exceed the previous record established in FY 2007 level. Please refer to Page 10 for further details of our shareholder return policy. As I explained earlier, by strengthening our earning power, we have achieved the midterm target ahead of schedule by the end of FY '21. Considering our credit rating of BBB+, further improvement in our financial structure is essential for us to obtain an A rating. On the other hand, we believe that we have already reached a certain level of shareholder returns at this point in time. Taking these circumstances into consideration, we plan to return 50% of net income, excluding inventory effects, to shareholders in FY 2022, with a dividend of JPY 150 per share, an increase of JPY 50 from the previous fiscal year with a JPY 75 interim and 75 year-end dividend, respectively. In addition, the company plans to buy back own shares worth up to JPY 20 billion. Please refer to Page 12. For progress in the wind power generation business. The middle part of the slide shows the pipeline of our onshore sites. We have 300,000 kilowatts in operation, another 300,000 kilowatts under construction and development and about 300,000 kilowatts of several other projects in development, including those preparing for FIT bidding. In total, the scale of power generation is expected to increase by approximately 900,000 kilowatts by FY 2030, which makes the total including offshore sites to exceed 1.5 million kilowatts by FY 2030. Next, on Page 13. I would like to explain the changes in electricity sales volume. The amount of electricity sold in FY '21 is 595 million kilowatts exceeding the previous year's level due to the commenced operation of the Chuki onshore site. Next, Page 14 shows details of projects under construction. We are currently working on the construction of the Akita Port and Noshiro port project, the first onshore, offshore wind power site in Japan, the Kamiyuchi project in Hokkaido and Oita project in Oita Prefecture, both of which are onshore sites. All of them are scheduled to start operation in the second half of FY 2022. We will continue to focus on the renewable energy business as a pillar of the new businesses under the midterm plan old and new. This concludes my explanation. Thank you.

This is Uematsu. I would like to present an overview of the financial results for FY 2021. Please refer to Page 16. I will explain the impact of COVID-19 pandemic. First, please refer to the impact on business continuity and operations. Please refer also to resource prices as written here. Next, let me discuss the impact on the market. As for petroleum products, the domestic market for products remained firm, while the demand remained at the same level as in the previous year. In the jet fuel market, market conditions are improving significantly due to Russia's invasion of Ukraine, but demand has yet to recover. As for petrochemical products, the presiding market has generally recovered to the pre-pandemic level. The benzene market has been contracting, but is still at the pre-COVID level. Next, I would like to touch upon the outlook for future impacts. In FY '21, the impact of the pandemic has largely been overcome. Page 17, please. It shows a summary of FY 2021 full year financial results. Consolidated ordinary income, excluding inventory valuation effects, is JPY 160.8 billion, an increase of JPY 84.2 billion year-on-year. Including the positive impact of inventory valuation of JPY 72.3 billion, profit is JPY 233.1 billion, an increase of JPY 135.7 billion year-on-year. Profit attributable to owners of parent is JPY 138.9 billion, an increase of JPY 53 billion year-on-year. It was a record high. In addition, an extraordinary loss of JPY 10.8 billion was recorded due to impairment loss at the Qatar Petroleum Development. By segment, petroleum business, ordinary profit, excluding inventory valuation, increased JPY 39.9 billion to JPY 93.2 billion due to improved margins for the 4 major products, positive time lag due to higher crude oil prices, contently high refinery utilization and increased sales volume of the 4 major products. Petrochemical business, ordinary profit is JPY 13.6 billion, an increase of JPY 16.9 billion year-on-year due to improvement in the benzene market, effect of shutdown maintenance at Maruzen Petrochemical and absence of naphtha delivery time lag that we had last year. All E&P ordinary profit is JPY 44.8 billion, an increase of JPY 30.9 billion from the previous year due to an increase in crude oil prices despite a decrease in sales volume. Renewable energy ordinary profit is JPY 3.5 billion, down JPY 0.6 billion from the previous year, mainly due to upfront costs incurred in connection with offshore wind power development at Cosmo Eco Power. Next, Page 18, please. This is P&L profits. As you can see in the table, I'm sure that you are aware of this. So I will skip explanation. Line 11, crude oil price from April to March is $78 per barrel. Line 12, exchange rate for April to March was JPY 112 per dollar. And Line 13, just for information, the January-December O&P assumption was $69 per barrel and exchange rate was JPY 110, this is for January to December. On Line 15, topper utilization was 95.4%, which was extremely high. Next, Page 19, please. The breakdown of ordinary profit, excluding inventory valuation by segment, I will explain the detail on next page. Page 20 shows factors behind JPY 84.2 billion year-on-year increase in ordinary income, excluding inventory valuation factors by segment. This is, first, petroleum business, shown in green, it's up JPY 39.9 billion. Margin and volume is up JPY 47.3 billion. Breakdown is as follows: margin increased JPY 25.3 billion for the 4 major products and a JPY 5.7 billion for other products for a total of JPY 31 billion. And this includes JPY 1.3 of time lag effect. Volume increased by JPY 11 billion for the 4 major products and JPY 3.6 billion for other products, including jet fuel, totaling JPY 14.6 billion, mainly due to the recovery from COVID-19. The total increase in profit was JPY 14.6 billion. Import and purchase is down JPY 0.5 billion due to worsening import and purchase costs, while export is up JPY 2.2 billion due to improvement in unit prices. Expense and others is down JPY 7.4 billion. The breakdown is as follows: minus JPY 11.6 billion due to deterioration of in-house fuel cost, plus JPY 4.6 billion due to the absence of regular maintenance cost and minus JPY 0.4 billion due to other factors. Next, the pricing factor is up JPY 19.2 billion due to improved market conditions, especially for benzene and absence of naphtha delivery time lag at the Maruzen Petrochemical that we saw last year. Volume is up JPY 1.6 billion due to the difference in the scale of regular maintenance at Maruzen Petrochemical and others down by JPY 3.9 billion. Oil E&P business, shown in orange, is up JPY 30.9 billion. The price factor is up JPY 36.6 billion due to the rise in crude oil prices. Volume is down JPY 3.9 billion due to the absence of the positive time lag that occurred last year. Renewable energy, shown in blue is down JPY 0.6 billion year-on-year, mainly due to an increase in upfront costs. Finally, others is down JPY 2.9 billion, mainly due to consolidation processes. Please move on to Page 21. I will now give you a summary of consolidated cash flow and balance sheet information. First, consolidated state cash flows, line 1, cash flow from operating activities is cash inflow of JPY 108.4 billion, mainly due to the posting of net profit. Operating cash flow is down year-on-year due to the time lag of gasoline tax payment caused by the number of holidays in the previous year and an increase in inventories due to higher crude oil prices. Line 2, cash flow from investing activities was negative JPY 67.5 billion, mainly due to capital investment. As a result, free cash flow was positive JPY 40.9 billion. Next, I will explain the consolidated balance sheet. Line 3, shareholders' equity increased JPY 131.3 billion to JPY 456.2 billion. Line 6, net D/E ratio improved dramatically by 0.55x to 1.04x. On Page 22, I will explain the consolidated capital investment. As you may be aware, capital expenditures for FY 2021 were JPY 57.1 billion, a decrease of JPY 22.5 billion from the previous year, mainly due to absence of regular maintenance we had last year. Page 23, please. It describes ESG topics from FY 2021 to date. The main topics are explained on next page. So please refer to Page 24. As for the environment, we have disclosed our road map to achieve net zero by 2050. The road map has been posted on our website since yesterday. So please have a look. Other topics related to the environment include signing of MOU with Masdar for collaboration and decarbonization, signing of a basic agreement with the Iwatani Corporation for collaboration in the hydrogen business and the signing of a document with ADNOC, an Abu Dhabi oil company on CCS and CCUS decarbonization collaboration. As for governance topics on which we received some comments from analysts, we introduced ESG evaluation for annual bonuses of executive officers, starting in FY '22. I will now begin my explanation on FY '22 forecast starting on Page 26. For FY '22, Oil E&P business is expected to post a large increase in profit due to rising crude oil prices. However, consolidated ordinary profit, excluding imagery effects, is expected to decrease due to the positive time lag effect that occurred in the previous fiscal year in the petroleum business. We expect full capacity utilization again in FY '22. Consolidated ordinary profit is expected to be JPY 190 billion, a decrease of JPY 43.1 billion year-on-year. While excluding inventory valuation factors, it is expected to be JPY 155 billion, a decrease of JPY 5.8 billion year-on-year, and the net income is JPY 93 billion, a decrease of JPY 45.9 billion year-on-year. By segment, petroleum business profits are expected to decrease due to the absence of a positive time lag effect that occurred in the previous fiscal year and the deterioration of in-house fuel costs caused by rising crude oil prices. despite the benefits of increased revenues from jet fuel and others coming from better overseas market conditions. Petrochemical business profit is expected to decrease due to deterioration of petrochemical market conditions, such as benzene offsetting the increased sales volume at Maruzen Petrochemical as a result of absence of regular maintenance. Oil E&P profit is expected to increase due to higher crude oil prices. Renewable energy business expects a lower profit due to upfront costs associated with the full-scale development of offshore wind power. Page 27 shows assumptions. I will give you more details by segment on next page, but crude oil price is $100 per barrel and FX rate is JPY 125 to the dollar. And the January to December assumption, which is for oil E&P is JPY 95 per barrel and exchange rate is JPY 123 to the dollar. Page 28, please. It explains factors behind the JPY 5.8 billion year-on-year decline in ordinary profit, excluding inventory factors by segment. First, petroleum business in green is down JPY 29.2 billion year-on-year. Margin on the volume is down JPY 15 billion. As for the breakdown, margin for the 4 major products is down JPY 23.8 billion, and the margin for other products is up JPY 7.1 billion, resulting in a total decrease of JPY 16.7 billion. Volume is down JPY 4.8 billion, including a decrease of JPY 4.6 billion for the 4 major products and JPY 0.2 billion for other products. Import and purchase is up JPY 1.4 billion and export is up JPY 5.1 billion due to export of diesel fuel. Expense in others is negative JPY 14.2 billion, including negative JPY 11.6 billion due to worsening of in-house fuel costs minus JPY 2.6 billion due to other factors. Next, petrochemical business in yellow is down JPY 6.6 billion. Price is down JPY 12.4 billion, mainly due to the worsening benzene market conditions. Volume is up JPY 6.6 billion due to the absence of regular maintenance. Expense and others is as shown here. Oil E&P in orange is up JPY 30.2 billion. Price is up JPY 52.5 billion due to an increase in crude oil prices. Volume is down JPY 9.8 billion, mainly due to the regular maintenance at Abu Dhabi Oil and expenses and others is down JPY 12.5 billion, mainly due to an increase in repair costs associated with regular maintenance. Renewable energy business shown in blue is down JPY 0.5 billion due to prior investment. Please refer to Page 29. This shows the forecast of consolidated cash flow, which is disclosed for the full year from this time onward. For financial indicators, please refer to the table at the bottom. Net worth ratio on line 2 is 25.7% and net D/E ratio is less than 1x. Page 30 shows consolidated capital expenditure plan for FY '22. Capital expenditures for FY '22 are expected to be JPY 90.4 billion, an increase of JPY 33.3 billion. By segment, Oil E&P is expected to increase by JPY 14.3 billion, mainly due to the secondary recovery investment in the Hail oil field, this is secondary recovery using the water flooding method. Due to fluctuation in oil prices, we were trying to determine the timing. Renewable energy business is expected to increase by JPY 14.3 billion. This is mainly due to capital investment in the newly constructed onshore sites. Investment securities is up JPY 11.7 billion to JPY 16.3 billion, mainly due to investments in offshore wind power projects. This concludes my presentation on FY '21 financial results and FY '22 forecast. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]