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

Good morning. Thank you very much for taking time out of your busy schedules to join us in our financial results briefing for fiscal year 2022. Today, I would like to present highlights of FY '22 financial results and FY '23 forecast, shareholder return policy for FY '23 and expansion of new fields to drive growth. Please turn to Page 3. I will explain the financial results of FY '22 and FY '23 forecast, starting with FY '22 results. As shown in the third line of the table below, ordinary profit excluding the impact of inventory valuation was JPY 142.9 billion, down JPY 17.9 billion year-on-year. Profit attributable to owners of parent was JPY 67.9 billion, down JPY 71 billion year-on-year. Next, regarding the forecast for FY '23, please refer to the figures on the right-hand side of the table. We are projecting ordinary profit of JPY 125 billion, excluding inventory effects, as shown in the third line; net profit of JPY 55 billion, as shown in the fourth line; and ROE of 10%, as shown in the 11th line. In addition, as we announced in the press release yesterday, we are acquiring a 20% equity interest in Cosmo Abu Dhabi Energy Exploration & Production, a consolidated subsidiary of our group from CEPSA, the joint venture partner. We believe that this will strengthen the earnings of our oil E&P segment. Please turn to Page 5. I would like to explain about our shareholder return policy for fiscal year 2023. We plan to pay a dividend of JPY 200 per share for fiscal year 2023 in accordance with the return policy of the seventh MTP or midterm management plan. We will consider additional returns as appropriate while confirming the progress of business performance, capital efficiency and financial soundness, with an eye on achieving a total return ratio of at least 60% over the 3-year period. Please turn to Page 7. I will explain the progress of the wind power generation business in the light of the basic policy on the expansion of new fields to drive growth under the seventh MTP. The areas where progress has been made since Q3 are circled in red. Sorry for the busy slide. But in the onshore wind power business, we have Kamiyuchi site in Hokkaido and Oita site in Oita Prefecture, which have already started operations in April. During the seventh MTP, we expect to start operations in Enshu Shizuoka Prefecture, Abukuma-minami first phase in Fukushima Prefecture and Shin-Mutsu-Ogawara and Shin-Iwaya in Aomori Prefecture, with replacement of old wind turbines. Please move on to Page 8. I would like to explain our initiatives for green electricity and next-generation energy. The green electricity supply chain initiative, as announced in the press release of May 9, at our Goto-Hassakubana wind power generation site, we have started supplying electricity under the feed-in premium or FIP scheme. Through this initiative, we aim to acquire operational know-how prior to the full-scale application of the FIP scheme. In our next-generation energy, we are steadily advancing our activities to procure waste cooking oil on a nationwide basis for Japan's first ever domestically produced SAF production, S-A-F production. In addition, we have concluded an MOU with Bangchak of Thailand regarding joint studies in the field of decarbonization, including the possibility of importing SAF and bionaphtha to Japan. We will continue to accelerate these activities to expand new fields. That's all from myself. Thank you. Next, I will present an overview of the financial results for FY 2022. Please refer to Page 10. I will explain an overview of the financial results for full year 2022. Detailed numbers will be given on the next page. So I will just give a general overview on this page. Here is the explanation of the results by segment. In the petroleum business, while overseas market conditions improved, ordinary profit excluding inventory effects declined JPY 49.6 billion year-on-year to JPY 44.1 billion due to the impact of refinery trouble and higher in-house fuel cost and energy costs. So that's the explanation for the mainstay petroleum business. Next is the petrochemical business. Ordinary profit was JPY 3.8 billion, down JPY 9.8 billion year-on-year, mainly due to lower sales volume caused by deteriorating olefin market conditions. In the oil E&P business, ordinary profit was JPY 84.5 billion, an increase of JPY 39.7 billion year-on-year, mainly due to higher crude oil prices. In the renewable energy business, ordinary profit declined JPY 0.9 billion to JPY 2.6 billion due to deterioration of wind conditions and the recognition of upfront costs for the development of offshore wind power generation, as we discussed in the past. Please go to Page 11. I will explain the summary of consolidated P&L. Ordinary profit on the fourth line is down JPY 68.6 billion from the previous year to JPY 164.5 billion. Net profit attributable to owners of the parent on the eighth line is down JPY 71 billion to JPY 67.9 billion. Inventory valuation effect on the ninth line deteriorated JPY 50.7 billion to JPY 21.6 billion. Excluding inventory valuation factors, ordinary profit was JPY 142.9 billion, down JPY 17.9 billion from the previous year. Next page, please. On Page 12, the chart shows ordinary profit excluding the impact of inventory valuation for each segment. Let me explain the details on Page 13. Page 13, please. I will start with the petroleum business on the left-hand side of the waterfall chart. The chart shows factors behind the JPY 17.9 billion year-on-year decline in ordinary profit excluding inventory effects. First is the JPY 49.6 billion year-on-year decline in ordinary profit of the petroleum business shown in yellow. Margin and volume deteriorated JPY 8.9 billion. As shown on the slide, I will give you the breakdown. Margin deteriorated JPY 6.2 billion for the 4 products and improved JPY 4.5 billion for other products, resulting in a deterioration of JPY 1.7 billion in total. Volume improved JPY 2.6 billion for the 4 products, mainly due to the easing of pandemic-related travel restrictions while it deteriorated JPY 6.6 billion for other products resulting in a deterioration of JPY 4 billion in total. Exports and purchases was slightly up by JPY 0.5 billion. Exports increased JPY 9.8 billion due to the export of diesel oil to take advantage of the improvement in the overseas market conditions. Other factors include a decline of JPY 13.5 billion due to the impact of refinery trouble. Next, the breakdown of minus JPY 40.7 billion in expense and others is as follows. Minus JPY 15.1 billion due to the deterioration of in-house fuel cost, minus JPY 16.9 billion due to increased variable costs such as LNG and electricity costs, minus JPY 14.9 billion due to increased provisions for shutdown maintenance and other inflationary effects and plus JPY 6.2 billion for others. Next is the factors behind the JPY 9.8 billion decrease in the petrochemical business, which is shown in purple. Price deteriorated JPY 6.3 billion due to weaker olefin market conditions and other factors. Volume deteriorated JPY 6.7 billion due to a decrease in export volume of Maruzen Petrochemical, resulting from worsening olefin market contents. Next, expense and others improved JPY 3.2 billion. Next is Oil E&P business shown in red. It's down JPY 39.7 billion year-on-year. Price improved JPY 59 billion due to the rise in crude oil prices and the depreciation of the yen. Volume deteriorated JPY 10.4 billion, and expenses and others decreased by JPY 8.9 billion. That's the breakdown. The renewable energy business shown in green showed a year-on-year decrease of JPY 0.9 billion due to the factors I mentioned earlier. I will now turn to Page 14 for an overview of consolidated cash flow and consolidated balance sheet. Regarding consolidated cash flow, cash flow from operating activities on the first line was positive JPY 8.1 billion, mainly due to the temporary impact of fuel subsidy program to curb extreme price increases. Free cash flow on the third line was negative JPY 73.1 billion. Next, I will explain the consolidated balance sheet. The third line shows net worth of JPY 527.9 billion, up JPY 71.7 billion from the end of the previous period. And the fourth line shows the net worth ratio of 24.9%, up 1.4% from the end of the previous year. The net D/E ratio on the sixth line was 1.1x, unchanged from the end of the previous year. Page 15, please. I will explain the results of consolidated capital expenditures. Capital expenditures for FY '22 totaled JPY 71.9 billion, up JPY 14.8 billion year-on-year, mainly due to the construction of onshore wind farm sites and secondary recovery investment at the Hail Oil Field. Moving on to Page 16, please. This slide discusses our initiatives for sustainability. The content, however, overlaps with that of the MTP, which is already announced. So I will just briefly touch upon it. As for HRX or human resources transformation initiatives, in addition to the 8% wage increase, we are proactively increasing investment in employee upskilling, promotion of female managers and mid-career hiring. These are the ongoing initiatives. Page 17, please. The slide shows our GX or green transformation initiatives. We have formulated Vision 2030 and seventh MTP, and we have reflected the content of these plans in our roadmap to net zero carbon neutrality. The initiatives shown in blue are newly added as new fields. We have newly added initiatives on green electricity supply chain and next-generation energy and raw materials. In addition to the 30% reduction target by 2030, we are aiming to achieve net zero including Scope 3 by 2050. That was my brief explanation of our full year financial results for FY 2022 and sustainability initiatives. Next, from Page 19, I will explain our full year forecast for FY 2023. The content of this forecast which I explained in detail on next page is in line with the earnings guidance of the MTP that has already been announced. You can see the content qualitatively on this page for each segment. Let me start. In this page, I can talk about each business one by one. In the petroleum business, we have already factored in a reduction in profits due to major maintenance work we are planning to conduct at our Chiba and Sakai refineries. On the other hand, we expect ordinary profit excluding inventory effects to be JPY 56 billion, an increase of JPY 11.9 billion from the previous year due to the improved margins for the 4 products and the absence of the impact from refinery trouble that occurred in the first half of last year. I will explain more details on the next page. So please turn to the next page for the waterfall chart. Page 20, please. This page shows full year forecast assumptions and sensitivities for fiscal year 2023. Let me go over the figures. Crude oil price assumption is $85 per barrel and exchange rate assumption is JPY 130 per dollar. The year-on-year differences by segment are explained in detail on the waterfall chart on the next page. Please go to Page 21. I will explain factors behind the JPY 17.9 billion year-on-year decline in ordinary profit excluding inventory effects. First of all, the petroleum business, shown in yellow, is increasing JPY 11.9 billion year-on-year. The breakdown of JPY 11.5 billion increase in margin and volume is as follows. Margin is expected to increase JPY 6.6 billion in total, JPY 17.5 billion increase for the 4 products and JPY 10.9 billion decrease for other products. For volume, we expect JPY 4.6 billion decrease for the 4 products and JPY 10.8 billion increase for other products for a total increase of JPY 6.2 billion. We expect a JPY 7 billion decrease in export and purchase, a JPY 7.8 billion decrease in export. In addition, we have factored in a JPY 13.5 billion increase in profit from the rebound from the refinery trouble we had in the first half of the previous year. The breakdown of the JPY 0.4 billion increase in expense and others is as follows. Let me give you the detailed figures. In-house fuel cost improving by JPY 6.1 billion, electricity cost improving JPY 3.1 billion, LNG purchase improving JPY 0.5 billion, variable selling costs and transportation costs deteriorating JPY 4.8 billion, depreciating cost deteriorating JPY 1.7 billion, labor service cost deteriorating JPY 1.2 billion, repair costs deteriorating JPY 0.2 billion, other deteriorating JPY 1.4 billion. Next, I will discuss the petrochemicals business in purple, which is deteriorating JPY 1.8 billion year-on-year. Price is deteriorating JPY 1.3 billion due to the deterioration of the MEK market. Despite a recovery in the olefin market, volume is increasing JPY 6.8 billion due to an increase in the production volume of Maruzen Petrochemical. Expense and others is deteriorating JPY 7.3 billion. This mainly includes inflation-related factors. As for the reasons for the JPY 29.5 billion decrease in the oil E&P business, which is shown in red, price is deteriorating JPY 17.8 billion due to the impact of crude oil prices. Expenses and others is up and is deteriorating by JPY 12.1 billion due to an increase in operating costs. The renewable energy business shown in green is expected to go down by JPY 0.6 billion due to a cost increase and other factors. Please turn to Page 22. I will explain the outlook on consolidated cash flow and the financial indices. First, on consolidated cash flow. Cash flow from operating activities is expected at JPY 188 billion, mainly due to the absence of onetime factors we had in the previous fiscal year. As a result, free cash flow is projected at positive JPY 71 billion. Regarding financial indices, we expect net worth to increase JPY 39.2 billion from the end of the previous fiscal year to JPY 567.1 billion and equity ratio to increase 1% to 25.9%. And as a result, net D/E ratio to improve by 0.21x to 0.89x. However, please note that since the end of the fiscal year this year falls on a weekend, the gasoline tax payment is postponed to the next fiscal year. Excluding this factor, net D/E ratio is about 0.95x. Please turn to Page 23. We I would like to explain our full year consolidated capital expenditures for FY 2023. Full year capital expenditure is projected at JPY 105.2 billion, an increase of JPY 33.3 billion year-on-year. The main reason for the increase is maintenance CapEx to conduct shutdown maintenance at refineries. That was my brief explanation of FY '22 financial results and FY '23 forecast. Thank you very much for your kind attention.