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

Good morning. Thank you for taking time out of your busy schedules today to attend the ESG briefing. This is the second time that the briefing is held following the one last year. We will mainly cover nonfinancial topics today, which may not be as easy to understand, but we hope that we can gain your understanding of our overall approach. Before I begin, there are a couple of comments I would like to convey regarding the plan announced on October 24 to hold an extraordinary general meeting of shareholders. I'm afraid that my explanation may overlap with what was already announced, but let me give you a brief explanation about what we are trying to do and why. On July 27, approximately 1 month after the last AGM, Annual General Meeting shareholders, we received a statement of intent for a large-scale purchase action from Mr. Murakami's group company, Minami Aoyama Fudosan and Aya Nomura. Subsequently, after several exchanges of questions and answers through the information provision process to understand what Mr. Murakami intends to do after the purchase of the company's shares while respecting the opinions of the independent committee to the maximum extent possible, we have come to a conclusion on October 24 that further purchases by the group would not be desirable for the company. It is on this conclusion that we would like to ask for the judgment of our shareholders. That's why we are convening an extraordinary shareholders' meeting. For more details, please refer to the document disclosed on October 24, as I cannot go into specific details today. But simply put, the content of their proposals would not improve the enterprise value of the Cosmo Energy Group and could potentially damage the interest of shareholders. That's the conclusion reached by the Board. We would like to ask for our shareholders' judgment regarding this conclusion at the extraordinary meeting of shareholders. We have decided to convene. We are committed to growing the Cosmo Energy Group further and enhancing enterprise value further. And today's topic, ESG, is part of the goals we are trying to accomplish. These goals are also moving into our mid-term plan and Vision 2030. So we would like to ask for shareholders' judgment based on these details. At this time, you may have various questions, but we hope that we can clarify them and gain your understanding of the company's position, not only today, but also on November 8 at the Q2 earnings briefing. Now I would like to start my explanation of the ESG topic, which is the main topic for today. Please refer to Page 3. I will explain about Cosmo Energy Group's sustainability management. At the top of the slide, you can see our group philosophy. As you can see, harmony and symbiosis and the creation of future value are the 2 components comprising our basic concept of sustainability and characterizing our approach to sustainability. The group is committed to the realization of a sustainable society through its business activities while achieving sustainability and sustainable growth of its own. Based on this group philosophy, we have identified material issues for the group as well as for society and are working to realize KPIs towards our vision. Please turn to Page 4 for material issues of the 7th mid-term plan and the Vision 2030. The 7th mid-term plan covering until FY 2025 defines 3 areas of fundamental management transformation, HRX, DX and GX, each of which is linked to and support material issues to be addressed towards year 2050. By addressing material issues, we will realize the ideal state defined by Vision 2030 and enhance the enterprise value. Please turn to Page 5, explaining our material issues. I will discuss the details of these issues. In the light of Vision 2030, we have revisited our material issues set 2 years ago. So as of April 2023, we have consolidated it into 8 material issues, as shown on the right-hand side of this slide, based on the ideal state. Through the process of identifying material issues, we have consolidated related issues and added DX or digital transformation as a new area given its increasing importance for society and the company. For each of these 8 material issues, we have set them and implemented KPIs by backcasting from the ideal state. Next on Page 6, I would like to explain about sustainability governance. As part of the material issues monitoring system, we have established a Sustainability Strategy Committee, where I'm chairing as the President of the company. The committee will discuss important sustainability-related issues, monitor the progress of material issues KPIs on a semiannual basis and report to the Board of Directors. On top of that, during FY 2022, the committee conducted lively discussions on the KPIs of the 7th mid-term plan, the road map to net zero emissions and report on human rights and due diligence. Next, Page 7 shows governance promotion structure. I will discuss the details of the structure. We believe that transparency and diversity of the Board of Directors with an oversight responsibility is crucial in ensuring effective sustainability governance. We have reinforced diversity by assigning women directors or 1/3 of the Board positions, as you may be aware. We have ensured the skill matrix of both internal as well as external directors will sufficiently cover those skills required to realize Vision 2030 in terms of business strategy and the management foundation. To enhance the Board effectiveness and transparency, we are currently considering the use of a third party to evaluate the effectiveness of the Board. Please turn to Page 8 for further details. First, executive remuneration plan. We have adopted a performance-linked system. Please look at the pie chart at the bottom. This is to ensure mid- to long-term performance improvement, enterprise value and shareholder value and alignment of interest with our shareholders. From FY 2023, this year, we have implemented revised performance evaluation criteria focused on net income, excluding the impact of inventory valuation instead of ordinary income, excluding the impact of inventory valuation to be in line with the shareholder return policy of the 7th midterm plan. The ESG-related personnel evaluation introduced in the previous fiscal year has been also made consistent with the material issues KPIs of the 7th mid-term plan. Mr. Uematsu and Mr. Takeda will explain the specific transformation initiative of HRX, DX and GX later in the briefing. I would like to conclude my part by reiterating my commitment to a more robust sustainable management. Thank you. Next is Mr. Uematsu.

Thank you. Please refer to Page 10. I would like to discuss our initiatives to achieve net zero carbon neutrality by 2050. In 2013, our group closed the Sakaide Refinery to rationalize our production system. And in 2013, we worked not only on energy saving, but on the reduction of carbon intensity through a more efficient operations. On the other hand, we are maintaining high utilization of refineries until 2030 despite the declining demand for petroleum products. This is to continue with a short position strategy in the midst of reduced imports from other countries. As indicated by the road map, the group aims to achieve 30% reduction for Scope 1 and 2 by 2030 and net zero emissions, including Scope 3 by 2050. Next pages will discuss our initiatives to achieve high utilization of refineries and net zero emissions. Page 11, please. Among our climate change countermeasures, I will talk about the initiatives to reduce emissions. In order to reduce emissions while maintaining high refinery utilization, the use of negative emission technologies is essential. CCS is one of the negative emission technologies. And for that, on October 13, announced was the start of a joint study with Kansai Electric Power Company, KEPCO, to establish a CCS value chain, as explained in the press release. Normally, each company needs facilities for liquefaction and temporary storage, but what we are aiming at is to design highly efficient shared facilities. On October 27, announced was the conclusion of an MOU with MOL regarding maritime transportation. We will continue to study the establishment of a CCS value chain, both internally and jointly with other companies going forward. Page 12, please. The slide shows climate change countermeasures and emissions reduction initiatives. After carbon capture and storage, the next stage is utilization. But let me discuss CCU technology first. We are studying collaboration with third parties listed here on this slide. We are studying a wide range of materials such as methanol and ethanol to convert CO2 components to sustainable products such as synthetic fuels and petrochemical substitutes. Various methods have been developed so far to produce methanol and ethanol from CO2. We will study the progress of technological innovation, CO2 reduction effects, investment profitability and other factors in cooperation with other companies. As for negative emission initiatives, we will first work on CCS, which captures various CO2 emitted by refineries and other facilities. Once CCU technology is established, we can start using CO2 as raw materials. Page 13, please. Provision of green energy products and services, initiatives for Scope 3. As for Scope 3, we have set a target of net zero emissions to be achieved by 2050 through development and supply of biofuels, such as S-A-F, SAF, reinforcement of the green electricity supply chain and initiatives for hydrogen supply chain and carbon-recycled products. Through these efforts, we will contribute to carbon neutrality of the society as a whole. Each of these measures has been incorporated into material issues, KPIs and set us mid-term targets. For example, as a KPI both strengthening, bringing electricity supply chain, becomes the amount of CO2 reduction through renewable energy. The result for Q1 FY 2023 was approximately 65,000 tons. In this way, we will continue to monitor each KPI and update the road map with new initiatives such as CCS and CCU discussed earlier. So by doing so, we would like to keep the road map up to date. That was my brief explanation of GX initiatives. Please turn to Page 15. This slide shows the information about digital transformation, or DX. Regarding DX, we are implementing various initiatives to transform our business model. Among them is the oil business where a road map was developed for shifting to digital plants to realize higher capacity utilization and more efficient operations. During the 7th mid-term plan period, we will establish a data infrastructure and enhance productivity by utilizing planned digital twin. Please move on to Page 16. The plant digital twin, the meaning of this is to reproduce an oil refinery in the virtual space. Using the AI-based simulation, humans can focus their efforts on complicated and exceptional situations and decision-makings. In addition, multiple refineries can be integrated together in the digital space, thinking various data and consolidating maintenance functions. This will allow us to ensure safer operations, more effective trouble risk control and higher utilization. Page 17, please. The other day, we have announced the adoption of Cognite Data Fusion, which is a data integration platform. Combined with the visualization tools already in place, the platform helps building a plant digital twin. All refineries are in scope in order to help accelerate data linkage and the functional integration. We will continue to promote DX also in other areas of the company. This concludes my presentation. Thank you. Next is Mr. Takeda.

Yes. Next, I will explain about the HRX initiatives. Please refer to Page 19. I'll explain the people strategy to motivate employees and harness their skills. Our HRX strategy aims to develop a pool of people who can realize our Vision 2030 and enhance our enterprise value. We will strengthen competencies of our human resources and enhance their well-being so that they can promote change and support business activities in each business area. We will secure our competencies in each of the 3 business domains of Vision 2030, while promoting the 4 general aspects of mindset to support transformation, namely, as you can see on the slide, the directions are promotional diversity, transition to autonomy and independence, motivation for self-growth and the development of DX literacy. These are the common aspects. In addition, as shown at the bottom, well-being and engagement should be the basis of all human resources in order to realize the full potential of each and every employee. We are working on measures in 5 areas to support full general aspects of mindset. Page 20, please. Based on the direction of transformation, we have translated the human resources strategy for 2030 into the following specific measures, which are being executed today. First, on the left-hand side, is human resources, training and development, which includes self-directed career development and training and development of change agents and specialized talents. In order to promote employees to remain a strong individual in a rapidly changing business environment, fostering and realizing their careers autonomously, that is important. In order to do so, we will encourage self-learning and make their abilities and skills visible and expand the job challenge system. We will also create a system that highly values actions and that lead to change and develop people who can promote change in businesses. Next, in the purple area in the middle, I will discuss about the organizational culture. We are aiming to maximize performance and improve engagement through diverse human resources and work styles. In expanding diversity, in addition to women and mid-career hires, we are strongly promoting the activities of senior employees and specialized professionals. For senior employees, in FY 2021, we have fundamentally revised the senior employee system to utilize their knowledge and experience and to fulfill the same roles and the performances as they did before the state has changed at age 60. And the personnel system, job grade and so forth will stay the same even after age 60. In addition, we have established a system for specialized professionals in terms of hiring of highly skilled talent, their training and skills development. Finally, on wellness. In promoting employee wellness management, we have established a new committee to reinforce the management's commitment to health. We are also promoting employee education on smoking, drinking and eating habits, which can pose high risks on their health. Page 21, please. These are the KPIs for the 7th mid-term plan. In addition to the KPIs, announced in March, on investment in education and engagement, we have set new KPIs related to change promotion. Especially for employees, skills development and enhancement, we are investing more during the 7th mid-term plan in order to improve human resources capabilities and form a pool of those talent beyond what we have done during the 6th mid-term plan to develop a pool of talent who can realize Vision 2030. In the second half of this fiscal year, we will focus on the development of core digital personnel, as mentioned by Mr. Uematsu earlier, the expanded subsidies for self-development courses that employees can voluntarily take and the regular session by professional coaches for management personnel. We are working more aggressively than in the past in order to secure sufficient resources to support the ongoing transformation. Page 22 onwards are just for your reference. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]