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

Thank you very much for participating in the earnings briefing for the second quarter of fiscal 2025 despite your busy schedule today. I will explain the highlights of the second quarter FY 2025 results and initiatives to enhance enterprise value. Please turn to Page 3. On Page 3, I will explain key highlights of the second quarter FY 2025. Ordinary profit was JPY 53.2 billion while excluding the impact of inventory variation of JPY 19.7 billion, it was JPY 72.9 billion. Profit attributable to owners of parent was JPY 23.6 billion. Excluding the impact of inventory variation, it was JPY 37.4 billion. Earnings forecast for FY 2025 remains unchanged. Turning to Page 5. I will explain the progress of the 7th consolidated midterm management plan regarding initiatives to enhance enterprise value. In Oil business structure improvement shown in blue, we strengthened the profit foundation through DX for maximizing uptime at refineries and production ramp-up at the Hail Oil Field. In restructuring of basic chemicals, we are promoting the preparation for ethylene production optimization, which was determined by Maruzen Petrochemical in April. In new field profit expansion shown in green, we started Japan's first domestic SAF production in 2025 to increase green electricity supply chain profit. We expanded power generation capacity in onshore wind power, started demonstration of electricity storage business and expanded green electricity sales as well as utilization of corporate PPA. We are promoting growth measures in new fields, such as business expansion of semiconductor photoresist resins in Specialty Chemicals segment and hydrogen-related business through alliances with Iwatani Corporation in the next-generation energy business. I'll explain topics in each initiative later. Please turn to Page 6. From Page 6, I'll explain topics in each initiative. Regarding the strengthening DX at refineries to maximize operation, in FY 2025, we completed VR development and promoted the consolidation of maintenance functions to strengthen predictive maintenance. Going forward, we will accelerate DX initiatives in entire refineries, including operational area. Please turn to Page 7. In Oil E&P business, Hail Oil Field, which started production ramp-up at the end of December 2024, continuous production steadily and we expect that it will contribute to the full year earnings for FY 2025. Please turn to Page 8. On Page 8, I will explain the Petrochemical business. In Basic Chemicals segment, we are preparing for the optimization of ethylene manufacturing system to strengthen competitiveness. In Specialty Chemicals, we are expanding business scale of semiconductor photoresist polymers where we boast world-leading market share. And in Chemicals segment, we increased production capacity for highly refined isododecane to respond to its growing demand. In Petrochemical business, we will promote initiatives to strengthen profitability in various fields. On Page 9, I will explain green electricity supply chain. We are developing infrastructure steadily in each area of renewable power generation, supply/demand adjustment in the storage and green electricity sales. In power generation, new Mutsu-Ogawara Wind Farm started operation in July, and we started the green electricity supply to Amazon through corporate PPA. We continue to work to expand profits through green electricity supply chain as one of our growth initiatives. Please turn to Page 10. I will explain initiatives on SAF and the capital and business alliance with Iwatani Corporation. We started supply Japan's first domestic SAF from mass production facility in 2025 and expanding sales channels. Regarding capital and business alliance with Iwatani Corporation, we continue discussions on business scheme for hydrogen supply chain in addition to the scheduled opening of the third hydrogen station around 2027. Consolidating management resources and expertise of both companies will strengthen and accelerate the collaboration and pursue synergies. Please turn to Page 12 for shareholder returns. We position appropriate return to shareholders as one of the important management initiatives. Interim dividend for FY 2025 is planned to be JPY 150 per share, and the year-end dividend is planned to be JPY 90 per share. This is due to the stock split effective on October 1, and there is effectively no change from a year-end dividend of JPY 180 per share, which was announced in May this year. We consider the method and the timing of returns in FY 2025 appropriately but we'll achieve a cumulative total payout ratio of 60% or more over the 3-year medium-term plan period as committed. As you are aware, this year is a final year of the seventh midterm management plan. We will be united in our effort to achieve the midterm plan target to the end. This concludes my presentation.

I will explain overview of the second quarter FY 2025 results. Please turn to Page 14. In the second quarter FY 2025, ordinary profit was JPY 53.2 billion and excluding the impact of the inventory, it was JPY 72.9 billion. Next, I explain by segment. In Petroleum business, ordinary profit excluding inventory impact was JPY 43.8 billion, up JPY 12.5 billion year-on-year due to solid domestic margins and improved uptime at refineries despite increased cost due to further inflation. In Petrochemical business, ordinary profit was minus JPY 2.2 billion due to the impact of opening inventory despite the absence of regular maintenance impact and the effects of improving business structure. In Oil E&P business, ordinary profit was JPY 24.1 billion, down by JPY 20.9 billion year-on-year due to foreign exchange impact. Production volume increased steadily through the implementation of water injection at the Hail Oil Field. In Renewable Energy business, ordinary profit was minus JPY 0.6 billion, up JPY 0.3 billion year-on-year due to favorable wind conditions and the commencement of operations at the new site. On Page 15, I will explain consolidated income statement. Please refer to table below. Net sales in top line were JPY 1,333.8 billion. Operating profit in second line was JPY 60.3 billion. Ordinary profit in the fourth line was JPY 53.2 billion and profit attributable to owners of parent in the eighth line was JPY 23.6 billion. Ordinary profit, excluding inventory impact in the 10th line was JPY 72.9 billion, excluding the impact of inventory variation in the ninth line, minus JPY 19.7 billion. Page 16 shows consolidated ordinary profit by segment. I will explain this in detail with a step chart on Page 17. Please turn to Page 17. I I'll explain factors for year-on-year difference of minus JPY 4.7 billion in ordinary profit, excluding inventory impact by segment. Let me start with profit increase of JPY 12.5 billion in Petroleum business, shown in yellow. Margin sales volume was plus JPY 18.7 billion. Breakdown is as follows: margin of 4 main products was plus JPY 11.7 billion, backed by steady domestic margin. Margin of other product was plus JPY 5.5 billion, volume of 4 main products was minus JPY 0.4 billion. Volume of other products was plus JPY 1.1 billion and import, purchase and export was plus JPY 0.8 billion. The breakdown of expense, other JPY 13.3 billion was in-house fuel cost plus JPY 1.3 billion, variable cost, minus JPY 0.5 billion, fixed cost, minus JPY 6 billion and other, minus JPY 9.1 billion. Major reason for increase in variable and fixed cost was cost increased by inflation. And clearing troubles at refineries was plus JPY 7.1 billion. Moving to Petrochemical business, profit increase of JPY 2.1 billion in purple. Price was flat year-on-year. Volume was minus JPY 1 billion. Expense, other was plus JPY 3.1 billion, partly due to business structure improvement. In Oil E&P business, profit decreased by JPY 20.9 billion in red. Price was minus JPY 9 billion due to crude oil price and FX impact and expense, other was minus JPY 24.3 billion due to loss of FX while volume impact was plus JPY 12.4 billion due to production increase at Hail Oil Field. In Renewable Energy business shown in green, profit increased by JPY 0.3 billion, and this is mainly due to favorable wind condition and the launch of operations at the new sites of customer Eco Power. On Page 18, I will explain consolidated cash flows and balance sheets. Regarding consolidated cash flows, operating cash flows on the top line was plus JPY 120.4 billion due to net profit and a return of consumption tax. Second line, investing cash flows was minus JPY 23.7 billion due to capital investment among others. As a result, third line, free cash flow was plus JPY 96.7 billion. Fourth line, financing cash flows was minus JPY 71.1 billion due to repayment of debt and the dividend payment. Next, I'll explain consolidated balance sheet. Total assets on the top line decreased JPY 41.7 billion from the end of the previous year to JPY 2,114.9 billion. Third line, net worth increased JPY 5.6 billion to JPY 590.4 billion. Fourth line, net worth ratio improved 0.8% to 27.9%. Sixth line, net D/E ratio improved by 0.09 percentage point to 0.75x. On Page 19, I will explain consolidated capital expenditure. In the second quarter FY 2025, capital expenditure decreased JPY 3.1 billion year-on-year to JPY 41.3 billion. Depreciation expense increased JPY 0.8 billion to JPY 28.8 billion. This concludes my presentation on the second quarter FY 2025 results. [Statements in English on this transcript were spoken by an interpreter present on the live call.]