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

Good morning, everyone. I am Yamada, Group CEO. Thank you very much for taking time out of your busy schedule today to participate in FY 2025 ESG presentation. I would like to start by explaining our corporate governance initiatives following the materials. Please turn to Page 3. On the right side of Page 3, the change in the composition of the Board of Directors is provided. In 2022, we reformed the Board of Directors and significant business execution authority was delegated to the Executive Officers Committee to enhance the monitoring function of the Board further and speed up its decision-making. In addition, to ensure robust governance, we have made reinforcements on both nomination and remuneration and established the structure to support directors. Next, please turn to Page 4. In order to attract outstanding candidates for directors, we have set a competitive remuneration level by raising the remuneration limit for directors and the members of Audit and Supervisory Committee members in FY 2024. In addition, we introduced malus and clawback clauses in FY 2025 to increase the soundness of our remuneration plan. We have also established the support system for directors and as training mainly for outside directors, we provide them with opportunities to visit our major facilities to deepen their understanding of our businesses. We also hold executive sessions several times a year. This is a session, where only outside directors gather and discuss and as described in the lower right of the slide, where they discuss is shared with the executive team without identifying speakers. As such, we have established a system that allows the knowledge and opinions of outside directors to be fully reflected in the management. We will continue to improve our enterprise value by establishing a strong governance system. Please turn to Page 5. In FY 2025, we consolidated the business execution decision-making function, including sustainability strategy into the Executive Officers Committee as a result of reviewing the governance system for sustainability promotion. At the same time, we established the Sustainability Strategy Council as a supporting body. In FY 2021, we established the Sustainability Strategy Committee with the major goal of spreading sustainable management throughout the company. We have decided to review the structure of this committee as we have achieved a certain degree of penetration of sustainable management, which was the original purpose of the committee. And there is a growing need to further integrate financial and nonfinancial aspects of the company's operations into a unified framework for discussion. We will continue our efforts to deepen our sustainable management. That is all for my brief explanation.

Thank you, Mr. Yamada. Next, Mr. Asai, Independent Outside Director, will answer pre-submitted questions. I'll read out the questions. Now let me read the first question. Compared to the time when you became an outside director, how do you see Cosmo's governance system or business has changed? Please tell us your assessment of the current situation? And how do you think you have contributed to this change? Mr. Asai, please.

Good morning, everyone. I am Keiichi Asai. As the moderator has just mentioned, I was appointed as an outside director in July 2021 and about 4.5 years have passed since then. Many things have happened over the past 4.5 years. And when I was asked this question, I looked back and thought about it and realized that it has truly been eventful 4.5 years. And I just wonder if there has ever been anything like it in the history of Cosmo. With regard to the governance system, we have increased the number of independent outside directors and female directors. And I believe that the diversity and transparency of the Board of Directors has been further enhanced. Regarding the remuneration system, as CEO mentioned earlier, we have revised the amount of remuneration for directors. And last year, we introduced malus and clawback clauses to enhance both offensive and defensive measures. The Board of Directors has delegated significant authority to the executive team and the Board of Directors is monitoring the implementation of this delegation. In that sense, its supervisory function is being strengthened. Let me talk about governance. I have heard that the corporate governance code will be revised next year. And I have been thinking about the meaning of corporate governance in Japan. And it seems to me that the most important purpose of corporate governance is to establish a system to strengthen profitability of a company. I suppose the meaning of corporate governance is a little different from that in the U.S. or Europe. In the U.S., emphasis is placed on checks and balances on the CEOs. And in Europe, emphasis is placed on accountability to stakeholders. In this sense, I think the Japanese version of corporate governance, a system to strengthen profitability is taking shape at our company over the past 4.5 years. As for the business, the appointment of CEO, Yamada on my left, as a top executive with a deep sense of balance and excellent risk management skills has gradually had a positive effect in his second and third years as CEO. One example is the withdrawal from bidding for offshore wind power. We decided not to bid for the project from the standpoint of economic rationality because costs are increasing due to rapid inflation and the competitive environment is becoming extremely fierce. As the environment surrounding the energy industry is changing drastically, we are determined to further enhance the strength of our original business, the oil business field, and shift management resources to the new business field as well. As you are all aware, it seems the progress on decarbonization is being rolled back, and it is difficult to proceed it under such circumstances. Still, I believe that well-balanced management has been practiced. Then what am I doing? I think it is part of the job of an outside director to provide advice on data-driven management with a focus on profitability and earnings. In that sense, I believe that I have been fulfilling my fiduciary duty for the past 4.5 years.

I will now read out the second question. What is your vision for the future of Cosmo Energy Holdings? What are your expectations of the company's future? And what do you think is the biggest challenge in achieving sustainable growth? Mr. Asai, please?

I need to carefully consider this question before providing an answer. But I think there are 2 points that is to foster and maintain growth expectations and refining an ability to adapt to change. For fostering growth expectations, our earnings structure is based on the efficient oil business field. And on top of that, the new business field exists, and it requires to take risks. As I mentioned earlier, the business environment in the new business field is slightly worsening as the timing to achieve net zero carbon emissions seems to be delayed a little due to its uncertainty and the impact of the current Trump administration's policies. However, in the medium to long term, I believe that this trend toward decarbonization and low carbon emissions will continue. Stronger oil business field and its earnings base will enable us to take risks and plant seeds in new business field where medium- to long-term growth is expected. For the time being, I expect the management to focus on strengthening the structure of the oil business field. As for addressing changes of the external environment, when we formulated our Vision 2030 and the seventh medium-term management plan, we could not predict the major changes in social conditions over the past few years, such as cost increases due to inflation like today or the elimination of labor shortages through the utilization of AI. Cosmo should be resilient and flexible to be able to respond to these changes in the environment and accept various things. I believe this is essential for achieving sustainable growth. There is growing demand for management that is seamless, comprehensive and resilient across all time horizons and the management team is required to have the ability to think, to adjust interests and to make decisions in these areas. Assume it is the role of outside directors to push them to fulfill such requirements. In addition to these skills, CEO also needs to have the ability to conceive new ideas to convince others to make decisions from diverse arguments and to unite people. Let me reassure all stakeholders that the outside directors are carefully watching these things in the Board of Directors' meetings.

Let me move on to the next question. Under Vision 2030, the company is working to expand the next-generation energy. What challenges do you recognize about the company's talent portfolio and human resources development as well as measures to be taken going forward in this area?

I am Chairperson of the Nomination and Remuneration Committee. And if I focus on the subjects of this committee's discussion, namely executive officers, I think it is fair to say that the most important issue for the committee is to discuss how the management personnel development and monitoring should be. One issue is that the pool of human resources for the next generation is not large enough as annual hiring numbers vary from year-to-year. The only way to solve this problem seems to be hiring excellent human resources from outside the company, but it is still important to design a good incentive system, including a remuneration system like the one implemented in 2024. However, I feel that this also needs to be constantly updated. I'm sure Ms. Takeda, Senior Executive Officer, will explain the details of the management human resource development later.

Next, let me move on to the fourth question. For the growth of a company, it is important to have a corporate culture atmosphere and a mindset that encourage many employees to take on challenges and look outside the company. From an outside director's perspective, do you think the management stance of the Cosmos executive team and internal atmosphere is supportive of new challenges for employees?

This is a very difficult question, but one of the messages that CEO has been sending to the entire company is to create friction in a positive sense. This is a clear indication of the direction he is taking as a top executive. And I feel that both the company and employees are changing in this regard. Cosmo has had a kind of laid-back internal atmosphere, and I have often felt frustrated. However, over the past 4.5 years, the ratio of mid-career hires has increased to more than 20%. And I think that the so-called friction caused by differences in thinking and background with the employees who joined Cosmo as new graduates is causing a positive chemical reaction. Also, the change of the major shareholder seems to have strengthened the sense of crisis and unity among employees. Even with the change of major shareholder from Murakami Fund to Iwatani Corporation, -- the sense of urgency and willingness to take on challenges have remained unchanged. And in this respect, I feel confident in our employees.

Let me continue. The company is required to address conflicting management challenges such as stable energy supply, increasing electricity demand and decarbonization as well as declining returns on investment due to high inflation as an outside director, please share the status of discussions on balancing measures against climate change and business strategy, particularly with respect to investment financing plans.

I am sure that Mr. Yamada will share his detailed thoughts on these issues later. But I'm certain that balancing measures against climate change and business strategy is an extremely difficult management issue. Our medium-term vision, Vision 2030 is covered in the recently released integrated report, and there is no change in our guiding principles of energy to change the future and energy to change society. But the time line of security assessment of fossil fuels and achieving net zero carbon emissions seem to be gradually falling behind. As for investment, it is commendable that the company flexibly reviewed its investment plans, including financing plans and allocation of funds in response to changes in the business environment, such as the decision to forego a bid for offshore wind power generation mentioned earlier or the withdrawal from the petrochemical business with Hyundai in South Korea. There were, of course, many projects that were put off due to the immaturity of the market or the lack of institutional arrangements. This is just my personal opinion, but the effectiveness of the medium-term management plan seems to be questionable. Assume that we need a kind of rolling system in which the plan is revised every year in response to changes in the environment based on the medium- to long-term vision. As I mentioned earlier, in discussions on investment and financial planning, we place emphasis on profitability and focus on figures like IRR. Discussions are also held from the perspective that businesses that contribute to solving social issues are a first priority for the company, whose mission is to provide a stable energy supply. It is one of the roles of the Board of Directors to encourage the executive team to make prompt and bold decisions from a medium- to long-term perspective while taking care not fall into short-term orientation or micromanagement by the management. That is all for my answer to question #6.

As the Chairperson of the Nomination and Remuneration Committee, what are your thoughts on the succession plan for outside directors?

Before talking about the succession plan for outside directors, I want to touch upon the term of outside directors. I hear it varies. For instance, rather many companies in Europe set it as 10 years. Let me share my thought with you. I think a skill matrix will be critical. Skills required for outside directors have changed considerably since I assumed this role in 2021. So I expect the appointment of outside directors who can contribute to the improvement in governance required by the company in line with the times and social changes. In addition, I believe that further knowledge of AI and DX will be required as skills going forward. In that sense, I think it is worth considering a retirement age system for outside directors. And as a prerequisite, I'd like to select candidates who can provide advice and recommendations to improve enterprise value or perform monitoring functions rather than knowledge and experience in the energy industry to maintain diversity on the Board of Directors.

This is the last question in this part. Is the design of Cosmos's nomination and remuneration system effective and influential in helping the top management to enhance enterprise value?

Nomination and remuneration is 2 major systems, which plays a vital role for the management to improve enterprise value. The Nomination and Remuneration Committee is an optional organization, and we have secured a system that can flexibly respond to the demands of the times. The committee is chaired by me, an outside director and has 5 members and 4 of them are also independent outside directors. And this ensures transparency and objectivity. The remuneration system for directors consists of 3 elements. First one is basic remuneration, which is monetary compensation. Then the second is annual incentive, which is also monetary compensation. These 2 account for about 60% to 70% of the total remuneration. And the third is medium- to long-term incentive, which is stock-based, and this makes 100% in total. The annual incentive includes ESG evaluation and individual evaluation. I am certain that this system is competitive enough when compared with other company in the same industry or other Japanese major companies by setting higher percentage of incentive compensation for higher position, it reflects the weight of management responsibility. In June 2024, we also reviewed the level of performance-based remuneration mentioned earlier as it will become the norm among domestic companies and will be further expanded. We always hold active discussions on the remuneration system also with outside consultants. Regarding nominations, we are increasing opportunities for dialogue and conversation at the Board of Directors, other committees and meetings to gain an understanding of personalities, achievement and track record of candidates who are discussed at this committee, so that we can have objective and independent discussions and judgments regarding nominations from the executive side. Therefore, I am certain that committee has effectiveness and influence. Thank you very much.

That concludes our responses to the pre-submitted questions. Now we will move on to the explanation of the [ 3 Xs ]. First, Executive Officer, Takeda, will explain our GX and HRX initiatives.

Thank you. I am Junko Takeda. I appreciate the opportunity to speak with you today. Let me now begin my presentation. Please turn to Page 9. I will start by explaining our efforts to reduce CO2 emissions. The Cosmo Energy Group is committed to contributing to the realization of a decarbonized society. To this end, we are working to reduce our group-wide CO2 emissions, targeting a 30% reduction in Scopes 1 and 2 by 2030 and net zero carbon emissions across the entire supply chain, including Scope 3 by 2050. As shown in the middle of the slide, total group CO2 emissions for Scopes 1 and 2 in FY 2024 were down 20% compared with FY 2013. Within this, the darkest section at the bottom of the bar indicates the CO2 emissions reduction in the petroleum business, thanks to efforts to improve energy efficiency and last year, lower refinery unit operating rates due to regular maintenance turnarounds, we achieved a year-on-year reduction of 460,000 tons. From this year onward, in order to continue reducing emissions while maintaining the operating performance of our refineries, we are also moving ahead with the use of negative emissions technologies such as CCS. Please turn to Page 10. This page explains our efforts in CCS and CCU. As shown at the top left, in 2024, we won 2 JOGMEC Open Call projects and began CCS feasibility studies. By separating and recovering CO2 emitted from our Chiba and Sakai refineries, we aim to reduce CO2 emissions. With respect to CCU, in March 2025, we initiated a joint basic study on biological conversion technology with the utilization of Carbon Dioxide Institute. Because this is a technology-driven initiative, we are working with our partners to examine both the technological feasibility of CCU and its investment profitability. Please turn to Page 11. This slide shows how we are bolstering the green electricity supply chain. To achieve net zero by 2050, we are working to expand the supply of renewable energy and thereby contribute to reducing CO2 emissions for society as a whole. First, in onshore wind power generation, development of new site is progressing steadily. As shown in the bar chart on the right, our CO2 reduction contribution from onshore wind was 250,000 tons. On the other hand, as has already been mentioned today, in offshore wind power generation, we decided to forgo bidding in the planned public tenders from the standpoint of economic rationality in light of the sharp rise in costs driven by rapid inflation and the increasingly fierce competitive environment. A slightly different area, but we are also working to secure long-term stable demand for the electricity we generate by using corporate PPAs, while at the same time, maximizing the value of green electricity. Please turn to Page 12. This slide summarizes our efforts in the SAF and hydrogen businesses. Regarding SAF produced from used cooking oil, the production facility at our Sakai site was completed in December 2024, and we began production and supply in FY 2025. We are currently the only supplier in Japan capable of mass producing domestically sourced SAF, and we intend to continue moving this business forward. In the hydrogen business, through a capital and business alliance with Iwatani Corporation, we are working on the development of hydrogen stations and the construction of a hydrogen supply chain. The details are shown at the right-hand side of the slide. As for the hydrogen station business, in 2024, our first station opened in Heiwajima, followed by the second in Ariake. For our third station, we plan to open the site in Shinsuna, Koto Ward, an area with many logistics hubs around 2027. In terms of the hydrogen supply chain at the bottom right of the slide, we have begun to study a hydrogen business that makes use of assets at our Chiba refinery. Specifically, together with Iwatani, we are examining the production and the sale of liquefied hydrogen. And within that supply chain, we are also considering using the hydrogen produced in our own petroleum refining operations. Next, please turn to Page 13. I will now explain our progress toward achieving net zero carbon emissions by 2050. Although there have been various external headwinds, we have been steadily implementing the initiatives set out in our road map for achieving net zero carbon by 2050. At the same time, we recognize that the road map itself needs to be revised in light of changes in the external environment and advances in technology. As we work toward our next midterm management plan, we are reassessing the road map, taking into account the increase in costs in each business due to rapid inflation, our response to the GX ETS system, the maturity level of markets in next-generation energy domains and developments in policy, economic conditions and the overall business environment. That concludes my explanation of our GX initiatives. Let me now move on to our HRX initiatives. Please turn to Page 15. The Cosmo Energy Group's HRX initiatives are designed to support Vision 2030, energy that shapes the future and energy that sustains society by creating new value through both next-generation energy and decarbonization and low carbonization. Even though the time line has slightly shifted backwards, we recognize that we are currently in a period of major transformation for the energy business environment. It is important for us both to take on challenges in new business domains and to strengthen the competitiveness of our existing oil business. Our vision is to achieve both at the same time. Therefore, our talent pool needs to consist of people who are autonomous, who think in diverse ways and who continuously rise to new challenges. As shown in the middle of the slide, we are promoting 4 key transformations, shift to autonomy and self-direction, fostering a growth mindset, expanding diversity and increased DX and AI literacy. So we are promoting these 4 points. And in parallel, we believe that maximizing human resource capabilities requires both wellness enhancement and higher engagement. Our HRX measures are designed from this perspective. Please turn to Page 16. Based on the 4 points I just mentioned, we are promoting specific initiatives in 3 categories. Human resource cultivation and development, organizational culture and wellness. Please turn to Page 17. As Director Asai mentioned earlier, within our broader human resource transformation, we focus particularly in FY 2024 on cultivating management personnel and successors. We are working to build a talent pool of future leaders who can drive transformation in the energy business and continue to take on growth challenges. Concretely, for those identified as candidates, we're giving them tough assignments and opportunities to take on higher goals and deliver results. We're also promoting early selection and expanding the pool of potential successors by encouraging them to gain a higher vantage point and acquire diverse knowledge. On the right-hand side of the slide, you can see our human capital investment, particularly in education and training. Our target at the end of the 7th MTMP is JPY 180,000 per person. And as of now, we have reached JPY 160,000 per person. So we are progressing steadily. Please turn to Page 18. One of the key elements is a high level of engagement. As shown at the right, we use an engagement index derived from employee surveys on factors such as work satisfaction, whether employees feel they can demonstrate their capabilities, and take on challenges with a strong sense of achievement and whether they feel proud of the company. Our KPI under the 7th MTMP was 60 points in FY 2024, supported in part by increased engagement at our refineries, we achieved 62 points. In FY 2024, in particular, recognizing that line managers play a critical role in developing talent and fostering a challenge-oriented mindset, we enhanced one-on-one meetings to enable more attentive development of subordinates. We have confirmed that employees whose managers conduct more frequent and higher quality one-on-one meetings tend to show higher engagement scores. We see this as one effective measure and are experiencing its positive impact firsthand. By further enhancing work satisfaction and the willingness to take on challenges and achieve results, we aim to bring out the full potential of each employee. Higher engagement leads to the pursuit of growth opportunities, maximize profitability and significantly improved productivity. In this way, we believe it will contribute to enhancing enterprise value, and we will continue to pursue our initiatives. Finally, please turn to Page 19. This slide shows the KPIs for the 7th MTMP. Overall, progress has been largely in line with plan. As the 7th MTMP is now in its final phase, we're firmly focused on achieving these targets. At the same time, these initiatives will not come to an end simply because we entered the 8th MTMP. They must continue seamlessly with an eye on the next plan. We will continue to advance these efforts. That concludes my explanation. Thank you very much. We will now ask Section Manager, Rzonca, to explain our DX initiatives.

Thank you. I am Noriko Rzonca, Chief Digital Officer. I would like to give you a brief explanation of Cosmo's DX initiatives. I believe our DX initiatives have changed dramatically over the past 3 years. The fact that GX has been positioned as one of our key management strategies is extremely important because field-driven initiatives require the enthusiasm of people on the front lines. We're building our projects from the ground up with full participation across the group. At the same time, management is providing strong support and a clear direction, and we are moving forward on these 2 axes. We have now built a solid structure for this all-employee DX promotion system. One example is the establishment of a centralized maintenance hub as shown on the right of the slide, the RCoE, which oversees maintenance functions across all refineries. For those of you who have come from the front line today, I hope you will take the opportunity to visit the site. Using AI-driven forecasting, we are implementing predictive maintenance before risks materialize, we can now visualize in numerical terms where risks are emerging, and this is changing how people work. Please tell us that whereas in the past, they reacted after problem occurred and indicators rose. Now the conversation has flipped. They're asking why are these numbers behaving this way and discussing issues proactively in terms of early detection, this is providing valuable insights ahead of time. Data is, of course, indispensable for this. We are, therefore, focusing on preparing data environments and building a culture in which people use AI effectively as those who use AI rather than being used by it. In the middle of the slide, you can see 5 major business challenge areas. While we categorize our DX initiatives into these 5 areas, their content is evolving with the times. 3 or 4 years ago, most projects focused on analytical AI, looking at numbers and predicting what might happen. Since then, we have seen a shift toward projects that want to use generative AI. And now we are seeing many project ideas from the field that want to leverage AI agents. As these needs change over time, it is important that we continue to support them from a business perspective while also orchestrating data horizontally across these major business challenge domains. This slide shows our progress in DX-related KPIs. On the right, you can see figures that we have disclosed publicly. We have already built a full DX cycle encompassing DX events, the DX forum and the DX hub. The cycle begins with awareness surveys that gauge each individual's mindset. From there, we encourage people to participate in events, learn more about AI in our forums and then apply that knowledge to actual projects. Our DX forum, in particular, has some distinctive features when AI is discussed, examples that are close to people's daily work. Like Copilot, interest is very high and participation has been increasing significantly compared with previous forums. This shows that DX and AI are taking root in the field. And at the same time, these forums are laying the groundwork for new project ideas. The DX hub initiative is about picking up many small project ideas and turning them into a larger wave of transformation. The number of projects implemented through the hub has grown considerably. Most importantly, the number of core digital personnel, people who drive data utilization has exceeded 1,000, surpassing our 3-year target of 900. We strongly feel that employees desire to do something and their wish to solve problems are now connecting directly to the use of digital and data, creating a flow that passes value onto the next generation. I believe these efforts were recognized and are being selected for the GX Stock 2025 list for the first time this year. We intend to continue taking on even greater challenges going forward. Thank you very much.