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

Thank you for taking the time out of your busy schedule to join us at this briefing on Fiscal 2025 Results of Cosmo Energy Holdings. I will present the financial results as well as fiscal 2026 forecast based on the impact of current situation in the Middle East and also talk about the initiatives to enhance enterprise value. Please turn to Page 4. Let me first present the fiscal 2025 results. Ordinary profit was JPY 149.2 billion. Impact of inventory valuation was minus JPY 16.5 billion. Excluding that, ordinary profit was JPY 165.7 billion. Profit attributable to owners of parent was JPY 74 billion. Excluding the inventory impact, profit was JPY 85.5 billion. Year-end dividend is expected to be JPY 90 per share. The full year dividend is JPY 165 per share. Fiscal '25 major management metrics are shown here at the bottom. The eighth line, the net worth was JPY 606.2 billion. Ninth line net worth ratio was 27.6%. 10 line debt-to-equity ratio, 0.71x. 11th line ROE, excluding inventory evaluation impact was 14.4%. Due to the tense situation in the Middle East, the cost of imported products increased, but the sharp rise in crude oil prices led to a positive time lag effect offsetting the higher costs. Please turn to Page 5. Before introducing fiscal '26 full year forecast, let me explain the situation in the Middle East and our initiatives to address it. Since the end of February, the situation has worsened and continue to be highly uncertain. As a company that plays a role to supply energy, our top priority is to fulfill responsibility of stable supply for the society. And based on that, we are operating the business. Specifically in the petroleum and petrochemical business, we maintain domestic sales on par with previous fiscal year and will continue supply to meet the domestic demand. We will continue to ensure a stable supply by combining flexible alternative sourcing of crude oil and feedstocks, the use of domestic crude oil reserves and the import of petroleum products such as gasoline and diesel fuel. In Oil E&P business, no injuries or property damage have been -- have occurred. Our policy is to continue to closely coordinate with oil-producing partners for early production normalization and maintain necessary personnel, equipment and materials. Please turn to Page 6. Let me explain the assumptions for fiscal '26 forecast in consideration of the current situation in the Middle East. Given the uncertainties of Middle East and market conditions and based on the expected timing of normalization, fiscal '26 forecast reflect conservative estimates. We will closely monitor the situation. And if there are material changes to the assumptions, we will make the update in an appropriate manner. In the current assumed scenario, as shown on the left, is that the situation in the Middle East is expected to stabilize by the end of Q1. And after a certain period of adjustment, that is Q2, Q3 time frame, the crude oil production is expected to normalize in August and crude procurement is expected to normalize from September onward. Crude oil price is expected to decline gradually from the peak at the start of the fiscal year due to the closure of Strait of Hormuz toward the end of the fiscal year, we expect this to normalize. And for the full year, we expect $89 level. In light of uncertainty in market trends, we will talk about this in details later, but domestic market conditions are set partly conservatively. Next, based on this assumed scenario, I'd like to talk about the impact from the Middle East situation. In petroleum business, higher costs due to alternative procurement and petroleum products import will be appropriately reflected to selling prices. Profits are expected to be pressured by a negative time lag effect due to the declining crude oil prices since the start of the period. Next, in petrochemical business, costs associated with alternative naphtha procurement are expected to be offset by improved market conditions with the naphtha link. Lastly, oil and E&P business, as I said earlier, the production constraints impact is incorporated through July. From August and onward, earnings are expected to be supported by high crude prices. Based on that on Page 7, I'd like to explain the FY 2026 forecast. Ordinary profit, JPY 115 billion. Inventory valuation impact is JPY 5 billion. Excluding this, the ordinary profit forecast is JPY 110 billion. Profit attributable to owners of parent, JPY 44 billion. Excluding the inventory valuation impact, this would be JPY 40 billion. We plan to keep the yearly dividend at JPY 165 per share, including the interim dividend of JPY 75 and year-end dividend of JPY 90. Overall capital policy, including the shareholder return, will be shared when we announce the next consolidated medium-term management plan on June 18. Next is Page 9. Let me explain the initiatives to enhance enterprise value. Looking back at the seventh medium-term management plan, we steadily executed planned initiatives. In oilfields, we implemented initiatives, including strengthening DX to maximize refinery uptime, starting to increase production at Hail oilfield and restructuring the basic chemicals business. In new fields, we strategically refrained from participating in offshore wind tenders in response to the changes in business environment while advancing growth initiatives such as starting the domestic SAF production, building a green power supply chain and expanding earnings from specialty chemicals. Please turn to Page 10. This page talks about the capital and business alliance with Iwatani Corporation. Iwatani Corporation decided to participate in the used cooking oil collection program. and joined efforts to establish the domestic SAF supply chain and have started the commercial viability assessment towards establishing a green LPG supply chain using off-gas produced during SAF production. Moving on to Page 11. This is also our partnership with Iwatani. It talks about the hydrogen supply chain. We leverage the combined expertise and the infrastructure of both companies fully to realize the scale up of the hydrogen supply chain. In hydrogen production and supply, we started to consider the realization of hydrogen business, leveraging refinery assets at the Chiba Refinery. In sales, we plan to open the 2 hydrogen stations in Tokyo and the third one in 2027. We are currently enhancing the collaboration to create synergy. So that was the initiatives to improve the enterprise value. With the worsening situation in Middle East, the situation continues to be very uncertain, but we will work as one united company to improve the enterprise value. That concludes my part of presentation. Next, I'd like to talk about the overview of fiscal 2025 full year results. Please turn to Page 13. Consolidated ordinary profit was JPY 149.2 billion. Consolidated ordinary profit, excluding the impact of inventory valuation was JPY 165.7 billion. Next, let me explain the profit by segment. In petroleum business, the profits increased by JPY 0.2 billion year-on-year to JPY 92.8 billion as a positive time lag effect from rising crude oil prices outweighed the cost increases driven by inflation and by import procurement to ensure stable supply. In petrochemical business, despite the continued losses due to the sluggish market conditions, profit improved as a result of business restructuring and higher sales on specialty chemicals. Ordinary profit increased by JPY 1.9 billion year-on-year to minus JPY 3.1 billion. In Oil E&P business, while profit declined due to the crude oil prices, production volume increased as production ramped up at the Hail oilfield. Ordinary profit 65.3 billion, down JPY 17.1 billion year-on-year. In Renewable Energy business, the profit improved following the commencement of operations at new sites. Ordinary profit was JPY 2.8 billion, up JPY 1.5 billion year-on-year. Next, Page 14 shows the consolidated income statement. The first line, net sales declined JPY 122.3 billion and reached JPY 2,677.6 billion. Second line operating profit was JPY 144.8 billion. Fourth line, ordinary profit was JPY 149.2 billion. Eighth line profit attributable to owners of parent increased by JPY 16.3 billion year-on-year to reach JPY 74 billion. Tenth line ordinary profit, excluding the impact of the inventory valuation, it was JPY 165.7 billion. Fiscal 2026 forecast is shown on the right-hand side. Page 15 shows the overview of consolidated ordinary profit by segment. I would explain the details on the following page. Please turn to Page 16. The consolidated ordinary profit, excluding the impact of the inventory valuation was minus JPY 15.9 billion. That is the decline year-on-year. Let's look at the petroleum business first. It's up by JPY 0.2 billion. Margin and sales volume, plus JPY 31.4 billion. This is mainly due to the time lag. Margin of 4 main products, positive JPY 42.2 billion. Margin of other products, plus JPY 27.5 billion. Volume of 4 main products, minus JPY 7.9 billion. Volume of other products, positive JPY 4.4 billion. Import, purchase and export, minus JPY 34.8 billion. Expense and other was minus JPY 34.5 billion. The breakdown is that in-house fuel cost plus JPY 1.4 billion; variable cost, plus JPY 0.5 billion; fixed cost, minus JPY 27.7 billion; other, minus JPY 8.7 billion. The higher cost -- higher fixed cost is due mainly to the higher cost because of the inflation and the provision for the regular maintenance. Impact of the refinery troubles in comparison to the year before was plus JPY 3.3 billion. Now let's look at the petrochemical profit in purple that increased by JPY 1.9 billion. The price was plus JPY 0.2 billion, the improved impact of regular maintenance. Volume is plus JPY 0.1 billion. Expense and other was plus JPY 1.6 billion with the effect of improvement of business structure. In Oil E&P business, it was down by JPY 17.1 billion with the Hail production increase. This is mainly due to the oil price and weaker yen. The price was minus JPY 19.4 billion; volume, plus JPY 14.6 billion. Expense and other was minus JPY 12.3 billion. The Renewable Energy business in green is up by JPY 1.5 billion, the start of the new sites and the improvement of the wind conditions. Lastly, other was down by JPY 2.4 billion. Please go to Page 17. This shows the overview of consolidated cash flows and the balance sheet. Starting with the consolidated cash flows. The first line, cash flows from operating activities. with the pretax profit and increase in working capital ended at JPY 213.7 billion. The second line, cash flow from investing activities was minus JPY 84.7 billion with fixed cost acquisition. As a result, free cash flow was a positive JPY 129 billion. Fourth line, cash flows from financing activities with the repayment of the borrowing and shareholder return was minus JPY 81.9 billion. Now moving on to the balance sheet. The first line, total assets, declined JPY 40 billion from the end of previous period and ended at JPY 2,196.6 billion. The net worth was up by JPY 21.4 billion and reached JPY 606.2 billion. Net worth ratio improved 0.5% year-on-year from the end of the previous year to 27.6%. Net debt-to-equity ratio improved by 0.13 and reached 0.71. Please move to Page 18. This is the capital expenditures overview. In fiscal 2025, CapEx increased by JPY 3.6 billion year-on-year to reach JPY 97.5 billion. Depreciation increased by JPY 1.1 billion to JPY 58.3 billion. So that concludes the results for 2025. Please refer to Page 20. Here, I'd like to talk about the forecast overview for fiscal 2026. The consolidated ordinary profit is expected to total JPY 115 billion, while the consolidated ordinary profit, excluding the impact of the inventory valuation is forecast to be JPY 110 billion. In petroleum business, there is a negative time lag effect and domestic market conditions are assumed conservatively. However, we will seek to reflect the incremental costs associated with ensuring stable supply continuity in selling prices. The ordinary profit, excluding the inventory valuation impact, JPY 56 billion. In petrochemical, profits are expected to improve by JPY 1 billion due to the lower export volumes, although overseas market conditions are expected to remain weak. In Oil E&P business, although the high crude oil price is expected to support the profit, sales volumes are projected to decrease as a result of the production constraint due to the closure of Strait of Hormuz. Ordinary profit, JPY 38 billion. In renewable energy, stable profits are expected despite the inflationary pressures driven primarily on onshore wind power ordinary profit, JPY 3 billion. Next is Page 21. This is the graphic representation of what I have explained. As you can see in the 10th row, the dividend for full year for 2026 is forecast to be JPY 165 per share. On Page 22, assumptions and sensitivities are shown for full year forecast of fiscal '26. As you can see left top, from April, March, Dubai crude oil was JPY 86 (sic) [ JPY 89 ] and the Japan-U.S. dollar exchange rate, JPY 155. As shown on the right-hand side, the crude oil prices started at the peak at the beginning of the fiscal year. But as the Strait of Hormuz closure was lifted, gradually started to decline. Page 23, please. This is the consolidated ordinary profit, excluding the impact of the inventory valuation, which was down JPY 55.7 billion year-on-year. Shown in yellow is the petroleum business, minus JPY 36.8 billion. The reasons are: first of all, margins and sales volume, minus JPY 38.6 billion. The breakdown is as follows: margin of 4 main products is minus JPY 85 billion with a negative time lag. Margin of other products, plus JPY 26.7 billion. Sales volume of all main products, minus JPY 3.1 billion; sales volume of other products, minus JPY 5.6 billion. Import, purchase and export, plus JPY 28.4 billion. Expense and other was minus JPY 8.1 billion. The in-house fuel cost, minus JPY 7.7 billion, the variable cost, minus JPY 7.5 billion and other is plus JPY 7.1 billion. Those are expected. And inflation is also being considered. And in solving the problems that happened last year, also this was included in this factor. Shown in purple is the petrochemical business. This went up by JPY 4.1 billion. Price is positive JPY 0.8 billion; volume, plus JPY 0.2 billion. Expense and other with the regular maintenance of the keiyo ethylene is up by JPY 3.1 billion. Shown in red is Oil E&P business, down JPY 27.3 billion. Price with the higher crude oil and weak yen is positive JPY 20.3 billion. Volume with the closure of the Strait of Hormuz minus JPY 39.8 billion. The expense and other is minus JPY 7.8 billion with lower utilization. In the Renewable Energy business, JPY 0.2 billion profit increase is expected due to the improved wind conditions. And other is up by JPY 4.1 billion with the consolidation and others. Please turn to Page 24. This is the consolidated cash flows and financial index. First, starting with the cash flows. The first line, cash flows from the operating activities is expected to be JPY 96 billion. The second line, cash flows from investing activities is expected to be the outflow of JPY 198 billion. As a result, free cash flow is outflow of JPY 102 billion in our forecast. Next is the consolidated balance sheet. Net worth changes is JPY 16.8 billion and our forecast is JPY 623 billion. Net worth ratio 26.7% and net debt-to-equity ratio 0.88x. Finally, the Page 25. This is the capital expenditure overview for fiscal '26 forecast. The full year capital expenditure is expected to rise JPY 96.5 billion to reach JPY 194 billion. Depreciation is expected to increase JPY 0.1 billion to reach JPY 58.4 billion. That concludes the presentation on the fiscal 2025 results as well as fiscal 2026 forecast. [Statements in English on this transcript were spoken by an interpreter present on the live call.]