ENEOS Holdings, Inc. (5020) Earnings Call Transcript & Summary

I am Sugimori, President of JXTG Holdings. I'd like to express my gratitude for the support and advice provided regularly by shareholders and investors for the business of JXTG Group. Now let me start explanation. Please refer to Page 2 marked as financial highlights at upper left for the overview of profit and loss in FY 2019. Operating income, excluding inventory valuation, declined JPY 419 billion year-on-year to JPY 96.7 billion. We recognized decreased chemical margins and impairment loss for petroleum products in the fourth quarter as petrochemical margins shrunk from the level at the beginning of the fiscal year and resource prices declined due to COVID-19 pandemic. Operating income, excluding inventory valuation, from January to March was negative JPY 175.5 billion. In addition, we had to post inventory valuation loss of JPY 209.8 billion. And it is regrettable for us to record profit attributable to owners of the parent as negative JPY 187.9 billion. Please turn to Page 3 for a brief summary of the first medium-term management plan. Results for management targets are as shown on this page. While we could achieve the targets for free cash flow and net D/E ratio, the targets for operating income and ROE were regrettably unmet. In FY 2017 and 2018, we achieved the targets ahead of schedule owing to the profit generated by the change of portfolio mix as well as stable market for both Japan and overseas. However, due to the results of FY 2019 I reported earlier, we were not able to achieve the target for operating income, excluding inventory valuation. Overall, negative factors in FY 2019 were almost offset by other positive factors, such as creation of synergy better than planned, earnings improvement with Caserones Mine, favorable market environment until FY 2018 as well as profit from the change of portfolio mix. Regarding shareholder returns, we realized a dividend increase and stock buyback against the backdrop of strong results in the first half of the medium-term management plan. Please turn to Page 4 for reviewing the measures and the medium-term management plan in which we set and worked on 3 basic policies. In enhancing profitability of core businesses, integration synergies achieved JPY 122.5 billion, which was far better than the plan of JPY 100 billion. Other measures were also implemented to enhance our competitiveness, such as integration under the ENEOS brand and reduction of refining capacity. In Metals business, profitability of Caserones has improved to be in the block for operating profit. And production capacity of electronic materials was increased steadily. In focusing on cash flows and capital efficiency, we divested the cell culture material business, interest in oil sands project in Canada and commercial buildings as well as optimized copper mine equity interest. We also changed portfolio mix through participating in retail sale of electric power and gas, developing electric power sources like renewable energy and acquiring tantalum and niobium business. Regarding enhancement of management foundation, we introduced internal control system and promoted ESG management. Also, in May 2019, we developed and announced JXTG Group Long-Term Vision to 2040. In order to address significantly changing business environment, we decided to effectively integrate the management of the holding company and the energy company to expedite the decision-making process and include ENEOS in the company name. As a result of these measures, we believe now we are ready for the future. Also, we assume we have established a financial base for the future. And as we maintain this financial base, we developed the second medium-term management plan as a new stage to accomplish the long-term vision to 2040. Before the explanation of the second medium-term management plan, let me briefly touch upon the outlook for FY 2020. It is difficult to determine how much effect COVID-19 will have on our business. Under such a circumstance, we set our assumption for crude oil price at $30 per barrel, copper price at $0.250 per pound and exchange rate as JPY 105 to the $1. Based on this assumption, we estimate the operating income, excluding inventory valuation, as JPY 165 billion. As we have factored in the impact of COVID-19, such as decreased sales volume until the end of the first half, there is much difference between the operating income forecast of first and second half. The breakdown of JPY 165 billion is: JPY 15 billion for the first half and JPY 150 billion for the second half. Forecast dividend for FY 2020 is JPY 22 per share. Next, I will explain about the second medium-term management plan. Please turn to Page 4 of the material for medium-term management plan. First, let me explain the long-term vision announced last year as we made a partial change to goals. We added the wording, carbon-neutral, to make the goal more specific in our envisioned goal number 3: contribute to the development of a low carbon, recycling-oriented society. Now please turn to the next page. After the announcement of the long-term vision, we consider specific measures such as energy conservation through automated operation energy service by distributed energy resource and CO2-free hydrogen. Then we realized it would be possible to achieve carbon-neutral status for our own CO2 emissions in the future by these measures. Even though that is based on back casting with assumption that technological innovation to reduce cost becomes available, that is the reason we added this wording to our goal statement. Please turn to the next page. We changed the names of growth businesses in this conceptual diagram to show our group businesses in 2040. This change was made to have wordings to express our ideal better like changing power generation to next-generation energy supply. Please refer to the slide for more details. Now I'd like to explain the second medium-term management plan. I skipped the results of the first medium-term management plan on Page 8 as I already covered them at the beginning. Please turn to the next page. As announced, we decided to change the management system to effectively integrate the holding company and the energy company and include ENEOS in the name of both companies. This is to accomplish our long-term vision and to accelerate decision-making and execution of our business in a rapidly changing business environment. We also aim to develop growth businesses and create new businesses by making use of the highly recognized brand name, ENEOS. Next page describes the positioning of the second medium-term management plan. In the first medium-term management plan, we established a stable financial base and executed structural reforms by maximizing synergies of business integration, sale and replacement of assets, et cetera. I want to position and work on the next 3 years of the second medium-term management plan to accelerate the structural reforms and pursue transformation for accomplishment of the long-term vision. To be more specific, we will develop and strengthen growth businesses by utilizing our group strengths such as efficient supply chain and service station network as well as by integrating digital technology and knowledge of different industries and areas into our strengths. Please turn to next page. We have 2 main basic policies for the second medium-term management plan. First one is pursuit of both implementation of business strategy to achieve the long-term vision and management focusing on cash flow. That is, to generate ongoing cash flow by strengthening the competitiveness of base businesses and to pursue selective investment to develop and strengthen growth businesses and optimize the business portfolio, which is based on the first point. At the same time, we'll maintain the soundness of the financial base and allocate cash flow appropriately. Second policy is strengthening the business foundation. We'll change the group management system to develop a management system, which enables quicker decision-making, and to strengthen monitoring by the Board of Directors. We also execute measures to realize the benefits of newly introduced ERP to strengthen system platforms for workstyle reform and to develop and secure human resources. In addition, as we make a transformation going forward, we'll promote constructive dialogue with various stakeholders such as shareholders, employees and customers to established medium to long-term trust. Next page is about our ESG management. We regard our ESG management is to realize the goals envisioned in the long-term vision to 2040 and to create social and economic value. This is exactly a description of our activities, and major points are listed on this page. Let me skip explanation in details in the interest of time. Now let me explain business strategy. From Page 13 onward, we cover major measures by business segment to be implemented during the second medium-term management plan toward accomplishment of the long-term vision. First segment is our base business, petroleum refining and marketing, oil and gas E&P, metal resources development, copper smelting and refining. In the second medium-term management plan, we will transform the supply chain by pursuing optimal production and supply structure and maximize the value of upstream assets of oil. And in copper smelting and refining business, we will continue stable operation of Caserones and strengthen competitiveness, mainly for Saganoseki Smelter & Refinery, reorganizing smelting business and integration of refining and recycling businesses. From Page 14, growth businesses I explained. First one is petrochemicals. In Petrochemicals business, we strive for improvement of competitiveness and profitability by transforming refineries to produce more chemical products and entering the high value-added derivatives business. In the second medium-term business plan, we will establish concrete measures to increase the chemical ratio at Kawasaki, Kashima, Mizushima and Oita industrial complexes and increase production capacity for products with technical advantage. Next is materials. Electronic materials business will offer advanced materials for telecommunications and digital mobility, health care devices and next-generation batteries and meet the needs of society. Under the second midterm management plan, we will capture the growing demand of emerging 5G devices and recovering memory products while attaining higher functionality and higher added value through product improvements. For next-generation energy supply and community services, I will introduce the outline using the following 4 slides. The slide shows our vision of low-carbon energy supporting people's lives. In addition to renewable energy, such as offshore-onshore wind power, we will see more solar power in homes and commercial facilities and CO2-free hydrogen power from overseas. I will explain the roles our company can play in such a future. On next page, I will discuss our VPP, or virtual power plant, business that connects these distributed power sources with our own power sources to support the local production and local consumption of energy. The slide also shows how the service stations are used for sharing and other mobility services as well as for various lifestyle support services to support diverse lifestyles of people. Next page shows how the customer information obtained from these infrastructure facilities can be converted into a database, which we can use to understand customer behavior and preference and to provide more efficient services. In this way, we are planning to build an ENEOS platform that will provide customers with convenient services related to mobility, lifestyle support and energy using the tightly connected network. Our goal is to transform ourselves into a next-generation energy supplier and a community service provider that provides a variety of services beyond just energy production and distribution. Next page, please. Our goal is to grow into a platform that provides a range of services from our service stations tailored to each customer's life stage. Under the second midterm management plan, with the aim of promoting mobility services, we will develop a business model of car sharing with vehicle delivery and a car leasing business that utilizes customer contacts at service stations. In the lifestyle support field, we will expand our services by leveraging third-party partners, the ENEOS brand and the local know-how of distributors. Page 21, please. The diagram shows the outline of next-generation energy supply and the community services centered on distributed power sources. We aim to provide electric power services that meet the needs of customers by achieving a stable and efficient power supply through the best mix of distributed power sources, which use low-carbon energy generated at low-cost and competitive large-scale power sources. Under the second midterm management plan, we will use and expand ENEOS Denki's customer base and build an optimal power supply portfolio by promoting Goi gas field thermal plant generation and strengthening and expanding renewable energy sources. In addition, for energy service using the company's own resources, we will promote rooftop solar power generation and other household consumption services and the VPP, which uses distributed power sources. As for CO2-free hydrogen, we will participate in a project aimed at building an overseas hydrogen supply chain and assess the feasibility. From next page, I will explain the 2 environmentally conscious businesses that are contributing to low-carbon recycling-oriented society. The first is the recycling business. As part of the second midterm management plan, we will promote the recycling of waste, plastic and waste metal at the refineries and smelters and examine the commercialization of lithium-ion battery recycling for automotive use, which are of high demand, contributing to the formation of a circular society. Under the midterm plan, together with Mitsubishi Chemical, using refineries, we are demonstrating and examining conversion of waste plastic into oil and the commercialization of lithium-ion battery for automotive use. In addition, together with BYD, a Chinese EV bus manufacturer, we will promote creation of a circular model of lease, reuse and recycle. For storage batteries of EV buses. The second type of environmentally conscious business is CCS or CCUS. We aim to contribute to the formation of a global low carbon society by developing our business in Southeast Asia, where we have competence. In the second midterm plan, we will utilize the technology and the know-how we have accumulated through our CO2 EOR business in the United States and conduct the feasibility assessment in cooperation with strategic partners such as national oil companies. That was my brief summary of the strategy of each business. From Page 24, I will explain the initiatives we will implement to promote growth and realize our long-term vision. First is open innovation. In order to create innovative businesses, it is essential to leverage technologies and ideas of startups and players of other industries. Through JXTG innovation partners, our wholly owned corporate venture capital business, we will pursue open innovation in the areas of town planning and mobility low-carbon and recycling-oriented society and data science. This company has an independent decision-making authority and a system to make quick decisions on investments and collaborations. Under the second midterm management plan, we have set aside a JPY 15 billion investment limit to search for new seeds of growth for the company and for the group. Next page, please. Digital transformation is essential if we are to continue to grow. In addition to creating groundbreaking new products and services using the customer data, as explained earlier, we will dramatically improve productivity mainly by automating operations at refineries, oil and gas fields and smelters. Securing and developing human resources is a key to success. We will move away from conventional HR measures and promote transformation. This is a slogan that we have adopted. As a mechanism to encourage transformation and a challenge, we will introduce job-type list hiring and year-round hiring of digital and other talents and promote optimal placement through our talent management system. We will encourage personnel evaluation based on merit rather than seniority and compensation based on responsibilities and performance. Regardless of age, gender and nationality, we will support personnel with diverse talent and value sets. Develop those talents who can promote innovation and promote those who are motivated and competent. We will also expand support for balancing work with child care, nursing care and illness care. Next, I will explain our financial strategy. Page 28 states the obvious. So I will not go into details, but it does indicate that we will use cash flow from our core businesses and the financial leverage to make strategic investments in growing businesses and the return profit to shareholders while improving ROE over the medium to long term. The financial plan of the second midterm management plan is on Page 29. Targeted operating income, excluding inventory valuation, is JPY 970 billion. This is a 3-year target in view of short-term fluctuations in resources prices and other factors. The targeted free cash flow is JPY 150 billion for 3 years. Net D/E ratio is less than 0.8x, and ROE is 10%. For 3 years, we plan to generate JPY 150 billion in free cash flow. Cash inflow is approximately JPY 2 trillion, and outflow is JPY 1.5 trillion, including CapEx and loans. Next is investment plans. The highlight is, as shown in the graph in the middle, we plan to make strategic investments of JPY 830 billion, which is much larger than in the first medium-term management plan. JPY 400 billion is for the supply of next-generation energy, including electricity and renewable energy; JPY 250 billion is for electronic material and petrochemicals; and JPY 180 billion for reimbursement and streamlining of core businesses. This includes a JPY 100 billion investment for digitalization. We've worked on the midterm management plan over the past 12 months, focusing on growth strategies. Although it remains difficult to assess the impact of COVID-19 pandemic at this time, we will continue to carefully assess the business environment and strictly manage our investments. This is about shareholder returns. Our basic understanding of the importance of returning profits to shareholders has not changed. However, we have made our return policy more articulate than before. And the total return ratio for the 3-year period is 50% or more of net income, excluding inventory effects. In addition, we will pay a minimum dividend of JPY 22 per share for FY 2019. We hope to clarify and deepen your understanding of our policy of allocating profits we generate to investments and shareholder returns. That was my overview of the second midterm management plan. As I mentioned at the beginning, it is unclear when the COVID-19 pandemic will be resolved and what society will look like. After that. By assessing the situation carefully, we will realize our long-term vision. The details of the FY '19 financial results and earnings forecast for FY '20 and will be explained by Mr. Ouchi.

Hello. I am Ouchi. I'd like to explain about financial results for FY 2019 as well as forecast for FY 2020. Please refer to the slide deck in front of you. Page 2 to 5 are for overview, and let me skip this part as they have been just covered by Mr. Sugimori. Please turn to Page 7 for business environment one. I start from Dubai crude oil as usual. Its price was $69 per barrel in FY 2018. But in FY 2019, it was $60 per barrel due to the decrease of oil price affected by COVID-19 in the fourth quarter. For FY 2020, we estimate $30 per barrel. Copper price in FY 2018 was $0.288 per pound. But in FY 2019, it declined to $0.266 per pound. That is the case for the oil price. For fiscal year 2020, we estimate $0.250 per pound. Please turn to Page 8. Margins of petroleum products as shown on the left. This fiscal year under review is shown in dark pink in the chart. And as you know, the average margins had been strong at about JPY 11 per liter until the third quarter. But it was affected by the oil price decrease in the fourth quarter and dropped to about JPY 6 per liter, as indicated by the bar chart. The annual average was about JPY 10 per liter, down about JPY 1 from the previous fiscal year. Paraxylene margin is shown on the right. Its supply increased by new production facilities in Asia, and this affected the margin throughout FY 2019. And as a result, it continued to be weak over the entire fiscal year, as shown by the chart. Next, please turn to Page 10 for PL. Operating income in FY 2019 was negative JPY 113.1 billion, as indicated in the middle column. As we posted inventory valuation loss of JPY 209.8 billion, operating income, excluding inventory valuation, was JPY 96.7 billion to record a significant profit decrease of JPY 419 billion in year. Finance income or cost was negative JPY 22.7 billion, and profit attributable to owners of the parent decreased by JPY 510.2 billion year-on-year to negative JPY 187.9 billion. Next, let me explain profit and loss by segment. Please turn to Page 12 for Energy business. Its operating income, excluding inventory valuation, declined by JPY 310.4 billion year-on-year to JPY 43.7 billion, as shown at the top. Petroleum products was decreased by JPY 179.7 billion year-on-year. Please refer to the waterfall chart below. Transient loss was JPY 86.2 billion. This includes the reversal of gain on sale of cell culture material business of JPY 77.7 billion recognized in the previous fiscal year and deterioration of equity in earnings of affiliates. On the right, sales volume is indicated, and petroleum products reduced its sales volume due to securing profitability and warm winter. Sales volume of coke decreased as well. And as a result, it declined by JPY 37.9 billion. Margins and other decreased due to the impact of oil price decrease on petroleum products in January-March quarter and its time lag and export. Petrochemicals indicated on the right, which declined by JPY 130.7 billion. Sales volume decreased by JPY 10 billion as shown on the waterfall chart. This is due to production adjustment driven by the deteriorated margin of paraxylene. Decrease of margins and other is JPY 120.7 billion. This is mainly because of the deteriorated margin of paraxylene. Please turn to Page 13 for oil and natural gas E&P business. Operating income decreased JPY 76.6 billion year-on-year to negative JPY 38.8 billion. Its breakdown is shown on the waterfall chart. Transient loss was JPY 57.3 billion, including impairment loss caused by the decline in oil price. Sales volume increased by JPY 11 billion due to increased production of Mariner Oil Field and Culzean Gas Field. Crude oil price was affected by the decrease of project unit price to decrease JPY 20.7 billion, and expense and other declined by JPY 9.6 billion. Page 14 is about Metals business. Operating income was down JPY 20.2 billion year-on-year to JPY 47.9 billion. In resources development, the negative impact of copper price was recognized as JPY 20.7 billion. However, the increased production of the copper mine at Caserones helped us to limit the decrease to JPY 4.4 billion. That is described in a box for Caserones on this page. Smelting and refining increased JPY 1.6 billion, owing to better market condition for sulfuric acid. Electronic materials, recycling and environmental services and other decreased JPY 17.4 billion. This is mainly because of the declined sales due to U.S.-China trade conflict, weak demand for smartphones and inventory adjustment by users as well as transient loss of affiliated companies. Please take a look at the balance sheet and the cash flow statement on Page 15. On the right-hand side is the statement of cash flows. In the past, figures, excluding the impact of IFRS 16 lease accounting, is shown in the blue box. Operating cash flow for FY '19 was positive JPY 450.7 billion after deducting depreciation and amortization of JPY 266.5 billion and a decrease in working capital of JPY 87.5 billion due to lower oil prices from operating income of JPY 96.7 billion. Investing cash flow was a cash outflow of JPY 371.3 billion, resulting in a free cash flow of JPY 79.4 billion. Net cash flow, which includes dividends and other factors, was minus JPY 76.6 billion. Next to it is the 3-year total for FY '17 through FY '19. Free cash flow was JPY 828.7 billion, and net cash flow was JPY 459.2 billion. The balance sheet is shown to the left. Net interest-bearing debt was JPY 1,898.8 billion, with an equity ratio attributable to owners of the parent of 28.8% and a net D/E ratio of 0.7x as of the end of March. For your reference, D/E ratio as of April 2017, the year of merger, was 0.89x. Please turn to Slide 16 for the full year forecast. The forecast is based on the assumption exchange rate of JPY 105 to the dollar, a crude oil price of $30 per barrel and a copper price of $0.205 (sic) [ $0.250 ] per pound. The impact of COVID-19 on the sales volume of petroleum and other product is expected to continue for about 6 months. We will carefully monitor the execution of investments. Please see the summary forecast on Slide 17. For FY 2020, operating income is projected at JPY 110 billion. Operating income, excluding inventory valuation, is JPY 165 billion. And net income is JPY 40 billion, an increase of JPY 227.9 million year-on-year. On Page 18, the second midterm management plan will begin in FY 2020. Within each segment, there are subsegments. For example, electric power and materials are in energy and the functional and the thin film materials are included in metals. There are some changes to the segmentation, as shown in the slide. Slide 19 shows earnings forecast for the energy business. Operating income, excluding the impact of inventory valuation, is projected to increase JPY 46.3 billion year-on-year to JPY 90 billion. There are 3 boxes. First of all, oil products is expected to go up by JPY 32.5 billion due to the negative time lag we had in the previous year despite a JPY 42.2 billion decline in sales volume caused by COVID-19. The petrochemical products business will improve by JPY 39 billion. Thanks to improved fuel efficiency amid declining crude oil prices, the electronic power business is expected to deteriorate with a decrease in margins in the face of increasing competition. Materials is expected to deteriorate by JPY 119.4 billion, with lower needle coke volumes and weaker margins. Next is upstream oil. Please turn to Page 20. Operating income is projected to go up by JPY 38.8 billion year-on-year. The absolute value is 0. Despite a deterioration of JPY 54.7 billion due to the decline in oil prices, as shown in the waterfall chart, the total improvement is JPY 38.8 billion, including a JPY 92.1 billion improvement due to the absence of impairment losses in the previous year. Next is the Metals segment on Page 21. Operating income is expected to decrease by JPY 18.9 billion year-on-year to JPY 29 billion. The functional materials, thin film materials and other is improving by JPY 6.5 billion due to the absence of one-time losses of affiliated companies, which we had last year. Mineral resources will deteriorate due to the impact of lower molybdenum prices and other factors. Smelting and recycle (sic) [ recycling ] is negative JPY 14.9 billion due to the deterioration of the sulfuric acid market and TC/RC. Next is cash flow on Slide 22. For FY 2020, operating cash flow is expected to be positive JPY 566 billion. Investing cash flow is an outflow of JPY 426 billion, and the free cash flow is positive JPY 140 billion. The impact of COVID-19 has been factored into operating income. We expect to increase the CapEx in line with our long-term vision, but as the president said earlier, we will implement it carefully while assessing the impact of COVID-19 on the social and economic environment. The information on Page 23 onwards is for reference only. This concludes my explanation. Thank you very much for your kind attention.