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

Good morning. I am Ota Katsuyuki, President of ENEOS Holdings. Thank you very much for participating the briefing on ESG management at the ENEOS Group. For sustainable corporate growth, it is essential to identify the future scenario of society and our envisioned goals and strategically execute initiatives. Today, I will explain our thoughts and initiatives about ESG management. Please turn to Page 1. I will explain these items on the slide. Please turn to Page 3. This slide is a review of our long-term vision announced in May 2019, and we assume a scenario of future society as a long-term goal in 2040. This assumption is based on the 3 global trends described here. That is low carbon, recycling oriented society, digital innovation and lifestyle changes. Please turn to Page 4. We expect low carbon recycling-oriented society will be achieved in the social scenario in 2040. This transition is accelerated and steadily progressing due to the declaration of carbon neutrality in Japan, promotion of environmental policies in the U.S. and Europe and lifestyle changes due to the COVID-19 pandemic. Based on these circumstances, we are aware that we also need to accelerate the speed of our initiatives, which I am going to explain now. From Page 5, I'll explain our value creation story, which begins with our group philosophy. Today, I will focus on pursuit of carbon neutrality and the strategic investment in the second medium-term management plan, which are the major points. Now please skip one page and refer to Page 7. This slide describes our envisioned goals for 2040. In the third goal, contribution to the development of a low-carbon recycling-oriented society, will pursue carbon neutrality in which we offset our own CO2 emissions by self-help efforts and initiatives through the enhancement of businesses with a low environmental burden and environmentally conscious businesses. Please turn to Page 9 for the blueprint to realizing carbon neutrality. First, please refer to the upper arrow in orange. Currently, about 29 million tons of CO2 is emitted in production processes of our group. But we estimate the emission will decrease to about 17 million tons in 2040, due to declining domestic demand. Next, please refer to the lower arrow in red. This indicates the effect of CO2 reduction compared to FY 2009 through our initiatives, such as promotion of environmentally conscious businesses and energy conservation. We aim to achieve carbon neutrality in our own emissions by achieving a reduction of 17 million tons by 2040. This is a major challenge. But by setting such a specific target, we intend to pursue the balance between stable supply of energy and materials required in society and contribution to low-carbon recycling-oriented society. Please turn to Page 10. This slide shows an overview of our future business portfolio for our envisioned goals. We categorize our group businesses into 2 groups. One is growth businesses in which we are strengthening strategic investment for growth toward 2040 and the other is base businesses in which we are pursuing stable supply of energy and optimization of the value chain. Specific plans for strategic investment are described on Page 13. Total capital investment in the second medium-term management plan is JPY 1.5 trillion. And about JPY 830 billion or 78% of this total is planned to be strategic investment in growth businesses, such as renewable energy. Based on the long-term funding plan, we'll continue efforts to secure lower interest and stable funds like green bonds announced last week. Needless to say, we will manage investments by rigorously applying investment criteria. Next, I will talk about the business foundation, which is the basis for all our corporate activities. Please turn to Page 15. The first point is governance. As shown on this slide, we have implemented various governance measures to establish the current structure. In June 2020, we effectively integrated the management of ENEOS Holdings and ENEOS Energy to accelerate decision-making and business execution. In addition, discussion criteria of the Board of Directors of ENEOS Holdings was revised to boldly delegate authority to the principal operating companies. And to address climate change issues, we revised the officer compensation system to reflect the level of achievement of the CO2 emission reduction goal. As shown by the table, the number of officers as of June 2020 is 16, a decrease from 22 as of June 2017. And we assume it is an appropriate number considering the size of the company and decision-making processes. Ratios of outside directors and female officers have substantially improved, as shown here. Next, let me explain our ESG management structure. Please turn to Page 16. In basic policy for ESG management, our group defines ESG management as formulating management and business strategies based on risks and business opportunities, contributing to resolution of social issues through our business and generating profits. Based on this policy, we have transitioned to a structure to further enhance and promote the effectiveness of ESG management. Please refer to Page 17 for more details. In the past, the structure of our group had the group CSR council under the ENEOS Holdings Executive Council and discussion results of the CSR Council were reported to the executive council. In this fiscal year, we changed the structure to integrate the functions of the CSR council to the Executive Council, to enable prompt and comprehensive discussions on risk identification and business opportunities by the executive council. Those identified risks and important issues will be assigned to the relevant departments to be addressed promptly and cross-functionally in the group. Please turn to Page 18. Please refer to the graph on the right. Based on the perspectives and the vertical axis, priority from external perspective and the horizontal axis priority from internal perspective in the group. Nine top priorities of the group are identified as shown in the table on the left. In priority from external perspective, we refer to assessment by ESG rating organizations, et cetera, to ensure a certain level of objectivity. Next, I'd like to touch upon major progress we made in FY 2019. First, CO2 emissions reduction. Please turn to Page 19. In FY 2019, we reduced CO2 emissions by 2.75 million tons compared to FY 2009, which is more than the original target of 2.72 million tons. Please turn to Page 20 for ensuring safety. In FY 2019, we targeted the achievement of 0 occupational fatalities and by implementing various safety initiatives with contractor companies, we achieved this target. We will continue our all-out efforts to maintain 0 occupational fatalities and further improve safety activities in the entire group. Next, please turn to Page 21 for human resource development and comfortable work environment. First, for human resource development, we completed implementation of effective training based on the human resource development plan, which is a target for FY 2019. In diversity and inclusion, work-life management and health enhancement, which are major challenges for a comfortable work environment, we achieved 4 out of 5 KPIs. It was regrettable, we slightly missed the target in health enhancement. We are continuing our efforts to achieve all the targets in FY 2020. Next, I will discuss digital transformation. Please turn to Page 22. Our group is promoting company-wide digital transformation, or DX, aiming to improve the efficiency of base businesses and create innovative new products and services. First, the Executive Vice President, Mr. Adachi, was appointed to the position of CDO to be responsible for the promotion of DX and we established the Digital Promotion Committee chaired by CDO as a structure for pursuit of DX initiatives for the entire group. The most important driver of this DX promotion is human resources. In our group, human resources who promote DX, are defined as ABCD human resources. And we are raising the level of digital literacy and developing human resources highly specialized in DX through various training programs. We will also promote the building of a digital platform to integrate and analyze various internal and external data, such as customer data, sensor data obtained from machines, et cetera. By combining this platform with our supply chain and network, we expect we cannot only generate innovative new products and services, but also enable automation, advancement and efficiency of refineries and plants, oil and gas field and smelters. Our DX initiatives have been highly evaluated, and we were selected as a DX stock. Next, I will explain initiatives to maintain a stable supply as measures for COVID-19. Please turn to Page 23. During the COVID-19 pandemic, our highest priority is maintaining a stable supply of products and consideration of the health and safety of employees working for ENEOS and the contractor companies. Fortunately, there have been no events that could impact the stable supply of products so far. Our group has rules for crisis and emergency response, which summarizes actions to be taken by the ENEOS Holdings for the entire group, in case of any event that could cause serious impacts on management. Based on these rules, response headquarters have been established at ENEOS Holdings and the principal major operating companies headed by the President of each company. In the event that the pandemic becomes even more serious, we'll address the situation properly based on the predefined BCP. In addition, the work style reforms and DX initiatives we have been carrying out are significantly contributing to preventing the spread of COVID-19. Now I will switch to a slightly different topic of creating business opportunities. Please turn to Page 25. This slide summarizes the strategies of each business based on the image of our future businesses in 2040. Among the growth businesses, I'd like to focus on petrochemicals, materials, next-generation energy supply and environmentally conscious businesses today and mainly explain characteristic examples for each. Let me start with the petrochemicals business. Please turn to Page 26. In petrochemicals business, we will increase the chemical ratio at the Kawasaki, Kashima, Mizushima and Oita industrial complexes, and expand the scale of technologically-superior products in order to transform refineries to produce more chemical product and enter the derivatives business. Our major initiatives in the past year are described on this page. Now let me briefly touch upon the future of our business for ENB, which is a derivative. Please turn to Page 27. ENB is an essential component for synthetic rubber used in automotive parts, such as radiator hoses and window frames. Since the synthetic rubber is used, also in electric and hybrid cars, the demand for ENB is expected to grow 3% to 4% per year. In response to the increase in auto production, ENB users are focusing on supply stability when selecting suppliers. With the largest production capacity and sales network in the world, we can respond quickly to the needs of these customers. In the future, we will continue to consider expansion into Saudi Arabia and other countries in order to capture growing demand. Next, I would like to explain the initiatives of our materials business. Please turn to Page 28. The materials business -- we will continue to meet the demand for electronic materials for 5G and develop lubricants that are environmentally friendly. Major initiatives in the past year in electronic materials and lubricants are described here. Let me explain the advantages of our corson alloy business. Page 29, please. Corson alloys are copper alloys used in connectors and other electronic components. Recently, electronic devices such as mobile terminals have become smaller and thinner with higher performance, requiring copper alloys to be stronger and more conductive than ever before. We can attain high conductivity by increasing the purity of copper, but the copper may become too soft or too weak to process. So the copper needs to be strengthened by mixing with other metals. However, since strength and conductivity are inversely related, we need advanced metal processing techniques to achieve both properties at the same time. In that sense, using proprietary technology, JX Nippon Mining and Metals has succeeded in developing a corson alloy with both high-strength and high conductivity. We will continue to produce high performance, high value-added products and contribute to the advancement of IoT and AI in society. Next, let me introduce specialized lubricants for electric and hybrid cars. Please turn to Page 30. Along with the growth of EVs and hybrid cars, the percentage of electric vehicles in new car sales will likely increase. As a result, there is an increased need for specialized lubricants for electric vehicles, which is a major business opportunity for our group. Our group has developed new products with characteristics required for electric vehicle lubricants, taking advantage of the lubricant development expertise, cultivated with our engine oil business. We intend to approach EV and drive system manufacturers in Japan and China first, and then the rest of the world, if we can find opportunities. Next, I would like to talk about our next-generation energy supply business. Please turn to Page 31. The group's next-generation energy supply platform is based on 2 ideas. The first is that renewable energy, such as solar power is a decentralized power source. So local production and local consumption of energy is crucial. The second is that hydrogen plays a major role in the effective use of renewable energy. I will show you our activities in 3 steps: production, storage and control and use. Please refer to Page 32. In the next-generation energy supply business, we are aiming for stable and efficient supply of low carbon energy. Construction of an optimal power supply portfolio, creation of energy services that make full use of our resources and the verification of an overseas hydrogen supply chain. I will discuss major initiatives of the past year with some examples on Page 33. First is on production. Our group has 25 renewable energy plants in Japan, and a total capacity of 125 megawatts as of the end of November, including projects in the planning stage. We will increase the capacity to 1,000 megawatts by the end of FY 2022 and several thousand megawatts by the end of FY 2030. Next is on storage and control. Please refer to Page 34. I will discuss the virtual power plant or VPP concept. As you know, a VPP controls electricity generation, including small-scale renewable plants, storage batteries, fuel cells and electricity demand centrally. It's called virtual because multiple small-scale power generation facilities are grouped together to function as if they were one power plant. To ensure a stable supply of renewable electricity through VPPs, the levering of supply is a major challenge. And advanced supply and demand adjustment and control capabilities are essential. At present, we are carrying out 4 VPP verification trials to accumulate experience and acquire necessary technologies. In the verification at service stations, storage batteries and solar panels are installed to verify the charging and discharging and response accuracy. In the verification of refineries and plants, power consumption, power generation capacity and the supply and demand management systems are linked with one another to verify the optimization of the surplus power generated in-house. Next is on use. I will introduce a hydrogen station case study on Page 35. We are using hydrogen stations, not only for FCV refueling, but also for supplying electricity to the community. In October this year, our group opened its 44th hydrogen station in Ariake, Tokyo as a hydrogen refueling station. After the planned relocation to the Tokyo Olympic Athlete Village redevelopment site in 2022, the station will function as a hydrogen supply base to vehicles as well as households in the area using a dedicated fuel cell and pipeline to be located in the community. We will continue to accelerate our collaboration with local governments and communities to expand our energy supply platform. Now let me explain about our environmentally conscious businesses on Page 36. In the recycling business, we will conduct verification trials and studies for the recycling of waste plastics and metals as well as automotive lithium-ion batteries using our refineries and smelters. The main initiatives of the past year are shown on the slide. Let me elaborate on the lithium-ion battery, or LIB recycling on Page 37. With the spread of EVs and hybrid vehicles, we anticipate a large increase in demand for rare metals, which are used in automotive lithium-ion batteries. We also expect a large volume of used LIBs will be generated. The establishment of recycling technologies and processes that enable both reuse and stable supply of rare metals has become an urgent issue. JX Nippon Mining and Metal's strength is its proprietary recovery technology for the extraction of high-quality rare metals from used LIBs and their reuse as battery materials. The challenge for the future is to establish a mass production process at a reasonable cost. In order to solve this problem, we are currently installing bench scale equipment at our Hitachi Works to conduct a series of demonstration tests. Page 38, please. JX Nippon Oil & Gas Exploration has been working on the CCS and the CCUS business using expertise gained through CO2 EOR. Specifically, we have started joint studies with NOCs of Indonesia and Malaysia and are also collaborating with the University of Texas at Austin and at Waseda University. Let's turn now to renewable synthetic fuels or e-fuels as a seed for the future. Page 40, please. Again, in order to reduce the fluctuation in the supply of renewable energy, it is essential to store and flexibly control the supply to be in line with the demand. There are multiple ways to store energy, each with its own advantages and disadvantages. But our group believes that conversion to hydrogen is the key to storing large amounts of electricity for long periods of time. Page 41, please. There are 2 ways to utilize hydrogen. One is direct usage in FCVs and others, the other is indirect usage after some processing. For example, synthetic fuels can be produced by chemically synthesizing hydrogen with CO2 as discussed by various utilities and automakers. This fuel is also known as e-fuel. The e comes from the first letter of the German word for renewable. Since the composition of synthetic fuels is similar to that of petroleum fuels. They can be used in existing social infrastructure, such as gasoline cars and service stations. And by using CO2-free hydrogen during production, it also helps to achieve zero carbon emissions. Page 42, please. On the other hand, the commercialization of renewable-based fuels depends how much we can drive down the production cost. The main keys to cost reduction are mass procurement of inexpensive CO2-free hydrogen and increased yields of renewable fuels derived from synthetic reactions. Page 43, please. First, let's take a look at hydrogen procurement. Compared with Japan, where land is limited, CO2-free hydrogen can be produced relatively cheaply in other countries. Therefore, it is extremely important for Japan to establish an international supply chain to safely transport large amounts of hydrogen. As we mentioned at the ESG briefing last December, our group is currently participating in several projects. Please refer to Page 44. The projects in which we are taking part are evaluating 2 methods of transportation, the liquid hydrogen method and MCH method. The liquid hydrogen method is currently verified by HySTRA, which is considering transportation of hydrogen to Japan after liquefaction of the brown coal-based hydrogen in Australia. The MCH method, which we revealed last year, is a method of transporting hydrogen after reacting it with Toluene. And we believe we have a competitive advantage because of our proprietary technology that simplifies the manufacturing process. Next, I will discuss how to improve the yield. Page 45, please. The main solutions to improve the yield are: development of high-efficiency catalysts and improvement of the manufacturing process. Let me explain about high-efficiency catalysts. Using the technology and the know-how developed in our refinery, our group is developing a catalyst with a yield 3 times higher than the current yield, but we are aiming at 4 times higher. In the future, we will further accelerate development by utilizing the materials informatics technology introduced last year. Finally, let me show you our road map for commercialization on Page 46. For commercialization and certification by 2030, our group will promote verification and other initiatives in stages, starting from 2022. With this, I would like to conclude my presentation. Thank you very much for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]