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

Good morning, everyone. I am Ota Katsuyuki, President of ENEOS Holdings. Thank you very much for your participation in the briefing on ESG management. The ENEOS Group is working to always be a valued and trusted company by responding to social needs and helping to solve social issues through our business activities and is reforming our corporate structure. Despite the persistent impact of the COVID-19, we continue our daily activities to ensure undisrupted and stable supply of energy and materials while paying utmost attention to infection prevention, especially at our manufacturing, distribution and sales sites. Looking toward the future, we are working to predict changes in the business environment and social needs to determine our envisioned goals and to implement strategic measures and promote company transformation. Today, I will explain our thoughts and initiatives from this perspective, that is ESG management. Please turn to Page 1. My presentation will cover these points listed on the slide. Please turn to Page 3. We have established a long-term vision setting 2040 as a goal. We believe the business environment surrounding us will drastically change with the keyword low-carbon recycling-oriented society, digital innovation and lifestyle changes. Please turn to Page 4. To properly respond to these changes in the business environment, the group aims to restructure its business portfolio toward 2040. To be more specific, we'll divide our group businesses into 2 groups, growth businesses and base businesses, to strengthen strategic investment for enhancement and the development of growth businesses and maximize cash flows by improving our competitiveness in base businesses. Please turn to Page 5. Our vision for 2040 is described on the right. We strive to become one with the most prominent and internationally competitive energy and materials company groups in Asia, to create value by transforming our current business structure and to contribute to the development of a low-carbon recycling-oriented society. We set our medium-term management plan for every 3 years. And in the first medium-term management plan until fiscal 2019, the main focus was completion of management integration and stabilization of a financial base. In fiscal 2019, we announced a long-term vision. And for the 3 years from fiscal 2020, pursuing transformation to realize this long-term vision has been our main focus, and we are working on reforming our business structure and management system. Please turn to Page 6. This is the basic policy of the second medium-term management plan for 3 years from 2020 to 2022. The main pillars of the plan are pursuing both implementation of business strategy to achieve the long-term vision and management focusing on cash flow and strengthening the business foundation. Please turn to Page 7. We define ESG management as realizing the goals envisioned in the long-term vision to 2040 and creating social and economic value. We are contributing to the development of a low-carbon recycling-oriented society, making persistent efforts to solve social challenges and strengthening the governance structure. Please turn to Page 8. This slide shows the progress of the second medium-term management plan. As shown in the figure on the lower left, the second medium-term management plan calls for a cumulative capital investment of JPY 1.5 trillion, of which JPY 860 billion is allocated for strategic investment in growth businesses, such as next-generation energy supply, community services and environmentally conscious businesses. Almost 2/3 of the total period of the plan have passed, and we are making a steady progress. On the right side, we listed major measures we have implemented for optimizing our business portfolio by enhancement of growth businesses such as new energy and materials and withdrawal from and sale of existing businesses and assets. Please turn to Page 9. Two years ago, we declared our aim to achieve carbon neutrality in our own Scope 1 and 2 emissions by 2040. The orange arrow at the top of the graph shows the CO2 emissions of the group. It is approximately 29 million tonnes at present, and it is expected to decrease to 17 million tonnes in 2040 due to the decline in domestic demand. The red arrow below indicates the CO2 reduction effect as a result of our own efforts, such as promotion of environmentally conscious businesses and energy conservation. We aim to make the emissions 17 million tonnes by 2040 as well to be carbon-neutral. Since the announcement of our policy, the global debate on decarbonization has progressed rapidly, including the goal setting by the Japanese government toward carbon neutrality and the announcement of the SBTi concept. We are currently reorganizing our policies and measures in light of these developments, but will not change our goal to achieve carbon neutrality by 2040, at least for Scope 1 and 2. As for emission reduction measures, we are reviewing them to newly develop and accelerate CCS in Japan and forestry projects in Japan and overseas. We will also proactively contribute to Scope 3 carbon neutrality through our new businesses, and we established a new department to steadily carry out measures to achieve carbon neutrality. We plan to announce further targets and the course of action at the time of our financial results disclosure in May 2022. Please turn to Page 10. Next, I will talk about strengthening the business foundation, which is the basis of all corporate activities. Please turn to Page 11. We have implemented a variety of measures to strengthen our corporate governance to establish the current system. Last year, in fiscal 2020, we effectively integrated the management of JXTG Holdings and JXTG Energy to accelerate decision-making and business execution. In addition, to ensure we address climate change issues, the degree of achievement of CO2 emission reduction targets is reflected in executive remuneration. In fiscal 2021, we reviewed our response to revision of the corporate governance code and confirmed that we continue to comply with all principles. Also, we plan to complete making NIPPO, a listed subsidiary, go private by the end of this fiscal year, which will lead to resolution of the parent subsidiary listing. In April 2022, I'll become a Director without representative authority to serve as a Chairman of the Board of Directors. This will further promote the separation of oversight and execution and enhance the supervising and monitoring functions of the Board of Directors. Next, please refer to Page 12. We have established basic policy for ESG management and based on this policy, we identify risks and discuss business opportunities promptly and comprehensively in the executive council. Risks and material ESG issues discussed and identified by the executive council will be assigned to responsible departments to address flexibly and cross-functionally. Please turn to Page 13. Material ESG issues are identified based on various guidelines, assessment items of ESG assessment organizations and assessment weighting. Please turn to Page 14. This slide shows the status of response to material ESG issues identified in fiscal 2020. Out of 13 items, 8 met their targets, but 5 didn't. For CO2 emissions, it will be impossible to properly evaluate reduction efforts such as energy conservation, if we take into account increases or decreases due to fluctuations in demand, which is uncontrollable for the company. Therefore, we make assumptions about facility operation based on historical results and set the reduction target by aggregating reductions from those assumptions. In fiscal 2020, the target was not achieved due to increased troubles in refineries and reduced CCUS utilization, but absolute CO2 emissions decreased significantly from 26.66 million tonnes in fiscal 2019 to 22.49 million tonnes due to lower refinery utilization rates. Regarding ensuring safety targets, unfortunately, there were 2 occupational fatalities during work at heights. We take this very seriously and are working to further strengthen and enforce safety rules for working at heights. Please turn to Page 15. This slide shows 15 material ESG issues identified for fiscal 2021. Please turn to Page 16. This is about financial impact from risks and opportunities associated with climate change, which we started to disclose from this fiscal year. There is no doubt that there will be a certain amount of demand for energy even as decarbonization progresses. And while declining oil demand is the greatest risk, capturing the demand for new energy sources such as renewable energy and hydrogen will create significant business opportunities for us. And overall, we expect more business opportunities will be created to exceed the risks. Please turn to Page 17. Developing human resources who implement strategies is a key in business operations. In order to realize our long-term vision, it is essential to further raise employee awareness to take on challenges and execute reforms and to activate the shift of human resources to growth areas. To address these issues, we have decided to introduce a job grade system for managers in fiscal 2022. Compensation will be determined based on the value of their jobs regardless of age or experience, and we encourage and support them to decide their career paths autonomously. We plan to introduce this system to employees who are not in a managerial position as well, so that we motivate them to change their awareness and behavior to increase the value of the work in a spontaneous manner and commit to outcomes by striking a balance between the value of work and compensation and rewarding their achievements. Finally, let me talk about how we are creating business opportunities to reach envisioned goals and initiatives for decarbonized recycling-oriented society. Please refer to Page 19. Let me take you through 5 initiatives shown in red. The first one is digital transformation on Page 20. One of the DX initiatives promoted by the base businesses at each part of the manufacturing and supply chain is automated operation of refineries. Plant operation is monitored 24 hours a day by a control system. Due to the aging of skilled operators who can make judgment on operation, we face a shortage of manpower and need to transfer know-how to next generation. To solve this problem, we have developed an AI system that performs automated operation and have succeeded in operating it for 2 consecutive days in a real petrochemical plant for the first time in Japan. Going forward, we will expand the scope of this initiative, introducing an AI model for automated operation to a wider range of plants, including toppers. Another example is Matlantis, a superfast AI atomistic simulator that uses materials informatics technology. We have succeeded in increasing the speed of calculation by tens of thousands of times compared to conventional simulators. This technology should accelerate the development of materials in various fields contributing to the creation and innovation of materials. The use of this simulator is not limited only to internal purposes. After the release, we have received inquiries from many companies and research institutes. Next example is Advanced Materials on Page 21. Copper materials will be extremely important in an increasingly electrified decarbonized society. Semiconductor materials and high-performance alloy materials are also essential for making electronic devices and batteries. Demand for these advanced materials is expected to increase along with the advancement of decarbonization and smartification, supported by IoT and AI technologies. Page 22, please. The ENEOS Group is developing these advanced materials and enjoys a dominant market position in the global market for treated rolled copper foil, sputtering targets for semiconductors and high-purity tantalum powder for electronic materials. Although we have gradually increased production capacity for rolled copper foil and sputtering targets for semiconductors to respond flexibly to rapidly increasing demand, we now have decided to make additional investment. We will continue to build a supply system that meets the trends of the market. Next example is CCS/CCUS on Page 23. CCS/CCUS technologies for capturing, utilizing and storing CO2 plays an important role in the realization of a decarbonized society. The ENEOS Group has long been a front runner in demonstrating CCS/CCUS technologies ahead of its competitors and building up a track record. In the current fiscal year, we participated in an offshore CO2 capture and storage project in Australia, obtained approval for the development plan that includes a CCUS project for the Tangguh LNG project in Indonesia and invested in 8 Rivers, a U.S. company with proprietary technologies. Going forward, we will accelerate our efforts in Japan and overseas by leveraging technologies and operational expertise we have gained over many years. Next, let me talk about hydrogen. Please turn to Page 24. These are our hydrogen strategies to 2040. Strategy 1 is to build a supply chain to transport inexpensive CO2-free hydrogen from overseas to users and customers. Strategy 2 is to develop a nationwide energy supply platform for local production for local consumption of domestic renewable energy. Strategy 3 is to expand hydrogen supply to buses and trucks which is a challenging target relative to others. We will use the Green Innovation Fund to build a CO2-free hydrogen supply chain and contribute to the realization of a hydrogen society while leveraging our strength, accelerating technological development and effectively utilizing existing facilities. After the current demonstration phase, we expect this to start supplying several tens of thousands of tons of hydrogen per year around 2025 followed by widespread expansion beginning in 2030 and a full-scale commercialization in 2040 and beyond. Our goal is to supply hydrogen equivalent to about half of domestic demand by 2050. Please move on to Page 25. And I will explain the initiatives we are taking toward full-scale commercialization from 2030 onwards, focusing on 3 areas. The first is establishment of a CO2-free hydrogen supply chain, the second is hydrogen supply to other industries and mobility and the third is development of new technologies. Of this, I will elaborate on the areas indicated in red, starting with the establishment of supply chain. Page 26, please. The first important factor to consider when building a supply chain is where to procure hydrogen. Given the high cost of domestic renewable energy and its limited availability in terms of volume, overseas hydrogen will be the main source as they are inexpensive and available in large quantities. There are 3 methods of transporting hydrogen from overseas in large quantities: liquefied hydrogen; MCH, where hydrogen is reacted with toluene to form methylcyclohexane; and ammonia. For liquefied hydrogen, we are a member of HySTRA, which is demonstrating a technology to transfer liquefied hydrogen produced from Australian brown coal to Japan. For MCH, we have a competitive advantage with our proprietary technology to simplify the production process. Ultimately, the optimal transportation method will be selected based on future technological developments and other factors. Page 27 summarizes a comparison between the 3 transportation methods. The cost of supplying hydrogen needs to be controlled for its widespread use and the best way to achieve this is to maximize the use of existing infrastructure. The table below shows transportation methods that are compatible with our facilities in blue, that present challenges in red and so forth. The liquefied hydrogen method requires hydrogen to be cooled to minus 253 degrees Celsius. So the development of large liquefaction facilities, transport vessels and liquefaction tanks can be an issue. The ammonia method requires measures to deal with the toxicity and the corrosiveness of ammonia itself and to save energy when extracting hydrogen from ammonia. On the other hand, the MCH method has a higher affinity with our facilities and technologies than the liquefied hydrogen and ammonia methods and is the transportation method we are most focused on. Please turn to Page 28 for more information. In establishing a hydrogen supply chain, the company is considering the effective use of its existing facilities, particularly its refineries. Refineries have storage facilities such as [ -- whilst to ] accommodate large tankers and tanks. Effective use of these facilities will reduce new investment and hydrogen supply cost. Page 29, please. This figure shows steel mills and LNG-fired power plants in the vicinity of our refineries. We believe that the locations of our refineries in integrated complexes with steel mills and power plants have high potential as hubs for a stable supply of hydrogen. Next, I will explain the technological development. Please keep 1 page to Page 31. As mentioned earlier in the explanation of the MCH method, we have proprietary technology that simplifies the MCH production process. This technology enables MCH manufacturing that normally requires 2 steps, to be performed in 1 step, thereby reducing manufacturing costs. We will be working on research and development for the enlargement of electrolytic cells, which is a challenge for practical application. Next is synthetic fuels. Please turn to Page 32. Synthetic fuels, as explained in detail at the previous ESG briefing, are fuels made by reacting hydrogen derived from renewable energy with CO2 and are one form of hydrogen utilization. Despite the progress in decarbonization, certain number of sectors will continue to require liquid fuels such as airlines, meaning that we can utilize the existing petroleum infrastructure for those sectors. We will expand adoption and reduce cost in the 2030s with the goal of achieving independent commercialization by 2040. In order to accelerate research and development, we are planning to strengthen our research facilities, including the relocation of the Central Research Laboratory. Finally, I would like to talk about recycling. Page 33, please. Like climate change, resource shortage and depletion associated with economic development is a serious risk for the society. As an energy and materials company, the ENEOS Group is defined contributing to a recycling-oriented society as one of the goals of the long-term vision to 2040. We are carrying out recycling in copper smelting, batteries and plastics. Most recently, we launched the project with Bridgestone to establish recycling technology for used tires, which was selected as a Green Innovation Fund project. This is the end of my presentation. Thank you very much for your kind attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]