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

Hello, everyone. I'm Tomohide Miyata. I would like to express our sincere gratitude to our shareholders and investors for your continued support and valuable advice regarding the business activities of the ENEOS Group. Let me now explain the FY 2025 Q2 financial results according to the materials. Please turn to Page 3. Operating profit for the first half of FY 2025 was JPY 166.7 billion. This includes a negative inventory valuation impact of JPY 106.8 billion. Excluding this impact, actual operating profit was JPY 273.5 billion, an increase of JPY 65.3 billion year-on-year. While profit from the oil and natural gas E&P business declined due to the falling oil prices and yen appreciation, the petroleum products business significantly improved, driven by higher petroleum product margins and gains from the sale of the Maritime Transportation business. Please turn to Page 4. We have revised our full year operating profit forecast to JPY 290 billion, down JPY 70 billion from the figure announced in May, reflecting the impact of lower oil prices on inventory valuation. On the other hand, operating profit, excluding inventory valuation, is forecasted to be JPY 420 billion, up JPY 10 billion from the May outlook. However, operating profit, excluding inventory valuation, is expected to be JPY 420 billion, up JPY 10 billion from the May outlook. Although there will be a temporary negative impact from time lag effects, we expect actual profit growth in the petroleum products business, excluding time lag as well as in the electricity business, driven by higher sales volume. From Page 5 onward, we will explain the progress of our fourth medium-term management plan. Please turn to Page 6. One of the key pillars of our fourth medium-term management plan is transforming into a robust management structure. To achieve this, we are actively and firmly driving a fundamental restructuring of the organization and systems across ENEOS Group companies. As shown in the middle right of the slide, at the start of the fourth medium-term management plan in March 2025, we had 651 consolidated subsidiaries, of which 535 were actual operating companies, excluding paper companies, with many belonging to the petroleum products business and Nippo Group. We view the petroleum products business as an area with significant potential for efficiency improvements, and we are focusing our efforts accordingly. In the first half of this fiscal year, the number of companies effectively decreased by 3 due to the restructuring of sales subsidiaries. However, since we are still only halfway through the process, we aim to achieve thorough reductions and restructuring to strengthen group governance. Please turn to Page 7. In addition to the restructuring of group companies, we also carried out business reorganization among major operating companies during this first half. Starting next April, we plan to have shared executive appointments, administrative divisions and part of business operation divisions between ENEOS Power, which handles the electricity business and ENEOS Renewable Energy, which handles the renewable energy business. We also plan to integrate ENEOS' natural gas business into ENEOS Xplora, which is responsible for oil and natural gas exploration and production. By operating these businesses together, we aim to improve efficiency, pursue new growth opportunities and maximize group-wide profits. Please turn to Page 8. Utilizing AI is also a key initiative in our transformation toward a robust management structure. We have already applied AI in specific areas such as optimizing crude oil shipping and automating the topper unit at the Kawasaki refinery. However, we recognize that we have not yet fully utilized AI across all business areas. We also see potential for AI to be applied in management and administrative functions. To address these challenges, we established the AI innovation department in June under the direct supervision of the President. Although it has only been 6 months since the announcement of the medium-term management plan, and we are not yet able to present concrete results regarding AI utilization, we aim to significantly improve operational efficiency and create profit-making opportunities through data utilization. We'll continue to share updates at key milestones. Please turn to Page 9. Let me explain our initiatives to improve refinery utilization rates, which are a key measure in the fourth medium-term management plan. As shown in the line graph on the left, multiple large-scale unplanned shutdowns occurred in Q1, temporarily lowering refinery utilization rates. However, thanks to horizontal knowledge sharing and the effect of continued measures, utilization rates are now improving. As shown in the center right of the slide, our initiatives to improve refinery utilization rates include not only reducing issues, but also reforming maintenance operations through AI and DX. We aim to enhance competitiveness by improving evaluation accuracy and operational efficiency. While these initiatives take a while, we believe that by steadily carrying them out, we will ultimately achieve concrete results, including higher operating rates and maximized profits. Please turn to Page 10. On the left side of the slide, you can see that under the fourth medium-term management plan, we have set an allocation management framework of JPY 500 billion to JPY 1 trillion to be allocated to strategic investments and additional shareholder returns flexibly. In the first half, strategic investments totaled JPY 15.8 billion, which is still limited at this stage. However, as shown in the upper right of the slide, we currently have candidate projects totaling several hundred billion yen under review for investment execution. We're evaluating these with cold eye review from multiple perspectives, prioritizing synergy creation with existing businesses. We'll continue selecting investment targets, including cross-border M&A beyond organic growth. Please turn to Page 12. Based on the solid progress in FY 2025 financial performance and medium-term management plan initiatives, we have decided to raise the level of shareholder returns. The annual dividend for FY 2025 will be JPY 34 per share, an increase of JPY 4 from the May announcement and JPY 8 year-on-year. We will continue to accelerate our efforts to achieve the medium-term management plan targets and strive to enhance corporate value. That concludes my presentation. Now CFO, Tanaka, will explain the financial details.

I'm Soichiro Tanaka. I will now walk you through the financial results for the second quarter of FY 2025 and our full year outlook according to the materials. Please turn to Page 14. The Dubai crude oil price started at $76 per barrel at the beginning of the quarter, temporarily dropped below $60 due to expectations of increased production by OPEC+ and then rose again due to heightened tensions in the Middle East. As a result, the quarterly average was $69, down $13 year-on-year. The exchange rate started at JPY 150, appreciated to the low JPY 140 range due to concerns over an economic slowdown stemming from U.S. tariff policies and then depreciated again due to Middle East tensions and U.S. monetary policy trends. The quarterly average was JPY 146, an appreciation of JPY 7 year-on-year. Please turn to Page 15. The petroleum products margin index remained at a high level, similar to the previous year. The paraxylene margin index deteriorated year-on-year mainly due to the impact of U.S. tariff policies. On Pages 17 and 18, you'll find the overall results and segment breakdown, and I'll cover the details from Page 19. Please turn to Page 19. Operating profit, excluding inventory valuation for petroleum products business increased by JPY 123.4 billion year-on-year to JPY 178.1 billion, mainly due to a JPY 45.5 billion improvement in margin, expense, et cetera, driven by higher petroleum products margins and a JPY 76.7 billion onetime gain from the sale of the Maritime Transportation business. For oil and natural gas E&P business, although sales volumes increased due to a higher equity interest in Vietnam and production growth in Middle East projects, operating profit declined by JPY 19.4 billion year-on-year to JPY 27.3 billion due to lower resource prices and the impact of strong yen. Please turn to Page 20. Operating profit for High Performance Materials. Business increased by JPY 0.3 billion year-on-year to JPY 9.4 billion, driven by increased sales of high-performance synthetic rubber for fuel-efficient tires and improved selling prices, although there were negative impacts from lower butadiene market prices and increased expenses due to inflation. Operating profit for electricity business increased by JPY 4.5 billion year-on-year to JPY 18.7 billion, mainly due to increased sales volume and full operation of the Goi thermal power plant. Last year, we brought each of its units online in phases, and now we've reached full capacity. Please turn to Page 21. Operating profit for renewable energy business decreased by JPY 0.3 billion year-on-year to JPY 1.1 billion. While there were positive factors such as the start-up of new power plants and a reversal from unfavorable weather in FY 2024, profit declined mainly due to upfront expenses for projects under development and impairment losses resulting from tightened regulations. Operating profit for the Other segment was roughly in line with the previous year, excluding the impact of reduced equity from the sale of JX Advanced Metals shares. Please turn to Page 22 for balance sheets and cash flows. On the left is the cash flow. Operating cash flow for Q2 was a cash inflow of JPY 334.3 billion, mainly from operating profit, excluding inventory valuation of JPY 273.5 billion and depreciation and amortization of JPY 160.7 billion. Investment cash flow was a cash outflow of JPY 123.0 billion, mainly due to capital investment of JPY 131.8 billion. As a result, free cash flow was a cash inflow of JPY 211.3 billion and net cash flow, including dividend payments was a cash inflow of JPY 131.9 billion. As shown on the right, net interest-bearing debt, including lease liabilities, was JPY 1,760.2 billion, and the net D/E ratio was 0.47. Next, let me explain the full year outlook. Please turn to Page 24. From October onward, we assume a Dubai crude oil price of $65 per barrel and an exchange rate of JPY 150 to the U.S. dollar. Based on these assumptions, we have revised our full year operating profit forecast to JPY 290 billion, down JPY 70 billion from the figure announced in May. Operating profit, excluding inventory valuation, is expected to be JPY 420 billion, up JPY 10 billion from the May outlook and profit attributable to owners of the parent, excluding inventory valuation is projected to be JPY 225 billion, an increase of JPY 5 billion. Details of the FY 2025 full year operating profit by segment are explained starting on Page 26. Operating profit, excluding inventory valuation for petroleum products, business is expected to be JPY 240 billion, roughly in line with the May outlook as improved petroleum product margins are expected to offset the impact of negative time lag and lower sales volumes. For oil and natural gas E&P business, operating profit is projected at JPY 50 billion, down JPY 5 billion from the May outlook, mainly due to lower resource prices. Please turn to Page 27. Operating profit for High Performance Materials business is expected to be JPY 16 billion, an increase of JPY 3 billion from the May outlook due to improved margins from exchange rate effects and cost optimization, even though sales volumes are expected to decline. Operating profit for electricity business is expected to be JPY 32 billion, an increase of JPY 9 billion from the May outlook, mainly due to higher sales volume, improved procurement costs from revised assumptions and expense reductions. Please turn to Page 28. Operating profit for Renewable Energy business is expected to be roughly in line with the May outlook. While positive factors such as increased power generation from favorable sunlight and cost reductions are expected, these will be offset by facilities issues and impairment losses resulting from tightened regulations on development projects. Operating profit for the Other segment is expected to be JPY 81 billion, an increase of JPY 3 billion from the May outlook, mainly reflecting higher earnings from JX Advanced Metals driven by weaker yen and rising copper prices. This concludes my presentation. Pages 29 onwards are for your reference, such as assumptions and sensitivities. Please refer to them later as needed. Thank you for your attention. [Statements in English on this transcript were spoken by an interpreter present on the live call.]