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

I am Miyata. First of all, 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. I will begin my presentation according to the materials. Before turning to the progress of our medium-term management plan and financial results, I would first like to address the matter we disclosed last month regarding suspected violations of the Antimonopoly Act by our group company. As a group, we have been continuously strengthening our governance and compliance framework. Against this backdrop, we take extremely seriously the fact that this incident has led to a criminal complaint and indictment involving one of our group companies. ENEOS Holdings is committed to thoroughly preventing any recurrence. In line with the restructuring of our group company structures outlined in our medium-term management plan, we will accelerate and rigorously implement measures already underway, including reducing the number of group companies and strengthening internal audit functions. Please turn to Page 2. I would like to begin with our response to the current situation in the Middle East. With regard to crude oil procurement, we are diversifying our sourcing, including increasing volumes from the United States. At the same time, in close coordination with the Japanese Government, we are working to secure crude oil loaded outside the Persian Gulf, thereby avoiding transit through the Strait of Hormuz. Specifically, as reported in the media, we procured cargoes from Azerbaijan on May 12. In addition, for Middle Eastern crude, certain shipping companies are willing to load cargoes in areas such as the Gulf of Oman and the Red Sea. We plan to conduct ship-to-ship transfers outside the Gulf with our group vessels and then transport the cargo to Japan. Preparations are currently underway for early execution. Furthermore, as a first initiative for our company, in addition to utilizing third-party vessels, we have begun deploying our own VLCCs to the United States. In this way, we are taking a multifaceted approach on the logistics front as well. As Japan's leading energy supplier, we remain fully committed to ensuring a stable energy supply. We will continue to meet domestic demand for Petroleum Products to the fullest extent possible through measures such as the utilization of national petroleum reserves and flexible product imports. Please turn to Page 3. Let me now highlight today's key points. Firstly, from the perspective of portfolio restructuring, in line with our midterm plan to expand Overseas Petroleum business, we have decided to acquire Petroleum Refining and Sales businesses in Southeast Asia and Australia from Chevron. In addition, we have decided to sell additional shares of JX Advanced Metals as part of portfolio optimization. Secondly, under our initiative to build a more robust management structure, we have established holding policies for each group company and formulated a concrete reduction plan. As for shareholder returns, we have decided to conduct a share buyback of JPY 50 billion, in accordance with our return policy under the current medium-term management plan and with a view to improving our capital efficiency. Please turn to Page 6. I will now explain the M&A of Overseas Refining and Sales businesses announced today. This M&A involves the acquisition of Chevron Group's businesses in Southeast Asia and Australia for USD 2,170 million, which is approximately JPY 340 billion. In terms of profitability, we expect a contribution of approximately USD 250 million, which is approximately JPY 39 billion in operating profit by FY 2030. The closing is currently planned for 2027. Please turn to Page 7. Let me outline the assets to be acquired. The business spans 6 countries: Singapore, Australia, Malaysia, the Philippines, Vietnam and Indonesia, covering fuel products and lubricants businesses. In Singapore, we will acquire a 50% stake in Singapore Refining Company, a joint venture with a PetroChina subsidiary, which operates a refinery with a capacity of 290,000 barrels per day. Please turn to Page 8. This M&A is a core initiative under the portfolio restructuring outlined in our midterm management plan. Following extensive evaluation from a global perspective, we position this as a highly strategic investment that will further strengthen our core Refining and Sales businesses and drive future growth. Currently, overseas business accounts for just under 20% of our revenue. Through this acquisition and the expansion of trading business, we aim to increase this to around 50% by FY 2030. Please turn to Page 9. The charts on this slide show long-term oil demand forecasts published by the IEA and IEEJ. As is widely recognized, domestic demand in Japan will continue to decline steadily. Therefore, I believe that expanding our focus to overseas markets is essential in order to strengthen and expand our Petroleum business. Through this acquisition, we will capture growth in Southeast Asia, where demand is expected to expand as well as in Australia, which is an export destination from Japan and leverage these opportunities to grow and expand our core Refining and Sales businesses. Please turn to Page 10. Let me explain the strengths of the acquired assets and expected synergies. The key points of this M&A are the acquisition of a highly cost-competitive export-oriented refinery, downstream businesses in Southeast Asia offering stable margins and highly capable and experienced personnel. In addition, by expanding our physical asset base, including refinery, storage tanks and sales networks in the Asia Pacific region alongside Japan, we significantly broadened our trading footprint. This will create substantial upside potential in trading profits. Details on Trading business initiatives are provided on the next page and can be reviewed later. Please turn to Page 12. As announced on May 11, we have decided to sell additional shares of JX Advanced Metals. Assuming full execution of the tender offer, we expect a positive impact of approximately JPY 110 billion on FY 2026 operating profit. We have also decided to conduct a share buyback of JPY 50 billion, in line with capital efficiency improvements and shareholder return policy. The chart on the right shows the status of our cash allocation reflecting these actions. Excluding inventory valuation, we expect net income of approximately JPY 660 billion over FY 2025 to FY 2026 to achieve a total payout ratio of 50%, an additional shareholder return of approximately JPY 100 billion will be required. In accordance with our policy of maintaining a total payout ratio of over 50% on a 3-year average basis, we will consider additional returns at an appropriate time, taking into account future performance. Please turn to Page 13. We continue to rigorously apply our stage-gate framework in evaluating investment projects. With the introduction of third-party reviews, we have achieved tangible results, including early screening of projects that do not meet our strategic or risk return criteria. At the same time, a number of projects are progressing toward final investment decisions through deeper evaluation at each stage. Recently, we approved and decided to reenter into the LNG Tiga project in Malaysia. This project expands our low-carbon business portfolio and will be promoted in partnership with Petronas, Malaysia's national oil company. Please turn to Page 14. As previously announced in November, our Electricity business and Renewable Energy business have been integrated under a unified management structure and Natural Gas businesses are unified into ENEOS Xplora, since April of this year. Next, I will explain progress of our second pillar, transformation to a robust management structure. Please turn to Page 16. This slide shows progress on the restructuring of our group companies organization and structure. We have established holding policies for each company and formulated a plan to reduce the number of group companies by approximately 100 compared to the end of March 2025. We will now move to the execution phase, including divestitures, integrations and restructuring. Through this initiative, we aim to both reduce the number of companies and strengthen governance of remaining entities, thereby improving group-wide ROIC. Please turn to Page 17. As part of these efforts, we reduced 13 companies in FY 2025. The details shown here summarize our previous press releases, so please refer to them later. Please turn to Page 18. This slide highlights progress in AI utilization across our operations, which we consider a key management priority alongside group restructuring. As an example, I will introduce our plan for optimizing the entire supply chain. We have already been leading the use of AI in areas such as crude oil shipping optimization and autonomous plant operations. Going forward, we will leverage the big data accumulated through these initiatives by feeding it into AI systems. Even in a constantly changing environment of market conditions and demand, we believe this will enable us to capture profit opportunities and generate significant earnings. Please turn to Page 19. Finally, I would like to touch on initiatives to enhance refinery competitiveness. In the most recent quarter, refinery utilization rate, excluding periodic repairs reached 86%, excluding Middle East-related impacts. We will continue implementing measures to achieve our FY 2027 target of 90%. As noted on the lower-right, in Petrochemicals, we have decided to shut down 1 ethylene unit at our Kawasaki Refinery as part of optimizing the production and supply. Given the continued decline in domestic ethylene demand and limited prospects for a significant recovery in the competitive environment, this decision will help reduce costs and improve utilization rates, thereby strengthening the competitiveness of our Petrochemical business. This concludes my presentation.

I am Soichiro Tanaka. I will now explain our financial results for FY 2025 and the outlook for FY 2026. Please turn to Page 21. Let me begin with the highlights of our financial results. For FY 2025, operating profit increased by JPY 94.9 billion year-on-year, mainly driven by improved inventory valuation from the rise in oil prices in March. Excluding inventory valuation, operating profit increased by JPY 45.1 billion, while onetime factors such as the reversal of goodwill impairment loss recorded last year and impacts related to the JX Advanced Metals IPO largely offset, the increase was mainly from the positive time lag effects with higher oil prices due to the Middle East situation. Please turn to Page 22. With regard to the FY 2026 outlook, it remains extremely difficult to predict when the situation in the Middle East will stabilize. In this forecast, we assume that the impact on our business will be limited until around April and May 2026, including those from procurement, production, sales and market conditions. Taking into account damage to infrastructure in the Middle East, we assume, a Dubai crude price of USD 80 from June onward. Please turn to Page 23. Based on these assumptions, we forecast operating profit for FY 2026 to increase by JPY 143.4 billion year-on-year. While the positive time lag effects recorded in the previous year are expected to reverse as the Middle East situation stabilizes, this will be more than offset by higher earnings in the Oil and Natural Gas E&P business as well as gains from the sale of JX Advanced Metal shares, excluding inventory valuation, operating profit is expected to increase by JPY 115.6 billion year-on-year. Please turn to Page 25 for the business environment. Dubai crude prices started the fiscal year at $76 and remained weak throughout most of the year. However, they surged in March amid escalating tensions in the Middle East, closing the fiscal year at $121. As a result, the annual average came to $72, down $7 year-on-year. The exchange rate started at JPY 150 and strengthened into the low JPY 140 range, reflecting U.S. monetary policy trends. It then weakened again, reaching JPY 160 at the end of March, partly due to heightened geopolitical tensions in the Middle East. The annual average rate was JPY 151, representing JPY 2 stronger year-on-year. Please turn to Page 26. Petroleum Product margins for the full year were slightly higher than the previous year due to time lag effects at the end of FY 2025 driven by Middle East situation. Paraxylene margins temporarily weakened due to high run rates of paraxylene units across Asia. However, supported by the removal of import restrictions in India and the deterioration of situation in the Middle East, margins for the full year were broadly in line with the previous year. Pages 28 and 29 provide the overall results and operating profit by segment. I will walk you through the details from Page 30 onward. Please turn to Page 30. Operating profit, excluding inventory valuation for Petroleum Products business increased by JPY 293.3 billion year-on-year to JPY 300.2 billion. This was driven by the reversal of onetime factor, including goodwill impairment loss and the sale of the Maritime Transportation business and time lag effects associated with rising oil prices. Operating profit in Oil and Natural Gas E&P business decreased by JPY 36.6 billion year-on-year to JPY 50.8 billion, mainly due to lower resource prices and the impact of a stronger yen. Please turn to Page 31. Operating profit in High Performance Materials business decreased by JPY 6.6 billion year-on-year to JPY 11.1 billion, while sales volume growth in high-performance rubber for fuel-efficient tires contributed positively, results were impacted by onetime factor at group companies. Operating profit in Electricity business increased by JPY 1.0 billion to JPY 22.0 billion despite impairment losses. This was supported by the full operation of the Goi thermal power plant, which began phased operations last year as well as increased sales volume. Please turn to Page 32. Operating profit in Renewable Energy business improved by JPY 16.0 billion year-on-year to negative JPY 0.9 billion. Although expenses for upfront project had a negative impact, this was offset by the new power plant start-ups and the reversal of impairment losses recorded in FY 2024. Operating profit in Other segment decreased by JPY 222.0 billion year-on-year to JPY 91.2 billion, mainly due to the absence of gains related to the JX Advanced Metals IPO and a reduction in our ownership interest. Moving to Page 33 for cash flows and the balance sheet. On the left, operating cash inflow for FY 2025 totaled JPY 620.0 billion, mainly reflecting JPY 474.4 billion in operating profit, excluding inventory valuation and JPY 329.2 billion in depreciation and amortization. Investing cash outflow was JPY 252.0 billion, primarily due to JPY 333.8 billion in capital investment. As a result, free cash flow was an inflow of JPY 368.0 billion. After dividend payment and other items, net cash inflow was JPY 251.1 billion. On the right, as of March 31, 2026, net interest-bearing debt, including lease liabilities, stood at JPY 1.7038 trillion, and the net D/E ratio was 0.42. Please turn to Page 35. Let me now explain our FY 2026 outlook. Based on the assumptions discussed earlier, we forecast full year operating profit of JPY 610.0 billion, an increase of JPY 143.4 billion year-on-year. Excluding inventory valuation, operating profit is expected to be JPY 590.0 billion, up JPY 115.6 billion. Profit attributable to owners of the parent, excluding inventory valuation, is projected to increase by JPY 135.8 billion to JPY 400.0 billion. Details of our operating profit outlook by segment will be explained using the waterfall chart. Please turn to Page 37. In Petroleum Products business, operating profit, excluding inventory valuation, is expected to decrease by JPY 23.9 billion to JPY 265.0 billion due to the loss of onetime gains from the sale of the Maritime Transportation business and negative time lag effects from lower oil prices. In Oil and Natural Gas E&P business, operating profit is expected to increase by JPY 37.9 billion to JPY 100.0 billion, supported by higher resource prices and a weaker yen. Please turn to Page 38. In High Performance Materials business, operating profit is expected to increase by JPY 4.9 billion to JPY 16.0 billion, driven by volume growth in strategic products such as high-performance rubber for fuel-efficient tires and binders for lithium-ion batteries despite higher expenses due to inflation. In Electricity business, operating profit is expected to decrease by JPY 7.0 billion to JPY 15.0 billion due to the regulatory termination of the interconnection lines and higher procurement costs despite higher sales volumes and reversal of impairment losses. Please turn to Page 39. In Renewable Energy business, operating profit is expected to increase by JPY 1.9 billion to JPY 1.0 billion, supported by the reversal of impairment losses despite the reversal of favorable weather conditions in FY 2025 and temporary increase in repair costs at existing power plants. In Other segment, excluding the impact of the sale of JX Advanced Metals share, results are expected to be broadly in line with the previous year. Please turn to Page 40. I will explain our cash flow outlook for FY 2026, as shown on the left side. Excluding the impact of holidays, operating cash flow for FY 2026 is expected to be an inflow of JPY 615.0 billion, investing cash flow is expected to be an outflow of JPY 381.0 billion, reflecting capital investment of JPY 672.0 billion and proceeds of JPY 250.0 billion from the sale of JX Advanced Metals shares. As a result, free cash flow, excluding the impact of holidays, is projected to be an inflow of JPY 234.0 billion. The net D/E ratio at the end of March 2027 is expected to be 0.39, including the financial impact of M&A in the Southeast Asia and Australia Petroleum Refining and Sales businesses scheduled for FY 2027, we estimate the ratio at 0.48. Finally, for your reference, Page 42 provides information on the increase in WACC, reflecting higher domestic interest rates and ROIC by segment. Pages 43 and 44 outline progress and initiatives to enhance corporate value, while Page 45 onward provides assumptions and sensitivities. Thank you very much for your attention.