ENEOS Holdings Inc

TSE:5020

Earnings Call Transcript 2021-Q2

[Katsuyuki Ota, executive]

I am Ota, President of ENEOS Holdings. I'd like to express my gratitude for support and advice provided regularly by shareholders and investors for the business of ENEOS Group. I will explain about our financial results for the second quarter of FY 2020 with the briefing material.

Please refer to Page 3. Operating income, excluding inventory valuation in the first half of FY 2020 was JPY 125.9 billion, down JPY 44.3 billion year-on-year. Positive factors include steady domestic petroleum product margins due to time lag and other reasons, increased sales of electronic materials due to stronger data communications demand with growing remote work as well as OpEx decrease. On the other hand, we were negatively affected by COVID-19 in terms of decreased petroleum product sales due to less movement of people, lower profit in oil and natural gas development projects due to weak crude oil price and production decreased at Caserones Copper Mine by reduction of workers to prevent infection. In addition, temporary loss was recognized due to the termination of Osaka Refinery by a decision to use Chiba Refinery instead for the refinery joint venture project with PetroChina International. With these factors, profit decreased year-on-year. As for FY 2020 forecast, while the COVID-19 impact was only included in assumptions for the first half forecast announced in May, now it is reflected in assumptions for the full year forecast. This brings in some additional negative factors, mainly as sales volume decrease, however, contribution from steady domestic petroleum product margins in the first half and OpEx decrease were recognized as well. With these factors, we estimate JPY 190 billion for operating income, excluding inventory valuation, up JPY 25 billion from the previous forecast in May.

Page 4 explains the progress of management indicators. As I just explained, operating income, excluding inventory valuation, is estimated to be JPY 190 billion, JPY 25 billion higher than the medium-term management plan. Free cash flow, net D/E ratio and ROE are expected to be in line with the original plan.

Please turn to Page 5. On this page, I'd like to touch upon some of our measures we have been implementing since the first half to achieve the medium-term management plan despite the COVID-19 pandemic. For strengthening the business foundation, our management system was changed to address rapidly changing business environment and accelerate the decision-making, and we have integrated the management of ENEOS Holdings Inc. and ENEOS Corporation in June for improved efficiency. Also, we established office of CDO for speedy and cross-functional execution of DX initiatives to improve efficiency and base businesses like refineries for the entire supply chain and to create new products and services.

Next is about strengthening the competitiveness of the base businesses. For the refinery joint venture project with PetroChina International, we decided to terminate refinery functions of Osaka Refinery in October and change refinery location to Chiba Refinery in December. We also decided to terminate manufacturing function of Chita plant in October 2021, earlier than originally planned. As such, we are steadily executing supply chain reform.

Regarding Caserones Copper Mine, we have reached a basic agreement with Mitsui Mining & Smelting, and Mitsui & Co., Ltd., joint investors in this Copper Mine on the transfer of all of their rights and interest in the mine.

Let me explain the background of this agreement. Originally, the negotiation was started when Mitsui & Co. expressed their idea of playing out of the project. Where we come to feel certain about reaching an agreement, we approached Mitsui Mining & Smelting the proposed transfer of their rights and interest with us. We decided this acquisition as we could agree on reasonable price for shares and credits. As a result of this acquisition, we can expect to accelerate various decision makings and more freedom in operating Caserones Copper Mine. Regarding financial impact, we can acquire credit owned by 2 companies at low price. We are currently scrutinizing if this transaction should be posted in profit and loss or handled as a capital transaction. We assume its financial impact is some tens of billions of yen. Including some of the cash that will become recoverable from this transaction, the result will be a net cash positive and inflow, which can be used to pay down interest-bearing debt. As the global trend of lower copper grades and higher impurity proceeds, the product from the Caserones Copper Mine is becoming more valuable, thanks to the high-grade and the clean copper ore. Despite the current decline in production due to COVID-19, we will try to maintain and increase production at the Caserones Copper Mine by focusing on automated operations using IoT.

Let me explain the development of growth businesses on Slide 6. In next generation, energy supply and community services, we completed the nationwide rollout of ENEOS Denki in June this year, expanded the customer base and options of renewable energy sources by commencing the operation of the Muroran Biomass Power plant, participating in the offshore wind power project in Akita and starting the operation of 3 mega solar power plants in Japan. We are working with local partners such as Shizuoka Prefecture, Higashimurayama City, Tokyo and Shintomi Town Miyazaki to promote the business of sustainable community development based on the concept of local production and the consumption of energy.

To build a new business model, we are promoting collaboration with a number of start-ups to help creating new value and realizing new carbon -- low-carbon recycling society. To transform our service station network into a platform, we started ENEOS Laundry, which is laundry service attached to service stations and began the demonstration of ENEOS car leasing in addition to the delivery-based car share service, whose demonstration was already started last year. Slide 7, please. The petrochemical business started a feasibility study on ENB expansion in Saudi Arabia in order to expand the scale of technologically superior products. The materials business completed the capacity expansion of the Isohara Plant in Ibaraki and the Kurami plant in Kanagawa to meet the increasing demand for electronic materials amid the ongoing shift towards IoT and AI.

The lubricants business started selling ENEOS X series, which is in conformance with the latest international standards with the improved energy-saving performances. The recycling business made a decision to expand its logistics centers in order to strengthen the recycling business of the Saganoseki Smelter & Refinery.

Page 8 plots the initiatives discussed so far on the map of Japan. We will continue to implement actions for our growth businesses to achieve our long-term vision and the medium-term management plan. Next, I would like to talk about shareholder returns. Please refer to Slide 9. The total shareholder return policy remains unchanged at 50% or higher of 3-year cumulative net income, excluding inventory valuation and annual dividends of no less than JPY 22 per share, which is the level distributed at the moment. We will continue to focus on maintaining stable dividends and shareholder returns as we consider returning profits to shareholders as an important management agenda. Although the impact of COVID-19 is likely to linger, the long-term vision and management policies announced last year as the premise for the second medium-term management plan are kept unchanged, even after the inclusion of the impact of COVID-19 in our guidance. Rather, the pandemic had an effect of elevating our awareness of the importance of accelerating various initiatives.

Also, the Suga administration has set the policy of going carbon-neutral by 2050, we have already set a target of carbon neutrality by 2040 to offset our own CO2 emissions and are working toward this goal. We will continue to implement various initiatives in line with the policies of our medium-term management plan.

Next, Mr. Tanaka will take you through details of the financial results and the forecasts.

[Tanaka Soichiro, executive]

I am Tanaka, and I will explain about the section from Slide 11. Graphs on Page 11 show our business environment. As you all know, in April, Dubai crude oil price was below $20 per barrel due to COVID-19. After that, with resumption of economic activities in various countries, it has recovered to around $40 per barrel. The average price in this first half is $37 per barrel. That is a year-on-year decrease by $27 from $64 per barrel. This resulted in a significant decrease of profit in development segment, which will be explained later.

Copper price significantly declined in the end of FY 2019 due to COVID-19 as well. However, it rose from $2.18 per pound at the beginning of fiscal year 2020 to $3 per pound in the end of September. This is because of decreased supply from major-producing countries like Chile due to the pandemic as well as reopening of economy in China. I'll talk about it later, but this price increase contributed to year-on-year growth in metal segment.

Please turn to Page 12 for changes in margins of petroleum products and paraxylene. In this quarter, margins of petroleum products have been higher year-on-year due to positive time lag effect in the recovery phase of oil price. On the other hand, paraxylene margin has been weak, affected by increased supply by start-up of new facilities and slow demand growth due to COVID-19. From the next slide, I'll explain about the details of first half financial results. Please turn to Page 14. Operating income in the first half of FY 2020 was JPY 88.9 billion with inventory valuation of minus JPY 37 billion. Operating income excluding inventory valuation was JPY 125.9 billion, down JPY 44.3 billion year-on-year, as explained earlier. Profit attributable to owners of the parent at the bottom was JPY 36.4 billion, down 49% year-on-year.

Next, please turn to Page 15. This slide shows operating income by segment. I'll elaborate on this by waterfall charts from the next page onward.

Please turn to Page 16. In Energy segment, operating income, excluding inventory valuation, was JPY 57.1 billion, down JPY 30.2 billion year-on-year. While sales volume of petroleum products decreased by JPY 41.8 billion due to decreased sales with lower demand in Japan and overseas affected by COVID-19, margins recorded an increase of JPY 46.3 billion due to stable petroleum product margin affected by time lag and other reasons explained earlier and cost reduction. This amount includes a temporary loss of JPY 27.9 billion from restructuring of refineries.

Petrochemicals indicated on the right was down JPY 12.5 billion year-on-year due to sales volume decrease and deteriorated margin in paraxylene and others. Electric power increased by JPY 5.6 billion year-on-year, owing to increased electric power sales by expanding sales area of ENEOS Denki nationwide. Materials recorded a decrease of JPY 27.8 billion year-on-year, mainly due to sales volume decline of needle coke.

Please turn to Page 17 for breakdowns of changes in operating income for oil and natural gas E&P segment. Despite the sales volume increase by starting production in new oil and gas field, such as Mariner and Colin in the U.K. and Layang in Malaysia, operating income of this segment declined by JPY 23.3 billion year-on-year to JPY 1.5 billion. This is mainly because of declined oil price. Expense and other decreased by JPY 10.8 billion, and this is due to increased operating expenses for new oilfields.

Please turn to Page 18 for Metals segment. Operating income was JPY 36.9 billion, up JPY 500 million year-on-year. Functional materials, thin film materials and others increased by JPY 5.2 billion, mainly due to sales volume increase by higher demand for data communications. Mineral resources were affected by the production decrease at Caserones Copper Mine due to COVID-19. However, the positive impact of increased copper price outweighed this negative impact, and this resulted in an increase of JPY 3 billion. As you saw in the graph earlier, copper price increased from $2.18 at the beginning of Q2 to $3 per pound at the end of Q2, and this significantly affected the result. Smelting and recycling declined by JPY 4.4 billion due to deteriorating market for sulfuric acid. Non-allocated corporate expenses and others decreased JPY 3.3 billion, affected by consolidated internal transactions. Next, let me move on to Page 19 for explanation of balance sheet and cash flow. First, please take a look at the consolidated cash flow on the right. I will explain using the figures after the repayment of lease liabilities. Operating cash flow for the first half was an inflow of JPY 251.4 billion, which is JPY 125.9 billion of operating income, excluding the impact of inventory valuation, plus JPY 124.6 billion, depreciation and amortization and JPY 900 million change in working capital. Investing cash flow was an outflow of JPY 133.9 billion. As a result, free cash flow was JPY 117.5 billion. The full year forecast is unchanged from the previous announcement at JPY 140 billion. The balance sheet is shown on the left-hand side. And as of the end of September, net interest-bearing debt was JPY 1,816.3 billion. The net D/E ratio was 0.68x. These are our results for the first half.

From next slide on, I will explain the full year forecast for fiscal year 2020. Slide '20, please. Assumptions for October onward are shown. Exchange rate, JPY 105, crude oil price $45 and a copper price $2.80. As mentioned earlier, at the time of the main announcement, the impact of COVID-19 was included only for the first half, but the reverse forecast this time includes the impact also for the second half.

Slide 21, please, for P&L statement. After reviewing the assumptions and the impact of COVID-19, our revised full year forecast is JPY 200 billion in operating income of JPY 90 billion. From the previous announcement, JPY 190 billion in operating income, excluding the impact of inventory valuation, up JPY 25 billion; and a JPY 90 billion in net income, up JPY 50 billion compared with the previous guidance.

Next, please refer to Slide 22, which shows projected full year operating income by segment. The slide shows the difference from the previous forecast for the first half and the second half, respectively. The energy business is positive JPY 77.1 billion for the first half, but negative JPY 92.1 billion for the second half. For the first half, there was a significant improvement due to solid margins of petroleum products due to the time lag and expense reduction. But in the second half, we expect significant decrease in volume and the deterioration in export and chemical margins due to the inclusion of the impact of COVID-19. The details are provided on the next slide. Please refer to Slide 23. Operating income, excluding the impact of inventory valuation in the energy business is down JPY 15 billion to JPY 75 billion compared to the previous forecast of JPY 90 billion. I will show you the breakdown by sub segment. For the first half, petrochemical product margin was positive JPY 76.7 billion, driven by expense reduction and a favorable petroleum margin. The margin figure includes onetime losses from refinery restructuring. For the second half, sales volume is expected to be negative JPY 25.3 billion due to the impact of COVID-19. Margin is expected to be negative JPY 28.9 billion due to the deterioration in export margin and other factors.

Petrochemicals are down JPY 11.5 billion for the first half from the previous guidance due to a decrease in sales volume and a deterioration in the margin of paraxylene and others. The figure for the second half is down JPY 21.5 billion. Electric power is up JPY 8 billion from our previous announcement, thanks to an increase in sales volume and improvement in margin. Materials is positive for the first half, thanks to the time lag effect of lubricant margin, but negative JPY 18.2 billion for the second half due to a decrease in the sales volume of needle cokes, et cetera. The segment is down JPY 15 billion for the full year from the previous guidance.

Please go to Slide 24. The oil and natural gas E&P segment is expected to post an operating income of JPY 5 billion, an increase of JPY 5 billion from the previous forecast, thanks to the impact of higher oil prices or a change in assumptions of JPY 9.3 billion, offsetting the impact of declining production volume from some oil fields.

Next, please turn to Page 25, which is a variance analysis of our Metals segment's operating income. We expect operating income to increase by JPY 25 billion to JPY 54 billion compared to the previous announcement of JPY 29 billion.

Here is the breakdown of sub segment. In functional materials and thin film materials, operating income is up JPY 7 billion, mainly due to increased sales in line with the increased demand for data communications. The decrease of JPY 1 billion in the other segment is mainly due to a decrease in sales of titanium for aircraft. For mineral resources, annual production at the Caserones Copper Mine is expected to be 131,000 tons, a decrease of 30,000 tons from the previous forecast due to COVID-19. On the other hand, we forecast an increase of JPY 8 billion in profit, mainly due to the positive impact of the revised copper price assumption for the second half from $2.50 to $2.80. Smelting & Recycling, despite the lower sulfuric acid market is JPY 8 billion higher than the previous forecast due to soaring precious metal prices and the decrease in expenses. Common operating expenses are up JPY 3 billion due to the effect of intercompany transactions and lower expenses.

This concludes my presentation. Thank you.