ENEOS Holdings Inc
TSE:5020
Earnings Call Analysis
Q2-2024 Analysis
ENEOS Holdings Inc
ENEOS Group displayed resilience despite a challenging market with fluctuating crude oil prices and a global economic slowdown. Operating income experienced a dip of JPY 103.3 billion to JPY 291.5 billion, largely owing to decreased inventory impacts compared to the previous year. However, even with a decline in the oil and natural gas E&P and Metal segments' profitability, the company’s strategic responses allowed the group's consolidated profits to climb by an encouraging JPY 152.5 billion.
ENEOS articulated revised forecasts considering resource prices and currency fluctuations. They anticipate inventory impacts of JPY 50 billion not accounted for in initial predictions, propelling operating income estimates up by JPY 80 billion to JPY 420 billion. This positive adjustment is underpinned by the oil and natural gas NP segment's improvement, acknowledging factors like yen depreciation and reduced costs. Expected net income is revised upward by JPY 20 billion to reach JPY 200 billion.
The company is progressing well through a three-pillar strategy comprising enhancing corporate value, establishing a solid earnings base, and reinforcing management. The initiatives include a comprehensive project to mitigate refinery problems, known as UCL, aiming to reduce facility maintenance issues. Coupled with business process reengineering, these efforts have generated cumulative effects over JPY 20 billion, reflecting in improved capital efficiency and heightened employee engagement toward change.
ENEOS is actively investing in projects to boost long-term sustainability and production capabilities, such as the Tangguh LNG expansion project, expected to increase output by 8,000 barrels per day by fiscal 2024. Moreover, establishing systems for autonomous management prepares the company for better strategic independence and growth across its operating segments.
The group prioritizes skill development, diversity, and employee empowerment. By enhancing communication channels and supporting merit-based achievements, ENEOS is forging an environment where every employee can contribute significantly to the group's philosophy and mission. These qualitative shifts complement the smooth progress in nonfinancial targets.
The company's financial health is mirrored in a reinforced balance sheet and positive cash flows. Notably, net interest-bearing debt reduced by JPY 270.4 billion, and net cash flow, including dividends, showed an inflow of JPY 255.2 billion. This demonstrates ENEOS's ability to maintain financial stability in the face of resource price volatility and economic uncertainties.
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Good afternoon, everyone. We'd like to express a sincere gratitude to our shareholders and investors for your continued support and advises regarding the business activities of the ENEOS Group. I would like to take this opportunity to thank you. I would like to explain the financial results for the second quarter of fiscal 2023 according to the materials. Please see Page 4. Highlights of the first half results. Last year, there was an inventory impact due to the rising crude oil prices, but this was significantly reduced and operating income decreased by JPY 103.3 billion to JPY 291.5 billion. Regarding operating income, excluding inventory valuation, the oil and natural gas E&P and Metal segments saw a decline in profit year-on-year due to a decline in resource prices and demand for semiconductors and ICT materials.
Now while the energy segment saw a significant increase in profit. As a result, group consolidated profits increased by JPY 152.5 billion. The Energy segment improved due to a positive time line, improved margins, including chemicals and improved selling prices in the electricity business. And another factor which I will explain more in detail later, was an improvement of approximately JPY 23 billion compared to the previous year through troubleshooting.
Please see Page 5. In order to reflect the effects of current resource prices in the weaker yen, we have forecasted an inventory impact of JPY 50 billion, which was not included in the May forecast and revised operating income for the full year upward by JPY 80 billion to JPY 420 billion. Operating income, excluding inventory valuation is expected to be JPY 370 billion, up by JPY 30 billion. This is mainly due to the improvement in the oil and natural gas NP segment, which takes into account factors such as the yen depreciation and cost reductions. In addition, net income is expected to be JPY 200 billion, an upward revision of JPY 20 billion.
The first half result was JPY 269.1 billion, and the second half is expected to drop to JPY 100.9 billion. This is due to the fact that the positive time lag of roughly JPY 50 billion in the first half, will turn negative and that expenses such as fixed asset taxes will increase in the second half. From Page 6, I will explain the progress of the third medium-term management plan. Please turn to Page 7. At Q1 results announcement in August, we explained our initiatives aimed at enhancing corporate value. Specifically, we will improve ROE and achieve a positive equity spread and accelerate efforts towards achieving energy transition, and continue to produce these results to increase accuracy towards the goal, gaining trust and expectations from the market. And that will allow us to accomplish a price to book of more than 1x.
The graph reflects the recent data in the materials released in August. We believe that price to book is improving along with ROE improvement. The third midterm management plan consists of 3 pillars: in addition to accelerating efforts towards achieving energy transition, establishing a solid earnings base and enhancing the management base, which will lead to improved ROE. Therefore, we'll also report on the progress of the third midterm management plan as well as the progress of our initiatives aimed at enhancing corporate value.
Please see Page 8. First, I'd like to explain UCL and planned capacity loss out of refineries. In our company-wide project to reduce problems, we have categorized the identified problems into 4 factors and have taken appropriate countermeasures for each. Currently, we are steadily seeing results towards our 2025 target of 3% and our UCL performance for the first half for the year was 8%, an improvement of 3% from the previous year. Let me explain the progress by cause of the problem. First is facility maintenance, which had the biggest impact last year. By prioritizing equipment that has a large impact on operations and taking risk on measures, we were able to make significant improvements.
There was a slight increase in inspection-related troubles. But this was partly due to an increase in the number of defects discovered by expanding the scope and expediting inspections. We are also improving construction quality by sharing knowledge with partner companies. On the other hand, this time, the problem that emerged was related to operations, although improvements were seen by increasing workforce and strengthening the education structures in Q2, problems occurred during nonroutine work during the start-up of regular repairs which accounted for the majority of UCL.
Since we already identified what the problem was, we are taking measures to prevent similar problems from augering, such as identifying risks deploying them horizontally and dedicating experienced engineers to troubleshooting. Drastic repair of risk areas is limited to periodic maintenance every 2 to 4 years. Although this will be a long-term project, we'll continue to work steadily towards establishing a solid earnings base, and we hope to report on this to everyone as it progresses. Please turn to Page 9. The top of the slide explains the progress of business process reengineering. We are promoting business process reengineering to improve profitability reduce costs and improve asset efficiency throughout the supply chain of existing businesses.
From the start of initiatives to the first half of FY 2023, we were able to generate a cumulative effect of over JPY 20 billion. In addition, we are contributing to improved capital efficiency through measures such as stricter screening of investments that are not directly reflected into P&L. Furthermore, as a result of regular surveys, we found that employee awareness towards changes is fostered and improved through business process reengineering initiatives. Along with reducing refinery troubles, business process reengineering is a key measure to establish a solid earnings base in the energy business.
We believe that it is necessary to launch this activity as soon as possible. So we started in the second half of 2022 before the start of the midterm management plan and the amount shown on the slide is accumulative total from the start. First, we'll improve profits by accumulative JPY 100 billion of the 3-year midterm management plan compared to before the business process engineering and then accumulate improvement measures to a cumulative JPY 100 billion compared to FY 2022, with the aim of improving profits by JPY 100 billion in a single year in the future. The bottom half oil and natural gas E&P, we have begun shipping LNG from the third train liquefaction facility, which was added in October of this year, in the Tangguh LNG expansion project, which we have been promoting in Indonesia for some time.
This project is expected to increase production by 8,000 barrels per day in fiscal 2024 on an interest holding basis. Please see Page 10. Let me touch on the progress of second pillar of the third midterm management plan initiatives for realization of energy transition. The contents of the slides are the compilation of press releases and others that have been published so far, so please read them for details. The third and fourth midterm management plans our position as a period of careful preparation and development.
With regard to renewable energy, SAF, hydrogen, low-carbon liquid fuels, CCS and forest absorption will utilize government support and also work with leading domestic and overseas partner companies to carefully select those that can secure profits and steadily move forward and we are taking necessary steps to prepare. Please turn to Page 11. Now let me move on to the progress of the 3 pillars of the third midterm management plan, enhancing the management base.
Today, we announced the ENEOS Group management structure from April 2024 onwards. ENEOS materials for the High-Performance Material business, ENEOS Power for the electricity and city gas business and ENEOS renewable energy for the Renewable Energy business are all directly owned subsidiaries of ENEOS Holdings and are positioned as the major businesses, same as ENEOS, and JX Nippon Oil and Gas exploration and JX Metals. And we'll proceed with a significant transfer of authority based on the management policy established by the company.
We are making steady progress in establishing a system for autonomous management in which each operating company secures competitiveness in its respective industry and pursues growth strategies and capital efficiency. And next, the right-hand side, it talks about group human resource strategy. In order to enable diverse human resources to fully demonstrate the abilities in order to achieve the third midterm management plan and long-term vision, we are promoting skill development and risk killing support for business portfolio transformation, promoting the active participation of women and the dynamic resource shift. We are working to secure and develop human resources who can break away from the traditional seniority environment and contribute to improving corporate value in a merit-based manner.
In addition to these initiatives, we are increasing opportunities to communicate with employees through messages from the management and townhall meetings aiming to improve engagement and increase the driving force in realizing the group philosophy and fulfilling our company's mission. Our nonfinancial targets are also progressing smoothly. So please take a look at them later. Now I covered the highlights of the financial results and our progress of the third midterm management plan. And next, I'll pass over to Managing Director, Tanaka, for the details of the financial results and outlook.
This is Tanaka, I would like to explain the financial results for fiscal 2023, second quarter and fiscal 2023 business forecast. Please turn to Page 13. The Dubai crude oil price with the red line started at $84 at the beginning of the year and rose to $96 at the end of the year. The half year average is $82 down $20 from the previous year. Yellow LME copper prices started at $0.405 per pound and fell to $0.373 per pound at the end of the period affected by concerns about global economic slowdown and low economic recovery in China. The average exchange rate for the half year was JPY 7 lower than the previous year to JPY 141 due to the widening interest rate differential between Japan and the U.S.
Next, please look at Page 14. The light crude oil margin index remains steady, including the positive time lag caused by rising crude oil prices improving by about JPY 2 to JPY 3 year-on-year. The paraxylene margin index has been improving year-on-year as the impact of COVID-19 has eased. Pages 16 and 17 provide an overview of financial results and operating income by segment. But I will explain the details using the waterfall chart, starting on Page 18. On Page 18, operating income in the Energy business, excluding inventory valuation, was JPY 136.4 billion, an increase of JPY 185.4 billion year-on-year. Sales of petroleum products increased by JPY 181 billion year-on-year.
This was mainly due to JPY 190.4 billion in margins in expenses, but this includes JPY 38 billion from the positive time lag of light crude oil and exports. JPY 86.1 billion from the real margin improvement, including chemicals and other margin effects of JPY 57 billion. Additionally, due to the reduction in troubles, the total impact on volume and margin improved by JPY 23 billion. Sales of High Performance Materials decreased by JPY 10.9 billion year-on-year. This was primarily due to a reversal of onetime gains from the previous year.
Electricity improved by JPY 8 billion, mainly due to improved selling prices. In renewable energy, profits increased by JPY 7.3 billion due to an increase in power generation capacity in addition to temporary factors such as the reversal of the payment losses from last year and ForEx gains from asset sales this fiscal year. Next, please look at Page 19. Operating income in the oil and natural gas E&P business decreased by JPY 8.7 billion from the previous year to JPY 51.7 billion, mainly due to a decline in resource prices. The positive JPY 8.1 billion in foreign exchange and expenses includes the impact of weaker yen as well as the impact of one-off accounting treatment associated with the conversion of Japan offshore drilling into a subsidiary in Q1. Please see Slide 20. Operating income for the Metals business was JPY 72.1 billion, down JPY 8.9 billion from the previous year. Sales of semiconductor materials and ICT materials decreased mainly due to inventory adjustment due to a decline in IT demand and profit decrease compared to the previous year. Metals and recycling increased by JPY 19.3 billion due to an accounting valuation gain by ForEx fluctuations associated with the sales of the Caserones Copper Mine.
This valuation gain is expected to ultimately result in a profit of roughly JPY 10 billion upon completion of the liquidation of the affiliated company. But this has already been factored into the forecast announced in May. I will explain the balance sheet and cash flow on Page 21. First, is the cash flow on the right. Please take a look at the numbers, excluding the impact of lease accounting in a dotted line. Operating cash inflow for the first half was JPY 472.2 billion. While working capital increased due to the weaker yen and higher crude oil prices, JPY 200 billion of taxes paid in 2022 was refunded in the second quarter, so other turned positive.
Investing cash outflow was JPY 145.5 billion. And as a result, free cash flow was JPY 326.7 billion. And in real terms, excluding the tax refund mentioned earlier, there was a cash inflow of JPY 80.2 billion. Net cash flow, including dividend payout was a cash inflow of JPY 255.2 billion. Reflecting this, as shown in the balance sheet on the left, net interest-bearing debt excluding cash on hand was JPY 2,489.7 billion, a decrease of JPY 270.4 billion from the end of the previous year, and the net debt-to-equity ratio was 0.21. Next, let me go over our full year forecast. Please turn to Page 23. Regarding major indices for the second half, we have revised the Dubai crude oil price to $85 an exchange rate to JPY 140.
The full year operating profit forecast based on these indices have been revised to JPY 420 billion, an increase of JPY 80 billion from the previous forecast. Operating income, excluding inventory valuation, is expected to increase by JPY 30 billion to JPY 370 billion, and net income attributable to owners of the parent company, excluding inventory valuation will go up by JPY 20 billion to JPY 200 billion. For example, the exchange rate assumption is currently around JPY 150 to a dollar but please refer to sensitivity on Page 30 for the impact of these differences on profits and losses.
And let me skip Page 24 because it overlaps with the waterfall chart from the next page. So please refer to Page 25. Operating income for the Energy business, excluding inventory valuation is expected to be JPY 170 billion, up by JPY 10 billion from the previous forecast. Petroleum products takes into account the decrease in export volume in the first half, positive time lag improvement in real margin to go up by JPY 13 billion and High Performance Materials down by JPY 5 billion and renewable energy takes into account the first half results to go up by JPY 2 billion. Please turn to Page 26.
Operating income for the oil and natural gas E&P business is expected to be JPY 80 billion. An increase of JPY 30 billion from the May forecast due to the effects of weaker yen, lower expenses and the acquisition of Japan Offshore Drilling as a subsidiary. Next, please turn to Page 27. Operating income for the Metals business is expected to be JPY 85 billion down JPY 5 billion from the previous forecast, mainly due to lower sales of semiconductor and ICT materials, although there will be an improvement in each segment due to the weaker yen.
That's all for the explanation. From Page 28 onwards, we have provided reference information regarding assumptions, sensitivities and efforts to realize energy transition. So please refer to them later. Thank you for your attention.