Cosmo Energy Holdings Co Ltd

TSE:5021

Earnings Call Transcript 2024-Q1

[Shigeru Yamada, executive]

Thank you very much for taking the time out of your busy schedules today to participate in our briefing on the financial results for the first quarter of fiscal year 2023. I would like to start my presentation on initiatives to enhance enterprise value, revised shareholder return policy and the revised dividend forecast.

Please open Page 3. First of all, I would like to explain how we assess our current situation in terms of trends in financial health and the price-to-book ratio or PBR. As you can see on the slide, our financial health has once deteriorated significantly as of the end of FY 2015 with net worth of JPY 108 billion and net D/E ratio of 4.6x, as shown in the lower chart, due to the severe damage from the accident caused by the Great East Japan Earthquake. These figures, however, have recovered steadily in response to the steady progress on the 6th midterm management plan started in FY 2018.

Furthermore, in May 2022, we have announced the shareholder return policy with major improvement in shareholder return. And in March 2023, we have announced the 7th midterm management plan, including the capital policy that simultaneously addresses the shareholder return, capital efficiency and the financial health. These actions resulted in an appreciation of the share price. However, the PBR remained at around 0.7x.

Page 4, please. Although we have basically achieved an ROE that exceeds the cost of equity in terms of CAPM, we have not yet achieved a PBR of 1x, as I explained earlier. In order to improve the PBR, we will work on mid- to long-term as well as short-term measures at the same time.

Please turn to Page 5. As we have already indicated, in the 7th midterm management plan announced in March this year, we believe we can maximize our enterprise value by improving profitability, enhancing capital policy and promoting growth expectation. In order to ensure the effectiveness of these activities, we have defined the following basic policies. First, for profitability, we will further strengthen our profitability by thoroughly implementing the measures of the midterm management plan.

Second, for capital policy, we will expedite the achievement of the total payout ratio of at least 60% and reexamine our business portfolio as well as our capital efficiency. Third, for growth expectation, we will steadily work on the development of new field businesses. Going forward, these 3 policies should drive the formulation and implementation of specific measures and enhancement of enterprise value and PBR as we announce these measures promptly to the market.

Next, Page 7, please. In accordance with these basic policies, we have revised our shareholder return policy and the dividend forecast. We have raised the minimum dividend for the 7th midterm management plan from JPY 200 to JPY 250 per share, an increase of JPY 50 per share. Accordingly, the dividend for the current fiscal year will be JPY 250 per share, an increase of JPY 50 per share from the initial forecast of JPY 200 per share. We will continue to work on the improvement of enterprise value and aim to achieve a PBR of 1x as soon as possible.

That concludes my part. Thank you.

[Takayuki Uematsu, executive]

Next, on Page 9, I will explain the FY 2023 Q1 financial results. As shown on the table, Line 2, impact of inventory valuation was negative JPY 17.1 billion due to lower crude oil prices. Line 3, ordinary profit excluding the impact of inventory valuation was JPY 27.1 billion. Line 5, net profit excluding impact of inventory valuation was JPY 4.7 billion. We will keep the full year forecast unchanged despite falling crude oil prices because the margin trend is improving, excluding time lag and other factors.

Turning to Page 11, I will discuss progress on the wind power generation business, one of the drivers of the 7th midterm plan basic policy, expansion of new field businesses. The chart below shows areas where progress has been made since the full year results briefing in the red box. First, the planning stage environmental consideration document for offshore Hiyama, Hokkaido has been published. Second, the offshore areas of Ishikari Bay, Shimamaki and the Hiyama have been designated as high potential areas. We will continue to explore more opportunities going forward.

Next, on Page 12, I would like to explain 3 initiatives related to green electricity and next-generation energy. As shown on the left, we have held a groundbreaking ceremony for Japan's first-ever waste cooking oil-based SAF production demonstration site. This project has been selected for the Tokyo Metropolitan Government's waste cooking oil recovery initiative. We will continue to work towards the completion of construction by the end of FY 2024 and the start of supply within 2025.

Secondly, for the enhancement of added value from green electricity sales shown on the upper right, as part of the Aizu Wakamatsu City's Digital Garden City Nation project, we have successfully visualized the environmental value of using residential solar power and built a platform to circulate the environmental value within the city.

The third is expansion of the mobility business in anticipation of an electric vehicle society. We have added ASF's commercial EVs to the existing Cosmo My Car lease portfolio. In addition, by offering the Zero Carbon Plan, a one-stop service offering EV leasing, Cosmo's green electricity, charging facilities and EV maintenance services, we are steadily expanding our mobility business in anticipation of an EV society.

Let me move on to an overview of the FY 2023 Q1 results. Please refer to Page 14 for a financial review. Consolidated ordinary profit excluding inventory impact was JPY 27.1 billion, a decrease of JPY 21.6 billion year-on-year. Due to a negative inventory impact of JPY 17.1 billion, consolidated ordinary profit was JPY 10 billion, a decrease of JPY 111.5 billion year-on-year.

I will now explain the results by segment. In the Petroleum business, ordinary profit excluding inventory effects was JPY 12.6 billion, a decrease of JPY 15.7 billion, mainly due to the absence of positive time lag we had last year. In the Petrochemical business, ordinary profit was negative JPY 2.4 billion, a decrease of JPY 7.7 billion, mainly due to the weakening of the MEK and the benzene markets. In the Oil E&P business, results were on par with the previous year. In the Renewable Energy business, ordinary profit was JPY 0.5 billion, an increase of JPY 0.4 billion, mainly due to improved wind conditions at Cosmo Eco Power.

On Page 15, I will discuss the overview of the consolidated P&L. As shown on the table, Line 2, operating profit, JPY 7.1 billion; Line 4, ordinary profit, JPY 10 billion; and the Line 8, net profit, negative JPY 7.2 billion; Line 9, inventory impact was negative JPY 17.1 billion; Line 10, ordinary profit excluding inventory valuation was JPY 27.1 billion.

Page 16, please. This page shows a breakdown of ordinary profit excluding inventory valuation by segment. On Page 17, I will explain the variance analysis in detail. Please turn to Page 17. I will explain the factors behind the JPY 21.6 billion decline in ordinary profit excluding inventory valuation by segment. The first factor is the JPY 15.7 billion decrease in the Petroleum business, shown in yellow. Margin and sales volume is down JPY 24.3 billion, as shown in the bubble. Margin is down JPY 24.8 billion, which is broken down to JPY 18.1 billion for 4 products and JPY 6.7 billion for other products.

Volume is increased JPY 2.9 billion, which is broken down to 0 for 4 products and JPY 2.9 billion for other products. Other products volume increased, mainly thanks to an increase in jet fuel oil. Import and purchase is down JPY 0.4 billion, while the export is down JPY 2 billion. Expense and others improved by JPY 8.6 billion, including improved in-house fuel cost due to lower oil prices of JPY 1.8 billion; lower variable costs, such as LNG and electricity cost of JPY 1.4 billion; lower fixed costs, such as repair costs of JPY 0.6 billion; and others of JPY 4.8 billion.

Next is the JPY 7.7 billion decrease in the Petrochemical business, shown in purple. Price is down JPY 6.4 billion due to the weakening of the MEK and the benzene markets, as I mentioned earlier. Volume is up JPY 1.1 billion due to an increase in the MEK volume. Expense and others deteriorated by JPY 2.4 billion.

Oil E&P, shown in red, is down JPY 0.8 billion. Price is up JPY 5.8 billion, mainly due to the weaker yen. Volume is down JPY 4.1 billion. Expense and others deteriorated by JPY 2.5 billion. The JPY 0.4 billion increase in the Renewable Energy business, shown in green, is mainly due to better wind conditions, as I mentioned earlier. Finally, the JPY 2.2 billion increase in Others is mainly due to the consolidation process.

Next, on Page 18, I will provide an overview of the consolidated balance sheet. Line 1, total assets is JPY 2,138.2 billion, up JPY 17.4 billion from the end of the previous period. Line 3, net worth is JPY 516.2 billion, down JPY 11.7 billion. Line 4, net worth ratio is 24.1%, down 0.8 points. Line 6, net D/E ratio improved by 0.12 to 0.98x.

Please move to Page 19, highlights of consolidated capital expenditures. Capital expenditures for Q1 FY 2023 were JPY 12.8 billion, a decrease of JPY 3.1 billion from the previous year.

That was my brief explanation of the Q1 FY 2023 results. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]