Cosmo Energy Holdings Co Ltd
TSE:5021
Earnings Call Analysis
Q2-2024 Analysis
Cosmo Energy Holdings Co Ltd
For the second quarter of the 2023 fiscal year, the company reported a consolidated ordinary profit of JPY 83.1 billion, a significant decrease by JPY 90.7 billion compared to the same period last year. After stripping out inventory valuation effects, the ordinary profit stood at JPY 77.9 billion, which was JPY 4.1 billion lower year-on-year. This decline was reflected in the earnings attributable to the owners, which fell sharply by JPY 58.8 billion to JPY 36.1 billion.
In terms of breakdown by segment, there were notable variances. The petroleum business, a key sector, saw a JPY 12.6 billion increase. However, lower sales volumes and margin reductions led to a decrease in income for many products. Troubles at the refinery resulted in a positive variance improvement, but still marked a JPY 10.1 billion impact this year compared to JPY 13.5 billion from the previous year. The petrochemical sector, faced with weaker market conditions for certain chemicals, decreased by JPY 11.2 billion.
Positive financial health was evident from a cash flow perspective: the operating activities generated a positive cash flow of JPY 165.3 billion, contributing to a strong free cash flow of JPY 146.6 billion. The company's net worth rose by JPY 35.5 billion to JPY 563.4 billion, with an improved net worth ratio of 25.8% and a lower debt-to-equity ratio of 0.83x, showcasing an enhanced financial stability.
Looking ahead, the company revised its full-year projections upwards due to expectations of exceeding previous forecasts. The new ordinary profit forecast is set at JPY 155 billion, up by JPY 30 billion. Similarly, the projected profit attributable to owners is increased to JPY 78 billion, a rise of JPY 23 billion from prior estimates. These revisions are based on assumptions about crude oil prices and exchange rates for the second half of the year ($85 per barrel and JPY 145 to the U.S. dollar, respectively).
The company expects further improvements in its financial indicators by year-end, with an anticipated increase in net worth to JPY 586 billion, and an even higher net worth ratio of 27.4%. The debt-to-equity ratio is also projected to improve further to 0.93x. These forecasts reflect the company's confidence in its continued operational efficiency and effective capital management going forward.
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Thank you very much for taking time out of your busy schedule today to participate in the financial results briefing for the second quarter of fiscal year 2023. My part will cover the following topics: initiatives to enhance enterprise value, revision of dividend forecast, progress of the 7th Mid-Term Plan and the highlight of Q2 results and the full year forecast.
Please go to Page 3. We have positioned the enhancement of enterprise value as one of the top priorities of the 7th Mid-Term Plan. For the improvement of PBR, we are checking progress from 4 perspectives, namely ROIC improvement, financial leverage optimization, cost of capital reduction and growth rate improvement. In the first half, PBR improved to around 0.9x, reflecting steady progress of each initiative, as you can see on the left-hand side. We will achieve a total payout ratio of 60% early during the midterm, establish an internal control system to improve ROIC or R-O-I-C and realize PBR of onetime at an early timing.
Please go to Page 5. In order to achieve a total payout ratio of 60% early during the midterm plan period, we have revised the FY 2023 dividend forecast to JPY 300 per share, an increase of JPY 50 per share from the previous announcement. We will continue to monitor the earnings environment, plan to and implement initiatives and achieve a total payout ratio of 60% at an early timing.
Page 7, please. The initiatives of the 7th Mid-Term Plan are listed on the left, and the progress during the first half is shown on the right-hand side. As indicated in the diagram, we are making steady progress on each of these initiatives. With regard to oil business structure improvement, we have introduced APM and implemented VR data in the petroleum business and started water injection to increase production in the Hail Oil Field in the oil E&P business. I will explain how we are expanding the profit in the new field on next page onward. We have initiatives such as commencement of domestic SAF production, expansion of green electricity supply chain profit, next-generation energy initiatives and CCS/CCU.
Next is Page 8. This page shows -- the title is new field profit expansion. This explains the progress of our wind power business. For onshore wind, the start of operations at Shin-Mutsu-Ogawara and Shin-Iwaya, which are circled in red and which are replacement projects, has been accelerated from the previous announcement of FY 2025 to FY 2024.
For offshore wind, as shown below, offshore northwest of Aomori and offshore near Yuza, Yamagata have been upgraded to promotion areas. As shown in the bar graph on the right, electricity sales volume has increased from last year, mainly due to improved wind conditions this year. We will continue to expand our wind power generation capacity.
Next is Page 9. It shows our green electricity and the next-generation energy initiatives. First of all, as shown on the left-hand side, we are expanding our customer network to increase profit from the green electricity supply chain. As announced in our press release, in the first half of FY 2023, we began supplying renewable energy power to Kawasaki City, Yokosuka City and Hayama Town in Kanagawa Prefecture.
Next-generation energy initiatives are shown on the right-hand side. In the hydrogen field, we have established a new joint venture with Iwatani Corporation. Combination of our engineering expertise and the Iwatani's hydrogen expertise should allow us to win hydrogen supply chain projects going forward.
Furthermore, as you can see on the lower right, in the lithium field in the bottom right, we have established a new subsidiary in the United States. We are aiming to enter the lithium resource development business in the United States by leveraging technologies we have accumulated over the years in the oil E&P field.
Page 10 explains our CCS and CCU initiatives. In the area of CCS for low carbon emission, we are building a CCS value chain in collaboration with companies with domain expertise such as Kansai Electric Power and the Mitsui O.S.K. Lines. In addition, we have concluded MOUs with 4 companies that have CCU technologies to jointly study effective use of CO2 beyond just the CCS. We will continue to work with each company to assess future technological innovations, CO2 reduction effects and the investment profitability.
Next, Page 12, please. This shows the financial results for Q2 of FY 2023. Line 1, ordinary profit was JPY 83.1 billion. Line 4, profit attributable to owners of parent was JPY 36.1 billion. Line 3, ordinary profit, excluding inventory valuation, was JPY 77.9 billion. Line 5, profit attributable to owners of parent, excluding inventory valuation, was JPY 32.5 billion.
As for the revision of the earnings forecast, please refer to FY 2023 forecast shown on the right-hand side. Line 1, ordinary profit is JPY 155 billion. Line 4, profit attributable to owners of parent is JPY 78 billion. Line 3, ordinary profit, excluding inventory valuation, is JPY 132 billion. Line 5, net income, excluding inventory valuation, is JPY 62 billion. We will make united efforts to achieve the main theme of the 7th Mid-Term Plan enhancement of enterprise value.
That concludes my presentation. Thank you.
I will now explain the summary of FY 2023 Q2 financial results on Page 14. For Q2 of FY 2023, consolidated ordinary profit, excluding inventory valuation, was JPY 77.9 billion, down JPY 4.1 billion year-on-year. Including inventory valuation of JPY 5.2 billion, consolidated ordinary profit was JPY 83.1 billion, down JPY 90.7 billion year-on-year.
Profit attributable to owners of parent was JPY 36.1 billion, down JPY 58.8 billion year-on-year. The results by segment is shown here, but I will skip this part as I will explain it on the variance analysis, and it is available on later pages. So later on, I will show you in detail.
Next, Page 15, please. This slide explains a summary of consolidated profits and losses. As shown in the table below, Line 2, operating profit was JPY 75.9 billion. Line 4, ordinary profit was JPY 83.1 billion. Line 8, profit attributable to owners of parent was JPY 36.1 billion. Line 9, inventory impact was JPY 5.2 billion. Ordinary profit, excluding inventory valuation, was JPY 77.9 billion.
Page 16 shows the breakdown of ordinary profit, excluding inventory valuation. I will explain this on variance analysis chart. So the next page is variance analysis. The difference in ordinary profit, excluding inventory valuation, was JPY 4.1 billion. The first factor is the JPY 12.6 billion increase in the Petroleum business shown in yellow.
Margin and sales volume is down JPY 2 billion, as shown in the yellow box. Margin is up JPY 17.7 billion for the 4 products and down JPY 4.3 billion for other products for a total increase of JPY 13.4 billion. Volume is down JPY 2.8 billion with an increase of JPY 0.4 billion for the 4 products and an increase of JPY 2.4 billion for other products. Imports and net purchase is down JPY 9 billion because we had a major shutdown maintenance this year. Exports is down JPY 9.2 billion.
Expense and other is up JPY 11.2 billion. This is broken down to JPY 4.9 billion due to improvement in in-house fuel cost caused by lower oil prices, and the JPY 6.3 billion remaining amount due to the following 3 factors: variable expenses, minus JPY 0.1 billion; personnel, labor and other fixed cost, minus JPY 3 billion; and onetime factors such as FX gain due to a decrease in foreign currency-denominated debt, plus JPY 9.4 billion.
The impact of the refinery trouble was JPY 13.5 billion last year and JPY 10.1 billion this year. So the factor was positive JPY 3.4 billion. So the size of the trouble was smaller this year.
Next is the JPY 11.2 billion decrease in the Petrochemical business shown in purple. Price is down JPY 8.3 billion due to weaker market conditions for MEK and olefins. Volume is down JPY 0.7 billion. Expense and other is down JPY 2.2 billion.
Next is Oil E&P shown in red. It's down JPY 8.1 billion. Price is up JPY 0.8 billion, mainly due to the weaker yen. Volume is down JPY 5.1 billion due to a temporary decrease in volume caused by the impact of Hail Oil Field construction work. Expense and other is down JPY 3.8 billion, mainly due to the cheaper yen.
Next is Renewable Energy business shown in green. It's up JPY 0.2 billion due to better wind conditions at Cosmo EcoPower, as Mr. Yamada mentioned earlier. Finally, other is up JPY 2.4 billion, mainly due to the consolidation process.
Page 18, please. This shows an outline of consolidated cash flow and the consolidated balance sheet. First, Line 1, cash flow from operating activities was positive JPY 165.3 billion due to net profit and the onetime impact of the subsidy for gasoline and other fuels. Line 2, cash flow from investing activities was negative JPY 18.7 billion. As a result, Line 3, free cash flow was positive JPY 146.6 billion. Line 4, cash flow from financing activities was negative JPY 124.6 billion, mainly due to the repayment of debt.
Next, I will explain the consolidated balance sheet. Line 3, net worth was JPY 563.4 billion, up JPY 35.5 billion from the end of the previous year. Line 4, net worth ratio improved 0.9 points to 25.8%. Line 6, net D/E ratio improved 0.27 to 0.83x.
Page 19 explains the first half results of consolidated capital expenditures. The CapEx increased mainly in the Petroleum segment. So please take a look at this later. That was my brief explanation of the FY 2023 Q2 results.
From Page 21, I will explain the revised full year forecast for FY 2023. As shown at the top, projected ordinary profit is JPY 155 billion, an increase of JPY 30 billion from the previous announcement. Consolidated ordinary profit, excluding inventory valuation, is JPY 132 billion, an increase of JPY 7 billion from the previous announcement. Line 8, profit attributable to owners of parent is JPY 78 billion, an increase of JPY 23 billion from the previous forecast.
Since both consolidated ordinary profit and net profit were expected to exceed the forecast, we have decided to revise the forecast upward. Assumptions on Line 15 and 16 for the second half are $85 per barrel in crude oil price and JPY 145 to the U.S. dollar.
Please refer to the variance analysis shown on Page 22 for the revised plan by segment. This chart shows changes from the previous announcement of JPY 7 billion in ordinary profit, excluding valuation impact. First, Petroleum business, shown in yellow, is revised up by JPY 8 billion. Margin and volume is up JPY 30.4 billion. As for the breakdown, margin is up JPY 28.3 billion for the 4 products and JPY 6 billion for other products for a total increase of JPY 34.3 billion.
Volume is up JPY 3.4 billion for the 4 products and down JPY 0.4 billion for other products for a total increase of JPY 3 billion. Import and purchase is down JPY 9.4 billion, mainly due to unit price effects. Export is up JPY 2.5 billion. Regarding exports, there was an export of diesel oil in the second half, which had a positive effect.
Expense and other is down JPY 3.7 billion, which is broken down to minus JPY 1.7 billion due to increased in-house fuel cost due to higher oil prices and a minus JPY 2.0 billion in expenses. Refinery trouble is down JPY 18.7 billion compared to the previous announcement.
Next is Petrochemical, shown in purple, and it is down JPY 9 billion. Price is down JPY 4.9 billion, mainly due to weakening olefin and MEK market conditions. Volume is up JPY 8.4 billion due to a decrease in capacity utilization caused by the deteriorated olefin market in the first half. Expense and other is expected to increase by JPY 4.3 billion due to cost reduction measures and to address our earnings environment.
Oil E&P, shown in red, is up JPY 9 billion compared to the previous forecast. Price is up JPY 5.6 billion, mainly due to the effect of yen's depreciation. Volume is up JPY 1.5 billion. Expense and other is up JPY 1.9 billion in cost and expenses. We kept Renewable Energy and Other unchanged from the previous announcement, respectively.
Page 23 shows the revised cash flow forecast and the balance sheet for the full year. First, I will explain the consolidated cash flow. Line 1, cash flow from operating activities is positive JPY 173.3 billion. Line 2, cash flow from investing activities is negative JPY 98.3 billion. As a result, Line 3, free cash flow is expected to be positive JPY 75 billion. The projected operating cash flow has increased dramatically year-on-year, not only from higher net profit, but also from onetime factors such as the tax payment day falling on a weekend and the receipt of subsidy for gasoline and other fuels.
As for financial indicators, we expect net worth to increase JPY 58.1 billion to JPY 586 billion, net worth ratio to increase 2.5 points to 27.4% and the net D/E ratio to improve by 0.17 to 0.93x. All of them are improving from the end of the previous year.
Page 24 shows consolidated CapEx plan for the full year FY 2023. There are some differences on a segment level, but the total amount is mostly unchanged. So please take a look at it later.
That's all from myself. Thank you very much.
[Statements in English on this transcript were spoken by an interpreter present on the live call.]