Earnings Call: Q2 2025

Nov 12, 2024

Summary

Q2 adjusted ordinary profit was ¥77.6bn, flat YoY, while an ¥18.8bn inventory loss reduced reported ordinary profit to ¥58.8bn. Full-year guidance was maintained; petrochemical restructuring and the HCP stake sale aim to improve profitability.

Good morning, everyone. 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 FY 2024. I will be presenting highlights of the financial results for the second quarter of FY 2024, and our initiatives to enhance the enterprise value. Please turn to page three for the financial results of the second quarter of FY 2024, and the full year forecast for FY 2024. First, for the second quarter of FY 2024, ordinary profit excluding impact of inventory valuation on line four was JPY 77.6 billion, which is the same level as the previous year, as the actual margin environment remained firm despite the negative time lag caused by the decline in crude oil prices and other factors. Major management indicators are provided on the eighth and subsequent lines. Net worth on line eight was JPY 593.7 billion. Net worth ratio on line nine was 26.8%, and the net debt to equity ratio on line 10 was 0.92 times. Please refer to the right side of the table for our full year forecast for FY 2024. Although inventory valuation losses were incurred due to the decline in crude oil prices, overall earnings forecasts remain unchanged in light of the favorable earnings environment and other factors. Please refer to page five. We are implementing the 7th Medium-Term Management Plan for enhancement of the enterprise value as one of our top priority issues, and we are striving to further value enhancement by flexibly implementing additional measures as needed in response to changes in the environment, in addition to the steady implementation of measures which have been already announced. Petrochemical business and capital and business alliance with Iwatani Corporation in bold letters will be explained later. Next, please turn to page seven. Page seven describes the progress in the 7th MTMP. The left side shows the measures taken in the MTMP, and the right side shows the progress made in the first half of FY 2024. These measures are progressing steadily. As a new measure for this fiscal year, we have started the restructuring of the petrochemical business, as indicated by a red arrow in oil business structural improvement. In new field profit expansion, we are working on increasing green electricity supply chain profit. As I explained in the August financial results briefing, we decided to postpone the third round bidding for offshore wind power from the viewpoint of profitability. I'll explain the various measures in detail on the following pages. Please turn to page eight for securing profitability in oil fields. We have established a sophisticated voluntary safety system at all refineries on obtaining Japan's first A certification at Sakai Refinery in August 2024. We will realize further enhancement of the competitiveness of our refineries by improving the level of safe and stable operations, by strengthening the OMS system and acquiring A certification, as well as continuous enhancement of DX. Please turn to page nine for expanding new fields. For power generation under the initiative to increase green electricity supply chain profit, we won the bid for the FIP of the Nouci project in Aomori Prefecture, which will be the group's largest ever installed capacity in onshore wind power. For green electricity sales, we are stepping up efforts to maximize the value of green electricity, and in September, a corporate PPA was signed with Tokyo Metro Co., Ltd. In addition, installation of Cosmo Denki Business Green is steadily increasing. We will continue to make steady progress in our efforts to establish a profit foundation for the green electricity supply chain. Please turn to page 10 for the progress of CCS and CCU. in October, the group was awarded 2 contracts from JOGMEC for its publicly advertised project of engineering design work for advanced CCS projects. We will verify the reduction of CO2 emissions at the Chiba and Sakai refineries. We will continue to collaborate with other companies to establish a value chain and study related technologies. Please turn to page 12 for the next initiative to enhance the enterprise value. On page 12 and 13, I will explain restructuring of the petrochemical business. First, on page 12, I will explain optimization of ethylene production at Maruzen Petrochemical. As announced on October 28, Maruzen Petrochemical has started studying a capacity reduction, including shutdown of ethylene production equipment. The graph on the lower left shows trends in the operating ratio and profit. The operating ratio is the key to production, so we aim to strengthen our competitiveness in the basic chemicals and reduce CO2 emissions by improving the operating ratio and reducing fixed costs. In addition, as shown on the right, for functional chemicals, we are accelerating stable supply of products to the semiconductor market, where growth is expected, and expansion of the scale of our business by increasing capacity and building new production equipment for photoresist resins for semiconductors. We will maximize Maruzen Petrochemical's profitability by the structural reform and turning profit positive in basic chemicals and expanding the scale of functional chemicals business. Next, on page 13, I will explain the sale of shares of HD Hyundai Cosmo Petrochemical, or HCP. We established HCP in 2009 to enter paraxylene business and secure mixed xylene sales channels in anticipation of a future gasoline surplus. Since its establishment, HCP has steadily generated profits and played an important role in our petroleum business as a supply destination of mixed xylene. However, the Chinese economic slowdown triggered by the pandemic and the construction and expansion of new paraxylene production facilities have continued, and that have caused a significant imbalance between supply and demand, mainly in Asia, resulting in a slump of the paraxylene market for a long time. During the same period, the company also experienced the changes in the business environment, such as short position strategy due to the closure of the Sakaide Refinery and the commencement of supply to Kygnus Sekiyu. Under these circumstances, as the paraxylene market is expected to remain sluggish for quite a long time, we have decided to sell our shares of HCP. We aim to improve profitability by the sale of HCP shares that will enable us to eliminate the impact of losses at HCP and make more flexible utilization of mixed xylene, as described on the slide. Through these business structural improvements at Maruzen Petrochemical and HCP, we will strengthen the profitability of the petrochemical business, which has been in a severe situation, as early as possible. Next, please turn to page 15 for the next initiative to enhance the enterprise value. On pages 15 and 16, I will explain the capital and business alliance with Iwatani Corporation. As shown on page 15, after concluding the capital and the business alliance agreement in April 2024, an Alliance Promotion Committee chaired by the representative directors of both companies, that is myself and President Majima of Iwatani Corporation, was launched. The Alliance Promotion Committee, led by both chairpersons, has been actively discussing and promoting projects. In addition, subcommittees have been established to discuss specific issues for projects expected to generate early synergies and have high social significance. On page 16, I'll briefly explain the main projects of the Alliance Promotion Committee and its subcommittees that are aimed at business expansion and new value creation. For initiatives to realize a decarbonized society, we have begun examining expansion of hydrogen station business and building a hydrogen supply chain indicated in the blue boxes on the left, specifically for expanding hydrogen business utilizing our refinery assets. As for strengthening relationships in existing business sectors, on the right, we are working on expansion of carbon dioxide trading and utilization of business foundation using products of both companies. We'll continue to pursue synergies by strengthening and accelerating collaborative efforts as we combine the management resources and know-how of both companies. Next, please refer to page 18 for shareholder returns. The company plans to pay an interim dividend of JPY 150 per share and a year-end dividend of JPY 150 per share, for a total annual dividend of JPY 300 per share for FY 2024. We regard the appropriate return of profits to shareholders as one of our important management policies and are working to achieve a total payout ratio of 60% or higher over the three-year period of the MTMP as soon as possible. We'll continue to flexibly consider early returns while keeping an eye on the earnings environment, stock price, and other factors. We'll continue to work together toward the enhancement of enterprise value, which is the main theme of the 7th MTMP. This concludes my explanation. Thank you. Next, Mr. Iwai, please. Next, I will explain a summary of the financial results for the second quarter of FY 2024. Please turn to page 20. Consolidated ordinary profit, excluding the impact of inventory valuation, was JPY 77.6 billion. Due to the impact of inventory valuation of minus JPY 18.8 billion, consolidated ordinary profit was JPY 58.8 billion. Profit attributable to owners of parent, excluding the impact of the inventory valuation, was JPY 33.8 billion. Next, I will explain the results by segment. In the petroleum business, ordinary profit excluding the impact of inventory valuation was JPY 31.3 billion, down JPY 12.2 billion year-on-year, due to the negative time lag and increased costs. In the petrochemical business, ordinary profit was minus JPY 4.3 billion, down JPY 0.9 billion year-on-year, mainly due to sluggish ethylene market. In the Oil E&P business, ordinary profit was JPY 45 billion, up JPY 12 billion year-on-year, mainly due to yen depreciation. In the renewable energy business, ordinary profit was minus JPY 0.9 billion, down JPY 1 billion year-on-year, due to deteriorated wind conditions. Next, please turn to page 21 for consolidated income statements. As shown in the table, operating profit on line 2 was JPY 41.2 billion. Ordinary profit on line 4 was JPY 58.8 billion, and the profit attributable to owners of parent on line 8 was JPY 20.6 billion. Impact of inventory valuation on line 9 was minus JPY 18.8 billion. Ordinary profit, excluding the impact of inventory valuation, was JPY 77.6 billion. Inventory impact of minus JPY 18.8 billion was mainly due to the decline in crude oil prices toward the end of the quarter. Please turn to page 22. Page 22 shows a breakdown of ordinary profit, excluding the impact of inventory valuation by segment. I will explain in detail in the waterfall chart on page 23. Now please turn to page 23. I will explain the factors behind the year-on-year difference of minus JPY 0.3 billion in ordinary profit, excluding the impact of inventory valuation by segment. First, factors for the JPY 12.2 billion decrease in the petroleum business, shown in yellow. Margin and sales volume was minus JPY 6.8 billion. Margin of 4 main products was minus JPY 3.8 billion due to time lag. Margin of other than 4 main products was plus JPY 0.1 billion. Volume of 4 main products was minus JPY 1.1 billion. Volume of other than 4 main products was minus JPY 7.3 billion. Import purchase and export was plus JPY 5.3 billion, affected by overseas product market conditions. The JPY 8.4 billion decrease in expenses and others includes minus JPY 0.9 billion for increase in in-house fuel costs due to the weak yen and minus JPY 7.5 billion for expenses and others. This minus JPY 7.5 billion includes minus JPY 4.9 billion in variable costs, minus JPY 3.9 billion in fixed costs, and plus JPY 1.3 billion in others. The main reasons for the increase in variable and fixed costs are inflation-related cost increases and the impact of turnaround. The impact of troubles was plus JPY 3 billion. Next is the decrease of JPY 0.9 billion in the petrochemical business, shown in purple. Price was minus JPY 0.6 billion, mainly due to deteriorated petrochemical market conditions. Volume was plus JPY 1.7 billion, and expenses and others was minus JPY 2 billion. Next is the JPY 12 billion increase in the Oil E&P business, shown in red. Price was plus JPY 6.4 billion, mainly due to the effect of foreign exchange rates. Volume was minus JPY 1.8 billion, and expenses and others was plus JPY 7.4 billion, mainly due to the effect of foreign exchange rates. The JPY 1 billion decrease in the renewable energy business, shown in green, was mainly due to deteriorated wind conditions at Cosmo Eco Power. Lastly, the JPY 1.8 billion increase in others is mainly due to the consolidation process. Page 24 provides an overview of the consolidated cash flows and balance sheets. First, I will explain the consolidated statements of cash flows. Cash flows from operating activities on line 1 was plus JPY 21.2 billion, mainly due to the recording of profit attributable to owners of parent. Cash flows from investing activities on line 2 was minus JPY 118.1 billion, mainly due to the capital expenditures and a change in the maturity of Abu Dhabi Oil's dollar time deposits. As a result, free cash flow on line 3 was minus JPY 96.9 billion. Cash flows from financing activities on line 4 was plus JPY 28.3 billion, mainly due to borrowings. Next, I will explain the consolidated balance sheet. Total assets on line 1 increased JPY 6.8 billion from the end of the previous fiscal year to JPY 2 trillion 219.4 billion. Net worth on line 3 was JPY 593.7 billion, down JPY 7.5 billion from the end of the previous fiscal year. Net worth ratio on line four worsened by 0.4% from the end of the previous fiscal year to 26.8%. Net debt to equity ratio on line six worsened by 0.09 points to 0.92 times. Next, on page 25, I will explain consolidated capital expenditures. Capital expenditures for the second quarter of FY 2024 was ¥44.4 billion, up ¥12.8 billion year-on-year. The main reason for the increase is a turnaround of Maruzen Petrochemical. Depreciation expenses increased ¥0.9 billion to ¥28 billion. That is all for my explanation of the financial results for the second quarter of FY 2024. Thank you.