Earnings Call: Q4 2024

May 9, 2024

Summary

FY 2023 adjusted ordinary profit hit a record ¥162.2bn, while adjusted ROE reached 14.6% and free cash flow was ¥145.1bn. FY 2024 guidance pairs ¥160bn adjusted ordinary profit with a ¥119.5bn investment plan and ¥300/share dividend.

Good morning, everyone. Thank you very much for taking time out of your busy schedule today to participate in our FY 2023 financial results briefing. I will explain the highlights of FY 2023 financial results and FY 2024 forecast, and our initiatives to enhance enterprise value. Please refer to page three for the highlights of FY 2023 results and FY 2024 forecast. In FY 2023 results, ordinary profit excluding the impact of inventory valuation on line three was JPY 162.2 billion, and profit attributable to owners of parent excluding the impact of inventory valuation on line five was JPY 82.4 billion. Ordinary profit excluding the impact of inventory valuation was a record high. Items from line eight and under show the results of major management indicators. Net worth on line eight was JPY 600.5 billion. Net worth ratio on line nine was 27.1%, and net debt to equity ratio on line 10 was 0.83 times, all of which improved from the previous fiscal year. As for capital efficiency indicators, ROE excluding the impact of inventory valuation on line 11 was 14.6%, and ROIC excluding the impact of inventory valuation on line 12 was 7.6%, both of which overachieved the medium-term management plan targets. Please refer to the right side for the full year forecast for FY 2024. We expect JPY 160 billion for ordinary profit excluding the impact of inventory valuation on line three, and JPY 75.5 billion for profit attributable to owners of parent excluding the impact of inventory valuation on line five. Net worth on line eight is estimated to be JPY 630 billion. Net worth ratio on line nine is 27.2%, and the net debt to equity ratio on line 10 is estimated to be 0.89 times. ROE excluding the impact of inventory valuation on line 11 is projected to be 12.3%, and we expect it will remain high as in the previous fiscal year. Now please turn to page five. We regard the appropriate return of profits to shareholders as one of our most important management policies and is working to achieve a cumulative three-year total payout ratio of 60% or higher in the medium-term management plan as soon as possible. To reflect our solid earnings in shareholder returns, we have decided share buyback of common stock up to JPY 23 billion in addition to the already announced year-end dividend of JPY 150 per share. Please turn to page six. In the return policy for FY 2024, we plan to pay an annual dividend of JPY 300 per share with interim dividend of JPY 150 and year-end dividend of JPY 150. We will increase the minimum dividend from JPY 250 to JPY 300 based on the assumption that the annual dividend of JPY 300 is sufficiently sustainable. We will flexibly consider various options to realize early returns to shareholders as we closely monitor the earnings environment, stock prices, and other factors. Next, please turn to page eight. We aim to maximize the enterprise value by a capital policy with a three-pronged approach to implement shareholder returns, financial health, and capital efficiency. As a result of implementing this capital policy based on solid earnings, the share price in FY 2023, the first year of the medium-term management plan, rose significantly to achieve P/B ratio of one. We believe that P/B ratio of one is just a starting point and we will continue to implement various measures of the medium-term management plan for further enhancement of the enterprise value. Next, I will explain the progress of the seventh consolidated medium-term management plan. Please turn to page 10 for a diagram showing each measure of the medium-term plan on the left and the initiatives in FY 2023 on the right. As for the blue box at the top left, oil business structural improvement in the petroleum business, we implemented following initiatives to maximize uptime. That is strengthening the OMS or Operation Management System. In addition to APM and facility performance management system, preparing to build a Digital Twin at refineries to enhance DX. In the oil E&P business, water injection has started to increase production in the Hail Oil Field. As for new field profit expansion in green, we have worked on building domestic SAF production facilities, increasing green electricity supply chain profit, and next generation energy initiatives and CCS/CCU. Lastly, for transforming management foundation in red, we implemented each measure set forth in the medium-term management plan as described here. On page 11, we provide the management goals and the medium-term management plan and actual results in FY 2023. As indicated by these results, we believe that we are making extremely good progress for all of these goals. Please turn to page 13 for our initiatives in FY 2024. On this page, I'll explain the initiative to maximize uptime in oil business structural improvement. This is a busy slide, but as shown below, the operating rate of crude distillation unit has been maintained at the high level of around 90%, although several refinery troubles occurred in FY 2023. In FY 2024, we will further improve the level of safe and stable operations by seeking to obtain A-level certification for Sakai Refinery, in addition to the existing initiatives such as strengthening OMS. We'll expand the scope of DX enhancement initiatives such as APM and Digital Twin, and move on to the implementation and operation phases in this fiscal year. We'll further improve our competitiveness and operating rates at refineries by obtaining Super and A-level certifications at all refineries and promoting DX. Next, I will explain initiatives in FY 2024 for expanding new field. Please refer to page 14. Both construction of SAF production equipment and securing raw material suppliers are progressing steadily to start SAF production by the end of FY 2024. We'll continue to work steadily toward mass production of Japan's first locally made SAF. Next, on page 15, I'll explain the progress of the wind power generation business. For onshore wind power generation, Shin-Mutsu-Ogawara and Shin-Iwaya sites are expected to start their operation in FY 2024. With that, the capacity of onshore wind power generation and operation is expected to be 340 megawatt. On page 16, I'll explain green electricity supply chain initiatives. First, about sales of green electricity. As of the end of FY 2023, the number of facilities using green power has increased to 2,400. As a result, the green power sales volume now accounts for about half of our total electricity sales volume of 520 million kilowatt hour. For the power storage business, we plan to start a demonstration at the Yokkaichi Kasumi Power Plant, as described here. With the results of these demonstrations, we'll consider and plan further expansion, such as participating in new electricity market trading. On page 17, I will explain the capital and business alliance with Iwatani Corporation. We reached an agreement to study collaboration in the hydrogen business and started studies in the three areas of hydrogen stations, engineering, and supply chain development. Specifically, in the hydrogen station area, after the establishment of a limited liability company, the first station opened in April 2024 in Heiwajima. As we implemented these efforts, following Iwatani Corporation's acquisition of our shares, we entered into a capital and business alliance agreement also in April 2024. The areas of the business alliance are as shown below. We established an alliance promotion committee chaired by the representative directors of both companies, which is me and President Majima. Through this committee, we will pursue synergies by bringing together the management resources and know-how of both parties to strengthen and accelerate collaborative efforts. In FY 2023, the first year of the seventh consolidated medium-term management plan, we implemented various measures and achieved P/B ratio of one as a result. Without being satisfied with this result, the entire company will continue to work toward enhancement of enterprise value, which is the main theme of the seventh consolidated medium-term management plan. That is all for my presentation. Thank you. Now I will explain FY 2023 financial results and the forecast for FY 2024. Please turn to page 19. For the full year FY 2023, consolidated ordinary profit excluding the impact of inventory valuation was JPY 162.2 billion, up JPY 19.3 billion year-on-year, and consolidated ordinary profit was JPY 161.6 billion, down JPY 2.9 billion year-on-year, due to the impact of inventory valuation of minus JPY 0.6 billion. Profit attributable to owners of parent excluding the impact of inventory valuation was JPY 82.4 billion, up JPY 29.6 billion year-on-year. Next, I will explain the results by segment. Despite the impact from turnaround and refinery troubles, the petroleum business recorded JPY 91.3 billion for its ordinary profit excluding the impact of inventory valuation, with a year-on-year increase of JPY 47.2 billion due to improved margins, cost reductions, and other improvements. In the petrochemical business, ordinary profit decreased JPY 11.6 billion year-on-year to minus JPY 7.8 billion, mainly due to softening market conditions for methyl ethyl ketone. In the oil E&P business, ordinary profit decreased JPY 16.2 billion year-on-year to JPY 68.3 billion due to falling crude oil prices and other factors. In the renewable energy business, ordinary profit increased JPY 0.2 billion year-on-year to JPY 2.8 billion due to improved wind conditions. Next, on page 20, I will explain the summary of consolidated income statement. As shown in the table below, operating profit on line 2 was JPY 149.2 billion. Ordinary profit on line 4 was JPY 161.6 billion, and profit attributable to owners of parent on line 8 was JPY 82.1 billion. Impact of inventory valuation on line 9 was minus JPY 0.6 billion, and ordinary profit excluding the impact of inventory valuation was JPY 162.2 billion. The full-year forecast for FY 2024 is as shown on the right. Page 21 shows ordinary profit excluding the impact of inventory valuation by segment. I will explain more detail with the waterfall chart on page 22. Now please turn to page 22 for factors behind the year-on-year increase of JPY 19.3 billion for ordinary profit, excluding the impact of inventory valuation by segment. The yellow part shows factors for JPY 47.2 billion increase in the petroleum business. Margins and sales volume increased JPY 44 billion with the following breakdown. Margin of four main products increased by JPY 57.9 billion against the backdrop of firm market conditions. Margin of products other than four main products was minus JPY 0.3 billion. Volume increased JPY 5.2 billion, and import purchase and export was minus JPY 18.8 billion, affected by turnaround and market conditions. The breakdown of expenses and others of JPY 8 billion is JPY 4.7 billion increase from the improvement of in-house fuel costs due to lower oil prices, and JPY 3.3 billion increase due to expenses and others that includes variable costs of JPY 1.6 billion, fixed costs of minus JPY 6.3 billion, and others of JPY 8 billion, which is mainly contributed by temporary factors such as foreign exchange gains. The impact of refinery troubles decreased JPY 4.8 billion from the previous fiscal year. Next, factors for a JPY 11.6 billion decrease in the petrochemical business shown in purple. Price was minus JPY 6.1 billion due to softening of the methyl ethyl ketone market. Volume was minus JPY 2.2 billion, and expenses and others was minus JPY 3.3 billion. Next is about the JPY 16.2 billion decrease for the oil E&P business in red. Price was minus JPY 11.1 billion, mainly due to the decline in crude oil prices. Volume increased JPY 0.7 billion due to the elimination of the impact of turnaround. While there was a temporary decrease in volume due to the construction work at Hail Oil Field, expenses and others was minus JPY 5.8 billion, mainly due to the impact of foreign exchange rates. JPY 0.2 billion increase in the renewable energy business in green is mainly due to better wind conditions at Cosmo Eco Power. Lastly, JPY 0.3 billion decrease in others is mainly due to consolidation. On page 23, I will explain the overview of consolidated cash flows and the balance sheet. First, I will explain the consolidated cash flow statement. Cash flows from operating activities on line 1 were positive JPY 177.9 billion due to recognition of net income and other temporary factors such as the impact of holidays on tax payments. Cash flows from investing activities on line 2 were negative JPY 32.8 billion, mainly due to capital expenditures. Free cash flow on line 3 was positive JPY 145.1 billion. Cash flows from financing activities on line 4 were negative JPY 104.2 billion, mainly due to loan repayments. Next, I will explain the consolidated balance sheet. Total assets on line 1 increased by JPY 91.1 billion from the end of the previous fiscal year to JPY 2 trillion 211.9 billion. Net worth on line 3 was JPY 600.5 billion, increased JPY 72.6 billion from the end of the previous fiscal year. Net worth ratio on line 4 improved by 2.2 percentage points from the end of the previous fiscal year to 27.1%. The net debt to equity ratio on line 6 improved by 0.27 points to 0.83 times. Next, on page 24, I will explain consolidated capital expenditures. Capital expenditures in FY 2023 increased by JPY 10.5 billion from the previous fiscal year to JPY 82.4 billion. Depreciation expenses, et cetera, decreased by JPY 2.9 billion to JPY 55.3 billion. That is all for the explanation of FY 2023 financial results. From page 26, I will explain our full year forecast for FY 2024. We expect consolidated ordinary profit, excluding the impact of inventory valuation in FY 2024 to be JPY 160 billion and consolidated ordinary profit to be JPY 165 billion. Profit attributable to owners of parent, excluding the impact of inventory valuation, is estimated to be JPY 75.5 billion. By segment basis, in the petroleum business, while the impact of refinery trouble has been resolved, ordinary profit, excluding the impact of inventory valuation, is projected to be JPY 81 billion due to the deterioration in markets for products other than four main products, the absence of the positive time lag effect, which occurred in the previous fiscal year, and the difference in turnaround from the previous fiscal year. Next, in the petrochemical business, ordinary profit is expected to be zero due to improvement of sales volume and methyl ethyl ketone market conditions. In the oil E&P business, ordinary profit is expected to be JPY 66 billion, mainly due to an increase in operating expenses and other factors, despite a positive factor of increase in crude oil prices associated with the weaker yen. In the renewable energy business, ordinary profit is expected to be JPY 2 billion due to increasing labor costs. Page 27 shows a table summarizing what I have just explained. As described on line 10, the dividend per share for FY 2024 is planned to be JPY 300. Page 28 shows our assumptions, business sensitivity, and refinery turnaround plans. As shown in the upper-left table, the assumption for Dubai crude oil price from April to March is $85 per barrel, and exchange rate is JPY 145 to the dollar. As described in the table below, Chiba and Yokkaichi refineries are scheduled to undergo turnaround in FY 2024. Please turn to page 29. I will explain the factors behind the year-on-year decrease of JPY 2.2 billion and the forecast of ordinary profit, excluding the impact of inventory valuation by segment. The yellow part is about the factors for a JPY 10.3 billion decrease in the petroleum business. Margins and sales volume is expected to decrease JPY 9.2 billion. The breakdown is minus JPY 2.5 billion for four main products margin, minus JPY 14.2 billion for margins of products other than four main products, minus JPY 0.3 billion for volume, and an increase of JPY 7.8 billion for import, purchase, and export due to the impact of market conditions. Expenses and others of minus JPY 13.6 billion includes JPY 0.1 billion increase from in-house fuel costs and minus JPY 13.7 billion for variable costs and fixed costs. Refinery trouble is expected to improve JPY 18.3 billion due to the elimination of troubles in the previous fiscal year. Lastly, the refinery turnaround difference is minus JPY 5.8 billion. This is because the refineries to undergo turnaround is different from the previous fiscal year, as mentioned on page 28. As for the JPY 7.8 billion increase in the petrochemical business shown in purple, price is expected to increase by JPY 4 billion due to recovery in domestic demand for olefins and improvement in methyl ethyl ketone market. Volume is expected to increase by JPY 7.8 billion due to improving olefin demand and increase of resist production volume. We expect expenses and others to be minus JPY 4 billion, mainly due to cost increase by the turnaround of Maruzen Petrochemical. Next, I will explain the JPY 2.3 billion decrease in the oil E&P business indicated in red. Price is expected to increase by JPY 4.9 billion, mainly affected by the yen depreciation. We estimate volume will increase JPY 0.4 billion, and expenses and others will decrease JPY 7.6 billion. The renewable energy business is estimated to decrease profit by JPY 0.8 billion due to increase in labor costs, et cetera. Lastly, others in gray is estimated to increase by JPY 3.4 billion, mainly due to consolidation. Next, on page 30, I will explain the outlook for consolidated cash flows and the balance sheet. First, for the consolidated cash flows, cash flows from operating activities on line one is estimated to be positive JPY 144 billion. Cash flows from investing activities on line two is expected to be negative JPY 147 billion, and free cash flow on line three is expected to be negative JPY 3 billion. Negative amount of cash flows from investing activity is expected to increase significantly from the previous fiscal year, and this is due to projected large investments, mainly in wind power generation, as well as one-time negative factor from a change in the deposit term of time deposits at Abu Dhabi Oil. Next, regarding financial indices, we estimate net worth will increase JPY 29.5 billion from the end of the previous fiscal year to JPY 630 billion, and net worth ratio will increase 0.1 percentage points to 27.2%, and the net debt to equity ratio will be 0.89 times. Next, please turn to page 31. I will explain our full year plan for consolidated capital expenditures in FY 2024. Full year capital expenditures are projected at JPY 119.5 billion, up JPY 37.1 billion year-on-year. The main reason for the increase is that large investment projects, mainly for wind power generation, are planned, as I explained in the cash flow section. For depreciation expenses, et cetera, we estimate JPY 60.8 billion, an increase of JPY 5.5 billion year-on-year. That is all for my explanation on the financial results and forecast. Thank you.