Earnings Call: Q3 2024

Feb 9, 2024

Summary

Q3 FY2023 earnings were broadly on forecast, with petroleum gains offset by weaker petrochemicals and oil E&P. Priorities include refinery reliability, shareholder returns and expansion of wind, hydrogen and SAF businesses.

Good morning, everyone. Thank you very much for joining the financial results briefing for the third quarter of fiscal year 2023, despite your busy schedule today. Now I would like to explain our initiatives to enhance enterprise value. Please refer to page 3. We position the enhancement of enterprise value as one of our top priorities and aim to improve the P/B ratio by steadily implementing measures based on the basic policies of the Seventh Medium Term Management Plan. The following pages will explain our current efforts in these measures. Please turn to page 4. We believe the source of our profitability lies in high refinery utilization and safe operations and stable supply are of utmost importance. On the other hand, we have experienced refinery trouble again in the current fiscal year, following the previous fiscal year, so we are reinforcing our effort to address them. As shown on the left, we have introduced and are operating OMS or Operations Management System in order to achieve world-class operations and will analyze the cause of the trouble properly and take it into the OMS mechanism. APM is described on the right, and this is to utilize big data and improve facility management. It has been in operation since April 2023 for production facilities in some of our refineries, and this was expanded to all refineries in October 2023. We plan to expand its scope to areas other than production facilities, such as piping in the future. We will promote OMS and APM further to pursue reduction of unplanned outages. Next, please refer to page 5. This is about our shareholder return policy. As we have already announced, in December last year, former major shareholders with whom we had been in conflict, sold their shares to Iwatani Corporation. We believe this allows us to adopt a flexible and agile approach to shareholder returns going forward. We will continue to aim for early shareholder returns. That is, a total payout ratio of more than 60% for the three-year cumulative period, which is in line with the return policy of the Seventh Medium Term Management Plan. Next page. On page 6, I will explain the progress in the wind power generation business and expanding new fields to drive growth. In the chart below, the areas where progress has been made since the closing of the second quarter are indicated by red boxes. For onshore wind power generation, a replacement project in Hasaki and a new construction project in Kitahiyama have been materialized. More than 80% of projects are materialized, and we are making good progress toward the target of 900 megawatts of onshore wind power generation by 2030. As shown at the bottom, in January, the public call has been opened for offshore wind power generation projects in the Sea of Japan, offshore near Aomori, and offshore near Yuza-machi, Yamagata Prefecture. We will continue our efforts for expansion to achieve our target of 1.5 gigawatts by 2030. On page 7, I will explain initiatives for our green electricity supply chain, next generation energy, and SAF, or sustainable aviation fuel. First, for green electricity, we have started verification of the power storage business. We aim to maximize the value of the green electricity supply chain by promoting the verification of the power storage business, which will play a key role in the supply-demand adjustment function through acquiring knowhow on storage battery operation, participating in new electricity market transactions, and expanding into Cosmo Zero Carbon Solution. For the hydrogen field, we will promote collaboration for hydrogen stations through a joint venture with Iwatani Corporation to enter the hydrogen supply chain. The joint venture has been selected as an operator by the Tokyo Metropolitan Government to establish two new hydrogen stations to make the total number of stations as three. As for the mass production of SAF using waste cooking oil as raw material, shown lower right, the facility construction and securing raw material suppliers are progressing steadily to start the operation by the end of FY 2024. Lastly, on page 8, I will explain about strengthening the effectiveness of the board of directors. Regarding the board member structure for the next fiscal year announced yesterday, we have informally decided to increase the number of independent outside directors and women directors considering various dialogues with investors. We will strengthen the effectiveness of the board of directors to sustainably enhance the enterprise value. We will continue to make concerted efforts to enhance the enterprise value in accordance with the basic policies of the Seventh Medium Term Management Plan. That is all from me. Next, on page 10, I will explain the highlights of the financial results for the third quarter of fiscal year 2023. Ordinary income shown on the first line was JPY 113.6 billion, and profit attributable to owners of parent on the fourth line was JPY 45.8 billion. Ordinary profit, excluding the impact of inventory valuation on the third line, was JPY 105 billion, and the profit attributable to owners of parent, excluding the impact of inventory valuation on the fifth line, was JPY 39.8 billion. The full-year forecasts remain unchanged as earnings are generally on par with the forecast announced in November. I will explain more details by segment in the following pages. Page 12 is for the review of financial results for Q3 FY 2023, and I will explain the results by segment. In the petroleum business, profit increased by JPY 20.8 billion year-on-year, with ordinary profit excluding the impact of inventory valuation of JPY 51.5 billion due to improved margins, cost, and other improvements despite regular refinery maintenance and refinery trouble. Next, in the petrochemical business, ordinary profit was minus JPY 3.7 billion, down JPY 10.9 billion year-on-year due to softening of MEK or methyl ethyl ketone and olefin market conditions, et cetera. The oil E&P business posted ordinary profit of JPY 49.3 billion, down JPY 20.1 billion year-on-year, mainly due to falling crude oil prices. The renewable energy business recognized ordinary profit of JPY 1.4 billion, up JPY 300 million year-on-year, mainly due to improved wind conditions. Page 13 shows a summary of consolidated income statement. This overlaps with my earlier explanation on page 10, so I will skip this page. For your reference, the crude oil price was $83 per barrel and the exchange rate was JPY 143 to the dollar, as shown on the 11th and the 12th lines respectively. Please turn to page 14. Page 14 shows a breakdown of ordinary profit, excluding the impact of inventory valuation by segment. I will explain more details with the waterfall chart on page 15. Please refer to page 15. I will explain the factors behind the year-on-year decrease of JPY 8.7 billion for consolidated ordinary profit, excluding the impact of inventory valuation by segment. First, let me explain the factors for an increase of JPY 20.8 billion in the petroleum business shown in yellow. Margins and sales volume increased JPY 17.5 billion with following breakdowns. Margin increased by JPY 39.9 billion for the four main products, and we recognize minus JPY 1.1 billion for other products than the four main products, and the total increase was JPY 38.8 billion. Sales volume was minus JPY 1 billion for the four main products and plus JPY 6.3 billion for other products, and the total increase was JPY 5.3 billion. Import and purchase decreased by JPY 16.8 billion, and export decreased by JPY 9.8 billion. The JPY 6.8 billion increase in expenses and others was mainly due to a JPY 6 billion improvement in in-house fuel costs attributable to lower oil prices. The impact of refinery trouble decreased by JPY 3.5 billion from the same period of the previous fiscal year. Next is the factors for the decrease of JPY 10.9 billion in the petrochemical business, shown in purple. Price decreased by JPY 6.9 billion due to softening market conditions for MEK and olefins. Volume decreased JPY 2 billion, and expenses and others also decreased JPY 2 billion. Next, the oil E&P business, shown in red, was with a decrease of JPY 20.1 billion. Price decreased by JPY 10.9 billion due to the decline in crude oil prices. Volume decreased JPY 5.6 billion, and expenses and others decreased JPY 3.6 billion, mainly due to depreciation of the yen. JPY 300 million increase in the renewable energy business, shown in green, was due to better wind conditions, as explained earlier. Lastly, an increase of JPY 1.2 billion for others was due to consolidation. Please turn to page 16. I will explain the overview of the consolidated balance sheet. Total assets on the first line increased JPY 164.9 billion from the end of the previous fiscal year to JPY 2 trillion 285.7 billion. Net worth on the third line increased JPY 33.9 billion from the end of the previous fiscal year to JPY 561.8 billion. The fourth line shows net worth ratio, and it declined 0.3 points from the end of the previous fiscal year to 24.6%. Although we have been increasing net worth with steady earnings, total assets increased in this third quarter under review, affected by transitory factors such as year-end holidays, yen depreciation, and increased inventories of kerosene for the winter demand, and this has led to the deterioration in indices. Net debt-to-equity ratio on the sixth line improved by 0.16 points to 0.94 times. Next, on page 17, I will explain consolidated capital expenditures. Capital expenditures for the third quarter of FY 2023 totaled JPY 53.8 billion, up JPY 12.2 billion year-on-year. Capital expenditures by segment are shown in the table on the right. This concludes my explanation on the financial results for the third quarter of fiscal year 2023. Thank you.