Earnings Call: Q2 2024

Nov 8, 2023

Summary

First-half ordinary profit excluding inventory valuation was ¥77.9B, down ¥4.1B YoY, while FY2023 profit forecasts and the dividend were raised. Key pressures include weak petrochemical markets and Hail-related E&P volume declines.

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 seventh midterm plan, and a highlight of Q2 results and full year forecast. Please go to page 3. We have positioned the enhancement of enterprise value as one of the top priorities of the seventh midterm plan. For the improvement of PBR, we are checking progress from four perspectives, namely ROIC improvement, financial leverage optimization, cost of capital reduction, and growth rate improvement. In the first half, PBR improved to around 0.9 times, 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 one time 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 seventh midterm 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 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 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 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 U.S. We are aiming to enter the lithium resource development business in the U.S. 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 Mitsui O.S.K. Lines. In addition, we have concluded MOUs with four 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 investment profitability. Next, page 12, please. This shows the financial results for Q2 of FY 2023. Line one, ordinary profit was JPY 83.1 billion. Line four, profit attributable to owners of parent was JPY 36.1 billion. Line three, ordinary profit excluding inventory valuation was JPY 77.9 billion. Line five, 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 one, ordinary profit is JPY 155 billion. Line four, profit attributable to owners of parent is JPY 78 billion. Line three, ordinary profit excluding inventory valuation is JPY 132 billion. Line five, net income excluding inventory valuation is JPY 62 billion. We will make united efforts to achieve the main theme of the seventh midterm 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 two, operating profit was JPY 75.9 billion. Line four, ordinary profit was JPY 83.1 billion. Line eight, profit attributable to owners of parent was JPY 36.1 billion. Line nine, 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. The next page is the 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 four 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 four products, and an increase of JPY 2.4 billion for other products. Imports and purchase is down JPY 9 billion because we had 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 costs caused by lower oil prices, and a JPY 6.3 billion remaining amount due to the following three factors. Variable expenses, minus JPY 0.1 billion, personnel, labor, and other fixed cost, minus JPY 3 billion, and one-time 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. The factor was positive JPY 3.4 billion. 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 Eco Power, 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 consolidated balance sheet. First, line one, cash flow from operating activities was positive JPY 165.3 billion due to net profit and a one-time impact of the subsidy for gasoline and other fuels. Line two, cash flow from investing activities was negative JPY 18.7 billion. As a result, line three, free cash flow was positive JPY 146.6 billion. Line four, 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 three, net worth was JPY 563.4 billion, up JPY 35.5 billion from the end of the previous year. Line four, net worth ratio improved 0.9 points to 25.8%. Line six, net D/E ratio improved 0.27 to 0.83 times. Page 19 explains the first half results of consolidated capital expenditures. The CapEx increased mainly in the petroleum segment. 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' 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 forecasts, 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 US 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 four 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 four 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 to 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 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 one-time factors, such as the tax payment date 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 0.93 times. 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 later. That is all from myself. Thank you very much.