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Edited Transcript of 5021.T earnings conference call or presentation 8-Nov-19 1:00am GMT

Q2 2020 Cosmo Energy Holdings Co Ltd Earnings Presentation

Dec 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Cosmo Energy Holdings Co Ltd earnings conference call or presentation Friday, November 8, 2019 at 1:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Hiroshi Kiriyama

Cosmo Energy Holdings Co., Ltd. - Group CEO & Representative Director

* Takayuki Uematsu

Cosmo Energy Holdings Co., Ltd. - Senior Executive Officer of Corporate Communication, Accounting & Finance Dept. and Director

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Presentation

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Hiroshi Kiriyama, Cosmo Energy Holdings Co., Ltd. - Group CEO & Representative Director [1]

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Good morning. Thank you for attending our financial results briefing for the second quarter of fiscal year 2019. In my part, I will cover the second quarter review and the policy for the second half of fiscal year 2019.

Please turn to Page 2. Starting from this quarter, in order to communicate the company's progress more precisely, we are showing a comparison of the results with initial forecast as well as with the previous year. Let me discuss the second quarter results versus last year.

For the period from April to September, ordinary profit was negatively affected by a negative time lag effect caused by the falling oil price compared with the positive time lag effect we had last year due to an increase in oil price. That was one factor behind the results. Also affected by the deteriorating price trend of petrochemical products, ordinary profit fell JPY 20.5 billion year-on-year. The year-on-year comparison by segment will be explained later by Mr. Uematsu.

In terms of the comparison with the initial forecast, despite the negative time lag effect caused by falling oil price and the deterioration in petrochemical prices, thanks to the oil E&P business maintaining a higher-than-expected production volume, ordinary profit, excluding the impact of inventory valuation, will short of the forecast only slightly by JPY 9.6 billion. So a positive performance of oil E&P was a major factor.

Page 3, please. Let me take you through our policy for the second half to resolve the gap with a forecast. Regarding petroleum refining, the coker unit capacity enhancement of the Sakai Refinery to ensure compliance with the IMO regulations has been completed in October. As you can see in the chart at the bottom, the difference between high-sulfur C fuel oil and a low-sulfur C fuel oil has been expanding significantly beyond initial expectation.

Going forward, we will increase the utilization of the coker unit of the Sakai Refinery as well as the Hydrodesulphurization Unit of the Chiba Refinery so that we can have wider choices of products and optimize our sales and product mix. The completion of the coker capacity enhancement should theoretically allow us to reduce the production of high-sulfur C fuel oil all the way to 0.

Page 4, please. Here is a policy on petroleum sales. For the second quarter of fiscal year 2019, petroleum margin deteriorated due to the time lag effect caused by falling oil prices. Excluding the time lag factor, however, the underlying price trend has actually been improving. Let me elaborate it using the chart at the bottom left, showing time lag effect.

The chart shows the trends in the average crude oil margin when crude oil is shipped as well as the average margin when it is landed. It shows the average margin of last year first half as well as the last year -- this year's first half. Generally, we book the sales of crude oil that are purchased in the previous month, so there is approximately 1-month time lag.

As shown by the chart on the left, the average landing margin for the first half of last year, shown in blue, was higher than the average shipment margin, shown in red, indicating a positive time lag because we benefited by buying low and selling high due to the time lag of 1 month.

In contrast, this year, as shown to the right, the relationship between the red line and the blue line has reversed. The price was lower when the crude oil arrived than when it was purchased, leading to a negative time lag. If you look closely year-on-year, however, the shipment margin, shown by the red line, is higher this year than the last year, meaning that the theoretical or formula-based margin is higher this year than in the last year.

In addition, we started supply to Kygnus Sekiyu in July this year. And we will continue with this, and we also expect to expand our group's distribution network. So for the second half, we expect a 13% increase year-on-year in sales volume.

Please move to Page 5. Petrochemical business expects to see a downturn in market conditions. The impact of downturn should be partly offset, however, by the contribution of Maruzen Petrochemical, who has only 30% or so of its sales volume exposed to market price fluctuation, helping us to secure a certain profit in the face of a declining market. In other words, we are structurally hedged against the market downturn.

In oil E&P, we expect an upside in production volume. Despite the controlled reduction of production volume at the Hail Oil Field, as we had been explaining since the beginning of this year, production volume at existing oil fields are trending higher than expected, helped by fewer failures of pumps.

Please turn to Page 6. We have kept the full year earnings forecast unchanged despite the lower crude oil and the petrochemical prices compared with the assumptions announced in May because of the unclear outlook of the future crude oil prices as well as expected upside factors in the second half, such as improving sales mix. Following the IMO regulations, expanded distribution network of the group and higher production volumes at existing oil fields, we are offsetting the downside during the first half.

We will continue to work together as one team towards becoming a good company in which all employees can have pride and a sustainable company, which continues to grow by enhancing financial structure and individual business competitiveness in order to achieve the financial targets of this fiscal year.

This concludes my remarks. Thank you.

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Takayuki Uematsu, Cosmo Energy Holdings Co., Ltd. - Senior Executive Officer of Corporate Communication, Accounting & Finance Dept. and Director [2]

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Please go to Page 8. I will take you through the results for the second quarter of fiscal year 2019. The second quarter of fiscal year 2019 saw ordinary profit declining year-on-year, excluding the impact of inventory valuation, affected by the negative time lag caused by falling oil prices and the deteriorating petrochemical prices. Meanwhile, the underlying trend of the petroleum business remained favorable. I will explain the details by segment later with the waterfall chart.

Please go to Page 9. This page shows consolidated income statement. Let me go through the numbers. First, line 2, operating profit was down JPY 52.9 billion year-on-year to JPY 26.2 billion. Line 4, ordinary profit was down JPY 49.5 billion year-on-year to JPY 29.2 billion. Line 8, profit attributable to owners of parent was down JPY 25.5 billion to JPY 14.9 billion. Line 10, ordinary profit, excluding the impact of inventory valuation, was down JPY 20.5 billion to JPY 36 billion. That was the results for the first 6 months.

Page 10 shows an outline of consolidated ordinary profit by business segment. Excluding the impact of inventory valuation, ordinary profit was JPY 36 billion in total on a consolidated basis. For the breakdown, petroleum business, JPY 4.9 billion; petrochemical business, JPY 6.6 billion; oil E&P, JPY 19.6 billion; and other, JPY 4.9 billion. For year-on-year changes, please refer to the rightmost column. Excluding the impact of inventory valuation, total was negative JPY 20.5 billion, of which petroleum was negative JPY 7.7 billion; petrochemical was negative JPY 5.4 billion; oil E&P, negative JPY 8.9 billion; and other was positive JPY 1.5 billion.

Please turn to Page 11. I will take you through the variance analysis for each segment using the waterfall chart. The total variance from the previous year was JPY 20.5 billion. The breakdown for each segment is as follows. Petroleum business, shown in green, was down JPY 7.7 billion, due mainly to the negative time lag effect caused by falling crude oil prices, which offset the positive factors, such as the improvement in the underlying business environment and the rebound from the last year's regular maintenance at Chiba Refinery.

Let me give you the breakdown of negative JPY 5.3 billion in margin and other, shown in the green box. Margin was negative JPY 15.4 billion, mainly due to the significant negative time lag effect of JPY 2.7 with this year's negative time lag of JPY 0.7 compared with the previous year's positive time lag of JPY 2.

On the other hand, volume was positive JPY 10.1 billion, supported by an increase in sales volume, a decrease in import and purchase due to the absence of regular maintenance at the Chiba Refinery and an increase in export. Expense and other was negative JPY 2.4 billion, due to an increase in, in-house fuel cost to support higher crude oil throughput and an impact of setting aside a provision for regular maintenance as well as an increase in transfer costs, offsetting the positive impact of the Chiba Refinery having no regular maintenance this year.

Next, petrochemical business, shown in yellow, was down JPY 5.4 billion year-on-year, mainly due to the weakening petrochemical prices canceling out the positive impact of higher sales volume obtained due to absence of regular maintenance we had last year at the petrochemical plant. Oil E&P, shown in orange, was down JPY 8.9 billion year-on-year, mainly due to the reduced output from the Hail Oil Field, though the volumes from the existing fields showed improvement. The increase in other businesses by JPY 1.5 billion was mainly attributable to consolidation accounting processes.

Page 12, please. This page summarizes the consolidated cash flow statement and balance sheet. On Page 12, I will explain the highlight of consolidated cash flow and balance sheet. First, let me take you through the consolidated cash flow statement. Line 1, cash flow from operating activities was JPY 36.3 billion inflow, mainly due to quarterly net profit. Line 2, cash flow from investing activities was JPY 40.3 billion outflow, mainly due to the repair works conducted at refineries and the petrochemical plants. As a result, line 3, free cash flow was JPY 4 billion outflow.

Moving on to the balance sheet. Total assets decreased JPY 13.5 billion, mainly due to a fall in crude oil prices and a decrease in accounts receivable. Net worth increased JPY 4 billion to JPY 285.1 billion, mainly due to quarterly net profit. Net worth ratio improved 0.4 points to 16.9%. Net D/E ratio stands at 1.99x. We will continue to work on the enhancement of the balance sheet.

Lastly, please look at Page 13, highlights of consolidated capital expenditures. Capital expenditures for the second quarter of fiscal year 2019 was JPY 31.2 billion, a decrease of JPY 5.7 billion year-on-year, mainly driven by the completion of major investment projects, such as the development of the Hail Oil Field. Depreciation expenses increased JPY 4.8 billion to JPY 30 billion due to increases in depreciation expenses for major investments, such as Hail.

Just for your information, full year CapEx projection is shown on the right-hand side. A major increase is anticipated in the petroleum business by JPY 24.1 billion year-on-year to support the capacity expansion of the coker unit in Sakai. That was my brief explanation of the financial results for the second quarter of fiscal year 2019. Thank you.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]