Cosmo Energy Holdings Co Aktie

Thank you for taking the time out of your busy schedule to join us at this briefing on Fiscal 2025 Results of Cosmo Energy Holdings. I will present the financial results as well as fiscal 2026 forecast based on the impact of current situation in the Middle East and also talk about the initiatives to enhance enterprise value.

Please turn to Page 4. Let me first present the fiscal 2025 results. Ordinary profit was JPY 149.2 billion. Impact of inventory valuation was minus JPY 16.5 billion. Excluding that, ordinary profit was JPY 165.7 billion. Profit attributable to owners of parent was JPY 74 billion. Excluding the inventory impact, profit was JPY 85.5 billion. Year-end dividend is expected to be JPY 90 per share. The full year dividend is JPY 165 per share.

Fiscal '25 major management metrics are shown here at the bottom. The eighth line, the net worth was JPY 606.2 billion. Ninth line net worth ratio was 27.6%. 10 line debt-to-equity ratio, 0.71x. 11th line ROE, excluding inventory evaluation impact was 14.4%. Due to the tense situation in the Middle East, the cost of imported products increased, but the sharp rise in crude oil prices led to a positive time lag effect offsetting the higher costs.

Please turn to Page 5. Before introducing fiscal '26 full year forecast, let me explain the situation in the Middle East and our initiatives to address it. Since the end of February, the situation has worsened and continue to be highly uncertain. As a company that plays a role to supply energy, our top priority is to fulfill responsibility of stable supply for the society.

And based on that, we are operating the business. Specifically in the petroleum and petrochemical business, we maintain domestic sales on par with previous fiscal year and will continue supply to meet the domestic demand. We will continue to ensure a stable supply by combining flexible alternative sourcing of crude oil and feedstocks, the use of domestic crude oil reserves and the import of petroleum products such as gasoline and diesel fuel.

In Oil E&P business, no injuries or property damage have been -- have occurred. Our policy is to continue to closely coordinate with oil-producing partners for early production normalization and maintain necessary personnel, equipment and materials.

Please turn to Page 6. Let me explain the assumptions for fiscal '26 forecast in consideration of the current situation in the Middle East. Given the uncertainties of Middle East and market conditions and based on the expected timing of normalization, fiscal '26 forecast reflect conservative estimates. We will closely monitor the situation. And if there are material changes to the assumptions, we will make the update in an appropriate manner.

In the current assumed scenario, as shown on the left, is that the situation in the Middle East is expected to stabilize by the end of Q1. And after a certain period of adjustment, that is Q2, Q3 time frame, the crude oil production is expected to normalize in August and crude procurement is expected to normalize from September onward. Crude oil price is expected to decline gradually from the peak at the start of the fiscal year due to the closure of Strait of Hormuz toward the end of the fiscal year, we expect this to normalize. And for the full year, we expect $89 level.

In light of uncertainty in market trends, we will talk about this in details later, but domestic market conditions are set partly conservatively. Next, based on this assumed scenario, I'd like to talk about the impact from the Middle East situation. In petroleum business, higher costs due to alternative procurement and petroleum products import will be appropriately reflected to selling prices. Profits are expected to be pressured by a negative time lag effect due to the declining crude oil prices since the start of the period.

Next, in petrochemical business, costs associated with alternative naphtha procurement are expected to be offset by improved market conditions with the naphtha link. Lastly, oil and E&P business, as I said earlier, the production constraints impact is incorporated through July. From August and onward, earnings are expected to be supported by high crude prices.

Based on that on Page 7, I'd like to explain the FY 2026 forecast. Ordinary profit, JPY 115 billion. Inventory valuation impact is JPY 5 billion. Excluding this, the ordinary profit forecast is JPY 110 billion. Profit attributable to owners of parent, JPY 44 billion. Excluding the inventory valuation impact, this would be JPY 40 billion. We plan to keep the yearly dividend at JPY 165 per share, including the interim dividend of JPY 75 and year-end dividend of JPY 90. Overall capital policy, including the shareholder return, will be shared when we announce the next consolidated medium-term management plan on June 18.

Next is Page 9. Let me explain the initiatives to enhance enterprise value. Looking back at the seventh medium-term management plan, we steadily executed planned initiatives. In oilfields, we implemented initiatives, including strengthening DX to maximize refinery uptime, starting to increase production at Hail oilfield and restructuring the basic chemicals business.

In new fields, we strategically refrained from participating in offshore wind tenders in response to the changes in business environment while advancing growth initiatives such as starting the domestic SAF production, building a green power supply chain and expanding earnings from specialty chemicals.

Please turn to Page 10. This page talks about the capital and business alliance with Iwatani Corporation. Iwatani Corporation decided to participate in the used cooking oil collection program. and joined efforts to establish the domestic SAF supply chain and have started the commercial viability assessment towards establishing a green LPG supply chain using off-gas produced during SAF production.

Moving on to Page 11. This is also our partnership with Iwatani. It talks about the hydrogen supply chain. We leverage the combined expertise and the infrastructure of both companies fully to realize the scale up of the hydrogen supply chain. In hydrogen production and supply, we started to consider the realization of hydrogen business, leveraging refinery assets at the Chiba Refinery.

In sales, we plan to open the 2 hydrogen stations in Tokyo and the third one in 2027. We are currently enhancing the collaboration to create synergy. So that was the initiatives to improve the enterprise value. With the worsening situation in Middle East, the situation continues to be very uncertain, but we will work as one united company to improve the enterprise value. That concludes my part of presentation.

Next, I'd like to talk about the overview of fiscal 2025 full year results. Please turn to Page 13. Consolidated ordinary profit was JPY 149.2 billion. Consolidated ordinary profit, excluding the impact of inventory valuation was JPY 165.7 billion. Next, let me explain the profit by segment. In petroleum business, the profits increased by JPY 0.2 billion year-on-year to JPY 92.8 billion as a positive time lag effect from rising crude oil prices outweighed the cost increases driven by inflation and by import procurement to ensure stable supply.

In petrochemical business, despite the continued losses due to the sluggish market conditions, profit improved as a result of business restructuring and higher sales on specialty chemicals. Ordinary profit increased by JPY 1.9 billion year-on-year to minus JPY 3.1 billion. In Oil E&P business, while profit declined due to the crude oil prices, production volume increased as production ramped up at the Hail oilfield. Ordinary profit 65.3 billion, down JPY 17.1 billion year-on-year.

In Renewable Energy business, the profit improved following the commencement of operations at new sites. Ordinary profit was JPY 2.8 billion, up JPY 1.5 billion year-on-year. Next, Page 14 shows the consolidated income statement. The first line, net sales declined JPY 122.3 billion and reached JPY 2,677.6 billion. Second line operating profit was JPY 144.8 billion. Fourth line, ordinary profit was JPY 149.2 billion. Eighth line profit attributable to owners of parent increased by JPY 16.3 billion year-on-year to reach JPY 74 billion.

Tenth line ordinary profit, excluding the impact of the inventory valuation, it was JPY 165.7 billion. Fiscal 2026 forecast is shown on the right-hand side. Page 15 shows the overview of consolidated ordinary profit by segment. I would explain the details on the following page. Please turn to Page 16. The consolidated ordinary profit, excluding the impact of the inventory valuation was minus JPY 15.9 billion. That is the decline year-on-year.

Let's look at the petroleum business first. It's up by JPY 0.2 billion. Margin and sales volume, plus JPY 31.4 billion. This is mainly due to the time lag. Margin of 4 main products, positive JPY 42.2 billion. Margin of other products, plus JPY 27.5 billion. Volume of 4 main products, minus JPY 7.9 billion. Volume of other products, positive JPY 4.4 billion. Import, purchase and export, minus JPY 34.8 billion. Expense and other was minus JPY 34.5 billion.

The breakdown is that in-house fuel cost plus JPY 1.4 billion; variable cost, plus JPY 0.5 billion; fixed cost, minus JPY 27.7 billion; other, minus JPY 8.7 billion. The higher cost -- higher fixed cost is due mainly to the higher cost because of the inflation and the provision for the regular maintenance. Impact of the refinery troubles in comparison to the year before was plus JPY 3.3 billion.

Now let's look at the petrochemical profit in purple that increased by JPY 1.9 billion. The price was plus JPY 0.2 billion, the improved impact of regular maintenance. Volume is plus JPY 0.1 billion. Expense and other was plus JPY 1.6 billion with the effect of improvement of business structure.

In Oil E&P business, it was down by JPY 17.1 billion with the Hail production increase. This is mainly due to the oil price and weaker yen. The price was minus JPY 19.4 billion; volume, plus JPY 14.6 billion. Expense and other was minus JPY 12.3 billion. The Renewable Energy business in green is up by JPY 1.5 billion, the start of the new sites and the improvement of the wind conditions. Lastly, other was down by JPY 2.4 billion.

Please go to Page 17. This shows the overview of consolidated cash flows and the balance sheet. Starting with the consolidated cash flows. The first line, cash flows from operating activities. with the pretax profit and increase in working capital ended at JPY 213.7 billion. The second line, cash flow from investing activities was minus JPY 84.7 billion with fixed cost acquisition. As a result, free cash flow was a positive JPY 129 billion. Fourth line, cash flows from financing activities with the repayment of the borrowing and shareholder return was minus JPY 81.9 billion.

Now moving on to the balance sheet. The first line, total assets, declined JPY 40 billion from the end of previous period and ended at JPY 2,196.6 billion. The net worth was up by JPY 21.4 billion and reached JPY 606.2 billion. Net worth ratio improved 0.5% year-on-year from the end of the previous year to 27.6%. Net debt-to-equity ratio improved by 0.13 and reached 0.71.

Please move to Page 18. This is the capital expenditures overview. In fiscal 2025, CapEx increased by JPY 3.6 billion year-on-year to reach JPY 97.5 billion. Depreciation increased by JPY 1.1 billion to JPY 58.3 billion. So that concludes the results for 2025.

Please refer to Page 20. Here, I'd like to talk about the forecast overview for fiscal 2026. The consolidated ordinary profit is expected to total JPY 115 billion, while the consolidated ordinary profit, excluding the impact of the inventory valuation is forecast to be JPY 110 billion. In petroleum business, there is a negative time lag effect and domestic market conditions are assumed conservatively. However, we will seek to reflect the incremental costs associated with ensuring stable supply continuity in selling prices. The ordinary profit, excluding the inventory valuation impact, JPY 56 billion.

In petrochemical, profits are expected to improve by JPY 1 billion due to the lower export volumes, although overseas market conditions are expected to remain weak. In Oil E&P business, although the high crude oil price is expected to support the profit, sales volumes are projected to decrease as a result of the production constraint due to the closure of Strait of Hormuz. Ordinary profit, JPY 38 billion. In renewable energy, stable profits are expected despite the inflationary pressures driven primarily on onshore wind power ordinary profit, JPY 3 billion.

Next is Page 21. This is the graphic representation of what I have explained. As you can see in the 10th row, the dividend for full year for 2026 is forecast to be JPY 165 per share. On Page 22, assumptions and sensitivities are shown for full year forecast of fiscal '26. As you can see left top, from April, March, Dubai crude oil was JPY 86 (sic) [ JPY 89 ] and the Japan-U.S. dollar exchange rate, JPY 155. As shown on the right-hand side, the crude oil prices started at the peak at the beginning of the fiscal year. But as the Strait of Hormuz closure was lifted, gradually started to decline.

Page 23, please. This is the consolidated ordinary profit, excluding the impact of the inventory valuation, which was down JPY 55.7 billion year-on-year. Shown in yellow is the petroleum business, minus JPY 36.8 billion. The reasons are: first of all, margins and sales volume, minus JPY 38.6 billion.

The breakdown is as follows: margin of 4 main products is minus JPY 85 billion with a negative time lag. Margin of other products, plus JPY 26.7 billion. Sales volume of all main products, minus JPY 3.1 billion; sales volume of other products, minus JPY 5.6 billion. Import, purchase and export, plus JPY 28.4 billion. Expense and other was minus JPY 8.1 billion. The in-house fuel cost, minus JPY 7.7 billion, the variable cost, minus JPY 7.5 billion and other is plus JPY 7.1 billion. Those are expected. And inflation is also being considered.

And in solving the problems that happened last year, also this was included in this factor. Shown in purple is the petrochemical business. This went up by JPY 4.1 billion. Price is positive JPY 0.8 billion; volume, plus JPY 0.2 billion. Expense and other with the regular maintenance of the keiyo ethylene is up by JPY 3.1 billion. Shown in red is Oil E&P business, down JPY 27.3 billion.

Price with the higher crude oil and weak yen is positive JPY 20.3 billion. Volume with the closure of the Strait of Hormuz minus JPY 39.8 billion. The expense and other is minus JPY 7.8 billion with lower utilization. In the Renewable Energy business, JPY 0.2 billion profit increase is expected due to the improved wind conditions. And other is up by JPY 4.1 billion with the consolidation and others.

Please turn to Page 24. This is the consolidated cash flows and financial index. First, starting with the cash flows. The first line, cash flows from the operating activities is expected to be JPY 96 billion. The second line, cash flows from investing activities is expected to be the outflow of JPY 198 billion. As a result, free cash flow is outflow of JPY 102 billion in our forecast.

Next is the consolidated balance sheet. Net worth changes is JPY 16.8 billion and our forecast is JPY 623 billion. Net worth ratio 26.7% and net debt-to-equity ratio 0.88x. Finally, the Page 25. This is the capital expenditure overview for fiscal '26 forecast. The full year capital expenditure is expected to rise JPY 96.5 billion to reach JPY 194 billion. Depreciation is expected to increase JPY 0.1 billion to reach JPY 58.4 billion. That concludes the presentation on the fiscal 2025 results as well as fiscal 2026 forecast.

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

Good morning, everyone. I am Yamada, Group CEO. Thank you very much for taking time out of your busy schedule today to participate in FY 2025 ESG presentation. I would like to start by explaining our corporate governance initiatives following the materials. Please turn to Page 3. On the right side of Page 3, the change in the composition of the Board of Directors is provided.

In 2022, we reformed the Board of Directors and significant business execution authority was delegated to the Executive Officers Committee to enhance the monitoring function of the Board further and speed up its decision-making.

In addition, to ensure robust governance, we have made reinforcements on both nomination and remuneration and established the structure to support directors.

Next, please turn to Page 4. In order to attract outstanding candidates for directors, we have set a competitive remuneration level by raising the remuneration limit for directors and the members of Audit and Supervisory Committee members in FY 2024.

In addition, we introduced malus and clawback clauses in FY 2025 to increase the soundness of our remuneration plan. We have also established the support system for directors and as training mainly for outside directors, we provide them with opportunities to visit our major facilities to deepen their understanding of our businesses.

We also hold executive sessions several times a year. This is a session, where only outside directors gather and discuss and as described in the lower right of the slide, where they discuss is shared with the executive team without identifying speakers.

As such, we have established a system that allows the knowledge and opinions of outside directors to be fully reflected in the management. We will continue to improve our enterprise value by establishing a strong governance system.

Please turn to Page 5. In FY 2025, we consolidated the business execution decision-making function, including sustainability strategy into the Executive Officers Committee as a result of reviewing the governance system for sustainability promotion. At the same time, we established the Sustainability Strategy Council as a supporting body.

In FY 2021, we established the Sustainability Strategy Committee with the major goal of spreading sustainable management throughout the company.

We have decided to review the structure of this committee as we have achieved a certain degree of penetration of sustainable management, which was the original purpose of the committee.

And there is a growing need to further integrate financial and nonfinancial aspects of the company's operations into a unified framework for discussion. We will continue our efforts to deepen our sustainable management. That is all for my brief explanation.

Thank you, Mr. Yamada. Next, Mr. Asai, Independent Outside Director, will answer pre-submitted questions. I'll read out the questions. Now let me read the first question. Compared to the time when you became an outside director, how do you see Cosmo's governance system or business has changed? Please tell us your assessment of the current situation? And how do you think you have contributed to this change? Mr. Asai, please.

Good morning, everyone. I am Keiichi Asai. As the moderator has just mentioned, I was appointed as an outside director in July 2021 and about 4.5 years have passed since then. Many things have happened over the past 4.5 years. And when I was asked this question, I looked back and thought about it and realized that it has truly been eventful 4.5 years. And I just wonder if there has ever been anything like it in the history of Cosmo.

With regard to the governance system, we have increased the number of independent outside directors and female directors. And I believe that the diversity and transparency of the Board of Directors has been further enhanced.

Regarding the remuneration system, as CEO mentioned earlier, we have revised the amount of remuneration for directors. And last year, we introduced malus and clawback clauses to enhance both offensive and defensive measures.

The Board of Directors has delegated significant authority to the executive team and the Board of Directors is monitoring the implementation of this delegation. In that sense, its supervisory function is being strengthened.

Let me talk about governance. I have heard that the corporate governance code will be revised next year. And I have been thinking about the meaning of corporate governance in Japan. And it seems to me that the most important purpose of corporate governance is to establish a system to strengthen profitability of a company.

I suppose the meaning of corporate governance is a little different from that in the U.S. or Europe. In the U.S., emphasis is placed on checks and balances on the CEOs. And in Europe, emphasis is placed on accountability to stakeholders.

In this sense, I think the Japanese version of corporate governance, a system to strengthen profitability is taking shape at our company over the past 4.5 years. As for the business, the appointment of CEO, Yamada on my left, as a top executive with a deep sense of balance and excellent risk management skills has gradually had a positive effect in his second and third years as CEO.

One example is the withdrawal from bidding for offshore wind power. We decided not to bid for the project from the standpoint of economic rationality because costs are increasing due to rapid inflation and the competitive environment is becoming extremely fierce.

As the environment surrounding the energy industry is changing drastically, we are determined to further enhance the strength of our original business, the oil business field, and shift management resources to the new business field as well.

As you are all aware, it seems the progress on decarbonization is being rolled back, and it is difficult to proceed it under such circumstances. Still, I believe that well-balanced management has been practiced. Then what am I doing? I think it is part of the job of an outside director to provide advice on data-driven management with a focus on profitability and earnings.

In that sense, I believe that I have been fulfilling my fiduciary duty for the past 4.5 years.

I will now read out the second question. What is your vision for the future of Cosmo Energy Holdings? What are your expectations of the company's future? And what do you think is the biggest challenge in achieving sustainable growth? Mr. Asai, please?

I need to carefully consider this question before providing an answer. But I think there are 2 points that is to foster and maintain growth expectations and refining an ability to adapt to change. For fostering growth expectations, our earnings structure is based on the efficient oil business field. And on top of that, the new business field exists, and it requires to take risks.

As I mentioned earlier, the business environment in the new business field is slightly worsening as the timing to achieve net zero carbon emissions seems to be delayed a little due to its uncertainty and the impact of the current Trump administration's policies.

However, in the medium to long term, I believe that this trend toward decarbonization and low carbon emissions will continue. Stronger oil business field and its earnings base will enable us to take risks and plant seeds in new business field where medium- to long-term growth is expected. For the time being, I expect the management to focus on strengthening the structure of the oil business field.

As for addressing changes of the external environment, when we formulated our Vision 2030 and the seventh medium-term management plan, we could not predict the major changes in social conditions over the past few years, such as cost increases due to inflation like today or the elimination of labor shortages through the utilization of AI.

Cosmo should be resilient and flexible to be able to respond to these changes in the environment and accept various things. I believe this is essential for achieving sustainable growth.

There is growing demand for management that is seamless, comprehensive and resilient across all time horizons and the management team is required to have the ability to think, to adjust interests and to make decisions in these areas. Assume it is the role of outside directors to push them to fulfill such requirements.

In addition to these skills, CEO also needs to have the ability to conceive new ideas to convince others to make decisions from diverse arguments and to unite people. Let me reassure all stakeholders that the outside directors are carefully watching these things in the Board of Directors' meetings.

Let me move on to the next question. Under Vision 2030, the company is working to expand the next-generation energy. What challenges do you recognize about the company's talent portfolio and human resources development as well as measures to be taken going forward in this area?

I am Chairperson of the Nomination and Remuneration Committee. And if I focus on the subjects of this committee's discussion, namely executive officers, I think it is fair to say that the most important issue for the committee is to discuss how the management personnel development and monitoring should be.

One issue is that the pool of human resources for the next generation is not large enough as annual hiring numbers vary from year-to-year. The only way to solve this problem seems to be hiring excellent human resources from outside the company, but it is still important to design a good incentive system, including a remuneration system like the one implemented in 2024.

However, I feel that this also needs to be constantly updated. I'm sure Ms. Takeda, Senior Executive Officer, will explain the details of the management human resource development later.

Next, let me move on to the fourth question. For the growth of a company, it is important to have a corporate culture atmosphere and a mindset that encourage many employees to take on challenges and look outside the company. From an outside director's perspective, do you think the management stance of the Cosmos executive team and internal atmosphere is supportive of new challenges for employees?

This is a very difficult question, but one of the messages that CEO has been sending to the entire company is to create friction in a positive sense. This is a clear indication of the direction he is taking as a top executive.

And I feel that both the company and employees are changing in this regard. Cosmo has had a kind of laid-back internal atmosphere, and I have often felt frustrated. However, over the past 4.5 years, the ratio of mid-career hires has increased to more than 20%.

And I think that the so-called friction caused by differences in thinking and background with the employees who joined Cosmo as new graduates is causing a positive chemical reaction.

Also, the change of the major shareholder seems to have strengthened the sense of crisis and unity among employees. Even with the change of major shareholder from Murakami Fund to Iwatani Corporation, -- the sense of urgency and willingness to take on challenges have remained unchanged. And in this respect, I feel confident in our employees.

Let me continue. The company is required to address conflicting management challenges such as stable energy supply, increasing electricity demand and decarbonization as well as declining returns on investment due to high inflation as an outside director, please share the status of discussions on balancing measures against climate change and business strategy, particularly with respect to investment financing plans.

I am sure that Mr. Yamada will share his detailed thoughts on these issues later. But I'm certain that balancing measures against climate change and business strategy is an extremely difficult management issue. Our medium-term vision, Vision 2030 is covered in the recently released integrated report, and there is no change in our guiding principles of energy to change the future and energy to change society.

But the time line of security assessment of fossil fuels and achieving net zero carbon emissions seem to be gradually falling behind. As for investment, it is commendable that the company flexibly reviewed its investment plans, including financing plans and allocation of funds in response to changes in the business environment, such as the decision to forego a bid for offshore wind power generation mentioned earlier or the withdrawal from the petrochemical business with Hyundai in South Korea.

There were, of course, many projects that were put off due to the immaturity of the market or the lack of institutional arrangements. This is just my personal opinion, but the effectiveness of the medium-term management plan seems to be questionable.

Assume that we need a kind of rolling system in which the plan is revised every year in response to changes in the environment based on the medium- to long-term vision.

As I mentioned earlier, in discussions on investment and financial planning, we place emphasis on profitability and focus on figures like IRR. Discussions are also held from the perspective that businesses that contribute to solving social issues are a first priority for the company, whose mission is to provide a stable energy supply.

It is one of the roles of the Board of Directors to encourage the executive team to make prompt and bold decisions from a medium- to long-term perspective while taking care not fall into short-term orientation or micromanagement by the management. That is all for my answer to question #6.

As the Chairperson of the Nomination and Remuneration Committee, what are your thoughts on the succession plan for outside directors?

Before talking about the succession plan for outside directors, I want to touch upon the term of outside directors. I hear it varies. For instance, rather many companies in Europe set it as 10 years. Let me share my thought with you. I think a skill matrix will be critical. Skills required for outside directors have changed considerably since I assumed this role in 2021.

So I expect the appointment of outside directors who can contribute to the improvement in governance required by the company in line with the times and social changes. In addition, I believe that further knowledge of AI and DX will be required as skills going forward.

In that sense, I think it is worth considering a retirement age system for outside directors. And as a prerequisite, I'd like to select candidates who can provide advice and recommendations to improve enterprise value or perform monitoring functions rather than knowledge and experience in the energy industry to maintain diversity on the Board of Directors.

This is the last question in this part. Is the design of Cosmos's nomination and remuneration system effective and influential in helping the top management to enhance enterprise value?

Nomination and remuneration is 2 major systems, which plays a vital role for the management to improve enterprise value. The Nomination and Remuneration Committee is an optional organization, and we have secured a system that can flexibly respond to the demands of the times.

The committee is chaired by me, an outside director and has 5 members and 4 of them are also independent outside directors.

And this ensures transparency and objectivity. The remuneration system for directors consists of 3 elements. First one is basic remuneration, which is monetary compensation. Then the second is annual incentive, which is also monetary compensation.

These 2 account for about 60% to 70% of the total remuneration. And the third is medium- to long-term incentive, which is stock-based, and this makes 100% in total. The annual incentive includes ESG evaluation and individual evaluation.

I am certain that this system is competitive enough when compared with other company in the same industry or other Japanese major companies by setting higher percentage of incentive compensation for higher position, it reflects the weight of management responsibility.

In June 2024, we also reviewed the level of performance-based remuneration mentioned earlier as it will become the norm among domestic companies and will be further expanded. We always hold active discussions on the remuneration system also with outside consultants.

Regarding nominations, we are increasing opportunities for dialogue and conversation at the Board of Directors, other committees and meetings to gain an understanding of personalities, achievement and track record of candidates who are discussed at this committee, so that we can have objective and independent discussions and judgments regarding nominations from the executive side.

Therefore, I am certain that committee has effectiveness and influence. Thank you very much.

That concludes our responses to the pre-submitted questions. Now we will move on to the explanation of the [ 3 Xs ]. First, Executive Officer, Takeda, will explain our GX and HRX initiatives.

Thank you. I am Junko Takeda. I appreciate the opportunity to speak with you today. Let me now begin my presentation. Please turn to Page 9. I will start by explaining our efforts to reduce CO2 emissions. The Cosmo Energy Group is committed to contributing to the realization of a decarbonized society.

To this end, we are working to reduce our group-wide CO2 emissions, targeting a 30% reduction in Scopes 1 and 2 by 2030 and net zero carbon emissions across the entire supply chain, including Scope 3 by 2050.

As shown in the middle of the slide, total group CO2 emissions for Scopes 1 and 2 in FY 2024 were down 20% compared with FY 2013.

Within this, the darkest section at the bottom of the bar indicates the CO2 emissions reduction in the petroleum business, thanks to efforts to improve energy efficiency and last year, lower refinery unit operating rates due to regular maintenance turnarounds, we achieved a year-on-year reduction of 460,000 tons.

From this year onward, in order to continue reducing emissions while maintaining the operating performance of our refineries, we are also moving ahead with the use of negative emissions technologies such as CCS.

Please turn to Page 10. This page explains our efforts in CCS and CCU. As shown at the top left, in 2024, we won 2 JOGMEC Open Call projects and began CCS feasibility studies. By separating and recovering CO2 emitted from our Chiba and Sakai refineries, we aim to reduce CO2 emissions.

With respect to CCU, in March 2025, we initiated a joint basic study on biological conversion technology with the utilization of Carbon Dioxide Institute. Because this is a technology-driven initiative, we are working with our partners to examine both the technological feasibility of CCU and its investment profitability.

Please turn to Page 11. This slide shows how we are bolstering the green electricity supply chain. To achieve net zero by 2050, we are working to expand the supply of renewable energy and thereby contribute to reducing CO2 emissions for society as a whole. First, in onshore wind power generation, development of new site is progressing steadily.

As shown in the bar chart on the right, our CO2 reduction contribution from onshore wind was 250,000 tons. On the other hand, as has already been mentioned today, in offshore wind power generation, we decided to forgo bidding in the planned public tenders from the standpoint of economic rationality in light of the sharp rise in costs driven by rapid inflation and the increasingly fierce competitive environment.

A slightly different area, but we are also working to secure long-term stable demand for the electricity we generate by using corporate PPAs, while at the same time, maximizing the value of green electricity.

Please turn to Page 12. This slide summarizes our efforts in the SAF and hydrogen businesses. Regarding SAF produced from used cooking oil, the production facility at our Sakai site was completed in December 2024, and we began production and supply in FY 2025.

We are currently the only supplier in Japan capable of mass producing domestically sourced SAF, and we intend to continue moving this business forward. In the hydrogen business, through a capital and business alliance with Iwatani Corporation, we are working on the development of hydrogen stations and the construction of a hydrogen supply chain.

The details are shown at the right-hand side of the slide. As for the hydrogen station business, in 2024, our first station opened in Heiwajima, followed by the second in Ariake. For our third station, we plan to open the site in Shinsuna, Koto Ward, an area with many logistics hubs around 2027.

In terms of the hydrogen supply chain at the bottom right of the slide, we have begun to study a hydrogen business that makes use of assets at our Chiba refinery. Specifically, together with Iwatani, we are examining the production and the sale of liquefied hydrogen.

And within that supply chain, we are also considering using the hydrogen produced in our own petroleum refining operations.

Next, please turn to Page 13. I will now explain our progress toward achieving net zero carbon emissions by 2050. Although there have been various external headwinds, we have been steadily implementing the initiatives set out in our road map for achieving net zero carbon by 2050.

At the same time, we recognize that the road map itself needs to be revised in light of changes in the external environment and advances in technology.

As we work toward our next midterm management plan, we are reassessing the road map, taking into account the increase in costs in each business due to rapid inflation, our response to the GX ETS system, the maturity level of markets in next-generation energy domains and developments in policy, economic conditions and the overall business environment. That concludes my explanation of our GX initiatives.

Let me now move on to our HRX initiatives. Please turn to Page 15. The Cosmo Energy Group's HRX initiatives are designed to support Vision 2030, energy that shapes the future and energy that sustains society by creating new value through both next-generation energy and decarbonization and low carbonization.

Even though the time line has slightly shifted backwards, we recognize that we are currently in a period of major transformation for the energy business environment. It is important for us both to take on challenges in new business domains and to strengthen the competitiveness of our existing oil business.

Our vision is to achieve both at the same time. Therefore, our talent pool needs to consist of people who are autonomous, who think in diverse ways and who continuously rise to new challenges.

As shown in the middle of the slide, we are promoting 4 key transformations, shift to autonomy and self-direction, fostering a growth mindset, expanding diversity and increased DX and AI literacy.

So we are promoting these 4 points. And in parallel, we believe that maximizing human resource capabilities requires both wellness enhancement and higher engagement. Our HRX measures are designed from this perspective.

Please turn to Page 16. Based on the 4 points I just mentioned, we are promoting specific initiatives in 3 categories. Human resource cultivation and development, organizational culture and wellness. Please turn to Page 17. As Director Asai mentioned earlier, within our broader human resource transformation, we focus particularly in FY 2024 on cultivating management personnel and successors.

We are working to build a talent pool of future leaders who can drive transformation in the energy business and continue to take on growth challenges. Concretely, for those identified as candidates, we're giving them tough assignments and opportunities to take on higher goals and deliver results.

We're also promoting early selection and expanding the pool of potential successors by encouraging them to gain a higher vantage point and acquire diverse knowledge.

On the right-hand side of the slide, you can see our human capital investment, particularly in education and training. Our target at the end of the 7th MTMP is JPY 180,000 per person. And as of now, we have reached JPY 160,000 per person. So we are progressing steadily.

Please turn to Page 18. One of the key elements is a high level of engagement. As shown at the right, we use an engagement index derived from employee surveys on factors such as work satisfaction, whether employees feel they can demonstrate their capabilities, and take on challenges with a strong sense of achievement and whether they feel proud of the company.

Our KPI under the 7th MTMP was 60 points in FY 2024, supported in part by increased engagement at our refineries, we achieved 62 points. In FY 2024, in particular, recognizing that line managers play a critical role in developing talent and fostering a challenge-oriented mindset, we enhanced one-on-one meetings to enable more attentive development of subordinates.

We have confirmed that employees whose managers conduct more frequent and higher quality one-on-one meetings tend to show higher engagement scores.

We see this as one effective measure and are experiencing its positive impact firsthand. By further enhancing work satisfaction and the willingness to take on challenges and achieve results, we aim to bring out the full potential of each employee.

Higher engagement leads to the pursuit of growth opportunities, maximize profitability and significantly improved productivity. In this way, we believe it will contribute to enhancing enterprise value, and we will continue to pursue our initiatives.

Finally, please turn to Page 19. This slide shows the KPIs for the 7th MTMP. Overall, progress has been largely in line with plan. As the 7th MTMP is now in its final phase, we're firmly focused on achieving these targets.

At the same time, these initiatives will not come to an end simply because we entered the 8th MTMP. They must continue seamlessly with an eye on the next plan. We will continue to advance these efforts. That concludes my explanation. Thank you very much. We will now ask Section Manager, Rzonca, to explain our DX initiatives.

Thank you. I am Noriko Rzonca, Chief Digital Officer. I would like to give you a brief explanation of Cosmo's DX initiatives. I believe our DX initiatives have changed dramatically over the past 3 years. The fact that GX has been positioned as one of our key management strategies is extremely important because field-driven initiatives require the enthusiasm of people on the front lines.

We're building our projects from the ground up with full participation across the group. At the same time, management is providing strong support and a clear direction, and we are moving forward on these 2 axes. We have now built a solid structure for this all-employee DX promotion system. One example is the establishment of a centralized maintenance hub as shown on the right of the slide, the RCoE, which oversees maintenance functions across all refineries.

For those of you who have come from the front line today, I hope you will take the opportunity to visit the site. Using AI-driven forecasting, we are implementing predictive maintenance before risks materialize, we can now visualize in numerical terms where risks are emerging, and this is changing how people work.

Please tell us that whereas in the past, they reacted after problem occurred and indicators rose. Now the conversation has flipped. They're asking why are these numbers behaving this way and discussing issues proactively in terms of early detection, this is providing valuable insights ahead of time.

Data is, of course, indispensable for this. We are, therefore, focusing on preparing data environments and building a culture in which people use AI effectively as those who use AI rather than being used by it.

In the middle of the slide, you can see 5 major business challenge areas. While we categorize our DX initiatives into these 5 areas, their content is evolving with the times. 3 or 4 years ago, most projects focused on analytical AI, looking at numbers and predicting what might happen. Since then, we have seen a shift toward projects that want to use generative AI.

And now we are seeing many project ideas from the field that want to leverage AI agents. As these needs change over time, it is important that we continue to support them from a business perspective while also orchestrating data horizontally across these major business challenge domains. This slide shows our progress in DX-related KPIs.

On the right, you can see figures that we have disclosed publicly. We have already built a full DX cycle encompassing DX events, the DX forum and the DX hub. The cycle begins with awareness surveys that gauge each individual's mindset.

From there, we encourage people to participate in events, learn more about AI in our forums and then apply that knowledge to actual projects. Our DX forum, in particular, has some distinctive features when AI is discussed, examples that are close to people's daily work.

Like Copilot, interest is very high and participation has been increasing significantly compared with previous forums. This shows that DX and AI are taking root in the field. And at the same time, these forums are laying the groundwork for new project ideas. The DX hub initiative is about picking up many small project ideas and turning them into a larger wave of transformation.

The number of projects implemented through the hub has grown considerably. Most importantly, the number of core digital personnel, people who drive data utilization has exceeded 1,000, surpassing our 3-year target of 900.

We strongly feel that employees desire to do something and their wish to solve problems are now connecting directly to the use of digital and data, creating a flow that passes value onto the next generation. I believe these efforts were recognized and are being selected for the GX Stock 2025 list for the first time this year. We intend to continue taking on even greater challenges going forward. Thank you very much.

Thank you very much for participating in the earnings briefing for the second quarter of fiscal 2025 despite your busy schedule today. I will explain the highlights of the second quarter FY 2025 results and initiatives to enhance enterprise value.

Please turn to Page 3. On Page 3, I will explain key highlights of the second quarter FY 2025. Ordinary profit was JPY 53.2 billion while excluding the impact of inventory variation of JPY 19.7 billion, it was JPY 72.9 billion. Profit attributable to owners of parent was JPY 23.6 billion. Excluding the impact of inventory variation, it was JPY 37.4 billion. Earnings forecast for FY 2025 remains unchanged.

Turning to Page 5. I will explain the progress of the 7th consolidated midterm management plan regarding initiatives to enhance enterprise value. In Oil business structure improvement shown in blue, we strengthened the profit foundation through DX for maximizing uptime at refineries and production ramp-up at the Hail Oil Field. In restructuring of basic chemicals, we are promoting the preparation for ethylene production optimization, which was determined by Maruzen Petrochemical in April.

In new field profit expansion shown in green, we started Japan's first domestic SAF production in 2025 to increase green electricity supply chain profit. We expanded power generation capacity in onshore wind power, started demonstration of electricity storage business and expanded green electricity sales as well as utilization of corporate PPA. We are promoting growth measures in new fields, such as business expansion of semiconductor photoresist resins in Specialty Chemicals segment and hydrogen-related business through alliances with Iwatani Corporation in the next-generation energy business. I'll explain topics in each initiative later.

Please turn to Page 6. From Page 6, I'll explain topics in each initiative. Regarding the strengthening DX at refineries to maximize operation, in FY 2025, we completed VR development and promoted the consolidation of maintenance functions to strengthen predictive maintenance. Going forward, we will accelerate DX initiatives in entire refineries, including operational area.

Please turn to Page 7. In Oil E&P business, Hail Oil Field, which started production ramp-up at the end of December 2024, continuous production steadily and we expect that it will contribute to the full year earnings for FY 2025.

Please turn to Page 8. On Page 8, I will explain the Petrochemical business. In Basic Chemicals segment, we are preparing for the optimization of ethylene manufacturing system to strengthen competitiveness. In Specialty Chemicals, we are expanding business scale of semiconductor photoresist polymers where we boast world-leading market share. And in Chemicals segment, we increased production capacity for highly refined isododecane to respond to its growing demand. In Petrochemical business, we will promote initiatives to strengthen profitability in various fields.

On Page 9, I will explain green electricity supply chain. We are developing infrastructure steadily in each area of renewable power generation, supply/demand adjustment in the storage and green electricity sales. In power generation, new Mutsu-Ogawara Wind Farm started operation in July, and we started the green electricity supply to Amazon through corporate PPA. We continue to work to expand profits through green electricity supply chain as one of our growth initiatives.

Please turn to Page 10. I will explain initiatives on SAF and the capital and business alliance with Iwatani Corporation. We started supply Japan's first domestic SAF from mass production facility in 2025 and expanding sales channels. Regarding capital and business alliance with Iwatani Corporation, we continue discussions on business scheme for hydrogen supply chain in addition to the scheduled opening of the third hydrogen station around 2027. Consolidating management resources and expertise of both companies will strengthen and accelerate the collaboration and pursue synergies.

Please turn to Page 12 for shareholder returns. We position appropriate return to shareholders as one of the important management initiatives. Interim dividend for FY 2025 is planned to be JPY 150 per share, and the year-end dividend is planned to be JPY 90 per share. This is due to the stock split effective on October 1, and there is effectively no change from a year-end dividend of JPY 180 per share, which was announced in May this year. We consider the method and the timing of returns in FY 2025 appropriately but we'll achieve a cumulative total payout ratio of 60% or more over the 3-year medium-term plan period as committed. As you are aware, this year is a final year of the seventh midterm management plan. We will be united in our effort to achieve the midterm plan target to the end.

This concludes my presentation.

I will explain overview of the second quarter FY 2025 results. Please turn to Page 14. In the second quarter FY 2025, ordinary profit was JPY 53.2 billion and excluding the impact of the inventory, it was JPY 72.9 billion.

Next, I explain by segment. In Petroleum business, ordinary profit excluding inventory impact was JPY 43.8 billion, up JPY 12.5 billion year-on-year due to solid domestic margins and improved uptime at refineries despite increased cost due to further inflation. In Petrochemical business, ordinary profit was minus JPY 2.2 billion due to the impact of opening inventory despite the absence of regular maintenance impact and the effects of improving business structure. In Oil E&P business, ordinary profit was JPY 24.1 billion, down by JPY 20.9 billion year-on-year due to foreign exchange impact. Production volume increased steadily through the implementation of water injection at the Hail Oil Field. In Renewable Energy business, ordinary profit was minus JPY 0.6 billion, up JPY 0.3 billion year-on-year due to favorable wind conditions and the commencement of operations at the new site.

On Page 15, I will explain consolidated income statement. Please refer to table below. Net sales in top line were JPY 1,333.8 billion. Operating profit in second line was JPY 60.3 billion. Ordinary profit in the fourth line was JPY 53.2 billion and profit attributable to owners of parent in the eighth line was JPY 23.6 billion. Ordinary profit, excluding inventory impact in the 10th line was JPY 72.9 billion, excluding the impact of inventory variation in the ninth line, minus JPY 19.7 billion.

Page 16 shows consolidated ordinary profit by segment. I will explain this in detail with a step chart on Page 17. Please turn to Page 17. I I'll explain factors for year-on-year difference of minus JPY 4.7 billion in ordinary profit, excluding inventory impact by segment.

Let me start with profit increase of JPY 12.5 billion in Petroleum business, shown in yellow. Margin sales volume was plus JPY 18.7 billion. Breakdown is as follows: margin of 4 main products was plus JPY 11.7 billion, backed by steady domestic margin. Margin of other product was plus JPY 5.5 billion, volume of 4 main products was minus JPY 0.4 billion. Volume of other products was plus JPY 1.1 billion and import, purchase and export was plus JPY 0.8 billion. The breakdown of expense, other JPY 13.3 billion was in-house fuel cost plus JPY 1.3 billion, variable cost, minus JPY 0.5 billion, fixed cost, minus JPY 6 billion and other, minus JPY 9.1 billion. Major reason for increase in variable and fixed cost was cost increased by inflation. And clearing troubles at refineries was plus JPY 7.1 billion.

Moving to Petrochemical business, profit increase of JPY 2.1 billion in purple. Price was flat year-on-year. Volume was minus JPY 1 billion. Expense, other was plus JPY 3.1 billion, partly due to business structure improvement. In Oil E&P business, profit decreased by JPY 20.9 billion in red. Price was minus JPY 9 billion due to crude oil price and FX impact and expense, other was minus JPY 24.3 billion due to loss of FX while volume impact was plus JPY 12.4 billion due to production increase at Hail Oil Field. In Renewable Energy business shown in green, profit increased by JPY 0.3 billion, and this is mainly due to favorable wind condition and the launch of operations at the new sites of customer Eco Power.

On Page 18, I will explain consolidated cash flows and balance sheets. Regarding consolidated cash flows, operating cash flows on the top line was plus JPY 120.4 billion due to net profit and a return of consumption tax. Second line, investing cash flows was minus JPY 23.7 billion due to capital investment among others. As a result, third line, free cash flow was plus JPY 96.7 billion. Fourth line, financing cash flows was minus JPY 71.1 billion due to repayment of debt and the dividend payment.

Next, I'll explain consolidated balance sheet. Total assets on the top line decreased JPY 41.7 billion from the end of the previous year to JPY 2,114.9 billion. Third line, net worth increased JPY 5.6 billion to JPY 590.4 billion. Fourth line, net worth ratio improved 0.8% to 27.9%. Sixth line, net D/E ratio improved by 0.09 percentage point to 0.75x.

On Page 19, I will explain consolidated capital expenditure. In the second quarter FY 2025, capital expenditure decreased JPY 3.1 billion year-on-year to JPY 41.3 billion. Depreciation expense increased JPY 0.8 billion to JPY 28.8 billion.

This concludes my presentation on the second quarter FY 2025 results.

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