K&O Energy Group Inc. Q2 FY2025 earnings call

Core Interim Financial Results

• Overall consolidated interim results: Revenue 48.536 billion yen (-0.6% YoY), operating profit 6.606 billion yen (+17.8% YoY), ordinary profit 7.134 billion yen (+20.3% YoY), net income attributable to parent shareholders 5.496 billion yen (+48.6% YoY), delivering lower revenue but higher profit.
• Net income growth was driven by higher operating profit plus one-off compensation income from gas facility relocation for river improvement.

Carbon Neutral New Business Initiatives

• Established Capital Region CCS Co., Ltd. as a joint venture with INPEX to advance CCS project development in the outer sea of Chiba Prefecture. The company will lead CO2 transportation and storage, and is currently conducting route surveys for onshore CO2 pipelines, targeting contribution to carbon neutrality goals.
• Launched a joint venture low-carbon hydrogen and CO2 business: Established Air Water K&O Co., Ltd. with Air Water Green Design, using locally produced Chiba natural gas as feedstock to produce low-carbon hydrogen and recover byproduct CO2 for dry ice manufacturing. Demand for both products is currently strong, and the business will help drive regional industrial development and GHG emission reductions.

Capital Allocation and Shareholder Return

• Balances investment in core domestic resource businesses and new growth areas, with planned 2025 total capital expenditure of 9.132 billion yen, including increased investment in gas/iodine development and iodine production capacity expansion.
• Commits to stable continuous dividends, with a planned full year 2025 dividend of 50 yen per share, an increase of 8 yen YoY and 2 yen higher than the previous guidance.

1. Gas Business: Interim revenue was 36.686 billion yen, down 5.4% year-over-year (YoY), accounting for 75.6% of total consolidated revenue. Segment profit was 3.53 billion yen, up 16 million yen YoY. Full year 2025 projected revenue is 67.6 billion yen (down 6.3% YoY), projected segment profit is 4.8 billion yen (down 291 million yen YoY).
2. Iodine Business: Interim production was 898 tons (up 7.9% YoY), sales volume was 902 tons (up 7.4% YoY). Interim revenue was 7.365 billion yen, up 12.1% YoY, accounting for 15.2% of total consolidated revenue. Segment profit was 4.316 billion yen, up 590 million yen YoY. Full year 2025 projected production is 1,766 tons (up 7.6% YoY), projected sales volume is 1,801 tons (up 4.5% YoY), projected revenue is 14.5 billion yen (up 7.2% YoY), projected segment profit is 8 billion yen (up 443 million yen YoY).
3. Other Segments: Interim revenue was 4.484 billion yen, up 28.8% YoY, accounting for 9.2% of total consolidated revenue. Segment profit was 314 million yen, up 15 million yen YoY. Full year 2025 projected revenue is 8.6 billion yen (up 27.4% YoY), projected segment profit is 800 million yen (up 349 million yen YoY).

• Management revised full year 2025 guidance upward for profit compared to the February forecast: Full year operating profit is projected at 90 billion yen, an increase of 13 billion yen (16.9%) from the original February forecast; ordinary profit projected at 100 billion yen (+14 billion yen, +16.3%); net income attributable to parent shareholders projected at 72 billion yen (+10 billion yen, +16.1%). Full year revenue is projected at 90.7 billion yen, a 1.3% downward revision from the original forecast.
• Full year overall guidance calls for 1.9% lower revenue (90.7 billion yen) but 2.0% higher operating profit (90 billion yen), 1.7% higher ordinary profit (100 billion yen), and 16.7% higher net income (72 billion yen) compared to the prior fiscal year, resulting in full year lower revenue but higher profit.
• The annual dividend per share guidance was raised by 2 yen to 50 yen, representing an 8 yen increase compared to the prior fiscal year.

• Iodine market prices are heavily influenced by production supply trends in Chile, the world's largest iodine producer. A large sudden increase in Chilean production could cause global iodine prices to drop sharply, and long-term price trends are difficult to forecast accurately.
• Gas sales volume for power generation use is exposed to high volatility in the power market, leading to unpredictable fluctuations in sales volume that can affect gas business performance.
• CCS project commercial viability depends heavily on future CO2 price levels, which are currently uncertain, and no definitive profit forecast is available at this stage.
• Large rapid expansion of iodine production capacity is constrained by the physical limit of incremental brine pumping volume, so production cannot be quickly scaled up to meet unexpected sudden demand growth.

Q: Why did gas sales volume for power generation decrease, and is this a temporary change? What is the outlook for coming years?

A: Power generation customers adjust output based on volatile power market conditions, leading to lower sales volume this year. Management notes it is hard to definitively label the decline as temporary, as strategies vary by operator, but it expects the impact to be short-term and views the decline as largely temporary. No major long-term impact on the gas business is expected.

Q: Are there further iodine production capacity expansion plans, and what is the remaining room for growth?

A: Management plans to continue incremental addition of wellhead iodine adsorption facilities to expand capacity gradually, as there are still undeveloped brine sources available. However, rapid large increases in brine pumping are not possible, so capacity will grow incrementally rather than through large step changes. There is room for expansion but large sudden capacity gains are not feasible.

Q: What is the growth outlook for iodine demand, particularly from perovskite solar cells?

A: Widespread global adoption of perovskite solar cells would drive very large iodine demand growth, which would be a major growth opportunity for K&O. However, perovskite is still at an early stage and not close to replacing silicon-based solar cells, so near-term demand impact from this end market is expected to be limited. Excluding perovskite, baseline iodine demand is expected to grow 2-3% annually, and K&O will scale production gradually in line with this baseline growth.

Q: Can the new hydrogen and CO2 business deliver better margins than conventional gas sales?

A: The business produces low-carbon hydrogen from natural gas, captures the resulting CO2 for sale as dry ice feedstock, which gives it advantages over other hydrogen production routes. It is lower cost than green hydrogen from renewable electrolysis, and its low-carbon profile offers ESG benefits over conventional hydrogen. Margin will depend on how much customers value the low-carbon attribute, but management sees clear room for better profitability than conventional gas sales, though no specific figures are available yet.