Earnings Call: Q4 2024

Apr 30, 2024

This is Mitsui O.S.K. Lines' fiscal year 2023 business performance and fiscal year 2024 outlook briefing. I am Takeshi Hashimoto, President of Mitsui O.S.K. Lines. Let me start with a general overview. Looking at our fiscal year 2023 results, the historical strong performance of the containerships business recorded the previous fiscal year gave way to a sharp year-on-year decline in profit due to a slump in container freight rates caused by a flood of new vessel deliveries, despite normalization of supply chains and increased liftings. However, profit before tax reached JPY 295.4 billion. We had set JPY 240 billion as our target for fiscal year 2025, the final fiscal year of phase one of our management plan, BLUE ACTION 2035, and we far exceeded the target in the first fiscal year of this phase. As a result, our balance sheet shows a strong financial position with total assets of JPY 4.1 trillion, shareholders' equity of JPY 2.3 trillion, and a shareholders' equity ratio including estimated lease obligations of JPY 0.9 trillion reaching 47%. As for progress on the investment plan under BLUE ACTION 2035, we have placed orders for LNG carriers in the energy business and are notching up M&A deals with a chemical tanker owner and wind farm maintenance provider and have built up investments of JPY 1.1 trillion against the investment plan of JPY 1.2 trillion by the end of fiscal year 2025. In addition, as part of our regional strategy, we signed an agreement on an FSRU new build with Polish operator Gaz-System, as announced in a press release last week. The action we took in fiscal year 2023 is steadily paying off. In our forecasts for fiscal year 2024, based on the exchange rate assumption of 140 yen to the US dollars, we forecast profit before tax of JPY 245.0 billion and net income of JPY 215.0 billion. While this represents a year-on-year decline in profit, if foreign currency effects and extraordinary items in fiscal year 2023 are deducted, then profit is expected to be mostly unchanged from fiscal year 2023. Meanwhile, business profit, which demonstrates the performance of our business, calculated as operating profit plus equity in earnings of affiliates, is expected to increase by JPY 41.0 billion year-on-year, which indicates our business is growing steadily. As for dividends, in accordance with our policy of maintaining a dividend payout ratio of 30%, we will pay a full-year dividend of JPY 220 per share for fiscal year 2023. This represents an increase of JPY 20. Our full-year dividend forecast for fiscal year 2024 is JPY 180. I will now hand over to CFO Kazuya Hamazaki to give further details of financial results in fiscal year 2023 and forecasts for fiscal year 2024. I am Kazuya Hamazaki, CFO of Mitsui O.S.K. Lines. I'll explain the outline of fiscal year 2023 financial results. Revenue increased 1% year-on-year to JPY 1,627.9 billion. Strong market conditions in the energy and car carrier markets, plus the effect of a weaker yen during the period led to higher revenue. Business profit, which is operating profit plus equity in earnings of affiliated companies, came to JPY 195.0 billion, and ordinary profit reached JPY 258.9 billion. As a result, profit before tax was JPY 295.4 billion, exceeding the forecast at the end of January. Net income also amounted to JPY 261.6 billion. I will now explain the financial results by segment. Dry bulk business. The dry bulk business posted ordinary profit of JPY 37.2 billion, a decrease of JPY 20.4 billion from the previous year, despite the contribution of reversal of an allowance for doubtful accounts recorded in the past. The profitability of Capesize bulkers, which are used mainly to transport iron ore, was propped up by profit from long-term charters. During the first half, market rates continued to lack buoyancy due to the global economic uncertainty that has persisted since the previous fiscal year and pessimism on China's economy. In the second half, tighter vessel supply and demand caused by the Panama Canal drought and the rerouting of ships to avoid the Suez Canal and firmer-than-anticipated Brazilian iron ore shipments led to stronger market conditions. However, market rates remained below the level a year earlier, resulting in profit decline. The small and medium-sized bulkers operated by MOL Drybulk were less profitable, reflecting exposure to market volatility and losses incurred in some short-term chartering. The profitability of wood chip carriers and multipurpose vessels, which transport mainly steel materials and palm kernel shells used as biomass fuel, was propped up by long-term charters, but fell year-on-year. Meanwhile, market rates for open-hatch bulkers operated by Gearbulk, an equity method affiliate, deteriorated in the absence of cargo inflow from containerships, resulting in a year-on-year decline in profit. Energy business. The energy business posted ordinary profit of JPY 66.9 billion, rising JPY 27.3 billion year-on-year. Results in almost all sub-segments exceeded expectations, pushing up our business results. Tankers and offshore business. In the tankers business, very large crude oil carriers or VLCCs, product tankers, and chemical tankers all benefited from strong market rates, reflecting tighter vessel demand due to the shift in trade patterns resulting from sanctions against Russia and the rerouting of vessels to avoid the Suez Canal. The tankers business posted a sharp increase in profit year-on-year. In the offshore business, the FPSO business reported higher profit due to the new projects that became operational during the fiscal year, in addition to existing long-term charter contracts. Liquefied gas business. LNG carriers achieved year-on-year profit growth due to the commencement of new charters contracts, in addition to existing long-term charter contracts. However, the FSRU business reported a decrease in profit due to one-off expenses associated with a change in deployment. The LNG-to-power ship business secured stable profit. Product transport business. The product transport business posted ordinary profit of JPY 125.5 billion, down by JPY 578.0 billion from the previous year, due to JPY 51.5 billion in profit in the containerships business and a sharp drop in equity and earnings of affiliated companies attributable to ONE in the containerships business, which offset higher profit in the car carrier business. Containerships. For details of the containerships business shown on ONE's magenta-colored materials. During the first three quarters of 2023, spot freight rates continued to stagnate due to slow growth in shipments and supply pressure stemming from new vessel deliveries. During the fourth quarter, a rise in the level of freight rates was seen amid uncertainty surrounding the Middle East situation. However, ONE posted a profit before tax of $974 million, representing a drop of $14,024 million from the previous year. MOL converted its 31% share of these earnings into JPY based on the exchange rate at the end of March and integrated this amount into segment profit as equity in earnings of affiliated companies. Car carriers. The car carrier business benefited from strong market rates, reflecting tighter vessel supply and demand in face of strong shipping demand for completed cars, as well as firm demand for the export of electric vehicles from China to Europe. However, congestion at ports in Australia, Latin America, and elsewhere, and the Panama Canal's drought caused deterioration in the vessel operation efficiency. Furthermore, due to the rerouting of vessels to avoid the Red Sea from December, the duration of voyages increased and transportation capacity decreased. However, vessel allocation plans were reviewed accordingly, and on a full-year basis, transportation volume increased year-on-year, resulting in higher profit than a year earlier. Terminal and logistics business. Container handling volumes in the terminal business decreased due to a slowdown in cargo movements at overseas terminals, while there were firm cargo movements at domestic terminals. In the logistics business, UTOC Corporation's profit contribution was offset by weak air and sea freight rates. The terminal and logistics business reported a year-on-year decline in profit. Wellbeing and lifestyle business. The wellbeing and lifestyle business posted ordinary profit of JPY 9.0 billion, up JPY 2.3 billion year-on-year, thanks to the profit contributions of the real property business, with Daibiru as the core company and the ferries and coastal ro-ro ships business. Real property business. The real property business reported profit of JPY 8.6 billion, an increase of JPY 0.5 billion from the previous year, reflecting occupancy of newly acquired Otemon Tower and higher occupancy at other properties, despite increased interest payments as a result of Daibiru's property acquisitions and costs associated with the rebuilding of existing properties. Ferries and coastal ro-ro ships business. The ferries and coastal ro-ro ships business achieved higher profit than a year earlier, reflecting a sharp increase in passenger transportation since the entry into service of new LNG-fueled ferries, which offset a decrease in cargo transportation. Cruise business. The cruise business achieved improved profitability year-on-year due to a recovery in traveling demand following the easing of COVID-19 restrictions. Associated businesses. Associated businesses, which include the tugboat business and trading company business, achieved ordinary profit of JPY 2.9 billion, an increase of JPY 0.3 billion year-on-year. Dividend. We plan to pay a year-end dividend per share of JPY 110, which represents an increase of JPY 20 to reflect our strong performance in fiscal year 2023. Together with the interim dividend of JPY 110, this will bring the full-year dividend up to JPY 220. This concludes the summary of the financial results for fiscal year 2023. Next, I would like to explain our fiscal year 2024 full-year forecast. We forecast business profit of JPY 236.0 billion and ordinary profit of JPY 230.0 billion. Based on the above, we forecast net income of JPY 215.0 billion. Our exchange rate assumption is JPY 140 to the US dollars, and our bunker, VLSFO price assumption is $660 per metric ton. I will now explain the forecasts for each segment. Dry Bulk business. The Dry Bulk business is expected to post ordinary profit of JPY 20.0 billion, which represents a year-on-year decline of JPY 17.2 billion. This mainly reflects the absence of special factors arising from the reversal of an allowance for doubtful accounts posted the previous year. Capesize bulkers are expected to be more profitable than in the previous year due to a boost from new favorable contracts finalized in fourth quarter of fiscal year 2023 and a tendency for improvement in market rates compared with the second half of the previous year. MOL Drybulk. Small and medium-sized bulkers operated by MOL Drybulk are expected to be more profitable, with the improvement in market rates seen since fourth quarter of fiscal year 2023 expected to continue. Other bulkers. Meanwhile, open-hatch bulkers operated by Gearbulk, an equity method affiliate, are likely to be less profitable on the assumption of less inflow of cargo from containerships in response to elevated containership rates as containership rates return to normal levels. Energy business. The energy business is expected to post ordinary profit of JPY 77.0 billion, which represents a year-on-year increase due to a strong performance in the tankers and offshore business. Tankers and offshore business. In the tanker business, profits are expected to increase as the market rates of crude oil tankers, product tankers, chemical tankers, and LPG and ammonia tankers are all expected to remain firm as a result of a shift in trade patterns continued from previous year. In addition, the effect of the acquisition of Fairfield Chemical Carriers completed in the previous fiscal year is expected to make a positive contribution. In the offshore business, the FPSO business will be more profitable and generate further stable profit due to the full-year contribution of two offshore projects in Brazil in fiscal year 2023. Liquefied gas business. The LNG carrier business is expected to report higher profit year-on-year due to newly delivered carriers in addition to existing long-term charter contracts. Moreover, successive deliveries of approximately 30 new builds are planned from fiscal year 2024 through fiscal year 2028. The LNG infrastructure business is likely to be more profitable than in fiscal year 2024, thanks to progress in the FSRU business, with an FSRU beginning commercial operation in Hong Kong from fiscal year 2023 and commercial operations also beginning in Indonesia from April 2024. Product transport business. The product transport business as a whole is expected to report ordinary profit of JPY 135.0 billion, a rise of JPY 9.4 billion year-on-year. Containerships. The containerships business is expected to post ordinary profit of JPY 55.0 billion, which represents a year-on-year increase of JPY 3.5 billion. This forecast factors in continued oversupply due to a flood of new vessel deliveries, offset by the impact of Red Sea tensions, which we assume to last through to the end of September 2024. As stated in ONE's magenta-colored materials in its full-year forecast for fiscal year 2024, ONE expects continued oversupply, with new vessel deliveries reaching a peak offset by growing vessel demand driven by increased use of the Cape of Good Hope route due to the uncertain situation in the Middle East, and ONE forecasts after-tax profit of $1.0 billion. Car carriers. In the car carrier business, movements of completed cars are expected to remain firm. However, the duration of voyages is projected to increase due to the avoidance of Red Sea, and the transportation volume is likely to fall year-on-year. While many new builds will be delivered through the latter part of this fiscal year, vessel supply and demand remains tight and the car carrier business is expected to achieve year-on-year growth in profit, underpinned by long-term contracts and bolstered by more efficient vessel allocation. Terminal and logistics business. This fiscal year, with UTOC Corporation and MOL Logistics Co., Ltd. as core companies, we will leverage our overseas network to push ahead with the streamlining of the overseas business. Nippon Concept Corporation, an equity-method affiliate with which we strengthened our capital alliance last year, is an international logistics company capable of handling specialized tank containers such as chemical and high-pressure gas containers. However, we aim to further strengthen the logistics business by creating synergies between Nippon Concept Corporation and MOL, and joining forces as a group. Wellbeing & Lifestyle business. The Wellbeing & Lifestyle business as a whole is expected to post ordinary profit of JPY 6.0 billion, falling year-on-year. Real property business. Daibiru, the core company in the real property business, will see an increase in interest payments for projects such as Yaesu Daibiru Building in Tokyo, which is scheduled for completion mid-2025, a redevelopment project in Sapporo, and office buildings overseas, a decrease in rental income due to move-outs by key tenants at existing properties, and it will also incur one-off expenses. As a result, ordinary profit in the real property business is forecast at JPY 7.5 billion, falling from the previous year. Ferries and Coastal Ro-Ro Ships. The Ferries and Coastal Ro-Ro Ships business is expected to see an increase in passengers due to the entry into service of LNG-fueled ferries and to be more profitable as a result. Cruise business. In the cruise business, we hope to have 2 cruise ships in operation under the Mitsui Ocean Cruises brand name, with the entry into service of Mitsui Ocean Fuji in December this year, in addition to the Nippon Maru. This fiscal year, the Nippon Maru is also expected to see better occupancy with the recovery in passenger numbers, and we anticipate higher revenue. However, profitability is expected to deteriorate due to the incurrence of one-time preparatory expenses for the entry into service of Mitsui Ocean Fuji. Associated businesses. The tugboat business is projected to post ordinary profit of JPY 1.0 billion, down from the level a year earlier, on expectations of a decrease in service frequency. In terms of dividends, in fiscal year 2024, we are planning an interim dividend of JPY 100 and a year-end dividend of JPY 80, making the annual total dividend JPY 180. We plan to increase the dividend in line with a 30% dividend payout ratio if our performance is even better than expected, and to pay a minimum dividend of JPY 150 even if our performance is worse than forecast. This concludes my explanation of the fiscal year 2024 forecast. Next, the progress on the corporate management plan, BLUE ACTION 2035, is explained by our Chief Strategy Officer, Enomoto. I am Makoto Enomoto, Chief Strategy Officer of Mitsui O.S.K. Lines. I will explain the progress of the Mitsui O.S.K. Lines Group Management Plan, BLUE ACTION 2035, in fiscal year 2023 and the action plan for fiscal year 2024. From now, the management plan will be called BA2035. We launched a new group management plan in April 2023. This plan states the group vision as what we want to be in 2035 and sets core KPIs, combining three financial KPIs and five non-financial KPIs as milestones along the way. Going forward, we will implement BA2035 in such a way that we update action plans annually based on monitoring of progress on core KPIs. Core KPIs. In fiscal year 2023, our results for the financial KPIs all exceeded the fiscal year 2025 targets. As explained previously, profit before tax came to JPY 295.4 billion, the net gearing ratio, taking into account off-balance assets such as charter hire liabilities, was 0.9 and our ROE was 12.2%. However, we failed to achieve our safety KPI, which is a non-financial KPI, with one fatal accident. We made a good start towards achieving our human capital and DX KPI targets for the end of fiscal year 2025. We are in the middle of aggregating data for the GHG emissions intensity reduction rate, which is our environment KPI, and will report back later. Generally, I think that for the first fiscal year of BA2035, we made a good start in most areas. The targets from 2025, which is the end year of phase 1, will stay the same, and we will continue to implement our business plan. Rebalancing plan. Under BA2035, MOL aims to reform its business portfolio into one that can remain profitable even during downturns in the shipping industry and to pursue both investment for growth and a yield that meets shareholders' expectations. When expanding total assets to JPY 7.5 trillion by 2035, we plan to increase the ratio of stable revenue and non-shipping business assets. In fiscal year 2023, we diverted cash generated from market-driven businesses to the LNG carrier and real property businesses, thereby steadily increasing the ratio of stable revenue and non-shipping business assets. Phase 1, investment progress. We set out a plan to invest JPY 1.2 trillion over the three-year period from 2023 to 2025, which corresponds to phase 1. While striking a balance between market-driven business and stable revenue business, we have so far made decisions to invest more than JPY 1.1 trillion as investments necessary to achieve our ROA of 5.3% by 2035. This includes decisions on approximately JPY 660.0 billion in environmental investment that will help reduce our GHG emissions and GHG emissions globally. Details of investment decisions made in fiscal year 2023 are shown on the right side of the table. Phase 1, cash allocation. Taking into consideration our performance in fiscal year 2023 and the special dividend planned by ONE, total cash flow from operating activities produced over the three-year period is expected to be approximately JPY 150.0 billion more than initially planned. This will give us additional surplus capacity for investment of JPY 140.0 billion. We will use this additional surplus capacity for investment flexibly, and we will be ready for opportunities such as used vessels and large M&A deals. Phase 1, shareholder return policy. There is no change to our shareholder return policy, which is to promote active investments with accumulated profits, which will lead to profit expansion and corporate value increase. For phase I, we have set a target dividend payout ratio of 30% and a minimum guaranteed dividend of JPY 150 per share to prevent underpayments, even if the shipping market rates are low, and we will aim to pay stable dividends. As a result, we plan to pay a dividend of JPY 180 in fiscal year 2024. Fiscal year 2024 action plans. Finally, I would like to go over the key points of our fiscal year 2024 action plans. In the Dry Bulk business, we aim to win business that is being newly created, mainly in the steel supply chain, such as the transportation of direct reduced iron. In the Energy business, we will accelerate the development of ammonia, hydrogen, and carbon dioxide-related business through our new business unit specializing in carbon solutions established on April 1st. We will also focus on post-merger integration with Fairfield Chemical Carriers and Hokutaku, which were made into subsidiaries last fiscal year, working on the early creation of synergies. In the Product Transport business, we will implement M&A deals overseas in the logistics business and also support as a shareholder the implementation of ONE’s medium-term management plan announced last month in the Containership's business. In the Wellbeing & Lifestyle business, we will prepare for the entry into service of Mitsui Ocean Fuji in December this year. Under our regional strategy, we have been strengthening organizations in earnest since 2023. Business development led by regional organizations is already underway, and we are also building up an investment track record, including expansion of our fleet in India and the FSRU new build in Poland, announced this month. In 2024, we will further accelerate new business development, focusing on M&A and non-shipping business. We have been implementing company-wide initiatives to address sustainability issues to become the group we aim to be under our environmental vision, safety vision, human capital vision, and DX vision formulated in 2022 and 2023. On the governance front, we will use the advisory board established under the leadership of the President and seek to strengthen our strategizing and risk management capabilities. In addition, we will increase the board of directors' involvement in sustainability strategy by introducing sustainability discussions at meetings of the board of directors. This concludes my fiscal year 2023 progress report and explanation of fiscal year 2024 action plans for BLUE ACTION 2035.