Earnings Call: Q3 2024

Jan 31, 2024

This is Mitsui O.S.K. Lines' fiscal year 2023 third quarter business performance briefing. Let me start with a general overview. Our third quarter results were business profit, which is operating profit plus equity in earnings of affiliated companies of JPY 144.6 billion, ordinary profit of JPY 197.2 billion, and net income of JPY 203.6 billion. On an ordinary profit basis, overall results exceeded expectations, with greater than anticipated deterioration in the Containerships business, offset by steady performances in other businesses. Compared with the same period a year earlier, equity in earnings of affiliated companies attributable to Ocean Network Express, or ONE in the Containerships business, fell by as much as around JPY 540.0 billion, causing the Containerships business to post a commensurately large decline in profit. However, excluding the Containerships business, our ordinary profit result was only slightly down year-on-year, mainly thanks to a strong performance in the energy business, and our profit was higher than the level a year earlier if we take extraordinary profit into consideration. I will explain our full-year forecast later, but our previous forecast for ordinary profit of JPY 220.0 billion has been raised by JPY 5.0 billion to JPY 225.0 billion with our exchange rate assumption, which was left unchanged from the level announced on October 31st last year and set at ¥140.0 to the US dollar from February. Additionally, our previous forecast for net income of JPY 220.0 billion has been raised by JPY 15.0 billion to JPY 235.0 billion. Accordingly, we have raised our previous year-end dividend forecast announced on October 31st by ¥10 to ¥90 per share, which will make the annual total dividend ¥200 per share, including the interim dividend of ¥110. As a result, we will maintain a full-year dividend payout ratio of 30% or above on an annual basis. I will now provide further details based on the financial results briefing materials. Revenue decreased by JPY 39.3 billion year-on-year to JPY 1,218.6 billion. Higher revenue in some segments, such as the energy business, was more than offset by revenue decline in the dry bulk business. Our business profit, ordinary profit, and net income were as explained earlier. I will now explain the financial results by segment. Dry bulk business. The dry bulk business posted ordinary profit of JPY 37.1 billion, a decrease of JPY 15.1 billion from the same period of the previous year. The Capesize bulker market rates trended upward, reflecting improved vessel supply and demand, especially in the Atlantic, due to recovery of bauxite shipments from West Africa with the end of the rainy season amid steady growth in iron ore shipments from Brazil. However, profit for the first nine months was down from the same period a year earlier due to the performance in the first half. Small and medium-sized bulkers like Panamax, Handymax, and smaller vessels operated by MOL Drybulk were less profitable than in the same period a year earlier, reflecting losses incurred in some short-term chartering, in addition to delays caused by the Panama Canal drought and increased costs due to diversions. Wood chip carriers also saw a decline in profit from the level a year earlier due to lackluster consumption in China, despite some signs of improvement. Meanwhile, open hatch bulkers achieved a year-on-year increase in profit due to the effect of reversal of an allowance for doubtful accounts recorded in the past in relation to Gearbulk, an equity method affiliate, despite the absence of the ripple effect of strong conditions in the Containerships business market. As a result, the dry bulk business overall posted a year-on-year profit decline but generated profit in line with the forecast. Energy business. The energy business posted ordinary profit of JPY 58.8 billion, rising by JPY 24.0 billion year-on-year. Results in almost all sub-segments exceeded expectations, pushing up our overall profit. Tankers and offshore business. VLCC market rates remained at a certain level, reflecting stable demand for U.S. exports due to the relatively low crude oil price, which offset OPEC+ oil output cuts. Market rates for product tankers and chemical tankers also remained at a high level. As a result, the tanker business posted an increase in profit year-on-year. In the offshore business, the FPSO business generated stable profit due to the effective deployment of FPSOs in projects off the coast of Brazil this fiscal year, and the full-year profit contribution of other offshore projects in Brazil following deployment last fiscal year, in addition to existing long-term charter contracts. Liquefied gas business. The LNG carrier business also generated profit on a par with the previous year through deployment under new charters. The LPG and ammonia transport business also performed strongly, bolstering profit. The FSRU business was more profitable than expected due to the start of a long-term project in Hong Kong. Product transport business. The product transport business, which includes the Containerships business, posted ordinary profit of JPY 85.2 billion, down by JPY 551.7 billion from the same period a year earlier. In the Containerships business, equity in earnings of affiliated companies attributable to ONE was less than anticipated and as a result, profit in the product transport business was also less than forecast. Starting from this fiscal year, the ferries and coastal RoRo ships business, which was previously included in the product transport business, is transferred to the newly established Wellbeing & Lifestyle Business. Year-on-year comparisons are based on results for the previous fiscal year that have been restated to reflect this change. I will now explain the performance of each sub-segment. Containerships business. The outline of financial results for the third quarter from October to December is as described in the summary. Spot freight rates remained low, reflecting continued softening of the supply-demand balance due to an increase of newly built vessels at a time when cargo movements decreased owing to the start of the slack season. In addition to slow consumption growth in face of persistent inflation, ONE posted a loss of $83 million for the third quarter, representing a sharp drop in profit from the same period last year. While spot freight rates started to rise at the beginning of December in response to geopolitical risk in the Middle East, it will take some time for the higher rates to be reflected in profit and loss, and the upturn had virtually no effect on third-quarter results. As shown in the middle of the chart in the center of the page, ONE's after-tax profit for the nine months from April to December amounted to $616 million. MOL converted its 31% share of these earnings into yen based on the exchange rate at the end of December and integrated this amount into segment profit as equity in earnings of affiliated companies. Please look at page four of the magenta-colored materials for details of changes in liftings, capacity utilization rates, and freight index. Due to these earnings at ONE, our Containerships business reported ordinary profit of JPY 30.0 billion for the first nine months. Car carrier business. Shipping demand for completed cars generally held firm in response to recovery in the automotive supply chain, and EV exports from China also remained brisk, leading to continued tightening in the vessel supply-demand balance and causing market rates to remain at a high level. Under such conditions, continued congestion at some ports in Australia and the Panama Canal's drought caused deterioration in the vessel operation efficiency. However, as forecast, profit in the car carrier business was mostly unchanged year-on-year due to the flexible revision of vessel allocation plans. 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. The logistics business was less profitable due to weak air and sea freight rates, and as a result, the terminal and logistics business posted lower profit year-on-year, but generated profit in line with the forecast. Wellbeing & Lifestyle Business. The Wellbeing & Lifestyle Business is made up of the real property business, the ferries and coastal RoRo ships business, and the cruise business. Comparisons are based on results for the previous fiscal year, which have been restated to reflect the new segmentation. The Wellbeing & Lifestyle Business posted ordinary profit of JPY 8.2 billion, which was up JPY 1.4 billion year-on-year and in line with the forecast. Real property business. Accounting for the majority of this segment's profit, the real property business turned in a stable performance, reporting ordinary profit of JPY 7.1 billion, which was mostly unchanged year-on-year. The real property business generated profit on a par with the previous year, thanks to higher occupancy at existing properties despite higher costs associated with new property acquisitions by Daibiru, the core company in the real property business. Ferries and coastal RoRo ships business. The ferries and coastal RoRo ships business achieved higher profit than in the same period a year earlier, reflecting a sharp increase in passenger transportation, largely attributable to the entry into service of new LNG-fueled ferries. 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. Overall, associated businesses generated ordinary profit of JPY 2.1 billion, which was mostly unchanged year-on-year with growth in the tugboat business, driven by the revision of service fees offset by profit decline in the trading business due to deterioration in the business environment. This concludes the summary of the financial results for the third quarter. Next, I would like to explain our fiscal year 2023 full year forecast. We have upwardly revised our full year forecast announced on October 31st, raising our business profit forecast by JPY 2.0 billion to JPY 172.0 billion, our ordinary profit forecast by JPY 5.0 billion to JPY 225.0 billion, and our net income forecast by JPY 15.0 billion to JPY 235.0 billion. We expect profit to be bolstered by extraordinary income and a review of corporate tax expense, in addition to recovery of the Containerships business and a strong performance in the energy business. We have left our exchange rate assumption unchanged at JPY 140 to the US dollar for the remaining two months of the current fiscal year. As stated for reference on page 7 of the materials, sensitivity against the full year forecast on an ordinary income basis is estimated at JPY 0.5 billion to the US dollar. I will now explain the forecasts for each segment. Dry Bulk business. The Dry Bulk business is expected to post full year ordinary profit of JPY 35.0 billion, which represents a downward revision of JPY 2.0 billion from the previous forecast. I will now explain the forecasts for each sub-segment. We have upwardly revised our forecast for the Capesize bulkers due to improvement in market rates since our previous forecast, even though market rates are likely to fall in the fourth quarter, given the usual decline in shipments from Brazil that happens every year due to the rainy season. Meanwhile, market rates for small and medium-sized bulkers operated by MOL Drybulk Ltd. are expected to continue reflecting a tight vessel supply and demand situation due to the impact of the drought in the Panama Canal and the impact of risks around the Red Sea. Market rates for wood chip carriers are also likely to continue improving. However, we have revised our forecast for small and medium-sized bulkers and wood chip carriers downward, taking into consideration factors such as the impact of losses incurred in some short-term chartering. We maintained our previous forecast for open-hatch bulkers operated by Gearbulk, an equity method affiliate, despite factoring in the absence of the inflow of cargo from containerships seen during the COVID-19 pandemic. Energy business. The Energy business is expected to record ordinary profit of JPY 60.0 billion on a full year basis, which represents an upward revision of JPY 7.0 billion from the previous forecast. The ordinary profit of the Energy business is also expected to be JPY 20.5 billion higher than the level a year earlier due to the strong performance of chemical tankers, among others. I will now explain the forecasts for each sub-segment. Tankers and Offshore business. In the Tanker business on the Very Large Crude Carrier or VLCC market, continued OPEC+ output cuts remain a cause for concern. However, we expect to see an increase in alternative crude oil supplies from non-OPEC+ countries such as the U.S. and Brazil, a continued increase in ton miles due to the avoidance of Russian crude oil, and a persistently tight vessel supply and demand situation due to limited new vessel deliveries. Assuming that product tankers and chemical tankers will also continue to benefit from favorable market rates, we expect the Tanker business as a whole to outperform our previous forecast. In the Offshore business, the FPSO business is expected to generate stable profit due to the effect of continued deployment in new projects. Liquefied Gas business. In the Liquefied Gas business, both the LNG carrier business and the FSRU business are likely to outperform our previous forecasts, reflecting improvement of profit in each project in the former, and the deployment of existing vessels under new contracts in the latter. Product Transport business. We have upwardly revised our previous full year ordinary profit forecast for the Product Transport business as a whole by JPY 3.0 billion to JPY 114.0 billion because while third quarter results in the Containerships business were less than forecast, we upwardly revised our forecast for the fourth quarter in view of the recent rise in freight rates. I will now explain the forecasts for each sub-segment. Containerships business. ONE forecasts after-tax profit of $156 million in the second half and $856 million on a full year basis. While cargo movements will take time to fully recover, ONE expects to secure a certain degree of profit due to the impact of recent situation in the Middle East, despite continued pressure on rates from the supply of newly built vessels. The right side of the top section of the chart shows a comparison with the previous forecast. Due to the lackluster third quarter performance, even with recent freight rates factored in, the full year forecast for after-tax profit has only been revised upward by $5 million. Please refer to ONE's response to recent changes in the business environment later on page six of ONE's magenta-colored materials for further details. Like ONE, MOL also assumes that there is no prospect of a dramatic recovery in demand before the end of the fiscal year due to the global economic slowdown and seasonal factors. While spot freight rates have been trending up recently, future conditions are difficult to determine, and we currently concur with ONE's forecast. We upwardly revised our previous full-year forecast for our Containerships business by JPY 2.0 billion to JPY 42.0 billion, taking into consideration income other than equity in earnings, such as an increase in charter fees paid from ONE. Car carrier business. In the car carrier business, we expect the market to remain tight. With the port congestion in Australia easing, transportation volume is likely to exceed the level a year earlier. However, since recovery will be slightly more gradual than initially anticipated, we expect performance to be mostly in line with our previous forecast. Terminal and logistics business. We maintained our previous forecast for the terminal and logistics business, taking into consideration factors such as the downward trend in handling volumes, in addition to the impact of the sale of overseas terminals. Wellbeing & Lifestyle Business. The Wellbeing & Lifestyle Business is expected to post ordinary profit of JPY 9.0 billion, which is in line with our previous forecast. I will now explain the forecasts for each sub-segment. Real property business. Daibiru, which is our real property business arm, is expected to generate stable profit due to the profit contribution of new properties partially acquired last year, such as Otemachi First Square, Otemon Tower, and ENEOS Building. And the high occupancy of existing properties, despite the rebuilding of several domestic properties, in addition to Yaesu Daibiru Building in Tokyo and Midosuji Daibiru Building in Osaka. Ferries and coastal RoRo ships business. In the ferries and RoRo ships business, we anticipate temporary decline in cargo volumes due to a review of vessel allocation at MOL Sunflower Ltd., which began operations as an integrated company in the second half. However, in addition to the recovery in the passenger transportation business and firm cargo movements, the effects of entry into service of the two newly built LNG-fueled ferries, Sunflower Kurenai and Sunflower Murasaki, are still expected. Cruise business. At MOL Cruises, Limited, preparations for the entry into service of Mitsui Ocean Fuji in December this year are underway. We will incur expenses in preparation for new business expansion. However, we expect increased revenue through a recovery in passengers and aim to improve profitability. Associated businesses. In the tugboat business, further profit growth is expected due to the effect of the revision of tugboat service fees at ports in Japan, including Kobe and Ise Bay. Finally, turning to our dividend forecast, as explained earlier, we have raised our year-end dividend forecast of JPY 80 per share by JPY 10 to JPY 90, and our full-year dividend forecast, including the interim dividend of JPY 110, is now JPY 200 per share. This concludes my explanation of the fiscal year 2023 forecast.