Earnings Call: Q4 2021

May 10, 2021

Financial highlights brief report for fiscal year 2020 A, financial highlights for fiscal year 2020 A1, financial results for fiscal year 2020. Our results report for this fiscal year reflects both positive and negative effects of the novel coronavirus here and after COVID-nineteen pandemic. The negative impact came from temporary declines in demand in the dry bulk, car carrier and other businesses. On the other hand, the container ships business showed a more variegated pattern due to some positive effects from stay at home demand as well as changes in consumer behavior caused mainly by working from home. Ultimately, the container ships business was the main driver of our profitability in this fiscal year. Consolidated operating revenues were JPY 625,500,000,000 down JPY 109,800,000,000 from the year before. Operating results were a loss of JPY 21,300,000,000, 28,100,000,000 yen worse than the year before. Ordinary income was 89,500,000,000 yen 82,100,000,000 yen improvement. Net income was JPY 108,700,000,000, an improvement of JPY 103,400,000,000. The average exchange rate for the fiscal year was JPY 105 point 79 yen per U. S. Dollar and the average bunker price was US363 dollars per metric tonne. In terms of key financial indicators, as of March 31, 2021, our equity capital was JPY218,200,000,000 at the end of the fiscal year, double the year earlier level. Interest bearing liability was JPY507,000,000,000, a reduction of JPY 36,500,000,000. Our cash and cash equivalents at the end of the period were JPY 130 0.0000000000, equivalent to 3 months business turnover. Our net DER was 172%, an improvement of 252 points. Our equity ratio was 22%, an improvement of 11 points from the end of the previous fiscal year. Regarding the year end dividend, we seek your understanding for our decision not to pay a dividend as part of our ongoing efforts to enhance our financial base. A2, financial results for fiscal year 2020 by segment. In the dry bulk segment, at the beginning of the fiscal year, Capesize vessels suffered a great negative impact from low levels of economic activity due to the COVID-nineteen pandemic. In Japan, the first half of the fiscal year was very harsh as steel mills cut blast furnace operation 30%, reducing cargo volume, while the market condition also worsened. In the second half of the year, however, market conditions gradually recovered as crude steel production in China rebounded among other factors. For Panamax and smaller sized vessels, as the same as Capesize vessels, the spread of the COVID-nineteen pandemic in the later first half of the year had a big impact as it caused a sharp slowdown in cargo movements globally. Later toward the second half of the year, market conditions recovered gradually due to higher demand for shipments of grain to China from North and South America and demand for coal due to cold weather in China among other factors. Both revenues and income dropped however because of the severity of the negative impact, particularly in the first half of the year and we showed an ordinary loss of 9,100,000,000 yen In the Energy Resource Transport segment, results deteriorated in offshore support vessel business due to poor market conditions. Prices for crude oil were lower in the first half of the year and demand and market conditions slumped in the second half of the year. We recorded a loss in drill ship business based on expectations of market conditions after the expiration of current contracts. While overall both revenues and income declined, we still showed an ordinary income of 1,100,000,000 yen In the product logistics segment, car carrier business suffered a severe negative impact in the first half of the year comparable to dry bulk business. Demand for automobile car sales slumped globally with demand for transport falling 40% in the first half of the year. The second half of the year was marked by recovery to a year on year decline of 10%. We suspended operations of some vessels and we diligently conducted temporary adjustments to our services, but we still recorded an ordinary loss because the overall drop in revenues and income in the first half was so severe. Ocean Network Express, ONE, financial results for fiscal year 2020 full year. At ONE, there were ways in which the COVID-nineteen pandemic actually had positive effects. As the pandemic began to exert negative effects on economic activity in the first half of last year, demand for transportation fact. After that, however, people began working from home and consumer behavior changed, spurring stay at home demand. As governments around the world shifted to fiscal stimulus paying out benefits, consumers increased their spending on goods rather than experiences, example. This sharply increased demand for transportation in the second half of the year. Particularly since last fall, cargo movements from Asia to North America have been up 30% year on year, a significant increase and cargo movements from Asia to Europe have been up over 10%. At the same time with supply chains in turmoil, the COVID-nineteen pandemic caused labor shortages. Marine transport is just one element of multimodal container transportation. After transport by sea, cargo is transferred to a port terminal connecting by rail to inland modes of transport and then it is transferred to trucks for delivery to customer warehouses. With the impact of the pandemic, labor shortages plagued every point of transfer, resulting in confusion and delays. In the end, there were shortages of both space and containers, resulting in brief spikes in freight rate market conditions. As a result, ONE's after tax profit roughly doubled to CAD515 1,000,000 in Q2 fiscal year 2020, CAD544 1,000,000 in Q3 and CAD1858 1,000,000 in Q4. Financial highlights brief report for fiscal year 2020. A, financial highlights for fiscal year 2020. A2, financial results for fiscal year 2020 by segment. In our product logistics segment, demand for transportation was low for a time, but after that cargo movements became robust once again, driven mainly by e commerce and full year results surpassed the previous year. In short sea and coastal businesses, the impact of the COVID-nineteen pandemic significantly limited demand for passenger transportation causing profitability to deteriorate particularly for ferry business. B, forecasts and initiatives for fiscal year 2021. B, 1, forecasts for fiscal year 2021 and key factors. Regarding our forecasts for the current fiscal year, we think the current situation does not allow us to relax our card due to the emergence of new variants of the COVID-nineteen virus will rekindle the pandemic among our eventualities. At the same time, we recognize that vaccinations are becoming more widespread, especially in Europe and North America. And we believe global economic activity will gradually recover. Our full year operating revenues forecast is JPY 570,000,000,000. In operating results, our projection is breakeven, an improvement of JPY 21,300,000,000. We estimate ordinary income will be 45,000,000,000 yen. We think net income will be 35,000,000,000 yen, reflecting a certain level of structural reform costs for unprofitable vessels and businesses. We estimate the exchange rate will average yen105.81 per U. S. Dollar and the bunker price will average US431 dollars per metric tonne. Our forecast for this fiscal year reflects our expectation that all of our 4 pillar businesses with the addition of the Energy Resource Transport and Product Logistics segments will show profit as dry bulk and car carrier businesses, which have been recovering since the second half of last year will return to profit. At this time, our expectations regarding dividends remain undetermined. In capital policies, we plan to invest as necessary in future growth strategies aiming for carbon neutrality. At the same time, we will continue to strengthen our financial base so that we may restore dividend payments as soon as possible. As part of the ongoing reorganization of our business portfolio, we recently announced the sale of Century Distribution Systems Incorporated, CDS. As we focus on low carbon and 0 carbon businesses, as recently announced, we are working with Kawasaki Kinkai Kisen Kaisha Limited to start a joint venture specialized in vessels to service offshore wind power generation facilities. In addition, as we advance towards carbon neutrality, we are considering structural reforms of unprofitable vessels and businesses to transform our business areas, as well as radical new measures. Accordingly, a certain amount related to such plans has been included in our forecast for next income loss of the current fiscal year. B2, forecasts for fiscal year 2021 by segment. In dry bulk business, we expect to see gradual economic recovery, thanks to fiscal stimulus measures and other forms of economic support in various countries and efforts to rein in the spread of the pandemic. At the same time, delivery of new vessels will remain limited and environmental regulations will become more stringent. We think more ships will be scrapped, but that demand supply balances will be basically tightened. However, China has announced it will make adjustments to production volume of crude steel, a development we will need to monitor closely. Our forecast is based on expectations that marketing additions will soften in the Q4 as demand is typically slack due to seasonal factors. Still, we think ordinary income will show an JPY18.6 billion year on year improvement to JPY9.5 billion. In the Energy Resource Transport segment, we think the temporary losses in the drillship business will be eliminated, while profitability should improve in thermal coal carrier and other businesses. Medium to long term contracts should help stabilize our income. We think ordinary income in this segment will be JPY 4,000,000,000, a year on year improvement of JPY 3,000,000,000. In the product logistics segment, car carrier businesses was depressed last year due to the low number of cars sold, but this year we expect the number to improve about 10% year on year. On the other hand, the shortage of semiconductors is a cause for concern, but our earnings projections factor in our expectation that the impact of this will be eliminated in the course of the year. We hope to return to a sound footing of profitability this fiscal year as a result of our long standing efforts to rationalize our route network, optimize the scale of our fleet and restore freight rates. In our logistics business, the impact of the COVID-nineteen pandemic is likely to linger over ferry business to some extent. But in the main, we hope to restore profitability equal to last year as demand recovers from pandemic lows. In containerships business, we expect ordinary earnings to worsen by JPY 70,800,000,000 from last year. Business at O and E quieted down as vaccinations became more widespread, particularly in Europe and North America. Renewed attention to the pandemic appeared warranted. However, as newer variants of COVID-nineteen emerged primarily in Asia, for this reason, ONE are not publishing a full year forecast at this time. Basically, however, we have created a forecast using ONE's own estimates. We think earnings in the container ships business as a whole will decline by JPY 70,800,000,000 year on year. As a result, we think the Product Logistics segment will post ordinary income of JPY 40,000,000,000, a JPY 64,600,000,000 year on year decrease. B3, key factors of improvement in fiscal year 2021 compared to fiscal year 2020. We expect both cargo movement and market conditions to recover generating improvement of 16,600,000,000 yen. This will manifest itself as recovery from the impact of COVID-nineteen and profitability improvement for our 4 pillar businesses. We hope to realize 9,700,000,000 yen in improvements through greater efficiency of vessels operations, rationalization of routes and optimization of our fleet scale. Based on the success of initiatives we announced in our management plan last year, this too will express itself mainly in the earnings of our 4 pillar businesses, where we expect profitability to improve by over JPY26,000,000,000 totally. Management plan in fiscal year 2021, rolling planning. Theme for management plan in fiscal year 2021. When the COVID-nineteen pandemic began to spread 1 year ago, we truly could not see the light at the end of the tunnel. Over the past year, we have been reminded of the important social mission we have as a link in the supply chain. We must further strengthen our ability to fulfill this mission by connecting the world via oceans and technology. Over the past year, our focus has been on damage control to keep the impact of the COVID-nineteen pandemic to a minimum. Marine transportation is an important element of the infrastructure that supports people's lives. This is an important infrastructure for raw materials, energy resources, motor vehicles and consumer goods. Our company has been committed to ensuring that this transportation is not interrupted. The vital nature of this infrastructure remains unchanged. But as a practical matter, transportation demand has fluctuated wildly, albeit temporarily causing volatility in market situations. Our company has had to cope with these fluctuations by taking on a suitable level of risk and investing as appropriate. We have elevated our risk return management capabilities to a higher level, but we must make enhanced efforts in that direction. Our customers are leaders in infrastructure and we must provide them with reliable services and earn stable returns. To that end, we will continue our efforts to optimize our fleet scale. We will think of technology as something that is indispensable to the improvement of our services, embracing both hardware and software. We research and implement a variety of technologies to realize a sustainable society and to lessen the burdens on the environment. We are also using DX to optimize vessel operations and improve convenience for our customers. This is an area where we must be steadfast in our efforts. Management plan review in fiscal year 2020, aiming for sustained improvement in corporate value, progress of management plan in fiscal year 2020. Looking back at fiscal year 2020, we had decided to reduce the size of our core fleet by 50 vessels by 2025, mainly cutting dry bulk carriers and car carriers as a means of optimizing our fleet scale, changing to a leaner fleet so as to not carry excess exposure. In fiscal year 2020, we carried out half of that plan, cutting 25 vessels from the fleet. Looking ahead, we recognize we must not merely reduce the numbers of ships, but we must transform our fleet into one that is more competitive in terms of its cost and environmental burdens. We are making steady progress in our efforts to introduce LNG fueled car carrier and enter into the LNG bunkering business to enhance safety, quality and environmental friendliness. We are working to keep cash on hand equivalent to more than 3 months business turnover to ensure liquidity in our operation. Regarding equity capital, we recognize the improvement of profitability at ONE. In addition, we completed the sale of our terminal business on the North American West Coast. We increased equity capital to the 210,000,000,000 yen level, far surpassing our goal of 150,000,000,000 yen well ahead of our target date of the mid-twenty 20. We will continue our efforts to strengthen our financial base. Management plan in fiscal year 2021, business strategy. Forwarding to growth in corporate value, compatibility with sustainable society. By refining our 4 pillar businesses into solidly competitive enterprises and with our customer base of important infrastructure companies, we expect to be able to recover our stable income of over 10,000,000,000 yen this fiscal year. We see bringing this to the 20,000,000,000 yen level as a matter of pressing importance. That is why we are engaging in the fleet scale optimization and converting to a more competitive fleet as discussed above. Regarding our efforts to enter new business areas, for example, small scale LNG transport in the Asia region or LNG bunkering vessels and similar adjacent businesses, These will contribute to efforts to low carbonization and 0 carbonization. We are also working with Kawasaki Kinkai Kisen Kaisha Limited to start a business specialized in vessels to support offshore wind power generation facilities. In the future, we plan to start doing business in transportation of new forms of energy such as ammonia, hydrogen and CO2, though the timing of that initiative has not yet been determined. In addition, we are implementing a variety of technologies and strengthening our use of DX further to enhance our own quality and service and lessen the burdens we impose on the environment. Regarding the acceleration of business development abroad, particularly in Asia, our aim is to increase our business presence in growth markets, not just in the mature market of Japan. We have already built a large base of partnerships through container ships business and we intend to work together with those partners to further strengthen our 4 pillar businesses. As part of our efforts to achieve further competitiveness in container ships business, we made great progress last fiscal year improving profitability at ONE. Going forward, we will be closely monitoring the situation to determine how much resulted from special demand related to the pandemic, how much from industry reorganization and what are the true strengths of ONE. At this time, as the shareholder, we recognize that the synergy effects and the benefits of steady implementation of best practices envisioned at the time of its establishment are emerging and intend to continue our solid support, including its personnel for O and E to enhance the value of the enterprise. Management plan in fiscal year 2021, business strategy. Accelerating business development abroad, particularly in Asia. We have already said that the importance of marine transportation as a form of infrastructure, the important mission remains unchanged. At the same time, we must acknowledge that things are changing in a big way in terms of energy policy and environmental action. Also regarding automobiles, the transition to EVs may be advancing and accelerating. We must give careful thought to where they will be produced with taking into consideration Japan, China, North America, Europe and Southeast Asia and how our car carrier business will handle this change. And we must make our businesses stronger while meeting the changes in our customers' needs. Initiatives for decarbonization and sustainability management, environment related investment. We plan to invest a total of about 100,000,000 yen in initiatives aimed at low carbonization and 0 carbonization. We will invest in developing environmental technologies such as SOX scrubbers, ballast water treatment systems, onboard equipment as in automated kite system utilizing natural wind energy, new businesses that promote low carbonization and vessels powered by LNG, LPG and other alternative fuels. We are also considering implementing internal carbon pricing, ICP as a new form of indicator for the evaluation of investments. Business plan, medium and long term targets. As medium to long term targets, we aim to increase ordinary income to JPY30,000,000,000 by mid-2020s and to JPY50,000,000,000 by fiscal year 2030. We aim to increase equity capital to at least JPY 300,000,000,000 by mid-twenty 20 and to at least JPY 400,000,000 by fiscal year 2030. It is our target to increase our equity ratio to at least 30% by mid-twenty 20s and to at least 40% by fiscal year 2030 for ROE of 10% or more. Regarding the breakdown of this 30,000,000,000 yen in ordinary income, ONE is now formulating a new business plan. And while these are provisional figures, above all, we think it is important we firstly build our 4 pillar businesses into a system that can stably generate 20,000,000,000 yen. This is our current assumption regarding the level of profit. Business plan, Investment plan. Over the next 5 years, we plan to keep total investment to about JPY 250,000,000 within the scope of operating cash flow. This figure includes investments based on medium to long term contracts and replacement investments centering on businesses with stable income, making up at least 50% of the total. For the time remaining 45% growth areas, for example, building of new LNG carriers or environmental initiatives, additional expenditures for alternative fuels such as LNG and LPG, installation of other new equipment to lessen environmental burdens by contributing to low carbonization, other research and development and other equipment.