Earnings Call: Q3 2021

Feb 3, 2021

A, financial highlights for Q3 fiscal year 2020. A1, financial results for Q3 fiscal year 2020. For the 9 months of the fiscal year ending March 2021, consolidated operating revenues were 468,700,000,000 yen Operating loss totaled 3,200,000,000 yen Ordinary income was 42,900,000,000 yen and net income attributable to owners of parents was 63,200,000,000 yen The average exchange rate during the period was USD 106.14 per U. S. Dollar and the average bunker price was USD 347 per metric tonne. Compared with the same 9 month period of the previous fiscal year, consolidated operating revenues declined US98.5 billion dollars and operating profit declined 24,800,000,000 yen Ordinary income increased 18,400,000,000 yen year on year and net income attributable to owners of parent increased JPY38,000,000,000 The ordinary income and net income results exceeded the forecast disclosed on December 28, 2020 by about JPY 3,000,000,000 Regarding the major factors affecting results, the consolidated ordinary income was boosted by higher after tax profit from equity method affiliate Ocean Network Express hereinafter ONE. Specifically, ONE's container ship business enjoyed strong cargo demand along with stable market conditions. The consolidated ordinary income reflects equity and earnings of ONE. In regard to net income attributable to owners of Parent, in addition to the profit growth from ONE, the company booked extraordinary income from the sale of its shares in International Transportation Service Inc, Hereinafter ITS, which operates terminals on the North American West Coast. In terms of key financial indicators, as of December 31, 2020, our shareholders' equity was 163,100,000,000 yen an increase of 62,000,000 yen compared with the end of fiscal year 2019. Interest bearing liability was 536,000,000,000 yen almost unchanged from the end of the previous fiscal year, with a decline of 7,500,000,000 yen Cash and cash equivalents at the end of the 3rd quarter totaled 143,700,000,000 yen an increase of 31,800,000,000 yen from the end of the previous fiscal year as we increased liquidity to respond to the novel coronavirus hereinafter COVID-nineteen pandemic among other needs. Net DER was 238%, a year on year improvement of 185 points from the end of the previous fiscal year. Our equity ratio was 17.7%, nearly 18%, and an improvement of 6 points compared with 11% at the end of the previous fiscal year. It was about 22% when including the 50% equity credit assigned by a rating agency to our subordinated loans. A2, financial results for 3rd quarter fiscal year 2020 by segment. Our ordinary income and loss for the 9 months of the fiscal year ending in March 2021 by segment show the following results. The dry bulk segment posted an ordinary loss of JPY 7,600,000,000 The Energy Resource Transport segment recorded ordinary income of JPY 4,000,000,000 the Product Logistics segment generated ordinary income of 51,900,000,000 yen and the containership business alone posted ordinary income of 51,700,000,000 yen The Product Logistics segment, excluding the containership business, had ordinary income of JPY 200,000,000 B, forecasts and initiatives for fiscal year 2020 b1, forecasts for fiscal year 2020 and key factors Regarding our forecast for the fiscal year ending March 2021 and key factors affecting results, we forecast operating revenues of 612,000,000 yen and operating loss of 21,000,000 yen ordinary income of 50,000,000 yen and net income attributable to owners of parents of 65,000,000 yen The average annual exchange rate is forecast at JPY 105.73 per U. S. Dollar, and the average bunker price is forecast at USD358 per metric tonne. Year on year, ordinary income is forecast to improve 42,600,000,000 yen and net income attributable to owners of parent is forecast to improve 59,700,000,000 yen The current ordinary income and net income forecasts are significantly higher than the forecast made at the end of the second quarter, with increases of 50,000,000 yen and JPY 45,000,000,000 respectively. Our assumptions for foreign exchange rates and explanations on key factors are shown at the bottom of the slide on Page 7. At present, we have not decided to pay year end dividends. We will make an announcement after carefully considering our full year forecast, financial condition and other factors. We appreciate the patience of our shareholders and regret we have not decided to pay it. B2, forecast for fiscal year 2020 by segment. Now we look at the full year forecast by segment. Regarding the dry bulk segment, Capesize market demand was robust at the start of the Q3 due to a rebound in crude steel production in major producing nations, driven primarily by robust steel demand in China. However, the Capesize market slumped considerably toward the end of the quarter, due mainly to lower iron ore exports from Brazil caused by poor weather and maintenance to mining equipment. Panamax and smaller sized vessel market conditions held firm in the 3rd quarter as a result of robust North American grain shipments to China and Australian coal shipments to India, Japan and South Korea. Regarding the outlook for the Q4 and beyond, seaborne cargo demand is expected to continue to rebound. It is important to note, however, that the global economy could be adversely affected by a resurgence in COVID-nineteen infection and the appearance of new strains of the virus in various countries. Additionally, other factors may emerge to prevent efficient vessel operations, including restrictions on crew changes. These and other factors could undermine the stability of the dry bulk market conditions moving forward. As a result, we are forecasting an annual ordinary loss of JPY 8,000,000,000 for the segment, which would be a year on year deterioration of JPY 12.1 1000000000 yen1.0 billion yen lower than the previous forecast. The Energy Resource Transport segment is expected to perform steadily, supported by long term chartering contracts, mainly in the LNG carrier and taker businesses. The segment is forecast to continue generating stable profit through the end of the fiscal year. Within the segment, however, offshore support vessel business is expected to continue to slump in the Q4 due to the decline in oil prices. We continue to cut costs and take other measures to improve profitability. Regarding drillship business, there is a risk of a temporary deterioration in profitability, taking into consideration the market condition forecast following the expiration of the current chartering contract in 2022. For the entire Energy Resource Transport segment, we forecast ordinary income of 1,000,000,000 yen a year on year decline of 8,900,000,000 yen and JPY 500,000,000 higher than the previous forecast. In the Product Logistics segment, shipments plunged in car carrier business, particularly at the start of the fiscal year due to the impact of COVID-nineteen, which caused a global slump in car sales and suspended factory operations in countries around the world. We have responded by suspension of vessels and reviewing some services as well as disposing of surplus vessels in order to reduce costs. Car carrier demand is currently rebounding, but the market improvement will not be enough to offset the decline in the first half of the fiscal year. For the full year, we forecast a significant year on year decline in shipment volume. In the Q4 and beyond, in addition to the disposal of surplus vessels and other measures previously completed, we will continue to optimize fleet scale and vessel deployment as shipping demands rebound. Regarding logistics business, cargo demand also plunged at the start of the fiscal year due to the spread of COVID-nineteen. Short sea and coastal businesses has experienced a decline in shipping demand for steel products, logs and others, while ferry business has also slumped. Currently, while there is concern of a resurgence in COVID-nineteen infection in and outside Japan, the stronger demand for container shipping is expected to continue for the time being. E commerce related cargo movements are robust at present, thanks to growing stay at home demand. Overall, therefore, the business remains strong and profitability is expected to remain stable. In December 2020, we completed the sale of the company's shares in ITS, which operates the terminals business on the North American West Coast, to infrastructure investment fund owned by Macquarie Group. In containership business, Equity Method Affiliate ONE posted higher profit year on year as a result of strong container shipping demand, flexible operations to meet changes in demand, and general higher freight rates. In the Q4 and near term, freight rates are expected to remain at high levels. There are, however, various unknown factors clouding the outlook, including how disruption to supply chains will be resolved in the future and how liftings will change and thus affect freight rates. O and E continues to monitor market developments and will flexibly and steadily adapt to business environment change. Overall, therefore, the Product Logistics segment is forecast to generate a full year operating income of JPY 65,000,000,000 a year on year improvement of JPY 67,900,000,000 JPY 53,500,000,000 higher than the previous forecast. B3, forecasts for fiscal year 2020 by segment. The waterfall chart on Page 9 provides an analysis of the changes to ordinary income and loss for each segment by comparing the previous fiscal year's results with the current full year forecast. Overall, in contrast to fiscal year 2019 year on year improvement of JPY 7,400,000,000 the current fiscal year's ordinary income is forecast to improve by JPY 50,000,000,000 The dry bulk segment is forecast to post ordinary loss of JPY 8,000,000,000 a deterioration of JPY 12,100,000,000 compared with fiscal year 2019 ordinary income of 4,100,000,000 yen The Energy Resource Transport segment is forecast to post ordinary income of 1,000,000,000 yen a deterioration of 8,900,000,000 yen compared with fiscal year 2019 ordinary income of 9,900,000,000 yen The Product Logistics segment, excluding containership business, is forecast to post ordinary loss of 1,000,000,000 yen a deterioration of 8,600,000,000 yen compared with fiscal year 2019 ordinary income of 7,500,000,000 yen The container ship business is forecast to post ordinary income of 66,000,000 yen compared with fiscal year 20 nineteen's ordinary loss of 10,400,000,000 yen or an improvement of 76,500,000,000 yen Overall, the total year on year improvement is forecast at 42,600,000,000 yen to reach the current forecast of 50,000,000 yen in operating income. Overall, there was a substantial decline in business in the first half of the fiscal year, with the exception of containership business. In the second half, both cargo volume and market conditions are generally recovering, and with the exception of some temporary factors dragging on profitability, our overall business is recovering. It is important to note, however, that countries around the world have enacted strict order controls, the result of which has been to force vessels to deviate from the most efficient route for ship crew change, to lengthen onboarding period and to cause higher personnel costs due to special payments to crew. Altogether, COVID-nineteen has caused direct expense of about 2,000,000,000 yen Financial results of Ocean Networks Express. Regarding O and E's business, we have explained that the company results and the contribution to our consolidated results. We would also like to take a minute to explain how O and E is tackling severe disruptions to global supply chains. 1st, in the container ship business, supply chains from one port to another are very long and complex. Shippers rent container boxes from the shipping company and load their cargo on the containers, which are then transported to the terminal at a loading port. At the loading port, the containers are loaded on the vessels and transported by sea to the discharging port. At the discharge port terminal, the containers are unloaded and picked up by cosignees. After cargo delivery, the empty containers are returned to the discharge port and finally to the next loading port. Currently, this long supply chain is being disrupted by extremely low efficiency in the cargo handling operations at ports. California has been especially hard hit by COVID-nineteen infections among port workers, and ports have suffered from lower manpower. Due to the slow cargo handling operation, vessels have remained at port longer than usual. A number of vessels are waiting outside ports of Los Angeles and Long Beach waiting to load and unload cargo. Furthermore, at discharge ports, empty containers cannot be collected due to disruptions to railway services and lack of trucks. In other cases, the container cannot be retrieved from customer sites. As a result, there are both a lack of space on vessels and a lack of containers to ship new cargo. At loading ports, there are not enough containers or not enough space on vessels. These problems have created significant inconvenience to customers. To deal with these problems, O and E has secured short term time charter vessels. These chartered vessels are collecting accumulated cargo at loading ports and transporting them to discharging ports and picking up empty containers over time. There has been a shortage of container boxes due to lower operating rates at container manufacturers. O and E placed significant orders for new containers in the second half of the fiscal year and will deliver them to markets where needed. On the customer relations side, the company has launched a self-service platform to manage the increase in the number of inquiries. As explained, ONE's role within the supply chain is limited as a shipping company. ONE is working diligently to implement effective measures to optimally circulate containers. If containers are not circulated efficiently, these supply chain problems cannot be alleviated. There have been some media reports about the issues surrounding container ship companies. We hope this explanation helps to understand the whole picture on the issue.