Earnings Call: Q2 2021

Nov 5, 2020

A, financial highlights for Q2 fiscal year 2020. A1, financial results for Q2 fiscal year 2020. For the Q2 of the fiscal year ending March 2021, consolidated operating revenues were 147,900,000,000 yen Operating loss was 3,600,000,000 yen Ordinary income was 11,000,000,000 yen and net income attributable to owners of parent was 10,600,000,000 yen For the first half of this fiscal year, consolidated operating revenues totaled 300,100,000,000 yen a decline of about 20% year on year due to the novel coronavirus COVID-nineteen impact. Operating loss totaled JPY 10,200,000,000. Ordinary income totaled 10,000,000,000 yen and net income attributable to owners of parent was 9,600,000,000 yen a year on year decline of 6,700,000,000 yen The ordinary income result of 10,000,000,000 yen exceeded the revised forecast disclosed on September 24 by 2,000,000,000 yen. The average exchange rate was 105.90 yen per U. S. Dollar and the average bunker price was US331 dollars per metric ton. In terms of financial indicators, as of September 30, 2020, our equity capital was 106,700,000,000 yen an increase of 5,600,000,000 yen compared with the end of the previous fiscal year. Interest bearing liability was 578,000,000 yen an increase of 34,500,000,000 yen Cash and cash equivalents at the end of the 2nd quarter totaled 150,800,000,000 yen equal to more than 3 months of operating revenues. Net DER was 3 98%. Our equity ratio improved 1 point over the end of the previous fiscal year to 12%, and it was about 16% when including the equity credit assigned by a rating agency to our subordinated loans. A2, financial results for Q2 fiscal year 2020 by segment. In the dry bulk segment, Capesize market conditions began to recover in the 2nd quarter after a significant Q1 decline due to COVID-nineteen. The recovery was driven by higher steel products demand in China and iron ore shipments from Brazil. Market conditions for Panamax and smaller sized vessels also began to recover due to China's purchase of soybeans and other agricultural products from the United States as well as an upturn in iron ore shipments from India. However, the drybulk segment as a whole posted lower second quarter revenues and profitability compared with the previous fiscal year, with an ordinary loss of 4,900,000,000 yen The results reflected the steep first quarter decline, partly because of the voyage completion method for accounting. In the Energy Resource Transport segment, tanker and LNG carrier businesses performed well as a result of stable medium to long term contracts. Offshore Support Vessels business market conditions deteriorated year on year due to the slump in crude oil prices. As a result, the overall Energy Resource Transport segment posted ordinary profit of 1,800,000,000 yen as both revenue and profit declined year on year. In the Product Logistics segment, car carrier business suffered a major impact from COVID-nineteen with 1st quarter shipment volume declining by about 50% year on year. Market conditions recovered somewhat in the Q2 after global car sale volume bottomed out and began to rebound gradually, and factories temporarily closed or shut down in various countries began to reopen for production. Shipment volume in the Q2 declined about 30% year on year, and the business posted a loss for the Q2. In containership business, ONE, Equity Method Affiliate posted a year on year increase in profit. Although containership cargo movements declined due to COVID-nineteen, the company responded flexibly to fluctuating demand by adjusting vessel allocation and implemented void sailings as necessary. At the same time, O and E benefited from firm freight rate market conditions and lower bunker fuel prices, while also making progress reorganizing its cargo portfolio. In logistics business, although transport volume declined overall, buyers consolidation business, which counts e commerce companies as its main customers, formed well as a result of growth in e commerce and growing stay at home demand. Short sea and coastal business, including ferry services, also suffered a major impact from COVID-nineteen as people limited their travel. Overall, the Product Logistics segment recorded a year on year decline in operating revenue, but ordinary income of 15,700,000,000 yen as the strength of containership business offset the declines in Car Carrier and Short Sea and Coastal businesses. B, forecasts and initiatives for fiscal year 2020. B1, forecasts for fiscal year 2020 and key factors. Regarding the full year outlook, we forecast operating revenues of 590,000,000,000 yen representing a 20% year on year decline, which is on par with the first half decline. Operating loss is forecast at 25,000,000,000 yen We project to breakeven on an ordinary basis, while net income attributable to owners of parents is forecast at 20,000,000 yen In the second half, we project a gradual recovery from the significant first half downturn caused by the spread of COVID-nineteen. Overall, however, the situation is still unpredictable and the market will continue to feel some level of impact from COVID-nineteen as infection increase in the United States and Europe begins to suffer a second wave. We forecast to breakeven on an ordinary basis. Net income attributable to owners of parent is forecast at 20,000,000,000 yen as a result of the sales of the overseas terminal business and other assets. Our assumptions for average exchange rate are $105 per U. S. Dollar for the second half and $105.98 per U. S. Dollar for the full year and an average annual bunker price of US362 dollars per metric tonne. We sincerely regret that we have decided not to pay interim dividend. Our decision is based on a comprehensive analysis of our current period results, future business trends, investments to ensure future growth and the need to improve our financial strength. The year end dividend remains to be determined at this time. And at a future date, we will make an announcement based on a comprehensive analysis of the business outlook and our financial strength. We would like to offer our sincere apologies to our shareholders and restate our commitment to improving our results and strengthening our finances. B2, forecast for fiscal year 2020 by segment. Looking at the dry bulk segment, in the Q2, global crude steel production declined nearly 9% year on year. In the July to September period, however, we can see that economic stimulus programs in countries around the world, infrastructure development in various countries, primarily China and global car sales rebounded on quarter on quarter basis. Besides crude steel production by Japanese steel mills in the April to June period, slumped about 30% year on year before recovering somewhat to an approximately 20% year on year decline in the July to September period. It is important to note that a second wave of COVID-nineteen infections has begun, mainly in Europe, and a full scale recovery will take more time. Although we forecast that the dry bulk segment will rebound to profitability for the second half, the recovery will not be enough to offset the significant loss in the first half. As a result, we forecast a full year ordinary loss of 7,000,000,000 yen for the segment, which would represent a year on year deterioration of 11,100,000,000 yen In the Energy Resource Transport segment, tanker LNG carrier businesses are forecast to perform stably as a result of medium to long term contracts. Regarding offshore support vessel business, we are cutting costs and taking other measures to improve profitability amid the ongoing decline in crude oil prices. Regarding drillships business, we forecast a temporary deterioration in profitability due to the crude oil price slump as well as COVID-nineteen. For the entire Energy Resource Transport segment, we forecast ordinary income of 500,000,000 yen a year on year decline of 9,400,000,000 yen and 3,500,000,000 yen lower than the previous forecast. In the product logistics segment, regarding car carrier business, global car sales in the April to June period declined 30% year on year. Our total units carried during the same period declined 50% year on year. For the July to September period, China car sales rose year on year, while car sales in the United States recovered to a 10% decline. We forecast our total units carried to decline 10% year on year for the second half. We will continue to adjust services tentatively and dispose of uneconomical and aged vessels in order to further reduce costs. Regarding logistics business, despite a gradual recovery in cargo volumes, both domestically and internationally, we expect a full scale recovery to take more time. In containership business, there are still uncertainties in the outlook for cargo movements, including U. S. Consumption trends as well as market conditions. ONE plans to continue its profitability improvement measures, such as flexibly allocating vessels and implementing void sailings as needed by carefully monitoring consumption trends and cargo movement demand, particularly in Europe and the United States. Overall, the Product Logistics segment is forecast to post a full year ordinary income of 11,500,000,000 yen a 14,500,000,000 yen year on year increase. D3 forecasts for fiscal year 2020 by segment. In comparison with the previous fiscal year's results, our forecast for the current fiscal year represents deterioration of 11,100,000,000 yen in the dry bulk segment, 9,400,000,000 yen in the Energy Resource Transport segment and 12,000,000,000 yen in the Product Logistics segment, excluding Container Shifts business, for a total year on year deterioration of 32,500,000,000 yen We estimate the impact of COVID-nineteen to be approximately 30,000,000 yen which includes a temporary decline in demand, market conditions deterioration and such direct expenses as the cost of vessel deviation to accommodate crew changeovers and port stay related costs associated with PCR testing and other measures. As we enter the second half, profitability is improving for the dry bulk segment with Car Carrier and other businesses. Excluding some temporary factors in the Energy Resource Transport segment, our core businesses continue on a recovery path. Regarding O and E, the company posted a strong year on year improvement in profitability, driven by flexible vessel deployment in response to cargo movements, firm freight rate market conditions and lower bunker fuel costs. ONE's strong profitability helped to offset the losses in Kline's own businesses. Regarding containership business, ONE is now in its 3rd year of business, and there are two key points to consider concerning its development. First, ONE's organization is performing well in its 3rd year. It has become an organizational structure that can successfully leverage the best practices of the 3 parent companies. And overall, O and E is now operating at cruising speed. This is the biggest point. 2nd, the container ship industry on a whole has evolved through reorganization and consolidations. As a result, the business environment has changed. The number of major shipping companies on east to west routes has decreased. And currently there are 3 major alliances after integration. Then COVID-nineteen emerged, and it seems that the pandemic has in effect triggered the benefits expected under the industry reorganization. At the start of 2020, as the cargo movement appeared to begin declining significantly, the container ship companies were prepared for this change. The alliances reacted by flexibly implementing void sailing without any decline in service quality. The alliance, to which O and E belongs, operates 16 weekly sailings on Asia to North American routes. So the reduction of one sailing reduced space by only 6%. While maintaining service quality, the alliances reduced services rapidly to ready to cargo demand deterioration. In actuality, demand did not decline as much as expected. As a result of this and the flexible adjustments, market conditions did not decline with the demand drop as they would have in past business environments. The recent environment has finally allowed us to witness the materialization of certain benefits of ONE's organizational development and the general consolidation and reorganization of the industry. In previous comments, it was noted that the total impact of COVID-nineteen is forecast at approximately JPY 30,000,000,000 Of this amount, about JPY 2,400,000,000 consists of the direct costs for vessel deviation to accommodate crew changes due to lockdowns as well as port stay period to ensure safety. B4, progress and initiatives for fiscal year 2020. Despite the gradual recovery from COVID-nineteen, as we indicated in our business plan announced with the Q1 results, we are actively taking measures to adapt to an environment where COVID-nineteen is the new norm. In addition to the immediate damage control measures, we are actively optimizing our fleet, especially through the redelivery of chartered vessels and the disposal of aged and uneconomical vessels. We are generally on track with the plan to redeliver and dispose of more than 20 vessels this year, mainly in the dry bulk segment and car carrier business. Additionally, in terms of liquidity on hand, we have secured cash on hand equivalent to 3 months of operating revenues. To increase shareholders' equity, we are progressing with the transfer of our outstanding shares of overseas container terminals on the North America as planned. We are also building a stable income business through firm targets for medium to long term contracts, including LNG carriers and other energy related businesses. Overall, we are making steady progress achieving each of the key measures of our business plan. B5, progress in coping with COVID-nineteen. The spread of COVID-nineteen remains unpredictable. We must carefully monitor the changing situation, especially considering the new wave of infections in the United States and Europe. In the face of these challenges, our marine and onshore divisions will work together to ensure that we continue to support the global logistics infrastructure. At Sea, we are strengthening our infection monitoring and preventative measures on board. As lockdowns continue, there are still obstacles to crew changes. We have approximately 4,300 crew members on boarding 194 vessels under in house shipment management at all times. At its peak, there were more than 1100 crew onboard such vessels for more than 10 months. That number has dropped to under 700 and is now in the 600 range. In our offices on land, we are ensuring safe environment by installing droplet infection prevention panels and making flexible use of telecommuting and flex time.