Earnings Call: Q1 2022

Aug 4, 2021

Financial Highlights Brief Report for Q1 fiscal year 2021. A, financial highlights for Q1 fiscal year 2021 a1 financial results for Q1 fiscal year 2021. For the Q1 of the fiscal year ending March 31, 2022, operating revenues were 174,700,000,000 yen Operating income was 2,400,000,000 yen ordinary income was 88,400,000,000 yen and net income attributable to owners of Parent was 1 100 and 2,000,000,000 yen Regarding operating income, recoveries in profitability of the cycle segment and car carrier business contributed to an improvement in performance. Ordinary income was enhanced by robust cargo demand in OME's container ship business. Additionally, Extraordinary income was posted as a result of the sale of shares in the logistics subsidiary Century Distribution Systems Inc. These results are reflected in the key financial indicators as of the end of the Q1. Equity capital was 321,400,000,000 yen DER decreased by 70 points compared to the end of the previous fiscal year to 162% and net DER also improved to 118%. This was due to the improvement in equity capital as there were no significant changes in interest bearing liability or cash and cash equivalents at the end of the period. The equity ratio was 30%. It increased about 33% when including the 50% equity credit assigned by a rating agency to our subordinated loans. B, forecasts and initiatives for fiscal year 2021 B1, forecast for fiscal year 2021 and key factors. Regarding our forecast for the fiscal year ending March 31, 2022, we forecast operating revenues of 630,000,000 yen operating income of 4,000,000,000 yen ordinary income of 275,000,000 yen and net income attributable to owners of parents of JPY 265,000,000,000. Compared to the same period of the previous fiscal year, there are improvements of 25,300,000,000 yen in operating income, JPY185,500,000,000 in ordinary income and JPY156,300,000,000 in net income. Our full year assumptions include an average exchange rate of 106.67 yen per U. S. Dollar and an average bunker price of US455 dollars per metric ton. Concerning sensitivities, impact of fluctuations. Each 1 yen fluctuation in the exchange rate will result in a 400,000,000 yen difference over the 9 months from the Q2. The change caused by a $10 fluctuation and the bunker price would be limited to around 10,000,000 yen At the current time, we are undecided on interim and year end dividend payments. B2, forecast for fiscal year 2021 by segment. In the dry bulk segment, Capesize market conditions continued to have strong demand for steel in various countries, including China. Market conditions for Panamax and smaller sized vessels are on the rise due to robust demand for grain imports in China, together with steady demand for coal as a result of factors such as the recovery of industrial activities in many countries. During the Q1, the segment's earnings were partially affected by negative factors such as COVID-nineteen. However, as future positive factors, we see the improvement in the vessel supply demand balance, the global spread of COVID-nineteen vaccinations and the continuation of financial and economic support policies in various countries. Backed by these positive factors, the seaborne trade volume of dry bulk cargo has been steady and has generally performed well despite some swings. Meanwhile, negative factors include the spread of COVID-nineteen variance and the resulting slump in logistics and longer port stay of vessels. The Chinese government's policy to restrict steel production is also a factor that needs to be monitored from the second half of the fiscal year. As a result, the dry bulk segment as a whole is forecast to post full year ordinary income of 12,500,000,000 yen a 21,600,000,000 yen year on year improvement. In the Energy Resource Transport segment, Sectors other than offshore support vessel businesses are supported by medium to long term contracts. Therefore, stable revenue is forecast. Meanwhile, market conditions in offshore support vessel business continue to be weak. We will remain committed to improving profitability through steps such as cost reductions and currency hedging. For the entire Energy Resource Transport segment, we forecast ordinary income of yen4,000,000,000 a year on year improvement of yen2,900,000,000 yen In the product logistics segment, Car carrier business has continued to recover from the impact of the spread of COVID-nineteen. Marine transportation demand has grown steadily, reducing the loss in the Q1. The recovery from the impact of COVID-nineteen is expected to accelerate from the Q2. Since the previous fiscal year, we have engaged in fleet scale optimization and route rationalization to improve vessel operation efficiency. We believe that the results of these efforts will be emerging. 1 of the immediate causes for concern is the impact of the shortage on automobile production. Another is the risk of slowdown in production at parts factories in Asia due to the spread of COVID-nineteen variance. Logistics business has been firm due to the shift of cargo to other modes of transportation such as air and land amid the tight supply demand situation for container ship transportation. This was seen in the domestic logistics and terminal business, overseas and international logistics businesses. In short sea and coastal businesses, Kawasaki Kinkai Kisan Limited, as our subsidiary, revised the forecast for ordinary income upward from 200,000,000 yen to 850,000,000 yen on July 30. This revision was made because profitability is expected to improve mainly in their short sea business. In containership business, within the product logistics segment, the robust cargo movement remains unchanged. And this is the largest factor contributing to the improvement in performance. In the Q1, cargo movements increased by 20% year on year globally and by 40% on Asia North America routes. There are no signs that this strong transportation demand will decrease from the Q2. Meanwhile, the problem of supply chain disruption continues to be addressed through initiatives such as OME utilizing empty sweeper vessels and improving operations. Unfortunately, the situation does not show any signs of significant improvement. In containership business, It is assumed that ordinary income will be 192,500,000,000 yen in the first half of the fiscal year, but less than half of it in the second half at 66,500,000,000 yen This gap in the forecast for the first half and the second half is based on two assumptions. One is that we will enter the slack season in which cargo movements slow in the second half of each fiscal year. The other is that supply chain disruption should begin to be resolved as vaccinations progress in the second half of the fiscal year. Overall, the Product Logistics segment is forecast to post ordinary income of 266,500,000,000 yen a 161,900,000,000 yen year on year increase. Kline's own businesses other than containership business are anticipated to post ordinary income of 7,500,000,000 yen B3, key factors of improvement for Kline's owned businesses in fiscal year 2021. In fiscal year 2020, Kline's own businesses other than containership business posted ordinary loss of 6,200,000,000 yen This is forecast to improve to ordinary income of JPY 24,000,000,000 at the end of the current fiscal year. The improvement is due to several factors, yen 9,800,000,000 from cargo movement recovery, yen 10,000,000,000 yen from market recovery, yen 4,200,000,000 yen from effective vessel allocation and professional division, yen 5,500,000,000 yen from fleet scale optimization and yen 700,000,000 yen from other factors. This is an indication that Kline's own businesses are overcoming the impact of the COVID-nineteen pandemic and moving toward improvement alongside the effects of efforts such as fleet scale optimization. B4, initiatives for growth in corporate value. Now we will look back on the initiatives that the company has taken to improve corporate value in the past. Firstly, the structural reform of containership business through the establishment of ONE was finally completed this fiscal year and this shows the timeline. The initiative resulted in the creation of synergies and further effects are also being enjoyed at present. Accordingly, OME's business plan, investment plan and dividend policies are currently being drawn up in the establishment of the overall capital policy. Regarding the profitability of Kline's owned businesses, as indicated earlier, we anticipate that around 24,000,000 yen will be generated this fiscal year. Although a loss was posted last fiscal year due to the impact of COVID-nineteen, we are steadily achieving the original goal of cumulating stable income here. The company's initial goals of improving equity capital and ROE over 5 to 10 years in our present management plan are expected to be achieved this fiscal year. The formulation of a growth strategy and capital policy had been intentionally postponed due to uncertainty about the future. However, it will be brought forward as a management issue focused on the enhancement of corporate value. In particular, we have begun preparations aimed at the announcement of a new management plan towards the next fiscal year incorporating growth strategy, further enhancement of financial strength and return to shareholders. B5, Major Containership Companies, CY 2020 Full Year Results Comparison. This is a comparison of the full year revenue and market capitalization of major container ship companies, including ONE and 3 competitors. O and E is shown on the far left. Company A is the world's largest container ship company based in Europe. Company B is a German container ship company around the same size as O and E. And Company C is a Taiwanese container ship company. ONE's EBIT is $3,831,000,000 and its EBIT margin is 26.6 percent. Since Asia North America routes performed well last fiscal year, container ship companies with a high proportion of business in this area had a high EBIT margin. As such, O and E and the timing of the company's E and C, each have a high percentage figure. What we would like to show here is O and E's potentiality in corporate value. The market capitalization of O and E is not stated because it is unlisted. Company A is valued at more than 5,000,000,000,000 yen and Company B, which has around the same revenue and fleet scale as O and E is valued at over 4,000,000,000,000 yen From here, O and E could be viewed to potentially have the same level of