Thank you very much for joining us today.
A-1. Financial Results for 1st Quarter and Estimates for 1st Half Fiscal 2016
Financial results of the first quarter of fiscal 2016 show operating revenues of 244.6 billion yen, operating income of –14.8 billion yen, ordinary income of –22.5 billion yen, and quarterly net income of –26.8 billion yen. The three points below had a major impact on the deterioration in the balance for the first quarter.
The first is the rapidly progressed appreciation of the yen. As you know, with the unpredictability of the global economy due to issues such as increasing geopolitical risks associated with terrorism and Brexit, purchase of Japanese yen that is considered as a riskless asset accelerated and the yen became stronger in a short period of time. At the end of the previous fiscal year, March 31, 2016, the exchange rate was 112.68 yen per US dollar. However, the exchange rate plummeted by nearly 10 yen at the end of the first quarter to below the level of 103 yen per US dollar. The rate was 102.91 yen per US dollar as of the end of June 2016.
The second is the stagnancy in the containership market. Tonnage was shifted from Asia-Europe trades where cargo movement showed a negative growth in the previous fiscal year to Asia-North America trades that exhibited bullish cargo movement. There also were other factors such as use of larger vessels being promoted for North America East Coast routes associated with the expansion of the Panama Canal. As a result, the supply-demand balance of Asia-North America trades became poor, and negotiations for relevant service contracts didn’t go as smoothly as expected in the final stage of negotiations. In addition, regarding the short-term freight rate markets for Asia-North America and Asia-Europe trades that are already far below the level experienced after the bankruptcy of Lehman Brothers, recovery has been much slower than our initial expectation. A growing tendency for it to recover finally began to emerge in June but it feels like being a lap behind.
The third is the slumping cargo movement in the Car Carrier Business. The cargo volume to resource exporting countries such as Middle East, Latin America, Africa and Russia fell far more than expected, which served as a cause of reduced income.
For the three factors above, the financial performance in the first quarter was well below the target of our initial business plan. While at the beginning of this fiscal year we expected a certain level of deterioration compared to the quarterly ordinary income of –8.4 billion yen in the fourth quarter of the previous fiscal year 2015, there was a loss of approx. 8.0 billion yen by revaluation of exchange rate associated with the rising yen as well as a reduction in service contracts by approximately 10.0 billion yen on a yearly basis compared to the expectation at the beginning of the fiscal year for Asia-North America containership trade that settled at dull freight rate levels. In addition, there was some influence from the delayed recovery in the short-term freight rate markets for both east and west routes. As a result, ordinary income of the first quarter was –22.5 billion yen.
In our latest forecast for the second quarter, we expect ordinary income to be –4.5 billion yen. The affecting factors include cutting back in the loss of approximately 8.0 billion yen by revaluation of exchange rate that occurred in the first quarter and the trend of recovery in the short-term freight rate market for containership business after June 2016. The market has finally headed in an upward trend since July albeit fluctuating. Although ordinary income may greatly improve compared to the bottomed-out figures in the first quarter, we expect it to still remain as a negative value for the second quarter.
Total estimated financial performance for the first half of fiscal 2016, by adding the latest forecast for the second quarter, indicates operating revenues of 500.0 billion yen, operating income –18.0 billion yen, ordinary income –27.0 billion yen, and half-yearly net income of –40.0 billion yen. By business segment, Containership Business is expected to be –14.0 billion yen, Bulk Shipping Business –8.0 billion yen, and Offshore Energy E&P Support & Heavy Lifter Segment to be –3.0 billion yen.
Regarding the main financial indices, taking into account the revaluation of exchange rate associated with the strong yen, equity capital was reduced to 307.7 billion yen, and equity ratio as of the end of the first quarter was 29%.
A-2. Estimates for FY 2016
We reviewed our estimate for fiscal year 2016, centering on Containership Business where recovery in the market is behind our initial expectation and on Car Carrier Business that is suffering from a substantial reduction in the movement of cargos to emerging markets due to a fall in resource prices. Regarding Containership Business, while the market of freight rates for spot cargos is indicating an increasing trend since June, we expect the increase to be sluggish considering the unlikeliness of supply-demand balance being fully restored for some time. As for Dry Bulk Business, although the market is finally pulling out of the historically low level, there is no specific outlook for recovery in the demand for cargo movement especially in China, so there is no chance of “binge shopping” by the Chinese that occurred a while back, and the supply pressure is still strong for newly-built ships. Due to these factors, we believe it will take a while for the market to recover fully. The current market movements are within our expectations, and we are diligently working on a reduction of exposure through structural reform for securing our competitiveness. We believe we can successfully promote structural reform as planned. Regarding Car Carrier Business, the number of cars exported to emerging markets was reduced by about 30%, which is causing some detrimental effects in terms of efficient operations and therefore serving as a factor that reduces revenue. We expect it will take a certain period of time for cargo movement to recover. Regarding Oil Tanker Business, although the market has been transitioning at levels beyond our expectation in the first half of the year, we are currently working to reduce the impact of market volatility by reducing exposure through acquisition of medium- and long-term contracts. We will keep paying extra attention to the impact of completion of new ships on the oil tanker market.
As for the exchange rate, we expect it to stabilize at a level with slightly stronger yen due to a rising sense of uncertainty in the global economy. The premise for exchange rate we assume is 105 yen per US dollar. The premise for fuel prices we assume is, albeit at a very high level compared to the current state, 310 US dollars per metric ton which corresponds to a Brent crude oil price of about 55 US dollars per barrel.
Regarding our estimate for entire fiscal year 2016, we revised operating income to –13.0 billion yen, ordinary income to –21.5 billion yen and yearly net income to –45.5 billion yen.
By business segment, ordinary income for Containership Business is –14.0 billion yen for the first half of the year and 3.5 billion yen for the second half, resulting in –10.5 billion yen for full year; for Bulk Shipping Business, –8.0 billion yen for the first half and 5.0 billion yen for the second half of the year, resulting in –3.0 billion yen for the full year. This is in the form of the loss by the Dry Bulk Business being covered by the profit made by Energy Resource Transport Business or that made in the Car Carrier Business. Amid the negative influence of declining exports to emerging markets in the Car Carrier Business, we expect some improvements in income by realizing structural reform towards the second half of the year centering on Dry Bulk Business. While we assume that income will turn into the black in the second half of the year, the loss made in the first half is likely to still outweigh overall. Regarding the Offshore Energy E&P Support & Heavy Lifter Segment, our estimate is –3.0 billion yen for the first half and –1.0 billion yen for the second half of the year, resulting in –4.0 billion yen for the full year.
A-3. Estimates for FY 2016 – Latest vs. as of April 2016
The change in the annual financial performance associated with the review is put into a waterfall chart. Regarding the first factor, the effect of exchange rate, there will be a loss of 6.0 billion yen by revaluation of exchange rate associated with the rising yen in addition to a loss of 1.7 billion yen on the operating income basis, resulting in a deterioration totaling about 8.0 billion yen. Regarding the market, the Containership Business is expected to go through a deterioration of about 23.8 billion yen in total due to the delayed recovery in the spot freight rate market for east-west routes in addition to a loss by about 10.0 billion yen for the year due to renewal of service contracts for Asia-North America. For the Bulk Shipping Business, there are factors to drag the profit down by a little less than 6.6 billion yen, including poorer income from the Car Carrier Business due to the reduced quantity of vehicles exported to emerging countries and downturn in the oil tanker market. Although we will attempt to further reduce cost, the overall ordinary income is expected to be –21.5 billion yen, 36.5 billion yen worse than the estimate of 15.0 billion yen announced at the beginning of the year.
A-4. Estimates for FY 2016 – Latest vs. FY 2015 Results / 1st Half vs. 2nd Half FY 2016
Compared with the previous fiscal year, consolidated ordinary income is expected to deteriorate from 3.3 billion yen by 24.8 billion yen to –21.5 billion yen. Because the annual average exchange rate changed by 15 points from 121 to 106 yen per US dollar, negative impact of exchange rate including revaluation loss is 15.9 billion yen. Regarding the market deterioration as expected since the beginning of the year, Dry Bulk Business spot contracts renewed at bottomed prices in the latter half of the previous year will take effect during this year, and the oil tanker market is expected to soften this year in contrast to its bullish tone in the previous year. Both are expected to serve as deteriorating factors totaling 14.9 billion yen for the Dry Bulk and Oil Tanker segments.
Additionally, there are other deteriorating factors totaling 6.6 billion yen, including the sluggish cargo movement in Car Carrier Business as reviewed this time and the stagnant market for the Offshore Energy E&P Support segment. On top of that, there is deterioration by 19.0 billion yen in the containership business market centering on Asia-North America trades. Combining all of these, the total amount of deteriorating factors attributable to market volatility as compared to the previous fiscal year is expected to exceed 40.0 billion yen. Meanwhile, we will continue our efforts to make improvements through self-supporting efforts totaling about 30.0 billion yen, including an improving effect of 10.0 billion yen by structural reform centering on Dry Bulk Business and profit improving measures worth 19.8 billion yen centering on Containership Business, which was revised upward by 1.0 billion yen from the measures to reduce cost by 18.8 billion yen in the initial plan. Summing up the negative factor of 40.0 billion yen due to market deterioration, the positive factor of 30.0 billion yen from improving measures through self-supporting efforts and the negative factor of 15.9 billion yen associated with the strengthening yen, there will be deterioration of 24.8 billion yen in total compared to the previous year.
Regarding the comparison between the first half and second half of the year, the pathway to a positive figure of 5.5 billion yen in the second half compared to the loss of 27.0 billion in the first half is shown in the chart on the right. The net financial impact due to factors such as exchange rate and bunker price fluctuation is an improvement by about 7.2 billion yen, which is derived by subtracting the deterioration arising from bunker price fluctuation from the improvement by reduction in exchange rate revaluation loss. There is an improvement of 7.0 billion yen by ongoing cost saving efforts centering on Containership Business and self-supporting efforts through realization of structural reform. There is another improvement of 18.3 billion yen in total from the short-term freight rate market for Containership Business that has been in an upward trend since June and a certain level of recovery in the Dry Bulk Business, albeit the increase rate is expected to be slow. All in all, we expect an improvement of 32.5 billion yen in the second half compared to the first half of the year.
A-5. Business Structural Reform and Cost Reduction / Earning Improvement Plan
While the Dry Bulk market is moving within our expectations, we are steadily promoting structural reform as planned. The expected improvement in ordinary income for fiscal year 2016 due to structural reform is 10.0 billion yen in total.Slightly more than 50% of negotiations have been settled in the first quarter. For nearly half of the structural reform for Dry Bulk Business, negotiations have progressed to about 80%, and we expect a large majority of negotiations will eventually be settled by the end of the first half of the year. Regarding the fundamental revision of business of affiliated companies towards improvement in fiscal year 2017, unfortunately this is not at a disclosable state at the moment, but we are diligently making considerations.
As for the fleet, through structural reform in Dry Bulk Business, our current plan is to reduce the core fleet of 218 ships as of the end of fiscal year 2014 to 196 ships by the end of fiscal year 2019, which is a 20% reduction compared to the previous plan to increase it to 239 ships. We plan to reduce it down to 182 ships as of the end of fiscal year 2016, which is a reduction by 36 ships compared to that in fiscal year 2014. For middle and small ships of Panamax and below, our current plan is to reduce them from 96 ships as of fiscal year 2014 to 70 ships, which is a 30% reduction compared to the initial plan to increase total to 99 ships. We plan to reduce them by 23 ships to 73 ships as of the end of this year.
Regarding cost savings, we have specified a new target of 19.8 billion yen by adding cost savings of 1.0 billion yen for Containership Business to the initial plan of cost saving by 18.8 billion yen. A plan to reduce cost by 17.5 billion yen in total is in place for the Containership Business, including rationalization of ports of call on the basis of our current alliance, ideal allocation of large ships, and business reduction for Asia-East Coast South America routes from which we have withdrawn. The rest comes from cutting inland costs in North America and accumulated effects of cost-saving activities implemented at various locations. For other segments, the main source of cost saving includes cutting of operation expenses by streamlining vessel allocation for Bulk Shipping Business.
As for dividends, as announced in the review of the Medium-term Management Plan, we will continue work on our initiatives to ensure both stability and competitiveness as priority tasks. We are currently thinking to make a decision on dividends for this year as of the end of the first half of the year, after ascertaining the trend of market environment for the second half.
B-1. Containership Business
Although income for the first quarter is expected to be reduced due to the fact that renewal of annual service contracts for Asia-North America trades was less successful than our expectation, the spot freight rate market seems to have bottomed after scoring record low levels during the period from the end of last year into the beginning of this year. The market has shown a recovering trend since June, and utilization has been improving towards the summer peak season. We believe this recovering trend will remain towards the second half of the year.
B-2. Bulk Shipping Business: Car Carrier Business
A fall in the price of resources such as crude oil has depressed the economy of Middle East, Latin America, Africa, Russia, etc. As a result, the volume of exports to these emerging markets has dropped by 20-30%, which is affecting our income. While it is expected to take a little longer for cargo movements to recover, we are planning to raise the income by strengthening our initiatives on “High & Heavy” cargos in addition to more efficient operation of 7 large 7,500-unit car carriers that have been completed and have higher cost competitiveness.
B-3. Bulk Shipping Business: Dry Bulk Business
In the first half of this year, although iron ore imports by China increased by 9% compared to the previous fiscal year and there was a temporary rise in the demand, it hasn’t come to a full-scale recovery yet. The market is showing a more sluggish price increase than what we expected at the beginning of the year. We are hoping to complete the structural reforms planned to realize improved financial balances in the future.
B-4. Bulk Shipping Business: LNG Carrier & Oil Tanker Business
Regarding the LNG Carrier Business presupposing medium- and long-term contracts, there is no major change from our original estimate at the beginning of the year. For Oil Tanker Business where the market transitioned into a bullish tone last year, we have been working on reduction of exposure assuming a certain level of softening occurring for the market this year.
B-5. Offshore Energy E&P Support & Heavy Lifter Business
For Offshore Support Vessels, the situation remains tense due to the slump in crude oil prices. Although we accounted for an exchange rate revaluation loss in the first quarter associated with debts in foreign currency, we will continue our efforts to reduce exchange rate revaluation losses at any given opportunity. Regarding Heavy Lifter Business, the loss has been narrowed down as a result of down-sizing the fleet by one vessel and relevant cost saving initiatives.
That completes today’s presentation. Thank you very much.
