Thank you very much for joining us today. I would like to explain the financial highlights for fiscal year 2017 and the business forecast for fiscal year 2018, in addition to the progress of the medium-term management plan and future initiatives.
A: Financial Results for Fiscal Year 2017
A-1: Financial Results for Fiscal Year 2017
A-1 shows the financial highlights for fiscal year 2017. Our operating revenues totaled 1,162 billion yen, operating income totaled 7.2 billion yen, ordinary income totaled 2.0 billion yen and net income attributable to owners of parent totaled 10.4 billion yen. The main factor leading to changes was the equity in losses in the Ocean Network Express Pte. Ltd. (ONE) integrated Containership Business amounting to 7.1 billion yen. This 7.1 billion yen is the Company’s 31% share in the approximately 220 million dollars incurred by ONE as a whole. The impact related to the integration of Containership Business including the reversal of secondment fees was minus 4.1 billion yen compared to the previous estimate for fiscal year 2017 of minus 5.0 billion yen. Also, due to appreciation of the yen, foreign exchange losses were 3.6 billion yen in the fourth quarter alone, and 1.5 billion yen for the entire year. In addition to these, market fluctuations led to ordinary income eventually being 2.0 billion yen. Net income attributable to owners of parent rose by 2.9 billion yen to 10.4 billion yen from the 8.5 billion yen previously announced in the third quarter, mainly due to fluctuations in the estimated amount of extraordinary income and losses assumed in the previous announcement.
The ratio of shareholders' equity, which is one of the important indicators in the medium-term management plan, was 21% at the end of fiscal year 2017, in line with the results at the end of the previous fiscal year. Although shareholders’ equity increased, this was offset by the foreign currency translation adjustment due to appreciation of the yen and loss of translation adjustments in the amount of dollar investment overseas, so it remained unchanged from the end of the previous fiscal year at the 21% level.
By segment, ordinary income in Containership Business increased from 0.5 billion yen as was previously announced in the third quarter to 3.4 billion yen. This was due to the positive effect of factors such as provision of allowance, including the overall impact of the integration of Containership Business even with the equity in losses in ONE, and the increase in equity in gains in Logistics Business. In Bulk Shipping Business, ordinary income fell by 3.8 billion yen from the previously announced 7.0 billion yen to 3.2 billion yen. This was due to the impact of foreign exchange losses stemming from appreciation of the yen and the decline in market conditions in Tanker Business. There is no major change in Other.
A-2: Financial Results for Fiscal Year 2017 versus Fiscal Year 2016
A-2 shows the main factors impacting the financial results for fiscal year 2017 compared to fiscal year 2016. In the full-year comparison of fiscal year 2017 and fiscal year 2016, internal achievements included the positive effect of 44.9 billion yen as a result of the impact of structural reforms, provision of allowance and cost reductions. External factors included the positive effect of 9.5 billion yen centered on fluctuations in market conditions in Containership Business, resulting in an improvement of 54.4 billion yen from an ordinary loss of 52.4 billion yen last fiscal year to ordinary income of 2.0 billion yen.
The market condition level in fiscal year 2017 was on par with the previous year on the Asia-North America routes but improved by six points on the Asia-Europe routes in Containership Business. Market conditions for Dry Bulk Business are seen to have bottomed out with all ship types improving compared to the previous year. Meanwhile, market conditions for Tanker Business have been softening recently, and also fell significantly compared to the previous year. Looking ahead in Tanker Business, market conditions are expected to recover due to factors such as progress in scrapping of old tankers, but we expect soft market conditions will continue.
A-3：Financial Impact by Structural Reforms and Provision of Allowance・Progress of Cost Savings
With regard to the financial impact from structural reforms and provision of allowance as well as cost savings shown in A-3, we mentioned in A-2 that the 44.9 billion yen improvement due to internal factors included the impact of structural reforms and provision of allowance improving by 25.3 billion yen compared to fiscal year 2016. A-3 states that the financial impact of structural reforms and provision of allowance was 34.6 billion yen, but this is the cumulative total of the impact of structural reforms conducted for two years in fiscal year 2015 and fiscal year 2016. Of this amount, 9.3 billion yen was already realized in fiscal year 2016, resulting in an increase of 25.3 billion yen compared to the previous fiscal year.
B: Estimate for Fiscal Year 2018
B-1: Renewal of Business Segment for Disclosure
B-1 contains our estimate for fiscal year 2018 and notice of a change of disclosure segments. Due to the integration of Containership Business, the Company’s business disclosure segments will be changed from fiscal year 2018. The objective of this is to provide stakeholders with a better understanding of business conditions in line with the Company’s business management policies. The changes involve the division of businesses into the following segments: Dry Bulk including Capesize mainly used for iron ore and Panamax and smallersize bulk carriers; Energy Resource Transport including LNG carrier, Tanker, Thermal Coal Carrier, Energy E&P support business, Offshore support business and Liquefied Gas New Business; and Product Logistics including Car Carrier, Automotive Logistics Business, Logistics Business, Short Sea and Coastal Business and Containerships.
Other and Adjustments and Eliminations have not been changed. We will continue to consider these to provide greater understanding in the future.
B-2: Estimate for Fiscal Year 2018
B-2 shows our estimates for fiscal year 2018. We forecast operating revenues will be 382.0 billion yen in the first half of the year and 372.5 billion yen in the second half of the year, totaling 754.5 billion yen. We forecast operating income will total 5.0 billion yen, with a loss of 7.5 billion yen in the first half of the year and a gain of 12.5 billion yen in the second half of the year. We forecast ordinary income will total 5.0 billion yen, with a loss of 9.0 billion yen in the first half of the year and a gain of 14.0 billion yen in the second half of the year. We are aiming for profit of 7.0 billion yen, including 2.5 billion yen in the first half of the year and 4.5 billion yen in the second half of the year. It is assumed that the exchange rate will be 109 yen per US dollar, and the bunker fuel price is 373 dollars per metric ton. A change of one yen in the exchange rate results in a fluctuation of 0.65 billion yen, and a 10-dollar fluctuation in the bunker fuel price has an impact of 0.1 billion yen. The reason the impact of fluctuations in the bunker fuel price is smaller than in the past is that the actual fluctuation is small because a relatively larger percentage is compensated by a bunker fuel surcharge in business segments other than Containership Business. Fluctuations in the bunker fuel price in ONE will be explained separately in the part on the business plan for ONE.
The estimates by new business segment and the market conditions assumed therein are forecast to be on par with fiscal year 2017 in the Dry Bulk segment during the first half of the year and ordinary income of 3.5 billion yen is expected for fiscal year 2018 due to improvement of market conditions usually seen in the third quarter during the second half of the year. In the Energy Resource Transport segment, the tanker market conditions are expected to remain soft while LNG carriers, thermal coal carriers and drillships are expected to operate stably. We are planning for ordinary income of 3.0 billion yen in fiscal year 2018. In the Product Logistics segment, Containership Business as a whole and equity in gains in ONE are stated separately, with equity in gains in ONE totaling 3.8 billion yen. We expect a loss of 4.8 billion yen in fiscal year 2018 in Containership Business due to a loss of 8.5 billion yen via the complex transportation progress method being recorded in the Company’s Containership Business as a transient factor in the first quarter. In all parts of the Product Logistics segment, we are aiming for ordinary income of 1.5 billion yen in fiscal year 2018. We have planned for income of 5.0 billion yen on a consolidated basis including Other and Adjustments and Eliminations.
The voyage completion method is used in businesses other than Containership Business, with both revenues and expenses being recorded when the voyage has completely ended. However, in Containership Business, freight is prorated while expenses are recorded as they occur because the complex transportation progress method is used. For example, in a case where cargo departs Tokyo on March 25, is unloaded in Long Beach on April 3 and arrives in Chicago on April 7, if the freight revenue for the Bill of Lading of this transport is 3,000 dollars, 2,000 dollars accounting for six-ninths of the 3,000 dollars in revenue is recorded in fiscal year 2017 as the portion from March 25 to 31. The remaining 1,000 dollars in freight is recorded in fiscal year 2018 and the unloading expenses in Long Beach and the railway expenses to Chicago are recorded in fiscal year 2018. Clearly, the loading expenses in Tokyo are recorded in fiscal year 2017. In this way, there is a possibility that expenses undertaken by “K” Line will arise as transient expenses until around May.
Finally, with regard to dividends for fiscal year 2018, we intend to engage in improvement of business performance with the view that improvement of financial standing is a pressing issue in line with the policies under our medium-term management plan, but neither interim nor year-end dividends payments have been determined at this time.
B-3: Estimate for Fiscal Year 2018 versus Financial Results for Fiscal Year 2017
B-3 shows the year-on-year changes in financial results for fiscal year 2018. Of the internal factors, equity in gains and losses in ONE are expected to improve by 7.9 billion yen from the 4.1 billion yen in equity in losses recorded in fiscal year 2017 to 3.8 billion yen in equity in gains in fiscal year 2018. However, transient expenses amounting to 8.5 billion yen are expected to arise in Containership Business, resulting in a total loss of 0.6 billion yen. Meanwhile, changes in market conditions and cargo volume conditions in the business segments of “K” LINE itself are expected to have a positive impact of 4.8 billion yen, with the external factors resulting in a total gain of 3.6 billion yen. A year-on-year improvement of 3.0 billion yen in total is expected when internal and external factors are combined. Market conditions are assumed to bottom out in Dry Bulk Business and weaken in Tanker Business.
C: Division Trend
C-1: Progress of Management Plan
C-1 shows the progress of our medium-term management plan and future initiatives. It summarizes the progress of the medium-term management plan during fiscal year 2017. With regard to the level of achievement of the indicators targeted in the medium-term management plan, we recorded a profit in fiscal year 2017 with a significant improvement compared to fiscal year 2016. We will continue to aim for further improvement of business results in the future. The building of stable business is proceeding smoothly toward exceeding 30.0 billion yen in fiscal year 2019, and stable income of approximately 27.0 billion yen was achieved in fiscal year 2017. We will continue with this as an important policy. The accumulation of the ratio of shareholders’ equity aimed at the mid-20% range has been halted by the losses from translation adjustments in the foreign currency translation adjustment stemming from the impact of the appreciation of the yen.
Our business portfolio strategy has been to engage in the accomplishment of the integration of Containership Business, selling Heavy Lifter Business and reducing the high-cost market-exposed fleet. Based on this, we intend to engage in further selection and concentration, dispose of non-core business assets to increase asset efficiency, and revise the level of cash and deposits on hand after the spin-off of Containership Business. In addition, we are also engaging in areas that will develop into the next generation of our core businesses. By implementing advanced business management and strengthening the linking of our business portfolio strategy, we will accelerate the transformation of our strategy from fiscal year 2018.
The implementation of advanced business management began with operation centered on business risk/return management that was announced at the end of October last year. We believe that this management is enabling the identification of issues from different angles and the implementation of solutions from there. We intend to achieve deeper business management of the Company by further increasing the maturity of operations.
In strategies by function, we believe it is necessary to strengthen CRM, innovate technology, transform business models, and combine the recruitment, training and diversification of personnel. We wish to proceed with the aim of collaborating to create new business models with an understanding of changes in society and customers’ strategies.
In our ESG initiatives, while we have proceeded to strengthen the unit supervisory system and strengthen risk management, environmental initiatives have also been highly regarded. We believe that corporate governance and environmental initiatives are important for executing our management plan. We intend to engage in such initiatives more deeply in the future.
C-2: Detailed Progress of Management Plan & Initiatives for Fiscal Year 2018
C-2 shows the progress of our medium-term management plan and important initiatives for fiscal year 2018 and onward. The issues are as follows. We will ensure that we continue with the thorough strengthening of stable business and making Containership Business profitable. From fiscal year 2018, we plan to reduce market-exposed businesses and further proceed to dispose of non-core business assets and take other steps to specifically implement our business portfolio strategy. Furthermore, there is no change in our engagement in the development of the next generation of core businesses as a key issue, in line with changes in customers’ strategies.
C-3: Dry Bulk Segment
C-3 provides a brief explanation of the Dry Bulk Business segment beginning with trends in fiscal year 2017. The level of market conditions has improved further due to a significant improvement in the gap between supply and demand stemming from a significant increase in transport demand primarily originating in China since fiscal year 2016 and the extremely limited supply of newly-constructed ships. Under such conditions, we conducted structural reforms in Dry Bulk Business in fiscal years 2015 and 2016, and the effects of these resulted in revenues increasing in fiscal year 2017 compared to fiscal year 2016, and Dry Bulk Business as a whole beginning to be profitable.
The total number of ships in our core fleet, excluding thermal coal carriers, has decreased from 201 in fiscal year 2015 to 177 in fiscal year 2016 and to 171 in fiscal year 2017. In our medium-term management plan announced last year, we executed a plan to reduce particularly high-cost fleet. This was aimed at increasing resilience to market fluctuations and reducing costs and is progressing as planned.
Meanwhile, the fleet scale as of the end of the fiscal year remains largely unchanged. Overall, the number of ships was 243, 236 and 243. The size of Dry Bulk Business as a whole has been maintained and has increased particularly in Capesize business. Therefore, we are proceeding to improve the make-up of the fleet while maintaining business size, ensuring that we have the base to strengthen earning power in the future.
As a result, the market exposure rate by fleet scale has been lowered to a very small amount in our plan for the beginning of fiscal year 2018; 9% for Capesize, 37% for Panamax and smallersize, and 0% for woodchip carriers. By improving the quality of its make-up, I think we are building a fleet that is very resilient to market conditions.
In addition, with regard to market conditions in fiscal year 2018, due to the general improvement in the gap between supply and demand that occurred until last year, although demand will not increase significantly, supply is very limited, and we believe the market environment will remain firm.
C-4:Energy Resource Transport Segment – Tanker/Thermal Coal Carrier
C-4 shows information on tankers and thermal coal carriers. In fiscal year 2016, the VLCC market was at over 30,000 dollars, exceeding the break-even point, and started the year at over 40,000 dollars. However, the market softened with the concentration of periodic inspections in the spring and supply pressure of new vessels, slumping to a level below 10,000 dollars from summer. Bolstered by a prolonged market slump and recovery in scrap steel prices, scrapping also progressed from July with a temporary recovery in early autumn, but the average throughout fiscal year 2017 remained at the low level of 15,000 dollars. Supply of new VLCCs during fiscal year 2017 was around 40 vessels, and although scrapping was particularly concentrated in the second half of the year, totaling around 30 vessels, result was a net increase of 10 vessels. The overall VLCC market is made up of 680 vessels, and the net increase was limited to 1.5%. A supply of approximately 40 new vessels is also expected in fiscal year 2018, but scrapping is also continuing at quite a high pace since the beginning of the year. We believe the level of scrapping will determine whether the market slump will continue.
The contract ratio of tankers was 70% for VLCCs and 100% for LPG carriers, but market exposure is high for other fleets. This portion is made up of Aframax Tankers and Product Tankers, but we are planning to reduce exposure this fiscal year by partially reducing the fleet.
Medium- and long-term contracts have been stably introduced for almost all thermal coal carriers, which are transporting thermal coal for power generation to electric power companies. Although it cannot be said that there are no concerns such as the postponement of construction and the re-evaluation of plans for new coal-fired power plants due to the progression of global environmental problems, we are conducting risk management through vessel age management, and have also reduced exposure by selling two aging vessels in fiscal year 2017.
C-5: Energy Resource Transport Segment– LNG Carrier/Offshore Support Business/Energy E&P Support Business
C-5 shows information on LNG carriers, liquefied gas new business and Offshore Energy E&P Support Business. The contract ratio of LNG carriers shows that almost all vessels are in medium- and long-term contracts. The same also applies to drillships and oil FPSO, which is an area we entered last fiscal year. Our exposure is high for offshore support vessels, but the number of rigs operating in the North Sea is also increasing with the recovery in crude oil prices. The market is gradually improving, and we would like to continue with efforts to reduce costs for now and take the opportunity to implement structural reform when it presents itself. Furthermore, in the liquefied gas new business, we are engaged in business development in LNG fuel and downstream in the energy value chain. However, while proceeding with consideration of using LNG fuel for various vessels in light of the IMO’s SOx regulations to be introduced in 2020, in addition to subsequent regulations on greenhouse gas emissions, we are steadily proceeding with business development such as the commencement of joint consideration of an LNG fuel supply business in the Chubu region with Chubu Electric Power Co., Inc., Toyota Tsusho Corporation and Nippon Yusen Kabushiki Kaisha as we have already announced.
C-6: Product Logistics Segment – Car Carrier/Automotive Logistics Business
C-6 is about car carriers and the automotive logistics business. The total volume of finished vehicles carried from Japan in fiscal year 2017 remained strong, continuing the trend for fiscal year 2016. Although shipments to Europe and the United States performed well, a slump has unfortunately continued particularly in shipments to resource rich countries in the Middle and Near East and Africa. With regard to supply and demand in the car carrier fleet market, there are around 750 vessels called PCCs dedicated to loading motor vehicles, and a gap in supply and demand in fiscal year 2016 led to a surplus of ships. However, from the second half of last fiscal year, ships particularly moored off the coast of South Korea returned to the market, and the balance in supply and demand is generally returning at present.
In fiscal year 2018, we will reduce our core fleet from 94 to 89 vessels. Since 2015, we have introduced newly-built vessels called Post-Panamax that are capable of carrying 7,500 vehicles and will introduce three more this year. This will complete our new fleet. It has taken 50 years since the TOYOTA MARU NO. 1 in 1968, but the replacement with new vessels is almost complete. Last fiscal year, the DRIVE GREEN HIGHWAY, which is the latest environmentally friendly vessel, received the Ship of the Year Award, and is also highly regarded in the market. In the future, we will aim to increase the volume of “high & heavy” cargo such as construction machinery, farming machinery, railway vehicles, and special plant equipment and power generation equipment. This is referred to as MAFI cargo, which involves placing cargo on roll-trailers where cars are normally loaded. It is highly regarded by customers because it is able to provide a very secure space. Furthermore, automotive logistics refers to logistics for finished vehicles, and involves not only marine shipping, but also the various tasks before and after. A new department was created around two and a half years ago, and the business has expanded to 10 countries, handling approximately three million vehicles. We intend to continue to strengthen our earning structure with efficient allocation of vessels and cost reductions.
C-7: Product Logistics Segment – Logistics Business
C-7 is about logistics business. We have produced stable earnings based on the assumption of logistics centered on Asia and the handling of air cargo transportation. However, the structure after the spin-off of Containership Business will be rebuilt to place “K” Line Logistics at the center of the Company’s overseas network as we have previously explained. In addition to revising our organization for initiatives in marine shipping cargo, “K” Line Logistics is proceeding to assume the containership customer base in countries where it has already established facilities. In locations where it does not have facilities, we will make further efforts to expand and strengthen Logistics Business, such as existing agents for Containership Business obtaining IATA licenses.
C-8: Product Logistics Segment – Containership Business
C-8 is about the Containership Business segment. Ordinary income in fiscal year 2018 is forecast to be a loss of 4.8 billion yen, with a loss of 9.1 billion yen in the first half of the year and a gain of 4.3 billion yen in the second half of the year. The loss in the first half of the year includes the transient impact of about 8.5 billion yen caused by business revenues and expenditures remaining on the Company’s side from fiscal year 2017, and this will drag down income in the first half of the year. With regards to equity in gains and losses in ONE, these include a certain decline in utilization amounting to 0.1 billion yen in the first half of the year, and a 3.5 billion yen improvement is expected in the second half of the year. With the establishment of ONE, we are revising the network that has supported containerships until now. The number of personnel will also be reduced, but it will be necessary to keep personnel for a certain period during the transition time until completely moving to the new structure. We also plan to reduce overhead costs by 3.5 to 4.0 billion yen in around 2019 when we eventually complete optimization of the network.
D: Ocean Network Express 3-Year Business Plan (Fiscal Year2018-2020) and Fiscal Year2018 Business Summary
Now I will explain the business plan of ONE. In supply and demand for shipping space, it is assumed that supply will slightly exceed demand, with a 5% increase in supply and a 4% increase in cargo movements. Last fiscal year, the market was partially disrupted by the restructuring of alliances in addition to competing for share ahead of the integration of shipping companies, but this is expected to gradually settle down in the future. The 3-year business plan forecasts revenue of 13.16 billion dollars and consolidated profit of 110 million dollars in fiscal year 2018. This includes a certain reduction in cargo at the start of the first half of the year, and ONE plans to make a profit of 3 million dollars as a whole during this period. A profit of 107 million dollars is expected in the second half of the year. The bunker fuel price is assumed to be 383 dollars per metric ton, and the effect of a 10-dollar fluctuation is 37 million dollars. “K” Line’s share in ONE is 31%, making the impact 11 million dollars. Freight rates have been reported to be generally in line with the business plan assuming market conditions of fiscal year 2017.
The plan assumes that consolidated profit will be 313 million dollars in fiscal year 2019 and 648 million dollars in fiscal year 2020. However, we have heard that freight rates are assumed to remain basically unchanged from fiscal year 2018, and that cargo volume is assumed to increase at a rate of 3-4% growth for total cargo movements. Furthermore, the plan aims to steadily increase earnings by realizing synergy effects within three years.
Synergy effects are based on exceeding the 110 billion yen presented at the announcement of the integration as a result of careful review including negotiations with vendors/service providers in each division once ONE has been completely launched. The latest target is 1,050 million dollars, but we aim to reach 60% in fiscal year 2018, which is the first year, 80% in the second year and 100% in the third year. The 1,050 million dollars can be broken down as follows. Variable cost reduction such as rail, truck, feeder and terminal fees account for around 40%, totaling 430 million dollars. Next, overhead cost reductions achieved through the integration of IT systems and the rationalization of organizations account for just under 40%, totaling 370 million dollars. Furthermore, effects such as the rationalization of allocation of ships including vessels not covered by alliances and the reduction of bunker fuel expenses are expected to account for just under 20%, totaling 250 million dollars. We have received reports from ONE that the outlook for the first year is that the achievement of the target is clearly in view due to smooth progress in negotiations with vendors/service providers.
When ONE’s portfolio is viewed by route, Transpacific routes are the largest portion, accounting for 47% of revenue. Asia/Europe routes account for 24% and Intra-Asia routes account for 13%.
The fleet is made up of a total of 224 vessels including chartered vessels from three companies, including 6 vessels of 20,000 TEU type and 23 vessels of 14,000 TEU type. ONE is in the 1.5 million TEU class following the three European lines. Problems with some bookings and issuing of Bills of Lading have been reported in industry publications, but these were not caused by factors such as system outages. There were problems caused by temporary personnel shortages and unfamiliarity with systems during the transition. We believe it is a matter of time until the problems are resolved because personnel are being reinforced and ONE is doing its best to resolve them. A certain drop in utilization at the time of launch has been budgeted for, and we have received reports that further efforts are being made to quickly improve customer service.
Thank you very much for your kind attention.