Thank you very much for joining us today.
First, I would like to explain our results for the first quarter of the fiscal year ending March 31, 2019. For the first quarter, due to temporary losses for the integration of the Containership Business into Ocean Network Express (“ONE”), we posted ordinary loss, which was approximately 3.0 billion yen higher than expected at the beginning of the fiscal year. Therefore, we revised downward the forecast for the first half of the fiscal year by 3.0 billion yen. No changes have been made to the full-year forecast for both of ordinary income and net income attributable to owners of the parent. With regard to ONE, although there was a downturn due to lower liftings at the commencement of service, we have not changed our initial full-year forecast.
A.Financial Highlights for First Quarter Fiscal Year 2018
A-1: Financial Results for First Quarter Fiscal Year 2018
For the first quarter of fiscal year 2018, our operating revenues totaled 212.2 billion yen, down 26.1% year-on-year, mainly due to the spin-off of the Containership Business. We posted an operating loss of 13.4 billion yen, an ordinary loss of 17.1 billion yen and a net loss attributable to owners of the parent of 19.3 billion yen. The average yen-dollar exchange rate was 108.10 yen to the dollar, and the average bunker fuel price was 414 dollars per metric ton.
Turning to ordinary income by segment, the Dry Bulk Segment performed well and increased ordinary income by 0.4 billion yen in the first quarter. The Energy Resource Transport Segment increased ordinary income by 0.3 billion yen. The Product Logistics Segment, which comprises Car Carrier/Automotive Logistics, Logistics, Short Sea and Coastal, and Containership Businesses, recorded an ordinary loss of 16.8 billion yen. Of this loss, the entire Containership Business accounted for 16.2 billion, including 4.3 billion yen from the Company’s equity in loss of ONE. With Others and Adjustments and Eliminations, the Company’s ordinary loss totaled 17.1 billion yen.
I will explain the main factors in the changes. Firstly, a temporary loss in the Company’s Containership Business, which is a significant factor in the first quarter, amounted to 11.5 billion yen, which was 3.0 billion yen higher than the 8.5 billion yen projected at the beginning of the fiscal year. Also, the Company’s equity in loss of ONE during the first quarter was larger than expected because of lower liftings caused by confusion in services at the time of launch. The Dry Bulk Business secured a profit on the back of steady market conditions. The average bunker fuel price was originally assumed to be 383 dollars per metric ton; however, the price increased by 31 dollars per metric ton, which had a negative impact of approximately 0.1 billion yen on our profitability. Furthermore, the business segments for disclosure have been changed from this fiscal year, and we have included an explanation in the notes stating that our year-on-year comparisons are based on the new segments.
Looking at our main financial indicators, equity capital at the end of the first quarter was 204.5 billion yen, interest-bearing liability remained almost unchanged at 576.3 billion yen, and the equity ratio was 20%.
A-2: Estimate for the First Half and Entire Fiscal Year 2018
A-2. Here I will explain the comparison of the forecasts for the second quarter, the first half and the full year, compared to the figures announced at the beginning of the fiscal year, based on the results for the first quarter that I mentioned earlier. The figures for the forecast for the second quarter are as shown in the materials, and the forecast for the first half has been revised downward due to the downturn in the results for the first quarter. For the first half, given operating revenues of 411.5 billion yen, we forecast an operating loss of 10.0 billion yen, an ordinary loss of 12.0 billion yen and a net loss attributable to the parent of 15.0 billion yen. The forecast for the full year remains largely unchanged. For the full year, we forecast operating revenues of 775.0 billion yen, operating income of 5.0 billion yen, ordinary income of 5.0 billion yen, and net income attributable to owners of the parent of 7.0 billion yen.
Compared to the figures announced at the beginning of the fiscal year, for ordinary income, the 3.0 billion yen decrease in the first half will be covered by an improvement in profitability in the second half, so that there is no change in the full-year forecast. In terms of net income attributable to owners of the parent, the 17.5 billion yen decrease in the first half will be covered by a 17.5 billion yen increase in the second half, so there is no change. This is principally due to the impact of the sale of assets scheduled for the first half being delayed until the second half. This also includes the delay in the transfer of the Overseas Terminal Business to ONE.
The assumed exchange rate of 109 yen to the dollar remains unchanged from the beginning of the fiscal year. The current exchange rate is 111 yen to the dollar, and we believe this is at an assumed level. The average bunker fuel price, which was assumed to be 373 dollars per metric ton at the beginning of the fiscal year, was changed significantly to 451 dollars. The current bunker fuel price is around 460 dollars per metric ton, and the new assumption is in line with this. Although some minor adjustments have been made to assumed market conditions, there are no major changes.
With regard to the impact of fluctuations in the exchange rate and the average bunker fuel price on the remaining nine months, a fluctuation of one yen in the exchange rate will result in a gain or loss of 0.5 billion yen, and a fluctuation of 10 dollars in the average bunker fuel price will result in a gain or loss of 0.08 billion yen. Fluctuations in the bunker fuel price do not include the impact of fluctuations in the bunker fuel price on ONE.
Regarding dividends, with much regret, we decided not to pay an interim dividend based on the revised forecast for the first half of the fiscal year. Year-end dividend remains undetermined at this time because the full-year forecast remains unchanged from the forecast announced at the beginning of the fiscal year, and we will endeavor to make improvements in business results.
For the main factors of the change, the challenge is to offset the 3.0 billion-yen decrease during the first half by a 3.0 billion yen increase in the second half of the year. This includes an increase of 2.5 billion yen by implementing measures to improve profitability in the Dry Bulk and Product Logistics Segments. Also, the Company’s equity in earnings of ONE for the full year remains unchanged from the forecast announced at the beginning of the fiscal year, which will result in a 1.6 billion yen increase. Meanwhile, we expect the change in the average bunker fuel price to have a negative impact of 0.5 billion yen.
A-3: Estimate for the First Half and Entire Fiscal Year 2018 by Segment
In the Dry Bulk Segment, ordinary income is forecast to be 1.0 billion yen for the first half and 6.0 billion yen for the full year. This is an upward revision of 2.5 billion yen compared with the forecast at the beginning of the fiscal year. This principally reflects market conditions being steady and also the effect of efficient vessel allocation, as well as measures to improve profitability, and we expect improvements for both the first half and full year.
The Energy Resource Transport Segment is projected to post ordinary incomes of 1.0 billion yen for the first half and 3.0 billion yen for the full year, with no changes from the forecasts announced at the beginning of the fiscal year. Although the oil tanker market has softened recently, this will be covered by other businesses in the Energy Resource Transport Segment, and we believe that the results will be in line with the forecast announced at the beginning of the fiscal year.
The Product Logistics Segment is forecast to post ordinary losses of 12.0 billion yen for the first half and 0.5 billion yen at most for the full year. The 0.5 billion yen loss in the latest full-year forecast represents a 2.0 billion yen decrease from the forecast announced at the beginning of the fiscal year. This is primarily because the ordinary loss incurred by the Containership Business was 1.8 billion yen higher than expected.
A-4: Latest Forecast for Fiscal Year 2018 vs. Financial Results for Fiscal Year 2017
The forecast for ordinary income for the full year remains unchanged at 5.0 billion yen, but I will explain the key points.
With regard to the Company’s internal achievements, we plan to cover the 3.0 billion yen decrease due to the impact of temporary losses in the Containership Business by improving profitability through relevant measures in both of the Dry Bulk and Product Logistics Segment. A 2.5 billion yen increase by such measures includes 0.9 billion yen in Dry Bulk and 0.7 billion yen in Product Logistics. Network restructuring refers to the global network built around the Containership Business being succeeded by the Car Carrier Business and Logistics Business, including reorganization and optimization of the network, as well as costs. Accelerating cost reduction is expected to contribute 0.4 billion yen to profit.
Although exchange rates have almost no impact, external factors are expected to cause a 0.5 billion yen negative impact. This includes a loss of 0.8 billion yen due to fluctuations in bunker fuel prices, and a gain of 0.3 billion yen from other temporary factors.
Assumed market conditions were forecast to be 19,000 dollars for Cape-size at the beginning of the fiscal year, but this has been revised upward to 19,250 dollars. This is currently around 24,000 dollars, so we do not think these market assumptions have been set high. For VLCCs, assumed market conditions were forecast to be 14,600 dollars at the beginning of the fiscal year, but this has been revised to 12,550 dollars considering the recent downturn in market conditions.
B-1: Dry Bulk Segment
Market conditions have been steady and stable. As shown in the market exposure rate by fleet scale for fiscal year 2018, we are steadily decreasing the exposure rate of Panamax and Smaller size vessels from 37% to 32%. Furthermore, we have steadily obtained medium- to long-term contracts and favorable COA contracts and believe that the expansion of stable earnings is progressing smoothly. An overview of the progress of our medium-term management plan will be provided after the completion of the first half of the fiscal year. Furthermore, in the Dry Bulk Segment, some policies thought to be economic stimulus and monetary easing have been seen in China recently, and we may be able to expect an additional impact on market conditions.
B-2: Energy Resource Transport Segment - Tanker / Thermal Coal Carrier Business
The fleet scale has been increased by two VLCCs as of the end of the fiscal year. Other oil tankers have been decreased by five vessels, and we mainly plan to decrease the number of Product Tankers. The exposure rate in terms of fleet scale has been reduced for Thermal Coal Carriers from 15% at the beginning of the fiscal year to 6% in the latest forecast.
B-3: Energy Resource Transport Segment - LNG Carrier / Offshore Support Business / Energy E&P Support Business
In the liquefied gas new business, a decision has been made with Chubu Electric Power, Co., Inc. Toyota Tsusho Corporation and Nippon Yusen Kabushiki Kaisha to commercially supply LNG fuel in Japan, and a joint venture between four companies including our company ordered an LNG fuel supply ship from Kawasaki Heavy Industries.
B-4: Product Logistics Segment - Car Carrier / Automotive Logistics Business
With a steady increase in the number of vehicles transported, the total number of units carried by car carriers was 987,000 in the first quarter of fiscal year 2018, compared to 887,000 in the same quarter of the previous year. However, the increase in the number of vehicles shipped does not simply mean a proportional increase in profits, and our profitability is struggling. The challenge we face from the second quarter is to improve profitability, even if only slightly, by steadily implementing various measures as soon as possible, in order to reduce remaining fixed costs incurred until optimizing the overseas network succeeded from the Containership Segment.
Furthermore, we changed the useful lives of car carriers from this fiscal year due to a revision in the fleet plan. The useful lives of vessels have been changed from 20 years to 25 years. We changed the useful lives of vessels because current car carriers are used for around 30 years. This was already incorporated into the full-year forecast, so that no changes have been made. The impact in the first quarter is a decrease of approximately 0.6 billion yen in losses.
B-5: Product Logistics Segment - Logistics Business
While revenues increased, profit decreased year-on-year, due to up-front expenses such as IT system investment in the international logistics business of “K” Line Logistics, our subsidiary in the Logistics Business. The international logistics business progressed smoothly with strong performance in the handling of semiconductors, mainly in air cargo. Kawasaki Kinkai Kisen will announce results on the Short Sea and Coastal Business, but expenses have increased due to the completion of some larger sized vessel and new allocation of vessels.
B-6: Product Logistics Segment - Containership Business
The temporary expenses in the Company’s Containership Business resulted in an increase of approximately 3.0 billion yen, and 10%, in ship operation costs. Furthermore, the Company’s network restructuring expenses following the integration of the Containership Business include expenses for provisions, as well as costs to be incurred, based on a variety of assumptions. At the end of fiscal year 2016, a provision was made for temporary personnel costs and property costs due to the transfer of personnel to ONE as loss related to business restructuring. Part of this provision remained at the end of fiscal year 2017. Furthermore, liquidation costs for a part of the Company’s network after the integration of the Containership Business have been separately included in the forecast for the full year. In addition, as for the remaining fixed costs (3.5 billion to 4.0 billion yen) to be incurred until the completion of optimizing the Company’s network in the Containership Business, we have factored in some cost reductions but will work to achieve the early implementation of further cost reductions.
C.ONE - Financial Results for First Quarter of Fiscal Year 2018
As summarized on page 16, the first quarter resulted in an after-tax loss of 120 million US dollars. The initial forecast for the first half was an after-tax income of 3 million dollars, but this time we revised down the forecast to an after-tax loss of 38 million dollars, a decrease of about 40 million dollars from the forecast announced at the beginning of the fiscal year. However, our full-year forecast remains unchanged at 110 million dollars. Although there has been a rapid increase in bunker fuel prices, this reflects synergy effects being brought forward and potential benefits from a revision of accounting methods. The revision of accounting methods was due to the application of new lease accounting standard of IFRS from fiscal year 2019. The assumed bunker fuel price was 383 dollars per metric ton, but this has been changed to 454 dollars.
Actual utilization during the first quarter is shown on page 17. This was 73% for Asia-North America routes and 73% for Asia-Europe routes. We caused inconvenience for some of our customers due to unfamiliarity with operations and personnel issues at the time operations began. As a result, utilization was slightly lower than initially forecast, and this negatively affected gross profit margin. However, utilization had recovered to 90% for Asia-North America routes and 92% for Asia-Europe routes in July. This has been the same level of utilization as assumed at the beginning of the fiscal year. We regrettably caused great inconvenience to our customers, but it is our view that we now have returned to normal.
As shown in the waterfall chart on page 18, there has been no change in the forecast for the full year, but the content has changed. Firstly, the decrease in gross profit margin was due to a 270 million dollar decrease mainly caused by the deterioration of utilization. Next, there was a 260 million dollar decrease caused by an increase in bunker fuel prices. There was also a 50 million dollar decrease due to the delay in the transfer of the overseas terminal business. The transfer of terminals from Japan's three largest shipping companies to ONE was also delayed compared to initial plans, and it is currently assumed that the figures will be reflected after the transfer in the fourth quarter. Next, the synergy effects of integration have been progressing at a faster pace than initially forecast, resulting in a 240 million dollar increase. Next, to reduce product costs, a project team has been established and is working feverishly to implement measures to reduce fuel consumption due to the rise in bunker fuel prices. The effects are already emerging, and we expect an increase of 240 million dollars. Finally, there is an increase of 100 million dollars due to a change of lease accounting methodology, and the forecast for the full year remains unchanged as a result.
Synergy effects are explained on page 19. Synergy effects are brought about by volume discounts through the consolidation of various functions in the three Japanese shipping companies, and cost reductions due to an increase in bargaining power. We expected around 60% of these to emerge in fiscal year 2018, which is the first year, but the latest forecasts suggest that 80% may emerge, and good progress is being made.
Thank you very much for your kind attention.