We would like to explain our results for the fiscal year ended March 31, 2019.
A. Financial Highlights for Fiscal Year 2018
A-1. Financial Results for Fiscal Year 2018
The financial highlights for fiscal year 2018 were consolidated operating revenues of 836.7 billion yen, operating loss of 24.7 billion yen, ordinary loss of 48.9 billion yen, and loss attributable to owners of parent of 111.2 billion yen. On March 7, we announced a revision to our full-year consolidated forecast due to a provision for losses and structural reform expenses. We will explain our full-year results in comparison with this revised forecast announced on March 7.
Our ordinary loss of 48.9 billion yen compares with the forecasted loss of 46.0 billion yen. The results were 2.9 billion yen worse than the forecast mainly due to the dam-break in Brazil in January, which had a larger-than-expected impact on dry bulk market conditions and worsened results by about 1.6 billion yen. In addition to this, temporary expenses impacted results.
The loss attributable to owners of parent of 111.2 billion yen was 11.2 billion yen worse than the forecast, mainly due to the higher-than-forecast ordinary loss, as well as changes in structural reform expenses and additional impairment losses related to containerships. The additional impairment losses were recognized as a result of assessing future retrievability. Combined with the benefits of structural reforms, this will help to lower our expenses in fiscal year 2019 and beyond.
Please turn to page 3 and to the table on the lower left of the page. One key financial indicator in the medium-term management plan is equity ratio. Due to the implementation of structural reform, the ratio declined to 11% at the end of fiscal year 2018 (end of March 2019). At the start of fiscal year 2019, we raised new funds through a subordinated loan of which 50% was assigned equity credit. Additionally, on April 1, we sold a portion of our shares in three domestic harbor transportation subsidiaries to boost our equity capital. As a result of these moves, our equity ratio is regarded as 16% as of the beginning of April. We will explain these factors in more detail later.
A-2. Financial Results for Fiscal Year 2018 by Segment
In regard to our segment results, we did not announce revisions to the forecasts on March 7. Therefore, we would like to explain our results in comparison to the forecast announced with the third-quarter financial results at the end of January 2019. The Dry Bulk segment posted a profit of 4.4 billion yen, 1.6 billion lower than forecast, due mainly to the rapid and severe deterioration of overall market conditions following the dam break in Brazil. The Energy Resource Transport segment posted a profit of 2.5 billion yen, 0.5 billion yen lower than forecast. The segment performed well overall, thanks to mid-long-term contracts, but temporary expenses impacted the results. The Product Logistics segment posted a loss of 49.2 billion yen, 16.2 billion yen lower than forecast. As announced on March 7, we recognized a provision for loss related to containership charter contracts for chartered vessels to ONE in fiscal year 2019.
A-3. Financial Results for Fiscal Year 2018 versus Assumption as of January 2019
In comparison with the ordinary loss of 28.0 billion yen forecasted at the end of the third quarter, the actual ordinary loss expanded by 20.9 billion yen to 48.9 billion yen as a result of the 15.1 billion yen provision for loss related to containership charter contracts for fiscal year 2019 and 1.6 billion yen from the deterioration of profitability in the Dry Bulk segment, along with other factors.
A-4. Progress of Management Plan in Fiscal Year 2018
Looking back on fiscal year 2018, the second year of the current medium-term management plan, the biggest issues we faced were the impact of the downward revision to ONE’s results announced on October 16, 2018, and the deterioration in the profitability of Car Carrier Business. These were the two main factors behind our regrettable failure to meet the three key financial targets of maintaining profitability for three straight years, raising our equity ratio to the mid-20% range and the early resumption of dividends.
On the other hand, as we will explain in more detail later, the comprehensive structural reforms we announced in March are designed to generate sustainable improvement in profitability, instead of just one-time effect. In that regard, we are focused first on achieving full-year profitability for fiscal year 2019. In regard to shareholders’ equity that decreased as a result of structural reforms, we mentioned earlier that we have completed fund-raising of 45.0 billion yen through a new subordinated loan. The credit rating agency JCR has assigned equity credit to 50% of this loan, and additionally we have boosted equity by selling a portion of shares in three domestic harbor transportation subsidiaries. Taking these factors into consideration, it follows that we raised the equity ratio to 16% as of the start of April.
In other areas, we are making progress on advancement of management, function-specific strategies and pursuit of ESG initiatives. One key achievement in this regard was being recognized as “A List,” the top rating, on climate change from Carbon Disclosure Project “CDP.” We will continue to make further progress on these and other initiatives.
A-5. Structural Reforms Results in FY2018/Implementation of Measures to Strengthen Capital Base
Next, we would like to explain the results and benefits of the structural reforms. In our March announcement, we forecast approximately 50.0 billion yen in charter cancellation expenses for approximately 25 high-cost vessels. We finally cancelled contracts for six dry bulk vessels and 17 containerships, for a total of 23 vessels, by gaining the cooperation of the ship owners. This generated an extraordinary loss of 51.9 billion yen. In terms of benefit, we forecast a profit of 11.0 billion yen for fiscal year 2019 alone. Additionally, as previously mentioned, we recognized a provision for loss related to containership charter contracts in fiscal year 2018, and this will raise the probability of improvement in Containership Business for fiscal year 2019.
Looking at the bottom graph, the implementation of structural reforms eroded shareholders’ equity by 51.9 billion yen. Review of the business portfolio, including the sale of a portion of shares in three domestic harbor transportation companies, will enhance shareholders’ equity by 20.0 billion yen, while the sale of non-core assets will raise 17.0 billion in extraordinary income, and 22.5 billion yen from the 50% equity-rated portion of the 45.0 billion subordinated loan will further boost equity. Besides, as for the benefits of the structural reforms, we expect to raise shareholders’ equity by 11.0 billion yen in fiscal year 2019, by a further 9.5 billion yen in fiscal year 2020, and by another 10.5 billion yen in fiscal year 2021. Through steady implementation of these measures, we will strive to restore eroded shareholders’ equity as quickly as possible.
B-1. Forecasts for Fiscal Year 2019
Now we would like to discuss the full-year forecasts for fiscal year 2019. We forecast consolidated operating revenues of 378.0 billion yen for the first half of the fiscal year and 382.0 billion yen for the second half of the year, totaling 760.0 billion yen for the full year. We forecast operating income of 8.0 billion yen for the first half and operating loss of 2.0 billion yen for the second half, for full-year operating income of 6.0 billion yen. We forecast ordinary income of 10.0 billion yen for the first half and ordinary loss of 5.0 billion yen for the second half, for full-year ordinary income of 5.0 billion yen. We forecast net income attributable to owners of parent of 6.0 billion yen for the first half and 5.0 billion yen for the second half, a total of 11.0 billion yen for the full year. Regarding the ordinary loss forecast for the second half, as previously mentioned, a provision for loss related to containership charter contracts for fiscal 2020 is to be recognized in the fourth quarter of fiscal year 2019.
With regard to segments, we forecast operating revenues of 229.0 billion yen and ordinary income of 4.0 billion yen for the Dry Bulk segment. The softness caused by the Brazil dam break has carried over to the start of the fiscal year and will impact results for the first half. We are meeting IMO requirements on SOx regulation taking effect in January 2020. The ordinary income forecast of 4.0 billion yen reflects the previous year’s result of 4.4 billion yen minus 0.4 billion yen for vessel off-hire to install SOx scrubber equipment.
In regard to the Energy Resource Transport segment, we expect market conditions for VLCC and other tankers to be on par with fiscal year 2018, but forecast ordinary income of 7.0 billion yen, an improvement of 4.5 billion yen year-on-year. This is because we are pressing forward with initiatives, such as building up mid-long-term contracts, mainly for LNG vessels that generate stable profit, while also refocusing our portfolio through withdrawal from the clean product tanker market as selection and concentration.
The Product Logistics segment includes ONE and Car Carrier Business, both of which are priority issues for us. In regard to ONE, we forecast an equity method investment gain of 2.8 billion yen, reflecting a year-on-year profitability improvement. Overall, the Containership Business is forecast to post a loss of 11.0 billion yen. Car Carrier Business is forecast to make an improvement of 5.5 billion yen. We have taken full-scale reform measures since the second half of fiscal year 2018, including a thorough review of route profitability to rationalize unprofitable routes and restore freight rates.
Logistics Business and the Short Sea and Coastal Business are forecast to continue generating stable profit in fiscal year 2019. The Product Logistics segment as a whole is forecast to post a full-year loss of 3.0 billion yen, representing a year-on-year improvement of 46.2 billion yen. Other business is forecast to generate income of 1.5 billion yen, a slight improvement over fiscal year 2018.
Our assumptions for fiscal year 2019 are an average exchange rate of 109 yen to the dollar and average bunker fuel price of 584 dollars per metric ton. Part of the reason for the higher fuel cost is the switch to a new fuel compliant with IMO’s SOx regulations, which greatly lowers sulfur content from 3.5% to 0.5%, from the second half of fiscal year 2019 to fiscal year 2020. A change of one yen in the exchange rate results in a fluctuation of 0.54 billion yen, and a 10-dollar fluctuation in the bunker fuel price has an impact of 0.05 billion yen.
Regarding dividends, one of the priority issues in our medium-term management plan is the return of profits to shareholders. At the same time, improving our financial condition is an urgent issue as we continue to take measures to improve profitability. Under these circumstances, we currently have not made a decision on whether or not to pay an interim or year-end dividend.
B-2. Forecasts for Fiscal Year 2019 versus Financial Results for Fiscal Year 2018
Looking closer at Containership Business overall, we forecast a year-on-year profitability improvement of 37.8 billion yen. Our equity in gains and losses from ONE is forecast to improve profitability by 23.0 billion yen year-on-year, Containership Business structural reforms are forecast to improve profitability by 9.4 billion yen, and the main containership business’s profitability is expected to improve by 5.4 billion yen, for a total improvement of 37.8 billion yen. “K” LINE’s own business is expected to post a 16.1 billion yen improvement in profitability. This includes dry bulk structural reforms generating an improvement of 1.6 billion yen; profitability measures in each segment generating 2.8 billion yen; car carrier route rationalization through full-scale consolidation of unprofitable routes and rate restorations generating 5.5 billion yen; and the benefit of increased mid-long-term contracts in the Energy Resource Transport segment generating 2.9 billion yen improvement. These and other measures combined will improve profitability by 16.1 billion yen. With these improvements, we forecast full-year ordinary income of 5.0 billion yen.
B-3. Objectives for Fiscal Year 2019 onwards and next Medium-Term Management Plan
We are strengthening governance of ONE. Since last year, we have held monthly management meetings attended by the CEOs of the three parent companies. We have also greatly improved the sophistication of the reporting structure from ONE to the parent companies to enable us to closely monitor ONE’s business activities. Since spinning off the containership business, we continue to refine the portfolio strategy and restructure affiliates. In regard to advanced business management, we have already transitioned from the preparation stage to launching initiatives, and in the final year of the management plan in fiscal year 2019, we will thoroughly introduce business risk and return management to provide a foundation for next-generation growth in its core businesses.
Regarding the enhancement of shareholders’ equity eroded by the structural reforms, as previously mentioned, the structural reforms are leading to higher profitability, and on that basis we will strive to stably rebuild our shareholders’ equity.
D. Ocean Network Express - Financial Results for Fiscal Year 2018
Please turn to page 20 for an overview of ONE’s results. For full-year fiscal year 2018, we forecast a loss of 594 million dollars at the announcement of the third-quarter results. The result was a loss of 586 million dollars, or 8 million dollars better than forecast. Recently, Asia-North America freight rate market conditions have been firm, while Asia-Europe spot freight rate market conditions have bottomed after trending downward for a period, as shown by the SCFI (Shanghai Containerized Freight Index) and other indicators.
Please turn to page 22 for an overview of the forecasts for fiscal year 2019. We aim for a profit of 85 million dollars, a year-on-year improvement of 671 million dollars. The disruption that we witnessed at the start of the service has now been resolved, and the fourth quarter showed considerable improvement, as shown by strong recovery in liftings and utilization in the fourth quarter. The main assumption for fiscal year 2019 is that liftings will return to close to the same levels as seen prior to integration of the three shipping companies. Additionally, excluding the year-on-year comparison with the first quarter of fiscal year 2018 when operations just began, we forecast only slight year-on-year increases in Asia-North America and Asia-Europe round-trips for the second and fourth quarters. There are no forecasts for large increases year-on-year.
The waterfall chart on page 23 shows our analysis of the effects of various factors on forecasts for fiscal year 2019. Using the fiscal year 2018 loss of 586 million dollars as the starting point, we forecast improvement in liftings and utilization that improve profitability by 400 million dollars now that the disruption has passed. The optimization of products is expected to boost profitability by 260 million dollars. Product optimization includes route rationalization by using pendulum allocation and services for the North American West Coast routes and Northern Europe routes, consolidating unprofitable routes, mainly in Asia, and taking other measures to consolidate and discontinue unprofitable business. Most of these efforts have already been completed as planned. Optimization of cargo portfolios is expected to generate an improvement of 190 million dollars. Last year, the three parent companies started business at ONE based on contracts they negotiated themselves, but this year, ONE will directly negotiate with clients to renew each contract with the aim of restoring freight rates, creating a better balance of inbound and outbound, including inland distribution in North America, and raising route profitability.
In regard to freight rates, the ONE Bunker Surcharge, or OBS, is a levy specific to ONE contracts to cover IMO’s SOx compliance and other factors. This will boost profitability by an expected 270 million dollars. Additionally, ONE has already started to reduce overhead costs, and these efforts will improve profitability by 50 million dollars. In terms of factors reducing profitability, we forecast the impact of higher bunker fuel prices at 190 million dollars. Variable costs are also rising due to some contract renewals, and this negative impact is forecast to be 90 million dollars. ONE will adopt IFRS accounting standards from fiscal year 2019, and the adoption of IFRS lease accounting will negatively impact profitability by 70 million dollars. Taking into account some other one-time factors, we forecast an 85 million dollar profit for the year.
Returning to “K” LINE, we will strive in fiscal year 2019 to support ONE through effective governance and aim to return to profitability. We plan to improve our profitability by boosting profitability of Car Carrier Business and by continuing to increase the portfolio of mid-long-term contracts in the Dry Bulk and Energy Resource Transport segments.
One final point before we conclude this briefing. As stated in a separate announcement today, we have nominated Mr. Ryuhei Uchida, a Director of Effissimo Capital Management Pte Ltd (hereinafter referred as “ECM”), which is a major shareholder of “K” LINE, as a candidate for Outside Non-Executive Director, and will submit the proposal for his nomination at the General Meeting of Shareholders. Mr. Uchida’s inclusion on our Board of Directors will enable us to gain insight from ECM, which invests in many Japanese companies, and contribute to raising our corporate value over the medium and long term. ECM has expressed its trust in “K” Line management and our medium-term management plan.
