We would like to begin the briefing on “K” Line’s consolidated financial results for the second quarter of the fiscal year ending March 31, 2020.


A-1. Financial Results for 2nd Quarter Fiscal Year 2019


For the first half of fiscal year 2019, operating revenues totaled 372.4 billion yen, operating income totaled 11.1 billion yen, ordinary income totaled 13.4 billion yen, and net income attributable to owners of parent totaled 16.3 billion yen. Ordinary income improved by 34.7 billion yen year-on-year and was 3.4 billion yen higher than the previous forecast. Net income attributable to owners of parent increased 40.9 billion yen year-on-year and was 9.3 billion yen above the previous forecast. The average exchange rate for the first half of the year was 109.18 yen per US dollar, and the average bunker price was $440 U.S. dollars per metric ton.


At the previous financial results briefing, we explained three key issues for “K” Line. The first was reducing fleet costs. We have cancelled charter contracts for high-cost vessels and taken other measures as structural reforms at the end of the previous fiscal year. The benefits of these measures are beginning to materialize. The second was our efforts to achieve profitability in Car Carrier Business. We have thoroughly rationalized service routes with a view towards prioritizing profitability, while working earnestly to achieve rate restoration. These measures are bearing fruit as we establish a structure to ensure steady profitability. The third issue was the profitability improvement of Ocean Network Express (hereinafter referred to as “ONE”). ONE has recovered from an initial period of instability experienced after its establishment, and it is striving to recover cargo opportunities lost last year. In fiscal year 2019, ONE began to renew its service contracts based on its marketing policy, and the benefits are beginning to materialize. Although ONE’s results still have room for improvement, they were generally in line with our forecast for the first half.


The Dry Bulk segment posted ordinary income of 0.2 billion yen in the first six months, representing a deterioration of 1.9 billion yen year-on-year and 0.8 billion yen lower than the previous forecast. Market conditions weakened significantly in the first half of this year and remained sluggish until a recovery in iron ore shipment volumes from Brazil and a resurgence in grain shipments from South America. Market conditions continue to recover. We also succeeded in reducing fleet costs through the previously-mentioned structural reforms and we expect full-year results to exceed our initial forecast.


The Energy Resource Transport segment was boosted by robust market conditions for oil tankers along with stable income from long-term contracts in LNG Carrier and Thermal Coal Carrier Businesses. Market conditions surrounding Offshore Support Vessel Business have bottomed out and improved to some extent. Additionally, we succeeded in limiting the impact of foreign exchange rate fluctuations through forward contracts. As a result, the Energy Resource Transport segment as a whole posted ordinary income of 4.6 billion yen, an improvement of 3.0 billion yen year-on-year and 1.1 billion yen higher than our previous forecast.


In the Product Logistics segment, looking at ONE’s results, although spot freight rates were lower than forecast, mainly on Asia-North America and Asia-Europe routes, ONE improved profitability with meticulous operational management, including optimization of its cargo portfolio by managing its service contract renewals for the first time as ONE, reduction in vessel operation costs through route rationalization, and reduction in variable costs due to benefits generated from synergies. “K” Line’s equity in ONE's ordinary income amounted to 4.5 billion yen, which was generally consistent with the initial plan at the start of the year. Containership Business as a whole posted ordinary income of 3.6 billion yen, representing year-on-year growth of 27.0 billion yen and 0.5 billion yen higher than previously forecast. The improvement reflects the absence of temporary expenses posted immediately after the transfer of business to ONE in the previous fiscal year, and an improved profitability as a result of structural reforms taken at the end of fiscal 2018.


In businesses other than Containership within the Product Logistics segment, as mentioned previously, Car Carrier Business improved due to successful measures to raise profitability, while Logistics Business and Short Sea and Coastal Business both achieved steady profits. All together, these other businesses posted 6.9 billion yen in ordinary income, a year-on-year improvement of 6.5 billion yen and 1.9 billion yen higher than the previous forecast. The Product Logistics segment on the whole, combining these other businesses with Containership segment, posted 10.5 billion yen in ordinary income, an improvement of 33.5 billion yen year-on-year and 2.4 billion yen higher than the previous forecast.


Regarding net income attributable to owners of parent, we continued to review our business and fleet portfolio. In relation to the portfolio changes, we posted extraordinary income on gain from the sale of assets in the first half, while our loss from liquidation of subsidiaries and affiliates in relation to the integration of Containership Business was lower than our conservative forecast. As a result, net income attributable to owners of parent for the first half was 16.3 billion yen, 9.3 billion yen higher than the previous forecast.


In terms of our key financial indicators, our equity capital stood at 115.5 billion yen, 11.9 billion yen higher than the end of the previous fiscal year, while interest-bearing liabilities declined 1.2 billion yen to 549.0 billion yen. Our equity ratio improved 2 points from the end of the previous fiscal year to 13%.



A-2. Forecasts for Fiscal Year 2019


Regarding our consolidated forecasts for the full year, while there has been some variation in the segment results and forecasts for the first half and second half, we have maintained the previous full-year forecasts for all profit levels from operating income and below. The current full-year forecast is operating revenues of 740.0 billion yen, operating income of 6.0 billion yen, ordinary income of 5.0 billion yen, and net income attributable to owners of parent of 11.0 billion yen. The ordinary income forecast of 5.0 billion yen would be a year-on-year improvement of 53.9 billion yen, while net income attributable to owners of parent of 11.0 billion yen would represent a year-on-year improvement of 122.2 billion yen, assuming an exchange rate of 108 yen to one US dollar in the second half, and a bunker price of 531 US dollars per metric ton for the second half compared to the previous forecast of 677 US dollars per metric ton. This revision reflects the shrinking of price difference between the regulation compliant fuel oil and the high sulfur fuel oil compared to the initial forecast. Regarding the impact of exchange rate and bunker price volatility in the second half, a change of 1 yen in yen-US dollar exchange rates will impact operating income by plus or minus 0.23 billion yen, and a change of 10 US dollars in bunker fuel prices will impact operating income by plus or minus 0.05 billion yen.


Regarding net income attributable to owners of parent, as we mentioned earlier, our first-half result was higher than forecast. For the second half as well, we expect to record a certain amount of extraordinary income. We are considering multiple deals to sell assets as part of our overall business portfolio restructuring, including the sale of overseas terminals. Regarding these deals, we plan to start with feasible ones where appropriate. Regarding dividend payments, which we greatly regret, it has been decided that no interim dividend will be paid. In keeping with our Medium-Term Management Plan, our priority is placed on improvement of financial strength, which we view as a pressing issue, and we are striving to improve our financial results. No decision has yet been made regarding payment of a year-end dividend at this point.



A-3. Forecasts for Fiscal Year 2019 by Segment


Regarding individual segments, the Dry Bulk segment posted a year-on-year decline in operating revenues for the first half due mainly to a significant slump in market conditions at the start of Fiscal Year 2019, which gave some impact into the first half beginning in April. For the second half, the supply of vessels is expected to decline due to increased off-hire for scrubber installation, mainly among large vessels. With a better supply-demand balance and an improvement in market conditions, the Dry Bulk segment is expected to post higher operating revenues. For the full year, we forecast Dry Bulk operating income of 5.0 billion yen, which would be a 0.5 billion yen year-on-year increase and 0.5 billion yen improvement over the previous forecast.


For the Energy Resource Transport segment, oil tanker market conditions are strengthening due to US sanctions against Chinese shipping companies in relation to the Iran issue. Additionally, we are generating stable earnings from highly-profitable long-term contracts for LNG and thermal coal carriers. In Offshore Energy E&P Support Business, as we previously mentioned, market conditions have bottomed out and are improving, while they are not yet at firm levels. Therefore, for the entire Energy Resource Transport segment, we forecast 9.0 billion yen in full-year ordinary income, which would be a year-on-year improvement of 6.5 billion yen and an improvement of 2.0 billion yen compared with our previous forecast.


In the Product Logistics segment, ONE’s results for the first half were generally consistent with forecasts. For the second half, we have revised assumptions for spot freight rate market conditions based on recent movements, stemming from the economic slowdown concerns from the US-China trade friction. Additionally, we expect lower liftings on Asia-North America and Asia-Europe routes due to service frequency reduction in our winter service plan, although ship operation costs will also decline. For the full year, we expect ONE to generate 2.3 billion yen in ordinary income corresponding to “K” Line’s equity, which would be a year-on-year improvement of 22.4 billion yen and a decline of 0.8 billion yen compared with the previous forecast. For the entire Containership Business, we forecast a significant improvement in ordinary income due to the positive effects of structural reforms and a decline in temporary costs, which were recorded last year. However, ONE’s reduction of services will negatively impact cargo volumes at domestic and foreign terminals, and therefore we have revised the forecast for ordinary loss to 13.5 billion yen, a deterioration of 1.5 billion yen compared with the previous forecast.


In other businesses in the Product Logistics segment, we are making strong improvements in profitability compared to the same period last year, mainly in Car Carrier and Logistics Businesses due to previously-mentioned comprehensive rationalization of our route network and other profitability enhancement measures. In the second half, however, intra-Europe services will be reduced in response to Brexit, lower cargo volumes to South America due to economic trends in Argentina, and temporary expenses for fuel switching costs to meet SOx regulations. In Logistics Business, some areas of Air Cargo Business are expected to slump. As a result, Product Logistics Segment Businesses excluding Containerships is expected to post ordinary income of 8.0 billion yen, 8.4 billion yen higher than the previous year but 1.0 billion yen lower than our previous forecast. For the entire Product Logistics segment including Containerships, we forecast an ordinary loss of 5.5 billion yen, which would be a year-on-year improvement on 43.7 billion yen, but a decline of 2.5 billion yen compared with our previous forecast.


We forecast consolidated ordinary income of 5.0 billion yen for the full year, consistent with the previous forecast. The 2.5 billion yen deterioration in the Product Logistics segment, including ONE, is expected to be offset by a combined improvement of 2.5 billion yen in the Energy Resource Transport segment and Dry Bulk segment. We have therefore maintained our previous ordinary income forecast.



A-4. Latest Forecasts for Fiscal Year 2019 – vs. Financial Results for Fiscal Year 2018


Compared with the 48.9 billion yen in ordinary loss for fiscal 2018, we forecast ordinary income of 5.0 billion yen, or an improvement of 53.9 billion yen. We forecast an improvement of 35.3 billion yen in Containership Business, which breaks down into an improvement of 22.4 billion yen at ONE, corresponding to our equity stake, 3.5 billion yen improvement in “K” Line’s own Containership Business excluding ONE, and 9.4 billion yen from the effects of structural reforms in fiscal year 2018. Besides Containership Business, we forecast an improvement of 18.6 billion yen in “K” Line’s own business. This includes 1.6 billion yen from the effects of structural reforms in the Dry Bulk segment, 2.8 billion yen from various measures to improve profitability, and 5.0 billion yen improvement from Car Carrier route rationalization, etc. We previously forecast these improvements to be 5.5 billion yen, and the current forecast of 5.0 billion yen is nearly consistent with this. Furthermore, the stronger market conditions and expansion of mid/long-term contracts in the Dry Bulk and Energy Resource Transport segments is expected to boost income by 7.0 billion yen, while exchange rate volatility is expected to lower profitability by 1.5 billion yen, with other effects expected to increase profitability by 3.7 billion yen. Overall, therefore, for “K” Line’s own businesses, we forecast a profitability improvement of 18.6 billion yen compared with the previous year, or 1.5 billion yen higher than our previous forecast.



A-5. Progress of Main Initiatives for 2nd Quarter Fiscal Year 2019


We continue to transform our portfolio strategy, which began at the end of the previous fiscal year with implementation of our structural reform program. In the Dry Bulk segment, for instance, we continue to expand our stable income business, mainly for our large vessels. In October, we commenced a long-term consecutive voyage contract for JFE Steel Corporation. We have also formed a consecutive voyage contract with Nippon Paper Industries Co., Ltd. as part of our efforts to build up stable contracts. In the Energy Resources Transport segment, we have also made strides accumulating stable income business, mainly for LNG and Thermal coal carriers. In July, we announced the establishment of an ownership and operation joint venture company with Taiwan Power Company and other partners, while in the second quarter, we announced the delivery of Thermal coal carriers for Hokuriku Electric Power Company and J-POWER.


In terms of reducing the environmental load, we announced in June that we will install the “Seawing” automated kite system on a large-sized bulk carrier. This system was researched and developed over the past two years in collaboration with AIRSEAS, a spinoff of aircraft manufacturer Airbus. In keeping with “K” Line Environmental Vision 2050, we are introducing cutting-edge environmental protection technologies to further reduce greenhouse gas emissions.



A-6.  Compliance with IMO SOx Regulations


Regarding initiatives for the second half of fiscal year 2019, we are making steady progress to meet SOx global cap regulations that take effect in January 2020. We have two main strategies. First, we have launched a global cap project team to meticulously plan the switch-over to regulation-compliant fuel for more than 300 vessels in our fleet, and they are making progress on a ship-to-ship basis. They are operating based on the policy of ensuring compliance with new regulations while also preventing any stoppage in voyages as a result of the switch-over. At the same time, a project team is coordinating with the sales divisions to minimize the economic impact of the switch-over.


We have also made progress with advanced procurement of regulation-compliant fuel at major ports, and we have nearly completed procurement for our needs with the exception of some smaller ports. Actual trials of usage have been successfully conducted on multiple types of vessels, including Cape-size vessels and Car Carriers, and we have completed assessment of the performance. We are also taking various measures to minimize the impact of higher fuel costs. Regarding high-sulfur fuel oil left over after the switch-over, we are planning to dilute this with low-sulfur marine gas oil (LSMGO), which has a very low sulfur content. We have already taken such steps as preparing sludge dispersion agents to minimize the amount of leftover fuel.


Further, with regard to increased fuel costs, we are carefully explaining to customers the need for an appropriate increase as a social and environmental cost. We are still in the process of holding discussions with some customers, but overall we are gaining their acceptance of the measures. This has been an intensive effort over the past two to three months on the part of our sales divisions, and we are just now coming to the end of the process.



C.  Ocean Network Express - Financial Results for Fiscal Year 2019 2nd Quarter and Forecasts for Fiscal Year 2019


Turning to ONE’s results, after-tax profit for the first half of fiscal year 2019 surged to 121 million dollars, a year-on-year improvement of 313 million dollars, as business rebounded from instability experienced after the company was launched last year. Both lifting volume and utilization rate improved, while ONE took its own measures for the first time to hike long-term contract rates on Asia -North America and Asia-Europe routes, particularly Asia-North America, optimizing its cargo portfolio, and lower operating costs by rationalizing routes. These combined measures led to the 121 million dollars profit. Revenue grew 146 million dollars year-on-year to 3,109 million dollars. Profitability improved through cargo portfolio optimization, cost reductions from synergy effects and lower variable costs.


Asia-North America eastbound lifting volume grew 12% year-on-year to 773,000-TEU, while utilization on these routes improved 4 points to 94%. Due to additional US tariffs on Chinese goods, some customers refrained from shipping. While there was improvement year-on-year in volume, the result was actually slightly less than the budget target. Asia-Europe westbound lifting volume surged 20% year-on-year to 488,000-TEU, while utilization improved 5 points to 95%. In Europe, various shipping alliances launched newly-delivered large-size vessels, causing supply growth to slightly outstrip demand growth. As a result, while lifting volume surpassed budget target, freight rates were slightly below the target. Regarding lifting volume on both Asia-North America westbound and Asia-Europe eastbound routes, as shown here, the results improved by about 30%, recovering from the initial instability after business launch.


Although first-half results were largely consistent with the forecast, as I mentioned earlier, we have revised downward the spot freight rates on Asia -North America and Asia-Europe routes for the second half due to current market trends. As a result, we currently forecast after-tax loss of 66 million dollars for the second half, a deterioration of 28 million dollars from the previous forecast. For the full year, we forecast ONE’s after-tax profit to be 60 million dollars, reflecting the 126 million dollar first-half profit and the 66 million dollar loss forecast for the second half. This represents a 30 million dollar downward revision from the previous forecast. “K” Line’s equity equivalent is forecast at 18.6 million dollar profit.


Regarding profitability improvement measures for fiscal year 2019, for the second half of the year, THE ALLIANCE is making progress reducing service frequency. In response to a decline in demand, steps will be taken from November to reduce service frequency on Asia-North America routes for the winter season. For Asia-Europe routes as well, discussions are underway with Hyundai Merchant Marine, which will join the Alliance in April next year, to reduce service frequency.


Additionally, the overhead cost reduction target for the current year is 50 million dollars, and steady progress is being made to meet this target. There is no change to our target of 1,050 million dollars in synergy benefits, with 82% fulfillment in fiscal 2018, 96% fulfillment in fiscal year 2019, and 100% fulfillment in fiscal 2020. Regarding MARPOL 2020 SOx regulations, we have been told that procurement of necessary volumes of regulation-compliant fuel has been completed. As for the increase in transport costs, we are asking customers to bear the higher cost. Customers have a higher consciousness of environmental problems, and they have generally agreed to the One Bunker Surcharge (OBS) to cover the cost increase. We have been told that such bunker surcharge has been added to long-term contracts, and the effort to gain customer acceptance is gradually being completed.