We would like to start the briefing on the consolidated results for the first nine months of the fiscal year ending March 31, 2020.
There are three key points to emphasize for our nine-month results. First, each of “K” LINE’s three core business segments, namely Dry Bulk, Product Logistics (Car Carriers, Logistics, Short Sea and Coastal), and Energy Resource Transport, performed very well during the period. Second, ONE posted a profit for the period. And third, regarding the IMO SOx regulations, we made a very smooth transition to the new regulation-compliant fuel oil. Additionally, the increased cost associated with the fuel switchover was generally within our expected range. Those are the three key points, and now we’d like to provide a summary of the results.
First, as of the end of the third quarter, there is no change to our full-year forecasts for ordinary income and net income attributable to owners of parent.
Currently, new risks are emerging, such as the impact of the spread of the new type of coronavirus. Despite the challenges, everyone in “K” LINE will be striving together in the last three months of this fiscal year to ensure a successful start to the new medium-term management plan to be started from next fiscal year.
A-1. Financial Results for 3rd Quarter FY2019
For the third quarter of the fiscal year, consolidated operating revenues were 194.8 billion yen, operating income was 10.6 billion yen, ordinary income was 11.2 billion yen, and net income attributable to owners of parent was 8.9 billion yen. For the first nine-month period, consolidated operating revenues were 567.2 billion yen, operating income was 21.6 billion yen, ordinary income was 24.5 billion yen, and net income attributable to owners of parent was 25.2 billion yen. The average exchange rate for the nine months was 109.05 yen per US dollar, and the average bunker price was 445 US dollars per metric ton.
Looking at the results by segment for the third quarter, Dry Bulk ordinary income was 3.8 billion yen, Energy Resource Transport ordinary income was 3.1 billion yen, and Product Logistics ordinary income was 5.2 billion yen, of which Containership Business posted income of 2.0 billion yen. Product Logistics’s remaining ordinary income of 3.2 billion yen, after subtracting Containership Business income of 2.0 billion yen, was derived from Car Carrier, Logistics, and Short Sea and Coastal Businesses. Containership Business income of 2.0 billion yen included equity in income of ONE of 0.3 billion yen. Total ordinary income for the three months was 11.2 billion yen.
For the nine-month period, Dry Bulk ordinary income was 4.0 billion yen, Energy Resource Transport ordinary income was 7.7 billion yen, and Product Logistics ordinary income was 15.7 billion yen, of which Containership Business posted income of 5.6 billion yen and equity in income of ONE was 4.8 billion yen. Product Logistics’s remaining ordinary income of 10.1 billion yen, after subtracting Containership Business income of 5.6 billion yen, was derived from Car Carrier, Logistics, and Short Sea and Coastal Businesses. Total ordinary income for the nine months was 24.5 billion yen.
Now we would like to explain the main business factors during the third quarter. In the Dry Bulk segment, market conditions in the first half showed upward momentum due to robust iron ore shipments from Brazil and grain shipment demand from South America. In the middle of the third quarter, however, shipments turned sluggish and market conditions softened. Under these conditions, we strove to raise the efficiency of vessel operation and allocation, with the result that the Dry Bulk segment posted 4.0 billion yen in third quarter ordinary income, a 0.4 billion yen year-on-year improvement.
Next, we would like to explain the Energy Resource Transport segment. Tanker market conditions recovered significantly at the start of the third quarter and have remained at high levels. The LNG Carrier and Thermal Coal Carrier Businesses have also performed as planned thanks to mid-to-long contracts. Offshore Energy E&P Support Business, which has been in an extended downturn, narrowed its losses after the market conditions improved somewhat. Overall, therefore, the Energy Resource Transport segment posted ordinary income of 7.7 billion yen, a year-on-year improvement of 5.7 billion yen.
In the Product Logistics segment, ONE posted its third straight quarterly profit. In the third quarter, although cargo movement on Asia-North America routes slumped, ONE suspended some services and continued to reduce service frequency to achieve a large reduction in vessel operating costs. Additionally, the supply-demand balance on Asia-South America and Asia-Europe routes improved. Finally, ONE improved its gross profit margin by reducing variable costs. The terminal business, which is “K” LINE’s remaining directly operated Containership Business, performed as expected. Overall, therefore, Containership Business posted ordinary income of 5.6 billion yen, a year-on-year improvement of 37.0 billion resulting from temporary costs to transfer business to ONE in the previous fiscal year.
Other businesses within the Product Logistics segment posted ordinary income of 10.1 billion yen, a year-on-year increase of 8.4 billion yen. Most of the improvement came from Car Carrier Business, which has continued to implement route rationalization and freight rate restoration measures since the second half of the previous fiscal year. Overall, therefore, the Product Logistics segment posted ordinary income of 15.7 billion yen, a year on year improvement of 45.4 billion yen.
Regarding key financial indicators, our equity capital, interest-bearing liability, DER, Net DER, and equity ratio all improved from the end of fiscal 2018. As of the end of the third quarter, our equity ratio stood at 14%, and in the case of taking subordinated loans with 50% equity credit from a rating agency into account, it was 18%.
A-2. Forecasts for FY2019
For the full year ending March 31, 2020, we forecast operating income of 5.0 billion yen, ordinary income of 5.0 billion yen, and net income attributable to owners of parent of 11.0 billion yen. Regarding net income attributable to owners of parent, specifically, the difference between the ordinary income of 5.0 billion yen and the net income of 11.0 billion yen, we continue to make progress on the sale of overseas terminal business. On the other hand, we also continue to review our business portfolio, and the earnings forecast takes into consideration all of these factors. Therefore, there is no change to the full-year earnings forecast. Our assumptions for average exchange rate is 109 yen to the US dollar, and an average bunker fuel price of 470 US dollars per metric ton.
Regarding the impact of exchange rate and bunker price volatility in the fourth quarter, a change of 1 yen in yen-US dollar exchange rates will impact operating income by plus or minus 0.08 million yen, and a change of 10 US dollars in bunker fuel prices will impact operating income by plus or minus 0.01 billion yen. Regarding dividend payments, we recognize resume dividend payment at an early stage as our important management task in our Mid-term management plan. Our priority is also to stabilize our financial strength and keep improving our financial results. No decision has yet been made regarding payment of a year-end dividend at this point.
A-3. Forecasts for FY2019 by Segment
Next, we would like to explain the full-year forecast for each segment. Please turn to page 5 of the materials.
This page shows the major changes in market conditions for each segment. In the Dry Bulk segment, market conditions surged during the second quarter, which is peak season. The market is currently in the low season, and we revised downward our assumptions for all vessel types due in part to these seasonal factors. Additionally, some vessels are undergoing extended period of SOx scrubber installation to comply with SOx regulations, and this is also having an impact. For the entire segment, we forecast full-year ordinary income of 3.5 billion yen, which would be a deterioration of 0.9 billion yen over the previous fiscal year and a deterioration of 1.5 billion yen compared to the previous forecast.
In the Energy Resource Transport segment, we forecast robust market conditions for the Tanker business as demand spikes during winter months and the supply of vessels shrinks due to vessel’s off-hire to meet SOx regulations. Thermal Coal Carrier, LNG Carrier, and Offshore Energy E&P Support Businesses are expected to perform as planned thanks to mid-to-long contracts. For the full year, we forecast ordinary income of 9.5 billion yen for the segment, which would be an improvement of 7.0 billion yen year on year and 0.5 billion higher than the previous forecast.
Regarding the Product Logistics segment results, ONE had strong results from the end of 2019 to the end of January, which is the traditional peak season before the Chinese New Year, mainly on Asia-South America and intra-Asia routes. Entering the low season after the Chinese New Year, the alliance plans to reduce service frequency further. Our forecast factors in the risk of a slump in short-term freight rate market conditions in the latter half of the fourth quarter, as well as the better-than-expected results of the third quarter. We forecast equity in ONE income of 3.1 billion yen, a year-on-year improvement of 23.2 billion yen and 0.8 billion yen higher than the previous forecast.
Regarding “K” LINE’s Containership Business, we have factored into the forecast provision for loss related to containerships chartering contract to ONE in the fourth quarter. In other businesses in the segment, some areas of the air forwarding business are slumping. Excluding Containership Business, the Product Logistics segment is forecast to post 8.0 billion yen in ordinary income, an improvement of 8.4 billion yen year on year and consistent with the previous forecast. The Product Logistics segment on the whole, therefore, is forecast to post an ordinary loss of 4.0 billion yen, a year-on-year improvement of 45.2 billion yen and 1.5 billion yen higher than the previous forecast.
A-4. Latest Forecasts for FY2019 – vs. Financial Results for FY2018
Reviewing the waterfall chart, the major factors in improving profitability from a full-year ordinary loss of 48.9 billion yen for the last fiscal year to an estimated ordinary income of 5.0 billion yen for the current fiscal year are the improvement of 23.2 billion yen from equity in income of ONE, 9.4 billion yen from effects of structural reforms in Containership Business, 6.5 billion yen from expansion of mid-long contracts in the Dry Bulk and Energy Resource Transport segments, and 5.0 billion yen from effects of route rationalization and freight rate restoration in Car Carrier Business.
A-6. Compliance with IMO SOx Regulations
Regarding measures to comply with SOx regulations, we have completed the switchover to regulation-complaint fuel oil as planned even while maintaining our core policy of keeping vessels in service to minimize the economic impact. Furthermore, we kept the cost increase to within the estimated range. Some off-hire vessels have taken slightly longer than expected to complete installation of SOx scrubbers, but these cost increases are already factored into the earnings forecast.
B. Division Trends
Our market-exposure rate versus the fleet size improved compared with the end of the second quarter. Regarding Car Carrier Business explained on page 13, the total units carried for the third quarter are shown along with the estimated shipments for the fourth quarter. Globally, automobile sales are declining, and therefore units carried is also declining.
C. Ocean Network Express - Financial Results for FY2019 3rd Quarter and Forecasts for FY2019
Regarding ONE’s results, as previously explained the company posted a profit of 5 million US dollars for the third quarter, while the forecast for the fourth quarter is a loss of 49 million US dollars. The full-year forecast is a profit of 81 million US dollars, representing an upward revision of 21 million US dollars over the previous forecast of 60 million dollars. The company has now posted a profit for three consecutive quarters.
Looking at ONE’s cargo movement trends, volume was in line with forecasts for East-West, North-South and intra-Asia routes until the Chinese New Year in late January. After the end of the Chinese New Year, however, cargo movement is expected to slump, partly because of the impact of the spread of the coronavirus. In response to the demand decline, ONE plans to reduce service frequency further, mainly under THE Alliance for East-West routes, in order to reduce operating cost. Variable costs, such as empty containers positioning optimization, have been reduced even beyond forecasts, significantly boosting profitability. These and other internal programs are raising the company’s contribution margin.
In the third quarter, the price of previously used HFO (heavy fuel oil) was lower than forecasts, boosting profitability. The price of regulation-compliant fuel oil from January is in line with the previous forecast. In compliance with IMO’s SOx (MARPOL 2020) regulations, ONE procured regulation-compliant fuel oil in advance and implemented micromanagement for each vessel operation. The transition was completed smoothly in December. Additional bunker costs incurred by compliance is being recovered as planned through bunker surcharges such as OBS (ONE BUNKER SURCHARGE).
Page 17 has a waterfall chart showing the factors behind the 21 million US dollar upward revision to profit. While the declines in freight rates and liftings are negatively affecting profit, the reductions in variable and operation costs, along with the drop in bunker prices, outweigh these factors, leading to the 21 million US dollar upward revision.
Page 18 shows the lifting, utilization, and freight rate indices. Regarding the results for the third quarter, Asia-North America eastbound liftings declined from 746,000TEU in the third quarter of fiscal 2018 to 665,000TEU in the third quarter of fiscal 2019. The main factor in the decline was the rush demand in the previous year due to US-China trade friction, and a comparative decline in the third quarter of the current fiscal year. Asia-Europe westbound liftings in the third quarter declined slightly from 442,000TEU a year earlier to 440,000TEU.
Utilization on Asia-North America declined from 95% in the third quarter of fiscal 2018 to 93% in the third quarter of fiscal 2019. Utilization on Asia-Europe was unchanged at 92%. Regarding freight rates, the Asia-North America index declined from 108 in the third quarter of fiscal 2018 to 104 in the third quarter of fiscal 2019, while the Asia-Europe index declined from 100 to 98 year on year. Although none of these indices improved year on year, ONE ensured profitability by taking cost-cutting measures and, as stated in the materials, reducing service frequency on major routes.
