A. Financial Highlights for 2nd Quarter FY2020
A-1：Financial Results for 2nd Quarter FY2020
For the second quarter of the fiscal year ending March 2021, consolidated operating revenues were 147.9 billion yen. Operating loss was 3.6 billion yen. Ordinary income was 11.0 billion yen, and net income attributable to owners of parent was 10.6 billion yen. For the first half of this fiscal year, consolidated operating revenues totaled 300.1 billion yen, a decline of about 20% year on year due to the novel coronavirus (COVID-19) impact. Operating loss totaled 10.2 billion yen. Ordinary income totaled 10.0 billion yen, and net income attributable to owners of parent was 9.6 billion yen, a year-on-year decline of 6.7 billion yen. The ordinary income result of 10.0 billion yen exceeded the revised forecast disclosed on September 24th by 2.0 billion yen. The average exchange rate was 105.90 yen per US dollar, and the average bunker price was 331 US dollars per metric ton.
In terms of financial indicators, as of September 30, 2020, our equity capital was 106.7 billion yen, an increase of 5.6 billion yen compared with the end of the previous fiscal year. Interest-bearing liability was 578.0 billion yen, an increase of 34.5 billion yen.
Cash and cash equivalents at the end of the second quarter totaled 150.8 billion yen, equal to more than three months of operating revenues. Net DER was 398%. Our equity ratio improved 1 point over the end of the previous fiscal year to 12%, and it was about 16% when including the equity credit assigned by a rating agency to our subordinated loans.
A-2：Financial Results for 2nd Quarter FY2020 by Segment
In the Dry Bulk segment, Cape-size market conditions began to recover in the second quarter after a significant first-quarter decline due to COVID-19. The recovery was driven by higher steel products demand in China and iron ore shipments from Brazil. Market conditions for Panamax and smaller size vessels also began to recover due to China’s purchase of soybeans and other agricultural products from the United States as well as an upturn in iron ore shipments from India. However, the Dry Bulk segment as a whole posted lower second-quarter revenues and profitability compared with the previous fiscal year, with an ordinary loss of 4.9 billion yen. The results reflected the steep first-quarter decline, partly because of the voyage completion method for accounting.
In the Energy Resource Transport segment, Tanker and LNG Carrier businesses performed well as a result of stable medium- to long-term contracts. Offshore Support Vessel Business market conditions deteriorated year on year due to the slump in crude oil prices. As a result, the overall Energy Resource Transport segment posted ordinary profit of 1.8 billion yen, as both revenue and profit declined year on year.
In the Product Logistics segment, Car Carrier Business suffered a major impact from COVID-19, with first-quarter shipment volume declining by about 50% year on year. Market conditions recovered somewhat in the second quarter after global car sales volume bottomed out and began to rebound gradually, and factories temporarily closed or shut down in various countries began to reopen for production. Shipment volume in the second quarter declined about 30% year on year, and the business posted a loss for the second quarter.
In Containership Business, ONE, equity-method affiliate posted a year-on-year increase in profit. Although containership cargo movements declined due to COVID-19, the company responded flexibly to fluctuating demand by adjusting vessel allocation and implemented void sailings as necessary. At the same time, ONE benefitted from firm freight rate market conditions and lower bunker fuel prices, while also making progress reorganizing its cargo portfolio.
In Logistics Business, although transport volume declined overall, Buyer’s consolidation business, which counts e-commerce companies as its main customers, performed well as a result of growth in e-commerce and growing stay-at-home demand.
Short Sea and Coastal Businesses, including ferry services, also suffered a major impact from COVID-19, as people limited their travel.
Overall, the Product Logistics segment recorded a year-on-year decline in operating revenue but ordinary income of 15.7 billion yen, as the strength of Containership Business offset the declines in Car Carrier and Short Sea and Coastal Businesses.
B. Forecasts and Initiatives for FY2020
B-1：Forecasts for FY2020 and Key Factors
Regarding the full-year outlook, we forecast operating revenues of 590.0 billion yen, representing a 20% year-on-year decline, which is on par with the first-half decline. Operating loss is forecast at 25.0 billion yen. We project to break even on an ordinary basis, while net income attributable to owners of parent is forecast at 20.0 billion yen.
In the second half, we project a gradual recovery from the significant first-half downturn caused by the spread of COVID-19. Overall, however, the situation is still unpredictable and the market will continue to feel some level of impact from COVID-19, as infections increase in the United States and Europe begins to suffer a second wave.
We forecast to break even on an ordinary basis. Net income attributable to owners of parent is forecast at 20.0 billion yen as a result of the sales of the overseas terminal business and other assets. Our assumptions for average exchange rate are 105 yen per US dollar for the second half and 105.98 yen per US dollar for the full year, and an average annual bunker price of 362 US dollars per metric ton.
We sincerely regret that we have decided not to pay interim dividend. Our decision is based on a comprehensive analysis of our current-period results, future business trends, investments to ensure future growth, and the need to improve our financial strength. The year-end dividend remains to be determined at this time, and at a future date we will make an announcement based on a comprehensive analysis of the business outlook and our financial strength. We would like to offer our sincere apologies to our shareholders and restate our commitment to improving our results and strengthening our finances.
B-2：Forecasts for FY2020 by Segment
Looking at the Dry Bulk segment, in the second quarter, global crude steel production declined nearly 9% year on year. In the July-September period, however, we can see that economic stimulus programs in countries around the world, infrastructure development in various countries, primarily China, and global car sales rebounded on quarter-on-quarter basis. Besides, crude steel production by Japanese steel mills in the April-June period slumped about 30% year on year before recovering somewhat to an approximately 20% year-on-year decline in the July-September period.
It is important to note that a second wave of COVID-19 infections has begun, mainly in Europe, and a full-scale recovery will take more time. Although we forecast that the Dry Bulk segment will rebound to profitability for the second half, the recovery will not be enough to offset the significant loss in the first half. As a result, we forecast a full-year ordinary loss of 7.0 billion yen for the segment, which would represent a year-on-year deterioration of 11.1 billion yen.
In the Energy Resource Transport segment, Tanker, LNG Carrier businesses are forecast to perform stably as a result of medium- to long-term contracts. Regarding Offshore Support Vessel Business, we are cutting costs and taking other measures to improve profitability amid the ongoing decline in crude oil prices. Regarding Drillship Business, we forecast a temporary deterioration in profitability due to the crude oil price slump as well as COVID-19. For the entire Energy Resource Transport segment, we forecast ordinary income of 0.5 billion yen, a year-on-year decline of 9.4 billion yen and 3.5 billion yen lower than the previous forecast.
In the Product Logistics segment, regarding Car Carrier Business, global car sales in the April-June period declined 30% year on year. Our total units carried during the same period declined 50% year on year. For the July to September period, China car sales rose year on year, while car sales in the United States recovered to a 10% decline. We forecast our total units carried to decline 10% year on year for the second half. We will continue to adjust services tentatively and dispose of uneconomical and aged vessels in order to further reduce costs. Regarding Logistics Business, despite a gradual recovery in cargo volumes both domestically and internationally, we expect a full-scale recovery to take more time.
In Containership Business, there are still uncertainties in the outlook for cargo movements, including US consumption trends, as well as market conditions. ONE plans to continue its profitability improvement measures, such as flexibly allocating vessels and implementing void sailings as needed by carefully monitoring consumption trends and cargo movement demand, particularly in Europe and the United States.
Overall, the Product Logistics segment is forecast to post full-year ordinary income of 11.5 billion yen, a 14.5 billion yen year-on-year increase.
B-3：Forecasts for FY2020 by Segment
In comparison with the previous fiscal year’s results, our forecasts for the current fiscal year represent deteriorations of 11.1 billion yen in the Dry Bulk segment, 9.4 billion yen in the Energy Resource Transport segment, and 12.0 billion yen in the Product Logistics segment excluding Containerships Business, for a total year-on-year deterioration of 32.5 billion yen. We estimate the impact of COVID-19 to be approximately 30.0 billion yen, which includes a temporary decline in demand, market conditions deterioration, and such direct expenses as the cost to vessel’s deviation to accommodate crew changeovers and port stay-related costs associated with PCR testing and other measures.
As we enter the second half, profitability is improving for the Dry Bulk segment with Car Carrier and other businesses. Excluding some temporary factors in the Energy Resource Transport Segment, our core businesses continue on a recovery path.
Regarding ONE, the company posted a strong year-on-year improvement in profitability, driven by flexible vessel deployment in response to cargo movements, firm freight rate market conditions, and lower bunker fuel costs. ONE’s strong profitability helped to offset the losses in K LINE’s own businesses.
Regarding Containership Business, ONE is now in its third year of business and there are two key points to consider concerning its development. First, ONE’s organization is performing well in its third year. It has become an organizational structure that can successfully leverage the best practices of the three parent companies, and overall, ONE is now operating at cruising speed. This is the biggest point.
Second, the containership industry on the whole has evolved through reorganizations and consolidations. As a result, the business environment has changed: the number of major shipping companies on East-West routes has decreased, and currently there are three major alliances after integration. Then COVID-19 emerged, and it seems that the pandemic has in effect triggered the benefits expected under the industry reorganization. At the start of 2020, as the cargo movement appeared to begin declining significantly, the containership companies were prepared for this change. The alliances reacted by flexibly implementing void sailings without any decline in service quality. THE ALLIANCE, to which ONE belongs, operates 16 weekly sailings on Asia-North American routes, so the reduction of one sailing reduced space by only 6%. While maintaining service quality, the alliances reduced services rapidly to ready to cargo demand deterioration.
In actuality, demand did not decline as much as expected. As a result of this and the flexible adjustments, market conditions did not decline with the demand drop as they would have in past business environments. The recent environment has finally allowed us to witness the materialization of certain benefits of ONE’s organizational development and the general consolidation and reorganization of the industry.
In previous comments, it was noted that the total impact of COVID-19 is forecast at approximately 30.0 billion yen. Of this amount, about 2.4 billion yen consists of the direct costs for vessel’s deviation to accommodate crew changes due to lockdowns as well as port stay period to ensure safety.
B-4：Progress in initiatives for FY2020
Despite the gradual recovery from COVID-19, as we indicated in our business plan announced with the first quarter results, we are actively taking measures to adapt to an environment where COVID-19 is the new norm. In addition to the immediate damage control measures, we are actively optimizing our fleet, especially through the redelivery of chartered vessels and the disposal of aged and uneconomical vessels. We are generally on track with the plan to redelivery and dispose of more than 20 vessels this year, mainly in the Dry Bulk segment and Car Carrier Business.
Additionally, in terms of liquidity on hand, we have secured cash on hand equivalent to three months of operating revenues.
To increase shareholders’ equity, we are progressing with the transfer of our outstanding shares of overseas container terminals on the North America as planned. We are also building the stable-income business through firm targets for medium- to long-term contracts including LNG Carriers and other energy-related businesses. Overall, we are making steady progress achieving each of the key measures of our business plan.
B-5：Progress in coping with COVID-19
The spread of COVID-19 remains unpredictable. We must carefully monitor the changing situation, especially considering the new wave of infections in the United States and Europe. In the face of these challenges, our marine and onshore divisions will work together to ensure that we continue to support the global logistics infrastructure. At sea, we are strengthening our infection monitoring and preventive measures onboard. As lockdowns continue, there are still obstacles to crew changes. We have approximately 4,300 crew members onboarding 194 vessels under in-house ship management at all times. At its peak, there were more than 1,100 crew on board such vessels for more than 10 months. That number has dropped to under 700, and is now in the 600 range.
In our offices on land, we are ensuring safe environments by installing droplet infection prevention panels and making flexible use of telecommuting and flextime.