A. Financial Highlights for 3rd Quarter FY2020
A-1：Financial Results for 3rd Quarter FY2020
For the nine months of the fiscal year ending March 2021, consolidated operating revenues were 468.7 billion yen. Operating loss totaled 3.2 billion yen. Ordinary income was 42.9 billion yen, and net income attributable to owners of parent was 63.2 billion yen. The average exchange rate during the period was 106.14 yen per US dollar, and the average bunker price was 347 US dollars per metric ton. Compared with the same nine-month period of the previous fiscal year, consolidated operating revenues declined 98.5 billion yen, and operating profit declined 24.8 billion yen. Ordinary income increased 18.4 billion yen year on year, and net income attributable to owners of parent increased 38.0 billion yen. The ordinary income and net income results exceeded the forecast disclosed on December 28, 2020, by about 3 billion yen.
Regarding the major factors affecting results, the consolidated ordinary income was boosted by higher after-tax profit from equity-method affiliate Ocean Network Express (hereinafter “ONE”). Specifically, ONE’s containership business enjoyed strong cargo demand along with stable market conditions. The consolidated ordinary income reflects equity in earnings of ONE. In regard to net income attributable to owners of parent, in addition to the profit growth from ONE, the Company booked extraordinary income from the sale of its shares in INTERNATIONAL TRANSPORTATION SERVICE, INC. (hereinafter “ITS”), which operates terminals on the North American west coast.
In terms of key financial indicators, as of December 31, 2020, our shareholder’s equity was 163.1 billion yen, an increase of 62.0 billion yen compared with the end of fiscal year 2019. Interest-bearing liability was 536.0 billion yen, almost unchanged from the end of the previous fiscal year, with a decline of 7.5 billion yen. Cash and cash equivalents at the end of the third quarter totaled 143.7 billion yen, an increase of 31.8 billion yen from the end of the previous fiscal year as we increased liquidity to respond to the novel coronavirus (hereinafter “COVID-19”) pandemic, among other needs. Net DER was 238%, a year-on-year improvement of 185 points from the end of the previous fiscal year. Our equity ratio was 17.7%, nearly 18%, and an improvement of 6 points compared with 11% at the end of the previous fiscal year. It was about 22% when including the 50% equity credit assigned by a rating agency to our subordinated loans.
A-2：Financial Results for 3rd Quarter FY2020 by Segment
Our ordinary income and loss for the nine months of the fiscal year ending March 2021 by segment show the following results: The Dry Bulk segment posted ordinary loss of 7.6 billion yen. The Energy Resource Transport segment recorded ordinary income of 4.0 billion yen. The Product Logistics segment generated ordinary income of 51.9 billion yen, and the Containership Business alone posted ordinary income of 51.7 billion yen. The Product Logistics segment, excluding the Containership Business, had ordinary income of 0.2 billion yen.
B. Forecasts and Initiatives for FY2020
B-1：Forecasts for FY2020 and Key Factors
Regarding our forecasts for the fiscal year ending March 2021 and key factors affecting results, we forecast operating revenues of 612.0 billion yen, an operating loss of 21.0 billion yen, ordinary income of 50.0 billion yen, and net income attributable to owners of parent of 65.0 billion yen. The average annual exchange rate is forecast at 105.73 yen per US dollar, and the average bunker price is forecast at 358 US dollars per metric ton. Year on year, ordinary income is forecast to improve 42.6 billion yen, and net income attributable to owners of parent is forecast to improve 59.7 billion yen. The current ordinary income and net income forecasts are significantly higher than the forecasts made at the end of the second quarter, with increases of 50.0 billion yen and 45.0 billion yen, respectively. Our assumptions for foreign exchange rates and explanations on key factors are shown at the bottom of the slide on Page 7.
At present, we are not decided to pay year-end dividend. We will make an announcement after carefully considering our full-year forecasts, financial condition, and other factors. We appreciate the patience of our shareholders and regret we have not decided to pay it.
B-2：Forecasts for FY2020 by Segment
Now, we look at the full-year forecasts by segment. Regarding the Dry Bulk segment, Capesize market demand was robust at the start of the third quarter due to a rebound in crude steel production in major producing nations, driven primarily by robust steel demand in China. However, the Capesize market slumped considerably towards the end of the quarter, due mainly to lower iron ore exports from Brazil caused by poor weather and maintenance to mining equipment. Panamax and smaller-size vessel market conditions held firm in the third quarter as a result of robust North American grain shipments to China and Australian coal shipments to India, Japan, and South Korea. Regarding the outlook for the fourth quarter and beyond, seaborne cargo demand is expected to continue to rebound. It is important to note, however, that the global economy could be adversely affected by a resurgence in COVID-19 infections and the appearance of new strains of the virus in various countries. Additionally, other factors may emerge to prevent efficient vessel operations, including restrictions on crew changes. These and other factors could undermine the stability of the dry bulk market conditions moving forward. As a result, we are forecasting an annual ordinary loss of 8.0 billion yen for the segment, which would be a year-on-year deterioration of 12.1 billion yen and 1.0 billion yen lower than the previous forecast.
The Energy Resource Transport segment is expected to perform steadily, supported by long-term chartering contracts mainly in the LNG Carrier and Tanker businesses. The segment is forecast to continue generating stable profit through the end of the fiscal year. Within the segment, however, Offshore Support Vessel Business is expected to continue to slump in the fourth quarter due to the decline in oil prices. We continue to cut costs and take other measures to improve profitability. Regarding Drillship Business, there is a risk of a temporary deterioration in profitability, taking into consideration the market condition forecast following the expiration the current chartering contracts in 2022. For the entire Energy Resource Transport segment, we forecast ordinary income of 1.0 billion yen, a year-on-year decline of 8.9 billion yen, and 0.5 billion yen higher than the previous forecast.
In the Product Logistics segment, shipments plunged in Car Carrier Business, particularly at the start of the fiscal year, due to the impact of COVID-19, which caused a global slump in car sales and suspended factory operations in countries around the world. We have responded by suspension of vessels and reviewing some services as well as disposing of surplus vessels in order to reduce costs. Car carrier demand is currently rebounding, but the market improvement will not be enough to offset the decline in the first half of the fiscal year. For the full year, we forecast a significant year-on-year decline in shipment volume. In the fourth quarter and beyond, in addition to the disposal of surplus vessels and other measures previously completed, we will continue to optimize fleet scale and vessel deployment as shipping demand rebounds.
Regarding Logistics Business, cargo demand also plunged at the start of the fiscal year due to the spread of COVID-19. Short Sea and Coastal Businesses has experienced a decline in shipping demand for steel products, logs, and others, while Ferry Business has also slumped. Currently, while there is concern of a resurgence in COVID-19 infections in and outside Japan, the strong demand for container shipping is expected to continue for the time being. E-commerce-related cargo movements are robust at present, thanks to growing stay-at-home demand. Overall, therefore, the business remains strong, and profitability is expected to remain stable. In December 2020, we completed the sale of the Company’s shares in ITS, which operates the terminals business on the North American west coast, to an infrastructure investment fund owned by Macquarie Group.
In Containership Business, equity-method affiliate ONE posted higher profit year on year as a result of strong container shipping demand, flexible operations to meet changes in demand, and generally higher freight rates. In the fourth quarter and near term, freight rates are expected to remain at high levels. There are, however, various unknown factors clouding the outlook, including how disruptions to supply chains will be resolved in the future and how liftings will change and thus affect freight rates. ONE continues to monitor market developments and will flexibly and steadily adapt to business environment change.
Overall, therefore, the Product Logistics segment is forecast to generate a full-year operating income of 65.0 billion yen, a year-on-year improvement of 67.9 billion yen and 53.5 billion yen higher than the previous forecast.
B-3：Forecasts for FY2020 by Segment
The waterfall chart on page 9 provides an analysis of the changes to ordinary income and loss for each segment by comparing the previous fiscal year’s results with the current full-year forecasts. Overall, in contrast to fiscal year 2019’s year-on-year improvement of 7.4 billion yen, the current fiscal year’s ordinary income is forecast to improve by 50.0 billion yen. The Dry Bulk segment is forecast to post ordinary loss of 8.0 billion yen, a deterioration of 12.1 billion yen compared with fiscal year 2019’s ordinary income of 4.1 billion yen. The Energy Resource Transport segment is forecast to post ordinary income of 1.0 billion yen, a deterioration of 8.9 billion yen compared with fiscal year 2019’s ordinary income of 9.9 billion yen. The Product Logistics segment excluding Containership Business is forecast to post ordinary loss of 1.0 billion yen, a deterioration of 8.6 billion yen, compared with fiscal year 2019’s ordinary income of 7.5 billion yen. The Containership Business is forecast to post ordinary income of 66.0 billion yen compared with fiscal year 2019’s ordinary loss of 10.4 billion yen, for an improvement of 76.5 billion yen. Overall, the total year-on-year improvement is forecast at 42.6 billion yen to reach the current forecast of 50.0 billion yen in operating income.
Overall, there was a substantial decline in business in the first half of the fiscal year, with the exception of Containership Business. In the second half, both cargo volume and market conditions are generally recovering, and with the exception of some temporary factors dragging on profitability, our overall business is recovering. It is important to note, however, that countries around the world have enacted strict border controls, the result of which has been to force vessels to deviate from the most efficient route for ship crew change, to lengthen onboarding period, and cause higher personnel costs due to special payments to crew. Altogether, COVID-19 has caused direct expenses of about 2.0 billion yen.
Financial Results of OCEAN NETWORK EXPRESS
Regarding ONE’s business, we have explained the company’s results and the contribution to our consolidated results. We would also like to take a minute to explain how ONE is tackling severe disruptions to global supply chains.
First, in the containership business, supply chains from one port to another are very long and complex. Shippers rent container boxes from the shipping company and load their cargo onto the containers, which are then transported to the terminal at loading port. At the loading port, the containers are loaded on the vessels and transported by sea to the discharging port. At the discharge port terminal, the containers are unloaded and picked up by the consignees. After the cargo delivery, the empty containers are returned to the discharge port and finally to next loading port. Currently, this long supply chain is being disrupted by extremely low efficiency in the cargo handling operations at ports. California has been especially hard-hit by COVID-19 infections among port workers, and ports have suffered from lower manpower. Due to the slow cargo handling operations, vessels have remained at port longer than usual. A number of vessels are waiting outside the ports of Los Angeles and Long Beach waiting to load and unload cargo. Furthermore, at discharging ports, empty containers cannot be collected due to disruptions to railway services and a lack of trucks. In other cases, the containers cannot be retrieved from customer sites. As a result, there are both a lack of space on vessels and a lack of containers to ship new cargo. At loading ports, there are not enough containers or not enough space on vessels. These problems have created significant inconvenience to customers.
To deal with the problems, ONE has secured short-term time charter vessels. These chartered vessels are collecting accumulated cargo at loading ports and transporting them to the discharging ports and picking up empty containers for return. There has been a shortage of container boxes due to lower operating rates at container manufacturers. ONE placed significant orders for new containers in the second half of the fiscal year and will deliver them to markets where needed. On the customer relations side, the company has launched a self-service platform to manage the increase in the number of inquiries. As explained, ONE’s role within the supply chain is limited as a shipping company. ONE is working diligently to implement effective measures to optimally circulate containers. If containers are not circulated efficiently, these supply chain problems cannot be alleviated. There have been some media reports about the issues surrounding containership companies. We hope this explanation helps to understanding the whole picture on the issue.