Financial Highlights Brief Report for FY2020

A. Financial Highlights for FY2020

A-1:Financial Results for FY2020

 Our results report for this fiscal year reflects both positive and negative effects of the novel coronavirus (hereinafter “COVID-19”) pandemic. The negative impact came from temporary declines in demand in the Dry Bulk, Car Carrier, and other businesses: on the other hand, the Containerships business showed a more variegated pattern, due to some positive effects from stay-at-home demand, as well as changes in consumer behavior caused mainly by working from home. Ultimately, the Containerships business was the main driver of our profitability in this fiscal year. Consolidated operating revenues were 625.5 billion yen, down 109.8 billion yen from the year before. Operating results were a loss of 21.3 billion yen, 28.1 billion yen worse than the year before. Ordinary income was 89.5 billion yen, 82.1 billion yen improvement. Net income was 108.7 billion yen, an improvement of 103.4 billion yen. The average exchange rate for the fiscal year was 105.79 yen per US dollar, and the average bunker price was 363 US dollars per metric ton.

 In terms of key financial indicators, as of March 31, 2021, our equity capital was 218.2 billion yen at the end of the fiscal year, double the year-earlier level. Interest-bearing liability was 507.0 billion yen, a reduction of 36.5 billion yen. Our cash and cash equivalents at the end of period were 130.0 billion yen, equivalent to three months’ business turnover. Our NET DER was 172%, an improvement of 252 points. Our equity ratio was 22%, an improvement of 11 points from the end of the previous fiscal year. Regarding the year-end dividend, we seek your understanding for our decision not to pay a dividend, as part of our ongoing efforts to enhance our financial base.


A-2:Financial Results for FY2020 by Segment

 In the Dry Bulk segment, at the beginning of the fiscal year, Capesize vessels suffered a great negative impact from low levels of economic activity due to the COVID-19 pandemic. In Japan, the first half of the fiscal year was very harsh, as steel mills cut blast furnace operation 30%, reducing cargo volume, while the market condition also worsened. In the second half of the year, however, market conditions gradually recovered, as crude steel production in China rebounded, among other factors. For Panamax and smaller-size vessels, as the same as Capesize vessels, the spread of the COVID-19 pandemic in the first half of the year had a big impact as it caused a sharp slowdown in cargo movements globally. Later, toward the second half of the year, market conditions recovered gradually due to higher demand for shipments of grain to China from North and South America, and demand for coal due to cold weather in China, among other factors. Both revenues and income dropped, however, because of the severity of the negative impact, particularly in the first half of the year, and we showed an ordinary loss of 9.1 billion yen.

 In the Energy Resource Transport segment, results deteriorated in Offshore Support Vessel Business due to poor market conditions. Prices for crude oil were lower in the first half of the year, and demand and market conditions slumped in the second half of the year. We recorded a loss in Drillship Business, based on expectations of market conditions after the expiration of current contracts. While overall both revenues and income declined, we still showed an ordinary income of 1.1 billion yen.

 In the Product Logistics segment, Car Carrier Business suffered a severe negative impact in the first half of the year, comparable to Dry Bulk Business. Demand for automobile car sales slumped globally, with demand for transport falling 40% in the first half of the year. The second half of the year was marked by recovery to a year-on-year decline of 10%. We suspended operations of some vessels, and we diligently conducted temporary adjustments to our services, but we still recorded an ordinary loss because the overall drop in revenues and income in the first half was so severe.


OCEAN NETWORK EXPRESS (ONE)  Financial Results for FY2020 Full-year

 At ONE, there were ways in which the COVID-19 pandemic actually had positive effects. As the pandemic began to exert negative effects on economic activity in the first half of last year, demand for transportation sagged. After that, however, people began working from home and consumer behavior changed, spurring stay-at-home demand. As governments around the world shifted to fiscal stimulus, paying out benefits, consumers increased their spending on goods rather than experiences, e.g. This sharply increased demand for transportation in the second half of the year. Particularly since last fall, cargo movements from Asia to North America have been up 30% year on year, a significant increase, and cargo movements from Asia to Europe have been up over 10%. At the same time, with supply chains in turmoil, the COVID-19 pandemic caused labor shortages. Marine transport is just one element of multimodal container transportation. After transport by sea, cargo is transferred to a port terminal, connecting by rail to inland modes of transport, and then it is transferred to trucks for delivery to customer warehouses. With the impact of the pandemic, labor shortages plagued every point of transfer, resulting in confusion and delays. In the end, there were shortages of both space and containers, resulting in brief spikes in freight rate market conditions. As a result, ONE’s after-tax profit roughly doubled, to 515 million dollars in 2Q FY2020, 944 million dollars in 3Q, and 1,858 million in 4Q.


Financial Highlights Brief Report for FY2020

A. Financial Highlights for FY2020

A-2:Financial Results for FY2020 by Segment

 In our Product Logistics segment, demand for transportation was low for a time, but after that cargo movements became robust once again, driven mainly by e-commerce, and full-year results surpassed the previous year. In Short Sea and Coastal Businesses, the impact of the COVID-19 pandemic significantly limited demand for passenger transportation, causing profitability to deteriorate, particularly for Ferry Business.


B. Forecasts and Initiatives for FY2021

B-1:Forecasts for FY2021 and Key Factors

 Regarding our forecasts for the current fiscal year, we think the current situation does not allow us to relax our guard, due to the emergence of new variants of the COVID-19 virus will rekindle the pandemic, among other eventualities. At the same time, we recognize that vaccinations are becoming more widespread, especially in Europe and North America, and we believe global economic activity will gradually recover. Our full-year operating revenues forecast is 570.0 billion yen. In operating results, our projection is break-even, an improvement of 21.3 billion yen. We estimate ordinary income will be 45.0 billion yen. We think net income will be 35.0 billion yen, reflecting a certain level of structural reform costs for unprofitable vessels and businesses. We estimate the exchange rate will average 105.81 yen per US dollar, and the bunker price will average 431 US dollars per metric ton. Our forecast for this fiscal year reflects our expectation that all of our Four-Pillar businesses (with the addition of the Energy Resource Transport and Product Logistics segments) will show profit, as Dry Bulk and Car Carrier Businesses, which have been recovering since the second half of last year, will return to profit. At this time, our expectations regarding dividends remain undetermined.

 In capital policies, we plan to invest as necessary in future growth strategies aiming for carbon neutrality. At the same time, we will continue to strengthen our financial base so that we may restore dividend payments as soon as possible. As part of the ongoing reorganization of our business portfolio, we recently announced the sale of Century Distribution Systems, Inc. (CDS). As we focus on low-carbon and zero-carbon businesses, as recently announced we are working with Kawasaki Kinkai Kisen Kaisha Ltd. to start a joint venture specialized in vessels to service offshore wind power generation facilities. In addition, as we advance toward carbon-neutrality, we are considering structural reforms of unprofitable vessels and businesses to transform our business areas, as well as radical new measures. Accordingly, a certain amount related to such plans has been included in our forecast for net income/loss of the current fiscal year.


B-2: Forecasts for FY2021 by Segment

 In Dry Bulk Business, we expect to see gradual economic recovery thanks to fiscal stimulus measures and other forms of economic support in various countries, and efforts to rein in the spread of the pandemic. At the same time, delivery of new vessels will remain limited, and environmental regulations will become more stringent. We think more ships will be scrapped, but that demand-supply balances will basically tighten. However, China has announced it will make adjustments to production volume of crude steel, a development we will need to monitor closely. Our forecast is based on expectations that market conditions will soften in 4Q, as demand is typically slack due to seasonal factors. Still, we think ordinary income will show an 18.6 billion yen year-on-year improvement to 9.5 billion yen.

 In the Energy Resource Transport segment, we think the temporary losses in the Drillship Business will be eliminated, while profitability should improve in Thermal Coal Carrier and other businesses. Medium- to long-term contracts should help stabilize our income. We think ordinary income in this segment will be 4.0 billion yen, a year-on-year improvement of 3.0 billion yen.

 In the Product Logistics segment, Car Carrier Business was depressed last year due to the low number of cars sold, but this year we expect the number to improve about 10% year on year. On the other hand, the shortage of semiconductors is a cause for concern, but our earnings projections factor in our expectation that the impact of this will be eliminated in the course of the year. We hope to return to a sound footing of profitability this fiscal year, as a result of our longstanding efforts to rationalize our route network, optimize the scale of our fleet, and restore freight rates.

 In our Logistics Business, the impact of the COVID-19 pandemic is likely to linger over Ferry Business to some extent, but in the main, we hope to restore profitability equal to last year as demand recovers from pandemic lows.

 In Containerships Business, we expect ordinary earnings to worsen by 70.8 billion yen from last year. Business at ONE quieted down as vaccinations became more widespread, particularly in Europe and North America. Renewed attention to the pandemic appeared warranted, however, as newer variants of COVID-19 emerged, primarily in Asia. For this reason, ONE are not publishing a full-year forecast at this time. Basically, however, we have created an forecast using ONE’s own estimates. We think earnings in the Containerships Business as a whole will decline by 70.8 billion yen year on year. As a result, we think the Product Logistics segment will post ordinary income of 40.0 billion yen, a 64.6 billion yen year-on-year decrease.


B-3:Key Factors of Improvement in FY2021(Compared to FY2020)

 We expect both cargo movement and market conditions to recover, generating improvement of 16.6 billion yen. This will manifest itself as recovery from the impact of COVID-19 and profitability improvement for our Four-Pillar businesses. We hope to realize 9.7 billion yen in improvements through greater efficiency of vessel operations, rationalization of routes, and optimization of our fleet scale. Based on the success of initiatives we announced in our management plan last year, this too will express itself mainly in the earnings of our Four-Pillar businesses, where we expect profitability to improve by over 26.0 billion yen totally.



Management Plan in Fiscal Year 2021 Rolling Planning

<Theme for Management plan in FY2021>

 When the COVID-19 pandemic began to spread one year ago, we truly could not see the light at the end of the tunnel. Over the past year, we have been reminded of the important social mission we have as a link in the supply chain. We must further strengthen our ability to fulfill this mission, by “connecting the world via oceans and technology.”

 Over the past year, our focus has been on damage control, to keep the impact of the COVID-19 pandemic to a minimum. Marine transportation is an important element of the infrastructure that supports people’s lives. This is an important infrastructure for raw materials, energy resources, motor vehicles, and consumer goods. Our company has been committed to ensuring that this transportation is not interrupted.

 The vital nature of this infrastructure remains unchanged. But as a practical matter, transportation demand has fluctuated wildly, albeit temporarily, causing volatility in market situations. Our company has had to cope with these fluctuations by taking on a suitable level of risk, and investing as appropriate. We have elevated our risk-return management capabilities to a higher level, but we must make enhanced efforts in that direction. Our customers are leaders in infrastructure, and we must provide them with reliable services and earn stable returns. To that end, we will continue our efforts to optimize our fleet scale. We think of “technology” as something that is indispensable to the improvement of our services, embracing both hardware and software. We research and implement a variety of technologies to realize a sustainable society, and to lessen the burdens on the environment. We are also using DX to optimize vessel operations and improve convenience for our customers. This is an area where we must be steadfast in our efforts.


<Management Plan Review in FY2020>

 Aiming for sustained improvement in corporate valueProgress of Management Plan in FY2020

 Looking back at fiscal year 2020, we had decided to reduce the size of our core fleet by 50 vessels by 2025, mainly cutting dry bulk carriers and car carriers, as a means of optimizing our fleet scale, changing to a leaner fleet so as not to carry excess exposure. In fiscal year 2020, we carried out half of that plan, cutting 25 vessels from the fleet. Looking ahead, we recognize we must not merely reduce the number of ships, but we must transform our fleet into one that is more competitive, in terms of its costs and environmental burdens.

 We are making steady progress in our efforts to introduce LNG-fueled Car Carrier, and enter into the LNG bunkering business, to enhance safety, quality, and environmental friendliness.

 We are working to keep cash on hand equivalent to more than three months’ business turnover, to ensure liquidity in our operations.

 Regarding equity capital, we recognize the improvement of profitability at ONE. In addition, we completed the sale of our terminal business on the North American west coast. We increased equity capital to the 210.0 billion yen level, far surpassing our goal of 150.0 billion yen, well ahead of our target date of the mid- 2020’s. We will continue our efforts to strengthen our financial base.


<Management Plan in FY2021 Business Strategy>

 Forwarding to Growth in Corporate Value Compatibility with Sustainable Society

 By refining our Four-pillar businesses into solidly competitive enterprises, and with our customer base of important infrastructure companies, we expect to be able to recover our stable income of over 10.0 billion yen this fiscal year. We see bringing this to the 20.0 billion yen level as a matter of pressing importance. That is why we are engaging in the fleet scale optimization and converting to a more competitive fleet, as discussed above.

 Regarding our efforts to enter new business areas, for example small-scale LNG transport in the Asia region, or LNG bunkering vessels and similar adjacent businesses, these will contribute to efforts to low-carbonization and zero-carbonization. We are also working with Kawasaki Kinkai Kisen Kaisha Ltd. to start a business specialized in vessels to support offshore wind power generation facilities. In the future, we plan to start doing business in transportation of new forms of energy such as ammonia, hydrogen, and CO2, though the timing of that initiative has not yet been determined. In addition, we are implementing a variety of technologies, and strengthening our use of DX further, to enhance our own quality and service, and lessen the burdens we impose on the environment.

 Regarding the acceleration of business development abroad, particularly in Asia, our aim is to increase our business presence in growth markets, not just in the mature market of Japan. We have already built a large base of partnerships through Containerships Business, and we intend to work together with those partners to further strengthen our Four-pillar businesses.

 As part of our efforts to achieve further competitiveness in Containerships Business, we made great progress last fiscal year in improving profitability at ONE. Going forward, we will be closely monitoring the situation to determine how much resulted from special demand related to the pandemic, how much from industry reorganization, and what are the true strengths of ONE. At this time, as the shareholder, we recognize that the synergy effects and the benefits of steady implementation of best practices envisioned at the time of its establishment are emerging and intend to continue our solid support including its personnel for ONE, to enhance the value of the enterprise.


<Management Plan in FY2021 Business Strategy>

 Accelerating business development abroad, particularly in Asia

 We have already said that the importance of marine transportation as a form of infrastructure, the important mission, remains unchanged. At the same time, we must acknowledge that things are changing in a big way in terms of energy policy and environmental action. Also, regarding automobiles, the transition to EVs may be advancing and accelerating. We must give careful thought to where they will be produced with taking into consideration Japan, China, North America, Europe, and Southeast Asia and how our Car Carrier Business will handle this change. And we must make our businesses stronger while meeting the changes in our customers’ needs.


<Initiatives for Decarbonization and Sustainability Management>

 Environment-related Investment

 We plan to invest a total of about 100.0 billion yen in initiatives aimed at low-carbonization and zero-carbonization. We will invest in developing environmental technologies such as SOx scrubbers, Ballast Water Treatment System, onboard equipment as an automated kite system utilizing natural wind energy, new businesses that promote low-carbonization, and vessels powered by LNG, LPG, or other alternative fuels.

We are also considering implementing internal carbon pricing (ICP) as a new form of indicator for the evaluation of investments.


<Business Plan>

 Medium- and Long-term Targets

 As medium- to long-term targets, we aim to increase ordinary income to 30.0 billion yen by mid-2020s, and to 50.0 billion yen by fiscal year 2030. We aim to increase equity capital to at least 300.0 billion yen by mid-2020s, and to at least 400.0 billion yen by fiscal year 2030. It is our target to increase our equity ratio to at least 30% by mid-2020s, and to at least 40% by fiscal year 2030, for ROE of 10% or more. Regarding the breakdown of this 30.0 billion yen in ordinary income, ONE is now formulating a new business plan, and while these are provisional figures, above all we think it is important that we firstly build our Four-pillar businesses into a system that can stably generate 20.0 billion yen. This is our current assumption regarding the level of profit.


<Business Plan>

 Investment Plan

 Over the next five years, we plan to keep total investment to about 250.0 billion yen, within the scope of operating cash flow. This figure includes investments based on medium- to long-term contracts, and replacement investments centering on businesses with stable-income, making up at least 50% of the total; for the remaining 45%, growth areas, for example building of new LNG carriers, or environmental initiatives, additional expenditures for alternative fuels such as LNG/LPG, installation of other new equipment to lessen environmental burdens by contributing to low-carbonization, other research and development, and other equipment.