【Financial Highlights Brief Report for 2nd Quarter FY2021】
A. Financial Highlights for 2nd Quarter FY2021
A-1：Financial Results for 2nd Quarter FY2021
Consolidated operating revenues reached 357.6 billion yen, marking an increase of 57.5 billion yen compared to the same period of the previous year. For that same period last year, there was an operating loss of 10.2 billion yen. A year ago marked the time when the pandemic impact was at its height. Profitability in the Dry Bulk segment, which includes transportation of coal and iron ore, and Car Carrier Business fell sharply due to a substantial drop in demand. After that, cargo movements for both dry bulk and car carriers entered a recovery period, and operating results improved by 20.4 billion yen, from a loss to an income of 10.2 billion yen. Ordinary income rose to 238.0 billion yen, an increase of 228.0 billion yen. This was due to a significant contribution of equity in earnings of Ocean Network Express (hereinafter “ONE”). ONE improved its business performance on the back of a tight supply and demand environment and strong transportation demand, along with special demand related to the COVID-19 pandemic. Net income attributable to owners of parent rose by 236.4 billion yen year on year to reach 246.0 billion yen. This reflects an already disclosed gain on the sale of all shares in Century Distribution Systems, Inc. (CDS), a logistics company in the US.
By the end of the second quarter, our equity capital had increased by 251.4 billion yen from the end of the previous fiscal year to 469.6 billion yen, and interest-bearing liability had decreased by 13.9 billion yen to 493.1 billion yen. DER improved 127 points to 105%, while net DER improved 88 points to 84%. The equity ratio rose by 16 points to 39%.
A-2：Financial Results for 2nd Quarter FY2021 by Segment
In the Dry Bulk segment, ordinary income was 5.9 billion yen, an improvement of 15.1 billion yen from a loss recorded in the same period of the previous year. In Capesize vessels carrying coal and iron ore, since the second half of last year, cargo movements to China have been strongly driving the market. The Chinese economy recovered quickly from the initial pandemic effects. However, when it entered an adjustment phase for real estate and infrastructure demand in the middle of this year, the economy slowed slightly. Despite this, steady cargo movements have continued. In other regions such as India and Japan, which were significantly impacted by the pandemic last year, cargo movements and demand have recovered. Overall, we expect cargo movements to exceed those of the previous fiscal year. With regard to Panamax and smaller-size vessels, loading ports of coal have shifted to countries such as India, Russia, and Colombia after China’s ban on imports of Australian coal. As a result, the shifting to transport by smaller size vessels tightened the supply and demand balance. The ton-miles have also increased, which is another factor in the tightening supply. In addition, Chinese demand for grain from North and South America has been strong after recovery from the African swine fever epidemic in that country. Overall, the supply and demand balance tightened in the first half of the year. On the supply side, inspections and regulations associated with pandemic border measures have become stricter, mainly in China and Australia. This has led to longer port stays of vessels, and supply of space capacity has been reduced by 5% to 6%. On the demand side, demand for iron ore, coking coal, thermal coal, grain, and other products is expected to increase by about 5% to 6% compared to the previous year. This, combined with the supply side conditions, is a factor in the current rise in the markets.
In the Energy Resource Transport segment, ordinary income was 0.8 billion yen, a decrease of 2.6 billion yen from the same period of the previous year. This result was not because of performance deterioration but rather due to the timing of dividend payments from affiliated companies. Mainly in LNG Carriers Business, the dividend timing is different this year from last year. The full-year figure is expected to exceed that of the previous year. Our LNG carriers, VLCCs, VLGCs, and LPG carriers are basically covered with medium- to long-term contracts, resulting in minimal income fluctuation. For thermal coal vessels, profitability is improving due to some COA contracts reflecting the current boom in dry bulk markets.
In the Product Logistics segment, ordinary income increased by 219.4 billion yen year on year to 238.1 billion yen. Even though Car Carrier Business saw a sharp decline last year, demand for cargo movements increased as automobile sales have recovered worldwide. However, semiconductor production has not been able to keep pace with initial assumptions. Also, due to the further spread of COVID-19 and production delays for auto parts such as cable harnesses at suppliers in Malaysia and Vietnam, automobile production volume dropped significantly in the summer months, plus September and October. Nevertheless, our automaker customers have informed us that production volume will return starting in November.
【OCEAN NETWORK EXPRESS (ONE) Financial Results for FY2021 2nd Quarter】
Second-quarter cargo movements by containerships increased 10% year on year across the entire market. Over the same period, liftings for ONE also increased by 10% year on year. In particular, the liftings for the Asia-North America routes increased by more than 15%, compared to the same period in 2019 before the pandemic. This was because government economic stimulus measures, such as unemployment benefits, drove demand for products. In addition to the increase in demand, as in the Dry Bulk segment, the disrupted supply chain is a factor that reduces capacity supply. Although ONE is making various efforts, the situation is difficult to resolve. The pandemic has caused shortages of drivers, staff, and other labor needed to move cargoes at ports and on land and handle inland railroad and truck transportation. Therefore, even when a vessel operated by ONE arrives at a terminal, the cargo cannot be picked up by customers in a timely manner, and transfers to rail terminals face the same situation. This is due to a lack of stevedores at ports, truckers and laborers at customer warehouses by the COVID-19 pandemic, so the entire transportation supply chain is affected negatively. At the terminals on the west coast of North America, such as Long Beach and Los Angeles, containerships have to wait for 10 days to nearly two weeks, and close to 80 vessels stay inside and outside the ports. This should reduce capacity supply by around 10%.
Revenue for ONE in the first half of the year was 13.3 billion US dollars, and profit after tax was 6.76 billion US dollars.
【Financial Highlights Brief Report for 2nd Quarter FY 2021】
B. Forecasts and Initiatives for FY2021
B-1：Forecasts for FY2021 and Key Factors
In the Dry Bulk segment, the improvement in profitability due to the rising market conditions should be reflected in results more in the second half than in the first half. In Car Carrier Business, cargo movements are expected to recover starting in November, when the effects of semiconductor and auto parts shortages should start disappearing. As for the full-year earnings forecast, operating revenues are expected to increase by 64.5 billion yen year on year to 690.0 billion yen. Operating results should improve by 36.3 billion yen to an income of 15.0 billion yen. Ordinary income is set to grow by 300.5 billion yen to 390.0 billion yen, and net income attributable to owners of parent will increase by 261.3 billion yen to 370.0 billion yen. These figures assume that business performance for dry bulk and car carriers will continue to improve in the second half. For ONE, compared to an after-tax profit of 6.76 billion US dollars in the first half, we forecast a profit of 5.0 billion US dollars in the second half. Forecasts for the second half have taken into account cargo volume decrease for the Chinese New Year and other seasonal factors. The assumed exchange rate for the second half is 106.15 yen for one dollar. Regarding exchange rate fluctuations, a one yen change against the dollar can have an impact of plus or minus 3.9 billion yen on our results. The impact of a 10 dollar fluctuation in the bunker price will be plus or minus about 0.02 billion yen.
Structural reform for unprofitable vessels and businesses is planned for the second half. Last year, it was announced that we would proceed with fleet optimization for approximately 50 vessels. Main targets are vessels with poor economic efficiency, such as high-cost or aged vessels and uneconomical car carriers. Most of the car carrier fleet was optimized last year, and all the plans for the first half have currently been completed. As market conditions reverse, short-term chartered vessels of dry bulk are not being canceled, and they are being fully utilized to take advantage of the current improvement in market conditions. At the same time, we are moving to cancel contracts for medium- to long-term charters by enjoying market conditions. Most of the measures to enhance economic efficiency and effects can likely be implemented in this fiscal year. Moreover, we are considering withdrawal from and disposal of unprofitable businesses. Since the negotiation process is currently ongoing, we may be able to provide more details by the end of this fiscal year or the next.
B-2：Forecasts for FY2021 by Segment
In the Dry Bulk segment, supply-demand balance for vessels should further tighten due to strong consumer demand and longer port-stay of vessels caused by protection measures at ports. Ordinary income for this segment is expected to be 19.5 billion yen, an increase of 28.6 billion yen year on year. In the Energy Resource Transport segment, ordinary income should rise by 2.4 billion yen to 3.5 billion yen. In the Product Logistics segment, ordinary income is expected to improve by 274.0 billion yen to 378.5 billion yen. In Car Carrier Business, measures are being taken to optimize the fleet of aged or small vessels with poor economic efficiency, to reorganize the route network, and to implement some rate restorations from this fiscal year going into the next fiscal year. The effects of these measures are expected to appear going forward. With the recovery of demand, Logistics Business is also reaching or exceeding the level in 2019 before the COVID-19 pandemic began.
B-3：Key Factors of Improvement for “K”Line’s own Businesses in FY2021
The following data shows the improvement for “K” LINE’s own business segments, excluding Containership Business. Compared to the ordinary loss of 6.2 billion yen in the previous fiscal year, this fiscal year’s ordinary income forecast is 32.0 billion yen, an increase of 38.2 billion yen. Approximately three-quarters of this is thanks to the recovery of cargo volume. Demand picked up after the large temporary drop due to the spread of COVID-19. The improvement of market conditions also contributed to the increase in ordinary income.
C. Return to Shareholders
C-1：Return to Shareholders
The financial position has improved to a certain extent due to a significant increase in profits, mainly in Containership Business, and improved profitability for “K” LINE own businesses. In addition, we have revised our dividend forecast this time. This is because distributable profits have been generated, given structural reforms such as the elimination of uneconomical vessels and unprofitable businesses in the current fiscal year. While no interim dividend will be paid, a year-end dividend of 300 yen per share is planned. With regard to dividend payment, the consolidated financial position and balance sheet have improved significantly due to the upswing in ONE’s business performance. In particular, while our equity capital has declined through structural reforms implemented over the past few years, the equity capital has grown on a consolidated basis due to the increased business performance. In addition, non-consolidated retained earnings, the source of dividend payments, are expected to turn positive. Therefore, we plan to pay a year-end dividend of 300 yen per share.
With respect to shareholder returns from the next fiscal year onwards, we are currently in the process of creating a new management plan. We would like to announce it around May next year. In our new business plan and management plan, we will present a shareholder return policy based on an optimal capital structure. As we build the optimal capital structure based on the appropriate capital level and make the investment necessary for growth, a medium and long-term growth strategy is required. Environment-related investments are also needed to strengthen low-carbon and decarbonization initiatives. Therefore, we intend to make these investments necessary for our growth strategy and strengthen our financial position. At the same time, we will ensure proper shareholder returns based on an optimal capital structure. After discussing a well-balanced capital policy that combines these efforts alongside the business plan, we expect to release a new management plan in May 2022.
【The Challenge of Achieving Net-Zero GHG Emissions ～Revision of 2050 Targets for “K” LINE Environmental Vision 2050～】
Our “K” LINE Environmental Vision sets goals to be achieved by 2050. Previously, we set a goal of reducing total greenhouse gas emissions by 50%, similar to that of the International Maritime Organization (IMO). Now, however, we have decided to take on the challenge of achieving net-zero greenhouse gas emissions.