Financial Highlights Brief Report for 3rd Quarter FY2021
A. Financial Highlights for 3rd Quarter FY2021
A-1：Financial Results for 3rd Quarter FY2021
Operating revenues were 556.5 billion yen, operating income was 23.3 billion yen, ordinary income was 433.6 billion yen, and net income attributable to owners of parent was 423.3 billion yen.
For the main financial indicators, equity capital was 655.6 billion yen at the end of the third quarter. Interest-bearing liability was 443.5 billion yen, a reduction of 63.5 billion yen from the end of the previous fiscal year. Cash and cash equivalents were 105.9 billion yen, a reduction of 24.1 billion yen from the end of the previous fiscal year. Here is an explanation for the decreases in interest-bearing liability as well as cash and cash equivalents. We received a transition linked loan this year and procured approximately 100 billion yen. It consists not only of a drawdown of cash, but also convenient financing that allows us to freely withdraw and repay funds at any time using a credit line. Therefore, interest-bearing liability as well as cash and deposits decreased because it became possible to repay interest-bearing liability and reduce cash and cash equivalents according to the cash-on-hand situation, or vice versa. We also have ample liquidity, as we have a credit line of about 140 billion yen in addition to cash and cash equivalents of 105.9 billion yen. At the end of the third quarter, the equity ratio was 49%.
A-2：Financial Results for 3rd Quarter FY2021 by Segment
In the Dry Bulk Carrier segment, ordinary income was 14.7 billion yen. The Energy Resource Transport segment recorded ordinary income of 2.1 billion yen. In the Product Logistics segment, ordinary income was 425.3 billion yen, which includes Containership Business’s ordinary income of 415.9 billion yen. This means more than half came from Containership Business.
B. Forecasts and Initiatives for FY2021
B-1：Forecasts for FY2021 and Key Factors
Operating revenues were 730.0 billion yen, operating income was 18.0 billion yen, ordinary income was 540.0 billion yen, and net income attributable to owners of parent was 520.0 billion yen. The average exchange rate for the fiscal year was 111.15 yen per US dollar, and the average bunker price was 535 US dollars per metric ton. Ordinary income increased by 450.5 billion yen year on year, while net income increased by 411.3 billion yen. Compared to the results released last November, both ordinary and net income are expected to improve by 150.0 billion yen, mainly due to the contribution of the equity in earnings of Ocean Network Express (hereinafter “ONE”).
Logistics subsidiary, Century Distribution Systems, Inc. (CDS) was sold in the first half of the fiscal year, resulting in an extraordinary income. Meanwhile in the second half, unprofitable vessels and businesses, including dry bulk and offshore support vessels, were liquidated, resulting in extraordinary losses. A one yen change in the exchange rate against the dollar has an impact of plus or minus 4.9 billion yen on profit. The actual impact will be determined by the exchange rate on the closing date at the end of the fiscal year. At present, the exchange rate at the end of the current fiscal year is predicted to be 110 yen per US dollar. However, if the exchange rate at the end of the current fiscal year is about 115 yen, which indicates a weaker yen, the result will be an increase of 5 yen multiplied by 4.9 billion yen. Please keep this possibility in mind. The forecasted dividend continues to be 300 yen per share, as announced on November 4, 2021. This will be explained in detail below.
B-2：Forecasts for FY2021 by Segment
In the Dry Bulk Carrier segment, we forecast ordinary income of 20.0 billion yen, up 29.1 billion yen from the previous year. The global economy continues to recover thanks to financial support and economic stimulus measures by various national governments. Transportation demand remains stable and strong, especially for coal to meet energy needs, as well as for grains and minor bulk cargo. Tighter ship inspection systems as part of pandemic measures, along with longer port stays of vessels due to stormy weather, have also served to curb the vessel supply. This means that the market level is at a high overall. Meanwhile, negative factors include a temporary drop in market conditions due to seasonal factors, or negative impacts on imports due to restrictions on steel production in China. Although the Indonesian coal export ban was brief, it also created some negative impact. Overall, however, global economic trends are favorable for dry bulk transport, and we expect ordinary income to increase by 20.0 billion yen.
For the Energy Resource Transport segment, we forecast ordinary income of 3.5 billion yen, which is a year-on-year improvement of 2.5 billion yen. Many of our businesses have been stabilized by long-term contracts. Accordingly, LNG carriers, Thermal coal carriers, VLCCs, and LPG carriers are able to generate steady profits regardless of market fluctuations. As a special note, as announced in the press release on December 17, 2021, we will be selling off the vessels used by our Offshore Support Business. We have decided to liquidate the operating company concerned, and this should yield some improvement in ordinary income.
In the Product Logistics segment, the current global shortage of semiconductors has affected Car Carrier Business, along with a shortage of parts mainly due to a pandemic-induced labor shortage at parts factories in Southeast Asia. Accordingly, Car Carrier Business is still recovering from pandemic-related impacts. Although the profit level is slightly lower than that expected at the beginning of the fiscal year, it is still profitable compared to the previous fiscal year and remains on a recovery trend. In the rest of Product Logistics segment, profits have recovered significantly, especially in the Terminal and Overseas logistics businesses. This is due to post-pandemic economic recovery and tightening capacity on containerships.
【OCEAN NETWORK EXPRESS (ONE) Financial Results for FY2021 3rd Quarter】
In the first half of fiscal year 2021, after-tax profit was 6.76 billion US dollars. The third-quarter profit was 4.889 billion US dollars. The after-tax profit forecast for the fourth quarter is 3.75 billion US dollars. We are assuming that the market freight rate level peaked in January, and it is expected to decline as March approaches, due to seasonal factors. On the other hand, although port-related and cargo handling costs are expected to be slightly higher in North America, no major downside factors are forecasted, and the figures are not deemed to be too conservative.
The current situation for Containership Business is that supply chain disruptions have still not yet subsided. ONE has also taken various steps to address this. For example, it had added about 1.7 million containers, both reefer and dry containers, by the end of December 2021. This was an increase of about 8,000 compared to September 30, 2021. Meanwhile, the charter market of containerships is running out of vessels, forcing us to wait for the completion of new vessels in 2022.
No one has a clear picture of the future, but the current supply chain disruptions are definitely a result of the pandemic. Therefore, substantial supply chain normalization cannot be expected until the pandemic has truly subsided. While there are reports that infections have peaked in Europe and the United States, the timing of recovery milestones remains far from certain. Future developments of the currently spreading Omicron variant will probably decide the course of supply chain disruptions and the normalization of freight rates.
B-3：Key Factors of Improvement for “K” Line’s own Businesses in FY2021
“K” Line’s own businesses other than Containership Business are expected to post ordinary income (before deduction of overhead costs) of 37.0 billion yen for fiscal year 2021. In fiscal year 2020, there was an ordinary loss of 6.2 billion yen, and this is expected to improve by about 43.0 billion yen. Of that amount, 33.5 billion yen is expected to stem from a recovery in market and cargo conditions and the pandemic’s waning impact. Self-reliance measures are expected to yield an additional 9.7 billion yen. In total, we expect to secure ordinary income of about 37.0 billion yen.
C. Progress of Next Mid-term Management Plan
C-1：Progress of the Management Plan in FY2021
Regarding our fiscal year 2021 management plan targets, we believe that most of them have been achieved. There are three key points. The first is the significant improvement in ONE’s earnings. Next, ordinary income for “K” Line’s own businesses has also increased by 37.0 billion yen before overhead costs, and the business performance has improved significantly. This also opens up the prospect of future cash flow generation. As part of efforts for continual financial base expansion, we were aiming to achieve the following financial indicators by 2030: ordinary income of 50.0 billion yen, equity capital of 400.0 billion yen, equity ratio of 40%, and ROE of 10% or more. We have already achieved these 10 years ahead of schedule.
Moreover, we have already resolved various issues that we had planned to tackle starting this fiscal year. This includes fleet scale optimization by reducing the size of our fleet by 50 vessels, mainly dry bulk and car carriers. Structural reform for unprofitable vessels and businesses was also a management issue for us, and we were able to liquidate the Offshore Support Vessel Business operated by KOAS. We also reorganized non-core businesses in a very economically effective way. This was done by reorganizing businesses centered on containerships, including the sale of Century Distribution Systems, Inc (CDS) and INTERNATIONAL TRANSPORTATION SERVICE, INC. (ITS). Our financial position has greatly improved as a result. The next Medium-Term Management Plan is being prepared with a focus on growth in order to further improve corporate value. It is scheduled to be released in May. Until fiscal year 2021, the expansion of our financial base was a pressing management issue, and we needed to maintain a defensive approach. As a result of expanding our financial base and improving the profitability of ONE and “K” Line’s own businesses, we can now finally shift to a proactive approach aimed at growth.
We are currently formulating a Medium-Term Management Plan for growth as well as our shareholder return policy, which will be linked together. At this time, we cannot make a dividend announcement based on automatically increasing the dividend, given the latest earnings forecast and a set payout ratio. However, when the Medium-Term Management Plan is released in May along with the final financial results, we will also announce our updated shareholder return policy.
C-2：Approach of the Next Mid-term Management Plan
While keeping the major trends of decarbonization and emissions reduction in mind, we are creating a long-term management vision. By identifying growth markets where we can leverage our corporate strengths, we are preparing a Medium-Term Management Plan to get us closer to our ultimate objectives. Called the Future Creation Project, the last seven months of 2021 were spent creating a grand vision for the entire company. Currently, we are putting together task force teams to tackle some of the major concrete issues that have been spun off from the project. This will lead to the preparation of a new medium-term plan. It will help us to clarify the role of each business in line with future growth and determine the best way to allocate resources for investment in growth.