Q1: Regarding dividends, you reported a profit for the first half and you forecast a profit for the full year, so it appears your overall profitability has recovered. Regarding the reason for not deciding on a year-end dividend, what will be required before you resume dividend payments? Do you plan to wait and see what the full-year results are, or are you simply undecided right now?
A1: Regarding dividends, we will confirm the profitability of our business in the second half of the year and carefully consider our capital strategy, including dividend payments, under the review and discussion of new Medium-Term Management Plan to begin from fiscal 2020. After carefully reviewing our approach, we will make an announcement on dividends at the appropriate time. At the present time, we are undecided about whether we will pay a year-end dividend.
Q2: Regarding investments plan, please explain your approach to the use of cash and your financial conditions for this fiscal year and next.
A2: For the first half of the current fiscal year, there were large cash out for the cancellation of chartering contracts implemented at the end of the previous fiscal year. Besides those expenses, our operating cash flow was positive. We are very selective in terms of new investments to ensure that there is sufficient return on the capital costs. We will take the same approach next fiscal year. We have ordered new vessels already, but the size of the investment isn’t significant and we don’t plan on expending more cash than we generate. Our basic financial strategy is to maintain the current levels of cash and reduce financial leverage gradually.
Q3: Regarding the forecast for extraordinary income and losses in the second half, in the first half, your net income was higher than expected due to the improved balance of extraordinary income and losses. Was the unexpected improvement simply the result of some income and expenses shifting to the first half, or will these first-half results have a material impact on the full-year results?
A3: Regarding second-half extraordinary income and losses, in addition to the sale of overseas terminals, we continue to restructure the overall portfolio. We are now considering multiple opportunities to adjust our business and assets. We will progress with deals at the appropriate timing.
[IMO SOx regulations]
Q1: Regarding “K” Line and ONE’s measures to comply with regulation-compliant fuel oil, you said that “generally” customers have agreed to introduce the bunker surcharge. About what percent do you mean by “generally”? Additionally, in regard to fuel procurement, at what prices are you purchasing regulation-compliant fuel? You have lowered your fuel price assumption because the spread between regulation-compliant fuel prices and high sulfur fuel prices has narrowed. It would appear there is a difference between the new assumption price and your actual purchase price. Are you assuming some kind of risk of purchasing regulation-compliant fuel in advance for a higher price?
A1: Regarding regulation-compliant fuel, there is no particular connection between the revision to the price assumption and our actual fuel procurement. Basically, there are indices for different types of fuel such as low-sulfur marine gas oil and low sulfur fuel oil to be introduced in the future, and we conclude contracts based on the indices. We have not procured fuel far from the market conditions at prices unusually high or low compared to the index price. We will continue to carefully monitor trends in prices.
[Energy Resource Transport Segment]
Q1: Regarding the Energy Resource Transport segment, you explained that the reason for the significant improvement in profitability in the first half was due to market conditions. Is it fair to assume that if market conditions decline, then profitability will also decline? Looking to next fiscal year, will your profitability improve further if you eliminate unprofitable routes? The amount of improvement is large this year, so please explain the factors involved.
A1: Our Energy Resources Transport Business is built mainly on mid-to-long contracts generating stable profits. The first-half improvement versus the previous forecast was to some extent the result of improved market conditions. For the second half, there would be an impact if market conditions declined significantly, but generally our market exposure is limited, and this is not a significant element impacting results.
[Product Logistics Segment]
Q1: In regard to business in the Product Logistics segment besides Containerships, your results surpassed forecasts, primarily from improvements in Car Carrier Business. In the second half, however, you forecast a deterioration of almost 3.0 billion yen for the second half. Please explain the details of such background.
A1: In the Product Logistics segment, the deterioration in the second-half forecast compared with the previous forecast is 2.5 billion yen, which breaks down into 1.5 billion yen related to Containership Business, and a little more than 1.0 billion yen in other businesses. In Car Carrier Business, KESS, our wholly owned car carrier company for intra-Europe shipments, forecasts a large temporary decline in shipment volume in relation to Brexit. Additionally, we forecast a temporary decline in shipments to South America due to recent economic trends in Argentina. Finally, the revision includes higher expenses for the fuel switchover to meet SOx regulations.
Q2: In Car Carrier Business, you originally forecast a full-year profitability improvement of 5.0 billion yen from rationalization measures. From the results for the first half, you appear to be ahead of schedule with the program.
A2: The first-half results were better than the original forecasts, but these improvements included one-time and temporary factors. We made the forecast based on effects for the entire year, and on an annualized basis, the progress in generating benefits is about on par with expectations.
Q3: Regarding Car Carrier Business, please explain how only “K” Line achieved significant results with freight rate restorations given the current business environment, and what opportunity there is for further improvement.
A3: Since last year, we have made gradual steps to restore freight rates in small increments with each contract renewal. Instead of large restorations on specific accounts or specific routes, this was more the result of accumulative efforts.
Q4: You explained that worsening market conditions are the reason for the second-half downward revision to ONE’s forecast, but you are assuming full application of the bunker surcharge to cover the cost increase by usage of regulation-complaint fuel. It would appear that the decline in freight rate market conditions and the inability to transfer the fuel cost increase to customers through spot contracts amounts to one and the same thing. Please explain your understanding of this risk. Regarding the amount of the higher costs to be transferred to customers in spot contracts, please explain if this is included in your forecast for improved market conditions.
A4: Spot freight rate market conditions bottomed out in October, and we expect market conditions on Asia-North America and Asia-Europe routes to strengthen entering November. For spot freight rates, we have generally gained customer acceptance of the bunker adjustment factor (BAF) to be implemented from January 2020. We expect to collect the bunker surcharge as planned. Already, we have gained acceptance of the surcharge for 90% of the long-term contracts, and we are in final negotiations on the remaining contracts. We expect to complete those negotiations satisfactorily, so we’re confident we can collect the bunker surcharge on nearly 100% of spot, medium-term, and long-term contracts.
We have revised our outlook downward due to recent sluggishness in freight rate market conditions, but the forecast also reflects expected future cargo movements. For example, we expect freight rate market conditions to make a seasonal rebound towards the Chinese New Year. These factors are included into the forecast. Generally, we believe the market has bottomed out.