【Forecasts for FY2020】
For the current fiscal year, you forecast ordinary income of 50.0 billion yen. According to the management plan you announced last August, you are targeting ordinary income of 10.0 billion yen for fiscal year 2021. For the next fiscal year, excluding one-time factors, is there the possibility of a decline in ordinary income compared with the current fiscal year?
At this point, we have not revised our ordinary income target for fiscal year 2021. There are two major factors to consider: ONE’s profitability trend and the extent to which the impact of COVID-19 will lessen. Regarding ONE, although recent profit results have been very strong, we remain unsure of their performance in next fiscal year to be as strong. As we explained in the briefing, current containership freight rate market conditions look extremely overheated due to a shortage of containers and other factors. It would be difficult to revise the ordinary income target of 10.0 billion yen unless ONE’s profitability trend becomes clear. Regarding COVID-19, with the exception of Containership Business, our overall operations are expected to rebound in the next fiscal year. However, we do not believe that business will return to our fiscal year 2019 levels. Given the growth in contracts signed in each of the businesses, we currently believe it possible to achieve the ordinary income target of 10.0 billion yen.
【Financial position and Shareholder return】
You have stated that strengthening your financial position is a top priority. On the other hand, given your current ordinary income forecast of 50.0 billion yen, is it reasonable to expect the resumption of dividend payments? Please explain the conditions that must be met before dividends are resumed.
There are no numerical criteria to be met regarding dividends. Our management plan includes a policy of accumulating shareholder’s equity toward targets of 150.0 billion yen by the mid-2020s and 250.0 billion yen by 2030. These are our priorities. When considering all the financial factors involved in dividend payments, it is important to note that Japan’s Companies Act use unconsolidated retained earnings as the standard for calculating the amount available for dividends. The full-year ordinary income forecast of 50.0 billion yen is on a consolidated basis. The expected equity-method earnings from ONE will contribute to consolidated ordinary results but not to unconsolidated retained earnings. That 50.0 billion yen is not used as the basis for determining dividend payments, nor is it used as a source of dividends.
Your equity ratio is about 18% without the equity credit assigned to subordinated loans. Your management plan includes a target of raising the equity ratio to about 20% by the mid-2020s. There are many different ways of raising the equity ratio. Please comment on the company’s current financial position, including the possibility of raising the target beyond 20%.
Our shareholder’s equity at the end of the third quarter was 163.1 billion yen, and our equity ratio was about 18%. In August 2020, we announced a management plan which included equity capital targets of 150.0 billion yen by the mid-2020s. In the third quarter, we exceeded this target. At the end of the current fiscal year, with the expected improvement in net income, we forecast the possibility of reaching about 165.0 billion yen. Even though we have achieved one target earlier than planned, we do not currently plan to change the targets in the management plan. We have yet to report full-year figures for the current fiscal year, and there are many changeable factors for the next fiscal year regarding profitability and others. It is important to carefully consider all of the factors involved. Since the management plan also serves as a basic plan to strengthen our financial position over five years, our basic thinking is that we will not make annual changes to the figures in reaction to profitability trends in any particular year.
You have reported higher-than-forecast profits. Other shipping companies, meanwhile, have promptly taken such measures as the disposal of uneconomical vessels. Please explain your company’s approach to the disposal of uneconomical vessels.
We have worked diligently this fiscal year to optimize our fleet scale, mainly in the car carrier and dry bulk carrier, as part of our measures to deal with the COVID-19 impact as well as execute the current management plan. In optimizing fleet scale, it is slightly different from the disposal of uneconomical vessels, but in general, our approach is the same as the other shipping companies. In fiscal year 2018, we aggressively disposed of uneconomical vessels and posted a large loss as a result. We do not plan to take the same approach under the current circumstances. Our top priority in the current management plan is to increase shareholder’s equity. Under the current market conditions, aggressively disposing of uneconomical vessels would run counter to the purpose of the management plan, and therefore we are not planning an aggressive disposal program. On the other hand, vessel market prices fluctuate, and in consideration of our financial position, we will be flexible in considering opportunities to dispose of vessels in the future under the right conditions.
In regard to the Dry Bulk segment, you explained that the downward revisions to forecasts were partly due to the temporary decline in market conditions in the third quarter. Please explain how a temporary decline in market conditions in the second half alone could lead to this size of a decline in profits. It is assumed that the dry bulk market exposure increased due to the impact of COVID-19. Please explain the impact of COVID-19 as well as the impact of changes in COA contracts. In addition, in discussing these factors, please also explain your forecast for the next fiscal year’s Dry Bulk segment.
As stated in the presentation materials, there was a decline in Cape-size market conditions from the second half of the third quarter. Of the 1.0 billion yen downward revision to the forecast, about half of the amount represents the impact of market conditions. It was not because there was an absence of COA contracts, but rather because exposure to market conditions, especially for Cape-size vessels, had a significant impact. More specifically, we had forecast Cape-size freight rates of 21,000 US dollars per day for the third quarter, but actual rates declined to around 10,000 US dollars per day at one point and then averaged 13,000 US dollars per day between mid-November and December. The impact from this decline will be recognized in the fourth quarter. Beyond this factor, exchange rates and route changes due to COVID-19 also impacted results. For the next fiscal year, while we cannot predict the impact of COVID-19, we forecast that cargo movements will rebound to levels experienced from last summer and that demand will continue at this level through 2021. At the same time, we expect the low pressure of vessel supply and the supply-demand balance to improve.
Regarding the Energy Resource Transport segment and specifically Offshore Support Vessel Business, the business environment has been severe due to the decline in oil prices. Recently, however, oil prices have rebounded to the previous year’s levels. Please explain the current trends in Offshore Support Vessel Business and your outlook.
As you stated, oil prices have rebounded to mid-50 US dollars. Oil demand, however, has declined significantly due to the COVID-19 impact, especially demand for jet fuel, and remains very weak. Our Offshore Support Vessel Business is focused around North Sea operations, where demand for support vessels typically declines in winter. These two factors have made the business environment very challenging. Regarding the next fiscal year and subsequent years, we expect the business environment will improve if COVID-19 comes under control, people start to travel again, and jet fuel demand rebounds.
Regarding Car Carrier Business, did the business return to profitability for the third quarter alone? Additionally, there is currently a shortage of semiconductors. Will this have an impact on your results for the fourth quarter and the next fiscal year?
Car Carrier Business returned to profitability for the third quarter. Regarding semiconductors, the shortage is currently not having a major impact on our business. The outlook is unclear, however, and we will be monitoring these factors going forward.
Please explain the effect of the current rise in containership freight rate market conditions on ONE’s long-term contract rates.
Typically, long-term contract renewals reflect how we consider the long-term outlook along with the impact of short-term freight rate market conditions. Affected by such short-term market conditions, freight rates for long-term contracts have been on an upward trend. Currently, however, it is unclear how long the current market conditions will continue. For this and other reasons, the current situation are not necessarily leading to more negotiations on long-term contracts, and we cannot at this time state that there is any particular update.
Will the higher prices for container boxes impact ONE’s or KLINE’s results?
In regard to the shortage of containers, ONE is ordering and securing leased containers in the short term, and this has been factored into the full-year forecasts. From a medium- to long-term view after fiscal year 2021 the replacement demand of containers will be the main focus, and investment in containers will be an issue to address going forward. We will continue to carefully monitor how the COVID-19 pandemic and the disruptions to the supply chain will come under control as we make investment plans.