【Forecasts for FY2021】
Q-1：Regarding your view of the second half of the fiscal year, you are expecting a slight decrease in ordinary income due to the difference between the first half and second half of the fiscal year in Containership Business. It can be assumed that supply chains will normalize in the second half. As you have not disclosed your results forecast for ONE, what assumptions have you made about freight rates each quarter?
A-1：One point is how to view ONE’s profit and particularly how to view the second half of the fiscal year. At present, we see no signs of improvement in the supply chain disruption, but it is our view that it will gradually improve and move toward a phase of adjustment. This does not mean that demand will significantly decline or that the supply chain disruption will be resolved. However, it is our view that gradual improvements will be made in the second half of the fiscal year, particularly in the latter half of this calendar year and at the end of the year.
With that in mind, we currently think that the freight rate in the second quarter will be around the same level as the first quarter or that it will rise further in the immediate future. However, it would not be surprising for the freight rate to gradually decline from the third quarter. This is based on the view that demand will gradually enter a phase of adjustment and supply chain disruption will improve.
Q-2：Regarding profit improvement trends in Car Carrier Business and the Dry Bulk segment in the first quarter, Car Carrier still posted a loss, and Dry Bulk’s profit looks relatively small for a first quarter. Nonetheless, it is anticipated that profit in Dry Bulk will improve significantly in the second quarter. Could you tell us what assumptions have been made in planning?
A-3：At the time of the announcement in May, Dry Bulk had squeezed the exposure in the first quarter. However, actual cargo movements became more active, which led to longer port-stay of vessels in various locations. Besides, the increased pace of carrying customers’ cargo prompted us to execute contracts ahead of schedule, and we had to charter vessels amid rising market conditions. Furthermore, there have also been actual cases of vessels stopping due to the impact of COVID-19. In addition, we are conducting hedging from the second quarter using forward freight agreements (FFA), but the unrealized loss due to the rise in market conditions emerged during the first quarter. As a result, profit was smaller in the first quarter, but we plan to reap the benefits of these positive market conditions from the second quarter.
As you can see, Car Carrier Business was limited to a small loss in the first quarter. The greatest cause was circumstances unique to Car Carrier Business, arising due to the freight rate system and particularly the handling of bunker surcharges (BAF). Specifically, bunker surcharges are linked to fluctuations in bunker prices, and those are reflected with a delay of several months, although dependent on contracts. Bunker costs rose much more than assumed in the first quarter, but the bunker surcharges covering the rise will actually apply several months later. This impact was greater than anticipated.
Q-3：Is there anything left on the menu for structural reform? Also, if you plan to take any steps this fiscal year, will they possibly be implemented as structural reforms?
A-3：There are still some uneconomical vessels and unprofitable businesses. We would like to take the same approach as in the past if possible by treating this as an issue to consider for improving profitability. We have already included it in our forecasts for this fiscal year, and we intend to implement a certain degree of structural reform that can be addressed in the immediate future.
The price of secondhand vessels happens to be rising at present, and the environment will enable us to implement effective structural reform while incurring less damage than previously thought. For this reason, we would like to take this opportunity to act flexibly, and this has also been incorporated into our forecasts. This will mainly be in the form of sale and disposition of secondhand vessels, but we may take the option of withdrawal of businesses themselves in some cases.
【Initiatives for Growth in Corporate Value】
Q-1：Regarding the new management plan incorporating a growth strategy explained on page 10 of the presentation material, is there anything you can tell us at present, such as what areas you believed to be as future growth areas or whether there is room to consider M&As?
A-1：First, we will explain the background to this. The first thing is the target of securing 400 billion yen or more in equity capital by 2030, our most important business challenge in the management plan previously announced in May. We expect to be able to achieve this goal by the end of this fiscal year due to a significant improvement in performance.
Another point is that during the stage of the COVID-19 pandemic last year at least, it was difficult to ascertain the industry trends of not only the shipping industry but also the cargo owners who are our customers. For example, it was unclear how industries such as the steel, thermal power generation, and automobile industries would proceed with decarbonization and how commercial distribution would change. However, it began to be seen somewhat in the direction taken by customers along the axis of the environment. There were two basic changes as above mentioned.
Last year, we intentionally refrained from establishing a growth strategy for the Company until we could ascertain this. However, now the achievement of our financial target is in sight, and the movements of customers in terms of environmental orientation have become clear. Given this situation, it is our current view that we need to create a management plan including a new growth strategy and capital policy as soon as possible.
We are yet to discuss specifics. Although we humbly realize that there may be some areas that we have not noticed concerning the Company’s values, our customers or employees may know about them. We would like to begin by an in-depth review of these to pick up what may be “K” Line’s core competencies or strengths that we have not noticed. After refining the findings, we apply them to discussion about what to do with our business portfolio.
Therefore, although we are unable to explain specifics at this time, we intend to make a new management plan including in-depth consideration extending to concepts such as those we just described.
Q-2：With regard to financial strategy, your consolidated equity capital has improved significantly. The difficult non-consolidated situation remains unchanged, but what is your assessment of this point? Page 11 of the presentation material mentions the market capitalization of ONE compared with other containership companies. Could you confirm your thoughts on improving your non-consolidated financial condition, including the option of selling the ONE shares held by “K” Line to the two other parent companies in order to improve your financial standing?
A-2：As you say, with regard to our finances and accounting after Containership Business was spun off, earnings from ONE are reflected in the profit and loss statement of our consolidated financial statements, but it is not directly reflected in the non-consolidated profit and loss statement. Therefore, in order to increase non-consolidated income and equity capital, we can either increase earnings in our own non-consolidated business, or receive dividends from subsidiaries and affiliates, although they will not be reflected in the consolidated profit and loss statement.
At present, profitability has improved at ONE, but as we have explained, ONE is in the process of formulating a business plan and a finance plan including dividends to its parent companies. Dividends from ONE to its parent companies will be determined by this commitment, and it is our view that the outcome will be the basis when we determine our non-consolidated equity capital policy.
We have not decided what to do with ONE shares at this time. Yet, as it is recorded on our balance sheet as an equity-method affiliate, the listing of ONE and what to do with the shares are subject to simulations as part of the various options and issues to consider.
Q-3：There are still losses from Containerships chartering. What is your view for this fiscal year and from next fiscal year? There is something that should be processed before considering the new growth strategy and it will have an impact on financials. How will it be positioned in the new management plan? Also, does this mean that you will redraft something like a long-term vision rather than a management plan?
A-3：We would like to make the new management plan with a period and a stance that differ somewhat from previous plans by considering what the Company should be like in five to ten years. Therefore, we do not intend to address each of the immediate problems at this time. We will eventually deal with such issues in the new management plan. However, our strongest desire at this time is for all levels and all members of the Company to consider painting a picture of how the Company will have grown in five years and what it will be like in ten years. That is something we have not been able to indicate very well in the past. For this reason, we are not in a position to be able to speak about individual issues at this time. Furthermore, rather than making a management plan for a single fiscal year, we would like to review the Company’s long-term portfolio strategy.
Q-4：Do you have any idea when you will be able to announce the new management plan?
A-4：We are unable to make an official statement on when we will announce it at this time, but we have set a goal to formulate it for next fiscal year.
【Other】
Q-1：With regard to page 11 of the presentation material, is it possible to simply compare overseas peer companies with ONE? The vessels’ charterage from the three Japanese shipping companies to ONE are relatively inexpensive, and it seems to be easy for ONE to make a profit. Is this the case?
A-1：This shows an assessment of other containership companies as a reference indicator, and as you have pointed out, an accurate comparison would be difficult to make without conducting more detailed due diligence. Still, it can be a useful tool for some form of estimation. For example, if the losses from Containerships chartering borne by parent companies is not reflected in ONE’s corporate value, that portion could be deducted from this graph and used for consideration.
