Kawasaki Kisen Kaisha Ltd

TSE:9107

Earnings Call Transcript 2021-Q1

[Yukikazu Myochin, executive]

A, financial highlights for first quarter fiscal year 2020.

A-1, financial results for first quarter fiscal year 2020. Due to the impact of the novel coronavirus disease, hereinafter COVID-19, consolidated operating revenues in the first quarter declined about 20% compared with the same period of the previous year to JPY 152.2 billion. Operating loss totaled JPY 6.6 billion, ordinary loss was JPY 1.0 billion and net loss attributable to owners of parent was JPY 1.0 billion. The average exchange rate was JPY 107.74 per U.S. dollar, and the average bunker price was USD 377 per metric ton.

In terms of financial indicators, as of June 30, 2020, our equity capital was JPY 100.2 billion, about on par with the end of the previous fiscal year. Interest-bearing liability was JPY 586.6 billion, an increase of JPY 43.1 billion from the end of the previous fiscal year, while cash and cash equivalents totaled JPY 161.7 billion, an increase of JPY 49.8 billion from the end of the previous fiscal year. We have secured liquidity on hand equivalent to more than 3 months' revenues. Our equity ratio was 11%, on par with the end of the previous fiscal year and 15% when including the equity credit in subordinated loans. The impact of COVID-19 in the first quarter totaled a loss of about JPY 8.0 billion, mainly from Car Carrier Business and the Dry Bulk segment.

A-2, financial results for first quarter fiscal year 2020 by segment. In the Dry Bulk segment, Cape-size market conditions slumped from the start of the year due to weak shipments from Brazil owing to poor weather. Before conditions had a chance to recover, the spread of COVID-19 caused the market to slump further. Meanwhile, in Japan, crude steel production declined more than 30% versus the first quarter of the previous year. At the same time, there was a postponement in the COA contract fulfillment, which dealt a double blow to the segment. The total impact was a deterioration of JPY 4.0 billion versus the same period of the previous year for an ordinary loss of JPY 4.4 billion.

The Energy Resource Transport segment generated stable profits mainly due to the mid-long contracts in Thermal Coal Carrier and LNG Carrier Businesses. The segment posted an ordinary income of JPY 1.6 billion, on par with the first quarter of the previous fiscal year.

In the Product Logistics segment, Car Carrier Business cargo volume declined by more than half year-on-year due to COVID-19. The segment posted an ordinary loss despite efforts to rationalize vessel allocation through suspension of vessels and temporary changing services.

In Containership Business, ONE succeeded in flexible vessel deployment in response to cargo demand, and East-West route market conditions stabilized. As a result, ONE posted higher profits. The entire segment, therefore, posted JPY 3.0 billion in ordinary income, a year-on-year improvement of JPY 1.2 billion.

B, forecasts and initiatives for fiscal year 2020.

B-1, forecast for fiscal year 2020. For the full fiscal year, we forecast operating revenues of JPY 600.0 billion, a year-on-year decline of nearly 20%, an operating loss of JPY 27.0 billion and an ordinary loss of JPY 28.0 billion. We expect to be breakeven in terms of net income attributable to owners of parent. The impact of COVID-19 will be significant mainly in the first half of the fiscal year, and we expect a challenging business environment to continue. Although we foresee a moderate recovery in the second half, the pandemic's effects will be felt and the situation will remain unpredictable.

When we announced our forecasts at the start of the fiscal year, we stated that damage control to the financial results in fiscal year 2020 would be our highest priority. These include measures to reduce operational costs through flexibility, reducing the fleet scale, rationalizing vessel allocation and suspending vessels. It also includes securing adequate liquidity on hand and selling assets to bolster shareholders' equity. We are making steady progress in each of these areas.

We forecast an ordinary loss of JPY 28.0 billion in conjunction with the decline in operating revenues. However, we expect to breakeven in terms of net income attributable to owners of parents, partly due to the transfer of our outstanding shares of a consolidated subsidiary operating container terminals on the North America West Coast, which we have agreed to sell as we announced on August 5. Our full year assumptions include an average exchange rate of JPY 107.25 per U.S. dollar and an average bunker price of USD 368 per metric ton. At the current time, we are undecided on interim and year-end dividend payments. Improvement of our financial strength remains our priority and we are taking steps to raise profitability.

B-2, forecasts for fiscal year 2020 by segment. In the Dry Bulk segment, signs of a demand recovery are emerging, particularly in raw materials transport. Still, a full-scale recovery will take more time. We forecast a profit for the segment for the second half, but for the full year, we forecast an ordinary loss of JPY 6.0 billion, a year-on-year deterioration of JPY 10.1 billion.

In the Energy Resource Transport segment, LNG Carrier and Tanker businesses are forecast to generate stable profits. However, the Offshore Energy E&P Support Business with KOAS is expected to record lower profit due to the decline in oil prices, while Thermal Coal Carrier Business is forecast to see lower utilization due to a temporary drop in demand. Overall, the segment is forecast to generate full year ordinary income of JPY 4.0 billion, a year-on-year decrease of JPY 5.9 billion.

In the Product Logistics segment, cargo movements in both Car Carrier and Containership Businesses are expected to recover from the slump caused by COVID-19 moderately into the second half of the fiscal year but not to pre-COVID-19 levels.

In Car Carrier Business, total units carried are forecast to decline by more than 40% year-on-year in the first half and by about 20% in the second half. The Containership Business loss will include a provision for losses related to chartering contracts. Logistics Business is expected to post a net profit, although the profit margin would decline. Short Sea and Coastal Businesses are forecast to fall into a net loss due to a severe impact from COVID-19, especially in ferry services. Overall, the segment is forecast to post an ordinary loss of JPY 21.5 billion, a year-on-year decline of JPY 18.1 billion.

B-3, forecasts for fiscal year 2020 by segment. In total, we forecast that COVID-19 will lower profitability by approximately JPY 35.0 billion. More than 2/3 of this will be concentrated in Car Carrier Business and the Dry Bulk segment.

B-4, progress in coping with COVID-19. Regarding our measures to cope with COVID-19, we are ensuring safe vessel operations by prioritizing safety and health, both onshore and offshore, while also fulfilling our mission to offer stable logistics services as part of the social infrastructure. We have taken thorough measures to prevent infections among vessel crew. Border-crossing restrictions in various countries have impeded our crew turnover plan. Among the 4,300 crew on our 194 vessels, the number of crew members on board for over 10 months peaked at around 1,100. At present, the number remains high at about 1,000. As we prepare for a possible second wave of infections, we are taking various measures to ease the difficulties in changing crew. On land, we have set up plastic panels in offices to prevent droplet infection, and we have instituted work style systems such as telework and flextime.

C, management plan.

C-1, positioning of management plan. Turning to our new management plan, we have laid out our key initiatives for this and next fiscal years as well as our basic approach to business. As the spread of COVID-19 has had a significant impact since the start of this year, we have set forth medium- and long-term global perspective, rather than merely a short-term one, on the post-COVID-19 world. From these perspectives, we have established a clear business direction as well as specific challenges to meet in the near term.

One of the effects of COVID-19 was to manifest various latent issues and concerns. Many concerns and issues that we believe could occur in the near future have actually come to pass right before our eyes. In this sense, COVID-19 has accelerated issues that were likely to appear at some point. Two examples are the decline in domestic crude steel production and car carrier shipments in Japan.

The business environment surrounding our customers is changing dramatically amid the unpredictable economic situation. We expect our customers to show more restraint in their investment activities as a result. In accordance with this outlook, each of our business units fully reconsidered their business environment in a post-COVID-19 world and reviewed their investment plans accordingly. The improvement of our financial strength remains an important initiative for us. Additionally, we will be reviewing each business and each contract under a more conservative scenario and market conditions to revise our business plans going forward.

In the Dry Bulk and Energy Resource Transport segment, led respectively by iron ore and LNG transport, we will continue to build up our portfolio of long-term or medium-term contracts. We have held a certain amount of exposure in order to support these businesses and the mid-long contracts as well as prepare for temporary fluctuations in demand. Some surplus have emerged, however, among certain types of vessels in the segments' fleets, and we have decided to scale down the fleet to appropriate levels going forward.

Our goal in fleet scale optimization is to create a structure that generates stabler profit based on core contracts through fleet scale optimization. This means we are adjusting the fleet scale to meet cargo contract levels. It does not suggest that we are shrinking our business scale in steps to cope with market stagnancy. We do not equate business scale with fleet scale. Instead, we will prioritize expansion of the business based on profitability and seek to maintain and expand business through long-term contracts. Our basic policy has not changed at all. Despite the challenging environment, we are confident we can expand the business by changing "K" LINE's strengths and advantages.

Our customers' business environment is changing in Car Carrier Business as well. Our approach is to firmly grasp core customer needs and optimize fleet scale while building and maintaining the strong bond of trust that we enjoy with our customers. In Logistics Business, which requires meticulous approach to a variety of business factors, we will seek to expand our business, particularly in Asia, by addressing issues one at a time and incorporating outside expertise and partnerships. In Containership Business, as ONE's profitability has begun to stabilize, we will collaborate with ONE to map out a future business plan as we continue to supply the company with superior vessels and support its human resources development.

The optimization of our fleet scale will lead to shrinking long-term fixed core fleet size. This will occur mainly through the retirement of aged vessels. At the same time, we will be introducing like LNG-fueled vessel with superior environmental performance driven by cutting-edge technologies for a more competitive fleet.

In a world where people are learning to live with COVID-19, awareness of the environment, which is the foundation of a sustainable society, continues to rise, and environmental concerns will become more important. We will strive to further promote the environment and safety as the foundation of our maritime transport. We, therefore, must refine our tangible and intangible technologies. To that end, beginning this April, we launched cross-organizational projects linking sales and technical departments and maritime and onshore departments. This project aims to study and introduce new technologies directly related to safety and the environment in order to strengthen ship management. While we expect there to be some trial and error, we will integrate our offshore and onshore organizations to put new technologies into practice. We will make similar efforts for the environment as well, striving to achieve reductions in greenhouse gas in order to raise the quality of transport services.

We plan to steadily build our portfolio of contracts and our profits by providing transport quality with more sophisticated environmental and safety performance. At the same time, we will closely measure the levels of total business risk in each business and adjust our exposure to achieve an adequate fleet scale. We thereby aim to generate an ordinary income of JPY 25.0 billion by 2025 under a conservative market and business condition forecast.

The new management plan outlines the initiatives we must take in the near term given our current understanding of how the global economy will develop post-COVID-19. There are a number of other factors that will undoubtedly continue to have a major impact on our business, including second and third waves of COVID-19, growing tensions between the U.S. and China and service innovation driven by digital technologies. Accordingly, we plan to revise our forecast annually as we monitor the post-COVID-19 environment.

C-2, review of previous medium-term management plan, Revival for Greater Strides. We have met nearly all our major targets under the previous management plan, including rebuilding portfolio strategy, advancement of management and function-specific strategies, ESG initiatives and ROA in stable-income business. Additionally, we have successfully spun off Containership Business, withdrawn from the heavy lifter and product tanker businesses and systemized the measurement of the level of business risk in each business unit. We also introduced new environmental technologies through Advanced Technology Group and built up our stable-income business based around a standard contract period of 2 years or longer. These initiatives progressed according to our targets.

In terms of our financial targets under the previous plan, we were unable to meet our target for returning to profit in 3 years from 2017, ratio of shareholders' equity and dividend policy. Regarding fiscal year 2018, the second year of the previous plan, ONE posted a significant loss after missteps made after its launch. The dry bulk market conditions slumped significantly, and we embarked on structural reform to dispose of high-cost vessels. This undermined our shareholders' equity and made it impossible to pay dividends. These were the key issues we reflected on in creating the new plan based on conservative market condition forecasts.

C-3, corporate vision. "K" LINE trust from all over the world. Under the new plan, we will continue to prioritize improving our financial strength and maintain our corporate vision as set forth in the previous medium-term management plan. We are logistics professionals centered around maritime shipping in support of the social infrastructure. As such, we strive to enhance safety, the environment and quality and be the company of choice among all our stakeholders, including our customers, employees, shareholders, business partners and financial companies. In this way, we will continually enhance our corporate value.

C-4, post-COVID-19 external environment. As a result of COVID-19, we have been confronted with the reality that many of the things we took for granted are simply not sustainable. People's behaviors and values are changing dramatically, and there are louder calls for creating a sustainable society and a heightened awareness of the environment. At the same time, we expect major changes to supply chains as protectionism and nationalism emerge. Latent issues are manifesting themselves. Issues that were predicted to occur are now occurring. As uncertainties grow, our customers will likely restrain their investment plans.

While the maritime shipping industry is expected to grow over the medium and long term, it is also true that the industry will require a substantial amount of time to recover from COVID-19. We do not expect fiscal year 2021 to return to levels of fiscal year 2019 and before, but rather it will take until fiscal year 2022 or 2023 for some businesses to recover to pre-COVID-19 levels.

C-5, forwarding to growth in corporate value, business policy in fiscal year 2020 and fiscal year 2021. In the near term, we are focused on firmly protecting our business by optimizing our fleet scale and rebuilding a lean structure from the current year through the next fiscal year. As we monitor the post-COVID-19 environment, we will make a comprehensive review of our investment plan and invest selectively. Our initiatives will also include strengthening our technological capabilities and enhancing our proposal-based sales capabilities as well as other measures to rebuild business to cover COVID-19-related losses and strengthen our finances. We plan to sell our overseas terminals business to ensure that we at least break even in terms of net income attributable to owners of parent in the current fiscal year.

C-6, medium-term business environment forecast. In the medium and long term, we expect the business environment to be characterized by continued high volatility and instability. In the dry bulk market, shipping of coking coal and iron ore is expected to decline as Japanese steel mills reduce their production to under 90 million tons to the 80 million tons level. Steel industry growth is expected in Asia, particularly India, while China production growth is expected to slow.

In the energy resources market, LNG demand is expected to continue to grow steadily. Thermal coal is expected to be impacted by recent energy policy trends aimed at promoting decarbonization, which will affect domestic industry consumption and shipping volumes. These trends are incorporated into the new management plan, and we will continue to monitor these trends. Regarding Car Carrier Business, global car sales this fiscal year are expected to decline around 20% year-on-year. It is likely that a full recovery will not be seen until 2022 or even after 2023. Logistics Business is expected to grow in Asia.

C-7, fiscal year 2020 and fiscal year 2021 ordinary income/loss and shareholders' equity forecast; medium- and long-term targets. We have set financial targets for ordinary income and shareholders' equity by the mid-2020s and 2030s. For fiscal year 2021, we expect JPY 10.0 billion in ordinary and net income to be achieved by firmly executing our strategies going forward. As medium-term targets, we have set targets of JPY 25.0 billion in ordinary income, JPY 150.0 billion in shareholders' equity and shareholders' equity ratio of 20% by the mid-2020s. By 2030, we aim to generate JPY 30.0 billion in ordinary income, JPY 250.0 billion in shareholders' equity and shareholders' equity ratio of 30%. In setting these targets, we have reviewed each business and taken a conservative approach to market conditions.

C-8, profit improvement factors toward fiscal year 2021 versus fiscal year 2020. For fiscal year 2021, we are targeting ordinary income and net income of JPY 10.0 billion based on the expected effect of our improvement measures. Specifically, the optimization of fleet scale and profitability improvement measures are expected to raise ordinary and net income to JPY 10.0 billion.

C-9, budget plan, image of ordinary income/loss. Behind these targets, we have separated business into 2 categories: the stable-income business based on mid-long-term contracts with core customers; and the market-exposed business comprised mostly of short-term contracts and specified shipping volumes, which includes some core customers.

Using advancement of management, we can measure the level of total business risk associated with each business unit and manage the invested capital in each business unit to optimal levels. Although some amount of exposure is necessary in each business unit, we are able to optimize the levels by shrinking the fleet scale and increase more mid-long-term contracts to expand our revenue. Higher income from ONE will decline as vessels are gradually returned.

C-10, fleet scale optimization. We do not measure our business in terms of fleet scale. Instead, we will expand our business as our revenue expands. Additionally, we are minimizing our exposure. Specifically, in the current fiscal year, we are making steady progress shrinking our fleet by more than 20 vessels, namely aged Cape-size, Panamax and smaller-sized bulkers, woodchip carriers, thermal coal carriers and car carriers. By 2025, we plan to reduce our long-term fixed core fleet to about 300 vessels while expanding core mid-long-term contracts.

C-11, investment strategy, 5-year plan. In preparation for future business, we have developed a selective 5-year investment plan worth about JPY 250.0 billion, a level within our operating cash flows. The focal point of the plan will be LNG Carriers and other energy transport vessels, along with coking coal and iron ore transport. In Car Carrier Business, even as we optimize the fleet scale by disposing of aged vessels, we will introduce the vessels in which new environmental technology installed like LNG-fueled with superior environmental performance. Other investments will be targeted at technologies to bolster our safety, environment and service quality, along with separate investments in technology development, renewable energy and other areas.

C-12, initiatives for strategic growing areas: safety, environment, quality.

C-13, specific initiatives. Regarding safety, environment and service quality, in order to accelerate initiatives, we have launched a cross-organizational project team combining sales and technical department staff. Moving forward, we will work with external partners to develop various necessary technologies.

C-14, business strategy. Each of the "K" LINE business units will strive to execute the policies and initiatives we have explained today as we work to further define each of the initiatives. We will also be continuing to support ONE with superior vessels, human resources, long-term business operation and business plan formulation.

ONE, Ocean Network Express, financial results for fiscal year 2020 first quarter. In the first quarter, ONE posted a profit of $167.0 million, a strong year-on-year improvement. ONE executed extra void sailings by an average of 20% in response to the lower demand. Although liftings declined 13%, freight rates remained stable, holding the revenue's decline to only 5%. Overall, the flexible fleet size adjustment was successful.

Regarding the second quarter, based on the current conditions, ONE does not forecast a major decline in business. For the second half, ONE has stated that it is unable to reasonably forecast financial performance. The figures of forecast in the second half are "K" LINE's own estimates. In terms of risk factors, there are a possible second wave of infections and uncertainty over payroll and other fiscal measures in each country. It is uncertain when the impact of COVID-19 will hit bottom. Some concerns have been raised over whether or not there is a slackened sense of urgency while shipping companies executed extra void sailings in the first half because it is uncertain when the impact of COVID-19 will hit bottom. Overall, there are fewer major container shipping companies, and the aggregation of alliances have made it possible for flexible vessel deployment to meet actual cargo demand. Although we do not expect to achieve the same levels of profitability in the second half as that in the first half due to a certain amount of backlash over the supply-side adjustments, we expect our forecast to generally hold.

In case profitability declines significantly, ONE must execute extra void sailings and vessel deployment to match cargo demand the same as before. This is our view on ONE.