Kawasaki Kisen Kaisha Ltd

TSE:9107

Earnings Call Transcript 2021-Q2

[Yukikazu Myochin, executive]

A, financial highlights for second quarter fiscal year 2020. A-1, financial results for second quarter fiscal year 2020. For the second quarter of the fiscal year ending March 2021, consolidated operating revenues were JPY 147.9 billion. Operating loss was JPY 3.6 billion. Ordinary income was JPY 11.0 billion, and net income attributable to owners of parent was JPY 10.6 billion.

For the first half of this fiscal year, consolidated operating revenues totaled JPY 300.1 billion, a decline of about 20% year-on-year due to the novel coronavirus COVID-19 impact. Operating loss totaled JPY 10.2 billion. Ordinary income totaled JPY 10.0 billion and net income attributable to owners of parent was JPY 9.6 billion, a year-on-year decline of JPY 6.7 billion. The ordinary income result of JPY 10.0 billion exceeded the revised forecast disclosed on September 24 by JPY 2.0 billion. The average exchange rate was JPY 105.90 per U.S. dollar, and the average bunker price was USD 331 per metric ton.

In terms of financial indicators, as of September 30, 2020, our equity capital was JPY 106.7 billion, an increase of JPY 5.6 billion compared with the end of the previous fiscal year. Interest-bearing liability was JPY 578.0 billion, an increase of JPY 34.5 billion. Cash and cash equivalents at the end of the second quarter totaled JPY 150.8 billion, equal to more than 3 months of operating revenues. Net DER was 398%. Our equity ratio improved 1 point over the end of the previous fiscal year to 12%, and it was about 16% when including the equity credit assigned by a rating agency to our subordinated loans.

A-2, financial results for second quarter fiscal year 2020 by segment. In the Dry Bulk segment, Cape-size market conditions began to recover in the second quarter after a significant first quarter decline due to COVID-19. The recovery was driven by higher steel products demand in China and iron ore shipments from Brazil. Market conditions for Panamax and smaller-sized vessels also began to recover due to China's purchase of soybeans and other agricultural products from the United States as well as an upturn in iron ore shipments from India. However, the Dry Bulk segment as a whole posted lower second quarter revenues and profitability compared with the previous fiscal year, with an ordinary loss of JPY 4.9 billion. The results reflected the steep first quarter decline, partly because of the voyage completion method for accounting.

In the Energy Resource Transport segment, tanker and LNG carrier businesses performed well as a result of stable medium- to long-term contracts. Offshore support vessels business market conditions deteriorated year-on-year due to the slump in crude oil prices. As a result, the overall Energy Resource Transport segment posted ordinary profit of JPY 1.8 billion as both revenue and profit declined year-on-year.

In the Product Logistics segment, Car Carrier business suffered a major impact from COVID-19, with first quarter shipment volume declining by about 50% year-on-year. Market conditions recovered somewhat in the second quarter after global car sale volume bottomed out and began to rebound gradually, and factories temporarily closed or shut down in various countries began to reopen for production. Shipment volume in the second quarter declined about 30% year-on-year and the business posted a loss for the second quarter.

In Containership business, ONE equity method affiliate posted a year-on-year increase in profit. Although Containership cargo movements declined due to COVID-19, the company responded flexibly to fluctuating demand by adjusting vessel allocation and implemented void sailings as necessary. At the same time, ONE benefited from firm freight rate market conditions and lower bunker fuel prices while also making progress reorganizing its cargo portfolio.

In Logistics Business, although transport volume declined overall, buyers consolidation business, which counts e-commerce companies as its main customers performed well as a result of growth in e-commerce and growing stay-at-home demand. Short Sea and Coastal business, including ferry services, also suffered a major impact from COVID-19 as people limited their travel. Overall, the Product Logistics segment recorded a year-on-year decline in operating revenue, but ordinary income of JPY 15.7 billion as the strength of Containership business offset the decline in Car Carrier and Short Sea and Coastal businesses.

B, forecast and initiatives for fiscal year 2020. B-1, forecasts for fiscal year 2020 and key factors. Regarding the full year outlook, we forecast operating revenues of JPY 590.0 billion, representing a 20% year-on-year decline, which is on par with the first half decline. Operating loss is forecast at JPY 25.0 billion. We project to break even on an ordinary basis while net income attributable to owners of parent is forecast at JPY 20.0 billion. In the second half, we project a gradual recovery from the significant first half downturn caused by the spread of COVID-19. Overall, however, the situation is still unpredictable, and the market will continue to feel some level of impact from COVID-19 as infection increase in the United States and Europe begins to suffer a second wave.

We forecast to break even on an ordinary basis. Net income attributable to owners of parent is forecast at JPY 20.0 billion as a result of the sales of the overseas terminal business and other assets. Our assumptions for average exchange rates are JPY 105 per U.S. dollar for the second half and JPY 105.98 per U.S. dollar for the full year and an average annual bunker price of USD 362 per metric ton.

We sincerely regret that we have decided not to pay interim dividend. Our decision is based on a comprehensive analysis of our current period results, future business trends, investments to ensure future growth and the need to improve our financial strength. The year-end dividend remains to be determined at this time. And at a future date, we will make an announcement based on a comprehensive analysis of the business outlook and our financial strength. We would like to offer our sincere apologies to our shareholders and restate our commitments to improving our results and strengthening our finances.

B-2, forecast for fiscal year 2020 by segment. Looking at the Dry Bulk segment, in the second quarter, global crude steel production declined nearly 9% year-on-year. In the July to September period, however, we can see that economic stimulus programs in countries around the world, infrastructure development in various countries, primarily China and global car sales rebounded on quarter-on-quarter basis. Besides crude steel production by Japanese steel mills in the April to June period slumped about 30% year-on-year before recovering somewhat to an approximately 20% year-on-year decline in the July to September period.

It is important to note that a second wave of COVID-19 infections has begun mainly in Europe, and a full-scale recovery will take more time. Although we forecast that the Dry Bulk segment will rebound to profitability for the second half, the recovery will not be enough to offset the significant loss in the first half. As a result, we forecast a full year ordinary loss of JPY 7.0 billion for the segment, which would represent a year-on-year deterioration of JPY 11.1 billion.

In the Energy Resource Transport segment, tanker, LNG carrier businesses are forecast to perform stably as a result of medium- to long-term contracts. Regarding offshore support vessel business, we are cutting costs and taking other measures to improve profitability amid the ongoing decline in crude oil prices. Regarding drillships business, we forecast a temporary deterioration in profitability due to the crude oil price slump as well as COVID-19. For the entire Energy Resource Transport segment, we forecast ordinary income of JPY 0.5 billion, a year-on-year decline of JPY 9.4 billion and JPY 3.5 billion lower than the previous forecast.

In the Product Logistics segment, regarding Car Carrier business, global car sales in the April to June period declined 30% year-on-year. Our total units carried during the same period declined 50% year-on-year. For the July to September period, China car sales rose year-on-year while car sales in the United States recovered to a 10% decline. We forecast our total units carry to decline 10% year-on-year for the second half. We will continue to adjust services tentatively and dispose of uneconomical and aged vessels in order to further reduce costs.

Regarding Logistics business, despite a gradual recovery in cargo volumes both domestically and internationally, we expect a full-scale recovery to take more time. In Containership business, there are still uncertainties in the outlook for cargo movements, including U.S. consumption trends as well as market conditions. ONE plans to continue its profitability improvement measures such as flexibly allocating vessels and implementing void sailings as needed by carefully monitoring consumption trends in cargo movement demand, particularly in Europe and the United States. Overall, the Product Logistics segment is forecast to post a full year ordinary income of JPY 11.5 billion, a JPY 14.5 billion year-on-year increase.

B-3, forecast for fiscal year 2020 by segment. In comparison with the previous fiscal year's results, our forecast for the current fiscal year represents deterioration of JPY 11.1 billion in the Dry Bulk segment, JPY 9.4 billion in the Energy Resource Transport segment and JPY 12.0 billion in the Product Logistics segment, excluding Containership's business, for a total year-on-year deterioration of JPY 32.5 billion. We estimate the impact of COVID-19 to be approximately JPY 30.0 billion, which includes a temporary decline in demand, market condition deterioration and such direct expenses as the cost of vessel deviation to accommodate crew changeovers and port stay-related costs associated with PCR testing and other measures.

As we enter the second half, profitability is improving for the Dry Bulk segment with Car Carrier and other businesses. Excluding some temporary factors in the Energy Resource Transport segment, our core businesses continue on a recovery path.

Regarding ONE, the company posted a strong year-on-year improvement in profitability, driven by a flexible vessel deployment in response to cargo movements, firm freight rate market conditions and lower bunker fuel costs. ONE's strong profitability helped to offset the losses in "K" LINE's own businesses.

Regarding Containership business, ONE is now in its third year of business, and there are 2 key points to consider concerning its development: first, ONE's organization is performing well in its third year. It has become an organizational structure that can successfully leverage the best practices of the 3 parent companies. And overall, ONE is now operating at cruising speed. This is the biggest point.

Second, the containership industry on a whole has evolved through reorganization and consolidation. As a result, the business environment has changed. The number of major shipping companies on East to West routes has decreased. And currently, there are 3 major alliances after integration. Then COVID-19 emerged and it seems that the pandemic has, in effect, triggered the benefits expected under the industry reorganization.

At the start of 2020, as the cargo movement appeared to begin declining significantly, the containership companies were prepared for this change. The alliances reacted by flexibly implementing void sailings without any decline in service quality. The alliance to which ONE belongs operates 16 weekly sailings on Asia to North American routes, so the reduction of 1 sailing reduced space by only 6%. While maintaining service quality, the alliances reduced services rapidly to ready to cargo demand deterioration. In actuality, demand did not decline as much as expected. As a result of this and the flexible adjustments, market conditions did not decline with the demand drop as they would have in past business environments.

The recent environment has finally allowed us to witness the materialization of certain benefits of ONE's organizational development and the general consolidation and reorganization of the industry. In previous comments, it was noted that the total impact of COVID-19 is forecast at approximately JPY 30.0 billion. Of this amount, about JPY 2.4 billion consists of the direct cost for vessels deviation to accommodate crew changes due to lockdowns as well as port stay period to ensure safety.

B-4, progress and initiatives for fiscal year 2020. Despite the gradual recovery from COVID-19, as we indicated in our business plan announced with the first quarter results, we are actively taking measures to adapt to an environment where COVID-19 is the new norm.

In addition to the immediate damage control measures, we are actively optimizing our fleet, especially through the redelivery of chartered vessels and the disposal of aged and uneconomical vessels. We are generally on track with the plan to redeliver and dispose of more than 20 vessels this year, mainly in the Dry Bulk segment and Car Carrier business.

Additionally, in terms of liquidity on hand, we have secured cash on hand equivalent to 3 months of operating revenues. To increase shareholders' equity, we are progressing with the transfer of our outstanding shares of overseas container terminals on the North America as planned. We are also building a stable income business through firm targets for medium- to long-term contracts, including LNG carriers and other energy-related businesses. Overall, we are making steady progress achieving each of the key measures of our business plan.

B-5, progress in coping with COVID-19. The spread of COVID-19 remains unpredictable. We must carefully monitor the changing situation, especially considering the new wave of infections in the United States and Europe. In the face of these challenges, our marine and onshore divisions will work together to ensure that we continue to support the global logistics infrastructure.

At sea, we are strengthening our infection monitoring and preventative measures on board. As lockdowns continue, there are still obstacles to crew changes. We have approximately 4,300 crew members onboarding 194 vessels under in-house shipment management at all times. At its peak, there were more than 1,100 crew on board such vessels for more than 10 months. That number has dropped to under 700 and is now in the 600 range. In our offices on land, we are ensuring safe environments by installing droplet infection prevention panels and making flexible use of telecommuting and flextime.