Kawasaki Kisen Kaisha Ltd

TSE:9107

Earnings Call Transcript 2018-Q3

[Harusato Nihei, executive]

Thank you very much for joining us this afternoon. I would like to begin the briefing on our consolidated financial results for the first 9 months of the fiscal year ending March 31, 2018.

A: Financial highlights for third quarter fiscal year 2017. A-1: Financial results for third quarter fiscal year 2017. For the first 9 months of fiscal year 2017, our operating revenues totaled JPY 884.1 billion, operating income totaled JPY 7.1 billion, ordinary income totaled JPY 9.4 billion and net income attributable to owners of the parent totaled JPY 9.3 billion. The average yen-dollar exchange rate during the period was JPY 111.68 to the dollar. And the average bunker fuel price was $336 per ton.

Compared with the same period of the previous year, operating revenues increased JPY 123.1 billion, operating income increased JPY 41.8 billion, ordinary income increased JPY 46.3 billion and net income attributable to owners of the parent increased JPY 63.9 billion.

For the October-December third quarter of fiscal year 2017, our operating revenues totaled JPY 305.1 billion, operating income totaled JPY 0.9 billion, ordinary loss totaled JPY 1.8 billion and net loss attributable to owners of the parent totaled JPY 3.9 billion.

Next, I would like to explain the segment results for the 9-month period. First, Containership business posted operating revenues of JPY 458.1 billion and ordinary income of JPY 7 billion. Operating revenues increased JPY 76.7 billion year-on-year. And ordinary income increased JPY 31 billion year-on-year. For third quarter alone, however, Containership business posted an ordinary loss of JPY 2 billion. Although cargo movement was robust, freight rate market conditions were weighed down by the continued supply-demand gap and competition for market share during the transition period involving several integrations among shipping companies.

Market conditions were in line with forecasts through the early part of November. Thereafter, the growth of demand slowed somewhat while the supply of capacity continued to rise. The result was sluggish freight rates. An increase in bunker fuel prices at the same time made the operating environment even more severe. Bulk Shipping business posted operating revenues of JPY 392.2 billion and ordinary income of JPY 5.4 billion for the 9-month period. Ordinary income for the third quarter alone was JPY 2.7 billion, generally consistent with the forecast.

Offshore Energy E&P Support Business posted operating revenues of JPY 7 billion and an ordinary loss of JPY 0.6 billion for the 9-month period. For the third quarter alone, the business posted operating revenues of JPY 0.7 billion and an ordinary loss of JPY 1.4 billion. The main reasons for the loss were the continued sluggish market conditions in the offshore support business and a foreign exchange valuation loss of approximately JPY 1 billion.

Taking into account other business and adjustments. Consolidated ordinary income for the 9-month period totaled JPY 9.4 billion. In terms of financial stability indices, our DER and net DER changed due to a decline in a portion of the interest-bearing debt. Other indices did not change significantly from the previously disclosed levels. This concludes our explanation of the 9-month financial results.

A-2: Estimate for fiscal year 2017. Turning to estimate for the full year, we forecast operating revenues of JPY 1,160 billion, operating income of JPY 11 billion, ordinary income of JPY 3 billion and net income attributable to owners of the parent of JPY 8.5 billion. Our assumptions for exchange rates and bunker fuel prices are shown in the briefing materials.

Compared with the previous full year forecast, we have increased the forecast for operating revenues by JPY 20 billion while lowering the forecast for operating income by JPY 2 billion and for ordinary income by JPY 10 billion. The reason for the difference in the levels of reduction in operating income and ordinary income relates to the expenses for Containership business integration. Specifically, among the expenses, the proceeds from secondment fees of "K"LINE employees seconded to ONE were booked as a reversal of operating expenses. Furthermore, despite the downward revision to ordinary income, we have maintained the forecast for net income attributable to owners of the parent because of expected recognition of extraordinary income and losses related to review of the business portfolio and assets, et cetera.

Regarding the impact of exchange rate and bunker fuel price volatility, in the fourth quarter alone, a change of JPY 1 in exchange rates will impact results by plus or minus JPY 0.1 billion. And a change of $10 in bunker fuel prices will impact results by plus or minus JPY 0.1 billion.

A-3: Estimate for fiscal year 2017 by segment. Regarding the estimate for fiscal year 2017 for Containership business, we forecast operating revenues of JPY 599 billion and ordinary income of JPY 0.5 billion, which represents a downward revision of JPY 8.5 billion compared with the forecast made in the second quarter. The reasons why we changed our assumptions are freight rate market conditions and higher bunker fuel prices.

With regard to ONE integration, we forecast fiscal year 2017 expenses of $3.38 million (sic) [ $338 million ]. Proceeds from secondment fee of our employees seconded to ONE will offset a portion of the expenses. And as a result, we forecast the integration to have a net impact of approximately JPY 5 billion in expenses.

Regarding Bulk Shipping business, there is no change to the ordinary income forecast made in the second quarter. Regarding Offshore Energy E&P Support business, we have revised downward, the ordinary income forecast made in the second quarter by JPY 1.5 billion, mainly because of foreign exchange valuation losses.

A-4: Latest forecast for fiscal year 2017 versus financial results for fiscal year 2016. Overall, we forecast ordinary income improving by JPY 55.4 billion compared with the previous year, comprised of JPY 44.7 billion improvement from company achievements and JPY 10.7 billion from external factors. The external factors include changes in the Containership market conditions, while the freight rate index for Asia and North America is forecast to be steady with the previous year at 75, the Asia Europe index is expected to improve from 47 last year to 53 this year for a 6-point rise.

A-5: Latest forecast for fiscal year 2017 versus assumption as of October 2017. Our current ordinary income forecast is JPY 10 billion lower than the forecast made in the second quarter. The main reason is external factors, which represent approximately JPY 9.3 billion of the JPY 10 billion decline. This is primarily due to changes in the Containership market conditions, which accounted for a decline of JPY 5.4 billion. The second half forecast index for Asia and North America is now 73 compared to the second quarter forecast of 77, while Asia Europe has been lowered from 55 to 51.

A-6: Financial impact in fiscal year 2017 from structural reforms and provision of allowance in fiscal year 2015 and fiscal year 2016 progress of cost savings. There is no major change to the forecast for provision of allowance and cost savings. We forecast approximately JPY 20 billion in full year financial impact from the provision of allowance for loss related to business restructuring. And as you can see from the consolidated statements of cash flow, there is still about JPY 6 billion remaining that we expect to recognize in the fourth quarter.

A-7: Progress of management plan third quarter fiscal year 2017. Regarding the progress of our medium-term management plan, in terms of rebuilding business portfolio strategies, we have started total auto logistics services for finished vehicles in Chile and the Philippines. This is in line with our medium-term management plan effort to bolster the logistics services related to Car Carrier business. In terms of advanced business management and function-specific strategies, we have begun implementing business risk and return management as part of the Advanced Business Management initiatives we explained before the second quarter briefing. We will continue to enhance this program through trial and error.

In terms of technological and business model innovation, we have begun joint discussions on LNG bunkering business in Japan as announced in a news release.

C: Operating company for new integrated Container Shipping business. Progress status report for business launch. Regarding the time schedule for operations at ONE integrated container shipping business shown on Page 17, we completed preparations on schedule by the end of October 2017. From February 2018, we will launch system operations and begin taking service bookings. From April 1, we will start services under the new operating company.

Pages 18 and 19 show the status of our progress towards integration. The Japan local office of ONE-Japan has moved from a temporary facility to its new office and made preparations to start sales operations from February 1. The Singapore global headquarters has moved from its temporary location to Marina One, a newly completed building. Furthermore, in regard to antitrust licensee approval, we have received approval from South Africa, where the delay had caused some concern. And now we have completed approvals in all countries required for the integrated business. ONE has announced its service schedule and has completed preparations of its IT infrastructure to start operations from February 1. ONE will begin shipping services from April 2018.

"K"LINE and its 2 partner companies are making every effort to finalize the preparations for the start of business. For "K"LINE, the success of ONE is vital for our business plans and earnings from the next fiscal year, and we will continue to provide all the support we can to ensure its success.

Thank you very much for your kind attention.