Kawasaki Kisen Kaisha Ltd

TSE:9107

Earnings Call Transcript 2019-Q3

[Harusato Nihei, executive]

Thank you very much for joining us today. Since the announcement in October 2018 of the financial results for the first 6 months of the fiscal year ending March 31, 2019, the business environment surrounding our company has changed substantially. Simply put, uncertainty is increasing. There have been a number of changes in the business environment. Notably, there were the emergence of economic deceleration and tightening of environmental regulations in China. The trade friction between the U.S. and China remains yet to be resolved. Expectations of U.S. interest rate hikes began to diminish over concerns about the future outlook for the U.S. economy. Furthermore, geopolitical risks heightened, particularly in Europe, centered on the U.K. and the Middle East.

These changes have led to fluctuations in market conditions affecting the company. There has been a trend toward yen appreciation in foreign exchange markets, and fuel oil prices are trending down after a temporary increase. Although the economic trend in China is not the only contributing factor, current dry bulk market conditions are on a downward trend.

With regard to the company's financial results and full year forecast for fiscal year 2018, although the business environment is increasingly uncertain and changing, we have not changed our full year forecast following the substantial downward revision to our forecasts in October 2018. We are currently steadily moving ahead with tasks we should undertake in preparation for fiscal year 2019.

As we have already announced in a news release dated December 21 of last year, we are steadily proceeding with the establishment of a joint holding company by our 3 domestic harbor transportation subsidiaries and the transfer of a portion of the shares of the holding company to Kamigumi Co., Ltd. We are also studying further measures, which we plan to implement.

We will now provide highlights of financial performance for the third quarter of the fiscal year ending March 31, 2019. A, financial highlights for third quarter fiscal year 2018. A-1, financial results for third quarter fiscal year 2018.

For the third quarter of the fiscal year ending March 31, 2019, consolidated operating revenues were JPY 222.4 billion, operating income was JPY 3 billion, ordinary loss was JPY 6.1 billion, and loss attributable to owners of parent was JPY 6.4 billion.

Looking at ordinary income and loss by segment. Ordinary income was JPY 1.4 billion in Dry Bulk and JPY 0.3 billion in Energy Resource Transport, and ordinary loss was JPY 6.7 billion in Product Logistics, of which operating loss from Containership business was JPY 8 billion, including equity in loss of Ocean Network Express Pte. Ltd., ONE, of JPY 6.6 billion. Total ordinary loss, including other and adjustment, was JPY 6.1 billion.

In the results for main financial indicators presented in the materials, equity capital decreased in comparison to the second quarter. This is mainly due to a loss attributable to owners of parent in the third quarter, a valuation loss on investment in securities accompanying a decline in equity markets and foreign exchange impact.

A-2, forecasts for fiscal year 2018. We forecast full year operating revenue of JPY 840 billion, operating loss of JPY 5 billion, ordinary loss of JPY 28 billion and loss attributable to owners of parent of JPY 20 billion. The only difference from the forecasts announced in October 2018 is that we have slightly revised the operating revenue forecast upward. There is no change in the forecasts for operating loss, ordinary loss and loss attributable to owners of parent. The assumptions for the full year are for an average yen-dollar exchange rate of JPY 110.35 and a bunker price of $429 per metric ton.

In the market condition assumptions that are the premise of this full year forecast, a substantial change from the second half forecast announced in October 2018 is a slight lowering of our forecasts for Dry Bulk, mainly Cape-size. By contrast, we have raised our forecasts for tankers. As announced at the time of the briefing on the second quarter results, we have decided not to pay a year-end dividend.

A-3, forecasts for fiscal year 2018 by segment. This page presents the full year forecasts by segment. For the Dry Bulk segment, we forecast fiscal year 2018 ordinary income of JPY 6 billion. We have revised the full year results forecast downward by JPY 0.5 billion compared to the forecast announced in October 2018 due to factors including deceleration of the Chinese economy and an accident in an iron ore producing area.

For the Energy Resource Transport segment, we forecast ordinary income of JPY 3 billion, an improvement of JPY 0.5 billion compared to the forecast announced in October. This is due to the impact of improvement in market conditions for VLCC and other vessels.

Next, for the Product Logistics segment overall, we forecast ordinary loss of JPY 33 billion, of which ordinary loss from Containership business is JPY 35 billion, including equity in loss of ONE of JPY 19.9 billion. This is an improvement of JPY 0.8 billion from the forecast announced in October, primarily reflecting a slight improvement in the full year financial results forecast for ONE.

With regard to the JPY 2.5 billion negative difference from the forecast announced in October for Containership business, the company has revised the full year forecast downward due to the recording of JPY 2.6 billion in the third quarter as expenses for fiscal year 2018 as a result of consideration of the profitability of additional Containership capital expenditures. Since there has been an upward revision of JPY 1 billion for the non-Containership part of Product Logistics business in connection with strong performance from domestic logistics and international logistics, including air cargo, the company has revised downward the forecast for the Product Logistics segment overall by JPY 1.5 billion in comparison with the forecast announced in October 2018. As indicated in the materials, the previously explained measures to improve profitability are progressing generally as planned.

A-4, latest forecasts for fiscal year 2018 versus assumption as of October 2018. As shown in the waterfall chart, as previously explained, the most recent full year forecast is unchanged from the forecast announced in October 2018. However, the details have changed with ordinary income from "K" LINE own business improving from JPY 4.5 billion to JPY 7 billion, while ordinary loss from the Containership business increased by JPY 2.5 billion. These figures offset each other, resulting in no change in the total. The factors contributing to the JPY 2.5 billion deterioration in Containership business performance are as previously explained.

A-5, detailed progress of management plan and initiatives for fiscal year 2018 fourth quarter onwards. When we announced the substantial downward revision to our forecasts in October 2018, we explained several important emergency tasks. We will now discuss the progress with initiatives to address these tasks. Initiatives for ONE's profit improvement are as shown in the materials. The key task leading up to fiscal year 2019 is to steadily work to advance recovery of liftings and utilization and, most important, cargo portfolio optimization in a variety of ways.

Since the full year financial results forecasts for ONE are nearly the same as the figures announced in October 2018, as mentioned previously, progress in fiscal year 2018 is according to plan. We are currently steadily implementing measures for profit improvement at ONE in fiscal year 2019.

Next, looking at Car Carrier business. We announced in October 2018 that we will undertake significant profitability improvement leading up to fiscal year 2019. Although we have been unable to secure profits from this segment, we are implementing measures aimed at an annual profit improvement of JPY 5 billion to JPY 6 billion in preparation for a return to profitability in fiscal year 2019. We have already secured a profitability improvement of approximately JPY 4.9 billion through negotiations with customers and intend to aim for further profit improvement.

Turning next to initiatives for selection and concentration. Details of an initiative for business reinforcement through collaboration with Kamigumi Co., Ltd. in domestic harbor transportation and logistics businesses are as announced in a news release. We are now beginning efforts to dispose of non-core assets, such as real estate, and to develop next-generation core businesses utilizing AI and digitalization.

With regard to shrinking market-exposed businesses, the fourth task, as shown in the materials, to achieve profit recovery and cost reduction in fiscal year 2019, we will work to strengthen business competitiveness, focusing on Dry Bulk and Container businesses. Specifically, we intend to lower fleet costs and strengthen competitiveness by means including disposal of uneconomical ships. Two months remain in fiscal year 2018, and we are currently considering the details of these initiatives. We intend to make a public announcement when the timing is appropriate.

Also, although we have not included this in the materials, the upcoming 2020 SOx regulations will become an extremely important future initiative in fiscal year 2019. Although we do not know yet the price difference between compliant fuel oil and the current high-sulfur fuel oil, since compliance will result in an extremely large cost increase, it will be necessary to negotiate with customers who use our services. We consider this an important task.

C, ONE financial results for fiscal year 2018 third quarter. The fiscal year 2018 third quarter financial results and the full year forecasts for ONE are as presented in the materials. Please refer to the latest full year forecasts for fiscal year 2018. The third quarter results were revenue of $3,025 million and loss of $179 million. The previous full year forecast of a loss of $600 million has been revised slightly to the current forecast of a loss of $594 million. Bunker prices, on which the forecasts are premised, are as shown in the materials.

Looking at the third quarter profit and loss summary. Loss was $179 million, an improvement over the previous forecast of a loss of $218 million. Utilization recovered substantially from the first half, although it fell slightly short of the previous forecast.

Freight rates on the Asia-North America eastbound routes remained at high levels, contributing to the improvement in the third quarter results. The cost-reduction effect of the current decline in fuel oil prices will appear in the fourth quarter. The latest fourth quarter forecasts conservatively factor in uncertainties in the external environment, such as the trends in China-U.S. trade friction and the European economy as well as the impact of China's environmental protection laws on backhaul trades. The full year loss is projected at $594 million, roughly the same as the previous forecast.

Please refer to the liftings and utilization figures on Page 17 of the materials. On the Asia-North America eastbound routes, a tight balance of supply and demand continued, accompanying stronger-than-usual demand in October and November following China's National Day and capacity reduction due to reduced frequency of some services, and lifting and freight rates remained at high levels. The results for the Asia-Europe westbound routes are as shown in the materials.

On the Asia-North America westbound/Asia-Europe eastbound routes, although both liftings and utilization increased substantially from the second quarter levels and freight rates remained stable, we will continue efforts to enhance yield management and increase utilization. In the third quarter, capacity decreased on the Asia-Europe westbound routes, as it did on the Asia-North America eastbound routes, and ONE is engaging in strategic route operation.

Page 18 shows a waterfall chart, analyzing the difference between third quarter results and forecasts. The deterioration of JPY 3.2 billion due to adjustment of first half exchange gain, shown in the bar second from the right, reflects a retroactive adjustment of first half exchange gain due to an adjustment in connection with systems construction at the time of recording foreign exchange gain. Further improvement would have been achieved if this factor had not occurred. Checks are underway to ensure that there is no reoccurrence of this or a similar problem in the future.

Page 19 shows analysis of differences between the October and most recent full year forecasts. Although there is no major change, as shown in the materials, analysis by variance factor shows that the negative impact of a decrease in liftings was compensated for by the positive difference of $55 million from an increase in freight rates and enhancement of detention and demurrage collection and also by a decrease in operating costs accompanying cancellation of some sailings.

A key consideration with regard to decrease in liftings, an item in the variance factor analysis shown on Page 20 of the materials, is that although liftings are improving overall, we have reexamined external factors after the Chinese New Year and factored in correspondingly conservative assumptions. Also, ONE and its 3 parent companies are continuing earnest negotiations aimed at implementing a transfer of overseas terminal businesses from the parent companies, mentioned under the item decrease in overhead costs, others, during fiscal year 2018.

In action plans toward fiscal year 2019, shown on Page 23 under Cargo Portfolio Optimization in Group 2, we will take into consideration matching of dominant and nondominant cargo and seek further profit improvement in both directions. We are also proceeding with cargo portfolio rebalancing through tender negotiations. The important consideration is whether this will result in an increase in profits in fiscal year 2019, and we are now at the first stage of negotiations focused on customers in Europe. We cannot yet offer details on this matter and intend to provide a detailed explanation in due course.

This concludes today's report, and we thank you for your kind attention.