Mitsui OSK Lines: CEO Junichiro Ikeda’s Explanation on FY 2017 Results

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Outline of FY2017 Financial Results

Ordinary profit for FY2017 totaled ¥31.4 billion, an increase of ¥6.0 billion, or 24%, in a year-on-year comparison. It ended with a large upturn from the previous outlook at ¥25.0 billion announced at the end of January. This was due mainly to scale-downed costs related to the establishment of the new company Ocean Network Express (ONE), which was recorded as equity in losses in the containership business, and to a slight upturn in the Dry Bulk Business and

Energy Transport Business

On the other hand, the company recorded a net loss of ¥47.3 billion as a result of a large extraordinary loss posted in the fourth quarter.

Extraordinary Loss

The three Japanese shipping companies’ containership businesses were integrated and the new company ONE launched its service in April of this year. The three parent companies time charter-out the containerships each one previously operated to ONE, and the rates are set at the prevailing market level. Currently, the market is at a low level, so, as far as MOL is concerned, this chartering-out to ONE results in negative yields. We decided to record provisions for the reasonably estimated future losses in a lump sum. Over 80% of the “¥73.4 billion loss related to business restructuring,” which was recorded in extraordinary losses for FY2017, is related to the loss from this chartering-out to ONE. Others include costs related to the closure of overseas subsidiaries, and so on.

By Segment

Dry Bulk Business

Spot markets for all four types of bulkers improved from the previous fiscal year. Speaking of Capesize vessels, after recording the highest rates for the first time in four years in December of last year, the demand and supply balance slackened due to the off-period in January, and further, ports closed by cyclones in Western Australia, and stagnation in shipments due to breakdowns of facilities at some iron ore mines in Brazil. As a result, the market weakened. Panamax and mid- and small-size bulkers, on the other hand, benefited from strong shipments of grain loaded on the East Coast of South America, and the market remains firm. The impact of the spot market’s upturn is limited due to the significant scale-down of our dry bulkers’ market exposure, but the business still ended with a slight upturn from the previous outlook.

Energy Transport Business

Tankers

The crude oil tanker market topped WS70 in early autumn of last year as a result of robust cargo trade, but the market did not pick up steam during the winter demand season due in part to the penetration of OPEC production cutbacks in addition to strong supply pressure from newbuilding vessels, so results were lower than in the previous fiscal year. The momentum of the product tanker market was also weak, though it rose temporarily due to stormy weather and rising demand during the winter season.

As a result of the overall market slowdown, profits for the Tanker Division as a whole showed a significant decrease from the previous fiscal year, but the major source for profits for crude oil tankers is mid- and long-term contracts, and methanol carriers and shuttle tankers posted stable profits. So this segment ended with a certain level of profit and showed a slight upturn from the previous outlook.

Containerships

Eastbound cargo trade on the Asia-North America routes increased by 5.4% in calendar year 2017, and westbound cargo trade on the Asia-Europe routes by 4.1%, and both routes marked record highs. Even since January of this year, trade on the Asia-North America routes remains strong despite the negative impact of slack period after the Chinese New Year, and a strong recovery of the trade on the westbound Asia-Europe routes, which was weakening slightly, has been underway since late March.

On the other hand, supply pressure from the launching of ultra large-size containerships remains strong, preventing a significant tightening of the demand and supply balance, and we saw only a limited recovery of freight rate levels. We recorded equity in losses associated with the launch of ONE as a special factor for FY2017.

Car Carriers

We sought to improve vessel allocation efficiency by reducing the core fleet by three vessels in FY2016 and another two in FY2017, to meet changes in trade patterns, which have resulted from a significant slowdown in trade for resource-producing countries. Its business performance remained generally firm until the third quarter. On the other hand, our cargo volume decreased significantly, unavoidably resulting in deficits for the fourth quarter. Ordinary income in this segment ended slightly higher than the previous fiscal year, while the full-year profit is still at a very low level.

Ferries/Coastal RoRo Ships

Regrettably, FY2017 ordinary profit for this segment decreased from the previous fiscal year due to delays in delivery of a newbuilding ferry and an increase in bunker prices, though the business environment itself remains strong due to factors such as the advancement of the “modal shift” in Japan and a shortage of truck drivers.

Rolling Plan 2018

Again, company-wide items to be enhanced—to achieve the vision for the MOL Group 10 years from now, which we announced as the Rolling Plan 2017 last year— are unchanged. The profit mid-term profit level we envision, as shown here, is also unchanged. We will enhance shareholder return, while further improving our financial strength.

Roadmap to Improving Profit

Our “highly stable profits,” which totaled ¥550 billion in FY2017, are projected to steadily accumulate over the next three years. We plan to significantly improve profitability by improving “other variable profits,” which have offset our highly stable profits. Transitional costs related to the integration of the containership business will occur both in FY2017 and FY2018, but we envision a significant improvement of overall profitability through restoration of “other variable profits,” as well as an absence of the transitional costs from FY2019.

Ocean Network Express

We project about ¥11.0 billion in synergistic effects from the integration. As a result of further scrutiny by ONE, they plan to target about 60% of that synergy yield in the initial year, about 80% in the second year, and 100% in the third year. Reduction of variable costs such as inland transport fees for railways, trucks, and so on, and terminal costs account for the largest portion in the breakdown. We will achieve this by adopting the best price among conventional rates adopted by the three parent companies.

Sea News, May 15