Mitsui O.S.K. Lines, Ltd. (9104) Earnings Call Transcript & Summary

I am Takeshi Hashimoto, President of Mitsui O.S.K. Lines. Let me start with a general overview. In the first half of fiscal year 2025, we achieved ordinary profit of JPY 114.6 billion and net income of JPY 116.2 billion. Our results exceeded our previous forecast, partly due to a stronger dollar than we had assumed. As a result, our balance sheet shows total assets exceeding JPY 5.39 trillion and shareholders' equity exceeding JPY 2.58 trillion. Our shareholders' equity ratio, including estimated lease obligations of JPY 900.0 billion was 39%. I will now explain our full year forecast. We revised our previous ordinary profit forecast downwards by JPY 18.0 billion to JPY 152.0 billion, and we revised our previous net income forecast downwards by JPY 20.0 billion to JPY 180.0 billion. The main factors behind our forecast of lower profit in the second half compared with the first half are seasonal factors in each business, lower freight rate assumptions in the Containerships business, periods of non-operation in the Energy business and the concentration of repairs and maintenance and dry docking expenses in the second half. Next, I will explain progress on the MOL Group management plan, BLUE ACTION 2035. Since we expect execution of real estate investment in the U.K. and investment in floating liquefied natural gas, FLNG vessels in the U.S. in the second half of fiscal year 2025, we have upwardly revised our total investment plan for the Phase 1 period to over JPY 2 trillion. During Phase 1, we have invested in the LNG and Ethane Carrier business, the offshore business and overseas real estate, all of which can be expected to generate stable cash flow. And we have also made acquisitions in the chemical tanker business and chemical tank terminal business aimed at strengthening the chemical logistics business. During Phase 2, we will increase the profitability of these investments and our core businesses and implement necessary asset recycling to generate cash flow. Finally, I will explain the dividend forecast. At the beginning of the fiscal year, we held off increasing shareholder returns due to the effects of tariffs, geopolitical risks and other factors. However, given that we now have a clear idea of fiscal year 2025 financial results and think our current stock price does not fully reflect our business fundamentals and future growth potential, enhancement of shareholder returns is deemed necessary. We have decided to increase the full year dividend to JPY 200 per share, keeping in mind a target payout ratio of 40%. Looking ahead to Phase 2, we will consider improvement of capital efficiency and a capital policy for sustainably increasing our corporate value. This latest dividend increase is underpinned by the cash flows that can be expected from investments in assets that generate stable cash flows made in Phase 1 and our strong financial position, and we aim to provide sustainable returns to shareholders. We expect that this increase will encourage a more reasonable valuation of our stock. Our CFO, Kazuya Hamazaki, will now give an overview of the financial results based on the financial results presentation materials.

For details of our business performance in the first half of fiscal year 2025, please refer to the outline on Page 6 and 7 in the briefing materials. In our fiscal year 2025 first half results, we recorded ordinary profit of JPY 114.6 billion, up JPY 9.6 billion from our previous forecast. Income before income taxes of JPY 134.9 billion, up JPY 8.9 billion from our previous forecast and net income of JPY 116.2 billion, up JPY 4.2 billion from our previous forecast. Dry Bulk business. The Dry Bulk business posted ordinary profit of JPY 3.1 billion, an increase of JPY 0.1 billion from the previous forecast. Looking at the market rates for each type of vessel. The Capesize bulker market rates remained firm due to steady iron ore shipments from Western Australia and Brazil. The market rates for Panamax and smaller vessels operated by MOL dry bulk held firm, underpinned by China's increased coal imports and solid shipments of South American grain, and minor bulk commodities. However, the market rates for wood chip carriers that transport wood chips for paper production and fuel were lackluster due to stagnant domestic demand in China. The Open-hatch vessel business posted higher profit than previous forecast due to contracts won for highly profitable project cargoes and lower-than-expected depreciation despite sluggish pulp demand from China. Energy business. The Energy business posted ordinary profit of JPY 47.7 billion, an increase of JPY 4.7 billion from the previous forecast. Tankers and Offshore business. Crude oil tankers generated steady profit, reflecting higher spot rates due to geopolitical risks and limited new vessel supply as well as stable profit contributions from long-term contracts. The market rates for product tankers softened under the impact of decreased production associated with lower refinery throughput in China. The market rates for chemical tankers softened amid weakening cargo demand due to economic stagnation in China and Europe. The Offshore business posted higher profit than previous forecast, reflecting a stable profit contribution from the FPSO business and a profit contribution from the CTV business. Liquefied gas business. The LNG or ethane carriers and gas infrastructure businesses were more profitable than previous forecast, reflecting profit contributions from long-term charter contracts, decreased expenses as a result of the rescheduling of dry docking for some vessels to the latter part of the fiscal year and onetime non-operating income related to refinancing. Product Transport business. The Product Transport business, which includes the Containerships business, posted ordinary profit of JPY 63.5 billion, down JPY 5.4 billion from the previous forecast. Containerships business, please refer to Page 3 of ONE's magenta colored materials. ONE posted lower profit than previous forecast, reflecting lower-than-anticipated freight rates due to a weakening supply-demand balance amid pressure from new vessel supply despite continued firm shipments following a provisional agreement to reduce tariffs between the U.S. and China in May. In the first half of fiscal year 2025, ONE reported after-tax profit of USD 371 million and MOL integrated its 31% share of these earnings into segment profit as equity and earnings of affiliated companies. Please look at Page 4 of the slides for details of changes in liftings, capacity utilization rates and freight index. Please return to Page 7 of MOL's blue-colored materials. Due to these earnings at one, our Containerships business reported ordinary profit for the first half of fiscal year 2025 of JPY 22.5 billion, which represents a decrease of JPY 6.4 billion from our previous forecast. Vehicle transport business. In addition to firm shipping demand for completed cars, improved operational efficiency resulting from the easing of port congestion in Australia and the Middle East led to steady profit. Terminal and Logistics business. The domestic terminal business remained firm. In the Logistics business, shipments to the U.S. declined, resulting in lower profit than previous forecast. Wellbeing & Lifestyle business. The Wellbeing & Lifestyle business achieved ordinary profit of JPY 0.8 billion, an increase of JPY 0.3 billion from the previous forecast, mainly reflecting the revenue and profit contribution of the Real Property business. Real Property business. The Real Property business achieved higher profit than previous forecast due to accounting changes in overseas business in addition to the profit contribution of newly acquired overseas properties. Ferries and Coastal RoRo Ships business. In the Ferries and Coastal RoRo Ships business, both the cargo transportation business and the passenger transportation business performed strongly. Cruise business. In the cruise business, profit decreased from the previous forecast due to decreased revenue as a result of the nonoperating period of MITSUI OCEAN FUJI and delay in recovering passenger numbers after the vessel resumed operations. Associated businesses. The Associated businesses posted higher profit than previous forecast due to the contributions of the Tugboat business and the trading business. This concludes the summary of the financial results for the first half. Next, I would like to explain our fiscal year 2025 full year forecast. Page 9 of the financial results presentation material shows our consolidated ordinary profit forecast by segment. Please refer to the key points for each segment on Page 11 and 12. We revised our exchange rate assumption to JPY 145. Assuming that transit through the Red Sea will not be resumed until April 2026 and factoring in the market rate assumptions of each business, we forecast ordinary profit of JPY 152.0 billion, income before income taxes of JPY 215.0 billion, and net income of JPY 180.0 billion. Dry Bulk business. The Dry Bulk business is expected to record ordinary profit of JPY 1.0 billion, which represents an upward revision of JPY 2.0 billion from the previous forecast. The Capesize bulker market rates are expected to remain firm until the end of the year on expectations for iron ore shipments from Brazil and recovery of bauxite shipments from West Africa. We assume that from the beginning of next year, Brazilian iron ore shipments will decrease due to Brazil's rainy season and market rates will soften. The market rates for Panamax and smaller vessels are expected to remain firm for the rest of the year, supported by increased grain shipments and demand for fuel for heating. However, we assume that shipments of wood chips for papermaking and fuel will decline. We assume that Open-hatch bulkers will continue to win contracts for highly profitable project cargoes, but that pulp demand from China will remain weak as in the first half. We revised our previous forecast for the Open-hatch vessel business upward because depreciation expenses associated with the consolidation of Gearbulk as a subsidiary were lower than previous forecast. Energy business. The Energy business is expected to record ordinary profit of JPY 65.0 billion, which represents an upward revision of JPY 1.0 billion from the previous forecast. Tankers and Offshore business. In the tanker business, long-term contracts will contribute to profit and market rates are likely to hold firm, reflecting tighter vessel supply and demand as a result of rising geopolitical tensions since the previous fiscal year. We assume that the chemical tanker business will continue to make a steady profit contribution, although we have factored in weakening spot freight rates as a result of economic stagnation in China and Europe. The forecast for the offshore business was revised upward due to the contribution of existing long-term charter contracts in the FPSO business, the contribution of more efficient FPSO operations and the improved profitability of the CTV business. In the liquefied gas business, there will be a boost from the delivery of new vessels and existing long-term contracts are likely to make a stable profit contribution. We revised our forecast upward even though we assume that the impact of recognizing dry docking expenses, et cetera, in the second half instead of the first half will have a negative impact on the second half performance. Product Transport business. In the Product Transport business overall, we forecast ordinary profit of JPY 88.0 billion, which represents a downward revision of JPY 18.0 billion from our previous forecast, reflecting downward revision for the Containerships business. Containerships business. Please refer to Page 5 of ON's Magenta colored materials. ONE has lowered its previous forecast for after-tax profit by USD 390 million to USD 310 million. Freight rates are worse than previous forecast due to pressure from the supply of new vessels and lack of progress in scrapping old vessels, and we assume that ONE will post a negative EBIT of minus USD 70 million in the second half, reflecting deterioration in the supply-demand balance after China's National Day. Please refer to once response to recent changes in the business environment later on Page 6 for further details. Please return to Page 12 of MOL's blue-colored materials. Taking once forecast into consideration, we lowered our previous full year forecast for our Containerships business by JPY 17.0 billion to JPY 25.0 billion. Vehicle Transport business. We assume that in the second half, the vehicle transport business will outperform the previous forecast given expectations for steady shipping volume, even though more demurrage days and higher operating expenses in response to changes in U.S. trade policy are anticipated. Terminal & Logistics business. The Terminal & Logistics business is expected to fall short of the previous forecast due to the impact of U.S. tariffs in the logistics business, Well-being and Lifestyle business. The Well-being and Lifestyle business is expected to post ordinary loss of JPY 2.0 billion, which is a decrease of JPY 4.0 billion from our previous forecast. Real Property business. We upwardly revised our forecast for DAIBURU, our core real property subsidiary, by JPY 1.0 billion due to the profit contribution of newly acquired properties overseas. While performance has deteriorated year-on-year under the impact of interest and development expenses for properties under development and the acquisition cost of newly acquired properties, performance will likely improve due to the existence of properties in Japan and overseas that will contribute on a full year basis from next fiscal year. Ferries and Coastal RoRo Ships business. In the Ferries and Coastal RoRo Ships business, the Logistics business and the passenger transportation business are both expected to perform strongly. Cruise business, we assume profit will be lower than previous forecast due to decreased revenue as a result of the nonoperating period of MITSUI OCEAN FUJI and delay in recovering passenger numbers after the vessel resumed operations. Associated businesses. We revised our previous forecast upward because strong performances are expected for the Tugboat business and trading business. Finally, I will explain the dividend forecast. We plan to pay an annual total dividend of JPY 200 per share, which is an increase of JPY 25. We are planning an interim dividend of JPY 85 per share and a year-end dividend of JPY 115 per share, which is an increase of JPY 25. This concludes my explanation of the fiscal year 2025 forecast. Fiscal year 2025 shareholder return policy. I will explain why we have switched to a fixed dividend of JPY 200 per share, increasing the full year dividend by JPY 25 when we expect lower profit than previous forecast. In fiscal year 2025, our performance has been worse than expected, reflecting a weak performance in the Containerships business associated with the effects of geopolitical risks and U.S. tariffs and oversupply of new vessels as well as the impact of increased depreciation expenses for tangible and intangible assets. Our ROE has also fallen short of the targeted level of 9% to 10%. However, we expect to be able to generate JPY 70.0 billion more cash than initially assumed through operating cash flow and asset recycling combined and have allocated around JPY 20 billion, including the dividend increase announced in the first quarter to shareholder returns. For this fiscal year, we have decided to pay a fixed dividend of JPY 200 per share, keeping in mind a target payout ratio of 40%. Since Phase 2 will start from next fiscal year, we plan to announce our business plan, action plan and shareholder return policy for Phase 2 in March 2026. As for cash allocation, we will formulate a plan concerning the balance between investments and shareholder returns. Regarding the shareholder return policy, we will formulate our plans with consideration for the dividend at this time and stable shareholder returns. Cash allocation. Finally, I would like to explain our latest forecast for Phase 1 cash allocation. Please look at Page 16 of the presentation materials. Our operating cash flow is expected to exceed the initial forecast by around JPY 10.0 billion. Together with an additional JPY 60.0 billion from planned asset replacement, in total, we are assuming additional cash in of JPY 70.0 billion. We are allocating around JPY 20.0 billion to shareholder returns and JPY 50.0 billion to additional investment.