Ocean Network Express Pte. Ltd. (9101) Earnings Call Transcript & Summary

Thank you for your patience. At this time, we would like to start the Ocean Network Express IR media conference that is a joint venture amongst NYK Line, K-Line and MOL. Thank you very much for joining us in the midst of your busy schedule. I will be your master of ceremony. My name is Shimomura of the IR Group of Nippon Yusen Kaisha. The presentation will be delivered by Ocean Network Express CEO, Mr. Jeremy Nixon. At the outset, there will be the presentation followed by which we will conduct a Q&A session. We will spend the coming approximate 1 hour for this session. So Jeremy, CEO, over to you.

Good afternoon, Shimomura-san, and everybody on the call today. My name is Jeremy Nixon. I'm the Global CEO of Ocean Network Express, or as we abbreviate it to, ONE. And I'm based out at Singapore, which is where our global head office is, and I'm very sorry that I can't be joining you in Tokyo today due to the COVID-19 travel restrictions. However, I hope that we can provide an informative insight into ONE's business as well as answer some of your questions during the Q&A session later on. So there's 4 topics I wanted to share with you today. The first is to give you some oversight of ONE's current business performance and some of the market developments which are going on at the moment and then open up and show you what our new midterm plan strategy at a very high level and further touch on our new green strategy and a further update on our general drive towards digitalization. So let's get started. And maybe just starting for those of you who are not so familiar, but maybe I could just recap what is our core business at ONE. We basically move freight, we move freight in containers and we move that internationally. And we move about 14 million 20-foot-equivalent units a year across 120 -- between 120 countries on multiple port payers, but we also offer a full container load service to the inland point as well. And that's using around about 150 scheduled weekly services. So it's a big business, it's across many markets and we are the owner-operator of the containers and the assets and we also interchange with other partners in terms of consortia. But we're also dealing directly with the customer, and we probably have around about 20,000 direct active customers today. Okay. ONE came to market, was announced in early 2017. And actually, we formally started in 2018 in April. And we started off as the amalgamation of the 3 legacy liner divisions of our 3 core shareholders, obviously, NYK Group, K-Line Group and MOL Group. So we combined the assets, that's the ships, the containers and the staff, and we started off in April 2018. So we're just coming up to our fourth year anniversary, and I'd like to just update you now on the current progress in terms of the overall P&L. So in the first 12 months of the year, first 12 months of operation, business plan 2018, we incurred a loss. But by 2019, we turned that around into a small profit. And then over the last 2 years, we've really had this exponential growth in terms of profitability as a company, reporting just under $3.5 billion net profit in 2020 business plan. And our latest assessment which we made in terms of a simulation forecast which we announced to the market at the end of January 2022 was that in this 2021 business plan period, which is almost complete, that we would post a profit of $15.4 billion or a little bit more, who knows? So that's a good track record, I think, for the first 4 years of the company. And obviously, we have been enjoying a particularly strong financial and strong service markets, in terms of container shipping and general shipping and all, over the last 18 months. But let's look [ further ] to that in a little bit more detail. I think the first thing to point out that by bringing the 3 companies together, the idea behind that was also to build synergies. And we set out an objective to try to create $1 billion worth of synergies by bringing those 3 companies together. And we were able to do that within the first 18 months of the operation. So that was achieved. And then secondly, by bringing the company together, we wanted to have a strong financial foothold and ability to ride out the bumps and difficulties and challenges in the market and have enough scale and strength to go forward. And I think we've achieved that. And we, of course, are not looking at just being big for big's sake, we're going to continue to look at our relative profitability against our peer group. And if you look at the top 8 carriers that report results in the container shipping sector at the global level, they produced in 2021 calendar an EBIT margin of 40%. And we've been able to achieve 53%. So I think that indicates that we're in the right place in terms of the right upper quartile, in terms of our relative performance against our competitors even though some of them are much larger than us. But of course, that remains a key focus, to stay competitive and profitable as we move forward. In terms of the current business environment, there are many factors going on, but obviously the big black swan event that has dominated all of our lives and dominated particularly container shipping and ONE has been COVID-19, which manifested itself back in February, March 2020 with an initial supply chain shock in China, where we saw a close-down -- cessation of production of the factories for a period of 2 to 3 months. And that meant we had to shrink down our network. And then that culminated by September 2020 into a demand shock, where there was this rapid catch-up as the factories came back online and many of our customers around the world at the destination levels needed to quickly recover and build back up their inventories. So we had this very strong period at the back end of 2020. And then as we went into 2021, we saw the COVID developments move out wider at the global level and particularly hit Europe and North America, and that led to shortfalls in workforce labor and working restrictions in the warehouses and in the distribution centers, with the trucking operations, rail operations and particularly in the ports. And that then resulted in this backup and congestion. And that congestion is still prevalent today, whereby essentially the land side operation and the port operation can't keep up with the supply side of the container shipping industry on the ocean level. There are signs that, that is getting better. But as you will appreciate, COVID-19 has not gone away. And actually, it's almost on a full circle now where we're back into a situation where we're starting to see some quarantining and lockdown restrictions back in China again. And as you're aware probably last week, [ especially ] in Shenzhen and in parts of Ningbo and Shanghai, we saw further quarantining and also some pullback in terms of booking production and some delays to the vessels in terms of berthing. So we're still getting our head around that to see how significant that is going to be and how long that's going to be. And I'm sure that everybody involved will want that to be as minimal as possible, so that we can continue on our trajectory of gradually improving supply chain fluency around the world. Right now the most immediate issue, of course, is Russia's invasion of Ukraine. And naturally, that has unfortunately meant that the complete cessation of container service into and out of Ukraine and the pullback in terms of services into and out of Russia. So Russia, as you're well aware, is now subject to many sanctions. And therefore, we've had to take a proactive approach to reduce down our booking levels and actually stop bookings coming in through the Europe gateway and the Black Sea gateway. Fortunately, as ONE, only about 1% of our global volume is being impacted by the Russia and Ukraine developments. However, as we're all aware, there are knock-on consequences of this conflict and specifically in terms of the energy situation and the high movement up in the fuel prices. And so we've seen in the markets already for fuel oil an increase of about $225 a ton across the shipping markets. Plus, of course, many of our customers are involved in quite integrated supply chains, none of them more than the automotive sector. So we've seen, for example, closures of plants in St. Petersburg. But we've also seen certain components for the automotive industry which are being manufactured in Ukraine now having some knock-on impact into the supply chain. So we're monitoring the situation very closely. The second development probably worth highlighting is the situation on the U.S. West Coast with the labor negotiations. So every 5 years, we have a labor negotiation, a collective bargaining, where the contract is reviewed. And this is often not such a straightforward process and can lead to some delays or drop in productivity. The current agreement is due to expire at the end of June this year. So we are just in the process of working through the negotiations with the unions as a collective industry. And I think the feedback from our North American colleagues and the ports industry there and many of our customers is the expectations are maybe not so high that, that could be resolved that easily. So we may see some slowdown in productivity or delays associated with the ILW negotiations during June, July and August. And that is frankly already being factored into our operational planning and also many of our customers in terms of how they've contracted this year, where space seems to be the key focus rather than necessarily unit price. Okay. We though still remain positive in terms of the outlook for container shipping. I think the first point to note is that container shipping is still the most efficient and effective way to move freight, particularly involving retailing, manufacturing, food commodity items that make up a very, very significant part of global trade. So the container is a well-proven concept, it's intermodal, it moves in land. And we don't see any immediate disruptors to that in the short to medium term. Secondly, the business continues to grow. And we've seen over the last 25 years an average growth of around 6% in terms of global volumes of containers, as more and more products become containerized and the global supply chain becomes larger and more complex. And of course, this is also driven by population, and the world's population continues to grow. And we see some good growth opportunities still in some of the markets like Latin America, Africa, where there is still some quite room to grow there as well. So I think overall, we remain positive. But of course, we will inevitably expect during certain cycles or parts of cycles, there to be some headwinds. And at the moment, you could argue that with energy costs and inflation concerns and interest rate concerns and possibly some slight switching back to a more balanced service consumer economy in terms of purchasing, we may see some slowdown in 2022 in terms of overall demand for container services. But many of the ports are still heavily congested. And even if that was to happen, it's still going to take time to work through the systems in terms of aligning supply and demand. Okay. I'd like to now go on to the second item, which is to give you an insight into ONE's thoughts and views around future investment and our midterm strategy. So very much the focus for the last 2 to 3, 4 years has been about building the company, getting it set up, getting it operating, getting it to perform profitably. But we now need to focus on the medium to long term in terms of, how does our balance sheet look? What are the future investment requirements we need in terms of assets? And how do we manage that in a well-controlled and logical manner? Let's quickly, though, refer back to this slide that we also put in our 2019 presentation, which kind of summarizes to some extent ONE's strategic logic. On the left-hand side is the economies of scale. That's about being a company that's of significant enough size in terms of the hardware, in terms of the ships and having enough procurement capability, but balancing that with the software side of the business, which is we've termed operational excellence here, which is about the way that we actually perform with those assets. So how efficient and effective are we with those assets deployed in terms of the round trip management, the yield management, the use of IT, the use of processes and particularly in terms of our management philosophy and the skills of our staff. So if we are good with the hardware and good with the software, that kind of multiplies itselves up and provides us with a competitive situation in this market. And that's really our key objective, is to remain competitive through keeping a reasonable level of economies of scale through the hardware development, but also continuing to build on our operational excellence and software side of the business, so that we can maintain profitability and at the same time aim for a return on equity or ROE of around about 10% on a long-term consistent basis. So therefore, we need to have a logical investment program across the many facets of our business and make sure that, that fits in with our financial capabilities and with our balance sheet as well. So if we look at the high level, we are estimating that between 2021 to 2030, over this decade, we are planning forward to invest around USD 20 billion in terms of overall ONE's requirements. And that will be made up of vessels, as you can see in the green box, investments in container terminals. So we've already made some investments in terminals, but this will be some further transfer of assets from our 3 parent shareholders across into ONE, new technology and upgrades in our systems and IT as well as enhancements in our green strategy requirements and particularly in our equipment management area. So on average, around about $2 billion per year investment in all of these 4 or 5 items to ensure that we have a good, steady, strong capability and that we're replenishing assets as we need and that, that asset management replacement is also in line with our green strategy, which I will also come on to touch on later on. In terms of the vessels, that process has already started. And since 2020, 2021, we've been active in terms of securing medium- into long-term charter tonnage. So we've released around 38 vessels already which will be deployed during 2022, 2023, 2024 and a little bit into 2025. And those vessels will have an overall capacity of around about 0.5 million TEU equivalent units. So that process has already started. And those assets will start to come online quite soon and replace ships that are due to come off charter, and also help to improve our overall efficiency and slot cost and also improve our carbon intensity as well in reducing -- making us greener in terms of our footprint. We will also continue, of course, to have some charter vessels on short-term charter, that will be inevitable. But we will slightly derisk in terms of that level percentage going forward. So that we'll have more medium- to long-term leased or owned vessels. And this slide shows that, overall, we'll probably be investing around about 150,000 TEU a year in terms of charters or long-term ownership, of assets and vessels. And that is to keep up with trade growth, that's to replace existing ships which are coming off higher and also to make sure that we are meeting our new green strategy requirements. So overall, over that period of 2022 to 2030, our fleet will grow by about 600,000 TEU equivalent units, but our investment and requirement for new ships would equate to about 1.2 million because we will actually be off hiring and gradually seeing some assets disappear. So in the case of our ships that we have on charter from 3J at the moment, in 2021 from our shareholders, those made up about 75% of our total fleet. By 2030, that would have reduced down to around about 20%. So this is why we need to replenish on our own balance sheet our future ship requirements. We also need, in addition to the hardware side which we just covered, which will also include some further investment in terminals and further investment of course in equipment in terms of our dry fleet and our reefer fleet and also some of the technological enhancements associated with the reefer IoT-type developments which are going on in terms of digitalizing, we also will continue to grow our brand and our customer service platform experience as well. So that is about operational excellence, having really good data and executing and doing what we say we're going to do in terms of our contract management with our clients, our schedule reliability, but that's also about having a very good customer service platform and a good customer service orientation towards the market so that we're easy to do business with. And also when things don't quite go to plan, we're very quick to update that and keep the customer informed and hopefully come up with a recovery plan. And thirdly, maintaining our very strong bank of good, quality experienced staff and growing our pipeline of new talent for the future as well. So that software side is just as important as the hardware side, and we have many programs in place at the moment to enhance that. And of course, in addition to operational excellence, hardware, software, environment, social and governance, ESG, is also very important as you're well aware, for many companies, including ONE. And I'm going to touch on the environmental side in a moment on the green strategy. But in terms of the social side, the corporate social responsibility, we have many initiatives where we're working closely with the local communities and trying to improve our understanding and support for general business working conditions and how we as a business can help society. And then on the governance side, of course, we have the J-SOX program, which we work on in terms of our own financial performance and compliance. And additionally, we have ISO14001 for the environment and ISO19001 (sic) [ 9001 ] systems also for our safety management systems as well as developing our cybersecurity, et cetera. So we have quite a broad church and involvement of ESG-type initiatives, and that will continue to develop over the coming years. So I'd like to now move on to the third topic, which is green strategy. The decarbonization of shipping is a major challenge. Today, shipping at the global level is around 60,000 ships, burning around 250 million tons of fuel oil. And we contribute [ as a ] overall industry about 3% of global greenhouse gases. The challenge statement we have today is that due to the large sizes of the ships, the long distances they're working and the need for very high energy efficiency in terms of the fuel types, is that we don't really have currently sustainable large volumes of fuel that are green in the quantities that we need, and we're still working on the technology to do that. However, I do fundamentally believe that as the industry, particularly ONE and our 3 shareholders who have a very strong environmental stance as well, that we are moving up in terms of our environmental strategy. We are no longer treating this as a kind of corporate planning tick-box exercise. This is really embedded in the senior management right up to CEO level in terms of our green strategy and ensuring that we have a coherent and a clear program of policy for the next 25 years to deliver on a credible decarbonization of our industry, and that we're working with multiple stakeholders to achieve that and also with other industry pioneers to do that as well. And that is being driven, this need to go to 0 carbon emissions, it's being driven fundamentally by our customers who expect that of us, but also, quite frankly, it's also being driven by our management and our staff and society in general. They expect that shipping will clean up its act and find a way forward to be able to decarbonize in the future. And so we are very focused on that, as are many of our business suppliers and, of course, the regulators who are also setting the goalposts. And currently, the IMO has set an objective to reduce overall carbon greenhouse gases in shipping by 50% by 2050. But actually, I believe now, as the shipping industry and as ONE and our other partners, we are now starting to push the regulators and actually that maybe industry wants to get ahead of regulation to move at a more ambitious level. So first of all, as ONE, with our green vision and our green strategy, our first objective is to achieve the IMO's Scope 1 requirement, which is to reduce carbon intensity by 2030 by 40% compared with the 2008 benchmark. We're well on track to do that, and we've assessed that we're probably going to be able to get close to and even maybe exceed that, around about 70% reduction, in fact, by 2030. So that's a key objective that we're pushing towards. Secondly, we really want to go to net carbon zero. And we've set ourselves the objective as a company. And we're encouraging our other industry colleagues as well to move towards net 0 by 2050. And I think there's now quite a strong movement among the shipping industry in that direction. That will be built around 7 key pillars as ONE. So yes, investing in real true assets which are green in terms of ships, containers, terminals, et cetera. Exploring and developing all types of different fuel types and learning which of those is going to be more suitable long term, and doing some pilot work to better assess those and [ effect ] those. Thirdly, in terms of our carbon management, managing our carbon footprint intensity, but also using an internal carbon price within our investment decision-making as well. Looking at our operational efficiency, not just on the newbuild ships that we're building, but also looking at the existing assets we have today and how can we reduce the carbon footprint of those 230 ships that we have operating today in terms of reducing down those greenhouse gases. And then also working across the community, the shipping industry and collaborating in a common ecosystem. So here in Singapore, we are one of the founding partners of the Global Center for Maritime Decarbonization, but we're also active in many trade associations with the World Shipping Council, the International Chamber of Shipping, the Getting to 0 Coalition and these various other parties to try to come together and accelerate the learning and understanding to move shipping forward in terms of 0 emissions. Also looking at clean ship recycling. There will be a lot of recycling work needed as assets become redundant economically [ or ] environmental terms and are making sure we are part of that and being right in terms of the protocols but also being active in terms of the overall environmental conservation and doing our part as a good citizen of the world. So that culminates in a very detailed green strategy plan which we put together and we are rolling out to take us forward, not just over the next couple of years, but to take us up to that 2030 objective, but take us well past that as the new fuels and new technology come online, to make we're really sure that we are fit for purpose and that we are not investing in potential stranded assets. Lastly, let's just touch on digitalization. Of course, digitalization is something we're all very familiar with across many different industries and it's something that ONE takes very seriously. We talked about it during the launch of the company. We talked about it back in December 2019 about the importance of digitalization. We've been very active during 2021, bringing further projects and further enhancing and upgrading the company's capabilities. There's really 3 areas that we're looking at specifically. One is our channel digitalization. So how do we interact with those 20,000 customers? Each have a slightly different needs and requirements. We're seeing, of course, less usage of phone calls today, less usage of e-mail, much more of a drive towards e-commerce, web-based products, mobile phones, chat. And we are now developing and continuing to enhance our e-commerce offerings, but also our ability to transact directly with some of our customers so that they can actually get a price, get a quote and actually be able to execute directly online without any interaction with any of our specific team if they want to do that. So we're offering long-term contracts, short-term contracts, but also spot capabilities through our ONE QUOTE platform. As well as upgrading our customer service and our ONE sales force team through our CRM and our cloud-based customer servicing system so that we have complete visibility in those 260 -- the 160 countries in the world in terms of how that customer shipment's being handled. And then we have the operational digitalization as well, which is all around how do we ensure that the company systems are really fit for purpose, are strong, make sure that our data management is good, our cybersecurity is good. And also the way that we interact between those different systems. So AI, machine learning and looking at artificial intelligence and improvements to existing systems and the way that those systems can reduce down some of the workloads. So areas like forecasting management of equipment, things like pricing now are quite prevalently systemized and digitalized. And then lastly, in terms of asset digitalization, of course, we have many assets, ships and containers and terminals. And those assets also need to be managed well. They provide a very data-rich level now of information, and we need to enhance and further improve the efficiency and effectiveness of those particular assets and management. So just closing out on the digital side, we've done a lot of work this year. We have these squads, which are these cross-functional teams, process owners, functional owners coming together. We have around 25 of those working across multiple challenge statements in the company. And we're bringing forward new products and ideas in 2022, and we'll continue to do that in 2023 to keep the company really fit for purpose and a digital leader in the industry. Okay. That closes out the formal part of the presentation. So thank you, and I will now head (sic) [ hand ] back to our master of ceremony to handle the Q&A process. Thank you.

[Interpreted] [ Chairman Nixon ] thank you very much. We would like to start questions and answers at this moment.

Very informative. On the last slide, with regard to digital initiatives, you mentioned blockchain there. I hear a lot of very favorable things about the prospects of blockchain replacing EDI and really increasing the efficiency and transparency in booking shipping containers, managing the process, things like trade lanes and the Chinese initiatives. Do you think these initiatives will possibly replace EDI and existing legacy systems, and will we see a much more efficient communication mechanism within the shipping industry?

Thank you for your question, and I think it's a very, very good one. So I would say that I believe that in the last 4, 5 years, we've seen an incredible change in terms of the way that we are interfacing with our customers. As I said, the e-mail or the phone side has really diminished down now. We do now something like 98% of all the interactions we have with our customers in terms of the bill of lading shipment management, process is now through EDI or through an API or a portal platform. So that's a good level of digitalization. But as you rightfully say, can we go to the next step where we could move into a blockchain environment with multiple nodes, where this information is being passed on a much quicker time frame in a standardized format with total visibility and also a way that it's authorized and validated? And I think the -- there's 4 or 5 blockchain projects at the moment, of which we're involved in 2 or 3 of those, more formally with TradeLens. And we're working through a series of pilots on this to really test the technology and also to be able to test the customers' aspirations and needs. I think we still have quite a long way to go. And we have some early adopters. And I think things like the e-bill of lading will be an early area of breakthrough, also with some of the track and trace and with some of the customers who are actually looking to upload shipping instructions and bills of lading. But if you look at the total number of customers out there and the total number of containers moved, I think we still have quite a long way to go before we could really bring forward a strong and credible blockchain solution which would start to get critical mass. But we remain optimistic. We remain engaged. And we're certainly trying to move the industry to some extent in that direction, yes.

It would seem like the freight forwarders with their legacy systems would be perhaps reluctant to embrace new blockchain technology. Or do you think there are signs that perhaps the freight forwarders will adopt the technology?

I think the -- in terms of the overall blockchain, I think everybody will be given access to it, whether a shipper or a consignee, a forwarder, an NVO, a carrier. So I think it is there as a communal system to be used. But obviously, it depends forwarder by forwarder. I think some of the 3PLs or 4PLs will actually embrace it. Some of the smaller forwarders, who will be more technologically challenged by their ability to adopt their systems and be able to integrate onto it, will have a more difficult situation. But let's see how this progresses really over the next 2, 3, 4 years.

Then final question's about the freight rates, et cetera.

[Interpreted] Thank you for the question. We would like to proceed to the next question.

[Interpreted] I have two questions. One question is regarding mid- to long-term fleet maintenance plan. And then the investment plan indicates that by 2030, you are to invest more than JPY 20 billion -- USD 20 billion. What kind of magnitude of profit are you expecting with that investment? And then the second question is with a $20 billion-plus investment, which is quite a large magnitude of investments, what would happen with the dividend, the philosophy of dividends to be paid to NYK, K-Line and MOL? So those are the 2 questions I ask.

[Interpreted] Thank you for your questions. So regarding the investment plan and the expected profits and as well as the -- your dividend policy, so I hand it over to Jeremy. But regarding dividends, as a matter of fact, the 3 parent companies are carefully scrutinizing and monitoring the situation of ONE. So I am afraid I must say that there may be no disclosure of that. It will be NYK, K-Line and MOL matter. So Jeremy, over to you, please.

Thank you. Yes, indeed, as you rightly pointed out, over the 2021 to 2030 period, we're looking at a potential investment of around about USD 20 billion to invest in multiple ships and equipment and containers and terminals, et cetera. And as you will have seen on the slide, the intention, of course, is to maintain a focus on a return on equity of around 10% a year. So we are hoping and intending that this industry and our business will be profitable and that we will continue to make profits. And we will make sure that the investment that we make over the next 10 years is realistic and reasonable and logical. It equates to about $2 billion, [ obviously said ], on average per year. At the moment, ONE's balance sheet is strong. We've built up from an original investment of $3 billion by our original shareholders. Our balance sheet now is heading towards about $15 billion in assets. So we want to maintain a strong balance sheet. We want to maintain the business as being profitable. We still want to be able to support our shareholders in terms of return on their investment and be able to support them with dividends as well. So we are trying to get the right balance between shareholder requirements and profitability, but also maintaining the long-term viability of the business and ensuring that we have a good, strong and steady profitable capability so that we are competitive on slot cost, that we can meet our green strategy requirements as well. So that is a fine balancing act, but it's something that we and the shareholders are in very close communication with and we will work together on.

[Interpreted] Thank you for your question. So let us move on to the next question.

I have two questions. The first one is about the green strategy. I mean it's a very impressive green strategy, and I'm sure the 0 emission target by 2050 will be highly appreciated by the industry. But at the same time, I think there's a lack of detail about what type of fuels that ONE will choose to go down that decarbonization path, whether it's LNG, methanol, ammonia.

[Interpreted] Thank you for the question. Jeremy-san, please answer.

Yes. Thank you. And I think that I would say that the green strategy, as we highlighted, is looking very long term. And as we highlighted also that today, the -- there are not sufficient amount of green fuel in large quantities for the industry to be able to move that soon towards 0 carbon emissions. So this is a long-term journey. And we said we will look at different alternative fuels, and we are looking at different green fuels. We are looking at hydrogen. We're looking at ammonia. We're looking at methanol. All 3 of those being genuine green fuels. We're looking at ways of trying to reduce down the carbon emissions of our existing fleet. So that will look at carbon capture and will look at trying to reduce efficiencies. But I think at this very stage, I don't think any particular player or shipping company is going to get trapped at this stage in being very, very definitive on one particular technology or one particular fuel type. We will continue to assess it year by year. We'll look at what is the trading scope of the vessels concerned? And therefore, what are the type of fuel types and the type of bunkering facilities that will be available in that location? What will be the quantities of the available green fuels? And what will be the comparative price points of that as well? So I would say, at this stage, we are now moving into the phase where we are starting to make our own orders as ONE, our own newbuilds. And each year, as we make that investment choice, we will look at the very latest technology and try to make sure that we make a decision that is right in the short, medium and long term. So I'm really sorry for not answering your question very specifically. We maintain an open mind, but we are looking at real green fuels. And we're looking at this in the long term, not just trying to make some savings in the immediate short term. So we're looking at this future proofing.

[Interpreted] We would like to proceed to the next question.

[Interpreted] I have two questions or requests. One is regarding tariffs. There be time needed in order for supply/demand situation to stabilize? And what is your philosophy for next fiscal year regarding freight, as much as you can disclose this, if you will? And then the second question is 2023 onwards. The environmental restriction impact. EEXI, CII, these will be rather reinforced. And so what effect will that impose on the industry overall? So those are the two questions I would like to ask.

Thank you for your question. And 2 parts to that. I think I would like to just take the second question first. And that's to, as you very correctly reminded me, when we were talking about the outlook for the container shipping sector over the next 20 years, it was remiss of me not to mention that also we do expect some supply-side constraint on ships in the future. That's built around the fact that the shipyards, we have seen some consolidation in the shipyards and therefore capacity is a bit tighter than it was. But as you secondly correctly referred to, the IMO requirements in terms of the EEDI, EEXI and the CII, which is the carbon intensity, will mean that existing assets on the water, existing ships within all of our fleets will have to be regulated and more tightly assessed in terms of its carbon emissions. And we will have to particularly look at those vessels which are not meeting certain thresholds. And the thresholds will get tighter and tougher as the years go by from 2023 leading up to 2028, 2030. We will probably have to start taking out some of the ships which are not so efficient early. And secondly, slowing down a number of ships. So that will have some impact on the supply side of the container ship industry, certainly during the course of the remaining of this decade. Back to your point on freight rates, and I'm quite amazed that we've got 30, 40 minutes into the presentation before we get to freight rates. But of course, naturally, you want to know about that and quite rightly you want to be informed about that. And what I would say is that, obviously, in 2021 calendar, we saw this very, very strong push up in the spot market. And during the course of the contract negotiations for 2022 which took place at the back end of 2021 for the calendar contracts, for the Japan contracts, which are just completing now for April going forward, and the Trans-Pacific contracts which take place during May 2022 and onwards, those contracts have gone -- have shown significant increases in the freight rates, to the extent that customers are now locking in 1 year or even longer close to the spot market, or if not higher, than the current spot market that we've witnessed in 2021. So that is a positive sign. And for ONE, overall, around about 50% of our freight is on long-term contracts. And then, of course, we have the other part of the equation, which is the spot market, which may be weekly, fortnightly, monthly or 3-quarter-type validity contracts on rate and volume. And those have been very high, and particularly were high coming up to Chinese New Year at the beginning of February. Since February, we've seen a slight drop off. But I would say that the level of drop-off in relative terms compared with the last 5 years trend patterns post Chinese New Year, actually it's showing -- it's a positive development in that it's -- the drop is not so significant as we've seen in the previous years. And of course, we have a mixture of factors going on. We naturally have some rain shadow after Chinese New Year when the factories pull back, production pulls back and it takes time to get those factories back up and running. But secondly, obviously, we have had some COVID developments in Shenzhen and in some other locations within China. So that's also partly impacting the data over the last couple of weeks. And then, of course, we've had the Russia-Ukraine developments which were responsible for about probably close to 2%, 2.5% of volumes, for example, on the Asia-Europe trade. So those 3 factors would normally indicate quite -- an expectation of quite a large drop-off in the spot market immediately after Chinese New Year. And we have not seen that large drop-off actually, we've seen a mild correction. Of course, we wait to see how events develop over the next 4, 6, 8, 10 weeks in terms of COVID in China, in terms of the Russia situation. But overall, we still have a lot of bottlenecks. And in the case of particularly North America, we have over 100 ships waiting on the East Coast and West Coast combined. So that's about 3 weeks' worth of production just waiting to get discharged. So even if we were to see a sharp drop-off in cargo bookings, which I don't believe will be the case. But if we were, we'd still have quite a lot of freight and ships waiting in the queue that would still need to be addressed. So we expect some level of normalization, as we've indicated, over the second half of 2022 calendar-wise, but because of the ILW developments I discussed earlier, in June, July, August on the U.S.A. side, and the very latest ongoing concerns and risks potentially about further COVID disruptions, we just have to say we take it on a case-by-case, month-by-month basis. But we remain still reasonably positive about the outlook for 2022.

[Interpreted] Thank you very much for the question. The next question.

I would like to ask a question about changing trade patterns in the Asia container market since the onset of the COVID pandemic. What changes have you noticed? And what have you done to address the situation?

The most immediate impact we saw, of course, was during the COVID supply chain shock in China, with the China reduction, down in production back in mid-2020. And that created a push-up in terms of production moving elsewhere, particularly to Southeast Asia. I would say that today, what we're seeing is that, generally, most of our customers are trying to hedge their risks. They still maintain a big book of Chinese orders and production. But I would say that our latest assessment is that export demand for 2022 out of China -- sorry, out of Japan, out of Korea, out of Taiwan, out of Southeast Asia looks particularly strong. And we think that is probably because [ as we ] say, many of the customers wanting to balance the risks between their strong China sourcing and these other locations.

[Interpreted] So we would like to proceed to the next person.

[Interpreted] Regarding Russia state of affairs with their invasion into Ukraine, [ now with ] the container vessel services having stopped in most cases. But Vladivostok route included what is the latest situation? And then with the economic sanctions imposed on Russia, what implication does that have? If you could please respond. And then also regarding insurance, you cannot be insured with the business in Russia. And so can you comment on that as well, please?

[Interpreted] Jeremy, over to you.

Thank you. And as you correctly point out, there are 3 gateways into Russia, of which the Russian Far East is the one, of course, most prevalent and closest to us here in Asia. That remains open at the moment, but the cargo volume is rapidly deteriorating due to the sanction situation. And as you've alluded to, the insurance and also capital markets and banking cover on many of this type of trade. So we continue to assess it very closely. I think that as ONE, of course, we have to be completely compliant with any sanctions regulations. Where possible, we would like to try to support humanitarian aid and also any specific strategic foodstuffs or medical requirements. But at the moment, we have seen a significant reduction in booking demand into that area and we are currently reviewing our current service, which is continuing. We dropped down from 2 services a week down to 1 service a week because of the volume shortfall. And we still have some volume -- some bookings in the pipeline, but we are watching the developments very, very closely week by week and day by day. Thank you.

[Interpreted] Thank you for your question.

[Interpreted] May I ask a follow-up question in relation to the first one that I asked.

[Interpreted] Please go ahead.

[Interpreted] Dollar-denominated settlement is very difficult with Russia and Ukraine, I believe. And how are you collecting a payment when you provide service to your clients?

[Interpreted] Jeremy-san, are you able to answer the question?

Yes, very carefully, quickly. Yes, in any of these type of situations where there is risk, we ensure that we are prepaid, that the freight is prepaid and that we have bank guarantees in place in case of any shortfall in future payments.

[Interpreted] We would like to proceed to the next question.

Very quick questions. The fleet expansion that you're mentioning, right, how is that going to be funded? Is it through debt and cash? Second part of that question is the -- out of the, say, 150,000 additional TEUs per year, could you give us a breakdown in terms of how much will be owned versus chartered? And then the third question I have is in terms of acquisitions, would you be looking to buy anything like logistics companies, smaller shipping companies in order to basically create more of a, shall we say, a door-to-door service?

Thank you. Yes, let me -- sorry, let me take the third one very quickly to say that, no, we are purely focused on being a full container -- point-to-point container shipping operator. We have no aspirations to move into 3PL/4PL type activities. In terms of future acquisitions of other shipping companies, that, of course, we don't comment on. And so I can't really speak on behalf of my shareholders on that. In terms of the financing and forward for the ships and the terminals, the equipment, we will continue to look at what is the best financial decision for ONE and its shareholders. So sometimes it is better to do long-term leases or long-term charters, other times to actually finance directly ourselves. So we remain flexible on that. We don't have any particular ratio. We don't have any specific commitment to own a certain number of ships or to charter a certain number of ships. I think, though, the key point is that in the past, we have been relying, obviously, on our 3J shareholders to provide us with tonnage, which, of course, is coming to an end now. And secondly, we've also been quite reliant on the short-term charter market. We really want to take back control and have more long-term core tonnage ourselves on long-term charters or owned, which will mean short -- make sure that we don't face that risk and we're more stable in the future. And we'll make sure that our balance sheet is strong and we could finance that type of activity where and if we need to do it ourselves.

[Interpreted] Thank you for your questions.

[Interpreted] The container logistics market, the prices are up, the rates are up. In the United States and Europe, the government authorities, is there any criticism directed to you from government authorities? And is surveillance and monitoring increasing? And how would that impact your business, if there is any?

[Interpreted] Jeremy, please?

Yes, of course, there is some -- container shipping is for once in the headlines because of our profitability. I think, as we all know, over the last 10 years, shipping, in particular container shipping, has not covered its cost of capital. It's been a very unprofitable industry. And obviously, like many companies during these COVID times, particularly those involved in shipping or logistics or trading of commodities, have seen a significant improvement in their profits. And we are no exception to that. I think that as ONE, we are always trying to maintain a very compliant operation, a very compliant way that we manage our pricing and the way that we manage our deployment. So we will continue to do that. And we will, of course, assist any questions that come through the regulatory channels in that regard. But at the moment, I believe that the situation will pass in due course. And we will see probably a more normal return to investment returns, but I hope significantly better than where the industry has been in the last 10 years, where, frankly, the politicians didn't show and the regulators didn't show much interest when we were losing lots of money and companies were going bust. Thank you.

[Interpreted] Thank you for your question. We would like to proceed to the next question.

[Interpreted] An ROE 10% is your target. What is the level of leverage or EBIT margin? If you have any picture about what level it will be, please share. That may be a hard question to answer.

[Interpreted] Jeremy-san, please respond.

Yes. So we have our modeling and we look at those numbers. But to be very frank, we have not disclosed those numbers or have any current plans to disclose that outside of our existing shareholders. So we will, of course, be as prudent and prevalent as we can, and that would be really under the shareholders' jurisdiction as to whether they wanted us to divulge those numbers.

[Interpreted] Thank you very much, and that will be shared amongst the shareholders. So we thank you for your continuing attention. We would like to proceed to the next question.

Yes, I would like to ask a few questions. The first question has to do with the business domain. Your peers are investing in logistics and other areas. So what is your thinking on investment or other areas? About green strategy, up until 2030, which specific automotive fuels will you be using? LNG and so forth is available. But what's your plan? What's the specific plan?

[Interpreted] Jeremy, if you could please answer.

Thank you. Yes, in terms of the situation on the fuel, as I said, we're continuing to look at all the different options. At the moment, our vessels are operating on fuel oil. And the orders that we've made in terms of the 38 vessels which I indicated on the earlier slide is also using fuel oil. We have not made any LNG investments yet, and we will continue to assess and look at that each year in terms of the viability and the technical capability and the carbon intensity of the LNG option. So I can't be drawn anything further on that, than other to say that we will continue to look at the options each year. Yes, indeed. So I think that each company will have its own strategy in the container shipping industry. And as you rightfully said, a number of competitors have decided to move outside of the immediate full container load to full container load sector and to put value-added services on in terms of warehousing, logistics, airline business, airfreight, 3PL activity, et cetera. We are, as I say, purely focused on the full container load end-to-end logistics market. And quite frankly, as you've outlined already, we have quite an extensive but I think realistic investment program just to look after and manage the existing asset requirements that we will need to support the business over the next 10 and 20 years. And a particular focus, of course, on the green strategy means that we will have to invest in new and more expensive technology. And that, I think, is going to -- is how we should really be using our balance sheet effectively, and maybe not broadening out too much into other areas which may dilute or confuse that. So we're very, very focused, as I say, on that FCL pure container shipping type operation.

[Interpreted] Thank you. We would like to proceed to the next question.

Just a couple of questions, Jeremy. I was wondering if you could give me -- give us a little bit more explanation about the new building program. There was a report in the Blue Paper [ on ] yesterday then that you're about to spend $1.6 billion on tank container ships. I was wondering if that was correct and what the other new building plans actually are.

I can't go into specifics because like in any new build program, there's a lot of conjecture and discussions ongoing between yards and companies and we're not in a position to be able to disclose something specific on that. However, what I can say is, is that if you look at the presentation today and the forward investment requirements, we identified the 38 vessels which would give us cover up till about 2024, 2025. It would not be surprising if we were looking at potentially more orders in the future, and maybe not just charters, but potentially actually direct purchases. So I think we'll continue to see developments like this being insinuated or turning into reality, depending on how developments move. So I'm sorry, I can't give you any specifics on anything which is not already agreed or in the public domain already.

[Interpreted] Thank you very much for your question. Let's move on.

[Interpreted] There is [ some ] concern for oversupply. Prior to COVID-19, there's a possibility that you could run up losses. But now that we're under COVID-19, can we ensure profitability? As an industry, how has it changed in terms of profitability over the past couple of years?

[Interpreted] Jeremy-san, please.

Well, I think in terms of profitability, it -- all the carriers have now already published their 2021 results, as you could see. Some are making some predictions in and around 2022. As ONE, we're not doing that yet, that's under the prerogative of our shareholders. And of course, they will be announcing their 2021 results quite soon and probably their expected outlook for 2022, which will include a component of that which will be the ONE and container shipping side. I think also what you're referring to, though, is the overall supply and demand situation. And the supply and demand situation was, I think, reasonably balanced pre-COVID. And then obviously, COVID has created a significant tightening, with demand pushing up but also supply being curtailed down due to the port congestion, was what we discussed. But actually, during the COVID period of 2020 and 2021, not many new ships have actually been delivered to the industry. And actually, in 2022, there are not many ships being delivered. The order book is a bit stronger in terms of 2023 and 2024 delivery. But much of 2023, 2024 and 2025 delivery will also be about improving environmental footprint, and the need to remove and take out tonnage that is inefficient. So today, 8% of the global container fleet is over 20 years of age. And those vessels which were ordered back in 2002 and were deployed 2023, some of the -- 2003 are running on to quite early containership efficiency criteria. And things have changed a lot. So with the fuel price now really pushing up and the new IMO regulations coming in, in terms of the greater scrutiny on the existing ship performance and particularly its fuel efficiency and its carbon footprint, I would expect that while we see more ships being deployed in 2024 and 2025, we'll also see a similar reduction in terms of ships through accelerated scrapping or the need to remove assets which are not efficient. So let's see how that plays out. I'm not trying to predict that today for you. I think we all have different views in and around that. But there will be no doubt further updates from the various analytical houses on supply and demand expectations once we get past this COVID period.

We have 2 more attendees asking questions. So we would like to close the Q&A session with those 2 more questions. Thank you for your patience.

[Interpreted] I have 2 questions. Regarding your performance, increasing the scope of the investment is also broadening, if I understand correctly. So how do you look at that? And then the second question is by 2030, you are going to invest USD 20 billion. Looking at the investment portfolio, about 50% is to be allocated to your [ wind ] strategy. How much percentage is to be allocated to vessels?

[Interpreted] Jeremy, please?

Yes. Thank you for your question. If I could just refer back to this slide which I used during the presentation. As you rightfully indicate, $20 billion was the figure that we used. But however, that is over a 10-year period. And that is over these 4 different classes of types of assets. So I don't really see us widening our diversity of portfolio. So we're continuing to invest in ships, equipment, containers and our digital platform. And that is consistent with what we set out when we set up the company back in 2018. And we are not widening our scope of involvement in terms of moving into more logistics or land site-type operations or investments. So I think that remains pretty tight. In terms of the split and breakout, this pie diagram that we've shown here gives approximately the weighting of how that $20 billion will be spent. So you can see just over 50% of that will be on vessels. Those vessels will be green technology provision vessels. And then of course the orange box, you can see, is for terminal investment. And then the blue section, which is going to be for IT systems and digitalization. And then the last quarter, which is the dark blue, which makes up round about 25%, that will be on future equipment and container requirements.

[Interpreted] Thank you for your question.

Ask if there's any indication over coming months given the impact to China manufacturing facilities, if there might be a slowdown in outbound volumes and we might see just over coming months some respite in the amount of volume going across the Pacific and allow some of these supply chain issues to resolve themselves.

Yes. Thank you. I think in terms of the Trans-Pacific market at the moment, the inventory levels are still below requirements for our customers. So our North American customers are trying to book all the time extra freight, trying to move more volume. But because we have this congestion going on in the U.S. East Coast and on the West Coast, overall, the industry is not able to provide its full capacity. So we may have deployed every ship that we can. But overall, at the moment, the industry is blanking around about 15% to 20% of all sailings in terms of sailing capacity. So demand may be 100%, but the supply side is only 80%. And so I think the booking demand will remain very, very strong to North America. And part of that is also being driven by the concerns that we will have a potential slowdown or even industrial dispute on the West Coast. And therefore, customers need to have that inventory in preparation of a potential curtailment there. And the real strong driver at the moment is booking demand, particularly to the U.S. East Coast, where customers try to get ahead of the curve by bringing in more freight to the East Coast as opposed to the West Coast, because they're expecting these problems to start quite soon. So I think...

Sorry, I was going to say the collapse in the number of containers on the docks in L.A. because they've been moved off to pop-up container yards and therefore the increased throughput of containers at L.A. That sort of stuff isn't having an improved flow-through effect, allowing ships to offload? You're not seeing any of that starting to affect, all these policies by the Biden administration to improve the supply chain efficiency?

Yes. We're seeing some improvement, but we have a long way to go. And the fundamental problem is that we've not seen any major capacity -- terminal capacity come online on the West Coast for quite some time. And secondly, we are not operating on a 24/7 operation there. So it means that due to the labor practices there and the shortage of labor that we've been having, that actually the productivity and following throughputs have really dropped down. So the ships are just waiting, trying to order enough labor, getting alongside. The yards are very congested, and they've been unable to then trade the boxes off from that and, therefore, be able to serve the vessels. I personally was in L.A. Long Beach 3 weeks ago visiting our container terminals there. I did start to see some improvement in terms of the labor availability due to the situation with COVID improving, but there's still a very, very large backlog and we still have a shortage of truckers in the industry and we actually have less chassis in circulation in North America than we had pre-COVID. So there are still some pretty significant bottlenecks to work through.

Yes. I understand that chassis shortage is a real crisis, but it could be resolved by shipping liners sharing chassis and the process of currently shipping liners only allocating chassis to their own containers. If that was temporarily removed, then we could improve that chassis situation, right?

That's not necessarily the case, though. The chassis is owned and operated and provided by the chassis pools or by the private truckers. So the shipping line doesn't own or operate its own chassis. And that's a fundamental change in the industry over the last 5 years. So one of the areas that we've seen, unfortunately, in North America is an underinvestment in chassis. And that situation has been made more difficult partly by the tariff situation where there was a $250 -- sorry, 250% tariff on new chassis brought in from China. So there is a shortage of chassis, and that has been an ongoing situation for a while. I don't think that's -- you could directly relate that to the individual carriers.

[Interpreted] Thank you very much. I'm afraid we have exceeded our time today significantly. We would like to close our IR media session today. Thank you very much for your attention over an extended period of time. I hand it over to Jeremy to share with us opening (sic) [ closing ] remarks. Over to you -- back to you, Jeremy.

Well, thank you very much for everybody that attended this presentation and also for the quality of the questions and the answers. I apologize if I didn't fully respond, and sometimes you'll appreciate that I'm restricted in what I can say, obviously, for shareholder reasons. Thank you also to those who have stayed on to the end here. I think I would just like to say in closing that ONE now has been up and running for 4 years. We have a long-term vision for how we want to drive the company. We've stabilized it. It's profitable. Our financial performance relative to our peers is now pretty competitive. We do need to invest to go forward due to the changeover between our 3J ownership structure and ONE, where the responsibility comes back to our balance sheet. I believe we've come up with a coherent plan, which is linked to our environmental green strategy. We will move forward in a conservative and sensible way with our investment. And we have a good balance sheet and a good capability to do that. And of course we will work very, very closely with our 3 very important shareholders to achieve that objective together. So thank you so much. Really appreciate the interaction today. And let's see how the 2022 goes. And hopefully, we will not be talking about COVID-19 at the next presentation. Thank you.

[Interpreted] Jeremy-san, thank you very much. So with that, we would like to bring the conference to a close. Thank you once again, ladies and gentlemen. Thank you. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]