Summary of Business Briefing on June 3, 2024

Opening Remarks (Yukikazu Myochin, President & CEO)

 

Today’s Objective (P.2)

• The current situation in the Middle East is becoming chaotic and has continued for a long time. In addition, geopolitical risks that could impact the business environment continue, such as concerns about conflict between the United States and China and the situation remains unpredictable.
• Under such circumstances, although the containership market, which once had soared, subsided, we were able to secure an ordinary profit of 135.7 billion yen mainly from our own businesses in FY23
• Additionally, this fiscal year marks the halfway point of our five-year Medium-term Management Plan. In the financial results announcement in May, we revised our ordinary profit target upward from the previous 140 billion yen to 160 billion yen in FY26, and also announced that we would aim for 250 billion yen + α in FY30.
• Regarding investment, it has been raised to 740 billion yen from the previous plan of 630 billion yen. Focusing on the three businesses with role of driving growth, we will implement investment plans also in businesses that contribute to reducing emissions and decarbonization of our company and society without relaxing investment discipline, and steadily accumulate profits from our own businesses.
• In regard to shareholder returns, the amount of total shareholder returns for the cumulative period of the Medium-term Management Plan was set at 500 billion yen or more previously, but we have raised this to 700 billion yen or more. We will continue to strive to improve corporate value over the medium to long term and create source of funds for shareholder returns.
• At last year's business briefing, we mainly explained the business overview and business environment for the three businesses with the role of driving growth. This time, we will provide thorough explanations on stability, including trends in profit levels and business KPIs for each business, so that you can deepen your understanding of our earnings plan towards FY30, where we are aiming for further growth. Furthermore, we would like to explain the growth strategies for each business to achieve “+α” in FY30.
• This time, we have added new business areas where we can leverage our strengths to our lineup of explanations. We are working on liquefied CO₂ transportation business, offshore wind turbine support vessel business, and hydrogen and ammonia transport business as businesses that contribute to the decarbonization of society. Among those businesses, today, we will provide an in-depth explanation focusing on the liquefied CO₂ transportation business, which we would like to do our best to help you further understand.

 

Earnings Targets (P.3)

• This is the ordinary profit target for “K” Line’s own businesses, which was revised in May when we announced FY23 final results and is aiming for 110 billion yen +α by 2030.
• We aim to achieve the base scenario of 110 billion yen through organic growth, centered on the three businesses with role of driving growth.
• Regarding “+α” upside, in addition to further self-supported growth of our own businesses, we will develop business toward reducing emissions and decarbonization as new business areas, and we will also work on measures to achieve discontinuous growth in fields where we can leverage our strengths.
• By FY30, including the upside, we would like to aim for the earnings target of “K” Line’s own businesses to be at the same level as the Containership business, or even higher.

 

M&A Strategy (P.4)

• Regarding the discontinuous growth that I explained earlier, we believe that our focus will be on projects that are expected to create high synergies and that will strengthen the scope and scale of those businesses in areas where we can leverage our strengths, particularly in businesses　with role of driving growth and in surrounding areas.
• We will set requirements and hurdle rates for target companies and proceed with investment decisions without relaxing investment discipline.

 

Business Briefing Agenda (P.5)

• Now, we will turn to briefings on the three businesses with the role of driving growth, given by the executive officers responsible for each business.
• Car Carrier Business will be presented by Takenori Igarashi, Senior Managing Executive Officer; Coal & Iron Ore Carrier Business by Masatoshi Taguchi, Managing Executive Officer; and LNG Carrier Business by Michitomo Iwashita, Managing Executive Officer. Finally, Projects for emission reduction and decarbonization will be explained by Satoshi Kanamori, Managing Executive Officer.

 

Car Carrier Business (Takenori Igarashi, Senior Managing Executive Officer)

 

1. Business Characteristics and Market Trends

Transport Demand Outlook and Business Characteristics (P.8)

• The business characteristics of Car Carrier Business are shown in the left side of the slide, which we think are:

　　　‣In the medium term, marine transportation demand is expected to remain steady, supported by an solid increase in car sales,

　　　‣Since the number of major customers such as passenger car manufacturers is limited, a relationship of mutual trust between customers and shipping companies is extremely important,

　　　‣and however, there are fluctuations in transportation demand, and it is necessary to prepare and respond in a balanced manner to changes in business demand and supply

• On the right side of the slide, forecasts for global passenger car unit sales and marine transportation demand are shown.
• We believe that global passenger car unit sales will steadily increase from 86 million units in 2023, supported by recovery from production constraints in semiconductors  and auto parts etc., as well as global population growth. Of the 86 million vehicles, approximately 16 million new completed vehicles are transported by sea each year.
• Although the pace of increase in electric vehicle (BEV) sales is currently slowing down, our basic scenario assumes that the share of electric vehicles in global sales will reach approximately 40% in 2030.
• We believe that this is a little faster than the current rate of BEV diffusion, and that the expansion of BEV sales is expected to have both the effect of decreasing demand for sea transport due to the progress of local production, and conversely the creation of new transport demand. We think this scenario is somewhat cautious in that sense.
• However, even with this assumption in 2030, we believe that demand for marine transportation of completed vehicles will increase from 12 billion ton days in 2023 to 13 billion ton days in 2030, an increase of approximately 8%.

　　　The ton-days used here is the multiplication of the amount of tons transported and the distance converted to days, and is a concept similar to the so-called ton-mile.

 

Vessel Supply Outlook (P.9)

• In order to make up for the current lack of transportation capacity, orders for new ships are progressing, and supply will increase by approximately 20% from 2023 to 2026.
• Although the number of new vessels to be delivered after 2027 has not been determined, we believe that the speed of new ship orders will be restrained for a certain period after 2027 for reasons below:

　　　‣Shipyard berths are filling up until around 2028

　　　‣Consideration is underway for new ships that use zero-emission fuels such as ammonia to replace LNG, and it may take some time before formal orders are placed and

　　　‣We are at the stage to see and figure out future political and economic trends, including geopolitical risks

• Approximately 250 car carriers, which were delivered in large numbers around the time of the global financial crisis in 2008, will begin to be retired from 2030 to 2035. As there are concerns about whether sufficient shipbuilding capacity will be available for car carriers replacement during that time, we believe it is necessary to develop and maintain a well-balanced fleet while closely monitoring the situation.

 

Supply and Demand Balance Outlook (P.10)

• In the future, 2023 will probably be called the year with the worst supply shortage ever. It is my understanding that completed vehicles that could not be transported by car carrier in 2023 had to be transported by other means of transportation, such as container ships or pulp ships, or that some production volumes had to be reduced.
• After 2024 onward, new vessels will continue to be delivered and supply and demand will be heading to balance, but the supply shortage itself will continue until around 2025
• After that, we expect supply and demand to finally reach a balance around 2026, but there are also factors such as the timing of considering orders for zero-emission vessels and the focus on car carrier shipbuilding capacity. Therefore, we believe supply after 2026 will be at a level that matches demand and then the demand and supply will stabilize

 

2. Medium-term Management Plan Targets and Progress

Progress in Strengthening Profitability and Investment Plan (P.11)

• In FY23, initiatives such as freight rate restoration, increased H&H transport volume expansion, and operational efficiency improvements progressed smoothly overall.
• In terms of profitability, as shown on the left side of the slide, the average NET freight rate for FY23 improved by approximately 10% compared to FY22. This was mainly due to continuous efforts on restoring freight rates.
• Additionally, although we were faced with a severe lack of space, we were able to increase H&H 　cargo volume loaded by 4%, mainly for our core customers.
• Investments centered on ships are progressing as planned, with a total of 14 vessels already arranged including the vessels to be delivered after 2026, which is the final year of the medium-term plan.
• The planned investment of 60 billion yen, which has not yet been invested, will be paid at the time of contract for new ships to be delivered from 2027 onwards, and will be invested after further consideration.

 

Progress in Fleet Development (P.12)

• For “Utilizing larger carriers,” the average capacities per ship are shown, and for “Strengthening increasing H&H transport capacity, the number of vessels is shown.
• The plan is to achieve these targets and improve profitability toward FY26.
• To increase the number of environmentally friendly vessels, we plan to first develop LNG-fueled ships. The details will be explained on the next slide, but as the demand for environmental measures increases, and especially as carbon emissions from maritime transport become more costly, the competitiveness of environmentally friendly vessels that can reduce CO₂ emissions is expected to surpass those of heavy oil-fueled vessels, and we will continue to develop a competitive, environmentally friendly vessel fleet.
• Finally, the downward fleet flexibility is expressed as a percentage. We believe that demand for marine transportation is currently firm, but we plan to prepare a portion of our fleet with adjustment capacity so that we can immediately adjust the size of our fleet even if demand for transportation slumps unexpectedly.
• The idea is that we will make downward flexibility around 15-20% ultimately.

 

3. Business Strategy

What is Competitiveness of Eco-friendly Vessels (P.13)

• This is a summary of the competitiveness of environmentally friendly vessels. A comparison is made between heavy oil-fueled vessels and LNG-fueled vessels.
• Ship cost and operational cost including bunker expense, is represented by a gray bar in the graph. The current gray area shows that LNG-fueled vessels are more expensive, even though they can reduce CO₂ emissions.
• However, the costing of carbon emissions, as exemplified by emissions trading in Europe, is currently being discussed at the International Maritime Organization (IMO), including its application to the entire world and it is expected that the regulations will start to be applied in the late 2020s, and regulations will be gradually strengthened.
• Under such circumstances, demand from customers has been increasing for fleets that can reduce CO₂ emissions, as they have a cost competitiveness advantage over conventional heavy oil-fueled vessels and can achieve reducing carbon/decarbonization effects.
• In addition to securing long-term transportation capacity, which has become important in recent years, a trend has begun for customers/shipping companies to cooperate and co-create transportation using these environmentally friendly vessels. We plan to strengthen this as a new business model.

 

Summary of Initiatives towards FY30 (P.14)

• Regarding our initiatives for FY30, our policy is to work toward further growth while maintaining the “Route-Fleet-Customer” balance.
• To maintain and expand customer base,

　　　‣By providing long-term sustainable services, we will respond to the increasing demand of our core customers,

　　　‣As new markets, in addition to China, which we have already been working on, we will also work on cargos from India, Mexico, etc. and

　　　‣The plan is to increase H&H loading by more than 10% by 2030.

• Regarding sustainable route design,

　　　‣in addition to reinforcing the routes in which we have strengths, we will also aim to improve the route network in response to the efforts to work on cargos from India/Mexico mentioned earlier.

• Regarding competitive fleet development,

　　　‣Strengthen competitiveness by developing ships with improved H&H loading capacity, making it possible to load ultra-heavy cargo that exceeds conventional limits, and by building larger ships and

　　　‣finally, we will continue to develop competitive, environmentally friendly vessels as new models.

• As stated in the lower right, we plan to have a total of cumulative 6 environmentally friendly vessels by this fiscal year, 13 by FY26, the final year of the medium-term plan, and a final total of 30 by FY30.

 

4. Earnings Plan

Future Earnings Outlook (P.15)

• Trends in earnings from this year to FY26 are that as supply and demand become balanced, some overheated market conditions will return to cruising speed, and there is the aftermath of the impact of charter hire hike in charter market, which has also been overheated currently. It seems that we will enter a slight adjustment phase.
• On the other hand, we will improve profitability by continuously expanding the number of vehicles transported to accommodate increased demand and increasing H&H transportation volume by improving transport capacity as we have explained earlier.
• At the same time, we plan to further build up our earning power by promoting the introduction of highly competitive and environmentally friendly vessels and co-creating a new transportation system together with a strong customer base.
• In addition, on the upside of earnings trends, we plan to strengthen stable earning power by increasing the scale of transportation in new growth markets such as exports from China, India, and Mexico, and further increasing H&H cargo loaded, as well as by promoting development and strengthening of environmentally friendly vessels including zero-emission ships.

 

5. Investment Plan

Future Investment Outlook (P.16)

• It shows plans for the size of the fleet up to FY35.
• Our basic policy is to develop our fleet based on the needs of our core customers, and if we need to respond to further upside, we will prepare our fleet including chartered vessels.
• As stated on the right, our investment in environmentally friendly ships is to first develop LNG-fueled ships, and then transition to zero-emission ships around 2030, with the aim of improving decarbonization value and cost competitiveness.
• At the same time, we plan to develop a highly competitive fleet that aims to become carbon neutral by increasing the size of ships and improving H&H loading capacity and we plan to invest 200 billion yen during the Medium-term Management Plan period ending in FY26. The investment plan after that will be compiled separately, but the plan is to build and maintain a total of 30 new vessels during the period by FY30.

 

Key Points of Briefing (P.17)

• Demand and supply: Demand for marine transportation remains steady. Supply shortages will continue until 2025. Supply and demand will balance and stabilize from around 2026, but trends in mass retirement and replacement new construction from 2030 to 2035 will be closely monitored.
• Progress of the Medium-term Management Plan: During the first two years of the Medium-term Management Plan, we have made steady progress with our the “Route-Fleet-Customer” balanced strategy, including improving profitability by restoring freight rates and increasing H&H transport volume, and developing a fleet that includes competitive, environmentally friendly vessels.
• Environmental response: In light of customers' demands for securing transportation capacity and pursuing decarbonization value, we will increase investment in environmentally friendly vessels and co-create with customers a competitive completed vehicle transportation service that aims to become carbon neutral.
• Earnings plan: Despite balancing supply and demand and a partially overheated market cooling to a cruising speed state, we will introduce competitive, environmentally friendly ships, capture increased demand and new growth markets, and improve profitability by increasing ship size and H&H cargo capacity.
• Initiatives in FY24: We will continue to acquire and launch contracts for environmentally friendly vessels, capture increased cargo demand and new growth markets further, continue to strengthen H&H cargo handling, and proceed with investigation and realization of future zero-emission vessel development.

 

Coal & Iron Ore Carrier Business (Masatoshi Taguchi, Managing Executive Officer)

 

1. Business Characteristics and Market Trends

Characteristics of Coal & Iron Ore Carrier Business (P.20)

• Coal & Iron Ore Carrier Business has two main pillars: stable earnings generated mainly by medium- to long-term contracts, and market-linked earnings generated mainly by short-term contracts.
• Stable earnings are generated primarily through medium- to long-term contracts with Japanese and Korean steel mills, and also contracts with core customers in India and the Middle East, while market-linked earnings are generated primarily through short-term contracts with major resources companies.
• Our earnings structure is anchored in the stable earnings business, with the market-linked business providing additional earnings.
• To achieve sustainable growth, therefore, it is important to expand the stable earnings business and manage the volatility of the market-linked business.
• Today, I would like to focus my remarks on strategies to expand the stable earnings business.

 

Market Trends (P.21)

• Demand from our main customers forecast to increase.
• The graphs on the left and in the middle of the slide show crude steel production in Japan, South Korea, and India, while the graph on the right shows the image of the different types of contracts format ratio that major resources companies have.
• Regarding Japanese and Korean steel mills, transport demand is expected to remain flat, in conjunction with the trends of crude steel production volume. The demand for eco-friendly vessels is forecast to increase towards 2030, however, making it important to capture opportunities amid this transition to alternative fuel vessels.
• In regard to India, crude steel production is forecast to increase 5-6% annually amid economic growth and together with demand for the Middle East, we expect higher transport demand for Capesize vessel towards 2030.
• In regard to major resources companies, the traditional short-term contracts are becoming medium- to long- term amid the shift to eco-friendly vessels. This presents opportunities to expand stable earnings-style contracts by securing environmental demands.

 

2. Medium-term Management Plan Targets and Progress

Business Strategy Progress (P.22)

• We are making steady progress in business strategy. We have set KPIs to manage our progress so that we can steadily implement the three key business strategies announced last year.
• The ballast voyage ratio is the percentage of empty-vessel voyages to loading ports (ballast voyage) measured in days, versus all voyage days. We have taken measures to raise vessel deployment efficiency and reduce the number of ballast voyage days by improving voyage continuity with the previous discharging port.
• As a result, the FY23 ballast voyage ratio improved by 1.9 percentage points.
• In regard to strengthening organizational sales capabilities, by April this year, we increased staffing in India, the Middle East, and Singapore. We aim to further strengthen our organizations towards FY26.
• In regard to measures to control exposure and fleet portfolio, we aim to create a balance between our short- and long-term cargo contracts and fleet composition, which will strengthen our resiliency to market volatility.
• In FY23, we made progress in improving the balance, as the ratio of owned vessels and long-term charters versus medium- and long-term cargo contracts improved by 2 points year on year compared with the FY22 where the ratio of owned vessels and long-term charters was 20 percent higher than medium- and long-term cargo contracts ratio.

 

Earnings Plan Progress (P.23)

• In FY23, earnings deteriorated temporarily, but we expect earnings to rebound in FY24.
• The graph on the left shows Coal & Iron Ore Carrier Business’s original FY23 ordinary income target, its results, and gap between the forecast and the result.
• In FY23, despite the achievement of stable earnings as planned, our overall earnings deteriorated due to the impact of market conditions, operational factors, and one-time cost factors.
• In regard to market conditions, earnings suffered in FY23 due to short-term cargo contracts signed during a market slump from the latter half of FY22 to the first half of 2023. We expect earnings to recover in FY24 as contracts signed in the second half of FY23, during an upswing in market conditions, will contribute to earnings.
• Although there was also a temporary deterioration in profitability due to ship delays in the Panama and Suez Canals and changes in routes to avoid the canals, we have been able to pass on the cost increase through higher freight rate, and consequently we forecast earnings improvement in FY24.

 

Investment Plan and Progress (P.24)

• The graph on the left shows the fleet development plan announced in May 2023, while the middle graph shows the current plan.
• Customers’ transition to eco-friendly vessels has been slower than originally forecast, causing us to postpone 50.0 billion yen originally earmarked for the current Medium-term Management Plan to future plans, which will be covered after the current Medium-term Management Plan period.
• On the other hand, the actuality of transitioning to new fuel vessels is increasing.
• A large amount of tonnage delivered around 2010 will be retired around 2030, and we expect replacement demand for entire Capesize vessels.
• We forecast demand for eco-friendly vessels to increase around 2030, driven by heightened interest in environmental measures amid the expected introduction of regulations.

 

3. Business Strategy

Business Strategy Overview (P.25)

• Towards 2030, we aim to expand the base scenario while also striving for further earnings by achieving our earnings potential upside.
• Regarding the base scenario, we will maintain and expand the “K” Line share of business among Japanese and Korean steel mills, Indian and Middle Eastern mills, and major resources companies.
• We will achieve our profit potential upside by capturing transport demand for new commercially available materials like reduced iron as well as demand growth for bauxite etc., while also expanding the customer base with clients in India and other growing regions.
• We will ensure sustainable earnings growth by steadily executing these two strategies.

 

Base Scenario Expansion: Customer Strategy (P.26)

• In regard to customer strategy, we aim to maintain and expand “K” Line’s share of core customer business by leveraging demand for environmentally friendly ships.
• The graph on the left shows transport demand on the horizontal axis and “K” Line’s share of customer business on the vertical axis.
• Our strategy is to focus on maintaining our share of Japanese and Korean steel mills’ business, capturing increasing demand in India and the Middle East, and increasing our share of major resources companies’ business.
• For Japanese and Korean mills and major resources companies, it will be important to capture demand for environmentally friendly ships.
• Demand for environmentally friendly ships will increase for Japanese and Korean mills toward 2030
• Regarding major resources companies, contracts are expected to shift from short-term to medium- and long-term contracts in conjunction with the transition to eco-friendly vessels, and this will offer opportunities to increase our share of their business.
• To meet growing demand from Indian and Middle Eastern steel mills, we will expand and strengthen local organizations, including maritime superintendents, to expand our customer base.

 

Base Scenario Expansion: Business Strategy (P.27)

• Our core business strategy, put simply, is: “continue to be chosen as a partner for customers' challenges and enhance the status of main carrier for them.”
• In order to continue to be chosen as a partner for customers to take on the more difficult challenges of decarbonization, we need to continue to be recognized as a main carrier by customers.
• To achieve this, we must enhance our safety and high operational quality, which are not only our strengths but requirements in the industry, while improving our ability to deliver solutions.
• More specific initiatives include developing our human resources, enhancing our organizational capabilities, and launching joint projects with customers.
• In regard to human resources, we will develop crew and ship managers for eco-friendly vessels by leveraging know-how accumulated in LNG transport, utilizing new fuels, and deploying proprietary safety guidelines laterally across organizations.
• Additionally, through joint research on decarbonization with customers, which we have been working on since the year before last, we will deepen our understanding of customer needs and refine our proposal capabilities. Moreover, we aim to further improve our service standards by participating in programs aimed at improving safe navigation and ship management quality.

 

Realizing Earnings Potential (P.28)

• We plan to achieve our profit potential upside by securing new transport demand.
• As growth opportunities, we will target transport demand for reduced iron amid the raw materials shift, as well as transport demand for bauxite and non-steel raw materials.
• As our customers decarbonize their steelmaking processes, new demand for transportation of reduced iron, an intermediate raw material, will emerge.
• In response to demand for the transportation of reduced iron, we aim to capture demand across our division by leveraging our strengths, including our marine technology.
• Capesize vessels transport raw materials, and small and medium-sized vessels transport steel products, and we are deeply involved with our customers in both areas and demonstrate comprehensive proposal-based sales capabilities by combining each other's strengths and working closely with customers across organizations.
• Furthermore, by leveraging the commercial flow of reduced iron, we aim to capture demand for the transportation of steel materials and other products and expand profit opportunities by improving the efficiency of vessel operation.
• We are now focusing on building a track record and know-how.

 

4. Earnings Plan

Earnings Plan (P.29)

• We will steadily execute our customer strategy and business strategy to expand the base scenario towards 2030.
• This graph illustrates net ordinary income and number of vessels, with FY24 as a base indicator 100. The gray bar shows vessel number and the red bar profits.
• We forecast an improvement in earnings in FY24.
• After that, by optimizing the balance between cargo contracts and fleet composition periods, we aim to increase its fleet size and expand profits by strengthening its resilience to volatility and capturing demand for environmentally friendly ships.
• Additionally, we can further improve profitability as eco-friendly vessels become more cost-competitive versus heavy oil-fueled vessels.
• By cultivating new transport demand, we can also realize our profit potential upside.

 

5. Investment Plan

Investment Plan (P.30)

• Our investment plan is to procure vessels, mainly new fuel vessels, to enhance competitiveness and expand fleet.
• The graph on the right shows our fleet size from FY22 and forecast to FY30.
• For owned vessels and long-term charters, we are transitioning from mainly heavy oil-fueled vessels to mainly new fuel vessels.
• Regarding heavy oil-fueled vessels, we will improve our competitiveness and resilience to market conditions by utilizing medium- and short-term charters of new, highly fuel-efficient vessels and optimizing the long-short balance of cargo contracts and fleet composition.
• We will invest mainly in new fuel vessels, shift heavy-oil fueled vessels to state-of-the-art vessels, and aim to match cargo contract terms.
• In addition, we can enhance our resiliency to market conditions by raising our competitiveness and optimizing the balance of cargo contracts and fleet composition, using state-of-the-art short- and medium-term charters with exceptional fuel efficiency.

 

Key Points of Briefing (P.31)

• Demand from our main customers forecast to increase. Demand from Japanese and Korean steel mills forecast to be flat, while business opportunities with Indian and Middle Eastern mills and major resources companies are expected to grow.
• Regarding current business results, earnings have temporarily deteriorated due to market conditions such as short-term cargo contracts contracted under low market conditions. Business performance is expected to recover in FY24.
• By continuing to be selected as a partner for customers' challenges and growing together as a main carrier, we will realize increased profits for our major customers such as Japanese and Korean mills, Indian and Middle Eastern mills, and major resources companies.
• Achieve further earnings upside by capturing new demand by shifting raw materials to reduced iron and capturing demand for transportation of other raw materials such as bauxite.
• In FY24, we will pursue the four initiatives; strengthening the sales function, promoting environmental-oriented sales, optimizing our fleet portfolio and developing crews and superintendent for ship management for eco-friendly vessels.

 

LNG Carrier Business (Michitomo Iwashita, Managing Executive Officer)

 

1. Business Characteristics and Market Trends

Strategic Category of LNG Carrier Business (P.34)

• LNG Carrier Business strategy is broadly divided into long-term stable and short-term market. We are focused on the long-term stable strategy, which leverages customer-oriented capabilities and focuses on energy resource companies and users.
• The keys to the success of the long-term stable strategy are relationships with customers and partners, and the capability to respond to customer needs.
• Today’s presentation will focus on our long-term stable strategy and our customer-oriented strengths.

 

LNG Demand Outlook（P.35）

• LNG demand is forecast to increase firmly until at least 2040 and remain stable after 2040. The main drivers of the stable growth are increased global energy consumption supported by economic growth, mainly in emerging countries, as well as LNG’s acceptance as a realistic solution to achieving a carbon neutral society.
• Based on overall demand increase and its maintenance of the LNG market, the demand for long-term stable LNG carrier transport services, which we are focused on, is also forecast to remain firm through 2040.

 

2. Medium-term Management Plan Targets and Progress

Business Strategy Progress（P.36）

• Regarding the progress of our Medium-term Management Plan, we recently succeeded in signing additional contracts with QatarEnergy, the largest LNG producer. We are steadily building our portfolio of long-term stable contracts, and overall the business strategy is progressing well.
• During the Medium-term Management Plan, we plan to increase the number of vessels in fleet from 44 to 65 vessels.
• Our business with QatarEnergy deserves mentioning here because we were able to secure four more vessel contracts in the second round of bids following 12 vessel contracts in the first round. The additional contracts were made possible thanks to recognition of “K” Line’s abundant experience and the safe and optimal operation services for existing projects.
• Additionally, Malaysian state company PETRONAS has awarded us with three long-term contracts based on recognition of our ship management and safety management capabilities provided through chartering services.
• Meanwhile, Mitsubishi Corporation subsidiary Diamond Gas International awarded us with a long-term charter contract. These are just some of the vessel contracts we have won, a couple of which we cannot disclose due to confidentiality agreements with the customers.
• We are steadily expanding our long-term stable earnings foundation as the core of our business portfolio.

 

Plan Progress (Earnings, Investment) （P.37）

• Regarding our earnings and investment plan progress under the Medium-term Management Plan, the graph on the left shows cumulative investment for LNG Carrier Business during the current plan.
• Our current investment plan is 250.0 billion yen, an increase of 90.0 billion yen from the plan of 160.0 billion yen announced in May 2023.
• The main reason for the increase is the materialization of large-scale LNG projects, mainly in Qatar and North America, and progress in customers’ vessel procurement plans amid overall medium- and long-term growth in LNG demand.
• Of the 250.0 yen billion in cumulative investing cash flow during the current plan, approximately 60% has been earmarked.
• Regarding earnings, FY23 earnings made solid progress towards targets, supported by stable existing contracts and exchange rates.

 

3. Business Strategy

Business Strategy（P.38）

• The priority under our business strategy is to continue our focus on long-term stable business.
• The graph on the left shows the expansion in our fleet size and market size.
• We plan to expand our fleet from the current 46 vessels to 65 vessels in FY26 and more than 75 vessels in FY30. As a medium- to long-term plan, we are eying a fleet of 100 vessels.
• To realize these goals, we will strive to maintain and increase “K” Line’s share of existing customers’ business while securing share from new customers.
• We can maintain and increase “K” Line’s share of existing customers’ business by securing contracts for newly planned projects with customers such as QatarEnergy and PETRONAS, as well as securing alternative demand for their existing contracts.
• At the same time, we will develop new customers, mainly for cargos bound for China, India, Southeast Asia and other emerging regions, as well as cargos originating from the world’s largest exporter market, North America.

 

Strengthening Structure to Expand the Fleet（P.39）

• An analysis of “K” Line’s strengths finds that we have a world-class ship management track record, along with customer responsiveness and solutions capabilities. We plan to continue to enhance these and strengthen our integrated maritime technology and sales for customer support.
• More specifically, we will train and hire crew to prepare for a future expansion of our fleet and ensure that we can continue to maintain high-quality ship management. We have set KPI for crew management as we strive to enhance our systems.
• In regard to sales, we aim to further differentiate services by expanding our sales network and continuing efforts to improve our understanding of customer needs through region- and customer-oriented approaches.
• In regard to maritime technology, we are strengthening our structure to prepare for a larger fleet through such measures as enhancing ship management quality, expanding the sales network, and deepening the coordination between maritime technology and sales.

 

KPI to Measure Business Plan Results（P.40）

• In addition to the previously explained initiatives to bolster our structure, I would like to introduce our measures to manage business plan progress and support its achievement through KPI for each of the phases of project acquisition, vessel construction, and vessel operation.
• For the project acquisition phase, the KPI is the number of vessels in fleet. By building a larger portfolio of long-term stable contracts, we aim to generate profit consistent with our business plan or even above it.
• In the vessel construction phase, our KPI is construction supervision preparation rate. This KPI is used to confirm that the appointments necessary in the construction supervision process are being steadily carried out. This ensures that high-quality vessels are delivered according to the previously made schedule, thereby raising the accuracy of our business plan.
• For the vessel operation phase, we use the three KPIs of crew retention rate, crew preparation rate, and vessel idle rate.
• The crew retention rate and crew preparation rate are used to manage our crew, which is one the key factors in ensuring we can continue to maintain our advantage in high-quality ship management. Additionally, the vessel idle rate is another indicator used to ensure that we can continually provide our high-quality ship management to our customers.

 

4. Earnings Plan

Earnings Plan（P.41）

• Towards FY30, we are striving to secure contracts and expand earnings at a pace faster than the overall market growth.
• The graph on the left shows the trends in market size, our fleet size, and net ordinary income.
• Between FY23 and FY30, the market is forecast to expand 40%. We are aiming to expand our fleet by 70% and our earnings by more than 150% in the same period.
• The main reason that we expect earnings growth to outpace the growth in fleet size is the difference in our ownership rate of individual projects. More specifically, compared to existing projects, our company will take the leadership in new projects. Our ownership rate of individual projects is mainly around 50%, and therefore our earnings are expected to grow faster than the number of vessels.
• At the same time, we will also aim to achieve our profit potential on top of the base scenario. Our ability to further increase earnings will hinge on securing more new contracts, and maximizing the value of used vessels.

 

5. Investment Plan

Investment Plan（P.42）

• On the previous slide, I explained our plan to raise earnings more than 150%. Our investment approach, however, is unchanged.
• More specifically, we are continuing our three main policies of “Continuation of long-term stable strategy”, “Investment at time of securing project”, and “Prioritize profitability over simply expanding number of projects”.
• We have planned a total investment of 250.0 billion yen during the Medium-term Management Plan, with approx. 60% already earmarked for specific projects.
• By 2030, the remaining 40% of the budget will be invested into new projects and the fleet expanded even as investment discipline policy is maintained. This investment will contribute to the expansion of earnings for the company over the medium- and long-term.

 

Key Points of Briefing（P.43）

• Regarding the business environment, we have positioned LNG Carriers as a growth business amid the overall market expansion, as LNG demand steadily increases and long-term stable LNG transport demand is forecast to increase firmly until 2040.
• Regarding our business strategy and business plan progress, we will focus on enhancing our sales network and improving our ship management quality, using our market-leading vessel management track record and ability to respond to customer needs and offer solutions. Through the coordination between our technologies and sales, we plan to expand our contract signings and earnings at a faster pace than overall market growth.
• Regarding our investment plan, we have already achieved the original investment targets under the Medium-term Management Plan. We are expanding the scale of investment to enhance the long-term stable earnings foundation of “K” Line’s business portfolio.
• Finally, as an initiative to support business plan achievement, we have set five KPIs to measure results across the three phases of project acquisition, vessel construction, and vessel operation. These KPIs will raise the probability of realizing our business plan.

 

Projects for emissions reduction and decarbonization (Satoshi Kanamori, Managing Executive Officer)

 

Introduction: Overview of Business for Emissions Reduction and Decarbonization

Overview of Business for Emissions Reduction and Decarbonization (1) （P.45）

• First, I would like to give an overview of our businesses for emissions reduction and decarbonization.
• “K” Line Environmental Vision 2050 targets “K” Line decarbonization and supporting the decarbonization of society as two main goals. To support the decarbonization of society, we are developing new business in four areas.
• We believe that both LNG and Carbon dioxide Capture and Storage(CCS) must be developed as realistic solutions to achieving net zero emissions. To this end, we are focusing our initiatives on four key business areas: liquified CO₂ transport vessel business and LNG carrier-related business to support the realization of a carbon neutral society; offshore wind turbine support vessel business to contribute to renewable energy development; and new fuels-related hydrogen and ammonia transport business.
• Today, I would like to focus the presentation on our liquified CO₂ transport vessel business.

 

Overview of Business for Emissions Reduction and Decarbonization (2) （P.46）

• In order to build a well balanced portfolio, we are pursuing these four separate emissions reduction and decarbonization businesses in parallel with each other.
• Today, in order to provide details on our liquified CO₂ transport vessel business, I omit the detailed explanation here.
• Suffice to say that in the LNG transport-related business, we are pursuing projects that contribute to the LNG carrier business, mainly FSU and FSRU projects. FSU and FSRU are floating storage and supply units that store liquified natural gas (LNG) and reprocess it through regasification. We are pursuing this as an LNG carrier-related business where we can leverage our operational know-how, track record, and assets in that business.
• In the offshore wind turbine support vessel business, we are accumulating our know-how in operational company "K" Line Wind Service, the Group’s offshore wind power brand, to provide services.
• In the hydrogen and ammonia transport business, we are aiming to leverage our partnerships with existing customers to secure transport projects to Japan.

 

Earnings Targets for Overall Business for Emissions Reduction and Decarbonization: （P.47）

• The following slides explain the earnings targets for overall business for emissions reduction and decarbonization.
• We target ordinary income of between 5.0 billion yen and 10.0 billion yen by the mid-2030s for the entire emissions reduction and decarbonization business, including the profit potential.
• We plan to invest 90.0 billion yen by the end of FY26.
• Following the current Medium-term Management Plan, we will invest dynamically in response to changes in demand for environmental measures towards carbon neutrality in 2050.

 

1. Business Characteristics

Social Importance of Liquified CO₂ Transport （P.49）

• The following slide explains the social importance of liquified CO₂ transport.
• In the liquified CO₂ transport business, it is important to build mid-stream processes within the entire CCS value chain essential for achieving carbon neutrality. For society, this represents a meaningful venture where we can utilize our strengths.
• In CCS, CO₂ emitted at factories and other facilities is recovered, transported, and injected underground as pressurized gas. This is one method for reducing CO₂.
• As mentioned in the LNG Carrier Business briefing, the development of both LNG and CCS is essential, as both represent practical solutions to achieving net zero emissions. CCS has therefore drawn considerable interest in recent years.
• Maritime transport by liquified CO₂ vessels is necessary for transporting CO₂ from the recovery sites to remotely located storage sites.

 

Importance of Initiative for “K” Line（P.50）

• The following slide explains the importance of liquified CO₂ transport for “K” Line.
• In addition to its social importance, CCS is important to “K” Line as a new business where we can leverage our strengths.
• First, we have taken part in a multitude of liquified gas (LNG and LPG) projects both in and outside Japan, making it a field where we can apply our considerable accumulated know-how.
• Second, it is a field where we can strengthen and expand partnerships with existing customers. Numerous industries require liquified CO₂ transport, from electric power and gas generation to energy and steel companies. Many companies with which we have existing business relationships are involved in CCS projects.
• Third, we can make contributions to the decarbonization of both our customers and society through liquified CO₂ transport, as CCS is critical to achieving net zero emissions in the future.
• As an example, the Northern Lights project, which is the first commercial CCS project of its kind in the world, has attracted the participation of such major petroleum companies as Equinor, Shell, and TotalEnergies. These major companies are existing customers of “K” Line, and the trusted business relationships we have with them helped us to secure the charter contract. Additionally, we are currently pursuing joint projects with existing customers for the introduction of CCS.

 

2. Market Trends

Transport Method Categories （P.51）

• The following slide explains the different methods of transporting CO₂.
• CCS uses three main CO₂ transport methods: maritime vessel, pipeline, and onsite injection.
• Generally speaking, as the transport distance lengthens, maritime transport becomes more advantageous.
• Pipelines, for example, entail construction and maintenance costs which can rise considerably with distance. For distances over 150 miles, maritime transport becomes more feasible. Additionally, maritime transport may be the only option in areas where the regulations of pipeline construction are strict.
• “K” Line is participating in the Norway’s Northern Lights project as the liquified CO₂ transport company. This is the world’s first marine transport-based CCS value chain business.

 

Demand Outlook（P.52）

• The following slide explains the liquified CO₂ transport vessel demand outlook.
• By our own estimations, liquified CO₂ transport vessel demand will emerge to the equivalent of 200 vessels by the mid-2030s.
• This slide explains our estimate calculations (CCS storage tons X ratio of marine transport tonnage / transport capacity per vessel).
• For CCS storage tons, we have referred to the International Energy Agency’s scenarios, and specifically its sustainable development scenario.
• Although maritime transport is more advantageous for long-distance transport, it is forecast that marine transport will account for only about 10% of transport needs, as short-distance transport and pipelines are expected to be the predominant methods in the entire CCS value chain because of their cost-competitiveness.
• Please note that CCS demand will depend significantly on support schemes in each country and the pace of technological innovation. We will monitor the market carefully and update our business and investment plans as needed.

 

3. Business Strategy

Customer Strategy（P.53）

• The following slide explains our customer strategy.
• We will engage primarily with existing customers in offering liquified CO₂ transport as a solution to their decarbonization challenge.
• As previously mentioned, a wide range of industries have a need for liquified CO₂ transport, including energy companies and steel manufacturers, and many of the companies in these industries are our existing customers. We are carrying out joint research  with many companies, which are published or unpublished.
• We plan to expand the liquified CO₂ transport business by assisting our existing customers in solving their decarbonization challenges.

 

Regional Strategy （P.54）

• The following slide explains our regional strategy.
• We plan to first enter the market in Europe, a leader in CCS, and thereafter expand to the Asia-Pacific region.
• There is a high level of environmental consciousness in Europe, manifested in governmental policies such as carbon taxes and government subsidies. We will participate in leading projects in Europe, including the world’s first commercial project, Northern Lights, and strive to build a track record by 2030.
• In the Asia-Pacific region, we plan to launch liquified CO₂ transport around 2030, mainly with innovative CCS projects in Japan, and join other companies in collaborative planning in preparation for launch.

 

Business Strategy（P.55）

• The following slide explains our business strategy.
• Our basic strategy is to be recognized as the best partner for liquified CO₂ transport and CCS project development, leveraging the first-mover advantages in joining customers from the project inception stage.
• It is important to note that there are many challenges to make CCS a success. The infrastructure behind the CCS value chain, for example, does not yet exist.
• We will systemize the know-how accumulated in the Northern Lights project and NEDO’s feasibility tests to establish our position as a first-mover in the business.
• Since our customers are facing heavy costs in launching CCS, we also plan to help them solve larger issues by collaborating with CO₂ storage companies to offer packaged transport-and-storage solutions.
• We will work with customers hand-in-hand from the project inception stage to be recognized as the best partner for liquified CO₂ transport and CCS project development.

 

Alliance Strategy（P.56）

• The following slide explains our alliance strategy.
• In May 2024, we established the joint venture Nippon LCO2 Shipping, Ltd. with Nippon Gas Line Co., Ltd. This new company will integrate ocean-going transport and coastal transport into a seamless and efficient maritime transport system.
• The joint venture aims to offer added-value services to customers by combining the liquified CO₂ transport know-how of both companies and by integrating Nippon Gas Line’s coastal shipping capabilities with “K” Line’s ocean-going transport. We will use such alliances to enhance our ability to provide new solutions that solve customer challenges.

 

4. Earnings Plan

Earnings Plan （P.57）

• The following slide explains our earnings plan.
• Our earnings target is to generate ordinary income of between 3.0 billion yen and 6.0 billion yen from liquified CO₂ transport by the mid-2030s, using a fleet of 20 or more vessels.
• The graph on the left shows the forecast for ordinary income from liquified CO₂ transport and the number of vessels engaged in the business.

 

5. Investment Plan

Investment Plan （P.58）

• The following slide explains our investment plan.
• Our investment plan for this business is similar to our plan in LNG Carrier Business. More specifically, our priorities are “Long-term stable strategy” and “Investment at time of securing project”.
• During the current Medium-term Management Plan, we plan to invest a total of 90.0 billion yen for the purpose of emissions reduction and decarbonization across all our businesses.
• From 2027 onward, we will take a dynamic approach to investments sensitive to changes in demand trends. This will enable us to expand our business even further if opportunities arise.

 

Key Points of Briefing （P.59）

• I would like to use the following slide to recap the key points of today’s briefing.
• We aim to contribute to society’s carbon reduction and decarbonization by engaging in four businesses aimed at emissions reduction and decarbonization, which together create a new business portfolio generating earnings of between 5.0 billion yen and 10.0 billion yen by mid-2030s.
• LNG and CCS are essential to achieve net zero. Liquified CO₂ transport in support of CCS is a particularly appealing business from the viewpoints of its importance to society and to “K” Line.
• By the mid-2030s, the market size of the liquified CO₂ transport vessel business is forecast to increase to a size equivalent to 200 vessels. We will build a track record and systemize the know-how accumulated in the Northern Lights project to expand our business to a fleet of 20 or more vessels.
• We have set an earnings target of between 3.0 billion yen and 6.0 billion yen for the liquified CO₂ transport business to be achieved by the mid-2030s. While maintaining our core investment discipline, we will expand the business further by investing dynamically in response to changes in demand for environmental measures.
• At the same time, instead of focusing entirely on the liquified CO₂ transport business, we will build a balanced portfolio including hydrogen and ammonia transport business, offshore wind turbine support vessel business, and other businesses.