A.Financial Highlights for Fiscal Year 2021

A-1:Financial Results for FY2021

 Consolidated operating revenues increased by 131.5 billion yen from the previous fiscal year to 757 billion yen. Operating income rose by 38.9 billion yen from a loss to 17.7 billion yen. Ordinary income was 657.5 billion yen, representing an improvement of 568 billion yen. Net income improved by 533.7 billion yen to 642.4 billion yen. The average exchange rate for the fiscal year was 112.06 yen per US dollar, and the average bunker price was 551 US dollars per metric ton.

Turning to the major financial indicators, equity capital at the end of the fiscal year was 884.6 billion yen, while interest-bearing liability was 423.5 billion yen. The equity ratio improved significantly to 56%, while the NET DER also improved substantially to 20%.

For the year-end dividend, we plan to add an additional 300 yen to the previous dividend forecast of 300 yen per share, resulting in a full-year dividend of 600 yen per share.


A-2:Financial Results for FY2021 by Segment

 In the Dry Bulk Segment, in addition to the cargo movement recovery for the fiscal year, supply and demand remained tight due to longer port stays of vessels associated with the tightening of pandemic control measures. Cost reduction through fleet optimization was also successful. As a result, ordinary income increased by 32.9 billion yen from a loss in the previous year to 23.7 billion yen. In the Energy Resource Transport Segment, there were temporary costs such as drillships in the previous fiscal year. Nevertheless, demand for thermal coal carriers recovered, resulting in an ordinary income increase of 3.7 billion yen to 4.8 billion yen. In the Product Logistics Segment, supply and demand was tight for the containership business, the largest in the segment, due to supply chain disruptions and the accompanying robust market conditions. Against this backdrop, ordinary income rose by 520 billion yen over the previous year to 623.8 billion yen. Moreover, the car carrier, logistics, and coastal and short sea businesses have all recovered, including car carrier operations which accounted for about two-thirds of the total recovery. Ordinary income for the Product Logistics Segment as a whole improved by 536.3 billion yen to 640.8 billion yen.


A-3:Business Summary in FY2021 Insights

 (1) The profitability of four of “K” Line’s own businesses improved compared to the previous fiscal year. (2) For the containership business, there was an improvement of 520 billion yen from the previous year. (3) Against the backdrop of improved business performance, an extraordinary loss of 26 billion yen was also recorded. This was due to structural reforms that involved the selling and disposing of unprofitable vessels ahead of schedule and also the unprofitable offshore support vessel business. On the other hand, we recorded an extraordinary profit of 20 billion yen from the sale of non-core businesses based on our portfolio strategy. As a result, (4) the company’s financial foundation improved significantly.


B. Forecasts and Initiatives for Fiscal Year 2022

B-1:Forecasts for FY2022 and Key Factors

 Our full-year operating revenues forecast is 780 billion yen. Operating income is expected to increase by 23.3 billion yen year-on-year to 41 billion yen, mainly due to the anticipated recovery of the car carrier business. Ordinary income is expected to decrease by 187.5 billion yen year-on-year to 470 billion yen. The containership business is the main reason for this, which will be explained below. Net income is expected to deteriorate by 182.5 billion yen to 460 billion yen. The average exchange rate is assumed to be 115 yen to the dollar from May onward. The exchange rate sensitivity would be 4.5 billion yen for each yen in fluctuation. We are considering extra shareholder returns of at least 100 billion yen in addition to the basic dividend of 300 yen per share for the fiscal year ending March 31, 2023. To distribute the additional returns, we plan to consider the share buy-back in addition to dividend payment.


B-2:Forecasts for FY2022 by Segment

 We expect the robust market conditions in the Dry Bulk Segment to gradually ease compared to the previous year, through a loosening of the tight pandemic supply situation. On the other hand, due to the effects of our structural reforms in the previous fiscal year and the renewal of contracts when market rates were high, we expect ordinary income of 24 billion yen. This is about the same as the previous fiscal year. In the Energy Resource Transport Segment, due to our withdrawal from the offshore support vessel and chemical tanker businesses, we expect ordinary income to climb by 1.2 billion yen year-on-year to 6 billion yen. Improvement is also expected in the Product Logistics Segment. Freight rates are set to rebound significantly for the car carrier business, and the benefits will be further supported by the ongoing route rationalization. The discontinuation of unprofitable routes for the coastal and short sea business and the improvement of market conditions for the short sea routes will further enhance profitability. In the containership business, the annual contracts for East-West routes, such as Asia to North America, and to Europe, which account for 50% to 60% of the total, are expected to improve significantly from the previous year. On the other hand, short-term rates are based on the assumption that supply chain disruptions will gradually ease in August or soon after, causing the short term rates to drop in the second half of the fiscal year. As a result, we expect ordinary income of 451 billion yen in the Product Logistics Segment.


B-3:Russia/Ukraine Situation

 The Dry Bulk Segment will see drops in coal and grain exports from Ukraine and Russia, while the Product Logistics Segment will handle fewer finished vehicles destined for Russia, and the containership business will similarly handle less cargo in certain regions. All of these expected impacts only account for a small proportion of the total revenues, and at the moment they can be offset by shipments of other cargo. On the other hand, there are concerns about possible impacts on the real economy arising from soaring energy prices, measures to curb inflation, and the tightening of monetary policy in the United States. These factors could suppress economic growth and cool demand, so we will continue to follow them closely.


Medium-term Management Plan

Devising the New Medium-Term Management Plan

 We believe that our management situation has been altered significantly by changes in the business environment in and outside the company and by improvements in our business performance. There are two major challenges that we face. Now that we have achieved a dramatic improvement in our financial position, the first major challenge is how to effectively use our capital and growth strategies to improve corporate value. The second major challenge is the growing importance of emissions reduction and decarbonization to society, along with the need for environmentally sound business management over the long term. While in the short term, we still must appropriately deal with changes in the business environment such as those caused by the pandemic, Russia’s war in Ukraine, and monetary tightening in the United States.

In order to tackle these two major challenges, since last summer we have been carefully investigating measures from multiple perspectives to improve corporate value through group-wide projects. In addition to devising a growth strategy for the future, we have reviewed difficult experiences in the past. To avoid repeating those mistakes, we have enhanced our investment discipline, including the setting of vessel investment guidelines. We have also spent time considering both defensive and proactive measures. Our capital and shareholder return policies have been investigated by us with reference to the advice of third-party experts, and the resulting measures are reflected in the new Medium-Term Management Plan.


Objective of the “K” LINE Group - Evaluation of Management Plan in FY2021

 We steadily tackled the five challenges of the previous fiscal year, and were able to achieve a certain level of results for all of them. As part of this, two critical challenges have emerged. The first is the implementation of a growth strategy for “K” Line’s own businesses based on emissions reduction and decarbonization, and the second is capital policy initiatives to improve corporate value.


Objective of the “K” LINE Group - Business environment surrounding the “K” LINE Group

 Our business environment remains uncertain due to global divisions caused by geopolitical factors and the rise of emerging Asian economies. The world is at a turning point in a major transition towards a cleaner energy mix. As a company that plays a role in the world’s shipping infrastructure, we believe in reducing our environmental impact. By reducing greenhouse gas emissions, shifting to alternative fuels, and responding to the demand for greener transport, we can ensure the sustainable growth of our company while enhancing our corporate value. Based on relevant knowledge, the “K” Line Group will seize the opportunities and work towards achieving this vision.


Objective of the “K” LINE Group - New Corporate Principle」「Vision」「Values the “K” LINE Group prizes 

 To enable “K” Line officers and employees to promote management and business execution with the same sense of purpose in a new development stage, we again thoroughly discussed and updated our corporate principle, vision, and values the “K” Line Group prizes. First, the Group reconfirmed that its core business area is logistics centered on shipping. In this business domain, we aim to improve corporate value by promoting emissions reduction and decarbonization for our company and society. To achieve this, we will focus our management resources on “K” Line’s own businesses with role of driving growth. We will seize growth opportunities by further strengthening partnerships with customers who want to engage in environmental activities such as emissions reduction and decarbonization.


Objective of the “K” LINE Group - Long-term Management Vision of “K” LINE Group

 In order to achieve profit growth along with reduced emissions and a decarbonized society, we need to concentrate our management resources on businesses that drive growth. By doing so, we aim to become a sustainable-growth company that can weather market volatility, based on our two mainstays of containership and “K” Line’s own businesses. We will undertake capital investment based on appropriate policies, while keeping the cost of capital in mind.


Objective of the “K” LINE Group - Measures for improvement of corporate value

 We have devised five capital policies to promote corporate growth and maximize corporate value. In “K” Line’s own businesses, we will prioritize capital allocation to the carrier businesses for Coal and Iron Ore Carriers, LNG Carriers, and Car Carriers, which will play a key role in growth. Secondly, as a major shareholder of Ocean Network Express (ONE), we will support the further improvement of its corporate value. This will strengthen our resistance to market fluctuations in “K” Line’s own and containership businesses. Thirdly, we will continue to enhance our business management and maintain investment discipline. Fourthly, we will strive to improve our corporate value through management that is conscious of the cost of capital. Finally, we will continually optimize cash flow allocation and our capital structure based on cash flow awareness to achieve both capital efficiency and financial soundness.


Objective of the “K” LINE Group - Contributing to a low-carbon/decarbonized society: Activity guidelines for reducing greenhouse gas emissions

 As a company responsible for part of the world’s transport infrastructure, we believe that efforts for emissions reduction and decarbonization are also our responsibility. At the same time, we recognize that appropriate environmental efforts will become the driving force of our business growth. The International Maritime Organization (IMO - a specialized agency of the United Nations) has set a 40% efficiency improvement target for CO2 emissions to be achieved by 2030, compared to 2008. We have set our own goal of 50% efficiency improvement and are already working to achieve the goal through concrete measures. “K” Line has been included on the Carbon Disclosure Program (CDP) “A List for climate change” for six consecutive years, and is one of only two such shipping companies in the world. We are proud that our pragmatic activities have been highly evaluated.


Objective of the “K” LINE Group - KPIs for Business Management

 In order to quantitatively monitor our efforts to improve corporate value, we are aiming to keep our return on equity (ROE - a measure of shareholder value) at 10% or more. As an indicator of the company’s earning power, ordinary income will be calculated in fiscal 2026, the final year of the Medium-Term Management Plan. The aim is to balance the profits of “K” Line’s own businesses, in which we are actively involved, and the containership business, in which we are a shareholder, and achieve ordinary income of 140 billion yen. To attain an optimal capital structure, we will balance capital efficiency optimization with financial soundness to enable strategic financing even during a recession. Finally, for our shareholder return policy, we aim to provide shareholder returns of 400 to 500 billion yen during the Medium-Term Management Plan period. Our goal is to continually maintain awareness of our optimal capital level, and to ensure the capital investment and financial soundness necessary to improve corporate value. Using any capital in excess of the appropriate level, we will proactively distribute shareholder returns, including the share buy-back, based on cash flow.


Objective of the “K” LINE Group - Portfolio Management

 While environmental and other capital investments are essential, we believe that focused allocation of limited management resources will lead to the maximization of corporate value. A portfolio strategy is the way to achieve this goal. We have redefined the role of each business portfolio based on two axes. One axis is profitability growth based on the company's competitive advantage in the market and its growth potential, and the other is partnership with customers. This axis includes the choice of whether to serve a wide variety of customers or to make substantial transactions with relatively few specific customers. Accordingly, we will focus on investments that can drive growth.

New Medium-term Management Plan (5 years) - Key points of the 2022 Medium-Term Management Plan

 We will explain three main points on the new Medium-term Management Plan, which are 1. business growth by prioritizing allocation of management resources, 2. building a solid business foundation to achieve the business strategies and 3. clarifying capital policy.


New Medium-term Management Plan (5 years) - Group-wide strategy: Portfolio business classification based on the new Medium-Term Management Plan

 As to Group-wide strategy, we have defined/classified the role of each business portfolio strategically so that we can achieve well-balanced resource allocation.

We will make three businesses with the role of driving growth, Coal and Iron Ore carriers, Car carriers and LNG carriers businesses, as primary source of revenue by closely getting aligned with our customers for emissions reduction and decarbonization. We intend to achieve growth bigger than the market growth by gaining share among not only existing customers but also new customers. Regarding allocation of management resources, about 80% of the business investment will be in this Coal and Iron Ore carriers, Car carriers and LNG carriers.

We have defined energy source transport such as thermal coal carriers and VLGC and VLCC as businesses with the role of supporting smooth energy source conversion and taking on new business opportunities. We will transform our business structure, minimizing business risks while helping customers transform their energy mix at the same time. In promoting our portfolio, we will continuously study replacement of asset by M&A or business transfer etc.


New Medium-term Management Plan (5 years) - Role of driving growth Growth Strategy for Coal and Iron Ore Carriers Business

 Growth strategy for Coal and Iron Ore carrier business will gain new customers from outside of Japan such as major resources companies, by being aware of their environmental needs, in addition to Japanese/Korean mills that have been our existing customers forming our revenue base. There are very strong needs for reduction on greenhouse gas from our customers. By supporting our customers to meet scope 3 requirement and make our long-term business relationships with customers even stronger. We will establish status as customers’ partner by responding to customers demand for alternative fuels vessels such as LNG fueled vessels and, also by improving sales capability as company focusing on customers need for environmental technology. We will also review organizational structure for sales.


New Medium-term Management Plan (5 years) - Role of driving growthGrowth Strategy for Car Carriers Business

 There are as strong demands as Coal and Iron Ore carrier customers, or even stronger demands, for reduction on greenhouse gas. That said, we will steadily promote alternative fuels vessels and establish supply network of alternative fuels. Moreover, we believe we need to adjust to alternation of industrial structure due to shifting to Electric Vehicle (EV). To expand transaction with emerging Battery Electric Vehicle (BEV) makers such as China and others, we will strengthen our sales including overseas offices and at the same time, we will enhance finished car logistics so that we can proactively attract such emerging BEV makers.


New Medium-term Management Plan (5 years) - Role of driving growth Growth Strategy for LNG Carriers Business

 LNG has strong demand as alternative fuel during energy transition period. It has been estimated that LNG demand will peak in 2040 to mid-2040’s and until that, demand will increase 4% or so every year. In such a situation, we will capture the demand for LNG carriers by securing businesses in the market where growth is expected in the future such as China, Malaysia, India and Indonesia for both conventional size and mid-size LNG carriers in addition to businesses with LNG suppliers. In order for us to do that, we will strive to focus on sales in overseas offices and providing ship management function from overseas strongly enhancing both commercial, safety operational support.


New Medium-term Management Plan (5 years) - Role of supporting smooth energy source conversion and taking on new business opportunitiesPath toward conversion of businesses related to Thermal Coal Carriers, VLGCs and VLCCs

 Regarding thermal coal carriers, VLGCs and VLCCs, we will fulfil the supply and transport responsibilities for existing energy by providing high quality of transportation. We will strive to reduce vessel asset risks together with customers. Moreover, we need to capture growth opportunity by responding customers demand for new energy transport to be created. Concretely, we will strive to be ready for new demand for transport of ammonia, hydrogen, and liquefied CO2. From our experience on owning and managing ammonia carrier, we are confident that we can utilize our capability derived from such experiences.


New Medium-term Management Plan (5 years) - Role of contributing by enhancing profitability Profitability Growth for Bulk Carriers, Short Sea and Coastal ship, Port and Logistic Businesses

 We have classified Bulk Carriers, Short Sea and Coastal ship, Port and Logistic Businesses as businesses with role of contributing by enhancing profitability. As a result of structural reforms, regarding Bulk carriers, the fleet has been optimized and resistance to market fluctuation has been improved drastically also thanks to high efficiency of operation. Without loosening the reins, we intend to further strengthen sales to enhance access to future growth markets such as Southeast Asia and the Middle East from newly relocated basis of the business in Singapore, and strategically to lighten asset ownership. By putting Kawasaki Kinkai Kisen, which is scheduled to be wholly owned subsidiary, as a center of domestic shipping of our group, we will maximize intra-group synergy and promote modal shift. For Logistics business, we will focus even more on the fields where we can pursue maximizing of synergy with the principal business. Such fields include finished vehicle logistics, domestic shipping and ferry, offshore wind power support vessel etc.


New Medium-term Management Plan (5 years) - Role of supporting the business as a shareholder and stabilizing the earning baseContainership Business

 We provide support and advice to Containership business as a shareholder and no need to mention that Containership is an important business segment for the “K” Line Group. We believe soaring freight rate due to the unique circumstances caused by COVID19 will be gradually normalized, however, we expect continuous growth as demand increases. As a shareholder, we intend to provide needed support, including human resources, for the sustainable growth and development of ONE.

We will also back up ONE so that they clarify their business plan and disclose it so that ONE can have appropriate appreciation in the transition from founding period to growth/maturation period.


New Medium-term Management Plan (5 years) - (Reference) EBITDAMultiple of Major Containerships companies and ONE

 Compared to other major container carrier firms, ONE’s EBITDA is higher than those of others. We see that ONE is transitioning from founding period into normal period after best practice of 3 Japanese shipping companies realized. We will strive to make sure ONE is reflected to K Line Groups’ corporate value appropriately through appropriate communication with the market.


New Medium-term Management Plan (5 years) - Expansion of new businesses in fields where “K” Line can utilize its strengths.

 We basically focus on fields that would contribute to emissions reduction and decarbonization and avoid pure investment with no acquisition of knowledge/experience or synergy. Current initiative includes “K” Line Wind Service, Ltd. established June last year jointly with Kawasaki Kinkai Kisen, Ltd. and other domestic subsidiaries. Kawasaki Kinkai Kisen owns Anchor Handling Tug Supply vessel with the biggest bollard pull in Japan (150t). We see that we can utilize our group’s knowledge and network to great extent in offshore wind power support vessel business and we are actively engaging.


New Medium-term Management Plan (5 years) - Business BaseBig picture of Functional Strategy

 By investing in key human resources for business strategy realization, we will continue to strengthen our business foundation. This includes human resources in areas such as digital transformation, environmental expertise, technology, as well as safety and vessel quality control. In this way we can steadily enhance our unique technology and expertise.


New Medium-term Management Plan (5 years) - Investment to HR: Develop and Secure Expertized HR X Diversity

 As part of this investment, we will also develop specialized executive human resources for the shipping business, while also nurturing personnel with marine technology expertise. To promote greater human resource diversity, we intend to further strengthen our competitive advantage by actively promoting human resources from outside Japan. This includes strengthening offshore sites such as Singapore, in business areas such as dry bulk and energy, which are seeing market expansion outside Japan. We also aim to increase the representation of women in manager positions to 15%.


New Medium-term Management Plan (5 years) - Digital Transformation

 One of our strengths is our relationships with customers in the business fields that drive growth. In order to strengthen these relationships and better support customers, we will actively promote the sharing of cargo and CO2 emissions information, as part of our digital transformation activities. Moreover, we are working to support safe and optimized operations in collaboration with partners in Japan and elsewhere, through the use of not only new hardware but also software to facilitate digital transformation.


New Medium-term Management Plan (5 years) - Environment/Technology, Safety/Ship Quality Management

 In the area of environmental expertise, technology, safety, and vessel quality control, we will strive to be a company that provides various energy-saving technologies and options for customers and encourages them to adopt them. Safe operations and vessel management are the highest priorities for a shipping company. Therefore, we intend to build a strong new three-base system for these activities in the United States, Europe, and Singapore. This will also allow us to promote a customer-oriented support system based on global expansion.


New Medium-term Management Plan (5 years) - Profitability Targets

 As for profitability targets, we will realize profit growth for “K” Line’s own businesses by promoting the strategies outlined above. Specifically, we are aiming to double profits in “K” Line’s own businesses by fiscal 2026, the final year of the Medium-Term Management Plan. The driving force will be ordinary income from the Coal and Iron ore transport, Car carriers and LNG carriers businesses. By doubling their profits and growing them to the point where they account for two-thirds of “K” Line’s own businesses, we intend to expand the profitability of these businesses to about the same as that of the containership business. Ordinary income for fiscal 2021 was 34 billion yen. However, this includes a temporary foreign exchange gain of about 8 billion yen, thanks to a rapid depreciation of the yen.
Assuming that ordinary income was effectively about 26 billion yen, the target of 55 billion yen by fiscal 2026 represents a goal to more than double profits.


New Medium-term Management Plan (5 years) - Cash Allocation

 Between fiscal 2021 and 2026, we expect to generate total operating cash flow of approximately 900 billion to 1 trillion yen. Approximately 500 billion yen is earmarked for investment and for repayment of working capital financing with the higher interest rates. We will also refinance to purchase competitive equipment, as part of appropriate debt utilization. On top of that, we plan to distribute 400 to 500 billion yen as shareholder returns.


New Medium-term Management Plan (5 years) - An investment plan that focuses on the environment and the role of driving growth

 Looking at the investment details, we will focus on the businesses with the role of driving growth and the environment. About 80% of the business investment will be in the Coal and Iron Ore carriers, Car carriers and LNG carriers. Meanwhile, we plan to invest 310 billion yen out of the 520 billion yen. This will go to environmental investment including alternative fuel vessels and will account for about 60% of the total. By concentrating our investment in the three key businesses that drive growth, the ordinary income of these three businesses can be doubled. By fiscal 2026, the income of these three should account for two-thirds of the earnings in “K” Line's own businesses.


New Medium-term Management Plan (5 years) - Return to Shareholders

 For our shareholder return policy, we will consider the cash flow generated in each fiscal year and the necessary business investment. Then we will respond with an appropriate mix of additional dividends and share buy-back, on top of the basic dividend. For fiscal 2021, a dividend of 600 yen per share is planned. For fiscal 2022, in addition to the regular dividend of 300 yen per share, we will consider extra returns of 100 billion yen or more, in the form of additional dividends and/or share buy-back. For fiscal 2023 onward, our goal is to continually maintain awareness of our optimal capital level, and to ensure the capital investment and financial soundness necessary to improve corporate value. Using any capital in excess of the appropriate level, we will proactively distribute shareholder returns, including share buy-back, based on cash flow.


New Medium-term Management Plan (5 years) - Further advancement of business management

 While making a large investment of 500 billion yen, we will implement a new accounting system that promotes business-specific responsibility. We want to further advance business management and relevant systems that increase awareness of cash flow and the cost of capital. “K” Line will also establish investment guidelines for each vessel type and maintain investment discipline based on an understanding of past mistakes.


New Medium-term Management Plan (5 years) - Summary of New Mid-term Management Plan

 With the significant improvement of our financial position, we have entered a new management stage. In our businesses centered on shipping, we intend to enhance our corporate value by actively meeting the demand for emissions reduction, decarbonization and other environmental measures. Through these efforts, we are aiming to achieve ordinary income of 140 billion yen by fiscal 2026, based on balanced earnings from our two mainstays of “K” Line’s own businesses and containership business. In “K” Line’s own businesses, we will prioritize the allocation of management resources to the three businesses, Coal and Iron Ore transport, Car carriers and LNG carriers businesses, which will drive growth. At the same time, we will actively participate in the containership business as a shareholder, and provide proper information disclosure. “K” Line will continue to advance its executive management through business-specific management accounting and business-specific evaluation with a focus on the cost of capital. We will also strive to thoroughly promote capital, financial, and investment discipline. Cash allocation will be promoted with an emphasis on growth investment and shareholder returns, while always maintaining optimal capital levels.