【Financial Highlights Brief Report for 1st Quarter FY2022】
A. Financial Highlights for 1st Quarter FY2022
A-1. Financial Results for 1st Quarter FY2022
Consolidated operating revenues came in at 228.5 billion yen, with operating income at 18.9 billion yen, ordinary income at 267.4 billion yen, and net income attributable to owners of parent at 266.6 billion yen. The exchange rate was 126.49 yen to the US dollar, and the bunker price was 821 US dollars per metric ton. These ordinary and net income figures represent record quarterly results.
As for the key financial indicators, equity capital was 1,187.8 billion yen and interest-bearing liability was 410.4 billion yen. As a result, NET DER improved to 13% while the equity ratio jumped to 64%.
A-2. Financial Results for 1st Quarter FY2022 by Segment
In the Dry Bulk segment, ordinary income was 15.0 billion yen. It represented an improvement of 14.1 billion yen compared to the same period last year. The Energy Resource Transport segment recorded ordinary income of 5.8 billion yen. This marked an improvement of 5.0 billion yen from the same period last year. In the Product Logistics segment including Containership Business, ordinary income grew to 248.8 billion yen, a year-on-year improvement of 159.9 billion yen.
B. Forecast and Initiatives for FY2022
B-1. Forecasts for FY2022 and Key Factors
We forecast first-half operating revenues of 470.0 billion yen, operating income of 39.0 billion yen, ordinary income of 500.0 billion yen, and net income attributable to owners of parent of 495.0 billion yen.
Second-half operating revenues are expected to be 420.0 billion yen, operating income will be 18.0 billion yen, ordinary income will be 200.0 billion yen, and net income attributable to owners of parent will be 195.0 billion yen. For the full year, ordinary income is expected to be 700.0 billion yen, while net income attributable to owners of parent will be 690.0 billion yen. These match the figures that were released on July 21, 2022.
Operating income is expected to rise by 39.3 billion yen compared to the same period last year. This is due to an earnings recovery in “K” Line’s own Dry Bulk Business and Car Carrier Business.
The ordinary income forecast of 700.0 billion yen represents an increase of 42.5 billion yen compared to the same period last year. This means that the earnings of Containership Business, OCEAN NETWORK EXPRESS (ONE) will be higher than the figures originally announced on May 9. While still not as strong as the previous fiscal year, the achievement gap has narrowed.
Assuming that the exchange rate will remain at 130 yen to the US dollar going forward, the forecasted full-year average is 129.68 yen to the US dollar and the average bunker price is 896 US dollars per metric ton.
A one-yen fluctuation in the exchange rate would have a large impact of 5.5 billion yen on the forecasted figures. With a considerable depreciation of the yen in recent weeks, we will continue to keep an eye on the exchange rate, as it could trigger a downward revision of earnings going forward.
After previously setting a dividend of 150 yen for the first half and 150 yen for the second half, we will increase the dividend to 300 yen for each half. On top of that, we still plan to distribute shareholder returns of over 100.0 billion yen. Moreover, we have already issued a press release announcing a three-for-one stock split to be executed on October 1, 2022.
B-2. Forecasts for FY2022 by Segment
Regarding the performance forecasts by segment, ordinary income is expected to be 36.0 billion yen in the Dry Bulk segment, 13.0 billion yen in the Energy Resource Transport segment, and 627.0 billion yen in Containership Business. Ordinary income in the Product Logistics segment is expected to be 663.0 billion yen. Excluding Containership Business, however, the figure is forecasted as 36.0 billion yen. Overall, ordinary income is forecasted to reach 700.0 billion yen.
Now let’s turn to the summaries by segment. Please refer to page 15 of the material for information concerning the Dry Bulk segment. The table at the top shows the dry bulk market results and our company's assumptions. The left side shows the results for fiscal year 2021, while the right side shows the assumptions for fiscal year 2022.
For example, comparing the full-year result and forecast for Capesize vessels, the previous fiscal year’s result was 32,750 US dollars, while this fiscal year's forecast is 22,400 US dollars. In all vessel types, the figures are assumed to be worse than in the previous period. This is actually less than the initial forecast for fiscal year 2022 announced in May.
Even under these circumstances, earnings for the Dry Bulk segment are expected to improve by 12.3 billion yen year on year. There are three factors behind this improvement, despite the aspects causing deterioration of market conditions. The first is the daily efforts outlined in our Medium-Term Management Plan. In particular, our exposure control measures are seeing the desired effect. In addition to utilizing the surplus vessels of our core fleet for spot and medium-term contracts, we are chartering vessels, according to circumstances, in a responsive way for short periods of time that match the transportation contracts, thereby expanding our business.
The second factor is the disposal of uneconomical vessels that we completed in the previous fiscal year. Let me give you an estimated reference value for a certain point in time. The disposal has helped increase ordinary income in the Dry Bulk segment by about 2.0 billion yen.
The third factor, which I will explain in detail later, is the exchange rate. The yen’s depreciation is having a positive effect on earnings in the Dry Bulk segment.
As for the Energy Resource Transport segment, our explanation always involved medium and long-term contracts with minimal fluctuations in market conditions. This time, however, I would like to mention activities that are not currently reflected in the figures. We have been receiving a lot of inquiries recently concerning future projects, especially involving LNG carriers. We are in the process of ordering new vessels for a number of projects and finalizing Time Charter contracts. This will show up in the numbers starting after fiscal year 2023. Our Energy Resource Transport segment is now focusing not only on operations with our current fleet but also on initiatives for a new future.
Under the Product Logistics segment, I will also cover Car Carrier, Logistics, Short Sea and Coastal, and Containership Businesses. Please refer to page 16 of the material for information about Car Carrier Business. This shows the actual number of vehicles transported in fiscal year 2021 and the current forecast for fiscal year 2022. Compared to the 2,886,000 vehicles transported in the previous fiscal year, the volume is expected to increase by about 17% to 3,365,000 vehicles this fiscal year.
With the high demand, the vessel supply is very tight right now and there are not enough car carriers. In particular, the charter market is running out of vessels, so the supply and demand situation is tight. Therefore, with contracts that require freight rates to be periodically renewed, the rates will be reset in a way that reflects supply and demand. By also increasing the proportion of cargo with higher rates, such as high and heavy construction equipment and machinery, or alternatively cargo from Asia, we can expect a relatively large increase in profit in Car Carrier Business, compared to the same period of the previous year.
On the other hand, earnings in Logistics Business are gradually diminishing from the previous fiscal year’s level. In the previous fiscal year, earnings, especially for forwarding, remained high due to the COVID-19 pandemic.
In Short Sea and Coastal Businesses, demand for Asian short sea routes (international shipping) is strong. In the ferry service area, we have made progress on restructuring and eliminating unprofitable routes, and we expect profits to also increase in this area year on year.
Turning to Containership Business, I will first explain the route situation. Over the longer term, the current supply chain disruptions are expected to ease. In particular, the number of vessels staying at the port on the west coast of North America has decreased from about 40 in the fourth quarter of the previous fiscal year to about 20 now. Meanwhile, the number of vessels rerouting to the east coast of North America is increasing, resulting in congestion there as well. Regarding shipping routes to Europe, such as to Hamburg and other European ports, strikes by port workers have simultaneously occurred. Overall, the situation has not improved significantly.
There also has been no noticeable movement on contract renewal negotiations between port operators on the west coast of North America and the ILWU labor union. Nevertheless, there are still no noticeable delays in terminal operations as a result of these negotiations, such as any slowing down of cargo handling.
On the other hand, the overall supply chain situation will not likely change under these circumstances. For example, inflation in the United States may cause consumers there to reduce consumption, while the situation in Ukraine may encourage Europeans also to curtail purchasing. Accordingly, the slightly lower freight rates at the moment are likely to continue, especially on the trades to the west coast of North America.
Given this situation, we predict that ONE's earnings this fiscal year will not reach the ordinary income level of the previous fiscal year. Assuming that profits will likely be around 7% lower than the previous fiscal year, 31% of those earnings will be returned to “K” Line. In the same period last year, Containership Business, including ONE etc, earned 623.8 billion yen for “K” Line, and our forecast for the current period is 627.0 billion yen.
B-3. Key Factors of Improvement for “K” Line’s own Business in FY2022
Changes in the dollar-yen exchange rate this fiscal year have been very remarkable, creating a substantial impact on earnings. Therefore, we have illustrated it to help you better understand its movement. The figure shows key points behind income improvement for “K” Line’s own businesses except Containership. The waterfall chart on the left side shows ordinary income from “K” Line’s own businesses in fiscal year 2021 of 45.5 billion yen, while the chart on the right side shows that this fiscal year’s income forecast has increased to 85.0 billion yen.
In the waterfall chart on the right, using 45.5 billion yen as the starting point, 21.8 billion yen represents the income improvement through the efforts made by “K” Line’s own businesses, while 17.7 billion yen (gray portion) is the earnings improvement generated by the weaker yen. By segment, Dry Bulk will improve by 12.3 billion yen. However, only 7.5 billion yen is due to profitability improvement by “K” Line’s own businesses, and 4.8 billion yen, about 40%, is due to the exchange rate change. The 8.2 billion yen increase in the Energy Resource Transport segment breaks down into 4.8 billion yen from improved shipping route profitability and 3.4 billion yen in exchange rate gains, which also represents about 40% of the total. The Product Logistics segment, excluding Containership Business, is set to increase by 19.0 billion yen. However, the actual improvement in income will be 9.5 billion yen, with the other half resulting from foreign exchange gains.
C. Status and Progress of Medium-term Management Plan
C-1. Operating Cash Flows
Now I will summarize the progress made with respect to our Medium-Term Management Plan.
Our forecast for full-year operating cash flow at the beginning of the fiscal year was 300.0 billion yen. ONE’s Containership Business and “K” Line’s own businesses have all achieved steady progress, and ONE’s earnings account for the majority of this performance. This will likely increase the cash flow by 100.0 billion yen over the initial forecast. As a result, we can now expect a full-year operating cash flow of 400.0 billion yen.
C-2. Return to Shareholders
The material shows our policy for return to shareholders. Our approach to shareholder returns is based mainly on consideration of cash inflow and investment needs for the period. Given the importance of these two factors, we have decided not to set a dividend payout ratio or other formula in advance. The newly announced additional dividend is part of an agile approach for responding to changes. Of course, we also consider the levels of surplus retained earnings as well as earnings in the previous fiscal year, and then we try to balance the shareholder returns accordingly. As a result, as shown in the upper right corner of the page, we will pay a total dividend of 600 yen per share, which includes the additional dividend. A decision has not yet been made on how and when to distribute the additional returns of 100.0 billion yen or more, but we still plan to execute it.
C-3. External Environment Surrounding “K” Line Group
The current business environment has led to many questions, so we have compiled a list here. In terms of the international situation, the current Taiwan crisis is certainly impacting us and should be also included. Please refer to the material.