【Financial Highlights Brief Report for 2nd Quarter FY2022】
A. Financial Highlights for 2nd Quarter FY2022
A-1. Financial Results for 2nd Quarter FY2022
Operating revenues in the first half of the fiscal year improved by 125.3 billion yen year on year to 482.9 billion yen, and this was mainly attributable to the increase in revenue centered on Car Carrier Business and the effect of the weak yen. Operating income improved by 42.8 billion yen to 53.0 billion yen due to the improvement of profitability centered on “K” Line’s own businesses. These results occurred in “K” Line’s own businesses due to a combination of the three factors of improvement in cargo movements and market conditions from the pandemic, the rapid weakening of the yen, and efforts to improve profitability, such as the completion of structural reforms during the previous fiscal year, including the disposal of high-cost vessels and fleet optimization. Driven by Containership Business that continued to significantly improve as it did in the previous fiscal year, ordinary income improved by 329.5 billion yen to 567.5 billion yen, and net income attributable to owners of parent improved by 319.4 billion yen to 565.4 billion yen.
Turning to the major financial indicators, equity capital improved by 643.1 billion yen from the end of the previous fiscal year to 1,527.7 billion yen, DER improved by 22 points to 26%, net DER improved by 9 points to 11%, and the equity ratio improved by 14 points to 70%.
A-2. Financial Results for 2nd Quarter FY2022 by Segment
In the Dry Bulk segment, ordinary income in the first half of the fiscal year improved by 20.1 billion yen to 26.0 billion yen. This was primarily due to the economic recovery, recovery in demand and recovery in cargo conditions from the pandemic, but profitability also increased due to progress in the disposal of high-cost vessels and fleet optimization mentioned earlier. In the Energy Resource Transport segment, ordinary income improved by 8.3 billion yen year on year to 9.2 billion yen. In the Product Logistics segment, ordinary income improved by 298.7 billion yen year on year to 536.9 billion yen. In Containership Business, the level of freight rates was high, centered on market conditions for short-term rates, due to robust transportation demand until the first half of this year, in addition to tightening of supply and demand associated with supply chain disruptions. In addition to the significant improvement in Containership Business, profitability of Car Carrier Business also improved significantly, and although the impact of the shortage of parts such as semiconductors remains, European, US and Japanese manufacturers have seen a recovery in production with the recovery in cargo conditions after the pandemic. Furthermore, a new increase in exports from China has also contributed.
B. Forecast and Initiatives for FY2022
B-1. Forecasts for FY2022 and Key Factors
As for the full-year forecasts, operating revenues are expected to increase by 163.0 billion yen year on year to 920.0 billion yen. This is primarily due to the increase in revenues in Car Carrier Business and the effect of the weak yen. Operating income is expected to increase by 62.4 billion yen to 80.0 billion yen due to improvements in Car Carrier, Dry Bulk, and Short Sea and Costal Businesses. Ordinary income is expected to improve by 52.5 billion yen to 710.0 billion yen, and net income attributable to owners of parent is expected to improve by 57.6 billion yen to 700.0 billion yen, reaching record earnings for the second consecutive period.
The assumed exchange rate for the full year is 132.02 yen for one dollar, but profitability from November onwards is calculated using an assumed rate of 130 yen. Regarding exchange rate fluctuations, a one yen change against the dollar can have an impact of 5.2 billion yen on our results, and if the exchange rate remains at 135 yen throughout the second half of the fiscal year, ordinary income will be boosted by 26.0 billion yen to 736.0 billion yen.
B-2. Forecasts for FY2022 by Segment
In the Dry Bulk segment, we forecast ordinary income of 33.0 billion yen, up 9.3 billion yen from the previous year. Although cargo conditions have improved in the first half of the fiscal year due to the economic recovery after the pandemic, iron and steel demand is going through an adjustment phase in China, which is continuing with its zero-COVID policy, and we have drawn up earnings forecasts based on the assumption that market conditions will go through a certain degree of adjustment centered on Cape size vessels during the second half of the fiscal year.
In the Energy Resource Transport segment, LNG carriers, thermal coal carriers, and very large crude carriers (VLCCs) are operating stably based on medium- to long-term contracts.
In the Product Logistics segment, ordinary income is forecast to improve by 34.2 billion yen year on year to 675.0 billion yen. In Containership Business, we forecast ordinary income to deteriorate by 10.8 billion yen to 613.0 billion yen, and an improvement of 45.0 billion yen is expected for “K” Line’s own businesses except Containership, of which the greatest factor is the improvement in profitability of Car Carrier Business. Although production centered on European, US and Japanese manufacturers is continuing to gradually recover after the pandemic, Chinese exports of not only EVs but also gasoline vehicles grew significantly amid the lingering impact of the semiconductor shortage. For example, exports from China were around 600,000 vehicles in FY2019 before the pandemic, but this number is expected to grow to almost quadruple at 2.4 million vehicles this year as extremely strong growth is expected. Exports from China include exports to distant markets such as Europe, the Middle East and South America, so the balance of supply and demand is very tight for car carriers overall. In addition to improvements in profitability and efficiency of operation, the results of actively engaging in the restoration of freight rates have appeared in profitability.
【OCEAN NETWORK EXPRESS (ONE) Financial Results for FY2022 2nd Quarter】
After-tax profit in the second quarter improved by 1.32 billion dollars to 5.521 billion dollars. Growth in cargo movements slowed and decreased compared to the previous fiscal year from a somewhat early stage in Europe, but Asia-North America routes gradually slowed from around August or September, and although negative growth was recorded year on year, the balance of supply and demand was tight due to continued supply chain disruptions centered on the first half of the first six months of the fiscal year, and we maintained a high level of freight rates. As a result, after-tax profit in the second quarter was 5.5 billion dollars, which was almost the same level as the first quarter.
ONE’s view of the future is explained in the future outlook on page 5. As the flow of people returns to normal due to the relaxation of border controls in various countries, goods consumption is returning to services consumption. Inventories of consumer goods are also accumulating, and a decline in consumer confidence due to inflation is a concern. On Asia-North America routes, a year-on-year decrease of over 5% in cargo movement is expected from September, and a similar decrease in cargo movement is also expected to continue for Europe in the future.
Therefore, the results forecast on page 6 includes softening and adjustments centered on short-term freight rates based on the assumption that there will be a continued relaxation of the tight balance between supply and demand that has continued until the first half of this year, due to the gradual resolution of the decline in short-term freight rates and demand and supply chain disruptions in the second half of the fiscal year. As a result after-tax profit for the full year is forecast to be 15.269 billion dollars. This is a year-on-year deterioration of 1.487 billion dollars. As renewals of medium- to long-term contracts approach, a certain degree of adjustment in movements of short-term freight rates is inevitable, and we will monitor future movements for signs of where the inflection point is.
B-3. Key Factors of Improvement for “K” Line’s Own Businesses in FY2022
With regard to key factors of improvement for “K”Line’s own businesses, in a comparison with FY2021 results, ordinary income in “K”Line’s own businesses is forecast to improve by 62.5 billion yen from 45.5 billion yen in the previous fiscal year to 108.0 billion yen. This includes 26.7 billion yen due to the impact of foreign exchange and 4.8 billion yen due to market conditions, cargo conditions and other factors, meaning that 31.5 billion yen accounting for around half of the improvement is due to external factors such as foreign exchange and market conditions. The remaining 31.0 billion yen is due to effects including various measures and structural reforms implemented to improve business profitability. With regard to Car Carrier Business, we disposed of vessels with poor cost performance such as small vessels and aged vessels when market conditions dipped significantly due to the pandemic in 2020, and proceeded to switch to large size vessels and also reorganized and revised the route network with emphasis on profitability. Furthermore, we have steadily engaged in initiatives for high-and-heavy cargo such as construction machinery that we have been working on, and initiatives to restore freight rates associated with the improvement in the balance of supply and demand. The effects have materialized, and Car Carrier Business accounts for a large portion of the 45.0 billion yen improvement in the overall Product Logistics segment excluding Containership Business. In addition, profitability has improved in the Short Sea and Coastal Business partially due to a recovery in demand after the pandemic.
C. Status and Progress of Medium-term Management Plan
C-1. Capital Policy Progress
With regard to progress of the capital policy, the Medium-term Management Plan we announced in May 2022 states that we will first remain conscious of optimal capital structure at any time while ensuring capital efficiency and financial soundness, and making the investments required for enhancement of corporate value based on cash flow. Based on this, our basic policy is to seek the enhancement of medium- to long-term corporate value by actively providing shareholder returns including share buy-backs. We presented a policy to implement shareholder returns of 400-500 billion yen for the FY2022-2026 period of the current Medium-term Management Plan, and additional returns of 100 billion yen or more for FY2022, in addition to the interim dividend and year-end dividend announced in August.
We recently determined that it is preferable for the additional returns to be in the form of share buy-backs for the entire amount, considering the scale. Considering the impact on the liquidity and market price of our shares, we approached major shareholders Effissimo Capital Management Pte Ltd. and Mizuho Bank, Ltd. to seek their participation in the share buyback transaction. After making our request regarding our plan to buy back a total of 100.0 billion yen, we confirmed that both companies’ intention to sell their “K” LINE stock in quantities roughly corresponding to their respective holding ratios with respect to the total number of “K” LINE shares to be acquired by the Company.
This arrangement should mitigate the potential impact on the stock liquidity and market stock price of “K” LINE to some extent. We have also determined that it would be beneficial for us and our shareholders to give shareholders other than Effissimo and Mizuho Bank the opportunity to sell their shares back to the Company, on the stock exchange. Therefore, we have also decided to acquire “K” LINE stock.
C-2. Shareholder’s Return Policy（FY2022）
The share buy-backs will be carried out with 100 billion yen as the maximum acquisition amount and the 35,236,000 shares as the maximum number of shares to be acquired. The method of acquisition will be purchase through off-auction own share repurchase trading (ToSTNeT-3) and auction market on the Tokyo Stock Exchange carried out during the period from November 8, 2022 until March 31, 2023. In principle, we plan to cancel the treasury shares to be acquired. With regard to dividends, as already announced in August, the interim dividend is 300 yen per share based on the standard prior to the share split, and we intend to pay a year-end dividend of 300 yen per share based on the standard prior to the share split, which is 100 yen per share after the share split. Furthermore, we will also consider additional returns including the year-end dividend with consideration for future operating cash flows and funding needs based on results in the second half of the fiscal year and the policy on shareholder returns.
C-3. Overview of Progress on the Medium-term Management Plan
In the current Medium-term Management Plan, we have established the Company’s growth strategy with low carbon and decarbonization as opportunities for growth and will aim to strengthen the revenue base through concentrated allocation of management resources with Coal and Iron Ore Carrier, Car Carrier, and LNG Carrier Businesses as the three businesses with the role of driving growth. In this respect, environmental measures including the provision of a variety of new technologies, and customer-oriented initiatives aimed at low carbon and decarbonization are extremely important. For this reason, we are proceeding with organizational changes such as strengthening of the sales system and establishment of new teams. With regard to our functional strategy, we are steadily moving forward with development and operational preparations for Seawing utilizing wind power to significantly contribute to lower carbon. Furthermore, expansion and strengthening of our Singapore office are progressing as planned to respond to diverse needs through a community-based and customer-oriented approach in expanding Asian markets for safe operations and ship management, which are vital for “K” Line. We are proceeding with digital transformation in safe operations and ship quality management, which are vital for “K” Line, by enhancing Wi-Fi functions enabling the utilization of a variety of devices by people working on vessels, and implementing cybersecurity measures on our vessels. In human resource development, securing and developing human resources supporting our business portfolio strategy are vital initiatives including diversification, and are being steadily implemented.
To ensure everyone understands the details and progress of the three businesses with the role of driving the growth of “K” Line, we intend to hold a separate business briefing in around May next year.
C-5. Business Strategy Progress：Role of driving growth
In Coal and Iron Ore Carrier Business, we are working with customers in a variety of ways to address need to change fuels including not only LNG-fueled vessels but also next-generation zero emission vessels. We have concluded memoranda of understanding on joint research and comprehensive cooperation aimed at decarbonization with Emirates Global Aluminium (EGA), which is the largest aluminum refining company in the Middle East and has done business with “K” Line for over 30 years, and JSW, which is a leading steel company in India. India is a country with vast territory and an underdeveloped land transport network, putting coastal shipping in a very important position, and JSW has concluded a medium- to long-term agreement with “K” Line as a partner in coastal shipping as well. Furthermore, we will begin installing the first Seawing on a Capesize bulk carrier in December this year, and have decided to proceed with installation of the second Seawing on an LNG-fueled vessel two years later. In addition, we are also energetically proceeding with development and initiatives for ammonia-fueled vessels using a Green Innovation Fund Project of the New Energy and Industrial Technology Development Organization (NEDO) in joint research with customers.
C-6. Business Strategy Progress：Role of driving growth
In Car Carrier Business, as the balance between supply and demand tightens, “K” Line is expanding transportation infrastructure even during the pandemic with OEMs who are existing customers, while capturing new BEV demand centered on China to raise profitability. We are also continuing with restoring freight rates and steady initiatives in high-and-heavy cargo such as construction machinery. Furthermore, like Coal and Iron Ore Carrier Business, we have established a new team to newly strengthen systems for organizational sales and environmental sales to discuss collaborative systems with customers including the utilization of environmentally friendly and new zero-emission fuels. We have begun specific talks with several customers, and will disclose any specific developments. We began operation of our first terminal for finished vehicles in Japan this April at Yokohama Port, and it is currently operating at full capacity, being utilized not only for Japanese vehicles, but also transshipment of foreign vehicles.
C-7. Business Strategy Progress：Role of driving growth
In LNG Carrier Business, we are steadily capturing expanding demand in Asia. This morning, we also announced additional agreements for five vessels, and we have completed the conclusion of a large long-term time charter contracts and shipbuilding contracts for a total of 12 vessels for QatarEnergy, which boasts the largest business in the world. Furthermore, we have already delivered two medium-sized vessels for PETRONAS, a Malaysian state-owned oil and gas company. As we work on a variety of other projects, our plans to expand the size of our fleet from the current level of 44 vessels to around 70 vessels by 2025, based on medium- to long-term agreements, are proceeding as scheduled.
C-8. Business Strategy Progress
In Short Sea and Coastal Business, Kawasaki Kinkai Kisen, which was made into a wholly owned subsidiary this June, has formed working groups including major domestic affiliates on several themes and is working with them to maximize the creation of synergies as a leader of group companies in the Company’s domestic transportation and marine transportation. We will inform you once results are produced.
C-9. Business Strategy Progress
In Containership Business, the most important thing for our company is to continue to supply human resources supporting both management and operations to ONE, and we will strengthen our involvement in the governance of ONE as a shareholder. This includes strengthening the crew skills and ship management capabilities of ONE, which will establish its own fleet in the future. As a shareholder, we will continue to strengthen support for the formulation and execution of business plans aimed at the enhancement of medium- to long-term corporate value of ONE.
In new businesses, we are implementing a joint project with Maersk, the Maritime and Port Authority of Singapore (MPA), Keppel corporation, and Sumitomo Corporation for the realization of ammonia fuel supply, which is a strong candidate for next-generation zero emissions in Singapore. In the business of Offshore support vessel for wind power generation installations, we have not only signed a memorandum of understanding, but also started specific discussions on collaboration in fleet management of offshore wind power support vessels with Penta-Ocean Construction, which leads marine construction in Japan.
C-12. External Environment Surrounding “K” Line Group
The business environment surrounding shipping is becoming increasingly uncertain. In order to cool the overheated economy and inflation sparked by the labor shortage in the United States, the Federal Open Market Committee (FOMC) announced monetary policy to raise interest rates yesterday, and there are concerns that this will put downward pressure on the economy. Furthermore, energy resource prices are rising due to the deterioration of natural gas supply caused by the Russia-Ukraine conflict. In addition, the zero-COVID policy of China is currently expected to continue until the National People's Congress is held next March, but there are concerns about whether it will be lifted shortly after that. The Company needs to monitor these as risks with a significant impact on the economic environment and the business environment. We will continue to steadily respond to these as we have done in the past. In particular, we have already completed fleet optimization and the disposal of high-cost vessels in the previous fiscal year as responses based on the Medium-term Management Plan, and we will strengthen market resilience because we have introduced methods to properly manage exposure of each segment. We will continue to strengthen earning capacity through the allocation of capital according to the characteristics of each business by firmly implementing our portfolio strategy. Based on this, we aim to be a company that is constantly chosen by implementing initiatives with customers aimed at low carbon and decarbonization in this energy mix transition period. This policy remains largely unchanged.
