Financial Highlights Brief Report for 3rd Quarter FY2022

A. Financial Highlights for 3rd Quarter FY2022

A-1. Financial Results for 3rd Quarter FY2022

 Looking at the third quarter results, operating revenues were 728.8 billion yen, operating income was 80.6 billion yen, ordinary income was 641.9 billion yen, and net income attributable to owners of parent was 638.2 billion yen.

 As for the main financial indicators, equity capital improved by 592.8 billion yen from the end of the previous fiscal year to 1,477.4 billion yen, and interest-bearing liability decreased by 47.8 billion yen to 375.7 billion yen. Meanwhile, DER improved by 23 points to 25%, and the equity ratio increased by 15 points to 71%.


A-2. Financial Results for 3rd Quarter FY2022 by Segment

 Let’s go over the ordinary income figures for the third quarter by segment. For Dry Bulk, ordinary income was 23.1 billion yen, representing an improvement of 8.3 billion yen compared to the same period last year. The Energy Resource Transport segment posted 9.3 billion yen, an improvement of 7.2 billion yen year on year. Product Logistics overall posted 615.9 billion yen, an improvement of 190.6 billion yen. Containership Business recorded 564.6 billion yen, an improvement of 148.7 billion yen year on year. For the Product Logistics segment excluding Containership Business, ordinary income was 51.3 billion yen, an improvement of 41.9 billion yen year on year. We will cover the market conditions and general conditions later on.



B. Forecast and Initiatives for FY2022

B-1. Forecasts for FY2022 and Key Factors

 Looking at the fiscal 2022 full-year forecast, operating revenues are expected to be 940.0 billion yen, operating income will be 85.0 billion yen, ordinary income will be 660.0 billion yen, and net income attributable to owners of parent will be 650.0 billion yen. An exchange rate of 134.17 yen to the US dollar is assumed for the full year, along with a bunker price of 772 US dollars per metric ton.

 The operating revenues forecast of 940.0 billion yen represents an increase of 183.0 billion yen year on year, and operating income is expected to increase by 67.4 billion yen year on year to 85.0 billion yen. The high levels of these two figures stem from the fact that sales and profits in “K” Line’s own businesses have been increasing. Incidentally, “K” Line’s record for operating revenues is 1,352.4 billion yen in the fiscal year ended March 31, 2015, and the operating income record is 129.6 billion yen for the fiscal year ended March 31, 2008. Ideally, the aim is to continue growing our own businesses under the medium-term management plan and break those records. The forecasted ordinary income figure of 660.0 billion yen and net income figure of 650.0 billion yen have been revised downward, but they are still records.

 Both ordinary and net income have been revised downward by 50.0 billion yen compared to the figures announced in the second quarter. This is due to three factors, as described in the last line of the Key Factors in Forecasts for FY2022. The biggest factor is the downward revision of ONE's equity-method profit forecast, caused by a downturn in the containership market. Next, the assumed yen-dollar exchange rate at the end of the fiscal year was revised from 130 yen to 128 yen in light of the yen’s current appreciation, so ordinary income has been revised downward. Lastly, due to the rapid appreciation of the yen from its low at around 150 yen to the US dollar in the third quarter, “K” Line has recorded temporary foreign exchange losses in the valuation of some of its foreign-currency denominated assets. Since this has already been finalized, any further fluctuations in the yen-dollar exchange rate will not have an impact on this. Due to these three reasons, a total downward revision of 50.0 billion yen has been made. Rather than declining, earnings from “K” Line’s own businesses improved compared to the second quarter.

 Exchange rate volatility is still having a major impact, with ordinary income fluctuating by 4.8 billion yen with a one yen shift in the exchange rate. On the other hand, bunker price fluctuations of 10 yen will have no impact on ordinary income. Since the bunker adjustment factor applies to all vessel types, “K” Line has positioned itself so that it is not affected by fluctuations in bunker fuel prices.

 Regarding shareholder returns, the previous year-end dividend forecast was 100 yen per share. This time, however, the year-end dividend forecast has been increased by 200 yen to 300 yen per share. Since an interim dividend of 100 yen has already been paid, the entire full-year dividend is expected to be 400 yen per share on an after stock split basis. On a before stock split basis, the dividend will be 1,200 yen per share.


B-2. Forecasts for FY2022 by Segment

 Here are the full-year forecasts by segment. Ordinary income is expected to be 24.0 billion yen for Dry Bulk, 10.0 billion yen for Energy Resource Transport, and 636.0 billion yen for Product Logistics overall. Of this, Containership Business is expected to achieve 570.0 billion yen, and the Product Logistics segment excluding Containership Business is expected to reach 66.0 billion yen in ordinary income.

 There are also negative seasonal factors at play for Dry Bulk, and market conditions are currently on a weakening trend. The medium-term future of steel demand in China remains uncertain. Moreover, there are concerns that market conditions could worsen due to rising inflation in Europe and the United States, as a negative factor. Meanwhile, the impact of the Russia-Ukraine situation is having some favorable effects. The number of ton-miles for dry bulk ocean transport has increased since the war began, and this is likely to be a positive factor for the dry bulk market. Next, on the supply side, only a limited number of vessels have been delivered, and shipping companies are refraining from placing orders. Accordingly, the supply and demand situation appears to be OK. As for the future outlook, the current seasonal factors and the extremely large decline due to uncertainty in the Chinese economy will likely disappear. The general view is that the outlook will strengthen toward the latter half of fiscal 2023. Recently, the IMF reviewed the world's GDP growth figures and revised China's upward by 0.8 percentage points to 5.2%. “K” Line’s policy is to efficiently allocate existing fleets by managing exposure while keeping an eye on factors such as these.

 In the Energy Resource Transport segment, most of the vessels in operation are under medium- and long-term contracts, and the impact of current market conditions remains extremely limited. Therefore, we believe that the priority is to maintain safe operations and avoid anything that might require a vessel to be taken out of service.

 A negative factor for Car Carrier Business is the continuing global shortage of semiconductors and parts. As a result, vehicle production is not as high as it might otherwise be. In addition, concerns remain about sluggish sales especially in Europe, due to the impact of the war in Ukraine.

 Please have a look at page 15 of the material. Given these circumstances, the forecasted number of vehicles transported by “K” Line car carriers for fiscal 2022 is 3,252,000. This is higher than the 2,886,000 vehicles transported in fiscal 2021. Although the figure is not included in the material, in fiscal 2019, the annual number of vehicles transported before the pandemic was 3,328,000. So the pre-pandemic level has not yet been reached.

 One positive factor for car carrier profitability is the general shortage of car carriers, and vessel supply is tighter than ever. Therefore, from a supply and demand perspective, the predominant view is that the current firm market conditions will continue into fiscal 2023. On the other hand, given the shortage of vessels, securing a fleet that can meet customer demand will be a major issue.

 In Logistics and Short Sea and Coastal Businesses, performance has been solid as a result of the pandemic impact in the first half. With the waning of pandemic effects in the second half, we expect the Forwarding and Short Sea and Coastal businesses to soften slightly.

 I will explain the containerships outlook when I talk about ONE.


B-3. Key Factors of Improvement for “K” Line’s Own Businesses in FY2022

 Here are the key factors for the improvement for “K” Line’s own businesses in fiscal 2022. These are the factors that determined the degree of improvement for “K” Line’s own businesses in the forecast for fiscal 2022 compared to fiscal 2021, and the reasons behind it. Ordinary income from “K” Line’s own businesses was 45.5 billion yen in fiscal 2021, and we expect it to increase to 100.0 billion yen at the end of this fiscal year. Excluding the impact of exchange rate fluctuations, the improvement in earnings is expected to be 40.6 billion yen, or 54.5 billion yen including foreign exchange impact. This 54.5 billion yen was predicted to be 62.5 billion yen in the second quarter announcement material, so it is slightly less than the previous forecast. A breakdown of the 54.5 billion yen ordinary income increase is shown at the bottom of the page. The first factor is the impact of exchange rate fluctuation, which is 13.9 billion yen, while the second is the improvement in “K” Line’s own businesses profitability, which is 33.4 billion yen. The third is an improvement of 7.2 billion yen due to improved market conditions, and other reasons. The dry bulk market has deteriorated compared to the previous year, resulting in a decrease of 13.7 billion yen. Even including that, the analysis shows the 7.2 billion yen improvement thanks to market conditions and other reasons as a whole.

 Looking at the reasons for improvement in each business area, the disposal of uneconomical vessels in Dry Bulk Business was completed at the end of the previous fiscal year, which enabled us to achieve fleet optimization and cost reduction. In the Energy Resource Transport segment, withdrawal was completed from low-profit areas such as the offshore support vessel and chemical tanker businesses. This allows us to now aim for stable earnings by accumulating medium- and long-term contracts. In the Car Carriers business, we secured space supply capacity and fleet competitiveness mainly by obtaining large size vessels. Given the current tight supply situation, we have been able to optimize and restore freight rates each time a contract is renewed. This is why profitability has been recovering. With regard to Short Sea and Coastal Business, we have just started to generate Group synergies after making it a wholly-owned subsidiary. The benefits of this are expected to steadily increase, and it should improve earnings going forward.



C. Status and Progress of Medium-term Management Plan

C-1. Shareholders Return Policy UpdateFY2022

 Next is the latest update on returns for shareholders. I explained the general situation earlier, and so far “K” Line has announced an interim dividend of 100 yen per share and a year-end dividend forecast of 100 yen. We now plan to increase the year-end dividend forecast by 200 yen to 300 yen per share, for a full-year dividend of 400 yen. This dividend increase is based on “K” Line’s basic approach for shareholder returns, outlined in its medium-term management plan. To secure cash inflow for the period covered by the medium-term management plan, which ends in fiscal 2026, we need to tackle issues such as enhancing corporate value and increasing investment in our strength areas through portfolio management. Therefore, our basic approach is to give top priority to investment in these areas, and ensure financial stability, before returning any surplus above appropriate capital levels to shareholders. Although this year is the first year of the new medium-term management plan, fortunately, the profit level and operating cash flow are significantly higher than the forecast at the beginning of the fiscal year. This led to the current announcement of an increase in dividends, with the aim of optimizing the capital structure and improving capital efficiency. We have also announced that we will acquire “K” Line’s own shares up to either a maximum value of 100.0 billion yen, or a total maximum of 35,236,000 shares. This is currently being carried out. As of January 31, 2023, “K” Line had completed acquisition of 31.79 million of its shares, paying 78.4 billion yen, or 78.4% of the target level. As previously announced, in principle, the acquired shares will be cancelled.


C-2. External Environment Surrounding “K” Line Group

 Please have a look at page 12 of the material. Regarding the broader business environment, we believe there are three main risks for our company. The first is fragmentation of the global economy, the second is soaring or volatile energy prices, and the third is the uncertain direction of the Chinese economy now that the zero-COVID policy has ended. Fortunately, we have completed disposal of uneconomical vessels and have withdrawn from unprofitable businesses, which would have generated large losses if any of the three risks were to materialize. These measures were not taken just to mitigate the three risks, but as part of structural reforms to advance our management plan. Therefore, “K” Line is ready to withstand possible market turmoil to some extent. Based on portfolio strategy in our medium-term management plan, we will concentrate our management resources on competitive business areas even if such risks were to materialize. There is no change in our policy to develop our business by capturing new demand in the shipping industry for low-carbon and decarbonized transport.



Ocean Network Express Financial Results for FY2022 3rd Quarter

 ONE posted an after-tax profit of 2.768 billion US dollars in the third quarter. This represents a decrease of 2.12 billion dollars compared to the same period last year, and is close to half of last year’s figure. On the other hand, compared to the amount forecasted in November 2022, the result represents an increase.


 To explain this, we need to begin with the demand situation. Lifting started to slow in the second quarter, which should have been the peak period, and the trend became more pronounced in the third quarter. The first reason behind this is that product inventory has been accumulating in North America and US imports have been sluggish. Meanwhile in Europe, inflation and soaring energy prices are causing a decline in consumer confidence, and cargo movements seem to be dropping as a result. Please refer to the table showing liftings and utilization rates by trades. The peak for Asia-North America east bound lifting is usually in the second quarter. Lifting in this period was 578,000 TEUs, mostly unchanged from 577,000 TEUs in the first quarter, and no peak activity was seen. Then, in the third quarter, the utilization rate fell to 80%. Looking at Asia-Europe west bound lifting however, in fiscal 2021 we were maintaining roughly 400,000 TEUs per quarter, but from the second quarter of fiscal 2022, it dropped to 300,000 TEUs. The utilization rate itself remains above 90%, but this is the figure due to changes in fleet capacity. Meanwhile, on the supply side, port congestion is dissipating worldwide, and service frequency is increasing, resulting in a substantial increase in supply. About half a year ago, approximately 15% of the total fleet was waiting in a port, but that figure has now decreased to 2% or 3%.


 With this situation, average freight rates are now dropping. For example, the index for Asia-North America east bound freight peaked only recently in the second quarter of fiscal 2022. After reaching 389 in that period, it fell to 264 in the third quarter, which is a fairly fast decline. On the other hand, the index for Asia-Europe west bound freight peaked at 552 in the fourth quarter of fiscal 2021. This remained at the same level for some time, before falling sharply to 303 in the third quarter. However, the rate of decline in freight rates has slowed, and we believe that freight rates have likely bottomed out for major routes from Asia to North America and Europe.


 Regarding ONE's full-year outlook, the company expects the after-tax profit for fiscal 2022 to be 14.728 billion US dollars. This is a downward revision of 542 million US dollars from the previous forecast in November.


 Please have a look at page 5 for information on the company’s response to this situation. Whether transport volume will return or freight rates will rise again remains uncertain. However, what ONE can do now is to increase blank sailings, as shown in “Operation excellency” in the table. We are also considering the option of increasing economic efficiency by sailing slowly around the Cape of Good Hope instead of passing through the costly Suez Canal. This is a rather preferable option to keeping ships waiting and idling, which causes vessel condition to deteriorate and costs to increase. Accordingly, slow steaming will be the way to go. Moreover, there is now a surplus of containers after being temporarily in short supply. Therefore, it is best to take steady steps now to return our surplus leased containers, and bring empty containers back to China and other Asian ports, from the consumption markets of Europe and America.


 There is a strong sense of uncertainty about the containership market in fiscal 2023 and beyond, which will be a crucial period. Looking at supply and demand, we expect market growth of around 0% to 3% in fiscal 2023. Looking only at new vessel delivery, supply is likely to grow by about 9%. However, when slow-steaming and vessel scrapping is factored in, supply might only grow by 5% to 7%. Assuming a fairly conservative demand growth of 0%, which is the same level as this year, the estimated supply-demand gap is around 5% to 7%. However, new containerships will be completed starting in 2024 or from around the end of fiscal 2023, so we will need to review our approach to some extent at that stage.