Financial Highlights Brief Report for Fiscal Year 2022

A. Financial Highlights for Fiscal Year 2022

A-1: Financial Results for FY2022

 In fiscal 2022, operating revenues came in at 942.6 billion yen, operating income at 78.8 billion yen, ordinary income at 690.8 billion yen, and net income attributable to owners of parent at 694.9 billion yen. The full-year average exchange rate was 135.07 yen to the US dollar. The exchange rate at the end of the fiscal year was 133.53 yen to the US dollar. The average bunker price was 769 US dollars per metric ton.

 First, operating income improved by 61.1 billion yen from the previous fiscal year, mainly due to increased cargo demand in Dry Bulk and improved performance in Product Logistics including Car Carrier Business. As for ordinary income, Containership Business operated by equity-method affiliate OCEAN NETWORK EXPRESS (ONE) experienced favorable market conditions in the first half of the fiscal year owing to strong cargo demand. However, in the second half of the fiscal year, market conditions, especially short-term rates, deteriorated primarily due to a decline in demand, particularly in the European and American routes, and improvements in vessel utilization rates as a result of resolving supply chain disruptions. Consequently, the full-year results fell slightly below those of fiscal 2021. As such, whereas operating income improved by 61.1 billion yen over the previous fiscal year, ordinary income and net income attributable to owners of parent only improved by 33.3 billion yen and 52.4 billion yen, respectively.

 Looking at the key financial indicators, equity capital was 1,515.3 billion yen, interest-bearing liability was 351.6 billion yen, DER was 23%, and the equity ratio was 74%. As for shareholder returns, the year-end dividend will be 300 yen per share, as announced earlier. Combined with the interim dividend of 100 yen / share, this brings the full-year dividend to 400 yen per share. Out of the 35,236,000 shares that were bought back, 33,536,000 or around 95% were cancelled on March 29, 2023. This is about 11.8% of the total number of shares outstanding before the cancellation. The remaining 1,700,000 shares or around 5% will be allocated as compensation for the BBT( Board Benefit Trust).


A-2: Financial Results for FY2022 by Segment

 In the Dry Bulk segment, ordinary income was 21.6 billion yen, representing a deterioration of 2.1 billion yen year on year. Although performance was strong in the first half, partly due to a tightening of shipping capacity supply caused by port congestion arising from COVID-19 measures, cargo movements stagnated in the second half due to China’s zero-COVID policy.

 The Energy Resource Transport segment resulted in ordinary income of 9.8 billion yen, representing an improvement of 5.0 billion yen compared to the previous fiscal year. This was due to structural reforms in the previous fiscal year, such as the withdrawal from the offshore support vessel business and the sale of the chemical tankers, as well as efforts to restore fleet cost competitiveness.

 With regard to the Product Logistics segment, shortages of semiconductors and other parts affected some production and shipments in Car Carrier Business. However, profitability improved owing to better margins and operating efficiency resulting from strong cargo demand, especially in China, as well as successful efforts to restore freight rates. Overall, Product Logistics was up 29.2 billion yen compared to the previous fiscal year to 670.0 billion yen, but Containership Business was down 16.4 billion yen. In contrast, the other businesses in the Product Logistics segment improved by 45.6 billion yen.


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

 Excluding Containerships, “K” Line’s own businesses improved to 94.0 billion yen before headquarters adjustments compared to 45.5 billion yen in the previous fiscal year. About 14.7 billion yen of this was attributable to temporary foreign exchange factors. Excluding these, the result was improved by 33.8 billion yen compared to the previous fiscal year. Going further and excluding market factors, the result was a 60% improvement over the 45.5 billion yen of the previous fiscal year.

 As for the Dry Bulk segment, fleet optimization through structural reforms and efficient allocation of vessels through exposure management made up for the deterioration of market conditions. In the Energy Resource Transport segment, earnings improved owing to withdrawal from unprofitable businesses and enhancement of cost competitiveness.

 In Car Carrier Business, we worked on restoring freight rates as supply and demand tightened and switched to larger vessels to make the fleet more cost competitive. We also continued our efforts to capture high and heavy cargo demand and reorganize our route network, and such efforts are gradually contributing to profitability.

 As for Short Sea and Coastal, Port, and Logistics Businesses, improved freight rates benefitted Logistics as well as Containerships. In addition, Kawasaki Kinkai Kisen, which was made a wholly owned subsidiary last June, is working to maximize synergy, and our withdrawal from and liquidation of unprofitable service routes resulted in improved profitability.



B. Forecast and Initiatives for Fiscal Year 2023

B-1. Forecasts for FY2023 and Key Factors

 In fiscal 2023, we expect operating revenues of 870.0 billion yen, operating income of 85.0 billion yen, ordinary income of 130.0 billion yen, and net income attributable to owners of parent of 120.0 billion yen.

 We expect the average exchange rate for the year to be 125.29 yen to the US dollar, but our assumption for the second quarter onward is that it will be 125 yen to the US dollar. We expect the average bunker price to be 679 US dollars per metric ton. Looking at the impact of fluctuations in exchange rates and bunker prices, a one yen change in the exchange rate would have an impact of 1.5 billion yen, and a 10 dollar change in bunker prices would have an impact of plus or minus 100 million yen.

 Operating income is expected to improve by 6.2 billion yen from the previous fiscal year to 85.0 billion yen. This is based on our expectation of steady growth in Product Logistics, mainly in Car Carrier Business, despite the impact of weaker market conditions in the Dry Bulk segment. We expect 130.0 billion yen in ordinary income as the containership market gradually stabilizes. I will discuss shareholder returns in more detail later.


B-2. Forecasts for FY2023 by Segment

 Regarding Dry Bulk, the market for Cape size vessels saw a sharp drop in the second half of the previous fiscal year, but we expect a gradual recovery going forward against a backdrop of resumed economic activity in China and a limited number of vessels being delivered. Meanwhile, we expect performance of Panamax and smaller size vessels to be slightly lower than in fiscal 2022. In fiscal 2022, some of the contracts signed in fiscal 2021 during high market conditions remained in place. These contracts, however, will go away in fiscal 2023. As a result, the overall forecast is for 12.0 billion yen in ordinary income, a deterioration of 9.6 billion yen from the previous fiscal year.

 As for Energy Resource Transport, the temporary foreign exchange factors that contributed in the previous fiscal year will no longer be present. However, we have secured stable earnings based on medium- to long-term contracts, so ordinary income is expected to decrease by 1.8 billion yen from the previous fiscal year to 8.0 billion yen.

 With regard to Product Logistics, some risks of global economic stagnation remain in Car Carrier Business. Nevertheless, there will be additional improvement in auto parts supply, especially semiconductors, and the recovery in production and shipments compared to the previous fiscal year will continue. Moreover, we will continue making progress on freight rate restoration. In Logistics and Short Sea and Coastal, as with Containerships, income will decrease due to the weakening of the market associated with the normalization of supply chains and the deterioration of the dry bulk market for small and medium-sized vessels.

 However, this will be offset by Car Carriers, resulting in an overall improvement of 5.4 billion yen from the previous fiscal year. Combined with Containerships, we expect ordinary income of 118.0 billion yen, down 552.0 billion yen from the previous fiscal year.

 Note that the earnings forecast for Containerships has been prepared based on careful discussions with ONE on market trends, annual contract renewals, and other recent developments. Since last summer, the improvement in vessel utilization rates following the normalization of the supply chain has led to a substantial increase in supply. On the other hand, previously strong demand for consumer goods has fallen sharply in the U.S. due to the drop in excess savings, inflation, soaring energy prices, and the impact of the resulting various government policies, such as interest rate hikes. Since last September, there has been a marked drop in cargo movement from Asia to the US and Europe, a situation that has continued into this year. Incidentally, cargo movements in January and February of this year were down 25% from the previous fiscal year for North America and 13% for Europe. At present, we assume that this situation will continue for the foreseeable future due to inventory adjustments associated with declining demand.

 Meanwhile, US National Retail Federation projects a return to pre-COVID-19 levels by July or August, roughly a year since last year’s decline. As we have seen, the market for short-term rates such as SCFI rapidly dropped to pre-COVID-19 levels due to substantial deterioration of the supply-demand balance. However, THE Alliance to which ONE belongs and various other companies have been flexibly addressing demand by reducing service, so the short-term rates market bounced back in April after bottoming out in March. For Asia-North America routes, freight rates have been restored to 600 US dollars/FEU, equivalent to approximately 40–50%, and the level of annual contract renewals is at a level that ensures profitability.

 In light of these latest circumstances, other companies in the industry are expecting to be profitable at the operating income level as already announced. Overall, ONE is expected to record income of approximately 1.2 billion US dollars, and we account for 31% of that.

On the other hand, heading into the second half of the fiscal year, it is certain that new ship deliveries will increase gradually. Although we expect to complete around 9% of new ship deliveries this year, there will be delays as usual. Additionally, there will be a substantial reduction in supply due to slow steaming to comply with CII environmental regulations.

 Furthermore, we expect a resumption of scrapping, which has been at a very low level for the past two years. These factors will contribute to a 3–4% reduction in the overall supply.

 As I mentioned earlier regarding demand, the first half of the fiscal year has seen a significant drop. As such, we expect the market to gradually recover starting in the summer, but we expect that it will be mostly flat looking at the whole year. However, our forecasts assume that, at the very least, second-half demand will surpass the fiscal 2019 level.


B-3. Key Factors for “K” Line’s Own Businesses in FY2023

 The 94.0 billion yen in ordinary income in fiscal 2022 would have been 82.5 billion yen excluding temporary factors such as the exchange rate. In fiscal 2023, we expect ordinary income of 88.0 billion yen, equivalent to an improvement of approximately 5.5 billion yen, in our own businesses.



C. Status and Progress of Medium-term Management Plan

C-1. Changes in the Business Environment

 The business environment remains uncertain due to various factors. These include the economic separation caused by the friction between the US and China since last year and the Russia’s war in Ukraine, the downward pressure on the economy caused by inflation, soaring energy prices, and interest rate hikes, and the shifting energy policies of various countries. Uncertainty is increasing and the outlook is unclear, but we believe it is important to respond flexibly to changes in the business environment in the short term while firmly promoting the initiatives set forth in the Medium-term Management Plan announced last year in the medium to long term. We will achieve growth together with our customers, considering the emission reduction and decarbonization of our own companies and society as a business opportunity. By continuing to allocate resources in line with our portfolio strategy, which leverages our strengths, we will also strengthen our market resilience. As a shipping company that supports the infrastructure of society, we will enhance our corporate value by thoroughly strengthening our safety and quality management systems. There is no change to this plan.


C-2. [Capital Policy]: Capital Policy Progress

 Under the Medium-term Management Plan, our goal is to continually maintain awareness of our optimal capital structure 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. Our commitment to maintaining both capital efficiency and financial soundness also remains unchanged.

 We reviewed the five-year projections for the Medium-term Management Plan, and in light of the improvement in our own businesses, mainly in the Product Logistics segment, we expect operating cash flows to be around 200 billion yen higher on a cumulative basis than the previous fiscal year’s announcement. Out of this 200 billion yen or so, we will first allocate 110 billion yen to investments necessary to improve corporate value. As I have been saying, without relaxing our investment discipline, we will allocate 80% of our cash flow to businesses that will help drive growth. Of this, we will also allocate around 60% to environmental investments to establish a competitive advantage. Meanwhile, the remaining 100 billion yen will be used for additional shareholder returns. The cumulative total of shareholder returns was initially planned to be at least 400 billion yen and up to 500 billion yen for the period of the Medium-term Management Plan, but now we will raise this to a minimum of 500 billion yen. I will explain this later.


C-3. [Capital Policy]: Earnings Targets and Performance Progress

 Part of our capital policy is to build earning power. We had initially established a plan to achieve ordinary income of 140 billion yen by 2026. Boosted by market conditions, however, we were able to get off to a good start in the first year of the Medium-term Management Plan. We also expect to exceed the numbers from the plan in our own businesses in the second year of the plan, primarily in the Product Logistics segment. As for our final-year target of 140 billion yen in ordinary income, we will keep working on firmly achieving it ahead of schedule and maintaining and further expanding this number.


C-4. [Capital Policy]: Cash Allocation

 As I mentioned earlier, operating cash flows during the period of the Medium-term Management Plan will exceed the previous announcement by 200 billion yen, going from 1,000 billion yen to 1,200 billion yen. As such, we plan to increase shareholder returns from the previously stated minimum of 400 billion yen and maximum of 500 billion yen to a minimum of 500 billion yen. We plan to flexibly / responsively invest in growth, provide additional returns, and allocate resources based on comprehensive consideration of investment opportunities and performance trends.


C-5. [Capital Policy]: Business Investment Plan

 In regard to the business investment plan, we have not changed our previous policy of allocating 80% to helping drive growth while maintaining investment discipline and making investments in light of risk and return. The majority of this 110 billion yen increase will be allocated to three businesses that will drive growth. During the past year, we have promoted various initiatives in line with the Medium-term Management Plan, and that has increased the likelihood of contracts with customers for some projects. Based on those circumstances, these investment plans have been incorporated into our strategy. There are some exceptions. As already announced, we are participating in the world’s first liquefied CO2 transport project in Norway and in relation to this, several specific projects have arisen. We are partially allocating resources to such specific projects. Basically, however, we will be investing in three businesses that will help drive growth and allocating our cash flows to them. As for coal and iron ore transport, we will strengthen our market resilience by utilizing chartered vessels while at the same time addressing the environmental needs of growing markets. We will also develop and provide our target customers in Car Carrier Business with a competitive fleet that is also environmentally friendly while ensuring the flexibility of the fleet. As for LNG Carriers, in addition to Qatar, which is our largest customer, we have several specific projects in the pipeline in emerging areas of Asia, where we expect future growth. This update to our investment plan was made to account for these projects.

And now for the details on our environmental investments, which account for around 60%. These are investments necessary to promote the emissions reduction and decarbonization of our company and society as set forth in our Medium-term Management Plan, such as alternative fuel vessels and businesses that contribute to emissions reduction. We hope to use these investments to establish a competitive advantage. In regard to the most recent investment review, the exchange rate assumption has been revised from 110 yen to 120 yen, and we have taken into account the increased investment in yen associated with this development. Our investment policy is to exercise restraint during favorable times and to be strategic when market conditions deteriorate. Based on this policy, we will continue to manage our business with an awareness of risk and return and cost of capital without relaxing our investment discipline as we execute investments at the right time.


C-6. [Capital Policy]: Return to Shareholders

 We will be increasing the total amount of return to shareholders during the period of the Medium-term Management Plan to at least 500 billion yen. Looking back, we returned around 250 billion yen to shareholders in fiscal 2021 and fiscal 2022. On top of this, we plan to return at least 250 billion yen during the remaining period of the Medium-term Management Plan from fiscal 2023 on. We raised the basic dividend to 120 yen per share. In fiscal 2023, we will provide an additional dividend of 80 yen per share, bringing the annual dividend to 200 yen per share. We also plan to return an additional 110 billion yen to shareholders starting this fiscal year. Out of that, at least 50 billion yen will be returned this fiscal year. We will proceed with the quick and steady implementation of additional returns, taking into consideration various circumstances, such as performance trends, progress in the business environment, and capital efficiency.


C-7. [Capital Policy]: Further Advancement of Business Management Target for each KPI

 I also talked about promoting further advancement of business management last time. In addition to ordinary income as an indicator of earning power, this time we are establishing ROIC as a new KPI. In addition to ROE, we have set forth a new target for ROIC of 6–7% as a target for measuring corporate value and stock value. In fiscal 2022, we surpassed our targets for both ROIC and ROE owing to improved performance of Containerships and our own businesses amid favorable business conditions. Going forward, the containerships market will decline, but by making improvements to our own businesses, we hope to achieve sustainable growth. As explained in the footnote, the ROIC calculation includes approximately 500–600 billion yen in off-balance-sheet charter hire. Incidentally, we estimate that at the end of fiscal 2022, the equity ratio, including these off-balance-sheet charter hire, will come in at 57–59%. As the Accounting Standards Board of Japan (ASBJ) determines how new lease obligations will be accounted for in the future, we are making preparations that will allow us to address the decision.


C-8. [Business Strategy]: Importance and Progress of Each Business

 I will discuss the three businesses driving growth later, so I would like to start with everything else. First, the whole group is coming together to promote the creation and strengthening of synergy with Kawasaki Kinkai Kisen, which we made a wholly owned subsidiary last June. In terms of sales, we will employ a multilayered approach with our customers in our International Shipping, Coastal, and Short Sea Businesses. As a response to the frequently discussed “2024 problem,” we are strengthening our port transport business in conjunction with the modal shift. Additionally, we are enhancing our offshore wind power support vessel business centered on K-Line Wind Service and are working on environmental technology. We are advancing all of these initiatives in collaboration with Kawasaki Kinkai Kisen. In regard to Containership business, we will secure capacity in line with market growth from the standpoint of shareholder. We will help improve profitability by maintaining and enhancing cost competitiveness. For fleet maintenance and other investments, we will strengthen our revenue base by improving capital efficiency, making efficient use of debt.


C-9. [Business Strategy]: Coal and Iron Ore Carriers–Growth Strategy Progress

 We are vigorously working to strengthen environment-based partnerships with target customers. First, with respect to our relationships with Japanese/Korean mills, we will respond to the environmental demand of our customers. In addition, we have launched various trial runs to procure and supply reduced iron, which has recently been attracting a great deal of attention. India and the Middle East are among the markets expected to grow in the future, and in such growing markets, we are promoting the capturing of environmental needs. From the standpoint of market responsiveness and resilience, we are strengthening our market resilience by optimizing the capacity of our own vessels and long-term chartered vessels, promoting vessel allocation according to the length of cargo contracts, and achieving high asset efficiency through the use of chartered vessels.


C-10. [Business Strategy]: Car Carriers–Growth Strategy Progress

 In Car Carrier Business, the various measures we have worked on to date are bearing fruit by improving the profitability of the business. First, for existing OEM of finished vehicles, we aim to expand the scale of our profits by developing a competitive fleet for our target markets and customers and addressing the environmental requirements. Amid these efforts, we are preparing a transport system to meet the new demand for Battery Electric Vehicles (BEVs) while also working to expand our market share in the High & Heavy segment, which has been one of our focuses, by setting targets for each customer. At the same time, we have almost completed the restructuring of our route network, and freight rate restoration efforts are underway amid the current very tight supply and demand environment. We are working on fleet maintenance from both of these perspectives, considering both the establishment of a competitive fleet, including environmental action, and ensuring fleet flexibility in light of the risk of a decline in demand.


C-11. [Business Strategy]: LNG Carriers–Growth Strategy Progress

 In addition to business expansion in Qatar, where we have the largest operations, we are making steady progress on building up our client base in Asia, where we are expecting growth. We signed a charter contract with QatarEnergy for a total of 12 vessels last August and November and are aiming to further expand the number of vessels under contract. Meanwhile, in the emerging areas of Asia, we have received high marks for our efforts in transport quality and ship management, which has opened the door to specific discussions with several customers, including PETRONAS. The 70-ship fleet that I talked about last time is inching ever closer to becoming a reality.


C-14. Progress on Further Advancement of Business Management

 We will incorporate cost of capital and cash flow-conscious management into each business unit. Basically, we plan to introduce business management using business-specific KPIs such as ROIC, EVA, and WACC in the current fiscal year. The business units will take the lead in formulating growth strategies and investment plans. Meanwhile, the corporate office will maintain investment discipline from a company-wide perspective and scrutinize these investments. With this approach, we will establish a structure that enables us to engage in management that addresses both aspects.