【Financial Highlights Brief Report for 1st Quarter FY2023】
A. Financial Highlights for 1st Quarter FY2023
A-1: Financial Results for 1st Quarter FY2023
For the fiscal 2023 first quarter results, operating revenues were 222.2 billion yen, operating income was 19.6 billion yen, ordinary income was 49.1 billion yen, and net income attributable to owners of parent was 38.5 billion yen. Compared year on year to the first quarter of fiscal 2022, operating income improved by 0.7 billion yen. This was mainly due to an increase in the number of transported vehicles in Car Carrier Business. Meanwhile, ordinary income deteriorated by 218.2 billion yen year on year, mainly due to a decline in the freight rates for OCEAN NETWORK EXPRESS (ONE), which had been at a high level due to supply restrictions through fiscal 2022, while the lifting volume had not yet returned to normal levels. The key financial indicators show that equity capital was 1,570.1 billion yen, interest-bearing liability was 358.8 billion yen, DER was 23%, and equity ratio was 74%.
A-2: Financial Results for 1st Quarter FY2023 by Segment
Ordinary income for the Dry Bulk segment was 1.5 billion yen, a decrease of 13.0 billion yen, compared to 14.5 billion yen in the same period last year. Since fiscal 2022 was an exceptionally strong year, profit decreased by comparison.
Ordinary income for the Energy Resource Transport segment was 2.4 billion yen, a year-on-year decrease of 3.1 billion yen.
Ordinary income for the Product Logistics segment as a whole was 45.9 billion yen, representing a decrease of 202.7 billion yen year on year. This includes ordinary income from Containership Business of 25.5 billion yen, a decrease of 212.7 billion yen year on year. For the Product Logistics segment excluding Containership Business, ordinary income in the first quarter was 20.4 billion yen, an improvement of 10.0 billion yen year on year. Although the first quarter results deteriorated year on year, they surpassed the forecasted earnings for the first quarter, released on May 8. The results have surpassed the figures forecasted at the beginning of the fiscal year, due to the improved profitability of ONE and Car Carrier Business, besides the significant effect of the recent depreciation of the yen.
B. Forecasts and Initiatives for FY2023
B-1: Forecasts for FY2023 and Key Factors
With regard to the fiscal 2023 full-year forecast, operating revenues are expected to be 900.0 billion yen, operating income will be 89.0 billion yen, ordinary income will be 135.0 billion yen, and net income attributable to owners of parent will be 120.0 billion yen. Compared to the figures released on May 8, the operating revenues forecast rose by 30.0 billion yen, operating income improved by 4.0 billion yen, ordinary income improved by 5.0 billion yen, and net income remained unchanged from the previous announcement.
In relation to conditions overall, Car Carrier Business will likely remain steady, and operating income is expected to improve by 10.2 billion yen year on year. We expect 135.0 billion yen in ordinary income as the containership business continues to stabilize.
The ordinary income increase of 5.0 billion yen compared to the previous forecast is due to revision of the assumed yen-to-dollar exchange rate, which was updated from the previous 125 yen to 135 yen for the second half, resulting in a foreign exchange valuation gain. Another positive note is higher earnings anticipated for Car Carrier Business. Negative forecast factors include downward revisions for Dry Bulk and Containerships, but despite these, ordinary income is expected to increase by 5.0 billion yen. Despite the anticipated improvement in ordinary income, the net income attributed to owners of parent forecast remains unchanged. The main factor behind this is tax costs. Based on a review of the forecast figures released at the previous briefing, and in light of the current accounting and tax rules, the tax expense is expected to be higher than previously estimated. As a result, the net income attributable to owners of parent for the fiscal year is expected to be the same as previously announced.
Assuming an exchange rate of 135 yen in the second half, the average exchange rate during the fiscal year would be 136.04 yen, while the average bunker price is estimated at 613 US dollars per metric ton. Based on these assumptions, a one-yen change in the assumed exchange rate during the nine months from the second quarter would result in a 1.2 billion yen change in ordinary income. Each 10 US dollar-per-ton change in the assumed bunker price would result in a 60 million-yen change in ordinary income.
As for our shareholder’s return, the planned annual dividend is 200 yen per share as previously announced. This includes a basic dividend of 120 yen per share and an additional dividend of 80 yen per share. There are no changes on this point. However, regarding additional shareholder’s return, we have today announced that we decided to conduct share buy-back up to 60.0 billion yen or 11,676,000 shares. An additional return of 50.0 billion yen or more was announced at the previous briefing, and in light of the size of this amount, a decision was made to buy back “K” Line shares as the preferred method for the shareholder’s return.
B-2: Forecasts for FY2023 by Segment
The forecasted full-year ordinary income for Dry Bulk is 9.0 billion yen, which represents a downward revision of 3.0 billion yen from the previous forecast announced on May 8. At the beginning of the period, we assumed that a full-scale recovery in the Chinese economy would begin by the summer. However, this recovery has been delayed slightly, and Cape-size transport of iron ore and coal to China, along with grain transport to the country by Panamax and smaller-size vessels, has not grown as much as expected.
For this reason, we have adopted more conservative market assumptions. Page 15 shows our market assumptions for the free portion of the Dry Bulk fleet. Based on this revision, our full-year forecast for Cape-size vessels is now 15,400 US dollars per day, down from the previous level of 18,250. Similarly, the forecast for Panamax dropped from 15,500 to 12,750 US dollars per day, while Handymax fell from 14,000 to 11,450 US dollars per day, and Small Handy decreased from 12,250 to 10,600 US dollars per day.
Under these circumstances, we have left the second-half ordinary income forecast of 6.0 billion yen unchanged, but we are anticipating a full-year ordinary income of 9.0 billion yen, a drop of 3.0 billion yen from the previous 12.0 billion yen forecast.
In the Energy Resource Transport segment, the full-year ordinary income forecast is 8.0 billion yen. This is the same figure as previously announced. Because “K” Line has signed mostly medium- and long-term contracts, we are not very susceptible to market fluctuations and other factors.
The full-year ordinary income forecast for Product Logistics is 125.0 billion yen, an increase of 7.0 billion yen from the previously announced figure of 118.0 billion yen. Meanwhile, the full-year ordinary income forecast for Containership Business is 49.0 billion yen, which is 1.0 billion yen less than the previous forecast of 50.0 billion yen. Therefore, Product Logistics excluding Containerships has increased by 8.0 billion yen compared to the previous forecast. In the Car Carrier portion of the Product Logistics segment, a shortage of transport capacity remains, and in fact this trend is only accelerating. In particular, the shortage of parts and semiconductors for OEMs in Japan and elsewhere is being resolved. As production plans return to normal, the supply and demand situation is becoming tighter. Reportedly, there are about 170 new car carriers currently under construction. However, given that the world’s current car carrier fleet comprises numerous older vessels, we are of the opinion that even if these new vessels are delivered, they will probably end up replacing older vessels. Therefore, we do not believe the vessel shortage situation will improve rapidly.
At the briefing on May 8, we forecasted ordinary income from Containership Business as 27.0 billion yen for the first half, 23.0 billion yen for the second half, and 50.0 billion yen for the full year. This has now been revised downward by 1.0 billion yen to 28.5 billion yen for the first half, 20.5 billion yen for the second half, and 49.0 billion yen for the full year. “K” Line’s earnings forecast for ONE as a whole is approximately 1.1 billion US dollars. At the previous briefing, the forecast was about 1.2 billion US dollars. Accordingly, the performance forecast for Containership Business has been updated based on the assumption that earnings will be lower by about 0.1 billion US dollars.
In terms of each quarter, ordinary income for the first quarter was 25.5 billion yen, which is higher than we had previously forecasted. The improvement can be attributed to the fact that long-term freight rate contracts from the previous fiscal year remained in place in April and May, especially on North American routes, which helped boost earnings. As the lifting volume was higher than expected, we were able to earn an ordinary income of 25.5 billion yen.
The ordinary income forecast for the second quarter is significantly lower at 3.0 billion yen, primarily because the freight rate level for the second quarter started falling from June onwards. In June, short-term freight rates dropped while long-term freight rate contracts signed in the previous fiscal year were no longer effective. Moreover, cargo volume is also lower than expected. Based on this, ONE is responding to the situation by resuming blank sailings again, although it was ceased in the first quarter. Along with these background factors, we have revised our exchange rate assumptions based on expectations for yen depreciation, in terms of calculating profitability. “K” Line’s earnings for Containership Business are adjusted by translating from US dollars to yen using the exchange rate at the end of the period. As the exchange rate assumption is now for a weaker yen, the earnings for the full year will likely increase. However, the numbers as of the end of the first quarter are fixed, and cannot be revised. Accordingly, the effect of the yen’s depreciation will be lost, especially in the second quarter. The earnings forecast for just the second quarter looks less positive than the actual situation, although the figures will be consistent as a whole. This, in addition to market factors, is making the second-quarter forecast worse.
The ordinary income forecast for the second half is now 20.5 billion yen, down from 23.0 billion yen at the previous briefing. This is due to the slight downward revision of the freight rate level in the second half based on the freight market conditions in the second quarter.
While there is some debate as to whether ONE's earnings forecast is conservative or not, we have factored in the effects of the cost reduction plan just explained to you. The effects do not change much in the future, but there is another factor to note. Starting this summer, shipping companies are applying a General Rate Increase, known as GRI, and asking customers to start paying higher freight rates. However, the effect of this rate increase has not yet been factored into the earnings forecast. If this restoration of higher freight rates is achieved and sustained, please note that the forecast may be revised upward accordingly.
B-3: Key Factors for “K” Line’s Own Businesses in FY2023 (Full-year results comparison with the previous year)
Next, I would like to explain a year-on-year comparison of ordinary income for “K” Line’s own businesses by element. The red bar graph on the right shows the fiscal 2023 ordinary income outlook for “K” Line’s own businesses excluding Containerships, which is currently 93.0 billion yen. By contrast, the actual ordinary income of “K” Line’s own businesses in fiscal 2022 was 89.2 billion yen. In the briefing in May, we shared a figure of 94.0 billion yen. However, after revising the allocations of general and administrative expenses to the business divisions and making them bear more of the costs, we ended up with a figure of 89.2 billion yen. In fiscal 2023, ordinary income is expected to reach 93.0 billion yen, an improvement compared to the previous fiscal year. The breakdown includes temporary positive components, mainly due to the impact of exchange rates, equaling 5.5 billion yen. The contribution from Dry Bulk is expected to decrease by 12.2 billion yen, while the contribution from Energy Resource Transport will also dip slightly by 1.2 billion yen. In the Product Logistics segment, an income increase of 11.7 billion yen is expected, mainly from Car Carrier Business. Accordingly, the total of these contributions is forecasted to increase by 3.8 billion yen year on year, resulting in 93.0 billion yen. At the time of the previous briefing, fiscal 2023 ordinary income from “K” Line’s own businesses was expected to be 88.0 billion yen. Therefore, the current forecast represents an increase of 5.0 billion yen.
C. Status and Progress of Medium-term Management Plan
C-1: Changes in the Business Environment
There is no significant change in our outlook for the business environment. As mentioned in economic decoupling, we expect geopolitical risks to continue for relations between the United States and China, as well as in Russia/Ukraine and the East Asia region including China, Taiwan, and North Korea. When it comes to global economic risk factors, business confidence in Europe and the United States, inflation, and, to a greater extent, the slow recovery of the Chinese economy, are all concerns. Updated national energy policies will likely increase environmental costs for companies, which must change their business systems and models in response to new regulations. Basically, this means extra costs. However, as mentioned in action based on the Medium-term Management Plan, we remain committed to our policy of realizing growth by considering the emissions reduction and decarbonization of us and the society as a business opportunity, based on our long-term management vision and with a focus on our portfolio strategy.
C-2[Capital Policy]: Capital Policy Progress and Corporate Value Improvement
The framework of the basic approach for our capital policy remains the same as outlined in the Medium-Term Management Plan. However, the relevant KPIs and numerical targets are regularly updated, so here is a summary of the latest changes.
To further enhance earning power, our goal is to achieve an operating cash flow of at least 1.2 trillion yen. Under our investment plan, the framework for growth-related investment remains at 630.0 billion yen for the time being. Our shareholder’s return policy is also unchanged, with a commitment to return at least 500.0 billion yen.
As part of efforts to further enhance corporate value, we have already set an ROE of 10% or more, along with a target ROIC of 6.0 to 7.0% by fiscal 2026. As of today, we are now additionally aiming for a PBR of 1.0 or more, as a numerical target. This is the only change since the previous briefing.
C-3[Capital Policy]: Shareholder’s Return Policy
The planned annual dividend is 200 yen per share, unchanged from last time, and the repurchase of “K” Line shares will continue until the pre-determined limit has been reached: either the maximum total acquisition value of shares (60.0 billion yen), or the maximum total number of shares (11,676,000 shares), whichever is attained first. Like last time, we plan to do this using off-auction own share repurchase trading (ToSTNeT-3). If it is not possible to acquire all the intended shares through this method alone, we plan to purchase the remainder on the Tokyo Stock Exchange. The entire share buy-back period is from August 3 to October 31. As announced today, the scheduled “K” Line share acquisition period using ToSTNeT-3 is during the period of August 3 to 9.
I will now explain the actual results of our shareholder’s return and changes to the future plans. We have increased our additional shareholder’s return for fiscal 2023. They have been raised from 50.0 billion yen or more to a maximum of 60.0 billion yen, through the buy-back of “K” Line shares. The total additional returns are set at 110.0 billion yen or more, and this figure remains unchanged. Accordingly, we plan to return the remaining 50.0 billion yen or more, as additional return, to shareholders by the end of fiscal 2026.
