【Financial Highlights Brief Report for 2nd Quarter FY2023】
A. Financial Highlights for 2nd Quarter FY2023 
A-1: Financial Results for 2nd Quarter FY2023 
 In the first half of the year, operating revenues were 458.9 billion yen, operating income was 44.6 billion yen and ordinary income was 85.2 billion yen. This is a large difference reflecting the strong performance of Containership Business that performed well last year, and is a year-on-year decrease of 482.2 billion yen. Meanwhile, when compared to the figures announced in the first quarter, ordinary income improved by 15.2 billion yen, mainly due to Product Logistics centered on Car Carriers and the exchange rate moving in the direction of weakening of the yen. Net income attributable to owners of parent was 63.1 billion yen, an improvement of 8.1 billion yen compared to the figure announced in the first quarter. The average exchange rate for the first half was 139.93 yen to the US dollar and the bunker price was 605 US dollars per metric ton. On the balance sheet, equity capital was 1,583.7 billion yen, interest-bearing liability was 357.0 billion yen, DER was 23%, and equity ratio was 74%.


A-2. Financial Results for 2nd Quarter FY2023 by Segment
 Ordinary income for the Dry Bulk segment in the first half of the year was 2.8 billion yen, a deterioration of 0.2 billion yen compared to the figure announced in the first quarter. Cargo movements suddenly made a temporary rebound after the end of China’s zero COVID policy at the start of the year, but since April, demand has decreased due to the slow pace of China’s economic recovery centered on real estate. On the supply side, there was a decrease in port congestion and suspension of vessels due to the impact of COVID falling away, and effective supply increased due to a rise in the utilization rates of vessels, and market conditions slumped in the first half, particularly in the second quarter.
 Ordinary income for the Energy Resource Transport segment was 5.2 billion yen, and we secured stable earnings based on mid- and long-term contracts centered on LNG Carriers, Tankers, and Thermal Coal Carriers.
 Ordinary income for the Product Logistics segment was 79.8 billion yen overall, including Containership Business being 36.2 billion yen, improvements of 13.3 billion yen and 7.7 billion yen, respectively, compared to the figures announced in the first quarter. Product Logistics improved, mainly in Car Carriers, due to the freight rate being restored due to recovering cargo movements resulting from the resolution of the parts shortage and an effort to improve vessel operation efficiency. Containership cargo movements temporarily recovered during the demand season in August, but this unfortunately lacked strength and no major improvements were seen in market conditions. However, the results were assisted by foreign exchange and an increase in interest income.


B. Forecasts and Initiatives for Fiscal Year 2023
B-1. Forecasts for FY2023 and Key Factors

 The full-year forecast is for 930.0 billion yen in operating revenues, an increase of 30.0 billion yen compared to the figure announced in the first quarter. Operating income is forecast to be 92.0 billion yen, an improvement of 3.0 billion yen compared to the figure announced in the first quarter. Ordinary income is forecast to be 135.0 billion yen, maintaining the level announced in the first quarter. Meanwhile, net income attributable to owners of parent is forecast to be 105.0 billion yen, a deterioration of 15.0 billion yen compared to the figure announced in the first quarter. It is assumed that the exchange rate will average 140 yen in the second half and also be 140 yen at the end of the fiscal year, and that the bunker price will be 624 US dollars per metric ton. For ordinary income, the downturn in Containerships is forecast to be covered overall by the exchange rate moving toward a weakening of the yen and strong Car Carriers. Net income attributable to owners of parent is forecast to be 105.0 billion yen, down 15.0 billion yen from the figure announced in the first quarter, primarily due to an increase in tax expenses resulting from an overall review of tax expenses and taxable income of Group companies. These are both transitory factors, and the impact on cash flow is limited, with no impact on shareholder’s return etc. I will discuss shareholder’s return in more detail later. The exchange rate is assumed to have an impact of plus or minus 0.9 billion yen per one yen change.


B-2. Forecasts for FY2023 by Segment
 Ordinary income for the Dry Bulk segment is forecast to be 8.5 billion yen, slightly below the figure announced in the first quarter. The third quarter is the Cape-size shipment season for iron ore, and bauxite from Guinea is performing well, with grain from North America and South America also performing well for Panamax and smaller-size vessels. Meanwhile, on the supply side, the balance between supply and demand is tight partly due to restrictions on passing through the Panama Canal as a result of the drought. Therefore, although the current outlook is for market conditions to be solid, it takes into account the decrease in cargo movements and softening of market conditions due to seasonal factors that occur every year in the fourth quarter.
 Ordinary income for the Energy Resource Transport segment is forecast to be 8.0 billion yen, remaining unchanged from the figure announced in the first quarter due to the forecast of stable earnings centered on LNG Carriers, Thermal Coal Carriers, and Tankers.
In the Product Logistics segment, overall ordinary income is anticipated to be 125.0 billion yen, remaining unchanged from the figure announced in the first quarter, but Containership Business is anticipated to deteriorate by 6.0 billion yen from the 49.0 billion yen assumption announced in the first quarter to 43.0 billion yen. Car Carrier Business is anticipated to see a further increase in production due to the impact of the shortage of parts such as semiconductors being almost eliminated in the second half. The number of vehicles sold in the United States in this year to September was 15.6 million, a year-on-year increase of 12%, and demand remains strong with inventory currently at the low level of 20,000 compared to 40,000 prior to COVID. One reason for the increase in marine transport volume is the continued strong exports of finished vehicles made in China. We will monitor conditions concerning the investigation into subsidies for Chinese EVs by the EU, but it is expected to take around a year until the results are released, and it is anticipated that tight supply and demand will remain unchanged this fiscal year. In Containership Business, it was our view at the beginning of the fiscal year that the recovery in consumption and clearance of inventory would progress to a certain degree mainly in Europe and the United States, but the latest forecast is unfortunately that a full recovery will be next fiscal year or later due to persistent high inflation and sluggish consumer spending. In addition, there has been an increase in the supply of new vessels, and this and other factors are expected to weigh on market conditions during the second half. However, compared to summer, companies including THE Alliance to which OCEAN NETWORK EXPRESS (ONE) belongs are actively reacting to the decline in demand through blank sailings. Normally, freight rates move downward in periods of low demand, but at present, companies are taking action by announcing rate hikes in November. Looking at this response of blank sailings to match demand, our view is that shipping companies are responding cautiously as they approach the period to renew service contracts next year. The overall outlook for ONE’s earnings is for after-tax profit in the second half to be revised downward from 500 million US dollars to 151 million US dollars, and the latest forecast is that annual after-tax profit will be revised from 1.2 billion US dollars to 851 million US dollars.


B-3. Key Factors for “K” Line’s Own Businesses in FY2023 (Full-year results comparison with the previous year)
 In “K” Lineʼs own businesses excluding Containership Business, ordinary income is forecast to improve by 9.3 billion yen from 89.2 billion yen in fiscal 2022 to 98.5 billion yen in the latest forecast for fiscal 2023. As mentioned earlier, Dry Bulk market conditions that were strong until last year are softening, and market conditions and cargo conditions have had an adverse effect of 14.6 billion yen. In the Product Logistics segment, logistics and forwarding have been affected by market conditions in the same manner as Containerships, and domestic cargo movements have slowed in Short Sea and Coastal Business, with both being negative factors, but Product Logistics overall is forecast to improve by 13.8 billion yen, driven by strong Car Carrier Business. With an improvement of 12.4 billion yen associated with the transitory impact of exchange rates, the latest forecast for ordinary income in “K” Lineʼs own businesses will be resulting in an overall improvement of 9.3 billion yen to 98.5 billion yen.


C. Status and Progress of Medium-term Management Plan
C-1. Key Points of the Medium-term Management Plan

 I will describe the progress of the Medium-term Management Plan that began last fiscal year and is in its second year now. We are striving to steadily implement the business strategy, capital policy, and functional strategy outlined in the Medium-term Management Plan, and as I mentioned earlier, the current forecast is that ordinary income in “K” Line’s own businesses will be 98.5 billion yen this fiscal year, exceeding the ordinary income target of 70.0 billion yen, out of the 140.0 billion yen target, for fiscal 2026. “K” Line is looking to raise the level of the target of ordinary income of 140.0 billion yen set for the final year of fiscal 2026, and we have just undertaken the consideration of business strategy leading to a further step up and a review of numerical targets in “K” Lineʼs own businesses, particularly the three businesses playing the role of driving growth. The Company has just begun considering how far we can take this, and we would like to organize this by the time of announcing full-year financial results at the end of the fiscal year.
 Meanwhile, regarding ONE, we are also working with the operating company in Singapore and other shareholders to formulate a new business plan for ONE, and we are providing firm support as a shareholder to formulate a business plan including investment planning, capital planning and capital policy.


C-2. 【Business Strategy】 Coal & Iron Ore Carriers and Car Carriers Growth Strategy Progress
 Next, I will report progress of our growth strategy centered on the three businesses playing the role of driving growth. I will provide an update based on the business briefing held in May.
 We are working to achieve sustained earnings and accumulate growth in Coal & Iron Ore Carrier Business by leveraging a customer-oriented approach and environmental sales to actively conduct sales to Japanese and South Korean steel companies that are our core customers, in addition to customers in the Indian and Middle East markets that are expected to undergo growth in future, and also major resource companies. The industry as a whole is currently ascertaining the future direction of fuel conversion, but of the customers we are talking to, there is a very high level of interest in future fuel conversion centered on companies such as JSW, EGA, Anglo American, and BHP, and we are periodically proceeding with discussions on specific efforts aimed at reducing emissions and decarbonization. Movements have recently slowed due to the ship prices remaining somewhat high, but as there are signs of an easing of rising ship prices centered on China, we hope to be able to advance more in-depth discussions. We would like to further discuss with these customers and take steps aimed at the realization of fuel conversion based on LNG-fueled vessels, ammonia-fueled vessels, and other ships.
 As mentioned earlier, in Car Carrier Business, we are proceeding with environmentally friendly measures against a backdrop of solid demand, and would like to further promote sustained growth by building medium- to long-term relationships with customers. Amid the current shortage of space, although deliveries of new vessels are forecast to increase from fiscal 2024, our current forecast is that the supply shortage will continue until 2026. This is due to an increase and recovery in cargo movements, slow steaming associated with environmental regulations, and decommissioning of aged vessels, even under the assumption that vessels will be used until they reach 25 years of age. Therefore, due to space not being provided at present amid tight supply and demand, we have received strong requests to provide space from customers, and contracts also span multiple years at present. A total of 10 LNG-fueled vessels that we ordered will be delivered from this year onward, and when talking about this we feel customers’ very high level of environmental awareness. This will perfectly coincide with the timing of the introduction of the EU-ETS, that could be called Europe’s border carbon tax, next year, and as interest increases significantly, it feels that we have obtained an adequate level of understanding from customers while talking about the additional costs required for introducing LNG-fueled vessels. Likewise for Coal & Iron Ore Carriers mentioned earlier, we have also started specific discussions with customers about not only LNG-fueled vessels, but also next-generation zero-emission vessels.


C-3. 【Business Strategy】 LNG Carriers and New Business Areas Growth Strategy Progress
 I think this is something fresh in everyone’s memory, but there was a sense of uncertainty surrounding LNG because it was thought for some time that the trend of decarbonization would proceed more in the direction of renewable energy. However, the situation was reversed due to the Russia-Ukraine situation, and it is currently a focal point from the perspective of stable energy supply. A very strong focus has been placed on LNG for being a form of clean energy with a relatively low environmental impact, and a new project will begin.

 Furthermore, the sales and purchase agreements with Qatar and others planning increased production have been extended from 15 years to 27 years, and inquiries from customers about medium- to long-term contracts assuming the project are increasing. The number of vessels will increase from 44 in fiscal 2022 to 67 in fiscal 2026, and we are already on track to reach our target. Expanding our fleet to 75 or more vessels in fiscal 2030 has also come into view to an extent. As already announced, negotiations for medium- to long-term contracts are proceeding with Mitsubishi subsidiary DGI, Petronas, and other customers in Japan and overseas, and as contracts are being signed, we will continue to endeavor to steadily accumulate stable earnings. Furthermore, we established a new organization called KME (K LINE MARINE & ENERGY) in Singapore this June to offer support with customers by combining marine technology and sales. This is an organization that will not only focus on increasing LNG service quality but also be able to respond to inquiries about environmental measures from a variety of customers.
 Finally, on new business areas, we are mainly centered on maritime shipping as stated in the Medium-Term Management Plan. We will proceed to participate in projects contributing to reducing emissions and decarbonization utilizing the abundant experience and expertise we have cultivated in the maritime shipping industry. In terms of the liquefied CO2 transportation business, Northern Lights, the world’s first full-scale CCS (Carbon Capture and Storage) project that will start next year, will use two CO2 carriers for the maritime transportation of 800,000 tons of CO2 per year, and we will be responsible for the operation and ship management of these. The currently widespread medium-temperature, medium-pressure vessels transport liquefied CO2 at a temperature of minus 20 degrees Celsius, but with subsidies from the Ministry of Economy, Trade and Industry, we are actively considering low-temperature, low-pressure technology (transporting liquefied CO2 at around minus 50 degrees Celsius), which will be required for carrying liquefied CO2 in larger volumes over long distances from Japan to Australia or Malaysia for example. Based on these, we will proceed to consider participation in multiple plans and projects in Japan and overseas. Furthermore, from the perspective of a new energy transportation business in the future, ammonia is used in co-combustion in coal-fired thermal power generation and hydrogen is used in co-combustion with LNG along with various other applications, and we are proceeding to consider these. For hydrogen, we have invested in JSE Ocean, which is planning to hold and operate large hydrogen carriers as we did release in September.


C-4. 【Capital Policy】 Initiatives for Corporate Value Improvement and PBR
 With regard to progress in capital policy, we would like to aim for a PBR of 1.0 or higher through initiatives aimed at improving corporate value in a variety of ways. Although the Company’s balance sheet improvements are finally settling in, our PBR is still only just over 0.8. The breakdown of PBR components results in PER representing the expectation for corporate growth and ROE representing the profitability and efficiency of management.
 PER indicates the expected growth of the company, and as explained earlier, we will set a new target that is higher than 140.0 billion yen for ordinary income in the final year of the Medium-Term Management Plan. By accumulating specific business strategies and measures aimed at this, accumulating results and highlighting these to the market to strengthen so-called earning power is one way of doing this. Factors impeding expected growth include issues such as volatility and investment discipline, which are inevitably associated with maritime shipping. Therefore, to strengthen governance, we will maintain and enforce the Company’s investment discipline as we have mentioned numerous times in the past, observe investment behavior that is controlled during strong performance and strategic during poor market conditions, and ensure that we act based on reflection on past actions. Along with this, in terms of governance and management conscious of diverse shareholders, the percentage of outside directors on the board is a majority from this fiscal year. I will also speak from the perspective of reducing volatility. As we work to address emissions reduction and decarbonization as earning opportunities centering on maritime shipping, we will not diversify our businesses but rather combine them around the three businesses driving growth, as well as businesses with different volatility and growth timelines. And our limited management resources, including people, will be concentrated there rather than dispersed. In this way, we will strengthen our resistance to market conditions and reduce volatility. We will continue to work to meet growth expectations through these, and be able to highlight the ability to generate future cash flow.
 With regard to ROE, or the profitability and efficiency of management, we have constantly maintained a level of 10% or more as we engage in investments and all projects. However, from the perspective of optimal capital structure, as we have spoken about in the past, we will make the investments required for growth and required for improving corporate value with a balance of sound financials enabling competitive funding and capital efficiency. Based on this, we have provided flexible and proactive shareholder’s return to date. One example is spending a total of 145.7 billion yen for buy-backs equivalent to 17% on two occasions last year and this August. There are various approaches to evaluation such as the intrinsic value assumed by the Company, but as the rate of increase in share price after the buy-back has greatly exceeded the rate of increase in EPS, we believe that they have led to improvement of corporate value and optimal capital structure. In order to support and manage these by applying PDCA, we have introduced a corporate management system by business conscious of capital cost and cash flow by business through promoting further advancement of business management as shown on the right side of the slide. Firmly implementing corporate management by business will ensure that we maintain the investment discipline mentioned earlier.


C-5. 【Capital Policy】 Capital Policy Progress and Corporate Value Improvement
 To reiterate about these capital policies, as we conduct deeper consideration of how far to raise the level of our ordinary income target of 140.0 billion yen again with regard to strengthening our earning power, we are making steady progress as planned for the 1.2 trillion yen in operating cash flow mentioned in the Medium-Term Management Plan. The investment plan is to inject almost 80% into the three businesses driving growth as mentioned earlier. Meanwhile, with regard to environmental investment being made by using emissions reduction and decarbonization as earning opportunities, which include new fuel vessels, we will invest around 60%. There is no change to the plan to invest a total of 630.0 billion yen for all of these.  I will explain our shareholder’s return policy shortly. Through such initiatives to improve corporate value, we aim to increase ROE to 10% or more and achieve a PBR of 1.0 or more and the fiscal 2026 ROIC target of 6.0 to 7.0%.


C-6. 【Capital Policy】 Shareholderʼs Return Policy
 With regard to our shareholder’s return policy, we implemented an interim dividend of 100 yen per share and intend to implement a year-end dividend of 100 yen per share as announced at the beginning of the fiscal year, and there is no change in the annual dividend of 200 yen per share. With regard to buy-backs, the buy-back announced in August ended with the acquisition of 11,676,000 shares valued at 56.2 billion yen in contrast to the plan for a 60.0 billion yen buy-back. This is as we stated on October 18. The buy-back was for 56.2 billion yen of the intended 60.0 billion yen. For this reason, the difference of 3.8 billion yen will be added to the additional returns of 50.0 billion yen or more planned, for a revised amount of 53.8 billion yen or more. There is no change to the basic dividend of 120 yen per share from next fiscal year onward. As I just mentioned, we aim to provide flexible returns by changing additional returns from 50.0 billion yen to 53.8 billion yen, and we will flexibly and proactively implement returns by making appropriate decisions based on the environment surrounding our business, performance trends, and the timing of demand for funding such as investments.


C-7. Changes in the business environment
 The business environment has undergone changes such as Russia-Ukraine, the Palestine issue between Israel and Hamas, economic decoupling, and changes in supply chains caused by these. Furthermore, in the global economy, there is some concern about the progression of inflation caused by continued high interest rate policies, and also Chinese economic trends. Energy policy has changed significantly over the past year, and fluid energy policy is inevitable. In addition, there are increasing regulations like new CO2 regulations and EU-ETS on large ocean-going vessels. We must quietly respond to these, and as I explained earlier, we would like to realize corporate value and sustained growth by steadily implementing the business strategy, capital policy, and functional strategy outlined in the Medium-Term Management Plan.