【Financial Highlights Brief Report for 3rd Quarter FY2023】
A. Financial Highlights for 3rd Quarter FY2023
A-1: Financial Results for 3rd Quarter FY2023
For the nine months through the third quarter of fiscal 2023, operating revenues were 715.3 billion yen, operating income was 70.1 billion yen, ordinary income was 98.5 billion yen, and net income attributable to owners of parent was 74.0 billion yen. As for our key financial indicators, equity capital is 1,508.5 billion yen, and the equity ratio is 73%. These were calculated using Japanese accounting standards. However, if we recognize the capital cost portion of our charter hire liabilities as on-balance sheet liabilities in accordance with the IFRS, the international standard for our industry, our equity ratio is approximately 57% to 59%. We estimate that this figure is almost on par with those of major European container shipping companies.
A-2. Financial Results for 3rd Quarter FY2023 by Segment
Turning to the financial data for the first nine months of the fiscal year by segment, ordinary income was 1.6 billion yen for Dry Bulk, 4.7 billion yen for Energy Resource Transport, 96.6 billion yen for overall Product Logistics, and 33.8 billion yen for Containership Business. Ordinary income for Product Logistics excluding Containership was 62.8 billion yen, an improvement of 12.6 billion yen year on year.
B. Forecasts and Initiatives for Fiscal Year 2023
B-1. Forecasts for FY2023 and Key Factors
In fiscal 2023, we expect operating revenues of 940.0 billion yen, operating income of 87.0 billion yen, ordinary income of 135.0 billion yen, and net income attributable to owners of parent of 105.0 billion yen. The operating revenues and operating income figures show the performance of “K” Lineʼs own businesses, before earnings from OCEAN NETWORK EXPRESS (ONE) are included in ordinary income. Operating revenues have increased by 10.0 billion yen compared to the previous announcement, and operating income decreased by 5.0 billion yen, but ordinary income and net income attributable to owners of parent remain unchanged from the previously announced figures.
Our highest annual operating revenues to date were 1,352.4 billion yen for the fiscal year ended March 2015, when Containership Business with high operating revenues was one of “K” Line’s own businesses. Our previous record for operating income was 129.6 billion yen in the fiscal year ended March 2008.
For the three months of the fourth quarter, the impact of US dollar-yen exchange rate fluctuations on ordinary income is expected to be an increase or decrease of 400 million yen for every one yen change in the exchange rate. For every 10-US dollar change in the bunker price per metric ton, there would be an impact of approximately 10 million yen. Most of the increase in fuel oil prices is covered by the Bunker Adjustment Factor (BAF).
Turning to shareholder returns, we have increased the fiscal year-end shareholder dividend by 50 yen to 150 yen per share, up from the previous forecast of 100 yen per share. Since we have already paid an interim dividend of 100 yen, we expect a full-year dividend of 250 yen. Moreover, we expect to increase the dividend in fiscal 2024, by providing a full-year dividend of 250 yen per share. We also plan to carry out a stock split. I will explain the shareholder returns in more detail when we get to page 13.
B-2. Forecasts for FY2023 by Segment
Looking at the full-year forecasts by segment, the ordinary income forecast is 5.5 billion yen for Dry Bulk and 7.5 billion yen for Energy Resource Transport. Product Logistics overall is 128.5 billion yen. Of this amount, Containership Business accounts for 45.0 billion yen, and Product Logistics excluding Containership Business accounts for 83.5 billion yen. The differences from the previously announced figures are that Dry Bulk has been revised downward by 3.0 billion yen, Energy Resource Transport has been revised downward by 0.5 billion yen, and Product Logistics has been revised upward by 3.5 billion yen. Overall, ordinary income remains unchanged from the previously announced figure.
Compared to the same period last year, profits decrease for Dry Bulk, Energy Resource Transport, and Containership Business. Meanwhile, Product Logistics excluding Containership Business shows an increase year on year, with ordinary income expanding to 83.5 billion yen, centered on Car Carrier Business. Looking at full-year ordinary income for Product Logistics excluding Containership Business, we are forecasting a significant 37% increase compared to fiscal 2022, growing from 61.1 billion yen to 83.5 billion yen. We have been able to maintain overall ordinary profit at 135.0 billion yen, unchanged from the previously announced figure.
Compared to the previously announced figure, Dry Bulk has been revised downward by 3.0 billion yen. This is mainly due to temporary causes and a combination of factors. These include delays and congestions due to restrictions on passage through the Panama Canal and delays due to stormy weather, and a temporary increase in some general and administrative expenses. The downward revision of 0.5 billion yen for Energy Resource Transport is also primarily due to a one-time occurrence of general and administrative expenses. Meanwhile, Containership Business has been revised upward by 2.0 billion yen compared to the previous announcement. In the third quarter, containership liftings and freight rates fell more than expected. In the fourth quarter, however, there is widespread market awareness that supply chains are becoming strained due to tensions in the Middle East. With the rapid rise in freight rates, the profit outlook for the fourth quarter should exceed the losses in the third quarter.
While the total ordinary income for the third quarter was 13.2 billion yen, it is expected to increase significantly in the fourth quarter with a forecast of 36.6 billion yen. This is a result of the one-off losses I explained earlier being concentrated mainly in the third quarter. Please note that the situation will return to normal in the fourth quarter.
Next, I will provide a qualitative overview for each of our businesses. For Dry Bulk, market conditions remained soft for Capesize vessels, due to the easing of port congestion starting around the fourth quarter of last fiscal year. Since the fall last year, demand has increased for iron ore from Australia and Brazil, bauxite from Africa, and coal from Colombia to China. The market has been volatile, with occasional spikes in prices. Market conditions for Panamax and smaller sizes declined at the beginning of the fiscal year due to a decline in coal and steel transport to remote destinations such as Europe. However, they have been improving since mid-August due to demand recovery for grain transport and utilization rates being lowered by factors such as delay and congestion caused by the Panama Canal drought. However, the market has been on a downward trend since the New Year holiday.
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 is extremely limited. Assuming no negative exchange rate impacts or one-off expenses that affect profits like those I mentioned earlier, we believe that the forecast figures will remain unchanged.
For Car Carrier Business, which is part of Product Logistics, automaker production cuts due to parts and semiconductor shortages have already eased. Automakers have not yet cleared backorders, but cargo volumes are steady and export demand is expected to remain high. The demand for car transport to North America is particularly strong, and at the end of 2023, transport space for 700,000 units of cargo was being sought in the Pacific region. On the other hand, we have recently heard that inventories of Chinese OEM vehicles, which have been growing in number, are increasing in various places. We will need to monitor the situation to see whether the export offensive will continue. We estimate that the number of automobiles transported by “K” Line in fiscal 2023 will be 3.314 million. In fiscal 2019 however, it was 3.328 million. Accordingly, we have finally returned to the pre-COVID level of 2019.
（ONE’s slides）3. FY2023 Full Year Forecast
Regarding the Containership Business portion of Product Logistics, ONE's full-year results for fiscal 2023 and profit after tax will be 856 million US dollars, or approximately 120 billion yen. Since “K” Line has a 31% stake in ONE, our portion will be approximately 37.2 billion yen. This is an increase of 5 million dollars from the previous forecast figure. Compared to the same period last year, profit was down 14,142 million US dollars, or about 94%.
In the third quarter, supply increased due to deliveries of new ships, and cargo movements from China did not increase after China’s National Day in October. Despite multiple attempts to restore freight rates, no improvement occurred. As a result, both liftings and freight rates for the third quarter were lower than originally forecast. Since the start of the fourth quarter, short-term freight rates on Asia-North America and Asia-Europe routes have been experiencing a temporary and significant increase. This is due to the anticipated tight supply chain caused by the current situation in the Middle East. With European and Mediterranean services that usually pass through the Suez Canal now detouring around the Cape of Good Hope, we expect this situation to continue until around March. Based on this premise, freight rates will remain high for now. However, we are creating an earnings plan based on the assumption that freight rates will level out after reaching their peak in February, the Chinese New Year month, with a clearer picture of the situation. Accordingly, if the safety of the shipping route through the Suez Canal is not secured as swiftly as expected, the tight supply situation may not improve and freight rates will possibly remain high.
B-3. Key Factors for “K” Line’s Own Businesses in FY2023 (Full-year results comparison with the previous year)
Compared with the ordinary income of “K” Lineʼs own businesses excluding Containership Business in fiscal 2022, which was 89.2 billion yen before deduction of overhead costs, the current fiscal year will see an improvement to 96.5 billion yen. However, the foreign exchange impact was 13.5 billion yen, which, together with improvements in Product Logistics of 14.1 billion yen, offset the negative impact of Dry Bulk and Energy Resource Transport results.
B-4. Responding to limits on the number of vessels passing through the Panama Canal and avoidance of the Suez Canal due to the deteriorating situation in the Middle East
I will now go over the avoidance of the Suez Canal due to the situation in the Middle East, and restrictions on transit through the Panama Canal. Starting chronologically, the situation with the Suez Canal began on October 7, 2023, when Hamas launched its attack on Israel. On November 19, a car carrier sailing through the Red Sea was captured by Houthi forces from Yemen. In response to this, starting around mid-December, containerships and some car carriers in particular, began changing their routes to avoid the Suez Canal and sail around the Cape of Good Hope instead. On January 11, 2024, U.S. and British forces launched air strikes on Houthi strongholds in Yemen. As a result, the Cape of Good Hope route has become the normalized option.
At the beginning of November, the average number of vessels passing through the Suez Canal was approximately 74 per day, but the number is now approximately 46 vessels per day, a decrease of about 40%. Also, according to Clarksons Research, the number of ship arrivals in the Gulf of Aden during the seven days prior to January 26 decreased by 68% compared to the level seen in the first half of December last year, and it came to approximately 40%. Looking at the situation for vessel arrivals by type, liquefied gas carriers, car carriers, and containerships have decreased by approximately 99%, 96%, and 90%, respectively, indicating a significant decline in arrivals for these types of ships.
Containership freight rates, which are especially sensitive to market conditions, were 2,861 US dollars/FEU on the routes from Shanghai to Europe for the week ending January 26, according to the Shanghai Containerized Freight Index (SCFI). This is about 2.8 times higher than in mid-December.
Regarding the effect of the avoidance of the Suez Canal, by detouring around the Cape of Good Hope, voyage times are extended by about a week to 10 days each way. Since the cost of these detours and the cost of rising insurance premiums to cover war risks are upfront costs, the negative impacts will first show up on the bottom lines of shipping companies. Over the medium term, this may become a factor that inhibits the supply of ships, resulting in upward market pressure on freight rates and charter hire, or a revision of freight rates based on discussions between shipping companies and customers. We believe that these changes will be reflected in the bottom lines of shipping companies around the second half of the fourth quarter.
Turning to the Panama Canal, due to the current El Niño event, 2023 turned out to be Panama’s lowest rainfall year on record. As a result, Lake Gatun, which supplies the water needed for the canal to operate, has dropped to a low level. Restrictions on the number of vessels allowed to pass through the canal have been in place since July 2023. Previously, the maximum daily number of ships passing through the Panama Canal was about 36, with 31 reservations available per day. The number of available reservations decreased to 24 in late November and 22 in December. Consequently, the number of vessels transiting the canal has fallen to two-thirds of the usual level. This number has recovered slightly to around 24 reservations as of January 16, but there is now a limit of one ship per day per shipping company. Because of this, starting around December, some shipping companies rerouted vessels from the Panama Canal to the Suez Canal for a westbound transit. Now, due to problems with the Suez Canal, companies are forced to further detour around the Cape of Good Hope.
C. Status and Progress of Medium-term Management Plan
C-1. 【Capital Policy】 Capital Policy Progress and Corporate Value Improvement
Now I would like to explain our capital policy KPIs and provide an overview of the achievement progress. We are steadily achieving our operating cash flow forecast of 1.2 trillion yen. It also seems likely that we will reach our fiscal 2026 ordinary income target of 140.0 billion yen ahead of schedule. Accordingly, we intend to revise upward our profit level target of 140.0 billion yen in ordinary income for fiscal 2026. We are currently in the process of finalizing this matter internally, and plan to announce the new target in May 2024.
We are promoting an investment cash flow of 630.0 billion yen without compromising investment discipline.
“K” Line is also actively implementing shareholder returns of 500.0 billion yen or more, which I will explain in more detail later.
Moreover, we have recently achieved our PBR target of 1.0 or more. However, our objective goes beyond just having a PBR of 1. It also includes an optimal capital structure, a new shareholder return policy, and an update of our growth strategy centered on the three businesses that will drive growth and we expect to announce a comprehensive plan in May 2024 together with the ordinary income target update that I just mentioned.
To achieve our ROIC target of 6-7% for fiscal 2026, we will emphasize capital efficiency, cash flow, and portfolio selection. We would like to pursue this by focusing on ROIC, WACC, EVA, and other related metrics as KPIs for each business division.
C-2 【Capital Policy】 Shareholder’s Return Policy
The previous annual dividend forecast for fiscal 2023 was 200 yen per share, including a basic dividend of 120 yen and an additional dividend of 80 yen. For this fiscal year, an additional 50 yen will be added, resulting in an annual dividend of 250 yen. Since we have already paid an interim dividend of 100 yen per share, the year-end dividend will be 150 yen to reach 250 yen per share.
For fiscal 2024, the previously announced figure was only 120 yen per share as a basic dividend. An additional dividend of 130 yen per share will be added, resulting in an annual dividend of 250 yen per share, thereby matching the fiscal 2023 dividend.
Total shareholder returns from fiscal 2021 onwards, including forecasted returns, will be 484.2 billion yen. This is close to the 500.0 billion yen that is indicated in the Medium-Term Management Plan. However, since our Medium-Term Management Plan actually stipulates a goal of 500.0 billion yen or more, we will continue to consider ways to return more than 500.0 billion yen to shareholders going forward.
The basic approach regarding the dividend increases for fiscal 2023 and 2024 has not changed. It is part of our policy, which remains unchanged, that we proactively return profits to shareholders based on cash flow and we return any portion that exceeds appropriate capital. One reason that 250 yen is the dividend for this and next fiscal year is that we want to provide predictably stable dividends. We announced to our shareholders that not only will we increase the dividend for the current fiscal year, but also for the next fiscal year, thereby indicating no risk of a dividend reduction in the next fiscal year. Also, please understand that we have not decided on a new dividend calculation formula, but rather we decided to provide shareholder returns at this level based on a comprehensive determination. We also took into account the market expectations for dividend yields, along with the yields of investment vehicles comparable to stocks, such as U.S. bonds.
Furthermore, we plan to split each share of “K” Line common stock into three shares, effective April 1 of this year. This is because while our stock price is rising, the TSE stock price guidelines require that the investment unit price (i.e. the price for the minimum investment amount, in our case 100 shares) be less than 500,000 yen. Therefore, we are performing the stock split in accordance with this. The stock split is also being made to take into consideration the anticipated demand for Nippon Individual Savings Accounts (NISA), the new Japanese government tax-free stock investment program introduced this year.
C-3. Changes in the Business Environment
Among the current business risks for 2024, there is economic separation particularly due to the conflict between the US and China, Russia’s war in Ukraine, conditions in East Asia including North Korea and Taiwan, and the situation in the Middle East, which were described in the topic of economic decoupling. We believe that political uncertainty in various countries will be a larger factor than any other risk. In particular, the topics I just covered will have a major direct impact on the performance of our industry. These include avoidance of the Suez Canal due to a security crisis in the Red Sea, the need to detour around the Cape of Good Hope, and the likelihood of the Panama Canal returning to normal operations. We plan to pay close attention to these factors.
