Financial Highlights Brief Report for Fiscal Year 2023

A. Financial Highlights for Fiscal Year 2023

A-1. Financial Results for FY2023

 In fiscal 2023, operating revenues improved by 19.6 billion yen from the previous year to 962.3 billion yen. Operating income rose by 5.9 billion yen to 84.7 billion yen despite softening market conditions for Dry Bulk, as steady performance was achieved mainly in Car Carrier Business. Ordinary income decreased substantially year over year by 555.0 billion yen to 135.7 billion yen, while net income decreased by 590.1 billion yen to 104.7 billion yen, as market conditions have been starting to settle after soaring demand during the COVID-19 pandemic, and market conditions softened for Containership Business of OCEAN NETWORK EXPRESS (ONE) due to a decline in cargo movements. This was caused by inflation and inventory adjustments, as well as an increase in deliveries of new ships. The average dollar-yen exchange rate during the period was 143.82 yen, and the average bunker price was 620 dollars.

 The key financial indicators show that equity capital was 1,591.9 billion yen, interest-bearing liability was 287.7 billion yen, DER was 18%, and equity ratio was 75%, using just on-balance sheet liabilities. I will go over our provisional estimates including off-balance sheet liabilities later.


 A-2. Financial Results for FY2023 by Segment

 Dry Bulk was affected by a significant deterioration in market conditions during the second half of fiscal 2022 and the first half of fiscal 2023. In fiscal 2023,  port congestions  decreased due to the removal of pandemic-related measures, and European coal imports decreased significantly, after temporarily soaring following Russia's invasion of Ukraine. However, the year also saw a decrease in revenue and increase in costs, as a result of drought-related restrictions at the Panama Canal and the need to avoid the Suez Canal due to the Israel-Hamas conflict. Demand, including demand for Brazilian iron ore, began to recover in the second half of fiscal 2023, but much of the effects will not be seen until fiscal 2024. The conditions during fiscal 2023, including temporary factors, put downward pressure on results for the year.

 In Energy Resource Transport, operating revenues increased but profits decreased, mainly for medium- to long-term contracts, resulting in stable earnings.

 In Product Logistics, Car Carrier Business continued to recover amid a further easing of the semiconductor and parts shortages that remained after the pandemic and the resulting impact on auto production and shipments, and demand for car carrier space continued to exceed capacity. Meanwhile, Logistics business, like Containership Business, was significantly affected by market conditions. Short Sea and Coastal Transport Business was also affected by a decline in demand and transport volume due to inflation and higher prices.

 In Containership Business, market conditions continued to deteriorate until the third quarter, which ended at an operating loss. Meanwhile, there was a movement toward adjusting long-term contract freight rates taking effect in fiscal 2024. With the increased supply of new ships being essentially absorbed due to avoidance of passing via the Suez Canal and the conflict zone in the Middle East, ONE's profitability recovered in the fourth quarter, and its after-tax profit for the year was 974.0 million dollars.

 Ordinary income for Product Logistics, excluding Containership Business, improved by 21.9 billion yen compared to the previous fiscal year.



B. Forecast and Initiatives for Fiscal Year 2024

B-1. Forecasts for FY2024 and Key Factors

 In fiscal 2024, operating revenues are expected to increase by 17.7 billion yen to 980.0 billion yen. Due to solid performance in Car Carrier Business and recovery centered on Dry Bulk, operating income is expected to improve by 8.3 billion yen to 93.0 billion yen. Ordinary income is expected to be 135.0 billion yen, almost the same as in fiscal 2023. Net income attributable to owners of parent will likely reach 120.0 billion yen, an improvement of 15.3 billion yen compared to the previous fiscal year, due to the absence of one-time impacts.

 The average dollar-yen exchange rate for the year is expected to be 140.95 yen, and the bunker price is expected to be 640 dollars. The exchange rate is assumed to have an impact of plus or minus 1.5 billion yen per one yen change. A 10-dollar change in the bunker price is assumed to have an impact of plus or minus 10.0 million yen. I will cover our shareholder’s return policy a little later.


B-2. Forecasts for FY2024 by Segment

 In Dry Bulk, cargo movements have been steady since the second half of fiscal 2023 and market conditions are recovering. The degree of recovery in the Chinese economy is the most important factor to watch. Based on our conversations with customers in China and elsewhere, crude steel production in China appears to be roughly at the same level as the previous fiscal year. Meanwhile, as domestic iron ore production stagnates, China’s dependence on imported ore is expected to continue. Demand for the transport of grain and bauxite is also expected, and although the market conditions have slightly worsened for Capesize vessels, they are settling down. Market conditions for Panamax and smaller-sized vessels are also expected to remain at a certain level.

 In Energy Resource Transport, LNG carriers, oil tankers, and thermal coal carriers will continue to earn stable profits as they operate under medium- to long-term contracts. Accordingly, the situation is basically expected to remain similar to the fiscal 2023 results. The earnings difference from the previous fiscal year takes into account the expected temporary impairment resulting from the disposal or write-off of aging vessels. Without this, the outlook is for results to be at the fiscal 2023 level on a cash basis.

 As for Car Carrier Business, the global car sales market needs to be closely watched in light of various future trends such as recession risk. Although vehicle sales volume, transport demand, and transport volume have not yet returned to pre-COVID levels, customers report that auto production and shipments are expected to remain steady. New vessels are gradually being delivered from this year onward, but it is estimated that it will take at least until the end of 2025 for the industry as a whole to reach a balance between supply and demand. For the time being we do not foresee any major changes in the current situation of tight transport capacity. Customers have also indicated that transport demand will remain strong in 2024, and we have finalized almost all of our transport contracts, including those for multiple years. Meanwhile, costs will increase to a certain extent due to soaring short-term charter hire rates and the need to detour around the Cape of Good Hope to avoid the conflict in the Middle East. Additionally, we anticipate that there will be some decline in the favorable exchange rates we enjoyed in fiscal 2023.

 For Logistics, Coastal, and Short Sea Businesses, we forecast that earnings will be roughly the same as the previous fiscal year.

 Turning to the fiscal 2024 outlook for Containership Business, ONE's after-tax profit is expected to be roughly the same as in the previous fiscal year at 1.0 billion dollars. While a gradual recovery in demand is expected mainly in the United States, there is no sign of a strong recovery amid continued inflation and geopolitical risks. We predict that long-term freight contracts will remain at roughly the same level as last year. At the beginning of the period, short-term freight rates started at a higher level than in the previous year, but we expect them to gradually decline in the second half. We assume that the need for detouring around the Cape of Good Hope to avoid the situation in the Middle East will continue during the first half of fiscal 2024. In terms of supply, while many new ships will be delivered this year, the number of aging ships is increasing due to the lack of scrapping progress over the past few years. We are closely monitoring the situation to see what happens to the balance of supply and demand, and how much older vessel demolition will occur in response to environmental regulations, and also how long the need for detouring around the Cape of Good Hope will continue.

 Some believe that ONE's current 2024 full-year forecast is a bit on the high side compared to those announced by other containership companies. We believe the main reasons for this include our assessment of the timing for improvement in the Middle East situation, and the steady performance of ONE's Asia-North America routes, which are one of its strengths.



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

C-1:Key Points of the Medium-term Management Plan

 This year marks the third year of our Medium-term Management Plan, which began in fiscal 2022. Based on the latest progress made toward plan achievement, we have comprehensively reviewed our overall earnings, investment, and business plans.

 Initially, we aimed to achieve a balance between “K” Line’s own businesses and Containership Business, with an ordinary income of 70.0 billion yen for each by the final year of the Medium-term Management Plan. Due to soaring demand for container transport, the results for fiscal 2022, the first year of the plan, far exceeded expectations. In the second year of the plan however, demand in the containership market fell sharply as a reaction. Nevertheless, with “K” Lineʼs own businesses steadily supporting earnings, the result was 135.7 billion yen, which is close to the target level for fiscal 2026, the plan’s final year. Therefore, in light of this achievement, we reviewed the progress of each business and the investment plans.

 As a result, we have raised our ordinary income target for fiscal 2026 from 140.0 to 160.0 billion yen, mainly for “K” Lineʼs own businesses, and have set a new target of 250.0 billion yen plus alpha for fiscal 2030. Most of the results of the investment plans currently underway will be seen in earnings after fiscal 2026 onwards, when the current Medium-Term Management Plan ends, so we have calculated the target figure including those results. The 250.0 billion yen amount was obtained by adding up the desired results of the investment and business plans currently in progress, based on the premise of organic growth. The “plus alpha” component of the target was added to indicate that we are still investigating measures for discontinuous dramatic growth.


C-2【Capital Policy】:Capital Policy Progress and Corporate Value Improvement

 Based on the current progress made on our capital policy, we have raised our ordinary income target for the final year by 20.0 billion yen to 160.0 billion yen. We also updated our operating cash flow expectations to reflect the latest trends and obtained a forecast of 1.4 trillion yen, an increase of 200.0 billion yen from the figure announced last fiscal year.

 As part of this, we intend to increase our investment plan to 740.0 billion yen, up 110.0 billion yen from the 630.0 billion yen announced in the previous fiscal year. We will continue to make the investments necessary for improving corporate value and growth without relaxing our investment discipline.

 We will continue to investigate the specific figures for achieving our optimal capital structure, as we need to still consider the levels of capital required for “K” Line’s own businesses and Containership Business. Meanwhile, 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 continue to distribute shareholder returns in a flexible and proactive manner based on cash flow. In light of this, and taking into account the positive cash flow trend, we have decided to increase total shareholder returns for the Medium-term Management Plan period to 700.0 billion yen or more. This is an increase of 200.0 billion yen from the 500.0 billion yen or more announced last year. The annual dividend for fiscal 2024 will be 85 yen per share, and the plan is to continue this in fiscal 2025 and 2026. Moreover, since the total amount to be added to the basic dividend is approximately 50.0 billion yen, we will distribute the remaining 150.0 billion yen using flexible measures during the Medium-term Management Plan period.

 In this way, “K” Line will continue to achieve ROE of 10% or more by actively enhancing profitability and improving capital efficiency. We will continue to improve our PER by pursuing lower capital costs, future cash flow, and the ability to generate earnings and continuously maintain a PBR of 1.0 or more.

 As part of efforts to improve our organizational strength, we will enhance management capabilities such as the decision-making and supervision of management policies by the board of directors, while promoting prompt decision-making and business execution by the senior management team. With the aim of increasing corporate value through further governance improvements and management reforms, we will begin preparations for transitioning to a “company with nominating committee, etc.” Moreover, we will continue our efforts to attract interest from the capital market through IR activities.


C-3【Capital Policy】:Raising ordinary income target based on a plan to enhance profitability

 The ordinary income for the first year of the Medium-term Management Plan (fiscal 2022) was 690.8 billion yen, due to soaring demand in the containership market. In fiscal 2023, the second year of the plan, activity in the container shipping industry settled down and market conditions were sluggish. However, as “K” Lineʼs own businesses were able to maintain performance and an ordinary income result was 135.7 billion yen, we have increased our target for the final plan year (fiscal 2026) by 20.0 billion yen, mainly for “K” Lineʼs own businesses, to 160.0 billion yen. Regarding the “250.0 billion yen plus alpha” to be achieved by fiscal 2030, we will continue to consider M&A and other measures for attaining discontinuous dramatic growth, and strive to further increase the plus alpha component.


C-4【Capital Policy】:Cash Allocation

 Now I will explain the current cash allocation situation under our capital policy. Regarding cash inflow (operating cash flow), the original plan was for 900.0 billion yen to 1.0 trillion yen, and last fiscal year we increased it by 200.0 billion yen. Now, the forecast has been further updated, and we are assuming an operating cash flow of 1.4 trillion yen. As for its allocation, investment cash flow will be 740.0 billion yen, an increase of 110.0 billion yen from the 630.0 billion yen announced last year. We also plan to increase shareholder returns to 700.0 billion yen or more, an increase of 200.0 billion yen from the 500.0 billion yen or more announced last year.


C-5【Capital Policy】:Business Investment Plan

 The new capital policy was prepared by taking into account cash flow growth and capital efficiency, and I would now like to explain our Business Investment Plan. In Coal & Iron Ore Carrier Business, we are making progress in discussions with customers about environmentally friendly vessels. However, the introduction of these vessels will likely be delayed a little, and the amount of investment during the current Medium-term Management Plan period has decreased slightly. Meanwhile, Car Carrier Business investment is progressing as planned. Demand for LNG is expected to keep growing, as it draws greater attention as a useful energy source during the transition to green energy. Therefore, we have now increased our investment target for LNG carriers, as we expect the contract periods for these vessels to become longer. We have also increased investment for new business areas related to ocean transport, in order to leverage “K” Line’s strengths. For example, we increased the investment amount from 30.0 to 90.0 billion yen for projects such as liquefied CO2 carriers, offshore wind turbine support ships, and vessels to transport alternative fuels such as ammonia and hydrogen. As a result, we are planning an investment cash flow of 740.0 billion yen.

 Under our Medium-term Management Plan, we plan to allocate about half of the total investment cash flow to businesses that promote emissions reduction and decarbonization, as part of “K” Line’s environmental measures. This includes meeting demand for vessels using alternative fuels. When LNG carriers are included in this area, approximately 80% of  total investment is related to environmental measures.


C-6【Capital Policy】:Return to Shareholder

 The original annual dividend forecast per share for fiscal 2024 was 250 yen before the 3-for-1 stock split, and after the split the dividend forecast was adjusted to approximately 83.33 yen per share. This has now been rounded upward by 1.70 yen to 85 yen per share. Moreover, we plan to add 45 yen to the basic dividend of 40 yen for fiscal 2025 and 2026, resulting in an annual dividend of 85 yen per share in total.

 During the remaining years of the Medium-term Management Plan, the total amount of additional dividends in excess of the basic dividend will be approximately 50.0 billion yen. After deducting this 50.0 billion yen from the total 200.0 billion yen increase, we are left with 150.0 billion yen. This amount will be distributed as additional returns in a flexible way, during the remaining years of the plan. In fiscal 2024, we plan to proceed with the acquisition of “K” Line shares up to a maximum of 100.0 billion yen or 39,556,000 shares.


C-7【Capital Policy】:Further Advancement of Business Management Target for each KPI

 As part of efforts to further enhance our business management capabilities, we are aiming for greater awareness of capital efficiency.

 ROIC was 5% in fiscal 2023 compared to 29% in fiscal 2022, while ROE was 58% in fiscal 2022 and 6.7% in fiscal 2023. This means we unfortunately did not reach our target ROIC of 6 to 7% or target ROE of 10% or more. The main reason for this was a deterioration in ONE's business earnings caused by a slump in the containership market.

 Looking at the ordinary income target, while we achieved a result of 135.7 billion yen in the previous fiscal year, the final target for fiscal 2026 has been raised to 160.0 billion yen. Our calculation of ROIC includes both on-balance sheet and off-balance sheet liabilities, including charter hire costs, and other obligations, which total approximately 600.0 to 700.0 billion yen. Moreover, the estimated equity ratio calculated by including off-balance liabilities is between 57% and 59%.


C-8【Business Strategy】:Growth Strategy for “K” Lineʼs Own Businesses

 Under the Medium-term Management Plan, the fiscal 2026 ordinary income target of 160.0 billion yen includes 90.0 billion yen for “K” Lineʼs own businesses. The same target for fiscal 2030 is 250.0 billion yen plus alpha, which includes 110.0 billion yen plus alpha for “K” Lineʼs own businesses. With this in mind, I would now like to briefly explain the details of these targets, the underlying approach, and our assumptions about the business environment.

 Dry Bulk’s orderbook for new vessels until 2026 stands at approximately less than 10% of the entire industry's existing fleet. Typically, ships with a 20-year depreciation schedule would require replacement at a rate of around 5% annually, totaling approximately 15% over three years. However, the current situation falls short of this. With the demand for alternative fuels that comply with environmental regulations and the future direction of this trend uncertain, orders for new ships have not made much progress, and this trend is particularly noticeable for Capesize vessels. Therefore, based on our outlook for 2024, we believe that although market tightness will ease to a certain extent, we expect market conditions will remain firm. Moreover, as all of our remaining vessels with high costs will be retired within this period, we expect our cost competitiveness to further increase.

 In Car Carrier Business, new ships will be delivered between this year and next. Supply and demand in this market is expected to balance out by the end of 2026, and we expect the strain on transport capacity will dissipate.

 Meanwhile, the demand for car carrier transport using vessels that have environmental protection measures and operate on alternative fuels is extremely strong compared to other ship types. Therefore, our introduction of environmentally friendly ships, mainly LNG-fueled vessels, is expected to boost our business results to a certain extent. Also, we expect additional business performance based on fleet conversion to larger ships through replacement by new ships, as well as by handling more high-and-heavy cargo (oversized cargo such as construction and agricultural machinery and rail vehicles etc.), which we have been working on for some time, as well as other types of cargo.

 As for Energy Resource Transport, we expect that most of our investment plans currently in progress will produce earnings results after the end of the current Medium-term Management Plan. This area is expected to return to the previous level of 10.0 billion yen, once the temporary factors of fiscal 2023 have disappeared.

 Looking at the supply of vessels for Dry Bulk, as you may remember, a large number of new ships were delivered between 2010 and 2012. These ships are expected to be retired by 2030, and we anticipate considerable progress in replacing them with environmentally friendly ships and those powered by alternative fuels. In addition to our core customers in Japan and South Korea, we are also actively working with customers in growth markets such as India and the Middle East. Our aim is to capture growing demand for green transport by switching to alternative fuel vessels. Meanwhile, by capturing new transport demand for cargo such as redox iron, we expect to increase earnings to the 20.0 billion yen level.

 As for Car Carrier Business, 2030 is probably when the large number of heavy oil-fueled vessels that were built before the 2008 financial crisis will begin to be retired. Moreover, there is a strong demand for environmentally friendly vessels powered by alternative fuels. As carbon pricing and taxes on carbon emissions expand, we expect the demand for low-carbon and zero-emission vessels to become even stronger. Under these circumstances, we intend to work closely with customers to meet their environmental needs and to provide reliable transport services over the medium and long term. The aim is to further expand our stable earnings base.

 Regarding our LNG carriers in Energy Resource Transport, many predict that approximately 400 million tons per year of the current global demand for LNG will increase to approximately 700 million tons per year, reaching a peak in 2040. We are currently actively working to expand new medium- to long-term contracts, and the earnings results are expected to appear between fiscal 2026 and 2030. We have also been strengthening our sales activities for transport services integrating the sales and marine technical divisions. In addition to the already announced 16 LNG carriers for the Qatar project and one for DGI, there are others we have not yet disclosed, and those contracts have already been signed. Therefore, we have already achieved more than half of our current plan to increase the number of LNG carriers from 46 to 75.

 In the area of new business projects, we will begin operating three liquefied CO2 transport vessels in Europe this year, where we can leverage our strengths mainly in marine transport. We plan to build on this track record and expand the business into Asia and Japan. Similarly, we continue to actively advance our business for offshore wind turbine support vessels and for transporting ammonia, of which demand is expected to increase for co-combustion in thermal power plants, mainly in Japan and South Korea. Our aim is to capture more of those new transport demand.


C-11【Functional Strategy】:Progress overview

 As part of our functional strategy, we have formed a project team that is working tirelessly to respond to environmental needs, especially for alternative fuels. We want to be able to respond to multiple future demand scenarios such as those involving ammonia and methanol in addition to LNG. Of course, we will continue to adopt a full range of energy-saving equipment. Meanwhile, to secure and train the crew needed to support these efforts, we are expanding relevant training facilities not only in the Philippines, but also in India, so that we can add more vessels powered by alternative fuels. We are also working on worldwide adoption of a next-generation ship management system called KONeCT.


C-13:Changes in the business environment

 Finally, we turn to changes in the business environment. For the short term there are concerns about increased geopolitical risks and regional conflicts, which might result in further economic decoupling. This could impact supply chains and cargo movements. “K” Line will also likely be affected in the short term by various other factors, which we will keep an eye on. These include a continuation of high resource prices and the resulting inflation, as well as stagnation of the global economy due to national policies for higher interest rates, and a decline in consumption. Over the medium and long term however, the green energy transition will reach a turning point. Looking at future energy demand, including the transitional situation for alternative fuels, energy-mix, we would like to expand our business with a focus on medium- to long-term contracts, while taking appropriate risks so that we will be able to respond to multiple future fuel demand scenarios rather than betting on just one of them.