【Financial Highlights Brief Report for 2nd Quarter FY2024】
A. Financial Highlights for 2nd Quarter FY 2024
A-1. Financial Results for 2nd Quarter FY2024
In the second quarter of fiscal 2024, operating revenues increased by 81.6 billion yen year-on-year (up 5.0 billion yen from the previous forecast) to 538.0 billion yen. Operating income improved by 16.9 billion yen year-on-year (up 1.1 billion yen from the previous forecast) to 61.1 billion yen. Ordinary income improved by 104.7 billion yen year-on-year (up 20.8 billion yen from the previous forecast) to 187.3 billion yen. Net income attributable to owners of parent for the first half increased by 122.4 billion yen, or 200% year-on-year to 183.2 billion yen, representing an increase of 21.2 billion yen from the previous forecast. One point to note is that in the second quarter, we recorded a 15.4 billion yen foreign exchange loss, which was due to one-time factors and did not affect cash flow. This resulted from a revaluation of foreign currency-denominated cash and deposits as well as receivables and payables.
Equity capital was 1,580.8 billion yen, interest-bearing liability was 287.8 billion yen, DER was 18%, and equity ratio was 76%.
A-2. Financial Results for 2nd Quarter FY2024 by Segment
Overall, compared to the same period last year, Dry Bulk and Containership Business contributed to profitability. Compared to the previous forecast, however, Car Carrier Business and Containership Business were the contributors. As for individual segments, as I just mentioned, a foreign exchange loss of 15.4 billion yen was recorded in the second quarter. This was due to the revaluation of foreign currency-denominated cash and deposits as well as receivables and payables. This loss has been allocated to each business segment based on a set of rules, which makes it difficult to see each segment’s actual performance clearly. Therefore, I will provide an overview of each business segment later when discussing the full-year outlook. The foreign exchange loss, which did not impact cash flow, was due to the yen’s sharp appreciation against the dollar. The dollar-yen rate went from the 161-yen level at the end of the first quarter to the 142-yen level at the end of the second quarter, a nearly 20-yen change.
B. Forecasts and Initiatives for FY2024
B-1. Forecasts for FY2024 and Key Factors
For the full-year forecast for fiscal 2024, operating revenues are expected to increase by 72.1 billion yen year-on-year (up 10.0 billion yen from the previous forecast) to 1,030.0 billion yen. Operating income is expected to improve by 21.9 billion yen year-on-year (up 4.0 billion yen from the previous forecast) to 106.0 billion yen. Ordinary income is expected to improve by 107.3 billion yen year-on-year (up 20.0 billion yen from the previous forecast) to 240.0 billion yen. Net income attributable to owners of parent for fiscal 2024 is expected to increase by 133.1 billion yen, or 130% year-on-year to 235.0 billion yen, representing an increase of 25.0 billion yen from the previous forecast. The actual exchange rate for October was used as the assumed rate for the second half. However, for November onward, including the end of the fiscal year, we are basing our earnings projections on a rate of 140 yen. The assumed average exchange rate for the full fiscal year is 147.17 yen, with the assumed bunker price at 624 dollars per metric ton. For reference, a 1-yen fluctuation in the exchange rate is expected to impact profits by ±1.6 billion yen, and a 10-dollar fluctuation in the bunker price is expected to impact profits by ±30 million yen. I will talk about shareholder returns later on.
B-2. Forecasts for FY2024 by Segment
For the full-year forecast by segment, ordinary income for Dry Bulk is projected to improve by 9.5 billion yen year-on-year. However, it is expected to decrease by 2.0 billion yen from the previous forecast, resulting in an ordinary income of 13.0 billion yen. In the market for Dry Bulk, compared to the previous fiscal year, market conditions were stable in the first half of the year, due to very strong demand for bauxite and iron ore transport using Capesize vessels. For the second half, we expect domestic Chinese demand for steel and other materials to decline, mainly due to the slump in China's real estate market, and the volume of iron ore shipped to China is also likely to decrease to a certain extent. Based on this outlook, a temporary softening of market conditions for Capesize vessels is expected in this half of the year. Turning to Panamax and smaller sizes, China saw a good grain harvest in the first half, and demand for grain transport from South America, primarily for corn, are below expectations. Although the market softened temporarily, it is expected to recover somewhat as cargo movements shift from corn to soybeans going forward. As for the medium and long-term outlook for Dry Bulk, concerns remain regarding a potential slowdown in China’s economy. Nevertheless, we expect demand growth from emerging markets, particularly India, combined with limited new vessel orders, especially for Capesize vessels, to provide underlying support to the market conditions.
For Energy Resource Transport, we forecast an ordinary income decrease of 2.5 billion yen year-on-year (1.0 billion yen below the previous forecast), resulting in a projected ordinary income of 5.0 billion yen. This forecast is based on one-off factors. Even so, other vessel types are generating stable earnings primarily through medium- to long-term contracts, and most of our current investments are expected to start enhancing profitability starting around fiscal 2026, mainly for LNG carrier business.
For Product Logistics, we anticipate an ordinary income improvement of 98.9 billion yen year-on-year (23.5 billion yen above the previous forecast), with a projected ordinary income of 227.5 billion yen. Within this segment, ordinary income for Containership Business is expected to improve by 99.2 billion yen year-on-year (17.0 billion yen above the previous forecast), resulting in an ordinary income of 145.0 billion yen. This means that other businesses under Product Logistics, including Car Carriers, are expected to improve by 6.5 billion yen above the previous forecast. For Car Carrier Business, transport demand remains strong, particularly from Asia to North America. Supply and demand is already tight, and the security situation in the Red Sea has forced us to reroute vessels via the Cape of Good Hope. We estimate this is reducing overall supply by about 6%. Accordingly, the approximately 45 new vessels being delivered this year should help to bridge this gap. We are also keeping a close eye on the impact of the EU’s extra tariffs on Chinese EVs, which took effect in November. Based on conversations with various customers, EV makers seem to be taking a range of response measures. These include shifting away from battery EVs, which are subject to the tariffs, and focusing on other types such as hybrids, plug-in hybrids, and gasoline vehicles. We will keep monitoring the situation to assess the impact.
As I already mentioned, the supply-demand situation remains very tight. Even if it is not necessary to reroute vessels via the Cape of Good Hope, our outlook would remain unchanged. In other words, we expect a tight supply-demand balance to continue through the end of 2025 and into early 2026. By fully utilizing our new eco-friendly larger vessels, we will work to restore freight rates, secure liftings, and expand earnings.
FY2024 2nd Quarter Results of OCEAN NETWORK EXPRESS (ONE)
Looking at Containership Business in the first half of the fiscal year, although consumer spending recovered, particularly in North America, there was uncertainty ahead of talks scheduled for October with the International Longshoremen's Association (ILA), which is the union representing port workers on the East Coast of North America, to renegotiate their labor agreement. Meanwhile, shipments to Europe continued to be affected by the Red Sea security situation, which has required the rerouting of vessels around the Cape of Good Hope, significantly extending voyage days. In order to avoid this, scheduled shipments were brought forward in the first half of the year, with cargo movements remaining strong and the short-term freight rate market rising. As a result, ONE’s after-tax profit for the first half increased by about 2,000 million dollars year-on-year to 2,778 million dollars, compared to 700 million in the same period last year.
FY2024 Full Year Forecast of ONE
For the second half, we expect a usual off-season coupled with the impact of early shipments in the first half. This will likely lead to a decrease in transport demand and a certain level of decline in the short-term freight rate market. We have also factored in some temporary costs related to an anticipated alliance restructuring around February next year. Therefore, profit for the second half is forecasted at 317 million dollars, with a full-year profit projection of about 3,095 million dollars.
C. Status and Progress of the Medium-term Management Plan
C-1【Capital Policy】:Capital Policy Progress and Corporate Value Improvement
Now I would like to give you a progress update on our Medium-term Management Plan.
Since the start of the plan period, we have been focused on enhancing our earning power and profitability. In May of this year, we raised the ordinary income target for the final year of the plan from 140.0 billion yen to 160.0 billion yen, an increase of 20.0 billion yen. However, as mentioned earlier, our latest forecast for the current fiscal year is now 240.0 billion yen.
Operating cash flow is also projected to increase by approximately 100.0 billion yen from the initial forecast, reaching a total of 1.5 trillion yen over the plan period. Meanwhile, we are still committed to conducting and accelerating essential investments that improve corporate value without relaxing our investment discipline. The investment target remains at 740.0 billion yen, unchanged from the figure announced in May.
Regarding our optimal capital structure, we will continue to assess the necessary capital levels for “K” Lineʼs own businesses and Containership Business. As we have consistently emphasized, our basic policy remains the same: We aim to balance financial soundness with capital efficiency, and based on cash flow, we will pursue the growth and investments necessary for improving corporate value while also distributing shareholder returns using a flexible approach.
As a result of the increase in operating cash flow, we have raised the cumulative shareholder return amount for the Medium-term Management Plan period from the previous level of 700.0 billion yen or more to 730.0 billion yen or more, an increase of 30.0 billion yen. Specifically, for fiscal 2024, we have planned a 15 yen increase in the dividend per share, bringing it to 100 yen. Additionally, we will carry out a share buy-back of 90.0 billion yen as an additional shareholder return, in line with our flexible approach. This follows the buy-back of 90.8 billion yen worth of shares from May to July this year. We are now planning a further share buy-back of up to 90.0 billion yen, or 36 million shares. As I said earlier, we will continue to strengthen our earnings power, enhance profitability, and improve capital efficiency, aiming to consistently achieve an ROE of 10% or more. In this process, we will also reduce our cost of capital and aim to return to a PBR of 1 or more, while maintaining and improving it.
C-2【Capital Policy】:Cash Allocation
Regarding cash allocation, operating cash flow has increased by 100.0 billion yen since the announcement in May of this year. We now expect a cumulative total of 1.5 trillion yen for the Medium-term Management Plan period. As a result, regarding our cash outflows, we have decided to increase our cumulative shareholder returns from 700.0 billion yen or more to 730.0 billion yen or more.
C-3【Capital Policy】:Shareholder’s Return Policy
For the shareholder return policy, we plan to increase the dividend by 15 yen per share to 100 yen for the current fiscal year. We will also conduct a flexible additional return through a share buy-back of up to 90.0 billion yen, or 36 million shares. The share buy-back will be carried out through off-auction own share buy-back trading (ToSTNet-3) and Auction market on the Tokyo Stock Exchange. The buy-back period is from November 6, 2024 to February 28, 2025. The repurchased shares will, in principle, be cancelled. This concludes the update on our shareholder return policy for fiscal 2024.
C-4【Business Strategy】:Three businesses that will drive growth and new business areas：Growth strategy progress
Finally, let me give you a progress update on our business strategy.
In the coal and iron ore carrier business, we are steadily replacing older vessels. This includes the acquisition of eco-friendly vessels such as those powered by LNG, including Capesize vessels. The aim is to maintain and expand our stable earnings base. This year, we took delivery of a 200,000-metric ton Capesize bulk carrier powered mainly by LNG, a first for "K" Line's Drybulk carriers. Stable operation of this vessel has begun under a long-term contract. Meanwhile, after thoroughly confirming demand, we are progressing with orders for additional vessels. Acquisition of medium- to long-term contracts is also advancing.
As part of our plan to expand our stable earnings base, we are focusing on long-term charter contracts of LNG carriers. The number of LNG carriers we operate is expected to grow from the current 46 vessels to 65 vessels by the final year of the Medium-term Management Plan in fiscal 2026, and to 75 vessels or more by fiscal 2030. As for the current level of progress, we signed contracts for 12 LNG carriers with QatarEnergy last year, and 4 new contracts this year, bringing the total to 16 vessels. Furthermore, we are accumulating contracts one by one, so the 65-vessel fleet by fiscal 2026 is now almost in sight. We are now intensifying efforts to enhance earnings growth toward fiscal 2030.
In Car Carrier Business, we are working to further enhance our recovered profitability by steadily replacing vessels with competitive, eco-friendly LNG-powered larger vessels. As of this fiscal year, five new LNG-powered larger vessels have already been delivered, with more on the way. These vessels help us reduce our Scope 3 CO2 emissions, and further contracts supporting these efforts are in the works. Moreover, since all these are larger vessels, we are taking advantage of their larger size to improve liftings and transportation efficiency. Also, by incorporating more high and heavy cargo and large non-motorized cargo, we aim to further strengthen our earnings base.
While shipping remains our core focus, by utilizing the experience and expertise we have accumulated in the maritime industry, we are also developing new business areas that can help reduce CO2 emissions and achieve a decarbonized society. Regarding the new business of liquefied CO2 transport, our project with Northern Lights, the world's first full-scale carbon capture and storage (CCS) operation, is finally set to get underway this fall. We have signed a third charter contract with Northern Lights and are actively pursuing further business expansion in Europe while securing new contracts.
Meanwhile, we are expanding into offshore wind turbine support vessels, which are expected to be constructed in Japan going forward. We have established a marine geo-survey vessel business as a joint venture with a British company. These vessels are for conducting marine geotechnical surveys, which are essential for the construction of offshore wind turbines and cable laying. One Japanese-flagged geo-survey vessel has just been put into service. We look forward to the success of these projects.
