【Financial Highlights Brief Report for 3rd Quarter FY2024】
A. Financial Highlights for 3rd Quarter FY 2024
A-1. Financial Results for 3rd Quarter FY2024
For the fiscal 2024 third quarter results, operating revenues were 804.9 billion yen, operating income was 92.2 billion yen, and ordinary income was 288.8 billion yen, while net income attributable to owners of parent was 284.7 billion yen. The average exchange rate over the nine month period is 152.27 yen. Both revenues and profits increased compared to the same period last year. Dry Bulk and Car Carrier Business were the top contributors to operating income. Ordinary income and net income attributable to owners of parent increased significantly due to stable short-term market conditions for Containership Business, which is operated by OCEAN NETWORK EXPRESS (ONE). The key financial indicators show that equity capital was 1,707.3 billion yen, interest-bearing liability was 342.9 billion yen, DER was 20%, and equity ratio was 75%. We believe that our financial position remains sound.
A-2. Financial Results for 3rd Quarter FY2024 by Segment
Looking at the first three quarters, the Dry Bulk segment reported ordinary income of 16.2 billion yen. In the same period, ordinary income was 6.3 billion yen for Energy Resource Transport and 269.7 billion yen for Product Logistics. As this includes 193.8 billion yen from Containership Business, ordinary income for “K” Lineʼs own Product Logistics businesses, excluding Containership Business, was 75.9 billion yen. “K” Line’s total ordinary income was 288.8 billion yen.
Each segment saw an increase in profits compared to the same period last year. I will explain the reasons for the main changes in each business later on, along with the full-year performance forecast. Ordinary income for “K” Lineʼs own businesses was 95.0 billion yen, calculated by deducting the 193.8 billion yen figure for Containership Business from the total figure of 288.8 billion yen. This represents an increase of more than 30.0 billion yen compared to the same period last year.
As stated in the footnote, “K” Line’s performance figures tend to fluctuate depending on exchange rate trends. In the third quarter of fiscal 2024, ordinary income was 101.5 billion yen. Meanwhile, the yen depreciated against the US dollar, with the exchange rate moving by 15 yen from 143 at the end of September to 158 at the end of December. The weaker yen resulted in a foreign exchange gain of 14.9 billion yen in the third quarter.
B. Forecasts and Initiatives for FY2024
B-1. Forecasts for FY2024 and Key Factors
Our full-year performance forecast for fiscal 2024 is for operating revenues of 1,050.0 billion yen, operating income of 106.0 billion yen, and ordinary income of 300.0 billion yen. Net income attributable to owners of parent is expected to be 295.0 billion yen. The average exchange rate during the period is 152.39 yen and the bunker price is 608 dollars per metric ton. The forecasted rate for the fiscal year-end (March 31) is 150 yen.
Comparing our performance with the same period last year, both revenues and profits have increased. Compared to the full-year performance forecast announced with the interim financial results on November 5, operating revenues are up 20.0 billion yen, ordinary income is up 60.0 billion yen, and net income attributable to owners of parent is up 60.0 billion yen. Regarding the situations for each segment, the basic structure remains unchanged from the third quarter results, with operating income being driven by Dry Bulk and Car Carrier Businesses, and ordinary income being driven largely by Containership Business.
Regarding the forecast assumptions and the impact of fluctuations, for every 1 yen change in the exchange rate, we expect an impact of plus or minus 1.0 billion yen on our figures. For example, a 1 yen depreciation will result in a 1.0 billion yen improvement in ordinary income, while a 1 yen appreciation of the yen will result in a 1.0 billion yen drop in ordinary income.
Regarding shareholder return for this fiscal year, 2024, the dividend will be 100 yen per share, which remains unchanged from the figure announced with our interim financial results. Meanwhile, we are in the process of implementing a share buy-back, up to a maximum of 36 million shares, or 90.0 billion yen. As announced with the interim financial results, we will proceed with the share buy-back process before the end of February, until we reach either the maximum purchase amount or the maximum number of shares. I will cover our shareholder return policy for the entire period of the Medium-term Management Plan a little later.
B-2. Forecasts for FY2024 by Segment
Turning to the full-year forecast for fiscal 2024 by segment, ordinary income is expected to be 14.5 billion yen for Dry Bulk, 6.5 billion yen for Energy Resource Transport, and 285.0 billion yen for Product Logistics. The Containership Business share of the Product Logistics figure is 197.0 billion yen. The remaining 88.0 billion yen represents ordinary income from “K” Lineʼs own Product Logistics businesses other than Containership. We are forecasting total ordinary income of 300.0 billion yen.
Compared to the same period last year, there was a one-time loss for Energy Resource Transport, resulting in a negative result. Otherwise, Dry Bulk, Product Logistics, and Containership Business are all showing improvements compared to the same period last year.
Also, compared to the forecast announced with the interim financial results on November 5, there have been improvements in all segments. Dry Bulk and Energy Resource Transport each improved by 1.5 billion yen. Product Logistics saw an improvement of 57.5 billion yen, which breaks down to 52.0 billion yen for Containership Business and 5.5 billion yen for “K” Lineʼs own Product Logistics businesses other than Containership.
Since there have been improvements compared to both the same period last year and the previous forecast announcement, we believe that we are making steady progress. As for the reasons for the main changes in each segment, conditions in the Dry Bulk market have been down slightly in the current fourth quarter, and this is reflected in the current earnings plan.
As for Energy Resource Transport, our business operations are basically based on long-term stable contracts. Accordingly, we expect the situation to remain stable in the fourth quarter and beyond.
Within the Product Logistics segment, Car Carrier Business has seen a decrease in cargo volume. This is primarily due to reduced vessel deployment efficiency, caused by port congestion leading to longer port stays for vessels in Australia and other regions. However, there have been no major changes in fundamentals for this segment. We will continue to strive for efficient vessel deployment to achieve stable earnings.
The key factors affecting Containership Business will be the market conditions for short-term freight rates, seasonal factors such as cargo movement trends after the Lunar New Year, and the impact of alliance restructuring starting in February this year. ONE will continue its efforts for efficient operations and vessel deployment that meets demand.
Looking at performance for the second half of the fiscal year, there is a huge difference in the third and fourth-quarter earnings. While ordinary income was 101.5 billion yen in the third quarter, it is expected to drop to 11.2 billion yen in the fourth quarter, resulting in a decrease of 90.0 billion yen. One factor behind this is a very substantial deterioration in the earnings forecast for Containership Business between those two quarters. Ordinary income for Containership Business, which was 57.4 billion yen in the third quarter, is expected to be 3.2 billion yen in the fourth quarter, a deterioration of approximately 54.0 billion yen. For the overall 90.0 billion yen decrease, approximately 60%, or 54.0 billion yen, is due to the outlook for Containership Business.
The remaining 40% was mostly due to the exchange rate impact. The dollar-yen exchange rate at the end of the second quarter (September 30) was 143 yen, a relatively strong position for the yen recently. At the end of the third quarter (December 31), however, the rate climbed 15 yen to 158 yen, indicating a weaker Japanese currency. The third quarter financial results include the foreign exchange valuation gains on foreign currency-denominated receivables and payables caused by the 15 yen depreciation of the yen.
On the other hand, our assumed exchange rate at the end of the fourth quarter (March 31, 2025) is 150 yen. Thus we expect the yen to appreciate by 8 yen from the 158 yen level at the end of the third quarter (December 31). This 8 yen appreciation will exert downward pressure on our results. Due to exchange rate trends, the results moved upward in the third quarter but are projected to move downward in the fourth quarter. The fluctuations in figures, moving both upward and downward with a widening gap, are a major reason for the difference between the third and fourth quarters. Since the exchange rate fluctuations result in foreign exchange valuation gains and losses on foreign currency-denominated assets, they do not affect cash flow. Therefore, we are seeing a temporary impact on our results due to exchange rate fluctuations.
Although Containership Business performance can be viewed in certain ways, apart from that, we believe that most of the decline can be attributed to temporary factors.
Looking at performance for “K” Lineʼs own businesses, for the current fiscal year, 2024, we are expecting ordinary income of 300.0 billion yen for the Company as a whole. Of this amount, Containership Business is expected to earn 197.0 billion yen, and the remaining 103.0 billion yen will be attributed to “K” Lineʼs own businesses.
We are working toward our goal of achieving an ordinary income of 90.0 billion yen in the final year of our Medium-term Management Plan, fiscal 2026, and further increasing our ordinary income to 110.0 billion yen by fiscal 2030. The third and fourth quarters of this fiscal year have seen fluctuations in exchange rates and seasonal factors. However, looking at the bigger picture, we believe that “K” Lineʼs own businesses will be able to continue to earn a solid income in line with our goals even after fiscal 2025. Furthermore, we believe the key influence on company-wide performance will be the future developments affecting Containership Business.
C. Status and Progress of the Medium-term Management Plan
C-1.【Capital Policy】:Capital Policy Progress and Corporate Value Improvement
With regard to earning power enhancement and our investment plan, we are currently conducting various reviews and investigations as we put together our earnings plan for fiscal 2025 and beyond. Therefore, we have not made any major changes to the figures at this time.
Regarding overall operating cash flow, we are currently carefully assessing how it will likely develop in 2025 and 2026, taking into account the better-than-expected performance this fiscal year.
Our current investment plan as announced is 740.0 billion yen. However, we are still examining what will likely happen within the Medium-term Management Plan period, including the direction of vessel prices, customer trends, and the timing of customer needs and projects. However, our basic investment policy remains unchanged. We will continue to make the investments necessary for the continued growth of the company, even if the timing needs to be slightly delayed. Therefore, we intend to continue making well-planned investments.
We are conducting in-depth internal discussions on our optimal capital structure, including the capital requirements for Containership Business, namely ONE.
Our shareholder return policy was previously set at 730.0 billion yen or more during the Medium-term Management Plan period. Now however, we have increased the figure by 20.0 billion yen to 750.0 billion yen or more. Specifically, for fiscal 2025 and 2026, dividends have been increased from 85 yen per share to 100 yen per share. Our approach to shareholder returns has not changed. We will make necessary investments while considering the optimal capital structure, and maintain financial soundness. For the portion exceeding the appropriate capital, we will actively deliver shareholder returns based on cash flow. During various reviews of our situation, we determined that it is entirely feasible to increase shareholder returns by approximately 20.0 billion yen. In addition, we are currently in a share buy-back process. We have adopted a policy of distributing shareholder returns in a way that takes into consideration the priorities of diverse shareholders. They include both those who are looking for capital gains and those seeking income gains. Therefore, we have decided to plan a reliable annual dividend of 100 yen per share during the Medium-term Management Plan period. We will continue to consider additional shareholder returns, taking cash flow into account. We continuously evaluate the timing, method, and scale of shareholder returns to improve corporate value most, and any decisions that are made will be shared in a timely manner.
C-3. Changes in the business environment
As always, when it comes to risks facing the shipping industry, economic decoupling, including geopolitical factors, global economic trends, and energy policy developments have a huge impact.
C-4. Shipping Industry Environment
We have prepared detailed materials focusing on two current issues and major points of concern that we are closely monitoring: the change of U.S. administration and the Middle East situation. I will not go into detail on these two issues, but in broad terms, there are three significant points of concern regarding the change of U.S. administration. These are U.S. energy policies, trade policies such as tariffs, and how the U.S. economy could develop depending on the actions of the new administration.
Regarding energy policies, many expect the U.S. to increase production of fossil fuels such as LNG, thereby increasing exports and business opportunities for “K” Line. On the other hand, for Car Carrier Business, we need to keep a close eye on things like EV sales trends and what types of cars could see stronger sales.
In terms of trade policies, we will be keeping a close eye on how supply chains might change, as this could have a particularly large impact on Containership Business and Car Carrier Business.
In terms of the U.S. economy, we believe that Containership Business and Car Carrier Business will be the most affected by any changes in consumer spending there. On the other hand, considering Energy Resource Transport, if inflation were to increase further, projects could be delayed, so we intend to closely monitor this situation. However, as always, “K” Line will continue to take the lead in environmental response while leveraging its strengths. We will also continue to grow and develop our business and improve our corporate value by working with customers to reduce emissions and achieve decarbonization. Although it is always difficult to predict the future, with this approach firmly in place, we intend to continue monitoring each situation closely and take any measures necessary.
Regarding the Middle East situation, diplomatic negotiations between Israel and Hamas are currently underway. The shipping industry is watching closely to see when the Suez Canal can resume normal operations and under what conditions vessels will be able to use this route again. Until the safety of our ships, our crews, and the cargo entrusted to us by customers can be fully guaranteed, we will not consider sending our vessels back to the Suez. Therefore, we will continue using the Cape of Good Hope route until we can be fully confident in the safety of the Suez, based on a comprehensive assessment of all relevant circumstances. Since it is difficult to determine the exact criteria for making such a decision at this point, we intend to carry out a thorough and careful assessment while taking a comprehensive look at the situation.
