Returns for “K” Line Shareholders
Q-1: As part of shareholder returns for the current fiscal year, you have announced a basic dividend of 300 yen per share. Since you are also planning shareholder returns of at least 100 billion yen that include share buy-back, does this mean you will buy “K” Line shares from the market?
A-1: We are currently considering how to proceed with the share buy-back.
Q-2: Could you explain why “K” Line is considering shareholder returns of 100 billion yen in addition to the basic dividend of 300 yen for the current fiscal year?
A-2: Basically, we will return an additional 100 billion yen or more to shareholders. We have decided to take some more time to consider the specific format of this supplementary distribution, whether it be additional dividends or through the share buy-back.
Q-3: Regarding the additional shareholder returns of 100 billion yen or more, are you considering share buy-back in addition to dividend payment to reduce the risk of lower returns if only dividends are paid, for example?
A-3: For the additional shareholder returns, it will take us some more time to consider our capital structure and other factors before deciding on the share buy-back.
Q-4: What would you consider to be an appropriate capital structure? Could you explain it from an objective perspective, such as using a target equity ratio?
A-4: We are currently doing a detailed investigation of how to achieve the optimal capital structure, but we think there are two main angles. The first is to decide the optimal structure based on our ultimate objectives for ONE, which is growing in terms of our balance sheet and profits. The second angle involves the soundness of our finances. We will continue to investigate our optimal capital level going forward, keeping in mind the need to secure a financial structure and rating that will allow us to make the necessary investments and to also raise strategic financing even during a recession.
Q-5: On page 29 of the Medium-Term Management Plan, it appears the total amount of shareholder returns will remain at the same level over the next three years. Is this the kind of shareholder returns you are expecting?
A-5: The basic approach is to figure out how to invest for growth and distribute shareholder returns on the basis of cash flow. At the moment, a certain amount of cash flow is expected for fiscal years 2023 and 2024. From fiscal year 2023 onward however, we want to have the flexibility to make decisions based on the actual cash flow for each fiscal year.
Q-6: To promote optimal capital allocation, you mentioned that liability reduction will start with the debt having the higher interest rates. Does this specifically refer to subordinated debt?
A-6: We will also consider subordinated debt as a target for debt reduction going forward.
Medium-Term Management Plan: Overall
Q-7: Your operating cash flow is expected to be in the range of 900 billion to 1 trillion yen during the period covered by the Medium-Term Management Plan. Given that your cash flow for the previous fiscal year was just over 200 billion yen, and assuming the profit from Containership Business will gradually decrease, how do you expect to reach the 900 billion to 1 trillion-yen range?
A-7: The operating cash flow is basically premised on the strong performance of Containership Business in fiscal years 2021 and 2022. We expect to reach a steady pace in fiscal year 2023 or soon after, and no major profit or cash flow increases from Container Business expected after that. To put it another way, our structural reforms have progressed, and new business projects such as LNG carriers will launch before long, so the benefits should materialize, including such cash flow.
Medium-Term Management Plan: “K” LINE’s Own Businesses
Q-8: You mentioned that “K” Line is drawing attention to its environmental initiatives for Coal and Iron Ore Carrier Business and Car Carrier Business. As mentioned in the materials for the Medium-Term Management Plan, “K” Line has been listed in the CDP’s “A rank” for six consecutive years and has also received SBT-certification basis well below 2 degree. This represents an extremely positive external evaluation for your environmental efforts. Has this kind of external environmental certification become critically important for promoting your Coal and Iron Ore Carrier Business and Car Carrier Business? Alternatively, do you think it is more important to have quantitative and technical evaluation, such as actual vessel performance figures and the company’s actual greenhouse gas reduction results? In your opinion, what kind of environmental evaluation is most important to customers?
A-8: We think both types are important. “K” Line has been highly evaluated because we can offer customers our specific greenhouse gas reduction measures, options, and various choices and actually implement them. Going forward, we will continue to propose environmental services to our customers. This will be based on the installation of various types of new energy-saving equipment, including LNG-fueled, ammonia-fueled, and zero-emission vessels. It also includes other transport packages to meet the demand for alternative vessel services. Moreover, we think these efforts are necessary for us to seize future growth opportunities.
Q-9: “K” Line expects to increase profits from “K” Line’s own businesses by about 21 billion yen over five years. How much return on investment and profits do you expect to make during this period? Also, regarding your investment projects, how would you divide them into ones that are more challenging to acquire and ones that are almost secured?
A-9: Our ordinary income for fiscal year 2021 includes foreign exchange gains. Excluding this amount, the expected increase by fiscal year 2026 is a little over 21 billion yen, which is more than double the fiscal year 2021 result. As part of this outlook, most of the projects for our LNG Carrier Business are ones where contracts have been signed or are being formed. There are also projects in Coal and Iron Ore Carrier Business and Car Carrier Business that are practically ready to go. Very little of the upcoming investment will contribute to profits by fiscal year 2026. Instead, the investment return will be more noticeable from fiscal year 2027 to 2030. Therefore, we set weighted average cost of capital (WACC) targets for each business and used return on investment (ROIC) figures that will exceed the set targets as the basic investment determination criteria.
Q-10: In the new Medium-Term Management Plan, there is no mention of immediate measures such as M&A. Are no such activities being considered?
A-10: We are constantly investigating M&A opportunities, but we did not include any in this plan because there are no solid prospects at this time.
Q-11: Since your plan is to almost double the size of the “K” Line own businesses by fiscal 2026, which specific growth businesses are expected to see profit expansion, and to what extent?
A-11: Our three leading growth businesses are basically expected to double in size. Moreover, they are expected to produce two-thirds of our ordinary income by fiscal year 2026. The largest of these is Car Carrier Business, followed by LNG Carrier Business. Coal and Iron Ore Carrier Business will also grow, and while the current market conditions for dry bulk remain very positive, the projected market conditions for fiscal year 2026 have been lowered to the median level for past years. Therefore, the profitability of the Coal and Iron Ore Carrier Business do not appear to increase that much.
Medium-Term Management Plan: Containership Business
Q-12: You mentioned that the supply chain disruptions currently affecting Containership Business will begin to subside by August. Could you elaborate on that? Also, your Medium-Term Management Plan assumes that ONE will reach a profit level a bit higher than the pre-pandemic level, including the profit enhancement resulting from the integration of the three Japanese shipping companies. When do you think that you will return to the pre-pandemic situation?
A-12: It is hard to predict when we will return to the pre-pandemic situation. Earlier predictions saw us returning by this year’s Lunar New Year and then by May. At this stage, we could return to pre-pandemic conditions by August at the earliest. We will probably return to a steady pace in the next fiscal year or soon after. We are an ONE shareholder and have expectations as such, and we believe that ONE is competitive enough to boost its profits by a certain level regardless of whether or not market conditions will return to pre-pandemic levels. The market environment has already changed at this stage.