【Returns for “K” Line Shareholders】

Q-1:For the shareholder returns, “K” Line is planning an increase of 300 yen per share on a pre-split basis and are allotting about 28.0 billion yen of capital for dividend distribution. I thought "K" Line would buy back its own shares, what led to the current decision to increase the planned dividends? Also, what is the status of the share buyback investigation?


A-1:The additional shareholder return measures are still under consideration. Our approach is to base the decision on performance trends with a focus on cash inflows and the status of our investment plans, and the decision is yet to be made.

At this point, cash inflows are expected to increase steadily. Therefore, we have decided to increase our planned dividend while keeping in mind the need for balanced shareholder returns, rather than choosing between dividend and share buyback.



Q-2:You say the additional shareholder returns of 100.0 billion yen or more are still undecided at this time. From the outside, however, it seems that your cash inflows and capital investment are mostly on track. Are there any other factors that you need to consider, such as the stock price or business performance? Or are you taking a wait-and-see approach, as this is still only the first quarter and the market outlook remains uncertain? Could you elaborate on this, please?


A-2:I think that we are close to the latter, "taking a wait-and-see approach," in a sense. It is necessary to consider various factors in addition to focusing on performance trends and the investment situation with respect to cash inflows. We believe it would be somewhat hasty to make a firm decision on shareholder returns in the first three months of a new Medium-Term Management Plan. The business environment presents many uncertainties, so we believe it prudent to study the situation further before making any decisions.



Q-3:Your non-consolidated retained earnings were around 190.0 billion yen at the end of the previous fiscal year. Would you say this level is sufficient to implement a sizeable shareholder return policy this fiscal year?


A-3:We believe that our non-consolidated retained earnings are at a sufficient level to deliver the shareholder return policy that has been currently announced. Our approach remains the same, and we intend to announce our shareholder return policy while ensuring the level of funds to be used.



Q-4:Is the additional dividend of 300 yen per share just for this fiscal year? Or will you continue to add that to the basic dividend and pay a total dividend per share of 600 yen from the next fiscal year onward?


A-4:At present, we are not considering profit distribution to shareholders by setting a dividend payout ratio or pre-determined dividend amount. We will continually adapt shareholder returns to the cash inflow during the period, the cash necessary for investment, and the financial situation. The planned dividend announced this time will not necessarily continue in the future.



Q-5:With regard to the additional dividend of 300 yen per share announced this time, is it correct to assume that one-third of the expected increase in operating cash flow of about 100.0 billion yen will be allocated to dividends?


A-5:We have not set a dividend payout formula based on cash inflow. Our aim is to distribute shareholder returns in a way that is seen as maximizing our corporate value, while still considering a range of factors, including cash inflow and investment choices. Just because we had a cash inflow of 100.0 billion yen does not mean that one-third of it has been allocated to shareholder dividends.



Q-6:What is the significance of waiting to announce the additional shareholder returns sometime in the future? "K" Line aims to maximize its corporate and shareholder value. Therefore, it would be a waste to implement everything in such a short period of time that it would not be fully reflected in “K” Line’s stock price. The impact on corporate value is heavily influenced by the announcement method, so what is "K" Line's intention for the announcement of the additional shareholder returns? For example, how will announcements be made in the first and second half of this fiscal year respectively, and whether should they be made during the period? Are these included in your assumptions and discussions? Please explain your approach.


A-6:We are in the process of investigating when/how to make announcements while also incorporating external knowledge and expertise. As you point out, the form of shareholder return announcements clearly makes a difference in how much the company's corporate value, namely its stock price, is likely to increase. Therefore, before making any such announcements, we intend to carefully consider the timing, method, and scale of such disclosures so that we can benefit as much as possible from our shareholder return activities.


Q-7:Since the financial results announcement, "K" Line's stock price has fallen slightly, so I wonder if the company's plans were properly conveyed. Given the possibility of miscommunication, wouldn't it be better to supplement the explanation?


A-7:Stock prices can fluctuate like that immediately after the announcement of financial results or shareholder returns. Based on my experience, I believe it is essential to accurately convey the overall picture in subsequent public announcements to the market and in explanations to analysts. We will continue to do our utmost in this regard.



Q-8:Is it correct to assume that the extra dividend this time was an additional return resulting from an operating cash flow of 100.0 billion yen that exceeded the target? Going forward, if business performance exceeds expectations with earnings and cash flow that are higher than expected, will you consider distributing additional dividends again? Since you still intend to provide the additional return to shareholders of more than 100.0 billion yen, could you confirm whether this is part of a separate framework?


A-8:As stated in the Medium-Term Management Plan, our shareholder return approach is to use cash inflows as a source of funds and to distribute returns within the scope of the non-consolidated retained earnings. Regarding the resulting cash outflows, our top priority is to first secure the necessary funds for capital investment. Then we need to ensure sufficient internal reserves to maintain financial soundness and prudence. To put it simply, we want to ensure financial stability and maintain an A rating or higher. Based on this approach, we aim to return the surplus to shareholders after securing an appropriate amount of equity capital. Therefore, even if operating cash flow increases in the future, shareholder returns will not automatically increase. We will adjust the shareholder returns based on the approach I just explained.

As for the additional shareholder return of 100.0 billion yen or more, the current announcement is separate from that. However, we would like to remain flexible in deciding whether or not to continue with the same in the future.



【Containership Business】

Q-1:Regarding Containership Business, I understand all the parent companies of OCEAN NETWORK EXPRESS (ONE) have recently revised their earning forecasts upwards and that ONE's business performance is strong. Does this mean that "K" Line is assuming that the strong performance will begin to decline with 3-month delay rather during the summer, which was originally assumed? Also, is it correct to assume that freight rates will likely decline more sharply  during the downward phase toward the end of the fiscal year than previously assumed?


A-1:Concerning the Containership Business earnings forecast, as you pointed out, we had previously assumed that freight rates would begin to decline along with the normalization of the supply chain starting around August. Looking at the current situation, however, this will probably not occur in August, and we assumed that freight rates should begin to decline gradually from around October. However, we have not changed our assumption that freight rates will return to pre-pandemic levels, or 2019 levels, toward the end of the fourth quarter. Therefore, the drop in rates is now expected to be sharper than predicted last time.



Q-2:In Containership Business, the assumption is that the freight rate level will drop starting in October. When we look at the current situation compared to the initial rate peak, we notice that the freight rate market is declining. This is especially true for the west coast of North America, where rates have dropped considerably and have recently fallen below $7,000/FEU.

I think the current freight rates are probably below the levels of the long-term rate contracts signed in the first half of this year. What kind of impact will this have on contracts?

The long-term contracts are presumably more flexible for European routes than for North America. Please explain the impact of current market conditions on long-term contracts.


A-2:As you pointed out, short-term freight rates for containerships have already entered an adjustment phase and are on a downward trend. While I would not say that rates have fallen sharply, the rate levels enjoyed by ONE have turned sluggish, but they are still trending slightly higher than the initial forecast. Therefore, we will likely enter a further adjustment phase starting in October, and we have factored this into our earnings forecasts.

Regarding the impact on long-term rates, short-term rates tend to set the direction for long-term rates for Europe more than for North America. However, they may have some impact on the North American route rates as well. The possibility that long-term rates may be dragged down by short-term rates has also been factored into the current earnings forecast to some extent.



Q-3-1:You talked about ILWU contract negotiation at North American west coast ports in your containership update. In addition to that, there seems to be an increase in other supply-side risks, such as unexpected US rail strikes and truck driver protests in California. There are also reports of rail freight congestion on the US west coast, so please explain your assessment of the situation. Moreover, I would also like to ask whether there is supply-side congestion arising from the port strikes in Europe.


A-3-1:As you pointed out, the level of port congestion on the west coast of North America, for example, is steadily decreasing. At the beginning of the year, there was a backlog of about 100 vessels, but now it is only about 20 vessels. Moving inland, however, there are transport bottlenecks due to a shortage of truckers and unstable railway services. Therefore, the situation is improving at ports but deteriorating inland. So I think that the overall direction is definitely improving, but it will still take some time to return to normal in North America.

Similarly, for Europe, there are situations where truck drivers or port workers have gone on strike, reflecting the current economic downturn. In the port of Hamburg, there have been delays of about 20 days in some cases.

Accordingly, I think the overall picture is improving, but there is still room for improvement on the local level. I have a feeling we are only halfway there.



Q-3-2:If a rail strike were to occur, would it have a significant impact on the containership company?


A-3-2:The terminals would fill up because it would be impossible to move the containers onward. Then, even if a ship docks, the cargo could not be unloaded. So it would have an impact, and it would only be a question of degree. Moreover, since the container turnover rate would decrease, there would also be a shortage of containers, which is actually already occurring.



Q-3-3:Are there any current cases of container backlogs due to bottlenecks for rail transport inland?


A-3-3:At the west coast terminals, the dockyards are full and turnover is much lower, rather there is a shortage of containers. ONE is continuing to work on returning empty containers efficiently to shipping customers in Asia, and we have not yet reached a situation where shippers are facing an extreme shortage of containers.



【Car Carrier Business】

Q-1:Given the current tight supply situation in Car Carrier Business, do you think you will be able to raise freight rates further for automakers during this fiscal year or toward the next fiscal year? You revised your forecast upward for this fiscal year, but the profit level is still slightly lower than in the past, so what are your thoughts on profitability going forward?


A-1:We do not raise prices but rather reach new agreements with shippers. As you pointed out, the supply and demand situation is extremely tight at the moment. This also means that the cost of increasing capacity, such as chartering additional vessels, is much higher than before. Therefore, I think customers need to help bear that burden appropriately.

 On the other hand, we have long-term relationships with customers in Car Carrier Business. With this taken into account, it is important to carefully consider this matter while keeping an eye on the direction of the global economy.



Q-2:The earnings levels in Car Carrier Business have risen considerably since the second half of last year, and profitability has been achieved. Shipping volumes do not seem to be significantly higher than they were before the pandemic, so please explain to us what is behind the improvement in profits.

Also, the current supply chain disruptions have created some temporarily good conditions for shipping companies, so how do you feel about the sustainability of your profits going forward?


A-2:We have discussed your question of freight rate normalization during financial results briefings over the past three years. The rate levels were low several years ago, and we have continued to talk with our customers about bringing them back to an appropriate level. The results of these efforts can be seen today.

In addition, we have been focusing on the transport of highly profitable high-and-heavy as well as tall vehicles, with the goal of shipping a higher proportion of these vehicles. We have made steady progress in this area. I believe that these are the two major factors behind our earnings level improvement.

Regarding your question about whether the current level of profitability will continue, the current supply and demand situation remains quite tight. These days, the future direction of the global economy, including the United States, Europe, and China, is somewhat hard to predict. Therefore, "K" Line will be closely monitoring changes in the business environment after the turn of the year and into the beginning of the next fiscal year.



【LNG Carrier Business】

Q-1:You mentioned that there are quite a few project inquiries involving LNG carriers. What can you tell us about the regions and details concerned? (For example, have the previous long-term contracts already expired, and have new ones been signed? Is there an increase in the number of projects involving LNG shipment from North America to Europe, or are there project for LNG shipment from Qatar? Alternatively, are there projects for LNG shipment to Japan from different regions than before?)


A-1:As you pointed out, we are currently working on a mixture of replacements of long-term projects and entirely new ones. Some of the projects are not yet at a stage where the details can be shared. As publicly known, however, we are currently working on an expansion project in Qatar, as well as new projects such as one in Mozambique, and the Petronas project in Malaysia. Although shale gas projects are expanding in North America, we are not yet working on specific LNG projects there. I think it is still too early for us as a shipping company to get involved in these  projects.



【The Investment Plan】

Q-1-1:It seems that foreign exchange gains have resulted in higher earnings this time. On the other hand, could exchange fluctuations have a negative impact on your capital investment plans and other activities? Please tell us if exchange rate fluctuations could have a negative or positive impact on future investment cash flows.


A-1-1:Let me explain whether the depreciation of the yen will adversely affect our capital investment activities or result in any changes. When purchasing a vessel priced in US dollars, for example, if you go to procure funds in yen with a low interest rate, a depreciation in the yen's value will mean that you borrow more yen to purchase the vessel. In that respect, I think there will be a negative impact since the amount of investment will increase more than initially anticipated.

In addition, one of the reasons for the appreciation of the US dollar against the yen is that yen interest rates have fallen while US dollar interest rates have soared. So if we want to borrow money in US dollars, it is highly likely that US dollar interest rates will rise more than initially expected in a situation where the US dollar is strong against the yen. Therefore, our investment costs could increase.



Q-1-2:Is it difficult to quantitatively measure, for example, how much the capital investment budget under the Medium-Term Management Plan will expand given the current exchange rate assumptions?


A-1-2:The 520.0 billion yen investment budget under the Medium-Term Management Plan has not been fully finalized, so the planned investment amount could change going forward. We have not yet made a detailed trial calculation of how the investment budget would change based on revised exchange rate assumptions.