【Returns for “K” Line Shareholders】
Q-1: How did you decide on the upper value limit of 60.0 billion yen for the share buy-back?
A-1: For the acquisition of “K” Line shares, we first looked at our current stock price level before determining the upper limit of the total amount of the acquisition value and the total number of shares of common stock to be purchased. We then needed to determine the maximum number of shares of common stock to be purchased while “K” Line’s additional returns for this fiscal year is at least 50.0 billion yen. To actually perform the buyback, we also need to have sufficient financial reserves. Considering the current stock price, the maximum number of shares of common stock to be purchased, and market trends, we need funding of about 60.0 billion yen, which is why we used this figure as the upper limit.
Q-2: Although you have committed to additional shareholder returns of 110.0 billion yen or more over the next four years, the 60.0 billion yen buy-back already announced for the first quarter appears to be setting an extremely fast pace. Does this indicate that you should or would like to adjust your capital structure sooner rather than later? Also, would you say the additional returns of 110.0 billion yen or more is just the starting point, and do you have any plans to maybe raise the additional returns amount further going forward?
A-2: The shareholder return policy has been established under our Medium-Term Management Plan. By focusing on cash flow, we will prioritize the business investment necessary for growth, while ensuring internal reserves for financial stability. The remaining reserves are to be actively returned to shareholders. Accordingly, we have announced a buy-back with an upper limit of 60.0 billion yen, as part of the current total of at least 110.0 billion yen for additional shareholder returns. We plan to return the remaining 50.0 billion yen or more by fiscal 2026. It is not a question of whether to adjust this figure or not. Going forward, shareholder returns will be decided after assessing how the overall cash flow and investment plans are progressing. Please understand that at this stage there is no definitive answer to the question of how the total returns figure might change.
【K Line’s Own Businesses】
Q-1: In Car Carrier Business, your earnings have increased beyond the extremely high level of the previous fiscal year. How long can you maintain this profit level, and is there room for further profit growth going forward? What is the current situation for customer negotiations to restore freight rates? Finally, do you feel the profit level for this business is excessive, or does “K” Line consider an appropriate profit level to be even higher?
A-1: As I mentioned earlier, there is a continuing shortage of shipping capacity and a tight supply and demand situation. We also expect cargo volume to increase going forward, along with the easing of production constraints. Accordingly, the current profit level should continue for a certain period of time. Basically, there is no prospect of a significant improvement in tight supply and demand situation over the next few years.
Regarding current freight rate negotiations, all customers attach great importance to securing the transport capacity they need. This means that freight rates are now restored. Nevertheless, it is difficult to predict the direction of future rate negotiations. Finally, it is very difficult to say whether the current profit level is too high, but I believe we have reached an appropriate freight rate level to some extent.
Q-2: According to page 15 of the briefing materials, the market exposure rate for Cape-size fleet is currently 22%. However, the exposure rate in the first quarter of the previous fiscal year was 11%. Is the difficulty in lowering the exposure rate due to the current sluggish market conditions? Also, what is your policy regarding future exposure rates?
A-2: Basically, we have not changed our policy on market exposure. As you noted, the exposure rate was higher in the first quarter of this fiscal year, compared to the same period last year. However, this is due to market conditions at the time of contract decision-making. For example, with regard to the first quarter of fiscal 2022, we started securing cargo contracts around the fall of the previous year (2021), and the market conditions at that time were reasonably good. For this fiscal year, however, cargo contracts had to be made amid extremely sluggish market conditions, partly due to China’s zero-COVID policy from the end of last year, and we did not fix the contracts much. We will continue to make efforts to reduce our market exposure as much as possible while regularly monitoring the situation for Forward Freight Agreement (FFA) market.
Q-3-1: Exchange rates seem to be one of the major factors behind the first quarter’s results and the upward forecast revision at this time. You mentioned that the first quarter results exceeded expectations due to exchange rate fluctuations, and the full-year forecast was increased by 5.0 billion yen as a result. A simple calculation based on the exchange rate sensitivity figure seems to indicate that exchange rates will increase earnings by about 10.0 billion yen. Is that correct?
A-3-1: We also have shown the sensitivity figures and how the exchange rate outlook has changed. The forecast has been changed due to change on dollar-yen exchange rate assumption and the change is about the same to what you mentioned.
Q-3-2: Am I correct in understanding that shifting exchange rates are the biggest factor behind the increases in both the first quarter’s results and the full year earnings forecast?
A-3-2: Yes, that is the biggest factor.
Q-4-1: For Car Carrier Business, it seems that the earnings forecasts for both the first and second halves have been increased by about 4.0 billion yen compared to the previous forecast. Given that the first-half forecast for the number of vehicles to be transported has now been lowered, how did the earnings forecast end up being raised? Similarly, why was the second-half earnings forecast raised, even though the expected number of vehicles to be transported has not changed? While the change on the exchange rate assumption is probably a factor, could you explain it in more detail?
A-4-1: There are two main reasons for the upward revision of Car Carrier earnings in the first and second halves. The first is the depreciation of the yen against the dollar. The second is that although the number of vehicles to be transported has changed somewhat, we have also been able to secure cargo contracts with higher freight rates. Moreover, we have been able to allocate vessels more efficiently than we had planned, which yields an improvement in profitability through more streamlined business operations. The first- and second-half forecasts were updated based on these two points.
Q-4-2: What portion of the increased forecast for Car Carrier Business was due to exchange rates? Aside from the exchange rate boost, does this mean that “K” Line’s self-reliance efforts have been effective?
A-4-2: We do not disclose the impact of exchange rates on individual businesses, so I cannot give a specific answer to this question. However, I believe the portion in question would be roughly proportional to Car Carrier Business’s contribution to total operating revenues. The remaining portion of the increased forecast figure is due to greater efficiency in business operations.
【Containership Business】
Q-1-1: Regarding your assumptions for Containership Business, is it correct to say that the short-term freight rates are based on the assumption that the freight rates of June will continue from July through September, and that cost reductions have been factored into the forecast figures? As freight rates have started to rise, the price increases should take hold to some extent in the second half. So is it still correct to say that there have been no major changes in the second half since the previous assumptions were made?
A-1-1: Regarding the short-term freight rates, as you know, we believe that the last two months of June and July represent the so-called bottoming out of the market. We expect that both freight rates and cargo volume will start recovering from August. However, please note that our current downward forecast revision applies to the full year.
Q-1-2: Does the low earnings forecast for the July-to-September period indicate an expectation that the current short-term freight rates will continue for a while? In your explanation earlier, you said an anticipated increase in freight rates during the summer peak season has not been factored into your forecast.
A-1-2: Regarding the potential change in short-term freight rates from August onwards, we do not yet have a specific idea of how much they might increase. Accordingly, we have not factored them into our earnings forecasts.
Q-2: What is the profit outlook for Containership Business in the second half? You said you are expecting profits to increase starting in the second quarter and into the second half. The reasons you gave were rising short-term freight rates and cost reductions. Could you tell us more about the cost reductions? Are you planning the usual measures of reducing operating and variable costs, or are you planning to reduce costs in some other way? Please let us know the scale and details of the planned measures. Furthermore, will the scale of the cost reduction measures be even greater than usual?
A-2: Our cost reduction measures are wide-ranging. They include all the usual cost-saving measures for a shipping company, including the streamlining of regular operations, as well as contract negotiations with various vendors such as feeder services and land transport providers. Regarding the scale of our cost reductions, we are looking at higher than usual target figures, as measures include the reorganization of some service routes.
Q-3-1: You mentioned that short-term freight rates for containerships are expected to rise starting in the second quarter and into the second half. Normally, shipping companies reach peak season in the summer, and then things get slower after China’s National Day, with a further slowdown after the Chinese New Year. This means there is usually a seasonal decline in the second half of the fiscal year. Considering this, could you explain why you expect short-term freight rates to rise in the second half?
A-3-1: Since last October, the third quarter of the previous fiscal year, cargo volumes have declined primarily for Asia-North America routes and Asia-Europe routes. Although inventory levels are still adjusting, cargo volume is recovering gradually. In addition, the expectation that rates will rise in the second half of the calendar year is based on the major shopping period of Thanksgiving through to Christmas in the United States and Europe, the major destinations for consumer goods. It is not clear what will happen after January, but at present, we expect cargo volume to pick up in the second half of the calendar year and continue beyond January. The freight rates will reflect this volume increase, and this is the forecast for the second half as a whole.
Q-3-2: Rather than the usual seasonality, are you anticipating a different scenario than usual, where cargo volume and freight rates increase as global economic performance follows an upward trend?
A-3-2: That is correct.
Q-4: Regarding ONE’s profit approach, it seems to be near the break-even point, especially in the second quarter. It appears that ONE earns about 600 million US dollars in interest income annually. Since it will likely be profitable in the second quarter partly thanks to interest income, could we assume that containership business portion itself excluding interest income is actually deficit?
A-4: As you say, ONE has non-operating interest income in addition to its regular operating income. Freight levels bottomed out in June and July. This market situation is not unique to ONE, and we believe that other shipping line operations are also just breaking even. As a result, depending on the week, ONE has also been temporarily in the red at the operating profit stage, but is now in the process of recovery.
