【K Line’s Own Businesses】
Q-1: You explained that the one-off expenses were incurred in Dry Bulk, Energy Resource Transport, and Containership Business. Could you tell us the level of one-time expenses incurred in each segment and the factors behind them? I imagine the situation in the Red Sea is having an impact, but I would like you to confirm this.
A-1: The one-off expenses have been explained only qualitatively, and our policy is to refrain from disclosing the details or amounts of such expenses. For the Dry Bulk one-time expenses, there are about three factors. These include the effects of delays and congestions mainly due to transit restrictions at the Panama Canal. There are also one-off costs due to ship delays caused by storms and other bad weather. Moreover, as part of the general and administrative expenses allocated to each division, there were unexpected one-time costs for Dry Bulk and Energy Resource Transport. Due to these factors, an amount equivalent to the downward revision amount plus alpha was incurred in the third quarter.
In Containership Business, the issue was not additional costs, but rather liftings and freight rates were worse than expected. Due to extremely challenging market conditions in the third quarter, we were unable to meet our forecast earnings.
Q-2: With regard to Car Carrier Business, profits of Product Logistics excluding Containership Business seem to have fallen in the third quarter compared to the period up to the second quarter. What is the background to this? Overall, the number of vehicles transported seems to have decreased compared to the previous fiscal year. The situation does not appear very good for major long haul, outbound, and homebound. Could you explain why this might be? Were there any special factors behind this decline, such as drought conditions at the Panama Canal? On the other hand, you are predicting an increase for full-year profit, so it looks like you see a recovery for the fourth quarter. Could you explain how I should consider this?
A-2: I will focus my explanation on Car Carrier Business. Compared to the first half, in the third quarter there were restrictions on passage through the Panama Canal due to the drought in Panama, as you pointed out. Also, a significant number of car carriers were delayed at ports in Australia and other countries. This resulted in a decrease in the number of vehicles transported, which has affected our financial performance. In the fourth quarter, however, while certain vessels are of course sailing around the Cape of Good Hope, some of our port delays have eased, mainly in Australia and elsewhere. We are also making up for the situation by taking on spot cargo and other efforts. Currently, we are continuing to forecast full-year Car Carrier results at the level previously announced.
【Containership Business】
Q-1: Looking at Containership, it seems spot freight rates have been rising since December due to the Red Sea situation, but you have not made much of an upward revision to profits. This is probably because detouring around the Cape of Good Hope and allocating vessels accordingly have generated additional costs, which are appearing first. Could you tell us the level of these costs as included in your current full year forecast?
A-1: It is unclear how long the current situation will continue, but there is an annual market trend where transportation demand falls off after Chinese New Year. We have already factored this into ONE's forecast, and that is why we do not currently have a large increase in that earnings forecast.
Q-2-1: I have heard that ONE’s business plan will be ready in March, by the end of the fiscal year. With such a challenging outlook for the macro environment, it can be extremely difficult to create earnings forecasts from the bottom up and present various KPIs. Given these circumstances, what kind of logic and methods do you use to devise ONE’s business plan and announce it?
A-2-1: ONE’s shareholders are currently discussing how to present the business plan. As you point out, the business environment has been changing recently. However, ONE has been operating successfully for more than five years, and has achieved a certain level of competitiveness. ONE has been leasing its fleet from three parent companies and now shifting to the stage where ONE is gradually investing in fleet as its own asset independently. Given these circumstances, we are considering such content as would first explain a certain degree of solid direction and business policy.
Q-2-2: Since ONE is not a listed company, there is an issue as to how qualitatively its disclosure should be made. ONE's business plan, which investors are waiting to see, will be based on considerable quantitative information. Is the plan you are currently considering more like a vision or a medium- to long-term objective, rather than a quantitative plan?
A-2-2: We are currently deciding on the degree of quantitative information that can be incorporated into ONE’s vision.
【Shareholder return policy, Capital policy and Optimal Capital Structure】
Q-1: Regarding shareholder returns, you announced at the beginning of this fiscal year that “K” Line would provide additional returns of more than 110.0 billion yen during the remainder of the Medium-Term Management Plan period, and 56.2 billion yen in share buy-backs were carried out. This time, the return is in the form of an additional dividend. Could you comment on the kind of internal discussions you had when choosing between share buy-back and dividends as the method for shareholder returns?
A-1: I cannot share any details, but we had a range of internal discussions. We have already carried out share buy-back in fiscal 2023. Based on our plan to return a total of 500.0 billion yen during the Medium-Term Management Plan period, we considered an appropriate amount for this fiscal year. After comprehensive consideration, and taking into account the factors I explained earlier, we also decided that paying dividends for this fiscal year and next fiscal year would be the method most welcomed by shareholders and the stock market. We have set the total amount at 500.0 billion yen “or more,” so if we continue to increase cash inflows going forward, we will be able to increase the source of returns and this does not mean that we will stop acquiring our own shares. While continuing to monitor our cash flow situation, we will choose shareholder returns options that are most effective in increasing our corporate value.
Q-2-1: With respect to the increase in the additional dividend this fiscal year, what has changed from the cash flow perspective? It seems there have been no changes to your earnings forecast, and you have made a slight downward revision for “K” Line’s own businesses, which are a source of cash flow, compared to the previous announcement. From a cash flow perspective, it does not seem to make sense to increase the dividend this fiscal year. For example, is the reason that you are not increasing capital investment as much as planned? How can the dividend be increased based on cash flow when the earnings forecast has not changed much?
A-2-1: In the previous shareholder return policy announcement, we explained that the dividend would be 200 yen per share at the same profit level. This did not necessarily mean limiting the dividend to 200 yen per share. At that time, we looked at the status of profitability along with cash flow, and announced a plan to acquire our own shares and pay a dividend of 200 yen per share. We did not say we would limit ourselves by that announcement and not increase the dividend any further. As of the third quarter, however, the numbers have been finalized and actual cash flow has become clearer. After taking into consideration the overall situation, including the cash outflows for investments, as you pointed out, we decided to pay a total dividend of 250 yen per share this fiscal year. This is what we believe will be most effective in terms of our shareholder return policy.
Q-2-2: From an external perspective, your profit plan does not seem to have changed much, but you started with a slight surplus in cash flow. Does this mean you have decided to return to shareholders this time after fully assessing this surplus?
A-2-2: Generally speaking, that is correct.
Q-3-1: Concerning capital policy on page 12 of the briefing materials, at the third point of “For corporate value improvement,” you state that “K” Line plans to update its shareholder return policy and growth strategy in May, including its optimal capital structure. Is this a plan to update the shareholder return policy with a leverage target?
A-3-1: Of course, our optimal capital structure will include issues such as leverage and DER as you pointed out, but we think the update will be a little more comprehensive than just a leverage target. In the past, during the severe recession around 2016, risks became apparent in each of “K” Line’s businesses. At the time, we reached a situation where we may have exceeded our originally anticipated risk buffer, or simply put, our liabilities have surpassed our equity. Through this experience, we became keenly aware that risk management issues are inherent in the shipping industry. Therefore, going forward we have been focusing more on risk and equity capital. This is essentially a focus on financial soundness, but capital efficiency must also be considered as a very important factor. Given these two factors, how do we decide the optimal level of capital? While we do not think this is a fixed level that can be set once and simply maintained, we are currently investigating what this optimal level should be. We are currently developing an overall approach that includes this optimal level, rather than simply concluding that we need to increase our leverage now.
Q-3-2: Once this approach has been decided, will it affect your shareholder return policy? Could the shareholder return policy also be updated? Will you also announce how your optimal capital, shareholder returns, and growth strategies will or will not change, along with the reasons and approaches behind those changes?
A-3-2: Yes, we believe so.
