Shareholder return policy, Capital policy and Optimal Capital Structure

Q-1-1: You indicated the planned shareholder returns for the period of the Medium-term Management Plan have increased by 200.0 billion yen, from the previous “500.0 billion yen or more” to “700.0 billion yen or more”. Could you let us know from what perspective and how you have decided/ you will decide if this 200.0 billion yen to be distributed as dividends or through buy-back of “K” Line shares? It has already been decided that 50.0 billion yen will be provided as additional dividends to the basic dividend, and 100.0 billion yen will be used for an upcoming share buy-back. So, it seems that a decision has yet to be made for the remaining 50.0 billion. There are various criteria you could have adopted, such as dividend yield or optimal capital structure etc. Could you let us know what process you used for these decisions, and how such future decisions will be made?


A-1-1: “K” Line has a diverse range of shareholders who are interested in both income and capital gains. As a result of discussions regarding the distribution of returns in ways that would maximize our corporate value, we have settled on this format in order to strike a balance between both types of gains.



Q-1-2: You have not made any announcements regarding “K” Line’s optimal capital structure or its target equity ratio. Is it correct to assume that the decision concerning the scale of the share buy-back was not based on criteria for achieving optimal capital structure?


A-1-2: We believe that our optimal capital structure remains as an issue for further consideration. This includes the optimal capital structure for ONE, which accounts for a large portion of our balance sheet. Given these circumstances, we have decided the amount allocated for shareholder returns based on cash flow and with the objective of maximizing capital efficiency, giving the priority to investment necessary for growth which contribute to improve corporate value, and then to ensuring financial soundness that will allow us to raise funds in a competitive way.



Q-2: I understand that you are still investigating “K” Line’s optimal capital structure this time. However, ONE has already announced its medium-term plan, so I am curious as to why you still cannot provide details of your optimal capital structure. Also, please share with us any figures you may have concerning the equity ratio level including off-balance sheet liabilities you are aiming for by fiscal 2026, the final year of the current Medium-term Management Plan.


A-2: As you pointed out, the ONE 2030 business plan has been released, along with the company’s planned shareholder return measures for the next three years. As we move forward with investment and business plans, and investment activities, the business environment is also expected to undergo major changes, including potential reorganization of alliances. ONE will also need to raise funds and capital going forward in order to procure new ships, and it is unclear how much credit it will need at such times. Considering these points, we believe that it is necessary to further refine the target capital level for ONE. Once we have a clearer picture of this, we will be able to quantify our optimal capital structure, including “K” Lineʼs own businesses, more concretely. Accordingly, the final target figures for fiscal 2026 will change depending on the optimal capital structure that is decided upon. Our decision to base this structure on cash flow will not change. However, please allow us a little more time until we are prepared to explain how “K” Line has determined its optimal capital structure and how it will be achieved.



Q-3: On page 13 of the Financial Highlights Brief Report, along with higher cash inflow, it shows increases in cash outflow for both investment and shareholder returns. Meanwhile, you say that you are also considering discontinuous dramatic growth opportunities, including M&A. However, if you are aiming for these kinds of growth measures, how will you deal with cash flow? Will you simply increase interest-bearing liabilities? Could you explain how you will maintain cash flow when you have to make significant investments to promote discontinuous dramatic growth?


A-3: Our policy is to distribute earnings to shareholders while ensuring and maintaining financial soundness. Whenever an M&A opportunity arises, in addition to the cash flow available at that time, we basically intend to use leverage to increase capital efficiency.



Status and Progress of the Medium-term Management Plan

Q-1: Regarding the increased income targets in the Medium-term Management Plan, can these mostly be explained by the need to compensate for the impact of the exchange rate because the yen is probably weaker than when the plan was first prepared? How did you determine the degree of increase in your income targets?

Regarding the target for fiscal 2030, demand and supply balance for Car Carrier is quite tight for now, and Product Logistics, excluding Containership Business, is likely to continue generating significant profits also in fiscal 2030. Moreover, the income target for containership company ONE has just increased significantly. Could you explain this situation?


A-1: We have excluded all exchange rate adjustments for our targets for the years from fiscal 2026, the final year of the Medium-term Management Plan period, up to fiscal 2030. It may be more accurate to say that our original exchange rate assumptions are now applied rather those for our fiscal 2024 forecast. Therefore, recent exchange rate improvements were not part of our calculations for the target increases.

I think all three shareholders of ONE have released the same containership targets for fiscal 2030, and these are numbers that have been calculated based on the ONE 2030 plan. “K” Line needs to develop its own businesses into an area that can generate revenue of over 140.0 billion yen (equivalent to Containership Business) by fiscal 2030. As for the plus alpha portion of the target, our current goal is to continue looking for discontinuous dramatic growth opportunities, including M&A.



Containership Business

Q-1: I understand that your annual container contracts, including Asia-North America service contracts, are generally at the same level as last year. Having annual contracts at the same level as last year seems odd considering the recent trends in spot freight rates.
However, if you are placing importance on maintaining long-term relationships with cargo owners, you could be keeping contracts at the same level. Could you confirm whether your annual contracts are really the same as the previous year, and your strategic rationale for this.


A-1: According to the reports we have received on the status of long-term freight rate contracts for containerships, rates have remained at the same level as last year. Although the Asia-North America and Asia-Europe routes involve long-term contracts, the contract periods vary slightly, as the Asia-North America routes mainly involve one-year contracts. For the Asia-Europe routes, even three- or six-month contracts fall under the framework of long-term contracts to a certain extent. As for the discrepancy with the short-term freight rates that you pointed out, some are speculating or assuming that given the current level of short-term freight rates, it might be possible to increase long-term contracts. The underlying situation for the higher spot rates is the Middle East conflict, which is a temporary situation with an unclear timeframe. Therefore, this factor is part of negotiations between cargo owners and shipping companies, and long-term contracts are still being finalized at the same level as last year.



K Line’s Own Businesses

Q-1-1: I see that your market exposure figures are listed on page 25 of the Financial Highlights Brief Report. Currently, your exposure relating to Capesize, Panamax and smaller-sized vessels, and thermal coal carriers has reached a level exceeding 10%. It seems like you are taking on some risk this fiscal year, especially with regard to thermal coal carriers. Could you explain the reason for increasing your market exposure with regard to thermal coal carriers and whether you will continue to maintain this level of exposure going forward?


A-1-1: Our basic approach is to not increase exposure for the entire company. Basically, we aim to develop stable earnings through strong relationships with customers, using mostly on medium- to long-term contracts. On the other hand, especially in Dry Bulk, there is also a need to respond to additional demand, and extra vessel capacity needs to be created in various ways. By taking on a certain level of necessary exposure, our strategy is to use it as a tool to ultimately maximize Dry Bulk profits. Accordingly, we have not changed our exposure policy for this fiscal year regarding Dry Bulk.



Q-1-2: For thermal coal carriers, are you saying that the spot contract ratio happen to be high this fiscal year, perhaps due to the termination of COA contracts, for example?


A-1-2: With regard to thermal coal carriers, when we prepared the Financial Highlights Brief Report, the service contract renewals had not yet been completely decided, and some contracts had not been finalized mainly in terms of annual renewal. Although there was overall exposure at the time of document preparation, please note that there was almost no actual exposure. This is because there was the basic premise that the contracts would be renewed, although after some delay.



Q-2: Your explanation of the market conditions relating to the security situation in the Red Sea was clear, but I would like to know more about the resulting costs. Other shipping companies have revealed that they are incurring upfront costs, mainly bunker costs. With the need to avoid the Red Sea, please let us know how you factored in the costs associated with detouring around the Cape of Good Hope for each ship type, under your current plan.


A-2: In the case of car carriers, the upfront costs for sailing around the Cape of Good Hope are discussed with the customer once the ship is actually en route, and then the customer is billed accordingly. Because the customer cannot be charged for this in advance, we incur the extra costs first, then subsequently invoice the customer. The upfront costs were incurred in the fourth quarter of fiscal 2023. In fiscal 2024 however, with the understanding of our customers, we expect to collect this amount as charges over the course of the fiscal year, so the impact will not be that significant. Currently, our outbound and inbound Asia-Europe routes involve a detour around the Cape of Good Hope. If we did not take any action, we would incur additional annual costs of around 3.0 billion yen. “K” Line’s policy is that we recover these additional costs in the form of charges.

When sailing around the Cape of Good Hope, containerships need to increase their speed somewhat in order to maintain their schedules, which drives up fuel costs. We have factored this into our plan.

In Dry Bulk, when the Cape of Good Hope detour began at the end of 2023, under the contracts at the time, we incurred the extra costs when we had to reroute midway through voyages. For contracts starting in 2024 however, the costs are being covered through contracts or through market freight rate. This premise has been incorporated into our plan.

On the whole, we are basically proceeding on the premise that the added costs will be reimbursed by customers.



Q-3: In Dry Bulk business forecast for fiscal 2024, market conditions are assumed to be more favorable than in the previous year, but I think the year-over-year increase in earnings will be quite large. While this appears to be an unrealistic plan compared to those of other companies, please share your assumptions concerning the significant increase in profits.


A-3: We expect cargo movements to remain robust in fiscal 2024, and we are planning on  steady earnings from dedicated vessel contracts and medium- to long-term contracts, which should provide stable earnings for “K” Line.

The market for Capesize, which declined in the middle of fiscal 2022, has been recovering since the second half of fiscal 2023. The market for Panamax and smaller-sized vessels has been recovering since the beginning of 2024. During this period, in fiscal 2023, there were some contracts in effect that had already been finalized in fiscal 2022, where the market was sluggish, and the arrangement for exposure did not go well. This put pressure on the earnings for fiscal 2023.

We planned to secure an adequate level of earnings for fiscal 2024 by finalizing fiscal 2024 contracts during the second half of fiscal 2023, which was the market recovery period. Additionally, some of the one-time expenses that occurred in fiscal 2023 will not reoccur in fiscal 2024. This may also be a reason why profits appear set to increase significantly.



Q-4: I have heard many reports that car carrier customers have been affected by the detour to avoid the Red Sea, and that inventories are building up in Europe. How do you see the supply and demand situation going forward, including the slowdown in China's EV exports? How has this affected your plan? Could you share with us any detailed assumptions you may have made for fiscal 2024. These might include assumptions for this year's contract freight rates, and renewals of multi-year contracts, etc., and how profits will compare to the previous year.


A-4: I would like to explain some of the factors that form the basis of our fiscal 2024 performance forecast for Car Carrier Business.

First, almost all of the contracts for this fiscal year, which started in April, had been finalized by the end of March. On the revenue side for fiscal 2024, the contracts have either one year, or two or three years remaining, and some are longer. Moreover, we are covered by those contracts, so there will be no major impact on our revenue in the near term.

On the demand side, global automobile sales are still in the process of recovery. Sales in the United States in particular have been more resilient than expected, greatly supporting overall demand. Therefore, the supply and demand situation will not change significantly in fiscal 2024. Instead, due to the use of the Cape of Good Hope route, we will need approximately 7% more ships overall, according to our calculations. Therefore, we expect the overall market situation to remain tight. I think that supply and demand will probably reach a balance point in the second half of 2025, as new ships are delivered and put into service.

Finally, regarding the volume of cargo exported from China, I understand that the number of vehicles transported by sea, excluding overland exports to Russia, was between 2.2 and 2.3 million vehicles in the 2023 calendar year. We expect that at least 2.4 million vehicles, slightly more than last year, will be exported in 2024. While the pace of growth seems to have slowed compared to initial expectations, I think those exports are still making steady progress. However, the number of completed cars shipped from China in containers will likely increase in 2024, compared to the previous year. For some destination markets, supply and demand could approach the balance point slightly sooner. Our business forecast for 2024 was prepared while taking these points into account. “K” Line’s business results for fiscal 2023 were very strong. Although we will be affected by various factors that increase costs, we believe that Car Carrier Business will continue to remain strong in fiscal 2024.