【K Line’s Own Businesses】
Q-1-1: Regarding profits for the Product Logistics segment, excluding Containership Business, the forecast for the second half of the fiscal year seems to show a decrease compared to the previous fiscal year. If the majority of this is attributable to Car Carrier Business, could you explain what is behind this?
A-1-1: We have been impacted by exchange rate fluctuations both in the first and second halves, as I explained earlier, so please look at our performance over the entire year. In terms of the full-year profitability, cargo movements remain solid. Our performance forecast assumes that our vessels will continue to avoid the Suez Canal and instead sail around the Cape of Good Hope during fiscal 2024. Although there will be shifts in vessel deployment between the first and second halves, we expect to achieve an increase in profits for the full year compared to the previous fiscal year. Please note that, on a full-year basis, we expect steady performance.
Q-1-2: When comparing the second half of last fiscal year to the same period this fiscal year, the Product Logistics segment, excluding Containership Business, seems to be undergoing a decline in profits. Does this mean that areas other than Car Carrier Business are underperforming?
A-1-2: There are aspects other than just Car Carrier Business. However, it would be more accurate to interpret the results as reflecting the foreign exchange impacts allocated across our businesses in the first and second halves.
Q-2: Could you provide more details on the earnings forecast for Energy Resource Transport on page 8 of the Financial Highlights Brief Report? Even with the foreign exchange impacts you mentioned, the Energy Resource Transport profit forecast―0.6 billion yen for the first half and 5.0 billion yen for the full year―appears to be somewhat modest considering your fleet scale. Could you share your take on this and the future direction?
A-2: This fiscal year marks a transitional period for Energy Resource Transport due to various factors, including the timing of contract renewals and dividends from subsidiaries. Starting next fiscal year, we expect the earnings from this segment to increase a little more. Also, the profits that will be earned going forward, such as the additional LNG carrier contracts that I explained earlier as part of the progress of the Medium-term Management Plan, will not be realized in the next two to three years, but instead will be reflected in our earnings from fiscal year 2026 onwards. Therefore, if we wait a little longer, we expect the earnings figures to grow significantly. We would like to provide a detailed explanation on this point once a certain number of investment projects have been finalized.
【Containership Business】
Q-1-1: Regarding Containership Business, you briefly explained the assumptions for freight rates and transport in the second half. I wonder if there is anything additional you can share. Currently, the SCFI and other indexes indicate that short-term rates are rising. What is your take on this?
A-1-1: The main factor influencing rates will be how much inventory is cleared during the year-end sales season in Europe and North America. We believe that supply-demand will be most affected by this situation. As for external factors, a three-day strike occurred on the East Coast of North America at the end of September when the contract expired with the port workers union. However, the strike did not end because a new labor contract was signed, but rather because the current contract was temporarily extended until January 15. Therefore, the ability to conclude labor negotiations on the East Coast of North America by January 15 will impact not only our Containership Business, but particularly the entire North American supply chain. Furthermore, alliance restructuring within the Global shipping industry, including Ocean Network Express (ONE), is scheduled for February next year. We are already anticipating a certain level of cost impact, but we are uncertain as to whether that will be all or whether it will end up being more than expected.
Q-1-2: How do you view the recent rise in short-term freight rates?
A-1-2: Short-term rates peaked between July and August and have been declining since then. This trend aligns with our forecast, but the decline was steeper than anticipated from late September to October. This drop is the primary reason for the downward revision of our second-half forecast. In response to this decline, ONE and other container shipping companies have been making efforts to regularly raise rates. The market is currently in a fluctuation phase. At the moment, rates have been rising for the last little while, likely due to approaching deadlines for the Christmas sales season. However, it is difficult to predict whether this increase will stabilize or decline as it depends on actual demand.
Q-2: What is your supply-demand outlook for Containership Business in the next fiscal year? Although making a forecast would be difficult given the many variables, if we assume that the current situation of avoiding the Suez Canal will persist into next fiscal year, what is your outlook?
A-2: Realistically, the containership industry outlook for next fiscal year is quite challenging to predict. One point to note is that the increase in supply due to the delivery of new vessels in 2024 was just under 10%, the largest increase in new vessel supply in recent years. Next fiscal year it is expected to be just under 5%. This means that after a large number of new vessels has been delivered, the supply of new vessels is expected to gradually decrease starting next year.
The pace of new vessel supply is expected to slow, but even if the Suez Canal situation remains unchanged, the supply-demand balance is expected to remain stable towards the next year. That said, supply pressure is still ongoing, and we are closely monitoring the potential impact of the expected new alliance framework next early year, as well as short-term rate trends influenced by factors besides the Suez Canal. Based on our past experience, I would say that although rates are fluctuating, shipping companies are making steady efforts to prevent a prolonged downturn if conditions were to worsen. Furthermore, with older vessels being kept in service rather than being scrapped, shipping companies have some downward flexibility. This means they have room for adjustments if conditions deteriorate. Given this environment, I am not able to say at this moment whether market conditions will likely trend upward or downward next year.
【Cash Allocation, Shareholders Return】
Q-1: Concerning the additional shareholder returns you announced, the scale of the additional returns seems large compared to the operating cash flow increase. What is the significance of this? Even compared to the forecast given for the first half of the fiscal year, the size of the share buy-back seems large. Could you explain what this decision is based on?
A-1: With today’s announcement, total shareholder returns over the period of the Medium-term Management Plan have been increased by 30.0 billion yen, from the previously announced level of 700.0 billion yen or more. On the other hand, our operating cash flow has improved by 100.0 billion yen. We have decided to implement an additional share buy-back of 90.0 billion yen as part of a flexible shareholder return policy. When we initially announced shareholder returns of 700.0 billion yen or more, there was included 50.0 billion yen planned as flexible additional returns, which we did not decide, including the timing, at that time. In addition, the 10.0 billion yen portion of the buy-back implemented between May and July of this year was left unused. These factors have been taken into account in our decision this time. Taking this into account, you can understand the current situation where cash flow is not fully aligned with the return amount.
Q-2: Operating cash flow has increased by 100.0 billion yen according to today’s announcement, with 30.0 billion yen allocated to shareholder returns. Could you explain what will be done with the remaining 70.0 billion yen?
A-2: Operating cash flow has indeed increased by 100.0 billion yen, and we have stated that 30.0 billion yen will be used for shareholder returns. When it comes to the remainder, we will look at our business performance trends to a certain degree and evaluate necessary investments that can improve corporate value. Based on this agile approach, we plan to maintain proactive and flexible shareholder returns. So the important thing to note is that, at this point in time, we increased shareholder returns by 30.0 billion yen.
Q-3: At the time of final financial results announcement in May 2024, you established an additional shareholder return framework of 150.0 billion yen, of which about 90.0 billion yen has now been used for share buy-backs, leaving around 60.0 billion yen in the additional return allocation. Today, you have announced an additional 90.0 billion yen for share buy-backs and 10.0 billion yen for a dividend increase, totaling 100.0 billion yen in returns. Does this mean that approximately 40.0 billion yen has been added based on your flexible approach?
A-3: You are correct concerning the calculation of the additional return.
Q-4: You increased total shareholder returns from 700.0 billion yen or more to 730.0 billion yen or more, which is an additional 30.0 billion yen. Has this already been allocated through this latest 90.0 billion yen share buy-back and 10.0 billion yen dividend increase?
A-4: With additional shareholder returns scheduled for the next and subsequent fiscal years, total shareholder returns for the entire the Medium-term Management Plan period have not yet reached 730.0 billion yen.
Q-5: Could you provide more details on the cash flow allocation mentioned on page 11 of the Financial Highlights Brief Report? The investment cash flow amount indicated here is still at 740.0 billion yen. Is this a deliberate decision to keep it unchanged, or is the focus currently on prioritizing operating cash flow and shareholder returns, with investment cash flow details to be reviewed later? Could you please explain your approach?
A-5: Regarding investment cash flow, we have not intentionally kept the figure the same, but have been constantly reviewing the situation. As a result of this process, we have decided to keep the figure the same at the current time. We did not start with a specific figure in mind, and we recognize the need to make essential investments to improve corporate value and support our growth. While maintaining investment discipline, our current investment plans and investment cash flow are based on this point. Should suitable new projects arise going forward, we will adjust the investment cash flow upward or downward as necessary. We remain committed to tirelessly making the investments necessary for growth and improving corporate value.
Q-6: Today you announced an additional shareholder return of 90.0 billion yen for share buy-backs and 10.0 billion yen for a dividend increase. Could you explain the rationale behind this particular allocation to share buy-backs and dividends? For example, you indicated a planned dividend level of 60.0 billion yen for next fiscal year. Could you provide any insights on your intentions for maintaining this level moving forward?
A-6: Our shareholder returns approach considers both shareholders interested in income gains and those interested in capital gains. Therefore, we are distributing returns through both dividends and share buy-backs. With a focus on improving capital efficiency, we also view share buy-backs as a means to improve capital efficiency. Accordingly, we are implementing buy-backs alongside dividend distributions. Looking at next fiscal year and beyond, we will disclose our return plans, including those for dividends and buy-backs, at the appropriate time. We aim to generate strong cash flow and achieve business performance that will enable us to consistently deliver shareholder returns through dividends and share buy-backs, while maintaining financial soundness.
【Foreign Exchange Gains and Losses】
Q-1: You provided the total foreign exchange loss amount, but could you explain the extent to which each business segment has been impacted? Also, starting this fiscal year, when it comes to translating income and expenses of foreign consolidated subsidiaries, you have switched from using the end-of-period exchange rate to the average rate during the period. However, since you still use the end-of-period rate for assets, should we expect fluctuations in the end-of-period rate to continue having a considerable impact? Finally, could you clarify how this change is accounted for in terms of exchange rate sensitivity, which you have stated as ±1.6 billion yen per 1-yen change?
A-1: You are aware of how foreign-currency-denominated cash and deposits as well as receivables and payables are presented at the end of the period. For the scope of ONE's equity method earnings, we have changed to using the quarterly average exchange rate. However, for foreign-currency-denominated receivables and payables, they are collectively revalued each time using the exchange rate at the end of the fiscal year. The rate sensitivity of ±1.6 billion yen per 1-yen change has been calculated with this fact in mind.
