【K Line’s Own Businesses】
Q-1: It seems your forecast for Car Carrier Business this fiscal year has been revised upwards. However, your cargo volume target has been lowered due to the impact of port congestion, and the assumed exchange rate has been revised in the direction of a weaker yen. So when exchange rate factors are excluded, does this mean that you have revised your outlook downward? In addition, regarding Product Logistics ordinary income for the current fiscal year, it appears that the figure is 88.0 billion yen, excluding Containership Business. Since Car Carrier Business is based on contract freight rates with OEMs, I understand that it will remain stable. So what is your outlook for Car Carrier Business next fiscal year, based on factors such as trends in demand and charter hire rate?
A-1: Cargo volume is shown in the Appendix of the Financial Highlights Brief Report provided. The fourth quarter figure is now expected to be lower than previously forecast in November. This is due to a decline in volume, caused by strikes in Australia and a decrease in vessel turnover rates. Excluding exchange rate factors, this temporary impact has had a significant effect, so we have lowered our full-year forecast accordingly. Our future outlook has not yet been finalized, but since most of the contracts for fiscal 2025 have already been secured for the medium to long term, we do not expect any major fluctuations regarding that aspect going forward. As for cargo volume, excluding the temporary factors mentioned earlier, we have received solid shipping plans from the manufacturers concerned, so we do not anticipate any major issues. However, it remains to be seen how the impact of potential U.S. tariffs will play out. For example, if cars cannot be imported into the United States from Mexico or Canada, they may have to be shipped in from elsewhere. On the other hand, inflation could also slow the U.S. economy, so we will need to carefully watch future developments.
【Capital policy 】
Q-1: Could you tell us the reason behind your planned dividend increase in fiscal 2025 and 2026? I would like to understand the background for the timing of this increase amid an uncertain external environment. It seems that around 70.0 billion yen had originally been allocated as a management allocation reserve when cash allocation was reviewed at the time of the financial results announcement for the first half of the year. Today you announced that full-year ordinary income for “K” Lineʼs own businesses is 103.0 billion yen. Can we view the dividend increase as an indication of your confidence that you will be able to maintain this level even if Containership Business performance declines? Could you talk about the expected level of performance for “K” Lineʼs own businesses next fiscal year, along with the dividend increase and its timing?
A-1: We are currently preparing various budgetary plans. Meanwhile, we also expect an improvement in our performance this fiscal year. As part of this, we are monitoring the cash flow outlook on a day-to-day basis. The planned dividend increase will result in an additional 20.0 billion yen in shareholder returns. Please understand that this decision reflects confidence and management’s decision that “K” Line can provide this additional amount without any issues during the Medium-term Management Plan period.
Q-2: I believe you will cover this at the time of the upcoming announcement of full-year financial results, but I am interested in a cash flow update for the remaining two years of the Medium-term Management Plan. Could you share any insights on whether operating cash flow and investment cash flow are expected to increase or decrease compared to the current plan, if there is any visible direction?
A-2: We are currently in the process of preparing the budget for fiscal 2025 and beyond, so I cannot say anything definitive. However, in terms of operating cash flow, I said earlier that I am confident about our performance, and I believe “K” Lineʼs own businesses will be able to proceed in full alignment with the goals of the Medium-term Management Plan. Therefore, we are basing our outlook on the current announcement of 1.5 trillion yen. Since this fiscal year’s earnings have also exceeded expectations, a key point will be whether we can anticipate forecasts of upward performance. As for investment cash flow, factors such as vessel price and project trends, and when customers will need new vessels must be considered. Additionally, since there are no shipyard berths available for the near term, determining the optimal timing for contracts is also an important issue. In this context, rather than only focusing on figures for the period ending in fiscal 2026, the final year of the Medium-term Management Plan, we need to continue to make the necessary investments. We are currently planning to invest 740.0 billion yen before the end of fiscal 2026. More importantly, however, we need to make the right investments at the right time. Therefore, we are in no way considering reducing our operations or investments. However, if we look only at the period of the Medium-term Management Plan, you might see a slight decrease in investment depending on shipyard berth availability going forward.
Q-3: What is your current understanding of the PBR of 1.0 or more mentioned on page 10 of the Financial Highlights Brief Report? Could you please tell us about the initiatives you have taken so far in your position as CFO? Specifically, why have you not yet achieved a PBR of 1.0 or more, what is your view of this, and what is your understanding of the current situation and your thoughts about it? In particular, even though “K” Line conducted a substantial share buy-backs in fiscal 2024, its share price has subsequently fallen. In light of the concept of PBR, this would ultimately suggest that the market’s expectations for “K” Line’s growth are low. How would you summarize this point?
A-3: It is extremely frustrating that our PBR still remains below 1.0. There are a number of reasons why our PBR has not yet reached that level. One reason is, of course, the high volatility of the shipping industry itself, and particularly the high volatility affecting Containership Business. Of course, we need to try and minimize this to a certain extent, but I think it is unavoidable due to the nature of the business. Accordingly, I have thought, and still think, that we need to show more concretely how we will increase the stable earnings of “K” Lineʼs own businesses and how we can get the market to recognize this.
Of course, this won’t happen overnight, but we are addressing this challenge with a strong sense of awareness. By continuing these efforts, we aim to develop and implement a growth strategy for “K” Line’s own businesses that will be more effectively reflected in our corporate value.
It is said that Containership Business accounts for a large proportion of “K” Line’s operations. However, I believe that the market conditions and industry structure relating to Containership Business have changed since the 2010s. I think that a certain degree of oligopoly and a decrease in the number of players in the market has created a lower limit and downward rigidity. I believe that there has not yet been enough time to gain the market's full trust on this point. Therefore, I believe as a shareholder of OCEAN NETWORK EXPRESS (ONE), “K” Line needs to continue to work with ONE to earn the market's confidence in our Containership Business.
【Containership Business】
Q-1: It seems many are expecting a decline in container freight rates towards the end of the fiscal year, probably to the level before the Red Sea incident occurred. How do you actually foresee the trends for current freight rates in the next two to three months, such as February, March, and April? Please let us know if you see anything apart from the current assumptions.
A-1: Freight rate levels peaked in July and August of last year and have been gradually declining ever since. Although freight rates have fallen, the decline in freight rates in the third quarter was smaller than previously expected, leading to the results revised upward. This trend continued into January. Therefore, as of January 31, short-term freight rates are actually trending slightly higher than the levels already incorporated into our plan. However, there is still uncertainty as to what demand will be like after the Lunar New Year, how the market will be affected by the alliance restructuring beginning in February, and how current short-term freight rate levels will change. Anyway, as of the end of January, the rates are trending at a level slightly higher than expected.
Q-2: Based on your explanation of cash flow and the dividend increases starting next fiscal year, I understand that you are confident in “K” Lineʼs own businesses. On the other hand, it is not clear how confident you are about ONE, which has shown considerable performance fluctuations. It seems your performance in the next fiscal year and beyond may improve or worsen depending on ONE. How confident are you in the accuracy of ONE’s performance forecast for the next fiscal year and its ability to achieve those projections? Also, it was stated that dividends of 100 yen per share can be paid in fiscal 2025 and 2026, even if ONE’s performance turns out worse than expected. Is that confidence based on an analysis under a pessimistic scenario?
A-2: Regarding the relationship between ONE's performance and shareholder returns, our shareholder return policy places emphasis on cash flow. While we are always mindful of shareholder returns based on cash flow, ONE’s profit and loss statement does not directly correspond to our cash flow. Since our cash flow originates from the dividends paid by ONE, it would be misleading to say that the impact of any decreased performance would be small. However, please understand that even if ONE's performance or the containership market were to deteriorate somewhat, we have determined that this would not have a significant impact on “K” Line’s ability to provide shareholder returns.
At this point, it is very difficult to predict how ONE will perform in fiscal 2025 and 2026, but I think the biggest factor will be when the Suez Canal can become viable again. At this point, ONE has no estimate for when shipping through the Suez Canal might resume. Even if it does become viable, reorganizing services will take several months. Accordingly, we do not currently anticipate a return to the Suez Canal in the first half of 2025.
Given this situation, ONE is preparing a medium-term earnings plan. Originally, we expected the market to soften in 2024 and 2025 due to the supply-demand balance. However, in 2024, due to the situation in the Middle East, shipping had to be detoured around the Cape of Good Hope, which absorbed the expected increase in supply from newly delivered vessels. We recognize that at some point the Suez Canal will become viable again, and the supply-demand balance will loosen again. However, the key question is when that will happen, and when it does, to what extent the supply-demand balance will deteriorate or not, considering factors such as the scrapping of aged vessels. There are various factors to consider, but even if market conditions worsen, we remain hopeful and do not expect extended operational losses, as was the case in the container shipping industry in the past. Please remember that ONE's anticipated performance for fiscal 2025 and 2026 has already been factored into our Medium-term Management Plan to a certain extent.
【Other】
Q-1: I would like to pose this question to Mr. Igarashi, who will soon become the president & CEO. This might be more relevant to the next Medium-term Management Plan rather than the current one, but what unique elements would you like to incorporate? I believe that the president's major business decisions involve investment. Have you already identified any challenges in this area? Do you have any objectives you would like to share with us today?
A-1: The next Medium-term Management Plan is still some way off, but I am planning to further strengthen the three functions we have been working on under the current plan, namely, “safety and ship quality management”, “environment/technology”, and “digital transformation”. We will also work on the area of human resources and organizational development. Of course, the results of these efforts are already visible in various areas, such as the liquefied CO2 transportation business. However, I would like us to continue working even harder to ensure that this progress is more widely recognized both inside and outside the company.
