【K Line’s Own Businesses】
Q-1: Regarding the upward revision for Car Carrier Business, I assume this is mainly due to an increase in the predicted number of units carried. Has there been any change in your forecast regarding freight rates? Even if you cannot disclose any details, a qualitative response would be great. Please let us know if there has been any change in your outlook on freight rates.
A-1: At this point, we do not expect any significant changes in freight rates. As you may be aware, most of our contracts are already fixed, so we believe there will be no major fluctuations in general. Additionally, unless there is a significant change in demand going forward, we also expect no major fluctuations in spot freight rates. This outlook forms the basis of our current forecast.
Q-2: Regarding Dry Bulk, the briefing materials mention the impact of vessel deployment changes due to accidents and disputes, which suggests that one-time costs have been incurred in the Dry Bulk segment. If that is the case, could you please tell us the amount?
A-2: I mentioned Guinea at the beginning, and there was also an accident at a loading port in Peru. Unfortunately, several adverse factors coincided. While I will refrain from disclosing a specific figure, we have incurred a loss of close to one billion yen.
【Containership Business】
Q-1-1: ONE’s profit for the first quarter was 86 million dollars, which came in slightly lower than expected. How do you evaluate this performance in light of “K” Line’s forecast? I understand that freight rates and liftings are part of the picture, but it seems operating costs, particularly in the first quarter, have increased. Considering these operational aspects, how does the result compare with “K” Line’s expectations?
A-1-1: Regarding our evaluation of first-quarter results, the quarter was impacted by U.S. tariff policies, which created disruption for both shipping companies and cargo owners. Due to this, vessel reallocation occurred not only on the Asia-North America and Asia-Europe routes but also across other routes. This is thought to have resulted in additional costs, which were not limited to ONE. Furthermore, cargo volumes originating from China temporarily declined in April and May. Although there was a recovery after this drop, the final result reflected the ups and downs during the period, which is our true assessment.
Q-1-2: As a follow-up question-can the vessel reallocation costs during the early phase of the tariff implementation be considered one-time costs?
A-1-2: Yes, you may regard them as one-time costs.
Q-1-3: Variable costs increased by 100 million dollars, and operating costs by 300 million. Should these also be generally understood as one-time costs?
A-1-3: I believe the figures you’re referring to are from waterfall chart in ONE’s slides. Those numbers represent year-on-year comparisons (FY2025 first quarter vs. FY2024 first quarter), so they are different from the most recent first-quarter figures themselves. However, please note that the one-time costs we just discussed are included in those numbers.
Q-2: Regarding the outlook for Containership Business, freight rates now seem to have bottomed out. Going forward, how do you expect things to develop through the second, third, and fourth quarters?
A-2: Regarding freight rates, it is true that the short-term market freight rates appear to have bottomed out. Normally, we would expect a peak season in the summer ahead of the year-end consumer demand period, but this year, judging from inventory conditions and other factors, we do not expect a significant increase in shipments or additional demand during the summer. This applies not only to demand volume, but also to any sharp rise in freight rates associated with increased demand. Therefore, we do not expect the typical peak season in summer or early fall to materialize to a significant extent. While current demand conditions are not bad, we expect this situation to persist through the end of the year, with supply-demand conditions further softening toward the fourth quarter. At the beginning of the year, ONE presented two scenarios for its full-year outlook: around 1,100 million dollars in profit if there were no tariff impacts, and around 250 million dollars in the case of maximum tariff impacts. Taking into account the past three months, the updated forecast has now been set at 700 million dollars. Coincidentally, this is close to our own forecast. From ONE’s perspective, the goal now is to maintain results at this level.
Q-3: Regarding the outlook for Containership Business, you have revised the full-year forecast upward by 2.0 billion yen since the May 2025 briefing. Compared to the revision for Car Carrier Business, this feels like a relatively small increase. Does this suggest you have factored in negative elements other than tariffs-such as changes in trade patterns or the still-undecided U.S.-China tariffs?
A-3: If your question is whether the 2.0 billion yen upward revision in our full-year forecast for Containership Business still includes some possible downside impact from U.S. tariffs, then that’s correct. Since factors such as U.S.-China tariffs remain unclear, we believe there is still potential for the tariff impacts to persist throughout the full year. However, at this point, we do not yet have a clear quantitative outlook on how much of an impact they will have over the remaining nine months.
Q-4: With regard to Containership Business, I believe you’ve factored in some impact from tariffs. The slide mentions the potential for changes in trade patterns. In reality, are there any signs of change at this point-for example, a decrease in exports from China and an increase in exports from Vietnam?
A-4: At present, there have not been any particularly noticeable developments. That said, depending on how U.S.-China relations evolve, there is a possibility that exports from China could decline further, with cargo volume shifting to other export regions to make up for the shortfall. However, as of now, we have not observed any major changes in trade patterns.
Q-5: Are there any changes in the way containership supply is being allocated? Looking at the recent spot market conditions, it seems that while the North America market remains soft, the Europe market is showing signs of firmness. Given this shift in market conditions, are there any changes in your capacity allocation by region?
A-5: Let me explain future containership capacity allocation. This is not only about ONE but also applies to the container shipping industry as a whole, so please take this as a general reference. The current divergence between the Asia-North America and Asia-Europe routes is, in part, due to carriers adjusting their services. As demand softens on the North America routes, they are shifting vessels to the Europe routes. Separately, while navigation through the Suez Canal remains restricted, the container shipping industry as a whole continues to see a steady increase in newly built vessel capacity. Until about a year ago, the utilization rate for containerships remained close to 100%. In other words, vessels were sailing full. However, as utilization rates gradually decline across the industry-including at ONE-we think we would begin to see measures being taken by carriers. These include the disposal of aged vessels, which had been deferred over the past few years, and service restructuring. We believe that, in conjunction with supply-demand dynamics, these developments will help adjust the market balance in the near term.
Q-6: Regarding second-quarter profits for Containership Business, you mentioned earlier that the usual peak season effect would be absent in the second quarter this year. With that in mind, ONE is forecasting a significant jump from 86 million dollars in the first quarter to around 450 million dollars in the second quarter. Is this increase mainly due to cost factors? Please explain the background for this expected sharp rise in profit from the previous quarter.
A-6: For Containership Business, this year we are not expecting a sharp rise in freight rates typically associated with the second quarter as peak season. However, since it is still a fairly busy season, we expect a certain level of demand to be maintained, and short-term freight rates are likely to remain firm as a result.
【Capital Policy】
Q-1: Regarding your approach to future shareholder returns, I understand that although the full-year forecast has been revised upward this time, the additional shareholder return of 50.0 billion yen or more has been left unchanged. Could you share your plans for reviewing this? What kind of timeline and decision-making criteria are you using?
A-1: We do not publicly commit to specific figures such as a payout ratio for shareholder return. Our basic approach is to determine the return policy while keeping in mind what we consider to be the optimal capital structure, ensuring financial soundness, and monitoring cash flow. Although we have revised upward our earnings forecast slightly since the beginning of the fiscal year, there have been no major changes from the initial outlook in terms of operating or investment cash flow. Accordingly, at this time, there are no changes to the specific shareholder return figures or our existing policy. As for the timing of the additional shareholder return of 50.0 billion yen or more, we would like to determine the specific method and timing once we have better clarity on how uncertainties such as tariff impacts might affect our performance. We do recognize that it is better to do this sooner rather than later, but we determined that it is still a bit too early to make a decision at this point of time. We are preparing to provide more details as soon as possible.
Q-2: Regarding shareholder return, depending on progress through the first half and changes in future cash flows, I am assuming there is a possibility that the plan for additional shareholder return of 50.0 billion yen or more might be revised somewhat. Also, with respect to investment progress, it seems there has been some delay looking at the original Medium-term Management Plan. You mentioned growth today, so I would also expect some updates regarding the use of free cash flow, particularly in light of the recent management changes. Please share your thoughts on the return policy going forward.
A-2: The reason we have not provided an update on shareholder returns this time is that there have been no major changes in operating or investment cash flows since the announcement in May. While the outlook remains uncertain, we have revised our earnings forecast upward by narrowing the extent of the negative impact from tariffs. However, we determined that there has not been a material impact on cash flow or earnings that would require a change in our return policy, and thus decided not to make any changes. Looking ahead, we do not want to make changes simply because of the management transition. As mentioned earlier in the briefing on PBR, we intend to clearly lay out a path for growth and appropriately allocate the necessary capital to support it. Our policy during the current Medium-term Management Plan has been consistent. That said, when it comes to investments, the timing is not determined solely by our own plans; it often depends on coordination with our customers. Therefore, as you pointed out, our investment appears to be delayed at present, and progress may seem somewhat behind schedule. Accordingly, we will set out our future growth strategy and explain the areas where we plan to allocate capital. At the same time, we do not intend to overlook shareholder returns. We would like to proceed without changing our policy- to proactively return any capital that exceeds the level required for an optimal structure.
Q-3: From an outside perspective, the specifics of an “optimal capital structure” are somewhat difficult to understand. I think that is why questions about shareholder return often arise. Is there still no concrete information available on this point?
A-3: I understand your desire for a clearer explanation of what the optimal capital structure means in actual numerical terms. There is also the question of whether it is appropriate to express our target capital levels only using simple financial ratios-such as equity ratio or debt-to-equity ratio. Nevertheless, we are continuously reviewing these indicators as part of our overall consideration. Given the structure of our business, ONE provides a significant portion of our profits. Accordingly, it also has a substantial impact on our cash flow. We intend to present our capital structure approach after carefully assessing these factors. I understand your need to receive a concrete explanation. As a company, however, we would like to present our approach after thoroughly examining what would be the best capital structure for “K” Line-including the portion related to ONE. I apologize for not being able to provide an immediate answer, and would appreciate your patience in giving us a little more time.
【Other】
Q-1-1: Regarding the impact of tariffs, your latest full-year forecast indicates a negative impact of 3.5 billion yen on “K” Lineʼs own businesses and 14.5 billion yen on Containership Business. Could you provide a breakdown of this by quarter-specifically, how much occurred in the first quarter?
A-1-1: While it is difficult to precisely identify which components qualify as tariff-related impacts, our general sense is that there was very little impact on “K” Lineʼs own businesses in the first quarter. Depending on how one defines the impact of tariffs, there may have been some minor effects. However, from our perspective, we recognize that there was virtually no impact that could be specifically attributed to tariffs in “K” Line’s own businesses over the period as a whole.
Q-1-2: So does that mean there was little first-quarter impact on Containership Business as well?
A-1-2: Actually, Containership Business did feel some impact. While not directly reflected in the performance figures, the impact was still significant. While it is extremely difficult to say what portion was specifically due to tariff effects, U.S.-China cargo movements did drop sharply in April and early May. However, while this is also related to the one-time costs I mentioned earlier, the analysis of the specific financial impact remains very challenging. At any rate, please note that tariffs did have a significant effect on our overall business results.
Q-2: I have a question about the impact of the change in the method for allocating foreign exchange gains and losses. When comparing current corporate expenses with those for fiscal 2024, there does not appear to be a significant difference. It seems to be simply a reallocation of just over 1.0 billion yen. Am I correct in understanding that foreign exchange losses are still affecting Car Carrier Business and losses in the Dry Bulk segment as they did before?
A-2: Recently, exchange rates have fluctuated sharply over short periods. Last fiscal year, we saw the yen weaken from the first to second quarter, followed by a sudden strengthening of the yen. “K” Line holds U.S. dollar-denominated deposits as part of its cash on hand, and the valuation gains and losses on those deposits have had a significant impact. Previously, these gains and losses were allocated to business segments based on a set formula. However, we recognized that foreign exchange impacts could obscure the true state of business performance. Therefore, starting in fiscal 2025, we have a new allocation method. For gains and losses directly tied to each business, we keep them as-is. However, for those gains and losses related to assets like trade receivables that are not linked to any specific segment and are held at the corporate level, we now allocate them differently. That is the background behind the change. At present, the impact of this change is not very noticeable, but the reasoning for the move is just as I explained.
