【K Line’s Own Businesses】
Q-1: It appears the ordinary income forecast for “K” Line’s own businesses has been revised downward to 78.5 billion yen for this fiscal year, reflecting the impact of temporary factors. Could you tell us where things stand in terms of your confidence and the prospects for achieving the 90.0 billion yen target in the next fiscal year?
A-1: Today, we have announced ordinary income for “K” Lineʼs own businesses of 78.5 billion yen, which includes temporary factors and the impact of exchange rates. Looking ahead to the next fiscal year, we expect certain businesses to further build on this result. We believe exchange rate movements will have some impact, but we intend to make steady efforts while taking such factors into account. We are currently examining various measures, but at this stage we cannot state with certainty that the target will be realized. As we refine our plans, including for the second half of the fiscal year, we hope to provide a more detailed explanation at a later date.
Q-2: Regarding the Car Carrier Business, you have revised downward the full-year ordinary income, and I understand that you lowered the number of vehicles transported at this time. There was talk of issues and mention of increased operating costs. I don't know if this is an increase in costs, but are there any factors unique to “K” Line?
A-2: The downward revision of the ordinary income of the Car Carrier Business from the August announcement was explained earlier. The issue was due to a strike in Korea that prevented production from proceeding smoothly. With regard to the 4.0 billion yen figure, we analyze about half of it as temporary factors and the other half as non-temporary factors.
Regarding temporary factors, the occurrence of issues and a temporary suspension in production during the transitional phase associated with the model changes, had an impact.
A non-temporary factor was a slight decrease in freight rates at the time of contract renewal. There are multi-year contracts, etc., which are reflected in the lower freight rates. Another factor was a slight drop in sales in some markets, which led to a decrease in cargo movements. The decrease in cargo movements is expected to be around 35,000 units.
Q-3: Regarding Car Carrier Business, I believe the impact of the one-year suspension of U.S. port entry fees has not been factored in. For example, if this results in reduced costs for vessel allocation planning, could there be an upside to Car Carrier Business profit outlook for the second half compared with your current plan?
A-3: As mentioned earlier, the impact of the U.S. port entry fees for car carriers has not been factored in. We are currently confirming whether the one-year postponement will indeed take place, but at this point we are operating on the assumption that the rules that took effect on October 14 remain in force, and we are in discussions with our customers regarding the sharing of the associated cost burden.
Q-4: Regarding the 4.0 billion yen downward revision in Car Carrier Business, you mentioned that 2.0 billion yen is temporary and attributable to the trouble. Should this be understood as the same factor behind higher operating costs? Also, could you explain, to the extent possible, the background behind the freight rate decline due to service contract renewals?
A-4: The trouble in question mainly resulted in shipment disruptions that led to lower cargo volumes. As for the factors behind the downward profit revision, multiple elements are intertwined, and there is some variability, but we are currently analyzing and organizing them into temporary and non-temporary factors. Regarding the non-temporary factor of freight rates, negotiations are still ongoing. Although rates are slightly below our expectations this fiscal year, we have been able to conclude several multi-year contracts covering next fiscal year and beyond, which we view positively. As explained earlier in the business briefing, the degree of freight rate decline remains within our expectations, and we do not anticipate any operational difficulties as a result.
Q-5-1: I wonder if you could explain the profit trends in the Dry Bulk segment in the first and second quarters, as well as your expectations for the second half. I understand there was an impact of several billion yen from the trouble in the first quarter, but what about in the second quarter? Moreover, given market assumptions, the second-half ordinary income forecast of 7.6 billion yen appears rather high. Could you elaborate on what factors, other than market conditions, explain such a difference in profit levels between the second quarter and the second half?
A-5-1: The main reason for the large gap between the second quarter and the second half is that although market conditions improved in the second quarter, the timing of contracts and operational time lags had an effect. This timing gap in operations is a normal occurrence, but the financial impact tends to appear with a delay. In addition, during the operations that spanned fiscal periods, there were port congestions in voyages and changes to routes, and as a result of operational adjustments, revenue recognition was shifted into the second half slightly more frequently than in a usual year. If we could even out such effects, the balance between the second quarter and the second half would be roughly in line with what we announced previously.
Q-5-2: Am I correct in understanding that there were no particular issues in the second quarter?
A-5-2: As you said, there were none.
【Containership Business】
Q-1: What do you envision for short-term freight rates for containerships in the second half of the fiscal year? It may be difficult to give a specific answer, but we would appreciate any hints as to how the downward revision was made compared to the previous announcement.
A-1: As I explained earlier, short-term freight rates dropped in September. In response to this situation, since mid-October, not only ONE but carriers have been adjusting their so-called price increases, and this has had an effect on the current situation. To explain the current situation, ONE is at a higher level of freight rates than we expect in the second half of the fiscal year, but the question is how long this situation will continue. We believe that short-term freight rate trends going forward will depend on the extent of consumption toward the end of the year, especially during the Christmas season and Thanksgiving, which are demand periods in the U.S. and Europe.
On the other hand, we expect the impact of the recent suspension of tariffs between the U.S. and China to bottom out, or increase cargo volumes, during the Chinese New Year shipping season next February, and that short-term freight rates will rise again accordingly.
Q-2: Regarding containerships, you mentioned that there was front-loaded demand for containerships after the General Rate Increase (GRI) and price increases were implemented in October, but I believe that demand is currently weak due to a reactionary decline. However, how do you see the demand environment from October through December, given the situation where short-term freight rate increases are firmly passed through?
A-2: As a shipping company, we have two points to make. The first is the implementation of the so-called GRI, which is to raise short-term rates. Second, the advance of demand, or what is called preemption, was evident. Originally, we had expected a peak in October, such as during China’s National Day celebration, but the market was not that active. Shipping companies usually implement measures such as reduced services during the winter season when demand is low and during the slack season. We implemented reduced services and other measures earlier than usual this year, which has positively influenced the current supply–demand balance for shipping companies, thereby enabling the GRI to take effect. However, we recognize that we need to keep a close watch on how long this situation will continue.
【Capital Policy】
Q-1: It appears that there were no particular updates today regarding the additional shareholder return of 50.0 billion yen or more. What decision-making criteria and timeline are you considering for this matter going forward?
A-1: We are still in the process of considering a framework of additional shareholder return of 50.0 billion yen or more. We cannot say at this time when this will be done, but we would like to explain how it will be done at an appropriate time, as soon as possible. Operating cash flow remains very robust, and we expect to maintain a level of 1.5 trillion yen. Therefore, we have no particular concerns, and we will strive to announce our policy by the end of fiscal 2026, or preferably sooner.
Q-2: Could you explain how the 80.0 billion yen management allocation is currently positioned? Does it still serve as a buffer within operating cash flow, or do you see the potential for changes on the investment cash flow side? In particular, taking into account the postponement of the adoption of the Net Zero Framework, could you share your views or policies on investment cash flow, to the extent possible?
A-2: The 80.0 billion yen management allocation is subject to similar considerations as the additional shareholder return. Since the overall situation is not entirely clear, we still see value in maintaining it as part of our cash allocation. At the same time, we are positively considering how best to utilize the funds, including for investments. Therefore, while I cannot yet share details, we intend to explain our approach at an appropriate time.
Q-3: I would like to ask about the additional 50.0 billion yen in cash allocated for shareholder returns. Given that the forecast for benchmark operating cash flow remains unchanged and highly certain, could you explain, as much as you can, what concerns or considerations led to the decision not to take any action at this time?
A-3: To be frank, as mentioned earlier, we are examining a variety of factors, including the business environment. It is not that there are any negative factors—rather, we are carefully determining what would be the most appropriate course of action, and for that reason we cannot provide details at this stage. There are no obstacles preventing implementation, and we are continuing our review with a positive stance. We intend to provide an explanation at an appropriate time, and appreciate your understanding.
Q-4: Your discussions on optimal capital structure appear to be ongoing but not yet concluded. Could you share how those discussions have evolved and what progress has been made so far?
A-4: We are taking various factors into account. As mentioned previously, we are also considering the optimal capital structure of ONE. The three shareholder companies are all engaged in these discussions. For “K” Lineʼs own businesses as well, we are examining not only current invested capital and business assets but also future plans, in order to establish a capital structure that adequately recovers our cost of capital. We are steadily working through these discussions to determine the most appropriate direction, though this process will take a little more time.
【Other】
Q-1: What is your perception of changes in cargo movements and conditions in containerships and Car Carriers after the U.S.-China agreement? Are you observing any improvements in cargo movement or an increase in inquiries as a result of lower tariffs and port charges?
A-1: Regarding containerships, we honestly have not been able to confirm any response or visible impact of the U.S.-China agreement at present. This is related to the consumption trends toward the end of the year and how much more shipments from China will increase, as we reported earlier. We are currently investigating the status of orders for next year's Chinese New Year by interviewing consignees and cargo owners at each of our offices about the status of their orders.
With regard to Car Carriers, the U.S.-China agreement has not had much of an impact at this time. Regarding sales in the U.S. market, a preliminary October figure of -5% for the total market was announced, but the year-to-date total from January to October is 3.3% higher year on year. Since different manufacturers have different model lineups and inventory levels, we expect to see some variation in sales results. On the other hand, tariffs from exporting countries Japan, the EU, and Korea have been reduced to 15%, which may have made it easier for each OEM to formulate sales measures. Therefore, we expect that the variation in sales performance of each manufacturer will level out in the future.
Q-2-1: The first half of this fiscal year has passed, and I think we are entering a phase where we have to think about and deal with the next fiscal year and beyond. As President Igarashi, how do you view the current changes and environment, and what management issues do you think need to be addressed in advance? Please tell us what actions you think need to be taken over the next six months for the next fiscal year.
A-2-1: There are a few things to consider as we move past the half-year mark. To give you an idea of the current situation in the current business, there has been a shortage of vessels in particular. This is true for all types of vessels as well, with various orders having been placed due to shortages. The supply-demand situation is beginning to deteriorate in some areas. There are examples like car carriers, whereas in other cases, like Capesize vessels, shortages are a concern.
Given these circumstances, we believe it is time to reassess the approach to future measures, including through the revitalization of Japan’s shipbuilding industry. In particular, we believe that we need to continue to make such preparations for decarbonization and energy-related initiatives, even though the adoption of the Net Zero Framework was postponed at the recent IMO’s MEPC. We will prepare more in-depth initiatives on decarbonization and energy-related issues for the coming year, and we will take firm action on the basis of these initiatives.
Q-2-2: Looking at the current situation, is it your understanding that not much has changed from what is envisioned in the Medium-term Management Plan and the current situation, and that there is no need to revise it?
A-2-2: We presented and announced our Medium-term Management Plan in May 2022, but a certain amount of time has passed since then, and I believe that the business environment has changed significantly in some areas. “K” Line would like to proceed with flexibility where necessary. The Medium-term Management Plan itself is set to end in FY2026, so this is naturally the time to begin considering various matters with a view to the next phase of the plan. Therefore, after careful consideration, we will make every effort to provide timely explanations as necessary.
