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Explanationby article

"K"LINE Vision 100

Instead of discussing prospects for next year separately, I would like to now talk about our new medium term management plan starting this April, in which I will describe Fiscal 2008 forecasts at the same time.

Although we have managed our business operation based on the last management plan, "K" LINE Vision 2008+, until end of this March, we decided to review that plan with the background I will talk about now.

The new management plan is called "K" LINE Vision 100, which was chosen based on what we will be like in year 2019 when we celebrate our 100th anniversary.

< Slide#4 >
Background of revisions to "K" LINE Vision 2008+
Business-performance trends and overview

I will briefly explain about the contents.

As background for the revisions to "K" LINE Vision 2008+ that originally covered the period from Fiscal 2006 through 2008, which I touched on previously, we came to face drastic changes in the economic situation on which our assumptions were forecasted when we established that management plan, so it was decided that we must revise the plan.

Because dry bulk freight rates especially sharply climbed far beyond our expectations along with expansion of the market, we were achieving most numerical targets for the last year of "K"LINE Vision 2008+ mentioned on the right side of this table, one year beforehand.

Actual Operating Revenues for Fiscal 2007 were over 1,300 billion yen; Ordinary Income, Net Income and most other items achieved the goals set for Fiscal 2008.

However, Shareholders' Equity, Equity Ratio and Debt Equity Ratio fulfilled the targets for Fiscal 2007 but did not reach those for Fiscal 2008.

In "K" LINE Vision 2008+ we also showed further image as to what we will be in the mid-2010s with greater goals such as Operating Revenues 1,500 billion yen, Ordinary Income 150 billion yen and our fleet scale 700 vessels. In Fiscal 2007, we succeeded in realizing achievements to the level that even such targets came within sight. Therefore it was decided that we would review the plan for Fiscal 2008 and thereafter as stated earlier.

< Slide#5 >
Background of revisions to "K" LINE Vision 2008+
Dramatic changes in the business environment: positive factors

As I mentioned previously, dry bulk market rate rose up drastically, and the background for that was growth in marine transportation. Of course, not only dry bulk cargo, but also containers and completed cars are increasing, which meant the entire marine cargo market grew to a great extent.

< Slide#6 >
Background of revisions to "K" LINE Vision 2008+
Dramatic changes in the business environment: negative factors

On the other hand, we also see negative factors.

As I said before, fuel oil price has been surging significantly. Originally in the plan we set the price at 300 U.S. dollars per metric ton through all 3 years of the plan, but in reality, average price during Fiscal 2007 was over 400 dollars.

For a very long time, we had been in a state of deflation and had not experienced any price up, but these days the world has been changing.

First, we were faced with L.O. (Lubricant Oil) up, and then maintenance costs. Furthermore, in response to the significant increase of vessels, costs for seafarers have been going up. A series of such rises in ship costs has continued, which is totally different from what we had prospected when we established the plan.

As shown on the right side of the graph, vessel costs per ship inflated by approximately 25% comparing 2007 to 2004.

< Slide#7 >
100th Anniversary Vision "K" LINE Vision 100
1919-2019 Toward the 100th Anniversary of the Company's founding (2019)

In such business environment, we reviewed our management plan, and establisher a new mid-term management plan, "K" LINE Vision 100 staring at2019, year of our centennial.

< Slide#8 >
Theme of "K" LINE Vision 100

Theme for our newly-established management plan is Synergy for All and Sustainable Growth, as I feel 'Synergy for All' sounds slightly hard.

We prospect seaborne trade will keep growing 3.5% annually, so there is a demand for our services. And as long as nations in the world are at peace and maintain economical growth, cargo movements by sea, which is the subject of our business, will continuously increase.

Therefore, in such a market, we want to accomplish Sustainable Growth, which is the same target as in our previous management plan.

Of course, we are not just hoping we alone can enjoy such market benefits, but we must also care about environmental issues that have recently become a major concern, as well as sharing profits with each of our stakeholders to reinforce those ties, which has been often said since a long time ago, and so we will endeavor to attain 'Synergy for All' that being why we set the theme of 'Synergy for All' and 'Sustainable Growth'.

Just for guidance, to establish this new management plan we did not just sum up numerical figures given by our planning divisions or any such limited part of the company. We listened to a broad range of opinions or suggestions from persons throughout the "K" LINE Group, not only the staff working in our Headquarters, or offices in Japan, but various employees working within the "K" LINE Group all over the world. In that way we integrated this theme for the new management plan.

< Slide#9 >
"K" LINE Vision 100
Efforts toward synergy for all and sustainable growth

We set five major subjects:

  • Activities to promote environmental protection
  • Stable and safe ship operation administration structure
  • Borderless management through the best and strongest organization
  • Proper allocation of strategic investment and management resources
  • Improvement of corporate value and complete risk management

I do not think there are any innovative points, but all of us throughout the "K" LINE Group would sincerely like to endeavor to achieve these subjects.

< Slide#10 >
Efforts toward synergy for all and sustainable growth
(Activities to promote environmental protection)

First of all, we put 'Activities to promote environmental protection' at the top of the list, but this does not necessarily imply that this order is according to importance of each subject.

But, still I think environmental issues are comparably important if we are to live and work in this world in the future. We will endeavor to promote environmental protection through any measures.

A specific target is to decrease CO2, SOx and NOx emissions per ton-mile by 10% from Fiscal 2006. For that purpose, our present Environmental Team will be upgraded to an Environmental Management Division effective of July 1st to make concrete action plans and to pursue execution for those plans.

The target of reducing 10% of emissions is never an easy goal. I suppose this is where we must make severe efforts to fulfill, and we will keep trying to pursue that in line with action plans to be set.

< Slide#11 >
"K" LINE Vision 100
Efforts toward synergy for all and sustainable growth
(Stable and safe ship operation administration structure)

For "K" Line to continue operations globally and gain the trust of our customers, the biggest subject is safety in navigation, as said many times during the past, and so we are trying to establish a stable and safe ship operation administration structure.

There are various benchmarks for that purpose in the world. We, "K" LINE, set our own "K" LINE Quality and "K" LINE Safety Standard, with which we will steadily proceed in accordance therewith.

< Slide#12 >
"K" LINE Vision 100
Efforts toward synergy for all and sustainable growth
(Borderless Management Through the Best and Strongest Organization)

Regarding subject for our organizations, now in marine transportation business, especially international marine transportation, "K" LINE's business aims at many customers world-wide. In this environment, we must build up organizations to be accepted globally, including a recruiting and promoting system. Under this general idea, I would like to make our organization more effective, and one that can be relied on from customers, not only in Japan but worldwide.

< Slide#13 >
Efforts toward synergy for all and sustainable growth
(Proper allocation of strategic investment and management resources)

As to 'Proper allocation of strategic investment and management resources', we have made clear what our numerical targets for the four years from Fiscal 2008 to Fiscal 2011 are, which include 180 vessels with 1,180 billion yen investment for the total of those four years.

At the end of Fiscal 2007, number of vessels in our fleet was 499 in total. Together with the 180 newly-built ships to be delivered in the coming 4 years, our operating fleet at the end of Fiscal 2011 will consist of 640 vessels.

In the previous management plan, "K" LINE Vision 2008+,our target was fleet scale of 700 ships in the mid-2010s, however, keeping this pace, our fleet will reach about 750 ships in mid-2010s.

At the end of the last year of this "K" LINE Vision 100, Fiscal 2019, we expect to have a total of around 900 vessels in our entire fleet.

Of course while we keep making positive investments to our existing business, we will also try to grow new business in the future as well.

Heavy lift business, as I mentioned previously, will have new vessels, and we have also decided to enter Offshore Supporting Vessel business, which we believe will bear fruit from Fiscal 2010 and thereafter.

You can see wording at the end of this slide that mentions 'advancing investment based on internal financial rules'. We do not think we can build ships just as rapidly as possibly without also having some caution in such a 'shotgun approach' and so we have set some internal financial rules:

Equity ratio, over 40 %,
ROA over 8%,
DER under 95%, and
Interest Bearing Liability / Operating Cash Flow ratio under 4.5.

We have made these rules to discipline ourselves, and they are based on the premise that we are rated, or will gain rating, so-called A-class.

< Slide#14 >
Efforts toward synergy for all and sustainable growth
(Improvement of corporate value and complete risk management)

The fifth one is 'Improvement of corporate value and complete risk management':

First, taking improvement of corporate value, as explained previously, while still steadily maintaining investment in ships, we will also try our best to return profit to our shareholders.

In the previous management plan, we said we would gradually increase the pay-out ratio targeting 30% for mid-2010s. As a step to the final target, and as an interim target, we would like to increase up to 25% for fiscal 2011 for the last year of this management plan.

Although there are various risks indicated here, the same as with internal financial rules, checking with many sections in our company, and holding balance, we would like to try to manage these risks.

< Slide#15 >
Business Strategies

As for business strategies, I will just talk about the overview now, and you are invited to ask about the details later.

< Slide#16 >
Business Strategies
Mid- to long-term (2010s) forecasts for management environment

This is also what I touched on before, in mid-to long-term view, as global macro-economy, there will continuously appear new emerging countries that will be growing up, so the world economy is expanding even if fluctuating somewhat. In line with this expansion, seaborne cargo that we are handling will likewise be increasing.

< Slide#17 >
"K" LINE Vision 100
Mid-term business strategies: containership business

Our containership sector, the major part of our core business, will continue to grow in the future.

At present, in line with the slowdown in the U.S. economy, cargo growth for this year to the U.S. will take notable turn downward, but in the mid or long run, it will again regain and reach cruising speed.

We would like to raise the ratio of 'North-South' trade, depending on the prediction that emerging countries are continuously developing, not only to enhance our existing trunk-line, the 'East-West' line.

< Slide#18 >
"K" LINE Vision 100
Mid-term business strategies: dry bulk carrier business

We see demand for the world's three major bulk products increasing because of population growth that leads to various raw material or thermal coal transport demand growing in line with development of the steel industry and power plants in emerging countries, and also rising grain transport.

And, we expect the demand for trades having longer 'ton-mile,' as we say in our industry, than existing trades will likely increase, because resources are spread thinly on the earth, and so transport distance of dry bulk business in general will be extending further in the future.

Especially since continuous developing of emerging countries is prospected, "K" LINE will further extend the strengthening of its overseas business bases more than ever, depending on relations of trust between our customers and us.

< Slide#19-21 >
"K" LINE Vision 100
Mid-term business strategies: dry bulk carrier business
(Coal and Iron Ore Carrier, General Bulk Carrier, Thermal Coal, Woodchip, and Pulp Carrier)

In dry bulk division, there are separate segments of Coal and Iron Ore Carrier, General Bulk Carrier, Thermal Coal, Woodchip, and Pulp Carrier, as indicated in these three slides individually, about which you may ask questions later, if you like.

< Slide#22 >
"K" LINE Vision 100
Mid-term business strategies: car carrier business

Demand for cars is prospected to increase as economies develop and quality of life is improved worldwide. At present, car sales are reported to be 70 million per year, which will expand to around 90 million in mid-2010s.

So, in line with that demand for our business, completed car transportation is prospected to increase and various trade patterns will be added.

< Slide#23 >
"K" LINE Vision 100
Mid-term business strategies: Energy Transportation and Oil Tanker

As I also mentioned at the beginning today, demand for energy is expected to be steady. Of course, considering environmental protection, etc., in some areas actual demand for gasoline could be down, but still considering world energy resources are limited, demand growth makes this business comparably stable.

We believe that to meet world energy demand growth, development of new petroleum or gas fields will be reinforced more than ever.

So, our intention is to enter into transportation directly concerned with upstream business, not only transportation of crude oil, such as offshore business, or CNG carrier business, which was planned before but not yet realized.

As oil producing countries are industrialized, they will try to export not only primary commodity, but also manufactured goods, so we see demand for product carriers and chemical carriers will be increased.

To handle such business while further enhancing our organization, we have decided to establish an Energy Transportation Business Development Group, not only to take care of existing businesses but to also seek for new business models.

< Slide#24・25 >
"K" LINE Vision 100
Mid-term business strategies: Energy Transportation and Oil Tanker
(LNG Carrier, Oil Tanker segment)

Among the energy transportation business, LNG carriers and tankers are as mentioned in these slides.

< Slide#26 >
Mid-term business strategies: Energy Transportation and Oil Tanker
(Offshore business segment)

It has been decided that the newly-established Energy Transportation Business Development Group will be in charge of offshore business.

< Slide#27 >
"K" LINE Vision 100
Mid-term business strategies: Heavy Lift Business

Concerning Heavy Lift Business, we have been steadily placing orders for highly-equipped new vessels so that we can successfully respond to demands in the future.

< Slide#28 >
"K" LINE Vision 100
Mid-term business strategies: logistics business

As for logistics business, as I keep repeating, further enhancing "K" LINE Logistics in order for it to become a core member in the "K" LINE Group's logistics companies, all of our group companies will aggressively support this objective.

< Slide#29 >
"K" LINE Vision 100
Mid-term business strategies: New Business

Some business here has not been realized yet, while some others are starting to materialize.

Regarding CNG carriers, as I mentioned previously, I have heard some good partners might be found, and depending on conditions for market or development of gas fields, some concrete plans could start quite rapidly.

Upstream business in the energy transportation segment and also new downstream business such as chemical carriers will also be strengthened.

As to environmental-related business, we will make research and development in this area by ourselves, which could be seeds for new business.

We are planning to enter into ship repair business overseas through capital participation, as these days we are struggling to find docks for maintenance while newly-built ships are delivered one-by-one. We will continue with our various investments.

< Slide#30 >
"K" LINE Vision 100 numerical targets
Performance / financial targets

Based on such business environment and our own strategies, we calculated our forecasts until Fiscal 2011: Our projection for Fiscal 2011 is Operating Revenues of 1,750 billion yen and Ordinary Income 160 billion yen. As pre-conditions for these, exchange rate between yen and U.S. dollar is 100 yen per one dollar; and fuel oil price 520 U.S. dollars per metric ton which is based on Dubai crude oil at 100 U.S. dollars per barrel.

Under these assumptions, for Fiscal 2008 we estimate Operating Revenues of 1,340 billion yen; Ordinary Income 121 billion yen and Net Income 78 billion yen.

In comparison with Fiscal 2007 results, Operating Revenues increase slightly while Ordinary Income and Net Income decline a little bit. However, throughout the later three years, Fiscal 2009, 2010 and 2011, we can prospect both revenues and profits will rise, so I do not worry much about slight profit decrease for Fiscal 2008.

Next year, April 2009 marks the 90th year since our foundation. Therefore, as some companies pay so-called 'memorial dividend', we will raise pay-out ratio to 22-23% for Fiscal 2008 including the idea of somewhat like a memorial, which amounts to 27 yen per share exactly.

< Slide#31 >
"K" LINE Vision 100 numerical targets
Assumptions of this plan.

As assumptions for this plan, as I mentioned previously, exchange rate is 100 yen per U.S. dollar and fuel oil price is 520 U.S. dollars per metric ton.

As you know very well, a major part of our recent company profits has been earned by dry bulk business, and the market level for this business is expected as indicated in this table:

Taking cape-size, 100 thousand dollars a day for Fiscal 2008, and thereafter slightly down to 80, 60 and 50 thousand dollars.

The rates for Panamax and Handymax are also as mentioned here.

These premises for the market are calculated based on present rates in the market for 'futures', or 3-year or 5-year contracts starting these days, and do not reflect our own view for the markets. We do not think dry bulk market will go down.

Based on these pre-conditions, we calculated the numerical targets in the previous slide. I understand that nowadays people often comment with concern about so-called 'Year 2010 problem,' over-tonnage situation to be revealed in year 2010. Even if these premises include risk of such problem, still we can describe steady growing line until Fiscal 2011, with secure stable profits, i.e., increase in long-term contracts.

This completes my explanation for our new management plan. Thank you very much for joining us today.

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