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Major Q & A

[Containership Business]
 
Q.1     How is the trade-wise breakdown of 7.8 billion yen deficit in 1st quarter Containership Business ?
      
A.1     Amount of deficit is more or less at same level in each of the 3 trades, i.e., Asia-North America, Asia-Europe and North-South/Inter-Asia.
      
Q.2     What is the reason for decrease in estimated Containership business deficit for 2nd quarter?
How do you think about freight index for 2nd quarter ?
Are you concerned about further delay of freight restoration which has been postponed again and again;otherwise, are you feeling that it might be impossible to restore the freight after all?
  
      
A.2     Although commencing time of PSS (Peak Season Surcharge) in Asia-North America trade and Rate Restoration in Asia-Europe trade was delayed from July to August, we think that Container freight will rise to some extent in 2nd quarter.
Because of freight increase in 2nd quarter, our deficit in 2nd quarter will decrease for that reason compared with 1st quarter. Although amount of freight restoration differs according to trade lanes, we think freight will be restored by + 5-10 points from the freight index of 1st quarter.
With regard to situation of freight negotiation, although the pace of cargo volume increase after June towards peak season is a bit weak, we think freight restoration is possible because it is expected that supply-demand balance will tighten considerably in the middle of August because some services of Asia-North America trade and Asia-Europe trade in the industry have been stopped recently.
For example, current situation in North-South trade shows that freight restored considerably from July and will be restored further from August. Considering economical situation of each Containership operator, we think mood of freight restoration will increase further.
  
Q.3     With regard to tonnage supply plan, you said that a part of services are now reduced, though my understanding is that some Asia-Europe trades are being idled. In case of your company, how much of your fleet are you planning to lay up from now on? How many TEUs?
      
A.3     About idling ships, what we mentioned applied to entire industry, not about any particular operator.
In case of "K" Line we decreased 25% of our capacity of Asia-Europe and Asia-North America trades in 2009 after the financial crisis, and from that background our current loading factor keeps very high level so we do not intend to stop any services as of today.
In case of the total CKYH Green Alliance to which we belong, some services have been decreased.
For the entire containership industry, we think ratio of decrease of each operator to total space is around 5% in both Asia-Europe and Asia-North America trades.
      
Q.4     Please let me know about condition whereby supply of space will be squeezed further.
      
A.4     Generally speaking we think the condition shows that freight level does not pay even bunker cost in operational costs which is like the same situation after the financial crisis, although situation varies among carriers as cost of each operator differs.
      
Q.5     With regard to container freight, you said that freight will be restored because supply-demand balance will tighten considerably from middle of August.
But looking at figures of US National Retail Federation it is expected that increase of cargo volume will accelerate after September by around 10% despite hardly any increase at all in July and August.
Under such situation is there any possibility that freight will be restored in 3rd quarter rather than 2nd quarter. Please let me know about that situation.
      
A.5     According to today's quick report from US National Retail Federation, it is a bit weak from June to August and with 10% increase from September. Hearing information from our local office in USA, there's news that import of cargo will restart again in around 3rd quarter because present situation is that they spend on backlog in an uncertain economy and current stock will decrease in 3rd quarter.
Under such situation, some operators stop their services because of severe economic situation of their own, not with the object of freight restoration. As a result, demand and supply will be balanced and freight will go up.
We think there are enough factors to see freight restoration in September and October if market becomes slightly more tightened, even if it is not possible in August.
    
Q.6   What is the difference between 1st quarter of 2010 and now?
1st quarter 2010 saw a great deal of, freight restoration.......compared with that time, what is the difference?
    
A.6   The background of freight restoration in 1Q 2010 from drastic drop after global financial crisis was basically balanced supply and demand. So basically it depends on economic trends in Europe and North America in the case of Asia-Europe and Asia-North America trades. From the aspect of supply of Containerships it is certain that total capacity will increase around 10% per year in 2011 and 2012, considering such supply and demand situation so I hope economic situation of North America picks up soon. In addition, an important factor is each operator's strong intention for freight restoration which means each carrier's financial condition is key point.
    
Q.7   Do you think volatility of containership business will increase further?
    
A.7   Although it is up to each one's way of thinking, I believe volatility of containership business is inevitable.
Cargo is transported individually under annual contracts basically. On the other hand, a containership operator cannot control supply of ships, so there is the idea it is natural that there is volatility in containership business.
I think management depends on how we hedge and manage risk by combination of business with volatility and stable business with continued profitability.
    
 
 
[Bulk Shipping Business]
 
Q.1     How many cars do you assume to carry for your 2nd Quarter?
Do you see any improvement for 2nd Half from your original plan, and what will be effect on present estimated profit level?
      
A.1     Loading volume for Car Carriers in this 2nd Quarter was expected just as normal.
When we calculated budget just after the great earthquake at the beginning of this fiscal year, we set the loading volume as recovering to the usual level after July.
We have expected some improvement for the 2nd Half from present forecasts, looking at increase in production plans announced by each auto manufacturer.
However, we are not sure how much of their production will be for export as there are still so many variable factors such as economic trends for both U.S. and E.U,, also exchange rate, etc.
When we report our financial results for 2nd Quarter, such points should become slightly clearer, and they will be reflected in our 2nd Half estimate at that time.
      
Q.2     In Bulk Shipping Business, for year-on-year basis, Ordinary Income for this 1st Quarter decreased by 13.7 billion yen, and it is expected to decrease by 6.8 billion yen for 2nd Quarter.
Would you advise breakdown for each, and how about comparison with previous forecasts as of April?
      
A.2     Compared to results for the same period last year, Ordinary Income for this 1st Quarter decreased by 13.7 billion yen.
Talking about section-wise breakdown, major impact was from Car Carrier Business and Dry Bulk Business.The affected amount of Car Carrier Business is greater than that of Dry Bulk Business.
For 2nd Quarter, 6.8 billion yen down for year-on-year basis is expected, which is mainly due to Dry Bulk Business and Car Carrier Business as well as in the 1st Quarter. If you ask about where damage will be greater, Dry Bulk Business is bigger than Car Carrier Business for the 2nd Quarter.
In comparison with our previous estimation, as a total of 1st Half, each business segment has remained almost unchanged, only a few hundred thousand yen difference for each.
      
    
 
[General/Others]
 
Q.1     As you said you did not change your forecasts for 2nd Half from previous one, what is the reason?
Is it only because of your business procedure that you will update your plan in August, or because you will update forecasts after you study about further cost cutting plans?
      
A.1     We will decide how much we should include under cost curtailment and asset disposal in our plan for 2nd Half during this summer.
Because we would like to publish updated expectations for this 2nd Half including those factors, we have not yet changed our forecasts in any way until today.
      
Q.2     Regarding additional earnings recovery/cost decrease target 5.0 billion yen + α, mentioned in the slide, would you please make some comments about the breakdown, and possibility to grow from 5.0 billion yen to, say, 10.0 billion yen?
Please also advise whether extraordinary loss is increasing to extent of making your Net Income go to red in line with or because of further improvement.
      
A.2     As you know, we set up a Committee for Business Structure Reform since the end of May, and have been continuously investigating about measures for profit improvement.
We have counted about 5.0 billion yen of improvement for 2nd Half on the basis of Ordinary Income, which we have accumulated step-by-step. It consists of very minute items.
One of the most major ones is slow steaming. We will seek for further slow steaming for containership and Car Carriers, and then negotiate to decrease terminal fee, or higher charterage.
I would like to further build pile up such items toward this 2nd Half.
Talking about extraordinary loss, if we can secure profit under Ordinary Income for 2nd Half, funded from sold assets, we would like to cancel charter contracts with unusually higher rates as of today, or shipbuilding contracts, etc.
      
Q.3     As we understand that approximately 240.0 billion yen of Investment Cash Flow is expected for the coming three years in your new management plan, "K" Line Vision 100 - New Challenges, various news such as development of LNG powered vessels, or studying about new gigantic containerships, etc, have been reported.
Please advise your updated thoughts about middle-term investing plan.
      
A.3     The 240 billion yen of investment for these three years has already been decided, and we will steadily secure financing and conduct those projects according to schedule. I understand your intention is to ask how we think about further investment chances other than those fixed plans. The LNG-powered ship reported the other day has not yet reached the step for materialization soon. So, it still take some time to realize this project and we do not have to prepare funds immediately.
Still, we recognize that eco-ships in the next generation are an inevitable choice for a company dedicating itself to shipping business, or rather, only companies initiating such eco-ships can survive in the industry.
Please understand this LNG-powered ship is a realistic dream that "K"Line will try to materialize.
Then, to build gigantic type containerships, as you know, for Asia-Europe trades, every shipping company has already decided to introduce them, either by ownership or by chartering from others.
We suppose "K" Line will also need to have such large type ships sometime as "K" Line maintains its Asia-Europe service.
However, present freight rates are staying at a level where we wonder whether such gigantic vessels can be justified or not so we are not of the opinion that we have to decide instantly and would prefer to take additional time before making a hasty decision.
Other than those projects, there are no other investment plans at this moment.
We will squeeze investment, or, 'freeze', which might be too strong word, for the time being at least.
Of course we will maintain necessary investments, but in case of large-scale projects, we have no specific plan involving investment right now.

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