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Explanation by article

Ladies and Gentlemen, thank you very much for joining us today when you are very busy.
Today, I will first explain our 4th Quarter (January 2011 - March 2011) Fiscal Year 2010 consolidated financial status and our estimate for full-year financial position for Fiscal 2011 (April 2011-March 2012) taking about 10 - 15 minutes, and then moving into mid-term management plan and make explanation about 20 minutes. Question time is set afterwards. Please allow me to have a seat. Let's start with Slide A-1-1.
A-1-1. Financial Results
As mentioned in this slide, Ordinary Income for this 4th Quarter was deficit of 5.2 billion yen, which was a decrease of 5.6 billion yen from the previous estimate as of January 2011. I suppose these results might somewhat disappoint your expectations.
Major factors for this downturn adjustment were bunker oil hike and lower freight market. Then, although yen appreciation has continued for a rather long time, even during this 4th Quarter it still reached an even considerably higher level, and counted as another negative factor.
Further, there is also impact from the Eastern Japan Earthquake of March 11. It was not a factor of immediate effect in this term, but due to the earthquake some cost-up factors have already been seen in some areas such as vessel allocation amendments.
As such incidents overlapped, our earnings greatly decreased from the forecasts as of January this year. For this 4th Quarter, we posted 5.2 billion yen Ordinary Loss.
However, for full year period, partly because business circumstances were relatively affirmative until 3rd Quarter, Operating Revenues were 985.1 billion yen, increase of 147.1 billion yen for year-on-year basis; Operating Income was 58.6 billion yen; Ordinary Income 47.4 billion yen; and Net income 30.6 billion yen, which also dramatically improved from last year.
A-1-2. Financial Results
(Business-wise Operating Revenues/Ordinary Income)
In the next slide, I will talk about segment-wise outline of financial results.
Taking Containership business indicated at the top of this table, as I believe you all have same understanding that after the worldwide financial crisis in 2008, the global economy experienced sharp downturn. Then, from 2009 to 2010, every major country in the world implemented all possible fiscal measures and economic trends started to recover gradually in developed countries such as the United States and Europe countries, while emerging economies like BRICs took the lead to turn up their economic growth. In accordance with those recoveries of the world economy, container cargo volume steadily returned in 2010 compared to the previous year. Under such circumstances, each Containership carrier undertook every possible means to restore freight rates.
In a sense, we could say that the efforts made to achieve freight restoration were like risking the survival of our own being, and fortunately freight rate markets went up.
In addition, we achieved cost-cutting through eco-slow steaming to save fuel oil charges, which were also at very high levels in previous term. With those measures for Containership Business, we earned 29.0 billion yen Ordinary Income. As 67.0 billion yen deficit was recorded in the previous Fiscal Year 2009, we achieved a quite significant recovery totaling 96.0 billion yen.
Next, as to Dry Bulk segment, until around middle of 3rd Quarter, market levels were rather healthy; but in latter half of 3rd Quarter, markets started to soften from those for cape-size vessels, the biggest type of dry bulker. As if to kick us when we were down, Australian loading ports and some mines were severely affected by unusually heavy rainfall starting in December that brought extensive flooding that ended up delaying coal and grain shipments that would have started in January.
In case of iron ore, which was not so much affected by the floods, shipments were rather slowing down anyway due to various reasons. In addition, price of iron ore stayed at very high level that led to decline in motivation for import by China, presently the biggest buyer in world markets. Due to those factors, market for dry bulk turned down sharply during 4th Quarter. However, for full year, I can say we have 'savings' earned until 1st Half of Fiscal 2010, and finally we booked slight increase in both sales and profit for year- on-year comparison.
In Car Carrier Business, for full-year basis compared with Fiscal 2009, number of cars loaded increased by 38%. Due to such favorable cargo recovery, this business made a profit for Fiscal 2010, although there was a loss for Fiscal 2009, which means notable increase in sales and profit.
Regarding Energy Transport Business, Operating Revenues were almost flat compared to last year, and market conditions did not improve so much, and so we were not able to make a profit from this business, but loss amount considerably decreased.
Those are our segment-wise explanations. For more details, please do not hesitate to ask later at Q&A session.
A-2. Key Points
The next slide shows what and how Fiscal 2010 changed from Fiscal 2009.
The biggest factor is bunker price, mentioned in 2nd column. Bunker price hike in Fiscal 2010 resulted in a huge 14.5 billion yen cost up. As to exchange rate, between U.S. Dollar and Yen, average Yen appreciated by 7 yen throughout the year compared with last year with negative factor of 5.3 billon yen as well. Average bunker price was up by 82 U.S. dollars per ton in fiscal 2010 from fiscal 2009. Total effect of these two factors was almost 20.0 billion yen, which was almost like being fettered with shackles for us, but we could enjoy both freight rate increases and business expansion to overcome these factors. In comparison with the previous year, we marked increases in Operating Revenue of 147.1 billion yen and Ordinary Income of 113.7 billion yen.
Up to now I have commented about actual results through fiscal 2010.
B-1. Estimate for Full Fiscal Year 2011
Now I will talk about estimates for Fiscal 2011, in which I understand you are most interested.
As you can find in this table showing our estimation for this fiscal year, we expect much greater drop than your expectation. Operating Revenue increase of well over 1 trillion yen, 1 trillion 90 billion yen, increase of about 100.0 billion yen from fiscal 2010 due to business expansion. However, Operating Income is estimated at 4.0 billion yen loss for 1st Half, and 10.0 billion yen profit for 2nd Half. Ordinary Income is likewise 5.0 billion yen loss for 1st Half, and 8.0 billion yen profit for 2nd Half. For full year, we estimate Operating Income of 6.0 billion yen, Ordinary Income 3.0 billion yen and Net Income 2.0 billion yen.
Premises for these figures are exchange rate between U.S. Dollar and Japanese Yen of 85 Yen per Dollar for the year, and fuel oil price of 650 U.S. Dollars per kilo ton.
I suppose you might be slightly surprised to see so much drop being expected for Fiscal 2011 compared to Fiscal 2010. After all, it is a situation where damage from the 3-11 earthquake will impact our business in 1st Half, and bunker oil price hike will be a continuously big blow to our earnings.
At any rate, for 1st Half I suppose it might be inevitable to incur such a tremendous loss due to effect of such a big earthquake, which I will touch on later, but for 2nd Half, as we see transportation of cars gradually recovering to normal level after summer, and other cargoes except for cars continuing to grow firmly since world economy has not experienced a sharp downturn due to Japan's earthquake, so market level will be adjusted on the upper side little-by-little. With this view, we expect we can properly make a profit in this 2nd Half.
Now I will explain segment-wise aspects, although they are rather minor details.
Indicated at bottom of this slide, Ordinary Income from Containership Business is estimated at break-even level for Fiscal 2011, a drastic decline from 29.0 billion yen for Fiscal 2010. However, as I understand this will be reported in more detail later, present freight rate levels for many service loops including Asia-Europe routes are becoming considerably weaker, but toward summer peak season, or I can say high season, vessel space will become tighter, so we expect freight rates to rise toward summer, which means we are not looking at things pessimistically.
As to Car Carrier Business, as I said before, for this 1st Quarter, business circumstances are so strict, but in the latter part of this year, we believe Japanese automakers will surely get over this situation. We also trust their real strength, which we understand is same as your view.
I suppose you would like to question about impact on us from the 3-11 Eastern Japan Earthquake. What we have grasped until now is around 10.0 billion yen within 1st Half, which is certainly a very rough estimation. Major part of that is due to sharp reduction in export of completed cars from Japan, which seriously affects our Car Carrier Business.
B-2. Key Points
This table shows Key Points of estimate for Fiscal 2011. This kind of assortment is somewhat difficult, as you know. Taking Bunker Oil Price, average price for this term is set at 650 Dollars per ton, up 161 Dollars per ton year-on-year comparison, which is expected to result in negative impact of 19.3 billion yen on our Ordinary Income. In addition, as I mentioned before, markets for dry bulk carriers remain in a slump, or dropping, and present lower freight rate levels for containership business show almost 22.9 billion yen negative impact in total for 'Market Volatility.' Together with all other factors, our Ordinary Income is expected to drop by 44.4 billion yen from Fiscal 2010, which shows in this Table.
Next, I will now briefly touch on segment-wise business trends.
B-3-1(1). Division-wise Trend of Operating Revenue/Ordinary Income
-Containership Business-
First, I will talk about Containership sector. Our estimate for Fiscal 2011 is, as I said before, Operating Revenues up but Ordinary Income down to 0. This is what I mentioned several minutes before, but now, in Asia-Europe trades, freight rate level is drastically dropping, which would be the largest factor, which you might be able to understand better from the next slide.
B-3-1(2). Division-wise Trend of Operating Revenue/Ordinary Income
-Containership Business-
This chart is what we have prepared almost every time showing what and how elements are changed for year-on-year basis. Although we earned 29.0 billion yen Ordinary Income for Fiscal 2010, for this Fiscal 2011, however, we expect 24.0 billion yen negative impact from bunker oil price hike. In addition, due to market volatility, freight rate fall will be 14.0 billion yen. Then, here mentioned 'Variable Cost Increase,' which means some cost up, including inland transportation fee in North America, etc., which will amount to 6.0 billion yen.
Aggregating all these unfavorable factors, there is 44.0 billion yen negative impact, while we will have cost savings of 8.0 billion yen due to eco slow steaming, effective operation of equipment or other various measures, and we will also count 7.0 billion yen from 'rationalization of vessel allocation.'
These are differences from previous year. Please ask later if you wish more details.
B-3-2. Division-wise Trend of Operating Revenue/Ordinary Income
-Dry Bulk Business-
Next, for Dry Bulk sector, as I touched on earlier, real situation is that current market freight rates have been seriously lowered to a level which we can say is too low, in a sense, especially in case of Cape-size or other bigger type vessels. However, during Fiscal 2011, our fleet is continuously expanding and operating tonnage is planned to grow by 14% from previous year, with which we expect to keep earning, roughly to say, double digit billion yen profit in this segment for Fiscal 2011, including effect of newly-built vessel deliveries for which we already made some profitable long-term contracts, even if the market level is down substantially.
Our assumption for future market is, as indicated in this slide, Cape-size 20,000 U.S. Dollars per day, Panamax 15,000 U.S. Dollars, and Handy-max 13,000 U.S. Dollars. Considering present market in which Cape-size is set slightly higher, I cannot believe current 6,000 U.S. Dollar level will hold for long.
B-3-3. Division-wise Trend of Operating Revenue /Ordinary Income
-Car Carrier Business-
Regarding Car Carrier sector, because situation is as I mentioned before, for this 1st Half we will be forced to face a very severe uphill battle. As to cargo volume for Fiscal 2011, we indicate 90,000 units at the top column in the table in this slide, which is estimated number of cars to be exported from Japan. We see loading volume decrease by over 100,000 cars compared with Fiscal 2010 throughout the year, and talking about 1st Half only, drop in volume is much greater than this number.
B-3-4. Division-wise Trend of Operating Revenue /Ordinary Income
-Energy Transportation-
The next slide is for Energy Transpiration and Heavy Lifters. In Energy Transportation segment, we continue to see no positive factors in market level for this year, either. It is more like over-tonnage situation remains except for LNG carriers where market is recently regaining rapidly.
This is primarily because supply of newbuildings ceased, and also because of Fukushima Daiichi Nuclear Plant problems, for this year 7-8 million tons of LNG demand growth, mainly for Tokyo Electric Power Company. With such demand boom, we suppose in the middle term this segment could become very promising, but for Fiscal 2011 only, this segment will not recover rapidly with these elements. However, for our mid-term management plan, which I will explain next, this segment is expected to be the one for which we can have a dream, or, say, hopeful business.
As to Heavy Lifter, in this sector, although there was substantial reduction in demand for plant-related cargo after the global financial crisis, in line with recovery of world economy, cargo demand has recently started to increase, and at this moment, profit level returns are near to break even level. This segment is also what we can look forward to in the middle term.
This is the end of my explanations for Estimate for Fiscal 2011.
Review of Medium-Term Management Plan
Background to the Revisions and New Measures (1)
Next I would like to explain our review of Medium-Term Management Plan
"K" Line Vision 100 - New Challenges.
First of all, we made and announced "K" Line Vision 100 in April 2008 as Medium-Term Management Plan towards mid-2010's which was based on very good market circumstances at that time.
However, there was drastic change in the market caused by the worldwide global financial crisis in autumn of that year.
So in January of 2010, we reviewed a part of the management plan and then announced "K" Line Vision 100 KV 2010.
We added following 3 missions to be achieved in KV2010: "Return to profitability in FY2010 and early resumption of dividends;" "Expansion of stable earnings base and sustainable growth;" and "Improvement and strengthening of financial makeup" in addition to existing missions in "K" Line Vision 100.
This time we drew up new management plan "K" Line Vision 100 - New Challenges because we have almost achieved 3 missions we set up in KV2010 and would like to make a fresh start this time with a new management plan that is a much more positive plan compared with the last one.
Review of Medium-Term Management Plan
Background to the Revisions and New Measures (2)
We did not change what is very basic at all, the 5 fundamental themes in our "K" Line Vision 100, and we took a style whereby we set new themes on these basic fundamentals. The 5 themes are: 1) Borderless management, which means globalization in management; 2) Proper allocation of management resources; 3) Improvement of corporate value; 4) Activities to promote environmental protection; and 5) Safe ship operation, which we think are eternal themes as far as we are in the shipping business. On the basis of those fundamental themes, we made our new 3-year management plan from 2011. In the new management plan we set 2 main themes.
Review of Medium-Term Management Plan
Background to the Revisions and New Measures (3)
Although we did not change our theme from the previous management plan that we will thoroughly make every effort for "Expansion of a stable earnings base and sustainable growth," we would rather like to proceed even further for Expansion of stable earnings and we show briefly here how we view business environment for next 3 years as we challenge this theme.
In Containership business, although market will be temporarily weak in 2011, supply and demand will improve after 2012 and we forecast steady growth of demand. In order to catch up with demand growth, we are now thinking as to how we should manage; in other words, it is time for us to seriously consider how we do our investing for next large-size containerships.
With regard to Dry Bulk business, as you may know from what we have already said in interviews and so on, we are surely and steadily proceeding towards a 300-vessel operating fleet.
As for Car carriers, we show this business to be reconstructed in response to structural changes in the transport of completely built-up cars, but we are concerned that these words may be a little unclear.
In clearly understandable terms, what we want to say is that car transportation pattern is no longer export from Japan only; for example, from Asia, inter-Mercosur market or between South America and North America, those quite various transportation patterns will come in the near future and how K-Line manages those demands is of vital importance.
For Energy transportation business, LNG will be spotlighted as energy just as we have said and demand will increase. Besides, crude oil and gas prices are rising and development of those resources must be accelerated, so we will expand our business into offshore support vessels which support those projects or drillships which are used in drilling work for new crude oil mines. Those are included in "respond to changes in global energy demand."
For Heavy Lifters, cargo volume is increasing and freight is rising as we said.
As to Logistics sector, we think it is possible to make a profit in logistics business if business is managed well and as long as goods continue to move. Future cargo volume will increase together with smooth expansion of global economy. We acquired a forwarding company in USA last year, and we would like to study further expansion whenever we have a chance.
Review of Medium-Term Management Plan
Background to the Revisions and New Measures (4)
Next slide is another main theme: "Strategic investment in response to changes in market structures and increase in demand." We would like to say that this will properly lead to improvement and strengthening of financial make up through "Investment in creation of a flexible fleet and in new businesses."
For Investment CF, as we described here, although we held CF down in 2010, we are targeting 95.0 billion yen for 2011 which is 39.0 billion yen increase from original plan. Breakdown of CF is mainly 23.0 billion yen for purchase of second-hand vessels, etc. for structural reform, and 37.0 billion yen for new business development which includes offshore support vessels and purchase of additional shares of heavy lifters as earlier stated.
As we are running short of time, we will touch briefly on the following:
Review of Business Strategies by Segment
Containership Business
With regard to Containership business, profitability will temporarily slow down a bit in 2011; but after 2012 supply and demand will be balanced and freight market will gradually improve. Our strategy is to make our Containership fleet flexible so that we can quickly adjust the fleet as soon as a crisis occurs, as I touched on previously in investment for structural improvements.
Review of Business Strategies by Segment
Dry Bulk Business
For Dry Bulk, to our regret there will be a lot of newbuildings delivered in 2011 and 2012 so demand and supply GAP will greatly increase, and we are afraid that it will be difficult to restore profitability level to the past high level again in 2011 and 2012. However, we think after 2013 supply and demand will improve and profitability will again be gradually restored.
Review of Business Strategies by Segment
Car Carrier Business
We do not feel nervous because we think that global cargo movements will be increasing steadily after recovery from negative impact of the 3-11 earthquake.
Review of Business Strategies by Segment
Energy Transportation Business
With regard to Energy Transportation, the important point is how we can make a profit when LNG carrier market is rising. We are looking forward to having some spot vessels which are exposed in the market after 2012.
Review of Business Strategies by Segment
Heavy Lifter and Offshore Support Vessel Businesses
We would like to have more presence in the market by having made SAL of Germany, with its most advanced heavy lifters, our wholly-owned subsidiary as of this year although we entered this business by just holding 50% share of that company.
In Offshore Support Vessel sector where we first entered this business through K-Line Offshore, we concluded long-term charter contracts for 2 vessels, Platform Supply Vessels, with Petrobras, and 2 vessels with Conoco-Philips.
We think this business will make a profit soon, as we made long-term contracts while market conditions were favorable.
Changes in Fleet Size and Investment
Our fleet size plan as of the end of 2013 is total 577 vessels against 494 vessels as of end of 2010. For the next 3 years, most of our newbuildings are Dry Bulk vessels. With regard to investment for new large-size containerships, we would like to study further from now on as we said earlier.
Quantitative Targets (the Newly-Revised Medium-Term Management Plan)
Working out what we have just now said, we will do our best towards achieving the Medium-Term Management Plan targets which are: Net Sales 1,250 billion yen, Ordinary Income 71.0 billion yen and Net Income 52.0 billion yen in 2013, final year of this mid-term plan.
By succeeding in these targets, we are determined to achieve our final objective, Net Sales 1,300 billion yen with Ordinary Income 110.0 billion yen in Mid-2010's.
This ends today's review and I thank you for your kind attention.

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