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Major Q & A

[Containership Business]
Q1.  Referring to slide page 8, adjustment factors for yearly financial results including item 'Cost increase of inland transportation in North America', what kind of situation is this? Has it been increasing earlier than expected?
A1.  During this summer, we faced serious container box shortage and to turn them over efficiently, we had to pay considerable extra costs. In addition, fuel surcharge that we must pay to railroad companies also increased to some extent.
Q2.  Looking at lifting volume from Asia to North America during this 2nd Quarter in slide page 9, total is 169,000 TEU, decreased from 180,000 TEU same period last year. I have the impression that for Containership industry as a whole, cargo volume for Asia-North America trades grew by around 10% from last year. Is the lower volume due to "K" Line's specific factor, or industry-wise trend?
A2.  It is not an overall trend in Asia-North America routes but applicable to "K" Line because we squeezed our containership fleet as much as possible. We implemented structural reform last year and shrunk available ship space, especially for both Asia-North America and Asia-Europe trades. As a result of this downsizing, our load factor for dominant voyages became 98%, almost full during this 2nd Quarter, but total volume itself did not grow.
Q3.  Regarding freight rate assumptions for this 2nd Half, I understand that spot rate level has already declined to some extent. Now, how much has your own rate level already decreased from the peak, and how much further do you assume it will go down in the future, or will it be flat?
A3.  As to our views about freight rate level for this 2nd Half, we expect winter slack season will soon start same as in normal years. So, PSS (Peak Season Surcharge) in Asia-North America trades will gradually cease and freight rate in Asia-Europe trades where rate renewals are basically made per 3 months is starting to decline, so we see about 10-15% rate drop from the peak for both trades.
 In slide page 9, Freight Index (2008 1Q = 100) is indicated, and based on this, average market level during 2nd Quarter Fiscal 2010 was about 107, and it will decrease by about 10-15% from the peak, which will vary per service routes.
For guidance, as of the end of September, the indices have not changed so much from the peak.
Q4.  How about freight renewal for Asia-Europe trades scheduled every three months? As I understand, it was likely to be revised almost monthly for a while, so please tell us whether you have renewed majority of freight contracts in this October, too.
A4.  Freight rates for Asia-Europe trades are rather frequently renewed based on spot rates quoted in Asian region, but October is not a major renewal season. We become aware of it at the timing to revise one year or half year contracts for some of customers such as manufacturers from December to January. The negotiations are still unpredictable. We will start to negotiate checking various circumstances like freight rate level for NVOCC(Non-Vessel Operating Common Carrier), etc. around that period.
Q5.  As you commented earlier that "K" Line is already prepared to start lay-up immediately, when do you intend to release firm plans as a whole for your Alliance members; for example, holding some services or laying up vessels, which Grand Alliance or Maersk announced already?
A5.  Talking about counter-measures against slack season, or any cases where cargo volume again drastically drops, our 'CKYH - the Green Alliance' of which we are one of the members, actually stopped total of 7 services for Asia Europe trades, 4 services toward Northern Europe and 3 for Mediterranean Sea, during the period of temporary lower cargo volume in October due to China's holidays around National Day. We are of course talking about views and situation related to cargo trends with alliance members.
 We had some previous fear that following China's National Day, winter slack season might be consecutively approaching, but present cargo volume seems to indicate a rather recovery trend to which we will respond by carefully watching all conditions.
Q6.  How much are you planning to reduce your vessel capacity for Asia-North America and Asia Europe trades during this 2nd Half compared to 1st Half?
A6.  In terms of vessel capacity precondition for our 2nd Half estimate, we have set Asia-North America trades at almost same as 1st Half, and Asia-Europe trades at 2-3% decrease. Though overall trends do not change in Asia-Europe trade, either, we will somewhat reduce services again just after the coming Chinese New Year holidays in addition to temporary service reduction due to China's National Day, so we therefore see our available space declining by 2-3% from our present projection.
Q7.   Ordinary Income earned by your Containership Business was 25.6 billion yen for this 1st Half, and it is expected to fall significantly to 6.4 billion yen for 2nd Half. What kind of factors do you see other than losing PSS, or inland transportation charge increase caused in North America that was mentioned earlier?
A7.  In addition to freight rate declining in this 2nd Half that I touched on previously, we have to include impact of exchange rate changing from 89 yen per one U.S. dollar in 1st Half to 80 yen for 2nd Half.
Q8.  As you mentioned that you would answer if we asked whether 6.4 billion yen of income estimation for 2nd Half Containership Business was conservative or not, would you please tell us your present feeling? I suppose it might depend on whether actual freight rates during the 2nd Half are finally moving in line with track of normal slack season level, about which we would like you to explain possible situation.
A8.  Our feeling about the 2nd Half is that we estimated freight rate levels going down by approximately 10-15% from peak level, which I suppose is the biggest feature. The rate will stay well within our expectations if present trend of cargo flows, after China's National Day holidays, continues. As this also depends on cargo volume, it is quite difficult to say how things are going considering present uncertain economic situation in both Europe and U.S. We have the feeling that actual cargo movements are rather strong in spite of the fact that everyone keeps saying that circumstances are deadly negative for this year.
Q9.  Even though I suppose it might be a little early to comment, how are you presently expecting next year's supply and demand balance to be?
A9.  We see over supply situation for containerships continuing to prevail next year. In case cargo volume grows only 5%, and all new ships on order are delivered next year and onward, load factor is not expected to reach 90% until 2015, which is the ratio at which we can say supply and demand will almost reach equilibrium.
There are many difficult points such as financing, etc., but as a part of the supply side, delivery of some ships could be delayed or canceled. Then, because even at present cargo volume is increasing more than 10% in year-on-year comparison, we can say 5% might be too conservative. For example, if we set this as 7%, supply and demand could reach a balance between 2012 and 2013.
Even so, I regret to say that after China's National Day holidays next year, it will again come to an over supply situation. Therefore, toward next year, we must still continue measures such as laying up ships, thinning service routes, slow steaming, etc. If we can manage to get through the over supply situation next year and carry it out to year 2012, then not only "K" Line but all major containership carriers can continuously secure freight rates that enable us to bring reinvestment in our sight.
Q10.  Regarding view to profit earned in Containership Business for next year, in case declining of freight rate during this 2nd Half is only 10-15% just as your estimation, can you again increase freight rate rather easily for next year, and gain Ordinary Income almost same level as this year?
A10.  I would eagerly like to proceed to next year in that way and I think we must do so. Therefore, if in this coming slack season freight rates fall only by 10-15%, I would like to continue profit level for next year at almost same as this year, and we are dedicated to do so even if over supply condition is still caused in 2nd Half next year.
For the supply side, because newly-built ships are delivered into market, it is said that 8-10% growth is expected respectively each year in 2010, 2011 and 2012. So, if demand is increasing over 7% we see present supply-demand balance remaining almost unchanged. So, first, positive demand is basic requirement; then how new vessels are delivered. We will also have to consider whether all vessels presently on order that bring supply increase of 8-10 % per year are actually delivered just as ordered, or not.
[Bulk Shipping Business]
Q1.  How do you estimate segment-wise breakdown of yearly forecasts for Bulk Shipping Business?
A1.  There are three segments: Dry Bulk business decreased by around 40% compared to previous estimates for this 2nd Half. Car Carrier business is flat, or earned rather slightly better profit, we can say. Energy Transportation business is down by about 2.0 billion yen from previous estimations.
As to Dry Bulk segment, especially vessels for steel raw materials, ratio of vessels that we own is high and so ratio of yen portion is high among costs. In this regard, exchange rate is major reason for profit decrease while our market assumptions are also another reason, which somewhat reflects latest slightly slowing market level.
Q2.  Regarding Car Carrier business, for which actual results of cargo volume during this 1st Half are indicated on page 11, does your comment "Cargo volume continuously recovering gradually" mean that it is still growing from 1st Half to 2nd Half? And also as commented in lower part of the same slide, how much 'negative impact by strong yen' do you expect? Do you still see your assumptions for present estimate as reasonable?
A2.  We expect the number of cars we carry for this 2nd Half to be almost flat versus 1st Half results, and slightly increasing in trades of Homebound/Others. However, in terms of cargoes to be exported from Japan, as we have heard in diligent comments from each auto manufacturer about the situation, and nowadays coming to the stage where exchange rate is between 80 and 81 yen per one U.S. dollar, some of them might adjust their export plans downward, in general, although this may differ from one manufacturer to another.
The quarterly number of exports from Japan has not changed drastically since same period last year and is set at almost same figure as one year ago. We have estimated cargo volume based on the precondition of 80 yen per U.S. dollar, and included some increase of export cargo from other Asian countries due to production shift from Japan to Asia, etc.
Q3.  Talking about earnings from Bulk Shipping Business for next year, if we roughly estimate it as double that of this 2nd Half forecast, it is about 10.0 billion yen, which does not seem to be enough. Do you think this could really happen, or what kind of measures can you take in order to avoid such a situation?
A3.  In Dry Bulk, number of our operating fleet totals 194 vessels, so fleet scale is large. As described, we are in a rather delicate position for strong yen because yen portion ratio in vessel cost is high. If 80 yen continues, profit next year could end up just double that of this 2nd half as estimate apart from freight market. However, we think we can improve profit next year because we will have new deliveries that have comparative cost advantage, and profit from fixed contracts for those new deliveries will be added. So we do not feel negative about Dry Bulk for next year, and we think it will be more than double this 2nd Half's profit as of the moment.
Car carriers were in the red to some extent last year, but will turn into black this 1st Half and are in gradual recovery trend. For cargo volume, we cannot expect very much, especially exports from Japan, as long as strong yen continues. However, depending on volume of Homebound/Others, it is possible to see a little improvement for 2nd Half itself. In addition, our current vessel cost is high because in the last 2 years we scrapped all those that were almost depreciated and there are some high-cost vessels which we started to charter in our fleet before the Lehman Shock that will continue until around next March. Those high-cost vessels will be replaced by new deliveries, after which fleet-cost will decrease.
In addition, our current vessel cost is high because we scrapped all those that were almost depreciated in the last 2 years and there are some high-cost vessels which we started to charter in our fleet before the Lehman Shock that will continue until around next March. Those high-cost vessels will be replaced by new deliveries, after which fleet-cost will decrease.
From the above, we do not think profit will be just double that of this 2nd Half next year, partly because there's some changes in next year.
In Energy Transportation for LNG carriers, although there were some vessels exposed to market, we could make middle-term charter contract as demand for middle-term increased recently and it is expected that we will see improvement compared with 1st Half. Other projects are already fixed basically. If strong yen stops at 80 yen, we think LNG business will be improved next year, as there's no more loss by exchange rate.
As for Tankers, current market is very low which is under break-even point by a large extent. 8 vessels out of our 9 VLCC Tankers are operated under long-term contract and the other one is exposed to and somewhat influenced by the market. We would like to fix this vessel by making a charter contract in some profitable way.
Although market of Aframax and LR II is very low, we are trying to improve profit, including counter-measure of decreasing the vessels as the case may be, so we think this year will be the bottom in this segment too.
Heavy Lifters are also recovering from huge cargo decline after Lehman Shock, and in 2nd Half cargo volume is improving and freight rate is also recovering. We think next year will be better, anyway we think this year will be bottom.
Q1.  Operating Income improved 8.0 billion yen in 1st Half and 12.0 billion yen for fiscal year whereas Ordinary Income improved 6.8 billion yen in 1st Half and 7.0 billion yen for fiscal year compared to previous estimate as of July 2010. As there's a discrepancy in improvement level between Operating Income and Ordinary Income, can you please explain the background?
A1.  We basically understand this part is because of results from each business department caused by premise of Yen/Dollar exchange rate which is set at 80 yen in 2nd Half. There's effect of impact from exchange rate to some extent because we changed premise from 90 yen in previous estimate to 80 yen, so this is just because of figures coming from exchange rate and not from our business operation itself.
Q2.  Although Operating Income and Ordinary Income are revised upward, Net Income remains unchanged at 32.0 billion yen, so please let us know reason for this.
A2.  This is because of loss on revaluation of investments in securities and loss of cancellation charge of time charter vessels, etc.
Q3.  Because estimate of ordinary income for this year is 55.0 billion yen, as a result it is more than 48.0 billion yen which was final profit target last year in Medium-Term Management Plan. Although it is not certain what this year's results will be, considering estimate for this year and regarding estimate for next year and the year after next, do you have intention to continue keeping current Medium-Term Management Plan?
A3.  The company as a whole is now involved until the end of next March hopefully in an internal review of our Medium-Term Management Plan through each subcommittee of Business Re-structuring and that of Organizational Reformation in Business Structural Reform Committee that we have again set up. As to timing of an announcement about this review, we think it will be at the time we make next year's forecast after figuring out most of the current year's results.
Q4.  With regard to fleet expansion plans, in various places in forecasting middle and long-term fleet plans, you said you will keep current fleet scale of Containerships as it is and increase Bulk shipping business fleet which will make Containership business ratio smaller. Above all, you would like to increase fleet scale of Dry Bulk to 300 vessels in the future, as I understand it. Please advise your view about this plan.
A4.  Our Dry Bulk fleet is 194 vessels as of today, and it is confirmed that fleet scale will reach 240-250 vessels within the next 3 years, including vessels already ordered. Accordingly, we think it is naturally quite possible to achieve 300 vessels by 2015 if a further 60 vessels will be added to the above while watching market situation.


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