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Explanation by article

Ladies and Gentlemen,
 
Thank you very much for joining us today. I will explain "K" LINE's 1st Half (April-September) Fiscal Year 2009 consolidated financial status and our revised prospects for full-year (April 2009-March 2010) financial position for Fiscal 2009, together with our measures for business structural reform.
 
 
A. Financial Highlights for 1st Half Fiscal 2009
 
A-1-1. Financial Results
 
I will start off with outline of "K" LINE's 1st Half Fiscal 2009 financial results.
 
Now, please have a look at Slide A-1-1 among the documents in your hands. As indicated in this slide, our Operating Revenues are 400.5 billion yen, which is in line with our previous prospects announced in July together with 1st Quarter results. Operating Income resulted in loss of 42.5 billion yen, and Ordinary Income 49.9 billion yen loss, a decrease of 5.9 billion yen compared to the prediction as of July. In terms of Net Income, minus 43.3 billion yen is about 10.0 billion yen down from the last forecasts.
 
With regard to Yen-U.S. Dollar exchange rate, average through 1st Half was 96.12 yen per one U.S. dollar which is almost the same as our premises set in July this year, but 9.55 yen appreciation for year-on-year comparison. As to bunker oil price, average rate during this term was 353 U.S. dollars per kilo ton, which was almost as prospected, and nearly 250 U.S. dollars lower than last year. Comparing these to the 1st Half previous year, exchange rate was 'minus' factor of 2.1 billion yen, and fuel oil price was a 'plus' 23.0 billion yen to our Ordinary Income for 1st Half.
 
As mentioned in upper part of this slide, except for additional costs for structural reform in Containership sector, which I will explain later, the 1st Half results were almost the same as previous projection announced with 1st Quarter results. As to structural reform costs for Containership business, 5.2 billion yen of Non-operating Loss was posted for 1st Half; so if this is deducted, as I touched on earlier, Ordinary Income for 1st Half was almost as we had planned.
 
 
A-1-2. Financial Results
           (Business-wise Operating Revenues/Ordinary Income)
 
With regard to division-wise results, Ordinary Income for Containership sector during this 1st Half was loss of 47.1 billion yen including 5.2 billion yen negative factor from structural reform costs for Containership Business, which was lower than our prediction as of July, even considering the effect of the structural reform costs. Taking "Other Marine Business," shipping sectors except for Containership, results totaled 4.6 billion yen loss, which we can see was nearly breakeven. Including Other Business, total Ordinary Income amounted to 49.9 billion yen.
 
Having a look at Quarter-wise outcome, as I mentioned when announcing 1st Quarter figures in July, although I had wanted it to hit the bottom within the 1st Quarter, there were various negative factors in some business divisions in the 2nd Quarter; for example, in Car Carrier segment cargo volume recovery was somewhat delayed, or freight restoration for Containership services, especially for Asia – North America trades, did not proceed as expected.
 
As a result, outcome became slightly different from the scenario that overall results should have been their worst during 1st Quarter, and turned toward a recovery for 2nd Quarter. In the 2nd Quarter, which seems to have remained low at almost the same as 1st Quarter, I feel like it might almost have bottomed out.
 
 
A-2. Key Points
 
Operating Revenues were almost flat as last forecasted in July. However, as indicated in Slide A-1-1, compared with the 1st Half of previous year, they fell nearly half, a fall of about 335 billion yen in terms of money amount, and as will be explained later, expected to be down roughly 500 billion yen on yearly basis.
 
One reason was exchange rate between U.S. dollar and yen, and another was the significant freight rate drops in Containership Business, and I feel this huge amount of revenue reduction caused the most critically severe damage for us. Because again, freight rates for Containership Business were down, and cargo volume for Car Carriers decreased, while markets for dry bulk carriers were comparably positive. Comparing with same term in previous year, as touched on before, revenue decreased about 335.0 billion yen, and including structural reform costs, Ordinary Income was down by over 100 billion yen, close to 125 billion yen. As this is the reason for profit being down, it is needless to comment again, as indicated here.
 
 
A-3-1. Division-wise Trends for 1st Half Fiscal 2009 Results - Containership Business -
 
Looking back division-wise, for Containership Business, both Operating Revenues and Ordinary Income dropped by tremendous amounts. Loading volume was almost as planned, but the pace of freight rate restoration, especially for the trades from Asia to North America, was slow. In year-on-year comparison, as you see in this slide, for all trades including both dominant and return routes, especially the dominant ones, freight rates dropped by 30-40% overall.
 
 
A-3-2. Division-wise Trends for 1st Half Fiscal 2009 Results - Dry Bulk Business -
 
In Dry Bulk division, although we achieved both greater revenue and profit growth than prospected, partly because the market level was comparably stable, but in comparison with same period last year when we faced an unprecedented boom, both revenues and profit were still significantly smaller. Freight market level was almost same as our assumption as of July, but again compared with 1st Half last year, we experienced large swings.
 
 
A-3-3. Division-wise Trends for 1st Half Fiscal 2009 Results - Car Carrier Business -
 
As to Car Carrier Business, revenues and profit decreased tremendously for year-on-year basis, but almost as we projected. In spite of recovery process being slightly delayed by 1-2 months, earnings were almost as estimated, but not yet reaching target. In this business segment, cargo trend almost bottomed out, about which you might have some questions considering that cargo trend for this 2nd Half is around 70-80 % of the level before the economic crisis can be expected to recover, although we see it still taking a while to return to nearly 100% level.
 
 
A-3-4. Division-wise Trends for 1st Half Fiscal 2009 Results - Energy Transportation -
 
As to our Energy Transportation sector, what we earned during this 1st Half was almost the same as our estimation in July. However, because this segment was also impacted by the global economic recession with cargo demand decreased, both revenues and profit also declined from last year in the area of Aframax and product carriers which are exposed to the market that went down, while all VLCC's in our operation are under long-term fixed contracts.
 
 
A-3-5. Division-wise Trends for 1st Half Fiscal 2009 Results - Other Businesses -
 
Among other businesses, the Heavy Lift sector, which has also started to be affected by the continuing worldwide economic turmoil, was in comparably steady tone for this 1st Half.
 
For Short Sea/Coastal Shipping sector, revenues and profit were generally pulled down compared with previous year, partly affected by the global economic climate, but damage was rather minor in comparison with international shipping.
 
 
 
B. Prospects for Full Year Fiscal 2009
 
B-1. Prospects for Full Year Fiscal 2009
 
Prospects for full year 2009 actually depend on just how we can estimate this 2nd Half, considering such extreme conditions for the 1st Half. As quoted at bottom part of this Slide B-1, it will take more time for supply-demand balance of the markets for Containership Business to recover, i.e., to get freight rates back to a sustainable level, or to a level that enables us to invest and reproduce, for unless relation of supply and demand is improved as a precondition, it will still take more time from a macro-economic point of view.
 
As you know very well, at this moment, overall capacity of containerships worldwide totals about 13 million TEU, and among them, around 10% of ships with total of 1.3 million TEU have already been idled or laid up.
It has been said in our industry for the past several months that hereafter until around 2012, newbuildings of about 6 million TEU against existing 13 million are scheduled for delivery, while it has been also said that new ships having 6 million TEU capacity might diminish to almost half because circumstances causing current deteriorated Containership markets could still last for awhile, partly due to finance issue of shipowners, cancellation or postponing delivery of new capacity still on order.
In any case, as I mentioned earlier, until filling in the present gaps of supply and demand, we think return to freight rate levels that allow us to make extended reproduction requires more time.
 
With regard to next fiscal year that ends in March 2011, such condition as 20 billion yen loss being incurred for Containership division every Quarter like this 1st Half cannot continue for the long-term, and so we now want to take fundamental measures concerning our tonnage that is presently considered surplus or excess so that we can manage to improve supply-demand situation by ourselves.
 
We would like to speed up our earnings improvement, and under this concept we wish to formulate plans during last half of 1st Half and carry them out in 2nd Half. What we have done in 1st Half was changing a part of containerships ordered, which were planned for delivery from 2010 to 2012, to other types. The cost for this measure was posted in the 5.2 billion yen Structural Reform cost as described.
 
In 2nd Half we would like to implement actions that will directly lead to earnings improvement from next year, mainly cancellation of charter contracts, and we have decided to take such action. Although this is not finally fixed, we expect that we can almost carry this action out. Although there's a counterpart for cancellation, we are not sure that cancellation will move ahead as part of our plan but we think it is likely we will carry out such action.
 
Including these several measures, 50.0 billion yen is posted as total for fiscal year Containership Structural Reform cost, although a part of total cost for change of ordered containerships to other types and cancellation fee of charter contracts before expiration is included in 1st Half, and this includes 5.2 billion yen of containership business in 1st Half ordinary income as a matter of fact.
As a result, for yearly prospects we post Operating Revenues 810.0 billion yen, Ordinary Income minus 71.0 billion yen and Net Income minus 79.0 billion yen, which may be an historically large deficit that our company has never had before. Precondition for 2nd Half is exchange rate of 90.0 yen/per us dollar and bunker price of $450/per metric ton.
 
After implementation of this structural reform for next fiscal year, we will be able to count at least roughly 7-8.0 billion yen improvement effect for Containership division, which will continue for several years. Based on this calculation, although we have not yet formally reviewed our next year earnings in detail, I suppose we can manage to achieve triple digit Ordinary Income as minimum. As the target has come within our sight, I have intended to settle in this way during this fiscal year.
 
 
B-2. Prospects for Full Year Fiscal 2009 with Business-wise Operating Revenues/Ordinary Income
 
As a general rule, those figures are on basis of bottoming out in 1st Half and recovery in 2nd Half. With regard to Containership Business Ordinary Income, it will be minus 26.9 billion yen for 2nd Half, including Structural Reform cost and minus 74.0 billion yen for fiscal year. In Other Marine Business, because current market is still in distinctly steady tone for Dry Bulk department, we expect that we can limit ordinary income loss to 21.1 billion yen in 2nd Half on company-wise basis, and minus 71.0 billion yen for the fiscal year.
 
 
B-3. Key Points for Full Year Fiscal 2009 Prospects
 
Compared with previous prospects when 1st Quarter results were announced in July 2009, we made downward revision due to exchange rate, bunker price, etc., and in addition we made revised plan reflecting market volatility.
 
 
B-4-1. Division-wise Trends for Full Year Fiscal 2009 Prospects
           (for Containership Business)
 
With regard to Containership Business, although there will be various questions later, basically we do not intend to increase current space supply quantity after next year. In this year we scaled down drastically compared with last year in rationalization and restructuring of trade lines, so we would like to keep that level. Until global demand recovers we think we should adjust fleet scale in each trade line so as to avoid surplus. The meaning of avoiding surplus is to allocate fleet in accordance with demand and avoid further freight decline by any possible means. This is our present thinking. Although we have already laid up 3 vessels, we will act flexibly according to demand at the time. We will avoid increasing our capacity even though cargo volume increases slightly. Furthermore, we recently heard that it is possible to reduce navigation speed less than we thought before. As a whole, we think we will make effective use of remaining assets to avoid fleet surplus and try to restore rates by any means.
 
 
B-4-2. Division-wise Trends for Full Year Fiscal 2009 Prospects
           (Dry Bulk Business/Car Carrier Business)
 
In Dry Bulk Business we expect Chinese domestic demand will continue to develop at a sustainable level, although the situation where recourse is just China seems to often be the case in other industries, too. In the near term we do not think there'll be any drastic change. A steady tone is shown according to voices from business fields, so we think that the assumed market level as described here can be maintained.
 
As for Car Carrier Business, we completed tonnage adjustment to being almost appropriate to demand by way of reduction of 16 vessels compared with last year. The present situation is that we are ready for allocation of our fleet which we have kept as back up for customer demand whenever demand recovers in order not to cause trouble to them and we expect to see car shipments recovering rather steadily.
 
 
B-4-3. Division-wise Trends for Full Year Fiscal 2009 Prospects
           (Energy Transportation & Heavy Lifter)
 
With regard to Energy Transportation, we think it will take some time for global demand to recover. But in the medium term, demand of developing countries such as China, India, etc. will continue increasing from now on so we think the market will be rather firm and stay at a certain level.
As for Heavy Lifter, we are afraid present severe circumstances will continue for some time with world economy slack through 2010; however, it is heard that inquiries of various plant projects are coming back again so we believe we can get over current short-term severe circumstances.
 
 
C-1. Tackling Business Structural Reform
 
I would like to explain about Tackling Business Structural Reform. On August 19th, a Business Structural Reform Committee was inaugurated and we set up 3 subcommittees, namely Cost-cutting Subcommittee, Business Re-structuring Subcommittee, and Organizational Reformation Subcommittee. Each subcommittee must drastically review, without sanctuary, what the current business circumstances in the industry are and what the problems were in our past investment behavior by not so many persons, limited within 10 people. With regard to Cost-cutting Subcommittee, as you can see here, further measures for cost-cutting and earnings improvement for "K" Line group as a whole and Financial and cash provision, reduction of interest-bearing debt by disposal of assets which is being reviewed. And through analyzing the situation that "K" Line is facing, decide how we must consider Containership business which is a problem that has been discussed for a long time. We think we will be interfering with our business operation seriously in the future if we do not insert the structural surgical knife of reform to our Containership business. After those discussions we decided to expose as much potential loss as possible, as it were, in this 1st Half which is unrealized at this stage as we announced.
 
With regard to other than Containership business, in Dry Bulk we will cancel charter contracts of higher charterage and will sell owned ships as appropriate for such structural reform cost cutting. About Car Carriers, we have or will scrap 16 vessels, selling and/or redelivering 9 vessels since last autumn.
 
 
C-1-1. Tackling Earnings Improvement - Cost Reduction -
 
Although we already did various cost cutting before setting Business Structural Reform Committee, we are carrying out 60.0 billion yen of cost cutting through 1st Half and 2nd Half which is another 2.0 billion yen over that which we targeted as announced in July 2009. Some are already done and others will be done in 2nd Half, and achievement in 1st Half is 29.0 billion yen. In our cost cutting measures, we have made thorough cost reduction even in administration costs, including pay reduction for senior managers in addition to Board members since October.
 
 
C-1-2. Tackling Business Structure Reform
 
Other than Cost-cutting Subcommittee, there is Business Re-structuring Subcommittee, which is planning to announce review of mid-term management plan including target figures after next year maybe at the time of announcing our 3rd quarter results at the end of January. We are having various discussions towards this review, including how our business portfolio will be, and it will take more time before final announcement. As we see the situation for these 5 years or so, or as you can understand in seeing last year's results that 1st Half had highest profit in the past but was miserable in 2nd Half, how we will manage business which includes such highly volatile departments is a big problem for us. As to direction we are aiming, we are discussing how to change our business structure to one in which we can make rather stable profit to some extent even though the market is low but possible to pay dividend to shareholders.
 
In recent years, shipping market was historically high so we enjoyed more favorable markets than ever before. In the meantime we became a bit loose in our investment behavior and risk management. Together with such self review, we are now discussing, without sanctuary, even including strict criticism about management. Through these discussions we expect that we can go forward with structural reform. In our Organization Reformation Subcommittee we are studying how our company should exist as an organization, how to globalize, etc., which are various concerns nowadays, for we as a private corporation cannot exist without globalization, especially in the shipping business field. We've already had fundamental discussions including how an organization or personnel system should be as a part of such globalization.
 
 
C-2. Review of Fleet Upgrading Plan
 
In our management plan "K" Line Vision 100 announced April 2008, target number for our operating fleet totaled 640 vessels by end of 2011. However, as a result of the economic crisis we have had various discussions and concluded a plan to operate 556 vessels by the end of 2011, an almost 100-vessel decrease by postponing delivery of ordered vessels, changing containership orders to other types and redelivery of chartered vessels before contract expiration. We will hold up any investment plan for new ships after 2013, so we will squeeze accumulated investment cash flow for 3 years from 2009 to 2011 to almost half compared with our original plan. This includes changing newbuildings from containership to other types which will be accounted as a loss at once in this year, and also promotion of off-balance sheet. From above actions, our current plan is to shrink investment to around one-half of our original plan.
 
With that, we come to the end of today's presentation. We can say again and again that the reason why we posted such huge costs for this fiscal year as structural reform is first of all, we think it is rather difficult to recover profitability of containership business next year looking objectively because V recovery next year after May is still a distant idea so we think we have to prepare ourselves for such a loss to some extent. However, we'll try to reach triple digit profit level, as I mentioned before, by compensation for shortfall of containership business by other marine business sectors trying to achieve cooperation of employees and board members and so far we think we can see daylight.
Thank you very much for joining us today.

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