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Explanation by article

Ladies and Gentlemen,
 
Thank you very much for joining us today.
 
 
A. Financial Highlights for 1st Quarter Fiscal 2009
 
A-1 Financial Results
 
I will start off with "K" LINE's 1st Quarter Fiscal 2009 financial results, which were extremely harsh.
 
We originally expected that our earnings for this 1st Quarter, April-June, would be the most severe during Fiscal 2009. We presented a noticeably bitter prediction for last year's 4th Quarter, January-March, and still I felt like circumstances for this 1st Quarter would be grimmest in various respects. Now that the results are known, things proceeded just as I had thought.
 
As indicated in these Power Point slides, Operating Revenues finished below 200 billion yen with a decrease of 45% from the same period last year. Ordinary Income was a loss of 22.7 billion yen, and Net Income 14.9 billion yen loss, a severely heavy outcome for us.
 
As much as 45 % of the drop in Operating Revenues was caused by not only containership freight rate fall, but also dry bulk market where ratio of decline exceeded even that of the containership sector, which would indicate the very hard conditions in the overall market.
 
Average exchange rate between Yen and U.S. dollar during the period appreciated by nearly 6 yen per one U.S. dollar for year-on-year basis. Average bunker oil price decreased by no less then 230 U.S. dollars per kilo ton, which pushed up profit by 11.3 billion yen. However, freight rate market slump was still deadly grievous.
 
I will explain our yearly projection in detail later but on full-year basis, an operating loss was reported for the first time in 23 years since Fiscal 1986 (April 1986-March 1987) and ordinary loss for the first time in 16 years since Fiscal 1993 (April 1993-March 1994). Therefore, even quarterly it was the worst in our history.
 
 
A-2 Key Points
 
Compared to the same term last year, among the variation of factors, the effect of marine cargo trends from the basic economy has been visibly growing since the financial crisis that broke out last year.
 
At present we are detecting some bright signs of bottoming out, but throughout this 1st Quarter our overall business circumstances were difficult. The range of freight rate drops in Containership Business was much bigger than our estimation and the markets for dry bulk carriers and tankers also fell. Among the variation of factors in this slide, 'market volatility' was the most significant item, which amounted to over 60.0 billion yen in year-on-year comparison.
 
 
A-3-1 Outline of Division-wise Results 1st Quarter Fiscal 2009 - Containership Business -
 
In the major part of our core business, Containership Business, loading volume decreased by 15% from previous year, and slightly down compared to our assumption made this April.
 
Among profit decrease factors, the biggest was the sharp drop in freight rates. In the Asia-Europe route especially, supply-demand balance worsened, which we have mentioned since last year and remains unchanged, or has become even worse as the bottom does not yet seem to be in sight. Freight rates here have tumbled by 50% from same term in the previous year.
 
As to rates for Asia-North America trade, while we have concluded Service Contracts step-by-step, at the final stage of revising them, when supply-demand balance was still in bad shape, we had little choice but to finalize remaining contracts at a substantially severe level. The rate was lower than our expectation as of April this year, and lower by nearly 30% than 1st Quarter last year.
 
Furthermore, our tactics for this business area include a change in our business portfolio, that is, although we have previously emphasized Asia-North America service, and also our trunk-line known as 'East-West' line, we will raise the ratio of 'North-South' trade, depending of course on the expectation that cargo trend here will be continuously growing in the future. We have taken various actions in that direction, although the global economic recession has affected even these 'North-South' routes, with freight rates having fallen by 50% for year-on-year basis.
 
 
A-3-2 Outline of Division-wise Results for 1st Quarter Fiscal 2009 - Dry Bulk Business -
 
In Dry Bulk Division, particularly after Japan's usual consecutive holidays from beginning of May, the market level recovered more than our expectation, which was among the few bright factors for us.
 
Though the market for large-type ships such as Cape-size especially rose much higher than our estimation, to our regret, both revenues and profit for this 1st Quarter declined compared to those for 2008 because, as is well known, market was in an all-time high in May last year.
 
There may be further questions later but considering prospects for our various business segments of Containership, Car Carriers, Energy transportation, etc., only that for Dry Bulk sector looks bright right now. We hope such business circumstances for Dry Bulk Business will continue to last.
 
 
A-3-3 Outline of Division-wise Results for 1st Quarter Fiscal 2009 - Car Carrier Business -
 
As to Car Carrier Business, I suppose conditions for this business segment might symbolically reflect the present Japanese economic situation.
 
That is to say, after around last November, inventory adjustment for Japanese car exports started, and perhaps we felt like production level would be reduced to almost 40% at the bottom. Our original view was that by April or May, inventory would be completely adjusted, and then cargo volume would grow steadily. Actually it bottomed out during this 1st Quarter, which we think was almost as we forecasted.
 
Of course, cargo volume declined by more than 50% compared with previous year, and considering supply-demand condition, the situation whereby car carriers were idling here and there has continued, in response to which we, needless to say, have taken various countermeasures including lay-up, or even selling some vessels. All in all, our earnings became incredibly hard-edged, which, to our deep regret, resulted in Car Carrier Business division being in the red.
 
 
A-3-4 Outline of Division-wise Results for 1st Quarter Fiscal 2009 - Energy Transportation -
 
As to our Energy Transportation sector, aside from some business expansion with one newly-built LNG carrier, we have a few 'free' vessels but short-term charter market for them was in a slump due to diminishing energy demand.
 
In addition, as for the oil tanker section, in spite of our business scale enhancement with one VLCC delivery, we had to post profit decrease overall because freight rate market for CLEAN tankers operated at Tokyo weakened, and AFRAMAX tankers operated by our subsidiary in Singapore experienced decline in market level for oil trade out of Southeast Asia.
 
 
A-3-5 Outline of Division-wise Results for 1st Quarter Fiscal 2009 - Other Business -
 
Among Other Business segments, despite world economy being in a downturn, Heavy Lift business achieved increase in both revenues and profit for year-on-year basis because of existing contracts fixed beforehand, and the market was still rather booming.
 
For Short Sea/Coastal Shipping sector, domestic services generally pulled down revenues and profit, partly because economic climate in Japan was slowing down.
 
In Logistics business, both revenues and profit regrettably declined from last year as well. One of the major negative factors was that previous demand growth in air cargoes was probably slacking off earlier than marine cargo.
 
As a whole, the situation was extremely cruel, as I have already indicated before.
 
 
B. Prospects for 1st Half and Full Year Fiscal 2009
 
B-1. Prospects for 1st Half and Full Year Fiscal 2009
 
With regard to prospects for 1st Half and full year 2009, we honestly would prefer to not make any announcement as to full-year prospects. This is not because we want to hide anything, but only that it is extremely difficult to read annual supply and demand of our customers' business fields at this stage. Although there's one management executive of a major company saying that it is wrong to make any full-year prospect during the current situation that is filled with such various unclear uncertainties, we feel we ourselves in the case of Kawasaki Kisen must make full-year prospects after studying as much as can be predicted at the present time.
 
Pre-condition of Yen-U.S. dollar exchange rate is 95 yen for 2nd Quarter and 2nd Half, and as a result, full-year average will be 96 yen which is affected by 1st Quarter. Pre-condition of bunker price is 400 dollars per metric ton for both 2nd Quarter and 2nd Half.
 
Apart from 1st Half, prospects for Ordinary Income in the full year will be minus 42 billion yen. On basis of this figure, Ordinary Income in the 1st Half will be minus 44 billion and our target in 2nd Half is plus 2 billion with minus 42 billion for full year; this is what we are currently planning.
 
 
B-2 Business-wise Operating Revenues/Ordinary Income
 
How much we can improve earnings, especially in Containership Business, is the biggest point for us. 1st Quarter Ordinary Income of Containership sector was deficit of 20 billion and prospect for 1st Half is 38 billion since current business surroundings are not expected to change drastically in the next 3 months. We will therefore try to reduce the deficit of that sector to 20 billion in 2nd Half by cost reduction and taking various measures for earnings improvement. We are planning to move totally into the black during 2nd Half by making profit of more than 20 billion in other business sectors such Dry Bulk, Car Carrier, Energy Transportation, etc.
The point after all is that our Containership Business loses almost 20 billion yen in each Quarter, which we must try to improve by any possible means, that being the biggest challenge for us right now.
 
From the very beginning time that we made our original budget for this fiscal year, we thought the global deterioration would not recover in just a few years. Since supply and demand got off balance completely, if we made our business plan with such preconditions that freight rates and cargo volume would increase gradually in a similar way like we have previously done before, the results could be a terrible mess. So, I requested staff not to make our prospects with assumption of freight rate growth, and we have taken many counter-measures based on that view. Therefore, our prospect is very severe in that sense and one of the factors is that freight rates will not increase with ease due to the current Containership supply and demand.
 
However, during 1st Quarter of this calendar year, total loss of the world's main Containership operators is more than 250 billion yen as you are aware, and we know that major Containership operators are incurring even more deficits during April-June than in the 1st Quarter as a general trend.
Although I have not yet analyzed all details, the situation of the other 2 major Japanese shipping companies may show same tendency. This means the total 250 billion yen loss of worldwide Containership operators during this January-March will even further expand in this April-June period. Some of the various main operators also have capital problems, so-called capital reinforcement.
 
That is to say Containership operators cannot indefinitely continue their business as long as the current market level prevails, although the large gap between supply and demand means freight rates will not rise from the point of view of just supply and demand relationship itself. Considering these factors, we expect freight rates will be restored to some extent with anticipation and certain high probability. In predicting so, we do not think the current situation will continue.
 
But even though freight rates increase to some extent, as long as fundamentals of supply and demand do not recover, freight rate increase will be at a limited level which should allow Containership operators to manage to get by but with small earnings.
Our prospect is on the basis of above pre-conditions, and we will try to somehow reduce the
Containership deficit to minus 20 billion. We will also keep on studying further, including
all various structure problems that may make it possible to improve even more.
 
As I have now more or less covered everything, may I ask you to see our materials for further details. Next please see Slide B-5 Key Points for Fiscal 2009
 
 
B-5. Forecast and Key Points for 2nd Half Fiscal 2009
 
As stated in Slide B-5 regarding Containership Business, we will carry out cost reduction and related activities as mentioned before, but those actions might not be the fundamental solution. Consequently, we are planning to achieve rate restoration up to a certain level; otherwise we cannot properly manage Containership Business. With strong determination we will face this critical problem, otherwise we think there's little hope for the improvement so badly needed
 
In that sense, we have various business sectors compared with companies that concentrate on just Containership Business, for better or for worse. We would like to further extend the business activities of sectors other than Containership in whatever way possible. In this regard, in Dry Bulk Business, although the market is much lower than before, current market is cost plus, plus, plus so far, so we are trying to maximize our profit in this field.
 
Car carrier Business is dependent on automakers, but even though we rely on them, cargo volume will hardly lead to increase until there is some recovery of demand in EU and North America. Therefore, we should keep pace with automakers taking special note of their various business plans.
 
Regarding Energy Transportation, which is something like macro-economics, and because domestic market is severe due to having its own limits whereas Energy demands in China, India, etc. will grow in the future, we would like to expand the width of our business base by further strengthening our activities like we reinforced them in Singapore, or by further expanding our customer base.
 
 
B-6. Tackling of Earning Improvement/Cost Reduction
 
As we said about Tackling of Earning Improvement/Cost Reduction, our original plan was for a total of 45 billion yen cost reduction which included 30 billion yen for Containership sector and 15 billion yen in other business fields. Because Containership earnings worsened more than we expected, we now plan to tackle total of 58 billion yen in Earning Improvement/Cost Reduction which is 13 billion more than originally planned. As of yesterday we set up a task force for further Earning Improvement/Cost Reduction, of which I am chairman, to carry out this goal in concrete terms.
 
I am sorry that I overlooked mentioning a most important item.
We actually announced this April at the time of our original yearly prospects that we were planning to pay 2.5 yen per share as year-end dividend on basis of our dividend payout ratio plan of 23% that was previously proposed on assumption that our net income would be 6.5 billion yen for fiscal 2009; however, net income fell into the red after review of 1st Quarter which means that we cannot and will not pay dividend at this time according to our dividend payout ratio plan.
However, we do not want to say that we will not pay any dividend at this stage because we will continue striving for further earnings improvement, and demand trend may also change in the future. Being unable to accurately predict various demand factors, dividend payout is still under consideration at present.
 
This completes my explanation.
Thank you very much for joining us today.

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