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Explanation by article

Ladies and Gentlemen,
 
Thank you very much for sharing your time to join us today when you are very busy since many companies are now rushing to announce their yearly results.
I will explain "K" LINE's Fiscal 2008 financial results, and our prospects for full-year financial position for Fiscal 2009 according to the Power Point slides in front of you, and the documents in your hands.
 
 
A-1-1. Financial Results for Fiscal 2008
 
I will start off by talking about the overall company results for Fiscal 2008, mentioned in this A-1-1 slide. During this Fiscal 2008, contrast between the 1st and 2nd Half was almost like the difference between Heaven and Hell.
 
For the 1st Half, as you well know, our Operating Revenues, Operating Income, Ordinary Income and Net Income all achieved new historically high records on Half-year basis. However, the 2nd Half was just the reverse, as quoted in this table with even Operating Income falling into red figures.
 
For full-year period, our Operating Revenues were 1,244.3 billion yen, 7% decrease for year-on-year comparison. Although Ordinary Income reached within inches of 60.0 billion yen, compared to last year's results, it was down 52% or roughly one-half.
 
Net Income improved slightly to 32.4 billion yen from 30.0 billion yen that was previously prospected as announced in January 2009, along with results for the accumulation to the 3rd Quarter, because of the tax effect related to the Extra Ordinary Loss from decline in appraisal of securities for our affiliated company, which had been treated as nondeductible as of the 3rd Quarter settlement, but came to be included in expenses this time. However, the Net Income still dropped by over 60% from previous year.
 
Though average Yen-U.S. Dollar exchange rate during this 2nd Half was in 95 yen range, for full-year it barely remained at 100 yen. As to bunker oil price, which has fallen even under 300 U.S. dollars per Metric Ton recently, the average consumed price throughout the 2nd Half term was nearly 400 dollars, and over 500 dollars for full year that was influenced by crude oil price hikes in the 1st Half.
 
As indicated at the bottom of this slide, 14.5 yen rise in the exchange rate between Yen and U.S. Dollar reduced profit by 13.3 billion yen for year-on-year basis. Fuel oil price was 97 U.S. dollars higher than last year, negatively affecting our profit by over 20.0 billion yen.
 
With regard to the decrease in appraisal of securities for our affiliated company, as explained at time of our 3rd Quarter closing, we posted unrealized loss of over 17.0 billion yen due to share price drop for FLEX LNG in which we had invested last year and whose major business was development of a Floating LNG Producer, or FPSO.
 
That completes the outline of Fiscal 2008 financial results.
 
 
A-1-2. Financial Results (Business-wise Operating Revenues/Ordinary Income)
 
Talking about segment-wise results, first we can say, earnings from Containership Business in general worsened rapidly in the 2nd Half, and market especially for dry bulk carriers fell drastically after the 2nd Half, which seemed to hit our profit directly.
 
I regret to say that for Containership Business, we were compelled to post a loss of 31.4 billion yen for this 2nd Half, in addition to 5.9 billion yen loss already booked for the 1st Half, which resulted in 42.0 billion yen total yearly drop compared to previous year.
 
Just as guidance, considering that our accounting rule change made in the previous Fiscal 2007 had decreased profit for this sector by approximately 11.8 billion yen, we could virtually count almost 54.0 billion yen as total reduction.
 
For Other Marine Business sectors, including car carrier, dry bulk or energy transportation businesses, overall Ordinary Income was reduced by over 20 billion yen compared to last year due to dry bulk market being down, and car carrier business slowdown, which also dropped below forecasts that were publicized with our accumulated 3rd Quarter results for Fiscal 2008.
 
Thus, taking our entire results, Ordinary Income declined by 65.9 billion yen for year-on-year comparison, and by 7.0 billion yen in comparison with our last projection released together with 3rd Quarter figures.
 
 
A-2. Key Points
 
Compared to previous annual results, our Operating Revenues decreased by 86.7 billion yen and Ordinary Income by 65.9 billion yen. As I commented before, in the 1st Half of this Fiscal 2008 we achieved record-high revenue and profit level. However, coming into the 2nd Half, cargo demand dramatically diminished to such an extent that trying to describe it in any common words would be useless. One newspaper expressed it as eevaporation' of demand, and I feel that wording might well represent the situation rather adequately.
 
 
Therefore, at present, all profit-affecting factors have indeed turned negative, including rapid shrink of cargo volume, deteriorating market for charter or freight, yen appreciation against U.S. dollar, and bunker oil price increase of nearly 100 dollars a Metric Ton in comparison with the average for last year, although it began calming down in the latter part of the 2nd Half.
 
With all these elements, the result came to a significantly hard outcome.
 
 
A-3-1. Outline of Division-wise Results for Containership Business
 
In our key business segment, Containership Department, we have seen signs of economic slowdown in the U.S.A. since late 2007.
 
So, for Fiscal 2008 we were quite cautious about cargo flow to the U.S., and we planned to apply our assets to Asia-Europe trades where cargo movement had been relatively firm, holding onto that idea for new ship allocation. However, subprime loan issue probably damaged the economy more seriously in Europe, rather than in the U.S. and so cargo demand declined swiftly, and so did freight rate levels.
 
Consequently, as indicated in this Power Point slide, for year-on-year basis, our total loading volume decreased by 3.6 % and freight rate for dominant leg in Asia-Europe trade reduced by over 17%.
Though the freight rate for Asia-North America route was slightly up from previous year, general trend was downward.
 
 
A-3-2. Outline of Division-wise Results for Dry Bulk Business
 
Regarding Dry Bulk Business, as well known, while the market hit an all-time high in May 2008 and then pitched down and down, we managed to secure profit for the 1st Half. In the 2nd Half, however, BDI (Baltic Dry Index) fell under 1,000, and even for long-term contracts or COA (Contract of Affreightment), some voyages were rescheduled, etc., being seriously affected by the tumbling of the market. Although operating tonnage grew by 4% compared to last year, drop in market level still had an extremely significant impact.
 
For reference, as quoted in this table, in Fiscal 2008, for example, average cape-size market rate was 134,000 dollars a day for the 1st Half, but then dropped to 12,000 dollars for the 2nd Half. Talking about Panamax and Handy, during the 2nd Half, there was almost no difference between the two types, or sometimes the rate for Panamax was even below that for Handy.
 
 
A-3-3. Outline of Division-wise Results for Car Carrier Business
 
As to Car Carrier Business, as a top auto manufacturer in Japan has commented to media, because their inventory level rapidly increased, they have vigorously struggled to adjust it, which as a result, drastically decreased the number of cars we carry. Through 2nd Half term, due to effect of the inventory adjustment, though car producers have said shipments descended around 40%, we feel like the drop may be slightly more based on our field side viewpoint.
 
If you ask us when it will bottom out, we will answer that including a bit of wishful thinking, we hope that shipping quantity will hit bottom and start to increase gradually in this 1st Quarter, i.e., during April-June.
Automakers definitely have a considerably wide base, and so their production level has been felt in many areas, such as various auto component suppliers, including steel mills. All in all, we think the sharp decrease in sale of automobiles negatively impacted demands over a very broad range, including various industries.
 
 
A-3-4. Outline of Division-wise Results for Energy Transportation
 
Regarding Energy Transportation, partly because 14 additional LNG Carriers were delivered within Fiscal 2008, revenues and profit rose from Fiscal 2007.
 
Until only recently, we had supposed that among the various business segments where we are concerned, perhaps effect of global demand decline might be relatively small for this segment, but considering the recent situation, that mood seems to be changing somewhat.
 
In comparison with previous fiscal year, as shown in this table, spot tanker market was rather better. However, comparing between the 1st and 2nd Half in Fiscal 2008, the level was notably down during the 2nd Half, which has caused us to be a little nervous about next Fiscal 2009 or later.
 
 
A-3-5. Outline of Division-wise Results for Other Businesses
 
With regard to Heavy Lift service, I am pleased to say that as we have been engaged in rather long-term businesses, the recent economic downturn has not greatly influenced this sector immediately, and so we achieved both revenue and profit growth.
 
Our Short Sea/Coastal Shipping sector, including short distance international trades, secured comparatively stable profit.
 
In Logistics sector, both revenues and profit decreased, especially because handling volume of air shipments partly decreased due to downward trend in cargo movement appearing faster than marine shipments.
 
 
B-1. Prospects for Full Fiscal Year 2009
 
Up to now I have commented about actual results through fiscal 2008, so now I will talk about prospects for fiscal 2009.
 
Under current falling demand situation, we recognize that markets will not recover as long as demand and supply are not balanced. Especially in Containership Department where we are afraid of over-supply of tonnage, we are planning some drastic countermeasures on assumption the over-supply situation will not change for some time. Although I was slow in advising you, last December we set up a task force for Emergency Countermeasures against Economic Crisis and came up with measures that exceeded 30 billion yen at that time; as a result, we prospect 45.0 billion yen for improved earnings which is beyond the original 30 billion yen figure.
 
Prospect for these assumptions uses exchange rate based on 100 Yen per one USD and Bunker price $300 per metric ton.
 
With regard to 1st Half fiscal 2009, I regret to say we still have red figures in operating income, ordinary income and net income, and our plan is to manage 11.0 billion yen of ordinary income for full fiscal year 2009. Because demand decreased drastically, Operating Revenue is expected to be 950.0 billion yen which is slightly below 1,000.0 billion (or one trillion) yen.
 
With respect to dividend for Fiscal 2008, although we had planned for 13.50 yen per share for mid-year and 11.5 yen as year-end-dividend, I regret to say that we will have to forego the year-end dividend payment because our ordinary profit for 2nd Half fiscal 2008 was in the red due to the drastic fall in demand situation.
 
In fiscal 2009, yearly prospect of net income is 6.5 billion yen under our current plan and we are planning to pay 2.5 yen per share as year-end-dividend as we do not intend to change our dividend payout ratio plan of 22% for fiscal 2008 and 23% for fiscal 2009 as we previously announced.
 
To our regret, no mid-term dividend is being planned because our profit is expected to show a red figure as of 1st half of fiscal 2009.
 
 
Assumption of bunker oil price US$300 is based on Dubai Crude oil price of US$53.
 
 
B-2. Business-wise Operating Revenues/Ordinary Profit Loss
 
On segment basis, ordinary loss of Containership business is estimated at 22.0 billion yen by taking all possible measures for improvement which means almost 15.0 billion yen improvement compared with loss of 37.3 billion yen fiscal 2008. And we would also like to manage to make a profit in other marine business sectors and try to achieve a total of 11.0 billion.
 
 
B-3. Key Points for Full Fiscal Year 2009 Prospects
 
On a full-year basis in comparison with last year, profit is prospected to decrease by 49.0 billion yen and most of the decrease comes from market volatility. We would like to achieve 11.0 billion yen of profit utilizing all possible means, especially lower bunker oil price and cost reduction.
 
 
B-4-1.  Division-wise Trends for Full Fiscal Year 2009 Prospects
   (Containership Business)
 
Although there may be further questions later, we prospected our earnings for containership business based on the assumption that cargo volume from Asia to North America would decrease 7% year-on-year and from Asia to Europe a decrease of 11% for year-on-year.
Though downward trend of freight rates is expected as per the chart, we think recovery of freight will continue to be very tough until there is a better balance between demand and supply. Our prospect for ordinary income of Containership Department is minus 22.0 billion yen for fiscal 2009 under all cost reduction measures including rationalization of services, idling/lay-up of ships and earning improvement measures, based on assumption that freight rate will decrease 17% from Asia to North America and 26% or more from Asia to Europe.
 
 
B-4-2.  Division-wise Trends for Full Fiscal Year 2009 Prospects
   (Dry Bulk Business/Car Carrier Business)
  
In the Dry Bulk sector, we assume charter rate for fiscal 2009 of 30,000 U.S. dollars a day for Cape-size, Panamax 13,000 U.S. Dollars, and 10,000 U.S. Dollars for Handy-size.
Considering present market level which is 20,000 U.S dollars for Cape size, 13,000 U.S dollars for Panamax and 10,000 U.S dollars for Handy-size, we think our assumption for fiscal 2009 is reasonable.
 
To understand the market for dry bulk, the economic situation in China occupies a large element. As far as we know, that country will carry out economy boosting measures of over 4 trillion Yuan, so that should have a substantial impact on expansion of domestic demand. On the basis that the situation for Iron Ore and Coal movements, which represent the biggest cargo, would be comparatively positive, we made our viewpoint on the prospect of the market.
 
Regarding Car Carrier service, it is expected that revenue and profit will both fall compared with last year. This year our prospect is based on a conclusion of the inventory adjustment during the 1st quarter from April to June, and that shipments will then recover gradually, and there's even some indication that we can expect cargo recovery during the latter half.
We think that it will recover in due course and we will implement all possible countermeasures for cost reduction including idling and laying up vessels until supply and demand balance will be achieved to some degree, same as for Containership Department.
 
 
B-4-3.  Division-wise Trends for Yearly FY2009 Prospects
   (Energy Transportation/Heavy Lifters)
  
Regarding Energy Resource transportation, until quite recently there was the view that influence from change of the market might be comparatively small, and recovery earlier than other business fields. But the same influence as in other business fields may develop if global economic trend does not improve. Although current index is seriously bad because there's possibility of the influence to this field, we think it is possible to expect this market to recover once the economic situation in China, etc. returns to a more active situation.
 
Although results of Heavy Lift business were quite good last year, our prospect is that revenues and profit will fall this year because of gradual effects from the global economy.
 
 
B-5. Financial Indices
 
With regard to Financial Indices, since latter half of last year we have mostly taken care of our financial strength under circumstances where demand has fallen sharply, which we now have to watch even more so than before. Last April we made our new management plan gKh Line Vision 100 and our target at that time was to aggressively catch up with increasing demand; however, demand has fallen sharply and under such circumstances we are planning to revise the figures themselves in the plan in due course.
We will not change our qualitative way of thinking in the management plan, but we feel that we have to review our figures as economical circumstances have changed drastically. At this stage, the future situation is unknown as demand cannot be predicted, so it will take more time to review figures for fiscal 2010 and 2011.
 
For the short-term, we'd like to observe internal financial rules covering 4 viewpoints that were previously announced, that is to say ROA of at least 8%; 40% for Equity Ratio; DER under 95%; and ratio of Interest-bearing Liabilities to Operating Cash Flow at 4.5 times or less. Although a severe situation has been expected since last year, we would like to achieve these figures in the short-term.
 
Interest-bearing Liabilities rapidly increased up to 439.6 billion yen last year. This is because we moved forward financing aggressively as the severe situation was expected from mid-year to year-end.
 
 
B-6-1.  Emergency Countermeasures against Economic Crisis
   Tackling of Earning Improvement/Cost reduction
 
In our task force for Emergency Countermeasures against Economic Crisis that we set up last December, we are approaching earnings improvement and cost reduction from all viewpoints. As mentioned in below table we count about 30 billion yen of revenue improvement in Containership Department and 15 billion in other Bulker/PCTC, etc., with total amount prospected this year being 45 billion yen overall improvement in earnings.
 
 
B-6-2.  Emergency Countermeasures against Economic Crisis
   Review of Fleet Upgrading Plan
 
With regard to our fleet upgrading plan, our original plan was at first for a total of 640 vessels by the end of fiscal 2011; however, we are planning to scale this number down drastically, especially containerships and car carriers because we factored into our calculation later redelivery of ships and scrapping due to this demand decrease.
 
 
 
This completes my explanation today. Thank you very much for joining us today.

 

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