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Major Q & A

(In General)
 Q1.  Referring to slide B-2, FY2009 Ordinary Income for 'Other Marine Business' is forecasted to decrease by 64.9 billion yen for year-on-year basis. We will greatly appreciate if you can disclose sector-wise breakdown for this 64.9 billion yen.
A1.  Though I would like to refrain from answering in detail, about two-thirds of that is from Dry Bulk sector, and the other portion is from Car Carrier and Energy Transportation.
Q2.  As slide B-6-1 shows total 45.0 billion yen to be gained during Fiscal 2009 through earnings improvement or cost reduction measures, please advise allocation between 1st and 2nd Half, together with just how confident you are to achieve these figures.
A2.  We set up a workshop on earnings improvement and cost reduction in our Economic Crisis Emergency Task Force last December as a time-limit organization that was effective until the end of March, and in which all divisions concerned joined to discuss and investigate any target items, and only counted in our forecasts what we were concretely sure of achieving. Other ideas are still pending.
Talking about allocation between 1st and 2nd Half, I feel like it would be around 4 : 6 because among cost reduction factors, further effective ship deployment or decreased service loops will be more fruitful toward the end of the year.
Q3.  In this Fiscal 2009, Containership Division is again expected to have a deficit. In order to move from red ink to black after next year, please tell us how you are proceeding?
A3.  Containership Business is our core business, as you well know, and consists of almost 50% of our total Operating Revenues. So, how fast we can improve earnings from this division is an extremely crucial point for us.
From the most pessimistic viewpoint, we see cargo volume for Containerships probably hitting bottom in 2010, but anyway picking up in 2011, which of course depends on trend of the global economy,
Although some people say a part of new shipbuildings is being canceled, those once firmly ordered will come out sooner or later.
Now assuming additional Containership capacity to be delivered through existing new ship orders of 6 Million TEU, and with freight rates restored only when present sunken demand recovers, or putting it differently, when load factor exceeds 90% or so, it will possibly take 3-4 years even being quite optimistic, and 4-5 years being more pessimistic.
 On the premises that during the term freight rates do not recover, can "K" Line survive or not?
Even considering in the most negative way, on the assumption that Containership freight rates do not recover at all during these years, we can still manage to survive with comparatively stable profit earned from our other business sectors.
By our trial estimation, in case Yen-U.S. dollar exchange rate is 90 Yen per Dollar, Bunker Oil Price 330 U.S. dollars per metric ton, which is on the basis of Dubai crude oil at 60 dollars per barrel, and freight rate for Containership business at almost the same level as Fiscal 2009, supported by our other business segments, for Fiscal 2010 we will be able to achieve Fiscal 2009 profit level plus Alpha, and for Fiscal 2011 further plus can be anticipated as well. So, I believe "K" Line can survive somehow as a whole group company, even if Containership freight rates do not go up.
However, if such situation keeps going on, with over 30.0 billion yen loss recorded for previous year, and for this year over 20.0 billion yen loss being prospected, which we as a business company feel is intolerable, we will take countermeasures with some serious determination.
One way is within our Alliance scheme, so called 'CKYH' in which we are now involved, but just what drastic measures we can take for cost reduction is most critical of actions to be taken.
Another way is what kind of cost saving measures inside of our company we can further study, which have already been included to some extent in this year's projection.
However, we will try our best to maintain our overseas network of agents, because if we shrink or remove such business network once established, reorganization takes so much time.
Therefore, we would like to go through the present recession, and endure until the market recovers. The reason is because still we have high expectations for the future of Containership business, and we also would like to continuously maintain this sector as our core business, so we will have to keep persevering for now.
Based on these factors, we will continue to operate our business in the years to come.
Q4.  You said the over-capacity condition in Containership Business will not be eliminated for some years; on the other hand, according to your fleet upgrading plan indicated in slide B-6-2, after 2010 you are planning to start expanding your Containership fleet again. Would you please tell us how you see the market situation through the coming three years, and whether you can turn this business into black for Fiscal 2010 even though you see red figures for this Fiscal 2009? If you think you can, please explain how you can improve the profitability.
A4.  Based on the assumption that it takes about 2-3 years until cargo demand returns, we must focus attention on the future. We have already concluded all contracts for newbuildings to be delivered by 2011 or 2012. At this moment we have never given consideration to any cancellation of those existing orders.
Some portion of the newly-built vessels will be for the purpose of replacing existing fleet, but most of them are for further business expansion. Until such time as demand again comes back, and in order to adjust supply-demand condition, we intend to temporarily idle some of our fleet. In the event demand does not turn around shortly, lay-up will be considered. Especially among our Car Carriers and Containerships, some are aged and to be replaced in the near future anyway, which we can dispose of slightly ahead of original schedule. With all these measures, we will attempt to balance supply and demand.
In this regard, for now we will not change our shipbuilding plans. However, we are negotiating about delaying some ship deliveries as far as possible with shipbuilders. Thus we are gaining time until cargo demand comes back.
Q5.  As you mentioned that you did not change your shipbuilding plans, let us confirm figures if your capital expenditures also remain unchanged.
A5.  As our investment is basically for shipbuilding, since last autumn we have started to reduce our investment cash flow. To be more precise, we have frozen extra orders for new ships, delayed deliveries as much as possible, and then made off-balance if allowed. For this Fiscal 2009 it is to be held down to roughly 78.0 billion yen. For fiscal 2010 and 2011, as far as what is currently coming in sight, it is scheduled to decrease to around 70.0 billion, respectively, and if needed, I would like to squeeze more.
(Containership business)
Q1.  With regard to freight rates for Asia-North America trade, prospect is 17% yearly downward trend for Fiscal 2009, so I wonder if most of the decrease might be caused by drop in Bunker Surcharge. So, if available, please let us know how much surcharge impact and base freight are estimated separately in your yearly projection, and considering situation for ongoing freight negotiation, how correctly do you feel they are reflected in your projection.
Then for Asia-Europe trade, as the rate is estimated to fall 27%, and since it seems to be in comparison with average rate through previous year, please tell us how much freight rates have improved after negotiation for contracts starting in April, and also how much is additionally expected next time for July, not on annual average.
A1.  About Asia-North America trade, there is possibility of a drop for this year. After fuel oil price started to go down, ratio of freight rates where bunker surcharge is not floating has increased. Therefore, separation between base rate and bunker surcharge has become more difficult. In case of this trade, basically freight rates are maintained for a full year, so rates we fixed last April or May have continued up to the present. New rates under negotiation currently have been influenced by downward trends in general, especially for Asia-Europe trade.
Talking about circumstances for Asia-Europe trade, we have succeeded to achieve some rate restoration for April. Now as we carefully watch trends towards the summer peak season, it is expected to improve more, because we have planned further rate restoration overall.
Q2.  Please let us know the breakdown of improvement factor and aggravating factor of 15.3 billion yen ordinary income loss decrease for year-on-year basis in B-4-1 slide.
A2.  Firstly, an aggravating factor is freight rate reduction, and we expect a decrease of around 60.0 billion yen compared with previous year.
Next, one of the improvement factors is a total of 30.0 billion yen in earnings improvement which includes around 15.0 billion yen for rationalization of ship deployment and 15.0 billion yen of operating cost reduction, ship cost reduction and bunker savings by slow steaming, etc. In addition, our assumption of bunker oil price is US$300 although it was US$490 as of the previous year and this will bring in total of 38.0 billion yen improvement for year-on-year basis.
All these improvement factors total 68.0 billion yen against aggravating factor 60.0 billion yen due to freight rate reduction. Further improvement of about 8.0 billion yen will result from return voyage from Europe or North America to China and trade line for South Africa and West Africa. All above improvement factors compared with previous year will total around 15.0 billion yen.
Q3.  I guess deficits will be expanded in first half of fiscal 2009 compared with previous year and earnings will be much improved in second half of 2009. Please let us know how you see the background of improvement in viewing each of the first half and second half of the year, also the effect of earnings improvement countermeasures in second half or freight rate recovery for Europe in second half?
A3.  Especially in second half we expect a little freight recovery in Europe trade and North-South trade as those improvement factors turn up during the second half.
Q4.  You said that recovery of freight levels is difficult until supply and demand come back into balance, even though there's effect of decreased bunker surcharge. Is this the best way for you on assumption freight decreases to this level? On basis of current freight level, do you have an option for no further increase in loading volume? Are there options for decreasing supply tonnage such as further idling or laying up ships, or option of changing contract terms for North America trade to quarterly in order to possibly renegotiate in summer season instead of annual contract?
A4.  It is said that total capacity of Containerships in the world is 12.0 million TEU as of 2008 in addition to a further 6.0 million of vessel capacity to be delivered to the market in 2009-2012. But it is uncertain because around 1.0 million TEU out of the total 6.0 million will be cancelled because of no chance to be chartered and deliveries of some vessels will be delayed if trade growth for 2009 does not turn upward but is still minus. It may take about 3-4 years even though market increases a bit after 2010, but of course this may be brought forward by 1-2 years if demand increases rapidly or cancellation of vessels is increased.
Nevertheless we see the market as being severe in 2009-2010. So we think we need to consider squeezing tonnage supply further while watching the freight negotiation situation in Europe trade which will be highlighted this summer as well as freight negotiations for North America trade which we have not yet finished.
(Dry Bulk Business)
Q1.  Although you show cargo movement of Dry Bulk remaining unchanged from previous year in financial highlights, your assumption in the material is that it will decrease per B-4-2 slide today. Please explain how you see the market.
A1.  Sorry for any confusion you may have as our description conflicts slightly about Dry Bulk cargo movement. Originally we thought cargo movement will decrease along with the global recession, but considering how healthy and effective the Chinese Economic policy is, we have seen results of iron ore imports for China, which occupies largest share of Dry Bulk cargo movement, increase 18.7% during Jan-March 2009 for year-on-year basis, so volume of China's iron ore imports this year will not decrease compared with previous year. Although Japanese crude steel production was at a historically low level during Jan-March, also in Apr-June, it will gradually increase from July on the basis of an easing in the reduced production at Japanese car factories, so our assumption of cargo movement is at same level as previous year with expectations of recovery in 2nd half.
Q2.  In case Dry Bulk vessel charter market remains unchanged, will earnings of Dry Bulk section
for next year decrease or improve?
A2.  If the market figures remain unchanged as per our assumption, earnings will improve next year without fail. One of the reasons is that we concluded mid- or long-term contracts which started 1 or 2 years later in second half of 2007 or first half of 2008 when the market was much better, so those contracts start from this year. In addition, we have a few vessels whose charter rates are comparatively higher, and those vessels will be returned at the time of expiration of the contracts after next year. For the above 2 reasons, earnings should improve as long as the Dry Bulk market does not crash.
Q3.  Please let us know if there's any change about long-term contracts for Dry Bulk vessels. If number of contracts decreases, what will the impact be on earnings?
A3.  Dry Bulk market is at a historically low level looking back at the past 5 years, with some customers requesting us to extend at expiration for as long a period as possible. We think now is the time that this should be considered carefully, whether it is better to extend longer or not. So if we think it's better to adjust length of contracts as a result of our calculations, we will conclude on either longer, shorter or mid-term, whichever it is decided is better.
(Car Carriers)
Q1.  Please let us know prospects for cargo volume.
A1.  With regard to cargo volume of cars, it has recently dropped drastically due to inventory adjustment and reduction of production. Adjustment of inventory will be finished in 1st quarter around May, with volume expected to gradually recover from May or June production, so it will take a bit more time before we can reach a cruising speed.
However, we expect that it will grow back in second half of this year, so our prospects for yearly cargo volume is to stop at 20-25% decrease compared with fiscal 2008.
Q2.  About earnings for Car Carrier Department in fiscal 2009, on basis of 20-25% cargo decrease that you mentioned, is the image for earnings expected to decrease the same as cargo volume? Please explain if there will be any change against your prospects?
A2.  Although our prospects for cargo volume indicate a 20-25% decrease, there is not necessarily a link between earnings and cargo volume due to earnings being subject to various factors such as cargo destination, etc



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