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Major Q & A

 (In General)
 
 Prospects for Yearly Fiscal 2008 (April 2008-March 2009)
 
Q.  We will greatly appreciate your disclosing sector-wise breakdown of downward revision for this full year estimation compared to previous one that you announced last October together with your interim financial results. Especially among businesses other than Containership, or non-liner services, how much is attributable to Car Carrier business.
   
A.  For this 3rd Quarter results, drop in Containership segment caused greatest impact. Dry Bulk business also worsened slightly while Car Carrier business was almost flat compared to the previous estimation, or rather improved slightly as of the end of the 3rd Quarter. Energy Transportation was down a bit whereas Heavy Lift segment turned more positive. Other sectors failed to attain that which was predicted in October last year.
   
Q.  In the 'B-2' Slide showing Ordinary Income for 'Other Marine Business' segment, a loss of 0.3 billion is indicated for 4th Quarter. Can you please be more specific as to which sectors in this segment you expect will have red ink figures?
   
A.  During the 4th Quarter, Dry Bulk business is forecasted to result in several billion yen loss whereas Car Carrier, Energy Transportation and Heavy Lift sectors continue making profit.
   
Q.  Again in the same 'B-2' Slide, Ordinary Income for 'Other Marine Business' segment is estimated to decrease by 18.0 billion yen in year-on-year comparison. Can you please expand a little as to actual business-wise breakdown for that 18.0 billion yen?
   
A.  Majority is from Dry Bulk sector that is expected to be down around 30.0 billion yen. Car Carrier business is prospected almost flat and Energy Transportation to be plus.
   
Q.  Please tell us your view as to whether Extra Ordinary Loss for 4th Quarter will be going up or down. In case of increase, please also advise item-wise trends.
   
A.  Constituting a large majority of the Extra Ordinary Loss is the appraisal loss from the securities of FLEX LNG, which we announced this January 13. Securities of this company are listed on Norway OTC market, and the loss amount will vary with share price in the market at the end of our fiscal year, March 2009, so we cannot predict any more precisely at this moment.
Then, in case we can successfully return vessels that are incurring higher charterage before contract closing period in order to improve our profit, taking into consideration whatever cancellation penalty, etc. that would be caused, we will decide whether we should execute or not considering general circumstances. I would like to make this determination in light of our corporate strength in the entire market together with prevailing conditions for financing.
   
Investment and Fleet Upgrading Plan
   
Q.  As for investment cash flow, we understand you have already scheduled to decrease the amount to about 140-150.0 billion yen during this fiscal year (ending in March 2009). What level are you estimating for the next year?
   
A.  Present estimation for this full year is approximately 146.0 billion yen. About half a year ago it was roughly 180.0 billion yen, so we have succeeded to constrict by roughly 35.0 billion yen as of now. After next year, as I explained before, new investment plans, which mainly are intended for ships, have virtually been frozen for these several months. Even for those existing plans already contracted, we are endeavoring to postpone delivery or to put them on off-balance sheet to settle financial indices within the range of our targets.
Viewing our recent business performances, we have some suspicions that operating cash flow will not grow as much as we expected, so we will try to shrink investment amount further to under 100.0 billion yen at most, even to as much as 70-80.0 billion yen if we can, at least for next year.
   
Measures to Recover Profit
   
Q.  As we understand measures to recover profit are now under consideration, can you please give us some hint as to what kind of items and amounts are included in your total of 30.0 billion yen profit recovery now being planned for next Fiscal Year?
   
A.  We established an in-house Emergency Task Force to cope with the present economic crisis which includes two working groups: 'Profit Recovery and Cost Reduction Group' and 'Dealing with Risk Factor Group.'
   
As for the total of profit recovery and cost reduction, we are now expecting over 30.0 billion yen. Though we have no concrete definition of 'profit recovery,' it rather means shrinking of loss, which includes negative but effective measures to improve our profit such as rationalization in fleet deployment, or decreasing and/or ceasing some present service loops, etc. They are expected to amount to around 40% of the above 30.0 billion yen.
   
The others are reduction in costs for operation, ship, fuel oil and general administration. Being more specific, operation costs include about 2.0 billion yen for feeder or draying fees, and almost same amount for cargo handling charges, then returning empty container box fees, port charges, etc.
Accumulating all these items, our goal for Fiscal 2009 is, though as a final goal we would like to increase it a little bit more, tentatively around 30.0 billion yen if I dare quote a figure at this moment.
   
Q.  A while ago, you listed postponement of new investment, demolition or returning chartered vessels as measures to adjust excess capacity of ships. However, I suppose, regarding postponing investment, for example, newbuildings planned to be delivered within this year would nevertheless be done in accordance with the schedule, so please advise your idea as to when vessel completion is to be actually made.
   
For scrapping, can you not find any more candidates other than car carriers? Or, when you return chartered vessels, how much of your fleet are you ready to bear, even considering loss incurred from chartering back before contracted period?
   
I would be quite happy if you would please provide in more detail about the extent to which you are preparing in order to adjust the over-capacity condition in relation to the previously-mentioned 30.0 billion yen of cost reduction, and to possibly add even more onto that.
   
A.  As you indicated, during next Fiscal 2009, 45 new ships are scheduled to be delivered. At present our fleet has 508 vessels in total, and the 45 newbuildings will be added during next year.
Speaking here as to how we can reduce vessels, we have already fixed the sale of 6 within this fiscal year, 5 car carriers and 1 dry bulk carrier. In addition, we have decided to return over 10 chartered vessels. Furthermore, there are some idling ships that are out of service but which are not yet cast away and are not being counted as part of our operating fleet. Tentatively the number of vessels in our fleet will therefore decrease to about 502 or so as of the end of this March.
   
During next fiscal year, 2009, we will accomplish re-delivery of over 30 chartered ships. We will also further speed up demolition, or sell vessels if circumstances allow, and if those methods are still not enough, we can idle even more surplus ships. Even after all these measures are introduced, we still expect to have around 500 vessels remaining in our fleet. While this may be rather slow progress, we will at least be holding up further growth of our fleet. Whether we will need to take further actions or not is a task to be decided after carefully watching overall business situation.
   
In our original midterm management plan, "K" Line Vision 100, our fleet was scheduled to expand to 573 vessels as of the end of Fiscal 2009 (March 2010), so we will have diminished the total by no less than 70, as far as we have counted at this time.
   
   
(Containership business)
   
Q.  With regard to freight rates for Asia-Europe trade, B-4-1 Slide shows yearly prospect is for a downward trend of 16.7%. Please let us know how much Bunker Surcharge impact and base freight are as of today because it seems freight rate is still decreasing even further after end of 3rd quarter.
   
A.  Freight rates for Asia-Europe, as you may already know, have dropped since last fall and current market level is at its lowest level, therefore we cannot imagine lowering any further. Our yearly prospect is based on that freight level for 4th quarter.
   
There are 2 reasons for rate decrease. First reason is gap between supply and demand and second reason is that Bunker surcharge, which we could introduce with most of our customers in first half of this year, decreased along with decline of oil price. Ultimately, Bunker surcharge does not have an impact on profit because Bunker cost itself is saved when there is oil price decline. However, regarding base freight, there is impact on profit to a large degree.
   
We think latest market level is the lowest at which any company can not continue performing service in the future. In the most extreme case, it is more economical to lay up ships than to keep running them in service. In that sense, we don't see current freight market level continuing next year or into later years.
   
Q.  What impact will current freight market for Asia-Europe have on coming freight negotiations for Asia-North America?
   
A.  We assume that there could be a large impact in case of disruption in supply and demand balance for Asia-North America trade if there were a shifting of ships from Asia-Europe trade to Asia-North America trade under current situation, rather than market trend of Asia-Europe itself having effect on Asia-North America market directly. However, actual profitability of Asia-America trade has turned sharply downward so what each carrier is doing at present time is to temporarily idle ships that are not needed in Asia-Europe trade. There is no trend of shifting ships from Asia-Europe to Asia-North America at all. Therefore, freight negotiations for Asia-North America that will start soon, basically depend on demand in North America. Prospects of North American demand for the near future are unforeseeable at this stage, but we do not think there will be any plus for year-on-year basis so we will have to wait and see just how much the minus level will be in the future.
   
Q.  With regard to next year's profitability of Containership department, we suppose that cargo demand will be very severe, although there are some profitable elements such as decline of Bunker price, restructuring services, etc. Under the circumstances, do you have any intention to offer lower freight rates? If so, please let us know the background for quoting such rates. Otherwise, please give us your comment if you have strong determination to neither fight nor lower freight rates further. It is understood that freight rates for container business are already much lower than break-even point, so we would like to hear your long-range outlook should you plan to offer any further lower rates.
   
A.  With regard to rate negotiations next year, current freight rate level for Europe is already so low that we should idle our ships from economical view as we mentioned. What we are planning as of this stage is to decrease space supply for Europe by restructuring our services in both Asia-North Europe and Asia-Mediterranean area. Ratio of supply decrease will be around 30%. By introducing this type of solution, we think freight rates will stop dropping or even increase a little. For such above reasons, we have no intention to lower freight rates in order to increase cargo volume.
   
About Asia-North America trade, we do not think we need to lower rates at this moment because we are taking some actions for cutting off supply, for example, by having other carriers suspend some services and operate joint service with us which in actual practice decreases our own space.
Of course Bunker surcharge is automatically linked to oil price decline. There are fixed price contracts including Bunker cost fluctuation, so we feel that we must assume that Bunker portion of total freight rate will decrease to some extent.
We do not think current circumstance is a situation whereby we should offer to lower rates any further considering our space supply.
   
   
(Other business)
   
Dry Bulk
   
Q.  Is it your assumption that 4Q Dry Bulk will be a red figure? If so, does it mean that minus amount of spot cargo business exceeds stable profit caused by long-mid-term contracts? We would like to hear your comments on this point.
   
A.  Although we expected Cape-size market to be $20,000/day as precondition for 2H at the time of announcing our 2nd quarter results in Oct 2008, current market is actually $8,000/day. 4th quarter result comes from that difference.
We chartered some ships by short-mid-term contracts and the profitability was balanced at the time of contract conclusion. Then we chartered out the ship to another carrier, but the carrier shrinks payment to us in case it subleases the ship to another company that became bankrupt. These things can happen.
Recently market for Cape-size recovered a little, however most of the vessels we use for spot shipments are under Panamax-size, so we are suffering a loss in the market for this particular class.
   
Q.  While many of your contracts are on the basis of mid-long-term, is there any recent case whereby revision of contract is required for COA or long-term contract? We would like to know the situation because that is a concern for us as people who live outside of the industry.
   
A.  In the case of Cape-size, we close most contracts with what we call 1st class shippers, for example Japanese mills, Chinese, Korean, Indian and Europeans. We have only a few ships for spot market.
Those 1st class shippers do not cancel the contract itself or overturn the contract from the bottom without previous agreement, although there are cases when they request a decrease in volume quantity. For example, they sometimes request decrease in number of voyages from the total that is fixed in the COA, such as from 10 to 9 or 8.
Regarding middle-small-size ships, ratio of free ships which are used for spot business increase; however, we guess average capital cost of our middle-small ships is comparatively low so in case we use those ships in spot market, minus amount per ship may be comparatively low even though market level is under break-even point.
We therefore concentrate on concluding contracts for upper Cape-size with firm contract shippers.
   
Q.  We have heard your explanations so far, but prospect for this 4th quarter is a red figure. How should we interpret this point?
   
A.  It is very difficult to know how to accurately estimate extra portion of fleet when market is rising. At the time market is going up, what we regarded as extra portion became not extra because of idling time at offshore due to port congestion or increase of transport distance.
Under such circumstances, we have to increase tonnage by chartering from other carriers in order to load all cargo for which we are responsible by contract. For example, at the time Dry Bulk market peaked in May last year, it happened that we had to charter a ship at $240,000/day for a 1-trip voyage to dispatch the cargo at value of $30,000/day. In such a case we could not bear chartering such an expensive ship and therefore chartered alternative ship at $50,000/day for 5 years. There is nothing wrong with that, however we cannot do anything to take alternative measures in current sharp drop in the market which was historically low in December last year although it was historically high in May same year. In addition we cancelled our contracts with people who cannot currently be firm shipper in sharp drop market. We thought 3 ships were extra portion but actually it was 6 ships and then those 6 were ruined in the market. Such things happen and current situation resulted by such various complicated elements.
   
Q.  How much is the portion of Japanese customers of Dry Bulk?
   
A.  Around 60 % in case of Cape-size ships.
   
Q.  What kind of Dry Bulk market do you expect in the near future?
What action will "K" Line take in the market?
   
A.  We do not anticipate the depression will continue long for dry bulk market. First of all, Chinese New Year will finish this weekend so we would like to watch the market situation. An additional element is price reduction negotiations for Iron ore, another factor we also want to monitor.
We think there will be some outcome in April in the earliest case and by June at the latest. Regarding Cape-size, market changed a bit earlier than expected, and cargo movement of Iron ore broke out slightly, so we feel that the market is turning out well although market level has not yet reached cost break-even point.
We can say that there's almost no extra ships used for spot business in our Cape-size fleet. Most free ships are small-mid-size as mentioned earlier. Ratio of free ships for spot business is low for our entire dry bulk fleet, so we do not expect a particularly cruel situation but one where we can take almost no measures even though current market continues for awhile.
   
Q.  The other day, there was a news report that a shipping company incorporated in Singapore fell into debt default, and that "K" Line would lose about 10 billion yen of contracted cash flow through the next few years. Since bulk market has still been in quite a sensitive situation as has the financial market as well, we would very much appreciate hearing your comments or your view about whether such an incident where you can expect cash flow to be damaged can occur again, and how many such cases can possibly happen together with your risk management countermeasures, or whether you regard any of your other counterparts as free from such potential risks.
   
A.  Recently in our industry there is a risk for credit called 'charter chain risk.' No matter how carefully
we make contracts to charter out our vessels to a charterer whom we believe to be first-class,
when he re-lets them to another charterer, and then the new charterer to another, like a chain
reaction, default risk is increased in such a long-linked chain. In case any player therein actually
makes a default, then the effect finally falls on ourselves. In other words, what goes around comes
around.
   
As our basic policy, even in case of chartering out our vessels, we have primarily tried to choose and contract with first-class charterers, and moreover with those who transport their responsible cargo secured by their own contracts for a long number of years.
   
However, in a few business situations we have still been caught in a chain where default has occurred. So if we are asked whether we can totally control credit risks, we cannot say exactly 100%. However, we have been trying to minimize the risk as much as we can.
   
Car Carrier Business
   
Q.  The number of cars you carried during this nine-month period through 3rd Quarter is shown in Slide A-3-3. How do you see the trend for cargo flow and freight rate level these days, or throughout this 4th Quarter?
   
A.  Until the 3rd Quarter, loaded cargo volume has not been seriously affected.
   
Under the environment whereby new automobile stock in the U.S. has been piling up, auto manufacturers have held down shipments, and perhaps for this 4th Quarter we will face downward flow of cargo by as much as 25-30%, mainly in trade toward the U.S, which could even be over 30%, depending on economic conditions.
   
We have cooperated with our customers as best we can to respond to their shipment squeeze, and so, they have not requested our cooperation at this point regarding freight rate level at all.
   
Q.  With regard to Car Carrier business, you mentioned that you do not have to make downward revision. Please advise background for your comment as to how, even in this situation where cargo trend is being decreased 25-30% in the 4th Quarter, you can maintain your profit expectations?
Although we have heard that you decided to scrap 5 car carriers, a decrease of only 5 out of about 100 ships of your entire fleet, while some newbuildings are also coming along next year, it seems to be rather difficult for you to adjust your loading capacity by 20-30%. So please give us some explanation about whether you still have room for response to the 20-30% cargo decrease to, say, 600-650 thousand unit level per Quarter, at the point of cost cutting.
We would appreciate if you tell us the reason why your profit is still not currently falling severely, and your view through next year.
   
A.  This segment has been plus until 3rd Quarter for year-on-year basis, as accumulation of year-to-date for 9 months and also 3rd Quarter alone. Although loading volume decreased in cross trades and intra-Europe service, it increased in other routes.
   
However, forecasts for car exports mainly from Japan during the 4th Quarter are reduced by about one-third, but this will not significantly affect this sector's final yearly results. That is, this business went fairly well up to the 3rd Quarter with increased cargo volume and more profitable than previous year. But it is falling in the 4th Quarter, which will somewhat decrease our profit but not have too severe a negative effect on annual basis.
   
After next year, we have not yet calculated just what the cargo demand will be. Until exactly when this production adjustment will last, or whether it finishes by the end of this March, has not yet come into sight, even though newspapers report producing units will probably decline to almost half in this January-March period, but I believe we must wait and carefully see just now much.
   
I have heard automobile sales in the U.S. last year were 13.2 million units annually, a decrease by about 20% for year-on-year basis, and for December, it fell to the level of 10.0 million on annually adjusted basis.
   
I suppose this is partly because there might be problems due to credit, or financial crunch, with it also becoming difficult to make a loan even if people would like to buy cars in the U.S. As some learned persons in the industry said, around 200 million cars exist in the U.S., and therefore even if Americans utilize a car for 15 years, there should be a need for approximately 15 million new car sales a year. So an adjusted level of monthly sales at 10 million yearly sounds like almost too extreme a situation, and I suppose at some stage in the near future, demand that shrank by credit crunch might be getting back to a more normal level. However, tremendous stocks remain at this moment. Until they decrease to ordinary level, exports from Japan, Korea, and even South-East Asia where our business is deeply concerned, will be inevitably reduced.

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