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Explanation by article

Ladies and Gentlemen,
 
Thank you very much for joining us today. I will explain "K" LINE's 2nd Quarter Fiscal 2008 financial results, and our prospects for half-year and full-year financial position for Fiscal 2008.
 
I will first give just a simple explanation as we will have Q&A time later.
 
 
A-1-1. Financial Results
 
Starting off by talking about the overall company results for 1st Half 2008, our Operating Revenues, Operating Income, Ordinary Income and Net income all achieved new historically high records during this half-year period. However, with regard to prospects for 2nd Half, our revised prospects are regretfully not expected to achieve original plan because the market for dry bulk has fallen sharply. We do not say that 1st Half was heaven and 2nd Half will be hell, but we are definitely facing a tough situation.
 
You will note this time we have indicated figures in our explanation materials in comparison with our last forecasts, rather than with results for same period in previous year, with point of view about how much the achievement ratio was and how it was achieved.
 
Operating revenues during 1st Half reached 735.5 billion yen which is 5.1% increase because our previous prospect as of July 2008 was 700 billion yen. Ordinary income for 1st Half is 75.1 billion yen which is 7.3% increase compared with our previously prospected 70 billion yen. Net profit for 1st Half is 51.2 billion yen which is 8% increase compared with our previous prospect of 47 billion yen.
 
With regard to Yen-U.S. Dollar exchange rate, average exchange rate through 1st Half was 105.67 yen per one U.S. dollar which is about 4 yen depreciation of yen due to its comparatively weakened level in 1st Half which is a really different situation from that during the recent few days.
As to bunker price, its average through 1st & 2nd Quarters was $621 per Metric Ton where our prospect for 2nd Quarter was $700 per Metric Ton; in that sense, bunker price was a bit lower than expected, about $20 per Metric Ton lower. You will also note it says right here that Operating Revenues, Operating Income, Ordinary Income and Net income all achieved new historically high records during this half period.
 
Exchange fluctuation was plus factor of 2.3 billion yen and fluctuation of bunker oil price was also plus factor of 2.6 billion yen as described here.
 
As a matter of fact, we announced amendments of dividend payment for Fiscal 2008 due to these financial results.
 
As that announcement stated with regard to dividend payout ratio, our target in mid-term management plan "K" Line Vision 100, which started from April 2008, is to eventually increase the ratio to 30% by middle of 2010's, from 20% for Fiscal 2007. With the progress of our planned targets as of 2011 being 25%, a first step dividend payout ratio for Fiscal 2008 was 22% which reflects our thoughts of it being a kind of memorial dividend because "K" Line marks its 90th anniversary in April 2009.
Although we had expected it would be possible to pay 27 yen per share on full-year basis as originally planned, we had to revise the amount from 27 yen to 25 yen because of 2nd Half profit worsening as I will explain in detail later.
Interim dividend remains unchanged at 13.5 yen because our profit achieved historical high in 1st Half, but dividend of year end was revised to 11.50 yen which means total 25 yen for this full year, as we announced yesterday.
 
 
A-1-2. Outline of Business-wise Results for first six months Fiscal 2008
 
With regard to division-wise results, Ordinary Income of containership sector decreased a bit due to results of first six months of the term which show loss of 5.9 billion yen against previously forecasted loss of 4.8 billion yen. With regards to Other Marine Business, Ordinary Income in the first six months of the term is 77.9 billion yen which is 5.4 billion yen plus compared with forecast, and this reflects high market in dry bulk business, which I will touch on again later. There is not so much change in Others as total Ordinary Income is 75.1 billion yen which is 5.1 billion yen higher than the 70 billion we forecasted.
 
 
A-2. Key Points for first six months Fiscal 2008
 
With regard to key points for the results which are up 35.5 billion yen in Operating Revenues and up 5.1 billion in Ordinary Income, plus factors are depreciation of yen and the fact that bunker oil price itself is lower than we expected. In addition, bunker consumption savings and streamlining of company costs helped our performance improve.
 
 
A-3-1. Outline of Division-wise Results for 2nd Quarter Fiscal 2008 for Containership Business
 
In containership sector, Ordinary Income decreased by 1.1 billion yen as we explained previously; however, Operating Revenues increased slightly.
 
With regard to factors involved in profit decrease, firstly there are plus factors as yen depreciation. Fuel oil price decreased and bunker consumption was saved due to more effective operations. However, loading volume and average freight decreased, and those minus factors were larger than the plus factors.
 
Total cargo volume decreased 2.7% to 1,724,000 TEUs compared with our last prospect. Freight rates were, as you can see in this slide, especially for Asia-Europe trade, depressed compared with our plan, about which I believe there may be various questions later, because cargo volume as a total increased but supply and demand of tonnage is much looser than we expected, and in first six months cargo volume itself increased but not to such a level as we had planned.
 
 
A-3-2. Outline of Division-wise Results for 2nd Quarter Fiscal 2008 for Dry Bulk Business
 
In Dry Bulk Division, we achieved both greater revenue and profit growth than we planned. As mentioned in the table here, market level was almost the same as we expected. After the end of August, as you may well know, the dry bulk market has fallen sharply and there will be severe minus factor in the latter six months although it has no practical impact to first six months.
 
 
A-3-3 Outline of Division-wise Results for 2nd Quarter Fiscal 2008 for Car Carrier Business -
  
As to trends for Car Carrier business, the results are almost as we planned. Total number of units carried was 1,762,000 units and transportation capacity was increased. Although cargo trend towards North America has been in downward trend recently, other routes especially to Latin America and Middle East have been very positive, so we could achieve almost what we planned.
 
 
A-3-4. Outline of Division-wise Results for 2nd Quarter Fiscal 2008 for Energy Transportation
 
As to our Energy Transportation sector, our business has expanded gradually. With regard to LNG tankers, 8 new ships for the project in which we are engaged were delivered and our fleet increased to a total of 41vessels. Markets for Aframax and Clean tankers were stronger than we expected, in addition to business scale expansion, and so our business went well.
 
 
A-3-5 Outline of Division-wise Results for 2nd Quarter Fiscal 2008 - Other Business
 
Heavy Lift business which we reentered in April 2007 has been in steady tone.
 
For the Short Sea/Coastal Shipping sector, Kawasaki Kinkai Kisen, which is our related company, has done fairly well in domestic business and achieved revenue and profit increases.
 
In Logistics business, Operating Revenues and Ordinary Income were flat compared with previous prospects although air cargo volume for North America was slacking off.
 
 
B-1. Prospects for Full Fiscal Year 2008 with Business-wise Operating Revenues/Ordinary Income
 
Now, I will move to yearly predictions for Fiscal 2008, as explanation of first six months has just ended.
 
As was mentioned in the beginning there are some aggravating factors in the latter six months.
 
As to our revised projection for full-year Fiscal 2008, under our pre-conditions of exchange rate 100 yen per dollar and bunker oil price US$500 per metric ton for 2nd Half, Operating Revenues for the term are expected to be lower than 1st Half by 90 billion yen as half-year basis, and Operating Revenues for full year are predicted to be a bit lower than 1 trillion 400 billion yen which we announced in forecast this July.
 
With regard to Ordinary Income, because of lower profit in containership business and market's downward trend in dry bulk business, it is expected to be lower than 30 billion yen in the latter six months. As for full fiscal year 2008, 105 billion yen is expected which is 16 billion less than 121 billion yen in our forecasts as of this July. In accordance with lower Ordinary Income, Net Income for full fiscal year 2008 is expected to be 71 billion which is 7 billion yen lower than 78 billion yen forecasted in this July.
 
Seen from business segments of Fiscal Year 2008, Ordinary income of Containership Business Division is expected to be minus 18.9 billion yen, Other Marine Business such as Dry Bulk and Car Carrier, etc. 119.5 billion yen. Others is expected to be 4.4 billion yen, resulting in total of 105 billion yen for full year.
 
Regarding payment of dividend, as I touched on previously, payout ratio will remain unchanged at 22%, but amount of yearly dividend was revised to 25 yen per share because net income decreased by 7 billion yen from our forecast of this July.
 
With regards to effect of the Yen-U.S. dollar exchange rate fluctuation for six month basis, 1 yen fall or rise will increase or decrease Ordinary Income by approximately 0.3 billion yen, while Bunker Oil price rise or decline by 10 U.S. dollars causes profit to go down or up by 0.8 billion yen
 
Although yen is strong, bunker oil price has recently been moving between $300-350. We think there may be a plus factor as long as bunker price continues to move in this price range, but it seems a little bit difficult to achieve our original plan which specified Ordinary Income of 121 billion yen.
 
 
B-2. Key Points for Full Fiscal Year 2008 Prospects
 
On a full-year basis, in comparison with our previous forecasts, Operating Revenues are prospected to decrease by 15.0 billion yen, and Ordinary Income by 16.0 billion yen. Biggest among the 'plus' factors is that assumption for bunker oil price is updated preferably; and among the 'minus' factors, market condition especially for dry bulk business is revised downward severely from our last pre-conditions as of July.
 
 
B-3-1. Division-wise Trends for Full Fiscal Year 2008 Prospects
(Container Business)
 
Containership business has recently been somewhat affected by the so-called 'financial crisis' which has already impacted various aspects of real economic activities. Cargo volume during this Fiscal Year (April 2008 to March 2009) from Asia to North America is forecasted to decrease by 6-7% for year-on-year basis. Although that from Asia to Europe will still grow by 6-7%, we see cargo flow in our 'East-West' routes in total could be declining slightly from the same term last year.
 
Although freight rates have stayed at rather stable level for the Asia-North America trade, in Asia-Europe trade they have fallen with no sign of touching the bottom until now, partly because of slack in supply and demand balance. As indicated in this slide, for Asia-Europe trade, freight rates are forecasted to go down by over 10% from our original prospects made in April 2008.
 
Accordingly, freight rate level itself is not satisfactory, the same as basic business conditions, but mainly because of change in premises for fuel oil price from previous 750 U.S. dollars per ton to 500, our revised profit is expected to be up slightly over the previous estimation as of July this year.
 
 
B-3-2. Division-wise Trends for Full Fiscal Year 2008 Prospects
(Dry Bulk Business/Car Carrier Business)
 
In the Dry Bulk sector, as I have mentioned from the beginning of today's report, we have faced a sharp market drop after September. In spite of the positive factor of fuel price decrease, the negative effect from drop in freight rates is prospected to be far beyond the plus effect.
 
For your guidance, when talking about our view of the market for this 2nd Half, present charter rate for a Cape-size vessel is under 10,000 U.S. dollars a day, for example, according to a market report. Since we cannot count on any good number of factors that the rate will drastically recover within this 3rd Quarter, we set our premises for Cape-size at 10,000 U.S. dollars a day.
 
However, we also think present market level is overshooting too much on the downward side, and so from the beginning of year 2009, our 4th Quarter, it might be rebounding. In this way we have assumed a rate for 4th Quarter of 30,000 U.S. dollars a day for Cape-size, with the average throughout 2nd Half at 20,000 U.S. dollars. In fact, when we issued previous forecasts in July for this full year, our assumption for that was over 100,000 U.S. dollars. Who could imagine such a rapid drop!
 
Likewise, we have almost the same view for Panamax and Handy Bulkers: as an average for the 2nd Half, Panamax is 11,500 U.S. Dollars, and over 10,000 U.S. Dollars for Handy-size.
 
Regarding Car Carrier service, although sales volume decreases in U.S.A. and E.U. have been reported in the media in various ways, we expect demand for completed car transportation where we are engaged will be rather stable in general even though we may face slight negative effects.
 
Our earnings will almost remain unchanged from our updated projection.
 
 
B-3-3. Division-wise Trends for Full Fiscal Year 2008 Prospects
(Energy Transportation/Heavy Lifters)
 
As for our Energy Transportation, our LNG fleet is further expanding during the 2nd Half, and our oil tanker fleet is also growing with delivery of newbuildings. Moreover, markets for Aframax and Clean Tankers are staying at rather preferable levels. Considering all these factors, this segment overall will achieve revenue and profit improvement
 
Heavy Lift business has been almost in line with our prospects, and our fleet has been expanded. Market conditions are relatively positive compared to other businesses.
 
 
B-4. Financial Indices
 
Regarding transition of financial indices, Operating Revenues will be slightly over the targets set in our mid-term management plan "K" Line Vision 100.
 
Looking at profits, we see some downturn, which will then slightly increase negative Free Cash Flow, while our investment is going as planned in anticipation of our future business scheme.
 
Shareholders' Equity in our updated forecasts is prospected to grow somewhat over 400 billion yen by the end of this fiscal year (March 2009), which does not, however, reach the target in the management plan, partly because of our profit slimming down somewhat.
 
Interest-bearing Liabilities will also exceed 400 billion yen if things continue to go as they are.
 
We set internal financial rules as guidelines to manage our company or promote investing. In the long run, we would like to keep minimum of 40% for Equity Ratio, ROA of at least 8%, DER under 95%, and a ratio of Interest-bearing Liabilities to Operating Cash Flow at 4.5 times or less.
 
Investment plans for maintaining our company's financial standing far deviate from theses rules and will be adjusted as a matter of course. We will manage to maintain our financial rules by all means, as we will be able to have opportunities to make additional investment in accordance with this guideline when our Operating Cash Flow increases.
 
This completes my explanation for 2nd Quarter financial results, and our prospects for full-year financial position. Thank you very much for joining us today.

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