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Explanation by article

Ladies and Gentlemen,

Thank you very much for sharing your time to join us today. I will explain "K" LINE's 1st Half Fiscal 2007 financial results, and our prospects for full-year financial position for Fiscal 2007 according to the Power Point slides in front of you, and the documents in your hands, which indicate the same contents.

A-1. Financial Results for 1st Half Fiscal 2007

First, I will outline the results briefly.

Our Operating Revenues for this 1st Half were 646.6 billion yen, and Ordinary Income 63.7 billion yen with Net Income 44.0 billion yen, which are all on Consolidated basis. Compared to the same period last year, Operating Revenues rose 25%, Ordinary Income up 159%, i.e., 2.6 times, and Net Income was plus 114%, more than double.

Average exchange rate during this 1st Half was 119.64 yen per one U.S. dollar, weakened by 4.38 yen in year-on-year comparison.

Bunker oil price was 353 U.S. dollars per kilo ton for average during this 1st Half, which was up by 16 U.S. dollars from 1st Half Fiscal 2006. Nowadays, we see it going over 400 U.S. dollars per kilo ton and so we are watching the direction of bunker oil price with much care.

As indicated at the bottom of this slide, yen depreciation by 4.38 yen from the previous 1st Half positively affected results by 2.6 billion yen, and fuel price increase of 16 U.S. dollars caused additional cost of 2.1 billion yen.

As to the important issue of dividends, for this 1st Half we today resolved in the Board of Directors' meeting to pay 12 yen per share, up 1 yen from previous forecasts, increase of 3 yen from last year's interim dividend, as our proposed payout ratio is set at 20% of annual consolidated net income, which was over our estimation when we announced the 1st Quarter results in this July.

A-2. Key Points for1st Half Fiscal 2007

Both Operating Revenues and Ordinary Income increased compared to previous year results or what we had projected as of July.

Among factors for these improvements, especially in comparison with the same term last year, we can count 'Business Expansion' first. With 47 vessels delivered within Fiscal 2006 and now running in full operation, and also 12 vessels within this 1st Half, our business scale was expanded and contributed to our profit growth.

Then, another major factor was that we could restore freight rates in our containership sector, the major part of our core business, especially for Asia-Europe routes, which I will again touch on later. Furthermore,as you know very well, dry bulk market has been at a historically high level, which also greatly contributed to our profits.

Lower yen also added positive effects to a small extent.

As mentioned in this table, 39.1 billion yen profit rise in year-on-year basis was brought first by the factor of 'Market Volatility' and then 'Business Expansion'.

A-3. Outline of Division-wise Results in 1st Half Fiscal 2007 for Container Business

In containership sector, revenues increased by almost 57 billion yen compared to the previous 1st Half. Profits grew by 11.3 billion yen despite the income decrease caused by the accounting standard change to be effective as of 30 September, which had been reported with our 1st Quarter results and revised half year prediction in this July.

If the 14 billion yen minus figure incurred by the amendment of accounting method was not recognized, we could say we achieved 25 billion yen improvement.

A factor that added revenues and profits for Containership sector was extension of our business scale. Enhancement of 'East-West' trades proceeded with delivery of 8000TEU-type vessels. We also enlarged our 'North-South' trades. As a result, total loading volume was over 1.6 million TEU, about 12% growth from last year.

Freight rate restoration was another positive factor as indicated in this slide. As I briefly touched on a few minutes ago, freight rates for Asia-Europe trade rose by 29% for year-on-year comparison. We succeeded in moving rates upward in dominant services for each route except for Trans-Atlantic.

As I explained in the previous meeting, in Asia-Europe trade, where freight rates had sharply dropped since autumn of 2005, the rate level was restored quarter-by-quarter during this 1st Half and is now slightly beyond the level just before they fell.

As I also touched on this before, the effect from the accounting standard change to "Percentage of complex transportation method" was minus 14.0 billion yen as indicated at the bottom of this slide.

A-3. Outline of Division-wise Results in 1st Half Fiscal 2007 for Dry Bulk Carriers

In Dry Bulk division, we also achieved both revenue and profit increases. Business scale was expanded as well. We received 8 newbuildings in this 1st Half, and operating tonnage grew 12.5% from the same term previous year.

The factor pushing our profit up was, as is very well known, just the historically inflating market, which is as high as anyone has ever seen before.

Although the market had once temporarily fallen around June, it has been going up sharply since September, and now at an extremely high level. I have been describing the large-size vessel market, but middle and small-size markets also show similar trends.

Even though it is becoming a worn-out saying, this brisk bulker market is driven by the high economic growth in China, and what supports the progress is, among elements relating to dry bulk business, the rapid increase in crude steel production in China. Their production volume was 420 million tons per annum in 2006, then 370 million tons in 2005, if my understanding is correct. For the year 2007, it was once said it will reach 500 million, now revised to around 480 million, as minimum estimation.

Though roughly 50 newly-built cape-size bulkers are delivered every year, iron ore imported by China has been growing by a rather larger magnitude and so supply and demand situation is still very tight. Furthermore, especially in Australia, heavy port congestion has caused supply-demand balance to become more severe.

A-3. Outline of Division-wise Results in 1st Half Fiscal 2007 for Car Carriers

In our Car Carrier business, again we were able to achieve a rise in both revenues and profits. With 8 new ships being delivered within the last fiscal year, number of cars we carried increased by nearly 10% and demand for transportation continues to be very strong.

A-3. Outline of Division-wise Results in 1st Half Fiscal 2007 for Energy Transportation

In this sector, total revenue resulted in an increase; to my regret, however, profits were slightly down for year-on-year comparison, which was because crude tanker market softened more than our expectation. However, business scale was extended as scheduled. Our existing LNG fleet of 32 vessels was in smooth operation, while some LNG projects to be operated in the future were at a temporary standstill.

In our tanker business, one new VLCC for Exxon Mobil was delivered in June, and two refrigerated Ammonia/LPG Carriers, which are just described as LPG carriers in this slide, started operation. So, despite business scale expansion, profits regrettably decreased due to sluggish market.

A-3. Outline of Division-wise Results in 1st Half Fiscal 2007 for Other Businesses

For the Short Sea/Coastal Shipping sector, especially domestic ferry services in Japan mainly operated by our consolidated subsidiary Kawasaki Kinkai Kisen Kaisha, Ltd., revenues and profits reportedly rose with comparable good demand.

In Logistics sector, we achieved both revenue and profit growth due to improvement in share of marine, land and air cargo market that is being realized little-by-little through synergy effects from our intermodal logistics business company, "K" Line Logistics, Ltd., that was set up last July by the merger of two of our former subsidiaries.

This now completes my explanation of our 1st Half financial results. Next, I will address the prospects for 2nd Half and Yearly Fiscal 2007.

B-1. Prospects for 2nd Half and Yearly Fiscal 2007

First, regarding premises for these forecasts, we have felt it is quite difficult to make predictions recently because yen has once again appreciated temporarily, and fuel oil price has been climbing to amazing levels, so we now expect exchange rate will go to around 115 yen per U.S. dollar during the 3rd Quarter.

For the 4th Quarter, we somehow feel like we are seeing factors for dollar depreciation coming in front of us in various ways, and so we suppose it might be better for us to set the assumption at 110 yen per U.S. dollar. As an average for the 2nd Half, the rate is 112.50 yen.

Fuel oil price for the 3rd Quarter is calculated to some extent based on the price of oil already bunkered, which is estimated around 390 dollars per kilo ton.

For the 4th Quarter, based on the presumption that the bunker price remains at this hiked level, we have tentatively set 450 dollars per kilo ton, which results in 420 dollars for average during this 2nd Half, which could vary according to crude oil price trend.

As to our revised projection for full-year Fiscal 2007, Operating Revenues are predicted to be 1 trillion 300 billion yen, up 20% from Fiscal 2006, and Ordinary Income almost doubled to 128 billion yen, which can be divided almost evenly between 1st Half and 2nd Half. Net Income will amount to 84 billion yen, up 60% over last year.

Since we have proposed 20% dividend payout ratio based on this consolidated Net Income and on the premise that a considerable amount of convertible bonds issued will be converted into stock, the Company will be ready to pay 25 yen per share as full-year dividend for this Fiscal 2007.

When these goals are fulfilled at the end of this fiscal year, we will achieve the best ever record for Operating Revenues, Operating Income, Ordinary Income and Net Income.

I must apologize that I forgot to touch on an important point when I talked about the results for this 1st Half, which is that on a Consolidated basis we attained new historical record highs for Operating Revenues, Operating Income, Ordinary Income and Net Income for the 1st Half.

On Non-consolidated basis, both Operating Revenues and Net Income also achieved new high records. Operating Income and Ordinary Income were second best, following 1st Half Fiscal 2004, when we previously exceeded our past records.

This full-year projection includes earnings from SAL, our new joint venture company for heavy lift shipping, a field that we re-entered in this April. We intend to consolidate this company into our accounting. Their yearly Operating Revenues are estimated at 15.3 billion yen, Ordinary Income 1.3 billion yen, but due to goodwill amortization, etc., Net Income will be 0.8 billion yen loss.

B-2. Business-wise Operating Revenues/Ordinary Profit Loss

Though we have only disclosed Container sector profit/loss as business-wise, but this time we have started to separate Other Marine Business which consists of Dry Bulk, Car Carrier and Energy Transportation. As indicated in this table we have calculated Operating Revenues and Ordinary Income.

On this basis, profit from Container Business is 14 billion yen annually, which is improved by 21.8 times over the 7.8 billion yen loss in Fiscal 2006. As a 14 billion yen negative effect from the change in accounting method is recognized in this prediction, it can be counted as 36 billion yen rise if we had not changed the accounting policy.

In business other than Containership sector, Operating Revenues are nearly 600 billion yen, and Ordinary Income is 107.5 billion yen, 41.5 billion yen growth for year-on-year basis.

As I mentioned before, though dry bulk market has been staying at a soaring level nowadays and has contributed enormously to our profits, major part of our core business is still the Containership sector, and as you know very well, that business is distinctly volatile. The profits were minus 7.8 billon yen during last Fiscal year 2006; plus 30 billion yen for Fiscal 2005; and plus 40 billion yen in Fiscal 2004, although I think it is somewhat unavoidable that market level is down due to supply/demand situation or other factors that affect our own Container Business profits.

I surely feel that we have now finally got over the disruption from freight rates that had so drastically fallen since autumn of 2005, and I felt that in the process of regaining, that our efforts for these many years have started to bear fruits, such as enhancing each of our national offices, strengthening sales, and furthermore the streamlining of our business operations.

It cannot be helped that freight rate levels go up and down depending on external factors, but in these circumstances I believe we have actually gained strength to respond to situational changes and this rapid recovery in our Containership sector tells what we have achieved. I believe we can say this is, as a result, one of the largest assets we possess.

B-3. Key Points for Yearly Fiscal 2007

On a full-year basis, as indicated in this slide, considerable rise in profit is being prospected, which is mainly because of 'market volatility' factor such as freight restoration in Containership sector and buoyant dry bulk market as well as 'business expansion' also. In comparison with last fiscal year, profits should be increased by 64 billion yen and 25 billion yen from our previous financial forecast for 1st Quarter announced in this July.

With regards to effect of the Yen-U.S. dollar exchange rate fluctuation for annual basis, 1 yen fall or rise will increase or decrease Ordinary Income by approximately 1.2 billion yen, while Bunker oil price rise or decline by 10 U.S. dollars causes profit to go down or up by 2.6 billion yen.

B-4. Outline of Division-wise Fiscal 2007 Prospects for Containership

Regarding prospects for Containership business, we see positive cargo volume being maintained, and supply and demand condition will be kept appreciably tight. Our loading volume for full year is estimated to be over 3 million, reaching 3.24 million TEU, which will be 10% up from last year.

As I suppose you have various questions concerning our view about these circumstances, for Asia-North America service, which is the biggest market for us, we are now concerned about how the subprime loan problem, etc. will affect real demand there. At least at the present moment, notable impact from that situation will not appear, or it has not appeared yet.

Whether there is any effect or not, I suppose it might be better for us to think there will be certain effects. If you ask how we will respond to such things when realized, I would like to explain later.

B-4. Outline of Division-wise Fiscal 2007 Prospects for Other Businesses

Regarding business conditions for other than containership, in our Car Carrier sector the very tight supply and demand situation has been continuously maintained. We expect cargo movements to be stable and profitability also going steadily.

As now is the point when the dry bulk market surge is over, at least we feel during this 2nd Half that it is going about the same as it has been recently. We can further discuss our market overview if you ask later.

Energy Transportation sector is in a slight slump. Though the business scale has been expanded, we see profitability as flat, or in the trend that it was during this 1st Half.

C. "K" LINE Vision 2008+

C-1. Actions to Business Assignments

Our present management plan, "K" LINE Vision 2008+ , includes several business assignments that we are now implementing step-by-step.

Among them, as to Business Expansion, we entered into heavy lift shipping business through a new joint venture with German-based SAL Group in April, which I mentioned before.

In June, though it might sound a little belated, we founded "K" LINE BRASIL LTDA, a new subsidiary in Brazil where we have strived to establish a business base to expand "K"Line's own business operation.

Then we started a new containership service from Asia to East Coast South America in June.

We opened a new liaison office in India in July, especially to provide a foundation to support Dry Bulk and Car Carrier operations which have already established various business relationships there. And of course we are also enlarging existing Containership business with our agency which has already been previously established.

Also in July, we placed an order for 10 new 4,500TEU-type containerships, and in September, launched a new container service between Asia and the Black Sea. Now around the Mediterranean Sea area, cargo demand has been really active and we are enhancing our operations responding to cargo flow.

Another major assignment in our management plan is further reinforcement in our overall ship management structure.

For this purpose, we have established "K" Line Maritime Academy (India), and for fostering the training of engineers in that country, we made a partnership with an educational institute for ship engineers in India. In Japan, the annex of "K"Line Training Center was completed, and our training program for seafarers on LNG carriers has been accredited for SIGTTO Standards.

We will strengthen our structure for safety in navigation and cargo operation, which is still in progress.

C-,Q. Transition of Major Financial Indices

When the present prospects for Fiscal 2007 that I now talked about are achieved, our Shareholders' Equity will come to a new status of over 450 billion yen.

Although Interest Bearing Liabilities slightly diminished in the 1st Half, as our shipbuilding plans are ongoing as scheduled, from this Fiscal year onwards our investment plan is going ahead; our Free Cash Flow is calculated to return negative; and Interest Bearing Liabilities will be in an increase trend.

From the viewpoint of profitability, we will be able to keep ROE 18%, and ROA 12%.

Equity Ratio will reach 42%, and DER will decline to 0.72.

Considering all these factors, I understand our financial strength has been further improved.

C-3. Progress of Fleet Upgrading Plan

Our fleet upgrading plan has been proceeding according to schedule. We will receive a total of 25 newly-built ships within this Fiscal 2007, then 41 in Fiscal 2008, and 48 in Fiscal 2009.

Our present "K" LINE Vision 2008+ is a long-range plan looking ahead to the mid-2010s. However, concrete numerical targets have only been publicized for Fiscal 2006, 2007 and 2008. Now I intend to confirm targets for after Fiscal 2009 using the time between now and the end of this year.

When we announce results for this Fiscal 2007 in next April, I would like to foresee the three consecutive years from Fiscal 2009 through 2011, which I understand is very delicate timing to consider how long present bulk market level might be maintained

We have now almost completed fixing our fleet upgrading plan until 2011, though only those vessels to be delivered by 2009 are indicated in this table. So, the question is how we see markets in the future, which will impact our numerical goals significantly. To be frank, as it is quite difficult for us to make forecasts for 2011 at this present stage, I would like to carefully think over just what targets we can achieve during the next half year.

I suppose in the next plan, rather than numeric value, even though numerical targets are of course a most important issue, and now that our financial status has changed and we are taking steps never previously taken before, that I would like to give more emphasis, for example, to safety in navigation and cargo operations, as our operating fleet has been tremendously increased. In accordance with such remarkable business expansion, diverse human resource problems have also appeared for both seafarers and land workforce.

So, I would like to focus on these areas within the period when we can predict profit level viewing what will lie ahead, if possible, which I think will become one of the major themes in the next plan.

This completes my explanation. Thank you very much for joining us today.

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