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Explanation by article

Ladies and Gentlemen,

I will explain "K" LINE's 1st Quarter Fiscal 2007 financial results, and our prospects for half-year and full-year financial position for Fiscal 2007according 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 Quarter Fiscal 2007

To sum up the results for this 1st Quarter Fiscal 2007 in one sentence, Revenues and Profits as well substantially increased for year-on-year comparison.

On quarterly basis, Consolidated and Non-Consolidated Operating Revenues achieved new historically high records. Operating Income was, we could say, second best, following 3rd Quarter Fiscal 2004.
We have achieved the best ever Ordinary Income on Consolidated basis, and second best on Non-Consolidated basis. Both Consolidated and Non-Consolidated Net Income marked record highs.

The reason why we were able to achieve these improvements, even exceeding our original expectation for this 1st Quarter was, as I will also mention in detail in the next slide, that recovery of containership freight rates was beyond our projection, and buoyant dry bulk spot market stayed at much higher level than we prospected.

Consolidated Operating Revenues were 309.2 billion yen, Ordinary Income 36.1 billion yen and Net Income 25.8 billion yen.

The table on the right side of this A-1 slide shows Business-wise Consolidated Operating Revenues and Ordinary Income, whereas we had disclosed only Containership Business in 'Sanko Joho' in 'Kessan Tanshin' just for reference, but from this Fiscal 2007 we decided to add a segment on information of 'Other Marine Businesses' including Dry Bulk Carriers, Car Carriers, Energy Transportation, etc.

As indicated in this slide, average exchange rate was 120 yen per one U.S. dollar, slightly lower than our forecast, and fuel oil price, which I felt was climbing quite a bit nowadays, but in reality was slightly less than the same term last year by 6 U.S. dollars per kilo ton.

A-2. Key Points for1st Quarter Fiscal 2007

Operating Revenues rose by approximately 56.9 billion yen and Ordinary Income by about 26.0 billion yen for year-on-year basis.

The factors for these results were, as indicated in this slide, that we could restore containership freight rates over our estimation, and then strong bulk market level continued, which I touched on in the previous slide. Furthermore, with 47 vessels delivered within Fiscal 2006 and now running in full operation, our business scale expanded in all divisions.

As major positive factors, Market Volatility and Business Expansion accounted for almost 25 billion yen profit growth.

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

In containership sector, which is the major part of our core business and which significantly affects our entire company profit/loss, revenues increased by more than 30 billion yen, and profits jumped by over 10 billion yen in comparison with the previous year. We think this result is generally in line with our expectations as of this May that we might improve containership division by almost 20 billion yen for year-on-year basis through this full year, though there exist various fluctuating factors.

Total of four 8,000TEU-type ships, the largest ones in our containership fleet, were delivered and now in full operation. We started a new service between Southeast Asia to the U.S. East Coast via Suez Canal where we were at first concerned about lower load factor, but our loading volume subsequently increased every week. Now it has considerably contributed to our business expansion. Another factor to extend our business scale was enlargement in 'North-South' trade. With all these factors we were able to successfully expand our containership business. Furthermore, cargo movements were positive in general. Especially in Asia-Europe trade, cargo growth was even over 20% in some weeks.

In Asia-North America trade, we have had some concerns although cargo has shown moderate increase but somewhat less than our expectation. On the other hand, however, actual ship space for this route has been reported rather lower than last year as many shipping companies have been reshuffling their Asia-North America ships due to concern about bunker oil price hike and slow cargo volume compared to the more active European trade.

As a result, loading factor for Asia-North America service has remained over 90%, and so a slowdown in economic performance by the U.S.A. has not affected containership business so far, at least in terms of supply/demand situation. The loaded cargo volume for this 1st Quarter increased about 14% from last year. So, I suppose for this year we will not have to worry too seriously about cargo demand, etc.

As for the important freight rates, trade-wise results are indicated in this slide. Taking Asia-Europe trade, where freight rates had sharply dropped since autumn of 2005, the rate level was restored to almost same level as before they fell. We even anticipate it will slightly exceed the level in 2nd Quarter.

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

In Dry Bulk division, our fleet was enlarged, and above all, the freight market still stayed at a high level, whereas we had experienced a notable fall during last April and May, which did not happen during this 1st Quarter. Under this situation, we were able to enjoy the market hike. As mentioned among profit increase factors in this slide, market for each of the large, middle, and small-size bulkers was really strong.

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

In this sector, Revenues and Profits increased with 8 new ships delivered within last year and which are now in full operation.

Although most recent data for automobile sales in the U.S. for June 2007 seemed to show the number dipped below 16 million cars for the first time in the past several months, but as I have previously touched on the U.S. economy slowdown or so, sales of products by Japanese auto manufacturers, our major customers, have not worsened. We see the circumstances as remaining unchanged for the time being, with stable demand for Japanese cars.

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

In our Energy Transportation business, total revenue results were almost flat despite business scale expansion and profits were slightly down, for year-on-year comparison.

As to freight market level for both VLCC and AFRA-MAX tankers, VLCC market does not affect our profit/loss now, and AFRA-MAX market especially softened somewhat compared with the previous year.

Although the market for clean product tankers had once been on the rise, it ended up dropping somewhat.

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

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

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

B. Prospects for Fiscal 2007
B-1. Prospects for 1st Half and Full Year Fiscal 2007

The 1st Quarter results were much better than our prospects, for which we are really pleased. Now, I will move to 1st Half and yearly predictions for Fiscal 2007.

First, I must ask you to take notice that we have not yet changed our estimation for this 2nd Half from what we had announced this May 9th, including assumption for market conditions, freight rate levels, etc., except for bunker oil price. As 1st Quarter is just now completed we would like you to allow us some more time to investigate each factor in detail before making our 2nd Half projection. However, as regards premise for fuel oil price, we felt it would be a real problem if we retain the original pre-condition unchanged despite situation that the price in Singapore went over 400 U.S. dollars per kilo ton last week. In this regard, we only revised price of fuel oil as 390 dollars per metric ton for this 2nd Half, 50 dollars up from the pre-condition set in May. Factors other than oil price, such as market level, are all just being kept unchanged. Based on these conditions we have revised our full-year prospects.

Before I explain figures for 1st Half, I must report to you that we have decided to change our accounting standard significantly. As was fixed at our Board meeting today, and official announcement made immediately thereafter, the standard applied for posting of earnings of our containership business is so-called 'full-loading and sailing method' at present. We understand that there are 3 accounting methods: one is 'voyage completing method'; second one is 'full-loading and sailing method' that we have adopted for a long time; and third one that we determined today is so-called 'percentage of complex transportation method', which is valued as an intermediate method between the first and second ones. In simple terms, it is the way to count earnings on a daily basis. In the 'voyage completing method' all revenues and expenses are recognized upon completion of a voyage.

In the 'full-loading and sailing method', taking the case of this 1 st Quarter for example, freight earnings for cargoes onboard vessels sailing out by 30th June are counted as revenue earned within the Quarter. Expenses related to the cargo will be counted when incurred.

In the view of accountants, the 'voyage completing method' is most conservative, or on the safe side, but I am not sure how clearly they categorize it as conservative. The 'full-loading and sailing method' is not the other end of the extreme, but it is regarded as rather 'non-conservative' in that it recognizes earnings immediately, and costs later. The 'percentage of complex transportation method' is valued as moderation, not as conservative as 'voyage completing' but more conservative than 'full-loading and sailing'.

For guidance, among the three Japanese containership carriers, Nippon Yusen and Mitsui OSK Lines have already adopted this 'percentage of complex transportation method'. Only we, "K" Line, have taken 'full-loading and sailing method' and this made some difference to the outlook of our financial results ; for example, when freight rates are going up, our revenues reflect the rise earliest among the three. This is one of the reasons we have decided to change the method.

Another reason is that in international accounting standards, where there is a lot of debate around nowadays for companies supplying the service, per-diem form is said as most commonly adopted, which means the 'percentage of complex transportation method' for shipping companies.

Although accounting method for Containership Business of course is not an issue concerning international accounting standards, we think it is better for us to use globally common standards as far as we can, considering such case as listing our corporate bonds on London Stock Exchange sometime in the future, or so, which is just an example.

With this change of accounting standard, Consolidated Operating Revenues, Operating Income and Ordinary Income for the 1st Half of Fiscal 2007 are estimated to decrease by 14.0 billion yen, respectively, and Net Income will be lowered by 8.5 billion yen, because their recognition is postponed.

Each of the three accounting methods which I previously mentioned is accepted by accountants, or in terms of tax laws.

In addition, in case of ourselves, even if we continue the 'full-loading and sailing method', using consistent flow in same methods, variation of freight rate, loading factor, etc. are compared coherently.

However, as I mentioned a few minutes before, we decided it is better for us to take more internationally common accounting method as far as possible, considering future benefits.

For this fiscal year, we see positive market and so we will expect to gain moderate profits even without the 14.0 billion yen of Ordinary Income and 8.5 billion yen of Net Income, which is why we thought the time for change was now.

On the premise that we do not recognize the 14.0 billion yen, we revised our forecasts for 1st Half Operating Revenues to 630.0 billion yen, Ordinary Income 59.0 billion yen, and Net Income 43.0 billion yen. Taking Ordinary Income for instance, it will be over our previous estimation announced May 9th by 11.0 billion yen, and by 34.4 billion rise in comparison with the results for 1st Quarter Fiscal 2006.

For guidance, as our revised projection for full-year Fiscal 2007, Operating Revenues will amount to 1 trillion 230 billion yen, Ordinary Income of 103 billion yen, which is not beyond the historical record for Fiscal 2004 but again over 100 billion yen, and Net Income of 71 billion yen, the best record for us ever as Net Income.

Based on this consolidated Net Profit, and since we have proposed 20% dividend payout ratio, the Company will be ready to pay 22 yen per share as full-year dividend for Fiscal 2007, including 11 yen interim dividend, marking a 1-yen rise from the previous estimated interim dividend.

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

Because the 14 billion yen is not recognized in Containership division, in appearance results for the division will show slight loss annually, although they are substantially plus 13.5 billion yen if the 14 billion yen is counted. I suppose we can say about 20 billion yen growth compared to the previous year, which we expected, is achieved.

We also see positive trends for the marine transportation businesses other than containership.

As I mentioned before, we have not revised market conditions, etc. for 2nd Half yet nor until we can see circumstances for the term more clearly. Upon completion of 1st Half, we will again calculate full-year estimation.

As for the market rate to be based for 2nd Half, as far as we now see, present pre-condition figures set on May 9th look slightly weak. We will revise these when we announce 2nd Half prospects with 1st Half results.

B-3. Key Points for 1st Half Fiscal 2007

I believe I have already touched on most of the key points.

B-4. Division-wise Trends for 1st Half Fiscal 2007 Prospects <Containership>

Regarding Containership division, we see continuous stable profit level for the 2nd Quarter, with rate negotiations as of July in Asia/Europe trade, and Peak Season Surcharges.

B-4. Division-wise Trends for 1st Half Fiscal 2007 Prospects <Other Businesses>

We expect to enjoy positive cargo volume trends and buoyant market level overall for other marine transportation businesses.

C. "K" LINE Vision 2008+
C-1. Transition of Major Financial Indices

Going over revised estimation for Full Year Fiscal 2007 with those preconditions, we are now confident to achieve the Operating Revenue target of 1 trillion 100 billion yen, which was set for Fiscal 2008, final year of our interim management plan "K" LINE Vision 2008+, as our revised prospects are now 1 trillion 200 billion yen. I feel it is also highly possible for us to achieve the profit targets.

In this regard, I think we will probably announce new targets for Fiscal 2008 and afterwards at the end of this fiscal year, with our investment plan for Fiscal 2008, 2009, and 2010 having been fixed recently. Based on these figures, we would like to investigate carefully about targets for mid-2010s.

C-2. Progress of Fleet Upgrading Plan

Although only those vessels to be delivered by 2009 are indicated in this table, actually some of them after 2010 have been fixed already. At present we have already grasped a total fleet of 500 ships by the end of Fiscal 2008 in our hands, and a 600-ship fleet as of the end of Fiscal 2011 is now coming within our sight.

We will report about the next new, or extension of this interim management plan, when we are in a position to do so.

C-,R. Cost Reduction Plan

Regarding cost-curtailing progress, we will keep trying our best even if the achieved amount becomes smaller. We expect to save around 8 billion yen for Fiscal 2007, mainly from Containership division.

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

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