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Explanation by article

Ladies and Gentlemen,

Thank you for joining us today. I will explain according to the Power Point slides in front of you.

A-1. Financial Results for 1st Quarter Fiscal 2006

During this 1st Quarter 2006, as is well-known, we earned more in sales, but less in profits than in the 1st Quarter during Fiscal 2005.

Operating revenues grew 14% for a year-on-year basis, in line with the trend of our projection announced on May 11th at the time of our Fiscal 2005 yearly financial close, although ordinary profits fell by 58% from last year and just touched double digit, 10.1 billion yen.

As indicated in this slide, with average exchange rate being 115 yen per one U.S. dollar, just as we had assumed, and bunker oil price not having reached our previous estimation of 350 U.S. dollars per kilo ton, I suppose we can say the pre-conditions are almost as expected.

I will provide explanations about division-wise results later.

A-2. Variation Factors for 1st Quarter Fiscal 2006

As I stated earlier, the results can be described as rise in Revenues and fall in profits for year-on-year basis. The factors that increased income were business expansion in line with our management plan, and we can also include the effect of a lower yen, which was 7 yen below last year's 1st Quarter.

Among the negative factors for income, the first to be mentioned is freight rates going below our expectation in some containership trades, which significantly dropped from the previous year.

Then, dry bulk market was slightly under our presumption, and at a notably lower level compared to last year.

The biggest factor was still the hike in fuel oil price.

You can see factor-wise effects listed in this table. Cost increase with the 'Market Volatility' or 'Business Expansion' consists of various complex factors, with 'Bunker Oil Price' being the biggest as an individual factor.

A-3. Outline of Division-wise Results in 1st Quarter Fiscal 2006 for Container Business

In containership business, which is the major part of our core businesses, revenues increased but profits decreased from the previous year.

As the results for this individual division have been publicized as 'Sanko Joho' in 'Kessan Tanshin' since the last fiscal year, the division-wise Ordinary Income is minus 3.4 billion yen, 12.7 billion declining in year-on-year comparison.

The background for this decline, quite simply, is the market rate downturn especially in Asia-Europe trade, which appeared last autumn, by nearly 300 dollars per TEU in comparison with the rate for peak season during last fiscal year.

We have been tackling this with rate restoration from this April and July, and even in October, which I suppose has succeeded in small steps.

In the beginning of this fiscal year, to be more precise, since this January, our most important mission in this sector had been to stop this freight rate fall, for which I gave strict orders to our group members in Europe and the Asian region. As a result, we were occasionally forced to give up some portion of cargoes in order to maintain average freight rate level.

Now, we have confirmed it has bottomed out and we are taking some measures for further recovery during the summer peak season, and we have some, but not really 100%, confidence in the results of rate restoring negotiation for July and afterwards. Therefore, we expect freight rates will continue on with an upward trend.

Vessels that have been added to our newly-built fleet have started service, and trading volume itself has been quite positive with 7.5 % rise for year-on-year basis. So as we achieve further rate restoration, in line with cargo trend that will still be favorable at the time, we do not feel that we have to be so serious about this deterioration, even if the results are short from those of last year.

Of course, we well recognize the seriousness of this situation, and we want containership business to again return to profitable level by way of structural measures and making efforts for rate restoration.

Trade-wise freight up and down ratio was as indicated in this slide; that which was weakest is the rate for service to Europe from Asia, down 18% from the previous year.

As I mentioned before, our bunker oil price prediction had been set as 350 dollars a metric ton, but in reality the price was below our expectation. However, the hike in crude oil price affected not only the bunker fuel for ships but also diesel oil for trucks, as we have experienced even in Japan nowadays, and other cost factors in many fields, which rebound off as the 'variation cost increase' in this table such as cost for feeder, trucks, etc.

'Booking expense for purchase of containers one-time' indicated on the bottom of the slide was specific item for this 1st Quarter and amounted to about 700 million yen, which was cost for purchase of second-hand containers posted one time. Companies can choose whichever way to record the fee as either long-term lease or put it at one time. We adopted the immediate way considering future strategy.

A-4. Outline of Division-wise Results in 1st Quarter Fiscal 2006 for Dry Bulk Carriers

For bulk carrier sector, again compared to last year, revenues increased, but profits decreased.

Due mainly to delivery of additional new vessels, operational scale was steadily enlarged to show almost 12% growth in operating tonnage from the previous year.
Here, demand for transportation itself has also been solid during 1st Quarter, however, market freight level went considerably downward for year-on-year basis.

Taking an example from this table, cape-size market dropped by over 30% from last year, which was one of the factors causing profit drop.

This might be touched on again later, but cargo movements here are quite strong at present.

Although we faced a tentative dip in the market for awhile after April due to China withholding purchase because of iron ore price negotiation being extended, it is still positive in the medium run.

Among these descriptions for the markets in the slides, it is particularly notable that charterage for Handy-max bulkers has been pretty favorable and exceeded even Panamax market, while Panamax and Cape-size freight levels have rather softened, which might be an effect from the huge demand from China.

A-5. Outline of Division-wise Results in 1st Quarter Fiscal 2006 for Car Carriers

In this sector, total number of cars carried moved upward by over 17% from the same period last year, thanks to such remarkably positive exports centering on smaller cars by Japanese auto manufacturers.

However, as this situation has continued more than one year, because the transport demand has been so strong, ship supply and demand condition has gone beyond tight to being almost stuck.

To fulfill such a strong export demand by our customers, we have had quite strained ship operations, and so our profit has not grown. For that reason, despite revenues having risen, profit level is flat compared to Fiscal 2005.

We see this severely tight supply and demand situation continuing for awhile. So, we have changed our policy to keep using vessels for the time being until they are 30 years old, which is not what we decided in this Quarter, and for that purpose we have raised reserve for additional dockage to provide life-extension work on several ships to result in some pressure on profits while our former policy was to deploy so-called 'core-fleet', our group owned vessels, for 25 years, and long-term chartered vessels for 20 years, basically, and to make long-term maintenance plan under this policy. Of course, as this enables us to use fully-depreciated vessels, those with lowest cost, for longer time by giving some additional care, average ship cost will become lower in the long-term.

A-6. Outline of Division-wise Results in 1st Quarter Fiscal 2006 for Energy Transportation

In our Energy Transportation business, total revenue and profit both grew.

In the LNG sector, our fleet has been operating as scheduled and contributed to improve our profit level to some extent, but it will take additional time to bring profits into full swing, that is, double-digit billion yen. In the long run, we expect this business will also become one of our main business pillars, and so we are now trying hard to keep expanding it even further.

For the Tanker sector, as you know well, we regrettably do not have any free portion at present for VLCC, and that, in a sense, is isolated from the freight market.

Our fleet of 10 AFRA-Max tankers managed through our Singapore subsidiary "K" Line Pte Ltd is the only section that earned more profit than last year, enjoying slightly better market although profits decreased in other businesses, especially containership and dry bulkers.

As there is no variation in our Energy Transportation business, in general, we see demand for energy from China and other emerging economies growing strongly in the future and would like to continuously emphasize this sector as well.

A-7. Outline of Division-wise Results in 1st Quarter Fiscal 2006 for Other Businesses

Although it is difficult to evaluate the results of only one Quarter, the Short Sea/Coastal Shipping sector which had made comparably stable profits shows a trend toward decline due to fuel oil price hike. This could be a concern for the future, but I feel we do not have to worry about it too seriously as it has been reported that they are trying to obtain longer-term contracts and secure more stable profit.

Logistics business also reflects active cargo movements, with results being better sales and profits compared to last year. As you probably know, in this July two of our "K" Line Group subsidiaries, ex-"K" Line Air Service, Ltd. and ex-"K" Logistics Corp., were merged into one new company, "K" Line Logistics, Ltd, which has targeted total streamlining of our logistics businesses through integration of all activities of our air forwarding and marine forwarding arms. I feel that we are just now on the starting line thanks to this consolidation. I have expectations to bring up this business to sales of 150 billion yen or so after 5 or 10 years.

This concludes the outline for the results of 1st Quarter Fiscal 2006. Next, I will explain about our prospects for the future.

B-1. Prospects for Fiscal 2006

With profits diminishing in the 1st Quarter in comparison with our estimation made in May, prospects for Ordinary Income in the 1st Half as a whole have been reduced by 6 billion yen, in other words, down from our initial target of 32.5 billion to 26.5 billion.

In the 2nd Half, regarding containership business as mentioned before, cargo movements are prospected fairly well. We have confirmed that freight rates have bottomed out, and we still have an intention to take various measures for further rate restoration, and we also have some rather drastic ideas for reducing costs, especially bunker oil cost. Even if we conduct all these actions, we feel there will still be some slight difficulty for any remarkable recovery in containership earnings.

Though we had expected 3 billion yen plus income for our annual business as of May, it is unavoidable that it will most likely end up in the red.

However, in non-containership business, because trade volume is now quite strong overall, and dry-bulk market is noticeably on the rise, we will be able to roughly make up for the fall in containership earnings. In this regard, we did not change our forecast for 2nd Half from what we had announced May 11th. We will be investigating each factor in detail before making our 2nd Half projection.

Yen-U.S. Dollar exchange rate is set as 110 yen per U.S. dollar, and bunker oil price is at 350 dollars per metric ton for 2nd Half, same as the premises used in May.

Although profit for 1st Half Fiscal 2006 is now forecasted to come down by 6 billion yen from our earlier expectation, we would like to hold same amount of 9 yen per share interim dividend, and 18 yen per share on full-year basis just as already announced.

Although it depends on the trend in the 2nd Half, as I commented before, if it is confirmed that our container business is indeed bottoming out and restoration can be expected to some extent, I believe recovery after next financial year is promising, and I would like to maintain our 18 yen dividend for this Fiscal 2006.

B-2. Key Points for Fiscal 2006 prospects

I have already touched on most of the key points. Trend for 1st Half follows about the same as for 1st Quarter when there was 6 billion yen loss from our prospects made in May. Therefore, this completes 2nd Half prospects just as I have explained.

B-3. Division-wise prospects

Containership division is just as was described earlier.

For non-container business, especially dry bulk business for instance, current cape-size market rate is indicated as 46,000 U.S. dollars per day, but in reality it has already climbed to over 50,000 dollars now, so I feel we do not have to be too overly anxious about this. We can also count on newbuildings that are to be delivered.

In Car Carrier business, the tight supply and demand situation continues. As the 8 new ships delivered within Fiscal 2005 are in smooth operation and fully contributing to our profit, rather stable business conditions will be maintained.

In Energy Transportation, AFRA-max market is now over our estimation as of May, and so here we can also earn rather positive profit.

B-4. Cost Reduction

Regarding cost reduction, which includes even so-called "leaf picking", or the piling up of very small pieces of cost saving items, as we have explained each time we meet with you, especially in containership division, we have saved bunker oil to a certain extent by taking more carefully-crafted measures such as speed reduction within existing operations even before the drastic methods that are to be introduced henceforth.

For example, navigating containerships at most economical speed resulted in nearly 600 million yen savings during 1st Quarter alone, and we will continuously endeavor to keep saving as well in each future Quarter.

Including all the effects listed in this table, we expect about 9 billion yen in total cost reduction.

B-5. Fleet Upgrading Plan

To be perfectly honest, since releasing our forecast for this fiscal year on May 11th, I have felt company prospects for the full year will be slightly tough in general, because of the slack in the containership market. However, we can still expect bright hope for next year, Fiscal 2007 and thereafter, even though it is still too early now to talk about next year, with only just the 1st Quarter having been completed. That is because, as mentioned in this slide, we received 38 new ships in Fiscal 2005, and for this Fiscal 2006, a total of 47 newly-built are scheduled for delivery. The number includes vessels for short-sea, or containerships, so new ships for non-liner business have been counted between 30 and 40 for each year.

These vessels were all ordered before shipbuilding costs rose so sharply. When all of these are delivered during next year, all 70 will become fully operational. Therefore, I feel we have so much to look forward to in our performance for next year.

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

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