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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, and the documents in your hands.

I wanted to meet you here with a bright expression on my face, but I cannot. Even though expected profits for this Fiscal 2006 which ends in March 2007 are prospected to decrease more severely than we experienced in Fiscal 2005, I will do my best to explain in detail.

A. Financial Highlights for Fiscal 2005

A-1. Financial Results for Fiscal 2005

I will start off by talking about results for Fiscal 2005.

As indicated in this slide, Operating Revenues were 940.8 billion yen, and Ordinary Income was 88.6 billion yen, on consolidated basis.

These results are, to put it in a nutshell, a rise in both Revenues and Net Income on year-on-year basis, achieving yet another new high record in Operating Revenues for the sixth consecutive year, and our best Net Income for four consecutive years.

Although Operating Income and Ordinary Income fell sharply by 17 to 18% in comparison with results for Fiscal 2004, we are not seriously worried about the future because we can give a good explanation for that, and nothing fundamentally wrong has happened in our business.

Regarding dividend amount, we are ready to offer 18 yen per share as proposed, 1.5 yen per share up from the previous year.

Reviewing overall, it is notable that the ratio of Consolidated to Non-Consolidated continues to show the same tendency of expanding as in recent years, which we can say indicates that fruits of our group management are being realized step-by-step.

A-2. Key Points for Fiscal 2005 results

As I previously stated, the results could be described as rise in Revenues and Net Income for year-on-year basis, and they are almost as prospected as of this February when we announced 3rd Quarter Fiscal 2005 financial close.

The slight decline from the projection was caused from bunker oil price hike beyond our expectation and freight rate softening in some Containership trades, which became obvious after we released the 3rd Quarter results.

Compared to last year, business circumstances have actually not turned so negative especially in terms of cargo volume, although bulk freight market significantly dropped and containership freight slacked in some routes.

In other business, both oil tanker and car carrier services were fairly stable.

Consequently, looking at the downside factors for Ordinary Income, the biggest one was the jump in fuel oil price, and then the market rate downturn in both bulk and container business.

Our long-concerned Shareholders' Equity reached over 250 billion yen, and DER, about which I understand there has been a variety of discussions, decreased to nearly 1, partly because of the record high Net Income. So, we feel like our financial constitution has become much stronger.

As to dividend policy, although dividend payout ratio was based on 20% of the non-consolidated net income as a guide in "K"Line Vision 2008, we have changed the policy to increase the ratio to 20% of the consolidated net income from Fiscal 2006, ending March 2007, and onward.
Though our offering 18 yen per share for the Fiscal 2005 is counted as approximately 27% of non-consolidated Net Income, we would like to stick to the amount of 18 yen and try to continue at that level even in the future.

A-3. Variation Factors for Fiscal 2005

This table shows factor-wise comparison at the level of Ordinary Income between the results for this Fiscal 2005 and the same period in Fiscal 2004 or our previous prediction for Fiscal 2005.

Actual average Yen-U.S. dollar exchange rate for Fiscal 2005 was slightly over 113 yen per U.S. dollar, which did not fluctuate much.
Sharp rise in average bunker oil price to 285.60 U.S dollars per metric ton from 191.71 U.S. dollars for the previous Fiscal 2004 brought a 25.4 billion yen loss, while it had been set as 283 U.S. dollars in our last forecasts.

Market slump for bulk and container services resulted in 11 billion yen minus factor, though we were able to minimize the effect with plus factor of firm business expansion, etc.

A-4. Major Financial Indices & Vessel Investment

Major financial indices are as mentioned in the left-hand table.
As our Operating Cash Flow was decreased due to profit fall from previous year, and we have implemented our investment plan as scheduled, Free Cash Flow went down into red figures.

As a result, Interest Bearing Liabilities grew by nearly 40 billion yen from last year to 278.2 billion yen, but I have not been overly concerned about that because our overall business scale has expanded, and especially enhancement of Shareholders' Equity has led to an improvement in our financial standing.

During Fiscal 2005, we invested in 46 vessels, including purchase of some that were pre-owned.

Among these ships, which are mentioned in the right-hand table, we can count on larger-size bulk carriers, car carriers, LNG carriers, and so on, as assurance for future stable profits.

ROE has become lower due to Shareholders' Equity growth, although this is just a trade-off relation.

A-5. Outline of Division-wise Results Fiscal 2005 for Container Business

Reviewing division-wise results, Containership business revenues increased but profits decreased in year-on-year comparison.

Ordinary Income for this segment was 30.5 billion yen, as publicized in our "Financial Highlights," down by 9.5 billion yen from the previous 40 billion yen.

With deliveries for our newly-built fleet, business scale has expanded steadily. This is especially true for our trunk lines, so-called east-west loops, in Asia-North America and Asia-Europe trades, where total loaded volume rose by 150 thousand TEUs or 16% from previous year; including 100 thousand TEUs for the route from Asia to North America, and 50 thousand TEUs from Asia to Europe.

Containership service overall, including returning leg for trunk lines, intra-Asia trades and north-south trades, loaded cargo volume went up by 7.8% to total of 2.65 million TEUs

As to freight rate level, which would be a point of interest, for Asia-North America loops it was not so much affected by market fluctuation as mentioned in this slide because it was usually negotiated once a year through Service Contracts, but for Asia-Europe loops, in practice, considerable fall was observed from the end of last year due to actions by some shipping companies.

I can tell you that when I visited Europe in this March, after reviewing and issuing the new "K"Line Vision 2008+, some analysts there asked me about fear of freight going down in Europe area, and we had actually observed the freight level drawn down to a certain degree at that time.

However, just after Chinese New Year, usually several weeks are required for cargo flow to pick up, but this year it soon began showing a really favorable mood however, we have faced a very odd situation that in spite of massive cargo volume, with cargo even overflowing in some loops, freight rates have fallen.

We gave instructions to all our agents worldwide not to lower the rate anymore than affected by the circumstances, because by necessity cargo volume would stay positive for some while. Now, we understand the rate level has already hit bottom.

For Asia-Europe trade, we recognize that it bottomed out by the end of March, and now we feel we do not have to worry about any further drop, or rather, we are trying our best to restore freight rates.

As you can see in this slide, freight levels for trans-Atlantic and intra-Asia loops were up.

In general, for trades other than Asia-Europe, we do not see any significant change.

We are also relying on our Cost Curtailing Campaign, but any way, the biggest impact was effect of the steep fuel oil price rise, which is calculated at nearly 19 billion yen for Container business division.


A-5. Outline of Division-wise Results Fiscal 2005 for Bulk Carriers

For bulk carrier sector, as touched in the slide "A-4 Major Financial Indices & Vessel Investment", due mainly to an additional 21 vessels, including purchase of second-hand ones during Fiscal 2005, operation scale was enlarged to show almost 3% growth in operating tonnage from the previous year.

However, because market freight level went downward throughout the year by roughly 40% from last year, profits were reduced while there were some signs of rebound in the 1st half.

Regarding cargo movements, when bulk market, especially cape-size, dramatically rose in 2004, the factor of strong iron ore demand in China was the primary background, and now that trend still remains unchanged.

China's crude steel production in 2005 is said to have been approximately 350 million tons, and the production from January to March this year was 370 million tons on annualized basis. Iron-ore imports last year were 275 million tons and annualized first quarter 2006 results were 320 million tons, so we see the China Factor is still the underlying support for the bulk market, or could be a contributor for a stable market trend at least for awhile.

A-5. Outline of Division-wise Results Fiscal 2005 for Car Carriers

In this sector, basic business conditions have been really favorable, especially overseas sales by Japanese auto manufacturers have been remarkably positive. With 8 new ships delivered within Fiscal 2005, all of them will be fully contributing to our profit from this Fiscal 2006.
Overall the total number of cars carried steadily moved upward.

Though basic business mood reflected a good trend, our profit was somewhat decreased due to hike in bunker price and spot charter rates that were inflated for short-term charter vessels to fulfill such a strong export demand by our customers. The cargo prospects for near future are still growing, and so as new ships are delivered one-by-one, they will improve our profitability.

A-5. Outline of Division-wise Results Fiscal 2005 for Energy Transportation

In the LNG sector of our Energy Transportation business, 4 new ships were completed as scheduled, which will increase our profit level little-by-little.

Our Thermal Coal Carrier sector was in very good trend because demand for electricity was at a high level, and power companies were seeking coal as a relatively low-cost fuel for power generation due to the steep rise in crude oil price.

I can report that the Tanker sector was stable, in general. Although market indications declined from previous year, AFRA-Max tanker business operated through our Singapore subsidiary "K" Line Pte Ltd earned a fairly good profit.

B. Prospects for Fiscal 2006

B-1. Prospects for Fiscal 2006

Prospects for Fiscal 2006 are indicated in a sentence as revenues growing and income declining.

Ordinary Income is expected to fall by 28.9% to 63 billion yen on year-on-year basis, despite our seeing revenues going over 1 trillion yen.

Although the revenue level will fluctuate according to freight market level, thanks to business expansion we will be able to, or want to, achieve 1 trillion yen within this Fiscal year 2006, although we thought it would take a few more years.

Expected Net Income is 45 billion yen, almost 28% drop.
Premises for those figures were Yen-U.S. Dollar exchange rate set for 1st Half of 115 yen per U.S. dollar, and 110 yen for 2nd Half, with yearly average being 112.5 yen.

Although we now feel the assumption of 115 yen per U.S. dollar for 1st Half might have been wishful thinking, I now believe we will be able to manage a 5 yen up per half year, which would lower profit by about 2 billion yen.

Bunker oil price is set at 350 dollars per metric ton during Fiscal 2006, which, we can say, would be roughly equivalent to the level of 70 U.S. dollars per barrel for WTI crude oil price, or 64 U.S. dollars for Dubai.

B-2. Key Points for Fiscal 2006 prospects

As indicated in this table, the biggest negative factor in our prospects is Containership freight rates, especially for Asia-Europe trades, which we must try very hard to increase, although restoring rates once they decrease is really tough.

The next factor is buoyant bunker oil price. When establishing "K"Line Vision 2008+, as of this March, we had assumed exchange rate of 110 yen per U.S. dollar, and fuel oil price at 300 U.S. dollar per metric ton. However, we were forced to change our latter precondition to 350 U.S. dollars. How we can cope with oil prices will be our most important assignment in future.

In the beginning stage, when bunker oil prices first started to climb, it was prospected to cool down within a certain level.

Of course I am not an authority on oil, or bunker fuel, and have heard views of various experts, many opinions being that such oil price hikes would just be temporary. Some said WTI would peak out around 60 U.S. dollars.
However, the majority recently seem to say there are no factors to cause oil price to drop significantly. I think we will just have to manage our business based on this high level bunker price for awhile.

In consequence, and maybe this will be mentioned again later, regarding cost reduction or rationalization of operations, it's true that we have to try to tackle this issue but not with not superficial measures, but rather with fundamental ones which I have ordered each operating division to work out, including review of service routes in Containership business.

B-3. Division-wise prospects

Business-wise market situation has not changed so much during the last 3 months.

To encourage ourselves, present cargo movements for containership trades have really been powerful, and so we must find the way to recover freight rates that have already dropped.

Furthermore, earnings from Containership Division for this fiscal year are forecasted as considerably low which management of our company cannot accept. "K"Line Group companies as a whole will try to work hard on a global basis for freight restoration, and partly because of such tremendous cargo demand, we are confident we can succeed.

As the other business sectors have generally been in stable condition, I feel we do not have to be too anxious, except for fuel oil prices.

C. "K" LINE Vision 2008+

This is in connection with "K" LINE Vision 2008+ publicized in March this year,

C-1. "K" LINE Vision2008+ assignments

The primary theme is as indicated here :"Sustainable growth and establishment of a stable profitability structure"

For the 4 assignments in this slide we have already started to implement concrete measures.

We continuously keep widely expanding our business scale as scheduled.

In our management plan, our fleet-size will reach 500 vessels by the end of Fiscal 2008, and then by mid-2010's it will grow to 700 vessels.

Factors preventing the Plan from being achieved would, if any, be human resources to bring it to realization and ship operation administration structure for safety in navigation of such a big fleet, which will be the most important tasks for all of us in the "K"Line Group.

Regarding these points, we are now developing not only ideas, but a firm action plan, about which we will be able to make an announcement shortly.

C-2. "K" LINE Vision 2008+
Fleet upgrading plan achieving maximum investment efficiency

Regarding vessel investment plan for Fiscal 2006, a total of 53 are scheduled including purchase of pre-owned ships, which is the biggest number during the 3 consecutive years starting from Fiscal 2006.

At present, 26 of 53 are planned to be on-balanced.
As we receive these new ships one-by-one, our profitability should be much improved.

C-3. "K" LINE Vision 2008+
Cost Structure Reform

As to cost structure reform, we have continuously tried our best to achieve maximum cost savings.

As I touched before, we are keenly developing ideas in that regard including even some fundamental approaches that we might have to execute in some situations, which is the reason why we call this cost 'structure reform'.

C-4. "K" LINE Vision 2008+
Major Financial Indices & Shareholder's Equity Reinforcement

Major financial indices are as mentioned in this last slide. Again, due to rise in investment amount and drop in operating cash flow from profit decline, interest bearing liabilities are expected to rise, reaching around 340 billion yen.

As this is because investments support our future profit structure, we will continuously think about various ways of financing, or how to own vessels to enhance corporate financial standing generally.

I almost forgot to comment further about dividend. As announced previously, from this Fiscal 2006, we intend that our dividend ratio will be based on 20% of consolidated Net Income.

As I have repeatedly said, we take the amount of 18 yen for the previous year very seriously.
Although profits for Fiscal 2006 are now forecasted to decrease to some extent, we would like to hold same amount of 18 yen per share instead of making any cut, which amounts to 24% as consolidated dividend ratio.
This decision is partly because cargo volume is prospected to be in favorable trend overall and delivery of new ships will improve our profitability in the future, as I have mentioned earlier.

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

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