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Explanation by article

Ladies and Gentlemen,

Thank you very much for sharing your time to join us today.
It is a pleasure to share this report with you on "K" LINE's Fiscal 2004 1st Half consolidated and non-consolidated financial results, and our prospects for the financial position for full-year Fiscal 2004, which were disclosed on November 11th.
Assuming that you might be most interested in the premises for the 2nd Half prospects, I would like to take a little longer time for that subject.

<A. Financial Highlights for 1st Half Fiscal 2004>

In this table, the first column in red letters shows results for 1st Half Fiscal 2004 that ended September 30, 2004. In each column in the table, the upper row shows consolidated figures and the lower row non-consolidated. I will talk mainly about consolidated performance.
The next column shows financial results for previous 1st Half. The next two columns provide comparisons between 2004 and 2003, and the next column, second column from the right, shows the latest half-yearly prospects published August 5th following announcement of Fiscal 2004 1st Quarter financial status.

Our Operating Revenues for this 1st Half were 413.6 Billion yen, 14 % up from the 1st Half Fiscal 2003, which I feel is fairly good. As we have achieved historical high records in both revenues and profits, Operating Revenues of over 400 Billion yen is what we have wished for for a long time. As you can see, 61.9 Billion yen of Ordinary Income is better than Operating Income 60.3 Billion yen, and is because of Exchange gains.

Regarding Net Income, you probably have greater interest on the non-consolidated 27.2 Billion yen because dividends are paid based on that amount.
As we announced upon disclosing Fiscal 2004 1st Quarter financial status on 5th August, our basic concept for dividends is continuous stable payment of 10 yen per share annually, and that we will try our best to return even more benefit to our shareholders when we achieve better results than expected, based on an appropriation of around 20 percent of net income on a non-consolidated basis.
In accordance with this policy, we have announced 7.5 yen per share as interim dividend, as prospected previously, and we currently intend to pay a total of 15 yen per share for this year.

Net Income result of 27.2 Billion yen is 0.8 Billion Yen short of previously prospected 28 Billion yen. This is because of extraordinary losses resulting from introduction of asset-impairment accounting, as mentioned at the bottom of the table.
The loss amounted to 7 Billion yen on consolidated basis, and 4.7 Billion yen on non-consolidated basis.

As many of you may remember, application of asset-impairment accounting during this 1st Half financial closing before being legalized had been scheduled, and some extraordinary loss from this was prospected since the announcement of this year's 1st Quarter results.

However, there is one asset included with much larger unrealized loss than we had estimated. It is a small piece of land we held for off-dock container pool area behind our Rokko Container Terminal in Kobe, Japan. When we and Maersk K.K. were in joint lease contract for the Rokko Container Terminal with Kobe Port Terminal Corporation at the beginning of this fiscal year, we had expected useage of the land to complement our services. However, as our operations in the terminal resulted in being more efficient than expected, we found that the land is no longer needed and so it is regarded as dormant. Actually, we have been trying to sell the land, or utilize it for some other project, but we have become aware that value of land in this area is much less than our estimation according to actual trading prices in the neighborhood. Thus, the extra-ordinary loss became larger than our previous prospect.

Extraordinary loss from other factors than the asset-impairment accounting is almost as expected.

The ratio of Consolidated to Non-Consolidated is around 1.25 in every item of Revenue or Income in this 1st Half, about the same tendency as last year, although we have felt it is roughly 1.3 for a long time. Recently the ratio has tended to decrease as improvement in Non-Consolidated-basis business, or our marine transport business, has been better than in the freight forwarding or harbor transport business which has grown rather moderately.


<B. Business Environment for 1st Half Fiscal 2004>

Business environment for 1st Half Fiscal 2004 is just as shown in this slide.
In the US , as you know, both Capital Investment and Consumer Spending have been increasing and the economy has been in an upward trend in this 1st Half.
The economy in the E.U. has sustained a strong position due to economic vitalization within the enlarged E.U..
In the area of Asia other than Japan, exports from Asia to the U.S. and E.U have both been increasing, and on the other hand, domestic consumption has also been growing nowadays, and so imports into Asia have been expanding as well, with Japan's situation having steadily improved, as you are aware.

As an overview of our business condition in the 1st Half, in containership business, as you know, we succeeded in achieving some freight restoration in trades between Asia and both North America and Europe, which we call 'East-West' routes or 'trunk' lines, and the same is true in trades between South and North where container movement has become very active these days.

In specified carrier services, bulker and tanker business could enjoy a very favorable freight market situation.
In car carrier business, exports from Far East to the U.S. E.U., and Australia have increased steadily. The fact that car sales in the U.S. are expected to mark 17 million units annually has especially made us feel that we are moving up to a different stage.

All these are 'plus' factors, but we can see some 'minus' factors for our business as well. One is increased bunker price, and the second is the hike in charterage, which are the other side of the increase in freight rates in the market. Then, the delay in cargo operations on the U.S. west coast has lowered turnover in vessel operations and container movements. We have taken necessary counter-measures for those factors by way of skipping ports to maintain service schedule or so, even though that has caused us considerable extra cost.

<C-1. Trend of Division-wise Results in 1st Half Fiscal 2004 for Container Business>

The number of containers loaded increased by about 10% from 1,130,000 TEUs in the previous 1st Half to 1,250,000 TEU's.
Background of this remarkable growth, of course, is the positive cargo flow from China, especially in Asia-Europe and intra-Asia trades.
Freight restoration in Asia-Europe and Asia-North America trades has been realized, about which you can refer to in the graphs for trend of average freight rate in the "Supplementary Report."

As to our own business factors, we started new services in Asia-Aegean Sea trade, which was really a timely implementation and is doing well; and we did the same in North and South America East Coast trade, which also started with quite a favorable trend. In addition, we increased frequency of services between Asia and Southeast Australia trade.

Those are factors of business expansion that contributed to profitability. However, hike in ship-charter rates, higher fuel oil prices and rise in value of Japanese Yen against U.S. Dollar mentioned at the bottom are common negative factors among all of our business segments.

<C-2. Trend of Division-wise Results in 1st Half Fiscal 2004 for Bulker and Car Carrier Service>

In the Bulker sector, as mentioned previously, we could enjoy very favorable market conditions with every type of bulker.
The market slumped temporarily in the beginning of this 1st Half, which you can see in the bulk market graph in Slide 1-10 of the 'Supplementary Report,' but it has now again rebounded and to a historical high level overall.

Operating tonnage in Bulker sector stayed almost at the same level as 1st Half Fiscal 2003. So, the reason we could achieve such a noticeable improvement in this sector was the positive freight market. Let me explain here in more depth as it will have further effect in the future.

As I commented during the meeting in May for Fiscal 2003 yearly results, in the sector of Thermal Coal Carriers some trades turned unprofitable during the year because we were faced with serious vessel shortages to meet some of our cargo contracts as a result of extraordinarily heavy congestion at loading ports, and were forced to charter vessels from the escalating short-term charter market even though we had secured a good number of vessels specified for thermal coal transport.
In this 1st Half, Bulker business was favored by both a good level in the freight market and high ratio of vessel operation without such severe port congestion. As a result, free vessels in our bulker fleet could successfully enjoy the high level of the freight market. Now, please kindly note that in this 2nd Half this favorable situation is changing as I will mention later.

As to Car Carrier sector, the sale of cars in the U.S. has been very positive, and exports from both Japan and Korea to the U.S. have been growing significantly. We could enjoy total volume increase of 53% for a year-on-year basis. Cargo movement from Asia to both Europe and Australia has been stable, and in off-shore trades the number of cars carried increased remarkably despite our having been holding a limited number of PCTC's in our fleet, and having to charter some additional ro/ro vessels from the market at higher charterage, although we minimized cost-up through achieving more efficient vessel operation.

<C-3. Trend of Division-wise Results in 1st Half Fiscal 2004 for Energy Transportation>

Energy Transportation covers services for LNG, Thermal Coal, Crude Oil and oil products.
Our 24 LNG Carriers in various trades, including trade for new projects, maintained stable operations and profitability, although operating tonnage decreased slightly because one of them was dry-docked for periodic inspection. Except for this factor, operating tonnage has increased as a whole.

In Thermal Coal Carrier sector, with delivery of a new vessel in the 1st Quarter, cargo carried increased, and additional charterage caused from vessel shortage in the previous year due to severe delay in vessel operations was eliminated. In this 1st Half, profit level in this sector has recovered to a stable level.

For Tanker sector, a new VLCC delivered in the 1st Quarter could enjoy buoyant spot market freight rates within the 1st Half. A fleet of so-called AFRA-Max, middle-size tankers, operated by our subsidiary in Singapore also enjoyed this high level market. However, in the 2nd Half, this newly built VLCC will not enjoy the same present record high freight market level, as she has been committed to enter into a long-term contract with a new customer in Japan according to our policy to develop this small section with stable long-term contract-basis business. In that regard, I believe we have made a wise choice considering the long-range perspective.

<C-4. Trend of Division-wise Results in 1st Half Fiscal 2004 for Consolidated Subsidiaries>

Coastal Shipping and Ferry services around Japan, mainly operated by Kawasaki Kinkai Kisen Kaisha, Ltd., another listed company in our group, have been stable. Despite such negative factors as weather, being hit by a record number of severe typhoons this year, they could secure good levels of revenue and stable income. They also managed Short Sea tramp services with smaller bulkers, which has also been a trend just the same as with our own Bulker Service and earned fairly good income, which I suppose they themselves would explain in their analyst meeting.

In Air Forwarding section, both Operating Revenue and Income increased as air cargo transportation has been expanding nowadays, as you are aware. In the Freight Forwarding/Harbor Transportation segment as a whole, along with the increase in container handling volume of our own Container Business, together with that of other marine transport companies, cargo movement has stayed strong and we could enjoy better revenue and income.

<D. Outline of upward/downward Profit Factors for 1st Half Fiscal 2004>

This slide shows outline of various upward/downward Profit Factors which I have previously mentioned. The left side figures show comparison between prospects announced on August 5th when disclosing Fiscal 2004 1st Quarter financial status. I suppose you can see changes more clearly from those on the right side showing comparison with results of the 1st Half of Fiscal 2003.
Negative effect from increase in exchange rate and bunker price totaled 6.5 billion Yen. Market fluctuation, or improvement, amounted to 21.7 billion Yen. Business Expansion was 7.6 billion, and Cost Reduction & other factors 8.7 billion, We can see an overall 31.5 billion yen improvement for year-on-year basis.

<E. Prospects for Fiscal 2004>

Next, I will talk about Fiscal 2004 yearly prospects, an area in which you perhaps are most interested.

Comparing our revised prospects for Fiscal 2004, mentioned in the column below the small letter (a), to the results for Fiscal 2003 in the far right column, you can see considerable improvement is expected. Assumptions for the 2nd Half are indicated at the bottom of the table: bunker price is set as 200 U.S. Dollars per kilo ton and Yen/U.S. Dollar exchange rate of 105 Yen per U.S. Dollar, while actual results for the 1st Half are based on 184 U.S. Dollars per kilo ton and 109 Yen per U.S. Dollar. Yearly prospects are the average of results and expectations.

The key points for this 2nd Half would be less profitability than 1st Half, which you might question. First, negative effects of increase in exchange rate and bunker price is estimated at 4 billion Yen in total. In addition and compared to the 1st Half, container cargo volume is slightly decreased to reflect the seasonal winter 'slack' factor.

In the bulker sector, as touched on previously, very tight supply-demand situation is expected to remain in the present 2nd Half, with some continued port congestion causing slower vessel operations. So, more vessels in our fleet are deployed for contracted cargo, and so number of cargo contracts from spot market will decrease compared to the 1st Half.
Then, also as I mentioned, a VLCC operated in the spot trades during 1st Half is going into long-term contract starting in the beginning of 2nd Half, and so profit here will not reach the same level as in the 1st Half.

Extraordinary losses caused from adoption of asset-impairment accounting in this 1st Half total 7 billion yen on consolidated basis, and 4.7 billion yen on non-consolidated basis. In the 2nd Half, about 2.5 billion yen of extra-ordinary loss is expected, mainly from disposal of some assets such as an office building or so owned by affiliated companies.

As we have explained for several years, we have sold economically non-efficient vessels with higher cost than the market in order to steadily strengthen our financial constitution, and now with the loss from asset-impairment accounting and 2.5 Billion yen in this 2nd Half, I believe all of our major items that cause extraordinary losses have been elaborated. Of course, some small items like golf club memberships, or so, still remain but items with considerable amount of value are cleaned up as far as we know at present.

Net Income on a non-consolidated basis is expected to be around 47 Billion yen, and so we intend to pay 15 yen per share as annual dividend as previously prospected. Based on this expectation, dividend payout ratio is estimated as 18.9%. Some of my staff have suggested that we should consider to pay more since our policy for dividend is 20% payout, but I would like to make sure how things are progressing for a little bit longer as there are some factors remaining that could still fluctuate in our prospects. So, about the time that the 3rd Quarter results are announced, or, when we can be more confident of yearly prospects and we can clearly see trends for next year, I will announce annual dividend amount. Today, I can just report that expected amount of annual dividend is 15 yen per share.

<F-1. Trend of division-wise prospects for Fiscal 2004 for Container Business>

The trend in Container Business, our core business that earns us around 52 or 53% of our revenue is an especially important factor in the performance of the 2nd Half. As to the business environment for the 2nd Half, exports from Asia to the U.S. and E.U, or to put it differently, imports by the U.S. and E.U., along with the shift in international production, keep increasing. Economics in the enlarged E.U. area especially look very vigorous and continue to extend more than in the U.S. A hike in fuel prices and cost increase in operations on the west coast of the U.S. are counted as negative factors.

As for business strategy, we have already publicly announced that delivery of 8 newly built 4,000-TEU Panamax-size containerships started in this Novemember, which we will first deploy into services between Asia and the U.S. Pacific Northwest, avoiding the chaos experienced earlier this year in the Los Angeles and Long Beach area. The older and smaller vessels replaced by the new 4,000-TEU vessels are being shifted into a new service between Asia and the U.S. East Coast.

All these transformations will be completed by next summer. I suppose how much additional profit this increased capacity will make would be a key point. Although container volume usually drops significantly in the winter season, which has been modified to some extent recently, we expect rather stable cargo movement to continue during the coming winter season, and the additional capacity in our PNW and U.S.East Coast services could contribute to increase the overall loaded volume, but that cannot be seen yet. We expect some downward adjustment in freight rates during the winter based on the assumption that cargo movement will become slightly dull.

<F-2. Trend of division-wise prospects for Fiscal 2004 for Bulker & Car Carrier Services>

In the Bulker sector, general situation seems to be really favorable because of strong demand for raw materials, and vessel capacity reduced due to vessel operating ratio falling as a result of heavier port congestion. However, as I touched previously, in this 2nd Half we see income earned here is declining because the number of vessels enjoying historical high level of spot freight market will decrease due to our policy to secure longer term contracts especially for cape-size type, which is, we can say, a kind of profit guarantee for the future. So, the 2nd Half prospects are less than the 1st Half results in bulker section, but this does not mean overall business conditions are turning worse.

Car Carrier Service is prospected on the basis that present trend remains unchanged, or rather units to be carried will increase somewhat in the 2nd Half.

<F-3. Trend of division-wise prospects for Fiscal 2004 for Energy Transportation>

Within our Energy Transportation business, the LNG Carrier sector seems to maintain continuously stable profit even as a new project starts.
Thermal Coal Carrier sector is also developing steadily, and so far we do not see any loss being caused from vessel delays due to congestion at ports as previously happened. However, vessel demand/supply situation is still very tight, so we still have concern that severe congestion at ports might be repeated, which could lead to shortage of vessel capacity and force us to charter more vessels at buoyant spot charter market prices in order to fulfill our cargo contracts.

In the Tanker business, our VLCC fleet is covered by long-term stable contracts, as I commented before. Some AFRA-Max and LR2-type product tankers are expected to enjoy spot markets.

<G. Outline of upward/downward Profit Factors for Fiscal 2004 >

These are factors that cause yearly prospects to fluctuate. Compared to figures for the previous year shown in the column to the right, total negative effect from exchange rate and bunker oil price factors is 11.8 Billion yen. Positive effect of market is plus 35.6 billion yen; business expansion 7.5 billion yen; cost reduction and others 11.1 billion yen, with Net 42.4 billion yen improvement.

As indicated in lower part of this slide, we can see that just 1 Yen rise in exchange rate negatively affects income by 1 billion Yen annually, and increase in bunker oil price of 10 Dollars per ton has about 2.3 billion Yen negative effect per year. Probably many of you are wondering how 2nd Half prospects have become worse compared with the 1st Half results. Exchange rate and bunker oil price each have an effect of approximately 2 billion yen. Market Volatility, including freight rate softening in Container Business due to seasonal influence amounts to around 5 billion yen, and decrease in the number of bulkers and tankers that benefited with the spot market, which was explained before, reduce income another 5 billion yen, with other factors totaling almost 4.8 billion yen.

<H. Cost curtailing campaign>

This table shows our cost curtailing campaign progress in detail. As we have continuously said, we will continue to pursue cost savings. We had been targeting 5 billion Yen in total during this fiscal year from the beginning of the year, and we have piled up small items step-by-step, so the results show that we have already gained about 3.5 billion Yen during the 1st Half.
We would like to realize more than 3.5 billion Yen of cost savings in the 2nd Half of the year, or at least 7 billion yen annually.

<I. Investment and Cash Flows>

In this table, you can see Fiscal 2003 results in the first column; 1st Half Fiscal 2004 results in the second column; then Fiscal 2004 yearly prospects revised; and in the last column, Fiscal 2004 previous prospects. As you can see, annual operating cash flow expected is 84 billion yen, and investment cash flow is 55 billion yen, so free cash flow is 29 billion yen, which would be appropriated for repayment of liabilities. We have adjusted some figures for prospects as our investment plan changed. Operating Cash Flow gained an additional 1 billion yen, but investment cash flow was up 3 billion yen. As a result, Free Cash Flow declined by 2 billion yen.

<J. Updated Status Of "K"Line Vision 2008 Fundamental Assignments>

This slide shows fundamental assignments in "K"Line Vision 2008, the interim management plan which was introduced from the beginning of this fiscal year. We are setting targets both qualitatively and quantitatively. Our quantitative targets are on page 4 of the Financial Highlights where you can compare Fiscal 2004 prospects with Fiscal 2008 targets, and you can see that we are making good progress in terms of our quantitative targets in "K" Line Vision 2008.

J-1. <Fundamental Assignments-1: Ensuring a stable profitability structure through reinforcing business base>

We are pursuing two qualitative targets simultaneously, which might be thought of as running after two hares at the same time. One is reinforcing our business base. For this target, we need to aggresively move into strategic fields or regions. The other is the establishment of a stable profitability structure.

Regarding new businesses for our iron ore carriers, as we have already announced, we have signed long-term contracts with both Nippon Steel Corporation and ILVA S.p.A. for one large Cape-Size Bulker each, also known as VLOC or Very Large Ore Carrier. We have also concluded a long-term contract with Jiangsu Shagang Group Co., Ltd., in China for a rather small size Cape Size Bulker.

For LNG Carrier business, we made 10-year charter agreements with an American trading firm along with project operating company, J&S Cheniere, for two newly built LNG carriers, one of which we independently ordered from Kawasaki Shipbuilding Corporation and we will own by ourselves.

In Container Business we have renamed some agents at major markets around the world in order to enhance our brand value by adding "K"Line to their names, such as "K"Line (Philippines), which not only changed its name but was also transformed into our subsidiary through increasing our shareholding. Although there are many joint ventures involving local capital among the agents, we are advancing with determination that we will offer our container service, car carrier service, or any other services under our own brand name with our own responsibility.

We set up our own agency office in the Czech Republic as our German subsidiary's branch office. In Taiwan, Finland and in other Scandinavian countries, we will also establish our agent companies soon. By flying our flag at major business bases throughout the world, our global operating framework will demonstrate how ready we are to serve markets on a global scale.

One of our subsidiaries, I.T.S. (International Transportation Service, Inc.), is operating container terminals in Long Beach, Oakland and Tacoma on the U.S. West Coast, Tacoma being a main port in our PNW route. We have recently reached a basic agreement with the Tacoma Port Authority to enhance our terminal there in order to improve overall operational structure for our PNW service, including additional land to adequately serve the added capacity of our new containership fleet.

For Logistics business, as described here, each project is proceeding based on regional communities.

J-2. <Fundamental Assignments-1: Ensuring a stable profitability structure through reinforcing business base>

I have consistently insisted on the cost curtailment campaign and expect to gain 7 billion yen through Fiscal 2004, which is regularly checked by our Cost Structure Reform Committee.

Development of transport technology and upgrading navigation technology are among the most important factors for marine transport nowadays. Perhaps many of you are not familiar with these issues, but I would like you to keep in mind that, say, if U.S. government enhances security codes to a much higher level as a countermeasure against terrorism, it could become an impediment to international trading.
To avoid such stagnation in transportation, each shipping company at various places, or every port, in cooporation with customers, is making efforts to enable smoothest possible import/export operations. This may cause some extra expenses to us, but on the other hand, by way of implementing such requirements we believe we can insure that worldwide trading, which is our own basic business field, will be stabilized and continue to grow. We hope that people accept that a reliable shipping company is one that fulfills these tasks, and that we will be honored as being one of them.

As to "strengthening of financial constitution and establishment of a stable dividend payment structure," please make reference to the next slide.

J-3. <Vision 2008 Achievement Goals (Management Indices)>

The first column in this table shows results for Fiscal 2003 in black letters; then in red letters are the results for 1st Half 2004 and present prospects for Fiscal 2004. The previous prospects for this fiscal year are mentioned in blue letters. The last column on the right indicates final targets set for 2008, the last year of "K"LINE Vision 2008, our 5-year management plan. Thanks to many favorable factors that I have mentioned, we will at least be able to achieve P/L targets for this year, or even for 2008 in some items. In Balance Sheet factors, I believe we can complete Interest Bearing Liabilities target considering Free Cash Flow expected at present, and we have made good progress in Equity Ratio and Debt Equity Ratio.

J-4. <Fundamental Assignments-2>

Creation of a high-level, refined and more matured culture, and upgrading of the "K" LINE Brand and
<Fundamental Assignments-3> Reinforcement of corporate governance and response to risk management

Finally, I will touch on indefinite targets: What we strongly proposed in this management plan is that we will make it a preemptive plan to project a strong presence in global shipping, just as we have concentrated to promote rationalization or efficiency in various ways in previous management plans. For example, we are working on various aspects for establishment of a global human resource scheme, including the upgrading of the "K"Line brand for the reliability of customers on a global basis, but I will spare going into further details here.

Then, as another major target in our management plan, we are steadily making improvement in corporate governance and response to risk management which we understand are extremely important for any reputable shipping company anywhere in the world. I believe that an essential scheme to maintain corporate governance, including inner audit structure, has been established and which is mentioned on page 4 of Financial Highlights. I firmly believe it is very important to keep managing this scheme in fairness, with fully transparent disclosure to the public

I am pleased to report that we have been doing well since we are still in the first year.

Thank you very much for your attention.

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