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Explanation by article

Ladies and Gentlemen,

Thank you for joining us today in spite of such hot summer weather.

It is a pleasure to share this report with you on "K" LINE's Fiscal 2004 1st Quarter consolidated and non-consolidated financial results, and prospects for half-year and full-year financial position for Fiscal 2004, which were disclosed on 5th of August.

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

This table shows an outline of financial results for 1st Quarter Fiscal 2004 which ended on June 30, 2004.
As you have been aware, balance of our US dollar income and expense is not small, and the yen exchange rate against U.S. dollar considerably affects our profit, and so does bunker oil price.
In this 1st Quarter, average exchange rate was 108.71 Yen, and bunker oil price was 180.40 U.S. Dollars per kilo ton, as mentioned in the 2nd line from the bottom.

Compared to the previous 1st Quarter, as mentioned in the last column in this table, average exchange rate rose approximately 10 Yen per dollar and bunker oil price about 10 Dollars, which decreased income approximately 3 billion Yen totally.
We see 1 Yen rise in exchange rate negatively affects income by 1 billion Yen annually, and increase of bunker oil price by 1 Dollar per ton has about 0.2 billion Yen negative effect per year.

In spite of such negative factors, Revenues, Operating Income, Ordinary* Income, and Net Income all improved (*Ordinary Income being income before income taxes and extra-ordinary items).

The balance between this 1st Quarter results and original prospects is mentioned in this table. In terms of the comparison with Fiscal 2003 1st Quarter results, which is not indicated here, Net Income increased threefold, and ordinary income by 2.5 times.

The ratio of Consolidated to Non-Consolidated is around 1.25 in this 1st Quarter, about the same tendency as last year while it had been roughly 1.3 in the past. In these two years, the ratio has changed because of remarkable improvement in the segment of shipping business mainly engaged with non-consolidated entity.
Because of business expansion and strengthening of competitiveness by cost saving we could achieve such improvement.

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

I will touch on business environment for 1st Quarter Fiscal 2004.
Macro-economic environment is just as mentioned here, so we can say, it was very, or decently good in general.
We assume the most important factor for shipping business during this Quarter was the economic situation in both the U.S. and E.U., also that in China, which was mainly concerned with import demand in the area of bulk and energy transport service.
As to aspects for our own business activity, let us discuss that next under division-wise consideration.

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

The trend in Container Business, our core business, is the most important factor in the performance of our overall group.
We have achieved much improvement in this 1st Quarter in comparison with the original prospects as of May, or the actual results for previous 1st Quarter.
Loaded cargo volume increased by 11% from 556,000 TEU's in the previous year to 616,000 TEU's, which reflects our business expansion from the point of quantity.
Positive cargo flow from China has continued steadily.
Freight restoration in Asia-Europe and Asia-North America trades as well was a major factor in these improvements.

Start of new services in Asia-Aegean Sea trade and the U.S. and South America East Coast trade has contributed to increase volume considerably.
In terms of earning, however, we could not reap very satisfactory results because they were still in just an early phase of business.

As for negative factors, ship charterage rates rose in containership market, and some ships in our fleet chartered from the market had to make contract extensions at increased charter rates.
Bunker oil price and exchange rate were as mentioned before.

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

The noticeable improvement in the Bulker and Car Carrier Service, compared with both our original prospects and Fiscal 2003 results, is quite distinctive for 1st Quarter of this fiscal 2004.

In the Bulker sector, market freight levels started to go up higher and higher from the middle of 2003 and reached abnormally high levels. Would you please take a glance at the bulk market graph in the Slide 1-6 "Supplemental Information."

As you can see, graph lines for recent market level seem to be moving above the lines for previous years overall.
This peaked out once in a historical hike at the beginning of this year, and declined for a while, but has now started to pick up again.
Please note how it is picking up here.
What I'm driving at is how this market level is going next toward the 2nd Quarter will make a respectable difference in the future.

Anyhow, market level has still been very high, although slightly declined, but still at higher level than in recent years, and which has significantly contributed to better results.

Operating tonnage in Bulker sector increased only 2%, as mentioned in the slide, so the reason why the exceptional improvement was achieved in this sector is rather because free vessels in our bulker fleet could enjoy a higher market.

Car Carrier sector is generally quite stable, but during this 1st Quarter, cars carried by PCTC for North America, Europe, Australia, and even Middle East from Far East Asia achieved positive results. As you can see, the number of total cars carried increased from 381,000 cars to 489,000 compared to the previous year

However, when it comes to yearly prospects, we do not see such a sharp expansion continuing, but rather returning to the trend of just stable cargo movement, or with slight increase.

In this sector, our fleet is partly chartered under long-term stable contracts, while some are just short-term chartered. We have a strong intention to reduce cost of car carrier business, and must do so, but the current market hike is due to world-wide cargo volume increase. In this 1st Quarter, we could achieve cost cutting with efficient ship operations supported by positive cargo movement.

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

In Energy Transportation, we have services of LNG, Thermal Coal, Crude Oil and oil products.

Our 24 LNG Carriers in various trades maintained stable operations and profitability, although operating tonnage decreased because one vessel named "Bishu-Maru," which was our first LNG carrier, has been dry-docked for periodic inspection.

As to the Thermal Coal Carrier sector, a slight loss resulted in Fiscal 2003 because some trades turned unprofitable due to sharply increased charterage, although more cargo than expected was carried.

As explained in the last meeting, demand actually increased more than predicted, however, severe delays and time loss in vessel operations resulted from extraordinarily heavy congestion at loading ports. As a result, we were faced with serious vessel shortages in meeting some of our cargo contracts and were forced to charter regular, inefficient Panamax vessels from the escalating short-term charter market even though we had secured a good number of vessels specified for thermal coal transport with wider hull and shallower draft, which type is our strong point.
Now, in this 1st Quarter, such heavy congestion has been eliminated and returned to almost normal operations.
Together with a 20% increase in operating tonnage, overall results improved.

For Tanker sector, the freight market has been at a high level, which you can see from the graph in Slide 1-7 in "Supplemental Information" next to the bulk market graph that we saw a few minutes ago.
Here, as an index, the VLCC market is shown.
For guidance, our main fleet in Tanker sector, so-called AFRA-Max showed a similar trend.

Average VLCC market level during 1st Quarter was up about 20 points in World Scale to 104 from 84.45 in previous year. However, we had only one VLCC in our fleet for enjoying this buoyant market and so the effect to the income was quite limited.
As we have estimated that a 10 point rise in World Scale increases income by approximately 100 million Yen, 20 points up in this 1st Quarter led to 200 million Yen.

Eventually, both business expansion and market improvement contributed to improved results in Energy Transport business.

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

Next slide C-4 shows results of Consolidated Subsidiaries.
We have categories for Short Sea & Coastal Shipping around Japan and Ferry services, Air Freight Forwarding services, and Services incidental to transportation among our consolidated subsidiaries.
In the segment of Services incidental to transportation, shipping agency and port terminal business were much improved along with increase in container handling volume in the 1st Quarter.
Kawasaki Kinkai Kisen Kaisha, Ltd., another listed company in our group that manages Short Sea and Coastal Shipping and Ferry service, has already officially announced that profitability has improved remarkably.
In fact, most of our consolidated subsidiaries have been doing fairly well.

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

This slide shows outline of upward/downward Profit Factors. You can see negative effects from increase in exchange rate and bunker price that I mentioned before amounting to 3.2 billion Yen.

Compared with results for 1st Quarter Fiscal 2003, the 14 billion Yen improvement resulted from better conditions in the market, 3.5 billion Yen from business expansion, and 1.9 billion Yen from cost reduction and others. Total improvement is 16.2 billion Yen.
As you can see, the hike in the market brought substantial improvement.
Shipping market is formed as per type of vessel.
For this 1st Quarter, the market for bulkers worked the most, which I suppose will also be key point for the 2nd Half.

<E. Prospects for 1st Half Fiscal 2004 >

Next, I will talk about 1st Half Fiscal 2004 including revised prospects for 2nd Quarter, which are the most precise expectations that we can issue right now, after being studied closely by each operating division.

However, concerning the 2nd Half prospects, let me mention first that they were recalculated more roughly than the 2nd Quarter for saving labor in investigating entire yearly prospects per 3 months.
The 2nd Half figures are adjusted in reference to only major indices, which have already appeared very clearly.

In reality, my staff has just started to work on revised firm prospects for 2nd Half, which we will publicize properly upon the announcement of the close of 1st Half financial results.

To put it more plainly, during this 1st Half, we see a continuation of the trend in the 1st Quarter.
Factors to be modified are bunker price indicated at the bottom of the table, which we originally expected to be 170 U.S. Dollars per kilo ton but actually reached around 180, and so we set the 180 as prediction for 1st Half as a whole.
And in regards to Yen/U.S. Dollar exchange rate, the original prospects we expected were 105 Yen per U.S. Dollar, but considering the present level, we have increased that to 108 Yen for the 2nd Quarter.

The ratio of Consolidated to Non-Consolidated is around 1.2, not changed so much. However, you can see a considerable amount of extra-ordinary loss here because we are introducing asset-impairment accounting from the end of this 1st Half closing in advance of it becoming compulsory in Japan in Fiscal 2005.
We have estimated 3.4 billion Yen extra-ordinary loss due to this change.

Based on the above, I have announced an interim dividend of 7.5 Yen per share, up 2.5 Yen from that originally prospected.

<F. Trend of division-wise prospects for 1st Half Fiscal 2004 >

Regarding 2nd Quarter prospects, in general, we assume the trend during 1st Quarter will be extended.

As to Container Business, the so-called "peak-season" is coming, and cargo movement from China to Europe and North America continues to be steady.
Freight rates are staying at improved levels, and moreover, scheduled rate restoration in some trades has been counted in.
Cargo volume is expected to increase to some extent because those new trades started in this 1st Quarter are now getting into full swing.
Totally, we see a substantial improvement compared to our original prospects.

In the Bulker and Car Carrier Service, as mentioned before, bulker market situation remains fairly good. We assume it will show a tendency to start going down slowly some day in the near future, but not expected to do so in this 2nd Quarter.
For Car Carrier Service, and reflecting firm export plans by our customers, the auto manufacturing giants, we expect steady cargo movement.

For Energy Transport Service, conditions for the 1st Quarter are basically not expected to change.

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

This slide shows outline of upward/downward Profit Factors for 1st Half Fiscal 2004.
Compared with 1st Half Fiscal 2003 results, the negative effects from both a rising Yen against the U.S. dollar and bunker price total approximately 6 billion Yen, about twice of that for 1st Quarter.
Market improvement amounts to plus effect of 22.5 billion Yen; business expansion 6 billion Yen; and cost reduction and others 3.2 billion Yen, and so the total is 25 billion Yen.
Market improvement here comes mostly from the bulker market, and also tanker market, although our tanker business is rather small and so the quantitative effect is limited.

<H. Prospects for Fiscal Year 2004 >

This next slide shows revised prospects for Fiscal 2004.
As I mentioned, adjustment for the 2nd Half was done rather roughly, but we include factors that are presently in sight.

Exchange rate for the 2nd Half Fiscal 2004 is set at 110 Yen to the U.S. Dollar, and bunker-oil price at 190 U.S. Dollars per kilo ton, which is now rising, and level even seems to vary among predictions by major Japanese shipping companies. At any rate, we have used 190 U.S. Dollars per ton figure.

In exchange rate yearly average for Fiscal 2004 is calculated as 109 Yen to the U.S. Dollar.
In case of bunker price, average throughout Fiscal 2004 is 185 dollars per kilo ton.
Result of Fiscal 2003 is indicated in the last column.
The ratio of Consolidated to Non-Consolidated remains almost the same.

The 3.4 billion yen of extra-ordinary loss from introduction of asset-impairment accounting is of course included.

<I. Trend of division-wise prospects for 2nd Half Fiscal 2004 >

Please have a look at the outline of prospects for the 2nd Half.

In Container Business, after the ' peak season,' it is assumed cargo movement will still remain stable although declining slightly due to usually expected seasonal trend.
Bunker oil price increase is taken into consideration as a negative factor.
In this regard, forecast for the 2nd Half is down from 1st Half.

In the Bulker and Car Carrier Service sector, bulker market began to turn upward as mentioned before, but in the longer term it is slowly calming down. So, we regard the 2nd Half income will be slightly less than the 1st Half.

Regarding Car Carriers, we will be able to continue enjoying positive cargo liftings.
However, as charterage rates for this sector and bunker prices have been increasing, profit for 2nd Half may end up being smaller than in the 1st Half.

Energy Transport Service does not include such factors as volatility, so stable income is expected.

Therefore, we are now expecting 3 out of 4 sectors will fall to some extent in the latter Half of this year.

<J. Cost curtailing campaign>

As we have previously said, we will continue to pursue cost savings. We could achieve our cost-saving target of more than 30 billion Yen in 2 years in the KV-Plan, the previous management plan. That was the key to the achievement of our goal in the KV-Plan. We are targeting 5 billion Yen in cost reduction during this fiscal year. The results show that we have already gained about 3 billion Yen as is shown here.
We would like to realize more than 3 billion Yen of cost savings in the 2nd Half of the year, and to exceed the original target of 5 billion Yen as much as possible.

<K. Vision 2008 Achievement Goals (Management Indices>

Let me tell you about the progress of our five-year plan, "K" Line Vision 2008, which we announced in May this year. Only a quarter of the first year has now passed since the five-year plan started, so we therefore think it is too early to review the overall plan. We would like you to see just the actual figures in the Fiscal 2004 prospects, which are indicated in red. Some figures show that we will accomplish 1 or 2 years earlier than scheduled, and as a whole we are going on as planned. Judging from the Fiscal 2004 prospects, it can be said that we are generally making good progress under "K" Line Vision 2008.

<L. Investment and Cash Flows>

Lastly, I will briefly touch on investment and cash flows. You can see Fiscal 2003 results in the first column, Fiscal 2004 prospects in the center, and then Fiscal 2004 original plan in the table.
We revised the Fiscal 2004 prospects because of several changes, such as the cancellation of purchasing vessels, as shown in this table. Our business in general is favorable, so free cash flow will increase compared to the original plan.

That concludes our explanation today about the settlement of accounts for the 1st Quarter and the revised prospects for the first half and full fiscal year.

Thank you very much for your attention.

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