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Explanation by article

Ladies and Gentlemen, thank you very much for joining us on such a muggy summer day for this analyst meeting
regarding our 1st Quarter Fiscal Year 2013 (April 2013–June 2013) consolidated financial status.
I understand that companies in Japan overall have been announcing rather positive results
due to effect of ‘Abenomics.’ Compared to that situation, I suppose you might feel some disappointment
with our results and updated forecasts. However, we have so far been unable to overcome the lingering
depression in our shipping industry, so I feel like results for this 1st Quarter are probably the best
we can achieve under such circumstances.


A-1. Financial Results for 1st Quarter Fiscal Year 2013

Now I will explain our 1st Quarter Fiscal Year 2013 (April 2013 – June 2013) consolidated financial status
along with slides and documents you have in your hands. Let me indicate financial data in this Slide A-1:
Operating Revenues were 295.7 billion yen, 22.1 billion yen up from the same term last year.
Operating Income was also up by 3.2 billion yen from last year to 7.3 bilalion yen.
Ordinary Income was up by 3.7 billion yen to 10.9 billion yen and Net Income was 7.0 billion yen,
improving by 7.7 billion yen.

Average exchange rate for 1st Quarter was 97.72 yen per U.S. dollar
and average fuel oil price was 638 U.S. dollars per metric ton.
Indicated in the footnote at the bottom of this slide, yen-dollar exchange rate depreciated by 16.95 yen
for year-on-year basis, which favorably affected our Ordinary Income by 4.0 billion yen
as we show its theoretical sensitivity every time when we announce our financial results.
Fuel oil price was much lower than last year, having fallen by 79 US dollars per ton,
and the effect was 2.9 billion yen increase in Ordinary Income.

Next, going to segment-wise financial results, for Containership Business sector,
which consists of two business sectors, containership and logistics businesses,
while Operating Revenues increased by 8.6 billion yen for year-on-year basis,
Ordinary Income decreased by 0.6 billion yen to almost break-even, zero. 

With respect to Bulk Shipping Business, Ordinary Income was 136.1 billion yen,
an increase of 11.1 billion yen compared to same term last year,
and Ordinary Income was 12.2 billion yen, up by 6.2 billion yen.

In Offshore Energy E&P Support & Heavy Lifter segment,
although Operating Revenues grew by 3.3 billion yen,
Ordinary Income was down by 1.7 billion yen from last year to loss of 1.2 billion yen.
Inclusive of other businesses and inter-segment adjustments, etc.,
total Operating Income was  297.5 billion yen and Ordinary Income was 10.9 billion yen, as I mentioned before.

Indicated are some of the major financial indices in the small column below,
which is, I am afraid are a little too small to read.
Shareholders' Equity was 370.1 billion yen, an increase of 29.5 billion yen for year-on-year comparison.
Cash and Cash Equivalents remain almost unchanged from last year. 163.1 billion yen on hand at the end of June.
Interest-bearing Debt decreased by 29.3 billion yen in comparison with one year ago to 600.6 billion yen.
Regarding Debt Equity Ratio (DER), Gross DER was 162%, down by 23%. Net DER was 11.8 billion yen, down by 19%.
Equity Ratio recorded 31.4%, rising above 30% after a long interval.

As for impact from exchange rate, I have reported 4.0 billion yen earlier,
which is a factor that improved Operating Income as quoted again in this Slide.
In addition to this, valuation gain booked as Non-Operating Income from our various overseas subsidiaries
was 3.8 billion yen in total, included in our Ordinary Income.
Of course our non-operating items consist not only from this valuation profit though.
For this 1st Quarter, we posted 3.8 billion yen of valuation gain
due to only exchange rate variation as Non-Operating Income.

As to extra-ordinary profit and loss, talking only about gross amount, for the 1st Quarter,
our extra- ordinary profit was 2.8 billion yen and extra-ordinary loss was 4.8 billion yen,
therefore 2.0 billion yen net loss.
Major item among extra-ordinary loss factors was revaluation loss from investment securities
which, although I will not indicate individual name of foreign company involved,
somewhat declined in share price.


A-2. Estimate for 1st Half Fiscal Year 2013

Now let’s turn to the next page and you will see our 1st Half estimate.
As you might be aware, average exchange rate premise set for 2nd Quarter is 99.53 yen per U.S. dollar,
which would look like too minute a figure. Because we set premises for August and September as 100 yen
and put actual figure for July, the average rate becomes that figure.
Bunker oil price premise is 620 U.S. dollars per metric ton, which remains unchanged from the assumption
set as of this April.
Based on these conditions, we have updated our 2nd Quarter projection, and therefore
our 1st Half estimations are: Operating Revenues of 610.0 billion yen,
Operating Income 13.0 billion yen, Ordinary Income  15.0 billion yen, and Net Income 7.5 billion yen.

In comparison with our previous estimates announced as of this April,
although Operating Revenues are expected to increase by 20.0 billion yen,
Operating Income will decrease by 3.0 billion yen.
Ordinary Income is up by 2.0 billion yen and Net Income up by 1.5 billion yen.
Regarding some loss at the level of Operating Income for 1st Half, as explained later
in the part for division-wise trends, the biggest factor should be
freight rates for containership sector which have been lower than our estimation since this April.

Probably, you may ask later whether the difference between 1st and 2nd Quarter might be too big,
so I will answer that now. During 1st Quarter we posted certain amount of non-Operating profit
such as valuation gain from exchange rate, which I mentioned before,
and dividends from investment securities or non-consolidated subsidiaries, etc.
However, we do not expect such kind of profit for 2nd Quarter.

Another reason we can point out is that accounting method for dry bulk and car carrier businesses
is voyage completion method, and so there are always possibilities of variation in profit
due to timing of voyage completion.
We found this time a considerable number of vessels with preferable contracts
expected to be booked for 2nd Quarter moved forward into 1st Quarter,
and some vessels planned to be completed within 1st Quarter with contracts involving loss
delayed to 2nd Quarter. I hope you will view our figures as a total of 1st Half.
So in terms of huge unbalanced figures between 1st and 2nd Quarters, substantially, as I mentioned before,
the biggest factor should be freight rates for containership being lower in reality than our estimation.


A-3. Estimate for Yearly Fiscal Year 2013

Moving to Slide A-3, I will talk about full-year forecasts for Fiscal Year 2013.
As for 2nd Half, actually our 2nd Half predictions remain unchanged from what we set in April.
Premise for average exchange rate for 2nd Half is 95 yen per U.S. dollar,
and that for bunker oil price is  620 U.S. dollars per metric ton.
We set market conditions for each business segment same as the assumption made in this April.

So far, in terms of market trend for Containership Business,
as I will explain in detail again in the division-wise part,
it has certainly been in a downturn, and so focus is how much we can recover due to further cost reduction.

As to Bulk Shipping Business, markets for dry bulk carriers,
although they have been in a slump for the past 1-2 weeks,
we felt reversal movement would have come earlier this year
and so the market might keep recovering steadily in the autumn,
which means actual market for 2nd Half could be better than the premises we set as of April.

For car carrier business in 2nd Half, we also have a more positive view than what we had in April
due to more effective ship allocation, etc.
Though we have such overall images for this 2nd Half, we have not changed our previous estimations
for the term as we have not yet completed our investigation in sufficient detail.

Finally, this full year's prediction:
Operating Revenues of 1 trillion 180 billion yen; Operating Income 28.0 billion yen,
including downward revision by 3.0 billion yen in 1st Half which I indicated before;
Ordinary Income 27.0 billion yen; and Net Income 14.5 billion yen.

Then, talking about footnote for sensitivities for this 2nd Half,
indicated in the box at the bottom of this slide,
exchange rate sensitivity is estimated that 1 yen change in yen-U.S. dollar
exchange rate for this 2nd Half will result in about 0.5 billion yen fluctuation in Ordinary Income,
and 10 U.S. dollars per one metric ton change in fuel oil price will result in about 0.7 billion yen
effect on Ordinary Income.
Sensitivity from exchange rate is less than before, because we have taken various measures
in order to shrink yen exposure to U.S. dollar rate in order to reduce volatility
against exchange rate fluctuation, for which we have tried to shift our management policy.


A-4. Key Points

This Slide shows Key Points of our estimate for Fiscal 2013.
Compared to the same term in previous year, 1st Quarter Operating Revenues increased by 22.1 billion yen
and Ordinary Income increased by 3.8 billion yen. For 1st Half estimation,
Operating Revenues will increase by 63.8 billion yen and Ordinary Income will increase by 5.9 billion yen.
For these profit increases we have counted factor-wise variations as shown in the Table,
but I feel like I cannot say all figures are absolutely correct,
but they still show rough image of current trends.
As shown in the item of Market Volatility, in which the figures are mentioned with black triangle,
freight rate markets for overall business areas have not been favorable,
and due to this our profit was lowered by 11.1 billion yen for 1st Quarter,
and is estimated to be down by 20.0 billion yen for 1st Half.

On the other hand, factors of exchange rate and bunker oil price
are affirmative for us, the effects of which are calculated as quoted in the Table,
which are admittedly somewhat theoretical.
Other than those factors, including actual accumulation of cost savings,
we have compiled such data, but please regard them as merely major trend.


A-5. Progress of Cost Saving Plan

The next Slide shows progress of our cost saving plan.
Our yearly cost saving targets set as of April totaled 14.5 billion yen.
During 1st Quarter we achieved 4.0 billion yen, ratio of 28% progress,
which led to our profit improvement.
For full year, it is indicated in the slide that we can fulfill the original target for full year
set as of April, which of course we will do.
On that basis, as I touched on before, corresponding to freight rates being down in Containership Business,
we will further spur cost reduction measures in containership sector after this summer.

Now I have concluded my explanation of results for this 1st Quarter Fiscal 2013.
I will next briefly talk about division-wise trends and then go to Q&A session for greater details.


B-1. Division-wise Trends  - Containership Business -

Regarding Containership Business, and comparing year-on-year,
1st quarter Revenue Increased but Profit Decreased,
and compared with previous estimate, Revenue is as expected and Deficit rather shrunk in 1st quarter.
Our concern is 2nd quarter as we are afraid negative impact of freight decline
will come up in 2nd quarter because freight dropped rapidly after April, especially in Europe trade.
About Freight index as we describe here, 1st quarter result is 98 in North America trade
and 62 in Europe trade where we think 62 is under lay-up point normally.
Freight for Europe trade especially declined in latter half of this 1st quarter.
On the other hand, utilization ratio of ours is 91% in North America trade and 94% in Europe trade,
so we could keep relatively high ratio compared with other carriers which expanded their space recently.
By means of Cost Saving, Scaling down non-profitable minor business other than North America and Europe trade,
cutting back frequency of North America and Europe trade and carrying out further slow steaming,
we are making every possible effort to come through the current difficult situation.


B-2. Division-wise Trends  - Dry Bulk Business -   

Regarding Dry Bulk Business in 1st quarter, Revenue Increased and Profit Increased year-on-year
although market itself was lowest level during this April – June period.
Needless to say, this improvement in revenues includes effect of yen depreciation.
Compared with previous estimate, Revenue increased and Profit increased
because profit of mid- and long-term contracts covers loss from collapsed spot market.
As we are often asked, we would like to explain in advance, our spot exposure of Large-size vessels.
Cape-size is about 9% which means about 8 vessels out of our total fleet of 97 vessels in the coming 3 quarters
for remaining 2nd, 3rd and 4th this year. In other types of vessels,
we decreased spot exposure of Panamax to some extent.
Compared with other carriers, we continue to keep spot exposure down as much as possible.


B-3. Division-wise Trends - Car Carrier Business -

During 1st quarter, Revenue Increased and Profit Increased for year-on-year
and in comparison with previous estimate, both Revenue and Profit Increased.
Looking at only loading results which include total of Outbound, Homebound, Others and Intra-Europe,
loading results of this 1st quarter totaled 861,000 compared with 905,000 in 2012.
As loading units themselves decreased from last year,
there may be a question that profit should also decrease theoretically.
Cargo movement of Car carriers nowadays varies greatly which is not only exports from Japan to overseas
but also many other cargo movements, including third-country trade world wide.
Frankly speaking, we put greater weight on profitability in allocation of vessels,
so loading results decreased but Revenue and Profit increased.
Of course there are additional factors, slow steaming to some extent, and effect of yen depreciation.


B-4. Division-wise Trends - LNG Carriers and Oil Tankers - 

Next material in B-4 is about LNG Carriers and Oil Tankers.
Revenue Decreased but Profit Increased for year-on-year in both sectors,
and compared  with previous estimate, Revenue Decreased but Profit also Increased.
The reason for decreasing Revenue is further down-sized scale of our fleet for tanker business.
Of course, we can still think about increasing our fleet if market situation improves;
however, we do not think market of crude oil tankers and product tankers will improve anytime soon,
so we believe we have no choice other than down-sizing our fleet.

As to LNG carriers, they are making stable profit as we have said since last year,
so we could secure stable profit by long- and mid-term contracts.
How many new business projects “K” Line can obtain in the future will become a hot topic in due course.


B-5. Division-wise Trends - Offshore Energy E&P Support & Heavy Lifter Segment -     

Finally we would like to explain Offshore Energy E&P Support & Heavy Lifter Segment.
Although we report to you each time about new business being  started recently,
these have not yet made for a stable profitable sector as of today.
There are various businesses in Development of Marine Resources, and one is Offshore Support Vessels
which support Offshore Rigs, mainly in North Sea or Offshore Brazil.
Although the market was not good two years ago,
operation of those Offshore Rigs accelerated again from the middle of last year
and our Offshore fleet is now producing earnings.
However, our Offshore Support Vessel company is in Norway and accounting currency is Norwegian krone.
To our regret, Norwegian krone has greatly depreciated against Dollar and Euro during this 1st quarter.
This caused valuation loss of exchange rate only in this Offshore Support Vessel sector,
and for this reason business results worsened, but little as far as accounting is concerned.

Drillship is a maritime vessel used for offshore drilling of oil offshore Brazil
in deep water at depth of 2,000 or 3,000 meters.
The Drillship operation is working steadily and earning stable profit.  

And finally let me explain about Heavy Lifter business.
Although we acquired 100% share of a long-established German Heavy Lifter Company,
other competitors have been aggressively investing in new vessels for the past 2 or 3 years,
and project cargo movement is not good because of lack of projects needing heavy cargo transport
due to Euro crisis, so this business is in the red as of today.
However, we are going to rationalize this business and try to make a profit as soon as possible.

Thank you very much for your kind attention.

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