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Explanation by article

Thank you very much for joining us today.

A: Results for Fiscal Year 2016
A-1: Financial Highlights for Fiscal Year 2016

I would like to inform you of our business performance in fiscal year 2016. The results for fiscal year 2016 show operating revenues of 1,030.2 billion yen, operating loss of 46.0 billion yen, ordinary loss of 52.4 billion yen and loss attributable to owners of parent of 139.5 billion yen. Compared to our forecast in January 2017, ordinary loss was larger by 5.4 billion yen, and net loss by 45.5 billion yen. As for main financial indicators, equity capital was 219.5 billion yen, interest-bearing liabilities 550.5 billion yen, and equity ratio 21%.
Ordinary income by business segment was a loss of 31.5 billion yen for  Containership Business, a loss of 9.5 billion yen for Bulk Shipping Business, and a loss of 5.1 billion yen for Offshore Energy E&P Support & Heavy Lifter. Ordinary loss was larger by 5.4 billion yen than our forecast announced in January this year. This difference consists of around 2.9 billion yen of exchange rate revaluation loss primarily in Bulk Shipping Business, 1.5 billion yen due to the transfer of some extraordinary losses to operating costs, and the remainder due to market conditions being below expectations in Offshore Energy E&P Support & Heavy Lifter.
Net loss totaled 139.5 billion yen, which was larger by 45.5 billion yen than our forecast announced in January 2017 as we booked 65.1 billion yen for impairment losses and provision of allowance for loss during fourth quarter.
As for year-end dividend, most regrettably, there will be no dividend since we record a net loss and would like to concentrate on financial structure improvement as our most urgent task.

A-2: Ordinary Income Year-on-Year Change

Fiscal year 2016 saw our efforts to increase earnings worth 30.2 billion yen, consisting of 9.3 billion yen through business structural reform implemented in fiscal year 2015 mainly in Dry Bulk Business, and 20.9 billion yen as a result of cost reductions during fiscal year 2016. On the other hand, markets for Containership Business and Dry Bulk Business saw unprecedented market slowdowns in the first half of the fiscal year, and Car Carrier Business experienced a decrease in quantity of vehicles exported to emerging or resource-rich economies. Due to these factors, ordinary income significantly decreased by 55.7 billion yen year-on-year.
This waterfall chart compares performance for fiscal years 2015 and 2016. Fiscal year 2016 showed a loss of 52.4 billion yen, down 55.7 billion yen from the profit of 3.3 billion yen in fiscal year 2015. The 30.2 billion yen of internal factors consists of 9.3 billion yen from internal efforts to improve earnings and structural reforms primarily in the Bulk Shipping Business, and 20.9 billion yen from cost reductions primarily in Containership Business.
The significant external factor is the earnings deterioration by market conditions. Please see the market comparison table at the bottom of the screen. In Containership Business, the freight index of the Asia-North America trades fell 16 points from 91 last fiscal year to 75 this fiscal year, and overall was a negative factor worth a decrease of 38.0 billion yen. Also in Bulk Shipping Business there was a total deterioration of 44.0 billion yen, consisting of 26.0 billion yen from the impact of market volatility and another 18.0 billion yen due to the impact of contracts renewed during the market stagnation of last fiscal year and the first half of this fiscal year. External factors, such as a deterioration of 3.1 billion yen due to foreign exchange impacts, and another 3.0 billion yen of other decline factors, produced a deterioration of a total of 85.9 billion yen, despite an improvement of 2.2 billion yen attributable to the fall in bunker prices.
As shown on the screen at the right, the fiscal year 2016 business summary shows traces of the impact of historically low markets in the Containership and Dry Bulk Businesses. In response, the Company has decided on a major structural reform in the Containership Business, in which we will establish a new company to handle sales in April 2018. We have also recorded impairments and loss allowances in Containership, Dry Bulk, Offshore and Heavy Lifter Businesses.

A-3: Extraordinary Loss and Cost Savings

In this business environment we implemented structural reforms and cost reductions in an effort to increase the competitiveness of “K” Line Group's businesses. Further, as a result of a determination on the possibility of collection of fixed assets and shipping contracts, we recorded impairment losses and losses related to business reorganization. The major provisions are 19.7 billion yen for structural reforms primarily in Dry Bulk Business, aimed at reducing exposure to market volatility. 50.9 billion yen relates to an impairments of vessels, losses related to business reorganization and allowances for loss related to charter contracts in Containership Business. And 14.2 billion yen of impairments of ship fixed assets in Heavy Lifter and Offshore Energy E&P Support Business. The total financial impact is 84.9 billion yen. As a result, as shown on the right, the impact was a positive contribution of 9.3 billion yen in fiscal year 2016 and a total of 34.3 billion yen in fiscal year 2017.
The amount recorded for structural reform implemented in fiscal year 2015 and fiscal year 2016 and extraordinary losses was 34.4 billion yen in fiscal year 2015, and 84.9 billion yen in fiscal year 2016, mainly in Dry Bulk Business, making a total of 119.3 billion yen over two years.
Also, we posted cost reductions of 20.9 billion yen in fiscal year 2016, mainly in  Containership and Bulk Shipping Businesses.


B: Estimate for Fiscal Year 2017
B-1: Estimate for Fiscal Year 2017

I would like to inform you of our estimates for Fiscal Year 2017. Assuming an exchange rate of 110 yen to one US dollar and a bunker price of 320 US dollars per metric ton, we forecast operating revenues of 1,130.0 billion yen, operating income of 24.0 billion yen, ordinary income of 21.0 billion yen and net income attributable to owners of parent of 21.0 billion yen.
By division, we forecast ordinary income in Containership Business of 19.0 billion yen, up 50.5 billion yen from last fiscal year, and 9.0 billion yen in Bulk Shipping Business, an improvement of 18.5 billion yen over last fiscal year. With an improvement of 3.1 billion yen compared to the previous fiscal year in Offshore Energy E&P Support & Heavy Lifter, we estimate a loss of 2.0 billion yen. The sensitivity is 0.4 billion yen for each yen in the exchange rate and 0.8 billion yen for each 10 US dollars per metric ton in bunker price. Regarding dividends, all officers and employees are united in placing highest current priority on improving our financial strength and building a stable business base, aiming for resuming dividend payments. However at this moment it is uncertain whether dividends can be paid in fiscal year 2017.

B-2: Ordinary Income Year-on-Year Change

This waterfall chart compares estimates for fiscal year 2017 and results for last fiscal year 2016. As internal factors, the impact of provision of allowance for loss in  Containership Business in fiscal year 2016 contributes positively by 20.3 billion yen. Structural business reform in Bulk Shipping Business provides a positive contribution of 2.6 billion yen. Impairments registered in Offshore Energy E&P Support & Heavy Lifter implemented in fiscal year 2016 make a positive contribution of 2.2 billion yen. And we also anticipate a positive contribution of 19.2 billion yen through cost reductions.
As external factors, the exchange rate made a positive contribution of 0.5 billion yen, and rising oil bunker prices was a negative factor of 4.7 billion yen. On the other hand, we expect a positive contribution of 20.7 billion yen in Containership Business where a gentle recovery is expected after bottoming out from the historically low levels of freight rates of last year and the year before last, plus a positive 7.0 billion yen in Bulk Shipping Business.
In Containership Business, the freight index is expected to increase 6 points year-on-year to 81 for Asia-North America route, and increase 10 points to 57 for Asia-Europe route. This freight index reflects the status of contract renewal as of the present time. A recovery trend has also been seen since fall of 2016 in Dry Bulk market, but in the short-term we expect the market to remain at the current level in 2017. With a slight rising trend towards 2018, we have assumed these market conditions continuing in the short-term. There are other factors of 5.6 billion yen, primarily foreign exchange revaluation.
This ends my report on the results for fiscal year 2016 and our predictions for full fiscal year 2017. In fiscal year 2017 our entire Group will be working towards achieving profitability, and we ask for your support.


Now I will move to the Management Plan. At this time, the "K" Line Group has returned to basics and formulated a new management plan, in light of changes in the business environment, mainly in the global economic environment and the impending integration of Containership Businesses of the three Japanese shipping companies.


C: Management Plan
C-1: Review: Business Environmental Changes

First, let's review. Since the global financial crisis that began with the bankruptcy of Lehman Brothers, there have been major changes in the business environment. Prior to the global financial crisis, in the shipping and logistics industries, large increases in demand due to economic growth in China and emerging markets, and an insufficient supply of vessels led to an unprecedented rising market. Despite a post-crisis significant decline in transportation demand, supply of vessels continued, including inflow of pre-crisis speculative funds, leading to over-supply becoming normalized. Since then, as global economic growth slows down and slow trade growth continues, the oversupply of vessels and the downturn in the shipping market have been prolonged.

C-2: Review: Business Assessment

Now let’s turn to business assessment. Over the past ten years our Group's business has focused on three broad efforts. In terms of stable business such as Dry Bulk, Oil Tanker and LNG Carrier Businesses which are based primarily on medium to long-term contracts, business expansion through the continuous support of our customers and high-quality services have produced good results.
However, in market-sensitive businesses that are affected by market volatility, while they contributed to expansion in the scale of both business and revenues prior to the global financial crisis, post-crisis changes in the business environment resulted in excessive investment risk being actualized, damaging our equity capital and leaving lessons learned. In these business fields, counter-measures taken include the merger of Containership Businesses of the three Japanese shipping companies in pursuit of synergies based on best practice, and structural reform designed to reduce the fleets of dry bulkers, vessels without contracts, which are primarily small and mid-sized vessels.
Regarding new business development designed to expand our Group's portfolio, while some efforts such as the Drillship Business have successfully contributed to stable gains in corporate value, we recognize that issues remain for the future. These include Heavy Lifter which requires fundamental action for its performance downturn resulting from the impact of the global financial crisis and energy prices, and Offshore Energy E&P Support Business that requires business restructuring measures.

C-3: Strengths: Analysis based on Historical Perspective

As we go back to basics to review our Company's management plan, it is useful to list our Group's strengths. The strength of our Group is based on providing high-quality logistics services to a customer base that values those services. The elements that make possible these high-quality services include strong technical skills exemplified by our eco-friendly flagship, transportation quality at a high level that will satisfy our customers, safety in navigation and cargo operation, ship management and operational quality. In addition we have global business offices to support these operations and a diversity of human resources who support change. We plan to further build on these strengths in the future.

C-4: Corporate Principles and Vision

In 2015 we announced a review of our management principles and vision. Now, in formulating a new management plan, we are further clarifying our Group's aims by adding to the vision our basic principles of customer-first and providing high-quality services. Future business activity will be conducted in accordance with the management principles and vision outlined here.

C-5: Business Environment for Shipping and Logistics, Future Policy

I would now like to summarize our understanding of the business environment in the shipping and logistics industries, and future issues. We believe that while logistics business will grow modestly against a background of population increase, the slowing of trade will continue due to uncertainties in the global economy, and markets will be unstable due to vessel over-supply. Customer demand for logistics has diversified and environmental protection and technological change will only serve to advance change in the industry. In this environment, the role played by logistics as an important social infra-structure, and the demand for global networks will continue to increase. The logistics industry must also respond to moves such as business mergers in various industries.
The Company recognizes three tasks in our response to these changes in the business environment. The first is to secure our competitiveness by maximizing our Company's strengths. The second is the building of a business portfolio that is resilient against market volatility resulting from the economic environment. Finally, we must achieve growth through technological innovation and reform of our business model against social change. Work on these tasks will link to continuous rise in our corporate value and lead to important management plans.

C-6: Basic Policy

In accordance with our Group's management plan, from fiscal year 2017, we formulated a new medium-term management plan called “Revival for Greater Strides” for the three years to fiscal year 2019 when we celebrate the 100th Anniversary of our foundation. The important tasks for the three years are the rebuilding of our portfolio strategy, advances in management control and strengthening of our function-based strategy, as well as our involvement in ESG. We aim to be an integrated marine logistics group that has a stable income base and growth fields founded on a customer base and high-quality services that realize both management principles and vision. We also want to be a corporate group as well that creates sustainable corporate value while responding to environmental changes, through advanced risk management and governance structures.

C-7-1: Rebuilding Portfolio Strategy

The point of the portfolio rebuilding is development of next-generation core businesses that will thoroughly strengthen and grow stable business, and accordingly the completion of Containership Business integration and reduction of market-sensitive business. For stable business, the main focus is the strengthening of a revenue base through cost reduction and acquisition of medium- to long-term contracts. The development of next generation core growth businesses involves working to create new services and markets through technological innovation and business model reform as well as developing logistics/vehicle distribution/energy value chain businesses.

C-7-2: Rebuilding Portfolio Strategy (by Business Segments)

We have summarized the plan for rebuilding the portfolio strategy by business segment. This will be further explained in the section on business strategy by business segment.

C-8: Advanced Management and Strategies

Regarding advanced management, the second of our important issues, we will strengthen our investment evaluation and business monitoring by considering risk for each business, based on past learning, and by setting an appropriate return for each business that takes into account the cost of capital. By understanding and managing the total amount of risk that exposes our equity capital, we can balance profitability and risk in each business, and build a system that supports the portfolio rebuilding strategy. While details are still being determined, from this fiscal year we intend to implement business risk-return management, setting clear goals for return in each business segment, and establishing thorough investment discipline by ensuring that they are well-understood throughout the Company.
Further, in terms of function-based strategy, we will emphasize the strengthening of Customer Relationship Management, or CRM, the pursuit of high-quality services through technological innovation and business model reform, and human resource retention and development. For CRM, our goal is to improve proposal-based sales horizontally across the Group. In the pursuit of high-quality services through technological innovation and business model reform, we plan to establish a new advanced technology group separate from shipbuilding technology, and by linking with CRM, use all the resources of the Group to create new services markets that respond to social and industry changes. In attracting and developing human resources, we will make efforts to attract human resources, which are the most important management resource in improving corporate value, in both quality and numbers that will permit us to cope with the development of New Core businesses.

C-9-1: ESG Measures - 1. Corporate Governance

Our Group has over the past years made progress in strengthening its corporate governance system. Recently, the Company has developed its governance structure, a move of utmost importance to the implementation of strategies that increase Group value. Initiatives include clarification of the executive officer system through the introduction of a Unit Supervisory System, and the strengthening of the Board of Directors’ organization in decision-making on important corporate strategy. We will continue to develop our corporate governance system.

C-9-2: ESG Measures - 2. Environmental Measures and CSR

Our Group positions its involvement in ESG as one of its most important tasks. We will continue to work on our environmental, safety and governance systems. In the safety field, as well as keeping serious maritime accidents at zero, our Company's enthusiastic activity in the environmental field has been rated highly, in particular with our selection for Climate A List for 2016 and on the 'Supplier Engagement Leader Board' by CDP

C-10: Fleet Planning and Investment Plans

In terms of 3-year fleet planning during the current management plan term, our goal is to reduce the fleet by a total of 35 ships, 31 of which are particularly market-sensitive types, and focus on reducing our exposure and on building stable business, with planned investment, excluding Containership Business, to total 80.0 billion yen over three years. As a specific policy to improve our financial base, we have secured 30.0 billion yen as a strategic investment framework for strategic investments in next generation growth.

C-11: Target for Key Performance Indicators

Our long-term goal for the mid-2020s is to achieve a double-digit ROE and an equity capital of 400.0 billion yen as a buffer against business risk, by achieving an ROA of 6% on an ordinary income base. The equity capital value is expected to be re-set after examining the effects and impact of Containership Business integration. Regarding dividends, our intention is to quickly return to a stable dividend policy.
The goals in the medium term management plan to 2019 are to have three years of profits from fiscal year 2017, through expansion of stable businesses to achieve an operating base ROA of 6% in those businesses, and to expand the stable businesses to an asset scale of around 500.0 billion yen in fiscal year 2019, providing stable income of over 30.0 billion yen. In terms of dividends, we assign the highest priority to improve financial strength and business foundation for the time being, with the aim of resuming payment of dividends at an early date.

C-12-1: Dry Bulk Business

Dry Bulk market rates bottomed out from a historic low of 2,000 dollar level for Cape in February 2016. An uptick saw prices exceed 10,000 dollars in September, then fall and rebound again from March, reaching a record 20,000 dollar level at fiscal yearend. Cargo movements of China-bound iron ore and coal in 2016 increased by a total of 100 million tons reflecting firm business, while the number of vessels scrapped seemed to slow slightly with the recovery in market conditions. Newbuildings were within expectation and sentiment has improved markedly.
Regarding market conditions for fiscal year 2017, Chinese moves such as  consuming higher quality of iron ore which was imported from overseas, seen last year, as well as the suppression of domestic coal, are expected to continue. These factors hold down demand for marine transportation and we anticipate that as the volume of new ship supply declines, performance in fiscal year 2017 will be higher than fiscal year 2016 levels for all ship types.
Further, at this moment the exposure rate by ship type is in the middle of the range from 10 to 20% for Cape, around 20% this year, formerly around 50%, for mid-to small vessels of Panamax and smaller, and has been kept to 15-16% for Dry Bulk overall. We are now seeing the benefits of concluding FFAs anticipating market recovery and short-term contracts of 1 to 2 years, and of the contraction in ship scale through structural reform over the past two years.
In terms of focus for fiscal year 2017 and beyond, we are developing our stable business based on medium- to long-term shipping contracts, primarily in movement of  iron ore and transportation of steaming coal, woodchips and pulp. In the future we would like to strengthen our relationships not only with our Japanese customers but with major overseas customers as well, endeavoring to expand our medium- to long-term contracts and enhance our stable revenue base. In the field of small/mid-sized vessels where long-term contracts are difficult to achieve, we will continue in our effort to rationalize market-sensitive businesses to realize a fleet portfolio in which the key fleet vessels with fixed costs are not impacted by exposure to market conditions.

C-12-2: LNG Carrier and Oil Tanker Business

Firstly, for LNG, in fiscal year 2016, with the addition of a new ship for Petronet LNG, the entire fleet of 42 ships operated smoothly under medium- and long-term contracts, contributing to Company revenues as a stable business base. We also have all 22 oil tankers operating smoothly with both large VLCC Oil Tankers and large LPG Carriers contributing to revenues. However, revenues are tight for Aframax Tankers and Product Tankers, impacted by a slowing of market conditions.
We will continue to expand our LNG carrier business as a major pillar of a stable business, a stable business that can be rebuilt, strengthened and expanded. Seven LNG carriers are now being built to add to the 42 ships currently in operation, with 3 ships to be completed this fiscal year and another 4 ships sequentially up to fiscal year 2020. In the short-term, demand for LNG itself has softened, and there is an increased need for ships with medium-term 7 to 10 year contracts, instead of the 15 to 20 year long-term contract-based ships of former years. As a Company we intend to cater to this demand while continuing to properly control business risk, expanding our fleet to around 60 ships in the medium term.
Likewise in Oil Tanker Business, we are aiming to strengthen and expand our stable business, specifically by increasing stable revenue sources through expansion of the VLCC and large LPG ship fleet which is based on medium- to long-term contracts. We expect to complete the building of one new VLCC this fiscal year and another two ships next fiscal year. One new large LPG carrier will be added to the fleet both this fiscal year and in the new fiscal year. We intend to rebuild our portfolio without changing the number of total ships in the fleet by reducing the number of Product Tankers which are a market-exposed business.

C-12-3: Offshore Energy E&P Support and Heavy Lifter Segment

During fiscal year 2016 Drillship Business operated on a stable base of long-term contract ships, and contributed to stable revenue. On the other hand, for Offshore Support Vessels, while business expanded in the North Sea, the excess supply of vessels impacted heavily on fiscal year 2016 income. Revenues were also tight in  Heavy Lifter Business, which suffered the impact of new projects being delayed due to low crude oil prices. In this environment, in both businesses, after considering the recoverability of ship assets in fiscal year 2016, we recognized a total of 14.2 billion yen in impairment losses.
In fiscal year 2017 and beyond, in Offshore Support Vessel and Heavy Lifter Businesses, we will review the portfolio which includes PSV and AHTS vessels, to reduce market volatility risk in addition to cost cutting and foreign exchange measures already commenced, and consider all possibilities in a non-exclusionary way. On the other hand under the medium-term management plan, another new core business to be developed for growth is the energy value chain related business. By combining our Company's knowhow in LNG transportation, our experience and customer base, and our partners, all of which have been cultivated over many years, we want to strengthen our involvement particularly in the middle and downstream end of the chain. Specifically, this April we established a special Liquefied Gas New Business Division, which brings together a customer contact center and company internal knowledge. In this way, we plan to study building a business around offshore LNG ships, called FSRU which are used for LNG storage and re-vaporization, and LNG fueled vessels, and enter the FSO business where long-term stable revenues can be expected.

C-12-4: Containership Business

Despite an improvement that began in the fall of 2016 from the historically low freight market conditions seen in the first half of fiscal year 2016, we recorded a loss of 31.5 billion yen for fiscal year 2016.
Fiscal year 2017 will be the last year of Containership Business as "K" Line. Firstly we anticipate some improvement in freight market conditions compared to last year. With cost cutting and the anticipated improvement in profitability of around 50.0 billion yen, we are forecasting a profit of around 19.0 billion yen for fiscal year 2017. If possible we plan to finish with an even better profit, and at the current time the outlook is reasonable.
Also, Containership Businesses of the three Japanese shipping companies will be integrated into a new company that will be established in July this year, to start operations from April next year.

C-12-5: Logistics Business

With the transfer of containership business to the new merged company next year, our Company's network in Containership Business, one of the major foundations of our global network, will disappear. We intend to expand the business handled by "K" Line Logistics, our core company in the logistics business, with the aim of it becoming the replacement infrastructure for our global network, and to expand its base including by merging it with other Group companies to further expand our stable revenues.

C-12-6: Car Carrier Business

Reviewing last fiscal year, marine shipping volumes of vehicles were strong in terms of cargo movements in the major markets of North America and Europe, but shipments of vehicles to resource-rich countries such as the Middle East, South America and Africa fell sharply due to declining resource prices, and this was a major factor in reduced revenues. It is projected that fiscal year 2017 will see no significant change in the overall status of marine cargo movements. However, we are aiming to increase overall volumes shipped through our plan to gain new contracts to increase volumes to 3.53 million vehicles in fiscal year 2017 compared to 3.1 million in fiscal year 2016, an increase of over 400,000 units, and also increase profits through progress in streamlining shipping efficiency.

That completes today’s presentation. Thank you very much.


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