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Explanation by article

Thank you very much for joining us this afternoon.

Today, I would like to explain our first-half financial performance, Advanced Business Management, one of the corner-stones of our medium-term management plan announced in April, and finally a progress report on the launch of an operating company for a new integrated container shipping business.  


A. Financial Highlights for Second Quarter Fiscal Year 2017

A-1: Financial Results for First Half Fiscal Year 2017

First, I will explain our results for the second quarter and the first half of the fiscal 2017. For the first half of fiscal 2017, our operating revenues totaled 578.9 billion yen, which was consistent with our forecast made in the first quarter. Operating income was 3.8 billion yen lower than the forecast due to the impact of containership market conditions, as well as bulk shipping market conditions, mainly for oil tankers. Our ordinary income totaled 11.1 billion yen, 1.1 billion yen higher than our first-quarter forecast. Net income attributable to owners of the parent totaled 13.2 billion yen, 1.8 billion yen lower than our forecast due to changes in extraordinary income and losses. The average yen-dollar exchange rate was 111.20 yen, and average bunker fuel price was 324 dollars per metric ton. Please see the presentation materials for more financial indicators and segment information. As previously announced, we completed the sale of our Heavy Lifter Business in the first half. 


A-2: Financial Results for First Half Fiscal Year 2017 vs. Assumption as of July 2017

Ordinary income for the first half of fiscal 2017 totaled 11.1 billion yen, 1.1 billion yen higher than our first-quarter forecast. The benefit from company achievements was 0.6 billion yen, reflecting success of our ongoing internal cost-saving programs. The benefit from external factors totaled 0.5 billion yen. Containership market volatility reduced ordinary income by 1.4 billion yen compared to the forecast, reflecting competition for market share during a transition period in which shipping companies are integrating and consolidating services, along with the impact of new large-scale vessel deliveries. Bulk shipping market conditions, however, were in line with first-quarter forecast. Exchange rate revaluation boosted ordinary income by 1.6 billion yen compared with the forecast. Combined with other factors, our ordinary income was 1.1 billion yen higher than the first-quarter forecast. 


A-3: Estimate for Fiscal Year 2017

For the full fiscal year, we forecast operating revenues of 1,140.0 billion yen, a slight increase over the first-quarter forecast; operating income of 13.0 billion yen, a decline of 10.0 billion yen compared with the first quarter forecast; ordinary income of 13.0 billion yen, a decline of 8.0 billion yen compared with the first quarter forecast; and net income attributable to owners of the parent of 8.5 billion yen, a decline of 12.5 billion yen compared with the first-quarter forecast. Regarding the impact of exchange rate and bunker fuel price volatility for the six months in the second half, a change of 1 yen in Yen-US$ exchange rates will impact operating income by plus or minus 0.2 billion yen, and a change of 10 dollars in bunker fuel prices will impact operating income by plus or minus 0.2 billion yen. Regarding net income attributable to owners of the parent, some of the extraordinary income and losses resulting from sale of assets planned for FY2017 will be postponed to the next fiscal year, and therefore we have revised our forecast accordingly. As announced previously, we regret that we will not pay dividends for fiscal 2017. 


A-4: Estimate for Fiscal Year 2017 by Segment

Looking at the full-year forecasts for each business segment, Containership segment is forecast to generate ordinary income of 9.0 billion yen, a decline of 10.0 billion yen compared to the first-quarter forecast. This is due primarily to approximately 4.0 billion yen in expenses related to the establishment of the integrated containership shipping business Ocean Network Express, which I will refer to as ONE below. Bulk Shipping segment is forecast to generate ordinary income of 7.0 billion yen, a decline of 0.5 billion yen compared to the first-quarter forecast. Offshore Energy E&P Support and Heavy Lifter segment is forecast to generate ordinary income of 0.4 billion yen, an increase of 1.9 billion yen compared to the first-quarter forecast.


A-5: Latest Forecast for Fiscal Year 2017 vs. Financial Results for Fiscal Year 2016

We forecast a year-on-year ordinary income improvement of 65.4 billion yen, comprised of 45.3 billion yen in net benefits from company achievements and 20.1 billion yen in net benefits from external factors. Regarding company achievements, the 45.3 billion yen improvement consists mainly of 25.1 billion yen by positive contribution from structural reforms and provision for allowance started in fiscal 2016, along with 20.2 billion yen by positive contribution of cumulative cost savings. Regarding external factors, the improvement in market conditions for both containership and bulk shipping provides a benefit of 20.8 billion yen; the rise in bunker fuel prices has a negative impact of 5.2 billion yen; and exchange rate volatility has a benefit of 6.8 billion yen, for a total net benefit of 20.1 billion yen.  


A-6: Latest Forecast for Fiscal Year 2017 vs. Assumption as of July 2017

Comparing our current full-year forecast with the forecast made in the first-quarter, the benefit from the company’s achievements improved the forecast by 1.2 billion yen. Most of the improvement is from cumulative cost savings. In terms of external factors, the forecast has deteriorated by 9.2 billion yen. The negative impact of containership market volatility has reduced the forecast by 7.6 billion yen. This reflects concerns about declining market share amid integration and consolidation among shipping companies, the delivery of large-scale vessels and other factors which have forced us to keep freight rate estimates for the second half at the same level as the first half. The negative impact of bulk shipping market volatility reduced the forecast by 2.0 billion yen, mostly due to oil tanker market conditions which have been affected by over-capacity. Overall, the balance between the positive benefits and the negative impacts is a deterioration of 8.0 billion yen in the forecast compared to our forecast in the first quarter.  


A-7: Financial Impact in Fiscal Year 2017 by Structural Reforms and Provision of Allowance in Fiscal Year 2015 & Fiscal Year 2016・Progress of Cost Savings

The financial impact of structural reforms and provision of allowance are estimated to be 34.4 billion yen, about the same as forecast at the start of the fiscal year. The positive contribution from cumulative cost savings are estimated to be 20.2 billion yen, slightly higher than original target at the start of the fiscal year.


A-8: Progress of Management Plan (Second Quarter Fiscal Year 2017)

Regarding the expansion of stable-income business, at the current time, our asset base for this business at the end of fiscal 2017 is forecast to be 500.0 billion yen, the same level as fiscal 2016. Ordinary income generated from this business is forecast to be 27.0 billion yen, 2.0 billion yen higher than fiscal 2016, thanks to higher efficiency in our stable business, cost savings and new contracts. We will continue striving to expand this stable-income business. 

Regarding Advanced Business Management, we are rolling out an initiative gradually from the second half of this fiscal year. In terms of function-specific strategies, we have started a group-wide initiative to strengthen our customer base through the reinforcement of customer relationship management. We are also making progress with technological and business model innovations. The installation of K-IMS, an optimized navigation support system developed jointly with the Kawasaki Heavy Industries (KHI) Group, will ensure optimized, economical and environmentally-friendly operation by energy saving. Additionally, we started discussions with Kawasaki Kinkai Kisen about collaborative development of Japan’s first LNG-fueled ferry. In these ways, we are making steady progress. 


B. Division Trends

B-1: Dry Bulk Business

Looking at the results for the dry bulk business in the first half, the dry bulk market was firm due to increasing transportation demand, mainly for China. China’s monthly steel production has increased year-on-year for 19 straight months. Behind this trend is an effort by the Chinese government to eliminate the illegal production of low-grade steel, which hasn’t been included in the production statistics. As a result, major and other steel producers are increasing their crude steel production and the monthly production statistics are rising to reflect this. For the January-September nine-month period, China’s cumulative iron ore imports were 7% higher than the same period of last year, while coal imports increased 14%. In the grain trade, which is handled most by small- and medium-sized vessels, China’s soybean imports increased 15% in the period. Altogether, the cargo demand from China was robust in the first half of the fiscal year. For the second half, although product adjustments are expected in some parts of Northern China in response to tougher environmental regulations, production among major Chinese steel producers is expected to remain strong before the seasonal winter demand and overall sentiment is not expected to be bad, but instead to improve somewhat. Dry bulk segment turned profitable in the second quarter and we expect the profit to expand in the second half. 


B-2: LNG Carrier/Oil Tanker/Thermal Coal Carrier Business

In the first half, the thermal coal carrier business was categorized under Dry bulk, but from the second half, it is categorized into Energy Resources shipping. Within this latter, there are both liquid and solid cargos, but since the customers are the same, we have made this change with the aim of offering the same service from the customer standpoint. 

Regarding LNG carrier and thermal coal carrier businesses, we are operating based on stable medium- and long-term contracts. As for the oil tanker business, the market sentiment has worsened significantly from the second half of fiscal 2016 when the market was maintaining a break-even line, due to the deployment of new tankers in fiscal 2017 and failure to make progress in the scrapping of old tankers. We had forecast a rate of 33,000 dollars for the second half in our first-quarter forecast, and the current actual rates declined to about 20,000 dollars, below the break-even line, and then 10,000 dollars. While we do not have significant exposure, the first-half results were below our forecasts. For the second half, the scrapping of old tankers has finally begun to show progress recently, and U.S. exports of shale oil have begun in earnest which increase the ton-mile performance. As a result, rates for the second half are currently increasing well beyond our forecasts.  


B-3: Offshore Energy E&P Support Segment

The drillship business is operating stably. The FPSO business, for which we made a basic equity participation agreement, is concluding new contracts and is expected to make a small contribution to earnings this fiscal year. The offshore support vessel business turned profitable in the first half with more than 1 billion yen in foreign exchange gains for the period, as the rise in oil prices increased demand for oil producing nations’ currencies. For the second half, Brent crude oil prices have recently surpassed 60 dollars a barrel for the first time in two years and four months. Rig operations have bottomed out and are on the rise, backed by such factors as Saudi Arabia’s continued production slowdown. Moving forward, we will continue with cost savings while taking measures to reduce our exchange rate exposure to prevent any major losses. 


B-4: Containership Business

Ordinary income for the Containership business in the second quarter alone was 2.9 billion yen, which unfortunately was 2.0 billion yen lower than the first-quarter forecast. The main reason was that freight rates on East-West routes were lower than expected. The second-quarter freight rate indices were 75 for Asia-North America routes and 56 for Asia-Europe routes, both three points lower than expected. We had expected short-term freight rate market conditions to recover in the peak August-September period of the second quarter, but unfortunately this never materialized. 

For the second half, we have revised downward the Containership business’s ordinary income forecast to zero, from the first-quarter forecast of 8.0 billion yen. There are two reasons. First, we have revised downward the freight rate indices to 77 for Asia-North America routes and 55 for Asia-Europe routes, about the same levels as the first half, based on the current freight rate market conditions for East-West routes. This represents a major downward revision of five points to the Asia-North America index and three points to the Asia-Europe index, as well as a significant decline in our income. The second reason is the establishment of ONE. The new company is expected to post a loss this year, and our portion of the loss will correspond to our 31% equity. This is expected to equal about 4.0 billion yen. These are the major factors impacting ordinary income in the second half. 


B-5: Car Carrier Business

In the car carrier business, neither business environment nor market conditions have changed significantly since our first-quarter forecast. We shipped 1.73 million vehicles in the first half, achieving a year-on-year increase of 14%. For the full year, we expect to ship 3.53 million vehicles compared with 3.11 million vehicles in the previous fiscal year, for a 14% increase and mostly consistent with our annual target. Basically, we are not planning to make changes to our navigation or fleet size; instead, we are allocating carriers more efficiently in recognition of the increase in volume and to expand profitability. Regarding the business environment, while shipments to the Middle East, South America, Africa and other resource-rich regions had declined since last year, automobile sales in these regions have begun to show signs of improvement and the expected gradual recovery in these markets should help boost the car carrier business and make a contribution to profitability. 


C: Advanced Business Management

Our Advanced Business Management initiative focuses on priority issues in consideration of the business environment outlined in the medium-term management plan announced in April and our current management conditions. We are striving to ensure both stability and growth by measuring the level of business risk, which is equal to the maximum potential losses given the nature of our business, and controlling the estimated maximum losses within consolidated shareholders’ equity. At the same time, we are prioritizing the achievement of a level of return in each business correspondent to its level of business risk in order to build an ideal portfolio. We have introduced two new important performance indicators to ensure return correspondent to business risk. “K” VaCS is our version of EVA, and “K” RIC is our version of ROIC. These indicators are helping us refocus our management on cost of capital.   

Regarding the level of business risk, we are measuring the maximum estimated potential losses for each business as a comprehensive logistics group with marine shipping as the core business, taking into consideration the unique characteristics of our businesses. The two types of risk being measured are earnings volatility risk and asset value volatility risk. We are managing other types of risk through a Group Risk Management Committee, which operates under the Crisis Management Committee. 

As to controlling the level of business risk and risk-return management, we will raise stability by setting a capacity for each business and ensuring that we can cover the risk through consolidated shareholders’ equity. We have also made risk-return management an important indicator to ensure we secure sufficient return corresponding to the business risk involved. In this way, we will reform our portfolio towards business with high earnings and growth potential. To assess businesses in accordance with these indicators, we have introduced the “K” VaCS and “K” RIC, which reflect the unique characteristics of our businesses, as investment assessment standards to help measure the business risk of each project and set targets for return. These will be used in tandem with qualitative management policies, such as compatibility with business strategy, to ensure that business leads to higher corporate value for the Group. This new method of business evaluation will support investment decisions and ensure that investments are consistent with our management strategy, including their future potential. 

Advanced Business Management is a foundation for raising corporate value. In tandem with  management policies, it will improve our ability to build an ideal business portfolio. We will gradually roll out the initiative from the second half of this fiscal year in support of better performance. 


D: Operating Company for New Integrated Container Shipping Business -Progress status report for business launch-

Finally, I would like to report on the progress of the launch of ONE. In July 2017, we established a holding company in Japan and a global headquarters in Singapore. In October, each of the regional headquarters and the Japan local office, ONE JAPAN, began operations. 

The regional headquarters are in Singapore, Hong Kong, the United Kingdom, the United States and Brazil. Regarding the antitrust approval process, unfortunately we have yet to receive approval in South Africa, but we are in the appeal phase and expect to complete approval in January 2018. Besides South Africa, we have received antitrust approval in every other country. We have gradually begun contract negotiations with customers and contracts with port companies and other vendors, with contracts to start from April 2018.

We have also started preparations for various operations required by the new company, including IT infrastructure, safe navigation systems, environmental management and corporate functions. Since ONE is a large, global company, there are many issues remaining before we begin sales activities in April 2018. The business plan is currently on schedule, however, with no major roadblocks in our way. The three companies will combine their capabilities to build an appealing and competitive company.

Thank you very much for your kind attention.

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