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Major Q & A

【Containership】
Q1: In Containership Business, I thought you suggested that three Japanese shipping companies are competing for market share. Please explain the background and whether this situation is continuing.

A1: Since last year, shipping companies have announced various mergers and integrations. Those involved are APL and CMA-CGM; COSCO Shipping and OOCL; Maersk and Hamburg Sud; Hapag Lloyd and UASC; and ONE. So far these are just announcements but in reality, companies are still operating separately. Looking at normal supply-demand trends in previous years, we would expect freight rates to begin increasing around this time of year. But it appears there has been a strategic mindset to secure market share before finalizing their mergers and integrations. Of course, the three companies within the ONE group are not competing with each other for market share. The situation is that shipping companies throughout the industry are integrating their businesses and we are moving from an industry with more than 10 companies to one with less than 10. Within this environment, on a macroeconomic level we would expect freight rates to begin to rise. But this hasn’t been the result, and the competition for market share is the only appropriate answer for a trend that we have never seen before.  


Q2: You said that your expenses related to the establishment of ONE are about 4 billion yen. Please explain whether this amount is additional expenses related to the establishment of the new company in July, or whether this amount is expenses generated in the July-September period. 

A2: This is the loss forecast for the period from July, when the company was established, through March 2018 and also includes estimated expenses in the second half. When we announced our first-quarter results, we did not have a firm estimate of expenses and we could not include all of the expenses into the earnings plan. Our current estimate is based on the expenses we can confirm from reports from ONE, and this has been included in the consolidated earnings forecast.


Q3: You expect second-half containership freight rate market conditions to be the same level as in the first half. What is your forecast for the next fiscal year?

A3: Although Containership Business has posted a loss for the past two years, the supply-demand conditions have improved significantly. Unfortunately, freight rates did not recover to the levels we expected this fiscal year. Once alliances have been restructured and as the integration and consolidation among shipping companies settles down, we can expect a recovery in freight rates to appropriate levels in the next fiscal year. From August this year, we should have seen short-term market conditions began to rise; however they gradually declined, as you know. Finally, freight rates have risen from November 1, and we believe the market is ready for a rate increase to a certain degree on the Asia-North America routes. Therefore, instead of next fiscal year, we can expect the second half of the current fiscal year to represent a turning point for freight rates. 


Q4: You explained that freight rates are currently weak due to competition for market share among shipping companies. Do you believe that freight rates will stabilize next fiscal year when the restructuring in the industry has settled down? In the past, we saw competition even among integrated shipping companies following period of integration and restructuring and the freight rates didn’t stabilize quickly. What kind of measures will ONE take to prevent this from happening again next fiscal year? 

A4: Among the three partners of ONE, there is no concern that they will undercut each other in competition. All three companies are eager to do everything they can to make a strong new company, so this is not a concern. Starting last year and continuing this year, the containership industry has undergone a historically transformative change. One of these changes was the alliance recombinant in this past April on a scale not seen in about 20 years. Around this period we have seen the merger and integration of major shipping companies, along with the bankruptcy of a major Korean shipping company. We had expected, after this period of change, to see a settling of market conditions as well. Some shipping companies, however, scheduled temporary voyages to grab market share instead of raising freight rates during the summer high season. For this reason, we were unable to revise freight rates. We finally saw an increase in freight rates on November 1, and we expect to be able to increase rates to a certain degree on Asia-North America routes. We believe this represents a turning point in market conditions. 

Furthermore, reviewing the macroeconomic indicators, the utilization last year and this year has been about 80%. This year, the utilization has been increasing about 5% considering the space available on East-West routes and the supply-demand conditions. This market condition is expected to continue for the next year. From fiscal 2019, we expect the utilization to rise further. From past performance, we know that when utilization surpasses 85%, the supply-demand balance tightens. Given this, we believe that after a period of about a year from integration, the market will become more stable and performance will improve somewhat, not only for ONE, but for the containership industry as a whole. 



【Advanced Business Management】
Q1: You explained that you will use Advanced Business Management to raise stable earnings. Currently, the dry bulk market conditions are improving, creating a favorable environment for the renewal of long-term contracts. Can you please advise whether you recognize it is really favorable condition by implementing a method of Advanced Business Management?

A1: Currently, we are in the process of formulating the details of Advanced Business Management, therefore we are unable to answer how the method will be applied under the current conditions. Rather than a method to be used when extending existing contracts, Advanced Business Management is an effective method for measuring and balancing various risks, such as the risk associated with ordering new vessels and the contracts we can secure for those vessels along with the market conditions. 


Q2: Regarding the “K” LINE version of ROIC, is there a risk that you will become too conservative with your investments given your fiscal 2019 goal of more than 30 billion yen in stable income, as previously announced in the medium-term management plan? Since you have already announced your targets for gross income, please explain whether there is flexibility in your hurdle rate for it. 

A2: The risk-adjusted return is just one measure that we are using in Advanced Business Management. We will use this measure when we are making new investments or assessing business performance. There are many different definitions of stable income. For example, long-term contracts with customers can generate stable income. The level of risk for a vessel with a long-term contract attached to it would be lower than a vessel without a long-term contract. However, though the risk may be lower, the corresponding return might also be low, and we have to make a judgment on the business feasibility. On the other hand, there may be investments in which the exposure is higher but the return is also higher. In our initial trials of this system, our indicators are being used to support the company’s decision-making in cases like these where we need to make management decisions. With these new indicators in mind, we will make investment decisions in consideration of future potential and other factors for investments in divisions where we are aiming for strategic business expansion.  


Q3: Regarding the control of business risk, at the current time, given your total level of risk, about how much market volatility exposure do you need to reduce in consideration of your shareholders’ equity and how have you evaluated this figure?

A3: We will use Advanced Business Management to measure our total level of risk exposure and confirm that we can manage it with consolidated shareholders’ equity. When measuring risk level in the shipping business, we need to consider the fact that we have many different divisions, each with its own special characteristics in terms of contracts and customers. We are now defining more accurate ways of measuring the risk through the development of logical methods. There are general trading companies, banks and other types of enterprises which have specific ways of measuring risk and have made public their levels of risk exposure after many years of refining the accuracy of their methods for managing risk through internal control systems. We appreciate your understanding that we are currently at the stage of refining our risk measurement methods. 


Q4: Please explain your understanding of shareholders’ equity cost. Is your level the same as the commonly accepted market level?

A4: I’m not sure what specific level you have in mind, but there is no major difference in the indicators we use and standard market indicators. We also consider ROE from the medium- and long-term perspectives. 



【Others】
Q1: Please explain the background for your decision on reversal of allowance for loss related to the Anti-Monopoly Act, which is included in the non-operating income. 

A1: Regarding a portion of allowance for loss related to the Anti-Monopoly Act, in the previous fiscal year we recognized this loss on the assumption of a partial settlement in the event the U.S. class action lawsuit was approved by the U.S. federal courts. In this fiscal year, however, the U.S. federal courts dismissed the lawsuit, and therefore we have reversed a portion recognized in the last fiscal year. This is stated in the notes to the financial statements, including the amount reversed. This applies only to the U.S. lawsuit.

 

Q2: Regarding the impact from structural reforms and the provision for allowance, please explain the effect of the allowance for losses in Containership Business. I believe the amount will decline slightly in the second half of this fiscal year, but what will be the impact next fiscal year from the 50.9 billion yen recognized? 

A2: Regarding provisions in the cash flow statement, we have recorded a decrease in allowance for loss related to business restructuring of about 9.9 billion yen for the first six months. This is the actual amount. We have not disclosed the amounts for the second half or for the next fiscal year.


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