Investor relations Financial Report

(Business Structural Reform)

Q1.		As 50.0 billion yen of business structural reform costs for Containership Business were posted for this fiscal year, please advise estimated breakdown together with allocation among operating costs, non-operating loss and extraordinary loss?

A1.		For 1st Half, 5.2 billion yen for Ordinary Income/Loss, and 13.4 billion of extraordinary loss; for 2nd Half, nil for Ordinary Income/Loss, 31.4 billion yen for extraordinary loss; full year basis, 5.2 billion yen of Ordinary Income/Loss, 44.8 billion of extraordinary loss; in total 50.0 billion yen. These costs include fees for redelivery of chartered vessels before contract expiration, and also for changing containership orders to other ship types.


Q2.		Regarding business structural reform, indicated in Slide C-1, 25 Containerships and 9 Car Carriers should be redelivered, or so. What is the number planned for Fiscal 2010, and 2011?

A2.		We will basically implement business structural reform intensively in this fiscal year, and thereby carry out disposal of all uneconomical ships within this year as much as possible.


Q3.		As you stated that effect of the reform costs for Containership sector was 5.2 billion yen as Ordinary Income/Loss, is this somewhat related to approximately 5.9 billion yen booked as the item of ’Loss on cancellation of derivatives’ in the Statements of Income in ’Financial Highlights’?

A3.		About 5.2 billion yen of the non-operational loss is for Containership division.

(Containership Business)

Q1.		Revised prospects of earnings for 2nd Half Containership division are forecasted to decline from previous plan. Was daily Containership operation without the reform costs estimated to go up or down comparing with the last forecasts?

A1.		For Containership business in 2^nd Half, we see loading volume and average freight rates being almost the same as expected as of July. With regard to freight rates, in some routes freight restoration has been delayed, but in other routes, it has recovered more than expected. As a whole, there are no negative factors in terms of market, cargo volume or freight rates. However, as an effect of cost reduction, although accumulated total achievement was calculated to increase from 58.0 to 60.0 billion yen, profit was slightly pushed down due in some part to rationalization of ’CKYH’ Alliance being delayed, and also cost increase of some minor items.


Q2.		What were the developments in Containership Business from 1st Quarter to 2nd Quarter? Except for the structural reform costs, loss incurred in this sector remained almost unchanged, or rather expanded slightly quarter-by-quarter. Why was the loss not shrunk while load factor was much higher, referring to ’Supplementary Report’ distributed now, and when freight market itself was said to have improved to some extent but not as much as you planned?

A2.		As quoted in Slide A-1-2, Ordinary Income for Containership Business in both 1st and 2nd Quarters remained almost unchanged, excluding 5.2 billion yen for business structural reform reported in 2nd Quarter.

		Roughly speaking, during 1st Quarter, in Asia-Europe and North-South trades, freight rates almost hit bottom. On the other hand, in the trade from Asia to North America, effect of higher rates of previous Service Contracts (annual contracts) signed last year until around June still remained. In the 2nd Quarter, although freight rates for Asia-Europe and North-South trades started to increase and earnings improved, rates in Asia-North America trades were down due to revision of Service Contracts after June and profit therefore worsened. These 2 factors canceled each other out, and so almost the same level was reached as in 1st Quarter. Although we tried hard to seek rate-up for Asia-North America trade with our customers around August in spite of it being mid-term of contract period, that effort was not successfully achieved as had been expected because of it still being in the contracted term.


Q3.		Regarding assumed Containership freight rates for 2nd Half, we understand you have counted a certain level of improvement mainly for service loops between Asia and Europe; how do you see the possibility of achieving your targeted rate levels for 2nd Half based on today’s recovery situation and negotiating developments at present and in the future? In addition, talking about announcement made by TSA (Transpacific Stabilization Agreements) the other day about freight rate restoration for the next year, how and why did they set the level as such?

A3.		As to premises for our revised projection, because we were coming into winter slack season, we set the freight rate at the end of September as starting point for October, and kept it almost flat afterwards. As you know, for various routes, especially that for Asia-Europe, it is reported that many shipping companies are trying to restore rates recently, but for this moment we calculated our projection predicated on almost flat basis.

		TSA made announcement concerning freight rate guideline to be restored for Asia-North America routes as follows: for cargoes destined to ports on the West Coast, U.S.$800/FEU (40-foot Equivalent Unit); those for inland points or ports on the East Coast through the Panama Canal, U.S.$1,000/FEU; which were not decided by only a small party of shipping companies, of course, but every major company joined the discussion and achieved consensus, considering the amount that could surely be secured in reality and that had dropped, and we should concentrate on restoring first of all.


Q4.		In Containership division from the 1st Half to 2nd Half, almost 20.0 billion yen is forecasted to improve. How about the trade-wise situation?

A4.		In Asia-Europe and North-South trades, freight rates were consecutively raised in July, August and September. In terms of earnings, between 4th Quarter Fiscal 2008 and 1st Quarter Fiscal 2009, the worst was Asia-Europe routes, which have now started to show gradual improvement. For 2nd Half, the worst is expected to be Asia-North America trade. But seeing trend in Asia-Europe routes where freight rates have been restored, apart from supply-demand situation, and due to such miserable earnings, we can be quite positive about freight rates for Asia-North America trades next year.

(Dry Bulk Business)

Q1.		In Slide C-2, Review of Fleet Upgrading Plan, total number in your bulk carrier fleet is scheduled to expand in just 2 years from 174 as of the end of Fiscal 2009 to 220 for Fiscal 2011. Are we to think most of these vessels are almost free from market risk because you have already secured long-term contracts or so? Is the free portion in your fleet as of the end of 2009 expected to extend noticeably in 2011?

A1.		For this 2nd Half Fiscal 2009, we have significantly shrunk the portion for market exposure in our fleet. For Fiscal 2010, we have also taken possible measures to decrease the portion to a certain extent. However, as for Fiscal 2011, two and half year from now, it is rather difficult to obtain contracts now, so you can note that a considerable ratio of our fleet is still open to the market. However, I would emphasize one thing in the case of large-size vessels, mainly Cape-size, our counter parties are firms like steel mills or power companies who themselves are primarily fond of long-term contracts, and so for most of the larger type vessels, you can assume cargo contracts have already been fixed.

(Car Carrier Business)

Q1.		As it is said that recovery in cargo trend for PCC’s has been slightly delayed, you have suggested for the 2nd Half that it might recover to around 70-80% of the peak. If it is realized, how can we expect your profit to be coming back? For next fiscal year for example, in case cargo volume comes to 70-80% of the peak on a yearly average, how much can we anticipate profit returns compared with the peak level?

A1.		Very roughly speaking, from Fiscal 2007 until 1st Half of Fiscal 2008, our monthly loading units were slightly over 200 thousand. Those for this 1st Half Fiscal 2009 were about 100 thousand, decreased to almost half. Our present projection for this 2nd Half is based on around 150 thousand units per month. Our fleet capacity have already been adjusted by a total of 25 vessels, including 16 scrapped and 9 redelivered, as of the end of September, which decreased our fleet scale from 90 ships as of the end of last fiscal year, to about 70. To carry these 150 thousand units monthly, space of 70 plus alpha ships will still slightly exceed required capacity, but it has been close to balance. However, it is still not a situation where our profit can grow sharply. We will try our best to take all possible measures for further improvement.

		In next year 2010, recovery pace of cargo movement is uneven all over the world. Although we cannot say that every region will recover smoothly in this way, we expect recovery in some degree without doubt, and cargo volume will be about 70% compared with its peak in 2007. Last year our Car Carrier fleet was about 90 vessels and it will decrease to about 70 vessels in next year which is almost 30% decrease. If the decreased fleet will be fully operated next year, we think at present that profit level will reach to some extent.

(Prospects for Fiscal 2009 (other than Containership Business))

Q1.		Comparing 1^st and 2^nd Half there was nearly 13.0 billion yen improvement in “Other Marine Business.” Please explain further, for example how much is for Dry Bulk Department?

A1.		Comparing 1^st Half results and 2^nd Half prospects, 2^nd Half of Dry Bulk Department is almost the same as 1^st Half. As Current market is better than expected in our pre-conditions, we think that there is some hope of earning more than our projection. In 2^nd Half, about 20% of our Dry Bulk fleet is so-called free portion. Main factors of improvement are Car Carriers and Energy transportation, with Car Carriers making greater contribution rather than Energy transportation.

(Prospects for Fiscal 2010)

Q1.		Although president mentioned he had image that ordinary income will reach triple digit in next year, how can you forecast that? Because we heard that effect of Business Structural Reform which posted 50.0 billion yen this year is making improvement of yearly 7-8 billion yen next year, I think this is not enough at all. How do you reach that amount ?

A1.		The image of triple digit ordinary income next year is, as we explained, not the figure that was built up after close investigation. As we posted large amount of Business Structural Reform cost this year, we must achieve recognizable improvement after next year; otherwise, saying that would become meaningless. While we are at least aiming to improve, the biggest factor is that, as we explained in Containership business, after this August freight rates of Asia-Europe trade, in other words freight rates of each trade line except Asia-North America, will be picking up considerably.

		In Containership business trade lines where a number of ship operators are competing, price-cutting wars without having learned their effect have occurred again and again in the past. However we think the pace of freight restoration will not crash this time because each ship operator has been shocked to a large degree which was not the same in past examples. For that reason we think pace of freight restoration after this August may continue next year, which should give large impact for earnings improvement of total Containership business sector except for so-called Business Structural Reform cost.

		In addition, Asia-North America trade line freight decline in this year is terrific. On the other hand, although how cargo volume will be is still under discussion, watching cargo prospected for next year that has been received from various sources, volume will decline considerably over 2008-2009, maybe around 20% decrease. But in some data, cargo volume will recover nearly 20% in next year. Consequently current circumstances will be improved to some degree for Asia-North America trade next year. Considering such cargo volume trends, we think we can expect freight restoration to some extent; therefore, we don’t see Containership sector’s profit as deficit of 20 billion yen in each half year period.

		With regard to Dry Bulk, there is the so-called "2010 problem" as one of several fears about the market due to excessive capacity being delivered in 2010. Even so, considering that delivery of newbuildings will decrease compared with what we had originally expected, and the fact that Chinese purchases of mainly iron ore are still firm, we can expect steady market to some degree.

		As for Car Carriers, cargo volume is on track to recovery in this 2^nd Half and if it continues into next year, we think increase range between this year and next year will be more than just a little. If cargo volume is 80% of its peak, even considering that per ship cost has increased appreciably because lower-cost vessels were eliminated from our fleet due to scrapping, we think it is possible to reach some profit level, although this is on assumption that cargo volume recovers to 80%.

		Based on above, we have no doubt about turnaround being at least even although exchange rate is 80 yen/$ and bunker price $500/mt, and expect triple digit profit depending on some favorable conditions.

(Others)

Q1.		Do you feel a desperate need for capital reinforcement?

A1.		As long as there’s no problem of financing, we would like to consider watching fiscal conditions and financial position, and we have therefore not studied about capital reinforcement in various ways so far.


Q2.		How many owners do you have relationships with? Are there generally many or just a few? If an owner goes bankrupt, is there any effect to your company?

A2.		The number we have relationships with is 70-80 owners. Although we are not sure about other shipping companies, considering the number of owners in Japan we think we have a relationship with almost all of the sound owners. In case of bankruptcy, although it depends on each contract, vessels seem to be under the ownership of third parties such as financial institutions, etc. and as a consequence, we will preferably manage the charter contract. With regard to financial strength of shipowners, we will be checking from the point of view of risk management from now on.


Q3.		As accounting regulations will change in the near future, and operating leases will show as on-balance-sheet starting from 2015, do you think this will influence present management judgment?


A3.		So far we have used the option of operating leases for a part of our operating vessels and appointed shipowners as mentioned before, showing them as off-balance-sheet. Firstly, the point is just how we should think about showing them as off-balance-sheet; for example, when we discuss with rating agency, in case of long-term operating lease even though it is off-balance-sheet as far as accounting is concerned, we hear that for the agency it is on-balance sheet in a very big way, and in such manner they study our financial affairs from various points. In the near future when operating leases are officially posted on-balance-sheet, since in either case our financial strength is evaluated on-balance-sheet, we will decide which is favorable from the point of finance.

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