Ladies and Gentlemen,
It is a pleasure to share this report with you on "K" LINE's Fiscal 2005 1st Half consolidated and non-consolidated financial results, and our prospects for full-year financial position for Fiscal 2005, which were disclosed on 10th of November.
I will explain according to the Power Point slides in front of you.
1. Financial Highlights for 1st Half Fiscal 2005
In a nutshell, during this 1st Half we earned more in sales, but less in profit than in the 1st Half last year.
Compared to our projection announced on August 4th at the close of our 1st Quarter 2005 financial report, all figures remained almost unchanged
Half year Operating Revenues of 454.8 billion have reached a new historical high. Ordinary Income has become second highest only to that in the 1st Half, and Net Income again set a record high. 34.9 billion yen of Net Income was slightly over our previous August 4th estimate of 34 billion.
For year-on-year comparison, as I just mentioned, revenues increased and income, especially Ordinary Income, decreased. I will explain about the factors later. For guidance, Operating Revenues rose 10% from the previous Half, and Ordinary Income fell 20%
2. Key Points for 1st Half Fiscal 2005
We have listed the variable factors here: Exchange Rate, Bunker Oil Price, Market Level, etc.
From our last forecast on August 4th, Ordinary Profit diminished 400 million yen for this 1st Half due to slight rise in bunker oil price.
Compared with 1st Half last year, Ordinary Income decreased by 10.4 billion yen due to the jump of about 77 U.S. dollars per metric ton in fuel oil price. We can count on roughly 130 million yen loss semi-annually from one U.S. dollar rise per one metric ton in bunker oil price.
Then, Market Volatility caused negative effect of 2 billion yen.
The biggest factor for this item is drop in dry bulk market by almost 30% from same period last year while average Containership freight rate was slightly increased in some trades.
As regards Business Expansion, loaded cargo volume increased by nearly 7% in Containership business, and also grew in Bulker, Car Carriers, Thermal Coal Carriers and Tankers. These expansions improved profit about 2 billion yen.
As we have mentioned every time, we continue tackling cost reduction as part of our corporate culture which dictates that we be severely cost-conscious as an inherent gene of our company. Fruit from these efforts amounted to 2.2 billion yen.
Other factors such as increase in ship related costs, charterage, etc. gave negative effect of 4.1 billion yen.
In total, Ordinary Income declined 12.3 billion yen from 1st Half last year.
Fortunately there were no major swings in average exchange rate for year-on-year comparison.
We can say the most important factor among these was rise in bunker price. Our bunker consumption is expected around 4,050,000 tons for full year, and for this 1st Half, almost 2 million tons were consumed. About 3 billion yen of the 10.4 billion was caused from oil consumption increase along with our business expansion. The rest is from the effect of price hikes.
3. Trend of Division-wise Results in 1st Half Fiscal 2005 for Containership Business
As you know well, containership business is the major part of our core businesses, and so the out-turn from this division determines how we will be overall.
Fortunately, loaded cargo volume reached 1,330,000 TEU, almost 7% increase from the results of the same period in the previous year, which was mainly because of service enhancement in Asia-North America loop, both for the U.S. West and East coasts.
We were also able to realize some freight restoration. In average, about 7% rise was achieved compared to 1st Half of Fiscal 2004.
Counted as negative factors are the "price-up" of bunker oil, as mentioned before, and also charterage increase.
For the year-on-year basis, revenues have grown but profit has stayed at almost the same level, i.e., Operating Revenues for Container segment is 222.8 billion yen, and Ordinary Income is 20.6 billion yen.
4. Trend of Division-wise Results in 1st Half Fiscal 2005 for Bulker Services
In the Bulker sector, as noted above, operating tonnage increased slightly over 6% from previous year. However, because of market freight level going downward in May, just after Japan's long consecutive so-called 'Golden Week' holiday, this caused profit decrease.
In the long view, bulk market trend generally shows state of plateau from last year. The biggest factor considered for that is growth in crude steel production in China and corresponding increase in import of raw materials, which have still not stopped at all, and so cargo movements will be positive in general.
5. Trend of Division-wise Results in 1st Half Fiscal 2005 for Car Carrier Services
As for the Car Carrier sector, the number of cars we carried rose about 50,000 units from 1,250,000 to 1,300,000 compared to the same period last year.
We have enjoyed stronger cargo volume, especially in the off-shore trades even though the profitability gain there is somewhat lower than in other trades. In addition, bunker price hikes, as well as increased charterage that has accelerated with shortage of PCCs, have somewhat reduced profit.
6. Trend of Division-wise Results in 1st Half Fiscal 2005 for Energy Transportation
In Energy Transportation, as you know very well, our business scale is relatively small but we have earned solid profits overall.
In sector for LNG carriers, we added one new building into our LNG fleet during this May that increases our own, or I should say our 'jointly-owned' fleet to 27 in total, as we have many vessels jointly owned and operated.
As to the Thermal Coal Carrier sector, our core fleet of 15 Corona-type vessels has been in smooth operation, and loaded cargo volume steadily rose approximately 4% from the previous 1st Half.
For the Tanker sector, we are operating only 4 VLCC's in our fleet without any 'free' portion during this fiscal year that would be affected by market volatility. However, AFRA-Max tankers operated through our Singapore subsidiary are considerably affected by the spot market that had temporarily declined, but the profit level remains almost the same due to fleet expansion with a new ship delivered at the beginning of this year.
As a whole, our Energy Transportation division is in stable situation compared with previous year.
7. Prospects for Fiscal 2005
Greater concern would be how things go in the 2nd Half Fiscal 2005.
First, premises for exchange rate remain unchanged from 110 yen per U.S. dollar, and fuel oil price which had the most negative impact on profit fall as explained earlier, has been reviewed as 300 dollars for this 2nd Half. The sensitivity is calculated at roughly 600 million yen loss or gain due to 1 yen up or down per One U.S. dollar, and as 130 million yen yen decrease or improvement when there is rise or fall of One dollar per metric ton. Those effects are really significant.
Right now, we cannot see whether future crude oil prices will go up or down, but since it is already mid- November and most fuel oil to be consumed in this 2nd Half has already been ordered, we do not see the average oil price could dramatically change from 300 U.S. dollars.
Based on these assumptions, we estimate Operating Revenues for full year at 925 billion yen, which will surpass the 900 billion yen level for the first time in our history.
Ordinary income is expected at 91 billion yen, which is lower than the previous prospect of 105 billion yen, but I believe we can achieve this 91 billion yen. Net Income forecast of 64 billion yen is also a new record, partly favored by the fact that asset-impairment accounting had already been applied in the previous year.
Regarding dividend amount, we have announced 9 yen per share as interim dividend, and we currently intend to pay a total of 18 yen per share annually, as we predicted upon disclosing Fiscal 2005 1st Quarter financial status on August 4th, because we see our Consolidated Net Income in revised plan still achieving a historical high, while Ordinary Income is declining.
I had made a promise to shareholders to increase payment ratio gradually based on our basic policy that we pay dividend on an appropriation of around 20 percent of net income on a non-consolidated basis. As now, dividend of 18 yen is equal to an even 25% ratio against amended Net Income, and I would like to maintain the presently prospected 18 yen per share.
We expect an additional extraordinary profit of about 3 billion yen from gain on sale of investment securities plus 900 million yen yen from sale of unused land situated at Rokko-Island in Kobe, which had not been included in our previous plan issued on August 4th.
8. Key Points for Fiscal 2005 prospects
Key points for full-year prediction is as mentioned here. In comparison with our last estimation and Fiscal 2004 results, the most variable factor is still hike in bunker oil price. As it is set at 300 dollars for the 2nd Half, the yearly average is calculated at $280 per metric ton, compared to $258 in our prospects disclosed on August 4th, and $192 in last year's results.
For year-on-year basis, negative effect of over 24 billion yen results from the soaring oil price.
Loss from Market Volatility is estimated around 7 billion yen compared to previous projection and approximately 5 billion yen from last year's result, which is partly because we had not changed market conditions in the last financial plan. We see bulker market will be the most important factor among any of the ship markets.
As discussed in the interim results, Business Expansion has progressed well and Cost Reduction has also been effective. As a whole, our revised forecast for Ordinary profit for the current fiscal year is 91 billion yen, 16.2 billion down from the previously-expected 107.2 billion yen.
9. Key Points for Division-wise prospects
Let us now touch on Division-wise prospects.
As to Containership Division, though we have heard questions raised about economic trends in the U.S. and E.U., so far for this 2nd Half cargo movement is quite positive overall, and so a favorable tone is expected in the Asia-Europe, Asia-North America loops and in Intra-Asia service.
Bulker market premises are as indicated here. We revised daily charterage for cape-size, for example, to $44,000 from $65,000 in our original expectations and for the other types as well.
For our Tanker sector, although it will not cause so much fluctuation to our overall corporate profit structure since our business scale is relatively small, the market level is set at slightly higher than the 1st Half. Especially regarding AFRAMAX tankers operated in Singapore, which are comparably affected with level in the market, our reviewed market level is 200 in World Scale while present actual level is nearly 300. We feel that in the event this level is continued until the end of this year, some additional profit could be gained.
10. Major Financial Indices
When we can achieve those income targets for this full year, Major Financial Indices here will be realized, which seems to be steadily getting closer toward the final targets set in our "K" Line Vision 2008, even though revised forecast for this 2nd Half shows slight down-turn from the previous one.
As to Cash Flows, because profit level is reviewed lower, Cash Flows from Operating Activities decrease; and on the other hand, Cash Flows from Investment Activities grow because investment amount is increased due to 3 new LNG carriers for Tangguh LNG Project, etc.
So, indices are slightly going down generally from our last prospects, but improved from what they had been for a long time.
11. Progress of Fleet Order Plan
Our fleet expansion plan has been updated from our mid-term management plan "K"Line Vision 2008 issued May 2004, as listed in this table. Our total fleet at the end of this September is 384, and it will be increased to 409 by the end of this Fiscal year, March 2006.
Talking about breakdown for the change, 36 vessels are coming into our core-fleet during this fiscal year, including long-term charter vessels, 18 for 1st Half, and another 18 for 2nd Half. Balanced with chartered-back vessels, 25 vessels are scheduled to be added in the core-fleet.
Division-wise there will be 5 Containerships, 17 Bulkers, 8 PCCs, 2 Thermal coal carriers, and 4 LNGs.
For the next fiscal year 2006, total of 37 consists of 6 Containerships, 10 Bulkers for iron ore and coking coal, 6 Bulkers for general cargo, 8 PCCs, 2 LNGs, 2 Thermal Coal carriers, and 3 Tankers.
12. Cost Curtailing Campaign
For the current year, we have targeted 5 billion yen, and 2.2 billion has already been achieved in the 1st Half. Items cover a wide variety but each item is not so huge an amount. We are confident of achieving the remaining 2.8 billion yen for the 2nd Half.
2 billion yen of yearly total for "various cargo charges reduction" is an accumulation of minute items, so-called 'leaf picking' in our offices all over the world; for instance, cut down on terminal charges through negotiation for contract extension, reduction in feeder costs, etc.
Then, a somewhat bigger item is total of 1.2 billion yen of Subsidiary companies' various costs, consisting of reduction in administrative cost in each office for overseas affiliated companies, or operating costs in subsidiaries for terminal operations and logistics in Japan, etc.
Division-wise, 3 billion of 5 billion yen are expected from Containership Business, including overseas offices.
That concludes my explanation today about the settlement of accounts for the 1st Half and the revised prospects for the full Fiscal year.
Thank you very much for joining us today.
