Ladies and Gentlemen,
It is a pleasure to share this report with you on "K" LINE´s Fiscal 2006 1st Half financial results, and our prospects for full-year Fiscal 2006. I will explain according to the Power Point slides in front of you, and the documents in your hands.
A-1. Financial Results for 1st Half Fiscal 2006
During this 1st Half we earned more in sales, but less in profits compared to the 1st Half last year.
Half-year Operating Revenues rose above 500 billion yen, breaking our historical high for half-year period, which is 14% growth for year-on-year basis.
By contrast, profits fell slightly over 50% compared to Fiscal 2005, amounting to 24.6 billion yen at the Ordinary Income level.
As indicated in this slide, average exchange rate is 115 yen per one U.S. dollar, almost as we had assumed, and bunker oil price 337 U.S. dollars per kilo ton, which rose by 76 U.S. dollars in comparison with same period last year, but almost in line with our previous estimation.
Regarding Interim Dividend for Fiscal 2006 which ends in March 2007, our Board of Directors resolved to pay 9 yen per share on 10 November 2006.
As for effect of the Yen-U.S. dollar exchange rate fluctuation, as mentioned in the footnotes, 6 yen fall increased Ordinary Income by 2.4 billion yen; and 76 U.S. dollar jump in fuel oil price caused decrease of 10.3 billion yen.
Among Extra-ordinary Items, on non-consolidated basis about 4 billion yen from gain on sale of securities, and on consolidated basis additional 2.5-6 billion yen profit from sale of vessels owned by subsidiary companies, were counted, which contributed somewhat to the increase in Net Income.
A-2. Key Points for 1st Half Fiscal 2006
The results of this 1st Half can be described as 63.3 billion yen rise in revenues and 25 billion yen fall in profits compared to previous year. As you see in this table, we can say the biggest negative factors were bunker oil price hike and market volatility.
As to market volatility factor, freight rates for Containership Business have softened, as I also mentioned when reporting 1st Quarter results. In fact, negative effect from downward rates in this Division is over 14 billion yen compared to 1st Half last year. This factor was also something I touched on in the 1st Quarter meeting when reporting that dry bulk markets were also below our estimation.
A-3. Outline of Division-wise Results in 1st Half Fiscal 2006 for Containership Business
For Containership Division as a whole, revenues increased along with fleet expansion in spite of freight rates declining compared to the same term in the previous year.
Operating Revenues were 243.9 billion yen, and Ordinary Income is minus 3.2 billion yen, which is worse than our prediction when we disclosed our Fiscal 2006 1st Quarter financial status on August 3rd. Though this Division ended up in the red, we have felt somewhat relieved by confirming that freight rates in the most damaged Asia-Europe trades have already bottomed out.
Business expansion has progressed in accordance with our middle-term management plan, "K" LINE Vision 2008-Plus issued on March 10, 2006. All 5 of the 5,500TEU-type newbuildings have been completed and deployed into Asia/U.S. Pacific Northwest trade replacing their 4000-TEU predecessors. We have also strengthened our Asia/U.S. East Coast fleet.
Loaded cargo volume grew over 10% from last year to 1,460,000 units, and annual total of 3 million TEU's is now coming into sight.
Load factor for vessels in each route from Asia to Europe and to North America has still been over 90% supported by favorable economic trend in E.U. and active exports by China, although freight rates for Asia/Europe trade dropped.
Rates in Asia to North America service also went down slightly, while those from Asia to Europe fell more significantly.
Among cost increase factors, bunker oil is still the biggest problem causing approximately 8 billion yen loss compared to the previous year.
A-4. Outline of Division-wise Results in 1st Half Fiscal 2006 for Dry Bulk Carriers
For dry bulk carrier sector during 1st Half, business scale was enhanced, and partly because of that, revenues increased, but at the same time profits decreased due to freight market for large-size vessels being tentatively in a slump, going below the level we expected in the 1st Quarter, which is in line with my explanation during our 1st Quarter meeting.
The markets for middle and small size bulkers, however, have continued to be quite stable.
I will talk about prospects for dry bulk markets later again, but I feel what mostly affects the markets, especially for large-size vessels, is crude steel production in China together with Chinese imports of related raw materials.
We have concluded long-term contracts with Baoshan Iron & Steel Co., Ltd. in China, which was announced recently. On that occasion, we had a chance to talk with many of the management personnel and found steel demand in China is considerably stronger than we expected.
It was indicated that crude steel production would reach approximately 420 million tons for this year. As we had previously felt it would be around 400 million tons, their projection went somewhat beyond our prospects.
There is even another person who said total of 420 million tons was rather moderate, and it could approach around 440 million tons. At any rate, strong demand for steel in China will not calm down for some while.
Though we cannot clearly foresee the world in 5 or 10 years later, we do expect this stable supply and demand situation will continue for some time.
A-5. Outline of Division-wise Results in 1st Half Fiscal 2006 for Car Carriers
In this sector, total number of cars carried moved upward to about 1.5 million, including intra-Europe services, up about 16 % from the same period last year, thanks to the remarkable and booming exports of Japanese cars exported from Japan or from overseas sites of Japanese automakers.
In spite of this cargo volume increase, however, profit level has not grown and instead the same situation has continued for more than one year. But for this 1st Half, profit has shown a trend toward picking up and so we feel we can breath a little easier, although we see this severely tight supply and demand situation continuing until around 2008.
It is difficult for us to expect to see our profits growing at the same ratio that our handling volume is rising.
A-6. Outline of Division-wise Results in 1st Half Fiscal 2006 for Energy Transportation
In our Energy Transportation business, total revenues and profits both rose along with strong cargo demand.
In the LNG sector, our fleet has been operating as scheduled, consisting of 31 vessels at the end of this 1st Half as a result of 1 vessel having been added in the 2nd Quarter.
For the Tanker sector, our fleet of 10 AFRA-Max tankers managed by our subsidiary "K" Line (Singapore) Pte Ltd is in stable operation. I am pleased to say that their on-site operating activities have become well established among our customers, and continuously making successful long-term COA's.
Thanks to these factors, we have achieved better sales and profits here versus the previous year.
A-7. Outline of Division-wise Results in 1st Half Fiscal 2006 for Other Businesses
For the Short Sea/Coastal Shipping sector, domestic ferry services in Japan operated by Kawasaki Kinkai Kisen Kaisha, Ltd., our consolidated subsidiary, enjoyed increased sales with rather stable demand, but bunker oil price hike caused their profits to decrease more severely than was the case in international operations.
In logistics business, "K" Line Logistics, Ltd, into which two of our subsidiaries were merged in July, has not yet achieved any notable success, but we expect some fruitful results in the future as more favorable trends for both marine and air cargo movements are now appearing.
B-1. Prospects for Fiscal 2006
First, premises for exchange rate are 115 yen per U.S. dollar, and fuel oil price of 315 dollars per kilo ton for this 2nd Half. On the basis of this bunker price, we set WTI crude oil price at 62 U.S. dollars per barrel, and Dubai oil at 57 U.S. dollars. Based on these assumptions, we prospect Operating Revenues for full year at 1 trillion 50 billion yen, which includes an added 30 billion yen to the estimation released with our 1st Quarter results.
This revenue growth is being expected because of the favorable note in dry bulk markets that has been maintained in general.
Although prospects for Ordinary Income for the 1st Half, and also for the full year in total, were reduced by 6 billion yen when our 1st Quarter announcement was made in August, due mainly to profits diminishing in Containership Division in comparison with what we had estimated in May, we have upwardly revised the annual prospects from 57 billion yen to 61 billion this time, because fuel oil price has calmed down, which is the biggest factor, and freight rates for dry bulk carriers have been quite steady for almost every size of bulkers due to the factors I explained before, while Containership Division is expected to be below 'zero' even with annual prospects.
Therefore, net Income being forecast is 51 billion yen.
Regarding dividend amount, we have announced 9 yen per share as semi-annual payment, and we currently intend to pay a total of 18 yen per share for full year, just the same amount as last year.
As for Extraordinary items, we expect an additional 7 billion yen or so in total, mainly from gain on sale of securities and vessels as was also the case in the 1st Half. The sale of a vessel has already been made within the 3rd Quarter.
B-2. Business-wise Operating Revenues/Ordinary Profit Loss
Talking about business-wise trends, Operating Revenues from Containership business for 2nd Half are projected to increase compared to 1st Half, and expected to total 500 billion yen annually. Ordinary Income for full year is minus 4.8 billion in total versus 3.2 billion yen loss for 1st Half and some additional loss for 2nd Half despite bunker oil price having decreased from our previous assumption.
Yearly revenues from Other Businesses are prospected to reach 550 billion yen, being more than 50 % of our entire company sales. Annual Ordinary Profit for all Group Companies is 61 billion yen, as I touched on before.
B-3. Key Points for Fiscal 2006 Prospects
Among key points in our yearly prediction, we see bunker oil price still being a significant factor even though we changed the assumption for 2nd Half to 315 dollars per ton from 350 dollars.
Regarding business conditions for each sector, i.e., containerships, car carriers, dry bulk carriers, crude oil tankers, etc., we do not see them as being negative since demand for each is quite strong.
B-4. Outline of Division-wise Fiscal 2006 Prospects
Containership and Dry Bulk Divisions will be touched on later.
In Car Carrier business though, 8 new ships were delivered in Fiscal 2005, and another 8 are to be delivered during Fiscal 2006, and as I mentioned before, cargo demand growth is expected to further exceed that of new vessels being supplied. We have secured rather high level of profits for this section, but it will not rise as sharply as the increase in cargo volume.
In Energy Transportation, one VLCC newbuilding will be received in this December so we should see a comparable increase in stable profits in the future.
B-5. Cost Reduction
In our cost-curtailing campaign that we have been promoting for a long time, the major portion is in operating costs for Containership business, which includes so-called cost reduction effect from delivery of giant ships. In total, we expect to achieve around 10 billion yen for this full year.
B-6. Progress of "K"LINE Vision 2008+ Fleet upgrading plan
Our fleet upgrading plan has been going ahead as scheduled. We received 38 new ships in Fiscal 2005, and during Fiscal 2006, a total of 47 newly-built ones are scheduled for delivery.
B-7. Progress of "K"LINE Vision 2008+ to Stabilize Profits
As to our business structure, about 50 % of revenues are from Containership business where we earned quite a high level of profit for 2 consecutive years: approximately 30 billion yen in Fiscal 2005, and 40 billion yen in Fiscal 2004. However, for this Fiscal 2006, an annual minus total of 5 billion yen is expected, reflecting just how volatile profits in this business are.
Of course, we would like to change our Containership business into a stable and highly-profitable scheme. One objective is to change our portfolio in the business in the medium run. As we have reported, we obviously endeavor to enhance our trunk line East-West services, and we would also like to increase the ratio of north-south trade from the present small percent towards around 10%.
For the company as a whole, our policy remains that we will not loosen our grasp for upgrading and expansion of Containership business, and at the same time we will pour resources into our Dry Bulk and Energy transportation segments, i.e., non-Containership business. We fully recognize deep concerns from the security market that Containership business might be too heavily volatile, especially as seen this year.
Another factor we have targeted in our on-going management plan "K"LINE Vision 2008-Plus is "sustainable growth and establishment of a stable profitability structure" to endeavor to enlarge the steady profits of each Division. This slide shows how the plan is scheduled year-by-year, including fleet upgrading plan for dry bulkers, PCTC, LNG carriers and tankers, which seem to earn comparably stable profits.
We see around 40 to 60 billion yen profits a year even despite the situation in our Containership Division. We will steadily implement our Management Plan, and to achieve even more than the Plan, we will continuously keep working so that we can secure better profitable contracts for our total fleet taking advantage of our superior sales activities.
B-8. Progress of "K"LINE Vision 2008+ Major Financial Indices
Major financial indices are as mentioned in this last slide. Partly because of decline in operating cash flows, interest bearing liabilities have slightly increased, but which we feel this is still not a level where we must be greatly concerned for now. We will surely enjoy fruitful results from our on-going investments a few years later, and so this is not a worry for us right now.
We would like to set our financial policy to remain at DER fewer than 100% sometime in the future. This completes my explanation today. Thank you very much for joining us.