Ladies and Gentlemen,
It is a pleasure to share this report with you on "K" LINE's Fiscal 2006 3rd Quarter financial results, and our prospects for full-year Fiscal 2006.
First, before going into contents of this report, let me touch on the collision of our VLCC "Mogamigawa" with a U.S. nuclear submarine in the Persian Gulf that occurred on January 8th, which we understand has caused you considerable concern. At this moment she is in a dockyard in Singapore undergoing thorough repair and being checked for any effects from the accident. I suppose this incident will have little effect on our corporate profit or loss, and we will fully report on this matter when all processes are completed.
Now, I will explain according to the Power Point slides in front of you, and the documents in your hands.
A-1. Financial Results for 3rd Quarter Fiscal 2006
I will start off by talking about accumulated results during the 9-month period from April 1 to December 31, 2006.
Consolidated Operating Revenues were 800.5 billion yen, an increase of over 110 billion yen and a rise of 16.2% for year-on-year basis. By contrast, Ordinary Income was 41.7 billion yen, a significant 27.8 billion yen or 40% drop from last year, with Net Income being 35.6 billion yen for an almost 30% fall. Average exchange rate resulted in 116 yen per one U.S. dollar, and bunker oil price was 325 U.S. dollars per kilo ton.
Compared to the same period in Fiscal 2005, the exchange rate weakened by 4 yen, which made for a positive effect of 2.6 billion yen. Bunker oil price rose by 50 U.S. dollars causing profits to drop over 10 billion yen.
Reviewing overall, it is notable that so-called ratio of Consolidated to Non-Consolidated has greatly improved, because our group companies earnings faired quite well while Company gained less earnings. For reference, the ratio is 2.16 at the level of Ordinary Income, and 2.42 for Net Income.
A-2. Key Points for 3rd Quarter Fiscal 2006
To sum up key points in one sentence, Revenues increased but Profits decreased for year-on-year comparison. Among factors for sales being up, we can count business expansion in every business division, and some effects of yen depreciation against the U.S. dollar.
One of the negative factors to profits is that restoration of container freight rates was not fully achieved, which had started to drop from early autumn of 2005. Other factors include hike in bunker price, etc. Although we have exerted efforts to earn more profits through business expansion and cost curtailment, such minus impacts more than offset them. Ordinary Income was reduced by 27.8 billion yen from the previous year.
I will talk about division-wise trend later but in a nutshell, the downturn in Containership Business was compensated for by other business sectors.
A-3. Outline of Division-wise Results in 3rd Quarter Fiscal 2006 for Containership Business
For Containership Division as a whole, revenues rose along with fleet expansion in comparison with the same term last year. Operating Revenue growth was about 35 billion yen, which improved overall company results to some extent. However, Ordinary Income fell by over 30 billion yen due to freight rates being down which I mentioned before and bunker price surge, etc.
Although our business expanded as scheduled, and loaded cargo volume grew almost 11% from last year, our basic problem was freight rates dropping by 14 % compared to the previous year's level, especially in Asia-Europe trades. Furthermore, additional costs for trans-shipments, etc. were caused operationally through ship allocation changes which arose from rationalization of service routes, or deployment of newbuildings. Costs for feeder, or trucking, etc. have also increased due to bunker price staying higher.
A-4. Outline of Division-wise Results in 3rd Quarter Fiscal 2006 for Dry Bulk Carriers
In the Dry Bulk Carrier sector, both revenues and profits rose for year-on-year basis. Business scale was enhanced with 16 newbuildings delivered by this 3rd Quarter, which resulted in over 11% rise in operating tonnage.
As for the freight market, although the large-size vessel market was tentatively in a slump during the1st Quarter, it picked up later and now markets for all type of vessels have become positive, which resulted in both revenues and profits being up. I believe what mostly affected the markets was crude steel production growth in China, which increased about 20% annually to reach 420 million tons, together with their imports of related raw materials.
A-5. Outline of Division-wise Results in 3rd Quarter Fiscal 2006 for Car Carriers
In this sector, we have achieved both revenue and profit improvement over the previous year due to contribution of 5 new ships. Total number of cars carried moved upward to over 2.3 million, growing about 16 % from the same period last year.
In addition to the strong cargo demand, efficient ship operation enabled us to enjoy rising profits.
A-6. Outline of Division-wise Results in 3rd Quarter Fiscal 2006 for Energy Transportation
In our Energy Transportation business, total revenues and profits both increased. By 3rd Quarter of this Fiscal year, one LNG carrier and also one AFRA-Max tanker were added to our fleet, and freight market for the AFRA-Max tankers has been rather stable. Thanks to these factors, we have achieved steady profits here versus Fiscal 2005. As you well know, AFRA-Max tankers managed by our subsidiary "K" Line (Singapore) Pte Ltd are especially being operated smoothly.
A-7. Outline of Division-wise Results in 3rd Quarter Fiscal 2006 for Other Business
In this 'Other Businesses' segment, for the Short Sea/Coastal Shipping sector, domestic ferry services in Japan operated by Kawasaki Kinkai Kisen Kaisha, Ltd., our consolidated subsidiary, achieved increased sales, however continuing high level of bunker oil price diminished their profits.
In logistics business, we could enjoy rise in both revenues and profits due to comparable solid cargo movements and business expansion through setup of "K" Line Logistics, Ltd. last July.
B-1. Prospects for Fiscal 2006
Now, I will move to yearly prospects for Fiscal 2006. First, please have a look at the horizontally long table at the bottom of this slide which shows quarter-basis Ordinary Income. As you see, for this 3rd Quarter it was 17.1 billion yen. Though for 1st and 2nd Quarters of Fiscal 2005 we earned around 25 billion yen, it sharply dropped in 1st Quarter Fiscal 2006, then since this 2nd Quarter it has started to regain step-by-step supported by business expansion overall and positive dry bulk market.
As to yearly prospects for this Fiscal 2006, including estimation for 4th Quarter, we expect Operating Revenues for full year of 1 trillion 80 billion yen, which is 30 billion yen increase from the last forecast we released with our 1st Half results in November 2006.
When our 1st Half announcement was made last November, prospects for Ordinary Income for the full year were estimated as 61 billion yen, which was 2 billion yen below what we had expected in May last year when our Fiscal 2005 results were issued. This time, however, we have revised the annual prospects upward from 61 billion yen to 63 billion yen because freight rates for dry bulk carriers have been quite solid, and so Dry Bulk Carrier Division together with Car Carrier Division will recover the profits still diminishing in our Containership Division, and also because fuel oil price has calmed down.
As for Net Income, we see 51.5 billion yen, a 0.5 billion yen rise from our prediction as of November 2006 when we publicized 1st Half financial results.
Premise for exchange rate is 116 yen per U.S. dollar, and fuel oil price of 290 dollars per kilo ton for this 4th Quarter. I suppose 116 yen may look somewhat as an odd sum for exchange rate presumption, but it does not mean anything special. For us, lower yen to the U.S. dollar is advantageous; however, historically we have been somewhat fearful when U.S. dollar depreciation continues for a long time. So, we are not comfortable in setting the exchange rate at the present 120 yen per U.S. dollar level, nor could we have it remain unchanged at 115 yen which seems to be slightly conservative.
So far, as exchange rate movements have been favorable for us, we can say the assumption was somewhat on the conservative side. Just for reference, with regards to effect of the Yen-U.S. dollar exchange rate, fluctuation for Quarterly basis of 1 yen fall increased Ordinary Income by approximately 200 million yen.
B-2. Business-wise Operating Revenues/Ordinary Profit Loss
This table shows revenues and profits from Containership Business and Other Businesses separately. Ordinary Income from Containership for full year is forecasted at minus 7.8 billion yen, 38.3 billion decrease from Fiscal 2005, and those from Other Businesses are prospected to reach 70.8 billion yen, up 12.7 billion from last year, which is mainly attributed to Dry Bulk Carriers and Car Carriers.
B-3. Key Points for Fiscal 2006 Prospects
The outline for each business is as mentioned in the papers in your hands, so please let me proceed to the next slide for Containership Business.
B-4. Outline of Division-wise Fiscal 2006 Prospects
As you well know, revised forecasts for annual profits for the division declined by 3 billion yen compared to previous expectation as of the announcement of our 1st Half results. As our own guidance, 3rd Quarter results amounted to 2.7 billion yen lower than the estimation. In this regard, 4th Quarter is prospected almost in line with the previous projection.
(Returning to) B-3. Key Points for Fiscal 2006 Prospects
For Other Businesses than Containership, business of both Dry Bulk Carriers and Car Carriers has been in favorable business trend and we still see positive circumstances during 4th Quarter. Tanker business is prospected as almost stable. Especially for this fiscal year, we have enhanced our fleet more than usual. Let me now jump to the last slide.
D-2. Progress of "K" LINE Vision 2008+ Fleet upgrading plan
As you can see for our fleet upgrading plan in this slide, a total of 47 newly-built ones are scheduled for delivery in this Fiscal 2006, which is maximum for the three years from Fiscal 2006 to 2008 which covers our on-going management plan "K"LINE Vision 2008-Plus. These new ships will contribute to profit growth little-by-little.
(Returning to) B-4. Outline of Division-wise Fiscal 2006 Prospects
As I briefly touched before, during this Fiscal 2006 a total of 22 newbuildings of dry bulk carriers and 4 oil tankers are scheduled to be delivered. 6 car carriers will be completed in the 2nd Half and our fleet of LNG carriers will consist of a total of 32 vessels at the end of this fiscal year as a result of 1 vessel to be added in the 4th Quarter.
According to these plans, much depends of course on movement of containership freight rates, although we see our estimation for the 4th Quarter as being reasonably solid. This concludes the review of annual prospects for Fiscal 2006.
C. Business Perspective for Fiscal 2007
As I have considered for some time, because freight rate level for Containership Business fell at the beginning of autumn in 2005, Fiscal 2006 is the most severe for us in the recent several years.
In view of this, our entire "K" Line Group profit & loss situation significantly depends on how and when we can restore Containership freight rates. I have requested every business segment throughout the Group to make their best efforts to achieve a bottoming out in this Fiscal 2006, and start recovery in Fiscal 2007, if not V-shaped.
We have not completed calculating our firm forecast for Fiscal 2007, but present cargo demands are quite strong in each business sector.
Even in Container Business, cargo volume for trunk lines to the U.S. and the E.U shows double digit increase and freight rates for Asia/Europe trade, which have been of greatest concern, are being gradually restored. I see Fiscal 2007 as being a year of distinctly telling response.
D. Progress of "K" LINE Vision 2008+
D-1. Progress of "K" LINE Vision 2008+ Cost Reduction
Among various measures for "K" LINE Vision 2008+, cost-curtailing campaign is one of most importance. We have tried to reduce costs in many fields and we expect to achieve around 10 billion yen for this full year in total. The major portion is in operating costs for Containership Business, including bunker oil savings due to navigation at most economical speeds, or so-called reorganization of service routes
(Returning to) D-2. Progress of "K" LINE Vision 2008+ Fleet upgrading plan
This slide shows the progress of our fleet upgrading or investing plan at which we took a look previously. This schedule until Fiscal 2008 has been almost unchanging with neither decrease nor increase. So, in a sense, we have little to look forward to, although this might be a misleading expression. At any rate, this plan has little room for further enhancement. The upgrading plan has been going ahead as scheduled, and we will be able to establish an appropriate structure to navigate a fleet of 500 vessels by the end of Fiscal 2008.
In closing and in view of these prospects, we will hold our dividend payment at 18 yen per share annually, including 9 yen as interim dividend, as we have announced since May last year at the start of this fiscal year.
This completes my explanation today. Thank you very much for joining us.
