Ladies and Gentlemen, thank you very much for joining us today.
I am pleased to have this chance to explain "K" LINE's 1st Half (April-September) Fiscal Year 2011 financial status and our revised estimate for full-year (April 2011-March 2012) financial position for Fiscal 2011.
Regrettably, we are unable to say results for this period are what we would like them to be. However, we have completed our move to the new Iino Building and are making a fresh start for 2nd Half, trying hard to improve our business performance. Your continued support and encouragement will therefore again be greatly appreciated.
A-1. Financial Results for 2nd Quarter Fiscal Year 2011
As mentioned in this Slide A-1, our financial status for 2nd Quarter Fiscal Year 2011 (July – September 2011), Operating Revenues were 252.8 billion yen; Operating Income was deficit of 8.5 billion yen; Ordinary Income deficit of 11.5 billion yen; and Net Income was deficit of 14.9 billion yen. Ordinary Income was slightly below our 1st Quarter results.
Giving an overview of this 1st Half overall, freight rate markets, not only for containerships but also for dry bulkers and oil tankers, were notably lower for all three of these business segments. In addition, unusual yen appreciation continued and bunker oil price hiked; furthermore, during this period even appraisal losses increased because of falling stock prices which resulted in significant Net Loss.
Moreover, if I can add one more issue, due to after effects of the March 11 Great East Japan Earthquake, many of our car carriers had to be idled which further added to our deficit that occurred in the 1st Quarter.
Here in the lower table of this slide indicating Containership Business, Bulk Shipping Business and Others, Ordinary Loss for 1st Quarter Containership Business was 7.8 billion yen and that for 2nd Quarter was 10.5 billion yen. At the beginning of this year we made our business forecasts assuming we could achieve some success in rate restoration in the summer peak season; however, the results regrettably did not come up to the level we anticipated. Instead, freight rates showed trend of further falling in the 2nd Quarter, which greatly disappointed our expectations.
Regarding Containership Business, after my explanations, Mr. Murakami, our Senior Managing Executive Officer, will talk later and provide more details.
Bulk Shipping Business results showed slight loss, which is almost in line with our original plan as of the beginning of this fiscal year.
As indicated at bottom of this slide, average exchange rate for this 1st Half was higher for year-on-year comparison by 9.46 yen per U.S. dollar, and fuel oil price was also higher by 188 U.S. dollars per ton. Negative effect of these two factors, 5.2 billion yen loss from exchange rate and 11.3 billion yen from fuel oil price, also led to more difficult business operations.
A-2. Key Points for 1st Half Fiscal Year 2011
In this A-2 slide, I will next talk about key points for our 1st Half results. As I have already explained to you, for year-on-year basis, the effect of Exchange Rate and Bunker Oil Price was respectively minus 5.2 billion yen, and minus 11.3 billion yen. Then, Market Volatility, in other words how much freight rate declined from the same period last year, was minus 6.4 billion yen. Furthermore, under the item of Business Expansion, minus 3.8 billion yen is indicated being caused mainly by cargo volume reduction in Car Carrier sector, which could be regarded as direct damage from the Great East Japan Earthquake.
Totaling all these items and the others, Ordinary Income worsened by 63.1 billion yen compared to 1st Half of last year.
A-3. Estimate for Full Fiscal Year 2011
Moving to Slide A-3, I will now talk about full-year forecasts for the Full Fiscal Year 2011.
Our 1st Half was as I just reported to you. We will continue making every possible effort to try and regain in the 2nd Half. Our 2nd Half estimations are based on assumptions of exchange rate of 77 yen per U.S. dollar and fuel oil price of 650 dollars per metric ton.
Operating Revenues for the 2nd Half are estimated at 494.0 billion yen, slightly below 1st Half results but almost the same. Operating Income is expected to be minus 11.6 billion yen; Ordinary Income minus 18.7 billion yen; and Net Income minus 13.4 billion yen. Comparing 3rd Quarter and 4th Quarter Ordinary Income basis, 3rd Quarter is minus 15.8 billion yen and 4th Quarter is minus 2.9 billion yen. So, 3rd Quarter is regarded as the worst term in our business performances.
For 4th Quarter, since we expect some freight restoration in Containership business and as we are actively promoting disposal of unprofitable oil tankers, as well as fact that dry bulk freight market has been recovering, we feel that our 4th Quarter achievement should be improving, all being factors that we counted in our present forecasts.
A-4. Key Points for Full Fiscal Year 2011
Next slide shows Key Points for this full year plan where we have summed up various factors. You can see item-wise effects for the year-on-year basis, which can be read later for your further guidance.
Now I will add some comments to the previous A-3 slide, business-wise predictions.
For full year basis, Ordinary Loss from Containership business is estimated as 34.0 billion yen with total deficit from other minus sectors including Car Carrier, Energy Transportation, Heavy Lifters and others expected to be about 19.0 billion yen. On the other hand, total profit from plus sectors (Dry Bulk business, Coastal Ferry, Logistics and Others) is 14.0 billion yen. Combining all of these sectors means Ordinary Loss of 39.0 billion yen, which is our present view.
B-1. Division-wise Trends - Containership Business
Taking Division-wise Trends, I will first talk about Containership Business.
As I already briefly mentioned, in this 1st Half, imposition of both peak season surcharge during summer, as well as GRI, all ended unsuccessfully. Failure of freight restorations is a major reason for the red-ink results for the period.
Supply-demand balance was one of the critical points. Growth of space was considerably big for this 1st Half. Then, regrettably, cargo volume trends, especially in Asia-North America, decreased for year-on-year basis after June, probably due mainly to economic slump in both U.S.A and Europe, which caused the supply-demand gap to widen even further. Cargo trends for Asia-Europe have still been increasing, but due to introduction of many ultra-large containerships, I think we can assume that has obviously contributed to an excess supply situation.
As for Containership business, our Senior Managing Executive Officer, Mr. Murakami, will talk in more detail later.
B-2. Division-wise Trends - Dry Bulk Business
Next, B-2 Dry Bulk Business, I will explain about freight market first.
Looking at the table in this slide, during this 1st Quarter, average market rate for Cape-size was 8,600 U.S. dollars per day, which was substantially below our break-even point, but coming into 2nd Half, it started to improve to 17,100 U.S. dollars. Then, for 3rd Quarter, although in reality recent market freight rate has been slightly under daily 30,000 U.S. dollars, we set our assumption for our forecasts based on 24,000 U.S. dollars. For the 4th Quarter, it is 18,000 U.S. dollars per day.
As indicated in the same table, both Panamax and Handy-max assumptions are also set around what they now actually are, or slightly lower than present level.
Our Dry Bulk Business has secured comparably more mid- and-long term contracts and market exposure is therefore not as high in this sector, so we should be able to continuously earn some reasonable profit in this 2nd Half.
B-3. Division-wise Trends - Car Carrier Business
Then, talking about B-3, Car Carrier Business, and as I said previously, loading volume drastically decreased in the 1st Quarter due to effect of the Great East Japan Earthquake and to our regret the result was a large deficit because of this.
2nd and 3rd Quarter loading volumes recovered dramatically due to intensive efforts of Japanese Automakers.
Therefore, results of Car Carrier sector also recovered gradually but it is still in the red or about break-even in both 2nd and 3rd Quarters.
We therefore think nearly full scale recovery of Car Carrier Business will be seen in 4th Quarter, which we counted in our revised estimate this time.
However, recent flooding in Thailand is another major new issue although we are not sure at this stage just how big an impact this may have, but we are fearful there will be at least some degree of impact.
Originally we thought that loading volumes out of Thailand would be around 100,000 units in 2nd half of this year on the basis of actual number of cars we carried in the past. However, in case production at Thai factories has to stop for 2 or 3 months, we can visualize cargo volume decreasing by half in the very worst scenario.
On the other hand, we have already taken counter-measures in various ways such as sublet of surplus vessels to the charter market, which will be further explained later.
B-4. Division-wise Trends - Energy Transportation and Heavy Lifters
Finally let me explain first about Energy Transportation Business where we show tanker market from 1st Quarter 2011 with average VLCC market being World Scale 54 in 1st Quarter and 47 in 2nd Quarter. For 3rd Quarter our estimate is World Scale 46. The market level of World Scale 47 in 2nd Quarter means there is nothing at all. Under high fuel oil price of 650 U.S. dollars per ton, daily earning is maximum $2,000-3000 in World Scale 47 which makes it preferable to lay up ships rather than keep in service.
Markets of AFRA-max and Clean are to a greater or lesser degree similar to VLCC. The more we transport the more our deficit will increase, although our fleet is not so very large. We evaluate Tanker market will not recover for some time and think it more important to take out some vessels in order to decrease deficit arising from keeping them in service. As already reported in some shipping news, we sold a VLCC and 2 AFRA-max tankers in this 2nd half.
In addition we have offshore support vessel business, a kind of small ship with high power which supports oil rigs at sea. This is a special ship sector and market for offshore support vessels has risen sharply in October. Today's market level is historically high and we think business results of this department will be better than our original plan despite our making new full-scale entry to the field just this year.
With regard to Heavy Lifters, we are afraid of slow growth of demand in project cargo considering current European economy, above all the financial aspect of those projects may be biggest problem. We would like to continue this business with long- to medium-term vision because our heavy lifter is a comparatively niche business.
Now Mr. Murakami will provide details of our Containership business.
Details of Containership business
The overall general situation of Containership business is just as was explained by President Asakura, but please allow me to add a few details in advance of the Q&A session later.
Result of Containership business in 1st half was a deficit of 18.3 billion yen which is a decline of 43.9 billion yen compared with previous year when it was plus 25.6 billion yen in 1st half of Fiscal 2010.
Main reasons are fuel oil price hike that is almost one-third and downturn trend in freight rate levels.
Average fuel oil price in 1st half 2010 was about 460 U.S. dollars per ton but it was 650 U.S. dollars per ton in 1st half 2011, which means price hike of 190 U.S. dollars per ton which hit us with huge impact.
In addition average freight rate levels dropped this year. Those two factors are main reasons for such a large deficit.
Compared with our previous estimate as of July 2011 which forecast a deficit of 11.5 billion yen, actual result was deficit of 18.3 billion yen which means a further decline of 6.8 billion yen. Primary reason for this big decline is just the drop in freight rate levels. Our estimate was too optimistic! The main factors accounting for the drop were that freight negotiations for peak season surcharge and other freight restoration efforts did not work as well as had been expected.
Hereafter, economic environment in both Europe and the U.S. seems to be highly uncertain. As Mr. Asakura has mentioned, at the beginning of this year cargo volume for Europe and the U.S. was strong, but later this year it began slipping down quite rapidly, about 3-4% down for year-on-year on Asia-North America trades, and Asia-Europe trades also reflecting weak trend.
With regard to 2nd half of 2011, we are estimating deficit of 15.7 billion yen. Growth of Asia-North America trades this year is expected to be between +0% and minus 1 or 2 % for year-on-year. And that of Asia-Europe is expected to be between +3 and 5 %, although it was 7-8 % in early 1st half of this year but is now expected to be around +3 to 5 % for full year on average because it has dropped recently.
Considering these situations, we are planning to increase number of ships laid up as member of CKYH Green Alliance and it is expected that number laid up will increase further in the industry based on current rumors being heard and according to various shipping business news.
We think the point is that it should be possible to restore freight rate levels from January 2012 before Chinese New Year, similar to freight restoration we achieved in 2009 after the global financial crisis.
Compared with 2nd Half 2010, we are estimating total decline of 19.0 billion yen, as our estimated deficit is 15.7 billion yen as against profit of 3.3 billion yen last year. This is only because of fuel oil price hike and drop in freight rate levels as has already been pointed out.
Compared with previous estimate as of July, as revised estimate for the 2nd Half includes an additional 1.0 billion yen, we foresee a decline of 16.7 billion yen, which can also be attributed to currently prevailing freight drop.