Thank you very much for joining us today.

We will now provide an explanation of the financial highlights for the first half and second quarter of fiscal year 2018. First, the Company announced a revision to its forecasts for the full fiscal year 2018 on October 16, and today's explanation will focus on the difference between those revised forecasts and the forecasts announced in July 2018, which were based on the first quarter results.


A. Financial Results for Second Quarter Fiscal Year 2018

A-1: Financial Results for Second Quarter

For the first six months of the fiscal year ending March 31, 2019, operating revenues came to 416.1 billion yen, 4.6 billion yen more than forecast in July 2018. The operating loss of 12.3 billion yen was larger than the July forecast by 2.3 billion yen. Ordinary loss was 21.3 billion yen, 9.3 billion yen less than the July forecast. The loss attributable to owners of parent came to 24.6 billion yen, was larger than the July forecast by 9.6 billion yen. The average exchange rate was 109.48 yen per US dollar, and the bunker price was 437 dollars per metric ton.
Looking at ordinary income by segment, both Dry Bulk and Energy Resource Transport were favorable, improving on the first-quarter forecasts by 1.1 billion yen and 0.6 billion yen respectively, but Product Logistics fell below the July forecast by a significant 11.1 billion yen. The main factors behind this result were Containership Business and Car Carrier Business. In Containership Business, the Company’s equity in loss of Ocean Network Express Pte. Ltd. (ONE) widened considerably, as a result of which there was an increased impact from overseas terminals on Containership Business, leading eventually to a 0.4 billion yen increase in temporary expenses. In Car Carrier Business, the main factors were economic deterioration in South America, reduced operational productivity on the routes from Europe, and lower-than-expected cargo volumes to resource-rich/oil-producing countries. The main financial indicators are presented below, with the equity ratio coming in at 20%.


A-2: Forecasts for Fiscal Year 2018

The operating revenue forecast for fiscal year 2018 has been revised to 820.0 billion yen, exceeding the forecast announced in July 2018 by 45.0 billion yen. At the operating level, we expect an operating loss of 5.0 billion yen, a downward revision of 10.0 billion yen over the July forecast. We now forecast an ordinary loss of 28.0 billion yen, lower than forecast in July by 33.0 billion yen. The loss attributable to owners of parent is forecast to be 20.0 billion yen, lower than forecast in July by 27.0 billion yen. The assumptions for the second half are for an average yen-dollar exchange rate of 110 yen, and a bunker price of 495 dollars per metric ton, with the respective impacts for the final six months of the fiscal year as presented in the materials.
In addition, because the first half results slightly exceeded the forecasts announced on October 16, this most recent adjustment to fiscal year 2018 forecasts constitutes a small upward revision, but given that the full-year forecasts now incorporate significant losses, with deep regret we have decided not to pay a year-end dividend.


A-3. Forecasts for Fiscal Year 2018 by Segment

Here are the forecasts for fiscal year 2018 by segment. For Dry Bulk Segment we expect measures to improve profitability and firm market conditions, resulting in ordinary income rising by 6.6 billion yen over fiscal year 2017, to 6.5 billion yen, and is also expected to exceed the July 2018 forecast by 0.5 billion yen. In Energy Resource Transport, operations for the part of the fleet working under medium- to long-term contracts, including LNG Carriers, Thermal Coal Carriers, and Tankers, have been steady. Due to this, and to the reduction in exposure from fiscal year 2017, ordinary income is seen rising 2.1 billion yen to 2.5 billion yen. However, this constitutes a 0.5 billion yen decline from the July 2018 forecast. Although these two segments experienced some volatility, the improvements in their performance are proceeding more or less as expected in July 2018. We intend to continue with these initiatives to strengthen them further going forward.
On the other hand, in the Product Logistics segment, the full-year ordinary loss from equity-method affiliate ONE is estimated at 20.7 billion yen. In addition, the impact on the Company’s overseas terminals of ONE’s failure to hit its lifting targets, combined with the eventual temporary expenses that resulted in a shortfall of 0.4 billion yen, led to an ordinary income forecast that is lower by 26.0 billion yen than forecast in July 2018. The non-containership part of Product Logistics Business also fell short of the July forecast by 5.0 billion yen. The main reason for this was the deterioration in the performance of Car Carrier Business. Cargo volumes on routes from Asia to Central and South America, Australia and the Middle East fell below the estimates announced in July 2018, in addition to which worsening conditions in Argentina and other South American economies resulted in lower cargo volumes; and deteriorating operational productivity on the routes from Europe also had an impact, leading to a decrease of 3.8 billion. Measures to deal with these two businesses have become a matter of urgency in the context of the Company’s performance.


A-4: Latest Forecasts for Fiscal Year 2018 - vs. Assumption as of July 2018

I will now explain the differences between these most recent forecasts for fiscal year 2018, and those from July 2018. Ordinary income for the “K” LINE Business, excluding Containership Business, has been revised down by 7.1 billion yen, from the 11.6 billion yen forecast in July 2018 to 4.5 billion yen, while the ordinary loss for Containership Business is now expected to be 32.5 billion yen, larger by 25.9 billion yen than the 6.6 billion yen loss forecasted in July. The main components of the shortfall in the “K” LINE Business, excluding the Containership Business, are a shortfall of 3.8 billion yen in Car Carrier Business, and an estimated 2.0 billion yen deterioration in foreign exchange valuations, assuming a rate of 110 yen per dollar in the second half. With regard to the measures to improve profitability that were announced at the end of the first quarter, we are updating progress in this area, and have revised the outlook from 2.5 billion yen to 2.0 billion yen. The Company is vigorously pursuing these measures, and we believe this target is feasible. In the Containership Business we also expect a shortfall of 1.4 billion yen. This is being caused by the increase in losses at equity-method affiliate ONE, and the resulting impact on overseas terminal performance of reduced liftings.


A-5. Detailed Progress of Management plan & Initiatives for Fiscal Year 2018 Second Half

Based on the deterioration in the Company's performance reviewed above, we will now discuss initiatives going forward. In the medium-term management plan, we designated as priorities the Rebuilding of Portfolio Strategy, Emphasizing Advancement of Management, Function-specific Strategies and Pursuing ESG Initiatives. There has been no change in these policies, and we continue to work steadily on related initiatives.
On the other hand, based on business conditions this fiscal year, it has become apparent that rebuilding the profit structure at ONE, improving the profitability of Car Carrier Business and putting in place initiatives for selection and concentration, are now urgent matters of the utmost importance. First, the Car Carrier Business recorded sea transport of 1,845,000 units in the first half of fiscal year 2018, an increase of 7% year-on-year, so overall the business is in good condition. However, cargo volumes on routes from Asia to Central and South America, Australia and the Middle East were lower than initial estimates, which had an impact on performance. This was caused by trends in vehicle sales in the various markets, and by trends in customer shipments. While disappointing, we were still able to secure a certain level of business and profitability on these same routes and we are moving ahead with preparations for such measures as more efficient allocation of vessels. With regard to the decline in vehicles shipped due to the deterioration in South American economies, such as Argentina, as well as the impact on performance of reduced operational productivity on the routes from Europe, we are taking steps within the Company to restructure services, such as cutting the number of vessels committed, or by suspending some routes. In addition to the above, we are working to restore freight rates, leading to estimated annual improvements of 5.0 billion yen to 6.0 billion yen next fiscal year, and we are drawing up strategies to increase this further. We will move forward with a tight focus on restoring the profitability of the Car Carrier Business, which is the central pillar of our business.
By applying an approach of “selection and concentration” to the structure of the “K” LINE business after the integration of the Containership Business, we will rebuild our portfolio of businesses, so as to focus closely on the four pillars of Dry Bulk, Car Carrier, Energy Transport and Logistics. This measure is moving forward with the replacement of assets aimed at concentrating the allocation of management resources necessary, in order to achieve these enhancements for added value. Unfortunately, losses are projected for fiscal year 2018, but proceeding with these measures to replace business assets will enable us to take further steps aimed at returning to profitability in fiscal year 2019. We will explain further details as necessary, and at the appropriate time.
I will go into more details about ONE later on, but the main point of the plan is the implementation of various initiatives for structural reform, such as overcoming the factors behind the temporary deterioration in performance in fiscal year 2018, which was caused by the shortfalls in liftings and utilization; optimizing cargo composition in preparation for fiscal year 2019; extending plans for reducing bunker fuel expenses; building more competitive services; and reviewing and optimizing the organization of ONE as a whole.
In addition, we are working to address the business issue of the global cap on SOx, and we intend to use compatible fuel oil and to introduce a scheme to recover those costs. Moreover, we have taken the decision to set up specialist organizations to promote initiatives in areas such as CRM and new technology, as set out in the medium-term management plan. These include the Corporate Marketing Strategy Division, the AI/Digitalization Promotion Division, and the Environment/Technology Committee. Future initiatives will need to be realized at an even higher level, and we intend to work steadily towards those goals.

Moving on, I will omit making any detailed explanation of the trends in performance for each division, but with regard to the state of expenses related to the integration of Containership Business, these are presented on page 14 of the materials. At the stage of operation profits/losses, temporary expenses increased by 0.4 billion yen, leading to an eventual loss of 11.9 billion yen. Restructuring expenses are as presented here, and we do not expect any major revisions to them. With regard to the previously-announced 3.5 billion yen to 4.0 billion yen in reductions to remaining fixed costs in preparation for fiscal year 2019, these are proceeding on schedule, and as discussed in relation to measures to improve profitability, we are planning to bring forward a further 0.2 billion yen in cost reductions this term.


C. ONE Financial Results for Fiscal Year 2018 First Half

I will now discuss the performance of ONE, and related initiatives going forward. To summarize the first half and the full year, during the first half there was a far greater than expected impact after the business was launched, due to service disruption caused by insufficient IT system proficiency. From July to September in particular, we were unable to achieve our plans for improving liftings and utilization on the homebound routes from North America and Europe, and on intra-Asia routes. This was the main factor behind the significant deterioration in performance. At this point the disruption to services has been resolved, but the second half of Fiscal Year 2018 recovery in liftings and utilization is still a work in progress, and cost reductions in response to soaring bunker prices have been lower than expected. Accordingly, although we estimated synergy effects for this fiscal year of around 75% of 1.05 billion dollars, results for the full year of fiscal year 2018 are projected to fall short of the forecasts made in July 2018 by 0.71 billion dollars, resulting in loss after tax of 0.6 billion dollars.
The results for the first half of fiscal year 2018 and the full-year forecasts are presented on page 17 of the materials. Loss after tax is projected to be 0.6 billion dollars for the full year.
Page 18 of the materials shows liftings and freight rate indices for the first half of fiscal year 2018. Freight rates have been stable, and utilization on the Asia-North America and Asia-Europe routes has now recovered to the 90% level. Going forward we plan to respond flexibly to softening demand in the so-called slack season through such initiatives as reducing the number of services. On the other hand, utilization rates on homebound have still not yet fully recovered. We will further strengthen our sales activities in an attempt to achieve our recovery plans.
Page 19 of the materials shows an analysis of the differences in the first half, which I will explain in combination with an analysis of the difference between the revised forecasts for the full year and the forecasts announced in July 2018, which can be found on page 20. The main components of the 0.71 billion dollars deterioration were insufficient liftings, which had an impact of 0.4 billion dollars, and the resulting increase in costs related to returning empty containers, which came to 0.17 billion dollars. In addition, there was an 80 million- dollars impact from the failure to achieve cost reduction targets. Based on the above, we are working first on a recovery in liftings in order to mitigate these effects, while implementing various cost-cutting initiatives and putting structures in place.
On page 21, there is an analysis of the difference in full-year results.
Page 22 has details of the profit improvement initiatives. Going forward, we are planning two important steps in preparation for rebuilding the profit structure at ONE. The first is to overcome the temporary factors that led to the deterioration in business right after the launch of the business. We plan to get the business back on track by engineering a recovery, and strengthening our efforts to recover detention and demurrage, namely the fees charged when containers are retained by customers after picking them up, or when containers are left in the terminal for long periods of time without customers coming to pick them up. The second is to revise and optimize the combined portfolio of cargo agreements in readiness for fiscal year 2019. That is, in addition to matching imbalances on outbound and homebound, we will work to optimize the proportion of long-term contracts, short-term contracts and spot contracts. In relation to the services offered by ONE, we will optimize them to match cargo composition, improve operational productivity and work to cut costs such as bunker fuel. The plan is to shift into areas where ONE is competitive and where the customer perceives there to be greater value. In addition, as well as steadily working to realize the synergies initially projected, we will move forward with initiatives to optimize the ONE organization, including measures to eliminate excess capacity. By these means, we will not only improve customer satisfaction with ONE’s services, and strengthen its competitiveness, but also guide the business back to the line of the original plan. Also, we plan for the holding company, in cooperation with the operating company head office in Singapore, to bolster its systems for achieving a timelier and more accurate grasp of the trend of profitability improvements. We will maintain close scrutiny over ONE’s operations so as to accelerate the implementation of the action plan aimed at improving profitability and increase the degree of certainty. In addition, we will have progress reports submitted to the holding company regularly and at short intervals and strive to further strengthen governance.

Thank you very much for your kind attention.