Major Q&A during the Analyst Meeting for 1st Half Fiscal Year 2007
Referring to presentation slide B-2, could you advise break-down for the improvement in Ordinary Profit from Containership Business, by 11.3 billion yen for the 1st Half results, and 21.8 billion yen for the full year estimation in year-on-year basis? I wonder if you might have estimated the 2nd Half too conservatively, especially taking in consideration that for this 1st Half you changed accounting system which made 14.0 billion yen negative effect. As I understand that fuel oil price up is one of the reasons for the 2nd Half slump, please make comments in detail.
For the 1st Half improvement in the Containership Business, major positive factors are 18.6 billion yen from freight rate increase, then 8.4 billion yen from our business expansion, and 0.9 billion yen from the effect of exchange rate. As negative factors, bunker oil price hike made 1.7 billion yen profit decrease, and so-called variable expenses 1.3 billion yen, which increases in accordance with growing business scale.
One reason why the 2nd Half profit is estimated much lower than 1st Half is, as you mentioned, bunker oil price is climbing up sharply. Another reason is, this is seasonality we see every year, cargo volume for the 2nd Half declines to a certain extent, and our forecasts are based on this trend.
Your Containership Business faired very well for the 1st Half, as revenues increased by 56.9 billion yen and ordinary profit by 11.3 billion yen in year-on-year comparison. As the reason for this, you indicated market situation and your own efforts for streamlining operation in your presentation. I understand that the streamlining is making your Containership Business standing out from competitors. Would you explain what it precisely is?
What differentiates our Containership Business from others most is, I think, how we can collect cargo with better profitability. In case of ourselves, our three major business bases in the world studies profitability of each trade in detail, and flexibly concentrate on good profit cargoes.
Please tell us situation of the Asia-East Coast South America trade started in this June.
We understand our service here is still smaller than NYK, or MOL, and makes very little profit now. However, cargo growth records around 20% from previous year, and freight rate is rising. So, we expect earnings will increase in future, and we will expand our business size somewhat.
Please advise your view for freight rate market for Asia-North America, and Asia-Europe trades for a half, or one year ahead.
Cargo movements from Asia to North America have been slow due to 'subprime loan' problem. We do not expect the situation will improve till 2009. However, the slow down has been caused since beginning of autumn in 2006. So, compared to last year, cargo growth will be almost flat this year. For the next year, we prospect possibly 4-5% growth.
On the other hand, this year vessel supply for the trade has been slightly lower than last year, which has made supply and demand balance very tight. In total of planned capacity by major shipping companies for Asia-North America route, the supply growth will be almost flat for the next year, too. So, though cargo volume will not be very favorable, demand supply situation will be continuously tight.
Therefore, we will be able to achieve freight rate up for the Asia-North America services, together with such cost up factors as fuel oil price and railroad charges in the U.S.
In Asia-Europe trade, cargo flow has been very strong, about 20% increase in year-on-year basis. We see this rapid growth will continue for a while, and so around 20% cargo increase is also forecasted for the next year.
At vessel capacity side, considering situation in Asia-North America trade, many shipping companies would adjust their capacity there and increase Asia-Europe service more. However, at present, in major ports in Europe, container handling capacity becomes almost full, and so, as a result, new loops to Europe possibly might not be accepted as a result.
(Other Marine Business)
Referring to presentation slide B-2, Ordinary Profit from Other Marine Business much improved by 41.5 billion yen for full year estimation in year-on-year basis. As I suppose major part of it was earned in Dry Bulk Business, would you make comments about which kind of vessel in dry bulk fleet most contributed to the profit increase?
In Other Marine Business, biggest profit increase area from previous year was dry bulk business, and the factor was market rate. So, 'free' vessels in dry bulk fleet which do not have specific contracts in the period most contributed to profit rise. Around 70% of cape-size and 50% of panamax fleet are relatively long-term contracts, but smaller vessels have few long-term contracts. In this regard, smaller vessels most contributed to jump profit, and then panamax, then cape-size.
Though I do not mean we made loss from cape-size bulkers, but most growing part was middle and small size vessels, such as panamax, and handy-size, in comparison with last year.
Please let us know so-called free portion in each of three major dry bulk carriers (Cape-size, Panamax, Handy-max), and also income sensitivity for each to freight rate market.
For this 3rd Quarter, contracts for almost all of our fleet have already been fixed now, and for the 4th Quarter, around 20% are still free in general. Present bulk market has stayed at a very high level, and has been beyond our assumption for this 4th Quarter. If this market level is kept for a while, though I cannot mention any certain figure considering bunker price up, etc., but maybe about 5-10 billion yen additional profit upon present forecast could be expected from our dry bulk business.
Would you comment on calculation basis for your bulk market assumption, as your prospect for Cape-size is 112,500 dollars a day for this 2nd Half according to slide B-4(-2) ?
We set almost real figure for the 3rd Quarter. Our cape-size market based for the 4th Quarter estimation is 95,000 dollars a day based Pacific-round charterage. At present we see this market level has reached almost 190, 000 dollars, but we cannot follow this day-by-day rapidly climbing market, and so our premises remained unchanged from some time ago.
Considering present market situation, do you have intention to change your policy to free portion of your fleet?
I understand general principle for free portion of dry bulk fleet is 20 to 30%. At present my idea is to secure longer time contracts now while we can enjoy this brisk market, which never lasts forever.
Please tell us "K"Line's, or your own view to dry bulk market both at supply and demand.
Dry bulk market has gone up since 2004. For long time before that considering supply and demand balance in the business, ship supply had been over, I think. When over ship tonnage was slightly resolved, market went up, and vice versa. In retrospect, the up/down amount was tiny.
However, economic expansion in China reversed this situation suddenly. Most conspicuous example is just now. The circumstance of market rate breaking previous high record almost everyday means that excess supply is fully resolved, and cargo demand is beyond supply.
If you ask how long this condition continues, we see vessel shortage does not improve and positive cargo growth keeps for some while considering BRICs' growth, etc. However, from 2010 or later, significant number of new vessels are planned to be delivered, and I suppose now every player in dry bulk business might be studying whether those additional capacities will be over global GDP, or transportation growth.
Your finance demand is at very high level mainly due to investment for building new vessels. Please advise how you will fulfill this finance requirement?
As this is same answer always when I am asked about this, we always would like to seek for best way of financing including equity finance.
(Tonnage Tax Introduction)
How about progress of introducing tonnage tax system, and view in future?
It has been 5-6 years since the Japanese Shipowners' Association raised tonnage tax issue, which has been introduced in 17 nations, and covered about 70% of operating vessels in the world.Why it should also be introduced in Japan is that tax system difference will diminish our international competitiveness in the worldwide shipping market. Especially in the market like this year, every shipping company on the earth can enjoy higher profit. In such circumstance, if net income after tax is significantly different, our competitiveness will weaken, so we have requested to the Japanese government to introduce tonnage tax system within this fiscal year (which ends at the end of March 2008).