Major Q&A during the Analyst Meeting for Fiscal Year 2007
(New medium-term management plan "K" LINE Vision 100)
In "K" LINE Vision 100, Ordinary Income for Fiscal 2011, the last year of the plan, is forecasted to increase by about 40 billion yen compared to that for Fiscal 2008. Would you please advise division-wise breakdown for the 40 billion yen, as far as you can disclose.
About half of the 40 billion yen is to be earned by Containership business. The rest is divided among several divisions: Revenues and profits for Car Carrier Division are prospected to rise somewhat due to business expansion. Energy Transportation Business and new businesses such as Heavy Lift Business and Offshore Support Business are also expected to contribute. The 40 billion is an accumulation of improvements for those divisions. We have estimated profits from Dry Bulk Business will be almost flat during these four consecutive years.
In the presentation slide No. 31 for Vision 100, premises indicated there for dry bulk carriers' charter market rates: taking Cape-size bulkers, the market for Fiscal 2011 is assumed as 50,000 U.S. dollars a day, which is less than half of current market level. Please tell us the factors that will make the earnings from Dry Bulk Business still amount to being almost flat.
While we assumed market rate descending based on present market for futures, etc., we have forecasted profit amount will not change so much from Fiscal 2008 level, because of business extension with fleet expansion and increase of fruitful contracts revised during Fiscal 2007.
Referring to graph in slide No. 6 for Vision 100, as it is said that ship costs will further rise at an accelerating pace after Fiscal 2008, please tell us to what extent you count cost-up factors in your mid-term management plan.
I understand that long-term cargo contracts with your customers usually do not reflect such increase of ship costs within contract period and so it will considerably squeeze your profitability, which is the reason why I would like to ask about the extent to which you are including such cost rises into the plan until Fiscal 2011.
As assumptions for cost factors until Fiscal 2011: first we set fuel oil price flat through the 4 years at 520 U.S. dollars per ton. Ship costs, such as lubricant oil, seafarers, maintenance of docking, ship supplies, etc., will not go up all at once. In the past, for example, in Fiscal 2006 lubricant oil price climbed sharply, and in Fiscal 2007 costs for seafarers increased, which was calculated to go up 6-7% annually overall. We see average cost up in our plan for Fiscal 2008 around 10 %, followed by several percent for each year thereafter until 2011.
(Prospects for Fiscal 2008 - Containership Business-)
Please tell us factor-wise breakdown for the slight decrease from 4.7 billion yen to 3.5 for this Fiscal 2008 Ordinary Income in Containership Division for year-on-year comparison.
As the factor-wise analysis for overall company profit going down is indicated in slide No. 14 of 'Financial Highlights', taking Containership Division individually, we understand that we can count on positive factors such as 11.8 billion yen from change in accounting method, or freight rate up. So, please let us know which factors are blowing off these plus factors with its breakdown.
Comparing Fiscal 2008 to Fiscal 2007, plus factors are approximately 22 billion yen from market rise, and 15 billion yen from business expansion. As cost up factors, effect from soaring fuel oil price is calculated at 26 billion yen; exchange rate between yen and U.S. dollar is about 6 billion yen; increase in inland-transport or feeder service charges 10 billion, and ship costs 7 billion yen, which total nearly 50 billion yen. Since plus effects are over 37 billion yen altogether, and also we must count on 11.8 billion yen of effect from the accounting standard change, our profit for this year was prospected to decline by the balance of 1.2 billion yen.
Would you comment on present freight negotiation situation for each of your trunk lines, Asia-North America, and Asia-Europe trades.
The pace of negotiations for Asia-North America services has been extremely slow this year. The ratio of contracts concluded until now is still just a few and we feel like it is reaching a supreme highlight this very week, or next week. Because the number of finalized negotiations is limited, I cannot say precisely about the freight rate level at which we have reached an agreement. However, at present, we are estimating the price up level might be around 70 % of what we originally expected as our target.
Speaking of services between Asia and North America, cargo volume loaded in North America is growing significantly, which might be affected somewhat by U.S. dollar depreciation, so vessels are now almost full on return voyage from North America to Asia. In line with such trends, freight rate is rising and also fuel surcharge is secured in the backhaul routes, which should make up for some of the shortage caused in dominant leg from Asia to North America.
In the services from Asia to Europe, freight rates for most cargoes out of Japan come to contract renewal as of April, and mostly concluded at around 60-70% of the level that we estimated. Although we also scheduled a rate up for cargoes loaded at Asian regions other than Japan as of April, we have not yet realized any price up as of April, with cargo movements from this January to March being slower than our original expectations. We are now negotiating rate improvement effective in May, one-month suspended, and the visibility has not been high yet.
If available, please advise exactly what percent of freight rate up you are expecting for both the North America and Europe trades.
The level we have now projected in our plan is approximately 10% up for the North America trades, and about 5% for the routes to Northern Europe area in the Asia-Europe trades, such as U.K., Germany, France, etc., and by nearly 10% fall for Mediterranean Sea area.
In the case of Asia-Europe trade, many contracts are renewed for three-month period and when cargo movements become better, freight rates go up, and when they do worse, rates go down, which makes it rather difficult for us to predict. Most recently, during this January to March cargo momentum was soft, but in April it greatly recovered and now in trades for both Northern Europe and Mediterranean Sea areas, our vessels have been operating almost full. If these conditions continue, even the rate negotiation as of May will likely succeed. Furthermore, we will surely be able to achieve rate up as of July, and also introduce peak season surcharge from June, which are not included in our present projection.
Though I am afraid this is a rather detailed point, I understand the non-operating profit and loss for Fiscal 2007 (ended March 2008) worsened with the factor of a big exchange loss due to sharp yen appreciation from 115 yen to 100 yen per one U.S. dollar in the term from January to March 2008. For this Fiscal 2008 (ending March 2009), there should be no more exchange loss and so I suppose that the non-operating profit and loss would therefore be remedied in that degree. However, it does not look like it is improving. Please explain which factors are causing that.
Some exchange loss continues to be seen in this Fiscal 2008 as financial closing for our subsidiaries is different from our own.