(Financial Highlights for 3rd Quarter FY2010)
Q.1 With regard to supply and demand in Containership business, please let us know what is going on. For example in the case of load factor, how is the current situation compared with last year?
A.1 As to load factor of current Containership service from Asia to both North America and Europe, it is shifting to almost fully loaded, partly because we squeezed supply space in both trades to North America and Europe about 10% since last summer which has already been publicized, and is squeezed about 15% for total Container shipping industry. Actually cargo volume itself may have decreased a little bit since this season last year, however supply space is considerably tight.
Q.2 With regard to Container freight negotiations in January, for Europe trade and Early Bird for North America trade where some customers start negotiations earlier, what do you think about the estimate?
A.2 Although freight negotiations in January have just started, feeling is that especially in case of Asia-Europe trade, 3-month freight contracts for NVOCC (Non-Vessel Operating Common Carrier) and CIF business achieved steady rate increase after last summer as is well known. As rates for annual contracts remain unchanged at a low level for a year, difference between the freight and current market price is considerably large. Those contracts will be restored as the contract period expires and that will be reflected in 2010.
With regard to Early Bird in North America trade, freight negotiations of ERC have been taking place successfully in parallel and present feeling is very good for us.
Tight supply space situation continues and feeling of booking recovery after Chinese New Year in middle of February looks good, so we think that it is possible to get a good start for full-scale negotiations of service contract in the Spring.
Q.3 How much ERC* in trade line from Asia to North America do you think you can acquire as of today? How much of it is included in the revised estimate?
A.3 We incorporate about half of ERC as amount in estimate of 4th quarter. According to public announcement by TSA (Transpacific Stabilization Agreement), ERC is US$400/FEU. We think that actually about 70-80% out of the full amount will be accepted.
*ERC=Emergency Revenue Surcharge(TSA declared to adopt in Trans-Pacific trade from Jan 2010)
Q.4 About the fact that impairment loss for Containership Business decreased, is that because estimation for collectability of freight payments has changed by considering current freight increase? Otherwise, is it just because amount changed after recalculation?
A.4 We calculate impairment loss by a standard through meetings with our accountant. The main difference was as we say evaluation of assets, which slightly shrank compared with what we calculated at the end of 2nd quarter; in short, the valuation loss shrank.
Q.1 How do you set assumption of cargo volume for car carriers this fiscal year?
What is the estimate for around 1st half of next year?
A.1 At present, and as far as what we are hearing from our main customers about export plans after next fiscal year, considerable recovery is shown after next April. However, from January to March this year cargo volume will not recover as expected so we are also not sure just what the volume will actually be.
We think it should increase by double-digit percentage in next fiscal year compared with this fiscal year. As cargo drop this fiscal year was so sharp, it is bottoming out as a whole and in a recovery stage.
Q.1 Please let us know portion for spot market of your Dry Bulk fleet in 4th quarter, although we understand that portion for spot market is decreasing as it approaches end of the year.
A.1 With regard to portion for spot market of our Dry Bulk fleet in 4th quarter, almost all Cape-Size and Panamax were fixed already, so there's almost no portion for spot market.
As to Handymax and Small Handy, there are some vessels which are not yet fixed; so roughly speaking, about 30% of small vessels are spot market exposure as of today.
Q.1 Referring to the variation factors that affect yearly estimate shown in Slide B-3, what is the reason for increasing cost by 8.4 billion yen compared to previous estimate as of October 2009? As I understand it is for costs other than bunker oil, so what kind of factors made your cost reduction plan unachievable?
A.1 It is mainly because of increase and decrease in variable costs for our Containership division. Another factor is difference between our previous plan and updated plan concerning our drastic fleet shrinking plan for Car Carrier division or for other sectors.
(Revised mid-term management plan "K" Line Vision 100 KV2010)
Q.1 For Containership Business, your plan is based on the premise that its Ordinary Income will recover significantly for the next fiscal year, and then moderately afterward. What kind of menu for recovery do you have in mind?
A.1 As premise for profit and loss for Containership segment, we have counted rate restoration only for Asia-North America trade just to cover cost increase.
If you ask why we have dared to include rate up in our projection, we will answer as follows: The highest freight rate levels for these some years are recorded during 1st and 2nd Quarters in Fiscal 2008. You can find the freight rate movement for Asia-Europe and Asia-North America trades in the graph on the bottom right corner as lines at the upper side, which shows recent peak was in Fiscal 2008.
For Asia-North America service, at the time when S/C (Service Contracts) were fixed last year, freight rates were almost 70% of the peak, and about 65% as an average during the 2nd Quarter. Since then, rates have continued to be in a recovery trend, but even including the effect of ERC or any other various charges, have not reached to 80% yet.
Considering these circumstances, and because costs that we cannot control by ourselves such as inland haulage costs, etc. are steadily going up, we expect we can increase our freight rates by that much, although they are still not profitable for us
Talking about supply-demand balance, we see idling ships owned by us, the Containership operators, will perhaps be dissolved in peak season of 2012, and those by shipowners will keep idling until around 2015. Due to such balance situation, we suppose market might continue to go back and forth. Around that time, idling ships owned by operators will disappear, and so market will slightly fluctuate, going in back and forth condition with bargain ships owned by shipowners in accordance with cargo demand growth.
Q.2 Referring to the chart showing profit and loss improvement situation in Slide 11, it seems that you put freight restoration during this Fiscal 2009 as 30.0 billion yen. Is this the amount that you can achieve only if present freight rate levels remain unchanged until next fiscal year, or challenging target you have to struggle to restore the rate further within these two months?
A.2 This is the amount calculated applying annual cargo volume with the balance between estimated average freight rate for Fiscal 2009 and freight rate level to be reached by the end of March 2010, which we believe is rather conservative. The result is just indicated in this chart, where scales are amazingly precise.
This estimate for Fiscal 2010 was made around last mid-November, and then in December and January, freight rates were significantly restored. We understand that about 30.0 billion yen for Fiscal 2009 has been secured, unless freight rates drop due to some unexpected conditions hereafter.,
The bar of rate restoration effect for Fiscal 2010 mentioned at the right side of this chart in Slide 11 is what we must further secure to reach present profit forecasts for Fiscal 2010. The balance we must achieve from now on has been becoming very small.
(Dry Bulk Business)
Q.1 For Dry Bulk Business, your strategy is indicated as 'Increase stable earnings sources' and 'Accelerated expansion of global business'. Are you changing your tactics, for example, about allocation for middle-long term contracts, or the number of 'free' ships in your fleet?
Furthermore, how much effect from customers in China or India can we expect in the future, insofar as expansion of global business?
A.1 To comment about strategy for Dry Bulk Business, I must first say that for a while we cannot expect dry bulk market will climb to any extraordinarily high level, such as, no less than 200,000 dollars a day for Capesize vessels, as it was a few years ago. So, we have proceeded to secure middle and long-term contracts as much as possible since around two years ago. As a result and to a certain degree, we have increased mid-long-term contracts.
The ratio of 'free' vessels in our fleet is, including Capesize, around 20%.
Because so-called '2010 Problem' could happen in the worst case, we will manage our business rather conservatively. For types of ships other than Capesize, we have also increased the ratio or fixed contracts accordingly. So as far as "K" Line is concerned, '2010 Problem' will not have severe effect severely even if it happens in reality.
As to global business, in China and India we already have a firmly established business base, and have made middle-long-term contracts with various customers. Especially in India, we have made total of 13 contracts with 'JSW group', a very large business group, all of which are scheduled to start within 3-4 years. Contracts that carry a total of approximately 8 million tons of coal a year for a single customer's account, once they all start, have already been established.
For China, of course we have already made contracts with such big names as Baosteel and Shougan Group. Furthermore, with resource companies indicated in the center of Slide 12, i.e., Rio Tinto, BHP Billiton, Vale, etc., all ore majors, we have recently been directly making more mid-long-term contracts.
(Investment Cash Flow)
Q.1 In Slide 19, Investment Cash Flow is indicated for this Fiscal 2009 (ends March 31, 2010) at minus 58.0 billion yen, and for next year, minus 85.0 billion yen. Please comment about this in detail.
A.1 Our estimation for Investment Cash Flow for the 3 consecutive years from Fiscal 2010 (ends March 31, 2011), is 85.0, 56.0 and 60.0 billion yen. For Fiscal 2010, the cash flow is mainly for Off-shore support vessels and Dry Bulk Carriers. For Fiscal 2011 and 2012, it is for vessels of any divisions, even including Car Carriers.
Q.2 We understand that factors to increase or decrease Investment Cash Flow include off-balance schemes. In case shipowners cannot fully accept your request for off-balance schemes, are there any risks that Investment Cash Flow for Fiscal 2010 will eventually grow over your planned 85.0 billion yen?
A.2 Our present estimation indicated in this Slide could somewhat vary, but we believe it is a relatively secure number at this stage.