【Containership】
Q.1 As you have presented a somewhat positive updated estimation of Ordinary Income for Containership Business during this 1st Half, please advise us of the amendment factors.
A1 For Containership Business, we are expecting improvement of 2.0 billion yen in Ordinary Income for 1st Half, compared to 4.0 billion yen in our original plan as we are now expecting 6.0 billion yen total, including both 1st Quarter results and 2nd Quarter expectations. Biggest factor is freight rate assumptions for Asia-Europe routes being better than originally forecast.
Q.2 Please let us know assumptions and present actual conditions for freight indices in each trade.
A.2 As indicated on page 9, in terms of our freight indices, which are based on freight rate level of 1st Quarter 2008 as 100, during this 1st Quarter April-June 2014), for Asia-North America trades the figure was 97 and for Asia-Europe trades it was 78 as indicated in this table. In the 2nd Quarter, for trades towards both North America and Europe the indices are assumed to improve by a few additional points.
Talking about current situation, in August we have announced considerable amount of rate restoration for trunk lines in both North America and Europe, and we feel like freight rates could increase more than what we originally expected. Every year there is the usual pattern with rates repeating ups and downs, so we cannot say clearly how much they may reach as an average in2nd Quarter period, but we still have a feeling that they can go beyond present 2nd Quarter estimations.
Q.3 You commented that for Containership Business you hoped you could manage to keep black figures even in the 2nd Half. As preconditions to turn 2nd Half into the black, what kind of points do you think are necessary?
A.3 Our comments about turning 2nd Half into the black means we have a sense of anticipation for that. One factor is freight rate levels. Economic trends in the U.S. have been much better than our expectations, and cargo volume for Europe has also been positive. Total circumstances for trading have been much improved compared to last year, also the year before last. We have always experienced ups and downs in freight rates but in this 1st Half they have stayed at a comparably higher level on average, which we expect to continue in the 2nd Half as well. In addition, there are many operators driven to the absolute edge of the ring, incurring large amount of loss, who cannot risk taking such reckless rate policy like a price war anymore.
Q.4 As I understand that present ratio of your spot cargo contracts is rather higher than other Japanese carriers, do you intend to change your cargo booking policy to increase the ratio of one-year contracts, or in some other way, because you will be receiving larger-type new ships next year?
A.4 The ratio of short-term contracts is around 65% for Asia-North America trades and about 80-85% for Asia-Europe trades for the past 1-2 years which might be slightly higher than other Japanese carriers, but not tremendously different, I suppose.
We will receive 5 newly-built large containerships of 14,000TEU type next year. However, this basically does not necessarily mean that our space for trunk lines between east and west will drastically increase with such new ships. Alternatively, we will sell off or dispose of middle or small size ships now in our present fleet. So, we do not intend to change our booking policy significantly at this stage. We will be making a decision about whether we should take more spot cargo or long-term cargo based on the view about future spot market conditions, but we do not have any specific thought as to whether present ratio is the best or not.
Q.5 What is the aim of the strategic partnership with Pots America about which you made an announcement today?
A.5 We have operated our own container terminals for a long time on the west coast of the U.S. at Long Beach in California and Tacoma in Washington which is in Northern west coast.
Our consolidated subsidiary in Long Beach named ITS (International Transportation Service) has operated more than 40 years, its operation having started in 1971. Considering business operations in the future, we see the day coming when type of our vessels for Asia – North America trades will become 10.000TEU or larger. In such circumstances, container terminals must expand and improve, corresponding to such larger type ships, otherwise our competitiveness could gradually be lost.
Until now we have operated the business through our 100%-owned subsidiary, but the time has come when it is necessary to consider a partnership in order to decrease burden in investment for upgrading our terminals and at the same time to invite additional cargoes other than our own. We have for some time been making a study regarding partnership with someone in various ways.
Ports America Group, Inc. (PA) is the largest independent marine terminal operator and stevedore company in the United States. We intend to reinforce our container terminal business in the U.S. to form a structure with higher earning power, and in this case by means of capital participation of 30% ITS shares being sold by us, “K”Line.
Q.6 Considering about 10.0 billion yen of extraordinary profit is counted from the sale of ITS shares, your present estimation of Net Income looks weaker. Do you see any extraordinary losses or so from such streamlining ?
A.6 We have been examining various factors closely and concluded it would be best if we could post the extraordinary profit fully even though some structural reforms that we should work for still remain. Therefore, in that regard we will make further examination.
Q.7 One of the other Japanese containership operators has announced a similar plan to form a partnership in the terminal business in the U.S. Do you also have intention to approach into countries with emerging economies in the same way as they are planning?
A.7 We do not yet have any firm plans for joint investment in such countries now. Ports America, our partner has mainly operated businesses within the U.S., but in the future they probably will consider investments outside the U.S., and in such cases, we should also be able to join and work together with them if such projects appear hopeful for us.
（Dry Bulk）
Q1 Is your market assumption for 2nd half still the same with Capesize $23,000 and Panamax $15,000 shown in previous estimate as of April 2014?
A1. We have not yet reviewed market assumption of Dry Bulk in 2nd half that we set in April. We are now working to review budget in 2nd half and market assumption will be reviewed along with this work. There honestly is not much good news for this market. The facts that ore exports from Brazil are good, Chinese crude steel production is very strong and Chinese Iron ore import volume has increased so far by nearly 100 million tons, can be seen as positive factors for a market upturn.
Q2. Please explain about market exposure in future.
A2. We do not have any spot exposure of Capesize. And Panamax is almost more than 80% covered by long-term contracts, so there’s not so much market exposure. And with Handymax, almost 70% is fixed by contracts.
Q3. Is spot exposure of middle and small vessels a negative factor if current market downtrend does not recover ?
A3. It is a negative factor but free exposure is not very much, so we do not have any serious worry. We hope market will recover somewhat because there is news that grain producers in United States expect good harvest and nickel stock decreased widely as nickel exports to China decreased to some extent due to Indonesian ban of ore exports.
Q4. In 2015 and 2016, it is expected that new ship deliveries of Capesize vessels will increase. What is your view of next year and how do you assess business management ?
A4. As you may know, new ship orders increased both last year and in this year, so we are watching the market after next year. We are trying to decrease spot exposure as much as possible and fix long-term firm contracts. In that sense, as we will have almost no spot exposure in Capesize next year, only middle and small size vessels can be a problem if anything happens. Usually about 70% of our Panamax fleet is fixed by contracts at the beginning of the year when we prepare our annual budget, I think next year will see same situation. However, there are not many long-term contracts in small-size vessel business, so we think it will be tough next year.
【Offshore Energy E&P Support & Heavy Lifter】
Q. Despite results for 1st Quarter of this segment being 1.9 billion yen loss, estimate for 2nd Quarter is profit of 0.9 billion yen. Is this because of exchange rate? Please explain about improvement in 2nd Quarter.
A. In 1st Quarter there was 1.2 billion yen revaluation loss of exchange rate in Offshore support vessel business, so it should improve 1.2 billion yen if there’s no such revaluation loss in 2nd Quarter. As for Heavy Lifters, it will improve considerably in 2nd Quarter compared with 1st Quarter. Although market of middle and small heavy lifters is very low in 1st Quarter, our large heavy lifters are already fully booked until end of the year because there are many inquiries which need big cranes like offshore related cargo. For the above reasons we think this segment will improve in 2nd Quarter.
(Others)
Q1. What is the main reason of profit increase of 2 billion yen in 2nd half?
A1.In this 1st half, there are negative impacts of revaluation loss of exchange rate in Bulk shipping business segment and Offshore Energy E&P Support business segment. It is expected that loss will turn over in 2nd half and that we count a billion yen of improvement in Bulk shipping business as well as in Offshore Energy E&P Support business. Consequently, we are factoring in improvement of 2 billion yen total in 2nd half.
Q2. About your estimate for 2nd half, I understand that basically you are not making a change in your estimate. What are your present thoughts regarding Containership and Dry bulk business in 2nd half?
A2.Honestly speaking, both are difficult to forecast. In our Dry bulk business, there’s no spot exposure in our Capesize fleet and most of our Panamax fleet are already fixed by long-term contracts. Middle and small vessels are most influenced by spot market, but spot market improves after autumn every year, so we need not worry very much. With regard to Containerships, our business management is relatively good, if we do say so ourselves, therefore I see no problem with Containerships in 2nd half.
Q3. In the material of A-4 Key Points Page 6 , there’s negative factor 4.7 billion yen in Others compared with Previous Estimate as of April 2014. What is the main item here?
A3. 2.6 billion yen out of 4.7 comes from revaluation loss in exchange rates (accounting loss), and there are other small items including factors from related companies.
