Q1. Please tell me the freight rates you estimate for the second half fiscal 2015.
A1. Using an index, when the actual freight rate in the first quarter of fiscal 2008 was set at 100, the result of Asia-North America trades was 93 for the second quarter, and we assume the average eastbound from Asia to North America freight rates in the second half FY2015 will be several points lower than that. Meanwhile, using the same index, the result of Asia-Europe trades was 51 for the second quarter, and we assume freight rates will improve by several points for the second half FY2015.
Q2. Regarding freight rates for Asia-Europe trades, you said you think they will improve by several points from the second quarter index of 51. Please tell me the reasons why you think so in view of the very severe supply-demand environment.
A2. Freight rates have been declining since September, and have gone below the second quarter index of 51 as of the end of October. For the general rate increases planned in Asia-Europe trades from November 1, we are currently offering 1,200 US dollars per 20 feet, and we think rates will increase by several dozen points as in the index. Depending on the speed of fall in freight rates after the raise, there is a concern over an influence on the freight renewal for long-term cargo from January next year. In any case, the current freight rates are unprecedentedly low, and we assume the rates will increase temporarily in November with announcement by shipping lines that fares will be raised. Our revenue and expenditure plan includes the rate hike in November and the freight repairing efforts by shipping companies such as reduced services taking effect thereafter.
Q3. About the future outlook of supply and demand, do you think present demand will further drop in second half fiscal 2015? Can the reduction in supply really catch up with the fall in demand? How are you going to address it as “K” Line or as the Alliance? Please let me know your general concept.
A3. For the first half of fiscal 2015, although the situation of over-supply continued in general for all trades, Asia-North America did relatively well. As to the ongoing over-supply, shipping companies and alliances finally started to promote reduction and cessation of services for various trade segments. Accordingly, the rate of lay-up has increased to nearly 5% of all ships as of now, compared to a rate of 2% that was observed in the summer. In the past, balance of supply and demand became tighter and the freight rate market started to revert when the lay-up rate exceeded 5%, but unfortunately it seems the situation hasn’t reached that point yet. However, by shipping companies having reduced their services, the possibility of services or capacity in Asia-Europe trades being increased is considered low for the rest of this year at least. Additionally, we are having a good feeling about the general rate increase planned from November 1, and demand is going strong with the slot utilization rate remaining high since the Anniversary of the Founding of the People’s Republic of China. From these, we believe that the risk of major supply-demand mis-match has been alleviated to a certain degree. Still, though, it currently is hard to assume a situation where cargos are piled up at ports and freight rates keep increasing.
Q4. Your outlook for ordinary income in the second half fiscal 2015 is ▲6.1 billion yen, and that appears somewhat large compared to the degree of deficit recorded for the second quarter. Please tell me whether it means you foresee the freight market for second half of the year conservatively, or you estimate that it will worsen this much due to deterioration in the Asia-North America trades.
A4. Our forecast is neither conservative nor optimistic in our understanding. For the Asia-North America trades, while the business went well in the first quarter, the performance has been gradually declining since the second quarter. In the first half term, Asia-North America trades propped up the revenue for the entire Containership Business, but the situation may become very severe in the second half fiscal 2015.
Q5. Please tell me the current situation of demand in both Asia-North America and Asia-Europe trades. As there was a declining trend for the Asia-Europe trades up to about June or July, is there any change in this trend? Also, looking at various statistical data, it seems that demand is currently slowing down in Asia-North America trades.
A5. For the Asia-Europe trades, demand was about negative 2-3% year-on-year at the beginning of the year, yet it plummeted to about negative 7-8% year-on-year during the summer. As of now, we are forecasting a negative 4-5% year-on-year for fiscal 2015 overall. As the demand remained relatively strong since the Anniversary of the Founding of the PRC in October, we assume that the stock adjustment at customers on European side has been completed and so it is expected that there will be some recovery in demand during latter half of this year. For the Asia-North America trades, it seems the demand is recovering by about 4-5%. Due to the devastating situation in other routes, shipping companies including “K” Line introduced new services and substantially increased capacity in Asia-North America trades this year, and supply may have increased by 10% or so. Therefore, although demand is growing, there unfortunately is no sense of tightness in the capacity in general unfortunately.
Q6. According to the report, ordinary income for the first quarter is 4.1 billion yen, and that for the second quarter is ▲1.0 billion yen. Is it correct to think the main cause is reduced profitability in the Asia-North America trades? Or, is there any other reason?
A6. The reduction in the freight rates in Asia-North America trades is the major factor.
Q7. Media reports say COSCO is going to merge with China Shipping. What are the impacts of the merger? If COSCO joins the “Ocean 3” Alliance, will that have any effect on the benefits of introducing 14,000TEU ships?
A7. COSCO is one of the main members of our containership Alliance CKYHE. There is no definitive information whether they will join Ocean 3 Alliance, remain in CKYHE Alliance or do business alone after merging with China Shipping. The concept of CKYHE Alliance was to form a flexible cooperating system that respects the independence of each member company, with each member operating its own loop and mutually exchanging part of capacity when necessity arises. Therefore, even if there is a regrouping of alliances, we believe this can be addressed accordingly.
Q8. Among the factors estimated for second half fiscal 2015 that are turning the income red, you assume a market downturn for the Asia-North America trades and flat or improving market for Asia-Europe trades. However, considering the fact that falling fuel price produces larger benefits for the second half of the year, these factors do not seem consistent with your estimate that the deficit will increase. If there are any other factors that may increase the cost, please let me know.
A8. While we estimate freight rates in Asia-North America trades will fall by several points from the second quarter index of 93, the index has already fallen by 4 points from the first quarter to the second quarter and the situation is not encouraging. In addition to the increasing terminal fees and inland transport cost, export from North America is slumping due to a strong US dollar, and some negative impacts such as the increasing cost for bringing empty containers back are considered to become more apparent in the second half of the year. Our revenue and expenditure plan is formulated including these cost increasing factors.
Dry Bulk Business
Q. On carrying out structural reform of Dry Bulk Business, does the filing of petition to commence civil rehabilitation proceedings by Daiichi Chuo Kisen Kaisha induce charter chain problems or hindrance to the reform?
A. “K” Line doesn’t have any direct trading with that company, and we believe there is no indirect influence on us via freight owners either. However, for the Dry Bulk Business in general, we are paying close attention to the impact of prolonged market stagnancy.
Offshore Energy E&P Support & Heavy Lifter Business
Q1. The estimate of ordinary income from Offshore Energy E&P Support & Heavy Lifter Business for FY2015 was adjusted downward by 6.0 billion yen. Please tell me the breakdown.
A1. About half of the adjustment, 3.5 billion yen is attributed to foreign currency denominated debt valuation at a foreign subsidiary in Norway. The rest takes into account market deterioration associated with the low crude oil price.
Q2. For Offshore Energy E&P Support Business, ordinary income was again adjusted downward into the red, and I believe there is no immediate prospect for price of crude oil to recover. What is your business policy for offshore support vessels?
A2. We believe Offshore Energy E&P Support Business is a growing segment. There will be more demand for energy globally, and our plans include endeavoring to make it grow into larger business in the future.
Q1. Please tell me the details and effect of structural reform in the second half fiscal 2015. Also please tell me if extraordinary losses are included this time.
A1. Please excuse me for not giving details with respect to parties we are negotiating with, but we are considering various measures including selling of vessels, especially in the Dry Bulk Business. The effect is being currently scrutinized, yet it is considered to become a scale of several billion yen at least. There are many factors involved with structural reform, and they will be decided through negotiations with other parties and in accordance with the profit trend in the second half year.
Q2. This time, total revaluation loss of investments in securities of 8.0 billion yen is shown. Are you going to resolve cross-held shares, or are you going to maintain the status quo? Please let me know future direction you have in mind.
A2. Except those that have specific objectives in our business policy that contribute to improving the corporate value of “K” Line as in maintaining and strengthening trade relationships or business partnerships, shares shall be sold when timing is right. “K” Line is a shipping company, and has many occasions of making large investments. For that, we shall carefully examine the reason of shareholding at least once a year and deal with them in conformity with our corporate governance codes.
Q3. The Medium-term Management Plan assumes an increase in income towards fiscal 2019. Please let me know the matters that are expected to serve as factors to increase profit.
A3. All five of the 14,000TEU containerships entering service are expected to produce stronger cost competitiveness, effects of further rationalization within the framework of our alliance and higher fuel efficiency. Additionally, all newly- built 7,500-vehicle car carriers that can accommodate various cargoes, not just completed cars, will enter service, and improved income exceeding 10.0 billion yen has already been secured by these various measures including the restructuring of Dry Bulk Business. Improvement in income toward the next fiscal year assumes accumulation of these factors.
Q4. According to your explanation, market deterioration in the Containership Business and Dry Bulk Business exceeded the benefits from falling bunker price. Shall I consider that the benefits from falling bunker price were 100% absorbed by customers or that falling bunker price has been beneficial for “K” Line and that the situation would have been much worse without it?
A4. While it varies depending on the business segment, part of the fall in bunker price is returned to customers in a form of reduced fuel surcharge. However, it also serves as a positive factor for the shipping company as in reduced operational costs. Meanwhile, regarding Containership Business where the market fluctuates violently due to over-supply of tonnage, the demerit of falling freight rate level is more overpowering than the merit of falling bunker price. As a result, for Containership Business, despite the fact that we made a positive profit last year, we have to assume a certain level of deficit for this term albeit a relatively small amount compared to that encountered in the past.
Q5. Please tell me how I should view the cash flows from investment activities. I mean, please tell me what “K” Line’s concept is for them in FY2015, and if there is any change from the next term onward to the capital investment plan that is described in the Medium-term Management Plan.
A5. There is no change to the basic concept of having 50.0 billion yen and increasing it over 2 years from 2018 that was announced in the Medium-term Management Plan. By maintaining a positive figure for free cash flow, we will make investments into stable profit segments and growth strategy segments.