January 4, 2010
At the start of the New Year, I would first like to convey my sincere appreciation to you all for every effort and accomplishment made in 2009 and wish for the well-being and happiness of all "K" Line colleagues and their families throughout the world. As an opportune time to prepare ourselves for the challenges we face in 2010, allow me to share with you a summary of events from the previous year together with some reflections and hopes for the future of "K" Line.
All of us witnessed the "Lehman Shock" in autumn of 2008 and the subsequent rapid economic downturn on a global scale. The substantial impact it had on our company’s operations shows in the 2nd quarter’s financial report of fiscal year (FY) 2009; "K" Line’s consolidated operating revenues decreased drastically by 45.6% compared to the previous year while our consolidated ordinary income, which had reached the record-high 75.1 billion yen went literally from black to red within a single year, plummeting to a deficit of 49.9 billion yen – the worst our company has ever experienced. Needless to say, the total loss of 125 billion yen attests to the severity of the current economic crisis. The financial outlook for this business year, presented in the 2nd quarter’s report, was adjusted to a forecast of 810 billion yen in operating revenues, 71 billion yen in ordinary loss, 79 billion yen in net deficit for the period – a clear indication that "K" Line will be forced to survive through an extremely trying business environment in 2010.
While economic indicators in the United States, Europe and elsewhere have begun to show signs of improvement since autumn of 2009, it is too premature to state that the world economy is on a solid track to recovery. 3rd quarter GDP growth in the United States and EU nations suggests some revival of business activities, yet the prevailing instability of the job market continues to affect society at large, and is a major concern in view of economic recovery. Dry bulk market trends have shown a more solid improvement than expected, owing to the increased demand in raw material shipments to China. On the other hand, recovery in car transport demand, particularly exports from Japan, has lagged behind our projections. The same can be said of energy resources transport – due to the global economic downturn, the rise in demand for crude oil and LNG carriers has been sluggish. As for the Containership Sector, projections for the containership industry worldwide are just as dire, forecasting a maximum annual deficit of 2 trillion yen. This grave situation has necessitated cost-reduction and adjustment of the supply-demand gap. Despite the steady, positive outcome of our efforts made in rate restoration, the balance of revenue less expenses remains well below our expectations. In view of the adverse circumstances and in the absence of a clear road map for overcoming this unprecedented global economic crisis, it is necessary to be realistic and pragmatic. We should not expect much improvement in the business environment for the next several years, and as such, it is imperative that we concentrate our efforts on paving our own new way for the future of the company.
The Emergency Task Force Committee formed in December 2008, with myself as chair, was reorganized in August 2009 into the Business Structural Reform Committee, under which three sub-committees have been assigned the tasks of: (a) earnings improvement; (b) business re-structuring; and (c) organizational reformation to pursue aggressive reforms across the entire "K" Line Group without sanctuary or exception. Perhaps the profitable circumstances "K" Line enjoyed over the past several years may have indeed led us to presume continuing business growth without question. Based on this hindsight, the three sub-committees have reviewed, discussed and have begun implementing various measures, wherever possible, to rebuild the company and reinforce its strong competitive standing.
In the short term, we have held back on capital investment plans in order to focus on the immediate restructuring of the Containership Sector, which has suffered the greatest damage, by scaling down and reorganizing freight services to North America and Europe in accordance with the decline in demand. Our fleet has been reduced by selling, demolishing or returning up to 30 vessels for a swift streamlining of our shipping operation. Additionally, for the purpose of improving cash flow, orders that had been placed for the construction of new vessels have been postponed or changed to other vessel types, and early termination of chartered vessels has been implemented as well. To achieve this restructuring it has been decided to allocate around 50 billion yen. We have also proceeded to enhance streamlining of the Car Carrier Sector, which has been hit hard by the drastic decline in the worldwide movement of automobiles. In consideration of the sharp decline in car freight movement at the global level, the demolition or return of over 20 vessels has downsized our car carrier fleet to one that is more appropriate to anticipated demands in future shipping. In the area of Dry Bulk and Energy Transportation Sectors, early termination and return of high-cost vessels and disposal of uneconomical ships have been completed, allowing us, albeit gradually, to regain business momentum. Owing to these measures, "K" Line’s profit-earning capacity has already seen rapid improvement, and our hopes are now much higher that we will likely return to profitability for FY2010 ending March 2011.
As to our mid-to-long term management plan, the above-mentioned three sub-committees concluded that a review of "K" Line’s operation portfolio was required, and the original investment plan of approximately 500 billion yen for the 3-year period between 2009 and 2011 has been cut back by 50% in line with those adjustments made in the business portfolio. This will help improve our financial indicator. With regard to the Containership Sector, being the backbone of "K" Line, not only a short-term recovery strategy but also sustaining long-term profitability must be considered. For this reason, a favorable balance between the scale of operation and earnings variability is required, and all the Containership Group members have been requested to continue conducting a zero-based review of their operations including rate restoration and augmenting cost-competitiveness as well as an overhaul of existing services with a view to future potentials. As for the Car Carrier Sector, shipments of Completed Built-Up cars are expected to increase in the long term while further diversification in transport routes and car lots is also surmised, hence restructuring is necessary so that we are fully equipped to provide the optimal vessel and service network in advance of others. It is also essential for the Dry Bulk Sector to accurately gauge new trends in trade and prepare the fleet to meet any need as required, considering the increasing complexity and diversity of the global economy. Another task is to expand the Energy Transport Sector as the new pillar of profitability, through new businesses including offshore support vessels, ultra deepwater drill ships, and floating LNG producers. Lastly, in line with changes made to the company portfolio, new business strategies are currently under consideration within the Logistics Department. Exchanges and discussions with the individual departments held in December are still ongoing and will be incorporated into "K" Line’s mid-term management plan, to be announced in the near future.
Since its founding, "K" Line has faced many challenges in the rapidly changing economic environment and successfully overcame each one under the guidance and wisdom of our predecessors and through trying and occasionally painful restructuring of the company. Because the gravity and severity of the present economic crisis is one that we have never encountered before, I am compelled to emphasize what I stated last year in my New Year’s greetings. The greatest asset and strength of the "K" Line Group is its human resources. I place my trust in the expertise, ingenuity and commitment of my fellow colleagues to view the adverse circumstances as a new opportunity for growth so that we can turn the odds to our favor. I ask again for the continuing cooperation of executives and staff at all "K" Line Group companies to bring recovery and growth back on track. I am confident that with your determination and action we will achieve better performance this year, which in turn shall position the company for further development in the years to come.
Also, I am very pleased to note that "K" Line encountered no major accidents in 2009, and would like to thank everyone on shore and at sea for their tireless efforts. At present there are various potential, unforeseeable risks at sea owing to the turbulent political climate over the world, an example being the problem of piracy in the Gulf of Aden. Navigation safety is essential and fundamental to our integrity as a maritime shipping company as well as our reputation as a service provider. I ask every member of the "K" Line team to expend all possible means and continue to place safety first in order to meet the expectations and trust of our valued customers who have chosen our services during the long history of our company.
Last but not least, I would like to express again my gratitude for your contribution in 2009, my very best wishes to all "K" Line Group staff and their families around the globe, and my hope for the safe journey of all "K" Line vessels throughout the year. Let us stride forward together in 2010.
President & CEO