Mitsui O.S.K. Lines Ltd.
Annual Report 2013

Plain-text annual report

M i t s u i O . S . K . L i n e s , L t d . A n n u a l R e p o r t 2 0 1 3 AnnUAL REpORT 2013 Year ended March 31, 2013 AnnUAL REpORT 2013 One Direction MOL suffered from a difficult business environment and recorded consecutive losses in fiscal 2011 and 2012. But things have started to change after MOL executed Business Structural Reforms (BSR), which are designed to steer MOL in one direction toward renewed growth. In the feature section of this report, MOL’s president is interviewed about the company’s focus on one direction. The feature comprises three parts in which the president discusses his recognition of the company’s circumstances (Why) and the measures taken to address them (How): (1) a review of fiscal 2012 and the BSR executed in the fourth quarter; (2) “RISE 2013,” MOL’s fiscal 2013 business plan for restoring the company to profitability; and (3) MOL’s scenario for renewed growth based on this foundation from fiscal 2014 onward. Later in the report, in “Overview of Operations,” the heads of each business division discuss divisional strategy in the same three‑part format. And under “Key Systems Underpinning MOL,” we explain in detail our corporate gover‑ nance and safe operation initiatives, which underpin our growth. MOL GROUp CORpORATE pRInCIpLES 1 as a multi-modal transport group, we will actively seize opportunities that contribute to global economic growth and development by meeting and responding to our cus- tomers’ needs and to this new era. 2 we will strive to maximize cor- porate value by always being creative, continually pursuing higher operating efficiency and promoting an open and visible management style that is guided by the highest ethical and social standards. 3 we will promote and protect our environment by maintain- ing strict, safe operation and navigation standards. Forward-Looking StatementS This annual report contains forward‑looking statements concerning MOL’s future plans, strategies and performance. These statements represent assumptions and beliefs based on information currently available and are not historical facts. Furthermore, forward‑looking statements are subject to a number of risks and uncertainties that include, but are not limited to, economic conditions, worldwide competition in the shipping industry, customer demand, foreign currency exchange rates, price of bunker, tax laws and other regulations. MOL therefore cautions readers that actual results may differ materially from these predictions. Contents 02 FInanCIaL hIGhLIGhts 03 key InDICatoRs 06 to ouR shaRehoLDeRs 08 FeatuRe: one Direction our new Growth scenario In fiscal 2012, we implemented Business Structural Reforms (BSR) to make MOL more resilient to the risk of changes in market prices, particularly in dry bulkers. In fiscal 2013, we are now drawing on all our strengths to execute “RISE 2013,” a single-year management plan that is designed to return MOL to profitability. Among other initiatives, this plan seeks to enhance the mea- sures set forth in the BSR, to expand highly stable profits and to strengthen the cost competitiveness of our containership business. Beyond that, we are work- ing in one direction—to put MOL on a new growth trajectory. 22 MoL at a GLanCe 24 MaRket PosItIon In the InDustRy 26 oveRvIeW oF oPeRatIons 49 key systems underpinning MoL 50 boaRD oF DIReCtoRs, CoRPoRate auDItoRs anD exeCutIve oFFICeRs 52 MessaGe FRoM an exteRnaL DIReCtoR 54 CoRPoRate GoveRnanCe 58 RIsk ManaGeMent 60 saFe oPeRatIons 62 CoRPoRate soCIaL ResPonsIbILIty (CsR) 67 Financial section 106 the MoL GRouP 108 WoRLDWIDe oFFICes 109 shaRehoLDeR InFoRMatIon MoL’s IR WebsIte http://www.mol.co.jp/ir-e/index.html MoL’s CoMMunICatIon tooLs MOL produces the following publications as a means of promoting communication with stakeholders: *The latest versions of all reports can be found on our website. http://www.mol.co.jp/menu-e.html annuaL repOrt* A detailed explanation of investor relations information such as a message from top management, management strategy, business environment, operating results and financial data. Primarily for shareholders and other investors. envIrOnMentaL and sOcIaL repOrt* This report introduces the company’s approach to corporate social responsibility (CSR) and the environment, and our latest initiatives, to all stakeholders. The report uses illustrations, tables and graphs and reflects the voices of our forefront staff where possible. MOL InvestOr GuIdebOOk* Easy-to-understand analysis using tables, charts and graphs of the MOL Group’s management plans, key financial indicators, business activities, market position and operating environment in each business. Primarily for shareholders and other investors. Market data* This report uses graphs and tables to introduce the latest marine transport-related information, such as freight rates for dry bulkers and tankers, and containership trade volume. Primarily for shareholders and other investors. cOrpOrate prOfILe Easy-to-understand discussion of the company’s business activities. Mainly for customers, business partners, local communities, and job-hunting university students and professionals, as well as the general public. 01 FInanCIaL hIGhLIGhts Mitsui O.S.K. Lines, Ltd. Years ended March 31 2013 2012 2011 2010 2009 2008 2013 Millions of yen Thousands of U.S. dollars for the year: Shipping and other revenues . . . . . . ¥1,509,194 ¥1,435,221 ¥1,543,661 ¥1,347,965 ¥1,865,802 ¥1,945,697 $16,046,720 Shipping and other expenses . . . . . 1,432,014 1,368,795 1,328,960 1,228,479 1,564,486 1,544,109 15,226,093 Selling, general and administrative expenses. . . . . . . . . Operating income (loss) . . . . . . . . . . Ordinary income (loss) . . . . . . . . . . . Income (loss) before income taxes and minority interests. . . . . . . . . . . Net income (loss). . . . . . . . . . . . . . . 92,946 (15,766) (28,568) (137,939) (178,847) 90,886 (24,460) (24,320) (33,516) (26,009) Free cash flows [(a) + (b)] . . . . . . . . . (25,285) (129,298) 91,300 123,401 121,622 95,367 58,277 46,970 98,547 20,939 24,235 27,776 12,722 104,105 197,211 204,511 197,732 126,988 110,303 291,285 302,219 988,261 (167,634) (303,753) 318,202 (1,466,656) 190,321 (1,901,616) (40,055) (71,038) 23,291 (268,846) Cash flows from operating activities (a) . . . . . . . . . . Cash flows from investing activities (b) . . . . . . . . . . . Tangible/intangible fixed assets increased . . . . . . . . . . . . . . at year-end: 78,956 5,014 181,755 93,428 118,984 283,359 839,511 (104,241) (134,313) (134,785) (133,484) (190,022) (260,068) (1,108,357) 164,890 175,726 220,443 204,190 223,208 303,573 1,753,216 Total assets . . . . . . . . . . . . . . . . . . . 2,164,611 1,946,162 1,868,741 1,861,312 1,807,080 1,900,551 23,015,534 Net vessels, property and equipment. . . . . . . . . 1,303,967 1,293,803 1,257,823 1,209,176 1,106,746 1,047,825 13,864,615 Interest-bearing debt . . . . . . . . . . . . 1,046,865 Net assets/Shareholders’ equity . . . 619,493 869,619 717,909 724,259 740,247 775,114 735,702 702,617 695,022 601,174 11,130,941 751,652 6,586,847 amounts per share of common stock: Yen U.S. dollars Net income (loss). . . . . . . . . . . . . . . ¥(149.57) ¥(21.76) ¥48.75 ¥10.63 ¥106.13 ¥159.14 $(1.590) Cash dividends applicable to the year . . . . . . . . . . . . . . . . . . . . . – 5.00 10.00 3.00 31.00 31.00 – Management indicators: Gearing ratio (%) . . . . . . . . . . . . . . . Equity ratio (%) . . . . . . . . . . . . . . . . ROA (%) . . . . . . . . . . . . . . . . . . . . . ROE (%) . . . . . . . . . . . . . . . . . . . . . Dividend payout ratio (%). . . . . . . . . Number of MOL Group employees: (the parent company and consolidated subsidiaries) . . . . 196 24.7 (8.7) (30.5) – 136 32.8 (1.4) (4.0) – 110 35.4 3.2 8.8 20.5 118 35.4 0.7 2.0 28.2 113 34.5 6.9 19.5 29.2 88 35.8 10.8 30.9 19.5 9,465 9,431 9,438 9,707 10,012 9,626 Please refer to the notes on p. 72, for “Translation of foreign currencies” and “Presentation of net assets in the balance sheet.” 02 key InDICatoRs shIppInG and Other revenues/ OrdInary IncOMe (LOss) tOtaL assets/net assets (¥ billions) 2,000 1,500 1,000 500 0 –500 08/3 09/3 10/3 11/3 12/3 13/3 400 300 200 100 0 –100 (¥ billions) 2,500 2,000 1,500 1,000 500 0 1,000 800 600 400 200 0 08/3 09/3 10/3 11/3 12/3 13/3 Shipping and other revenues (left scale) Ordinary income (loss) (right scale) fy2012 shipping and other revenues fy2012 Ordinary income (loss) ¥1,509.1 billion ¥(28.5) billion Total assets (left scale) Net assets (right scale) fy2012 total assets fy2012 net assets ¥2,164.6 billion ¥619.4 billion Although revenues increased ¥73.9 billion year on year, MOL recorded an ordinary loss that was ¥4.2 billion larger than fiscal 2011. This result reflected soft spot market rates due to a deterioration in the supply- demand balance of vessels, and the loss arising as a result negated highly stable profits derived from medium- and long-term contracts. Total assets as of March 31, 2013 were ¥218.4 billion higher than at March 31, 2012 due to increases in cash and deposits, and other long-term assets, the latter because of the yen’s depreciation. Net assets decreased ¥98.4 billion year on year due mainly to a decrease in retained earnings. OrdInary IncOMe (LOss) by cOnsOLIdated seGMent net IncOMe (LOss) per share/ cash dIvIdends appLIcabLe tO the year (¥ billions) 300 200 100 0 –100 08/3 09/3 10/3 11/3 12/3 13/3 (¥) 200 150 100 50 0 –50 –100 –150 08/3 09/3 10/3 11/3 12/3 13/3 Bulkships Containerships Other segments, etc. Net income (loss) per share Cash dividends applicable to the year fy2012 bulkships fy2012 containerships fy2012 Other segments, etc. ¥(24.7) billion ¥(11.2) billion ¥7.4 billion fy2012 net income (loss) per share fy2012 cash dividends applicable to the year ¥(149.57) ¥ Bulkships posted a larger ordinary loss than fiscal 2011 due primarily to lower spot rates in dry bulker markets. Containerships, meanwhile, recorded a smaller ordinary loss despite no substantial improvement in the vessel supply-demand balance. This was the result of efforts to reduce costs and operate more efficiently. MOL posted a net loss of ¥178.8 billion, partly reflecting the fourth-quarter cost of Business Structural Reforms and reversal of deferred tax assets. MOL took the decision not to pay a dividend throughout the fiscal year. 03 cash fLOws (¥ billions) 300 150 0 –150 –300 08/3 09/3 10/3 11/3 12/3 13/3 Cash flows from operating activities Cash flows from investing activities Free cash flows fy2012 cash flows from operating activities fy2012 cash flows from investing activities fy2012 free cash flows ¥78.9 billion ¥(104.2) billion ¥(25.2) billion Operating activities provided net cash of ¥78.9 billion, up ¥73.9 billion year on year. On the other hand, investing activities used net cash of ¥104.2 billion, ¥30.0 billion less year on year. The net result was negative free cash flows for the second straight year. rOa/rOe (%) 40 20 0 –20 –40 ROA ROE fy2012 rOa fy2012 rOe 08/3 09/3 10/3 11/3 12/3 13/3 (8.7)% (30.5)% ROA and ROE both deteriorated sharply because the net loss widened by ¥152.8 billion year-on-year. Interest-bearInG debt/sharehOLders’ equIty GearInG ratIO/equIty ratIO (¥ billions) 1,200 1,000 800 600 400 200 0 08/3 09/3 10/3 11/3 12/3 13/3 (%) 200 150 100 50 0 40 35 30 25 20 08/3 09/3 10/3 11/3 12/3 13/3 Interest-bearing debt Shareholders’ equity fy2012 Interest-bearing debt fy2012 shareholders’ equity ¥1,046.8 billion ¥535.4 billion Gearing ratio (left scale) Equity ratio (right scale) fy2012 Gearing ratio fy2012 equity ratio 196% 24.7% * “Shareholders’ equity” in this section comprises the total of owners’ equity and accumulated other comprehensive income (loss). Interest-bearing debt increased ¥177.2 billion to ¥1,046.8 billion, as the company procured funds by bank loans, corporate bonds and other means to cover negative free cash flows. The gearing ratio increased 60 points, reflecting the ¥177.2 billion rise in interest-bearing debt and the ¥102.0 billion decrease in shareholders’ equity. The equity ratio fell 8.1 points due to the ¥218.4 billion increase in total assets. 04 cOst reductIOns hIGhLy stabLe prOfIts (¥ billions) 120 90 60 30 0 13/3 result 12/3 result 11/3 result GEAR UP! MOL Original Plan Results 11/3 12/3 13/3 fy2010 result fy2011 result fy2012 result ¥49.0 billion ¥24.5 billion ¥29.0 billion (¥ billions) 80 60 40 20 0 11/3 12/3 13/3 fy2012 highly stable profits ¥50.0 billion In fiscal 2012, MOL achieved total cost reductions of ¥29.0 billion, exceeding its ¥28.0 billion target. This was achieved by reducing bunker expenses through slow steaming, improving vessel allocation efficiency and taking other actions. The fiscal 2012 figure exceeded its target, as was the case with the fiscal 2011 figure of ¥24.5 billion. Highly stable profits are firm profits based on medium- to long-term contracts exceeding one year, and profits from highly stable businesses. MOL generated highly stable profits of ¥50.0 billion in fiscal 2012. credIt ratInGs (As of July 2013) capItaL expendIture JCR R&I type of rating rating Short-term debt rating (CP) J–1 Long-term preferred debt (issuer) rating Long-term debt rating Issuer rating Short-term debt rating (CP) Long-term individual debt rating A A A– a–1 A– Moody’s Issuer rating Baa3 (¥ billions) 300 200 100 0 08/3 09/3 10/3 11/3 12/3 13/3 Jcr r&I Moody’s a a– baa3 fy2012 capital expenditure ¥120.8 billion MOL’s financial indicators deteriorated due to the company’s lackluster performance, and MOL’s credit ratings were downgraded by credit rating agencies, losing its position in fiscal 2011 of having the highest rating of any company in the global marine transport industry. Capital expenditure is the actual amount calculated by deducting proceeds from the sale of vessels when delivered from “Tangible/intangible fixed assets increased” contained in the annual securities report. 05 to ouR shaRehoLDeRs akIMItsu ashIda Chairman kOIchI MutO President 06 Loss for the second straight year in fiscal 2012 fourth-quarter business structural reforms fiscal 2013 single- year Management plan “rIse 2013” working toward sustainable Growth The MOL Group completed the “GEAR UP! MOL” midterm management plan at the end of March 2013. Despite making a bright start in the first year of this three-year plan, the subsequent two years saw us exposed to an extremely harsh external operating environment. We had to contend with a number of negative factors all at once, including the European financial crisis, slowing growth in China and other emerging markets, the Great East Japan Earthquake and other natural disasters, the yen’s appreciation, and soaring bunker fuel prices. Coupled with these and other negative factors, there was a supply glut of vessels caused by continued deliveries of large numbers of vessels. We worked hard to overcome these difficulties that could be described as once-in-decades conditions. However, in fiscal 2011 we posted an ordinary loss of ¥24.3 billion as our containership, dry bulker and tanker divisions were all unable to stave off market declines caused by the supply of vessels outstripping demand. In fiscal 2012, we recorded a second straight ordinary loss of ¥28.5 billion. While the loss in containerships was dramatically reduced thanks to cost cutting and improved operational efficiency, an unprecedented slump in the dry bulker market negated our work to turn around results. Given this situation, and with no immediate prospects for a full-fledged recovery of the shipping market in fiscal 2013 because the vessel supply-demand equation will take some time to correct, we decided to implement Business Structural Reforms in the fourth quarter of fiscal 2012. We decided it was vital to implement full-scale reforms to improve our performance without waiting for the external operating envi- ronment to pick up. One action we took was to shift sales and operations of free vessels in dry bulkers to Singapore. This action was prompted by the need to turn around free vessel earnings, as these vessels had largely undermined highly stable profits from medium- to long-term contracts. We also decided to strengthen our ability to withstand the risk of market changes by reducing the number of free vessels in our dry bulker and tanker operations. As a result of these actions, we regrettably took large restructuring charges in fiscal 2012. However, we believe that our actions have secured us the competitiveness to move back onto a growth trajectory from fiscal 2013. Since April 2013, MOL has been working company-wide on a single-year management plan, “RISE 2013,” the goal of which is to ensure that we return to profitability in fiscal 2013. This year would ordinar- ily have seen us announce our next midterm management plan. However, we decided instead to launch a single-year plan designed to instill a crisis mentality in all corporate officers and employees and to lay a solid foundation for sustainable growth by restoring profitability and building up cash flows. Business model reform is the cornerstone of “RISE 2013.” We are returning to the essence of the MOL Group Corporate Principles, and strengthening sales to respond to customer needs and increasing the number of cargo shipping contracts to build up highly stable profits. In tandem with this, we are scaling down our market exposure to a more appropriate level. In addition, so that we can always sur- pass market expectations by creating added value in any market, we will demonstrate creativity and ingenuity in terms of cargo collection and operations, as well as execute more strategies to achieve deeper cost cutting. As part of these initiatives, we will reinforce business in Singapore, which is becom- ing a hub for international shipping, and other overseas bases. Through “RISE 2013,” MOL aims to equip itself with the ability to capture cargo volume, which is expected to be continually created in step with world economic growth, as well as rebuild a solid founda- tion to that end. We intend to work hard to put MOL back onto a growth trajectory after that and further grow the company’s corporate value. We would like to ask for the continued understanding and support of shareholders as we work to achieve these goals. August 2013 akIMItsu ashIda Chairman kOIchI MutO President 077 kOIchI MutO President 08 one Direction our new Growth scenario In fiscal 2012, we implemented Business Structural Reforms (BSR) to make MOL more resil- ient to the risk of changes in market prices, particularly in dry bulkers. In fiscal 2013, we are now drawing on all our strengths to execute “RISE 2013,” a single-year management plan that is designed to return MOL to profitability. Among other initiatives, this plan seeks to enhance the measures set forth in the BSR, to expand highly stable profits and to strengthen the cost competitiveness of our containership business. Beyond that, we are working in one direction— to put MOL on a new growth trajectory. 09 one Direction /our new Growth scenario special Charge for spot vessels ¥ 101billion 10 Why Fiscal 2012 was the final year of our three- year midterm management plan “GeaR uP! MoL,” which began in fiscal 2010. For fiscal 2012, we set the initial target of achieving ordinary income of ¥10.0 billion. however, we ended up posting an ordinary loss of ¥28.5 billion, which was even bigger than the ¥24.3 billion ordinary loss recorded a year earlier, as a result of continued volatility in market con- ditions in the marine transport industry and strong supply pressures created by new ships. Looking more closely, our fiscal 2012 perfor- mance differed to fiscal 2011 in certain respects. on the one hand, we saw a major improvement in the containership business. on the other hand, however, dry bulker market conditions remained as soft as they have ever been, and this negated the profit improvement in the containership business. the containership business posted an ordi- nary loss, but held it to ¥11.2 billion. this was an ¥18.6 billion improvement on the ¥29.9 billion ordinary loss it recorded in fiscal 2011. this marked improvement owed much to the restoration of freight rates by adjusting space supplied, and to strengthening the competi- tiveness of the service network by expanding and enhancing alliances. In stark contrast, the bulkships business, which includes the dry bulker business, saw the ordinary loss worsen by ¥17.8 billion from ¥6.9 billion in fiscal 2011 to ¥24.7 billion in fiscal 2012. this busi- ness was severely impacted even more than the previous year by depressed dry bulker market conditions as the number of new ship deliveries remained at a historically high level. In this way, the deterioration in our fiscal 2012 performance was mainly due to lacklus- ter market conditions for our free vessels *1 in dry bulkers. as the forecast for fiscal 2013 was looking challenging again, we took some forthright actions in the fourth quarter of fiscal 2012. With market conditions not expected to recover until mid-2013 at the earliest based on market participants building a consensus that vessel oversupply had peaked out, we decided not to wait for a recovery in market conditions to turn our performance around. Considering also the expected number of deliveries of tankers and containerships, we implemented business structural Reforms (bsR) designed to dramatically raise our infor- mation gathering capabilities to enable us to generate earnings even amid soft market con- ditions. these reforms caused us to take one- time charges of ¥101.5 billion as extraordinary losses (cost of bsR), breaking into retained earnings in fiscal 2012. but we saw this as an opportunity to take the first step toward put- ting MoL back on a growth trajectory. the focus of our recent bsR was shifting sales and operations of free vessels in dry bulkers to singapore, a central point for ship- ping in asia and for customers and informa- tion. Many MoL customers and brokers already have bases in singapore, meaning that differences have arisen in the volume of infor- mation obtainable from traditional tokyo- centered sales. even though advances in information technologies have enhanced com- munication, there is still no substitute for face-to-face communication in daily business. tokyo is no longer the ideal location as a sales base in a global market. this is what led us to decide to centralize the free vessels of dry bulkers in singapore. Regarding the transfer of operations, mainly time charter agreements were assigned to MoL’s wholly owned local subsidiaries in singapore at market price, resulting in large losses *2 on assignment as extraordinary losses. this accounted for the lion’s share of the ¥101.5 billion in cost of bsR. the large net loss of ¥178.8 billion for fiscal 2012 reflected the addition of these extraordinary expenses to the ordinary loss of ¥28.5 billion as well as the impact of reversing deferred tax assets. Importantly, however, the bsR have lowered the cost of MoL’s free vessels of dry bulkers now in singapore to the market rate. We expect this to yield a ¥40.0 billion earn- ings improvement in fiscal 2013, followed by projected improvements of ¥30.0 billion and ¥20.0 billion in fiscal 2014 and fiscal 2015 *3. In other words, we believe that MoL now has one of the world’s most competitive fleets of free vessels in singapore. 11 *1: free vessel: So-called free vessels comprise ships contracted at spot rates or on contracts of less than one year. As a result, these vessels are exposed to changing market conditions. *2: Large losses: The assignment losses represent the difference between the original charter rate and the prevailing market rate. *3: The projected earnings improve- ment is in comparison with fiscal 2012. Total benefits, which are expected to continue flowing through fiscal 2016 and beyond, match the ¥101.5 billion. While the extent of the benefits will decline year by year, this should not negatively affect earnings, because the number of free vessels will also decline at the same time, reducing the source of costs. (3) cost reductions at different stages along with reforms in both dry bulkers and tankers, MoL is pursuing deeper cost-cutting on a company-wide scale. In addition to past cost-cutting measures such as reducing fuel expenses through slow steaming, MoL will pursue all manner of means to return the company to profitability. It has also cut direc- tors’ compensation further and reduced the remuneration of managerial personnel, as well as closed some welfare facilities. We were able to execute the bsR while leaving sufficient corporate strength amid expectations of a continued difficult business environment with no marked improvement in the vessel supply-demand gap. We were able to do so partly because our comprehen- sive risk management functioned on a com- pany-wide level. In other words, our total risk management functioned. I have managed the company thus far by constantly looking at the extent to which we can take on challenges or risk based on the volatility of each business segment and our shareholders’ equity. We have lessons to learn for sure: the abnormal market conditions are the worst-case scenario and our dependence on free vessels in dry bulkers was a little too high. but we have been able to embark on a new journey to put MoL back on a growth trajectory again because our total risk exposure had not reached the danger zone. how there were three main aspects to our bsR. First was accelerating expansion to singapore, as I mentioned earlier. second was scaling down market exposure of dry bulkers and tankers. third was cost reductions at different stages. (1) expansion in singapore accelerated In the past, MoL has taken steps to develop business operations in singapore, including transferring sales and operations bases for free vessels in the tanker business. With sales and operations of free vessels in dry bulkers now centered on singapore, MoL will improve its sales and information gathering capabilities. (2) scaling down market exposure of dry bulkers and tankers Free vessels of dry bulkers and tankers have exerted considerable pressure on MoL’s earnings, because they were forced to operate at a loss due to soft market prices. as of september 30, 2012, MoL had 170 dry bulkers and 80 tankers operating as free vessels. by March 31, 2014, MoL plans to reduce these numbers to 120 and 60, respec- tively. through a combination of redelivering vessels after expiry of charter contracts, sell- ing vessels owned by MoL, and increasing the number of vessels operating on medium- to long-term contracts, MoL plans to scale back its exposure to market rates. therefore, MoL does not expect to incur any new extraordinary losses. 12  13 one Direction /our new Growth scenario Fiscal 2013 ordinary Income ¥ 60billion 14 *1: The depreciation period for most of the bulkship fleet has been extended to 20 years from fiscal 2013. (The depreciation period for LNG carriers was extended to 20 years in fiscal 2010.) Why the main theme of the single-year management plan RIse 2013 is to “achieve profitability in fiscal 2013 to make it the first year of MoL’s growth stage.” under this plan, in fiscal 2013 we are projecting ordinary income of ¥60.0 billion, which would represent a large improvement of close to ¥90.0 billion from fiscal 2012. breaking this down, we expect ¥40.0 billion in benefits from bsR, ¥10.0 billion in benefits from extending the depreciation period *1, ¥25.0 billion in benefits from a weaker yen and bunker price fluctuations (lower prices), and a ¥15.0 billion contribution from cost-cutting. however, if the first two benefits are taken out—they are accounting benefits that do not affect cash—that leaves only ¥10.0 billion in ordinary income. as our business environment remains as difficult as ever, I am urging all corporate officers and employees to see ¥60.0 billion in ordinary income as the minimum target we should achieve and calling on them to work to build up cash flow as an even more important imperative. normally, fiscal 2013 would have seen us launch a new three-year medium-term manage- ment plan. Instead we opted for a one-year plan. the reasons warrant an explanation. Given the unprecedentedly difficult business environment, with freight rates softening or remaining low for an extended period of time in all main ship types, including dry bulkers, tankers and con- tainerships because of the continued delivery of factOrs behInd prOJected chanGe In OrdInary IncOMe In fy2013 (¥ billions) Effect of weaker yen, stronger euro, and lower bunker prices Forex and bunker ¥25.0 Depreciation period extension ¥10.0 Business Structural Reforms ¥40.0 FY2012 ordinary loss ¥28.5 (Announced Apr. 2013) numerous new vessels, MoL’s urgent task is to create an earnings structure that isn’t reliant on market conditions and, based on this policy, to scale back our risk exposure to the market (i.e., the size of our free vessel fleet). at the same time, we will do our utmost to build up highly stable profits from medium- to long-term contracts, leveraging our safe operations and high-quality services. We believe, however, that ensuring we return to profitability in fiscal 2013 is imperative for creating the platform to grow. that is why we decided on a one-year plan. as above, it is difficult to see market conditions improving substantially in fiscal 2013. but if we can achieve ordinary income of ¥60.0 billion under these conditions, this would represent a start toward transforming our earnings structure and provide proof that we had begun to make progress. RIse 2013 encapsulates that sort of meaning. that brings me to the positioning of free vessels in our plan. the bsR we executed utilizing share- holders’ equity has equipped our free dry bulkers with world-leading cost competitiveness. the spot market is a place where a marine transport com- pany can show its strengths in terms of how well it can utilize its free vessels to both satisfy customers and generate profits. Going forward, MoL plans to continue doing business in the spot market albeit with a smaller fleet and procure vessels with stron- ger market resilience. I wish to point out that a free vessel itself as a business model is not the problem, but a free vessel with a high cost is. therefore, there will be no change to MoL’s portfolio management approach of pursuing maximum returns while controlling risk through the optimal combination of different types of vessels and cargo transport contract periods. P/L reflection among the through-year target of ¥31.5 in cost reductions Market and cargo volume changes ¥10.0 Others ¥11.5 Cost cutting ¥15.0 FY2013 ordinary profit ¥60.0 (Announced Apr. 2013) 15 how our ¥60.0 billion ordinary income forecast for fiscal 2013 is based on various premises. starting with the business environment, there have been signs of an upturn in the macroeco- nomic environment, highlighted by the u.s. economic recovery and yen depreciation. the yen's value against the u.s. dollar naturally has an impact on our earnings, because freight rates are generally denominated in u.s. dol- lars in the international ocean shipping busi- ness. Given that approximately 80% of our revenues are in u.s. dollars, a 1-yen deprecia- tion in the yen can bolster our ordinary income by ¥2.0 billion. For fiscal 2013, we are assuming a sharp depreciation in the yen with an average exchange rate of ¥95, from the average of ¥82.31 in fiscal 2012. While yen depreciation and euro appreciation will have a slight negative effect, we are projecting a positive effect on earnings of approximately ¥25.0 billion. this includes the positive effect on earnings of lower bunker prices, where we are assuming an average price of us$650 for fiscal 2013, compared with the actual average price of us$662 in fiscal 2012. on the other hand, our fiscal 2013 earnings forecast does not assume a major recovery in market prices, because the gap between supply and demand for vessels is still expected to take some time to close. Put another way, our ¥60.0 billion ordinary income forecast assumes that market rates will be close to the lowest level. this could probably be seen as the lower limit for estimating our earnings going forward. In terms of fiscal 2013 divisional forecasts, we are projecting ordinary income in bulkships of ¥40.0 billion. this would equate to a ¥64.7 billion turnaround from the fiscal 2012 ordinary loss of ¥24.7 billion. as we lowered the cost of our 130-strong fleet of free vessels to prevailing market rates due to the bsR, we expect a ¥40.0 earnings boost as a result and dry bulkers to act as a key driving force for the earnings turnaround. Looking at market rates by vessel size, Capesize bulkers are expected to see improved market rates from summer toward the second half of fiscal 2013 in step with the return to normal levels of shipments of iron ore from brazil, which had stagnated since the start of the year due to heavy rain and scheduled port facility mainte- nance. a projected reduction in the number of new ships delivered and progress with scrapping are also reasons for the improved outlook for market rates. Contrastingly, small- and medium- sized dry bulkers are expected to see any increase in market rates capped, as more time is needed to eliminate the vessel supply glut. Meanwhile, tankers have suffered from abnormally low market rates, generating an operating loss. but, due to reduced market risk exposure resulting from the bsR and backed by the benefits of unre- lenting cost-cutting, a return to profitability of the tanker segment is now in sight. LnG carriers fy2013 sInGLe-year ManaGeMent pLan “rIse 2013” MaIn theMe: “achieve profitability in Fy2013 to make it the first year of MoL’s new growth stage.” OutLIne Of “rIse 2013” transform business model (1) Enforce our sales structure to meet customer needs and add stable profits through expansion of business in overseas markets. (2) Scale down market risk exposure (free tonnage) Realize an appropriate fleet scale through skillful combination of increasing cargo contracts and decreasing fleet by sale or redelivery. (3) Pursue business opportunities by capitalizing on safe operation know-how and sophisticated services. achieve a higher level of business intelligence (1) Track supply capacity of major shipbuilding countries accurately and increase capabilities in fleet supply and demand analysis. (2) Pursue business opportunities arising from the shale gas revolution, next-generation fuels, etc. Reduce costs on an entirely different stage than before 16 are expected to see higher earnings from the continued generation of highly stable profits, mainly from long-term contracts. With car carriers, we don't expect to see much of a change from the trend among Japanese carmak- ers of producing vehicles in the region where they are sold. our forecasts factor in higher earnings from car carriers based on growth in freight in terms of cross trade and inbound trade by capturing growth in emerging markets such as India, Mexico and asean countries as the central focus of our strategy. turning to containerships, this business was unable to turn a profit in fiscal 2012, record- ing an ordinary loss of ¥11.2 billion. this loss was attributable to factors specific to fiscal 2012: delays in securing sufficient cargo in the asia-to-north america east Coast trade (via the suez Canal) that was restructured last year, and a drop in freight rates on the east Coast of south america route, where MoL has a major share. however, route profits have improved sharply, with new services for the east Coast of north america route growing in recognition among customers. Coupled with ¥10.0 billion in cost cutting, including reduc- tion of system costs due to the delivery of large vessels, a ¥7.0 billion profit contribution from the yen's depreciation and bunker price decline, and a ¥10.0 billion contribution from freight rate recovery (mainly pushed up by higher reefer container freight rates) and an increase in lifting volume, we are projecting ordinary income in containerships of ¥10.0 rIse 2013: fLeet scaLe transItIOn (as Of aprIL 2013) (No. of vessels) billion for fiscal 2013. this would represent a ¥21.2 billion improvement from fiscal 2012. amid continuing vessel supply pressures, almost all participants in this business will be forced to operate at a loss on freight rates like fiscal 2012, so we expect to see companies move in earnest to restore freight rates them- selves, and to limit the cargo capacity by reduc- ing service frequencies and using slow steaming. the ferry & domestic transport business posted its first profit in five years in fiscal 2012, and associated businesses delivered stable earnings. We therefore expect both businesses to continue making a contribution to earnings in fiscal 2013. the risk of not achieving the projected earn- ings is probably in containerships. the number of new ships to be supplied in 2013 is set to increase by 7% from 2012, while demand is forecast to rise by only 3% to 4%, leaving a gap of around 3 percentage points between growth in supply and demand. Most of the large new vessels will ply europe routes, where demand is rather weak, meaning that if the supply of cargo capacity isn't accurately adjusted, the supply- demand balance could collapse. MoL will of course take steps according to demand such as adjusting the supply of cargo slots, but the potential instability of the supply-demand bal- ance is a risk that must be watched vigilantly. In a market environment that must be watched at all times, we will manage our businesses with an extreme sense of urgency, setting the goal of achieving profitability with a minimum of ¥60.0 billion in ordinary income in fiscal 2013. September 30, 2012 4q fy12 March 31, 2013 RIse 2013 March 31, 2014 bulkships Fleet Scale Dry bulkers Tankers Fleet Scale Free tonnage Fleet Scale Free tonnage LNG carriers Fleet Scale Car carriers Fleet Scale containerships Fleet Scale Other total Fleet Scale Fleet Scale execution of business structural reforms 814 414 170 201 80 68 131 116 51 981 794 404 194 69 127 115 49 958 729 365 120 177 60 68 119 117 44 890 Note: “Fleet Scale” shows the total number of owned vessels (including those owned by joint ventures) and chartered vessels (long, short-term), at each date. 17 one Direction /our new Growth scenario and More our new Growth scenario 18 Why the sound platform created by the execution of bsR and the achievement of ordinary income in fiscal 2013 of ¥60.0 billion will be the first step toward new growth for MoL. sustainable growth is required of the company to realize its corporate principles of increasing corporate value and contributing to global economic growth and development. to this end, we must transform our business model so that we can deliver something more, every quarter and every fiscal year. as we execute our RIse 2013 single-year management plan in fiscal 2013, we aim to restore ordinary income to a level where we are profitable based on built-up cash flows without relying on the profit contribution on an accounting basis of bsR. In the spring of 2014, we plan to announce a new three-year medium-term management plan. this plan will see us aim to strengthen our financial position to the extent that we restore our equity ratio to its former level of at least around 35%, and if possible 40%, after it fell to 25% at the end of fiscal 2012. trust in the com- pany underpinned by a strong balance sheet is an essential and important prerequisite for securing medium- and long-term contracts, which contribute to highly stable profits, the source of sustainable growth. In fiscal 2013, we first intend to build some momentum by gener- ating net income of ¥50.0 billion and strengthen our ability to generate cash flows by pushing ahead with business model reforms. thus, we do not envisage repairing our share- holders’ equity by increasing capital. In terms of shareholder returns, we aim to maintain the consolidated dividend payout ratio at 20% and will look at raising it to around 30% over the medium- and long-term. We have not decided on dividends for fiscal 2013 at this stage, because we would like to see what RIse 2013 delivers. 19 19 how a key factor in promoting the business model transformation for enabling sustainable growth will be how well we can develop the free vessel business, particularly dry bulkers. In the mid- 2000s, when dry bulker market rates were very high, we generated earnings by owning and chartering out free vessels to other ship- ping companies. however, the situation is different these days because the world has more than enough shipbuilding capacity. today, it is difficult to envisage a future where market rates soar to unprecedented levels, pushed by the sort of demand we saw in the past, because many ships of the type wanted can be built quickly at low cost. accordingly, we have aban- doned our business model of the mid-2000s of owning and chartering free vessels with the expectation that market rates will continue to rise. Instead, we have returned to our origins as a shipping company. In other words, we will revert to a business model that seeks to build up highly stable profits by offering value-added service, that is, safe operation. safe operation is the social mission for MoL as a marine transport company, as outlined in our corporate principles. It is also the most important element for being chosen by custom- ers. that’s why MoL has worked to make our safety performance visible to everyone by intro- ducing objective numerical indicators and implementing various measures for reinforcing safe navigation, such as establishing and operat- ing the safety operation supporting Center. notwithstanding, I must report that in June 2013, the MoL-operated containership MOL COMFORT suffered a crack amidships and sank while under way in the Indian ocean. MoL is yet to pinpoint the cause of this serious marine incident, but I deeply regret the troubles this caused customers and other stakeholders, and the loss of cargo. together with the shipyard that built this vessel and the classification soci- ety, we are working hard to identify the cause of the incident. Meanwhile, in order to elimi- nate any possibility of recurrence of a similar incident, MoL decided to immediately imple- ment preventive safe operation measures such as reinforcing the hulls of six sister vessels to a level above that of international standards. We see LnG transport and offshore businesses as becoming core business models that can gen- erate highly stable profits. MoL is currently involved with 85 LnG carriers in the MoL Group (including 16 vessels under construction). this is approximately 18% of the 475 LnG car- riers in the world, making MoL the world’s largest LnG carrier operator. With market 20 observers suggesting that another 100 or so vessels will be required by 2020, MoL’s track record and presence in LnG transportation will position it well to capture major business opportunities. that’s why we see it as a major driving force for our growth strategy. MoL’s track record of safe operation has been lauded when securing contracts, so we are determined to maintain and raise the quality of safe opera- tion going forward. When shale gas projects are developed in earnest in north america, it is expected that the number of seafarers required will also increase sharply. It is necessary to plan and prepare for this different stage. We will pursue seafarer expansion in line with business expansion while ensuring the safe operation quality. and, we will secure as many LnG transportation contracts as we can, as the lead- ing player in LnG transportation. as I said earlier, we are also actively partici- pating in offshore businesses which are con- nected with seafloor oil and gas field development. MoL isn’t directly involved in development itself, but since the development takes place offshore, facilities are needed off- shore to produce, store and offload the extracted crude oil and gas and for regasifica- tion in the case of LnG. MoL is already par- ticipating in three projects providing FPsos (Floating Production, storage and offloading systems) to Petrobras. and we want to lever- age our know-how in LnG carrier transporta- tion to make further inroads into the field of FsRus (Floating storage and Regasification units), which is an area where we can use LnG carriers that come off long-term contracts. another field we hope to grow further is Capesize bulkers, the largest type of dry bulk- ers. We already operate 70 of these ships on medium- to long-term contracts, and aim to increase that number. the dry bulker business is facing extremely difficult market conditions, as evidenced by companies going bankrupt because of low market prices. If viewed another way, however, this presents us with more opportunities to win contracts as the Carrier of Choice, given our financial base, safe operating system and other management resources. to secure medium- to long-term contracts, I think it is necessary to maintain a certain number of free vessels. high-cost free vessels pressure operations when market rates are low, but free vessels that are resilient to market rates can increase a company’s competitiveness and increase the chances of securing medium- to long-term contracts by offering a proposal in combination with such free vessels. that said, as I explained before, we have eschewed our former business model of procuring free vessels and relying on rising market rates. MoL boasts one of the world’s largest tanker fleets. It also has a well-balanced fleet, compris- ing crude oil tankers, product tankers, chemical tankers and LPG tankers. the nature of the cargo carried means that the operational level required is as strict as that for LnG carriers, and large customers like oil majors are becom- ing even more demanding in respect of safe operation. there is also a procession of compa- nies exiting this market because they cannot live with these demands. any company that can meet these demands has an opportunity to grow as a market survivor. In fact, MoL’s rela- tive competitiveness is increasing due to its ability to meet these demands, including in terms of its financial strength. on another front, the shale oil and shale gas revolution has everyone talking in the energy transportation sector. using our business intelligence, we will capture transport demand steadily by spotting changes in trends. another growth vehicle is Daibiru Corporation, the fulcrum of our real estate business. Daibiru generates stable earnings from the ownership of many prime properties in Japan. this company is searching for more growth overseas and in 2011 successfully advanced into ho Chi Minh City, vietnam. I expect Daibiru to accumulate stable earnings by developing overseas and overseas tenants. to my regret, MoL recorded losses for two consecutive years in fiscal 2011 and fiscal 2012, causing considerable concern to shareholders and other investors. but we are determined to move back into the black and transform our business structure so that it is impervious to market rates in fiscal 2013 under our RIse 2013 single-year management plan after having exe- cuted the bsR in the 4th quarter of fiscal 2012. We will also continue to focus our efforts to the utmost on strengthening safe operations so that we can achieve sustainable growth while contributing to global economic development, and thereby strive faithfully for higher shareholder value. 21 MoL at a GLanCe saLes breakdOwn by seGMent (Fiscal 2012 results) ASSOCIATED BUSINESSES 7% FERRY & DOMESTIC TRANSPORT 4% CONTAINERSHIPS 40% buLkshIPs (Dry Bulkers, Tankers, LNG Carriers and Car Carriers) buLkshIPs (Dry Bulkers, Tankers, LNG Carriers and Car Carriers) Please refer to pages 26–41 for details. perfOrMance (¥ billions) 800 600 400 200 0 11/3 12/3 13/3 100 75 50 25 0 –25 Revenues (left scale) Ordinary income (loss) (right scale) BULKSHIPS 48% Dry Bulkers 21% Tankers 10% LNG Carriers 3% Car Carriers 15% [Dry bulker] Bulk carrier: LAMBERT MARU [tanker] Crude oil tanker: MITAKE [Dry bulker] Wood chip carrier: WHITE KINGDOM [tanker] Product tanker: IRIS VICTORIA [Dry bulker] Heavy lifter: ATHENA TRIUMPH [tanker] LPG tanker: GAS ORIENTAL 22 buLkshIPs (Dry Bulkers, Tankers, LNG Carriers and Car Carriers) ContaIneRshIPs FeRRy & DoMestIC tRansPoRt assoCIateD busInesses Please refer to pages 42–45 for details. Please refer to pages 46–47 for details. Please refer to page 48 for details. perfOrMance (¥ billions) perfOrMance (¥ billions) 600 400 200 0 60 40 20 0 90 60 30 0 –30 11/3 12/3 13/3 11/3 12/3 13/3 perfOrMance (¥ billions) 120 90 60 30 0 11/3 12/3 13/3 3 2 1 0 –1 12 9 6 3 0 Revenues (left scale) Ordinary income (loss) (right scale) Revenues (left scale) Ordinary income (loss) (right scale) Revenues (left scale) Ordinary income (loss) (right scale) [LnG Carrier] GDF SUEZ POINT FORTIN [Car Carrier] EMERALD ACE ContaIneRshIPs FeRRy & DoMestIC tRansPoRt assoCIateD busInesses [Containership] MOL MODERN The Jacksonville Container terminal in the U.S. [Ferry] SUNFLOWER GOLD [Cruise ship] NIPPON MARU 23 MaRket PosItIon In the InDustRy MOL operates a large and balanced oceangoing fleet. In terms of its total fleet size and presence in individual market categories, MOL ranks among the world’s largest shipping companies. wOrLd MaJOr carrIers’ fLeets (aLL vesseL types) (Million deadweight tons (DWT)) 0 20 40 60 80 68 120 100 958 MOL (Japan) nyk (Japan) cOscO (china) a.p.Møller-Mærsk (denmark) k Line (Japan) china shipping (china) Oldendorff (Germany) Zodiac (u.k.) teekay shipping (canada) swiss Marine (switzerland) frontline (norway) bw Group (singapore) 0 (Number of vessels) 200 DWT Number of vessels 400 600 800 1,000 1,200 Source: MOL internal calculation based on each company’s published data and others. As of March 2013 wOrLd MaJOr carrIers’ revenue pOrtfOLIO by seGMents (%) 0 20 40 48 60 80 40 11 100 MOL nyk k Line a.p.Møller-Mærsk evergreen nOL OOIL MIsc frontline teekay pacific basin Golar LnG Bulkships Containerships and related business Other businesses Source: MOL calculations based on each company’s financial statements and/or website. MOL’s containerships and related business includes revenue from Containerships, Terminal and Logistics. NYK’s containerships and related business includes revenue from Containerships, Air freighters and Logistics. 24 dry buLkers (Thousand deadweight tons) Source: Companies’ published data and Clarkson Research Services Limited 2013 As of March 2013 nyk MOL k Line cOscO china shipping tankers (Thousand deadweight tons) MOL fredriksen scf nyk MIsc teekay nIOc a.p.Møller-Mærsk dynacom tankers angelicoussis Source: Clarkson Research Services Limited 2013 As of March 2013 LnG carrIers (Number of vessels) MOL nyk nakilat* k Line MIsc MOL nyk k Line eukOr hOeGh wwL *Qatar Gas Transport Company Ltd. Source: MOL internal calculations As of March 2013 car carrIers (Number of vessels) Source: MOL internal calculations As of March 2013 cOntaInershIps by teu capacIty (Thousand TEU) Mærsk Msc cMa-cGM cOscO evergreen hapag-Lloyd hanJIn nOL cscL MOL haMburG-sud OOcL nyk yanG MInG ZIM k Line hyundaI csav uasc pIL Source: MDS Transmodal “Containership Databank” Feb 2013 As of February 2013 0 0 0 0 10,000 20,000 30,000 40,000 50,000 34,928 5,000 10,000 15,000 20,000 15,458 20 40 60 80 69 40 80 120 123 160 0 500 1,000 1,500 2,000 2,500 496 25 oveRvIeW oF oPeRatIons buLkshIPs Dry Bulkers kenIchI naGata Senior Managing Executive Officer fiscal 2012 in review The market for dry bulk shipping, especially the largest class of ships—Capesize bulkers— has been negatively affected by the recent delivery of many newly built vessels, which has caused an oversupply in the market *1. During the 2012 calendar year, the average daily charter rate fell below US$10,000 and drifted at the lowest level recorded since the Baltic Exchange first began publishing market rates. The supply of new vessels has also affected market conditions for Panamax and smaller vessels. This vessel supply pressure *1, combined with the impact on demand of an economic slow- down in China and drought in North America during the summer, generally kept average daily charter rates for those sizes of vessels below US$10,000. Steaming coal carriers enjoyed somewhat stronger demand and maintained high operating rates, as coal-fired thermal power plants which had been damaged by the Great East Japan Earthquake came back on line and revived coal shipment volume. Wood chip carriers experienced sluggish condi- tions due to the impact of softer markets for small and medium-sized dry bulkers with which they compete in some cargoes. MOL’s dry bulkers business worked to maintain highly stable profits by securing long-term contracts to transport iron ore and coking coal mainly by Capesize bulkers, and for wood chip carriers, steaming coal carriers and other vessels. The company also improved operational efficiency, with these actions leading to higher earnings and lower costs. Meanwhile, we are aggressively scrapping older Capesize bulkers and wood chip carriers to lower the average age of the fleet and boost ship quality, thus allowing MOL to offer high-quality transport services 26 Singapore as part of Business Structural Reforms (BSR), which was executed in the fourth quarter (Jan-Mar 2013). Charter con- tracts of about 130 free vessels, mostly small and medium-sized vessels, were assigned to wholly owned Singapore subsidiaries *3, one by one, at present market value at that time. The disparity between original charter rates and the current market rates was booked as an extraordinary loss, which was the main factor of the total charges related to the BSR of ¥101.5 billion. fiscal 2013 profit recovery scenario In fiscal 2013, we aim to restore earnings from the record ordinary loss we posted in fiscal 2012 to a profit. For now, this is the one target that we believe must be achieved. The majority of the ¥101.5 billion in restructuring charges taken in fiscal 2012 was generated by the dry bulker segment. This includes the assignment of the approxi- mately 130 free vessels, allowing them to operate at costs that are much closer to market level. For example, the cost of small and medium-sized dry bulkers operated by MOL Bulk Carriers Pte. Ltd. has fallen to less than US$10,000/day. At this level, the segment will be able to take a big step towards recovering its competitive vigor. We estimate that these business restructuring vessels 12/3 392 13/3 404 thousand deadweight tons 12/3 34,911 13/3 34,928 Note: Figures include spot-chartered ships and those owned by joint ventures. to customers. Nevertheless, depressed market conditions for Capesize bulkers prevented the company from covering losses on free vessels *2 exposed to the market with highly stable profits from medium- to long-term contracts. Further- more, in Panamax and smaller vessels, the higher ratio of free vessels created an unprecedented unprofitable business envi- ronment. As a result, losses in this segment were substantially larger than in fiscal 2011. To address these harsh market condi- tions, MOL initiated steps to revive compet- itiveness and return to profitability as quickly as possible. Sales and operations for free vessels has been transferred from Tokyo to MaIn rOutes Iron ore Grain and others GLObaL seabOrne trade Of MaJOr dry buLk carGO (Million tons) 2007 2007 2008 2008 2009 2009 2010 2010 2011 2011 Source: MOL internal 2012 calculations based on data for each cargo type 2012 0 500 1,000 1,500 2,000 2,500 3,000 Iron ore Coking coal Steaming coal Grain measures will reduce fleet costs by ¥40.0 billion in fiscal 2013. The weaker yen will also benefit the company, and it plans to lower costs by reducing navigating speeds and through other means. This should make it possible for the segment to return to profitability. The outlook for the dry bulker market in fiscal 2013 is likely to be influenced by the decreasing number of deliveries for new Capesize bulkers and the scrapping of vessels. This process is likely to ease some of the pressure on the supply-demand gap. Looking at the demand side, shipments of iron ore from Brazil, which were delayed due to heavy rain at the beginning of the year, as well as the regularly scheduled maintenance of port facilities conducted during the rainy season, should return to normal. This is likely to revive demand and improve market conditions over the summer and the remainder of the year. Panamax bulkers may continue to experi- ence problems due to the continuous delivery of new ships, which is preventing the market from achieving a substantial improvement. However, MOL is assuming the market will improve slightly as demand is not likely to be as weak as it was in fiscal 2012 when there were unusual factors such as the drought in the U.S. Looking ahead Prior to the Lehman Shock, MOL and its competitors raced to build new ships amid soaring rates in the dry bulker markets. To some extent, it seems that companies took their eyes off the most basic, underlying purpose of the shipping industry—“to transport cargoes for customers.” Many of the newly built vessels were ordered with- out actual contracts from direct clients and were thus exposed to fluctuations in the spot charter markets. As a result, MOL found itself with too many free vessels and unable to fully manage market risks. Traditionally, the mission of the shipping business has been to build a fleet that closely matches and responds to the vari- ous needs of customers, provide the best possible service, and perform a central function in the customer’s supply chain. It is also important to have an appropriate bal- ance of ships for long-term, medium-term and short-term contracts in line with cus- tomers’ needs. In this sense, it is necessary to have some free vessels in a company’s fleet. What is important is that vessels gen- erating stable profits should be increased in parallel with any increase in the number of free vessels. In other words, exposure to the spot market should be limited to a level which can be covered by the highly stable profits from long-term contracts. In fiscal 2013 and beyond, MOL intends to intensify its focus on total risk management, seeking to increase the number of vessels generating highly stable profits and limit exposure to the spot market for free vessels. In terms of generating highly stable profits centered on large vessels operating on medium- to long-term contracts, an operator cannot attract contracts merely by procuring the cheapest ship available. Shipping custom- ers can choose from among a large number of providers, which makes earning the trust of cargo owners key. This trust includes the level of technical support for cargo shipments, a track record of making deliveries on schedule and safe ship operation, as well as a solid financial base. In addition to these fundamental qualities, a shipping company must maintain close communication with clients, and provide them with a sense of security. By focusing on these factors, MOL aims to enhance the com- petitiveness of its dry bulker operations and thereby increase highly stable profits. Regarding free vessels, by relocating the hub of this business to Singapore, MOL hopes to enhance sales and operations as Singapore is located at a crossroad of global shipping lanes. Many ocean transport companies are based in the country and information on the business is thus concentrated there. By taking advantage of centering its activities in Singapore, MOL expects to increase the dry buLker fLeet tabLe (As of March 31, 2013) vessel type Capesize Panamax Handymax Small Handy-size Steaming coal carriers Wood chip carriers Other (Heavy lifters, coastal vessels) Total standard dwt no. of vessels use 170,000 103 Steel raw materials (iron ore, coking coal) 72,000 38 Iron ore, coking coal, steaming coal, grains, etc. 55,000 28,000 93,000 50,000 12,000 68 52 41 Steaming coal, grains, salt, cement, steel products, etc. Steel products, cement, grains, ores, etc. Steaming coal 44 Wood chips, soybean meal, etc. 58 – 404 Glossary *1 During calendar 2012, a total of 215 new Capesize bulkers were completed and delivered worldwide. Deducting the 75 older vessels that were scrapped during the year, there was a net increase of 140 vessels. At the end of December 2012, there were 1,510 such vessels in operation, an increase of 10% from the previous year. This followed a 16% increase in 2011. This increase in shipping capacity severely weakened the structural supply-demand balance in the bulker markets, and represents the main reason for the historically low level of charter rates. While there are expected to be half as many new Capesize bulker deliveries in 2013 as in 2012, there is still an obvious sentiment of over-capacity. The number of new Panamax vessels to be delivered in 2013 is also expected to remain high. Thus, the market outlook for 2013 is still challenging. cOnsOLIdated revenues breakdOwn (Results of FY2012) Subsidiary (Mitsui O.S.K. Kinkai, Ltd.) Steaming Coal Wood Chip 8% 13% 12% 21% General Bulk Iron Ore and Coking Coal49% *2 free vessel: Vessels that operate on spot contracts (contract period of less than one year) and are thus exposed to changing market conditions. Iron Ore and Coking Coal 48% *3 singapore subsidiaries: MOL Cape (Singapore) Pte. Ltd. and MOL Bulk Carriers Pte. Ltd. Charter contracts of Capesize bulkers were assigned to MOL Cape (Singapore) Pte. Ltd., while those of Panamax and smaller vessels were assigned to MOL Bulk Carriers Pte. Ltd. Both are wholly owned subsidiaries of MOL based in Singapore. *4 cOa (contract of affreightment) is a type of contract to transport cargo based on weight or volume. They are usually concluded on a long-term basis to transport large bulk cargoes of iron ore, coal or crude oil. The contracts are based on the volume of cargo transported and the delivery period, so vessels are not specified and the method of transporting the cargo is left to the discretion of the shipping company. 27 number of COA *4 and other actual ship- ping contracts to transport cargo. This may allow us to reduce the number of free ves- sels exposed to market fluctuations. In addition, MOL intends to redouble efforts to develop business in Southeast Asia, India and Australia through Singapore subsidiar- ies *3, allowing ships to combine cargoes on routes within the region and thereby reduce the number of ships travelling on non-income-generating ballast voyages. In this way, MOL aims to generate higher profitability than the market average. Although MOL’s aim is to develop a business structure that is not reliant on market conditions, we also believe that the market reached its bottom in fiscal 2012, and that it will gradually begin to recover from here on. The number of new Capesize bulkers to be delivered in 2013 is expected to be half the number of vessels delivered in 2012 *1. In the latter half of the year, there- fore, market sentiment should begin to improve and we anticipate a certain rebound in rates. In the market for Panamax and smaller vessels, many load- ing ports are placing stricter regulations on the age of ships, and rapid advances in fuel performance are increasing the obsoles- cence of old ships. With global environmen- tal restrictions being tightened as well, it is becoming too expensive to repair or upgrade many older vessels. Owners are scrapping ships instead. As more of these older ships are taken out of service, market conditions are likely to improve gradually. Nevertheless, it is unrealistic to expect the dry bulker segment to return to the lucrative conditions it experienced in the mid-2000s. It will probably remain difficult to make large profits on the operation of free vessels. Some ship owners and shipping com- panies, particularly outside Japan, have responded to falling ship prices by continu- ing to invest in new construction. However, most expect the dry bulker markets to remain weak for the time being, which conversely may give MOL the option of chartering some vessels at low rates. As noted above, the primary consideration for the company at present is to stabilize and improve earnings. On the other hand, MOL will maintain a flexible and alert stance on ways to obtain shipping capacity and respond to market trends. In this way, while maintaining some degree of free vessel capacity, the company intends to build a cost structure that can generate profits 28 even without a large rise in market rates. As outlined above, the company aims to return operations to the black in fiscal 2013 by minimizing exposure to market conditions. At the same time, we will place top priority on the basics of transporting cargo for customers safely and efficiently. MOL will work to improve sales capabilities to respond to customers’ various needs, while making full use of the cost-competi- tive fleet built up through the BSR. In this way, MOL intends to put the dry bulker business back on a trajectory of sustain- able growth. wOrLd dry buLkers aGe prOfILe (As of March 2013) capesIZe (100,000 DWT–,1,513 ships) panaMax (60–99,000 DWT, 2,320 ships) 25+ 22 1% 20–24 124 8% 15–19 173 11% 0–14 1,194 79% 25+ 123 5% 20–24 136 6% 15–19 299 13% handyMax (40–59,000 DWT, 2,718 ships) handysIZe (10–39,000 DWT, 3,017 ships) 0–14 2,037 75% 25+ 752 25% 20–24 133 4% 15–19 372 12% 25+ 217 8% 20–24 94 3% 15–19 370 14% Source: Clarkson March 2013 IMpOrt/expOrt 1,200 areawIse wOrLd IrOn Ore 1,000 seabOrne trade (Million tons) 800 1,200 1,000 800 600 600 Age No. of ships % 0–14 1,762 76% 0–14 1,760 59% 2012 export 400 200 400 200 2007 – 2012 Import China Others Taiwan Korea Japan 0 0 07 08 07 09 08 10 09 11 10 12 11 12 12 12 Others Sweden Canada India South Africa Brazil Australia Source: Tex Report, Clarkson, Trade Statistics Import export IMpOrt/expOrt 1,000 areawIse wOrLd steaMInG cOaL seabOrne trade (Million tons) 800 600 2007 – 2012 Import 1,000 800 600 400 400 200 200 China/Hong Kong Others India Taiwan Korea North America Europe Japan Source: SSY 0 0 07 08 07 09 08 10 09 11 10 12 11 12 12 12 Import export 2012 export Others South Africa Columbia Australia Indonesia buLkshIPs Dry Bulkers the Capesize bulker ORE SaO LuiS (tubarao, brazil) Ore SaO LuiS is a Capesize bulker that transports iron ore between Brazil and China under a long-term contract with Brazilian resource company Vale. MOL strives to provide safe, reliable ocean transport services, taking advantage of its advanced safe operation management system and fleet scale to meet continually growing demand for iron ore transport. 29 buLkshIPs Tankers tsuneO watanabe Senior Managing Executive Officer fiscal 2012 in review Demand for oil dropped off following the Lehman Shock in 2008, and this coin- cided with the delivery of many new ves- sels, creating a wider gap between supply and demand for shipping capacity. For the past four years, that gap has remained a critical factor in depressing the market for tanker transportation. While there are signs of recovery for some types of tanker vessels, the tanker business as a whole has posted losses for the past four con- secutive fiscal years. As of the start of 2012, there were 588 Very Large Crude Oil Carriers (VLCCs)—the largest ships used to transport crude oil— in operation worldwide. During 2012, 49 more VLCCs were delivered, while 21 were scrapped. Thus, the number of ships in operation increased approximately 5% during the year, to 616. China, among other leading oil consumers, expanded oil imports from distant countries in South America and West Africa. This produced a slight, albeit temporary, improvement in the VLCC market, but an economic slowdown in China caused crude oil inventories to swell. Coupled with traditionally low demand during the summer, market condi- tions deteriorated. Though a slight pick-up during the high-demand winter months eased the sense of vessel overcapacity, it was not enough of an improvement to close the supply-demand gap. The market as a whole therefore remained depressed. The product tanker market remained range-bound during the first half of the fiscal year, but in the latter half there was an improvement due to several factors. Strong naphtha demand in East Asia and overall demand for fuel oil during the winter boosted shipping volume. On top of that, 30 volume from the Middle East. However, economic sanctions placed on Iran by the EU disrupted LPG shipments from that coun- try. This crippled the balance of supply and demand for Very Large Gas Carriers (VLGC) and caused market conditions to weaken in the second half of the fiscal year. MOL operates 17 methanol tankers on long-term charter contracts, meaning that it has a 40% share of the market. The steady contribution from these tankers supports the earnings of the tanker business. The company introduced Business Struc- tural Reforms in fiscal 2012, which included the sale of five crude oil tankers. This helped reduce MOL’s exposure to market risk. As of September 30, 2012, we operated 80 free vessels in this segment; but this number had been reduced to 74 by March 31, 2013. recovery scenario toward profitability in fiscal 2013 During 2013, the number of new VLCC deliveries is expected to drop to just 35— fewer than in 2012. Furthermore, tighter safe operation standards are increasing mainte- nance costs for older ships, and driving up costs related to vessel inspections. It is likely that many older vessels will be scrapped as a result of becoming less profitable. And the oil majors are now avoiding the use of VLCCs that are over 15 years old; there are about 70 VLCCs which have been in service for more than 15 years in the world. It is vessels 12/3 200 13/3 194 thousand deadweight tons 12/3 18,756 13/3 19,037 Note: Figures include spot-chartered ships and those owned by joint ventures. the closure of refineries in Australia caused an increase in trade volume, improving market conditions in the Pacific region. With the additional boost from demand in Africa and South America, the market recovered all around the globe. The chemical tanker market remained harsh in 2012 due to soft economic growth in China, the largest source of demand, and the fiscal crisis in Europe. Since the start of 2013, however, the chemical tanker market has shown signs of recovery as a whole, as demand for transporting vegeta- ble oils and others increased while the market of product tankers, which can also transport them, upturned. LPG tanker rates rose in the first half of 2012 with an increase in LPG export MaIn rOutes Crude oil Product tanker fLeet tabLe (No. of vessels) Crude oil tanker Product tanker Chemical tanker LPG tanker Total 11/3 12/3 13/3 pool Management 48 60 85 13 46 62 79 13 47 61 75 11 206 200 194 VLCC LR1 Plan to start in autumn 2013 VLGC therefore likely that the owners of these older ships will choose to scrap the vessels in the near term. As this process continues, the market should gradually return to more normal conditions. Although the business environment has been very harsh of late, the success of the Business Structural Reforms and progress on the current “RISE 2013” management plan are helping to reduce the market exposure risk in fiscal 2013. Not only are conditions for product tankers improving, but U.S. exports of LPG are beginning to improve the VLGC market as well. Diligent efforts to reduce costs are also helping to improve earnings conditions, and a return to profitability is in sight. Looking ahead In order to meet global demand for energy, the absolute volume of oil consumption is expected to continue rising. According to the U.S. Energy Information Administration (EIA), total energy demand worldwide is likely to increase by around 50% between 2010 and 2035, and demand for oil is expected to increase by 30–35%. This will create a steady increase in shipping volume of crude oil and petroleum products. Oil tankers play a vital role in supporting the global economy, but operating profit, the net result of freight revenues minus operational expenses, has fallen close to zero. It is abnormal for such conditions to last so long. In order to alter these condi- tions, it is necessary to address structural changes in trade patterns and prevailing business transactions of oil in a manner of a commodity deal. In recent years, as the market price of crude oil has fluctuated dramatically, it has come to be traded like any other commod- ity. The same is very true of petroleum products and petrochemicals. The linkage among oil and these products is intensify- ing, and the entire petroleum sector has been transformed into a single market. In the past, it was typical for crude oil trans- portation contracts to be concluded on a 10-year basis or longer. However, the contract period is tending to be shortened. Since oil prices are so volatile, oil shippers cannot maintain their competitiveness if they do not change to match market con- ditions. In the product tanker market, the cargoes are already commoditized, and the same thing is happening in the LPG tanker and chemical tanker business fields. There has also been a structural shift in the nature of the petroleum product trade. The development of shale oil reserves in the U.S. has reduced the shipping oil volume to the U.S., one of typical long- distance trades. On the other hand, oil refineries in leading industrialized countries outside North America are being closed down, while shipments from facilities in the Middle East, India and the U.S. are increas- ing. Furthermore, demand is shifting from the leading industrialized countries to places such as the Middle East, Africa and South America. As a result, Singapore has become an important player for these trades, and the main theme of MOL’s busi- ness structural reforms was to accelerate expansion in Singapore. Having stepped up efforts to make Singapore the center of sales and ship operations early, we are starting to see the benefits of this. Meanwhile, as the petroleum market becomes increasingly interlinked and com- moditized, MOL is striving to develop busi- nesses that more fully meet the needs of customers. The key, in our view, is to establish a reputation as a leading player in all sectors of the transport market, from crude oil to petroleum products and petro- chemicals. By itself, MOL cannot change the current market conditions. However, we believe a pool system is the best busi- ness platform to make ourselves regarded as the No. 1 player. In 2011, we jointly established Straits Tankers Pte. Ltd., a ship pool management company for LR1 product tankers (approx. 75,000 DWT). This com- pany operates 30 LR1 vessels at present. In VLGCs, we are operating VLGCs in a pool through a Singaporean subsidiary. This subsidiary operates 12 vessels at present. In another move, in 2012 we established Nova Tankers A/S as a VLCC pool management company together with four other companies. All of MOL’s spot operations have been transferred to this company, which presently operates 44 vessels. As with other pools, it is leverag- ing economies of scale to provide high- quality services in all sea areas to garner more support from customers. At the same time, it is improving profitability by raising efficiency in vessel allocation through reductions in ballast voyages and so forth. In the fall of 2013, chemical tanker operations will be turned over to another pool management company created in cooperation with a European shipowner, under the name Milestone Chemical Tankers Pte Ltd. In this way, MOL hopes to achieve unprecedented efficient operations in this sector as well. Due to the current abnormal market conditions, it is still too soon to identify any confirmed impact from these measures. However, when business players offering high-quality services survive and the market returns to normal, our entire tanker business, including the spot trades, will be able to make a major contribution to MOL’s sustainable growth. Crude Oil 36% Product 29% cOnsOLIdated revenues breakdOwn (Results of FY2012) Chemical (Tokyo Marine Co., Ltd.) 24% Methanol/LPG 12% GLObaL OIL deMand (Million b/d) Source: IEA’s “Oil Market Report” 2007 2008 2009 2010 2011 2012 0 20 40 60 80 100 North America Europe Japan Other Asia/Pacific Latin America Others China 31 buLkshIPs Tankers the vLCC SELENE TRaDER (keiyo sea berth, Chiba) 32 Singapore-based Nova Tankers A/S, a VLCC pool management company MOL established together with four other companies, currently owns 44 vessels. Young vessels, sophisticated vessel management capabilities and the sound financial bases of the partner companies are the source of this VLCC pool’s competitiveness. It is leveraging economies of scale to provide high-quality services in all sea areas that have garnered the support of customers. 33 buLkshIPs LNG Carriers takeshI hashIMOtO Managing Executive Officer fiscal 2012 in review As a result of the unprecedented deteriora- tion in market conditions for the shipping industry, MOL as a whole posted a loss for the second consecutive fiscal year. On the other hand, earnings from LNG carriers, which were mainly derived from long-term contracts, roughly matched levels in the previous fiscal year, lending continued support to the company’s highly stable profits; nearly all of MOL’s 69 LNG carriers are operated under long-term contracts. Furthermore, the volume of global trade of LNG remained strong. Although economic stagnation in Europe has depressed demand in that region, this has been offset by increased demand from Japan’s electric power companies. Consequently, the spot charter rate remained as firm in fiscal 2012 as in the previous fiscal year. During fiscal 2012, there was a growing disparity in spot charter rates; the rates for aging vessels diverged from those for newer, more advanced vessels. This reflects the fact that older vessels are less efficient to operate, consuming more fuel while offering less cargo tank capacity. This trend has not been a tailwind for MOL, since the company has been in the LNG carrier business for a long time and has many older vessels in its fleet. However, MOL has been able to keep the negative impact to a minimum, because of its fairly strong profit structure. As above, most of the company’s earnings from LNG carriers come from vessels operating under long- term contracts. In fiscal 2012, the company succeeded in attracting orders which placed three new LNG carriers under long-term contracts to deliver LNG to Japan. One of these is a Moss-type *1 LNG carrier of the largest 34 With the three vessels described above, MOL has procured long-term contracts for nine ships in total since 2010—five transport cargo to Japan and four travel delivery routes to China. These vessels are due to be delivered one by one from 2014, thus contributing to highly stable profits. MOL is also continuing aggressive devel- opment of its offshore businesses. For example, in the FPSO *3 business, the com- pany has already taken part in two projects for Brazil’s national oil company, Petrobras, and in fiscal 2012 MOL was chosen to par- ticipate in a third project, which is due to commence operations in 2015. fiscal 2013 earnings Growth scenario In fiscal 2013, earnings are expected to increase in response to cost reduction and the impact of a weaker yen, among other factors. The company’s single-year manage- ment plan—“RISE 2013”—aims to restore the company to profitability overall. The LNG carrier business can continue to contribute greatly to this goal since it provides highly stable profits that are not excessively affected by short-term market fluctuations. The company will also work aggressively to lay the groundwork for new long-term con- tracts, as part of the ongoing effort to expand highly stable profits. vessels 12/3 69 13/3 69 thousand deadweight tons 12/3 5,306 13/3 5,310 Note: Figures include spot-chartered ships and those owned by joint ventures. class that is able to transit the expanded Panama Canal. The other two are Moss- type LNG carriers with four spherical tanks covered by a continuous cover. This peapod-shaped continuous cover is inte- grated with the ship’s hull, achieving weight reduction while maintaining overall hull rigidity. All three vessels will adopt a new steam turbine engine that reuses steam for heating. This will also reduce fuel con- sumption. And they feature an advanced heat insulation system that offers the lowest LNG vaporization rate—0.08%/ day—of any LNG carrier in the world. Its environment-friendly and economically advanced design also effectively controls surplus boil-off gas *2. MaIn rOutes Anticipated future routes LnG deMand fOrecast (Million tons/year) Source: MOL calculations based on Poten & Partners, etc. 2012 2013 2014 2015 2016 2017 2018 2019 2020 0 100 200 300 400 Japan Korea China Taiwan India Europe Americas Others  Looking ahead Since the start of fiscal 2013, the company has concluded contracts for two additional projects, one in Japan and one overseas. In May 2013, MOL secured a long-term contract (for one ship) to transport LNG from the Ichthys LNG Project in Australia to Japan. This contract marks the first time that an LNG carrier wholly owned by a Japanese shipping company will serve on joint transport for an electric power com- pany and a gas company in Japan. In the other project, MOL will take part in a project to supply LNG to China Petro- leum & Chemical Corporation, known as “SINOPEC,” which will obtain its LNG from Australia Pacific LNG Pty Limited. It will be a massive LNG transport project, involving the use of six newly built LNG carriers. All six of the vessels are being built by Hudong-Zhonghua Shipbuilding (Group) Co., Ltd. (Hudong) in China. This is our second big milestone in the burgeoning business of LNG transportation to China, after our participation in the ExxonMobil China project *4, which was announced in March 2010. MOL has 30 years of experi- ence and expertise in the LNG transport business, and has earned a very positive reputation for safe and stable operations. This reputation and the experience gained through the ExxonMobil China project has allowed MOL to develop a relationship of trust with Chinese partners, and contrib- uted to the company’s selection to take part in this project. Engagement in this project will enhance MOL’s presence in the business of transporting LNG to China, and strengthen its close relationships with Chinese partners for further cooperation and opportunities. All of the LNG carriers for the above project and the ExxonMobil China project are due to be completed and delivered by 2017. This will give MOL a fleet of 10 LNG tankers delivering LNG to China. Global demand for LNG stood at around 240 million tons in 2012. Demand is expected to increase further in the future. This is because LNG is attracting attention as a clean energy resource amid surging demand for energy in emerging countries. LNG is also in higher demand in Japan after the Great East Japan Earthquake and in Europe where there are moves away from nuclear power generation. By 2020, global demand for LNG could rise to as high as 400 million tons. In order to meet this rising demand, it is estimated that around 100 additional LNG carriers will be required, in addition to ships that have already been ordered. While the expectation of rising demand has pushed up spot charter rates for LNG carriers, it has also contributed to specula- tive orders for new LNG carriers. Between 2013 and 2017, over 100 new carriers are due to be delivered. Considering that there are already approximately 370 LNG carriers operating worldwide, the number of these ships in operation is expected to reach approximately 480 by 2017. Expectations of a supply glut could contribute to a weak- ening in spot market conditions from the latter half of 2013. On the other hand, a number of new LNG projects currently under development in Australia and else- where are due to start full-scale operations from around 2015. When these projects begin supplying LNG, their output is likely to take up all of the additional capacity created by the new vessels. For that reason, we believe that the market will once again start to face a shortage of LNG vessels from around 2016. Since demand for LNG carriers is expected to increase dramatically over the next few years, we plan to expand our fleet of LNG carriers to around 110 vessels by 2020, and intend to further enhance our industry-leading position in the LNG trans- port business. It will be important for us to utilize our skills and know-how as the world leader in safe operations in order to accomplish this goal. Ingenuity is also required to meet a broad range of cus- tomer needs, as are networks to put solu- tions into effect. Another critical prerequisite to building a larger fleet of LNG carriers is the training and retention of skilled crews on board LNG carriers. MOL has launched its own seafarer education and training program and is building education and training infrastructure. This training program com- plies with SIGTTO *5 and TOTS *6 requirements, and also recently received certification from Norway’s Det Norske Veritas AS (headquarters in Oslo) for com- pliance with the Competence Management System (CMS) *7. Operation of this CMS enhances MOL’s existing training program by identifying the skills required of seafarers and the current situation and pinpointing issues in this regard so as to continuously improve the program. By continuing to develop and conduct this seafarer training program to expand the LNG fleet, making revisions whenever necessary, MOL is striving to develop the skill of seafarers who will help it maintain its status as the world leader in safe operations. Glossary *1 Moss-type tankers (developed by norway’s Moss rosenberg) are LNG carriers which have indepen- dent spherical cargo tanks. *2 boil-off gas: This refers to the gas released from LNG during transport, due to vaporization caused by external heat. *3 fpsO (floating production, storage and Offload- ing system): A facility for producing oil and gas offshore. The oil is stored in tanks in the facility and directly offloaded to tankers for direct transport to the destination. *4 exxonMobil china procject: This project is a joint venture between MOL and Chinese partners, to transport LNG from Papua New Guinea and Australia to China under long-term contracts. MOL has ordered four new LNG carriers from Hudong to be used in this project, and the first completed vessel is to be delivered in early 2015. *5 sIGttO: The Society of International Gas Tanker & Terminal Operators Ltd. This organization is responsi- ble for setting standards for safe operations in the LNG industry, covering everything from LNG produc- tion to the transport and consumption of natural gas. These include the “SIGTTO Standards” for the training of LNG carrier crews. *6 tOts: Tanker Officer Training Standard. This is a standard set by the International Association of Independent Tanker Owners (INTERTANKO) for the training of personnel working on tanker vessels, either on board ship or at ports of call. It is designed to raise the skill level of these workers. *7 competence Management system (cMs) is a management system which assesses the skills of crew members and identifies any disparities between these skills and the standards required to achieve the corporate goals of a shipping company. The system is designed to continuously improve the quality of crew training programs. Japan’s LnG IMpOrts by cOuntry (%) Source: BP Statistical Review of World Energy 2013 Equatorial Guinea Nigeria Oman UAE 3% 5% 5% 6% 7% 7% Brunei Indonesia Others Australia 4% 18% Qatar 18% Malaysia Russian Federation 17% 10% 35 buLkshIPs LNG Carriers the Moss-type LnG Carrier ENERGY PROGRESS (tokyo bay) 36 There are approximately 370 LNG carriers operating worldwide at present. MOL operates 69 vessels, including 45 managed vessels, making the company’s fleet of LNG carriers the largest in the world. MOL has outstanding orders for 16 vessels, all of which will be managed by MOL. With demand for LNG carriers expected to surge over the next few years, MOL plans to increase the size of its LNG carrier fleet to around 110 vessels by 2020. 37 buLkshIPs Car Carriers takashI kurauchI Senior Managing Executive Officer fiscal 2012 in review There were initial expectations that exports of completed Japanese cars would grow on the back of a shift towards vehicle production for export following the termination of govern- ment subsidies for purchases of eco-friendly cars. Nevertheless, growth in exports of completed cars from Japan remained elu- sive, mainly due to increasingly prolonged market stagnation in Europe. Furthermore, Japanese carmakers increasingly produced cars in the markets where they were to be sold as part of moves to step up local pro- duction for local consumption. Under this environment, we increased business in such areas as exporting cargo from Asian coun- tries other than Japan as well as handling cross trade and inbound cargo, and worked to secure new business opportunities. As a result of these measures, this segment recorded much higher profits than those of fiscal 2011, when the Great East Japan Earthquake hit the Japanese economy. Global auto sales reached 81 million units in 2012, a new record high for the second straight year. The number of vehi- cles transported by sea worldwide also reached a new record high of approximately 14 million units, exceeding the 13 million unit figure set in 2007. MOL transported 3.9 million units, a record for the company. One of the defining features of the ocean transport of automobiles in recent years has been the ongoing diversification of trade patterns. In the past, the main routes were from Japan to Europe and the U.S. Today, however, we are seeing more countries producing and consuming automobiles. Vehicle exports are increasing not only from BRICs nations, but also Thailand, Mexico, Indonesia, Turkey, Morocco, South Africa and other countries. In this changing 38 region where they are sold, even if the yen softens. They are also expected to increase auto production in the U.S., Mexico, Russia and elsewhere. In the U.S., where auto sales remain brisk, sales are shifting towards larger cars, which are the forte of the “Big Three” U.S. automakers. Even though we anticipate these factors going forward, we expect our earnings to increase, considering the weaker yen. Since the start of 2013, the yen has weak- ened considerably. If it should reach levels of more than ¥100 to the U.S. dollar, some models of vehicles manufactured in Japan might still be competitive in overseas markets. Consequently, if the yen should remain at cur- rent levels for a few years, it is possible that there might be a revival of auto production in Japan, and a recovery in exports of completed vehicles from Japan. Nevertheless, based on the current strong trend towards production of vehicles in the region where they are sold, MOL has not reflected such a comeback scenario in its earnings forecasts for fiscal 2013. Looking ahead Global auto sales are currently being driven by growth in the markets of India, Brazil, Russia and China. Unit sales are expected to reach 84 million in 2013, 90 million in 2015 and as high as 100 million in 2020. Although sales in Europe are not likely to rebound as long as the eurozone countries face fiscal problems, rising demand in the U.S. for large-model SUVs and vessels 12/3 128 13/3 127 thousand deadweight tons 12/3 2,055 13/3 2,063 Note: Figures include spot-chartered ships and those owned by joint ventures. business environment, it is vital to respond flexibly to information concerning loading and discharging locations, which changes by the day. As a result, we are seeing an increase in the number of vehicles we trans- port on cross trades and inbound trades. fiscal 2013 earnings Growth scenario Looking at prospects for 2013, we expect exports of completed vehicles from Japan to stay at roughly the same level, or per- haps decline year on year. Shipments to Europe should stay stagnant due to the ongoing euro fiscal crisis. Meanwhile, Japanese automakers are likely to continue their policy of manufacturing vehicles in the MaIn rOutes GLObaL car seabOrne trade (Thousand units) Source: MOL internal calculations, excluding CKD 2007 2008 2009 2010 2011 2012 0 5,000 10,000 15,000 Exports from Japan Exports from Korea Others pickup trucks is likely to boost sales to around 15 million units a year. While there will be regional variations in the strength or weakness of the auto market, the trend in demand worldwide is likely to support a steady increase in unit sales. The ocean transport of automobiles is also likely to increase, though the overall pace of growth is expected to weaken, due to the trend towards local-based production. Transportation patterns will become ever more complex than in the past. For example, Thailand and South Africa have become major auto exporters, and India is also emerging as a major auto exporting country. There are a number of other countries that have become key production bases, such as Mexico, Brazil, Turkey and Morocco, and cars built in these countries are sold over a wide area, creating many new trade routes. This reflects the fact that automakers are always considering a range of factors, includ- ing exchange rate-related risks, when select- ing the most appropriate base for production. In order to avoid exchange rate-related risks, automakers not only seek to increase local production, but often produce the same model in several countries. By doing so, they can adjust their operations flexibly in response to exchange rate fluctuations, seeking the most profitable combination of production site and site of final sale. To do this, they need to establish the necessary production and transport network. For example, vehicles manufactured in Mexico are not only sold in the U.S.; increasingly, they are being shipped to Europe and Asia for sale. Manufacturers need to set up an export structure to handle these shipments. In this way, many new seaborne trades are developing. In response, MOL must try to deal adroitly with the complexity of custom- ers’ shipping needs. It must also take steps to compete successfully against railroads and other forms of cargo transportation. In order to turn this competitive opportu- nity into a new source of income, MOL needs to intensify its efforts to achieve efficient distribution and operation of its vessels, while offering services that help customers reduce their logistics costs. To this end, the company has continued to align its fleet, placing priority on the stan- dardization of vessel size by designating 6400 RT-type car carriers as the company’s “basic standard.” These car carriers are the largest vessels at present, with high usabil- ity in various sea lanes and ports across the past it has been relatively difficult to respond to the trade in short-range cargo transport, such as shipments between ports in Southeast Asia, or cargo transport within the North American and South American continents. MOL will respond with efforts to establish a shipping network that serves these short-distance shipping needs, and will pursue new cargo movements from Asia other than Japan while minimizing the operation of empty vessels. In newly emerging economies, the devel- opment of inland transport infrastructure has an impact on the shipping business in terms of the number of vehicles exported. MOL has responded with measures such as developing terminal operations at the Ennore Port in India and inland transport businesses in the coun- try. In addition to operations in India, MOL has launched terminal operation businesses in Australia and Turkey. In each of these cases, it is essential for us to generate synergies with our mainstay ocean transport business, while working to strengthen ties with customers who are expanding into each region. In June 2012, MOL began operating the world’s first hybrid car carrier, the emeraLd ace. The ship is equipped with lithium-ion batteries that are charged by solar power gener- ation systems while at sea. The emeraLd ace. then uses this power while at berth, which allows the diesel power generators to be completely shut off. As a result, the emeraLd ace. can achieve “zero emissions while at berth.” Having actually operated this vessel, MOL has con- firmed a reduction in the environmental burden. globe, and account for over 60% of the vessels in MOL’s car carrier fleet. In recent years, some companies have placed orders for even larger, 7000 RT and 8000 RT-type car carriers. However, MOL recognizes that size alone is not what matters. Based on a comprehensive evaluation of factors such as fuel efficiency and vessel cost, as well as the physical restrictions of various ports around the world and the average loads and shipment volumes needed on the world’s main shipping routes, MOL has determined that the 6400 RT-type vessels currently are the best solution to respond to and match our customers’ needs. By main- taining a large fleet of similarly sized ves- sels, it is easier for MOL to respond to problems such as bad weather or port congestion that hinders shipping sched- ules. In case these problems emerge, the company can respond flexibly to the situa- tion and dispatch a replacement vessel of the same size, thereby ensuring that cus- tomers receive reliable service. The MOL Group’s fleet of car carriers is currently the largest in the world in terms of the total number of ships in operation. How- ever, the key to the company’s competitive strategy is not simply to assemble the larg- est fleet. In the future, it will become increas- ingly important to anticipate the needs of customers and respond flexibly by providing finely tuned services that meet these needs. This is the foundation of MOL’s strategy for increasing earnings. For example, in the car expOrt frOM Japan (Thousand units) Others Oceania Central/South America Africa Middle/Near East Asia Europe North America 8,000 6,000 4,000 2,000 Source: MOL internal calculations, destination-wise/excluding CKD 0 2007 2008 2009 2010 2011 2012 car expOrt frOM eMerGInG cOuntrIes (Thousand units) ex. Mexico ex. South Africa ex. India ex. China ex. Thailand 6,000 4,000 2,000 Source: MOL internal calculations based on FORIN data, etc. 0 2007 2008 2009 2010 2011 2012 39 buLkshIPs Car Carriers the Car Carrier ELEGaNT aCE (Durban, south africa) 40 The eLeGaNT ace, a 6400 RT-type car carrier departing from the South African port of Durban. The “4 Continents Express Service” does an anti-clockwise loop around the Atlantic Ocean calling in at ports on four continents (Africa, Europe, North America and South America), starting from Durban. Since its launch in 2001, this service has won high marks from customers for providing stable, regular services with dedicated vessels. At present, MOL’s share of the transport of finished vehicles from South Africa exceeds 50%. 41 ContaIneRshIPs JunIchIrO Ikeda Senior Managing Executive Officer fiscal 2012 in review In fiscal 2011, almost all containership companies were forced to operate in the red, particularly on East-West routes, due to overheated freight rate competition. Critical reflection on this state of affairs led to changes in the overall market in fiscal 2012 as companies independently made adjustments to the supply of vessels and moved to restore freight rates. This improved rate levels to a certain extent. MOL also aggressively promoted opera- tional efficiency improvements and cost reductions by strengthening the competi- tiveness of its service network, through alliances called TNWA *1 and G6 *2, and by more fully implementing slow steaming and other measures. As a result, we improved earnings by ¥18.6 billion compared to the previous fiscal year, although fiscal 2012 ended with an ordinary loss of ¥11.2 billion. Worldwide containership trade volume in 2012 increased by 4.1%, but vessel supply also rose by 6.1% as supply growth out- stripped demand growth, as was the case in the previous fiscal year *3. A significant number of ultra-large containerships with capacity exceeding 10,000 TEU were deliv- ered and this was the main cause of the increase in supply. There was concern about the negative impact on supply and demand because these ships would oper- ate mainly on European routes, but contain- ership companies dealt with the problem by reining in supply through such measures as laying up vessels, reducing service frequen- cies, and slow steaming, which helped restore freight rates toward the beginning of spring to a considerable extent. Freight rates gradually softened from the summer onward, however, due to prolonged 42 Consequently, on Asia–Europe routes, freight rate levels improved year on year despite cargo movement slowing, and on Asia–North American and other routes, we were able to significantly increase lifting numbers. In addition to these develop- ments, yen depreciation (¥78.85/US$ in fiscal 2011 to ¥82.31/US$ in fiscal 2012) and a slightly lower bunker price (US$667/ MT in fiscal 2011 down to US$662/MT in fiscal 2012) played a part as well, and we were able to significantly improve earnings on all routes. However, the containership division overall was not able to return to the black, despite stable income from the termi- nal business and the logistics business. fiscal 2013 profit recovery scenario In fiscal 2012, we were only able to reduce the division’s margin of loss, but in fiscal 2013 we are targeting positive ordinary income of ¥5.0 billion (as of the July 31, 2013 announcement). This would represent an improvement of approximately ¥15 billion compared to fiscal 2012. This forecast is premised on an improvement in external conditions, specifically, substantial yen depreciation (¥82.31/US$ for fiscal 2012 versus an assumption of ¥99.20/US$ for fiscal 2013) and a lower bunker price. The forecast also reflects the Europe-originated vessels 12/3 115 13/3 115 thousand deadweight tons 12/3 6,205 13/3 6,370 Note: Figures include spot-chartered ships and those owned by joint ventures. sluggishness in cargo movement to Europe. That said, the operating results of European routes on a full-year basis improved sub- stantially over the previous year. Regarding cargo movement on other routes, trade was firmly rooted along Asia– North American routes, while in Inter-Asia trade increased. This reflected the return to normal levels after trade was impacted last fiscal year by the flooding in Thailand. The increase was also the result of companies shifting production to ASEAN countries and away from excessive clustering in China. North-South routes were affected by import restrictions in Argentina, but cargo movement was maintained. MaIn rOutes cOntaInershIp seabOrne trade (1995 = 100) 400 300 200 100 Source: MOL internal calculations based on Clarkson Research Service Shipping Review Database Spring 2013 0 1995 2000 2005 2010 2012 (estimated) G6 Alliance expanding to the North Ameri- can East Coast, reduced slot costs and increased lifting volume derived from large vessels being added to the fleet, as well as additional progress in restoring freight rates, including reefer containers. Addition- ally, in order to improve our earnings regardless of market conditions, we intend to aggressively promote cost cutting and other self-reliant efforts under the division’s three-year plan, “Operation CORE” (Count On Reliability and Excellence), which runs from fiscal 2012 to fiscal 2014. For Asia–North America routes specifi- cally, with the G6 Alliance expanding its range to include the North American East Coast, we will promote even more efficient vessel allocation and cost reductions and work to increase lifting numbers while accommodating North American-bound cargo, which is expected to remain firm. In addition, through GRI *4, PSS *5 and other measures, we will continue to restore freight rates. On Asia-Europe routes, we will actively work to increase stable contracts with cargo owners known as BCOs *6 that do not go through NVOCCs *7 and increase lifting numbers by utilizing space on new large vessels that will be delivered during fiscal 2013. Also on Asia–Europe routes, although it is expected that market condi- tions for freight rates will potentially soften given economic conditions in Europe, we will continue to restore freight rates through GRI, PSS and other measures while tighten- ing vessel supply by such means as laying up vessels, reducing voyages, and imple- menting slow steaming. We also plan to increase lifting numbers by accommodating increased cargo movement along Inter-Asia and North-South routes. In the terminal business and the logistics business, which support containership routes, we will generate steady profits. Capital investment is currently being made in the terminal business, primarily overseas. At the Port of Los Angeles, we are investing in automation using IT, conversion to on- dock rail and other projects. At Cai Mep Port in Vietnam, terminal business opera- tions have been stable since commencing in January 2011. At Rotterdam Port, we are making investments with a view to com- mencing operations in 2014. From fiscal 2014 onward, when all of these overseas terminals are operating, the terminal busi- ness will contribute in a major way to enhancing its presence as a stable business in the containership division. The logistics business also continues to generate steady profits. Leveraging the respective strengths of MOL Logistics (Japan) Co. Ltd., Utoc Corporation, MOL Consolidation Service Limited, Mitsui O.S.K. Lines (Thailand) Co., asIa-nOrth aMerIca cOntaIner trade carGO MOveMents (Million TEU) Outbound voyage Inbound voyage Source: Piers/JoC etc., excluding Canada cargo asIa-eurOpe cOntaIner trade carGO MOveMents (Million TEU) Outbound voyage Inbound voyage Source: Drewry, including Mediterranean cargo 15 10 5 0 15 10 5 0 2008 2009 2010 2011 2012 2008 2009 2010 2011 2012 Ltd. and other group companies involved in logistics, the MOL Group as a whole is actively working to raise service quality while promoting development of business in emerging countries. We intend to accelerate these activities and translate achievements into profit growth. Looking ahead With growing uncertainty in the global economy, management of the container- ship business has become increasingly difficult. However, we will work to provide high-quality marine transport services while bolstering cost competitiveness. To accomplish this, we moved headquarters’ functions of MOL’s Liner Division to Hong Kong in July 2012 due to the location’s long history as a base for the shipping business, its proximity to growth regions, and its strong established infrastructure. As was said before, the division is cur- rently executing its own three-year plan, Operation CORE, which covers from fiscal 2012 to fiscal 2014. The ordinary loss in the containership division was ¥29.9 billion in fiscal 2011 when the plan was con- ceived, and even if market conditions have not improved since that time, the plan is targeting improvement in profits of ¥40 billion to ¥50 billion over the 3 years of the plan so that ordinary income in the range of Glossary 1. the new world alliance (tnwa) is an alliance of three companies, MOL, APL (Singapore) and Hyundai Merchant Marine (South Korea). It has conducted joint operations on Asia–North America and Asia–Europe routes since the 1990s. 2. the G6 alliance is an alliance of six companies and represents the integration of TNWA and the Grand Alliance (Nippon Yusen Kaisha (Japan), Hapag-Lloyd AG (Germany) and Orient Overseas Container Line (Hong Kong)). The alliance began operating jointly in Asia–Europe (Northern Europe and Mediterranean) routes in March 2012 and expanded its framework to include North American East Coast routes in May 2013. *3 2012 calendar basis. Source: Drewry *4 GrI (General rate Increase): Increasing prices across the board to boost rates that have fallen. *5 pss (peak season surcharge): Charging premium rates during peak seasons when cargo movement increases. *6 bcO (beneficial cargo Owner): A cargo owner that contracts directly with containership companies without going through an NVOCC or other intermedi- ary. Cargo control is handled internally by the cargo owner’s logistics divisions. Most BCOs are multina- tional corporations that regularly import and export certain amounts of cargo. *7 nvOcc (non-vessel Operating common carrier): Also called Freight Forwarders. These companies handle freight transport operations using existing shipping companies but do not possess their own modes of transport. 43 ¥10 billion to ¥20 billion can be earned continuously. To meet these targets we intend to improve cost competitiveness by reducing slot costs and lowering organiza- tional costs per unit by putting large ves- sels into operation, and acquiring volume discounts from terminals, railways and other companies against a backdrop of increasing cargo volume. In addition, under the slogan “Count on MOL,” we will continue disclosing key performance indicators for transport qual- ity (on-time performance percentages), environmental protection (reduction ratios for CO2, NOx and SOx emissions from containerships) and safe operations (the number of long-time operational stop- pages per year for 3 or more consecutive days) to promote MOL’s safety and service quality and continue working to differenti- ate ourselves from competitors. Global economic development is cur- rently supported by an international division of labor, so economic growth in different regions is connected and causes transport to increase between them. Maritime ship- ping is the key mode of inter-region trans- port, and the containership business in particular helps spread prosperity brought about by international specialization to more countries, industries and people in that it handles cargo for innumerable cus- tomers. In this growth market, we have continually provided stable, sophisticated transport quality to earn widespread trust. We intend to continue working to achieve sustainable growth and establish contain- erships as a truly CORE business of MOL. share by MaJOr carrIer aLLIance Of the eurOpe rOutes (As of March 2012) Others MSC* 13% 15% 11% 18% Maersk* CMA-CGM* *The “P3 Network,” a new alliance, is scheduled to be launced in April–June 2014. Source: MDS revenue breakdOwn by trade (Results of FY2012) capacIty breakdOwn by trade (Results of FY2012) Intra-Asia Trade 19% South America/ Africa Trade 15% 32% Europe Trade Intra-Asia Trade 31% South America/ Africa Trade 14% 44 CKYH + Evergreen 25% TNWA GA G6 18% North America Trade 34% North America Trade 29% Europe Trade 26% ContaIneRshIPs the Containership MOL MiSSiON (san Francisco, u.s.) MOL’s containership division is working to protect the environment as part of the “Count on MOL” initiative. Besides its low fuel consumption and outstanding capacity, mOL miSSiON has pre-empted new regulations regarding safety and the environment. This containership boasts double-hull fuel tanks to reduce the risk of fuel oil leaks. In addition, it is equipped with low sulfur fuel tanks, electronically controlled main engines and an onshore power supply system, among other features that give consideration for the environment. 45 FeRRy & DoMestIC tRansPoRt vessels 12/3 45 13/3 44 thousand deadweight tons 12/3 158 13/3 159 Note: Figures include spot-chartered ships and those owned by joint ventures. in revenues caused by route rationalization and other factors, and allow the division to achieve profit growth. Looking ahead Although it is difficult to imagine the domestic marine transport business fading in the foreseeable future, it is no longer a business segment which offers the pros- pect of steady or dramatic earnings growth. Over the past 20 years, this indus- try has gradually consolidated and the number of ferry operators in Japan has declined significantly. Domestic marine transport has become a mature industry in Japan, but conversely, it is also difficult for new players to enter the business. While existing companies formerly were able to achieve growth through consolidation and rationalization, the industry has now entered an era in which knowledge and ingenuity must be used to create opportu- nities for growth. One example of a potential growth opportunity in the ferry business is the development of ships that function as a sort of “moving hotel,” such as the popular “Dangan Ferry *2.” By developing other ways to make services both time- and cost-effective for tourists, we are striving to attract tourism-related demand. In addition, the introduction of tighter regulations on domestic, long-distance trucking services opens up business opportunities for night- time ferry services, which can be more cost-effective and safer while reducing environmental impact. Many truck opera- tors are becoming increasingly aware of these advantages and shifting from road to ferry transport. This has the potential to drive growth in ferry operations. hIrOkaZu hatta Managing Executive Officer fiscal 2012 in review In fiscal 2012, we returned to profitability for the first time in 5 years on an ordinary income basis, generating growth in reve- nues and contributing ¥1.2 billion to ordi- nary income. We have been pursuing this immediate goal ever since this business slipped into the red in fiscal 2008, steadily pursuing profitability with cumulative efforts to cut costs and rationalize operations. However, the Great East Japan Earthquake in 2011 had a major impact on the Eastern Japan ferry route. The mother port for vessels running the Kita-Kanto–Hokkaido route, Oarai Port, was completely out of service for around three months. Ships had to be diverted to the Port of Tokyo, and the effort to rebuild operations and profitability was extremely difficult. In fiscal 2012, the effects of the earth- quake began to decline, with total cargo volume and revenues returning to pre- disaster levels. The ferry business also felt the beneficial impact of a business integra- tion, conducted in fiscal 2011, to rationalize ferry operations in Western Japan *1. This contributed directly to the earnings recov- ery, as did the restart of thermal power generation facilities operated by the electric power companies, which increased demand for fuel oil and coal transported by MOL’s domestic coastal shipping business. As a result, this business division returned to the black. fiscal 2013 earnings Growth scenario We expect to see benefits from streamlin- ing and further cost reductions in this busi- ness division during fiscal 2013. This should offset an anticipated modest decline 46 Glossary *1 The two ferry companies serving the Osaka/ Kobe–Kyushu route—The Diamond Ferry Co., Ltd. and Kansai Kisen Kaisha—were integrated to form Ferry Sunflower Ltd. *2 “dangan ferry” is an overnight round-trip service which arrives at the destination port in the morning and departs there the same evening. Travelers spend two nights aboard ship, and thus do not require lodging on land. FeRRy & DoMestIC tRansPoRt the Ferry SuNFLOwER FuRaNO (oarai District, Ibaraki Port, Ibaraki) Tractors haul trailers into ferries. Once inside, the tractor is detached from the trailer and only the person-less trailer is transported to the destination port. Ferries help ease the burden on truck drivers and reduce the risk of traffic accidents. They are also an environmentally friendly mode of transport. 47 assoCIateD busInesses hIrOkaZu hatta Managing Executive Officer fiscal 2012 in review This division comprises MOL’s real estate, tugboat, cruise ship and other businesses. More than half of the profits in this division are accounted for by the real estate busi- ness, particularly Daibiru Corporation. In this company’s main operating regions— the business districts of Tokyo and Osaka—office building vacancy rates remain at high levels, and this continues to constrain rent income. However, Daibiru’s properties are located in excellent locations and provide a high level of service, which has allowed the company to maintain high occupancy rates relative to the overall market average, supporting solid results. Losses in the cruise ship business were reduced, while tugboat and other associ- ated businesses remained generally solid. As a result, ordinary income in the division increased compared with fiscal 2011, to ¥10.7 billion. fiscal 2013 earnings Growth scenario In fiscal 2013, we expect ordinary income to remain essentially unchanged, at ¥10.5 billion. Daibiru continues to generate a stable flow of income, and we expect profit contributions from the tugboat business to roughly match fiscal 2012’s levels. Although the cruise ship business will remain in the red, we will pursue deeper reforms in line with the single-year management plan “RISE 2013,” so that it can make a contri- bution to profit growth of this division. Looking ahead Due to depressed conditions in the marine transport industry, MOL posted a consoli- dated ordinary loss in fiscal 2012 of ¥28.5 billion. However, associated businesses contributed ordinary income of ¥10.7 bil- lion, thus greatly moderating the scale of the overall loss. In fiscal 2013, as MOL is taking steps to reform the cruise ship busi- ness, it is more likely that all business segments and all group companies will return to profitability. In the real estate business, Daibiru completed construction of the Daibiru Honkan in March 2013, and expects to finish construction of another building (provisional name: New Shin Daibiru) in March 2015. In fiscal 2013, Daibiru embarked on a new medium-term management plan entitled “Design 100” Project Phase-I. This 5-year plan, which continues through the end of fiscal 2017, aims to expand revenues and profits by approximately 20%, thus allowing the company to continue making steady con- tributions to MOL group earnings. In the tugboat business, we will use high-performance “Japan Brand” tugboats and try to appeal to customers based on sophisticated skill at maneuvering vessels. As our entry to the Vietnamese market in 2010 demonstrates, the tugboat business will leverage new port development in the Asian region to capture new demand. Under this strategy, we have ordered addi- tional tugboats, focusing mainly on high- powered tugboats, as we reshape the tugboat fleet, which was composed of 39 boats in Japan and 16 boats overseas (as of the end of fiscal 2012). The cruise ship business, along with ferry operations, is a rare example of a business in which MOL has direct access to individual consumers. Although the company operates a fleet of over 900 vessels, the only people who might know one of these vessels by name are the cargo owners who contract them. On the other hand, the name of our leading cruise ship, the NiPPON maru, is known by a large number of people. It contributes disproportionately to public recognition of MOL and helps the company draw atten- tion from the market. As the cruise ship business has an influential role to play in this way, we will strive to attract more passengers and increase earnings in an effort to stabilize this business. assoCIateD busInesses the tugboat KaMiYa (Cai Mep Port, vietnam) Vessels in the Asian region are becoming larger, reflecting buoyant marine transport in the region. To accommodate these larger vessels, new ports are being opened and existing ports are expanding in Asian countries. The opening of these new ports will create new demand for tugboats. MOL plans to expand its overseas tugboat operations with high-quality tugboats and the expertise it has built up in Japan. 48 key systems underpinning MoL: Corporate Governance and Corporate social Responsibility Contents 50 boaRD oF DIReCtoRs, CoRPoRate auDItoRs anD exeCutIve oFFICeRs 52 MessaGe FRoM an exteRnaL DIReCtoR 54 CoRPoRate GoveRnanCe 54 MoL’s PhILosoPhy anD Past ManaGeMent ReFoRMs/ CoRPoRate GoveRnanCe oRGanIzatIon 56 DIReCtoR anD CoRPoRate auDItoR CoMPensatIon/CoMPLIanCe 57 InteRnaL ContRoL systeM/InDePenDent DIReCtoRs anD CoRPoRate auDItoRs/ annuaL GeneRaL shaRehoLDeRs’ MeetInG/aCCountabILIty 58 RIsk ManaGeMent 60 saFe oPeRatIon 62 CoRPoRate soCIaL ResPonsIbILIty (CsR) 62 MoL’s aPPRoaCh to CsR/the MoL GRouP basIC PRoCuReMent PoLICy/ PaRtICIPatInG In the un GLobaL CoMPaCt 63 huMan RIGhts/envIRonMentaL PRoteCtIon 65 soCIaL ContRIbutIon aCtIvItIes 66 thIRD-PaRty evaLuatIons/MoL’s envIRonMentaL teChnoLoGIes SENPaKu iSHiN 49 boaRD oF DIReCtoRs, CoRPoRate auDItoRs anD exeCutIve oFFICeRs (As of June 21, 2013) akIMItsu ashIda Representative Director Chairman of the Board Born 1943 kaZuhIrO satO Representative Director Born 1953 Apr. 1967 Joined Mitsui O.S.K. Lines, Ltd. Apr. 1995 General Manager of Liner Division Jun. 1996 Director, General Manager of Planning Division Jun. 1998 Managing Director Jun. 2000 Senior Managing Director, Senior Managing Executive Officer Jun. 2003 Representative Director, Executive Vice President, Executive Officer Jun. 2004 Representative Director, President Executive Officer Jun. 2010 Representative Director, Chairman of the Board, Chairman Executive Officer (current) Apr. 1975 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2001 General Manager of LNG Carrier Division (A) Jun. 2004 General Manager of LNG Carrier Division Jun. 2005 Executive Officer General Manager of LNG Carrier Division Jun. 2008 Managing Executive Officer Jun. 2010 Senior Managing Executive Officer Jun. 2013 Representative Director, Executive Vice President Executive Officer (current) Apr. 1979 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2004 General Manager of Human Resources Division Jun. 2007 General Manager of Liner Division Jun. 2008 Executive Officer Jun. 2010 Managing Executive Officer Jun. 2013 Director, Senior Managing Executive Officer (current) Apr. 1976 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2002 General Manager of Bulk Carrier Division Jan. 2003 General Manager of Corporate Planning Division Jun. 2004 Executive Officer, General Manager of Corporate Planning Division Jun. 2006 Managing Executive Officer Jun. 2007 Director, Managing Executive Officer kOIchI MutO Representative Director Born 1953 Jun. 2008 Director, Senior Managing Executive Officer Jun. 2010 Representative Director, President Executive Officer (current) tsuneO watanabe Director Born 1955 Apr. 1978 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2004 General Manager of Tanker Division Jun. 2006 Executive Officer Jun. 2008 Managing Executive Officer Jun. 2010 Director, Managing Executive Officer Jun. 2011 Director, Senior Managing Executive Officer (current) Apr. 1979 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2003 General Manager of Logistics Business Division Jun. 2008 Executive Officer, MOL Europe B.V. Managing Director Jun. 2011 Managing Executive Officer Jun. 2013 Director, Managing Executive Officer (current) JunIchIrO Ikeda Director Born 1956 MasahIrO tanabe Director Born 1957 Apr. 2008 President of The Salt Science Research Foundation (current) Jun. 2008 Director of Mitsui O.S.K. Lines, Ltd. (current) Jun. 2010 Chairman of the Board and Representative Member of the Board of Toray Industries, Inc. (current), Director of Mitsui O.S.K. Lines, Ltd. (current) takeshI kOMura Director Born 1939 sadayukI sakakIbara Director Born 1943 May 2011 Senior Advisor of The Boston Consulting Group K.K. (current) Jun. 2011 Director of Mitsui O.S.K. Lines, Ltd. (current) corporate auditors MasaakI tsuda corporate auditor Born 1959 takehIkO Ota corporate auditor Born 1960 Apr. 1981 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2006 General Manager of General Affairs Division Jun. 2011 Corporate Auditor of Mitsui O.S.K. Lines, Ltd. (current) Apr. 1984 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2008 General Manager of Investor Relations Office Jun. 2013 Corporate Auditor of Mitsui O.S.K. Lines, Ltd. (current) suMIO IIJIMa corporate auditor Born 1941 hIrOyukI ItaMI corporate auditor Born 1945 Apr. 1966 Attorney at law, Tokyo Toranomon Law office (current) Jun. 2006 Corporate Auditor of Mitsui O.S.K. Lines, Ltd. (current) Oct. 2008 Professor and Dean of Tokyo University of Science, Graduate School of Innovation Studies (current) Jun. 2011 Corporate Auditor of Mitsui O.S.K. Lines, Ltd. (current) MasayukI MatsushIMa Director Born 1945 50 12 9 8 7 3 1 2 4 5 6 10 11 23 21 19 17 15 13 14 16 18 20 22 24 executive Officers 1 2 3 4 5 6 7 8 akIMItsu ashIda Chairman kOIchI MutO President kaZuhIrO satO Executive Vice President Executive Officer (Assistant to President) tsuneO watanabe Senior Managing Executive Officer (Tanker Division, Tanker Safety Management Office) takashI kurauchI Senior Managing Executive Officer (Car Carrier Division) kenIchI naGata Senior Managing Executive Officer (Coal and Iron Ore Carrier Division, Bulk Carrier Office, Dry Bulk Carrier Supervising Office) JunIchIrO Ikeda Senior Managing Executive Officer (Liner Division, Human Resources Division, Research Office) MasahIrO tanabe Managing Executive Officer (Finance Division, Accounting Division, Investor Relations Office) 9 10 11 12 13 14 shIZuO takahashI Managing Executive Officer (Internal Audit Office, Secretaries Office, Corporate Planning Division, Public Relations Office, MOL Information Systems, Ltd.) kIyOtaka yOshIda Managing Executive Officer (Technical Division) hIrOkaZu hatta Managing Executive Officer (General Affairs Division, Group Business Division, Kansai Area) takeshI hashIMOtO Managing Executive Officer (LNG Carrier Division, MOL LNG Transport Co., Ltd., Offshore Business) tetsurO nIshIO Managing Executive Officer (Dedicated Bulk Carrier Division) MasaakI neMOtO Managing Executive Officer (Human Resources Division, Marine Safety Division, Tanker Safety Management Office, MOL Ship Management Co., Ltd., MOL LNG Transport Co., Ltd., Safe Operation) 15 16 17 18 19 20 tOshIya kOnIshI Managing Executive Officer (Liner Division) tsuyOshI yOshIda Executive Officer (President/Chief Executive Officer of MOL (America) Inc.) takashI MaruyaMa Executive Officer (General Manager of Finance Division) akIhIkO OnO Executive Officer (General Manager of Corporate Planning Division) takaakI InOue Executive Officer (Marine Safety Division, Tanker Safety Management Office, MOL Ship Management Co., Ltd., MOL LNG Transport Co., Ltd.) tOshIyukI sOnObe Executive Officer (Managing Director of Mitsui O.S.K. Bulk Shipping (Asia Oceania) Pte. Ltd., Southeast Asia) 21 22 23 24 yOshIkaZu kawaGOe Executive Officer (General Manager of Technical Division) hIdeO hOrIGuchI Executive Officer (General Manager of Accounting Division) akIO MItsuta Executive Officer (General Manager of Tanker Division) kOIchI yashIMa Executive Officer (Human Resources Division) 51 MessaGe FRoM an exteRnaL DIReCtoR MasayukI MatsushIMa External Director Two years have now elapsed since I assumed the While it is critical, of course, that MOL determine position of external director for MOL. Before my how best to operate in the current market, I believe appointment, I had the image of MOL as “an organi- this is also an ideal opportunity for shipping compa- zation that leads the world shipping industry." This nies to reassess how they should proceed going image has not changed. Indeed, in many respects forward. They have endured hard times in the past, my expectations have been surpassed, in terms of such as the oil shock of the 1970s, and the yen’s strong leadership under successive management sharp appreciation after the Plaza Accord of 1985. teams, daring action geared toward providing best- Every time it faced these challenges, MOL made fit solutions to customers, an extremely open corpo- serious efforts to survive by adopting a broad range rate culture, and employees’ earnest approach to of policies from various cost-cutting measures and their work. adjusting its fleet to large-scale restructuring, In the midst of the worst shipping recession in including two rounds of industry consolidation. The recent years, MOL now finds itself enduring a very future will remain challenging and undoubtedly rough passage. When freight rates for dry bulkers, present every kind of risk. In this highly volatile tankers, and containerships all slump at once, the business climate, I believe MOL must learn and situation is akin to a violent hurricane and a tornado think about how to identify and contain ever-pres- striking simultaneously. Even from my standpoint as ent risks. Without the benefit of accumulated an external director, I am struck by the uphill battle wisdom, MOL could not remain afloat in conditions faced by those on the front line, in the face of this that are worse than expected. It is no exaggeration protracted industry downturn. As a leader within the to say that the heart of company management lies marine transport industry, however, MOL has boldly in its ability to prepare for potential risks. changed tack and is forging ahead. 52 After MOL returns to profitability following its Business Structural Reforms, I would like to see it become a true global company in terms of both qual- ity and quantity. I believe the company has made good progress in expanding its overseas operations, but still see scope for further globalization. In particular, I think MOL must take advantage of Asia’s rapid growth. MOL already uses Hong Kong as the base of its con- tainership business and Singapore as the hub for most tankers. With this latest round of reforms, the com- pany has continued this shift to Asia by transferring the operation of dry bulker free vessels to Singapore as well. MOL employs people from many countries, and not just in sales activities on land; many seafarers, to me, management does not mean avoid- ing the winds of risk, but rather facing into those winds and seeing them as your allies. Currently, MOL is planning to reduce its free for example, hail from the Philippines. Going forward, I vessels. Some might think it sufficient only to would like to see the company focusing not so much reduce the number of free vessels and increase the on setting up and expanding individual operating ratio of medium- and long-term contracts, but I bases, but rather on building a united and organic don’t think so. It is far more important for MOL to trading sphere across Asia. To this end, MOL would establish a long-lasting business model that strikes do well to explore every possible means, including a the right balance between stable revenue and stepped-up alliance strategy, personnel exchanges, opportunity cost. In the process of building this enhanced sales partnerships among organizations model, the first job is to identify the risk profiles of around the world, and even video conferencing for vessel types and correlations of risk variables. And exchanging and sharing information. I would like to see it become a true global company in terms of both quality and quantity. then MOL must explore the best mix of vessel type in its portfolio with reference to the global supply- demand outlook, taking into account the risk toler- ance of the company. Hedging against every possible risk to eliminate the influence of all risk is not what I would call man- agement. To me, management does not mean avoiding the winds of risk, but rather facing into those winds and seeing them as your allies. In the shipping industry, the winds can fluctuate greatly. It is very important that employees across the entire company accept this reality, and maintain a sharp sense of the line between earnings optimization and risk tolerance, in both good times and bad. While it is only natural that the pursuit of profit is a MOL has bled huge red ink. I believe the com- major objective for companies, I believe that profit is pany must retain the lessons learned this time not everything. It is also extremely important to find about how to deal with market risk and incorporate the optimal balance between the interests of various it into management. stakeholders, and to maintain accurate disclosure. Also, companies need to envision the roles and responsibilities expected of them by society, 5 and even 10 years down the track. Based on these con- siderations above, I would like to contribute to MOL’s ongoing evolution. 53 CoRPoRate GoveRnanCe MoL’s Philosophy and Past Management Reforms The MOL Group established the MOL Group Corporate Principles in March 2001. One of the pledges in our Corporate Principles states, “We will strive to maximize corporate value by always being creative, continually pursuing higher operating efficiency and pro- moting an open and visible management style that is guided by the highest ethical and social standards.” In order to realize the ideals set forth in the principles, MOL reformed its corporate governance structure, instituting manage- ment reforms that brought outside directors onto the board, sepa- rated management and executive functions, and set standards for accountability, risk management and compliance. These reforms were implemented as follows: 1997 1998 Outside auditors increased from one to two out of a total of four auditors George Hayashi (former APL chairman) invited to join the Board of Directors (became Director and Vice President in 1999, following revision of the Shipping Act) 2000 Management organization reform 1. Introduced a system of executive officers 2. Abolished the Managing Directors Committee and established an Executive Committee (reduced the membership from 21 to 10) 2001 2002 3. Reformed the Board of Directors (redefined its duties as the highest-ranking decision-making body and the supervision of business activities) and reduced membership from 28 to 12 4. Elected two outside directors 5. Established the Corporate Visionary Meeting Established the IR Office Started holding the Annual General Shareholders’ Meeting on a day relatively free of other shareholders’ meetings Established the MOL Group Corporate Principles Added one more outside director, increasing the number of outside directors to three Established Compliance Policy and a Compliance Committee Second stage of management reforms Reforms reinforced roles of the Board of Directors concerning deter- mination of basic strategies and monitoring risk management while providing for faster decision-making at the business execution level 1. Board of Directors was reorganized to carry out three important functions: (1) deliberation on issues requiring approval by the directors; (2) receipt of reports on business operations; and (3) deliberation on corporate strategy and vision 2. Review and consolidation of issues submitted to the Board of Directors 3. Expanded jurisdiction of the Executive Committee regarding execution of business activities 2006 Decided basic policy on the establishment of internal control systems in response to enforcement of the new Japanese Companies Act In response to the enforcement of the Financial Instruments and Exchange Act, the Internal Control Planning Office was established in the Corporate Planning Division. 2007 The Internal Control Planning Office enhanced internal control systems for the purpose of ensuring the accuracy of financial report- ing, in accordance with the Financial Instruments and Exchange Act. 2008 We have been using management evaluations of internal controls relating to financial reporting required by the Financial Instruments and Exchange Law since fiscal 2008, audits by the Internal Audit Office and advice based on the results of those audits, to improve internal controls throughout the Group. 2009 We submitted an internal control report to the Kanto Local Finance Bureau in Japan containing an assessment by management that internal controls over financial reporting at MOL were effective. 2011 Revised the Mitsui O.S.K. Lines’ Compliance Policy and Rules of Conduct Corporate Governance organization The chart on the next page shows the structure of our corporate governance organization. At MOL, we believe that the essence of corporate governance lies not in its structure or organization, but in whether or not it functions effectively. We have put in place frameworks and organi- zations for this. 54 n the board of directors The Board of Directors, as the company’s highest-ranking decision-making body, discusses and decides on basic policy and the most important matters connected with MOL Group manage- ment. It consists of nine directors, including three outside direc- tors. In principle, the Board of Directors convenes around 10 times a year, and as necessary. Major investment projects, such as the construction of new vessels, are submitted to the Board of Directors at the basic policy formulation stage. The directors thoroughly evaluate and discuss the pros and cons of the projects and make decisions on their feasibility from many perspectives. Transferring the authority to implement projects within the scope of the basic policy to execu- tive officers supervised by the president speeds decision-making on individual projects. n deliberation on corporate strategy and vision A major feature of the Board of Directors is deliberation on corporate strategy and vision. At each meeting, the board focuses on a partic- ular topic concerning management strategies, MOL’s long-term vision or other subjects involving management. These discussions provide an opportunity for lively debates that include the outside directors and corporate auditors, thus helping to ensure that the perspective of shareholders is reflected in how MOL is managed. theMes dIscussed In cOrpOrate strateGy and vIsIOn deLIberatIOns heLd In fIscaL 2012 (4 tIMes) May 2012 Strategies for recruiting and training seafarers October 2012 Management plan formulation policy december 2012 Structural reforms february 2013 Shale revolution and energy transportation n executive committee and committees MOL established the Executive Committee in 2000 as part of reforms to its management organization. As the second step of those reforms, in 2002 the company expanded the jurisdiction of the Executive Committee regarding execution of business activi- ties, and also transferred the authority to implement projects within the scope of the basic policy approved by the Board of Directors to executive officers supervised by the president to speed up decision-making on individual projects. MOL has also established the following committees to study and discuss important matters that will be submitted to the Execu- tive Committee for discussion and projects straddling divisions, as sub-committees of the Executive Committee. rIse committee Executes and follows up on management plans for MOL and the MOL Group, and examines and discusses matters related to the MOL Group’s management strategy. budget committee Formulates basic policy on budget preparation for MOL and the MOL Group and sets targets; ascertains the status of implementa- tion at MOL and in the MOL Group of the overall budget; and studies and discusses results evaluation and other matters. compliance committee Studies and discusses the enhancement of the compliance system and actions for dealing with compliance violations, and matters related to establishing a structure for protecting and managing personal information, among other topics. Investment and finance committee Studies and discusses items that will be submitted to the Executive Committee such as matters related to investment and finance and guarantees of obligations, the fleet control plan for individual vessels, and important matters relating to Group com- pany management. Operational safety committee Chaired by the President, this committee studies and discusses basic policies and measures for ensuring safe operation of MOL Group-operated vessels through rigorous attention to every detail. As subordinate organizations of this committee, there are the Safety Assurance Committee, which monitors efforts to strengthen the safe operation system, confirms progress and achievements thereof, and discusses advice for making neces- sary revisions to measures; and the Ship Standard Specification Committee, which discusses standard specifications for MOL vessels and MOL Ship Management Standards. csr and environment committee Studies and discusses corporate social responsibility (CSR), and matters related to company systems for reducing global environ- mental impact. business reconstruction committee Studies and discusses matters relating to rehabilitation plans for depressed businesses. n functions of Outside directors and reasons for appointment As part of efforts to strengthen corporate governance, MOL appoints outside directors, with the aim of bolstering oversight of the execution of business operations by bringing in an outside perspective to management. MOL has appointed three outside directors: Takeshi Komura, who is President of The Salt Science Research Foundation; Sadayuki Sakakibara, who is Chairman of the Board and Represen- tative Member of the Board of Toray Industries, Inc.; and Masayuki Matsushima, Senior Advisor of The Boston Consulting Group K.K. MOL has adjudged that all three individuals are independent and have neutral positions with no conflicts of interest with the com- pany. The outside directors draw on their individual experience and insight to check the appropriateness of management and the status of execution of business operations from the shareholders’ standpoint. At the same time, they express valuable opinions about management as a whole. In these ways, the outside directors play a major role in enhancing the operation of the Board of Directors. cOrpOrate GOvernance OrGanIZatIOn (as Of June 21, 2013) GeneraL sharehOLders’ MeetInG Elect and appoint/dismiss board of directors [12] Outside directors: 3 Internal directors: 6 Total: 9 Elect and appoint/supervise Submit basic management policies and other issues for discussion executive committee [47] Internal directors and Executive officers: 10 Business audit Accounting audit corporate auditors Internal auditors: 2 Outside auditors: 2 Total: 4 Elect and appoint/dismiss Accounting audit corporate auditor Office accounting auditors Elect and appoint/dismiss Submit to Executive Committee after preliminary deliberations Provide direction on important business issues committees under the executive committee RISE Committee [22], Budget Committee [2], Investment and Finance Committee [37], Operational Safety Committee [3], CSR and Environment Committee [2], Compliance Committee [1], Business Reconstruction Committee Submit report on important business and other issues Provide direction Audit plan, Audit report Communicate and coordi- nate with corporate auditors and independent public accountant executive Officers Director/Executive officers: 6 Executive officers: 18 Total: 24 Divisions/Offices/Branches/Vessels/Group companies Internal audit Office Business audit Accounting audit Numbers in brackets show the number of meetings of the Board of Directors, Executive Committee and their sub-committees during fiscal 2012. The RISE Committee, an organization under the Executive Committee, was called the GEAR UP Committee in fiscal 2012 and met 22 times. 55 name position reason for appointment Takeshi Komura President of The Salt Science Research Foundation Sadayuki Sakakibara Chairman and Representative Member of the Board of Toray Industries, Inc. Masayuki Matsushima Senior Advisor of The Boston Consulting Group K.K. (As of June 21, 2013) MOL adjudged that he has a neutral position with no conflicts of interest with the company, and that he has wide-ranging experience and knowledge for checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspec- tive based on his longtime experience in and knowledge of economic management and policy finance of Japan. MOL adjudged that he has a neutral position with no conflicts of interest with the company, and that he has wide-ranging experience and knowledge for checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspective, with an objective view independent from that of internal executive management, based on his abundant experience and extensive knowl- edge as a corporate executive. MOL adjudged that he has a neutral position with no conflicts of interest with the company, and that he has wide-ranging experience and knowledge for checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspec- tive based on his long-time experience in and knowledge of the financial sector. n functions of Outside corporate auditors and reasons for appointment The Board of Directors has nine members, including three outside directors who are completely independent and have no conflicts of interest with MOL. Likewise, there are four corporate auditors, who are responsible for performing statutory auditing functions, includ- ing two outside corporate auditors who are completely indepen- dent and have no conflicts of interest with MOL. At a time when the auditing systems of corporations are taking on added impor- tance, it goes without saying that the independence of auditors from management and policy execution is assured. Our corporate auditors work closely with the Internal Audit Office and indepen- dent public accountants to assure effective corporate governance. They also work on strengthening corporate governance and com- pliance throughout the group. name position reason for appointment Sumio Iijima Attorney at law, Tokyo Toranomon Law office Hiroyuki Itami Professor and Dean of Tokyo University of Science, Graduate School of Innovation Studies MOL adjudged that he has a neutral position with no conflicts of interest with the company, and that he has wide-ranging experience and knowledge for checking the appro- priateness of management deci- sions and supervising the execution of business operations from the shareholders’ perspective based on his specialist knowledge as an attorney at law. MOL adjudged that he has a neutral position with no conflicts of interest with the company, and that he has wide-ranging experience and knowledge for checking the appro- priateness of management deci- sions and supervising the execution of business operations from the shareholders’ perspective based on his specialist knowledge as a scholar of business administration. (As of June 21, 2013) 56 Director and Corporate auditor Compensation The Board of Directors, including the outside directors, determines compensation for the directors and corporate auditors. Compen- sation paid to directors and corporate auditors in fiscal 2012 is shown in the following table. The company has granted stock options to all directors, exec- utive officers, general managers of divisions and branch offices and managers in similar positions, as well as to presidents of con- solidated subsidiaries, to motivate them to carry out operations for the benefit of shareholders. n compensation for directors and corporate auditors no. of people remuner- ated total remunera- tion (¥ millions) (thousands of u.s.$) 7 2 5 ¥350 $3,721 68 51 723 542 Directors (Excluding outside directors) Corporate auditors (Excluding outside corporate auditors) Outside directors and outside corporate auditors n compensation for Independent public accountants (¥ millions) (thousands of u.s.$) Compensation for auditing services ¥106 $1,127 Compensation for auditing-related services Total 16 170 ¥122 $1,297 Compliance The company is aware of the crucial role that compliance plays in living up to its broad corporate social responsibilities, and that compliance with the letter of the law is at the core of this role. We have established a Compliance Committee, which is headed by a corporate officer appointed by the Executive Commit- tee, and formulated the Compliance Policy to assure strict adher- ence to rules and regulations. General managers of divisions and offices are appointed as Compliance Officers. They are responsible for enforcing compliance regulations and are also required to report to the Compliance Committee Secretariat Office in the event of a compliance breach. The Internal Audit Office, a body that operates independently of the company’s divisions and offices, provides a counseling service. The Internal Audit Office undertakes investigations of breaches and reports the results to the Compli- ance Committee. In addition to the existing counseling service, in fiscal 2011 we established an external compliance advisory service desk, which we entrusted an attorney to run. The company works to assure a proper relationship with its independent public accountants. Compensation paid to indepen- dent public accountants in fiscal 2012 is shown in the table above. Internal Control system Since the fiscal year ended March 2009, the Financial Instruments and Exchange Act has obligated publicly listed companies to prepare a report evaluating their internal controls over financial reporting by management (Internal Control Reporting System) and to have this evaluation audited by auditors outside the company. This internal control reporting system involves management them- selves confirming the effectiveness of the framework for disclosing information such as appropriate and proper financial reporting through methods that visualize and evaluate operations, and an audit by auditors from outside the company. Using the occasion of this system reform, MOL went beyond the scope required of it by law, and is promoting activities to fur- ther enhance MOL Group management effectiveness, efficiency and transparency, namely ensuring the appropriateness of busi- ness operations and the trustworthiness of financial reporting. In fiscal 2012, MOL again assessed the status of the internal controls over financial reporting and the operation thereof, confirm- ing that there were no major flaws in the MOL Group’s internal controls over financial reporting. Going forward, the MOL Group will continue working to enhance its internal control system. Independent Directors/ Corporate auditors Due to partial amendments to the Securities Listing Regulations that came into force in December 2009, publicly listed companies are required to secure independent director(s)/corporate auditor(s) from the standpoint of protecting general investors (Rule 436-2 of the Securities Listing Regulations). An independent director/corpo- rate auditor means an outside director or outside corporate auditor who is unlikely to have a conflict of interest with general investors. Independent directors/corporate auditors are expected to act to protect the interests of general investors. For instance, they are expected to state necessary opinions to ensure the interests of general shareholders are taken into consideration in a situation where a decision is made concerning business operations in the Board of Directors or other decision-making body of a publicly listed company. MOL has designated its three outside directors and two outside corporate auditors as independent directors/corporate auditors, respectively, because there is no concern about a conflict of inter- est with general investors in conformity with the criteria for indepen- dent directors/corporate auditors of listed securities exchanges. Each of these individuals plays a major role in corporate gover- nance by checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspective based on their experience and insight. annual General shareholders’ Meeting MOL aims to hold open General Shareholders’ Meetings. In addi- tion to sending the notice of the general meeting of shareholders out about three weeks before the meeting, MOL avoids dates when many Japanese companies hold their annual meetings so that as many shareholders as possible can attend. MOL has also enabled shareholders to exercise their voting rights by mobile phone and the Internet since the June 2006 annual meeting, in addition to postal voting, so that shareholders who cannot attend the annual meeting can vote on proposals. Furthermore, since the June 2006 annual meeting, MOL has used the electronic voting platform for institutional investors so that proxy voting rights holders can exercise voting rights. Moreover, a summary of questions received about matters reported and pro- posed at the annual meeting is posted on MOL’s website after the conclusion of the meeting in the interest of fair disclosure. accountability MOL believes that timely, full and fair disclosure of corporate and financial information is an important aspect of corporate gover- nance. In addition to being accountable to shareholders and inves- tors by providing information, the company makes every effort possible to reflect their opinions in management. The distinguishing feature of our investor relations activities is that the president takes the lead in their implementation. In fiscal 2012, the president participated in the company’s presentations of quarterly results and attended meetings with domestic and foreign investors. This reflects his conviction that it is the chief executive officer’s responsibility to explain future corporate strategies to investors. The company is also aware of the need for full and fair disclosure to all investors, whether in Japan or overseas. At the same time its quarterly financial results in Japanese are released over the Tokyo Stock Exchange’s TDnet, the company posts them to its website with an accompanying English translation. The Japa- nese and English drafts of presentation materials are also posted on the website. This information is e-mailed on the same day to foreign investors registered with the company. MOL actively disseminates information about management strategy, investment plans, market conditions and other informa- tion through its website. In fiscal 2012, MOL revamped its website to enhance accessibility to necessary information. The company received the 2012 Internet IR Commendation Award from Daiwa Investor Relations Co., Ltd. The responsibility to provide information is not limited to management and financial issues. MOL’s basic stance is to quickly disclose information, even if it is negative such as infor- mation on accidents, to all stakeholders. Furthermore, we hold regular drills for responding to the media in emergencies and are working to strengthen our ability to be able to quickly and prop- erly disclose information. MOL will continue working to raise confidence in its business policies and management through close communication with various stakeholders. 57 RIsk ManaGeMent Fluctuations of Cargo volume, Fleet supply and Freight Rates The global shipping business, like many other industries, is greatly affected by trends in the global economic cycle, and is thus sub- ject to both macroeconomic risk, as well as business risk associ- ated with trends in specific industries. There are a multitude of factors that are subject to change, such as fluctuations in the economies of individual countries, changes in the trade structure, demand for freight space, market conditions, and cargo volumes. Achieving the best performance hinges on coolly analyzing infor- mation so as to continually increase the probability, even if only low, of generating even higher earnings. With this in mind, MOL has adopted a strategy of “diversifying operations to reduce risk” and “raising highly stable profits” by aligning its fleet to match international marine transport demand in the transport of both raw materials and finished goods. In this way, we strive to maximize returns and sustain profit growth. n diversifying Operations to reduce risk MOL operates a “full-line marine transport group.” As of the end of March 2013, our fleet consisted of 958 vessels ranging from dry bulkers and tankers to car carriers and containerships, capable of transporting a diverse range of raw materials and finished goods. Supply and demand trends fluctuate for each type of ship and each type of cargo. While there are some factors that are closely fLeet cOMpOsItIOn (AS OF MARCH 31, 2013) Number of Vessels Deadweight (1,000 DWT) Dry Bulkers 404 42% Tankers 194 20% Dry Bulkers 34,928 51% Tankers 19,037 28% Others 49 5% Containerships 115 12% Car Carriers 127 13% LNG Carriers 69 7% Others 188 0% Containerships 6,370 9% Car Carriers 2,063 3% LNG Carriers 5,310 8% 58 related and affect all of these segments in the same way, there are also many factors which affect demand in each sector differently, so the impact in one sector offsets the impact in another in many cases. By maintaining a diverse, well-balanced assortment of ships, MOL can take advantage of this relationship to minimize risk and maximize return. n raising highly stable profits through the use of Medium- and Long-term contracts and Other Means The company pursues medium- and long-term contracts won based on long-standing relationships of trust with customers. These contracts ensure a stable future cash flow that will help reduce the risk that market fluctuations could have on its results. International marine transportation is increasing even amid lower exports from emerging markets to industrialized nations because of European economic sluggishness. The company aims to conclude contracts that are not largely affected by changes in the external business environment and constitute a stable source of profit. By expanding these contracts from a long-term perspec- tive, MOL will create an even steadier earnings structure. To achieve this objective, one of the options we will look closely at as a matter of priority is M&As in growing sectors which enjoy a rela- tively stable cash flow. exchange Rate Fluctuations Apart from some Japanese clients, with whom MOL has con- cluded transport contracts on a yen-denominated basis, most transactions in the international marine transport business are concluded on a U.S. dollar-denominated basis. Since U.S. dollar- denominated revenue exceeds U.S. dollar-denominated expenses, when the yen strengthens against the U.S. dollar this can have a negative impact on Group earnings. In fiscal 2013, we project that each ¥1-per-dollar change in the yen-U.S. dollar exchange rate will have an impact of approximately ¥2.0 billion on consolidated ordi- nary income. As for changes in the value of the euro, MOL’s euro-denominated income and expenditures are roughly equivalent, as are euro-denominated receivables and payables. Therefore, changes in the euro-yen exchange rate have a limited impact on consoli- dated earnings. Interest Rate Fluctuations MOL depends mainly on the issuance of corporate bonds and funds borrowed from banks and other financial institutions to meet working capital and capital expenditure requirements. Loans are denominated in either yen or U.S. dollars, with funds procured at variable interest rates affected by interest rate fluctuations. As of March 31, 2013, interest-bearing debt totaled ¥1,046.8 billion, and between 50% and 60% of that loan principal is locked in at a fixed interest rate. As a result, an increase of 1 percentage point in inter- est rates on both yen-denominated and U.S. dollar-denominated interest-bearing liabilities would impact annual consolidated ordi- nary income by approximately ¥4.5 billion. Although MOL has benefited from ultra-low interest rates in the aftermath of the Lehman Brothers collapse, the company is taking steps to mitigate the risk of a future interest rate rise. It plans to flexibly adjust the ratio of variable-rate and fixed-rate loans through interest swaps and other means according to changes in financial conditions, taking into consideration the balance between variable- and fixed- rate interest. bunker Price Fluctuations The market price of bunker is generally linked to the price of crude oil, and any increase in bunker prices has a negative impact on earnings for the MOL Group. The Group operates a fleet of approximately 960 vessels, whose annual fuel consumption amounts to around 6 million tons of bunker. The company is able to pass on about 50% of the risk to customers. Therefore, an increase of US$1 per metric ton in the average annual price of bunker would lower earnings by approximately ¥0.18 billion (net of hedging). The International Maritime Organization (IMO) has been con- sidering possible measures to address the problem of sulfur oxide and nitrogen oxide emissions generated by ships. The IMO has already introduced restrictions up to Phase 2 mainly on the sulfur content of bunker used by ships, and the type of electrical genera- tors and shipboard engines that vessels use, in order to reduce nitrogen oxide emissions. It is presently discussing the details of Phase 3 regulations. The introduction of Phase 3 restrictions could have an impact on fuel costs and ship costs. The company intends to take steps over time to pass on these higher costs via freight rate increases and higher charter fees, while watching developments with discussions at the IMO. averaGe bunker prIce (US$/MT) 800 600 400 200 0 99/3 00/3 01/3 02/3 03/3 04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 sensitivity of earnings to exchange rate/Interest rate/ bunker price fluctuations Exchange Rate (¥/US$) Interest Rate (%) A ¥1 appreciation reduces ordinary income by approximately ¥2.0 billion A 1 point rise in both yen- and U.S. dollar- denominated interest-bearing debt reduces ordinary income by approximately ¥4.5 billion Bunker Price (US$/MT) A US$1/MT increase reduces ordinary income by approximately ¥0.18 billion vessel operations MOL operates a fleet of approximately 960 vessels and it is there- fore impossible to ignore the risks related to various incidents that may occur on the high seas. In order to prevent accidents, the company has introduced a variety of measures such as safety standards, a safety management system, comprehensive crew education and training, and new organizations to support safe operations. Furthermore, MOL has arranged sufficient insurance coverage so that its financial results will not be materially impacted, should the company or a third party suffer damages in the unlikely event of an MOL-operated vessel being involved in a collision, sinking, fire or other marine incident. natural Disaster Risk An earthquake or other natural disaster, or an outbreak of an infec- tious disease (hereinafter “disaster or such like”) could affect MOL- operated vessels, offices and facilities, as well as employees, hampering business operations. MOL puts the highest priority on an ensuring the safety of its vessels and company personnel in the event of a disaster or such like. The company has formulated a business continuity plan doc- umenting procedures to enable it to continue providing its core ocean transport services and quickly restore operations in the unlikely event that they are suspended. This business continuity plan establishes organizations and delegates authority for duties relating to maintaining the safe operation of vessels, execution of transportation contracts and charter agreements, financial prepa- ration, securing required personnel and other matters. Further- more, for some years MOL has been conducting regular disaster-preparedness drills at Head Office and outside of the company and other measures. By addressing issues arising from these drills, MOL believes that it has a high state of readiness. Nevertheless, in the event of a disaster or such like in which MOL cannot completely avoid damage, the company’s business perfor- mance may be affected. 59 saFe oPeRatIon Please allow MOL to offer its sincere apologies to customers and other parties concerned for the inconvenience and anxiety caused by the marine incident involving the MOL-operated containership mOL cOmFOrT in June 2013. MOL has been aiming to become the world leader in safe operation and has until now implemented various measures for reinforcing safe operation in terms of ship facilities, seafarers, ship management and our safety culture. Rigorously ensuring safe operation is of the utmost importance for MOL. Aware that this is the starting point for earning the trust and patronage of stakeholders, MOL is working cohe- sively as a group on safe operation as a primary management imperative. n emergency response system MOL continues to strengthen its systems so that it can provide an accurate response in the unlikely event of an emergency. safety Operation supporting center (sOsc) The SOSC is staffed at all times by two marine technical specialists, including an experienced MOL captain, and supports the safe navigation of MOL-operated ves- sels around the clock 365 days a year. The center monitors the position and move- ment of more than 900 MOL Group-affili- ated vessels, providing assistance from the captain’s perspective by supplying informa- tion on abnormal weather and tsunamis and on piracy and terrorism incidents to relevant personnel on the ship and land. At the same time as serving as an information portal supporting the safe operation of MOL ships, the center also functions as a help desk for urgent inquiries from ships regarding safe operation. Since its estab- lishment, the center has helped to steadily reduce the number of incidents involving adverse weather or emergency entry. safe operation Management n safe Operation Management structure MOL has an Operational Safety Commit- tee, which is chaired by the president of MOL. Under this committee are the Safety Assurance Committee and the Ship Stan- dard Specification Committee. The Opera- tional Safety Committee discusses and determines basic policies and measures for ensuring safe operation of vessels through rigorous attention to every detail. The Safety Operations Headquarters, which consists of marine technical and ship management divisions, is responsible for implementing specific measures, with progress overseen by the Safety Assur- ance Committee. The Ship Standard Specification Committee discusses and determines MOL Safety Standards and owned ship maintenance standards from a fail-safe *1 perspective. OrGanIZatIOnaL structure suppOrtInG safe OperatIOn executive committee Operational safety committee safety assurance committee ship standard specification committee safety Operations headquarters Safety Operation Supporting Center (SOSC) • Marine Safety Division • MOL Ship Management Co., Ltd. • Tanker Safety Management Office • MOL LNG Transport Co., Ltd. • Dry Bulk Carrier Supervising Office • Car Carrier Division, Marine Technical Group • MOL Liner Ltd., Liner Fleet Supervising and Marine Operation accident response drills MOL regularly conducts accident response drills that simulate various situa- tions such as an on-board fire or water immersion, or act of piracy or terrorism, so that seafarers can respond swiftly and appropriately in an emergency. Head Office conducts accident response drills twice a year with the cooperation of the Regional Coast Guard Headquarters. The drills involve MOL’s president, other cor- porate officers, representatives of relevant 60 Evacuation drill departments and ship management com- panies, and vessels. Furthermore, MOL Group companies that operate ferries and cruise ships conduct emergency response drills, including evacuation guidance, on a regular basis, as they put the highest prior- ity on ensuring customer safety in an emer- gency. In July 2013, MOL Ferry Co., Ltd. held an evacuation drill on-board a ferry berthed at Oarai Port. This marked the first time in Japan that ordinary customers participated in an evacuation drill. safe operation Measures Efforts to ensure safe operation will never end. True to this statement, MOL continues to implement measures in fiscal 2013. n Making processes for realizing safe Operation visible MOL has introduced objective numerical indicators for mea- suring safety levels, and also set the following numerical targets, including the Four Zeroes. 1. Four Zeroes (an unblemished record in terms of serious marine incidents, oil pollution, fatal accidents and cargo damage) 2. LTIF *2 (Lost Time Injury Frequency): 0.25 or below 3. Operational stoppage time *3: 24 hours/ship or below 4. Operational stoppage accident rate *4: 1.0/ship or below n breaking the chain of errors We continue to make improvements related to both seafarer training and ship facilities to break the chain of errors in which minor factors combine and ulti- mately lead to major maritime accidents. In terms of seafarer training, we are reinforcing our OJT Instructor System *5 on-board ships, and enhancing land-based education and training curriculums and programs such as “Hazard experience” training sessions. These measures are geared towards enhancing the ability of seafarers to perceive danger. In addition, we are working to raise safety awareness among seafarers by collecting information from each vessel in operation on examples of incidents and problems as well as close calls *6 and by using videos, photos and illustrations to appeal to the visual sense of seafarers. In terms of ship facilities, we are working to equip ships with error-resistant equipment. This involves promoting the fail-safe design concept by providing shipyards and equipment manufacturers with feedback from vessels in operation on areas of non- conformance and areas in need of improvement. LOst tIMe InJury frequency (LtIf) 1.8 1.5 1.2 0.9 0.6 0.3 0 2012 average for all industries: 1.59 MOL target: 0.25 or below 0.39 0.42 0.38 0.31 0.24 2008 2009 2010 2011 2012 OperatIOnaL stOppaGe accIdents averaGe tIMe and frequency (Hour/ship) (Number of accidents/ship) 40 30 20 10 0 35.35 22.96 1.04 22.59 19.82 19.04 0.83 0.64 0.66 Operational stoppage accident rate target: 1.00 or below 0.40 2008 2009 2010 2011 2012 2.0 1.5 1.0 0.5 0 Average operational stoppage time (hour/ship) (left scale) Operational stoppage accident rate (accidents/ship) (right scale) In fiscal 2013, MOL will work on three important targets: (1) eradicate work- related accidents causing injury or death, (2) eradicate collisions and groundings, and (3) eradicate machinery trouble result- ing in a dead ship condition (a ship being unable to move under its own power). On-the-job Training (OJT) Instructor System From the standpoint of protecting seafarers, it is the MOL Group’s ultimate goal to eradicate work-related accidents causing death. MOL analyzes the factors and causes behind accidents from various angles and uses the results to make improvements in ship facilities. It also asks employees on land and at sea to discuss examples of serious incidents and prob- lems “as if they are their problem” and to propose preventive measures as part of efforts to prevent accidents. n cooperation for safe Operation The MOL Group works together with ves- sels, shipowners, and ship management companies to ensure the safe operation of all owned and chartered vessels by sharing safety-related information. MOL conducts “Safety Operation Meetings” and “Safety Campaigns” involving vessels, shipowners and ship management companies to deepen understanding of its safety stan- dards and to discuss safety improvements. MOL also inspects vessels to check whether its safety standards are under- stood well and put into effect. If there is a need to make improvements, MOL will take corrective actions, communicating with the vessel, shipowner and ship man- agement company in the process. Glossary *1 fail-safe: Equipment and systems are designed to operate safely at all times, even when trouble occurs due to operator error or malfunction. *2 LtIf: Number of work-related accidents per one million hours worked that resulted in time lost from work of one day or more. Average for all industries (2012) was 1.59; for shipping industry, 1.39; for shipbuilding and repair, 0.77. (Source: 2012 Survey on Industrial Accidents issued by the Ministry of Health, Labour and Welfare) *3 Operational stoppage time: Expresses the amount of ship operational stoppage time due to an accident per ship per year. *4 Operational stoppage accident rate: Expresses the number of accidents that result in ship operational stoppage per ship per year. *5 OJt instructor system: This system involves experienced captains and chief engineers who understand MOL standards of safe operations travelling onboard ships to identify unsafe practices and latent risks only discoverable on the ships in service and order immediate improvements. *6 close calls: Risky incidents that came very close to causing a more serious accident. MOL COMFORT Marine Incident On June 17, 2013, mOL cOmFOrT (an 8000-TEU type containership built in 2008) suffered a crack amidships during inclement weather while under way from Singapore to Jeddah, Saudi Arabia, in the Indian Ocean. This made it impossible for the vessel to continue on under its own power. Subsequently, the vessel fractured into two parts and MOL organized to tow the vessel to rescue the cargo and hull. On June 27, how- ever, the aft part of the containership sank. On July 6, a fire broke out on the fore part while being towed and this section later sank on July 11 with firefighting efforts hampered by adverse weather. As of the end of July 2013, no large-volume leakage of fuel oil and other oil due to this incident had been confirmed. All crew members were safely rescued. Since directly after the incident, MOL has been continuing a thorough investigation to find the cause with the cooperation of the shipbuilder, the classification society and other parties. Because it may take some time to identify the cause of the incident, the company decided to take extra preventive measures for six sister vessels operated by MOL, including strengthening hull structures. 61 CoRPoRate soCIaL ResPonsIbILIty (CsR) MoL’s approach to CsR In our view, CSR means conducting business management that adequately takes into account laws and regulations, social norms, safety and environmental issues, human rights and other consider- ations, and developing together with society sustainably and harmoniously while earning the support and trust of stakeholders, including shareholders, customers, business partners, employees and local communities. csr OvervIew Raise corporate value, contribute to stakeholders, help solve social issues and contribute to society’s sustainable growth trust of stakeholders support of stakeholders business activities csr activities Safe operation; environmental measures; compliance; corporate governance; risk management; accountability; fair trading; respect for human rights; employment, labor, occupational health and safety, health management and employee satisfaction; social contribution activities MOL Group corporate principles The CSR and Environment Committee was established in June 2004 by reorga- nizing the former Environment Committee. This committee works to promote CSR throughout the MOL Group by setting and reviewing annual targets for initiatives related to compliance, corporate gover- nance, accountability, risk management, safe operation, human rights, care for employees and seafarers, social contribu- tions and the environment. the MoL Group basic Procurement Policy As a company that handles part of the supply chain of customers and in order to fulfill the social responsibility of the MOL Group itself, we formulated the MOL Group Basic Procurement Policy in 2012. This clearly documents our CSR activity policy regarding the Group’s procurement activities. To embed this policy in the MOL Group, we work to observe laws and regulations in supply chains and social norms, incorporate consideration for environmental protec- tion in our activities, pursue safety, engage in fair trading and build trust, with the understanding and cooperation of business partners. In this way, we aim to contribute towards the realization of sustainable societies together. In order to fulfill these responsibilities, MOL deliberates on CSR-related policies and measures, primarily through the three committees under the Executive Committee. OrGanIZatIOnaL fraMewOrk fOr csr InItIatIves CSR and Environment Committee Chief Executive Officer (President) Executive Committee Operational Safety Committee Compliance Committee the MOL GrOup basIc prOcureMent pOLIcy the MoL Group procures goods and/or services in accordance with the following basic policy: 1. We comply with applicable laws, regula- tions and social norms, and pay due con- sideration to the protection of the environment. 2. We procure goods and/or services, includ- ing the delivery or execution of such goods and/or services, that meet high safety standards. 3. We conduct fair trade, and endeavor to establish trusting relationships with contractors. We work to make sure that our contractors understand our basic Procurement Policy, with the aim of contributing towards the realization of sustainable societies together. Participating in the un Global Compact CSR activities are broad and, from time to time, the strength and priority of those activities change depending on the operating environment, global circumstances and region where business is being developed. With business activities spread across the globe, MOL believes that building good relationships with various stakeholders worldwide and contributing to the realization of sustainable growth of society are vital as it seeks to realize the ideas set forth in the MOL Group Corporate Principles. In order to contribute to an international framework for realizing these goals, MOL became the first Japanese shipping company to partici- pate in the United Nations (UN) Global Com- pact in 2005. Since then, MOL has worked to support and practice the 10 principles in 4 areas of the UN Global Compact, which shares the same values as MOL’s Rules of Conduct, which were established as a set of guidelines for executives and employees. 62 n 10 principles of the Global compact human Rights PRInCIPLe 1. business should support and respect the protection of interna- tionally proclaimed human rights; and PRInCIPLe 2. Make sure that they are not complicit in human rights abuses. Labour PRInCIPLe 3. businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; PRInCIPLe 4. the elimination of all forms of forced and compulsory labour; PRInCIPLe 5. the effective abolition of child labour; and PRInCIPLe 6. the elimination of discrimination in respect of employment and occupation. environment PRInCIPLe 7. businesses should support a precautionary approach to envi- ronmental challenges; PRInCIPLe 8. undertake initiatives to promote greater environmental responsi- bility; and PRInCIPLe 9. encourage the development and diffusion of environmentally friendly technologies. anti-Corruption PRInCIPLe 10. businesses should work against corruption in all its forms, including extortion and bribery. human Rights MOL aims to be an organization that respects human rights and is rich in diver- sity. To this end, MOL sees human rights education as a core and important activity. While there are many issues surrounding the subject of human rights, MOL aims to foster a workplace environment where all corporate officers and employees share an understanding of the need for mutual respect and can carry out their work with a positive frame of mind. These efforts are designed to eliminate human rights breaches or discrimination caused by mistaken beliefs founded on baseless biases or delusions. n basic stance MOL works to raise and entrench human rights awareness throughout the whole Group by ensuring awareness of the prin- ciples of important international human rights regulations such as the International Covenants on Human Rights. As one effort, MOL is participating in the UN Global Compact and is supporting and practicing universal principles regarding human rights and labor. Furthermore, MOL’s Rules of Conduct state that the company will respect human rights and will not engage in discrimination and harassment. n educational activities Every year, MOL conducts training based on various human rights themes by posi- tion, including new employees. In addi- tion, the company disseminates information about human rights through its intranet to increase employee familiarity with the subject. MOL is also an active member of a human rights awareness group. Insights obtained about human rights are reflected in internal training, and MOL collects “Human Rights Slogans” from MOL and MOL Group employees and their families and gives internal awards to the best entries. environmental Protection n environmental Management systems and certifications MOL has two unique environmental man- agement systems—MOL EMS21 and the MOL Group Environmental Target System. Through these systems we have taken steps to reduce our environmental burden. MOL EMS21: We introduced our environ- mental management system—MOL EMS21—in April 2001. In January 2003, we expanded its scope to all our operated vessels (except charter vessels on con- tracts of one year or less), and acquired internationally recognized ISO 14001 certification. Certificate of ISO 14001, an international standard for environmental management (Certified by DET NORSKE VERITAS (DNV)) MOL Group Environmental Target System: This system applies to MOL’s 53 main Group companies in Japan and 17 overseas affiliates and subsidiaries. It serves as a framework for Group-wide environmental protection activities. MOL Group companies in Japan are working hard on complying with the “green man- agement” environmental certification system promoted by the Japanese Minis- try of Land, Infrastructure, Transport and Tourism. A total of 14 MOL Group compa- nies have earned this certification. n prevention of Global warming and air pollution Although shipping is a more energy effi- cient mode than other modes of transport, vessels burn fossil fuels and inevitably emit carbon dioxide (CO2), which is a cause of global warming, as well as nitrogen oxide (NOx), sulfur oxide (SOx), soot and other emissions, which are linked to acid rain and atmospheric pollution. The MOL Group is fully aware of the effects on air quality associated with its business activi- ties and thus proactively works to reduce the impact on an ongoing basis. Environmental Technologies: MOL is engaged in various research, development and innovation of technologies for ships. (Please refer to our website at the follow- ing URL: http://www.mol.co.jp/ishin/en/) 63 roofs of the gate building, where trailer trucks enter and exit the terminal, and the vehicle wash building. In fiscal 2012, this system generated approximately 236,000 kWh of power, which covered about 37% of the power needs for the control building. In addition, Utoc Corporation and Shosen Koun Co., Ltd. have also introduced hybrid transfer cranes at their container terminals in Tokyo and Kobe, respectively. These cranes consume approximately 40% less fuel than conventional ones. n approaches to Marine environmen- tal and biodiversity protection By rigorously ensuring safe operation, MOL is working to prevent marine pollu- tion caused by marine accidents. At the same time, MOL is taking into consider- ation biodiversity and actively pushing ahead with measures to protect the seas and oceans, which are not only our place of business, but also the shared heritage of everyone on Earth. Double-hull Tankers: We have been adopting double-hull vessels in our tanker fleet to prevent spills of crude oil, petro- leum products and chemicals caused by a grounding or collision of vessels. As a result, our fleet of tankers is 100% double-hulled. Reducing NOx/SOx/Soot/Smoke and Dust: MOL controls NOx emissions through the installation of electronically controlled engines. Regarding SOx, MOL has set a standard of using bunker oil with a maximum sulfur content below the cur- rent 3.5% for general sea areas in the MARPOL Convention. In respect of soot contained in ship exhaust gases, MOL teamed up with Akasaka Diesels Limited to develop a diesel particulate filter (DPF). This DPF has been trialed aboard an MOL Group-operated coastal ferry, where it was shown to remove more than 80% of par- ticulate matter from diesel emissions. Modal Shift: Approximately 20% of Japan’s CO2 emissions are accounted for by the transportation sector. In order to reduce these emissions, the Japanese Ministry of Land, Infrastructure, Transport and Tourism and other concerned agen- cies have set up programs to establish a transportation system with a low environ- mental burden and have promoted the so-called “modal shift” of using rail trans- port, shipping and other low-impact modes of transport. The MOL Group stands ready to do its utmost to facilitate this modal shift by providing Japan’s largest lineup of ferry and coastal shipping services. Eco Terminal: MOL and MOL Group company Utoc Corporation installed one of the largest solar power generation systems in Tokyo at the Tokyo Interna- tional Container Terminal. The system generates 200 kW of power. In 2007, 1,200 solar panels were installed on the Double-hull structure Tokyo International Container Terminal Increasing Transportation Efficiency with Larger Ships and Improved Propulsion: MOL believes that the intro- duction of larger vessels and improve- ment of propulsion are effective measures to fulfill the social responsibility of the shipping industry to meet burgeoning international demand for ocean shipping and, at the same time, to prevent global warming. With this in mind, MOL is con- ducting research and applying those results to vessels. The iron ore carrier BraSiL maru ECO SAILING Thoroughly Adopted: MOL practices an approach we call ECO SAILING to save fuel and reduce environ- mental impact. We rigorously apply the principles of ECO SAILING whenever we operate vessels. Specifically, we 1) decel- erate to the most economical navigation speeds, 2) take advantage of weather and sea condition forecasts, 3) take the optimum trim, 4) select optimum routes, 5) reduce vessels’ wetted surfaces, 6) opti- mize operation and maintenance of main engines, auxiliary equipment and other machinery, 7) develop energy efficient ship designs, and 8) equip vessels with Propel- ler Boss Cap Fins (PBCF*). * PBCF: PBCF efficiently recovers energy loss from the hub vortex generated behind a ship’s propeller. This is an MOL proprietary technology that uses the same number of fins attached to the rear end of the propeller shaft. 64 Caring for the Environment When Scrapping Vessels: Aging vessels must often be scrapped in the interest of safe operation and protection of the marine environment. However, measures for workers’ safety and the environment have been insufficient when scrapping ships in some Asian countries. MOL is working to create inventory lists of hazardous materi- als on ships, ahead of the enforcement of the Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships which was adopted in May 2009. Efforts are led by a task force made up of related divisions in the com- pany that was established in 2010. At the same time, when selling a ship on the assumption that it will be scrapped, we check that the scrapping yard has acquired ISO 14001 certification (or the environmental management equivalent), and uses scrapping methods and proce- dures that are sufficiently safe for the environment and personnel. Responding to Ballast Water Management Convention: Ballast water is discharged when cargo is loaded. It may have an impact on local ecosystems by introducing foreign marine organisms from another location as well as the pres- ervation and sustainable use of biodiver- sity. This potential cross-border transportation of foreign marine organisms in ballast water has been highlighted as an international issue since the late 1980s. As a result, the Ballast Water Management Convention was adopted by the IMO in 2004, and work is proceeding on ratifica- tion ahead of enforcement. We have developed a ballast water purification system and conducted on-board demon- strations in cooperation with manufactur- ers and other concerned parties. In addition, care is exercised to reduce the impact of normal operation of our vessels on the oceans. MOL strictly adheres to all marine pollution treaties, including the International Convention for the Prevention of Pollution from Ships (MARPOL Convention), as well as applica- ble laws and regulations around the world. The company has stringent internal rules to prevent oil discharges and to ensure the proper disposal of lubricating oil and bilge water (which includes oil and other pollutants) to protect the marine environment. Regarding anti-fouling ship bottom paints, MOL has switched to tin-free paints. These are just part of our efforts to help protect biodiversity. social Contribution activities MOL aims to be a company that grows sustainably and harmoniously with society. We therefore carefully consider social issues to tackle, and work to help solve them based on the following three princi- ples. Guided by these principles, we pro- actively undertake social contribution activities that only a shipping company with a global network can. I. Contribute to the UN Millennium Development Goals* as a company growing in step with the global econ- omy and social development. Contribute to protecting biodiversity and preserving nature as a company that impacts the environment to an extent and as a company that does business on the ocean, a rich reposi- tory of living organisms. II. III. Contribute to local communities as a good corporate citizen. * The Millennium Development Goals consist of specific numerical targets to be achieved by 2015 in eight fields, including “achieve universal primary education” and “reduce child mortality.” n somalia support project Frequent incidents of piracy in the Indian Ocean off Somalia pose a serious threat to global shipping. MOL and six other com- panies* reached an agreement to jointly address the need to stabilize Somalia. They announced plans to provide US$1 million in funding to the Somalia Support Project, run by the United Nations Development Programme (UNDP). Saudi Arabia Persian Gulf Gulf of Aden Arabian Sea Somalia Piracy-prone Area Indian Ocean This industry contribution will support long-term job creation and skill develop- ment for the younger generation in Somalia. By creating opportunities for stable employment, the program will contribute to safe operation in the seas off Somalia. * Shell, BP, Maersk, Stena, Nippon Yusen Kabushiki Kaisha (NYK), Kawasaki Kisen Kaisha, Ltd. (K Line) and MOL n daycare center Opened in the philippines In November 2012, MOL opened a day- care center in Navotas in the Philippines. This facility will provide education for pre-school children, health checkups, meals for underprivileged people, and other services. This program was launched based on a proposal from Philippines-based company Magsaysay MOL Marine, Inc., following the collection of “Social Contribution Activity Proposals” from MOL Group companies in fiscal 2010. More than half of MOL’s seafarers come from the Philippines, and we believe that this daycare center will deepen ties with the country. 65 third-Party evaluations n MOL selected for continuing Inclu- sion in dow Jones sustainability Indexes (dJsI) Since 2003, MOL has been included in the DJSI, a designation reserved for compa- nies capable of sustaining growth over the long term while maintaining excellence in environmental, social, and investor rela- tions programs. In September 2012, MOL was selected for continuing inclusion in the DJSI. n MOL selected for continuing Inclu- sion in the ftse4Good Global Index FTSE is a global index company owned by the London Stock Exchange. Since 2003, FTSE has included MOL in one of its major indices, the FTSE4Good Global Index, which is a socially responsible investment index. In April 2013, MOL was selected for continuing inclusion in the index. n MOL selected for continuing Inclusion in the Morningstar socially responsible Investment Index (Ms-srI) The MS-SRI, Japan’s first socially responsible investment index, is based on the stock prices of 150 of Japan’s listed companies that have been selected by Morningstar Japan K.K. for superior social responsibility. MOL has been included in the MS-SRI since 2003. In January 2013, MOL was selected for continuing inclusion in the index. environmental and social Report MOL’s approach to CSR and environmental issues is discussed in detail in our Environmental and Social Report. urL: http://www.mol.co.jp/csr-e/ MoL’s environmental technologies Senpaku iSHiN With business activities spread across the globe, protecting the global environment is included as one of MOL’s top priorities, along- side safe operation, in the MOL Group Corporate Principles. The Senpaku iSHiN project, our concept for next-generation vessels launched in September 2009, is a ground-breaking initiative that helps protect the environment in a substantive way by reducing carbon dioxide emissions using feasible technologies. Previously, MOL announced concepts for iSHiN-i, iSHiN-ii and iSHiN-iii as a series of next-generation vessels. In June 2012, MOL took delivery of the emeraLd ace, a new car carrier equipped with a hybrid electric power supply system, taking a major step toward realizing the company’s iSHiN-i image of future car carriers. MOL will continue to work actively to develop technolo- gies for reducing the environmental burden of ships and operations. Other next-Generation vessels ISHIN-II ferry that uses LnG as fuel features • Use of LNG as fuel: By using liquefied natural gas (LNG) as fuel, the vessel has cleaner exhaust gases and greatly reduces CO2 emissions. • Use of shore power supply system: While in port and at berth, the ship uses electricity supplied from shore and rechargeable batteries to achieve zero emissions • Emphasis on comfort • CO2 reduction: 50% ISHIN-I hybrid car carrier EMERALD ACE was delivered ISHIN-III very Large Ore carrier with high-efficiency waste heat energy recovery system features • Waste heat energy recovery to assist propulsion • Employs technologies to reduce CO2 emissions even at low speeds, as well as during normal operation • CO2 reduction: 30% details of the component technologies can be found on the Senpaku ISHIN section of MOL’s website http://www.mol.co.jp/ishin/en/ 66 Financial section Contents 68 ManaGeMent’s DIsCussIon anD anaLysIs 72 11-yeaR suMMaRy 74 ConsoLIDateD baLanCe sheets 76 ConsoLIDateD stateMents oF oPeRatIons anD ConsoLIDateD stateMents oF CoMPRehensIve InCoMe 77 ConsoLIDateD stateMents oF ChanGes In net assets 78 ConsoLIDateD stateMents oF Cash FLoWs 79 notes to ConsoLIDateD FInanCIaL stateMents 105 InDePenDent auDItoR’s RePoRt 67 ManaGeMent’s DIsCussIon anD anaLysIs MasahIrO tanabe Managing Executive Officer Continuing to Invest in Promising Projects While strengthening our Financial base in a Difficult business environment In fiscal 2011, MOL had to contend with a drop in cargo demand caused by the Great East Japan Earth- quake, the flooding in Thailand and other factors. In fiscal 2012, the operating environment remained just as difficult as ever for the maritime transport industry but for different reasons. While there were no acts of nature that severely impacted cargo demand in fiscal 2012, the industry faced macroeconomic head- winds in the form of the persistent European sovereign debt problem, and the strong yen, which hit ¥75 to the U.S. dollar at one point. In addition, a supply glut of vessels depressed market conditions further. Compared to other Japanese marine transport companies, MOL has a high free vessel *1 ratio in its *1 free vessel: So-called free dry bulker and tanker fleets. As a result, MOL was hit hard by the slump in market conditions in fiscal 2012, posting a consolidated ordinary loss of ¥28.5 billion, even larger than the ¥24.3 billion loss in fiscal 2011, which had been the largest ever loss since the company’s founding. Under these circumstances, MOL moved to overhaul the dry bulkers business, one of the main rea- sons for the loss. MOL executed Business Structural Reforms (BSR) that entailed moving the sales and operations bases of free vessels to Singapore, a hub for the dry bulker business and for cargo owners and marine transport-related companies. This caused MOL to record ¥101.5 billion in extraordinary losses, mainly for losses on the assignment of charter contracts to Singapore subsidiaries. As a result of reversing deferred tax assets simultaneously, MOL recorded a large consolidated net loss of ¥178.8 billion for fiscal 2012. To our regret, MOL recorded huge losses in fiscal 2011 and 2012, causing considerable concern to shareholders. However, free dry bulker vessels, which were the main cause of these losses and for which we executed the BSR, were also a main driving force for the company’s rapid growth in the past, con- tributing handsomely to the build-up of shareholders’ equity, the robust financial base which made the reforms possible. Even amid the difficult operating environment, MOL chalked up some noteworthy achievements, which will contribute steadily to highly stable profits going forward. For instance, MOL secured new long-term contracts regarding six LNG carriers for China Petroleum & Chemical Corporation, known as “SINOPEC” following the fixture of four LNG carriers for the Papua New Guinea/Australia–China LNG Project (PNG/ Australia LNG Project) *2 led by ExxonMobil. And MOL successively secured long-term contracts for five vessels with Japanese electricity and gas utilities, including for two vessels signed in fiscal 2013. Another highlight concerns FPSO *3 in offshore businesses, which MOL entered for the first time in 2010; MOL was chosen to take part in its third FPSO project in fiscal 2012. Importantly, MOL has clear prospects on fundrais- ing for these projects, using project finance *4 or corporate finance *5 depending on the nature of the project. Although correction of the yen’s excessive appreciation has brightened the operating environment for the Japanese marine transport industry, MOL expects the recent challenging conditions to linger in fiscal 2013, with the supply glut of vessels looking set to weigh on the industry for the time being. Even under such circumstances, we expect the dry bulker fleet, which has now regained its cost competitiveness thanks to the BSR, to contribute to our earnings. With these and other earnings, MOL is determined to work to improve its financial position, which was hurt in fiscal 2011 and fiscal 2012, while surmounting the difficult conditions without neglecting to make investments for the future. 68 vessels comprise ships contracted at spot rates or on contracts of less than one year. As a result, these vessels are exposed to changing market conditions. *2 pnG/australia LnG project: This project is a joint venture between MOL and Chinese partners, to transport LNG from Papua New Guinea and Australia to China under long-term con- tracts. MOL has ordered four new LNG carriers from Hudong to be used in this project, and the first completed vessel is due to be delivered in early 2015. *3 fpsO: Floating Production, Storage and Offloading System *4 project finance: A method of raising funds, based on projected cash flows from a project, and using a ship as collateral, without the necessity for MOL as a shareholder to guarantee the obligation. This type of financial arrangement does not affect the company’s fundraising capability. *5 corporate finance: A method of raising funds where the funds for repaying borrowings are based on the business profits of MOL as a shareholder, and MOL guarantees the obligation. Cash Flows and Financial Indicators MOL generated only ¥5.0 billion in operating cash flows in fiscal 2011, but these recovered to ¥78.9 billion in fiscal 2012, partly reflecting a decrease in income tax payments. On the other hand, investing activities used net cash of ¥104.2 billion, ¥30.0 billion less than in fiscal 2011. This meant that free cash flows *6 in fiscal 2012 were negative ¥25.2 billion. During fiscal 2012, MOL actively raised funds, including issuing domestic straight bonds totaling ¥55.0 billion *7, in order to intentionally build up cash on hand to be prepared for any unexpected difficulties in the market for raising funds due to the protracted slump in shipping market conditions and the drawn-out European sovereign debt problem. As a result, as of March 31, 2013, interest-bearing debt totaled ¥1,046.8 billion, ¥177.2 billion more than at March 31, 2012. On the other hand, shareholders’ equity dropped sharply because of the ¥178.8 billion net loss, which dragged the equity ratio, once an indicator where MOL surpassed other Japanese shipping com- panies, down to 25%. Additionally, the gearing ratio *8 worsened to 196%. As was mentioned earlier, this partly reflected MOL’s intentional raising of more funds than needed in fiscal 2012. Net interest- bearing debt, interest-bearing debt less cash and cash equivalents, rose by ¥59.4 billion to ¥846.2 billion, meaning the net gearing ratio *9 only increased to 158%. In terms of investing cash flows in fiscal 2013, MOL expects investments in traditional types of ves- sels, such as dry bulkers, tankers, car carriers, and containerships, to be limited to around half the amount invested at the peak. However, MOL still projects that investing activities in fiscal 2013 will use net cash of ¥165.0 billion, ¥60.0 billion more than in fiscal 2012, due to the demand for funds while FPSO and LNG carriers to be delivered from fiscal 2015 are built, as well as due to instantaneous invest- ments not seen in normal years, namely, investments by our subsidiary Daibiru in the construction of new buildings, and investments in overseas container terminals. The funds for these investments will be raised through off-balance sheet techniques where possible, as MOL works to prevent an unnecessary increase in interest-bearing debt. *6 free cash flows: Operating cash flows – Investing cash flows *7 domestic straight bonds totaling ¥55.0 billion: MOL ¥45.0 billion and Daibiru Corporation ¥10.0 billion *8 Gearing ratio: Interest-bearing debt / Shareholders’ equity *9 net gearing ratio: (Interest- bearing debt – cash and cash equivalents) / Shareholders’ equity Cash Management, Financial Ratings and Fund-Raising MOL’s financial indicators, namely the gear- credIt ratInGs (As of July 2013) ing ratio and equity ratio, worsened as a result of the company’s lackluster perfor- mance and it was downgraded by credit rating agencies, losing its much-prized JCR R&I status as having the highest ratings within Moody’s the marine transport industry. Credit Ratings A A– Baa3 MOL has for many years exchanged information with credit rating agencies. In order to prevent fur- ther ratings downgrades, in addition to using off-balance sheet financing and project finance, MOL intends to divest some idle assets and investment securities, something it has not actively done in the past, considering the ongoing recovery in real estate and stock markets, while also focusing on improv- ing its financial position by building up earnings. That said, MOL is also determined to conduct financial management so there are no restrictions in terms of its financial position on making investments that are necessary for expanding highly stable profits derived from medium- to long-term contracts. These invest- ments will not be limited to the offshore businesses and the LNG carrier business. Because MOL holds much more cash and cash equivalents than it would have in a typical year, in fiscal 2013, the company plans to use this cash on hand in combination with normal borrowing and bond issuance to cover fund- ing needs, rather than use capital fund-raising, as long as there is no large demand for funds for large- scale M&As or investments in new fields. MOL will also continue enhancing its cash management system in Japan and overseas in fiscal 2013. MOL is striving for even greater capital efficiency so that surplus funds do not accumulate at local subsidiaries, including in Singapore where MOL transferred the bulk carrier business, and the Netherlands where finance subsidiaries are headquartered. 69 MOL straIGht bOnd Issuance (As of the end of March 2013) Straight bonds No. 10 Straight bonds No. 11 Straight bonds No. 12 Straight bonds No. 13 Straight bonds No. 14 Straight bonds No. 15 Straight bonds No. 16 Straight bonds No. 17 Straight bonds No. 18 Date of Issue Years Interest Rate Total Amount of Issue Outstanding 2008.12.19 2009.5.27 2009.5.27 2009.12.17 2011.6.21 2011.6.21 2012.7.12 2012.7.12 2012.7.12 5 5 10 7 5 10 3 5 10 1.43% 1.28% 2.00% 1.11% 0.57% 1.36% 0.30% 0.46% 1.14% ¥15.0 billion ¥15.0 billion ¥30.0 billion ¥30.0 billion ¥20.0 billion ¥18.5 billion ¥20.0 billion ¥20.0 billion ¥10.0 billion ¥10.0 billion ¥20.0 billion ¥20.0 billion ¥15.0 billion ¥15.0 billion ¥20.0 billion ¥20.0 billion ¥10.0 billion ¥10.0 billion Pension Management Policy and Response to new Pension accounting In fiscal 2010, MOL shifted to a defined benefit corporate pension plan and lowered the assumed rate of interest to 2.0%. Along with this move, MOL changed its policy from investing in four traditional asset classes to investing mainly in bonds which pay comparatively stable returns. Regarding pension accounting changes, from fiscal 2013, MOL will be required to immediately rec- ognize on the balance sheet unrecognized actuarial differences *10 that have been off the balance sheet until now, due to revisions to accounting standards for retirement benefits. The MOL Group’s unrecog- nized actuarial differences at the end of fiscal 2012 were ¥0.7 billion on a consolidated basis, so this would have had only a negligible impact on shareholders’ equity. Furthermore, the ratio of plan assets to pension liabilities on a consolidated basis at the end of fiscal 2012 saw a ¥3.4 billion excess, meaning MOL has a sound position. tonnage tax system The “tonnage tax” system is a standardized tax system that is utilized in the global marine transport industry. Japanese companies were able to apply the system from fiscal 2009, which MOL has duly done. However, because the system applies only to Japanese-flagged vessels, meaning there are restrictions, MOL and other Japanese shipping companies have urged the government through the Japanese Shipowners’ Association to create a more flexible system similar to foreign countries. As a result, from fiscal 2013, the system will be extended to include some foreign-flagged vessels. MOL has obtained certification for applying this new system and will do so from fiscal 2013. As of March 31, 2013, MOL had 36 ships to which the system applied and plans to progressively increase the number of eligi- ble vessels going forward. MOL will work to improve cash flows by applying this tax system and at the same time continue to urge the government on a number of fronts to make the system even more flexible. *10 unrecognized actuarial differences: The difference between the expected return on plan assets and the actual return, and the difference arising from divergence between actuarial assumptions and actual results when calculating retirement benefit obligations, are defined as actuarial differ- ences. These differences are amortized over a certain number of years and recognized as expenses (or income). The portion still to be recognized as an expense (or income) of these actuarial differences is what is called unrecognized actuarial differences. Until now, these have not been recognized on the balance sheet. 70 OrdInary IncOMe (LOss)/net IncOMe (LOss) (¥ billions) cash fLOws (¥ billions) 300 200 100 0 –100 –200 08/3 09/3 10/3 11/3 12/3 13/3 300 150 0 –150 –300 08/3 09/3 10/3 11/3 12/3 13/3 Ordinary Income (Loss) Net Income (Loss) Cash flows from operating activities Cash flows from investing activities Free cash flows Interest-bearInG debt/sharehOLders’ equIty (¥ billions) GearInG ratIO/equIty ratIO (%) 1,200 1,000 800 600 400 200 0 08/3 09/3 10/3 11/3 12/3 13/3 200 150 100 50 0 08/3 09/3 10/3 11/3 12/3 13/3 Interest-bearing Debt Shareholders’ Equity* * “Shareholders’ equity” in this section com- prises the total of owners’ equity and accu- mulated other comprehensive income (loss). Gearing ratio (left scale) Equity ratio (right scale) capItaL expendIture* (¥ billions) 300 200 100 0 08/3 09/3 10/3 11/3 12/3 13/3 * Capital expenditure is the actual amount calculated by deducting proceeds from the sale of vessels when delivered from “Tangible/intangible fixed assets increased” contained in the annual securities report. 40 35 30 25 20 71 11-year Summary Mitsui O.S.K. Lines, Ltd. Years ended March 31 For the year: 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 Millions of yen Shipping and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,509,194 ¥1,435,221 ¥1,543,661 ¥1,347,965 ¥1,865,802 ¥1,945,697 ¥1,568,435 ¥1,366,725 ¥1,173,332 ¥ 997,260 ¥ 910,288 $16,046,720 Shipping and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,432,014 1,368,795 1,328,960 1,228,479 1,564,486 1,544,109 1,300,038 1,101,459 917,149 824,902 787,540 15,226,093 Selling, general and administrative expenses . . . . . . . . . . . . . . . 92,946 90,886 91,300 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,766) (24,460) 123,401 Equity in earnings (losses) of unconsolidated subsidiaries and affiliated companies, net . . . . . . . . . . . . . . . . . . . . . . . . . . (4,936) 3,300 8,174 Ordinary income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,568) (24,320) 121,622 Income (Loss) before income taxes and minority interests . . . . . . (137,939) (33,516) 95,367 Income taxes, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes, deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,325) (24,799) (4,784) (9,546) (36,431) 20,814 (3,761) 2,797 (3,456) 98,547 20,939 5,363 24,235 27,776 (8,078) (3,764) (3,212) 104,105 110,303 100,324 92,273 84,388 197,211 291,285 168,073 172,993 171,795 16,000 18,199 16,171 16,817 11,764 204,511 302,219 182,488 176,503 174,979 197,732 318,202 197,854 188,290 155,057 80,232 92,126 6,613 90,556 89,776 77,392 45,356 3,387 33,405 25,114 (65,074) (115,183) (63,042) (61,200) (52,587) (35,346) (10,872) (638) (5,032) (5,694) (7,004) (7,468) (6,404) (7,570) (5,788) (1,205) (3,004) 2,152 (1,191) 1,435 (967) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (178,847) (26,009) 58,277 12,722 126,988 190,321 120,940 113,732 98,261 55,391 14,710 (1,901,616) At year-end: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 514,246 425,725 386,936 344,444 352,030 428,598 506,078 405,474 340,355 299,835 299,544 289,645 322,851 374,269 355,185 440,910 528,390 482,810 433,023 429,695 398,091 423,838 Net vessels, property and equipment . . . . . . . . . . . . . . . . . . . . . 1,303,967 1,293,803 1,257,823 1,209,176 1,106,746 1,047,825 847,660 769,902 665,320 477,621 569,234 13,864,615 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164,611 1,946,162 1,868,741 1,861,312 1,807,080 1,900,551 1,639,940 1,470,824 1,232,252 1,000,206 1,046,612 23,015,534 Long-term debt due after one year . . . . . . . . . . . . . . . . . . . . . . . Net assets/Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 861,728 619,493 447,830 739,188 559,541 594,711 499,193 459,280 398,534 399,617 340,598 311,021 395,589 717,909 740,247 735,702 695,022 751,652 620,989 424,461 298,258 221,535 164,790 629,667 664,645 616,736 623,626 536,096 375,443 275,689 182,143 101,991 56,469 Amounts per share of common stock: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(149.57) ¥ (21.76) ¥ 48.75 ¥ 10.63 ¥106.13 ¥159.14 ¥101.20 ¥ 94.98 ¥ 81.99 ¥ 46.14 ¥ 12.16 $(1.590) Net assets/Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 447.76 533.27 Cash dividends applicable to the year . . . . . . . . . . . . . . . . . . . . . – 5.00 552.83 10.00 551.70 3.00 567.74 31.00 459.55 20.00 354.01 18.00 248.40 16.00 185.06 11.00 137.44 5.00 4.761 – Yen 521.23 31.00 Thousands of U.S. dollars 2013 988,261 (167,634) (52,483) (303,753) (1,466,656) (120,415) (263,679) (50,866) 5,467,793 4,526,582 9,162,446 6,586,847 4,761,616 U.S. dollars (Translation of foreign currencies) The Japanese yen amounts for 2013 have been translated into U.S. dollars using the prevailing exchange rate at March 31, 2013, which was ¥94.05 to U.S. $1.00, solely for the convenience of readers. (The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.) (Presentation of net assets in the balance sheet) Effective from the year ended March 31, 2007, the Company adopted the new accounting standard for presentation of net assets in the balance sheet and related guidance (ASBJ Statement No. 5, “Accounting Standard for Presentation of Net Assets in the Balance Sheet” issued by the Accounting Standards Board of Japan on December 9, 2005) and Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet (ASBJ Guidance No. 8 issued by the Accounting Standards Board of Japan on December 9, 2005). Net assets are comprised of shareholders’ equity as defined up to the year ended March 31, 2006, minority interests, share subscription rights and unrealized gains (losses) on hedging derivatives, net of tax. (Ordinary income (loss)) Ordinary income (loss) is calculated by adjusting operating income for gains on management of surplus funds (interest income, etc.) and the cost of raising funds (interest expense, etc.). 72 2013 2012 2011 2010 Millions of yen 2009 2008 2007 2006 2005 2004 2003 Thousands of U.S. dollars 2013 Shipping and other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥1,509,194 ¥1,435,221 ¥1,543,661 ¥1,347,965 ¥1,865,802 ¥1,945,697 ¥1,568,435 ¥1,366,725 ¥1,173,332 ¥ 997,260 ¥ 910,288 $16,046,720 Shipping and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,432,014 1,368,795 1,328,960 1,228,479 1,564,486 1,544,109 1,300,038 1,101,459 917,149 824,902 787,540 15,226,093 Selling, general and administrative expenses . . . . . . . . . . . . . . . 92,946 90,886 91,300 104,105 110,303 100,324 92,273 84,388 Operating income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,766) (24,460) 123,401 197,211 291,285 168,073 172,993 171,795 Equity in earnings (losses) of unconsolidated subsidiaries and affiliated companies, net . . . . . . . . . . . . . . . . . . . . . . . . . . (4,936) 3,300 8,174 16,000 18,199 16,171 16,817 11,764 Ordinary income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (28,568) (24,320) 121,622 204,511 302,219 182,488 176,503 174,979 Income (Loss) before income taxes and minority interests . . . . . . (137,939) (33,516) 95,367 197,732 318,202 197,854 188,290 155,057 80,232 92,126 6,613 90,556 89,776 77,392 45,356 3,387 33,405 25,114 Income taxes, current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,546) (36,431) (65,074) (115,183) (63,042) (61,200) (52,587) (35,346) (10,872) Income taxes, deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,814 (3,761) 2,797 (3,456) (638) (5,032) (5,694) (7,004) (7,468) (6,404) (7,570) (5,788) (1,205) (3,004) 2,152 (1,191) 1,435 (967) 98,547 20,939 5,363 24,235 27,776 (8,078) (3,764) (3,212) 988,261 (167,634) (52,483) (303,753) (1,466,656) (120,415) (263,679) (50,866) Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (178,847) (26,009) 58,277 12,722 126,988 190,321 120,940 113,732 98,261 55,391 14,710 (1,901,616) For the year: At year-end: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 386,936 344,444 352,030 428,598 506,078 405,474 340,355 299,835 299,544 289,645 Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322,851 374,269 355,185 440,910 528,390 482,810 433,023 429,695 398,091 423,838 5,467,793 4,526,582 Net vessels, property and equipment . . . . . . . . . . . . . . . . . . . . . 1,303,967 1,293,803 1,257,823 1,209,176 1,106,746 1,047,825 847,660 769,902 665,320 477,621 569,234 13,864,615 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,164,611 1,946,162 1,868,741 1,861,312 1,807,080 1,900,551 1,639,940 1,470,824 1,232,252 1,000,206 1,046,612 23,015,534 Long-term debt due after one year . . . . . . . . . . . . . . . . . . . . . . . 739,188 559,541 594,711 499,193 459,280 398,534 399,617 340,598 311,021 395,589 Net assets/Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 717,909 740,247 735,702 695,022 751,652 620,989 424,461 298,258 221,535 164,790 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 629,667 664,645 616,736 623,626 536,096 375,443 275,689 182,143 101,991 56,469 Amounts per share of common stock: Yen 9,162,446 6,586,847 4,761,616 U.S. dollars Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥(149.57) ¥ (21.76) ¥ 48.75 ¥ 10.63 ¥106.13 ¥159.14 ¥101.20 ¥ 94.98 ¥ 81.99 ¥ 46.14 ¥ 12.16 $(1.590) Net assets/Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . 447.76 533.27 Cash dividends applicable to the year . . . . . . . . . . . . . . . . . . . . . – 5.00 552.83 10.00 551.70 3.00 521.23 31.00 567.74 31.00 459.55 20.00 354.01 18.00 248.40 16.00 185.06 11.00 137.44 5.00 4.761 – (11,325) (24,799) (4,784) 514,246 425,725 861,728 619,493 447,830 (Translation of foreign currencies) The Japanese yen amounts for 2013 have been translated into U.S. dollars using the prevailing exchange rate at March 31, 2013, which was ¥94.05 to U.S. $1.00, solely for the convenience of readers. (The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange.) (Presentation of net assets in the balance sheet) Effective from the year ended March 31, 2007, the Company adopted the new accounting standard for presentation of net assets in the balance sheet and related guidance (ASBJ Statement No. 5, “Accounting Standard for Presentation of Net Assets in the Balance Sheet” issued by the Accounting Standards Board of Japan on December 9, 2005) and Guidance on Accounting Standard for Presentation of Net Assets in the Balance Sheet (ASBJ Guidance No. 8 issued by the Accounting Standards Board of Japan on December 9, 2005). Net assets are comprised of shareholders’ equity as defined up to the year ended March 31, 2006, minority interests, share subscription rights and unrealized gains (losses) on hedging derivatives, net of tax. (Ordinary income (loss)) (interest expense, etc.). Ordinary income (loss) is calculated by adjusting operating income for gains on management of surplus funds (interest income, etc.) and the cost of raising funds 73 ConSolidated BalanCe SheetS Mitsui O.S.K. Lines, Ltd. March 31, 2013 and 2012 ASSETS Current assets: Millions of yen 2013 2012 Thousands of U.S. dollars (Note 1) 2013 Cash and cash equivalents (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketable securities (Notes 3 and 4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade receivables (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories (Note 5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred and prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets (Note 15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ 200,636 2,938 145,408 (590) 59,437 56,274 1,908 48,235 514,246 ¥ 82,837 23 130,922 (401) 54,336 53,744 4,595 60,880 386,936 $ 2,133,291 31,239 1,546,071 (6,273) 631,972 598,341 20,287 512,865 5,467,793 Vessels, property and equipment (Notes 7 and 13): Vessels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and structures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment, mainly containers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vessels and other property under construction. . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net vessels, property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,386,355 273,946 65,544 214,615 109,917 2,050,377 (746,410) 1,303,967 1,354,315 252,043 61,315 215,959 116,724 2,000,356 (706,553) 1,293,803 14,740,617 2,912,770 696,905 2,281,925 1,168,708 21,800,925 (7,936,310) 13,864,615 Investments and other assets: Investment securities (Notes 3, 4 and 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investments in and advances to unconsolidated subsidiaries and affiliated companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term loans receivable (Note 3). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible fixed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax assets (Note 15). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103,756 93,806 1,103,200 91,093 23,117 22,929 4,034 101,469 79,877 19,166 16,194 11,692 44,688 968,559 245,795 243,796 42,892 1,078,884 3,683,126 $23,015,534 Total investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346,398 ¥2,164,611 265,423 ¥1,946,162 See accompanying notes. 74 Millions of yen 2013 2012 Thousands of U.S. dollars (Note 1) 2013 LIABILITIES AND NET ASSETS Current liabilities: Short-term loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total short-term debt (Notes 3 and 7). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term bank loans due within one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds due within one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term debt due within one year (Notes 3 and 7). . . . . . . . . . . . . . . . . Trade payables (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advances received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current liabilities: Long-term bank loans due after one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonds due after one year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total long-term debt due after one year (Notes 3 and 7). . . . . . . . . . . . . . . . . . Employees’ severance and retirement benefits (Note 16) . . . . . . . . . . . . . . . . . Directors’ and corporate auditors’ retirement benefits . . . . . . . . . . . . . . . . . . . Reserve for periodic drydocking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities (Note 15) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and contingent liabilities (Note 8) Net assets (Note 9): Owners’ equity Common stock; ¥ 49,250 2,000 51,250 88,296 25,000 113,296 142,585 26,661 7,048 1,118 83,767 425,725 648,228 213,500 861,728 13,472 2,028 14,758 71,132 156,275 1,119,393 1,545,118 ¥ 38,751 5,000 43,751 62,261 4,191 66,452 133,600 19,809 6,112 902 52,225 322,851 552,157 187,031 739,188 13,766 2,160 14,058 18,733 117,497 905,402 1,228,253 Authorized —3,154,000,000 shares Issued —1,206,286,115 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total owners’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss Unrealized holding gains on available-for-sale securities, net of tax. . . . . . . . . . Unrealized losses on hedging derivatives, net of tax . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . Share subscription rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities and net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,400 44,483 447,830 (6,998) 550,715 24,753 (196) (39,849) (15,292) 2,115 81,955 619,493 ¥2,164,611 65,400 44,487 629,667 (7,152) 732,402 16,888 (54,936) (56,932) (94,980) 2,006 78,481 717,909 ¥1,946,162 $ 523,658 21,265 544,923 938,820 265,816 1,204,636 1,516,055 283,477 74,939 11,887 890,665 4,526,582 6,892,377 2,270,069 9,162,446 143,243 21,563 156,917 756,321 1,661,615 11,902,105 16,428,687 695,375 472,972 4,761,616 (74,407) 5,855,556 263,190 (2,084) (423,700) (162,594) 22,488 871,397 6,586,847 $23,015,534 75 ConSolidated StatementS of operationS and ConSolidated StatementS of ComprehenSive inCome Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2013 and 2012 (Consolidated Statements of Operations) Shipping and other revenues (Note 14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shipping and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . Operating loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expenses): Interest and dividend income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in earnings (losses) of affiliated companies, net . . . . . . . . . . . . . . . . . . . Others, net (Notes 10 and 11) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before income taxes and minority interests . . . . . . . . . . . . . . . . . . . . . Income taxes (Note 15): Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss before minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Millions of yen 2013 ¥1,509,194 1,432,014 77,180 92,946 (15,766) 2012 ¥1,435,221 1,368,795 66,426 90,886 (24,460) 5,166 (13,021) (4,936) (109,382) (122,173) (137,939) (11,325) (24,799) (174,063) (4,784) 7,959 (11,511) 3,300 (8,804) (9,056) (33,516) (9,546) 20,814 (22,248) (3,761) Thousands of U.S. dollars (Note 1) 2013 $16,046,720 15,226,093 820,627 988,261 (167,634) 54,928 (138,447) (52,483) (1,163,020) (1,299,022) (1,466,656) (120,415) (263,679) (1,850,750) (50,866) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ¥ (178,847) ¥ (26,009) $ (1,901,616) (Consolidated Statements of Comprehensive Income) Loss before minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (Note 20): Unrealized holding gains on available-for-sale securities, net of tax. . . . . . . . . . Unrealized gains on hedging derivatives, net of tax. . . . . . . . . . . . . . . . . . . . . . Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share of other comprehensive income (loss) of associates accounted for using equity method. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Comprehensive loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Millions of yen 2013 ¥(174,063) 2012 ¥(22,248) Thousands of U.S. dollars (Note 1) 2013 $(1,850,750) 9,093 56,413 14,909 1,104 81,519 ¥ (92,544) 2,504 18,731 (1,303) (10,051) 9,881 ¥(12,367) 96,683 599,820 158,522 11,738 866,763 $ (983,987) Comprehensive income (loss) Comprehensive loss attributable to owners of the parent. . . . . . . . . . . . . . . . . . . Comprehensive income attributable to minority interests . . . . . . . . . . . . . . . . . . . ¥ (99,159) 6,615 ¥(14,404) 2,037 $(1,054,321) 70,334 (Amounts per share of common stock) Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted net income (Note 2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends applicable to the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . See accompanying notes. Yen ¥(149.57) – – ¥(21.76) – 5.00 U.S. dollars (Note 1) $(1.590) – – 76 Consolidated statements of Changes in net assets Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2013 and 2012 Common stock Capital surplus Retained earnings Treasury stock, at cost Millions of yen Unrealized holding gains on available- for-sale securities, net of tax Unrealized losses on hedging derivatives, net of tax Foreign currency translation adjustments Share subscription rights Minority interests Total net assets Balance at April 1, 2011           ¥65,400 ¥44,516 ¥ 664,645 ¥(7,181) ¥14,489 ¥(68,355) ¥(52,719) ¥1,871 ¥77,581 ¥ 740,247 Due to change in consolidated subsidiaries        Due to change in affiliated companies accounted for by the equity method              Due to change in accounting period of consolidated subsidiaries      Net loss                      Purchases of treasury stock       Disposal of treasury stock         Dividends paid                 Net changes during the year       Balance at March 31 and April 1, 2012       Due to change in consolidated subsidiaries        Net loss                      Purchases of treasury stock       Disposal of treasury stock         Dividends paid                 Net changes during the year       Balance at March 31, 2013        – – – – – – – – – – – – – (29) – – 12 159 (170) (26,009) – – (8,970) – – – – – (28) 57 – – – – – – – – – 2,399 – – – – – – – 13,419 – – – – – – – (4,213) – – – – – – – 135 – – – – – – – 900 12 159 (170) (26,009) (28) 28 (8,970) 12,640 ¥65,400 ¥44,487 ¥ 629,667 ¥(7,152) ¥16,888 ¥(54,936) ¥(56,932) ¥2,006 ¥78,481 ¥ 717,909 – – – – – – ¥65,400 – – – (4) – – ¥44,483 (0) (178,847) – – (2,990) – ¥ 447,830 – – (21) 175 – – ¥(6,998) – – – – – 7,865 ¥24,753 – – – – – 54,740 ¥ (196) – – – – – 17,083 ¥(39,849) – – – – – 109 ¥2,115 – – – – – 3,474 ¥81,955 (0) (178,847) (21) 171 (2,990) 83,271 ¥ 619,493 Common stock Capital surplus Retained earnings Thousands of US dollars (Note 1) Unrealized holding gains on available- for-sale securities, net of tax Unrealized losses on hedging derivatives, net of tax Treasury stock, at cost Foreign currency translation adjustments Share subscription rights Minority interests Total net assets Balance at April 1, 2012           $695,375 $473,014 $ 6,695,024 $(76,045) $179,564 $(584,115) $(605,338) $21,329 $834,460 $ 7,633,268 Due to change in consolidated subsidiaries        Net loss                      Purchases of treasury stock       Disposal of treasury stock         Dividends paid                 Net changes during the year       – – – – – – Balance at March 31, 2013        $695,375 See accompanying notes – – – (42) – – (0) (1,901,616) – – (31,792) – $472,972 $ 4,761,616 – – (223) 1,861 – – $(74,407) – – – – – 83,626 $263,190 – – – – – – – – – – 582,031 1,159 $ (2,084) $(423,700) $22,488 – – – – – 181,638 – – – – – 36,937 $871,397 (0) (1,901,616) (223) 1,819 (31,792) 885,391 $ 6,586,847 77 Consolidated statements of Cash flows Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2013 and 2012 Cash flows from operating activities: Loss before income taxes and minority interests                           Adjustments to reconcile loss before income taxes and minority interests to net cash provided by operating activities Depreciation and amortization                                       Impairment loss                                                  Cost of business structural reforms                                   Equity in earnings (losses) of affiliated companies, net                     Loss on write-down of investment securities                            Various provisions (reversals)                                        Interest and dividend income                                        Interest expense                                                 Loss (Gain) on sale of investment securities                             Gain on sale and disposal of vessels, property and equipment              Exchange loss, net                                               Changes in operating assets and liabilities: Trade receivables                                               Inventories                                                    Trade payables                                                 Others, net                                                     Sub total                                                       Cash received for interest and dividend                                Cash paid for interest                                             Cash refunded (paid) for corporate income tax, resident tax and enterprise tax   Net cash provided by operating activities                                Cash flows from investing activities: Purchase of investment securities                                    Proceeds from sale of investment securities                            Payments for purchase of vessels and other tangible and intangible fixed assets                                                    Proceeds from sale of vessels and other tangible and intangible fixed assets    Net decrease (increase) in short-term loans receivables                    Disbursements for long-term loans receivables                          Collections of long-term loans receivables                              Others, net                                                     Net cash used in investing activities                                    Cash flows from financing activities: Net increase (decrease) in short-term bonds                            Net increase (decrease) in short-term loans                             Net increase (decrease) in commercial paper                            Proceeds from long-term bank loans                                  Repayments of long-term bank loans                                 Proceeds from issuance of bonds                                    Redemption of bonds                                             Purchase of treasury stock                                         Sale of treasury stock                                             Cash dividends paid by the Company                                 Cash dividends paid to minority interests                               Others, net                                                     Net cash provided by financing activities                                 Effect of exchange rate changes on cash and cash equivalents          Net increase in cash and cash equivalents                            Cash and cash equivalents at beginning of year                       Net cash increase from new consolidation/ de-consolidation of subsidiaries                                   Increase in cash and cash equivalents due to change in accounting periods for consolidated subsidiaries                              Cash and cash equivalents at end of year                             See accompanying notes 78 Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 ¥(137,939) ¥ (33,516) $(1,466,656) 94,685 10,978 101,463 4,936 2,653 529 (5,166) 13,021 99 (8,375) 2,842 (11,661) (5,001) 6,878 11,719 81,661 9,233 (12,695) 757 78,956 (16,853) 1,126 (165,544) 80,198 (197) (5,152) 2,863 (682) (104,241) – 9,661 (3,000) 216,407 (117,417) 55,000 (7,337) (21) 25 (3,047) (2,999) (8,504) 138,768 4,316 117,799 82,837 85,624 5,468 – (3,300) 9,163 (4,004) (7,959) 11,511 (224) (9,729) 4,172 (3,971) (7,932) 3,805 (6,843) 42,265 17,368 (10,478) (44,141) 5,014 (1,158) 699 (175,036) 44,879 127 (4,528) 8,384 (7,680) (134,313) 56 (2,958) (16,500) 270,357 (115,662) 30,000 (7,890) (28) 28 (9,041) (1,306) 1,217 148,273 (1,940) 17,034 65,477 1,006,751 116,725 1,078,820 52,483 28,208 5,625 (54,928) 138,447 1,053 (89,048) 30,218 (123,987) (53,174) 73,131 124,604 868,272 98,171 (134,981) 8,049 839,511 (179,192) 11,972 (1,760,170) 852,717 (2,095) (54,779) 30,441 (7,251) (1,108,357) – 102,722 (31,898) 2,300,979 (1,248,453) 584,795 (78,012) (223) 266 (32,398) (31,887) (90,421) 1,475,470 45,891 1,252,515 880,776 – 115 – – ¥ 200,636 211 ¥ 82,837 – $ 2,133,291 notes to Consolidated finanCial statements Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2013 and 2012 1. BAsIs of PrEsENtINg CoNsolIdAtEd fINANCIAl stAtEMENts The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan (together “Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards The accounts of overseas subsidiaries are made revisions according to ASBJ PITF No 18 The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions) from the consolidated financial state- ments of Mitsui OSK Lines, Ltd (the “Company”) prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instruments and Exchange Act Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements The translations of the Japanese yen amounts into US dollars are included solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31, 2013, which was ¥9405 to US $100 The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into US dollars at this or any other rate of exchange 2. suMMAry of sIgNIfICANt ACCouNtINg PolICIEs (1) PrINCIPlEs of CoNsolIdAtIoN All companies are required to consolidate all significant investees which are controlled through substantial ownership of majority voting rights or existence of certain conditions The consolidated financial statements include the accounts of the Company and 349 subsidiaries for the year ended March 31, 2013 (335 subsidiaries for the year ended March 31, 2012) All significant inter-company balances, transactions and all material unrealized profit within the consolidated group have been eliminated in consolidation Investments in unconsolidated subsidiaries and affiliated companies (20% to 50% owned and certain others 15% to 20% owned) are accounted for by the equity method Companies accounted for using the equity method include 65 affiliated companies for the year ended March 31, 2013, and 63 affiliated companies for the year ended March 31, 2012 Investments in other subsidiaries (107 for the year ended March 31, 2013 and 113 for the year ended March 31, 2012) and affiliated companies (68 and 71 for the respective years) were stated at cost since total revenues, total assets, the Company’s equity in net income and retained earnings and others in such com- panies were not material In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minor- ity shareholders, are recorded based on the fair value at the time the Company acquired control of the respective subsidiaries The difference between acquisition cost and net assets acquired is treated as goodwill and negative goodwill and is amortized princi- pally over 5 years on a straight-line basis Net amortized amount is included in “Selling, general and administrative expenses” or “Other income” of the consolidated statements of operations Meanwhile, the negative goodwill incurred after April 1, 2010 is recognized as “Other income” at the time of occurrence in accordance with the revised Japanese GAAP (2) trANslAtIoN of forEIgN CurrENCy Revenues earned and expenses incurred in currencies other than Japanese yen of the Company and its subsidiaries keeping their books in Japanese yen are translated into Japanese yen either at a monthly exchange rate or at the rate prevailing on the date of the transaction Monetary assets and liabilities denominated in currencies other than Japanese yen are translated into yen at the exchange rate prevailing at the balance sheet date Subsidiaries keeping their books in a currency other than Japanese yen translate the revenues and expenses and assets and liabilities in foreign currencies into the currency used for financial reporting in accordance with accounting principles generally accepted in their respec- tive countries All the items in financial statements of subsidiaries, which are stated in currencies other than Japanese yen, were translated into Japanese yen at the year-end exchange rate, except for owners’ equity which is translated at historical rates Translation differences arising from the application of more than one exchange rate are presented as foreign currency translation adjustments in the net assets section of the consolidated balance sheets (3) CAsH ANd CAsH EQuIVAlENts In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase are considered to be cash and cash equivalents 79 (4) frEIgHt rEVENuEs ANd rElAtEd EXPENsEs 1. Containerships Freight revenues and the related voyage expenses are recognized by the multiple transportation progress method 2. Vessels other than containerships Freight revenues and the related voyage expenses are recognized mainly by the completed-voyage method (5) sECurItIEs Securities are classified into (a) securities held for trading purposes (hereafter, “trading securities”), (b) debt securities intended to be held to maturity (hereafter, “held-to-maturity debt securities”), (c) equity securities issued by subsidiaries and affiliated companies, or (d) for all other securities that are not classified in any of the above categories (hereafter, “available-for-sale securities”) Trading securities are stated at fair market value Unrealized gains and losses from market value fluctuations are recognized as gains or losses in the period of the change Held-to-maturity debt securities are stated at amortized cost, net of the amount considered not col- lectible Equity securities issued by subsidiaries and affiliated companies which are not consolidated or accounted for using the equity method are stated at moving-average cost Available-for-sale securities with fair market values are stated at fair market values, and the corresponding unrealized holding gains or losses, net of applicable income taxes, are reported as separate component of net assets Other securities with no available fair market value are stated at moving-average cost If the market value of held-to-maturity debt securities, equity securities issued by unconsolidated subsidiaries and affiliated companies not on the equity method, and available-for-sale securities, declines significantly, such securities are stated at fair market value and the difference between fair market value and the carrying amount is recognized as loss in the period of the decline If the fair market value of held-to-maturity debt securities, equity securities issued by unconsolidated subsidiaries and affiliated companies not on the equity method, and available-for-sale securities is not readily available, such securities should be written down to net assets value with a cor- responding charge in the statements of operations in the event net assets value declines significantly In these cases, such fair market value or the net assets value will be the carrying amount of the securities at the beginning of the next year (6) INVENtorIEs Inventories are stated principally at cost determined by the moving-average method (with regard to the book value of inventories on the balance sheet, by writing the inventories down based on their decrease in profitability of assets) (7) dEPrECIAtIoN of VEssEls, ProPErty ANd EQuIPMENt Depreciation of vessels and buildings is computed mainly by the straight-line method Depreciation of other property and equipment is computed mainly by the declining-balance method Depreciation of finance lease that transfer ownership to lessees is computed mainly by the identical to depreciation method applied to self-owned noncurrent assets Depreciation of finance lease that do not transfer ownership to lessees is computed mainly by straight-line method on the assumption that the lease term is the useful life and an estimated residual is zero With regard to finance lease that do not transfer ownership for which the starting date for the lease transaction is prior to March 31, 2008, they will continue to be accounted for by a method corresponding to that used for ordinary operating lease contracts (8) AMortIZAtIoN of BoNd IssuE EXPENsE ANd stoCK IssuE EXPENsE Bond issue expense and stock issue expense are charged to income as incurred (9) INtErEst CAPItAlIZAtIoN In cases where a vessel’s construction period is long and the amount of interest accruing during this period is significant, such interest expenses are capitalized as a part of the acquisition cost which amounted to ¥1,228 million ($13,057 thousand) for the year ended March 31, 2013 and ¥1,156 million for the year ended March 31, 2012 (10) AlloWANCE for douBtful ACCouNts Allowance for doubtful accounts is provided in an amount sufficient to cover probable losses on collection It consists of the estimated uncollectible amount with respect to certain identified doubtful receivables and an amount calculated using the actual percentage of the Company’s collection losses (11) EMPloyEEs’ sEVErANCE ANd rEtIrEMENt BENEfIts The Company has the defined benefit pension plans for employees engaged in shore and sea services Employees engaged in sea ser- vice who retire prior to a certain age are also entitled to a lump-sum payment Some subsidiaries have the defined benefit pension plans which cover all or a part of the retirement benefits and some other subsidiaries have established reserves for a lump-sum payment for retirement benefits The Company has a retirement benefit trust scheme Under the accounting standards for employees’ severance and retirement benefits, liabilities and expenses for employees’ severance and retirement benefits are determined based on the amounts actuarially calculated using certain assumptions The Company and its consolidated subsidiaries (the “Group”) provided allowance for employees’ severance and retirement benefits at March 31, 2013 and 2012 based on the estimated amounts of projected benefit obligation and the fair value of the plan assets at those dates 80 Actuarial gains and losses are recognized in the statements of operations using the straight-line method over the average of the esti- mated remaining service lives of mainly 10 years commencing with the following period Past service liability is chiefly accounted for as expenses in lump-sum at the time of occurrence (12) dIrECtors’ ANd CorPorAtE AudItors’ rEtIrEMENt BENEfIts The Company and its domestic subsidiaries recognize liabilities for retirement benefits for directors and corporate auditors at an amount required in accordance with the internal regulations Effective from the shareholders’ meeting of the Company, held on June 23, 2005, the Company abolished the retirement benefits plan for directors and corporate auditors Accordingly, the Company recognizes liabilities for retirement benefit for directors and corporate auditors till the completion of the shareholders’ meeting on June 23, 2005, which will be paid upon their retirement (13) INCoME tAXEs The Group recognizes tax effects of temporary differences between the financial statement basis and the tax basis of assets and liabilities The provision for income taxes is computed based on the pretax income included in the consolidated statements of operations The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences (14) AMouNts PEr sHArE of CoMMoN stoCK Net loss per share of common stock is computed based upon the weighted-average number of shares outstanding during the year Fully diluted net income per share of common stock assumes exercise of the outstanding stock options at the beginning of the year or at the date of issuance For the years ended March 31, 2013 and 2012 fully diluted net income per share is not disclosed because of the Company’s net loss position Cash dividends per share have been presented on an accrual basis and include dividends to be approved after the balance sheet date, but applicable to the year then ended (15) dErIVAtIVEs ANd HEdgE ACCouNtINg Companies are required to state derivative financial instruments at fair value and to recognize changes in the fair value as gains or losses unless derivative financial instruments are used for hedging purposes If derivative financial instruments are used as hedging instruments and meet certain hedging criteria, the Group defers recognition of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items are recognized If interest rate swap contracts are used as hedging instruments and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed (“special treatment”) If foreign exchange forward contracts are used as hedging instruments and meet certain hedging criteria, hedged foreign currency assets and liabilities are translated at the rate of these contracts (“allocation method”) The following summarizes hedging derivative financial instruments used by the Group and items hedged: Hedging instruments: Hedged items: Loans payable in foreign currencies Foreign currency future transactions Forward foreign exchange contracts Foreign currency future transactions Currency option contracts Currency swap contracts Foreign currency future transactions Foreign currency loans payable Interest rate swap contracts Interest on loans and bonds payable Crude oil swap contracts Commodities futures Freight futures Fuel oil Fuel oil Freight The derivative transactions are executed and managed by the Company in accordance with the established policies in order to hedge the Group’s exposure to interest rate increases, fuel oil increases, freight decreases, and foreign currency exchange rate risk The Company evaluates hedge effectiveness semi-annually by comparing the cumulative changes in cash flows from or the changes in fair value of hedged items and the cumulative changes in cash flows from or the changes in fair value of hedging instruments (16) rEClAssIfICAtIoNs Certain prior year amounts have been reclassified to conform to the 2013 presentation These changes had no impact on previously reported results of operations or cash flows or net assets (17) ACCouNtINg stANdArds IssuEd But Not yEt APPlIEd Accounting standard for retirement Benefits (AsBJ statement No. 26, May 17, 2012) and guidance on Accounting stan- dard for retirement Benefits (AsBJ guidance No. 25, May 17, 2012) 81 1 Summary Under the amended rule, actuarial gains and losses and past service costs would be recognized within the net asset section, after adjust- ing for tax effects, and the deficit or surplus would be recognized as a liability or asset without any adjustments For determining method of attributing expected benefit to periods, the Standard now allows to choose benefit formula basis, as well as straight-line basis Method for determination of discount rate has also been amended 2 Effective dates Effective for the end of annual periods ending on or after March 31, 2014 Amendments relating to determination of retirement benefit obligations and current service costs are effective from the beginning of annual periods ending on or after March 31, 2015 3 Effect of application of the standard The Company and its consolidated domestic subsidiaries are currently in the process of determining the effects of these new standards on the consolidated financial statements (18) CHANgE IN ACCouNtINg PolICIEs WItH AMENdMENt of rEsPECtIVE lAW or rEgulAtIoN tHAt ArE Not dIstINguIsHABlE froM CHANgE IN ACCouNtINg EstIMAtEs (Change in depreciation method) From the year ended March 31, 2013, in accordance with the amendment in corporate tax law, the Company and its domestic subsidiar- ies have changed its depreciation method for property and equipment Assets acquired on or after April 1, 2012 are depreciated using the method prescribed in amended corporate tax law The effect on the consolidated financial statements of the change is not material (19) AddItIoNAl INforMAtIoN 1. Application of accounting standards for accounting changes and error corrections For accounting changes and corrections of past errors which are implemented from the year beginning on April 1, 2011, the Company adopts the Accounting Standard for Accounting Changes and Error Corrections (ASBJ Statement No 24, December 4, 2009) and Guid- ance on Accounting Standard for Accounting Changes and Error Corrections (ASBJ Guidance No 24, December 4, 2009) 2. underwriting of capital increase of shares of an affiliated company accounted for by the equity method The Company resolved at its meeting of the Board of Directors on March 29, 2013 to underwrite capital increase through a third-party allotment of new shares of Daiichi Chuo Kisen Kaisha, an affiliated company accounted for by the equity method The details and sub- scription amount of the capital increase through third-party allotment are as follows: (1) Profile of the affiliated company accounted for by the equity method (i) Name (ii) Date of establishment (iii) Main Business (iv) Capital (v) Number of issued shares Common stock Class A stock (Number of issued shares after capital increase Common stock Class A stock (2) Outline of subscription (i) Total amount of subscription (ii) Subscription price Daiichi Chuo Kisen Kaisha October 1, 1960 Marine transportation ¥20,758 million ($220,712 thousand) (Capital after capital increase ¥28,958 million ($307,900 thousand)) 263,549,171 shares 15,000,000 shares 263,549,171 shares 31,400,000 shares) ¥15,000 million ($159,490 thousand) ¥1,000 per share ($1063 per share) (iii) Number of shares to be subscribed Class A stock 15,000,000 shares (iv) Purpose of subscription Stabilization of the financial base (3) Shareholding before and after subscription Number of shares held before capital increase Common stock Class A stock Number of shares held after capital increase Common stock Class A stock 68,774,960 shares 15,000,000 shares 68,774,960 shares 30,000,000 shares 82 (4) Schedule March 29, 2013 Resolution at the meeting of the Board of Directors June 27, 2013 (scheduled) Annual shareholders’ meeting of Daiichi Chuo Kisen Kaisha, class shareholders’ meeting by common shareholders and class shareholders’ meeting by class A shareholders June 28, 2013 (scheduled) Application and payment date 3. fINANCIAl INstruMENts (1) QuAlItAtIVE INforMAtIoN oN fINANCIAl INstruMENts I. Policies for using financial instruments We raise capital investment funds to acquire vessels and other fixed assets primarily through bank loans and corporate bonds In addi- tion, we secure short-term operating funds through commercial papers and bank loans Furthermore, we have established commitment line with Japanese banks in preparation for supplementing liquidity in emergency situations Derivatives are utilized to hedge risks as discussed below and are executed within the scope of real requirements Our policy is not to use derivatives for speculative purposes II. details of financial instruments/risk and its management Trade receivables are exposed to the credit risks of customers We strive to mitigate such risks in accordance with internal regulations Besides, trade receivables denominated in foreign currencies are exposed to the foreign currency exchange rate risk We avoid the risk mainly by, in principle, utilizing forward exchange contracts which cover the net position (The difference between trade receivables and trade payables dominated in foreign currencies) Investment securities are mainly stocks of companies with which we have business relationships These investment securities are exposed to the price fluctuation risk We identify the market value of listed stocks on a quarterly basis Trade payables are due within a year Short-term loans and commercial papers are primarily used for raising short-term operating funds, while long-term loans and bonds are mainly for capital investments Although several items with variable interest rates are exposed to the interest rate risk, a certain portion of such variable interest rates is fixed with the use of interest rate swaps Long-term loans and bonds denominated in foreign currencies are exposed to the foreign currency exchange rate risk, a part of which is avoided by using currency swaps Our major derivative transactions and hedged risks are as follows * Forward foreign exchange contracts/Currency swap contracts : To cover exchange volatility of foreign-currency-denominated trade receivables, trade payables, long-term loans, and corporate bonds * Interest rate swap contracts : To avoid interest rate risk arising out of interest payment of long-term loans and corporate bonds * Crude oil swap contracts/Commodities futures : To hedge fluctuation of fuel oil price With regard to the detail of hedge accounting (hedging instruments, hedged items, the way of evaluating hedge effectiveness), see Note 2 (15) to the consolidated financial statements Derivative transactions are executed and managed in accordance with our internal regulations and dealt only with highly rated financial institutions to mitigate credit risks On the other hand, as trade payables, loan payables, bonds, and commercial papers are exposed to the risk of financing for repay- ment, we manage the risk by planning cash management program monthly, having established commitment line with several financial institutions, and adjusting funding period (balancing short-term/long-term combination), in consideration of market circumstances III. supplemental information on fair value Fair value of financial instruments that are actively traded in organized financial markets is determined by market value For those where there are no active markets, it is determined by reasonable estimation Reasonably estimated value might vary depending on condition of calculation as several variation factors are included in the calculation On the other hand, derivative transac- tions mentioned in following (2) do not indicate the market risk of such derivatives 83 (2) fAIr VAluEs of fINANCIAl INstruMENts Book values and fair values of the financial instruments on the consolidated balance sheet at March 31, 2013 are the following; Assets Cash and cash equivalents                                       Time deposits with a maturity of more than three months                Trade receivables                                              Marketable securities Available-for-sale securities                                     Short-term loans receivable                                       Investment securities Available-for-sale securities                                     Long-term loans receivable (*1)                                     Total                                                        Liabilities Trade payables                                                Short-term loans                                               Commercial paper                                              Bonds (*2)                                                     Long-term bank loans (*3)                                         Total                                                        Derivative financial instruments (*4)                                  Book Value ¥ 200,636 1,139 145,408 2,938 1,188 92,785 24,759 ¥ 468,853 ¥ 142,585 49,250 2,000 238,500 736,524 ¥1,168,859 ¥ 36,966 Millions of yen Fair Value ¥ 200,636 1,139 145,408 2,938 1,188 92,785 30,955 ¥ 475,049 ¥ 142,585 49,250 2,000 242,650 739,244 ¥1,175,729 ¥ 36,518 Difference ¥ – – – – – – 6,196 ¥6,196 ¥ – – – 4,150 2,720 ¥6,870 ¥ (448) Book Value Thousands of US dollars (Note 1) Fair Value Difference $ 2,133,291 12,110 1,546,071 $ 2,133,291 12,110 1,546,071 $ Assets Cash and cash equivalents                                       Time deposits with a maturity of more than three months                Trade receivables                                              Marketable securities Available-for-sale securities                                     Short-term loans receivable                                       Investment securities Available-for-sale securities                                     Long-term loans receivable (*1)                                     Total                                                        Liabilities Trade payables                                                Short-term loans                                               Commercial paper                                              Bonds (*2)                                                     Long-term bank loans (*3)                                         Total                                                        Derivative financial instruments (*4)                                  31,239 12,631 31,239 12,631 986,550 263,254 $ 4,985,146 $ 1,516,055 523,658 21,265 2,535,885 7,831,197 $12,428,060 $ 393,046 986,550 329,134 $ 5,051,026 $ 1,516,055 523,658 21,265 2,580,011 7,860,117 $12,501,106 $ 388,283 – – – – – – 65,880 $65,880 $ – – – 44,126 28,920 $73,046 $ (4,763) *1 The book value of long-term loans receivable includes current portion amounting to ¥1,642 million ($17,459 thousand) *2 The book value of bonds includes current portion amounting to ¥25,000 million ($265,816 thousand) *3 The book value of long-term bank loans includes current portion amounting to ¥88,296 million ($938,820 thousand) *4 Amounts of derivative financial instruments are net of asset and liability Negative amount stated with ( ) means that the net amount is liability 84 Book values and fair values of the financial instruments on the consolidated balance sheet at March 31, 2012 are the following; Book Value Millions of yen Fair Value Assets Cash and cash equivalents                                       Time deposits with a maturity of more than three months                Trade receivables                                              Marketable securities Available-for-sale securities                                     Short-term loans receivable                                       Investment securities Available-for-sale securities                                     Long-term loans receivable (*1)                                     Allowance for doubtful accounts (*2)                               Total                                                        Liabilities Trade payables                                                Short-term loans                                               Commercial paper                                              Bonds (*3)                                                     Long-term bank loans (*4)                                         Total                                                        Derivative financial instruments (*5)                                  ¥ 82,837 1,005 130,922 23 1,534 82,897 19,598 (185) 19,413 ¥318,631 ¥133,600 38,751 5,000 191,222 614,418 ¥982,991 ¥ (52,523) ¥ 82,837 1,005 130,922 23 1,534 82,897 26,031 ¥325,249 ¥133,600 38,751 5,000 197,269 616,014 ¥990,634 ¥ (54,374) *1 The book value of long-term loans receivable includes current portion amounting to ¥432 million *2 Allowance identified for long-term loans receivable is deducted *3 The book value of bonds includes current portion amounting to ¥4,191 million *4 The book value of long-term bank loans includes current portion amounting to ¥62,261 million *5 Amounts of derivative financial instruments are net of asset and liability Negative amount stated with ( ) means that the net amount is liability Difference ¥ – – – – – – 6,618 ¥ 6,618 ¥ – – – 6,047 1,596 ¥ 7,643 ¥(1,851) The following is a description of the valuation methodologies used for the assets and liabilities measured at the fair value Cash and cash equivalents, Time deposits with a maturity of more than three months, Trade receivables and Short-term loans receivable Since these assets are settled in a short term and their fair value is almost equal to the book value, the fair value is evaluated at the book value Marketable securities and Investment securities The fair value of stocks is evaluated at market prices at stock exchange as of the end of the year and the fair value of bonds is evaluated at market prices at stock exchange or provided by financial institutions as of the end of the years Long-term loans receivable The fair value of long-term loans receivable with variable interests rate is evaluated at the book value because the interest rate reflects the market rate in a short term and their fair value is almost equal to the book value, unless the creditworthiness of the borrower has changed significantly since the loan origination The fair value of long-term loans receivable with fixed interest rates, for each category of loans based on types of loans, and maturity length, is evaluated by discounting the total amount of principal and interest using the rate which would apply if similar loans were newly made Trade payables, Short-term loans and Commercial paper Since these liabilities are settled in a short term and their fair value is almost equal to the book value, the fair value is evaluated at the book value Bonds The fair value of corporate bonds with market price is evaluated based on their market price The fair value of variable interest rates cor- porate bonds without market price is evaluated at the book value because the interest rate reflects the market rate in a short term and there has been no significant change in the creditworthiness of us before and after the issue 85 Long-term bank loans The fair value of long-term bank loans with variable interest rates is evaluated at the book value because the interest rate reflects the market rate in a short term and there has been no significant change in the creditworthiness of us before and after such bank loans were made The fair value of long-term bank loans with fixed interest rates, for each category of bank loans based on types of bank loans, and maturity length, is evaluated by discounting the total amount of principal and interest using the rate which would apply if similar bank loans were newly made The fair value of long-term bank loans qualifying for allocation method of interest and currency swap is evaluated at the book value because such bank loans were deemed as the variable interest rates bank loans and the interest rate reflects the market rate in a short term Derivative financial instruments Please refer to Note 6 to the consolidated financial statements The following table summarizes financial instruments whose fair value is extremely difficult to estimate Unlisted stocks                                                 Unlisted foreign securities                                         Others                                                        Total                                                         Millions of yen Book Value 2013 ¥ 7,764 3,200 7 ¥10,971 Book Value 2012 ¥ 7,667 3,200 42 ¥10,909 Thousands of US dollars (Note 1) Book Value 2013 $ 82,552 34,024 74 $116,650 The above items are not included in the amount presented under the line “Investments securities” in the table summarizing fair value of financial instruments, because the fair value is extremely difficult to estimates as they have no quoted market price and the future cash flow cannot be estimated At March 31, 2013, the aggregate annual maturity of monetary claims and securities was as follows; Cash and cash equivalents                          Time deposits with a maturity of more than three months   Trade receivables                                 Short-term loans receivable                          Marketable securities and investments securities Held-to-maturity debt securities (Other)               Available-for-sale securities (Governmental/municipal bonds)                   Available-for-sale securities (Corporate bonds)          Long-term loans receivable                          Total                                           Millions of yen After one year through five years ¥ – – – – After five years through ten years ¥ – – – – Within a year ¥200,636 1,139 145,408 1,188 – – – 3,000 1,642 ¥353,013 10 200 16,099 ¥16,309 – – – 2,321 ¥2,321 Thousands of US dollars (Note 1) After ten years – ¥ – – – 3,200 – – 4,697 ¥7,897 $ After ten years – – – – After one year through five years $ – – – – – After five years through ten years $ – – – – – 34,024 106 2,127 171,175 $173,408 – – 24,678 $24,678 – – 49,942 $83,966 Cash and cash equivalents                          Time deposits with a maturity of more than three months   Trade receivables                                 Short-term loans receivable                          Marketable securities and investments securities Held-to-maturity debt securities (Other)               Available-for-sale securities (Governmental/municipal bonds)                   Available-for-sale securities (Corporate bonds)          Long-term loans receivable                          Total                                           Within a year $2,133,291 12,110 1,546,071 12,631 – – 31,898 17,459 $3,753,460 86 At March 31, 2012, the aggregate annual maturity of monetary claims and securities was as follows; Cash and cash equivalents                          Time deposits with a maturity of more than three months   Trade receivables                                 Short-term loans receivable                          Marketable securities and investments securities Held-to-maturity debt securities (Other)               Available-for-sale securities (Governmental bonds/Corporate bonds)             Long-term loans receivable                          Total                                           Millions of yen Within a year ¥ 82,837 1,005 130,922 1,534 After one year through five years ¥ – – – – – – – 432 ¥216,730 10 12,420 ¥12,430 After five years through ten years ¥ – – – – – – 2,768 ¥2,768 After ten years – ¥ – – – 3,200 – 3,978 ¥7,178 4. sECurItIEs A The following tables summarize acquisition costs, book values and fair values of securities with available fair values at March 31, 2013 and 2012 Available-for-sale securities: Securities with book values exceeding acquisition costs at March 31, 2013 Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost ¥33,088 3,060 – ¥36,148 Millions of yen Book value ¥73,550 3,166 – ¥76,716 Difference ¥40,462 106 – ¥40,568 Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost $351,813 32,536 – $384,349 Thousands of US dollars (Note 1) Book value $782,031 33,663 – $815,694 Difference $430,218 1,127 – $431,345 Securities with book values exceeding acquisition costs at March 31, 2012 Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost ¥24,930 210 – ¥25,140 Millions of yen Book value ¥56,798 224 – ¥57,022 Difference ¥31,868 14 – ¥31,882 87 Securities with book values not exceeding acquisition costs at March 31, 2013 Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost ¥22,581 – – ¥22,581 Millions of yen Book value ¥19,007 – – ¥19,007 Difference ¥(3,574) – – ¥(3,574) Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost $240,096 – – $240,096 Thousands of US dollars (Note 1) Book value $202,095 – – $202,095 Difference $(38,001) – – $(38,001) Securities with book values not exceeding acquisition costs at March 31, 2012 Type Equity securities                                                  Bonds                                                          Others                                                          Total                                                           Acquisition cost ¥34,171 – 23 ¥34,194 Millions of yen Book value ¥25,875 – 23 ¥25,898 Difference ¥(8,296) – – ¥(8,296) B Total sales of available-for-sale securities sold in the years ended March 31, 2013 and 2012 and the related gains and losses were as follows: Proceeds from sales                                             Gross realized gains                                             Gross realized losses                                            ¥932 309 369 ¥522 225 1 Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 $9,910 3,285 3,923 C Impairment losses of securities For the years ended March 31, 2013 and 2012, the Company reduced the book value on the securities and booked the reductions as impairment losses of ¥2,892 million ($30,750 thousand) and ¥9,163 million, respectively With regard to the impairment losses, the Company principally reduces the book value on the securities to the amount which is con- sidered the recoverability etc in the event the fair market value declines more than 50% in comparison with the acquisition cost 88 5. INVENtorIEs Inventories as of March 31, 2013 and 2012 consisted of the following: Fuel and supplies                                               Others                                                        Total                                                         Millions of yen 2013 ¥58,326 1,111 ¥59,437 2012 ¥52,848 1,488 ¥54,336 Thousands of US dollars (Note 1) 2013 $620,159 11,813 $631,972 6. dErIVAtIVE trANsACtIoNs The Group enters into derivative transactions to hedge the Group’s exposure to interest rate increases, fuel oil increases, freight decreases, and currency exchange fluctuations, in accordance with the guidance determined by the management of the Company I. HEdgE ACCouNtINg Not APPlIEd The following tables summarize the outstanding contract amounts and fair values of financial derivatives of the Group at March 31, 2013 and 2012, for which hedge accounting has not been applied Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 (1) Currency related: Forward currency exchange contracts Sell (US dollar): Contracts outstanding                                        Fair values                                                 ¥11,286 (2,046) ¥ 468 (9) Buy (US dollar): Contracts outstanding                                        Fair values                                                 Buy (Others): Contracts outstanding                                        Fair values                                                 ¥ ¥ 13 0 2 0 ¥ ¥ 29 (0) 5 0 Currency swaps contracts Buy (US dollar): Contracts outstanding                                        Fair values                                                 ¥ 5,102 (651) ¥ 7,882 (1,777) Millions of yen 2013 2012 $120,000 (21,754) $ $ 138 0 21 0 $ 54,248 (6,922) Thousands of US dollars (Note 1) 2013 (2) Interest related Interest rate swaps Receive floating, pay fixed Contracts outstanding                                        Fair values                                                 Receive fixed, pay floating Contracts outstanding                                        Fair values                                                 ¥46,899 (2,769) ¥ 291 2 ¥51,276 (2,966) ¥ – – $498,660 (29,442) $ 3,094 21 Note: Fair values are measured based on forward exchange rates prevailing at the end of the year and information provided by financial institutions, etc 89 II. HEdgE ACCouNtINg APPlIEd The following tables summarize the outstanding contract amounts and fair values of financial derivatives of the Group at March 31, 2013 and 2012, for which hedge accounting has been applied Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 (1) deferral hedge accounting a Forward currency exchange contracts to hedge the risk for the foreign currency transactions Sell (US dollar): Contracts outstanding                                        Fair values                                                 ¥ 26,969 (1,947) ¥ 25,479 (1,333) Buy (US dollar): Contracts outstanding                                        Fair values                                                 ¥ 62,906 9,189 ¥ 98,802 (6,360) b Currency swaps contracts to hedge the risk for charterages Sell (US dollar): Contracts outstanding                                        Fair values                                                 ¥ 1,686 (162) ¥ 1,863 131 Buy (US dollar): Contracts outstanding                                        Fair values                                                 ¥491,628 50,309 ¥609,265 (29,780) c Interest rate swaps to hedge the risk for the long-term bank loans $ 286,752 (20,702) $ 668,857 97,703 $ 17,927 (1,722) $5,227,305 534,918 and charterages Receive floating, pay fixed Contracts outstanding                                        Fair values                                                 ¥197,060 (16,246) ¥174,262 (13,955) $2,095,268 (172,738) Receive fixed, pay floating Contracts outstanding                                        Fair values                                                 d Commodities futures to hedge the risk for the fuel oil Contracts outstanding                                        Fair values                                                 ¥ 10,698 289 ¥ 40,680 997 ¥ 14,336 452 ¥ 25,371 3,074 Millions of yen 2013 2012 (2) special treatment Interest rate swaps to hedge the risk for the long-term bank loans Receive floating, pay fixed Contracts outstanding                                        Fair values                                                 ¥3,719 (447) ¥15,090 (1,851) Millions of yen 2013 2012 $ 113,748 3,073 $ 432,536 10,601 Thousands of US dollars (Note 1) 2013 $39,543 (4,753) Thousands of US dollars (Note 1) 2013 (3) Allocation method Currency swaps to hedge the risk for the foreign bonds and long-term bank loans Contracts outstanding                                        Fair values                                                 ¥27,827 – ¥30,354 – $295,875 – Notes: 1 Fair values are measured based on forward exchange rates prevailing at the end of the year and information provided by financial institutions, etc 2 Currency swaps which allocation method are applied to are recorded as the combined amount of such currency swaps and their hedge items Therefore, their fair values are included in fair values of such hedge items 90 7. sHort-tErM dEBt ANd loNg-tErM dEBt (1) sHort-tErM dEBt Short-term debt amounting to ¥51,250 million ($544,923 thousand) and ¥43,751 million at March 31, 2013 and 2012, respectively, were principally unsecured The interest rates on short-term debt were mainly set on a floating rate basis (2) loNg-tErM dEBt Long-term debt at March 31, 2013 and 2012 consisted of the following: Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 Bonds: Floating/fixed rate Euro medium term notes due 2012–2013             1428% yen bonds due 2013                                    1760% yen bonds due 2014                                    1278% yen bonds due 2014                                    1590% yen bonds due 2015                                    0296% yen bonds due 2015                                    0573% yen bonds due 2016                                    2070% yen bonds due 2016                                    1106% yen bonds due 2016                                    0461% yen bonds due 2017                                    1999% yen bonds due 2019                                    1670% yen bonds due 2019                                    1400% yen bonds due 2020                                    1361% yen bonds due 2021                                    1650% yen bonds due 2022                                    1139% yen bonds due 2022                                    1070% yen bonds due 2023                                    secured loans from: ¥ – 15,000 10,000 30,000 15,000 15,000 10,000 15,000 20,000 20,000 18,500 10,000 15,000 20,000 5,000 10,000 10,000 ¥ 6,222 15,000 10,000 30,000 15,000 – 10,000 15,000 20,000 – 20,000 10,000 15,000 20,000 5,000 – – Japan Development Bank due through 2027 at interest rates of 021% to 470%                                             Other financial institutions due through 2031 at interest rates of 039% to 670%                                             59,453 66,084 55,649 14,581 $ – 159,490 106,326 318,979 159,490 159,490 106,326 159,490 212,653 212,653 196,704 106,326 159,490 212,653 53,163 106,326 106,326 632,143 591,696 unsecured loans from: Other financial institutions due through 2031 at interest rates of 016% to 463%                                             Amount due within one year                                       621,422 975,024 113,296 ¥861,728 533,753 805,640 66,452 ¥739,188 6,607,358 10,367,082 1,204,636 $ 9,162,446 At March 31, 2013, the aggregate annual maturity of long-term debt was as follows: Year ending March 31 2014                                                                       2015                                                                       2016                                                                       2017                                                                       2018                                                                       2019 and thereafter                                                            Millions of yen ¥113,296 119,000 100,493 109,966 80,671 451,598 ¥975,024 Thousands of US dollars (Note 1) $ 1,204,636 1,265,284 1,068,506 1,169,229 857,746 4,801,681 $10,367,082 91 (3) AssEts PlEdgEd ANd sECurEd dEBt At March 31, 2013, the following assets were pledged as collateral for short-term debt and long-term debt Assets pledged Vessels                                                                     Buildings and structures                                                        Vessels and other property under construction                                       Investment securities                                                           Secured debt Short-term debt                                                              Long-term debt due within one year                                               Long-term debt due after one year                                                Millions of yen ¥195,173 139 32,012 75,344 ¥302,668 Millions of yen ¥ 520 14,630 100,472 ¥115,622 Thousands of US dollars (Note 1) $2,075,205 1,478 340,372 801,106 $3,218,161 Thousands of US dollars (Note 1) $ 5,529 155,556 1,068,283 $1,229,368 8. CoMMItMENts ANd CoNtINgENt lIABIlItIEs (A) CoMMItMENt At March 31, 2013, the Company had loan commitment agreements with certain affiliated companies The nonexercised portion of loan commitments was as follows: Total loan limits                                                               Loan executions                                                              The nonexercised portion of loan commitments                                      Millions of yen ¥14,107 – ¥14,107 Thousands of US dollars (Note 1) $149,995 – $149,995 (B) CoNtINgENt lIABIlItIEs At March 31, 2013, the Company and its consolidated subsidiaries were contingently liable mainly as guarantors or co-guarantors of indebtedness of related and other companies in the aggregate amount of ¥80,458 million ($855,481 thousand) 9. NEt AssEts Net assets comprises four sections, which are the owners’ equity, accumulated other comprehensive income, share subscription rights and minority interests Under the Japanese Companies Act (“the Act”) and regulations, the entire amount paid for new shares is required to be designated as common stock However, a company may, by a resolution of the board of directors, designate an amount not exceeding one-half of the price of the new shares as additional paid-in-capital, which is included in capital surplus Under the Act, in cases where a dividend distribution of surplus is made, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in-capital and legal earnings reserve must be set aside as addi- tional paid-in-capital or legal earnings reserve Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets Under the Act, appropriations (legal earnings reserve and additional paid-in-capital could be used to eliminate or reduce a deficit or could be capitalized) generally require a resolution of the shareholders’ meeting 92 (A) sHArEs IssuEd ANd outstANdINg Changes in number of shares issued and outstanding during the years ended March 31, 2013 and 2012 were as follows: Balance at April 1, 2011                                                        Increase during the year                                                      Decrease during the year                                                      Balance at March 31 and April 1, 2012                                             Increase during the year                                                      Decrease during the year                                                      Balance at March 31, 2013                                                      1,206,286 – – 1,206,286 – – 1,206,286 10,984 76 (85) 10,975 82 (555) 10,502 Shares of common stock (Thousands) Shares of treasury stock (Thousands) (B) sHArE suBsCrIPtIoN rIgHts Share subscription rights at March 31, 2013 and 2012 consisted of the following: Stock options                                                  Total                                                         (C) dIVIdENds Dividends paid for the year ended March 31, 2013 were as follows: Millions of yen 2013 ¥2,115 ¥2,115 2012 ¥2,006 ¥2,006 Thousands of US dollars (Note 1) 2013 $22,488 $22,488 Approved at the shareholders’ meeting held on June 22, 2012                           Total                                                                       Millions of yen ¥2,990 ¥2,990 Thousands of US dollars (Note 1) $31,792 $31,792 There were no dividends included in the retained earnings at March 31, 2013 and to be paid in subsequent periods 10. IMPAIrMENt loss For the year ended March 31, 2013, the Group recorded an impairment loss on the following asset group Application Assets to be disposed of by sale Type Vessels and Other Millions of yen ¥10,978 Thousands of US dollars (Note 1) $116,725 For the year ended March 31, 2012, the Group recorded an impairment loss on the following asset group Application Assets to be disposed of by sale Type Vessels and Other Millions of yen ¥5,468 The Group group operating assets based on management accounting categories, and also group assets to be disposed of by sale and idle assets by structure For the years ended March 31, 2013 and 2012, with regard to the target price of assets to be disposed of by sale which fell below book value, the Group reduced the book value on these assets to recoverable amounts and booked the reduc- tions as impairment losses The recoverable amount for this asset group is evaluated based on the asset’s net selling price And the asset’s net selling price is appraised based on the target price of assets to be disposed of by sale 93 11. otHEr INCoME (EXPENsEs): otHErs, NEt—BrEAKdoWN Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 others, net: Exchange loss, net                                            Amortization of goodwill, net                                     Gain on sale of vessels, investment securities and others               Loss on sale and disposal of vessels, investment securities and others     Loss arising from dissolution of subsidiaries and affiliated companies      Loss on write-down of investment securities and others                Provision for doubtful accounts                                   Special retirement                                             Cancellation fee for chartered ships, net                            Impairment loss                                               Cost of business structural reforms                                Sundries, net                                                 Total                                                         ¥ (3,297) 220 12,521 (4,187) (152) (2,892) (90) (79) 1,744 (10,978) (101,463) (729) ¥(109,382) ¥ (4,440) 288 11,784 (1,831) (286) (9,163) (28) (361) (199) (5,468) – 900 ¥ (8,804) $ (35,056) 2,339 133,131 (44,519) (1,616) (30,750) (957) (840) 18,543 (116,725) (1,078,820) (7,750) $(1,163,020) NotE: BrEAKdoWN of Cost of BusINEss struCturAl rEforMs Profits and losses associated with the business structural reforms in the dry bulker and tanker businesses such as loss on transfer of time charter contracts, impairment loss, loss on sale of vessels and gain/loss on cancellation of derivatives were collectively recorded as cost of business structural reforms Breakdown of the cost was as follows: Loss on transfer of time charter contracts                                           Impairment loss                                                               Loss on sale of vessels                                                         Gain on cancellation of derivatives                                                 Others                                                                      Total                                                                       Millions of yen ¥103,422 7,279 1,341 (10,346) (233) ¥101,463 Thousands of US dollars (Note 1) $1,099,649 77,395 14,258 (110,005) (2,477) $1,078,820 (IMPAIrMENt loss) For the year ended March 31, 2013, the Group recorded an impairment loss on the following asset group: Application Assets to be disposed of by sale Type Vessels Millions of yen ¥7,279 Thousands of US dollars (Note 1) $77,395 The Group group operating assets based on management accounting categories, and also group assets to be disposed of by sale and idle assets by structure For the year ended March 31, 2013, with regard to the target price of assets to be disposed of by sale which fell below book value, the Group reduced the book value on these assets to recoverable amounts and booked the reductions as cost of business structural reforms The recoverable amount for this asset group is evaluated based on the asset’s net selling price And the asset’s net selling price is appraised based on the target price of assets to be disposed of by sale 94 12. lEAsEs As lEssEE: (A) INforMAtIoN oN fINANCE lEAsEs ACCouNtEd for As oPErAtINg lEAsEs: (1) A summary of assumed amounts of acquisition cost, accumulated depreciation and net book value at March 31, 2013 of finance leases that do not transfer ownership to the lessee was as follows: Acquisition cost                                                                    Accumulated depreciation                                                            Net book value                                                                    Acquisition cost                                                                    Accumulated depreciation                                                            Net book value                                                                    Millions of yen Equipment, mainly containers ¥26,337 25,171 ¥ 1,166 Total ¥26,337 25,171 ¥ 1,166 Thousands of US dollars (Note 1) Equipment, mainly containers $280,032 267,634 $ 12,398 Total $280,032 267,634 $ 12,398 A summary of assumed amounts of acquisition cost, accumulated depreciation and net book value at March 31, 2012 of finance leases that do not transfer ownership to the lessee was as follows: Acquisition cost                                                     Accumulated depreciation                                             Net book value                                                     (2) Future lease payments at March 31, 2013 and 2012 Amount due within one year                                       Amount due after one year                                        Total                                                         (3) Lease payments, depreciation equivalent and interest equivalent Lease payments                                                Depreciation equivalent                                           Interest equivalent                                               Equipment, mainly containers ¥34,800 32,316 ¥ 2,484 Millions of yen Others ¥89 85 ¥ 4 Total ¥34,889 32,401 ¥ 2,488 Millions of yen 2013 ¥2,041 1,177 ¥3,218 Millions of yen 2013 ¥2,713 1,322 79 2012 ¥2,631 2,814 ¥5,445 2012 ¥3,167 1,898 125 Thousands of US dollars (Note 1) 2013 $21,701 12,515 $34,216 Thousands of US dollars (Note 1) 2013 $28,846 14,056 840 (4) Calculation of depreciation equivalent Assumed depreciation amounts are computed using the declining-balance method or the straight-line method over the lease terms assuming no residual value (5) Calculation of interest equivalent The excess of total lease payments over acquisition cost equivalents is regarded as amounts representing interest payable equivalents and is allocated to each period using the interest method (6) Impairment loss There was no impairment loss on finance lease accounted for as operating leases 95 (B) futurE lEAsE PAyMENts uNdEr oPErAtINg lEAsEs for oNly NoN-CANCElABlE CoNtrACts At MArCH 31, 2013 ANd 2012: Amount due within one year                                       Amount due after one year                                        Total                                                         Millions of yen 2013 ¥ 43,810 252,281 ¥296,091 2012 ¥ 38,589 240,143 ¥278,732 Thousands of US dollars (Note 1) 2013 $ 465,816 2,682,414 $3,148,230 As lEssor: (A) futurE lEAsE INCoME uNdEr oPErAtINg lEAsEs for oNly NoN-CANCElABlE CoNtrACts At MArCH 31, 2013 ANd 2012: Amount due within one year                                       Amount due after one year                                        Total                                                         Millions of yen 2013 ¥13,571 47,167 ¥60,738 2012 ¥13,125 42,020 ¥55,145 Thousands of US dollars (Note 1) 2013 $144,295 501,510 $645,805 13. rENtAl ProPErtIEs The Company and some of its consolidated subsidiaries own real estate for office lease (including lands) in Tokyo, Osaka and other areas Information about the book value and the fair value of such rental properties was as follows: Book value                                                    Fair value                                                      Millions of yen 2013 ¥279,130 368,128 2012 ¥267,295 356,497 Thousands of US dollars (Note 1) 2013 $2,967,889 3,914,173 Notes: 1 Book value was calculated as the amount equivalent to the cost for acquisition deducting accumulated depreciation and impairment loss 2 Fair value is mainly based upon the amount appraised by outside independent real estate appraisers In addition, information about rental revenue and expense from rental properties was as follows: Rental revenue                                                 Rental expense                                                 Difference                                                     Millions of yen 2013 ¥26,193 14,776 ¥11,417 2012 ¥26,223 14,431 ¥11,792 Thousands of US dollars (Note 1) 2013 $278,501 157,108 $121,393 Note: Rental revenue is mainly recorded as “shipping and other revenues” and rental expense (depreciation expense, repairs and maintenance fee, utilities, personnel cost, tax and public charge, etc) is mainly recorded as “shipping and other expenses” 96 14. sEgMENt ANd rElAtEd INforMAtIoN (A) sEgMENt INforMAtIoN: Reportable segment Bulkships Container- ships Ferry & Domestic transport Associated business Sub Total Others Total Adjustment Consolidated Millions of yen For the year ended March 31, 2013: 1. revenues: (1) Revenues from customers, unconsolidated subsidiaries and affiliated companies           ¥ 731,269 (2) Inter-segment revenues        735 Total revenues               ¥ 732,004 Segment income (loss)         ¥ (24,800) Segment assets              ¥1,298,682 ¥606,589 1,678 ¥608,267 ¥ (11,291) ¥403,167 2. others (1) Depreciation and amortization   ¥ (2) Amortization of goodwill, net     (3) Interest income               (4) Interest expenses             (5) Equity in earnings (losses) of 66,689 (573) 1,144 10,785 ¥ 14,901 34 178 2,501 ¥54,285 193 ¥54,478 ¥ 1,283 ¥36,420 ¥ 3,530 273 37 331 ¥109,650 18,377 ¥128,027 ¥ 10,746 ¥379,969 ¥1,501,793 20,983 ¥1,522,776 ¥ (24,062) ¥2,118,238 ¥ 7,401 7,061 ¥ 14,462 ¥ 2,449 ¥303,650 ¥1,509,194 28,044 ¥1,537,238 ¥ (21,613) ¥2,421,888 ¥ – (28,044) ¥ (28,044) ¥ (6,955) ¥(257,277) ¥1,509,194 – ¥1,509,194 ¥ (28,568) ¥2,164,611 ¥ 7,964 63 97 1,957 ¥ 93,084 (203) 1,456 15,574 ¥ 410 (17) 1,252 858 ¥ 93,494 (220) 2,708 16,432 ¥ 1,191 – (1,034) (3,411) ¥ 94,685 (220) 1,674 13,021 affiliated companies, net        (6,551) 1,258 153 140 (5,000) 64 (4,936) (6) Cost of business structural reforms             (7) Investment in affiliates          (8) Tangible/intangible fixed 101,463 66,624 – 6,031 – 1,625 – 1,190 101,463 75,470 – 2,282 101,463 77,752 – – – (4,936) 101,463 77,752 assets increased              128,440 11,463 1,102 20,339 161,344 622 161,966 2,924 164,890 Reportable segment Bulkships Container- ships Ferry & Domestic transport Associated business Sub Total Others Total Adjustment Consolidated Thousands of US dollars (Note 1) For the year ended March 31, 2013: 1. revenues: (1) Revenues from customers, unconsolidated subsidiaries and affiliated companies           $ 7,775,322 $6,449,644 (2) Inter-segment revenues        17,842 Total revenues               $ 7,783,137 $6,467,486 Segment income (loss)         $ (263,690) $ (120,053) Segment assets              $13,808,421 $4,286,730 7,815 2,052 195,396 $577,193 $1,165,869 $15,968,028 $ – $16,046,720 78,692 $16,046,720 $ – 75,077 $579,245 $1,361,265 $16,191,133 $ 153,769 $16,344,902 $ (298,182) $16,046,720 (73,950) $ (303,753) $ 13,642 $ 114,258 $ $387,241 $4,040,075 $22,522,467 $3,228,602 $25,751,069 $(2,735,535) $23,015,534 (229,803) $ (255,843) $ 26,040 $ (298,182) 223,105 298,182 2. others (1) Depreciation and amortization   $ (2) Amortization of goodwill, net     (3) Interest income               (4) Interest expenses             (5) Equity in earnings (losses) of 709,080 $ 158,437 362 1,893 26,592 (6,093) 12,164 114,673 $ 37,533 $ 84,679 $ 2,903 393 3,519 670 1,031 20,809 989,729 $ (2,158) 15,481 165,593 4,359 $ (181) 13,312 9,123 994,088 $ (2,339) 28,793 174,716 12,663 $ 1,006,751 (2,339) 17,799 138,447 – (10,994) (36,269) affiliated companies, net        (69,654) 13,376 1,627 1,488 (53,163) 680 (52,483) (6) Cost of business structural reforms             (7) Investment in affiliates          (8) Tangible/intangible fixed 1,078,820 708,389 – 64,125 – 17,278 – 12,654 1,078,820 802,446 – 24,263 1,078,820 826,709 – – – (52,483) 1,078,820 826,709 assets increased              1,365,657 121,882 11,717 216,257 1,715,513 6,614 1,722,127 31,089 1,753,216 Effective from the year ended March 31, 2013, the Company has changed the method of allocating general and administrative expenses to reflect global expansion of our business locations on segment information appropriately In case of calculating segment information for the year ended March 31, 2012 in accordance with the new method, segment loss would be decreased by ¥2,260 million ($24,030 thou- sand) in “Bulkships,” ¥541 million ($5,752 thousand) in “Containerships” and ¥51 million ($542 thousand) in “Ferry & Domestic Transport” respectively and increased by ¥2,891 million ($30,739 thousand) in “Adjustment” And segment income would be increased by ¥71 mil- lion ($755 thousand) in “Associated Business” and decreased by ¥33 million ($351 thousand) in “Others” 97 Reportable segment Bulkships Container- ships Ferry & Domestic transport Associated business Sub Total Others Total Adjustment Consolidated Millions of yen For the year ended March 31, 2012: 1. revenues: (1) Revenues from customers, unconsolidated subsidiaries and affiliated companies           ¥ 726,011 (2) Inter-segment revenues        978 Total revenues               ¥ 726,989 Segment income (loss)         ¥ (6,922) Segment assets              ¥1,194,814 2. others (1) Depreciation and amortization   ¥ 58,371 (558) (2) Amortization of goodwill, net     798 (3) Interest income               (4) Interest expenses             9,818 (5) Equity in earnings of affiliated ¥542,426 1,700 ¥544,126 ¥ (29,910) ¥365,975 ¥ 13,433 35 170 2,457 ¥52,134 206 ¥52,340 ¥ (534) ¥36,089 ¥106,710 17,729 ¥124,439 ¥ 9,099 ¥355,342 ¥1,427,281 20,613 ¥1,447,894 ¥ (28,267) ¥1,952,220 ¥ 7,940 7,206 ¥ 15,146 ¥ 4,304 ¥278,061 ¥1,435,221 27,819 ¥1,463,040 ¥ (23,963) ¥2,230,281 ¥ – (27,819) ¥ (27,819) ¥ (357) ¥(284,119) ¥1,435,221 – ¥1,435,221 ¥ (24,320) ¥1,946,162 ¥ 3,867 241 70 406 ¥ 8,254 (12) 42 1,980 ¥ 83,925 (294) 1,080 14,661 ¥ 1,446 6 1,256 1,056 ¥ 85,371 (288) 2,336 15,717 ¥ 253 – (1,163) (4,206) ¥ 85,624 (288) 1,173 11,511 companies, net               (6) Investment in affiliates          (7) Tangible/intangible fixed 1,883 59,381 984 5,082 93 1,096 124 1,370 3,084 66,929 216 2,228 3,300 69,157 – – 3,300 69,157 assets increased              158,188 8,210 829 5,442 172,669 2,768 175,437 289 175,726 (Segment income (loss)) Segment income (loss) is calculated by adjusting operating income for gains on management of surplus funds (interest income, etc) and the cost of raising funds (interest expense, etc) (B) rElAtEd INforMAtIoN: (1) Information about geographic areas: Our service areas are not necessarily consistent with our customer’s location in our core ocean transport business That’s why the revenues of geographic areas are revenues, wherever they may be earned, of companies registered in countries in the geographic areas For the year ended March 31, 2013: Revenues                         Tangible fixed assets                 Japan ¥1,400,961 ¥1,211,948 North America ¥17,422 ¥23,456 Europe ¥35,220 ¥ 3,651 Asia ¥55,591 ¥64,844 Millions of yen For the year ended March 31, 2013: Revenues                         $14,895,917 Tangible fixed assets                 $12,886,209 Japan North America $185,242 $249,399 Europe $374,482 $ 38,820 Asia $591,079 $689,463 Thousands of US dollars (Note 1) For the year ended March 31, 2012: Revenues                         Tangible fixed assets                 Japan ¥1,355,877 ¥1,226,211 North America ¥19,150 ¥25,194 Europe ¥25,008 ¥ 4,013 Asia ¥34,657 ¥38,299 Millions of yen Others ¥ – ¥68 Others $ – $724 Others ¥529 ¥ 86 Consolidated ¥1,509,194 ¥1,303,967 Consolidated $16,046,720 $13,864,615 Consolidated ¥1,435,221 ¥1,293,803 98 (2) Information about impairment loss by reportable segment: For the year ended March 31, 2013: Impairment loss                    Bulkships ¥8,407 For the year ended March 31, 2013: Impairment loss                    Bulkships $89,389 Millions of yen Reportable segment Container- ships ¥– Ferry & Domestic transport ¥368 Associated business ¥– Sub Total ¥8,775 Others ¥278 and elimination Consolidated ¥10,978 ¥1,925 Adjustment Thousands of US dollars (Note 1) Reportable segment Container- ships $– Ferry & Domestic transport $3,912 Associated business $– Sub Total $93,301 Others $2,956 and elimination Consolidated $116,725 $20,468 Adjustment Note: Other than the amounts written above, impairment loss associated with bulkships segment (¥7,279 million ($77,395 thousand)) were included in cost of business structural reforms For the year ended March 31, 2012: Impairment loss                    Bulkships ¥5,468 Millions of yen Reportable segment Container- ships ¥– Ferry & Domestic transport ¥– Associated business ¥– Sub Total ¥5,468 Others ¥– and elimination Consolidated ¥5,468 ¥– Adjustment (3) Information about goodwill (negative goodwill) by reportable segment: Reportable segment Millions of yen For the year ended March 31, 2013: Goodwill (Negative goodwill) at the end of current year           Bulkships Container- ships Ferry & Domestic transport Associated business Sub Total Others and elimination Consolidated Adjustment ¥(1,014) ¥16 ¥704 ¥1,397 ¥1,103 ¥2 ¥– ¥1,105 For the year ended March 31, 2013: Goodwill (Negative goodwill) at the end of current year           $(10,782) Bulkships Thousands of US dollars (Note 1) Reportable segment Container- ships Ferry & Domestic transport Associated business Sub Total Others and elimination Consolidated Adjustment $170 $7,485 $14,855 $11,728 $21 $– $11,749 For the year ended March 31, 2012: Goodwill (Negative goodwill) at the end of current year           Bulkships Container- ships Ferry & Domestic transport Associated business Sub Total Others and elimination Consolidated Adjustment ¥(1,362) ¥62 ¥977 ¥1,155 ¥832 ¥14 ¥– ¥846 Reportable segment Millions of yen 99 15. INCoME tAXEs The Company is subject to a number of taxes based on income, which, in the aggregate, indicate statutory rates in Japan of approxi- mately 3425% for the year ended March 31, 2013 and 3725% for the year ended March 31, 2012 (A) Significant components of deferred tax assets and liabilities at March 31, 2013 and 2012 were as follows: deferred tax assets: Excess bad debt expenses                                      Reserve for bonuses expenses                                   Retirement benefits expenses                                    Retirement allowances for directors                                Write-down of securities and other investments                       Accrued business tax                                          Operating loss carried forward                                    Unrealized gain on sale of fixed assets                              Impairment loss                                               Unrealized losses on hedging derivatives                            Others                                                      Total deferred tax assets                                        Valuation allowance                                            Net deferred tax assets                                         deferred tax liabilities: Reserve deductible for tax purposes when appropriated for deferred gain on real properties                                         Reserve deductible for tax purposes when appropriated for special depreciation                                           Unrealized holding gains on available-for-sale securities                 Gain on securities contributed to employee retirement benefit trust        Revaluation reserve                                            Retained earnings of consolidated subsidiaries                       Unrealized gains on hedging derivatives                            Others                                                      Total deferred tax liabilities                                       Net deferred tax liabilities                                        Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 ¥ 1,772 1,463 4,287 728 1,576 423 69,292 1,699 1,212 – 3,287 85,739 (77,693) 8,046 ¥ 673 1,495 4,198 702 2,404 392 25,491 2,052 613 13,150 3,787 54,957 (11,269) 43,688 $ 18,841 15,556 45,582 7,741 16,757 4,498 736,757 18,065 12,887 – 34,948 911,632 (826,082) 85,550 (1,815) (1,849) (19,298) (889) (15,200) (3,698) (14,811) (16,489) (21,127) (325) (74,354) ¥(66,308) (1,173) (10,931) (3,698) (14,787) (14,228) – (370) (47,036) ¥ (3,348) (9,452) (161,616) (39,320) (157,480) (175,322) (224,636) (3,455) (790,579) $(705,029) Following the promulgation on December 2, 2011 of the “Act for Partial Revision of the Income Tax Act, etc for the Purpose of Creat- ing Taxation System Responding to Changes in Economic and Social Structures” (Act No 114 of 2011) and the “Act on Special Mea- sures for Securing Financial Resources Necessary to Implement Measures for Reconstruction following the Great East Japan Earthquake” (Act No 117 of 2011), Japanese corporation tax rates will be reduced and the special reconstruction corporation tax, a surtax for recon- struction funding after the Great East Japan Earthquake, will be imposed for the fiscal years beginning on or after April 1, 2012 In line with these revisions, the Company changed the statutory tax rate to calculate deferred tax assets and liabilities from 3725% to 3425% for temporary differences which are expected to reverse during the period from the fiscal year beginning on April 1, 2012 to the fiscal year beginning on April 1, 2014 Similarly, the Company changed the statutory tax rate to calculate deferred tax assets and liabilities from 3725% to 3175% for temporary differences which are expected to reverse from the fiscal years beginning on or after April 1, 2015 As a result of this change, net deferred tax assets (after netting deferred tax liabilities) decreased by ¥527 million, and income taxes— deferred, unrealized holding gains on available-for-sale securities, net of tax increased by ¥556 million, ¥1,782 million, respectively and unrealized losses on hedging derivatives, net of tax decreased by ¥1,752 million (B) Significant difference between the statutory tax rate and the effective tax rate for the financial statement purpose for the years ended March 31, 2013 and 2012 are not stated as the Company recorded loss before income taxes and minority interests 100 16. EMPloyEEs’ sEVErANCE ANd rEtIrEMENt BENEfIts Employees’ severance and retirement benefits included in the liability section of the consolidated balance sheets at March 31, 2013 and 2012 consisted of the following: Projected benefit obligation                                        Unrecognized actuarial differences                                  Prepaid pension expenses                                        Less fair value of pension assets                                    Employees’ severance and retirement benefits                         Millions of yen 2013 ¥ 61,280 (712) 17,576 (64,672) ¥ 13,472 2012 ¥ 61,317 (3,887) 17,566 (61,230) ¥ 13,766 Thousands of US dollars (Note 1) 2013 $ 651,568 (7,570) 186,879 (687,634) $ 143,243 Included in the consolidated statements of operations for the years ended March 31, 2013 and 2012 were severance and retirement benefit expenses, which comprised the following: Service costs—benefits earned during the year                         Interest cost on projected benefit obligation                           Expected return on plan assets                                     Amortization of actuarial differences                                 Others*                                                       Employees’ severance and retirement benefits expenses                 Millions of yen 2013 ¥ 3,054 873 (1,087) 239 1,102 ¥ 4,181 2012 ¥ 3,965 874 (1,085) 685 459 ¥ 4,898 Thousands of US dollars (Note 1) 2013 $ 32,472 9,282 (11,558) 2,541 11,718 $ 44,455 * “Others” represents special retirement and expenses related to the defined contribution pension plan of the Group The discount rate for the years ended March 31, 2013 and 2012 used by the Company is mainly 20% Also, the rate of expected return on plan assets for the years ended March 31, 2013 and 2012 is mainly 20% The estimated amount of all retirement benefits to be paid at the future retirement date is allocated equally to each service year using the estimated number of total service years 101 17. stoCK oPtIoNs (A) EXPENsEd AMouNt Expensed amounts on stock options for the years ended March 31, 2013 and 2012 were as follows: Selling, general and administrative expenses                           Total                                                         Millions of yen 2013 ¥110 ¥110 2012 ¥150 ¥150 Thousands of US dollars (Note 1) 2013 $1,170 $1,170 (B) tErMs ANd CoNdItIoNs The following table summarizes terms and conditions of stock options for the years when they were granted: 2002 2003 2004 2005 Number of grantees Directors: 13 Executive officers: 19 Employees: 52 Number of stock options Grant date Vesting conditions Service period Exercise period Common stock 1,560,000 September 11, 2002 No provisions No provisions From June 26, 2004 to June 25, 2012 Directors: 11 Executive officers: 16 Employees: 37 Presidents of the Company’s domestic consolidated subsidiaries: 34 Common stock 1,590,000 August 8, 2003 No provisions No provisions From June 20, 2004 to June 25, 2013 Directors: 11 Executive officers: 16 Employees: 32 Presidents of the Company’s domestic consolidated subsidiaries: 34 Common stock 1,570,000 August 5, 2004 No provisions No provisions From June 20, 2005 to June 24, 2014 Directors: 11 Executive officers: 17 Employees: 38 Presidents of the Company’s domestic consolidated subsidiaries: 34 Common stock 1,650,000 August 5, 2005 No provisions No provisions From June 20, 2006 to June 23, 2015 Number of grantees Number of stock options Grant date Vesting conditions Service period Exercise period Number of grantees Number of stock options Grant date Vesting conditions Service period Exercise period 2006 2007 2008 2009 Directors: 11 Executive officers: 17 Employees: 34 Presidents of the Company’s domestic consolidated subsidiaries: 37 Common stock 1,670,000 August 11, 2006 No provisions No provisions From June 20, 2007 to June 22, 2016 Directors: 11 Executive officers: 20 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 36 Common stock 1,710,000 August 10, 2007 No provisions No provisions From June 20, 2008 to June 21, 2017 Directors: 11 Executive officers: 20 Employees: 38 Presidents of the Company’s domestic consolidated subsidiaries: 36 Common stock 1,760,000 August 8, 2008 No provisions No provisions From July 25, 2009 to June 24, 2018 Directors: 11 Executive officers: 20 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 35 Common stock 1,640,000 August 14, 2009 No provisions No provisions From July 31, 2011 to June 22, 2019 2010 2011 2012 Directors: 10 Executive officers: 21 Employees: 36 Presidents of the Company’s domestic consolidated subsidiaries: 33 Common stock 1,710,000 August 16, 2010 No provisions No provisions From July 31, 2012 to June 21, 2020 Directors: 10 Executive officers: 22 Employees: 34 Presidents of the Company’s domestic consolidated subsidiaries: 33 Common stock 1,720,000 August 9, 2011 No provisions No provisions From July 26, 2013 to June 22, 2021 Directors: 9 Executive officers: 22 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 30 Common stock 1,640,000 August 13, 2012 No provisions No provisions From July 28, 2014 to June 21, 2022 102 (C) CHANgEs IN NuMBEr ANd uNIt PrICEs The following tables summarize changes in number and unit prices of stock options for the years when they were granted: (1) Changes in number of stock options Non-vested stock options Balance at March 31, 2012        Options granted during the year    Options expired during the year     Options vested during the year     Balance at March 31, 2013        2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 1,710,000 1,720,000 – – – – – 1,710,000 – – – 1,640,000 – – – – – 1,720,000 1,640,000 Vested stock options Balance at March 31, 2012        Options vested during the year     Options exercised during the year   Options expired during the year     Balance at March 31, 2013        2002 20,000 – 20,000 – – 2003 14,000 – – – 14,000 2004 286,000 – – – 286,000 (2) Unit prices of stock options exercised during the year 2008 2009 2005 2006 2007 878,000 1,443,000 1,680,000 1,750,000 1,630,000 – – 1,710,000 – – – – 878,000 1,443,000 1,680,000 1,750,000 1,630,000 1,710,000 – – – – – – – – – – – – – – – – – – – – – – 2010 2011 2012 Exercise price                  Average market price of share at exercise                    Fair value per stock option at grant date                  2002 2003 2004 2005 2006 ¥264 ¥377 ¥644 ¥762 ¥841 2007 ¥1,962 2008 ¥1,569 2009 2010 2011 2012 ¥639 ¥642 ¥468 ¥277 ¥276 – – – – – – – – – – – – – – ¥219 ¥ 352 ¥ 217 ¥136 ¥208 ¥ 87 ¥ 67 (d) KEy fIgurEs for fAIr VAluE PEr stoCK oPtIoN The Company utilized the Black Scholes Model for calculating fair value per stock option Key figures of the calculation were as follows: Stock price volatility                                                                           Expected remaining term of the option                                                            Expected dividends                                                                           Risk-free interest rate                                                                         470% 5 years and 11 months ¥5 per share 029% 2012 18. MAtErIAl NoN-CAsH trANsACtIoNs Amounts of lease assets and lease obligations recognized for the years ended March 31, 2013 and 2012 were ¥495 million ($5,263 thousand) and ¥3,817 million, respectively 19. BusINEss CoMBINAtIoNs (1) Name and business description of companies subject to business combination Surviving company: Utoc Corporation (business: harbor and transport business and other activities) Absorbed company: International Container Terminal Co, Ltd (business: harbor and transport business and other activities) (2) Date of business combination (effective date) April 1, 2011 (3) Legal form of business combination Merger in which Utoc Corporation is the surviving company (4) Name of company after business combination Utoc Corporation (5) Outline of transaction including its purpose The merger was conducted between Utoc Corporation, which is engaged in a wide range of business activities including plant con- struction, warehousing and logistics in addition to harbor and transport business, and International Container Terminal Co, Ltd, which has made achievements as a high-quality container terminal operator This merger thus promotes effective use of management resources and expanded service menus in pursuing aggressive business activities not only in the harbor and transport business but also in the logistics and plant businesses By so doing, the Company will work to enhance the service quality that is well recognized by customers in various sectors in an aim to grow, expand and maximize corporate value The transaction underlying the business combination entails allotment of 104 shares of common stock of Utoc Corporation for every 1 share of common stock of International Container Terminal Co, Ltd 103 (6) Overview of accounting treatment of transaction The transfer was accounted for as a transaction under common control as per Accounting Standard for Business Combinations (ASBJ Statement No 21, December 26, 2008) and the Revised Guidance on Accounting Standard for Business Combinations and Account- ing Standard for Business Divestitures (ASBJ Guidance No 10, December 26, 2008) 20. CoMPrEHENsIVE INCoME For the years ended March 31, 2013 and 2012, the amounts reclassified to net loss that were recognized in other comprehensive income and tax effects for each component of other comprehensive income were as follows: Millions of yen 2013 2012 Thousands of US dollars (Note 1) 2013 unrealized holding gains on available-for-sale securities, net of tax: Increase (Decrease) during the year                                Reclassification adjustments                                     Sub-total, before tax                                           Tax benefit (expense)                                           unrealized gains on hedging derivatives, net of tax: Increase during the year                                        Reclassification adjustments                                     Adjustments of acquisition cost                                   Sub-total, before tax                                           Tax expense                                                 foreign currency translation adjustments: Increase (Decrease) during the year                                Reclassification adjustments                                     ¥ 10,770 2,801 13,571 (4,478) 9,093 70,181 17,796 2,712 90,689 (34,276) 56,413 14,902 7 14,909 ¥ (7,682) 8,891 1,209 1,295 2,504 19,784 9,894 6,316 35,994 (17,263) 18,731 (2,569) 1,266 (1,303) share of other comprehensive income (loss) of associates accounted for using equity method: Decrease during the year                                        Reclassification adjustments                                     Total other comprehensive income                                  (3,560) 4,664 1,104 ¥ 81,519 (15,672) 5,621 (10,051) ¥ 9,881 $ 114,514 29,782 144,296 (47,613) 96,683 746,209 189,219 28,836 964,264 (364,444) 599,820 158,448 74 158,522 (37,852) 49,590 11,738 $ 866,763 21. rElAtEd PArty trANsACtIoNs Category Affiliated company Name of company Address Daiichi Chuo Kisen Kaisha Chuo-ku, Tokyo Millions of yen Paid-in capital Business description Ratio of the Group’s voting rights Relation with related party ¥20,758 Marine Directly 2696% Interlocking directorate transportation Ship chartering Loans of capital Millions of yen Transactions during the year ended March 31, 2013 Balance at March 31, 2013 Transacted Thousands of US dollars (Note 1) Transactions during the year ended March 31, 2013 Balance at March 31, 2013 Description of transaction amount Account Amount Transacted amount Amount Underwriting of capital increase Loans of capital ¥15,000 38,400 – – $159,490 408,293 – Notes: 1 (1) With regard to underwriting of capital increase, the Company underwrote capital increase through a third-party allotment of new shares of Daiichi Chuo Kisen Kaisha at ¥1,000 per share (2) With regard to loans of capital, interest rates on loans were decided after considering market interest rates Furthermore, collateral was not accepted 2 Consumption taxes are not included in transacted amount 22. suBsEQuENt EVENt There are no applicable matters to report 104 independent auditor’s report 105 the mol group Mitsui O.S.K. Lines, Ltd. March 31, 2013  Consolidated Subsidiaries ▲ Affiliated Companies Accounted for by the Equity Method Registered Office MOL’s Voting Rights (%)* Paid-in Capital (Thousands) Bulkships  BGT Ltd  BLNG Inc  Chugoku Shipping Agencies Ltd  El Sol Shipping Ltd SA  Euro Marine Carrier BV  Euro Marine Logistics NV  LNG Fukurokuju Shipping Corporation  LNG Jurojin Shipping Corporation  MOL LNG Transport Co, Ltd  MCGC International Ltd  Mitsui OSK Bulk Shipping (Asia Oceania) Pte Ltd  Mitsui OSK Bulk Shipping (Europe) Ltd  Mitsui OSK Bulk Shipping (USA), Inc  Mitsui OSK Kinkai, Ltd  MOG LNG Transport SA  MOL Bridge Finance SA  MOL Bulk Carriers Pte Ltd  MOL-NIC Transport Ltd  MOL Cape (Singapore) Pte Ltd  MOL Netherlands Bulkship BV  Nissan Carrier Europe BV  Nissan Motor Car Carrier Co, Ltd  Phoenix Tankers Pte Ltd  Samba Offshore SA  Shining Shipping SA  Shipowner/Chartering companies (197 companies) in Panama, Cayman Islands, Liberia, Singapore, Hong Kong, Cyprus, Malta, Isle of Man, Marshall Islands and the UK Liberia USA Japan Panama Netherlands Belgium Bahamas Bahamas Japan Bahamas Singapore UK USA Japan Panama Panama Singapore Liberia Singapore Netherlands Netherlands Japan Singapore Panama Panama  Tokyo Marine Asia Pte Ltd  Tokyo Marine Co, Ltd  Unix Line Pte Ltd  World Logistics Service (USA), Inc  Others (3 companies) ▲ Act Maritime Co, Ltd ▲ Aramo Shipping (Singapore) Pte Ltd ▲ Asahi Tanker Co, Ltd ▲ Cernambi Norte MV26 BV ▲ Cernambi Sul MV24 BV ▲ Daiichi Chuo Kisen Kaisha ▲ Gearbulk Holding Limited ▲ MSTanker Shipping Limited ▲ Trans Pacific Shipping 2 Ltd ▲ Shipowner/Chartering companies (43 companies) in Liberia, Panama, Bahamas, Singapore Japan Singapore USA Japan Singapore Japan Netherlands Netherlands Japan Bermuda Hong Kong Bahamas Containerships 106 Malta, Netherlands, Indonesia, Marshall Islands and Cayman Islands  Chiba Utoc Corporation  Hong Kong Logistics Co, Ltd  International Container Transport Co, Ltd  MO Air International (Taiwan) Co, Ltd  Mitsui OSK Lines (Australia) Pty Ltd  Mitsui OSK Lines (Japan) Ltd  Mitsui OSK Lines (SEA) Pte Ltd  MOL (America) Inc  MOL (Brasil) Ltda  MOL (China) Co, Ltd  MOL (Europe) BV  MOL (Europe) Ltd  MOL (Singapore) Pte Ltd  MOL Consolidation Service Limited  MOL Consolidation Service Ltd (China)  MOL Liner, Limited  MOL Logistics (Deutschland) GmbH  MOL Logistics (Europe) BV  MOL Logistics (HK) Ltd  MOL Logistics (Japan) Co, Ltd  MOL Logistics (Netherlands) BV  MOL Logistics (Singapore) Pte Ltd  MOL Logistics (Thailand) Co, Ltd  MOL Logistics (UK) Ltd  MOL Logistics (USA) Inc  MOL Logistics Holding (Europe) BV  MOL South Africa (Proprietary) Limited  Shanghai Huajia International Freight Forwarding Co, Ltd  Shipowner companies (15 companies) in Panama, Marshall Islands, Liberia and Hong Kong  Shosen Koun Co, Ltd  TraPac, Inc  Utoc Corporation  Utoc Engineering Pte Ltd  Utoc Logistics Corporation  Utoc Stevedoring Corporation  Others (9 companies) Japan Hong Kong Japan Taiwan Australia Japan Singapore USA Brazil China Netherlands UK Singapore Hong Kong China Hong Kong Germany Netherlands Hong Kong Japan Netherlands Singapore Thailand UK USA Netherlands South Africa China Japan USA Japan Singapore Japan Japan 10000 7500 10000 10000 7550 5000 10000 10000 10000 8010 10000 10000 10000 10000 10000 10000 10000 7500 10000 10000 10000 7001 10000 10000 10000 10000 10000 10000 10000 4900 5000 2475 2060 2060 2696 4900 5000 5000 10000 10000 5100 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 7506 10000 10000 4900 10000 10000 10000 10000 7600 7998 10000 6755 10000 10000 10000 US$5 US$1 ¥10,000 US$10 €91 €900 ¥1,000 ¥1,000 ¥40,000 US$1 S$2,350 US$402 US$200 ¥660,000 ¥0 US$8 US$3,500 US$13,061 US$14,752 €18 €195 ¥640,000 US$328,811 US$10 US$10 S$138,018 ¥2,000,000 US$344 US$200 ¥90,000 US$20,743 ¥600,045 €100 €100 ¥20,758,410 US$61,225 HK$2,000 ¥1,200,000 ¥90,000 HK$58,600 ¥100,000 NT$7,500 A$1,000 ¥100,000 S$200 US$6 R$2,403 US$1,960 €456 £1,500 S$5,000 HK$1,000 RMB8,000 HK$40,000 €537 €414 HK$3,676 ¥756,250 €3,049 S$700 BT20,000 £400 US$9,814 €19 R3,000 US$1,720 ¥300,000 US$3,000 ¥2,155,300 S$2,000 ¥50,000 ¥50,000 Containerships ferry & domestic transport associated Business others *MOL includes MOL and its subsidiaries ▲ Mitsui OSK Lines (Thailand) Co, Ltd ▲ Shanghai Kakyakusen Kaisha, Ltd ▲ Shanghai Longfei International Logistics Co, Ltd ▲ Other company (1 company)  Blue Sea Network Co, Ltd  Blue Highway Express Kyushu Co, Ltd  Blue Highway Service KK  Ferry Sunflower Limited  MOL Naikou, Ltd  Shipowner company (1 company) in Panama  MOL Ferry Co, Ltd  Others (7 companies) ▲ Meimon Taiyo Ferry Co, Ltd ▲ Others (2 companies)  Daibiru Corporation  Daibiru Facility Management Ltd  Green Kaiji Kaisha, Ltd  Green Shipping, Ltd  Hokuso Kohatsu KK  Ikuta & Marine Co, Ltd  Japan Express Co, Ltd (Kobe)  Japan Express Co, Ltd (Yokohama)  Japan Express Packing & Transport Co, Ltd  Japan Hydrographic Charts & Publications Co, Ltd  Jentower Limited  Kosan Kanri Service Co, Ltd  Kosan Kanri Service · West Co,Ltd  Kitanihon Tug-boat Co, Ltd  Kobe Towing Co, Ltd  Kusakabe Maritime Engineering Co, Ltd  MOL Career Support, Ltd  Mitsui OSK Kosan Co, Ltd  Mitsui OSK Passenger Line, Ltd  MOL Kaiji Co, Ltd  MOL Techno-Trade, Ltd  MO Tourist Co, Ltd  Nihon Tug-Boat Co, Ltd  Chartering company (1 company) in Panama  Saigon Tower Co, Ltd  Tanshin Building Service Co, Ltd  Ube Port Service Co, Ltd ▲ Nippon Charter Cruise, Ltd ▲ Shinyo Kaiun Corporation ▲ South China Towing Co, Ltd ▲ Tan Cang-Cai Mep Towage Services Co, Ltd  Euromol BV  MOL Ocean Expert Co, Ltd  International Transportation Inc  Linkman Holdings Inc  MOL Cableship Ltd  MOL Marine Consulting, Ltd  MOL Ship Tech Inc  Mitsui Kinkai Kisen Co, Ltd  Mitsui OSK Holdings (Benelux) BV  MOL Accounting Co, Ltd  MOL Adjustment, Ltd  MOL Engineering Co, Ltd  MOL FG, Inc  MOL Information Systems, Ltd  MOL Manning Service SA  MOL Ship Management Co, Ltd  MOL SI, Inc  Shipowner/Chartering companies (4 companies) in Panama ▲ Minaminippon Shipbuilding Co, Ltd ▲ Osaka Shipping Co, Ltd Registered Office MOL’s Voting Rights (%)* Paid-in Capital (Thousands) Thailand Japan China Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Hong Kong Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Vietnam Japan Japan Japan Japan Hong Kong Vietnam Netherlands Japan USA Liberia Japan Japan Japan Japan Netherlands Japan Japan Japan USA Japan Panama Japan USA Japan Japan 4700 3198 2205 10000 10000 10000 10000 10000 BT20,000 ¥100,000 US$1,240 ¥54,600 ¥50,000 ¥30,000 ¥100,000 ¥650,000 10000 ¥1,577,400 3873 ¥880,000 5107 10000 10000 10000 10000 10000 8627 10000 10000 9525 10000 10000 10000 6200 10000 10000 10000 10000 10000 10000 10000 10000 8726 10000 10000 9939 5000 3600 2500 4000 10000 10000 10000 10000 10000 10000 10000 8042 10000 10000 10000 10000 10000 10000 10000 10000 10000 2400 3012 ¥12,227,847 ¥17,000 ¥95,400 ¥172,000 ¥50,000 ¥26,500 ¥99,960 ¥236,000 ¥60,000 ¥32,000 US$0 ¥20,000 ¥14,400 ¥50,000 ¥50,000 ¥200,000 ¥100,000 ¥300,000 ¥100,000 ¥95,000 ¥490,000 ¥250,000 ¥134,203 VND48,166,000 ¥20,000 ¥14,950 ¥290,000 ¥100,000 HK$12,400 US$4,500 €8,444 ¥100,000 US$0 US$3 ¥10,000 ¥100,000 ¥50,000 ¥350,000 €17,245 ¥30,000 ¥10,000 ¥20,000 US$20 ¥100,000 US$135 ¥50,000 US$100 ¥200,000 ¥498,000 107 worldwide offiCes head office 1-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8688, Japan PO Box 5, Shiba, Tokyo Tel: 81-3-3587-6224 Branch Offices Fax: 81-3-3587-7734 Nagoya, Kansai, Hiroshima, Kyushu Japan Mitsui o.s.K. lines (Japan), ltd. Head Office (Tokyo): Yokohama: Nagoya: Osaka: Kyushu: Tel: 81-3-3587-7684 Tel: 81-45-212-7710 Tel: 81-52-564-7000 Tel: 81-6-6446-6501 Tel: 81-92-262-0701 Fax: 81-3-3587-7730 Fax: 81-45-212-7735 Fax: 81-52-564-7047 Fax: 81-6-6446-6513 Fax: 81-92-262-0720 north america Mol (America) Inc. Head Office (Chicago): Tel: 1-630-812-3700 Main Branch Offices Atlanta: Long Beach: New Jersey: San Francisco: Seattle: Tel: 1-678-855-7700 Tel: 1-562-983-6200 Tel: 1-732-512-5200 Tel: 1-925-603-7200 Tel: 1-206-444-6900 Fax: 1-630-812-3703 Fax: 1-678-855-7747 Fax: 1-562-983-6292 Fax: 1-732-512-5300 Fax: 1-925-603-7229 Fax: 1-206-444-6903 Mitsui o.s.K. Bulk shipping (usA) Inc. Head Office (New Jersey): Tel: 1-201-395-5800 Tel: 1-832-615-6470 Houston: Tel: 1-562-528-7500 Long Beach: Fax: 1-201-395-5820 Fax: 1-832-615-6480 Fax: 1-562-528-7515 africa Mol south Africa (Pty) ltd. Head Office (Cape Town): Tel: 27-21-441-2200 Fax: 27-21-419-1040 Mitsui o.s.K. lines (Nigeria) ltd. Lagos: Mol (ghana) ltd. Tema: Tel: 234-1-2806556 Fax: 234-1-2806559 Tel: 233-30-3212084 Fax: 233-30-3210807 middle east Mitsui o.s.K. lines ltd. Middle East Headquarters Dubai: Mol (uAE) l.l.C. Tel: 971-4-3573566 Fax: 971-4-3573066 Head Office (Dubai): Tel: 971-4-3573566 Fax: 971-4-3573066 Mitsui o.s.K. Bulk shipping (Asia, oceania) Pte. ltd. Doha: Muscat: Mol (Europe) ltd. Beirut: Tel: 974-4-836541 Tel: 968-2440-0950 Fax: 968-2440-0953 Fax: 974-4-836563 Tel: 961-3-809812 Fax: 961-4-530492 oceania Mitsui o.s.K. lines (Australia) Pty. ltd. Head Office (Sydney): Tel: 61-2-9320-1600 Fax: 61-2-9320-1601 Mitsui o.s.K. lines (New Zealand) ltd. Auckland: Tel: 64-9-3005820 Fax: 64-9-3091439 Mitsui o.s.K. Bulk shipping (Asia, oceania) Pte. ltd. Melbourne: Perth: Brisbane: Tel: 61-3-9691-3224 Fax: 61-3-9691-3223 Tel: 61-8-9278-2499 Fax: 61-8-9278-2727 Tel: 61-7-3007-2115 Fax: 61-7-3007-2116 Mol logistics (Australia) Pty. ltd. Mol logistics (usA) Inc. Head Office (Melbourne): Tel: 61-3-9335-8555 Fax: 61-3-9335-8599 Head Office (New York): Tel: 1-516-403-2100 Tel: 1-310-787-8351 Los Angeles: Fax: 1-516-626-6092 Fax: 1-310-787-8168 Central and south america Mol (Brasil) ltda. asia Mol liner ltd. Head Office (Hong Kong): Tel: 852-2823-6800 Fax: 852-2865-0906 Mitsui o.s.K. lines (India) Private limited Head Office (Sao Paulo): Tel: 55-11-3145-3972 Fax: 55-11-3145-3945 Head Office (Mumbai): Tel: 91-22-4054-6300 Fax: 91-22-4054-6301 Mol (Chile) ltda. Mitsui o.s.K. lines lanka (Private) ltd. Head Office (Santiago): Tel: 56-2-630-1950 Fax: 56-2-231-5622 Corporativo Mol de Mexico s.A. de C.V. Head Office (Colombo): Mol (singapore) Pte. ltd. Tel: 94-11-2304721 Fax: 94-11-2304730 Head Office (Mexico City): Tel: 52-55-5010-5200 Fax: 52-55-5010-5220 Head Office (Singapore): Tel: 65-6225-2811 Fax: 65-6225-6096 Mol (Panama) Inc. Mitsui o.s.K. lines (Malaysia) sdn. Bhd. Head Office (Panama): Tel: 11-507-300-3200 Fax: 11-507-300-3212 Head Office (Kuala Lumpur): Tel: 60-3-5623-9666 Fax: 60-3-5623-9600 Mitsui o.s.K. Bulk shipping (usA) Inc. P.t. Mitsui o.s.K. lines Indonesia Sao Paulo: Tel: 55-11-3145-3980 Fax: 55-11-3145-3946 Head Office (Jakarta): Tel: 62-21-521-1740 Fax: 62-21-521-1741 Mol (Peru) s.A.C. Mitsui o.s.K. lines (thailand) Co., ltd. Lima: Tel: 51-1-6119400 Fax: 51-1-6119429 Head Office (Bangkok): Tel: 66-2-234-6252 Fax: 66-2-237-9021 europe Mol (Europe) B.V. Head Office (Rotterdam): Tel: 31-10-201-3200 Antwerp: Genoa: Hamburg: Le Havre: Vienna: Tel: 32-3-2024860 Tel: 39-010-2901711 Tel: 49-40-356110 Tel: 33-2-32-74-24-00 Tel: 43-1-877-6971 Fax: 31-10-201-3186 Fax: 32-3-2024870 Fax: 39-010-5960450 Fax: 49-40-352506 Fax: 33-2-32-74-24-39 Fax: 43-1-876-4725 Mol (Europe) ltd. Head Office (Southampton): Tel: 44-2380-714500 Fax: 44-2380-714519 Mitsui o.s.K. Bulk shipping (Europe) ltd. Head Office (London): Tel: 44-20-7265-7676 Tel: 32-2-305-4240 Brussels: Tel: 49-40-3609-7410 Hamburg: Fax: 44-20-7265-7699 Fax: 32-2-305-4241 Fax: 49-40-3609-7450 Mol logistics (deutschland) gmbH Head Office (Dusseldorf): Tel: 49-211-41883-0 Fax: 49-211-4183310 Mol logistics (Netherlands) B.V. Head Office (Tilburg): Tel: 31-13-537-33-73 Fax: 31-13-537-35-75 Mol logistics (u.K.) ltd. Head Office (London): Tel: 44-1895-459700 Fax: 44-1895-449600 108 Mol Philippines, Inc. Head Office (Manila): Tel: 632-888-6531 Fax: 632-884-1766 Mitsui o.s.K. lines (Vietnam) ltd. Head Office (Ho Chi Minh): Tel: 84-83-8219219 Fax: 84-83-8219317 Mitsui o.s.K. lines (Cambodia) Co., ltd. Head Office (Phnom Penh): Tel: 855-23-223-036 Fax: 855-23-223-040 Mitsui o.s.K. lines Pakistan (Pvt.) ltd. Head Office (Karachi): Mol (China) Co., ltd. Tel: 9221-5205397 Fax: 9221-5202559 Head Office (Shanghai): Beijing: Tianjin: Shenzhen: Tel: 86-21-2320-6000 Fax: 86-21-2320-6402 Tel: 86-10-8529-9121 Fax: 86-10-8529-9126 Tel: 86-22-8331-1331 Fax: 86-22-8331-1318 Tel: 86-755-2598-2200 Fax: 86-755-2598-2210 Mol (taiwan) Co., ltd. Head Office (Taipei): Tel: 886-2-2537-8000 Fax: 886-2-2537-8098 Mitsui o.s.K. Bulk shipping (Asia, oceania) Pte. ltd. Head Office (Singapore): Tel: 65-323-1303 Bangkok: Kuala Lumpur: Seoul: Mumbai: Chennai: Tel: 66-2-634-0807 Tel: 60-3-5623-9772 Fax: 60-3-5623-9666 Tel: 82-2-5672718 Tel: 91-22-4071-4500 Fax: 91-22-4071-4557 Tel: 91-44-4208-1020 Fax: 91-44-4208-1020 Fax: 65-323-1305 Fax: 66-2-634-0806 Fax: 82-2-5672719 SHAREHOLDER InFORMATIOn Capital: Head office: ¥65,400,351,028 1‑1, Toranomon 2‑chome, Minato‑ku, Tokyo 105‑8688, Japan number of MOL employees: 926 number of MOL Group employees: 9,465 (The parent company and consolidated subsidiaries) Total number of shares authorized: 3,154,000,000 number of shares issued: number of shareholders: Shares listed in: Share transfer agent: Communications materials: 1,206,286,115 120,874 Tokyo, Osaka, Nagoya Mitsubishi UFJ Trust and Banking Corporation 10‑11, Higashisuna 7‑chome, Koto‑ku, Tokyo 137‑8081, Japan Annual Report (English/Japanese) Investor Guidebook (English/Japanese) Market Data (English/Japanese) News Releases (English/Japanese) Website (English/Japanese) Quarterly Newsletter Open Sea (English/Website) Monthly Newsletter Unabara (Japanese) Environmental and Social Report (English/Japanese) (As of March 31, 2013) Stock Price range (tokyo Stock exchange) and VoLume oF Stock trade Fiscal 2010 High ¥713 Low ¥433 Fiscal 2011 High ¥477 Low ¥220 Fiscal 2012 High ¥369 Low ¥177 (¥) 800 700 600 500 400 300 200 100 0 (Million shares) 800 10 /4 98765 10 11 12 11 /1 98765432 10 11 12 12 /1 98765432 10 11 12 13 /1 765432 700 600 500 400 300 200 100 0 109 M i t s u i O . S . K . L i n e s , L t d . A n n u a l R e p o r t 2 0 1 3 For further information, please contact: Investor Relations Office Mitsui O.S.K. Lines, Ltd. 1-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8688, Japan Telephone: +81-3-3587-6224 Facsimile: +81-3-3587-7734 E-mail: URL: iromo@molgroup.com http://www.mol.co.jp/en/ This annual report is printed on Forest Stewardship Council™ (FSC)‑certified paper made of wood from responsibly managed forests. It was also printed using vegetable oil inks. Printed in Japan 

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