Yusen Group Newsletter - Philippine Edition

Message from President Tanaka (continuation...)

...YAS Group. Both in Japan and overseas. We forecast new records in terms of operating revenue - which appears as net sales in the income statement—and of profits, in the accounts both of the parent company and of our consolidated group.

This will be an especially happy outcome for the parent enterprise—Yusen Air & Sea Service Company - as we celebrate the 50^th anniversary of our founding this February. Given that few companies in Japan can exist in essentially the same narrow business niche for longer than 30 years, we can congratulate ourselves on the double achievement of reaching our 50^th corporate birthday and recording strong business results.

I would like to take this opportunity to express the heartfelt gratitude of all of us here at YAS for the support and cooperation extended over many years by our customers, the air freight carriers, and all other business partners, shareholders, and financial institutions. But despite our recent successes, we have no intention of resting on our laurels. All the management and staff of YAS are preparing themselves to power the Company into its next-stage growth.

To mark this auspicious occasion. We have come up with a new slogan:

Yusen is proud to announce its 50^th anniversary of Logistics service, we look forward to serving our customers for next 50 years as well.

No company can be at the top in every field of business activity; each has its strengths and its weaknesses, and these must be faced squarely. I believe that the best strategic course for a company is to concentrate on building on its areas of strength in the short term, while at the same time laying the groundwork over the medium-to-long term for a fundamental solution to the problems that the lie behind its weaknesses.

So, what are the strengths of YAS?

Firstly, Yusen air’s marketing efforts are focused overwhelmingly on the Japanese manufacturing sector, particularly on the automotive, electric and electronic equipment industries. These are not only vital lifelines for an export-oriented nation like Japan, they also possess high growth potential.

Secondly, we have actively expanded our overseas business operations, and not solely in one or two specific markets such as the United State and China, but in all four of the major global markets – North America, Europe, the East Asia (Chinese-speaking area plus South Korea), and the Southeast Asia & Oceania region.

Our third strength is the integrated management style at the YAS Group. That is to say, while responding flexibly to the unique features of each market, we have constantly taken care to strengthen the liaison among Group companies

I feel that these three points largely sum the Company’s strengths.

Let’s take a look at how these facts relate to our business performance figures for the first-half period of fiscal 2004, which were announced in early November.

Firstly, in a breakdown of operating revenue by customer industry in Japan, we find that the proportion accounted for by the automotive industry increased slightly, while those of electric machinery and electronic equipment declined. These two industrial sectors together accounted for 80% of our export trade and 60% of our import trade, unchanged from the previous year.

The earnings of the Group as a whole are showing a firm undertone, and growth is being achieved in various respects. The ratio of consolidated to non-consolidated recurring profit, for instance which was 1.7 for fiscal 2003, has reached 2.0 for the reporting first-half period. Moreover the ratios of operating income and recurring profit as a percentage of net sales in the consolidated accounts have already surpassed the figures for the parent company alone.

Looking at the Group’s business by operational segment, we are continuing to expand into other activities to avoid overdependence on air freight exports from Japan. Although air freight exports account for 80% of revenues on a non-consolidated accounts basis, the figure for the entire consolidated group is just under 50%. When the import business is included, the ratio of air freight rises to 80%. An analysis of gross profit on a consolidated basis shows that the air freight business accounts for 80%, sea freight for 13%, and logistics services for the remaining 7%. On a non-consolidated basis, air freight exports account for 60% of gross profit. In the case of Group companies engaged solely in cargo handling and transport within Japan, the ratios are 70% and 30% for air freight and sea freight respectively.

In overseas operations, despite differences among the various major markets, the air freight business on average account for 70% of gross profit while sea freight and logistics account for roughly 15% each. During the reporting period, overseas Group companies posted sharp increases in revenue from exports from their respective countries.

Exports by air from Japan by YAS Group companies posted a large year-on-year growth of more than 30%, far in excess of the average growth for the Japanese air freight industry as a whole. Our overseas Group companies, too recorded year-on-year gains of 16% in the Americas and Europe, 20% in the Southeast Asia and Oceania market, and 40% in the East Asia market for an overall growth of just under 30%. We believe that overseas companies' success in importing goods from Japan has led to the increased receipt of orders for exports, too.

Finally, companies in the YAS Group engaged in the travel agency business, notably Yusen travel, have also been enjoying excellent business performances.

It goes without saying that a company cannot expect to achieve continuous straight –line growth. Corporate growth follows a varied pattern of slow inclines, plateaus, and sudden sharp jumps to a higher level. But sudden expansions of business scale, or new business departures, entail risks. To avoid damaging setbacks, a company’s management must constantly work to ensure that is operational base is solid and its financial position is sound.

It is my belief that YAS, having reached the major milestone of 50 years in business is now preparing for the next significant leap forward. Using recurring profit on consolidated basis (excluding one-time profit) as our yardstick considering that we have managed to raise the figure from five billion yen two years ago to seven billion yen now, our next goal should be another two billion yen jump, taking us to recurring profit of nine billion yen within two or three years. To reach this objective we must address the following three issues:

Firstly, the long-term decline in the gross profit margin on air freight handling operations
Secondly, the industry-wide movement toward increased business alliances and mergers as a means of surviving in this era of increasingly severe international competition.
Thirdly, securing and training highly talented and qualified staff. This is clearly the most effective solution to the two issues.

I hope that all employees of the YAS group will work together o attain these goals.

Thank you for your attention and once again, I wish all of you the best of health and happiness in the year to come.