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Explanation by article

Thank you very much for joining us today.

I would like to begin our briefing on the results for the first quarter of fiscal year 2017. There are two highlights for this quarter. First, this is our first quarterly profit in seven quarters, since the second quarter of fiscal year 2015. I would like to further note that current business forecast is generally in line with the forecast made at the start of the fiscal year. Second, we are making steady progress on the medium-term management plan launched at the start of the current fiscal year. For example, as we announced last week, we plan to sell our Heavy Lifter Business among other initiatives now underway. 

A. Financial Highlights for 1st Quarter Fiscal Year 2017

A-1:Financial Results for 1st Quarter Fiscal Year 2017

Please turn to page 3 as I explain the overall financial results for the first quarter. Regarding the business environment, in Containership Business, freight rate market experienced a recovery as cargo movements in East-West routes and Intra-Asia routes were strong. Freight rate market conditions also showed signs of improvement. In Dry Bulk Business, while freight rate market conditions improved for some medium- to small-sized vessels, the capacity supply-demand gap remains an ongoing issue which cannot be solved quickly. For the previous two fiscal years, we implemented structural reforms aimed at enhancing the competitiveness of Dry Bulk and Containership Businesses. In addition to the benefits of these structural reforms, we made even harder efforts to improve profitability through ongoing cost cuts and raising the efficiency of vessel allocation. As a result of the initiatives, we achieved operating revenues of 287.4 billion yen, operating income of 3.9 billion yen, ordinary income of 6.0 billion yen and net income attributable to owners of parent of 8.5 billion yen for the first quarter. Breaking down our ordinary income by segment, Containership Business posted income of 6.1 billion yen, Bulk Shipping Business posted income of 0.4 billion yen, and the Offshore Energy E&P Support & Heavy Lifter Business posted a loss of 0.2 billion yen. This totals 6.0 billion yen, including other businesses. Now I would like to briefly explain results for each segment. In Containership Business, profitability improved as the market bottomed out, mainly for the Asia-North America and Asia-Europe routes. Business rebounded to profitability through route rationalization and stringent cost-cutting measures. In Bulk Shipping Business, the oil tanker market remained at a low level, while the clouded outlook on dry bulk demand weighed on the upward trend in rates. The impact of cyclones also delayed the completion of some voyages into the second quarter. Car Carrier Business was sluggish on routes to resource-rich countries, while the Asia-Europe services and Trans-Atlantic services performed well. We succeeded in reducing exposure through structural reform measures taken through the previous two fiscal years. This contributed to the Bulk Shipping Business’s rebound to profitability. As for Offshore Energy E&P Support & Heavy Lifter Business, we sold our Heavy Lifter Business in July. We also concluded a basic agreement on participation in the FPSO business as a way to rebuild our portfolio strategy. Rates for offshore support vessels have slumped, and we continue to take measures to stabilize profitability. Looking at our main financial indicators, equity capital at the end of the first quarter was 227.6 billion yen, interest-bearing liabilities 555.0 billion yen, DER was 244%, Net DER was 154%, and equity ratio 22%.

A-2:Results for 1st Quarter - 1st Quarter Fiscal Year 2017 vs. 1st Quarter Fiscal Year 2016

Page 4 describes the year-on-year changes in first-quarter financial results broken down by internal company achievements and external factors. In the first quarter of fiscal year 2016, we posted an ordinary loss of 22.5 billion yen. In the first quarter of fiscal year 2017, we posted an ordinary profit of 6.0 billion yen, for a year-on-year improvement of 28.5 billion yen. Internal company achievements led to an improvement of 13.8 billion yen, and external factors led to an improvement of 14.7 billion yen. The main internal company achievements were benefits from structural reforms and provision for allowance, which together totaled about 9.0 billion yen. We also achieved cost savings of 4.6 billion yen related mostly to containerships. Regarding external factors, containership market conditions showed improvement, with the Asia-North America freight index improving three points from 73 last year to 76 this year, and the Asia-Europe freight index increasing 14 points from 40 last year to 54 this year. In terms of Bulk Shipping Business, although oil tanker market declined significantly, the dry bulk market improved. These improvements in freight rates improved containership income by 9.2 billion yen and bulk shipping income by 0.9 billion yen. Exchange rate factors led to an improvement of 9.0 billion yen, and with other factors included, the total year-on-year improvement from external factors was 14.7 billion yen. Combining internal company achievements and external factors, the total improvement was therefore 28.5 billion yen.

A-3:Estimate for 1st Half & Fiscal Year 2017

Page 5 explains our forecasts. For the first half of the fiscal year, we forecast operating revenues of 570.0 billion yen, unchanged from the original forecast made at the start of the fiscal year. First-half operating income is forecast at 10.0 billion yen, a decline of one billion yen from the original forecast. First-half ordinary income and net income attributable to owners of the parent are forecast at 10.0 billion yen and 15.0 billion yen respectively, unchanged from the original forecasts. The one billion downward revision to the operating income forecast is due to the slump in oil tanker rates. Regarding the full-year forecast, while market conditions for both the containership and bulk shipping business have rebounded from rock-bottom, a substantial improvement in the capacity supply-demand gap will require more time. We plan to institute further cost-cutting and rationalization programs to improve profitability. Our targets for the fiscal year are operating revenues of 1,122.0 billion yen, operating income of 23.0 billion yen, ordinary income of 21.0 billion yen, and net income attributable to owners of the parent of 21.0 billion yen.Our forecasts are based on assumptions of average yen-dollar exchange rates of 111 yen in the first half and 110 yen for the full year, unchanged from the original forecast. Our estimated average bunker fuel prices are 325 dollars for the first half and 322 dollars for the full year, which are two dollars higher than the original forecast. For the nine-month period beginning with the second quarter, each one yen fluctuation in exchange rates will affect ordinary income by plus or minus 0.4 billion yen, while each 10 dollar change in bunker prices will alter ordinary income by plus or minus 0.6 billion yen. Regarding dividends, our priorities this fiscal year are to improve our financial structure and stabilize our business foundation. For this reason, it is with great regret that we must forgo payment of interim and year-end dividends. 

A-4:Estimate for 1st Half & Fiscal Year 2017 by Segment

Page 6 explains our segment forecasts for the first half and the full year. We forecast full-year ordinary income of 19.0 billion yen for Containership Business, unchanged from the original forecast. For Bulk Shipping Business, we forecast full-year ordinary income of 7.5 billion yen, a reduction of 1.5 billion yen from the original forecast. The main factor is the slump in the oil tanker market. For Offshore Energy E&P Support & Heavy Lifter Business, we forecast an ordinary loss of 1.5 billion yen, an improvement of 0.5 billion yen from the original forecast. Including Other Business and adjustments, we forecast a total ordinary income of 21.0 billion yen, unchanged from the original forecast. I would like to explain factors impacting each business segment. In Containership Business, while we see improvement in market conditions, we will need to monitor how a variety of potential risks will impact the market, including geopolitical risks, accelerating mergers and integration among competitors. We will also aim to use THE Alliance to satisfy customer needs and continue to deliver an even more robust shipping network. In Bulk Shipping Business, dry bulk freight rates continue to show a gradual improvement. Oil tanker rates, however, are expected to continue facing a limited upside. In Car Carrier Business, while there is uncertainty surrounding shipping demand to resource-rich countries, the global market for finished car shipments is generally strong. We will take advantage of these market conditions and maximize the use of our large-scale vessels for highly efficient shipping operations. In Offshore Energy E&P Support & Heavy Lifter Business, we expect it will take more time for offshore support vessel rates to recover. We will continue efforts to stabilize profitability through structural reforms. 

A-5:Latest Forecast for Fiscal Year 2017 1st Half - vs. Assumption as of April 2017

Page 7 explains the main factors impacting our business in the first half of fiscal year 2017. Our most recent forecast for ordinary income is unchanged from the original estimate of 10.0 billion yen made at the start of the fiscal year. Therefore, I will refrain from commenting further on this page except to say that our assumptions for containership freight indices, dry bulk market conditions and oil tanker market conditions are shown here.

A-6:Financial Impact in Fiscal Year 2017 by Structural Reforms and Provision of Allowance in Fiscal Year 2015 & Fiscal Year 2016・Progress of Cost Savings

Page 8 explains fiscal year 2017 impact of structural reforms and provision of allowance in fiscal years 2015 and 2016. The explanation is the same as was provided at the year-end briefing for fiscal year 2016, and our most recent forecast for the full year is nearly unchanged. In terms of our cost-cutting results for the first quarter, we have made progress generally in line with the targets set at the start of the fiscal year. There is also no significant change to our forecasts for the rest of this fiscal year.  

A-7:Progress of Management Plan (1st Quarter Fiscal Year 2017)

Lastly, on page 9, I would like to explain progress of our medium-term management plan. Our management plan has three pillars: rebuild the portfolio strategy, implement advanced management and strategy, and promote ESG initiatives.  Regarding progress on rebuilding our portfolio strategy, we have sold Heavy Lifter Business and agreed in principle to participate in the owning and chartering business for FPSO for an oil and gas field, offshore of Ghana. We have also developed more customers such as Tenaga National in Malaysia, with whom we have signed a COA covering steaming coal for electric power generation. This and other contracts will bolster our stable earnings foundation. Regarding Containership Business, we are making strenuous efforts to complete integration and consolidation. Regarding the implementation of advanced management and strategy, first, we continue to make progress developing more advanced systems for managing business risk and return. We will be announcing these new systems in the near future. We are also making progress strengthening our customer relations management. Internally, we have already created a project team to ensure that we can provide the highest level of services to customers through a cross-functional, integrated organization. We will also take organizational and sales measures to ensure that the entire Kawasaki Kisen Group can provide the highest level of services to customers. In terms of technological and business model reforms, we established “Advanced Technology Group” in July. This organization will collaborate with CRM to develop new technologies enabling us to better serve new customer needs. Finally, in terms of our ESG initiatives, thanks to the cooperation of all parties concerned, our car carrier DRIVE GREEN HIGHWAY was fortunately recognized with the Ship of the Year 2016 Award. We also continue to be included in SRI investment indices. We continue to vigorously promote ESG initiatives. 

This completes today’s briefing. Thank you very much.

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