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Message to Our Shareholders

Dear Shareholders:

Eizo Murakami

Eizo Murakami
President & CEO

  Your Board of Directors always appreciates your continuing support.

  We would like to herewith report our 2nd Quarter Fiscal Year 2017consolidated financial results and our estimates for full-year financial position for Fiscal 2017that ends March 31, 2018.

1) Summary of Consolidated Operating Results for 2nd Quarter FY2017

Results for 2nd Quarter FY2017 Six months ended
September 30, 2016
Six months ended
September 30, 2017
Change
Operating revenues 491.2 578.9 87.8
Operating income(loss) (26.4) 6.2 32.7
Ordinary income(loss) (36.1) 11.1 47.3
Profit(loss) attributable to owners of parent (50.5) 13.2 63.6
Exchange Rate
(6-months average)
¥107.31/US$ ¥111.20/US$
Fuel oil price
(6-months average)
US$226/MT US$324/MT

(Billion Yen; rounded to the nearest 100 million yen)

  In the first six months of the fiscal year ending March 31, 2018 (from April 1 to September 30, 2017; hereinafter referred to as the “six-month period”), the global economy showed a cyclical recovery on the whole even though the economic conditions were unstable due to such factors as rising geopolitical tensions in some regions.
  In the United States, private consumption declined temporarily because of the impact of direct hits by a series of powerful hurricanes, but the U.S. economy continued to grow, supported by firm capital investment and the favorable employment situation. In Europe, where concerns over political risks eased somewhat, private consumption stayed firm and exports increased moderately. Among emerging countries, some economies, including India, staged a recovery due mainly to export growth propped up by the economic recovery in developed countries. However, the economic situation varied from country to country, with countries dependent on energy and resource exports continuing to struggle under the weight of stagnant resource prices. In China, while fixed asset investment declined somewhat, the pace of economic growth picked up thanks to robust exports and private consumption.
In Japan, export growth lost some momentum, but the economy continued to recover at a moderate pace, as private consumption stayed firm against the backdrop of the favorable employment situation.

  As for the business environment for the shipping industry, freight rates bottomed out in the containership business as cargo movements in the East-West services remained firm. In the dry bulk business as well, market stayed on the path of recovery due to strong steel product demand in China in the Cape-size sector and robust cargo movements of grains and coal in the medium and small vessel sector. In addition to the structural reforms carried out in the previous two fiscal years in order to enhance competitiveness, the Group implemented measures to improve its profitability, including continued cost reduction and improvement of vessel allocation efficiency.

  As a result, operating revenues for the six-month period were ¥578.928 billion (up ¥87.775 billion year on year), operating income was ¥6.247 billion (compared to operating loss of ¥26.423 billion for the previous fiscal year), ordinary income was ¥11.146 billion (compared to ordinary loss of ¥36.125 billion for the previous fiscal year). Profit attributable to owners of the parent was ¥13.175 billion (compared to loss attributable to owners of the parent of ¥50.457 billion for the previous fiscal year).

2) Prospects for Fiscal 2017

Prospects for FY2017 Prior Forecast
(at the time of
announcement of
dated July 31, 2017)
Current Forecast
(at the time of
announcement
the 2nd Quarter result) Change
Change
Operating revenues 1,122.0 1,140.0 18.0
Operating income 23.0 13.0 (10.0)
Ordinary income 21.0 13.0 (8.0)
Profit attributable to
owners of parent
21.0 8.5 (12.5)
Exchange Rate
(12-months average)
¥110.37/US$ ¥110.83/US$
Fuel oil price
(12-months average)
US$322/MT US$325/MT

(Billion Yen; rounded to the nearest 100 million yen)

  In the third quarter and beyond, the global economy is expected to remain on the path of moderate growth on the whole. However, a careful watch should be kept on the economic conditions, as a further rise in geopolitical tensions or the rollback of monetary easing in various countries could cause the economy to slow down by inducing risk-aversion.
  In the containership business, freight rates are recovering from the historic low recorded in the previous fiscal year, but the rates remain top-heavy due to changes in the business environment caused by mergers and consolidation between shipping companies and the realignment of alliances, and on-schedule delivery of new large vessels. Under “THE Alliance”, which it joined in Fiscal 2017, the Group will strive to strengthen its income structure through more careful cost control efforts, including cost reduction through optimal vessel allocation and cuts in equipment costs through an improvement in the balance of inward and outward shipments. Meanwhile, the Group will prepare for the start of operation in April 2018 by the new company created through the containership business integration with two other domestic shipping companies.
  In the dry bulk business, market started to recover due to robust cargo movements, but the vessel supply-demand balance is unlikely to improve significantly given the delivery of new vessels and the decrease in scrapped capacity. In addition to continuing to improve the efficiency of vessel operation and reduce costs, the Group will strive to expand stable income by achieving an optimal fleet mix by implementing the portfolio-rebuilding strategy that has been set forth under the medium-term management plan.
  In the car carrier business, despite the lingering uncertainty over the future course of the economies of resource-rich and emerging countries as well as oil-producing countries, mainly in the Middle East, global demand for marine transport of finished vehicles is expected to stay firm over the medium to long term in line with growth in global vehicle sales. On the other hand, automakers’ production bases are becoming increasingly diverse amid a shift to trends such as “local production, local consumption,” “mass production in the right place” and “appropriate production in the right place.” In order to make a flexible and timely response to changes in and the increasing complexity of the trade structure, the Group will strengthen its business foundation by reorganizing the shipping route network and maintaining an optimal fleet scale in an appropriate manner. The Group will also strive to enhance its revenue base by making maximum use of a new generation of large vessels featuring greater loading capacity for heavy construction machinery and rail cars. It will also continue strenuous efforts to reduce vessel expenditure and operation costs.
  In the LNG carrier business and Tanker business, the Group will strive to secure stable revenues for LNG carriers, VLCCs, LPG carriers and thermal coal carriers by maintaining medium- and long-term charter contracts.
  In the offshore energy E&P support business, although it is expected to take some time for the market to recover, the Group will continue efforts to improve its profitability through cost cutting and other measures.
  In the domestic logistics business, demand for logistics services is expected to remain steady, mainly for land transport and warehousing, and handling volume related to sea/land transportation service is on an uptrend. In the international logistics business as well, demand for logistics services will remain firm. The Group will seek to increase profits through the effects of expanded localized services in Asian countries such as Thailand and Vietnam, the enhancement of its global network, and business expansion strategies, including forwarding and buyers consolidation.
  In the short sea and coastal business, the Group will better satisfy customers’ needs by improving user convenience through an optimal fleet scale intended to match the transportation demand and the market conditions.

  As described above, although market has started to recover in the dry bulk business, it is expected to take some time before the vessel supply-demand gap is fully resolved. In the containership business, as freight rates will remain top-heavy due to on-schedule delivery of new large vessels, the recovery is expected to be slower than initially forecasted. Freight rates are also expected to remain low for tankers. In addition, the forecasts of the full-year results have been revised downward because the preparation cost for opening the new company created through the integration of the containership businesses of the Group was reflected in them.

  The Group regards it to be its important task to maximize the return to its shareholders while maintaining necessary internal reserves to fund its capital investment and strengthen its financial position so that the Group can achieve sustainable growth, which is one of the priorities of its management plan. However, as outlined in the medium-term management plan announced in April 2017, improving the financial structure and stabilizing the business foundation are its top priorities for the current fiscal year. Therefore, although the Group expects to return to profitability in the current fiscal year from a loss in the previous year, it has decided to pay no interim dividend and have forecasted no year-end dividend for the current fiscal year.

  All directors and employees of "K" LINE and the "K" LINE Group are vigilantly dedicated to the accomplishment of our goals with one voice, and we appreciate your continued support and encouragement.

  Thank you very much for your kind attention.

 

October 31, 2017

Eizo Murakami
President & CEO
Kawasaki Kisen Kaisha, Ltd

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