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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 1st Quarter Fiscal Year 2017consolidated financial results and our estimates for full-year financial position for Fiscal 2017 that ends March 31, 2018.

1) Summary of Consolidated Operating Results for 1st Quarter FY2017

Results for 1st Quarter FY2017 Three months ended
June 30, 2016
Three months ended
June 30, 2017
Change
Operating revenues 244.6 287.4 42.8
Operating income(loss) (14.8) 3.9 18.7
Ordinary income(loss) (22.5) 6.0 28.5
Profit(loss) attributable to owners of parent (26.8) 8.5 35.3
Exchange Rate (¥/US$)
(3-months average)
¥111.12/US$ ¥111.48/US$  
Fuel oil price (US$/MT)
(3-months average)
US$208/MT US$326/MT

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

  During the first three months of the fiscal year ending March 31, 2018 (from April 1, 2017 to June 30, 2017; hereinafter “the three-month period”), the global economy gradually recovered, despite unstable situations with geopolitical risks. The U.S. economy made solid movement, with strong private consumption, increased capital investment and real estate investment. In Europe, anxiety over political risks was temporarily wiped out as political events including the French presidential election ended without any major confusion, and while there was some variance by country, the overall European economy maintained its course of recovery centered on capital investment. While government policy temporally supported the Chinese economy, overall trend was weak partly due to concern about the government again making structural corrections out of fear over overheating in the financial and real estate markets. Overall, the economies of developing nations struggled to improve, as the economies of resource-rich countries weighed heavily due to low levels of resource prices, which had been on a course of recovery, despite current pickup in consumption in the Indian economy, whose growth rate had temporarily faltered partly responding to the ban of their large currency bills.
The Japanese economy continued its gradual recovery due to increased exports following the recovery in the global economy. Domestic demand including private consumption and capital investment showed recovery backed by improvement in employment and income.

  In the business environment for the shipping industry, freight rate market experienced a recovery as cargo movements in the East-West services and Intra-Asia services were strong in the containership business. On the other hand, in the dry bulk business, while recovery was seen in parts of the market in the medium and small vessel sector, the Group expects it will still take some time for improvement in the vessel supply-demand gap. The Group, during the previous two fiscal years, carried out business structural reform as an initiative to increase competitiveness in the dry bulk business, containership business, and offshore energy E&P support and heavy lifter business. The Group worked on measures to improve profitability such as implementing ongoing cost cuts and more efficient vessel allocation, in addition to the effect of the business structural reform.

  As a result, operating revenues for the fiscal year were ¥287.375 billion (up ¥42.782 billion year on year), operating income was ¥3.878 billion (compared to operating loss of ¥14.836 billion for the previous fiscal year), ordinary income was ¥5.970 billion (compared to ordinary loss of ¥22.515 billion for the previous fiscal year). Profit attributable to owners of the parent was ¥8.523 billion (compared to loss attributable to owners of the parent of ¥26.793 billion for the previous fiscal year).

2) Prospects for Fiscal 2017

Prospects for FY2017 Prior Forecast
(at the time of announcement
dated April 28, 2017)
Current Forecast
(at the time of announcement of
the 1st Quarter result)
Change
Operating revenues 1,130.0 1,122.0 (8.0)
Operating income 24.0 23.0 (1.0)
Ordinary income 21.0 21.0 -
Net income attributable to owners of parent 21.0 21.0 -
Exchange Rate (¥/US$)
(12-months average)
¥110.00/US$ ¥110.37/US$
Fuel oil price (US$/MT)
(12-months average)
US$320/MT US$322/MT

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

  Looking at the global economy from the second quarter onward, while an overall gradual expansion is maintained, the pace of recovery is expected to remain sluggish for the foreseeable future with resource and oil prices have trouble rising. Political risks such as the delay in the realization of the U.S. administration’s policies, as well as geopolitical risks such as increased tension in the Middle East and North Korea mean an unstable situation will likely to continue for some time.
  Under this business environment in the containership business, the freight rate market turned to an upward trend after reaching historically low levels last year, and there has been improvement in both long-term and short-term contracts. On the other hand, there are still unresolved issues that require observation such as changes to the business environment following events such as accelerating mergers and integrations of other shipping companies and the impact of geopolitical risks in major countries on consumer trends and cargo movements. Based on “THE Alliance” service launched by the Company in Fiscal 2017, in addition to responding to diversifying customer needs, through further cost cutting, while working to strengthen our income structure, the Group will make solid progress in our preparations for the integration of our containership business with the two other domestic shipping companies.
  In the dry bulk business, while the gradual course of recovery is maintained, the market will continue to have difficulty rising since some time is required for adjusting tonnage surplus. While continuing to work to improve the efficiency of vessel operation and cost cutting, the Group will aim to utilize strengths to increase medium- and long-term contracts and work to stabilize revenue.
  In the car carrier business, while sense of uncertainty remains over the economies of resource-rich countries starting with the countries of the Middle East and emerging countries such as Russia, the Group forecasts continued strong global demand for marine transport of finished vehicles. The production bases of each automaker are in the midst of a shift to “mass production in the right place” and “appropriate production in the right place.” To respond flexibly in the future to changes in the increasingly complicated trade structure, while appropriately upgrading our fleet and continuing to reinforce its business platform, the Group will strive to enhance its revenue base by making maximum use of its fleet of large-sized and new generation vessels, featuring larger loading capacity for heavy construction machinery and rail cars as well as improved fuel efficiency. In addition, the Group will continuously work to cut operation costs.
  In the LNG carrier business and Tanker business, the Group will continuously work to secure stable revenues for LNG carriers, VLCCs and LPG carriers supported by 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 to work to improve its profitability through cost cutting and other means.
  In the logistics business, demand for domestic logistics services, including inland transportation services and warehousing, is projected to trend stably in line with the previous year. Transport demand for air cargo continues to be strong in the international logistics services, and expanded localized services in Thailand and Vietnam are starting to produce results. The Group will strive to accumulate profits through further enhancement of its global network and its business expansion strategies of forwarding and buyer’s consolidation.
In the short sea and coastal business, the Group will continue to aggressively expand its business operations.

  As noted above, while the marine transportation market for containerships and dry bulk has begun to show signs of escaping rock bottom and recovering, it should still take some time before the balance between vessel supply and demand improves fundamentally, and the Group will strive to improve profitability through further cost cutting and rationalization. The Group expects full-year results for operating income to be amounts that are slightly lower than the previous announcement, but has not changed the amounts of the previous announcement for ordinary income and profit attributable to owners of the parent.

  Our important task is to maximize returns to our shareholders while maintaining necessary internal reserves to fund our capital investment and strengthen our financial position for the sake of sustainable growth, which is a priority of our management plan. However, as outlined in the medium-term management plan announced in April 2017, improving financial structure and stabilizing the business foundation are our current highest priorities. As such, it is with sincere regret that the Company announces it has decided not to pay an interim dividend or an annual dividend for the current fiscal year.

  We express our appreciation for your support and look forward to your continued cooperation to our “K” Line Group.

  Thank you very much for your kind attention.


  July 31, 2017

  Eizo Murakami
  President & CEO
 Kawasaki Kisen Kaisha, Ltd

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