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Message to Our Shareholders

Dear Shareholders:

Jiro Asakura

Jiro Asakura
President and CEO

Your Board of Directors always appreciates your continuing support.

“K” Line takes pleasure in reporting our 1st Quarter (April-June) Fiscal Year 2014 consolidated financial status and our revised prospects for accumulated 1st Half (April-September), and full-year financial position for Fiscal 2014, which have been disclosed today. I will make brief explanation outlining each of them.

During the first quarter of the cumulative consolidated fiscal year (April 1, 2014 to June 30, 2014, hereinafter referred to as the “Current Cumulative Period”), the world economy saw a continued mild recovery of the US economy. In Europe, which had suffered from prolonged economic downturn, although certain countries experienced a slow turnaround, as a whole there has been little sign of improvement in the economic growth rate. Among emerging economies, India and some others saw weak economic growth while the Chinese economy showed signs of reversal from a slowdown.

With respect to business environment surrounding the shipping industry, Car Carrier business continued to experience its shrinking trend in ex-Japan cargos, and Dry Bulk business suffered from poor market conditions. Despite these negative factors, Containership business saw an uptrend in continued low freight rates for Asia-Europe routes.

As a whole, our financial results for this period are almost in line with our original estimations as of April 2014.

(Results for 1Q Fiscal 2014) (1 April 2014 - 30 June 2014)

Unit: Billion Yen

F2014 1Q Results (F2013 1Q Results)
Operating Revenues 319.8 (295.7)
Operating Income 9.7 ( 7.3 )
Ordinary Income 6.5 ( 10.9 )
Net Income 4.3 ( 7.0)
Average exchange rate (Yen/U.S. $) ¥102.40 ¥97.72
Bunker oil price (U.S. $/Metric Ton) $615 $638

In Containership business, in view of construction of large-size vessels, tonnage demand remains unsteady, but we expect a certain recovery of freight rates during the strong summer period. Our group will be devoted to prudent business operations with focus on profitability and continue our efforts to enhance cost competitiveness.

In Logistics business, we expect that domestic logistics services will stay firm. With respect to international logistics services, we expect continued recovery of ex-Japan air cargo as well as continued solid performance of logistics activities. particularly in the Asian region.

In Dry Bulk business, we expect large-sized vessel sector will see a market recovery after the summer, but that it will still take more time to eliminate the excess of supply in mid/small-sized vessel sector.
Our Group is committed to build a profitable structure, which will not be easily affected by market conditions, by having and securing additional medium- and long-term contracts as well as continuing our efforts to improve profitability by implementing all possible profit improvement measures such as efficient vessel allocation and cost-cutting measures.

In Car Carrier business, we expect steady development in the demand for sea-borne transportation of complete cars on a global basis. We will flexibly respond to changes in trade patterns such as ex-Japan trades which is expected to proceed on the trend of slight decrease, somewhat offset by further increasing trend in ex-Southeast Asia trades as well as intra-Atlantic basin trade.

In LNG carrier and Oil Tanker business, we expect stable operations of our LNG carriers under long/mid-term charter contracts. On the other hand, we will have VLCCs and LPG carries operating under medium- to long-term charter contracts to secure stable revenues while seeking further profitability of Aframax tankers and product tankers through more efficient vessel allocation.

In Short Sea transportation business, we will adjust available tonnage and further reduce operating costs for higher competitiveness, and engage in careful, prudent business operations.

In Coastal transportation business, we will work to develop new customers for tramper services while maintaining stable relationships with existing customers; for liner services, we will switch to newly-built large-size vessels to increase our transportation capacity. In ferry transportation, we will further our efforts to take thorough safety measures and work to win more cars and passengers.

In Offshore Energy E&P support vessel business, we expect continuous contribution to our earnings by offshore support vessels and drill ships through their stable operation.

In Heavy Lifter services, we expect it will still take more time before the market recovers in mid/small-sized vessel sector. On the other hand, in large-sized vessel sector, we expect a larger volume of project and offshore-related business due to an increase in energy/infrastructure projects. We will continue to make further efforts to win more orders of such cargos and installation works with higher profitability and try to improve further profitability through reinforcement in continued cost-cutting measures.

Considering all these circumstances, we have set our revised forecasts for 1st Half in reflection of 1st Quarter results and updated expectations for 2nd Quarter as follows; Operating Revenues plus 20.0 billion yen, Ordinary Income minus 2.0 billion yen, and Operating Income and Net Income remain unchanged.

(Revised Forecasts for Accumulated 1H Fiscal 2014)   (1 April 2014 - 30 Sept 2014)

Unit: Billion Yen

F2014 1H Forecasts (Previous Estimations*) (F2013 1H Results)
Operating Revenues 650.0 (630.0) (606.6)
Operating Income 18.0 ( 18.0) ( 19.8)
Ordinary Income 15.0 ( 17.0) ( 20.0)
Net Income 11.0 ( 11.0) ( 14.7)
Average exchange rate (Yen/U.S. $) ¥101.43 ¥100.00 ¥98.03
Bunker oil price (U.S. $/Metric Ton) $615 $621 $628

 For our full year forecasts, we have reflected plus 20.0 billion yen to be earned additionally during 1st Half, but at present we expect Operating Income, Ordinary Income, and Net Income to remain unchanged from previous estimations as of this April.

(Revised Forecasts for Yearly Fiscal 2014) (1 April 2014 - 31 March 2015)

Unit: Billion Yen

F2014 Forecasts (Previous Estimations*) (F2013 Results)
Operating Revenues 12,500.0 (12,300.0) (12,241.0)
Operating Income 36.0 ( 36.0) ( 28.9)
Ordinary Income 34.0 ( 34.0) ( 32.5)
Net Income 18.0 ( 18.0) ( 16.5)
Average exchange rate (Yen/U.S. $) ¥100.72 ¥100.00 ¥99.75
Bunker oil price (U.S. $/Metric Ton) $618 $621 $626

(For guidance, premises for F2014 2H; Yen/U.S. Dollar average exchange rate ¥100.00; bunker oil price U.S. $621 per Metric Ton)

*Previous Estimations are as of 30th April 2014 when we released our revised forecasts for consolidated financial results.

Pre-conditions for foreign exchange rate and fuel oil price are as mentioned above, and sensitivity on our 2nd Half Ordinary Income for this Fiscal 2014 is estimated as follows: Exchange rate: 1 yen/US$ => Ordinary Income change approx. 0.6 billion yen* Fuel oil price: US$10/MT => Ordinary Income change approx. 0.6 billion yen
* Yen depreciation is preferable for us.

The Company’s highest priority is maximizing return to shareholders while taking into consideration the need for securing our internal reserves necessary for reinforcing the Company’s financial standing and capital investment to achieve sustainable growth, both key issues of the Company’s management plan. Our policy for payout ratio is to gradually increase the dividend payout as a percentage of consolidated net income, with a target of reaching 30% by the mid-2010’s. For the current period, as we announced previously in April 2014, we plan to pay an annual dividend of 5.0 yen per share (including 2.5 yen per share interim dividend) .

Despite some signs of improvement in our business circumstances and expectation that our financial plan is going almost in line with our original, market conditions for marine freight rates and trends for exchange rate and fuel oil price, etc. will still affect financial status and business performance of our “K” Line Group. The “K” Line Group will maintain a sound financial position as its highest priority task, and work for thorough-going rationalization of our services and further cost curtailing to earn profits for dividend payout to the maximum extent.

In the meanwhile, “K” Line and Ports America Group, Inc. (PA), the largest independent marine terminal operator and stevedore company in the United States, currently operating in 44 ports and 88 terminals, have agreed to form a strategic partnership aiming at further strengthening “K” Line’s containership and container terminal business further. Regarding this partnership, “K” Line has today resolved to assign to PA 30 % of total shares of International Transportation Service, Inc.(ITS), a wholly-owned consolidated subsidiary of “K” Line and a container terminal operator on the west coast of the United States.

Approximately 10.0 billion yen gain to be earned from this transfer of shares is planned to be posted in our 2nd Quarter Fiscal 2014 financial results. This partnership with PA will further enhance “K” Line’s containership business and ITS’s container terminal operations with higher operating standards, improved efficiency, quality service and cost competitiveness corresponding to the accelerating growth in size of containerships in the future.

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

Thank you very much for your kind attention.

July 31, 2014

Jiro Asakura
President & CEO
Kawasaki Kisen Kaisha, Ltd

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