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Message to Our Shareholders

Dear Shareholders:

Eizo Murakami
President & CEO

Your Board of Directors always appreciates your continuing support.


We would like to herewith report our 3rd Quarter Fiscal Year 2015 consolidated financial results and our estimates for full-year financial position for Fiscal 2015 that ends March 31, 2016.

1) Summary of Consolidated Operating Results for 3rd Quarter FY2015

Results for 3rd Quarter
FY2015
Nine months ended
December 31, 2015
Nine months ended
December 31, 2014
Change
Operating revenues 977.8 1015.1 ▲ 37.3
Operating income 15.2 40.3 ▲ 25.1
Ordinary income 11.7 46.2 ▲ 34.5
Net income attributable to
owners of parent
9.3 33.0 ▲ 23.7
Exchange Rate (¥/US$)
(9-months average)
¥121.58 ¥105.80 ¥15.78
Fuel oil price (US$/MT)
(9-months average)
US$325/MT US$588/MT ▲US$263

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



During the first nine months of the fiscal year ending March 31, 2016 (from April 1, 2015 to December 31, 2015; hereinafter “the nine-month period”), in the global economy, the U.S. Federal Reserve Board revised its policy interest rate in December for the first time since December 2008, raising it from a range between 0% and 0.25% to a range between 0.25% and 0.5%. The move reflected strong performance in the U.S. economy backed by a recovery in personal consumption, housing investment, and other factors, driven by an improved employment situation. In Europe the major countries such as Germany displayed a gradual recovery as share prices increased and the euro depreciated due to quantitative easing by the European Central Bank. Meanwhile, the slowdown in the Chinese economy became clear, with ongoing reduction of excess investment and adjustment of surplus facilities. The sharp fall in resource prices such as crude oil also affected the business conditions in emerging markets in Asia, and the economies of Brazil and Russia also deteriorated.

The Japanese economy continued its recovery trend, with an upturn in personal incomes reflecting a modest improvement in the employment situation. However, the trend was too weak to boost consumer spending or capital expenditure.

In the business environment for the shipping industry, market conditions recovered in the oil tanker business amid a fall in fuel oil prices and the yen’s continued depreciation, due to expansion in stockpiles and transport demand associated with the drop in crude oil prices. Nevertheless, in the containership business, freight rate market slumped as the gap between tonnage supply and demand widened due to stagnating cargo movement combined with the continued launches of newly built large-sized containerships. In the dry bulk business as well, freight rates stagnated at record-low market levels as an oversupply of vessels overlapped a retreat in demand due to the slowdown in the Chinese economy and other factors. Amid this tough business environment, the Group worked on measures to improve profitability, such as more efficient vessel allocation, and strived to reduce vessel operating costs. Nevertheless, business performance declined year on year.

As a result, operating revenues for the nine-month period were ¥977.783 billion (down ¥37.277 billion year on year), operating income was ¥15.192 billion (down ¥25.135 billion), ordinary income was ¥11.729 billion (down ¥34.455 billion), and net income attributable to owners of parent was ¥9.275 billion (down ¥23.731 billion).



2) Prospects for Fiscal 2015

Prospects for FY2015 Current Forecast
(at the time of
announcement of
the 3rd Quarter result)
Prior Forecast
(at the time of
announcement
dated October 30, 2015)
FY2014
Operating revenues 1,275.0 1,300.0 1,352.4
Operating income 11.0 24.0 48.0
Ordinary income 7.0 20.0 49.0
Net income attribute to
owners of parent
5.0 12.0 26.8
Exchange Rate (¥/US$)
(12-months average)
¥120.44 ¥120.88 ¥109.19
Fuel oil price (US$/MT)
(12-months average)
US$304/MT US$314/MT US$541/MT

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



In the global economy from the fourth quarter onward, advanced countries such as the U.S. are expected to continue posting moderate growth. However, there are concerns over the impact of mounting geopolitical risks, such as the refugee issue in Europe and the situation in the Middle East, as well as potential for a slowdown in economies in emerging countries and others, due to factors such as a further decline in resource prices and further interest rate hikes in the U.S.

In this business environment, recovery of the freight rate market for containership business is expected to take some time, although the expansion in tonnage supply due to the launch of newly built ships has eased. The Group will work to improve income by maximizing the advantage of its alliances on the East-West services, strengthening its cost competitiveness by replacing the older vessels with five newly-built, large-sized vessels featuring new energy-efficient technologies with loading capacity of 14,000 TEU, taking initiatives on highly profitable cargo such as reefer cargo, strengthening profit management through advanced IT utilization, reducing unprofitable service lines, rationalizing, and reducing service capacity in line with market demand.

In the dry bulk business as well, it will take some more time for recovery of the supply and demand balance. The Group will continue to make every effort to improve its income, such as efficiently allocating vessels and reducing vessel operating costs. At the same time, the Group will strive to build an income structure that is resilient against market fluctuations, including downsizing its fleet.

In the car carrier business, the Group will continue to reinforce the business platform to reflect the change in trade structure such as pursuing cargos from South-East Asian countries and trade within the Atlantic Basin. At the same time, the Group will strive to enhance its revenue base by making maximum use of its successively completed 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 the LNG carrier business and tanker business, the Group expects to secure stable revenues for LNG carriers, VLCCs and LPG carriers supported by medium- and long-term contracts, and to improve its profitability in oil tanker services overall due to the recovery of freight market conditions.

In the offshore energy E&P support business and the heavy lifter business, the market is expected to continue to be affected by low oil prices; however, the Group will work to improve its profitability through efficient vessel allocation and other means. In the logistics business and the coastal business, the Group will aggressively expand its operations.

As noted above, the Group is facing a harsh business environment due to the prolonged slump in market conditions, mainly in the containership business sector and the dry bulk business sector. The Group therefore expects its full-year results for operating income, ordinary income, and net income attributable to owners of parent to be lower than the previously announced figures.

Our important task is to maximize returns to our shareholders while, maintaining necessary internal reserves to fund our investments in plant and equipment and strengthen our financial position for the sake of sustainable growth, which is a priority of our management plan. Under our new medium-term management plan “ Value for our Next Century”, we are aiming to achieve an appropriate balance between stability and growth, while paying stable dividends and sharing profit exceeding a designated level in line with our total return ratio target.

For the annual dividend in the fiscal year ending March 31, 2016, although full-year business results are expected to be lower than the figures announced in the second-quarter financial report, we plan to pay a year-end dividend of ¥2.5 per share as announced previously in line with the above policy.

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.

January 29, 2016

Eizo Murakami
President & CEO
Kawasaki Kisen Kaisha, Ltd

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