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Message to Our Shareholders

Dear Shareholders:

January 30, 2015

Jiro Asakura

Jiro Asakura
President and CEO

Your Board of Directors always appreciates your continuing support.

We would like to herewith report our accumulated first three quarters (April-December) of Fiscal Year 2014 consolidated financial status, and full-year financial position for Fiscal 2014 which have been disclosed today.

【Results for accumulated 3Q FY2014 (1 April 2014 – 31 December 2014)】

Unit: Billion Yen

(F2014 1-3Q Results) (F2013 1-3Q Results)
Operating Revenues 1,015.1 (918.0)
Operating Income 40.3 ( 24.1)
Ordinary Income 46.2 ( 29.2)
Net Income 33.0 ( 15.7)

(F2014 1-3Q Yen/U.S. Dollar average exchange rate ¥105.80 ; bunker oil price U.S. $588 per MT)

During the first nine months of the fiscal year ending March 31, 2015 (from April 1, 2014 to December 31, 2014; hereinafter “the nine-month period”), global economy saw a recovery trend continuing in the US, while the recovery appeared to mark time in Europe, where the political instability in southern Europe, in addition to the concern over deterioration in the situation in the Ukraine, affected the situation. In emerging countries, China again showed signs of slowing economic growth, while in India the economy appeared to gradually turn into a recovery trend.

The yen continued to depreciate against the US dollar, reaching \120 per dollar at one point in expectation of an early interest rate rise by the Federal Reserve in the US. In addition, the downward trend in oil prices grew even stronger after the Organization of the Petroleum Exporting Countries (OPEC) decided at its regular meeting in November to leave production targets unchanged.

In the business environment for the shipping industry, negative factors included the continuing market slump in the dry bulk business sector, and the declining trend in the export volume of finished vehicles from Japan in the car carrier business sector. However, the oil tanker market recovered further in line with improvement of tonnage supply-demand balance, while the containership business saw freight rates on East-West services enter an uptrend atop steady cargo volumes.

As a result of these developments, for the current cumulative period we could improve revenue and profit year on year.

【Division-wise Trends】

(1)Containership Business Segment

Containership Business
During the nine-month period, the Group’s cargo volume loaded increased by around 5% year on year, supported by steady cargo movements. Cargo volumes were up around 7% year on year on the Asia-North America service and around 9% on the Asia-Europe service, but declined by around 4% on both the Intra-Asia and North-South services. The freight rates improved year on year, due mainly to relatively stable market activities on East-West services. In addition to the effect of a fall in fuel oil prices, as a result of initiatives including rigorous implementation of slow steaming navigations and cost cutting measures, and sales activities to take profitable cargos such as reefer cargos, the Group recorded a year-on-year increase in revenues for the nine-month period, and income went into the black.

Logistics Business
The domestic logistics services performed strongly in the nine-month period. The international logistics services also delivered steady results, mainly in Asia, with a large increase in handling volume of air freight export cargos from Japan. Supported by the yen’s depreciation, the Group recorded year-on-year increases in both revenues and income for the nine-month period in the logistics business.

As a result of the above, the Containership Business Segment recorded year-on-year increases in revenues for the nine-month period, and income went into the black.


(2)Bulk Shipping Business Segment

Dry Bulk Business
In the large vessel sector, the market recovered temporarily from the start of October, only to slump to the lowest level on record in December, due to a decline in volumes of iron-ore supply from Brazil. The market for medium-sized vessels continued to stagnate due to a persistent oversupply of vessels partly reflecting a drop in the volume of coal transported to China. In the small vessel sector, the market has yet to recover, as upward pressure on freight rates has been limited, despite brisk cargo volumes of coal transportation to India and steel products transportation to China, as well as an increase in grain transportation. In this severe environment, the Group worked to improve profitability throughout the period through measures such as reducing vessel operating costs and minimizing cargo-free vessels by securing medium- and long-term contracts. Despite these efforts, the Group recorded higher revenues but lower income for the nine-month period compared with the same period of the previous fiscal year.

Car Carrier Business
During the nine-month period, the Group’s total volume of finished vehicles shipped declined by around 3% year on year. Cargo volumes were steady from Europe and North America to the Far East, and within the Atlantic Basin; however, there was a declining trend in cargo volumes from Japan. Despite the Group’s continued efforts towards efficient allocation and operation of vessels, the Group recorded higher revenues and lower income for the nine-month period compared with the same period of the previous fiscal year.


LNG Carrier Business and Tanker Business
LNG carriers, large crude tankers (VLCCs), and LPG carriers performed steadily on medium- and long-term charter contracts. Freight rates for medium-sized crude oil carriers and oil product carriers broke from their prolonged slump and started on a recovery trend amid falling oil prices, and profitability improved. The LNG carrier business and tanker business in aggregate reported year-on-year increases in both revenues and income for the nine-month period.

Short Sea and Coastal Business
In the coastal business in the nine-month period, while the volume of cargos transported in the liner service remained the same year on year, the volume declined in the ferry service due partly to a slackening of consumer consumption after the consumption tax hike. For the tramper service, the utilization level of shipper-dedicated vessels was stable, and likewise, the market for the small-sized vessels sector developed steadily supported by Japan’s economy, which is in a recovery trend. As a result, although the Group’s operating result in the short sea business sector was a loss owing to the weak market, the Group posted year-on-year increases in both revenues and income in the Short Sea and Coastal Business sector as a whole for the nine-month period.

As a result of the above, the Bulk Shipping Business Segment recorded higher revenues and lower income compared with the same period of the previous fiscal year.


(3)Offshore Energy E&P Support and Heavy Lifter Business Segment

Offshore Energy E&P Support Business
In the offshore support business, all vessels were in steady utilization backed by active drilling operations at offshore oil and gas fields. The drill ship was deployed stably, contributing to stable long-term earnings.
Overall, however, the offshore energy E&P support business recorded higher revenues year on year, but recorded a loss due to the impact of loss on foreign currency valuation at a foreign subsidiary.

Heavy Lifter Business
In the heavy lifter business, the Group was awarded contracts for profitable projects such as offshore operations in the large-sized vessels sector. The medium-sized and small-sized vessel sector saw recovery in the market conditions for semi-liner services. As a result, the heavy lifter business recorded a significant year-on-year increase in revenues and a decrease in operating losses.

As a result of the above, the Offshore Energy E&P Support and Heavy Lifter Business Segment as a whole recorded higher revenues year on year but its operating losses worsened compared with the same period of the previous fiscal year.

【Updated Forecasts for Yearly Fiscal 2014】 (1 April 2014 – 31 March 2015)

Unit: Billion Yen

Consolidated (Previous prospects*) (F2013 Results)
Operating Revenues 1,350.0 (1,250.0) (1,224.1)
Operating Income 46.0 ( 36.0) ( 28.9)
Ordinary Income 48.0 ( 34.0) ( 32.5)
Net Income 25.0 ( 21.5) ( 16.5)

(F2014 4Q Yen/U.S. Dollar average exchange rate ¥116.85 ; bunker oil price U.S. $478 per KT)
(F2014   Yen/U.S. Dollar average exchange rate ¥ 108.56 ; bunker oil price U.S. $560 per KT)

*Data as of the end of October, when 2Q Financial Results were announced

Pre-conditions for foreign exchange rate and fuel oil price are as mentioned above,
and sensitivity on our Operating Income for this 4th Quarter Fiscal 2014 is estimated as follows:
Exchange rate: 1 yen/US$ => Operating Income change approx 0.2 billion yen*
Fuel oil price : US$10/MT => Operating Income change approx 0.3 billion yen
* Yen depreciation is preferable for us.

While there are uncertainties surrounding the market outlook for the containership business and the dry bulk business in the fourth quarter, the Group has revised its full-year operating forecasts taking into consideration the effects of further depreciation of the yen and the fall in fuel oil prices.

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.

As for the year-end dividend for the current fiscal period, we are planning to change the amount of payment based on a revised forecast of the Group’s operating results announced today. The final decision on the amount of payment will be made in line with the progress level of the fourth quarter forecast.

Thank you very much for your kind attention.

Jiro Asakura
President & CEO
Kawasaki Kisen Kaisha, Ltd

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