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Message to Our Shareholders

Dear Shareholders:

Jiro Asakura

Jiro Asakura
President and CEO

Kawasaki Kisen Kaisha, Ltd. ("K" LINE) is pleased to share with you our First Half (April-September) Fiscal Year 2014 consolidated financial status, and full-year financial position for Fiscal 2014 together with notice regarding payment of dividend.

In the second cumulative consolidated fiscal quarter (April 1, 2014 through September 30, 2014, hereinafter referred to as the “current cumulative period”) the world economy saw a mild recovery trend continuing in the U.S., while the pace of recovery from the economic downturn slowed in Europe as G20 nations shared concern over it. In emerging economies, China showed recurrence of slowing down in growth while the growth rate appeared to have bottomed out in India.

Our domestic economy as a whole maintained the momentum for the recovery although there was a temporary decline in capital investment and personal consumption after consumption tax hike.

In the business environment surrounding the shipping industry, we saw declining trend in volume of ex-Japan cargos in car carrier business as well as in freight rates market in dry bulk business sector, while in containership business we saw upward trend in freight rates for Europe-bound routes that had long been low.

Besides there were positive factors of yen depreciation and low bunker oil price which were F2014 1H Yen/U.S. Dollar average exchange rate ¥102.52; bunker oil price U.S. $611 per mt.

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


(Results for 1H Fiscal 2014) (1 April 2014 – 30 September 2014)

Unit: Billion Yen

Consolidated Results (Previous Estimations*) (F2013 1H Results)
Operating Revenues 659.8 (650.0) (606.6)
Operating Income 24.9 ( 18.0) ( 19.8)
Ordinary Income 25.9 ( 15.0) ( 20.0)
Net Income 21.2 ( 11.0) ( 14.7)


*Previous Estimations as of July 2014 when 1Q Financial Results were announced

(1)Containership Business Segment

Containership Business
The number of loaded containers transported by us in the current cumulative period increased by 8% in Asia - North America and Asia-Europe services as compared with the year-ago period, while decreased by 2% in Intra-Asia and North South services. Our overall volume increased by 5%. Our average freight rate improved as compared with the year-ago period due to the restoration of freight rates for short term contracts in Asia-Europe service. In addition to these conditions, our continued efforts for cost cutting including slow steaming navigation increased our revenues and income as compared with the yea-ago period.

Logistics Business
For the logistics business in the current cumulative period, we continued fairly strong operation in the domestic logistics service. In international logistics service, we handled an increased volume of ex-Japan air cargo due to the effect of yen depreciation. In logistics business as a whole, we posted increased revenues and income as compared with the year-ago period.

As a result of these developments, we posted increased revenues and income in the Containership Business segment as compared with the year-ago period.

 

(2)Bulk Shipping Business Segment

Dry Bulk Business
In Cape-size sector, the freight rates market remained lackluster due to tonnage oversupply although the import of iron ore by China increased. In Panamax-size sector, the market remained sluggish owing to the tonnage oversupply caused partly by stagnant activity of coal transportation to China. On the other hand, in Handy-size and Small Handy sectors, the market stayed stable supported by tonnage demand for coal transportation bound for India as well as good harvest forecast of crops in North America in spite of a negative effect of Indonesia’s ban on mineral ore exports.
In this business environment, we posted decreased income on increased revenues as compared with the year-ago period notwithstanding to our continued effort on reducing vessel operating costs as well as forming efficient vessel allocation.

Car Carrier Business
The business operations in the current cumulative period saw a steady performance in the transportation of ex-Europe and ex-North America cargos bound for Fat Eastern markets as well as cargos in the Atlantic basin. However, we saw a declining trend in the volume of outbound cargos from Japan. The total number of cars transported by us dropped 4% as compared with the year-ago period.
In such a business environment, we posted decreased revenues and income in the current cumulative period as compared with the year-ago period despite our continued efforts toward reducing ship operating costs and forming efficient vessel allocations.

 

LNG Carrier Business and Tanker Business
Our LNG carriers, VLCCs and LPG carriers operated steadily under long and medium term charter contracts. With respect to Aframax tankers and product tankers, we maintained our tonnage size in an appropriate scale and kept our exposure to the market at a limited level.
The financial performance of our LNG carrier and tanker business as a whole in the current cumulative period turned out to be increased income on a decreased revenues as compared with the year-ago period.

Short Sea and Coastal Business
In short sea dry bulk sector in the current cumulative period, the volume of our coal transportation increased supported by firm operations of manufacturers including steel makers. As for the timber, despite a decrease in plywood imports into Japan, we carried more timber products than in year-ago period, but we carried less chip as the market remained slump. As for the steel products and general cargos, the volume of our transportation was smaller than in year-ago period since the demands for these products were low in major destinations of our service.
In coastal shipping business sector in the current cumulative period, shipper-dedicated carriers of limestone and coal continued stable service. Besides, small-size general cargo ships rendered firm operation following a recovery trend of the domestic economy. For our coastal liner and ferry services, we carried same volume of cargos as those in year-ago period in liner service while we carried less cargo and passengers in ferry service due partly to declining in consumer spending subsequent to the consumption tax hike.

As a result, in the Bulk Shipping Business segment as a whole, we posted decreased income on increased revenues as compared with the year-ago period.

 

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

Offshore Energy E&P Support Business
In offshore support business, the spot rate market surged in summer in relation to active drilling operations at offshore oil and gas fields, by which we gained more revenues than in year-ago period. The drill ship worked well and contributed to our earnings. In Offshore Energy E&P Support Business as a whole, we posted increased revenues and income as compared to the year-ago period.

Heavy Lifter Business
In heavy lifter business, the freight rate market was in a mild recovery trend, by which we gained more revenues than in a year-ago period. In addition to this, our various cost-cutting measures such as enhancement of slow steaming navigation reduced the loss we had posted in the year-ago period.

As a result, in the Offshore Energy E&P Support and Heavy Lifter Business segment as a whole, we posted increased revenues, consequently reduced the loss as compared with the year-ago period.


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

Unit: Billion Yen

Consolidated Results (Previous Estimations*) (F2013 1H Results)
Operating Revenues 1,250.0 (1,250.0) (1,224.1)
Operating Income 36.0 ( 36.0) ( 28.9)
Ordinary Income 34.0 ( 34.0) ( 32.5)
Net Income 21.5 ( 18.0) ( 16.6)

For guidance, premises for F2014 2H; Yen/U.S. Dollar average exchange rate \105.00;
Bunker oil price U.S. $590 per Metric Ton)
*Previous Estimations as of July 2014 when 1Q Financial Results were announced

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. 0.4 billion yen*
Fuel oil price: US$10/MT => Ordinary Income change approx. 0.65 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 as of July 2014, we plan to pay an annual dividend of 5.0 yen per share (including 2.5 yen per share of interim dividend) .

Despite some signs of improvement in our business circumstances and we expect our financial plan is going almost in line with our original plan, 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 in our services and cost curtailing to earn profits for dividend payout to the maximum extent.

Thank you very much for your kind attention.

October 31, 2014


Jiro Asakura
President & CEO
Kawasaki Kisen Kaisha, Ltd

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