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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 1st Quarter Fiscal Year 2016 consolidated financial results and our estimates for full-year financial position for Fiscal 2016 that ends March 31, 2017.

1) Summary of Consolidated Operating Results for 1st Quarter FY2016

Results for 1st Quarter FY2016 Three months ended
June 30, 2016
Three months ended
June 30, 2015
Change
Operating revenues 244.6 335.5 ▲90.9
Operating income(loss) 14.8 11.2 ▲26.1
Ordinary income(loss) 22.5 14.6 ▲37.1
Profit(loss) attributable to
owners of parent
26.8 10.2 ▲37.0
Exchange Rate (¥/US$)
(3-months average)
111.12¥US$ 120.97¥/US$
Fuel oil price (US$/MT)
(3-months average)
US$208MT US$366/MT

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

  During the first three months of the fiscal year ending March 31, 2017 (from April 1, 2016 to June 30, 2016; hereinafter “the three-month period”), the global economy, while exhibiting much variability between regions, continued along a gradual recovery trend overall. However, international financial markets were temporarily in turmoil due to the result of the United Kingdom European Union membership referendum, and this has increased uncertainty, particularly with regard to the appreciation of the yen.

  In the U.S., a gradual economic recovery continued amid increasing personal consumption and low levels of unemployment. Meanwhile the European economy was plagued with mounting concerns regarding the business outlook amid rising uncertainty regarding terrorism and the refugee crisis, in addition to turmoil on the financial markets. In Brazil and other emerging countries, falling resource prices continued their effect and there were no signs of any broad recovery. Whereas there was a pronounced slowing tendency of economic growth in China, consumer spending in India drove its economic growth.

  As for the Japanese economy, although the employment and income environments have continued to improve, business confidence has been unstable due to languishing consumer spending combined with the strengthening yen and falling share prices.

  In the business environment for the shipping industry, the containership business faced slumping freight rate market mainly in the Asia-North America service as the gap between vessel supply and demand did not decrease as a result of gradual increases in cargo movements being counteracted by the continuing supply pressure from completions of newly-built large-sized containerships. In the dry bulk business, freight rates also remained at low levels given that recovery with respect to some cargo movements has not helped to improve the balance of vessel supply and demand. The Group made efforts to improve profitability, such as more efficient vessel allocation, and strived to reduce vessel operation costs. Nevertheless, business performance declined year on year as a result of having recorded extraordinary losses associated with business structural reform, in addition to foreign exchange losses associated with yen appreciation.

  As a result, operating revenues for the three-month period were ¥244.593 billion (down ¥90.864 billion year on year), operating loss was ¥14.836 billion (compared to operating income of ¥11.243 billion for the previous fiscal year), ordinary loss was ¥22.515 billion (compared to ordinary income of ¥14.587 billion for the previous fiscal year), and loss attributable to owners of the parent was ¥26.793 billion (compared to profit attributable to owners of the parent of ¥10.194 billion for the previous fiscal year).

2) Prospects for Fiscal 2016

Prospects for FY2016 Current Forecast
(at the time of announcement of
the 1st Quarter result)
Prior Forecast
(at the time of announcement
dated April 28, 2016)
Change
Operating revenues 1,030.0 1,100.0 ▲70.0
Operating income 13.0 17.0 ▲30.0
Ordinary income 21.5 15.0 ▲36.5
Net income attributable to
owners of parent
45.5 ▲35.0 ▲10.5
Exchange Rate (¥/US$)
(12-months average)
106.02¥US$ 110.00¥/US$
Fuel oil price (US$/MT)
(12-months average)
US$267MT US$275/MT

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

  Looking at the global economy from the second quarter onward, there are continuing conditions of uncertainty such as a more pronounced slowdown of economic growth in China and economic sluggishness in the emerging countries. At the same time, there is concern that economic growth in the developed countries, notably in the United States, could weaken due to the effect of the uncertain outlook for the international financial markets following the United Kingdom’s decision to leave the EU and the rising geopolitical risks in Europe.
  Under this business environment, in the containership business, there are signs freight rate levels will recover in the second quarter onward for the Asia-Europe service, on which supply has reduced compared with the same period of the previous fiscal year, due to the recovery in cargo movements. This trend of market restoration in freight rates is set to continue through the second half of the fiscal year. For the Asia-North America service, meanwhile, although the freight rate level lowered due to one-year contract revisions at the beginning of the year, which were affected by the deterioration in the demand-supply balance, entering the summer peak-demand season, the short-term freight market appears to be now moving toward recovery. To further strengthen meticulous cost cutting activities and improve profit management, the Group is also continuing to flexibly reduce the number of vessels in response to changes to the supply-demand balance and utilize IT to reduce the cost burden from empty containers.
  In the dry bulk business, although no significant increase in demand can be expected for marine cargo movement due to the slowing growth of the Chinese economy, there has been some progress toward the scrapping of vessels. Amid such an environment in which there has been a gentle recovery from historic low levels but stubborn resistance on the upward, the Group will work on ensuring competitiveness through structural reforms and strengthening an income structure that is resilient against market fluctuations.
  In the car carrier business, there has been a slowdown in freight bound for the resource producing countries. Amid this environment, 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 allocate its vessels more efficiently and 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 will 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 and the heavy lifter business, although it is expected to take some time for the market to recover due to the effect of crude oil prices, 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 continue to aggressively expand its business operations.

  As noted above, amid a market environment that, while gently recovering, is stubbornly resisting the upward, the Group will strive to improve profitability through further cost cutting and rationalization while implementing structural reforms according to the plan. The Group expects its full-year results for operating income(loss), ordinary income(loss), and loss attributable to owners of the parent to be amounts that are lower than the previous announcement.

  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. Although the Company continues to describe its basic policy as a policy of providing stable dividends, the annual dividend in the fiscal year ending March 31, 2017 has yet to be decided because loss attributable to owners of the parent is expected. We will give comprehensive consideration to the full year forecast, the Company’s financial position and other factors, and make another announcement when we publish the six-month results.

  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 29, 2016

  Eizo Murakami
  President & CEO
  Kawasaki Kisen Kaisha, Ltd

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