Management Plan

28th April 2017

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Management Plan

Management Policy:
∎C-1：Review: Business environmental Changes
∎C-2：Review: Business Assessment
∎C-3：Strengths: Analysis based on Historical Perspective
∎C-4：Corporate Principles and Vision
∎C-5：Business Environment for Shipping and Logistics, Future Policy
Medium-term Management Plan (FY2017-FY2019)
∎C-6：Basic Policy
∎C-7-1：1. Rebuilding Portfolio Strategy
∎C-7-2：2. Rebuilding Portfolio Strategy (by Business Segments)
∎C-8：Advanced management and Strategy
∎C-9-1：ESG Measures - 1. Corporate Governance System
∎C-9-2 : ESG Measures - 2. Environmental Measures and CSR
∎C-10：Fleet Planning and Investment Plans
∎C-11：Target for Key Performance Indicators
∎C-12-1：Dry Bulk Business
∎C-12-2：LNG Carrier and Oil Tankers Business
∎C-12-3：Offshore Energy E&P Support and Heavy Lifter Segment
∎C-12-4：Containership Business
∎C-12-5：Logistics Business
∎C-12-6：Car Carrier Business
C-1 Management Plan
Review: Business environmental Changes
Up to 2008 Dry Bulk Vessel Supply-Demand and Market Trend
∎ Rapid growth in China & other EM (unit: million
deadweight tons) Demand Supply Baltic Dry Index （BDI）
∎ Rates surge on strong growth
6,000 8,000
in marine transport demand
∎ Speculative money flows into
shipping industry Oversupply

6,000

4,000
Global Financial Crisis(GFC) Strong demand
(Leman Shock)

4,000

Since 2009
2,000
∎ Slow down in Global economic growth & Market slump
By Oversupply 2,000
trade and global economy becomes
uncertain Global financial crisis
(GFC)
∎ Oversupply of new-buildings ordered
before GFC
∎ Prolonged slump in freight market
by supply-demand gap 0 0

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C-2 Management Plan
Review: Business Assessment
Stable business developed; need to take steps based on emerging risks in market-
sensitive businesses and issues in new business expansion

Market-sensitive
Stable business New business
business

and

∎ Differentiate based ∎ Emerging risk of overinvestment ∎ Contribute to stable revenue

on high service quality ∎ Shareholders’ equity erosion
and increasing corporate value
Response and
∎ Secure stable business Countermeasures ▶ Drillship business
▶ Containership business
‣ Three major Japanese carriers to ∎ Earnings slump,
Ordinary income integrate containership businesses shareholders’ equity erosion
from stable business
‣ Impairment Loss & Loss allowances ▶ Heavy Lifter Business

‣ FY2016 ¥25.0 billion ▶ Dry bulk business (mid/small-sized) ∎ Structural Reform

‣ Executed structural reform 35 ▶ Offshore Energy E&P Support
vessels (FY2015-FY2016) Business

Target Target
Dry bulk carriers, oil tankers, LNG carriers with Containerships (sensitive to rate volatility),
medium-and-long term contracts; vessels without contracts and Dry bulk carriers
stable expansion of car carriers, short sea and (mainly small and mid-sized vessels),
coastal vessels, and logistics businesses some Oil tankers (product tankers, etc.)

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C-3 Management Plan
Strengths: Analysis based on Historical Perspective

Customers
(who support “K” Line’s high quality services)

To be a best and long-term business partner for customers

by providing logistics solutions that
only “K” Line is capable

High-quality logistics services?? Such as;

Excellent Human resource
Engineering shipping services Global network
diversity
E.g.; ・Safety in navigation 313 Group companies about 8,000
Eco-friendly flagship and cargo operation at home and overseas employees
“Drive Green Highway” ・ Ship management (total in Japan and
・Operational quality overseas)
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C-4 Management Plan
Corporate Principles and Vision

Corporate Principle and Vision

∎Corporate Principle ～ : trust from all over the world ～

As an integrated logistics company grown from shipping business,
the “K” Line Group contributes to society so that people live well and prosperously.
We always recognize this principle in our operations

∎Vision
Our aim is to become an important infrastructure for global society,
and to be the best partner with customers by providing the high-quality logistics
services based on customer first policy.

Values the “K” Line Group’s prizes

∎ Providing reliable and excellent services Contributing to society

∎ A fair way of business Fostering trust from society
∎ Relentless efforts to achieve innovation Generating new values
∎ Respecting humanity Corporate culture that respects
individuality and diversity

We have gone back to the basics to reassess our vision by putting the customer first.

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C-5 Management Plan
Business Environment for Shipping and Logistics, Future Policy

Murky global
economic outlook

Mild growth in Tonnage oversupply

logistics demand to persist

Build a business portfolio resilient

against market rate swings

Diversifying
Global network
demand from
demand
customers “K” Line Group
Achieve growth Maximize our
via technological and strengths to
Mission to ensure competitiveness Mission to be
business model innovation
conserve the the best logistics
environment
infrastructure
More business
Social change via
consolidations and
technological
tie-ups across
innovation
various industries
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 Medium-term
Management Plan
｢Revival for Greater Strides｣

(FY2017-FY2019)

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C-6 Medium-term Management Plan
Basic Policy

“K” Line Group’s aiming future with corporate principle and vision
A total marine transport and logistics company in growing fields supported by customers
∎ by competitiveness with high-quality service
∎ by creating value under newly-adopted advanced risk management and governance systems

The three years to FY2019 (100th anniversary of our foundation)

is the period we make “Revival for Greater Strides”.

Our priority initiatives are as follows;

1 Rebuilding Portfolio Strategy

2 Advanced management and Strategy

3 ESG initiatives

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C-7-1 Medium-term Management Plan
1 Rebuilding Portfolio Strategy

Develop Stable Business Develop New Core business

∎ Improve and expand ∎ Develop logistics & car distribution

stable medium/long-term contracts & energy value chain
∎ Successful integration of containership business ∎ Create markets and services via
∎ Reduce market-sensitive business technological and business model innovation
∎ Cost savings
What we aim to become
New business

Present shape

Rebuilding Portfolio Strategy

New business
Stable
Stable Business
Business

Asset base ¥500 billion

Ordinary income ¥25.0 billion
ROA (ordinary income) 5.0%

Containership business
Containership business Stabilize revenues via merger
(equity-method affiliate)

Market-sensitive
business
market-sensitive
business
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 C-7-2 Medium-term Management Plan
1 Rebuilding Portfolio Strategy (by Business Segments)

Policies for each Business

Expand Stable Business and develop Next-gen core Business with growth potential

Dry Bulk ∎ Expand fleet with fixed contracts; mainly cape size carriers, electric coal carriers, and wood chip carriers
Business ∎ Reduce market-exposed core fleet, mainly small/mid-sized vessels

LNG Carrier ∎ LNG Carrier - Expand project-linked vessels

and Tanker ∎ Enter energy value chain for LNG/LPG demand creation
Business ∎ Expand stable oil tanker fleet, mainly VLCCs/LPG vessels

Offshore Energy
∎ Execute structural reforms to stabilize offshore business
E&P Support
∎ Generate steady profit in new businesses
Business

Containership ∎ Improve profitability and business stability via THE Alliance

Business ∎ Improve service quality and business competitiveness via successful integration in 2018

Logistics ∎ Expand forwarding business by bolstering our global network centered on “K” Line Logistics
Business ∎ Expand local logistics in developing regions, centered on Asia where we have strength, and expand other areas

Car Carrier ∎ Add large-sized vessels / expand volume of high & heavy cargoes / improve operational efficiency
Business ∎ Expand auto-mobile logistics business with a solid customer base

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C-8 Medium-term Management Plan
2 Advanced management and Strategies

1 Advanced Business Management Commences from FY2017

(we plan to disclose more on this program at a later date)

▶ Total risk-return management

▶ Introduce business assessment with a greater focus on capital costs
▶ Introduce PDCA cycle management

2 Key Strategies by Function

▶ Strengthen customer relationship management (CRM)

▶ Pursue high-quality service via technological and business model innovation
▶ Attract and retain human resources, nurture diversity

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C-9-1 Medium-term Management Plan
3 ESG Measures - 1. Corporate Governance System

Corporate governance initiatives 2016~

3rd Clarified executive officer system
Stage Stronger Board monitoring
2015~2016
2nd Review governance system
∎ Unit supervisory system
~2015 Stage
∎ Evaluating board effectiveness
Evolution of 1st ∎ Governance system reforms
“K” Line’s Stage Governance reform ∎ Added independent outside directors
governance
∎ Executive officer system (2006) ∎ Nominating Advisory Committee &
∎ Established single-year term
Remuneration Advisory Committee
system for board appointments
(2009)
∎ Corporate governance guidelines
∎ Recruited outside directors to
join our Board of Directors
(2009)

Formulate global compliance policy

Shareholders’ Meeting

Audit & Supervisory Board Board of Directors Nominating Advisory

Committee
Remuneration Advisory
Executive Officers’ Meeting Committee

Containerships, Car Dry bulk and Energy Corporate Unit Information System Unit Marine Sector, Technical
Carriers, Port Business, Transportation Unit and Environmental Affairs
Logistics, Affiliated Unit
Business Promotion Unit
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C-9-2 Medium-term Management Plan
3 ESG Measures - 2. Environmental Measures and CSR

World Leading
in Safety Navigation & Cargo Operation
∎ Keep serious maritime accidents at zero

∎ Developed and introduced the K-IMS integrated vessel operation and performance
management system

∎ Constructed an energy management system

∎ Bolster safe navigation hardware via K-DNA guidelines for installing safety equipment

Environment Society
∎ Named to Climate A List for 2016 and to the ∎ Bolster stakeholder engagement, vessel tours
Supplier Engagement Leader Board by CDP to promote community engagement,
∎ New interim CO2 reduction target under “K” implement volunteer activities
Line’s Environmental Vision 2050 has been ∎ Devise supply chain guidelines
certified as a “Science Based Target” (SBT) ∎ Devise and launch a new personnel system
∎ Exhaust gas washing system of eco-flagship aimed at achieving diverse working styles
Drive Green Highway received certification as a ∎ Offer diverse training to improve the know-
Japanese national flagship how & skills and foster teamwork of maritime
∎ Group environment management system technical personnel via “K” Line Maritime
established Academy, etc.

K-IMS：Integrated vessel operation and performance management system

K-DNA：Kline Safety Equipment Installation Guidelines (Kline Drive to No Accident)
SBT：Science Based Target – Science Based Target for greenhouse gas reduction
between CDP, UNGC (United Nations Global Compact), WRI (World Resources Institute) and WWF (World Wide Fund for Nature) 13
C-10 Medium-term Management Plan
Fleet Planning and Investment Plans
Fleet Planning and Investment Plans Three-year investment plan
(FY2017-FY2019 excludes containership business)
Number of key fleet vessels (trend) ∎ Careful selection of investments so as to
FY2019 vs. improve financial strength
15F 16F 19F FY2015:
Disparity ∎ Strategic investment framework of
¥30 billion (three years)
Containerships 63 58 -- -- Reduce
Dry bulk market- Environment-
225 200 194 ▲31 sensitive related investment
carriers Strategic
fleet investment
Capesize 88 81 81 ▲7
framework
¥15 bln
Panamax 104 87 73 ▲31

Thermal coal ¥30 bln

24 23 31 ＋7
carrier
TOTAL
Wood chip
carrier
9 9 9 0 ¥80 bln Fleet
restructuring,
including
Car carriers 102 93 91 ▲11
replacements
Tankers 23 22 23 0 Increase ¥35 bln
fleet
LNG carriers 41 42 49 ＋8
based on
Offshore E&P contracts Strategic investment
8 8 8 0
support framework
Heavy lifter
15 15 15 0
vessels In the three years of the “Revival for greater strides”
Short sea, plan, we will carefully screen investments with a focus on
coastal, and 51 48 50 ▲1 improving our financial strength; our strategic investment
other framework for stable-income and next-gen core businesses
合計 465 428 430 ▲35 has been placed directly.

(*) Total and disparity vs. FY2015 does not include containerships
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C-11 Medium-term Management Plan
Target for Key Performance Indicators

Long-term target (mid-2020s)

∎ Achieve ROA (ordinary income) of 6%, ROE of double digits

– Foster both growing fields and stable-income foundation via advanced management

∎ Shareholders’ equity: ¥400 billion

– Verify benefits from containership business merger, plan to reset

∎ Dividend policy – Return to a stable dividend policy

Medium-term Management Plan (FY2017-FY2019)

∎ Maintain profit for three consecutive years from FY2017

∎ Achieve 6% ROA (ordinary income) in stable business, and expand business scale

Ordinary income from stable business in FY2019: over ¥30 billion

∎ Ratio of Shareholders’ equity – Targeting mid 20%’s

∎ Dividend policy – Our priority is to stabilize our business base and financial strength.
We are aiming to resume paying dividends soon.
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Business Strategy

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C-12-1 Medium-term Management Plan
Dry bulk Business
FY2016 results
∎ Supply-demand gap still in place despite uptick in freight rates from historic slump
∎ Large vessels: Limited upside in rates despite firmness in China-bound cargo volumes of iron ore and coal
∎ Small/mid-sized vessels: iron ore and cereal demand is up and still recovering but oversupply to persist

Rebuilding Portfolio Strategy (Initiatives from FY2017) Rebalance vessel portfolio toward
fixed-rate contracts
∎ Expand stable-income vessels Vessel portfolio
▶ Add vessels with medium-and-long- term contracts, Cargo contract composition
centering on iron ore and coal, based on a global, Long-term,
Medium-
top-notch, long-term customer base and-long-term
fixed-rate
Contracted
▶ Reduce vessels with too-high fixed costs, which are mostly contracts vessels
▶ small/mid-sized vessels
Ratio of
∎ Develop next-gen core businesses Exposed
vessels Exposures
▶ Respond to needs to reduce eco-footprint via LNG-fueled and Short-term charter
contracted vessels
LPG-fueled carriers

FY2016
FY2017
FY2015 1-4Q
Dry bulk T/C rates
results FY2016 1H 2H FY2017
1Q results 2Q results 3Q results 4Q results
results forecast forecast forecast
CAPE $7,250 $6,700 $8,000 $12,000 $11,000 $9,450 $14,000 $16,000 $15,000
PANAMAX $5,100 $4,900 $5,800 $8,700 $8,200 $6,900 $10,000 $11,000 $10,500
HANDYMAX $6,250 $5,800 $7,000 $8,400 $8,100 $7,350 $9,000 $9,000 $9,000
SMALL HANDY $4,900 $4,800 $5,800 $7,000 $6,600 $6,050 $7,000 $7,000 $7,000

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C-12-2 Medium-term Management Plan
LNG Carrier Business and Tanker Business
FY2016 results
▶ LNG carriers
‣ With dexterity, operate a fleet of stable-income vessels with medium-and-long-term contracts
‣ Completed new PRACHI vessel for India’s Petronet LNG
▶ Oil tanker
‣ With dexterity, operate a fleet of stable-income vessels, mainly VLCC and LPG carriers,
with medium-and-long-term contracts
Rebuilding Portfolio Strategy (Initiatives from FY2017)

∎ Expand stable-income vessels

▶ LNG carriers
‣ Build up stable-income fleet by securing more medium-
and-long-term contracts (57 vessels in medium term)
▶ Oil tanker
‣ Expand medium-and-long-term contracts via vessel replacements and achieving new business opportunities
‣ Shrink market-exposed business

FY2016 1-4Q FY2017

Oil tankers on FY2015
FY2017
spot market (WS*) results
1Q results 2Q results 3Q results 4Q results FY2016 results 1H forecast 2H forecast forecast

VLCC 66 60 37 70 69 59 72 77 75
(Middle East-Japan) $68,000 $42,000 $16,000 $48,000 $28,000 $33,500 $31,000 $33,000 $32,000
AFRAMAX 117 101 75 97 115 97 134 137 136
(South Asia-Japan) $33,000 $18,600 $10,000 $15,000 $13,500 $14,300 $18,000 $18,000 $18,000

Clean tanker 110kmt 108 88 91 75 107 90 136 145 141

(Middle East-Japan)
$28,000 $14,400 $14,500 $9,500 $11,000 $12,400 $17,000 $18,000 $17,500

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C-12-3 Medium-term Management Plan
Offshore Energy E&P Support and Heavy Lifter Segment

FY2016 results Rebuilding Portfolio Strategy

(Initiatives from FY2017)
▶ Ocean support vessel ∎ Expand stable-income vessels
‣ Flagging spot rates owing to weakness in offshore ▶ Offshore support vessels (K Line Offshore AS)
E&P development and sagging crude oil prices ‣ Structural reforms, cost cuts, and foreign
exchange countermeasures to stabilize earnings
▶ Drillships
‣ Earn stable income through steady operation of ▶ Drillship business
vessels via long-term contracts ‣ This has become a stable-income business via a high
utilization approach to navigation and operation
▶ Heavy lifters
‣ Contain erosion in net income, despite weak trend ∎ Develop next-gen core businesses
in spot rates, via fleet size rationalization ▶ Advance initiatives for an energy value chain by
‣ Recognize business impairment losses as part of collaborating with top-notch partners and
structural reform harnessing our know-how and technologies
▶ Create a new division for new businesses relating
Down
Upstream Mid-stream to gas liquefaction
stream

‣ Demonstrate our overall power via

掘削 掘削 掘削 掘削 掘削 collaboration with our partners
FSRU, LNG small-batch transport, LNG fuel supply business,
▶Drillships ▶OIL FPSO ▶LNG Carriers ▶LPG Carriers ▶LNG FSRU Target
offshore LNG power generation etc.
▶semi- ▶MOPU ▶Crude oil ▶Petroleum ▶LNG/LPG
submersible rigs Tankers product fueled Vessels
Tankers

‣ OIL FPSO ：Floating production, storage, and offloading (FPSO) unit for crude oil
‣ LNG FSRU ：LNG floating production, storage and offloading unit (LNG-FPSO)

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C-12-4 Medium-term Management Plan
Containership Business
FY2016 results
∎ In 1H, earnings slumped sharply as cargo activity flagged due to slowing in Europe, China, and EMs versus the year-earlier level
∎ 2H saw continued losses as the supply-demand gap persisted despite bottoming in spot freight rates and slot utilization rates and a
pickup in tone

Initiatives for FY2017

∎ Long-term contracts have improved y on y on bottoming of spot freight rates but amid the persisting supply-demand
gap, spot rates must be monitored
∎ Promote bolstering of high-margin specialty cargo, reduce costs, proceed with fleet rationalization, and respond to
clear-cut further slowing that coincides with seasonal factors
∎ Provide a stronger network by responding to customer needs via THE Alliance
∎ Strengthen vessel competitiveness via completion of three 14,000-TEU containerships
Rebuilding Portfolio Strategy
∎ Bolster business competitiveness and improve service quality via successful merger of three major Japanese marine
∎ transport companies
▶ Improve margins and business stability via deployment of management resources as a core Group business
We plan to disclose a business plan for merged containership business at a later date when we finish devising
and thoroughly vetting it
FY2015 FY2016 FY2017

Results 1Q resullts 2Q resullts 3Q resullts 4Q resullts results Forecast

Operating revenue (\bln) 614.9 122.2 124.7 134.5 137.6 519.0 580.0
Ordinary income (\bln) ▲ 10.0 ▲ 12.3 ▲ 8.7 ▲ 2.9 ▲ 7.6 ▲ 31.5 19.0
Freight rate trends Asia-North America 91 73 71 76 81 75 81
FY'08 1Q = 100 Asia-Europe 47 40 47 47 54 47 57
Asia-North America 89.8 23.3 26.6 26.4 23.5 99.7 102.3
Lifting (10,000 TEU)
Asia-Europe 40.6 10.0 10.4 10.6 10.9 41.8 47.6
Asia-North America 100.9 26.5 27.7 27.0 25.8 107.0 113.4
Capacity (10,000 TEU)
Asia-Europe 49.7 11.4 11.7 11.6 11.3 46.0 50.3
Asia-North America 89% 88% 96% 97% 91% 93% 90%
Utilization (%)
Asia-Europe 82% 88% 89% 91% 96% 91% 95%
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C-12-5 Medium-term Management Plan
Logistics Business
FY2016 results
∎ Launch Vietnam freezer warehouse business
∎ Expand Thai warehouse
∎ Launch cargo handling business for ports in India

Rebuilding Portfolio Strategy (Initiatives from FY2017)

∎ Expand stable-income businesses
▶ Expand forwarding business by bolstering and restructuring our global network centered on “K” Line Logistics
▶ Expand local logistics businesses in Asia, where we expect growth

∎ Develop next-gen core businesses

▶ Harness the Group’s know-how to invest in and support growth fields
▶ Provide high-value-added transport solutions based transport know-how and IT technologies
we have honed for many years
▶ Extend buyers’ consolidation by responding to high-variety, small-batch production trends

Step Strengthen responsiveness Step Step Organically connect with

Expand local logistics
1 to customers
2 3 network

Retain trust of customers Further expand know-how Leverage our ability to propose
via careful response to them and record from starting Solutions that harness
across the “K” Line Group as a whole Businesses in Thailand the entire Group’s assets
and other parts of Asia and distribution network

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C-12-6 Medium-term Management Plan
Car Carrier Business
FY2016 results
∎ Cargo shipped to Europe/US is rising gradually with overall volumes trending firm
∎ Transport demand for cargo heading to resource-rich countries has sagged on low crude prices and China’s slowing
economy
Rebuilding Portfolio Strategy (Initiatives from FY2017)
∎ Expand stable-income vessels
▶ Sector-trusted by customers, a pleasing business expansion
▶ Maximize our strengths such as transport service quality, operational quality, advanced IT, etc.
▶ Improve fleet operation and allocation, add large, next-gen carriers with +7,500 vehicle capacity,
and expand base of competitiveness harnessing know-how in safe cargo transport
▶ Expand strategic basis for competitive advantage in both Pacific and Atlantic regions

∎ Develop next-gen core businesses

▶ Go further in pursuit of total services by expanding built-up car distribution business
▶ Achieve transport method that reduces eco-footprint such as LNG-fueled carriers

Total units carried FY2015 FY2016 FY2017

FY2017
(1,000 units) Results 1Q results 2Q results 3Q results 4Q results Results 1H forecast 2H forecast
forecast
Outbound 1,156 265 261 296 250 1,071 550 548 1,099
Homebound 247 47 50 48 36 181 99 94 194
Others 1,060 289 283 312 286 1,171 676 661 1,337
Intra-Europe 685 170 154 155 203 682 450 457 907
Total units carried 3,149 771 748 811 776 3,106 1,775 1,760 3,535
Number of operation
102 100 97 95 94 94
vessels
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