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New Year's Message from the President

January 9, 2015

I would like to wish everyone a happy and healthy New Year and provide some thoughts as we look forward to operations in 2015.
 
Outlook for 2015
I would like to start by considering the world economic outlook, which has such a significant impact on our business. Personal consumption in North America, which has supported the recovery in employment and housing markets, remains favorable, and we expect the expansionary tone to continue in 2015. While the risk of deflation still remains in the European economy, we expect that an expansion in exports and a recovery in capital investment will result in an improvement in conditions, albeit gradual. As China prioritizes structural reform in its economy, we can no longer expect the kind of high growth rates that we have seen in recent years; however, economic growth forecasts still remain around the 7 percent mark. Although there are differences from region to region, the world economy is generally maintaining its trend towards improvement and growth, and I believe that this will result in a steady increase in the volume of cargo movement again in 2015.
Nevertheless, while the demand side is maintaining an expansionary tone, supply pressure in shipping capacity remains deeply rooted, particularly in terms of containerships and bulk carriers. As a result, we are unlikely to see any resolution of the overall gap in supply and demand in the short term. Possible factors affecting this include the increasing demand to replace fleets with more fuel-efficient vessels due to rising fuel oil costs, and the expansion in ship construction for investment purposes due to low interest rates and excessive capital worldwide. Accordingly, the full situation cannot be explained by simply looking at supply and demand relationships. Furthermore, with factors including geopolitical risk in the Middle East and Ukraine, the risk of changing climate patterns causing major natural disasters, and instability in exchange rates and oil prices, the business environment is becoming increasingly uncertain.
In order to ensure that we continue to record stable profit across the overall NYK Group in this environment, we must continue our market activities based on a business model with stable freight rates as well as focusing on fleet composition resilient to market conditions and constantly maintaining cargo-long positions in non-stable freight rate businesses. At the same time, we must secure diversity in the group’s overall business portfolio, and it is essential that we develop initiatives to thoroughly reduce the 3 M’s (muda, mura, and muri ? muda: non-value-adding activities; mura: unevenness in production or work activities; and muri: excessive burdens), including efforts in terms of fuel saving.
I am pleased to announce that we have progressed well in terms of profit so far this fiscal year, and we are projecting full-year recurring profit of approximately \65 billion (US$626 million) for fiscal 2014. I would like to take this opportunity to express my appreciation for your efforts in achieving this. I would also like to ask each of you, in your respective workplaces, to focus on finding “creative solutions,” which are our key source of differentiation and competitiveness, in order to steadily expand our business and profit going forward. 
 
As We Approach Our 130th Anniversary
NYK was established in 1885 through the merger of Yubin Kisen Mitsubishi Kaisha (Mitsubishi Mail Steamship Company) and Kyodo Unyu Kaisha (Kyodo Transport Company), and 2015 marks 130 years since our establishment. When we inaugurated operations in 1885, our total capital was \11 million and we had a fleet of 58 steamships. Today, we have grown to total capital of \144.3 billion (US$1.4 billion) on a consolidated basis and a fleet of 877 ships under operation (as of end-March 2014). In just 10 years, since March 2004, we have grown revenue by approximately 60 percent, from \1.4 trillion to \2.2 trillion (US$21.7 billion). We have also grown the number of ships under operation by approximately 40 percent, adding 260 vessels to our fleet over this period. Further, we have grown steadily in new segments other than traditional shipping such as logistics and offshore businesses, making the group’s business portfolio even more diverse and robust.
I would like to discuss the changes over the past 10 years in more detail for each business sector. In the container shipping business, for example, we have reduced the size of the fleet on a vessel-number basis by over 20 percent, from 131 ships at end-March 2004 to 101 ships at end-March 2014. This is the result of optimizing fleet size in line with the restructuring of alliances and service routes. These measures have enabled us to improve efficiency in fleet management including upgrading to larger vessels and the associated disposal of ageing ships and ships with poor fuel economy. Despite this, however, the volume of containers handled by NYK has increased by approximately 50 percent over the past 10 years, from 2.64 million TEUs to 3.85 million TEUs. It goes without saying that cargo between countries not including Japan has been a particular driver in this increase. Looking at the breakdown of the current 3.85 million TEU volume handled, over 3 million TEUs (approximately 80 percent) are on non-Japan service routes.
In addition to our traditional container shipping business, we have also been focusing on business areas including the NVOCC business through group company Yusen Logistics, as well as the terminal business, in order to increase the overall scale of our container-shipping-related operations. At the same time, we are taking proactive measures to reform our business structure to strengthen resilience.
Next, let us take a look at our bulk shipping business, where we have increased the number of car carriers we operate by more than 30 percent over the past 10 years, from 93 vessels as of end-March 2004 to 125 as of end-March 2014. We have also grown the volume of cars we transport by 50 percent, from approximately 2.4 million to approximately 3.6 million over this period. Of this, the volume exported from Japan has only increased from 1.5 million to 1.6 million cars, while the volume of cars originating from ports outside Japan has grown significantly, from 0.9 million to 2 million units. In other words, motor vehicle export volume from Japan has been forced into stagnation due to the effects of multiple negative factors including the Great East Japan Earthquake and the strong yen. Meanwhile, exports from emerging markets such as Thailand, India, and Indonesia have grown strongly, which has been a major factor supporting growth in our overall auto logistics business.
We have also been focusing on auto logistics in areas other than maritime transport, which has resulted in the expansion of the number of facilities the group operates globally to 37. Overseas car terminals operated by the NYK Group handled over 6.3 million vehicles in the year ended March 2014, significantly exceeding our shipping result of 3.6 million. As I have stated before, providing high-quality and highly value-added services using radiofrequency identification tags (RFID) and IT software to meet the needs to our customers has contributed significantly to achieving these results.
We have also grown the dry-bulk carrier fleet dramatically over the past 10 years. Our fleet of Capesize bulkers and Panamax and handysize bulkers has nearly doubled, from 71 and 145 respectively as of end-March 2004 to 129 and 286 as of end-March 2014. We have increased the fleet in this way in response to the rapid growth in emerging economies such as China and India since the beginning of the 21st century and the associated increase in maritime transport of a wide range of bulk materials. For example, looking at the results of NYK Bulk & Projects Carriers Ltd. for cargo transported using handysize bulkers, Japan-related cargo made up three-quarters of cargo volume 10 years ago and routes not including Japan no more than one-quarter. This split has changed to almost fifty-fifty now and is underpinning the contribution of growth in demand outside Japan to our business expansion.
Unfortunately, however, there is a large gap in supply and demand capacity in the current dry bulk market, and we believe that aligning this will require significant time. This means that we must work toward quickly closing the gap between cargo contract periods on the income side and vessel holding and charter periods on the expenses side to convert to a business structure less vulnerable to market fluctuations.
Our energy-related businesses have grown dramatically over the past 10 years. The number of LNG carriers in our fleet has more than doubled, from 28 as of end-March 2004 to 67 as of end-March 2014, and the number of other tankers under operation has also increased by nearly 40 percent from 56 to 77. This is partly due to the increased polarization of supply and demand for oil and gas; however, structural changes in energy supply and demand in recent years due to the shale gas revolution are also a factor. Because of this, we believe that world demand for LNG in particular will continue to show high rates of growth going forward. Further, on the basis of the technology and expertise we have accumulated over many years of LNG shipping, we have been able to enter upstream and midstream businesses in the LNG value chain. This is a first for a shipping company and an achievement we would not have even considered possible 10 years ago.
Particularly noteworthy is the way we have stepped up to the challenge in growing offshore businesses. Our first entrance into this business was with a joint investment in a drillship off the coast of Brazil in 2009. We then launched Knutsen NYK Offshore Tankers AS in 2010, becoming the first Japanese shipping company to enter the shuttle tanker business. Today, we operate nearly 30 shuttle tankers. In 2011, we took the further step of entering the FPSO (floating production, storage, and offloading) business. All of these new offshore businesses offer truly “creative solutions” that require sophisticated technological capacity, highly specialized expertise, and cooperation with our overseas partners all over the world, and I believe that we must continue to be bold in taking on these challenges going forward.
Looking back at the growth we have achieved in each of our businesses over the past 10 years, it is clear that the source of growth has shifted rapidly from being centered on Japan to service routes that do not include Japan and to other overseas businesses. This does not change in any way the importance of the Japanese market for NYK going forward; however, it does mean that securing business overseas will become increasingly important in order to expand our operations over the next 10 years.
 
NYK’s DNA
It is a great source of pride for us as a company to have continued our business for nearly 130 years in the unforgiving shipping industry, despite also having been caught up in a major war during this time. And I believe that it is our group values of integrity, innovation, and intensity that have been our supporting foundations over this time.
Our current medium-term management plan, “More Than Shipping 2018,” aims to maintain growth by differentiating us from our competitors by adhering to these values and capitalizing on our ability to propose and deliver “creative solutions” that improve services from the perspective of our customers. Further, given that the places where we must realize growth will increasingly be in overseas markets, it is no exaggeration to say that the degree to which we can embed the NYK Group’s DNA — our integrity, innovation, and intensity — throughout the entire organization, worldwide, will be a key factor in whether or not we can achieve future growth.
Moreover, I believe that we have already entered a generation where the group must share a strong sense of danger regarding our very survival if we were to fail against our challenge in the rapidly expanding world market. We must be acutely aware that our proud 130-year history is simply the result of our integrity, innovation, and intensity to date — it is by no means a guarantee of continued success going forward. Our challenge in the global marketplace continues.
 
Compliance
I would like to close my speech by touching on compliance-related matters. As a result of an investigation regarding a breach of the Antimonopoly Act in 2012, we received a surcharge payment order of a tremendous amount from the Japan Fair Trade Commission in March of last year, and also decided to enter into a plea agreement with the U.S. Department of Justice, agreeing to pay a fine of US$59.4 million, at the end of last year. I would like to emphasize that we conduct our business in a highly complicated environment where some exemptions from antitrust law remain in part. In this regard, we must not simply accept these fines without reexamining our business. We need to ensure that we correctly understand antitrust law and comply with the law thoroughly. Furthermore, the need for legal compliance applies not only to antitrust law. Other relevant laws and regulations related to our business are becoming tougher and stricter on a global scale, including the strengthening of anti-bribery laws in the U.S. and Europe, and the observance of trade restrictions to countries subject to economic sanctions. Therefore, we must render full cooperation with the Legal Group and ensure thorough legal compliance with risk management measures.
 
Finally, I would like to wish you and your families all the very best of happiness and prosperity for 2015.
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