Mitsui O.S.K. Lines Ltd.
Annual Report 2017

Plain-text annual report

For further information, please contact: Investor Relations Office Mitsui O.S.K. Lines, Ltd. 1-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8688, Japan E-mail: iromo@molgroup.com URL: http://www.mol.co.jp/en/ Forging Ahead Annual Report 2017 Year ended March 31, 2017 This annual report is printed on Forest Stewardship Council™ (FSC)-certified paper made of wood from responsibly managed forests. It was also printed using vegetable oil inks. Printed in Japan Glossary (In alphabetical order) Ballast Voyage Sailing to the next loading port without any cargo loaded. Pool Arrangement Ship operators and owners pool certain ships to conduct joint operations. Ballast Water Ocean water that is taken in by the vessel to maintain ideal buoy- ancy and control the vessel when not fully loaded with cargo. Usually, ballast water is taken on when cargo is unloaded, and is discharged when cargo is loaded. Ballast water transports marine organisms across the ocean, which may have a negative impact on the preservation of marine ecosystems and biodiversity. After the Ballast Water Management Convention enters into force in September 2017, ballast water treatment systems must be installed in all ocean-going vessels within a certain period of time. Chemical Tankers Tankers fitted with multiple tanks to transport many different types of liquid chemical cargo at the same time. These tankers have complex design specifications, as they are equipped with independent pipelines, cargo pumps and temperature regulat- ing functions for each tank, in addition to dedicated facilities for cleaning and other features. Ethane Carriers Ethane carriers are specialized for transporting liquefied ethane, which has been cooled to around −92°C, and equipped with a reliquefaction system. LNG carriers transport cargo at −162°C, and LPG tankers transport cargo at −42°C, so ethane carriers fall somewhere between the two. FPSO (Floating Production, Storage and Offloading System) A floating facility for producing crude oil offshore. The crude oil is stored in tanks in the facility and directly offloaded to shuttle tankers for direct transport to the destination. FSRU (Floating Storage and Regasification Unit) A floating facility for storing and regasification of LNG offshore, which is then pressurized and piped ashore. Plans to introduce FSRUs in regions around the world are making steady progress as they can be set up in less time and with less cost than conven- tional onshore receiving terminals. Highly Stable Profits Profits that are fixed, from contracts of two years or more, and projected profits from highly stable businesses. Highly stable profits are currently provided by the following segments: Dry bulkers, Tankers, and LNG carriers/Offshore businesses under mid- and long-term contracts (two years or more); Associated businesses and Others. Market Exposure If vessels procured for the mid and long term (owned or mid- and long-term chartered vessels) operate only under short-term cargo transport contracts, these vessels are exposed to market rate fluctuations as a result of the mismatch between the vessel procurement and operating periods. MOL defines the number of mid- and long-term procured vessels operating under cargo contracts of less than two years as “market exposure,” and moni- tors the ratio of its market exposure with the aim of controlling the risk of market fluctuation. RoRo (Roll-on/Roll-off) Ships Featuring a ramp, these ships have a vehicle deck to hold trucks, trailers and other vehicles. Cranes and other loading equipment are not used in loading; instead vehicles are driven onto the ship. In general, while ferries transport passengers and personal-use automobiles in addition to freight vehicles, RoRo ships mainly transport freight vehicles. Shuttle Tankers Tankers that transport crude oil from offshore oil rigs, such as FPSOs, to onshore refineries as an alternative means of pipelines. Shuttle tankers are fitted with a unique system that enables cargo to be loaded from the bow of the vessel, rather than from the side like ordinary tankers, while maintaining a certain dis- tance from the offshore platform. Small- and Medium-sized Bulkers In this report, small- and medium-sized bulkers consist of Pana- max, Handymax and Small Handy dry bulkers that transport general bulk cargo, such as coal, grain, salt, cement and steel products. SOx The term “SOx” collectively refers to sulfur oxide emissions, including sulfur dioxide (SO2), which are air pollutants emitted during the combustion of fossil fuels containing sulfur, such as oil and coal. In the marine transport industry, regulations requir- ing a drastic reduction in the sulfur content of fuel will come into effect in 2020, in order to curtail the amount of SOx in vessel emissions. Subsea Support Vessels Vessels designed for arrangement and technical support work during exploitation of offshore oil and gas fields. “Visualization of Marine Operations” Measures to provide visualization of the conditions of vessels and cargo at sea using ICT, thereby achieving optimal vessel operations, in conjunction with providing value-added services to customers. For example, big data on weather and sea condi- tions is analyzed and effectively utilized to achieve safer vessel operations and optimal routing. In addition, measures will be taken to improve the safety of vessel operations and ship man- agement efficiency, including remotely monitoring the opera- tional status of engines and other machinery and making maintenance arrangements in advance. Yield Management In the containership business, this refers to a management tech- nique to maximize profitability for the round-trip voyage of each container. Freight rates are set and sales activities conducted to maximize net proceeds (gross profits calculated by deducting direct costs from freight revenues) rather than freight rates themselves. Direct costs include loading and unloading costs, feeder costs, and the costs of returning empty containers (calcu- lated to reflect the aspect of surplus and shortage of containers at each point).  4 MOL’s Voyage So Far 20 Message from the CEO 10 4 MOL’s History: “Spirit of Challenge and Innovation” 6 Market Position in the Industry 8 Our Fleet Charting a Course for Further Growth 12 Feature: MOL’s Three Compass Points 20 Message from the CEO 26 Feature: CEO and Investor Dialogue 30 Sustainability Highlights 32 At a Glance 36 Overview of Operations 48 Financial and Non-Financial Highlights 50 Key Indicators 52 Message from the Officer in Charge of Finance 55 Management Foundation Providing MOL’s Forward Thrust 56 Board of Directors, Audit & Supervisory Board Members and Executive Officers 58 Dialogue between Outside Directors 60 Corporate Governance 64 Safe Operation 67 Risk Management 69 Corporate Social Responsibility (CSR) 73 Data Section 74 Consolidated Financial Statements 110 The MOL Group 112 Worldwide Offices 113 Shareholder Information  MOL’s Communication Tools MOL produces the following publications as a means of promoting communica- tion with stakeholders. The latest versions of all reports can be found on our website. http://www.mol.co.jp/en/ir/ http://www.mol.co.jp/en/csr/ Annual Report Investor Guidebook Market Data Safety, Environmental and Social Report 26 Feature: CEO and Investor Dialogue strategies future plans,  Forward-Looking Statements This annual report contains forward-looking statements concerning MOL’s and performance. These statements represent assumptions and beliefs based on information currently* available and are not historical facts. Furthermore, forward-looking statements are subject to a number of risks and uncertainties that limited to, economic conditions, worldwide competition in the shipping industry, customer demand, foreign currency exchange rates, price of bunker, tax laws and other regulations. MOL therefore cautions readers that actual results may differ materially from these predictions. * As of June 30, 2017 unless otherwise specified include, but are not Our New Voyage Has Begun Annual Report 2017 1 Forging Ahead For over 130 years since its foundation, the MOL Group has grown into a world-class full-line marine transport company with a diversified business portfolio by anticipating the demands of the times and responding to customers’ needs. In formulating our new management plan amid a dramatically changing management environment, we started with our “Vision for the MOL Group Ten Years from Now.” Based on this, we will focus on our allocation of resources, aiming to achieve sustainable growth by improving our financial position and innovating our business portfolio. Looking ahead, we will leverage the combined capabilities of the MOL Group as a solid, reliable partner striving to achieve our long-term vision and to uphold the trust of our stakeholders. Junichiro Ikeda President & CEO MOL GROUP CORPORATE PRINCIPLES As a multi-modal transport group, we will: 1 actively contribute to global economic growth and development, anticipating the needs of our customers and the challenges of this new era 2 strive to maximize corporate value through creativity, operating efficiency and promotion of ethical and transparent management 3 nurture and protect the natural environment by maintaining the highest standards of operational safety and navigation Long-Term Vision To develop the MOL Group into an excellent and resilient organization that leads the world shipping industry What is MOL CHART? MOL CHART represents the values that are to be shared by all members of the MOL Group worldwide. These values shall be common guidelines to pursue the best course of action for the highest quality of output for our stakeholders and to achieve MOL’s corporate goal and long-term vision. Challenge Innovate through insight Honesty Do the right thing Accountability Commit to acting with a sense of ownership Reliability Gain the trust of customers Teamwork Build a strong team 2 Mitsui O.S.K. Lines Annual Report 2017 3 MOL’s History: “Spirit of Challenge and Innovation” Throughout its more than 130 years of history, MOL has grown into one of the world’s largest full-line marine transport groups by anticipating the needs of its customers and the demands of the future, while overcoming various challenges along the way. What has supported us has been our “spirit of challenge and innovation.” Going forward, we will nurture this spirit and maintain course into the next 130 years. 1884 The Birth of Osaka Shosen Kaisha (OSK Line) The founding of MOL can be traced back to Osaka Shosen Kaisha (OSK Line), which was established in 1884 by 55 ship owners of Seto Inland Sea area in Western Japan and their in-kind contributions of 93 vessels. 1973〜1985 Competitiveness of Japanese Flagged Vessels Challenged by the Yen’s Sharp Appreciation Following the Plaza Accord and Floating Exchange Rates In 1973, Japan switched from a fixed exchange rate system where one U.S. dollar equaled ¥360 to a floating exchange rate system. With the signing of the Plaza Accord in 1985, the yen appreciated sharply from around ¥240 per U.S. dollar to about ¥120. This caused the competitiveness of Japanese flagged vessels to nosedive. MOL began promoting mixed crews of Japanese and foreign national seafarers, and reduced a large number of Japanese seafarers as part of its restructuring process. 1983 Japan’s first specialized methanol tanker, the KOHZAN MARU is launched. 1968 Full containership service commenced. 1942 Mitsui & Co., Ltd. spins off its shipping department to create Mitsui Steamship Co., Ltd. 1964 Mitsui O.S.K. Lines (MOL) is founded by a merger of OSK Line and Mitsui Steamship. 1961 World’s first automated ship, the KINKASAN MARU, is launched. AMERICA MARU (700TEU) 1965 Japan’s first specialized car carrier, the OPPAMA MARU, is launched. 1945〜1970 The Devastation and Recovery of Japan’s Merchant Fleets from World War II Japan’s private merchant shipping fleets were conscripted into military transport, losing a total of around 2,400 vessels and over 30,000 seafarers. While recovering from its defeat in the war, Japan becomes a major trading country that imports iron ore, petroleum and other resources while exporting automobiles, electrical appliances and other products. Growing in tandem with the rebounding Japanese economy, MOL provides much needed marine transport, promoting diversification and specialization of its businesses to ultimately develop into a full-line marine transport group boasting a wide range of vessel types. 4 Mitsui O.S.K. Lines 1984 Launched the SENSHU MARU, an LNG Carrier Demand, mainly from electric power companies, increased for imports of liquefied natural gas (LNG), an energy source with a low environmental burden. Requiring transport at minus 162 degrees Celsius, LNG is technically challenging to transport. MOL rose to the challenge, entering the LNG transport field in 1983. Since then, MOL’s fleet of LNG carriers has expanded to a world-leading 92 (including outstanding orders) as of March 31, 2017. 2016 World’s first large ethane carrier ETHANE CRYSTAL completed Photo: MODEC, Inc. 2012 The world’s first hybrid car carrier, the EMERALD ACE, is launched. 2010 The first participation in FPSO 1989 Navix Line is established by the merger of Japan Line and Yamashita-Shinnihon Steamship. 2013 Japan’s first participation in FSRU project 2004 Daibiru Corporation becomes a consolidated subsidiary of MOL. 1999 New Mitsui O.S.K. Lines is established by the merger of MOL and Navix Line. 1996 MOL acquires a share in chemical tanker operator Tokyo Marine (Current: MOL Chemical Tankers Pte. Ltd.) 1995 Commenced First Alliance in Containership Services (The Global Alliance) In containerships, massive investments are required for vessel construction, operating a number of sea routes and other aspects of the business. MOL commenced the industry’s first global alliance with container shipping companies based in the United States, Europe and Hong Kong, to augment each other’s network of trade routes. The allied companies also worked to enhance customer service by sharing space on containerships and increasing the ports of call and the frequency of stops. Mid 2000s~2015 China’s Commodity Import Boom Surges and Wanes MOL’s aggressive investment in the field of natural resource and energy transport was successful. With the unprecedented marine transport boom brought about by China’s commodity import boom, we recorded historic profits in fiscal 2007. However, amid slowing economic growth worldwide and the oversupply of vessels following the economic crisis in 2008, the marine transport market stumbled and has continued to struggle with ongoing stagnation. To respond to this vastly different business environment, MOL implemented two major reforms: one in fiscal 2012 and one in fiscal 2015. 2016 Three Japanese Shipping Companies Announce Inte- gration of Containership Operations ( related information on P. 7 and 17) To enhance the competitive edge of our global network, we decided to integrate our containership business with those of Nippon Yusen Kabushiki Kaisha and Kawasaki Kisen Kaisha, Ltd. The combined vessel fleet after integration will be approximately 1.43 million TEUs—sixth largest in the world with a 7% global share. We have made steady progress in preparing for the integration, aiming to start operations in April 2018 under the name “Ocean Network Express.” Early 2000s Aggressive Investment in Resource and Energy Transport After the 1999 merger with Navix Lines, which was particularly strong in transporting natural resources and energy, MOL aggressively invested in these fields, predicting China’s economic development and increased demand for resources. We continued to scale up our fleet of LNG carriers, crude oil tankers, and dry bulkers which transport iron ore, coal, etc. Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 5 20,000TEU-class containership MOL TRIUMPH —one of the largest containerships in the world Market Position in the Industry MOL operates a balanced oceangoing fleet. In terms of its total fleet size and presence in individual market Containerships categories, MOL ranks among the world’s top class shipping companies. As of April 2017 (existing capacity only) (Thousand TEU) As of April 2018 (estimation including orderbook) (Thousand TEU) 0 500 1,000 1,500 2,000 2,500 3,000 3,500 0 1,000 2,000 3,000 4,000 5,000 World Major Carriers’ Fleets (All Vessel Types) (Number of Vessels) 0 200 400 600 800 1,000 1,200 62 847 China COSCO (China) NYK (Japan) MOL (Japan) Oldendorff (Germany) K Line (Japan) APM-Maersk (Denmark) MSC (Switzerland) China Merchants (China) CMA-CGM (France) Swiss Marine (Switzerland) Teekay (Canada) NITC (Iran) Maersk MSC CMA-CGM China COSCO Evergreen Hapag-Lloyd OOCL Yang Ming Hamburg-Sud NYK MOL UASC Hyundai K Line 529 529 375 Maersk (+Hamburg-Sud) MSC CMA-CGM China COSCO NEW J/V (Ocean Network Express) Hapag-Lloyd (+UASC) Evergreen OOCL Yang Ming Hyundai 1,743 Containership Business Integration P.17 Global Fleet Capacity Source: Alphaliner (As of April 2017) Global Fleet Capacity Orderbook Source: Alphaliner (As of April 2017) 0 20 40 60 80 100 120 (Million deadweight tons (DWT)) Dry Bulkers Tankers Number of Vessels Deadweight Tonnage (DWT) Source: MOL internal estimation based on each companies’ published data, Clarkson and Alphaliner (March 2017) (Thousand DWT) 0 10,000 20,000 30,000 40,000 50,000 60,000 (Thousand DWT) 0 5,000 10,000 15,000 20,000 20 40 60 80 100 50 26 10 3 11 Global Major Carriers’ Fleet Composition (by DWT) (%) 0 Global Seaborne Trade MOL NYK K Line APM-Maersk China COSCO Teekay CMA-CGM Frontline Oldendorff Dry Bulker Tanker LNG Carrier Car Carrier Containership Source: Global seaborne trade = MOL estimates based on Clarkson data and others Fleet composition = MOL estimates based on each company’s published data and Clarkson/Alphaliner (Excluding passenger ships, ferries and tugboats) Oldendorff NYK China COSCO MOL K Line Swiss Marine 30,762 China COSCO MOL NITC China Merchants NYK Bahri Source: Companies’ published data and Clarkson (March 2017) Source: Companies’ published data and Clarkson (March 2017) 15,942 LNG Carriers Car Carriers (Number of Vessels) 0 20 40 60 80 100 (Number of Vessels) 0 20 40 60 80 100 120 140 MOL NYK Nakilat* K Line Teekay Maran Gas 92 NYK MOL K Line EUKOR GLOVIS HOEGH  In Operation  On Order * Qatar Gas Transport Company Ltd. Source: MOL (March 2017) Note: The numbers include the vessels which are owned by each company (wholly or partially) and the vessels for which vessel operation is entrusted to each company. Source: MOL (March 2017) Note: Excluding spot-chartered vessels 113 6 Mitsui O.S.K. Lines Annual Report 2017 7 [Methanol Carrier] CAJUN SUN [FPSO] Cidade de Caraguatatuba MV27 Photo: MODEC, Inc. [Ferry] SUNFLOWER IVORY [LNG Carrier] LNG FUKUROKUJU [Car Carrier] SWIFT ACE [VLCC] AZUMASAN Our Fleet [Chemical Tanker] GINGA OCELOT [Heavy Lifter] VENUS TRIUMPH [FSRU] GNL DEL PLATA [Tugboat] ATSUMI MARU [Containership] MOL TRIUMPH [Iron Ore Carrier] Shinzan Maru 8 Mitsui O.S.K. Lines [Cruise Ship] NIPPON MARU [Shuttle Tanker] Madre De Deus [Subsea Support Vessel] Skandi Santos [Steaming Coal Carrier] SHIN YAHAGI MARU [Very Large Ethane Carrier] ETHANE CRYSTAL Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 9 12 Feature: MOL’s Three Compass Points 26 Feature: CEO and Investor Dialogue 20 Message from the CEO 30 Sustainability Highlights 32 At a Glance 48 Financial and Non-Financial Highlights 50 Key Indicators 36 Overview of Operations 52 Message from the Officer in Charge of Finance Charting a Course for Further Growth 10 Mitsui O.S.K. Lines Annual Report 2017 11 Feature MOL’s Three Compass Points In the previous medium-term management plan “STEER FOR 2020,” which started in fiscal 2014, we steadily produced results by implementing our “Three Innovations” in the areas of our Business Portfolio, Business Model, and Business Domain. In April 2017, we launched the newly formulated management plan “Rolling Plan 2017,” under which we will further develop the “Three Innovations” as compass points for our growth towards realizing our “Vision for the MOL Group Ten Years from Now.” In this feature, we will describe our accomplishments so far, and our innovations for forging ahead. 1 Innovation of Business Portfolio ( P.14) We will aim to build a business portfolio that enables sustainable growth by strategically allocating management resources in businesses where we expect high growth and stable long-term profits. 2 Innovation of Business Model ( P.16) Evolve to a fleet composition with high market tolerability and competitiveness, and transform to a business model that can deliver profits regardless of market fluctuations. 3 Innovation of Business Domain ( P.18) Create a value chain by expanding the marine transport business domain vertically both upstream and downstream. Previous medium-term management plan “STEER FOR 2020” New management plan “Rolling Plan 2017” 12 Mitsui O.S.K. Lines Annual Report 2017 13 AccomplishmentsForging Ahead 1 Innovation of Business Portfolio Strategically allocate management resources between expanding and defensive businesses As of March 31, 2017 As of March 31, 2016 Highly specialized* Fields for strategic resource allocation Fleet Table (Number of vessels) Dry Bulkers (including Steaming Coal Carriers) Tankers LNG Carriers (including Ethane Carriers) Offshore Businesses (FPSO) Car Carriers Containerships Ferries & Coastal RoRo Ships Cruise Ship Others Total 337 169 80 4 120 91 14 1 31 847 373 175 69 3 120 95 15 1 32 883 Note. Figures include short-term chartered vessels and vessels owned by joint ventures. Variable profits Business integration by three Japanese shipping companies Product Tankers Aim to realize stable growth through investment of management resources in fields where MOL can leverage its competitive edge Chemical Tankers Ferries & Coastal RoRo Ships LNG carriers and offshore businesses Terminals and Logistics Businesses Tugboats Methanol Tankers Daibiru Corporation Car Carriers Trading Business Crude Oil Tankers Dry Bulkers (medium- to long-term contracts, etc.) Stable profits Accomplish- ments • Built up long-term contracts in the LNG carriers and offshore businesses through concentrating resource investment • Scaled down market exposure of dry bulkers, reduced vessel costs of core fleet of small- and medium-sized dry bulkers Containerships Dry Bulkers (vessels vulnerable to market exposure) Reduced through Business Structural Reforms Less specialized* Accomplishments Forging Ahead Forging Ahead • In addition to the LNG carriers and offshore businesses, strategically allocate resources to methanol tankers, chemical tankers, ferries & coastal RoRo ships, terminals, logistics, and real estate businesses • Sharpen cost competitiveness through the integration of the containership business * In plotting the vertical axis (highly to less specialized), each business was considered comprehensively after taking account of the perspectives in the box to the immediate right. • Niche or mass market • Competitive environment • MOL’s relative superiority • Versatility of vessel type 14 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 15 2 Innovation of Business Model Evolve into a fleet composition with high market tolerability and competitiveness Accomplishments Forging Ahead Innovation of the Dry Bulker Business Integration of the Containership Business ▍ Dramatically reduced market exposure by implementing the Business Structural Reforms 0 10 20 30 40 50 60 70 80 90 (%) 100 2013年度末 March 31, 2014 2014年度末 March 31, 2015 2015年度末 March 31, 2016 2016年度末 March 31, 2017 47% 43% 43% Implemented the Business Structural Reforms 27%  Owned or mid- and long-term chartered vessels with mid- and long-term contracts  Owned or mid- and long-term chartered vessels with short-term contracts (market exposure)  Short-term chartered vessels with short-term contracts ▍ Small- and medium-sized bulkers: Shift to a business model that is resilient to market fluctuations Past Profit Loss Present Profit Income Expenses Income Expenses ▍Scale Expansion ( P.7) The integration of the three Company’s containership businesses will expand the scale of the business to rank as a major global player in the industry. The newly formed company “Ocean Network Express” will have higher net sales than the entire MOL Group, and the sixth largest fleet in the world. FY2016 Consolidated net sales Containership business sales* MOL ¥1.5 trillion ¥0.6 trillion NYK ¥1.9 trillion ¥0.6 trillion K Line ¥1.0 trillion ¥0.5 trillion Integrated company “Ocean Network Express” Net sales Approx. ¥1.7 trillion (simple sum) * For the containership business sales for the three companies, we used the disclosed segment sales of each company for convenience. The figure therefore includes sales of domestic terminal businesses (all three companies) and the logistics businesses (MOL, K Line), which are not included in the integration. ▍Strengthening Competitive Advantage Operational Efficiency Economy of Scale Competi- tiveness (Profitability) Best Practices Larger Business Size Creation of more synergy and enhance- ment of operational efficiency by inte- gration of each company’s best practices Achievement of economy of scale by integrating the three companies Synergy of Approx. ¥110 billion/year Profit stabilization by accomplishment of synergy of approx. ¥110 billion/year 16 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 17 3 Innovation of Business Domain Expand business domain in response to customer needs and lead initiatives on the environment Participated in shuttle tanker business Participated in subsea support vessel business Create Value Chain Participated in FSRU project Commercialization of ship management and crew training services Participated in coastal LNG shuttle transportation project in Indonesia Respond to Customer Needs Operation of very large ethane carriers Accomplishments Develop Environmental Strategy Launched methanol- fueled tankers Launched a joint study of LNG-fueled capesize bulkers LNG-fueled tugboat construction decided Participated in project for installation of offshore wind power generation systems Explore the possibility of entering the tanker terminal and tank container businesses Pursue vertically integrated business centered on LNG transportation Forging Ahead Nurture the environment and emission-free businesses Look at entry into the LNG fuel supply ship business Consider commercialization of floating LNG power plants 18 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 19 Message from the CEO Aiming to be the Customer’s Preferred Choice by Providing “Stress-Free Services” Progress and Evaluation of Medium-Term Management Plan “STEER FOR 2020” The overall strategy behind MOL’s last medium-term man- agement plan, entitled “STEER FOR 2020,” was to implement “three innovations”—Innovation of Business Portfolio, Innova- tion of Business Model, and Innovation of Business Domain. I think that we have made genuine and creditworthy strides towards achieving each of those objectives. In Innovation of Business Portfolio, we made intensive investments of our resources in LNG carriers and offshore businesses, leading to the accumulation of a portfolio of long-term contracts that will generate highly stable profits over the long term. Due to a prolonged slump in the price of energy resources, work on new LNG development projects was suspended, and this prevented the Company from meeting the numerical targets originally laid out in the management plan. Nevertheless, we have achieved significant progress in the implementation of our overall strategy. In Innovation of Business Model, mean- while, we reduced our market exposure, particularly in the dry bulker business. Through the Business Structural Reforms, we have reinvented our business model in this division with the aim of establishing a structure that can generate stable income even in the current stagnant market. Innovation of Business Domain includes advances into new areas of business. Having made inroads into shuttle tanker and subsea support vessel operations, we are now establishing a foundation to expand our business further in those fields. Although these measures have significantly moved the Com- pany toward its strategic objectives, market rates for dry bulkers and container ship freights remain at historically low levels. Consequently, it was necessary to book extraordinary losses in order to implement the Business Structural Reforms, which swiftly addressed the situation. This forced us to aban- don the financial targets that were originally set for the final year of the medium-term management plan. In fiscal 2016, which was the final year of our previous medium-term management plan, the Company decided to introduce a single-year management plan prioritizing mea- sures to deal with the situation in our dry bulker and contain- ership businesses. During that fiscal year, the containership business faced even more difficult conditions and our reform measures were not enough to achieve a rebound in ordinary profit. In the dry bulker business, however, our efforts to make the fleet more competitive and more resilient in the face of market conditions were successful, and operations returned to the black. Junichiro Ikeda President & CEO 20 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 21 Message from the CEO Containership Business Integration New Management Plan “Rolling Plan 2017” Since I was appointed as president in June 2015, I have made it my top priority to rebuild the Company’s containership business. Containerships play an essential role as the “conveyor belt” that keeps global trade flowing. Although the pace of growth may not be as great as it was in the past, the business itself is expected to continue growing in the future. Nevertheless, it is also a business subject to fierce competition. We consider it essential to rank within the top one third of the most com- petitive operators in order to survive in this business. We have had some success in efforts to reduce costs, such as strengthening control of yield management and further promoting rationalization of unprofitable routes. However, there have been dramatic changes in the cost structure of this business in recent years, and it has become essential to enhance economies of scale. In the past, fuel and vessel costs accounted for a predominant share of the unit cost of ship- ping each container. However, this situation has changed as fuel prices have declined, ships have increased in size and scale, and vessel charter-in rates have fallen. As a result, the costs of loading and unloading activities at port terminals and inland transportation costs have come to account for a larger share of the overall costs than in the past. Inland trans- portation costs in this case refer to costs to move containers to their final destination by means such as rail or trucks. This has greatly increased the importance of cost competitive- ness and negotiation capabilities that are possible for large- scale container shipping companies. Convinced of the future potential for growth of the containership business, we sought to respond to changes in the business climate by further expanding the scale of our global operations. There- fore, the Company decided to merge its containership busi- ness with those of two other Japanese container shipping companies whose corporate cultures and values are most similar to those of MOL. (The new company is due to com- mence operations in April 2018). This integration of the containership business represents a further step in our efforts to innovate the Company’s busi- ness portfolio and business model, and lays the groundwork for even greater advances. The synergy achieved through this merger is expected to produce a ¥110 billion reduction on annual costs. We will strive to realize this synergy as quickly as possible to return operations to the black and stabilize our income going forward. In formulating our next medium-term management plan, we have decided to abandon the three-year planning cycle used in the past, and to try to envision the management objec- tives we hope to achieve ten years from now. Given the rapid changes that affect our industry nowadays, strategies based on a medium-term management plan fixed in three-year periods may prevent the management from responding flexibly to changes in the business environment. Instead, it is more effective to adopt a broad philosophy or “vision” for the business and consider what the Company should look like 10 years into the future. This long-term objective can then be used to make plans related to our overall business strategy. The investments we make in our businesses, including build- ing vessels, need to be decided under careful consideration of the next 10- and 15-year scenarios. Unfortunately, we often tend to let the current market conditions and supply and demand trends dominate our thinking, when instead, our plans should be based on how we want to be 10 years in the future. I believe that the new planning process is effec- tive in helping employees to develop the right priorities, and focus on longer-term objectives. As a result of our planning discussions, we have formu- lated the “Vision for the MOL Group Ten Years from Now” (see accompanying diagram). To achieve this vision, we must take further steps to inno- vate in three areas: our Business Portfolio, our Business Model and our Business Domains. We will continue to allocate resources with the goal of selecting and focusing on areas of core competence, while enhancing financial strength and also reinventing the business portfolio, in order to maintain sustainable growth. The Group-wide priorities under this plan are comprised of five specific themes: marine technical skills, ICT, technology development, the environment, and workstyle reforms. We will strive to achieve our goals in each of these areas. 1. Vision for the MOL Group Ten Years from Now (2027) ■ The MOL Group will provide stress-free services that are truly convenient for customers world- wide, with the aim of serving customers as a solid and reliable partner at all times. ■ The Group will develop the environment and emission-free businesses into one of its future core operations. ■ The Group will strategically allocate resources to carefully selected businesses that have a clear competitive edge. The goal is to make the MOL Group a collection of businesses boasting the highest competitiveness in their respective fields. 2. Strategies for Realizing the Vision ■ Carefully select opportunities for new investments and pursue business models focused on cash flow ■ Prioritize resources to develop and defend business fields ■ Group-wide priorities for strengthening the MOL Group Marine technical skills ICT Provide services that fully harness the MOL Group's marine technical skills Provide “visualization of marine operations” (safe and optimal vessel operation) and added value to customers Technology development Environment Workstyle reforms Push ahead with the “ISHIN NEXT—MOL SMART SHIP PROJECT—” (advanced support technologies for safer vessel operation and technologies for reducing environmental impact) Develop and promote environment and emission- free businesses as innovative, future core businesses by staying on top of changes in the external environment Enhance human resources competitiveness and achieve innovation through an organizational culture that encourages employees to work vibrantly and productively 3. Medium- to Long-Term Profit Levels and Key Financial Indicators Projected medium-term levels 2027 Targets ¥80.0–¥100.0 billion ¥150.0–¥200.0 billion Ordinary profit ROE 8–12% Gearing ratio 2.0 or less — 1.0 22 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 23 Message from the CEO Providing “Stress-Free Services” and Strengthening the Group in Five Target Areas Cultivating a Cadre of Highly Competitive Businesses In the volatile business environment that prevails today, we need to improve capital efficiency and elevate corporate value. To do this, it is essential that we grow the most compet- itive operations in our business portfolio that most effectively leverage the Company’s competitive edge. We aim to focus management resources, including human resources, in these core business sectors from now on. In previous years, the LNG carrier and offshore businesses and the methanol tanker business have been contributing to highly stable profits and accumulating long-term contracts. We will continue to priori- tize these businesses in our future investments. We think that the prospects for our chemical tanker business are also very strong. Earnings in this sector are comparatively stable, and it is a specialized business with significant barriers to market entry, so we will be able to expand our operation scale while maintaining our leading position in the sector. We are also exploring possible related activities, such as entry into tanker terminal operations, where we may be able to open up new businesses and further enhance MOL’s strength as a full-line marine transport group. One segment of MOL’s business portfolio that is rather unique is the ferry business. We also plan to make this an area of focus. In the past, we were inclined to view domestic ferry services as a sideline operation. However, these services are becoming increasingly important as a way to reduce the environmental impact of large-scale cargo transport activi- ties. Furthermore, Japan faces a severe shortage of truck drivers, making it even harder for domestic transport compa- nies to manage smooth logistical operations around the country. Increasingly, a modal shift from road transport to coastal ocean transport is becoming noticeable. This has greatly expanded the role that ferry services can play in domestic logistics. MOL currently accounts for over 40% of domestic passenger traffic by ferry, and over 40% of ferry- based cargo truck transport as well. The Group plans to establish itself as the clear market leader and accelerate growth in this segment. Among the objectives we have set for the Group in our “Vision for the MOL Group Ten Years from Now,” the one that I person- ally am most invested in is the goal of offering “stress-free services” to customers. This of course includes the safety and reliability that is provided by our marine transport services. However, when considering the customer’s overall value chain, marine transport services are just one part of a larger whole. We need to understand in far greater detail the sort of support and service that they really want from a logistics partner with the customers’ entire value chain in mind. The five Group-wide priorities mentioned above for strengthening the MOL Group are essentially measures for realizing “stress-free service.” The priority of “marine technical skills” encompasses nearly all of the capabilities that underlie Group operations. Improvement in this area is signified not only by ensuring the safe operation of vessels, it also includes utilizing know-how and expertise in marine operations. This is in order to provide the widest possible range of services to clients, such as optimization of port operations to make load- ing and unloading more efficient. In “ICT,” we not only need to analyze big data on weather and ocean conditions to support safe operations and to select the best routes, but we will also pursue “visualization of marine operations,” such as real-time monitoring of data on ship engines and identification of specific conditions. This will ensure that maintenance and replacement of parts can be conducted before any problems arise. “Technology development” includes not only essential acceleration of measures to reduce CO2 and SOx emissions, but also mechanization and automation of vessel operations in order to improve safety levels and reduce the burden on crews. These issues will be improved further in the future. The “environment” field encompasses the development of envi- ronment and emission-free businesses as one of the Group’s core businesses in the future. Examples include the installa- tion and maintenance of offshore wind power generation facilities, the operation of LNG-fueled vessels and LNG fuel supply operations. Utilizing the Group’s technological skills, we hope to contribute to reductions in CO2 emissions, and develop a synergy with our existing businesses to steadily expand the scope of operations. Finally, “workstyle reforms” will be applied to all of the activities already mentioned. Every one of us in the Group needs to make every possible effort to explore new, creative and flexible ideas or solutions. I believe this means we must make reforms to change our mindsets and our organizational culture. Our ultimate goal is to create a business culture in which new ideas can develop. Improving Capital Efficiency In Closing Our business model is to invest in vessels, which we operate under long-term transport contracts, as much as possible in order to generate stable earnings. Under today’s prevailing market conditions—which could be characterized as “slow trade”—the business portfolio and model that the Company has maintained in the past will not be enough for MOL to generate returns that significantly surpass the market aver- age. This means that the Company needs to allocate resources and select business priorities based on a very strict set of investment criteria. In particular, the earnings outlook for the next three years dictates that we must limit the burden on cash flow by investing only in top-priority projects and business opportunities that offer high and stable returns. Business models using chartered-in and second-hand vessels will also be an effective option to limit cash outflows. Although we expect to generate a negative free cash flow over the next two fiscal years, we expect these measures to turn it around to a positive cash flow in fiscal 2019. As I have noted above, it appears that MOL will continue to face a harsh business environment. New vessel deliveries in the industry will remain at a high level, and the excess of supply over demand is likely to persist to at least 2018. It will be some time before we can expect a real recovery in the supply and demand balance. On the other hand, we expect that global marine transport volumes will continue to grow steadily, albeit not as fast as seen before the global financial crisis. As a full-line marine transport company, MOL’s business portfolio includes global leaders in various segments of the industry, including many that hold the number one position in their segments. This enables the Group to generate stable earnings. Over its more than 130-year history, MOL has built a reputation for reliability and a brand strength that will be enhanced further as we pursue environmental protection and ICT activities. By offering “stress-free services” to custom- ers globally, the Company will continue to earn the trust and loyalty of customers not only in Japan, but around the world. Looking ahead, I believe that we can further demonstrate the superior quality of our services and make the MOL Group the first choice of customers in all of our markets and businesses. I would like to thank all stakeholders for their continued understanding and support in these endeavors. 24 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 25 Feature CEO and Investor Dialogue With the launch of a new management plan, which lays out our “Vision for the MOL Group Ten Years from Now,” MOL has embarked on a series of large-scale innovations. In this section, President & CEO Ikeda discusses with a global investor about the measures MOL is taking in order to create corporate value over the long term. Junichiro Ikeda President & CEO Akitsugu Era Director, Head of Investment Stewardship, BlackRock Japan Co., Ltd.  New Management Plan “ In response to the rapidly changing business environment, we have laid out our ‘Vision for the MOL Group Ten Years from Now’” Era When MOL unveiled its new management plan “Rolling Plan 2017,” I was particularly intrigued by the decision to base plans on a vision of the Company in 10 years. I understand that the rolling plan will be revised each year. What was behind the decision to change from the previous approach to planning? Ikeda There were two basic considerations we had. First of all, since the 1990s, MOL had been formulating medi- um-term management plans, each covering three-year peri- ods. It worked as a way of giving shareholders an idea of our profit projections for each respective period. However for MOL, the three year plan was more of an investment plan. The problem with this approach was that vessels, the main target of our investments, have an average operating life of 20 years. As such, our plans need to consider what conditions will look like 10 or 15 years in the future. This disparity in the length of our planning cycle and that of our fundamental business model was one concern. The other was the upheaval in the marine transport business. There was an idea that when formulating management plans we should assume that such major changes in the business environ- ment will continue. What’s more, the environment doesn’t wait three years to change—it is ever-changing. Manage- ment plans need to be adjusted and reevaluated every year  Innovation of Business Portfolio to quickly respond to such changes. This is why we have adopted a “Rolling Plan” system. Era So the point was to set a vision for 10 years from now and then backcast from the target to determine shorter-term plans, identifying the gaps between the current situation and the 10-year goals. I also heard that younger employees and managers who are expected to assume leadership roles within the Company in 10 years’ time have played an import- ant part in drafting “Rolling Plan 2017.” Ikeda That’s right. After all, the investments that we make today will have an impact on profits 10 years from now. Therefore, we must envisage the situations and agendas that those who steer MOL in the future will face. Our manage- ment plans need to reflect the thinking and objectives of young staff members and managers. Era I always believe that management plans need to be more than just ideas on paper, and that they should shape the character of the organization from its deepest levels. From what I have heard so far, it sounds like the new plan has garnered the commitment and understanding of the internal stakeholders. “ We aim to further enhance our competitive edge in the full-line marine transport business model” Era Most of the global firms in the marine transport indus- try operate businesses by specializing in a particular seg- ment, such as containerships or dry bulkers. MOL, on the other hand, describes its business model as “full-line marine transport operation.” My understanding is that this business model is a reflection of the long history of how the Company has evolved; I would further like to know how this business portfolio will change going forward. Ikeda Yes, MOL is somewhat unique in terms of the wide range of businesses and vessel types it possesses in its busi- ness portfolio. This is a reflection of the Company’s historical role in supporting Japan’s emergence as an economic power. We served a multitude of client industries, transporting raw materials from overseas to domestic manufacturers and then exporting all sorts of manufactured products. As a result, the Company’s operations became quite diverse. Car carriers are a case in point. Automobiles were initially exported on con- ventional cargo ships, with a few dozen cars loaded along- side all sorts of other cargo. But as Japanese exports expanded, it became necessary to develop specially designed car carriers. Naturally, our portfolio has changed in response to global economic changes—not only Japan. In recent years, there has been a particularly sharp change in energy-related businesses, and LNG has really entered the spotlight. Not surprisingly, LNG carrier operations now make up an increasing share of MOL’s business portfolio. The containership business has served as the backbone for global commerce over many years, not only in Japan but worldwide, and containerships still account for a large share of the Company’s operations. However, it has become more difficult to maintain a competitive advantage, and the profit- ability of these operations is waning. This is the key issue we must now address. We have given careful thought to the role that this business plays, and should play, in our overall port- folio, and concluded that the best solution is to integrate MOL’s containership business with those of two other lead- ing Japanese marine transport companies. Some of the businesses in the Company’s portfolio are subject to fluctuations in profitability driven by market cycles. However, as a medium-term strategy, we have decided to focus a larger share of management resources on businesses that are comparatively resilient to market fluctuations, such as LNG carriers, as these businesses will generate long-term stable earnings. 26 Mitsui O.S.K. Lines Annual Report 2017 27 “Our management plans need to reflect the thinking and objectives of the young employees and managers who will guide the Company in the future.” “I was particularly intrigued by the decision to base planning of the MOL Group on a vision of itself 10 years ahead.”  Decision-Making by the Board of Directors Change was decided after thorough discussion in the “Deliberation on Corporate Strategy and Vision” Era At a time when the global economy is changing rap- idly, I assume that there are also times when management perspectives need to pivot, or the needs of MOL’s clients to change. In response to the changing business environment, how did the Board of Directors discuss and reach a conclu- sion on the key decision to change the business portfolio, such as reducing market exposure or integrating the contain- ership business? Ikeda The question of how to manage the impact on earnings caused by market fluctuations has always been a challenge for MOL’s management. In considering the inter- ests of investors, Company employees, and other stakehold- ers, we need to do everything possible right now to limit the impact of market volatility and stabilize earnings trends. These considerations were the basis for our Business Struc- ture Reforms in fiscal 2015 through 2016 as well as the deci- sion to integrate our containership business. The process for these decisions naturally included vigorous discussion by the board, including the outside directors. Era So, the matters were discussed thoroughly at the “Deliberation on Corporate Strategy and Vision,” which is one of the key features of MOL’s corporate governance system? meetings thoroughly examine issues that affect medium- and long-term strategies, as well as any important manage- ment issues that arise. In addition to the conventional perspectives of people within the Company, we actively solicit the input of outside directors, who have a broader perspective and expert insight. We seek to reflect these in our management decisions by encouraging everyone to freely express their views. This is exactly how we approached the issue of integrating our containership business. Era From an investor’s perspective, there are sometimes cases in which board meetings appear to be turning into a place mainly for explaining matters to outside directors and do not seem to be functioning effectively. Ikeda MOL was ahead of the curve with outside directors, appointing outsiders to the board as early as 2000, and from my perspective at least, the outside directors seem to feel free to express opinions. They have also made this comment themselves. I cannot say that there is never a sense that we are “explaining things” to the outside directors, but we aim to use their input in an effective way, particularly when dealing with concrete issues such as in the “Deliberation on Corpo- rate Strategy and Vision.” of MOL’s achievement in this context, we completed the Company’s first methanol-fueled tanker last year, and we have launched a project in collaboration with existing clients to develop LNG-fueled capesize bulkers. Era So, over the long term, these projects are expected to ultimately lead to developments in the environment and emission-free businesses or, at a higher level, are expected to lead to “strengthening marine technical skills,” as set forth in the new management plan. Ikeda By taking our environmental response a step further and viewing it as an environmental business, I think we have made an even deeper commitment with the new manage- ment plan. Actually, the idea of environment and emission- free businesses initially came from some of our younger staff. Their ambition to move the Company forward with a longer- term view came across to the management. I think our young staff members started to act in a more proactive manner, thinking about the Company’s future and clearly voicing their opinions. There is certainly this kind of atmo- sphere in the Company. I believe the establishment of such a corporate culture forms the true basis for effective manage- ment planning. I agree that placing corporate values and culture at the Era center of workstyle reforms is essential for leading real reforms in underlying attitudes and organization.  Relationship with Investors On another subject, ICT is also an important focus for the Company. What are the views regarding the new develop- ments, such as artificial intelligence (AI) and the Internet of Things (IoT) and how will they affect marine transport in the future? Ikeda We see ICT as a tool for reducing the workload of crews, and thereby improving safe vessel operations. For example, in the case of engine maintenance, up to now we have relied in some measure on the experience and exper- tise of our engineers. However, if we also have ICT systems monitoring the condition of engines in real time on shore and performing big data analysis, we will be able to identify potential problems before they happen, replace worn com- ponents, and perform necessary maintenance. At MOL, we refer to this as the “visualization of marine operations.” I see. And what impact will this have over the medium Era and long term? Ikeda Well, it is going to take some time, but ultimately we intend to automate shipping as completely as possible, leading to the use of “unmanned ships.” Compared to land- based operations, ships still rely heavily on manual activities for soft operational aspects. However, if we set high goals, I expect that technological advances will be made much sooner. Ikeda Yes, we hold regular scheduled meetings of the “Deliberation on Corporate Strategy and Vision.” These (Details regarding “Deliberation on Corporate Strategy P.58‒59) and Vision” “ I think investors help us to notice current issues”  Environmental and Safety-Related Issues “We will make use of ICT and technological development to promote ‘visualization of marine operations,’ and develop the environment and emission-free businesses with a view to the future” Era One persistent trend in the marine transport industry is the tightening of environmental regulations, such as ballast water management and SOx emission reduction. And I believe significant investments must be made to comply with these new environmental rules—what would be the strategy to ensure returns on these additional investments? Ikeda The environmental strategy is high on the agenda in our current management plan. In fact, we actively try to differentiate MOL from rivals in this area. Nevertheless, we obviously have to find a way to make the Company profit- able even after environment-related investments. At some point, we will have to approach customers to share additional costs in order to support the basic cost for main- taining shipping as a mode of transport. Era Could you provide more details regarding how MOL plans to differentiate itself from other competitors? Ikeda I think this is actually a valuable opportunity for the Company. Customers have a great deal of latent concern for environmental issues, some of them are already indicating a desire for tighter environmental standards. By taking an aggressive approach to environmental issues, I believe that customers will naturally be inclined to select MOL as their preferred marine transport partner. To show some examples Era This will be my last question. In my role as an investor, I always aim to offer corporate managers different “perspec- tives” in the hope of helping them notice something during meetings. Do you have any specific expectations towards investors in supporting the growth of the business? In a general sense, I think investors provide us with Ikeda a kind of tension and discipline. In the process of meeting and talking to investors, we listen to their candid comments about issues that concern them, while expressing our strat- egy and way of thinking straightforwardly. Through these discussions, we can gain a clear sense of what issues we have when seen from the outside. Obviously, we feel tension as we are required to deliver results in terms of the Compa- ny’s share price and related performance figures, but it can also serve as a good source of motivation as well. Therefore, I look forward to having constructive discussions with inves- tors, and I hope they will continue to make their opinions and concerns clear. 28 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 29 Sustainability Highlights In addition to advancing the Three Innovations, the MOL Group is taking various initiatives to build a stronger management foundation as a marine transport company. Through these initiatives, the MOL Group aims to become a solid and reliable enterprise that achieves sustainable growth into the future. Human Resources Development MOL Decided to Establish a Maritime Academy in the Philippines Continuously Training Top-Quality Seafarers for Global Top-Class Safety in Vessel Operations Emission-Free Business MOL Invests in Self-Elevating Platform Vessel Operator for Installation of Offshore Wind Power Generation Systems Moving into the Offshore Business Following FPSO, FSRU, Shuttle Tankers, and Subsea Support Vessels MOL has acquired a 5% share in Seajacks International Lim- ited (Seajacks) Group, which owns and operates self- elevating platform vessels for the installation of offshore wind power generation systems. There has been significant expan- sion in offshore wind power generation systems, led by Europe, with Asia offering strong growth prospects for the future. For MOL, this investment will expand the horizons of its offshore business, along with marking its first step into the renewable energy business field. One of the world’s largest self-elevating platform vessels owned and operated by Seajacks Environmental Initiatives MOL Launches a Joint Study of LNG-fueled Capesize Bulker Initiative on Environmental Protection Ahead of International Rules In January 2017, MOL reached an agreement to launch “Green Corridor,” a joint study of an LNG-fueled capesize bulker with five other companies—resource and energy majors Rio Tinto, BHP Billiton, and Woodside Energy, as well as DNV GL, an international classification society based in Norway and Germany, and Shanghai Merchant Ship Design & Research Institute, a member of the China State Shipbuilding Corporation Group. Thereafter, Australian resources major Fortescue Metals Group and Taiwanese shipping company U-Ming Marine Transport Corporation joined the study. The joint study is now conducting research into the technologi- cal and economic feasibility of an LNG-fueled capesize bulker, in advance of international treaties calling for stricter NOx and SOx emissions standards. At the signing ceremony Underlined words are explained in the Glossary on the Contents page. In June 2018, MOL will inaugurate MOL Magsaysay Maritime Academy Inc., a maritime academy, in Dasmariñas, Cavite in the Philippines. With its local partner Magsaysay Maritime Corporation, the MOL Group plans to recruit about 300 grad- uates every year, providing continuous training programs to develop top-quality seafarers who will be able to hit the ground running through a four-year curriculum that encom- passes basic education and specialized coursework. Conceptual image of the completed maritime academy campus (provisional) Technological Development MOL Launches the “ISHIN NEXT—MOL SMART SHIP PROJECT—” Enhancing Business Strengths and Increasing Corporate Value In November 2016, MOL launched the “ISHIN NEXT—MOL SMART SHIP PROJECT—,” a new technological development project that builds on the success of the Senpaku ISHIN Project, which was announced in 2009. Through the project, MOL will share its technological development policies with customers and other stakeholders, thereby capturing diversi- fied needs and collecting various seeds of technologies. By matching those needs with technologies, MOL intends to develop technologies for safer vessel operation and for reducing environmental impact, which will help to enhance its business strengths and increase its corporate value. Advanced support technologies for safer vessel operation Towards autonomous sailing in the future New technologies in various fields Safety & Environment ICT e.g. utilization of big data Technologies for reducing environmental impact For global environmental protection Safe Operation “Project for Establishing a System to Visualize Onboard Environments Utilizing ICT” Proactive ICT Utilization for Safer Vessel Operation As part of the abovementioned “ISHIN NEXT—MOL SMART SHIP PROJECT—,” MOL will conduct the “Project for Establish- ing a System to Visualize Onboard Environments Utilizing ICT.” The aims of this project are to reduce workplace accidents onboard, reduce the workload of seafarers, and enhance crew operation and technical skills. MOL will enhance safer operation, improving the safety awareness and skills of crew members, by developing: (1) The health and safety management of crew through the use of wearable devices; and (2) The education of crew and skill transfer using head- mount displays, virtual reality (VR) / augmented reality (AR) technologies, and remote support systems for use during maintenance and repairs. 30 Mitsui O.S.K. Lines Annual Report 2017 31 At a Glance FY2016 Performance (Consolidated) Revenues/Ordinary Profit by Segment Figures are provided for reference by simply restating according to new segmentation applied from fiscal 2017 without adjusting inter-segment transactions Shipping and other revenues ¥1,504.3 billion Equity ratio 25.8% Ordinary profit Gearing ratio ¥25.4 billion 1.96 Total assets Net gearing ratio ¥2,217.5 billion 1.64 Net assets MOL’s fleet (number of vessels) ¥683.6 billion 847 Revenues by Segment Ferries & Coastal RoRo Ships 3% Dry Bulkers (excluding Steaming Coal Carriers) 18% Associated Businesses and Others 6% Product Transport Business 58% Dry Bulk Business 18% Energy Transport Business 18% Containerships 41% Car Carriers 14% Fleet Composition Tankers 10% Ordinary Profit by Segment (¥ billions) LNG Carriers/ Offshore Businesses 5% Steaming Coal Carriers 3% Dry Bulk Business Energy Transport Business Product Transport Business Containerships only Associated Businesses Others Corporate/Eliminate Total FY2016 performance 11.9 26.7 (27.9) (32.8) 12.3 1.8 0.5 25.4 Others 2% Dry Bulkers 43% Number of ships (847) Containerships 11% Dry Bulkers 50% Deadweight tons (62 Million) Car Carriers 3% LNG Carriers 10% Tankers 26% Containerships 11% Car Carriers 14% LNG Carriers/ Offshore Businesses 10% Tankers 20% 32 Mitsui O.S.K. Lines Annual Report 2017 33 At a Glance MOL established the Dry Bulk Business Unit and the Energy Transport Business Unit in April 2016, and the Product Transport Business Unit in April 2017. Accordingly, MOL has reclassified its previous disclosure segments, namely Bulkships, Containerships, and Ferries & Coastal RoRo Ships, as the Dry Bulk Business, Energy Transport Business and Product Transport Business from fiscal 2017. In this section, disclosure is provided in accordance with the new disclosure segments. Business Activities With one of the world’s largest fleets, MOL reliably transports such dry bulk cargo as iron ore, coal, grains, wood, wood chips, cement, fertilizer and salt. Our fleet includes highly versatile bulk carriers and specialized vessels for specific cargo types. Dry Bulk Business Dry Bulkers (excluding Steaming Coal Carriers) [Dry Bulker] Capesize Bulker: JASPER DREAM With one of the world’s largest fleets, MOL is expanding activities globally. Our fleet includes crude oil tankers; product tankers that carry naphtha, gasoline and other refined petroleum products; chemical tankers that carry liquid chemical products; and LPG tankers that carry liquefied petroleum gas. Tankers Energy Transport Business LNG Carriers/Off- shore Businesses With one of the world’s largest LNG carrier fleets, MOL safely transports liquefied natural gas (LNG), which is experiencing growing global demand. In addition, we are active in offshore businesses, including FPSOs and FSRUs, which are poised for continued growth. Steaming Coal Carriers MOL transports coal for thermal power generation, mainly on medium- to long-term transport contracts with electric power companies in Japan. Looking ahead, we also plan to engage aggressively in coal transport for emerging countries, where growth is expected. As a division within the Energy Transport Business Unit, the steaming coal carriers division will coordinate with other divisions to meet diversifying customer needs. MOL is stably expanding transport services to meet the changing needs of automakers as they move production to optimal sites around the world. We operate globally with specialized car carriers that can effectively transport any type of vehicle from passenger cars to construction machinery. Car Carriers Product Transport Business Containerships Ferries & Coastal RoRo Ships Through MOL’s global network of sea routes, we transport containers loaded with electric products, automotive parts, clothes, furniture, food products and many other products to deliver them around the world. We are expanding our network with wider port coverage and increased service frequency, not only on our self-operated routes but also in joint operations with partners. MOL develops the ferry business, which transports both passengers and vehicles (automobiles, trucks, etc.), and the coastal RoRo ships business which specializes in the transport of freight vehicles. We are raising our profile as the leader of an eco-friendly modal shift in domestic logistics. Leveraging the know-how accumulated over more than 130 years in the marine transport business, we are promoting various businesses in related activities including real estate, tugboats, cruise ship (the NIPPON MARU), and trading. Associated Businesses 34 Mitsui O.S.K. Lines [Tanker] VLCC: CHOKAISAN [LNG Carrier] LNG SATURN [Steaming Coal Carrier] JP MAGENTA [Car Carrier] GLORIOUS ACE [Containership] MOL TRIUMPH [Ferry] SUNFLOWER FURANO [Cruise Ship] NIPPON MARU Year in Review Business Environment Market conditions are still in the process of recovering. However, thanks to the Business Structural Reforms, we have implemented in small- and medium-sized bulkers in addition to reducing the numbers of capesize bulkers operated on the spot market, profitability improved significantly from the previous fiscal year, turning a certain level of profit in fiscal 2016. The tanker division focused on reducing market exposure and soundly executing long-term contracts, in conjunction with working to secure new contracts for crude oil and other tankers from overseas customers. In addition, we continued to work to improve operation efficiency and reduce costs. As a result, although profit levels decreased significantly year on year, we posted a certain profit in fiscal 2016. The LNG carrier division continued to secure stable profits from long-term contracts while increasing its profit year on year, partly through incremental income from newly delivered vessels, including the world’s first large ethane carriers. In addition, the offshore project division posted higher profit year on year due to steady FPSO operations, including a new FPSO unit. Cargo volumes of completed cars to the U.S. and Europe were firm, while imports by emerging countries and resource-producing countries continued lackluster as their economies slowed down as a result of falling resource prices and other factors. Against this backdrop, we worked to reduce the fleet size and improve operation efficiency in response to changes in trade patterns. Despite these efforts, ordinary profit declined sharply year on year. In addition to improving our slot utilization rates by strengthening our sales capabilities, we continued working to reduce costs, such as the cost of repositioning empty containers, by bolstering yield management. These efforts produced a certain measure of results. However, the division’s loss increased slightly, mainly due to the downturn in annual contracted freight rates after historically low freight levels in January-March 2016. Cargo volumes trended firmly as the trend toward a modal shift in transportation—i.e., a switch from long-distance land transport by trucks to ferry transport—accelerated further. In terms of the number of passengers, although certain routes were negatively impacted by the Kumamoto Earthquakes, we secured the same level of overall profit as in the previous fiscal year, supported in part by a decline in fuel prices. In the cruise ship business, ordinary profit increased year on year due to healthy sales for the cruise ship NIPPON MARU. Ordinary profit in the real estate business increased as well, underpinned by a robust office leasing market. In other areas, the tugboats, trading and certain other businesses showed a generally firm performance trend. Consequently, the segment’s overall ordinary profit increased year on year. Dry Bulker Market (BDI*1) (Jan 4, 1985=1,000) 1,600 1,200 800 400 0 15/4 16/4 17/4 Source: MOL internal calculation based on TDS and others *1 Baltic Dry Index VLCC*2 Market (AG - Japan) (US$/day) 120,000 90,000 60,000 30,000 0 15/4 16/4 17/4 Source: MOL internal calculation based on Clarkson *2 Very large crude carrier (300,000-DWT class) Containership Market (CCFI*3) (Jan 1, 1998=1,000) Europe Trade U.S. West Coast Trade U.S. East Coast Trade South America Trade 1,600 1,200 800 400 0 15/4 Source: SSE *3 China Containerized Freight Index 16/4 17/4 Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 35 Overview of Operations Dry Bulk Business Unit Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses Fiscal 2017 Initiatives As a result of the Business Structural Reforms, we have achieved an appropriate fleet structure. Now we will aim for growth while balancing risk. Having streamlined the fleet to an appropriate scale, our strategy now is to place even higher priority on acquiring medium- to long-term transpor- tation contracts with our main customers. The important points in executing this strategy will be to leverage the advantages of the trust and brand strength that we have built up with our customers over many years. Customers seeking medium- to long-term contracts put a high priority on quality of transport services and financial stability in choosing partners. MOL is one of a limited pool of carriers that qualify. For example, we are seeing an expansion of demand for biomass fuel transportation, a relatively new field in the small- and medium-sized bulker sector. Our long track record and stance on safe operations has helped to increase the evaluation of the MOL brand and contributed to our gaining new contracts in this new business field. We are creating a virtuous cycle where building a record of achieve- ments leads to positive evaluation, and this in-turn helps to strengthen our brand. On the other hand, the ratio of long-term contracts for some types of cargo is set to decline going forward, and our business model could change. In response to this trend, the business unit system that we launched in fiscal 2016 will have an important role to play. The divisions within the Dry Bulk Business Unit will share information to keep track of what kinds of transport demand are occurring, and we expect this will help us to acquire new contracts and deploy vessels effectively. We also expect it to enable flexible person- nel deployment in response to changes in the business environment. Another key aspect of our strategy is environmental response. Naturally, we are responding to the Ballast Water Management Convention and tightening of regulations on the sulfur oxide content in fuel oil (SOx regulations). A large number of dry bulkers were ordered during the shipping boom in the first decade of the 2000s, but a significant number of these vessels are believed not to meet the quality standards. It is possible that these vessels could be with- drawn from the market going forward as they may fail to comply with the new environmental regulations. Customers’ awareness of environmental issues is also increasing rapidly. MOL joined forces with major iron ore suppliers and several other companies to start the joint research project “Green Corridor” on LNG-fueled bulkers. Through these and other initiatives, we are working to reduce our environmental burden as a responsible marine transport company, and we will continue to provide even better quality in our transport services going forward. Toshiaki Tanaka Managing Executive Officer Director General of Dry Bulk Business Unit Hirofumi Kuwata Executive Officer Deputy Director General Dry Bulkers Fiscal 2016 in Review In fiscal 2016, the business unit continued to experience an adverse business environment; however, we secured a profit due after significantly reducing market exposure through the Business Structural Reforms that have been underway since fiscal 2015 while posting stable profits from long-term con- tracts. In the Business Structural Reforms, we steadily pro- ceeded to sell off some of our capesize bulkers and optimized the size of our fleet. In small- and medium-sized dry bulkers, we redelivered chartered-in vessels before their charter contracts reached maturity, and lowered vessel costs for the remaining core fleet to a level in line with the then-prevailing market. These measures transformed our fleet, making it highly competitive and streamlining it to align with the number of cargo contracts we have accumu- lated. The dry bulker market itself has broken out of the record slump it had entered prior to spring 2016 and is now showing a gradual recovery trend driven by firm shipments of Brazilian iron ore and an increase in Chinese coal imports. Our vessels operating under medium- and long-term cargo contracts for iron ore and coking coal, wood chips, and so forth continued to secure stable profits. Although losses were recorded by certain affiliates, overall results surpassed the plan at the start of the fiscal year. Consolidated Revenues Breakdown (FY2016) ● Iron Ore & Coal Carrier 50% 31% ● General Bulk Carrier 11% ● Wood Chip Carrier ● General Cargo Carrier/ Heavy Lifter 8% Dry Bulker Fleet Table (Number of vessels) Vessel type Standard DWT At the end of Mar. 2017 At the end of Mar. 2016 Use Capesize 180,000 Panamax 80,000 Handymax 55,000 Small handy 33,000 Wood chip carriers Short sea ships Total 54,000 12,000 90 24 57 31 39 55 92 31 60 52 41 54 Steel raw materials (iron ore, coking coal) Iron ore, coking coal, steaming coal, grains, etc. Steaming coal, grains, salt, cement, steel products, etc. Steel products, cement, grains, ores, etc. Wood chips, soybean meal, etc. Steel products, plants, etc. 296 330 Portfolio Highly Specialized Wood Chip Carriers Short Sea Ships V a r i a b e P r o l f i t s l S t a b e P r o f i t s Small- and Medium- Sized Bulkers Capesize Bulkers Less Specialized Global Seaborne Trade of Major Dry Bulk Cargoes (Million tons) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 2011 2012 2013 2014 2015 2016 ■ Iron Ore ■ Coking Coal ■ Steaming Coal ■ Grains ○ YoY % Source: Clarkson Vessels Supply (Capesize) (Number of vessels) 300 200 100 0 –100 2011 2012 2013 2014 2015 2016 ■ Deliveries ■ Demolitions ○ YoY % Source: MOL internal calculation based on IHS-Fairplay (%) 12 10 8 6 4 2 0 –2 24% 16% 8% 0% 36 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 37 Overview of Operations Energy Transport Business Unit Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses Fiscal 2017 Initiatives In fiscal 2017, we expect supply to increase due to new vessel deliveries, and the tanker market to continue facing adverse overall conditions. In response to this environment, we will conduct business management by clearly selecting and concentrating our resources. In crude oil tankers, we will focus on maintaining and renewing the medium- and long- term contracts we have built up with oil companies in Japan and overseas. In product tankers, where there is no apparent demand for medium- and long-term contracts, we will con- tinue to scale down our fleet. Meanwhile, we will scale up our fleet in the chemical tanker field, which has high entry barriers, as we can leverage our advantages there. In metha- nol tankers, we intend to use our cost competitive fleet to help capture more medium- and long-term contracts. In addition to these vessel type-specific strategies, we will also take steps to strengthen the MOL brand. In one instance of making use of the MOL brand in this division to gain con- tracts, we expanded our medium- and long-term contract for VLCCs with Reliance Industries Limited of India to five vessels. We have already been supplying ethane carrier services to Reliance in the LNG carrier division, and their high evaluation of our transport quality, including ship management, appears to have led to the conclusion of this latest VLCC contract expansion. This is clearly a successful result of synergies arising from initiatives undertaken by the Energy Transport Business Unit. We will continue to accumulate such achieve- ments going forward, further strengthening the relationships of trust with our customers. The Company’s tanker division is one of the largest in the world in terms of overall scale, and has a distinctively diverse portfolio of various vessel types for different cargo, even within the class of tankers. In product and LPG tankers, which are not prominent in terms of independent vessel numbers, we have entered pool arrangements with overseas partners to form pools with world-class global scale overall. We will continue to utilize scale benefits of our fleets, including these pool arrangements, while enhancing our cost competitive- ness and service quality, as well as steadily executing safe vessel operations. In doing so, we will aim to earn a reputa- tion among customers as the “go-to Company for tanker services.” Kenta Matsuzaka Executive Officer Deputy Director General (LNG Carriers) Takeshi Hashimoto Senior Managing Executive Officer Director General of Energy Transport Business Unit (Management and Offshore Businesses) Hirofumi Kuwata Executive Officer Deputy Director General (Steaming Coal Carriers) Akio Mitsuta Senior Managing Executive Officer Deputy Director General (Tankers) Tankers Fiscal 2016 in Review In the previous fiscal year (2015), the tanker division achieved a huge increase in profit due to favorable market conditions. However, from the start of fiscal 2016, we operated under the assumption that the market would soften due to an increase in supply arising from new vessel deliveries. In fact, the market deterioration exceeded our expectations. Under these circumstances, we effectively minimized the negative impact on earnings by responding appropriately for each vessel type. In crude oil tankers, product tankers, and LPG tankers, the spot market grew sluggish due to ongoing easing of the supply and demand balance. However, we steadily recorded highly stable profits from VLCCs deployed on long-term contracts with oil companies in Japan and overseas, as well as methanol tankers, where we replaced five vessels with newly built vessels during fiscal 2016, including three methanol-fueled vessels equipped with dual-fuel diesel engines. In chemical tankers, although the spot market soft- ened, we managed to reduce the negative impact by fixing approximately 70% of cargoes with one- to three-year con- tracts of affreightment (COAs) under our business policy. As a result, profits declined substantially from fiscal 2015, when market conditions had been extremely favorable; but we managed to post a certain level of profit. Consolidated Revenues Breakdown (FY2016) ● Crude Oil Tanker ● Chemical Tanker ● Methanol Tanker ● Product Tanker ● LPG Tanker 29% 39% 11% 15% 6% Tanker Fleet Table (Number of vessels) Vessel type At the end of Mar. 2017 At the end of Mar. 2016 Vessel type under pool management (at the end of Mar. 2017) Crude oil tankers Chemical tankers*1 Methanol tankers Product tankers*2 LPG tankers 40 51 27 43 8 42 54 25 45 9 LR1 (70,000 DWT) MR (50,000 DWT) VLGC (Very Large Gas Carrier, 80,000 m3) Total 169 175 *1 Main cargoes: xylene, benzene and vegetable oil, etc. *2 Main cargoes: gasoline, naphtha, kerosene, jet fuel and gas oil, etc. Portfolio V a r i a b e P r o l f i t s Highly Specialized Chemical Tankers LPG Tankers Methanol Tankers Crude Oil Tankers Product Tankers Less Specialized l S t a b e P r o f i t s Crude Oil: Global Seaborne Trade by Import Country/Area (Million tons) 2,000 1,500 1,000 500 0 2011 2012 2013 2014 2015 2016* 2017** ■China ■Japan ■Other A/P ■Europe ■N. America ■Others Source: Clarkson * Estimate ** Forecast Vessels Supply (VLCC) (Number of vessels) 75 50 25 0 –25 2011 2012 2013 2014 2015 2016 ■Deliveries ■Demolitions ○ YoY % Source: MOL internal calculation based on IHS-Fairplay 15% 10% 5% 0% 38 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 39 Overview of Operations Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses LNG Carriers/Offshore Businesses Fiscal 2016 in Review Our vessels in this division are basically operated under long- term contracts with customers, so the division reported stable profits as always in fiscal 2016. In particular, fiscal 2016 saw the completion of construction of six LNG carriers, one FPSO unit, and five very large ethane carriers, which have now started contributing to profits. On the other hand, we were unable to achieve remarkable progress in securing new long-term contracts. The LNG carriers/offshore businesses division uses a business model of incorporating transport demand generated from new resource development proj- ects; however, the development of such new projects has almost ground to a complete halt due to the ongoing slump in energy prices such as oil and gas since 2015. In this situa- tion, we spent the year focusing on bringing the investments of the past few years to fruition. Even amid a general slump in the marine transport market, the division performed its role as expected by steadily posting long-term, highly stable profits. Fiscal 2017 Initiatives The start of execution of the long-term contracts that we have already built up will contribute to the expansion of our fleet and ensure the expansion of highly stable profits over the next few years. In our efforts to acquire new long-term contracts, we expect to see adverse conditions continue in fiscal 2017; however, oil prices have been stable since the previous year-end, and oil majors are starting to invest in energy resource development projects again. We will follow these movements very closely to obtain new contracts. By its nature, the global shipping business itself is a cyclical industry. However, a special feature of this division is the ability to achieve stable cash flow through long-term con- tracts. Looking ahead, we plan to use this to contribute to stable earnings for the Company overall by expanding investments that can secure highly stable profits. As energy consumption in Japan declines over the medium to long term, we will need to approach regions where consumption is set to grow in the future, such as India, China, Southeast Asia, and Central and South America. In such countries and regions, alliances with local partners will become important for smoothly rolling out business operations. As this division’s strongpoint, it has built firm relationships with local partners in every country through its achievements to date. Even now MOL has established a strong position in the LNG carrier field. When all of the LNG carriers that we currently have under construction are delivered, our fleet of over 90 vessels will be the largest in the world, with an unrivalled scale. Based on the benefits of scale, we will strengthen our customer rela- tionships even further and expand our other energy trans- port businesses such as tankers and steaming coal carriers in India, China and other growth regions. By establishing the New Projects Starting Operation in FY2017 LNG Carriers Tokyo Gas ex. USA To Japan 1 vessel SINOPEC (China) ex. Australia To China 3 vessels Yamal (Russia) ex. Russia To China 1 vessel Offshore Businesses Petrobras Brazil Tullow Ghana Ghana Ethane Carriers FPSO FPSO 1 unit 1 unit Reliance (India) ex. USA To India 1 vessel Portfolio V a r i a b e P r o l f i t s Highly Specialized Offshore Businesses (Medium- to long- term contracts) LNG Carriers (medium- to long-term contracts) Steaming Coal Carriers Less Specialized l S t a b e P r o f i t s LNG: Demand Forecast by Area 13% 7% 6% 9% 32% 2016 265 million tons 6% 12% 15% 17% 21% 9% 4% 2025 (forecast) 395 million tons 9% 15% 20% ■Japan ■Korea ■Europe ■America ■China ■Taiwan ■India ■Others Source: MOL internal calculation based on Wood Mackenzie 5% Energy Transport Business Unit structure and chief country representatives, we have created a framework for providing customers with optimal solutions from an energy transport perspective. We will continue working to leverage synergies between the divisions and strengthen our sales capabilities. In offshore businesses, we expect to see an increase in demand for FSRUs for emerging countries, and we will actively work to address this need. As upstream investment resumes, we will aim to capture new FPSO projects, mainly those off the coast of Brazil and West Africa. In February 2017, MOL entered the self-elevating platform vessel business, providing offshore wind power generation installation ser- vices. Offshore wind power generation is already being rolled out in large scale in Europe, and is expected to expand in Japan, Taiwan, and other Asian counties going forward. We therefore plan to proceed steadily in this field. LNG: Seaborne Trade (Million tons) 400 350 300 250 200 150 100 50 0 2012 2013 2014 2015 2016 2017* 2018* 2019* 2020* 2021* 2022* 2023* ■■Middle East ■■Australia ■■Other A/P ■■North America 　 ■■Africa ■■South America ■■Europe Source: MOL internal calculation based on Wood Mackenzie 2025* 2024* * Forecast Steaming Coal Carriers The steaming coal carrier division, which is developing its business mainly in medium- to long-term contracts with electric power companies in Japan, encountered a generally adverse environment in fiscal 2016, due to the impacts of the slump in dry bulker market conditions and shortening trend of transportation contracts in association with the deregula- tion of Japan’s electric power industry. However, rigorous implementation of efficient vessel operations and cost reductions enabled the division to secure a profit. In Japan, there is a growing movement to reorganize the electric power industry and revise the composition of electric power sources through the separation of power generation and transmission, which will take place in 2020. Despite these uncertainties, we believe that there is solid demand for coal-fired power plants as a stable source of power. We will therefore work to expand our market share through our strengths in taking a hands-on approach and proposal-based sales. Meanwhile, demand for steaming coal is soaring in emerging countries such as Southeast Asian countries and India. The division is actively engaged in sales activities tar- geting this new demand. These have produced concrete results such as the acquisition in June 2017 of a coal trans- port contract for Thermal Powertech Corporation India Lim- ited, an Indian independent power producer. Looking ahead, the steaming coal carrier division will utilize its accumulated expertise in safe, reliable transporta- tion of coal to Japan and firmly capture anticipated growth in demand for energy transport to emerging countries, foster- ing cooperation with the tanker division and LNG carrier/ offshore businesses division within the Energy Transport Business Unit. 40 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 41 Overview of Operations Product Transport Business Unit Toshiya Konishi Managing Executive Officer Deputy Director General (Terminals & Logistics) Naotoshi Omoto Managing Executive Officer Deputy Director General (Car Carriers) Masahiro Tanabe Executive Vice President Director General of Product Transport Business Unit Koichi Yashima Managing Executive Officer Deputy Director General (Ferries & Coastal RoRo Ships) Akihiko Ono Senior Managing Executive Officer Deputy Director General (Containerships) Portfolio Highly Specialized V a r i a b e P r o l f i t s ロジスティクス 関連事業 （海事） Car Carriers l S t a b e P r o f i t s Less Specialized Main Routes Car Carriers Fiscal 2016 in Review In fiscal 2016, the division faced an extremely difficult operat- ing environment compared with the past few years. Global auto sales volumes and marine transport volumes were little changed from the previous year; however, the business environment was substantially changed by the emergence of regional differences. Cargo volumes from Japan increased, reflecting firm auto sales in North America and Europe, which have a powerful influence over marine transport route orga- nization. On the other hand, cargo volumes declined sharply to emerging and oil-producing regions such as the Middle East, Africa, South America, and Southeast Asia, reflecting an economic downturn due to slumping crude oil prices. The drop in cargo volumes has affected cargoes from Europe and the United States, as well as East Asia. Previously, we were able to achieve efficient vessel deployment and reduce ballast voyages by transporting cargoes from Europe and the United States to the Middle East and Africa on the return voyage after carrying cargoes from East Asia to Europe and the United States . However, the decline in return-voyage cargoes has caused voyage profitability to deteriorate rapidly. In addition, a decline of more than 10% in overseas exports from South Korea saw an easing of the overall vessel supply and demand balance, prompting a fall in the level of freight rates and causing fiercer competition. In response to these changes, the car carrier division has taken steps to improve operation efficiency, such as reducing the number of vessels deployed and coping with the increase in cargo volumes to Europe and the United States by chartering space on other companies’ vessels for one way of the voyage only. Despite Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses these efforts however, profits deteriorated significantly from the previous fiscal year, also affected by the impact of the yen’s appreciation in foreign exchange rates. Fiscal 2017 Initiatives In fiscal 2017, global auto sales volumes are expected to increase steadily, albeit with regional differences. On the assumption that the trade pattern in marine transport will not change significantly from the previous fiscal year, we aim to enhance the efficiency of our operational fleet by continu- ing to reduce fleet size from the current 120 car carriers to achieve an appropriate scale, mainly through the retirement of aging vessels. Moreover, in fiscal 2017 and fiscal 2018, we plan to launch four new vessels capable of efficiently carrying diverse vehicles such as construction machinery by using multiple internal decks with adjustable heights. These will gradually begin to enhance our earning capability. In recent years, trade patterns for vehicles have been growing more complex as Japanese automakers expanded their overseas manufacturing bases and then engaged in locally optimized mass production to cover demand from the regions around these bases. The car carrier division will respond flexibly to diversifying customer needs and trends by using our network, which is one of the largest in the world. At the same time, we will examine business develop- ment in Asia and other regions with potential for major expansion in vehicle production and imports going forward. One of the major issues we face is response to environ- mental issues. Customers are also rapidly becoming more aware of the environment. We are currently examining devel- opment of new vessels with LNG-fueled engines, which can reduce CO2 emissions by as much as 25% compared to con- ventional diesel engines. From fiscal 2017, we established the Product Transport Business Unit, and the car carrier division became one of the divisions in this business unit, alongside containerships, terminals and logistics, and ferries and RoRo ships. Previously, the division shared information with the containerships sales teams to respond to customer needs. Now we are looking to extend this further to cooperate with the Port Projects & Logistics Business Division on the expanding onshore auto- mobile logistics business. Looking ahead, we will continue working to provide optimal solutions to customers as “One MOL” by leveraging synergies between business divisions to capture new growth opportunities. Global Car Seaborne Trade (Thousand units) 16,000 12,000 8,000 4,000 0 2011 2012 2013 2014 2015 2016 ■ex. Japan ■ex. Korea ■Others Source: MOL internal calculation based on Trade Statistics of Japan (MOF), etc. (excluding CKD) Car Export from Japan by Destination (Thousand units) 6,000 4,500 3,000 1,500 0 2011 2012 2013 2014 2015 2016 ■N. America ■Europe ■Middle East ■Oceania ■Asia ■Latin America ■Africa Of which, Car Export for the Middle East, Central and South America, and Africa (Thousand units) 800 600 400 200 0 2011 2012 2013 2014 2015 2016 ■Middle East ■Central and South America ■Africa Source: MOL internal calculation based on Trade Statistics of Japan (MOF) (excluding CKD) 42 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 43 Overview of Operations Containerships Fiscal 2016 in Review The containership business posted a loss of ¥32.8 billion in fiscal 2016. Regrettably, we were unable to improve the loss from the previous fiscal year. With freight rates sinking to a historical low during January to March 2016, our business operated amid particularly adverse conditions for the first half of the fiscal year. In the second half, signs of a recovery trend emerged. Around the start of autumn, the collapse of a major overseas container shipping company resulted in an increase in idle containerships and a decrease in capacity supplied. Due to that incident, customers have been show- ing an increasing preference for shipping companies with financial soundness. We also saw stronger growth than usual in cargo movements before the Chinese New Year at the end of January 2017. By route, the Asia-North America route saw firm cargo movements, but earnings were weighed down throughout the fiscal year by a sharp decline in annual contract freight rates, renewals of which coincided with a marked slump in spot freight rates. On the Asia-Europe route, the declining trend in cargo movements due to inventory adjustments and other factors in Europe was halted, and activity began to resume gradually. However, the upticks in freight rates were short-lived and the market generally remained at a low level. On the other hand, the Asia-East Coast of South America route, which posted a significant loss in fiscal 2015, saw a firm freight rate market resulting from improvements in the supply and demand situation. To improve our earnings, we reduced vessel costs through the Business Structural Reforms. We also took every measure possible to increase the yield per container and enhance cost competitiveness, improved the slot utilization rate by bolster- ing sales capabilities, and continuously strengthened yield management to reduce the cost of returning empty contain- ers. These efforts have produced some results, but these were outweighed by the impact of lower revenues due to the decline in freight rates, causing the loss to expand from fiscal 2015. Fiscal 2017 Initiatives In fiscal 2017 and beyond, the issue of excessive vessel supply is expected to continue due to deliveries of new Ultra- Large Containerships (ULCSs). However, we expect that the increase in supply may be slower than initially predicted as some deliveries appear to have been pushed back. Mean- while, an expanding trend has emerged in cargo move- ments. Movements of outbound cargoes from Asia to North America and Europe are expected to remain firm, and car- goes on the backhaul from North America and Europe to Asia have also been growing. This will increase revenue while simultaneously working directly to reduce the cost of return- ing empty containers by reducing the imbalance between outbound and inbound cargoes. In addition, North-South Consolidated Revenues Breakdown (FY2016) ● North America Trade 45% 26% ● Europe Trade 10% ● North-South Trade 19% ● Intra-Asia Trade Portfolio Highly Specialized Terminals Logistics V a r i a b e P r o l f i t s Containerships Less Specialized Global Containership Capacity (Thousand TEU) 20,000 15,000 10,000 5,000 0 2011 2012 2013 2014 2015 2016 l S t a b e P r o f i t s 20% 15% 10% 5% 0% ■14,000TEU~ ■11,000~13,999TEU ■8,000~10,999TEU ■5,100~7,999TEU ■4,300~5,099TEU ■~4,299TEU ○ YoY % Source: MOL internal calculations based on Alphaliner / IHS-Fairplay routes, including the Asia-East Coast of South America route which returned to profitability in fiscal 2016, are expected to see firm cargo movements overall. Under these conditions, MOL started services under a new alliance called “THE Alliance” in April 2017. THE Alliance has Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses adopted a “best ship” approach in which the optimal vessels are deployed for each route among the vessels supplied by the alliance partners. Furthermore, each partner is scheduled to launch a series of state-of-the-art ULCSs, by which the alliance plans to form an extensive network and enhance direct services to provide competitive, high-frequency ser- vices. Moreover, in addition to strengthening the hard aspects of the business, we will also take steps to differenti- ate our services and improve earnings through the imple- mentation of various soft aspects such as ongoing efforts to bolster our sales capabilities and to further deepen our yield management. The glut in the vessel supply is expected to take some time to clear. However, orders for new deliveries are already on hold, while recent growth in cargo movements is already leading to tighter demand in some routes. We believe that signs of improvement are beginning to appear for the con- tainership industry overall. In October 2016, MOL announced the integration of its containership business with two other Japanese shipping companies. A holding company is to be established in Tokyo with an operating company established in Singapore, and the integration is proceeding steadily ahead of the planned start of operations in April 2018, under the trade name “Ocean Network Express.” In fiscal 2017, the Company will strengthen the competitiveness of its own containership business and strive to hand it over to the new company with the best possible improvement to earnings. Terminals & Logistics In the Terminals & Logistics business, which is expected to grow and secure relatively stable earnings, our earnings for fiscal 2016 continued to be in line with expectations. Domes- tic terminals saw a significant increase in the number of containers handled, mainly at the Kobe Port terminal, which is now one of the largest in Japan after having had its berths extended. In overseas terminals, our key strengths are lead- ing-edge automated container handling terminals at each of the largest North American and European ports in terms of container volume. At our TraPac terminal at the Port of Los Angeles, an on-dock rail service started operation, connect- ing the inside of the terminal with the inland railway network for even greater efficiency. The form of the Company’s termi- nal business operations is set to change with the transfer of the overseas terminal business to the new joint company for integrating container shipping businesses; however, we will seek further growth opportunities by examining entry into new business domains, such as terminals that handle cargo other than containers. Underlined words are explained in the Glossary on the Contents page. Asia-North America Container Trade Cargo Movements (Million TEU) (Excluding Canada cargo) 16 12 8 4 0 2011 2012 2013 2014 2015 2016 ■Outbound ■Inbound Source: Piers/JoC, etc. Asia-Europe Container Trade Cargo Movements (Million TEU) (Including Mediterranean cargo) 16 12 8 4 0 2011 2012 2013 2014 2015 2016 ■Outbound ■Inbound Source: Drewry Following the integration of the containership business, the MOL brand service in the transport of individual products will be assumed by the logistics business. We will aggres- sively invest management resources to strengthen our exist- ing businesses while aiming to expand through M&As and so forth in the field of locally tailored logistics services, mainly in Southeast Asia and the Americas. In March 2017, we expanded our network in Asia by investing in a major logis- tics company in Malaysia, where stable growth is anticipated. In the logistics business, we have been working to expand our cargoes handled in one-stop services encompassing containerships, multipurpose cargo ships and RoRo ships under the unified brand “MOL Project & Heavy Cargo.” In addition to this project, we will work to maintain and expand our presence in transport of individual products by further developing our collaboration between divisions, including new alliances with existing local partners in various countries. To this end, we make use of the newly established Product Transport Business Unit and a system of chief country/ regional representatives. 44 Mitsui O.S.K. Lines Annual Report 2017 45 Overview of Operations Ferries & Coastal RoRo Ships Fiscal 2016 in Review The division continued to post stable profits in fiscal 2016. Cargo volumes were firm, as a modal shift from long-distance land transport by trucks to ocean transport by ferries was accelerated by a shortage and aging of truck drivers and enforcement of legitimate labor management in addition to efforts to reduce environmental load. For the overall business of the division, we secured the same level of profit as the previous fiscal year due to the above factors and support from the fall in bunker fuel prices, despite the impact on passenger services of the Kumamoto Earthquakes and sailing cancellations due to typhoons, primarily in Hokkaido. In this division, we responded to a vehicle deck fire that occurred on the SUNFLOWER DAISETSU in 2015 by taking steps to prevent a recurrence. We conducted a comprehensive review of soft aspects such as formulation of a firefighting plan and seafarer drill plan for the vehicle deck, and made further enhancements to our safe operation systems. We are also looking at hard aspects for strengthening safety man- agement even further such as installing the latest firefighting equipment on newly built vessels going forward. Fiscal 2017 Initiatives In fiscal 2017, our plan is to continue capturing firm demand and steadily accumulating stable profits. We are also plan- ning to launch two new ferries on the Eastern Japan route this fiscal year. We already launched the new SUNFLOWER FURANO in May, and plan to launch the new SUNFLOWER SAPPORO this autumn. The new vessels use contra-rotating propellers and a hybrid propulsion system to enhance sailing performance, shortening voyage times and dramatically increasing customer convenience. At the same time, the ferries are designed from the passenger’s perspective. Passen- ger comfort has been greatly improved through measures such as increasing the ratio of individual cabins to around 50% (from around 30% in current vessels) to provide com- fortable private spaces, while barrier-free features have also been increased. In 2018, we plan to launch two more new ferries on the Western Japan route, and we will engage in digital marketing based on big data while further promoting the division’s core strategy of acquiring passengers. The strength of MOL’s ferries and coastal RoRo ships busi- ness lies in offering Japan’s most extensive maritime network. We connect each area of the country, from Hokkaido in the north to Kagoshima in the south. With a 40-50% share of the domestic long-distance ferry market in both passengers and trucks, we serve as an artery for domestic distribution sup- porting Japan’s regional economies. We will continue working to expand our diverse services to meet customer needs while reinforcing safe operations and transportation quality, thereby strengthening MOL’s brand. l S t a b e P r o f i t s Portfolio Highly Specialized V a r i a b e P r o l f i t s Ferries & Coastal RoRo Ships Less Specialized Increased the ratio of individual cabins (SUNFLOWER FURANO has 20 “Premium” class cabins) Dry Bulk Business Unit Energy Transport Business Unit Product Transport Business Unit Associated Businesses Associated Businesses entire vessel. Moreover, in the tugboat and trading busi- nesses, we will continue entering new fields, mainly those peripheral to offshore businesses and environmental busi- nesses, such as specialty tugboats that assist in installing wind power generation facilities and after-installation main- tenance operations. Through these measures, we plan to expand the segment’s contribution to profits. Portfolio Highly Specialized Koichi Yashima Managing Executive Officer V a r i a b e P r o l f i t s Tugboats Trading l S t a b e P r o f i t s Daibiru Corporation Less Specialized Fiscal 2016 in Review This segment comprises MOL’s real estate, cruise ship, tug- boat, trading and other businesses. In fiscal 2016, the main- stay real estate business saw a year-on-year increase in profits at Daibiru Corporation, the core company of the business, supported by a firm office leasing market, mainly in Tokyo. Daibiru currently owns and operates 12 office buildings in Tokyo, 12 in Osaka, and 2 overseas in Vietnam. In fiscal 2015, initial expenses relating to the completion of the Shin-Daib- iru Building in Osaka were posted; however in fiscal 2016, the building contributed to profits with an occupancy ratio of nearly 100%. Meanwhile, in the cruise ship business, NIPPON MARU performed well in attracting guests, increasing its profits year on year, while other businesses such as the tug- boat and trading businesses also performed solidly overall. As a result, the associated businesses overall recorded an increase in profits. Fiscal 2017 Initiatives In fiscal 2017, we expect to continue steadily accumulating highly stable profits through solid business development, with results on par with the previous fiscal year. At the two office buildings in Vietnam, Daibiru has been developing tenant services that suit the preferences of Japanese compa- nies expanding locally, using knowledge and expertise culti- vated over years from its domestic operations, and we expect steady growth in the future. Daibiru is accumulating profits in line with the targets of its current medium-term manage- ment plan, “Design 100” Project, which is making steady progress. Daibiru is also planning to invest in projects over- seas going forward. In the cruise ship business, we will con- tinue making efforts to attract more guests. The diligent efforts to offer high-class service and customer- oriented hospitality by the crew on the NIPPON MARU are bearing fruit, and in addition to ordinary cruises, we will enhance our charter cruise business offerings, where we charter-out an The new SUNFLOWER FURANO Shin-Daibiru Building 46 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 47 Financial and Non-Financial Highlights MOL STEP MOL ADVANCE GEAR UP! MOL RISE 2013 STEER FOR 2020 2007/3 2008/3 2009/3 2010/3 2011/3 2012/3 2013/3 2014/3 2015/3 2016/3 2017/3 Millions of yen For the year: Shipping and other revenues Shipping and other expenses Selling, general and administrative expenses Operating profit (loss) Ordinary profit (loss) Income (loss) before income taxes and minority interests Profit (loss) attributable to owners of parent Free cash flow [(a) + (b)] Cash flows from operating activities (a) Cash flows from investing activities (b) Depreciation and amortization At year-end: Total assets Net vessels, property and equipment Interest-bearing debt Net assets Shareholders’ equity Amounts per share of common stock: Profit (loss) attributable to owners of parent Net assets Cash dividends applicable to the year Management indicators: Gearing ratio Net gearing ratio Equity ratio (%) ROA (%)* ROE (%) Dividend payout ratio (%) ¥1,568,435 1,300,038 ¥1,945,697 1,544,109 ¥1,865,802 1,564,486 ¥1,347,965 1,228,479 ¥1,543,661 1,328,960 ¥1,435,221 1,368,795 ¥1,509,194 1,432,014 100,324 168,073 182,488 197,854 120,940 20,369 156,418 (136,049) 68,581 1,639,940 847,660 569,417 620,989 550,764 ¥101.20 459.55 20.00 1.04 0.94 33.6 11.7 24.8 19.8 110,303 291,285 302,219 318,202 190,321 23,291 283,359 (260,068) 74,481 1,900,551 1,047,825 601,174 751,652 679,315 ¥159.14 567.74 31.00 0.88 0.79 35.8 17.1 30.9 19.5 104,105 197,211 204,511 197,732 126,988 (71,038) 118,984 (190,022) 78,156 1,807,080 1,106,746 702,617 695,022 623,714 ¥106.13 521.23 31.00 1.13 0.99 34.5 11.0 19.5 29.2 20,374 10,012 98,547 20,939 24,235 27,776 12,722 (40,055) 93,428 (133,484) 88,366 1,861,312 1,209,176 775,114 735,702 659,507 ¥ 10.63 551.70 3.00 1.18 1.05 35.4 1.3 2.0 28.2 18,684 9,707 91,300 123,401 121,622 95,367 58,277 46,970 181,755 (134,785) 77,446 1,868,741 1,257,823 724,259 740,247 660,795 ¥ 48.75 552.83 10.00 1.10 1.00 35.4 6.5 8.8 20.5 90,886 (24,460) (24,320) (33,516) (26,009) (129,298) 5,014 (134,313) 85,624 1,946,162 1,293,803 869,619 717,909 637,422 ¥ (21.76) 533.27 5.00 1.36 1.23 32.8 (1.3) (4.0) — 92,946 (15,766) (28,568) (137,939) (178,847) (25,285) 78,956 (104,241) 94,685 2,164,611 1,303,967 1,046,865 619,493 535,423 ¥(149.57) 447.76 — 1.96 1.58 24.7 (1.4) (30.5) — 20,053 19,435 19,053 9,438 9,431 9,465 ¥1,729,452 ¥1,817,070 ¥1,712,223 ¥1,504,374 1,587,902 100,458 41,092 54,986 71,710 57,394 (25,615) 94,256 (119,871) 83,984 2,364,695 1,379,245 1,094,081 783,549 679,160 ¥ 47.99 567.90 5.00 1.61 1.35 28.7 2.4 9.5 10.4 18,860 10,289 1,683,795 116,025 17,250 51,330 58,332 42,356 (66,656) 92,495 (159,151) 87,804 2,624,050 1,498,028 1,183,401 892,435 782,557 ¥ 35.42 654.26 7.00 1.51 1.35 29.8 2.1 5.8 19.8 18,803 10,508 1,594,569 115,330 2,324 36,269 (154,385) (170,448) 182,509 209,190 (26,681) 92,772 2,219,587 1,376,432 1,044,980 646,925 540,951 ¥(142.50) 452.28 5.00 1.93 1.64 24.4 1.5 (25.8) — 18,676 10,500 1,388,265 113,551 2,558 25,426 23,303 5,257 (56,318) 17,624 (73,942) 87,191 2,217,529 1,323,665 1,122,400 683,621 571,983 Yen ¥ 4.40 478.23 2.00 1.96 1.64 25.8 1.1 0.9 45.5 18,204 10,794 CO2 emissions of MOL fleet (Thousand tons) 18,392 20,065 Number of MOL Group employees (the parent company and consolidated subsidiaries) 8,621 9,626 * Ordinary profit (loss) / Average total assets at the beginning and the end of the fiscal year 48 Mitsui O.S.K. Lines Annual Report 2017 49 Key Indicators Shipping and Other Revenues/Ordinary Profit (Loss) Total Assets/Net Assets Ordinary Profit (Loss) by Segment Interest-Bearing Debt / Net Interest- Bearing Debt / Shareholders’ Equity Gearing Ratio / Net Gearing Ratio / Equity Ratio FY2016 Shipping and Other Revenues ¥1,504.3 billion ¥25.4 billion Ordinary Profit FY2016 Total Assets Net Assets ¥2,217.5 billion ¥683.6 billion (¥ billions) (¥ billions) FY2016 Bulkships Containerships Other Segments, etc. (¥ billions) ¥39.0 billion ¥(32.8) billion ¥19.2 billion FY2016 Interest-Bearing Debt Net Interest-Bearing Debt* Shareholders’ Equity** (¥ billions) ¥1,122.4 billion ¥935.5 billion ¥571.9 billion FY2016 Gearing Ratio Net Gearing Ratio Equity Ratio 2,000 1,500 1,000 500 0 12/3 13/3 14/3 15/3 16/3 17/3 200 150 100 50 0 −50 3,000 2,400 1,800 1,200 600 0 1,000 800 600 400 200 160 120 80 40 0 12/3 13/3 14/3 15/3 16/3 17/3 0 –40 12/3 13/3 14/3 15/3 16/3 17/3  Shipping and other revenues (left scale)  Ordinary profit (loss) (right scale)  Total assets (left scale)  Net assets (right scale)  Bulkships  Containerships  Other segments, etc. Ordinary profit decreased ¥10.8 billion, mainly due to a sharp downturn in the tanker market, as well as the yen’s appreciation and high fuel prices, plus worsening profitability in the car carrier business due to changes in trade patterns. However, dry bulkers achieved a return to profitability due to the positive effects of the Business Structural Reforms. Total assets as of March 31, 2017 were mostly unchanged from a year earlier, as an increase in cash and cash equivalents was largely offset by a decrease in vessels. Net assets increased ¥36.6 billion from a year earlier, primarily due to an increase in unrealized gains on hedging derivatives, net of tax. In the bulkships segment, ordinary profit decreased year on year as the decrease in profits in the tanker division and car carriers significantly exceeded the improvement in profits in the dry bulker division. The containerships segment posted a larger ordinary loss. In other segments, etc., ordinary profit increased due to profit growth in the strong-performing real estate business. 1,200 1,000 800 600 400 200 0 13/3 12/3 14/3  Interest-bearing debt  Net interest-bearing debt  Shareholders’ equity 16/3 17/3 15/3 * Interest-bearing debt – cash & cash equivalents ** “Shareholders’ equity” in this section comprises the total of owners’ equity and accumulated other comprehensive income (loss). Interest-bearing debt increased ¥77.4 billion to ¥1,122.4 billion due to increases in short- and long-term bank loans. Meanwhile, shareholders’ equity increased ¥31.0 billion to ¥571.9 billion due to an increase in unrealized gains on hedging derivatives, net of tax. 1.96 1.64 25.8% (%) 40 30 20 10 0 2.00 1.50 1.00 0.50 0 12/3 13/3 14/3 15/3 16/3 17/3  Gearing ratio (left scale)  Net gearing ratio (left scale)  Equity ratio (right scale) The gearing ratio worsened 0.03 of a point and the equity ratio improved 1.4 points, reflecting the ¥77.4 billion increase in interest-bearing debt, the ¥2.0 billion decrease in total assets, and the ¥31.0 billion increase in shareholders’ equity. Credit Ratings (As of June 2017) Type of rating Short-term debt rating (CP) Long-term senior debt (issuer) rating Long-term debt rating Issuer rating Short-term debt rating (CP) Long-term debt rating Corporate family rating Rating J–1 A– A– BBB a–2 BBB Ba1 JCR R&I Moody’s R&I JCR Moodyʼs A– BBB Ba1 MOL has maintained its current ratings, reflecting steady, albeit gradual, improvement in the overall marine transport market and in MOL’s business performance. Going forward, MOL will continue working to bolster its profitability and improve its financial standing, in an effort to enhance its ratings. ROA (based on Ordinary Profit)/ROE Capital Expenditure CO2 Emissions of MOL Fleet 1.1 % 0.9 % FY2016 Capital Expenditure ¥126.0 billion FY2016 CO2 Emissions of MOL Fleet 18,204 thousand tons Net Income (Loss)* per Share/Cash Dividends Applicable to the Year/Dividend Payout Ratio Cash Flows FY2016 Net Income (Loss)* per Share Cash Dividends Applicable to the Year Dividend Payout Ratio (Yen) FY2016 Cash Flows from Operating Activities ¥17.6 billion Cash Flows from Investing Activities ¥(73.9) billion ¥4.40 ¥2.00 45.5% (%) (¥ billions) 150 100 50 0 –50 –100 –150 12/3 13/3 14/3 15/3 16/3 17/3 60 40 20 0 250 200 150 100 50 0 –50 –100 –150 –200 –250 12/3 13/3 14/3 15/3 16/3 17/3  Net income (loss)* per share (left scale)  Cash dividends applicable to the year (left scale)  Dividend payout ratio (right scale)  Cash flows from operating activities  Cash flows from investing activities  Free cash flow MOL restored net income*, achieving a year-on- year improvement of ¥175.7 billion from the net loss posted in the previous fiscal year, when expenses related to the Business Structural Reforms were recorded. MOL paid dividends for the fiscal year of ¥2 per share, a year-on-year decrease of ¥3 per share. (The year-end dividends were forgone.) * Profit (loss) attributable to owners of parent 50 Mitsui O.S.K. Lines Net cash provided by operating activities was down ¥191.5 billion year on year, while net cash used in investing activities was up ¥47.2 billion, resulting in negative free cash flow. FY2016 ROA ROE (%) 20 10 0 –10 –20 –30 –40  ROA  ROE 12/3 13/3 14/3 15/3 16/3 17/3 ROA decreased year on year, as ordinary profit declined while total assets remained flat. ROE improved dramatically year on year as MOL restored net income* in the absence of an extraordinary loss recorded in the previous fiscal year in connection with the Business Structural Reforms. * Profit (loss) attributable to owners of parent (¥ billions) (thousand tons) 200 150 100 50 0 12/3 13/3 14/3 15/3 16/3 17/3 20,000 15,000 10,000 5,000 0 12/3 13/3 14/3 15/3 16/3 17/3 Capital expenditure represented here is the net amount calculated by deducting proceeds from the sale of vessels when delivered from “Tangible/ intangible fixed assets increased” contained in the annual securities report. The listed CO2 emissions were mainly from bunker A and C used as fuel for vessels operated by the MOL Group. Annual Report 2017 51 Message from the Officer in Charge of Finance Takashi Maruyama Managing Executive Officer Investment Plans and Outlook for Cash Flows Under our new management plan, we are projecting total cash flow from investing activities to reach a net outflow of around ¥400 billion over the next three years (excluding investment in the containership business integration). Of this, ¥250 billion is planned for existing projects and ¥150 billion for new projects. The new projects will be further selected with greater scrutiny, giving consideration to the status of operating cash flow. In our medium-term management plans of the past, the investment plan amount was based on the investment that would be decided in the three years covered by the plan. However, the figures in the new plan are based on the amounts actually to be paid and reflected in the cash flow statements for the period. This concept was adopted in line with “pursue business models focused on cash flow” as stated in the new plan. To achieve Innovation of the Business Portfolio, we will concentrate investment in businesses that can generate relatively stable profits and where the Com- pany can leverage its strengths. Those businesses include chemical tankers, methanol tankers, terminals, logistics, and ferries and coastal RoRo ships, in addition to LNG carriers and offshore businesses, which have also been main investment targets in the past few years. FY2017–2019 Investment Cash Flows (Three-Year Total) Excluding invest in the containership joint venture Existing projects New projects (to be selected with greater scrutiny) Total 約2,500億円 ¥250 billion 約1,500億円 ¥150 billion 約4,000億円 ¥400 billion  Chemical/Methanol Tankers  LNG Carriers & Offshore Businesses  Ferries/Associated Businesses/ Terminals/Logistics  Other Vessels 12% 39% 24% 25%  Chemical/Methanol Tankers  LNG Carriers & Offshore Businesses  Ferries/Associated Businesses/ Terminals/Logistics  Other Vessels  Environment/IT 19% 32% 15% 4% 30%  Chemical/Methanol Tankers  LNG Carriers & Offshore Businesses  Ferries/Associated Businesses/ Terminals/Logistics  Other Vessels  Environment/IT 15% 36% 21% 17% 11% Financial Foundation Due to the slump in profit levels in the recent few years, the Company’s equity ratio deteriorated to around 26% and its gearing ratio to nearly 2.0 at the end of fiscal 2016. As we are expecting negative free cash flow for the next two years, the gearing ratio is unlikely to improve; however, we will strive to prevent it from deteriorating further by pursuing a business model that can mitigate cash outflows, such as utilizing chartered-in and second-hand vessels. As the synergy effect of the containership business inte- gration emerges and our highly stable profits expand, we believe that our ordinary profit, ROE, and gearing ratio tar- gets, which are projected in medium-term levels, will be well within reach. As we accumulate profits, we will restore our equity. Medium-Term Profit Levels and Key Financial Indicators Ordinary profit ROE Gearing ratio Projected medium-term levels ¥80.0–100.0 billion 8–12% 2.0 or less Meanwhile, net cash provided by operating activities for fiscal 2017 and 2018 is not expected to cover cash flows from investing activities, resulting in negative free cash flow over these two years. This is a tough situation, but we believe that we need to invest around ¥100 billion each year to maintain our business scale and achieve further growth. We also need to achieve positive free cash flow from fiscal 2019 onward by lifting our profit levels through the current strategies while at the same time rigorously selecting investments necessary for ensuring stable profits in the future. An internal hurdle rate for investments has been set with profit margins that will enable an envisaged medium-term ROE of 8 to 12%. We will also focus on cash flow generation capability when making investment decisions. Fund Procurement We don’t anticipate any issues with procuring funds for capi- tal investment through borrowings from financial institu- tions. We have established good relationships with financial institutions and our investments over the next three years will be mainly in blue chip projects that are backed by stable revenues over the long term. In addition, in October 2016, we undertook a large-scale fund procurement in the form of hybrid loan*. The hybrid loan by its nature has helped to shore up MOL’s financial strength, which had been influenced by implementing the Business Structural Reforms. The loan can also be effectively utilized to fund meticulously selected investments. As we prepare to take bold steps under the new management plan to return to a growth trajectory, we have succeeded in conducting a large-scale fund procurement with favorable conditions. * Long-term bank loans that are treated as borrowings in accounting terms, but a portion of which are treated as capital surplus by financial institutions and ratings agencies assessing the Company’s debt. Highly Stable Profits and Other Variable Profits (Losses) Highly Stable Profits + Other Variable Profits (Losses) = Ordinary Profit Highly stable profits: Dry bulkers/Tankers (medium- to long-term contracts), LNG carriers/Offshore businesses, and Associated businesses Other variable profits (losses): Dry bulkers/Tankers (spot operations), Car carriers, Containerships, Terminals & Logistics, and Ferries/Coastal RoRo ships Roadmap to Improving Other Variable Profits (Losses) 5.0 55.0 10.0 55.0 55.0 FY2017: Losses will continue Containership profitability has yet to improve significantly. Assume a sluggish recovery in the dry bulker market. FY2018: Get closer to the breakeven point Synergies from the integration of the containership business will be partly realized. Expand the scale of operation in the chemical tanker and logistics businesses. FY2019: Restore profitability of several tens of billions of yen Significantly improve profitability in the containership business. Increase profits in the chemical tanker, logistics and ferry businesses. The dry bulker market will likely recover to some extent. 2017 ¥110/$ 2018 ¥110/$ 2019 ¥110/$  Highly stable profits (existing)  Highly stable profits (stretch target)  Other variable profits (losses) (¥ billion) 80.0 60.0 40.0 20.0 0 –20.0 –40.0 52 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 53 Message from the Officer in Charge of Finance Impact of Exchange Rates and Bunker Prices on Financial Results As for exchange rates, our financial results are primarily impacted by the Japanese yen-U.S. dollar exchange rate. This is because freight revenues are primarily denominated in U.S. dollars while a certain portion of costs are in yen. In fiscal 2017, we project that each ¥1-per-dollar change against the assumed ¥110-to-U.S. dollar yearly average exchange rate will have an impact of approximately ¥700 million in ordinary profit. (If the yen weakens, it will improve profitability.) Turning to bunker prices, the yearly average price was assumed to be US$350 per metric ton, and we calculated at the beginning of the fiscal year that every dollar deviation would have an impact of ¥170 million. (If the price falls, it will improve profitability.) However, MOL will continue to strate- gically utilize hedging in order to control the effect of fluctu- ating bunker prices going forward. With the progress made in placing hedges, the degree of impact from fluctuating bunker prices will become smaller. Impact of Exchange Rate Fluctuations (Model) Impact=1+2 Revenues Expenses Impact of Bunker Price Fluctuations (Model) I m p a c t Profit 2 Exposure U.S. Dollar Revenue U.S. Dollar Expense 1 Japanese Yen Expense Japanese Yen Revenue T o t a l C o n s u m p t i o n Hedged Portion Recoverable by Surcharge, etc. Status of Credit Ratings MOL’s credit ratings are still under downward pressure, reflecting the impact on its financial standing due to the Business Structural Reforms and the protracted severe busi- ness environment. We are exchanging information more closely with the credit rating agencies. With the aim of recov- ering our credit ratings going forward, I think we need to steadily carry out the new management plan and improve our profit level. We also need to precisely explain our timeline and course to implement our growth strategies and improve our financial standing. Under the new management plan, we are concentrating our investment on businesses that can generate stable prof- its based on sound long-term transport contracts with highly credible customers, and on businesses where we can lever- age the Company’s strengths. The ratings agencies have evaluated these investments as contributing to further growth and the accumulation of long-term highly stable profits. Change in Reporting Segments From fiscal 2017, we have changed our reporting segments. This change is in line with a newly established structure comprising three business units through the establishment of the Product Transport Business Unit in fiscal 2017, adding to the Dry Bulk Business Unit and Energy Transport Business Unit established in fiscal 2016. The change was also intended to help shareholders and investors acquire a deeper and more accurate understanding of the Company’s manage- ment structure. As the officer responsible for finance, accounting and IR, I will work to engage in constructive dialogue with shareholders and investors through accurate, fair, and prompt disclosure. Shareholders’ Equity / Interest-Bearing Debt (¥ billion) Gearing Ratio* / Equity Ratio 1,122.4 1,203.2 1,044.9 540.9 571.9 567.0 1,400 1,050 700 350 2.50 2.00 1.50 1.93 24% 1.96 26% 0 FY2015 (Result)  Shareholders’ equity  Interest-bearing debt FY2016 (Result) FY2017 (Forecast) 1.00 FY2015 (Result)  Gearing ratio (left scale)  Equity ratio (right scale) * Interest-bearing debt / Shareholders’ equity FY2016 (Result) Management Foundation Providing MOL’s Forward Thrust 56 Board of Directors, Audit & Supervisory Board Members and Executive Officers 58 Dialogue between Outside Directors 60 Corporate Governance 64 Safe Operation 67 Risk Management 69 Corporate Social Responsibility (%) 40 30 20 2.12 25% FY2017 (Forecast) 54 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 55 Board of Directors, Audit & Supervisory Board Members and Executive Officers (At the end of June 2017) Board of Directors Audit & Supervisory Board Members Takashi Nakashima Born 1959 Audit & Supervisory Board Member Kenji Jitsu Audit & Supervisory Board Member Born 1960 Apr. 1982 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2009 General Manager of Research Office Jun. 2011 General Manager of General Affairs Division Jun. 2015 Audit & Supervisory Board Member of Mitsui O.S.K. Lines, Ltd. (current) Apr. 1984 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2009 General Manager of CSR and Environment Office, Corporate Planning Division Jun. 2013 General Manager of Investor Relations Office Jun. 2015 General Manager of Accounting Division Jun. 2017 Audit & Supervisory Board Member of Mitsui O.S.K. Lines, Ltd. (current) Koichi Muto Representative Director Born 1953 Junichiro Ikeda Representative Director Born 1956 Masahiro Tanabe Representative Director Born 1957 Apr. 1976 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2002 General Manager of Bulk Carrier Division Jan. 2003 General Manager of Corporate Planning Division Jun. 2004 Executive Officer, General Manager of Corporate Planning Division Jun. 2006 Managing Executive Officer Jun. 2007 Director, Managing Executive Officer Jun. 2008 Director, Senior Managing Executive Officer Jun. 2010 Representative Director, President and Executive Officer Jun. 2015 Representative Director, Chairman, Executive Officer (current) Apr. 1979 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2004 General Manager of Human Resources Division Jun. 2007 General Manager of Liner Division Jun. 2008 Executive Officer Jun. 2010 Managing Executive Officer Jun. 2013 Director, Senior Managing Executive Officer Jun. 2015 Representative Director, President, Chief Executive Officer (current) Apr. 1979 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2003 General Manager of Logistics Business Division Jun. 2008 Executive Officer, Managing Director of MOL (Europe) B.V. Jun. 2011 Managing Executive Officer Jun. 2013 Director, Managing Executive Officer Jun. 2015 Director, Senior Managing Executive Officer Apr. 2017 Representative Director, Executive Vice President, Executive Officer (current) Independent Officers Hiroyuki Itami Outside Audit & Supervisory Board Member Jun. 2010 Outside Corporate Auditor of JFE Holdings, Inc. (current) Jun. 2011 Audit & Supervisory Board Member of Mitsui O.S.K. Lines, Ltd. (current) Shizuo Takahashi Director Born 1959 Takeshi Hashimoto Director Born 1957 Takashi Maruyama Director Born 1959 Apr. 1981 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2006 General Manager of Corporate Planning Division Jun. 2008 Executive Officer, General Manager of Corporate Planning Division Jun. 2010 Executive Officer Jun. 2011 Managing Executive Officer Jun. 2014 Director, Managing Executive Officer Jun. 2015 Director, Senior Managing Executive Officer (current) Apr. 1982 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2008 General Manager of LNG Carrier Division Jun. 2009 Executive Officer, General Manager of LNG Carrier Division Jun. 2011 Executive Officer Jun. 2012 Managing Executive Officer Jun. 2015 Director, Managing Executive Officer Apr. 2016 Director, Senior Managing Executive Officer (current) Apr. 1983 Joined Mitsui O.S.K. Lines, Ltd. Jun. 2010 General Manager of Finance Division Jun. 2011 Executive Officer, General Manager of Finance Division Jun. 2015 Managing Executive Officer Jun. 2017 Director, Managing Executive Officer (current) Independent Officers Masayuki Matsushima Outside Director Jun. 2011 Director of Mitsui O.S.K. Lines, Ltd. (current) Jun. 2011 Outside Director of Mitsui Fudosan Co., Ltd. (current) Nov. 2012 Chairman of NWIC Co., Ltd. (current) Sept. 2014 Senior Advisor of Integral Corporation (current) Jun. 2016 Outside Director of JGC Corporation (current) Hideto Fujii Outside Director Jun. 2015 Adviser of Sumitomo Corporation (current) Jun. 2016 Director of Mitsui O.S.K. Lines, Ltd. (current) Etsuko Katsu Outside Director Apr. 2003 Professor of School of Political Science and Economics, Meiji University (current) Jan. 2013 Board Member of Japan-United States Educational Commission (current) Mar. 2015 Vice President of Center for Entrance Examination Standardization (current) Jun. 2016 Director of Mitsui O.S.K. Lines, Ltd. (current) Nov. 2016 Administrative Board Member of International Association of Universities (current) Executive Officers Koichi Muto Chairman, Executive Officer Junichiro Ikeda President, Chief Executive Officer Masahiro Tanabe Executive Vice President, Executive Officer (Assistant to President, Chief Compliance Officer, Product Transport Business Unit, Liner Division, Port Projects & Logistics Business Division, New Business Creation and Group Business Division, Internal Audit Office, General Affairs Division) Shizuo Takahashi Senior Managing Executive Officer (Chief Information Officer, Safety Operations Headquarters, Secretaries Office, Corporate Planning Division, Smart Shipping Office, MOL Information Systems, Ltd.) Takeshi Hashimoto Senior Managing Executive Officer (Energy Transport Business Unit, Steaming Coal Carrier Division, LNG Carrier Division, Energy Business Strategy Office, Bunker Business Office, Offshore Project Division) Akihiko Ono Senior Managing Executive Officer (Product Transport Business Unit, Liner Division) Akio Mitsuta Senior Managing Executive Officer (Energy Transport Business Unit, Tanker Division, Tanker Safety Management Office, Bunker Business Office) Toshiya Konishi Managing Executive Officer (Product Transport Business Unit, Europe, Africa and the Americas Area, Port Projects & Logistics Business Division, Chief Executive Representative for Americas) Takashi Maruyama Managing Executive Officer (Finance Division, Accounting Division, Investor Relations Office) Naotoshi Omoto Managing Executive Officer (Product Transport Business Unit, Car Carrier Division) Yoshikazu Kawagoe Managing Executive Officer (Technical Division, Smart Shipping Office) Koichi Yashima Managing Executive Officer (Product Transport Business Unit, Kansai Area, Human Resources Division, New Business Creation and Group Business Division) Mitsujiro Akasaka Managing Executive Officer (Asia, Middle East and Oceania Area, Chief Executive Representative for Asia, Middle East and Oceania, Managing Director of MOL (Asia Oceania) Pte. Ltd.) Toshiaki Tanaka Managing Executive Officer (Dry Bulk Business Unit, Dry Bulk Business Planning & Co-ordination Office, Dry Bulk Carrier Division (A), Dry Bulk Carrier Division (B), Dry Bulk Carrier Supervising Office) Masanori Kato Managing Executive Officer (Safety Operations Headquarters, Human Resources Division, Marine Safety Division, Smart Shipping Office) Kenta Matsuzaka Executive Officer (Energy Transport Business Unit, LNG Carrier Division, LNG Safety Management Office, Offshore Project Division) Masanori Kobayashi Executive Officer (Safety Operations Headquarters, Dry Bulk Carrier Supervising Office, Tanker Safety Management Office, LNG Safety Management Office, Marine Safety Division, Smart Shipping Office) Hideki Yamashita Outside Audit & Supervisory Board Member Apr. 1982 Attorney-at-Law (current) Apr. 1985 Established YAMASHITA & TOYAMA LAW AND PATENT OFFICE Mar. 1993 Patent Attorney (current) Mar. 2012 Outside Corporate Auditor of I-Cell Networks Corp. (current) Jun. 2014 Audit & Supervisory Board Member of Mitsui O.S.K. Lines, Ltd. (current) Yutaka Hinooka Executive Officer (General Manager of Liner Division) Masato Koike Executive Officer (General Manager of Tanker Division) Kayo Ichikawa Executive Officer (Corporate Communication, Diversity Promotion, Work Efficiency Improvement, Public Relations Office, Corporate Planning Division, Human Resources Division, Investor Relations Office) Hikaru Isegawa Executive Officer (New Business Creation and Group Business Division) Toshinobu Shinoda Executive Officer (Finance Division) Hirofumi Kuwata Executive Officer (Dry Bulk Business Unit, Energy Transport Business Unit, Steaming Coal Carrier Division, Dry Bulk Carrier Division (B)) Nobuo Shiotsu Executive Officer (Dry Bulk Carrier Division (A)) 56 Mitsui O.S.K. Lines Annual Report 2017 57 Dialogue between Outside Directors Hideto Fujii Outside Director Etsuko Katsu Outside Director “We made our active and open exchange of opinions in the ‘Deliberation on Corporate Strategy and Vision’” Theme: Impressions of MOL and evaluation of the “Deliberation on Corporate Strategy and Vision” initiative Fujii The impression I have of MOL’s Executive Committee and its discussions is that people seem to feel free to speak their mind. I also feel that MOL maintains great transparency in explaining matters to stakeholders. Furthermore, the Company seems to have been working sincerely on its corporate citizenship activities. Katsu My initial impression of MOL was that there are many upstanding individuals in the Company. As a global marine trans- port organization, their corporate culture is forward-thinking, open, and proactive. I also was impressed by their very flexible approach to strategic issues. Fujii When I took part in MOL’s unique “Deliberation on Corporate Strategy and Vision” initiative, I felt that the greater the uncer- tainty in the business environment going forward, the more important it is for the Company to focus on its comprehensive strate- gies for each business. It is necessary for the Company to hold thorough discussions on fundamental issues such as which businesses to prioritize when it strives to differentiate itself from rivals, and what strategies should be adopted in divisions such as dry bulkers or tankers. I think the frank and open discussions that take place in the “Deliberation on Corporate Strategy and Vision” are ideal for this purpose. I hold the new management plan, which adopts a rolling plan format, in very high regard. At a time of such global eco- Katsu nomic and political uncertainty, a company should not cling to plans which have been decided simply but should be flexible enough to respond as appropriate in its management plan. I think MOL’s creation of this kind of structure is highly commendable. In particular, after the critical decision to integrate its containership business with those of two other companies, it is now more important to decide which business to designate as the cornerstone of MOL operations in the medium to long term. By discussing these questions in the “Deliberation on Corporate Strategy and Vision,” all directors can share their vision on which businesses are most important. “By offering a critical, third-party perspective, I focus on the process by which MOL maximizes its corporate value.” Theme: Outside directors’ perspectives on the important issues deliberated during fiscal 2016 Fujii For me, the most important management issue was the adoption of a new format for management planning—the selec- tion of a ten-year time axis on which to base long-term plans. Now the question is how to earn the trust of all stakeholders, and help them to understand that these plans are appropriate. It is also essential that MOL follow through and implement the plans successfully, and deliver results. I expressed my opinion on this issue in the discussions, and I think the other directors shared my views. The new management plan has a clear overall vision and includes strategies that need to be implemented. Katsu Several important decisions were discussed in fiscal 2016, including not just the new management plan but also the integration of the containership business and large-scale investment decisions. As outside directors, I believe that our role is to cri- tique such issues from an unbiased perspective. Of course, it is important to ensure that our corporate value is maximized in a way that is acceptable to shareholders, but we also focused on the Company’s process of creating corporate value in terms of environmental and social responsibilities. Outside directors also have to play an important supervisory role to ensure that the management process addresses issues of compliance, risk management and enhancement of its financial ground. “We need swift decision-making in response to the changing situation.” “It is essential that human resource development and employee commit- ments be brought into line with global standards.” Theme: What we expect for MOL in the execution of its new management plan In a time of global economic and political uncertainty, it is essential that MOL Fujii constantly collect and analyze information, not only to monitor its own position, but to respond flexibly and make adjustments whenever necessary. In order to achieve its overarching goal of boosting corporate value, I think the most important point is to adopt flexible means of decision-making to allow swift reaction to changes in condi- tions or methods. Katsu For MOL to grow further in the future, I think that human resource develop- ment will be very important. MOL is planning to open a maritime academy in the Philippines, and while this kind of global personnel training is important for enhancing corporate value, it is also essential to bring employee commitments and human resource systems into line with global standards. In addition, the Company needs to enhance its financial ground and accumulate the capacity necessary to assume business risks going forward. MOL should continue to focus carefully on the allocation of resources, taking aggressive or defensive stances as conditions dictate, while maintaining an ade- quate capacity to take advantage of investment opportunities as they arise. This will become increasingly important going forward. MOL’s “Deliberation on Corporate Strategy and Vision” At MOL, three hours are set aside for board meetings, with one of the hours allotted to “Deliberation on Corporate Strategy and Vision.” At the “Deliberation on Corporate Strategy and Vision,” a theme is selected related to our management strategy, long-term vision or management in general. A free exchange of opinions ensues at these deliberations which include outside directors and outside Audit & Supervisory Board members. List of Agenda Items for “Deliberation on Corporate Strategy and Vision” Fiscal 2015 Fiscal 2016 April, May, July MOL’s corporate governance April Strategy for the car carrier division Agenda Agenda September, October The advancement of global personnel September December Portfolio of the tanker business and busi- ness policy going forward January, February The future of containership business March Strategy for the LNG carriers and offshore businesses January February Discussion on formulation of the next medium- term management plan Outline proposal for the next medium-term management plan Outline proposal for the next medium-term management plan (continued) 58 Mitsui O.S.K. Lines Annual Report 2017 59 Corporate Governance System of governance Company with an audit & supervisory board Total directors 9 Outside directors (ratio) 3 (1/3) Independent officers (directors and Audit & Supervisory Board Members) 5 Number of Board Meetings held in fiscal 2016 11 Total Audit & Supervisory Board Members 4 Outside Audit & Supervisory Board Members (ratio) 2 (1/2) Attendance rate of outside directors for Board Meetings in fiscal 2016 100% Term of directors 1 year Stock option system Yes Retirement benefit system No Anti-takeover measures No Compliance rules Yes External compliance advisory service desk Yes HISTORY 2000 Management organization reform: 1. Introduced a system of executive officers 2. Established an Executive Committee 3. Reformed the Board of Directors (redefined its duties as the highest-ranking decision-making body and the supervision of business activities) and reduced membership from 28 to 12 4. Elected two outside directors 5. Established the Corporate Visionary Meeting Established the IR Office Started holding the Annual General Shareholders’ Meeting on a day relatively free of other shareholders’ meetings 2001 Established the Compliance Policy and Compliance Committee 2011 Revised MOL’s Compliance Policy and Rules of Conduct 2014 Revised the Compliance Policy and established a chief compliance officer (CCO) 2015 Established the Nomination Advisory Committee and Remuneration Advisory Committee (chaired by outside directors) 2017 Established independence determination standards for outside directors and Audit & Supervisory Board Members Corporate Governance—Enabling Sustainable Growth and Raising Corporate Value Effective corporate governance has two sides. The defensive side focuses on eliminating risks and ensuring business is conducted in line with social norms and corporate ethics. The other side is offensive, striving to maximize corporate value by accurately evaluating latent risks in the process of pursing business oppor- tunities, then actively taking those risks deemed reasonable. A company needs both wheels of governance. One brings order, the other provides growth dynamics. With both wheels firmly in place, a company can gain the trust of its customers, stockhold- ers, business partners, employees, local communities and other stakeholders to sustainably conduct business. MOL greatly shored up its management structure in the years surrounding 2000. Taking a lead position among Japanese com- panies, MOL established an advanced, highly transparent corpo- rate governance structure by, for example, inviting outside directors and introducing an executive officer system. We are reaping the benefits of those efforts, yet MOL has only arrived at its current position through a process of continuous improve- ment and evolution. We work hard to enhance corporate value. Corporate Governance Organization MOL has established a corporate governance system that maxi- mizes shareholder profits through the most appropriate alloca- tion of management resources, with higher transparency of corporate management as shown in the chart on the next page. The Board of Directors (with the participation of independent outside directors, who are indispensable to corporate gover- nance) supervises and encourages business operations, which are carried out by the president as chief executive officer. In addition, as a company with an Audit & Supervisory Board, business and accounting audits are conducted by four Audit & Supervisory Board members, including two outside members. To make even better use of the Board of Directors, we are working to carefully select and revise issues taken up by the board so that it can dedicate more of its meeting time to the MOL Group Long-Term Vision, strategy direction and manage- ment oversight. Accordingly, we have expanded the scope of authority transferred to the Executive Committee to accelerate decision-making related to business operations. At MOL, we believe that the essence of corporate governance lies not in its structure or organization, but in whether or not it functions effectively. The framework described in the preceding paragraph is operated in the manner outlined in the following sections. The Board of Directors The Board of Directors, as the Company's highest-ranking decision-making body, discusses and decides on basic policies and the most important matters connected with MOL Group management. The Board of Directors consists of six (6) inside directors and three (3) outside directors who have no stake in the Company. Outside directors confirm the appropriateness of management decisions and check the management of business operations from an independent position based on their individual experi- ence and knowledge, while playing a major role in revitalizing the Board of Directors by expressing helpful insights regarding overall management. We also provide a system to support out- side directors in such ways as providing them with preliminarily explanations of proposals before Board of Directors meetings and reports on important matters related to business operations on a case-by-case basis. In addition, we also hold the “Delibera- tion on Corporate Strategy and Vision”, in which opinions are freely exchanged about management strategies, our long-term vision, and overall management, with both outside directors and outside Audit & Supervisory Board members. Nomination Advisory Committee and Remuneration Advisory Committee MOL established the Nomination Advisory Committee and the Remuneration Advisory Committee as discretionary organiza- tions under the Board of Directors. Both committees are chaired by an outside director, consist of three outside directors and two internal directors, and aim to enhance outside directors’ supervi- sion of directors responsible for business execution. The commit- tees conduct investigations from an objective standpoint emphasizing the perspective of shareholders, the Nomination Advisory Committee regarding the selection of directors and executive officers and the Remuneration Advisory Committee regarding the status of remuneration of directors, including incentives for long-term improvement of corporate value. The Board of Directors respects the content of reports from both committees, and uses it in formulating necessary resolutions. Executive Committee and Committees Within the scope of the basic policy approved by the Board of Directors, MOL transfers significant authority to implement projects to the Executive Committee. This helps to speed up decision-making on individual projects by the executive officers supervised by the president. MOL has also established the following sub-committees of the Executive Committee to study and discuss especially import- ant matters and projects straddling divisions that will be submit- ted to the Executive Committee for discussion. (See the chart below.) Functions of Outside Directors and Reasons for Appointment As part of efforts to strengthen corporate governance, MOL has been appointing outside directors since 2000, with the aim of bolstering oversight of the execution of business operations by bringing an outside perspective to management. MOL has appointed three outside directors whose experience encompasses the realms of finance, business, and academia in Corporate Governance Organization (as of June 27, 2017) Japan. MOL has adjudged that all three individuals are indepen- dent and have neutral positions with no conflicts of interest with the Company. The outside directors draw on their individual experience and insight to check the appropriateness of manage- ment and the status of execution of business operations from the shareholders’ standpoint. At the same time, they express valuable opinions about management as a whole. In these ways, the outside directors play a major role in enhancing the opera- tion of the Board of Directors. Reasons for Appointment of Outside Directors Name Position Reason for appointment Masayuki Matsushima Outside Director of Mitsui Fudosan Co., Ltd. Chairman of NWIC Co., Ltd. Senior Advisor of Integral Corporation Outside Director of JGC Corporation Hideto Fujii Adviser of Sumitomo Corporation Etsuko Katsu Professor of School of Political Science and Economics, Meiji University Board Member of Japan-United States Educational Commission Vice President of Center for Entrance Examination Standardization Administrative Board Member of International Association of Universities (As of June 30, 2017) MOL adjudged that he has a neutral position with no conflicts of interest with the Company as well as extensive, wide-ranging experience in and knowledge of finance and other sectors. He will thus be able to bring a global perspective to the Company’s management and appropriately supervise business execution. MOL adjudged that he has a neutral position with no conflicts of interest with the Company as well as extensive, wide-ranging experience in and knowledge of the management of Japan’s economy and monetary policy. He will thus be able to help maintain and strengthen the Company’s corporate governance from an independent and fair perspective. MOL adjudged that she has a neutral position with no conflicts of interest with the Company as well as experience and insight in university management and global human resource development. She is also an expert in international finance. She will thus be able to offer advice on the Company’s manage- ment and business execution from an independent perspective and contribute to the maintenance and reinforcement of corporate governance. Elect and appoint/dismiss Board of Directors [11] Outside directors: 3 Internal directors: 6 Total: 9 Elect and appoint/supervise General Shareholders’ Meeting Business audit/ accounting audit Accounting audit Audit & Supervisory Board Outside members: 2 Internal members: 2 Total: 4 Elect and appoint/dismiss Elect and appoint/ dismiss Audit & Supervisory Board Office Accounting Auditors Submit basic management policies and other issues for discussion Nomination Advisory Committee Outside directors: 3 Internal directors: 2 Total: 5 Remuneration Advisory Committee Outside directors: 3 Internal directors: 2 Total: 5 Chaired by outside directors Executive Committee [50] Internal directors and executive officers: 9 Submit to executive Committee after preliminary deliberations Instruction Provide direction on important business issues Committees under the Executive Committee STEER Committee, Budget Committee, Investment and Finance Committee, Operational Safety Committee, CSR Committee, Compliance Committee, One MOL Business Strategy Committee, SOx 2020 Regulation Response Committee Submit for discussion and/or report on important business and other issues Executive Officers Director/Executive officers: 6 Executive officers: 18 Total: 24 Divisions / Offices / Branches / Vessels / Group companies Numbers in brackets show the number of meetings of the Board of Directors and Executive Committee during fiscal 2016. Business audit/ accounting audit Audit plan/ audit report Communicate and coordinate with Audit & Supervisory Board Members and the Accounting Auditors Internal Audit Office 60 Mitsui O.S.K. Lines Annual Report 2017 61 Corporate Governance Functions of Outside Audit & Supervisory Board Members and Reasons for Appointment MOL has appointed four Audit & Supervisory Board members, who are responsible for performing statutory auditing functions, including two outside Audit & Supervisory Board members who are completely independent and have no conflicts of interest with MOL. At a time when corporate auditing systems are taking on added importance, it goes without saying that the indepen- dence of members from management and policy execution is assured. Our Audit & Supervisory Board members work closely with the Internal Audit Office and independent public accoun- tants to assure effective corporate governance. They also work on strengthening corporate governance and compliance throughout the Group. Reasons for Appointment of Outside Audit & Supervisory Board Members Name Reason for appointment Position Hiroyuki Itami Outside Corporate Auditor, JFE Holdings, Inc. Hideki Yamashita Attorney-at-Law and Patent Attorney, YAMASHITA & TOYAMA LAW AND PATENT OFFICE, Outside Corporate Auditor of I-Cell Networks Corp. (As of June 30, 2017) MOL adjudged that he has a neutral position with no conflicts of interest with the Company, and that he has wide-ranging experience and knowledge for checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspective based on his specialist knowledge as a scholar of business administration. MOL adjudged that he has a neutral position with no conflicts of interest with the Company, and that he has wide-ranging experience and knowledge for checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ perspective based on his specialist knowledge as an attorney at law. Compensation for Directors, Audit & Supervisory Board Members and Independent Public Accountants The Board of Directors, including the outside directors, deter- mines compensation for the directors and Audit & Supervisory Board members. Compensation paid to directors and Audit & Supervisory Board members in fiscal 2016 is shown in the follow- ing table. The Company has granted stock options to all directors, exec- utive officers, general managers of divisions and branch offices and managers in similar positions, as well as to presidents of consolidated subsidiaries, to motivate them to carry out opera- tions for the benefit of shareholders. Compensation for Directors and Audit & Supervisory Board Members No. of people remunerated Total remuneration (¥ millions) (Thousands of U.S.$) Directors (excluding outside directors) Audit & Supervisory Board Members (excluding outside members) Outside directors and outside members 6 2 6 ¥256 $2,281 55 48 490 427 Compensation for the Accounting Auditors Compensa- tion for audit operations (¥ millions) Compensa- tion for non-audit operations (¥ millions) Total (¥ millions) (Thousands of U.S.$) Parent company ¥116 Consolidated subsidiaries Total 106 ¥223 ¥87 2 ¥89 ¥203 108 ¥312 $1,809 963 $2,781 Independent Officers MOL has designated its three outside directors and two outside Audit & Supervisory Board members as independent officers because there is no concern about a conflict of interest with general investors in conformity with the criteria for independent officers of listed securities exchanges. Each of these individuals plays a major role in corporate governance by checking the appropriateness of management decisions and supervising the execution of business operations from the shareholders’ per- spective based on their experience and insight. Internal Control System MOL has established a basic policy on the establishment of internal control systems* and goes beyond the scope required by law to promote activities to further enhance MOL Group management effectiveness, efficiency and transparency, namely ensuring the appropriateness of business operations and the trustworthiness of financial reporting. We have chosen two extracts from the policy and introduce them below: 1. Compli- ance and 2. Role of the Audit & Supervisory Board members. * Established by resolution of the Board of Directors in 2006, partially amended in 2015 1. Compliance The Company has established a Compliance Committee, which is headed by the chief compliance officer, and formulated the Compliance Policy. General managers of divisions and offices are appointed as Compliance Officers. They are responsible for enforcing compliance regulations and are also required to report to the Compliance Committee in the event of a compliance breach. The Internal Audit Office, a body that operates inde- pendently of the Company’s divisions and offices, provides a counseling service. The Internal Audit Office undertakes investi- gations of breaches and reports the results to the Compliance Committee. In addition to the existing counseling service, we established an external compliance advisory service desk, which we entrusted an outside attorney to run. The desk provides anonymous counseling services. 2. Role of the Audit & Supervisory Board Members The MOL Group has established rules for reporting to its Audit & Supervisory Board members, creating a system in which direc- tors, executive officers and employees report to the Audit & Supervisory Board members on the Company’s operations and important matters that may impact business performance. These rules also safeguard appropriate frameworks for reporting legal violations and other compliance issues to Audit & Supervisory Board members. Furthermore, the representative directors strive to regularly meet with Audit & Supervisory Board members, and the Internal Audit Office works in coordination with the Audit & Supervisory Board members to provide assistance. In these ways, the Company actively cooperates with the Audit & Supervisory Board members to facilitate effective auditing. Measures Ensuring Compliance with the Antimonopoly Act In 2014, the Japan Fair Trade Commission (JFTC) found MOL had violated Article 3 of the Antimonopoly Act. Considering this violation to be a very serious matter, we established the Review Committee of Recurrence Prevention Measures for Anticompetitive Practices, headed by the president. The committee has examined and executed various concrete policies to prevent a recurrence of cartel activities, including revising the compliance system and reforming the corpo- rate culture. The measures resolved by the Review Commit- tee of Recurrence Prevention Measures for Anticompetitive Practices are now being carried on by the Compliance Committee. Annual General Shareholders’ Meeting MOL aims to hold open Annual General Shareholders’ Meetings. In addition to sending the notice of the Annual General Share- holders’ Meeting out about three weeks before the meeting, MOL avoids dates when many Japanese companies hold their annual meetings so that as many shareholders as possible can attend. MOL has also enabled shareholders to exercise their voting rights by mobile phone and the Internet, in addition to postal voting, so that shareholders who cannot attend the annual meeting can vote on proposals. Furthermore, MOL has used the electronic voting platform for institutional investors so that proxy voting rights holders can exercise voting rights. Moreover, a summary of questions received about matters reported and proposed at the annual meeting is posted on MOL’s website after the conclusion of the meeting in the interest of fair disclosure. Accountability MOL believes that timely, full and fair disclosure of corporate and financial information is an important aspect of corporate gover- nance. In addition to being accountable to shareholders and investors by providing information, the Company makes every effort possible to reflect their opinions in management. The distinguishing feature of our investor relations activities is that the president takes the lead in their implementation. In fiscal 2016, the president participated in the Company’s presentations of quarterly results and attended meetings with domestic and foreign investors. The Company is also aware of the need for full and fair disclosure to all investors, whether in Japan or overseas. In releasing its quarterly financial results, the Company releases the financial results in Japanese and English on the Tokyo Stock Exchange’s TDnet, while simultaneously posting the Japanese and English drafts of presentation materials on its website. This information is e-mailed on the same day to foreign investors registered with the Company. MOL actively disseminates information about management strategy, investment plans, market conditions and other information through its website. As recommended by the Corporate Governance Code, MOL proactively holds constructive dialogues with institutional inves- tors and there will be no change to this policy. Feedback is regularly provided to management with regard to the content of discussions held with investors and analysts. Going forward, MOL will further bolster the quality and quantity of communication while being mindfully aware of fair disclosure. The responsibility to provide information is not limited to management and financial issues. MOL’s basic stance is to quickly disclose information, even if it is negative such as infor- mation on accidents, to all stakeholders. Furthermore, we hold regular drills for responding to the media in emergencies and are working to strengthen our ability to quickly and properly dis- close information. MOL will continue working to raise confidence in its business policies and management through close communication with various stakeholders. IR Activities in Fiscal 2016 (April 2016–March 2017) Business performance presentations Frequency Details 4 times Quarterly results/forecasts 2 times Held for analysts in Japan President’s small meetings Overseas investor road shows 4 times Activity For securities analysts and institutional investors For overseas institutional investors Conferences held by securities companies 4 times For individual investors Corporate presenta- tions for individual investors 3 times Once in North America, twice in Europe, once in Asia (Hong Kong and Singapore) Attended conferences in Japan and held individual meetings Attended seminars for individual investors in Tokyo, Osaka and Nagoya, once in each city IR Materials (available on MOL’s website) Material Japanese English Financial reports Stock exchange filings (financial highlights, etc.) Business performance presentation materials (including summaries of Q&A sessions) Annual reports Securities reports Quarterly reports Business reports for shareholders Safety, Environmental and Social Reports Investor guidebooks Market data Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes No No No Yes Yes Yes 62 Mitsui O.S.K. Lines Annual Report 2017 63 Safe Operation Safe Operation Management Safe Operation Management Structure MOL reorganized the division responsible for safe operation in February 2015. This move was aimed at integrating and horizon- tally disseminating information among different types of vessels while maintaining a structure that focuses on the front-line operation of every vessel type, reinforcing company-wide opera- tional safety measures, and developing an organizational struc- ture that focuses all the authority necessary to be responsible for the entire Group’s safe vessel operations into the Marine Safety Division. Under the new structure, all land-based and oceango- ing personnel are united to strive to maximize operating safety, with the goal of becoming the world leader in safe operation. Organizational Structure Supporting Safe Operation Executive Committee Operational Safety Committee Safety Assurance Committee Ship Standard Specification Committee Manning Committee Safety Operations Headquarters Marine Safety Division Ship management coordinating divisions Marine technical teams supporting vessel opera- tions for business divisions In-house ship management companies leading working-level ship management* * MOL Ship Management Co., Ltd. and MOL LNG Transport Co., Ltd. Emergency Response System MOL continues to strengthen its systems so that it can provide an accurate response in the unlikely event of an emergency.  Safety Operation Supporting Center (SOSC) The SOSC is staffed at all times by two marine technical special- ists, including an experienced MOL captain. They use the FMS. Safety system, which was developed in cooperation with Weath- ernews Inc., to monitor weather and related developments where our vessels are operating. FMS.Safety is used to check on the weather, sea, and other conditions surrounding the approxi- mately 850 vessels operated by MOL Group companies 24 hours a day 365 days a year. There is always someone ready and at hand if a ship captain needs assistance. The system collects information on weather, international media reports, and other factors that might affect vessels under way so that the SOSC stands ready to offer timely information and advice and help prevent serious accidents before they happen. Safety Operation Supporting Center (SOSC)  Accident Response Drills MOL regularly conducts accident response drills on vessels while at sea. These drills simulate various situations such as an onboard fire or water immersion, or acts of piracy or terrorism, so that seafarers can respond swiftly and appropriately in an emergency. The Head Office conducts serious marine incident emergency response drills once a year with the cooperation of the Regional Coast Guard Headquarters. The drills involve MOL’s president, other corporate officers, representatives of relevant departments and ship management companies, and vessels. In November 2016, we conducted an emergency response drill based on the premise of an iron ore carrier colliding with a breakwater and becoming stranded offshore from Kashima Port. We will continue to conduct drills on a regular basis and further strengthen our emergency response system. Evacuation drill on board Safe Operation Measures Efforts to ensure safe operation will never end. Coupled with the revision and continuation of policies already in place to strengthen safe operation, MOL will thoroughly implement policies to prevent a recurrence of serious marine incidents. Making Processes for Realizing Safe Operation Visible MOL has introduced objective numerical indicators for measur- ing safety levels, and also set the following numerical targets, including the Four Zeroes. 1. Four Zeroes (an unblemished record in terms of serious marine incidents, oil pollution, fatal accidents and cargo damage) 2. LTIF*1 (Lost Time Injury Frequency): 0.7 or below 3. Operational stoppage time*2: 24 hours/ship or below 4. Operational stoppage accident rate*3: 1.0/ship or below In fiscal 2016, 2–4 above were achieved, but we did not achieve 1 as unfortunately two fatal workplace accidents occurred. We will nevertheless continue to work toward achiev- ing these targets. Preventing New or a Recurrence of Serious Incidents MOL is constantly and repeatedly implementing and raising awareness of fundamental matters while striving to thoroughly keep fresh the memory of serious incidents we have experi- enced and prevent a recurrence of serious incidents while giving due consideration to improving teamwork, safety awareness, awareness of relevant parties and vessel management quality. We will continue to adapt our accident prevention system by making improvements related to both seafarer training and ship facilities to break the chain of errors in which minor factors combine and ultimately lead to major maritime accidents. In terms of seafarer training, we are thoroughly implementing drills prior to boarding and supervising the instruction of less experienced seafarers. We are also enhancing land-based educa- tion and training curriculum and programs such as “hazard experience” training sessions and BRM drills.*4 These measures are geared towards enhancing the ability of seafarers to perceive danger and promoting teamwork. In addition, we are working to raise safety awareness among seafarers by collecting information from each vessel in operation on examples of incidents and problems as well as close calls*5 and by using videos, photos and illustrations to appeal to the visual sense of seafarers. In terms of ship facilities, we are working to equip ships with error-resistant equipment and promoting the adoption of information technol- ogy. This involves promoting the fail-safe design concept by providing shipyards and equipment manufacturers with feed- back from vessels in operation on areas of non-conformance and areas in need of improvement. Cooperation for Safe Operation The MOL Group works together with vessels, shipowners, and ship management companies to work toward achieving the world’s highest level of safe operation of all owned and char- tered vessels by sharing safety-related information. The Com- pany regularly broadcasts “Safety Alerts”—information pertaining to safe operation, including work-related incidents involving casualties—to every vessel. MOL conducts “Safety Operation Meetings” and “Safety Campaigns” involving vessels, shipowners, ship management companies and even the sales division to deepen understanding of its safety standards and to discuss safety improvements. MOL also inspects vessels to check whether its safety standards are understood well and put into effect. If there is a need to make improvements, MOL will take corrective actions, communicating with the vessel, shipowner and ship management company in the process. Lost Time Injury Frequency (LTIF) Average Operational Stoppage Time and Operational Stoppage Accident Rate (Hours/ship) (Accidents/ship) 1.8 1.5 1.2 0.9 0.6 0.3 0 2016 average for all industries: 1.63 MOL target: 0.7 or below for 2015 onward 0.38 0.44 0.30 0.53 0.50 2012 2013 2014 2015 2016 (FY) 40 30 20 10 0 Average operational stoppage time target: 24 hours or below 28.45 25.04 19.04 0.66 0.52 0.51 Operational stoppage accident rate target: 1.0 or below 25.56 0.99 22.53 0.91 2012 2013 2014 2015 2016 (FY) 2.0 1.5 1.0 0.5 0 ○ Average operational stoppage time (left scale) ○ Operational stoppage accident rate (right scale) 64 Mitsui O.S.K. Lines Annual Report 2017 65 Safe Operation Risk Management ESG-Based IR Meetings In March 2015, many institutional investors attended a meeting we held entitled "Achieving the World’s Safest Operations." We explained our safety measures in regard to both our facilities and our personnel, as well as how we have learned from previous marine incidents to strengthen our safety initiatives. They were also given a tour of our SOSC during the meeting. This was also a valuable opportunity for us to explain how MOL creates long- term value. Establishing a Self-Operated University of Merchant Marines in the Philippines Filipino seafarers form the core of the crews on MOL's operated vessels. As operation technology grows increasingly sophisti- cated, we expect to see more activity for these seafarers. As the culmination of MOL’s initiatives aimed at safe operations, we will establish the largest self-operated university of merchant marines in the Asia-Pacific region as we plan to reinforce efforts to secure and train excellent seafarers and achieve the world's safest operations. Third-Party Evaluations Safe Operation, Including Evaluations of Seafarer Educational Programs  Standard Training Courses for liquefied gas transportation certified by DNV GL AS The LNG Carrier Standard Training Course and the LEG/LPG Carrier Standard Training Course implemented globally by MOL were certified by Norway’s Det Norske Veritas (DNV) GL AS in 2007 for compliance with the LNG carrier crew ability standards and in 2016 for compliance with the LEG/LPG advocated by SIGTTO.*6  Management program for seafarer education and training acquired certification from DNV GL AS MOL’s management program for sea- farer education and training was recog- nized to be effective and certified in its tanker and LNG carrier operations by DNV GL AS in 2012 for compliance with the Competence Management System (CMS). Glossary *1 LTIF (Lost time injury frequency): Number of work-related accidents per one million hours worked that resulted in time lost from work of one day or more. In the scope of calculations, we originally included only workplace illnesses and injuries requiring disembarkation from the ship. The LTIF criteria was strengthened from fiscal 2015, and now includes any work- place illness or injury that prevents a worker from resuming even a reduced workload on that day, regardless of whether the illness or injury requires disembarkation. Average for all industries (2016) was 1.63; for shipping industry, 1.51; for transportation equipment manufacturing industry, 0.39. (Source: 2016 Survey on Industrial Accidents issued by the Ministry of Health, Labour and Welfare) *2 Operational stoppage time: Expresses the amount of ship operational stoppage time due to an accident per ship per year. *3 Operational stoppage accident rate: Expresses the number of accidents that result in ship operational stoppage per ship per year. *4 Bridge resource management drill: Simulating an incident on a vessel operation simulator to enable seafarers to acquire response techniques. It includes MOL’s original programs. *5 Close calls: Risky incidents that came very close to causing a more serious accident. *6 Society of International Gas Tanker and Terminal Operators Ltd. The Company identifies the risks surrounding the MOL Group, such as fluctuations of freight rates, with the aim of managing and reducing these risks. MOL has designated the reinforcement of total risk control as one measure to strengthen its manage- ment foundation and support the successful execution of the plan. To fully exercise sustainable risk management, the Com- pany transparently quantifies its comprehensive risk. Fluctuations of Cargo Volume, Fleet Supply and Freight Rates The global shipping business, like many other industries, is greatly affected by trends in the global economic cycle, and is thus subject to both macroeconomic risk, as well as business risk associated with trends in specific industries. There are a multi- tude of factors that are subject to change, such as fluctuations in the economies of individual countries, changes in trade struc- tures, vessel supply and demand balance, market conditions and cargo volumes. Achieving the best performance hinges on objectively analyzing information so as to continually increase the probability of generating higher earnings. With this in mind, MOL has adopted a strategy of “diversifying operations to reduce risk” and “raising highly stable profits” by aligning its fleet to match international marine transport demand in the transport of both raw materials and finished goods. In this way, we strive to maximize returns and sustain profit growth. In accordance with our internal market risk management regulations, we appropri- ately reduce risks related to fluctuation, especially those arising from freight rates, bunker prices, exchange rates, and interest rates. The Investment and Finance Committee also identifies, analyzes and evaluates risks related to such material issues as investment in ships. Variation of Procurement and Contract Terms (as of March 2017) 0 20% 40% 60% 80% 100% Dry Bulkers (337 ships) Tankers (169) LNG Carriers (80) Car Carriers (120) Containerships (91) 46% 27% 27% 36% 55% 9% 100% 95% 5% 80% 20% ■ Owned or mid- and long-term chartered vessels with mid- and long-term contracts ■ Owned or mid- and long-term chartered vessels with short-term contracts ■ Short-term chartered vessels with short-term contracts Market Exposure by Vessel type (as of March 2017) Total number of fleet Market exposure Capsize Small- and medium-sized bulkers VLCCs Product tankers LPG tankers 90 112 31 43 8 17% 9% 16% 84% 50% Underlined words are explained in the Glossary on the Contents page. Diversifying Operations to Reduce Risk MOL operates a “full-line marine transport group.” As of the end of March 2017, we operated around 850 vessels, ranging from dry bulkers, tankers, and LNG carriers to car carriers and contain- erships, capable of transporting a diverse range of raw materials and finished goods. Each type of ship and each type of cargo have particular supply and demand trends, and create particular markets. While some of these markets are highly correlated with each other, others are negatively correlated depending mainly on the economic environment, so the impact in one sector offsets the impact in another. By assessing the suitability of a particular vessel type for medium- to long-term contracts and market exposure the Company expects, MOL constructs an optimum business portfolio, which allows the Company to pursue higher profits while mitigating risks. Building Up Highly Stable Profits through the Use of Medium- and Long-Term Contracts and Other Means The Company pursues medium- and long-term contracts won based on long-standing relationships of trust with customers. These contracts ensure a stable future cash flow that will help reduce the risk that market fluctuations could have on its results. International marine transportation is expanding, but consid- ering the ongoing glut of shipbuilding capacity, more time will likely need to elapse before a structural turnaround is realized in the market environment. The Company aims to conclude con- tracts that are not largely affected by changes in the external business environment and constitute a stable source of profit. By expanding these contracts from a long-term perspective, MOL will create an even steadier earnings structure. To achieve this objective, one of the options we will look closely at as a matter of priority is M&A deals in growing sectors which enjoy a rela- tively stable cash flow. Exchange Rate Fluctuations Although MOL has concluded transport contracts on a yen- denominated basis with some Japanese clients, most transac- tions in the international marine transport business are concluded on a U.S. dollar-denominated basis. Despite our best efforts to incur expenses in U.S. dollars, U.S. dollar-denominated revenue currently exceeds U.S. dollar-denominated expenses, so when the yen strengthens against the U.S. dollar this can have a negative impact on Group earnings. In fiscal 2017, we project that each ¥1-per-dollar change in the yen-U.S. dollar exchange rate will have an impact of approximately ¥0.7 billion on consoli- dated ordinary profit. Interest Rate Fluctuations MOL depends mainly on the issuance of corporate bonds and funds borrowed from banks and other financial institutions to meet working capital and capital expenditure requirements. Loans are denominated in either yen or U.S. dollars, with funds procured at variable interest rates affected by interest rate fluctu- ations. As of March 31, 2017, interest-bearing debt totaled ¥1,122.4 billion, and around 30% of that loan principal is locked in at a fixed interest rate. As a result, an increase of 1 percentage point in market interest rates on both yen-denominated and U.S. dollar-denominated interest-bearing liabilities would impact 66 Mitsui O.S.K. Lines Annual Report 2017 67 Risk Management Corporate Social Responsibility (CSR) annual consolidated ordinary profit by no larger than approxi- mately ¥4.0 billion. Although MOL has benefited from ultra-low interest rates in the aftermath of the financial crisis, the Company is taking steps to mitigate the risk of a future interest rate rise. It plans to flexibly adjust the ratio of variable- and fixed-rate loans through interest rate swaps and other means according to changes in financial conditions, taking into consideration the balance between variable- and fixed-rate interest. Bunker Price Fluctuations The market price of bunker is generally linked to the price of crude oil, and any increase in bunker prices has a negative impact on earnings for the MOL Group. The Group operates a fleet of approximately 850 vessels, whose annual fuel consump- tion amounts to around 5.7 million tons of bunker. The Company is able to pass on about 60% of the risk to customers. Therefore, an increase of US$1 per metric ton in the average annual price of bunker would lower earnings by approximately ¥0.17 billion (net of hedging) at the maximum. Stricter regulation to reduce SOx emissions generated by ships will be introduced in 2020. This regulation would require the use of low-sulfur fuel oil containing less than 0.5% sulfur, the installation of SOx scrubbers on vessels to remove sulfur, or the use of alternative fuels such as LNG, LPG, and methanol, which could have an impact on fuel costs or capital costs. In this case, the Company plans to recover these additional costs by raising freight rates and other fees. Sensitivity of Earnings to Exchange Rate/Interest Rate/Bunker Price Fluctuations Exchange rate (¥/US$) A ¥1 appreciation reduces ordinary profit by approximately ¥0.7 billion Interest rate (%) A 1 percentage point rise in both yen- and U.S. dollar-de- nominated interest-bearing debt reduces ordinary profit by approximately ¥4.0 billion Bunker price (US$/MT) A US$1/MT increase reduces ordinary profit by approxi- mately ¥0.17 billion Average Bunker Price (US$/MT) 800 600 400 200 0 04/3 05/3 06/3 07/3 08/3 09/3 10/3 11/3 12/3 13/3 14/3 15/3 16/3 17/3 Vessel Operations MOL operates a fleet of approximately 850 vessels and it is there- fore impossible to ignore the risks related to various incidents that may occur on the high seas. In order to prevent accidents, the Company has introduced a variety of measures such as safety standards, a safety management system, comprehensive crew education and training, and establishment of organizations to support safe operations. Furthermore, MOL has arranged sufficient insurance coverage so that its financial results will not be materially impacted, should the Company or a third party suffer damages in the unlikely event of an MOL-operated vessel being involved in a collision, sinking, fire or other marine incident. Group Company Operational Management The MOL Group Corporate Principles serve as the basis for set- ting regulations at MOL Group companies. Each Group company submits required reports to MOL in a timely manner in accor- dance with Group Company Management Regulations. After properly ascertaining the financial conditions and business risks, the Company, as a shareholder, requests Group companies obtain permission prior to executing important management matters. Natural Disaster or Similar Event An earthquake, other natural disaster or an outbreak of an infec- tious disease (hereinafter “disaster or similar event”) could affect MOL-operated vessels, offices and facilities, as well as employees, hampering business operations. MOL puts the highest priority on ensuring the safety of its vessels and personnel in the event of a disaster or similar event. The Company has formulated a business continuity plan docu- menting procedures to enable it to continue providing core ocean transport services and quickly restore operations in the unlikely event that they are suspended. This business continuity plan establishes organizations and delegates authority for duties relating to maintaining the safe operation of vessels, execution of transportation contracts and charter agreements, financial preparation, securing required personnel, and other matters. Furthermore, for some years, MOL has been conducting regular disaster-preparedness drills on and off premise at its Head Office, aboard ships and throughout the Group’s other facilities, as well as taking other measures to ensure preparedness. By addressing issues arising from these drills, MOL believes that it maintains a high state of readiness. Nevertheless, in the event of a disaster or similar event in which MOL cannot completely avoid damage, the Company’s business performance may be affected. MOL’s Approach to CSR In our view, CSR means conducting business management that adequately takes into account laws and regulations, social norms, safety and environmental issues, human rights and other considerations, and developing together with society sustain- ably and harmoniously while earning the support and trust of stakeholders, including shareholders, customers, business part- ners, employees and local communities. In order to fulfill these responsibilities, MOL deliberates on CSR-related policies and measures, primarily through the three committees under the Executive Committee. The MOL Group’s initiatives and policies regarding overall CSR are deliberated on by the CSR Committee, which then sets single-year, medium- and long-term targets and conducts regu- lar reviews. The Operational Safety Committee discusses basic policies and measures for ensuring the safe operation of MOL Group operated vessels through rigorous attention to every detail. The Compliance Committee discusses basic policies and measures for enhancing the compliance system, dealing with compliance violations, and establishing a structure for protecting and man- aging personal information. To further ensure sustainable growth, MOL CHART was estab- lished in 2015 as a set of values to be passed down between MOL Group employees indefinitely. For more information on MOL CHART, see page 3. Organizational Framework for CSR Initiatives Chief Execu- tive Officer (President) Executive Committee CSR Committee Operational Safety Committee Compliance Committee Participating in the UN Global Compact CSR activities are broad and, from time to time, the strength and priority of those activities change depending on the operating environment, global circumstances and region where business is being developed. With business activities spread across the globe, MOL believes that building good relationships with vari- ous stakeholders worldwide and contributing to the realization of sustainable growth of society are vital as it seeks to realize the ideas set forth in the MOL Group Corporate Principles. In order to contribute to an international framework for realizing these goals, MOL became the first Japanese shipping company to participate in the United Nations (UN) Global Compact in 2005. Since then, MOL has worked to support and practice the 10 principles in 4 areas of the UN Global Compact, which shares the same values as MOL’s Rules of Conduct, which were established as a set of guidelines for executives and employees. 10 Principles of the UN Global Compact Human Rights Principle 1. Business should support and respect the protection of internationally proclaimed human rights; and 2. Make sure that they are not complicit in human rights abuses. Labour 3. Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; 4. The elimination of all forms of forced and compul- sory labour; 5. The effective abolition of child labour; and 6. The elimination of discrimination in respect of employment and occupation. Environ- ment 7. Businesses should support a precautionary approach to environmental challenges; 8. Undertake initiatives to promote greater environ- mental responsibility; and 9. Encourage the development and diffusion of envi- ronmentally friendly technologies. Anti- Corruption 10. Businesses should work against corruption in all its forms, including extortion and bribery. The MOL Group Basic Procurement Policy We formulated the MOL Group Basic Procurement Policy in 2012. This clearly documents our CSR activity policy regarding the Group’s procurement activities. To embed this policy in the MOL Group, we work throughout our supply chain to observe laws and regulations and social norms, incorporate consideration for environmental protection in our activities, pursue safety, engage in fair trading and build trust, with the understanding and coop- eration of business partners. In this way, we aim to contribute towards the realization of sustainable societies together. The MOL Group Basic Procurement Policy The MOL Group procures goods and/or services in accor- dance with the following basic policy: 1. We comply with applicable laws, regulations and social norms, and pay due consideration to the protection of the environment. 2. We procure goods and/or services, including the delivery or execution of such goods and/or services, that meet high safety standards. 3. We conduct fair trade, and endeavor to establish trusting relationships with contractors. We work to make sure that our contractors understand our Basic Procurement Policy, with the aim of contributing towards the realization of sustainable societies together. 68 Mitsui O.S.K. Lines Underlined words are explained in the Glossary on the Contents page. Annual Report 2017 69 Corporate Social Responsibility (CSR) Initiatives on the Environment In April 2017, we formulated MOL Group Environmental Vision 2030 to present our cutting-edge initiatives for environmental preservation. Environmental Regulations Schedule of Environmental Regulations by IMO, etc MOL Group Environmental Vision 2030 Shipping companies are responsible for undertaking the marine transportation vital to the infrastructure underpinning people’s daily lives worldwide. Meanwhile, the effectuation of the Paris Agreement on climate control has unified efforts by the international com- munity to mitigate global warming. With this in mind, the MOL Group believes that it has a social obligation to take innovative steps to help solve environmental issues such as greenhouse gas emissions, air pollution and biodiversity impediments. The MOL Group will grasp the environmental needs of customers and other stakeholders and provide solutions, in tandem with developing its environment and emission-free businesses into future core operations, with the aim of contributing to global environmental preservation. The MOL Group targets reduction of greenhouse gas emis- sions per unit load by 25% by 2030 and by 50% by 2050 com- pared to fiscal 2014. CO2 Emissions (Per Unit Load) (Fiscal 2014 = 100) Environmental Investments 100 95 90 85 100.0 96.7 10.2% reduction compared with fiscal 2014 89.8 2014 2015 2016 (FY) Key Environmental Issues In March 2014, we identified the highest-priority environmental issues and set about addressing those issues in a proactive manner. To identify these priorities, we analyzed issues from international conditions regarding environmental issues; the opinions of stakeholders including customers, investors, and so on; as well as our own internal viewpoints. Finally, through dis- cussions in the CSR Committee, we formulated the following eight action plans. 1. Promote use and innovation of technologies for reducing environmental impact and advanced support technologies for safer vessel operation through the “ISHIN NEXT—MOL SMART SHIP PROJECT—.” 2. Participate in projects to build vessels that run on alterna- tive fuels such as LNG and supply alternative fuels. 3. Reduce greenhouse gas emissions by using ICT to optimize sailing even further. 4. Utilize renewable energy such as wind and solar power for vessel propulsion and at Group-related facilities in Japan and overseas. 5. Create environment and emission-free businesses. 6. Investigate emissions trading as a way to achieve green- house gas reduction targets. 7. Respond appropriately and proactively to air pollution prevention and the Ballast Water Management Convention. 8. Promote modal shift in transportation by enhancing the ferry and coastal shipping business in Japan. 70 Mitsui O.S.K. Lines Environment-related R&D activities Utilization and expansion of existing environmental technologies Responses to environmental regulations Initiatives to save bunker fuel Initiatives of Group companies Total Fiscal 2014 0.7 Fiscal 2015 0.3 (Billions of yen) Fiscal 2016 0.4 2.1 0.5 0.9 0.2 4.3 0.9 2.2 1.0 0.3 4.6 0.5 3.1 1.1 0.3 5.4 Organizational Structure for Environmental Initiatives To effectively promote environmental initiatives based on the MOL Environmental Policy, the CSR Committee, a sub- committee of the Executive Committee, oversees planning and promotion of environment-related measures under the direction of the president. The CSR Committee assesses environment- related risks and opportunities involving MOL, identifies the highest-priority issues in the Group’s environmental manage- ment, and sets environmental targets. As an environmentally advanced company, MOL will actively strive to grasp stakehold- ers’ environmental needs. In February 2016, MOL established the Technology, Innovation and Environment Committee, which is tasked with promoting technology innovation and proposal of strategies for environ- mental measures, followed by the Ballast Water Treatment System Installation Committee, which is responsible for responding properly to the Ballast Water Management Convention. Further- more, in November 2016, the Company established the SOx 2020 Regulation Compliance Committee, which is to respond to stricter regulation on sulfur content in fuel oil scheduled for 2020. Organizational Structure to Promote Environmental Initiatives Executive Committee CSR Committee Technology, Innovation and Environment Committee (Secretariat Office: Corporate Planning Division, CSR and Environment Office) Director responsible for environmental management (Chairman of CSR Committee) Executive officer of CSR Committee (Vice- Chairman of CSR Committee) Divisions/Offices Divisions/Offices General Manager (Personnel responsible for environmental management) Ballast Water Management Convention SOx Regulation 2016 2017 2018 2019 2020 2021 2016 2017 2018 2019 2020 2021 (Adopted in 2004) Mandatory (For existing vessels: within seven years from September 2017 For new vessels: completed from September 2017 onward) A convention to prevent cross-border transfer of foreign marine organisms through vessel ballast water was adopted in 2004 and will be in effect from September 2017. Vessels are mandated to install ballast water treatment sys- tems, which cost US$1-2 million, by the first special survey (Dry Dock) which will come within seven years after it takes effect (as of July 2017). Ballast voyage departure port Destination port Marine organisms Destruction of the marine ecosystem Unloading cargo and taking in ballast water Loading cargo and discharging ballast water MOL’s Initiatives • In fiscal 2014, MOL set a Company-wide policy to install ballast water management systems on our vessels before the conven- tion took effect. • We have already completed installation on more than 87 owned vessels (as of June 2017). Sulfur limit: 3.5% Sulfur limit: 0.5% Regulate the sulfur content in fuel oil to control SOx volume in exhaust emissions. The sulfur limit will be tightened from 3.5% or less to 0.5% or less from 2020. Ship owners/operators have to choose a method from the following menu: Method Advantages Disadvantages/Issues Low-sulfur fuel oil No initial costs SOx scrubber Lower fuel costs • High fuel cost • Supply availability in question • High initial cost • Large space required Alternative fuel (LNG, etc.) Effective for other environmental regulations • High equipment cost • Insufficient supply system • Difficult modifications MOL’s Initiatives • MOL has been studying low-sulfur fuel oil and SOx scrubbers as both are subject to future fuel prices. • MOL teamed up with BHP Billion, Rio Tinto, etc., on a joint research project for an LNG-fueled capesize bulker. • MOL took delivery of three methanol tankers equipped with dual-fuel, low-speed diesel engines that can run on methanol (a world first). • In 2019, MOL will take delivery of a tugboat with a dual-fuel (bunker A/LNG) engine. Others Regulations 2016 2017 2018 2019 Tackling global warming GHG emissions EEDI*1 SEEMP*2 Phase 1 Mandatory 2020 Phase 2 2025 Phase 3 * Introduction of MRV (Monitoring, Reporting and Verification of actual fuel consumption) and MBM (Market-Based Measures) is under study toward further reduction of GHG emissions. Preventing air pollution NOx emissions*3 General Sea Areas Tier II ECA*4 Tier II Tier III Marine environ- ment protection Minimizing the transfer of invasive aquatic species by shipping*5 (Guideline adopted in 2011) Ship Recycling Convention*6 (Adopted in 2009: not ratified) *1 EEDI (Energy Efficiency Design Index) is a measure of a ship’s energy efficiency (g/ton-mile) The required EEDI of each Phase is as follows: Phase 0=0%, Phase 1=10%, Phase 2=20% (Applied to new ships) *2 SEEMP (Ship Energy Efficiency Management Plan) is required to be drawn up to show optimal measures of operation that should be adjusted to the characteristics of individual ships, and to be kept onboard a ship. (Applied to both new and existing ships) *3 The regulation for reduction of NOx in exhaust gases: Tier I is applied to ships laid down in 2000-2010, Tier II to ships laid down in/after 2011, and Tier III to ships laid down in/after 2016. *4 The existing ECAs (Emission Control Areas) are: 1. Within 200 miles off the coast of the USA and Canada (NOx/SOx) 2. The USA Caribbean Sea area (NOx/SOx) 3. The Baltic Sea and the North Sea areas (currently only SOx). (From 2021 onward, new shipbuilding will be subject to third-generation NOx regulations.) Underlined words are explained in the Glossary on the Contents page. *5 The guideline aimed at minimizing transfer of invasive aquatic species attaching to the bottom of ships, recommending installation of the systems on vessels to keep the bottom clean of marine organisms and other measures. (It remains as a voluntary guideline during the review period.) *6 The convention prohibits and restricts the fitting and use of treaty-specified hazardous materials, and requires vessels to prepare, record and update inventory lists showing the quantity and location of hazardous materials on ships over a ship's lifetime. The conven- tion shall enter into force 24 months after the following conditions are met: Conditions: Ratification by not less than 15 countries representing a combined total G/T of more than 40% of the world’s merchant fleet and an annual ship recycling volume not less than 3% of the combined tonnage of the ratifying countries. (As of March 2017, 5 countries have ratified.) Annual Report 2017 71 Data Section 74 Consolidated Financial Statements 74 Consolidated Balance Sheets 76 Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income 77 Consolidated Statements of Changes in Net Assets 78 Consolidated Statements of Cash Flows 79 Notes to Consolidated Financial Statements 109 Independent Auditor’s Report 110 The MOL Group 112 Worldwide Offices 113 Shareholder Information Corporate Social Responsibility (CSR) Third-Party Evaluations (Environment-Related)  ISO 14001 Certification MOL has used its own environmental management system MOL EMS21 since April 2001, and also holds ISO 14001 certification, an international standard for environmental management. (Since 2003)  ISO 50001 Certification MOL acquired ISO 50001 certification for its energy management system and ISO 14001 certification for its environmental manage- ment system. Certified companies: MOL Ship Management Co., Ltd., MOL Ship Management (Singapore) Pte. Ltd., MOL Ship Manage- ment (Hong Kong) Company, Limited and Magsaysay MOL Ship Management, Inc.  Recognized by CDP as a Leader in Climate Change Transparency and in Corporate Action on Climate Change MOL was recognized as a leader for the depth and quality of the climate change data it has disclosed for indepen- dent assessment through CDP, an international non-profit organization. This marks the third time MOL has received this distinction (2015). External Recognition (Overall, CSR-Related)  CSR Rating by the Dow Jones Sustainability Indices (DJSI) Since 2003, MOL has been included in the DJSI Asia Pacific, a designation reserved for companies capable of sustaining growth over the long term while maintaining excellence in environmental, social, and investor relations programs.  CSR Rating by the FTSE4Good Global Index FTSE is a global index company owned by the London Stock Exchange. Since 2003, FTSE has included MOL in one of its major indices, the FTSE4Good Global Index, which is a socially respon- sible investment index.  FTSE Blossom Japan MOL has been included in the FTSE Blossom Japan Index. The index was developed in 2017 by FTSE and targets Japanese companies making a superior response to environment, social, and governance (ESG) issues.  MSCI ESG Leaders Indexes MOL has been included in the MSCI ESG Leaders Indexes for its superior efforts on measures taken for risks and opportunities related to ESG. (Since 2010; index name changed in 2017)  MSCI Japan ESG Select Leaders Index MOL has been included in the Japan ESG Select Leaders Index, which was newly developed in 2017 and targets companies with a superior ESG evaluation relatively speaking for each industry.  MSCI Japan Empowering Women Index (WIN) MOL has been included in the MSCI Japan Empowering Women Index (WIN), which was newly developed in 2017 and targets companies in all industries with superior performance in promot- ing gender diversity. THE INCLUSION OF Mitsui O.S.K. Lines, Ltd. IN ANY MSCI INDEX, AND THE USE OF MSCI LOGOS, TRADEMARKS, SERVICE MARKS OR INDEX NAMES HEREIN, DO NOT CONSTITUTE A SPONSORSHIP, ENDORSEMENT OR PROMOTION OF Mitsui O.S.K. Lines, Ltd. BY MSCI OR ANY OF ITS AFFILIATES. THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES AND LOGOS ARE TRADEMARKS OR SERVICE MARKS OF MSCI OR ITS AFFILIATES.  SMBC Sustainability Assessment Loan In 2016, MOL received the highest rating for SMBC Sustainability Assessment Loans from Sumitomo Mitsui Banking Corporation (SMBC), winning specific praise for timely and accurate disclosure of environmental, social, and governance (ESG) issues and for its initiatives on sustainability.  SMBC Nadeshiko Assessment Loan MOL continued to be approved for an SMBC Nadeshiko Assessment Loan by Sumitomo Mitsui Banking Corporation (SMBC), receiving praise for being a leading company where women play an active role thanks to its initiatives for creating a workplace where women can play a more active role (2017). 72 Mitsui O.S.K. Lines Annual Report 2017 73 Consolidated Financial Statements Consolidated Balance Sheets Mitsui O.S.K. Lines, Ltd. March 31, 2017 and 2016 ASSETS Current assets: Cash and cash equivalents (Note 3) Trade receivables (Note 3) Inventories (Note 5) Deferred and prepaid expenses Deferred tax assets (Note 15) Other current assets (Notes 3 and 6) Allowance for doubtful accounts Total current assets Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥ 186,844 130,420 36,358 60,889 1,274 66,122 (429) 481,478 ¥ 159,450 130,293 27,860 66,101 1,449 72,297 (975) 456,475 $ 1,665,425 1,162,492 324,075 542,731 11,356 589,375 (3,824) 4,291,630 Vessels, property and equipment, net of accumulated depreciation (Notes 7 and 13): Vessels Buildings and structures Machinery, equipment and vehicles Furniture and fixtures Land Vessels and other property under construction Others Net vessels, property and equipment 756,930 153,768 26,630 5,366 221,343 156,935 2,693 1,323,665 822,270 159,483 22,828 4,482 221,614 143,342 2,413 1,376,432 6,746,858 1,370,603 237,365 47,830 1,972,930 1,398,832 24,004 11,798,422 LIABILITIES AND NET ASSETS Current liabilities: Trade payables (Note 3) Bonds due within one year (Notes 3 and 7) Short-term bank loans (Notes 3 and 7) Accrued income taxes (Note 15) Advances received Deferred tax liabilities (Note 15) Allowance for bonuses Allowance for directors’ bonuses Provision for loss on business liquidation Provision for contract loss Other current liabilities (Note 6) Total current liabilities Non-current liabilities: Bonds due after one year (Notes 3 and 7) Long-term bank loans (Notes 3 and 7) Lease obligations Deferred tax liabilities (Note 15) Net defined benefit liabilities (Note 16) Directors’ and corporate auditors’ retirement benefits Reserve for periodic drydocking Provision for contract loss Provision for environmental measures Other non-current liabilities (Note 6) Total non-current liabilities Total liabilities Commitments and contingent liabilities (Note 8) Net assets (Note 9): Owners’ equity: Common stock: Authorized —3,154,000,000 shares Issued —1,206,286,115 shares Capital surplus Retained earnings Treasury stock, at cost Total owners’ equity Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥ 125,119 20,000 133,155 6,642 32,259 1,188 4,403 154 2,753 1,239 56,545 383,457 210,595 738,163 18,372 56,678 12,446 1,459 18,566 226 620 93,326 1,150,451 1,533,908 ¥ 127,172 45,000 107,976 4,872 29,327 712 4,485 130 71,008 8,604 64,508 463,794 220,840 648,117 20,948 81,553 13,442 1,659 14,854 — — 107,455 1,108,868 1,572,662 $ 1,115,242 178,269 1,186,870 59,203 287,539 10,589 39,246 1,373 24,539 11,044 504,011 3,417,925 1,877,128 6,579,579 163,758 505,197 110,937 13,005 165,487 2,014 5,526 831,857 10,254,488 13,672,413 65,400 45,382 355,263 (6,820) 459,225 28,354 54,327 27,178 2,899 112,758 2,447 109,191 683,621 ¥2,217,529 65,400 45,389 354,180 (6,848) 458,121 20,950 35,034 26,886 (40) 82,830 2,682 103,292 646,925 ¥2,219,587 582,940 404,510 3,166,619 (60,790) 4,093,279 252,732 484,241 242,250 25,840 1,005,063 21,811 973,269 6,093,422 $19,765,835 Annual Report 2017 75 Investments, intangibles and other assets: Intangible assets Investment securities (Notes 3, 4 and 7) Long-term loans receivable (Note 3) Long-term prepaid expenses Net defined benefit assets (Note 16) Deferred tax assets (Note 15) Other non-current assets (Note 6) Allowance for doubtful accounts Total investments, intangibles and other assets Total assets See accompanying notes. 74 Mitsui O.S.K. Lines 31,288 231,978 62,797 6,825 15,390 3,536 62,661 (2,089) 412,386 ¥2,217,529 33,483 215,056 49,015 3,565 13,292 4,422 69,908 (2,061) 386,680 ¥2,219,587 278,884 2,067,724 559,738 60,834 137,178 31,518 558,527 (18,620) 3,675,783 $19,765,835 Accumulated other comprehensive income Unrealized holding gains on available-for-sale securities, net of tax Unrealized gains on hedging derivatives, net of tax Foreign currency translation adjustments Remeasurements of defined benefit plans, net of tax Total accumulated other comprehensive income Share subscription rights Non-controlling interests Total net assets Total liabilities and net assets Consolidated Financial Statements Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income Consolidated Financial Statements Consolidated Statements of Changes in Net Assets Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2017 and 2016 Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2017 and 2016 (CONSOLIDATED STATEMENTS OF OPERATIONS) Shipping and other revenues (Note 14) Shipping and other expenses Gross operating income Selling, general and administrative expenses Operating income Non-operating income: Interest income Dividend income Equity in earnings of affiliated companies Foreign exchange gain Others Total non-operating income Non-operating expenses: Interest expense Others Total non-operating expenses Ordinary income Other gains: Gain on sales of vessels, property, equipment and others Gain on sales of shares of subsidiaries and associates Others Total other gains Other losses: Loss on sales and disposals of vessels, property, equipment and others Impairment loss (Note 10) Costs of business structural reforms (Note 11) Others Total other losses Income (Loss) before income taxes Income taxes (Note 15): Current Deferred Net income (loss) Net income attributable to non-controlling interests Net income (loss) attributable to owners of parent (CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME) Net income (loss) Other comprehensive income (Note 18): Unrealized holding gains on available-for-sale securities, net of tax Unrealized gains on hedging derivatives, net of tax Foreign currency translation adjustments Remeasurements of defined benefit plans, net of tax Share of other comprehensive income (loss) of associates accounted for using equity method Comprehensive income Comprehensive income Comprehensive income attributable to owners of parent Comprehensive income attributable to non-controlling interests (AMOUNTS PER SHARE OF COMMON STOCK) Net income (loss) Diluted net income (Note 2) Cash dividends applicable to the year See accompanying notes. Millions of yen 2017 ¥1,504,374 1,388,265 116,109 113,551 2,558 2016 ¥1,712,223 1,594,569 117,654 115,330 2,324 Thousands of U.S. dollars (Note 1) 2017 $13,409,163 12,374,231 1,034,932 1,012,131 22,801 5,918 6,022 5,544 24,180 3,875 45,539 19,037 3,634 22,671 25,426 6,125 20,008 9,073 35,206 1,260 22,274 6,490 7,305 37,329 23,303 4,079 6,131 9,178 23,908 7,452 50,748 14,576 2,227 16,803 36,269 9,431 817 19,764 30,012 629 — 179,291 40,746 220,666 (154,385) 52,750 53,677 49,416 215,527 34,540 405,910 169,685 32,392 202,077 226,634 54,595 178,340 80,871 313,806 11,231 198,538 57,848 65,113 332,730 207,710 13,324 (626) 10,605 5,348 ¥ 5,257 11,134 261 (165,780) 4,668 ¥ (170,448) Millions of yen 2017 ¥10,605 2016 ¥(165,780) 8,768 13,072 2,463 2,944 4,101 31,348 ¥41,953 (24,187) (31,368) (1,520) (5,369) (3,475) (65,919) ¥(231,699) ¥35,184 6,769 ¥(233,644) 1,945 118,763 (5,580) 94,527 47,669 $ 46,858 Thousands of U.S. dollars (Note 1) 2017 $ 94,527 78,153 116,517 21,954 26,241 36,554 279,419 $373,946 $313,611 60,335 Yen 2017 ¥4.40 4.06 2.00 2016 ¥(142.50) — 5.00 U.S. dollars (Note 1) 2017 $0.04 0.04 0.02 Millions of yen Unrealized holding gains on available- for-sale securities, net of tax Treasury stock, at cost Unrealized gains on hedging derivatives, net of tax Foreign currency translation adjustments Remeasure- ments of defined benefit plans, net of tax Share subscription rights Non- controlling interests Total net assets Common stock Capital surplus Retained earnings Balance at April 1, 2015 ¥65,400 ¥44,469 ¥ 533,485 ¥(6,823) ¥ 44,261 ¥ 68,770 ¥27,673 ¥ 5,322 ¥2,553 ¥107,325 ¥ 892,435 Issuance of new shares—exercise of subscription rights to shares Dividends paid Net income (loss) attributable to owners of parent Due to change in affiliated companies accounted for by the equity method Purchases of treasury stock Disposal of treasury stock Purchases of shares of consolidated subsidiaries Net changes of items other than owner’s equity during the year — — — — — — — — — — — — — — 920 — — (8,971) (170,448) 141 — (27) — — 7 — — — (47) 15 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (7) — — — — — — — — — — — — — — (8,971) (170,448) 141 (47) (12) 920 (23,311) (33,736) (787) (5,362) 136 (4,033) (67,093) Balance at March 31 and April 1, 2016 ¥65,400 ¥45,389 ¥ 354,180 ¥(6,848) ¥ 20,950 ¥ 35,034 ¥26,886 ¥ (40) ¥2,682 ¥103,292 ¥ 646,925 Issuance of new shares—exercise of subscription rights to shares Dividends paid Net income (loss) attributable to owners of parent Due to change in consolidated subsidiaries Purchases of treasury stock Disposal of treasury stock Purchases of shares of consolidated subsidiaries Net changes of items other than owner’s equity during the year — — — — — — — — — — — — — — (7) — — (4,186) 5,257 36 — (24) — — 5 — — — (23) 46 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (5) — — — — — — — — — — — — — — (4,186) 5,257 36 (23) 22 (7) 7,404 19,293 292 2,939 (230) 5,899 35,597 Balance at March 31, 2017 ¥65,400 ¥45,382 ¥ 355,263 ¥(6,820) ¥ 28,354 ¥ 54,327 ¥27,178 ¥ 2,899 ¥2,447 ¥109,191 ¥ 683,621 Thousands of U.S. dollars (Note 1) Unrealized holding gains on available- for-sale securities, net of tax Treasury stock, at cost Unrealized gains on hedging derivatives, net of tax Foreign currency translation adjustments Remeasure- ments of defined benefit plans, net of tax Share subscription rights Non- controlling interests Total net assets Common stock Capital surplus Retained earnings Balance at April 1, 2016 $582,940 $404,573 $3,156,966 $(61,040) $186,737 $312,274 $239,647 $ (357) $23,906 $920,688 $5,766,334 Issuance of new shares—exercise of subscription rights to shares Dividends paid Net income (loss) attributable to owners of parent Due to change in consolidated subsidiaries Purchases of treasury stock Disposal of treasury stock Purchases of shares of consolidated subsidiaries Net changes of items other than owner’s equity during the year Balance at March 31, 2017 See accompanying notes. — — — — — — — — — — — — — — (63) — — (37,312) 46,858 321 — (214) — — 45 — — — (205) 410 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — (45) — — — — — — — — — — — — — — (37,312) 46,858 321 (205) 196 (63) — 65,995 171,967 2,603 26,197 (2,050) 52,581 317,293 $582,940 $404,510 $3,166,619 $(60,790) $252,732 $484,241 $242,250 $25,840 $21,811 $973,269 $6,093,422 76 Mitsui O.S.K. Lines Annual Report 2017 77 Consolidated Financial Statements Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2017 and 2016 Mitsui O.S.K. Lines, Ltd. Years ended March 31, 2017 and 2016 Cash flows from operating activities: Income (loss) before income taxes Adjustments to reconcile income (loss) before income taxes to net cash provided by operating activities Depreciation and amortization Impairment loss Costs of business structural reforms Equity in losses (earnings) of affiliated companies, net Various provisions (reversals) Decrease (Increase) in net defined benefit assets Increase (Decrease) in net defined benefit liabilities Interest and dividend income Interest expense Loss (Gain) on sales and disposal of vessels, property and equipment, net Gain on sales of shares of subsidiaries and associates, net Foreign exchange loss (gain) Changes in operating assets and liabilities: Trade receivables Inventories Trade payables Others, net Sub total Interest and dividend income received Interest expenses paid Income taxes paid Net cash provided by operating activities Cash flows from investing activities: Purchase of investment securities Proceeds from sales and redemption of investment securities Purchase of vessels, property and equipment and intangible assets Proceeds from sales of vessels, property and equipment and intangible assets Net decrease (increase) in short-term loans receivables Disbursements for long-term loans receivables Collections of long-term loans receivables Others, net Net cash used in investing activities Cash flows from financing activities: Net increase (decrease) in short-term bank loans Net increase (decrease) in commercial paper Proceeds from long-term bank loans Repayments of long-term bank loans Proceeds from issuance of bonds Redemption of bonds Cash dividends paid by the Company Cash dividends paid to non-controlling interests Others, net Net cash provided by (used in) financing activities Effect of foreign exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Net cash increase from new consolidation/de-consolidation of subsidiaries Cash and cash equivalents at end of year See accompanying notes. Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥ 23,303 ¥(154,385) $ 207,710 87,191 22,274 6,490 (5,544) (20,054) 1,996 (756) (11,940) 19,037 (4,516) (19,946) (25,818) (1,683) (8,691) (574) (31,167) 29,602 15,352 (18,778) (8,552) 17,624 (14,534) 27,738 (143,178) 71,351 (6,653) (21,375) 9,832 2,877 (73,942) 9,907 — 239,075 (119,253) 10,000 (45,000) (4,258) (1,018) (2,323) 87,130 (3,454) 27,358 159,450 36 ¥ 186,844 92,772 — 179,291 (9,178) (1,096) (454) (233) (10,210) 14,576 (8,643) (817) (25,084) 47,462 21,185 (38,943) 118,754 224,997 14,099 (14,306) (15,600) 209,190 (7,919) 16,371 (123,840) 69,202 (5,459) (32,984) 49,311 8,637 (26,681) (40,010) (5,500) 80,885 (152,552) — (15,600) (8,928) (1,116) (5,914) (148,735) (3,126) 30,648 128,802 — ¥ 159,450 777,173 198,538 57,848 (49,416) (178,750) 17,791 (6,739) (106,427) 169,685 (40,253) (177,788) (230,127) (15,001) (77,467) (5,116) (277,805) 263,856 136,840 (167,377) (76,228) 157,091 (129,548) 247,241 (1,276,210) 635,984 (59,301) (190,525) 87,637 25,644 (659,078) 88,306 — 2,130,983 (1,062,956) 89,135 (401,105) (37,953) (9,074) (20,707) 776,629 (30,788) 243,854 1,421,250 321 $ 1,665,425 1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Financial Instruments and Exchange Act and its related accounting regulations, and in conformity with accounting principles generally accepted in Japan (together “Japanese GAAP”), which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards. The accounts of overseas subsidiaries are made revisions according to ASBJ PITF No. 18. The accompanying consolidated financial statements have been restructured and translated into English (with some expanded descriptions) from the consolidated financial statements of Mitsui O.S.K. Lines, Ltd. (the “Company”) prepared in accordance with Japanese GAAP and filed with the appropriate Local Finance Bureau of the Ministry of Finance as required by the Financial Instru- ments and Exchange Act. Some supplementary information included in the statutory Japanese language consolidated financial statements, but not required for fair presentation, is not presented in the accompanying consolidated financial statements. The translations of the Japanese yen amounts into U.S. dollars are included solely for the convenience of readers outside Japan, using the prevailing exchange rate at March 31, 2017, which was ¥112.19 to U.S.$1.00. The convenience translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be, converted into U.S. dollars at this or any other rate of exchange. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (1) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and 368 subsidiaries for the year ended March 31, 2017 (362 subsidiaries for the year ended March 31, 2016). All significant inter-company balances, transactions and all material unrealized profit within the consolidated group have been eliminated in consolidation. Investments in unconsolidated subsidiaries and affiliated companies are accounted for by the equity method. Companies accounted for using the equity method include 76 affiliated companies for the year ended March 31, 2017 and 2016. Investments in other subsidiaries and affiliated companies were stated at cost since total revenues, total assets, the Company’s equity in net income and retained earnings and others in such companies were not material. The difference between acquisition cost and net assets acquired is treated as goodwill and is amortized principally over 5 years on a straight-line basis. Amortized amount is included in “Selling, general and administrative expenses” of the consolidated statements of operations. (2) TRANSLATION OF FOREIGN CURRENCY Revenues earned and expenses incurred in currencies other than Japanese yen of the Company and its subsidiaries keeping their books in Japanese yen are translated into Japanese yen either at a monthly exchange rate or at the rate prevailing on the date of the transaction. Monetary assets and liabilities denominated in currencies other than Japanese yen are translated into yen at the exchange rate prevailing at the balance sheet date. Subsidiaries keeping their books in a currency other than Japanese yen translate the revenues and expenses and assets and liabilities in foreign currencies into the currency used for financial reporting in accordance with accounting principles generally accepted in their respective countries. All the items in financial statements of subsidiaries, which are stated in currencies other than Japanese yen, were translated into Japanese yen at the year-end exchange rate, except for owners’ equity which is translated at historical rates. Translation differences arising from the application of more than one exchange rate are presented as foreign currency translation adjustments in the net assets section of the consolidated balance sheets. (3) CASH AND CASH EQUIVALENTS In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and short-term highly liquid investments with maturities not exceeding three months at the time of purchase are considered to be cash and cash equivalents. (4) FREIGHT REVENUES AND RELATED EXPENSES 1. Containerships Freight revenues and the related voyage expenses are recognized by the multiple transportation progress method. 2. Vessels other than containerships Freight revenues and the related voyage expenses are recognized mainly by the completed-voyage method. (5) SECURITIES Securities are classified into (a) securities held for trading purposes (hereafter, “trading securities”), (b) debt securities intended to be held to maturity (hereafter, “held-to-maturity debt securities”), (c) equity securities issued by subsidiaries and affiliated compa- nies, or (d) for all other securities that are not classified in any of the above categories (hereafter, “available-for-sale securities”). 78 Mitsui O.S.K. Lines Annual Report 2017 79 Trading securities are stated at fair market value. Unrealized gains and losses from market value fluctuations are recognized as gains or losses in the period of the change. Held-to-maturity debt securities are stated at amortized cost, net of the amount considered not collectible. Equity securities issued by subsidiaries and affiliated companies which are not consolidated or accounted for using the equity method are stated at moving-average cost. Available-for-sale securities with fair market values are stated at fair market values, and the corresponding unrealized holding gains or losses, net of applicable income taxes, are reported as separate component of net assets. Available-for-sale securities of which fair value is not readily determinable are stated at moving-average cost. (6) INVENTORIES Inventories are stated principally at cost determined by the moving-average method (with regard to the book value of inventories on the balance sheet, by writing the inventories down based on their decrease in profitability of assets). (7) DEPRECIATION AND AMORTIZATION Depreciation of vessels and buildings is computed mainly by the straight-line method. Depreciation of other property and equip- ment is computed mainly by the declining-balance method. Amortization of intangible assets is computed by the straight-line method. Computer software is amortized by the straight-line method based principally on the length of period it can be used internally (five years). Depreciation of finance lease that transfer ownership to lessees is computed mainly by the identical to depreciation method applied to self-owned non-current assets. Depreciation of finance lease that do not transfer ownership to lessees is computed mainly by straight-line method on the assumption that the lease term is the useful life and an estimated residual is zero. With regard to finance lease that do not transfer ownership for which the starting date for the lease transaction is prior to March 31, 2008, they are continuously accounted for by a method corresponding to that used for ordinary operating lease contracts. (8) AMORTIZATION OF BOND ISSUE EXPENSE AND STOCK ISSUE EXPENSE Bond issue expense and stock issue expense are charged to income as incurred. (9) INTEREST CAPITALIZATION In cases where a vessel’s construction period is long and the amount of interest accruing during this period is significant, such interest expenses are capitalized as a part of the acquisition cost which amounted to ¥1,408 million ($12,550 thousand) for the year ended March 31, 2017. (10) ALLOWANCE FOR DOUBTFUL ACCOUNTS Allowance for doubtful accounts is provided in an amount sufficient to cover probable losses on collection. It consists of the estimated uncollectible amount with respect to certain identified doubtful receivables and an amount calculated using the actual percentage of the Company’s collection losses. (11) ALLOWANCE FOR BONUSES Allowance for bonuses to employees is based on the estimated amount of future payments attributed to the fiscal year. (12) ALLOWANCE FOR DIRECTORS’ BONUSES The Company and several domestic consolidated subsidiaries record allowance for bonuses to directors based on the estimated amount of future payments. (13) PROVISION FOR LOSS ON BUSINESS LIQUIDATION Provision for loss on business liquidation is recorded for estimated losses arising from business liquidations to be carried out. (14) PROVISION FOR CONTRACT LOSS The Company recognizes provision for contract loss to cover potential losses with higher probability for the future performance of contract due to a decision made over contract, etc. (15) DIRECTORS’ AND CORPORATE AUDITORS’ RETIREMENT BENEFITS The domestic subsidiaries of the company recognize liabilities for retirement benefits for directors and corporate auditors at an amount required in accordance with the internal regulations. (16) RESERVE FOR PERIODIC DRYDOCKING Reserve for periodic drydocking is based on the estimated amount of expenditures for periodic drydocking in the future. (17) PROVISION FOR ENVIRONMENTAL MEASURES Provision for environmental measures is based on the estimated amounts of future obligations associated with polychlorinated biphenyl (PCB) waste. (18) EMPLOYEES’ SEVERANCE AND RETIREMENT BENEFITS The Company and its consolidated subsidiaries (the “Group”) recognized net defined benefit assets and net defined benefit liabilities for employees’ severance and retirement benefits based on the estimated amounts of projected benefit obligation and the fair value of the plan assets at end of the year. Projected benefit obligations are attributed to each period by the straight-line method. Actuarial gains and losses are recognized in the statements of operations using the straight-line method over the average of the estimated remaining service lives of mainly 10 years commencing with the following period. Past service costs are chiefly accounted for as expenses in lump-sum at the time of occurrence. (19) INCOME TAXES The Group recognizes tax effects of temporary differences between the financial statement basis and the tax basis of assets and liabilities. The provision for income taxes is computed based on the pretax income included in the consolidated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences. (20) AMOUNTS PER SHARE OF COMMON STOCK Net income per share of common stock is computed based upon the weighted-average number of shares outstanding during the year. Fully diluted net income per share of common stock assumes exercise of the outstanding stock options at the beginning of the year or at the date of issuance. For the year ended March 31, 2016 fully diluted net income per share is not disclosed because of the Company’s net loss position. Cash dividends per share have been presented on an accrual basis and include dividends to be approved after the balance sheet date, but applicable to the year then ended. (21) DERIVATIVES AND HEDGE ACCOUNTING Companies are required to state derivative financial instruments at fair value and to recognize changes in the fair value as gains or losses unless derivative financial instruments are used for hedging purposes. If derivative financial instruments are used as hedging instruments and meet certain hedging criteria, the Group defers recogni- tion of gains or losses resulting from changes in fair value of derivative financial instruments until the related losses or gains on the hedged items are recognized. If interest rate swap contracts are used as hedging instruments and meet certain hedging criteria, the net amount to be paid or received under the interest rate swap contract is added to or deducted from the interest on the assets or liabilities for which the swap contract was executed (“special treatment”). If foreign exchange forward contracts are used as hedging instruments and meet certain hedging criteria, hedged foreign currency assets and liabilities are translated at the rate of these contracts (“allocation method”). The following summarizes hedging derivative financial instruments used by the Group and items hedged: Hedging instruments: Loans payable in foreign currencies Forward foreign exchange contracts Currency option contracts Currency swap contracts Hedged items: Foreign currency future transactions Foreign currency future transactions Foreign currency future transactions Charterage and foreign currency loans payable Interest rate swap contracts Interest rate cap contracts Fuel oil swap contracts Freight futures Interest on loans and bonds payable Interest on loans Fuel oil Freight The derivative transactions are executed and managed by the Company in accordance with the established policies in order to hedge the Group’s exposure to interest rate increases, fuel oil increases, freight decreases, and foreign currency exchange rate risk. The Company evaluates hedge effectiveness by comparing the cumulative changes in cash flows from or the changes in fair value of hedged items and the cumulative changes in cash flows from or the changes in fair value of hedging instruments. (22) RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the 2017 presentation. 80 Mitsui O.S.K. Lines Annual Report 2017 81 (23) CHANGES IN ACCOUNTING POLICIES (Adoption of Practical Solution on a change in depreciation method due to Tax Reform 2016) Due to amendments to the Japanese Corporation Tax Act, the Company and its domestic subsidiaries adopted “Practical Solution on a change in depreciation method due to Tax Reform 2016” (Practice Issue Task Force No. 32, June 17, 2016) from the current fiscal year and changed the depreciation method for buildings, facilities attached to buildings and structures, which were acquired since April 1, 2016, from the declining-balance method to the straight-line method. The effect of these changes on the consolidated financial statement is immaterial. (24) ADDITIONAL INFORMATION (Adoption of the Revised Implementation Guidance on Recoverability of Deferred Tax Assets) The Company and its domestic subsidiaries adopted “Revised Implementation Guidance on Recoverability of Deferred Tax Assets” (ASBJ Guidance No. 26, March 28, 2016) from the current fiscal year. (Conclusion of Agreements on the Integration of Container Shipping Businesses) Following a resolution passed at a meeting of the Board of Directors on October 31, 2016, the Company concluded a business integration contract and a shareholder agreement with Nippon Yusen Kabushiki Kaisha and Kawasaki Kisen Kaisha, Ltd., subject to regulatory approval from the authorities, on establishing a joint-venture company to integrate container shipping businesses (hereinafter the “Integration”). An overview of the Integration is as follows. I. Overview of Integration Although growing modestly, the container shipping industry has struggled in recent years due to a decline in container growth rate and a rapid influx of newly built vessels. These two factors have contributed to an imbalance of supply and demand, which has destabilized the industry and has created an environment that is adverse to container line profitability. To combat these factors, industry participants have sought to gain economies of scale through mergers and acquisitions and, consequently, the structure of the industry is changing significantly. Under these circumstances, the Company has decided on a business integration to secure stable and sustainable operations of the container shipping businesses. II. Overview of the joint-venture company (planned) i) Shareholders/Contribution Ratio: Mitsui O.S.K. Lines, Ltd. ii) Amount of contribution iii) Business domain iv) Fleet size 31% 31% 38% Kawasaki Kisen Kaisha, Ltd. Nippon Yusen Kabushiki Kaisha Approximately ¥300 billion (including fleets, share of terminals as investment in kind) Container shipping business (including terminal operating business excluding Japan) Approx. 1.4 million TEU (*) Note: Figures are total fleet size of three companies as of October 2016 (excluding undelivered orders). (*TEU: Twenty-foot Equivalent Unit) III. Schedule i) Agreement date: ii) Establishment of the new-joint venture company: July 1, 2017 (planned) April 1, 2018 (planned) iii) Business commencement: October 31, 2016 3. FINANCIAL INSTRUMENTS (1) Qualitative information on financial instruments I. Policies for using financial instruments We raise capital investment funds to acquire vessels and other fixed assets primarily through bank loans and corporate bonds. In addition, we secure short-term operating funds primarily through bank loans. Furthermore, we have established commitment line with Japanese banks to maintain a sufficient amount of working capital and prepare supplementary liquidity for emergency situations. Derivatives are utilized to hedge risks as discussed below and are executed within the scope of real requirements. Our policy is not to use derivatives for speculative purposes. II. Details of financial instruments / Risk and its management Trade receivables are exposed to the credit risks of customers. We strive to mitigate such risks in accordance with internal regula- tions. Besides, trade receivables denominated in foreign currencies are exposed to the foreign currency exchange rate risk. We avoid the risk mainly by, in principle, utilizing forward exchange contracts which cover the net position (The difference between trade receivables and trade payables dominated in foreign currencies). Investment securities are mainly stocks of companies with which we have business relationships. These investment securities are exposed to the price fluctuation risk. We identify the market value of listed stocks on a quarterly basis. Trade payables are due within a year. Short-term bank loans and commercial papers are primarily used for raising short-term operating funds, while long-term loans and bonds are mainly for capital investments. Although several items with variable interest rates are exposed to the interest rate risk, a certain portion of such variable interest rates is fixed with the use of interest rate swaps or interest rate caps. Long-term bank loans and bonds denominated in foreign currencies are exposed to the foreign currency exchange rate risk, a part of which is avoided by using currency swaps. Our major derivative transactions and hedged risks are as follows. * Forward foreign exchange contracts / Currency swap contracts: To cover exchange volatility of foreign-currency-denominated trade receivables, trade payables, long-term bank loans, and corporate bonds. * Interest rate swap contracts/Interest rate cap contracts: To avoid interest rate risk arising out of interest payment of long-term bank loans and corporate bonds. * Fuel oil swap contracts: To hedge fluctuation of fuel oil price. With regard to the detail of hedge accounting (hedging instruments, hedged items, the way of evaluating hedge effectiveness), see Note 2 (21) to the consolidated financial statements. Derivative transactions are executed and managed in accordance with our internal regulations and dealt only with highly rated financial institutions to mitigate credit risks. On the other hand, as trade payables, bank loan payables, bonds, and commercial papers are exposed to the risk of financing for repayment, we manage the risk by planning cash management program monthly, having established commitment lines with several financial institutions, and adjusting funding period (balancing short-term/long-term combination), in consideration of market circumstances. III. Supplemental information on fair value Fair value of financial instruments that are actively traded in organized financial markets is determined by market value. For those where there are no active markets, it is determined by reasonable estimation. Reasonably estimated value might vary depending on condition of calculation as several variation factors are included in the calculation. On the other hand, derivative transactions mentioned in following (2) do not indicate the market risk of such derivatives. (2) Fair values of financial instruments Book values and fair values of the financial instruments on the consolidated balance sheet at March 31, 2017 were the following; Assets Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Investment securities Available-for-sale securities Long-term loans receivable (*1) Total Liabilities Trade payables Short-term bank loans Bonds (*2) Long-term bank loans (*3) Total Derivative financial instruments (*4) Millions of yen Book value Fair value Difference ¥ 186,844 3,102 130,420 17,263 ¥ 186,844 3,102 130,420 17,263 98,675 70,799 ¥ 507,103 98,675 74,695 ¥ 510,999 ¥ 125,119 39,164 230,595 832,154 ¥1,227,032 ¥ 18,746 ¥ 125,119 39,164 231,950 849,862 ¥1,246,095 ¥ 18,593 ¥ — — — — — 3,896 ¥ 3,896 ¥ — — 1,355 17,708 ¥19,063 (153) ¥ 82 Mitsui O.S.K. Lines Annual Report 2017 83 Assets Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Investment securities Available-for-sale securities Long-term loans receivable (*1) Total Liabilities Trade payables Short-term bank loans Bonds (*2) Long-term bank loans (*3) Total Derivative financial instruments (*4) Thousands of U.S. dollars (Note 1) Book value Fair value Difference $ 1,665,425 27,650 1,162,492 153,873 $ 1,665,425 27,650 1,162,492 153,873 879,535 631,063 $ 4,520,038 879,535 665,790 $ 4,554,765 $ 1,115,242 349,086 2,055,397 7,417,363 $10,937,088 $ 167,092 $ 1,115,242 349,086 2,067,475 7,575,203 $11,107,006 $ 165,728 $ — — — — — 34,727 $ 34,727 $ — — 12,078 157,840 $169,918 $ (1,364) *1 The book value of long-term loans receivable includes current portion amounting to ¥8,002 million ($71,325 thousand). *2 The book value of bonds includes current portion amounting to ¥20,000 million ($178,269 thousand). *3 The book value of long-term bank loans includes current portion amounting to ¥93,991 million ($837,784 thousand). *4 Amounts of derivative financial instruments are net of asset and liability. Negative amount stated with ( ) means that the net amount is liability. Book values and fair values of the financial instruments on the consolidated balance sheet at March 31, 2016 were the following; Assets Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Investment securities Available-for-sale securities Long-term loans receivable (*1) Total Liabilities Trade payables Short-term bank loans Bonds (*2) Long-term bank loans (*3) Total Derivative financial instruments (*4) Millions of yen Book value Fair value Difference ¥ 159,450 6,810 130,293 10,988 87,319 59,132 ¥ 453,992 ¥ 127,172 30,275 265,840 725,818 ¥1,149,105 ¥ 16,405 ¥ 159,450 6,810 130,293 10,988 87,319 64,561 ¥ 459,421 ¥ 127,172 30,275 261,864 746,600 ¥1,165,911 ¥ 16,187 ¥ — — — — — 5,429 ¥ 5,429 ¥ — — (3,976) 20,782 ¥16,806 (218) ¥ *1 The book value of long-term loans receivable includes current portion amounting to ¥10,117 million. *2 The book value of bonds includes current portion amounting to ¥45,000 million. *3 The book value of long-term bank loans includes current portion amounting to ¥77,701 million. *4 Amounts of derivative financial instruments are net of asset and liability. Negative amount stated with ( ) means that the net amount is liability. The following is a description of the valuation methodologies used for the assets and liabilities measured at the fair value. Cash and cash equivalents, Time deposits with a maturity of more than three months, Trade receivables and Short-term loans receivable The fair value of above assets is evaluated at the book value because they are settled within a short term period and the fair value is almost equal to book value. Investment securities The fair value of stocks is evaluated at market prices at stock exchange at the end of the years and the fair value of bonds is evalu- ated at market prices at the stock exchange or at the value provided by financial institutions as at the end of the years. Long-term loans receivable The fair value of long-term loans receivable with variable interests rates is evaluated at the book value because the interest rate reflects the market rate in a short term and the fair value is almost equal to the book value, unless the creditworthiness of the borrower has changed significantly because the loan was made. The fair value of long-term loans receivable with fixed interest rates, for each category of loans based on the type of loans, and maturity length, is evaluated by discounting the total amount of principal and interest using the rate which would apply if similar loans were newly made. Trade payables and short-term bank loans The fair value of above liabilities is evaluated at the book value because they are settled within a short term period and the fair value is almost equal to the book value. Bonds The fair value of corporate bonds is evaluated on their market price. Long-term bank loans The fair value of long-term bank loans with variable interest rates is evaluated at the book value because the interest rate reflects the market rate in a short term and there has been no significant change in the Company’s creditworthiness before and after such bank loans were made. The fair value of long-term bank loans with fixed interest rates, for each category of bank loans based on types of bank loans, and maturity length, is evaluated by discounting the total amount of principal and interest using the rate which would apply if similar bank loans were newly made. The fair value of long-term bank loans qualifying for allocation method of currency swap is evaluated at the book value because such bank loans were deemed as the variable interest rates bank loans and the interest rate reflects the market rate in a short term. Derivative financial instruments Please refer to Note 6 to the consolidated financial statements. The following table summarizes financial instruments whose fair value is extremely difficult to estimate. Unlisted stocks Investments in unconsolidated subsidiaries and affiliated companies Others Total Millions of yen Thousands of U.S. dollars (Note 1) Book value Book value Book value 2017 ¥ 7,663 125,628 12 ¥133,303 2016 ¥ 7,063 120,668 6 ¥127,737 2017 $ 68,304 1,119,779 106 $1,188,189 The above items are not included in the amount presented under the line “Investments securities” in the table summarizing fair value of financial instruments, because the fair value is extremely difficult to estimate as they have no quoted market price and the future cash flow cannot be estimated. 84 Mitsui O.S.K. Lines Annual Report 2017 85 At March 31, 2017, the aggregate annual maturity of monetary claims and securities was as follows; 4. SECURITIES Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Marketable securities and investments securities Available-for-sale securities (Governmental/municipal bonds) Available-for-sale securities (Corporate bonds) Long-term loans receivable Total Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Marketable securities and investments securities Available-for-sale securities (Governmental/municipal bonds) Available-for-sale securities (Corporate bonds) Long-term loans receivable Total Within a year ¥186,844 3,102 130,420 17,263 — — 8,002 ¥345,631 Within a year $1,665,425 27,650 1,162,492 153,873 — — 71,325 $3,080,765 Millions of yen After one year through five years ¥ — — — — After five years through ten years ¥ — — — — 10 200 3,853 ¥4,063 — — 5,785 ¥5,785 Thousands of U.S. dollars (Note 1) After one year through five years $ — — — — After five years through ten years $ — — — — 89 1,783 34,344 $36,216 — — 51,564 $51,564 At March 31, 2016, the aggregate annual maturity of monetary claims and securities was as follows; Cash and cash equivalents Time deposits with a maturity of more than three months Trade receivables Short-term loans receivable Marketable securities and investments securities Available-for-sale securities (Governmental/municipal bonds) Available-for-sale securities (Corporate bonds) Long-term loans receivable Total Within a year ¥159,450 6,810 130,293 10,988 — — 10,117 ¥317,658 Millions of yen After one year through five years ¥ — — — — After five years through ten years ¥ — — — — 10 200 9,572 ¥9,782 — — 4,283 ¥4,283 After ten years ¥ — — — — — — 53,159 ¥53,159 $ After ten years — — — — — — 473,830 $473,830 After ten years ¥ — — — — — — 35,160 ¥35,160 86 Mitsui O.S.K. Lines A. The following tables summarize acquisition costs, book values and fair values of securities with available fair values at March 31, 2017 and 2016. Available-for-sale securities: Securities with book values exceeding acquisition costs at March 31, 2017 Type Equity securities Bonds Total Type Equity securities Bonds Total Securities with book values exceeding acquisition costs at March 31, 2016 Type Equity securities Bonds Total Securities with book values not exceeding acquisition costs at March 31, 2017 Type Equity securities Total Type Equity securities Total Securities with book values not exceeding acquisition costs at March 31, 2016 Type Equity securities Total Acquisition cost ¥43,975 210 ¥44,185 Millions of yen Book value Difference ¥89,266 222 ¥89,488 ¥45,291 12 ¥45,303 Thousands of U.S. dollars (Note 1) Acquisition cost $391,969 1,872 $393,841 Book value $795,668 1,979 $797,647 Difference $403,699 107 $403,806 Acquisition cost ¥33,086 210 ¥33,296 Millions of yen Book value Difference ¥66,378 225 ¥66,603 ¥33,292 15 ¥33,307 Acquisition cost ¥11,066 ¥11,066 Millions of yen Book value ¥9,187 ¥9,187 Difference ¥(1,879) ¥(1,879) Thousands of U.S. dollars (Note 1) Acquisition cost $98,636 $98,636 Book value $81,888 $81,888 Difference $(16,748) $(16,748) Acquisition cost ¥23,494 ¥23,494 Millions of yen Book value ¥20,716 ¥20,716 Difference ¥(2,778) ¥(2,778) B. Total sales of available-for-sale securities sold in the years ended March 31, 2017 and 2016 and the related gains and losses were as follows: Proceeds from sales Gross realized gains Gross realized losses Millions of yen 2017 ¥3,346 2,250 406 2016 ¥15,279 12,934 2 Thousands of U.S. dollars (Note 1) 2017 $29,824 20,055 3,619 Annual Report 2017 87 C. Impairment losses of securities For the year ended March 31, 2017, the Company reduced the book value on the securities and booked the reductions as impairment losses of ¥13 million ($116 thousand). For the year ended March 31, 2016, the Company reduced the book value on the securities and booked the reductions as impairment losses of ¥26,285 million. With regard to the impairment losses, the Company principally reduces the book value on the securities to the amount which is considered the recoverability etc. in the event the fair market value declines more than 50% in comparison with the acquisition cost. 5. INVENTORIES Inventories at March 31, 2017 and 2016 consisted of the following: Fuel and supplies Others Total Millions of yen 2017 ¥34,685 1,673 ¥36,358 2016 ¥26,603 1,257 ¥27,860 Thousands of U.S. dollars (Note 1) 2017 $309,163 14,912 $324,075 6. DERIVATIVE TRANSACTIONS The Group enters into derivative transactions to hedge the Group’s exposure to interest rate increases, fuel oil increases, freight decreases, and currency exchange fluctuations, in accordance with the guidance determined by the management of the Company. I. Hedge accounting not applied The following tables summarize the outstanding contract amounts and fair values of financial derivatives of the Group at March 31, 2017 and 2016, for which hedge accounting has not been applied. (1) Currency related: Forward currency exchange contracts Sell (U.S. dollar): Contracts outstanding Fair values Buy (U.S. dollar): Contracts outstanding Fair values Buy (Others): Contracts outstanding Fair values (2) Interest related Interest rate swaps Receive floating, pay fixed Contracts outstanding Fair values Receive fixed, pay floating Contracts outstanding Fair values 88 Mitsui O.S.K. Lines Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥1,563 5 ¥ 41 0 ¥ 25 (0) ¥ 1 0 ¥260 (9) ¥ 24 1 $13,932 45 $ 365 0 $ 223 (1) Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥22,826 (1,684) ¥15,590 (616) ¥25,435 (2,090) ¥9,034 200 $203,458 (15,010) $138,961 (5,491) (3) Others a. Fuel oil swaps Receive floating, pay fixed Contracts outstanding Fair values b. Freight futures Contracts outstanding Fair values Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥ 375 (168) ¥ 240 (8) ¥— — ¥— — $ 3,343 (1,497) $ 2,139 (71) Note: Fair values are measured based on forward exchange rates prevailing at the end of the year and information provided by financial institutions, etc. II. Hedge accounting applied The following tables summarize the outstanding contract amounts and fair values of financial derivatives of the Group at March 31, 2017 and 2016, for which hedge accounting has been applied. (1) Deferred hedge accounting a. Forward currency exchange contracts to hedge the risk for the foreign currency transactions Sell (U.S. dollar): Contracts outstanding Fair values Buy (U.S. dollar): Contracts outstanding Fair values b. Currency swaps contracts to hedge the risk for charterages Sell (U.S. dollar): Contracts outstanding Fair values Buy (U.S. dollar): Contracts outstanding Fair values c. Interest rate swaps to hedge the risk for the long-term bank loans and charterages Receive floating, pay fixed Contracts outstanding Fair values d. Interest rate caps to hedge the risk for the long-term bank loans Buy Contracts outstanding Fair values e. Fuel oil swaps to hedge the risk for the fuel oil Receive floating, pay fixed Contracts outstanding Fair values Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥ 67,676 136 ¥ 49,932 (854) $ 603,227 1,212 ¥ 62,955 (990) ¥ 55,421 (2,323) $ 561,146 (8,824) ¥ 5,078 (905) ¥ 6,458 (1,397) $ 45,263 (8,067) ¥164,417 40,852 ¥185,023 49,596 $1,465,523 364,132 ¥282,033 (18,206) ¥307,776 (25,858) $2,513,887 (162,277) ¥ 23,892 (48) ¥ — — $ 212,960 (428) ¥ 5,918 378 ¥ 2,669 (861) $ 52,750 3,369 Annual Report 2017 89 Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 (2) LONG-TERM DEBT Long-term debt at March 31, 2017 and 2016 consisted of the following: (2) Special treatment Interest rate swaps to hedge the risk for the long-term bank loans Receive floating, pay fixed Contracts outstanding Fair values (3) Allocation method Currency swaps to hedge the risk for the foreign bonds and long-term bank loans Contracts outstanding Fair values ¥20,618 (153) ¥20,758 (218) $183,778 (1,364) Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥6,285 — ¥13,700 — $56,021 — Notes: 1. Fair values are measured based on forward exchange rates prevailing at the end of the year and information provided by financial institutions, etc. 2. Currency swaps which allocation method are applied to are recorded as the combined amount of such currency swaps and their hedge items. Therefore, their fair values are included in fair values of such hedge items. 7. SHORT-TERM DEBT AND LONG-TERM DEBT (1) SHORT-TERM DEBT Short-term debt at March 31, 2017 and 2016 consisted of the following: Short-term bank loans Total Millions of yen 2017 ¥39,164 ¥39,164 2016 ¥30,275 ¥30,275 Thousands of U.S. dollars (Note 1) 2017 $349,086 $349,086 Average interest rates on short-term bank loans at March 31, 2017 and 2016 were 0.88% and 0.46%, respectively. Bonds: 0.573% yen bonds due June 21, 2016 2.070% yen bonds due September 30, 2016 1.106% yen bonds due December 17, 2016 0.461% yen bonds due July 12, 2017 0.000% U.S. dollars bonds due April 24, 2018* 1.999% yen bonds due May 27, 2019 1.673% yen bonds due September 13, 2019 0.000% U.S. dollars bonds due April 24, 2020* 1.398% yen bonds due May 28, 2020 1.361% yen bonds due June 21, 2021 1.652% yen bonds due May 27, 2022 1.139% yen bonds due July 12, 2022 1.071% yen bonds due January 23, 2023 0.845% yen bonds due March 4, 2024 0.970% yen bonds due June 19, 2024 0.803% yen bonds due March 3, 2025 0.850% yen bonds due December 15, 2031 Long-term bank loans due within one year: Long-term bank loans due within one year at average interest rate of 1.22% and 0.87% at March 31, 2017 and 2016, respectively Long-term bank loans due after one year: Long-term bank loans due through 2076 at average interest rate of 1.73% and 1.50% at March 31, 2017 and 2016, respectively Amount due within one year * Zero coupon convertible bonds, details are as follows. The 2018 Bonds The 2020 Bonds (1) Exercise period From May 8, 2014 to April 10 2018 From May 8, 2014 to April 9, 2020 (2) Conversion price U.S.$5.31 per share U.S.$4.78 per share Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥ — — — 20,000 33,657 18,500 10,000 22,438 15,000 17,800 5,000 8,700 10,000 15,000 29,500 15,000 10,000 ¥ 10,000 15,000 20,000 20,000 33,804 18,500 10,000 22,536 15,000 17,800 5,000 8,700 10,000 15,000 29,500 15,000 — $ — — — 178,269 300,000 164,899 89,134 200,000 133,702 158,660 44,567 77,547 89,134 133,702 262,947 133,702 89,134 93,991 77,701 837,784 738,163 1,062,749 113,991 ¥ 948,758 648,117 991,658 122,701 ¥868,957 6,579,579 9,472,760 1,016,053 $8,456,707 At March 31, 2017, the aggregate annual maturity of long-term debt was as follows: Year ending March 31 2018 2019 2020 2021 2022 2023 and thereafter Total Millions of yen ¥ 113,991 145,722 97,728 127,773 98,218 479,317 ¥1,062,749 Thousands of U.S. dollars (Note 1) $1,016,053 1,298,886 871,094 1,138,898 875,461 4,272,368 $9,472,760 90 Mitsui O.S.K. Lines Annual Report 2017 91 (3) ASSETS PLEDGED AND SECURED DEBT At March 31, 2017 and 2016, the following assets were pledged as collateral for short-term debt and long-term debt. (A) SHARES ISSUED AND OUTSTANDING Changes in number of shares issued and outstanding during the years ended March 31, 2017 and 2016 were as follows: Assets pledged Vessels Vessels and other property under construction Investment securities Total Secured debt Long-term bank loans due within one year Long-term bank loans due after one year Total Millions of yen 2017 ¥216,193 — 83,030 ¥299,223 2016 ¥245,710 26,108 76,623 ¥348,441 Millions of yen 2017 ¥ 12,175 160,119 ¥172,294 2016 ¥ 14,500 158,772 ¥173,272 Thousands of U.S. dollars (Note 1) 2017 $1,927,025 — 740,084 $2,667,109 Thousands of U.S. dollars (Note 1) 2017 $ 108,521 1,427,213 $1,535,734 8. COMMITMENTS AND CONTINGENT LIABILITIES (A) COMMITMENT At March 31, 2017 and 2016, certain subsidiaries had loan commitment agreements. The nonexercised portion of loan commit- ments was as follows: Total loan limits Loan executions The nonexercised portion of loan commitments Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥16,268 16,268 ¥ — 2016 ¥13,522 9,578 ¥ 3,944 2017 $145,000 145,000 — $ (B) CONTINGENT LIABILITIES At March 31, 2017 and 2016, the Company and its consolidated subsidiaries were contingently liable mainly as guarantors or co- guarantors of indebtedness of related and other companies in the aggregate amount of ¥159,430 million ($1,421,071 thousand) and ¥148,653 million, respectively. 9. NET ASSETS Net assets comprises four sections, which are the owners’ equity, accumulated other comprehensive income, share subscription rights and non-controlling interests. Under the Japanese Companies Act (”the Act”) and regulations, the entire amount paid for new shares is required to be desig- nated as common stock. However, a company may, by a resolution of the board of directors, designate an amount not exceeding one-half of the price of the new shares as additional paid-in-capital, which is included in capital surplus. Under the Act, in cases where a dividend distribution of surplus is made, the smaller of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in-capital and legal earnings reserve must be set aside as additional paid-in-capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompa- nying consolidated balance sheets. Under the Act, appropriations (legal earnings reserve and additional paid-in-capital could be used to eliminate or reduce a deficit or could be capitalized) generally require a resolution of the shareholders’ meeting. Balance at April 1, 2015 Increase during the year Decrease during the year Balance at March 31 and April 1, 2016 Increase during the year Decrease during the year Balance at March 31, 2017 (B) SHARE SUBSCRIPTION RIGHTS Share subscription rights at March 31, 2017 and 2016 consisted of the following: Stock options Total (C) DIVIDENDS (1) Dividends paid for the year ended March 31, 2017 were as follows: Approved at the shareholders’ meeting held on June 21, 2016 Approved at the board of directors held on October 31, 2016 Total Shares of common stock (Thousands) 1,206,286 — — 1,206,286 — — 1,206,286 Shares of treasury stock (Thousands) 10,186 140 (104) 10,222 86 (76) 10,232 Millions of yen 2017 ¥2,447 ¥2,447 2016 ¥2,682 ¥2,682 Thousands of U.S. dollars (Note 1) 2017 $21,811 $21,811 Millions of yen ¥1,794 ¥2,392 ¥4,186 Thousands of U.S. dollars (Note 1) $15,991 $21,321 $37,312 There were no dividends included in the retained earnings at March 31, 2017 and to be paid in subsequent periods. 10. IMPAIRMENT LOSS For the year ended March 31, 2017, the Group recorded an impairment loss on the following asset group. Application Assets for operations Assets to be disposed of by sale Total Type Vessels and Other Vessels Millions of yen ¥21,007 1,267 ¥22,274 Thousands of U.S. dollars (Note 1) $187,245 11,293 $198,538 The Group grouped operating assets based on management accounting categories, and also grouped assets to be disposed of by sale and idle assets by asset unit. For the year ended March 31, 2017, since profitability of the assets related to Containerships segment for operations signifi- cantly deteriorated, the Group reduced the book value on these assets to recoverable amounts and booked the reductions as impairment loss. For the year ended March 31, 2017, with regard to the target price of assets related to Bulkships segment to be disposed of by sale which fell below book value, the Group reduced the book value on these assets to recoverable amounts and booked the reductions as impairment loss. The recoverable amount for these asset groups were evaluated based on the asset’s net selling price. And the asset’s net selling price was appraised based on the appraisal value reasonably calculated by a third party and the target price of assets to be disposed of by sale. 92 Mitsui O.S.K. Lines Annual Report 2017 93 11. BREAKDOWN OF COSTS OF BUSINESS STRUCTURAL REFORMS (B) FUTURE LEASE PAYMENTS UNDER OPERATING LEASES FOR ONLY NON-CANCELABLE CONTRACTS AT MARCH 31, 2017 Mainly for the year ended March 31, 2016, the Company recognized costs of business structural reforms arising from the business struc- tural reforms for bulk carriers and containerships which mainly consist of impairment loss and provision for loss on business liquidation. A breakdown of the costs was as follows: Impairment loss (*) Provision for loss on business liquidation Loss on cancellation fee for chartered vessels Adjustment due to foreign exchange rate fluctuations Others Total Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥ — — — 6,490 — ¥6,490 2016 ¥ 90,308 71,008 9,459 — 8,516 ¥179,291 2017 $ — — — 57,848 — $57,848 * For the year ended March 31, 2016, the Group recorded an impairment loss on the following asset group. Application Assets for operations Assets to be disposed of by sale Type Vessels and Other Vessels and Other Millions of yen ¥56,449 33,859 The Group grouped operating assets based on management accounting categories, and also grouped assets to be disposed of by sale and idle assets by asset unit. For the year ended March 31, 2016, since profitability of the assets related to Containerships segment for operations signifi- cantly deteriorated, the Group reduced the book value on these assets to recoverable amounts and booked the reductions as costs of business structural reforms. For the year ended March 31, 2016, with regard to the target price of assets related to Bulkships segment to be disposed of by sale which fell below book value, the Group reduced the book value on these assets to recoverable amounts and booked the reductions as costs of business structural reforms. The recoverable amount for these asset groups were evaluated based on the asset’s net selling price. And the asset’s net selling price was appraised based on the appraisal value reasonably calculated by a third party and the target price of assets to be disposed of by sale. 12. LEASES AS LESSEE: (A) INFORMATION ON FINANCE LEASES ACCOUNTED FOR AS OPERATING LEASES: (1) Lease payments, depreciation equivalent and interest equivalent Lease payments Depreciation equivalent Interest equivalent Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥13 10 0 2016 ¥126 41 2 2017 $116 89 0 (2) Calculation of depreciation equivalent Assumed depreciation amounts are computed using the declining-balance method or the straight-line method over the lease terms assuming no residual value. (3) Calculation of interest equivalent The excess of total lease payments over acquisition cost equivalents is regarded as amounts representing interest payable equiva- lents and is allocated to each period using the interest method. AND 2016: Amount due within one year Amount due after one year Total Millions of yen 2017 ¥ 45,022 284,385 ¥329,407 2016 ¥ 51,195 286,547 ¥337,742 Thousands of U.S. dollars (Note 1) 2017 $ 401,301 2,534,852 $2,936,153 AS LESSOR: (A) FUTURE LEASE INCOME UNDER OPERATING LEASES FOR ONLY NON-CANCELABLE CONTRACTS AT MARCH 31, 2017 AND 2016: Amount due within one year Amount due after one year Total 13. RENTAL PROPERTIES Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥17,717 34,958 ¥52,675 2016 ¥14,146 42,867 ¥57,013 2017 $157,920 311,596 $469,516 The Company and some of its consolidated subsidiaries own real estate for office lease (including lands) in Tokyo, Osaka and other areas. Information about the book value and the fair value of such rental properties was as follows: For the year ended March 31 Book value Balance at beginning of the year Changes during the year Balance at end of the year Fair value at end of the year Millions of yen 2017 2016 Thousands of U.S. dollars (Note 1) 2017 ¥311,092 (6,525) 304,567 458,711 ¥317,018 (5,926) 311,092 444,844 $2,772,903 (58,160) 2,714,743 4,088,698 Notes: 1. Book value is the acquisition cost, net of accumulated depreciation. 2. Fair value is mainly based on the amount appraised by outside independent real estate appraisers. 3. Of changes during the year ended March 31, 2016, the primary increase was mainly due to the renewal construction of office buildings (¥1,367 million), and the additional acquisition of land near Akihabara Station (¥724 million), while the primary decrease was mainly due to the depreciation of existing properties (¥7,782 million). 4. Of changes during the year ended March 31, 2017, the primary decrease was mainly due to the depreciation of existing properties (¥7,292 million ($64,997 thousand)). In addition, information for rental revenue and expense from rental properties was as follows: Rental revenue Rental expense Difference Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥30,246 17,845 ¥12,401 2016 ¥28,492 17,917 ¥10,575 2017 $269,596 159,060 $110,536 Note: Rental revenue is mainly recorded as “shipping and other revenues” and rental expense (depreciation expense, repairs and maintenance fee, utilities, personnel cost, tax and public charge, etc.) is mainly recorded as “shipping and other expenses.” 94 Mitsui O.S.K. Lines Annual Report 2017 95 14. SEGMENT AND RELATED INFORMATION (A) SEGMENT INFORMATION: For the year ended March 31, 2017: Bulkships 1. Revenues: Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Millions of yen Sub Total Others*1 Total Adjustment*2 Consolidated (1) Revenues from customers ¥ 744,288 ¥620,714 ¥42,036 ¥ 90,025 ¥1,497,063 ¥ 7,311 ¥1,504,374 ¥ — ¥1,504,374 (2) Inter-segment revenues 168 1,817 108 27,518 29,611 5,916 35,527 (35,527) — Total revenues ¥ 744,456 ¥622,531 ¥42,144 ¥117,543 ¥1,526,674 ¥ 13,227 ¥1,539,901 ¥ (35,527) ¥1,504,374 Segment income (loss) ¥ 39,051 ¥ (32,865) ¥ 4,507 ¥ 12,337 ¥ 23,030 ¥ 1,811 ¥ 24,841 ¥ 585 ¥ 25,426 Segment assets ¥1,441,138 ¥388,029 ¥54,418 ¥415,399 ¥2,298,984 ¥359,526 ¥2,658,510 ¥(440,981) ¥2,217,529 2. Others Depreciation and amortization ¥ 62,246 ¥ 12,131 ¥ 1,905 ¥ 9,396 ¥ 85,678 ¥ 320 ¥ 85,998 ¥ 1,193 ¥ 87,191 22 4,172 15,910 5,792 94,528 0 895 1,728 — 14 124 (5) 12,635 360 2,449 164 44 1,437 227 2,139 186 5,125 19,199 6,374 111,751 0 2,118 1,082 (830) 1,049 186 7,243 20,281 5,544 112,800 — (1,325) (1,244) 186 5,918 19,037 — — 5,544 112,800 Amortization of goodwill Interest income Interest expense Equity in earnings (losses) of affiliated companies, net Investment in affiliates Increase in vessels, property and equipment and intangible assets For the year ended March 31, 2017: Bulkships 1. Revenues: Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Thousands of U.S. dollars (Note 1) (1) Revenues from customers $ 6,634,175 $5,532,703 $374,686 $ 802,433 $13,343,997 $ 65,166 $13,409,163 $ — $13,409,163 (2) Inter-segment revenues 1,497 16,196 962 245,281 263,936 52,732 316,668 (316,668) — Total revenues $ 6,635,672 $5,548,899 $375,648 $1,047,714 $13,607,933 $ 117,898 $13,725,831 $ (316,668) $13,409,163 Segment income (loss) $ 348,079 $ (292,940) $ 40,173 $ 109,965 $ 205,277 $ 16,142 $ 221,419 $ 5,215 $ 226,634 Segment assets $12,845,512 $3,458,677 $485,052 $3,702,639 $20,491,880 $3,204,617 $23,696,497 $(3,930,662) $19,765,835 2. Others Depreciation and amortization $ 554,827 $ 108,129 $ 16,980 $ 83,751 $ 763,687 $ 2,852 $ 766,539 $ 10,634 $ 777,173 196 37,187 141,813 0 7,977 15,402 — 125 1,462 392 1,658 45,681 1,105 12,809 171,129 0 18,879 9,645 1,658 64,560 180,774 — (11,810) (11,089) 1,658 52,750 169,685 Amortization of goodwill Interest income Interest expense Equity in earnings (losses) of affiliated companies, net Investment in affiliates 842,571 112,621 51,627 (45) 3,209 21,829 2,023 19,066 56,814 996,087 (7,398) 9,350 49,416 1,005,437 — — 49,416 1,005,437 Increase in vessels, property and equipment and intangible assets 777,101 252,322 180,319 44,006 1,253,748 1,605 1,255,353 8,521 1,263,874 For the year ended March 31, 2016: Bulkships 1. Revenues: Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Millions of yen Sub Total Others*1 Total Adjustment*5 Consolidated (1) Revenues from customers ¥ 845,356 ¥719,109 ¥43,155 ¥ 96,606 ¥1,704,226 ¥ 7,997 ¥1,712,223 ¥ — ¥1,712,223 (2) Inter-segment revenues 251 2,026 188 30,373 32,838 5,312 38,150 (38,150) — Total revenues ¥ 845,607 ¥721,135 ¥43,343 ¥126,979 ¥1,737,064 ¥ 13,309 ¥1,750,373 ¥ (38,150) ¥1,712,223 Segment income (loss) ¥ 54,899 ¥ (29,831) ¥ 4,382 ¥ 10,172 ¥ 39,622 ¥ 3,550 ¥ 43,172 ¥ (6,903) ¥ 36,269 Segment assets ¥1,531,278 ¥397,081 ¥39,402 ¥416,454 ¥2,384,215 ¥162,725 ¥2,546,940 ¥(327,353) ¥2,219,587 2. Others Depreciation and amortization ¥ 62,228 ¥ 16,907 ¥ 1,906 ¥ 10,091 ¥ 91,132 ¥ 273 ¥ 91,405 ¥ 1,367 ¥ 92,772 Amortization of goodwill, net Interest income Interest expense Equity in earnings (losses) of affiliated companies, net Costs of business structural reforms Investment in affiliates Increase in tangible / intangible fixed assets 12 2,761 12,934 63 665 2,022 7,813 706 — 21 143 453 132 74 1,738 207 3,521 16,837 1 1,785 1,034 208 5,306 17,871 255 9,227 (49) 9,178 117,411 91,287 61,880 14,131 — 2,094 — 2,083 179,291 109,595 — 1,896 179,291 111,491 — (1,227) (3,295) — — — 208 4,079 14,576 9,178 179,291 111,491 88,254 15,526 4,728 5,177 113,685 124 113,809 1,903 115,712 the ship chartering business, the financing business and the shipbuilding business. 2. (1) Adjustment in Segment income (loss) of ¥585 million ($5,215 thousand) include the following: –¥4,579 million (–$40,815 thousand) of corporate profit which is not allocated to segments, ¥6,312 million ($56,262 thousand) of adjustment for management accounting and –¥1,148 million (–$10,232 thousand) of inter- segment transaction elimination. (2) Adjustment in Segment assets of –¥440,981 million (–$3,930,662 thousand) include the following: ¥14,715 million ($131,161 thousand) of assets which are not allocated to segments and –¥455,696 million (–$4,061,823 thousand) of inter-segment transaction elimination. (3) Adjustment in Depreciation and amortization of ¥1,193 million ($10,634 thousand) include the following: ¥1,193 million ($10,634 thousand) of depreciation of (4) Adjustment in Interest income of –¥1,325 million (–$11,810 thousand) include the following: ¥2,522 million ($22,480 thousand) of interest income which is not allocated to segments and –¥3,847 million (–$34,290 thousand) of inter-segment transaction elimination. (5) Adjustment in Interest expenses of –¥1,244 million (–$11,089 thousand) include the following: ¥5,604 million ($49,951 thousand) of interest expenses which are not allocated to segments, –¥2,999 million (–$26,731 thousand) of adjustment for management accounting and –¥3,849 million (–$34,309 thousand) of inter- segment transaction elimination. (6) Adjustment in Increase of tangible/intangible fixed assets of ¥956 million ($8,521 thousand) is increase of tangible/intangible fixed assets which are not allocated to segments. 3. Management has decided not to allocate liabilities to segments. Therefore segment information regarding liabilities is not disclosed. 4. Segment income (loss) corresponds to Ordinary profit in the consolidated statements of operations. 5. (1) Adjustment in Segment income (loss) of ¥6,903 million include the following: –¥12,610 million of corporate profit which is not allocated to segments, ¥6,949 million of adjustment for management accounting and –¥1,242 million of inter-segment transaction elimination. (2) Adjustment in Segment assets of –¥327,353 million include the following: ¥18,087 million of assets which are not allocated to segments and –¥345,440 million of inter-segment transaction elimination (3) Adjustment in Depreciation and amortization of ¥1,367 million include the following: ¥1,376 million of depreciation of assets which are not allocated to segments and –¥9 million of inter-segment transaction elimination. (4) Adjustment in Interest income of –¥1,227 million include the following: ¥1,796 million of interest income which is not allocated to segments and –¥3,023 million of inter-segment transaction elimination. (5) Adjustment in Interest expenses of –¥3,295 million include the following: ¥3,039 million of interest expenses which are not allocated to segments, –¥3,309 million of adjustment for management accounting and –¥3,025 million of inter-segment transaction elimination. (6) Adjustment in Increase of tangible/intangible fixed assets of ¥1,903 million is increase of tangible/intangible fixed assets which are not allocated to segments. 6. The Group has realigned its business segments from the fiscal year ended March 31, 2017 to reflect certain modifications in its organizational structure. The former “Ferry & Domestic Transport” segment has been changed to the “Ferries & Coastal RoRo Ships” segment. In connection with this alignment, figures of the “Bulkships” segment and the “Ferry & Domestic Transport” segment for the fiscal year ended March 31, 2016 have been reclassified to conform to the presentation of the fiscal year ended March 31, 2017. 87,183 28,308 20,230 4,937 140,658 180 140,838 956 141,794 *1. ”Others” primarily consists of business segments that are not included in reportable segments, such as the ship operations business, the ship management business, Sub Total Others*1 Total Adjustment*2 Consolidated assets which are not allocated to segments. 96 Mitsui O.S.K. Lines Annual Report 2017 97 (Segment income (loss)) Segment income (loss) is calculated by adjusting ordinary income (loss). (B) RELATED INFORMATION: (1) Information about geographic areas: In our core marine transportation business, the areas which services are provided are not necessarily consistent with the location of our customers. Therefore, revenues by geographic areas are revenues by geographic areas of each company’s registration. For the year ended March 31, 2017: Revenues Vessels, property and equipment Japan ¥1,264,122 ¥1,020,254 North America ¥27,571 ¥43,966 Millions of yen Europe ¥32,196 ¥ 2,975 Asia ¥180,063 ¥220,888 Others ¥ 422 ¥35,582 Consolidated ¥1,504,374 ¥1,323,665 For the year ended March 31, 2017: Revenues Vessels, property and equipment Japan $11,267,689 $ 9,093,983 North America $245,753 $391,889 Thousands of U.S. dollars (Note 1) Europe $286,977 $ 26,518 Asia $1,604,983 $1,968,874 Others $ 3,761 $317,158 Consolidated $13,409,163 $11,798,422 For the year ended March 31, 2016: Revenues Vessels, property and equipment Japan ¥1,432,969 ¥1,082,305 North America ¥28,185 ¥41,748 Millions of yen Europe ¥35,759 ¥ 3,455 Asia ¥214,875 ¥214,263 Others ¥ 435 ¥34,661 Consolidated ¥1,712,223 ¥1,376,432 (2) Information about impairment loss by reportable segment: For the year ended March 31, 2017: Bulkships Millions of yen Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated Impairment loss ¥1,267 ¥21,007 ¥— ¥— ¥22,274 ¥— ¥— ¥22,274 For the year ended March 31, 2017: Bulkships Thousands of U.S. dollars (Note 1) Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated Impairment loss $11,293 $187,245 $— $— $198,538 $— $— $198,538 For the year ended March 31, 2016: Bulkships Millions of yen Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated Impairment loss ¥33,859 ¥56,449 ¥— ¥— ¥90,308 ¥— ¥— ¥90,308 Note: Above Impairment loss for the year ended March 31, 2016 was included in Costs of business structural reforms (other losses) in consolidated statements of operations. (3) Information about goodwill by reportable segment: For the year ended March 31, 2017: Bulkships Millions of yen Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated Goodwill at the end of current year ¥67 ¥0 ¥— ¥2,074 ¥2,141 ¥— ¥— ¥2,141 For the year ended March 31, 2017: Goodwill at the end of current year Bulkships $597 Thousands of U.S. dollars (Note 1) Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated $0 $— $18,487 $19,084 $— $— $19,084 For the year ended March 31, 2016: Bulkships Millions of yen Reportable segment Container- ships Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others Adjustment and elimination Consolidated Goodwill at the end of current year ¥89 ¥14 ¥— ¥2,317 ¥2,420 ¥0 ¥— ¥2,420 15. INCOME TAXES The Company is subject to a number of taxes based on income, which, in the aggregate, indicate statutory rates in Japan of approximately 28.8% for the year ended March 31, 2017 and 29.8% for the year ended March 31, 2016. (A) Significant components of deferred tax assets and liabilities at March 31, 2017 and 2016 were as follows: Deferred tax assets: Operating loss carried forward Write-down of securities and other investments Reserve for bonuses expenses Impairment loss Excess bad debt expenses Net defined benefit liabilities Retirement allowances for directors Unrealized gain on sale of fixed assets Provision for loss on business liquidation Provision for contract loss Unrealized gains on hedging derivatives Transfer of charters from subsidiaries and affiliates Deemed dividends Others Total deferred tax assets Valuation allowance Net deferred tax assets Deferred tax liabilities: Reserve deductible for tax purposes when appropriated for deferred gain on real properties Reserve deductible for tax purposes when appropriated for special depreciation Unrealized holding gains on available-for-sale securities Gain on securities contributed to employee retirement benefit trust Revaluation reserve Retained earnings of consolidated subsidiaries Unrealized gains on hedging derivatives Others Total deferred tax liabilities Net deferred tax liabilities Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥ 70,899 757 1,338 20,873 585 4,696 487 1,303 785 391 20,208 8,694 11,224 7,163 149,403 (141,743) 7,660 ¥ 53,931 1,519 1,412 26,346 892 4,651 559 1,435 20,237 1,204 — — 1,855 4,056 118,097 (110,911) 7,186 $ 631,955 6,747 11,926 186,050 5,214 41,858 4,341 11,614 6,997 3,485 180,123 77,494 100,045 63,847 1,331,696 (1,263,419) 68,277 (2,564) (1,749) (22,854) (722) (15,332) (2,714) (17,060) (7,707) (11,969) (2,648) (60,716) ¥ (53,056) (604) (11,806) (2,714) (17,179) (8,496) (39,531) (1,501) (83,580) ¥ (76,394) (6,436) (136,661) (24,191) (152,063) (68,696) (106,685) (23,603) (541,189) $ (472,912) 98 Mitsui O.S.K. Lines Annual Report 2017 99 (B) Reconciliation of the statutory tax rate to the effective tax rate for the year ended March 31,2017, was as follows: (3) MOVEMENTS IN NET LIABILITY FOR RETIREMENT BENEFITS BASED ON THE SIMPLIFIED METHOD Statutory tax rate Non-deductible expenses Tax exempt revenues Effect on tonnage tax system Changes in valuation allowance Equity in earnings of unconsolidated subsidiaries and affiliated companies Effect on difference of effective tax rate for consolidated subsidiaries Others Effective tax rate 2017 28.8 % 1.5 (9.0) (11.5) 63.1 (6.8) (10.0) (1.6) 54.5 % Balance at beginning of the year Retirement benefit costs Benefits paid Contributions paid by the employer Increase in retirement benefit obligations from change of scope of consolidation Balance at end of the year Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥10,159 1,751 (1,979) (683) 12 ¥ 9,260 2016 ¥10,264 2,158 (1,510) (753) — ¥10,159 2017 $ 90,552 15,607 (17,640) (6,088) 107 $ 82,538 *1 Changes in valuation allowance of effect on net loss carried forward for foreign subsidiaries are included in Effect on difference of effective tax rate for (4) RECONCILIATION FROM RETIREMENT BENEFIT OBLIGATIONS AND PLAN ASSETS TO LIABILITY (ASSET) FOR RETIREMENT BENEFITS consolidated subsidiaries. *2 Reconciliation of the statutory tax rate to the effective tax rate for the year ended March 31, 2016, is not stated as the Company recorded loss before income taxes. INCLUDING PLAN APPLIED SIMPLIFIED METHOD 16. EMPLOYEES’ SEVERANCE AND RETIREMENT BENEFITS (A) OUTLINE OF EMPLOYEES’ SEVERANCE AND RETIREMENT BENEFITS The Group has funded and un-funded defined benefit pension plans and defined contribution pension plans. The defined benefit corporate pension plans provide for a lump-sum payment or annuity payment determined by reference to the current rate of pay and the length of service. The Company has a retirement benefit trust. The retirement lump-sum plans provide for a lump-sum payment, as employee retirement benefits, determined by reference to the current rate of pay and the length of service. Certain consolidated subsidiaries calculate liabilities for retirement benefit and retirement benefit expenses, for the defined benefit corporate pension plans and the retirement lump-sum plans based on the amount which would be payable at the year end if all eligible employees terminated their services voluntarily (the “simplified method”). (B) DEFINED BENEFIT PLANS (1) MOVEMENTS IN RETIREMENT BENEFIT OBLIGATIONS EXCEPT PLAN APPLIED SIMPLIFIED METHOD Balance at beginning of the year Service cost Interest cost Actuarial loss (gain) Benefits paid Balance at end of the year (2) MOVEMENTS IN PLAN ASSETS EXCEPT PLAN APPLIED SIMPLIFIED METHOD Balance at beginning of the year Expected return on plan assets Actuarial loss (gain) Contributions paid by the employer Benefits paid Return of assets of retirement benefit trust Balance at end of the year Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥46,769 1,768 407 (193) (1,999) ¥46,752 2016 ¥45,500 1,694 485 4,934 (5,844) ¥46,769 2017 $416,873 15,759 3,628 (1,720) (17,818) $416,722 Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥56,777 1,136 2,774 28 (1,758) — ¥58,957 2016 ¥66,169 1,323 (1,550) — (5,584) (3,581) ¥56,777 2017 $506,079 10,126 24,726 250 (15,671) — $525,510 Funded retirement benefit obligations Plan assets Unfunded retirement benefit obligations Total net liability (asset) for retirement benefits at end of the year Liability for retirement benefits Asset for retirement benefits Total net liability (asset) for retirement benefits at end of the year (5) RETIREMENT BENEFIT COSTS Service cost Interest cost Expected return on plan assets Net actuarial loss amortization Retirement benefit costs calculated by the simplified method Other Total retirement benefit costs for the fiscal year (6) REMEASUREMENTS OF DEFINED BENEFIT PLANS Actuarial loss (gain) (7) ACCUMULATED REMEASUREMENTS OF DEFINED BENEFIT PLANS Unrecognized actuarial differences Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥ 54,258 (68,911) (14,653) 11,709 (2,944) 12,446 (15,390) ¥ (2,944) 2016 ¥ 55,188 (66,745) (11,557) 11,707 150 13,442 (13,292) ¥ 150 2017 $ 483,626 (614,235) (130,609) 104,368 (26,241) 110,937 (137,178) $ (26,241) Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥ 1,768 407 (1,136) 1,153 1,751 (23) ¥3,920 2016 ¥ 1,694 485 (1,323) (1,192) 2,158 221 ¥ 2,043 2017 $ 15,759 3,628 (10,126) 10,277 15,607 (205) $ 34,940 Millions of yen 2017 ¥4,119 2016 ¥(7,675) Thousands of U.S. dollars (Note 1) 2017 $36,715 Millions of yen 2017 ¥4,070 Thousands of U.S. dollars (Note 1) 2017 $36,278 2016 ¥(49) 100 Mitsui O.S.K. Lines Annual Report 2017 101 (8) PLAN ASSETS 1. Plan assets comprise: Equity securities Bonds Jointly invested assets Cash and cash equivalents Other Total Retirement benefit trust 2017 31% 26 35 8 0 100% 27% 2016 34% 23 36 7 0 100% 27% 2. Long-term expected rate of return Current and target asset allocations, historical and expected returns on various categories of plan assets have been considered in determining the long-term expected rate of return. (9) ACTUARIAL ASSUMPTIONS The discount rates were mainly 0.5%–1.1% for the year ended March 31, 2017 and 2016. The rates of expected return on plan assets were mainly 2.0% for the years ended March 31, 2017 and 2016. The expected rate of salary increase were mainly 0.51% ~5.7% for the years ended March 31, 2017 and 2016. (C) DEFINED CONTRIBUTION PLANS The estimated amounts of contributions to defined contribution plans were ¥650 million ($5,794 thousand) at March 31, 2017 and ¥816 million at March 31, 2016. 17. STOCK OPTIONS (A) EXPENSED AMOUNT Expensed amounts on stock options for the years ended March 31, 2017 and 2016 were as follows: Selling, general and administrative expenses Total Millions of yen Thousands of U.S. dollars (Note 1) 2017 ¥88 ¥88 2016 ¥146 ¥146 2017 $784 $784 (B) TERMS AND CONDITIONS The following table summarizes terms and conditions of stock options for the years when they were granted: 2006 2007 2008 2009 Number of grantees Directors: 11 Executive officers: 17 Employees: 37 Presidents of the Company’s domestic consolidated subsidiaries: 37 Number of stock options Common stock 1,700,000 Grant date Vesting conditions Service period Exercise period August 11, 2006 No provisions No provisions From June 20, 2007 to June 22, 2016 Directors: 11 Executive officers: 20 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 36 Common stock 1,710,000 August 10, 2007 No provisions No provisions From June 20, 2008 to June 21, 2017 Directors: 11 Executive officers: 20 Employees: 38 Presidents of the Company’s domestic consolidated subsidiaries: 36 Common stock 1,760,000 August 8, 2008 No provisions No provisions From July 25, 2009 to June 24, 2018 Directors: 11 Executive officers: 20 Employees: 34 Presidents of the Company’s domestic consolidated subsidiaries: 35 Common stock 1,650,000 August 14, 2009 No provisions No provisions From July 31, 2011 to June 22, 2019 2010 2011 2012 2013 Number of grantees Directors: 10 Executive officers: 21 Employees: 36 Presidents of the Company’s domestic consolidated subsidiaries: 33 Number of stock options Common stock 1,710,000 Grant date Vesting conditions Service period Exercise period August 16, 2010 No provisions No provisions From July 31, 2012 to June 21, 2020 Directors: 10 Executive officers: 22 Employees: 35 Presidents of the Company’s domestic consolidated subsidiaries: 33 Common stock 1,730,000 August 9, 2011 No provisions No provisions From July 26, 2013 to June 22, 2021 Directors: 9 Executive officers: 22 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 30 Common stock 1,640,000 August 13, 2012 No provisions No provisions From July 28, 2014 to June 21, 2022 Directors: 9 Executive officers: 18 Employees: 38 Presidents of the Company’s domestic consolidated subsidiaries: 33 Common stock 1,600,000 August 16, 2013 No provisions No provisions From August 2, 2015 to June 20, 2023 2014 2015 2016 Number of grantees Directors: 9 Executive officers: 19 Employees: 33 Presidents of the Company’s domestic consolidated subsidiaries: 32 Number of stock options Common stock 1,480,000 Grant date Vesting conditions Service period Exercise period August 18, 2014 No provisions No provisions From August 2, 2016 to June 23, 2024 Directors: 8 Executive officers: 18 Employees: 37 Presidents of the Company’s domestic consolidated subsidiaries: 32 Common stock 1,550,000 August 17, 2015 No provisions No provisions From August 1, 2017 to June 20, 2025 Directors: 9 Executive officers: 18 Employees: 32 Presidents of the Company’s domestic consolidated subsidiaries: 37 Common stock 1,580,000 August 15, 2016 No provisions No provisions From August 1, 2018 to June 19, 2026 (C) CHANGES IN NUMBER AND UNIT PRICES The following tables summarize changes in number and unit prices of stock options for the years when they were granted: (1) Changes in number of stock options Non-vested stock options 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Balance at March 31, 2016 Options granted during the year Options expired during the year Options vested during the year Balance at March 31, 2017 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 2016 — — 1,480,000 1,550,000 — — — — — 1,480,000 — 1,580,000 — — — — — — 1,550,000 1,580,000 102 Mitsui O.S.K. Lines Annual Report 2017 103 Vested stock options 2006 2007 2008 2009 2010 2011 2012 2013 Balance at March 31, 2016 1,423,000 1,650,000 1,720,000 1,630,000 1,700,000 1,710,000 1,329,000 1,568,000 2014 — Options vested during the year Options exercised during the year — — — — — — Options expired during the year 1,423,000 10,000 10,000 — — — — — — — — — — 31,000 — — 1,480,000 — — 20,000 — Balance at March 31, 2017 — 1,640,000 1,710,000 1,630,000 1,700,000 1,710,000 1,298,000 1,568,000 1,460,000 2015 2016 — — — — — — — — — — (2) Unit prices of stock options exercised during the year Exercise price Average market price of share at exercise Fair value per stock option at grant date 2006 ¥841 2007 2008 ¥1,962 ¥1,569 2009 ¥639 2010 ¥642 2011 ¥468 2012 ¥277 2013 ¥447 2014 ¥412 2015 ¥427 2016 ¥242 — — — — — — ¥355 — ¥380 — — ¥219 ¥ 352 ¥ 217 ¥136 ¥203 ¥ 87 ¥ 67 ¥172 ¥132 ¥ 94 ¥ 56 (D) KEY FIGURES FOR FAIR VALUE PER STOCK OPTION The Company utilized the Black Scholes Model for calculating fair value per stock option. Key figures of the calculation were as follows: Stock price volatility Expected remaining term of the option Expected dividends Risk-free interest rate 2016 39.53% 5 years and 11 months ¥5 per share (0.26)% 18. COMPREHENSIVE INCOME For the years ended March 31, 2017 and 2016, the amounts reclassified to net income (loss) that were recognized in other compre- hensive income and tax effects for each component of other comprehensive income were as follows: Unrealized holding gains on available-for-sale securities, net of tax: Increase (Decrease) during the year Reclassification adjustments Sub-total, before tax Tax effect Unrealized gains on hedging derivatives, net of tax: Increase (Decrease) during the year Reclassification adjustments Adjustments of acquisition cost Sub-total, before tax Tax effect Foreign currency translation adjustments: Increase (Decrease) during the year Reclassification adjustments Remeasurements of defined benefit plans: Increase (Decrease) during the year Reclassification adjustments Sub-total, before tax Tax effect Millions of yen Thousands of U.S. dollars (Note 1) 2017 2016 2017 ¥ 13,932 (1,414) 12,518 (3,750) 8,768 30,282 (19,502) 166 10,946 2,126 13,072 3,148 (685) 2,463 2,966 1,153 4,119 (1,175) 2,944 ¥(22,226) (12,791) (35,017) 10,830 (24,187) (31,038) (13,985) 0 (45,023) 13,655 (31,368) (5,247) 3,727 (1,520) (6,483) (1,192) (7,675) 2,306 (5,369) $ 124,182 (12,603) 111,579 (33,426) 78,153 269,917 (173,830) 1,480 97,567 18,950 116,517 28,060 (6,106) 21,954 26,438 10,277 36,715 (10,474) 26,241 Share of other comprehensive income (loss) of associates accounted for using equity method: Decrease during the year Reclassification adjustments Adjustments of acquisition cost Total other comprehensive income (loss) (1,521) 5,570 52 4,101 ¥ 31,348 (8,186) 3,091 1,620 (3,475) ¥(65,919) (13,557) 49,648 463 36,554 $ 279,419 104 Mitsui O.S.K. Lines Annual Report 2017 105 19. RELATED PARTY TRANSACTIONS For the year ended March 31, 2017 Millions of yen Category Name of company Address Paid-in capital Business description Ratio of the Group’s voting rights Transactions during the year ended March 31, 2017 Balance at March 31, 2017 Relation with related party Description of transaction Transacted amount Account Amount Thousands of U.S. dollars (Note 1) Transactions during the year ended March 31, 2017 Transacted amount Balance at March 31, 2017 Amount Affiliated company TARTARUGA MV29 B.V. Affiliated company T.E.N. GHANA MV25 B.V. Affiliated company CARIOCA MV27 B.V. NETHERLANDS US$110,000 Bulkships NETHERLANDS €100,000 Bulkships 20.60% Interlocking directorate Debt guarantee Debt guarantee 20.00% Interlocking directorate Debt guarantee Debt guarantee NETHERLANDS €100,000 Bulkships 20.60% Interlocking directorate Debt guarantee Debt guarantee ¥29,235 28,741 28,706 — — — — $260,585 — 256,181 — 255,870 — — — Note: Transaction terms and the policy are decided based on the form of guarantees and other conditions. For the year ended March 31, 2016 Address Paid-in capital Business description NETHERLANDS €100,000 Bulkships Category Affiliated company Name of company T.E.N. GHANA MV25 B.V. Affiliated company CARIOCA MV27 B.V. NETHERLANDS €100,000 Bulkships 20.60% Interlocking directorate Debt guarantee Debt guarantee Millions of yen Transactions during the year ended March 31, 2016 Balance at March 31, 2016 Relation with related party Description of transaction Transacted amount Account Amount Ratio of the Group’s voting rights 20.00% Interlocking directorate Debt guarantee Debt guarantee ¥26,123 25,456 — — — — Note: Transaction terms and the policy are decided based on the form of guarantees and other conditions. 20. SUBSEQUENT EVENT (Changes in Number of Shares Constituting One Unit, Consolidation of Shares, and Partial Amendment to Articles of Incorporation) At the Board of Directors meeting held on April 28, 2017, the Company resolved to propose a change in the number of shares constituting one unit, consolidation of shares, and a partial amendment to its Articles of Incorporation at the Annual General Meeting of Shareholders scheduled to be held on June 27, 2017. 1. Objectives of consolidation Following the guidelines issued by Japanese Stock Exchanges in their “Action Plan for Consolidating Trading Units” with the aim of unifying the trading units of common shares at 100 shares, the Company decided to change the number of shares constituting one unit of shares, which will be the Company’s share trading unit, from 1,000 shares to 100 shares, effective October 1, 2017. In conjunc- tion with the change, the Company will consolidate its shares (ten shares into one share) with the purpose of minimizing the impact on the rights of shareholders following the change in the number of shares constituting one unit. 2. Particulars of consolidation (1) Class of shares to be consolidated Common shares (2) Consolidation ratio On October 1, 2017, every 10 shares held by shareholders listed or recorded on the final register of shareholders of September 30, 2017, will be consolidated into one share. (3) Number of shares to be consolidated Number of outstanding shares before consolidation (as of March 31, 2017) Number of shares reduced through consolidation (Note) Number of outstanding shares after consolidation (Note) Shares Common shares Common shares Common shares 1,206,286,115 1,085,657,504 120,628,611 Note: “Number of shares reduced through consolidation” and “Number of outstanding shares after consolidation” are theoretical values calculated based on the “Number of outstanding shares before consolidation” and the consolidation ratio. 3. Treatment of cases of a fraction constituting less than one share In case a fraction constituting less than one share arises as a result of share consolidation, the Company will liquidate all such fractional shares in a lump based on the provisions in Articles 235 of the Companies Act, and the proceeds from the sale will be distributed to shareholders who hold fractional shares, in accordance with the percentages of said fractions. 4. Impact on per share information Per share information for this fiscal year, calculated as though the said consolidation of shares was conducted at the beginning of this fiscal year, is presented as follows. (1) Net assets per share (2) Net income per share ¥4,782.25 ($42.63) ¥ 43.95 ($ 0.39) (Change in Business Segment Classification) Effective April 1, 2017 the Group restructured corporate organizations. Our chief aims are to optimize our fleet portfolio and to pursue further efficiency in managerial resources. In addition, the Group has established an “One-MOL” cross-sectional sales promotion platform to offer the best transportation service that meets our customers’ needs. In the fiscal year ended March 31, 2017, the Group’s business domains were namely Bulkships, Containerships, Ferries & Coastal RoRo Ships and Associated Businesses. Reflecting the aforementioned restructure, from the beginning of fiscal year ending March 31, 2018, the Group’s business domains will be namely Dry Bulk Business, Energy Transport Business, Product Transport Business and Associated Businesses. Within the Product Transport Business, Containerships and Car Carriers, Ferries & Coastal RoRo Ships are further identified as reportable segments. Revenues and Segment income (loss) of the Group for the fiscal year ended March 31, 2017 under the new segment classifica- tion are as follows: For the year ended March 31, 2017 Millions of yen Reportable Segments Product Transport Business Dry Bulk Business Energy Transport Business Container- ships Car Carriers, Ferries & Coastal RoRo Ships Associated Businesses Sub Total Others*1 Total Adjust- ments*2 Consoli- dated Revenues Revenues from customers ¥267,864 ¥267,809 ¥620,714 ¥250,651 ¥ 90,025 ¥1,497,063 ¥ 7,311 ¥1,504,374 ¥ — ¥1,504,374 Inter-segment revenues 15 430 1,817 194 27,518 29,974 5,916 35,890 (35,890) — Total Revenues ¥267,879 ¥268,239 ¥622,531 ¥250,845 ¥117,543 ¥1,527,037 ¥13,227 ¥1,540,264 ¥(35,890) ¥1,504,374 Segment income (loss) ¥ 11,978 ¥ 26,702 ¥ (32,865) ¥ 4,878 ¥ 12,337 ¥ 23,030 ¥ 1,811 ¥ 24,841 ¥ 585 ¥ 25,426 106 Mitsui O.S.K. Lines Annual Report 2017 107 Independent Auditor’s Report Thousands of U.S. dollars (Note 1) Reportable Segments Product Transport Business Dry Bulk Business Energy Transport Business Container- ships Car Carriers, Ferries & Coastal RoRo Ships Associated Business Sub Total Others*1 Total Adjust- ments*2 Consoli- dated Revenues Revenues from customers $2,387,593 $2,387,102 $5,532,703 $2,234,166 $ 802,433 $13,343,997 $ 65,166 $13,409,163 $ — $13,409,163 Inter-segment revenues 133 3,833 16,196 1,729 245,281 267,172 52,732 319,904 (319,904) — Total Revenues $2,387,726 $2,390,935 $5,548,899 $2,235,895 $1,047,714 $13,611,169 $117,898 $13,729,067 $(319,904) $13,409,163 Segment income (loss) $ 106,765 $ 238,007 $ (292,940) $ 43,480 $ 109,965 $ 205,277 $ 16,142 $ 221,419 $ 5,215 $ 226,634 *1 “Others” primarily consists of business segments that are not included in reportable segments, such as the ship operations business, the ship management business, the ship chartering business, the financing business and the shipbuilding business. *2 Adjustment in Segment income (loss) of ¥585 million ($5,215 thousand) include the following: –¥4,579 million (–$40,815 thousand) of corporate profit which is not allocated to segments, ¥6,312 million ($56,262 thousand) of adjustment for management accounting and –¥1,148 million yen (–$10,232 thousand) of inter–segment transaction elimination. *3 Segment income (loss) corresponds to Ordinary profit in the consolidated statements of operations. 21. OTHERS (1) Litigation On January 10, 2014, the Company filed a lawsuit against Mitsubishi Heavy Industries, Ltd. (hereinafter “MHI”) at Tokyo District Court seeking compensation for damages in association with a maritime accident caused by a vessel constructed by MHI. In response, MHI filed a countersuit at Tokyo District Court seeking payment for reinforcement of the strength of the ship’s hull of the same type of ship, and the legal dispute is continuing. The Company recognizes the claims of the countersuit by MHI has no legitimate basis, and intends to assert the propriety of the Company in addition to upholding the claims for damages under the lawsuit. (2) Others The Group is subject to investigations by overseas competition law authorities including those of the U.S. and Europe for violation of competition laws of those countries regarding price control negotiations for ocean transport services of completely built-up vehicles. In addition, a class-action lawsuit was filed in the U.S. and other countries against the Group for damage claims and for a cease and desist order for the questioned conduct. Meanwhile, the effect of these investigations and lawsuit on the financial results of the Group is uncertain as its financial impact is not estimable at this stage. 108 Mitsui O.S.K. Lines Annual Report 2017 109 The MOL Group Mitsui O.S.K. Lines, Ltd. March 31, 2017 ■ Consolidated Subsidiaries ▲ Affiliated Companies Accounted for by the Equity Method Dry Bulk Business Energy Transport Business Product Transport Business ■ Mitsui O.S.K. Kinkai, Ltd. ■ MOL Bridge Finance S.A. ■ MOL Cape (Singapore) Pte. Ltd. ■ Shipowner/Chartering companies (61 companies) in Panama, Marshall Islands, Liberia, ■ Other (1 company) ▲ Gearbulk Holding AG ▲ Shipowner company (1 company) in Panama Hong Kong, Cayman Islands, and Singapore Registered Office MOL’s Voting Rights (%)* Paid-In Capital (Thousands) Japan Panama Singapore 100.00 100.00 100.00 ¥660,000 US$8 US$62,752 Switzerland 49.00 US$228,100 ■ El Sol Shipping Ltd. S.A. ■ Lakler S.A. ■ MCGC International Ltd. ■ Mitsui O.S.K. Bulk Shipping (Europe) Ltd. ■ MNN Holdings Inc. ■ MOG LNG Transport S.A. ■ MOL (Asia Oceania) Pte. Ltd. ■ MOL Coastal Shipping, Ltd. ■ MOL LNG Transport Co., Ltd. ■ MOL Chemical Tankers Japan Co., Ltd. ■ MOL Chemical Tankers Pte. Ltd. ■ MOL Netherlands Bulkship B.V. ■ Pacific LNG Transport Ltd. ■ Phoenix Tankers Pte. Ltd. ■ Samba Offshore S.A. ■ Shining Shipping S.A. ■ Unix Line Pte. Ltd. ■ Shipowner/Chartering companies (116 companies) in Panama, Marshall Islands, Liberia, ▲ Aramo Shipping (Singapore) Pte. Ltd. ▲ Asahi Tanker Co., Ltd. ▲ Avium Subsea AS ▲ Carioca MV27 B.V. ▲ Cernambi Norte MV26 B.V. ▲ Cernambi Sul MV24 B.V. ▲ LNG Fukurokuju Shipping Corp. ▲ LNG Jurojin Shipping Corp. ▲ T.E.N. Ghana MV25 B.V. ▲ Tartaruga MV29 B.V. ▲ Trans Pacific Shipping 2 Ltd. ▲ Trans Pacific Shipping 5 Ltd. ▲ Trans Pacific Shipping 8 Ltd. ▲ Viken MOL AS ▲ Viken Shuttle AS ▲ Shipowner/Chartering companies (47 companies) in Panama, Marshall Islands, Liberia, Hong Kong, Singapore, Indonesia and Malta Hong Kong, Cayman Islands, Singapore, Indonesia, Cyprus, Bahamas and Malta ■ Asia Utoc Pte. Ltd. ■ Bangkok Container Service Co., Ltd. ■ Bangpoo Intermodal Systems Co., Ltd. ■ Blue Highway Express Kyushu Co., Ltd ■ Blue Highway Service K.K. ■ Blue Sea Network Co., Ltd. ■ Chiba Utoc Corp. ■ Chugoku Shipping Agencies Ltd. ■ Euro Marine Carrier B.V. ■ Euro Marine Logistics N.V. ■ Ferry Sunflower Ltd. ■ Hong Kong Logistics Co., Ltd. ■ International Container Transport Co., Ltd. ■ International Transportation Inc. ■ Mitsui O.S.K. Bulk Shipping (USA), LLC ■ Mitsui O.S.K. Lines (Australia) Pty. Ltd. ■ Mitsui O.S.K. Lines (Japan) Ltd. ■ Mitsui O.S.K. Lines (Nigeria) Ltd. ■ Mitsui O.S.K. Lines (SEA) Pte. Ltd. ■ Mitsui O.S.K. Lines (Thailand) Co., Ltd. ■ MOL (America) Inc. ■ MOL (Brasil) Ltda. ■ MOL (China) Co., Ltd. ■ MOL (Europe) B.V. ■ MOL (Europe) Central Support Unit SP. Zoo ■ MOL (Europe) Ltd. ■ MOL (Ghana) Ltd. ■ MOL (Singapore) Pte. Ltd. ■ MOL Consolidation Service Ltd. ■ MOL Consolidation Service Ltd. (China) ■ MOL Container Center (Thailand) Co., Ltd. ■ MOL Cote d’Ivoire S.A. ■ MOL Egypt for Maritime Services Ltd. ■ MOL Ferry Co., Ltd. ■ MOL Liner, Ltd. ■ MOL Logistics (Deutschland) GMBH ■ MOL Logistics (Europe) B.V. ■ MOL Logistics (H.K.) Ltd. Panama Uruguay Bahamas U.K. Liberia Panama Singapore Japan Japan Japan Singapore Netherlands Bahamas Singapore Panama Panama Singapore Singapore Japan Norway Netherlands Netherlands Netherlands Bahamas Bahamas Netherlands Netherlands Bahamas Bahamas Bahamas Norway Norway Singapore Thailand Thailand Japan Japan Japan Japan Japan Netherlands Belgium Japan Hong Kong Japan U.S.A. U.S.A. Australia Japan Nigeria Singapore Thailand U.S.A. Brazil China Netherlands Poland U.K. Ghana Singapore Hong Kong China Thailand Ivory Coast Egypt Japan Hong Kong Germany Netherlands Hong Kong 100.00 100.00 80.10 100.00 75.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 50.00 25.96 25.00 20.60 20.60 20.60 30.00 30.00 20.00 20.60 20.00 50.00 50.00 50.00 50.00 100.00 100.00 74.62 100.00 100.00 100.00 100.00 100.00 75.50 50.00 99.00 100.00 51.00 51.00 100.00 100.00 100.00 100.00 100.00 47.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 99.60 100.00 49.00 100.00 100.00 100.00 100.00 100.00 US$10 US$91,401 US$1 US$8,402 US$22,100 ¥200 S$2,350 ¥650,000 ¥40,000 ¥100,000 S$138,018 €18 US$1 US$379,311 US$10 US$10 US$344 US$20,743 ¥600,045 US$27,600 €100 €175,026 €162,160 ¥1,000 ¥1,000 €100 US$110 ¥3,961,100 ¥36,400 ¥35,000 US$18 US$338 S$900 THB10,000 THB130,000 ¥50,000 ¥30,000 ¥54,600 ¥90,000 ¥10,000 €91 €1,950 ¥100,000 HK$58,600 ¥100,000 US$0 — A$1,000 ¥100,000 NGN2,636 S$200 THB20,000 US$6 BRL3,603 US$2,200 €456 PLN5 £1,500 GHS92 S$5,000 HK$1,000 RMB8,000 THB10,000 XOF50,000 EGP750 ¥1,577,400 HK$40,000 €537 €414 HK$14,100 ■ MOL Logistics (Japan) Co., Ltd. ■ MOL Logistics (Netherlands) B.V. ■ MOL Logistics (Singapore) Pte. Ltd. ■ MOL Logistics (Taiwan) Co., Ltd. ■ MOL Logistics (Thailand) Co., Ltd. ■ MOL Logistics (UK) Ltd. ■ MOL Logistics (USA) Inc. ■ MOL Logistics Holding (Europe) B.V. ■ MOL South Africa (Pty.) Ltd. ■ Nissan Carrier Europe B.V. ■ Nissan Motor Car Carrier Co., Ltd. ■ Shanghai Huajia International Freight Forwarding Co., Ltd. ■ Shosen Koun Co., Ltd. ■ Thai Intermodal Systems Co., Ltd. ■ TraPac, LLC. ■ TraPac Jacksonville, LLC. ■ Utoc Corp. ■ Utoc Engineering Pte. Ltd. ■ Utoc Logistics Corp. ■ Utoc Ryutsu Service Corp. ■ Utoc Stevedoring Corp. ■ World Logistics Service (U.S.A.), Inc. ■ Shipowner/Chartering companies (50 companies) in Panama, Marshall Islands, Liberia, ■ Others (10 companies) ▲ Meimon Taiyo Ferry Co., Ltd. ▲ PKT Logistics Group Sdn. Bhd. ▲ Rotterdam World Gateway B.V. ▲ Shanghai Kakyakusen Kaisha, Ltd. ▲ Shanghai Longfei International Logistics Co., Ltd. ▲ Tan Cang-Cai Mep International Terminal Co. Ltd. ▲ TIPS Co., Ltd. ▲ Other (1 company) Hong Kong, Cayman Islands, Singapore and Isle of Man Associated Businesses ■ Daibiru Corp. ■ Daibiru Facility Management Ltd. ■ Daibiru Saigon Tower Co., Ltd. ■ Green Kaiji Kaisha, Ltd. ■ Green Shipping, Ltd. ■ Hokuso Kohatsu K.K. ■ Ikuta & Marine Co., Ltd. ■ Japan Express Co., Ltd. ■ Japan Hydrographic Charts & Publications Co., Ltd. ■ Jentower Ltd. ■ Kitanihon Tug-boat Co., Ltd. ■ Kobe Towing Co., Ltd. ■ Kosan Kanri Service Co., Ltd. ■ Kosan Kanri Service-West Co., Ltd. ■ M.O. Tourist Co., Ltd. ■ Mitsui O.S.K. Kosan Co., Ltd. ■ Mitsui O.S.K. Passenger Line, Ltd. ■ MOL Career Support, Ltd. ■ MOL Kaiji Co., Ltd. ■ MOL Techno-Trade, Ltd. ■ Nihon Tug-Boat Co., Ltd. ■ Nishinihon Sogo Setsubi Co., Ltd. ■ Tanshin Building Service Co., Ltd. ■ Tokai Tugboat K.K. ■ Ube Port Service Co., Ltd. ■ Vibank-Ngt Co. Ltd. ■ White Lotus Properties Ltd. ■ Chartering company (1 company) in Panama ■ Others (2 companies) ▲ Shinyo Kaiun Corp. ▲ South China Towing Co., Ltd. ▲ Tan Cang-Cai Mep Towage Services Co., Ltd. Others ■ Euromol B.V. ■ Linkman Holdings Inc. ■ Mitsui Kinkai Kisen Co., Ltd. ■ Mitsui O.S.K. Holdings (Benelux) B.V. ■ MOL (Americas) Holdings, Inc. ■ MOL Accounting Co., Ltd. ■ MOL Adjustment, Ltd. ■ MOL Engineering Co., Ltd. ■ MOL FG, Inc. ■ MOL Information Systems, Ltd. ■ MOL Manning Service S.A. ■ MOL Marine Co., Ltd. ■ MOL Ocean Expert Co., Ltd. ■ MOL Ship Management Co., Ltd. ■ MOL Ship Tech Inc. ■ MOL SI, Inc. ■ MOL Treasury Management Pte. Ltd. ■ Shipowner/Chartering companies (3 companies) in Panama ▲ Minaminippon Shipbuilding Co., Ltd. * MOL’s voting rights include voting rights of MOL and its subsidiaries Registered Office MOL’s Voting Rights (%)* Paid-In Capital (Thousands) Japan Netherlands Singapore Taiwan Thailand U.K. U.S.A. Netherlands South Africa Netherlands Japan China Japan Thailand U.S.A. U.S.A. Japan Singapore Japan Japan Japan U.S.A. Japan Malaysia Netherlands Japan China Vietnam Thailand Japan Japan Vietnam Japan Japan Japan Japan Japan Japan British Virgin Islands Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan Vietnam British Virgin Islands Japan Hong Kong Vietnam Netherlands Liberia Japan Netherlands U.S.A. Japan Japan Japan U.S.A. Japan Panama Japan Japan Japan Japan U.S.A. Singapore Japan 75.06 100.00 100.00 100.00 99.00 100.00 100.00 100.00 100.00 100.00 90.00 76.00 79.98 100.00 100.00 100.00 67.55 100.00 100.00 100.00 100.00 100.00 40.33 20.86 20.00 31.98 22.05 21.33 24.44 51.07 100.00 100.00 100.00 100.00 100.00 100.00 86.27 95.25 100.00 62.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 87.26 100.00 100.00 70.00 99.39 100.00 100.00 36.00 25.00 40.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 100.00 24.00 ¥756,250 €3,049 S$700 NT$7,500 THB20,000 £400 US$9,814 €19 ZAR3,000 €195 ¥640,000 US$1,720 ¥300,000 THB77,500 — — ¥2,155,300 S$2,000 ¥50,000 ¥10,000 ¥50,000 US$200 ¥880,000 MYR254,685 €14,000 ¥100,000 US$1,240 VND732,966,020 THB100,000 ¥12,227,847 ¥17,000 VND124,203,000 ¥95,400 ¥172,000 ¥50,000 ¥26,500 ¥99,960 ¥32,000 US$0 ¥50,000 ¥50,000 ¥20,000 ¥14,400 ¥250,000 ¥300,000 ¥100,000 ¥100,000 ¥95,000 ¥490,000 ¥134,203 ¥10,000 ¥20,000 ¥10,000 ¥14,950 VND349,000,000 ¥6,810,000 ¥100,000 HK$12,400 US$4,500 €8,444 US$3 ¥350,000 €17,245 US$200 ¥30,000 ¥10,000 ¥20,000 US$20 ¥100,000 US$525 ¥100,000 ¥100,000 ¥50,000 ¥50,000 US$100 US$2,000 ¥200,000 110 Mitsui O.S.K. Lines Annual Report 2017 111 Worldwide Offices Shareholder Information JAPAN Mitsui O.S.K. Lines, Ltd. Head Office (Tokyo): Nagoya Branch: Kansai Branch: Hiroshima Branch: Kyushu Branch: Tel: 81-3-3587-6224 Tel: 81-52-564-7020 Tel: 81-6-6446-6522 Tel: 81-82-252-6020 Tel: 81-92-262-0701 Fax: 81-3-3587-7734 Fax: 81-52-564-7047 Fax: 81-6-6446-6513 Fax: 81-82-254-0876 Fax: 81-92-262-0720 Mitsui O.S.K. Lines (Japan), Ltd. Head Office (Tokyo): Yokohama: Nagoya: Osaka: Kyushu: Tel: 81-3-3587-7684 Tel: 81-45-212-7710 Tel: 81-52-564-7000 Tel: 81-6-6446-6501 Tel: 81-92-262-0701 Fax: 81-3-3587-7730 Fax: 81-45-212-7735 Fax: 81-52-564-7047 Fax: 81-6-6446-6513 Fax: 81-92-262-0720 NORTH AMERICA MOL (America) Inc. Head Office (Chicago): Atlanta: Long Beach: New Jersey: San Francisco: Seattle: MOL (Canada) Inc. Head Office (Toronto): Tel: 1-630-812-3700 Tel: 1-678-855-7700 Tel: 1-562-983-6200 Tel: 1-732-512-5200 Tel: 1-925-603-7200 Tel: 1-206-444-6905 Fax: 1-630-812-3703 Fax: 1-678-855-7747 Fax: 1-562-983-6292 Fax: 1-732-512-5300 Fax: 1-925-603-7229 Fax: 1-206-444-6909 Tel: 1-905-629-5925 Fax: 1-905-629-5914 Mitsui O.S.K. Bulk Shipping (USA) LLC. Head Office (New Jersey): Houston: Long Beach: Tel: 1-201-395-5800 Tel: 1-832-615-6470 Tel: 1-562-528-7500 Fax: 1-201-395-5820 Fax: 1-832-615-6480 Fax: 1-562-528-7515 CENTRAL AND SOUTH AMERICA MOL (Brasil) Ltda. Head Office (Sao Paulo): MOL (Chile) Ltda. Head Office (Santiago): MOL (Panama) Inc. Head Office (Panama): MOL (PERU) S.A.C. Head Office (Lima): Tel: 55-11-3145-3980 Fax: 55-11-3145-3946 Tel: 56-2-2630-1950 Fax: 56-2-2231-5622 Tel: 11-507-300-3200 Fax: 11-507-300-3212 Tel: 51-1-611-9400 Fax: 51-1-611-9429 Corporativo MOL de Mexico S.A. de C.V. Head Office (Mexico City): Tel: 52-55-5010-5200 Fax: 52-55-5010-5220 Mitsui O.S.K. Bulk Shipping (USA) LLC. Mexico City: Sao Paulo: Tel: 52-55-5550-1612 Tel: 55-11-3145-3980 Fax: 52-55-5089-2280 Fax: 55-11-3145-3946 EUROPE MOL (Europe) B.V. Head Office (Rotterdam): Genoa: Hamburg: Le Havre: Vienna: Basel: MOL (Europe) Ltd. Head Office (Southampton): MOL (Europe Africa) Ltd. Head Office (London): Hamburg: AFRICA MOL South Africa (Pty) Ltd. Head Office (Cape Town): Tel: 31-10-201-3200 Tel: 39-10-2901711 Tel: 49-40-356110 Tel: 33-2-32-74-24-00 Tel: 43-1-877-6971 Tel: 41-61-716-8001 Fax: 31-10-201-3158 Fax: 39-10-5960450 Fax: 49-40-352506 Fax: 33-2-32-74-24-39 Fax: 43-1-876-4725 Fax: 41-61-716-8070 Tel: 44-2380-714500 Fax: 44-2380-714519 Tel: 44-20-3764-8000 Tel: 49-40-3609-7410 Fax: 44-20-3764-8393 Fax: 49-40-8430-6105 Tel: 27-21-441-2200 Fax: 27-21-419-1040 Mitsui O.S.K. Lines (Nigeria) Ltd. Head Office (Lagos): Tel: 234-1-2806556 Fax: 234-1-2806559 MOL (Ghana) Ltd. Head Office (Tema): MOL Cote d’Ivoire Head Office (Abidjan): Tel: 233-22-212084 Fax: 233-22-210807 Tel: 225-21756920 MIDDLE EAST MOL (UAE) L.L.C. Head Office (Dubai): Tel: 971-4-3573566 Fax: 971-4-3573066 MOL (Asia Oceania) Pte. Ltd. Doha: Muscat: Tel: 974-4-836541 Tel: 968-2440-0950 Fax: 974-4-836563 Fax: 968-2440-0953 MOL Egypt for Shipping Agencies S.A.E. Cairo: Tel: 20-22-456-8900 Fax: 20-22-259-5857 OCEANIA Mitsui O.S.K. Lines (Australia) Pty. Ltd. Head Office (Sydney): Tel: 61-2-9320-1600 Fax: 61-2-9320-1601 Mitsui O.S.K. Lines (New Zealand) Ltd. Head Office (Auckland): Tel: 64-9-300-5820 Fax: 64-9-309-1439 MOL (Asia Oceania) Pte. Ltd. Melbourne: Perth: Sydney: Tel: 61-3-9691-3224 Tel: 61-8-9278-2499 Tel: 61-2-9320-1629 Fax: 61-3-9691-3223 Fax: 61-8-9278-2727 Fax: 61-2-9320-1601 ASIA MOL Liner Ltd. Head Office (Hong Kong): MOL (Asia) Limited Head Office (Hong Kong): Tel: 852-2823-6800 Fax: 852-2865-0906 Tel: 852-2823-6800 Fax: 852-2865-0906 Mitsui O.S.K. Lines (India) Private Limited Head Office (Mumbai): Tel: 91-22-4054-6300 Fax: 91-22-4054-6301 Mitsui O.S.K. Lines Lanka (Private) Ltd. Head Office (Colombo): Tel: 94-11-2304721 Fax: 94-11-2304730 MOL (Singapore) Pte. Ltd. Head Office (Singapore): Tel: 65-6225-2811 Fax: 65-6225-6096 Mitsui O.S.K. Lines (Malaysia) Sdn. Bhd. Head Office (Kuala Lumpur): Tel: 60-3-5623-9666 Fax: 60-3-5623-9600 MOL Myanmar Limited Head Office (Yangon): Tel: 95-9-7318-9815 Fax: 95-9-5137-7174 P.T. Mitsui O.S.K. Lines Indonesia Head Office (Jakarta): Tel: 62-21-5288-0008 Fax: 62-21-5292-0920 Mitsui O.S.K. Lines (Thailand) Co., Ltd. Head Office (Bangkok): Tel: 66-2-234-6252 Fax: 66-2-237-9021 MOL Philippines, Inc. Head Office (Manila): Tel: 632-888-6531 Fax: 632-884-1766 Mitsui O.S.K. Lines (Vietnam) Ltd. Head Office (Ho Chi Minh): Tel: 84-83-8219219 Fax: 84-83-8219317 Mitsui O.S.K. Lines (Cambodia) Co., Ltd. Head Office (Phnom Penh): Tel: 855-23-223-036 Fax: 855-23-223-040 Mitsui O.S.K. Lines Pakistan (Pvt.) Ltd. Head Office (Karachi): Tel: 92-21-35205397 Fax: 92-21-35202559 MOL (China) Co., Ltd. Head Office (Shanghai): Beijing: Tianjin: Shenzhen: MOL (Taiwan) Co., Ltd. Head Office (Taipei): MOL (HK) Agency Ltd. Head Office (Hong Kong): MOL (Korea) Co., Ltd. Head Office (Seoul): Fax: 86-21-2320-6331 Tel: 86-21-2320-6000 Fax: 86-10-8529-9126 Tel: 86-10-8529-9121 Tel: 86-22-8331-1331 Fax: 86-22-8331-1318 Tel: 86-755-8400-7900 Fax: 86-755-8400-7901 Tel: 886-2-2537-8000 Fax: 886-2-2537-8098 Tel: 852-2823-6800 Fax: 852-2529-9989 Tel: 82-2-559-3001 Fax: 82-2-561-9490 MOL (Asia Oceania) Pte. Ltd. Head Office (Singapore): Bangkok: Kuala Lumpur: Chennai: Tel: 65-6323-1303 Tel: 66-2-634-0807 Tel: 60-3-5623-9772 Tel: 91-44-4208-1020 Fax: 65-6323-1305 Fax: 66-2-634-0806 Fax: 60-3-5623-3107 Fax: 91-44-4208-1020 Capital Head office ¥65,400,351,028 1-1, Toranomon 2-chome, Minato-ku, Tokyo 105-8688, Japan Number of MOL employees Number of MOL Group employees (The parent company and consolidated subsidiaries) Total number of shares authorized Number of shares issued Number of shareholders Shares listed in Share transfer agent (Contact information) Communications materials 966 10,794 3,154,000,000 1,206,286,115 96,892 Tokyo* Sumitomo Mitsui Trust Bank, Limited Stock Transfer Agency Business Planning Department 8-4, Izumi 2-chome, Suginami-ku, Tokyo 168-0063, Japan Annual Report (English/Japanese) Investor Guidebook (English/Japanese) Market Data (English/Japanese) News Releases (English/Japanese) Website (English/Japanese) Safety, Environmental and Social Report (English/Japanese) * Delisting of common stock on the Nagoya Stock Exchange was made on May 18, 2017. (As of March 31, 2017) Stock Price Range (Tokyo Stock Exchange) and Volume of Stock Trade (¥) 800 700 600 500 400 300 200 100 0 Fiscal 2014 High ¥450 Low ¥308 Fiscal 2015 High ¥437 Low ¥183 Fiscal 2016 High ¥389 Low ¥199 (Million shares) 14 /4 5 6 7 8 9 10 11 12 15 /1 2 3 4 5 6 7 8 9 10 11 12 16 /1 2 3 4 5 6 7 8 9 10 11 12 17 /1 2 3 4 5 6 800 700 600 500 400 300 200 100 0 112 Mitsui O.S.K. Lines Annual Report 2017 113 

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