Nippon Yusen KK

TSE:9101

Earnings Call Transcript 2019-Q1

[Tadaaki Naito, executive]

Thank you for attending today's explanation of the fiscal year 2018 first quarter results.

Before I begin, I would first like to apologize for the concern and inconvenience caused to our shareholders and investors in relation to the business improvement order regarding the securing of air transportation safety received from the Minister of Land, Infrastructure, Transport and Tourism on July 20 by our consolidated subsidiary, Nippon Cargo Airlines. As a company, we, too, are taking this administrative action very seriously. We will oversee and support Nippon Cargo Airlines as it definitely executes improvements to the business and implements measures to strengthen the compliance system and prevent recurrence. I sincerely apologize for this occurrence.

Today's explanation will be given following the slides. To begin, although it is not contained on a slide, I would like to give a summary of the results. I will provide an evaluation of the first quarter financial results followed by the full year forecast and, finally, the management issues.

Regarding the evaluation of the first quarter financial results, we recorded a recurring loss of JPY 6.6 billion and a net loss of JPY 4.5 billion.

In April of this year, we started the new medium-term management plan, Staying Ahead 2022, with Digitalization and Green. Given the results in the first quarter of this new plan, I feel that we stumbled out of the gate. Concerning the factors behind the loss, one is the larger-than-expected one-off costs in the Liner business. The other is the fact that NCA grounded all of its aircraft from June 17 in order to confirm the airworthiness.

However, not all the businesses recorded poor results, and there were some bright spots. One is the improvement in the Logistics business. Another is Dry Bulk. Due in part to the improvement in the market conditions, the results are improving.

During the first quarter, we started with the early termination of chartered-in vessels and the liquidation of assets as set forth in the medium-term management plan.

This ends my evaluation of the first quarter financial results.

Regarding the full year forecast, it was necessary to make a downward revision, and I sincerely apologize for this. Recurring profit has been revised down to JPY 10 billion from the JPY 40 billion in the forecast issued at the beginning of the year. And net profit has been revised down from JPY 29 billion to JPY 12 billion. Here, too, the main factors in this are the Liner business and NCA. The Liner business has fallen below the previous forecast by JPY 10 billion. The Air Cargo business is JPY 17.5 billion below the previous forecast. And these amounts can almost fully explain the downward revision.

One other point I would like to mention is the dividend forecast. Although it has been revised lower, we intend to continue issuing a dividend. In the previous forecast, it was a full year dividend of JPY 40, but this has been changed to a full year dividend of JPY 20, which is planned to be issued as a 10-year interim dividend and a 10-year year-end dividend. We reinstated the dividend last year and have set a target of issuing a stable dividend. We intend to somehow find a way to continue issuing a dividend.

Regarding the management issues, the most pressing issue is NCA. We will place all our efforts into restoring operations and returning the business to normal. Another issue is the steady execution of the medium-term management plan. Our intention is to build a framework for sustainable growth.

From the perspective of profit buildup, we are steadily building up the profits, but I want to further build them up. Also, for the purpose of cutting costs and reducing the losses, I am thinking about canceling the charter contracts and liquidating assets in line with this in a suitable manner.

I will now begin my explanation of the slides. Please turn to Page 3. This slide shows an overview of the first quarter results. Revenues have significantly declined year-on-year as the revenue of the equity method affiliate, ONE, is no longer included.

Regarding recurring profit, although the Dry Bulk and Liquid businesses are earning profits as forecast, the one-off costs required to exit the container business weighed heavily on the results, hurting profitability compared to the same period last year.

Regarding extraordinary income and loss, we have begun the early cancellation of chartered-in dry bulk vessels in accordance with the strategy in the medium-term management plan. Also, we have begun the sale of investment securities from the perspective of liquidating assets.

Please turn to the next page. This page shows a summary of the first quarter results. Recurring profit was a loss of JPY 6.6 billion, and net income was a loss of JPY 4.5 billion. The figures on the right are a comparison with last year, and all of the profit levels have deteriorated from last year.

As my remarks, first, revenues have significantly declined due to the transfer of the Liner business to ONE. Also, because the profit from equity method affiliates all over the world is recorded as nonoperating profit, it provided a large positive effect for many years. However, because ONE recorded a loss for the first time this quarter, profit and loss by the equity method deteriorated. In addition, although the net income and loss was a loss, extraordinary income and loss balance was positive. This is the result of the sale of investment securities and vessel assets.

Please turn to the next page. This slide shows a year-on-year comparison by industrial segment. Regarding the recurring profit in the first quarter, the Liner business recorded a loss of JPY 16.6 billion, and the Air Cargo business recorded a loss of JPY 1.6 billion. These are extremely large losses. On a consolidated basis, recurring profit was a loss of JPY 6.6 billion.

The column on the far right shows a comparison with last year, and the Liner business is a year-on-year decline of JPY 22.3 billion. On the other hand, the Logistics business was plus JPY 1.3 billion, Bulk Shipping business was plus JPY 7.6 billion. So there were some bright spots.

The consolidated recurring profit largely declined by JPY 16.8 billion compared to the same term last year.

Please turn to the next page. This page shows an analysis of the year-on-year change in recurring profit.

Looking at the total, recurring profit deteriorated by JPY 16.8 billion, and the biggest factor was the others item, which was minus JPY 16 billion. The largest contributing factor was the minus JPY 14 billion required as a one-off cost for the termination of the container business. The costs were larger than expected, and a loss was recorded.

On the other hand, market effects, et cetera, was plus JPY 2.2 billion, indicating the market somewhat improved. The market conditions are strong.

Please turn to Page 7. Starting on this page, I will explain the full year forecast. Compared to the previous forecast, we are now expecting significantly lower revenues and profits. For the Liner business, as you are aware, the results are calculated by adding ONE's equity in earnings of affiliates to NYK's PL.

First, at NYK Line, higher-than-expected costs were incurred during the first quarter, resulting in a major loss. But these costs are expected to gradually decrease going forward. The results at ONE have basically been as forecast. And as I will mention later, the full year forecasts have been left unchanged.

In the first half, the forecast has been revised down by JPY 40 million, and it has been revised up by JPY 40 million in the second half. I believe the extent to which costs can be reduced will be a key point that determines whether or not the plan can be executed.

Concerning the status of service at ONE, which had been a cause of concern, the initial confusion has almost completely ended, and operations have been proceeding smoothly since July.

Also, I would like to mention the terminals business. Concerning the overseas terminals business, it is planned to transfer this business to ONE, but because the timing of the transfer is undecided at this time, the forecast has been created based on the premise NYK Line will continue to hold on to the business.

Regarding the Air Cargo business, I will discuss it in more detail later. But currently, the airworthiness of all 11 aircraft is being confirmed. It is planned to successively return the aircraft to operation as the airworthiness is confirmed, but it is necessary to plan for a significant decrease in the number of flights.

Regarding the Bulk Shipping business. Dry Bulk division is robust. In the Liquid division, the LNG and offshore business is robust, but the VLCC and product tanker markets are somewhat weak. In the car carrier segment, there is forecast to be a minor drop in transportation demand.

Regarding the dividend, the forecast has been revised down to a full year dividend of JPY 20.

Although it's not shown on the slide, there are 2 key points for the full year. The first is the performance of ONE and whether the cost reductions will exceed the impact of the higher bunker prices. The other point is NCA and the timing of when the aircraft can be returned to service.

Please turn to the next page. This page shows a summary of the full year forecast. As I mentioned earlier, recurring profit is forecast to be JPY 10 billion, and net income is forecast to be JPY 12 billion. Here, too, I would like you to note the extraordinary income and loss balance. An extraordinary income was recorded. We plan to proceed with the liquidation of assets such as vessels and securities.

Also, the exchange rate assumption used for the forecast is $1 equals JPY 105, and the bunker price is assumed to be $460. Concerning the exchange rate sensitivity, a change of JPY 1 will have a full year impact on recurring profit of JPY 0.5 billion. In terms of bunker prices, a change of $10 will have an impact of JPY 1.6 billion.

Please turn to the next page. This page shows the forecast by segment. In the Liner business, although the result in the first quarter was minus JPY 16.6 billion, the performance is expected to gradually return to normal with results of JPY 2.2 billion in the second quarter and JPY 6 billion in the second half. On the other hand, NCA grounded all of its aircraft in order to confirm the safety. And although currently, 2 aircraft have been returned to service, confirming the airworthiness will take time. As a result, the second quarter is forecast to be minus JPY 5.8 billion and then minus JPY 8.5 billion in the second half.

One additional point is the second quarter in the Bulk Shipping business. Although recurring profit in the first quarter was JPY 10.4 billion, it is expected to be JPY 3.5 billion in the second quarter. Because it will then recover to JPY 16 billion in the second half, this indicates there will be a downturn in the second quarter. The reason for this is mainly the car carrier segment. Due to the heavy rains in June and July, the shipments by car manufacturers have been disrupted, and it is expected to have an impact. Another point is the rising bunker prices. Overall, recurring profit is expected to gradually improve from the minus JPY 6.6 billion in the first quarter to JPY 1.6 billion in the second quarter and JPY 15 billion in the second half.

Please turn to the next page. This page also shows a comparison with the previous forecast. And as you can see, the figures from both the Liner business and Air Cargo business are much worse. Also, in the car carrier segment, the outlook has deteriorated compared to the forecast issued at the beginning of the year, and the Bulk Shipping segment is expected to be minus JPY 3 billion.

We can skip over Page 11.

Page 12 shows the details of the Liner Trade. The previous forecast was a profit of JPY 1.5 billion, but the revised forecast is a loss of JPY 8.5 billion. This is a drop of exactly JPY 10 billion. Roughly dividing the figure in 2, the area on the left shows the details related to ONE, and the item outlined in yellow on the right relates to NYK Line.

As I mentioned earlier, the full year profits at ONE have been left unchanged at $110 million. The first half was revised down by $40 million, while the second half was revised up by $40 million. With this are the -- within this are the benefits from the integration synergies. I have heard that these benefits are appearing earlier than anticipated. There will be definite benefits in the railroad freight rates in America and the terminal costs.

Also, in regards to the revision to lease accounting, there will be a definite impact from the late application of IFRS.

If I have to bring it up, the additional cost reductions of JPY 10 billion are forecast to offset the bunker price increase, and the extent to which the cost reductions can be realized will be a key point. I have heard that ONE is implementing projects aimed at achieving the targets.

Next, I will discuss the additional exit costs incurred by NYK Line. There are 3 main points.

First, we intend to basically transfer the containers to ONE, but the timing has been delayed.

Second, the variable costs in relation to the transfer were underestimated, and the actual costs exceeded the forecast. In the container business, up to last year, the variable costs at NYK Line were slightly less than JPY 300 billion per year. Given this huge figure, minor discrepancies result in large amounts, with a 1% discrepancy being JPY 3 billion and a 2% discrepancy being JPY 6 billion. This is our first experience withdrawing from a business, and we were unable to forecast all of the costs. I offer my sincere apologies.

The final point is the unrecoverable freight receiver -- receivables that could arise in the future will exceed the forecast. In this aspect, we are taking a somewhat conservative view. The total impact of these 3 points is JPY 12 billion. As I mentioned earlier, regarding the transfer of the overseas terminals, the asset assessment is taking time, but we are presently working with the aim of completing the transfer this year.

This page covers NCA. As I mentioned earlier, the earnings will not improve, and a loss of JPY 16 billion is forecast for the full year. The first point, regarding normalization of the business, it is necessary to obtain permission from the Civil Aviation Bureau before the aircraft can be flown, and I do not think it is appropriate to speculate on when the aircraft can definitely be flown before the permission is received. However, I do think it will be very difficult to return all 11 aircraft to service during the current term. Also, the current forecast has been created, working very hard in response to the administrative action that was received and preparing the necessary systems based on these instructions received from the authorities. So I will refrain from providing any forecast for when or how many airplanes will be returned to service. I think it is possible to obtain a rough understanding of the figures based on the volumes in the previous and current forecasts, and I would prefer not to go into any further depth.

Regarding the financial results forecast, it will depend on the review of the production system and maintenance system. The results could be higher, but they can also be lower. I apologize, but I am unable to say anything more at this time.

Moving along, Page 14 shows the status of Yusen Logistics and the Logistics business. The business is steadily improving and is on the rise. We have established a committee and are continuing activities aimed at pursuing synergies between NYK Line and YLK.

NYK Line has been involved in a joint venture with ANJI Logistics, a subsidiary of SAIC Motor Corporation. But recently, NYK Line transferred some of its shareholdings to YLK and reorganized the venture into a 3-party joint venture. Going forward, I intend to pursue synergies such as YLK focusing on and achieving results in the area of auto logistics.

Please turn to the next page. This page covers the Bulk Shipping business and shows the market forecast for dry bulk and tankers. As you are aware, the market, particularly dry bulk, is recovering. In the Liquid segment, the crude oil and product tanker markets are weak, but the LNG and offshore business is robust. We have raised the forecast for the Capesize market to $18,000 in the second quarter. Recently, the market has been around $24,000, so it is slightly above the market forecast. On the other hand, we have lowered the forecast for VLCCs to $18,000.

Regarding the early cancellation of chartered-in vessels, we are making some progress in the first quarter and plan to continue returning more in the second quarter. But this has not been incorporated into the current forecast. It is a very delicate topic, and we are moving ahead while holding discussions with our shipowner partners, so I wish not to get into further details.

Also, although it is not included in the financial forecasts, in the event we proceed with an early cancellation, we intend to respond by liquidating assets.

Please turn to the last page. In the car carrier segment, the handling volume is expected to fall by 9% year-on-year in the second quarter. The heavy rain in June and July has severely disrupted the shipments, and we have been greatly impacted. This is not the only factor, but I believe there will be a downturn in the second quarter. Shipment volumes to North America and Europe are strong, but the recovery in the shipments to resource-rich countries has been slow to occur.

In regards to improving the earnings, we are thinking about reducing the number of ships and utilizing trade charters, and we are moving toward reducing the services on unprofitable routes.

This ends my explanation. Thank you for listening.