Nippon Yusen KK

TSE:9101

Earnings Call Transcript 2021-Q1

[Hitoshi Nagasawa, executive]

Hello. I am NYK Line President, Hitoshi Nagasawa. Thank you for attending today's presentation of the financial results for the first quarter of the fiscal year ending March 31, 2021. Without keeping you waiting any longer, I will now provide an overview of the quarter.

When announcing the full year results for last year on May 25, I also provided a forecast for this year. At that time, I stated that COVID-19 would have an extremely large impact this year, and I will now touch briefly on the situation since then. First, during the pandemic, we are, of course, placing top priority on securing the safety of the group employees, seafarers and other workers. There have been some cases of infections, but I understand that it has been limited to the minimum extent possible.

Concerning the problem of crew changes, which has been raised as an issue by many people, the impact has been larger than expected. I will explain more about this later. The second major impact is cargo volumes. Initially, we forecast that cargo volumes of consumer goods, including automobiles, would bottom in the first quarter, gradually recover in the second quarter and then recover to a certain level from the third quarter. This trend is continuing basically as expected. On this point, too, I will explain in more detail later using figures.

Please turn to Page 3 for an overview of the first quarter results for the fiscal year ending March 31, 2021. As stated here, revenue decreased as a result of the lower transport volumes in the shipping business due to COVID-19 and the weakness in the dry bulk market. Concerning recurring profit, although profit decreased in bulk shipping, as announced previously, the improvements in the global logistics businesses of Air Cargo Transportation, Logistics and Liner Trade exceeded this decline, resulting in increased profit of JPY 10.1 billion compared to the same period last year.

Concerning our extraordinary profit and loss, an impairment loss of slightly over JPY 5 billion was recorded mainly for the Handymax and Handysize dry bulk carriers operated by our wholly-owned subsidiary NBP. Looking back on the first quarter, under the impact of COVID-19, as stated, the drop in cargo volumes was generally as forecast, but the container shipping business operated by ONE was able to maintain high utilization despite liftings decreasing by a little less than 20%. This was achieved by proactively and flexibly adjusting capacity and nimbly voiding sailings through the alliances and as a result, freight rates remained strong and the business performance was greatly improved compared to the initial forecast.

Next, looking at the Air Cargo Transportation segment, Page 15 in the Appendix provides the clearest explanation. Please turn to Page 15. As you can see in the third and fourth quarters of last year, the business operated under a fully-restored operational framework and recorded revenue of about JPY 20 billion during each quarter. However, revenue jumped to about JPY 29 billion in the first quarter of this year for a recorded revenue of slightly less than JPY 30 billion.

Against an increase in transportation volume and capacity of about 10% each, revenue significantly climbed by slightly less than 50%. As shown here, this is the result of increased yield or, in other words, freight rates. As you know, most passenger flights have been suspended, resulting in the disappearance of the cargo space aboard those planes. This has led to a major improvement in the supply-and-demand balance as well as higher freight rates. In turn, this has led to increased revenue and, subsequently, to improved profits. Also, as the result of the falling oil prices, the price of jet fuel remained extremely low and this was also a large factor in the strong results.

Concerning the Logistics segment, as you can see from the details on Page 16, COVID-19 caused the handling volumes to fall in both the ocean and air freight forwarding businesses by about 20% in the first quarter. However, as I stated previously, when discussing the Air Cargo Transportation segment, the freight rates in the air freight forwarding business rose significantly, leading to a great improvement in this business. As a result, the overall Logistics segment achieved higher profits. Concerning Bulk Shipping, the results were basically in line with the previous forecast. However, cargo volumes greatly declined in the car transportation business. On a loading basis, volumes declined by about 50% year-on-year in the first quarter.

Please turn back to Page 4. Shown here is a summary of first quarter results. In the first quarter of the fiscal year ending March 31, 2021, revenue was JPY 361.1 billion. Operating profit was JPY 8.9 billion. Recurring profit was JPY 16.5 billion, and net income was JPY 11.6 billion. Also, the exchange rate was JPY 107.74 against the U.S. dollar, and bunker oil prices were USD 452. Although COVID-19 caused a drop in revenue of about JPY 45 billion, operating profit, recurring profit and net income all improved.

Moving on to Page 5. Shown here is a comparison by segment. As you can see, the Liner, Air Cargo and Logistics segments in Global Logistics were all profitable and together achieved a recurring profit of JPY 18.8 billion. In Bulk Shipping, although profit greatly declined compared to last year, to an extent, this was an expected result. And in fact, it was slightly better than we had initially expected. In the first quarter, recurring profit on a consolidated basis was JPY 16.5 billion. One additional point I would like to add regarding the first quarter results is the JPY 0.4 billion loss in the other segment. The passenger ship, Asuka II, has remained out of operations since April and the expenses incurred during this nonoperating period led to the loss.

The waterfall graph on Page 6 illustrates everything I have stated up to now. One thing I would like to add is that there was almost no impact resulting from bunker oil price fluctuations or yen appreciation. Concerning bunker oil, we have basically transitioned to the use of regulatory compliant fuel, which is more expensive, and this has had an impact. On the other hand, market prices significantly fell in the first quarter due in part to the impact of COVID-19. However, our vessels were still using bunker oil procured before prices dropped. So ultimately, there was no major impact on the results.

Please turn to Page 7. Shown here is the forecast for the fiscal year ending March 2021. Initially, operating profit was expected to be about JPY 5 billion, and recurring profit was expected to breakeven or somehow achieve a profit. Also, net income was left undetermined at that time. However, following the recent results, recurring profit has been revised up to a full year profit of JPY 20 billion, and net income is now forecast to be JPY 13.5 billion. The dividend forecast remains unchanged from the previously announced minimum dividend of JPY 20 per share. Generally, we are targeting a dividend payout ratio of 25%. And assuming the current net income forecast of JPY 13.5 billion, that calculates out to a dividend of JPY 20.

Also, concerning the responses to COVID-19, I have been consistent in conveying that our top priority is on safety, and we will take far-reaching measures to ensure safety. Concerning our cash flow, we have already secured sufficient free cash flows. Also, I feel that we will likely have to take strong measures to address safety navigation and crew changes. In particular, as mentioned at the start of the presentation in regards to the crew changes, both physical and economic impacts have occurred. Because the permitted actions vary in each country, it is necessary to respond to each vessel separately.

And in terms of costs, additional expenses of about JPY 2 billion are expected to arise from the second quarter. This amount includes the cost of deviations to facilitate crew changes and chartered flights. To repeat myself, additional expenses of about JPY 2 billion are expected to be incurred from the second quarter as crew change expenses. Also, as referenced, these expenses were about JPY 0.15 billion in the first quarter. This issue did not have a major impact during the first quarter, so the additional expenses were only about JPY 0.15 billion.

Please turn to Page 8. I think I will receive a lot of questions later about why, despite the good first quarter results and relatively strong forecast for the first half in the liner trade, the figures in the second half are expected to be weak. The reason for this is that we have been extremely conservative in our forecast, given the potential for second and third waves of COVID-19 and the uncertainty surrounding cargo volumes going forward.

In the Air Cargo Transportation segment, some additional expenses for engine maintenance will arise in the second quarter, and freight rates are expected to undergo a gradual correction from the extremely strong rates in the first quarter. Given this, the second quarter is likely to be slightly subdued. But in light of the forecast improvement in the second half, particularly in the third quarter, the full year profit forecast has been revised up. In the Logistics segment, similar to the Air Cargo Transportation segment, the air freight forwarding business is expected to have a strong year, and the profit forecast for this segment as a whole has been revised up. Bulk Shipping is progressing, basically in line with the initial forecast.

Page 9 shows a numerical breakdown of the forecast. The full year results are forecast to be: revenue of JPY 1,450 billion; operating profit of JPY 13 billion; recurring profit of JPY 20 billion; and net income of JPY 13.5 billion. When compared to last year, due to the impact of COVID-19: revenue will be over JPY 200 billion lower; operating profit will be about JPY 25 billion lower; recurring profit will be about JPY 25 billion lower; and net income will be over JPY 17 billion lower.

Concerning the forecast for each segment, please turn to Page 10. Compared to last year, recurring profit in the Liner segment is unfortunately forecast to fall by about JPY 12 billion due to the expected weakness in the second half. On the other hand, profit is forecast to be much higher this year in the Air Cargo Transportation segment, as I explained earlier. On the other hand, the Bulk Shipping segment was negatively impacted by COVID-19. And in particular, the market conditions are expected to be challenging in the first half in both the car transportation and dry bulk divisions, resulting in significantly lower profit. To give a quick summary, compared to last year, profit will be lower in the Liner segment, much lower in Bulk Shipping and greatly higher in Air Cargo Transportation, for a total recurring profit forecast of JPY 20 billion for the year.

Page 11 shows the difference between the current and initial forecasts. The initial forecast only indicated the full year forecast for each segment. When comparing the current and initial forecast for each segment: the Liner segment is expected to improve by JPY 12 billion; Air Cargo Transportation by JPY 1 billion; and Logistics by JPY 3.5 billion, for a total improvement in Global Logistics of JPY 17 billion. On the other hand, Bulk Shipping will only improve by JPY 0.5 billion, indicating that the results are expected to be basically in line with the initial forecast.

In the other segment, profit is forecast to be 0 in the second half. This forecast is based on the assumption that Asuka II will, at some point, start offering cruises again. If the resumption of operations remains unachievable, a minor loss will likely be unavoidable. Regardless, there will not be any major impact, so I feel that the full year recurring profit target of JPY 20 billion is a fully achievable figure.

I would now like to touch briefly on the status of each segment. I will be repeating myself a little bit, but please turn to Page 13. In the Liner segment, cargo movements are gradually recovering from the second quarter. However, uncertainty still exists around the potential for second and third waves of COVID-19. Concerning the Air Cargo Transportation segment, as I mentioned earlier, a certain amount of additional expenses will be incurred for engine maintenance in the second quarter. This, combined with a gradual correction in freight rates, will make the second quarter slightly more challenging. However, following a recovery of demand heading into peak season, profit is expected to be somewhat higher. In the Logistics segment, the trends are expected to basically track those in the Air Cargo Transportation segment.

Page 14 explains the Bulk Shipping segment. Overall, this segment is performing basically in line with the initial forecast. Individually, the figures in the car transportation division show how difficult this year will be. The shipping volume in the first quarter declined by 35% compared to last year on a voyage-completion basis. On a loading basis, it was a 50% drop.

In the second quarter, shipping volumes are expected to fall 50% on a voyage-completion basis and by 30% on a loading basis compared to the previous year. Basically, in the car transportation division, the voyage completion standards are adopted for accounting, so the results are expected to deteriorate in the second quarter. However, looking at the shipping volumes, the situation is improving from the second quarter. I think many of you here today are particularly interested in the car carrier business, so please turn to Page 18.

Shown here are the forecast shipping volumes. Last year, we transported a total of 3.17 million vehicles. This year, we expect to transport 930,000 vehicles in the first half and 1.41 million vehicles in the second half for a full year total of 2.34 million vehicles. These figures are all forecast on a voyage-completion basis. Shipping volumes are expected to fall by 40% in the first half and 10% in the second half compared to last year. As a result, the current forecast is based on a full year decline of 26%. Concerning the slides explaining the results at ONE, I think you have likely heard this explanation from various other sources already, so I will not go into detail here.

Lastly, I would like to provide a quick overall summary. Cargo volumes were basically in line with the initial forecast, taking into account the impact of COVID-19. In the Liner segment, ONE proactively took the initiative on vessel deployment and voided sailings based on the experience gained from adversity faced up to now. Also, each alliance took similar actions. As a result, freight rates remained intact, and it was possible to achieve significantly higher profits compared to the initially forecast loss.

Also compared to the other shipping lines, our Air Cargo Transportation business, which had been a point of weakness for many years, provided a tailwind this quarter that led to the strong results. However, this is not something that can be greatly rejoiced given the extreme difficulty being faced by JAL and ANA. Despite the expectations for some ups and downs from the second quarter, without a doubt, we should be able to earn a profit this year. This ends my explanation of the first quarter financial results.

[Statements in English on this transcript were spoken by an interpreter present on the live call.]