Nippon Yusen KK

TSE:9101

Earnings Call Transcript 2023-Q1

[Shuichiro Shimomura, executive]

Thank you very much for waiting. This is NYK. Thank you for your support. Thank you very much for attending this meeting despite your busy schedule.

We'd like to start the financial results for the first quarter FY 2022 for NYK.

I am Shimomura, Head of IR. First of all, I would like to explain the presenters of today. The Senior Managing Executive Officer, Chief Executive of Liner & Logistics Headquarters, Hiroki Harada.

[Hiroki Harada, executive]

Hello. This is Harada. Thank you very much.

[Shuichiro Shimomura, executive]

We have the Senior Managing Executive Officer and CFO, Takaya Soga.

[Takaya Soga, executive]

This is Soga. Thank you very much.

[Shuichiro Shimomura, executive]

So Soga, CFO, he will make a presentation about the financial results for the first quarter FY 2022 and for your forecast. We go to Q&A, and we plan to end this meeting by 4 p.m.

The presentation is uploaded on our website. So please take a look. In terms of the questions, we will receive it through chat or through oral questions. I would explain about how to ask questions afterwards. This presentation, including the Q&A session, will be available on demand through a video stream.

So let's show the presentation. Mr. Soga, please?

[Takaya Soga, executive]

So I'm Soga of NYK. Thank you very much for attending this meeting despite your busy schedule. So I would like to extend my gratitude to your support. Today, first of all, I will explain about the overview of the first quarter results of FY 2022. Next, I will explain about the revised forecast of the full year of fiscal 2022. After the presentation, we will turn to Q&A.

First, refer to the presentation material that you have on hand, or we will be showing you the same page on the screen. So please refer to the screen, whichever is comfortable for you.

First, I would like to explain about the summary of the first quarter results. Please turn to Page 6. So this is about each of the income lines. From the top, revenue was JPY 673 billion. Operating profit, JPY 89.1 billion. Recurring profit, JPY 377.7 billion and net income was JPY 343.3 billion. All the items have surpassed the initial forecast, resulting in very strong results. As for the revenue, in the Bulk Shipping segment, the market remained favorable from the previous quarter in the dry bulk business and automotive transportation business recovered. Additionally, due to the impact of the exchange rate, revenue in the Bulk Shipping segment increased by JPY 74.5 billion year-over-year. In the Logistics segment, revenue rose by JPY 63 billion year-over-year due to the increase of freight rates. In total, we saw a JPY 168.4 billion increase of revenue year-over-year, achieving JPY 673 billion.

With the recurring profit, the Liner & Logistics business, which consists of the Liner Trade, Air Cargo Transportation and the Logistics business, saw a large increase by JPY 176.1 billion year-over-year. Furthermore, in the Bulk Shipping segment, due to the favorable market and dry bulk improvement of the transportation efficiency in Automotive Transportation business, recurring profit increased by JPY 48.1 billion. In total, recurring profit went up by JPY 224.1 billion year over year to JPY 377.7 billion.

Taking into account extraordinary loss and gains and corporate tax for this quarter, net income increased by JPY 192.2 billion year-over-year, reaching JPY 343.3 billion. To follow up on the extraordinary loss, in view of the unpredictable situation in Russia and Ukraine, from an accounting perspective for the LNG transportation for Sakhalin 2 project, we decided to review the asset value. Accordingly, we have booked JPY 17.8 billion of exit ordering loss in this quarter.

Next, I will explain about the performance of each segment at the recurring profit level in more detail. Please turn to Page 7. First, for the Liner Trade business. This is on the very top column. Recurring profit was JPY 270.4 billion, a JPY 159 billion increase year-over-year. The major reason behind this is the continuing strong market condition in the Container Shipping business of ONE, our equity method company. There has been some easing of the condition that some of the major ports of the U.S., such as in the West Coast, but this has not led to the resolution of the restructuring in land transportation. There was some impact coming from the lockdown in Shanghai and the situation in Russia and Ukraine. But overall, the robust transportation demand continued. Some adjustments were conducted from the very high spot freight rates. But as the rates increased through the renewal of long-term contracts, this supported the average price. As a result, recurring profit was better against our initial outlook.

In the Air Cargo Transportation segment, recurring profit was JPY 24.6 billion, up JPY 9.3 billion year-over-year. The tightness in demand and supply eased somewhat through the reopening of the international passenger flights. However, a favorable market condition is still continuing. We had to suspend flights on the Shanghai route due to the lockdown and reduced flights for the European service due to the ongoing situation in Russia and Ukraine. But freight rates stayed at a high level.

Going to the Logistics segment. Recurring profit was JPY 19.3 billion, a JPY 7.7 billion increase year-over-year. In the forwarding business, both ocean freight and airfreight saw a decline in handling volume year-over-year. However, sales pricing continued to be high, and additional demand such as urgent transportation boosted earnings. In the contract logistics business, although personnel costs soared, supported by movement of general consumer goods, performance stayed strong.

Lastly, turning to the Bulk Shipping business, which consists of the automotive transportation business, dry bulk and energy. Recurring profit was JPY 64.1 billion, increasing JPY 48.1 billion year-over-year. In the automotive transportation business, we continue to be impacted from the suspension of production and shipping of vehicles due to the lack of automatic components coming from semiconductor shortages and the lockdown in Shanghai. However, through our efforts in optimizing vessel deployment and collection of alternative cargo, we were able to maintain the same level of transportation volume as of last year. In the dry bulk business, the market rate for charter vessels remained strong. Specifically, favorable conditions continued for small- and medium-sized vessels such as Panamax, Handy and Handymax.

As for the energy business, market condition for some tankers such as VLCC, the very large tankers, remained weak. However, the VLGC market improved. As mentioned previously, for the LNG vessels, as I have mentioned, we booked an extraordinary loss for this [ high-end to ] transportation business. But on the recurring profit level, earnings remain stable, supported by medium- to long-term contracts, including offshore businesses. For your reference, what I have just explained is written from Page 3 to Page 5 in the presentation material.

Please turn to Page 8. So this is the chart and the graph. To sum up, in the first quarter of 2022, as shown in the graph on the right-hand side, all segments booked an increase of profit from the previous year. If we refer to the chart on the left-hand side, out of the JPY 224.1 billion profit increase, about JPY 25 billion is coming from the weaker yen.

This has been the outline of the first quarter results for FY 2022.

Let me explain the forecast for FY 2022. Please look at Page 12. This graph is also showing the forecast of the performance. As a result of the review from the initial forecast announced in May, revenue, operating profit, recurring profit and net income are revised upward. The revenue is expected to be JPY 2.5 trillion, up JPY 200 billion from the initial forecast. Operating profit, JPY 250 billion, up JPY 63 billion. Recurring profit JPY 1.4 trillion, up JPY 280 billion. And net income, JPY 960 billion, up JPY 240 billion. In terms of the breakdown, the recurring profit in the first half will be JPY 720 billion and the second half will be JPY 290 billion. Net income in the first half will be JPY 670 billion, and the second half will be JPY 290 billion. Most of the expected increase in revenue and profit are concentrated in the first half, primarily due to high level first quarter actual outperforming the initial forecast and the outlook to maintain the comparable level in the second quarter.

In the second half, after the third quarter, as it is extremely difficult to predict economic outlook due to interest rate policy of each country and the timing and the magnitude of softening of freight rate at the aftermath of the convergence in logistics and supply chain disruption, we must retain relatively conservative position on all business segments. Having said that, our guidance in the second half is not overly conservative. Exchange rate assumption is changed from JPY 120 per dollar to JPY 127.62. And bunker price assumption is changed from $741.25 per metric ton to $838.24 per metric ton.

Let me walk you through the full year forecast on recurring profit of each segment. Please turn to Page 13. On this chart, this is in comparison with the previous year. Starting from Liner Trade, the recurring profit is expected to be JPY 770 billion, up JPY 220 billion from the initial forecast. The environment surrounding container shipping still has multiple unpredictable fluctuating factors, including impact of lockdown by COVID-19, the situation in Russia and Ukraine, soaring resource prices, effect of port labor negotiations at the West Coast of North America, and economic outlook based on policy interest rate in each country. Although ONE does not disclose forecast, as it is difficult to indicate reasonable outlook, certain assumptions are made and reflected on our full year forecast.

The assumptions include fluctuating factors in the first half, as I mentioned earlier, yet we retain the assumptions of continued outperformance in the second quarter as in the first quarter, gradual stabilization of demand, mainly in North America in the second half, convergence of logistics supply chain disruption, normalization of supply-demand balance and downward adjustment of extremely high spot freight rate, but to be supported by long-term freight rates renewed at the backdrop of rising spot freight rate to a certain extent. Thus, our forecast for increase in recurring profit for Liner is JPY 220 billion, of which JPY 200 billion will be in the first half and JPY 20 billion in the second half.

In Air Cargo, we expect recurring profit of JPY 77 billion, up JPY 15 billion from the initial forecast. It is still anticipated to take some time for tight supply-demand balance to loosen by the recovery of the international passenger flights, and coupled by increase of long-term multiple-year contracts, yield index is expected to stay at high level for the time being.

In Logistics business, we expect recurring profit of JPY 48 billion, up JPY 10 billion from the initial forecast. Although both ocean freight and airfreight do have experienced job in freight rate, as we factored in at the beginning of the year and with a relatively high level rate during the first half, we anticipate a gradual decline in profit level as supply-demand balance normalized after the second half.

Lastly, in Bulk Shipping, we expect recurring profit of JPY 154 billion, up JPY 40 billion from the initial forecast. In automotive transportation, although the impact of discrete production of finished cars resulting from semiconductor and parts shortage is still uncertain, steady transportation volume is expected be retained by capturing transportation demand for construction machinery and used cars. While dry bulk business continues to enjoy favorable market, mainly for small-sized vessels in the first half, market falls -- each vessel type is expected to weaken slightly in the second half. Yet overall, we expect to see continued steady performance.

In Energy business, VLCC market is expected to recover to a certain level in the second half, but it may be difficult to see the recovery. VLGC is expected to improve compared with the initial forecast. Strong performance is expected, supported by medium- to long-term contracts for MLG carriers and offshore businesses. What I just explained are covered in Pages 9 to 11 of the materials you're seeing on the screen. Please refer to the material as well.

Lastly, I will touch on dividend. Please turn to Page 9 of the materials. At the very bottom of this page, you see the description on dividend. As I mentioned, the dividend forecast is based on the revised full year forecast. In accordance with the basic policy to refer to consolidated payout ratio of 25% as an indicator, the interim dividend will be JPY 1,000 per share and the year-end dividend will be JPY 145 per share based on the number of shares after 3-for-1 common stock split, calculating from anticipated net profit for the first half and the second half of FY 2022. Based on the number of shares before stock split, year-end dividend will be JPY 435 and full year dividend will be JPY 1,455 which is up JPY 350 per share in interim dividend and JPY 30 per share in year-end dividends, and up JPY 380 per share in full year dividend.

That concludes the overview of Q1 results for FY '22 and revision of forecast for FY 2022. Thank you very much for your attention.

[Shuichiro Shimomura, executive]

Thank you. We'd like to go into the Q&A session. So let's start the Q&A session.

[Unknown Analyst]

I have 3 questions. First of all, my first question is, you -- Soga, you have explained about the container shipping freight rate. The spot rate has been going down, but it has been supported through the annual contract rate. If you look at the past experience, that when the spot rate goes down, the annual contract rate will go down as well, that may be a risk. But you are predicting that is not happening. So what is the reason behind this? That's the first question.

And the second question is that -- this is on Page 13. The second, how are you going to look at the second quarter? For the Logistics business year-over-year, it's going to be -- profit is going to decline year-over-year. The Air Cargo is going to go up. So what is the background? It's in the same market, but between the integrators and the orders, maybe there's a different outlook. So I would like to hear your view upon that.

And the third question, again, this is about the Logistics business. This is on Page 17. In terms of the airfreight, so the first half, 170, 202 -- in the first half in terms of the volume, second half 202. So the first half, the volume has gone down and the second half it's going to go up. So maybe the volume that has not been able to carry by the ships, maybe that will impact the second half. But in terms of the increase of the volume in the second half, any -- if you have any specific reasons then would please give us that? Would you please answer my questions?

[Takaya Soga, executive]

So thank you for your questions. First, Harada, would you like to start with?

[Hiroki Harada, executive]

So Liner and Logistics business, your question -- 3 questions about those. So I would like to respond to your question.

Your first question was about the spot rate of the container shipping. If it goes down, it will impact the full year annual contracts. So that is the past experience, but what are you anticipating for this time around? And first of all, as you have pointed out in the past for the container shipping business, so as a fact, for the same period of time, if the spot freight -- if it goes under the annual contract for some level of time, when there is renegotiations for the annual contract, the cargo will basically go through the forwarder spot market. So in this time around, through the normalization -- to some extent, that will happen. So that is our assumption.

In the first half, so depending on the route, there are some other things happening. But if you look -- if you start reach a certain time line in the certain level, so it has not impacted annual contract right now. For the first half, we do not think that this will happen. Going into the second half, specifically in the second -- the latter half of the quarter, depending on the route, this will happen. As a result, for the fourth quarter -- of course, by January, the annual contract will be renewed in some cases. So these type of contract renewals will be impacted. So that's our outlook for the second half. So what we have experienced in the past though the normalization process, it will happen, specifically for the second half, and that is our assumption. That is our outlook. And that is the basis of our outlook for the full year.

Your second point, what you have referred, I have not looked up the figure specifically. But in terms of the airfreight business, the so-called asset-type NCA. So in terms of the Air Cargo business, but the air freight forwarding business, there I think it's a bit different to, there will be a difference in the quarter.

But what's happening in the market right now is that, generally speaking, the forwarders towards the air cargo business operators, they think the demand is strong and they try to take up the space. So it was a mixed cargo and then it was about a 6-month contract. So -- but it's going to 1 year. I mean some customers had a 2-year agreement on the BSA -- according to the BSA. So for the Air Cargo business, the certain level of foreseeable revenue can be expected. On the other hand, for the forwarding business, so it's not the cargo movement is not very strong right now. So if you have -- basically, if you have the space, that will come out as expense, as a cost. To be able to get the volume as much as possible, there will be some competition in terms of -- at the rate level.

So as a result, the asset-type business -- well, NCA, that's asset-type business or the airfreight business, there will be a difference in the business. That is my understanding.

To your third question about the -- in terms of the cargo and the -- so we do not think, in the second half, there will not be some cargo that will be loaded in the ships. So in terms of the normal cargo, we do have concerns about the U.S. economy, but in terms of [indiscernible], the movement of the cargo is -- in October and December is strong.

In terms of the airfreight from autumn onwards, if you look at the demand from the customer side against the space that they have taken up, I think basically, there is a certain level of cargo volumes that can be expected. So compared to the past, I think basically, there will be some movements in the cargo. So thank you very much for your question.

[Shuichiro Shimomura, executive]

So there has been a transition from the sea to air cargo, actually has been seeing that already. So in the second half, we do not expect that type of thing happening. So that is the type of thing that we expect in terms of the cargo movement.

[Unknown Analyst]

Next, I have 2 questions. The first question is about the Sakhalin 2 impairment. And this is what I would like to hear, and looking at this for LNG transportation. But with respect to tanker, I think it's different, but do you have impairment on tanker? I would like to know the details about the impairment process. And the second question is somewhat related, and this is related to Air Cargo Transportation business. Looking from the previous assumption, the profit level seems to be revised upward on a full year basis. But looking at the volume of the cargo, it seems like it's dropping, and yield is extremely high. And this is the reason why the profit is high. So the cargo volume is decreasing, but since there is a tightening supply and demand, the profit is increasing. Am I correct in my understanding? Those are my 2 questions.

[Shuichiro Shimomura, executive]

All right. Starting from the Sakhalin 2 question, Soga is going to explain and the remaining airfreight will be explained by Harada.

[Takaya Soga, executive]

Thank you. On impairment of Sakhalin 2 project, you asked us about the details of this impairment. In this Sakhalin 2 project, this is LNG transportation. And in our case, we have the joint venture with the ocean freight company in Russia, and we have 2 vessels for transporting LNG. This is the current status. And due to this Russia-Ukraine situation, there are economic sanctions. And by avoiding that, for continuity of this project transportation, the counterpart, the Russian transportation company for the equity that the joint venture partner have, we are trying to acquire their stake. So we have 100% of these 2 vessels are related to LNG transportation for the Sakhalin 2 project. But since we have acquired from the partner, we have 100% stake of this joint venture. But going forward, with this project in the future progress according to the plan, the uncertainty is expected at the moment.

So we have consulted with accountants. And as of now -- because there are uncertainties for this level, we decided to go through the impairment process for the time being. That is the background. But realistically speaking, this transportation is still continuing. And as to what will occur in the future, we still do not know. If this continues, then impairment may recover, but there are uncertainties. So this is accounting-related treatment to have the impairment for the time being. I just responded to your question.

[Hiroki Harada, executive]

For the second question, about Air Cargo Transportation on the full year profit, there seems to be upward revision. The cargo volume is not increasing. So yield should be improving compared to what was expected at the beginning. In a nutshell, your understanding and your analysis is correct. And with respect to yield, the biggest reason for the increase in yield is more than what we expected. As I mentioned, a half year mixed loading is now changed more than 1-year BSA. And the supporting the freight rate is very high. And that portion is now increasing. That's one aspect.

And as for spot, in some of the routes, because of the sudden increase, for example, in Hong Kong, there is increasing number of flights in Cathay Pacific, and the market declined temporarily. But what's happening is not impacting to the long-term contract by the spot price. And furthermore, one of the reasons boosting the yield is a semiconductor-related charter. A high trade rate is now visible. As a result, the yield is increasing. So the volume is not increasing, but the profitability is improving. And the demand supply situation is not so distorted. But part of the air cargo transporters have increased the space in some areas, but the long-term yield with a higher charter freight rates, the average is high and the performance is improving. That is our view.

[Unknown Analyst]

About the Sakhalin 2, about JPY 17.9 billion. In terms of book value, technically speaking, it has become 0. Am I correct?

[Takaya Soga, executive]

The vessel itself, we have acquired 2 vessels. So those are remaining at our assets.

[Unknown Analyst]

I see. So the company part is now 0.

[Unknown Executive]

Yes. It's like a goodwill, and that part is impaired.

[Unknown Analyst]

I have 2 questions. One is about the Logistics business, the Yusen Logistics. So JPY 19.3 billion for the first quarter profit. The fourth quarter was JPY 13 billion. So it has improved even more. So I would like to know the back end of this. I think it is the improvement of the margin. But I want to know in more detail. For the other companies, the first quarter forwarding profit compared to the fourth quarter has gone down. So where -- what is the difference between you and the other peers? I would like to know the reason.

The second question is about the container freight rate and the current situation. It is a peak season, but we don't see any rebound. So why? I would like to know your view about that. If you just look at the news flow in North America, the cargo handling is good. In some ports there may be -- we should see the container being loaded. So -- but it doesn't seem that the freight rate is going up for continuous. I would like to know your view about that.

[Shuichiro Shimomura, executive]

So this is the Liner & Logistics business, so Harada is going to respond.

[Hiroki Harada, executive]

So first, I would like to talk about -- respond to the Liner & Logistics related business. First of all, in terms of NCA's -- excuse me, YLK's performance, specifically compared to the fourth quarter last year and the first quarter of this year, the difference between these 2 quarters, compared to other forwarders, I think you're comparing it to the other forwarders for its performance. In terms of YLK, this -- be able to do 3 months, I think there has been some special demand that came into this first quarter that what appeared in March as well. But -- so there has been some cargo that has not been able to be loaded in the -- by sea vessels, and that has been handled by airfreight. So that impact was seen until April and up to May. So the special demand was there. So that is the reason for the first quarter of this fiscal year that have been impacting the first quarter results.

And there's a reason why we have been done better than the fourth quarter of last year. So the fourth quarter, again, this is special situation in the fourth quarter. It should have been a high season. But -- so SG&A -- so there will be the bonuses, et cetera. So we had to pay those bonuses in the fourth quarter and that was booked in the fourth quarter. And because of this reason, the fourth quarter and the first quarter difference for YLK turned out this way. So in terms of the cargo volume, it's basically the special demand for air LL.

So in terms of the peak season, rebound is not seen, but if you look at the situation, the freight rate is -- has been some adjustments on the spot market, of course. So in terms of the cargo demand, is not as strong as I've seen as the peak season. So the peak actually isn't happening -- coming right now. So maybe the demand is a bit weak. On top of that, the North American side, because the situation has improved and the ships start to return and there has been supply coming in from Asia, so the space has become available. From the Asia side, there has been some supply of this space. And then basically, the space is sold.

On the other hand, mainly the railway, there has been some congestion of the cargo. So going forward, I think we have to observe situation going forward. But in terms of the peak season in terms of the cargo situation, we don't think that there will be a seasonal peak. So maybe the ship will turn and then availability from Asia is there, and then there is some competition. But we don't know how the situation is going to trend going forward. We have to look at the core situation and observe going forward. That's our view.

So going back to your first question about the special demand that happened for the fourth quarter in the first quarter, it would be automotive components, semiconductors, those type of product. I think it's basically the automotive-related components.

[Unknown Analyst]

I have 2 questions. The first question is about the container shipping. And as you mentioned, the spot freight rate, it seems like there is improvement at ports as well. And the volume continues to be very strong after February. But looking at our ports, it seems like we don't see so much improvement in terms of the processing and the handling. But can you explain on that aspect on ports?

And the second one is related to Logistics and also Air Cargo Transportation. You mentioned that there was a special demand in the first quarter. And in the second quarter, is there a major difference in situations that there is a drop? And coming to the third question, in terms of the demand, I think you are trying to reduce demand on a 4-year basis. And you're also trying to revise downward for the second half. So are we beginning to see the slowdown in demand? This is the point I would like to confirm.

[Shuichiro Shimomura, executive]

Thank you. Then can we ask Harada to respond to the questions?

[Hiroki Harada, executive]

Thank you for your questions. Starting from the first question. Thank you for the question about the spot freight rate for container shipping. Looking at the port situation, it does not seem like there is a dramatic increase in labor, and there seems to be improvement. And does that create an impact to the spot freight rate? And what is happening now? And what will be the impact going forward? And looking at ports, originally, local cargoes, compared to some time, we are seeing more workforce and we are receiving more cargo. And it seems like for some time, railway was quite favorable, and we no longer have much risk of infection, but more than 100 vessels, for example, in Los Angeles. There was a stopping of about 100 vessels to 20 vessels. And even with 20 vessels, this is a higher-than-the-normal situation.

But with respect to railway, currently, the railway transportation seems to have a congestion, and we have more cargoes in yard. And what we are concerned about is that it's taking more time for receiving the cargoes locally. And I'm hoping that there isn't much relationship with the inventories, but it seems like there is an increase. And if this kind of situation is going to continue, it's probably sometime later that we will see the complete resolution of the port situations. And this may create an impact to spot freight rate depending on whether the vessels would come back or not. But for the time being, it's not bad. But as I mentioned earlier, seasonal momentum with respect to this fiscal year, we feel that there isn't any seasonal momentum this year. And in Logistics and Air Cargo Transportation for the first quarter and the second quarter, especially in case of YLK in Logistics, second quarter seems to be weaker compared to the first quarter, and this may be repetition, but the special demand from the fourth quarter ended in May.

And in comparison with that -- because there was so much profit from that impact, it seems like there is a slightly weaker second quarter, and the Logistics figures in the second quarter will be not as strong. But on the other hand, a customer is giving us the information that there may be recovery after fall, including semiconductor. So the second quarter is slightly weaker in terms of the figures. I think that is how you can understand. This is similar in Air Cargo Transportation as well. And first quarter had a special demand from a switchover from sea to air. And in case of shipping from Japan, there seems to be some slowdown during summer. And so second quarter seems to be weaker compared to the first quarter, but this is not a dramatic aggravation. First quarter was better. So it's just a matter of comparison.

And then in terms of the overall demand, this can be applied to L&L business. But no matter which business you see, there is a certain level of demand. So we are not seeing that there isn't any imbalance of the supply and demand. But normally entering in fall, mainly in the United States, and looking at the current situation in the world, there could be possible recession. And some people claim that. And some -- we are not receiving the -- we are not receiving information that the customer is saying that the cargoes will drop. But we are expecting that would begin to take place in fall, and that may reduce the demand. And also in terms of the forecast compared with the first half, we must take a more conservative stance, specifically against the possible recession. We are not seeing that the customers are trying to adjust cargo.

[Unknown Analyst]

Well, may I just ask one follow-up question. If -- after the second half, if the volume drops at the NCA, long-term contract, free trade, can that be maintained? Or just like container shipping, will there be room for revision if the spot rate becomes weaker? So may I confirm about the downside risk?

[Hiroki Harada, executive]

About the downside risk compared with the long-term contract of the Liner Trade, Air Cargo Transportation, 6 months BSA may be retained. But what the customers are saying is that there may be more demand from fall, but it may require more space. So far, for example, what was acquired by NCA and the BSA freight rate, we are not seeing any downside risk as to the impact.

[Unknown Analyst]

So this is about the container shipping business. I have 2 questions. So on the second quarter freight rate, and compared to the first quarter, what is your outlook? Up to now, the freight rate will be gradually going down step-by-step. That has been your outlook. Is -- has your outlook changed or is it unchanged? And so compared to the CFI and CCFI, what is your assumptions? And for the first quarter, so CFI has gone down, but your -- in terms of your correlation to your freight rate, what was your correlation? No more -- not much of an adjustment? So I would like to hear about that.

And my second question is about the demand for the containers. So if you look at the transportation category for in terms of furniture, home appliances due to the impact of the retail situation, there is an adjustment. But if you look at the total transportation volume, in North America, rail is still holding up. It's still strong. So in terms of risk, it is there, but the overall transportation volume is strong. So what is your evaluation about the situation? Would you please explain about that?

[Shuichiro Shimomura, executive]

So first, you asked about the -- 2 questions about the container business. So Mr. Harada, please, would you respond?

[Hiroki Harada, executive]

Thank you very much for your question. So I would like to respond to your 2 questions. As this is related to the L&L business, I would like to expand. So for the second quarter read for the container shipping, what is our outlook? As I've said, the spot rate, it has already started to go into adjustment. And in a short period, it has been impacted the annual rates. But if it -- it has to continue for a certain period of time with a certain gap, so although you have to impact the annual rate. So that is our experience.

So in the second quarter, there will be some adjustment for the spot rate. But during the second quarter, whether it will have an impact on the annual contract, that is your question I think. Our answer is that, no. Because basically forecast the cargo demand, if you look at the space availability. So I do -- I'm looking into the situation. We don't think that will happen in the second quarter.

So compared to the first quarter, in some spot freight rate on average compared to the second quarter will be lower than the first quarter. But we do not think that will have impact on annual contracts. If that is good to happen, that will start from the third quarter onwards, going into the second half, that is. That is our assumption. So on ONE, well, we do not -- we cannot elaborate by the performance of ONE, but the lower floor and the FI trend of [ between ] ONE, so how much there will be a choice, but it seems that there is a correlation, maybe synchronized if you look at the past track record. So the SFI's Index is very close to the movement that the ONE is assuming in terms of the stock rate. That is our take.

And in terms of the -- well, in North America -- well, basically, in terms of the cargo volume or the cargo handling, is not basically the things that have been handling. So I think basically, this is where it's very difficult to have an outlook.

So some information points that with a Walmart, Target, the U.S. customers -- well, that will be our customers, these retailers, they have started to build up inventory, their sales have started to go down. We do have that type of information. But if you look at the more short-term situation, is that impacting the [ call of the moment a lot ], no. So when and what shape will this come out? So that's the reason why we're seeing that the timing and the deepest depth of the normalization, we don't know. So ONE has not been able to make that kind of outlook as well.

So we do have an assumption. But that said, we do not think that this situation will continue from autumn and onwards if you look at the macroeconomic situation and the U.S. market situation. So putting that into account, the demand for a certain level, through normalization, that will impact the freight rate. So that is the only way that we can assume. So that is the reason why we have reflected risk for our outlook. That's all.

[Unknown Analyst]

So going back to your first response. So the spot rates as an average, second quarter is going to be lower than the first quarter, but the full year is going to go up for the profit. The first quarter between the second quarter is not going to change. Is that your take?

[Hiroki Harada, executive]

Well, in practicality, from -- everything is going to be reset and started from April. Some of the cargo will be start on May or June, or that will be the [ season ] in the U.S. In some cases, there's some booking, but there's some roll-ups because we cannot handle all the cargo. So the higher rates will be pushed forward. So there will be some rollover of the rates. So in the long term, average as the rates compared to the first quarter, the second quarter, there's some peak season surcharge, although we have not been able to get all of that for the annual contracts. And so maybe the July to September will be high. But for the spot rates, as you have pointed out, if you look at the situation, the spot for the July to September will be lower in total.

[Unknown Analyst]

Okay. So basically, things are trending as you have assumed, in terms of the average rate, that is?

[Hiroki Harada, executive]

It is. The average rate is higher than our initial outlook. So in the second quarter, we don't think that's going to -- the rates might go down sharply in the second quarter based on the reasons I had said because annual contract is there compared to the first quarter. I will be assuming that will be a higher base rate level. The spot rate will go down a bit. But in total, the average rate, they will not be that different from the first quarter to the second quarter.

[Unknown Analyst]

So going to second response, sorry, to go into detail. So furnitures, basically, in terms of the container volume at this time down from the last year. So for ONE, is that the same situation?

[Hiroki Harada, executive]

I'm sorry, by item, by customer data, I do not have that with me. But according to the customer information, we do not have the situation from the customer is saying to us that the booking is going to go down from now on. But on the other hand, so we do not have all the information from the customers in terms of how the recovery is going to be from automotive for next year. So we think that we should reflect some risk in this area.

[Shuichiro Shimomura, executive]

It seems like we don't have any more questions. And then we are a little bit early than the scheduled time, but we would like to close the Q&A session.

So with this, we would like to conclude the meeting for financial results for FY 2022. So please jot down your response. Thank you very much for your attendance today. We would like to close the meeting.

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