Nippon Yusen KK

TSE:9101

Earnings Call Transcript 2024-Q1

[岡田 泰章, executive]

[Interpreted] Thank you very much for participating despite your busy schedule. I'd like to start the fiscal year 2023 first quarter financial results briefing of NYK. I am Yasuaki Okada, Head of IR. Thank you very much. First of all, I would like to introduce today's attendants. We have the Vice President CFO, Mr. Kono. Representative Director and the Managing Executive Officer and logistics business head, Mr. Banno. Today, from Mr. Kono, we will have a presentation about the first quarter results briefing for fiscal 2023. After that, we will have a question-and-answer session. I would like to explain how to ask questions afterwards. The presentation material would be on our website. Please download that according to a necessity. Including the Q&A session, this presentation will be shown on-demand streaming. Please understand. Let us start the presentation. Mr. Kono, please.

[Akira Kono, executive]

[Interpreted] As of 1st of April, I assumed the position of CFO and Kono of NYK. Thank you very much for taking time-out of your busy schedule to attend this briefing today. Today, I will first provide an overview for the first quarter financial results for fiscal year 2023 followed by an explanation of the full year earnings forecast for fiscal year 2023. After that, we will have time for questions and answers. The presentation materials will be projected on the screen you're looking at or if you have downloaded them from our website, please have them ready at hand.

First, I would like to give you an overview of the first quarter results for fiscal year 2023. Please refer to the table on Page 6. The second blue column from the right shows the results for the first quarter of fiscal year 2023. Revenue decreased by JPY 105.5 billion year-on-year to JPY 567.5 billion, recurring profit decreased by JPY 288.3 billion year-on-year to JPY 89.4 billion, and net income decreased by JPY 269.8 billion year-on-year to JPY 73.4 billion. Both revenues and profits decreased.

The main reasons behind this is that the Liner & Logistics segment, which consists of ONE, Air Cargo Transportation and Logistics, which had been strong. In the same period of the previous year, saw a decline in rates and handling volumes due to the easing of supply demand as a result of the resolution of supply chain disruptions. Both revenue and segment profit declined.

The dry bulk market also declined compared to the high market situation in the same period of the previous year. Please see the table on Page 7 for comparison by segments. Here, too, the second blue column from the right shows the first quarter results. The recurring profit loss of Liner & Logistics business, which consists of Liner Trade, Air Cargo Transportation Logistics, for instance for Liner saw the year-on-year decrease of JPY 238.5 billion to JPY 31.6 billion. For Air Cargo Transportation, a year-on-year decrease of JPY 24.1 billion to JPY 0.4 billion, for Logistics a year-on-year decrease of JPY 12.2 billion to JPY 7 billion.

Each of the businesses were affected by the decline in transportation demand, which became pronounced from the fourth quarter of the last fiscal year and onward. In the Liner Trade business in ONE, profit level fell due to a decline in spot freight rates caused by an easing of supply-demand, which also affected contract renewals. The Air Cargo Transportation business freight rate levels fell due to a decrease in cargo movement and increases of freight based resulting from a recovery in the international passenger traffic, which caused the supply/demand to ease.

In the Logistics Business, the Logistics division performed well. But as explained earlier, the Ocean freight and Air freight handling business were affected by the Liner Trade and international air freight markets resulting in a decline in profit levels.

As a result, the Liner & Logistics segment as a whole recurring profit was JPY 39.1 billion, down JPY 275 billion from the same period last year. The Bulk Shipping business posted recurring profit of JPY 53.7 billion, down JPY 10 billion from the same period last year.

In the Dry Bulk carrier business, although efforts were made to reduce the risk of market fluctuations through futures trading and other means. Market conditions for each type of vessels were worse than in the same period of the previous year due to the delayed recovery of the Chinese economy and other factors.

On the other hand, in Automotive Transportation business, the supply-demand balance remained tight due to strong transportation demand in the second half of the previous fiscal year.

As a result of the efforts, optimized vessel allocation improved operating rates, the number of units transported increased compared to previous year. In the Energy business, LNG and offshore business remained steady supported by long-term contracts. And market conditions for VLCCs and VLGCs improved significantly from the same period of the previous year.

Please turn back to Page 3 of the document. Again, overall, growing profit decreased by JPY 288.3 billion year-on-year to JPY 89.4 billion and net income decreased by JPY 269.8 billion year-on-year to JPY 73.4 billion after adjusting for extraordinary losses and taxes and other items.

Next, please refer to Page 8. As shown in the table on the left, the JPY 288.3 billion decrease in recurring profit compared to the same period last year was largely due to the fluctuations in the shipping market, particularly in the Liner Trade segment. This has mix summary of the financial results for the first quarter of FY '23.

Next, I would like to explain the full year forecast for this fiscal year FY 2023.

Please refer to Page 9. With regards to full year forecast for FY 2023, these figures are versus the forecast announced in May at the time of the full year results briefing. The revenue rate was revised down by JPY 130 billion to JPY 2.170 trillion and recurring profit and net income were both revised up by JPY 20 billion to JPY 220 billion. I will cover the details of each segment later versus the previous forecast Liners & Logistics segment was impacted by the sluggish market and the forecast was revised down by JPY 19.5 billion.

In Bulk Shipping segment, there was a benefit from a strong performance of automotive transportation business and VLCC, VLGC market, which led to forecast revision of JPY 39.5 billion.

On Page 12, you can find the profit at each level and exchange rate assumptions as well as Bunker prices. The dividend forecast in accordance of the payout ratio guidance of 30% led to upward revision by JPY 10 of the dividend, which is JPY 130 annually, JPY 60 per share for interim dividend and JPY 70 per share for year-end dividend.

In addition, as we have explained in the medium-term management plan, it has been decided to acquire treasury stock of up to JPY 200 billion during the period of August 4 in 2023 and April 30 of 2024. In the Board of Directors meeting held today, this was resolved. The acquired treasury stocks will all be retired and the dividend forecast that I just explained is based on the number of shares before this share buyback.

Next, is the full year forecast by segment compared with the forecast announced at the previous full year results. Please turn to Page 14. The blue column in the center is the revised forecast for FY '23. First, with regards to Liner Trade, recurring profit was revised down by JPY 2 billion to JPY 67 billion. With regards to the environment surrounding containerships, currently, the transportation demand is low and there is oversupply of container shipping capacity. Therefore, spot freight rates are staying at low level. In the second quarter, forecast for the first -- compared to first quarter, the profit level shall be lower. However, after fall, we expect the inventory level in the U.S. retail sector to decline and the market will start to recover.

For Air Cargo Transportation business, as was announced, the assumption is that the sales of the entire stock of Nippon Cargo Airlines company to ANL Holdings is to be completed on October 1 this year. And also, we expect the current soft market condition to continue. Therefore, the forecast versus last forecast is down by JPY 7 billion to plus/minus 0.

Next is logistics versus last forecast, we expect the decline by JPY 10.5 billion to JPY 23 billion. Both the ocean and air cargo market is soft, and we expect the profit level to decline. On the other hand, in the logistics business, we expect a robust demand in the U.S. and Europe to contribute and we do not expect the profit level to decline in a major way.

Next is Bulk Shipping versus last forecast, we revised upward by JPY 39.5 billion to JPY 141.5 billion. In the Automotive Transportation business, we expect strong demand to continue higher than last forecast. And through optimization of vessel deployment and efficient operation of vessels versus last forecast, we expect transportation volume to increase by 70,000 cars.

In Dry Bulk business, the recovery of economy in China is delayed than anticipation. And so we revised downward the market assumptions for second quarter and beyond. In Energy business, in LNG vessels and offshore business, we expect stronger performance supported by medium- to long-term contract. And for VLCC and VLGC, we expect tighter than expected supply and demand conditions to continue and revised upward the market assumptions.

On Page 13, there is a table that compares with last year. For your information on this page in the notes at the bottom of the slide, we explained that the calculation method for the interest amount allocated to each segment was changed. And for the sake of apple-to-apple comparison, we revised the previous year's recurring profit numbers reflecting the new calculation method.

The main change is the small decline in the cost of other segment. And in response, each business segment profit declined by a small amount. And there is no impact to the total number and to the total revenue. That was the explanation of the full year forecast for FY '23.

In the presentation material published in the home page, there are additional pages in the appendix, which covers information on the assumptions of each business segment and other reference materials. Please refer to those slides as well. This concludes my explanation. Thank you very much for your attention.

[岡田 泰章, executive]

[Interpreted] Thank you very much. Next, we would like to go to a question-and-answer session.

[Unknown Analyst]

[Interpreted] I have 2 questions. So this time ground, the vision against your plan so I would like to ask about your assumptions that you have used, for instance, improved the book shipping business. The first quarter -- rather than first quarter, second quarter, the profit is going to decline. And in terms of the season, the dry bulk at the second half, the market will improve. So the profit going to be lower than the first half. I'm just one question about the assumption. And in the same vein, in terms of the Logistics business. In the first half -- rather than the first half, the second half has to be the peak of the demand, and I think the profit should increase but it is not reflected to the plan. So I was just wondering what capital assumptions that you were using?

My second question is that in the midterm plan. So trying to control your capital, what the initiatives you're taking in the midterm plan, in terms of the JPY 200 billion of share buybacks, you have made that announcement. So in terms of the -- including the off balance, improving the actual equity 1.22%, how this is going to progress. So the plan has been slightly rise upwards. But against the plan, the more the profits is over the plan, it means that the capital will increase as well. So it means that you will have to go forward in those initiatives. So I would like to hear about your initiatives against this.

[Akira Kono, executive]

[Interpreted] Thank you for your question. First, to your question about the assumptions that we're using for our revised plan for the book shipping. And for the logistics business, the question was that compared to the first half, the second half profit level is lower. And the background or the assumptions we're using, I understand your questioning about that. In terms of the bulk shipping business. So currently, so with tankers and VLGCs, currently, we are being able to enjoy a high level of $70,000, $80,000, we are at a high level. But going forward, I think if you look at the appendix, I think you'll be able to understand. But as you can see there, in the appendix, going forward, we think that the market is going to decline. So that is the reason, we reflected in our assumptions.

In terms of the automotive transportation vessels, as we have said, overall, against our initial outlook in terms of the volume has gone up. But going forward, the cost because we have to renew some of our chartered vessels. So the cost will be going up a bit. So for the bulk shipping business overall, that will lead to the difference of the profit between the first half and the second half. In terms of the logistics business, Mr. Banno, will answer your question.

[Takuji Banno, executive]

[Interpreted] Thank you for your question. In terms of the logistics business, why does the second half will be worse than the first half. I think the general consensus is the second half will be better than the first half. That's true. In terms of volume, it will gradually improve and the second half volume wise, it will improve. Before that Mr. Kono said that the contract logistics service is focusing on warehousing is basically the same, whether it be the first half or the second half. The porting business, Air and Ocean porting businesses were the difference.

For these businesses, in terms of the procurement price from the beginning of the year, which has started to decline but in terms of the rates that we have been seeking for the customers, there is a lag in terms of how this is reflected. So because of this, the margins was higher, was better. That was background. But the rate has started to become closer to the procurement cost, meaning that the margins that we will be able to get will be lower. So that will be more pronounced in the second half rather the first half. So in terms of the revenue, it's going to grow but in terms of profit, it's going to decline.

[Akira Kono, executive]

[Interpreted] And a follow-up to your second question. In terms of the adjustment for the shareholders equities, so JPY 200 billion of share buybacks as a result for the full year -- at the end of the full year in terms of the forecast of the balance sheet, which are the indices. That was your question? As we have been saying, for this fiscal year's profit forecast is JPY 20 billion. So in terms of the -- even after recovery of all shares, and of course, we pay a dividend. If you take that, we said the shareholders equity ratio and our balance sheet, these type of indices will not see a larger level of leverage. I do not think that it's going to be the case.

But that said, there will be -- we have to strike a balance between our investment plans. Currently in our midterm management plan, we have investment plans as well. Under my point of understanding, the investment plans are going forward very smoothly -- but the speed depending on the speed of the focus in the single year maybe, the cash flow and the investment cash flow related investment will change on the balance sheet.

So reflecting this, I think, the next year onwards figures or numbers will be decided. So in that sense, debt equity ratio, the shareholders equity ratio against the initial plan or in terms of the adjustment I want to make in terms of shareholder equity. Of course, it will progress. But it will all depend on how much investment or the progress of the investment that we're going to make.

[Unknown Analyst]

[Interpreted] So in terms of the Logistics business. So is there a delay in terms of the payment of procurement, in terms of the freight situation, I think you have already known about that from April or May. So if your business done any major change in the market condition in the last 2 months, if you're going to visit your outlook downwards. In terms of the shareholder equity reduction yes, I think I understand that you have a plan, but we would like to do this. It means that in terms of the capital reduction, I think you have to invest in any case. And so is it the -- basically, you will do that according to your formula, you're going to stick to your formula? Is that what you're seeing?

[Akira Kono, executive]

[Interpreted] Well, let me first talk about the situation of logistics. Well, 3 months ago in comparing right now, the situation hasn't changed that much. But the major element here is that as the freight rates decline has been larger than we have estimated. Especially for Air porting business, the fleets there. Well, the marketable is declining, but what we are dealing with, they are maybe less of the shipment of what we are handling. So we have started to see that in May. So that is the reason why the profit has declined.

And going to your second question, let me explain about that. As you have pointed out, basically, we are progressing according to a midterm plan. So JPY 200 billion of share buybacks within the midterm plan, it will be a 2-year time frame but we are doing this all of that for this year.

But there is a timing difference, but the numbers already reflects that. And on top of that, in the mid-term plan, about JPY 140 billion management allocation is included and that will be according to the progress of the investment plan or the other changes in the profit plan including additional return, we'll be utilizing that very flexible. And so basically, that scenario hasn't changed. So as I've said, so investment and we have conducted a provision of JPY 20 billion. And based on the numbers that has been put out by the end of this fiscal year, we will consider about the capital plan from next fiscal year onwards. That is basically in line with what we have anticipated within our midterm plan.

[岡田 泰章, executive]

[Interpreted] We would like to entertain the next question.

[Unknown Analyst]

[Interpreted] I have 2 questions. First question is regarding the Bulk business. The Bulk shipping business, what are the factors for or revising upward the profit plan. Per business, what is the largest contributor to the upward revision or any business area where you reduce the profit plan. That is the first question.

Second question is regarding your cash position. As of the end of June, the cash on the balance sheet is JPY 220 billion. And the share buyback funding will likely to be covered by the funding plan. Is that, am I correct? And from medium- to long-term working capital, what would be the right level of cash to be held? Those are the 2 main questions.

[Akira Kono, executive]

[Interpreted] Regarding your first point, the breakdown of Bulk shipping, strong areas and weaker areas, well as I have explained, the automotive vessels and energy, VLCC and VLGC in particular, they outperformed our assumptions. On the other hand, dry bulk was more or less in line with our expectations. For Dry, second half onward, we do expect deceleration of the market. The assumption is revised downward from our initial assumption. So for the full year, that will be the factor for negative contribution. For automotive and energy, the number of transported cars that contribution is larger.

With regards to the cash position, as you have pointed out, this time, JPY 200 billion share buyback will be executed. And in addition to cash at hand, we fund using debt, such as transition bond issuance, we did issue recently. And along with the progression of the investment plan, we will cover with the fundraising as well through debt. The current JPY 220 billion cash position, we do feel that it is slightly larger than optimum. So we will likely to make some adjustments going forward. That was my reply.

[Unknown Analyst]

[Interpreted] I have one additional question as a follow-up. For Bulk shipping business, the FX assumption is changed by only JPY 2 on annual basis. So am I correct to assume that FX rate, exchange rate assumption change impact is not significant. Second half assumption is JPY 130 to the dollar. So this is unchanged. In the first half, we factored in the current rate to a certain extent. So the impact is relatively small. In the first quarter, we explained on the material, which page was it? It's on Page 8. In the first quarter, it is JPY 135. So the change is JPY 5 versus last quarter, it said JPY 3 billion. So the assumption is weaker JPY 1 by JPY 5.

Second quarter onward, the FX impact amount for this. Well each business revenue has been reviewed once again. And slightly the sensitivity has risen compared to the previous assumption. The initial assumption was JPY 1.16 billion per JPY 1, but current sensitivity assumption is JPY 1.24 billion per JPY 1 fluctuation.

[岡田 泰章, executive]

[Interpreted] Going to the next question.

[Unknown Analyst]

[Interpreted] So this is an overlap with the previous person, but more than assume profit and cash, if that is generated, more than accepted profit is generated, I would like to talk about the optimization of capital and the return policy. So the upward revision this time, the additional return that you have announced, with the increased dividends or JPY 200 billion of share buybacks, is that basically the all that you're going to do in terms of the enhanced return?

Going forward, for instance, if the profit is better to the weaker yen, maybe to the ONE additional dividends coming from ONE. If that happens, is there a new really additional return that you're going to conduct to the shareholders? What is the timing or the methodology? So is it just basically increase the dividend based on the 30% or the payout ratio or some our dividend payment policy. If you have any ideas in terms of how are you going to -- if you're going to do some additional returns? And how are you going to do that?

[Akira Kono, executive]

[Interpreted] Going to your first question. So this time, the additional return, well, in terms of the increase of the dividend. So this is due to the revised revision. So JPY 220 billion of the net income is the outlook. So based on the 30% payout ratio target that we have in line with that, we are forecasting or have decided to increase the dividend. Going forward, so we are not forecasting downward revision. But if it's an upward move, then 30% of payout ratio is our target to start from this fiscal year. I think in terms of returns, we'll consider that looking at the target. So this JPY 200 billion of share buybacks. This is based on the midterm plan. And from the beginning, we have been explaining about that. And it's just that the timing has been front-loaded.

And going forward, in terms of our shareholder return policy or the methodology that we're going to take, we have not decided definitely maybe more than 30% of the payout ratio going to 35%. We have not discussed about that currently. But this 30% will be is a type of the criteria and that will be a dividend policy will be based on this 30%. With the additional return to our shareholders, I think what you are asking is that further share buybacks, whether that's going to do that or not. I think that's the gist of your question. As the midterm plan, we have explained the JPY 140 billion of management allocation will be there.

On top of that, based on our future investment plans, if there is additional profit that we're going to generate this fiscal year, we'll take a comprehensive view and then discuss what we want to do with that. So whether it's going to be through share buybacks or is it going to be through additional payment of dividends, currently it's not decided but to further share buybacks. So well, what we are doing right now is not the end. As a possibility and there is a possibility that we're going to do further share buyback.

[岡田 泰章, executive]

[Interpreted] I would like to assign the person who raised the hand.

[Unknown Analyst]

[Interpreted] With regards to container shipping, what is the situation for April to June period on a monthly basis, what is the P&L? There are former contracts, which contributed to profit. And what is the status of that? And from July to September period, what would be the rate at spot freight rates that make up the business. If you could share that with us.

[Akira Kono, executive]

[Interpreted] On this question, Mr. Banno will reply.

[Takuji Banno, executive]

[Interpreted] With regards to the market trend, from the beginning of the year, the level has gradually come down. In June, we see that the bottom has been hit and then that trend started to rise since that time. With regards to the containership P&L, there's some time gap to reflect the market trend. From first quarter, to early second quarter -- first half of the second quarter, deterioration continues and then recovery will start. Especially in April, last fiscal year's high rate contract still existed remained. So we were able to generate quite a large profit and that led to the first quarter result.

And second quarter results, a lot of adjustments are being already done and that is reflected in the second quarter. The reason for deterioration, those are the assumptions. Currently, I think you are aware that from mid-July or second half of July to August, the spot rates are recovering gradually. So depending on the trend there may be potential for overshoot, but we need to remain vigilant. That was my reply.

[Unknown Analyst]

[Interpreted] Understood. Additional question. The freight rate assumption for the second half, currently, the spot is rising. And once that has stabilized, then you will be able to generate more profit. What is the assumption of the freight rates?

[Akira Kono, executive]

[Interpreted] The freight rates and the volume, both are the factors and for the volumes, we are making adjustments on the vessel capacity to maintain high capacity utilization rate but still, there is a sufficient capacity. We do not expect a rapid increase but compared to 3 months ago, we made some downward revision, but currently, we expect the volume will increase. On the other hand, on the rate side, currently, it is rising slightly. In the future, for a certain period of time, well, we do assume the rates will further rise a little bit. In the beginning of the year, it comes down again. There is such seasonality. So that is our assumption.

[岡田 泰章, executive]

[Interpreted] Let's go to the next question. There's a question via chat. This is about shareholder return, I will read it up. With the share buyback, the number of shares is going to decrease substantially. So JPY 100 will be a minimum level. Why are you continuing to pay this dividend?

[Akira Kono, executive]

[Interpreted] So this time around, in terms of a dividend payment, as I said in the previous explanation, we haven't reflected a decline in the number of shares through the share buybacks because we don't know how many shares we're going to be able to buy back, what time this is going to happen. So in terms of the term average number of shares, what is going to be, it's very difficult for us to make a rational assumption. So it is not reflected in the JPY 10 increase of dividend.

So including the minimum level of JPY 100. So our target will be 30% of the payout ratio. At the end of the fiscal year, we will look at the average number of shares during the fiscal year and how far this share buyback has been progressing. And I think ultimately, we'll look at these situations and decide about our dividend. In this context, how much number of shares is going to decline, depending on the number, maybe we will review the minimum full year dividend payment. That is possible. But as of now, it's difficult for us to make a forecast. So it's not reflected included in our dividend payment prediction.

[岡田 泰章, executive]

[Interpreted] We are still accepting questions. Please either raise your hand or write your question in the chat. Please go ahead.

[Unknown Analyst]

[Interpreted] I would like to make an additional question. The assessment of the first quarter with regards to the progress of profit, how has this been assessed. The ordinary profit is up by JPY 20 billion in first quarter, is assessed to be in line or positively assessed?

[Akira Kono, executive]

[Interpreted] Basically, you are correct. First half, especially in the first quarter, the performance was higher than our assumptions in some areas. As I have been explaining, at ONE, the contract from last period before renewal contributed. And in Dry bulk, currently market is slightly down. So we have been able to enjoy the higher level of risk. So on top of that, the market itself has been continuously being able to not a kind of one-off on the first quarter, but in the second quarter onwards, we think that the Automotive Cargo Transportation business is going to be strong. But the tankers, VLCC, VLGC is strong.

So these were the factors. That's the reason why the first quarter, we have been able to show a good result in that sense. Of course, there's some ups and downs but for the second half, the positive elements will be able to offset the ramp of the Liner & Logistics segment. And so now, that's the reason why we have not change the full year outlook that we have announced at the beginning of the year. So that's all from me.

[岡田 泰章, executive]

[Interpreted] So there seems to be no further questions. It's earlier than planned. But with this, would like to end the Q&A session. Thank you. First quarter earnings briefing for the fiscal year 2023. Thank you very much for your participation.

[Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]