Nippon Yusen KK

TSE:9101

Earnings Call Analysis

Stronger Profits and Revised Forecasts Drive Growth

In Q1 FY2024, the company saw a significant 36.3 billion yen increase in recurring profit, totaling 125.7 billion yen. Profit attributable to the owners of the parent rose by 36.7 billion yen to 110.2 billion yen. This was driven by higher freight rates and strong performance across several segments, including automotive, air cargo, and dry bulk. For the full year, the company revised its net sales forecast to 2.57 trillion yen, with a recurring profit of 410 billion yen and net profit of 390 billion yen. Additionally, the dividend per share is expected to increase to 260 yen for the fiscal year.

Strong Start to FY 2024

In the first quarter of FY 2024, the company experienced impressive growth, with revenue reaching JPY 651.7 billion, a year-on-year increase of JPY 84.1 billion. Recurring profit jumped to JPY 125.7 billion, up by JPY 36.3 billion from the previous year, while profit attributable to owners of the parent surged by JPY 36.7 billion to JPY 110.2 billion. This solid performance was driven by tight demand in container shipping, particularly in the Red Sea, pushing freight rates higher. The Air Cargo Transportation, Automotive, and Dry Bulk businesses also played significant roles in boosting overall revenue and profit.

Segment Restructuring for Clarity

To provide better clarity and facilitate understanding among shareholders, the company restructured its Bulk Shipping business into three segments: Automotive, Dry Bulk, and Energy. This move helps to focus on the performance of each distinct area, making it easier for investors to track progress and potential.

Upward Revision of Full-Year Forecast

Recognizing the strong start to the fiscal year, the company revised its full-year forecast for FY 2024. Net sales are now expected to reach JPY 2.570 trillion, an increase of JPY 280 billion from the initial forecast. Recurring profit is projected to be JPY 410 billion, up by JPY 160 billion, and net profit is estimated at JPY 390 billion, JPY 145 billion higher than the previous forecast. All operational segments saw upward revisions, with the Liner Trade segment alone being raised by JPY 106.5 billion.

Liner Trade and Logistics

Liner Trade, comprising container shipping, showed strong profits of JPY 53.7 billion in Q1, a rise of JPY 22 billion year-on-year. Although the container shipping market experienced high freight rates in the first quarter, it is anticipated that short-term freight rates will decline by the end of the fiscal year as the tight supply-demand balance eases. For the full year, recurring profit for Liner Trade is expected to increase by JPY 106.5 billion from the previous forecast. Similarly, the Logistics division also saw improved recurring profit forecasts due to higher Ocean and Air Cargo sales prices and increased volumes in the automotive-related sector.

Automotive Business Performance

The Automotive business continued its robust performance, driven by increased demand for transportation and favorable market conditions. Recurring profit in this segment rose to JPY 37.8 billion, up by JPY 8.2 billion year-on-year. The full-year recurring profit forecast for Automotive was uplifted by JPY 20.5 billion to JPY 120 billion, bolstered by the weak yen and spot market improvements.

Dry Bulk and Energy Insights

The Dry Bulk business benefited from improved market conditions for both Capesize and Panamax vessels, driven primarily by strong transportation demand. Recurring profit in this segment increased by JPY 1.1 billion to JPY 14 billion for the quarter. For the full year, the Dry Bulk forecast was revised upwards by JPY 10.5 billion to JPY 33 billion. The Energy business, supported by long-term contracts, showed steady performance with a recurring profit of JPY 11 billion, almost level with last year. The full-year forecast for the Energy segment was raised by JPY 4 billion to JPY 45 billion.

Shareholder Returns

In light of the strong financial results, the company has decided to increase the interim and full-year dividends to JPY 130 per share each, bringing the total annual dividend to JPY 260 per share. This is in line with the company's policy to maintain a payout ratio of 30%. Additionally, the ongoing share repurchase program continues, with 8,061,300 shares repurchased as of July 31, 2024, amounting to JPY 38.5 billion.

Future Outlook and Market Assumptions

While the current short-term freight rates are anticipated to decline towards the end of the fiscal year, the company expects overall market conditions to remain favorable for the remainder of the year. The solid performance of the Automotive, Dry Bulk, and Energy businesses, along with strategic market assumptions, support the revised forecasts. Potential geopolitical risks, exchange rate fluctuations, and changes in market conditions will be closely monitored, but the company is optimistic about achieving its revised targets for FY 2024.

Earnings Call Transcript 2025-Q1

[岡田 泰章, executive]

Thank you very much for waiting. Thank you very much for your participation to today's session today despite your busy schedule. We now like to begin the NYK Group's financial results announcement for the first quarter of FY 2024 ending in March 2025. I am Okada, head of the IR Group. I will be moderating this session today.

First of all, our presenters for today's session: Representative Director, Executive Vice President, Executive Officer, CFO, Kono; Managing Executive Officer, Chief Executive Officer of Liner & Logistics Headquarters, Banno. Today, Mr. Kono will present on the summary of the first quarter results for FY '24. We will take Q&A time afterwards. We will instruct you how to cast the questions later. The presentation materials are posted on our company's web page. If you could refer that for your convenience would be very much appreciated. And today's session is going to be streamlined on an on-demand basis, including a Q&A session. And I'd like to ask for your kind cooperation. We now would like to start the presentation. Kono-san please.

[Akira Kono, executive]

I am Kono, CFO. Thank you very much for taking time out of your busy schedules to join us at this earnings briefing today. Today, I will first present our financial results for the first quarter of fiscal year 2024 and then our forecast for the full year of FY 2024. Following the presentation, we will take time for questions and answers. The presentation material will be projected on the screen for you to see. But if you have downloaded the material from our website, please also have that ready at your hand.

First, I would like to explain about the changes in the reportable segment. Please have a look at Page 3 of the material. As is described here, effective as of this first quarter of FY 2024, changes are made to the segment. The Bulk Shipping business, which is expanding its operations, is now divided into 3 segments, namely the Automotive Business, the Dry Bulk Business and the Energy Business. For the shareholders, for this change, I think this will facilitate your understanding for each of these segments now that it's broken down into 3.

At this moment, allow me to provide an overview of FY 2024 first quarter results. Please take a look at Page 6 of the material. The second column from the right in blue represents the actual results of Q1 FY 2024. Both revenue as well as profit increased in Q1 with a revenue of JPY 651.7 billion, up by JPY 84.1 billion year-on-year, recurring profit of JPY 125.7 billion, an increase of JPY 36.3 billion year-on-year and profit attributable to owners of the parent, JPY 110.2 billion, up by JPY 36.7 billion year-on-year.

The main factors behind the results include tight demand for container shipping due to the situation in the Red Sea, which has continued since the end of last fiscal year, pushing up freight rates in the market even higher into this term, resulting in strong profits for ONE. Our revenue and profit also grew on the back of good market conditions in our Air Cargo Transportation, Automotive and Dry Bulk businesses, bolstering our overall revenue and profit.

For Q1 comparison by segment, please have a look at the table on Page 7. As I said at the beginning, and as shown in the notes below the table, on top of the changes made to the segments, with the Bulk Shipping business being broken down into the Automotive, Dry Bulk and Energy businesses, the numbers for the Real Estate business, which had been disclosed independently before have now been included as part of the Other segment.

Now please take a look at the second column from the right in blue for the results of Q1. For the recurring profit of the Liner & Logistics segment, which is comprised of Liner Trade, Air Cargo Transportation and Logistics, Liner Trade and JPY 53.7 billion, up by JPY 22 billion year-on-year; Air Cargo, JPY 3.4 billion, up by JPY 3 billion year-on-year; and logistics JPY 5.5 billion, down by JPY 1.4 billion year-on-year. Liner Trade saw a major increase in profit due to ONE's robust business, as I mentioned earlier.

In the Air Cargo Transportation business, recovery in semiconductor market conditions has led to increases in air cargo supported, in particular, by substantial cargo volumes from Asia as well as cost reductions from declining unit price of bunker oil and deferred maintenance costs, resulting in rising revenue and profit.

In Logistics, Contract Logistics business underpinned profits for the segment, supported by strong cargo volumes in the automotive-related sector. But in the Air and Ocean Freight businesses, although the volumes handled grew year-on-year with recovery mainly in Asia, because of rising purchase prices, profit levels dropped, pushing down profit for the overall Logistics segment year-on-year. As a result, for the entire Liner & Logistics segment, recurring profit came to JPY 62.6 billion, an increase of JPY 23.6 billion year-on-year.

Next, on the former Bulk Shipping Business, which is now broken into 3 segments for disclosure. First, recurring profit for the automotive sector increased to JPY 37.8 billion, up by JPY 8.2 billion year-on-year. Despite continuing port congestion and changes in ocean routes, due to improved utilization rates of vessels and robust demand for transportation, which was successfully captured plus the contributions from the cheap JP yen, the Automotive business saw growth in both revenue and profit. In the Dry Bulk business, market conditions improved for both Capesize and Panamax vessels due to strong transportation demand compared to last year. With a recurring profit of JPY 14 billion, up by JPY 1.1 billion year-on-year, both revenue as well as profit increased for this business.

In the Energy business, although carrier and ocean freight business remained steady, underpinned by long-term contracts, market levels for VLCC and VLGC declined year-on-year, resulting in a recurring profit of JPY 11 billion, which was nearly the same level as last year.

If you could go back to Page 3 of the material once again, to repeat, the total recurring profit overall reached JPY 125.7 billion, an increase of JPY 36.3 billion year-on-year. Based on this, after adjusting for extraordinary gains and losses as well as taxes, profit attributable to the owners of the parent was JPY 110.2 billion, up by JPY 36.7 billion year-on-year. Further, share repurchase for FY 2024, which was commenced on May 9, on a cumulative basis, as of July 31, stood at 8,061,300 shares with a total amount of JPY 38.5 billion repurchased.

As is on the left-hand side table, on Page 8, we can see that the increase of JPY 36.3 billion in recurring profit year-on-year was largely due to increased freight rates for Liner Trade and the cheap yen.

This concludes the summary of the financial results for the first quarter of FY '24. Next, let me present on our full year forecast for the ongoing year FY 2024. Please turn to Page 9.

As we announced in the timely disclosure on July 22, we have revised up our full year forecast for FY '24 compared to the initial forecast made at the time of the announcement of FY '23 full year financial results back in May. Net sales is revised by JPY 280 billion up to JPY 2.570 trillion; recurring profit by JPY 160 billion to JPY 410 billion; and net profit, JPY 145 billion to JPY 390 billion. The details will be described later in the segment information. All operational segments were revised upward compared with the previous forecast. Most notably, Liner Trade was revised up JPY 106.5 billion.

With different levels of profit, underlying exchange rates and bunker oil prices and so forth are described on Page 12 for your reference. As for a dividend forecast, taking into account a payout ratio of 30% as a policy, interim and year-end dividends, our growth up JPY 50 from the previous forecast. Thus, JPY 130 per share for interim dividend and JPY 130, a full-year dividend, respectively, a full year dividend is JPY 260 per share.

In addition, as we discussed as a part of the Q1 results, we are executing share repurchasing program, and full year dividend forecast is calculated based on the number of shares excluding the treasury stock acquired as of July 31, 2024.

Next, let me present on the full year forecast for each business segment in comparison with the previous forecast. Please refer to Page 13. The blue color in the center shows the full year forecast for FY 2024. First, for Liner Trade, recurring profit is up JPY 183 billion, up JPY 106.5 billion from the previous forecast. Although freight rate with container ships rose in the first quarter due to the strong cargo movement, we expect the market for short-term freight rates to decline toward the end of the fiscal year as the tight supply-demand balances for shipping capacity eases after peaking in the second quarter. For the full year, we expect profit to be much higher than our previous forecast due to the contribution of revenue growth, mainly in the first half of this year.

Next is Air Cargo transportation, as announced in June, the share exchange with the Nippon Cargo Airlines Co. and ANA Holdings was rescheduled to March 31, 2025. As a result, we have added back forecast for the second through fourth quarters, which were not included in the initial forecast. We expect strong cargo movement from Asia to U.S., Europe in the second quarter and beyond, and we expect a substantial increase in profit for the full year over the previous year.

Next, for logistics. We forecast a recurring profit of JPY 22 billion, an increase of JPY 7 billion, from the previous forecast. Both Ocean and Air Cargo sales are expected to increase due to higher prices, and we are projecting a higher profit level than the previous forecast. In addition, the Logistics business is also expected to contribute to the solid demand, especially in North America, supporting profitability.

In the Automotive businesses, forecast for recurring profit was up JPY 20.5 billion to JPY 120 billion. Although concerns about geopolitical risks such as Middle East and others continue to linger, but we expect automotive transport demand to remain strong, and we expect the units transported to be in line with our initial forecast as we strive to improve the efficiency of capacity allocation.

The upward revision for the full year is mainly due to the depreciation yen and increase in spot freight mainly in the first half of the year, and solid performance of the Automotive Logistics business supported profitability.

In the Dry Bulk segment, we forecast recurring profit of JPY 33 billion, an upward revision of JPY 10.5 billion from the previous forecast. We expect market conditions to be higher than the previous forecast. Previous year, for all vessel types, mainly Capesize vessels, which will be supported by strong transport of iron ore and bauxite to China.

The recurring profit forecast for the energy division has been revised up by JPY 4 billion to be JPY 45 billion, with LNG carriers and offshore businesses expected to perform strongly, supported by medium and long-term contracts. VLCC, VLGC market assumptions for the full year, although lower than the previous forecast, is generally expected to perform in line with the previous forecast supported by medium- to long-term contracts.

On the other hand, profit for petroleum tankers and chemical tankers is expected to go up. On top of the depreciation of yen, we expect full year profit to increase. Please refer to a table on Page 13 for the comparison with the previous fiscal year, full year reference.

This concludes our full year forecast for FY '24. In addition to the slides presented today, please refer to the materials published on our website. In attendance, we are sharing reference materials assumptions for each business segment and so forth. This concludes my presentation. Thank you very much.

[岡田 泰章, executive]

At this moment, we would like to move on to questions and answers. First, I would like to explain how people can ask questions. Those of you with questions?

[Unknown Analyst]

My first question is as follows. With the upward revisions to the performance, you will accumulate your capital. What is your view? So in the medium-term business plan, you want to lower your capital adequacy ratio with investments planned. So you're increasing demand, but what is your view on this?

My second question is as follows. So profit in the Automotive segment, which was broken down, the profit was very good last year, and it seems that both revenue as well as profit are strong this quarter. So the number of vehicles are transported, port congestion, how is the Automotive business being affected by these factors?

And my third question, which is my last question, regarding air transportation, on a full year basis, you have put out a new plan. The profit that's generated this term even after the transfer to ANA, are you going to capture the cash or incorporate cash into your financial results?

[Akira Kono, executive]

Thank you very much for your question. To address your first question. So our view on capital accumulation, in principle, from our point of view, we have the investment plan. And if there's an investment opportunity, we would like to consider making investments. And in the MTP, the investments that are planned in the plan, when we announced our earnings in May this year, compared to the initial forecast, the amount has been slightly increased.

With respect to shareholder return, we would like to strike the right balance. Pointed out, our capital adequacy ratio, we do have a guideline for that. So in line with that, we would like to conduct the shareholder returns. So in line with all of that, we have this guideline of 30% payout ratio for dividends. And based on that, we reviewed our dividend payment this time. Going forward, we have just finished the first quarter. There are still uncertainties ahead. As of today, foreign exchange rates have moved quite substantially, stock prices as well. So we have to look at the developments for some time to see what impact they will bring on our profitability. We do not, at this moment, foresee any major impact, but we will still have to watch. So in view of that, we would like to consider shareholder return going forward. So our thinking remains unchanged from the past. So while looking at the capital adequacy ratio, we would like to strike the right balance between shareholder return and investments.

With respect to the Automotive business, it continues to be strong. Last fiscal year, in FY 2023, there was good profitability, and there has been an increase from that. And compared to the initial forecast, we have made an upward revision of JPY 20 billion. One of the factors is the cheap yen. And another is that in the first quarter, because of the quirks in the vessel deployment as well as timing of the shipping or ship allocation, loading based on spot price increased. And our space continues to be tied with rising demand. So that has increased freight rates in the spot market. And so those are the factors that are contributing to that.

About the NCA, regarding the profitability of NCA, the profit that's incorporated as part of financial results this trend, well, on the balance sheet of NCA, our lending to NCA, the borrowing of NCA from us, there will be adjustments made in those trends. So those are the answers. Thank you very much.

[岡田 泰章, executive]

Thank you very much for the first question. [Operator Instructions]

[Unknown Analyst]

On Energy business and Dry Bulk, the profit was disclosed this time. And for energy, the profit is quite substantial, and we were able to convert the number. To begin with, the crude oil, chemical product or other -- the offshore businesses and so forth, what is the composition of the profit to be this particular number? That is the first question.

And the second question is regarding the containerships businesses. And since July, there were a surge in spot prices and so forth, and there seems to be a slight adjustment happening in the market. What is your take for the future? When we look at CCFI, sometimes the lag is observed. And the contract price is probably lagging behind compared to the peak season. And if you could elaborate on such situation, indeed I appreciate that.

[Akira Kono, executive]

Thank you very much for your question. For the first part of the question, I will be answering. In regards to the breakdown of the profit of Energy business segment, that is not disclosed specifically. And yet being a part of our Energy business, they see and offshore and also tanker business and tanker is comprised of VLCC, VLGC and also petroleum tanker and chemical tankers. All these are included in this area; on top of that, coal for the power companies. So general coal is included in this particular segment.

And energy portion accounts the largest portion of energy profit. In addition, tanker and VLCC, that is based on the medium- to long-term contracts and therefore, generates very stable profit. And of the coal for power companies, it's also the same.

There are some areas that we are taking some exposures to the market. Though the size is not very big, the petroleum and the chemical vessels are the type of the business of that nature. Underlying market is performing quite well. Therefore, that particular business was performing quite well this time.

In regard to the portfolio, based upon market conditions and business situation we may choose to change the portfolio of the business. But as we announced the other day, ENEOS Oceans, 80% of that company's [ stage ] is now considered to be acquired, and we are making efforts to finalize the transition. ENEOS Oceans vessels is not VLCC. Therefore, [ VLGC ] chemicals and petroleum mostly, and 49 vessels are owned by ENEOS Ocean. And 80% of the share for the profit is going to be reflected in our company's financial results. So that is a part of our portfolio change where we are exploring at this moment, and that is initiative at the Energy business unit.

In regard to container business, and particularly, the freight rates, we'd like to invite Mr. Banno.

[Takuji Banno, executive]

Thank you for your question. Now the current freight rate situation, as you know, have seen a high and others were the -- starting from the peak of July, the freight rate is starting to decline. So when the freight rates of ONE would have impacted several weeks of time lag that we will have in the meantime.

Now spot freight is one thing. However, for the long-term contract peak time surcharge are introduced ahead of the time, and that is working quite well at this moment. And with the decline in the spot freight rates that long-term contract freight rate base will be maintained in the meantime. So therefore, the freight rate for us will not drastically reduce from the peak time of July. And if we go to ONE, currently, the cargo movement, freight utilization rate is quite good and that it's operated quite nicely. And therefore, we do not expect the freight rate to decline drastically at this moment. That concludes my answer.

[Unknown Analyst]

Permission, just a supplemental question. Can we go to the container business? For [ universal ] and Middle East, Hamas, Israel, Hezbollah, all these situation seem to be quite fluid. And what's the assumptions of normalizing the situation at this moment? Or are there any specific conditions where if that is met and all these will be resolved?

[Takuji Banno, executive]

No, ONE does not have a certain fixed conditions. I believe that, that is all up to all of the customers. And for the container ships going through resets is going to be very difficult as other types of vessels start to be operated. And then if that situation seems to be safe enough and our container vessels will start to operate, probably smaller player. I will start our operations, and only we'll decide after carefully monitoring the situation.

And just for instance, one of the underlying assumption is that when other Japanese vessels start to operate, then the current situation is expected to continue at least by December. But there's -- but this is just an assumption at this moment. We do not necessarily have an accurate precision analysis of the Middle East situation, therefore, the situation continues to be very fluid.

[Unknown Analyst]

I would like to ask a 2-detail questions. Question number one, regarding logistics, Page 4, Q1 results, profit declined because of increased purchase price. But on a full year basis, you made an upward revision, and that's because of strong sales prices. So purchase prices are up, but price is being passed on to the customer, perhaps. So if you could please explain the background as to why you're making an upward revision on a full year basis.

And again, a detailed question. The Other segment, there's upward revision made to the profitability of that segment. And you have also moved the real estate business as part of Other segment. It's not moving very much, I assume. So what are the factors behind increased upward revision made to the profitability? Any good news?

[Akira Kono, executive]

So regarding logistics, I would like to turn to Mr. Banno for an answer.

[Takuji Banno, executive]

So in the first quarter, container shipping market, all of a sudden, improved and went up. So the surge in the market conditions was even faster and greater than that in the COVID period. So we have not been able to catch up with the speed, and purchase prices increased, and we have not been able to successfully pass on increase to purchase prices to the customer. And so in that regard, performance suffered in the first quarter.

But going forward, I'm not sure whether we are hitting the peak. But the rates are quite high. So in line with that, and I'm sure they will start to gradually come down, and there will be impact on the opposite side. And because the market is very high, I think we will be able to enjoy that situation from the second quarter to the fourth quarter and thus, the numbers that we have disclosed.

Next, on the Other segment, Kono will answer that question.

[Akira Kono, executive]

The real estate business, you said that it has not changed very much, perhaps, and you are right. But in the passenger business, while there were some problems with the vessels last year and some vessels could not be utilized operated, as a result, the number of passengers attracted did not increase as much as expected. But this year, all those problems were resolved.

In early spring, world cruise was on plan successfully. And of late, we have been seeing this trend since last year, but into this year, in particular, tourism demand is very strong. Once we start selling, summer cruise products, they are snatched up and sold out. So compared to last year, tourism business is very robust. Although the number is not very large, it does reflect favorably in the other segment. So that's the answer.

[Unknown Analyst]

Additional question. In the second half, how should we forecast, well, compared to the initial forecast for the container or others? Are there any major changes in your assumptions other than the [ falling ] exchange rate for the second half? If there's any, I'd like to clarify segment by segment.

[Akira Kono, executive]

Thank you very much for your question. As for the container, I will invite Mr. Banno to give supplemental evolution. But for the other segment, we are reviewing, for example, dry bulk, particularly -- and as well as energy, all these market assumptions are included in Appendix. And there are the comparison of the changes in functions made in the first initial forecast and so forth. For the dry bulk and the most [ indiscernible ] situation, which is not linked with the agreed prices and so forth. However, Capesize bulk ships are moving relatively well in such a situation compared to the initial forecast. Second quarter and onwards, Capesize bunkers' performance is expected to be better. So our outlook for the market was upgraded compared to the initial broadcast. So in the ongoing situation, the future freight rate indexes observed and the level which we have revised up, it seems that still the trend is within the range where we made the revised up number.

And of course, if the forecasted assumption changed and, of course, we may adjust our forecast. But the portion on which we upgraded this time was actually reviewed slightly back. In the past, I would not expect a major change in the current market outlook.

In regard to the container, during the first half and second half, differences in the profit is reflective of the freight rate as is presented as a part of my earlier presentation, Second quarter and beyond, the freight rates will start to decline. That is as an assumption which we incorporated.

Mr. Banno, are there any supplemental explanation on this point?

[Takuji Banno, executive]

There's no major supplemental information. Three months ago, we have announced a full year forecast. And in March and April, there was a trend of the freight rate increase. And therefore, we expected that the freight rate would decline spanning 12 months since then. However, for the last 3 months, the freight rates start to continue to increase. Therefore, starting point of the peak has actually become very high. And ultimately, the bottom freight rate, is the same, but gradually, we would expect a freight rate decrease.

[岡田 泰章, executive]

Thank you very much for the questions. We are still taking questions. [Operator Instructions] If there are no further questions, although it's earlier than scheduled, we would like to bring this briefing session to a close.

So with that the earnings briefing for Q1 FY 2024 is brought to a close. After the webinar is closed automatically, the questionnaire survey will appear on the screen, please kindly fill it out. Once again, thank you very much for your participation today. [Statements in English on this transcript were spoken by an interpreter present on the live call.]