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Earnings Call Transcript

Earnings Call Transcript
2021-Q2

from 0
H
Hitoshi Nagasawa
executive

Thank you for joining us for today's explanation of the second quarter results fiscal year 2020.

Before starting my detailed explanation, I would like to reflect briefly on the first half. At the beginning of the year, the COVID-19 pandemic was expected to have a huge impact on the bottom line in the container and car transportation businesses and our goal was to do whatever it took to just secure a profit.

However, as it turned out, in the container business, although cargo volumes declined as forecast, capacity was adjusted in line with the demand. And as a result, it was possible to maintain the freight rate levels. In Air Cargo Transportation, although JAL and ANA are suffering severely, and there is no joy in the situation. The decreased capacity provided a tailwind for NCA. Overall, we were able to achieve extremely positive results in the first half.

Moving on, I will now begin my detailed explanation. Please turn to Page 3. First, concerning revenues, maritime shipping revenues decreased due to COVID-19. The lower shipping volumes were mainly centered in automobiles, and along with the sluggish dry bulk market, revenue declined concerning recurring profit and loss. As I mentioned during my overview of the first half, the significant improvements in Global Logistics which includes the Liner, Air Cargo and Logistics segments, greatly exceeded the lower profits in Bulk Shipping, particularly car transportation. This resulted in higher profits.

Recurring profit was JPY 31.4 billion higher than the same period last year. Concerning extraordinary profit and loss, structural reforms were carried out in the Dry Bulk business as set forth in the medium-term management plan. An extraordinary loss of JPY 17.6 billion was recorded in the second quarter for the expenses incurred in relation to the early redelivery of chartered vessels and other expenses.

Looking at each segment, in the Liner trade, as stated here, lifting has recovered after the lockdown was lifted in both spot and short-term freight rates rose. In particular, in the North America routes, lifting has recovered to levels similar to last year, and utilization and freight rates were higher year-on-year, leading to increased profits.

The detailed figures can be found in the appendix at the end of the materials provided. But to give a quick summary, comparing the first half of this year with that in fiscal 2019, liftings were 1.38 million TEUs in the Asia North America eastbound routes this year. Compared to 1.44 million TEUs last year.

In the European routes, liftings were 770,000 TEUs this year compared to 950,000 last year. However, the freight rate index was 115 this year compared to 104 last year in the North America routes. And in the European routes, it was 104 this year compared to 100 last year. As indicated by these figures, yield improved. And as a result, higher profits were achieved.

In Air Cargo, similar to what I said during my explanation of the first quarter results, Air Cargo demand itself has declined. But due to the suspension of international passenger flights space supply is greatly lower.

As a result, freight rate levels have been higher since the spring, and they have continued to remain firm from July. As a result, space utilization and yield that NCA improved. Looking at the specific figures, the loading volume in the first half of last year was 190,000 tons. This year, it was 240,000 tons, an increase of 50,000 tons. Also, looking at the yield based on the performance last year, it rose significantly from 84 last year to 111 this year. As a result, profits are much higher this year.

In Logistics too, due to the increased yield in Air Cargo, as I just mentioned, gross profit from Air Cargo increased. Also contract logistics, which was expected to be greatly affected by COVID-19, put in a strong effort and achieved significantly higher profits. Global Logistics, which includes Liners, air Cargo And Logistics was the driver of profit during the first half.

On the other hand, in Bulk Shipping, although Energy transport was steadily based mainly on medium- to long-term contracts, unfortunately, shipping volumes greatly declined in car transportation as initially forecast. In terms of the actual shipping volumes, only 960,000 vehicles were transported in the first half of this year, a 40% drop from the 1.62 million vehicles transported in the first half of last year. Also in dry bulk, the market was extremely slow at the beginning of the year. As a result in Bulk Shipping as a whole, profits fell significantly compared to last year.

Page 4 shows the actual figures. In the first half of this year, revenue was JPY 722 billion. Operating profit was JPY 16.6 billion, recurring profit was JPY 47.4 billion, and net income was JPY 22.1 billion.

Page 5 shows the detailed figures for each segment. As I stated at the start of today's explanation, Global Logistics has greatly improved from last year.

In the Liner segment, recurring profit was JPY 28.4 billion compared to JPY 9.7 billion last year. In addition, the Air Cargo segment achieved a profit of JPY 13.2 billion this year compared to the loss of JPY 9.1 billion last year.

In Logistics, recurring profit rose from JPY 2.3 billion last year to JPY 8.1 billion this year. And a Global Logistics as a whole profit climbed from JPY 2.8 billion last year to JPY 49.8 billion this year. This is an improvement of JPY 47 billion.

On the other hand in Bulk Shipping the drop in car volumes was severe. This was anticipated at the start of the year, and it was possible to avoid a loss due to the solid performance of the Energy division. The Bulk Shipping segment as a whole, which includes Car Transportation, Dry Bulk, and Energy recorded a profit of JPY 0.1 billion. This is basically a breakeven result. The first half of last year was a profit of JPY 14.2 billion. So this is a decline of about JPY 14 billion.

Overall, the JPY 49.8 billion recurring profit in Global Logistics was the main driver of profits during the first half. And although I feel Bulk Shipping made solid effort in achieving a breakeven result, the Global Logistics profits accounted for almost all of the overall recurring profit of JPY 47.4 billion.

Page 6 shows a waterfall graph of the situation I just explained, so I will not go into any detail.

From Page 7, the materials cover what is expected to occur through the end of the year. For the full year, we expect to achieve a recurring profit of JPY 70 billion. Initially, when reporting the first quarter results, we announced a recurring profit forecast of JPY 20 billion, but this has now been revised up to JPY 70 billion, concerning extraordinary profit and loss. Although the amount is still fluid, we are considering further structural reforms in Dry Bulk. As a result, full year net income is forecast to be JPY 35 billion. This too is a large upward revision from the JPY 13.5 billion announced when reporting their first quarter results. As a result, in addition to the decision to issue an interim dividend of JPY 20. We are planning to issue a year-end dividend of JPY 30 for a full year dividend of JPY 50 per share. At the start of the year, we promised a full year dividend of JPY 20. So compared to this, the dividend has been raised much higher.

Shown at the bottom of the page are the responses to COVID-19. As can be seen here, the responses remain unchanged, while working to ensure the safety of employees, a work system centered on remote work continues to be implemented. Also concerning cash flow in preparation for unexpected events consideration is being given to borrowing long-term funds and securing strong free cash flow. Safe operations and crew changes are areas in which we are currently facing great difficulty due to the uneven national responses to COVID-19 around the world. This is expected to result in additional expenses of about JPY 2 billion and about JPY 0.6 billion of these expenses were incurred during the first half.

Moving on to Page 8. Shown here again are the responses being taken. I will not provide a detailed explanation. But in short, we have created a task force and are basically working to smoothly carry out crew changes by broadly collecting information and implementing responses on an individual vessel basis. As a result, as shown in the graph, the crew change ratio was extremely low at around 20% to 30% in April and May. Since then, it has risen. And now crew changes are being carried out generally as planned.

Page 9 shows the full year forecast for the fiscal year ending March 2021. I would like to briefly explain the recurring profit trend in comparison with the previous forecast as well as to provide a comparison of the first and second halves, although the actual figures are not stated here.

In the Liner segment, the recurring profit forecast has been raised from JPY 1.5 billion to JPY 40.5 billion, looking at the first and second halves, profit in the first half was JPY 28.4 billion, and it is expected to be JPY 12 billion in the second half.

Based on the figures at one, costs are expected to increase in the second half, particularly for container repositioning. And this is expected to cause the bottom line to deteriorate slightly compared to the first half.

In Air Cargo, profits have been revised up to JPY 19 billion from JPY 13.5 billion in the previous forecast. Again, looking at the first and second halves, profit was JPY 13.2 billion in the first half and is expected to be JPY 5.7 billion in the second half. Compared to the first half, cargo volumes are likely to decline slightly from 240,000 tons to 230,000 tons.

In addition, yield is expected to fall from 111 in the first half to around 94. As a result, in terms of the bottom line, profit will likely decline slightly compared to the first half. Logistics will trend similar to Air Cargo, and thus, falling yield in the second half will result in lower gross profit. Against the JPY 8.1 billion profit in the first half, profit is forecast to be JPY 4.3 billion in the second half. Overall, concerning the second half we have taken a conservative approach to the forecast for all 3 segments.

On the other hand, in Bulk Shipping, the profit forecast has unfortunately been revised down from the previous JPY 8 billion to JPY 2.5 billion now. The reason for the downward revision is the more gradual than expected recovery in Car Transportation. Also, the Energy division, as stated here, will be steady based on the medium- and long-term contracts. However, we have been forced to revise down the forecast earnings from some contracts in the offshore business due to the low oil prices. As a result, against the basically breakeven result of JPY 0.1 billion in the first half, due in part to the benefits derived from the structural reforms in Dry Bulk, profit is forecast to be JPY 2.4 billion in the second half for a full year recurring profit of JPY 2.5 billion.

Page 10 shows a summary of the full year forecast. We expect revenue of JPY 1,460 billion, operating profit of JPY 30 billion, recurring profit of JPY 70 billion and net income of JPY 35 billion.

Page 11 shows the breakdown by segment. I have covered almost everything here already. But compared to the first half Global Logistics, which includes the Liner, Air Cargo and Logistics segments, is expected to have a more subdued performance in the second half. Given this in Global Logistics, recurring profit is forecast to be JPY 22.1 billion in the second half compared to the JPY 49.8 billion recorded in the first half.

In Bulk Shipping, as I have already stated, profit is expected to be JPY 2.4 billion in the second half for a full year total of JPY 2.5 billion after taking into account the breakeven result in the first half.

Page 12 shows a comparison of the previous and current forecast. The figures have changed so much, there is no particular need to provide a detailed explanation.

Given that we are in the middle of the current medium-term management plan term, I would like to talk briefly about the progress that has been made, as shown from Page 13.

Please turn first to Page 14. Described here are the efforts to construct a Dry Bulk business that can withstand market volatility. In other words, the initiatives to eliminate the mismatch. In the graph on the right-hand side, the pink section in the middle indicates the medium- to long-term vessels being used to transport short-term cargo. This is a mismatch between the vessel contract and cargo contract. The recent structural reforms have been aimed at minimizing this mismatch and as shown here, it has been reduced from 35% when the medium-term management plan was issued at the end of March 2018 to 27% now. In the second half, we are considering additional structural reforms to further reduce this figure and minimize this mismatch.

Page 15 shows the accumulation of stable freight rate businesses. Stated here are the contracts that have already been concluded, and we are continuing to conduct negotiations aimed at concluding additional medium- to long-term contracts in the LNG and other businesses. Going forward, we will continue to accumulate the stable freight rate businesses.

Page 16 shows the increases to efficiency and new value creation through Digitalization. I will not cover the initiatives in great detail, but we are conducting a variety of trials. As stated in the example at the top, we have opened an engine plant monitoring center in Manila for the vessels we operate. Also, in the area of human resources, the second session of the NYK Digital Academy was completed. As evidenced by these examples, we are making steady progress towards achieving the major medium-term management plan target of Digitalization and Green.

Page 17 shows some of the initiatives for the Green part of Digitalization and Green. As stated here, we are currently looking for ways to incorporate the environment into our businesses. Such as offshore wind power, LNG fuel, ammonia and hydrogen. Here too, we will not advance in leaps and bounds, rather we will make steady progress towards realizing our goals, in particular, in the first half, the vessel Kaguya became the first vessel in Japan to supply LNG fuel through ship-to-ship bunkering when supplying LNG fuel to a pure car carrier. This event occurred earlier this year.

This ends my explanation of the provided materials. But to add a quick overview from my own perspective, each division has implemented strong responses to the adverse challenges caused by COVID-19. And I believe that this, along with the great efforts shown by all the people working on the front lines of the actual operations, including the seafarers, pilots, truck drivers and others is the reason we were able to achieve such excellent results in the first half.

In the second half, although there is expected to be elements that will place downward pressure on profits, I feel we will, again, be able to achieve solid results. At the very least, I want to achieve the currently forecast recurrent profit of JPY 70 billion and net income of JPY 35 billion. This ends my explanation. Thank you for your time.

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