Nippon Yusen KK

TSE:9101

Earnings Call Transcript 2023-Q2

[Shuichiro Shimomura, executive]

Thank you very much for your patience. Thank you very much for attending this presentation meeting despite your very busy schedule. This is NYK Line presentation meeting of the financial results for Fiscal 2022 Second Quarter. My name is Shuichiro Shimomura, the Head of IR Group. I'd like to serve as the facilitator today.

And I'd like to introduce today's presenters. First of all, represented by our Director and President, Nagasawa, President Nagasawa.

[Hitoshi Nagasawa, executive]

This is Nagasawa. Hello to all of you.

[Shuichiro Shimomura, executive]

And then the Senior Managing Executive Officer, Mr. Harada.

[Hiroki Harada, executive]

Hello, this is Harada.

[Shuichiro Shimomura, executive]

And the Senior Managing Executive Officer and the CFO, Soga.

[Takaya Soga, executive]

My name is Soga.

[Shuichiro Shimomura, executive]

So today, President Nagasawa, and Mr. Soga will give you the overview of the results of the second quarter fiscal 2022 and the full year forecast. And we are going to have some time for Q&A before we close at around 4:00 p.m. Japan Time, and the materials are available from our website.

And the questions, you can use the chat box or you can ask already. When we reach the Q&A session, we will explain how to ask a question. And including the QA session, this meeting will be recorded, and it will be streamed later on and made available online.

So President Nagasawa, over to you.

[Hitoshi Nagasawa, executive]

Once again, thank you very much for your participation. This is the presentation meeting of the financial results for NYK Line's Second Quarter Fiscal 2022. Thank you for your attendance today. And also, I would like to take this opportunity to express a deep gratitude for your support and cooperation to NYK Line.

First of all, second quarter and the results overview as well as the 2022 full year forecast, and also I will talk a little bit about the new midterm plan or the other, the progress against the current midterm plan. And then Mr. Soga will explain the details about the results of the second quarter.

Please go to Page 3. Second quarter results are outlined here. Exchange rate last year, in the second quarter compared to last year's second quarter, about JPY 110 to JPY 132. So actually, the yen got weaker. That was the tailwind for our business. But when it comes to revenue and recurring profit and net income, the profits and the revenue increased.

First of all, revenue, JPY 1,365.8 billion, about JPY 300 billion increase year-on-year. On the Bulk Shipping business, so there was an increase in the automotive transportation and also the significant increase in the revenue by the logistics. So the above JPY 300 billion increase year-on-year.

When it comes to recurring profit, JPY 765.3 billion. So once again, increased by JPY 368 billion year-on-year. So this year, once again, Liner & Logistics business, which includes Liner Trade, ONE, Air Cargo Transportation and Logistics, YNK and all these businesses are -- have been brisk and we were able to maintain a high level of profitability. So out of JPY 368 billion, less than JPY 300 billion are because of this Liner & Logistics business. And when it comes to Bulk Shipping business, dry bulk -- well, in that area, we were able to acquire the transportation contracts, which are favorable. And also, we were able to effectively respond to the changes in the transport demand in automotive transportation. We achieved about JPY 70 billion increase. And as for the exchange impact and the exchange rate impact I mentioned earlier. So as a result, net income was JPY 706 billion. So once again, this resulted in the increase of the net income by JPY 300 billion.

And the dividend, as I mentioned repeatedly, well, our policy is the consolidated dividend payout ratio of 25%. So the interim dividend, we announced JPY 1,000 per share, but it was increased up to JPY 1,050 per share. So that was the interim dividend. And well, this -- the base date is the 30th of September, the record date. That is about the stock split, and this is the dividend that will be paid before -- based upon the number of shares before the stock split.

And then please jump to Page 9. This is about the full year performance. Continuously, well, at the time of the first quarter, when we announced the first quarter and the -- this shows how this performs against what we announced in September as for revenue. And so the JPY 2,700 billion, the upward revision of JPY 200 billion and the recurring profit, JPY 1,110 billion, and they're up JPY 70 billion and net income, JPY 1,030 billion, up JPY 70 billion from the previous revision. But the JPY 112 to JPY 137, that is the major change in exchange rate we applied, a significant weakening of the yen, and that was taken in to consideration for this upward revision.

For the second half of the year, last year, Liner & Logistics business, second half, the performance was JPY 515 billion. And this year, it is the JPY 291.8 billion. And also this year, JPY 60.6 billion. And then it was -- JPY 91.3 billion is another business. So the -- in terms of the recurring profit, despite of the weakening of the yen compared to last year compared to year-on-year, the profit is down on the -- in the second half. So this is because of the slowing down and the lower level of freight rate.

So looking at these numbers, on the second half last year and this year, half year, so that was a peak time of our performance, since them gradually. And it is coming down, it is partly because of the normalization of the logistics and the transportation. But in terms of the revenue, it is on a decreasing trend, which I cannot -- decline. And the JPY 1,050 for the interim dividend before stock split, that was what we announced. For the year-end, the dividend, JPY 160 per share after stock split.

Our basic policy of the shareholder return is the payout ratio of 25%. So based upon this percentage, JPY 145 to the JPY 160, we increased the year-end dividend up to JPY 160 per share. So this is the overview of the financial results, but the details will be given by Mr. Soga, CFO.

But before that, lastly, I would like to mention about the new midterm plan. Page 18, please. Currently, so we made the current midterm plan in the year 2018. And this year is the last year of the current midterm plan, as you see at the top of this page. When we started, our target back then was because of the favorable market conditions, we were able to achieve the actual accomplishment, which is far higher than the targets. And based upon that, currently, we are preparing and working on the preparation of the new midterm plan, and to the shareholders, institutional investors, probably capital policy is what you are interested in. So once again, I'd like to reiterate on this point, capital policy.

So ESG management is what we would like to promote. So from an investment point of view, of course, the environmental investment plays an important role. But in the upcoming midterm plan, our viewpoint or the visibility was 2030. How much environment investment will be needed, that's what we are looking at, and also to continue the business for business continuity, what kind of capital is needed. So as the equity, how much do we need to keep our net equity. So based upon this, we are going to talk about and then think about the DOE introduction, and the dividend payout ratio.

We need to have a good discussion, all these topics, so that we can invest and incorporate the good capital policy into our new midterm plan and also our capital how partially are we going to be -- achieve the return to the shareholders. So that's what we'd like to look into closely. Well, probably the new midterm plan will be announced probably March next year, and we'd like to make a good preparation for that.

So they are so much for my opening remarks and the summary, and then I will ask CFO, Soga, to give you further details. So Soga, over to you.

[Takaya Soga, executive]

Thank you very much. This is Soga, CFO of the company. Thank you very much that you attended this meeting despite your very busy schedule. For today, based upon the materials at your hand, please refer to that or we are going to show the slide on the screen as well. So based upon that, first of all, I will give you the overview of the financial results for second quarter fiscal 2022. And then I will talk about the revision of the full year forecast.

Firstly, well, President Nagasawa already talked about these points and some of my explanation, maybe the repetition of what he mentioned, but please bear with me. And last year, this is -- this year is the last year of the midterm plan. So I would like to talk a little bit about the progress so far. And then after that, we'd like to have a time for Q&A.

Now please refer to the material at your hand or look at the screen. So this is the overview of the second quarter fiscal 2022. This is on Page 6 of the material. On the right-hand side, you see blue columns, in the first quarter, second quarter and the first half cumulative, the revenue is JPY 1,365.8 billion; operating profit, JPY 163.3, billion; recurring profit, JPY 765.3 billion and net income is JPY 706 billion. So all these numbers are higher year-on-year at all these levels.

When it comes to revenue, the Bulk Shipping business, which includes automotive transportation, which increased and also, we acquired the transportation contract for the dry bulk under the very favorable condition and also Logistics business, the freight rate improved. So as a result, Bulk Shipping revenue was JPY 1,365.8 billion, up JPY 314.4 billion year-on-year. As for recurring profit, as I mentioned, automotive transportation dry bulk as well as the Liner & Logistics business, which consists of the container shipping via Airfreight and Air Cargo and the Logistics business, the movement of the cargo slowed down.

However, we were able to maintain the high profit level and the recurring profit was JPY 765.3 billion, up JPY 368 billion, year-on-year. But as was mentioned by President Nagasawa, there was an impact of a weaker yen that contributed. About JPY 66.7 billion of the cost effect of weaker yen is included. And then considering the extraordinary loss items as well as the corporate income tax, net income was up JPY 294.7 billion year-on-year, up to JPY 706 billion. All these numbers and explanations are written on Page 3.

Now let us move on to the breakdown of recurring profit by segment. I'd like to give you further details. Please refer to Page 7. First of all, Liner Trade, on the right-hand side, there is a blue column, and please take note of the lower part of the first half. The Liner Trade recurring profit was JPY 567 billion, up JPY 276.6 billion year-on-year. It is because of the risk business of the container shipping, ONE, which is the equity net of the company, mainly in Europe and the U.S., there was the inventory accumulation of consumer goods and inflation, and that resulted in slowing down of the transportation demand and the declining trend of the spot rate. However, despite of that, ONE has been able to maintain a high level of profitability and the good business results.

Next, Air Cargo Transportation. Recurring profit, JPY 44 billion, which is up JPY 11 billion year-on-year. Once again, there was a lockdown in China, slowing down of the world economy as well as the wakening switchover from ocean freight to airfreight, there was a wakening of such a trend. And that resulted in the slower cargo movement. However, at the same time, there was a brisk demand for the shipment of the semiconductors and also business was supported by long-term contract. So freight rate remained high as well.

Next, Logistics business. Recurring profit, JPY 37.1 billion, up JPY 8.7 billion year-on-year. Within the forwarding division, airfreight handling as well as the profit level of that segment decreased because of the lower business related to automotive transportation. And as for the ocean freight, the volume was declined year-on-year because of the slower the cargo movement. However, we made efforts to expand the sales of ancillary services like customers clearance to maintain the profitability. In the contracted Logistics segment, there is the increase in the personnel cost as well as the utility expenses. However, mainly in North America, the general consumer goods movement was very active, and the segment remained strong.

Next, Bulk Shipping. Recurring profit, JPY 119.4 billion, up JPY 71.7 billion year-on-year. As for automotive transportation, because of the shortage of the semiconductors and expansion of the pandemic, and there is a concern of the automotive production volume reduction. But we try to optimize the vessel deployment and the shipping schedule, and we responded to customer needs flexibly. And also, we made efforts to collect the alternative cargos in order to increase the utilization of the vessels, and we have been able to acquire the transportation volume, which was higher than last year.

As for drybulk business, the market boomed on the out of season in the first quarter. However, since the start of the second quarter, the global slowing down of the business became evident. So the capesize as well as other vessel types, the market declined. However, we were able to obtain the transportation contract at the very good timing under the favorable market condition in the past. And also, we made the efforts for the cost reduction. So we were able to maintain the good results.

As for Energy business, the market remains stagnant around the year July. However, there was a rebounding of the business in the VLCC. And because of the Russia-Ukraine situation, the shipping ports changed and that resulted in longer transportation distance, and also the VLCC, the demand became tighter. And also, the LNG, and the oil tanker business, it was supported by the longer the contract. So the energy business also remained robust and strong, including LNG and the offshore business.

Then we see another portion of the stable tied to the others. And it is related to real estate, which experienced the reduction in both revenue and profit. It is because of the partial transfer of subsidiary shares. And the real estate business size itself became smaller, and that is the reason. What I have just mentioned so far is written on Page 4 and Page 5 of the material. Please take a look at these pages later on.

Next, let me move on to Page 8 of the material. So this is the summary. So the results of the second quarter fiscal '22 are shown on the right-hand side in the graph, so the both revenue and profit increased year-on-year in all the key segments. On the left-hand side, you see analysis by factor. Out of the year, the total increase in the profit of JPY 368 billion, JPY 66.7 billion is because of the exchange rate for the weaker yen. So the so much is the summary of the results of second quarter 2022.

Next, I would like to talk about the full year forecast for fiscal year 2022. Please go to Page 12. On the right-hand side, there is the part which is written in blue. This is for a full year basis. As for full year forecast, back in August, we announced the last revision. And it was also revised once again upward for revenue, operating profit, recurring profit and net income. All these numbers were revised upward. Full year revenue increased by JPY 200 billion, up to JPY 2,700 billion. Operating profit, JPY 270 billion, up JPY 20 billion from the previous forecast. Recurring profit, JPY 1,110 billion, up JPY 70 billion from the previous forecast and net income, JPY 1,030 billion, up JPY 70 billion from the previous forecast.

Looking at the second half, recurring profit increased by JPY 24.7 billion from the previous number of JPY 320 billion. Now it is JPY 344.7 billion, and the net income increased from the previous forecast about JPY 290 billion by JPY 34 billion. Now it is JPY 324 billion. All these numbers were revised upward since August. But comparing these numbers with the figures of the first half, these numbers are about JPY 300 billion lower than the first half. It is due to the forecast of the container shipping business by ONE largely. And back in May and August, already, we included this in our forecast. Meaning that the second half is lower than the first half. So this is not a surprise.

So as for the second half seems in and after the third quarter of the business. Well, there are many factors that are uncertain, including the policy raised by various governments and the -- when the disruption of the supply chain will be alleviated, when and to what extent the container freight rate will be lower. So these are the effects that's quite difficult to forecast. So the -- all these full year forecasts are not excessively conservative. So this is the revision of the full year forecast, taking all these factors into consideration. So please regard this as a very solid forecast.

Now as for the exchange rate assumptions, back in August, the full year rate, it was JPY 127.62 to the dollar, but we changed this to JPY 137.28 to the dollar. And the bunker prices, we changed from $838.24 to $101.85 per metric ton. So we changed all these numbers a little bit. So these are the changes of the assumption.

Next, I will explain the full year forecast for each business segment in terms of recurring profit. Please refer to Page 13. Please look at the full year column figures in blue on the right. The lower part is recurring profit. First, in the Liner Trade segment, we forecast recurring profit of JPY 815 billion, an increase of JPY 80.8 billion from the previous forecast. In the container business, we expect the supply-demand balance to normalize as a result of the easing of port congestion and the decline in transportation demand due to global inflation and the buildup of inventories of consumer goods in the U.S., and we expect the spot trade readjustment that began around August to continue in the second half.

Therefore, although we expect a decrease in profit in the second half compared to the first half due to the first half performance supported by high freight rates and the foreign exchange impact of yen depreciation, we expect full year results to exceed our previous forecast in August. In the Air Cargo business, we expect recurring profit of JPY 73 billion, down JPY 4 billion from the previous forecast. Due to the global economic slowdown, we expect the slowdown in air cargo movement to continue.

Although freight rates are expected to soften compared to the first half of the fiscal year due to the easing of supply-demand balance for transportation space, we anticipate that the amount of profit decline will be somewhat contained by the supportive effects of multiyear contracts and other factors.

In the Logistics segment, we forecast recurring profit of JPY 52 billion, up JPY 4 billion from the previous forecast. In the Ocean Freight Forwarding business, we expect a decline in profit level due to the current downward trend in the market, but we expect to maintain a high profit level for the full year due to the strong first half of the fiscal year. In the Airfreight business, profit level is expected to decline to a certain degree due to a slowdown in cargo movement.

In the Contract Logistics business, despite the impact of further increases in labor costs and utility costs, we will work to stabilize earnings by revising contracts, including the price revisions and other measures that we have been pursuing as well as through cost-cutting efforts. Lastly, in the Bulk Shipping segment, we forecast recurring profit JPY 180 billion, an increase of JPY 26 billion from the previous forecast.

In the automotive transportation business, the impact of production cutbacks in completed cars due to the shortage of semiconductors and parts is gradually dissipating and we expect to maintain firm transport volume by capturing export demand for bulk orders from automakers as well as transport demand for construction machinery and used cars.

In the dry bulk carrier business, market conditions are expected to weaken in the second half for all sizes of vessels, but favorable market conditions in the first half, especially in the first quarter, with small and midsized vessels are expected to contribute to strong full year results.

In the Energy business, we expect the VLCC market, which has recovered sharply from the previous fiscal year and the VLGC market to continue to be strong, and we also expect the LNG carrier and offshore business to continue to perform well, supported by stable medium- and longer-term contracts. Please refer to Pages 9 to 11 of the presentation for further details of what I've just said.

Finally, I would like to explain the dividend forecast. Mr. Nagasawa, explained about it, please refer to Page 9. As you can see, in accordance with basic shareholders' return policy, which aims for a consolidated dividend payout ratio of 25%, we have increased our interim dividend by JPY 50 to JPY 1,050 per share and year-end dividend by JPY 15 to JPY 160 per share based on the results for the first half of FY 2022 and the upward revision of net income for the second half of the year.

As you know, a 3-for-1 stock split was implemented with September 30 as the record date and October 1 as the effective date. On a free split basis, the year-end dividend to be JPY 480 per share or JPY 1,530 per share for the full year. This is an overview of the financial results for the second quarter of fiscal year 2022 and the revision of the full year earnings forecast.

Next, as the last item on my agenda, I'd like to briefly explain the progress of the current medium-term management plan, which is now in its final year. Please refer to Page 16 of the document. The goal of the current medium-term management plan is to strengthen resistance to volatility, business growth and improved profitability. And we have established the following 3 pillars as the necessary actions to achieve this goal.

First, number 1, establishment of a business portfolio with high resistance to market conditions through a fundamental review of the dry bulk business and the success of the integrated containership business company. Number 2, the establishment of a stable profit structure by building up businesses with stable freight rates. Number 3, improvement of efficiency and creation of new value through digitalization and green initiatives. We have been engaged in specific actions. And the progress on the above 1 and 2 is briefly shown on Page 16.

In terms of building a stable freight rate business, as shown in the bottom left chart, the Logistics business has steadily expanded and strengthened since 2020. So the other logistics, it's shown in light blue since 2020 is expanding very steadily. The automobile transportation business has steadily secured transportation volumes through flexibility and ingenuity even in the situation of reduced production of finished cars due to the expansion of the pandemic and chip shortage. And the Energy business has steadily built up its LNG carriers business of priority investment area.

On the top part, it says energy. So when we developed the current midterm plan, we have 71 LNG carriers or that is end of year 2017. And as of the end of 2020, 86 LNG carriers. And including all deepwater contracts, 111 vessels.

As shown in the bottom right chart, in businesses added and stable freight rate business, we have improved the profitability of dry bulk business through structural reforms, such as early return of vessels with high charter rates and have reduced the impact of market fluctuations through more stringent exposure management. ONE integrated container shipping company has emerged from its initial struggles and is now a highly successful company.

NCA, our airline business, which has been suffering from losses for many years has also become a significant contributor to consolidated earnings. Of course, we cannot deny that the change in logistics structure due to the split of COVID is a major factor. However, I'm proud to say that this is the result of the wisdom and ingenuity of each of our business decisions to ride the wave of change and do what needs to be done with a sense of vision to never stop logistics for the sake of the lives and happiness of people around the world.

As for the 5 pillar, Page 17 shows an example of how we are steadily advancing our efforts to achieve net 0 emissions by 2050, promoting ESG management. In the field of fewer convergence for ships, we are working on the implementation and commercialization of ammonia fuel, which is considered a promising next-generation 0 emission fuel as well as various offshore projects related to offshore wind power, which is considered promising as alternative energy source in Japan. We newly opened Akita branch to support such projects through smart cooperation with the local community, making steady progress in tangible ways.

Finally, please refer to Page 18 for the quantitative targets and progress of the current medium-term management plan. We have already achieved the targets for each of the financial indicators in FY 2021. Based on the above, we are currently preparing a new medium-term management plan, as Mr. Nagasawa explained. This plan will start in the next fiscal year. This plan is based on a road map from an ultra-long-term perspective. Looking ahead to 2050 and will cover the period up to 2030.

The most important part of this plan are how we will pursue capital policies based on the financial structure that has improved significantly over the past few years, how we will systematically further advance our decarbonization efforts in terms of environmental responsiveness and how we will develop human resource strategies to promote ESG management in the future. Of course, this is not all, but we would like to present to you a new medium-term of business plan that incorporates all of these things. The announcement is scheduled for around March of next year.

That concludes my presentation. Thank you.

[Shuichiro Shimomura, executive]

[Operator Instructions] Liner & Logistics business, I have 3 questions there. Container shipping first of all, GRI and the long-term contracts, these are what I'd like to ask you. Currently -- well, in the first quarter, well, the -- well, that it is possible to increase the rate? And the freight rate on the long-term contract, well, are there any customers who are moving away from the long-term contracts and try to choose the spot transaction? So -- and the next is about the dividend from ONE. Well, the JPY 31 billion is that to be received on the 15th of November? And that is on the income in the second half. And do you have a clear policy regarding ONE. And also the air and the cargo. Well, how many contracts are for the multiple years? Are there any risks for the determination of the contract? So these are the 3 questions I'd like to ask you.

[Hitoshi Nagasawa, executive]

Thank you for the questions. So for these 3 questions, Mr. Harada in charge of the business. Please respond to those questions.

[Hiroki Harada, executive]

Thank you for the questions. So 3 questions are related to L&L. So one by one, I'd like to respond. First question. GRI related to container shipping and whether it is possible to raise the freight rates under the current condition. How about its impact on the current status, are there any switchover from a spot on the L&L rating to long-term contracts.

GRI, first of all, you mentioned. So the spot price may go up -- and the spot rate restoration is what you mean by that. It is written in the industry magazine, but on some routes and the services, it is starting to some extent in the South America, for example. But it is reversing to the previous conditions. So it is not unstable. And also service the Middle East. Well, rate restoration, it is emerging to some extent, but the Transpacific is the biggest in the area, particularly the West Coast of the U.S. is the major market. We expected some movement in November.

However, supply-demand conditioning is not a tailwind for that. Yes, there isn't much demand. And so because of that, well, in November, rate restoration is going to happen or not. I have a question mark about that. But when we only look at the supply aspect, 3 major alliances and as well as a single service provider, including them, structural VMS, we call them structural VMS, but the 10 loops or the stop on the -- after the national holiday. So the -- of course, it depends upon the demand situation, but the export rate may increase from time to time and the -- so that is what the ONE is thinking about.

And whether there is a switch back to the long-term contract, early August, we announced mid-summer announcement. The numbers of the ONE was not alone. But the base upon the information from ONE 3 shareholders, the certain -- the projection regarding its impact on the long-term contract. I think it's -- the impact is limited. If the price differential becomes larger and if the time it gets longer in time, then customers may start talking about it. So the ONE, the revision and the review of the business, I believe that this is already incorporated into their view.

In other words, right at this moment, in front of us, well, it is a limited trend to switch from a spot to the contract base rate. But if the spot rate comes down significantly and the takes longer time, then it may have a certain impact on the contract, and that has already taken into consideration in our projection.

Second question is about the dividend from ONE about JPY 310 billion, they would be paid on the 15th of November. And how about the future policy or how you regard the dividend from ONE. The ONE achieved a record profit in the previous 6-month period. So it was agreed upon to pay this much amount of dividend. However, well, there is a consensus between ONE and the certain shareholders. But on the long-term perspective, what shall be the long-term capital policy for ONE. Well, it is difficult to forecast the market in the 2023 demand as well as the supply, the availability of the vessels. So we have to pay close attention to that and continue discussing. So right now, dividend level by ONE, there is nothing that has been determined from a long-term perspective.

Lastly, Air Cargo was another question. Are there any multiple year contracts and what is the current status? The specific numbers, sorry, we are not able to give you specific numbers. But the NCA, main market of NCA is between Japan, Japan to North America. So that is the major market for the company. Looking at that service, there are certain contracts that go beyond 1 year. So the space from Japan to North America, and to some extent, about 20% to 35% of that are covered mostly by a contract, more than 1 year. Well, there are several contracts that go beyond 1 year. And totally, the space has been sold off and they are take up. And that is a portion that is not only subjected to the fluctuation in the market.

Did I answer your questions?

[Hitoshi Nagasawa, executive]

Next question, please.

[Shuichiro Shimomura, executive]

I have the questions. The containers, rate-related questions. First, so the previous person ask similar question. For the next quarter, the demand supply will be better balanced. I read about it in the industry newspaper. So what is the reason? And what will be the timing, the timing of demand and supply to be well balanced? That's my first question.

And the second question. Based on the spot rates, where will come the breakeven point? It is less than $2,000 in the West Coast and on the East Coast of America it seems that the slowdown is accelerated. But the charter costs and the labor costs are on the rise. So breakeven point, where are you positioning the breakeven point?

[Hitoshi Nagasawa, executive]

So Harada is going to answer those questions.

[Hiroki Harada, executive]

Thank you for the questions. Two questions. First one is about ONE, the CEO, Jeremy said that in the next quarter, the demand and the supply will be better balanced. And what is the background of that comment? So on that point, I'm sorry, I have not talked about it with Jeremy on specific terms. But as I mentioned earlier, especially for the North America, structure of VMS. In other words, there are about 10 bps going from the market for various reasons.

For one thing, the spot forecast the companies, the current spot rates, of course, it depends on the size of vessels. They are using spot rates without long-term contracts. So the situation is becoming very difficult for those players. Of course, chartered vessels, either your own vessels, situation could be different, calculation will be different. But when the supply gets tighter and for the demand side, the North America, there's labor union, the negotiation and the Christmas is coming up. So the stock has been built up and the impact is now being felt. And North America, to what extent the American consumers will purchase things. So once those stock portion is consumed, then there will be new demands. And based on that, the balance will be better, especially for North American road.

And as to the other breakeven point, the second question, that's difficult to answer that question. There's one thing that I can say, namely the very limited spot focused players that probably they're paying very high chartered fees. Setting aside those players, the 3 major alliances members with the current spot rates, the profit will increase when the space is occupied. That is the assumption. So it's not that the spot rate will reduce at the profit level. But it is difficult to say whether they have completed their calculations completely. So the current spot rate will not bring the business to breakeven. That argument could be valid. The other long-term contract players at least for them, I think we can say that.

As to supply side thinking, right, after the COVID emerged, there were the cargo movements that were deeply affected. Currently, spot rates are coming down, but there will be some profit probably 4%, the level of the decrease in the flights.

And in the other vessels or the other shipping trades would be that -- currently, the gap is so huge between the American spot rate and the other contract rate. When the other freight goes down further, that will worsen the overall results. And that argument is completely valid. So rather than the occupying, refilling the next space, you might want to stop the bank space.

[Shuichiro Shimomura, executive]

First question is about the air transport and the logistics, Air Cargo and Logistics. Air cargo, the spot rate came down in October. And you plan that you can generate this much profit despite of the reduction of the spot rate. And also the -- compared to the first half, the -- well, you mentioned that the second quarter, the business may decline in the air cargo, but the logistics, that was not the case. So could you please clarify?

And the second point, well, how about the financial discipline that you would like to maintain in the midterm plan? And excessive capital, what is your idea about the excessive capital? So when is the policy is established, please let us know. But are you conducting the good discussion for that point, I would like to hear your view on that point.

And then third question is also related to next midterm management plan and to use more leverage. So the profit -- so they have to create your own business. That is one important point. And the other targets, well, as a result of the investment by when -- how much the profit can be generated. So you can set such targets? Do you have a strong intention to clarify that and also make such plan for the future?

[Hitoshi Nagasawa, executive]

Thank you very much for your questions. So first of all, the first question was about the cargo and logistics. So Mr. Harada, please respond to that. Second question, third question related to midterm plan. So Mr. Soga and also, I will respond. So Mr. Harada, please.

[Hiroki Harada, executive]

Thank you for the question. First question was about air cargo and forwarding related business. First of all, air cargo spot rate is coming down. And -- is it fully reflected on the projection of the business that we announced this time? Yes. Most recently, particularly Shanghai, Hong Kong, for the North America, the spot rate decreased. You're right in mentioning that. So at the last minute, we already incorporated into that -- incorporated that into our plan. So the spot rate reduction is already included in our forecast as well as the plan for this year.

And forwarding related point and the logistics, this is about YLK. And the numbers may be too conservative. So that's probably what you are referring to. Contract Logistics is very stable, so setting that aside. The AFS? AFS and OFS. AFS, one concern is that the volume of the cargo is not coming up, and it is not increasing so much. And the growth -- it is not that the gross margin will go down, but the volume of the cargo is not sufficient. So certain space has to be returned. And that is what is happening in forwarding. So we already included that in our view.

As for OFS in forwarding, there is some time difference always. And the contract with the customers, it is very high, but we were not -- the company was not able to secure this space. So if we buy the space from the ship owner, well, it will affect the profit. It will not continue. Once the contract expires, then the contract rate in the next time around will go down is because of the time differential. And it was also taken into consideration, but we were somewhat conservative in this point. So there may be some upside. That's how I view it. So that's my response to your question.

And then second question about the midterm plan, the adequate capital policy? Or what the idea about, so the -- Mr. Soga, please.

[Takaya Soga, executive]

Thank you very much for your question. First point, the financial discipline; and the second point, excessive capital. Relationship between these 2 are very close. They are inseparable from our viewpoint. First of all, the financial discipline, well, we have so much the net worth and the equity. It is not that we can invest in anything. So how to introduce the discipline and how, of course, we are discussing on this point. And one major point is that so far, within NYK, the IRR or EIIR, so these are what we focused upon so far when we decide upon and evaluate the investment. However, that's not sufficient. And also how much return shall be generated. And how in each project, the return is earned and generated by each project? We need to keep track over each project every year, and IRR is not sufficient to do so. To monitor these factors, the ROIC and other indicators are available. So which indicators be best for us for which allows us to take the immediate action. So the -- that is the viewpoint we are studying various alternatives.

And also the networks or the shareholders' equity is coming up so much. That means the work is very high, WACC. And if the investment is done based upon work, it is quite difficult to make the adequate decision. We may miss the opportunity. So if that is the case, then the action to lower the WACC may be needed. In other words, right now, the equity ratio has come up to a very high level, DER is very low. So what is the adequate level for them in order to rectify the positioning or the level of WACC, that's part of the discussion as well. And then the amount of the net worth and the shareholders' equity and the -- how to optimize that. And to raise the DER, maybe we should use more leverage.

And then what shall we do to raise the level or the leverage as we consider the investment? That is also related to the financial discipline as well as the excessive capital on the actions. So these are what we are focusing upon now. So the financial discipline, the capital policy as well as the excess of our capital that has been built up. So what is the most adequate action, so that's what we are focusing upon and studying right now.

As for your third point, the purpose and the target of the investment, naturally, well, we need to raise our profitability. That is part of the target. So when it comes to the investment target, well, we are aware to put the new criteria, new indicator to make that decision. That's what we have to understand. And ESG, the environment-related investment, particularly, it is not that we can see the results immediately. After many years, so we may be able to see the actual results and the return of that investment when it comes to ESG investment.

So internal carbon pricing, of course, we have that. And also, we have to think about the other factors as well related to environment investment. And we don't have any clear answer to that question. But it is now within the agenda for our discussion.

And additionally, well, we didn't have sufficient capital level. So there were certain investments that were outside of the balance sheet -- off balance sheet. But to raise the ratio of our own vessels, for example, these are the specific actions that our business units have already started studying. So these are the answers to your 3 questions.

[Hitoshi Nagasawa, executive]

I would like to make some additional comments. So the adequate level of capital and that is also relevant to the shareholder return. And there are many factors to be considered, as Mr. Soga mentioned. Well, when we make new investments, investment for the environment or the offshore wind, the new investments, there are such new investment opportunities as well. And at the same time, as we lost our financial health in the past, there were certain things that we were not able to do, for example, deterioration of the lineup of the vessels. So the -- so we also have to look at that as we consider investment policy.

And also profitability is important. And looking towards 2030, of course, there may be some aberrations or the tolerance to be considered. But how much cash we can generate, how much profit we can achieve? By 2030, we have to make simulation. And what is the adequate level of capital with the 2030 in mind, so that's what we'd like to consider. And so that's how we would like to approach to this question.

And what concerns me as Mr. Soga mentioned, right now, is the environment investment. As was indicated on the slide, the ammonia-based ships or the LNG-based vessels, the return from customers is difficult to expect. So justification of the investment projects, how to justify those investments? And we have to clearly indicate that to the investors, otherwise, our decision will not be accepted. And the investment shall generate return sufficiently. So we have to introduce ways to show the road map. And for example, the internal carbon pricing may be utilized for the explanation. And the CO2 is going to be a cost in the future. And then that means the collection of the investment because of that. But it may take time to reach to the stage.

So we have accountability responsibility to explain clearly. So we have to be ready to do that. That is all for my response. Thank you very much.

[Shuichiro Shimomura, executive]

Next question, please. So this is going to be the last question. I have 3 questions. First, container shipping business. The current spot rate that will bring some profit, I understand. But when the demand goes down further going forward because you can reduce the number of rate of trades. And by doing so, that you can cope with that? Or there will be some services which were going to direct?

My second question is in freight, NCA and logistics or the use in logistics. I think the focus of your company between the 2 is somewhat different. Is there any other difference in the way you're thinking about NCA and YLK? And as to dry bulk, for the second quarter, you said that you acquired some contracts that are good timing. How long do you think that the tailwind will continue?

[Hitoshi Nagasawa, executive]

Thank you for those questions. Harada will answer your questions.

[Hiroki Harada, executive]

Thank you for the questions. About the container, the spot freight rate level when the rate goes down, any services which were going to direct? Well, by route, it's not that we are seeing any services which are in the direct, or but going forward, compared to when the COVID started or compared to 10 years ago, depending on route, it could happen that there are some services we're going to the direct. But the question is how long will that last? And watching that closely, we will make decisions. It will be meaningless to just transport air, nothing, in other words. That will be meaningless. Of course, there are regulators in among different countries, the shipping companies and the specific alliance, specific decisions are made amongst the other alliance, so we need to be prudent. But we do not assume that the other -- we can continue the services in direct for a prolonged time period. It could happen temporarily, though.

As to air freight in our case, this is about NCA asset type business and YLK forwarding business, maybe there are some differences between the 2. But the big difference between the 2 is that as follows: they are dealing with different sectors, industries as customers. So the shipping volume of these different industries could be very different. And they are formulating their numbers and assumptions. You're talking with their customers, especially for the semi -- the chip related business. NCA is engaged in the semiconductor, but not so much for YLK. So yes, they might have different perspective or demands. In the case of YLK, cost trade included, they are engaged in the wider scope, and the NCA is mainly Asia-America routes. So that's the business. And the forwarding business, the perspectives for demand could be different. Thank you.

[Hitoshi Nagasawa, executive]

As to dry bulk, as we showed in the presentation in the second half for the other Bulk Shipping as a whole, JPY 120 billion in the first half and JPY 60 billion in the second half. So it is getting very tough for dry bulk index. The JPY 120 billion or so for the second half, especially for the capesize, the second half will be tough. But in 2020, we executed structural reform, the costly vessels are now gone. And index-linked and other market existent vessels are more in use. So when other -- the current other market conditions, there are some level of resistance. In the first half, it was robust. But in the second half, we cannot deny that we might struggle to some extent. Thank you.

[Shuichiro Shimomura, executive]

So we have passed the scheduled time. I'm sorry about that. So with that, we'd like to conclude the announcement of results for the second quarter of fiscal 2022. Thank you.

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