Nippon Express Holdings, Inc. (9147) Earnings Call Transcript & Summary

Now it's time to start. So we'd like to start the explanation briefing. I will explain the attendees. On the right-hand side of the table, Nippon Express Holdings Company Representative Director and President, Mr. Horikiri. On the left of Mr. Horikiri is Mr. Takezoe, President and Chief Executive Officer of Nippon Express Company. On the right-hand side, in the back row is Nippon Express Holdings, Inc. Senior Executive Officer in charge of Corporate Strategy, Mr. Otsuki. On Otsuki's left is likewise, Senior Executive Managing Officer, Mr. Otsuji, who is in charge of the Global Business Division. The Secretariat is Director and Senior Managing Executive Officer, Mr. Akaishi, responsible for the Corporate Planning Department; Mr. Nakamura, Senior General Manager of the Financial Planning Department; and the facilitator is myself, Tsumori, of the IR Promotion Office, Corporate Planning Department. This is today's schedule. First, our President, Horikiri, will provide a 20-minute presentation on the financial results overview and our initiative to enhance corporate value. After that, we will allow time for questions-and-answer session. We expect to conclude at 6:00 p.m. The material to be used today consists of 3 documents, the financial results presentation materials, the earnings release and the progress report on initiatives to enhance corporate value. These are posted on our corporate website for your reference. Please note that today's briefing is being conducted as a live broadcast in both Japanese and English via simultaneous interpretation. Thank you for your understanding. So we will proceed to explain the fiscal year 2025 financial results by Mr. Horikiri, our President.

This is Horikiri. Thank you very much for taking time out of your busy schedules to attend our financial results briefing today. We also extend our sincere gratitude for your continued patronage. I will now present an overview of the fiscal year ending December 2025 financial results, our full year earnings forecast and initiatives aimed at enhancing corporate value. Please refer to Page 5 of the materials for an overview of the financial results. The consolidated results for the fiscal year ending December 2025 are as stated in the materials. Although shifts in trade policies such as changes to U.S. tariff policy have had an impact, the global economy has remained relatively resilient and demand for international logistics is showing signs of recovery. However, we expect it will take a certain amount of time before a full-scale recovery is achieved. Under these circumstances, air forwarding saw an increase in annual volume compared with the previous year, driven by steady handling of Asia-Europe lanes and intra-Asia routes. However, despite growth in demand in the ocean transport market, the shift of BCOs led to a decline in our ocean forwarding volumes. Furthermore, domestic logistics revenue decreased due to restructuring of our small cargo business, which offset the earnings contribution from the acquisition of Simon Hegele company completed in February of this year, resulting in a decline in net sales. With respect to profits, in response to deteriorating performance in overseas regions, we advanced structural reforms, including consolidation of bases and personnel reductions, particularly in Europe and East Asia, which generated onetime costs. Despite this, consolidated operating income and operating profit increased due to a combination of factors, a rebound from the prior year's second quarter decline in forwarding gross margins, higher earnings at Logistics Japan, thanks to spot domestic logistics and improved profitability, and stronger handling at NX SHOJI that led to increased profits in the Logistics Support segment. Please note that the effects of the structural reform in the areas overseas regions are expected to materialize gradually in fiscal 2026. Regarding changes in operating profit, there was an impairment loss on goodwill in Europe, while an impairment of JPY 59.2 billion was recorded and gains on land sales increased by JPY 75.3 billion year-on-year, which are the main factors. For the current terms, proceeds from land sales amounted to JPY 111.4 billion and gains on sales were JPY 79.4 billion, representing an increase in proceeds of JPY 105.6 billion compared with the previous year. On the other hand, the year-on-year decrease in current term profit is mainly attributable to foreign exchange losses caused by weaker dollar as well as increased interest expenses and tax costs. Next, compared with the forecast figures announced on November 12, while revenue was in line with expectations, operating profit fell short due to expanded restructuring costs in overseas regions. Furthermore, while operating profit exceeded expectations due to increased gains from the sale of underperforming real estate despite an expanded impairment loss on goodwill in Europe, net income for the period fell short of projections because of higher tax expenses resulting from these fluctuations. Please turn to Page 6. We have organized the details concerning the changes in operating profit that I just now explained. Among these, the additional tax assessment for NX Italia resulted from local tax audits conducted for fiscal years 2019 to 2022, which partially disallowed input VAT directions. Similar cases have occurred frequently at other logistics companies. Please note that since fiscal 2022, our company has applied the local tax regime known as a reverse charge mechanism and such issues will not arise going forward. Please turn to Page 7. As indicated in the materials, the downside in overseas is now larger significantly. I will explain these details together with the quarter-on-quarter comparison. Please refer to Page 11. We present a comparison by segment between 4Q and 3Q as well as versus the forecast. In terms of performance trends, revenue increased quarter-on-quarter, but operating profit decreased. Among these, Logistics Japan posted a quarter-on-quarter decline in profit. This was attributable not only to a reduction following the one-off spot work in third quarter related to events such as the Osaka Expo, but also to increased personnel expenses associated with lump sum retirement payments for the second career support program, which led to a higher provision for business taxes. The increase in business taxes caused the shortfall relative to the forecast. Overseas operations recorded quarter-on-quarter revenue growth due to an increase in cross-border e-commerce cargo originating from China and Hong Kong. However, operating profit declined because of the incurrence of restructuring costs. Moreover, although the handling volume of e-commerce cargo increased, profitability from these operations fell short of expectations, which further widened the shortfall against forecast. Additionally, heavy goods construction underperformed as additional construction work fell below anticipated levels, whereas logistics support exceeded expectations with quarter-on-quarter revenue and profit growth driven by increased sales of logistics equipment and LP gas. Next, I will explain the status of each business within the Logistics segment. Please refer to Page 12. With respect to the Japan segment, Logistics had anticipated a quarter-on-quarter decline in profit due to a pullback for spot transactions in Q3. However, thanks to expanded year-end demand, it maintained profits at the Q3 level. Meanwhile, Ocean Transport posted a quarter-on-quarter decline in profit due to a reduction in unit gross margin falling short of expectations. As a result, the business achieved nearly the expected level of profit. However, due to an increase in enterprise taxes and other factors previously explained, segment profit fell short by JPY 700 million. Overseas Aviation exceeded expectations in quarter-on-quarter profit growth due to an increase in handled volumes. However, overseas ocean operations fell short of expectations because although NVO handling increase, this was offset by reduced handling of import-related services such as drayage. In addition, cargo-partner saw quarter-on-quarter increases in revenue and profit driven by a rise in cross-border e-commerce air exports, but fell short of expectations due to deterioration in profitability. Furthermore, as restructuring costs expanded, segment profit fell short by JPY 3.5 billion. Please refer to Page 18. Next, I will explain our earnings forecast for 2026. Although geopolitical risks persist and the operating environment remains uncertain, we expect logistics demand to continue recovering both domestically and internationally, even though a full-scale recovery will require some time. Furthermore, through cost reductions driven by structural reforms and other measures, we anticipate year-on-year increases in both revenue and profit. Please note that the main reason operating profit increases more than business profit is that in fiscal 2025, gains from land sales were offset by impairments and other factors, whereas in fiscal 2026, we expect approximately JPY 19 billion in land sale gains, which will primarily drive the profit uplift. Please refer to Page 19 of the materials. With respect to the operating profit forecast of JPY 100 billion, we have incorporated the effects of the 3 measures described in the materials. Starting from an operating profit level of JPY 68.5 billion, which excludes the onetime gains and losses such as impairment charges and land sale profits in fiscal 2025, we will work to expand operating profit. Please turn to Page 20. We are presenting the projected performance by segment. Among these, Logistics Japan expects increased revenues and profits through revised pricing and reductions in direct costs together with the commencement of new logistics operations. For overseas operations, we also, in addition to expanding handling of SMEs, expect increased revenues and profits due to cost-down effects and other factors. Regarding cost reductions by reviewing company-wide common expenses such as head office projects, we anticipate that the adjustments amount will also contribute to increased profits. On the other hand, logistics support is expected to see a decline in profit, primarily due to the negative impact following the last fiscal year's land sale brokerage fee. Next, please turn to Page 25. I will now explain the progress of initiatives under the management plan. First, regarding the business growth strategy and the track record in our priority industries, the negative impact of the BCO shift affected all industries. Among the priority industries, 3 sectors fell short of the previous year, while 2 maintained revenue growth, albeit with a slowdown in momentum. With respect to mobility, the decrease was larger due to a rebound from the prior year's spot handling in aviation and shipping. Technology, excluding the effect of the liquidation of the U.S. subsidiary in the previous year, is essentially on par with the prior year. Please turn to Page 26. Next, with regard to our business segment, as for airfreight, IATA reports that international air cargo volume increased by 4.2% for the full year 2025. However, while traffic to Europe and intra-Asia routes remained robust, volumes bound for North America remained subdued, though showing signs of recovery. So the situation varies by trade lane. Against this backdrop, our handled volumes increased by 1.3%, which is below the market growth rate. Excluding the impact of cross-border e-commerce cargo demand, we regard this as largely in line with the market. Regarding ocean forwarding, while volumes to Europe and North America have showed a sluggish trend, intra-Asia trade and other major routes have remained firm and cargo movements on major trade lanes for the cumulative period from January through to November have increased by 5.0%. Meanwhile, owing to increased space supply, the supply-demand balance has softened and freight rates have generally been on the downward trend. Under these circumstances, impacted by factors such as a shift toward BCOs, our handled volumes decreased by 5.3%. Regarding revenue from warehousing and distribution, we recorded a 3.2% increase compared with the same period of the previous year, which attributes to the measures we have implemented and the investments we have made are beginning to yield results. Please refer to Page 27. Regarding the restructuring of our Japan operations, we are aiming to improve operating profit margin through the 3 initiatives described in the materials. Due primarily to a reactionary decline in spot air forwarding from the previous year, the initiative to transform into a more customer-oriented company resulted in a decrease in profit. However, thanks to rate revisions and efforts to improve performance, business profit increased and the business profit margin improved by 0.3 percentage points year-on-year to 3.5%. Please turn to Page 28. Next, regarding our M&A strategy. 2 years have passed since the acquisition of CP and 1 year has passed since the acquisition of Simon Hegele. I will now report on the progress of each company's post-merger integration. With respect to CP, we are proceeding in stages with initiatives to generate synergies in procurement and sales. And by 2025, we had broadly completed the consolidation framework for countries where Nippon Express and CP have overlapping basis and resulting in a progress generally in line with the plan. Meanwhile, with the business performance remaining sluggish due to factors such as a downturn in the European economy, we will pursue profitability improvements through business expansion in addition to cost reductions from consolidation of locations. Please refer to Page 29. As of now, our assessment of the acquisition of CP is that transaction has strengthened the Central and Eastern European region with respect to the mobility industry and the related sectors. Furthermore, while the increased forwarding volumes have enhanced our presence as a forwarder and thereby strengthened our purchasing power, air freight has met the projected volumes, whereas ocean freight has fallen short of projections due to the deterioration of the market conditions in Europe. Additionally, with respect to acquisition of customer base, we have observed changes in CP's customer base as supply chains shift due to geopolitical and other factors. We believe it's necessary to respond to these environmental changes in order to advance post-merger integration moving forward. Please turn to Page 30. In light of these circumstances, while completing efficiency improvement through the integration of organizations and functions within this fiscal year, we will further develop our cross-selling initiatives into measures to expand our Central and Eastern Europe business that link European in-region policies with Asia, Central and Eastern Europe trade lane measures. Please turn to Page 31. Next, SH is a logistics firm headquartered in Germany with expertise in the installation of large medical devices within hospitals. By integrating our group's forwarding capabilities, we are now able to provide global end-to-end services. In addition, for SH customer base of foreign medical device manufacturers, we are first rolling out the same logistics services in Japan as are provided in Europe. We intend to drive the creation of synergies by primarily focusing on integrating forwarding operations from customers originating with SH and focusing on the global expansion of logistics services. Please turn to Page 33. Next, for shareholder returns in the fiscal year ended December 2025. We have set the annual dividend at JPY 100. In addition, with an upper limit of JPY 50 billion, we are acquiring treasury shares and canceling treasury shares, including those acquired. For the fiscal year ending December 2026, we project an annual dividend of JPY 100, and on that basis, forecasting an ROE of 7.0%. Although the figure is below the interim target of 8%, we will continue to enhance shareholder returns, including consideration of share repurchases based on achievement of earnings forecast and trends in share prices and performance. Please refer to Page 35. This section outlines the key initiatives to achieve the business plan. We believe results are steadily emerging. To accelerate this, in February of last year, we decided to update our initiatives to improve corporate value. Next, I will explain the current progress. Please refer to Page 2 of the material titled Progress in Initiatives to Improve Corporate Value. In the update on this material, Progress in Initiatives to Improve Corporate Value, we have set interim targets for fiscal year 2026 and are working to strengthen balance sheet management, review capital policy and promote business portfolio management. Please refer to Page 3. As part of improving corporate value, this shows the progress of the items added in the update. As an overall framework for our initiatives, by pursuing 3 approaches set out in the materials, we aim to secure and further expand the equity spread. Among these measures, with regard to the sale of low-profit properties, we had initially planned a target amount of JPY 50 billion or more, but we have accelerated and executed part of the disposal of large-scale commercial assets. As a result, by the end of 2025, cumulative sales totaled JPY 117.2 billion, and we have further advanced this initiative by raising the disposal target of low-yield real estate to more than JPY 150 billion. In addition, progress is noted in the materials regarding the advancement of our business portfolio strategy and the reduction of strategic shareholdings. We intend to invest the proceeds from these disposals primarily into growth areas such as M&A and thereby drive business portfolio management. To achieve this, we have increased the planned amount for M&A investment by JPY 50 billion from the previous plan, bringing it to JPY 450 billion. Please refer to Page 9 and 10 of the materials for further details on the promotion of business portfolio management. Regarding capital policy, we aim to maintain a credit rating by targeting an equity ratio of approximately 35%. The equity ratio at the end of 2025 stood at 34.3%. And as disclosed by R&I on February 3, the credit rating remained at AA-. We will proceed with the consideration of share repurchases, keeping the planned acquisition amount in mind. Please turn to Page 4. Based on our current analysis and assessment, our present PBR is approximately 1x. To further improve the PBR, we consider it necessary to secure and expand the equity spread. Please turn to Page 5. We view the securing and expansion of this equity spread as requiring promotion of 3 approaches aimed at enhancing corporate value. And in particular, we regard improvement in ROE through increased earning power, i.e., profit growth as necessary. In addition to pursuing cost reduction through structural reforms, it's important to accelerate the strategies formulated in the management plan. For future growth, we believe the key will be expanding and accelerating end-to-end solutions driven by account management. To achieve this, it is essential to strengthen our customer base and global network. We must increase the pace of these efforts and, while leveraging M&A, build a business portfolio that supports the realization of our management plan. By integrating organic and inorganic strategies and accelerating strategy execution, we aim to expand profits and create a virtuous cycle that fosters further growth and enhance shareholder returns. Please refer to Page 6. I will explain the key M&A policies and direction that are central to our company's growth. Regarding M&A, we are continuously exploring multiple opportunities from various angles, focusing on acquiring overseas customer bases and expanding volumes in forwarding and related services and strengthening function in priority industries. Although nothing has been decided at this point in time, for our business, which holds strength within the Asia region, the areas to be completed are acquiring non-Japanese customer segments from Europe and the Americas and increasing volumes on Asia origin destination lanes. As a future direction in expanding our global reach to further strengthen the global network infrastructure, we will focus on access to non-Japanese customers in North America and acquisition of logistic capabilities and reinforcement of Asia-bound and departing lanes. As functional enhancements, we will focus on strengthening capabilities in priority industries and establish business bases in growth regions where we have not yet advanced where expansion of locations is required. And while implementing improvements based on past M&A activities, we will continue to actively consider overseas M&A. We have now explained the highlights of the financial results for the fiscal year ended December 2025 as well as the progress made in initiatives aimed at improving corporate value. Going forward, the group will continue to work together to realize our long-term vision, and we kindly ask for your continued support and cooperation. Thank you very much. [Statements in English on this transcript were spoken by an interpreter present on the live call.]