Nippon Yusen Kabushiki Kaisha (9101) Earnings Call Transcript & Summary

Good afternoon, everyone. I am NYK President, Hitoshi Nagasawa. Thank you for taking the time to attend today's presentation of our financial results. This is the first for this presentation to be held remotely by means of a webcast, so please overlook any minor issues that may arise. Before starting my presentation, I would like to make a few remarks. At the start of this year, the novel coronavirus infection started to spread and from March, the virus began to have a pronounced impact around the world, causing great damage to people's daily lives and the global economy. Given the situation at the NYK group, we are addressing the following 3 points as the top priority issues: number one, prioritize above all else, the safety of the group's employees and seafarers; number two, secure sufficient cash flow to ensure business continuity; and number three, share information in order to quickly respond to any changes in the situation. As a result, although there will be no avoiding the external factor in the form of reduced cargo volumes. Based on the strong belief among all group employees that logistics must keep moving, we take pride in our efforts to firmly continue the business. Also, the recent events have made painfully clear the size and weight of our group's social mission as a logistics provider operating on sea, land and air. For example, while most passenger planes have been forced to suspend their flights, without Nippon Cargo Airlines, who would have transported the masks and medical equipment? I hope all investors will give consideration to the size and weight of our group's social responsibility and mission. And I would like to take this opportunity to, again, ask for your continued warm support of our group. In Japan, thankfully, the state of emergency is expected to be lifted in all prefectures as of today. But looking around the world, the number of infected people continues to rise. I offer my sincere condolences to anybody attending today's event who knows someone who has been infected. And at the same time, I also ask everyone to continue giving due attention to health management in order to prevent further infections. I would now like to start my explanation of the results for the fiscal year ending March 2020 and the forecast for the fiscal year ending March 2021. Concerning ONE, I understand that a detailed explanation has already been provided by MOL and K-Line. So the explanation of the fiscal 2019 results at ONE will be omitted from today's presentation. To begin, please turn to Page 3 of the provided document. Shown here is a summary of the full year results for the fiscal year ending March 2020. Looking back on the results, revenues decreased slightly compared to the previous year due to the sale of subsidiary shares and the portfolio revision. The lower revenues resulted from the spin-off or transfer of the cruise ship business and part of the terminal and container businesses from NYK to ONE. Recurring profit and loss improved greatly by JPY 46.5 billion compared to the previous year, and a profit was achieved. Touching briefly on each segment, profits increased significantly at ONE in the Liner segment. In the Air Cargo segment, the fleet was completely grounded in fiscal 2018, but the aircraft all returned to service last year and were fully operational. Unfortunately, however, the drop in cargo volumes and subsequent weak freight rate levels resulted in little improvement compared to fiscal 2018. However, in the fourth quarter, the supply of cargo space on passenger flights was limited due to the impact of the coronavirus, resulting in a rapid improvement to the bottom line. Regarding the Logistics segment, I will get into more detail shortly, but freight forwarding volumes fell, resulting in lower profits compared to the previous year. In the Bulk Shipping segment, the number of vehicles transported in the Car Transportation division declined slightly, but profitability improved as a result of vessel deployment, rationalization and withdrawing from the unprofitable trades. Also, the Energy division was strong based on the LNG and offshore businesses operating under medium- to long-term contracts as well as the positive moves in the tanker market. In the Dry Bulk division, the market unfortunately did not improve much compared to the previous year. However, through hedges, that included freight forward agreements, I feel that very minimum results were achieved. On the extraordinary income and loss level. First, concerning the extraordinary loss. A total of slightly less than JPY 40 billion was recorded for the impairment loss on aircraft and the early termination of high-cost chartered-in dry bulk vessels. On the other hand, a total extraordinary income of JPY 37.4 billion was recorded from the sale of strategic shareholdings and real estate. Concerning the dividend, a year-end dividend of JPY 20 per share will be issued as planned for an annual dividend of JPY 40 per share, including the interim dividend. Moving on, please turn to Page 4. Concerning these specific figures, revenues declined slightly, as I just mentioned, due to the partial portfolio revision. Operating income, recurring profit and net income attributable to owners of the parent company all improved. Also, as you can see, the figures are all slightly better than the previous forecast issued in the third quarter. In March, although the coronavirus triggered a fall in crude oil prices and stock prices resulting in a bunker fuel valuation loss on the recurring profit level and investment securities valuation loss on the net income level, I believe the improvement in day-to-day operations enabled us to achieve the initial target. Page 5 provides further details. I would like to touch briefly on each segment. The Liner segment, which includes ONE, achieved a great improvement, as already explained. Air Cargo, as I mentioned earlier, recorded a loss on par with the previous year despite returning to full operating capacity. Logistics is slightly lower compared to fiscal 2018 due to a drop in freight forwarding volumes. On a recurring profit basis, profits fell by about JPY 3 billion compared to fiscal 2018. In Bulk Shipping, the Car Transportation division transported 3.17 million vehicles in fiscal 2019 compared to 3.4 million vehicles in fiscal 2018. However, although volumes declined as a result of revising vessel deployment and the unprofitable trades, the bottom line improved. The Energy division also improved for the reasons I mentioned earlier. As a result, for the Bulk Shipping segment as a whole, recurring profit improved by about JPY 10 billion from fiscal 2018. The improvements mainly in the Liner and Bulk Shipping segments led to the major recurring profit improvement of JPY 46.5 billion. Now please turn to Page 6. This page is simply a waterfall graph of the situation I just explained. So I will not cover it in detail. Please turn to Page 7. I think what most of you are interested in hearing today is definitely the forecast for the fiscal year ending March 2021. The main point stated here, I already mentioned in my opening remarks, our intention to address the novel coronavirus as a company is again stated here. Moving on to page 8. I would now like to explain our full year forecast for the fiscal year ending March 2021 that incorporates the impact of the novel coronavirus. Under the assumption that the first quarter from April to June will be the worst period and the bottom, economic activities are expected to gradually recover from the second quarter. And the economy is forecast to return to a certain level from the third quarter forward. These expectations may obviously be greatly affected by second and third waves of the novel coronavirus and progress in the development and availability of a treatment and vaccine. But our forecast for fiscal 2020 is currently based on the assumptions stated here. Also, when I say recover, it does not mean that the coronavirus will be eradicated. Rather, it means coexisting with the coronavirus. Also, the current forecast for each segment have been incorporated. For example, at NCA in the Air Cargo segment, supply is currently limited, resulting in much higher market levels. In the Car Transportation division, the situation differs depending on the manufacturer and destination. So we have incorporated the known elements. Based on the situation, the full year forecast is, unfortunately, decreased profit on lower revenue. Recurring profit is forecast to be plus 0 for the full year, and it is our hope that we can act on the plus part and achieve a profit. The novel coronavirus is expected to have an impact of JPY 50 billion to JPY 60 billion on a recurring profit basis. Also concerning the dividend based on a dividend payout ratio of 25%, as stated in our current dividend policy, we have set an annual dividend of JPY 20 per share as the minimum dividend in accordance with this policy, although net income is still undetermined at this time, a full year dividend of JPY 20 per share is forecast. However, we will forego paying an interim dividend and issue only a year-end dividend. Many of you may be questioning why we have not announced a net income forecast or revenues forecast for each segment. I understand your concerns. But the current situation is completely opaque, and there are a number of uncertainties. Providing a forecast for revenues, operating income and recurring profit is all that is possible at this time. Traditionally, the various data used for the forecast is disclosed. But in the current situation, there is the risk that such a disclosure may take on a life of its own and be misleading. Based on this, we have decided to only disclose the total revenues, operating income and recurring profit and the recurring profit for each segment. Of course, if the situation becomes clearer and an improvement is determined to be appropriate and rational, we will discuss those figures at that time. Please look at Page 9. Shown here are the currently disclosed figures. Revenues are expected to be JPY 1,430 billion, a drop of about JPY 230 billion compared to last year. Operating income is forecast to be JPY 5 billion and recurring profit will breakeven. These are declines of JPY 33 billion and JPY 44 billion, respectively, compared to the previous year. The following page shows the forecast for each segment. Later pages qualitatively show the various detailed figures. So I will get into further detail there. But regardless, the coronavirus has had the largest impact on consumer goods resulting in a major impact on ONE and Car Carriers. How this will improve is an issue to focus on going forward. But based on the current forecast, recurring profit in the Liner segment is expected to be a loss of JPY 10.5 billion, which is a drop of JPY 23 billion to JPY 24 billion compared to fiscal 2019. In Air Cargo, the business is presently in a very good situation. Again, this will depend on when the passenger planes start flying again and overall Air Cargo volumes. But at the present time, this segment is expected to achieve a full year recurring profit of JPY 12 billion. This is an improvement of JPY 27.5 billion from the loss this past year. Logistics will suffer falling freight forwarding volumes and is expected to record a loss. Overall, profit is expected to decline by about JPY 7 billion. In Bulk Shipping, recurring profit is expected to fall by JPY 36.6 billion. The main factors in this will be Car Carriers and Dry Bulk. Concerning Dry Bulk, based on the information available to us, the market has not fallen that much at present. However, the market started the year at a weak level unrelated to the coronavirus and is also suffering weak sentiment due to the coronavirus. And as a result, it is trending at lower-than-expected levels. As of today, Car Carriers and Dry Bulk will face greatly lower profits due to the coronavirus. After totaling the forecast for each segment, recurring profit is forecast to breakeven. This will be a decline of JPY 44.4 billion compared to the previous year. Next, please turn to Page 11. Concerning the financing, capital policies and the financial plans, as I mentioned in my opening remarks, when the coronavirus crisis struck, the first discussions among the management meeting members was to secure sufficient financing. We have already moved our plans to borrow about JPY 120 billion in long-term funds. Part of this will be executed going forward, but we have made arrangements to secure the financing of long-term funds amounting to JPY 120 billion, which will mostly cover the redemption in fiscal 2020. Also, we have secured commitment credit lines spending several years and as of March 31, 2020, the remaining unused balance is JPY 230 billion. As a result, despite the uncertainty over how long the coronavirus crisis will last, we have been able to guarantee a certain cash flow. Second, concerning the investment policy, priority will be placed on securing free cash flows. Although this goes without saying, we will be even stricter in the selection of the new investments. And based on the situation, we will continue the asset liquidation policy set forth in the medium-term management plan. The figures shown in this small box on the right-hand side of the page concern the limiting of investments. During the financial crisis of 2008, we had outstanding orders amounting to JPY 1.1 trillion making it very difficult to limit our investments. However, as of March 31, 2020, we had -- we only had outstanding orders of JPY 0.23 trillion, this is a fivefold reduction compared to the financial crisis of 2008, and it will allow us to easily control our investments. Lastly, our dividend policy shown here is, as I explained earlier, based on our policy of a minimum annual dividend of JPY 20 per share, we plan to issue a dividend of JPY 20 this year. Please turn to Page 12. Concerning the medium to long-term measures, I would like to mention the direction of the medium-term management plan in light of the coronavirus impact. As stated here, there is no change to the basic policy. However, when looking at the figures, many of the elements have greatly changed. So we will likely have to review the quantitative targets and progress status at some point. Also, the long-term growth strategy will remain unchanged with ESG positioned at the center of management. We will continue to advance this strategy even within the current coronavirus environment. Shown in the blue box are excerpts from the current medium-term management plan. I will not go into any detail here. Please turn to Page 13. I believe most of you are very interested in this section, which covers our outlook for this year. We have listed a large part of our forecast in these pages here. As stated in Liner, recent cargo volumes have fallen by over 20%. The first quarter will be the worst, followed by a gradual recovery. But the decline in global container demand this year is still expected to exceed 10% compared to the previous year. Please read through the remaining points, and I will answer any questions you have later. Concerning logistics 2, there will be no avoiding lower demand and falling freight forwarding volumes caused by the coronavirus. In Air Cargo, cargo volumes are expected to again drop to a record low in April as has been reported by various organizations. Volumes to and from Japan have fallen by about 30% compared to last year. But on the supply side, the supply of cargo space, particularly in the bellies of passenger planes has also been limited. This has created a supply and demand balance that favors demand, resulting in a positive turn in the business environment in high market levels recently. Frankly speaking, going forward, the return of the passenger planes to service and Air Cargo volume trends will likely have a major impact on the business results. Next please turn to Page 14. For the Car Transportation division, we have disclosed everything possible here. The first quarter will be the worst. During this time, vehicle volumes have declined by about 50%. Although it will vary by region, volumes are forecast to gradually recover going forward. However, lower profits are still expected on a full year basis. In the Dry Bulk division, as I mentioned earlier, market rates have been extremely low recently. The forecast market assumptions are partially based on the FFA basically. In addition, we have added some of our own ideas to arrive at the figures I will provide later. Compared to fiscal 2019, recent market levels are much worse, and I feel there will be no avoiding the psychological impact of the coronavirus and weak sentiment. So profits will likely be lower this year. The Energy division basically operates under long-term contracts, and we were also able to secure contracts when the tanker market rose based on increased floating storage demand as crude oil prices crashed. Overall, there are not that many uncertainties compared to fiscal 2019. This is the current situation in the Bulk Shipping segment. Please turn to Page 15. Shown here is the situation surrounding real estate and other businesses. No major impacts are expected on the real estate business. Concerning the cruise ships, honestly, it is difficult to say what will happen at this point. Presently, all cruises with a return date through the end of August have been canceled. But for the cruises thereafter, I believe it will depend on the situation going forward. The following pages cover the progress in the medium-term management plan. Basically, we will work to reduce our market exposure in the dry bulk business. Page 18 shows the progress in securing medium- to long-term contracts for priority investment projects such as the Energy division. Page 19 covers the details concerning the digitalization part of D&G. Lastly, Page 20 covers the Green business as set forth in the medium-term management plan. Please take the time to read through these pages. And if you have any questions, they should be addressed to the IR group at a later point in time. Please turn to Page 21. Shown here are the details of the stable freight rate businesses through fiscal 2019. It was decided that including fiscal 2020 would result in unnecessary confusion and misunderstanding, so this year has purposely been omitted. The remaining slides are additional information covering the business segments and forecast that I have explained. This ends my presentation. Thank you for listening.