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

I would like to start my explanation of the full year financial results for the fiscal year ending March 2021. Please turn to Page 3. Shown here is an overview of the results for the fiscal year ending March 2021. Revenues were JPY 1,608.4 billion, down about JPY 60 billion from the previous year. In the first half, the bulk shipping segment, mainly Car Carriers was negatively affected by COVID-19. Conversely, in the second half, revenue greatly increased in the Air Cargo and Logistics segments, resulting in higher revenue year-on-year. Recurring profit was a record high, JPY 215.3 billion. This is an increase of JPY 170.8 billion compared to the previous year. As I have explained before, during previous explanations of the financial results, the bottom line greatly improved in the Liner, Air Cargo and Logistics segments by about JPY 200 billion. On the other hand, in the bulk shipping segment, the impact of COVID-19 caused profits to deteriorate by JPY 25 billion. These are comparisons with the previous year. In total, net income was JPY 139.2 billion, up JPY 108 billion compared to the previous year. This figure includes as I have explained before, the structural reforms to the dry bulk division. An extraordinary loss of about JPY 55 billion was recorded, targeting the medium and large-sized vessels. As a result, based on our dividend policy for a dividend payout ratio of 25%, we plan to issue a year-end dividend of JPY 180 per share, including the interim dividend of JPY 20 per share already issued, the total annual dividend will be JPY 200 per share. Looking back at the past year, the announcement of the fiscal results for the previous fiscal year occurred in the middle of the COVID-19 pandemic. And in fiscal 2020 started under a cloud of extreme uncertainty. Many of you probably remember that for our profit target, I stated we would do whatever it takes to secure a profit. At the time, we were forecasting a major decline in the first quarter, followed by a minor recovery in the second quarter and gradual recovery from the third quarter. As I will show you later, in terms of revenue, this forecast was very accurate. But following the rapid recovery in cargo volumes at ONE in the container shipping division, freight rates rose to extremely high levels, leading to greater-than-expected profit. As a result, as I will explain later, our fiscal position, which had deteriorated over the years, improved to a shareholder's equity ratio of about 30% and a debt-to-equity ratio of 1.52, thus moving closer to the target set in the medium-term management plan. Moving on, please turn to Page 4 for an overview of the results by segment. I have just covered most of the main points, but compared to the previous year, recurring profit in the Liner segment increased by JPY 127.4 billion to about JPY 140 billion. However, I would like to take this opportunity to apologize to our customers who were inconvenienced due to the shortage of containers and harbor congestion caused by the rapid recovery in cargo volumes. We are continuing to address the situation with the full intent of fulfilling our responsibility as a transportation provider. In the Air Cargo segment, from the start of the year, we expected demand for space aboard the cargo planes operated by our subsidiary, Nippon Cargo Airlines to tighten following the cancellation of international passenger flights. But in addition to this, the recovery of cargo volumes was greater than expected, resulting in sustained high freight rates that led to the JPY 33 billion profit. Also, in the Logistics segment, particularly in -- use in Logistics strength of air cargo forwarding, the strong performance led to strong results in the form of profit amounting to JPY 27 billion. Moving on to the next page. Bulk shipping basically performed as expected. As shown here, in the Car Carrier business after bottoming in the first quarter, shipping volumes recovered, as I stated earlier. Compared to the previous year, full year volumes declined by 23%, dropping 39% in the first half and 7% in the second half. Based on these figures, it is easy to see that a recovery occurred from the first half through the second half. In dry bulk, the market was extremely weak at the start of the year. In the Energy division, performance was steadily based mainly on the medium and long-term contracts. And overall, recurring profit was JPY 18.6 billion, down JPY 25.5 billion from the previous year. Shown here too is the difference between the previous full year forecast and the actual results. This section was included given the outlook that some people may wonder how the results can change so much in just a few months. In the previous full year forecast, recurring profit was expected to be JPY 160 billion. But actual profit was JPY 215.3 billion. The reason for this difference is that in normal years, cargo volumes largely slacking after the Chinese New Year in February, but they remained strong in fiscal 2020. Please turn to Page 6. This information has already been communicated before, but mainly efforts were made to carry out the second response, safe operation and measures to maintain operations, including crew changes. Including deviations and arranging hotel accommodations for crew members, additional expenses of about JPY 2.2 billion were incurred to ensure safe operations and carry out crew changes. Moving on to a topic many of you are most interested in. Shown here is a summary of the results for the fiscal year ending March 2021. As I stated earlier, compared to the previous forecast, revenue declined by about 20% in quarter 1 and quarter 2. Then it recovered to almost the same level as the previous year in quarter 3 before greatly exceeding the previous year in quarter 4. As you can see, quarter 1 and quarter 2 were significantly impacted by COVID-19. However, the strong recovery in quarter 4 was completely unexpected. As a result, recurring profit was also extremely high in quarter 4, as seen here. Please turn to Page 8 for a comparison by segment. I have already explained the figures shown here. So I will not go into any further detail. Moving on to Page 9. The factors affecting recurring profit are shown here as a waterfall graph. As you can see, profits in the Liner, Air Cargo and Logistics segments greatly improved compared to the previous year and powered the overall results. Please turn to Page 10 for an explanation of the full year forecast for the fiscal year ending March 2022. Revenues are forecast to be JPY 1,500 billion. This is a decline of about JPY 110 billion compared to the previous year in fiscal 2020. One of the factors behind the lower revenue is lower handling volumes expected in Logistics and Air Cargo compared to the extremely strong year in fiscal 2020. And this has been incorporated as a negative factor for revenue. Recurring profit is forecast to be JPY 140 billion, as shown in the figures here. The markets are expected to soften to a certain extent, in the Liner, Air Cargo and Logistics segments, which drove the results in fiscal 2020. In total, profit is expected to decline by about JPY 110 billion in these 3 segments. On the other hand, in bulk shipping, as you will see in the figures shown later, the Car Carrier business is expected to recover. And dry bulk is expected to return to normal following the structural reforms implemented in fiscal 2020, resulting in a profit increasing by JPY 35 billion. The 3 segments that drove profits in fiscal 2020 will weaken to a certain extent, while the bulk shipping segment, which was significantly impacted by COVID-19 will recover. After taking into account these positive and negative factors, recurring profit is expected to decline by about JPY 75 billion to JPY 140 billion, as shown in the figures here. On the other hand, regarding net income, taking into account all of our various plans, there is expected to be an extraordinary gain in fiscal 2021. So net income is forecast to be the same as recurring profit. That is JPY 140 billion. As a result, concerning the dividend based on a net income of JPY 140 billion and a dividend payout ratio of 25%, similar to fiscal 2020, we expect to issue an annual dividend of JPY 200 per share. This will be paid as a JPY 100 interim dividend and a JPY 100 year-end dividend. Moving on to Page 11. Shown here are the forecast for each segment. I think many of the questions will likely concern these forecasts. But in the Liner segment, we have formulated an extremely conservative forecast. Several of the reasons are stated here. Recently, this segment has remained very strong. But at some point, the current situation is expected to end or gradually return to normal. As stated here, we expect the business to gradually normalize from the latter half of quarter 1. The key point is what normal means, but we expect the business to trend toward the status prior to COVID-19. Concerning Air Cargo, the segment continues to be very strong. However, as vaccinations progress, international passenger flights are expected to return to a certain extent. And based on this assumption, profit is forecast to decline by JPY 13 billion to JPY 20 billion. Page 12 shows the forecast for the Logistics segment. As freight rates for Air Cargo and Ocean Cargo settled down, margins will fall, leading to profit decreasing by JPY 15 billion to JPY 12 billion. In bulk shipping, as I stated earlier, following the recovery in Car Carriers, effects of the structural reforms in dry bulk and continued stable performance in energy, profit is forecast to increase by JPY 35 billion to JPY 54 billion. Page 13 shows a summary of these forecasts. As you can see here, recurring profit is forecast to be JPY 86 billion in the first half and JPY 54 billion in the second half. Assuming the current situation continues, performance will be strong in the first half before being impacted by a return to normal in the second half. Page 14 shows the forecast by segment. And as you can see here, the Liner segment is shown at the top. Recurring profit is forecast to be JPY 44 billion in the first half and JPY 13 billion in the second half for a full year total of JPY 57 billion. In the second half, the positive effects of COVID-19 are expected to largely fall away. I have nothing particular to add about the other segments, in particular, the impact of the Liner segment in the first half and the second half will be extremely large. Here, too, I expect there will be many questions concerning the full year forecast, and I hope to answer them. Moving on concerning the progress of the medium-term management plan because this is the explanation of the full year results, I would like to briefly touch on the subject. Page 16 shows the 3 main issues that is to optimize the business portfolio, secure a stable freight rate business and increase efficiency and create new value. First, concerning optimizing the business portfolio, the structural reforms implemented in fiscal 2020 and dry bulk resulted in significant progress. Also, the success of the Liner business is clearly visible in the financial results. Concerning step 2, leveraging the logistics capabilities of YLK, as stated here, extremely good progress was achieved last year, and good progress is expected to be realized again this year. Moreover, I want to further accelerate the progress at YLK. In the Car Carrier business, due to COVID-19, I would like to say that fiscal 2020 was a rather difficult year. In the LNG and Offshore businesses, we continue to steadily secure contracts. Step 3 concerns digitalization and Green, in particular, within Green, including the initiatives for offshore wind power or the research into next-generation fuels, such as hydrogen and ammonia, we are working extremely hard. At the same time concerning digitalization, too, including security within the group, we are continuing to work to create new businesses such as MarcoPay. Given this, I feel we are making very steady progress in the basic strategies. Page 17 shows a detailed breakdown of that progress. If you take the time to read everything here, you should be able to better understand the details of step 1, step 2 and step 3. Shown on Page 18 are the numerical targets in the medium-term management plan. And in fiscal 2020, recurring profit in ROE greatly exceeded the targets. As I stated earlier, the shareholder's equity ratio of about 30% and debt-to-equity ratio of 1.52 are extremely close to the medium-term management plan targets. Moreover, fiscal 2021 is expected to be another fairly good year. So we should be able to achieve ROE of 21%. Shareholder's equity ratio exceeding 32% and a debt-to-equity ratio around 1.3. Concerning the stable freight rate business shown at the bottom of the page, we secured new contracts. But unfortunately, some of the old contracts expired. So no major increase was achieved overall. On the other hand, as shown at the bottom -- in the bottom right, nonstable freight rate business, which includes the Liner and Air Cargo segments achieved greatly higher profit in fiscal 2020. Page 19 covers the NYK Group ESG story. The information here has already been explained during the previous announcement of the fiscal results on February 3. So I will not repeat anything today. Moving on, Page 20 shows the future initiatives. The current medium-term management plan runs until fiscal 2022. Consideration was given to revising the current plan, but it has been decided to execute the current plan through fiscal 2022. However, concerning the new plan from fiscal 2023, we intend to create it with consideration for the milestone year of fiscal 2050. Already this year, we kicked off a task force directed at creating a vision for 2050 and are advancing discussions among the young executive offices. Based on these discussions, we will start to develop the medium-term management plan that will start from fiscal 2023. Moving on, I would now like to explain the main points covered in the appendix. Page 22 concerns the structural reforms in the dry bulk business. Looking at the bar graphs, you can see that the pink area which indicates the use of medium, long-term vessels for short-term cargo was 35% of the dry bulk business in March 2018. But we have been able to decrease this ratio to 16% through the structural reforms implemented last year. As a result, it is now generally possible to transport long-term cargo using long-term vessels and short-term cargo using short-term vessels. So the structural reforms to the dry bulk business are, for the most part, complete. The following slides provide additional details of the progress. So please take the time to read through them. Please turn to Page 27. I will now briefly explain the volumes used as the assumptions for the fiscal 2021 full year forecast. First, at NCA, as stated here, the fourth item from the top, volume RTK was 2,771 in fiscal 2020, but it is expected to fall by slightly less than 10% to 2,519 this year. Also concerning yield as well, it is expected to fall from 111 last year to 94 this year. These figures here are the basis for the JPY 20 billion figure stated earlier. Page 28 shows the Logistics segment. And at Yusen Logistics, ocean export volumes are expected to remain fairly strong, while air export is expected to fall 6% from 326 last year to 306 this year. In this segment, too, the first half is expected to be strong, followed by a slight rebound in the second half. Show on Page 29 are the market assumptions. As you can see in the figures here, it is a very conservative forecast for dry bulk carriers. For example, the full year BDI is forecast to be 1,563. But given that it has been at 3,183 recently, this is a very conservative forecast. The figures shown here are also very conservative compared to the recent market levels. Concerning tankers, the figures reflect the current situation. Lastly, the Car Carrier business is shown on Page 30. Compared to the previous year. The transportation volumes within Europe have been included from this year. So the figures have changed slightly. Based on this, 4.42 million vehicles were transported in the fiscal year ending March 2020. As already stated, volumes fell by 23% to 3.39 million vehicles in the fiscal year ending March 2021. This year, transportation volumes are forecast to decline about 10% compared to fiscal 2019 and increase about 20% compared to last year to 4.01 million vehicles. However, this forecast does not include the impact of the semiconductor shortage. So the figures may change slightly. I would like to state that the full year forecast has been created based on these figures. This ends my brief summary of the financial results for fiscal 2020 and the forecast for fiscal 2021. [Statements in English on this transcript were spoken by an interpreter present on the live call.]