Earnings Transcript for 9101.T - Q3 Fiscal Year 2023

Yasuaki Okada: Thank you very much for your patience. Thank you very much for taking your precious time to attend this session. We will now like to begin NYK Group. Third quarter results for fiscal 2023. I am your MC for today. My name Yasuaki Okada, General Manager of IR Group. Please bear with me. First of all, I would like to introduce the presenters for today. We have Representative Director, Executive President and Executive Officer, CFO, Mr. Kono. We also have Managing Executive Officer, Chief Executive of Liner and Logistics headquarters, Mr. Banno. First, our CFO, Mr. Kono will begin with the overview of the third quarter results for the fiscal 2023, followed by a Q&A session. I would like to explain how to raise questions later. The materials to be used for today's presentation are already posted on the home page of the company. Please take a look at them. Please be advised that this session, including the Q&A session will be distributed for online distribution. Now we would like to move on to the presentation. Mr. Kono the floor is yours.

Akira Kono: Hello. This is Kono, CFO of the company. Thank you very much for taking your precious time to attend our presentation session today. For today, I would like to begin with the overview of the financial results for the third -- first 3 quarters of fiscal 2023 and then, after that, we would like to provide you with the full year guidance, full year forecast for fiscal 2023. After I finish my presentation, I would like to open the floor for a Q&A session. The materials to be used for today's presentation will be projected on the screen. However, you have already downloaded the material from the homepage, please make them ready at your hand. First of all, regarding the overview of the results for the first 3 quarters of fiscal 2023, if you can open the table on Page 6, the blue column second from the right show the cumulative results through the first 3 quarters, including the first half results. In the first 3 quarters, including the first half, the cumulative revenues decreased by JPY 260.9 billion year-on-year to JPY 1,789.2 billion. Recurring profit decreased by JPY 805.6 billion to JPY 202 billion, and net income dropped by JPY 766.7 billion year-on-year to JPY 153.5 billion. So we recorded a decrease in both revenues and profit. As for the overview, as similar to the trend in the first half of the year, in the line and Logistics business, which comprises Ocean Network Express, Air Cargo Transportation and liner logistics business that showed a strong performance last year. This business recorded a decrease in both revenues and profit as a result of freight rates and handling volume dropping compared to the last fiscal year due to looser supply and demand conditions and also because of the dry mark markets underperformed in the same period of last fiscal year. On Page 7, you see the results by segment. Here again, the columns -- the second column from the right in blue are the results for the first 3 quarters. As for recurring profit of Liner and Logistics business, which comprises liner, air cargo transportation and logistics, liner trade dropped by JPY 682.8 billion year-on-year to JPY 45.3 billion. Air cargo transportation dropped by JPY 50.9 billion year-on-year to JPY 5.2 billion. And logistics was down by JPY 29.1 billion year-on-year and came in at JPY 21 billion. Each of these businesses were affected by the decline in transportation demand. In particular, in the Liner Trade business, OEE suffered from a sluggish cargo demand due to interest rate hikes and inflation in Europe and America as well as the increased shipping capacity resulting from the completion of new vessels which caused the spot rates to decline further from the first half of the year. Consequently, we recorded net losses for the third quarter and the results came in lower compared to our previous forecast. And in air cargo transportation business, in addition to the reduction in cargo shipment, because of the increased supply of space due to resumption of international passenger flights, we recorded a year-on-year decrease in unit freight level. However, in the third quarter, because of the steady demand for e-commerce-related cargo for North America, the revenue for the third quarter came in higher than our previous forecast. In logistics business, Air and Ocean Cargo recorded a significant decline in revenue year-on-year because the market fell due to weak cargo volumes. However, Contract Logistics business was steady, supported by the strong cargo traffic in the e-commerce and automotive industries. Consequently, liner and Logistics business overall recorded a recurring profit of JPY 71.7 billion, which was down JPY 762.9 billion year-on-year. In Bulk Shipping, recurring profit decreased by JPY 35.7 billion year-on-year to JPY 137.4 billion, of which dry bulk business has seen a recovery in the Capesize market towards the end of the year. However, Panamax size underperformed the same period of last fiscal year when the market was very strong. On the other hand, in automotive, risk transportation demand continued since the second half of last year. In addition, because of the congestion of ports and the limitation of ships passing the Panama Canal, the supply-demand situation remained tight. In Energy business, LNG and Ocean business were favorable with the support of long-term contracts. And in fact, the VLCC market improved as this was the peak season and VLGC also recorded further increase in revenues due to favorable market conditions, making positive contribution to overall revenues. If you could go back to Page 3. Here again, overall recurring profit was JPY 202 billion down JPY 805.6 billion. After adjusting for the extraordinary losses and taxes, net income came in at JPY 153.5 billion, down JPY 766.7 billion year-on-year. As for the share -- the acquisition of treasury shares, which we commenced on August 4 we have completed a repurchase of 36, 950,100 shares as of January 31 and a total cost of approximately JPY 142 billion. Next, on Page 8. As you can see on the table on the left, the JPY 805 billion year-on-year decrease in recurring profit was mainly due to the drop of the liner market and the decline of the freight rate and handling volume in the Air Cargo Transportation business, which negatively affected the overall liner and logistics business. So that was the key factor. So that was the overview of the first 3 quarters of fiscal 2023. Next, I'd like to explain about full year forecast for 2023 fiscal year. Please look at Page 9. Compared to the previous forecast at the first half results announcement in November, the revenue forecast of the full year basis was up JPY 60 billion at JPY 2,340 billion. The recurring profit is up -- is up by JPY 10 billion at JPY 245 billion. And as to the net income, the timing of NCA share transfer and transition of overseas terminals ONE have been changed. And because of that, net income has been revised down by JPY 20 billion to JPY 200 billion. As I'm going to touch upon later when I talk about segments, against the previous Liner & Logistics was revised up by JPY 6.5 billion. And for the Bulk Shipping was revised up by JPY 5 billion and these are recurring profits. And this is because of the robust automotive VLCC and VLGC market. On Page 12, we have profits, ForEx, bunker oil prices the assumptions for these numbers, please look at them as well. Based on these numbers, dividend payout ratio is as follows

A - Takaya Soga : Thank you very much. Now we would like to move on to the Q&A session. [Operator Instructions].

Operator: Two questions. I have 2 questions. First, for the October-December period, the foreign exchange gains and loss. I think there was a significant impact of about JPY 20 billion or so. What is the reason behind this? Can you elaborate on the background of this foreign exchange gain and loss? And how does this impact which part of your business. And my second question is that if I look at the other two companies, the passage restrictions in the Panama Canal, there seems to have been some impact on the PO. But what is your case? Can you elaborate on that point, the impact of Panama?

Akira Kono: Thank you very much, sir, for your question. Now I would like to answer your question. The first question regarding the foreign exchange gains and loss, that was about JPY 20 billion or so, slightly less than JPY 20 billion and how did that impact our business? The unreceived receivables, based on the balance of that receivable, the impact will be -- will vary. In addition to that, the currency hedge cost has increased. And those were the major factors behind this number. Because we have to apply a certain amount of foreign exchange hedge and because the interest gap between U.S. and Japan widening, that also had a very -- had an impact. My -- the second question, Panama Canal restriction of passage, how did that impact our business? As far as dry bulk is concerned, the impact was minimal, if any, according to how we see it. On the other hand, this has an impact on containers, especially the OEE part and also the automotive vessels. For the third quarter, this is already reflected in the actual numbers. So we have seen little impact from the Panama restriction. So you can -- that's how you should interpret the numbers. For the containers because the freight started to rise towards the end of the fiscal -- towards the end of December because this was partly affected by the Panama Canal passage restriction according to our interpretation. And that is already reflected to some extent in our actual numbers. As for automotive vessels, for East Coast of the United States, they have to -- because not being able to go through the Panama channel, there was a certain impact. But as I said, we are trying to efficiently allocate the ship. And by doing so, we are trying to minimize the impact on our P&L. And we have been able to access to successfully curve that impact so far? And that's all for myself. Thank you. Did I answer your question?

Operator: Yes. A follow-up question. Regarding the bulk shipping, there was a JPY 34.3 billion as of the end of December coming down from JPY 40 billion. Was this because of the foreign exchange gains and losses. And was this significantly affected by the Panama Canal restrictions? Or was that due to some other reasons? Market conditions, for example, Automotive and energy they -- there were not so many irregular factors for that part. But in the dry bulk, to a certain extent, the forward freights were hedged to some extent. So the foreign exchange impact. And together with the foreign exchange impact, the market -- with the market conditions improving, the hedge evaluation losses will manifest itself. So that's included in the numbers there.

Unidentified Analyst: I have one question. For this fiscal year, free cash flow, what is your latest forecast for this year's freeze free cash flow? Interim results according to about JPY 82 billion upward the revision was expected compared to the initial forecast. About the timing of selling your assets has been postponed, and there have been some factors to impact on the free cash flow. I think that the final cash flow will be better than the initial forecast. If there's any other comment that you can make at the moment, please?

Akira Kono: Thank you for the question. As to free cash flow, Operating cash flow is steady at earnings are increasing. As to investment cash flow, since the timing regarding NCA is postponed. So as I mentioned earlier, so the sales of overseas terminals will come only in the next fiscal year. So that is the change of the timing. The early point next year, we'll see the selling of those assets. But for this fiscal year, we will not have expected the cash in, which would have come from the sales of assets. At this moment, we do not have the details here, but -- so it's not going to have the big -- the impact aside that asset sales timing change. And we would like to explain about that at an appropriate timing. Thank you.

Unidentified Analyst: So basically, you are going to look at the cash flow year after year, and you are going to think about it if it's possible to add more shareholders' return. Am I right?

Akira Kono: As we explained about it last time for this fiscal year, by the end of April, the JPY 200 billion being the ceiling that we are buying our own shares. And looking at the free cash flow going forward, we will continue to think about additional shareholders' return next year and onwards. Thank you.

Operator: Thank you very much for the question. Now moving on to the next question. So I would like to nominate a person who has raised hand. Please mute your microphone and begin your question.

Unidentified Analyst: I have an additional question. For the January to March period, I would like to ask a question regarding your assumption for your plan. For the bulk shipping, the profit level seems to be the same as the October to December period and foreign exchange, you said that you had some reservations. So I don't think this will no longer be a factor for the January-March period. So why is there a difference between [indiscernible] improvement and also the registry business, the profit is coming down. And also the Air Transportation business, I'm sure that there was an e-commerce factor. So that has made an improvement in the December quarter, but this is projected to make losses in the January, March period. Why is this?

Akira Kono: First of all, for the air transport business, in the fourth quarter, in addition to seasonal factors, we also have to incur maintenance costs in the fourth quarter. So because of the [indiscernible] factor compared to the third quarter, we are projecting a decline. So if we exclude this regular factor of maintenance cost, the drop in the fourth quarter will be smaller or be milder. So that's how you should interpret the numbers. Also, regarding the valuation of foreign exchange, you are right in that dry bulk in the fourth quarter, we are expecting some recovery to some extent. But on the other hand, then from next fiscal year onwards, the foreign exchange reservation, we are making some hedges on foreign exchange, and that evaluation has to be -- can only -- we can only know about the valuations only after March. So how will that turn out to be something that we don't know yet.

Unidentified Analyst: Okay. Thank you. And also what about logistics business, the logistics.

Akira Kono: Of course, Mr. Banno can add some comments later. But for ocean and also air cargo, the handling volume in terms of quantity -- well, actually, the unit price of freight. Freight rate has been improving with our ocean freight, but the margin has not caught up yet. So we are taking longer time than effected for catching up. Mr. Banno, if you have any additional comments, please make some comments.

Takuji Banno : Yes, as Mr. Kono mentioned already, if you compare third quarter with the fourth quarter for the forwarding business, overall, the market conditions remain unfavorable. So therefore, the sluggishness remains persistent. Contract Logistics business is going to change dramatically because in the third quarter, NYK has been quite strong in transport business, and we were able to handle a lot of cargo. So that translated into gains in the third quarter. However, in the fourth quarter, after the new year, we are seeing some slowdown. And therefore, this will appear as weakness in the fourth quarter. So compared to the third quarter, I think things will be slower in the fourth quarter.

Unidentified Analyst : Thank you I have an additional question. It's not about the results. The Swiss canal and Panama Canal, the impact has shifted and the continuous schedules and cargo, which is left unloaded. Could you please talk about some update on the cargo situation? And also how your clients, customers are dealing with them? and forwarding business, I think there must be some handling process about the current situation.

Takaya Soga : So Banno is going to explain about it.

Takuji Banno : Thank you for the question. Panama Canal, from the end of last year, the impact has been merging especially for the East Coast of North America, it has been the change to the Swiss canal. And coming into this year, now the Swiss Canal, there's no passing there either. So the -- it is getting a longer haul the transportation on both sides. And around [indiscernible] the cargo movements were not so good. And as for ONE for North America and for Europe, we have discontinued lots. And as a result of that, there's some -- the vessels left not being used. And now we are fulfilling the longer loops with those vessels. We are currently recovering going back to the complete weekly services. That is the current situation. We are not seeing any complete recovery yet. And now it is getting the longer distance. So the air transportation demand is expected to rise. But 2 years ago, we had the pandemic and the current situation is different. The vessel itself, the ocean transportation itself is not completely imply, but it's not that the space is becoming tighter. The customers have space. In some cases, especially for production parts, the inventory might be low in some places. But it's not the case that the customers are hassling to use air cargo to transport their parts. That's not the situation.

Operator: Moving on to the next question. Are there any questions? If we do not have any questions, although it is slightly earlier than scheduled time to finish the meeting we would like to finish this session at this juncture. If you have any follow-up questions later, you are welcome to send them to the IR group. All right. Thank you. With this, we would like to finish the Q&A session. Thank you very much. With this, we would like to finish the 2023 3rd quarter results presentation session. Thank you very much once again for your participation.