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NYK Reports Increased Results Despite Slow Down of Container Shipping

Qualitative Information on Quarterly Results

(1)Review of Operating Results

In the first half of the fiscal year ending March 31, 2023 (April 1, 2022 to September 30, 2022), consolidated revenues amounted to ¥1,365.8 billion (increased by ¥314.4 billion compared to the first half of the previous fiscal year), operating profit amounted to ¥163.3 billion (increased by ¥45.4 billion), recurring profit amounted to ¥765.3 billion (increased by ¥368.0 billion), profit attributable to owners of parent amounted to ¥706.0 billion (increased by ¥294.7 billion).

Due to the strong performance of OCEAN NETWORK EXPRESS PTE. LTD. (ONE), our equity-method affiliate, equity in earnings of unconsolidated subsidiaries and affiliates of ¥572.6 billion in non-operating income was recorded. Within this amount, equity in earnings of affiliates from ONE was ¥551.6 billion.

Changes in the average exchange rate between the U.S. dollar and yen as well as the average bunker oil price during the first half of the current and previous fiscal years are shown in the following tables.

Overview by Business Segment

Business segment information for the six months ended September 30, 2022 (April 1, 2022 to September 30, 2022) is as follows.

Liner Trade Business

In the container shipping division, transportation demand noticeably slowed due to multiple factors including inflation and high consumer goods inventories in consumer markets mainly in Europe and the United States, and recent spot freight rates have fallen. However, ONE was able to maintain freight rates at high levels throughout the first half and continued to achieve strong financial results. In the major trades, although the number of sailings voided due to port congestion declined in the North America trade, shipment volumes declined due to weaker cargo demand compared to the soaring demand in the same period last year, resulting in lower liftings and utilization year on year. In the Europe trade, too, although port congestion remained ongoing, weaker cargo demand resulted in lower shipment volumes, and both liftings and utilization declined compared to the same period last year. On the other hand, freight rates on both trades trended higher than the same period last year, driving the overall financial results.

At the terminals in Japan, lower cargo volumes resulting from delays in the containership voyage schedules and the impact of the lockdowns in China resulted in lower overall handling volumes compared to the same period last year. At the overseas terminals, handling volumes declined compared to the same period last year due to the sale of several terminals in North America. However, ancillary income from container demurrage increased at several terminals and contributed to the bottom line.

As a result of the above, profit increased on higher revenue in the overall Liner Trade Business compared to the same period last year.

Air Cargo Transportation Business

In the Air Cargo Transportation Business, cargo volumes declined due to the lockdowns in China, global economic slowdown and weaker demand for shifting maritime cargo to air freight. In addition, the business was impacted by sustained high fuel prices due in part to the situation in Russia and Ukraine. Despite

these factors, the business was supported by long-term contracts and strong transportation demand for semiconductor manufacturing equipment, and freight rates continued to trend at high levels.

As a result of the above, profit increased on higher revenue in the overall Air Cargo Transportation Business compared to the same period last year.

Logistics Business

In the air freight forwarding business, handling volumes and profit levels declined compared to the same period last year due to lower cargo volumes in the automobile industry.

In the ocean freight forwarding business, slowing cargo volumes due to the impact of the lockdowns in China caused handling volumes to decline compared to the same period last year. Recently, although the slackening in supply-and-demand condition has become particularly noticeable, it was possible to secure a certain level of profit through efforts to conduct agile marketing and increase sales of ancillary services such as customs clearance.

In the contract logistics business, although soaring labor and energy costs were particularly pronounced in Europe and the United States, active cargo volumes resulting from the firm demand mainly for general consumer goods made it possible to achieve strong business results.

In the coastal transportation business, handling volumes declined on several trades, but in the ferry business, the financial results benefited from the weaker yen and soaring feeder freight rates.

As a result of the above, profit increased on higher revenue in the overall Logistics Business compared to the same period last year.

Bulk Shipping Business

In the automotive transportation division, although lower automobile production volumes due to the impact of COVID-19 and global semiconductor shortage continued to be a concern, vessel utilization was improved by flexibly responding to customer requests through optimized vessel deployment plans and sailing schedules. As a result, shipping volumes increased compared to the same period last year. In the auto logistics business, although the scope of operations was revised in several regions following changes in the business environment, actions were taken to increase profitability by capturing the recovering demand after COVID-19 while reorganizing the business portfolio, including receiving terminal related orders for export vehicles in China.

In the dry bulk business division, the Capesize market temporarily recovered after the seasonal market correction ended in late April and increased vessel waiting times due to the lockdowns in China combined with more active shipments of coal. This unseasonal rise in market levels was subsequently followed by a rapid fall. From June, increased concerns about slowing global economic activity caused the market to fall further to unusually low levels in August and September and trend at levels greatly below the same period last year. In the Panamax segment, strong cargo volumes of grain and coal caused markets to remain at levels exceeding the previous year until May. Thereafter, market levels declined in line with the deterioration in the Capesize market. Although the market started to recover from September as shipments of newly harvested grain commenced from the United States, weakness in the Capesize segment continued to weigh on the market. As a result, the Panamax market trended at levels below the same period last year. The Handymax and Handy segments performed similarly and trended at levels below the same period last year. Although markets were lower than the same period last year for all vessel segments, opportunistic efforts were made to secure transportation contracts when the market was high. Also, within this business environment, efforts were made to stabilize revenue by securing long-term contracts and reduce costs through efficient operations.

In the energy business division, VLCC (Very Large Crude Carrier) further rebounded off market lows from July, and after oil prices fell in mid-August following the release from the strategic petroleum reserve (SPR) in the United States, shipments of oil from the Middle East and United States in particular rose to destinations in Europe and Asia. Due in part to this, the use of VLCC increased, causing supply-and- demand conditions to tighten and the market to rapidly recover. Thereafter, the higher shipment volumes continued into September. In the petrochemical tanker market, due to the impact of the situation in Russia and Ukraine, the origin of shipments bound for Europe shifted from Russia to the United States, Middle East and India, resulting longer sailing distances. This caused supply-and-demand conditions to tighten, and markets trended at levels greatly exceeding the same period last year. In the VLGC (Very Large LPG Carrier) segment, markets trended at levels exceeding the same period last year on support from strong shipments to Europe. In the LNG carriers, the results were steady based on support from the long-term contracts that generate stable earnings. Also, in the offshore business, FPSO (Floating Production, Storage and Offloading), drill ship and shuttle tankers were generally steady as expected.

As a result of the above, the overall Bulk Shipping Business recorded increased profit on higher revenue compared to the same period last year.

Also, in the energy business division, an extraordinary loss was recorded in relation to LNG transportation involving the Sakhalin 2 project due to the deteriorating business environment in the first half caused by the situation in Russia and Ukraine.

Real Estate and Other Businesses

In the Real Estate Business, profit decreased on lower revenue compared to the same period last year following the partial transfer of shares of a subsidiary in the last fiscal year.

In Other Business Services, the bunker fuel sales business was strong, and the marine equipment supplies sales business was firm. In the cruise business, operations were suspended in late March due to a problem involving the electrical equipment aboard the ship, but cruises resumed from early June. Thereafter, a COVID-19 infection involving a crew member occurred in mid-August, causing operations to be temporarily suspended again before resuming from mid-September. As a result of the above, revenue increased in Other Business Services compared to the same period last year, a profit was recorded.

(2)Explanation of the Financial Position

Ⓒ Status of Assets, Liabilities and Equity

As of the end of the second quarter of the current consolidated fiscal year, assets amounted to ¥3,938.1 billion, an increase of ¥858.0 billion compared to the end of the previous consolidated fiscal year due to an increase in notes and operating accounts receivable-trade and contract assets, an increase in investment securities after recording the profit from ONE and other equity method affiliates and an increase in tangible non-current assets, mainly vessels. Interest bearing debt increased by ¥43.6 billion to ¥851.9 billion due to an increase in loans payable, and total liabilities amounted to ¥1,450.4 billion, an increase of ¥129.5 billion compared to the end of the previous fiscal year. Under consolidated equity, retained earnings increased by ¥494.1 billion, and shareholders’ equity, which is the aggregate of shareholders’ capital and accumulated other comprehensive income, amounted to ¥2,441.0 billion. This amount combined with non-controlling interest of ¥46.5 billion brought total equity to ¥2,487.6 billion. Based on this result, the debt-to-equity ratio (D/E ratio) came to 0.35, and the equity ratio was 62.0%.

Ⓒ Cash flow

The balance of cash and cash equivalents as of the end of the second quarter of the current consolidated fiscal year was ¥129.6 billion, a decrease of ¥97.0 billion compared to the beginning of the fiscal year. Cash flow from operating activities was ¥295.4 billion (compared to ¥109.9 billion during the same period last year) as a result of profit before income taxes of ¥750.6 billion, non-cash depreciation and amortization of ¥57.9 billion, equity in earnings of unconsolidated subsidiaries and affiliates outflow of ¥572.6 billion and interest and dividend income of ¥142.6 billion. Cash flow from investing activities was an outflow of
¥142.4 billion (compared to an inflow of ¥5.6 billion during the same period last year) as a result of the acquisition and sale of non-current assets, mainly vessels. Cash flow from financing activities was an outflow of ¥260.8 billion (compared to an outflow of ¥135.7 billion during the same period last year) due to the repayment of long-term loans payable, payment of the dividend, redemption of bonds payable and repayment of lease liabilities.

(3)Explanation of the Consolidated Earnings Forecast and Future Outlook

① Forecast of the Consolidated Financial Results

In the Liner Trade Business, spot freight rates in the container shipping division began to decline from the middle of the first half, and the business environment in which ONE operates is starting to change. However, although freight rates will likely fall further in the second half as transportation demand slows, full-year profit levels are expected to remain high.

At the terminals in Japan, handling volumes are expected to remain firm. At the overseas terminals, with priority to transferring the terminals on the west coast of North America to ONE, it is planned to then successively transfer the terminals in other regions.

In the Air Cargo Transportation Business, in addition to the return of international passenger flights to a certain extent, cargo volumes are expected to decline following the global economic slowdown. As a result, market levels in the second half are forecast to soften compared to the first half.

In the Logistics Business, based on the recent market weakness in both the air freight and ocean freight forwarding businesses, although profit levels are expected to decline, they are forecast to remain at levels higher than before COVID-19 as a result of improved cost competitiveness achieved through far-reaching reforms to the business processes in the ocean freight forwarding business. Also, in the contract logistics

business, although soaring personnel expenses will have an impact, continued efforts will be made to stabilize earnings through cost cutting measures and revisions to the service contracts, including price adjustments.

In the Bulk Shipping Business, there continue to be concerns in the automotive transportation division about transportation volumes due to the semiconductor and automotive component shortages. However, transportation volumes are expected to increase slightly in the second half compared to the first half, and full-year transportation volumes are forecast to grow year on year.

In the dry bulk business division, although market levels for all vessel segments are expected to trend below the same period last year, efforts will be made to minimize the impact of market volatility through the use of futures contracts and securing transportation contracts.

In the energy business division, the VLCC market is expected to recover from the low levels in the first half, and the VLGC market is forecast to remain firm. Also, profits in LNG carriers and the offshore business are expected to remain firm on support from the stable medium to long-term contracts.

Based on the above outlook, the full-year forecast has been revised as follows.

Dividends for the Fiscal Year ending March 31, 2023

We have designated the stable return of profits to shareholders as one of the most important management priorities, and the distribution of profits is decided after comprehensively taking into account the business forecast and other factors and generally targeting a consolidated payout ratio of 25%.

In accordance with this basic policy, the interim dividend for the current fiscal year (ending March 31, 2023) has been increased by ¥50 per share from the previous forecast to ¥1,050 per share. Concerning the year-end dividend, following the 3-for-1 common stock split conducted with a record date of September 30, 2022 and effective date of October 1, 2022, it was planned to issue a dividend of ¥145 per share, but this dividend has been increased by ¥15 to ¥160 per share. Concerning the full-year dividend, it is not possible to simply add the interim and year-end dividend together due to the stock split, but based on the number of shares prior to the stock split, it is equivalent to a full-year dividend of ¥1,530 per share.
Full Report

Source: Nippon Yusen Kabushiki Kaisha

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