NYK Rides Out Pandemic Year
During the current consolidated fiscal year, the COVID-19 pandemic had a major impact on the global economy, causing a year on year decline in cargo volumes across the businesses in the first quarter. From the second quarter, a stronger than expected demand recovery occurred, and supported by robust cargo volumes particularly in the Liner Trade, Air Cargo Transportation and Logistics segments, strong results were achieved.
In the container shipping division, robust shipping demand continued following increased demand for medical supplies and consumer goods in relation to stay at home demand. In the Air Cargo Transportation and Logistics segments, the number of international passenger flights was lower than expected due to the ongoing impact of the COVID-19 pandemic, and supply and demand tightened. There were also some ocean cargoes which shifted to air transport due to the confusion in ocean transport. In the dry bulk division, although market conditions remained at a high level in the fourth quarter due to firm cargo movements of iron ore and grain, suffered from the aftereffects of sluggish market conditions at the beginning of the year. In the energy division, the COVID-19 pandemic caused energy demand to fall, leading to the collapse of the supply and demand balance, and resulted in unstable market conditions. Bunker oil prices were lower in year-on-year comparison.
Under this environment, in the Liner Trade segment, while cargo volumes and vacancy rates keep advancing at a high level for OCEAN NETWORK EXPRESS PTE. LTD. (ONE), ONE worked to resolve and stabilize issues such as schedule delays and a shortage of containers due to congestion at ports and inland areas. In the Bulk Shipping segment, further advances were made in the structural reforms to the dry bulk division as set forth in the medium-term management plan, and in the car transportation division, efforts were made on efficient operation by devising vessel deployment and other measures. In the energy division, a loss was recorded following the renewal of a drill ship contract in the fourth quarter, but the bottom line remained firm, supported by stable medium and long-term contracts primarily for LNG carriers.
As a result of the above, for the current consolidated fiscal year ended March 31, 2021, revenues amounted to ¥1,608.4 billion, operating profit amounted to ¥71.5 billion, recurring profit amounted to ¥215.3 billion and profit attributed to owners of parent amounted to ¥139.2 billion, and profit greatly increased. Due to improved earnings at ONE, our equity-method affiliate, equity in earnings of unconsolidated subsidiaries and affiliates of ¥155.9 billion in non-operating income was recorded. Within this amount, the amount of equity in earnings of affiliates from ONE was ¥140 billion for the current fiscal year and ¥74.4 billion for the fourth quarter.
In the container shipping division, ONE suffered a major decline in liftings year on year in the first quarter caused by the impact of the global COVID-19 pandemic. However, from the second quarter, demand rapidly recovered mainly on the North America trade after the lockdowns were lifted, and liftings recovered to similar levels compared to last year. During the traditional peak season, both freight rates and utilization increased. In the third quarter, demand further increased and recovered to the level which exceeds the previous year. In addition, a labor shortage occurred due to the workplace restrictions implemented following a resurgence of the COVID-19 pandemic, resulting in lower cargo handling efficiency and harbor congestion. Due in part to the subsequent schedule delays, a shortage of shipping capacity occurred, and a shortage of shipping containers caused by slow turnaround times led to further tightening of the supply and demand balance. During the fourth quarter, impact from the decline in cargo volumes during Chinese New Year was limited, harbor congestion remained ongoing mainly in North America and both freight rates and utilization levels exceeded the previous year. Given this situation, ONE chartered additional vessels and procured additional containers, and while working to minimize the schedule delays, efforts were made to eliminate the various issues in order to maximize available shipping space.
At the terminals in Japan, handling volumes declined due to the impact of the COVID-19 pandemic, but recovered from the third quarter. At the terminals overseas, although handling volumes declined in Asia compared to last year, handling volumes in North America rebounded from the second half of the fiscal year and increased compared to last year.
As a result of the above, although revenue declined year on year in the overall Liner Trade segment, the business performance greatly improved, and profit increased.
Air Cargo Transportation
In the Air Cargo Transportation segment, international passenger flights continued to be cancelled and suspended due to the ongoing impact of the COVID-19 pandemic, and air freight space supply was greatly reduced. Under this environment, shipments of mainly automotive components, semiconductors and electronic devices recovered from the third quarter which rapidly tightened the supply and demand balance, and capacity utilization and freight rates remained at high levels. Also, some of the ocean cargo was shifted to air cargo due to the impact of the shortage of shipping space aboard containerships, providing a further tailwind to the business.
As a result of the above, business result significantly improved compared to the previous fiscal year, and profit was recorded.
In the air freight forwarding business, handling volumes increased as a result of the decline in air cargo space caused by the largescale cancellation and suspension of international passenger flights and the shift of some ocean cargo to air cargo. In the ocean freight forwarding business, despite soaring procurement costs, handling volumes recovered as economic activities resumed. In the logistics business, cargo volumes increased mainly in e-commerce related business as a result of higher stay at home demand. In the coastal transportation business, handling volumes declined due to the impact of the COVID-19 pandemic.
As a result of the above, profit increased on higher revenue in the overall Logistics segment compared to the same period last year.
In the car transportation division, while shipping volumes of finished cars gradually recovered from the large year on year decline in the first half, efforts were made to innovate vessel deployment for cost reduction. Also, as one of the current measures to reduce greenhouse gas emissions, the Japan’s first LNG-fueled car carrier entered service in October, and know-how on increasing quality and safety was accumulated directed at the LNG-fueled vessels to be built going forward. In the auto logistics segment, although there were national and regional variations in the supply and demand balance, efforts were made to cut costs and rationalize the business in countries including China, Russia and India, and at the same time, progress was made in revising the business portfolio, including building and preparing to open new finished-car terminals in Turkey and Egypt and studies for realizing rail transportation between China and Central Asia.
In the dry bulk division, the vessel supply and demand balance tightened in the Capesize market in the fourth quarter following a recovery of iron ore shipments and increased vessel congestion after a cold wave in China. However, the market remained below the levels last year through the third quarter due to the prolonged impact of the wet season at the start of last year on iron ore shipments from Brazil, which has a major influence on the market, and this greatly affected the bottom line. In the Panamax market, cargo volumes of soybeans and corn to China from the United States were strong from the third quarter, and the supply and demand balance tightened due to factors including increased congestion resulting from the measures against COVID-19 at ports of entry in China and active shipments of soybeans from South America. Despite these positive factors, the market weakness in the beginning of last year pushed the bottom line down. Under this environment, along with fixing revenue through the use of futures agreements in order to limit the impact of market fluctuations on earnings, efforts were made to stabilize revenue by securing long-term contracts and reduce costs through efficient operations. Also, extraordinary losses were recorded for the expenses forecasted to arise in the future for the structural reforms implemented in the second and third quarters.
In the energy division, falling energy demand triggered by the COVID-19 pandemic caused oil prices to drop greatly lower, leading to increased vessel demand for floating storage and the VLCC (Very Large Crude Carriers) and petrochemical tankers markets to soar briefly. However, the markets steadily settled down following production cuts by oil producing countries and the return of oil prices to normal levels. From the second quarter, the supply and demand balance slackened, and the markets weakened. Also, the unwinding of floating storage overlapped with these events, leading to an increase in vessel supply and further deterioration of the supply and demand balance, and as a result, the market dropped to historic lows in the fourth quarter. In VLGC (Very Large LPG Carriers), following temporary market weakness in the first quarter caused by lower vessel demand, market levels strengthened from the second quarter as a result of lower capacity supply due to an increase in dry docking period and waiting days at discharging ports, as well as increased ton-miles and congestion at the Panama Canal due to more active shipments from North America. However, the market rapidly weakened in the fourth quarter. In LNG carriers, the results were steady based on support from the long-term contracts that generate stable earnings. Also, in the offshore business, although FPSO (Floating Production, Storage and Offloading) were steady, in drill ships, a loss was recorded in the fourth quarter following the renewal of a drill ship contract.
As a result of the above, the overall Bulk Shipping segment recorded lower profit on decreased revenue year on year.
Real Estate and Other Businesses
The real estate segment was steady with both revenue and recurring profit generally unchanged year on year.
In the Other Business Services segment, bunker fuel sales and chemical product manufacturing and sales were weak compared to last year. Also, the technical service business and marine equipment sales were affected by lower customer demand and project schedule delays caused by the COVID-19 pandemic. In the cruise business, although cruises commenced again from November 2020 after being cancelled in the first half as a measure to prevent the spread of COVID-19, having the regular dry dock period in January, operations resumed from March 27.
As a result of the above, profit declined on lower revenue in the Other Business Service segment compared to the same period last year.
(2) Review of Change in Financial Position
Total assets as of the end of the current consolidated fiscal year were ¥2,125.4 billion, an increase of
¥192.2 billion compared to the end of the previous consolidated fiscal year as a result of an increase in notes and operating accounts receivable-trade and an increase in investment securities after recording the profit from the equity method affiliate ONE. Although interest bearing debt decreased by ¥98.7 billion compared to the end of the previous consolidated fiscal year as a result of a decrease in bonds payable and long-term loans payable, total liabilities amounted to ¥1,458.0 billion, an increase of ¥23.6 billion compared to the end of the previous consolidated fiscal year due to an increase in notes and operating accounts payable-trade and increased provision for losses related to contracts for the structural reforms in the dry bulk division. Under consolidated equity, retained earnings increased by ¥132.9 billion and shareholders’ equity, which is the aggregate of shareholders’ capital and accumulated other comprehensive income, amounted to ¥625.3 billion. This amount combined with the non-controlling interests of ¥42.0 billion brought total equity to ¥667.4 billion. Based on this result, the debt-to-equity ratio (D/E ratio) came to 1.52, and the equity ratio was 29.4%.
(3) Cash Flows
The balance of cash and cash equivalents as of the end of the current consolidated fiscal year was ¥103.5 billion, an increase of ¥26.5 billion compared to the end of the previous consolidated fiscal year.
Cash flow from operating activities was ¥159.3 billion (compared to ¥116.9 billion at the end of the previous fiscal year) as a result of the profit before income taxes of ¥170.4 billion, non-cash depreciation and amortization of ¥98.8 billion, equity in earnings of unconsolidated subsidiaries and affiliates outflow of ¥155.9 billion and interest and dividend income of ¥42.0 billion. Cash flow from investing activities was an outflow of ¥16.8 billion (compared to an outflow of ¥54.8 billion at the end of the previous fiscal year) as a result of the acquisition and sale of non-current assets, mainly vessels. Cash flow from financing activities was an outflow of ¥125.4 billion (compared to an outflow of ¥61.7 billion at the end of the previous fiscal year) due to decreases in short-term loans payable and commercial paper, redemption of bonds payable and repayment of leases liabilities.
(4) Consolidated Earnings Outlook
It is still unclear what impact the COVID-19 pandemic will have on the global economy and when the pandemic will come to an end. During the past year, the container shipping division was most affected by the pandemic, and although strong shipping demand and harbor congestion remain ongoing, due to the uncertainty surrounding when the situation will return to normal, forecasts are based on the assumption that situation will gradually move toward normalization from the second half of the first quarter onward. Although handling volumes at terminals in Japan are expected to increase, handling volumes at overseas terminals are expected to decline as the container demand on the North America trade settles down. In the Air Cargo Transportation segment, while a gradual return of international passenger flights to the market is anticipated, cargo volumes are expected to remain strong as the global economy recovers. In the Logistics segment, although a decrease in the handling volume is assumed, market levels are expected to trend higher than usual. In the ocean freight forwarding business, agile marketing will continue to be conducted based on the demand, and in the logistics business, efforts will be made to stabilize earnings through revisions to contract prices and cost reductions. In the car transportation division, although there are concerns about the impact on the number of vehicles transported due to insufficient semiconductor production, the cargo volume is expected to recover from the previous fiscal year. In the dry bulk division, the market has been strong at the start of the year, and it is expected to remain at elevated levels compared to last year throughout the year for all vessel segments. In the energy division, the VLCC (Very Large Crude Carriers) and VLGC (Very Large LPG Carriers) markets continue to be weak, but the results are expected to remain steady based on support from stable medium and long-term contracts in the LNG carrier and offshore businesses.
Based on the above forecast, profit is expected to be lower on decreased revenue next year, but business results are expected to remain at a favorable level.
(In billion yen)
(5) Basic Policy Concerning Dividends and Planned Dividend Payments
NYK Line has designated the stable return of profits to shareholders as one of the most important management priorities, and generally targeting a dividend payout ratio of 25%, the profit distribution is decided after comprehensively taking into account the business forecast and other factors. At the same time, based on an ongoing minimum dividend that is not affected by the business results, an annual dividend of ¥20 per share has been set as the minimum dividend for the time being. In accordance with this policy, for the current fiscal year (fiscal year ending March 31, 2021), it is planned to issue a year-end dividend of ¥180 per share for a full-year dividend of ¥200 per share including the interim dividend. Regarding next year (fiscal year ending March 31, 2022), based on this policy, it is currently planned to issue an interim dividend of ¥100 per share and a year-end dividend of ¥100 per share for a full-year dividend of ¥200 per share.
2. Basic Approach to Selection of Accounting Standards
We currently apply Japanese generally accepted accounting principles to the consolidated financial statements of the NYK Group. We constantly examine application of the optimal accounting standards with a view toward the future while paying due attention to trends surrounding the various accounting standards available to us for selection.
Source: NYK Line