Nippon Yusen Kabushiki Kaisha (OTCPK:NPNYY) Q1 2022 Earnings Conference Call August 2, 2022 11:00 PM ET
Company Participants
Shuichiro Shimomura – Head of Investor Relations
Hiroki Harada – Senior Managing Executive Officer and Chief Executive of Liner & Logistics Headquarters
Takaya Soga – Senior Managing Executive Officer and Chief Financial Officer
Conference Call Participants
Shuichiro Shimomura
Thank you very much for waiting. This is NYK. Thank you for your support. Thank you very much for attending this meeting despite your busy schedule. We would like to start the Financial Results for the First Quarter FY2022 for NYK. I am Shimomura, Head of IR. First of all, I would like to explain the presenters of today the Senior Managing Executive Officer and Chief Executive of Liner & Logistics Headquarters, Hiroki Harada.
Hiroki Harada
Hello. This is Harada. Thank you very much.
Shuichiro Shimomura
We have the Senior Managing Executive Officer CFO, Takaya Soga.
Takaya Soga
This is Soga. Thank you very much.
Shuichiro Shimomura
So from Soga, CFO, he will make a presentation about the financial results for the first quarter of FY2022 and the full year forecast. We go to Q&A and we plan to end this meeting by 4:00 p.m. The presentation is uploaded on our website. So please take a look. In terms of the questions, we will receive it through chat or through oral questions. I would explain about how to ask questions afterwards. This presentation, including the Q&A session, will be available on-demand through video streaming.
So let’s start the presentation. Mr. Soga, please.
Takaya Soga
So I’m Soga of NYK. Thank you very much for attending this meeting despite your busy schedule. So I would like to expand my gratitude to your support. Today, first of all, I will explain about the overview of the first quarter results of FY2022. Next, I will explain about the revised forecast of the full year of fiscal 2022. After the presentation, we will turn to Q&A.
First, refer to the presentation material that you have on hand or we will be showing you the same page on the screen, so please refer to the screen, whichever is – which is comfortable for you. First, I would like to explain about the summary of the first quarter results. Please turn to Page 6. So this is about each of the income lines from the top revenue was ¥673 billion, operating profit ¥89.1 billion, recurring profit ¥377.7 billion and net income was ¥343.3 billion. All the items have surpassed our initial forecast resulting in very strong results.
As for the revenue in the bulk shipping segment, the market remained favorable from the previous quarter in the dry bulk business and automotive transportation business recovered. Additionally, due to the impact of the exchange rate, revenue in the bulk shipping segment increased by ¥74.5 billion year-over-year. In the logistics segment, revenue rose by ¥63 billion year-over-year due to the increase of freight rates. In total, we saw a ¥168.4 billion increase of revenue year-over-year, achieving ¥673 billion.
For the recurring profit, the Liner and Logistics business, which consists of the liner trade, air cargo transportation and our logistics business, so a large increase by ¥176.1 billion year-over-year. Furthermore, in the bulk shipping segment due to the favorable market in dry bulk improvement of the transportation efficiency in the automotive transportation business, recurring profit increased by ¥48.1 billion. In total, recurring profit went up by ¥224.1 billion year-over-year to ¥377.7 billion.
Taking into account extraordinary loss and gains and corporate tax for this quarter, net income increased by ¥192.2 billion year-over-year reaching ¥343.3 billion. To follow up on the extraordinary loss in view of the unpredictable situation in Russia and Ukraine from an accounting perspective will the LNG transportation for Sakhalin 2 project, we decided to review the asset value. Accordingly, we have booked ¥17.8 billion of extraordinary loss in this quarter. Next I will explain about the performance of each segment at the recurring profit level in more detail.
Please turn to Page 7. First for the liner trade business, this is on the very top column, recurring profit was ¥270.4 billion, ¥159 billion increase year-over-year. The major reason behind this is the continuing strong market condition in the container shipping business of ONE, our equity method company. There has been some easing of the congestion as some of the major port of the U.S. such as in the West Coast, but this has not led to the resolution of the disruption inland transportation. There was impact coming from the lockdown in Shanghai and the situation in Russia and Ukraine, but overall, robust transportation demand continued.
Some adjustments were conducted from the very high spot freight rates, but as the rates increased through the renewal of long-term contracts, this supported the average price. As a result, recurring profit was better against our initial outlook.
In the air cargo transportation segment, recurring profit was ¥24.6 billion, up ¥9.3 billion year-over-year. The tightness in demand and supply eased somewhat through the reopening of the international passenger flights. However, a favorable market condition is still continuing.
We had to suspend flights on the Shanghai route due to the lockdown and reduce flights for the European service due to the ongoing situation in Russia and Ukraine. But freight rate stayed at a high level.
Going to the logistics segment, recurring profit was ¥19.3 billion, a ¥7.7 billion increase year-over-year. In the forwarding business, both ocean freight and air freight saw a decline in handling volume year-over-year. However, sales pricing continue to be high and additional demand such as urgent transportation, busted earnings. In the contract logistics business, although personal costs soared supported by movement of general consumer goods, performance stayed strong.
Lastly, turning to the bulk shipping business, which consists of the automotive transportation business, dry bulk and energy, recurring profit was ¥64.1 billion, increasing ¥48.1 billion year-over-year.
In the automotive transportation business, we continue to be impacted from the suspension of production and shipping of vehicles due to the lack of automotive components coming from semiconductor shortages and the lockdown in Shanghai. However, through our efforts in optimizing vessel deployment and collection of alternative cargo, we are able to maintain the same level of transportation volume as of last year.
In the dry bulk business, the market rate for charter vessels remained strong. Specifically, favorable conditions continue for small and medium sized vessels, such as Panamax, Handy and Handymax.
As for the energy business market condition for some tankers, such as VLCC, the very large tankers remained weak. However, the VLGC market improved.
As mentioned previously for the LNG vessels, as I had mentioned, we booked an extraordinary loss for this Sakhalin 2 transportation business, but on the recurring profit level earnings remained stable, supported by medium to long term contracts, including offshore businesses.
For your reference what I have just explained is written from Page 3 to Page 5 in the presentation material.
Please turn to Page 8. So this is the chart and the graph we have to sum up. In the first quarter of 2022 as shown in the graph on the right hand side, all segments booked an increase of profit from the previous year. If you refer to the chart on the left hand side, out of the ¥224.1 billion profit increase about ¥25 billion is coming from the weaker yen. This has been the outline of the first quarter results for FY2022.
Let me explain the forecast for FY2022. Please look at Page 12. This graph is also showing the forecast of the performance. As a result of the review from the initial forecast announced in May revenue, operating profit, recurring profit and net income are revised upward. The revenue is expected to be ¥2.5 trillion, up ¥200 billion from the initial forecast operating profit ¥250 billion up ¥63 billion; recurring profit, ¥1.4 trillion up ¥280 billion; and net income, ¥960 billion, up ¥240 billion.
In terms of the breakdown, the recurring profit in the first half will be ¥720 billion and the second half will be ¥290 billion. Net income in the first half will be ¥670 billion and the second half will be ¥290 billion. Most of the expected increase in revenue and profit are concentrated in the first half, primarily due to high level, first quarter, actual outperforming the initial forecast and the outlook to maintain the comparable level in the second quarter.
In the second half after the third quarter, as it is extremely difficult to predict economic outlook due to interest rate policy of each country and the timing and the magnitude of softening of freight rate at the aftermath of the convergence in logistic and supply chain disruption, we must retain relatively conservative position on all business segments.
Having said that, our guidance in the second half is not overly conservative. Exchange rate assumption is changed from ¥120 per dollar to ¥127.62 and bunker price assumption is changed from $741.25 per metric ton to $838.24 per metric ton. Let me walk you through the full year forecast on recurring profit of each segment.
Please turn to Page 13. On this chart, this is in comparison with the previous year, starting from Liner Trade. The recurring profit is expected to be ¥770 billion, up ¥220 billion from the initial forecast. The environment surrounding container shipping still has multiple unpredictable fluctuating factors including impact of lockdown by COVID-19. The situation in Russia and Ukraine soaring resource prices, effective port labor negotiations at the west coast of North America and economic outlook based on policy interest rate in each country. Although, O&E does not disclose forecast as it is difficult to indicate reasonable outlook, certain assumptions are made and reflected on our full year forecast.
The assumptions include fluctuating factors in the first half, as I mentioned earlier, yet we retain the assumptions of continued outperformance in the second quarter, as in the first quarter gradual stabilization of demand, mainly in North America in the second half convergence of logistic supply chain disruption, normalization of supply demand, balance, and downward adjustment of extremely high spot freight rate, but to be supported by long-term freight rate renewed at the backdrop of rising spot freight rate to certain extent.
Thus, our forecast for increasing recurring profit for Liner is ¥220 billion in of which ¥200 billion will be in the first half and ¥20 billion in the second half. In Air Cargo, we expect recurring profit of ¥77 billion, up ¥15 billion from the initial forecast. It is still anticipated to take some time for tight supply demand balance to loosen by the recovery of the international passenger flights and coupled by increase of long-term multiple year contracts yield index is expected to stay at high level for the time being.
In logistics business, we expect recurring profit of ¥48 billion, up ¥10 billion from the initial forecast, although both ocean freight and air freight do not experience drop in freight rate. As we factored in at the beginning of the year and retain relatively high level rate during the first half, we anticipate gradual decline in profit level as supply demand balance normalized after the second half. Lastly, in bulk shipping, we expect recurring profit of ¥154 billion, again, up ¥40 billion from the industry forecast.
In automotive transportation, although the impact of production of finished cars resulting from semiconductor and parts shortage is still uncertain. Steady transportation volume is expected to be retained by capturing transportation demand for construction machinery and used cars while dry bulk business continues to enjoy favorable market mainly for small sized vessels in the first half, market falls each vessel type is expected to weaken slightly in the second half. Yet overall, we expect to see continued study performance.
In energy business, VLCC market is expected to recover to a certain level in the second half, but it may be difficult to see the recovery VLGC is expected to improve compared with the initial forecast, strong performance is expected supported by medium to long-term contracts for LNG carriers and offshore businesses. What I just explained are covered in Pages 9 to 11 of the materials you’re seeing on the screen, please refer to the material as well.
Lastly, I will touch on dividend. Please turn to Page 9 of the materials. At the very bottom of this page, you see the description on dividend, as I mentioned. The dividend forecast is based on the revised full year forecast in accordance with the basic policy to refer to consolidated payout ratio of 25% as an indicator, the interim dividend will be ¥1000 per share. And the year-end dividend will be ¥145 per share based on the number of shares after 3-for-1 common stock split calculating from anticipating net profit for the first half and the second half of FY2022. Based on the number of shares before stocks split, year-end dividend will be ¥435 and full year dividend will be ¥1,435, which is up ¥350 per share in interim dividend and ¥30 per share in year-end dividend and up ¥380 per share in full year dividend.
That concludes the overview of Q1 results for FY2022 and revision of forecast for FY2022. Thank you very much for your attention.
Question-and-Answer Session
A – Shuichiro Shimomura
Thank you. We’d like to go into the Q&A session. So let’s start the Q&A session. I have three questions. First of all, my first question is you – Soga san, you have explained about the container shipping freight rate. The spot rate has been going down, but has been supported through the annual contract rate. If you look at the past experience, when the spot rate goes down, the annual contract rate will go down as well. That may be a risk, but you are predicting that is not happening. So what is the reason behind this? That’s the first question.
And the second question is that this is on Page 13, the second – how are you going to look at a second quarter for the logistics business year-over-year, it’s going to – profit is going to decline year-over-year. The Air Cargo is going to go up. So what is the background? It’s in the same market, but if between the integrators and the borders, maybe there’s a different outlook. So I would like to hear your view upon that.
And the third question again this is about the logistic business. This is on Page 17. In terms of the air freight, so the first half 170, 202 and first half in terms of the volume, second half 202. So the first half the volume has gone down and second half is going to go up. So maybe the volume that has not been able to carry by the – by ships. And maybe that will impact the second half, but in terms of the increase of the volume in the second half, any – if you have any specific reasons, would you please give us that? Would you please answer my questions?
Takaya Soga
So thank you for your questions. First, Harada san, would like to start with. So liner and logistics business your question – three questions about those. So I would like to respond to your question, the – your first question was about the spot rate of the container shipping, if it goes down, it will impact the full year annual contracts.
So that is the past experience, but what you’re anticipating for this time around, and first of all, as you have pointed out in the past for the container shipping business. So as a fact for the certain period of time, the spot – if the spot rate, if it goes under the annual contract for some level of time, when there is renegotiations for the annual contract, the cargo will basically go through the forwarders spot markets. So in this time around through the normalization to some extent that will happen.
So that is our assumption. In the first half, so depending on the route, there are some other things happening. But if you look, it has not reached a certain timeline in the certain level. So it has not impacted on your contract right now. For the first half, we do not think that this will happen, going into the second half specifically in the second – the latter half of these after quarter, depending on the route, this will happen.
And as a result, for the fourth quarter, of course, when January the annual contract will be renewed in some cases. So these type of contract renewals will be impacted. So that’s our outlook for the second half. So what we have experienced in the past, through the normalization process, it will happen specifically for the second half that is our assumption. That is our outlook. And that is the basis of our outlook for the full year.
Their second point, well, what you have referred, I have not looked up the figure specifically, but in terms of the air freight business, this all called asset type NCA. So in terms of the air cargo, that’s air cargo business, but the AFA freight forwarding business, they – I think basically referring to there would be a difference in the quarter, but what’s happening in the market right now is that generally speaking the forwarders towards the air cargo business operators, they think the demand is strong and they tried to take up the space.
So it was a mixed cargo. And then it was about six-month contract. So but it’s going to one-year, I mean some customers, they have three-year agreement on the PSA, according to PSA. So for the air cargo business, the certain level of foreseeable revenue can be expected on the other hand for the forwarding business. So it’s not the cargo movement is not very strong right now. So if you have – basically, if you have the space that will come out as expense of the course, to be able to get the volume as much as possible, there will be some competition in terms of at the rate level. So as a result, the asset type business – well NCA that’s asset type business or the air freight business, there will be a difference in the business. That is my understanding.
To your third question, about the – in terms of the cargo, the – so we do not think in the second half, there will not be some cargo that will be loaded in the ships. So in terms of the normal cargo, we do have concerns about the U.S. economy, but in terms of this ability the movement of the cargo is within October and December is strong. In terms of the air cargo – air freight from autumn onwards, if you look at the demand from the customers side against the space that they have taken up, I think basically there is a certain level of cargo volume that can be expected. So compared to the past I think basically there will be some movements in the cargo. So thank you very much for your question, that was the – question. Thank you.
So there has been transition from the sea to air cargo actually has been seen that already. So in the second half we do not expect that type of thing happening. So that is the type of thing that we are expecting in terms of the cargo movement.
Shuichiro Shimomura
And next, and I have two questions, the first question, it’s about Sakhalin 2 impairment. And this is what I would like to hear and looking at this for LNG transportation. But with respect to tanker, I think it’s different. But do you have impairment on tanker? I would like to know the details about the impairment process. And the second question is somewhat related and this is related to air cargo transportation business, looking from the previous assumption, the profit level seems to be revised the upward on a full year basis, but looking at the volume of the cargo, it seems like it’s dropping and yield is extremely high. And this is the reason why the profit is high. So the cargo volume is decreasing, but since there is a tightening, a supply and demand, the profit is increasing. Am I correct? In my understanding, those are my two questions.
Takaya Soga
All right. Starting from the Sakhalin 2 question, Soga san is going to explain, and the remaining AFF will be explained by Harada san. And thank you. On impairment of Sakhalin 2 project, you asked us about the details of this impairment. In this Sakhalin 2 project, that this is LNG transportation. And in our case, we have a joint venture with the ocean freight, a company in Russia, and we have two vessels for transporting LNG. This is the current status.
And due to this Russia-Ukraine situation, there are economic sanctions. And by avoiding that for continuity of this project that transportation. At the counterpart, the Russian as transportation company for the equity that the joint venture partner have, we are trying to acquire their stake. So we have a 100% of this two vessels are related to LNG transportation for this Sakhalin 2 project.
But since we have acquired from the partner, we have a 100% stake of this joint venture, but going forward, with this project in the future progress, according to the plan, the uncertainty is expected at the moment. So we have consulted with the accountants and as of now, because there are uncertainties for this level, we decided to go through the impairment process for the time being that is the background. But realistically speaking, this transportation is still continuing and as to what will occur in the future, we still do not know if this continues and then impairment may recover, but there are uncertainties. So this is accounting related treatment to – have the impairment for the time being. I just responded to your question.
Hiroki Harada
Thank you. For the second question about the Air Cargo Transportation. On the full year profit, there seems to be upward revision. And the cargo volume is not increasing. So yield should be improving compared to what was expected at the beginning. In a nutshell, your understanding, and your analysis is correct. And with respect to yield, the biggest reason for the increase in yield is more than what we expected. As I mentioned a half year mixed loading is now changed to more than one year BSA and at the supporting freight rate is a very high, and that portion is now increasing that’s one aspect. And as for spot – in some of the routes, because of the sudden increase, for example, in Hong Kong, there is increasing number of flights in Cathay Pacific, and the market declined temporarily.
But what’s happening is not impacting to the long-term contract by the spot price. And furthermore, one of the reasons are boosting the yield is a semiconductor-related charter, a high rate is now visible as a result, yield is increasing. So the volume is not increasing, but the profitability is improving. And the demand, a supply situation is not so distorted, but part of the air cargo transporters have increased the space in some areas, but the long-term yield and with a higher charter freight rates, the average is high and the performance is improving. That is our view.
Shuichiro Shimomura
Thank you. About the ¥17.9 billion in terms of a book value, technically speaking, it has become zero. Am I correct?
Takaya Soga
The vessel itself we have acquired two vessels. So those are remaining as our assets.
Shuichiro Shimomura
I see. So the company part is now zero?
Takaya Soga
Yes, it’s like a goodwill and that part is impaired.
Shuichiro Shimomura
I see. Thank you very much.
Takaya Soga
Thank you.
Shuichiro Shimomura
Next I have two questions. One is about the logistics business, the using logistics. So ¥19.3 billion for the first quarter is profit. The fourth quarter was on ¥13 billion, so it has improved even more. So, I’d like to know the background of this. I think it is the improvement of the margin, but I want to know in more detail. For the other companies, the first quarter forwarding profit compared to the fourth quarter has gone down. So where – what is the difference between you and the other peers? I would like to know the reason.
The second question is about the container freight rate. The current situation, it is a peak season, but we don’t see any rebound. So, why I would like to know your view about that. If you just look at the news flow, the North America, the cargo handling is good and some ports they may be – we should seeing the container being loaded. So, but it doesn’t seem that the freight rate is going up for containers. I would like to know your view about that.
Takaya Soga
So this is the line of logistic business. So, I don’t know how is going to respond? So, first, I would like to talk about respond to the line of logistic related business. First of all, in terms of NCA’s, or excuse me, YLK’s performance, specifically compared to the fourth quarter last year, and the first quarter of this year, the difference between these two quarters, compared to other four quarters, I think you’re comparing it to the other quarters performance. In terms of YLK this be April to June three months. I think there has been some special demand that came into this first quarter that what appeared in March as well. But, so there has been some cargo that has not been able to be loaded in these vessels, and that has been handled by air freights.
So that impact was seen until April and up until May. So this special demand was there. So that is the reason for the first quarter of this fiscal year that has been impacting the first quarter results. And that’s reason why we have been done better than the fourth quarter of last year.
So the fourth quarter, again, this is special situation, fourth quarter, it should have been a high season, but so SG&A, that would be the bonuses, et cetera. So we had to pay those bonuses in the fourth quarter, and that was booked on the fourth quarter. And because of this reason, the fourth quarter and the first quarter difference for IRK turn out this way. So in terms of the cargo volume, it’s basically the special demand. So in terms of the peak system we found is not seen, but if you look at the situation the freight rate has been some adjustments on the spot market of course.
So in terms of the cargo, demand is not as strong as seen as the peak season. So the peak actually isn’t happening coming right now. So maybe that’s the demand is a bit weak on top of that, the North American side, because the situations has improved and the ships are started to return. And there has been supply coming here from Asia. So the space has become available from the Asia side, there has been some supply of the space. And then basically the space is sold.
On the other hand mainly in the railway, there has been some congestion of the cargo, so going forward I think we have to observe the situation going forward, but in terms of the peak season, in terms of the cargo situation, we don’t think that there’ll be a season of peak. So maybe the ship will return and then from everything from Asia is there, and then there is some competition, but we don’t know how the situation is going to trend going forward. We have to look at the core situation and observe going forward, that’s our view. Thank you.
So, going back to your first question about the special demand that happened for the first quarter in the first quarter, it will be automotive components in conductors, those, those type of cargo. I think it’s basically the auto motive related components. Thank you.
Shuichiro Shimomura
Thank you very much. I have two questions. The first question is about the container shipping, and as you mentioned, spot of freight rate and it seems like there is improvement at ports as well, and the volume continues to be very strong after February. But looking at board it seems like we don’t see so much improvement in terms of the processing and the handling, but can you explain on that aspect on port. And the second one is related to logistics and also air cargo transportation, you mentioned that there were special demand in the first quarter and in the second quarter is there a major difference in situations that there is a job and coming to the third question in terms of the demand I think you are trying to reduce a demand on a four year basis, and you are also trying to revise a downward for the second half. So are we beginning to see the slowdown in demand? This is the point I would like to confirm.
Thank you. Then can we ask how the Takaya Soga to respond to the questions?
Takaya Soga
Thank you for your questions. Starting from the first question, thank you for the question. About the spot, the freight rate for container shipping, looking at the port a situation. It does not seem like there is dramatic increase in labor and there seems to be improvement and that data create an impact to the spot, the freight rate and what is happening now, and what will be the impact of going forward. And looking at ports originally local cargos compared to sometime we are seeing more workforce and we are receiving more cargo. And it seems like for some time, railway was quite favorable and we no longer have a much risk of infection, but more than a 100 vessels, for example, in Los Angeles there was a stopping of about 100 vessels to 20 vessels and even with that 20 vessels this is higher than the normal situation, but with respect to railway, currently, the railway transportation seems to have a congestion and we have more cargos in yard. And what we are concerned about is that it’s taking more time for receiving the cargos locally. And I’m hoping that there isn’t a much relationship with the inventories. But it seems like there is an increase. And if this kind of situation is going to continue, it’s probably sometime later that we will see the complete resolution of the port situations. And this may create an impact to spot the freight rate that depending on whether the vessels would come back or not.
But for the time being, it’s not bad, but as I mentioned earlier a seasonal momentum. With respect to this fiscal year, we feel that there isn’t any seasonal momentum this year. And in Logistics and Air Cargo Transportation for the first quarter and the second quarter, especially in case of YK [ph] in Logistics, second quarter seems to be weaker compared to the first quarter and this may be repetition. But the special demand from the fourth quarter ended in May and in comparison with that because there was so much profit from that impact. It seems like there is a slightly weaker second quarter and the Logistics figures in the second quarter will be not as strong. But on the other hand, customer is giving us the information that there may be recovery after fall including semiconductor.
So the second quarter is a slightly weaker in terms of the figures. I think that is how you can understand. This is similar in Air Cargo Transportation as well. And first quarter had a special demand from a switch over from [indiscernible]. And in case of shipping from Japan, there seems to be some slow down during summer. And so second quarter seems to be weaker compared to the first quarter, but this is not a dramatic aggravation. First quarter was better. So it’s just a matter of comparison.
And then in terms of the overall demand, this can be applied to L&L business, but no matter which business you see, there is a certain level of demand. So we are not seeing that there isn’t any imbalance of the supply and demand, but normally entering in fall, mainly in the United States. And looking at the current situation in the world, there could be possible recession. Some people claim that and some not receiving the situation – we are not receiving information that the customers say that the cargos were job. But we are expecting that would begin to take place in fall. And that may reduce the demand. And also in terms of the forecast compared with the first half, we must take a more conservative stance specifically against the possible recession, we are not seeing that the customers are trying to adjust a cargo.
Shuichiro Shimomura
Well, may I just ask one follow-up question? If – after the second half, if the volume drops at the NCA long-term contract freight trade, can that be maintained? Or just like us container shipping, would there be room for revision if the spot rate becomes weaker? So may I confirm about the downside risk? Thank you very much.
Hiroki Harada
About the downside risk compared with the long-term contract of the Liner Trade, Air Cargo Transportation, six months PSA may be retained. But what the customers are saying is that there may be a more demand from fall. But it may require more space. So far, for example, what’s acquired by NCA and PSA, a freight rate, we are not seeing any downside risk as to the impact.
Unidentified Analyst
Thank you very much for your response.
Shuichiro Shimomura
Are there any other questions?
Shuichiro Shimomura
Thank you. So this is about the container shipping business. I have two questions. So the second quarter freight rate and compared to the first quarter, what is your outlook? Up to now the freight rate will be gradually going down step-by-step, that has been your outlook. Is has your outlook changed or is it unchanged? And so as compared to the CFI and CCFI, what is your assumptions? And for the first quarter, so the CFI has gone down, but in terms of your correlation to your freight rate, how was your correlation? No more – not much of adjustment. So I would like to hear about that?
And my second question is about the demand for the containers. So if you look at the transportation category for, in terms of furniture, home appliances, due to the impact of the retails, a situation there’s an adjustment, but if you look at the total transportation volume in North American route is still holding up, it’s still strong. So in terms of risk, it is there but the overall transportation volume is strong. So what is your evaluation about that situation, would you please explain about that?
Takaya Soga
So first you asked about the two questions about the container business. So Mr. Hiroki, please, would you explain.
Hiroki Harada
Thank you very much for your question. I would like to respond to your two questions. This is related to the LNL [ph] business, I would like to respond. So for the second quarter rate for the continuous shipping what is our outlook? As I have said, the spot rate, or it has already started to go into adjustment and in a short period it has been impacted the annual rates. But if it – it has to continue for a certain period of time with a certain gap. So although, and you have to have that impact annual rate, so that is our experience.
So in the second quarter, there will be some adjustment for the spot rate, but during in the second quarter, whether it will have an impact for the annual contract? That is your question. I think a quick answer you said no, because basically if we look at the cargo demand, if you look at the space availability, so I do – I’m looking into the situation. We don’t think that’ll happen in the second quarter. So compared to the first quarter in some spot of freight rate, on average compared to the second quarter would be lower than the first quarter, but we do not think that will have an impact on the annual contracts. If that is good to happen, that will start from the third quarter onwards or going into the second half that is, that is our assumption.
So ONEs, well we do not – we cannot elaborate by the performance of ONEs but the lower floor and the [indiscernible] trend between O&E so how much there will be a charge. But it seems that there is a correlation. It is synchronized if you look at the past check record, so the SFI’s index is very close to the movement that the O&E is assuming in terms of the spot rate, that is our take. And in terms of the well in North America route, basically in terms of the cargo volume or the cargo handling it’s not basically the things that has be help handling. So I think basically this is where it is very difficult to have an outlook.
So some information points that if you look at Walmart, Target, the U.S. customers, well that would be our customers. These retailers, they have started to pile up inventory, they started to go down. Maybe we do have that type of information, but if you look at the most short-term situation is that impacting the government, a lot know. So when and what shape will this come out?
So that is the reason why we are saying that the timing and the deepest depth of normalization, we don’t know. So without any has not been able to make that kind of outlook as well. So we do have an assumption, but that said, we do not think that this situation will continue from autumn onwards. If you look at the macroeconomic situation and the U.S. market situation. So putting that into account, the demand for a certain level through normalization, and that will impact the freight rate. So that is the only way that we can assume. So that is reason, why we have reflected a risk for our outlook. That’s all.
Shuichiro Shimomura
So going back to your first response, so the spot rates see, as an average gotten, second quarter is going to be lower than the first quarter, but the four year is going to go up to the profit. The first quarter between the second quarter is not going to change. Is that you – would take?
Hiroki Harada
Well in practicality from April, is that the, all everything’s going to be reset and start from April. Some of the cargo will be start from March and May or June, or that will be the seasoned in the U.S., in some case there’s some booking, but there’s some rollovers because we cannot handle all the cargo.
So the higher rates will be pushed forward. So there would be some, rollover of the rates. So in the long-term average of the rates compared to the first quarter, the second quarter, there’s some peak season surcharge although we have not been able to get all of that for the annual contract. And so maybe the July to September will be high, but for the spot rates, as you have pointed out, if you look at the situation, the spot for this – for the July to September will be lower in total.
Shuichiro Shimomura
Okay. So basically things are changing as you have assumed, in terms of the average rate there is?
Takaya Soga
It is the average rate is higher than our initial outlook. So in the second quarter, we don’t think that’s going, the rate is going to go down sharply in the second quarter, based on the reasons I said, because the annual contract is there compared to the first quarter, it will be higher by a certain based on level of spot rate will go down a bit. But in total, the average rate, there will not be that different from the first quarter to the second quarter.
Shuichiro Shimomura
So going to a second response sorry, we’re going into detail. So furniture is not basically in terms the container volume is did down from the last year, so for all we need is at the same situation.
Takaya Soga
I’m sorry, by item, by customer data. I do not have that with me, but according to the customer information, we do not have the situation that the, from the customer is saying to us that the booking is going to go down from now on, but on the other hand, so we do not have all the information from the customers in terms of how the cargo is going to be from autumn, always by next year. So we think that we should reflect some risk in this area.
Shuichiro Shimomura
Understood. Thank you.
Shuichiro Shimomura
It seems like we don’t have any more questions. And then we are a little bit early then the scheduled time, but we will like to close the Q&A session. So with this, we would like to conclude the meeting for a financial results for FY 2022. So please jot down your response. Thank you very much for your attendance today. We would like to close the meeting.
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