WAWI Q1-2021 Earnings Call

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Earnings Call Transcript

Guidance

Revenue

EBITDA

Financing Cash Flow

Return on Capital Employed

Torbjorn Mogard Wist

Acting CEO & CFO

Good morning to everybody. On behalf of Wallenius Wilhelmsen, I would like to welcome you all to this webcast for our first quarter results. My name is Torbjorn Wist, and I am the CFO as well as acting CEO of the company. First, I would like to start off by covering the key highlights for the quarter. While the COVID-19 pandemic and its impact on the world economy is not over, demand in our core markets have more than returned since the first quarter of last year and continues to develop along a positive underlying trend. From the beginning of this year, we have introduced 3 new reporting segments: Shipping, Logistics and Government Services. And this is, of course, an effort to try to increase the transparency in terms of our underlying numbers and how these segments develop. Further, our mission, as you know, is to provide sustainable logistics for a world in motion. And in Q1, we established a science-based target to reduce the CO2 intensity by 27.5% by 2030, using 2019 as the base year. In addition, we introduced the Orcelle Wind, which will be the world's first full-scale wind-powered RoRo ship concept. The rising volumes that we have experienced across the global supply chains have, however, led to inefficiencies, tight capacity, parts shortage and ramp-up costs for companies involved in manufacturing, logistics and trade. For the Wallenius Wilhelmsen Group, this has translated into higher costs for chartering fleet capacity and higher fuel consumption as the fleet speed has increased alongside a growing number of port calls, as well as costs relating to reactivation of vessels in cold layup. We ended the quarter with EBITDA of $132 million, which is flat year-over-year, but reduced since Q4 due to the higher fuel and ramp-up costs. Our liquidity position of $898 million remains comfortable and is $180 million higher since the end of Q1 '20, which was the first quarter impacted by the pandemic. We firmly believe that what is good for the environment is also good for the business. With vehicle logistics as our core competence area, we will drive sustainability in our customers' value chains, expand our reach to include operations and involvement in the entire value chain through the whole life cycle and usership of vehicles. Our sustainability approach involves a gradual and continuous reduction in emissions driven by innovations that decrease fuel consumption. Innovations include vessel design, new biofueling techniques, engine performance optimization as well as advanced weather routing. At the same time, we are actively engaging in projects to develop technologies that can deliver leap improvement in emissions. For example, we rolled out a weather routing software solution, developed in collaboration with StormGeo, across our fleet to reduce emissions and improve onboard safety for our crew and cargo. We've also taken some big strides ahead in Q1 in our ESG initiatives. We set the greenhouse gas targets to ensure that we put our business on the right heading using the science-based target methodology and have committed to reducing CO2 intensity by 27% by 2030 from 2019, as I said, subject, of course, to the SBTi's approval, which is the process that we have entered into now. Also we introduced, as mentioned, the Orcelle Wind, which is an exciting project, which we'll come back to on the subsequent page. Using wind as her main propulsion, Orcelle Wind will be able to reduce emissions by as much as 90%. The vessel is the RoRo segment adaptation of the Oceanbird concept from Wallenius Marine. And her key features include an average speed of some 10 knots; a 7,000-car capacity, it's about 200 meters long and 40 meters across; and they will have telescoping masts for the bridge navigation. Right now, we're in the process of conducting an evaluation of technical, operational, commercial, financial aspects. And I'm pleased to report that this work is proceeding as planned and according to schedule. Important issues. Our discussion areas in this regard includes the propulsion alternatives because we'll still need some form of propulsion onboard. And this is from the perspectives of operational emission. We're looking at cargo hold design, safety regularity, economy, engine size and, of course, the effect this would have on the vessel design. The main fuel options being discussed as we speak are LNG, ammonia as well as hydrogen. The goal remains to have a design ready for contracting with the shipyard by mid-'22 and a finished vessel ready for the high seas by '25. And we will, of course, update the market as we proceed on this journey. So as usual, we have a fairly busy agenda, but our presentation follows a structure and format which should be familiar to our regular audience, including a review of our business performance in the quarter, a market update and a review of our financial performance. We will have a Q&A session at the end of the presentation, and viewers are encouraged to submit questions in writing during the presentation, which we will then aim to answer towards the end of our webcast. To the extent we don't answer it online here, we will, of course, ensure we come back to you in writing with an answer. Before I delve into our business highlights, I would like to mention that we're fortunate to be joined here today by Erik Noeklebye, who is our EVP and COO of our Shipping segment. He's based in Seoul, Korea. And he and I will together review the key business and market developments during the quarter. Before we dive into the business update, I thought I'd say a couple of words about the CEO situation. As you all know, Craig Jasienski stepped down in March as the company's CEO, following an agreement with the Board. And I took over as the acting CEO. And I would again like to take this opportunity to thank him for his long service to the group. The Board has now engaged an executive search firm that will manage the process of identifying and securing the best CEO candidate for the group. This is, of course, a process that is exclusively handled by our Board. And any further announcements will be made as and when the Board has concluded on this selection process. We have now introduced 3 new reporting segments to further improve the transparency in our reporting. These are, as mentioned, Shipping Services, Logistics Services as well as Government Services. The activity in the Government Services segment was previously mainly recognized in the Ocean side -- or the Ocean segment, as we called it before, but also partly in the Landbased segment, as it was called before. Shipping is, of course, engaged in ocean transport of cars and roll-on/roll-off cargo. Its main customers are global car manufacturers as well as manufacturers of construction and other high & heavy equipment, in addition, of course, to select industrial break-bulk cargo. The Logistics segment serve mainly the same customer groups as Shipping Services, but on land. Customers operating globally are offered sophisticated logistics services, such as vehicle processing centers, equipment processing centers, inland distribution networks as well as terminals. The Government Service segment provides ocean transport, again, of roll-on/roll-off cargo and break-bulk as well as logistics services. Their primary customer is the U.S. government, but also commercial cargoes that require U.S.-flag vessel transportation. Revenue and EBITDA is primarily driven by government activities often linked to world events and government -- U.S. government objectives, and they do not necessarily follow the regular seasonal patterns or quarterly trends that we have in Shipping and Logistics. With that, I thought I would hand over to Erik for an update on the Shipping Services operations and the market area.

Erik Noeklebye

Executive VP & COO of Shipping Services

Yes. Thank you, Torbjorn. Then let me get into the business update that, this time around, focuses on the Shipping segment. So demand in the group's core markets has returned since the first quarter of 2020, as you heard Torbjorn mention, and it does continue to develop along a positive underlying trend. The prorated shipping volumes improved 14% year-on-year, though it fell 3% compared to Q4. However, actual demand continued to increase quarter-over-quarter. But the tight tonnage situation that we currently find ourselves in, mixed with the trade route imbalance and also inefficiencies in most major supply chains, actually meant that we were not able to lift all the available volumes. And also as a side note, the larger portion of the volume we could not lift actually represents the higher-margin spot cargo. Getting back to the -- going back to the trading patterns. That then remained imbalanced in Q1 for us, as an operator, but also for the market. And we saw a solid demand and volume increase out of Asia, and that was then countered by weaker exports from Europe and then in the Atlantic trade, both east- and west-bound. The strong demand from Asia stretches across most cargo segments and also partly driven by the increased production of popular auto models, including EVs from China and Korea. When we look at volumes ex Europe and the Atlantic in particular, they were partly down due to seasonality, but it's also due to the parts shortages. That's what the auto manufacturers are currently experiencing, specifically in January and February. But the activity did pick up for these trade routes during March. Looking at the cargo mix for Q1. It has normalized again back at a level of 28.2 (sic) [ 28.3 ]% high & heavy mix. It's down from the spike that we had in the first quarter of 2020 when high & heavy volumes did prove to be more resilient than the auto volumes during the initial stages of COVID-19. Our shipping business for automotive and high & heavy clients, it's largely categorized by 1- to 3-year contracts with pre-agreed pricing and also fuel adjustment clauses. So for us, this means that we do not see the same fluctuation in rates when the supply-demand balance changes, as experienced, for example, by the container lines. So only a smaller share of our volumes are generated on a spot basis. For 2021, the contracts up for renewal amounts to approximately 1/4 of the 2020 revenue. And at the end of this quarter, 25% of the renewals were concluded with a small positive impact on contract rates, and most of the renewed contracts will then commence during 2021. So if we go into the fleet side of the operation. The rising volumes across global supply chains have led to inefficiencies, and of course, tight capacities. The parts shortage plays into this general disruption and along [ go ] ramp-up costs then for companies involved in the trade, including ourselves. And for Wallenius Wilhelmsen, this has translated into higher costs relating to reactivation and also vessel capacity and fuel consumption. We saw a continued need to access the short-term charter market during Q1 at increasing rates. And given the tight tonnage situation that we are in, we are likely to selectively continue to utilize the short-term charter market going forward in order to regain both optimal fleet efficiency and be able to lift all volumes that are available to us. The fleet reverted to a more normal speed average at approximately 16.5 knots from -- up from 5 -- 15.9 in Q4. And as you know, we have decided to reactivate all 16 vessels from cold layup, 8 of which reentered service then during Q1. The core fleet today, then excluding short-term TC, stood at 117 vessels at the end of the quarter, accounting for about 20% of the global car carrier fleets. The core fleet consists of vessels on long-term charter as well as owned, and the total number includes vessels in cold layup. They are the numbers that you see on the slide. The fleet was reduced by 1 vessel since Q4, as a vessel above the age of 24 was sold for recycling in January. And of course, the recycling is then done in line with the group's long-standing policy of recycling as per green policy. And it's reported according to the Ship Recycling Transparency Initiative. Finally, on the fleet, the group's final newbuild, a Post-Panamax Hero 4 vessel with a size of 8,000 CEU, is scheduled for delivery in Q3 2021 and also has a bank financing in place. I would then like to move over to the market update, and we'll go into the automotive light vehicle segment first. The solid 19% recovery in light vehicle sales including deep-sea volume continued in the first quarter, with volumes growing year-on-year. Main drivers for the growth include pent-up demand, incentives such as reduced VAT on EVs and also increased consumer purchasing power. The light vehicle sales development, as you can see on the slide, is higher than that of the light vehicle deep-sea volumes, as sales was more hit in the beginning of COVID in '20, lowering the base and increasing the percentage change year-on-year. For the rest of the year, we expect the recovery to continue as vaccination rollout continues and also OEMs ensuring sufficient inventories and also consumer spending returning to normal. I would like to get a little bit deeper into each of the main regions that we serve. If we start with North America. The sales were down early in the quarter due to weather issues and some other supply chain issues. But we definitely saw solid sales rates in March. Inventories could lack certain models and trims, and OEMs have in this process prioritized the most profitable models. And that has resulted in record high average retail prices supporting then the OEMs' profits. And of course, the $2 trillion stimulus package is expected to stimulate the economy and also auto sales eventually. Moving on to Europe. Light vehicle sales is a bit -- has been a bit soft due to COVID-related lockdowns and also slightly less number of incentives and size of incentives. However, most incentives continues and are still related to low-emission vehicles. Brexit uncertainty and diesel woes still dampen off some sales. And that's then covering overall for Europe. Just a couple of comments towards the end on China. We still see solid sales in terms of light vehicles, and that's on the back of both pent-up demand and also stimulus fuelled sales for that marketplace as well. If I can then move on to high & heavy, which is a market that's also recovered and continues to recover driven by construction, given its relative size, but with volume growth across all segments. We expect this to continue in the near and medium term driven by buoyant end-user demand and also inventory replenishment around the world. We believe that for construction, that machinery demand will continue to recover from last year's low base as the residential markets remain buoyant with low interest rates. And also nonresidential recovery continues. It's a little bit more uncertain. But we do expect similar spending around the world to support this segment ahead as well. For mining, the fundamentals are strong, and agriculture, following the very strong commodity price inflation over the last 12 months. Metals and minerals prices have not been this high in 10 years. We see miners are now able to reap the benefits of the increased capital prudency that we saw since the cycle busted last time around, and also then significantly reduce debt. And also mining companies now have ample cash to continue to replace aging machinery fleets that were in commission actually in the mid-20s. We have seen them sweating the assets fairly -- in a fairly big way. If we move on to the agricultural sector. The same goes here as global food prices have not been this high since 2014. So farmers are now making more money than they have for years, and that is then reflected in strong sentiment readings around the world. While the inventories are beginning to look tight, especially in agriculture, high & heavy has for now gone clear of the biggest supply challenges, but this is, of course, something that we continue to monitor closely. If I move on to the final slide of the market update, and that's towards global PCTC fleet. The solid demand recovery has contributed to the tight tonnage situation. It's not just us who experience this. And the tonnage situation is mirrored in the global fleet figures that you see here, where we then only saw 1 recycling in Q1. So there are still a substantial number of recycling candidates out there. And if you look at the order book, it consists of only 10 vessels, which is at an historic low level, and it also contributes to expectations of a continued tight tonnage situation. Markets are forecasted to be tight with a utilization rate of 88% next year, and this is an increase of 2 percentage points since the last quarterly update. And just as a side note, a global fleet utilization of between 85% to 90% is considered to be a fully utilized fleet, given that there are always some inefficiencies in running a global operation.Okay. I think I will leave it at that, and then send this back to Torbjorn, who will then cover the financial performance section.

Torbjorn Mogard Wist

Acting CEO & CFO

Thank you, Erik, for that update. And let me then proceed with the financial performance section. We start off with, call it, the key financial highlights for the quarter. What you can see on the left-hand side of the chart or the page is the total revenue, so $838 million, which is slightly up quarter-on-quarter at about 2%, and year-on-year, about 1%. The Shipping Services revenue increased 5% over Q4 despite a small reduction in volumes on higher net freight rate and fuel surcharge revenues. Revenues were flat in Logistics, but a bit down in Government Services. The adjusted EBITDA ended at $132 million, which is down $18 million since Q4, but flat year-over-year. In the middle, in Q1, we posted a net loss of $5 million. The EBITDA margins came under a bit of pressure for the reasons already mentioned, falling to 15.7%. And we'll get into some of the more underlying explanations on the following pages. Our cash position remains solid at just under $600 million, and net debt increased to $3.5 billion. On the right-hand side of the chart, the annualized return on capital employed was 0.8%, which is down since Q4 due to lower EBITDA generation as well as a slight decrease in the value of the EUKOR put-call option, which basically affected both the numerator -- decreasing the numerator whilst the denominator is stable. The equity ratio is basically flat from Q4. And with LTM EBITDA now carrying a full year of COVID-19 impacts, net debt-to-EBITDA ended at 6.5x. During the quarter, we did experience diverging developments across the segments. The Shipping segment experienced continued margin pressure in Q1, ending at 16%, down from 18.8% in Q4. Rising volumes in the global vehicle supply chains led to pressure on fleet capacity and operations. Fuel prices continued to rise in the first quarter, meaning higher cost, while the cost recovery through fuel surcharge revenues will lag. However, the underlying volume and demand trend remains positive, and revenue increased $30 million in the same period. The Logistics segment margin is slightly up in the first quarter on seasonally strong high & heavy activity for Keen in North America. The segment has seen a significant recovery since Q2 2020, when several sites around the world had to close due to lockdowns caused by the pandemic. And this particularly affected our landbased operations. The Government Services margin fell in Q1 due to lower activity versus Q4. And Q4 EBITDA was bolstered by activity under a storage and logistics support services contract which generated periodical monthly business. The segment revenue and EBITDA is primarily driven by U.S. government activities, as mentioned, and again, are very much linked to world events and government objectives and will, as a result, not follow, call it, the regular seasonal patterns of quarterly trends. We will now dive a little bit into the Q-on-Q EBITDA development. The EBITDA ended at $132 million, which is a 12% reduction quarter-on-quarter despite a $16 million improvement in revenues. The lower EBITDA derived from the $12 million reduction in Shipping Services EBITDA and a $5 million reduction in Government Services EBITDA, as well as certain holding effects. Looking at the EBITDA development for the group compared to Q4 '20, the key impacts can be categorized as follows. We start from the left, on the volume effect side. The 3% reduction in volumes led to a negative effect on -- of about $9 million. If we look at, call it, a profitability per CBM measure, what we saw was that the net freight rate improved on higher high & heavy share and improved trade mix, but the positive effect is dampened by ramp-up costs, which include reactivation costs of about $2 million. We had congestion issues at ports, and we, of course, had the Suez Canal blockage which caused some delays as well as increased cargo and voyage expenses as we tried to catch up to make up for both -- make up for the stresses that we have seen in the supply chain. If we look at the net fuel effect. The main reason for the EBITDA margin pressure in Q1 was increasing net fuel cost. The fuel price per tonne increased approximately 25%, which is the weighted average based on each type of fuel consumed quarter-on-quarter, while the fuel surcharge revenue lags the cost impact. As you know, the fuel adjustment factor is calculated based on the average fuel price over a historical period and then fixed during the volumes of an application period. And this creates a lag effect. In other words, in periods of rising fuel prices, the segment will not be able to recoup the higher prices then there through the FAF. Conversely, in periods of falling fuel prices, this segment will benefit from the adjustment factor as you will then be locked in at higher prices. Fuel consumption increased on the pressure on fleet operations from speed increase, reactivation of vessels. We, of course, had to transport vessels from whichever fjord they were in, whether in Norway or Malaysia, to the place where they need to be going to dry dock. We had fuel increase due to trade imbalances as well as congestion in ports. The charter expenses had about $1 million of negative impact Q-on-Q on continued use of the short-term charter market at rising rates due to the tonnage demand. Vessel OpEx was flat quarter-on-quarter. SG&A improved $7 million from Q4, with contributions across all 3 segments on things like lower IT, pension and consultancy costs as well as the absence of some of the one-offs we saw in Q4. Other Shipping includes improvement quarter-over-quarter. That reflects the higher operating revenue, which includes commissions, TC income, et cetera. The Other Logistics is the residual changes in the Logistics EBITDA deriving from lower internal operating revenue compared to Q4. Other Logistics also include profitability improvement leading to a slight improvement in the Logistics Services EBITDA margin during the quarter. And Other Government is basically the reduction in EBITDA not covered by SG&A. If we look at the liquidity development in the quarter. Total liquidity reduced by $83 million to $898 million, where cash decreased by $55 million to $599 million. And unutilized credit facility is around $27 million to $299 million, due to a net drawdown on the revolving credit facilities during the quarter. The key reasons for the reductions in liquidity are the lower EBITDA experienced in the quarter compared to the fourth quarter; a significant increase in working capital, reflecting the positive underlying business trend, but also the increase in fuel prices; as well as settlement of customer claims related to antitrust during the quarter. The return to normal debt repayments after the partial installment holiday in the second half of 2020 is also a reason why the financing cash flows have contributed negatively in this quarter. When looking in further detail at the cash flows, the cash flows from operations at $79 million is explained by the adjusted EBITDA of $132 million being offset by a negative change in working capital of some $48 million quarter-on-quarter. As mentioned, the increased business activity and higher fuel price led current assets, including fuel inventories, to increase more than current liabilities with approximately $24 million. Relating to antitrust, the settlement of customer claims during the quarter and recategorization from noncurrent to current provisions increased working capital with $24 million. Then we had some taxes of about $6 million. The investment cash flow of $9 million mainly consists of $2 million in solutions maintenance CapEx and $7 million for dry docking and installment of ballast water treatment systems. On the financing side, we had a net debt repayment of $79 million, which was basically an uptake of $92 million but a repayment of $171 million. We had a net drawdown on RCF of $27 million. We had a $52 million refinancing of 2 vessels, Morning Lily and Morning Lynn, as well as a scrubber on Lily, with net proceeds of $8 million. We had regular bank debt installments of $80 million, regular lease payments of $47 million and interest paid of some $46 million. All in all, EBITDA in Q1 was sufficient to cover financing items and CapEx, but the change in working capital had a negative effect. Turning to the balance sheet. We maintain a solid balance sheet and a comfortable liquidity position at the end of the first quarter. Total assets are stable at $7.6 billion. Equity is at $2.6 billion and decreased by about $10 million in the first quarter due to a $5 million net loss as well as some currency effects. And this caused a 0.1% decrease in the equity ratio. The net debt increased $70 million to $3.5 billion, and this increase is mainly due to the reduction in cash as well as noncash adjustments on long-term leases in EUKOR. And then we had $52 million in vessel refinancings that were concluded in the first quarter. The group has cash on hand available to cover the $63 million in maturing debt for the remainder of '21, $56 million of which relates to the bond maturity in September and $7 million relates to a small balloon on vessel financing in WW Ocean. Remaining maturities through the year consist of regular installments on leases and bank loans, and again, will be covered by cash flow from operations. If we then turn to our prospects. We see that the markets have recovered significantly since last year. We do expect the supply-demand balance to remain favorable midterm, on global fleet reduction as well as volume rebounds. Potential risks from further disruptions to global supply chains, fleet capacity constraints and virus intensity are potential risks that could affect, of course, the trajectory. But what is clear is that stabilizing market conditions will help provide more financial flexibility going forward. On a final note, before we open up for questions, I would like to point out that we have a vessel that will be arriving in Drammen on Friday. This is the Morning Lady. And that is the same ship that is shown on this slide. And this is a ship that is coming in and is loaded with new electrical vehicles destined for the Norwegian market. The ship will arrive on Friday morning. And the final few hours of the voyage and approach to Drammen will be broadcast live on NRK2 and NRK.no starting at 05:30, for those of you who are early birds. So unless you're an early riser in Europe, please don't forget to set your alarm clocks. That concludes the presentation we had planned for today, and we will now open up for Q&A via the web application. And Anette, our Head of Treasury and IR, will be managing the questions. And some questions we'll try to cover here. And what is not covered here, we will cover off-line. So with that, we'll open up for questions, Anette.

Anette Orsten