Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2023-Q1

[Lasse Kristoffersen, executive]

Good morning, and welcome to the Q1 Presentation of Wallenius Wilhelmsen. A warm welcome to those who are here in the audience and also to those following us on stream. As always, we will have a Q&A at the end. So if you would like to write your questions on the stream, feel free. Or you will have the chance to ask them after the presentation.Torbjorn Wist, CFO, will join me in the presentation later on and we will follow basically the same sequence. I will talk through a few highlights, the market and the businesses. And Torbjorn will talk you through the financial numbers.So let's get started. The first quarter -- let's see. Okay. There we go. We had a very strong first quarter in 2023, the third strongest on record. We saw still very tight market balance and we have a very positive development in our logistics area, which we expected last year, and we could see that continue into the first quarter. For shipping, we had a temporarily somewhat lower EBITDA than Q4, partly due to some fuel effects and also due to congestion in Australia. And we'll come back to these topics later in the presentation.Our government segment is also continuing to perform strongly. So, we see strong demand in all our segments in Wallenius Wilhelmsen. We just passed our AGM and concluded the dividends for last year, a total of $360 million paid back to the shareholders during 2023. We also announced in Q1 an updated Group Executive Management team, and I'm very happy to welcome Anette Koefoed to the management team as the Chief Communications and Marketing Officer; and also Gro Rognstad as our Acting Chief Technology and Information Officer. And with this, I believe we have a very strong team to deliver on our strategy, which I will cover briefly in the next slide.Just to close with that, we still see a very strong market. Last year, we said that we expected 2023, market-wise, to be somewhat similar to 2022. That is correct. And maybe it's even stronger than what we expected last year. We thought there would be a negative development during the year in the demand for our services. We do not think that anymore. 2023 looks very strong. The feedback we get from our customers are that their volumes are up for 2023 across auto and also high and heavy. And the only area where we see somewhat weakening is on the breakbulk side, but this is well covered by the 2 other segments. So 2023 looks from a market perspective, really strong. And of course, also from a financial perspective, we have -- we think 2023 will be a strong year. And we will come back to that.Few words on our updated strategy, which we have covered in various for us, but I just wanted to set some context for the rest of the presentation. So, we are the leader in our segment. We are the biggest provider of shipping services and logistics services to the auto and high and heavy industries in the world. These industries are facing significant transformations. Transformation in taking out carbon from their supply chains, we call it decarbonization, transformation in how they use technology and data to run their operations and redefine their logistics and their supply chains. And also, we see a change in the global footprint of our customers. And to some extent, we are now in the phase of de-globalization, where we see more regional development in terms of production. So, these transformations are really set for Wallenius Wilhelmsen to drive. And we have, as an ambition, to lead the way in transforming how supply chains and logistics are run in our industries.We have set 4 goals to define how we will do that. We will use the data and technology we have and through developing new platforms, enable our customers to run their supply chains better. I just came out of a meeting in Japan with one of our biggest high and heavy customers. And they told us our data and information on how we run supply chains are a mess. If you can help us with that, that will be very welcomed. That's exactly what we will do.Our customers have faced during the pandemic and now also post-pandemic that they need to get much more resilient supply chains. To do so, they need partners, they need data and they need tools. And that's exactly what our strategic goal is to be able to deliver that infrastructure to our customers. We still -- we are #1 in shipping. We would like to be still #1 in shipping, and we will be so increasingly for the customers that really look upon us as a partner.Further, we have a partner strategy on our logistics business. What does that mean? Well, that means that we are now increasingly working with customers and OEMs that use our capabilities at the end of their factory line, in our terminals, in shipping and certainly also in their import markets and use that to tailor their products to the market. And one of the examples we have, and I brought this nice little tractor. John Deere is one example of that, where we are basically sitting in their whole supply chain and helping them to tailor these specific products to the needs in Brazil, in Australia, or wherever the products are used.Last but not least, we have set ourselves a very stretched target to be able to deliver a net zero solution from end-to-end to our customers by 2027, meaning that we are now investing in zero emission inland transportation trucks. We are looking into and we are investing in renewable energy in our terminals and our processing centers, and we are working actively to see how can we take our vessels to net zero. And I know there are some questions on our fleet strategy. We are not coming with any news on that today. But we are continuously working on the side. We are in dialogue with yards, as we have said before, and we have promised to come back to the market in 2023 with the fleet strategy.So then back to the quarter, starting off with a market update. In terms of auto, we have not changed any forecast for the total sale of autos this year. We expect it to be north of 80 million cars, close to 83 million cars sold. We saw in the first quarter a slight dip in the total car sales of the world quarter-on-quarter. This is normal. There is a seasonality, and there's a big push on pushing out cars at the end of the year, and we see this every year. However, and what's worth noticing is that despite total reduction in sales, the deep-sea volumes are growing quarter-on-quarter. And we see that still the OEMs are prioritizing their export markets. And certainly, this is also partly driven by China.And if you look at the right-hand side of this chart, you can see the development in exports per quarter from China. This is an extreme development that is just continuing, and this is obviously driving a lot of demand for our services. These cars are primarily going far away to Europe, to North America and other places. And one thing worth noticing on the Chinese export is that to Europe, around 70% of the export from Chinese OEMs are EVs. So, we don't think that these Chinese producers are here just for a while. They have basically positioned themselves for the EV transformation. And we also now see that it's not only Chinese car manufacturers, but also Western OEMs that are now increasing their production and starting to deliver significant volume of EVs out of China this year and into the next.The EV sales development is faster than most in the market believed. And basically, today, this is a -- the bets that most OEMs are on. The Western OEMs have already started that transformation. The Korean ones, which we are working very closely with, Hyundai and Kia, have had a tremendous transformation on EVs. And now also we see that Japanese manufacturers are truly jumping on that. And we saw an announcement 2 weeks ago from Toyota saying that they are now really gearing up for a fast growth in EVs. So, EV will basically change the landscape of OEMs and the product we carry. And we also believe it will drive different needs, both in terms of processing, but certainly also in terms of decarbonizing supply chains.On high and heavy, we see stronger volumes than we expected and we also have still significant order backlogs. And again, back to our dear friend, John Deere, we have many, but this is one of them. They have told us -- they have basically sold out all production for the full-year 2023. So, this is still a very strong market. In construction, there has been somewhat weakening on the residential construction demand, but this has really been countered by a strong demand in the infrastructure construction, meaning that they are selling more of the bigger machines than the smaller machines that typically go into residential, which is good for us. We are probably the one best positioned to carry big, high and heavy equipment.Mining sector also continuing. And in the agricultural side, we see somewhat weakening in the demand, but still most order books are sold out for 2023. So, we expected somewhat a slowdown in 2023 versus 2022, which will still maybe happen, but certainly still at volumes that are -- that we have not seen before, maybe except for '22. And we are currently having more demand on high and heavy transport than what we can deliver and the industry can deliver.The order book is continuously developing. We saw new orders added just the other day. So now, I think the official number is 26-point something, close to 27% of the world fleet. A lot of this will be delivered second half next year and into '25. And that will, of course, have an impulse in the market at that time. But if you're on the right-hand side of this chart, look at the long-term fundamentals of the supply side. You will see that we are basically just now getting back to the long-term trend of growing the fleet, basically with the growth in the world economy. And the car carrier fleet has grown more or less 3% year-on-year as have the global economy, and we are now getting back on track on that. And also, it's worth noticing at the bottom of this chart that there is significant potential for phasing out vessels towards the second half of this decade. So, we are of the opinion that the current order book in a long-term perspective and medium-term perspective is what this industry needs. But of course, there are uncertainty on what happens when a lot of vessels are delivered within 12 months to 18 months, but that's still 1.5 and 2 years ahead of us.Before moving on to the business areas, I wanted to talk about the issue of the quarter, and that was congestion in Australia. And we have seen significant congestion in Australia, and this has been caused by stricter enforcement of biosecurity measures. What you see on this picture is a -- on the picture to the right, you see a small seed. And the 10% of the Australian economy and growing is agriculture. They are protecting that as good as they can. And that's why they are -- we have, for a long time, done fumigation of stink bugs, basically small animals. But now also, they're focusing in on the seeds. And cars are coming in with seeds.They should have been clean before they came onboard our vessels. This is the OEM's responsibility. They were not. So, we've set up a significant operation in Melbourne. I was down there looking at it a month or 2 ago. These are pictures that I took. And you can see we have had recruited a lot of people now standing with the torch and the stick. The stick is one in the middle, very high tech, wooden stick with a double-sided tape at the end, picking every single seed on these cars. And this is why suddenly there was a big backlog of vessels in congested and a big backlog of cars that was not cleared for the market.When I was there in, I think in March, we had a backlog of 7,000 cars just sitting there waiting to be cleaned. Now that is down to around 1,000. So in our view, the Oceania issue is now under control. The congestion is significantly lower, and we believe the situation should be normalized by the summer. And we already see that the impact on our business is far less in the second quarter than in the first quarter.All right. So then a few words about the segments before I hand it over to Torbjorn. Shipping is still sold out. We could probably have added 10%, 20% to our capacity and still only meeting the current customers' demand. So, there are too little capacity in shipping, and that was also the case in Q1. And the reason why we saw a somewhat dip in the numbers for Q1 was purely due to this Oceania situation and also some fuel effects. Torbjorn will cover. We are -- we have been, for a while, the most significant player in the Oceania market and that's why we were somewhat hard hit in the first quarter.Looking more into the details. The volumes are down 3.3% as a consequence of this. Basically, our vessels sit there waiting. They can't move cargo. And also, this affected some of our trade mix. The most important export area we have that's out of Asia, that's out of Korea, Japan and China primarily. And as our vessels were stuck in Australia, typically, that will bring them back to Asia after.We had less liftings out of Asia in Q1 than what we normally should have. And we have now seen through March that these number of voyage starts out of Asia have picked up significantly. So, we are now back to at least the expectations we had in terms of volumes out of Asia. So that's why we believe that this is a temporary change. And the cargo mix in terms of high and heavy and breakbulk versus cars were stable quarter-on-quarter. Still very strong high and heavy volumes, but less breakbulk volumes. This is partly due to prioritization on our end. We have limited capacity to bring it on, but also no doubt that some volumes have gone back to container. So when we saw a real hike in the container rates, a lot of volume moved into the RoRo industry.Now as the container rates are down, some of this volume is moving back. This does not mean that the volume that we carried on breakbulk before the container hike are going away. These are typically things, as you can see on this picture, that you can't fit into a container easily. So breakbulk volumes are not gone, but they are lower and now at a, I would say, across cycle normal level.Our fleet was stable. For those who read our reports extremely closely, you can see that the fleet is somewhat bigger than the last report. That is because we are now including our Armacup long-term vessels in our fleet count as Armacup is a significant part of us, and we eventually will have Armacup as full part of Wallenius Wilhelmsen. You can also see the effect of the congestion and that we had close to 1,000 vessel days sitting idle, primarily in Australia in the first quarter, and this is about 10% of our fleet capacity. So, 10% of our vessel days during the quarter were just sitting there doing nothing. And this is something we work extremely hard on.We had a big issue last year in Europe. We were able to fix that, at least for now. Then the problem moved to Oceania. And we also now see that there are congestion picking up on the West Coast of the US. And this is just an expression that there are too much volume going through a supply chain that is not sized to this level of volume. So, we expect this issue to pop up different places. But as we said, for Oceania, second quarter looks much better than first quarter in terms of our own congestion.In logistics, I'm very happy to report that the positive development continues. The development has been very strong in terms of volume increases. This picture is an example of what we call end of factory line. In the US, we're sitting at the end of several companies factory lines, Nissan and Volkswagen and others. And basically, we finished the last piece of the vessel, not the vessel, their car. We make it ready. We inspect it, make it ready for shipment and we make sure that it's transported out of the factory. These operations were muted last year due to limited access to semiconductors. That is now mostly gone. So, these factories are getting back to normal levels of production.Also due to big value fluctuations in volume last year, we need to do a lot of temporary employees. We have not been able to replace them with more permanent employees, giving us a better cost base. So, our logistics activity in general and in particular related to auto volumes in the US had a very positive development during the first quarter. And you can see that on the revenue growth on the left-hand side, which is very strong quarter-on-quarter -- no, sorry, year-on-year and also somewhat strong quarter-on-quarter.High and heavy, a little bit down. This is due to seasonality, but also partly due to the Australia issues because Australia is a big importer of heavy equipment, both to the agricultural and the mining sector. Terminal revenues are significantly up. A huge part of that is the fact that we -- these services I showed earlier on, where we are handpicking seeds from cars, and that revenue has really boosted our operation in Melbourne, MIRRAT, during the quarter.Inland revenues are also up as we see increasing volumes. So in general, the picture for logistic services is that we are -- the activity level is picking up and the constraints on the OEMs on producing the volumes they intend are no more or less gone. And still, there are upside potential in the volumes. On the left-hand side, you see the production levels in the US before COVID and where they are now. So, we still believe that there are growth opportunities in the key markets we're in. And we are a leading -- maybe the leading player in logistics services for cars and heavy equipment in the US. And on the right-hand side, you see the graph on how the US market is positioning themselves for electric vehicles.And thanks to many different elements, but in part also the new IRA regulations, we see a significant growth in investments in EV production. And of course, not only EV production but also battery production in the US. And we believe we are perfectly positioned for this growth. These are new players coming in with new factories, needing the services we have at the end of their production line in transport, in terminal and in logistics. And we expect the volumes produced in the US to remain strong in the long term going forward. And another anecdotal example is that Toyota, as I said, are now announcing -- announced a new EV strategy. And the first they announced was the establishment of a significant factory in the US, battery and car production.Sustainability, before we move into the numbers. This is really the sad part of this presentation. We are not happy with the safety performance in the first quarter. We had 2 serious incidents on our vessels, both related to mooring operations. One where, sadly, one of our crew members lost part of their leg and another where there was -- broke their leg and had to be hospitalized. This is not acceptable. We are working forcefully on safety, and we are not happy with the performance we have. These have limited impact on our financial numbers in the short term, but we are of the real view that our safety performance is an indication also of our long-term financial performance. And we are really dedicated to get safety back to where it should be.We're also working hard on decarbonization due to a lot of disruptions in the supply chains, congestion, vessels waiting. And through that, we also need to increase speed of our fleet. We saw a more or less flat development on carbon footprint during -- quarter-on-quarter. But we are totally committed to our goal of reducing our emissions by 27.5% by 2030, and committed to the goal of providing net-zero emission services by 2027.I think I'll stop there and then leave it to you, Torbjorn.

[Torbjørn Wist, executive]

Thank you, Lasse, and good to see everybody.I'm here to present the financial update for first quarter. If we start with the financial highlights. As Lasse has been through, we did see a decline in the first quarter due to the congestion that we saw in Australia. In addition, we had some negative effects from fuel, which I will come back to later. The adjusted EBITDA was $398 million, which is down 19% quarter-on-quarter, but up almost 30% year-over-year.The net profit ended up at $173 million. This was partially impacted by the decline in results, but also due to some unrealized mark-to-market on our derivatives on cross-currency swaps. And just for comparison, in Q4, we had some positive effects on that, which accentuates the decline in the net profit. We did see a solid increase in cash. And while Q1 is lower in terms of EBITDA in the first quarter, the cash generated in the first quarter is $70 million higher than the cash generated in the fourth quarter. So, we did see a solid increase in the cash. We had some scheduled repayments on debt, which meant that our net debt decreased. And of course, our cash position has strengthened.Last quarter, we also communicated our new financial targets. I will not go through the targets that we have set, but only to say that we ended the quarter with strong performance on all the financial targets, with ROCE 14.5%, equity ratio of 42.4% and of course, a leverage ratio of 1.5x, which is very strong. Again, I'd like to remind people that when I started, we were at 6.4%. So it's nice to see the trajectory that we have experienced on the leverage side.If we then look at the segments in themselves, Shipping, again, year-over-year has been strong down in the quarter. Again, it is the congestion effect, which has affected CBM, as well as the trade mix that we have. And then, of course, we have the net fuel. When we have problems on the congestion side in Australia, this has driven business into the logistics side, and it's really encouraging to see that we've had a strong performance in logistics.You will see on the slide that EBITDA is $37 million in both quarters. But in the $37 million for Q1, there is also a $6 million effect of bonuses, to call it, non-bonus entitled employees as a reward for the strong performance that we had in '22. So if you were to add back the $6 million there, you will see that the underlying development in logistics is really, really strong.Government is down. Yes, it has been impacted by congestion. But one of the reasons that performance has been a bit lower is due to dry docking of a vessel. Some of the capacity was taken out. What we see in the government segment is that due to the conflict in the Ukraine, volumes continues to be very high. There is a strong demand for the services of our Government Services segment.We've talked about the EBITDA. So if you look at the sort of sum of the volume and the revenue per CBM effect, that's roughly $47 million explanation in terms of, call it, the drop of revenues. Then you can see that we had $55 million less fuel surcharges in this quarter. And I will come back to the fuel side in a minute. So when you then look at the EBITDA, you've taken the revenue effect of $95 million from the top chart. We had slightly lower fuel costs. So the net fuel effect in the quarter was $36 million. So that meant that we -- our EBITDA fell by $90 million in the first quarter. And again, it is explained by the congestion effect as well as the fuel.If you read our report, you will see the explanation of the fuel adjustment factor. In periods where fuel prices are rising, you will have -- you will, in general, have a net fuel cost, which is higher. The reason being that the surcharge adjustments is lagging the whole time. So if the fuel prices keep increasing, you're not getting compensated for that by your customers before 3 months to 5 months later.Conversely, in periods where fuel prices drop, you will benefit from lower fuel cost and you will have higher fuel surcharges. If you look at the line at the bottom of the chart, you will see that fuel prices -- this is VLSFO prices, peaked in the second quarter. So then into third and fourth quarter, we benefited from high surcharges that we sort of carried with us into Q3 and Q4. And when you look at the strong result that we had in Q4, we essentially carried in a $68 million benefit from, call it, the curve and the lag effect of surcharges.Then you can see that the VLSFO price flattens out. So what we saw in this quarter is that fuel prices were just marginally down roughly 4% on average. That meant that we have now flattened out in the fuel and the surcharge effect is tapering away. So the effect that we saw in this quarter with a negative development in net fuel cost, net fuel, i.e., fuel cost, less surcharges, is likely to carry into the second quarter, unless, of course, there's a radical change in the fuel price in either direction.Cash increased by $223 million, driven by the solid EBITDA as well as changes in working capital. So that meant that we ended the first quarter with $1.4 billion of cash. For comparison in Q4, that cash generation was $153 million. When you look at the CapEx that we've had in the quarter, mainly relates to the investment that we made in Syngin, where we bought out minorities there. We've had some dry docking events and smaller investments in minor projects and vehicle replacement.You have another investing items. This is essentially interest received on deposits. We have, at the moment, a -- we're all following the Norwegian kroner. It seems to be in the headline every day. And in this quarter, we had to increase the collateral. These are on the cross-currency swap we have on our NOK debt. When you look at the net debt position, we have repaid debt in the quarter. And finally, we have increased credit facilities by $100 million. So as of end of Q1, we have $347 million of undrawn credit facilities that can be used for general corporate purposes.We have a very solid balance sheet and a strong liquidity position. Equity ratio is at 42.4%, as I mentioned. The net debt decreased, thanks to the cash generation and the debt repayments. We have no bond maturities until September next year, and any other debt maturities will just be refinanced on a running basis. And then, finally, we're extremely proud and pleased to have received the award for the Deal of the Year for our 1.25 sustainability-linked bond that we did last year, very pleased with that. So, a little marketing at the bottom.And with that, I will stop and hand over to Lasse.

[Lasse Kristoffersen, executive]

Thank you, Torbjorn.And before we move into the Q&A, I'll just have a quick wrap-up of the prospects as we see it. The market demand is still very strong and similar to what we saw in 2022. This is despite an economic slowdown that we see in the world. And this is partly due to the fact that there's been muted delivery of products in our industry for quite a while, and there is a big pent-up demand. And that means that we believe the volumes to stay high all the way through 2023. We also believe the long-term fundamentals look really strong for our industry. There is still a significant upside to the global volumes on cars and high and heavy compared to pre-COVID. But, of course, looking forward, there is more uncertainty. And also the impulse of vessels coming in '24 and '25 will have or could have a short-term effect. But as we showed on the long-term fleet development, we believe that there is a strong fundamentals for our industry in the long term.And through that, we also expect our numbers and our financial results to grow and improve through the year. Q1 had a short-term effect, as Torbjorn explained. The whole year looks strong, and we believe we will, through this year, continue to strengthen our financial position.With this, we close the presentation and move into the Q&A. Should we start in the room? Anette?

[Anette Orsten, executive]

Yes. We'll start in the room.

[Lasse Kristoffersen, executive]

Remember to say your name and get a mic so those at the stream can hear as well, if you have questions. No hands here. Did you have any questions on the stream?

[Anette Orsten, executive]

Yes.

[Lasse Kristoffersen, executive]

Okay.

[Anette Orsten, executive]

So first question goes to you, Lasse, on CII. And it is from [ Evan Kolkoyd ], saying with shipyard delivery times extending into 2026, you will likely operate all the vessels longer to maintain capacity. How do you plan to comply with CII in the coming years and what are the estimated costs?

[Lasse Kristoffersen, executive]

We are certainly looking at how we can run our vessels as long as possible. We also think this is an environmentally-friendly thing to do, as there's a lot of emissions related to decommissioning of vessels and building. First, on the new building side, he is correct. Vessels can be delivered sometime in '26. That's what's available now. So, we are really looking into how we can keep on running our vessels. CII regulations will kick in from this year. We have done a lot when it comes to operational and technical measures. We will continue to do that. As we presented in the previous quarter, we are now testing out sales that we are trying -- putting on most likely next year on one vessel. And then we're also actively looking into biofuel to reduce the carbon footprint of our vessels. So, we have a very rigorous plan on how we are going to meet the CII regulations. And that will come at some cost. But at the same time, it's important also to mention that our customers are now starting to pay for decarbonization in the contracts that we are now renewing at sustainable earnings levels. We're also able to partner with our customers to start paying for decarbonization. And in the short term, that means using biofuels.

[Anette Orsten, executive]

Great. We have another question, and lot of questions in one question, actually. So, I think maybe both of you will answer that. That's from Eirik Haavaldsen.So can you please help us understand a little bit better how the net freight per CBM now is the lowest since Q4 '21? First question. Can you be more specific on 2023 prospects? And is Q1 firmly the low point? So, I don't know if you want to start.

[Lasse Kristoffersen, executive]

I can start, and then you can fill me in. And on the first one, on the net freight, the net freight rate for us are -- that's basically driven by 2 main components. It's cargo mix, how much cars versus high and heavy and breakbulk do we have and even more so the trade mix. That means where are we picking up cargo. As we said, due to the congestion in Australia, in Q1, we had less voyage starts out of Asia than we normally have. Asia is where we have the most favorable rates and this affected our net rate.Also that some of the breakbulk volumes are -- we have a lower cargo mix in terms of lower breakbulk volumes. But the main reason is the trade mix. And as we said, this is a temporary effect. And then you need to remind us of the next question.

[Anette Orsten, executive]

Can you be more specific on 2023 prospects? And is Q1 firmly the low point?

[Lasse Kristoffersen, executive]

Well, we are not giving guidance specifically on quarters, but I can just repeat what I said. One, the market is really strong. We see no dampening in demand. There is more demand than we have capacity. There were temporary effects in the first quarter. So, that gives an indication of what we think of the rest of the year.

[Anette Orsten, executive]

Great. Torbjorn, any add on?

[Torbjørn Wist, executive]

No, I think, Anette, just to add, in this quarter, we had some negative development in the net fuel and as explained on the fuel slide, barring any sort of radical changes in the fuel prices, we expect some negative development on net fuel into second quarter as well. But as far as the trajectory is concerned, we see that there is a strong demand and a strong curve for 2023.

[Anette Orsten, executive]

Great. Thank you. We can see since there is a lag online. So are there more questions in the room? Please raise your hand. This must have been very clear because there are very few questions today. So let's just give it -- I don't know. We will soon conclude. But are there anything you guys want to add? We'll see if I get more questions here. This is a lag.

[Lasse Kristoffersen, executive]

I think we have covered it. Again, we are very happy to see the robustness of our business model. Shipping has been strong for a while. We are now really getting payback for our position in the logistics segment, both in terminals and in processing. Volumes are increasing. And also, our Government Services are in high demand, and we see that there is strong high demand also going forward to provide government transport primarily from the US into Europe.

[Anette Orsten, executive]

No more questions. So, I think with that, we'll say thank you.

[Lasse Kristoffersen, executive]

Okay.

[Torbjørn Wist, executive]

Thank you.

[Lasse Kristoffersen, executive]

Thank you.