Wallenius Wilhelmsen ASA

OSE:WAWI

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the Wallenius Wilhelmsen Second Quarter Results 2021. Throughout today's recorded presentation, [Operator Instructions]. And I would now like to turn the conference over to Torbjorn Wist. Please go ahead.

[Torbjorn Mogard Wist, Acting CEO & CFO]

Good morning, and welcome to all. This is Torbjorn Wist, I'm the CFO, as well as acting CEO of the company. I trust that everyone had some well-deserved time off for rest and relaxation over the summer holiday, and I'm happy to be here to share our second quarter results. We'll start with some of the highlights for the quarter. What is clear is that underlying results are back to pre-pandemic levels in all 3 segments. Shipping saw strong volumes and enhanced profitability from improved cargo and trade mix, as we mentioned, a couple of key drivers. Client heavy volumes are the highest we've experienced since the third quarter of 2012, which was during the last commodity super cycle. And this, of course, benefited both Shipping, as well as the Logistics segment. The adjusted EBITDA was $205 million, up 56% quarter-on-quarter and near the 2019 quarterly average.As you will have noted, we've also taken a provision. The group has been part of the unfortunate antitrust process in 2012. I'm pleased to report that during the first half of 2021, proceedings with the final outstanding jurisdictions were resolved. The timeline for the resolution of the civil claims is a bit more uncertain. And in Q2, an updated assessment of these claims was made, following which an additional provision of $35 million was recognized as an OpEx. At present, we see no reason to anticipate any further adjustments to the provisions. This has been a difficult and costly case, and we very much look forward to the day when we can see this matter in the rearview mirror. Turning to our liquidity position. That is at $915 million and remains imminently comfortable. Moving on to the agenda for today, we have, as usual, a lot going on that we want to share with you. We follow the usual structure, which will be a decent update to our regular audience, including the review of our business performance, market update and a review of our financial performance. We will have a Q&A session at the end of the presentation and managed by conference call host. And here, we will also be joined by Anette Orsten, our Head of Treasury and IR. If you have any questions, please dial into the conference call numbers where you will be able to ask the questions live. Now before we dwell into the business highlights, I would like to mention that we're fortunate to be joined here today by the leaders of our 2 largest segments, Mike Hynekamp, COO of our Logistics segment based in New Jersey, U.S.A.; and Erik Noeklebye, COO of our Shipping segment based in South Korea. They will together review the key business and market development during the quarter. And with that, I'll now hand over to Mike, who is joining us in the very early hours of the morning, his time, for an update on the Logistics Services operation. Mike, please.

[Michael Hynekamp, Chief Operating Officer of Ocean]

Good morning, everyone, and thank you, Torbjorn. I would like to take a step back briefly and reintroduce the core logistics service offering before updating on the Q2 Logistics operations for everyone. Wallenius Wilhelmsen has a long legacy as a ship owner and ship operator, as everyone knows. But for over 1.5 decades, we have been heavily investing in growing globally in land-based logistics services. The Logistics segment itself and its activity today are involved in the major share of our volumes in near terms. We employ approximately 6,500 team members and serve essentially a similar customer base to that which we've developed in our shipping business. Our land-based network has a global footprint. However, with its largest concentration today is North America. And we at Wallenius Wilhelmsen view logistics and logistics services as an extension of our value chain is a key part of our evolution in differentiating the Wallenius Wilhelmsen as an integrated finished goods logistics provider. Within the segment, there are many new and future innovations that will drive effectiveness, efficiency and sustainability across the supply chain that Wallenius Wilhelmsen continues to capitalize on. And as mentioned, the Logistics segment itself serves the customers of auto and light vehicles, high and heavy rolling equipment and the breakbulk industry across essentially 3 main service categories. Number one, technical services through vehicle and equipment processing centers; number two, terminals at our ports; and number three, inland distribution and supply chain management. Now delving into the vehicle and equipment processing centers, these often act as an extension to our customers' operations and our crucial link in the light vehicle and high and heavy supply chains that they serve. The centers are strategically placed around the world, on and off board, as well as embedded in OEM plants to ensure seamless high-quality delivery to the eventual end consumer of these customers. Whether it's just basic quality checks or predelivery inspections or extensive customization work, we provide our customers with a cost-effective and efficient process resulting in units reaching their final destination timely and in perfect condition. Switching over to terminal services, I think everyone knows that terminal services is an integral part of the finished new goods supply chain as it's a bit of the middleware that connects shipping services, processing and inland distribution. With 9 strategically finishing terminals in some of the largest ports in the world, we were able to offer cargo processing, handling storage, premium fumigation as well as the host of customized services for the customers we serve. And finally, inland distribution and supply chain management services. These provide seamless transportation of vehicles and heavy equipment by sea, road or rail to the 5-point of sale in the most effective and efficient way possible. Our global network combines our digital capabilities with our own assets, as well as those with trusted suppliers and partners to offer optimization, as well as visibility services for the cargo that we're handling on their behalf. So that's a bit of an update as to where we are as far as the portfolio that we represent today and a small reminder. Now I'm going to turn your attention over to the actual developments in the quarter. So while Logistics and the segment of logistics revenue was back to pre-pandemic levels as early as Q4 2020 and has been stable ever since. The segment itself did see a mixed development during Q2. Not surprisingly, auto volumes and logistics were negatively impacted as the semiconductor chip shortage continue to disrupt production globally, and this especially hit our vehicle processing centers in Solutions Americas and EMEA and APAC, with also some small impact inside of our terminals. Switching over to terminals, the business benefited from higher overall volumes from the Shipping segment, but with significant increases in breakbulk volumes on some spillover effects from the lack of capacity in the container market, as well as increases that we're able to serve in value-added services such as washing and shortage for the overall increased volumes. There has been seasonality effects in the quarter for unique activities such as fumigation relating to the infamous Brown marmorated stink over BMSB, we sell off as expected quarter-on-quarter as April marked the end of the season itself thus impacting terminals and EMEA/APAC revenues as well. And just as a reference note the season for BMSB begins again in September. And then finally, I just wanted to touch upon high and heavy inland transportation activity, which increased inside of Solutions Americas with strong seasonal effects. It was also heavily helped by the general servers that we saw overall in our group with high and heavy on the back of strong commodity markets and the OEMs that we serve in those. So as you see, segment of sales did see mix development, but the mix in terms of our portfolio generally allows for us to have stable results quarter-on-quarter. With that, I'd like to now hand over to my colleague, Erik Noeklebye, for an update on the Shipping Services area and the operations there, as well as a general market update. Erik?

[Erik Noeklebye, Executive VP & COO of Shipping Services]

Thank you, Mike. And then let me start off with the Shipping segment update. We have seen the volume increase with a healthy 12% quarter-on-quarter, and they are now back at what we consider to be pre-pandemic levels. The high and heavy portion ended at a strong 32.2%. And this is largely due to a larger volume increase for high and heavy versus CO2 volumes during the quarter. And as was mentioned before, they are now at the highest level we have seen since the third quarter of 2012. When we look at the trading patterns, they remain imbalanced. More than half of the volume increase quarter-on-quarter is driven by the continued strong market exposure for exports from Asia. While we see European volumes are not yet back at the pre-pandemic levels for export. We saw strong demands in all main export trades from Asia. And I can mention in particular Asia to South America for both new and used cargo segments. The oceanic trade also experienced a solid development which we're very happy about. And we are also here closing in on pre-pandemic volume levels. The volume development, however, from Europe to North America and Asia continue to be muted, especially due to the semiconductor shortage for the auto manufacturers in particular. For Shipping Business, when it comes to the automotive and high and heavy clients, we largely categorized the contracting with them by a 1- to 3-year contract period. And then, of course, we have pre-agreed pricing and should adjustment closes as well. So this means that we do not see the same fluctuations in rates when the supply/demand analysis changes. Neither up nor down experience by, for example, the container lines. Only a smaller share of our total volume are generated on a spot basis. And in Q2, we did see a solid demand for spot volumes for used vehicles, in particular, as well as from backward customers. And we also had a more active vessel base available to risk that spot volume than in Q1. But of course, not to the extent that we would have liked to. And the increase in breakbulk demand is partially driven also by the spillover from the shortage in the container market as well. And we have been able to translate some of that into interest to our service and then also some for new contracts and project checklist . During the first half, we also renewed contracts, as well as we had some additional new business development. And most of the signed contracts commenced in Q2 and early Q3. And we have seen some of the recent signings they have done with some positive -- modest but positive rate impact. For the remainder of the year, and in addition to that new business, our contracting activity is focusing on the renewal of contracts that commencing in 2022. So this activity is most expected to impact rates, obviously, so significantly for the second half, as we maybe have seen from the first half of this year. If I then move on to talk a little bit about the fleet. The increase in shipping volumes meant that fleet capacity remains tight in Q2, and it's further exacerbated by trade routing balances, and also, obviously, operational impacts that we still have from the COVID-19 related restrictions and also virus outbreaks. Thanks for the pressure from congestion in global ports now has decreased somewhat since the first quarter of the year. The core fleet, which includes short-term TC, stood at 119 vessels at the end of Q2, and that accounts for about 20% of the global car carrier fleet. And the core fleet obviously consists of vessels on long-term charter, as well as owned. And the total number includes vessels also in cold layup. The core fleet increased by 2 vessels in the second quarter as we secured 2 short-term charter vessels on the longer-term contracts. We were also able to increase the fleet capacity measured in active vessel days with 3% compared to Q1, which together with improved efficiency overall and others to lift that higher volume. And this was achieved thanks to the activation of vessels and also increased operational efficiency despite the decrease in availability in the short-term charter market. We believe that we will continue to increase the long-term fleet capacity during the second half of the year. We activated 5 for the vessel from cold layup, which will only have their first full quarter operation in Q3. And all the 3 vessels that remained in layup at the end of Q2 to have now since been reactivated and the final vessel will be reactivated in the second half of the year. In Q2, we also decided to cancel the planned earlier recycling from 1 vessel which continue in normal service. And this vessel was one of 4 recycling candidates identified in the first quarter of 2020. And the 3 other vessels were then recycled during the last 12 months. And finally, the delivery of the last newbuilding that we have on order, the post-Panamax vessel 4 has been scheduled for delivery in late third quarter. I'll then move on to the market update, and I'll start off with the light vehicle market segment. We saw high sales volume growth of 36% year-on-year, obviously affected by the relatively lower sales during the early stages of the pandemic with quick lockdowns, et cetera. On a quarter-on-quarter basis, we see sales growing with 1.6%. And the year-on-year, light vehicle sales growth has some clear positive drivers. The markets are coming back and it looks strong. We also see that combined with a low interest rate environment, and both are obviously being through a stronger consumer confidence and purchasing power, we see that all major regions continue to have incentives. And then Europe and China focus on low emission vehicles and U.S. economy is fueled by fiscal stimulus by the $2 trillion package. And we also see that there is still a pent-up demand after the lockdown period. On a slightly more negative side, we do see the tight supply chain into the semiconductor shortage and also low inventories. And the high commodity prices might lead to cost pressure for OEMs as well. The steel price, as an example, have increased with 4x in some parts of the world during the last 12 months. We also see lack of workers in manufacturing and also rising labor costs that's influencing the light vehicle production, particularly in North America. Light vehicle sales development is lower than the growth for the light vehicle deep sea volumes, as we saw deep sea volumes drop more in the second quarter of 2020 than original sales. For the rest of the year, we do expect the recovery to continue as vaccinations rollout continues and OEMs ensure sufficient inventories as well. Just some comments on the regional sales development in those markets. For North America, we see good job figures, low interest rates and fiscal stimuli. That does contributes to the rising sales. Inventories, that of course, could lack certain malls and trims and OEMs to prioritize the most profitable models as well. We see the record high average retail prices. That's now support their profit as well, which is eventually also good for the oil business. And increased focus, of course, on the low-emission vehicles, including the current administrations, nonbinding role for a 50% increase in sales by 2030. In Europe, like we were saying see a positive trend. Nevertheless, it's a bit soft due to continued COVID related lockdowns and slightly less incentives. Most incentives, they do continue though and are still related to low-emission vehicles supporting the EU's Fit for 55 package that is now coming and when use old vehicles will have a significant less emissions. That's the target. In China, we are seeing solid sales in light vehicles. And here also, we see low energy vehicles continue to gain around there. Overall, pent-up demand and stimulus in fuel sales. However, the stronger underlying demand has not shown us with full potential yet we believe in the natural production and sales as the semiconductor shortage continues to interrupt semiconductor production. And we do expect the situation to continue to stabilize into 2022. If we then move on to the high and heavy side, the strong recovery in the high & heavy markets continued in the quarter. We now rebounding from the trough last year in all 3 segments. Global machinery trades not only surpassed the same pre-pandemic period in 2019, but volumes in the period were the highest in 2012. We still anticipate strong momentum in the near term, although we acknowledge that the supply side challenges have only intensified in the last quarter. Necessity on the construction equipment side, we continue to experience unsynchronized building activity around the world. And we also see that the residential building leaves the recovery, while the nonresidential construction sector still faces a number of obstructions brought down by the pandemic. For mining and also agriculture, these are sectors that we continue to view the fundamental strong wind. For mining, the metal prices have not been higher in the last 10 years despite the recent pullback in some of the commodities, such as iron ore and copper. And while miners are expected to show further capital discipline in the years ahead, we do additional spending on machinery as inevitable and given the age of some of the machines that are out there. Agriculture, food prices have also not been this high for almost a decade. Farmers are making good money. That generally goes well for machinery demand and replacement. But we are keeping an eye on the sentiment around the world that have become more unsynchronized over the course of the quarter and how this might also lead into higher imbalance in overall trading. If I then end the market update with a look at the overall global tonnage entry situation, the solid demand recovery has contributed to the tight situation, obviously. And the situation is mirrored in the global fleet figures where we saw no recycling and only 1 delivery in Q2. There are still a substantial number of recycling candidates, and the order book is increasing and now stands at 16 vessels, up from 10 last quarter, but it's still at a very low level. And this contributes then to an expectation of a continued tight supply and demand balance. The new orders currently have a lead time of 3 to 4 years, up from the average 1.5 to 2 years. And we've seen our current supply chain inefficiencies like port congestions, volume spike and other activities. We will eventually add capacity. But we now see, for example, that China has introduced tougher measures again in their course. So this will probably continue for a while in terms of congestions negatively affecting our capacity. Markets are forecasted to be tight with utilization rate of 9% next year, and that is considered to be a full year 9%. Continued media reports on even more activity in the ordering markets. However, these are still not firm and time orders and they're not, accounting numbers that we that you see here. And the delivery of these will be a few years out anyway. So it was to affect the short-term outlook. Okay, this concludes the market update. I would like to hand back to Torbjorn for the financial performance section.

[Torbjorn Mogard Wist, Acting CEO & CFO]

Thank you, Erik. Let me start, as usual, with some of the key financial highlights. On the left side of the chart, you can see that total revenue was $978 billion which is up 17% quarter-on-quarter and 62% up year-over-year since Q2 last year was heavily affected by COVID-19. The shipping services revenue increased 22% over Q1 on higher volumes. Fuel surcharges is an improved net freight from -- with the net freight rate, which was up from $41.1 to $42.7 per cubic meter. Since first quarter revenues were flat in logistics and up 14% in Government Services. And as mentioned previously, the adjusted EBITDA was $205 million up 56% quarter-on-quarter. Turning our eyes to the middle section, in Q2, the group posted a net profit of $17 million. The adjusted EBITDA margin increased to 20.9% and we'll get into some of the key drivers behind the margins on the next slide. Cash remains solid at $566 million. And net debt has decreased almost $3.49 billion. On the right side of the chart, the annualized return on capital employed was 3.8%, up since the first quarter on the increased EBITDA generation, as well as on a $14 million reversal of impairment related to the vessel we classified as a tangible asset, which has now taken from asset held for sale, as it is no longer intended for early recycling. The equity ratio is up to 34.5% on the back of the net profit. Net debt-to-EBITDA improved to 5.5, down from 6.5% in Q1 as the LTM EBITDA carries one less COVID-19 impacted quarter. Moving on to the next page. In Q2, all segments are back to pre-pandemic activity as well as the adjusted EBITDA. The Shipping segment increased the adjusted EBITDA margin, up from 16% in Q1 to 21.5. Strong volumes, enhanced profitability from improved cargo and trade route mix, combined with increased fuel surcharges contributed to the significant strengthening in this quarter. It is important to note that while we expect favorable market conditions to continue, there are risks, as highlighted in the prospect statement that may lead to volatility in margins going forward. The Logistics segment margin increased in Q2, though it developed flat when adjusting for one-offs relating to the adjusted EBITDA margin is still satisfactory as logistics recovered activity. And if we move on to the Government Services, the margin increased somewhat in Q2 on higher U.S. fly cargo activity compared to Q1. We will now look further into the Q-on-Q revenue and EBITDA development on the next slide. Adjusted EBITDA was $205 million and close to the 2019 quarterly average, while reported EBITDA ended at $170 million, which is a 29% improvement quarter-on-quarter, taking into account the $35 million increase in provision. To explain the key drivers behind the improvement in adjusted EBITDA, we will first look at how the group revenue improved 17% to $978 million compared to Q1. Volume effect is the largest contributor as shipping volumes grew 12%. Logistics saw some negative volume effect due to the impact on auto volumes from semiconductor chip shortages. The revenue per cubic meter increased in all segments. For Shipping, net freight rate per CBM increased on the strong cargo mix, beneficial trade route mix as well as some rate improvements on contracted and spot volumes. For Logistics, revenue per unit increased on higher level of value-added services and cargo mix in terminals. And for government, the higher activity led to higher revenue per unit. Fuel surcharges earned on the fuel adjustment clauses in shipping contracts increased by $27 million from the first quarter, reflecting the increase in fuel prices over the previous period. Charter income increased $4 million for shipping in Q2, reflecting normal vessel swap activity with other liners and not a reduction in fleet capacity. Looking at the $73 million improvement in adjusted EBITDA compared to Q1, the key impact behind the $140 million revenue increase can mainly be categorized as follows: cargo voyage costs, the volume and revenue growth in shipping was profitable in Q2 as the cargo and voyage costs only increased by $19 million, while revenue increased by a much larger amount. Fuel costs increased by $40 million for shipping due to the continued increase in fuel prices in the quarter and a 5% increase in fuel consumption for shipping due to higher volumes and more active vessel days. Fuel costs for government increased by $1 million, reflecting price increase. Vessel OpEx increased by $11 million due to the reactivation cost of $3 million, increased crude expenses and higher cost on normal maintenance repair activity. SG&A improvements include a $5 million gain in logistics on an adjustment on medical insurance provisions. Turning to our liquidity development, in the quarter, total liquidity reduced by $17 million to $950 million, where cash decreased by $33 million to $566, and unutilized credit facilities are up $50 million to $349 due to the increased availability on the logistics RCF following the end of the covenant waiver period agreed during the early pandemic impact in 2020. The key reasons for the reduction in cash is a significant increase in working capital, reflecting the positive underlying business trends. Number two, increased CapEx, mainly related to dry docking of vessels and other maintenance CapEx. And number three, higher net debt repayment than last quarter. When looking into further detail at the cash flow in the quarter, the cash flow from operations at $145 is explained by adjusted EBITDA of $205 million offset by a negative change in working capital of some $57 million quarter-on-quarter. The higher level of working capital can be mainly explained by the increased business activity, which has led to higher inventories and accounts receivables. The investment cash flow of $28 million mainly consists of $29 million in CapEx, which mainly consists of $23 million in shipping government for dry docking and installation of ballast water treatment systems and some logistics maintenance CapEx offset by some interest received. On financing, we had net debt repayment of $150 million. And here, we have a net effect of $4 million of -- a positive $4 million effect of $21 million refinancing of 1 vessel. We have regular bank debt installments of $65 million, regular lease payments of $47 million and interest paid of some $41 million, just to mention a few. All in all, cash flow from operations in Q2 was sufficient to cover financing items and CapEx items despite the increase in working capital on the back of increased business activity. On the balance sheet, we maintain a solid balance sheet and a comfortable liquidity position at the end of Q2. Total assets are stable at $7.6 billion. Equity is at $2.6 billion, increasing by some $19 million in Q1, many thanks to the $70 million net profit and currency effects. Net debt decreased $14 million to $3.5 -- just below $3.5 billion. And a slight decrease is mainly because of the large net debt reduction has been partially offset by a reduction in the cash position and $21 million in vessel refinancing were concluded in Q2. The group has cash on hand available to cover the $63 million in maturing debt for the remainder of 2021, $66 million related to the bond maturity in September and $7 million related to a small ballooning on the vessel financing later in the year. The remaining maturities through the year consists of regular installments on leases and bank loans and is expected to be covered by cash flow from operations. You will have noticed perhaps that we sent out the morning -- sent out the press release this morning about potential bond issue that we're contemplating that. And Danske Bank, DNB, Nordea, SEB and Swedbank are mandated as joint lead managers to range a series of fixed income investor calls. And then not denominated senior unsecured floating rate transaction may follow, subject to market conditions. And if we go through with this issue, net proceeds will be used for partial refinancing and outlining bonds and general corporate purposes. So now turning to the prospects, we expect the shipping supply-demand balance to remain favorable in the midterm. Clearly, for logistics, volumes will benefit from stabilizing semiconductor chip supplies. Potential risks going forward include fleet capacity constraints, increasing virus intensity with related impact on operations, and of course, further disruption of global supply chains where continued stabilization of market conditions will provide more financial flexibility and help drive shareholder value in the future. This concludes the presentation, and we will now open up for Q&A via the conference call functionality.Thank you.

[Operator]

[Operator Instructions] There are currently no questions at this time. I would like to hand back to Torbjorn for closing comments.

[Torbjorn Mogard Wist, Acting CEO & CFO]

Okay, thank you. If there are no questions here now, then I guess we shall just conclude the call. And of course, feel free to reach out if there are any questions after the fact through our IR department. So I guess with that, I thank you all for tuning in to our second quarter presentation this morning, and look forward to speaking to you guys in the future. Thank you.

[Operator]

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.