Compania Sud Americana de Vapores SA

SGO:VAPORES

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the CSAV's First Quarter 2018 Results Conference Call. Today's conference is being recorded. [Operator Instructions]

I would now like to turn the conference over to Tomás Tafra. Please go ahead.

[Tomás Rioja, executive]

Hello. Good morning to everyone. We are here in the first quarter 2018 results conference call, and we will go through the presentation you are seeing now in the webcast. So just [ let me discuss ] the agenda, the highlights of the quarter regarding the results of CSAV and the results of Hapag-Lloyd that explains most of the performance of the company. And second, we'll have a market overview, mainly on the container industry to give a context to the results of Hapag-Lloyd. Afterwards, some dive into the figures. And at last, some comments about the outlook for the container business and for the retained business, in this case car carrier.

So highlights of the quarter for CSAV. First of all, we reported a loss of around $21 million in the first quarter, mainly explained by the result of Hapag-Lloyd, by our participation in the net loss that Hapag-Lloyd reported, but also with around an effective $9 million coming from the tax loss carryforwards and mainly of deferred tax as a cost because of the higher euro value against the dollar in the first 3 months of the year that at the end generates taxable profit in Chile, and as we have explained in previous quarters, that means cost on a consolidated tax level.

On the other side, what we have is the result of the car carrier business that is positive again. And this is the eighth consecutive quarter in which we have profits in this segment. And that, of course, is somewhat -- we have much lesser scale netting the effect of the losses of the negative result of the container business.

When we look at the performance of Hapag-Lloyd, Hapag-Lloyd, no matter it is presenting at a net loss at the bottom line, it has a positive operating result at the EBIT level and a highly positive EBITDA, much better than the one it had on the first quarter of 2017. Considering in that analysis that even the first quarter of 2017, Hapag-Lloyd did not consolidate the activities of USAC (sic) [ UASC ], so we're when we look at the reported figures of Hapag-Lloyd, we are comparing one quarter of 2017 without UASC without the merger, with one quarter now in 2018 with the merger with the UASC volumes, but of course, with a new mix of freight rates of revenues and costs.

Moving into the market [ segments ], so that we can give a little bit of context into this result. We are seeing, at the beginning of 2018, very low levels of order book, in line with what we saw at the end of 2017. And we believe, I would say, minimum levels that we have been used for the past year. This order book of 13% is, as we have said before, is very low compared to a figure that we have considered stable for the industry. And why is this? Because at the end, when we look at the depreciation of these vessels, there is around 5% per year, and you take into consideration that our vessel take between 2 and 3 years to be finally built, we should have an order book just to replace depreciation of around 12% to 15%. And on top of that, we have -- the growth that we're seeing in the demand, in the transported volume, we should be seeing order book levels in order to grow [ bandwidth ] Depreciation of around 20%, so this -- minimum. So this level of 13%, we think it's very, it's a very good indicator that the industry is focusing on lowering the excess capacity, on using the excess capacity in transporting the volume growth. And that for the next quarters and probably 2 years, we will have scenario where volumes are able to grow in line with the demand, and with the supplies, sorry, and also seems that the second semester of this year and probably 2019 to outpace the growth in supply.

When we look at the net capacity growth of 2017, it was around 4.2%, and that 4.2% is lower than the growth in supply, in demand, right, in the transported volumes. And for this year, we are seeing figures, net capacity growth projected figures of around 4.2% also. There are some estimations that would be higher, but growth of demand is strong at around 5.3% projected for the year, and that is another year of reducing the oversupply of things.

When we look at the idle fleet, that's another good thing coming from the last quarter of 2017. We're seeing a reduction that is now already into the operating services of the industry. It is already deployed, so any effect that I don't see that we have at the beginning of the year, could happen in the supply demand balance and in the price mix is, at this moment, are very incorporated. But at the end, what we are seeing also is demand in the first quarter, that is something [indiscernible] fix. It is also lowering -- a lower freight rate during the quarter compared to December, especially when looking at the trades from Asia. If we look at the trade from Asia, and this is mainly looking at the [ Shanghai Composite Index ], right, we're seeing lower rates, and we're seeing higher bunker price, right, than last quarter of 2017 and than the first quarter of 2017 also on a next country level. And that is, of course, affecting the profitability of the industry as a whole. If you look at the results of some of the competitors of Hapag-Lloyd, the results of those companies have been heavily impacted by the effect of the freight rate and of the bunker cost. That also, we're seeing another trade much more stability than we saw at the beginning of last year. So for the industry, I would say, it has been a very difficult start of the year, first quarter, but at the end, we are seeing already a recovery in rates at the end of March and April. And we are seeing also volumes picking up along the second quarter, normal seasonality, and moving forward to the peak season, we should expect volumes to pick up.

If we look on the other side, at the effects the deployment of new fleets has been having on the operating capacity. Of course, we have an effect of the vessels that have been already delivered to the shipping companies and put into the operating fleet. That effect is mostly concentrated in the first semester. So one could expect still the second quarter of the year to be a bit lower rates, the [ pressure ] rates because supply will be growing more than demand than transported volume, mainly because the deliveries of the year are mainly concentrated in the first semester. But for the second semester, we should be seeing volumes picking up alongside the peak season and a very low increase in the operated fleet because mostly the deliveries of the year will be done, as I said, in the first 6 months.

Going now to the results of CSAV. We have, on Page 7, the bridge between the net income of the first quarter of 2017 and the net income of the first quarter of this year. That the figures are very similar that we have there some balancing effects. First of all, in the other transport services segment, that is the car carrier business mainly, we have $400,000 improvement, with the result of the segment of around $1.2 million, right? Then, in the container transport segment, we have 2 main effects. One is the improvement in the result of Hapag-Lloyd. There is explained $4 million in the net income effect to CSAV. You have to take into consideration that this $4 million is not just the 25.5% of the improvement in Hapag-Lloyd because, as I said at the beginning of the call, the first quarter of 2017 was a quarter where the company was not just merged with UASC. So we, at CSAV, had a higher share in the result of Hapag-Lloyd. And on the other side, we had a different effect of the TBA. So at the end, when you take both effects, we have a net impact in the equity-accounted industry's result of around $1 million. So $5 million of this $4 million are coming from an improvement in the result of Hapag-Lloyd and around $1 million from the net effect of the PPA and the dilution effects of the merger.

When you look at the other relevant accounts, it's mainly deferred taxes. That is explained, as I said before, by the appreciation of the euro in the first 3 months of the year and what we had in the past weeks, on the opposite direction the depreciation of the euro against the dollar, of course, we have a balancing impact, a netting impact of this amount in the second quarter if these rates of exchanges continue throughout June and then until the end of the first semester.

And then, of course, we have the net effect of the 3 main lane movements that I explained that comes to a result of $21.4 million of a loss in the first quarter.

When we look at the figures in Page 8, there you can see the same $21 million. And those $21 million are mostly comprise the [indiscernible] evaluation, right, explained before by the equity-accounted industry's result coming from the participation in Hapag-Lloyd and from the effect of the deferred tax cost of around $9 million that we have in the first quarter.

When we look at the segment results in Page 9, what we have is mainly a profit in the other transport services segment coming from the car carrier business. If we look at the gross margin of the car carrier business, in the first quarter of 2018, it is better margin than in the same quarter of '17 and also a better margin than in the fourth quarter of '17. So it's an interannual and interquarter improvement that is mostly explained because of high volume growth and high utilization. And on the other side, when we are seeing the container segment is mostly an improvement in the equity-accounted industry's result regarding the first quarter of 2017, but of course, the of course the [ variation ] of negative evolution regarding the fourth quarter of last year where we had a positive effect here coming from the result of Hapag-Lloyd and also coming from the badwill from the last purchase of shares.

And finally, we're [indiscernible] at the container transport services segment result of around EUR 22.6 million of a loss.

Then going into the main figures of Hapag-Lloyd. During the quarter, we're seeing, as I said, when going to the highlights, we're seeing a better EBITDA margin that we saw in the first quarter of 2017, of this quarter, 8.4%. We're seeing also a better margin, EBIT margin and a smaller group profit loss.

If we look at the evolution of the EBITDA, EBIT and the bottom line, right, profit/loss, we see a big impact here of the merger of the combined business with UASC, right, because, of course, a big chunk of our depreciation of our vessels is now explained by the vessels that UASC contributed to the company, so that explains why also EBITDA has a big growth.

On the EBIT side, of course, there is an improvement in the business, but also an improvement in the trades we're it's supposed to and on the group profit loss. The net figure that we're seeing is the better EBIT margin that we have against last year, but also higher interest, higher financial cost mainly coming from the vessels that UASC contributed to the company and the debt UASC contributed to the company, that is of course now part of the financial cost of Hapag-Lloyd.

So going into the main variations of the reported figures now in Page 11. What we see here is a high increase in volume when looking at reported figures. But as I said before, reported figures do not include in 2017 the volumes and the figures of UASC, so that is explaining why we have a big increase in transport volume, in revenue and in most of the other accounts. When we look at the growth regarding the fourth quarter, we're seeing, now comparing merged company in both quarters, we're seeing a 3% growth. That is something positive regarding normally the lower volumes that we see in the first quarter due to the Chinese New Year and to seasonality effects and also the deterioration of the freight rate regarding the fourth quarter and of ex bunker freight rate regarding both the first quarter 2017 and before. Because the increase in bunker price is much greater, right, than the small variation that we have in the freight rate. So the most important effect here is explained by the reported freight rate but by the bunker price increase that at the end is driving the ex bunker rate, the lower levels and we saw last year in the same quarter and also in the last.

When we look at the EBIT margin of Hapag-Lloyd and the EBIT of $66 million of a profit, we're seeing a very good performance compared to the rest of the industry. It was very surprising to see very negative results in the carriers that have already published their figures. And we think that this performance of Hapag-Lloyd is very competitive, considering the difficult scenario on freight rate and ex bunker freight rate that the industry had to face in the first quarter. But still, there should be a big space to improve regarding now the volumes that we should be seeing in the start of the peak season later in the year and with the effect in the freight rate that the growth in volume of the second semester should have against a fleet that will be mostly stable. So very, very important in our side to highlight the good comparative result of Hapag-Lloyd. No matter, still, we're behind our plans and behind what we think is a profitable result going forward. We are confident that with this very competitive result against the rest of the industry, we are in good shape to take advantage of the improvement in the business that could come in the second semester.

When we look at the cost, the cost, as many other companies have already released to the market, have been under pressure mainly because of charter costs and because of other operating costs. And in the case of Hapag-Lloyd, we are now seeing how synergies coming from the merger of UASC are helping us cope with that pressure in costs. And hopefully, we will be able to see at the end of the year a reduction in the unitary cost, the unitary transport cost coming from the synergies being able to go back to the effects of cost inflation. That -- of course, that needs to be seen regarding the effect that, finally, the bunker price should have in the construction of the industry.

Now going to the balance sheet of CSAV, back into the reported figures of the company. We are seeing a small decrease in cash, mainly coming from one-off effects of reduction in provisions. If you look at the liability side, we had a sharp reduction in provisions. That is explaining more -- that's explaining mostly the effect in cash. And also, we have the effect in the assets of the first asset reduction coming from the deferred tax cost of $9 million that we already explained in the P&L. It is important to note that when we say that the result was impacted by our cost, right, of deferred taxes. That cost is of course cash neutral because the company has a tax shield, right, a tax laws carryforward that we are at this moment consuming when generating taxable profit. So what you see in the P&L is our cost. You also see in the balance sheet in the noncurrent assets is the a reduction of the deferred tax asset and without any impact in cash. And also, you have the effect of the reduction in the equity-accounted industry's balance coming from the loss of Hapag-Lloyd, net of the OCI effect of the comprehensive income.

As I explained before in Page 13, we find the cash position of the company, summarized cash flow where most of that $3.6 million is explained by the operating cash flow, and inside that operating cash flow by one-offs coming from the reduction -- mainly from reductions in provision. And then we have an investing cash flow positive coming from also from the sale of several synergistic assets that we discontinued during the last quarter of 2017 and the payment of interest of our container-related debt during the first quarter of the year. So with that, we have a final cash position of $38.8 million at the end of March.

Now moving to the outlook. What we're seeing is as Hapag-Lloyd already released to the market in their investor presentation, we're seeing a high focus of the management of Hapag-Lloyd in reaching the expected synergies during the year. The Hapag-Lloyd management estimated around 90% of capture synergies during 2018. That is a very positive projection, and we are looking forward to that also because of the cost inflation that we're seeing on some cost items. As I said before, in charter, in of course, in market price and because of the lower expansion rate that we are facing at this moment. But of course, this is something we need to keep monitoring throughout the year and to keep optimizing in the cost structure, going forward.

When we look at the debt of Hapag-Lloyd, there's also something very positive to highlight and it's that after the merger with UASC, the company had a very high debt and also a high unsecured debt amount that has been, throughout these quarters, already decreasing. At this moment, less capital increase and some portion of the free cash flow of last year was used for reducing this debt level. And the positive EBITDA that we are seeing for this quarter and also for the rest -- projected for the rest of the year should also help us to continue deleveraging, considering that we have not -- that the company, in this case, Hapag-Lloyd has not announced any kind of new vessel investment for the next years.

For the volumes, as I said in the beginning, we're seeing strong volumes, strong volume growth. And that is something a bit conflicting with what we have seen in the press regarding this potential commercial wars or commercial disputes that could arise because of the U.S. and China mainly conflict or potential conflict. And what we are seeing on the other side is no effect of that, but also a big recovery of the growth in the demand being now strongly projected at between 5% and 5.5%, depending on the analysts, and also some strong volume growth expected for 2019 in the preliminary projections.

When we look at the freight rate, as I said before, we have been under pressure in the first quarter, under pressure in the first quarter or mainly the deployment of the new vessels that have been delivered to the fleet during the first 3 months. And also, we continue doing the second 3 months of the year up to the first semester, we should expect volatility and pressure to continue up until June or July. But after that, the delivery of vessels will decrease very shortly, and we should expect a second semester with a strong growth in volume. So that is something that we're looking forward to see and to get some tailwind to the evolution of prices. But of course, we're talking about things that need to happen also in the next 3 to 4 months.

When we are -- when we look at some of the risks that we're seeing going forward, and this is also very much explained and released in the Hapag-Lloyd, investor presentation, you can identify the regulatory. So for change that will impact the bunker industry uses for its operation and its [indiscernible] regulation is something that of course will impact Hapag-Lloyd but will impact the industry as a whole. And there's a bit of uncertainty regarding that. We are -- we think we are in a very good position to cope with the changes mainly because the company has a very high on-fleet ratio, an efficient on-fleet ratio, mainly being owners of the big and new and more efficient vessels and also because of the flexibility that the former UASC fleet has eventually converted to LNG and to synergies. And of course, this is something that the management of Hapag-Lloyd will need to continue disclosing to the market, alongside the company, take more decisions on this one.

And for the car carrier business, what we have at this moment is very high-volume growth. We haven't seen yet an increase in freight rates. There's a bit of pressure on that, but we are confident that during the second quarter of the year we will continue to have a positive and a good result, but with some risks related to cost items mainly chartering and other fleet-related cost items that could impact somehow the results in the second semester, but still to be seen, the effect of freight rates could have considering the high volume growth that we have seen.

So that is mainly our presentation. In case you have any queries, now the line is open to make them through the webcast system. And also, in case you want to deep dive a little bit more in the figures, you have the investor report and investor presentation that Hapag-Lloyd has provided to the market. That is very, very straightforward and very clear on the performance of Hapag-Lloyd. And the CSAV result analysis and financial statements that of course, engaged between the Hapag-Lloyd reported figures and what you're seeing in the P&L and balance sheet of CSAV.

So now we give one minute to -- for you to make the queries and we come back with our replies. Thank you very much.

[Tomás Rioja, executive]

Okay, so going into the queries. First, we have a query regarding how do we project CSAV's revenues, gross profit and SG&A for December.

I would say that, as I explained before for the container business, we are expecting volumes to grow in line with what the market is projecting with around 5% in the container business, right? On the freight rate side, we are expecting freight rates to be on a similar level than last year regarding the full year figures, but of course, that is depending on the evolution that we can see on the next months and with the start of the high-volume season, right, the peak season. And regarding cost items, we are seeing some pressure in cost and we're also seeing some improvements in unitary costs coming from synergies. So I would say that as Hapag-Lloyd has in its own outlook, it is very, I would say, very straightforward to consider that we will realize an important chunk of synergies, but of course, with some pressure on cost items, and we should expect volumes to grow and to outpace the growth in supply. No matter, as I said before in the first semester, we are seeing some more pressure because supply will be growing more than the growth in volumes if we project the figures that we're seeing now until -- March until May.

Then we have a query regarding the other income. I imagine that is related to Hapag-Lloyd and regarding the detaining the cost items and revenue items of Hapag-Lloyd, we're in no position to comment on that, more than saying that in that -- in those cost and revenue lines, what you see is also part of the operating business. So it should move in line with that.

Then we have a query regarding the capitalization of losses in order to be ready to pay dividends. In that case, we are not in a position to define anything about that in this moment. We, in the last shareholders' meeting, we explained very clearly that, that is something that needs to be done when the company has important revenues coming from the investment in Hapag-Lloyd and, of course, is something that we will be informed to the shareholders appropriately. And that is the queries that we have related to our financial statements. Mainly, in this moment, we're in no position to answer any other query regarding cases not related to this conference call, but of course, our Investor Relations department is also eager to hear your queries and your questions.

So thank you very much, and have a very nice day or evening the ones that are connected from abroad. Bye now.

[Operator]

Ladies and gentlemen, this concludes the CSAV's fiscal year 2018 Results Conference Call. Thank you for your participation. You may now disconnect.