Earnings Call: Q2 2021

Aug 18, 2021

Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome and thank you for joining the Walneus Wilhelmsen Second Quarter Results 2021. Throughout today's recording presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. And I would now like to turn the conference over to Torbjorn Wist. Please go ahead. Good morning and welcome to all. This is Torbjorn Wist. I'm the CFO as well as actually the CEO of the company. Trust that everyone has some well deserved time off for rest and relaxation over the Summer Holiday, and I'm happy to be here to share our 2nd quarter results. If we start with Some of the highlights for the quarter. What is clear is that underlying results are back to pre pandemic levels in all in 3 segments. Shipping saw strong volumes and enhanced profitability from improved cargo and trade mix, as I mentioned a couple of key drivers. Client heavy volumes are the highest we've experienced since the Q3 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 It was $205,000,000 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 Outstanding jurisdictions were resolved. The time line 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 €35,000,000 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 €950,000,000 and remains imminently comfortable. Moving on to the agenda for today. We have, as usual, a lot going on I want to share with you. We follow the usual structure, which will be a bit similar to our regular audience, including the review of our business performance and market update and a review of our financial performance. We will have a Q and A session at the end of the presentation and managed by a conference call host. And here we will also be joined by Annette de Oosten, our Head of Treasury and IR. If you have any questions, please Now before we delve 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 Heinekamp, COO of our Logistics segment based in New Jersey, U. S. A. And Erik Knopfelbe, COO of our Shipping segment based in Seoul, Korea. They will together review the key business and market developments 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 and for an update on the Logistics Services operation. Mike, please. Good morning, everyone, and thank you, Tobjorg. 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. The Wilhelmsen has a long legacy as a ship owner and ship operator as everyone knows. But for over one and a half We have been heavily investing and growing globally in land based logistics services. The logistics segment And its activities today are involved in the major share of our volumes in unit terms. We employ approximately 6,000 500 team members and serve essentially a similar customer base to that which we've developed in our shipping business. Our Landis network has a global footprint, however, with its largest concentration today in North America. And we at Walnutius Wilhelmsen, we view logistics and logistics services as an extension of our value chain. It's a key part of our evolution in differentiating Sustainability across the supply chain that 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 breakable industry across Essentially 3 main service categories. Number 1, technical services through vehicle and equipment processing centers. Number 2, terminals at our ports and number 3, 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 are a 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 pre delivery section 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 vehicle supply chain As it's a bit of a middleware that connects shipping services, processing and inland distribution. With 9 strategically positioned terminals in some of Largest World Reports in the world. We were able to offer cargo processing, handling storage, cleaning and fumigation as well as a host of customized services for the customers And finally, inland distribution and supply chain management services. These provide seamless transportation of vehicles and heavy equipment Sea, road or rail to the final point of sale in the most effective and efficient way possible. Our global network combines Call. 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 attention over to the actual developments in the quarter. So while logistics and the segment 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 mix Development during Q2. Not surprisingly, auto volumes in 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 break bulk volumes on some spillover effect from the lack of capacity in the container market, As well as increases that we were able to serve in value added services such as Washington storage 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 bug or BMSB. Call. The sell off as expected quarter on quarter as April marked the end of the season itself, thus impacting terminals and EMEA pack revenues as well. And just as a reference note, the season for BMSD 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 its strong seasonal effects. It was also Heavily helped by the general surge 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, the segment itself did see mix development, but the mix in terms of our portfolio generally allowed for us to have stable results quarter on quarter. With that, I'd like to now hand over to my colleague, Eric Beelzebue, for an update on the shipping services area and the operations there as well as the general market update. Erik? 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 the larger The volume increase for high and heavy versus the auto volumes during the quarter. And as was mentioned before, they are now at the highest level we have seen since the Q3 of 2012. When we look at the trading patterns, they remain imbalanced. More than half of the volume increased Quarter on quarter is driven by the continued strong market exposure for exports from Asia, while we see the European volumes are not yet back at the pre pandemic levels for exports. We saw strong demands in all main export rates 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 are 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 the shipping business, when it comes to the automotive and high end heavy clients, we largely categorize Contracting with them via 1 to 2 year contract periods. And then, of course, we have pre agreed pricing and sugar adjustment sources as well. So this means that we do not see the same fluctuations in rates when the supply demand analysis changes, Neither of more down ex 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 Breckwell customers. And we also had the more active vessel days available to lift that spot volume than in Q1, but of course, not to the extent that we would have liked to. And the increase in breakable 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 into our service and then also some firm new contracts and project shipments. 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 some positive modest, but positive rate impacts. For the remainder of the year, and in addition to that new business, our contracting activity is focusing on the renewal of contracts that's commencing in 2022. So this activity is then not expected to impact rates So significantly for the second half, as you 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 feed capacity remains tight in Q2, And it's further exacerbated by trade route imbalances and also obviously operational impacts That is still Hel from the COVID-nineteen related restrictions and also virus outbreaks. Thankfully though, the pressure from congestion in global ports And canals has decreased somewhat since the Q1 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 and the vessels also in cold layup. The core fleet increased by 2 vessels in the 2nd quarter as we Secured 2 short term charter vessels on the longer term contracts. We were also able to increase results. Measured in active vessel days with 3% compared to Q1, which together with improved efficiency overall allowed us to lift that higher volume. And this was achieved, thanks to reactivation of vessels and also increased operational efficiency, despite the decreasing availability in the short term charter We believe that we will continue to increase the long term fleet capacity during the second half of the year. Yes, we activated 5 further vessels 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, 2 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 for 1 vessel, Which continue in normal service. And this vessel was one of 4 recycling candidates identified in the Q1 of 2020. And the 3 other vessels were then recycled during the last 12 months. And finally, the delivery of the last building that we have on order in the post Panamax Lesson 4 is then scheduled for delivery in late Q3. 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, This is affected by the relatively over sale during the early stages of the pandemic, with peak lockdowns, etcetera. On a quarter on quarter basis, We see sales growing with 1.6%. And the year on year light vehicle sales growth have some clear positive drivers. Your markets are coming back, and it looks strong. We also see that combined with a lower interest rate environment and both are We see that all major regions continue to have incentives, And then we're in Europe and China focused on lower emission nickels, and the U. S. Economy is fueled by Fiscal stimulus via the $2,000,000,000,000 package. And we also see that there is still a Hence, up demand after the lockdown period. On the slightly more negative side, we do see a tight supply chain, Including semiconductor shortage and also low inventories. And the high commodity prices might lead to cost pressure for OEMs as well. Lifting price, as an example, has 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 flat vehicle production And particularly in North America. Light vehicle sales development, it's lower than the Growth for the Night Vehicle Deepsea volumes, as we saw Deepsea volumes drop more in the Q2 of 2020 than original For the rest of the year, we do expect the recovery to continue as fractionations roll out continues and OEMs results. Just some comments on the regional sales development in those markets. For North America, we see good job figures, low interest rates and fiscal stability. That contributes to the rising sales. Inventories that, of course, should lack certain models and trims And OEMs do 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 whole business. And increased focus, Of course, on the lower emission vehicles, including the current administration's non binding goal for a 50% increase in EV sales by 2,030. In Europe, the light vehicle sales 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 and Are still related to low emission vehicles supporting the EU's Fit for 55 package that's now coming and where new All vehicles will have a significant less emissions. That's the target. We're trying now. There are still solid sales to light vehicles. And here also, we see new energy vehicles continue to gain a ground there. Overall, pent up demand and stimulus and fuel sales. However, the strong underlying demand has not shown its full potential yet, it really is, in the actual production and sales as the semiconductor shortage Continues to interrupt some production. And we do expect the situation to continue to stabilize into 2020. If we then move on to the high and heavy side, the strong recovery in the high and heavy markets continued in the quarter, With demand rebounding from the trough last year in all three segments, global machinery trades not only surpassed the 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, All of the acknowledge that the supply side challenges have only intensified in the last quarter. Specifically on the Construction Equipment side, We continue to experience unsynchronized building activity around the world, and we also see that residential building leads The recovery, while the non residential construction sector still faces a number of uncertainties brought on by the pandemic. For mining and also agriculture, these are sectors that we continue to view the fundamentals Call. For mining, the metal prices have not been higher in the last 10 years, despite the recent pullback in some other commodities, such as iron ore and copper. And my miners are expected to show further capital discipline in the years ahead. We do view additional spending on machinery as inevitable, Given the age of some of the machines that are out there. Agriculture, food prices have also not been as high for almost a decade. Farmers are making good money, and that generally bodes well for machinery demand and replacements. 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 then to a higher imbalance in overall trading. If I then end the market update with a look at the overall global tonnage and fleet situation, the solid demand recovery Has contributed to the tight selling situation, obviously. And the situation is mirrored in the global fleet figures where we So no recycling and only one 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 easing our current supply chain inefficiencies like For congestions, volume spikes that we've undergone activities, we will eventually add capacity. But we now see, for example, that China has introduced tougher measures again in the course. So this will probably continue for a while in terms of congestion's negative effect in our capacity. Markets are forecasted to be tight to the utilization rate of 80% to 9% next year, and that is considered to be a fully utilized fleet when you come after the first 19 Continued media reports on even more activity in the ordering markets. However, these are still not firm and signed orders, And they're not accounted for any numbers that you may that you do see here. And the delivery of these will be a few years out anyway, so likely not to and Short Term Outlook. Okay. This concludes the market update. And then I would like to hand back to Torbjorn by the Financial Performance section. Thank you, Erik. Let me start, as usual, with some of the key Financial highlights. If we start on the left side of the chart, you can see that total revenue was 9 $78,000,000 which is up 17% quarter on quarter and 62% up year over year since Q2 last year was heavily affected by COVID-nineteen. 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 Q1, revenues were flat in logistics and up 14% in government services. And as mentioned previously, the adjusted EBITDA was NOK 205,000,000 up 56% quarter on quarter. Turning our eyes to the middle section. In Q2, the group posted a net profit of $17,000,000 The adjusted EBITDA margins increased to 20.9%, and we'll get into some of the key drivers behind the margins on the next slide. The cash remains solid at EUR 566,000,000 and net debt has decreased somewhat to EUR 3,490,000,000. On the right side of the chart, the annualized return on capital employed was 3.8%, up Since the Q1 on the increased EBITDA generation as well as on a $14,000,000 reversal of impairment related to the vessel reclassified as a tangible asset, which is now taken from Astotel for sale as it is no longer intended for early recycling. Team. 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-nineteen impacted quarter. Moving on to the next page. In Q2, All segments were 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 group 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 develops 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. Flight 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 $205,000,000 and close to the 2019 quarterly average, While reported EBITDA ended at SEK 170,000,000, which is a 29% improvement quarter on quarter. Taking into account the €35,000,000 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 CHF 978,000,000 compared to Q1. Volume effect is the largest contributor as shipping volumes grew 12%. Logistics saw some negative volume effects 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 CPM 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 €27,000,000 from the 1st quarter, reflecting the increase in fuel prices over the previous period. Charter income increased $4,000,000 per shipping in Q2, reflecting normal vessel swap activities with other liners and not a reduction in fleet capacity. Looking at the $73,000,000 improvement In adjusted EBITDA compared to Q1, the key impacts behind the €140,000,000 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 Only increased by $19,000,000 while revenue increased by a much larger amount. Fuel costs increased by €40,000,000 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 cost for government increased by €1,000,000 reflecting price increase. Vessel OpEx increased by SEK 11,000,000 due to the reactivation cost of SEK 3,000,000 increased expenses and higher costs on normal maintenance repair activity. SG and A improvements include a €5,000,000 gain in logistics on an adjustment of our medical insurance provisions. Turning to our liquidity development. In the quarter, Sure. Total liquidity reduced by €17,000,000 to €950,000,000 where cash decreased by €33,000,000 to €566,000,000 and unutilized credit facilities are up €50,000,000 to €349,000,000 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 trend. Number 2, increased CapEx, mainly related to dry docking of vessels and other maintenance CapEx And number 3, 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 €145,000,000 is explained by adjusted EBITDA of €205,000,000 Offset by a negative change in working capital of some SEK 57,000,000 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 €28,000,000 mainly consists of €29,000,000 in CapEx, Which mainly consists of CHF 23,000,000 in shipping, government for drydocking and installation of ballast water treatment systems And some logistics maintenance CapEx, we offset by some interest received. On financing, we had net debt Payment of €150,000,000 And here, we have net effect of €4,000,000 of a well, a Positive €4,000,000 effect over €21,000,000 refinancing of 1 vessel. We have regular bank debt installments of 65,000,000 regular lease payments of 47,000,000 and interest paid of some 41,000,000, 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 Equity position at the end of Q2. Total assets are stable at SEK 7,600,000,000. Equity is at SEK 2,600,000,000, increasing by some SEK 19,000,000 in Q1, mainly thanks to the SEK 17,000,000 net Profit and currency effects. Net debt decreased SEK 14,000,000 to SEK 3.5 billion, just below SEK 3,500,000,000. And this slight decrease is mainly because the large net debt reduction has been partially offset by a reduction in the cash position. And SEK 21,000,000 in vessel refinancing were concluded in Q2. The group has cash on hand available To cover the NOK 63,000,000 in maturing debt for the remainder of 2021, NOK 66,000,000 related to the bond maturity in September and SEK 7,000,000 relate to a small balloon on the vessel financing later in the year. And the remaining maturities through the year It's a regular installment on leases and bank loans and is expected to be covered by cash flow from operation. You will have noticed perhaps That we sent out a morning sent out a press release this morning about potential bond issue that we're contemplating that. And Donske Bank, DNB, Nordea, SEB and Swedbank are mandated as joint lead managers to arrange a series of fixed Income Investor Calls. And a NOK denominated senior unsecured floating rate transaction may follow, subject to market conditions. And if we go through with the net this issue, net proceeds will be used for partial refinancing of outstanding 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, increase in 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 and A via the conference call Functionality. Thank you. Ladies and gentlemen, at this time, we'll begin the question and answer And there are currently no questions at this time. I would like to hand back to Torbjorn Wiss for closing comments. Okay. Thank you. If there are no questions here now, then I 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 Q2 presentation this morning and look forward to speaking to you guys in the future. Thank you.