Wilson Sons S.A. (PORT3) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Welcome to the Conference Call for the Wilson Sons Limited First Quarter of 2020 Results. Today with us, we have Mr. Cezar Baião, CEO of Operations in Brazil; Mr. Fernando Salek, CFO of Brazilian Subsidiaries and Investor Relations Officer; and Mr. Arnaldo Calbucci, COO of Operations in Brazil. As a reminder, this conference is being recorded, and we will have simultaneous translation for those who wish to listen to the English version. [Operator Instructions] In line with the rules of physical isolation, the company is conducting this conference digitally. Therefore, the executives may take more time to respond compared to traditional conference calls. Before proceeding, we would like to mention that Page 3 of the presentation contains the usual forward-looking statements for your reference. Now I would like to turn the conference over to Mr. Fernando Salek. Mr. Fernando Salek, you may proceed.

[Interpreted] Thank you. Good morning, everyone. Welcome to our results conference call for the first quarter of 2020. I hope you're well and safe in these challenging times. I'd like to start my presentation on Slide 4, which gives an update on how we're dealing with the COVID-19 pandemic. We are aware of the importance of our services, so we have focused our efforts on 3 key pillars. First, preserving the health and well-being of our employees and other stakeholders. Second, ensuring the operational continuity of our assets. And third, safeguarding the company's financial strength. To guarantee responsiveness and adaptability in the face of this dynamic situation, in early March, we've created a multidisciplinary crisis committee to lead our response efforts. To date, we've been successful in keeping our business activities operational, and this has only been made possible by the flexibility and commitment of our employees. We have also taken austerity measures to safeguard the financial strength and resilience of our business. In order to preserve a robust cash flow through this global crisis, we're implementing several operational and financial initiatives to further increase our liquidity, including reduction in our capital and operating expenses. Turning to Slide 5. Here, we highlight our safety performance, not only for its importance to protect the lives of our people and our operations, but also as a fundamental principle for our customers, who contract our services to ensure the safety of their employees, assets and products. Our commitment to safety can be evidenced by the improvement in workplace safety. In the first 3 months of 2020, our lost time injury frequency rate dropped to 0.34 incidents per 1 million man-hours worked, a 95% reduction since 2010. We're pleased to see that even during such a serious health crisis, we've managed to remain focused and absolutely committed to our safety standards, clearly demonstrating that they are nonnegotiable. The safety in all our operations is our top priority. We will strive for the continuous improvement of our work safety to maintain best practice in this area, ensuring the quality of the services we provide to our customers. Now moving to Slide 6. Here, we present an overview of our results in the first quarter of 2020. While results in the first 3 months of the year suffered little impact from the COVID-19 pandemic, we expect the second quarter to show a further reduction in operating volumes. Container terminal volumes were broadly stable, down 0.1% from the first quarter of 2019. The towage division registered a 3% drop in harbor maneuvers, and this was mainly due to the increased competition and reduced iron ore exports. Offshore support vessel days in operation increased 27.1%. This was driven by the commencement of 5 new contracts since the second quarter of 2019, in addition to the improvement in spot activities. It's important to note that the environment remains challenging, and the recent oil price shock will delay the recovery in offshore oil and gas support services. EBITDA fell 3.3% against the 2019 comparative due to a reduction in operating revenues. At the bottom line, we reported a net loss in the quarter due to the negative impacts of exchange rate variation. Our liquidity remains solid, with a position of $96.8 million in cash at the end of the quarter. We now move to Slide #7, please. On this slide, we present an overview of our results for the reported period. Net revenues decreased 9.3% to $91.1 million in the quarter compared to the same period of 2019. It mainly reflects a decline in logistics revenues due to the end of a specific high-volume contract, the negative impact of the Brazilian real devaluation on container terminal revenues and, finally, the reduction in offshore support base revenues on the backdrop of a pressured oil and gas sector. Operating expenses declined 12.5% in U.S. dollars, benefiting from the 18.5% devaluation of the Brazilian real against the U.S. dollar against the comparative period. EBITDA fell 3.3% compared to the first quarter of last year to $36.1 million, mainly driven by the decrease in logistics and offshore support-based results. However, despite the lower operating revenues, EBITDA margin increased by 2.5 percentage points to 39.6% as a result of cost reductions. We recorded a loss after tax of $7.8 million in the first quarter due to negative exchange rate effects totaling $14.4 million. Excluding the foreign exchange impacts, the company would show a net profit of $6.6 million. Following to Slide 8. Here, we give more details on our main operating yield ratios. The average revenue per TEU fell 9% in U.S. dollars, negatively impacted by currency devaluation in the period. In BRL terms, the average yield per TEU increased 7.6% year-on-year. In towage, the average revenue per harbor maneuver improved by 7.3% in U.S. dollars, benefiting from the overall price increase despite the 3% drop in volumes. In the offshore support vessel division, the average daily rate decreased 10.2% in U.S. dollars due to the negative impact of currency depreciation on the portion of revenue denominated in Brazilian reals. In Brazilian real terms, the average daily rate increased 27.3%. Moving to Slide 9. On this slide, we can see some of our liquidity and leverage ratios. The metrics show that all liquidity ratios remain strong as a result of a robust balance sheet. The company had $96.8 million in cash at the end of the quarter with loan disbursements. It's a good financial performance, and the loan disbursements were mainly for the container terminal division. Net bank debt decreased 2.8% to $227.5 million, of which 85.1% was long term. Excluding the effects of IFRS 16, the trailing 12-month net debt bank-to-EBITDA ratio increased slightly to 2x. During the quarter, we signed financing agreements totaling $24.6 million to reinforce our liquidity given the volatility caused by the COVID-19 crisis on global markets. Recently, the BNDES granted us eligibility for the COVID-19 standstill financing line with the postponement of installment payments that would occur between May and October 2020. The approximate amount will be USD 10.3 million for the group's consolidated companies and $9.9 million regarding the company's 50% share in the offshore support vessel joint venture to be paid according to the remaining term of the contracts included. CapEx decreased 26.4% year-on-year to $16.1 million with the construction of the WS Aries escort tugboat in the first quarter of 2019 and the Salvador expansion costs, which were also higher in the comparative quarter. We now move to Slide 10, please. Here, we highlight our CapEx expectation for the next 2 years, basically comprising the investments necessary to maintain our operations as well as the completion of Salvador terminal expansion. In 2020, we're estimating a total investment of $60 million to $70 million, of which approximately $38 million will be allocated to the Salvador expansion. For 2021, we forecast between $50 million and $65 million in maintenance CapEx. Turning to Slide 11, please. On this image taken in May, we can see the arrival of new equipment at the Salvador terminal. We received 3 STS key cranes and 3 RTG yard cranes, as planned in the expansion project, as well as 2 RTGs to replace older equipment. In April, we completed the civil works to extend the main key to 800 meters in length, allowing the simultaneous berthing of 2 post -- excuse me, 2 super-post-Panamax ships, facilitating access to the port and the largest economy in the northeast of Brazil. Operations on the new berths are expected to start in the second half of 2020 after installing the new STS. This project is of critical importance to the economy of Bahia, and it's a priority investment of the Brazilian government's investment partnership program. It reflects the company's commitment to continuously improve the efficiency and competitiveness of the Port of Salvador. Moving to Slide 12, please. On this slide, we outline the company's operating data registered in the first 4 months of 2020, so that includes April. While the first quarter 2020 results suffered little impact from the COVID-19 outbreak, the demand outlook heading into the second quarter has been deteriorating sharply. In April, container terminal volumes fell 7.2% and harbor towage maneuvers decreased by 5.6%. Container handling at the Rio Grande terminal fell 4.4%, negatively affected by the decrease in export and cabotage volumes as well as 2 blank sailings and 3 vessel call cancellations due to the COVID-19 outbreak. Exports fell 11.6% as the comparative period benefited from the one-off carryover of excess volumes of tobacco from the fourth quarter of 2018 to the first half of 2019. The 27.4% decrease in cabotage was mainly driven by the significant reduction of industrial activity in Brazil. At the Salvador terminal, volumes declined 1.2%, also reflecting lower industrial activity and its impact on domestic and international consumption. Additionally, cabotage volumes decreased with shift of cargo to road transportation due to lower prices and the following cancellation of a service given the volume reduction. The towage division saw, as I said, a 5.6% drop in harbor maneuvers, mainly due to the impact of COVID-19, adding to the negative effect of increased competition and lower iron ore exports. Offshore vessel days in operation of offshore support vessels increased 16.1% with the commencement of 5 new contracts since the second quarter of 2019 and higher spot activity. Vessel turnarounds at our offshore support basis fell 42.9%, mainly due to the reduced activities for Equinor. It's important to note that the environment remains challenging, and the recent oil price shock will delay the recovery in offshore oil and gas support services. While the full impact from the coronavirus outbreak on economic activity and global trade is still uncertain, we remain confident in our resilience -- excuse me, in the resilience of our assets, as demonstrated in other volatile periods such as the 2008 financial crisis. Above all, I would like to highlight the commitment of all our employees who have guaranteed the continuity of our services to our customers. The presentation ends here, and I'd like to invite you to the Q&A session. Thank you.

[Operator Instructions] Our first question will be asked in English by Mr. Rob Byde.

I have 3 questions, please. Firstly, can you say are all of your businesses still operational through this crisis? Second question, could you talk a bit about your covenants -- your banking covenants and how close to those levels you might be? And thirdly, could you talk a bit about the operating expenses savings that you're making?

[Interpreted] Hi, Rob, this is Mr. Baião. So we had 3 questions from you. And the first was, if all our businesses are still operational. And I can tell you that they are. 100% of our operations are fully operational, our terminals, our tugboats, maritime agencies and so on. Our support basis, all our units are fully operational. The second question was about our banking covenants, and I'm going to ask Fernando to answer your question.

[Interpreted] Thank you, Baião. Regarding the banking covenants we have, when we decided to reinforce our liquidity, we imagined some stress test scenarios to assess the impacts to our covenants. So at that time, we calibrated our debt activities exactly not to pressure our banking covenants in more difficult scenarios. Obviously, only very extreme scenarios would lead to any kind of covenant difficulties, if the EBITDA was to drop sharply, for example. But we're very comfortable with the current scenario considering the covenant level we have.

[Interpreted] Thank you, Fernando. And the third question, if I'm not mistaken, was about our operating expenses savings. We mentioned some of the actions we took in terms of operational expenses. They were varied across all segments. We had some savings actions in all our activities. We were concerned about our cash flow, not only from the operational point of view, but also from the financial standpoint. We were one of the first companies to really apply with banks, such as the BNDES, for a suspension of payments of the main debt and interest rates. So we were able to get that for 6 months. This will be a great help and a very important cash relief during the crisis. So let me ask if Arnaldo and Fernando have any more details to give to answer Rob's third question.

[Interpreted] I would add some austerity measures that we took. From the CapEx standpoint, even for the CapEx that had already been budgeted, we now have a much more rigorous approval process to ensure that we really will do what is essential and not spend more than we should. We also used a few important levers. Our shareholders know this, but we reduced the amount of dividends declared during this period, exactly so that we can understand the current scenario and wait for uncertainties to go down before we make any decisions for the future. We also reinforced our liquidity with some working capital lines, just so we can overcome any scenarios that we might face with the right levels of liquidity.

[Interpreted] Rob, this is Arnaldo Calbucci. Obviously, we also had to take some actions that make costs go up, such as hiring temporary recruitment for tugboats to work as backups. We had to furlough some people who were in the risk group, and this was a determination from the Ministry of Health. So some people had to come in. And also replacement crew members for those who might be sick. So that is a slight addition to our cost, but it's absolutely necessary to keep our operations at a good level, and they have been good so far.

Our next question comes from [ Lucas Fakuri, Arctica ].

[Interpreted] I have 3 questions to ask. First, I'd like to ask about the joint venture, the support vessel -- offshore support vessel joint venture. You have 3 contracts concluding in 2020, if I'm not mistaken. So I'd just like to hear any updates on those contracts if they'll be renewed or not. Can you shed some light into that matter? Secondly, in towage, if you could give us an update on the competitive scenario in terms of prices. How things are doing, especially after the strongest COVID-19 impact in May, if you believe the prices will deteriorate or not. And also, you mentioned that you had a cabotage line canceled. So if you could tell us a bit more about that. What volume is it? Is it representative or not?

[Interpreted] Okay, [ Lucas ], I'm going to let Arnaldo answer your questions on contracts in our offshore support vessel joint venture. And he can probably answer your second question about towage.

[Interpreted] Well, regarding the contracts for our -- in our offshore support vessel joint venture, these contracts do allow for renewal. Petrogas, at the beginning of the pandemic, demonstrated some interest to renew it. But with their resilience committee, the bureaucracy for this approval is taking a bit longer than expected. And obviously, surprises may come. But we haven't renewed contracts yet, but we do have contracts that are going to begin due to tenders that we won late last year and earlier this year. We can go into details about that later. Regarding towage, our competitors haven't changed much. We still have the same scenario. So despite some new star nab operations which began, the scenario didn't change significantly. It's still very competitive. We've been able to have a good resilience in our results, and that's due to special operations contracts that we've obtained in the last months. And we've also gained efficiency. So far, the price trends remain the same. We see a small improvement, especially in comparison to last year, meaning that it's stable. But right now, it's going to be very difficult to know exactly the impact of COVID-19, if it's going to have a negative impact on prices or not. So far, it hasn't really impacted us in a relevant manner.

[Interpreted] Lucas, just to add to the answer. Besides not seeing any changes in competitor pressure or prices from last year, we started seeing a slight improvement. The commodity volumes in Brazil are still strong despite the COVID-19 crisis. So that's the good news for the towage. Commodity exports, whether agricultural or mineral, is basically done in big marine vessels. So that's always good news for towage. Now your third question, you asked about a cabotage line in the Salvador terminal. And we clearly see that this is a one-off situation because of the COVID crisis, we have no doubt. And it's especially due to the industries in the greater Manaus free trade zone. They were very affected. And there's a great impact on the southbound routes coming from the Manaus free trade zone, and that ends -- and ends up creating an impact to that area. It wasn't lost to a different terminal. It's just a matter of volume and demand. And ship owners, due to a low demand, are not doing that anymore.

[Interpreted] We have a question from Pedro Fonseca via webcast. He asks if we have actions being taken to adjust our U.S. dollar exposure to hedge it somehow. So I'll let Salek answer. But I would say before that, Pedro, we do have a strong concern about hedging our cash flow. We never really hedge for balance impacts, but we do hedge for cash impacts. And that's the natural hedge that we get from our revenues in U.S. dollars. So that allows us to cover the expenses, especially financial expenses, that we have related to the U.S. dollar. But I'll let Fernando answer because I'm sure that he'll be able to give you some more information about that.

[Interpreted] Thank you, Baião. So first, to reinforce what Baião said. From the cash flow point of view, we have a natural hedge, which comes from our BRL costs being equivalent to our BRL revenues. And that gives us an EBITDA, which is deeply connected to the U.S. dollar. So from the bottom line point of view, we have suffered some impacts but which were mitigated over time, specifically regarding companies that use the Brazilian real as its functional currency. So we've been displacing our indebtedness from U.S. dollars to BRL, which helped us with the results for those companies. But for the companies that are denominated in U.S. dollars, since we have cash assets in BRL that receive liabilities in BRL and we had an abrupt variation of the U.S. dollar, then in the gain or loss line, we suffered that impact we mentioned during the presentation. This obviously is an atypical situation. And at the same time, the difference between the assets and liabilities in BRL affected us. This is not something that is -- that we -- this is not something that we want to hedge against according to our policy.

[Operator Instructions] This concludes today's questions-and-answer session. I would like to invite Mr. Cezar Baião to proceed with his closing statements. Please go ahead, sir.

[Interpreted] So I'd like to conclude this call by saying that in what is a challenging environment for humanity, everyone here at Wilson Sons reaffirms our commitment to the safety and well-being of all our stakeholders and all our employees, and we remain very confident in the resilience of our businesses. I'm very proud of the impressive commitment and courage of our more than 4,300 employees across the country. We're working hard to support our people, our customers' businesses and the societies we're a part of. To date, we've been successful in keeping all our business activities operational. Our services are essential to meet the urgent needs of society and contribute daily to ensure supply to Brazilian citizens. We've also taken several immediate austerity measures to safeguard the financial strength and resilience of our business. We'll continue to monitor the situation closely, and we're strongly positioned to navigate through this crisis. We're sure of that. I'd like to thank everyone for participating in our conference call. I hope you're all well and safe. Thank you, and have a good day.

That concludes the Wilson Sons conference call for today. Thank you very much for your participation, and have a good day. [Portions of this transcript that are marked [Interpreted] were spoken by an interpreter present on the live call.]