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

Good morning, everyone. Welcome to Wilson Sons Limited's Earnings Conference Call for the Second Quarter of 2020. Today with us, we have Mr. Cezar Baiao, CEO of Operations in Brazil; Mr. Fernando Salek, CFO of Brazilian Subsidiaries and Investor Relations; 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, and 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. You may continue, sir.

Thank you. Good morning, everyone. Welcome to our earnings conference call for the second quarter of 2020. I hope you're well and safe in these exceptional circumstances. I would like to start on Slide 4 with 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 fronts: first, preserving the health and wellbeing of our employees and other stakeholders. Secondly, ensuring the operational continuity of our assets. And third, safeguarding the company's financial strength. To date, we have been successful in keeping all our business activities operational, and this has only been made possible by the flexibility and commitment of all our employees. We've also adopted immediate austerity measures to safeguard the financial strength and resilience of our businesses. In order to preserve a robust cash flow through this global crisis, we are implementing several operational and financial initiatives to further strengthen our liquidity, including a reduction in our capital spend as well as operating and administrative expenses. Turning to Slide 5, please. Here, we highlight an overview of our safety performance as well as an update on our environmental, social and corporate governance practices. We carefully monitor 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 was evidenced by the improvement in workplace safety. During the first half of 2020, our lost-time injury frequency rate increased slightly to 0.51 incidents per 1 million man-hours worked. And this is versus the 2019 level, and it was due to 3 accidents recorded in the period. However, we saw a 93% 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, which clearly demonstrates that they are nonnegotiable. Safety in all our operations is our top priority. We will continue to strive for the improvement of our work safety to maintain best practice in this area, ensuring the quality of the services we provide to our customers. We also seek improvements in our corporate governance practices. In July 2020, we appointed a second independent member to the company's Board of Directors. We also published our 2020 Brazilian Corporate Governance Code best practices report, improving our adherence to the code from 77% in 2019 to 81%. In August, our Board approved the establishment of a statutory audit committee. Now moving to Slide 6, please. On this slide, we present a summary of our results for the second quarter of 2020. Net revenues decreased 15.8% to $83.1 million in the quarter when compared to the same period of 2019, mainly reflecting the negative impact of the Brazilian real devaluation on container terminal revenues, also a decline in logistics revenues due to the end of a specific high-volume contract. And finally, the reduction in offshore support base revenues against a backdrop of a pressured oil and gas sector. On the other hand, the company benefited from the solid increase in towage revenues. In Brazilian real terms, group net revenues rose 15.6%. Overall expenses fell 29.1% in U.S. dollars against the comparative period, benefiting from the 37.3% devaluation of the Brazilian real versus the U.S. dollar. In light of the COVID-19 pandemic, we took several austerity measures to safeguard the financial strength and resilience of our businesses, including travel bans, hiring freezes, restrictions on discretionary spend and administrative expense reductions. EBITDA increased 10.6% compared to the first quarter of last year to $36.9 million, fueled by strong results in towage and lower costs. In Brazilian real terms, EBITDA rose a robust 53.6%. Our EBITDA margin increased by 10.6 percentage points to 44.5%, reflecting the solid results and cost reductions. Profit after tax fell 14.1% to $5.7 million, negatively impacted by exchange rate effects totaling $1.5 million in this period. Excluding exchange rate movements, the company would have shown a net profit of $7.2 million. Our liquidity remain solid with $97.3 million in cash at the quarter end due to the strong operating performance and bank loans disbursements, mainly for the container terminal division. The company currently has material headroom in its bank covenants. We now move to Slide 7. Here, we detail our operating yield registered in the second quarter against the 2019 comparative. Container terminal revenues decreased 23.9% in U.S. dollars, negatively affected by currency devaluation in the period. In Brazilian real terms, revenues increased 4.6%. Despite the drop in maneuvers performed, towage revenues rose 10% in U.S. dollars, benefiting from an improved revenue mix, reflecting the volume growth in more profitable port operations, the increase in the average size of ships attended and higher revenues from special operations. In the Offshore Support Vessel division, revenues decreased 12% in U.S. dollars due to the negative impact of currency devaluation on the portion of revenue denominated in Brazilian reais. The Brazilian real terms -- in Brazilian real terms, revenues increased 20.8%. Moving to Slide 8, please. 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. Net bank debt increased 3.2% to $234.8 million compared to the end of the first quarter of 2020, with investments made in the Salvador terminal expansion and the $15 million dividend paid in April 2020. At quarter end, 85.2% of the total bank debt was long term. Excluding IFRS 16 effects, the net debt-to-EBITDA ratio remained flat at 1.9x. We now move to Slide 9. 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 the Salvador terminal expansion. In 2020, we are 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, primarily in maintenance CapEx. During the second quarter, CapEx increased 13.8% to $27.1 million due to the Salvador terminal civil works to extend the principal key and the arrival of 3 super-Post-Panamax STS key cranes and 5 RTG yard cranes. In view of the COVID-19 pandemic, we took several measures to temporarily reduce our capital spend in order to preserve a robust cash flow through this global crisis. Turning to Slide 10. In this image taken in June, we can see the ongoing expansion at the Salvador terminal expected to be completed in the fourth quarter of this year. In May, we received the new key in-yard cranes and are currently carrying out the commissioning of the equipment as well as the leveling and paving of an existing backyard area. With the commencement of operations on the new berth at the end of the year, the extended 800 meter key will allow the simultaneous berthing of 2 super Post-Panamax ships, facilitating access to the port and the largest economy in the northeast of Brazil. This project is of critical importance to the economy of Bahia, and it's a priority investment of the Brazilian government's Investor Partnership Program. It reflects the company's commitment to continuously improve the efficiency and competitiveness of the port of Salvador. Moving to Slide 11, please. On this slide, we outline our operating data registered until July 2020. In the first 7 months of the year, trade-linked activities at our container terminal and towage divisions remained resilient, although they were impacted by COVID-19 obviously. In July, container terminals -- excuse me, container terminal volumes grew 16.3%, while towage harbor maneuvers saw a slight decrease compared to the same period last year. Container handling at the Rio Grande terminal rose 18%, mainly driven by an increase in gateway, transshipment and empty container flows. Exports grew 6.2%, with exceptional volumes of tobacco and pork, supported by the devaluation of the Brazilian real against the U.S. dollar. Cabotage rose 43.4%, with better volumes of rice and a higher number of calls performed. Transshipment and shifting grew 31.4%, driven by new route strategies from Hapag-Lloyd and CMA CGM. Empty container flows increased due to higher container repositioning. At the Salvador terminal, container handling grew 12.3%, mainly supported by an increase in export, cabotage and empty container flows. Exports rose 22.6% due to increase in one-off volumes of aluminum beverage cans as well as the better performance of pulp and polymers. Cabotage was up 27.8%, reflecting better volumes of rice, beverages and chemicals and the resumption of a service that had been canceled, given the volume reduction in the first quarter of 2020. Empty container flows also increased due to higher container repositioning. The towage division saw a slight decrease of 1% in Harbor Maneuvers performed during the quarter. And this reflects the volume decline caused by COVID-19. Offshore Support Vessel operating days declined 3.8% with the termination of a few contracts in this period. Vessel turnarounds at our offshore support basis fell 35.3% due to reduced activities for Equinor and Enauta. And it's worth mentioning that the environment remains challenging and the recent oil price weakness is expected to 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 the resilience of our assets as demonstrated in other volatile periods such as the 2008 financial crisis. More importantly, 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 would like to invite you to the Q&A session. Thank you.

You received a question from the webcast from Adam Sues at Yacktman Asset Management. He's asking if when the expansion works are concluded in the Salvador terminal, if we will see a profit increase immediately. Or if it will be gradual as the terminal is utilized?

So I can answer this first question already. Yes, we will definitely -- when the expansion is ready, that is by the end of the year, what usually happens is that gradually a volume comes in. It's not an immediate boost. So there is really a suppressed demand in Bahia so that we would see a substantial volume growth immediately. Our expectation is that volumes will come in gradually.

He also asks a second question. His question is when -- or over how much time would incremental profits cover the rate for the investment, the hurdle rate for the investment in this expansion.

Well, the hurdle rate for the expansion was foreseen to be 15%. So I wouldn't be able to tell you how much time it would take for that to happen for us to receive that incremental profit that is enough to cover the hurdle rate of the expansion investment.

[Operator Instructions] There's another question here from Jacqueline Broers from ICM. Her question is if we could give any insight on the container volumes and towage expectations for the second half of 2020.

So Jacqueline, before I let Arnaldo answer, as you can see, volumes for July, which were made available earlier this week, have shown a good level of recovery in volumes. But the crisis is still ongoing, and it's difficult to really predict if it will be a good half of the year. What we can say is that in July, we already saw a strong recovery in volumes, especially in the 2 terminals. Do you have anything to add, Arnaldo?

No. It's basically -- it's very difficult to predict anything for the second half of the year. But the first signs are showing stability and growth. It's not significant in terms of volumes, but it's really still difficult to know.

We have another question from [ Pedro Fico ] at [ Charlies ] [indiscernible]. His question is do you expect the lower mix and with the increased size of ships will lead to more operations in adopted ports over the next quarters?

Well, regarding special operations, Pedro, that's always difficult to forecast. The first half of the year was especially good for special operations. Apparently, there is a trend to increase as the -- as the average dead weight for ships was higher than average. Arnaldo, do you have anything to add?

No. I think basically what you've said is true. It's very difficult for special operations to be at the same level as they were in the first half of the year. There is a trend towards bigger ships due to our portfolio mix and how the market is performing. So we can expect that to continue. So we will probably have more profitable operations in ports in the next quarters. Just to add one more thing about special operations. There are some longer contracts in oil and gas. We have a new contract in the state of Sergipe, which will continue because it's a long-term contract, and it's a special operation in Sergipe. That's something that started earlier this year.

The next question is from Bruno Bretas at 3G. He's asking about offshore vessels and how many are there? As contracts come to a close in September and October, do you have any negotiations ongoing?

Arnaldo, can you answer Bruno's question?

Bruno, there are several opportunities for new contracts with Petrobras and with other clients. The Fragata contract should be renewed, we believe. Batuira will come to an end in October this year, but we already have some perspectives for it to go back into operation. And right now, we have 5 vessels without contracts. There are contracts beginning from now until 2020.

This concludes today's questions-and-answer session. I'd like to invite Mr. Cezar Baiao to proceed with his closing statements. Please go ahead, sir.

Okay. We'd like to conclude this conference by saying that in what is a challenging environment for humanity, especially for Brazilians, we reaffirm our commitment to the safety and wellbeing of all our stakeholders. And we remain very confident in the resilience of our businesses. We've also taken several austerity measures to safeguard the financial strength and resilience of our business. We were agile in adopting precautionary measures and adapting to this dynamic scenario. And we have been successful in keeping all our business activities operational. We'll continue to monitor the situation carefully, and we're well-positioned to deliver sustainable growth, perpetuating efficiency gains. I'd like to thank everyone for participating in our conference call. I hope all of you are 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.