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

Good morning, and welcome to Wilson Sons Earnings Call for the second quarter of 2022. Today, we have with us Fernando Salek, the company's CEO; Fabricia De Souza, the CFO; and Arnaldo Calbucci, the COO. 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] Before proceeding, we would like to mention that Page 3 of the presentation contains the usual disclaimers on forward-looking statements for your reference. Now we would like to turn the conference over to Fabrícia Souza.

Thank you. Good morning, everyone, and welcome to our earnings conference call. Let's start on Slide 5 by talking about safety, which is one of the key material priorities for our company. In 2021, still under the impact of the COVID-19 pandemic, our safety results fell short of our own benchmark, which led the company to take numerous actions. These actions have proven to be assertive and we have already noticed a recovery in our performance. The last lost time accident occurred in September 2021, reducing our lost time injury frequency rate to 0.3 incidents per million hours worked, which reinforces that we are on the right track with the measures adopted. During this quarter, we published our first sustainability report in compliance with the Global Reporting Initiative, or GRI, which in July, was nominated as a finalist in the services category of the ESG Investing Reporting Awards. In the second quarter, our shipyard delivered WS Centaurus, the most powerful tugboat in Brazil and the first of a series of 6 90-ton, bollard pull vessels joining our fleet over the next 2 years. The vessels follow the International Maritime Organization, Tier III standard. And the new hydrodynamic design improves whole efficiency for an estimated reduction of up to 14% in greenhouse gas emissions compared to previous technologies. During the period, the Salvador Terminal contracted the acquisition of 12 fully electric yard tractors to implement the first electrification project of this nature in Brazil, which will contribute to reducing our carbon emissions. To reinforce our ESG strategy even further, we hired an executive with almost 30 years of experience in this agenda to lead the sustainability department. All these actions contribute to the development and continuous improvement of our ESG practices and operational excellence, strengthening one of our strategic pillars. Turning to Slide 7. Here, we present a summary of our consolidated results. Although the operating performance of the container terminals was impacted by global logistics bottlenecks as we will discuss later. Our net revenues increased 6% this quarter to BRL 540 million with highlights, including the price and volume improvement in the international logistics division, Allink. The increase in the average revenue per manoeuvre in towage is also a highlight as well as the higher operational activity in the offshore support vessels and also the growth in conversions and dry docking services for third parties in our shipyard unit. Despite the revenue increase, EBITDA declined 9% in the quarter to BRL 201 million, negatively affected by the equity income from our offshore vessel joint venture. With the Brazilian real depreciation impacting balance sheet items such as deferred tax assets and net monetary items. Excluding equity accounting effects, the company's EBITDA was slightly above the comparative in Brazilian reals and grew 8% in U.S. dollar terms. Net profit decreased 86% in the quarter to BRL 16 million, mainly reflecting the impact of exchange rate variation on the company's results, as the Brazilian real depreciated 11% over the U.S. dollar against a 12% appreciation in the comparative period. Negative exchange rate effects amounted to BRL 50 million, as of which BRL 18 million are impact on deferred tax assets mainly due to U.S. dollar-denominated loans and BRL 22 million arising from Brazilian real denominated monetary items of the offshore vessel joint venture. Excluding these effects, the company's net income would have increased by 21%. In the accumulated first 6 months of the year, EBITDA was 2% below the comparative period in Brazilian reals. This was mainly affected by the decrease in container terminal volumes due to vessel call cancellations and the shortage of empty containers. Although there was a 4% increase in U.S. dollar terms. Net profit increased 8% in the first half to BRL 160 million and was 13% above the comparative in U.S. dollar terms. We now move to Slide 8. Here, we highlight the financial performance of our main business units in the quarter. Container terminal revenues remained resilient as global logistics bottlenecks impacting operational activities were offset by improved warehousing with increased container dwell time in both terminals. In U.S. dollar terms, revenues rose 7%. The Rio Grande terminal was the most impacted by logistical bottlenecks and shortage of empty containers, registering a volume decline due to 38 vessel call cancellations and 3 blank sailings in the quarter. In the Salvador terminal, volumes grew 4%, mainly driven by an increase in transshipment despite the negative impact of the empty container shortage and 17 vessel call cancellations in the period. In towage, revenues grew more than 3% to BRL 262 million, with a 5% increase in the average revenue per manoeuvre. The improved revenue mix reflects the drop in container ship calls, which have a lower average price. In U.S. dollar terms, revenues rose 12%. Our offshore support vessel joint venture continues to show a recovery. Net revenues grew 61% with a 29% increase in operating days and a 25% improvement in the fleet average daily rate. Another highlight this quarter is our international logistics division, Allink, which posted a 36% increase in net revenues to BRL 36 million. This result reflects the high levels of demand and better revenues from both shipowners and terminals. Looking ahead to the second half of the year, we believe that the challenging scenario for container terminals may show some signs of improvement depending on the resolution of port closures in China. And especially in the case of Rio Grande, this recovery is also subject to the reduction of call cancellations and an increase in the availability of empty containers. In our businesses related to the oil and gas industry, we expect the recovery trend to continue with new contracts, both in our offshore vessel joint venture and in the support base division. Moving to Slide 9. Here, we present an update on the global supply chain crisis and the recent impact on the company's terminals. We understand that the logistics crisis scenario is not only a national issue, but a global situation that has impacted maritime and port operations worldwide, maintaining port reliability at extremely low levels of less than 35%. The situation is not simple at all. Recently, the International Transport Forum, an organization linked to the OECD that aims to study and analyze transport modes and their impact on economic development, published a report called Performance of Maritime Logistics, in which the current logistics crisis scenario is the main focus of study. According to the report, the crisis is due to a combination of a series of factors from port congestion to the active fleet capacity managed -- management by shipping lines, which has attracted greater regulatory attention recently. So adding to this complexity with the continued risk of lockdowns in China, the prospects of strikes in European and North American ports and the peak season in the third quarter, the consensus view is that this scenario is likely to remain challenging throughout the second half of the year and probably also during the first months of 2023. Our container terminals continue to suffer the impact of the scenario. Experiencing high levels of vessel cancellations and blank sailings, resulting in lower operational performance for Rio Grande in particular, due to a more pronounced cargo imbalance as import volumes only account for 1/4 of its deep sea volumes. Also, with freight rate increases and the empty container shortage, some shippers have been opting to ship their goods on general cargo vessels, including cargoes rarely transported via break bulk. Moving to Slide 11. On this slide, we can see some of our liquidity and leverage ratios, which, as you can see, have remained solid as a result of a resilient balance sheet and business performance. Bank debt rose in the quarter mainly due to Brazilian real depreciation, increasing the reported balance of U.S. dollar-denominated debt. New disbursements of BRL 65 million from the Merchant Marine Fund related to the construction of new tugboats and fleet maintenance, dry docking as well as other disbursements offset BRL 74 million in loan amortizations in the period. Net bank debt of BRL 1.5 billion, increased 11% compared to 31 December 2021, reflecting the payment of BRL 196 million in dividends to the company's shareholders in April 2022 as well as the impact of the Brazilian real depreciation mentioned above. In terms of cash flow movements, the main outflows in the period were the BRL 70 million in CapEx, mainly for the construction of new tugboats for the company. As a result, we ended the period with almost BRL 151 million in cash. Our leverage ratio remains low although it has increased slightly to 2x net bank debt to EBITDA as a result of dividend distribution in the quarter. In terms of debt profile, 81% of our bank debt is long term and 67% is financed by the Merchant Marine Fund. Well, the presentation ends here, and I'd like to invite you to the Q&A session.

[Operator Instructions] We will now continue with questions asked via text. We received a question from Pedro Fonseca from Edison on what business segments, we have the most room for price increases to offset cost inflation?

I'll answer that. Fernando Salek is speaking here. There is a cost inflation historically in our negotiations, we have been able to incorporate cost inflation in our price discussions. And normally, we are successful at that.

So we received one more question here about the offshore segment and how it has been recovering. They ask, if we could speak a little bit about the current demand and price scenario and medium-term perspectives. I'll pass it on to Arnaldo Calbucci, our COO.

Well, the offshore segment has shown improvements in Brazil and in the world. This is caused by increases in oil prices and definitely by becoming more aware that oil is a fuel that will be necessary for a long time as we transition into a more green metrics. So people are more aware of that now. Demand around the world has gone up from 50% to 70% in the utilization of support vessels. And in Brazil, these figures have been even more expressive. We have seen higher demands and improvements, of course, not great improvements, but a good price improvements. So perspectives are good right now and for the next few years.

We received a question from Marcelo Arazi from BTG asking about margins for the end of the year, considering this challenging scenario should continue.

Marcelo, from our margins perspectives, we expect them to stay at the healthy levels they are in right now throughout the next half. We don't expect any margin compression caused by any challenges in this current scenario.

[Operator Instructions] We have received a question from [ Christianos' Bastos ] from [indiscernible] and she is basically asking how we see the business scenario from the profitability perspective. And what we expect for the maritime -- excuse me, for the tugboat market. So I'll pass it on to Arnaldo Calbucci.

Well, we're working with a scenario of stability for profitability. The important things we are seeing this year are the acquisitions of the Starline Narrowboats from SAAM. This is a positive movement showing that the market is consolidating. And with the demand we have, this will allow us to maintain stability without expanding the Brazilian fleet. So we expect to maintain profitability and as the maritime industry recovers as the bottleneck is reduced globally, we estimate that we'll still have a slight growth.

[Operator Instructions] You received one more question here. In July, Salvador had record volumes. Can you explain why we have this performance in this current scenario? Arnaldo?

Yes, Salvador had important volumes in transshipment and shifting. This is an important movement for volume and also to maintain terminal calls. But to summarize it, we've had important volumes in all segments: imports, exports, cabotage and even empty vessels. This is related to the resilience of our strategy and a strong commercial effort that was very successful, made by our team in the Salvador terminal. Yes, I'd just like to highlight something. Salvador, our terminal doesn't have the same pronounced imbalance between exports and imports. So that helps us to mitigate the effects of the crisis. So although in Salvador, we had some cancellations and so on. The availability of empty containers has not been a big issue like it was in Rio Grande.

We received another question from Alex Paterson in Peel Hunt. Let me read it to you. First, he makes a statement saying that the level of investment in the oil and gas industry -- in the offshore oil and gas industry has been very weak even before COVID began. And he's asking if we have the expectation to catch up, to accelerate capital investments. And if that's the case, what kind of utilization rates, we expect in 2023 or 2024?

Alex, I'll start answering your question. So what you said is a fact, the level of investments in the industry, the CapEx for the upstream oil and gas industry has been very low in the last years. I think for a number of reasons, and even geopolitical reasons are coming to a moment in which we understand that the role of oil and gas as a source of transition energy is essential and will be longer. And of course, oil prices changed investment logic. So I do believe there will be an acceleration towards projects, but they will be selected. And Brazil has a very good position when it comes to competitiveness to receive a significant part of these investments. I think that's the idea. About utilization rates. We expect a gradual recovery of the industry, as Arnaldo said before, we're starting to see that there will be a recovery in 2022. It will continue in 2023 and accelerate in 2024. And we believe that gradually, the utilization rate will go up, balancing offer and demand better for the market.

[Operator Instructions] We have a question from Pedro Moreira from the [ Investments Trail ]. Question is, what is the strategy to increased volumes in Rio Grande on the medium-term after the crisis.

Pedro, what we're doing and what we will continue to do after the crisis passes, this will be very evident. What we're doing is working very closely with our cargo clients, trying to recover volumes like in Rio Grande that are being exported by other ports. Due to the current crisis, part of the cargo produced in Rio Grande has been loaded in other ports, sometimes even in the Port of Santos. So we've been making that effort. With the reduction in cancellations, we believe that this cargo will come back to us. And another point is to work on an environmental solution. which is using our barges in Lagoa dos Patos which is a solution that removes many trucks from the road, reduces emissions and has been widely accepted by clients who need to reduce their footprint. Another point is cargo that migrated to break bulk vessels due to high prices in loading and importing through containers. So importers and exporters were forced to export cargo and break bulk vessels. And we hope that as the crisis goes away and shipping prices go down that they will continue to come through Rio Grande in containers.

Fernando, I just like to add something. Since we're talking about the medium-term here, and here, I would say even medium to long-term. It's important to say this. As vessels grow in size continuously, in Rio Grande, we're very well positioned with draft conditions and so on, to consolidate over time as an important hub for the South of Brazil, including the [indiscernible] region and so on. So this is an important topic that we have been working on with the state so that we can move in that direction. Obviously, another important point is fostering the industry in Rio Grande do Sul, so that it can have a higher demand for imports over time.

Since there are no further questions, I would like to hand it over to Mr. Fernando Salek for his closing remarks. You may continue, sir.

Thank you. First of all, I would like to highlight our satisfaction with the absence of lost time accidents since September 2021. In addition, we were very pleased with the resilient financial results recorded in the quarter. We recognize that the current environment is challenging, but we continue to strive to improve the world-class performance of our infrastructure, the portfolio of our activities and the resilience and versatility of our services. We believe it is the best possible way to address the challenges of our industry transforming maritime transport over time and creating a better future for everyone involved. I'd like to thank everyone for participating in our conference call. I hope you are well and safe. Thank you, and have a good day.

This concludes Wilson Sons conference call. [Statements in English on this transcript were spoken by an interpreter present on the live call.]