Wallenius Wilhelmsen Asa

Good morning and welcome to the first quarter presentation by Valerius Willemsen. I will present together with our CFO Torbjörn Vist that will join me later on the numbers. As always, please type your questions in the chat and we will have a Q&A after the presentation. So let me start head on. We delivered another strong quarter in the first quarter of 2024 with an EBITDA of $438 million. We delivered very strong numbers, both in logistics and in government. And despite significant challenges, both in the Red Sea and Baltimore and other places, we delivered strong numbers also in shipping. We see a continued strong customer demand. Basically, we are sold out in shipping. And we see rates improving both year on year and quarter on quarter, thanks to new contracts signed by the end of next year and early this year. The high and heavy piece element was down to 25% in the quarter, but fully compensated by cars, which increasingly narrowed the gap between high and heavy on cars on freight rates. In the quarter, we announced that we have ordered four more new buildings. So in the Shaper class, we now have eight vessels altogether ordered. And we have announced our new commitments on sustainability. We have now a very clear and explicit target of net zero in 2040. And we have set a target of delivering a 40% reduction in 2030 as compared to 2022. And last but not least, despite external events and shocks around us, we still expect 2024 to be somewhat better than 2023. Let me take you through some more details, starting with the EBITDA and the return on capital. Still, we see a positive trend in this, and we are in an all-time high on the long-term average for our EBITDA, and we are above 60% on total return on capital employed for our total company. Red Sea has been a big topic in the quarter. We decided on December 18, 2023, to not transit through the Red Sea due to the security and safety situation there. The rest of the industry followed thereafter, and as you can see from this picture, today hardly any vessels transit the Suez Canal in the railroad segment. We believe this is the new normal, and the situation in the Red Sea is a part of a much bigger security situation in the region, and we do not think that we will be back in the Red Sea until we see a solution on the ground. We do not think there is a military solution to this problem. Hence, we are planning for this situation to last, and we are now making our plans to transit around Africa for still quite a while. Altogether, if this situation continues for the full year of 2023, we expect a financial impact on us in the range of 90 to 100 million dollars from the Red Sea alone. We committed to updating our emission targets and net zero in 2040 is now our announced target. We are working hard on this every day and I'm very happy to say that we are already on track. And this is thanks to the huge effort we do on energy efficiency and we drive down the energy use on every single vessel every year for quite a period. We use everything from physical investments on the vessels to AI on the bridge and how we trade and optimize our trade network. We are looking into new fuels and more than 10% of the fuels we will use in 2024 will be of a biofuel blend. And we are looking into electrifying everything we do across the logistics chain, meaning that we are now setting up a zero emission trucking. We are investing in zero emission handling equipment in our terminals and processing centers. And we are looking and investing into renewable energy. In our strategy, we have said that we will provide the world's first net zero end-to-end service by 2027. And we still think this is doable. So then to the numbers for the quarter, starting with shipping, we saw a decline of close to 10% in volumes quarter on quarter. This is more or less only due to the Red Sea effect where we had to reschedule our vessels, some of them already all the way down in the Red Sea or well up in the Indian Ocean when we decided to reschedule by the end of last year. So we had an extraordinary strong effect in the first quarter on volumes transported. This is not to be read as any weakening in the demand for volumes, rather the opposite. Due to now the loss of more or less 5% capacity over a year due to the Red Sea, there is even tighter capacity in the market, and I will come back to this a bit later in the presentation. The high and heavy portion of our trade were 25%. This is less of a problem for us than it used to be because we have renewed a lot of the car contracts and narrowing the gap on the earnings on cars versus high and heavy. And we also do, and I'll come back to that, think that the high and heavy volumes will come back up in the period to come. This affects the increased rates in our portfolio and also the fact that we are sold out is shown in our net earnings. And as you can see, we are now at an all-time high on our time charter equivalent of $59,000 a day as the average of the fleet. The demand for transport is still very strong. This is despite the fact that we see somewhat slowing in production of cars. The global sale of cars is expected to grow two to 3% in 2024 versus 2023. However, during 2023, there were strong production of cars and inventory was built up. So we now see a little bit of a slowing in terms of production and exports, but we think this is temporary due to the inventory. Having said that, we still see a significant growth in the exports out of China and in particular into Europe. And year on year from 23 to 24, the export out of China is expected to grow more than 25%, of which the majority and more than 80% are deep sea exported volumes. So in general, the demand from ex-China volumes more than outweigh the somewhat slowdown in the global production of cars. The high and heavy volumes are down from all-time high, but still well above historic average. And the numbers you see here are adjusted for inflation, so these are relatively neutral if you look on the history, meaning that we still see very strong high and heavy volumes, but somewhat down from the all-time high in 2023. We see that the mining sector is still strong and have a strong demand. In construction is mixed, residential construction is slowing down while infrastructure is picking up. And on agriculture, there's no doubt that volumes will be down in 2024 versus 2023, partly due to falling commodity prices and less investment capacity in the agri sector. However, we know that this is a cyclical sector and that the need for agricultural machines will come back up. So in the medium to long term, we are optimistic on the high and heavy volumes. And for now, it is actually helpful to us that there are somewhat more muted high and heavy volumes versus 23, because we have so much to do in the cars and they pay well. A big concern among many is the order book. And yes, the order book is substantial and approaching 40% of the fleet on water. Our view, and we have repeated this earlier, is that we need this order book structurally to renew the fleet and grow the fleet towards 2030. And then there's no doubt that we have six years of fleet capacity replacement coming maybe in two to three years. So the challenge is what happens in the short term. We have made a little illustration to show that we think that the market will maintain tight also in 24 and possibly also into 25. On the illustration, you can see that we believe, and for simplicity, we're saying that the fleet were sold out in 2023. Then we have a fleet growth coming in this year, which will increase the supply side. And we have... a demand growth out of China of more than 10% net on total demand, also adjusting for the Red Sea, we actually see a tightening this year in terms of supply demand for rural shipping. Moving into 2025 is of course much harder to forecast, but if we just from an illustration perspective look at the fleet growth of some 11% next year, If we see the same demand growth, that means that the situation out of China continues, that more or less outweighs the increased supply in 2025. And this is assuming that there is no extra sailing days due to the Red Sea, i.e. the Red Sea situation is resolved. So if the Red Sea situation continues, And the China growth in exports continues. There are indications that even the significant fleet deliveries in 25 will be outweighed by demand. But again, and let me be very clear on this, this is more for illustration. This is not a forecast. However, for 2024, we feel quite firm that this is going to be a very tight and maybe even tighter year than 23. And this is important for us, not because we are much exposed to the spot market, but because we are renewing contracts in this market. And 2024 is a very important year for us. We will renew some 46% of our contract book with some of our most important customers. And we see that there is strong demand for services. And most of our customers are advancing their dialogues with us because they need to secure capacity. Moving on to logistics, the big event of the quarter was by no doubt the bridge collapse in Baltimore, a tragic accident causing loss of life and also having significant impact on us. We had one vessel stuck inside or behind the bridge and the collapsed bridge when it happened, and that was Carmen. Luckily, we were able to take her out on April 25th. Still, there is only a temporary channel open, but we are really impressed and happy with how they are working both on a federal and a state level in Baltimore to solve this. And it seems that there will be a permanent opening of the channel within May. And we are now assuming that we will be back to normal operations as of June. In total, we estimate that the incident in Baltimore and the consequentials for us are in the range of 10 to 12 million dollars. Logistics continue to deliver strong results. That is partly due to the increased car volumes processed, in particular in the US, and we see that the activity is growing and the margins are still strong. In high and heavy, we still see a high activity, but the margins are falling a little bit. And that is partly because the products are moving a bit slower. So we have a little bit less of processing, which is high margin, and more of storage, which is lower margin. But still, our facilities are pretty much full of equipment. Terminals suffered from the fact that we had less volumes on our vessels in the first quarter, and hence there were less volumes coming into the terminals. But still, terminal capacity is very tight, and we expect this to continue to be an issue going forward. The inland area of our logistics business has seen some softening, a lot due to less moves on high and heavy inland, both in the U.S. and in Europe. But overall, we are very happy with the numbers we delivered in logistics in the quarter. And as I said, logistics have a very strong footprint in the U.S., and we believe we are the leading player when it comes to car and heavy equipment logistics in the U.S., Last year, we processed, either in the factories in the US or imported and exported cars, close to 2.5 million units. We processed more than 100,000 high and heavy pieces of equipment, and we had more than 300,000 cars and units going through our terminals. And when we say processing, that means putting in and adding value to the cars and to the equipment. And for some of the heavy equipment, we're actually assembling the last pieces of the equipment before it goes to a customer. We have a wide network across the US, and we announced in the quarter that we have now opened our new Brunswick facility, which will be the biggest in the US, somewhat 40% bigger than the second biggest terminal and processing area in the US as of today. And we are now able to service this terminal from all our three brands, And if you take a very close look, you can both see Valenius Veljamsson, UCOR and ARC in Brunswick using this terminal. We also have significantly upgraded processing facilities, in particular for EPCs. And we now see that customers like Caterpillar and Devalon and others are really looking at how they can integrate even more with our processing to create an integrated supply chain solution for them. So this is both a capacity development for us, but certainly a new strategic capability within logistics in the market, the US, that we see have a strong growth and development, both domestically for imports and for exports. Then I will end up with sustainability. And we are very much focusing in on sustainability. And for us, safety comes first. As we presented in the last quarterly report, we unfortunately had a tragic fatality in the quarter. But we are very happy to see that the hard work we put down on safety gives us an improvement in the underlying results. So the lost time incident frequency is down both in shipping and in logistics. Despite the fact that we had to reschedule the whole fleet in the first quarter and also adjust with some speed for a limited period of time, we are still able to deliver on our targets on decarbonization and we will deliver on these targets by the end of the year. We will not compensate for the Red Sea by increasing speed, as this would make us unable to deliver on our decarbonisation targets. We are very much committed to that, and we will deliver by the end of the year. So with those words, I pass it over to more details on the financials to Torbjörn.

Thank you, Lasse. Good morning, everybody. Let's jump right into it, turning to the financial highlights. As Lasse mentioned, Q1 was another strong quarter for us, despite some of the external events, like the Red Sea as well as Baltimore, and I will come back to some of that in a bit. Revenues was marginally down, EBITDA as well, mainly related to the volume effects coming out of the Red Sea. Our cash generation continues to be strong, and when you combine that with the repayment of debt, that has contributed to the net debt falling even further. As a result of our capital structure and as a result of the results, we continue to deliver exceedingly well on all financial targets set out on the right side of the page. Jumping into the segments and turning to shipping, first quarter was really the quarter where the Red Sea effect really hit us. We stopped trading through the Red Sea in December, but given prorating effects, the first quarter is really when the effects started to come through. We continue to be sold out. The utilization is extremely high. And as we have mentioned in the past, this contributes to a fairly favorable backdrop for contract negotiations and business activity. The EBITDA, however, is down on less volumes. And I will come back to the usual revenue and EBITDA bridge. But the EBITDA effect of the revenue side has been somewhat offset due to improved cargo and voyage expenses in the operation. Logistics, Loss has already covered that. If you sort of take out some of the extraordinary effects that hit both the fourth quarter as well as the first quarter, overall it is stable, strong delivery from the segment. If you remember in the fourth quarter we had some provisions for employee bonuses. This quarter we have healthcare costs and other things which kind of distorts the numbers. But if you strip those out, the underlying performance is solid and stable. U.S. cargo in the government services continues to perform very well. We have covered that well in the past, but clearly all the activity both within the U.S. and NATO as a result of the security situation in Europe continues to contribute favorably to the performance of this segment. So if we then jump into the revenue and EBITDA bridge, if you look at the top chart, you can see that the volume effect, call it the Red Sea effect, was about 80 million US dollars. This volume effect was partially offset by a higher revenue per CBM as some of our renewed contracts are starting to shine through the numbers. We also had a slightly positive improvement in the fuel surcharges, which also helped offset some of the revenue effect. But as I covered on the first slide, the revenue quarter over quarter was a little bit down. Moving down to the EBITDA chart on the bottom, we take down the revenue change of $26 million. In other news, fuel cost increased a little bit in Q1, as a result of which the fuel cost took away a further $22 million. As mentioned in the previous pages, the improved cargo expenses and voyage expenses helped offset all of the fuel cost increase as well as part of the revenue effect. So you can see that the overall delta in terms of the EBITDA in the quarter is 16 million versus a 26 million dollar top line change. We continue to see a positive increasing trend on cash flow per share with a strong operating cash flow conversion within the business. The reason why the LTM free cash flow to equity per share is down is mainly due to higher scheduled debt repayments in the quarter. Jumping to cash, the cash on hand increased by $148 million, and again, very much driven by the solid operational performance. The net capex, a fairly marginal number, includes investments related to dry dock, projects, and other tangible assets. The net debt development consists of scheduled debt repayments, offset to some extent by a net positive refinancing effect of the financing done in ARK in relation to the purchase of ARK Honor from shipping. Our undrawn credit facilities remain at 372 million. For those of you who follow us closely, you will have seen that the AGM approved our revised dividend policy here last week. And we then have an upcoming dividend payment of $288 million by the end of May. Also like to point out that we have about 800 million of commitments related to the vessel purchases for the eight vessels that are on firm order. We are now in the process of securing financing for the first four, and we do register a very, very strong interest from our partner banks. Finally, in terms of the balance sheet, the equity ratio ended at 46.6% at the end of Q1, slightly down from 46.9% in Q4. This is essentially the solid profit that we generated was countered by a dividend to the UCOR minority. As mentioned in the annual report, and I think as covered in the last quarter, given our structure, the way cash is upstream from UCOR is through dividends. We there have a 20% minority in our partner, HMG. And when there is an upstream of dividends to the mothership, then there is a dividend stream going to the minority shareholder there. The net debt declined mainly due to the debt repayments and the cash flow. We have 19 unencumbered vessels at the end of this quarter. And we're very proud that Marine Money has awarded us the Green Category Deal of the Year for our 2023 Sustainability Link Bond. So with that, I will hand over to Lasse for the prospects.

Thank you, Torbjörn. As I opened with today, we see a strong 2024 and we believe 2024 will be somewhat better than 2023. This is despite the lower volumes in high and heavy and also the fleet growth. The driver of the tightening is the demand from exports ex-Asia and also the situation in the Red Sea. And we believe this market will be supportive also for the contract renewals, which will provide us with contract backing also for the years to come after 2024. We are a global company faced with more or less all risks that exist out there when it comes to geopolitics and trade. And of course, this is something we watch very closely. We estimate that for the full year of 2024, the external events, primarily linked to the Red Sea and Baltimore, will have a financial implication for us in the range of $100 million, which is, of course, included in our forecast when we conclude that, despite this, we believe 2024 will be somewhat better than 2023. So with that, we open up for questions and let me invite Torbjörn Anandas back to the stage.

Okay, we have a few questions so far. The first probably to Lasse. It goes, it's from . Ordering new ships, how will it affect dividends in both short and long time?

Well, the ordering of vessels are already included in what Torbjörn said in our financial plans. When you order vessels, you have installments coming over a period of time. And of course, investing in vessels will take some cash. But in our policy, we have said that we have 30 to 50% of our net profits will be dividends, meaning that we are reinvesting the other half of our net profits to the business. So by and large, you can say that the new building problem will not affect our ability to pay dividends.

Then one from Ove Heltman. It goes on the phasing in on revenue, really. From my understanding, the full impact of the contracts renewed in 2023 has yet to show up in 2024 Q1 financials, but there will be an uplift in Q2. Is that correct?

That is a fair assumption, but not totally correct. We see some effect of it in Q1, but quite some of the volumes in Q1 were loaded in 2023 with 2023 rates. So yes, we will see an increasing effect of the new contracts into Q2, but there were also effects of this in Q1.

And then a follow-up in terms of what do we see for this year in terms of contract renewals? What is the timing and when do we expect it to show up in the next year?

This year, it's also quite tail-heavy, meaning that it's towards the second half of the year. The process has already started with most of our customers. We're already in active discussions. But most of the renewals are towards the end of this year with effect from late this year or early next year.

Then there is a question.

Just to add on to that, as you would have seen on one of Lasse's slides, this is a year where about 46% of 2023 volumes are renegotiated. So this is an important year. The reason why the percentage is so high is, of course, that we have the so-called OCC contracts with Hyundai Motor Group, which will be negotiated this year, taking effect from next year.

Then there is one from Petter Haugen at ABG. To what extent does the 2040 net zero target require new ships and what is the likely timing of orders for such?

For short, for us to get to net zero in 2040, we need to renew a large part of our fleet. We have in our plan, and we will come back to much more details on this, but in our plan there's also a significant element of biodiesels to be used on existing vessels. But there's no doubt that it requires new vessels. We have said that we will only order new vessels that can take us towards net zero, and we will probably need to use various technologies and fuel sources. The new building program that we have announced is, of course, a part of our net zero strategy and also needed in terms of fleet renewal. And as of now, we have committed to eight vessels.

Yeah. Then there's a question from Jakob Walla. Can you indicate annual dividend in present market as Vavi is lacking peers? That's probably for you, Torbjörn.

Well, As you recall, at the AGM now, the new dividend policy that was proposed by the board was resolved. This has now gone over to a semi-annual pay-as-you-go dividend. As we have said, 2024 will be a year where you will have the dividends for 2023 plus on top of that will be any dividend declared by the Board for the first half of 2024. The second half would of course be payable in 2025. We don't give any indications as to call it the level of the dividends, other than to say that the company, management board, etc. are very committed to compensating our shareholders fairly. And this year, obviously, given the sort of combination of the two, is a fairly bumper year.

And just on your comment also regarding pairs, of course, we cannot comment on pairs, but we have a policy, a very clear policy, where we would have 30 to 50% of our net result will be dividends. The other piece will be used to reinvest in our business, in vessels, and in other growth opportunities. And we see both a significant need to renew our fleet over the next decade, and significant growth opportunities outside of shipping. So we will have a good balance between dividends and reinvesting in the business.

Here's another one for you, Torbjörn. What kind of leverage ratio, loan-to-value, are you comfortable with over the next few years? And then follow on in terms of what portion of your 2024, 2025, 2026 maturities is expected to be refinanced?

Okay, starting with the last one, we've already communicated that the 24 maturity, the remaining part of the 24 maturity, because as you remember when we did the Marine Money Awarded Sustainability Link Bond last year, we used a significant chunk of the proceeds there to purchase back some of the 24 maturity. The remainder we expect to repay. The remaining three bonds, our intention is to keep those outstanding so that we have, in other words, refinance as they come up to maturity, so that we have at least three bonds outstanding in the market at any point in time. So, the first question was? The first part of the question, rather.

The first question was?

Hold on. So, the leverage ratio. Yeah, the leverage ratio. So, the leverage ratio, what we have in our financial targets is to say that over the cycle, long-term, we want to remain under three and a half times. Of course, now, we are exceptionally strong. Loan to value is not something we look at, call it in the context of that particular leverage ratio, but what I can say is that in connection with the, call it the financing of the new vessels, we are looking at sort of 60 to 70% leverage on those new vessels. And as mentioned, there is a very strong level of interest from the banks in terms of participating in financing those.

Just as a reminder, if you have questions, please talk to me in the chat box on the webcast. Then we have a question from . What was the quarter-over-quarter and year-over-year change in volumes adjusted for the rerouting?

Well, that's really hard to say because we have the volumes here. But the fleet is more or less the same. It's a little bit down. The demand is very strong and we are fully utilized. So the effect quarter over quarter of close to 10% is principally due to the Red Sea. So there is no weakening in demand, rather the opposite. We see that that cargo is left behind in Asia because all the operators are now transiting around Africa and have less capacity.

There are no further questions right now, but we'll pause for a few seconds in order to allow for a delay. But again, if you have questions, please type them in the chat box. There seems to be no further questions.

Okay, then let's conclude. Thank you for following. And as we said, we have delivered another strong quarter despite significant external events. And we believe that 2024 will be another strong year, somewhat better than 2023. Thank you.