AN assiduous debt reduction strategy including the sale of two vessels has helped livestock shipping charter company Wellard Limited to this morning announce its first full year profit since its public listing in December 2015.
The Net Profit After Tax (NPAT) profit was a modest $0.2 million, but was partnered with a doubling of EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) to a best full year result of $23.3m, and a reduction of net debt by around $103 million, down by 92 percent year on year.
In the past financial year Wellard completed the sale and leaseback of the M/V Ocean Swagman to a subsidiary of major shareholder Heytesbury Holdings Company Ptd Ltd for A$33 million and the sale of the M/V Ocean Shearer for A$77.8 million to Kuwait Livestock Transport and Trading Company, which renamed the vessel the Al Kuwait.
That has reduced the number of vessels the company owns to three – the M/V Ocean Drover, M/V Ocean Swagman and M/V Ocean Ute.
Wellard said the proceeds from the sales of the Swagman and Shearer were used to pay off both ship debt and corporate noteholders to reduce its net debt from $111.8 million on 30 June 2019 and $84.5 million on 31 December 2019 to just $8.9 million on 30 June 2020.
The company’s strategic shift from being a major livestock exporter to a livestock vessel charter business and the reduction in its fleet has brought a significant decrease in revenue from $235.1m to $87.6m, which brought a corresponding reduction in gross profit to $27.9 million, down by 28 percent year on year.
However gross profit margin almost doubled from 16.5 percent to 31.8 percent with the transition in business activity.
The results show Wellard is beginning to realise the benefits of its ongoing debt restructure program, Wellard Executive Chairman John Klepec said.
“The Company is in a vastly superior financial position than it was 12 months ago,” he said.
Despite reducing debt the company retained $16.8 million cash at hand at financial year end.
“The changes we have made to Wellard’s debt structure, operating base and business strategy have begun to yield results,” Mr Klepec said in the company’s statement announcing its full year result to the ASX this morning.
“While we would have preferred a higher NPAT, it was a good result given the global COVID-19 disruptions during the second half.
“More importantly it demonstrates a positive trend over the last three years, and we are heading in the right direction.
“With low net debt, a healthy cash balance, reduced cost base and a reasonable order book of charter activity in the near term, the Company has started FY2021 in a robust financial position.
“We have completed our balance sheet restructure to provide the Company with greater financial resilience, and I’m pleased to say this is the first set of financial results since listing where Wellard is in full compliance with all of its financial covenants.”
Mr Klepec said the FY2020 result was aided by a further halving in operational and administration expenses as part of an ongoing cost savings strategy.
“We are getting greater stability into our earnings and with the balance sheet restructure now completed, our interest bill has been reduced considerably. This is already enabling better conversion of revenue into profit for shareholders,” Mr Klepec said.
“Our fleet is now right sized for the current market conditions, so although the fleet is smaller the company is more financially resilient with a more robust balance sheet and better fleet utilisation. This places us in a good position to capture sustainable growth opportunities.”
“Importantly our cost reductions have not come at the expense of animal welfare outcomes and ongoing maintenance of the fleet, with management focussed on both these key success indicators.”
Nearly all the debt is now shipping finance and the ship loan to asset book value ratio has improved from 61.9pc a year ago to 37.6pc at the end of the reporting period.
For the first time since listing on the ASX Wellard is in full compliance of all financial covenants, the statement said.
Mr Klepec said the biggest impact to the companies operations caused by the COVID-19 pandemic has involved the restricted ability to undertake crew changes and longer berth times at each port of call as countries adopted new procedures.
“We have only recently been able to divert our vessels to ports where some crew changes could be achieved, increasing ballast voyage sailing times which has both a direct and an opportunity cost to the Company.
“Only one voyage experienced a direct demand-related COVID-19 impact, when two charterers on a multi-charter voyage to Indonesia materially reduced the area chartered at late notice due to an importing customer issue related to COVID-19.
“No other charters have been directly impacted in this manner.”
The company described the current outlook for the first half of 2021 as “good” with all available tonnage chartered (with the exception of the M/V Ocean Ute which commenced six weeks of planned drydock in August) for the first quarter and a good pipeline of both confirmed charters and opportunities for the second quarter.
Chinese demand for Australian and New Zealand dairy and beef breeding cattle, a large contributor to Wellard’s vessels’ activity in FY2020, showed no signs of slowing, it said.
The M/V Ocean Swagman is close to completing a successful charter from Chile to China with very good results, the company said, opening a potential new market opportunity in transporting breeding stock from South America to China.
There was less certainty around is Wellard’s two other core markets – Australian feeder cattle to Indonesia and Australian slaughter cattle to Vietnam.
High Australian cattle prices are presenting challenges for exporters servicing the Indonesia and Vietnam markets as they seek to compete with alternative proteins, Wellard said.
“Despite expected high cattle prices remaining in FY2021 as the herd rebuild continues after drought, placing downward pressure on the volumes exported, there will still be a volume of cattle shipped albeit at lower volumes than previous years.”
The key South America to Turkey trade also remained uncertain, with import permits for small shiploads of cattle being released at present.
“If Turkey starts to release more import permits and for larger numbers, the M/V Ocean Drover could be deployed from its Australian base to that trade.
“With this trade currently operating at a trickle, and Australia’s annual northern hemisphere summer live export suspension in force, most large vessels in the global livestock fleet have been at anchor awaiting the issuing of Turkey import permits.
“Until the idle shipping capacity is utilised in the market there is no likelihood of any improvement on ship charter rates in FY2021.
The statement noted that in 2020 the Wellard fleet reported one of the highest success delivery rates in its history.
Of the 335,250 head of cattle loaded during the period, our vessels delivered 334,882 cattle, recording a success rate of 99.9pc, and of the 95,360 sheep loaded during the period, our vessels delivered 95,164 sheep, recording a success rate of 99.8pc.
Wellard is a plaintiff member of the successful class action against then Federal Agriculture Minister Joe Ludwig’s decision to ban the live export of cattle to Indonesia in 2011 and was the largest cattle exporter to Indonesia at the time. It noted it is still unclear what the quantum of damages awarded to the class of plaintiffs might be or when any payments will occur.
Wellard is also the target of a class action launched against the company in March 2020, which is based on allegations the prospectus which preceded Wellard’s December 2015 initial public offering contained forecasts that were misleading to investors.
Wellard’s statement said it has lodged its defence in response to that action.
“The Company has been asked by a number of shareholders whether it possesses Directors and Officers (D&O) liability insurance,” the statement said.
“The specific arrangements Wellard has with its insurers are confidential, however, as would be expected of a listed public company, Wellard has various insurances in place to deal with a variety of risks and the Company would be expected to give ongoing consideration to its entitlements under any potentially relevant insurance.”
Transition to US$ reporting
Wellard said its board has decided to report future financial results in $US, as its strategic move from livestock trading to livestock logistics services and the consequent refocus on the chartering activity of its Singapore-based subsidiaries means nearly all of the Group’s revenue and expenses are conducted in US Dollars.
Click here to view Wellard’s full ASX Announcement.