The COVID-19 pandemic is affecting demand for vehicles and equipment, disrupting supply chains and production patterns and is likely to affect the group’s operations. The group is taking a precautionary approach to safeguard the health and safety of employees, crew, business partners and members of the public, whilst striving to avoid adverse operational impact. The pandemic continues to progress and evolve, and at this juncture it is challenging to predict the full extent and duration of resulting operational and economic impact on the group. The development of the pandemic and the mitigating actions implemented create uncertainty as to demand for our customers’ products as well as their ability to operate, putting pressure on volumes. In the same way, mitigating actions restricting freedom of movement can disturb our ability to operate efficiently. The impact of COVID-19 on the group’s business in 2020 is at this stage very hard to predict, and Wallenius Wilhelmsen will continue to monitor developments closely and respond accordingly. The group has estimated a 20% reduction in ocean volumes for first quarter 2020 compared to first quarter 2019. The company expects an impact into second quarter, but the extent will depend on the rate of recovery in Asia, the spread of the coronavirus, the corresponding reaction of global markets and the impact on vehicle sales.
Based on the expected volume drop there is an overcapacity in the group’s fleet of 10-15 vessels net of already planned redelivery of charter vessels. To take out capacity and reduce operational costs, the group is considering recycling of up to four vessels, all 24 years or older. The early recycling is expected to lead to a potential impairment of up to USD 40 million. In addition, preparations are being made to initially place up to 10 vessels in cold lay-up. The estimated cost saving for a vessel in cold lay-up is USD 3-4,000 per day depending on length of lay-up. Of the 11 vessels that have been chartered in which are available for redelivery at the start of the year, four have been redelivered and another three will be redelivered before end of June. One vessel has been extended and the remaining three are under consideration.
In line with automaker plant closures, the group is suspending operations at several landbased processing centres, starting temporary layoffs for about 2,500 production workers in the USA and Mexico. At the publication of these financial statements it is difficult to estimate the financial impact on first and second quarter result for the landbased segment as it depends on how long the closure of the automaker plants will last and if other automakers also decides temporary closures.
In addition, the COVID-19 breakout is an indicator of impairment for assets such as goodwill, other intangible assets, vessels and right of use assets. The value in use impairment assessment for these types of assets may be impacted by the COVID-19 breakout in connection with reporting of interim financial information for the first quarter 2020 and onwards.
Per end of 2019, the group had a solid liquidity situation, with cash and cash equivalents of USD 398 million and around USD 377 million in undrawn credit facilities, which makes the group well prepared to handle a downturn. The only covenant on group level, related to the group’s bond debt, is limitation on the ability to pledge assets. All financing at the level of the different business units have covenants measured on the level of the business unit. The bank and lease financing of vessels have financial covenant clauses relating to one or several of the following minimum liquidity, current assets/current liabilities, loan to value clauses, and in some cases fixed charge/interest coverage. The financing for the landbased segment has covenants related to net interest-bearing debt/EBITDA, equity ratio and minimum liquidity. We do not see any risk of covenant breach in the first quarter as a consequence of the COVID-19 pandemic. As the impact on our customers’ production, as well as market demand for their products, evolves week by week, we will continue to monitor the situation closely.
On 30 March 2020, it was announced that Torbjørn Wist will join the group as Chief Financial Officer starting 1 October. Mr. Wist is a Norwegian national who today is CFO at the Scandinavian airline SAS.