WFS - Q2 20 results call and comments

All,

With these relatively reassuring results, WFS buys some time to consider its next steps. We remain cautious on the name. We continue to see air freight as being much less impacted than ground handling, both in the short and in the long term. We also see air freight as a structurally higher quality activity, with more barriers to entry and advantages of scale. However, the company has had a disproportionally large amount of EBITDA addbacks, and its capital structure was unsustainable even before the coronavirus. 

WFS Q2 20 results came out not as weak as initially guided (“monthly EBITDA loss of single digit millions”).  As expected, the company’s exposure to the air freight segment partially mitigated the major slowdown in the ground handling division. The liquidity outlook is relatively reassuring, as it suggests WFS will have a bit more time to either try to weather the storm or to have less hurried discussions with creditors on a potential solution to the capital structure. And as we anticipated, airline bankruptcies are beginning to take a toll on the company’s collection of receivables.

Key takeaways:
- Sales down 39% yoy in Q2 20.

- Adjusted EBITDA at negative EUR-4.1m in Q2 20, vs EUR+35.2m in Q2 19.

- EBITDA addbacks in Q2 20 declined to EUR1.5m from EUR13.8m in Q2 19. Note that some of this improvement is due to temporary furlough measures.

- Adjusted EBITDA tuned positive in July and August.

- EUR8.8m of provisions taken on airline bankruptcies – Thai, Avianca, Air Mauritius, and the key Brazilian subsidiary of the LATAM group in July.

- Gradual improvement in air freight market trends from April (-27.7% yoy) to May (-20.3% yoy) and June (-17.6% yoy); July -16% and August -13%

- Less improvement in ground handling market trends from April (-94.3% yoy) to May (-91% yoy) and June (-86.5% yoy). July -66% and August -60%

- Revenues by segment:  EMEAA Cargo revenues – 30.8% yoy. EMEAA Ground -77%. North America -24%. South America -95.9%.

- Cash reserves of EUR194m at the end of June.

- FCF positive due to significant working capital-related cash inflows. This boost is expected to unwind in 2H 20 but this unwind should also extend into 2021 and even 2022, depending on the speed of the recovery.

- Management continues to pursue further liquidity measures including the French state-backed PGE loan.
Please feel free to reach out if you would like to exchange ideas on the name. 

Juliano