Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2020-Q1

[Engebret Dahm, Chief Executive Officer]

Welcome to the first quarter result presentation of Klaveness Combination Carriers. My name is Engebret Dahm. I'm the CEO of the company. And together with me, I have Liv Dyrnes, CFO.We will go through the questions after the presentation. Please send in questions while we present on this webcast solution.So in our business, safety is priority #1. And in this time, COVID-19 times, especially the safety of our seafarers is important. We do whatever we can to ensure that there are no spread of the virus to our ships. We have made a number of precautionary measures to make sure this happens. And we're pleased to see that through this quarter and to date, there have been no incidents on board the ships. The ships are operating fine, no -- without any problems, thanks to our -- the dedication of our crew.Just to remind you who we are. We -- the KCC stands out in the standardized shipping world with unique solutions, which we have developed over time. We are the world leader in combination carriers, having 80% of the world fleet of combination carriers, including newbuilds. We have 2 types of ships. We have the CABUs. We have 9 ships on water, which are servicing the alumina industry, transporting caustic soda one way and dry bulk the other way, competing against MR tankers in the caustic soda trade and dry bulk in the -- Panamax dry bulk in the dry bulk trades. We have 3 CLEANBUs on water, the new generation of ships, which are full-fledged LR1 tankers, and a Kamsarmax bulk carrier at the same time. We have another 5 ships delivering over the next 9 months.Our concepts, which are combining wet and dry in an efficient trading patterns, ensure that we are the -- by far, the most carbon-efficient shipping solutions around today. We have set ambitions to improve further, to reduce emissions and energy consumption on our ships and improve operations and to reach the target of carbon-neutral operation in 2030. The ability of our ships to load both dry and wet cargoes and switch between the markets. Next, that our ships are more flexible and has a more diversified earning space than most other shipping segments. And we see we benefit that in a number of instances over the last year. Seeing in the third quarter with very strong dry market, the switching between dry and wet made the earnings stand out. And while the market fell into the first quarter, we substituted dry loading on one of our trades with a wet loading, which we have on -- in our combi trades, the possibility we have, which increased earnings. And we also saw that coming into April, we fixed all our CLEANBUs in -- on time charters, where asset tanker -- when the tanker market overshoot. So this shows, again, the flexibility the concepts have, which are extremely important in the volatile markets we have in the shipping world today.So again, pleased to present the results for the first quarter, the strongest clear quarter we ever had in KCC since the company was established in 2018. We have earnings of the CABUs and CLEANBUs about $20,000 per day. We have -- with the same fleet, as in the fourth quarter, we have a 40% higher EBITDA, and we have a result of $4.3 million in the first quarter.The extremely strong tanker market over the recent months, in our opinion, was short-lived, which has shown to be the case. And we decided to utilize this short period of time to do whatever we can to fix earnings ahead in time. And we fixed, as mentioned, 3 ships on CLEANBUs on time charter. We extended 2 contracts, CABU contracts, and we also sold FFAs derivatives ahead in time for the tanker market.We're also pleased to see that with the conclusion or credit approval of the last finance facility of the CLEANBUs, our company is fully financed, including the issue of a new bond we did in January this year. And based on the positive results, the Board decided to triple the dividend payments to $0.03 per share for the first quarter.The CABUs are servicing, as mentioned, the alumina industry, and alumina is the intermediate product in aluminum production. As you know, the aluminum industry is hardly hit by the COVID-19 situation due to much less demand from auto industry, construction and aviation, for instance, meaning that there are a number of smelters that has been curtailed and production falling off.All our alumina refinery customers in Australia and Brazil are among the world's most cost-efficient producers. And they are maintaining production at full production. And from what we understand from our customers, there are no plans to reduce production on these plants. So that means that we are seeing on to the right of this slide, you're seeing the number of bookings of caustic soda cargoes. And we are seeing that in the first half of this year, we have managed to increase considerably from the second half and especially from the first half of '19, where we had the issues around the Alunorte refinery in Brazil. We are seeing that changes in the caustic soda market caused by the COVID-19 situation leads to regional price differences of caustic soda, which are supporting our main trades from Far East to -- and Middle East to Australia, meaning that we are confident that we can fill up the full capacity of the CABUs in the caustic soda combi trade for this year.So the results of 2,000 -- $20,283 per day in the second quarter, up by around $1,200 per day. It's a very strong results. It is impacted by a settlement of -- from one of the customers for underperformance in 2019 of about $800 per day impact. And the good results are part, as I mentioned, that we have a more or less full utilization of the ships in our combi trades. Secondly, we did renew contracts at the end of 2019 at good levels. And it's also right to say that the results are negatively impacted by the poor dry market, dry bulk market and the low -- the falling fuel prices.Looking -- going over to the CLEANBUs, where the phase-in of the CLEANBUs are continuing and are progressing well. We're seeing that during the quarter and year-to-date, we have increased the number of customers. We had substantially increased the number of terminals that we have called. And we're also pleased to see that we have doubled the number of dry to wet switches. And we have reached in a very important milestone in the quarter, where we have done the first switch between dry cargo and jet fuel, which is the most demanding type of wet commodity we transport. And that happened now in May in Japan after we completed discharge of grain cargo from South America to China. So this is a major milestone and shows that our ships are able to transport the most demanding CPP without any trace of carbon contamination.Looking at the CLEANBUs, we have increased the share of the capacity in combi trades in the first quarter. And -- but we have maintained one ship in -- asset tank in the tanker trade to develop new trades and to increase the number of terminal acceptance.The earnings in combi trade is very satisfactory, over $24,000 per day, exceeding the earnings of standard LR1 tankers. While the earnings asset tanker is somewhat below and -- which is due to the fact that operating only 1 ship in the tanker market is not ideal. So the results of close to $21,000 per day for the first quarter is positive, and we are pleased to see again that we are getting good earnings in the combi trade and 2/3 of the ships in combi capacity, slightly underperforming the LR1 market but more than 3x the earnings of a standard dry ship.Looking on operation of the ships, we are pleased to see that the off-hire is minimal for the CLEANBUs for the first quarter. We are seeing that after a fairly demanding 2019 with a lot of guarantee works on, especially the first ship, operation is strong.There will be some -- the one guarantee item remaining on ship #2 and 3, which will be made for the -- 1 of the ships during the fourth quarter of the year and 1 ship during the first half of the year, which will impact off-hire but -- which will be covered as a guarantee item by the shipyard. The COVID situation at the shipyard and delays has impacted delivery of the remaining newbuilds. We expect CLEANBU #4 to be delivered in mid-July and the remaining ships to be 1 to 2 months delayed.Also looking on OpEx, we have had a good development. The CABUs are in line with expectations, about $7,100 per day, which is slightly above the year-end target. The CLEANBUs has also come down substantially in operating cost from $10,300 per day in the fourth quarter, which included a number of start-up costs, down to close to $8,400 per day in the first quarter.The target for this year for the ships that are in operation, the 3 ships that were delivered last year, is about $8,100 per day, while we expect the new ships delivering to be on-hire due to start-up costs. We have, as mentioned, high ambitions when it comes to decarbonizing our business. And we have a number of ongoing projects, including investing in the ships during the upcoming dockings of 3 CABUs. And we also a number of initiatives to improve the operational efficiency, to reduce carbon emissions per vessel and to improve the carbon efficiency further of our ships.The individual KPIs for one quarter isolated, it's difficult to make sense of. But as you see from the below, where we have the carbon efficiency to the left, which is the best ever at 7.2. The ballast is slightly up because of one positioning voyage from Far East to U.S. with a lot of ballast, while the CO2 emission is up, mainly due to calculation method, reasons which would be even out further in the quarter -- as the quarters go.The COVID-19 situation is a big concern and a big risk for all businesses and which is, of course, particularly true for a volatile business like the shipping. We're seeing to lapsing the -- in black is the Purchasing Managers' Index, a 3-month moving average, which is a good indicator for the industrial production, which is turning down quite dramatically in March, April. While we see the blue is the 3 months moving average of the Baltic Dry Index, which is bottoming out.So yet, we can't see any -- from this graph any, what we call, bottoming out of the macro cycle. But a number of indicators from everything, from the coal consumption in China, which is the graph to the right, to the reported oil consumption figures for April, May, which shows that probably the trough in the world economy has been passed in April and May. And that we are seeing the world economy restarting and improving. But there are, of course, uncertainty with respect to the -- to how fast and how long time it will take to get back to something, which looks as a normal activity level. In the tanker market, we have been through a spectacular boom in -- over the last 2 months, which is partly due to the increased oil supply, due to the Saudi-Russian price war, in combination with dramatic fall in oil demand, which led to a contango pricing for fuel, which again led to increased demand for floating storage for tankers, also quite a bit increase of congestion in ports as well as increased shipment volumes. The oil markets have normalized quicker than many expected. We are seeing the demand is picking up. We're seeing supply and production -- oil production and also refinery runs are decreasing quite a bit, which is, again, one of the reasons why the tanker market fell down quite dramatically over the last weeks. Still at the level which is good, but is -- we expect that to be downside in the tanker market coming into the second half, as the destocking starts up and ships with -- on a floating storage will be released.So we have used, as mentioned, the time over April to fix 2 contracts, CABU contracts, important CABU contracts, 1 for 12 months, 1 for 3 years and -- which means that we have close to 3 quarters of our capacity for the CABUs covered for the second half of the year, a little bit less than half of the capacity for first half of next year.You see in blue, you see the part which is fixed-rate contracts, while the gray is the index-linked contracts which is then linked to the market.On the CLEANBUs, we see that we also are fully fixed for first -- for the second quarter, for the second half. We have -- including the FFAs we have sold, we have covered around 60% of the financial exposure of the CLEANBUs for the second half. For the first half next year, we have fairly limited coverage, but we have some time charter coverage and some FFAs.The dry market had a strong quarter in the third quarter, fell back through the fourth quarter and into the first quarter as seasonally normal. While we didn't get the pickup after Chinese New Year due to COVID-19 situation and the strong, we'll call, disruption in world production -- industrial production due to COVID-19 situation.We are -- as the forward market, which is illustrated here on the graph to the left, shows there's optimism that the dry market will recover somewhat over the next quarters, partly due to increased -- expected increased shipments of iron ore from Brazil, stimulated by Chinese positive stimulant packages. So we -- there are also the grain season from U.S. coming up in -- after the summer, which should have a positive impact. So now our business, we have -- we are only hatching dry markets at fairly high levels. And we are more or less fixed for second quarter. We have 1 shipment left to be shipped -- fixed for the second quarter. And for the second half, we have about 1/3 of the capacity fixed when in terms of rates. While we are in -- operationally-wise, we are about 40% covered. The levels we have covered are at good levels, good earnings, well above $10,000 per day, which were made partly in August, the autumn of 2018 and partly in the autumn of 2019.So Liv, then I leave it to you to go through the figures in more detail.

[Liv Hege Dyrnes, Chief Financial Officer]

Thank you, and good morning, everyone. Q1 was impacted by a fleet in full operation, efficient combination trading and support from a strengthening tanker market during the quarter. Net revenues ended at $22.4 million, up approximately 20% compared to the previous quarter and up from $13.3 million in Q1 last year. Operating expenses and SG&A, quite stable over the last quarters. Hence, we had ended at a strong EBITDA for the quarter, adjusted of $12.9 million. That's 40% higher than last quarter and up from $4.7 million in Q1 last year. Depreciation, also quite stable over the last quarters, while net finance cost increased by approximately $1.4 million. The main reason for this is the repurchase of the KCC03 bond and the corresponding settlement of the swap, in total $0.9 million in one-offs. We also saw USD 200,000 higher interest rate costs related to higher bond debt.In addition, we had some negative FX effects for the quarter. EBT, hence, ended at $4.3 million, up from $1.7 million last quarter and negative $0.8 million in Q1 '19. This corresponds to $0.09 per share.I would also like to mention that we, from 1st of January this year, has accounted for all financial derivatives as hedge accounting, which means that the value change of these derivatives, the unrealized value change, will be part of the other comprehensive income going forward. We will, hence, see less volatility in the financial results going over P&L.When comparing EBITDA in Q1 this year compared to Q1 last year, we saw an improvement of $7.6 million. CABU net revenues, up $3.5 million, mainly due to a much higher caustic soda volume, which again implies more combination trading. The rate per day was up $4,200 per day. CLEANBU net revenues, up $5.6 million, which, of course, relates mainly to 2 additional vessels in operation. The rate per day was up $10,000 per day. However, we took delivery of the first CLEANBU vessel in January last year, which impacted that quarter. We had off-hire related to the delivery, and we did not start combination trading for that vessel until later that year.Operating expenses, up $1.8 million, also related to -- or mainly related to 2 additional CLEANBU vessels. All in all, EBITDA for the quarter, $12.9 million, driven -- the change driven by higher caustic soda volumes and the 2 additional vessels. When comparing to the previous quarter, we see an improvement of 40%, $3.7 million. CABU net revenues, up $1 million. Rates are up $1,300 per day. This is mainly based on more combi trading. We only had, as mentioned earlier, one positioning voyage for the CABU vessels this quarter that do not qualify for combination trading. CLEANBU net revenues, up $2.5 million. Rate per day, up $2,200 per day. OpEx and SG&A, quite stable. As mentioned earlier, for the quarter, we had both segments delivered earnings per day about $20,000 per day. We saw much higher combination trading compared to last quarter, up from 80% to 92% for the CABU vessels and from 58% to 68% for the CLEANBU vessels. In addition, we only had 9 off-hire days for the entire fleet in Q1.We have 2 main funding events this quarter, as Engebret mentioned in the start of the presentation. As mentioned earlier, we have refinanced the KCC03 bond. We repurchased $160 million -- or close to $160 million in Q1. And we issued a new bond, 5-year bond of NOK 500 million. We are very pleased with the timing of this issue when we see the situation that the world is in today. And also, we were able to get a 50% -- 50 bps lower margin. The bond was listed on Oslo Stock Exchange on Monday. We have also obtained credit approval for the bank financing of the last 2 CLEANBU vessels being delivered next year. This is subject to final documentation, but we estimate to close the transaction within the end of Q2. So all in all, we are fully funded. We have a limited refinancing risk over the next years and -- yes. Over to some balance sheet key financials. Equity ratio, down from 47% at the end of the year to 43% by the end of Q1, mainly due to higher interest-bearing debt and also some negative impact on equity due to unrealized value changes of derivatives of, in total, $8.5 million.Equity, hence, decreased by $4.6 million.Cash and cash equivalents, up $21 million based on a strong EBITDA and also higher interest-bearing debt. We have paid newbuilding costs of $10.3 million for the quarter. And in addition to other regular cash flow items, we paid cash collateral of $2.9 million related to negative value on the cross-currency interest rate swaps related to the bond debt. This is down to approximately $500,000 today.Return on capital employed, up from 4% on an annualized basis from Q4 to 8% in Q1. If we adjust for capital related to the newbuilding program, of course, this would have been even higher.Dividends, up from $0.01 per share to $0.03 per share, in total, approximately $1.5 million and in line with our dividend policy.So all in all, we delivered a strong financial result for the quarter. We have a solid financial position. We are -- we have a fully-funded newbuilding program, and we continue to pay dividends. Thank you.

[Engebret Dahm, Chief Executive Officer]

So to wrap it up, the outlook for KCC, and despite the current difficult macro situation and the COVID-19 situation, is positive. First quarter was a strong quarter, and we are very pleased for the quarter, but we expect the second quarter to be even stronger. Based on the bookings we have made -- based on both on CABUs and the CLEANBUs, we are more or less fully booked now for the remaining part of the quarter. So we are pleased to increase the guiding for the CABU earnings from $17,000 per day we gave at the end of the first -- when we made the presentation in early April, up to $19,000 to $20,000 per day for today, the update. When it comes to the CLEANBUs, based on the fixtures we have made, we expect earnings of between $28,000 and $29,000 per day in the second quarter. Looking ahead for the second half of the year, due to the decreasing and weaker tanker market, we expect earnings to fall back slightly. But we have -- based on the strong bookings we have of contracts and time charters and also an expected improvements in the dry market, we expect also second half of the year to be a healthy year for the company.In this difficult world economy, having a diversified risk base and high degree of efficiency is important. So with the basis we have, with being a fully-financed company and really good contract coverage, we believe we are, probably more than most shipping companies, robust for whatever comes and the effects of the COVID-19 situation.So with that, we are ready to take questions. So Linda, do we have any questions?

[Linda Kim Gresseth]

We have one question. You have previously aimed to exercise multiple of the remaining 4 options for CLEANBU newbuilds, subject to the company being able to secure equity financing. Have you changed your view on these options following the recent market turbulence?

[Engebret Dahm, Chief Executive Officer]

I think we are -- as we have said, we are dependent on raising new capital to fund newbuilds. And that means that, as the market looks today, we are not going to declare these options in a short term. But luckily, we have 4 options, which we have -- which are going. The next one is exercisable in October, and then we have another 2 options in -- after the new year. So we believe it makes sense for the company, assuming that we get the repricing of our shares to grow the fleet further. But again, there are no immediate plans for the next months to declare options.

[Linda Kim Gresseth]

The next question, can you say anything about the size of the new financing commitment for the 2 last newbuildings?

[Engebret Dahm, Chief Executive Officer]

Liv, will you take that?

[Liv Hege Dyrnes, Chief Financial Officer]

Yes. It's in line with existing financing of the CLEANBUs, so it's approximately $30 million per vessel and the same -- approximately the same profile, and it's a 5-year tenure.

[Linda Kim Gresseth]

That looks like that's it.

[Engebret Dahm, Chief Executive Officer]

That's it. Okay. Thank you for participating. And please reach out if you have further questions ahead in time. Thank you.