Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2021-Q1

[Engebret Dahm, Chief Executive Officer]

Welcome to the first quarter 2021 results presentation of Klaveness Combination Carriers. I apologize for the small delay in the start. We will, as always, take questions after the presentation, so please write questions on the webcast solution. So KCC, we in KCC, we are owners and operators of combination carriers, which are vessels that can ship both dry and wet cargoes. We have 2 concepts. We have the CABUs, which are transporting caustic soda to alumina refinery customers in South America and Brazil. And we have our new CLEANBUs, which are more versatile ships that also service the petrochemical industry, the petroleum industry and the biofuel industry, and which have a bigger market and more trading opportunities. More than ever, this quarter, we have seen the value of combination carrier concept, which were -- our earnings depend on 3 different markets. We have the tanker market, is the lowest and weakest market since 2012. The dry market, on the other hand, is the strongest since 2010 and we have had a good support of the fuel markets. So looking on result-wise for the quarter, it is a small bump in the road, but we are still satisfied given the market circumstance we had. We are seeing the effects of weak tanker market. We are seeing the lagged effect of the dry-bulk market, where we haven't yet seen the positive effect of a strong dry market. And also, certain operational effects that leads to the lower earnings, both for the CABUs and the CLEANBUs in the quarter. So we are around $16,700 per day for the CABUs, which are in the low range of our guiding from the last quarter. And the CLEANBUs are at close to $18,000 per day, which is the high end of the quarter. The good thing to see is that we again overperformed the standard tankers by 2.6 for the CABUs and 1.7 for the CLEANBUs and matching the dry-bulk market. We have the EBITDA is falling with around $1.7 million and, again, is impacted by the weak earnings in the tanker market and the fact it has on both our CABUs and CLEANBUs. We have -- we also see the effects of the delivery of 2 newbuilds during the quarter and also some COVID-19 effects that are lower than the previous quarters. And we continue to pay dividends, same as the last 4 quarters. And we do hope that as the full fleet is delivered, coming into end of the second quarter, the dividend potential will increase. And depending on the markets, we will -- hopefully, we'll be able to increase the dividend flow from the second half of the year. Our business model demonstrates strength that answers many of the questions that investors and concerns investors have to the shipping industry. We are -- our concept is, we all have the lowest carbon transportation solution in the market. We provide earnings which are more stable in markets which are extremely volatile. And even though we can, in some quarters, may have a negative result over time, we show substantially higher earnings, time charter earnings and profitability than the standard markets. The focus on decarbonization in the industry is increasing day by day. And I think that illustrates this wholeness of our strategy to have -- to be a leader in the -- in low-carbon freight in the shipping, in the dry-bulk and tanker shipping industry and to provide our customers with the lowest-carbon freight in the market and most cost-effective freight in the market. Let's show one example from the start-up of one trade in the first quarter in the Atlantic. The standard tankers, which are blue, and standard dry-bulk ships, which are green, have long ballast before loading the dry cargo, the dry ship in Brazil and the tanker vessel in Europe. The tanker vessel has a slightly lower ballast than the dry ship. Ownership, this is the exact trade of first CLEANBU [indiscernible] bringing iron ore from Brazil to Europe and returning the naphtha to the Brazilian petrochemical industry is more or less no ballast. Comparing the CO2 emission of the CLEANBU with the 2 ships that perform the same transportation work, we see a 35% difference in CO2 emission. And this would become increasingly important as Europe now will implement and include shipping into the emission trading scheme now from 1st of January 2023. And the strict environmental requirements, and also including more industries into the emission trading scheme has led to increasing costs and prices for emitting carbon emission in Europe. We are seeing that through March and April, prices have increased. And it's now more than double what we saw back in the fourth quarter 2020. And people expect -- most analysts expect this to increase further up to around EUR 100 per ton. So if we apply these prices to the example from the Atlantic trade, we see that the difference in CO2 emission from older ships and the 2 ships that perform the same transportation work, with the current pricing of the EUA price, is around $0.8 million per year, assuming 6 shipments back and forth, which 1 ship can make. If we -- the price of increases to around EUR 100 per ton, this cost -- this saving in carbon taxes will increase to $1.8 million per year, per ship, which illustrates the large value these ships are contributing to our customers. To fulfill our strategy to give our customers the most cost-efficient carbon decarbonization in shipping and to meet the targets in our environmental strategy, we have to improve the energy efficiency of our ships and efficiency of our operation and our trading. We have normal ongoing projects and initiatives that are in the various stages of implementation. And while we can't spot the facts yet in the first quarter, we are confident with that coming into the second half, we will see the effects of what we're doing to reduce emissions on our fleet. Aside the value index of our concept in these extreme markets is proven, and in this -- and also by the fact we can have the earnings depending on 3 different markets and also to the fact that we can allocate capacity between the markets. We have -- and looking here at the tanker market, it fell down from the peak in -- during spring last year, have capped at low levels throughout the autumn, with some ups and downs. Looking at the first quarter, we see low periods with earnings below operating cost levels, a small upturn in March, falling back again now in April. The opposite development we see in the blue line, with the Panamax dry market, coming from low levels during the first half of 2020 due to the COVID-19 situation, good levels through most of the second half 2020 and early 2021. And by mid-February, the market peaked, and we're seeing historically high levels through March and even though in April. Also looking at -- looking at the fuel prices, have increased steadily over the quarter, meaning that we have 2 of the 3 markets that we derive earnings from are strong which gives a good momentum for our company going forward. Looking at the tanker market, we see the latest EUA statistics show that the demand for oil products are still -- and for oil are still well below the pre-COVID level. We see -- and it seems from the graph that the recovery has flattened a little bit out in the first quarter. But the latest figures from -- amongst others, U.S., where we see a larger uptick in air travel and also road traffic, suggests that the recovery is underway. Also, the destocking of the oil market is continuing with a good pace. And we are -- analysts expect that the stock level should be down to the 5-year average by this summer, which creates a good basis for -- also for improving tanker market. Also, the order book is low and little ordering activity in the tanker market, which also, again, is a good basis for the recovery in the tanker market that we hope can come to force coming into the autumn. The expectations of a better tanker market is reflected in the forward market, you see to the graph to the left. And we have more or less the full capacity of our fleet fixed for second quarter. And while we have, in total, around 40% contract coverage for the fleet second half, of which a little bit more than half is fixed rate coverage. We expect to increase the contract coverage for the CABUs for the caustic soda business during the next months and also discussing contracts for the CLEANBUs with customers. When you go over to the dry market, we see that looking at historical development of Panamax, we see that the overhang of supply from the trough back in 2015 has been absorbed. And there was a rising trend in earnings since then, interrupted by 2 incidents, this dam disaster in Brazil in 2019 and the COVID effects in the first half of 2020. We also see that demand in the dry market is strong. We see 2020 seasonal development in the black curve, has been at the top of the range for the last 5 years through the year. And also see the strength from the start of the market in the first quarter. We -- the same as in the tanker market, there is little ordering activity in the dry market, but we do expect, given the strength of the market, the ordering to pick up. But again, we are then talking about the deliveries from -- mainly from 2023. And again, we see in the graph to the left, the forward market for Panamax. And we see the expectations, So we're peaking the market in May, that the market remains strong over the both second quarter and second half of the year. We have quite a bit of our capacity fixed for the second quarter. I think we have our own 64%, 65% of the dry capacity fixed and -- for the second quarter. And if you add the FFA coverage, we are up in 84%. And the coverage for second half is around 50% on a fixed rate basis. We have, over time, shown earnings well above the standard markets, and that is also the case for the CABUs for the first quarter, where we have results of $16,700 per day, which is down from $18,958 in the fourth quarter. The effects we see are, again, a weak tanker market, where we had impacting both spot fixtures and caustic soda and also our index in the caustic soda contract. We are seeing one operational impact from from positioning 1 ship to dry dock in China from the U.S. and replacing the ship back again to U.S. which accounts for around 15% of the capacity, dry capacity in the market -- sorry, in KCC for this quarter at low levels. And this positioning effect will not happen in the next 3 quarters. We -- in addition, we see the lagged effect from the upturn in dry market, which picked up in the second half of February. More or less no effect is seen in the results of KCC for the first quarter. These effects will be seen in the second quarter. And here we illustrate again the CABU's dry earnings from the third, fourth, first quarter this year and also the booking we have made to date in the second quarter. And we see, in totality, we have booked 60% of the planned dry capacity of the CABU -- for the CABUs in second quarter at levels at close to $23,000 today, which includes the negative effects of the paper, the FFAs that are sold. This shows again the extreme strength of the dry market, but also ability to take advantage of the dry market, even with a fairly high contract coverage. On our CLEANBUs, we are continuing to expand the trading and build the business step by step. And as mentioned, we are very pleased with the start-up of our trades in the Atlantic, which looks very promising. And we expect to add more ships there over the second half of the year. We are also expanding the trade to Australia. We have made to date -- or we have fixed to date 3 shipments that will be on a combination basis with last CABU dry. And also, fixed 2 newbuilds directly with CPP to Australia. So this is promising development in our 2 main target markets. The earnings for the CLEANBUs closed to $18,000 per day in the first quarter, down from $20,850 in the fourth quarter. Again, we see big effects of the weak dry market and of course the more volatile alumina market has effect on the earnings on the CLEANBUs. We have chosen to charter out 3 ships on time charter trips, long-haul grain shipments from Brazil and from U.S. West Coast to take the benefit of the strong dry market in the very weak tanker market. We -- the last tanker time charter, which we fixed at the peak of the market in 2020 was to be delivered in early February this year. So this graph only shows how we allocate capacity between the different markets. We see that the time in combination trade is increasing slightly over the -- in 2021 compared to last year. But you also see that the medium blue color, which is the tanker market charters, is reduced, while we had increased -- we increased allocation to the dry market. Our main business is combination trade and we expect to take back most of the capacity in combination trade within the summer. So then I'll leave it to you, Liv.

[Liv Hege Dyrnes, Chief Financial Officer]

Yes, thank you. Then over to EBITDA. Adjusted EBITDA is down 16% from Q4 last year to Q1 this year. And it's mainly driven by the poor tanker market. The CABU TCE earnings is down approximately $2,200 per day, while on-hire capacity is quite stable. As you can see here, that has a negative effect between the 2 quarters of approximately $2 million. CLEANBU TCE earnings down approximately $2,900 per day. And for a similar fleet to that in Q4, that has a negative impact of approximately $1.2 million. However, you can see here that the CLEANBU operating expenses has improved somewhat from Q4 to Q1, and I'll revert with some comments related to that. Then we have additional vessel capacity due to the deliveries in Q4 and Q1, and this has a positive impact from Q4 to Q1 of approximately $0.8 million. So in total, adjusted EBITDA of $9.2 million for the quarter. The illustration to the right shows the effect of a full fleet on water annual -- on an annualized basis based on Q1 results for EBITDA. And then to the far right, you see the effect of a full fleet based on trailing 12 months EBITDA. So here, you see -- or at least it's an illustration of the range of EBITDA potential. As mentioned, we have taken delivery of 2 vessels during the quarter, 1 in January and 1 in late March. We will take delivery of the last CLEANBU vessel in late May. And by the beginning of July, we expect to have the full fleet in operation. Hence, we will have the effect of the entire CLEANBU fleet of 8 vessels coming into Q3. We still are impacted by travel restrictions in China related to the newbuild deliveries. Hence, we still take delivery of the vessels with a Chinese crew and then we sail to South Korea to change crew. And this impacts the number of days from delivery until start of trading negatively. However, you can see here that for the vessel delivered in January, Baiacu, it's down compared to the average last year or slightly down to 44 days. And we expect approximately the same for the vessel that was delivered in March that will start trading in early May and the last vessel coming on in late May. Unscheduled off-hire is down from 39 days in Q4 to 4 days in Q1. COVID-related off-hire is down from 27 days to 4 days. So this is quite a large improvement. Partly, we believe that we have become better at scheduling the crew changes. However, there are large uncertainties related to the effects of COVID-19 on continued crew changes. Hence, this might increase over the next quarters again. But the start of April is good so far with very limited unscheduled off-hire. Scheduled off-hired, 47 days for Q1. We had 1 CABU vessel coming out of regular dry dock in early January, 1 CABU vessel close to completed dry dock in first quarter and then we will have additional 3 CABUs dry docking in the second half of the year with an estimated 30 to 40 days off-hire per vessel. Then we as well in Q1, had our first CLEANBU guarantee repairs, sorry. And we expect approximately 60 days off-hire related to this in Q2. 2 additional CLEANBUs will go to yard for repairs in second half of the year with an estimated 90 to 115, sorry, days off-hire. Yes, and I think that's it when it comes to off-hire. Operating expenses per day for the CABU vessels ended at approximately $7,460 per day, quite stable compared to the average for 2020. As you can see here, the CLEANBU operating expenses per day ended at approximately $8,100 per day. This is partly prioritization effects between the quarters, and we expect this to come up to an average of approximately the same as in 2020 of around $9,000 per day in total for the year. COVID-19 effects of -- for Q1 was approximately $1.9 million, down from $2.8 million last quarter. As mentioned, we saw the impact on newbuilds to be quite stable, while both off-hire, due to deviations as well as costs, came down quite considerably. Uncertainty related to this is quite high for the next couple of quarters, but the trend is at least positive from Q4 to Q1. So despite a weaker financial result, the combi concept continues to demonstrate the value of flexibility and diversification. That is reflected through the TCE earnings that are 1.7 to 2.6 higher than the standard tankers. As you can see here, earnings before interest and tax ended at $1.3 million, down from $4.7 million last quarter. And in addition to the mentioned effects on EBITDA, depreciation is up as a consequence of more vessels. Net financial items, quite stable. Mortgage debt has increased due to delivery of newbuilds. However, we have lower bond debt than in Q4 and we had as well some one-offs in Q4 last year related to the settlement of the KCC03 bond.Hence, we had a loss for the quarter of $2 million compared to a profit last quarter of $1.2 million. The cash position is down from approximately $66 million to $36 million. And the main drivers are net newbuild CapEx, dry docking as well as debt service. As you see here, operating cash flow from operations is close to 0, but is impacted by negative working capital changes of around $8 million. This mainly relates to temporary effects related to clearing and initial margin for derivative. And we expect this to be -- or the main part to be reversed during the year. Remaining net newbuild CapEx is $6 million, and we, in addition, have RCF capacity available related to one of the newbuilds of approximately $5 million. And we as well have a short-term overdraft facility of $20 million available. Equity ratio came down to 35% following delivery of the newbuilds, and we expect this to bottom up -- bottom out during the second quarter. I think that was the summary of the financials for the quarter. And then over to you again, Engebret.

[Engebret Dahm, Chief Executive Officer]

Well, as mentioned, the first quarter was impacted by the very weak tanker market, the lagged effect of -- from dry market and also a number of operational effects linked among status of the newbuilds. So despite this, we are pretty happy with the results for first quarter. And looking ahead, it will be a bump in the road for the profitability of KCC. So if we look ahead, take into account what we have fixed for the second quarter and our expectations for the remaining positions we have in the second quarter, we can guide substantially up the earnings for the CABUs for the second quarter. So we expect the earnings to be between $21,000 and $22,000 per day. On the CLEANBUs, we'll see that -- we see that earnings will -- we expect to be approximately at the same level as in the first quarter, partly linked to the weak -- continued weak alumina tanker market, lower contract coverage than the CABUs, but also still facing effects on the CLEANBUs in that trade. But in totality for the company, we see a substantial improvement in earnings in the second quarter compared to the first quarter, which ends between $19,600 and $20,600 per day, which is 20% to 25% higher than the actual earnings in the first quarter. So we are optimistic for both the second quarter and especially for the second half of the year, despite the fact that we believe the tanker market will be weak well into the third quarter. And then hopefully, we'll recover coming into the autumn and winter. The dry market has shown tremendous strength now in the -- since February, and we expect it to remain strong through the quarter. We have -- the underlying business is doing well. We expect to increase the contract coverage for the CABUs. We expect to improve the trading pattern and trading efficiency of the CLEANBUs. So in totality, we -- with the delivery of the last CLEANBU now in May, with a full fleet on water in -- coming into the summer, we -- the outlook for our business is very good. So to repeat again, we have a concept that provides the lowest carbon emission freight in the tanker and dry-bulk market in the world. We have far lower volatility in earnings than extremely cyclical markets that we are employed in. And thirdly, we show a profitability over time that exceeds the standard market. So that was the summary of presentation. So then we are ready to take your questions.

[Unknown Executive]

So the first question is a question on capital spending going forward. So you mentioned that dividend capacity is set to improve following delivery of the final CLEANBU vessel in second quarter. Could you elaborate on how you prioritize further fleet expansion and dividend payments going forward?

[Engebret Dahm, Chief Executive Officer]

I think we have no options left in our newbuilding program. And we -- our priority now is to focus on the ships that are delivering, to prove the earning capacity. And meaning that we will -- we target to live up to our dividend policy of paying out 80% of the free cash flow to shareholders.

[Unknown Executive]

Yes. That was actually the second question. That your goal is still to pay out around 80% of the free cash flow going forward. So you just confirmed that.

[Engebret Dahm, Chief Executive Officer]

Yes. Confirmed that. Yes.

[Unknown Executive]

The third question is, what's your view on newbuild investments for KCC? What's the potential cost of new CLEANBU? And how is your long-term strategy to renew the fleet?

[Engebret Dahm, Chief Executive Officer]

I think we have now fleet, after delivery of the last ship, of 17 vessels that is sufficient for this scale of operation of our company. We do see that we have some older CABUs that will be -- which are coming close to the end of their operation life, which will -- we will start to recycle coming into 2025, '26. So that may be the first target, but we still have time to work out a good deal in that sense. So we don't expect anything to happen in the short run. The CLEANBUs, I guess, we probably will use more time, prove that it works, prove that it earns what it should earn, before continuing expansion.

[Unknown Executive]

Here are two parts of this question, so I'll do the first question first. When reviewing your revenue mix for Q1 this year, 52% of revenue was from [indiscernible] versus the historical average of 67%. should we expect additional co-announcements for the CLEANBUs? Or will you take a spot short-term market approach to the CLEANBUs?

[Engebret Dahm, Chief Executive Officer]

I think we have said before that on the CLEANBUs is that as we phase in, we prefer not to have contracts. We want to test out the trades, learning by doing, before we do contracts. But we are -- we already have 1 small contract from India to among Southeast Australia. And we expect to add more contracts coming into the second half of the year. So we have an industrial focus and where we want to have certain trades that are stable for part of the fleet and then be a bit more opportunistic on the remaining part of the fleet. So yes, you can expect higher contract coverage for the CLEANBUs, but they will mainly be index-linked, meaning while more of the contracts for the CABUs are fixed rates.

[Unknown Executive]

The second question is the Nordea Danske Bank facility matures in under a year. Are you confident in refinancing? And do you have any indications of terms and facility size?

[Liv Hege Dyrnes, Chief Financial Officer]

We do not -- we have not started the refinancing of that yet. But based on our history and our relationship with the banks, yes, we are confident that, that will be refinanced, but I have not any indications on the amount yet.

[Unknown Executive]

Question three, with the EU ETS to include shipping emissions from 2023, have any charterers reached out to you to explore potential cooperation?

[Engebret Dahm, Chief Executive Officer]

I think not specifically to the EU requirement, but we -- as we said before, the fact that the industry is preparing for carbon taxes, which could be in the way of emission trading schemes, they know that they will have to pay for the carbon emissions of the seaborne logistics. And that opens doors to us, and I think it has made customers that we may not have been able to approach open for doing business with us.

[Unknown Executive]

Thank you. That was all the questions today.

[Engebret Dahm, Chief Executive Officer]

Okay. Thank you all for joining and apologize again for being a bit late out. So please contact us, should you have any further questions to the results. Thank you.