Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2021-Q2

[Engebret Dahm, Chief Executive Officer]

Welcome to the second quarter presentation of Klaveness Combination Carriers. I'm Engebret Dahm, I'm the CEO of the company. Together with me, I have Liv Dyrnes, CFO. [Operator Instructions]KCC, we are owners and operators of combination carriers that are vessels that can transport both dry and wet cargoes, competing against the standard tankers and dry-bulk ships. We have 2 type of ships. We have the CABUs, which in dry mode can transport all type of dry-bulk commodities, and in tanker mode is specialized for transportation of caustic soda to the alumina industry. Our new fleet to CLEANBUs can do the same transportation work as the CABUs. But in tanker mode, it can transport a much bigger variety of tanker cargoes, hence, having a bigger market.Our ships due to transportation work of both a tanker and dry-bulk ship more efficiently with less ballast, meaning that all other things equal, our ships earn more than a standard tankers and dry-bulk ships. And with the 50-50 utilization of the tanker in dry market, our ships should, in all other things equal, earn at least 1.5x the standard markets.This quarter is a big milestone. We took delivery of the last newbuild in May, putting on service in July, meaning that we can now say we have completed the big newbuilding program where, over the last 5 years, have taken delivery of 11 newbuilds. This is important because it increases KCC's earning base and dividend potential for the coming years. And we are very focused on showing our investors the full potential of our business in the coming quarters.Looking at the second quarter, it's been a spectacular quarter when it comes to market development. The tanker market has an average weaken as the biggest-sized product tankers have weakened earnings in the second quarter. While the dry market, the strongest market since the China boom, has been spectacular over the quarter. It's been acceptable -- a good quarter for KCC with earnings -- time charter earnings up 20% compared to the first quarter being in line in the top range of the guiding we gave when we presented the first quarter results. The earnings for the CABUs has been very strong at $21,900 per day, driven by the strong dry market. The CLEANBUs at an earnings of $18,500 is lagging behind. But still, I'm pleased to see that we have progressed big time in this business over the quarter and the summer.Looking at EBITDA, we have -- we can show you an increase of 66% compared to first quarter ending at $15.3 million adjusted EBITDA. Based on the posted results and a positive outlook for the second half, we are pleased to announce a 50% increase in dividends for the second quarter. And depending on the market, we expect to increase the dividends for the coming quarters.We believe we have -- this company has a good value proposition to customers. We have a future-proof business model that delivers positive results through the shipping cycle, and that's easy to forget when you are in the boom phase of one of the commodity markets. We have, by far, lowest carbon emission shipping solution in the dry bulk and tanker market, which will be increasingly important in this industry over the coming years. We have earnings that are far less volatile than the standard tankers and dry-bulk ships by being diversified. And we also deliver consistently, over time, higher earnings than the standard markets at fairly marginal increased operating costs. This company has never lost money in any year through the cycle.The release of the UN's Climate Panels report in August is a big wake-up call for all of us and also for the shipping industry as such. This, I'm sure, will lead to increased demand for effective decarbonization regulations in shipping. And the truth is that, up to date, introduction on effective decarbonization regulations and shipping has been moving very slowly. This summer has been, however, an exception by IMO approving the shorter measures in June, which sets minimum requirements to ship owners when it comes to energy efficiency and operational efficiency or the so-called carbon intensity. In our mind, this regulation will have limited effect. It's ineffective and partly inappropriate for the next 6 years.A bright spot is the proposal given by the EU Commission in July for introducing shipping into the emission training scheme. It is a requirement that shipowners will need to buy emission allowances for 50% of the emission from transportation in and out of Europe. There is a phase-in from 2023 to 2026. But this is a milestone by the fact it's the first time in the shipping industry starts paying forward to carbon emission. Driven partly by EU regulation and other things we are seeing moving, our customers will increasingly focus on cutting emissions from the ocean freight. This means we will see increased demand for shipping solutions that can deliver these cuts in emission. And we believe strongly that the market for low-carbon shipping solutions will be the strongest demand increase over the coming years. For KCC, delivering the lowest carbon shipping solution, this is improving our competitiveness.And I've given you one example, we showed you in the last quarter. Our new trade in the Atlantic for CLEANBU, where we bring iron ore and grains from Brazil to Europe. And in return, we bring naphtha and other clean petroleum products. Compared to the 2 standard ships doing same transportation work as the CLEANBUs, we cut emissions by 35%. And since April, there are 2 big changes. One is that the cost for emitting carbon in Europe has increased further by 20% since April. It's now at EUR 58 per tonne, and we'll expect this to increase further as EU progresses further with the Fit for 55 regulations. The second is we now have a much bigger certainty what are the cost effects of these regulations. And looking at how it looks in 2026, it will give customers the incentive to choose low-carbon shipping solutions. And with our CLEANBUs, they can save close to $0.5 million per year using one of our ships, which equates to $1,500 earnings for KCC with the current EUA pricing. Similarly, if these costs of emitting carbon increased to $100, it's $0.8 million or $2,500 per day. This gives customers incentive to choose rightly.We also see that discussion regarding decarbonization is becoming an important part of our discussions with our charters. We are pleased to see that we're getting increased appreciation and acceptance that the capabilities of our combination carriers to cut substantially emission by substituting the standard ships. And this was an important trigger when we concluded this major contract for CLEANBUs this summer with one of the main players in the oil market. We are, going forward, targeting to work closely with our customers and including features in the contracts that drives both us and the customers to cut emission. Firstly, we are including in all our contracts reporting on net by shipment basis on totality of the emissions. And it's right to say, if you can't measure it, you can't manage it. We're going to introduce more features into these contracts, establishing baseline emission targets and also targeting to agree with customers a carbon pricing mechanism giving us incentives to improve further.When it comes to our emissions this quarter, we have all hands on deck, full attention through our company to cut emission throughout what we do. We are pleased to see that we are moving in the right direction when it comes to the absolute CO2 emission average per ship per year, showing that both for the CABU fleet and the CLEANBU fleet reaching closer to the target we have in 2022 of average 17,700 tons CO2 per ship. On the carbon intensity, we have not -- cannot show the same post results for the first half. The CABUs, a slight increase. And CLEANBUs, which I will come back to, a fairly large increase in EUA due to the training of the CLEANBUs. We expect both to be temporary. We expect for the CABUs to deliver improved total carbon intensity figures for the year, and the CLEANBUs coming into 2022 will show big improvements. Target for the average for the fleet is 5.8 in 2022.This quarter has also shown that having a diversified business model has a big value by -- partly also by having the ability to shift capacity from one market to the other. Looking at the tanker market, this is the MR tanker earnings development, showing after the spectacular boom last spring. It's been low and, as an average for the tanker market, has fallen back in the second quarter. Quite opposite development in the dry market, as explained. Continuous upward movement in the dry earnings in the quarter to the highest level since the China boom falling back in July, but recovering again in August up to new heights. Also, the fuel market has -- fuel prices have increased in the second quarter, but has fallen back slightly in the third quarter. So we have 2 of our 3 markets that decide earnings of KCC being strong, and we're now waiting for the tanker market to recover. And we believe the process of rebalancing of the tanker market is continuing, and the recovery is coming in much closer. We are seeing it on the oil consumption. We see that on the graph where we see the global oil consumption demand is improving, getting closer and closer to the pre-pandemic level of 2019. An important thing, this summer in the U.S., we had the highest consumption -- oil consumption ever. We are seeing oil stocks being drawn down to levels well below average over the last 5 years and well below pre-pandemic levels.Lastly, we see that the supply side looks under control with a record low contracting of pro tankers. Order book of 6%. The spike in big tankers, VLCCs contracting in first quarter, has come down in the second quarter. So the totality looks very good.The dry market is very strong, driven partly by solid growth in dry-bulk demand. To date, we have a 6.6% increased total dry-bulk demand compared to last year. And you see from the light blue curve that demand is well above historical average. And important thing to note is, however, that what's happening around the world has increased the dry-bulk congestion substantially over this year. Seeing that congestion is around -- in July, it was around 14% higher than last year, impacting that dry-bulk supply growth, in fact, was negative in July, which is one of the reasons why we have the strong market we have. But we're seeing that the congestion is increasing in China as Chinese government introducing new limitations in ports due to the spread of this Delta variant. So there are no -- it will take time before this congestion will be released. Order book also on the dry-bulk side is positive. There's been some increased ordering. But still we are at a record low order book also in the dry-bulk sector. So we as a company, we are positioning for a strong 2020. In the dry market, as normal in this part of the third quarter, we are more or less fully booked on the dry side. We have a 50% coverage -- fixed-rate coverage for the fourth quarter, but substantially lower coverage for 2022. We are about to discuss extension of a major index-linked contract. We will look at other ways to secure high earnings, but focusing on keeping the upside in the dry market for 2022. The same picture we see in the tanker market where we are more or less fully booked for the third quarter. We have a 43% coverage for the fourth quarter. We are in discussions of extending the caustic soda contracts we have to Australia, which are partly index-linked and partly fixed rates. So we expect, with the limited coverage we have in 2022, to increase over the coming months, and we look forward to reporting on this going forward.Looking at earnings. The CABUs, a key explanation of the CABU is the strong combination trading of caustic bulks with increasing caustic soda volumes to Australia, partly driven by increased demand and partly by more favorable caustic soda sourcing to Australia. This has led to the fact we have increased the part of the capacity in combination trade and decreasing the ballast.Looking at earnings. With earnings in the second quarter of $21,900 per day, it's quite fascinating to see the gearing this company has to the dry market. Comparing to the first quarter, where we had dry earnings before FFA effects of $14,300 per day, it has doubled in the second quarter up to close to $20,000 per day. And if you compare this to the dry bulk spot market, which was about $21,900 for Panamax, you're seeing that our CABUs before FFA effect produced 30% higher dry earnings than the standard markets. You see also how that the tanker earnings is flat, partly secured by contracts. And looking at -- which is the same looking for July, but it's positive to see the spectacular increase in earnings for our CABUs in July, increasing dry earnings to $36,400, leading to CABU results all inclusive of $26,500 per day, which gives some indication on what's coming for the second quarter.Also compared to the standard markets, the performance of the CABUs has been stellar. The earnings of $21,900 means around 2.9x the earnings of standard and MR tankers and matching the earnings of Panamax dry-bulk ships, which is we're very satisfied with in -- with the context we have and a weak tanker market. The same picture we see in the -- for the year-to-date figures of $19,400 when outperforming both the MR tankers and the dry market.The CLEANBUs, we have seen that very weak allo tanker market with allo tankers. Queuing up in loading areas has not been the ideal timing for introducing a new shipping concept in the tanker market. With the weak rates, we have optimized the situation by switching capacity into dry trades, taking benefit of the strong dry market and showing large flexibility we have in our fleet to adjust capacity between the markets. As this graph shows in the second quarter, 86% of the days were in dry market, partly in combi trade and mostly in as a standard dry ship. This has had the fact that the percentage of time in combi trade reduced to 30% and the ballast increased to 28%, which is one of the reasons for the performance on the carbon intensity, the EUA, which I mentioned before. But looking at the July figure, we show this is about to change. And this is not due to the stronger tanker market as such, it's due to the fact that we have succeeded to advance our discussions with tanker customers, partly driven by the environmental agenda. We concluded the new clean petroleum product contract affreightment with one of the leading tanker players, Charters, which will take 1 to 1.5 of the capacity -- investment capacity for the next 1 to 2 years. We advanced with other customers as well, fixing the first combi version to West Africa, expanding into trade. So now in July, we have fixed 5 of the 8 CLEANBUs into clean petroleum trades, bringing the ships into dry-bulk export regions. And we expect to make further shipments fixtures over the next weeks. Meaning that within the end of the third quarter, we should have at least 7 or 8 ships trading in combination trade, which will be one of main the drivers for increasing the earnings of the CLEANBUs in the third and fourth quarter.Earnings ended at $18,500 per day. And compared to the first quarter, we see a positive effect of dry earnings increasing from $17,400 to $23,700 per day. But you note the big decrease in tanker earnings, partly a reflection of the weak allo 1 tanker market and partly start-up costs for new ships delivered and new trades being started up.July figure, again, gives an indication of what's to come in the second half, with earnings increasing to around $21,600 per day with increased earnings both in the dry bulk and in the tanker days. Compared to the standard markets, we -- the CLEANBUs have clearly outperformed the allo 1 earnings. But given the not fully optimal trading of the CLEANBUs, we have not managed to match the earnings of the Kamsarmax bulkers. This is the same for the year-to-date figures of $18,200 per day. So Liv, I'll leave the word to you.

[Liv Hege Dyrnes, Chief Financial Officer]

Yes. Thank you. Over to or back to EBITDA, I should probably say. EBITDA for the quarter ended at $15.3 million, an increase of 66% Q-on-Q. The driver behind this increase is mainly driven by CABU revenue. CABU TCE earnings increased by more than $5,000 per day compared to Q1, which is the effect here shown as $4 million, mainly driven by a strong dry-bulk market and efficient combination trading. In addition, we had less off-hire related to dry docking in Q2 compared to Q1, an effect of approximately $1 million.CLEANBU revenue increased by $2.3 million, approximately 65% due to a larger fleet and 35% related to higher TCE earnings approximately or close to $600 per day. CLEANBU operating expenses is up $1.1 million from Q1 to Q2 as a consequence of the larger fleet. And finally, we have a full fleet on water. The last newbuild delivered in May started trading in early July. Hence, Q3 will be the first quarter with full earnings for the entire CLEANBU fleet. As you can see here, Q2, hence, was impacted by the delivery of both the vessels delivered in late March and late May. As you can see to the right, the number of days from delivery until start of trading has been between 40 and 45 days for all the 3 vessels delivered in 2021. When comparing to 2019 here, shown as 12 days in average, the main difference here is a consequence of COVID-19 as we take delivery of the vessels with a Chinese crew and then changed crew later on.COVID-19 effects is estimated to be approximately $2.2 million for Q2, up from $1.9 million in Q1, 70% of this relates to the newbuilds and, hence, we expect these effects of COVID-19 to be smaller going forward. Both scheduled and unscheduled off-hire is quite stable compared to Q1. We had a limited 2 days COVID-related off-hire in Q2 compared to 4 in Q1, which is a huge improvement from second half last year. However, it is still challenging to do the changes of crews. We have approximately 30% fully vaccinated crew, but there are no lighter restrictions related to the crew changes in the relevant ports and countries. So far in Q3, it looks good as well to COVID-related off-hire days. But this is not over. Hence, there are uncertainties related to this over the next quarters.One CABU vessel completed dry docking in April, and we had 1 CLEANBU in for guarantee repairs in Q2 and total 49 days. Over the next 2 quarters, we will dry dock additional 3 CABU vessels. And guarantee repairs for the last 2 CLEANBUs have been postponed due to the closedown of certain regions in China, and this is for now postponed until Q4 or going into 2022.CABU and CLEANBU OpEx, as you can see in the graph to the right, is quite stable compared to Q1, $8,000 per day for the CLEANBU vessels and $7,500 per day for the CABUs. The CABUs are quite in line with historic numbers. For the CLEANBUs, we expect this to be a bit volatile also going forward and might increase slightly over the next 2 quarters.I have commented on the net revenue, operating expenses and EBITDA. But as you can see here, both SG&A, depreciation and net interest cost is quite stable, however, impacted by a larger fleet. Profit for the quarter ended at $3.5 million compared to a loss of $2 million last quarter. And earnings per share at $0.073 for the quarter. As mentioned earlier, dividend per share is up 50% Q-on-Q to $0.045 per share, which is a payout ratio about 60% for the quarter. Return on capital employed increased by 4 percentage points to 5.5% for the quarter. Cash by the end of June, close to $35 million, down approximately $5.3 million. In addition to the positive effect of adjusted EBITDA, we saw a negative cash flow related to clearing of freight derivatives in Q2 of $12 million. There's a mismatch or a timing mismatch in the cash flows from the derivatives and the physical contracts. Hence, the positive cash flow from the contract will materialize in 2021 and 2022. Drydocking and upgrades, $2.3 million. And then lastly -- or the last, newbuilding CapEx, $35.4 million, sorry. Net mortgage debt, $28 million positive as we draw on debt related to newbuilds. Interest cost, $3.6. And dividends, $1.4 million. In addition, we had a drawdown of $7.5 million on the overdraft facility at the end of the quarter, and we had undrawn capacity of approximately $12.5 million. We expect cash to improve over the next periods, both as we have taken delivery of the last newbuild. We have a full fleet on water and a strong market outlook. Book value of vessels increased by $30 million and interest-bearing debt by $35 million as a consequence of the newbuild delivery in May. Equity is down approximately $10 million in the quarter to $201 million as we have had a negative mark-to-market effects of freight derivatives over the other comprehensive income. Hence, equity ratio ended at 32.5%, down from 34.5% at the end of Q1. However, we expect this as for cash to improve going forward. And by the end of July, it was close to 33%. To the right, you can see the maturity profile. And we have a facility falling due in March next year. We have initiated discussion with banks related to the refinancing. We have no firm commitment yet, but the indicative terms are very good, and we hope to finalize this in Q4. Then over to you, Engebret, for the bright outlook.

[Engebret Dahm, Chief Executive Officer]

Thank you, Liv. So second quarter has been a good quarter, substantially increasing earnings, substantially increasing dividends and progressing well with the business both on the CLEANBUs and the CABUs. Looking ahead, we have booked 80% to 85% of the capacity for the second -- for the third quarter, meaning we have a good visibility for the earnings for the quarter. We are pleased to guide up considerably for the CABUs by $2,000 to $3,000 per day compared to the -- sorry, $2,000 -- $1,500 to $2,500 per day, sorry, up to $23,500 to $24,500 per day. We see a smaller uplift for the CLEANBUs between $500 to -- sorry, $1,000 to $2,000 per day, which is partly due to the effect of fixing cleaners in the tanker market in the third quarter, and it should be seen together with the effects in the fourth quarter where we get the benefit of high dry earnings in combination trade. So it's important to have a look also on the fourth quarter. And with the current FFA pricing in the market for fourth quarter, the CABUs look approximately the same range as we have guided for the third quarter. So staying between $23,000 and $25,000 per day. The CLEANBUs will get the benefit of positive earnings and dry freights. And we estimate that with the current forward market to be between $23,000 and $26,000 per day.Looking at 2022, it's quite interesting. For the first time since the China boom, there's a good possibility that we'll see both a strong dry market and a strong tanker market. And given the nature of our business, no company can get the same out of this market situation than KCC. An illustration of this is the dividend potential of the company. Here, we show the dividends per year in totality per share per year and linked to the earnings -- average earnings of the time charter earnings of the KCC fleet.Looking to the left at the bottom, you see the dividend yield given the current earnings in second quarter. On average, $20,500 per day. Showing that in 2022 with no newbuild deliveries, we can double the dividend yield with the same earnings from currently 4% to 8%. If we can high achieve earnings, which I believe is very likely, you see a double-digit dividend yield of this company.So to summarize, again, we believe we have an exceptionally good business model, providing the lowest carbon shipping solution, low volatility and high earnings. And outlook is very strong. Thank you, and we look forward to answering your questions.

[Operator]

It seems like everything is clear so far. Engebret, we have no questions.

[Engebret Dahm, Chief Executive Officer]

No questions. Okay. Good. Then crystal clear. Thank you. Thanks for joining.