Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2023-Q2

[Engebret Dahm, executive]

Welcome to the Second Quarter Presentation of KCC. My name is Engebret Dahm, I'm the CEO of the company. And together with me, I have Liv Hege Dyrnes, the CFO.

As normal, please use the webcast solution to write in your questions, and we'll go through it after the presentation. So the second quarter continued to -- with a high volatility in our markets, the dry bulk market started up quite well in March and April, falling back substantially in May and through the summer. But as an average, ended up at a higher level than in the first quarter. Product tanker market also had a good start of the quarter, but also fell back during the spring -- late spring and summer as an average, considerably below the first quarter.

So in these markets, we are very happy to present another strong quarter for the company with average time charter earnings of close to $32,000 per day, which is the third highest in the company's history.

The CABUs performed splendidly while the CLEANBUs performed somewhat lower than expected, ending up with earnings somewhat below the guiding range we gave back in May. Also compared to the spot earnings of the standard markets, we performed well, around 2.4x higher than the dry bulk market earnings and close to the product tanker earnings of a factor of 0.9.

The EBITDA ended up at $29.5 million, down from the spectacular earnings in the first quarter. This is mainly due to lower earnings from the CLEANBUs, but also some OpEx effect. But mind you, the third highest EBITDA level since the establishment of KCC. We continue with following our dividend policy or paying 80% of dividends to our shareholders, and the Board decided to pay out $0.25 per share as dividend, which equates to $15 million. This gives a running yield of 15% based on yesterday's share price.

The biggest event in the second quarter was the contracting of 3 third-generation CABU vessels. And this would be an important strategic step for our company. The ships are designed as zero-emission ships, ready to be converted to burning zero-emission fuels, but we have postponed the big investments to later -- to time where we expect to have more predictability on fuel supply, on regulations and customer support.

Where we put in our money is to make these ships as fuel efficient and as efficient in all or a sense from day 1 after delivery. We have put in quite big amounts in energy efficiency initiatives. We made ships bigger and they are far more efficient in terms of cleaning and turnaround time, producing 25% higher earnings than our old ships today and 35% lower carbon footprint. And if you add the benefits of combination trading, these ships should be at a minimum 50% than today's standard tankers and dry bulk vessels.

Looking on the markets, we continue to get benefits from our combination trading with being in both the dry bulk and the tanker market and having benefits of stronger fuel prices due to a high efficiency. The dry market, we have the Kamsarmax spot earnings had, as I said, a good April, May at levels around $14,000 to $15,000 per day, fell back in early July to $8,000 per day. And we have had a good recovery now in the latest weeks up now to around $14,000 per day. Also, the product tankers performed well during the early spring after the start of the year but fell back through May and through summer, but has also recovered lately to level around $30,000 per day for LR1 vessel.

The fuel prices have been pretty constant over the year -- over the quarter. So if we look on the dry market, contrary to popular perception, the demand has been pretty decent over the first 2 quarters with a deadweight mile growth of close to 2.6%. That has been driven mainly by Chinese imports of coal and bauxite and contrary to lower grain shipments caused by lower shipments of grain out of Argentina.

What has cost the weaker markets this spring is the high growth in effective supply, which is as a result of release of ships and congestion and the good thing, it peaked at around 9% back in May, and it has fallen down to around 5% now in the first part of August. And we expect the effective supply to slow down and to get closer to the nominal growth of the fleet, which is around 2% for this year and the next 2 years.

So in totality, despite the rather weak development in China, the dry market is balanced and quite limited effects that can drive market up. We have a limited supply, and we see increasing growth in other parts of the world than China. So in totality, we believe the dry market has good upside potential.

The situation in the tanker market is different. It's far more solid. We see that the oil consumption this year will be back to pre-COVID levels and our further growth potential into 2024 with increasing air travel and also increasing industrial demand. We also see the stock levels are historically low, the high buildup of inventories in Europe has come down during the summer and is now at close to historical levels even in Europe.

So the market fundamentals are strong, and it's mainly driven by the displacement of Russian oil and oil products into Europe with longer distances, sale with imports from U.S., Middle East and even Asia. And we have Clarksons estimating around 12% growth this year in tonne miles and 6% growth next year, which compares well to supply growth of around 2% -- 1% to 2% for the next 2 years.

So in totality, the tanker market will, in our opinion, remain strong going forward. So looking at our performance, we have, over time, managed to outperform both the dry bulk and the tanker markets in more or less every year.

Last year, we had earnings of -- average earnings of the fleet of around $30,000 per day, which matched the spot earnings in the product tankers and was 1.4x the dry bulk earnings. This year, we are at $35,400 in the first half, which is around 90% of the spot tanker market and 3x the dry bulk earnings.

If you look on the CABU business, we have had a very active second quarter in caustic soda shipments, which has turned out to a higher percentage in tanker trading. The schedule has been very tight, meaning that we've had to balance a couple of ships to get -- be in time for the next caustic soda shipments, which in our KPI results in a lower share of the capacity in tanker trading.

We also see the effect of the tight schedule in the ballast. So the development -- this development has been a part of our strategy to focus and concentrate our CABU business in Australia and to build our market share and our presence in that market. And we are pleased to see the results of these initiatives where we have increased the number of shipments this year, the expected shipments by around 20% compared to last year.

And this is also made to position ourselves for a growth in the market and the growth will come mainly through the start-up and expansion of lithium refineries producing lithium hydroxide for electric car batteries. And within 2027, we expect the volume in caustic soda into Australia, into the same port we serviced the alumina refineries to reach 0.5 million tonnes, which equates to the demand of one of the bigger Australian alumina refineries.

So the earnings of the CABUs ended at $34,500 per day, which is the highest earnings ever. And this, as mentioned, is due to a high share of the capacity trading in caustic soda, high earnings on the caustic soda contracts, both on the fixed rate contracts, fixed before Christmas last year and through the index-linked contracts. And this is also despite a very poor earnings for our CABUs and also some negative facts from the trading efficiency.

So in total, we earn 1.1x the spot earnings for MR product tankers and 2.7x the dry bulk earnings for standard dry bulk vessel. So going over to the CLEANBUs, we -- as we have been presented before, due to the long voyages and the variations in the geographical positions of our ships, the share of the capacity with CLEANBU fleet in the tanker market will have large variations from quarter to quarter.

We are trying to increase the percentage in tanker trading, which we have achieved, if you see from more than 1 quarter at a time. And we do that partly by adding a third tanker leg. We replaced dry bulk shipments with veg oil, if we can, with a large flexibility of the ships. And we also do ballast more to -- if it pays take into account a shadow carbon pricing to do the ballast instead of taking the dry in the current market.

So this has in the second quarter resulted in a higher share of days in combination trading. But -- and in this high share of combination trading, we should have expected the balance to decrease. It has marginally increased in quarter, which illustrates that we, in this quarter, have had somewhat lower trading efficiency being mainly a result of the large variations and shifts in trade flows and hence, large variations in cargo volume in the various geographical areas with trade.

To improve the training efficiency, we are working hard to be more efficient and to grow our customer base. We grow our customer base based on excellent performance, both on vetting and daily operation and service and we are pleased to show you how the good increase we've had to date this year, we have increased the number of acceptance over concept where we trade in key petroleum products, followed by dry bulk. And the big achievement over the recent month is the final -- getting acceptance from Abu Dhabi National Oil Company, one of the biggest exporters out of the Middle East, which after having used our ships several times, finally has accepted to -- accepted the ships with last cargo dry bulk.

So based on this work that we do every day to improve the efficiency and add more customers, we are confident that we can continue to improve trading efficiency and improve their relative earnings in every market going forward.

So then looking on the earnings of the CLEANBUs ending at close to $29,500 per day, which is well below the spectacular earnings in the first quarter, mainly due to lower share of the capacity in the tanker market, but also considerably lower tanker -- product tanker spot earnings in the quarter. So this earnings is the fourth highest in the company's history. It is more than twice the earnings of a Kamsarmax, but it is somewhat lower, around 70% below relative to the LR1 product tanker spot earnings in the core.

Liv, will you take over?

[Liv Dyrnes, executive]

Yes. Thank you. Let's start with the EBITDA for the quarter, which is down 28% Q-on-Q. And as Engebret already showed that is mainly driven by the CLEANBU TCE earnings, which were down approximately $60,400 per day, amounting to $11.6 million. However, the CLEANBU TCE earnings were up approximately $3,000 per day and total 2.1% compared to last quarter.

We as well had more scheduled off-hire related to dockings this quarter, which impacted the figures negatively $1.3 million. OpEx increased somewhat $1.3 million. I'll come back to that on the next slide and SG&A down $0.6 million. The reason for the change in SG&A is mainly due to exercise of options in Q1 as well as some positive FX effects this quarter.

EBITDA for Q2 ended at $29.5 million, which is still a solid quarter. Operating expenses for the CABUs quite flat from last quarter, $7,140 per day while we saw an increase for the CLEANBUs of approximately $1,550 per day to $10,189 per day.

This is mainly due to timing of procurement and crewing, and we have mentioned this earlier as well that we do see these kinds of changes from quarter-to-quarter. The average for the year so for, however, is quite in line with -- or more in line with what we expect going forward. We as well started dry-docking and complete the dry-docking of vessels in Q2, hence scheduled off-hire increased to 60 days for the quarter. Unscheduled off-hire still at very low levels. More on the CapEx and off-hire for the remaining part of '23 and first half '24 can be found on Slide 37 in the appendix.

In addition to EBITDA, depreciation improved somewhat from last quarter, 6.4%. This is mainly due to postponement of some dry-dockings. Net financial items increased by 20% approximately from last quarter and it's mainly related to expensing a capitalized fee on one of the refinanced facilities. Profit after tax, $16.4 million resulting in return on capital employed of 14% and return on equity of 19% on an annualized basis for the quarter. So still a very solid quarter, although somewhat weaker than last quarter.

Dividend per share, as mentioned, $0.25, approximately equal to a dividend yield of 15%.

Then over to the profit and loss for first half of 2023. Q2 concluded a record strong 6-month period for KCC. EBITDA ended at $70.5 million, an increase of 60% or close to 60% from the same period last year. It's, of course, mainly driven by TCE earnings. For the CLEANBUs, they were up close to $14,000 per day and for the CABUs close to $5,500 per day.

We also saw a considerably lower unscheduled off-hire in first half this year, and now it's at quite normal levels, below 1 day per vessel. The higher SG&A, as you can see here, that's mainly driven by somewhat higher expenses related to the new build project in first half of 2023. We started capitalizing the costs on the project after signing the agreement in June. We as well see higher activity level, somewhat higher travel expenses and wages and it's also impacted by some one-offs.

Depreciation, up 15.6% from the same period last year. And as mentioned earlier, that's due to periodization of dry-docking that we -- during 2022 started to periodize over a shorter period.

Net financial items, up 41%. There are 3 main reasons for this. One reason is, as mentioned, the expense fee on one of the refinanced facilities in Q2. The other is a modification gain of $1.2 million that we had in first half 2022 related to some changed terms on one of the mortgage debt facilities. And the last reason is the underlying higher interest rates.

Profit after tax, $44.6 million, an increase of close to 90% from the same period last year. Return on capital employed, 18% and return on equity, a strong 25% for this period.

Over to the balance sheet. The main changes from the end of Q1 is increased equity. In addition to the regular items such as profit and dividends, we raised close to $50 million in equity in May to fund the new build -- or part of the equity for the new build program.

We will as well see here that short-term mortgage debt is substantially down, and that's due to the refinancing of 2 of the facilities in Q2 and hence, this was moved to mortgage debt or long-term mortgage debt. Some of you might as well have noticed that there are no new build items in the balance sheet. We paid the first new build yard installment in July, amounting to $17.2 million. So you will see this in the third quarter balance sheet. Equity ratio was strong, 55.3% at the end of the quarter.

Over to the cash flow. We started the quarter with a cash position of $79.3 million and long-term available liquidity of $109 million. We first see the regular items such as EBITDA, working capital changes and CapEx. But in addition to these items, we have some substantial one-offs this quarter. The first one is the net effect of the equity issue amounting to $48.7 million. Then you will see the regular debt service and more ordinary financial items. But then we have used the excess cash to regulate the revolving credit facilities amounting to close to $50 million.

We as well terminated several interest rate swaps with duration below 2 years during the quarter, with a cash effect of $4 million positive. The P&L effect of this termination will be periodized over the existing or the initial tenor of the swaps. Dividend, $20.9 million paid in Q2 and hence, cash for the end of Q2 ended at $83.8 million and long-term available liquidity, $196.8 million.

This is, of course, a very solid cash position for a company like KCC and hence, I think it's important to emphasize that approximately $90 million of this available liquidity is committed to the equity portion of the new builds as well as energy efficiency measures. Then we upsized the mortgage debt facilities during the refinancing with close to $38 million in liquidity effect. And it's likely that part or the whole amount of this will be used for additional energy efficiency measures when we roll that out on a larger part of the fleet.

The interest-bearing debt maturity profile is identical to the one that we showed in the last presentation. What's important to say here is that the finalized refinancing is as shown as the maturity in 2028. We as well transferred all the swaps and mortgage debt facilities from LIBOR to SOFR. And as you can see here, the first refinancing coming up is the bond loan that matures in early 2025. Some of you might as well have noticed that we, in June, published a sustainability-linked financing framework. The framework is based on the updated environmental strategy that we published in March this year. And the targets are linked to our carbon intensity performance measured by the EEOI.

We have, since the start of 2020, refinanced all of our mortgage debt facilities on sustainability-linked or with sustainability-linked mechanisms. And the last refinancing that we did now in Q2 is based on this framework. The framework and the second party opinion from DNV can be found on our website. And the intention is that we, going forward, will do all refinancings, both in the bond and bank market based on this framework.

Engebret, over to you again for the remaining part.

[Engebret Dahm, executive]

So we do work actively through auto business to improve the carbon footprint of our business and to reach our ambitious decarbonization targets. Liv talked about what we do on the finance with the sustainability linked financing. We do it on reporting. We work with our customers to improve the trading efficiency. We work hard to improve the [indiscernible] execution, and we invest large money in energy efficiency initiatives. On the latter, we hope to be back to you in the next quarter with further updates on what we are doing and what we are achieving in this sense.

But looking on the second quarter, we see a somewhat increase in the average carbon emission per vessel, which is a reflection of higher transportation work, more time at sea, more cargo transport. So while we definitely will decrease and reduce the carbon emission per vessel, our main target in our strategy is to cut the carbon emission per tonne transporter, the so-called carbon intensity. And we are, therefore, very pleased to see that in the second quarter, we've reached an all-time low on the so-called EEOI at 6.3 compared to 6.9 last year, which compares well to our 2026 target of 5.3.

To illustrate our focus, we wanted to show you a comparison from our own fleet of the CLEANBU ships. We chartered out one ship, which is traded currently as a standard tanker. In the second quarter, it had a ballast of 32%, which compares well to the productivity of the standard LR1 tanker fleet.

If you're looking on the remaining 7 CLEANBUs, they have 17% balance, which is not a particularly good quarter, as I already mentioned. But if you measure the difference in carbon intensity between the one ship on time charter and the other 7 ships, it's a 35% difference in carbon intensity. This shows the importance of efficiency in reaching decarbonization targets, not only for our company but for the industry as a total.

So looking ahead, we all know it's very difficult to predict markets and especially so in the current environment with high geopolitical and macroeconomic risks. So looking on the markets, starting up with the dry market, we were clearly expecting the market to be much higher than it actually turned out to be, mainly due to the effects of weaker Chinese growth. But the market, as mentioned, is balanced and fairly tight, and we believe that the dry market could surprise on the upside.

The product tanker market in blue has fallen down, and that was somewhat weak during summer. But we -- as mentioned, we had very high expectations, so both, the product tanker market and the energy markets going forward. The dotted line shows the forward -- the derivative forward pricing of these markets, which in our mind, underestimates the potential in these markets. So with this market view, we are well positioned in KCC. We are more or less fully booked for the third quarter, both on the -- especially on tankers, but also now gradually on the dry bulk.

For the fourth quarter, we have around 50% of the capacity fixed on fixed rate contracts, mainly on the CABUs having the caustic soda contracts and also the one CLEANBU on time charter. For the dry bulk, we have very limited coverage for the fourth quarter. For 2024, we have some index-linked contracts, both on caustic soda, on clean petroleum products and dry bulk, but we have quite a bit open exposure to the markets. We will, over the coming months, fix quite a number of caustic soda contracts, as we now come into the contract renewal season, which we are optimistic will be done at strong levels, reflecting the continuous strong tanker market.

So looking ahead for the third quarter, we end up with another strong quarter for the company. The CABUs will continue with very strong earnings based on the strong earnings from the caustic soda contracts and also high capacity in caustic soda shipments. The CLEANBUs will get a benefit from a higher tanker trading in the third quarter, but the quite weak market development during June and July. It turns out that the earnings will be somewhat lower than in the second quarter, guiding between $26,000 and $28,000 per day.

So in totality, we end up with the third quarter, which are slightly lower than second quarter, but still at strong levels. And which will deliver strong earnings for the company, which gives us the possibility to continue the high dividend distribution to our shareholders.

So to summarize, we have a concept and a business that is future proof, in our mind, the lowest carbon emission shipping solution in the tanker and dry bulk space. Due to our diversified earnings space and higher efficiency, we have lower volatility and higher earnings. So to our dear shareholders, we have a share that gives the greenest and the best risk-adjusted return in dry bulk and tanker shipping.

Thank you. So then we are ready for questions.

[Unknown Executive]

Yes. Thank you, Engebret. And we do have some questions here. First question is asking, are there any changes in the delivery schedule for the new builds?

[Engebret Dahm, executive]

No. The delivery schedule is constant, as Liv told you, we paid the first installment during the summer and the contract is effective. So the first ship is expected to deliver the first quarter 2026, the second in the second quarter, and the third in the third quarter.

[Unknown Executive]

Okay. And then we have another question here. And what is the expected percentage of days in tanker trade for CLEANBUs in Q3? And could you say something about the estimates in Q4?

[Engebret Dahm, executive]

I think we are heading towards close between 65% and 70% in tanker trading in the third quarter. I think the fourth quarter probably will be slightly less. I would expect something like 60%.

[Unknown Executive]

Okay. And then another question. If current tanker and dry bulk earnings remain at current levels throughout 2023, would it be reasonable to expect the share of tanker days for CLEANBUs to increase in the second half of '23 versus the first half?

[Engebret Dahm, executive]

I think we had the exceptionally high tanker trading in the first quarter, which was due to a number of reasons. So if you end up with -- and that, of course, was at a time where the tanker earnings was incredibly high and far, far higher than the dry bulk earnings. With the tanker market coming down, from the extremely high levels in the early part of the year, we believe it's still profitable to maintain in combination trading. But as I said, we will try to tilt activity in a way that keeps the higher share in tanker trading. So I would guess that as a total for the second half, we will still be lower than the first half. But still at -- I would expect as an average between 60% and 70%.

[Unknown Executive]

And what do you expect when it comes to the renegotiations of CSS contracts later this year?

[Engebret Dahm, executive]

Again, we are competing against the standard tanker owners, which are servicing these contracts with MR contract -- MR ships. And what we have learned that their pricing normally starts with the time charter costs for the MR ships. And given the high level of time charter rates for the next 12 to 24 months, we are confident that the earnings under these contracts will be very strong. It's still some months before we conclude. So it's still too early to give you a definite target.

But we are very confident that the high levels of CABU earnings will continue into 2024 based on a strong caustic soda contract coverage.

[Unknown Executive]

Okay. And then I have a long message here that we'll see if we can go through each part of the question. Regarding the cost of CO2 certificates in 2024, and in general, it makes sense to replace all the carriers with new ones. Simply to keep fuel consumption low, minimize the CO2 footprint and ultimately save money. For this reason, 3 old carriers will be retired, and the question is all sold and replaced in 2026, will more be replaced or will the fleet be expanded in the near future? And as a follow-up, with $6 million new shares recently issued, will new shares be issued again to fund new projects?

[Engebret Dahm, executive]

That was a long question. So please remind me if I forget part of it. So I think we have the 3 ships that are contracted as the question pointed to, will replace 3 of the older ships that will be phased out between 2000 and early 2026 and into 2027.

The next ships that are turning 25, which is the age we are confident we can maintain the operation of these ships will only be in 2030 and 2032. So meaning that we have no immediate plans to contract new builds. Of course, over time, we believe we can grow the business. But when it comes to the fleet structure on the CABUs, we are well positioned with the new building contract we have done.

But over time, we do hope that we can find opportunities to grow the company further. But again, critical is to find the right time and make sure it's accretive for our shareholders. When it comes to the cost of carbon, of course, what's coming in 2024 is limited to Europe. And of course, with the introduction of effectively carbon taxes through the ETS system, it will pay to have product in units in service.

We have quite limited activity into Europe at the moment. It is occasional shipments on the CLEANBUs. We will get the benefit. But I think the potential for KCC and for the industry as such is, of course, that -- at some stage, we get a carbon tax on a global scale, but of course, will put further pressure on getting out old ineffective ships and introducing new and more effective ships. And of course, there is where we have our big advantage through our superior trading efficiency with our combination carriers.

[Unknown Executive]

Okay. That was the last question. Thank you, Engebret and thank you, Liv.

[Engebret Dahm, executive]

Then we thank you all for joining me today and see you in 3 months' time. Thank you.