Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2022-Q3

[Engebret Dahm, executive]

Good morning, everyone, and welcome to the third quarter results presentation of Klaveness Combination Carriers. I'm Engebret Dahm, CEO of the company. And together with me, I have Liv Dyrnes, our CFO. And as always, please use the webcast solution to send in your questions, and we will go through it after the presentation.

So we are owners of Combination Carriers, being both tankers and dry bulk vessels, in tanker mode competing against LR1 and MR product tankers, and in dry bulk mode competing against Panamax and Kamsarmax dry bulk big vessels. We employ our ships in trades, where our ships through combining the cargos of a standard tank and dry bulk vessels improves substantially the efficiency of the shipping in the trades they are employed.

We have a quite unique value creation to our shareholders and other stakeholders through being more sustainable, lower earnings volatility and over time, higher profitability than the standard vessels in the tanker and dry bulk space, which I will come back to. But let's start off looking at the third quarter.

It was quite an action-filled quarter in all the three markets, where we derive our earnings. Dry bulk market fell back quite considerably. The product tanker market continued its boon through the summer. Fuel markets peaked in June, but still ended at a higher level for the quarter as an average. So in the quarter, we had, in fact, three strong markets. [Audio Gap] and it's close to the earnings from a product tanker, which is good when you take into account the contract base we have and the strength of the product tanker market.

So we have an all-time financial results in the quarter where the EBITDA increased to $34.5 million, which is 30% up compared to the second quarter. This is mainly driven by extremely high earnings of our CLEANBU vessels. The Board has decided to continue increasing dividends, increasing to $0.30 in the third quarter from $0.23 in the last quarter, a 30% increase. This is in line with our policy of distributing 80% of the free cash flow as dividends to our shareholders.

To date, the three first quarters in 2022, we have paid out $0.71 per share, in total $37 million in dividends. And we are confident that we can continue to pay healthy dividends over the coming quarters.

Our combination carriers cut waste and improved efficiency in the trades they are employed by combining the dry and the wet cargoes. Standard ships go sailing over long distances without any cargo onboard. And our ships through the combination transport more cargoes than the standard ships, reducing fuel consumption per ton transporter and emission per ton transported by 30% to 40%.

We are targeting to improve this important competitive advantage further through a number of initiatives, including a large energy efficiency program. So we are targeting to have a business over the next years that are at least 50% lower carbon footprint than our competitors.

And we can show over the recent years, a good improvement in -- over the initiatives we have started. And the average CO2 emissions have reduced by around 17% over the last 12 months compared to the 2018, which is expected to meet our 2022 target.

We have also learned that the carbon intensity expressed in the so-called EEY has been more difficult to reduce. We are ending up with around 6% decrease since 2018, so well above our target of 25% reduction.

So we have, for sure, learned a lot since we geared up our energy and efficiency and emission reduction initiatives in 2019 and presented our first environmental strategy in early 2020. And we'll bring with us all this experience and learning points when we, early next year, present our new and updated environmental strategy with revised targets.

I can promise you two things. One is that we will continue with our high ambitions when it comes to the environment. And secondly, we'll be honest and transparent on what we believe we can achieve. So no greenwashing in this company.

We have a diversified earnings space in our company being -- trading in both the dry bulk market, the tanker market, and also having a positive impact from higher fuel prices due to our superior efficiency. And if you look on the tanker and dry bulk market, you can see that they are, in fact, moving in opposite directions very often.

Starting up here with the dry bulk market, the market for Kamsarmax, this year peaked around $30,000 per day in April, May, falling back with some ups and downs to around $15,000 per day for Kamsarmax yesterday.

Looking out on the LR1 earnings, you see since the spring, this market has boomed with a bit up and downs. This week, the earnings lies around -- spot earnings lies around $40,000 per day.

So if you add up the curve for the fuel prices and shipping, which peaked in June, still at extremely high levels, you get an impression of the risk-reducing effects of the diversification of 3 markets for our business.

But looking first at the dry market. The underlying demand growth, as expressed in deadweight miles, has been fairly strong to date with an increase of year-to-date of 5% compared to last year. And the main reason for the weak dry market is the normalization of the congestion, where you see that part of the capacity import, as expressed in this graph, has reduced by around 6 percentage points since April, which attractively increased the supply in the dry market by 6%.

On a positive note, the contracting of dry bulk ships is very limited, meaning that the order book continues to reduce slightly, now down to around 7%. And this implies a very low fleet growth over the coming quarters -- coming years.

In 2023, we expect a bit more than 1%. It will fall further down in 2024. And also 2025, it's likely to be very low, meaning that this is definitely risk reducing in the medium term for the dry bulk market.

And a big upside potential in the dry market is the ongoing dislocation of Russian coal and also longer distances on grain shipments, in totality increasing ton miles in the dry bulk segment.

Panamax market where 80% of the cargoes transported are either grains or coal will be the biggest benefit -- get the biggest benefit of this development. But we know that the total demand in the dry market is dependent on the macroeconomic development.

And all eyes are, of course, on China. And the white line shows how the development in start-up of newbuildings in China, falling 45% over the recent month, which gives a good indication that we are set for some weak quarters in the Chinese economy.

The blue line shows the trade-weighted purchasing manager index, which now stands at 50, which is the inflection point between expansion and contraction, which also indicates that the industrial production likely will be rather weak over the coming quarters.

So totality, we continue to believe that the dry market is fairly balanced with -- especially based on the low fleet growth in the dry market, but we expect some weak quarters in the dry market going ahead in time.

We continue to believe that despite macroeconomic headwinds, that the tanker market fundamentals are very strong. The graph here shows in the white line, the world production of oil is now exceeding the pre-COVID. Also the oil demand has improved substantially at slightly below 2019 levels because of the continued COVID restrictions in China.

We see that the -- in the light blue line at the bottom that the oil stocks is still at a very low level despite increasing somewhat. And the order book stands -- or product tanker stands at around 5%, which gives a very low fleet growth over the coming quarters.

And year-on-year expected to be 2% to 3% in 2023. And looking at the total tanker market, it's expected to be between 0% and 1%. And this is definitely improving the resilience of the tanker market for unexpected events.

But what's going to drive the tanker market, in our opinion, is the dislocation of Russian crude and products to Europe. Today, Russia -- sorry, EU imports around 50% of their products from Russia mainly from the Baltics.

And up to now to February, EU has to replace this 50% in total 1.2 million tons barrels per day with longer haul imports. And the graph shows that we expect this imports to come from US Gulf, Middle East and possibly Far East.

And just calculating the ton-mile effect of the total product tanker market of this replacement, we end up an 11% increase just by this effect, disregarding the effect of longer distances of the Russian exports, which needs to find new buyers further away.

But we know that with this macroeconomic outlook and high oil prices, there will be demand disruption in the oil markets. But looking back in time, as this graph shows where you see the GDP growth and the growth in oil consumption, you see that even in the worst recessions, you are normally down 5% to 6% when it comes to negative growth in oil consumption.

So if you put these two together, we are confident that the effects we see in the tanker market, despite economic headwinds, we'll secure a very strong product tanker market for the coming year.

Taking a quick look at the fourth quarter, where we are when it comes to booking, we are more or less fully booked for the fourth quarter, taking into account the index-linked contracts, both in the tanker market and the dry bulk market.

We are starting to book contracts for next year, and I will come back to that later on. But we are certain that we will have the majority of our capacity either in index-linked contracts or in the spot market in 2023.

We have been successful to book a number of important index-linked contracts. In total, accounting for around 20% of our total CABU CLEANBU tanker capacity and around 14% of the CABU CLEANBU dry bulk capacity.

Being a combination carrier trading in both tanker and the dry bulk market, we have been able to get the best out of the two markets. And looking at the average earnings for year-to-date 2022 at $29,150, we are outperforming the product tanker supply by a factor of 1.1 and the dry market with 1.2 to 1.3. Seen over the last 6, 7 years, we have outperformed these markets by 1.5.

Starting up with the CABUs, it's been a very strong quarter for the CABUs, despite a weaker dry market and also continuing large port congestions impacting our scheduling efficiency. After we brought all our CABUs back to trading in the Pacific to and from Australia, we have the normal 50-50 mix between dry and met cargoes. And we are increasing the trading efficiency by having more than 90% of our capacity in combination trade and having ballasts below 10%, meeting our targets.

The earnings of the CABUs of $26,100 per day is the second best over the last 10 years, but it's still 15% down compared to the second quarter which is due to the weaker dry market, but also some negative bunker effects of lower fuel prices.

The CABUs due to the high contract coverage in the tanker space has got fairly limited effects of the strong tanker market in 2022, which also explains why we are underperforming the tanker market for the CABUs this year with a fact of 0.7, but outperforming the dry bulk market with 1.4 in the quarter. The increase in earnings looking at the year-to-date 2022 is around 26% compared to last year.

Looking on the CLEANBUs, it's been a fantastic quarter. Both operational and wetting performance has been strong. We have successfully improved our combination trading and also earnings are substantially up.

As mentioned when we presented our results in August, we had a number of CLEANBUs completing discharge of dry cargoes and reloaded clean petroleum products during the early summer. Meaning that these ships have traded mainly in the product tanker space in the third quarter, ending up with 72% of the capacity in tanker trades in the third quarter. This is higher, more than you can expect over the coming quarters, but of course, has had a positive effect on earnings in the third quarter.

We are seeing again that we maintain a very high percentage of the capacity in combination trade, showing that we have been successful to expand the trading, build our customer base and terminal acceptance. The balance is slightly higher than our target, which is going to be around 10%, and we're optimistic we can bring that down.

The earnings on the CLEANBUs at around $45,000 per day is fantastic and, of course, shows the strong earnings capacity of these new ships in efficient combination trading and in a strong tanker market.

We have had 5 out of 8 ships trading in long-haul combination trades between Middle East, India to South America and U.S. East Coast, where we had -- we're bringing in petroleum products into Americas and bringing back the grains and sugar on the way back again.

This is very efficient and has been very profitable. And we are pleased to see that we have been able to outperform the standard LR1s by a factor 1.1 and the standard bulk vessel by 2.3. Earnings to date is -- this year is $31,100 per day.

So then, Liv, I think you take over the show.

[Liv Dyrnes, executive]

Yes, thank you. And good morning, everyone. Over to EBITDA and some financials. EBITDA for the quarter was $34.5 million, an increase of 30% compared to last quarter. As Engebret mentioned, the main driver behind the increase is CLEANBU TCE earnings, which increased by more than $15,000 per day. In total, this amounts to a change from Q2 to Q3 of more than $10 million.

The utilization of the two different fleets or segments offset each other somewhat compared to Q2, while CABU TCE earnings were down by approximately $4,700 per day from last quarter to Q3. This, in total, amounts to more than $3 million. We saw a positive development in operating expenses of $0.6 million, mainly driven by lower CABU OpEx related to crew mainly and some FX effects as well. SG&A increased by $0.2 million from last quarter mainly driven by provisions and partly offset by positive FX effects.

Over to operating expenses per day. For both segments, we saw a decrease compared to Q2. And if we have a look at the average for the year for the three last -- sorry, first quarters of Q3, the average for the CABUs, here as seen in the light line, is approximately $7,500 per day and for the CLEANBUs, approximately $8,600 per day.

We do expect this to increase somewhat for the full year of 2022. And as well based on the global inflation that we see, high inflation, I think it's fair to expect that 2023 costs will be higher as well.

If we then have a closer look at the P&L for the quarter, for the items below EBITDA, depreciation increased by $0.8 million. This is due to depreciation of docking and yes, a shorter period where we depreciated the docking element. This was as well mentioned in the Q2 presentation.

Net financial costs increased by $1.3 million, and that's mainly due to a positive one-off in Q2. That's a modification gain related to renegotiating terms on one of the mortgage debt facilities. Profit for the quarter, $22 million, an increase of 36% compared to last quarter. Earnings per share, $0.42 and dividends per share, 30%. The latter is approximately a dividend yield of 18% based on close yesterday.

Return on capital employed, on an annualized basis for Q3, 17%. Then at the bottom, you see the off-hire days, which increased by approximately 20 days from Q2 to Q3, and the driver behind that is dry docking.

The cash was down a bit compared to Q2 and ended at $63.3 million at the end of September. In addition to the regular items such as EBITDA, drydock CapEx, debt service and dividends, we had a negative working capital development for the quarter of approximately $14 million.

The reason behind this change is mainly trading pattern and type of contract as we operate in both the dry bulk market and the tanker market, and they are quite different payment terms on these types of contracts. This will temporarily have quite large effects. And we have seen very positive cash inflow for October.

And all in all, available liquidity, very solid at $113 million when including both the short-term and the long-term available credit facilities. Equity ratio ended at 46.1% at the end of September. That's an increase of 2.5 percentage points from the end of Q2. We have started to -- or started the initial discussions related to the refinancing of both the facility falling due in 4Q next year as well as the short-term overdraft facility that falls due this year with very positive feedback.

Then Engebret, over to you for final remarks and outlook.

[Engebret Dahm, executive]

Thank you, Liv. So as you have understood, we are quite -- with high hopes for and expectations for the tanker and energy markets for next year. And this graph shows the historical development in the three markets. And the dotted lines show how the forward pricing is in the derivative market at the moment. And we believe, especially for the tankers, product tankers and the fuel prices substantially underestimates the potential in these markets.

The blue line shows the dry market development, where we agree that 2023 earnings will be substantially lower than in 2021 and 2022, but probably can't underestimate the potential of recovery at an earlier stage than the line shows.

So hence, we still -- next year, we'll have two of three markets strong, which is sufficient to drive the earnings of our company and to secure a high dividend distribution and a competitive yield to our shareholders.

Taking a look on the cargoes. We have, as mentioned, every year around the fourth quarter, we are negotiating extension of our caustic soda contracts, which to a large extent are fixed rate for a 12-month period. So in end of 2021 we fixed around 60% of our capacity based on the forward pricing at the time. And that has, of course implied that this year, we have only had a positive effect of the strong tanker market through the 38%, 39% of the capacity, which are in index-linked contracts or in spot.

We have -- this looks different for next year where we expect a large increase in contract rates. We will continue to book fixed rate contracts. We have a recent week started, booking one contract, representing around 18% of the capacity of the CABUs. And we expect over the coming months up to Christmas to be able to increase the cargo volume compared to last year, fully booking the capacity -- tanker capacity of our CABUs.

And the earnings -- the freight earnings of these contracts, as is illustrated by the development in the 12-month MR tanker time charters, will be high. We see how the blue line shows that compared to the same period last year, 12-month time charter rates for MR tanker is more than doubled. And this corresponds well with the time charter earnings we have booked through the one contract we have put on our books over the recent weeks, having earnings of around 2.5x the earnings we had in 2022, which I have to admit is a pretty bullish sign for the earnings of our cargo fleet for next year.

As mentioned, the third quarter utilization with 72% in the tanker market was not fully representative of the average. The fact is that the ships that -- number of ships have completed discharge of product tanker cargoes at the end of the third quarter and early fourth quarter, and we'll have a higher proportion of dry bulk trading in the fourth quarter, which will have a slightly negative effect on the earnings on the CLEANBUs, given the big difference between the tanker earnings and the dry bulk earnings at the moment.

But we have achieved the higher capacity utilization in the tanker market. If you look on the totality of the third and the fourth quarter, adding at closer to 60% of the capacity.

But as I said, this development will be a bit different from quarter-to-quarter, which is a natural consequence that we are trading these ships on long-haul trades and where we combine dry and tanker cargoes.

Looking at the contract base, we have extended the contract we had with one of the oil majors, which, for next year, represent around 15% of the tanker capacity of the CLEANBUs. We are working to increase the contract coverage further in next year with 15% to 30% coming up, and around 1/3 to close to half of the capacity fixed on index-linked contracts.

So meaning that the CLEANBUs, as it looks today, will be fully spot exposed in the product tanker market. But the best thing we can do in order to secure the value creation and high earnings of our CLEANBU fleet is to ensure that they are trading in the most efficient combination trades where they create value. And that's what we intend to do.

So looking at the earnings for -- indications for and guiding for the fourth quarter, CABUs are expected to be flat between $25,500 to $26,500; the CLEANBUs with the guiding we have between $34,500 and $36,500 will be the second highest quarter in our history, but still will be somewhat below the record high earnings in the fourth quarter as a result of the higher trading in the dry market in this quarter.

So in totality, we end at the guiding of between $30,200 and $31,700 per day for the fourth quarter, which is somewhat lower than the third quarter, but still likely to end higher than the second quarter.

So to summarize, we are entering into a period with high risks and uncertainties and probably high volatility, and we believe that especially in these times, our concept will prove its value. So we have the higher efficiency and the lowest carbon emission solution will be more important going forward. We have more stability in earnings given our diversified base and contract coverage, and we deliver higher profitability over time.

So thank you. So that ends the presentation. So we are now ready for questions.

[Unknown Executive]

Right. So we have a couple of questions from the audience. The first one is actually more a comment. I think 2023 product tanker predictions was a bit negative in your chart?

[Engebret Dahm, executive]

That's right. And we fully agree because, again, it was not our predictions. This, as I mentioned, was the current forward pricing in the derivative market. And, yes.

[Unknown Executive]

Two here, considering the discrepancy in earnings and outlooks between dry bulk and tankers, could you consider trading the CLEANBUs as pure product tankers?

[Engebret Dahm, executive]

We are, all the time, evaluating whether the combination trading creates the value. And when we get efficient trading in dry with limited waiting time, it more or less always pays to go in and do the dry bulk trading instead of ballasting.

But again, there will be instances where there will be waiting time for the dry cargo with dilutes or efficiency advantage, where we may, from time to time, go straight into the tanker market. So -- but the concept is that it's a win-win over time.

[Unknown Executive]

A follow-up for this one is also with all the changes in trading patterns, do you see any new trading opportunities for your combination carriers?

[Engebret Dahm, executive]

We have -- the main trades we have had in recent quarter is into South America, but also it's interesting that we have increased the trading into U.S. East Coast, bringing some special oil products from India into New York, which was the front page of our presentation. That is a trade we believe can grow for us. And also it's very efficient given the long haul trading, and so that is a potential.

We also see a potential for U.S. West Coast that could emerge. So yes, I think we have a lot of opportunities for the CLEANBUs where we can efficiently combine the dry and the wet cargoes.

[Unknown Executive]

Another one here. How should we think about the TCE impact in U.S. dollars per day from the renewed cost for 2023 compared with 2022?

[Engebret Dahm, executive]

You can do your math yourself as well. But again, if you end up with CABU -- caustic soda contracts of 70% of the wet capacity being 2.5x higher than last year, you can do the math that it's going to have a substantial positive effect on the CABU earnings for next year.

But again, we haven't yet concluded everything. But again, we have advanced far enough in discussions to have confidence that we will see a big increase in earnings -- in the tanker earnings for the CABUs next year.

[Unknown Executive]

Last question. Can you give us some more details related to the caustic soda contract renewals?

[Engebret Dahm, executive]

That, I guess, basically I have already answered. And it's good to see that we see both increased cargo volumes and better pricing, which is essential to get the most optimal trading for the CABUs. And we may even have to use a little bit of the CLEANBU capacity into that trade, if need be.

So that summarizes the third quarter presentation. Thank you all for joining. And I can promise you to be exciting times ahead. Thank you.