Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Analysis

Earnings Call Transcript 2023-Q3

[Engebret Dahm, executive]

Good morning, everyone, and welcome to the Third Quarter Results Presentation of Klaveness Combination Carriers. My name is Engebret. I'm the CEO. I have Liv Dyrnes with me, the CFO. And please choose to that cash solution to write your questions, and we'll go through it after the presentation.

So the third quarter was a strong quarter for KCC, when we capped both timeshare earnings and profitability despite weak product tanker dry bulk markets. And time charter earnings average for the fleet ended at $32,314 per day which is around $2,000 above the mid-range of the guiding we gave back in December.

It's 1.2x the product tanker spot market than 3.4x the dry bulk market. Other big events this quarter is the successful placement of NOK 500 million sustainably-linked bond and also the completion of a large energy efficiency retrofit on one of our CABU II vessels.

Looking on the EBITDA is slightly down from the second quarter, ending at $27.9 million. It's impacted by a somewhat weaker CLEANBU earnings, reflecting a weaker spot markets. But offset by strong carb earnings. There's also somewhat higher OpEx in the quarter.

We continue to live up to our dividend policy of paying 80% of the free cash flow as dividends, and the dividend for this quarter ends at $0.25 per share, which is equal to last quarter. This gives a 15% running yield. And I'm pleased to say that over the last 4 quarters, have paid out $67 million in dividends. Over the last 8 quarters, we have paid $109 million in dividends.

So let's first look on the spot market development in the 3 markets that impact KCC earnings. The ones that, I have shown in light blue, the Kamsarmax dry bulk spot market in dark blue and fuel prices in gray. And the gray spotted area is the months which are deciding in the third quarter earnings for the company. So as we see the product tanker market fell considerably during the late spring and the summer and hit the bottom in July before recovering in August and through the autumn. The product tanker market has kept up at very strong levels, which is quite impressive given the soft growth during the summer. And the LR1 tanker market, as the graph shown has continued to increase over the autumn, while [ MR ] tankers, flatmate in September and has weaken somewhat over the recent months.

You see a bit of similar development in the Panamax dry bulk market in the line at the bottom, which has full back during the late spring and the summer and recovered over in August and flatout over the last month or 2. The great line showing the product -- the fuel prices show an increase over the recent months, which is benefiting the earnings of our company given that we have positive exposure to fuel prices. Looking first on the dry bulk market.

That's been a very positive demand development in the dry bulk market, mainly driven by increased Chinese imports of bauxite, iron ore and coal. The development in other parts of the world has been negative to date this year. This positive development has been more than offset by increasing effective fleet growth in the dry bulk market to date this year being in the area of 6% to 7% to date, which has weakened the market balance in the dry bulk market.

We have -- this is mainly caused by increasing, decreased the congestion, which bottomed out in September and has since been on the rise, caused by increasing congestion in South America. The ordering of dry bulk vessels has capped low, in fact, lower than in 2022 at the same period of time in 2022 and in 2021, keeping the order book at historically low levels at around 8% of the fleet. Looking ahead, we are cautiously optimistic for the dry bulk market for the -- for the fourth quarter and for next year.

The dry bulk fleet growth is under control. We expect considerably lower effective fleet growth given limited potential for further congestion reductions and also lower deliveries in 2024, given our estimate over 1.9% fleet growth in 2020. On the demand side, all eyes are on China. And for sure, there are mixed signals in the Chinese economy.

The property market is still weak, but we are seeing some positive signs, including a ramp-up of government stimulus targeting the construction industry. We also see low stock levels of raw materials, including record low stock levels of iron ore. We also see some positive signs in India and in far east for demand for trial commodities.

And if the soft landing of the world economy comes through, we may also get some positive signs from other parts of the world coming into the second half of next year. The picture for the product tankers is solid, and we see a very strong demand development in the black line. And also EIA estimates continued solid demand growth as seen in the adopted line on the graph. The OECD oil inventories has capped at historically low level.

And as mentioned, we have seen a stock throw of oil products in many regions over the summer, which is a good starting point for the tanker market. Ordering of product tankers have increased considerably over this year, increasing the order book in -- from our own 5% -- 5.5% in the early part of the year up to currently around 10%, which still is still quite modest.

So looking at the market ahead in time. Here, we see the market balance as estimated by Clarksons. We're seeing the blue line is the expected demand growth, ton-mile demand growth. And we see 2024 keeps up very well at levels between 6% to 7% demand growth, albeit somewhat lower than in the very strong levels in 2023. You see the black dotted line shows a further reduction in fleet supply ending at 1.3%. So in totality, this shows a continued tight market for product tankers for the next quarters and in 2024.

So looking at how KCC is performing, I would like to remind you about the value creation or combination carriers. High efficiency, diversified earnings base more flexible vessels that we can shift from to the market, which is the relative strongest. And the graph here shows the KCC average earnings in the columns and the spot market for product tankers in blue and dry bulk spot market in gray, showing the higher stability of earnings we produce and also the higher earnings over time. The year-to-date earnings for our combination carriers of $34,353 is super strong, being close to the average spot market for product tankers and more than 3x the earnings of the dry bulk vessels.

You get a bit the same impression by looking at the development of the last 6 -- 5, 6 quarters, where we see, again, the product tank spot market in blue and dry bulk spot market in gray and time charter earnings of KCC in the comings We're not -- we cannot beat both markets every quarter. And it differs by many reasons. But looking at the third quarter, the earnings of $32,314 is 1.2x the product tanker spot market. And after we had the earnings for the first -- 2 quarters was [ 0.9 ] relative to the product tanker spot market.

So if our projections for fourth quarter comes through, we are likely to match the product tank spot earnings for the calendar year 2023, which we did also in 2022. Looking at the CABUs, it's been a successful quarter, increased caustic soda contract volumes increased slightly the share of tank trading in the quarter, very high productivity of the fleet with a very low balance of 10% and a higher share of the capacity in combination trade has produced a record high quarterly earnings of $37,130 per tonne, which is the highest since 2010 for the CABUs.

The CLEANBU are benefiting from the strong product tanker market, which has partly been driven by trade changes and longer haul shipments. The other side of the coin is that the trade changes also impact the clean trading. And this graph shows the share of Russian diesel in the Brazilian market this year. It was 0% in January, increasing to 80% in July, falling back to 59% in September.

And needless to say that this has impacted our trading, but to adapt to these changes, we started in the second quarter to shift capacity into our other main combination trading. And this graph just shows the percentage of the tanker days in the 3 main trades we do -- we have East Coast South America, black -- sorry, dark blue at the bottom. We have the U.S. Atlantic Coast trading in light blue, and we have Australia trading in the very light blue on the top.

So we see that we -- that South American trading decreased from 71% in the first quarter to around 25% expected for the fourth quarter, while the totality of used Atlantic and Australia trading went from below 30% to 3/4 in the fourth quarter. This successful trade changes is a testament to the ongoing work to build the strength and resilience of the CLEANBU business, which to remind you, is still a fairly new business for KCC. The key has been to substantially increase the number of terminal and customer acceptance which is the -- which opens up for the possibility to trade the ships in any trade.

And we work hard to make the CLEANBUs, the preferred transportation solution in all our main trade through the highest possible technical and vetting performance and also highest possible service. And I think we are well on the way to deliver on these targets. So for the third quarter, the share of the capacity in tanker trading increased again, as we have talked about before in our presentations, the share and tanker trading goes up and down depending on geographical positions of the ships that differ from quarter-to-quarter but also is the deliberate choice to do more triangulation trading and also we do, from time to time, some balance to optimize the earnings in the tanker market.

This shows that we have still both the part of the capacity in combination trading and also the ballast percentage is below our targets for the CLEANBU business. And this is also influenced by the 1 ship that we have on charter to Reliance. The earnings for the CLEANBUs added at close to $8,000 per day. It's a reduction of around 5%, but mind you, the LR1 product tanker spot market decreased by 30% in the third quarter. So we are very pleased with the results of our CLEANBU in the third quarter. So over to you, Liv.

[Liv Dyrnes, executive]

Thank you We'll start with EBITDA, which is down 5% Q-on-Q. And the main changes are, as an bat mentioned, stronger CABU TCE, earnings, of approximately $2,600 per day, amounting to $1.7 million in change from Q2. The clean boost on the other hand, had a negative change in TCE earnings of approximately $1,500 per day and total negative change Q-on-Q of $1 million. Then we had more dry docking days in Q3 compared to Q2, and the effect of this is a negative change of approximately $1.4 million. .

Operating expenses increased by $0.6 million and SG&A increased by $0.3 million. The latter is a change in and salary for the 31st quarters of the year, which were booked on voyage expenses and has now been transferred to SG&A. All in all, a strong quarter EBITDA of $27.9 million. .

If we look closer at operating expenses, we continue to see variations from quarter-to-quarter. You will here see that the CLEANBU had an OpEx per day of $9,959 and the CABU $7,963 million. These variations from Q-to-Q is mainly due to timing of procurement and crewing as I probably mentioned every quarter. This quarter, we as well had a negative effect of a provision made for a potential loss related to a yard claim of $0.4 million, which had a negative impact on the CLEANBU OpEx.

But all in all, higher 0.6% from last quarter, a 5% increase. We had limited unscheduled off-hire of 4 days for the quarter. while we had scheduled off-hire of 108 days. 100 of these days relates to drydocking of 2 vessels, including Ballard, which installed air lubrication and shaft generator.

One vessel will start drydocking in Q4 towards the end of the quarter. And you will see on Slide 34, details, both related to off-hire and estimated cost for the next 4 quarters. Over to the full P&L. As mentioned, EBITDA down 5% Q-on-Q. Depreciation, quite flat, $7.9 million. Net financial costs down $1.4 million from last quarter. This relates to lower net interest cost as we had lower drawdown on debt. It relates to a negative one-off that we had in Q2 related to the refinancing of mortgage debt. And then we actually had a slightly positive P&L effect of the bond refinancing in Q3.

The premium paid for the repurchase of the KCC04 bonds, were offset by a positive market-to-market effect that was transferred from other comprehensive income to the P&L. Profit after tax, $16.3 million, quite flat from last quarter. Return on capital employed on an annualized basis 13% and return on equity on an annualized basis, 18%. As Abe mentioned, dividend stable from last quarter, $0.25 per share corresponding to a dividend yield of approximately 15%.

Over to the balance sheet. The main changes from the end of June is the payment of the first installment on the Newbuilding contracts in total $17.5 million. Other current assets, down from approximately $46 million at the end of Q2 to $36 million at the end of Q3. This is mainly related to trade receivables. Equity quite stable Q-on-Q mortgage debt, that's the normal repayment that we do every quarter, approximately $6.2 million. And then the main effect of the refinancing of the bonds you will see here as a change in long-term financial liabilities. Total assets, $628 million at the end of Q3 and a solid equity ratio of 56%. The cash flow was down or the cash at the end of the quarter was $64 million approximately and available long-term liquidity, $177 million.

That's down close to $20 million from last quarter. And in addition to EBITDA and positive change in working capital of $27.9 million and $8.2 million, respectively. You will here see the newbuilding CapEx at $17.5 million. We had CapEx related to dry docking and upgrading of $4 million, and then the usual debt service between $10 million and $11 million per quarter. And then the one-off, that was the bond refinancing of negative $9.1 million. This includes both premium paid for the repurchased amount. We repurchased a somewhat higher amount than what we issued NOK 508.5 million versus NOK 500 million. It includes a fee. And then the main part here is the change in U.S. dollar NOKs from $9.2 million approximately in 2020 to $10.6 million in 2023.

Three shareholders declared their warrants in Q3, positive effect of $0.4 million. These warrants were granted in 2018 when the company was established. And after the declaration in Q3, there are no more outstanding warrants. Dividend for Q2 of $15.1 million was paid in Q3. So still a very solid cash position and available liquidity position at the end of the quarter. And when adjusting for the commitments that we have for the new builds as well as expected investments in energy efficiency measures, we still have a very strong cash buffer. Over to some more details on the bond issue. We issued NOK 500 million in bonds, 5 years unsecured Pricing is 3 months NIBOR plus 365 bps. The bonds have now been listed on Oslo Stock Exchange under the ticker KCC05.

As mentioned, we repurchased NOK 580.5 million and KCC04 bond issue maturing in February 2025, and the outstanding amount here is now NOK 191.5 million, as you can see in the graph to the left under the 2025 maturities. The new bond issue was made under the sustainability-linked financing framework that we published in June.

And the pricing is very strong. It's down 110 bps from the last issue in 2020. And I think 365 bps for 5 years unsecured debt is very competitive. So then that was the short wrap-up of the financials for Q3. Over to you, Engebret.

[Engebret Dahm, executive]

Thank you, Liv. So as we all know, decarbonization in shipping is not easy. But I think it's fair to say that the progress the industry is doing is not very impressive -- and I think that's the background for this headline in TradeWinds last week, commenting on the discussions in Global Maritime Forum in Greece a week ago. While Elvis is not very high on my Spotify list, I can assure you that decarbonization is the center of everything we do in KCC. We do what we say. We work across our business to reduce -- improve efficiency and reduce emissions.

And we do believe we can deliver on our promises and our targets for the respect to decompensation. I'm happy to see that in our main KPI for the decarbonization, the carbon intensity, measuring the carbon efficiency of transportation work shows a good progress this year with the third quarter being at the level of 6.4 grams per tonne-mile, which is roughly the same as in the second quarter, substantially below both 2022 and 2021.

The main event this week was the successful completion of the large retrofit upgrade of Ballard built in 2017. The upgrade included a silver stream air lubrication system, our shaft general, which is providing the energy to the system. And Mewis duct and 3 to 4 other measures that are targeted to reduce emissions and decrease fuel consumption. We have tested out the ship during sea trial and more on line. And based on these results, we are very pleased that the effect is approximately what we expected, around 15% based on investment of $4 million and the current fuel prices, this gives a payback of 8 years. We believe fuel prices will increase when you take into account carbon cost.

And if we then use the current fuel price, adding to the current fuel price, the payback is 6 years. I think it is quite interesting to compare this to other measures that is possible to do. For instance, installing dual fuel LNG engine, cost -- which costs around 3x what this initiative has done and has a carbon emission reduction well to wake of around 15% to 20%, but this gives no immediate financial payback. So we believe in what we are doing, and we will start to roll this out on more vessels. And we have the next ship is the CLEANBU, which is going into dock in December, and we expect another 4 ships in 2024 and early 2025.

Looking ahead for -- and let's first look at the market backdrop for home KCC will perform over the coming quarters. This graph shows the historical development in solid lines, the blue product tankers the dark grade on the bottom is the dry bulk earnings d Kamsarmax's and the dark blue on the top is fuel prices. The product tanker market is, in our opinion, has a larger upside potential than what you can see in adopted lines, the blue dotted lines. The market is balance looks very tight, with limited supply over the next year or 2 and expected continued solid demand growth.

We also moderately posted to the dry bulk market. The market is rather balanced and seasonal variations and small positive demand effects can have rather large earnings effect well beyond the black, the gray dotted line, which is pretty flat for the forward pricing for driver in the derivative markets.

And we are adjusting our contract portfolio to this market view. And looking out on the CABU, we are in midst of the contract renewal season for the contract for caustic soda for next year. And the graph to the right shows that we are -- had a very positive market backdrop for these discussions. The graph shows the development of the 12-month time charter earnings, which is the best indicator for home MR tanker owners, which we are competing against are pricing contracts 1-year contracts for 2024.

We see the blue line on the top shows the development to date in 2023, showing that we are somewhat below the very strong development in 2022, which indicates that we will end up with contracted earnings on a time charter basis being somewhat lower than we achieved for 2022 but still at very high levels. The graph to the right shows to let them in shows we had a very high portion of fixed rate contracts cause contracts in 2023. And accounting for around 75% of the tanker capacity. Index-linked contracts accounted for around 25%.

For 2024, we expect a higher portion of index-linked contracts accounting for around 60%. Fixed rate contracts is likely to be more around 40%. In 2023, we earn more money from the fixed rate contracts than we did on index-linked contracts given that the product tanker market was somewhat weaker than expected at the end of last year. Next year, we hope that the development in on index-linked or the floating rate as we see on the graph will overperform the fixed rate contracts we are booked to once.

Looking on the CLEANBUs. We see the graph to the right that we, over the recent quarters have increased the share of the capacity in the tanker market for the CLEANBUs. We had 75 -- 74% of the capacity in the first half and we expect also the second half to end at approximately the same level. For 2024, we expect to maintain a high share of the capacity in the tanker trading, given the large -- expected lot difference between the earnings in the product tanker and the dry bulk market. Our guess estimate will be between 65% and 70% of the capacity. On the Tanker trading, the most important thing for the CLEANBUs is to maintain the trading in the best and most efficient combination trades.

And we do that partly through index-linked contracts and partly through repeat business on a spot basis with our customers. In 2023, contract of affreightment accounted for around 16% and spot earnings in spot days in the tanker market was 70%. We expect this to be approximately the same for next year, a little bit increase in index-linked contracts.

And we see at the bottom, we have the 1 ship that we have fixed on a [ 2-year ] time charter running up to February 2025, which account for around 20%. So looking at the fourth quarter, we are confident we will end 2023 with -- on a strong note. We see that CABUs will continue to -- with a very strong earnings, but we expect slightly lower than the record-high second quarter results. So CABUs ending at between $34,500 and $35,500 per day. The CLEANBUs will see a good progress compared to the last 2 quarters, with earnings estimate by $33,000 to $34,000 per day. This is mainly driven by a stronger dry bulk and product tanker spot market. So as an average, will end between $700 and $1,700 higher per day than in the second quarter. And maybe we will outperform that as well.

2024 looks also solid based on our market expectations and based on how we are positioning our fleet. But we are mindful that there are increased geopolitical risks partly as a consequence of what's happening in Israel and Gaza, there are still high macroeconomic risks despite recent signs of a soft landing in the world economy. So in this market circumstance, it's good to know that we have a more low-risk business model than most in the tank and dry bulk market.

And meaning that we could tackle quite well should our market expectations not come through for the next year. And to illustrate this point further, we just -- so we had a graph illustrating the average quarterly return on the vertical axis and with the volatility of earnings on horizontal access. So this shows the relation between return and risk. And as we see from the graph, KCC has the best relation between risk and return compared to the other listed dry bulk product tank and chemical tanker companies on Oslo Stock Exchange. And so this 1 shows and in our opinion, that KCC maintains the best the best risk-adjusted return in dry bulk and tanker shipping. And is one of the good reasons why our investors should take a good look on our share, both current and new investors. So that summarizes our presentation for the third quarter, and we are pleased to take questions.

[Unknown Executive]

Yes, but we have a few questions, so we'll take them in order. [indiscernible], asking which product market is the benchmark for KCC when it says it will match the earnings in Q4?

[Engebret Dahm, executive]

We are using 2 different indices. We're using Clarksons average long-term MR market spot index, which are -- which we are measuring the CABUs against. And we are using Clarkson's average LR1 spot earnings for the CLEANBUs so which are for the LR1s..

[Unknown Executive]

And next question regarding your move to trade more of the CLEANBUs in U.S. A. C., are you treating more with known counterparties, or have you increased the number of counterparties? If so, has this resulted in higher rate discounts?

[Engebret Dahm, executive]

I think for the Atlantic Coast, it's mainly to date 1 customer. But for the trade to Australia, we have been successful to expanding the number of customers we do...

[Unknown Executive]

And do you expect to draw more -- sorry, do you expect to continue with dividends in the same magnitude as Q3?

[Engebret Dahm, executive]

I think the dividend strategy policy remains as it is, meaning we are paying 80% of our free cash flow to our shareholders. So that means that the future dividend flow will be dependent on our earnings.

[Unknown Executive]

And there was another question from the same person. Do you expect to draw more from the $190 million term loan RCF from Q2?

[Engebret Dahm, executive]

Maybe Liv will you comment on that?

[Liv Dyrnes, executive]

Yes, maybe not from Q2. But of course, when we come closer to the next yard installments, then we need to draw more on the debt as well. .

[Unknown Executive]

Yes. And then Engebret referencing Slide 25, when you calculate payback for your energy efficiency installments, isn't additional expected off-hire days taken into consideration.

[Engebret Dahm, executive]

They are not. We are -- this does not take into account to extra [ fund ]. We do these installations during dry dock. So we expect that the extra days on Ballard accounted for roughly 20 days. So that will, of course, extend the payback somewhat.

[Unknown Executive]

And can you remind us what is the implied TCE for the CABU COAs for 2024? And has the charters any optionality in these contracts.

[Engebret Dahm, executive]

We have not concluded -- we have advanced well with the contract negotiations of -- in total 5 different contracts for which will be fixed rate. We have not concluded any of them, so I would not like to comment on the exact level. As mentioned, they are -- we expect them to be somewhat lower than last year, which was historically high, given the booming a MR tanker market during the autumn of last year.

[Unknown Executive]

And that's it.

[Engebret Dahm, executive]

Thank you. So thank you all for joining this result presentation. please reach out to us if you have further questions. Thank you.