Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2019-Q4

[Engebret Dahm, Chief Executive Officer]

Again, welcome to the fourth quarter result presentation for Klaveness Combination Carriers. My name is Engebret Dahm, I'm heading up Klaveness Combination Carriers. Together with me, I have Liv Dyrnes, who is CFO of the company, who will go through the details of the figures afterwards. As usual, I'm starting off to say, who are we? We are the world leader in combination carriers. We have 17 of in total 20 ships that are able to combine between dry and wet cargoes, including newbuilds. Our ships are specifically made by Klaveness, unique designs made to switch efficiently between dry and wet cargo to comply with all the strict requirements that customers have with respect to the cleanliness of the cargo holds to avoid cargo contamination. We have 2 different type of ships. We have the CABUs, which are specialized for caustic soda transportation, which is a wet commodity and dry bulk, and we have the new CLEANBUs which are full-fledged LR1 tankers and can do all type of -- more or less all type of wet commodities and dry commodities. And these ships are employed in efficient combination trading between dry and wet cargoes. Klaveness Combination Carriers have taken the ambition to be in the lead to the transition to low-carbon shipping. We have a unique starting point by having a trading pattern where -- and ships that are able to combine the wet and dry cargoes, where in most of our trades, we perform 30% to 40% better with respect to cargo -- carbon emissions than standard ships to which we compete. We have 2.5 weeks ago presented our environmental strategy, where we have set ambitious targets to improve further, to reach carbon neutrality within 2030 and a number of other targets that I will come back to. As a third pillar in our strategy is that we will be fully transparent on the performance we have going forward, and we'll report each quarter, and we will also have a third-party audit of our figures. So going back to summarizing this quarter. It is the best quarter we've had for the last 18 months. So we have a result of $1.7 million earnings before tax, which then ends up with a $0.6 million positive profit for the year of 2019. This is the -- the CABUs delivered the best earnings per day for the last -- second last best earnings for the last 3.5 years at $19,000 per day, we are -- which is very good. We are also pleased with the CLEANBUs, which are performing well in the combination trades, earning well above the standard markets in combination trades. But as we'll come back to, the percentage of the fleet employed in combi is lower in this quarter, meaning that the earnings are somewhat down from the last quarter. We have -- we are progressing well with the introduction of the CLEANBUs. We are building a track record with new type of cargoes, new type of customers and new type of cargo operations. We are -- the year is starting up well on the CABU side as well as the CLEANBUs. We had good booking for the CABUs for this year. We have 94% of the capacity for the caustic soda booked for the first half. So it looks good in that sense. The Board has decided to pay a dividend for the fourth quarter of $0.5 million/$0.01 per share, which then continues the strategy we have of paying 80% of the free cash flow to the shareholders. Looking on the CABUs. As mentioned, we have had a good quarter with $19,000 per day. We had positive effect of a strong tanker market through our index-linked contracts. We -- the dry market fell back slightly. But still, the good earnings were not sufficient to offset the rather weak earnings we had in the first quarter and second quarter. So the earnings for the total year for the CABUs per day ended close to $16,900 per day, which is about $500 lower than last year. And as we've been through before, the earnings for the first half was impacted by lower caustic soda volumes, mainly caused by the 50% production cut of Alunorte in Brazil. This plant is now up to 90% utilization in the fourth quarter, which means that the volumes are back again in the second half. But also I know the customer in Pacific, we've had some delays in the cargoes, which also impacted the second half results. If we compare it to the standard markets, we see we have performing well compared to the standard dry bulk ships, 1.5 to 1.6. It's a bit more difficult to compare towards the MR tankers this quarter. We -- the MR-tankers, as we all know, it was a strong tanker market, especially peaking up in October, November. So we are at par in the fourth quarter with Clarksons index for average spot index for MR tankers. And as a year -- as a total, we are 1.2 the standard MR tankers, which is below what we had -- our historical average has been over the years. When we see how -- when it comes to the number of caustic soda cargoes shipped, which basically decides how much combination trade we aim to do on the ships, and that's where we are creating value for when it comes to earnings and also on the environmental side. We are seeing that -- how that the second half of the year the number of cargoes increased substantially from the first year, which is the reasons I mentioned, regarding the Alunorte and also the second customer in the Far East. We have good bookings for the first half. We have about 3 cargoes more for the first half. And so we are basically fully booked on the caustic soda side for the first half of 2020. Second half, we are not that fully booked. We are -- but we expect that the contracts that we have booked for first half will be extended into the second half of the year. And our expectation is that we will have a similar contract coverage for the caustic soda also in the second half of the year. When it comes to the CLEANBUs, we are happy with the introduction of the CLEANBUs. When we are phasing in the ships, we have 3 objectives. We are testing out the ships with new type of cargo operations, with new type of cargoes and new type of terminals and customers. We are secondly targeting to expand the combination patterns where we are creating the value, which is important for this concept to be successful. And thirdly, we are -- we wanted to earn money, every day we are and to outperform the standard markets. So we have progressed well. We have now increased the number of customers testing out the ships to 6. We have done multiple cargoes with 2 customers. We have now transported 6 different type of wet commodities. And we have visited 20 terminals, including ship-to-ship transfers and single point moorings. And we have done also other advanced type of cargo operations on our ships. So I think the important thing is that we go forward step-by-step, we are -- each customer that we have want to do more business and each terminal we've been to going to -- welcome the ship back, which is important, and that's the way we go forward. Looking out on this slide, you see to the left, you see the number of days employed in combination trade and the number of days employed outside the combination trade. And you see that we started up with the combination trading on the first ship, the Baru, basically in end of May, and we expanded that into the third quarter. In the fourth quarter, you see that we have deliberately chosen to have 1 ship in tanker trade in the Far East to build the track record we need to expand the concept and to be in position to start trading in new combi trades. And you also see that to the right, you see the earnings per day. And the big difference we have between the -- when we are employing the ships in combination trade and when we are trading them as standard tankers. The earnings of standard tankers in the fourth quarter was hit by the positioning of the Baru into the guaranteed docking, which makes that earnings for -- which is basically the Baru is fairly low in the fourth quarter. But overall, you see that the earnings we have as -- in combination trading is as an average for the year is $22,000 per day, which is substantially higher than in the standard markets. So then going into the average, where we average out the time in combi trade and outside the combi trade, we see the earnings in the fourth quarter ended at $18,700 per day, down from $22,802 in the third quarter, bringing the yearly average to $18,300 per day and which is explained by the fact that we have a lower share of the fleet in combi trading in the fourth quarter. Comparing to the standard markets, again, we outperformed the dry market with 1.5. Comparing to the LR1 standard markets is especially tricky in this quarter because with the boom in -- booming market in October, we saw that the indices that we compare against, the Clarksons average index, includes a number of fixtures that were failed. And meaning that it seems to overstate the market at the time. And also, there are some negative factors, which makes it a bit more difficult. But if you still compare it to the standard market in the fourth quarter, we were -- the CLEANBUs were at 70% of the earnings. But again looking at the year as a total, we match the standard markets for the year, which in a phase-in isn't that bad.Looking at the number of off-hire days for the ship, this illustrates a bit what we have been through in the year. The blue columns shows the off-hire at shipyard, which is the Bantry. The Bantry was the first ship delivered in January. It was the prototype. We immediately after delivery in the first months of trading discovered a number of items we needed to correct and on that basis, we delayed the -- postponed delivery of the second and third ship. We had, as mentioned, put in about 2 times once in March-April and now lately in October-November to shipyard to make the necessary guarantee works. The second one was made to -- mainly to correct the propeller shaft. And we had to see that the Baru is now performing well. We have completed all the main guarantee items that we expect to be relevant for that ship. And we don't expect any further outstanding items that would impact the trading of the vessel.The Barracuda was delivered in the end of July and Barramundi was delivered in September. And as all new ships, there are guarantee items on the ships. We had one item that will impact also off-hire for the 2 ships. We are discussing with the shipyard what to be done. And we expect to optimize this repair as good as we can. As normal, the shipyard will pay the cost for the repair and we need to take the hit on the off-hire. The plan we have today is that we will postpone these repairs to the scheduled special survey, which will be made in 2022, but there is still a risk that we may have to make it earlier. So we'll keep you updated on development on that item. Otherwise, the corona situation in China has impacted the progress on the construction of the outstanding ships, remaining ships, #4, we expect to be delayed by roughly 2 months. We -- the shipyard has started up production somewhat this week, but we don't know yet how fast it will ramp up production to get up to normal. So at the moment, with what we know, delivery of the full ship will then be in early May. And for the remaining part of the outstanding ships, we have -- we expect, at the moment, 1 to 2 months delay as it is.We have, as mentioned, set a target that we want to be in lead when it comes to the transition to low carbon shipping. And we have put up 2 main targets. One is that we will reach, be carbon neutral as a company within 2030. And on the road to that target, we are -- we will reduce -- improve energy efficiency of the ships. And we have set a target that we should at least be 15% more energy efficient coming into 2022 than we were in 2018. So that meaning reducing CO2 emissions of -- average CO2 emission per ship by 15% within 2022. And road towards 2030, we will continue improving energy efficiency. We will start up using new type of fuels, biofuels, we will test out one next month on one of the ships. And we potentially will buy carbon offset points and the latter will be -- hope to be a smaller part of what we want to achieve. When it comes to the carbon intensity, IMO has set the target that the world fleet should be 40% more -- have 40% lower carbon intensity by 2030. We target to reach that target within 2022, meaning that we will have 40% less carbon intensity compared to the standard ships that we are competing against in 2018. And this will be further improved coming into 2030. Looking at the KPIs that we have in our reports, there are 3 main KPIs. We have the carbon emissions per transported cargo per ton mile, which we have set the target for 2022 at 5.8. We are slightly up in 2019 due to the issues with -- on the CABUs in the first half, where we are trading more as standard dry bulk carriers and also the introduction of the CLEANBUs that has impacted the carbon intensity. We are also in ballast days slightly up compared to 2019. And again, the target here is to reach 7.5% ballast days in 2022. For both these KPIs, the fourth quarter was better than the third quarter and the third quarter was better than the first half. But still, we are -- the KPIs for this year is impacted by, especially the first half -- the first half performance. When it comes to the CO2 emissions, we have -- the total is reduced by 4% from -- in 2019 from 2018. But again, the operation has not been fully optimal in this year, which impacts also the CO2 emission per ship. When it comes to the OpEx for the fleet, the CABUs are performing well. They are slightly up compared to the third quarter, but still in line with expectations. On the CLEANBUs side, for various reasons, the OpEx per day is up compared to the third quarter partly due to the guarantee docking on Baru where we have booked a cost about $300,000, that impacts the earnings per day, which is -- which we are discussing with the shipyard that we may not need to take. So in total, the operating cost for '19 is $9,800, and we expect the operating cost for the ships to be less than $8,000 going forward. So the underlying OpEx for the CLEANBUs is going down as the ships are in service. But in the fourth quarter, there were a number of special issues that impacted the daily cost as we had reported. When it comes to the coverage -- contract coverage we have for the fleet, we have a high coverage, both on the dry side and the tanker side in the first half of the year. Looking at the dry side, we have quite a bit of FFAs that were done at fairly high levels back in the second half of '18 and second half of '19, including the bookings that we already have made. We are -- more than half of our capacity is fixed for first half this year. For the second half, we see we still have quite a bit of paper hedges FFAs, but quite -- not that much when it comes to the physical contracts, fixed rate contracts. On the wet side, we see we have a high booking on the CABUs. This does not include the index-linked contracts we have, which brings up the first half coverage for the CABUs up to 94%. But on the fixed rate contracts, we are at 76% -- 78%. Including the CLEANBUs, we are at about 62% coverage for the fleet for the first half. For the second half, the percentage coverage is lower, partly due to the lower coverage of the CABUs, which, as mentioned, we expect will be increased coming into the spring and into the summer. When it comes to the coronavirus issue, I think that's on all our mind. We are concerned with -- to make sure that when our ships are visiting China that we make all precautions to -- that there will be no impact on our crew. Similarly, we are very concerned with the site team that we have in -- at the shipyard in China. We have demobilized them. They will -- if things move as we think, they will be back within the next couple of weeks. But it also impacts, of course, the earnings side and the situation in the shipping market. I think it's important to see that the worst may be behind us, looking at LR1 -- the graph to the left with the LR1 earnings in triangulation trades. We are seeing that over the last weeks, the earnings has improved quite a bit. We are seeing also that the Panamax dry -- the Kamsarmax dry market has bottomed out. So hopefully, when China starts up again, slowly, the markets will continue to pick up again. And we believe that once the coronavirus situation is settled, which we hope can happen over the next month or 2, there are upside potential in both the shipping markets. We -- on the graph to the right, you see the proxy for the industrial production in black, and you see the Baltic dry index in blue. And you see that based on the latest figures, we see that there is -- it seems that the industrial production proxy is bottoming out and there are signs that the cycle may -- the macro cycle may improve. And then, of course, it's unknown which effect the coronavirus could have on the world economy. But again, I think the underlying macro outlook is not that bad. And also looking at the trade war, there are positive signs. And again, the effects on the supply from the corona situation likely will have a positive effect on the markets going forward as delivery of new ships will be delivered and also the installation of scrubbers and off-hire connected to this scrub installations will be delayed into the second half of the year. So looking at the markets, we have the dry bulk market, which is 1 of 3 markets our combination carriers are exposed to, falling down dramatically in the first months of the year, which is partly seasonal, linked to the Chinese New Year. But this year, it fell even more than normal. As mentioned, the market has started to move up again and forward markets pricing this, would call V-shaped recovery in the second and the third and fourth quarter. Looking at the product tankers in the graph in the middle, we see that also the market fell back for product tankers. They also -- both markets -- both the MRs and LR1s has moved up somewhat from the trough in mid-February, and we see the fuel markets are pricing up and positive market development going forward. The fuel prices also have fallen back over the new year. But still, it's important to note that the fuel cost that the shipping industry is facing in the markets we are is substantially higher than last year. And you've seen that how the premium between heavy fuel and low sulfur heavy fuel, the dark -- the black and the light blue is about 180, 190 in this year and then falling back to 160 in next year as it looks. So totality of the 3 markets we -- our company is exposed to, I think, both the fuel market and still the tanker market looks good, which proves to be a good backdrop for the earnings for the company going forward as soon as we get clarification on the coronavirus situation. That was my first part. And then Liv, you go a little bit more on the details.

[Liv Hege Dyrnes, Chief Financial Officer]

Yes, then some more details related to the financials for fourth quarter and also for the full year of 2019. As mentioned, earnings before tax for fourth quarter ended at $1.7 million, and the underlying result was $1.6 million. This is the strongest quarter since second quarter 2018. This is also up from $0.6 million when comparing to the same quarter in '18. Earnings per day for fourth quarter ended at $19,000 per day, which is down approximately $200 per day compared to Q4 '18. We saw less efficient combination trading in fourth quarter '19 around 80%, down from above 90% in the same quarter in '19 -- '18, sorry. However, rates were supported by a substantially stronger tanker market, up approximately $10,000 per day. We had 40 more on-hire days for the CABU segment in Q4 '19 as we had no dry dockings. CLEANBU EBITDA came in at approximately 0. This also includes $0.2 million in start-up costs. The rate per day, as mentioned, $18,700 per day and OpEx at $10,836 per day. OpEx was impacted by costs related to the docking of Baru, and EBITDA is also impacted by off-hire of 60 days for the quarter. Financial items, $0.1 million when comparing the 2 quarters. However, some underlying effects. Negative market-to-market noncash was $1 million in Q4 '18 and close to 0 in Q4 '19. However, this was offset by interest rate costs of approximately $1 million higher in Q4 as we had 3 additional vessels on water. Other $0.6 million includes reversal of an old provision of $0.3 million and also some effects related to depreciation and other costs. When comparing to the previous quarter, Q3 '19, we also see an improvement. Earnings before interest and tax for CABUs up approximately $2 million. The rate is up $1,700 per day. Also, here some of the same effects as when comparing to the fourth quarter of '18. Less combination trading, positive impact of a stronger tanker market. However, we also saw positive effects of higher intake of caustic soda on the cargoes in the Atlantic. And also here, more on-hire days, 60 in total. But that's also related to periodic dry docking for the CABUs in the third quarter. CLEANBU earnings before tax down approximately $2 million when adjusting for start-up costs. Here, rates per day were down $4,000 per day. In the third quarter, we had close to 100% efficient combination trading for the CLEANBUs, while we saw below 60% in fourth quarter as we decided to keep on vessel and less efficient combi-trading patterns in the Pacific, as we target to increase number of customers, terminals, trading patterns and cargoes. Start-up costs down to $0.2 million in fourth quarter from $0.6 million in the third quarter. Financial items also here some of the same effects as when comparing to fourth quarter '18. We guided on a small profit for the year in total in the third quarter presentation. And we ended at $0.6 million for the year. If we adjust for one-offs related to the year, start-up costs for the CLEANBUs, noncash market-to-market effects, listing costs as well as reversal of provision, the underlying earnings before tax ended at $5.2 million. If we, in addition, adjust for off-hire on the CLEANBU vessels, we had in total 114 off-hire days for the CLEANBU vessels in '19 and we assume the average rate for the year of $18,300 per day, and we, in addition, adjust for OpEx or a more normalized OpEx level of $8,000 per day, the earnings before tax based on a more normalized CLEANBU operation ended at close to $9 million. All in all, for '19, I think we have to say that we have had negative impacts of lower caustic soda cargo volumes, both related to the Alunorte situation in Brazil and some canceled volumes or postponed volumes in the Pacific. This impacts our trading pattern, which again impacts rates negatively. We had negative effects of the CLEANBU introduction, both related to OpEx levels, one-off costs and also off-hire and in addition, negative noncash market-to-market effects. However, we saw during the year that earnings for the CABUs improved on the back of increased caustic soda volumes through the quarters and also due to improved markets. And for the CLEANBUs, I think we definitely have proved that when trading the vessels in efficient combi-trades, we definitely have a strong earnings potential of around $22,000 per day, at least for the fourth quarter and third quarter. Then over to some information related to funding. We successfully issued NOK 500 million bond in early February. At the same time, we repurchased part of the KCC03 volume, and we will likely call the remaining part of the volume in November. It was substantially oversubscribed, and hence, margin was down 50 bps to 4.75%. We are also in the process of securing bank debt for the deliveries in 2021, that's 2 vessels. And I assume that will be finalized in the second quarter. Equity ratio stable at 47% for the quarter. And as mentioned, we continue to pay dividends of $0.01 per share, in line with second and third quarter. All in all, $0.5 million for Q4. That's it from me.

[Engebret Dahm, Chief Executive Officer]

So just to summarize again, when it comes to the CABUs, we have had a very strong starting point for 2020, January was and also February will be very strong based on a high contract coverage for -- on caustic soda for the year made at a considerable increase in earnings compared to last year. We will get the effects of the coronavirus into March, especially and also into second quarter of the year. But again, we are guiding that the first quarter of 2020 will be in line with the fourth quarter 2019 for the CABU earnings per day. When it comes to the CLEANBUs, we have proven in 2019, the earning capacity of the ships when they are trading in combi-trading. And going forward, we expect the share of the combi fleet in combi-trading -- the CLEANBU fleet in combi-trading to increase compared to what we saw in the fourth quarter. And based on progress in phase-in more ships coming out, the picture for -- outlook for the CLEANBUs looks also good for 2020. The big uncertainty for us and for all shipping companies is what happens in China and the rest of the world when it comes to the coronavirus. We believe that our company, based on the contract coverage we have and our trading pattern is more robust to impacts of the coronavirus, but we will not be spared either if the impact will be delayed further going forward. But as mentioned, when we see that the situation will stabilize and will improve, we are seeing that underlying and fundamental macro picture and the supply-demand picture in both dry bulk and specialty tankers and supported by the fuel markets will be very positive for the Klaveness Combination Carriers for 2020 and going forward. So that summarizes the presentation. And now we open up for questions. If you have question, please, we have -- I think we have a microphone, so you can use.

[Dennis Anghelopoulos, Research Analyst]

Dennis Anghelopoulos from ABG Sundal Collier. First question, Engebret. How did the core renewals go in Q4 '19?

[Engebret Dahm, Chief Executive Officer]

Pardon me?

[Dennis Anghelopoulos, Research Analyst]

How did the core renewals go in Q4 '19?

[Engebret Dahm, Chief Executive Officer]

The contract renewals?

[Dennis Anghelopoulos, Research Analyst]

Yes.

[Engebret Dahm, Chief Executive Officer]

I think they were good. They were up considerably compared to 2019 levels. As I think we mentioned before, some customers wanted to only make -- who normally make 12-month contracts, only did 6 months contract, partly due to the IMO 2020 effects, which were uncertain. But I think in totality, both, as we mentioned, the volume and earnings are good.

[Dennis Anghelopoulos, Research Analyst]

Because I see that in the beginning, it's 78% that's on a fixed rate and then it goes down to 28%. So is it safe to assume that your H2 exposure is going to be more index-linked versus...

[Engebret Dahm, Chief Executive Officer]

No, I think -- most likely, I think second half will be fixed rate. What is in -- the only index-linked contract we have goes through '21. So that means will continue through second half of the year.

[Dennis Anghelopoulos, Research Analyst]

And then following up on the Barracuda and the Barramundi, they're going to have to do this special survey, right? So is it -- that's 2.5 years after they've been delivered. Is that the norm going forward?

[Engebret Dahm, Chief Executive Officer]

That's the norm. We don't expect them to go into dock, but we do expect them to go into shipyard to do some maintenance. So -- and that's where we expect to do this repair, which I mentioned.

[Dennis Anghelopoulos, Research Analyst]

But excluding the repairs, every 2.5 years, you're going to be doing the special survey. What's the cost for that?

[Engebret Dahm, Chief Executive Officer]

I don't have it in -- I think it will probably be linked to the quoting of the cargo holds. And again, I think it will be based a bit on experience going forward, how the ships are operated and what the need is. So again, we don't have any specific, what we call, detail for that. I think it will be made as we get experience. But as the plan is, we expect that the ships for the first special survey in '22 will be into dock for some period. But not on underlying cost base, it will not be a normal docking because it will be not into dock, which are the main component. So I will guess that we are talking about a couple of hundred thousand dollars for that -- for these costs.

[Dennis Anghelopoulos, Research Analyst]

And then last question on the caustic volumes. They seem to be increasing quite a lot even from 2016 on looking at the history going forward. What's the key driver of that? Is it Pacific? Or is it Atlantic or...

[Engebret Dahm, Chief Executive Officer]

I think it partly is, again, the trading into Australia, the supply where are the Australians supplying from. I think we are probably seeing that the supply from the U.S., which increased for a couple of years, has stabilized and seems to fall back a little bit. So I think that's the main reason. And also, again, that we have increased also the number of cargoes we take in -- to Brazil. But again, of course, excluding the dip we had in the second half '18 and first half '19.

[Unknown Executive]

That's all the questions, then.

[Engebret Dahm, Chief Executive Officer]

No questions on the webcast?

[Liv Hege Dyrnes, Chief Financial Officer]

No.

[Engebret Dahm, Chief Executive Officer]

Okay. Done summarizing. Thank you very much.