Klaveness Combination Carriers ASA

OSE:KCC

Earnings Call Transcript 2021-Q4

[Engebret Dahm, Chief Executive Officer]

Good morning, everyone, and welcome to the fourth quarter result presentation of Klaveness Combination Carriers. I'm Engebret Dahm, CEO of the company. Together with me, I have Liv Dyrnes, CFO. We encourage you to write your questions in the webcast solution and we'll go through it after we have completed our presentation. So KCC, we are owners and operators of combination carriers, which are ships that transport which are both tankers and dry bulk vessels. In tanker mode, they compete against MR and LR1 tankers. In dry mode, they compete against Panamax and Kamsarmax dry bulk vessels. We have 2 type of concepts. We have caustic bulkers or CABUs, which in tanker mode are specialized to transporting caustic soda to the alumina industry and in dry bulk mode, tank all type of dry wood commodities.On new CLEANBUs, the last ship was delivered and put in service in July last year. It can transport any type of tanker cargoes in the market and can do the same work as the CABUs and the same type of dry bulk commodities as the CABUs. Our business idea is to transport tanker cargos, caustic soda and clean petroleum products, into regions that are big exporters of dry bulk commodities. These are regions where the standard tanks and dry bulk vessels are sailing long distances and so-called ballasts due to the underlying trade flows. Our ships, we combine the dry and the wet cargo with a minimal ballast in between reducing the carbon footprint and increasing earnings for our company. And looking at the 3 markets, which we are exposed to, it has been an exciting and volatile market also this quarter. The dry bulk market ended at a more sober and spectacular 2021 with the market peaking in October, falling back in November and December, but still at very high and interesting levels.The product tanker market had a seasonal upturn in the fourth quarter, rather modest and rather short-lived. And fuel markets continued to improve and tighten during the quarter. We are pleased to present the fourth quarter results, which is the best results of KCC ever with an average total earnings of around $23,600 per day, which is also the highest since the establishment of the company. This is a couple of hundred dollars below our guiding mainly caused by the CABUs ending at $22,700 per day, which are around $1,700 below the guiding. We are extremely pleased to report the earnings of the CLEANBUs ending at 24,460 per day, which is at the very high end of the guiding range we get. We see from the graph that we didn't succeed to match with the dry bulk market this quarter, but are outperforming the tanker market by 2x to 4x.Looking at the EBITDA, we had 9% increase from the third quarter, $1.6 million increase driven by the continued strong but a bit weaker dry market and better CLEANBU earnings. We have a dividend policy in the company to pay 80% of our adjusted free cash flow as dividends and to have -- to try to have a fairly stable distribution of dividends. We are very pleased to announce a $0.10 per share dividend for this quarter, which is more than double the level of dividends compared to from the third quarter. Before proceeding, just wanted to remind you about the main advantages and strong points of our business. We believe we have a more future-proof business model than the standard tankers and dry bulk vessels. We provide the lowest carbon emission shipping service in the dry bulk and tanker industry.We are exposed to 3 markets, which are less correlated, which even saw earnings and reduced risks. And due to efficiency, we have over time shown that we provide higher earnings than standard markets giving -- providing positive value and positive results throughout the shipping cycles. We have -- in our company, we are the market leader in low carbon shipping in the dry bulk and tanker space, providing our customers in the main trades with a 30% to 40% lower carbon footprint than standard vessels. This gives us a unique competitive advantage, which we believe will be more and more important going forward. With the shipping industry needing to decarbonize its business with the introduction of new regulations and a likely global carbon tax within this decade. This is why decarbonization and sustainability is the centerpiece of our strategy and why we concentrate on improving further our competitive advantage and increasing the lead compared to our competitors.We are doing this by focusing throughout our business to deliver large cut in carbon emissions of our operation. We do that by optimizing our trading pattern, which I will come back to later on, in both the CABUs and the CLEANBUs. We do it by improving the operational efficiency and we're also introducing, as I'll come back to, an ambitious energy efficiency program. We are testing out new fuels and we are planning for new generations of ships to come. To reach this, we are working close with our customers and we are entering into what we call sustainability-linked contracts where we of course are reporting our emissions based on high-quality data, we are assigning common targets for reducing emissions and we target to introduce a mechanism whereby our freight will depend on our carbon emission performance. We are using our strong points in low carbon shipping to attract competitive finance.We have entered into 2 sustainability-linked bank financings and we do hope that investors open their eyes for the fact that KCC has the best ESG case in the shipping. We are focusing also on providing a top-quality and highly transparent ESG reporting and we are working hard to improve that further. And we are pleased to see that the rating we get from sustainability agencies like the Governance Group and CDP places us as among the best in Norwegian shipping. We have set emissions target to reduce emissions. As mentioned, we have 2 targets. We have the average CO2 emission per ship, which we have set a target to reduce by 15% from 2018 to 2022. We are pleased to see that we have achieved a 10% reduced average emission per ship in 2021 compared to 2020 and we are well on track to reach the target for 2022.When it comes to the carbon intensity, so-called EEOI, we are lagging behind partly due to the fact that we have employed our CLEANBUs in dry bulk trade for part of the year and also we had certain operational challenges on the CABUs in the second part of the year. We see -- we maintain that we will show quarters this year where we are getting close to the target we set out for 25% reduction in EOI compared to 2018, but we appreciate that we will not reach the target for calendar year 2022 overall. We note that in the fourth quarter the CLEANBUs had an EOI of around, which is very strong and we also see that in certain quarters this year, we have -- our CABUs have had -- partnered CABUs have had similar level of low EOI. So we will maintain that we will, at the end of this year, reach quarters where we can show this level of EOI. We raised $25 million to fund energy efficiency program of our fleet and we're working hard to deliver on the introduction of various measures to cut emissions.We have to date introduced a large number of initiatives, which are today fairly small and medium-sized, everything from $20,000 to $300,000 per ship per measure and these are focused on reducing the hull friction of the ships, we are focusing on improving the propeller and the hull efficiency of the ships and we are also focusing on improving the technical and operational systems of the ships. Big initiatives are coming. We are in negotiations with suppliers and shipyards to introduce 2 specific initiatives, which are both complex and costly, which we do intend and hope to present and to announce within this quarter. So I believe we are well on track to reach our targets and hopefully, you see that we mean what we talk when it comes to emission reductions.Looking at the fact that we have a more stable business than the commodity markets we are in and we have 3 -- our earnings are exposed to 3 markets, which are fairly low correlated and we also have ability to shift capacity between the tanker and the dry bulk market, which in totality reduces the risks and the volatility of our earnings. If we look on the market development, we see the dry bulk market peaking here in October, falling back through November, a bit up and downs, falling back further in January and improving in February. You see on the tanker market again the spectacular boom in spring of 2020, being at fairly low levels since then. You notice on the graph the upturn in the fourth quarter -- seasonal upturn, but again falling back into the first quarter. The fuel markets have continued to increase throughout the year, which again supports our business. So in totality, we had 2 of the markets are fairly strong and we're waiting for the tanker market to improve.Looking at the dry market first. The main reason for the strong market in 2021 is exceptionally high demand increase with a demand increase of around 6%, which is highest since the China boom 10, 15 years ago. We see strong grain shipments in the first half of the year, [ steel ] strong throughout the years, iron ore was strong in the middle of the year while coal has underperformed. Looking the market turn in October mainly due to impacts from China where the effect of a coming down property sector impacted the steel industry in China. You see on the blue line the falling Chinese steel production, which went up again at the end of the year and we believe that Chinese steel production will gradually improve after now the Olympics and Chinese New Year celebration has completed.But we appreciate that China is not going to be the driving force in the dry bulk sector in 2022, but we are still optimistic about the dry market for 2022 partly due to very low supply growth, we are talking about around 2.1% increase in supply in 2022 compared to 3.5% increase in 2021. We have -- there is a positive macro development in most of the parts of the world outside China, which will support the market. We have seen that the COVID conflicted inefficiencies in the market seem to stay for a rather long time and we also see positive effects from the booming container market absorbing capacity in the smaller sectors. Going over to the tanker market, we see that the oil consumption has more or less improved back again to levels seen before the COVID pandemic. What we see from dark line is that oil production is lagging behind and this results in reducing inventories and stock levels of oil throughout the world.And you see on the dark blue line that we are now getting through 2021. stock levels has been falling and we are now at the very low historical range of global stock levels of oil. And this again creates the backbone for a turnaround in the tanker market supported by a very low tanker fleet growth for next year around 2% and a very low order book. This looks very promising for the tanker market, but largely we need to wait until the second half before we see a major upturn in tanker rates. Looking at our contract portfolio and market coverage. We start up with the tanker market where we see in gray, we see the capacity which is fixed to date and the fixed-rate contracts. In the first half of the year, we see contract coverage -- fixed-rate contract coverage to around 45% in the tanker market adding index-linked contracts. We are ending up at a coverage of about 57%.The fixed-rate coverage is only linked to the contracts for the CABU business for caustic soda while we have index-linked contracts both for CABUs and CLEANBUs. For second half we see the coverage is less mainly due to the fact that we -- there are no ships that are fixed for the second half of the year. So we have a fixed rate coverage around 26% of the capacity and including the index-linked contracts we're up at 41%. Advancing to the dry bulk market again, we see the gray line shows the fixed -- the vessels fixed and FFA portfolio we have at the moment and we are at around 57% covered and at the top of that we have -- the first half. On the top of that, we have options. The operational coverage is index-linked contracts and that is fixed to date. For the second half, we see a lower level of coverage partly due to the fact again we have not fixed any ships for the second half. So you see the FFA portfolio accounts for around 25% of the dry bulk capacity while the operation coverage is limited to the index-linked contracts.Advancing to the earnings slides that our company provides. This graph shows the long history back in time where we show in the light blue columns the average earnings of our fleet over time compared to the average tanker market and private goings. And we note that we have outperformed the market every year since over these 13 years we have in this graph except we are somewhat below the dry market in 2021. Over the last 6 years, we have outperformed the dry market by about 1.5x and the tank market by around 1.7x. Looking at the CABU business, we have used the strong market to optimize the business. After delivery to the new owner of the Banasol ownership that was sold this autumn, we have decided to exit our Brazil business. And from having 2 ships in the Atlantic trading and around 7 in the Pacific, we will from April this year have had 8 ships employed in trades to Australia. We believe this will increase all other things equal the earnings of our CABU business.We have over the last 4 years had earnings around 20% higher, around $4,000 higher per day in the Atlantic -- in Australian trade compared to the Brazil trade mainly due to inefficiencies in the Brazil trade compared to Australia trade. We have succeeded to expand our business to Australia by booking more caustic soda cargos into Australia. So we have the best starting point of the year ever with 37 cargos fixed for the year and we believe that we will add another minimum 5 cargos on the top meaning that we are able to expand and absorb the increased ship volume to Australia. We have fixed 4 contracts, old contracts that we expected, at higher levels than we had last year, around 10% higher as an average. And we are particularly pleased with the announcement we made before New Year about the 6-year extension of a contract with South32, which is index linked.If you look on the CABU business, as mentioned at the end of the year, there were increasing congestion and COVID-related delays in China meaning that we had to deploy our CLEANBUs to service our caustic soda customers. That meant that we had -- we employed more CABU capacity in the dry bulk market and we see now again the division between dry bulk trading, 75% trading in dry and 25% in the tanker market. Well, far lower tanker trading in the market than in previous quarters. The CABU -- we see that again on the days in combination trading falling down to 50% and we also see it on the ballast increasing up to 20%. Within annual earnings levels, which are historically high for the CABU business at $22,776 per day, around $17 lower than in the third quarter. Strong dry earnings around $30,000 per day outperforming the dry bulk vessels. We had negative value of our FFA portfolio of around $5,000 per day.Again we are seeing that on the totality we did match the dry bulk market, but we substantially outperformed the MR tankers. The same picture we see for the year as it's shown where we ended up at around $21,500 per day, which is still close to dry market earnings and substantially above the MR market earnings. Looking on the CLEANBU business, we have expanded our trading and customers throughout the year. We're especially pleased to see that we have now made the first CPP shipment into Western Australia, which is our home base for caustic soda business. So we're now servicing all coasts in Australia and have to date visited 8 terminals in Australia. With more ships trading and the ships into combination trade, we are seeing that we are able to expand the number of positions for CPP in the market, increasing the number of CPP shipments in the second half and to-date in 2022 and a number of switches. This is the prerequisite for expanding the customer base and the trading.Looking at the quarter, we see again the perfect combi trading for the CLEANBUs in the quarter with around 50-50 in dry bulk and tanker trading. We see an exceptionally high CLEANBU pace in combination trading at 94% and we also see a very low ballast for the CLEANBUs down at 13% in the fourth quarter. We see the earnings at a stellar $24,460 per day and we see the positive effect we have had after we repositioned our CELANBUs back into combination trade in the third quarter placing them on tanker trades into dry bulk regions and the payoff came in the fourth quarter with strong dry bulk earnings around $40,000 per day, which again outperforming the standard dry ships in the trade. But in totality, we had a negative effect of the FFA market, which meant that we are not matching the dry bulk market, but are substantially outperforming the standard LR1 tankers. Ending the year at around $20,200 per day for the CLEANBUs, which is below last year but still taking into account the weak tanker market is at acceptable levels.So Liv, will you continue?

[Liv Hege Dyrnes, Chief Financial Officer]

Yes. Thank you. So from TCE to EBITDA. Adjusted EBITDA increased by 9% Q-on-Q and ended the year at $19.5 million. In addition, we had one-offs of in total approximately $7.8 million mainly related to the sales gain on MV Banasol. Banasol was delivered to its new owners during Q4 and approximately 80% of the negative $1.2 million that you see in the graph to the right relates to Banasol. CABU TCE earnings decreased by approximately $2,100 per day and totaled $1.5 million while the CLEANBU TCE earnings increased by approximately $5,700 per day, in total approximately $4 million. Engebret has been through the TCE comments in detail so I'll move on to operating expenses, which increased by $1 million approximately 50-50 CABU-CLEANBU. The $0.9 million to the right that's related to IFRS effects. So if we have a closer look at off-hire and operating expenses, you will see that we dry docked 2 vessels in Q4 53 days in total.In addition, Banasol was off-hire 18 days in relation to making the vessel ready for the sale and taking off the CLEANBU features, et cetera. We still see effects of the COVID. We have operational challenges and approximately 60% to 70% of the 26 unscheduled off-hire days related to COVID-19, both directly, crude changes, deviations, et cetera; and more indirectly through delayed forwarding, et cetera. Operating expenses per day for the CABU vessels increased by approximately $900 per day and for the CLEANBU vessels approximately $600 per day. The average operating expenses per day for the CABU vessels around $8,300 per day for Q4 and $8,900 per day for the CLEANBU vessels. The increase mainly relates to higher crew costs both related to crude changes, the matrix, et cetera. We also saw some postponed maintenance costs as well as some costs related to the sale of Banasol.In total for the year, the average operating expenses for the CABU vessels were approximately $7,700 per day and an increase of 4% year-on-year while it's nice to see that the operating expenses on average for 2021 for the CLEANBU vessels decreased by approximately 9% and ended at around $8,300 per day. Total COVID effects for Q4 are estimated to be $0.7 million, up from $1.5 million in Q3. In total for 2021, we have estimated the COVID effects to be approximately $6.3 million whereof approximately 50% related to new builds. In addition to the EBITDA comments, you will see the depreciation is slightly down from Q3 while net financial items are up approximately $0.6 million. Depreciation is a consequence of the sale of Banasol while net financial items the increase relates mainly to FX. Profit for the quarter $15.1 million, an increase of close to 150% Q-on-Q and EPS $0.297. DPS $0.10 per share, that's 122%, up from Q3 while the return on capital employed about 8% on an annualized basis for fourth quarter.Let's have a look at the 2021 full year as well. Adjusted EBITDA up 25% to $61.8 million. The CABU rate increased by approximately $1,700 per day partly offset by somewhat higher operating expenses and total EBITDA per vessel for between '20 and '21 increased by approximately $400,000. For the CLEANBUs, you will see the opposite effect. The TCE down approximately $3,700 per day while partly offset by somewhat lower operating expenses. EBITDA per vessel down approximately $850,000 from '20 to '21. But here you will see that the large increase is related to 3.4 more vessel years in the CLEANBU fleet coming on during 2021 and totaled $14 million. Administrative expenses increased by $1.5 million, approximately 50% relates to project costs that were no longer capitalized on the balance sheet while other was the IFRS effects again.Both depreciation and financial items increased compared to 2020, but that's a consequence of a larger fleet and hence higher interest-bearing debt. Profit $22.6 million for 2021, an increase of close to 50%. EPS $0.464 and DPS $0.22, an increase of more than 80% year-on-year. Return on capital employed quite stable as both the increase in EBIT as well as the balance sheet mainly relates to a larger fleet. We had a very strong cash flow development during fourth quarter. We ended the quarter or the year actually at close to $54 million in cash. That was an increase of $18 million during the quarter. In addition to strong underlying financial performance, we had positive working capital of $8.5 million, which also includes repayment of clearing. The sale of Banasol contributed with $10.6 million. We also refinanced a bank facility amounting to $9.7 million positive as well as the equity issue of $24.1 million net.In addition to the ordinary items such as dry docking, debt service as well as dividend payments amounting to negative $12.5 million, we did an extraordinary repayment of debt of $42.8 million. This relates to an RCF, revolving credit facility, and a short-term overdraft facility and can be reborrowed when if needed. All in all, available liquidity at year-end above $100 million. Equity ratio above 40% at year-end, it's many of the same items. Of course the equity issue contributed positive for the quarter. We as well had a profit for the quarter and other comprehensive income was close to $10 million positive. The ratio is of course also impacted by the extraordinary repayment of debt. We finalized the refinancing pushing the maturity to 2026 and the first debt maturity for us now is in December 2023 as you can see from the graph to the right. So in summary, I would say for KCC, we had a strong underlying financial performance for Q4 in addition to some positive one-offs. We more than doubled dividend from Q3 to Q4 and we have a positive outlook market-wise for the rest of the year.Over to you for the outlook, Engebret.

[Engebret Dahm, Chief Executive Officer]

Yes. As Liv said, it's been a good 2021. We have passed a number of important milestones for the company: taking delivery of the last new build, completing the newbuilding program, improving and advancing well on our CLEANBU business, we have optimized our CABU business selling 1 ship at the peak of the market and moving the business to Australia. We have -- the beauty of our business is that we have 2 parts, which are complementing each other and with good link. We have a CABU business, which is with high contract coverage, which has fairly stable earnings. We have a CLEANBU business, which in the tanker space is 100% spot-based or index-linked contracts with high volatility. And we noticed the same when we're looking at the guiding for this quarter -- for the first quarter.We see earnings of the CABUs strengthening compared to the fourth quarter based on high caustic soda contract coverage and increasing earnings under these contracts so we're guiding between $23,500 and $24,500 per day based on 77% of the capacity fixed. We are guiding on our earnings on the CLEANBU business with falling down to $17,500 to $18,500 per day. This is partly impacted by a very weak start of the tanker market in the first quarter being $4,000 to $5,000 below the average fourth quarter level year-to-date in 2022 and we have been hit by some weak Atlantic dry bulk market in the first part of the year. In addition, there are some one-offs in connection with what we call business development, introducing the ships to new customers. We expect this to improve over the coming quarters. But in totality, we see that earnings we are guiding at $20,500 to $21,500 per day, which at the peak level is fairly in line with the earnings from the third quarter. So still at pretty good levels.Looking at total 2022, we see on the graph the historical development as well as the forward market pricing at the moment. We see that the market expects the dry market to be strong, the fuel market to remain strong. But the fair market has not yet taken into account the upside in the tanker market. So while we have good earnings at the current market levels and forward levels that are seen on the graph, the big and exciting upside potential is with a quicker recovery in the tanker market, which is our expectations, in the second half of the year where we can get into a situation where we have all the 3 markets we are exposed to being high and healthy. So we conclude on a positive outlook for 2022. And before ending, just reminding you about our 3 main advantages: providing the lowest carbon emission service in the dry bulk and tanker business; having a more stable earnings, better than standard tankers and dry bulk vessels and delivering a higher earnings over time, providing a positive return even in the lowest markets.Thank you and we start off with the questions, please.

[Unknown Executive]

Yes, we've had a few questions. You raised equity last year with weak development in price and volume afterward. Do you plan any more raises?

[Engebret Dahm, Chief Executive Officer]

We don't foresee any raises this year. We have no capital needs. We raised money for the specific energy efficiency program and this is the policy that we do. We pay out the running cash flow as dividends and when we have big investments, we raise money. And with no -- with all what we call investment program and capital need already covered, we don't foresee any capital raise this year.

[Unknown Executive]

Could you elaborate on the breakdown of the emission reduction per ship, speed, hull cleaning, weather routing, new devices, et cetera? And also explain why the EEOI is not showing the same reduction, higher dead freight, more ballasting, et cetera?

[Engebret Dahm, Chief Executive Officer]

This was a quite comprehensive question so I think I'll just concentrate on why the EOI has not shown the same progress as we have shown on the average CO2 emission per vessel. And this is mainly due to the trading of the ships. While in 2018 the employed CABU is fairly efficient, we have introduced the big fleet of the CLEANBUs into the company. And as we saw in the first half and partly into third quarter, we employ these ships as drybulk -- the CLEANBUs as dry bulk vessels with EOI performance more or less in line with the standard markets. And that means as long as we don't get the ships into combination trading, we do not achieve our EOI targets. But also potentially again here what we noted in the fourth quarter where we see the CLEANBUs reaching EOI of around 6, which is very competitive and which illustrates our ability to reach our target when we get the trading right. So I think that's the main message. We will and we shall get the ships into efficient combination trading, which together with our energy efficiency program and other operational efficiency initiatives shall reach the targets.

[Unknown Executive]

Second question from the same sender. Q1 guiding, could you state what is the FFA rate that is used in the guiding also for the tanker FFAs?

[Engebret Dahm, Chief Executive Officer]

We do not have any tanker FFAs. So what we have on the dry bulk FFAs, we are pricing that to the forward market. And for the first quarter, I believe they as an average are around -- I can't recall, but they are at I guess something like $18,000, $19,000 per day for the first quarter for TCE.

[Unknown Executive]

And how do you see CABU combination trade percentage-wise in Q1 2022 and can we expect continued strong percentages for the CLEANBUs?

[Engebret Dahm, Chief Executive Officer]

I think for the CABUs, you will see that we are positioning 2 ships from the Atlantic to the Pacific. And as mentioned, only from April we will have all the 8 CABUs in trade to Australia where we have confidence that we will achieve efficient combination trading. So meaning that the first quarter, you would see the effect of this positioning of the CABUs back to Australia also in the EOI performance. On CLEANBUs, we are confident that we will maintain a high percentage in combination trade, which is the key to achieve both delivering on the emission reduction KPIs and on earnings. But of course, that could vary a little bit from quarter-to-quarter. We see that the tanker market is extremely weak and we have a much better -- and sometimes having much better choice in the dry market, we may utilize that possibility to optimize earnings. But our target is to maintain above 80% of the capacity in combination trade at any time, hopefully getting closer to 90% as we had in the fourth quarter.

[Unknown Executive]

And second -- another question from the same sender. With the strong fuel oil prices, do you see that you get the ballast bonus as expected? What's the impact on TCE approximately?

[Engebret Dahm, Chief Executive Officer]

I think we -- the ballast bonus of course applies both to the tanker and the dry bulk market. And you see the dry bulker market, we get the premium as more ships. We get the same price in the dry bulk market as standard ships and hence, we get the benefit of increasing fuel prices. We also get the benefit in the tanker market, but at the moment we are giving discounts to tanker customers which are partly offsetting the gains we get based on the higher fuel prices. So to estimate the exact effect, we have previously said that for every $100 increase in fuel prices, we increase our earnings between $500 and $800 per day. So the exact effect of first quarter 2022 compared to the previous quarters is a bit difficult for me to take just now.

[Unknown Executive]

Do we have an ambition to increase the CLEANBU fleet size owing to the fact that the concept is now accepted in the market and giving good returns?

[Engebret Dahm, Chief Executive Officer]

I think over time we believe we should be able to grow the business. 8 ships covers or need to cover to operate the ships in 2 to 3 trades, but over time panning development in the [ newbuilding ] market, there should be possibilities to grow the concept further.

[Unknown Executive]

That's it.

[Engebret Dahm, Chief Executive Officer]

Okay. Thank you all for joining.