Odfjell SE

OSE:ODF

Earnings Call Transcript 2021-Q1

[Kristian Verner Morch, Chief Executive Officer]

Hello, and welcome to the presentation of the first quarter results for Odfjell SE. My name is Kristian Morch. I'm the CEO of Odfjell SE, and I'm joined today by Terje Iversen, who is the CFO. We are live streaming this presentation from Bergen today. It will also be available afterwards on our website. If you are watching this presentation live, you have the possibility of asking questions in the top right-hand corner of your screen. There should be a link or a button you can press and then you can post questions. And towards the end of the presentation today, we will be answering the questions that came in. We appreciate the interest and the time you're taking to participate today. The agenda today is that I will take you through the highlights of the quarter, then Terje will come on and talk about financials and then I will come back and talk about operational review and strategy, not a lot of strategy this time, and then I'll talk about prospects and markets update. And we will have a Q&A session towards the end of the presentation. In terms of the highlights of the quarter, the first quarter is not a quarter we are very happy about in terms of financial performance. We were -- on the bottom line, we were $15 million behind the fourth quarter. The fourth quarter was in comparison a fairly strong quarter. But nonetheless, we are not happy about the drop. It was a slightly difficult environment for us in the first quarter. And there were really 3 main things that were disrupting our markets. First of all, we had the big freeze in Texas, which really has disrupted the entire supply chain for chemicals around the world, I would say. And that impacted certainly our shipping business but also our terminal in Houston. The second disruption was the temporary or the short block of the Suez Canal. It did not have a great impact, but it was a disruption. And lastly, we were facing a very depressed CPP product tanker market. And that meant that we have been facing more competition [indiscernible] than we have in the previous quarters. So all in all, that was very -- that meant that it was a disappointing quarter in terms of earnings. But there were some one-off factors that influenced the market. And they are more or less behind us. If you look at our time-charter earnings for Odfjell Tankers, it was -- we were at $120 million compared to $125 million in the previous quarter. So down $5 million. The net result from the terminals was positive, so they are making profit, although minor profit with USD 200,000. But you have to remember that apart from the 3 factors I mentioned, we also had a fire at the terminal in December. And we were still suffering from that. So there were 2 force majeure events at the terminal in Houston. Our EBIT were $10 million behind with $8 million compared to $18 million in the fourth quarter. And our net results came in at minus $16 million compared to minus $3 million in the previous quarter. But if you exclude extraordinary items, the net result was minus $14 million, which means it's $13 behind -- $13 million behind the fourth quarter. Also, we have a new slide later on in the pack about our sustainability, our emission targets. We -- our annual efficiency AER rating for our managed fleet for the first quarter is slightly up compared to the previous quarter. But we are still below the trajectory that we have committed ourselves to as part of the bond. And I'll speak more about that a little bit later. Two other things to mention. One is that we -- the 2 small gas carriers that we used to own in a joint venture, we have been buying our joint venture partner out of that joint venture during the quarter. And those ships are now owned and included in -- fully owned and included in the Odfjell Tankers figures. And lastly, the Board has decided not to recommend the dividend for 2020. So there were some impacts, a challenging market environment. We did continue to operate well and safely. Our biggest operational challenge is still that we are unable to efficiently move the seafarers around the world, and that's a headache for us. But other than that, we did operate well but in a very difficult market. We do see things improving towards the end of the quarter, and we think that there are strong fundamentals, so we -- what we're saying in terms of guidance for the second quarter is that we expect to report improved results for that quarter. Now I will hand it over to Terje Iversen and then I will come back later on with an operational update.

[Terje Iversen, Chief Financial Officer]

Thank you, Kristian, and good morning, and good afternoon to everyone. I will start with the financials and the P&L. And here, we will show you a somewhat compromised version of our P&L. Previously, we have focused on kind of the gross consolidation method, presenting the various business areas. But we are now showing the figures according to the equity method. The reason for that being that most analysts and investors are reviewing us and kind of reviewing the figures using the equity method, and we think that's a more transparent way to show the figures. Of course, that means that showing our joint ventures, the figures will be kind of not that visible in the P&L. But we will go through more in details on the terminals through the operational review because they're later in the presentation. So starting with the revenue side. Time-charter earnings this quarter ended at $120 million, reduced from $125 million due to particular markets and also the disruptions we saw this quarter. When it comes to the Texas freeze, we have said that the around USD 2 million negatively impacted our time-charter earnings in this quarter. And we also included time-charter earnings from the gas vessels due to the fact that we have now acquired those 100%. That is also increasing the time-charter earnings that we are booking. That was USD 3.8 million this quarter compared to USD 2.8 million in the fourth quarter of 2020. Time charter -- net time-charter earnings is reflecting the time-charter earnings for our own fleet and also including management fees and profit split from the external crews, but it's not including the revenue from the external crew vessels. Looking at the time-charter expenses. That decreased this quarter from USD 73.6 million. Main reason for that is that some of our short-term time charters has been extended this quarter and are reclassified as long-term time charters, meaning that we are capitalizing them and booking them as right of use of assets and then showing a decreased time-charter expenses due to that reclassification. Share of operating -- sorry, operating expenses this quarter increased with around USD 4 million. That is also partly related to the fact that we have reclassified these short-term time charters to long term. So we don't estimate an OpEx related to those time charters. Around USD 1 million of that is included in operating expenses. In addition, we are now consolidating Odfjell Gas 100% and we have done, including around USD 1 million in OpEx, from the gas vessels that were not kind of included in the fourth quarter. So that is also partly explaining the increase in operating expenses. In addition, we also saw some increase when it comes to crew and crew changes in this quarter. Share of net results from joint ventures and associates, USD 0.8 million this quarter. That is the contribution from the joint venture of Odfjell Terminals and also Odfjell Gas, which was also partly this quarter a joint venture but will not be included as a joint venture going forward. $0.8 million is done before allocation of corporate costs related to running the terminal business from the headquarter. G&A increased from $15.0 million to $16.9 million. Main reason for the increase is related to the long-term incentive payments of around USD 0.9 million this quarter. Then we had an EBITDA of $53.2 million compared to $59.3 million in the preceding quarter. Looking at the depreciation, we saw an increase with around -- from $41.5 million to $45.6 million this quarter. That is also partly explained by the reclassification of the short-term time charters to long term, which meaning that you have to depreciate the estimated value of the assets that is being capitalized. In addition, we also have kind of reviewed the estimated residual value of the vessel this -- beginning of this quarter. Due to decrease in steel prices, et cetera, we have included lower residual value many of our vessels, which means that we have to depreciate that on a shorter term, increasing depreciation this quarter with USD 1.5 million. Then we are left with EBIT of $7.8 billion compared to $17.8 million in the preceding quarter. Net interest expenses, very much comparable to last quarter and then the other financial items, negative $1.9 million. That is related to currency and also sort of mark-to-market on our derivatives. After taxes, we then delivered a net result of $15.6 million compared to negative $2.6 million in the fourth quarter. But adjusting for the other financial items this quarter, the results negative $14 million compared to negative -- adjusted result in the fourth quarter of USD 1 million negative. Looking at the balance sheet. We saw some increase in the ships this quarter that is related to the consolidation of Odfjell Gas. There are no new building contracts anymore. So this is only the level of vessels that we have on our balance sheet. We saw that investment in associate and joint ventures went from USD 200 million to USD 181 million. That is due to the fact that we now own 100% of the gas vessels. So we have kind of [indiscernible] that joint venture, that is not included in associates and joint ventures anymore. On cash, we have around $72 million, down for $103 million in the fourth quarter. But if we include undrawn part of the credit facility. We have around USD 130 million in available cash. On equity, that was slightly reduced due to the negative results. We had a positive other comprehensive income though, but we end with an equity ratio of 29.1% compared to 30% end of fourth quarter. On the left side, we can see that long-term debt has increased slightly due to the fact that we refinanced the bond, which was previously classified as short-term debt, that is now being long-term debt, also with a larger number. But then at the same time, we see that current portion of interest-bearing debt is reduced from USD 179 million to USD 99.8 million this quarter. And then cash flow statement this quarter. Cash from operations, $19.3 million compared to $39.3 million in the fourth quarter, the reduction being mainly the reduced results, of course, but also the fact that the working capital increased somewhat this quarter, which then negatively impacted the cash flow from operations. Looking at cash flow from investing activities, that was around USD 10 million for dry dockings and other projects on our vessels and also USD 10 million related to acquisition of the outstanding shares in Odfjell Gas. So we ended with negative USD 21.1 million in cash flow from investing activities this quarter. On the financing side, it's been quite busy. We have refinanced the bond. But we have repaid around USD 140 million and took up new debt of USD 121 million and additional repaid temporary under credit -- the revolving credit facility, USD 20 million and then a negative cash flow in financing activities of around USD 30 million. And the net cash flow for the quarter of negative $30 million, ending at a cash at around USD 72 million. But including, as I mentioned, this undrawn part of the credit facility, we have around $130 million in available liquidity in the quarter. Here, we show the cash breakeven and targets long term and also for 2021. We estimate cash breakeven for 2021 to be around $21,300 per day. And that is the cash needed to cover all the OpEx, the G&A, interest installments in addition to investment on our vessels. The target is $21,300 based on kind of the amortization profile and the loans we have on our balance sheet today. But looking at this quarter, we ended with a time-charter results below USD 20,000 and then have a negative [indiscernible] according to -- or compared to the target of $21,300. Long term, we still think we are on the right track. We're kind of in reach of our long-term target of being a bit between USD 18,000 and USD 19,000 per day in cash breakeven. Bunker expenses, not that much to report on this quarter. We saw that the prices in -- for bunker increased throughout the quarter. But at the same time, we see that we have a positive effect from our bunker adjustment clauses, making sure that the bunker costs are quite stable, so -- and quite comparable to the preceding quarter. We got kind of a positive effect from our bunker adjustment clause this quarter of USD 2.1 million. We also have positive contribution from financial derivatives or hedging position of $1.8 million. And then we ended with around the same market expenses that we had in the preceding quarter. Going forward, we think we have still a good hedge with our profit portfolio of around 50% contract coverage. That should cover also 50% of the bunker cost exposure. In addition, we also had some derivatives covering around 12.5% of our exposure for 2021. So we think we have a quite good coverage. And also the derivatives we have around the balance sheet have a positive mark-to-market value of around USD 5 million for today. Looking at the debt development. Going forward, we see that we have quite limited repayments in the coming quarters, just repayment of some kind of sizes in the second quarter 2022 and we have a bond maturing. But before that, it's quite kind of uneventful on the financing side. We have, after the end of the first quarter, refinanced 4 vessels that we have, I think I also mentioned earlier, that we were in process of refinancing. We have taken 4 vessels that we have refinanced, also using the sustainability-linked framework that we have for the bond also in January. And then we are, with this facility, actually reducing the cash breakeven for these vessels with around $4,750 per day due to this refinancing. That is due to the longer amortization profiles on the loan, the reduced leverage and also reduced interest on these 4 vessels. So that is a positive impact on our financial cost going forward. And then on the bottom slide, on the bottom part of the slide, you see that we estimate what is achievable kind of deleveraging going forward and kind of really show what could the debt be end of '21, '22 and '23 if we just repay all our loans according to repayments scheduled without repaying or refinancing any of the finance -- ship financing loans we have on our balance sheet. Based on earnings we have had kind of rolling in the last quarters and last year, we should be in a good position to reach these levels and targets. But of course, it also remains to see how the market develop. And I hope that will enable us to reach those levels. That was the part of my presentation. So Kristian, back to you again.

[Kristian Verner Morch, Chief Executive Officer]

Thank you, Terje. Operational review. First of all, let's start off looking at our earnings and our rates. On the left-hand side of the slide, you're looking at the comparison of the ODFIX to the Clarksons index, and we continue to keep the same band in terms of outperformance. But you can see the ODFIX dropped 4.8% whereas the Clarksons index only dropped to 3.5%. An index, like the Clarksons index, does not take operational disturbances into the picture. And when you see what happens was in the first quarter with the big 3s and so on, I think that explains why there's a difference in those two.Fundamentally, if you look at the specialty chemical market and you peel away the effects of the big freeze in Texas, that market continues actually to do well. There's a high demand. Whereas when you go into the CPP market and, let's say, the easy chemicals and the veg oil markets, those are the markets that were really influenced by the added swing tonnage from the CPP markets. If you look at our COA and volume development, on the left-hand side, you can see that our COA coverage during the quarter was 48%. We did renew a number of COAs. We are also ramping up COAs that goes in to cover in our coated pools, which we have been growing. So we have been renewing a number of COAs during the quarter. What, of course, jumps out on this page is the middle graph, where you can see that the renewal rate for the COAs was minus 5%. There's one big backhaul contract that was renewed at a discount to the current rates. But if you take that away and only look at the other COAs and specialty COAs, then they are up actually 1.1% also during the first quarter. So the 5% are a little bit misleading because there was 1 big high-volume backhaul contract included. For our tank terminals, they returned to profit, not a big profit, but they did return to the profit. But our operations, especially in the U.S., was impacted by the big freeze. I mentioned before, there were 2 force majeure events. One was the big freeze and the other one was the fire that we had in December that continued to be a challenge into the first quarter. But despite all that, the terminal division is back to profit. In general, you can say in Houston that the inventory levels are lower, lower than usual because of the disruptions. And in a slide, you're going to see that the producer margins are up. And I think everyone producing chemicals are producing as fast as they can. So I think those inventories will fill up fairly quickly. But that has also been a factor in the first quarter. In Antwerp, the construction of the next 35,000-cubic meter capacity is proceeding according to schedule whereas the expansion in the U.S. will be a little bit delayed also because of the disruptions we have been facing in the first quarter. As you may be aware, we have -- we issued the first sustainability-linked bond in the shipping industry globally. And as part of that, there was a sustainability-linked finance framework that we were using. And in that framework, we committed to a trajectory towards 2030 in terms of reducing our carbon footprint. That trajectory, when you're looking at this graph, is what you see on the right-hand side, the dotted orange graph, that's trajectory from that framework. And as you can see, in the first quarter, we are below that. In our managed fleet, the AER is 8.53. The AER is actually grams of CO2 per deadweight in tonnes -- deadweight and distance that the ship moves. So it's actual emissions. There's, of course, still a debate in the industry on what is going to be the right measure going forward. I think the battle is between two, it's the AER, which is, as I mentioned, the actual emission; and the EEOI, which is more the operational index that takes into account how much cargo is onboard the ship. I think there are good arguments for both and we do monitor and track both. But AER is the one chosen by IMO, and it's the one that we think is the most meaningful if you want to reduce the actual carbon emission to the environment. And we will continue to report on our AER on a quarterly basis. So you'll be seeing this graph again. In terms of prospects and markets update, first of all, the middle slide, I think, is a significant point I want to make. When you look at the inventories from Asian importers from, let's say, third quarter last year until today, it has dropped by 45%. Anyone looking at the container industry, looking at the industrial production and the export of, let's say, durable goods and so on from Asia can see that, that is going full steam ahead. And that means that there have been a depletion of feedstock for that production in Asia. And it's coming to a level now where they really need to fill up the inventories. And that's going to come from long haul. It's going to come from the U.S. It's going to come from the Middle East. And that's going to be good for demand in our market. I also mentioned, on the right-hand side, the producer margins are increasing and the feedstock prices are increasing and the demand is going to increase. So I think there's a high likelihood that we'll be facing a busy second half of this year. And we're already seeing demand pick up. So we think that's a very strong demand story for chemicals. If you look at the supply dynamics in terms of real supply, the order book size is still -- for our chemical tankers still only 4.8% compared to the current fleet, which compounded means around 1% fleet growth in the coming years. And on the previous slide, you saw a strong demand story. And we think that's going be around 1% -- 4% compounded. Of course, in this quarter, you have seen -- we have seen the amount of swing tonnage, which means easy chemical-capable IMO2 tonnage swinging into easy chemicals, that has gone up. We think it has peaked and we think a reversal will be happening very quickly when the CPP markets pick up and we also think there are arguments for that to happen. So a supply side that's very much under control. So in terms of the market conclusion, the easing lockdowns around the world, the rollout of vaccines, the strong growth in terms of the economic growth. Of course, a lot of that comes from stimuli. But nonetheless, I think there's a strong growth environment. And I think that's going to be good for the demand. Whereas in terms of supply, there are limited supply growth, around 1% per year in the coming 3 years, and demand is going to grow by around 4%. So that's what we mean when we refer to healthy fundamentals.So in summary, first quarter was not a quarter we are happy about in terms of financial performance, slower market. There were a significant amount of challenges from, let's say, the one-offs or the incidents that we saw in the first quarter and the seasonality. But we do think that there's a healthy fundamental. And if you look at specialty chemical in isolation, it's continued to perform well. I think I'm not going to repeat myself, but I think I have mentioned the other things a number of times already. And the guidance we are making for the second quarter is that we expect to report good results for the second quarter. So that was the end of the presentation. I can see we have had a number of questions coming in that we're going to start taking. It's not too late to post. So please post if you have any questions.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

The first question is from Lars Bastian Østereng from Arctic Securities. Do you still have a plan to sell the gas carriers?

[Kristian Verner Morch, Chief Executive Officer]

Yes. I think we -- having 2 gas carriers is not a strategic investment. And if there is a way to sell those ships, well, we would have been considering it. In the meantime, we have placed the ships on good-earning time charters, so there's no rush. But for the right opportunity, we are still selling the gas carriers.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And then one more from Lars. How have rates developed since quarter end?

[Kristian Verner Morch, Chief Executive Officer]

Well, the CPP market hasn't really picked up. But I think what we are seeing is increased activity in the chemical, in the specialty chemicals. So we are seeing the rates beginning to go up.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And one more from Lars. Is it possible to point out a rate level at which product tankers will swing back to trading CPP, the MRs being the example?

[Kristian Verner Morch, Chief Executive Officer]

I think that's very difficult because it depends on a number of things. It depends on whether it's the east of Suez and west of Suez and commodities and so on. I'd say a normalized MR market is probably around -- this is from the top of my head, so what I would say around, let's say, $15,000, that's a normal-ish MR market. And I think that if we reach that point, I think the tonnage will swing back into CPP. Whether that will start earlier, it's hard to say.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

Then a question from Mats Bye from DNB Markets. Should we expect to see the COA rate drop materially below 50% going forward, considering you increased your 20% coverage of volumes in quarter?

[Kristian Verner Morch, Chief Executive Officer]

No, I think we have shown over time that we are capable of maintaining the same coverage whether we grow or shrink our tonnage base. So I think -- I don't expect it to drop significantly below. But we have, of course, taken a very big step into the coated IMO2 market. That's slightly different from the specialty chemical market. So you might see a little bit of a different coverage compared to whether it's stainless steel, let's say, specialized tonnage or it's the commodity -- more commodity ties the IMO2 ships. But in general, I don't expect it to drop below, what, [ 50%, what it is today ].

[Bjørn Kristian Røed, Manager Investor Relations & Research]

One more from Mats. Can you give some commercial reflections on exiting COA backhaul, taking a total of the quarter down 5%? You said not -- no to lower rate contracts before.

[Kristian Verner Morch, Chief Executive Officer]

Yes. I think you should be careful looking at one backhaul contract. I think when -- there might be -- there are very good reasons why that contract makes sense. And one COA in our system very rarely stands on its own. So you have to see it in combination with other contracts. So if you get a lot of front-haul contracts out and you know you're going to commit more tonnage to a certain trade, then you -- then the [indiscernible] calculations will improve even if you accept the lower COA rate for that backhaul contract. So I think it's a little bit wrong to look at a drop based on one COA. I mean, we would not take a COA if it did not -- if it wasn't accretive to our earnings. And that's also what happened with this COA. So yes, I don't know if that was a good answer. You can give me a call, Mats, if you think I was misleading you here.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And then from [ Ole ] in SEB, are there currently any debt on the 2 small gas ships?

[Kristian Verner Morch, Chief Executive Officer]

Yes, there is. There's a $21 million of debt in the 2 ships combined.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

There should be no further questions as of now.

[Kristian Verner Morch, Chief Executive Officer]

All right. Okay. If there are no further questions, then the last thing from me is to draw your attention to the fact that we're going to have a Capital Market Day. So please save the day on the 10th of June. Due to COVID-19, we'll be hosting it online, and we will send out invitations. And I hope that you have a chance to join us on the Capital Market Day. There's a lot going on in our industry and in our company that we are looking forward to talking about. Okay. If there are no last-minute questions, then there's only one thing that for me and that is to say thank you again for your interest in the company. Thank you for your time. And if you have any questions or you feel that we did not answer your questions adequately, please make sure to reach out, and we'll be happy to take any questions or comments that you may have. So in the meantime, stay safe.