Odfjell SE

OSE:ODF

Earnings Call Transcript 2022-Q1

[Kristian Morch;CEO, executive]

Good morning, and welcome to the Presentation of the Odfjell First Quarter Results. We are sending this live from our new studio here at our headquarters in Bergen. My name is Kristian Morch. I'm the CEO of Odfjell, but I'm -- this is, unfortunately, going to be my last appearance as the CEO because, tomorrow, I will be handing over the CEO responsibility to Harald Fotland. And Harald, he will be available also for questions, and you will see him towards the end of this presentation.

Seven years in Odfjell, it has been an amazing journey. It has been tough, but it has been rewarding. And Odfjell today stands on, what I think is, the most competitive platform in our industry. And with the markets that are coming, the way they are, which you will see in a moment, then I think good things are in front of us, and the company is ready to be handed over to Harald.

I also want to say that we are going to take questions towards the end of the presentation. There should be a button on the top right-hand corner of your screen, I believe. And if you post questions throughout the presentation, then Terje Iversen, the CFO of Odfjell, myself and Harald Fotland, incoming CEO of Odfjell will be happy to take any questions that you may have towards the end of the presentation.

The agenda for today is, I will take you through the highlights of the quarter. Then, as usual, Terje will come on and take you through the financials. Then we will briefly touch on operational review and our strategy, not so much strategy this time, and then I will finish off with the prospects and the market update. And then as I mentioned, we will be happy to take any questions that you might have in the following Q&A.

The highlights for the first quarter is that we are pleased with our first quarter results. Time charter earnings in Odfjell Tankers came in at $136 million, which is actually unchanged from the previous quarter, but we had fewer ship days to produce those numbers. So the markets are up compared to the previous quarter. The net result contribution from Terminals was $3 million, which is in line with the previous quarter. That gave us an EBIT of $27 million compared to $35 million in the previous quarter and a net result of $11 million compared to $15 million in the previous quarter. But if you adjust those numbers for one-offs, then the first quarter results, net result was $9 million, which was in line with the $10 million that we reported in the fourth quarter of '21.

Also positively this quarter is that our COA renewal rates were up 7% on average during the quarter. And actually, our contract coverage during the quarter was down slightly, down to 49%, which suited as well because the spot markets are firm. So there's no alarm bells going off. I'll speak more about the contract coverage in a moment. And finally, we also announced that the Board is recommending a dividend of NOK 1 per share for fiscal year 2021, which is to be approved by the AGM, which is happening later on today. The Board has also approved the dividend policy for the company where Odfjell will pay 50% of net income adjusted for extraordinary items on a semiannual basis. And Terje, he will speak more about that when he comes on.

And finally, as I said, Harald Fotland has been appointed as the company's new CEO. I have been working with Harald in his capacity as COO for the last 7 years. And I can assure you that there's no other person who is better suited for the job than Harald and I'm very happy to be handing over the reins to Harald at the close of business today.

So as you can see in the bottom right-hand corner, the quote is that we are pleased with our first quarter results. It reflects the competitive strength of the company. The chemical tanker market actually started the quarter not in -- not at too high fashion, but it's firmed throughout the quarter and the quarter ended on a positive note. That strengthening of markets are continuing. So we are expecting to report stronger results in the second quarter.

At this point, I will hand it over to Terje, and then I will come back for the operational review.

[Terje Iversen, executive]

Thank you, Kristian. I will then, as usual, start with the P&L income statement this quarter. As you can see, our time charter earnings ended at $135.6 million, very comparable to the fourth quarter in '21. We saw a weak start of the year, but that was offset by improving tanker rates towards the end of the quarter. Adjusting for fewer days -- fewer calendar days and also fewer vessels, actually, time charter earnings improved with around USD 3 million compared to the fourth quarter '21. Time charter expenses, very much in line with the fourth quarter. Also OpEx continued to be quite stable. Net results from associate and joint ventures ended at $3.3 million compared to $2.6 million. We got a good contribution from the terminal in the U.S., [ including insurance proceeds ] of $2.4 million, of course, impacting the figures in this quarter. And if you adjust for depreciation of surplus values that we have on this joint venture, the terminals delivered a net result of around USD 5 million in the first quarter.

G&A increased compared to fourth quarter to USD 18 million. The main reason for the increase being that the fourth quarter last year, we had some one-offs that reduced G&A compared to a normal level. So we see we are more on a stable normal level in the first quarter this year compared to what we should expect going forward. After operating income, we are at $67.4 million in EBITDA compared to $77.3 million. Depreciation decreased from $43.6 million to $40.7 million. Main reason, of course, we have slightly fewer vessels with the regional vessels being divested. But main reason being that we have reassessed the residual values, which we do every year -- end of year due to increased steel prices and increased nickel prices. So there will be slight reduction then in the depreciations going forward.

No capital gain this quarter that led to an EBIT of $26.7 million compared to $35.3 million in the fourth quarter. And the main reason for the reduction is that we had this one-offs in the fourth quarter with USD 6 million from the war insurance. And also, we had a quite substantial reduction in G&A, which I just touched upon. On the other hand, we've got kind of USD 3 million improvement due to the decreased depreciation this quarter. That leads us to net result of $11 million compared to $15 million in the fourth quarter. But as Kristian mentioned, if you adjust for financials and nonrecurring items, we are very much at the same level that we saw in the fourth quarter of '21.

Balance sheet, not that much to talk about. We have a cash position, $61.5 million compared to $73.5 million. But if we include undrawn loan facilities, we have cash available at USD 123 million compared to USD 109 million end of fourth quarter. IFRS adjusted equity is around 31% compared to 29% end of last year, of course, impacted by the net result being positive, but also we had other comprehensive income, quite good figures due to the mark-to-market of our derivatives, mainly being interest rate hedging that we have done previously. And also on the balance sheet, we see that the equity is increasing, of course, but on the debt side, we have repaid totally this quarter, around USD 55 million.

Cash flow statements, we saw that operating cash flow decreased somewhat compared to the fourth quarter, ended at $29.7 million. Main reason being that we had quite good operating cash flow in the fourth quarter with these one-offs, which I just mentioned. On the investment side, we sold 3 regional vessels, giving proceeds of USD 21 million. Actually, that was more or less cash-neutral transactions because we had around the same amount of debt attached to these vessels, which was repaid when we divested the vessels. Then we had investment in noncurrent assets being dry dockings and also some energy saving devices of USD 5.1 million this quarter compared to USD 6.8 million in the fourth quarter. That led to $15.5 million in cash flow from investment activities.

On the debt side, as I just said, we have been quite active. We have done some refinancing. That is why we see new interest-bearing debt. But on the other side, we have repaid existing debt of $123.6 million. So net, we have then paid down around USD 55 million. The new interest-bearing debt is actually refinancing on some vessels where we have extended the profile and, of course, also the maturity, but also seeing lower interest cost on this structure compared to where it was originally.

So after cash flow from financing activity, we have a net cash flow of negative USD 12 million compared to USD 18.8 million, end of fourth quarter. So that leads to cash and cash equivalent of $61.5 million compared to $73.5 million. But if you include undrawn loan facilities, we have an increase in available cash compared to end of last year.

Therefore, on a long-term basis, so actually, the free cash flow has developed. And as you can see, it has increased quite good compared to where it was 1 or 2 years back. We have that positive free cash flow and has been increasing for the last quarters. And if you look at a rolling basis, we had the free cash flow in the first quarter of around $45 million. And if you exclude debt paid down, right of use of assets, we have around USD 30 million. The main reason for the cash flow going slightly down, as I said, we had quite a good development on the operational cash flow in the fourth quarter, while we didn't see that same effect in the first quarter this year. We also saw increasing working capital in the first quarter due to increased gross revenue and also increase in bunker prices.

Here we show the time charter earnings compared to the cash breakeven. And as you can see, this quarter, we delivered time charter earnings per day of $22,368 per day, up from $20,868 in the fourth quarter and this is above the expected annual cash breakeven for 2022 of $21,800 per day. We sold some vessels, as I mentioned, and that actually increased our time charter earnings per day because these vessels were smaller vessels, delivering a lower average time charter earnings than the larger vessels in our fleet. Cash breakeven for the quarter ended at $21,476 compared to $20,308 million in the fourth quarter and USD 21,192 per day in 2021, and increase, again, is due to reversal of G&A provisions and fewer dockings in the fourth quarter. Going forward, we will see effect from lower debt, taking down our cash breakeven, also improved terms on the debt, we expect, while on the other hand, we will see interest benchmark rates pull in the opposite direction with increasing LIBOR rates and increasing day rates in the market.

Together with the annual accounts, we announced a dividend policy, as also Kristian mentioned. Main takeaways is that we intend to pay out 50% of net income adjusted for external items. And also that dividends will be paid out semiannually. The Board of Directors will propose to the general meeting or decide on the timing and the final size of the dividend and always contingent on the financial strength of the company. Based on the results in the first quarter and also the activity we see into the second quarter, there should be expectations for a positive development and a positive net result for the first half year, and then we should be in a good position to pay dividend already in August this year based on results in the first year. But of course, always contingent on financial strength of the company.

Just a slide on the bunker expenses. As most of you know, the oil price has increased and we also see that the bunker cost or the bunker price in the market is increasing. But we see the same as we have shown for many quarters that we have good effects from the [ back ] adjustment clauses in our contracts. So if you net out that, the bunker cost that we have to book in our P&L is quite stable. Actually, comparing to the fourth quarter, we see an increase in net bunker cost from $44.9 million to $48.1 million, increase of $3.2 million. And looking behind the figures, the main reason or the only reason is that we don't have any financial hedging in the first quarter. The $3.2 million that we took in positive effect in the fourth quarter was not the same in the first quarter because we don't have any financial hedging in the first quarter. Also going forward, we don't have any financial hedging in the balance sheet per today.

Debt development, not that much new to tell about. We have -- second quarter, we have some balloons maturing. Of course, that has been taken care of already. We have a bond maturing in mid-June of USD 33 million (sic) [ USD 39 million ] equivalents that will be repaid based on the cash we have on the balance sheet and also the proceeds we have got on a drawdown on refinanced mortgage facilities. So we are in a good position on that then going forward, and we don't have any big loan maturing before third quarter 2023. So we are on a good path to reduce our debt and you can see on the lower part of this slide, we are repaying around USD 100 million per year on our gross interest-bearing debt. And we haven't issued any refinancing of bond in this slide so that will depend, of course, on the earnings and the market, but we are on a good path to come with deliberation on our balance sheet and also reducing the cash breakeven for the company.

Then I will leave the word to you again, Kristian.

[Kristian Morch;CEO, executive]

Thank you, Terje. So operational review, first of all, I want to come back to the COA and the volume development, as I spoke about in the -- during the introduction. If you look on the bottom left-hand side, you can see that our COA coverage fell to 49% during the quarter. This was driven mainly by port congestions and redelivery of tonnage, which means that when you're doing changes to your selling pattern, then you won't get -- we don't have so many sailings and so on. And at the same time, the spot markets were higher. So that takes a larger share. It is nothing -- we are not signaling that we are dropping below where it is today, but that is what's the explanation for the first quarter.

As I also mentioned, in the middle on the bottom, you can see that the COA renewal rate this quarter was up by 7%, which is a very good sign. And on the right-hand side, you can see that our -- the total amount of tonnage of cargo carried is basically stable with what it was. So you can see that the volumes carried by pool tonnage is dropping, and that's because we are redelivering some of the MRs that go into the Hafnia fleet.

When you look at the rates and the cargo mix, you can see that the ODFIX this quarter is up by 3.6%, whereas the Clarksons Chemical Tanker Spot Index was 0.0%. We have triple checked that number. I think the reason for that being flat was that the quarter started very slowly, actually on a negative trend and then it picked up towards the end of the quarter. So for the first quarter, it was 0% for the Clarksons index. Since the end of the first quarter, until today, the Clarksons spot index is up by 9.8%. So that is also, of course, picking up the increases in our markets.

We had some volume increases for our specialties, whereas both on easy chems and on vegoils, it was basically almost the same in terms of volumes, but something is happening, especially in the vegoils that I'll speak about in a moment. And on CPP, those of you following the product tanker markets, that market has [Technical Difficulty]. So both for easy chems, vegoil and for CPP, we are experiencing far less competition from swing tonnage and which is, of course, helping the real supply situation and is one of the reasons why our markets are firming at the moment.

Very briefly about the Russia-Ukraine war. We don't call any Russian or Ukrainian ports frequently. Our last call in Ukraine was back in March 2020. And that was the only port call we have done in the last 7 years. So Ukraine is not a country we call. And our last call in Russia was back in 2016 and in 2020 on the Pacific Coast of Russia. So we don't lift any Russian-related cargos. We don't have any trades into the Black Sea or into the Russian part of the Baltic Sea and also not on the Pacific Coast. So from a real trade perspective, this is not something that has a direct impact on how we trade in Odfjell.

For the Tank Terminals, all the terminals that are managed by us continued to maintain safe and continuous operation throughout the first quarter. The first quarter EBITDA ended at $9.4 million compared to $10.3 million in the fourth quarter of last year. Both our U.S. terminals continue to perform well, and we are presently operating at near full capacity. The same is true in our terminal in Antwerp, it continues to deliver strong performance with commercial occupancy of 100%, whereas our terminal in Korea is doing better, but it's not -- it's, of course, suffering from some of the shutdowns and the COVID effects that are still [ chasing ] the Asian -- many of the Asian countries, but it stayed consistent with the same quarter in 2021. The outlook for the terminals in U.S. and Europe remains positive with strong demand for storage capacity, and we expect the markets in Asia to gradually improve as well.

Also, we can say about [Technical Difficulty], during the first quarter, we took a final investment decision for a new 36,000 cubic meter tank pit at our terminal in Antwerp. And in Houston, the construction has started of Bay 13, which we spoke about on previous presentations. So things are developing as expected in our terminals side.

So now I'll talk about prospects and market update. The first slide is a little bit busy, but one of the things that I wanted to touch briefly upon is when you look on the left-hand side, we are looking -- we have been taking a look at direct impact on chemical and vegoil trade flows from Russia and Ukraine. And if you look at the Russia and Ukraine export volumes, global share of chemicals, then Russia is 2% and Ukraine is basically 0%. So there is no real disruption to the global flow of chemicals because of this crisis. But that picture is different when you look at the vegoils because Russia supplies 7% of the world's vegoil and Ukraine provides 12% of the global vegoil production. That is mainly in the sunflower seed oil. And that supply has to be met from elsewhere, which means that suddenly you have vegoils market picking up, you have vegoils trading longer distances from the Far East and so on. So that is causing some imbalances.

Also, the Russian or the Western ban on Russian oil and refined products is, of course, also impacting the trades, and that is certainly something that's impacting the clean markets quite dramatically. So you have some trade changes, which is boosting real demand. And with supply as tight as it is, both in chemicals and in product tankers, then you're seeing what you're seeing on the right-hand side. You're seeing CPP markets firming. You are seeing palm oil markets firming and you're seeing all the trades in the chemical -- all the trades in the global chemical trade also firming. So we are seeing a very robust increase in the global markets.

This is a more closer look at what happens to the chemical trades. These are dollar per ton rates that comes from the Clarksons. On the left-hand side, you're looking at the trades West of Suez, and on the right-hand side, you're looking at the trades East of Suez. And it's clear when you look at this picture that since the turn of the year, those markets have started to pick up quite significantly, and we're seeing that trend continuing.

I mentioned it already, supply is under -- very much under control, very low deliveries, very few new orders being placed, some scrapping going on. So basically, we are looking at a supply picture that is zero or maybe even contracting in -- during next year. And with all the uncertainty about new technology and decarbonization and the shutdown in China, most owners are hesitant to place new orders. So that supply picture is the strongest picture we've been looking at for many, many years. And with demand growing, that's a really good part of the fundamental story.

That means that we are now above 90% utilization. We are somewhere between 91% and 95%. By next year, we're going to believe we are going to be 95%. And the last time that happened was back in 2003-2004. And that was the beginning of quite a high -- quite a long upturn in the global chemical trade. Supply is not going to be available for the next coming years, and the demand story, as I said, is quite strong. So we really -- we have been saying that for some years, we have been wrong about the timing, but this is basically what we have been saying that, that supply situation will tighten and demand for long-haul chemical transportation is strong and healthy. So that's why we are guiding also positively for the next quarter.

So in summary, TCE for our results stayed unchanged for the first quarter, relatively weak start to the quarter ended strongly, and that continued throughout the quarter. In Tankers, our results improved in the second quarter due to the tightening markets across all trade lanes, starting from March. In Terminals, we continue to perform well, recording positive occupancy growth and healthy activity levels. Our markets remain strong throughout 2022 and beyond. We think the market balance is tight. We have not seen that tight fundamental picture since 2007-2008. So that's why we are leaning out and saying -- well, we're not leaning out, we are confident that the strong market is now driving how we see the future, and we expect to report stronger results in the second quarter.

Those were the last official words for me as the CEO. Harald will come in also during the Q&A. On a personal note, I want to thank everybody who has been supporting the company, and I hope that you will give the same positive support to Harald and the team, and the company is in the best possible shape and in the best possible hands for the future. Thank you very much. Did we have any questions?

[Unknown Executive]

Yes. So to the Q&A session, and thank you, Kristian. The first question that we have received is for Terje. You have $123 million of available liquidity and guiding for an even stronger second quarter that should increase further. Apart from the 50% in dividends, will this only be used to pay down the bond? Or do you have other potential uses for this surplus cash?

[Terje Iversen, executive]

In the first round, of course, we will use the cash available to repay the bond maturing in June already. Going forward, if we continue to see improving results and the same good cash flow as we have today, that will enable us to continue our path to delever and also to decrease the cost of capital and the cash breakeven. As I said before several times, we have an ambition to reduce cash breakeven to be at a sustainable level, that will mean around USD 19,000 to USD 18,000 per day. So that will enable us to approach that target in the coming years.

[Unknown Executive]

And then to Kristian, are you now being more active in the CPP market considering the strength we see there?

[Kristian Morch;CEO, executive]

No, I don't think we are. The CPP market is not a natural hunting ground for Odfjell. But we have seen also -- what we saw last year in the second quarter when the CPP markets really took off -- of course, we do have ships that does the CPP well, and on occasion, we take advantage of that for backhauls, but our main focus is on the chemicals. We don't expect to be very active in the CPP markets unless there are some earning pockets that we will pick up, but not from a sort of fundamental focus area.

[Unknown Executive]

Yes. And then another question also market-related. Would you say the strong improvement you see in the market today is artificially strong at this time like we saw in 2020? Or do you see that the improvement is here to stay for a while?

[Kristian Morch;CEO, executive]

No, I think the improvements are here to stay for a while. And the reason for that is that really what's driving this is the tightness in supply and that will not go away. Demand will go up and down and who knows whether China goes into even more severe lockdown and those things can happen. But when you look at the volumes being shipped and you look at what's available with tonnage with a zero growth in ships, I think it's a very fundamental upturn this time. And with a fear of sounding too overly optimistic, I really do want to remind everybody that we have not seen a strong supply-demand situation for the past, I would say, almost 20 years. So I think this -- and we don't see an influx of new orders because of new technology and questions about that. So I really do think this is a fundamental upturn.

[Unknown Executive]

Yes. And then one question related to China, again, you touched upon it on the newbuilding side. But on the market side, how is the COVID situation in China affecting your markets?

[Kristian Morch;CEO, executive]

Well, it's drawing tonnage out of the market because it's difficult to get in and out of China. And of course, when the industry shut down, it will do something to demand. So it is affecting us. If it was a real concern, the markets will not be doing what they're doing. So I don't think it's a major issue. I mean industry will resume and so on. So it's not something that keeps us awake at night. But of course, it's something that we watch. And from an operational perspective, it is a challenge.

[Unknown Executive]

Yes. And then lastly, a question for you, Harald, if I may. Could you share some insight on what your immediate focus will be in your new role?

[Harald Fotland;COO, executive]

Yes. To be honest, I think I'm taking over tomorrow. And I think I deserve to share those thoughts with my colleagues before I share it publicly. But what I can say is that by the Board's choice of an internal candidate, I think that's a clear recognition of the results that we have achieved over the past 7 years. We built the world's largest deep-sea fleet of chemical tankers, and we probably have the most competent organization in the industry. So I think the expectation is that we shall continue to build on that platform and further develop it. So that would be my main priority for the coming months.

[Unknown Executive]

There's no further questions. So maybe you will have the last words today then, Harald.

[Harald Fotland;COO, executive]

Yes, I can only say that I'm extremely excited by the opportunity, and I'm also confident that I'm leading a fantastic team in Odfjell. So I'm looking forward to taking over from Kristian. I would also like to add that what Kristian has done to Odfjell during the past 7 years is quite extraordinary. We started with a challenging starting point and what we see today is totally different from what we saw back in 2015.

[Kristian Morch;CEO, executive]

Thank you.