Odfjell SE

OSE:ODF

Earnings Call Transcript 2022-Q2

[Harald Fotland, executive]

Good morning, everybody, and welcome to Odfjell's quarterly presentation for the second quarter of 2022. This is my first presentation, and it's also -- we are also presenting Odfjell's best quarterly results in 15 years.

We have a standard agenda. I will present the highlights. Our CFO, Terje Iversen, will present the financial figures. And then I will continue with an operational review and our prospects for the future. Please also note that it's possible to write in questions directly on the screen.

Our highlights. We are, as I said, reporting the best quarter in 15 years, and it's also the second best quarter in Odfjell's history. Our earnings increased with $24 million to USD 160 million in time charter earnings. We delivered a net result of $2 million from Odfjell Terminals. We almost doubled our EBIT from USD 27 million to USD 53 million. We almost tripled our net result from USD 11 million to $30 million.

We saw an increase in contract rates during the quarter of 14%. We have -- we utilized the strong nickel market early in the quarter and sold one vessel for recycling, which resulted in a $4 million equity gain and then $8 million cash effect. We have exited the terminal in Tianjin. And during the second half of 2022, we will discontinue 3 of our 5 pools.

I'm also happy to inform you that the Board has decided a dividend of $0.23 per share based on our first half results.

When it comes to our outlook, we expect to also report continued strong results in the third quarter, with time charter earnings more or less in line with what we see in the second quarter.

So that -- by that, I give the floor to Terje to present the financial results.

[Terje Iversen, executive]

Thank you very much, Harald. And I will start just echoing Harald, saying it's a pleasure to present these figures being the best figures in 15 years for Odfjell. And also, it's a pleasure to announce that we are now starting and paying our first half year dividend based on the results for the first half year this year.

I will start going through the P&L for this quarter. And as Harald said, we increased the time charter earnings with USD 24 million this quarter, main reason being that the market improved. We saw increased spot rates and also increased contract rates. And despite fewer days, we were able then to increase the time charter earnings quite substantially due to a strong market.

That is also taking into effect that actually, we sold one vessel beginning of the quarter, which reduced our time charter earnings with USD 1.8 million compared to what we could have delivered this quarter.

Looking at operating expenses, that is quite stable as in the first quarter. Even though we have one vessel less, that means that there's a slight increase in the operating expenses due to cost escalation -- inflation globally, but it's only a minor increase all over for the quarter.

Looking at the contribution from terminals ended at USD 1.5 million this quarter, down from $3.3 million in the first quarter, main reason being that we had a positive impact from insurance proceeds in the first quarter of USD 2.5 million. Looking into the third quarter, we expect the continued stable activity at the terminals. And in addition, we will then book a gain related to the final insurance proceeds from the fire back in 2021 at OTH.

G&A increased from $18.0 million to $19.3 million this quarter, main reason being some provisions made due to a closure of one office and some smaller general provisions this quarter. We had other operating income expenses of USD 1.1 million related to some gas vessels and insurance claims. And then we had an EBITDA of $89.5 million compared to $67.4 million in the first quarter.

We had a capital gain, as Harald mentioned, at $3.9 million in this quarter. And then we have -- are left with an EBIT of $52.8 million compared to $26.7 million in the first quarter. And then looking behind the figure, the reason we are growing EBIT this quarter is the increased market. Time charter rates, up with USD 24 million and also the capital gain around USD 4 million, contributing to the increase in EBIT.

Interest expenses ended at $17.9 million compared to $18.3 million, a slight reduction due to less debt and also some improved terms for some of our financing instruments. Going forward, we should expect to see increased interest expenses, though, due to the increase in 3-month LIBOR that will impact our figures in the second half.

After other financial items and taxes of $1.4 million, we are left in a net result of USD 30 million compared to $11.1 million in the first quarter and an earnings per share of $0.38 compared to $0.14 in the first quarter. And as mentioned, it's a pleasure then to announce that we are distributing dividend within the next few weeks of $0.23 per share based on the normalized result for the first half year.

Time charter increased this quarter, as mentioned. This quarter, we ended at $27,206 per day. That's a substantial increase compared to first quarter of $22,368, well above our breakeven -- cash breakeven level for 2022 estimated to be around $22,140.

Looking at the quarter alone, we had a cash breakeven of $22,291 compared to $21,476 in the first quarter. The slight increase is due to the fewer trading days, as mentioned, also increased dry docking expenses this quarter compared to the previous quarter.

Looking at our balance sheet, most, I think, to note. Ships and newbuildings contract at USD 135 billion, slightly decreased since first quarter. Looking at investment in associate joint ventures ended at $182 million to $187 million in the first quarter. The reason for the reduction is related to the dividend. We have got some dividend out of the terminals and also there are some currency exchange effects that have negatively impacted the book value in U.S. dollar in end of second quarter.

Looking at cash and cash available liquidities. We had cash end of second quarter of $94.8 million. If we include under our loan facilities, we are at USD 142 million. But then you should deduct USD 27 million that we had on the balance sheet end of June. That is settled to our terminal partner after the end of the quarter. And if you deduct that, we are at USD 115 million in available cash and liquidity end of second quarter.

Equity ratio continued to increase based on the positive results, increased from 31% to 33% end of second quarter. On the liability side, most noting -- most worth noting thing is that the other current liabilities and derivatives, $185.6 million then also included USD 27 million. But as mentioned, that you should deduct from our cash available end of the quarter.

Looking at interest-bearing debt and you should also look that together with the current liabilities and derivatives because some of this hedging arrangement for the NOK bonds are included in those balance sheets items. So -- but looking at the quarter as a whole, we reduced interest-bearing debt to around USD 40 million, including the noncurrent and also current portion of the interest-bearing debt.

Cash flow this quarter, we delivered solid operational cash flow, increased with around $30 million compared to the first quarter. That is, of course, driven by the improved results and also the fact that in the second -- in the first quarter, we had an increase in working capital -- quite substantial increase in working capital that has more stabilized into the second quarter.

So that left us with a positive operating cash flow of $68 million. Investment activities, we had a positive quarter also this quarter due to the sale of this vessel event for recycling. That gave us a positive of $13.7 million. Then we had some investments in dry dockings and energy saving devices, up $10.8 million this quarter, up from the first quarter, but that left us with then USD 4.1 million in positive cash flow from investment activities this quarter.

Financial activities, negative $37.6 million. Looking behind the figures, as mentioned, we reduced the debt with around USD 40 million this quarter. And we also paid dividend based on the annual results for 2021 of $8.1 million, which is included in negative $37.6 million. For the quarter as a whole, we then increased cash with $33 million, leading to an end -- cash end of quarter of USD 94.8 million.

Looking at the cash flow in a longer perspective, you see that we have seen improving free cash flow through many quarters now. Looking at this quarter, we ended $72 million in positive cash flow before payments on operating leases. And if you adjust fourth quarter '21 because we then had some one-offs, we have been stable increasing the free cash flow for many consecutive quarters.

If you then deduct or reduce for the kind of rolling factor here, we had a free cash flow in the last 12 months of USD 55 million. And if you adjust that for payment on the operational leases, we are USD 40 million each quarter in the free cash flow on a rolling 12-month basis. This quarter, we more or less used the free cash flow to reduce our debt and also to pay down the dividend for 2021.

Bunker expenses, just a few words about that because we have seen a continued increase in the oil price and the bunker expenses, but we see that we have positive effect on our bunker adjustment clauses.

On a gross this quarter, we had USD 88.4 million in bunker costs, but then reducing -- reduction for the adjustment clauses and also external pool vessels, we ended at $54 million compared to $48.1 million in the first quarter. Of course, that is more than covered by the increase in the spot rates during this quarter, leading to an increase in the time charter earnings as explained earlier.

On the debt side, not much news to tell about. We continue to do some refinancing to decrease the capital cost. Going forward, we have very few large loan maturities coming towards us, but we are still considering, and I will do a refinance of some of these maturities to have a kind of better profile and also reduce the cost of capital for these financing.

Looking at kind of long-term picture ahead of us. We are still on a good path, we think, to reduce our debt as we have kind of been very clear about we are going to do. We expect to be around USD 1 billion in debt end of this year, and we are on target, I think, to reach a level of around USD 900 million end of 2023. But of course, that will also be market-dependent and dependent on the earnings that you will see in the quarters ahead of us.

Then I would think I will leave over to you again, Harald.

[Harald Fotland, executive]

Thank you. Yes. When it comes to our contract coverage, we see a relatively stable picture with a coverage of 50%. This is up 1% compared to last quarter, and it's also up 150,000 tonnes compared to last quarter.

Our contract rates renewals increased by 14%, and this figure is including a couple of contracts that were renewed at preagreed rollover terms. We also see a very high demand from charters to enter into new contracts, and we also see that the available space for these contracts is limited. So we believe that there will be a strong continued momentum also into the second half of 2022. We are closing 3 of our 5 pools, and the effects of these closures are limited on our -- when it comes to our financial results.

We saw a whopping 21% increase in the ODFIX graph compared to an increase of 8% in the Clarksons graph. The latter is explained by the trades that are included in the Clarksons graph.

When it comes to volumes, we saw specialties relatively stable. We saw increase in volumes for easy chemicals. We saw increases in veg oils, particularly when it comes to imports of energy-related cargoes into Europe, and we saw increases in the volumes for CPP.

Compared to the IMO 2008 baseline, we have now managed to reduce our emissions to AER by more than 50%. The second takeaway from this slide is that for the fifth quarter in a row, we are reducing our emissions. And the third takeaway from this slide is that we are reporting the lowest emissions ever in Odfjell's history.

Tank terminals, stable development. We delivered an EBITDA of $8.5 million. We saw high occupancy rates in Europe and U.S., close to 100%. We also saw high throughput on those terminals. We saw a slightly lower occupancy rate in Asia at our terminal in Ulsan, but also there, we saw high levels of throughput.

We have concluded the sale of our terminal in Tianjin, and that also marks the exit of our partnership with Lindsay Goldberg. We will also book $5 million gain related to insurance proceeds from the fire at OTH that occurred in 2020.

Prospects. These are figures by Clarksons. If you look at the freight rates west of Suez, we should see a sharp increase that started in the first quarter -- by the end of the first quarter and continued through the second quarter. And we see a similar and even stronger tendency when it comes to the trade lanes east of Suez. As an example, we saw -- in the West, we saw export rates from the East Coast of South America, increasing by 41%. And we also see a very strong market in the Eastern trade lanes.

In addition, we see that more and more swing tonnage is going back to CPP due to the increasing rates for CPP. Due to this, we see that the availability of tonnage in Europe in our region is going down. We saw a reduction of 9% in the second quarter. And similarly, we saw an increase of available tonnage by 11% in the Asian markets. This has contributed to the improved market in the Atlantic Basin that I showed you before.

We also noticed that the speed of the chemical tanker fleet continues to decrease from 2016 to -- until today, we've seen a decrease of more than 6%. And we have to remember that next year, for many vessels, this decrease will be mandatory due to the new IMO legislation when it comes to decarbonization.

There are a lot of talk of recession ahead of us, and the graph on the left shows the chemical tanker market during previous recession periods. And as you can see, the chemical tanker demand has been quite resilient when it comes to previous recessions. This year, we should see a 6% year-on-year growth when it comes to demand for chemical tankers. And as I mentioned before, we see a sharp increase in volumes of energy-related products being shipped into Europe.

All in all, we expect that the expansion of the chemical market will continue, with approximately 4% in the coming years. But even more interesting is the development on the supply side, where we see a flat development, where the tonnage will increase with approximately 0.5% during the next 3 years. This is a calculation of available deadweight tonnes. Into this picture, you have to calculate the reduced speed. You have to calculate the fact that tonne-mile production is increasing due to the Russian invasion of Ukraine. And you have to calculate that more vessels than before are being sold to domestic and regional trades. For that reason, we believe that there will be a negative fleet development in the years ahead.

To summarize this presentation, we have delivered our strongest result in 15 years and also our second strongest result ever. We see very strong markets across all trades. And we also see a tendency that there is a lack of supply in all regions. Odfjell Terminals performed well in the second quarter. They have very high occupancy rates and stable throughput. We expect the markets to be resilient in the years ahead, and this is driven by -- partly by supply growth and also by a healthy demand picture.

The company has agreed -- has decided a $0.23 per share dividend for the first half of '22. And despite softer market in typically in the third quarter, we expect to report continued strong results also in the third quarter.

So by that, I thank you, and this concludes the presentation, and now we are open to answer questions.

[Bjørn Røed, executive]

Thank you, Harald. We got some questions here online for you. And then one question from [ Felipe ]. You let the June bond mature with cash or other resources. Will you come back to the market now that spreads are beneficial and your earnings obviously in a strong momentum?

[Terje Iversen, executive]

I can answer that. I think we are -- we have a long-term target to reduce our interest-bearing debt and be in the range of USD 750 million to USD 900 million. Today or end of this year, we expect to be around USD 1 billion. And looking at installments in 2023, we are at around USD 99 million, I think. So that we are very close to reach that target being below $900 million. In addition, we have the bond that is maturing in September next year. Of course, that could also be interesting to look into if we want to reduce the debt further to come within our financial targets. And we also would expect that if we should do a new bond issue, that should be at substantially improved terms based on the earnings that we are seeing and the strength that we have on our balance sheet today and expect to see continue improving further.

[Bjørn Røed, executive]

And then one question here for you, Harald. How do you look at the management composition now after having changed CEO internally? Is there a plan to strengthen the top management team to face upcoming strategic commercial and operational challenges?

[Harald Fotland, executive]

Well, I think that's a bit too early to say. But what I can say is that the present management team has taken us through 7 very difficult years. And I'm very confident with the team that we have. Whether there will be changes going forward, that remains to be seen.

[Bjørn Røed, executive]

And one for you again, Terje, here. Congratulations on a strong quarter. Now that you generate strong cash flow, when and how will you reach your deleveraging targets?

[Terje Iversen, executive]

As I just mentioned, we are on target, I think, to reach the debt levels that we have set as a kind of a target rate -- frame end of next year. That should be possible. We also have a cash breakeven targets that could be more challenging to reach already next year, and that will also depend on the fleet that we have. And we also -- based on the fact that we see some cost increase and OpEx inflation and also interest costs increasing due to increased short-term interest, so there could be some need for resetting that target at some stage. But I think we will work quite hard to reach that target and come as close as we can get based on the balance sheet and opportunities that we see today.

[Bjørn Røed, executive]

And then one here for you, Harald. This is the last question we got so far. Could you elaborate a bit more on the strong COA rate increases during the quarter and expectations on this going forward?

[Harald Fotland, executive]

Yes, as I mentioned in the presentation, we have seen an increase in contract rates of 14% in average for the contracts that we renewed during the second quarter. We believe that, that figure will continue to increase going forward. And the reason for that is, I think, mainly seen on the supply side. Our customers will experience that the availability of chemical tankers available for contracts will decrease, partly due to the very strong spot market. And partly due to the fact that we will see a decrease in tank capacity due to speed reductions, due to tankers being sold for domestic markets and also due to the increased tonne-mile demand. So we believe that there is a strong market for contracts going forward.

[Bjørn Røed, executive]

Thank you. There are no further questions online right now. So I'll leave the word for some final remarks from you, Harald.

[Harald Fotland, executive]

Yes. Then I thank all of you for attending and asking questions, and have a good day.