Odfjell SE

OSE:ODF

Earnings Call Analysis

Odfjell Sets New Quarterly Records Amid Strong Market Performance

Odfjell achieved record earnings this quarter, with time charter earnings rising to $215 million, up $20 million from the previous quarter. The net result soared to $88 million, compared to $69 million previously. Despite trade disruptions, volumes remained stable, and contract rates were up by 5%. The company also approved a $1 per share dividend and reported strong safety performance. Although the next quarter is expected to be strong, it may not reach the same high levels due to market adjustments.

Strong Earnings Signal Robust Performance

Odfjell has announced a record quarter, marking the third consecutive quarter of elevated results. The company's time charter earnings surged to USD 215 million, a USD 20 million increase from the previous quarter's USD 195 million. This growth was supported by improved freight rates, enabling the company to achieve an EBIT of USD 107 million, surpassing the previous quarter's USD 89 million. The record net result for the quarter reached USD 88 million, up from USD 69 million adjusted for one-off items in the first quarter.

Consistent Contract Growth and Operational Efficiency

The firm renewed about 6% of its total contract volumes during the quarter with an average rate increase of approximately 5%. This marks an encouraging trend, having increased contract rates for 13 consecutive quarters. Additionally, Odfjell's operational safety performance remained exemplary, with all safety-related KPIs well within targets.

Financial Health and Long-Term Commitments

Odfjell reported an increase in cash flow from operations to USD 108 million, up from USD 91 million the prior quarter. The cash breakeven point was also reduced to USD 22,103, down from USD 22,501, with a future target set at around USD 21,000. Odfjell finished the quarter with USD 140.8 million in available cash and expects to distribute USD 79 million in dividends based on first half results. Total outstanding interest-bearing debt was around USD 787 million, reflecting a manageable maturity schedule.

Market Dynamics and Future Outlook

Looking ahead, Odfjell anticipates that the freight rates will remain elevated but may experience some adjustments. Supply chain dynamics, particularly the reopening of the Panama Canal, have returned transit volumes to normal, potentially impacting the ton-mile demand. Nonetheless, Odfjell maintains a positive outlook for the third quarter, albeit with expectations of slightly lower results than the exceptional second quarter. Overall growth in global GDP is forecast at 3.2%, which will likely bolster demand for the chemical tankers operated by Odfjell.

Commitments to Sustainability and Efficiency

The company remains committed to reducing its carbon footprint, showing a slight decrease in carbon intensity to 7.05 from the previous quarter's figures. Future projects include installing suction sails on one of their vessels to improve fuel efficiency, illustrating Odfjell's proactive approach to sustainability.

Earnings Call Transcript 2024-Q2

[Operator]

[Foreign Language]

[Harald Fotland, executive]

Thank you very much, Helga. As you said, we are today presenting for a live audience at Scandic Hotel close to Flesland Airport and we will go through our quarterly and half yearly results. For those following us on the webcast, unfortunately, you will not be able to ask questions directly during this presentation due to the live presentation, but you are more than welcome to direct any questions you might have to my colleague, Nils Jørgen Selvik, our Finance Director.

This presentation will follow a very traditional pattern. I will go through the highlights and then my colleague and CFO, Terje Iversen will take you through the financials and I will conclude the presentation with an update on operations and our markets. So if we then switch to the highlights. I'm extremely pleased to inform you that once again, actually the third time, we are now presenting a record quarter for Odfjell at elevated levels. And with freight rate increases compared to our last quarter.

I'm also similarly happy to say that our safety performance remains strong. All our safety-related KPIs are well within target and we did not experience any serious incidents during the quarter. Our time charter earnings in Odfjell Tankers ended at USD 215 million, that's USD 20 million up compared to the USD 195 million that we delivered after the first quarter. We saw an EBIT of USD 107 million and this compares to USD 89 million in the first quarter. And we have a record quarterly net result of USD 88 million and adjusted for one-off items, this USD 88 million compared to USD 69 million for the first quarter.

The rates on our renewed contracts during the quarter were up 5% and we renewed approximately 6% of our total contract volumes during the quarter. The net result contribution from Odfjell Tankers (sic) [ Terminals ] was USD 2.9 million and this compares to USD 3.2 billion during the previous quarter. The carbon intensity is slightly down to 7.1, actually 7.05 and this is marginally better than what we saw in the first quarter. During the quarter, we also took delivery of one long-term time charter vessel, and we also signed contracts for 2 additional vessels, indicating that we now have 17 vessels on order during the period from now until 2028.

I'm also happy to inform that the Board concluded and approved a dividend of $1 per share based on our adjusted first half results. Our results comes at the back of a very strong and robust contract portfolio. And I'm also happy to say that -- to repeat that we saw an excellent safety and operational performance during the quarter. To use an expression from [indiscernible], most of what we try to do during the quarter were pole in. Our view for the next quarter is that the next quarter will also be strong but slightly lower than what we saw during the quarter behind us. So by that, I give the word to Terje, who will take you through our financial performance.

[Terje Iversen, executive]

Thank you, Harald. I will always start with the financials on the P&L and the balance sheet. I'll also take you through the cash flow development, the financing and also give an update on CapEx and time charter commitments per end of June. Starting with the income statement. We saw that the time charter earnings increased to USD 215 million, actually up USD 20 million compared to the first quarter. Main reason for that is that we saw improved spot rates and also improved contract rates while a number of days and the volumes were quite stable compared to the first quarter. Time charter expenses being time charter -- short-term time charter vessels decreased or increased slightly to USD 3.4 million due to less off-hire days and also on renewed rate for one of the vessels while operating expenses increased slightly from USD 49.1 million to USD 51 million this quarter. Main reason is that we had a bit higher insurance costs this quarter compared to the first quarter. .

Share of net results from joint ventures associated with new venture is our net result from the Terminal business under that USD 2.9 million compared to USD 3.2 million in the first quarter. Main reason for the slight decrease is somewhat lower result at our Terminals in the U.S.

G&A decreased compared to the first quarter, but that's mainly due to seasonal reasons being that we actually -- we expand salary throughout 11 months instead of 12 months, meaning that units were at kind of free in our accounts in the June than reducing the G&A in the second quarter compared to average quarters. Then we ended with an EBITDA of USD 147.2 million, up from USD 126.8 million in the first quarter. Depreciation slightly up USD 39.9 million and that gives us an EBIT of USD 107.4 million compared to USD 88.5 million in the first quarter. Net interest expenses quite stable compared to the first quarter, USD 19.1 million and after other financial items and taxes, we underdone, as Harald said, with a net result of USD 88.2 million, which is a new record compared to the last record in the first quarter of USD 67.8 million. Adjusting for very few nonrecurring items, we underdone at USD 88 million in net result compared to USD 69 million in the first quarter.

Our cash breakeven compared to time charter rates, of course, that has been a quite nice development. We saw that the time of the rates for the second quarter ended at $33,493 in the second quarter, up from $33,005 in the first quarter. Cash break-even for this quarter ended at $22,103 compared to $22,501 in the first quarter, bringing the 12 months rolling average around $22 876. Main reason for the decline is somewhat lower expenses and also some changes in our financing during the quarter.

Going forward, we have set a new target or cash breakeven to be around USD 21,000 per day. We are still above that level, but we expect to continue to be around the levels that we have seen in the last few quarters or so in the coming quarters, but still the aim is to reduce that going forward. That could be on the back of lower interest but also reduced debt in the future. Looking at the balance sheet. During the quarter, we took delivery of the one new vessel on long-term time charter Bow Jaguar that led to an increase in right-of-use assets to USD 293.6 million. Also, we saw that we had a nice increase in cash and ended at USD 140.8 million. And if we include undrawn loan facilities, we are around USD 231 million in available cash. And we would then pay out USD 79 million during the quarter or beginning of September related to the net adjusted result for the first half.

Total assets is around USD 2 billion. We have now an equity around USD 900 million. And if you adjust for IFRS 16-related debt, which is excluded from our financial loan covenants, we have an equity ratio of 51%, meaning a quite solid balance sheet, I would say. On the debt side, we had done a few refinancing. So we have actually increased noncurrent interest-bearing debt but at the same time, we had done reduced current portion of interest-bearing debt by refinancing some of the current portion during this quarter. Including in the current portion of USD 170.3 million is also the bond loan of USD 850 million, which is maturing in January next year.

Looking at the cash flow, we are happy to see that the increase in net results also is reflected in the increase in operating cash flow during the quarter and at USD 108 million in the second quarter, up from USD 91 million in the first quarter. And of course, that is driven by increase in earnings and the reduce in expenses. We saw a change in working capital negative USD 14.5 million. that is mostly related to the increase in revenue during this quarter. And looking at the investment side, limited CapEx, we have done some dry docking during the quarter and also paid 1 installment on a new building in China.

So net, we had cash flow from investing activities, negative USD 17.5 million in the quarter. On the refinancing side, we were quite active, as mentioned. And if you include the refinancing and also what we paid on the IFRS 16 or operational lease debt, with a negative cash flow from financial activities of USD 36.6 million. And total for this quarter, we increased the cash with USD 54.2 million, ending at USD 140.8 million. This is showing the cash flow or the free cash flow development in the last 13 quarters.

And as you can see, we have had a quite a nice development also reflected this quarter. As I said, operating cash flow of USD 108 million. Cash flow from investments, negative USD 17, meaning that we had free cash flow this quarter of USD 91 million. And we look at it -- if you look at the 12 months rolling, we are at around USD 82 million. And if you adjust that for a right of use of assets, meaning time charter payments on long-term time charters, the free cash flow reached USD 66 million.

If you look at the debt side on the upcoming maturities, I think I am just one ahead of the presentation here. If we go to the next one, There we are. I think I was slide -- 1 slide ahead of what was on the screen actually for some reason. This is showing what we have our maturities going forward. We have quite limited maturities, I would say for the coming quarters. We have some maturities in the fourth quarter, including also some planned refinancing.

Besides that, we, of course, have the bond loan that is maturing in first quarter next year. The plan for today based on the solid cash flow that we are experiencing is to repay that with debt from a cash or balance sheet at the time of maturity. We have earlier said that we are considering to enter the market to do a refinancing, but currently, that is not the plan we are working with. If we look at the total interest-bearing debt, we are around USD 787 million, end of this quarter. And if you repay loan according to the installments in the loan agreements going forward, we expect to be around USD 653 million in outstanding debt end of fourth quarter, '25.

Looking at CapEx and time charter commitments. This is an overview, we haven't included in the previous presentations, but we have been quite active, especially on the time charter, new long-term time charters the last few quarters. So here, we are showing what are the actually committed capital expenditure and also what is the committed time charter rates for the new long-term charters we have went into. The first table there shows the clear options. We had 4 purchase option for 4 bareboat vessels of 41,000 deadweight tons.

We have exercised one option and take delivery of one option. In addition, we also declared an option in the third quarter of last year and in the second quarter this year for 2 additional vessels being Bow Aquarius and Bow Gemini. This will be delivered in December '24 and in the second in 2025. In addition, we also have an option for a fourth vessel that we have included here because we think it's very likely that we are going to exercise that option because the option prices are quite favorable compared to today's market levels.

So if we summarize these options, including new building, we have at Dingheng. We are at around USD 143 million in CapEx commitments. And if we exclude the options not exercised yet, we are at around USD 108 million. More interesting maybe is the figures on the bottom of this slide. We have entered into many long-term charters the last few quarters, being new buildings being built in Japan.

And if you summarize the total time of the commitments for all these 16 vessels that are going to be delivered, we have close to USD 1 billion in times of the commitments. Total, we are then controlling around 20% of the total order book within our segment. And when these vessels are going to be delivered, of course, we had to capitalize the commitment, but that will be the bareboat element of the time charter rates. So it will be lower amounts that we are showing on this slide. [indiscernible] will lead out to you again, Harald.

[Harald Fotland, executive]

Thank you, Terje. I will continue with an operational review and then we will conclude this presentation with market update and prospects going forward. We saw a very strong second quarter and trade disruptions continued to affect our market. We now see that the Panama Canal is returning to maximum capacity, and the Canal is today around 90%. The Clarksons Index increased with 2.5% during the quarter, while the ODFIX spot index ended up 10.5%. If you look at the Panama Canal graph, we will see that the transits were at absolutely low during February and March and those vessels transiting the Canal, were those that were that had no other options, those with ports just on the other side of the canal.

For the long-range vessels, those transiting the Pacific, those vessels were all going the other way across the Atlantic and The Indian Ocean and then to the Far East. That situation is more or less solved today and we are back to normal operation for the super-segregators. And that is, of course, slightly reducing the ton mile demand. We have now increased our contract rates for 13 consecutive quarters. This quarter, we renewed 6% of our volumes. And on average, the contract rates were up approximately 5%.

It's also important to notice that when we are reporting on contract renewals, we are only reporting on contracts that are directly comparable with the previous quarters. If there are significant changes either to volumes or to the ports, then of course, the rates will no longer be comparable, and we are not reporting on those contracts with significant changes. Volumes climbed slightly during the quarter. And despite that longer sailing distances has an impact on the volumes that we are able to carry, I'm happy to see that we are also quite stable on our volumes, both for the -- operator tonnage and our pool vessels.

During the 6 last quarters, we have been stable above 60% on contract coverage. We are comfortable with that figure. And for the last quarter, we had a contract coverage of 62%, leaving approximately 38% open for spot cargoes. As mentioned, we see good rate increases and we've seen them during the quarters behind us. And also, I'm happy to see that volumes are stable despite the longer sailing distances. The last implies that our brokers are able to fill up the vessels and utilize them at the maximum despite that the capacity is taken up by those longer distances.

If we look at our carbon intensity, once again, we are reporting a slightly lower carbon intensity than the previous quarter, this quarter at 7.05, which is slightly lower than the average for last year. We've also, during the last year, tested out a new and novel technology called air lubrication. That system was tested on one of our pilot class vessels, the Bow Summer. Unfortunately, we did not see the expected results on that project and we are now in dialogue with the manufacturer to see what we can learn from the last year. This does not imply that we will cease developing novel technology. On the contrary, we are still 100% committed to support those projects to see whether there are inventions that can bring the carbon efficiency further up for the deep sea vessels. The next project out is suction sails.

We are cooperating with a Spanish company called [indiscernible]. The vessel that will get sales on board is Bow Olympus, one of Hudong class vessels and we expect to install those sales towards the end of this year. The vessel is entering dry dock this year, for the fifth survey and then the vessel will be repositioned to Europe for installation. So this naturally takes some time.

These projects, of course, important for our sailing vessels because they are relatively easy to retrofit. But of course, they are also important for the next series of new buildings for Odfjell account, where we are gaining, I would say, very important learning items from all these improvement projects that we are involved in.

On the Terminal side, the summary of this slide is that terminals are performing extremely well and we have a good overview of the operations and activity at all our terminals. The average commercial occupancy rate was at almost 97%, 96.9% we saw more or less full occupancy, 100% almost at our terminal in Antwerp. We saw increased occupancy in Ulsan and Charleston and we saw a slight downtick at our Houston terminal. Our financial performance is stable with EBITDA for the second quarter, more or less at the same level as we saw in the previous quarter.

We also see that the high freight rates are taking away arbitrage opportunities and that is one of the reasons why we have seen a slight decrease in import and exports, particularly from the U.S. but also from Ulsan. And this, in combination with a reduction in end consumer demand in certain regions, has resulted in a moderate reduction in activity levels at our terminals. If you look at the bottom slide, this might give the impression that we have more or less stable throughput at our terminals. But you also have to take into consideration that we have expansion programs more or less at all our terminals.

So the available cubic meters at our terminals is slightly increasing. And therefore, the figures here are not 100% comparable. The [indiscernible] go back in time for the terminal business, but still healthy and stable business on the terminal side. Then to our market update. I'll start with the markets West of Suez, as mentioned, the Panama Canal transit is back into operation and that means that, that also has an impact on markets, particularly those going westwards, to the Far East. And we also saw a slight reduction in exports going the other direction across the Atlantic to Europe. All in all, if you summarize the various markets, we saw more or less flat development west of Suez.

The situation is slightly better in East of Suez. The export volumes were strong, both in Asia and the Middle East regions but we also saw that the demand in China has been slightly reduced during the half year -- first half year of 2024. Rates are perceived as volatile. And this implies that there is a certain nervousness in the market and it's not easy to predict those things going forward. But all in all, we've seen an average increase on the rates East of Suez.

And then to the swing tonnage, we've seen an uptick since February this year, where we're at all-time low, around 3% of the MOs that are traditionally trading with CPP were into the chemical tanker -- chemical markets. And those 3% are those MOs that always are trading chemicals. So back in February, we were at all-time low. And now we've seen, I would say, a modest increase to approximately 4.5%, which is still very much acceptable compared to previous levels. Total volumes are still stable around 35 million tonnes per month.

Then to the order book. And in nutshell, we are mainly focusing on what we call the core, deep sea segment and that segment consists of medium-sized chemical tanker, large chemical tankers and the super-segregators. The order book today stands at approximately 9% of the total fleet, which I will say is still well within comfortable levels. To put this into perspective, in 2007, when the downturn started, the order book stood at 70%. If we look at the segments, there are the highest number of orders are in the so-called medium segment and we consider many of those vessels as replacement tonnage, mainly for 20,000 tonnes now being sold for domestic or regional trade, which means that those vessels will no longer be competing in what we define as the international market for deep sea chemical tankers.

And those vessels leaving for domestic and renewal trades, are being replaced by -- typically by 25,000 tonnes, which is by far the biggest segment of orders in the medium segment. We have also seen some orders of what we define as super-segregators, the biggest chemical tankers with more than 28 tanks and more than 50% stainless steel. We consider all those vessels being ordered as replacement tonnage. If we look at the total order book, approximately 20% of that order book is for Odfjell account.

Yes, we've been through Panama a couple of times already, but I would say that maybe our biggest focus these days is geopolitical tension. We see that the situation in the Red Sea and Gulf of Aden is nowhere near an immediate solution. And we also see that the situation is not at all improving between Russia and Ukraine. So we anticipate that we will still have high political tension -- geopolitical tension going forward.

The growth in GDP is forecasted at 3.2% in 2024 and that is one of the main KPIs for -- to estimate the chemical market going forward. So we see that there is a soft lending within reach. The growth in China has picked up somewhat, but it's still slower than what was expected at the start of the year. And in line with the growth in GDP, we foresee that the global chemical production will grow by approximately 3% this year. We also see that the summer slowdown is now coming to an end and activity is gradually picking up among our customers. So all in all, a development on the production side as normal, there have been a slight decrease in ton mile production due to the reopening of the Panama Canal, but we still anticipate that we will have to sail through -- sorry, around Africa in the months to come.

There have been some orders during the quarter for new tonnage, if we are going today to order new vessels, the earliest we anticipate that the ship can be delivered is in 2028. So we do not foresee any large changes when it comes to the order book. We have seen an increase on the swing tonnage that is, of course, impacting the chemical tankers. And to finalize this slide, average fleet speed has continued to remain at the present level.

So to summarize this presentation, we, once again, achieved a record result in the second quarter, a result that I'm extremely proud of. And the reason for that is that it is not only market driven, it's driven by clever chartering by our ship brokers. We have a rock-solid contract portfolio. And on top of that, we see that our vessels and the operations run extremely well. And at the back of that, we produce excellent results.

So it's no secret that I'm, today, extremely proud of what my colleagues are delivering. We saw increased time charter earnings in the second quarter. We see freight rates staying at elevated levels and we also saw a stable volumes despite what I said about ton mile being increased. Stable net result contribution from Odfjell Terminals despite the fact that we saw a slight activity reduction at our Houston terminal.

We expect the spot markets to pick up towards the end of the third quarter and we also see that some of the [indiscernible] operators are contemplating to move from clean products to dirty, which will again support our segments. Then to summarize, the freight rates are still at historically elevated levels despite some adjustment from recent highs and we expect stable underlying results from Odfjell Terminals.

And in sum, we expect the third quarter to be another strong quarter, but maybe somewhat below what we saw in the second quarter. So by that, I thank you all for your attention, and we are open to questions if any in the audience have questions to us.

[Harald Fotland, executive]

Yes, there was 1 at the back.

[Jørgen Lian, analyst]

So this is Jørgen Lian from DNB markets. A fantastic quarter. Still a very strong market. You now have 17 vessels in the order book. Just wanted to ask your thoughts about the need for further vessels going forward and how you view both fleet renewal and also potentially growth?

[Harald Fotland, executive]

First of all, I would say that we are extremely happy with our cooperation with these Japanese tonnage providers. We have a good cooperation. And I would say that the rates on those contracts are favorable. If you look into the details of what we have on order in Japan, it's mainly traditional tonnage and not so much the super-segregators. In Odfjell, we today have 11 Canal close vessels that reaching certain ages. And we also have to look at the super segregator segment. And if we do anything on -- within that segment, I think it will be for [indiscernible] and not through external tonnage providers.

So we at -- we are looking at 2 different segments when we are discussing this. For traditional commodity tonnage, we are extremely happy with what we see in Japan. And when it comes to the really specialized tonnage then it will be our preference to do that on our own book.

[Jørgen Lian, analyst]

Okay. And on the market more in general, there's been somewhat of a sell-off in the equity markets, recession risks picking up. Do you get any feedback from the customers in that regard, given the summer slowdown and the expected pickup going forward?

[Harald Fotland, executive]

Well then we have to look at the nominations that we receive from the nominations on the contracts, the volumes that they actually put onboard of our ships. And I think the slide that I showed you in many ways speak for themselves. We are servicing an extremely industrialized market. And those volumes continue to go slightly independent of what traders and others are thinking. So we are delivering building blocks that the world needs every day. So we remain optimistic, but of course, I read the newspapers myself, so there is clearly a nervousness in the market.

And I think you also have to take into consideration what we've seen in Europe, where volumes have been slightly reduced to the benefit of producers in the U.S. and Middle East. So I would say that in our segment, volumes are stable, but -- or in our market, volumes are stable, but we see that the trading patterns are changing somewhat.

Any other questions? Okay then, I thank you all for your attention and thank you also for coming to hear this presentation. Thank you.