Odfjell SE

OSE:ODF

Earnings Call Transcript 2018-Q3

[Kristian Verner Mørch, Chief Executive Officer]

Welcome to the Odfjell presentation of our third quarter results. Today, we are doing the quarterly earnings release as a conference call from Bergen. I'm here together with Terje Iversen, CFO; Bjørn Kristian Røed who is Head of Investor Relations; and myself, Kristian Mørch, CEO of the company. We will run you through the presentation that you can follow here on the web, and you can also access the presentation yourself on our website. So I will, as usual, take you through the highlights, then Terje will take you through the financials and then I will come back for the operational review and market update, and then we'll have a Q&A towards the end of the presentation. The highlights from -- the highlights for the third quarter is not very exciting. The markets continued to be difficult. There was no real movements in neither the market for the chemical tankers nor for our terminals. That means that if you take out the Rotterdam effect, then our EBITDA result was more or less in line with what it was in the second quarter. EBITDA was $32 million compared to $37 million, but as I said, the effect of Rotterdam is around $5 million. So if you look at the Odfjell Tankers, EBITDA of $27 million compared to $28 million in the previous quarter. And if you look at Odfjell Terminals, it was $4 million compared to $9 million in the preceding quarter. Our net result was $31 million loss compared to $120 million the quarter before, but you have to remember that, that includes the effects of the sale of Rotterdam. Also during the quarter, we completed the, finally, the Sinochem transaction. I mean, the transaction is -- was completed a long time ago, but there was quite a lot of documentation and the involvement of the banks that has deadened the ships and that finally fell into place and everything is now signed. And the bareboat ships -- that half of the ships that we are taking on bareboat have begun to deliver into our share. Also during the third quarter, we successfully placed a new bond, NOK 500 million, in September and, as I said, the sale of the Rotterdam finally closed also in September. In the quote itself, you can say that we're repeating that the tanker market remained depressed during the quarter. And we continue to believe, and I'll talk about that towards the end of the presentation, that 2018 is the turning point for the chemical tanker market. It's always slightly scary to say it like this, but we really feel that this is the case. Exactly when it's going to happen is harder to predict, but we have a hard time finding data and indications that suggest that they will not happen. So we remain optimistic that this is -- that the market will be turning. We're also saying that we've been positioning ourselves well for the future. I mean, we have -- we're going to have one of the most efficient fleets, if not the most efficient fleet, within the chemical tankers. A final comment is it is never satisfactory to present the quarterly result with a loss, but we are in the middle of the worst market we have seen for quite many years. Seen in that light, yes, it is what it is. So Terje, I'll hand it over to you on the financials and then I'll come back for the operational review.

[Terje Iversen, Chief Financial Officer]

Thank you. I will start with the tankers this quarter. As you see, the gross revenue ended at $209 million, the same as in second quarter. Looking behind the figures, we saw some increase in the volumes. At the same time, we saw that the rates were slightly down. Actually, we also got -- going to have a positive revenue effect on the increased bunker surcharges this quarter and that also leads me to the voyage expenses, which increased with $4.7 million this quarter to $89.9 million. Most of that is kind of passed on to our customer through the bunker surcharges through the contracts and that is also partly covered by the external shipowners in the pools. So nothing out that the voyage expenses were quite in line with the second quarter. Time charter expenses decreased, as we have seen for many quarters now, due to continued redelivery of time charter vessels, while we see that the pool distribution is increasing somewhat due to more pool losses in our fleet. On the cost side, we see that both OpEx and G&A for the tankers are quite stable, which has been for many quarters now. That leads us to an EBITDA of $26.8 million versus $28 million in the second quarter. After depreciation and capital gain and losses, we arrive at EBIT at USD 1.9 million compared to $3.9 million in the second quarter. We see -- we saw a slight increase in interest expenses this quarter due to increase in LIBOR and also slightly increase in the total debt. Then we have other financial items being currency exchange positive effects and also a change in term on some of the derivatives that gave positive effect this quarter. Net finance was $13.4 million, down from $18.8 million in the second quarter. After taxes, we are left with a net result of USD 12 million (sic) [ negative USD 12 million ] compared to a negative result of $16.2 million in the second quarter. On the terminals side, there are some special items I would like to direct you towards. One is that we see that the revenue decreased from $25.9 million to $22.6 million this quarter. Most of the decline in revenue is related to reduced activity at the Rotterdam terminal due to the oil spill in the harbor. There was less activity in -- a few weeks there, impacting the revenue for Rotterdam. Rotterdam is included in the third quarter until the transaction was closed 20th of December -- September and is then kind of this is the last quarter we see the effects from the Rotterdam terminal in our results. Looking at the OpEx, that was quite in line with the second quarter, slightly down to $12.5 million, while we saw an increase in the G&A to USD 6.1 million this quarter compared to minus $3.8 million in the second quarter. Then we have to add that it was maybe slightly lower last quarter than in a normal quarter. At the same time, we had around USD 2 million this quarter related to the restructuring of Odfjell Terminals and the sale of the Rotterdam terminal. Then we ended with an EBITDA of $3.9 million compared to $8.9 million in the second quarter. And looking at the capital gain/loss line, you see that we had $12.5 million in negative effect this quarter. All of that is related to the Rotterdam terminal, around USD 10 million is related to currency exchange translation loss in this quarter. As we guided in the second quarter, we had a kind of equity effect on the currency exchange translation already in the second quarter, around USD 10 million, that now is appearing on the P&L, but are already taken into account on the equity in the balance sheet. Then we are left with an EBIT of minus $16.1 million compared to $57.1 million negative in the second quarter. And after finance and taxes, we are at a net result of minus $19.8 million compared to minus $104 million in the second quarter. Looking at the total, the net result ended at minus $31.2 million, but adjusting for one-off or nonrecurring effects mainly related to the Rotterdam terminal and also to the positive effect from the term this quarter, the normalized result is minus $18 million compared to a normalized result in the second quarter of around minus USD 14 million. The balance sheet. As you can see, the investments in associates and joint ventures are quite in line with the second quarter. We have received the funds from the sale of Rotterdam. That is included in $243.1 million. And as we have highlighted here, USD 88 million is the proceeds that we received for Odfjell SE for the sale of Rotterdam, which is still included in the terminal figures. But the liquidity has been transferred to Odfjell SE and will appear as cash and cash equivalents for Odfjell SE for the fourth quarter while investments in the JVs will then decline with the same figures. Cash and cash equivalents increased somewhat to $206.8 million this quarter, and as I said, it will be then increased with $88 million in the fourth quarter. At the same time, we will also use USD 27 million for increasing our shares in the Antwerp terminal as agreed with Lindsay Goldberg and as also communicated in the second quarter. Also in the fourth quarter, we will have to repay the bond that is maturing in December of around USD 77 million and that will be redeemed at maturity. Looking to equity, we see that equity is around 33%. It's reduced with USD 13.2 million this quarter comparing with the negative result of $31.2 million and the difference is related to other comprehensive income, meaning that we have effects that have been taken off our balance sheet already and -- that are reflected in the P&L but are not reducing our equity portion this quarter. On the debt side, we see that noncurrent interest-bearing debt is decreasing somewhat while we see an increase in the current portion of liabilities and there -- of interest-bearing debt and that is related to the bond that is maturing in September next year of around USD 61 million. The cash flow. We see that the cash flow from operating activities declined from $19.8 million to $4.1 million this quarter. That's not that dramatic and the results are very much in line with the second quarter. And the reason that we see a decline in the cash flow from operating activities is related to increase in accounts receivable and also a reduction in short-term liabilities in the third quarter. Cash flow from investing activities around USD 19 million, mainly related to installments of ballast water treatment systems and also some docking expenses and installments on the newbuildings. Then on the financing side, we see that we have now included the new bond that was drawn in September. We also have had some drawings on the newbuildings included in these figures. Net cash flow for the period ended at around USD 14 million compared to $11.5 million in the second quarter. One of our main costs, as you are aware of, is the bunker. And as many know, the bunker cost has increased, oil price has increased through many quarters now. However, we are showing that actually last 5 quarters, the average Platts in FOB Rotterdam has increased to 43% the last 5 quarters. But looking at the bunker cost total, we see that the increase in the bunker expenses has been around 8% and the reason is that we have a large contract portfolio where we are passing on the increased bunker cost to our customers. We also see the effects from having more fuel-efficient vessels in our fleet. For this quarter, we saw that the gross bunker cost was around USD 50 million. We saw increase in the bunker surcharges from our customers, taking out USD 4.2 million of debt and also bunker expenses included in the gross with USD 3 million related to third-party vessels. And that leaves us with a net bunker cost for Odfjell's owned fleet of around USD 43 million. Going forward, we expect to see the continued kind of hedging to our contracts due to our contract portfolio around 60% to 65%. On debt development, this is shown that in the fourth quarter, we have the bond that is maturing in December, which I mentioned, which will be redeemed. Except of that, we don't have much repayments before third quarter in '19 where we have also a bond maturing at around USD 61 million. Beside of that, we are actually looking towards third quarter '20 before we have large balloons coming to maturity. On the total debt kind of forecast, going forward, we see that total debt will decrease somewhat in '19 and then it will increase somewhat in 2020 when we have all the newbuildings from Hudong delivered. But then for 2021 and onwards, we expect to see a decrease in the leverage and we also would like to see a decrease in the total leverage for the group based on the earnings going forward. On the CapEx, not very much new information since the last quarter. We still have the Hudong vessels expected to be delivered in 2019 and 2020. We have very limited equity needs for these 6 newbuildings, USD 6 million remaining of this year and USD 12 million for 2019 to have these vessels delivered and fully financed. On the tank terminal side, this is quite limited number when it comes to planned expansions, planned CapEx expansions, that is, of course -- could be changing. We have interesting investment opportunities or market opportunities, especially in the U.S., so that may change going forward, but this is based on the expected plans -- or the plans we have per today. When we, at some stage, would like to see our planning increased activity or increased CapEx, that is still expected to be funded within the Odfjell Terminals JVs going forward. And we also have the expected kind of costs related to the ballast water treatment systems on our fleet for the chemical tanker fleet around USD 13 million for the next 2 years. We also included here some expected dockings for our fleet going forward. Then I leave the word to Kristian again.

[Kristian Verner Mørch, Chief Executive Officer]

Okay. Thank you, Terje. If we look for the headlines, operational headlines, for Odfjell Tankers on the top left-hand corner, you can see the development in our voyage days. This is kind of our -- the footprint we have in the market on the tanker side. And as you can see, the growth curve since beginning of 2017, our footprint has been going up. That's going a little bit backwards in the third quarter. We are redelivering time charter ships as we are beginning to take delivery of the pool ships and the ships that we are taking. So that's more some of the effects you're seeing in the third quarter. What you're also seeing on this slide is the red dotted line, which is actually the Odfjell SE exposure to the market and that has been reducing. So as the pool ships get delivered, our own, let's say, exposure to the market gets reduced, but we still carry some of the upside of those pool days because we have reason and the profit-sharing structures on it. What you're also seeing from this slide is that in 2018, we've had quite a number of off-hire days. These are the gray bars you're looking at. Many dry dockings has been impacting us during 2018 and also in the third quarter. We expect that to normalize as we go into next year. If you look on the bottom, our total volumes carried, we carried 3.8 million tonnes of cargo in the third quarter, 3.3 million of that was on our own vessels. Top right-hand corner, a very important number. The COA coverage remains high, around 60%, and when you compare that to the growth curve we've had on the left-hand side, we are happy to see that we have been able to maintain and even grow our contract coverage as the fleet also grows. Bottom right-hand corner is the usual comparison of the Clarkson spot index and the chemical tankers through the ODFIX index. This is a little bit apples and oranges because the Clarkson's index is a market index and the ODFIX is kind of an operational index that has operational effects in there. But this quarter, you're seeing that the market dropped by 3.7% and the ODFIX dropped by 2%. Our third quarter was, indeed, a difficult quarter market-wise. If you look at a few comments to the fleet changes we're making, if you look at the top bars on this slide, you can see that comparing January to September in '17 to the same period this year, our time charter expenses has gone down by 24% from $146 million to $112 million. It's a significant change in our exposure and our cost, and as I mentioned before, a lot of that is because we have taken pool ships in the Sinochem deal at the same time. So that's a big improvement in our TC cost, of course. When you then look at on the right-hand side, this is a picture of our fleet expansion programs. We do have ships coming in, in the fourth quarter. We do have newbuildings and other fleet changes happening in '19 and '20. So our current estimate is that by fourth quarter of 2020, it's going to be 92 ships, then maybe changed to this number when we decide to take a little bit more time charter exposure or reduce it, but we'll be adapting to the terrain as we go. But we do have ships coming in, in the coming years. I mentioned in the beginning that we will have one of the most efficient fleets in the world once our fleet renewal program is completed. What you're looking at on the bottom, we've been -- bottom left, we have been taking our old super-segregators, the Kvaerner class. They used to burn 35 tonnes of fuel per day. After we did the propeller changes and the modifications to the ship, they burn 28 -- around 28 tonnes of fuel per day. And if you compare that to the newbuildings coming in, they will be burning 24 tonnes per day. So this is a real improvement in consumption for the ships. And then in the middle bars, we are saying, well, at the same time, you're actually getting more than 10,000 -- 14,000 cubic meters more space. So if you take the consumption by cubic meter, you will see that it's an improvement in unit cost of around 32%. This is a simplified way of looking at efficiencies, but it is a significant improvement in our efficiency. If you look on the next slide, IMO 2020 is the hottest topic in the industry at the moment. We have been vocal in the press in the last months about our stand in this market. I think the highlights of our -- the way we see it is that, first of all, we don't think the scrubbers is the way to solve the challenges of the industry. Our focus has been on reducing emissions through burning less and being smart and wise about how we operate. If you reduce emission -- reduce consumption, you also reduce emissions and a scrubber doesn't really do that. So our focus is on having the most efficient fleet and what we have also communicated to the market is that the principles of how we operate today with our customers, and it has been like that for many years, is that we have bunker adjustment clauses. And there's really nothing that's going to change in that policy from Odfjell's perspective. The only change we're going to make is that we're going to adapt those bunker adjustment clause -- try to adapt those bunker clauses to reflect the change in regulation, which means that it will have to be for compliant fuel. But these are ongoing discussions with our customers and then we -- what we are saying is that Odfjell's bunker adjustment clause will be less than the competition because we burn less by unit carried. If we then, for a moment, turn to the terminals, we have stable performance compared to the previous quarter when you adjust for OTR. Top left-hand graph shows you that actually on the chemical storage, we're actually increasing our utilization of our chemical capacity globally whereas the blue bar, and I think this is going to be the last quarter where we show that, but that's OTR, and OTR is more mineral oil storage and so on and that continues to drop. That's a difficult market in Europe at the moment. And of course, this has been -- this is the reason why we're drawing down the average utilization to 81% in the third quarter. Bottom bar shows the total footprint, and with all the changes we have made to our terminal portfolio, we are now down to 1.5 million cubic meter globally, but that is almost exclusively chemicals and a very different and more strategic place for us to stand. Maybe one comment on the top right-hand bar is Houston, the -- we are currently full in our terminal in Houston. The U.S.-based exporters are producing as hard as they can, so this is a really favorable market. And we do have expansion plans. We have -- in Houston, we have greenfield and brownfield land available and waterfront available in Houston. And this is a promising market and that terminal in Houston is doing quite well. This is -- there's no change really in this slide compared to what we showed last quarter, but we wanted to repeat it anyway. This is going to be our footprint after the OTR is gone. The numbers you're looking at on EBITDA 2017 numbers, but you're seeing that the portfolio is almost exclusively chemical. It is a mix of mature and up-and-coming terminals and so on, but we have a much more strategic and stable terminal portfolio after the transaction in Rotterdam. And we -- with not having Rotterdam, we have a much better visibility also on our CapEx program going forward. We now turn to market prospects and updates. First of all, chemical tanker demand, there's no real change in our view on the fundamental demand for seaborne chemicals. We maintain a view of around 4%. And in addition to the 4%, you have to add the tonne-mile effect, which is anywhere between 1% and 3% depending on your assumptions and how much product is going to go long haul versus short haul. And so there's really no change in our fundamental view on demand. We have added a few comments to the right side in terms of demand and one of them is that the higher oil price is favoring shale gas-based chemical producers mainly in the U.S. because other producers around the world they produce chemicals based on naphthas and so on and that will -- price of that will go up with the increasing oil price. So if anything, the increasing oil price will be favoring U.S. shale gas producers and the U.S. export story, which is one of the biggest expenses we have seen. And the other comment we have made is that the ongoing trade war has so far not had a measurable effect on the chemical tanker demand. I think it will be a mistake to be overly confident that it won't in the future. We have been trying to stress test a few scenarios on what can happen and the number we arrived at is that if you really stress test it, it will have a like a 0.6 percentage point impact on fundamental demand. We don't think that's going to happen, but this is kind of the number we arrive at when we start stress testing it. So, so far, we have not seen a significant measurable effect on the total seaborne chemical demand. So that was demand. If you look at the fundamental supply picture, not a lot has changed. We're still saying that the total growth in supply is going to grow by around 2% on average to 2020. If you only look at the core fleet, that number is, I think, 3.6%. So overall, the addition of supply is under control and it's going to grow at a slower pace than demand. We have -- there was 2 orders of the stainless steel ships, which is the first stainless steel orders we have recognized in 2018. Those are 2 ships being ordered at the Japanese yard, but overall, there's very, very few orders of chemical ships coming in. And the data we are looking at for prices is that the price is up around 15% from the bottom when the markets continue to be difficult and we have a hard time seeing that there will be a major influx of orders in this segment, but we don't know. But at least until 2020 and probably '21, we have fairly good visibility on supply and that picture looks like what -- is what you're looking at on the left-hand side. The last comment I want to make is that consolidation continues. There are articles in the news about the BW fleet going through Ace. And if you put your ear to the ground in this market, there are other discussions going on out there. So we believe, as we have been saying before, that the consolidation will continue in this market. One point that we have addressed on the next slide is the swing tonnage and we have -- what we are feeling every day and sensing every day is that the amount of IMO to product tankers that are carrying chemicals has been increasing over the past year, but it's been frustratingly difficult to quantify it. And we've been searching high and low for good data to just kind of quantify, okay, so how much are we talking about, and in the last couple of weeks, we have finally found a reliable data source. And it's important to say when you look at this graph that this is not an exact science, but at least if we use the same methodology back in time in the last couple of years, what you're looking at, at this picture and this is the MRs, out of the total MR fleet, historically, you've had about 13% of the MR fleet trading in what we define as chemicals and that includes the veg oils. And what you saw from the fourth quarter 2016, that has been growing to the point that, as by November of this year, around 25% of the total MR fleet has been trading in what we define as the chemical trade. So that's a significant increase in supply and it is one of the main reasons where the markets are where they are in our opinion. So if you start playing with a few scenarios there, if the CPP markets come back and just half of the additional capacity that we have seen in the last year swings back into products, it would be -- it would mean that around 6% of the total supply of ships in our market will disappear, I wouldn't say overnight but almost. So this is really a factor that we're going to be watching, and personally, I think this is one of the real -- one of the things that can really change the way that our market dynamics work on a short-term spot basis. We -- that has prompted us to take a look at the clean markets so -- and we don't pretend to be experts in the product tanker market. So what we have done on this slide is we have taken a consensus view. We have looked at 6 external analysts of product tanker markets and been trying to overlay the views that we see in the market. And when you do -- and we've been trying to summarize this in the slide you are looking at. And what the consensus is that in 2018, supply and demand is fairly well balanced, but if you go into '19 and '20, you will see demand growing quite a lot faster than supply. At the same time, you have very low inventory of middle distillates and products around the world. And what you've also seen in the last month or so is that the gasoline are up. The forward curve -- forward price of gasoline is now in contango again, which means that the traders will probably be more active. So the view -- the consensus view of the people as mentioned on the bottom of the slide is that the market will be increasing in '19 and '20, and historically, I think the rule of thumb in our industry has been around $15,000 per day. MRs will swing back into the trades where they -- that they were designed for in CPP. So there could be signs that the swing effect that I spoke about in the previous slide will be less. So overall, demand outlook conclusion is that we think that the strong demand story is still very much there. The fear of the trade war is still something we're watching, but so far, it has not had a measurable effect. On the supply side, we think that supply is also under control, and for the first time, we can actually quantify the swing tonnage and the magnitude of that data surprised us actually. So depending on what you believe also on the CPP, then we think that the supply story in chemicals is quite favorable. So in summary, we expect that the chemical tanker market will remain challenging into fourth quarter, but with all the fundamentals that we are looking at, we do believe that it is a turning point. How fast it's going to come and exactly what months it's going to come is more tricky. But fundamentally, we believe it's a strong story. And then we expect Odfjell Terminals to be -- results to be improving in the fourth quarter partly because we don't have Rotterdam anymore, but also because the market in the U.S. is quite favorable. So that was the end of the presentation, and I think we will now open for questions both online and on the phone.

[Operator]

[Operator Instructions]

[Kristian Verner Mørch, Chief Executive Officer]

You can also post questions online. Last chance today. Last chance. Here you go. So we have a question from Anders. Do you want to...

[Bjørn Kristian Røed, Manager Investor Relations & Research]

Yes, so question from Anders Karlsen in Danske Bank, and it's a modeling question. Your G&A were low this quarter. What is the level we can expect going forward, both for Odfjell SE and for terminals?

[Terje Iversen, Chief Financial Officer]

I think you can -- on the terminal side, you should certainly expect that the G&A should be lower going forward. As I mentioned, we had around USD 2 million this quarter related to sale of Rotterdam and restructuring, but I think that the figures in the second quarter is a good baseline. When it comes to tankers, it was slightly down this quarter, as you can see, but I think you should use then the average of what you have seen in kind of the last 4 or 5 quarters when modeling the expected G&A in the tankers going forward.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

And the second question from Mats Bye in DNB. Do you have any comments to you having less days during the quarter and you're transporting more volumes?

[Kristian Verner Mørch, Chief Executive Officer]

Yes, it's a good question. It's certainly the case that we have to transport them all with less days. It's slightly harder to find out exactly why. I mean, we have been working very -- we have been very focused on increasing our efficiencies to turning the ships faster in port, and in general, optimizing the trade. And I think there's an element of that. There's probably also an element of the fact that the markets have been slow and when the markets are slow, it's easier to get in and out of terminals. So one thing is probably what the initiatives we have taken and the other one is that we have -- yes, the circumstances mean that we can just swing the ships quicker in and out. I don't have a better question than that -- better answer than that, but it is certainly the case that we are more productive in the third quarter.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

There seems to be no further questions on the web. And I'll hand over the word to Kristian for some final comments.

[Kristian Verner Mørch, Chief Executive Officer]

Yes, but I don't have a lot more to add. We want to thank you for your interest in the company. And if you have any questions also after this call finishes, you're always welcome to reach out. We are always available. So thank you for your interest.

[Operator]

This concludes today's call, and thank you for your participation. You may now disconnect.