Odfjell SE

OSE:ODF

Earnings Call Transcript 2021-Q3

[Kristian Verner Morch, Chief Executive Officer]

Good morning, and welcome to the presentation of Odfjell's Third Quarter Results, which we are streaming here live here from Oslo, first time since the start of corona that we're doing this outside of Bergen. My name is Kristian Morch. I'm the CEO of Odfjell SE. And I will, together with our CFO, Terje Iversen, take you through the highlights of the third quarter. [Operator Instructions] And we will be addressing those questions towards the end. And for the people who are here physically today, please wait with your questions until the end, and then we will be available for Q&A. But to get started, I will take you through the highlights of the quarter. And then as usual, Terje Iversen will come on and take you through the financials. Then I will speak about our operational review, and then I will speak about prospects and market update towards the end of the presentation. Third quarter was not a great quarter. It was not an exciting quarter for Odfjell. It was a quarter that was slightly better than the second quarter. We had strong markets in the Eastern Hemisphere, whereas the markets in the Western Hemisphere was and continues to be a challenge for us. The time-charter earnings for Odfjell Tankers came in at $125 million, which is up $2 million compared to the previous quarter. Net contribution from Odfjell Terminals was $1 million, which was in line with the previous quarter. We also announced the day before yesterday the sale of 3 -- our 3 last short-sea vessels in Asia. And as part of that sale, we have had to book an impairment of $21 million in this quarter. Terje will also speak more about that, and I will get back to that as well. That gives us an EBIT of minus $7 million compared to $11 million positive last quarter. But if you exclude the impairment, then we had an EBIT of $14 million. So it's up, on comparable basis, $4 million compared to the previous -- $3 million, I'm sorry, compared to the previous quarter. That gives us a net result of $25 million compared to minus $8 million. But again, adjusting for one-offs, third quarter came in at minus $4 million compared to a net adjusted result of minus $10 million in the previous quarter. So that's an improvement of $6 million. We're also entering the COA renewal season. Fourth quarter is going to be very busy. During the third quarter, we only renewed a small part of our COAs, but the ones that we did renew was up 5% on freight rates. So we are still seeing an increasing trend, although the slow markets in the Western Hemisphere is a challenge also in that respect. After the quarter ended, there are 3 things we want to highlight. First of all, we concluded the sale of the 2 gas carriers, the 2 ethylene carriers. We were paid partly in shares and partly in cash by BW EPIC Kosan. And the shares, as we've previously said, they are freely transferable and they are now strategic for Odfjell. We also entered into the sale of the last 3 Asian short-sea ships. And that marks the exit -- Odfjell's exit' from the short-sea trade in Asia. And I'll speak more about that a little bit later. Finally, we will, in the fourth quarter, receive $6 million return from Den Norske Krigsforsikring, the war risk club, and that will be booked in the fourth quarter of this year. So we -- as we're saying, as you can see on the right-hand side, the chemical tanker market was strong in the Eastern Hemisphere. It was weak in the West, mainly because of lack of U.S. exports. I'll get into that a little bit later. It is not a demand problem. Demand for our chemicals around the world is -- continues to be high. And that supports our continued positive view. We've been saying that for a while now. But if you trust the data, there's no doubt that it's a very strong demand story. The exit from gas and the last short-sea ships in Asia concludes the streamlining of our deep sea platform. And in terms of guidance, we are saying that although there are signs now of improvements, it will take a little bit of time for that to filter through. So we are saying that the underlying results in the fourth quarter will be in line with the third quarter. At this stage, I will ask Terje to come on, and then I'll be back a little bit later. Thank you.

[Terje Iversen, Chief Financial Officer]

Thank you, Kristian, and good morning to all of you. I will, as normal, start with the P&L income statement for this quarter. Starting with the net time charter revenue. We saw that increased slightly to USD 125 million this quarter. As Kristian said, we are stable compared to last quarter, both with regard to volumes and also regard to the rates. Time-charter expenses ended at $5.3 million, up from $4.1 million in the second quarter, while we saw that operating expenses decreased to $46.8 million compared to $49 million in the second quarter. Main reason being that the second quarter OpEx was a bit higher than normal quarter due to insurance claim and also some crude expenses in the second quarter. So this is more a normalized level, I would say, going forward. But also, we will also see some decrease due to the sale of the [indiscernible] regional vessels in Asia in the coming quarters. Then we have shares of net result from associate and joint ventures being our shares in the terminals, had a net result of USD 1.1 million. That also includes $1.7 million in depreciation of surplus values that we have in the group accounts. G&A ended at USD 60 million compared to USD 14.2 million in the second quarter, a bit of the opposite, as the OpEx, we saw lower than normal in the second quarter. So I think we are more normal level in the second quarter -- the third quarter with a USD 60 million. Then we are left with an EBITDA of $58.2 million compared to $56.6 million in the second quarter. Depreciation is very much unchanged for the $45.1 million. And then we had the impairment of the regional vessels in Asia with USD 21 million. All of those asset classified as asset held for sale end of third quarter, and we had to do an impairment. This was a kind of separate cash-generating unit where we saw that we had to defend the values previously based on the estimated sales values. But actual sales gave us lower prices than we expected, and now we had to take a loss when we did this transaction. Then we had a capital gain this quarter of $1.2 million related to the sale of one of the gas vessels. Then we are left EBIT of 9 -- $6.8 million negative compared to $11.1 million in the second quarter. If you adjust then for the impairment this quarter, we improved EBIT to around USD 14 million in the third quarter. Net interest expenses continues to be decreased for various reasons. We have less debt. We have also cheaper financing costs. And we also have some interest hedges that terminated or was ended in the second -- or the beginning of the third quarter. That also has reduced the interest expenses, and we'll reduce it going forward. After other financial items and taxes, we are left with a net result of negative $25.3 million compared to negative $7.8 million in the second quarter. But again, then you have to adjust for the impairment to have a normalized net result this quarter. Looking at the balance sheet. We see that ships and newbuilding contracts, so we don't have that much newbuilding contracts. But ships, end of the third quarter was USD 1.4 billion compared to USD 1.5 billion approximately in the second quarter. Reduction is due to the sale of the 3 regional vessels, but also due to the sale of the 2 gas vessels. This says 1 gas vessel, but actually 2 gas vessels are taken out of ships and reclassified. One of those was sold actually in the third quarter, and this last one will be sold in the fourth quarter. So it has been reclassified both of those 2 assets. Looking at the cash equivalents that decreased somewhat to $54.6 million. If you include undrawn commitments of long-term bank facilities, we have around USD 95 million in cash and free liquidity compared to $111 million end of second quarter. Then we have other current assets that increased somewhat in this quarter. That is due to the same reclassification of the sale of the vessels, the regional vessels and also the gas vessels. One of the gas vessel is classified as asset held for sale, including other current asset. And the one that we transferred in the third quarter is classified as shares held for sale being the shares that we have in BW EPIC Kosan that is included in other current asset end of third quarter. Equity decreased due to negative results. Adjusted for IFRS liabilities, we have an equity covenant ratio down of around 29% end of third quarter compared to 29.4% end of second quarter. Looking at the cash flow this quarter, quite stable, I would say, compared to the second quarter. Cash flow from operating activities, $34.8 million, also affecting that result much the same as in the second quarter. Then we have investing activities, quite limited investments in assets. We had some investment in dockings and also some CapEx on the vessels energy-saving devices. Then we had a sale of one of the ships with gas ships with $10.1 million. So we had then a positive cash flow from investing activities of $2.0 million this quarter compared to negative $5.0 million in the second quarter. On financing, we continue to reduce our debt, repayment of interest paying debt around USD 34 million this quarter. And we also then repaid one of the loan facilities related to the first gas vessel that we transferred to BW EPIC Kosan in the third quarter with USD 10.1 million. Then we are left with net cash flow for the quarter of negative $2.3 million. And we have done end of this quarter around USD 55 million in cash, including to the undrawn facilities at our bank arrangements. Free cash flow. We show the free cash flow after investments back to the first quarter in 2020. We see that during the last 7 quarters, we have seen increasing free cash flow due to the fact that the newbuilding program has now been delivered. And if you annualize the third quarter free cash, we are at around USD 108 million. Then we take the USD 37 million, adjust for the USD 10 million for the gain on the sale of the asset in this quarter, and then we are at a quite okay level compared to we have been due to the fact that we don't have that much investment going forward. And going forward, of course, we will use this free cash flow, first and foremost, to reduce and deliver on our plan to deleverage and reduce the cost of capital and some -- at some stage, be in a position to establish a sustainable dividend policy also going forward. This is showing the debt development in the coming quarters. As you can see, we have some balloons this fourth quarter that is taken care of, of course. Besides with that, we have the bond that is maturing in June 2022. We are starting to look into that. We are considering we could repay or refinance that before maturity. We are also looking into other alternatives, whether we could combine it. We're doing some taps on the existing bond loans in combination with refinancing of some vessels and also using free cash. So we see how we can do that in a most capital-efficient way based on the expectations we have going forward. On the lower part of the slide, you see the scheduled repayments on our loans and also some planned refinancing. In principle, we expect to refinance some vessels. But they are rather low long-term value, conservative, as we call it, because the fact that we are going to reduce that going forward and also going to reduce the cost of capital. End of 2022, this is kind of showing that we will be around USD 1 billion if we repay all the loan that is maturing, refinance some of the mortgage loan. But then we also have included that we will repay the bond loan with not any refinancing. And most likely, we will do that partly or in whole as I just mentioned. The bunker expenses continue to be one of our largest cost elements. And as you can see, we have seen an increase in the bunker expenses in our books in the last quarter due to the increased oil price and the increased bunker prices. Even though we have a good hedging with our financial hedgings and also our bunker adjustment clauses, we see that we get an increase from $40.3 million to $43.9 million this quarter. But the fact that the gross cost increased from $58.2 million to $63.4 million shows that we have a good hedge in the financial hedging and also the bank adjustment clauses taking out a part of that cost increase that we see that if you just look at the prices in the market. And we also, of course, expect that to continue going forward, that we'll add the bank adjustment clauses taking part of that cost increase if that continues. Then I will leave the word to you, Kristian. Thank you.

[Kristian Verner Morch, Chief Executive Officer]

Thank you, Terje. I will talk you through an operational review and talk about market and prospects from fairly interesting things going on in our markets these days. First of all, regarding our contracts and our volumes. As you can see on this graph, our contract, the nominations, our contract -- share of contracts in the third quarter was 51%. So that is in line with what it has been lately. You can also see in the middle graph on the bottom that we continue to increase the rates under those COAs with 5% in the quarter. So it's really not the contracts that has been bothering us this year. It has been the lack of exports out of the U.S. and the spot market that has not been functioning in the way that we are used to. The COAs has helped us in that environment, especially out of the U.S. If you -- if the spot market is not working, you are dependent on the COAs to fill the ships. And as you can see, this is the comparison with the Clarksons chemical tanker index that dropped 3% this quarter. We were stable. That is not to say that we completely beat the market. But we are actually comparing apples to oranges in this slide a little bit because the chemical tanker index from class is a spot index, and ours is a mix of COAs and spot. But here, when the markets are challenged, it is a comfort to have a 50% contract coverage that helps us to schedule the ships. The demand for the products we carry continues to be high, especially on what we call specialties. There's improved demand and nomination on our COAs. Whereas on the veg oils, the easy chems and on the CPP, because of the very depressed CPP market, the product tanker markets, that has been all the way down to $2,000, $3,000 per day. We are seeing an increased amount of competition also for those cargoes. In order to try and quantify what we mean with the lack of exports, a lack of spot market out of the U.S., in a normal month, Odfjell will be fixing between 50,000 and 60,000 tonnes of chemicals in the spot market. And there was 1 month during the summer where there was 3,000 tonnes per month. So it has been very dysfunctional. That was in the middle of the summer. We are seeing that now moving back towards the average. So we are seeing activity picking up also in the spot market. But as we say in our guidance, it will take some time before that filters through. We have mentioned a few times the impairment of $21 million in connection with the sale of the 3 last ships we had in Asia. On the right-hand side, you see our fleet development since 2015, where we had 14 ships in that trade. We were down to 3, and we were clearly subscale in that trade. That trade was partly built around the need for transshipment of our own fleet. When the ships come in and have to discharge to a port where there's not enough draft, the new transshipment into a smaller ship, and that will go up the river in China or wherever it may be. Those markets have changed and matured. And our contract portfolio has also changed, so that need is no longer there. And as we became smaller, it became increasingly difficult to make money in that trade. And we have, therefore, taken the decision to pull out of that trade and sell those ships. So that means the only activity we have in the regional business is in Flumar, which is our outfit in Brazil. But in general, for Odfjell Tankers, we are now a pure deep sea operators -- a pure deep sea operator of chemical tankers, which is what we have been working on in the past 5, 6 years to get to this point. And as you can also see on the graph on the right, that fleet has grown from 58 to 87 ships in the same period. So this really concludes the refocusing of the tanker business to being a pure deep sea operator. Yes, I think that was it on that point. On tank terminals, we continue to operate safely and efficiently. We had an EBITDA in the third quarter of $7.9 million compared to $7.6 million, so more or less in line with the previous quarter. The activity in the U.S. is picking up. In Europe, we saw a continuation of the positive trend. Whereas in Asia, especially in Ulsan, our biggest terminal, it was another quarter with reduction in occupancy level because of some shutdowns and, let's say, the turbulence that's happening in the chemical trade with some trade reversing and so on. It's not a massive problem for us in Ulsan, but it is not as positive as it is for us in the U.S. and in Antwerp. So the outlook for the terminals in the U.S. and Europe remains positive, and we expect that market in Asia to stabilize when we get into 2022. Also, we are saying on this slide, the construction of the new 35,000 cubic meter stainless steel capacity in our Antwerp terminal is on track and will begin to operate from the second quarter of 2022. In terms of the market update, I've said a number of times now that the biggest challenge we have now is the lack of U.S. exports. On the right-hand side, you can see that the exports out of the U.S. of chemicals has basically been cut in half since the first quarter 2020. And as you zoom the bottom, at the same time, you've seen export of CPP products out of the U.S. also being -- also going down. So that has really put the spot market out of that region in -- as well been a challenge in that market. And the reason for that is really it started during COVID-19, where for those quarters where everybody stopped in their tracks, people reduced inventories. Because of COVID, a lot of maintenance shutdowns were postponed and so on. So there was a -- there was certainly a lack of -- or a reduction of inventory and capacity. And then at the same time, there was hurricanes. We had the big freeze in Texas and so on. And then I think the world collectively was taken by surprise to see how strong the demand for durable goods and everything else that chemicals go into producing. And since then, the world has really been struggling to keep up supplying those products. At the same time, you're looking at U.S.-based production of the chemicals who have record-high margins. And you're also seeing a domestic market in the U.S. that is record high. So all our customers are having record results, and they do that without exporting because the home market is so strong. So that's really the key reason why we are not seeing the exports. And it will take a little while for that to come back, but we are seeing capacity being ramped up. And as I said, this is not a demand problem. On the contrary, it's a supply problem. And from a sort of fundamental view on our industry, that's a good thing. If it has been a demand problem, we would have -- we'll be more alarmed about it. But this is a temporary issue as far as we are concerned. So what happens when the U.S. stops exporting? Well, then the Asian buyers and European buyers have to find their products elsewhere. And this is what we are speaking about in this graph. On the right-hand side, you can see Northeast Asia exports to Europe has gone from 35,000 tonnes to 276,000 tonnes in that bracket. And as you can also see in the bottom part, freight rates out of Asia has gone up. So really, what used to be backhaul trade at the moment are front haul trades. So we have -- we are showing very good results coming back to U.S. and Europe, whereas we have been struggling to fill the ships going out again. I think, at least in my time, in tankers, that's the first time we have seen that reversal of trade. But it does not change the fact that U.S.-based producers of chemicals, they are far more competitive than the current suppliers of -- current Asian suppliers. So as they sort out the bottlenecks in the U.S., we are confident that those exports will resume, and we will see the normalization of the trades. And that's really all we need for our markets to pick up. If you look at the supply of chemical tankers in a, let's say, from a slightly helicopter view, what we are showing on this graph is, year-by-year, the share of the fleet that is above 20, 25 years of age. And what you're seeing -- this is from 2015 going down to 2023. So what's worth noting on this graph is the middle bars. If you can see the ratio between ships that are up plus 20 years and the order book, and there are virtually no orders being placed. There are virtually no ships that are being delivered in the coming years. And there's an increasing amount of ships going out of the core trades. We have, in the last 18 months, registered 1.2 million deadweight ton going into what we call retirement trades, which means that they are leaving our markets. And at the same time, in the next 2 years, you can see nearly 1 million deadweight ton becoming plus 25 years of age, which makes them more or less impossible to trade in the main trades. And then you have no addition of capacity. So that's really -- we have a very clear understanding of the supply side in the next 3, 4 years. What happens after that is anyone's guess. And will we see a big influx of new orders with the uncertainty we have on new technology and decarbonization? It will probably take a little while longer. So we think that the supply side and chemical tankers is under control for the coming period. What's harder to predict is what happens to swing tonnage. This is a measurement of the amount of MR tonnage that's trading in our markets, veg oils and easy chems, and so on, the IMO2 tonnage. And as you can see towards the during 2020, with where the product tankers were functioning, you actually saw that reversing quite dramatically. And then you're seeing in a market where the CPP markets are struggling, you're seeing that creeping back. I don't think it will go back to pre-2017 levels because at the same time, you have to remember that a lot of the MRs that have been built have been built with IMO2 capacity. But we will see it -- definitely, we will see it coming down. And it will go fairly quickly. I want to remind everybody what happened in the second quarter of 2020 when you saw the product tanker markets pick up, and you also saw what happens with the Odfjell results in that quarter. So it happens very, very quickly when suddenly the product tanker market spike. And we don't need them to spike. We just need them to normalize for this picture to be balanced. So we continue to say the same thing. I know I sound like a broken record. I've been saying it for a couple of quarters now. But if you do believe the data, then that data is quite clear that the tonne-mile demand will grow from somewhere between 3% to 5% per year from now until 2024. And the supply side is very much under control, and that will be a growth of around 1% to 3% in the same period. And we have been looking at the same picture for quite a while now, so if there had been some catch up and there were some catch up, then we see that market could tighten if we see a normalization of the U.S. exports and the CPP markets. So in summary, it was not a very exciting quarter. It was slightly better than the second quarter, which means we had stable results despite the seasonality as well. But it was not a great quarter. In Odfjell Tankers, we had strong markets and continue to have strong markets in the East, and we continue to struggle a little bit in the West, but we do see things picking up again. On Terminals, stronger demand for storage in the U.S., and that's normally a precursor for more activity in the tanker market. So we're seeing that happening. And in terms of the market outlook, I'm not going to repeat what I just said, but we think that there's a strong story for -- strong fundamental story for our markets. But it will take a while for that pickup to filter through. So what we are guiding in the fourth quarter is we were probably on operations be in line with Q3. And then we are looking at an improvement into 2022. That was the end of the presentation, then we are happy to take questions. I don't know, Bjørn Kristian, you had questions posted online.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

There's no questions online, but we can ask the audience here in Oslo first if there are any questions?

[Ole Stenhagen]

Ole Stenhagen from SEB. It'd be a real shame to let you go all the way back to Bergen without one question.

[Kristian Verner Morch, Chief Executive Officer]

Yes, I'm happy. Thank you, Ole.

[Ole Stenhagen]

So you've -- I think your story on the fleet is very compelling. What you didn't mention is EEXI and CII coming from 2023. So as our visibility on the current order book diminishes because new orders can be placed, I think there's an argument of varying strength across the segments for reduction even so. So what is your view of the chemical tanker market and -- or the fleet in this?

[Kristian Verner Morch, Chief Executive Officer]

I think that's a very, very good point, Ole. And I think the supply figures we have here does not take into account the fact that a big part of the fleet may be starting to slow steam in 2023, which I think a lot of people will have to do because they simply haven't invested enough in energy-saving devices. As I also said, I could find myself standing saying more or less the same thing for a lot of quarters now and nothing really has happened. If we start to twist our supply story to take another, let's say, 10%, 20% out of that capacity, then our utilization models, they show a fairly interesting perspective. But I think -- and we are doing those numbers. But I think we would like to see things materialize before we really start taking that into account. But it is certainly something that not only for the chemical tankers. It is certainly a supply thing that I think personally think will be real across segments. I think many people have not woken up to the fact that in 2 years, they have to start buying carbon credits. And when they trade in the EU, they have not really understood what they need to do in terms to be compliant. So I think it's a really good point and something that could be a further kicker, I'm not sure what the right word is, but a positive element in the supply side. Good question.

[Bjørn Kristian Røed, Manager Investor Relations & Research]

Yes. There's no questions online. So if there are no further questions here in Oslo, I guess we can end it here.

[Terje Iversen, Chief Financial Officer]

We had one.

[Kristian Verner Morch, Chief Executive Officer]

Thank you. All right. Despite the fact that there are no questions. And if you're watching this off-line, please never hesitate to give us a call. We're always available and happy to talk about Odfjell and our view on the market. And that also goes for everyone here, we are going to be available afterwards. So thank you very much for listening, and stay safe.