Odfjell SE

OSE:ODF

Earnings Call Transcript 2022-Q3

[Harald Fotland, executive]

Good morning, everybody, and welcome to the presentation of Odfjell's third quarter results. Before I continue, please note that you have the option to type in questions during the presentation, and those questions will be answered at the end of this session.

Today's agenda should be well known to all of you. I will start with the highlights. Then my colleague, Terje Iversen, our CFO, will take you through the financials. And then I will continue with an operational review. And we will end this session with a market update and our prospects going forward.

Then to the highlights. We saw the third quarter continued improvements from the second quarter. This is despite the fact that, normally, the third quarter is a seasonally slower quarter.

Our time charter earnings increased by 7% from USD 160 million to USD 171 million.

The net result contribution from Odfjell Terminals was USD 8 million. This compares to USD 2 million in the second quarter. And if we exclude insurance proceeds, then we saw stable results from the terminals in the third quarter.

Our EBIT reached USD 71 million. This compares to USD 53 million in the second quarter.

The net result was USD 50 million compared to USD 36 million (sic) [ USD 30 million ] in the previous quarter. If we adjust the net result for one-offs, then the corresponding figures are USD 46 million compared to USD 30 million in the second quarter.

And by that, Odfjell is presenting the best quarterly result in our history.

We renewed 6% of our contract portfolio in the third quarter. And in average, the rates were up by 9%.

We have 8 25,000 stainless steel tankers on order for long-term charter. The first of these, the Bow Cheetah, was delivered in September. And the next one, Bow Panther, will be delivered later this month.

So this concludes the summary of the highlights for this quarter. And by that, I will give the word to my colleague, Terje Iversen.

[Terje Iversen, executive]

Thank you, Harald. I will, as usual, start with the income statement. And I must say that the real big headlines this quarter is that we had a nice increase in the revenues and we have a quite stable cost, both when it comes to OpEx and G&A and also finance, linked to also a net increase in the results, quite nice figures.

If I go more into the details, and the time charter earnings this quarter ended at $171 million compared to $160 million in the second quarter. That was based on quite stable number of revenue days for Odfjell-owned vessels, but we saw some reduction in the volumes driven by redelivery of external pool tonnage. So the main driver for the improved time charter earnings is the improved spot market that we saw across most trade lines in the third quarter.

Operating expenses, as I said, quite on par with the preceding quarters.

Looking at the net results from associates and joint ventures, being our terminal business, that ended at USD 7.6 million. That includes $5.7 million as insurance proceeds that are booked on the P&L this quarter. So if you adjust for that and also adjust for some FX rates this quarter, results for terminals in this quarter is quite on par with the second quarter this year.

G&A, $16.6 million compared to $19.3 million in the second quarter. That's a quite strong improvement, so to say, but we had some one-offs that were included in the second quarter, leading to a higher G&A that quarter compared to kind of the average that we have seen.

Then we ended up with an EBITDA of $111.6 million compared to $90 million in the second quarter. Depreciation at $40.6 million, same as preceding quarter. After a small capital gain of $0.1 million, we had an EBIT operating result of $71.1 million compared to $53 million in the second quarter.

Net interest expenses increased from $17.9 million to $18.8 million, main reason being increased interest -- market interest. Even though we are reducing the debt, we see that we are hit by the increased rates in the market.

After other financial items and taxes, we then now are presenting a net result of $50.2 million compared to $30.0 million in the second quarter. And as Harald mentioned, if you adjust for nonrecurring items, the adjusted result is $46 million compared to $30 million in the second quarter. And that led to an EPS of $0.64 compared to $0.38 in the second quarter.

We saw that our time chart earnings per day increased quite much during this quarter while we see that the annual breakeven level remains stable. Our time charter earnings increased to $29,612 in the third quarter, up from $27,206 in the second quarter, which is then as well above our average annual cash breakeven, around $22,165.

If you look at the quarter alone, we delivered a cash breakeven at $22,694 versus $22,291 in the second quarter. And the quarter-on-quarter increase was driven by higher interest rates and also some increased dry-docking expenses compared to the previous quarter. And as you can see, we are still somewhat above our target, which is below $20,000 for the cash breakeven.

Our balance sheet. Most interesting is to note that right of use of assets increased from $189 million to $197.5 million. That is due to the level of the time charter vessel, Bow Cheetah, which has been capitalized and included in right of use of assets.

We see that the investment in associates and joint ventures ended at USD 159 million, down from $183 million in the second quarter, main reason being that we took some cash out of the terminal division or the joint venture in terminals. In the last quarter, that was transferred to Odfjell and has now been further repaid to the external owners, then reducing our share in the terminals.

Cash position increased slightly to close to USD 100 million. And if we include undrawn loan facilities, we are around $157 million in available liquidity. We also did an extraordinary debt repayment of USD 15 million in this quarter on top of scheduled installments of USD 20 million.

Our equity continued to increase. We have now USD 630 million in equity. And if you adjust for IFRS 16 debt, we are at an equity ratio of 36% compared to 33% end of last quarter.

On the debt side, you can note that we have reclassified the bond maturing in September next year, as from long-term to short-term debt, around USD 110 million, which now is included in the portion -- the current portion of interest-bearing debt. I will address that further in -- later in the presentation.

Cash flow statement. That's -- of course, we see that we increased the operating cash flow, increased from USD 68 million to USD 105 million this quarter, of course, driven by the improved profits. But we also saw a positive development in the working capital this quarter, which helped to the increase in the operating cash flow.

On the investment side, we are continuing to do some smaller investments in energy-saving devices, and we also had some dry-dockings, including in the $11.1 million. And in total, we had cash flow from investment activities of $30.6 million, but that's included the item, although which actually is a repayment of debt to external parties within the terminal joint venture, which I just addressed at the previous slide.

On the debt side, we reduced our debt with $35 million, including the scheduled and additional debt reductions. And we also then paid a dividend of USD 18.2 million in August this year, leading to a net cash flow from financing of $68.2 million. And then we ended up with a slight increase in the cash and cash equivalents this quarter.

Looking at the cash flow on the longer term, this is the last 10 quarters. We continue to see an increase in the free cash flow. Looking at the 12 months rolling free cash flow, we reached USD 64 million this quarter. And if you adjust for debt repayments related to right of use of assets capitalized on our balance sheet, we had a free cash flow of around USD 49 million.

The improved working capital in this quarter also helped on the operating cash flow, as mentioned. And we see that the working capital total this year has been reduced with USD 6 million, which is very comforting given the increased revenue we have seen through the year.

And as mentioned, we schedule -- we used the free cash flow to allocate to both dividend but also additional debt repayments this quarter.

If we look at this quarter alone, we delivered a free cash flow of $74 million, consisting of $107 million of operating cash flow and then deducted for a negative $30 million on investments. And as I mentioned, if you then adjust for the USD 20 million, which actually was a repayment of debt to external parties, we are at a cash -- free cash flow this quarter of around USD 94 million.

Looking forward, this is showing the debt installments going forward and also maturities. And as we have also announced in the quarterly report, we have this quarter exercised option to buy back vessels, which we have on financial lease. The aim is to refinance them in the bank market prior to the year-end. These vessels are on the financial lease, meaning that we have capitalized the vessels on our balance sheet [indiscernible]. So the impact on the balance sheet will be more or less 0, except for we are targeting a reduction in leverage on the vessel and also a reduction of our breakeven levels to reduce margins on the bank financing that we are targeting and are expecting to close before year-end.

We repaid an additional $50 million on a revolving credit facility in the third quarter. And the total undrawn/repaid is now around USD 57 million at the end of the quarter.

Going forward, we have headroom now to repay additional USD 110 million on the revolving loans that we have today, but we are continuing to targeting higher cost facilities for early refinancing and also permanent repayments to reduce the cash breakeven to reduce the capital cost for the group.

At the lower part of this slide, you see the estimated debt end of this year and also for '23 and '24, according to the loan we have in place today and the scheduled repayments. We are close to USD 1 billion in debt, external debt, end of this year. And if we assume a full repayment of the bond maturing in September next year, we will be around USD 835 million and then within our target debt level, which is between USD 850 million and USD 900 million.

So we are continuing to do that, and we are considering what to do with the debt maturity in September. But based on the cash flow we see today, we will have options and also could be alternative for us to just redeem and repay the full loan amount in September when the loan is due. That will depend, of course, on the cash flow or from the activities going forward.

That was my presentation. So I turn it back to you again, Harald.

[Harald Fotland, executive]

Thank you, Terje. I will continue with an operational review. And first, we will have a look at our volumes.

We saw that the Odfjell -- the volumes on the Odfjell fleet grew in the third quarter, while the effect of the pool tonnage that was redelivered was a slight decrease in total volumes. Chemical demand remained healthy through the quarter, and we also saw very robust spot markets. On the back of that, we see a strong demand for contracts of affreightment. And we also see that there is less capacity available for these contracts going forward.

In the third quarter, we had a contract coverage of 49%, and this also corresponds to a decrease in total actual volumes of about 200,000 tonnes. As mentioned earlier, we renewed 6% of our contract portfolio in the third quarter. And in average, the rates were up by 9%.

We see that demand from charterers to enter into new contracts is high. And this should continue the strong momentum for contract renewals also into the fourth quarter.

As also mentioned earlier, we have some vessels that are being redelivered in the fourth quarter. That's for pool vessels, and this will partly be offset by the delivery of the Bow Cheetah in September and the delivery of Bow Panther in November. The financial impact of those redeliveries will therefore be negligible.

We saw the ODFIX increased by almost 10% during the quarter, and we saw the corresponding Clarksons chemical tanker spot index increased by almost 14%. Most important takeaway from this slide is that we see stable and good volumes in all chemical segments. And at the same time, we see reduced Odfjell activity in the CPP market.

Our AER, this means our carbon intensity, increased slightly in the third quarter. This is due to speed increases on some of our vessel classes. And I think that shows the sensitivity of carbon intensity related to speed adjustments.

In Odfjell, we've had a strong focus on reducing our carbon intensity all the way since 2008. We have reduced our carbon intensity with almost 50%. We are well below our internal trajectory leading up to 2030. And I can assure you that in Odfjell, we will continue to focus on technical and operational improvements to further reduce our impact on the environment.

On the tank terminals side, we delivered an EBITDA of $13.8 million as to $8.5 million in the previous quarter. And if we adjust for the previously mentioned nonrecurring items, then we saw a stable result in the third quarter.

The average commercial occupancy remained high for the terminal portfolio and ended at 97.5% in the third quarter. This is slightly up compared to the second quarter.

We have very strong activity in the United States and Europe, and we are close to 100% occupancy on those 2 terminals. And we also see strong activity levels.

In Asia, our terminal in Ulsan sees improving figures. We have occupancy well above 90% and -- but a modest reduction in throughput.

We do see that the present environment is detecting high inflation, high interest rates and the risk of recession. But despite this, we do anticipate that our terminal portfolio will be resilient to those changes. And we have a positive outlook for the terminal division into 2023.

If we look at the prospects going forward, then the first slide shows the development in freight rates in all of our major trades. And if we start with the West of Suez, we see that the trend from the second quarter has continued with similar strength into the third quarter.

The Atlantic Basin, we had average rate increases of 15%. And I would also like to highlight the export rates of veg oil out of South America, where we now see rates which are almost double the corresponding quarter in 2021.

East of Suez, we also saw very healthy increases. Exports out of Asia increased by 27%. And similarly, we saw exports out of the Middle East increasing by 28% and 41%, respectively.

We have also seen that the MR market on the CPP side has remained strong, and that continues to drive swing tonnage out of the chemical segment and into the CPP segment. This trend is also explained in my next slide, where we have looked at vessel supply in various key chemical hubs.

The 2 upper slides are describing availability of coated tonnage for chemical cargoes. And if you look away from quarterly variations, the trend is quite clear that in 2022, we see less tonnage available for chemical cargoes compared to 2021. And the background is, of course, that those vessels are swinging into the CPP market.

We see the same trend when it comes to stainless steel vessels available for chemical cargoes in the key chemical hubs. And of course, the stainless steel vessels, they don't have any market to swing into. So the explanation why we see a decrease in available tonnage compared to the previous year are more complex.

One of the explanation is that more tonnage -- older tonnage is sold for domestic and regional use in certain trades. So some of the tonnage is still counted, but it's no longer available in our trades. We also see that the speed reductions have an impact. And finally, the third explanation is that the chemical tankers are traveling longer distances than they did the previous year. There is a higher ton-mile demand. So the combination of vessels exiting our trade vessels traveling longer distances and vessels traveling at slower speed means that every vessel has less capacity to do port calls than the previous year.

When it comes to the prospects, the first important item to notice here is that we have seen a clear -- over time, a clear decrease on the price of ethylene. And ethylene is among the most important building blocks for the chemicals that we transport. It's also a fact that we, during the past 2 years, have seen supply chain challenges and also a very strong demand in the United States, and that has reduced the availability of cargo from -- for export from the U.S.

So when we now see a softening local demand in the U.S., we see that the challenges related to supply chain is easing up. And we also see that the building blocks are becoming cheaper, and we believe that this will stimulate export going forward.

During the quarter, we've seen stable contract nominations, but we have been missing a strong spot market out of the U.S. We believe that we now see the first signs that also the export market from the U.S. will be back on track. And that will contribute to a market where we see very strong demand in all trade lanes.

So to summarize the prospects, I think we are all well aware of the macroeconomics. We do see high inflation. We do see increasing interest rates. We do see that the economic growth is slowing down. And we see that the recession is coming closer and closer. We also see that there is an energy crisis in Europe. And we see increased political tension in many parts of the world.

At the back of this, we do believe that the chemical production will be reduced in the coming years. But at the back of what I previously presented to you, we do believe that more of these products will be made available for export.

It is on the supply side that we will see the biggest changes. There is, today, very few vessels, chemical tankers being built. There are very few vessels on order. We see swing tonnage going out of the chemical tanker market. We see older tonnage leaving the international trades and going into regional and domestic trades. We see that the average fleet speed is also continuing to go down. And this -- the speed reduction will, for many ship owners, be mandatory when IMO implement the new regulations in 2023.

So to summarize today's presentation, this is another strong quarter for Odfjell, and the results are driven by a very robust chemical tanker spot market. On the tanker side, we see strong performance and strong markets in all trades, and we believe that this will be stable going forward, partly due to more swing tonnage leaving our trades. We have a stable performance within Odfjell Terminals, and we have a positive outlook going forward.

The market outlook is that we do believe that the reductions in supply will outnumber a possible reduction in demand, and we do believe that more swing tonnage will leave our trades. We expect continued strong spot rates across [indiscernible] going forward. And together with the improved terms that we will achieve on our contracts, that should translate into slightly improved time charter earnings in the fourth quarter.

This concludes our presentation, and we will now continue with the questions.

[Bjørn Røed, executive]

Yes. So we have had a couple of questions so far. And I think the first one goes to you, Terje. How do you see development of cash breakeven towards your target range given the current global economic outlook?

[Terje Iversen, executive]

If you see back a few years, we are now at a position where we have reduced the cash breakeven quite substantially, I would say. We are at around $21,200. We are targeting even lower cash breakeven going forward. And we are working quite intensively to reduce our debt and also refinance with lower margins. So that will improve the cash breakeven going forward.

However, we see that there are inflation and also our interest -- increase in interest rates in the market, so that is pulling in the other direction. So it's still challenging, but we still have a target to reach a cash breakeven level below USD 20,000 per day. Whether we achieve that next year or the year thereafter, that will depend on the cash flow in the coming years and quarters.

[Bjørn Røed, executive]

Yes. Thank you. And a question for you, Harald. There's a lot of talk about the expected EU regulations that will put a price on vessel emissions. So what is Odfjell's stance on these changes?

[Harald Fotland, executive]

Well, first, you are correct. From next year, yes, we do expect that we will be paying a carbon levy in the EU region. To put this into perspective, Odfjell has been reducing our carbon intensity year-by-year since 2008, and we are determined to reduce our carbon intensity even further. We do believe that we have a leading position when it comes to the emissions from our vessels. And on that background, we welcome any initiative that will contribute to bringing the whole shipping sector to improve the emissions from ships. So we are positive to this development. And I would also say that we have systems in place to bring these additional costs onto the charterers.

[Bjørn Røed, executive]

Thank you. There are no further questions, so I'll leave it to you for some finishing remarks.

[Harald Fotland, executive]

Thank you. This is a special day. We have presented the best quarterly result in Odfjell's history. And of course, this is, first and foremost, driven by improved market conditions.

But I would also like to highlight that this is also the result of 7 years of continuous improvement in Oslo -- in Odfjell.

Secondly, another important item is that we are blessed with the staff in Odfjell, where everyone is pulling in the same direction. So this is not a one-man job. This is the efforts of the entire Odfjell team. And I'm sure that I speak for all of us when I say that this is a proud day in Odfjell's history.

So I thank you all for listening in, and I wish you a continued good day. Thank you very much.