Odfjell SE

OSE:ODF

Earnings Call Analysis

Odfjell Q3 Performance and Outlook

Odfjell's core markets remained resilient in 2023; Q4 earnings anticipated to stay consistent despite dryer vessels, ensuring fewer commercial days. Contracts resetting to market levels fall into two categories: contracts reset previously to market standards and others emerging from option periods adjusting to current rates. Fleet renewal isn't immediate given recent updates, but an aging Kvaerner class will require attention in the foreseeable future. No dry-docking delays expected. The supply side's outlook is extremely favorable, with stable demand and a reduction in the operated fleet leading to increased cargo on owned vessels. Dividend policy to stay unchanged until targeted cash breakeven is closer to $20,000 per day. Finally, the company remains open to increasing exposure in the Terminals segment if the right opportunity presents itself.

Sustained Financial Performance with Optimized Capital Structure

Odfjell's narrative in the third quarter remains one of resilience and financial strength. The company reported a marginal dip in time charter earnings at $184 million, nearly holding steady from the $185 million in the previous quarter. However, this slight reduction was counterbalanced by an 18% average rate increase in renewed contracts, signaling a strong pricing power in the market. Despite one-off items that necessitated adjustments, Odfjell delivered a robust net result of $52 million, with the adjusted figure at $49.4 million, a modest decline from the $53 million reported in Q2. The consistent performance is accentuated by their proactive redemption of a $113 million bond, reflecting a strategic move to optimize their capital structure and reduce interest-bearing debt.

Prudent Financial Management and Cash Flow Optimization

Odfjell's commitment to prudent financial stewardship is evident from their approach to managing capital and cash flows. Executives outlined a decline in operating cash flow to $76.6 million, primarily driven by an increase in working capital. Nonetheless, the sale of Bow Pioneer resulted in a positive investment cash inflow, showcasing the firm's capacity to leverage its assets effectively for liquidity. Notably, the third-quarter activities included not only the repayment of a significant bond but also the distribution of $49 million in dividends, denoting a balance between maintaining a healthy balance sheet and rewarding shareholders. The report further indicates an agile approach to refinancing, as seen in the early refinancing of four vessels, suggesting strategic liability management aimed at minimizing the cost of capital and enhancing the firm's financial flexibility.

Strengthening Equity and Bolstering Cash Reserves

With a reported IFRS-adjusted equity ratio of 44%, up from 42%, Odfjell continues to fortify its equity base. In tandem with a reduction in interest-bearing debt, the company demonstrates both resilience and a commitment to financial health. Even after substantial transactions including the bond repayment and dividend payouts, Odfjell maintains a safety net of cash, along with undrawn loan facilities, amounting to an available $99 million. Their ability to navigate the financial waters is further highlighted by the strategic decision to accept a public offer for the sale of their shares in BW Epic Kosan at a favorable price point, contributing to the liquidity and further evidencing the company's savvy asset management.

Positioning for Future Growth amid Strategic Refinancing

Looking ahead, Odfjell positions itself for sustainable growth. With a strategy that includes limited capital expenditures and refinancing initiatives to reduce both the cost of capital and cash breakeven, the company sets the stage for continued strong free cash flow generation. This future-oriented approach, combined with a solid foundation of good earning results and an optimized capital structure, presents a narrative of a company with not only the resilience to withstand market fluctuations but also the insight to seize opportunities for value creation and growth.

Earnings Call Transcript 2023-Q3

[Harald Fotland, executive]

Good morning, everybody, and welcome to the presentation of Odfjell's third quarter results. This presentation will follow a standard agenda. I will go through the highlights, and then my colleague, Terje Iversen, will present our financial performance. And I will conclude this presentation with an operational review. I will go through the market update, and finally, our prospects going forward.

Turning to the highlights. The third quarter was another strong quarter for Odfjell. The time charter earnings for Odfjell Tankers ended at USD 184 million, and this compares to USD 185 million in the previous quarter. We delivered an EBIT of USD 76 million, and this compares to USD 79 million in the second quarter. We delivered a solid net result of USD 52 million, and adjusted for one-off items, the result was $49.4 million compared to USD 53 million in the second quarter.

The rates on our renewed contracts during the quarter were up 18% on average, and this covered approximately 7% of our total estimated contract volume. Net result contribution from Odfjell Terminals was stable at $2.1 million compared to $2.3 million in the previous quarter. Our carbon intensity, the AER, for the third quarter came in at 7.2. This is due to seasonal changes such as weather and trading patterns, so the third quarter was, as expected, slightly higher than the record low of 7.0 recorded in the second quarter. And finally on September 19, we fully redeemed our USD 113 million bond.

And by that, I give the word to Terje.

[Terje Iversen, executive]

Thank you, Harald. I will go through the financials this quarter. And as usual, I will start with the revenue or the income statement for the quarter. If you look at the time charter earnings, we ended at USD 184 million in time charter earnings this quarter, quite close to the preceding quarter with $185 million.

We saw that there were some lower spot rates this quarter. but that was countered by more revenue days for our fleet and also slightly higher contract volumes this quarter. The increase in revenue days, that was due to less of fire days than in the preceding quarter and also that we have 1 more calendar day in this quarter. Time charter expenses ended at $6.8 million compared to $4.9 million, increased because we have slightly more time charter vessels on short-term time charter.

Operating expenses, slightly lower than in the preceding quarter with $48 million compared to $49.3 million, then we saw the share of net results from joint ventures [ from ] Odfjell Terminals ended at $2.1 million compared to $2.3 million, and we also saw a decline in G&A ended at $17.0 million compared to that $15.5 million in the preceding quarter. The reduction has more to do with seasonal effects that we had lower G&A in the second quarter than we normally have in the other quarters through the year.

Depreciation ended at $39.4 million compared to $39.3 million, and we also had a small capital gain related to the sale of Bow Pioneer at $1.3 million. That leaves us with an EBIT of $76.1 million compared to $78.5 million in the second quarter. On the finance side, we saw that we had an increase in net interest expenses, $24.8 million compared to $22.9 million.

The reason for that is that we had to expense capital interest or financing costs related to the refinancing that we did, was around USD 2.8 million this quarter, and that was due to a refinancing where we refinanced some leases and refinanced that into the bank market, and I will come back to that a bit later in the presentation.

After other financial items and taxes, we ended at $51.9 million compared to $52.6 million in the second quarter. That leaves us with an earnings per share of $0.66 per share compared to $0.67 in the second quarter. If we adjust for capital gain and also other financial items, we are left with an adjusted net result of USD 49 million compared to both to USD 53 million in the second quarter.

Moving on. We see that the time charter earnings this quarter ended just above USD 30,000 compared to USD 30,842 million in the second quarter. On the cash breakeven, we see that, that is kind of flattening out this quarter. We have seen that increasing for a few quarters now due to increased interest and also some inflation, but happy to see that we ended this quarter at around $22,800, around $500 lower than in the preceding quarter and bringing then the 12 months rolling average to $23,300.

Going forward, we'll, of course, continue to chase possibilities to reduce cash breakeven, but we have done a lot on the debt side, stretching maturities, refinancing and getting cheaper financing costs. But going forward, I think the main contribution will be to continue to reduce that to be able to approach our target, which is still below USD 20,000 per day in cash breakeven.

The balance sheet, most interesting to note is that the cash and the cash equivalents decreased this quarter. We ended at USD 74.3 million compared to $131 million. Main reason, of course, is that we repaid a bond in September of USD 113 million without doing any new issue or tap issue on existing bond. And we also did a dividend payment of USD 49 million.

If we include undrawn loan facilities, we have a cash available around USD 99 million end of third quarter. Also looking at other current assets at $198.7 million, that has been decreased somewhat due to the sale of Bow Pioneer, which was included in -- at the end of second quarter. On the other hand, we have seen an increase in working capital. Also [indiscernible] that figure is not that reduced compared to the preceding quarter.

Including in other current assets is also our shares in BW Epic Kosan, which we have now accepted a public offer to sell our shares. We have around 7 million shares, and we have accepted to sell them NOK 24 per share compared to NOK 21 per share, which is the booked value of the shares per end of the third quarter.

Our equity continues to increase. We have now IFRS 16 adjusted equity ratio of around 44%, up from 42% end of the first half. And as you can see on the debt side, we have reduced and continue to reduce our interest-bearing debt, both the noncurrent interest-bearing debt and also the current portion of interest-bearing debt primarily driven by the repayment of the bond of USD 113 million in September.

Looking at the cash flow. We saw that the operating cash flow decreased this quarter and that is [ $76.6 million ] compared to $99.5 million. The decrease is primarily driven by increase in working capital with around USD 19 million. On the investment side, we, of course, positively impacted by the sale of Bow Pioneer with USD 31 million -- USD 3 million, and [ ended down at ] $16.6 million in positive contribution for investment activities this quarter.

On the debt side, we have been quite active. We have repaid the bond, as I mentioned. We also did refinancing of 4 vessels this quarter. So in total, we actually took up new debt of USD 166 million and we repaid existing debt of USD 250 million. Also this quarter, we then paid dividend of $49 million, leading to net cash flow from financing activities at negative $150 million for this quarter.

That means that our cash decreased with $56.9 million, and based on opening cash of $131 million, we are now left with a closing cash and cash equivalent of $74.3 million end of the third quarter.

If we look at the cash flow on a kind of quarterly basis, the last 3 years, we see that we continue to deliver strong free cash flow, driven by the, of course, the earnings, but also this quarter, helped by the sale of the Bow Pioneer. So we ended at USD 93 million in free cash flow. If you look at the rolling, 12 months rolling, we are at around USD 80 million, continuing to increase. And also, if we adjust for debt repayments related to the right of use of assets, we are around USD 63 million in quarterly 12-month rolling free cash flow for the company.

As I mentioned, also included there is that the fact that we had a negative increase in the working capital of USD 19 million, which we should expect should reverse in the coming quarter. Going forward, we should expect -- based on limited CapEx and also based on the guiding on the results, we should expect to see a continued strong free cash flow going forward. On the debt side, we have, as you can see here, we have a few upcoming maturities, not -- actually before we are coming into the third quarter of '24, but we will continue to look into maybe to refinance some facilities early to lower our cost of capital and also lower the cash breakeven further.

As I mentioned, we were quite active on the refinancing side this quarter. We refinanced 2 lease vessels in the bank markets, actually lowering the cash breakeven for these vessels with around USD 3,000 per day per vessel. And we achieved what I would call is historically low margins, and also profiles that match the economic lifetime of the vessels that we are refinanced. We also included Bow Capricorn in the new facility, which was taken into -- was delivered to the company in October this year.

Going forward, we expect to see total loan balance end of this year at $875 million, which is within our targeted debt range of USD 750 million to USD 900 million. And our prognosis or forecast going forward based on existing loan agreements, based on installments profile, is to be around $774 million end of 2024 if we are able to repay and service this debt based on the existing loan agreements. So then we are quite close to being below actually our targets, as I said, between USD 750 million and USD 900 million. But of course, that will also help our cash breakeven going forward, then we continue to reduce the debt. I'll leave it over to you again, Harald.

[Harald Fotland, executive]

Thank you. I will continue with an operational review. The spot market in the third quarter continued to soften, but Odfjell nevertheless maintained solid earnings at the back of increased contract coverage. During the quarter, we saw the ODFIX drop by 1.7%, and this compares to a drop of 7.9% in the Clarksons chemical tanker spot index.

Turning to the categories of chemicals, we saw specialties at healthy contract rates and resilient volumes during the quarter. We saw Easy Chemicals maintain their historical share. We saw a slight decrease when it comes to exports of vegetable oils, and we saw a slight increase in our share of the CPP market. In sum, you can summarize the volumes that they are more or less in line with our historical averages.

We saw increased contract volumes, and we also had contract rate renewals up 18% during the quarter. Contract coverage climbed further in the third quarter, reaching 54% measured against our total volumes. Measured against volumes carried on Odfjell vessels and excluding the external relets, then the contract coverage was 63%.

During the quarter, a selection of existing contracts were renewed at an average rate increase of 18%, and this covered approximately 7% of our total annual estimated contract volumes. We are now entering the peak season for contract renewals, and as we are now 1.5 years into a very strong market, we will see more renewals of contracts that have already been reset to current market levels.

We maintained our carbon intensity within our targets. With an AER of 7.2 in the third quarter. Odfjell maintained a carbon intensity more than 50% below IMO's 2008 baseline. Due to weather-related seasonal variances, our AER was slightly higher than the 7.0 reported in the previous quarter. We are committed to retain our market leadership within energy efficiency.

We have several ongoing novel technology initiatives, and these will deliver further efficiency gains without mandating extensive dry docking or substantial CapEx. The first of these projects, air lubrication has already been successfully installed on board our vessel Bow Summer, and we have also commenced the testing of this system.

Turning to the EU ETS, Odfjell is well prepared for the inclusion of shipping in the EU ETS, and we will pass through this cost to our charters. Since 2008, we have measured our emissions on a detailed level, and since early 2022, we have routinely distributed this data onto our charters, and also the EU ETS is now a topic in every customer meeting and in every contract negotiation.

I would also like to add that pass-through of ETS cost will encourage charters to prioritize energy and emission-efficient alternatives. These emissions are allocated based on the Sea Cargo Charter principles, and also ETS cost will only incur in the sea legs that goes to, from or within Europe. The total cost of Odfjell's EU ETS allowances in 2024 is estimated to approximately USD 7 million. Transporting with Odfjell will minimize ETS cost because we have the most energy-efficient chemical tanker fleet in the market.

Turning to the Tank Terminals performance. The third quarter EBITDA was USD 9.4 million, and this is in line with the previous quarter. Our terminals in Antwerp, Houston and Charleston continue to operate at high or full capacity during the quarter. The Ulsan terminal experienced a quarter-on-quarter decline, and this was due to recent completion of several 10-year tank inspections. The average commercial occupancy rate for the portfolio, therefore, ended at 95.1%, and this compares to 97.6% in the previous quarter.

Market development. The third quarter saw reduced throughput, and we also saw leading chemical producer reporting a somewhat lower activity. We saw -- maintained good imports of chemicals to Europe, and that resulted in continued strong demand for the services that our Antwerp terminal are delivering.

On the outlook side, we expect the reduced occupancy rate to recover in the fourth quarter, and this is due to the tanks in Ulsan being back in operation again. And we also expect the present activity level to continue throughout the fourth quarter.

And then to a short market update. We saw spot markets softening in the third quarter, but they were bouncing back during the second half of the third quarter. West of Suez, we saw most trade lanes bottoming out in July, and they have been slowly rebounding since then. The transatlantic West trade lane saw steady rate development.

East of Suez, we saw that spot rates were negatively affected during the quarter, mainly due to reduced exports of vegetable oils and lube oils. Crude quarter spot rates for Middle East export remained relatively flat, while exports from the Far East saw a strengthening trend.

Overall, the volumes are stable and the share of swing tonnage lifting chemicals remain at low levels. We now anticipate that approximately 4% of the swing tonnage is active in chemicals, and that is historically a low figure. The order book is also at historical low levels, particularly for vessels in our core segment of larger stainless steel vessels.

There are a couple of orders in the medium segment. There are very few orders in the large segment, and there are 0 orders within super-segregators. In total, the order book stands at approximately 4.1% of the current core chemical tanker fleet. The average age is 13 years, and 16% of the fleet is now 20 years or older.

Current market conditions are expected to continue despite the uncertain times that we experience right now. Interest rates are at or close to the top in most countries, and there are signs that this situation will continue for a longer time than first expected. We've also seen that the geopolitical tension has increased further, particularly in the European region. The Chinese economy remains sluggish, but there are some first signs of improvement in that region, and on the production side, we see that the European production remains at a low level.

Turning in to demand and supply. We expect the production to be stable in the fourth quarter, and we also expect the production of tonne-mile to continue in the present pattern. On the supply side, we do not see any signs of growth in the chemical tanker fleet. We expect the swing tonnage to remain in CPP in the coming quarter. We also continue to see that the older tonnage is being sold out of our markets. and we do not see any signs that the fleet is increasing speed.

To summarize this presentation, third quarter was another strong quarter for Odfjell. This was supported by increased volumes and more revenue days. In Odfjell Tankers, we saw volatile spot rates, and we also saw some more revenue days, which in sum delivered a quarterly result in line with the second quarter. For the Odfjell Terminals, we saw stable performance. We had some tanks down for maintenance during the quarter. and we also saw a slight reduction in the activity levels at our terminals.

Going forward, we noticed that the volumes within our core markets have shown strong resilience through 2023. We expect swing tonnage to remain in CPP. We expect the present tight supply side to continue with very limited new orders, and therefore, we anticipate that the current market will continue.

The fourth quarter is a seasonally strong quarter, and we expect activity levels and freight rates to remain at the present levels. In Odfjell, we will have more vessels than usual planned for dry docking during the quarter, and therefore, we will have slightly fewer commercial days compared to the second quarter. In sum, we therefore expect our earnings to remain stable in the fourth quarter of 2023.

And this concludes the presentation of our quarterly results, and we will now turn to questions from the audience.

[Nils Selvik, executive]

Yes. Good day, everyone. And just before we start with -- there's a couple of questions that have come in. [Operator Instructions]. Not too many questions that have come in so far, but we have a couple, and I think the first one here is for you, Harald.

And it's a question on our contracts, and I'm just reading here. It's how should we think about core rate renewals in Q4 and Q1? How much of estimated contract volumes expected to be renewed, and could these potentially be done at lower rates?

[Harald Fotland, executive]

Well, that is an interesting question, and I'll be careful not to speculate in upcoming renewals. But I think it's fair to say that our contract portfolio can be split in 2. There are a significant number of contracts that have already been reset to the current market levels, and I think those contracts will see a contract renewal in line with the present market situation.

And then we have some contracts that are coming out of the option periods, and of course, they will have to be reset to the current market levels. So we will have some contracts with slightly more moderate increases, and then we will have a certain portion of contracts where the customers will have to accept that their contracts are being reset to the current level.

[Nils Selvik, executive]

Exactly. The next question, I think, is also for you, Harald, and it goes on our fleet renewal, and it's basically just can you give some comments regarding potential fleet renewal?

[Harald Fotland, executive]

That is also calling for speculations. But then you have to look at our fleet renewal in a tenure perspective. And then -- and we've done major changes to our fleet since, let's say, 2016, 2017. So we are in this market with a young and extremely competitive fleet. So there are no immediate needs for Odfjell to renew our fleet.

Having said that, it's also a fact that particularly our Kvaerner class is getting older, and at some point, we will, of course, go into the market and renew that segment. Whether that will happen next year or the year after, that is way too early to say.

[Nils Selvik, executive]

Okay. And the next question is also related to our vessels at least, and it's any risk of delays to the scheduled dry dockings.

[Harald Fotland, executive]

The answer to that is no. We have a very dedicated dry docking team, and we have better processes for organizing and carrying out dry docks than we've ever had before in Odfjell. So I would say that, that probability is low.

[Nils Selvik, executive]

Okay. And then there is a couple of questions that are related to the market and market outlook. I think the first question is more specifically on how the fourth quarter has fared so far, and there's a couple here on the more sort of next year compared to this year, how do we see it developing?

[Harald Fotland, executive]

Well, I think we all know that there are uncertain times right now and there are uncertain times ahead. So trying to predict the demand side is, I would say, challenging. And we also see that in the local markets, that rates are going up and down. There are surplus of vessels in one market, and then that surplus is moving to a different market.

So on the spot side, I would say that I should be careful to give too much guidance on the demand side. On the supply side, then all the figures are already on the table. We know what the supply side is, and we know what the supply side will be next year and also the year after. And I would say that the supply side right now is extremely favorable for the operators. So to summarize that, I would say a stable demand side and favorable supply side.

[Nils Selvik, executive]

Excellent. The questions keep coming in here. So I think we'll go back to the COA topic for the next question. And the question is, in contrast to your peers, you have steadily increased your core ratio over the last few quarters. Can you provide any color on why?

[Harald Fotland, executive]

I think one of the -- those who have followed Odfjell over a certain period of time have seen that most of the pure tonnage has exited Odfjell, particularly during 2022. And the exit of those 20-plus vessels, of course, that left contract volumes on the table. And those volumes were transferred to the Odfjell-controlled own vessels.

So I think part of the explanation is the reduction of our operated fleet. More volumes are going onto the Odfjell vessels, and part of the explanation is simply that we have seen interesting contracts in the market, and we have used the opportunity to take those contracts.

[Nils Selvik, executive]

Next question is for you, Terje. It's regarding our leverage, and the question is, your leverage is now on target. Can we expect higher dividends going forward?

[Terje Iversen, executive]

That's a good question. We have kind of delivered according to our promise to deliver 50% of the net results as dividend in the last few kind of quarters. And of course, going forward, to have decreased leverage will help and kind of give us the possibility to deliver more dividend.

But we still continue to chase our target to get a reduction in the cash breakeven, to get that down to a sustainable level, around USD 20,000 per day. So I don't think we will revisit that policy before we actually see that cash breakeven is coming closer to our targets.

[Nils Selvik, executive]

Okay. I think the next question is also for you, Terje, and it's regarding our 2 share classes. And the question is, any news regarding potential consolidation of A and B shares?

[Terje Iversen, executive]

That is something that we are getting questioned about from time to time. And the standard answer is that is up to our owners and general assembly to decide, but we are not kind of pursuing that possibility at the current [indiscernible] time.

[Nils Selvik, executive]

Okay. Yes. And there's another question on the COAs again. I guess that's the favorite topic today, for sure. I think you've already touched upon it, but the question is for the upcoming renewals in Q4 and Q1, is it possible to give a rough split between COAs coming off optional periods and those that already have been set to the current market during the last 18 months?

[Harald Fotland, executive]

Well, I'd be careful to put a figure on that question. But I guess we are talking approximately 2/3 of our total contract portfolio has been through a resetting of the freight rates. And then in the region, 1/3 will still -- in an option period and will be renewed during the next 6 months, I would say.

[Nils Selvik, executive]

And then I think it's the final question. And this goes -- well, it could go to both of you, but I'll ask you first, Harald. It's given the strong earnings, do you see any opportunities to increase exposure on the Terminals segment as it is also part of the corporate strategy?

[Harald Fotland, executive]

Well, we have communicated and signaled an intention to increase our exposure towards terminals. And if the right opportunity should arise, then that is something that we will seriously consider.

[Nils Selvik, executive]

Okay. Thank you. I think that was all the questions that we got in today. So with that, I'll give the word to you again, Harald.

[Harald Fotland, executive]

Okay. This concludes the Odfjell presentation of our third quarter results. I thank all of you for listening and look forward to presenting our fourth quarter results in early February. So thanks to all of you.