Odfjell SE

OSE:ODF

Earnings Call Analysis

Odfjell Reports Strong Q3 Despite Weaker Spot Market

Odfjell delivered robust Q3 results with net time charter earnings of $202 million, down from $214 million in Q2. Despite a slight softening in the spot market, the company maintained strong volumes, achieving a net profit of $71 million, similar to Q2. Odfjell's contracts saw a 7% rate increase, marking the 14th consecutive quarter of growth, though average time charter earnings dipped to $33,906 per day from $36,493. Looking ahead, Q4 earnings are expected to be lower due to current spot market conditions, yet the company remains optimistic about seasonal improvements toward year-end.

Solid Quarterly Performance Amid Market Fluctuations

Odfjell reported a strong third quarter, achieving significant financial metrics despite a slight softening in the spot market. The company’s net time charter earnings reached $202 million, although this reflected a decrease of $13 million from the record set in the previous quarter. The earnings before interest and taxes (EBIT) stood at $91 million, down from $107 million in the second quarter. However, Odfjell still delivered its second-best quarterly net result, with a net profit of $71 million.

Operational Resilience and Contract Rate Trends

In this quarter, Odfjell achieved a 7% increase in contract rates, marking the 14th consecutive quarter of advances in its contract portfolio. Despite the reduction in spot rates, the overall volume of contracts remained stable, indicating a resilient demand. The average daily time charter earnings were reported at $33,906, down from the previous high of $36,493, but still significantly higher than the cash breakeven point of approximately $23,000.

Balanced Financial Management and Cash Flow Insights

Odfjell demonstrated strong cash management, ending the quarter with $144 million in cash, and a total of $231 million when including undrawn facilities. The operating cash flow was robust at $118 million, reflecting ongoing financial health. Notably, the company achieved record free cash flow of $116 million, attributed to high operating cash results and limited investment outflows.

Strategic Fleet Management and Growth Plans

During the quarter, Odfjell added a new vessel and currently has 16 vessels on order, with expansions planned in both Japan and China. The company also exercised a purchase option for a 41,000 deadweight stainless steel vessel, expected to be delivered in early 2026. This proactive fleet management positions Odfjell well for future operational needs.

Future Outlook Amidst Softening Spot Markets

Looking forward, Odfjell anticipates a strong performance in the fourth quarter, albeit slightly below Q3 results due to diminishing spot market dynamics. The company remains positive, highlighting expectations for seasonal market upturns and stable demand in chemical production. Overall, while challenges exist, Odfjell's operational and financial frameworks appear resilient.

Expanding Terminal Operations and Expected Growth

Odfjell's terminal operations also demonstrated stability, with a consistent net contribution of $2.9 million. There are ongoing expansion projects in both Ulsan and Antwerp, designed to enhance capacity and meet future demand. The strategic partnership with S-OIL for the Ulsan project substantiates Odfjell's commitment to growth in terminal operations.

Market Landscape Considerations and Implications

The broader market scenario reflects ongoing geopolitical tensions, but chemical production remains stable with a 6% increase compared to last year. Odfjell’s management noted that while there may be short-term fluctuations in freight rates, overall rates remain favorable compared to historical performance. This perspective on future growth in chemical production and the management’s strategic response set a positive tone going forward.

Earnings Call Transcript 2024-Q3

[Harald Fotland, executive]

Good morning, everybody, and welcome to this Presentation of Odfjell's Third Quarter Results. This presentation will follow a traditional pattern. I will start and take you through the highlights. My colleague, Terje Iversen, will take you through our financial performance. And then I will conclude this presentation with an operational review, market update and prospects going forward.

If we then turn to the highlights, we delivered another very strong third quarter result despite a slightly softening spot market. We had a strong safety performance, and we had no significant incidents during the quarter. Our time charter earnings in Odfjell Tankers ended at USD 212 million (sic) [ USD 202 million ]. This is $13 million below the second quarter, which was a record of USD 215 million. We delivered an EBIT of USD 91 million, and this compares to USD 107 million in the second quarter. We had a very strong quarterly net result of USD 71 million, and this net result adjusted for one-off items remained at USD 71 million compared to USD 88 million in the second quarter. And by that, we delivered the second best quarterly result in Odfjell's history.

We renewed a limited number of contracts during the quarter, but still the rates were up 7%, and this is the 14th consecutive quarter where we deliver rate increases in our contract portfolio. The net contribution from Odfjell Terminals was USD 2.9 million, and this is in line with what we delivered in the second quarter. Our carbon intensity, the AER, for the third quarter came in at 7.2, and this is marginally up from the second quarter due to seasonal effects mainly. And the average AER for the first 3 quarters of '24 is 7.12.

During the quarter, we took delivery of 1 newbuilding on long-term time charter, and that leaves us with 16 vessels currently on order, 15 vessels on long-term charter in Japan, and we have 1 vessel on order in China on our own book. At the quarter end, Odfjell also declared a purchase option for one 41,000 deadweight stainless steel vessel, which is currently on bareboat to Odfjell, and that vessel will be delivered to Odfjell early 2026.

Outlook, we expect another strong quarter in the fourth quarter, but this will likely be below the third quarter due to the presently weakening spot markets.

And by that, I give the word to my colleague, Terje Iversen.

[Terje Iversen, executive]

Thank you, Harald. I will then take you through the financials this quarter. And as usual, I'm going to start with the income statement. We saw net time charter earnings ended at $202.1 million, down from $214.8 million in the second quarter. Reason being that the spot rates came down, as Harald mentioned, and we also saw some reduction in nomination under our contracts. Volumes were stable though, meaning that some of the contract volumes were replaced with increased spot volume in this quarter.

Time charter expenses ended at $1.2 million, down from $3.4 million in the second quarter. Operating expenses increased with $2.7 million to $53.7 million. Main reason for the increase is that, we had some positive one-offs in the second quarter. So this is maybe more on a normal level this quarter. Share of net result from associates and joint ventures being the Terminal business ended at $2.9 million, same as the preceding quarter.

G&A ended at $17.9 million, up from $16.2 million in the second quarter. Main reason for the increase being that we had some positive one-offs also in the second quarter, meaning that the numbers in the third quarter are more on the expected level. That gives an EBITDA of $132.3 million, down from $147.2 million in the second quarter.

Depreciation and amortization increased slightly to $41.8 million. Main reason for the increase being that we have more vessels on our balance sheet and we also did extraordinary depreciation of the air lubrication system that we have invested in. That leaves us an EBIT of $90.5 million compared to $107.4 million in the second quarter.

Net interest expenses ended at $18.3 million, improvement from previous quarter. That is -- main reason for that is that, we have lower interest expenses, lower debt, but also that we had lower -- higher interest income this quarter.

After other financial items and taxes, we are then left with a net result of $71.3 million compared to $88.2 million in the second quarter, and this gives us an earnings per share this quarter of $0.90.

Time charter earnings ended at $33,906 per day this quarter, down from the record quarter of $36,493 in the second quarter. But, of course, we have a large gap between the cash breakeven, which is around $23,000 when we are looking at the 12 months rolling average compared to the time charter earnings of $33,906 this quarter. The slight increase we saw in the cash breakeven this quarter was mainly driven by the fact that we had lower OpEx and G&A in the preceding quarters, and we did also capital repayment that positively impacted the cash breakeven in the second quarter. Going forward, we have reason to believe that we will stay around $23,000 level also for the coming quarters.

Looking at the balance sheet, we see that we have ships and newbuilding contracts at USD 1,238.5 million. We also see that we have an increase in right-of-use of assets to $307 million, the reason being that we took delivery of 1 new time charter vessel, Bow Cougar this quarter, and that also increased the noncurrent debt right-of-use of assets and also current debt right-of-use of assets this quarter.

Looking at the cash position, we ended at $144 million, quite stable to the preceding quarter. If you include then undrawn loan facilities, we have available cash around USD 231 million per end of the third quarter.

On the equity side, that was a slight reduction to USD 889 million. The reason for the decrease, of course, being the dividend that we paid out during the third quarter. Also, on the balance sheet, it's interesting to note that we have a current portion of interest-bearing debt of USD 168 million and the main part of that being the bond that is maturing in January next year, which I'll come back to later in the presentation.

The cash flow this quarter, we saw a strong operating cash flow. We delivered USD 118 million in cash flow, up from $108 million in the second quarter. Reason for that being that we are, of course, continuing to deliver stable and good results, but we also saw an improvement in working capital this quarter, which then led to a record high cash from operating activities this quarter.

On the investing side, we had some investments in noncurrent assets being dry dockings and also some smaller investments in our vessels. But we also had a positive impact from Bow Atlantic, which was delivered in the third quarter, where we received USD 5.2 million in net cash proceeds. So that led to a negative cash flow from investing activities of USD 1.4 million only this quarter.

On financing activities, most interesting to know is that, we paid a dividend of USD 79.1 million during this quarter. On the repayment of debt and operational lease debt, it's very much same level as preceding quarters. That led to net cash flow from financing activities of negative $113 million. But for the quarter as a whole, we had a slightly positive increase in cash and cash equivalents.

Looking at the cash flow from a more long-term perspective and looking at the free cash flow. We delivered USD 116 million in free cash flow this quarter being the strongest quarter ever, I think, for Odfjell, of course, driven by high operating cash flow and also by the low cash flow from investment being negative only USD 1 million.

Looking at the 12 months rolling free cash flow, we are then at USD 88 million. And if you adjust for debt repayments related to right-of-use of assets, we have reached then USD 71 million. Going forward, we have rather limited CapEx commitments. We have 2 vessels that we have bought back, and we are going to take delivery of in the end of this year and next year. That will impact the free cash flow. But based on the favorable purchase price for these vessels, we expect to finance those more or less at 100% of the purchase price with new mortgage financing.

Looking at the debt side, going to the kind of coming quarters, we see that we had a balloon of around USD 25 million maturing in the fourth quarter. That has been taken care of already. We had 2 vessels that were on lease. We bought them back and we took 1 of the vessel into an existing bank facility, where we left the other vessel unencumbered on our balance sheet.

Bond maturing in January, the plan is still to repay that the maturity with cash from our balance sheet. And based on the cash and the cash position we have today, that should be not a big issue for us to take care of when that time comes.

Going forward, we see that our balance is -- we continue to reduce our debt. Debt around USD 769 million end of this quarter, and we expect to be around USD 750 million end of this year. And we also expect the debt to continue to decline going forward, unless we should do anything material on the fleet side going forward.

We are still exploring refinancing alternatives. We have some leasing facilities that could be refinanced, and we think that could be favorable with regard to the timing and regard to the terms we could obtain, both when it comes to margins and also the repayment profile that we can obtain for a new financing of these vessels.

Looking at the CapEx and time charter commitments, as also Harald mentioned, we have, after the end of this quarter, declared a purchase option for Bow Hercules for delivery in first quarter '26. And this is the remaining vessel of the three 41,000 deadweight ton vessels that we currently have on bareboat to Odfjell. And the first of these vessel, Bow Aquarius will be delivered in December this year. And these 3 vessels are kind of part of the original 4 vessels that we had on operational lease from Sinochem, meaning that we have no declared purchase options for all those vessels. All the purchase options also are well below the current market values. And as mentioned, we then expect to obtain financing around the full purchase amount for these vessels.

Long-term time charters, as also mentioned by Harald, we have done 15 newbuildings on long-term time charters to be delivered to Odfjell in the coming years from now until 2028. And this table on the bottom part here shows what are the nominal time charter payments to be made on these time charter vessels when they are being delivered to Odfjell. These are gross figures, meaning the total time charter commitments. And, of course, we'll only have to book the bareboat element of these vessels when they are delivered to Odfjell.

And then I will leave the word to you again, Harald.

[Harald Fotland, executive]

Yeah. And then I will continue with our operational review. I'll start with the market overview. We are still in a strong market, although we have experienced some more pronounced headwinds lately. The ODFIX, which is an index that is reflecting Odfjell's average time charter earnings was down 6.6%, and this compares to the Clarksons chemical tanker spot earnings, which was down 6.3% during the same period. We believe that one of the contributing factors to this decline is the swing of crude tankers from crude to products on the Arabian Gulf exports to West of Suez. The graph on your right-hand side indicates that from -- if you look at large crude carriers in 2023, at that time, the crude carriers carried approximately 10% of that export. And since then, the export -- their influx has doubled to 20% during the third quarter of 2024. And crude tankers swinging into products is forcing MRs and handysize product tankers to swing into Easy Chemicals. And that is, again, taking away products from the core chemical tanker fleet. So we believe that this swing is one of the contributing factors to why we have seen a decline in our spot index.

Our contracts were renewed 7% up during the third quarter. This is the 14th consecutive quarter where we report increases in our contract portfolio, but this time for a relatively limited number of contracts. I'm also happy to see that our total volumes were stable during the quarter despite the fact that some of our contract customers nominated smaller volumes than what they've done in the previous quarters. So we maintain approximately 3.3 million tonnes of cargo on our owned and controlled fleet, and this is very much in line with the previous quarter despite the fall in contract volumes.

Our carbon intensity came in at 7.2. The average for the year thus far is 7.12 and 7.2 is approximately 52% below the 2008 average IMO baseline. We are progressing well with our suction sail project. The Hudong class vessel, Bow Olympus has recently completed the installation of the foundations for these 4 sails. The ship is now being traded to Europe, and we expect the sails to be installed on board sometime during the first quarter of 2025.

We have also completed our long-running solid oxide fuel cell project. This is a project that has been going on for 5 years already. Our conclusion is that, the technology is working, but it's also a conclusion that the technology is immature for installation in marine environment. Nevertheless, we've gained very interesting experiences related to the technology and also related to future fuels since the solid oxide fuel cell is a multi-fuel solution.

Then turning to terminals. We delivered an occupancy rate of 95% during the third quarter. We have a stable financial performance with an EBITDA for the third quarter in line with the previous quarters.

We also have concluded 2 very interesting expansion projects, 1 at Ulsan and 1 at our Antwerp terminal. We have recently approved the expansion project at our terminal in Korea, the E5 project, expansion # 5. And this project will comprise 10 carbon steel tanks of a total of 88,000 cubic meters, and we expect it to be operational in the fourth quarter of 2026. The key driver for E5 is the S-OIL/Aramco Shaheen project, a USD 7 billion crude-to-chemical facility, that is being constructed in very close vicinity to our terminal. We have already signed a contract with S-OIL for 10 years for 3 of our tanks. And this contract will lay the foundation for future development of this strategic partnership. The project will be funded locally. We've also decided on a new expansion project at our terminal in Antwerp, 2 stainless steel tanks in total 12,000 cubic meters. Here, the foundation is already started due to cooperation with previous expansion projects, and we expect those 2 tanks to be -- to come on stream already during the second half of next year.

Then I will conclude this presentation with a market update and our prospects going forward. If we look at the MR earnings in the Atlantic and the Pacific, we see that during 2024, we've seen a reduction in earnings, particularly towards -- during the second half of 2024. And this reduction is spilling over to chemical freight rates, both West of Suez and East of Suez. I think the most important thing to notice on those 2 graphs is that, even if we see a reduction in freight rates, the freight rates are still well above what we saw 1 year ago. So, in perspective, the reduction is not dramatic.

I mentioned the influx of crude tankers into products, which again is forcing MR tankers into Easy Chemicals. And in -- after the second quarter, we reported that approximately 5% of the product tankers are trading in Easy Chemicals. We now see that this figure has increased to 6%.

If we look at the order book, we have not seen significant increases in orders. After the second quarter, we reported slightly above 9% order book. And today, the order book stands at 10%. It's particularly for medium stainless steel where we see that there is an increase in orders. And during the next 3 to 4 years, we will see a slight increase in that segment. We will see a decrease in the segment for large stainless steel vessels. Here, there are fewer vessels on order than what we expect to be recycled during the coming years. And the super-segregator segment is more or less in balanced. All in all, 15% of the core chemical tanker fleet is older than 20 years and approximately 6% of the core chemical tanker fleet is above 25 years. So we perceive that the order book compared to expected recycling remains beneficial.

The geopolitical tension is still high. We have high-risk situations in Ukraine/Russia and also in the Middle East, and we've seen some increase instability in the Taiwan Strait. The macroeconomic uncertainty remains, and we see some sluggishness, both in China and in Europe. And we still see that the U.S. recession risk is at a low level despite the fact that we expect a slower GDP growth going forward. We also see that manufacturing is still at low levels. But at the same time, the production of chemicals has increased by approximately 6% compared to the same period last year. And we see growth in China, and we also see that production is about to rebound in Germany.

So chemical production, we expect to continue to see a slight increase. We expect the average sailing distances to remain at present levels. We are not concerned about the chemical tanker fleet growth. We do believe that swing tonnage will swing back to products, and we don't foresee any changes in fleet speed.

So to summarize this presentation, we delivered another solid financial result in the third quarter, although it's somewhat below our record results from the second quarter. Time charter earnings decreased in the third quarter. This came at the back of reduced contract volumes that were replaced by spot volumes that have seen a slight decrease compared to the previous quarter. We also saw increased influx of swing tonnage. Volumes were stable, and we believe that the swing tonnage will gradually leave our segment somewhat.

On the Terminals side, we have stable net contributions, and we will see our capacity to continue to increase going forward with the expansion projects, both in Ulsan and Antwerp.

Market outlook, we expect markets to pick up seasonally towards the end of the year, where the development for product tankers and swing tonnage will be the key drivers for this uptick. We also see that there are signaled increased production volumes from OPEC, and that might also have an impact early next year.

To summarize this presentation, we expect continued stable contributions from Odfjell Terminals going forward. We expect another strong quarter in the fourth quarter, but maybe below the third quarter due to the weakening spot markets that I have previously mentioned.

So this concludes our presentation, and we now continue with the Q&A session. Johannes and Terje?

[Johannes Tang Hystad, executive]

All right. We've had a few questions already, so feel free to add more.

Terje, I think the first one goes to you. Could you mention the exact elements you include in your cash breakeven? Do you include ship depreciation?

[Terje Iversen, executive]

Sure. I can explain. We include in cash breakeven all running expenses in the group in the shipping activity, meaning OpEx and G&A. We also include the finance element, being interest and installment, and we also include running investments on the vessels. An idea is simple, as long as we then deliver time charter earnings above cash breakeven, we should be positive when it comes to be able to deliver cash to our owners, and depreciation is not included, but interest and installments are included. So -- and that is an important factor for us to measure, and we still have a target to decrease cash breakeven further to have a sufficient buffer against the time charter earnings to be able to deliver cash to our owners.

[Johannes Tang Hystad, executive]

Perfect. And the second one also for you. Do you plan to exercise purchase options on more ships?

[Terje Iversen, executive]

Maybe. We have a portfolio of vessels, both on time charter and bareboats and several of these contracts have purchase options, and they are coming into effect at some stage during the tenor of the leases. And we are continuously evaluating when these are effectively open for us to exercise, whether that is favorable compared to the market price of the vessel. So, yes, I think we will most likely continue to exercise purchase options going forward.

[Harald Fotland, executive]

I think I can add to that question that you have to keep in mind that the purchase options that are maturing today are agreements that were made sometime between 2015 and 2018. At that time, building prices were favorable, and that is also reflected in today's purchase options. So, so far, the purchase options that we have exercised have been favorable to Odfjell, you could say.

[Johannes Tang Hystad, executive]

Then a question to you, Harald. It seems more and more likely that Donald Trump will be the next U.S. President. What will that mean for your markets?

[Harald Fotland, executive]

Yes, I saw that in the newspapers this morning. I think there are -- it's -- I think the first answer is that, we have to see what comes before we are too conclusive. But what we do know is that, that Trump is maybe more protectionistic than Harris was expected to be. The expectation to Harris was that she would simply continue the policies of Biden. So the expectation is that, we will see more protectionism, and that might be an issue for exports out of the U.S. It's also an expectation that he will reverse some of the initiatives in the Inflation Reduction Act that is, of course, not good for the planet, but it might be good for Europe, which is struggling a bit because of that law. So I think, all in all, we might see a slight reduction in activities in the U.S. due to -- if he is able to implement the protectionistic matters that he has promised to do.

[Johannes Tang Hystad, executive]

So we have a question from Bendik [indiscernible]. Can you give some more color on how important swing tonnage has been for the recent reduction in rates?

[Harald Fotland, executive]

Well, swing tonnage is not directly competing with Odfjell. Swing tonnage is focusing and concentrating on the most Easy Chemicals. And those are chemicals that Odfjell is normally not too occupied with. The problem is that, when the less advanced chemical tankers use that market, and then they are also swinging upwards. So it's like a domino effect where sooner or later, other chemical players will start to swing into our core markets. So that is the reason why swing tonnage is important for us. And these are normally large vessels with huge capacity. So they are easily replacing maybe 1 or 2 or 3 traditional chemical tankers when they decide to go, for instance, methanol or glycols or other relatively Easy Chemicals.

[Johannes Tang Hystad, executive]

All right. And also a question related to this. How should we think about the Q4 guidance of earnings below Q3 compared with the last quarter's guiding of Q3 somewhat below Q2, where TCE rates were down 7% quarter-over-quarter?

[Harald Fotland, executive]

Well, interesting question. I think we -- first and foremost, we have to keep in mind that we are presently in the strongest market that we've seen for more than 10 years. In the second quarter, we delivered a historic result that I think it will be difficult to beat at least in the near future. We delivered $36,000 in average time charter earnings, which is the absolute record in Odfjell [indiscernible]. And now we have -- we are delivering a result that is slightly below that record quarter. So the fact that we are guiding slightly down is, we are not concerned about that. It's a reflection of a somewhat depressed spot market and with average contract coverage of approximately 60% in normal quarters, then we are still 40% exposed to that market. So our guidance is a reflection of what we see presently in the spot market.

[Johannes Tang Hystad, executive]

Thank you. So that was the final question. So I'll leave it to you for a final remark then.

[Harald Fotland, executive]

Okay. Then I would like to thank all of you for watching this presentation, and I wish you a good day ahead, and look forward to welcoming you to the fourth quarter presentation. Thank you very much.