Odfjell SE

OSE:ODF

Earnings Call Transcript 2017-Q4

[Kristian Verner Morch, Chief Executive Officer]

All right. Good morning, and welcome to the presentation of the Odfjell SE Fourth Quarter Results and Preliminary Results for 2017. If I had to sum up the fourth quarter in one sentence, it would be pretty much how I would sum up the year and that is that it was a difficult quarter, but we feel that we continue to make good progress as a company.In terms of the agenda today, I will talk you briefly through the highlights, then Terje, he will come on and talk about the financials, and then I will come back with an operational review, update on our strategy, and then I'll speak a little bit more than we usually do in terms of prospects and market update towards the end of the presentation. Because we are broadcasting this presentation live, I kindly ask you to wait until the end with questions and after that we'll be available for whatever questions you may have.Okay. So highlights for the year. As I said, it was a challenging quarter. The chemical tanker markets remained challenging during the quarter despite some improvements in rates, but at the same time we saw increase in bunker prices in our fuel cost. So the net result was not great and the terminal market was slightly compared improved to the third quarter. Especially in our Houston terminal, we saw an increase in activity and results. So the EBITDA came out of the quarter at $41 million, which was $4 million ahead of the previous quarter. And our net result was -- came out at $96 million compared to a minus of $11 million in the previous quarter. Unfortunately, that did not come from the operations, but it came mainly from the sale of our Singapore terminal and a capital gain of $136 million in the fourth quarter.Unfortunately, we also had to take some impairments on our terminal in Charleston and on 3 ships in our regional fleet, and Terje, he will talk more about the one-offs that occurred during the fourth quarter. As I said, we concluded the sale of our Singapore terminal in the fourth quarter at a very attractive valuation. It contributed with $150 million in cash and out of that, $117 million was transferred up to Odfjell SE. We also signed an agreement with Sinochem during the fourth quarter which gives us control over the 8 Supersegregators that they have been building. And I have a slide on that topic a little bit later in the presentation.We also announced today that the board will be proposing a dividend of NOK 1.5 per share at the AGM to reflect the gain on the sale in the Singapore terminal. You can say our operational result does not necessarily justify a dividend in that size but with everything else taken into consideration, we think that that's appropriate.On the right-hand side, you see the key figures. I think I will not go through those because Terje will do that in the coming slides.So as I said, the highlight is, the markets remain challenging. We continue to make good progress. We have achieved faster than we thought it would achieve the fleet growth ambitions we had and we have also participated in the consolidation of the industry in a capital-efficient way, and as you can see, we have, at the same time actually managed to strengthen the balance sheet. So, all in all, that's good progress despite the challenging market conditions.And at this point I will hand it over to Terje to take us through the financials.

[Terje Iversen]

Thank you, Kristian. I will speak -- start with P&L this quarter comparing to last quarter, start with Tanker division. As you see, we increased the gross revenue from the Tanker division to USD 213 million this quarter compared to $207 million in the preceding quarter. The main reason for the increase in the revenues related to the number of days, meaning that we have more vessels on the water this quarter and also that we had some increase in the revenue in the regional activity.Looking into voyage expenses. That increased from USD 78 million to USD 82 million this quarter. That has mainly also to do with increased number of days, more vessels on the water. In addition, also increased bunker cost is affecting the voyage expenses. Time-charter expenses increased slightly to USD 48.9 million. Main contributor is, of course, more time-charter vessels this quarter. And we see that the OpEx was reduced a bit around USD 1 million this quarter compared to last quarter. That has mainly to do with the reversal of accruals made at the end of the year.G&A is also slightly down from USD 17.3 million to USD 16.5 million, and we see that they are quite kind of stable compared to the preceding quarters, slightly down also here because of some reversals of accruals. [indiscernible] EBITDA of USD 30.6 million compared to USD 28 million. Depreciation increased to USD 27.1 million compared to USD 33.9 million (sic) [ USD 23.9 million ] in the third quarter. Main reason is that we have done some accelerated depreciation of some equipment on the vessels related to replacement of propeller and also recoating of a few vessels.We had an impairment in this quarter of USD 21.9 million. I will come back to that on the next slide. And we also had a small capital gain under the EBIT of USD 18.3 million negative compared to USD 3.6 million in the preceding quarter. Of course, the negative EBIT was heavily impacted by the impairment we did in this quarter.Of the net finance and taxes, under the net result for the Tanker division of USD 28.5 million compared to negative USD 8.5 million in the preceding quarter. When we look at the terminals, we see also there a slight increase in the revenue as [indiscernible] is related to U.S., but also we see increased revenue in Asia and also partly in Europe and also increased earnings from the activities. The OpEx was down USD 1 million this quarter compared to last quarter and also G&A was slightly up and then we had an EBITDA of USD 9.8 million compared to USD 8.7 million in the third quarter. Depreciation, very much at the same level. We did an impairment of the Charleston terminal, I'll come back to that on the next slide in more details. Then we have the capital gain from the sale of Singapore. Then we had an EBIT of USD 116.7 million compared to a slightly negative EBIT last quarter.Of the net finance and taxes, we ended at USD 125 million in net results compared to minus USD 2 million in the preceding quarter. I will also come back to the taxes and the kind of capital -- the gain on the taxes in this quarter. The total [indiscernible] increased revenue from USD 236 million to USD 242 million this quarter. EBITDA in total increased from USD 37 million to USD 40.7 million and EBIT went from USD 3.6 million to USD 98.5 million. I mean, under the net result at USD 96.4 million compared to negative USD 10.5 million in the third quarter.And also mentioned on the terminal side, this is including the result from Singapore that was divested in kind of mid-December. So we included around USD 1.8 million on EBITDA from the Singapore terminal before the sale in mid-December. That is included in these figures.Looking more into the details on the non-recurring items. The big one on the Tanker division is the impairment we did on the 3 vessels in the regional fleet in Asia. That was 3 vessels that we ordered back in 2018 at the peak in the market and the vessels were delivered in 2011 around at that time and we have seen that we haven't been able actually to defend the book values of these vessels and especially when we are kind of now looking at regional activity in Asia, so more or less a disintegrated part of our total fleets. We have to kind of do an impairment assessment of that cash-generating unit alone and then we have to do this impairment of USD 21.9 million in this quarter.On the terminal side, we did an impairment on the Charleston terminal. That was finalized in 2013. We have built the terminal to kind of infrastructure, to expand and build more tanks on the terminal. We haven't been able to find a viable business case for the terminal. So we are kind of having to defend the values based on existing activity and the existing earnings that we have on the terminal. So then we have [ done ] this impairment of USD 20.7 million and the remaining value of that asset in our balance sheet is around USD 33 million per day. The capital gain from the sale of Singapore, I think we have mentioned that, gave us a gain of USD 136 million in the quarter. And the last item on this list is the tax gain related to the U.S. activity for the terminal business that has to do with the decrease in the tax rates in the U.S. So that's actually decreasing our deferred tax liability related to that terminal. So if we summarize this and kind of normalize the results, the adjusted EBIT this quarter is around USD 7.5 million and adjusted net profit around minus USD 3.7 million.One of the main cost in our P&L is of course the bunker cost. As mentioned, the voyage expenses has increased this quarter, and we see that the bunker cost in our P&L increased from USD 37.8 million to USD 39.1 million. At the same time, we see that the bunker price is increasing more, but we have the bunker adjustment clauses that is kind of hedging the really large increase in the bunker price. At the same time, going forward, we estimate that we have around 65%, 64% covered -- hedged throughout the next 12 months through our contract portfolio. At the same time, we don't have any more financial derivatives hedging in the market in 2018.Looking at the balance sheet, we see the ships on newbuilding contracts as the largest part of asset side, of course, that is decreasing somewhat this quarter related to the depreciation, also related to the impairment, and we've also done a few installments on the newbuildings that is reversing kind of part of the depreciation impairment kind of effect.On the balance sheet, we also see that we have a cash position, USD 206 million under fourth quarter. So we think we have a quite solid position with balance sheet. Let us come back to the liquidity and also the equity where we now have around USD 808 million in equity and equity percentage around 41% using the equity method. We also have done some restructuring, I would say, on the debt side. We see that we have actually decreased long-term interest-bearing debt and increased the current portion of the interest-bearing debt, and that has to do with bond maturing in December 2018 which is now considered as current debt instead of non-current interest-bearing debt.The cash flow. I wanted to go through the details in this cash flow, but the main topics, we see that cash from operating activities this quarter is increasing somewhat compared to last quarter, that has mainly to do with reduced working capital. On the investment activities, we see that we get good kind of result from the dividend received from the Singapore sale of USD 117 million. We've done some installments on the newbuildings in the same period, but we have done a positive cash flow for investment activities at USD 117 million.For the financing activity, we've done some repayments of around USD 31 million this quarter. Then we have in a net cash flow for this quarter of around positive USD 105 million. The financial ratios. Of course, looking at kind of return on equity, return on capital employed and also gross interest-bearing debt above EBITDA, the kind of the figures are somewhat impacted by the sale of Singapore. So that is kind of producing quite decent figures when it comes to both return on equity, return on capital employed and also the kind of the multiple on the debt side. If we kind of take that out of the figures, we are of course reaching a higher number, kind of on the gross interest debt/EBITDA, but we are still within decent figures, I would say. And as mentioned, we have a solid equity position of around 41% which has been now increasing from 31% back in 2014 and quite steadily throughout the last 4 years.On the debt side, we have some repayments in the coming years, around USD 250 million maturing in 2018. This is a mixed bag of balloons or mortgage financing that is maturing, and installments and also a bond that as I mentioned is due down in December 2018. At the same time, on the left side here we see from the bars that we expect to refinance a part -- a large part with the maturing loans. So when we're repaying around USD 250 million, we estimate that we will kind of take a new debt around USD 200 million, which is done consisting of course on the new debt on the newbuildings around USD 125 million and around USD 75 million in refinanced debt throughout the year.[indiscernible] is a strong appetite for the loans that we're going to do refinancing in the coming months and quarters and also I think we are in a good position when it comes to the bond that matures in December. We have a solid balance sheet, we have a solid cash position, so we are not in a rush in a way. So we will kind of monitor the market and try to time a refinancing in the best possible way, and we could also use the cash position that we have on our balance sheet if we don't find a market attractive enough.Capital expenditure program. The figures are very much the same that we showed last time. The last CapEx is to -- almost, of course, is to Hudong vessels, the 6 vessels that we are building in China. Also the AVIC ship, 3x AVIC. One of those was delivered already in January this year. So in total we have CapEx commitments in -- due in 2018 around USD 138 million; in '19, USD 156 million; and USD 129 million in 2020. As we have said before, all this has been taken care with financing, mostly in Chinese lease sale-back structures. So actually, the equity installments on these newbuildings is quite limited. In 2018, we are injecting USD 12 million and the same in 2019 to fuel the finance in newbuildings that we have on our book.On the tank terminal side, that is a mix, kind of some of the investments are decided and approved with the terminals board and some are expected and planned investments. So these investments are kind of expecting to be kind of changing also going forward, but this is the best estimate that we have for today, and this is showing [ over ] share of the CapEx in terminal business.All right. Operational headlines. On chemical tankers, if you look at the top left bar of graph on this slide, you will see that since the fourth quarter of 2016, we have been increasing our fleet. It was one of our targets that we have to increase our footprint and our top line. So we have actually since fourth quarter 2016 increased our number of ship days by 12%, so that has gone up. What you're looking at on the right-hand side of this slide is our CoA coverage and we are very happy because we have actually -- despite the growth in fleet, we have actually managed to even increase our contract portfolio. So now we are ahead of historic averages. We are close to 62%, 65%, maybe even on our contract portfolio, and also going forward, that is the same picture for 2018. We have secured quite good contract coverage for the year we are in now.The not so good thing about this slide that you're looking at, on the left-hand side bottom corner is the volume carried, and as you can see, that does not go up in the same speed as the fleet and that's a testament of the fact that the market is difficult. The Hurricane Harvey and so on means that it's -- we have to work harder to schedule the ships. We do spend longer time, have more port calls and so on. So operationally in a market like this, things are becoming more difficult and that's also why the ODFIX is down by 5% in this quarter compared to the Clarkson index, which is actually up by 0.8%.We are actually on this slide and we mentioned this before, comparing a little bit apples to pears because the Clarkson index is a market index that measures standard round voyage without any waiting time where the ODFIX is a performance indicator that also includes operational inefficiencies because of, for instance, Hurricane Harvey. So that explains why the ODFIX is dropping faster than the underlying market.On terminals, the main -- 2 main points I wanted to make on this slide. On the left-hand side, you can see that our overall utilization on terminals went up a little bit to 88% in fourth quarter. The dark blue line, you can see, is the mineral oil storage, middle distillates, diesel and gasoline and so on, and that is down to 80%, whereas the storage for chemicals remains more or less flat at 92%. The reason for the big drop in the mineral storage is the fact that the contango disappeared in the middle of last year and when the forward price of middle distillates is not higher than the current price, then traders do not have incentives to storage and trade as much and this is the impact you are seeing.The right-hand-side bar shows picture of Rotterdam where the dark bars is the revenue coming from storage and as you can see that is following the graph you are looking -- the utilization slide on the left-hand side whereas the light blue bars is revenues coming from the PID or the refining service we are offering down there. And as you can see, that is increasing and we have signed up a long-term contract for PID in Rotterdam.A year ago, we launched the Odfjell Compass and we showed you this slide about what would be our priorities for 2017, and we thought we would give you an idea of how did that go, did we follow the plan and what have we achieved? The growth target has definitely been achieved and also faster than we thought it would. We feel that with the relatively low CapEx spend, we have achieved a very attractive growth in our fleet. It's a younger, more efficient fleet, and we have preserved our balance sheet in doing so. We also had the ambition to participate in the consolidation and we have done so with CTG and Sinochem. In terms of high-quality service, predictability, reliability and so on, we have made good progress. We're a little bit paranoid about speaking too openly about how we measure that because this turns into a competitive thing, but we do have hot data that supports that we're making good progress on our efficiency in terms of how the ships are scheduled.Operational excellence. We have taken out USD 8 million in G&A and OpEx. So we are on good track there and the operational excellence project in terminals is also progressing. It -- of course, it's not as visible when you look at how difficult the market is, in particular in Rotterdam, but if you drill down into Rotterdam and the performance, for instance, with barge turnaround times and all kind of operational measures on the terminal, we are making very good progress.Both Terje and I talked about financial strength and the strength in balance sheet, and I think we have come far there. Cost of capital is a never-ending story in a way. We cannot afford to structurally have higher financing costs than our competitors, and at the moment, we do. But as Terje said, let's see what happens on the next bond and so on, but it is our largest capital -- our largest cost of capital cost, so we need to make sure that that's competitive as well.Terminals, back to black so to speak, we are not there, it's not for lack of trying, but the markets have not been helpful and we're doing everything we can to progress on that front as well.I want to spend just a little time on the Sinochem transaction because for me -- for us, it is one of the most important strategic steps we took in 2017. Sinochem had been building 8 Supersegregators, very advanced, high-quality ships to trade in the key trade lanes of Stolt and Odfjell, and we were getting concerned about how would that go in terms of contract -- [indiscernible] of contracts and so on.So the deal we've made with Sinochem is that 4 of the newbuildings will be taken on a bareboat charter by Odfjell with purchase options in the end, not obligations, but options, and then the remaining 4 ships are placed in management without fill and pool is managed as an integral part of our fleet.So there's 0 CapEx involved in this transaction and we have taken a big step in closing the gap to Stolt in terms of footprint in the super segregator market, which is the picture of the competitive landscape you're looking at on the right-hand side. If you can see -- I don't know how clear it is, but if you can see the outlined circle of where Odfjell is today and where Stolt is today, you can see a significant difference both in terms of age and footprint.And then if you add the initiatives we have done on our new buildings and everything else and on top of that you add the Sinochem deal, you can see that by 2021, that gap has been closed. I want to say that this slide assumes the fact that Stolt will sit still between now and 2021, and if that happens, I'll be very, very surprised. So this picture with a high likelihood change, but at least for the moment, I think we have taken great steps to close the gap strategically.We also think and this is a personal opinion, I think with our deal with Sinochem and CTG and Stolt's acquisition of Jo Tankers and of course also the Crystal Nordic and Essberger merger, we think that the consolidation is underway and I personally think that 2018, you'll see a number of more transactions within our industry. Whether we will participate or not is -- I don't want to guess about that. I think we have our hands full for the moment but never say never. But the window is open and we do think that the markets will continue to consolidate.I want to speak a little bit more about prospects and market fundamentals because as you can see from our release also today, we keep referring to the fact that we have improving fundamentals for chemical tankers, and I wanted to add a little bit more flavor to that.Globally, there's about 3 billion tonnes of liquid oil and related products being transported around the world and only 232 million tonnes of that is chemicals. That composes of 4 main chunks. The biggest chunk is organic chemicals, which is chemicals that comes out of the oil industry. Then you have inorganic chemicals which are chemicals that comes out from other products than oil. It could be phosphate rock and so on. And then you have vegetable oils and then you have some minor other commodities. Those volumes have, in the past years, been growing with 3% and we believe that the demand for seaborne transport of those materials will grow by 4% going forward. I think that is probably around the same as many other people's -- many other people and research houses will say. But of course, the biggest question we have to ask yourself when you say that so much growth is coming into seaborne chemicals is where's that chemical -- where's that volume going to go, is it going to go deep sea or is it going to go short sea and so on? And that's where our opinions starts to differ.I saw a notice yesterday about Drewry that has a very different view than we do. So you do have to make a number of assumptions, but at least, the way that we look at this market is that by far the largest capacity in terms of production comes in the U.S. and in the Middle East. And if you look at the advances that the U.S. producers have in terms of raw material coming out from the shale gas, we do think that there's quite strong economic arguments that that volume will go long haul, and that's a big difference. If you export chemicals from the U.S. to Europe, it travels an average of 5,000 miles, but if it goes to China, it travels 10,000 miles, so twice the distance. And you see the same picture when you look at the Middle East. If it goes to Southeast Asia, it's 3,800 miles, but if it goes to China, it's 6,000 miles.So, on top of the volume growth of around 4%, you have to add an element of the tonne mile demand. And if you believe that the exports will favor -- shorter routes, you can add around 1% and if you're really optimistic in terms of the long-haul trades, you can add as much as 3%. But of course, a lot of the assumptions, as I say, go into that. It will depend on a number of issues, but the structural change in terms of chemical production capacity in the States will be driving -- in our opinion will be driving the long-haul trades for chemicals.I also wanted to say with this path, this is going to be a main theme at our Capital Market Day in June. We have built a very detailed demand model and that's going to be one of the main themes on the Capital Market Day as a teaser.If you look at the supply side, the orange bars you're looking at is what we call the core fleet, which is the stainless fleet, and that's going to grow on a compounded basis in the next 3 years by 3.6%, whereas the swing tonnage or the IMO tonne is the more quoted tonnage, this is going to grow by only around 1.9%. So on an aggregated basis, if you look at supply from the bigger perspective, it's going to grow by around 2% per year.So when we say that we feel that there's solid fundamentals or improving fundamentals for chemical tankers, that's the picture we're looking at. We're looking at a 4% growth in seaborne volume. You can add whatever you want to believe in terms of long-haul trades to add a tonne mile effect on top of that.Some of the things that can change that and probably after 2021 will change is a question mark about China building up new capacity and so on. But as I said, we have to add whatever you believe on top of the 4% and then if you look at supply growth, it will be growing by 2% if you look at it on a larger scale, but even if you zero in on the core fleet, it will grow by 3.6%. So demand will, in our model, be outgrowing supply.One thing that I want to add here is, when you look at these things, we think that the chemical tanker story is very interesting going forward. But you cannot ignore the fact that our markets have been historically highly correlated to the other tanker markets. So, of course, that's an interesting discussion. Will it actually be able for the chemical tanker market to fundamentally improve if the same thing does not happen in the product tanker market? And I'll leave the answer to that question open and something that we want to address at the Capital Market Day in June as well.So the bottom line is that we continue to believe that the markets will improve towards the end of 2018, strong tonne-mile demand story that will outgrow the net fleet growth. We do expect that the storage for oil minerals will remain challenging, but we do expect fairly stable demand for chemical storage. And in terms of our chemical tanker results for first quarter, we expect that the time-charter results for the first quarter will be marginally better than what we saw in the fourth quarter of 2017.I think the final slide here is, and I mentioned it already, we're going to have a Capital Market Day on the 5th of June. Our intention is to have that Capital Market Day here in Oslo, and we hope many of you will participate. As I said, the main theme -- one of the main themes will be to present our demand case, which will also include specific commodities.So that's the end of the presentation. So now I think we will be taking Q&A.

[Terje Iversen]

Kristian, do you have the microphone for whoever wants to ask questions?

[Kristian Verner Morch, Chief Executive Officer]

Yes.

[Unknown Analyst]

You don't mention anything on your previously proposed or potential ethylene terminal in the U.S. Now you pay out also more in dividends from terminals down to Odfjell and we -- at least I assumed. How should I think about that going forward?

[Kristian Verner Morch, Chief Executive Officer]

I didn't get you. You mean the ethylene project or…

[Unknown Analyst]

You haven't mentioned anything on the ethylene export project?

[Kristian Verner Morch, Chief Executive Officer]

No, we didn't. I think -- I don't know if you picked it up, but the competing project has announced that they'll go forward. We do not know how solid that in reality is, but they have announced it. We have said from the beginning that if you want to invest USD 350 million roughly in first of its kind export facility, we do not want to do that without having security that we have customers that supported come hell and high water, and we were not able to get that and we still have discussions about that. So we do not rule it out. But our risk appetite is not very high on a project like this. So we need to sign up the customers before going forward. If the competing project goes forward, there is probably a less likelihood of us doing it as well. They probably have a different risk appetite than we do and that's the reason why we don't mention it. But fundamentally, there's nothing that has changed. We think it's a great project if we get the right customer contracts, but we haven't got them.

[Unknown Analyst]

In the last report, you said FID in Q1 '18. So do you want to give a specific timing as to when you can potentially do FID now?

[Kristian Verner Morch, Chief Executive Officer]

No. It might have come across a little bit true, let's say, from -- in the last -- I think the reality is we will not take FID before those customer contracts would be in place. And if that happens, then we can do it fairly quickly because we have all the permits, we have all the engineering done, but -- so it will be pure speculation for me to pick a date.

[Unknown Analyst]

But you would then need to re-inject some of that cash you now pay down as dividends to you and [indiscernible] back into terminals in order to proceed?

[Kristian Verner Morch, Chief Executive Officer]

If we indeed did the project, yes, we would probably have to support with some of that cash, yes.

[Unknown Analyst]

And on your CoA strategy then, you are counting on increasing CoA coverage throughout this year as well, even though you're perhaps more bullish on '19, '20, if I read it correctly. Is that how we should assume your coverage going forward or because --?

[Kristian Verner Morch, Chief Executive Officer]

No. I think -- this can turn out to be a very long answer if I have to give you a complete picture. But the reality is, you don't want to bring your contract portfolio much higher than what we have today because if you do so, you lock yourself into trades and in tonnage. So we have no room to maneuver. So we think that the sweet spot is somewhere between 60% and 70% and we are at, call it 65% or 63%, at the moment. So we don't have any ambition to bring that further up. We also don't have the ambition to bring it further down because what may or may not happen to the market. I think many of the contracts we have -- a contract we've had for 15 years, they allow us to trade the ships the way that we do and in many ways, if you look at the freight on the CoAs, they do not follow the spot market the same way. So for us to have a strategy to reduce our CoA coverage, I don't think, it would be right.

[Unknown Analyst]

Okay. But how is the -- how tough is the competition [indiscernible] because by you increasing your share and it must mean someone else is losing market share.

[Kristian Verner Morch, Chief Executive Officer]

Yes. So it's a tough -- I can tell you it's a tougher battle.

[Unknown Analyst]

A very quick question. Can you -- have you seen any changes in the shipped cargo commodity types of chemicals versus specialty types of chemicals in Odfjell? Has this been any -- has there been any structural changes here throughout the year?

[Kristian Verner Morch, Chief Executive Officer]

In terms of the commodities we carry?

[Unknown Analyst]

Right.

[Kristian Verner Morch, Chief Executive Officer]

No, not really. I think the number is, correct me if I'm wrong, [indiscernible], but I think 55% or -- more than 55% of what we carry are organic chemicals and I think that has stayed stable. We don't carry any middle distillates. I think it's below 3% or something like this. So the distribution of cargoes is more or less the same, but we do carry them over longer distances and the lot size has also increased.Any other comments or questions? Last chance. No? All right. Then, I want to thank you for spending your time and thank you for your continued interest in Odfjell SE. Have a good day.